UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
xS QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
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 November 4, 2011.
EXPLANATORY NOTE
Park National Corporation (“Park”) is filing this Form 10-Q/A (Amendment No. 1) (this “Form 10-Q/A for September 30, 2011”) with respect to its Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, as originally filed with the Securities and Exchange Commission (the “SEC”) on November 9, 2011 (the “Original September 30, 2011 Form 10-Q”), in order to amend Part I –Items 1, 2 and 4, and Part II – Items 1A and 6. This Form 10-Q/A for September 30, 2011 is being filed to amend and restate our unaudited consolidated condensed financial statements as of and for the three and nine month periods ended September 30, 2011 included in “Item 1 – Financial Statements” of Part I and related disclosures in “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part I to make the corrections identified below.May 3, 2012.
This Form 10-Q/A for September 30, 2011 is being filed to reflect the impact on the consolidated financial information as of and for the three and nine month periods ended September 30, 2011 of the restatement of Park’s audited consolidated financial statements as of and for the year ended December 31, 2010. This Form 10-Q/A for September 30, 2011 should be read in conjunction with and follows the filing by Park of Form 10-K/A (Amendment No. 2) for the fiscal year ended December 31, 2010, which was filed on February 28, 2012. The restatement of consolidated financial information as of and for the three and nine month periods ended September 30, 2011 results in the following corrections:
Impact on Items Reported in Consolidated Condensed Statements of Income (Unaudited):
Impact on Items Reported in Consolidated Condensed Balance Sheet (Unaudited):
For a more detailed description of the restatement of the consolidated condensed financial statements, see Note 1A, “Restatement of Financial Statements” in our Notes to Unaudited Consolidated Condensed Financial Statements.
Park has not modified or updated the information in the Original September 30, 2011 Form 10-Q, except as necessary to reflect the effects of the restated consolidated condensed financial statements which took into consideration subsequent additional information about conditions that existed at September 30, 2011. This Form 10-Q/A for September 30, 2011 continues to speak as of the dates described herein, and we have not updated the disclosures contained in the Original September 30, 2011 Form 10-Q to reflect any events that occurred subsequent to such dates except as necessitated by the restatement and to discuss a subsequent event in Note 19 - Sale of Vision Bank. Information not affected by the restatement is unchanged and reflects the disclosures made at the time of the filing of the Original September 30, 2011 Form 10-Q on November 9, 2011. With respect to management’s discussion, within “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, of the projected results for the fiscal year ending December 31, 2011, we have removed the portion of the discussion related to items that would no longer be appropriate given the nature of the restatement of the consolidated financial information as of and for the quarterly period ended September 30, 2011 and the impact it had on certain line items in the Consolidated Condensed Statements of Income for the three and nine month periods ended September 30, 2011, including the provision for loan losses. Accordingly, this Form 10-Q/A for September 30, 2011 should be read in conjunction with our subsequent filings with the SEC, as information in such filings may update or supersede certain information contained in this Form 10-Q/A for September 30, 2011.
Park has modified “Item 4 – Controls and Procedures” of Part I in order to reflect the reevaluation by Park’s management of the effectiveness of the design and operation of Park’s disclosure controls and procedures as of September 30, 2011 in connection with the restatement of the consolidated condensed financial statements as described in this Form 10-Q/A for September 30, 2011.
Park has also modified the risk factor included in “Item 1A – Risk Factors” of Part II to include the restated financial information for Vision Bank where appropriate. The risk factor, including the corrected information, remains applicable as of the filing date of the Original September 30, 2011 Form 10-Q.
Park has updated the Computation of Ratio of Earnings to Fixed Charges and the Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends included as Exhibit 12 to this Form 10-Q/A for September 30, 2011, in order to reflect the corrected consolidated financial information. Additionally, updated certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 have been included as Exhibits 31.1 and 31.2 to this Form 10-Q/A for September 30, 2011, and updated certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 have been included as Exhibits 32.1 and 32.2 to this Form 10-Q/A for September 30, 2011, which have been reflected in “Item 6 – Exhibits” of Part II.
For the convenience of the reader, this Form 10-Q/A for September 30, 2011 sets forth the disclosures to be included in the Form 10-Q for the quarterly period ended September 30, 2011 in their entirety, although Park is only amending and restating Items 1, 2 and 4 of Part I and Items 1A and 6 of Part II from the Original September 30, 2011 Form 10-Q as these are the only Items affected by the corrected consolidated financial information.
Subsequent Event - Sale of Vision Bank
On November 16, 2011, Park and Vision Bank entered into a Purchase and Assumption Agreement (the “Purchase Agreement”) with Home BancShares, Inc. (“Home”) and its wholly-owned subsidiary Centennial Bank, an Arkansas state-chartered bank (“Centennial”), to sell substantially all of the operating assets and liabilities associated with Vision to Centennial for a purchase price of $27.9 million.
On February 16, 2012, Park and Vision Bank completed the transaction contemplated by the previously announced Purchase Agreement. In accordance with the Agreement, Vision sold approximately $354 million in performing loans, approximately $520 million of deposits, fixed assets of approximately $12.5 million and other miscellaneous assets and liabilities for a purchase price of $27.9 million.
Immediately following the closing of the transactions contemplated by the Agreement, Vision surrendered its Florida banking charter to the Florida Office of Financial Regulation (the “OFR”) and became a non-bank Florida corporation (the “Florida Corporation”). This 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. Subsequent to the transactions contemplated by the Purchase Agreement, Vision will be left with approximately $22 million of performing loans and non-performing loans with a fair value of $88 million (both net of any necessary loan loss allowance that may have existed prior to the transactions). Park recognized a pre-tax gain, net of expenses directly related to the sale, of approximately $22 million.
PARK NATIONAL CORPORATION
CONTENTS
Page | |
PART I. FINANCIAL INFORMATION | |
Item 1. Financial Statements | |
Consolidated Condensed Balance Sheets as of | 3 |
Consolidated Condensed Statements of Income for the three | 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 | |
Consolidated Condensed Statements of Cash Flows for the | |
Notes to Unaudited Consolidated Condensed Financial Statements | 9 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3. Quantitative and Qualitative Disclosures | |
Item 4. Controls and Procedures | |
PART II. OTHER INFORMATION | |
Item 1. Legal Proceedings | |
Item 1A. Risk Factors | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 3. Defaults Upon Senior Securities | |
Item 4. | |
Item 5. Other Information | |
Item 6. Exhibits | |
SIGNATURES |
PARK NATIONAL CORPORATION
Consolidated Condensed Balance Sheets (Unaudited)
(in thousands, except share and per share data)
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
Restated | ||||||||
Assets: | ||||||||
Cash and due from banks | $ | 132,988 | $ | 109,058 | ||||
Money market instruments | 139,109 | 24,722 | ||||||
Cash and cash equivalents | 272,097 | 133,780 | ||||||
Investment securities | ||||||||
Securities available-for-sale, at fair value | ||||||||
(amortized cost of $772,910 and $1,274,258 at September 30, 2011 and December 31, 2010) | 797,163 | 1,297,522 | ||||||
Securities held-to-maturity, at amortized cost | ||||||||
(fair value of $861,369 and $686,114 at September 30, 2011 and December 31, 2010) | 843,576 | 673,570 | ||||||
Other investment securities | 67,892 | 68,699 | ||||||
Total investment securities | 1,708,631 | 2,039,791 | ||||||
Loans | 4,680,575 | 4,732,685 | ||||||
Allowance for loan losses | (107,310 | ) | (143,575 | ) | ||||
Net loans | 4,573,265 | 4,589,110 | ||||||
Bank owned life insurance | 153,159 | 146,450 | ||||||
Goodwill and other intangible assets | 76,370 | 78,377 | ||||||
Bank premises and equipment, net | 68,633 | 69,567 | ||||||
Other real estate owned | 46,911 | 41,709 | ||||||
Accrued interest receivable | 21,990 | 24,137 | ||||||
Mortgage loan servicing rights | 10,069 | 10,488 | ||||||
Other | 163,973 | 148,852 | ||||||
Total assets | $ | 7,095,098 | $ | 7,282,261 | ||||
Liabilities and Stockholders' Equity: | ||||||||
Deposits: | ||||||||
Noninterest bearing | $ | 1,000,969 | $ | 937,719 | ||||
Interest bearing | 4,088,218 | 4,157,701 | ||||||
Total deposits | 5,089,187 | 5,095,420 | ||||||
Short-term borrowings | 243,071 | 663,669 | ||||||
Long-term debt | 823,722 | 636,733 | ||||||
Subordinated debentures and notes | 75,250 | 75,250 | ||||||
Accrued interest payable | 5,416 | 6,123 | ||||||
Other | 103,399 | 75,358 | ||||||
Total liabilities | 6,340,045 | 6,552,553 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
Stockholders' equity: | ||||||||
Preferred stock (200,000 shares authorized; 100,000 shares issued with $1,000 per share liquidation preference) | 97,932 | 97,290 | ||||||
Common stock (No par value; 20,000,000 shares authorized; 16,151,033 shares issued at September 30, 2011 and 16,151,062 shares issued at December 31, 2010) | 301,203 | 301,204 | ||||||
Common stock warrants | 4,406 | 4,473 | ||||||
Retained earnings | 430,121 | 406,342 | ||||||
Treasury stock (752,129 shares at September 30, 2011 and 752,128 shares at December 31, 2010) | (77,733 | ) | (77,733 | ) | ||||
Accumulated other comprehensive (loss), net of taxes | (876 | ) | (1,868 | ) | ||||
Total stockholders' equity | 755,053 | 729,708 | ||||||
Total liabilities and stockholders' equity | $ | 7,095,098 | $ | 7,282,261 |
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 sharesauthorized; 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
PARK NATIONAL CORPORATION
Consolidated Condensed Statements of Income (Unaudited)
(in thousands, except share and per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Restated | Restated | |||||||||||||||
Interest and dividend income: | ||||||||||||||||
Interest and fees on loans | $ | 65,645 | $ | 67,123 | $ | 196,961 | $ | 200,287 | ||||||||
Interest and dividends on: | ||||||||||||||||
Obligations of U.S. Government, its agencies and other securities | 16,289 | 19,333 | 54,302 | 60,071 | ||||||||||||
Obligations of states and political subdivisions | 69 | 192 | 310 | 613 | ||||||||||||
Other interest income | 62 | 34 | 76 | 155 | ||||||||||||
Total interest and dividend income | 82,065 | 86,682 | 251,649 | 261,126 | ||||||||||||
Interest expense: | ||||||||||||||||
Interest on deposits: | ||||||||||||||||
Demand and savings deposits | 976 | 1,263 | 2,918 | 4,620 | ||||||||||||
Time deposits | 5,661 | 8,532 | 18,595 | 28,700 | ||||||||||||
Interest on borrowings: | ||||||||||||||||
Short-term borrowings | 182 | 269 | 642 | 915 | ||||||||||||
Long-term debt | 7,626 | 7,173 | 22,539 | 21,345 | ||||||||||||
Total interest expense | 14,445 | 17,237 | 44,694 | 55,580 | ||||||||||||
Net interest income | 67,620 | 69,445 | 206,955 | 205,546 | ||||||||||||
Provision for loan losses | 16,438 | 14,654 | 43,054 | 44,454 | ||||||||||||
Net interest income after provision for loan losses | 51,182 | 54,791 | 163,901 | 161,092 | ||||||||||||
Other income: | ||||||||||||||||
Income from fiduciary activities | 3,615 | 3,314 | 11,266 | 10,264 | ||||||||||||
Service charges on deposit accounts | 4,894 | 5,026 | 13,664 | 14,864 | ||||||||||||
Other service income | 3,087 | 3,909 | 8,122 | 10,367 | ||||||||||||
Checkcard fee income | 3,154 | 2,900 | 9,381 | 8,109 | ||||||||||||
Bank owned life insurance income | 1,229 | 1,313 | 3,686 | 3,783 | ||||||||||||
ATM fees | 726 | 699 | 2,062 | 2,296 | ||||||||||||
OREO devaluations | (588 | ) | (1,555 | ) | (6,478 | ) | (4,619 | ) | ||||||||
Other | 1,910 | 1,924 | 6,492 | 5,823 | ||||||||||||
Total other income | 18,027 | 17,530 | 48,195 | 50,887 | ||||||||||||
Gain on sale of securities | 3,465 | - | 25,462 | 11,819 |
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 |
PARK NATIONAL CORPORATION
Consolidated Condensed Statements of Income (Unaudited)
(in thousands, except share and per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Restated | Restated | |||||||||||||||
Other expense: | ||||||||||||||||
Salaries and employee benefits | $ | 25,799 | $ | 24,500 | $ | 76,116 | $ | 73,684 | ||||||||
Occupancy expense | 2,665 | 2,840 | 8,429 | 8,750 | ||||||||||||
Furniture and equipment expense | 2,688 | 2,624 | 8,130 | 7,820 | ||||||||||||
Data processing fees | 1,184 | 1,403 | 3,572 | 4,390 | ||||||||||||
Professional fees and services | 5,005 | 4,477 | 15,199 | 14,632 | ||||||||||||
Amortization of intangibles | 669 | 822 | 2,007 | 2,600 | ||||||||||||
Marketing | 764 | 840 | 2,115 | 2,688 | ||||||||||||
Insurance | 681 | 2,316 | 5,295 | 6,847 | ||||||||||||
Communication | 1,475 | 1,696 | 4,516 | 5,112 | ||||||||||||
State taxes | 469 | 865 | 1,414 | 2,548 | ||||||||||||
Other expense | 4,200 | 3,313 | 12,159 | 11,516 | ||||||||||||
Total other expense | 45,599 | 45,696 | 138,952 | 140,587 | ||||||||||||
Income before income taxes | 27,075 | 26,625 | 98,606 | 83,211 | ||||||||||||
Income taxes | 6,694 | 7,048 | 27,076 | 21,689 | ||||||||||||
Net income | $ | 20,381 | $ | 19,577 | $ | 71,530 | $ | 61,522 | ||||||||
Preferred stock dividends and accretion | 1,464 | 1,452 | 4,392 | 4,355 | ||||||||||||
Net income available to common shareholders | $ | 18,917 | $ | 18,125 | $ | 67,138 | $ | 57,167 | ||||||||
Per Common Share: | ||||||||||||||||
Net income available to common shareholders | ||||||||||||||||
Basic | $ | 1.23 | $ | 1.19 | $ | 4.36 | $ | 3.79 | ||||||||
Diluted | $ | 1.23 | $ | 1.19 | $ | 4.36 | $ | 3.79 | ||||||||
Weighted average common shares outstanding | ||||||||||||||||
Basic | 15,398,909 | 15,272,720 | 15,398,919 | 15,090,113 | ||||||||||||
Diluted | 15,398,909 | 15,272,720 | 15,400,641 | 15,090,113 | ||||||||||||
Cash dividends declared | $ | 0.94 | $ | 0.94 | $ | 2.82 | $ | 2.82 |
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
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)
Accumulated | ||||||||||||||||||||||||
Treasury | Other | |||||||||||||||||||||||
Preferred | Common | Retained | Stock | Comprehensive | Comprehensive | |||||||||||||||||||
Nine Months ended September 30, 2011 and 2010 | Stock | Stock | Earnings | at Cost | Income (loss) | Income (loss) | ||||||||||||||||||
Balance at December 31, 2009 | $ | 96,483 | $ | 306,569 | $ | 423,872 | $ | (125,321 | ) | $ | 15,661 | |||||||||||||
Net Income | 61,522 | $ | 61,522 | |||||||||||||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||
Unrealized net holding (loss) on cash flow hedge, net of income taxes of $(149) | (277 | ) | (277 | ) | ||||||||||||||||||||
Unrealized net holding (loss) on securities available-for-sale, net of income taxes of $(1,631) | (3,030 | ) | (3,030 | ) | ||||||||||||||||||||
Total comprehensive income | $ | 58,215 | ||||||||||||||||||||||
Cash dividends on common stock at $2.82 per share | (42,668 | ) | ||||||||||||||||||||||
Cash payment for fractional shares in dividend reinvestment plan | (2 | ) | ||||||||||||||||||||||
Reissuance of common stock from treasury shares held for warrants issued | (852 | ) | (9,495 | ) | 37,915 | |||||||||||||||||||
Accretion of discount on preferred stock | 605 | (605 | ) | |||||||||||||||||||||
Preferred stock dividends | (3,750 | ) | ||||||||||||||||||||||
Balance at September 30, 2010 | $ | 97,088 | $ | 305,715 | $ | 428,876 | $ | (87,406 | ) | $ | 12,354 | |||||||||||||
Balance at December 31, 2010 | $ | 97,290 | $ | 305,677 | $ | 406,342 | $ | (77,733 | ) | $ | (1,868 | ) | ||||||||||||
Net Income (Restated) | 71,530 | $ | 71,530 | |||||||||||||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||
Unrealized net holding gain on cash flow hedge, net of income taxes of $187 | 348 | 348 | ||||||||||||||||||||||
Unrealized net holding gain on securities available-for-sale, net of income taxes of $345 | 644 | 644 | ||||||||||||||||||||||
Total comprehensive income (Restated) | $ | 72,522 | ||||||||||||||||||||||
Cash dividends on common stock at $2.82 per share | (43,425 | ) | ||||||||||||||||||||||
Cash payment for fractional shares in dividend reinvestment plan | (2 | ) | ||||||||||||||||||||||
Common stock warrants cancelled | (66 | ) | 66 | |||||||||||||||||||||
Accretion of discount on preferred stock | 642 | (642 | ) | |||||||||||||||||||||
Preferred stock dividends | (3,750 | ) | ||||||||||||||||||||||
Balance at September 30, 2011(Restated) | $ | 97,932 | $ | 305,609 | $ | 430,121 | $ | (77,733 | ) | $ | (876 | ) |
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
Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Restated | ||||||||
Operating activities: | ||||||||
Net income | $ | 71,530 | $ | 61,522 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation, accretion and amortization | 8,457 | 9,511 | ||||||
Provision for loan losses | 43,054 | 44,454 | ||||||
Other-than-temporary impairment on investment securities | - | 23 | ||||||
Amortization of core deposit intangibles | 2,007 | 2,600 | ||||||
Realized net investment security gains | (25,462 | ) | (11,819 | ) | ||||
OREO devaluations | 6,478 | 4,619 | ||||||
Changes in assets and liabilities: | ||||||||
(Increase) in other assets | (35,456 | ) | (30,621 | ) | ||||
Increase in other liabilities | 6,510 | 712 | ||||||
Net cash provided by operating activities | $ | 77,118 | $ | 81,001 | ||||
Investing activities: | ||||||||
Proceeds from sales of available-for-sale securities | $ | 535,768 | $ | 344,325 | ||||
Proceeds from sales of Federal Home Loan Bank stock | 807 | 111 | ||||||
Proceeds from maturity of: | ||||||||
Available-for-sale securities | 351,226 | 1,354,317 | ||||||
Held-to-maturity securities | 281,159 | 166,321 | ||||||
Purchases of: | ||||||||
Available-for-sale securities | (360,835 | ) | (1,665,825 | ) | ||||
Held-to-maturity securities | (429,993 | ) | (77,478 | ) | ||||
Net (increase) in loans | (22,149 | ) | (60,036 | ) | ||||
Purchases of bank owned life insurance, net | (3,000 | ) | (4,562 | ) | ||||
Purchases of premises and equipment, net | (4,765 | ) | (6,579 | ) | ||||
Net cash provided by investing activities | $ | 348,218 | $ | 50,594 |
Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Financing activities: | ||||||||
Net (decrease) in deposits | $ | (6,233 | ) | $ | (88,022 | ) | ||
Net (decrease) in short-term borrowings | (420,598 | ) | (38,562 | ) | ||||
Proceeds from issuance of long-term debt | 203,000 | - | ||||||
Repayment of long-term debt | (16,011 | ) | (11,664 | ) | ||||
Cash payment for fractional shares in dividend reinvestment plan | (2 | ) | (2 | ) | ||||
Proceeds from reissuance of common stock from treasury shares held | - | 27,568 | ||||||
Cash dividends paid on common and preferred stock | (47,175 | ) | (46,418 | ) | ||||
Net cash (used in) financing activities | $ | (287,019 | ) | $ | (157,100 | ) | ||
Increase (decrease) in cash and cash equivalents | 138,317 | (25,505 | ) | |||||
Cash and cash equivalents at beginning of year | 133,780 | 159,091 | ||||||
Cash and cash equivalents at end of period | $ | 272,097 | $ | 133,586 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for: | ||||||||
Interest | $ | 45,401 | $ | 58,068 | ||||
Income taxes | $ | 16,700 | $ | 19,200 | ||||
Non cash activities: | ||||||||
Securities purchased, not yet settled | $ | 21,172 | $ | 148,023 |
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 and nine month periodsperiod ended September 30, 2011March 31, 2012 are not necessarily indicative of the operating results to be anticipated for the fiscal year ending December 31, 2011.2012.
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 audited consolidated financial statements included in the Annual Report on Form 10-K/A – Amendment No. 2 of Park for the fiscal year ended December 31, 2010 filed on February 28, 2012 (the “2010 Form 10-K/A”), which served to restate the audited consolidated financial statements which had been incorporated by reference in the Annual Report on Form 10-K of Park for the fiscal year ended December 31, 2010 filed on February 28, 2011 from Park’s 20102011 Annual Report to Shareholders (the “2010(“2011 Annual Report”).
Park’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2010 Form 10-K/A.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.
1A. RESTATEMENT OF FINANCIAL STATEMENTS
In a Current Report on Form 8-K filed on January 31, 2012 (the “January 31, 2012 Form 8-K”), Park announced that on January 27, 2012, management determined that (i) Park’s previously issued audited consolidated financial statements, incorporated by reference in Park’s Annual Report on Form 10-K forwith the year ended December 31, 2010, filed on February 28, 2011, and (ii) Park’s unaudited condensed consolidated financial statements included in Park’s Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2011, June 30, 2011, and September 30, 2011 should be restated.
The accounting treatment giving rise to the restatement was the inclusion of estimated future cash flows supporting the allowance for loan losses related to certain impaired commercial loans. For the year ended December 31, 2010, as part of Park’s process to measure impairment on certain impaired commercial loans at Vision Bank, management had reliedon expected future cash flows from guarantors, as to whom we were in litigation.Management determined that reliance on expected future cash flows, which may require protracted litigation to actually be received, is inappropriate given the difficulty in obtaining objective verifiable evidence supporting a conclusion as to the amount and timingexception of the expected cash flows. GAAP requires that our assumptions be “reasonable and supportable” and the facts and circumstances around the existencesubsequent events discussed in Note 20 of protracted litigation make this assumption more difficultthese Notes to support.Consolidated Condensed Financial Statements.
The restatement also reflects certain OREO devaluations and additional loan loss provisions that are not related to guarantor support. These expense items are related to valuation issues identified at December 31, 2010, where Vision Bank management utilized (i) the work of a third-party contractor, which was not a licensed appraiser, when calculating the fair value of collateral for certain impaired loans and the fair value of certain OREO held by Vision Bank, and management did not have sufficient documentation to support the estimates of this third-party contractor, and (ii) internal estimates of collateral value when calculating specific reserves for certain impaired loans when, at times, such internal estimates were outdated. The impact is to reverse provisions for loan losses and OREO devaluations originally recorded in 2011 and recognize these provisions for loan losses and OREO devaluations in the restated audited consolidated financial statements for the year ended December 31, 2010.
The tables below detail the restated financial statement line items and Park’s regulatory capital ratios for the three and nine months ended September 30, 2011.
Effect on Consolidated Condensed Balance Sheets | ||||||||||||
September 30, 2011 | ||||||||||||
As Previously Reported | As Restated | Effect of Change | ||||||||||
Allowance for loan losses | $ | 100,248 | $ | 107,310 | $ | 7,062 | ||||||
Net loans | 4,580,327 | 4,573,265 | (7,062 | ) | ||||||||
Other assets | 161,501 | 163,973 | 2,472 | |||||||||
Total assets | 7,099,688 | 7,095,098 | (4,590 | ) | ||||||||
Retained earnings | 434,711 | 430,121 | (4,590 | ) | ||||||||
Total stockholders’ equity | 759,643 | 755,053 | (4,590 | ) | ||||||||
Total liabilities and stockholders’ equity | 7,099,688 | 7,095,098 | (4,590 | ) |
Effect on Consolidated Condensed Statements of Income | ||||||||||||
Three months ended September 30, 2011 | ||||||||||||
As Previously Reported | As Restated | Effect of Change | ||||||||||
Provision for loan losses | $ | 18,525 | $ | 16,438 | $ | (2,087 | ) | |||||
Net interest income after provision for loan losses | 49,095 | 51,182 | 2,087 | |||||||||
OREO devaluations | (1,688 | ) | (588 | ) | 1,100 | |||||||
Other income | 16,927 | 18,027 | 1,100 | |||||||||
Income before income taxes | 23,888 | 27,075 | 3,187 | |||||||||
Income taxes | 5,579 | 6,694 | 1,115 | |||||||||
Net income | 18,309 | 20,381 | 2,072 | |||||||||
Net income available to common shareholders | 16,845 | 18,917 | 2,072 | |||||||||
Earnings per common share | ||||||||||||
Basic | $ | 1.09 | $ | 1.23 | $ | 0.14 | ||||||
Diluted | $ | 1.09 | $ | 1.23 | $ | 0.14 |
Effect on Consolidated Condensed Statements of Income | ||||||||||||
Nine months ended September 30, 2011 | ||||||||||||
As Previously Reported | As Restated | Effect of Change | ||||||||||
Provision for loan losses | $ | 55,925 | $ | 43,054 | $ | (12,871 | ) | |||||
Net interest income after provision for loan losses | 151,030 | 163,901 | 12,871 | |||||||||
OREO devaluations | (11,339 | ) | (6,478 | ) | 4,861 | |||||||
Other income | 43,334 | 48,195 | 4,861 | |||||||||
Income before income taxes | 80,874 | 98,606 | 17,732 | |||||||||
Income taxes | 20,870 | 27,076 | 6,206 | |||||||||
Net income | 60,004 | 71,530 | 11,526 | |||||||||
Net income available to common shareholders | 55,612 | 67,138 | 11,526 | |||||||||
Earnings per common share | ||||||||||||
Basic | $ | 3.61 | $ | 4.36 | $ | 0.75 | ||||||
Diluted | $ | 3.61 | $ | 4.36 | $ | 0.75 |
Effect on Consolidated Condensed Statements of Changes in Stockholders' Equity | ||||||||||||
Nine months ended September 30, 2011 | ||||||||||||
As Previously Reported | As Restated | Effect of Change | ||||||||||
Retained earnings, December 31, 2010 | $ | 422,458 | $ | 406,342 | $ | (16,116 | ) | |||||
Net income | 60,004 | 71,530 | 11,526 | |||||||||
Total comprehensive income | 60,996 | 72,522 | 11,526 | |||||||||
Retained earnings, September 30, 2011 | 434,711 | 430,121 | (4,590 | ) |
Effect on Consolidated Condensed Statements of Cash Flows | ||||||||||||
Nine months ended September 30, 2011 | ||||||||||||
As Previously Reported | As Restated | Effect of Change | ||||||||||
Net income | $ | 60,004 | $ | 71,530 | $ | 11,526 | ||||||
Provision for loan losses | 55,925 | 43,054 | (12,871 | ) | ||||||||
OREO devaluations | 11,339 | 6,478 | (4,861 | ) | ||||||||
(Increase) in other assets | (41,662 | ) | (35,456 | ) | 6,206 |
Effect on Park National Corporation's Capital Ratios | ||||||||||||
September 30, 2011 | ||||||||||||
As Previously Reported | As Restated | Effect of Change | ||||||||||
Tier 1 Leverage Ratio | 9.73 | % | 9.67 | % | -0.06 | % | ||||||
Tier 1 Risk-based Capital Ratio | 14.04 | % | 13.96 | % | -0.08 | % | ||||||
Total Risk-based Capital Ratio | 16.52 | % | 16.44 | % | -0.08 | % |
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 clarifyNo. 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 guidanceNo. 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 |
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 34 –Goodwill and Intangible Assets
The following table shows the activity in goodwill and core deposit intangibles for the first ninethree months of 2011.
(in thousands) | Goodwill | Core Deposit Intangibles | Total | |||||||||
December 31, 2010 | $ | 72,334 | $ | 6,043 | $ | 78,377 | ||||||
Amortization | - | 2,007 | 2,007 | |||||||||
September 30, 2011 | $ | 72,334 | $ | 4,036 | $ | 76,370 |
(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 periods ranging froma period of six years. The amortization period for the core deposit intangibles related to ten years.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 $669,000approximately $139,000 for each of the fourth quarterremaining quarters of 2011.
Core deposit intangibles amortization expense is projected to be as follows for the remainder of 20112012 and for each of the following years:
(in thousands) | Annual Amortization | |||
Remainder of 2011 | $ | 669 | ||
2012 | 2,677 | |||
2013 | 690 | |||
Total | $ | 4,036 |
(in thousands) | Annual Amortization | |||
Remainder of 2012 | $ | 418 | ||
2013 | 337 | |||
2014 | - | |||
Total | $ | 755 |
Note 45 –Loans
The composition of the loan portfolio, by class of loan, as of September 30, 2011March 31, 2012 and December 31, 20102011 was as follows:
September 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
Loan balance | Accrued interest receivable | Recorded investment | Loan balance | Accrued interest receivable | Recorded investment | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Commercial, financial and agricultural * | $ | 756,888 | $ | 2,992 | $ | 759,880 | $ | 737,902 | $ | 2,886 | $ | 740,788 | ||||||||||||
Commercial real estate * | 1,250,936 | 5,064 | 1,256,000 | 1,226,616 | 4,804 | 1,231,420 | ||||||||||||||||||
Construction real estate: | ||||||||||||||||||||||||
Vision commercial land and development * | 102,271 | 232 | 102,503 | 171,334 | 282 | 171,616 | ||||||||||||||||||
Remaining commercial | 163,606 | 341 | 163,947 | 195,693 | 622 | 196,315 | ||||||||||||||||||
Mortgage | 19,857 | 62 | 19,919 | 26,326 | 95 | 26,421 | ||||||||||||||||||
Installment | 15,007 | 65 | 15,072 | 13,127 | 54 | 13,181 | ||||||||||||||||||
Residential real estate | ||||||||||||||||||||||||
Commercial | 456,670 | 1,276 | 457,946 | 464,903 | 1,403 | 466,306 | ||||||||||||||||||
Mortgage | 968,330 | 1,355 | 969,685 | 906,648 | 2,789 | 909,437 | ||||||||||||||||||
HELOC | 253,461 | 959 | 254,420 | 260,463 | 1,014 | 261,477 | ||||||||||||||||||
Installment | 51,118 | 204 | 51,322 | 60,195 | 255 | 60,450 | ||||||||||||||||||
Consumer | 640,267 | 2,679 | 642,946 | 666,871 | 3,245 | 670,116 | ||||||||||||||||||
Leases | 2,164 | 40 | 2,204 | 2,607 | 56 | 2,663 | ||||||||||||||||||
Total loans | $ | 4,680,575 | $ | 15,269 | $ | 4,695,844 | $ | 4,732,685 | $ | 17,505 | $ | 4,750,190 |
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 VisionVision/SE LLC commercial land and development loans areis 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 September 30, 2011March 31, 2012 and December 31, 2010:
September 30, 2011 | ||||||||||||||||
(In thousands) | Nonaccrual loans | Accruing restructured loans | Loans past due 90 days or more and accruing | Total nonperforming loans | ||||||||||||
Commercial, financial and agricultural | $ | 21,844 | $ | 3,081 | $ | 22 | $ | 24,947 | ||||||||
Commercial real estate | 41,856 | 2,243 | - | 44,099 | ||||||||||||
Construction real estate: | ||||||||||||||||
Vision commercial land and development | 42,353 | 1,249 | - | 43,602 | ||||||||||||
Remaining commercial | 29,386 | 4,575 | - | 33,961 | ||||||||||||
Mortgage | 66 | - | - | 66 | ||||||||||||
Installment | 107 | - | - | 107 | ||||||||||||
Residential real estate: | ||||||||||||||||
Commercial | 47,422 | - | - | 47,422 | ||||||||||||
Mortgage | 25,976 | 4,393 | 1,237 | 31,606 | ||||||||||||
HELOC | 1,420 | - | - | 1,420 | ||||||||||||
Installment | 1,953 | 22 | 112 | 2,087 | ||||||||||||
Consumer | 1,983 | - | 851 | 2,834 | ||||||||||||
Leases | - | - | - | - | ||||||||||||
Total loans | $ | 214,366 | $ | 15,563 | $ | 2,222 | $ | 232,151 |
December 31, 2010 | ||||||||||||||||
(In thousands) | Nonaccrual loans | Accruing restructured loans | Loans past due 90 days or more and accruing | Total nonperforming loans | ||||||||||||
Commercial, financial and agricultural | $ | 19,276 | $ | - | $ | - | $ | 19,276 | ||||||||
Commercial real estate | 57,941 | - | 20 | 57,961 | ||||||||||||
Construction real estate: | ||||||||||||||||
Vision commercial land and development | 87,424 | - | - | 87,424 | ||||||||||||
Remaining commercial | 27,080 | - | - | 27,080 | ||||||||||||
Mortgage | 354 | - | - | 354 | ||||||||||||
Installment | 417 | - | 13 | 430 | ||||||||||||
Residential real estate: | ||||||||||||||||
Commercial | 60,227 | - | - | 60,227 | ||||||||||||
Mortgage | 32,479 | - | 2,175 | 34,654 | ||||||||||||
HELOC | 964 | - | 149 | 1,113 | ||||||||||||
Installment | 1,195 | - | 277 | 1,472 | ||||||||||||
Consumer | 1,911 | - | 1,059 | 2,970 | ||||||||||||
Leases | - | - | - | - | ||||||||||||
Total loans | $ | 289,268 | $ | - | $ | 3,693 | $ | 292,961 |
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 |
The following table provides additional information regarding those nonaccrual and accruing restructured loans that arewere individually evaluated for impairment and those collectively evaluated for impairment as of September 30, 2011March 31, 2012 and December 31, 2010.
September 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
(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 | $ | 24,925 | $ | 24,925 | $ | - | $ | 19,276 | $ | 19,205 | $ | 71 | ||||||||||||
Commercial real estate | 44,099 | 44,099 | - | 57,941 | 57,930 | 11 | ||||||||||||||||||
Construction real estate: | ||||||||||||||||||||||||
Vision commercial land and development | 43,602 | 42,036 | 1,566 | 87,424 | 86,491 | 933 | ||||||||||||||||||
Remaining commercial | 33,961 | 33,961 | - | 27,080 | 27,080 | - | ||||||||||||||||||
Mortgage | 66 | - | 66 | 354 | - | 354 | ||||||||||||||||||
Installment | 107 | - | 107 | 417 | - | 417 | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
Commercial | 47,422 | 47,422 | - | 60,227 | 60,227 | - | ||||||||||||||||||
Mortgage | 30,369 | - | 30,369 | 32,479 | - | 32,479 | ||||||||||||||||||
HELOC | 1,420 | - | 1,420 | 964 | - | 964 | ||||||||||||||||||
Installment | 1,975 | - | 1,975 | 1,195 | - | 1,195 | ||||||||||||||||||
Consumer | 1,983 | 21 | 1,962 | 1,911 | - | 1,911 | ||||||||||||||||||
Leases | - | - | - | - | - | - | ||||||||||||||||||
Total loans | $ | 229,929 | $ | 192,464 | $ | 37,465 | $ | 289,268 | $ | 250,933 | $ | 38,335 |
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.
The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2011March 31, 2012 and December 31, 2010.
September 30, 2011 (Restated) | December 31, 2010 | |||||||||||||||||||||||
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 | $ | 17,903 | $ | 12,329 | $ | — | $ | 9,347 | $ | 8,891 | $ | — | ||||||||||||
Commercial real estate | 39,400 | 30,680 | — | 21,526 | 17,170 | — | ||||||||||||||||||
Construction real estate: | ||||||||||||||||||||||||
Vision commercial land and development | 41,022 | 15,952 | — | 11,206 | 7,847 | — | ||||||||||||||||||
Remaining commercial | 17,582 | 16,299 | — | 12,305 | 11,743 | — | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
Commercial | 32,568 | 29,949 | — | 46,344 | 43,031 | — | ||||||||||||||||||
Consumer | — | — | — | — | — | — | ||||||||||||||||||
With an allowance recorded | ||||||||||||||||||||||||
Commercial, financial and agricultural | 15,945 | 12,596 | 6,400 | 11,801 | 10,314 | 3,028 | ||||||||||||||||||
Commercial real estate | 18,560 | 12,419 | 5,183 | 44,789 | 40,760 | 12,652 | ||||||||||||||||||
Construction real estate: | ||||||||||||||||||||||||
Vision commercial land and development | 52,623 | 26,084 | 15,133 | 103,937 | 78,644 | 39,887 | ||||||||||||||||||
Remaining commercial | 30,813 | 17,662 | 8,940 | 23,563 | 15,337 | 5,425 | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
Commercial | 21,847 | 17,473 | 4,681 | 19,716 | 17,196 | 5,912 | ||||||||||||||||||
Consumer | 21 | 21 | — | — | — | — | ||||||||||||||||||
Total | $ | 288,284 | $ | 192,464 | $ | 40,337 | $ | 304,534 | $ | 250,933 | $ | 66,904 |
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 |
The allowance for loan losses included specific reserves related to loans individually evaluated for impairment at September 30, 2011March 31, 2012 and December 31, 2010,2011, of $40.3$9.5 million and $66.9$15.9 million, respectively, related to loans with a recorded investment of $86.3$33.7 million and $162.3$52.7 million.
The following table presents the average recorded investment and interest income recognized on loans individually evaluated for impairment as of and for the three and nine months ended September 30,March 31, 2012 and March 31, 2011:
Three months ended September 30, 2011 | Nine months ended September 30, 2011 | |||||||||||||||||||
Recorded investment as of September 30, 2011 | Average recorded investment | Interest income recognized | Average recorded investment | Interest income recognized | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Commercial, financial and agricultural | $ | 24,925 | $ | 24,049 | $ | 49 | $ | 21,361 | $ | 155 | ||||||||||
Commercial real estate | 44,099 | 45,162 | 26 | 50,874 | 150 | |||||||||||||||
Construction real estate: | ||||||||||||||||||||
Vision commercial land and development | 42,036 | 43,555 | - | 67,135 | - | |||||||||||||||
Remaining commercial | 33,961 | 34,027 | 116 | 29,573 | 330 | |||||||||||||||
Residential real estate: | ||||||||||||||||||||
Commercial | 47,422 | 48,064 | - | 54,454 | 153 | |||||||||||||||
Consumer | 21 | 21 | - | 15 | 1 | |||||||||||||||
Total | $ | 192,464 | $ | 194,878 | $ | 191 | $ | 223,412 | $ | 789 |
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 September 30, 2011March 31, 2012 and December 31, 20102011 by class of loans.
September 30, 2011 | ||||||||||||||||||||
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 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Commercial, financial and agricultural | $ | 2,211 | $ | 16,457 | $ | 18,668 | $ | 741,212 | $ | 759,880 | ||||||||||
Commercial real estate | 9,543 | 23,119 | 32,662 | 1,223,338 | 1,256,000 | |||||||||||||||
Construction real estate: | ||||||||||||||||||||
Vision commercial land and development | 425 | 35,654 | 36,079 | 66,424 | 102,503 | |||||||||||||||
Remaining commercial | - | 17,807 | 17,807 | 146,140 | 163,947 | |||||||||||||||
Mortgage | 145 | 66 | 211 | 19,708 | 19,919 | |||||||||||||||
Installment | 202 | 69 | 271 | 14,801 | 15,072 | |||||||||||||||
Residential real estate: | ||||||||||||||||||||
Commercial | 1,264 | 17,295 | 18,559 | 439,387 | 457,946 | |||||||||||||||
Mortgage | 14,015 | 21,618 | 35,633 | 934,052 | 969,685 | |||||||||||||||
HELOC | 539 | 673 | 1,212 | 253,208 | 254,420 | |||||||||||||||
Installment | 1,428 | 499 | 1,927 | 49,395 | 51,322 | |||||||||||||||
Consumer | 9,799 | 2,061 | 11,860 | 631,086 | 642,946 | |||||||||||||||
Leases | - | - | - | 2,204 | 2,204 | |||||||||||||||
Total loans | $ | 39,571 | $ | 135,318 | $ | 174,889 | $ | 4,520,955 | $ | 4,695,844 |
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 $2.2$2.4 million of loans past due 90 days or more and accruing.
December 31, 2010 | ||||||||||||||||||||
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 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Commercial, financial and agricultural | $ | 2,247 | $ | 15,622 | $ | 17,869 | $ | 722,919 | $ | 740,788 | ||||||||||
Commercial real estate | 9,521 | 53,269 | 62,790 | 1,168,630 | 1,231,420 | |||||||||||||||
Construction real estate: | ||||||||||||||||||||
Vision commercial land and development | 2,406 | 65,130 | 67,536 | 104,080 | 171,616 | |||||||||||||||
Remaining commercial | 141 | 19,687 | 19,828 | 176,487 | 196,315 | |||||||||||||||
Mortgage | 479 | 148 | 627 | 25,794 | 26,421 | |||||||||||||||
Installment | 235 | 399 | 634 | 12,547 | 13,181 | |||||||||||||||
Residential real estate: | ||||||||||||||||||||
Commercial | 3,281 | 26,845 | 30,126 | 436,180 | 466,306 | |||||||||||||||
Mortgage | 17,460 | 24,422 | 41,882 | 867,555 | 909,437 | |||||||||||||||
HELOC | 1,396 | 667 | 2,063 | 259,414 | 261,477 | |||||||||||||||
Installment | 1,018 | 892 | 1,910 | 58,540 | 60,450 | |||||||||||||||
Consumer | 11,204 | 2,465 | 13,669 | 656,447 | 670,116 | |||||||||||||||
Leases | 5 | - | 5 | 2,658 | 2,663 | |||||||||||||||
Total loans | $ | 49,393 | $ | 209,546 | $ | 258,939 | $ | 4,491,251 | $ | 4,750,190 |
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) throughout the consumer loan segment.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 4.54 (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 deserverequire management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loansloan or of the institution’s credit position at some future date. Commercial loans graded 6 (substandard), also considered watch list credits, are considered to represent higher credit risk and, as a result, a higher loan loss reserve percentage is allocated to these loans. Loans classified as substandard loans are inadequately protected by the current netsound worth and paying capacity of the obligor and/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 nonperformingnonaccrual 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.
The tables below present the recorded investment by loan grade at September 30, 2011March 31, 2012 and December 31, 20102011 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 |
September 30, 2011 | ||||||||||||||||||||
(in thousands) | 5 Rated | 6 Rated | Impaired | Pass Rated | Recorded Investment | |||||||||||||||
Commercial, financial and agricultural | $ | 36,037 | $ | 7,150 | $ | 24,925 | $ | 691,768 | $ | 759,880 | ||||||||||
Commercial real estate | 51,417 | 21,222 | 44,099 | 1,139,262 | 1,256,000 | |||||||||||||||
Construction real estate: | ||||||||||||||||||||
Vision commercial land and development | 10,791 | 2,040 | 42,036 | 47,636 | 102,503 | |||||||||||||||
Remaining commercial | 7,954 | 14,626 | 33,961 | 107,406 | 163,947 | |||||||||||||||
Residential real estate: | ||||||||||||||||||||
Commercial | 22,825 | 14,096 | 47,422 | 373,603 | 457,946 | |||||||||||||||
Leases | - | - | - | 2,204 | 2,204 | |||||||||||||||
Total Commercial Loans | $ | 129,024 | $ | 59,134 | $ | 192,443 | $ | 2,361,879 | $ | 2,742,480 |
December 31, 2010 | ||||||||||||||||||||
(in thousands) | 5 Rated | 6 Rated | Impaired | Pass Rated | Recorded Investment | |||||||||||||||
Commercial, financial and agricultural | $ | 26,322 | $ | 11,447 | $ | 19,276 | $ | 683,743 | $ | 740,788 | ||||||||||
Commercial real estate | 57,394 | 26,992 | 57,941 | 1,089,093 | 1,231,420 | |||||||||||||||
Construction real estate: | ||||||||||||||||||||
Vision commercial land and development | 10,220 | 7,941 | 87,424 | 66,031 | 171,616 | |||||||||||||||
Remaining commercial | 14,021 | 39,062 | 27,080 | 116,152 | 196,315 | |||||||||||||||
Residential real estate: | ||||||||||||||||||||
Commercial | 29,206 | 18,117 | 60,227 | 358,756 | 466,306 | |||||||||||||||
Leases | - | - | - | 2,663 | 2,663 | |||||||||||||||
Total Commercial Loans | $ | 137,163 | $ | 103,559 | $ | 251,948 | $ | 2,316,438 | $ | 2,809,108 |
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’sCompany’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 ending September 30, 2011ended 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 September 30, 2011March 31, 2012 and December 31, 2010,2011, there were $82.1$98.6 million and $80.7$100.4 million, respectively, of TDRs included in nonaccrual loan totals. As of September 30,March 31, 2012 and December 31, 2011, there were $15.6$34.6 million and $28.7 million, respectively, of TDRs included in accruing loan totals. None of the TDRs as of DecemberAt March 31, 2010 were accruing. Prior to management's adoption of ASU 2011-02, Park classified all TDRs as nonaccrual loans. With the adoption of ASU 2011-02, management determined it was appropriate to return certain TDRs to accrual status. Specifically, if the restructured note has been current for a period of at least six months and management expects the borrower will remain current throughout the renegotiated contract, the loan may be returned to accrual status. At September 30, 20112012 and December 31, 2010, $55.92011, $52.8 million and $50.3$79.9 million of the nonaccrual TDRs were current. Management will continue to review the renegotiatedrestructured loans and may determine it appropriate to move certain of the loans back to accrual status in the future. At September 30, 2011March 31, 2012 and December 31, 2010,2011, Park had commitments to lend $1.2$5.1 million and $434,000,$4.0 million, respectively, of additional funds to borrowers whose terms had been modified in a TDR.
The specific reserve related to TDRs at September 30,March 31, 2012 and December 31, 2011 was $4.4 million and $9.1 million, respectively. Modifications made in 2011 and December 30, 2010 was $12.2 million and $9.4 million respectively. Classifying these loans as TDRs generally resulted in a reduction2012 were largely the result of renewals, extending the maturity date of the allowanceloan, 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 loan lossessimilar 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 performing an individual impairment analysis rather than apply a general reserve percentage.
The terms of certain other loans were modified during the three month period ending September 30, 2011ended March 31, 2012 that did not meet the definition of a troubled debt restructuring.TDR. Modified substandard commercial loans which did not meet the definition of a TDR havehad a total recorded investment as of September 30, 2011March 31, 2012 of $6.0$3.6 million. The modification of these loansloans: (1) involved either a modification of the terms of a loan to borrowersa borrower who werewas not experiencing financial difficulties, or(2) resulted in a delay in a payment that was considered to be insignificant.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 havehad a total recorded investment as of September 30, 2011March 31, 2012 of $11.7$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.
The following table details the number of contracts modified as TDRs during the 3 months and 9 monthsthree month period ended September 30, 2011March 31, 2012 as well as the period end recorded investment of these contracts. The recorded investment prepre- and post modificationpost-modification is generally the same.
3 months ended September 30, 2011 | 9 months ended September 30, 2011 | |||||||||||||||
Number of Contracts | Recorded Investment | Number of Contracts | Total recorded investment | |||||||||||||
(In thousands) | ||||||||||||||||
Commercial, financial and agricultural | 14 | $ | 1,977 | 32 | $ | 5,677 | ||||||||||
Commercial real estate | 4 | 2,763 | 21 | 7,633 | ||||||||||||
Construction real estate: | ||||||||||||||||
Vision commercial land and development | 2 | 504 | 8 | 3,342 | ||||||||||||
Remaining commercial | 3 | 2,192 | 16 | 14,795 | ||||||||||||
Mortgage | - | - | 1 | 66 | ||||||||||||
Installment | - | - | - | - | ||||||||||||
Residential real estate: | ||||||||||||||||
Commercial | 3 | 239 | 10 | 3,493 | ||||||||||||
Mortgage | 7 | 1,550 | 27 | 4,137 | ||||||||||||
HELOC | - | - | 1 | 50 | ||||||||||||
Installment | 1 | 17 | 2 | 36 | ||||||||||||
Consumer | - | - | - | - | ||||||||||||
Leases | - | - | - | - | ||||||||||||
Total loans | 34 | $ | 9,242 | 118 | $ | 39,229 |
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.
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 3three month and 9 month periodsperiod ended September 30, 2011.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.
3 months ended September 30, 2011 | 9 months ended September 30, 2011 | |||||||||||||||
Number of Contracts | Recorded Investment | Number of Contracts | Total recorded investment | |||||||||||||
(In thousands) | ||||||||||||||||
Commercial, financial and agricultural | 3 | $ | 506 | 7 | $ | 642 | ||||||||||
Commercial real estate | 5 | 8,511 | 7 | 12,994 | ||||||||||||
Construction real estate: | ||||||||||||||||
Vision commercial land and development | 2 | 1,962 | 3 | 1,979 | ||||||||||||
Remaining commercial | 1 | 5,000 | 1 | 5,000 | ||||||||||||
Mortgage | 1 | 66 | 1 | 66 | ||||||||||||
Installment | - | - | - | - | ||||||||||||
Residential real estate: | ||||||||||||||||
Commercial | 1 | 607 | 5 | 20,061 | ||||||||||||
Mortgage | 4 | 736 | 8 | 1,695 | ||||||||||||
HELOC | 1 | 50 | 1 | 50 | ||||||||||||
Installment | - | - | - | - | ||||||||||||
Total loans | 18 | $ | 17,438 | 33 | $ | 42,487 |
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 56 –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 “Item 8 - Financial Statements and Supplementary Data” of Part II of Park’s 2010 Form 10-K/A.
The activity in the allowance for loan losses for the three and nine months ended September 30,March 31, 2012 and March 31, 2011 and September 30, 2010 is summarized in the following table.
Three months ended September 30, 2011 (Restated) | Three months ended March 31, 2012 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial, financial and agricultural | Commercial real estate | Construction real estate | Residential real estate | Consumer | Leases | Total | 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 | $ | 16,709 | $ | 23,307 | $ | 40,113 | $ | 32,297 | $ | 7,744 | $ | 4 | $ | 120,174 | $ | 16,950 | $ | 15,539 | $ | 14,433 | $ | 15,692 | $ | 5,830 | $ | - | $ | - | $ | 68,444 | ||||||||||||||||||||||||||||||
Charge-offs | 5,199 | 6,505 | 12,587 | 5,886 | 1,682 | — | 31,859 | 4,538 | 4,934 | 4,320 | 3,922 | 1,253 | - | - | 18,967 | |||||||||||||||||||||||||||||||||||||||||||||
Recoveries | 154 | 845 | 621 | 341 | 595 | 1 | 2,557 | 468 | 92 | 67 | 609 | 707 | - | - | 1,943 | |||||||||||||||||||||||||||||||||||||||||||||
Net Charge-offs | 5,045 | 5,660 | 11,966 | 5,545 | 1,087 | (1 | ) | 29,302 | 4,070 | 4,842 | 4,253 | 3,313 | 546 | - | - | 17,024 | ||||||||||||||||||||||||||||||||||||||||||||
Provision | 3,358 | 912 | 8,240 | 3,533 | 396 | (1 | ) | 16,438 | 5,448 | 1,309 | (433 | ) | 1,489 | 525 | - | - | 8,338 | |||||||||||||||||||||||||||||||||||||||||||
Ending balance | $ | 15,022 | $ | 18,559 | $ | 36,387 | $ | 30,285 | $ | 7,053 | $ | 4 | $ | 107,310 | $ | 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 |
Nine months ended September 30, 2011 (Restated) | ||||||||||||||||||||||||||||
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 | 12,370 | 14,855 | 39,686 | 13,162 | 5,597 | — | 85,670 | |||||||||||||||||||||
Recoveries | 1,050 | 1,669 | 834 | 1,232 | 1,562 | 4 | 6,351 | |||||||||||||||||||||
Net Charge-offs | 11,320 | 13,186 | 38,852 | 11,930 | 4,035 | (4 | ) | 79,319 | ||||||||||||||||||||
Provision | 14,787 | 7,376 | 4,777 | 11,956 | 4,163 | (5 | ) | 43,054 | ||||||||||||||||||||
Ending balance | $ | 15,022 | $ | 18,559 | $ | 36,387 | $ | 30,285 | $ | 7,053 | $ | 4 | $ | 107,310 |
(In thousands) | Three months ended September 30, 2010 | Nine months ended September 30, 2010 | ||||||
Allowance for credit losses: | ||||||||
Beginning balance | $ | 120,676 | $ | 116,717 | ||||
Charge-offs | 19,205 | 48,056 | ||||||
Recoveries | 1,280 | 4,290 | ||||||
Net Charge-offs | 17,925 | 43,766 | ||||||
Provision | 14,654 | 44,454 | ||||||
Ending balance | $ | 117,405 | $ | 117,405 |
September 30, 2011 (Restated) | ||||||||||||||||||||||||||||
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 | $ | 6,400 | $ | 5,183 | $ | 24,073 | $ | 4,681 | $ | — | $ | — | $ | 40,337 | ||||||||||||||
Collectively evaluated for impairment | 8,622 | 13,376 | 12,314 | 25,604 | 7,053 | 4 | 66,973 | |||||||||||||||||||||
Total ending allowance balance | $ | 15,022 | $ | 18,559 | $ | 36,387 | $ | 30,285 | $ | 7,053 | $ | 4 | $ | 107,310 | ||||||||||||||
Loan Balance: | ||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 24,899 | $ | 44,051 | $ | 75,970 | $ | 47,422 | $ | 21 | $ | — | $ | 192,363 | ||||||||||||||
Loans collectively evaluated for impairment | 731,989 | 1,206,885 | 224,771 | 1,682,157 | 640,246 | 2,164 | 4,488,212 | |||||||||||||||||||||
Total ending loan balance | $ | 756,888 | $ | 1,250,936 | $ | 300,741 | $ | 1,729,579 | $ | 640,267 | $ | 2,164 | $ | 4,680,575 | ||||||||||||||
Allowance for loan losses as a percentage of loan balance: | ||||||||||||||||||||||||||||
Loans individually evaluated for impairment | 25.70 | % | 11.77 | % | 31.69 | % | 9.87 | % | — | — | 20.97 | % | ||||||||||||||||
Loans collectively evaluated for impairment | 1.18 | % | 1.11 | % | 5.48 | % | 1.52 | % | 1.10 | % | 0.18 | % | 1.49 | % | ||||||||||||||
Total ending loan balance | 1.98 | % | 1.48 | % | 12.10 | % | 1.75 | % | 1.10 | % | 0.18 | % | 2.29 | % | ||||||||||||||
Recorded Investment: | ||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 24,925 | $ | 44,099 | $ | 75,997 | $ | 47,422 | $ | 21 | $ | — | $ | 192,464 | ||||||||||||||
Loans collectively evaluated for impairment | 734,955 | 1,211,901 | 225,444 | 1,685,951 | 642,925 | 2,204 | 4,503,380 | |||||||||||||||||||||
Total ending loan balance | $ | 759,880 | $ | 1,256,000 | $ | 301,441 | $ | 1,733,373 | $ | 642,946 | $ | 2,204 | $ | 4,695,844 |
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 |
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 |
December 31, 2010 | ||||||||||||||||||||||||||||
(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 | $ | 3,028 | $ | 12,652 | $ | 45,312 | $ | 5,912 | $ | — | $ | — | $ | 66,904 | ||||||||||||||
Collectively evaluated for impairment | 8,527 | 11,717 | 25,150 | 24,347 | 6,925 | 5 | 76,671 | |||||||||||||||||||||
Total ending allowance balance | $ | 11,555 | $ | 24,369 | $ | 70,462 | $ | 30,259 | $ | 6,925 | $ | 5 | $ | 143,575 | ||||||||||||||
Loan Balance: | ||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 19,205 | $ | 57,930 | $ | 113,571 | $ | 60,227 | $ | — | $ | — | $ | 250,933 | ||||||||||||||
Loans collectively evaluated for impairment | 718,697 | 1,168,686 | 292,909 | 1,631,982 | 666,871 | 2,607 | 4,481,752 | |||||||||||||||||||||
Total ending loan balance | $ | 737,902 | $ | 1,226,616 | $ | 406,480 | $ | 1,692,209 | $ | 666,871 | $ | 2,607 | $ | 4,732,685 | ||||||||||||||
Allowance for loan losses as a percentage of loan balance: | ||||||||||||||||||||||||||||
Loans individually evaluated for impairment | 15.77 | % | 21.84 | % | 39.90 | % | 9.82 | % | — | — | 26.66 | % | ||||||||||||||||
Loans collectively evaluated for impairment | 1.19 | % | 1.00 | % | 8.59 | % | 1.49 | % | 1.04 | % | 0.19 | % | 1.71 | % | ||||||||||||||
Total ending loan balance | 1.57 | % | 1.99 | % | 17.33 | % | 1.79 | % | 1.04 | % | 0.19 | % | 3.03 | % | ||||||||||||||
Recorded Investment: | ||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 19,205 | $ | 57,930 | $ | 113,571 | $ | 60,227 | $ | — | $ | — | $ | 250,933 | ||||||||||||||
Loans collectively evaluated for impairment | 721,583 | 1,173,490 | 293,962 | 1,637,443 | 670,116 | 2,663 | 4,499,257 | |||||||||||||||||||||
Total ending loan balance | $ | 740,788 | $ | 1,231,420 | $ | 407,533 | $ | 1,697,670 | $ | 670,116 | $ | 2,663 | $ | 4,750,190 |
Note 67 –Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per common share for the three and nine months ended September 30, 2011March 31, 2012 and 2010.
(in thousands, except share and per share data) | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Numerator: | Restated | Restated | ||||||||||||||
Income available to common shareholders | $ | 18,917 | $ | 18,125 | $ | 67,138 | $ | 57,167 | ||||||||
Denominator: | ||||||||||||||||
Denominator for basic earnings per share (weighted average common shares outstanding) | 15,398,909 | 15,272,720 | 15,398,919 | 15,090,113 | ||||||||||||
Effect of dilutive options and warrants | - | - | 1,722 | - | ||||||||||||
Denominator for diluted earnings per share (weighted average common shares outstanding adjusted for the effect of dilutive options and warrants) | 15,398,909 | 15,272,720 | 15,400,641 | 15,090,113 | ||||||||||||
Earnings per common share: | ||||||||||||||||
Basic earnings per common share | $ | 1.23 | $ | 1.19 | $ | 4.36 | $ | 3.79 | ||||||||
Diluted earnings per common share | $ | 1.23 | $ | 1.19 | $ | 4.36 | $ | 3.79 |
(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 September 30,March 31, 2012 and 2011, and 2010, options to purchase 74,57066,625 and 82,17575,895 common shares, respectively, were outstanding under the Park National CorporationPark’s 2005 Incentive Stock Option Plan (the “2005 Plan”).Opion Plan. A warrant to purchase 227,376 common shares was outstanding at both September 30,March 31, 2012 and 2011 and 2010 as a result of Park’s participation in the U.S. Treasury’sTreasury Capital Purchase Program (the “CPP”(“CPP.”). Additionally, In addition, warrants to purchase an aggregate of 35,99271,984 common shares (the “December 2010 Warrants”) were outstanding at September 30,March 31, 2011 as a result of the issuance of common stockshares and warrants to purchase common shares on December 10, 2010.2010 (the “December 2010 Warrants”). The December 2010 Warrants to purchase an aggregate of 80,500 common shares (the “October 2009 Warrants”) were outstanding at September 30, 2010 as a result of the issuance of common stock andexpired in 2011, with no warrants on October 30, 2009. All October 2009 Warrants were exercised or expired as of October 30, 2010 and thus had no impact on the three or nine month periods ended September 30, 2011.
The common shares represented by the options the CPP Warrant (for the three month period only), and the December 2010 Warrants for the three and nine months ended September 30, 2011, totaling a weighted average of 338,74373,683 and 133,343, respectively, and the common shares represented by the options, the CPP Warrant and the October 2009 Warrants for the three and nine months ended September 30, 2010, totaling a weighted average of 420,778 and 604,010, respectively,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 ninethree month weighted average of 133,343 at September 30,73,683 for 2012 or 149,591 for 2011, as the dilutive effect of this warrant was 1,72211,835 and 4,490 common shares of common stock for the ninethree month periodperiods ended September 30, 2011.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 78 –Segment Information
The Corporation is a multi-bankbank holding company headquartered in Newark, Ohio. ThePrior to February 16, 2012 the operating segments for the Corporation arewere 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) (“VB”. 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.
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 athe company’s performance, better understand the potential for future cash flows, and make more informed judgments about the company as a whole. Park has twothree operating segments, as: (i) there are two separate and distinct geographic markets in which Park operates, (ii) discrete financial information is available for each operating segment and (iii)(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 September 30, 2011 | ||||||||||||||||
(in thousands) | PNB | VB(Restated) | All Other | Total(Restated) | ||||||||||||
Net interest income | $ | 58,588 | $ | 6,493 | $ | 2,539 | $ | 67,620 | ||||||||
Provision for loan losses | 9,000 | 6,913 | 525 | 16,438 | ||||||||||||
Other income (loss) and security gains | 20,290 | 2,014 | (812 | ) | 21,492 | |||||||||||
Other expense | 35,936 | 7,267 | 2,396 | 45,599 | ||||||||||||
Net income (loss) | 24,518 | (3,665 | ) | (472 | ) | 20,381 | ||||||||||
Balance at September 30, 2011 | ||||||||||||||||
Assets | $ | 6,346,125 | $ | 714,674 | $ | 34,299 | $ | 7,095,098 |
Operating Results for the three months ended September 30, 2010 | ||||||||||||||||
(in thousands) | PNB | VB | All Other | Total | ||||||||||||
Net interest income | $ | 59,986 | $ | 7,174 | $ | 2,285 | $ | 69,445 | ||||||||
Provision for loan losses | 6,576 | 7,529 | 549 | 14,654 | ||||||||||||
Other income (loss) and security gains | 17,588 | (139 | ) | 81 | 17,530 | |||||||||||
Other expense | 35,406 | 7,726 | 2,564 | 45,696 | ||||||||||||
Net income (loss) | 24,425 | (5,316 | ) | 468 | 19,577 | |||||||||||
Balance at September 30, 2010 | ||||||||||||||||
Assets | $ | 6,269,783 | $ | 838,090 | $ | (17,417 | ) | $ | 7,090,456 |
Operating Results for the nine months ended September 30, 2011 | ||||||||||||||||
(in thousands) | PNB | VB (Restated) | All Other | Total (Restated) | ||||||||||||
Net interest income | $ | 179,366 | $ | 20,248 | $ | 7,341 | $ | 206,955 | ||||||||
Provision for loan losses | 18,950 | 22,529 | 1,575 | 43,054 | ||||||||||||
Other income (loss) and security gains | 73,590 | 2,352 | (2,285 | ) | 73,657 | |||||||||||
Other expense | 108,572 | 22,866 | 7,514 | 138,952 | ||||||||||||
Net income (loss) | 87,798 | (14,730 | ) | (1,538 | ) | 71,530 |
Operating Results for the nine months ended September 30, 2010 | ||||||||||||||||
(in thousands) | PNB | VB | All Other | Total | ||||||||||||
Net interest income | $ | 177,997 | $ | 20,979 | $ | 6,570 | $ | 205,546 | ||||||||
Provision for loan losses | 15,126 | 27,729 | 1,599 | 44,454 | ||||||||||||
Other income (loss) and security gains | 63,206 | (744 | ) | 244 | 62,706 | |||||||||||
Other expense | 107,960 | 23,817 | 8,810 | 140,587 | ||||||||||||
Net income (loss) | 80,610 | (19,528 | ) | 440 | 61,522 |
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 and Guardian Financial Services Company (GFC) in the “All Other” column are used to reconcile the segment totals to the consolidated condensed statements of income for the three and nine month periods ended September 30, 2011March 31, 2012 and 2010.2011. The reconciling amounts for consolidated total assets for the periods ended September 30,March 31, 2012 and 2011 and 2010 consistconsisted of the elimination of intersegment borrowings and the assets of the Parent Company and GFC which arewere not eliminated.
Note 89 –Stock Option Plan
Park did not grant any stock options during the ninethree month periods ended September 30, 2011March 31, 2012 and 2010. Additionally, no stock options vested during the first nine months of 2011 or 2010.
The following table summarizes stock option activity during the first ninethree months of 2011.
Stock Options | Weighted Average Exercise Price Per Share | |||||||
Outstanding at December 31, 2010 | 78,075 | $ | 74.96 | |||||
Granted | - | - | ||||||
Exercised | - | - | ||||||
Forfeited/Expired | 3,505 | 74.96 | ||||||
Outstanding at September 30, 2011 | 74,570 | $ | 74.96 |
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 |
All of the stock options outstanding at September 30, 2011March 31, 2012 were exercisable. The aggregate intrinsic value of the outstanding stock options at September 30, 2011March 31, 2012 was $0. In addition, no stock options were exercised during the first ninethree months of 20112012 or 2010.2011. The weighted average contractual remaining term was 1.190.69 years for the stock options outstanding at September 30, 2011.
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 September 30, 2011,March 31, 2012, incentive stock options granted under the 2005 Plan covering 74,57066,625 common shares were outstanding. At September 30, 2011,March 31, 2012, Park held 488,761517,733 treasury shares that arewere available for issuance under the 2005 Plan.
Note 910 –Mortgage Loans Held For Sale
Mortgage loans held for sale are carried at their fair value. At September 30, 2011March 31, 2012 and December 31, 2010,2011, respectively, Park had approximately $10.8$11.1 million and $8.3$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 45 and 5.
Note 1011 –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 and nine months ended September 30,March 31, 2012 and 2011, and September 30, 2010, there were no investment securities deemed to be other-than-temporarily impaired.
Investment securities at September 30, 2011,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 | $ | 223,459 | $ | 1,358 | $ | - | $ | 224,817 | ||||||||
Obligations of states and political subdivisions | 3,615 | 109 | - | 3,724 | ||||||||||||
U.S. Government sponsored entities asset-backed securities | 544,648 | 22,100 | - | 566,748 | ||||||||||||
Other equity securities | 1,188 | 717 | 31 | 1,874 | ||||||||||||
Total | $ | 772,910 | $ | 24,284 | $ | 31 | $ | 797,163 |
Securities Held-to-Maturity | Amortized Cost | Gross Unrealized Holding Gains | Gross Unrealized Holding Losses | Estimated Fair Value | ||||||||||||
Obligations of states and political subdivisions | $ | 1,992 | $ | 7 | $ | - | $ | 1,999 | ||||||||
U.S. Government sponsored entities asset-backed securities | 841,584 | 17,971 | 185 | 859,370 | ||||||||||||
Total | $ | 843,576 | $ | 17,978 | $ | 185 | $ | 861,369 |
(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 |
Management does not believe any of the unrealized losses at September 30, 2011March 31, 2012 or December 31, 2010, represents2011 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 September 30, 2011,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 | ||||||||||||||||||
Other equity securities | $ | - | $ | - | $ | 80 | $ | 31 | $ | 80 | $ | 31 | ||||||||||||
Securities Held-to-Maturity | ||||||||||||||||||||||||
U.S. Government sponsored entities asset-backed securities | $ | 107,352 | $ | 185 | $ | - | $ | - | $ | 107,352 | $ | 185 |
(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, 2010,2011, 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 | $ | 272,301 | $ | 2,968 | $ | 1,956 | $ | 273,313 | ||||||||
Obligations of states and political subdivisions | 10,815 | 281 | 52 | 11,044 | ||||||||||||
U.S. Government sponsored entities asset-backed securities | 990,204 | 30,633 | 9,425 | 1,011,412 | ||||||||||||
Other equity securities | 938 | 858 | 43 | 1,753 | ||||||||||||
Total | $ | 1,274,258 | $ | 34,740 | $ | 11,476 | $ | 1,297,522 |
Securities Held-to-Maturity | Amortized cost | Gross unrealized holding gains | Gross unrealized holding losses | Estimated fair value | ||||||||||||
Obligations of states and political subdivisions | $ | 3,167 | $ | 7 | $ | - | $ | 3,174 | ||||||||
U.S. Government sponsored entities asset-backed securities | 670,403 | 17,157 | 4,620 | 682,940 | ||||||||||||
Total | $ | 673,570 | $ | 17,164 | $ | 4,620 | $ | 686,114 |
(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 |
Securities with unrealized losses at December 31, 2010,2011, 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 | ||||||||||||||||||
Obligations of U.S. Treasury and other U.S. Government sponsored entities | $ | 74,379 | $ | 1,956 | $ | - | $ | - | $ | 74,379 | $ | 1,956 | ||||||||||||
Obligations of states and political subdivisions | 1,459 | 52 | 1,459 | 52 | ||||||||||||||||||||
U.S. Government sponsored entities asset-backed securities | 418,156 | 9,425 | - | - | 418,156 | 9,425 | ||||||||||||||||||
Other equity securities | 74 | 29 | 221 | 14 | 295 | 43 | ||||||||||||||||||
Total | $ | 494,068 | $ | 11,462 | $ | 221 | $ | 14 | $ | 494,289 | $ | 11,476 | ||||||||||||
Securities Held-to-Maturity | ||||||||||||||||||||||||
U.S. Government sponsored entities asset-backed securities | $ | 297,584 | $ | 4,620 | $ | - | $ | - | $ | 297,584 | $ | 4,620 |
(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 September 30, 2011,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 | $ | 223,459 | $ | 224,817 | ||||
Total | $ | 223,459 | $ | 224,817 | ||||
Obligations of states and political subdivisions: | ||||||||
Due within one year | $ | 2,315 | $ | 2,327 | ||||
Due one through five years | 1,300 | 1,397 | ||||||
$ | 3,615 | $ | 3,724 | |||||
U.S. Government sponsored entities asset-backed securities: | ||||||||
Total | $ | 544,648 | $ | 566,748 |
(in thousands) | Amortized cost | Fair value | ||||||
Securities Held-to-Maturity | ||||||||
Obligations of state and political subdivisions: | ||||||||
Due within one year | $ | 1,992 | $ | 1,999 | ||||
Total | $ | 1,992 | $ | 1,999 | ||||
U.S. Government sponsored entities asset-backed securities: | ||||||||
Total | $ | 841,584 | $ | 859,370 |
(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 |
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 79 to 1115 years, but are shown in the table at their expected call date. The remaining $30 million of securities in this category are U.S. Government sponsored entities discount notes that mature within 30 days.
Note 1112 –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.
September 30, | December 31, | |||||||
(in thousands) | 2011 | 2010 | ||||||
Federal Home Loan Bank stock | $ | 61,016 | $ | 61,823 | ||||
Federal Reserve Bank stock | 6,876 | 6,876 | ||||||
Total | $ | 67,892 | $ | 68,699 |
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 1213 –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 $14$15.9 million and $2$14.0 million for the ninethree month periods ended September 30,March 31, 2012 and 2011, and 2010, respectively.
The following table shows the components of net periodic benefit expense:
(in thousands) | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Service cost | $ | 1,139 | $ | 918 | $ | 3,417 | $ | 2,754 | ||||||||
Interest cost | 992 | 895 | 2,976 | 2,687 | ||||||||||||
Expected return on plan assets | (1,885 | ) | (1,476 | ) | (5,657 | ) | (4,390 | ) | ||||||||
Amortization of prior service cost | 5 | 6 | 15 | 16 | ||||||||||||
Recognized net actuarial loss | 352 | 269 | 1,057 | 809 | ||||||||||||
Benefit expense | $ | 603 | $ | 612 | $ | 1,808 | $ | 1,876 |
(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 1314 –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.
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 entered intoissued 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 September 30, 2011,March 31, 2012, the interest rate swap’s fair value of $(1.1) million$(700,000) was included in other liabilities. No hedge ineffectiveness on the cash flow hedge was recognized during the quarter or ninethree months ended September 30, 2011.March 31, 2012. At September 30, 2011,March 31, 2012, the variable rate on the $25 million subordinated note was 2.37%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 ninethree months ended September 30, 2011,March 31, 2012, the change in the fair value of the interest rate swap reported in other comprehensive income was a gain of $348,000$113,000 (net of taxes of $187,000)$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 September 30, 2011,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 September 30, 2011,March 31, 2012, Park had mortgage loan interest rate lock commitments outstanding of approximately $29.3$16.0 million. Park has specific forward contracts to sell each of these loans to a third partythird-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 September 30, 2011,March 31, 2012, the fair value of the derivative instruments was approximately $378,000.$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 partythird-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 September 30, 2011,March 31, 2012, the fair value of the swap liability of $200,000$135,000 is an estimate of the exposure based upon probability-weighted potential Visa litigation losses.
Note 1415 –Loan Servicing
Park serviced sold mortgage loans of $1.41$1.30 billion at September 30, 2011,March 31, 2012, compared to $1.51$1.35 billion at September 30, 2010.December 31, 2011 and $1.44 billion at March 31, 2011. At September 30, 2011, $30.6March 31, 2012, $22.6 million of the sold mortgage loans were sold with recourse compared to $42.0$34.1 million at September 30, 2010.March 31, 2011. Management closely monitors the delinquency rates on the mortgage loans sold with recourse. At September 30, 2011,March 31, 2012, management determined that no liability was deemed necessary for these loans.
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 September 30, 2011 | Nine months ended September 30, 2011 | ||||||
Mortgage servicing rights: | ||||||||
Carrying amount, net, beginning of period | $ | 10,259 | $ | 10,488 | ||||
Additions | 431 | 1,070 | ||||||
Amortization | (621 | ) | (1,557 | ) | ||||
Changes in valuation inputs & assumptions | - | 68 | ||||||
Carrying amount, net, end of period | $ | 10,069 | $ | 10,069 | ||||
Valuation allowance: | ||||||||
Beginning of period | $ | 680 | $ | 748 | ||||
Changes due to fair value adjustments | - | (68 | ) | |||||
End of period | $ | 680 | $ | 680 |
(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 $1.5 million and $4.3$1.2 million for the three and nine months ended September 30, 2011, respectively.March 31, 2012. For the three and nine months ended September 30, 2010,March 31, 2011, servicing fees included in other service income were $1.7 million and $4.4 million, respectively.
Note 1516 –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 partythird-party appraisals or internal estimates of collateral values.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
:The following table presents assets and liabilities measured at fair value on a recurring basis:
Fair Value Measurements at September 30, 2011 using: | ||||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Balance at September 30, 2011 | ||||||||||||
Assets | ||||||||||||||||
Investment securities | ||||||||||||||||
Obligations of U.S. Treasury and other U.S. Government sponsored entities | $ | - | $ | 224,817 | $ | - | $ | 224,817 | ||||||||
Obligations of states and political subdivisions | - | 3,724 | - | 3,724 | ||||||||||||
U.S. Government sponsored entities’ asset-backed securities | - | 566,748 | - | 566,748 | ||||||||||||
Equity securities | 1,125 | - | 749 | 1,874 | ||||||||||||
Mortgage loans held for sale | - | 10,778 | - | 10,778 | ||||||||||||
Mortgage IRLCs | - | 378 | - | 378 | ||||||||||||
Liabilities | ||||||||||||||||
Interest rate swap | $ | - | $ | 1,099 | $ | - | $ | 1,099 | ||||||||
Fair value swap | - | - | 200 | 200 |
Fair Value Measurements at December 31, 2010 using: | ||||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Balance at December 31, 2010 | ||||||||||||
Assets | ||||||||||||||||
Investment securities | ||||||||||||||||
Obligations of U.S. Treasury and other U.S. Government sponsored entities | $ | - | $ | 273,313 | $ | - | $ | 273,313 | ||||||||
Obligations of states and political subdivisions | - | 8,446 | 2,598 | 11,044 | ||||||||||||
U.S. Government sponsored entities’ asset-backed securities | - | 1,011,412 | - | 1,011,412 | ||||||||||||
Equity securities | 1,008 | - | 745 | 1,753 | ||||||||||||
Mortgage loans held for sale | - | 8,340 | - | 8,340 | ||||||||||||
Mortgage IRLCs | - | 166 | - | 166 | ||||||||||||
Liabilities | ||||||||||||||||
Interest rate swap | $ | - | $ | 1,634 | $ | - | $ | 1,634 | ||||||||
Fair value swap | - | - | 60 | 60 |
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.
The following methods and assumptions were used by the CorporationCompany 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 fairThe 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 nine month periods ended September 30, 2011, and 2010, for financial instruments measured on a recurring basis and classified as Level 3:
Level 3 Fair Value Measurements Three months ended September 30, 2011 and 2010 | ||||||||||||
(in thousands) | Obligations of states and political subdivisions | Equity Securities | Fair value swap | |||||||||
Balance, at June 30, 2011 | $ | - | $ | 741 | $ | (200 | ) | |||||
Total gains/(losses) | ||||||||||||
Included in earnings – realized | - | - | - | |||||||||
Included in earnings – unrealized | - | - | - | |||||||||
Included in other comprehensive income | - | 8 | - | |||||||||
Purchases, sales, issuances and settlements, other, net | - | - | - | |||||||||
Balance September 30, 2011 | $ | - | $ | 749 | $ | (200 | ) | |||||
Balance, at June 30, 2010 | $ | 2,756 | $ | - | $ | (340 | ) | |||||
Total gains/(losses) | ||||||||||||
Included in earnings – realized | - | - | - | |||||||||
Included in earnings – unrealized | - | - | - | |||||||||
Included in other comprehensive income | 93 | - | - | |||||||||
Purchases, sales, issuances and settlements, other, net | - | - | - | |||||||||
Balance September 30, 2010 | $ | 2,849 | $ | - | $ | (340 | ) |
Level 3 Fair Value Measurements
Three months ended September 30,March 31, 2012 and 2011 and 2010
(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 | ) |
34 |
(in thousands) | Obligations of states and political subdivisions | Equity Securities | Fair value swap | |||||||||
Balance, at January 1, 2011 | $ | 2,598 | $ | 745 | $ | (60 | ) | |||||
Total gains/(losses) | ||||||||||||
Included in earnings – realized | - | - | - | |||||||||
Included in earnings – unrealized | (128 | ) | - | - | ||||||||
Included in other comprehensive income | - | 4 | - | |||||||||
Settlement | (2,470 | ) | - | - | ||||||||
Re-evaluation of fair value swap | - | - | (140 | ) | ||||||||
Balance September 30, 2011 | $ | - | $ | 749 | $ | (200 | ) | |||||
Balance, at January 1, 2010 | $ | 2,751 | $ | - | $ | (500 | ) | |||||
Total gains/(losses) | ||||||||||||
Included in earnings – realized | - | - | - | |||||||||
Included in earnings – unrealized | - | - | - | |||||||||
Included in other comprehensive income | 98 | - | - | |||||||||
Settlements | - | - | 160 | |||||||||
Balance September 30, 2010 | $ | 2,849 | $ | - | $ | (340 | ) |
Assets and liabilities measured at fair value on a nonrecurring basis:
The following table presentsmethods and assumptions were used by the Company in determining the fair value of assets and liabilities measured at fair value on a nonrecurring basis:
Fair Value Measurements at September 30, 2011 (as restated) using: | ||||||||||||||||
(in thousands) | (Level 1) | (Level 2) | (Level 3) | Balance at September 30, 2011 | ||||||||||||
Impaired loans: | ||||||||||||||||
Commercial, financial and agricultural | $ | - | $ | - | $ | 11,731 | $ | 11,731 | ||||||||
Commercial real estate | 20,347 | 20,347 | ||||||||||||||
Construction real estate: | ||||||||||||||||
Vision commercial land and development | 25,317 | 25,317 | ||||||||||||||
Remaining commercial | 10,178 | 10,178 | ||||||||||||||
Residential real estate | 15,222 | 15,222 | ||||||||||||||
Total impaired loans | $ | - | $ | - | $ | 82,795 | $ | 82,795 | ||||||||
Mortgage servicing rights | - | 4,963 | - | 4,963 | ||||||||||||
Other real estate owned | - | - | 46,911 | 46,911 |
Fair Value Measurements at December 31, 2010 Using: | ||||||||||||||||
(in thousands) | (Level 1) | (Level 2) | (Level 3) | Balance at December 31, 2010 | ||||||||||||
Impaired loans: | ||||||||||||||||
Commercial, financial and agricultural | $ | - | $ | - | $ | 8,276 | $ | 8,276 | ||||||||
Commercial real estate | 32,229 | 32,229 | ||||||||||||||
Construction real estate: | ||||||||||||||||
Vision commercial land and development | 42,274 | 42,274 | ||||||||||||||
Remaining commercial | 10,465 | 10,465 | ||||||||||||||
Residential real estate | 16,399 | 16,399 | ||||||||||||||
Total impaired loans | $ | - | $ | - | $ | 109,643 | $ | 109,643 | ||||||||
Mortgage servicing rights | - | 3,813 | - | 3,813 | ||||||||||||
Other real estate owned | - | - | 41,709 | 41,709 |
Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans whichcarried 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 measuredroutinely 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 usingand 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 underlying collateral or the present value of expected future cash flows, had a book value of $192.4 million at September 30, 2011, after partial charge-offs of $95.9 million. In addition, these loans had a specific valuation allowance of $40.3 million. Of the $192.4 million impaired loan portfolio, loans with a book value of $123.2 million were carried at their fair value of $82.8 million, as a result of the aforementioned charge-offs and specific valuation allowance. The remaining $69.2 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 these loans exceeded the book value for each individual credit. At December 31, 2010, impaired loans had a book value of $250.9 million. Of these, $109.6 million were carried at fair value, as a result of partial charge-offs of $53.6 million and a specific valuation allowance of $66.9 million. The remaining $74.4 million of impaired loans at December 31, 2010 were carried at cost.
· | 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 which are carried at the lower of cost or fair value, were recorded at $10.1 million at September 30, 2011. Of the $10.1 million MSR carrying balance at September 30, 2011, $5.0 million was recorded at fair value and included a valuation allowance of $680,000. The remaining $5.1 million was recorded at cost, as the fair value exceeded cost at September 30, 2011. MSRsvalue.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 partythird-party specialist, determineddetermines 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 wasis then compared to market values where possible to ascertain the reasonableness of the valuation in relation to current market expectations for similar products. Accordingly, MSRs are classified as Level 2.
The following 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, 2010,2011, 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 $10.5$9.3 million, including a valuation allowance of $748,000.
At September 30, 2011March 31, 2012 and December 31, 2010,2011, the estimated fair value of OREO, less estimated selling costs, amounted to $46.9$42.0 million and $41.7$42.3 million, respectively. The financial impact of OREO devaluation adjustments for the three month and nine month periodsperiod ended September 30, 2011March 31, 2012 was $588,000 and $6.5 million, respectively.
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 sheetbalancesheets 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.
The fair value of financial instruments at September 30, 2011March 31, 2012 and December 31, 2010,2011, was as follows:
(in thousands) | September 30, 2011 | December 31, 2010 | ||||||||||||||
Carrying value | Fair value | Carrying value | Fair value | |||||||||||||
Financial assets: | ||||||||||||||||
Cash and money market instruments | $ | 272,097 | $ | 272,097 | $ | 133,780 | $ | 133,780 | ||||||||
Investment securities | 1,640,739 | 1,658,532 | 1,971,092 | 1,983,636 | ||||||||||||
Accrued interest receivable | 21,990 | 21,990 | 24,137 | 24,137 | ||||||||||||
Mortgage loans held for sale | 10,778 | 10,778 | 8,340 | 8,340 | ||||||||||||
Impaired loans carried at fair value (Restated) | 82,795 | 82,795 | 109,643 | 109,643 | ||||||||||||
Other loans (Restated) | 4,479,692 | 4,491,085 | 4,471,127 | 4,490,855 | ||||||||||||
Loans receivable, net | $ | 4,573,265 | $ | 4,584,658 | $ | 4,589,110 | $ | 4,608,838 | ||||||||
Financial liabilities: | ||||||||||||||||
Noninterest bearing checking accounts | $ | 1,000,969 | $ | 1,000,969 | $ | 937,719 | $ | 937,719 | ||||||||
Interest bearing transactions accounts | 1,432,827 | 1,432,827 | 1,283,159 | 1,283,159 | ||||||||||||
Savings accounts | 943,948 | 943,948 | 899,288 | 899,288 | ||||||||||||
Time deposits | 1,705,844 | 1,713,888 | 1,973,903 | 1,990,163 | ||||||||||||
Other | 5,599 | 5,599 | 1,351 | 1,351 | ||||||||||||
Total deposits | $ | 5,089,187 | $ | 5,097,231 | $ | 5,095,420 | $ | 5,111,680 | ||||||||
Short-term borrowings | $ | 243,071 | $ | 243,071 | $ | 663,669 | $ | 663,669 | ||||||||
Long-term debt | 823,722 | 917,963 | 636,733 | 699,080 | ||||||||||||
Subordinated debentures/notes | 75,250 | 66,934 | 75,250 | 63,099 | ||||||||||||
Accrued interest payable | 5,416 | 5,416 | 6,123 | 6,123 | ||||||||||||
Derivative financial instruments: | ||||||||||||||||
Interest rate swap | $ | 1,099 | $ | 1,099 | $ | 1,634 | $ | 1,634 | ||||||||
Fair value swap | 200 | 200 | 60 | 60 |
(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 |
(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 1617 –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 constituteconstituted Tier 1 capital and rankranked 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 will reset to a rate of 9% per annum thereafter. For the three and nine month periodsperiod ended September 30, 2011,March 31, 2012, Park recognized a charge to retained earnings of $1.5 million and $4.4 million, respectively, 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 iswas 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 warrantWarrant and the market price for determining the number of common shares subject to the warrantWarrant 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 warrantWarrant has a term of 10 years.
As a participant in the CPP, mustthe 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 iswas partially restricted until December 23, 2011 as a result of its participation in the CPP.
Note 18 –Other Comprehensive Income (Loss)
Other comprehensive income (loss) components and related taxestax effect are shown in the following table for the three and nine month periods ended September 30, 2011March 31, 2012 and 2010:
Nine months ended September 30, (in thousands) | Before-tax amount | Tax expense (benefit) | Net-of-tax amount | |||||||||
2011: | ||||||||||||
Unrealized gains on available-for-sale securities | $ | 26,451 | $ | 9,257 | $ | 17,194 | ||||||
Reclassification adjustment for gains realized in net income | (25,462 | ) | (8,912 | ) | (16,550 | ) | ||||||
Unrealized net holding gain on cash flow hedge | 535 | 187 | 348 | |||||||||
Other comprehensive income | $ | 1,524 | $ | 532 | $ | 992 | ||||||
2010: | ||||||||||||
Unrealized gains on available-for-sale securities | $ | 7,158 | $ | 2,506 | $ | 4,652 | ||||||
Reclassification adjustment for gains realized in net income | (11,819 | ) | (4,137 | ) | (7,682 | ) | ||||||
Unrealized net holding loss on cash flow hedge | (426 | ) | (149 | ) | (277 | ) | ||||||
Other comprehensive loss | $ | (5,087 | ) | $ | (1,780 | ) | $ | (3,307 | ) |
Three months ended September 30, (in thousands) | Before-tax amount | Tax expense (benefit) | Net-of-tax amount | |||||||||
2011: | ||||||||||||
Unrealized gains on available-for-sale securities | $ | 17,532 | $ | 6,136 | $ | 11,396 | ||||||
Reclassification adjustment for gains realized in net income | (3,465 | ) | (1,213 | ) | (2,252 | ) | ||||||
Unrealized net holding gain on cash flow hedge | 238 | 83 | 155 | |||||||||
Other comprehensive income | $ | 14,305 | $ | 5,006 | $ | 9,299 | ||||||
2010: | ||||||||||||
Unrealized losses on available-for-sale securities | $ | (5,321 | ) | $ | (1,862 | ) | $ | (3,459 | ) | |||
Unrealized net holding loss on cash flow hedge | (102 | ) | (36 | ) | (66 | ) | ||||||
Other comprehensive loss | $ | (5,423 | ) | $ | (1,898 | ) | $ | (3,525 | ) |
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 expense (benefit) | Net-of-tax amount | |||||||||
September 30, 2011: | ||||||||||||
Changes in pension plan assets and benefit obligations | $ | (24,503 | ) | $ | (8,576 | ) | $ | (15,927 | ) | |||
Unrealized gains on available-for-sale securities | 24,253 | 8,488 | 15,765 | |||||||||
Unrealized net holding loss on cash flow hedge | (1,099 | ) | (385 | ) | (714 | ) | ||||||
Total accumulated other comprehensive loss | $ | (1,349 | ) | $ | (473 | ) | $ | (876 | ) | |||
December 31, 2010: | ||||||||||||
Changes in pension plan assets and benefit obligations | $ | (24,503 | ) | $ | (8,576 | ) | $ | (15,927 | ) | |||
Unrealized gains on available-for-sale securities | 23,264 | 8,143 | 15,121 | |||||||||
Unrealized net holding loss on cash flow hedge | (1,634 | ) | (572 | ) | (1,062 | ) | ||||||
Total accumulated other comprehensive loss | $ | (2,873 | ) | $ | (1,005 | ) | $ | (1,868 | ) | |||
September 30, 2010: | ||||||||||||
Changes in pension plan assets and benefit obligations | $ | (20,769 | ) | $ | (7,269 | ) | $ | (13,500 | ) | |||
Unrealized gains on available-for-sale securities | 41,685 | 14,590 | 27,095 | |||||||||
Unrealized net holding loss on cash flow hedge | (1,909 | ) | (668 | ) | (1,241 | ) | ||||||
Total accumulated other comprehensive income | $ | 19,007 | $ | 6,653 | $ | 12,354 |
(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 | ) |
Note 1819 —Sale of Common Shares and Issuance of Common Stock Warrants
There were no sales of common shares or issuance of common stock were issuedwarrants during the three and nine months ended September 30,March 31, 2012 or March 31, 2011. Outstanding as of September 30,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 havehad an exercise price of $76.41 and an expiration date of December 10, 2011.$76.41. The 35,992 Series A Common Share Warrants issued in December 2010 were not exercised and expired on June 10, 2011.
19 –Sale of Vision Bank
On February 16, 2012, Park The Series B Common Share Warrants were not exercised and its wholly-owned subsidiary, Vision Bank, a Florida state-chartered bank, completed its sale of substantially all of the operating assets and liabilities associated with Vision Bank to Home BancShares, Inc. (“Home”) and its wholly-owned Arkansas state-chartered bank, Centennial Bank (“Centennial”), as contemplated by the previously announced Purchase and Assumption Agreement (the “Agreement”) by and between Park, Vision, Home and Centennial, dated as of November 16,expired on December 20, 2011.
Note 20 -Subsequent Events
In accordanceconnection with the Agreement, Vision sold approximately $354 million in performing loans, approximately $520application 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 deposits, fixed assetssubordinated notes, which are intended to qualify as “Tier 2 Capital” under applicable rules and regulations of approximately $12.5 millionthe 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 other miscellaneous assetscollectively, 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 liabilitiescollectively, 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 $27.9 million.$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.
Immediately following the closing of the transactions contemplated by the Agreement, Vision surrendered its Florida banking charter to the Florida Office of Financial Regulation (the “OFR”) and became a non-bank Florida corporation (the “Florida Corporation”). This Florida Corporation merged with andOn May 2, 2012, Park entered into a wholly-owned, non-bank subsidiaryLetter 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 SE Property Holdings, LLC (“SE LLC”), with SE LLC being the surviving entity. Subsequent to the transactions contemplated by the Purchase Agreement, Vision will be left with approximately $22 million of performing loans and non-performing loans with a fair value of $88 million (both net of any necessary loan loss allowance that may have existed prior to the transactions). Park recognized a pre-tax gain, net of expenses directly related to the sale, of approximately $22 million.common share.
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis (“MD&A”) contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance. We have tried, whenever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “forecast,” “project,” “intend,” “plan,” “believe,” and similar expressions in connection with any discussion of future operating or financial performance. The forward-looking statements are based on management’s current expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation: Park’s ability to execute its business plan successfully and within the expected timeframe; deterioration in the asset value of ourPark's loan portfolio may be worse than expected due to a number of factors, such as adverse changes in economic conditions that impair the ability of borrowers to repay their loans, the underlying value of the collateral could prove less valuable than assumed and cash flows may be worse than expected; Park’sPark's ability to sell OREO properties at prices as favorable as anticipated; changes inPark's ability to execute its business plan successfully and within the expected timeframe; general economic and financial market conditions, and weakening in the economy, specifically the real estate market and the credit markets,market, either nationally or in the states in which Park and its subsidiaries do business, may be worse than expected which could decrease the demand for loan, deposit and other financial services and increase loan delinquencies and defaults; changes in interest rates and prices may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our consolidated balance sheet; changes in consumer spending, borrowing and saving habits; changes in unemployment; asset/liability repricing risks and liquidity risks; our liquidity requirements could be adversely affected by changes in our assets and liabilities; competitive factors among financial institutionsservice organizations increase significantly, including product and pricing pressures and Park’sour ability to attract, develop and retain qualified bank professionals; the nature, timing and effect of changes in banking regulations or other regulatory or legislative requirements affecting the respective businesses of Park and its subsidiaries, including changes in laws and regulations concerning taxes, accounting, banking, securities and other aspects of the financial services industry, specifically the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010;2010 (the “Dodd-Frank Act”), as well as future regulations which will be adopted by the relevant regulatory agencies, including the Consumer Financial Protection Bureau, to implement the Dodd-Frank Act’s provisions; the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board, the SEC, the Public Company Accounting Oversight Board and other regulatory agencies, and the accuracy of our assumptions and estimates used to prepare our financial statements; the effect of fiscal and governmental policies of the United States federal government; the adequacy of our risk management program; a failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors and other service providers, including as a result of cyber attacks; demand for loans in the respective market areas served by Park and its subsidiaries; and other risk factors relating to the banking industry as detailed from time to time in Park’s reports filed with the Securities and Exchange Commission (“SEC”) including those described in “Item 1A. Risk Factors” of Part I of Park’s 2010 Form 10-K/A, in “Item 1A. Risk Factors” of Part II of Park’s QuarterlyAnnual Report on Form 10-Q/A (Amendment No. 1)10-K for the quarterly periodfiscal year ended MarchDecember 31, 2011, in “Item 1A. Risk Factors” of Part II of Park’s Quarterly Report on Form 10-Q/A (Amendment No. 2) for the quarterly period ended June 30, 2011 and in “Item 1A. Risk Factors” of Part II of this Quarterly Report on Form 10-Q/A (Amendment No. 1).2011. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date they were originally made.of this Quarterly Report on Form 10-Q. Park does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions that may be made to update any forward-looking statement to reflect the events or circumstances after the date on which the forward-looking statement is made, or reflect the occurrence of unanticipated events, except to the extent required by law.
Critical Accounting Policies
Note 1 of the Notes to Consolidated Financial Statements included in “Item 8 - Financial Statements and Supplementary Data of Part II of Park’s 2010 Form 10-K/A2011 Annual Report to Shareholders (“2011 Annual Report”) lists significant accounting policies used in the development and presentation of Park’s consolidated financial statements. The accounting and reporting policies of Park conform with U.S. generally accepted accounting principles (GAAP) and general practices within the financial services industry. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
Park believes the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb probable incurred credit losses in the loan portfolio. Management’s determination of the adequacy of the allowance for loan losses is based on periodic evaluations of the loan portfolio and of current economic conditions. However, this evaluation is inherently subjective as it requires material estimates, including expected default probabilities, the loss given default, the amounts and timing of expected future cash flows on impaired loans, and estimated losses on consumer loans and residential mortgage loans based on historical loss experience and current economic conditions. All of these factors may be susceptible to significant change. To the extent that actual results differ from management estimates, additional loan loss provisions may be required that would adversely impact earnings forin future periods. (Refer to the “Provision for Loan Losses” section within this MD&A for additional discussion.)
Other real estate owned (“OREO”), property acquired through foreclosure, is recorded at estimated fair value less anticipated selling costs (net realizable value). If the net realizable value is below the carrying value of the loan on the date of transfer, the difference is charged to the allowance for loan losses. Subsequent declines in value, OREO devaluations, are reported as adjustments to the carrying amount of OREO and are expensed within other income. Gains or losses not previously recognized, resulting from the sale of OREO, are recognized in other income on the date of sale. At September 30, 2011,March 31, 2012, OREO totaled $46.9$42.0 million, representing a 12.5% increase0.7% decrease compared to 41.7%$42.3 million at December 31, 2010.2011. The $5.2 million$300,000 net increasedecrease in OREO during the first ninethree months of 20112012 was a result of $27.7$5.0 million in new OREO offset by sales of $16.0$3.9 million and devaluations of $6.5$1.4 million.
U.S. GAAP requires management to establish a fair value hierarchy, which has the objective of maximizing the use of observable market inputs. U.S. GAAP also requires enhanced disclosures regarding the inputs used to calculate fair value. These are classified as Level 1, 2, and 3. Level 3 inputs are those with significant unobservable inputs that reflect a company’s own assumptions about the market for a particular instrument. Some of these inputs could be based on internal models and cash flow analyses. At September 30, 2011,March 31, 2012, the fair value of assets based on Level 3 inputs for Park was approximately $130.5$126.0 million. This was 13.9%11.0% of the total amount of assets measured at fair value as of the end of the thirdfirst quarter. The fair value of impaired loans was approximately $82.8$83.3 million (or 63.5%66.1%) of the total amount of Level 3 inputs. Additionally, there were $69.2$86.5 million of loans that were impaired and carried at cost, as fair value exceeded book value for each individual credit. The large majority of Park’s Level 2 inputs consist of available-for-sale (“AFS”) securities. The fair value of these AFS securities is obtained largely through the use of matrix pricing, which is a mathematical technique widely used in the financial services industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.
Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. U.S. GAAP establishes standards for the amortization of acquired intangible assets and the impairment assessment of goodwill. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Park’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Park’s Ohio-based banking subsidiariessubsidiary, The Park National Bank (“PNB”) to provide quality, cost-effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base, the inability to deliver cost-effective services over sustained periods or significant credit problems can lead to impairment of goodwill that could adversely impact earnings in future periods. U.S. GAAP requires an annual evaluation of goodwill for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Park’s most recent evaluation was completed during the second quarter of 2011 and resulted in no impairment of goodwill. The fair value of the goodwill, which resides on the books of Park’s subsidiary banks,PNB, is estimated by reviewing the past and projected operating results for the Park subsidiary banks,PNB, deposit and loan totals for the Park subsidiary banksPNB and banking industry comparable information. At September 30, 2011,March 31, 2012, on a consolidated basis, Park had core deposit intangibles of $4.0 million$755,000 subject to amortization and $72.3 million of goodwill, which was not subject to periodic amortization. The core deposit intangibles recorded on the balance sheet of Park National Bank (PNB) totaled $1.0 million and the core deposit intangibles at Vision Bank were $3.0 million. The goodwill asset of $72.3 million is carried on the balance sheet of PNB. Please see Note 34 –Goodwill and Intangible Assets of the Notes to Unaudited Consolidated Condensed Financial Statements in this Quarterly Report on Form 10-Q/A10-Q for additional information on intangible assets.
Comparison of Results of Operations
For the Three and Nine Months Ended September 30,March 31, 2012 and 2011 and 2010
Summary Discussion of Results
Net income for the three months ended September 30, 2011March 31, 2012 was $20.4$31.5 million compared to $19.6$22.2 million for the thirdfirst quarter of 2010,2011, an increase of $804,000$9.3 million or 4.1%41.9%. Net income available to common shareholders (which is net of preferred stock dividends and accretion) was $18.9$30.0 million for the thirdfirst quarter of 20112012 compared to $18.1$20.7 million for the three months ended September 30, 2010,March 31, 2011, an increase of $792,000$9.3 million or 4.4%44.9%. Preferred stock dividends and the related accretion of the discount on the preferred stock, pertaining to the $100 millionFixed Rate Cumulative Perpetual Preferred Shares, Series A, each without par value and with a liquidation preference of preferred stock$1,000 per share (the “Series A Preferred Shares”) issued to the U.S. Treasury on December 23, 2008, were $1.46$1.48 million for the thirdfirst quarter of 20112012 and $1.45$1.46 million for the same quarter in 2010.
Diluted earnings per common share were $1.23$1.95 for the thirdfirst quarter of 2012 compared to $1.35 for the first quarter of 2011, compared to $1.19 for the third quarter of 2010, an increase of $0.04$0.60 per share or 3.4%44.4%. Weighted average diluted common shares outstanding were 15,398,90915,417,745 for the three months ended September 30, 2011March 31, 2012 compared to 15,272,72015,403,420 diluted common shares for the thirdfirst quarter of 2010,2011, an increase of 126,18914,325 diluted common shares or 0.8%0.09%. Park sold
Included in the results discussed above for the first quarter of 2012 are the operating results for SE Property Holdings, LLC (“SE LLC”), a totalnon-bank subsidiary of 509,184 common shares, issuedPark. The remaining assets and liabilities retained by Vision Bank (“Vision”) subsequent to the sale to Centennial Bank (refer to additional discussion in the “Sale of Vision Bank Business” section below) were subsequently transferred to SE LLC through the merger of Vision into SE LLC. SE LLC also holds other real estate owned (“OREO”) that had previously been transferred to SE LLC from treasury shares, during the last three quarters of 2010. Most of the sales of common shares (437,200) resulted from the exercise of Series A and Series B Common Share Warrants issued in connection with the registered direct public offering which closed on October 30, 2009. In addition, Park sold 71,984 common shares, issued from treasury shares, in connection with a registered direct public offering which closed on December 10, 2010.
Sale of Vision Bank Business
On February 16, 2012, Park completed the purchase and assumption transaction between Park, Home BancShares, Inc. (“Home”) and their respective subsidiary banks. Home subsidiary Centennial Bank (“Centennial”) purchased certain assets and liabilities of Vision for a purchase price of $27.9 million. Centennial purchased performing loans with an unpaid principal balance of approximately $354 million, assumed ownership or operation of all 17 Vision office locations, and assumed deposit liabilities of approximately $520 million. Certain other miscellaneous assets and liabilities were also purchased by Centennial. The remaining assets and liabilities were retained by Vision.
As a result of the transaction, Park recorded a pre-tax gain of $22.2 million (after actual expenses directly related to the transaction). The transaction also decreased Park’s total assets during the first quarter of 2012. As of March 31, 2012, Park had total assets of $6.8 billion, compared to $57.2 million for the same period in 2010, an increase of $9.9 million or 17.3%. Preferred stock dividends and the related accretion of the discount on the preferred stock issued to the U.S. Treasury totaled $4.4 million for the first nine months of$7.0 billion at December 31, 2011 and 2010.
The following tables compare the components of net income for the three and nine month periodsperiod ended September 30, 2011March 31, 2012 with the components of net income for the three and nine month periodsperiod ended September 30, 2010.March 31, 2011. This information is provided for Park, Vision BankPNB, Guardian Financial Services Company (“Guardian”), and Park excluding Vision Bank (“Park’s Ohio-based operations”). In general, for the first nine months of 2011, the operating results for Park’s Ohio-based operations were a little stronger than management projected, but the results for Vision Bank were weaker than anticipated.
Park – Summary Income Statement | ||||||||||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||
(in thousands) | 2011 (Restated) | 2010 | % Change | 2011 (Restated) | 2010 | % Change | ||||||||||||||||||
Net interest income | $ | 67,620 | $ | 69,445 | -2.63 | % | $ | 206,955 | $ | 205,546 | 0.69 | % | ||||||||||||
Provision for loan losses | 16,438 | 14,654 | -12.17 | % | 43,054 | 44,454 | -3.15 | % | ||||||||||||||||
Total other income | 18,027 | 17,530 | 2.84 | % | 48,195 | 50,887 | -5.29 | % | ||||||||||||||||
Gain on sale of securities | 3,465 | - | N.M. | 25,462 | 11,819 | 115.43 | % | |||||||||||||||||
Total other expense | 45,599 | 45,696 | -0.21 | % | 138,952 | 140,587 | -1.16 | % | ||||||||||||||||
Income before taxes | $ | 27,075 | $ | 26,625 | 1,69 | % | $ | 98,606 | $ | 83,211 | 18.50 | % | ||||||||||||
Income taxes | 6,694 | 7,048 | -5.02 | % | 27,076 | 21,689 | 24.84 | % | ||||||||||||||||
Net income | $ | 20,381 | $ | 19,577 | 4.11 | % | $ | 71,530 | $ | 61,522 | 16.27 | % |
Table - Park – Summary Income Statement | ||||||||||||
Three months ended March 31, | ||||||||||||
(In thousands) | 2012 | 2011 | % Change | |||||||||
Net interest income | $ | 61,728 | $ | 69,313 | -10.94 | % | ||||||
Provision for loan losses | 9,000 | 14,100 | -36.17 | % | ||||||||
Other income | 17,453 | 15,030 | 16.12 | % | ||||||||
Gain on sale of Vision business | 22,167 | - | N.M. | |||||||||
Security gains | - | 6,635 | N.M. | |||||||||
Operating expenses | 47,808 | 46,346 | 3.15 | % | ||||||||
Income before taxes | $ | 44,540 | $ | 30,532 | 45.88 | % | ||||||
Income taxes | 13,065 | 8,336 | 56.73 | % | ||||||||
Net income | $ | 31,475 | $ | 22,196 | 41.80 | % |
Table - PNB – Summary Income Statement | ||||||||||||
Three months ended March 31, | ||||||||||||
(In thousands) | 2012 | 2011 | % Change | |||||||||
Net interest income | $ | 55,846 | $ | 60,236 | -7.29 | % | ||||||
Provision for loan losses | 4,672 | 4,975 | -6.09 | % | ||||||||
Other income | 16,661 | 16,262 | 2.45 | % | ||||||||
Security gains | - | 6,635 | N.M. | |||||||||
Operating expenses | 38,056 | 36,321 | 4.78 | % | ||||||||
Income before taxes | $ | 29,779 | $ | 41,837 | -28.82 | % | ||||||
Income taxes | 8,218 | 12,808 | -35.84 | % | ||||||||
Net income | $ | 21,561 | $ | 29,029 | -25.73 | % |
Table - Guardian – Summary Income Statement Three months ended March 31, | ||||||||||||
(In thousands) | 2012 | 2011 | % Change | |||||||||
Net interest income | $ | 2,211 | $ | 2,025 | 9.19 | % | ||||||
Provision for loan losses | 250 | 525 | -52.38 | % | ||||||||
Other income | - | - | - | |||||||||
Security gains | - | - | - | |||||||||
Operating expenses | 721 | 577 | 24.96 | % | ||||||||
Income before taxes | $ | 1,240 | $ | 923 | 34.34 | % | ||||||
Income taxes | 434 | 323 | 34.37 | % | ||||||||
Net income | $ | 806 | $ | 600 | 34.33 | % |
Table - SE LLC – Summary Income Statement Three months ended March 31, | ||||||||||||
(In thousands) | 2012 | 2011 | % Change | |||||||||
Net interest income | $ | 2,610 | - | N.M. | ||||||||
Provision for loan losses | 4,078 | - | N.M. | |||||||||
Other income | 724 | - | N.M. | |||||||||
Gain on sale of Vision business | 22,167 | - | N.M. | |||||||||
Security gains | - | - | N.M. | |||||||||
Operating expenses | 7,503 | - | N.M. | |||||||||
Income before taxes | $ | 13,920 | - | N.M. | ||||||||
Income taxes | 4,861 | - | N.M. | |||||||||
Net income | $ | 9,059 | - | N.M. |
The following table compares the guidance for 20112012 that management provided in Park’s 20102011 Annual Report with the actual results for the ninethree month period ended September 30, 2011.March 31, 2012. This guidance was included in Park’s 20102011 Annual Report in the “Financial Review” section on pages 38 through 40.
(in thousands) | Projected results for 2011 | 75% of annual projection | Actual results for the first nine months of 2011 (Restated) | |||||||||
Net interest income | $ | 268,000 to $278,000 | $ | 201,000 - $208,500 | $ | 206,955 | ||||||
Provision for loan losses | $ | 47,000 to $57,000 | $ | 35,250 - $42,750 | $ | 43,054 | ||||||
Total other income | $ | 63,000 to $67,000 | $ | 47,250 - $50,250 | $ | 48,195 | ||||||
Total other expense | $ | 183,000 to $187,000 | $ | 137,250- $140,250 | $ | 138,952 |
(in thousands) | Projected results for 2012 | 25% of annual projection | Actual results for the first three months of 2012 | ||||||||
Net interest income | $ | 240,000 to $250,000 | $ | 60,000 - $62,500 | $ | 61,728 | |||||
Provision for loan losses | $ | 20,000 to $27,000 | $ | 5,000 - $6,750 | $ | 9,000 | |||||
Total other income | $ | 62,000 to $66,000 | $ | 15,500 - $16,500 | $ | 17,453 | |||||
Total other expense | $ | 170,000 to $175,000 | $ | 42,500- $43,750 | $ | 47,808 |
Park’s management believes that the guidance previously provided for net interesttotal other income and total other expense continuescontinue to be a good estimateestimates for 2011.
Net interest income for the first ninequarter of 2012 was within 25% of the annual projection for 2012; however, management’s most recent projection for the twelve months ending December 31, 2012 is for net interest income to be within the range of 2011. By comparison, there were no gains or losses from the sale of investment securities$235 million to $245 million. See more information in the thirdsection called “Guidance on Net Interest Income for 2012”.
The provision for loan losses for the first quarter of 2010 and gains were $11.8 million2012 was $9.0 million. The loan loss provision for the first three quartersmonths of 2010.
Vision Bank – Summary Statement of Operations | ||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
(in thousands) | 2011 (Restated) | 2010 | % Change (Restated) | 2011 (Restated) | 2010 | % Change (Restated) | ||||||||||||||||||
Net interest income | $ | 6,493 | $ | 7,174 | -9.49 | % | $ | 20,248 | $ | 20,979 | -3.48 | % | ||||||||||||
Provision for loan losses | 6,913 | 7,529 | -8.18 | % | 22,529 | 27,729 | -18.75 | % | ||||||||||||||||
Total other income (loss) | 2,014 | (139 | ) | N.M. | 524 | (744 | ) | N.M. | ||||||||||||||||
Gain on sale of securities | — | — | N.M. | 1,828 | — | N.M. | ||||||||||||||||||
Total other expense | 7,267 | 7,726 | -5.94 | % | 22,866 | 23,817 | -3.99 | % | ||||||||||||||||
Loss before taxes | $ | (5,673 | ) | $ | (8,220 | ) | 30.99 | % | $ | (22,795 | ) | $ | (31,311 | ) | 27.20 | % | ||||||||
Income tax credits | (2,008 | ) | (2,904 | ) | 30.85 | % | (8,065 | ) | (11,783 | ) | 31.55 | % | ||||||||||||
Net loss | $ | (3,665 | ) | $ | (5,316 | ) | 31.06 | % | $ | (14,730 | ) | $ | (19,528 | ) | 24.57 | % |
Park Excluding Vision Bank – Summary Income Statement | ||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
(in thousands) | 2011 | 2010 | % Change | 2011 | 2010 | % Change | ||||||||||||||||||
Net interest income | $ | 61,127 | $ | 62,271 | -1.84 | % | $ | 186,707 | $ | 184,567 | 1.16 | % | ||||||||||||
Provision for loan losses | 9,525 | 7,125 | 33.68 | % | 20,525 | 16,725 | 22.72 | % | ||||||||||||||||
Total other income | 16,013 | 17,669 | -9.37 | % | 47,671 | 51,631 | -7.67 | % | ||||||||||||||||
Gain on sale of securities | 3,465 | — | N.M. | 23,634 | 11,819 | 99.97 | % | |||||||||||||||||
Total other expense | 38,332 | 37,970 | 0.95 | % | 116,086 | 116,770 | -0.59 | % | ||||||||||||||||
Income before taxes | $ | 32,748 | $ | 34,845 | -6.02 | % | $ | 121,401 | $ | 114,522 | 6.01 | % | ||||||||||||
Income taxes | 8,702 | 9,952 | -12.56 | % | 35,141 | 33,472 | 4.99 | % | ||||||||||||||||
Net income | $ | 24,046 | $ | 24,893 | -3.40 | % | $ | 86,260 | $ | 81,050 | 6.43 | % |
Vision Bank – Summary Statement of Operations | ||||||||||||||||
Nine Months Ended September 30, | Year Ended December 31, | |||||||||||||||
(in thousands) | 2011 (Restated) | 2010 | 2009 | 2008 | ||||||||||||
Net interest income | $ | 20,248 | $ | 27,867 | $ | 25,634 | $ | 27,065 | ||||||||
Provision for loan losses | 22,529 | 61,407 | 44,430 | 46,963 | ||||||||||||
Total other income (loss) | 524 | (6,023 | ) | (2,047 | ) | 3,014 | ||||||||||
Goodwill impairment | - | - | - | 54,986 | ||||||||||||
Gain on sale of securities | 1,828 | - | - | - | ||||||||||||
Total other expense | 22,866 | 31,623 | 28,091 | 27,149 | ||||||||||||
Loss before taxes | $ | (22,795 | ) | $ | (71,186 | ) | $ | (48,934 | ) | $ | (99,019 | ) | ||||
Income tax credits | (8,065 | ) | (45,413 | ) | (18,824 | ) | (17,832 | ) | ||||||||
Net loss | $ | (14,730 | ) | $ | (25,773 | ) | $ | (30,110 | ) | $ | (81,187 | ) |
Vision Bank CL&D Loan Portfolio | ||||||||||||||||
(in thousands) - end of each respective period | September 30, 2011 (Restated) | Dec. 31, 2010 | Dec. 31, 2009 | Dec. 31, 2008 | ||||||||||||
CL&D loans | $ | 102,271 | $ | 171,334 | $ | 218,263 | $ | 251,443 | ||||||||
Performing CL&D loans | 60,240 | 84,843 | 132,380 | 191,712 | ||||||||||||
Impaired CL&D loans | $ | 42,031 | $ | 86,491 | $ | 85,883 | $ | 59,731 | ||||||||
Specific reserve on impaired CL&D loans | $ | 15,133 | $ | 39,887 | $ | 21,802 | $ | 3,134 | ||||||||
Cumulative charge-offs on impaired CL&D loans | 51,615 | 28,652 | 24,931 | 18,839 | ||||||||||||
Specific reserves plus cumulative charge-offs | $ | 66,748 | $ | 68,539 | $ | 46,733 | $ | 21,973 | ||||||||
Specific reserves plus cumulative charge-offs as a percentage of impaired CL&D loans plus cumulative charge-offs | 71.3 | % | 59.5 | % | 42.2 | % | 28.0 | % |
Nine months ended | Year ended December 31, | |||||||||||||||
(dollars in thousands) | Sept. 30, 2011(Restated) | 2010 | 2009 | 2008 | ||||||||||||
OREO devaluations | $ | 3,025 | $ | 11,359 | $ | 6,139 | $ | 2,663 | ||||||||
Other income absent OREO devaluations | 3,549 | 5,336 | 4,092 | 5,440 | ||||||||||||
Other income absent OREO devaluations as a % of average assets (annualized for 2011) | 0.62 | % | 0.62 | % | 0.45 | % | 0.60 | % |
September 30, | Year ended December 31, | |||||||||||||||
2011 | 2010 | 2009 | 2008 | |||||||||||||
Nonperforming Assets - Vision Bank: | ||||||||||||||||
Nonaccrual loans | $ | 106,000 | $ | 171,453 | $ | 148,347 | $ | 91,206 | ||||||||
Accruing renegotiated loans | 1,743 | - | - | 2,845 | ||||||||||||
Loans past due 90 days or more | - | 364 | 11,277 | 644 | ||||||||||||
Total nonperforming loans | $ | 107,743 | $ | 171,817 | $ | 159,624 | $ | 94,695 | ||||||||
Other real estate owned | 769 | 33,324 | 35,203 | 19,699 | ||||||||||||
Total nonperforming assets | $ | 108,512 | $ | 205,141 | $ | 194,827 | $ | 114,394 | ||||||||
% of nonperforming loans to period end loans | 19.61 | % | 26.82 | % | 23.58 | % | 13.71 | % | ||||||||
% of nonperforming assets to period end loans | 19.75 | % | 32.02 | % | 28.78 | % | 16.57 | % | ||||||||
% of nonperforming assets to period end assets | 15.09 | % | 25.90 | % | 21.70 | % | 12.47 | % |
Nine months ended | Year ended December 31, | |||||||||||||||
(in thousands) | September 30, 2011 | 2010 | 2009 | 2008 | ||||||||||||
Nonaccrual loans, beginning of period | $ | 171,453 | $ | 148,347 | $ | 91,206 | $ | 63,015 | ||||||||
New nonaccrual loans - Vision Bank | 14,517 | 90,094 | 126,540 | 83,588 | ||||||||||||
Resolved nonaccrual loans (1) | 79,970 | 66,988 | 69,399 | 55,397 | ||||||||||||
Nonaccrual loans, end of period | $ | 106,000 | $ | 171,453 | $ | 148,347 | $ | 91,206 |
Vision Bank - Projected Operating Results | ||||||||||||
Q4 2011 | 2011 | 2012 | ||||||||||
Net interest income | $ | 6,193 | $ | 26,441 | $ | 23,866 | ||||||
Provision for loan losses | 6,000 | 41,400 | 13,000 | |||||||||
Total other income (loss) | 737 | (3,600 | ) | 4,662 | ||||||||
Gain on sale of securities | - | 1,828 | - | |||||||||
Total other expense | 7,558 | 30,424 | 26,416 | |||||||||
Loss before taxes | $ | (6,628 | ) | $ | (47,155 | ) | $ | (10,888 | ) | |||
Income tax credits | (2,320 | ) | (16,591 | ) | (3,811 | ) | ||||||
Net loss | $ | (4,308 | ) | $ | (30,564 | ) | $ | (7,077 | ) |
Net Interest Income Comparison for the ThirdFirst Quarter of 20112012 and 2010
Park’s principal source of earnings is net interest income, the difference between total interest income and total interest expense. Net interest income results from average balances outstanding for interest earning assets and interest bearing liabilities in conjunction with the average rates earned and paid on them. Net interest income decreased by $1.8$7.6 million or 2.6%11.0% to $67.6$61.7 million for the thirdfirst quarter of 20112012 compared to $69.4$69.3 million for the thirdfirst quarter of 2010.
The following table compares the average balance and tax equivalent yield on interest earning assets and the average balance and cost of interest bearing liabilities for the thirdfirst quarter of 20112012 with the same quarter in 2010.
Three months ended September 30, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
(in thousands) | Average balance | Tax equivalent % | Average balance | Tax equivalent % | ||||||||||||
Loans (1) | $ | 4,692,013 | 5.59 | % | $ | 4,651,739 | 5.76 | % | ||||||||
Taxable investments | 1,812,012 | 3.57 | % | 1,748,629 | 4.39 | % | ||||||||||
Tax exempt investments | 6,293 | 6.79 | % | 16,650 | 7.11 | % | ||||||||||
Money market instruments | 100,635 | 0.24 | % | 67,923 | 0.20 | % | ||||||||||
Interest earning assets | $ | 6,610,953 | 4.95 | % | $ | 6,484,941 | 5.34 | % | ||||||||
Interest bearing deposits | $ | 4,191,312 | 0.63 | % | $ | 4,283,049 | 0.91 | % | ||||||||
Short-term borrowings | 253,700 | 0.28 | % | 287,172 | 0.37 | % | ||||||||||
Long-term debt | 898,789 | 3.37 | % | 727,262 | 3.91 | % | ||||||||||
Interest bearing liabilities | $ | 5,343,801 | 1.07 | % | $ | 5,297,483 | 1.29 | % | ||||||||
Excess interest earning assets | $ | 1,267,152 | $ | 1,187,458 | ||||||||||||
Net interest spread | 3.88 | % | 4.05 | % | ||||||||||||
Net interest margin | 4.09 | % | 4.28 | % |
Three months ended March 31, | ||||||||||||||||
2012 | 2011 | |||||||||||||||
(in thousands) | Average balance | Tax equivalent % | Average balance | Tax equivalent % | ||||||||||||
Loans (1) | $ | 4,485,074 | 5.52 | % | $ | 4,743,075 | 5.63 | % | ||||||||
Taxable investments | 1,639,775 | 3.33 | % | 1,939,873 | 3.98 | % | ||||||||||
Tax exempt investments | 4,043 | 7.05 | % | 12,240 | 7.63 | % | ||||||||||
Money market instruments | 168,880 | 0.25 | % | 26,948 | 0.10 | % | ||||||||||
Interest earning assets | $ | 6,297,772 | 4.81 | % | $ | 6,722,136 | 5.14 | % | ||||||||
Interest bearing deposits | $ | 3,891,482 | 0.56 | % | $ | 4,245,255 | 0.74 | % | ||||||||
Short-term borrowings | 241,329 | 0.29 | % | 391,366 | 0.28 | % | ||||||||||
Long-term debt | 897,699 | 3.38 | % | 847,800 | 3.52 | % | ||||||||||
Interest bearing liabilities | $ | 5,030,510 | 1.05 | % | $ | 5,484,421 | 1.14 | % | ||||||||
Excess interest earning assets | $ | 1,267,262 | $ | 1,237,715 | ||||||||||||
Net interest spread | 3.76 | % | 4.00 | % | ||||||||||||
Net interest margin | 3.97 | % | 4.21 | % |
(1) For purposes of the computation, nonaccrual loans and Vision loans held for sale through February 16, 2012 are included in the average balance.
Average interest earning assets for the thirdfirst quarter of 2011 increased2012 decreased by $126$424 million or 1.9%6.3% to $6,611$6,298 million compared to $6,485$6,722 million for the thirdfirst quarter of 2010.2011. The average yield on interest earning assets decreased by 3933 basis points to 4.95%4.81% for the thirdfirst quarter of 20112012 compared to 5.34%5.14% for the thirdfirst quarter of 2010.
Average interest bearing liabilities for the thirdfirst quarter of 2011 increased2012 decreased by $47$453 million or 0.9%8.3% to $5,344$5,031 million compared to $5,297$5,484 million for the thirdfirst quarter of 2010.2011. The average cost of interest bearing liabilities decreased by 229 basis points to 1.07%1.05% for the thirdfirst quarter of 20112012 compared to 1.29%1.14% for the thirdfirst quarter of 2010.
Interest Rates
Short-term interest rates continue to be extremely low. The average federal funds rate was .10%0.10% for the first three quartersquarter of 2011, compared to .17% for2012, the first nine monthssame as all of 2010.
In December 2008, the Federal Open Market Committee (“FOMC”) of the Federal Reserve lowered the targeted federal funds rate to a range of 0% to .25%0.25% in response to a severe recession in the U.S. economy. Economic conditions began to improve in the second half of 2009 and continued to improve modestly throughout 2010.2010 and 2011. The modest economic recovery has continued during the first ninethree months of 2011,2012, but the U.S. housing market continues to be significantly depressed and the U.S. unemployment rate continues to be relatively high at 9.1%8.2% as of September 30, 2011.
Park’s management expects that the FOMC will continue to maintain the targeted federal funds interest rate in the range of 0% to .25%0.25% during the last quarter of 2011.2012. The annual average federal funds rate was .16%0.16% for 2009, 0.18% for 2010, and .18%0.10% for 2010.
Discussion of Loans, Investments, Deposits and Borrowings
Average loan balances increaseddecreased by $40$258 million or 0.9%5.4% to $4,692$4,485 million for the three months ended September 30, 2011,March 31, 2012, compared to $4,652$4,743 million for the thirdfirst quarter of 2010.2011. The average yield on the loan portfolio decreased by 1711 basis points to 5.59%5.52% for the thirdfirst quarter of 20112012 compared to 5.76%5.63% for the thirdfirst quarter of 2010.
Total loan balances outstanding at September 30, 2011March 31, 2012 were $4,681$4,324 million compared to $4,733$4,317 million at December 31, 2010, a decrease2011, an increase of $52$7 million, or 1.1%an annualized 0.7%. This decrease in loan balances inThe December 31, 2011 was due to a decrease in loan balancesamount excludes Vision loans held for sale at Vision Bank. Total loan balances at Vision Bank decreased by approximately $92 million to $549 million at September 30, 2011. Approximately $65 million of this decrease in loan balances at Vision Bank was due to a reduction in nonaccrual loans, as these loans were charged off or collected. Management expects modest loan growth during the fourth quarter of 2011.
The average balance of taxable investment securities increaseddecreased by $63$300 million or 3.6%15.5% to $1,812$1,640 million for the thirdfirst quarter of 20112012 compared to $1,749$1,940 million for the thirdfirst quarter of 2010.2011. The average yield on taxable investment securities was 3.57%3.33% for the thirdfirst quarter of 20112012 compared to 4.39%3.98% for the thirdfirst quarter of 2010.
The average balance of tax exempt investment securities decreased by $10.4$8.2 million or 62.3%67.2% to $6.3$4.0 million for the thirdfirst quarter of 20112012 compared to $16.7$12.2 million for the thirdfirst quarter of 2010.2011. The tax equivalent yield on tax exempt investment securities was 6.79%7.05% for the thirdfirst quarter of 20112012 and 7.11%7.63% for the thirdfirst quarter of 2010.2011. Park has not purchased any tax exempt investment securities for the past several quarters and does not plan to purchase tax exempt securities in the lastsecond quarter of 2011.
The average balance of money market instruments increased by $32.7$142 million or 48.2% to $100.6$168.9 million for the thirdfirst quarter of 20112012 compared to $67.9$26.9 million for the thirdfirst quarter of 2010.2011. The average yield on money market instruments was 0.24%0.25% for the thirdfirst quarter of 20112012 compared to 0.20%0.10% for the thirdfirst quarter of 2010.
The amortized cost of total investment securities was $1,684$1,841 million at September 30, 2011,March 31, 2012, compared to $2,017$1,689 million at December 31, 2010.2011. At September 30, 2011,March 31, 2012, the tax equivalent yield on Park’s investment portfolio was 3.68%3.34% and the remaining average life was 1.72.7 years.
Average interest bearing deposit accounts decreased by $92$354 million or 2.1%8.3% to $4,191$3,891 million for the thirdfirst quarter of 20112012 compared to $4,283$4,245 million for the thirdfirst quarter of 2010.2011. The average interest rate paid on interest bearing deposits decreased by 2818 basis points to 0.63%0.56% for the thirdfirst quarter of 20112012 compared to 0.91%0.74% for the thirdfirst quarter last year.
Average total borrowings were $1,152$1,139 million for the three months ended September 30, 2011,March 31, 2012, compared to $1,014$1,239 million for the thirdfirst quarter of 2010, an increase2011, a decrease of $138$100 million or 13.6%8.1%. The average interest rate paid on total borrowings was 2.69%2.73% for the thirdfirst quarter of 20112012 compared to 2.91%2.50% for the thirdfirst quarter of 2010.
The net interest spread (the difference between the tax equivalent yield on interest earning assets and the cost of interest bearing liabilities) decreased by 1724 basis points to 3.88%3.76% for the thirdfirst quarter of 20112012 compared to 4.05%4.00% for the thirdfirst quarter last year. The net interest margin (the annualized tax equivalent net interest income divided by average interest earning assets) was 4.09% for the third quarter of 2011 compared to 4.28% for the third quarter of 2010.
Nine Months Ended September 30, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
(in thousands) | Average balance | Tax equivalent % | Average balance | Tax equivalent % | ||||||||||||
Loans (1) | $ | 4,726,074 | 5.61 | % | $ | 4,624,692 | 5.82 | % | ||||||||
Taxable investments | 1,907,719 | 3.81 | % | 1,755,472 | 4.58 | % | ||||||||||
Tax exempt investments | 8,882 | 7.24 | % | 17,489 | 7.28 | % | ||||||||||
Money market instruments | 49,877 | 0.20 | % | 95,917 | 0.22 | % | ||||||||||
Interest earning assets | $ | 6,692,552 | 5.06 | % | $ | 6,493,570 | 5.41 | % | ||||||||
Interest bearing deposits | $ | 4,245,949 | 0.68 | % | $ | 4,312,565 | 1.03 | % | ||||||||
Short-term borrowings | 311,281 | 0.28 | % | 292,305 | 0.42 | % | ||||||||||
Long-term debt | 876,228 | 3.44 | % | 728,724 | 3.92 | % | ||||||||||
Interest bearing liabilities | $ | 5,433,458 | 1.10 | % | $ | 5,333,594 | 1.39 | % | ||||||||
Excess interest earning assets | $ | 1,259,094 | $ | 1,159,976 | ||||||||||||
Net interest spread | 3.96 | % | 4.02 | % | ||||||||||||
Net interest margin | 4.16 | % | 4.26 | % |
Guidance on Net Interest Income for 2011
Management provided guidance in Park’s 20102011 Annual Report (page 38) that net interest income for 20112012 would be approximately $268$240 million to $278$250 million, the tax equivalent net interest margin would be approximately 4.10%3.88% to 4.20%3.98% and the average interest earning assets for 20112012 would be approximately $6,550$6,200 million.
The actual results for the first ninethree months of 20112012 were slightly abovein line with management’s guidance. Net interest income for the first ninethree months of 20112012 was $207.0$61.7 million, which annualized would be approximately $276.8$248.2 million for 2011.2012. The tax equivalent net interest margin was 4.16%3.97% and average interest earning assets were $6,693$6,298 million for the first ninethree months of 2011.
The following table displays for the past five quarters the average balance of interest earning assets, net interest income and the tax equivalent net interest margin.
(in thousands) | Average interest earning assets | Net interest income | Tax equivalent net interest margin | |||||||||
September 2010 | $ | 6,484,941 | $ | 69,445 | 4.28 | % | ||||||
December 2010 | $ | 6,447,046 | $ | 68,498 | 4.25 | % | ||||||
March 2011 | $ | 6,722,136 | $ | 69,313 | 4.21 | % | ||||||
June 2011 | $ | 6,745,790 | $ | 70,022 | 4.19 | % | ||||||
September 2011 | $ | 6,610,953 | $ | 67,620 | 4.09 | % |
(in thousands) | Average interest earning assets | Net interest income | Tax equivalent net interest margin | |||||||||
March 2011 | $ | 6,722,136 | $ | 69,313 | 4.21 | % | ||||||
June 2011 | $ | 6,745,790 | $ | 70,022 | 4.19 | % | ||||||
September 2011 | $ | 6,610,953 | $ | 67,620 | 4.09 | % | ||||||
December 2011 | $ | 6,487,958 | $ | 66,279 | 4.08 | % | ||||||
March 2012 | $ | 6,297,772 | $ | 61,728 | 3.97 | % |
Management’s current forecast projects that net interest income for the fourthsecond quarter of 2012 will be approximately $65$59 million and approximately $272$239 million for all of 2011.2012. Management also expects that average interest earning assets will be approximately $6,400$6,188 million for the lastsecond quarter of 20112012 and that the tax equivalent net interest margin will be about 4.05%.
Mix of Average Interest Earning Assets and Yield on Average Interest Earning Assets
The following table shows the mix of average interest earning assets for the first three quartersquarter of 20112012 and for the years of 2011, 2010 and 2009.
($ in thousands) | Loans | Investments | Money Market Instruments | Total | ||||||||||||
2009 - year | $ | 4,594,436 | $ | 1,877,303 | $ | 52,658 | $ | 6,524,397 | ||||||||
Percentage | 70.42 | % | 28.77 | % | .81 | % | 100.00 | % | ||||||||
2010 - year | $ | 4,642,478 | $ | 1,746,356 | $ | 93,009 | $ | 6,481,843 | ||||||||
Percentage | 71.62 | % | 26.94 | % | 1.44 | % | 100.00 | % | ||||||||
March 2011 - quarter | $ | 4,743,075 | $ | 1,952,113 | $ | 26,948 | $ | 6,722,136 | ||||||||
Percentage | 70.56 | % | �� | 29.04 | % | .40 | % | 100.00 | % | |||||||
June 2011 - quarter | $ | 4,743,696 | $ | 1,980,855 | $ | 21,239 | $ | 6,745,790 | ||||||||
Percentage | 70.32 | % | 29.36 | % | .32 | % | 100.00 | % | ||||||||
Sept. 2011 - quarter | $ | 4,692,013 | $ | 1,818,305 | $ | 100,635 | $ | 6,610,953 | ||||||||
Percentage | 70.97 | % | 27.51 | % | 1.52 | % | 100.00 | % |
(dollars in thousands) | Loans | Investments | Money Market Instruments | Total | ||||||||||||
2009 - year | $ | 4,594,436 | $ | 1,877,303 | $ | 52,658 | $ | 6,524,397 | ||||||||
Percentage | 70.42 | % | 28.77 | % | 0.81 | % | 100.00 | % | ||||||||
2010 - year | $ | 4,642,478 | $ | 1,746,356 | $ | 93,009 | $ | 6,481,843 | ||||||||
Percentage | 71.62 | % | 26.94 | % | 1.44 | % | 100.00 | % | ||||||||
2011 - year | $ | 4,713,511 | $ | 1,848,880 | $ | 78,593 | $ | 6,640,984 | ||||||||
Percentage | 70.98 | % | 27.84 | % | 1.18 | % | 100.00 | % | ||||||||
2012 - first quarter | $ | 4,485,074 | $ | 1,643,818 | $ | 168,880 | $ | 6,297,772 | ||||||||
Percentage | 71.22 | % | 26.10 | % | 2.68 | % | 100.00 | % |
A primary financial goal for Park is to increase the amount of quality loans on its balance sheet. Management emphasizes the importance of growing quality loans on an ongoing basis to its retail and commercial lenders. The average balance of loans for the first ninethree months of 20112012 was $4,726$4,485 million, compared to $4,642$4,714 million for all of 2010.
Management actively manages the investment portfolio. The average balance of investment securities may increase as a result of attractive investment opportunities. Likewise, the average balance of investment securities may decrease if management sells investment securities or chooses not to reinvest the cash flow from maturities or investment repayments.
The following table shows the yield on average interest earning assets for the first three quartersquarter of 20112012 and for the years of 2011, 2010 and 2009.
Loans | Investments | Money Market Instruments | Total | |||||||||||||
2009 | 6.03 | % | 4.94 | % | .22 | % | 5.67 | % | ||||||||
2010 | 5.80 | % | 4.47 | % | .22 | % | 5.36 | % | ||||||||
March 2011 | 5.63 | % | 4.00 | % | .10 | % | 5.14 | % | ||||||||
June 2011 | 5.61 | % | 3.87 | % | .15 | % | 5.08 | % | ||||||||
September 2011 | 5.59 | % | 3.58 | % | .24 | % | 4.95 | % |
Loans | Investments | Money Market Instruments | Total | |||||||||||||
2009 - year | 6.03 | % | 4.94 | % | 0.22 | % | 5.67 | % | ||||||||
2010 - year | 5.80 | % | 4.47 | % | 0.22 | % | 5.36 | % | ||||||||
2011 - year | 5.60 | % | 3.76 | % | 0.23 | % | 5.03 | % | ||||||||
2012 - first quarter | 5.52 | % | 3.34 | % | 0.25 | % | 4.81 | % |
The loan portfolio for Park provides a higher yield than the yield on investment securities. As stated previously, a primary financial objective of Park is to grow quality loans. Our commercial and retail lenders are actively calling on current and prospective customers in an effort to generate additional loan volume.
Park’s net interest income and net interest margin would increase if Park were able to increase its loan portfolio with quality loans. Park has strong liquidity and would be able to easily fund an increase in its loan portfolio.
Provision for Loan Losses
The provision for loan losses for Park was $16.4$9.0 million for the three months ended September 30, 2011,March 31, 2012, compared to $14.7$14.1 million for the same period in 2010.2011. Net loan charge-offs for Park were $29.3$17.0 million for the thirdfirst quarter of 2011,2012, compared to $17.9$9.1 million for the thirdfirst quarter of 2010.2011.Net loan charge-offs for the three months ended March 31, 2012 included the charge-off of $12.1 million related to the retained Vision loans to bring the retained Vision loan portfolio to fair value prior to the merger of Vision with and into SE LLC on February 16, 2012. In addition to this $12.1 million charge-off, PNB, Guardian and SE LLC recorded net charge-offs of $2.7 million, $197,000 and $2.1 million, respectively, during the first quarter of 2012. Park’s annualized ratio of net loan charge-offs to average loans was 1.53% for the three months ended March 31, 2012, compared to 0.78% for the same period in 2011.Management expects the annualized net loan charge-off ratio will decline throughout the remainder of 2012.
The provision for loan losses for PNB and Guardian, Park’s two Ohio-based subsidiaries, was $4.9 million for the three months ended March 31, 2012, compared to $5.5 million for the same period in 2011. Net loan charge-offs for PNB and Guardian were $2.9 million for the first quarter of 2012, compared to $4.1 million for the first quarter of 2011. The annualized ratio of net loan charge-offs to average loans for PNB and Guardian was 2.48%0.28% for the three months ended September 30, 2011,March 31, 2012, compared to 1.53%0.40% for the same period in 2010.
The provision for loan losses increased by $1.4 millionfor SE LLC, including those provisions recorded at Vision prior to $43.1 million, compared to $44.5the February 16, 2012 merger of Vision with and into SE LLC, was $4.1 million for the same period in 2010.three months ended March 31, 2012. Net loan charge-offs for SE LLC during the first quarter of 2012, subsequent to February 16, 2012, were $79.3$2.1 million. As previously discussed, Vision recognized charge-offs of $12.1 million forto bring the nine months ended September 30, 2011, or 2.24% of averageloan portfolio to fair value on February 16, 2012.
SE LLC, as a non-bank subsidiary, is not permitted to carry an ALLL, but instead must record loans on an annualized basis, comparedits balance sheet at fair value. Given this requirement, both the performing and nonperforming retained loan portfolios have been charged down to $43.8their fair value, as noted in the table below:
SE LLC – Retained Vision Loan Portfolio | ||||||||||||||||
Charge-offs as a percentage of unpaid principal balance | ||||||||||||||||
March 31, 2012 | ||||||||||||||||
(In thousands) | Unpaid Principal Balance | Charge-Offs | Net Book Balance | Charge-off Percentage | ||||||||||||
Nonperforming loans - retained by SE LLC | $ | 160,858 | $ | 78,532 | $ | 82,326 | 49 | % | ||||||||
Performing loans - retained by SE LLC | 17,348 | 1,225 | 16,123 | 7 | % | |||||||||||
Total SE LLC loan exposure | $ | 178,206 | $ | 79,757 | $ | 98,449 | 45 | % |
As part of the transaction between Vision and Centennial, Park agreed to allow Centennial to “put back” up to $7.5 million or 1.27%aggregate principal amount of average loans, which were originally included within the loans sold in the transaction. The loan put-back option expires 180 days after the closing of the transaction, on an annualized basis, forAugust 16, 2012. While it remains uncertain the total principal amount of loans which may be put back by Centennial and the potential loss exposure that may be recognized in connection with any loans repurchased, Park recorded a loan loss provision of $662,000 in respect of the Centennial put-back option during the first nine monthsquarter of 2010.
The following table provides additional information related to Park’s allowance for loan losses, including information related to specific reserves and general reserves, at September 30, 2011,March 31, 2012 and December 31, 2010 and September 30, 2010.
Park National Corporation – Allowance for Loan & Lease Losses (ALLL) | ||||||||||||
(in thousands) | September 30, 2011 (Restated) | December 31, 2010 | September 30, 2010 | |||||||||
Total ALLL | $ | 107,310 | $ | 143,575 | $ | 117,405 | ||||||
Less Ohio specific reserves | ||||||||||||
Ohio impaired loans | 7,496 | 5,475 | 4,582 | |||||||||
Vision Bank participations | 7,396 | 7,501 | 4,843 | |||||||||
Less specific reserves at Vision Bank | 25,445 | 53,928 | 25,868 | |||||||||
General reserves | $ | 66,973 | $ | 76,671 | $ | 82,112 | ||||||
Total loans | $ | 4,680,575 | $ | 4,732,685 | $ | 4,656,902 | ||||||
Less impaired commercial loans | 192,363 | 250,933 | 206,155 | |||||||||
Non-impaired loans | $ | 4,488,212 | $ | 4,481,752 | $ | 4,450,747 | ||||||
Total ALLL to total loan ratio | 2.29 | % | 3.03 | % | 2.52 | % | ||||||
General reserves as a % of non-impaired loans | 1.49 | % | 1.71 | % | 1.84 | % |
Park National Corporation - Allowance for Loan & Lease Losses | ||||||||
(In thousands) | March 31, 2012 | December 31, 2011 | ||||||
Total ALLL | $ | 59,758 | $ | 68,444 | ||||
Specific reserves | 9,505 | 15,935 | ||||||
General reserves | $ | 50,253 | $ | 52,509 | ||||
Total loans | $ | 4,324,383 | $ | 4,317,099 | ||||
Impaired commercial loans | 179,293 | 187,074 | ||||||
Non-impaired loans | $ | 4,145,090 | $ | 4,130,025 | ||||
Total ALLL to total loan ratio | 1.38 | % | 1.59 | % | ||||
General reserves as a % of non-impaired loans | 1.21 | % | 1.27 | % |
During the first ninethree months of 2011, new nonaccrual loans for Park were approximately $65.0 million, compared to $95.2 million for the same period in 2010. For all of 2010,2012, new nonaccrual loans were approximately $175.2$21.8 million. Management expectsThese new nonaccruals were down significantly from the total level of new nonaccrual loans experienced in the previous four years and management expects this will continue to be well below levels experienced in 2009 and 2010.throughout 2012. The following table shows new nonaccrual loans for the first three quartersquarter of 20112012 and the twofour previous years.
New nonaccrual loan information (in thousands): | Sept. 30, 2011 | June 30, 2011 | March 31, 2011 | 2010 | 2009 | |||||||||||||||
Nonaccrual loans, beginning of period | $ | 238,690 | $ | 278,819 | $ | 289,268 | $ | 233,544 | $ | 159,512 | ||||||||||
New nonaccrual loans - Ohio-based operations | 19,354 | 22,439 | 8,674 | 85,081 | 57,641 | |||||||||||||||
New nonaccrual loans - Vision Bank | 5,543 | 2,980 | 5,994 | 90,094 | 126,540 | |||||||||||||||
Resolved nonaccrual loans | 49,221 | 65,548 | 25,117 | 119,451 | 110,149 | |||||||||||||||
Nonaccrual loans, end of period | $ | 214,366 | $ | 238,690 | $ | 278,819 | $ | 289,268 | $ | 233,544 |
New nonaccrual loan information (in thousands): | March 31, 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
Nonaccrual loans, beginning of period | $ | 195,106 | $ | 289,268 | $ | 233,544 | $ | 159,512 | $ | 101,128 | ||||||||||
New nonaccrual loans - Ohio-based operations | 21,210 | 78,316 | 85,081 | 57,641 | 58,161 | |||||||||||||||
New nonaccrual loans - Vision/SE LLC | 568 | 45,842 | 90,094 | 126,540 | 83,588 | |||||||||||||||
Resolved nonaccrual loans | 33,657 | 218,320 | 119,451 | 110,149 | 83,365 | |||||||||||||||
Nonaccrual loans, end of period | $ | 183,227 | $ | 195,106 | $ | 289,268 | $ | 233,544 | $ | 159,512 |
The following table compares Park'sPark’s nonperforming assets at September 30, 2011,March 31, 2012, December 31, 20102011 and September 30, 2010.
Park National Corporation - Nonperforming Assets | ||||||||||||
(in thousands) | September 30, 2011 | December 31, 2010 | September 30, 2010 | |||||||||
Nonaccrual loans | $ | 214,366 | $ | 289,268 | $ | 237,194 | ||||||
Renegotiated loans on accrual status | 15,448 | - | - | |||||||||
Loans past due 90 days or more | 2,162 | 3,590 | 10,700 | |||||||||
Total nonperforming loans | $ | 231,976 | $ | 292,858 | $ | 247,894 | ||||||
Other Real Estate Owned – Park National Bank | 11,815 | 8,385 | 9,658 | |||||||||
Other Real Estate Owned – SE Property Holdings | 34,327 | - | - | |||||||||
Other Real Estate Owned – Vision Bank | 769 | 33,324 | 43,179 | |||||||||
Total nonperforming assets | $ | 278,887 | $ | 334,567 | $ | 300,731 | ||||||
Percentage of nonperforming loans to total loans | 4.96 | % | 6.19 | % | 5.32 | % | ||||||
Percentage of nonperforming assets to total loans | 5.96 | % | 7.07 | % | 6.46 | % | ||||||
Percentage of nonperforming assets to total assets | 3.93 | % | 4.59 | % | 4.24 | % |
Park classifiedNational Corporation - Nonperforming Assets
(in thousands) | March 31, 2012 | December 31, 2011 | March 31, 2011 | |||||||||
Nonaccrual loans | $ | 183,227 | $ | 195,106 | $ | 278,819 | ||||||
Renegotiated loans on accrual status | 34,436 | 28,607 | 260 | |||||||||
Loans past due 90 days or more | 2,281 | 3,489 | 2,228 | |||||||||
Total nonperforming loans | $ | 219,944 | $ | 227,202 | $ | 281,307 | ||||||
Other real estate owned – PNB | 13,387 | 13,240 | 9,788 | |||||||||
Other real estate owned – SE LLC | 28,578 | 29,032 | 13,004 | |||||||||
Other real estate owned – Vision | - | - | 22,476 | |||||||||
Total nonperforming assets | $ | 261,909 | $ | 269,474 | $ | 326,575 | ||||||
Percentage of nonaccrual loans to total loans | 4.24 | % | 4.52 | % | 5.87 | % | ||||||
Percentage of nonperforming loans to total loans | 5.09 | % | 5.26 | % | 5.92 | % | ||||||
Percentage of nonperforming assets to total loans | 6.06 | % | 6.24 | % | 6.87 | % | ||||||
Percentage of nonperforming assets to total assets | 3.86 | % | 3.86 | % | 4.46 | % |
Park management reviews all troubled debt restructurings (TDRs) quarterly and may classify a TDR as nonaccrual loans. With the adoption of ASU 2011-02, management determined it was appropriate to return certain TDRs to accrual status. Specifically,accruing if the restructured noteborrower has been current for a period of at least six months with respect to loan payments and management expects that the borrower will remain current throughoutbe able to continue to make payments in accordance with the renegotiated
Vision Bank - Nonperforming Assets | ||||||||||||
(in thousands) | September 30, 2011 | December 31, 2010 | September 30, 2010 | |||||||||
Nonaccrual loans | $ | 106,000 | $ | 171,453 | $ | 132,806 | ||||||
Renegotiated loans on accrual status | 1,743 | - | - | |||||||||
Loans past due 90 days or more | - | 364 | 5,962 | |||||||||
Total nonperforming loans | $ | 107,743 | $ | 171,817 | $ | 138,768 | ||||||
Other Real Estate Owned | 769 | 33,324 | 43,179 | |||||||||
Total nonperforming assets | $ | 108,512 | $ | 205,141 | $ | 181,947 | ||||||
Percentage of nonperforming loans to total loans | 19.61 | % | 26.82 | % | 21.27 | % | ||||||
Percentage of nonperforming assets to total loans | 19.75 | % | 32.02 | % | 27.89 | % | ||||||
Percentage of nonperforming assets to total assets | 15.09 | % | 25.90 | % | 21.71 | % |
Nonperforming assets for Park, excluding PNB and Guardian and for SE LLC/Vision Bank, at September 30, 2011,as of March 31, 2012, December 31, 20102011 and September 30, 2010, are includedMarch 31, 2011 were as reported in the following table:
Park, excluding Vision Bank - Nonperforming Assets | ||||||||||||
(in thousands) | September 30, 2011 | December 31, 2010 | September 30, 2010 | |||||||||
Nonaccrual loans | $ | 108,366 | $ | 117,815 | $ | 104,388 | ||||||
Renegotiated loans | 13,705 | - | - | |||||||||
Loans past due 90 days or more | 2,162 | 3,226 | 4,738 | |||||||||
Total nonperforming loans | $ | 124,233 | $ | 121,041 | $ | 109,126 | ||||||
Other Real Estate Owned – Park National Bank | 11,815 | 8,385 | 9,658 | |||||||||
Other Real Estate Owned – SE Property Holdings | 34,327 | - | - | |||||||||
Total nonperforming assets | $ | 170,375 | $ | 129,426 | $ | 118,784 | ||||||
Percentage of nonperforming loans to total loans | 3.01 | % | 2.96 | % | 2.73 | % | ||||||
Percentage of nonperforming assets to total loans | 4.12 | % | 3.16 | % | 2.97 | % | ||||||
Percentage of nonperforming assets to total assets | 2.67 | % | 1.99 | % | 1.90 | % |
PNB and placed on nonaccrual status.
(in thousands) | March 31, 2012 | December 31, 2011 | March 31, 2011 | |||||||||
Nonaccrual loans | $ | 102,886 | $ | 96,113 | $ | 115,476 | ||||||
Renegotiated loans on accrual status | 32,451 | 26,342 | 260 | |||||||||
Loans past due 90 days or more | 2,281 | 3,367 | 2,228 | |||||||||
Total nonperforming loans | $ | 137,618 | $ | 125,822 | $ | 117,964 | ||||||
Other real estate owned – Park National Bank | 13,387 | 13,240 | 9,788 | |||||||||
Total nonperforming assets | $ | 151,005 | $ | 139,062 | $ | 127,752 | ||||||
Percentage of nonaccrual loans to total loans | 2.43 | % | 2.29 | % | 2.78 | % | ||||||
Percentage of nonperforming loans to total loans | 3.26 | % | 3.00 | % | 2.84 | % | ||||||
Percentage of nonperforming assets to total loans | 3.57 | % | 3.32 | % | 3.08 | % | ||||||
Percentage of nonperforming assets to total assets | 2.29 | % | 2.21 | % | 1.93 | % |
SE LLC/Vision Bank’s CL&D loan portfolio over the past four years, management continues to believe it is necessary to segregate this portion of the portfolio for both impaired credits, as well as those accruing CL&D loans at September 30, 2011. Cumulative charge-offs within Vision Bank’s impaired CL&D loan portfolio at September 30, 2011 was $51.6 million. Additionally, at September 30, 2011, management established a specific reserve of $12.1 million related to those CL&D loans at Vision Bank that were deemed to be impaired. The aggregate of cumulative prior charge-offs on impaired Vision Bank CL&D loans, along with the specific reserves at September 30, 2011, totaled $63.8 million. The following table summarizes the CL&D loan portfolio at Vision Bank:
Vision Bank CL&D Loan Portfolio | ||||||||||||||||
(in thousands) - end of each respective period | September 30, 2011 (Restated) | Dec. 31, 2010 | Dec. 31, 2009 | Dec. 31, 2008 | ||||||||||||
CL&D loans | $ | 102,271 | $ | 171,334 | $ | 218,263 | $ | 251,443 | ||||||||
Performing CL&D loans | 60,240 | 84,843 | 132,380 | 191,712 | ||||||||||||
Impaired CL&D loans | $ | 42,031 | $ | 86,491 | $ | 85,883 | $ | 59,731 | ||||||||
Specific reserve on impaired CL&D loans | $ | 15,133 | $ | 39,887 | $ | 21,802 | $ | 3,134 | ||||||||
Cumulative charge-offs on impaired CL&D loans | 51,615 | 28,652 | 24,931 | 18,839 | ||||||||||||
Specific reserves plus cumulative charge-offs | $ | 66,748 | $ | 68,539 | $ | 46,733 | $ | 21,973 | ||||||||
Specific reserves plus cumulative charge-offs as a percentage of impaired CL&D loans plus cumulative charge-offs | 71.3 | % | 59.5 | % | 42.2 | % | 28.0 | % |
(in thousands) | March 31, 2012 | December 31, 2011 | March 31, 2011 | |||||||||
Nonaccrual loans | $ | 80,341 | $ | 98,993 | $ | 163,343 | ||||||
Renegotiated loans on accrual status | 1,985 | 2,265 | - | |||||||||
Loans past due 90 days or more | - | 122 | - | |||||||||
Total nonperforming loans | $ | 82,326 | $ | 101,380 | $ | 163,343 | ||||||
Other real estate owned – SE LLC | 28,578 | 29,032 | - | |||||||||
Other real estate owned – Vision | - | - | 22,476 | |||||||||
Total nonperforming assets | $ | 110,904 | $ | 130,412 | $ | 185,819 | ||||||
Percentage of nonaccrual loans to total loans | N.M. | N.M. | 26.06 | % | ||||||||
Percentage of nonperforming loans to total loans | N.M. | N.M. | 26.06 | % | ||||||||
Percentage of nonperforming assets to total loans | N.M. | N.M. | 29.65 | % | ||||||||
Percentage of nonperforming assets to total assets | N.M. | N.M. | 23.62 | % |
When determining the quarterly loan loss provision, Park reviews the grades of commercial loans. These loans are graded from 1 to 8. A grade of 1 indicates little or no credit risk and a grade of 8 is considered a loss. Commercial loans 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. 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. Generally, commercial loans that are graded a 6 are considered for partial charge-off. Commercial loans that are graded a 7 (doubtful) are shown as nonperforming and Park generally charges these loans down to their fair value by taking a partial charge-off or recording a specific reserve. Any commercial loan graded an 8 (loss) is completely charged-off.
As of March 31, 2012, Park had taken partial charge-offs of approximately $108.3 million related to the $179.3 million of commercial loans considered to be impaired, compared to charge-offs of approximately $103.8 million related to the $187.1 million of impaired commercial loans at December 31, 2011. The table below provides additional information related to the Park impaired commercial loans at March 31, 2012, including those impaired commercial loans at PNB and those impaired Vision commercial loans retained at SE LLC.
Park National Corporation - Impaired Commercial Loans at March 31, 2012
(In thousands) | Unsold Principal balance (UPB) | Prior charge- offs | Total impaired loans | Specific reserve | Carrying balance | Carrying balance as a % of UPB | ||||||||||||||||||
PNB | $ | 140,338 | $ | 36,157 | $ | 104,181 | $ | 9,505 | $ | 94,676 | 67.46 | % | ||||||||||||
SE LLC - CL&D loans | 67,545 | 48,112 | 19,433 | - | 19,433 | 28.77 | % | |||||||||||||||||
SE LLC - Other loans | 79,740 | 24,061 | 55,679 | - | 55,679 | 69.83 | % | |||||||||||||||||
PRK totals | $ | 287,623 | $ | 108,330 | $ | 179,293 | $ | 9,505 | $ | 169,788 | 59.03 | % |
A significant portion of Park’s allowance for loan losses is allocated to commercial loans classified as “special mention” or “substandard.” “Special mention” loans are loans that have potential weaknesses that may result in loss exposure to Park. “Substandard” loans are those that exhibit a well defined weakness, jeopardizing repayment of the loan, resulting in a higher probability that Park will suffer a loss on the loan unless the weakness is corrected. As previously discussed, management believes it is appropriate to segregatePark’s annualized 36-month loss experience for the Vision Bank CL&D loans from other commercial loans that are still accruing. The Vision CL&D loans that were still accruing at September 30, 2011 totaled $60.2 million compared to $84.5 million atperiod ended December 31, 2010. Park’s loss experience,2011, defined as charge-offs plus changes in specific reserves, on CL&D loans forwithin the 48 months ended December 31, 2010 was an annual rate of 10.03%. Management has allocated an allowance for loan losses to the $60.2 million of accruing CL&D loans based on one year of historical losses to cover probable incurred losses, for a total reserve of $6.0 million or 10.03%. Further, this allocation of 10.03% to the $60.2 million of CL&D loans was made regardless of the current loan grade, as this portion of thecommercial loan portfolio has experienced significant declines in collateral values, and thus if management determines that borrowers are unable to pay in accordance with the contractual terms of the loan agreement, significant specific reserves have typically been necessary.
The overall reserve of 1.47%1.64% for other accruing commercial loans breaks down as follows: pass-rated commercial loans are reserved at 1.04%1.35%; special mention commercial loans are reserved at 3.97%4.66%; and substandard commercial loans are reserved at 13.80%21.77%.
§ | Loss Emergence Period Factor:Annually during the fourth quarter, management calculates the loss emergence period for each commercial loan segment. This loss emergence period is calculated based upon the average period of time it takes a credit to move from pass-rated to non - accrual. If the loss emergence period for any commercial loan segment is greater than one year, management applies additional general reserves to all performing loans within that segment of the commercial loan portfolio. |
§ | Loss Migration Factor:Park’s commercial loans are individually risk graded. If loan downgrades occur, the probability of default increases, and accordingly, management allocates a higher percentage reserve to those accruing commercial loans graded special mention and substandard. Annually, management calculates a loss migration factor for each commercial loan segment for special mention and substandard credits based on a review of losses over the past three year period, considering how each individual credit was rated at the beginning of the three year period. |
§ | Environmental Loss Factor:Management has identified certain macroeconomic factors that trend in accordance with losses in Park’s commercial loan portfolio. These macroeconomic factors are reviewed quarterly and adjustments to the environmental loss factor impacting each segment in the performing commercial loan portfolio correlates to changes in the macroeconomic environment. |
Generally, consumer loans are not individually graded. Consumer loans include: (1) mortgage and installment loans included in the construction real estate segment of the loan portfolio; (2) mortgage, home equity lines of credit (HELOC), and installment loans included in the residential real estate segment of the loan portfolio; and (3) all loans included in the consumer segment of the loan portfolio. The amount of loan loss reserve assigned to these loans is based on historical loss experience over the past 36 months ended Decembermonths. Management generally considers a one-year coverage period (the “Historical Loss Factor”) appropriate because the probable loss on any given loan in the consumer loan pool should ordinarily become apparent in that time frame. However, management may incorporate adjustments to the Historical Loss Factor as circumstances warrant additional reserves (e.g., increased loan delinquencies, improving or deteriorating economic conditions, changes in lending management and underwriting standards, etc.). At March 31, 2010, judgmentally increased to cover2012, the coverage period within the consumer portfolio was approximately 1.5 years of probable incurred losses.
The judgmental increases discussed above incorporate management’s evaluation of the impact of environmental qualitative factors which pose additional risks and assignassignment of a component of the allowance for loan lossesALLL in consideration of these factors. Such environmental factors include: national and local economic trends and conditions; experience, ability and depth of lending management and staff; effects of any changes in lending policies and procedures; and levels of, and trends in, consumer bankruptcies, delinquencies, impaired loans and charge-offs and recoveries. The determination of this component of the allowance for loan lossesALLL requires considerable management judgment. As always, management is workingManagement continues to work to address weaknesses in those loans that may result in future loss. Actual loss experience may be more or less than the amount allocated.
On page 41 of Park’s 2011 Annual Report, management projected that the provision for loan losses would be within the range from $20 million to $27 million for 2012. While management expects that the provision for loan losses will be lower in each of the next three quarters compared to the first quarter of 2012, the projected range for the twelve months ended December 31, 2012 has been increased. Management now expects the provision for loan losses will be within the range of $23 million to $30 million for 2012.
Total Other Income
Total other income exclusive of securities gains increased by $0.5$24.6 million or 2.9% to $18.0$39.6 million for the quarter ended September 30, 2011,March 31, 2012, compared to $17.5$15.0 million for the thirdfirst quarter of 2010. For2011. Excluding the nine months ended September 30, 2011,$22.2 million gain on sale of Vision in the first quarter of 2012, total other income decreasedincreased by $2.7$2.4 million or 5.3% to $48.2 million compared to $50.9 million for the same period in 2010.
The following table is a summary of the changes in the components of total other income.
(in thousands) | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
2011 Restated | 2010 | Change Restated | 2011 Restated | 2010 | Change Restated | |||||||||||||||||||
Income from fiduciary activities | $ | 3,615 | $ | 3,314 | $ | 301 | $ | 11,266 | $ | 10,264 | $ | 1,002 | ||||||||||||
Service charges on deposits | 4,894 | 5,026 | (132 | ) | 13,664 | 14,864 | (1,200 | ) | ||||||||||||||||
Other service income | 3,087 | 3,909 | (822 | ) | 8,122 | 10,367 | (2,245 | ) | ||||||||||||||||
Checkcard fee income | 3,154 | 2,900 | 254 | 9,381 | 8,109 | 1,272 | ||||||||||||||||||
Bank owned life insurance income | 1,229 | 1,313 | (84 | ) | 3,686 | 3,783 | (97 | ) | ||||||||||||||||
ATM fees | 726 | 699 | 27 | 2,062 | 2,296 | (234 | ) | |||||||||||||||||
OREO devaluations | (588 | ) | (1,555 | ) | 967 | (6,478 | ) | (4,619 | ) | (1,859 | ) | |||||||||||||
Other | 1,910 | 1,924 | (14 | ) | 6,492 | 5,823 | 669 | |||||||||||||||||
Total other income | $ | 18,027 | $ | 17,530 | $ | 497 | $ | 48,195 | $ | 50,887 | $ | (2,692 | ) |
(in thousands) | Three months ended March 31, | |||||||||||
2012 | 2011 | Change | ||||||||||
Income from fiduciary activities | $ | 3,828 | $ | 3,722 | $ | 106 | ||||||
Service charges on deposits | 4,071 | 4,245 | (174 | ) | ||||||||
Other service income | 2,734 | 2,301 | 433 | |||||||||
Checkcard fee income | 3,172 | 2,976 | 196 | |||||||||
Bank owned life insurance income | 1,202 | 1,229 | (27 | ) | ||||||||
ATM fees | 608 | 654 | (46 | ) | ||||||||
OREO devaluations | (1,359 | ) | (2,535 | ) | 1,176 | |||||||
Gain on sale of the Vision business | 22,167 | - | 22,167 | |||||||||
Other | 3,197 | 2,438 | 759 | |||||||||
Total other income | $ | 39,620 | $ | 15,030 | $ | 24,590 |
Income from fiduciary activities, which represents revenue earned from Park’s trust activities, increased by $301,000,$106,000, or 9.1%2.8%, to $3.6$3.8 million for the three months ended September 30, 2011,March 31, 2012, compared to $3.3$3.7 million for the same period in 2010. For the nine months ended September 30, 2011, income from fiduciary activities increased by $1 million or 9.7% to $11.3 million compared to $10.3 million in 2010.2011. Fiduciary fees are generally charged based on the market value of customer accounts. The average market value for assets under management for the ninethree months ended September 30, 2011March 31, 2012 was $3.394$3,554 million, an increase of approximately 10.6%3.2% compared to the average for the ninethree months ended September 30, 2010March 31, 2011 of $3.069$3,445 million.
Service charges on deposits decreased by $132,000,$174,000, or 2.6%4.1%, to $4.9$4.1 million for the three-month period ended September 30, 2011,March 31, 2012, compared to $5.0$4.2 million for the same period in 2010. Through the first nine months of 2011, service charges declined $1.2 million, or 8.1%, to $13.7 million, compared to $14.9 million in 2010.2011. This decrease was primarily attributable to a modest decline in non-sufficient funds (“NSF”) and overdraft charges during the first ninethree months of 20112012 compared to the same period in 2010.
Fee income earned from origination and sale into the secondary market of long-term fixed-rate mortgage loans is included within other non-yield related fees in the subcategory “Other service income”. Other service income decreasedincreased by $822,000,$433,000, or 21.0%18.8%, to $3.1$2.7 million for the three months ended September 30, 2011,March 31, 2012, compared to $3.9$2.3 million for the same period in 2010. For the nine months ended September 30, 2011, other service income decreased $2.2 million, or 21.7%, to $8.1 million, compared to $10.4 million in 2010.2011. This declineincrease was due to a declinean increase in mortgage originations during 2011 and Park’s decisionthe first three months of 2012 compared to maintain a majority of the 15-year, fixed-rate mortgages on its balance sheet.
Checkcard fee income, which is generated from debit card transactions, increased $254,000,$196,000, or 8.8%6.6%, to $3.2 million for the three months ended September 30, 2011,March 31, 2012, compared to $2.9$3.0 million for the same period in 2010. For the nine months ended September 30, 2011, checkcard fee income increased $1.3 million, or 15.7%, to $9.4 million compared to $8.1 million in 2010.2011. This increase iswas attributable to continued increases in the volume of debit card transactions. For the first ninethree months of 2011,2012, the number of Visa debit card transactions have increased by 12.2%7.4% compared to the same period in 2010.
OREO devaluations decreased by $967,000$1.2 million to $588,000$1.4 million for the three months ended September 30, 2011,March 31, 2012, compared to $1.6$2.5 million for the same period in 2010. For2011. Approximately $1.1 million of the nine months ended September 30, 2011, OREO devaluations increased $1.9were at SE LLC and $0.3 million to $6.5 million compared to $4.6 million in 2010. The increase was largely due to devaluations of OREOwere at Vision Bank throughPNB during the first nine monthsquarter of 2011.
Management provided guidance in Park’s 2011 Annual Report (page 40) that total other income between Park’s Ohio-based operations and Vision Bank.
Three months ended September 30, 2011 | Nine months ended September 30, 2011 | |||||||||||||||||||||||
(In thousands) | Ohio-based operations | Vision Bank (Restated) | Total (Restated) | Ohio-based operations | Vision Bank (Restated) | Total (Restated) | ||||||||||||||||||
Income from fiduciary activities | $ | 302 | $ | (1 | ) | $ | 301 | $ | 997 | $ | 5 | $ | 1,002 | |||||||||||
Service charges on deposits | (118 | ) | (14 | ) | (132 | ) | (953 | ) | (247 | ) | (1,200 | ) | ||||||||||||
Non-yield loan fee income | (851 | ) | 29 | (822 | ) | (2,335 | ) | 90 | (2,245 | ) | ||||||||||||||
Checkcard fee income | 212 | 42 | 254 | 816 | 456 | 1,272 | ||||||||||||||||||
Bank owned life insurance income | (84 | ) | - | (84 | ) | (92 | ) | (5 | ) | (97 | ) | |||||||||||||
ATM fees | 31 | (4 | ) | 27 | 48 | (282 | ) | (234 | ) | |||||||||||||||
OREO devaluations | (1,285 | ) | 2,252 | 967 | (2,967 | ) | 1,108 | (1,859 | ) | |||||||||||||||
Other | 137 | (151 | ) | (14 | ) | 525 | 144 | 669 | ||||||||||||||||
Total | $ | (1,656 | ) | $ | 2,153 | $ | 497 | $ | (3,961 | ) | $ | 1,269 | $ | (2,692 | ) |
Gain on Sale of Securities
For the salefirst quarter of 2012, Park did not sell any investment securities were $3.5 million forsecurities. During the thirdfirst quarter of 2011, and $25.5Park sold approximately $105 million for the first nine months of 2011. By comparison, there were no gains or losses from the sale of investment securities in the third quarter of 2010 and gains were $11.8 million for the first three quarters of 2010.
(in thousands) | Amortized Cost | Book Yield | Sales Proceeds | Yield to buyer | Gain | |||||||||||||||
Third Quarter | $ | 212,799 | 2.60 | % | $ | 216,264 | 2.03 | % | $ | 3,465 | ||||||||||
Second Quarter | 191,037 | 5.25 | % | 206,399 | 1.92 | % | 15,362 | |||||||||||||
First Quarter | 105,444 | 5.02 | % | 112,079 | 2.10 | % | 6,635 | |||||||||||||
Total | $ | 509,280 | 4.10 | % | $ | 534,742 | 2.00 | % | $ | 25,462 |
Total Other Expense
The following table is a summary of the changes in the components of total other expense.
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||
(in thousands) | 2011 | 2010 | Change | 2011 | 2010 | Change | ||||||||||||||||||
Salaries and employee benefits | $ | 25,799 | $ | 24,500 | $ | 1,299 | $ | 76,116 | $ | 73,684 | $ | 2,432 | ||||||||||||
Occupancy expense | 2,665 | 2,840 | (175 | ) | 8,429 | 8,750 | (321 | ) | ||||||||||||||||
Furniture and equipment expense | 2,688 | 2,624 | 64 | 8,130 | 7,820 | 310 | ||||||||||||||||||
Data processing fees | 1,184 | 1,403 | (219 | ) | 3,572 | 4,390 | (818 | ) | ||||||||||||||||
Professional fees and services | 5,005 | 4,477 | 528 | 15,199 | 14,632 | 567 | ||||||||||||||||||
Amortization of intangibles | 669 | 822 | (153 | ) | 2,007 | 2,600 | (593 | ) | ||||||||||||||||
Marketing | 764 | 840 | (76 | ) | 2,115 | 2,688 | (573 | ) | ||||||||||||||||
Insurance | 681 | 2,316 | (1,635 | ) | 5,295 | 6,847 | (1,552 | ) | ||||||||||||||||
Communication | 1,475 | 1,696 | (221 | ) | 4,516 | 5,112 | (596 | ) | ||||||||||||||||
State taxes | 469 | 865 | (396 | ) | 1,414 | 2,548 | (1,134 | ) | ||||||||||||||||
Other | 4,200 | 3,313 | 887 | 12,159 | 11,516 | 643 | ||||||||||||||||||
Total other expense | $ | 45,599 | $ | 45,696 | $ | (97 | ) | $ | 138,952 | $ | 140,587 | $ | (1,635 | ) |
Three months ended March 31, | ||||||||||||
(in thousands) | 2012 | 2011 | Change | |||||||||
Salaries and employee benefits | $ | 24,823 | $ | 25,064 | $ | (241 | ) | |||||
Occupancy expense | 2,670 | 3,000 | (330 | ) | ||||||||
Furniture and equipment expense | 2,621 | 2,657 | (36 | ) | ||||||||
Data processing fees | 1,200 | 1,253 | (53 | ) | ||||||||
Professional fees and services | 5,581 | 4,874 | 707 | |||||||||
Amortization of intangibles | 1,754 | 669 | 1,085 | |||||||||
Marketing | 843 | 623 | 220 | |||||||||
Insurance | 1,490 | 2,269 | (779 | ) | ||||||||
Communication | 1,537 | 1,556 | (19 | ) | ||||||||
Other | 5,289 | 4,381 | 908 | |||||||||
Total other expense | $ | 47,808 | $ | 46,346 | $ | 1,462 |
Salaries and employee benefits increaseddecreased by $1.3 million,$241,000, or 5.3%1.0% to $25.8$24.8 million for the three months ended September 30, 2011March 31, 2012 compared to $24.5$25.1 million for the same period in 2010. For2011.Salaries and benefits for SE LLC (and Vision for first quarter 2011) were $2.0 million for the ninefirst three months ended September 30, 2011, salaries and employee benefits increased by $2.4 million, or 3.3% to $76.1 millionof 2012 compared to $73.7$3.1 million for the same period in 2010. The table below breaks out2011. Management anticipates that salaries and employee benefits for SE LLC will continue to decline in the threesecond quarter of 2012 as a result of the sale of the Vision business and nine month periodsthe completion of system conversions (both for Park and Home).
Occupancy expense declined by $330,000, or 11.0% to $2.7 million for the quarter ended September 30, 2011March 31, 2012 compared to the same periods in 2010.
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||
(in thousands) | 2011 | 2010 | Change | 2011 | 2010 | Change | ||||||||||||||||||
Salaries | $ | 20,503 | $ | 19,747 | $ | 756 | $ | 60,519 | $ | 59,407 | $ | 1,112 | ||||||||||||
Employee benefits | 5,296 | 4,753 | 543 | 15,597 | 14,277 | 1,320 | ||||||||||||||||||
Total salaries and employee benefits | $ | 25,799 | $ | 24,500 | $ | 1,299 | $ | 76,116 | $ | 73,684 | $ | 2,432 |
Professional fees and services increased by $707,000, or 14.5% to $5.6 million for the first three months of 2012 compared to $4.9 million for the first quarter of 2011. Approximately $400,000 of the increase was at PNB and consisted of higher legal expenses and higher title appraisal expenses resulting from an increase in mortgage loan originations during the quarter. The remaining increase was largely related to increases in 2011legal fees associated with our continued pursuit of borrowers and guarantors at SE LLC.
Amortization of intangibles increased by $1.1 million, or 162% to $1.8 million for the first quarter of 2012 compared to 2010 are primarily related$669,000 for the same period in 2011. This increase was due to higher medical claims experienced during 2011.
Insurance expense declined by $1.6$779,000 million or 70.5%34.3% to $681,000$1.5 million for the three months ended September 30, 2011March 31, 2012 compared to $2.3 million for the same period in 2010. For the nine months ended September 30, 2011 insurance declined by $1.6 million or 22.7% to $5.3 million compared to $6.8 million for the same period in 2010.2011. During the third quarter of 2011, Park began recognizing insurance expense for the premiums to be paid to the FDIC based on the new assessment methodology. This new methodology is based on a calculation using total assets less tangible equity. The new methodology will result in a decline in insurance expense going forward for the rest of 2012.
Management provided guidance in Park’s 2011 and 2012.
The table below provides information related to other expense at Park, Vision and Park less Vision Bank.
Three months ended September 30, 2011 | Nine months ended September 30, 2011 | |||||||||||||||||||||||
(in thousands) | Ohio-based operations | Vision Bank | Total | Ohio-based operations | Vision Bank | Total | ||||||||||||||||||
Salaries and employee benefits | $ | 1,624 | $ | (325 | ) | $ | 1,299 | $ | 2,835 | $ | (403 | ) | $ | 2,432 | ||||||||||
Occupancy expense | (186 | ) | 11 | (175 | ) | (339 | ) | 18 | (321 | ) | ||||||||||||||
Furniture and equipment expense | 90 | (26 | ) | 64 | 428 | (118 | ) | 310 | ||||||||||||||||
Data processing fees | (100 | ) | (119 | ) | (219 | ) | (420 | ) | (398 | ) | (818 | ) | ||||||||||||
Professional fees and services | (123 | ) | 651 | 528 | 124 | 443 | 567 | |||||||||||||||||
Amortization of intangibles | (153 | ) | - | (153 | ) | (593 | ) | - | (593 | ) | ||||||||||||||
Marketing | (79 | ) | 3 | (76 | ) | (534 | ) | (39 | ) | (573 | ) | |||||||||||||
Insurance | (1,394 | ) | (241 | ) | (1,635 | ) | (1,122 | ) | (430 | ) | (1,552 | ) | ||||||||||||
Communication | (198 | ) | (23 | ) | (221 | ) | (587 | ) | (9 | ) | (596 | ) | ||||||||||||
State taxes | (377 | ) | (19 | ) | (396 | ) | (1,130 | ) | (4 | ) | (1,134 | ) | ||||||||||||
Other | 1,258 | (371 | ) | 887 | 654 | (11 | ) | 643 | ||||||||||||||||
Total other expense | $ | 362 | $ | (459 | ) | $ | (97 | ) | $ | (684 | ) | $ | (951 | ) | $ | (1,635 | ) |
Other Expense - Quarterly 2011 | ||||||||||||
Park | Vision | Park, less Vision | ||||||||||
Q1 2011 | $ | 46,346 | $ | 7,425 | $ | 38,921 | ||||||
Q2 2011 | 47,007 | 8,174 | 38,833 | |||||||||
Q3 2011 | 45,599 | 7,267 | 38,332 | |||||||||
Q4 2011 | 49,365 | 8,513 | 40,852 | |||||||||
Total 2011 | $ | 188,317 | $ | 31,379 | $ | 156,938 | ||||||
Average quarterly expense | $ | 47,079 | $ | 7,845 | $ | 39,234 |
As shown in the table above, absent Vision, other expense would have been approximately $39.2 million per quarter in 2011. While SE LLC will continue to have other expense as Park management works through the retained loans and OREO, other expense at SE LLC is expected to be significantly lower than the average quarterly Vision expense recognized in 2011. Management currently expects total other expense will be approximately $41 to $42 million quarterly throughout the remainder of 2012.
Income Tax
Federal income tax expense was $6.7 million and no state income tax benefit was recognized, compared to federal income tax expense of $7.0 million and no state income tax benefit for the third quarter of 2010. For the nine months ended September 30, 2011, federal income tax was $27.1 million and no state income tax benefit was recognized, compared to federal income tax of $22.8 million and a state income tax benefit of $1.2taxes were $13.1 million for the first nine monthsquarter of 2010.
Park and its Ohio-based subsidiariesaffiliates do not pay state income taxtaxes to the state of Ohio, but pay a franchise tax based on year-endyear end equity. The franchise tax expense is included in “state taxes” as part of total other expense on Park’s Consolidated Condensed Statements of Income.
Management provided guidance in the third quarter of 2011 compared to 26.5% forAnnual Report (page 40) that the same period in 2010. For the first nine months of 2011,effective federal income tax expense as a percentage of income before taxes was 27.5%rate for 2012 would be approximately 26% to 28%, compared to 27.5% for the same period in 2010. The federal effective income tax ratewhich is lower than the statutory rate of 35% primarily due to tax-exempt interest income from state and municipal investments and loans, low income housing tax credits and income from bank owned life insurance.
Comparison of Financial Condition
At September 30, 2011March 31, 2012 and December 31, 2010
Changes in Financial Condition and Liquidity
Total assets decreased by $187$195 million or 2.6%2.8% to $7,095$6,777 million at September 30, 2011,March 31, 2012, compared to $7,282$6,972 million at December 31, 2010.2011. This decrease in total assets was due to declines in investment securities and loan balances, offset by increases in cash and cash equivalents and other miscellaneous assets.
Total investment securities decreasedincreased by $331$149 million or 16.2%8.7% to $1,709$1,857 million at September 30, 2011,March 31, 2012, compared to $2,040$1,708 million at December 31, 2010.2011. Loan balances decreasedincreased by $52$7 million to $4,681$4,324 million at September 30, 2011March 31, 2012 compared to $4,733$4,317 million at December 31, 2010.
Total liabilities decreased by $213$210 million or 3.3%3.4% during the first ninethree months of 20112012 to $6,340$6,020 million at September 30, 2011March 31, 2012 from $6,553$6,230 million at December 31, 2010.2011. The decrease in total liabilities was primarily due to a decrease in total borrowings.
Total deposits decreasedincreased by $6$352 million or 0.1%7.9% during the first ninethree months of 20112012 to $5,089$4,817 million at September 30, 2011March 31, 2012 from $5,095$4,465 million at December 31, 2010. 2011. The mix of deposit balances has changed significantly duringincrease in deposits in the first nine monthsquarter of 2011. Refer2012 was largely related to the following table for a breakdownan increase in public fund deposits. This is consistent with increases in prior years. At March 31, 2011, total deposits were $5,315 million, which included deposits at Vision of the change in total deposits:
(in thousands) | September 30, 2011 | December 31, 2010 | Change | |||||||||
Noninterest bearing deposits | $ | 1,000,969 | $ | 937,719 | $ | 63,250 | ||||||
NOW and Money Market | 1,432,827 | 1,283,158 | 149,669 | |||||||||
Savings | 949,547 | 900,639 | 48,908 | |||||||||
Brokered Deposits | 0 | 110,065 | (110,065 | ) | ||||||||
Certificates of Deposit | 1,705,844 | 1,863,839 | (157,995 | ) | ||||||||
Total Deposits | $ | 5,089,187 | $ | 5,095,420 | $ | (6,233 | ) |
Short-term borrowings decreased by $421$27 million or 63.4%10.2% to $243$237 million at September 30, 2011March 31, 2012 from $664$264 million at December 31, 2010. Conversely, long-term2011. Long-term borrowings increaseddecreased slightly by $187$1 million to $824$897 million at September 30, 2011March 31, 2012 compared to $637$898 million at December 31, 2010.
Other liabilities increased by $28$2.7 million or 37.3%4.4% to $103$64.3 million at September 30, 2011March 31, 2012 from $75$61.6 million at December 31, 2010. This increase in other liabilities was primarily due to a payable at September 30, 2011 for the purchase of $21.2 million of investment securities that settled in the month of October.
Total stockholders’ equity increased by $25.4$14 million or 3.5%1.9% to $755.1$756.4 million at September 30, 2011,March 31, 2012, from $729.7$742.4 million at December 31, 2010.2011. Retained earnings increased by $23.8$15.5 million during the period as a result of net income of $71.5$31.5 million, offset by common stock dividends of $43.4$14.5 million and accretion and dividends on the preferred stock of $4.4$1.5 million. Preferred stock increased by $642,000$226,000 during the first ninethree months of 20112012 as a result of the accretion of the discount on preferred stock. Accumulated other comprehensive loss improvedincreased by $992,000$1.7 million during the first ninethree months of 20112012 to a loss of $876,000$10.5 million at September 30, 2011.March 31, 2012. The increase of $1.7 million in other comprehensive loss was related to an unrealized net holding gainsloss in the investment portfolio increased by $644,000,of $2.2 million, net of taxes, as a result of the mark-to-market adjustment at September 30, 2011 and Park also recognizedMarch 31, 2012, which was partially offset by (1) a $348,000 decline$113,000 increase in the unrealized net holding lossgain on the cash flow hedge.
Increases or decreases in the investment securities portfolio, short-term borrowings and long-term debt are greatly dependent upon the growth in loans and deposits. The primary objective of management is to grow loan and deposit totals. To the extent that management is unable to grow loan totals at a desired growth rate, additional investment securities may be acquired. Likewise, both short-term borrowings and long-term debt are utilized to fund the growth in earning assets if the growth in deposits and cash flow from operations are not sufficient to do so.
Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as the operating cash needs of the Corporation, are met. Funds are available from a number of sources, including the securities portfolio, the core deposit base, Federal Home Loan Bank borrowings, and the capability to securitize or package loans for sale. The Corporation’s loan to asset ratio was 65.9%63.81% at September 30, 2011,March 31, 2012, compared to 64.8%61.92% at December 31, 20102011 and 65.7%64.88% at September 30, 2010.March 31, 2011. Cash and cash equivalents were $272.1$161.1 million at September 30, 2011,March 31, 2012, compared to $133.8$157.5 million at December 31, 20102011 and $133.6$134.2 million at September 30, 2010.March 31, 2011. Management believes that the present funding sources provide more than adequate liquidity for the Corporation to meet its cash flow needs.
On a monthly basis, Park’s Treasury Department forecasts the financial statements for the next twelve months. The projected liquidity position for the Corporation is reviewed each month to ensure that adequate liquidity is maintained. Management targets that the Corporation would have a minimum of $800 million of funds available to handle liquidity needs on a daily basis. This $800 million liquidity “war chest” consists of currently available additional borrowing capacity from the Federal Home Loan Bank, federal funds sold and unpledged U.S. Government Agency securities.
Capital Resources
Total stockholders’ equity at September 30, 2011March 31, 2012 was $755$756 million, or 11.2% of total assets, compared to $742 million, or 10.6% of total assets, compared toat December 31, 2011 and $730 million, or 10.0% of total assets, at DecemberMarch 31, 2010 and $757 million, or 10.7% of total assets, at September 30, 2010.2011. Common equity, which is stockholders’ equity excluding the preferred stock, was $657$658 million at September 30, 2011,March 31, 2012, or 9.3%9.7% of total assets, compared to $632$644 million, or 8.7%9.2% of total assets, at December 31, 2010.
Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank holding companies. The net unrealized gain or loss on available-for-sale securities is generally not included in computing regulatory capital. The minimum leverage capital ratio (defined as stockholders’ equity less intangible assets divided by tangible assets) is 4% and the well capitalized ratio is greater than or equal to 5%. Park’s leverage ratio was 9.67%10.35% at September 30, 2011March 31, 2012 and 9.54%9.81% at December 31, 2010.2011. The minimum Tier 1 risk-based capital ratio (defined as leverage capital divided by risk-adjusted assets) is 4% and the well capitalized ratio is greater than or equal to 6%. Park’s Tier 1 risk-based capital ratio was 13.96%15.35% at September 30, 2011March 31, 2012 and 13.24%14.15% at December 31, 2010.2011. The minimum total risk-based capital ratio (defined as leverage capital plus supplemental capital divided by risk-adjusted assets) is 8% and the well capitalized ratio is greater than or equal to 10%. Park’s total risk-based capital ratio was 16.44%17.92% at September 30, 2011March 31, 2012 and 15.71%16.65% at December 31, 2010.
PNB met the well capitalized ratio guidelines at September 30, 2011.March 31, 2012. The following table indicates the capital ratios for each financial institution subsidiaryPNB and Park at September 30, 2011.
Leverage | Tier 1 Risk Based | Total Risk-Based | ||||||||||
The Park National Bank | 6.67 | % | 9.81 | % | 11.76 | % | ||||||
Vision Bank - Restated | 15..50 | % | 21.02 | % | 22.35 | % | ||||||
Park National Corporation - Restated | 9.67 | % | 13.96 | % | 16.44 | % | ||||||
Minimum capital ratio | 4.00 | % | 4.00 | % | 8.00 | % | ||||||
Well capitalized ratio | 5.00 | % | 6.00 | % | 10.00 | % |
Leverage | Tier 1 Risk Based | Total Risk-Based | ||||||||||
The Park National Bank | 6.53 | % | 9.43 | % | 11.37 | % | ||||||
Park National Corporation | 10.35 | % | 15.35 | % | 17.92 | % | ||||||
Minimum capital ratio | 4.00 | % | 4.00 | % | 8.00 | % | ||||||
Well capitalized ratio | 5.00 | % | 6.00 | % | 10.00 | % |
On April 25, 2012, Park entered into a Letter Agreement with the U.S. Treasury (the “Preferred Shares Repurchase Letter Agreement”) pursuant to which Park purchased from the U.S. Treasury all 100,000 of Park’s Series A Preferred Shares for a purchase price of $100 million plus final prorated accrued and unpaid dividends of $972,000. On May 2, 2012, Park entered into a second Letter Agreement with the U.S. Treasury (the “Warrant Repurchase Letter Agreement”) pursuant to which Park purchased from the U.S. Treasury the Warrant to purchase 227,376 Park common shares (the “Warrant”) which had been issued to the U.S. Treasury on December 23, 2008 in connection with Park’s sale to the U.S. Treasury of the Series A Preferred Shares. Park repurchased the Warrant for a purchase price of $2,842,400, or $12.50 per Park common share. The table below provides Park’s capital ratios as of March 31, 2012, excluding the $100 million related to the Series A Preferred Shares.
Leverage | Tier 1 Risk Based | Total Risk-Based | ||||||||||
Park National Corporation | 8.89 | % | 13.18 | % | 15.75 | % |
Contractual Obligations and Commitments
In the ordinary course of operations, Park enters into certain contractual obligations. Such obligations include the funding of operations through debt issuances as well as leases for premises. See Table 24page 46 of Park’s 2010 Form 10-K/A2011 Annual Report (Table 31) for disclosure concerning contractual obligations and commitments at December 31, 2010.2011. There were no significant changes in contractual obligations and commitments during the first ninethree months of 2011.
Financial Instruments with Off-Balance Sheet Risk
PNB is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of their respectiveits customers. These financial instruments include loan commitments and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements.
The exposure to credit loss (for the subsidiary banks of Park)PNB) in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. Park and each of its subsidiary banksPNB use the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments. Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.
The total amounts of off-balance sheet financial instruments with credit risk were as follows:
(in thousands) | March 31, 2012 | December 31, 2011 | ||||||
Loan commitments | $ | 773,014 | $ | 809,140 | ||||
Standby letters of credit | $ | 24,175 | $ | 18,772 |
60 |
(in thousands) | September 30, 2011 | December 31, 2010 | ||||||
Loan commitments | $ | 837,299 | $ | 716,598 | ||||
Standby letters of credit | $ | 20,238 | $ | 24,462 |
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management reviews interest rate sensitivity on a bi-monthly basis by modeling the consolidated financial statements under various interest rate scenarios. The primary reason for these efforts is to guard Park from adverse impacts of unforeseen changes in interest rates. Management continues to believe that further changes in interest rates will have a small impact on net income, consistent with the disclosure on pages 4344 and 4445 of Park’s 20102011 Annual Report.
On Table 23page 45 (Table 30) of Park’s 2010 Form 10-K/A,2011 Annual Report, management reported that Park’s twelve month cumulative rate sensitivity gap was a positive (assets exceeding liabilities) $647.8$1,376 million or 9.53%21.46% of interest earning assets at December 31, 2010.2011. At September 30, 2011,March 31, 2012, Park’s twelve month cumulative rate sensitivity gap was a positive (assets exceeding liabilities) $1,166$592 million or 17.9%9.5% of interest earning assets.
Management supplements the interest rate sensitivity gap analysis with periodic simulations of balance sheet sensitivity under various interest rate and what-if scenarios to better forecast and manage the net interest margin. Management uses a 50 basis point change in market interest rates per quarter for a total of 200 basis points per year in evaluating the impact of changing interest rates on net interest income and net income over a twelve month horizon.
On page 4445 of Park’s 20102011 Annual Report, management reported that at December 31, 2010, the earnings simulation model projected that net income would increase by 2.4% using a rising interest rate scenario and decrease by 1.4% using a declining interest rate scenario over the next year. At September 30, 2011, the earnings simulation model projected that net income would increase by 0.3%2.14% using a rising interest rate scenario and decrease by 3.52% using a declining interest rate scenario over the next year. At March 31, 2012, the earnings simulation model projected that net income would increase by 2.0% using a rising interest rate scenario and would decrease by 3.25%3.4% in a declining interest rate scenario. At September 30, 2011,March 31, 2012, management continues to believe that gradual changes in interest rates (50 basis points per quarter for a total of 200 basis points per year) will have a small impact on net income.
ITEM 4 – CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of September 30, 2011, the end of the quarterly period covered by this Form 10-Q/A for September 30, 2011, Park carried out an evaluation under the supervision and with
With the participation of Park’s management, including Park’sthe Chairman of the Board and Chief Executive Officer (the principal executive officer) and Park’sthe Chief Financial Officer (the principal financial officer), of Park, Park’s management has evaluated the effectiveness of Park’s disclosure controls and procedures. In designing and evaluating Park’s disclosure controls and procedures Park and its management recognize(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based on that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and Park’s management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon the evaluation, Park’s Chairman of the Board and Chief Executive Officer and Park’s Chief Financial Officer have concluded that Park’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by Park in the reports it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and the such information is accumulated and communicated to Park’s management, including Park’s Chairman of the Board and Chief Executive Officer and Park’s Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
As a result of the events necessitating the restatement described in the Explanatory Note and in Notes 1 and 1A of the Notes to Unaudited Consolidated Condensed Financial Statements set forth in “Item 1 - Financial Statements” of Part I of this Form 10-Q/A for September 30, 2011, however, Park’s management, including Park’s Chairman of the Board and Chief Executive Officer and Park’s Chief Financial Officer, has reevaluated the design and operation of Park’s disclosure controls and procedures and has now concluded that, as of September 30, 2011, Park did not maintain effective controls to ensure that the allowance for loan losses related to certain impaired commercial loans with guarantor support and the expenses related to certain devaluations of other real estate owned (“OREO”) and additional loan loss provisions that are not related to guarantor support were properly calculated.
Specifically, the accounting treatment giving rise to the restatement was the inclusion of estimated future cash flows supporting the allowance for loan losses related to certain impaired commercial loans. For the year ended December 31, 2010, as part of Park’s process to measure impairment on certain impaired commercial loans at Vision Bank, management had relied on expected cash flows from guarantors, as to whom Vision Bank was in litigation. Management has determined that reliance on expected cash flows, which may require protracted litigation to actually be received, is inappropriate given the difficulty in obtaining objective verifiable evidence supporting the conclusion as to the amount and timing of the expected cash flows. U.S. generally accepted accounting principles require that Park’s assumption be “reasonable and supportable” and the facts and circumstances around the existence of protracted litigation make this assumption more difficult to support.
The restatement also reflects certain OREO devaluations and additional loan loss provisions that are not related to guarantor support. These expense items are related to valuation issues identified at December 31, 2010, where Vision Bank management utilized (i) the work of a third-party contractor, which was not a licensed appraiser, when calculating the fair value of collateral for certain impaired loans and the fair value of certain OREO held by Vision Bank, and management did not have sufficient documentation to support the estimates of this third-party contractor, and (ii) internal estimates of collateral value when calculating specific reserves for certain impaired loans when, at times, such internal estimates were outdated. The impact is to reverse provisions for loan losses and OREO devaluations in the restated audited consolidated financial statements for the year ended December 31, 2010.
Because of these control deficiencies, which are considered to be material weaknesses and resulted in the restatement of not only Park’s previously issued audited consolidated financial statements incorporated by reference in Park’s Annual Report on Form 10-K for the year ended December 31, 2010 but also Park’s unaudited condensed consolidated financial statements included in Park’s Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2011, June 30, 2011 and September 30, 2011, Park’s management has restated its assessment for the period ended September 30, 2011 and concluded that Park’s disclosure controls and procedures were not effective as of September 30, 2011.
Park reviews its disclosure controls and procedures, which may include its internal control over financial reporting, on an ongoing basis and may from time to time make changes aimed at enhancing their effectiveness. Park’s management made process improvements throughout 2011 in an effort to address the material weakness related to guarantor support and as of the date of this filing, when calculating impairment under ASC 310, management no longer relies on expected cash flows from guarantors where litigation is required to collect those cash flows. Additionally, Park’s management made process improvements throughout 2011 in an effort to address the material weakness related to the OREO devaluations and loan loss provisions that are not related to guarantor support. These process improvements included:that:
· |
· |
· |
As of the date of the filing of this Form 10-Q/A (Amendment No. 1), management believes that the enhancements to Park’s internal control processes have resolved the material weaknesses that existed as of December 31, 2010.
Park reviews its disclosure controls and procedures, which may include its
There were no changes in Park’s internal control over financial reporting on an ongoing basis and may from time(as defined in Rule 13a – 15(f) under the Exchange Act) that occurred during Park’s fiscal quarter ended March 31, 2012, that have materially affected, or are reasonably likely to time make changes aimed at enhancing their effectiveness. Park’s management made process improvements throughout 2011 in an effort to address the material weakness related to guarantor support and as of the date of this filing, when calculating impairment under ASC 310, management no longer relies on expected cash flows from guarantors where litigation is required to collect those cash flows. Additionally, Park’s management made process improvements throughout 2011 in an effort to address the material weakness related to the OREO devaluations and loan loss provisions that are not related to guarantor support. These process improvements included:
As of the date of the filing of this Form 10-Q/A (Amendment No. 1), management believes that the enhancements tomaterially affect, Park’s internal control processes have resolved the material weaknesses that existed as of December 31, 2010.over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending legal proceedings to which Park or any of its subsidiaries is a party or to which any of their property is subject, except for routine legal proceedings to which Park’s subsidiary banks are partiesbank is party to incidental to their respectiveits banking businesses.business. There are also certain legal proceedings at SE LLC which are routine legal proceedings to which Vision Bank (and SE LLC as the successor to Vision Bank) is party to incidental to its business. Park considers none of those proceedings to be material.
Item 1A. Risk Factors
There are certain risks and uncertainties in our business that could cause our actual results to differ materially from those anticipated. In “ITEM 1A. RISK FACTORS” of Part I of Park’s Annual Report on Form 10-K for the fiscal year ended December 31, 20102011 (the “2010“2011 Form 10-K”), we included a detailed discussion of our risk factors. Certain numbers included within the 2010 Form 10-K were subsequently updated in the 2010 Form 10-K/A - Amendment No. 2 filed on February 28, 2012. The following information updates certain of our risk factors and should be read in conjunction with the risk factors disclosed in the 2010 Form 10-K as updated by the Form 10-K/A - Amendment No . 2 . These risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements contained in this From 10-Q/A for September 30, 2011.Quarterly Report on Form 10-Q. Any of the risks described below or in the 20102011 Form 10-K as updated by the Form 10-K/A - Amendment No. 2 could materially adversely affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. These are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a.) | Not applicable |
(b.) | Not applicable |
(c.) | No purchases of Park’s common shares were made by or on behalf of Park or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, during the three months ended |
Period | Total number of common shares purchased | Average price paid per common share | Total number of common shares purchased as part of publicly announced plans or programs | Maximum number of common shares that may yet be purchased under the plans or programs (1) | ||||||||||||
- | - | - | ||||||||||||||
- | - | - | ||||||||||||||
- | - | - | ||||||||||||||
Total | - | - | - |
(1) | The number shown represents, as of the end of each period, the maximum number of common shares that may yet be purchased as part of Park’s publicly announced stock repurchase authorization to fund the Park National Corporation 2005 Incentive Stock Option |
The 2005 Plan was adopted by the Board of Directors of Park on January 18, 2005 and was approved by the Park shareholders at the Annual Meeting of Shareholders on April 18, 2005. Under the 2005 Plan, 1,500,000 common shares are authorized for delivery upon the exercise of incentive stock options granted under the 2005 Plan. All of the common shares delivered upon the exercise of incentive stock options granted under the 2005 Plan are to be treasury shares. As of September 30, 2011,March 31, 2012, incentive stock options covering 74,57066,625 common shares were outstanding and 1,425,4301,433,375 common shares were available for future grants.
With 488,761451,108 common shares held as treasury shares for purposes of funding the 2005 Plan at September 30, 2011,March 31, 2012, an additional 1,011,239982,267 common shares remained authorized for repurchase for purposes of funding the 2005 Plan.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
(a), (b) Not applicable.
Item 6. Exhibits
Purchase and Assumption Agreement, made and entered into on November 16, 2011, by and between Vision Bank and Park National Corporation (collectively, “Seller”) and Centennial Bank and Home BancShares, Inc. (collectively, “Buyer”) (Incorporated herein by reference to Exhibit 2.1 to Park National Corporation’s Current Report on Form 8-K, dated and filed November 17, 2011 (File No. 1-13006)) |
Note: The disclosure schedules and other schedules (with the exception of Schedule S) referenced in the Purchase and Assumption Agreement have been omitted pursuant to Item 601(b)(2) of SEC Regulation S-K. Park National Corporation hereby undertakes to furnish a copy of the omitted disclosure schedules and other schedules upon request by the SEC.
2.1(b) | First Amendment to Purchase and Assumption Agreement by and between Vision Bank and Park National Corporation and Centennial Bank and Home BancShares, Inc., effective as of January 25, 2012 (Incorporated herein by reference to Exhibit 2.1(b) to Park National Corporation’s Current Report on Form 8-K, dated and filed February 16, 2012 (File No. 1-13006)) |
2.1(c) | Second Amendment to Purchase and Assumption Agreement by and between Vision Bank and Park National Corporation and Centennial Bank and Home BancShares, Inc., effective as of April 30, 2012 (filed herewith) |
2.2 | Agreement and Plan of Merger, entered into as of January 25, 2012, by and between Vision Bank and SE Property Holdings, LLC (Incorporated herein by reference to Exhibit 2.2 to Park National Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (File No. 1-13006)) |
3.1(a) | Articles of Incorporation of Park National Corporation as filed with the Ohio Secretary of State on March 24, 1992 (Incorporated herein by reference to Exhibit 3(a) to Park National Corporation’s Form 8-B, filed on May 20, 1992 (File No. 0-18772) (“Park’s Form 8-B”)) |
3.1(b) | Certificate of Amendment to the Articles of Incorporation of Park National Corporation as filed with the Ohio Secretary of State on May 6, 1993 (Incorporated herein by reference to Exhibit 3(b) to Park National Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-18772)) |
3.1(c) | Certificate of Amendment to the Articles of Incorporation of Park National Corporation as filed with the Ohio Secretary of State on April 16, 1996 (Incorporated herein by reference to Exhibit 3(a) to Park National Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996 (File No. 1-13006)) |
3.1(d) | Certificate of Amendment by Shareholders to the Articles of Incorporation of Park National Corporation as filed with the Ohio Secretary of State on April 22, 1997 (Incorporated herein by reference to Exhibit 3(a)(1) to Park National Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997 (File No. 1-13006) (“Park’s June 30, 1997 Form 10-Q”)) |
3.1(e) | Certificate of Amendment by Shareholders or Members as filed with the Ohio Secretary of State |
3.1(f) | Certificate of Amendment by Directors or Incorporators to Articles as filed with the Ohio Secretary of State |
3.1(g) | Certificate of Amendment by Shareholders or Members filed with the Ohio Secretary of State |
3.1(h) | Articles of Incorporation of Park National Corporation (reflecting amendments through April 18, 2011) [for SEC reporting compliance purposes only – not filed with Ohio Secretary of State] (Incorporated herein by reference to Exhibit 3.1(h) to Park National Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011 (File No. 1-13006)) |
3.2(a) | Regulations of Park National Corporation (Incorporated herein by reference to Exhibit 3(b) to Park’s Form 8-B) |
3.2(b) | Certified Resolution regarding Adoption of Amendment to Subsection 2.02(A) of the Regulations of Park National Corporation by Shareholders on April 21, 1997 (Incorporated herein by reference to Exhibit 3(b)(1) to Park’s June 30, 1997 Form 10-Q) |
3.2(c) | Certificate Regarding Adoption of Amendments to Sections 1.04 and 1.11 of Park National Corporation’s Regulations by the Shareholders on April 17, 2006 (Incorporated herein by reference to Exhibit 3.1 to Park National Corporation’s Current Report on Form 8-K dated and filed on April 18, 2006 (File No. 1-13006)) |
3.2(d) | Certificate Regarding Adoption by the Shareholders of Park National Corporation on April 21, 2008 of Amendment to Regulations to Add New Section 5.10 to Article Five (Incorporated herein by reference to Exhibit 3.2(d) to Park National Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008 (File No. 1-13006) (“Park’s March 31, 2008 Form 10-Q”)) |
3.2(e) | Regulations of Park National Corporation (reflecting amendments through April 21, 2008) [For purposes of SEC reporting compliance only] (Incorporated herein by reference to Exhibit 3.2(e) to Park’s March 31, 2008 Form 10-Q) |
4.1 | Note Purchase Agreement, dated April 20, 2012, between Park National Corporation and a group of 56 accredited investors (Incorporated herein by reference to Exhibit 4.1 to Park National Corporation’s Current Report on Form 8-K, dated and filed April 20, 2012 (File No. 1-13006) (“Park’s April 20, 2012 Form 8-K”)) |
4.2 | Form of 7% Subordinated Note due April 20, 2022 (Incorporated herein by reference to Exhibit 4.2 to Park’s April 20, 2012 for 8-K) |
10.1 | Letter Agreement, dated April 25, 2012, between Park National Corporation and the United States Department of the Treasury related to the repurchase of the 100,000 Fixed Rate Cumulative Perpetual Preferred Shares, Series A, issued by Park National Corporation (Incorporated herein by reference to Exhibit 10.1 to Park National Corporation’s Current Report on Form 8-K, dated and filed April 25, 2012 (File No. 1-13006)) |
10.2 | Letter Agreement, dated May 2, 2012, between Park National Corporation and the United States Department of the Treasury related to the repurchase of the Warrant to purchase 227,376 Common Shares issued by Park National Corporation (Incorporated herein by reference to Exhibit 10.1 to Park National Corporation’s Current Report on Form 8-K, dated and filed May 2, 2012 (File No. 1-13006)) |
12 | Computation of Ratios of Earnings to Fixed Charges and of Earnings to Fixed Charges and Preferred Share Dividends (filed herewith) |
31.1 | Rule 13a – 14(a) / 15d – 14(a) Certifications (Principal Executive Officer) (filed herewith) |
31.2 | Rule 13a – 14(a) / 15d – 14(a) Certifications (Principal Financial Officer) (filed herewith) |
32.1 | Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (Principal Executive Officer) (furnished herewith) |
32.2 | Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (Principal Financial Officer) (furnished herewith) |
101 | The following information from Park’s |
Pursuant to Rule 406T of Regulation S-T, the interactive data files included as Exhibit 101 are furnished and not deemed filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those Sections.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PARK NATIONAL CORPORATION | ||
DATE: | /s/ C. Daniel DeLawder | |
C. Daniel DeLawder | ||
Chairman of the Board and | ||
Chief Executive Officer | ||
DATE: | /s/ John W. Kozak | |
John W. Kozak | ||
Chief Financial Officer |