PARK NATIONAL CORP /OH/ - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019



☐	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,	P.O. Box 3500	Newark,	Ohio	43058-3500
(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)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common shares, without par value	PRK	NYSE American

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes ☒ No ☐

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



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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

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

Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 16,346,446 Common Shares, no par value per share, outstanding at November 1, 2019.

PARK NATIONAL CORPORATION

CONTENTS



	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Condensed Balance Sheets as of September 30, 2019 and December 31, 2018 (unaudited)	4

Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2019 and 2018 (unaudited)	6

Consolidated Condensed Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and 2018 (unaudited)	8

Consolidated Condensed Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2019 and 2018 (unaudited)	9

Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited)	11

Notes to Unaudited Consolidated Condensed Financial Statements	13

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	66

Item 3. Quantitative and Qualitative Disclosures About Market Risk	93

Item 4. Controls and Procedures	93

PART II. OTHER INFORMATION	94

Item 1. Legal Proceedings	94

Item 1A. Risk Factors	94

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	94

Item 3. Defaults Upon Senior Securities	95

Item 4. Mine Safety Disclosures	95

Item 5. Other Information	95

Item 6. Exhibits	95

SIGNATURES	98

Glossary of Abbreviations and Acronyms

Park has identified the following list of abbreviations and acronyms that are used in the Notes to Unaudited Consolidated Condensed Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations.



AFS	Available-for-sale	NAV	Net asset value
ALLL	Allowance for loan losses	OCI	Other comprehensive income
Allowance	Allowance for loan losses	OREO	Other real estate owned
AOCI	Accumulated other comprehensive income	Park	Park National Corporation and its subsidiaries
ASU	Accounting standards update	PBRSUs	Performance-based restricted stock units
CABF	CAB Financial Corporation and its subsidiaries	PCI	Purchase credit impaired
Carolina Alliance	CAB Financial Corporation and its subsidiaries	PNB	The Park National Bank
CECL	Current expected credit loss	ROU	Right-of-use
FASB	Financial Accounting Standards Board	SARs	Stock appreciation rights
FHLB	Federal Home Loan Bank	SEPH	SE Property Holdings, LLC
FRB	Federal Reserve Bank	TBRSUs	Time-based restricted stock units
GFSC	Guardian Financial Services Company	TDRs	Troubled debt restructurings
HTM	Held-to-maturity	U.S. GAAP	United States Generally Accepted Accounting Principles
IRLC	Interest rate lock commitment	U.S.	United States
MSRs	Mortgage servicing rights

Table of Contents

PARK NATIONAL CORPORATION AND SUBSIDARIES

Consolidated Condensed Balance Sheets (Unaudited)

(in thousands, except share and per share data)



	September 30, 2019			December 31, 2018
Assets:
Cash and due from banks	$	190,353		$	141,890
Money market instruments	182,373			25,324
Cash and cash equivalents	372,726			167,214
Investment securities:
Debt securities available-for-sale, at fair value (amortized cost of $1,237,990 and $1,028,883 at September 30, 2019 and December 31, 2018, respectively)	1,260,286			1,003,421
Debt securities held-to-maturity, at amortized cost (fair value of $351,422 at December 31, 2018)	—			351,808
Other investment securities	68,644			72,916
Total investment securities	1,328,930			1,428,145

Loans	6,403,647			5,692,132
Allowance for loan losses	(55,853		)	(51,512		)
Net loans	6,347,794			5,640,620
Bank owned life insurance	208,594			188,417
Prepaid assets	99,939			94,079
Goodwill	157,999			112,739
Other intangible assets	15,490			6,971
Premises and equipment, net	72,779			59,771
Affordable housing tax credit investments	54,909			50,347
Other real estate owned	3,779			4,303
Accrued interest receivable	24,721			22,974
Operating lease right-of-use asset	14,412			—
Mortgage loan servicing rights	9,960			10,178
Other	11,578			18,550
Total assets	$	8,723,610		$	7,804,308

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PARK NATIONAL CORPORATION AND SUBSIDARIES

Consolidated Condensed Balance Sheets (Unaudited) (Continued)

(in thousands, except share and per share data)



	September 30, 2019			December 31, 2018
Liabilities and Shareholders' Equity:
Deposits:
Noninterest bearing	$	1,941,694		$	1,804,881
Interest bearing	5,226,565			4,455,979
Total deposits	7,168,259			6,260,860
Short-term borrowings	185,838			221,966
Long-term debt	297,500			400,000
Subordinated notes	15,000			15,000
Unfunded commitments in affordable housing tax credit investments	28,439			22,282
Operating lease liability	15,191			—
Accrued interest payable	3,254			2,625
Other	53,989			49,069
Total liabilities	$	7,767,470		$	6,971,802

Shareholders' equity:
Preferred shares (200,000 shares authorized; 0 shares issued)	$	—		$	—
Common shares (No par value; 20,000,000 shares authorized; 17,623,208 shares issued at September 30, 2019 and 16,586,165 shares issued at December 31, 2018)	458,142			358,598
Retained earnings	639,594			614,069
Treasury shares (1,290,257 shares at September 30, 2019 and 887,987 shares at December 31, 2018)	(128,982		)	(90,373		)
Accumulated other comprehensive loss, net of taxes	(12,614		)	(49,788		)
Total shareholders' equity	956,140			832,506
Total liabilities and shareholders’ equity	$	8,723,610		$	7,804,308

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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PARK NATIONAL CORPORATION AND SUBSIDIARIES

Consolidated Condensed Statements of Income (Unaudited)

(in thousands, except share and per share data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Interest and dividend income:

Interest and fees on loans	$	84,213		$	69,905		$	238,687		$	198,803

Interest and dividends on:
Obligations of U.S. Government, its agencies and other securities - taxable	6,326			7,691			20,240			22,204
Obligations of states and political subdivisions - tax-exempt	2,225			2,205			6,750			6,557
Other interest income	1,825			428			2,994			1,070
Total interest and dividend income	94,589			80,229			268,671			228,634

Interest expense:

Interest on deposits:
Demand and savings deposits	9,649			6,412			25,553			13,809
Time deposits	4,694			3,328			12,828			8,765

Interest on borrowings:
Short-term borrowings	478			288			1,977			1,283
Long-term debt	2,667			2,525			7,585			7,509

Total interest expense	17,488			12,553			47,943			31,366

Net interest income	77,101			67,676			220,728			197,268

Provision for loan losses	1,967			2,940			6,384			4,586
Net interest income after provision for loan losses	75,134			64,736			214,344			192,682

Other income:
Income from fiduciary activities	6,842			6,418			20,500			19,479
Service charges on deposit accounts	2,864			2,861			8,078			8,609
Other service income	4,260			3,246			11,118			10,890
Debit card fee income	5,313			4,352			14,909			12,736
Bank owned life insurance income	1,107			2,585			3,399			4,625
ATM fees	482			500			1,382			1,534
OREO valuation adjustments	(41		)	(77		)	(123		)	(398		)
(Loss) gain on sale of OREO, net	(53		)	(81		)	(224		)	4,093
Net gain (loss) on the sale of investment securities	186			—			(421		)	(2,271		)
Gain on equity securities, net	3,335			89			5,309			4,633
Other components of net periodic pension benefit income	1,183			1,705			3,549			5,115
Miscellaneous	2,658			2,466			5,493			5,164
Total other income	28,136			24,064			72,969			74,209

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PARK NATIONAL CORPORATION AND SUBSIDIARIES

Consolidated Condensed Statements of Income (Unaudited) (Continued)

(in thousands, except share and per share data)



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Other expense:
Salaries	$	30,713	$	27,229	$	88,611	$	76,652
Employee benefits	10,389		7,653		27,833		22,312
Occupancy expense	3,226		2,976		9,460		8,482
Furniture and equipment expense	4,177		3,807		12,713		11,969
Data processing fees	2,935		2,580		7,973		6,255
Professional fees and services	6,702		8,065		22,814		20,378
Marketing	1,604		1,364		4,285		3,767
Insurance	276		1,388		2,813		4,012
Communication	1,387		1,207		4,095		3,646
State tax expense	746		1,000		2,805		3,063
Amortization of intangible assets	741		289		1,732		289
Miscellaneous	2,842		1,758		7,623		5,333
Total other expense	65,738		59,316		192,757		166,158

Income before income taxes	37,532		29,484		94,556		100,733

Income taxes	6,386		4,722		15,792		16,607

Net income	$	31,146	$	24,762	$	78,764	$	84,126

Earnings per Common Share:
Basic	$	1.90	$	1.58	$	4.86	$	5.46
Diluted	$	1.89	$	1.56	$	4.84	$	5.41

Weighted average common shares outstanding
Basic	16,382,798		15,686,542		16,198,294		15,420,135
Diluted	16,475,741		15,832,734		16,287,695		15,560,666

Cash dividends declared	$	1.01	$	0.96	$	3.23	$	3.11

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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PARK NATIONAL CORPORATION AND SUBSIDIARIES

Consolidated Condensed Statements of Comprehensive Income (Unaudited)

(in thousands)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net income	$	31,146		$	24,762		$	78,764		$	84,126

Other comprehensive income (loss), net of tax:
Net (gain) loss realized on sale of securities, net of income tax effect of $(39) for the three months ended September 30, 2019 and $88 and $538 for the nine months ended September 30, 2019 and 2018, respectively	(147		)	—			333			2,024
Unrealized gains on debt securities transferred from held-to-maturity to available-for-sale, net of income tax effect of $5,076 for both the three months ended September 30, 2019 and the nine months ended September 30, 2019	19,095			—			19,095			—
Unrealized net holding (loss) gain on debt securities available-for-sale, net of income tax effect of $(1,385) and $(1,364) for the three months ended September 30, 2019 and 2018, respectively and $4,864 and $(8,217) for the nine months ended September 30, 2019 and 2018, respectively	(5,206		)	(5,141		)	18,302			(30,919		)
Unrealized loss on cash flow hedging derivatives, net of income tax effect of $(13) for the three months ended September 30, 2019 and $(148) for the nine months ended September 30, 2019	(49		)	—			(556		)	—
Other comprehensive income (loss)	$	13,693		$	(5,141	)	$	37,174		$	(28,895	)

Comprehensive income	$	44,839		$	19,621		$	115,938		$	55,231

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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PARK NATIONAL CORPORATION AND SUBSIDIARIES

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

(in thousands, except share and per share data)



	Preferred Shares		Common Shares			Retained Earnings			Treasury Shares			Accumulated Other Comprehensive (Loss) Income
Balance at January 1, 2019, as previously presented	$	—	$	358,598		$	614,069		$	(90,373	)	$	(49,788	)
Cumulative effect of change in accounting principle for leases, net of tax						(143		)
Balance at January 1, 2019, as adjusted	—		358,598			613,926			(90,373		)	(49,788		)
Net income						25,455
Other comprehensive income, net of tax												14,335
Dividends on common shares at $1.21 per share						(19,137		)
Cash payment for fractional common shares in dividend reinvestment plan			(1		)
Issuance of 27,719 common shares under share-based compensation awards, net of 8,736 common shares withheld to pay employee income taxes			(2,480		)	(273		)	1,926
Repurchase of 86,650 common shares to be held as treasury shares									(8,502		)
Share-based compensation expense			1,358
Balance at March 31, 2019	$	—	$	357,475		$	619,971		$	(96,949	)	$	(35,453	)
Net income						22,163
Other comprehensive income, net of tax												9,146
Dividends on common shares at $1.01 per share						(16,907		)
Cash payment for fractional common shares in dividend reinvestment plan			(1		)
Repurchase of 250,000 common shares to be held as treasury shares									(24,450		)
Issuance of 1,037,205 common shares for the acquisition of CAB Financial Corporation			98,275
Share-based compensation expense			1,162
Balance at June 30, 2019	$	—	$	456,911		$	625,227		$	(121,399	)	$	(26,307	)
Net income						31,146
Other comprehensive income, net of tax												13,693
Dividends on common shares at $1.01 per share						(16,779		)
Cash payment for fractional common shares in dividend reinvestment plan			(1		)
Repurchase of 84,603 common shares to be held as treasury shares									(7,583		)
Share-based compensation expense			1,232
Balance at September 30, 2019	$	—	$	458,142		$	639,594		$	(128,982	)	$	(12,614	)

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PARK NATIONAL CORPORATION AND SUBSIDIARIES

Consolidated Condensed Statements of Changes in Shareholders' Equity (Unaudited) (Continued)

(in thousands, except share and per share data)



	Preferred Shares		Common Shares			Retained Earnings			Treasury Shares			Accumulated Other Comprehensive (Loss) Income
Balance at January 1, 2018, as previously presented	$	—	$	307,726		$	561,908		$	(87,079	)	$	(26,454	)
Cumulative effect of change in accounting principle for marketable equity securities, net of tax						1,917						(995		)
Balance at January 1, 2018, as adjusted	—		307,726			563,825			(87,079		)	(27,449		)
Reclassification of disproportionate income tax effects						3,806						(3,806		)
Net income						31,123
Other comprehensive loss, net of tax												(21,386		)
Dividends on common shares at $0.94 per share						(14,496		)
Cash payment for fractional common shares in dividend reinvestment plan			(1		)
Issuance of 18,800 common shares under share-based compensation awards, net of 5,879 common shares withheld to pay employee income taxes			(1,597		)	(317		)	$	1,304
Share-based compensation expense			1,121
Balance at March 31, 2018	$	—	$	307,249		$	583,941		$	(85,775	)	$	(52,641	)
Net income						28,241
Other comprehensive loss, net of tax												(2,368		)
Dividends on common shares at $1.21 per share						(18,670		)
Cash payment for fractional common shares in dividend reinvestment plan			(1		)
Repurchase of 50,000 common shares to be held as treasury shares									(5,784		)
Share-based compensation expense			896
Balance at June 30, 2018	$	—	$	308,144		$	593,512		$	(91,559	)	$	(55,009	)
Net income						24,762
Other comprehensive loss, net of tax												(5,141		)
Dividends on common shares at $0.96 per share						(15,183		)
Cash payment for fractional common shares in dividend reinvestment plan			(1		)
Issuance of 435,457 common shares for the acquisition of NewDominion Bank			$	48,519
Share-based compensation expense			1,047
Balance at September 30, 2018	$	—	$	357,709		$	603,091		$	(91,559	)	$	(60,150	)

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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PARK NATIONAL CORPORATION AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows (Unaudited)

(in thousands)



	Nine Months Ended September 30,
	2019			2018
Operating activities:
Net income	$	78,764		$	84,126

Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	6,384			4,586
Accretion of loan fees and costs, net	(5,077		)	(4,631		)
Depreciation of premises and equipment	6,676			6,446
Amortization of investment securities, net	1,102			932
Net accretion of purchase accounting adjustments	(2,052		)	6
Realized net investment securities losses	421			2,271
Gain on equity securities, net	(5,309		)	(4,633		)
Loan originations to be sold in secondary market	(224,314		)	(153,093		)
Proceeds from sale of loans in secondary market	214,266			154,544
Gain on sale of loans in secondary market	(4,658		)	(3,604		)
Share-based compensation expense	3,752			3,064
OREO valuation adjustments	123			398
Loss (gain) on sale of OREO, net	224			(4,093		)
Bank owned life insurance income	(3,399		)	(4,625		)
Investment in qualified affordable housing tax credits amortization	5,438			5,553

Changes in assets and liabilities:
Increase in prepaid dealer premiums	(4,625		)	(1,399		)
Decrease in other assets	5,127			6,594
Increase in other liabilities	1,128			4,536
Net cash provided by operating activities	$	73,971		$	96,978

Investing activities:
Proceeds from the redemption/repurchase of Federal Home Loan Bank stock	$	9,964		$	7,004
Proceeds from sales of investment securities	91,110			244,399
Proceeds from calls and maturities of:
Available-for-sale debt securities	145,851			151,860
Held-to-maturity debt securities	475			10,102
Purchases of:
Available-for-sale debt securities	—			(373,372		)
Held-to-maturity debt securities	—			(4,946		)
Equity securities	—			(2,590		)
Federal Reserve Bank stock	(5,180		)	—
Net decrease in other investments	6,145			1,141
Net loan (originations) paydowns, portfolio loans	(112,767		)	12,027
Investment in qualified affordable housing	(3,843		)	—
Proceeds from the sale of OREO	1,098			11,919
Life insurance death benefits	1,344			4,028
Cash (paid for) received from acquisitions, net	(4,831		)	12,270
Purchases of premises and equipment	(11,641		)	(7,145		)
Net cash provided by investing activities	$	117,725		$	66,697

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PARK NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Condensed Statements of Cash Flows (Unaudited) (Continued) (in thousands)
	Nine Months Ended September 30,
	2019			2018
Financing activities:
Net increase in deposits	$	275,207		$	177,626
Net decrease in short-term borrowings	(64,891		)	(211,471		)
Proceeds from issuance of long-term debt	50,000			25,000
Repayment of long-term debt	(152,500		)	(125,000		)
Value of common shares withheld to pay employee income taxes	(827		)	(610		)
Repurchase of common shares to be held as treasury shares	(40,535		)	(5,784		)
Cash dividends paid	(52,638		)	(47,944		)
Net cash provided by (used in) financing activities	$	13,816		$	(188,183	)

Increase (decrease) in cash and cash equivalents	205,512			(24,508		)

Cash and cash equivalents at beginning of year	167,214			169,112

Cash and cash equivalents at end of period	$	372,726		$	144,604

Supplemental disclosures of cash flow information:

Cash paid for:
Interest	$	47,891		$	30,424

Federal income tax	$	9,261		$	5,525

Non-cash items:
Transfer of debt securities from HTM to AFS	$	349,773		$	—

Loans transferred to OREO	$	951		$	1,037

Right-of-use assets obtained in exchange for lease obligations	$	11,351		$	—

Loans transferred to foreclosed assets	$	—		$	11,379

New commitments in affordable housing tax credit investments	$	10,000		$	8,000

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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PARK NATIONAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

The accompanying unaudited consolidated condensed financial statements included in this report have been prepared for Park National Corporation (sometimes also referred to as the “Registrant”) and its subsidiaries. Unless the context otherwise requires, references to "Park", the "Corporation" or the "Company" and similar terms mean Park National Corporation and its subsidiaries. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of operations for the interim periods included herein have been made. The results of operations for the three-month and nine-month periods ended September 30, 2019 are not necessarily indicative of the operating results to be anticipated for the year ending December 31, 2019.

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of the condensed balance sheets, condensed statements of income, condensed statements of comprehensive income, condensed statements of changes in shareholders’ equity and condensed statements of cash flows in conformity with U.S. GAAP. These financial statements should be read in conjunction with the consolidated financial statements incorporated by reference in the Annual Report on Form 10-K of Park for the fiscal year ended December 31, 2018 from Park’s 2018 Annual Report to Shareholders (“Park's 2018 Annual Report”). Certain prior period amounts have been reclassified to conform to the current period presentation.

Park’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2018 Annual Report. For interim reporting purposes, Park follows the same basic accounting policies, as updated by the information contained in this report, and considers each interim period an integral part of an annual period.

Note 2 - Adoption of New Accounting Pronouncements and Issued But Not Yet Effective Accounting Standards

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

Adoption of New Accounting Pronouncements

ASU 2016-02 - Leases (Topic 842): In February 2016, the FASB issued ASU 2016-02 - Leases (Topic 842). This ASU requires all organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Additional qualitative and quantitative disclosures are required so that users can understand more about the nature of an entity’s leasing activities. The new guidance is effective for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2018. The adoption of this guidance on January 1, 2019 resulted in a $11.0 million increase in assets, a $11.2 million increase in liabilities and a $143,000 decrease in beginning retained earnings, but did not have a material impact on Park's consolidated statement of income. Additionally, Note 13 - Leases includes new required disclosures.

ASU 2017-08 - Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities: In March 2017, the FASB issued ASU 2017-08 - Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU amends the amortization period for certain purchased callable debt securities held at a premium. It shortens the amortization period for the premium to the earliest call date. Under previous U.S. GAAP, premiums on callable debt securities generally were amortized to the maturity date. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2018. The adoption of this guidance on January 1, 2019 did not have a material impact on Park's consolidated financial statements.

ASU 2018-10 - Codification Improvements to Topic 842, Leases: In July 2018, the FASB issued ASU 2018-10 - Codification Improvements to Topic 842, Leases. This ASU includes amendments that clarify certain aspects of the guidance issued in ASU 2016-02. Park considered these clarifications in determining the appropriate adoption of ASU 2016-02 on January 1, 2019.

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ASU 2018-11 - Leases (Topic 842): Targeted Improvements: In July 2018, the FASB issued ASU 2018-11 - Leases (Topic 842): Targeted Improvements. This ASU amends the guidance in ASU 2016-02 which was not yet effective. The amendments in the ASU provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings for the period of adoption. Additionally, this amendment provides lessors with a practical expedient, by class of asset, to not separate nonlease components from the associated lease component and, instead, to account for those components as a single component if certain criteria are met. Park considered these clarifications in determining the appropriate adoption of ASU 2016-02 on January 1, 2019.

ASU 2018-16 - Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes: In October 2018, the FASB issued ASU 2018-16 - Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in this ASU permit use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the interest rates on direct Treasury obligations of the U.S. government ("UST"), the LIBOR swap rate, the OIS rate based on the Fed Funds Effective Rate, and the SIFMA Municipal Swap Rate. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The adoption of this guidance on January 1, 2019 did not have an impact on Park’s consolidated financial statements.

ASU 2018-20 - Leases (Topic 842): Narrow - Scope Improvements for Lessors: In December 2018, the FASB issued ASU 2018-20 - Leases (Topic 842): Narrow - Scope Improvements for Lessors. The amendments in this ASU address the treatment of certain sales taxes and other similar taxes, certain lessor costs and recognition of variable payments for contracts with lease and nonlease components. Park considered these clarifications in determining the appropriate adoption of ASU 2016-02 on January 1, 2019.

ASU 2019-01 - Leases (Topic 842): Narrow - Codification Improvements: In January 2019, the FASB issued ASU 2019-01 - Leases (Topic 842): Codification Improvements. The amendments in this ASU address the determination of the fair value of the underlying asset by lessors that are not manufacturers or dealers, the presentation on the statement of cash flows for sales type and direct financing leases, and transition disclosures related to Topic 250, Accounting Changes and Error Corrections. Park considered these clarifications in determining the appropriate adoption of ASU 2016-02 on January 1, 2019.

ASU 2019-07 - Codification Updates to SEC Sections: In July 2019, the FASB issued ASU 2019-07 - Codification Updates to SEC Sections. The amendments in this ASU update SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates. Park considered these amendments in presenting Park's consolidated condensed financial statements and disclosures.

Issued But Not Yet Effective Accounting Standards

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

Management is currently evaluating the impact of the adoption of this guidance on Park's consolidated financial statements. We anticipate that the adoption of the CECL model will result in a material increase to Park's allowance for loan losses. Management has established a committee to oversee the implementation of the CECL model. Currently, management is focusing on segmentation and loss driver analysis with the anticipation that models will be operational in the fourth quarter of 2019.

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ASU 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement: In August 2018, the FASB issued ASU 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement by removing, modifying and adding certain requirements. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of this ASU. An entity is permitted to early adopt and remove or modify disclosures upon issuance of the ASU and delay adoption of the additional disclosures until their effective date. The adoption of this guidance will not have an impact on Park’s consolidated financial statements, but will impact disclosures.

ASU 2018-14 - Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans: In August 2018, the FASB issued ASU 2018-14 - Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this ASU modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing disclosures that are no longer considered cost beneficial, clarifying the specific requirements of disclosures and adding disclosure requirements identified as relevant. The amendments in this ASU are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The adoption of this guidance will not have an impact on Park’s consolidated financial statements, but will impact disclosures.

ASU 2018-19 - Codification Improvements to Topic 326, Financial Instruments - Credit Losses: In November 2018, the FASB issued ASU 2018-19 - Codification Improvements to Topic 326, Financial Instruments - Credit Losses. The amendment in this ASU clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. Park will consider this clarification in determining the appropriate adoption of ASU 2016-13.

ASU 2019-04 - Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments: In April 2019, the FASB issued ASU 2018-19 - Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This ASU includes amendments that clarify or address specific issues about certain aspects of the amendments in ASU 2016-01, Financial Instruments - Overall (Subtopic 925-10): Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.

Park has already adopted ASU 2016-01. As a result, certain provisions in the amendments within ASU 2019-04 related to the same topics as ASU 2016-01 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of these provision is permitted. The adoption of the provisions related to the same topics as ASU 2016-01 is not expected to have a material effect on Park’s consolidated financial statements.

For the amendments related to Topic 326 that clarify or address specific aspects of ASU 2016-13, Park will consider these clarifications in determining the appropriate adoption of ASU 2016-13.

Park has already adopted ASU 2017-12. As a result, the amendments within ASU 2019-04 are effective as of January 1, 2020 with early adoption permitted. This ASU allows entities, like Park, who did not reclassify debt securities from HTM to AFS upon the adoption of ASU 2017-12 to reclassify these securities as of the adoption of ASU 2019-04. Park has considered this option and, effective September 1, 2019, reclassified all HTM debt securities to AFS. The transfer occurred at fair value and resulted in an unrealized gain, net of taxes, of $19.1 million being recorded in other comprehensive income.

ASU 2019-05 - Financial Instruments - Credit Losses (Topic 326): In May 2019, the FASB issued ASU 2019-05 - Financial Instruments - Credit Losses (Topic 326). The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments - Overall, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326. Park will consider this amendment in determining the appropriate adoption of ASU 2016-13.

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Note 3 - Business Combinations

NewDominion Bank

On July 1, 2018, NewDominion Bank, a North Carolina state-chartered bank (“NewDominion”), merged with and into The Park National Bank, the national bank subsidiary of Park, with PNB continuing as the surviving entity pursuant to the Agreement and Plan of Merger and Reorganization (the “NewDominion Merger Agreement”), dated as of January 22, 2018, by and among Park, PNB, and NewDominion. In accordance with the NewDominion Merger Agreement, NewDominion shareholders were permitted to make an election to receive for their shares of NewDominion common stock either $1.08 in cash without interest (the cash consideration) or 0.01023 of a Park common share, plus cash in lieu of any fractional Park common share (the stock consideration). Based on the terms of the New Dominion Merger Agreement, the aggregate consideration to be paid in the merger was subject to proration and allocation procedures to ensure that 60 percent of the shares of NewDominion common stock outstanding immediately prior to the completion of the merger were exchanged for the stock consideration and that the remaining 40 percent of the shares of NewDominion common stock outstanding immediately prior to the completion of the merger were exchanged for the cash consideration, including, in each case, shares of NewDominion common stock subject to NewDominion options and restricted stock awards.

Purchase consideration consisted of 435,457 Park common shares, valued at $48.5 million, and $30.7 million in cash to acquire 91.45% of NewDominion's outstanding shares of common stock. The remaining 8.55% of NewDominion's outstanding shares of common stock was previously held by Park. Park recognized a gain of $3.5 million as a result of remeasuring to fair value its 8.55% equity interest in NewDominion held before the business combination. This non-taxable gain is included in "Gain on equity securities, net" in the consolidated condensed statements of income. The acquisition is expected to provide additional revenue growth and geographic diversification.

NewDominion's results of operations were included in Park’s results beginning July 1, 2018. For the three and nine months ended September 30, 2019, Park recorded merger-related expenses of $4,000 and $83,000, respectively, associated with the NewDominion acquisition. For the three and nine months ended September 30, 2018, Park recorded merger-related expenses of $3.1 million and $3.7 million, respectively, associated with the NewDominion acquisition.

Goodwill of $40.4 million arising from the acquisition consisted largely of synergies and the cost savings resulting from the combining of the operations of the PNB and NewDominion. The goodwill is not deductible for income tax purposes as the transaction was accounted for as a tax-free exchange.

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The following table summarizes the consideration paid for NewDominion and the amounts of the assets acquired and liabilities assumed at their fair value:



(in thousands)
Consideration
Cash	$	30,684
Park common shares	48,519
Previous 8.55% investment in NewDominion	7,000
Fair value of total consideration transferred	$	86,203

Recognized amounts of identifiable assets acquired and liabilities assumed
Cash and cash equivalents	$	42,954
Securities	1,954
Loans	272,753
Premises and equipment	940
Core deposit intangibles	6,249
Trade name intangible	1,300
Other assets	6,133
Total assets acquired	332,283

Deposits	284,231
Other liabilities	2,254
Total liabilities assumed	286,485

Net identifiable assets	45,798

Goodwill	$	40,405

Park accounted for the NewDominion acquisition using the acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date, in accordance with FASB ASC Topic 805, Business Combinations.

The fair value of net assets acquired includes fair value adjustments to loans that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. However, Park believes that all contractual cash flows related to these loans will be collected. As such, these loans were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans which have shown evidence of credit deterioration since origination. Loans acquired that were not subject to these requirements included non-impaired loans with a fair value and gross contractual amounts receivable of $267.9 million and $273.7 million, respectively, on the date of acquisition.

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The table below presents information with respect to the fair value of acquired loans as well as their book balance at the acquisition date.



(in thousands)	Book Balance		Fair Value
Commercial, financial and agricultural	$	19,246	$	19,138
Commercial real estate	119,434		117,638
Construction real estate:
Commercial	22,494		22,235
Mortgage	8,391		8,111
Residential real estate:
Commercial	14,798		14,797
Mortgage	50,295		48,714
HELOC	37,651		36,688
Consumer	541		539
Purchased credit impaired	5,069		4,893
Total loans	$	277,919	$	272,753

CAB Financial Corporation

On April 1, 2019, CAB Financial Corporation, a South Carolina corporation, merged with and into Park, with Park continuing as the surviving entity pursuant to the Agreement and Plan of Merger and Reorganization (the "CABF Merger Agreement"), dated as of September 12, 2018, by and between Park and CABF. Immediately following the CABF merger into Park, Carolina Alliance Bank, a South Carolina state-chartered bank and a wholly-owned subsidiary of CABF, was merged with and into PNB, with PNB as the surviving bank. In accordance with the CABF Merger Agreement, CABF shareholders were to receive for each share of their CABF common stock (i) $3.80 in cash (the cash consideration) and (ii) 0.1378 of a Park common share (the stock consideration). CABF stock options and restricted stock awards were fully vested (with any performance-based vesting condition deemed satisfied) and canceled and converted automatically into the right to receive merger consideration.

Purchase consideration consisted of 1,037,205 Park common shares, valued at $98.3 million, and $28.6 million in cash to acquire 100% of CABF's outstanding shares of common stock. The acquisition is expected to provide additional revenue growth and geographic diversification.

Carolina Alliance's results of operations were included in Park's results beginning April 1, 2019. For the three and nine months ended September 30, 2019, Park recorded merger-related expenses of $0.7 million and $6.9 million, respectively, associated with the Carolina Alliance acquisition. For the both the three or nine months ended September 30, 2018, Park recorded merger-related expenses of $251,000 associated with the Carolina Alliance acquisition.

Goodwill of $45.3 million arising from the acquisition consisted largely of synergies and the cost savings resulting from the combining of the operations of PNB and Carolina Alliance. The goodwill is not deductible for income tax purposes as the transaction was accounted for as a tax-free exchange.

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The following table summarizes the consideration paid for Carolina Alliance and the amounts of the assets acquired and liabilities assumed at their fair value:



(in thousands)
Consideration
Cash	$	28,630
Park common shares	98,275
Fair value of total consideration transferred	$	126,905

Recognized amounts of identifiable assets acquired and liabilities assumed
Cash and cash equivalents	$	23,799
Securities	97,606
Loans	578,577
Premises and equipment	8,337
Core deposit intangibles	10,251
Other assets	31,675
Total assets acquired	750,245

Deposits	632,649
Other liabilities	35,951
Total liabilities assumed	668,600

Net identifiable assets	81,645

Goodwill	$	45,260

Park accounted for the Carolina Alliance acquisition using the acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date, in accordance with FASB ASC Topic 805, Business Combinations. The fair value measurements of assets acquired and liabilities assumed are subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available. Park continues to finalize the fair values of loans, intangible assets, and deferred taxes. As a result, the fair value adjustments are preliminary and may change as information becomes available. Fair value adjustments will be finalized no later than April 2020. During the three months ended September 30, 2019, Park made a $58,000 adjustment to decrease the initial fair value of deposits, which resulted in a $58,000 reduction in goodwill.

The fair value of net assets acquired includes fair value adjustments to loans that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. However, Park believes that all contractual cash flows related to these loans will be collected. As such, these loans were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans which have shown evidence of credit deterioration since origination. Loans acquired that were not subject to these requirements included non-impaired loans with a fair value and gross contractual amounts receivable of $558.6 million and $570.8 million, respectively, on the date of acquisition.

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The table below presents information with respect to the fair value of acquired loans as well as their book balance at the acquisition date.



(in thousands)	Book Balance		Fair Value
Commercial, financial and agricultural	$	79,537	$	79,373
Commercial real estate	281,425		273,855
Construction real estate:
Commercial	43,106		42,176
Mortgage	11,130		10,633
Residential real estate:
Commercial	48,546		48,684
Mortgage	30,519		30,969
HELOC	40,227		39,526
Consumer	4,813		4,647
Leases	28,589		28,781
Purchased credit impaired	21,806		19,933
Total loans	$	589,698	$	578,577

The following table presents supplemental pro forma information as if the NewDominion and Carolina Alliance acquisitions had occurred as of January 1, 2018. The unaudited pro forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the respective transactions, depreciation expense on property acquired, interest expense on deposits acquired, and the related tax effects. The pro forma information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed date.



	Nine months ended September 30,
(dollars in thousands, except per share data)	2019		2018
Net interest income	$	227,585	$	225,753
Net income	$	85,720	$	94,509
Basic earnings per share	$	5.18	$	5.64
Diluted earnings per share	$	5.15	$	5.59

Note 4 – Investment Securities

The amortized cost and fair value of investment securities are shown in the following tables. Management performs a quarterly evaluation of investment securities for any other-than-temporary impairment. For the three-month and nine-month periods ended September 30, 2019 and 2018, there were no investment securities deemed to be other-than-temporarily impaired.

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Investment securities at September 30, 2019, were as follows:



Debt Securities AFS (In thousands)	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses		Estimated Fair Value
Obligations of states and political subdivisions	$	303,522	$	18,383	$	—	$	321,905
U.S. Government sponsored entities' asset-backed securities	934,468		10,373		6,460		938,381
Total	$	1,237,990	$	28,756	$	6,460	$	1,260,286

Investment securities with unrealized losses at September 30, 2019, were as follows:



	Unrealized loss position for less than 12 months				Unrealized loss position for 12 months or longer				Total
(In thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Debt Securities AFS
U.S. Government sponsored entities' asset-backed securities	$	251,414	$	1,095	$	181,807	$	5,365	$	433,221	$	6,460
Total	$	251,414	$	1,095	$	181,807	$	5,365	$	433,221	$	6,460

Investment securities at December 31, 2018, were as follows:



Debt Securities AFS (In thousands)	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses		Estimated Fair Value
U.S. Government sponsored entities' asset-backed securities	$	1,028,883	$	453	$	25,915	$	1,003,421
Total	$	1,028,883	$	453	$	25,915	$	1,003,421



Debt Securities HTM (In thousands)	Amortized Cost		Gross Unrecognized Holding Gains		Gross Unrecognized Holding Losses		Estimated Fair Value
Obligations of states and political subdivisions	$	305,278	$	3,202	$	2,672	$	305,808
U.S. Government sponsored entities' asset-backed securities	46,530		87		1,003		45,614
Total	$	351,808	$	3,289	$	3,675	$	351,422

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Investment securities with unrealized/unrecognized losses at December 31, 2018, were as follows:



	Unrealized/unrecognized loss position for less than 12 months				Unrealized/unrecognized loss position for 12 months or longer				Total
(In thousands)	Fair value		Unrealized/unrecognized losses		Fair value		Unrealized/unrecognized losses		Fair value		Unrealized/unrecognized losses
Debt Securities AFS
U.S. Government sponsored entities' asset-backed securities	$	506,280	$	5,998	$	449,569	$	19,917	$	955,849	$	25,915
Total	$	506,280	$	5,998	$	449,569	$	19,917	$	955,849	$	25,915
Debt Securities HTM
Obligations of states and political subdivisions	$	91,960	$	1,095	$	70,723	$	1,577	$	162,683	$	2,672
U.S. Government sponsored entities' asset-backed securities	32,656		838		6,931		165		39,587		1,003
Total	$	124,616	$	1,933	$	77,654	$	1,742	$	202,270	$	3,675

Management does not believe any of the unrealized/unrecognized losses at September 30, 2019 or December 31, 2018 represented other-than-temporary impairment. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized within net income in the period the other-than-temporary impairment is identified.

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

On September 1, 2019, Park adopted the portion of ASU 2019-04 which allowed for a one time reclassification of securities from HTM to AFS. On this date, Park transferred HTM securities with a fair value of $373.9 million to AFS classification. The transfer occurred at fair value and had a related unrealized gain, net of taxes, of $19.1 million recorded in other comprehensive income.

The amortized cost and estimated fair value of investments in debt securities at September 30, 2019, are shown in the following table by contractual maturity, except for asset-backed securities, which are shown as a single total, due to the unpredictability of the timing of principal repayments.



Securities AFS (In thousands)	Amortized cost		Fair value		Tax equivalent yield ⁽¹⁾

U.S. Government sponsored entities' asset-backed securities	$	934,468	$	938,381	2.37	%

Obligations of state and political subdivisions:
Due five through ten years	$	3,998	$	4,140	3.04	%
Due over ten years	299,524		317,765		3.69	%
Total ⁽¹⁾	$	303,522	$	321,905	3.68	%

(1) The tax equivalent yield for certain obligations of state and political subdivisions includes the effects of a taxable equivalent adjustment using a 21% federal corporate income tax rate.

During the three-month period ended September 30, 2019, Park sold certain AFS debt securities with a book value of $10.7 million at a gross loss of $67,000, with a tax benefit of $14,000, and sold certain AFS debt securities with a book value of $23.8 million at a gross gain of $253,000, with tax expense of $53,000. During the nine-month period ended September 30, 2019, Park sold certain AFS debt securities with a book value of $62.4 million at a gross loss of $692,000, with a tax benefit of $145,000, and sold certain AFS debt securities with a book value of $29.1 million at a gross gain of $271,000, with tax expense of $57,000.

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There were no sales of investment securities during the three-month period ended September 30, 2018. During the nine-month period ended September 30, 2018, Park sold certain AFS debt securities with a book value of $245.0 million at a gross loss of $2.6 million, with a tax benefit of $551,000, and sold certain AFS debt securities with a book value of $2.0 million at a gross gain of $60,000, with tax expense of $13,000. Additionally, during the nine-month period ended September 30, 2018, Park sold certain HTM debt securities with a book value of $7.4 million at a gross gain of $291,000, with tax expense of $61,000. These HTM securities had been paid down by 96.3% of the principal outstanding at acquisition.

Investment securities having a book value of $574 million and $634 million at September 30, 2019 and December 31, 2018, respectively, were pledged to collateralize government and trust department deposits in accordance with federal and state requirements, to secure repurchase agreements sold and as collateral for Federal Home Loan Bank advance borrowings.

Note 5 – Other Investment Securities

Other investment securities consist of stock investments in the FHLB, the FRB, and equity securities. The FHLB and FRB restricted stock investments are carried at their redemption value. Equity securities with a readily determinable fair value are carried at fair value. Equity securities without a readily determinable fair value are recorded at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions ("modified cost"). Park's portfolio of equity investments in limited partnerships which provide mezzanine funding ("Partnership Investments") are valued using the net asset value practical expedient in accordance with ASC 820.

The carrying amount of other investment securities at September 30, 2019 and December 31, 2018 was as follows:



(In thousands)	September 30, 2019		December 31, 2018
FHLB stock	$	33,424	$	43,388
FRB stock	14,653		8,225
Equity investments carried at fair value	1,889		1,649
Equity investments carried at cost/modified cost ⁽¹⁾	2,689		2,589
Equity investments carried at net asset value	15,989		17,065
Total other investment securities	$	68,644	$	72,916

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

During the nine months ended September 30, 2019, the FHLB repurchased 99,646 shares of FHLB stock with a book value of $10.0 million, and Park purchased 128,553 shares of FRB stock, with a book value of $6.4 million.

During the three months ended September 30, 2019 and 2018, $58,000 and $(326,000), respectively, of unrealized gains (losses) on equity investments carried at fair value were recorded within "Gain on equity securities, net" on the consolidated condensed statements of income. During the nine months ended September 30, 2019 and 2018, $241,000 and $(33,000), respectively, of unrealized gains (losses) on equity investments carried at fair value were recorded within "Gain on equity securities, net" on the consolidated condensed statements of income.

During the three months ended September 30, 2019 and 2018, $3.3 million and $415,000, respectively, of gains on equity investments carried at NAV were recorded within “Gain on equity securities, net” on the consolidated condensed statements of income. During the nine months ended September 30, 2019 and 2018, $5.1 million and $1.2 million, respectively, of gains on equity investment carried at NAV were recorded within “Gain on equity securities, net” on the consolidated condensed statements of income.

An additional $3.5 million gain recorded within “Gain on equity securities, net” on the consolidated condensed statement of income for the nine months ended September 30, 2018 relates to Park's 8.55% investment in NewDominion which was held at June 30, 2018. See Note 3 - Business Combinations.

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Note 6 – Loans

The composition of the loan portfolio, by class of loan, as of September 30, 2019 and December 31, 2018 was as follows:



	September 30, 2019						December 31, 2018
(In thousands)	Loan Balance		Accrued Interest Receivable		Recorded Investment		Loan Balance		Accrued Interest Receivable		Recorded Investment
Commercial, financial and agricultural *	$	1,140,138	$	5,404	$	1,145,542	$	1,072,786	$	4,603	$	1,077,389
Commercial real estate *	1,599,697		5,767		1,605,464		1,283,045		4,750		1,287,795
Construction real estate:
Commercial	223,603		777		224,380		175,300		801		176,101
Mortgage	92,985		232		93,217		70,541		151		70,692
Installment	1,581		5		1,586		2,433		7		2,440
Residential real estate:
Commercial	465,656		1,199		466,855		429,730		1,150		430,880
Mortgage	1,174,421		1,529		1,175,950		1,134,278		1,227		1,135,505
HELOC	231,007		1,185		232,192		215,283		1,159		216,442
Installment	13,027		34		13,061		14,327		36		14,363
Consumer	1,430,400		3,946		1,434,346		1,292,136		3,756		1,295,892
Leases	31,132		30		31,162		2,273		26		2,299
Total loans	$	6,403,647	$	20,108	$	6,423,755	$	5,692,132	$	17,666	$	5,709,798

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

Loans are shown net of deferred origination fees, costs and unearned income of $15.9 million at September 30, 2019 and $12.5 million at December 31, 2018, which represented a net deferred income position at each date. At September 30, 2019 and December 31, 2018, loans included purchase accounting adjustments of $13.4 million and $4.4 million, respectively, which represented a net deferred income position at each date. This fair market value adjustment is expected to be recognized into interest income on a level yield basis over the remaining expected life of the loans.

Overdrawn deposit accounts of $2.0 million and $2.3 million had been reclassified to loans at September 30, 2019 and December 31, 2018, respectively, and are included in the commercial, financial and agricultural loan class above.

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Credit Quality

The following tables present the recorded investment in nonaccrual loans, accruing TDRs, and loans past due 90 days or more and still accruing by class of loan as of September 30, 2019 and December 31, 2018:



	September 30, 2019
(In thousands)	Nonaccrual Loans		Accruing TDRs		Loans Past Due 90 Days or More and Accruing		Total Nonperforming Loans
Commercial, financial and agricultural	$	28,099	$	3,430	$	—	$	31,529
Commercial real estate	36,663		2,136		625		39,424
Construction real estate:
Commercial	1,786		82		235		2,103
Mortgage	27		7		—		34
Installment	73		6		12		91
Residential real estate:
Commercial	2,224		14		—		2,238
Mortgage	15,367		8,821		1,641		25,829
HELOC	1,700		1,021		56		2,777
Installment	512		1,915		—		2,427
Consumer	3,016		1,053		570		4,639
Leases	88		—		209		297
Total loans	$	89,555	$	18,485	$	3,348	$	111,388



	December 31, 2018
(In thousands)	Nonaccrual Loans		Accruing TDRs		Loans Past Due 90 Days or More and Accruing		Total Nonperforming Loans
Commercial, financial and agricultural	$	14,998	$	196	$	10	$	15,204
Commercial real estate	25,566		2,860		—		28,426
Construction real estate:
Commercial	1,866		—		—		1,866
Mortgage	—		15		20		35
Installment	19		9		—		28
Residential real estate:
Commercial	2,610		122		—		2,732
Mortgage	16,892		9,100		1,124		27,116
HELOC	2,158		1,028		9		3,195
Installment	468		1,049		24		1,541
Consumer	3,377		843		1,115		5,335
Leases	—		—		—		—
Total loans	$	67,954	$	15,222	$	2,302	$	85,478

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The following table provides additional information regarding those nonaccrual loans and accruing TDR loans that were individually evaluated for impairment and those collectively evaluated for impairment, as of September 30, 2019 and December 31, 2018.



	September 30, 2019						December 31, 2018
(In thousands)	Nonaccrual and Accruing TDRs		Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Nonaccrual and Accruing TDRs		Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment
Commercial, financial and agricultural	$	31,529	$	31,485	$	44	$	15,194	$	15,120	$	74
Commercial real estate	38,799		38,799		—		28,426		28,426		—
Construction real estate:
Commercial	1,868		1,868		—		1,866		1,866		—
Mortgage	34		—		34		15		—		15
Installment	79		—		79		28		—		28
Residential real estate:
Commercial	2,238		2,238		—		2,732		2,732		—
Mortgage	24,188		—		24,188		25,992		—		25,992
HELOC	2,721		—		2,721		3,186		—		3,186
Installment	2,427		—		2,427		1,517		—		1,517
Consumer	4,069		—		4,069		4,220		—		4,220
Leases	88		88		—		—		—		—
Total loans	$	108,040	$	74,478	$	33,562	$	83,176	$	48,144	$	35,032

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

The following table presents loans individually evaluated for impairment by class of loan, together with the related allowance recorded, as of September 30, 2019 and December 31, 2018.



	September 30, 2019						December 31, 2018
(In thousands)	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Commercial, financial and agricultural	$	19,140	$	18,783	$	—	$	8,999	$	3,713	$	—
Commercial real estate	38,723		38,519		—		26,663		26,213		—
Construction real estate:
Commercial	4,682		1,868		—		4,679		1,866		—
Residential real estate:
Commercial	2,101		2,035		—		2,691		2,374		—
Leases	—		—		—		—		—		—

With an allowance recorded:
Commercial, financial and agricultural	14,839		12,702		2,917		13,736		11,407		2,169
Commercial real estate	280		280		30		2,255		2,213		86
Construction real estate:
Commercial	—		—		—		—		—		—
Residential real estate:
Commercial	203		203		111		358		358		18
Leases	88		88		25		—		—		—
Total	$	80,056	$	74,478	$	3,083	$	59,381	$	48,144	$	2,273

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Management’s general practice is to charge down loans individually evaluated for impairment to the fair value of the underlying collateral. At September 30, 2019 and December 31, 2018, there were $3.5 million and $8.8 million, respectively, of partial charge-offs on loans individually evaluated for impairment with no related allowance recorded and $2.1 million and $2.4 million, respectively, of partial charge-offs on loans individually evaluated for impairment that also had a specific reserve allocated.

The allowance included specific reserves related to loans individually evaluated for impairment at September 30, 2019 and December 31, 2018 of $3.1 million and $2.3 million, respectively. These loans with specific reserves had a recorded investment of $13.3 million and $14.0 million as of September 30, 2019 and December 31, 2018, respectively.

Interest income on nonaccrual loans individually evaluated for impairment is recognized on a cash basis only when Park expects to receive the entire recorded investment of the loans. Interest income on accruing TDRs individually evaluated for impairment continues to be recorded on an accrual basis. The following table presents the average recorded investment and interest income recognized subsequent to impairment on loans individually evaluated for impairment as of and for the three and nine months ended September 30, 2019 and September 30, 2018:



	Three Months Ended September 30, 2019						Three Months Ended September 30, 2018
(In thousands)	Recorded Investment as of September 30, 2019		Average Recorded Investment		Interest Income Recognized		Recorded Investment as of September 30, 2018		Average Recorded Investment		Interest Income Recognized
Commercial, financial and agricultural	$	31,485	$	23,468	$	107	$	16,026	$	23,247	$	187
Commercial real estate	38,799		29,779		277		25,805		26,428		268
Construction real estate:
Commercial	1,868		1,922		1		2,016		2,246		4
Residential real estate:
Commercial	2,238		1,977		27		2,913		2,758		26
Leases	88		90		—		—		—		—
Total	$	74,478	$	57,236	$	412	$	46,760	$	54,679	$	485



	Nine Months Ended September 30, 2019							Nine Months Ended September 30, 2018
(In thousands)	Recorded Investment as of September 30, 2019		Average Recorded Investment		Interest Income Recognized			Recorded Investment as of September 30, 2018		Average Recorded Investment		Interest Income Recognized
Commercial, financial and agricultural	$	31,485	$	18,368	$	244	—	$	16,026	$	22,686	$	506
Commercial real estate	38,799		29,712		803		—	25,805		21,582		671
Construction real estate:
Commercial	1,868		2,176		23		—	2,016		1,661		31
Residential real estate:
Commercial	2,238		2,198		72		—	2,913		6,086		84
Leases	88		36		—			—		—		—
Total	$	74,478	$	52,490	$	1,142	—	$	46,760	$	52,015	$	1,292

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The following tables present the aging of the recorded investment in past due loans as of September 30, 2019 and December 31, 2018 by class of loan.



	September 30, 2019
(In thousands)	Accruing Loans Past Due 30-89 Days		Past Due Nonaccrual Loans and Loans Past Due 90 Days or More and Accruing ⁽¹⁾		Total Past Due		Total Current ⁽²⁾		Total Recorded Investment
Commercial, financial and agricultural	$	2,570	$	10,602	$	13,172	$	1,132,370	$	1,145,542
Commercial real estate	673		1,354		2,027		1,603,437		1,605,464
Construction real estate:
Commercial	—		2,023		2,023		222,357		224,380
Mortgage	118		—		118		93,099		93,217
Installment	—		12		12		1,574		1,586
Residential real estate:
Commercial	40		791		831		466,024		466,855
Mortgage	10,196		9,508		19,704		1,156,246		1,175,950
HELOC	570		845		1,415		230,777		232,192
Installment	45		269		314		12,747		13,061
Consumer	5,758		1,572		7,330		1,427,016		1,434,346
Leases	51		209		260		30,902		31,162
Total loans	$	20,021	$	27,185	$	47,206	$	6,376,549	$	6,423,755

(1) Includes an aggregate of $3.3 million of loans past due 90 days or more and accruing. The remaining loans were past due nonaccrual loans.

(2) Includes an aggregate of $65.7 million of nonaccrual loans which were current in regards to contractual principal and interest payments.



	December 31, 2018
(in thousands)	Accruing Loans Past Due 30-89 Days		Past Due Nonaccrual Loans and Loans Past Due 90 Days or More and Accruing ⁽¹⁾		Total Past Due		Total Current ⁽²⁾		Total Recorded Investment
Commercial, financial and agricultural	$	4,786	$	1,375	$	6,161	$	1,071,228	$	1,077,389
Commercial real estate	780		3,584		4,364		1,283,431		1,287,795
Construction real estate:
Commercial	—		1,635		1,635		174,466		176,101
Mortgage	133		20		153		70,539		70,692
Installment	28		19		47		2,393		2,440
Residential real estate:
Commercial	683		1,104		1,787		429,093		430,880
Mortgage	13,210		8,553		21,763		1,113,742		1,135,505
HELOC	620		907		1,527		214,915		216,442
Installment	155		274		429		13,934		14,363
Consumer	9,524		2,131		11,655		1,284,237		1,295,892
Leases	—		—		—		2,299		2,299
Total loans	$	29,919	$	19,602	$	49,521	$	5,660,277	$	5,709,798

(1) Includes an aggregate of $2.3 million of loans past due 90 days or more and accruing. The remaining loans were past due nonaccrual loans.

(2) Includes an aggregate of $50.7 million of nonaccrual loans which were current in regards to contractual principal and interest payments.

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Credit Quality Indicators

Management utilizes past due information as a credit quality indicator across the loan portfolio. Past due information as of September 30, 2019 and December 31, 2018 is included in the tables above. The past due information is the primary credit quality indicator within the following classes of loans: (1) mortgage loans and installment loans in the construction real estate segment; (2) mortgage loans, HELOC and installment loans in the residential real estate segment; and (3) consumer loans. The primary credit indicator for commercial loans is based on an internal grading system that grades commercial loans on a scale from 1 to 8. Credit grades are continuously monitored by the responsible loan officer and adjustments are made when appropriate. A grade of 1 indicates little or no credit risk and a grade of 8 is considered a loss. Commercial loans that are pass-rated (graded an 1 through a 4) are considered to be of acceptable credit risk. Commercial loans graded a 5 (special mention) are considered to be watch list credits and a higher loan loss reserve percentage is allocated to these loans. Loans classified as special mention have potential weaknesses that require management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of Park’s credit position at some future date. Commercial loans graded a 6 (substandard), also considered to be watch list credits, are considered to represent higher credit risk and, as a result, a higher loan loss reserve percentage is allocated to these loans. Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or the value of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that Park will sustain some loss if the deficiencies are not corrected. Commercial loans that are graded a 7 (doubtful) are shown as nonaccrual and Park generally charges these loans down to their fair value by taking a partial charge-off or recording a specific reserve. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Certain 6-rated loans and all 7-rated loans are placed on nonaccrual status and included within the impaired category. A loan is deemed impaired when management determines the borrower's ability to perform in accordance with the contractual loan agreement is in doubt. Any commercial loan graded an 8 (loss) is completely charged off.

The tables below present the recorded investment by loan grade at September 30, 2019 and December 31, 2018 for all commercial loans:



	September 30, 2019
(In thousands)	5 Rated		6 Rated		Nonaccrual and Accruing TDRs		Purchase Credit Impaired ⁽¹⁾		Pass-Rated		Recorded Investment
Commercial, financial and agricultural *	$	27,059	$	315	$	31,529	$	4,803	$	1,081,836	$	1,145,542
Commercial real estate *	11,429		1,246		38,799		10,595		1,543,395		1,605,464
Construction real estate:
Commercial	3,852		—		1,868		1,288		217,372		224,380
Residential real estate:
Commercial	1,001		33		2,238		1,926		461,657		466,855
Leases	—		—		88		568		30,506		31,162
Total commercial loans	$	43,341	$	1,594	$	74,522	$	19,180	$	3,334,766	$	3,473,403

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

(1) Excludes loans acquired with deteriorated credit quality which are nonaccrual or TDRs due to additional credit deterioration or modification post acquisition. These loans had a recorded investment of $11,000 at September 30, 2019.

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	December 31, 2018
(In thousands)	5 Rated		6 Rated		Nonaccrual and Accruing TDRs		Purchase Credit Impaired ⁽¹⁾		Pass-Rated		Recorded Investment
Commercial, financial and agricultural *	$	11,509	$	444	$	15,194	$	148	$	1,050,094	$	1,077,389
Commercial real estate *	2,707		—		28,426		3,059		1,253,603		1,287,795
Construction real estate:
Commercial	1,560		—		1,866		503		172,172		176,101
Residential real estate:
Commercial	272		41		2,732		251		427,584		430,880
Leases	—		—		—		—		2,299		2,299
Total Commercial Loans	$	16,048	$	485	$	48,218	$	3,961	$	2,905,752	$	2,974,464

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

Loans and Leases Acquired with Deteriorated Credit Quality

In conjunction with the NewDominion Bank acquisition, Park acquired loans with a book value of $277.9 million as of July 1, 2018. These loans were recorded at the initial fair value of $272.8 million. Loans acquired with deteriorated credit quality with a book value of $5.1 million were recorded at the initial fair value of $4.9 million. The carrying amount of loans acquired with deteriorated credit quality at September 30, 2019 and December 31, 2018 was $3.3 million and $4.4 million, respectively, while the outstanding customer balance was $3.4 million and $4.6 million, respectively. At September 30, 2019 and December 31, 2018, no allowance had been recognized related to the acquired impaired loans.

In conjunction with the Carolina Alliance acquisition, Park acquired loans and leases with a book value of $589.7 million as of April 1, 2019. These loans and leases were recorded at the initial fair value of $578.6 million. Loans and leases acquired with deteriorated credit quality with a book value of $21.8 million were recorded at the initial fair value of $19.9 million. The carrying amount of loans and leases acquired with deteriorated credit quality at September 30, 2019 was $17.2 million, while the outstanding customer balance was $18.9 million. At September 30, 2019, no allowance had been recognized related to the acquired impaired loans and leases.

Troubled Debt Restructurings

Management classifies loans as TDRs when a borrower is experiencing financial difficulties and Park has granted a concession to the borrower as part of a modification or in the loan renewal process. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of the borrower's debt in the foreseeable future without the modification. This evaluation is performed in accordance with the Company’s internal underwriting policy. Management’s policy is to modify loans by extending the term or by granting a temporary or permanent contractual interest rate below the market rate, not by forgiving debt. A court's discharge of a borrower's debt in a Chapter 7 bankruptcy is considered a concession when the borrower does not reaffirm the discharged debt.

Certain loans which were modified during the three-month and nine-month periods ended September 30, 2019 and September 30, 2018 did not meet the definition of a TDR as the modification was a delay in a payment that was considered to be insignificant. Management considers a forbearance period of up to three months or a delay in payment of up to 30 days to be insignificant. TDRs may be classified as accruing if the borrower has been current for a period of at least six months with respect to loan payments and management expects that the borrower will be able to continue to make payments in accordance with the terms of the restructured note. Management reviews all accruing TDRs quarterly to ensure payments continue to be made in accordance with the modified terms.

Quarterly, management reviews renewals/modifications of loans previously identified as TDRs to consider if it is appropriate to remove the TDR classification. If the borrower is no longer experiencing financial difficulty and the renewal/modification did not contain a concessionary interest rate or other concessionary terms and the terms of the renewal/modification are considered to be market terms based on the current risk characteristics of the borrower, management considers the potential removal of the TDR classification. If deemed appropriate, the TDR classification is removed if the borrower has complied with the terms of the loan at the date of the renewal/modification and there was a reasonable expectation that the borrower would continue to

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comply with the terms of the loan subsequent to the date of the renewal/modification. The majority of these TDRs were originally considered restructurings in a prior year as a result of a renewal/modification with an interest rate that was not commensurate with the risk of the underlying loan at the time of the renewal/modification. The TDR classification was removed on $15,000 of loans during the three-month period ended September 30, 2019 and on $38,000 of loans during the nine-month period ended September 30, 2019. The TDR classification was removed on $0.2 million of loans during the three-month period ended September 30, 2018 and on $2.4 million of loans during the nine-month period ended September 30, 2018.

At September 30, 2019 and December 31, 2018, there were $29.1 million and $24.6 million, respectively, of TDRs included in the nonaccrual loan totals. At September 30, 2019 and December 31, 2018, $17.2 million and $19.2 million, respectively, of these nonaccrual TDRs were performing in accordance with the terms of the restructured note. As of September 30, 2019 and December 31, 2018, loans with a recorded investment of $18.5 million and $15.2 million, respectively, were included in accruing TDR loan totals. Management will continue to review the restructured loans and may determine it is appropriate to move certain nonaccrual TDRs to accrual status in the future.

At September 30, 2019 and December 31, 2018, Park had commitments to lend $3.4 million and $0.3 million, respectively, of additional funds to borrowers whose outstanding loan terms had been modified in a TDR.

At both September 30, 2019 and December 31, 2018, there were $1.2 million of specific reserves related to TDRs. Modifications made in 2019 and 2018 were largely the result of renewals and extending the maturity date of the loans at terms consistent with the original notes. These modifications were deemed to be TDRs primarily due to Park’s conclusion that the borrower would likely not have qualified for similar terms through another lender. Many of the modifications deemed to be TDRs were previously identified as impaired loans, and thus were also previously evaluated for impairment under Accounting Standards Codification (ASC) 310. There were no additional specific reserves recorded during the three-month period ended September 30, 2019 as a result of TDRs identified in the period. Additional specific reserves of $150,000 were recorded during the three-month period ended September 30, 2018 as a result of TDRs identified in the period. Additional specific reserves of $1,000 and $160,000 were recorded during the nine-month periods ended September 30, 2019 and September 30, 2018, respectively, as a result of TDRs identified in the respective periods.

The terms of certain other loans were modified during the three-month and nine-month periods ended September 30, 2019 and September 30, 2018 that did not meet the definition of a TDR. There were $0.4 million of substandard commercial loans modified during the three-month period ended September 30, 2019 which did not meet the definition of a TDR. Substandard commercial loans modified during the nine-month period ended September 30, 2019 which did not meet the definition of a TDR had a total recorded investment of $0.6 million. There were no substandard commercial loans modified during the three-month period ended September 30, 2018 which did not meet the definition of a TDR. Substandard commercial loans modified during the nine-month period ended September 30, 2018 which did not meet the definition of a TDR had a total recorded investment of $0.2 million. Consumer loans modified during the three-month and nine-month periods ended September 30, 2019 which did not meet the definition of a TDR had a total recorded investment of $11.9 million and $21.4 million, respectively. Consumer loans with a recorded investment of $6.6 million and $17.0 million were modified during the three-month and nine-month periods ended September 30, 2018, respectively, and did not meet the definition of a TDR. Many of these loans were to borrowers who were not experiencing financial difficulties but who were looking to reduce their cost of funds.

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The following tables detail the number of contracts modified as TDRs during the three-month periods ended September 30, 2019 and September 30, 2018, as well as the recorded investment of these contracts at September 30, 2019 and September 30, 2018. The recorded investment pre- and post-modification is generally the same due to the fact that Park does not typically forgive principal.



	Three Months Ended September 30, 2019
(In thousands)	Number of Contracts	Accruing		Nonaccrual		Total Recorded Investment
Commercial, financial and agricultural	8	$	752	$	5,002	$	5,754
Commercial real estate	1	—		241		241
Construction real estate:
Commercial	1	82		—		82
Mortgage	—	—		—		—
Installment	—	—		—		—
Residential real estate:
Commercial	1	13		—		13
Mortgage	4	286		215		501
HELOC	6	31		107		138
Installment	9	407		14		421
Consumer	77	174		542		716
Total loans	107	$	1,745	$	6,121	$	7,866



	Three Months Ended September 30, 2018
(In thousands)	Number of Contracts	Accruing		Nonaccrual		Total Recorded Investment
Commercial, financial and agricultural	8	$	22	$	552	$	574
Commercial real estate	3	—		1,154		1,154
Construction real estate:
Commercial	—	—		—		—
Mortgage	—	—		—		—
Installment	—	—		—		—
Residential real estate:
Commercial	2	55		249		304
Mortgage	4	—		246		246
HELOC	10	453		16		469
Installment	8	336		—		336
Consumer	71	31		590		621
Total loans	106	$	897	$	2,807	$	3,704

Of those loans which were modified and determined to be a TDR during the three-month period ended September 30, 2019, $0.6 million were on nonaccrual status as of December 31, 2018. Of those loans which were modified and determined to be a TDR during the three-month period ended September 30, 2018, $0.1 million were on nonaccrual status as of December 31, 2017.

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The following tables detail the number of contracts modified as TDRs during the nine-month periods ended September 30, 2019 and September 30, 2018, as well as the recorded investment of these contracts at September 30, 2019 and September 30, 2018. The recorded investment pre- and post-modification is generally the same due to the fact that Park does not typically forgive principal.



	Nine Months Ended September 30, 2019
(In thousands)	Number of Contracts	Accruing		Nonaccrual		Total Recorded Investment
Commercial, financial and agricultural	24	$	3,237	$	6,059	$	9,296
Commercial real estate	5	—		3,236		3,236
Construction real estate:
Commercial	2	82		—		82
Mortgage	1	—		—		—
Installment	—	—		—		—
Residential real estate:
Commercial	2	13		36		49
Mortgage	18	340		673		1,013
HELOC	14	121		243		364
Installment	25	951		52		1,003
Consumer	251	199		987		1,186
Total loans	342	$	4,943	$	11,286	$	16,229



	Nine Months Ended September 30, 2018
(In thousands)	Number of Contracts	Accruing		Nonaccrual		Total Recorded Investment
Commercial, financial and agricultural	16	$	208	$	592	$	800
Commercial real estate	10	447		1,412		1,859
Construction real estate:
Commercial	1	—		—		—
Mortgage	—	—		—		—
Installment	2	12		—		12
Residential real estate:
Commercial	2	55		249		304
Mortgage	17	90		972		1,062
HELOC	18	735		125		860
Installment	17	437		16		453
Consumer	206	59		1,157		1,216
Total loans	289	$	2,043	$	4,523	$	6,566

Of those loans which were modified and determined to be a TDR during the nine-month period ended September 30, 2019, $1.8 million were on nonaccrual status as of December 31, 2018. Of those loans which were modified and determined to be a TDR during the nine-month period ended September 30, 2018, $0.5 million were on nonaccrual status as of December 31, 2017.

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The following tables present the recorded investment in loans which were modified as TDRs within the previous 12 months and for which there was a payment default during the three-month and nine-month periods ended September 30, 2019 and September 30, 2018, respectively. For these tables, a loan is considered to be in default when it becomes 30 days contractually past due under the modified terms. The additional allowance for loan loss resulting from the defaults on TDR loans was immaterial.



	Three Months Ended September 30, 2019			Three Months Ended September 30, 2018
(In thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Commercial, financial and agricultural	2	$	2	1	$	1
Commercial real estate	—	—		—	—
Construction real estate:
Commercial	—	—		—	—
Mortgage	—	—		—	—
Installment	—	—		—	—
Residential real estate:
Commercial	—	—		—	—
Mortgage	4	257		8	688
HELOC	5	135		3	108
Installment	2	66		—	—
Consumer	51	477		40	315
Leases	—	—		—	—
Total loans	64	$	937	52	$	1,112

Of the $0.9 million in modified TDRs which defaulted during the three-month period ended September 30, 2019, $48,000 were accruing loans and $0.9 million were nonaccrual loans. Of the $1.1 million in modified TDRs which defaulted during the three-month period ended September 30, 2018, $67,000 were accruing loans and $1.0 million were nonaccrual loans.



	Nine Months Ended September 30, 2019			Nine Months Ended September 30, 2018
(In thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Commercial, financial and agricultural	3	$	65	1	$	1
Commercial real estate	—	—		—	—
Construction real estate:
Commercial	—	—		—	—
Mortgage	—	—		—	—
Installment	—	—		—	—
Residential real estate:
Commercial	1	13		—	—
Mortgage	7	370		9	789
HELOC	7	165		3	108
Installment	2	66		—	—
Consumer	58	530		50	392
Leases	—	—		—	—
Total loans	78	$	1,209	63	$	1,290

Of the $1.2 million in modified TDRs which defaulted during the nine-month period ended September 30, 2019, $87,000 were accruing loans and $1.1 million were nonaccrual loans. Of the $1.3 million in modified TDRs which defaulted during the nine-month period ended September 30, 2018, $67,000 were accruing loans and $1.2 million were nonaccrual loans.

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Note 7 – Allowance for Loan Losses

The allowance for loan losses is that amount management believes is adequate to absorb probable incurred credit losses in the loan portfolio based on management’s evaluation of various factors including overall growth in the loan portfolio, an analysis of individual loans, prior and current loss experience, and current economic conditions. A provision for loan losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors as discussed within Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2018 Annual Report.

Loss factors are reviewed quarterly and updated at least annually to reflect recent loan loss history and incorporate current risks and trends which may not be recognized in historical data. The following are factors management reviews on a quarterly or annual basis.

•

Historical Loss Factor: Management updated the historical loss calculation during the fourth quarter of 2018, incorporating net charge-offs plus changes in specific reserves through December 31, 2018. With the addition of 2018 historical losses, management extended the historical loss period to 108 months from 96 months. The 108-month historical loss period captures all annual periods subsequent to June 2009, the end of the most recent recession, thus encompassing the full economic cycle to date.

•

Loss Emergence Period Factor: At least annually, management calculates the loss emergence period for each commercial loan segment. The loss emergence period is calculated based upon the average period of time it takes from the probable occurrence of a loss event to the credit being moved to nonaccrual. If the loss emergence period for any commercial loan segment is greater than one year, management applies additional general reserves to all performing loans within that segment of the commercial loan portfolio. The loss emergence period was last updated in the fourth quarter of 2018.

•

Loss Migration Factor: Park’s commercial loans are individually risk graded. If loan downgrades occur, the probability of default increases, and accordingly, management allocates a higher percentage reserve to those accruing commercial loans graded special mention and substandard. Annually, management calculates a loss migration factor for each commercial loan segment for special mention and substandard credits based on a review of losses over the period of time a loan takes to migrate from pass-rated to impaired. The loss migration factor was last updated in the fourth quarter of 2018.

•

Environmental Loss Factor: Management has identified certain macroeconomic factors that trend in accordance with losses in Park’s commercial loan portfolio. These macroeconomic factors are reviewed quarterly and the adjustments made to the environmental loss factor impacting each segment in the performing commercial loan portfolio correlate to changes in the macroeconomic environment. No change was made to the environmental loss factor during the nine months ended September 30, 2019.

The activity in the allowance for loan losses for the three-month and nine-month periods ended September 30, 2019 and September 30, 2018 is summarized in the following tables.



	Three Months Ended September 30, 2019
(In thousands)	Commercial, financial and agricultural		Commercial real estate			Construction real estate			Residential real estate			Consumer		Leases		Total
Allowance for loan losses:
Beginning balance	$	17,370	$	10,377		$	5,065		$	8,869		$	12,265	$	57	$	54,003
Charge-offs	585		8			—			85			1,801		—		2,479
Recoveries	403		246			432			98			1,183		—		2,362
Net charge-offs/(recoveries)	182		(238		)	(432		)	(13		)	618		—		117
Provision/(recovery)	1,238		(177		)	(65		)	49			908		14		1,967
Ending balance	$	18,426	$	10,438		$	5,432		$	8,931		$	12,555	$	71	$	55,853

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	Three Months Ended September 30, 2018
(In thousands)	Commercial, financial and agricultural		Commercial real estate			Construction real estate			Residential real estate			Consumer		Leases			Total
Allowance for loan losses:
Beginning balance	$	14,478	$	9,406		$	4,652		$	9,245		$	11,671	$	—		$	49,452
Charge-offs	993		23			26			61			2,371		—			3,474
Recoveries	136		27			156			130			875		4			1,328
Net charge-offs/(recoveries)	857		(4		)	(130		)	(69		)	1,496		(4		)	2,146
Provision/(recovery)	1,394		337			(187		)	(212		)	1,612		(4		)	2,940
Ending balance	$	15,015	$	9,747		$	4,595		$	9,102		$	11,787	$	—		$	50,246



	Nine Months Ended September 30, 2019
(In thousands)	Commercial, financial and agricultural		Commercial real estate		Construction real estate			Residential real estate			Consumer		Leases			Total
Allowance for loan losses:
Beginning balance	$	16,777	$	9,768	$	4,463		$	8,731		$	11,773	$	—		$	51,512
Charge-offs	1,498		401		—			176			6,319		—			8,394
Recoveries	983		360		543			640			3,824		1			6,351
Net charge-offs/(recoveries)	515		41		(543		)	(464		)	2,495		(1		)	2,043
Provision/(recovery)	2,164		711		426			(264		)	3,277		70			6,384
Ending balance	$	18,426	$	10,438	$	5,432		$	8,931		$	12,555	$	71		$	55,853



	Nine Months Ended September 30, 2018
(In thousands)	Commercial, financial and agricultural		Commercial real estate		Construction real estate			Residential real estate			Consumer		Leases			Total
Allowance for loan losses:
Beginning balance	$	15,022	$	9,601	$	4,430		$	9,321		$	11,614	$	—		$	49,988
Charge-offs	1,929		252		57			279			7,123		—			9,640
Recoveries	994		203		435			734			2,942		4			5,312
Net charge-offs/(recoveries)	935		49		(378		)	(455		)	4,181		(4		)	4,328
Provision/(recovery)	928		195		(213		)	(674		)	4,354		(4		)	4,586
Ending balance	$	15,015	$	9,747	$	4,595		$	9,102		$	11,787	$	—		$	50,246

Loans collectively evaluated for impairment in the following tables include all performing loans at September 30, 2019 and December 31, 2018, as well as nonperforming loans internally classified as consumer loans. Nonperforming consumer loans are not typically individually evaluated for impairment, but receive a portion of the statistical allocation of the allowance for loan losses. Loans individually evaluated for impairment include all impaired loans internally classified as commercial loans at September 30, 2019 and December 31, 2018, which are evaluated for impairment in accordance with U.S. GAAP (see Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2018 Annual Report).

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The composition of the allowance for loan losses at September 30, 2019 and December 31, 2018 was as follows:



	September 30, 2019
(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	$	2,917		$	30		$	—		$	111		$	—		$	25		$	3,083
Collectively evaluated for impairment	15,509			10,408			5,432			8,820			12,555			46			52,770
Acquired with deteriorated credit quality ⁽¹⁾	—			—			—			—			—			—			—
Total ending allowance balance	$	18,426		$	10,438		$	5,432		$	8,931		$	12,555		$	71		$	55,853

Loan balance:
Loans individually evaluated for impairment	$	31,472		$	38,758		$	1,869		$	2,237		$	—		$	88		$	74,424
Loans collectively evaluated for impairment	1,103,885			1,550,422			314,942			1,878,615			1,430,397			30,476			6,308,737
Loans acquired with deteriorated credit quality ⁽¹⁾	4,781			10,517			1,358			3,259			3			568			20,486
Total ending loan balance	$	1,140,138		$	1,599,697		$	318,169		$	1,884,111		$	1,430,400		$	31,132		$	6,403,647

Allowance for loan losses as a percentage of loan balance:
Loans individually evaluated for impairment	9.27		%	0.08		%	—		%	4.96		%	—		%	28.41		%	4.14		%
Loans collectively evaluated for impairment	1.40		%	0.67		%	1.72		%	0.47		%	0.88		%	0.15		%	0.84		%
Loans acquired with deteriorated credit quality	—		%	—		%	—		%	—		%	—		%	—		%	—		%
Total	1.62		%	0.65		%	1.71		%	0.47		%	0.88		%	0.23		%	0.87		%

Recorded investment:
Loans individually evaluated for impairment	$	31,485		$	38,799		$	1,868		$	2,238		$	—		$	88		$	74,478
Loans collectively evaluated for impairment	1,109,254			1,556,070			315,927			1,882,543			1,434,343			30,506			6,328,643
Loans acquired with deteriorated credit quality ⁽¹⁾	4,803			10,595			1,388			3,277			3			568			20,634
Total ending recorded investment	$	1,145,542		$	1,605,464		$	319,183		$	1,888,058		$	1,434,346		$	31,162		$	6,423,755

⁽¹⁾ Excludes loans acquired with deteriorated credit quality which are individually evaluated for impairment due to additional credit deterioration or modification post-acquisition. These loans had a balance of $11,000, a recorded investment of $11,000, and no allowance as of September 30, 2019.

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	December 31, 2018
(In thousands)	Commercial, financial and agricultural			Commercial real estate			Construction real estate			Residential real estate			Consumer			Leases			Total
Allowance for loan losses:
Ending allowance balance attributed to loans:
Individually evaluated for impairment	$	2,169		$	86		$	—		$	18		$	—		$	—		$	2,273
Collectively evaluated for impairment	14,608			9,682			4,463			8,713			11,773			—			49,239
Acquired with deteriorated credit quality	—			—			—			—			—			—			—
Total ending allowance balance	$	16,777		$	9,768		$	4,463		$	8,731		$	11,773		$	—		$	51,512

Loan balance:
Loans individually evaluated for impairment	$	15,119		$	28,418		$	1,866		$	2,732		$	—		$	—		$	48,135
Loans collectively evaluated for impairment	1,057,520			1,251,579			245,909			1,790,637			1,292,136			2,273			5,640,054
Loans acquired with deteriorated credit quality⁽¹⁾	147			3,048			499			249			—			—			3,943
Total ending loan balance	$	1,072,786		$	1,283,045		$	248,274		$	1,793,618		$	1,292,136		$	2,273		$	5,692,132

Allowance for loan losses as a percentage of loan balance:
Loans individually evaluated for impairment	14.35		%	0.30		%	—		%	0.66		%	—		%	—		%	4.72		%
Loans collectively evaluated for impairment	1.38		%	0.77		%	1.81		%	0.49		%	0.91		%	—		%	0.87		%
Loans acquired with deteriorated credit quality	—		%	—		%	—		%	—		%	—		%	—		%	—		%
Total	1.56		%	0.76		%	1.80		%	0.49		%	0.91		%	—		%	0.90		%

Recorded investment:
Loans individually evaluated for impairment	$	15,120		$	28,426		$	1,866		$	2,732		$	—		$	—		$	48,144
Loans collectively evaluated for impairment	1,062,121			1,256,310			246,864			1,794,207			1,295,892			2,299			5,657,693
Loans acquired with deteriorated credit quality ⁽¹⁾	148			3,059			503			251			—			—			3,961
Total ending recorded investment	$	1,077,389		$	1,287,795		$	249,233		$	1,797,190		$	1,295,892		$	2,299		$	5,709,798

⁽¹⁾ Excludes loans acquired with deteriorated credit quality which are individually evaluated for impairment due to additional credit deterioration or modification post acquisition. These loans had a balance of $475,000, a recorded investment of $475,000, and no allowance as of December 31, 2018.

Note 8 – Loans Held For Sale

Mortgage loans held for sale are carried at their fair value. At September 30, 2019 and December 31, 2018, respectively, Park had $22.0 million and $4.2 million in mortgage loans held for sale. These amounts are included in loans on the consolidated condensed balance sheets and in the residential real estate loan segments in Note 6 - Loans, and Note 7 - Allowance for Loan Losses. The contractual balance was $21.7 million and $4.1 million at September 30, 2019 and December 31, 2018, respectively. The gain expected upon sale was $294,000 and $60,000 at September 30, 2019 and December 31, 2018, respectively. None of these loans were 90 days or more past due or on nonaccrual status as of September 30, 2019 or December 31, 2018.

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Note 9 – Goodwill and Other Intangible Assets

The following table shows the activity in goodwill and other intangible assets for the nine months ended September 30, 2019 and 2018.



(in thousands)	Goodwill		Other intangible assets		Total
December 31, 2017	$	72,334	$	—	$	72,334
Acquired goodwill and other intangible assets	40,405		7,549		47,954
Amortization	—		289		289
September 30, 2018	$	112,739	$	7,260	$	119,999

December 31, 2018	$	112,739	$	6,971	$	119,710
Acquired goodwill and other intangible assets	45,260		10,251		55,511
Amortization	—		1,732		1,732
September 30, 2019	$	157,999	$	15,490	$	173,489

Park evaluates goodwill for impairment during the second quarter of each year, with financial data as of March 31. Based on the analysis performed during the second quarter of 2019, the Company determined that goodwill for Park's reporting unit, PNB, was not impaired. There have been no subsequent circumstances or events triggering an additional evaluation.

Acquired Intangible Assets

The following table shows the balance of acquired intangible assets as of September 30, 2019 and December 31, 2018.



	September 30, 2019				December 31, 2018
(in thousands)	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Other intangible assets:
Core deposit intangible assets	$	16,500	$	2,310	$	6,249	$	578
Trade name intangible assets	1,300		—		1,300		—
Total	$	17,800	$	2,310	$	7,549	$	578

Core deposit intangible assets are being amortized, on an accelerated basis, over a period of ten years. The trade name intangible is an indefinite life asset and is not amortized, but rather is assessed, at least annually, for impairment. Aggregate amortization expense was $741,000 and $1.7 million for the three and nine months ended September 30, 2019, respectively. Aggregate amortization expense was $289,000 for both the three and nine months ended September 30, 2018.

Estimated amortization expense related to core deposit intangible assets for each of the periods listed below follows:



(in thousands)	Total
Three months ending December 31, 2019	$	741
2020	2,502
2021	2,040
2022	1,725
2023	1,548

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Note 10 – Investment in Qualified Affordable Housing

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

The table below details the balances of Park’s affordable housing tax credit investments and related unfunded commitments as of September 30, 2019 and December 31, 2018.



(in thousands)	September 30, 2019		December 31, 2018
Affordable housing tax credit investments	$	54,909	$	50,347
Unfunded commitments	28,439		22,282

Commitments are funded when capital calls are made by the general partner. Park expects that the current commitments will be funded between 2019 and 2029.

During the three months ended September 30, 2019 and 2018, Park recognized amortization expense of $1.8 million and $1.9 million, respectively, which was included within the provision for income taxes. During the nine months ended September 30, 2019 and 2018, Park recognized amortization expense of $5.4 million and $5.6 million, respectively, which was included within the provision for income taxes. Additionally, during the three months ended September 30, 2019 and 2018, Park recognized tax credits and other benefits from its affordable housing tax credit investments of $2.6 million and $2.0 million, respectively, and during each of the nine months ended September 30, 2019 and 2018, Park recognized tax credits and other benefits from its affordable housing tax credit investments of $6.9 million, which was included within the provision for income taxes.

Note 11 – Foreclosed and Repossessed Assets

Park typically transfers a loan to other real estate owned at the time that Park takes deed/title to the real estate property asset. The carrying amounts of foreclosed real estate properties held at September 30, 2019 and December 31, 2018 are listed below, as well as the recorded investment of loans secured by residential real estate properties for which formal foreclosure proceedings were in process at those dates.



(in thousands)	September 30, 2019		December 31, 2018
OREO:
Commercial real estate	$	2,385	$	2,359
Construction real estate	380		1,108
Residential real estate	1,014		836
Total OREO	$	3,779	$	4,303

Loans in process of foreclosure:
Residential real estate	$	2,499	$	2,346

In addition to real estate, Park may also repossess different types of collateral. At both September 30, 2019 and December 31, 2018, Park had $4.0 million in other repossessed assets which are included in "Other Assets" on the Consolidated Condensed Balance Sheets. For both periods presented, the other repossessed assets largely consisted of an aircraft acquired as part of a loan workout.

Note 12 – Loan Servicing

Park serviced sold mortgage loans of $1.41 billion at September 30, 2019, $1.39 billion at December 31, 2018 and $1.38 billion at September 30, 2018. At September 30, 2019, $2.4 million of the sold mortgage loans were sold with recourse, compared to $2.5 million at December 31, 2018 and $2.6 million at September 30, 2018. Management closely monitors the delinquency rates on the mortgage loans sold with recourse. At September 30, 2019 and December 31, 2018, management had established reserves of $26,000 and $60,000, respectively, to account for expected losses on loan repurchases.

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

Activity for MSRs and the related valuation allowance follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2019			2018			2019			2018
Mortgage servicing rights:
Carrying amount, net, beginning of period	$	10,104		$	10,077		$	10,178		$	9,688
Additions	722			432			1,462			1,208
Amortization	(534		)	(387		)	(1,259		)	(1,156		)
Changes in valuation allowance	(332		)	(26		)	(421		)	356
Carrying amount, net, end of period	$	9,960		$	10,096		$	9,960		$	10,096

Valuation allowance:
Beginning of period	$	321		$	248		$	232		$	630
Changes in valuation allowance	332			26			421			(356		)
End of period	$	653		$	274		$	653		$	274

Servicing fees included in other service income were $0.9 million for each of the three months ended September 30, 2019 and 2018 and were $2.7 million for each of the nine months ended September 30, 2019 and 2018.

Note 13 - Leases

Park is a lessee in several noncancellable operating lease arrangements, primarily for retail branches, administrative and warehouse buildings, ATMs, and certain office equipment within its Ohio, North Carolina, South Carolina, and Kentucky markets. Certain of these leases contain renewal options for periods ranging from one to five years. Park’s leases generally do not include termination options for either party to the lease or restrictive financial or other covenants. Payments due under the lease contracts include fixed payments plus, for many of Park’s real estate leases, variable payments such as Park's proportionate share of property taxes, insurance, and common area maintenance.

The Company adopted ASU 2016-02, Leases (ASC 842), using the modified retrospective method as of the date of adoption, January 1, 2019, as permitted by the amendments in ASU 2018-11. As a result, the Company was not required to adjust its comparative period financial information for effects of the adoption of the standard or make the new required lease disclosures for periods prior to the effective date. Upon adoption of this accounting guidance on January 1, 2019, Park recorded an initial ROU asset of $11.0 million, and a lease liability of $11.8 million, and reclassified an existing deferred rent liability of $0.6 million. The impact to the Company's retained earnings, net of the tax impact, was $143,000.

Management elected to adopt the package of transition practical expedients and, therefore, has not reassessed (1) whether existing or expired contracts contain a lease, (2) lease classification for existing or expired leases or (3) the accounting for initial direct costs that were previously capitalized. The Company did not elect the practical expedient to use hindsight for leases existing at the adoption date. Park elected the practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease components. Additionally, Park has elected not to recognize ROU assets and lease liabilities for short-term leases that have a lease term of 12 months or less. The Company recognizes the lease payments associated with its short-term leases as an expense on a cash basis.

Management determines if an arrangement is or contains a lease at contract inception. If an arrangement is determined to be or contain a lease, Park recognizes a ROU asset and a lease liability at the lease commencement date.

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Park’s lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. Key estimates and judgments related to the lease liability include how management determines (1) the discount rate it uses to discount the unpaid lease payments to present value, (2) the lease term, and (3) lease payments.

•

ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. Generally, management cannot determine the interest rate implicit in the lease because it does not have access to the lessor’s estimated residual value or the amount of the lessor’s deferred initial direct costs. Therefore, Park utilizes its incremental borrowing rate as the discount rate for leases. Park’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. To manage its capital and liquidity needs, Park periodically obtains wholesale funding from the FHLB on an over-collateralized basis. The impact of utilizing an interest rate on an over-collateralized borrowing versus a fully collateralized borrowing is not material. Therefore, the FHLB yield curve was selected by management as a baseline to determine Park’s discount rates for leases.

•

The lease term for all of the Company’s leases includes the noncancellable period of the lease plus any additional periods covered by either Park's option to extend (or not to terminate) the lease that the Company is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor. If a lease contract contains multiple renewal options, management generally models lease cash flows through the first renewal option period unless the contract contains economic incentives or other conditions that increase the likelihood that additional renewals are reasonably certain to be exercised.


•	Lease payments included in the measurement of the lease liability are comprised of the following:

–Fixed payments, including in-substance fixed payments, owed over the lease term;

–For certain of Park's gross real estate leases, non-lease components such as real estate taxes, insurance, and common area maintenance; and

–Variable lease payments that depend on an index or rate, initially measured using the index or rate at the lease commencement date.

The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Park's operating lease ROU asset and lease liability are presented in “Operating lease right-of-use asset" and "Operating lease liability," respectively, on Park's consolidated condensed balance sheet. The carrying amount of Park's ROU asset and lease liability at September 30, 2019 were $14.4 million and $15.2 million, respectively. Park's operating lease expense is recorded in "Occupancy expense" on the Company's consolidated condensed statements of income.

Other information related to operating leases for the three and nine months ended September 30, 2019 was as follows:



(Dollars in thousands)	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019
Lease cost
Operating lease cost	$	831		$	2,320
Sublease income	(97		)	(285		)
Total lease cost	$	734		$	2,035

Other information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	843		$	2,336
ROU assets obtained in exchange for new operating lease liabilities	$	342		$	381
Reductions to ROU assets resulting from reductions to lease obligations	$	(726	)	$	(2,021	)

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At September 30, 2019, Park's operating leases had a weighted average remaining term of 7.4 years and a weighted average discount rate of 3.1%.

Undiscounted cash flows included in lease liabilities have expected contractual payments as follows:



(in thousands)	September 30, 2019
Three months ending December 31, 2019	$	852
2020	2,868
2021	2,565
2022	2,406
2023	2,294
Thereafter	6,044
Total undiscounted minimum lease payments	$	17,029
Present value adjustment	(1,838		)
Total lease liabilities	$	15,191

Note 14 – Repurchase Agreement Borrowings

Securities sold under agreements to repurchase ("repurchase agreements") with customers represent funds deposited by customers, generally on an overnight basis, that are collateralized by investment securities owned by Park. Repurchase agreements with customers are included in short-term borrowings on the consolidated condensed balance sheets.

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

At September 30, 2019 and December 31, 2018, Park's repurchase agreement borrowings totaled $161 million and $165 million, respectively. These borrowings were collateralized with U.S. government and agency securities with a fair value of $188 million and $272 million at September 30, 2019 and December 31, 2018, respectively. Declines in the value of the collateral would require Park to pledge additional securities. As of September 30, 2019 and December 31, 2018, Park had $785 million and $933 million, respectively, of available unpledged securities.

The table below shows the remaining contractual maturity of repurchase agreements by collateral pledged at September 30, 2019 and December 31, 2018:



	September 30, 2019
(in thousands)	Remaining Contractual Maturity of the Agreements
	Overnight and Continuous		Up to 30 days		30 - 90 days		Greater than 90 days		Total
U.S. government and agency securities	$	160,838	$	—	$	—	$	—	$	160,838

	December 31, 2018
(in thousands)	Remaining Contractual Maturity of the Agreements
	Overnight and Continuous		Up to 30 days		30 - 90 days		Greater than 90 days		Total
U.S. government and agency securities	$	164,966	$	—	$	—	$	—	$	164,966

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Note 15 - Derivatives

Park uses certain derivative instruments to meet the needs of its clients while managing the interest rate risk associated with certain transactions. Park does not use derivatives for speculative purposes. A summary of derivative instruments utilized by Park follows.

Interest Rate Swaps

Park utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position and as a means to meet the financing, interest rate and other risk management needs of qualifying commercial banking customers. The notional amount of the interest rate swaps does not represent the amount exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.

Borrowing Derivatives: Interest rate swaps with notional amounts totaling $25.0 million as of September 30, 2019 were designated as cash flow hedges of certain FHLB advances. There were no interest rate swaps of FHLB advances as of December 31, 2018.

Loan Derivatives: In conjunction with the Carolina Alliance acquisition, Park acquired interest rate swaps related to certain commercial loans. These interest rate swaps were simultaneously hedged by offsetting interest rate swaps that Carolina Alliance executed with a third party, such that Carolina Alliance minimized its net interest rate risk exposure resulting from such transactions. These interest rate swaps had a notional amount totaling $36.0 million as of September 30, 2019. There were no interest rate swaps of commercial loans as of December 31, 2018.

All of the Company's interest rate swaps were determined to be fully effective during the three and nine months ended September 30, 2019. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swaps is recorded in other assets and other liabilities with changes in fair value recorded in other comprehensive income. The amount included in accumulated other comprehensive loss would be reclassified to current earnings should the hedges no longer be considered effective. Park expects the hedges to remain fully effective during the remaining respective terms of the swaps.

Summary information about Park's interest rate swaps as of September 30, 2019 follows:



	September 30, 2019
(In thousands, except weighted average data)	Borrowing Derivatives			Loan Derivatives
Notional amounts	$	25,000		$	35,961
Weighted average pay rates	2.595		%	4.692		%
Weighted average receive rates	2.303		%	4.692		%
Weighted average maturity (years)	2.7			10.4
Unrealized losses	$	704		$	—

Interest expense recorded on swap transactions totaled $16,000 and $7,000 for the three-month and nine-month periods ended September 30, 2019. No interest income or expense related to swap transactions was recorded during the three-month and nine-month periods ended September 30, 2018.

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Interest Rate Swaps

The following table presents the net gains (losses), net of income taxes, recorded in AOCI and the consolidated condensed statements of income related to interest rate swaps for the three-month and nine-month periods ended September 30, 2019.



	Three Months Ended September 30, 2019
(In thousands)	Amount of Gain (Loss) Recognized in OCI (Effective Portion)			Amount of Gain (Loss) Reclassified from OCI to Interest Income		Amount of Gain (Loss) Recognized in Other Non-interest Income (Ineffective Portion)
Interest rate contracts	$	(49	)	$	—	$	—



	Nine Months Ended September 30, 2019
(In thousands)	Amount of Gain (Loss) Recognized in OCI (Effective Portion)			Amount of Gain (Loss) Reclassified from OCI to Interest Income		Amount of Gain (Loss) Recognized in Other Non-interest Income (Ineffective Portion)
Interest rate contracts	$	(556	)	$	—	$	—

The following table reflects the interest rate swaps included in the consolidated condensed balance sheets as of September 30, 2019.



(In thousands)	September 30, 2019
(In thousands)	Notional Amount		Fair Value
Included in other assets:
Borrowing derivatives - interest rate swaps related to FHLB advances	$	—	$	—
Loan derivatives - instruments associated with loans
Matched interest rate swaps with borrower	35,163		2,503
Matched interest rate swaps with counterparty	798		3
Total included in other assets	$	35,961	$	2,506

Included in other liabilities:
Borrowing derivatives - interest rate swaps related to FHLB advances	$	25,000	$	(704	)
Loan derivatives - instruments associated with loans
Matched interest rate swaps with borrower	798		(3		)
Matched interest rate swaps with counterparty	35,163		(2,503		)
Total included in other liabilities	$	60,961	$	(3,210	)

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Mortgage Banking Derivatives

Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. In order to hedge the change in interest rates resulting from its commitments to fund the loans, the Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into. These mortgage banking derivatives are not designated in hedge relationships. The fair value of the interest rate lock is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted for the expected exercise of the commitment before the loan is funded. Fair values of these mortgage banking derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked. Changes in the fair values of these derivatives are included in "Other service income" in the Condensed Consolidated Statements of Income.

At September 30, 2019 and December 31, 2018, Park had $28.8 million and $5.8 million, respectively, of interest rate lock commitments. The fair value of these mortgage banking derivatives was reflected by a derivative asset of $422,000 and $87,000 at September 30, 2019 and December 31, 2018, respectively.

Other Derivatives

In connection with the sale of Park’s Class B Visa shares during 2009, 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, 2019, the fair value of the swap liability of $226,000 was an estimate of the exposure based upon probability-weighted potential Visa litigation losses.

Note 16 – Accumulated Other Comprehensive Loss

Other comprehensive income (loss) components, net of income tax, are shown in the following table for the three-month and nine-month periods ended September 30, 2019 and 2018:



(in thousands)		Changes in pension plan assets and benefit obligations			Unrealized net holding loss on cash flow hedge			Unrealized gains (losses) on AFS debt securities			Total
Beginning balance at July 1, 2019		$	(29,672	)	$	(507	)	$	3,872		$	(26,307	)
	Other comprehensive (loss) income before reclassifications ⁽¹⁾	—			(49		)	13,889			13,840
	Amounts reclassified from accumulated other comprehensive loss	—			—			(147		)	(147		)
Net current period other comprehensive (loss) income		—			(49		)	13,742			13,693
Ending balance at September 30, 2019		$	(29,672	)	$	(556	)	$	17,614		$	(12,614	)

Beginning balance at July 1, 2018		$	(26,701	)	$	—		$	(28,308	)	$	(55,009	)
	Other comprehensive loss before reclassifications	—			—			(5,141		)	(5,141		)
Net current period other comprehensive loss		—			—			(5,141		)	(5,141		)
Ending balance at September 30, 2018		$	(26,701	)	$	—		$	(33,449	)	$	(60,150	)

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(in thousands)		Changes in pension plan assets and benefit obligations			Unrealized net holding loss on cash flow hedge			Unrealized gains (losses) on AFS debt securities			Total
Beginning balance at January 1, 2019		$	(29,672	)	$	—		$	(20,116	)	$	(49,788	)
	Other comprehensive (loss) income before reclassifications ⁽¹⁾	—			(556		)	37,397			36,841
	Amounts reclassified from accumulated other comprehensive loss	—			—			333			333
Net current period other comprehensive (loss) income		—			(556		)	37,730			37,174
Ending balance at September 30, 2019		$	(29,672	)	$	(556	)	$	17,614		$	(12,614	)

Beginning balance at January 1, 2018, as previously presented		$	(23,526	)	$	—		$	(2,928	)	$	(26,454	)
	Cumulative effect of change in accounting principle for marketable equity securities, net of tax	—			—			(995		)	(995		)
Beginning balance at January 1, 2018, as adjusted		(23,526		)	—			(3,923		)	(27,449		)
	Reclassification of disproportionate income tax effects	(3,175		)	—			(631		)	(3,806		)
Net current period activity
	Other comprehensive loss before reclassifications	—			—			(30,919		)	(30,919		)
	Amounts reclassified from accumulated other comprehensive loss	—			—			2,024			2,024
Net current period other comprehensive loss		—			—			(28,895		)	(28,895		)
Ending balance at September 30, 2018		$	(26,701	)	$	—		$	(33,449	)	$	(60,150	)

(1) During the three-month and nine-month periods ended September 30, 2019, Park transferred HTM securities with a fair value of $373.9 million to AFS classification. The transfer occurred at fair value and had a related unrealized gain of $24.2 million ($19.1 million net of taxes), recorded in other comprehensive income.

During the three-month period ended September 30, 2019, there was $186,000 ($147,000 net of tax) reclassified out of accumulated other comprehensive loss due to net gains on the sale of AFS debt securities. During the nine-month period ended September 30, 2019, there was $421,000 ($333,000 net of tax) reclassified out of accumulated other comprehensive loss due to net losses on the sale of AFS debt securities. During the nine-month period ended September 30, 2018, there was $2.6 million ($2.0 million net of tax) reclassified out of accumulated other comprehensive loss due to net losses on the sale of AFS debt securities. All of these losses were recorded within "net gain (loss) on the sale of investment securities" on the consolidated condensed statements of income. During the three-month period ended September 30, 2018, there were no reclassifications out of accumulated other comprehensive loss.

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Note 17 – 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, 2019 and 2018.



	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except share and per common share data)	2019		2018		2019		2018
Numerator:
Net income	$	31,146	$	24,762	$	78,764	$	84,126
Denominator:
Weighted-average common shares outstanding	16,382,798		15,686,542		16,198,294		15,420,135
Effect of dilutive PBRSUs and TBRSUs	92,943		146,192		89,401		140,531
Weighted-average common shares outstanding adjusted for the effect of dilutive PBRSUs and TBRSUs	16,475,741		15,832,734		16,287,695		15,560,666
Earnings per common share:
Basic earnings per common share	$	1.90	$	1.58	$	4.86	$	5.46
Diluted earnings per common share	$	1.89	$	1.56	$	4.84	$	5.41

Park awarded 58,740 and 48,053 PBRSUs to certain employees during the nine months ended September 30, 2019 and 2018, respectively. No PBRSUs were awarded during either of the three months ended September 30, 2019 and 2018.

On April 1, 2019, Park issued 1,037,205 common shares to complete its acquisition of Carolina Alliance and granted 15,700 TBRSUs to Carolina Alliance Division employees. These common shares are included in average common shares outstanding beginning on that date.

Park repurchased 84,603 and 421,253 common shares during the three and nine months ended September 30, 2019, respectively, to fund the PBRSUs, TBRSUs and common shares to be awarded to directors of Park and to directors of Park's subsidiary PNB (and its divisions) and pursuant to Park's previously announced stock repurchase authorizations. Park repurchased 50,000 common shares to fund the PBRSUs, TBRSUs and common shares to be awarded to directors of Park and to directors of Park's subsidiary PNB (and its divisions) during the nine months ended September 30, 2018. No common shares were repurchased during the three months ended September 30, 2018.

Note 18 – Segment Information

The Corporation is a financial holding company headquartered in Newark, Ohio. The reportable segments for the Corporation are its chartered national bank subsidiary, PNB (headquartered in Newark, Ohio), and Guardian Financial Services Company. "All Other", which primarily consists of Park as the "Parent Company" and SE Property Holdings, LLC, is shown to reconcile the segment totals to the consolidated condensed statements of income.

Management is required to disclose information about the different types of business activities in which a company engages and also information on the different economic environments in which a company operates, so that the users of the financial statements can better understand the company’s performance, better understand the potential for future cash flows, and make more informed judgments about the company as a whole. Park has two reportable segments, as: (i) discrete financial information is available for each reportable segment and (ii) the segments are aligned with internal reporting to Park’s Chief Executive Officer, who is the chief operating decision maker.

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	Operating Results for the three months ended September 30, 2019
(In thousands)	PNB		GFSC		All Other			Total
Net interest income (expense)	$	76,180	$	1,244	$	(323	)	$	77,101
Provision for (recovery of) loan losses	2,320		143		(496		)	1,967
Other income	24,842		59		3,235			28,136
Other expense	60,943		902		3,893			65,738
Income (loss) before income taxes	$	37,759	$	258	$	(485	)	$	37,532
Income tax expense (benefit)	6,811		55		(480		)	6,386
Net income (loss)	$	30,948	$	203	$	(5	)	$	31,146

Assets (as of September 30, 2019)	$	8,673,919	$	27,481	$	22,210		$	8,723,610



	Operating Results for the three months ended September 30, 2018
(In thousands)	PNB		GFSC		All Other			Total
Net interest income	$	66,195	$	1,252	$	229		$	67,676
Provision for (recovery of) loan losses	2,935		183		(178		)	2,940
Other income	22,559		63		1,442			24,064
Other expense	51,982		810		6,524			59,316
Income (loss) before income taxes	$	33,837	$	322	$	(4,675	)	$	29,484
Income tax expense (benefit)	5,981		68		(1,327		)	4,722
Net income (loss)	$	27,856	$	254	$	(3,348	)	$	24,762

Assets (as of September 30, 2018)	$	7,707,474	$	28,551	$	20,466		$	7,756,491



	Operating Results for the nine months ended September 30, 2019
(In thousands)	PNB		GFSC		All Other			Total
Net interest income (expense)	$	217,355	$	3,786	$	(413	)	$	220,728
Provision for (recovery of) loan losses	6,563		458		(637		)	6,384
Other income	68,224		142		4,603			72,969
Other expense	172,931		2,638		17,188			192,757
Income (loss) before income taxes	$	106,085	$	832	$	(12,361	)	$	94,556
Income tax expense (benefit)	19,063		179		(3,450		)	15,792
Net income (loss)	$	87,022	$	653	$	(8,911	)	$	78,764



	Operating Results for the nine months ended September 30, 2018
(In thousands)	PNB		GFSC		All Other			Total
Net interest income	$	190,319	$	3,818	$	3,131		$	197,268
Provision for (recovery of) loan losses	4,491		773		(678		)	4,586
Other income	64,544		135		9,530			74,209
Other expense	149,152		2,412		14,594			166,158
Income (loss) before income taxes	$	101,220	$	768	$	(1,255	)	$	100,733
Income tax expense (benefit)	17,822		162		(1,377		)	16,607
Net income	$	83,398	$	606	$	122		$	84,126

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The operating results in the “All Other” column are used to reconcile the segment totals to the consolidated condensed statements of income for the three-month and nine-month periods ended September 30, 2019 and 2018. The reconciling amounts for consolidated total assets for the periods ended September 30, 2019 and 2018 consisted of the elimination of intersegment borrowings and the assets of the Parent Company and SEPH which were not eliminated.

Note 19 - Share-Based Compensation

The Park National Corporation 2013 Long-Term Incentive Plan (the "2013 Incentive Plan") was adopted by the Board of Directors of Park on January 28, 2013 and was approved by Park's shareholders at the Annual Meeting of Shareholders on April 22, 2013. The 2013 Incentive Plan made equity-based awards and cash-based awards available for grant to participants (who could have been employees or non-employee directors) in the form of incentive stock options, nonqualified stock options, SARs, restricted common shares (“Restricted Stock”), restricted stock unit awards that may be settled in common shares, cash or a combination of the two (“Restricted Stock Units”), unrestricted common shares (“Other Stock-Based Awards”) and cash-based awards. Under the 2013 Incentive Plan, 600,000 common shares were authorized to be delivered in connection with grants under the 2013 Incentive Plan. The common shares to be delivered under the 2013 Incentive Plan are to consist of either common shares currently held or common shares subsequently acquired by Park as treasury shares, including common shares purchased in the open market or in private transactions. As of September 30, 2019, there were 60,805 common shares subject to PBRSUs issued under the 2013 Incentive Plan, which represented the only awards outstanding under the 2013 Incentive Plan.

The Park National Corporation 2017 Long-Term Incentive Plan for Employees (the "2017 Employees LTIP") was adopted by the Board of Directors of Park on January 23, 2017 and was approved by Park's shareholders at the Annual Meeting of Shareholders on April 24, 2017. The 2017 Employees LTIP makes equity-based awards and cash-based awards available for grant to employee participants in the form of incentive stock options, nonqualified stock options, SARs, Restricted Stock, Restricted Stock Units, Other Stock-Based Awards and cash-based awards. Under the 2017 Employees LTIP, 750,000 common shares are authorized to be delivered in connection with grants under the 2017 Employees LTIP. The common shares to be delivered under the 2017 Employees LTIP are to consist of either common shares currently held or common shares subsequently acquired by Park as treasury shares, including common shares purchased in the open market or in private transactions. At September 30, 2019, 616,083 common shares were available for future grants under the 2017 Employees LTIP.

The Park National Corporation 2017 Long-Term Incentive Plan for Non-Employee Directors (the "2017 Non-Employee Directors LTIP") was adopted by the Board of Directors of Park on January 23, 2017 and was approved by Park's shareholders at the Annual Meeting of Shareholders on April 24, 2017. The 2017 Non-Employee Directors LTIP makes equity-based awards and cash-based awards available for grant to non-employee director participants in the form of nonqualified stock options, SARs, Restricted Stock, Restricted Stock Units, Other Stock-Based Awards, and cash-based awards. Under the 2017 Non-Employee Directors LTIP, 150,000 common shares are authorized to be delivered in connection with grants under the 2017 Non-Employee Directors LTIP. The common shares to be delivered under the 2017 Non-Employee Directors LTIP are to consist of either common shares currently held or common shares subsequently acquired by Park as treasury shares, including common shares purchased in the open market or in private transactions. At September 30, 2019, 127,200 common shares were available for future grants under the 2017 Non-Employee Directors LTIP.

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

There were no awards granted during the three months ended September 30, 2019. During the nine months ended September 30, 2019, the Compensation Committee of the Board of Directors of Park granted awards of TBRSUs, under the 2017 Employees LTIP, covering an aggregate of 15,700 shares to Carolina Alliance Bank Division employees and granted awards of PBRSUs, under the 2017 Employees LTIP, covering an aggregate of 58,740 common shares to certain employees of Park and its subsidiaries. During the nine months ended September 30, 2018, the Compensation Committee of the Board of Directors of Park granted awards of PBRSUs, under the 2017 Employees LTIP, covering an aggregate of 48,053 common shares to certain employees of Park and its subsidiaries. Additionally, on July 1, 2018, Park granted 13,637 TBRSUs to NewDominion Bank Division employees. The number of PBRSUs earned or settled will depend on the level of achievement with respect to certain performance criteria and are also subject to subsequent service-based vesting. The number of TBRSUs earned or settled are subject to service-based vesting.

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A summary of changes in the common shares subject to nonvested PBRSUs and TBRSUs for the nine months ended September 30, 2019 follows:



	Common shares subject to PBRSUs and TBRSUs
Nonvested at January 1, 2019	152,631
Granted	74,440
Vested	(27,719	)
Forfeited	(1,262	)
Adjustment for performance conditions of PBRSUs ⁽¹⁾	(3,368	)
Nonvested at September 30, 2019 ⁽²⁾	194,722

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

(2) Nonvested amount herein represents the maximum number of nonvested PBRSUs and TBRSUs. As of September 30, 2019, 176,007 PBRSUs and TBRSUs are expected to vest.

On March 31, 2019, an aggregate of 27,719 of the PBRSUs granted in 2015 and 2016 vestedin full due to the level of achievement with respect to certain performance criteria and the satisfaction of the service-based vesting requirement. A total of 8,736 common shares were withheld to satisfy employee income tax withholding obligations. This resulted in a net number of 18,983 common shares being issued to employees of Park. On March 31, 2018, 18,800 of the PBRSUs granted in 2014 and 2015 vestedin full due to the level of achievement with respect to certain performance criteria and the satisfaction of the service-based vesting requirement. A total of 5,879 common shares were withheld to satisfy employee income tax withholding obligations. This resulted in a net number of 12,921 common shares being issued to employees of Park.

Share-based compensation expense of $1.2 million and $1.0 million was recognized for the three-month periods ended September 30, 2019 and 2018, respectively, and $3.8 million and $3.1 million was recognized for the nine-month periods ended September 30, 2019 and 2018, respectively.

The following table details expected additional share-based compensation expense related to PBRSUs and TBRSUs outstanding as of September 30, 2019:



(In thousands)
Three months ending December 31, 2019	$	1,287
2020	4,047
2021	2,388
2022	1,038
2023	163
Total	$	8,923

Note 20 – Benefit Plans

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

There were no Pension Plan contributions for any of the three-month or nine-month periods ended September 30, 2019 and 2018.

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



	Three Months Ended September 30,						Nine Months Ended September 30,						Affected Line Item in the Consolidated Condensed Statements of Income
(In thousands)	2019			2018			2019			2018
Service cost	$	1,468		$	1,637		$	4,404		$	4,911		Employee benefits
Interest cost	1,373			1,309			4,119			3,927			Other components of net periodic pension benefit income
Expected return on plan assets	(3,026		)	(3,354		)	(9,078		)	(10,062		)	Other components of net periodic pension benefit income
Recognized net actuarial loss	470			340			1,410			1,020			Other components of net periodic pension benefit income
Net periodic pension benefit expense (income)	$	285		$	(68	)	$	855		$	(204	)

Park has entered into Supplemental Executive Retirement Plan Agreements (the “SERP Agreements”) with certain key officers of the Corporation and its subsidiaries which provide defined pension benefits in excess of limits imposed by federal tax law. The expense for the Corporation related to the SERP Agreements for the three months and nine months ended September 30, 2019 and 2018 was as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,				Affected Line Item in the Consolidated Condensed Statement of Income
(In thousands)	2019		2018		2019		2018
Service cost	$	202	$	157	$	604	$	635	Employee benefits
Interest cost	165		188		495		349		Miscellaneous expense
Total SERP expense	$	367	$	345	$	1,099	$	984

Note 21 – Fair Value

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


•	Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that Park has the ability to access as of the measurement date.


•	Level 2: Level 1 inputs for assets or liabilities that are not actively traded. Also consists of an observable market price for a similar asset or liability. This includes the use of “matrix pricing” to value debt securities absent the exclusive use of quoted prices.


•	Level 3: Consists of unobservable inputs that are used to measure fair value when observable market inputs are not available. This could include the use of internally developed models, financial forecasting and similar inputs.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the balance sheet date. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to observable market data for similar assets and liabilities. However, certain assets and liabilities are not traded in observable markets and Park must use other valuation methods to develop a fair value. The fair value of impaired loans is typically based on the fair value of the underlying collateral, which is estimated through third-party appraisals in accordance with Park's valuation requirements under its commercial and real estate loan policies.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis:

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



Fair Value Measurements at September 30, 2019 using:
(In thousands)	Level 1		Level 2		Level 3		Balance at September 30, 2019
Assets
Investment securities:
Obligations of states and political subdivisions	—		321,905				321,905
U.S. Government sponsored entities’ asset-backed securities	—		938,381		—		938,381
Equity securities	1,451		—		438		1,889
Mortgage loans held for sale	—		21,986		—		21,986
Mortgage IRLCs	—		422		—		422
Loan interest rate swaps	—		2,506		—		2,506

Liabilities
Fair value swap	$	—	$	—	$	226	$	226
Borrowing interest rate swap	—		704		—		704
Loan interest rate swaps	—		2,506		—		2,506



Fair Value Measurements at December 31, 2018 using:
(In thousands)	Level 1		Level 2		Level 3		Balance at December 31, 2018
Assets
Investment securities:
U.S. Government sponsored entities’ asset-backed securities	$	—	$	1,003,421	$	—	$	1,003,421
Equity securities	1,225		—		424		1,649
Mortgage loans held for sale	—		4,158		—		4,158
Mortgage IRLCs	—		87		—		87

Liabilities
Fair value swap	$	—	$	—	$	226	$	226

There were no transfers between Level 1 and Level 2 during any of the three-month or nine-month periods ended September 30, 2019 or 2018. Management’s policy is to transfer assets or liabilities from one level to another when the methodology to obtain the fair value changes such that there are more or fewer unobservable inputs as of the end of the reporting period.

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

Interest rate swaps: The fair values of interest rate swaps are based on valuation models using observable market data as of the measurement date (Level 2).

Investment securities: Fair values for investment securities are based on quoted market prices, where available (Level 1). If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows (Level 3).

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

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

The tables below present a reconciliation of the beginning and ending balances of the Level 3 inputs for the three and nine months ended September 30, 2019 and 2018, for financial instruments measured on a recurring basis and classified as Level 3:

Level 3 Fair Value Measurements

Three months ended September 30, 2019 and 2018



(In thousands)	Equity Securities		Fair value swap
Balance at July 1, 2019	$	433	$	(226	)
Total gains/(losses)
Included in other income	5		—
Balance at September 30, 2019	$	438	$	(226	)

Balance at July 1, 2018	$	420	$	(226	)
Total gains/(losses)
Included in other income	4		—
Balance at September 30, 2018	$	424	$	(226	)

Level 3 Fair Value Measurements

Nine months ended September 30, 2019 and 2018



(In thousands)	Equity Securities		Fair value swap
Balance at January 1, 2019	$	424	$	(226	)
Total gains/(losses)
Included in other income	14		—
Balance at September 30, 2019	$	438	$	(226	)

Balance at January 1, 2018	$	417	$	(226	)
Total gains/(losses)
Included in other income	7		—
Balance at September 30, 2018	$	424	$	(226	)

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis:

The following methods and assumptions were used by the Company in determining the fair value of assets and liabilities measured at fair value on a nonrecurring basis described below:

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

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

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

Appraisals for both collateral dependent impaired loans and OREO are performed by licensed appraisers. Appraisals are generally obtained to support the fair value of collateral. In general, there are three types of appraisals received by the Company: real estate appraisals, income approach appraisals, and lot development loan appraisals. These are discussed below:

•

Real estate appraisals typically incorporate measures such as recent sales prices for comparable properties. Appraisers may make adjustments to the sales prices of the comparable properties as deemed appropriate based on the age, condition or general characteristics of the subject property. Management generally applies a 15% discount to real estate appraised values which management expects will cover all disposition costs (including selling costs). This 15% discount is based on historical discounts to appraised values on sold OREO properties.


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

•

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

Other repossessed assets: Other repossessed assets are initially recorded at fair value less costs to sell when acquired. The carrying value of other repossessed assets 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. As of September 30, 2019 and December 31, 2018, other repossessed assets primarily consisted of aircraft acquired as part of a loan workout. Fair value is based on Aircraft Bluebook and VREF Aircraft Value Reference values based on the model of aircraft and adjustments for flight hours, features and other variables. Such adjustments result in a Level 3 classification of the inputs for determining fair value.

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

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The following tables present assets and liabilities measured at fair value on a nonrecurring basis. Collateral dependent impaired loans are carried at fair value if they have been charged down to fair value or if a specific valuation allowance has been established. As of September 30, 2019, there were no PCI loans carried at fair value. A new cost basis is established at the time a property is initially recorded in OREO. OREO properties are carried at fair value if a devaluation has been taken with respect to the property's value subsequent to the initial measurement.



Fair Value Measurements at September 30, 2019 using:
(In thousands)	Level 1		Level 2		Level 3		Balance at September 30, 2019
Impaired loans recorded at fair value:
Commercial real estate	$	—	$	—	$	1,862	$	1,862
Construction real estate	—		—		1,635		1,635
Residential real estate	—		—		182		182
Total impaired loans recorded at fair value	$	—	$	—	$	3,679	$	3,679

MSRs	$	—	$	7,462	$	—	$	7,462

OREO:
Commercial real estate	—		—		2,385		2,385
Residential real estate	—		—		779		779
Total OREO recorded at fair value	$	—	$	—	$	3,164	$	3,164

Other repossessed assets	$	—	$	—	$	3,598	$	3,598



Fair Value Measurements at December 31, 2018 using:
(In thousands)	Level 1		Level 2		Level 3		Balance at December 31, 2018
Impaired loans recorded at fair value:
Commercial real estate	$	—	$	—	$	4,059	$	4,059
Construction real estate	—		—		1,635		1,635
Residential real estate	—		—		705		705
Total impaired loans recorded at fair value	$	—	$	—	$	6,399	$	6,399

MSRs	$	—	$	1,169	$	—	$	1,169

OREO:
Commercial real estate	—		—		2,295		2,295
Construction real estate	—		—		729		729
Residential real estate	—		—		650		650
Total OREO recorded at fair value	$	—	$	—	$	3,674	$	3,674

Other repossessed assets	$	—	$	—	$	3,464	$	3,464

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



	September 30, 2019
(In thousands)	Recorded Investment		Prior Charge-Offs		Specific Valuation Allowance		Carrying Balance
Impaired loans recorded at fair value	$	3,820	$	3,126	$	141	$	3,679
Remaining impaired loans	70,658		2,507		2,942		67,716
Total impaired loans	$	74,478	$	5,633	$	3,083	$	71,395



	December 31, 2018
(In thousands)	Recorded Investment		Prior Charge-Offs		Specific Valuation Allowance		Carrying Balance
Impaired loans recorded at fair value	$	6,503	$	3,630	$	104	$	6,399
Remaining impaired loans	41,641		7,616		2,169		39,472
Total impaired loans	$	48,144	$	11,246	$	2,273	$	45,871

The expense from credit adjustments related to impaired loans carried at fair value was $0.1 million for both of the three-month periods ended September 30, 2019 and 2018. The expense from credit adjustments related to impaired loans carried at fair value during the nine months ended September 30, 2019 and 2018 was $0.2 million and $0.3 million, respectively.

MSRs totaled $10.0 million at September 30, 2019. Of this $10.0 million MSR carrying balance, $7.5 million was recorded at fair value and included a valuation allowance of $0.7 million. The remaining $2.5 million was recorded at cost, as the fair value of the MSRs exceeded cost at September 30, 2019. At December 31, 2018, MSRs totaled $10.2 million. Of this $10.2 million MSR carrying balance, $1.2 million was recorded at fair value and included a valuation allowance of $0.2 million. The remaining $9.0 million was recorded at cost, as the fair value exceeded cost at December 31, 2018. The expense related to MSRs carried at fair value during the three months ended September 30, 2019 and 2018 was $332,000 and $26,000, respectively. The expense (income) related to MSRs carried at fair value during the nine months ended September 30, 2019 and 2018 was $421,000 and $(356,000), respectively.

Total OREO held by Park at September 30, 2019 and December 31, 2018 was $3.8 million and $4.3 million, respectively. Approximately 84% and 85% of OREO held by Park at September 30, 2019 and December 31, 2018, respectively, was carried at fair value due to fair value adjustments made subsequent to the initial OREO measurement. At September 30, 2019 and December 31, 2018, OREO held at fair value, less estimated selling costs, amounted to $3.2 million and $3.7 million, respectively. The net expense related to OREO fair value adjustments was $41,000 and $77,000 for the three-month periods ended September 30, 2019 and 2018, respectively. The net expense related to OREO fair value adjustments was $123,000 and $398,000 for the nine-month periods ended September 30, 2019 and 2018, respectively.

Other repossessed assets totaled $4.0 million at September 30, 2019, of which $3.6 million was recorded at fair value. Other repossessed assets totaled $4.0 million at December 31, 2018, of which $3.5 million was recorded at fair value. There was no expense related to fair value adjustments on other repossessed assets for the three-month and nine-month periods ended September 30, 2019. Expense related to fair value adjustments on other repossessed assets for each of the three-month periods and nine-month periods ended September 30, 2018 was $0.3 million.

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The following tables present qualitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at September 30, 2019 and December 31, 2018:



September 30, 2019
(In thousands)	Fair Value		Valuation Technique	Unobservable Input(s)	Range (Weighted Average)
Impaired loans:
Commercial real estate	$	1,861	Sales comparison approach	Adj to comparables	0.0% - 89.6% (28.1%)
			Income approach	Capitalization rate	10.6% (10.6%)
			Cost approach	Accumulated depreciation	60.0% - 93.1% (72.4%)

Construction real estate	$	1,635	Sales comparison approach	Adj to comparables	0.1% - 72.4% (38.5%)

Residential real estate	$	182	Sales comparison approach	Adj to comparables	0.0% - 53.5% (13.8%)

Other real estate owned:
Commercial real estate	$	2,385	Sales comparison approach	Adj to comparables	0.9% - 68.4% (31.1%)
			Income approach	Capitalization rate	10.0% - 13.0% (12.8%)

Residential real estate	$	779	Sales comparison approach	Adj to comparables	1.9% - 54.6% (34.6%)

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Balance at December 31, 2018
(In thousands)	Fair Value		Valuation Technique	Unobservable Input(s)	Range (Weighted Average)
Impaired loans:
Commercial real estate	$	4,059	Sales comparison approach	Adj to comparables	0.0% - 107.5% (31.1%)
			Income approach	Capitalization rate	9.5% - 10.8% (10.6%)
			Cost approach	Accumulated depreciation	4.2% - 90.1% (11.0%)

Construction real estate	$	1,635	Sales comparison approach	Adj to comparables	5.0% - 90.0% (26.1%)


Residential real estate	$	705	Sales comparison approach	Adj to comparables	0.0% - 40.0% (13.2%)
			Income approach	Capitalization rate	10.5% (10.5%)

Other real estate owned:
Commercial real estate	$	2,295	Sales comparison approach	Adj to comparables	0.9% - 68.4% (34.7%)
			Income approach	Capitalization rate	13.0% (13.0%)

Construction real estate	$	729	Sales comparison approach	Adj to comparables	0.0% - 45.0% (21.7%)

Residential real estate	$	650	Sales comparison approach	Adj to comparables	30.4% - 54.6% (42.5%)

Assets Measured at Net Asset Value:

Park's portfolio of equity investments in limited partnerships which provide mezzanine funding ("Partnership Investments") are valued using the NAV practical expedient in accordance with ASC 820.

As of September 30, 2019 and December 31, 2018, Park had Partnership Investments with a NAV of $12.4 million and $11.0 million, respectively. As of September 30, 2019 and December 31, 2018, Park had $3.6 million and $6.1 million, respectively, in unfunded commitments related to these Partnership Investments. For the three-month periods ended September 30, 2019 and 2018, Park recognized income of $3.3 million and $0.4 million, respectively, related to these Partnership Investments. For the nine-month periods ended September 30, 2019 and 2018, Park recognized income of $5.1 million and $1.2 million, respectively, related to these Partnership Investments.

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The fair value of certain financial instruments at September 30, 2019 and December 31, 2018, was as follows:



	September 30, 2019
			Fair Value Measurements
(In thousands)	Carrying value		Level 1		Level 2		Level 3		Total fair value
Financial assets:
Cash and money market instruments	$	372,726	$	372,726	$	—	$	—	$	372,726
Investment securities ⁽¹⁾	1,260,286		—		1,260,286		—		1,260,286
Other investment securities ⁽²⁾	1,889		1,451		—		438		1,889

Loans held for sale	21,986		—		21,986		—		21,986
Mortgage IRLCs	422		—		422		—		422
Impaired loans carried at fair value	3,678		—		—		3,679		3,679
Other loans, net	6,321,708		—		—		6,325,294		6,325,294
Loans receivable, net	$	6,347,794	$	—	$	22,408	$	6,328,973	$	6,351,381

Financial liabilities:
Time deposits	1,127,366		—		1,133,648		—		1,133,648
Other	5,271		5,271		—		—		5,271
Deposits (excluding demand deposits)	$	1,132,637	$	5,271	$	1,133,648	$	—	$	1,138,919

Short-term borrowings	$	185,838	$	—	$	185,838	$	—	$	185,838
Long-term debt	297,500		—		307,047		—		307,047
Subordinated notes	15,000		—		13,810		—		13,810

Derivative financial instruments - assets:
Loan interest rate swaps	$	2,506	$	—	$	2,506	$	—	$	2,506

Derivative financial instruments - liabilities:
Fair value swap	$	226	$	—	$	—	$	226	$	226
Borrowing interest rate swap	704		—		704		—		704
Loan interest rate swaps	2,506		—		2,506		—		2,506

(1) Includes AFS debt securities.

(2) Excludes FHLB stock and FRB stock which are carried at their respective redemption values, investment securities accounted for at modified cost as these investments do not have a readily determinable fair value, and Partnership Investments valued using the NAV practical expedient.

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	December 31, 2018
			Fair Value Measurements
(In thousands)	Carrying value		Level 1		Level 2		Level 3		Total fair value
Financial assets:
Cash and money market instruments	$	167,214	$	167,214	$	—	$	—	$	167,214
Investment securities ⁽¹⁾	1,355,229		—		1,354,843		—		1,354,843
Other investment securities ⁽²⁾	1,649		1,225		—		424		1,649

Loans held for sale	4,158		—		4,158		—		4,158
Mortgage IRLCs	87		—		87		—		87
Impaired loans carried at fair value	6,399		—		—		6,399		6,399
Other loans, net	5,629,976		—		—		5,570,136		5,570,136
Loans receivable, net	$	5,640,620	$	—	$	4,245	$	5,576,535	$	5,580,780

Financial liabilities:
Time deposits	$	1,043,177	$	—	$	1,044,620	—		$	1,044,620
Other	1,267		1,267		—		—		1,267
Deposits (excluding demand deposits)	$	1,044,444	$	1,267	$	1,044,620	$	—	$	1,045,887

Short-term borrowings	$	221,966	$	—	$	221,966	$	—	$	221,966
Long-term debt	400,000		—		400,203		—		400,203
Subordinated notes	15,000		—		12,959		—		12,959

Derivative financial instruments:
Fair value swap	$	226	$	—	$	—	$	226	$	226

(1) Includes AFS debt securities and HTM debt securities.

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Note 22 - Revenue from Contracts with Customers

All of Park's revenue from contracts with customers within the scope of ASC 606 is recognized within "Other income" in the Consolidated Condensed Statements of Income. The following table presents the Corporation's sources of other income by revenue stream and operating segment for the three-month and nine-month periods ended September 30, 2019 and September 30, 2018.



	Three Months Ended September 30, 2019
Revenue by Operating Segment (in thousands)	PNB			GFSC		All Other			Total
Income from fiduciary activities
Personal trust and agency accounts	$	2,151		$	—	$	—		$	2,151
Employee benefit and retirement-related accounts	1,753			—		—			1,753
Investment management and investment advisory agency accounts	2,547			—		—			2,547
Other	391			—		—			391
Service charges on deposit accounts
Non-sufficient funds (NSF) fees	1,911			—		—			1,911
Demand deposit account (DDA) charges	784			—		—			784
Other	169			—		—			169
Other service income ⁽¹⁾
Credit card	586			1		—			587
HELOC	71			—		1			72
Installment	62			—		(88		)	(26		)
Real estate	3,226			—		(1		)	3,225
Commercial	262			—		140			402
Debit card fee income	5,313			—		—			5,313
Bank owned life insurance income ⁽²⁾	1,021			—		86			1,107
ATM fees	482			—		—			482
OREO valuation adjustments ⁽²⁾	(41		)	—		—			(41		)
Loss on sale of OREO, net	(53		)	—		—			(53		)
Net gain on sale of investment securities ⁽²⁾	186			—		—			186
Gain on equity securities, net ⁽²⁾	240			—		3,095			3,335
Other components of net periodic pension benefit income ⁽²⁾	1,147			13		23			1,183
Miscellaneous ⁽³⁾	2,634			45		(21		)	2,658
Total other income	$	24,842		$	59	$	3,235		$	28,136

⁽¹⁾Of the $4.3 million of aggregate revenue included within "Other service income", approximately $1.3 million is within the scope of ASC 606, with the remaining $3.0 million consisting primarily of residential real estate loan fees which are out of scope.

⁽²⁾ Not within the scope of ASC 606.

⁽³⁾ "Miscellaneous" income includes brokerage income, safe deposit box rentals, and miscellaneous bank fees totaling $2.7 million, all of which are within scope of ASC 606.

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	Three Months Ended September 30, 2018
Revenue by Operating Segment (in thousands)	PNB			GFSC		All Other			Total
Income from fiduciary activities
Personal trust and agency accounts	$	1,994		$	—	$	—		$	1,994
Employee benefit and retirement-related accounts	1,703			—		—			1,703
Investment management and investment advisory agency accounts	2,353			—		—			2,353
Other	368			—		—			368
Service charges on deposit accounts
Non-sufficient funds (NSF) fees	1,926			—		—			1,926
Demand deposit account (DDA) charges	764			—		—			764
Other	171			—		—			171
Other service income ⁽¹⁾
Credit card	592			6		—			598
HELOC	128			—		—			128
Installment	60			—		6			66
Real estate	2,145			—		—			2,145
Commercial	291			—		18			309
Debit card fee income	4,352			—		—			4,352
Bank owned life insurance income ⁽²⁾	960			—		1,625			2,585
ATM fees	500			—		—			500
OREO valuation adjustments ⁽²⁾	(78		)	—		1			(77		)
Gain (loss) on sale of OREO, net	36			—		(117		)	(81		)
Gain (loss) on equity securities, net ⁽²⁾	228			—		(139		)	89
Other components of net periodic pension benefit income ⁽²⁾	1,653			18		34			1,705
Miscellaneous ⁽³⁾	2,413			39		14			2,466
Total other income	$	22,559		$	63	$	1,442		$	24,064

⁽¹⁾Of the $3.2 million of aggregate revenue included within "Other service income", approximately $1.1 million is within the scope of ASC 606, with the remaining $2.1 million consisting primarily of residential real estate loan fees which are out of scope.

⁽²⁾ Not within the scope of ASC 606.

⁽³⁾ "Miscellaneous" income includes brokerage income, safe deposit box rentals, and miscellaneous bank fees totaling $2.5 million, all of which are within scope of ASC 606.

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	Nine Months Ended September 30, 2019
Revenue by Operating Segment (in thousands)	PNB			GFSC		All Other			Total
Income from fiduciary activities
Personal trust and agency accounts	$	6,757		$	—	$	—		$	6,757
Employee benefit and retirement-related accounts	5,185			—		—			5,185
Investment management and investment advisory agency accounts	7,421			—		—			7,421
Other	1,137			—		—			1,137
Service charges on deposit accounts
Non-sufficient funds (NSF) fees	5,241			—		—			5,241
Demand deposit account (DDA) charges	2,336			—		—			2,336
Other	501			—		—			501
Other service income ⁽¹⁾
Credit card	1,785			5		—			1,790
HELOC	282			—		4			286
Installment	203			—		(83		)	120
Real estate	7,890			—		(10		)	7,880
Commercial	901			—		141			1,042
Debit card fee income	14,909			—		—			14,909
Bank owned life insurance income ⁽²⁾	3,116			—		283			3,399
ATM fees	1,382			—		—			1,382
OREO valuation adjustments ⁽²⁾	(123		)	—		—			(123		)
Loss on sale of OREO, net	(84		)	—		(140		)	(224		)
Net loss on sale of investment securities ⁽²⁾	(421		)	—		—			(421		)
Gain on equity securities, net ⁽²⁾	972			—		4,337			5,309
Other components of net periodic pension benefit income ⁽²⁾	3,440			40		69			3,549
Miscellaneous ⁽³⁾	5,394			97		2			5,493
Total other income	$	68,224		$	142	$	4,603		$	72,969

⁽¹⁾Of the $11.1 million of aggregate revenue included within "Other service income", approximately $4.0 million is within the scope of ASC 606, with the remaining $7.1 million consisting primarily of residential real estate loan fees which are out of scope.

⁽²⁾ Not within the scope of ASC 606.

⁽³⁾ "Miscellaneous" income includes brokerage income, safe deposit box rentals, and miscellaneous bank fees totaling $5.5 million, all of which are within scope of ASC 606.

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	Nine Months Ended September 30, 2018
Revenue by Operating Segment (in thousands)	PNB			GFSC		All Other			Total
Income from fiduciary activities
Personal trust and agency accounts	$	6,383		$	—	$	—		$	6,383
Employee benefit and retirement-related accounts	5,003			—		—			5,003
Investment management and investment advisory agency accounts	6,936			—		—			6,936
Other	1,157			—		—			1,157
Service charges on deposit accounts
Non-sufficient funds (NSF) fees	5,608			—		—			5,608
Demand deposit account (DDA) charges	2,503			—		—			2,503
Other	498			—		—			498
Other service income ⁽¹⁾
Credit card	1,652			20		—			1,672
HELOC	345			—		—			345
Installment	197			—		6			203
Real estate	6,748			—		—			6,748
Commercial	847			—		1,075			1,922
Debit card fee income	12,736			—		—			12,736
Bank owned life insurance income ⁽²⁾	2,822			—		1,803			4,625
ATM fees	1,534			—		—			1,534
OREO valuation adjustments ⁽²⁾	(179		)	—		(219		)	(398		)
Gain on sale of OREO, net	1,442			—		2,651			4,093
Net loss on sale of investment securities ⁽²⁾	(2,271		)	—		—			(2,271		)
Gain on equity securities, net ⁽²⁾	520			—		4,113			4,633
Other components of net periodic pension benefit income ⁽²⁾	4,957			56		102			5,115
Miscellaneous ⁽³⁾	5,106			59		(1		)	5,164
Total other income	$	64,544		$	135	$	9,530		$	74,209

⁽¹⁾Of the $10.9 million of aggregate revenue included within "Other service income", approximately $4.4 million is within the scope of ASC 606, with the remaining $6.5 million consisting primarily of residential real estate loan fees which are out of scope.

⁽²⁾ Not within the scope of ASC 606.

⁽³⁾ "Miscellaneous" income includes brokerage income, safe deposit box rentals, and miscellaneous bank fees totaling $5.2 million, all of which are within the scope of ASC 606.

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

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

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

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

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

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

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. The forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation: Park's ability to execute our business plan successfully and within the expected timeframe; general economic and financial market conditions, specifically in the real estate markets and the credit markets, either nationally or in the states in which Park and our subsidiaries do business, may experience a slowing or reversal of the current economic expansion in addition to continuing residual effects of recessionary conditions and an uneven spread of positive impacts of recovery on the economy and our counterparties, resulting in adverse impacts on the demand for loan, deposit and other financial services, delinquencies, defaults and counterparties' inability to meet credit and other obligations and the possible impairment of collectability of loans; changes in interest rates and prices may adversely impact prepayment penalty income, mortgage banking income, the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our consolidated balance sheet as well as reduce interest margins and impact loan demand; changes in consumer spending, borrowing and saving habits, whether due to tax reform legislation, changes in retail distribution strategies, consumer preferences and behavior, changes in business and economic conditions, legislative and regulatory initiatives, or other factors; changes in unemployment; changes in customers', suppliers', and other counterparties' performance and creditworthiness; the adequacy of our internal controls and risk management program in the event of changes in the market, economic, operational, asset/liability repricing, legal, compliance, strategic, cybersecurity, liquidity, credit and interest rate risks associated with Park's business; disruption in the liquidity and other functioning of U.S. financial markets; our liquidity requirements could be adversely affected by changes to regulations governing bank and bank holding company capital and liquidity standards as well as by changes in our assets and liabilities; competitive factors among financial services organizations could increase significantly, including product and pricing pressures (which could in turn impact our credit spreads), customer acquisition and retention, changes to third-party relationships and revenues, changes in the manner of providing services, customer acquisition and retention pressures, and our ability to attract, develop and retain qualified banking professionals; customers could pursue alternatives to bank deposits, causing us to lose a relatively inexpensive source of funding; uncertainty regarding the nature, timing, cost and effect of changes in banking regulations or other regulatory or legislative requirements affecting the respective businesses of Park and our subsidiaries, including major reform of the regulatory oversight structure of the financial services industry and changes in laws and regulations concerning taxes, pensions, bankruptcy, consumer protection, rent regulation and housing, financial accounting and reporting, environmental protection, insurance, bank products and services, bank capital and liquidity standards, fiduciary standards, securities and other aspects of the financial services industry, specifically the reforms provided for in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and the Basel III regulatory capital reforms, as well as regulations already adopted and which may be adopted in the future by the relevant regulatory agencies, including the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve Board, to implement the Dodd-Frank Act's provisions, and the Basel III regulatory capital reforms; the effects of easing restrictions on participants in the financial services industry; the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board (the "FASB"), the SEC, the Public Company Accounting Oversight Board and other regulatory agencies, including the extent to which the new current expected credit loss rule issued by the FASB in June 2016, which will require banks to record, at the time of origination, credit losses expected throughout the life of the asset portfolio on loans and HTM securities, as opposed to the current practice of recording losses which it is probable that a loss event has occurred, may adversely affect Park's reported financial condition or results of operations; Park's assumptions and estimates used in applying critical accounting policies, which may prove unreliable, inaccurate or not predictive of actual results; changes in law and policy accompanying the current presidential administration and uncertainty or speculation pending the enactment of such changes;

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significant changes in the tax laws, which may adversely affect the fair values of net deferred tax assets and obligations of state and political subdivisions held in Park's investment securities portfolio; the impact of our ability to anticipate and respond to technological changes on our ability to respond to customer needs and meet competitive demands; operational issues stemming from and/or capital spending necessitated by the potential need to adapt to industry changes in information technology systems on which Park and our subsidiaries are highly dependent; the ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks; a failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors and other service providers, resulting in failures or disruptions in customer account management, general ledger, deposit, loan, or other systems, including as a result of cyber attacks; the existence or exacerbation of general geopolitical instability and uncertainty; the effect of trade policies (including the impact of potential or imposed tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulations and changes in the relationship of the U.S. and its global trading partners), monetary and other fiscal policies (including the impact of money supply and interest rate policies to the Federal Reserve Board) and other governmental policies of the U.S. federal government; the impact on financial markets and the economy of any changes in the credit ratings of the U.S. Treasury obligations and other U.S. government - backed debt, as well as issues surrounding the levels of U.S., European and Asian government debt and concerns regarding the creditworthiness of certain sovereign governments, supranationals and financial institutions in Europe and Asia; the uncertainty surrounding the actions to be taken to implement the referendum by United Kingdom voters to exit the European Union; our litigation and regulatory compliance exposure, including the costs and effects of any adverse developments in legal proceedings or other claims and the costs and effects of unfavorable resolution of regulatory and other governmental examinations or other inquiries; continued availability of earnings and excess capital sufficient for the lawful and prudent declaration of dividends; fraud, scams and schemes of third parties; the impact of widespread natural and other disasters, pandemics, dislocations, civil unrest, terrorist activities or international hostilities on the economy and financial markets generally and on us or our counterparties specifically; the effect of healthcare laws in the U.S. and potential changes for such laws which may increase our healthcare and other costs and negatively impact our operations and financial results; Park's ability to integrate recent acquisitions (including CABF) as well as to identify, make or integrate any future suitable strategic acquisitions, which may be unsuccessful, or may be more difficult, time-consuming or costly than expected; risk and uncertainties associated with Park's entry into new geographic markets with its recent acquisitions, including expected revenue synergies and cost savings from the merger of Park and CABF not being fully realized or realized within the expected time frame; revenues following the merger of Park and CABF may be lower than expected; customer and employee relationships and business operations may be disrupted by the merger of Park and CABF; Park issued equity securities in the acquisitions of NewDominion Bank and CABF and may issue equity securities in connection with future acquisitions, which could cause ownership and economic dilution to Park's current shareholders; the discontinuation of LIBOR and other reference rates which may result in increased expenses and litigation, and adversely impact the effectiveness of hedging strategies; and other risk factors relating to the banking industry as detailed from time to time in Park's reports filed with the SEC including those described in "Item 1A. Risk Factors" of Part I of Park's Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Park does not undertake, and specifically disclaims any obligation, to publicly release the results of any revisions that may be made to update any forward-looking statement to reflect the events or circumstances after the date on which the forward-looking statement was made, or reflect the occurrence of unanticipated events, except to the extent required by law.

Non-GAAP Financial Measures

Item 2 of Part I of of this Form 10-Q contains non-U.S. GAAP financial measures where management believes it to be helpful in understanding Park’s results of operations or financial position. Where non-U.S. GAAP financial measures are used, the comparable U.S. GAAP financial measure, as well as the reconciliation to the comparable U.S. GAAP financial measure, can be found herein.

Items Impacting Comparability of Period Results

From time to time, revenue, expenses, and/or taxes are impacted by items judged by management of Park to be outside of ordinary banking activities and/or by items that, while they may be associated with ordinary banking activities, are so unusually large that their outsized impact is believed by management of Park at that time to be infrequent or short-term in nature. Most often, these items impacting comparability of period results are due to merger and acquisition activities and revenue and expenses related to former Vision Bank loan relationships. In other cases, they may result from management's decisions associated with significant corporate actions outside of the ordinary course of business.

Even though certain revenue and expense items are naturally subject to more volatility than others due to changes in market and economic environment conditions, as a general rule volatility alone does not result in the inclusion of an item as one impacting comparability of period results. For example, changes in the provision for credit losses (aside from former Vision Bank loan relationships), gains (losses) on equity securities, and asset valuation writedowns, reflect ordinary banking activities and are, therefore, typically excluded from consideration as items impacting comparability of period results.

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Management believes the disclosure of items impacting comparability of period results provides a better understanding of our performance and trends and allows management to ascertain which of such items, if any, to include or exclude from an analysis of our performance; i.e., within the context of determining how that performance differed from expectations, as well as how, if at all, to adjust estimates of future performance taking such items into account.

Items impacting comparability of the results of particular periods are not intended to be a complete list of items that may materially impact current or future period performance.

FTE (fully taxable equivalent) Ratios

Interest income, yields, and ratios on a FTE basis are considered non-U.S. GAAP financial measures. Management believes net interest income on a FTE basis provides an insightful picture of the interest margin for comparison purposes. The FTE basis also allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. The FTE basis assumes a federal statutory tax rate of 21 percent. In the tables included within the "Net Interest Income" section of this MD&A, Park has provided detail of FTE interest income solely for the purpose of complying with SEC Regulation G and not as an indication that FTE interest income, yields and ratios are substitutes for interest income, yields and ratios, as determined in accordance with U.S. GAAP.

Critical Accounting Policies

Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2018 Annual Report lists significant accounting policies used in the development and presentation of Park’s consolidated financial statements. The accounting and reporting policies of Park conform with U.S. GAAP and general practices within the financial services industry. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.

Park believes the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb probable incurred credit losses in the loan portfolio. Management’s determination of the adequacy of the allowance for loan losses is based on periodic evaluations of the loan portfolio and of current economic conditions. However, this evaluation has subjective components requiring material estimates, including expected default probabilities, the expected loss given default, the amounts and timing of expected future cash flows on impaired loans, and estimated losses based on historical loss experience and current economic conditions. All of these factors may be susceptible to significant change. To the extent that actual results differ from management estimates, additional loan loss provisions may be required that would adversely impact earnings in future periods. Refer to the “Credit Metrics and Provision for Loan Losses” section within this MD&A for additional discussion.

OREO, property acquired through foreclosure, is recorded at estimated fair value less anticipated selling costs (net realizable value). If the net realizable value is below the carrying value of the loan on the date of transfer, the difference is charged to the allowance for loan losses. Subsequent declines in value, OREO devaluations, are reported as adjustments to the carrying amount of OREO and are expensed within other income. Gains or losses not previously recognized, resulting from the sale of OREO, are recognized within other income on the date of sale.

U.S. GAAP requires management to establish a fair value hierarchy, which has the objective of maximizing the use of observable market inputs. U.S. GAAP also requires enhanced disclosures regarding the inputs used to calculate fair value. These are classified as Level 1, Level 2, and Level 3. Level 3 inputs are those with significant unobservable inputs that reflect a company’s own assumptions about the market for a particular instrument. Some of these inputs could be based on internal models and cash flow analyses. The large majority of Park’s assets whose fair value is determined using Level 2 inputs consists of AFS debt securities. The fair value of these AFS debt securities is calculated 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 debt securities but rather relying on the debt securities’ relationship to other benchmark quoted debt securities. Please see Note 21 - Fair Value of the Notes to Unaudited Consolidated Condensed Financial Statements in this Quarterly Report on Form 10-Q for additional information on fair value.

Management believes that the accounting for goodwill also involves a higher degree of judgment than most other significant accounting policies. U.S. GAAP establishes standards for the impairment assessment of goodwill. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Park’s goodwill, as of September 30, 2019, relates to the value inherent in the banking industry and that value is dependent upon the ability of Park’s national bank subsidiary, The Park National Bank 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

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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 2019, with financial data as of March 31, 2019, and resulted in no impairment of goodwill. Further, there have been no events subsequent to that analysis that provide any evidence that goodwill is impaired. The fair value of the goodwill, which resides on the books of PNB, is estimated by reviewing the past and projected operating results for PNB, deposit and loan totals for PNB and banking industry comparable information.

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

Significant assumptions used to measure our annual pension expense include:


•	the interest rate used to determine the present value of liabilities (discount rate);


•	certain employee-related factors, such as turnover, retirement age and mortality;


•	the expected return on assets in our funded pension plan; and


•	the rate of salary increases where benefits are based on earnings.

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

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Comparison of Results of Operations

For the Three and Nine Months Ended September 30, 2019 and 2018

Summary Discussion of Results

Net income for the three months ended September 30, 2019 was $31.1 million, compared to $24.8 million for the third quarter of 2018. Diluted earnings per common share were $1.89 for the third quarter of 2019, compared to $1.56 for the third quarter of 2018. Weighted average diluted common shares outstanding were 16,475,741 for the third quarter of 2019, compared to 15,832,734 weighted average diluted common shares outstanding for the third quarter of 2018.

Net income for the nine months ended September 30, 2019 was $78.8 million, compared to $84.1 million for the first nine months of 2018. Diluted earnings per common share were $4.84 for the first nine months of 2019, compared to $5.41 for the first nine months of 2018. Weighted average diluted common shares outstanding were 16,287,695 for the first nine months of 2019, compared to 15,560,666 weighted average diluted common shares outstanding for the first nine months of 2018.

Financial Results by Segment

The table below reflects the net income (loss) by segment for the first, second and third quarters of 2019, for the first nine months of each of 2019 and 2018, and for the years ended December 31, 2018 and 2017. Park's segments include The Park National Bank ("PNB"), Guardian Financial Services Company ("GFSC") and "All Other" which primarily consists of Park as the "Parent Company" and SE Property Holdings, LLC ("SEPH"). SEPH is a non-bank subsidiary of Park, holding former Vision Bank OREO property and non-performing loans.



Net income (loss) by segment
(In thousands)	Q3 2019			Q2 2019			Q1 2019			Nine months YTD 2019			Nine months YTD 2018		2018		2017
PNB	$	30,948		$	29,382		$	26,692		$	87,022		$	83,398	$	109,472	$	87,315
GFSC	203			163			287			653			606		521		260
All Other	(5		)	(7,382		)	(1,524		)	(8,911		)	122		394		(3,333		)
Total Park	$	31,146		$	22,163		$	25,455		$	78,764		$	84,126	$	110,387	$	84,242

Net income for the nine months ended September 30, 2019 of $78.8 million represented a $5.4 million, or 6.4%, decrease compared to $84.1 million for the nine months ended September 30, 2018. Net income for both the nine months ended September 30, 2019 and the nine months ended September 30, 2018 included several items of income and expense that impact comparability of period results. Refer to the "Items Impacting Comparability" section within this MD&A for further information.

The following discussion provides additional information regarding the two segments that make up Park's ongoing operations, followed by additional information regarding All Other, which consists of the Parent Company and SEPH.

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The Park National Bank (PNB)

The table below reflects PNB's net income for the first, second and third quarters of 2019, for the first nine months of each of 2019 and 2018, and for the years ended December 31, 2018 and 2017.



(In thousands)	Q3 2019		Q2 2019		Q1 2019		Nine months YTD 2019		Nine months YTD 2018		2018		2017
Net interest income	$	76,180	$	74,893	$	66,282	$	217,355	$	190,319	$	258,547	$	235,243
Provision for loan losses	2,320		1,803		2,440		6,563		4,491		7,569		9,898
Other income	24,842		22,674		20,708		68,224		64,544		88,981		82,742
Other expense	60,943		60,014		51,974		172,931		149,152		206,843		185,891
Income before income taxes	$	37,759	$	35,750	$	32,576	$	106,085	$	101,220	$	133,116	$	122,196
Income tax expense	6,811		6,368		5,884		19,063		17,822		23,644		34,881
Net income	$	30,948	$	29,382	$	26,692	$	87,022	$	83,398	$	109,472	$	87,315

Net interest income of $217.4 million for the nine months ended September 30, 2019 represented a $27.0 million, or 14.2%, increase compared to $190.3 million for the nine months ended September 30, 2018. The increase was a result of a $42.6 million increase in interest income, offset by a $15.6 million increase in interest expense.

The $42.6 million increase in interest income was primarily due to a $42.5 million increase in interest income on loans. The increase in interest income on loans was partially the result of a $731.9 million increase in average loans from $5.38 billion for the nine months ended September 30, 2018, to $6.11 billion for the nine months ended September 30, 2019. Additionally, the yield on loans increased 36 basis points to 5.15% for the nine months ended September 30, 2019, compared to 4.79% for the nine months ended September 30, 2018. Interest income was impacted by the acquisition of NewDominion Bank ("NewDominion") on July 1, 2018 and the acquisition of CABF on April 1, 2019. The NewDominion Bank Division and the Carolina Alliance Bank Division contributed an aggregate of $29.0 million to interest income at PNB during the nine months ended September 30, 2019. The NewDominion Bank Division contributed $3.9 million to interest income at PNB during the nine months ended September 30, 2018.

The $15.6 million increase in interest expense was primarily due to a $15.8 million increase in interest expense on deposits. The increase in interest expense on deposits was partially the result of a $499.3 million increase in average interest-bearing deposits from $4.46 billion for the nine months ended September 30, 2018, to $4.96 billion for the nine months ended September 30, 2019. Additionally, the cost of deposits increased by 36 basis points from 0.67% for the nine months ended September 30, 2018 to 1.03% for the nine months ended September 30, 2019. Interest expense was impacted by the acquisitions of NewDominion and Carolina Alliance. The NewDominion Bank Division and the Carolina Alliance Bank Division contributed an aggregate of $3.5 million to interest expense at PNB during the nine months ended September 30, 2019. The NewDominion Bank Division contributed $353,000 to interest expense at PNB during the nine months ended September 30, 2018.

The provision for loan losses of $6.6 million for the nine months ended September 30, 2019 represented an increase of $2.1 million, compared to $4.5 million for the nine months ended September 30, 2018. Refer to the “Credit Metrics and Provision for Loan Losses” section of this MD&A for additional details regarding the level of the provision for loan losses recognized in each period presented above.

Other income of $68.2 million for the nine months ended September 30, 2019 represented an increase of $3.7 million, or 5.7%, compared to $64.5 million for the nine months ended September 30, 2018. The $3.7 million increase was primarily related to a $2.2 million increase in debit card fee income, a $1.3 million increase in other service income, a $1.0 million increase in income from fiduciary activities, a $903,000 increase in operating lease income, which is included in miscellaneous income, and a decrease of $1.8 million in net losses on the sale of investment securities, offset by a $1.5 million decrease in net gains on the sale of OREO, a $1.5 million decrease in other components of net periodic benefit income, and a $532,000 decrease in service charges on deposit accounts. Other income was impacted by the acquisitions of NewDominion and Carolina Alliance. The NewDominion Bank Division and the Carolina Alliance Bank Division contributed an aggregate of $3.2 million to other income at PNB during the nine months ended September 30, 2019. The NewDominion Bank Division contributed $225,000 to other income at PNB during the nine months ended September 30, 2018.

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Other expense of $172.9 million for the nine months ended September 30, 2019 represented an increase of $23.8 million, or 15.9%, compared to $149.2 million for the nine months ended September 30, 2018. The $23.8 million increase was related to a $10.1 million increase in salary expense, a $5.7 million increase in employee benefits expense, primarily related to increased group insurance costs, payroll taxes and an increase in the company match in Park's defined contribution plan, a $1.8 million increase in data processing expense, a $1.7 million increase in professional fees and services expense, a $1.4 million increase in core deposit intangible amortization expense, a $966,000 increase in occupancy expense, a $886,000 increase in operating lease depreciation, which is included in miscellaneous expense, a $764,000 increase in furniture and equipment expense, a $518,000 increase in marketing expense, and a $470,000 increase in non loan related losses, offset by a $1.3 million decrease in other insurance expense, primarily related to an assessment credit utilized for the FDIC expense. Other expense was impacted by the acquisitions of NewDominion and Carolina Alliance. The NewDominion Bank Division and the Carolina Alliance Bank Division added $7.0 million and $11.4 million, respectively, to other expense at PNB during the nine months ended September 30, 2019. The NewDominion Bank Division added $3.1 million to other expense at PNB during the nine months ended September 30, 2018. Cost savings related to the Carolina Alliance acquisition are expected to be fully realized following the fourth quarter of 2019 conversion of Carolina Alliance's core banking system.

Excluding the impact of the NewDominion Bank Division and the Carolina Alliance Bank Division, other expense of $154.5 million for the nine months ended September 30, 2019 represented an increase of $8.4 million, or 5.8%, compared to $146.1 million for the nine months ended September 30, 2018. The $8.4 million increase was related to a $4.1 million increase in employee benefits expense, primarily related to increased group insurance costs, payroll taxes and an increase in the company match in Park's defined contribution plan, a $3.5 million increase in salary expense, a $1.1 million increase in data processing expense, a $916,000 increase in professional fees and services expense, and a $339,000 increase in non loan related losses, offset by a $1.5 million decrease in other insurance expense, primarily related to an assessment credit utilized for the FDIC expense, and a $336,000 decrease in occupancy expense.

The table below provides certain balance sheet information and financial ratios for PNB as of or for the nine months ended September 30, 2019 and 2018 and the year ended December 31, 2018.



(In thousands)	September 30, 2019			December 31, 2018			September 30, 2018			% change from 12/31/18		% change from 9/30/18
Loans	$	6,382,673		$	5,671,173		$	5,605,925		12.55	%	13.86	%
Allowance for loan losses	53,865			49,067			47,981			9.78	%	12.26	%
Net loans	6,328,808			5,622,106			5,557,944			12.57	%	13.87	%
Investment securities	1,321,018			1,418,938			1,435,046			(6.90	)%	(7.95	)%
Total assets	8,673,919			7,753,848			7,707,474			11.87	%	12.54	%
Total deposits	7,234,450			6,334,796			6,353,965			14.20	%	13.86	%
Average assets ⁽¹⁾	8,353,174			7,573,713			7,523,967			10.29	%	11.02	%
Efficiency ratio ⁽²⁾	60.09		%	59.03		%	58.04		%	1.80	%	3.53	%
Return on average assets ⁽³⁾	1.39		%	1.45		%	1.48		%	(4.14	)%	(6.08	)%

(1) Average assets for the nine months ended September 30, 2019 and 2018 and for the year ended December 31, 2018.

(2) Calculated utilizing fully taxable equivalent net interest income which includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustments were $2.2 million and $2.1 million for the nine months ended September 30, 2019 and 2018, respectively, and $2.9 million for the year ended December 31, 2018.

(3) Annualized for the nine months ended September 30, 2019 and 2018.

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Loans outstanding at September 30, 2019 were $6.38 billion, compared to $5.67 billion at December 31, 2018, an increase of $711.5 million, or 12.6% (16.8% annualized). Excluding $570.5 million of loans at the Carolina Alliance Bank Division at September 30, 2019, loans outstanding at September 30, 2019 were $5.81 billion, compared to $5.67 billion at December 31, 2018, an increase of $141.0 million, or 2.5% (3.3% annualized). The table below breaks out the change in loans outstanding, excluding those at the Carolina Alliance Bank Division, by loan type.



PNB less Carolina Alliance Bank Division
(In thousands)	September 30, 2019		December 31, 2018		change			% change		% change annualized
Home equity	$	196,147	$	215,426	$	(19,279	)	(8.9	)%	(12.0	)%
Installment	1,406,305		1,279,831		126,474			9.9	%	13.2	%
Real estate	1,224,844		1,207,160		17,684			1.5	%	2.0	%
Commercial	2,980,699		2,963,339		17,360			0.6	%	0.8	%
Other	4,200		5,417		(1,217		)	(22.5	)%	(30.0	)%
Total loans	$	5,812,195	$	5,671,173	$	141,022		2.5	%	3.3	%

Loans outstanding at September 30, 2019 were $6.38 billion, compared to $5.61 billion at September 30, 2018, an increase of $776.7 million, or 13.9%. Excluding $570.5 million of loans outstanding at the Carolina Alliance Bank Division at September 30, 2019, loans outstanding at September 30, 2019 were $5.81 billion, compared to $5.61 billion at September 30, 2018, an increase of $206.3 million, or 3.7%. The table below breaks out the change in loans outstanding, excluding those at the Carolina Alliance Bank Division, by loan type.



PNB less Carolina Alliance Bank Division
(In thousands)	September 30, 2019		September 30, 2018		change			% change
Home equity	$	196,147	$	221,779	$	(25,632	)	(11.6	)%
Installment	1,406,305		1,281,320		124,985			9.8	%
Real estate	1,224,844		1,208,683		16,161			1.3	%
Commercial	2,980,699		2,889,413		91,286			3.2	%
Other	4,200		4,730		(530		)	(11.2	)%
Total loans	$	5,812,195	$	5,605,925	$	206,270		3.7	%

PNB's allowance for loan losses increased by $4.8 million, or 9.8%, to $53.9 million at September 30, 2019, compared to $49.1 million at December 31, 2018. Net charge offs were $1.8 million, or 0.04% of total average loans (annualized), for the nine months ended September 30, 2019 and were $6.1 million, or 0.11% of total average loans, for the twelve months ended December 31, 2018. Refer to the “Credit Metrics and Provision for Loan Losses” section for additional information regarding PNB's loan portfolio and the level of provision for loan losses recognized in each period presented.

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Total deposits at September 30, 2019 were $7.23 billion, compared to $6.33 billion at December 31, 2018, an increase of $899.7 million, or 14.2% (19.0% annualized). Excluding $632.4 million of total deposits at the Carolina Alliance Bank Division at September 30, 2019, total deposits at September 30, 2019 were $6.60 billion, compared to $6.33 billion at December 31, 2018, an increase of $267.2 million, or 4.2% (5.6% annualized). The table below breaks out the change in deposit balances, excluding those at the Carolina Alliance Bank Division, by deposit type.



PNB less Carolina Alliance Bank Division
(In thousands)	September 30, 2019		December 31, 2018		change			% change		% change annualized
Non-interest bearing deposits	$	1,871,843	$	1,882,979	$	(11,136	)	(0.6	)%	(0.8	)%
Transaction accounts	1,489,468		1,364,743		124,725			9.1	%	12.2	%
Savings	2,249,825		2,043,897		205,928			10.1	%	13.5	%
Certificates of deposits	990,886		1,043,177		(52,291		)	(5.0	)%	(6.7	)%
Total deposits	$	6,602,022	$	6,334,796	$	267,226		4.2	%	5.6	%

Total deposits at September 30, 2019 were $7.23 billion, compared to $6.35 billion at September 30, 2018, an increase of $880.5 million, or 13.9%. Excluding $632.4 million of total deposits at the Carolina Alliance Bank Division at September 30, 2019, total deposits at September 30, 2019 were $6.60 billion, compared to $6.35 billion at September 30, 2018, an increase of $248.1 million, or 3.9%. The table below breaks out the change in deposit balances, excluding those at the Carolina Alliance Bank Division, by deposit type.



PNB less Carolina Alliance Bank Division
(In thousands)	September 30, 2019		September 30, 2018		change			% change
Non-interest bearing deposits	$	1,871,843	$	1,804,924	$	66,919		3.7	%
Transaction accounts	1,489,468		1,431,242		58,226			4.1	%
Savings	2,249,825		2,027,682		222,143			11.0	%
Certificates of deposits	990,886		1,090,117		(99,231		)	(9.1	)%
Total deposits	$	6,602,022	$	6,353,965	$	248,057		3.9	%

Guardian Financial Services Company (GFSC)

The table below reflects GFSC's net income for the first, second and third quarters of 2019, for the first nine months of each of 2019 and 2018, and for the years ended December 31, 2018 and 2017.



(In thousands)	Q3 2019		Q2 2019		Q1 2019		Nine months YTD 2019		Nine months YTD 2018		2018		2017
Net interest income	$	1,244	$	1,217	$	1,325	$	3,786	$	3,818	$	5,048	$	5,839
Provision for loan losses	143		170		145		458		773		1,328		1,917
Other income	59		51		32		142		135		187		103
Other expense	902		891		845		2,638		2,412		3,245		3,099
Income before income taxes	$	258	$	207	$	367	$	832	$	768	$	662	$	926
Income tax expense	55		44		80		179		162		141		666
Net income	$	203	$	163	$	287	$	653	$	606	$	521	$	260

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The table below provides certain balance sheet information and financial ratios for GFSC as of or for the nine months ended September 30, 2019 and 2018 and for the year ended December 31, 2018.



(In thousands)	September 30, 2019			December 31, 2018			September 30, 2018			% change from 12/31/18		% change from 9/30/18
Loans	$	27,964		$	32,664		$	29,849		(14.39	)%	(6.32	)%
Allowance for loan losses	1,988			2,445			2,265			(18.69	)%	(12.23	)%
Net loans	25,976			30,219			27,584			(14.04	)%	(5.83	)%
Total assets	27,481			31,388			28,551			(12.45	)%	(3.75	)%
Average assets⁽¹⁾	29,713			29,741			30,126			(0.09	)%	(1.37	)%
Return on average assets ⁽²⁾	2.94		%	1.75		%	2.69		%	68.00	%	9.29	%

(1) Average assets for the nine months ended September 30, 2019 and 2018 and for the year ended December 31, 2018.

(2) Annualized for the nine months ended September 30, 2019 and 2018.

All Other

The table below reflects All Other net (loss) income for the first, second and third quarters of 2019, for the first nine months of each of 2019 and 2018, and for the years ended December 31, 2018 and 2017.



(In thousands)	Q3 2019			Q2 2019			Q1 2019			Nine months YTD 2019			Nine months YTD 2018			2018			2017
Net interest (expense) income	$	(323	)	$	(259	)	$	169		$	(413	)	$	3,131		$	3,303		$	2,677
Recovery of loan losses	(496		)	(54		)	(87		)	(637		)	(678		)	(952		)	(3,258		)
Other income	3,235			83			1,285			4,603			9,530			11,933			3,584
Other expense	3,893			9,287			4,008			17,188			14,594			18,667			14,172
Net loss before income tax benefit	$	(485	)	$	(9,409	)	$	(2,467	)	$	(12,361	)	$	(1,255	)	$	(2,479	)	$	(4,653	)
Income tax benefit	(480		)	(2,027		)	(943		)	(3,450		)	(1,377		)	(2,873		)	(1,320		)
Net (loss) income	$	(5	)	$	(7,382	)	$	(1,524	)	$	(8,911	)	$	122		$	394		$	(3,333	)

The net interest (expense) income for All Other included, for all periods presented, interest income on subordinated debt investments in PNB, which were eliminated in the consolidated Park National Corporation totals, as well as interest income on SEPH impaired loan relationships.

Net interest (expense) income decreased to net expense of $413,000 for the nine months ended September 30, 2019 from net income of $3.1 million for the nine months ended September 30, 2018. The decrease was the result of a decrease in interest payments received from SEPH impaired loan relationships.

SEPH had net recoveries of $637,000 for the nine months ended September 30, 2019, compared to net recoveries of $678,000 for the nine months ended September 30, 2018.

Other income of $4.6 million for the nine months ended September 30, 2019 represented a decrease of $4.9 million, compared to $9.5 million for the nine months ended September 30, 2018. The $4.9 million decrease was largely due to a $2.8 million decrease in gain on the sale of OREO, net, a $1.5 million decrease in bank owned life insurance income, primarily related to income from death benefits paid on policies in 2018, and a $1.0 million decrease in loan fee income as a result of a reduction in payments received from SEPH impaired loan relationships.

Other expense of $17.2 million for the nine months ended September 30, 2019 represented an increase of $2.6 million, or 17.8%, compared to $14.6 million for the nine months ended September 30, 2018. The $2.6 million increase was primarily related to an increase of $1.8 million in salary expense, and a $543,000 increase in professional fees and services (both increases primarily related to merger-related expenses). Merger-related expenses were $7.0 million for the nine months ended September 30, 2019, compared to $3.9 million for the nine months ended September 30, 2018.

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Park National Corporation

The table below reflects Park's consolidated net income for the first, second and third quarters of 2019, for the first nine months of each of 2019 and 2018, and for the years ended December 31, 2018 and 2017.



(In thousands)	Q3 2019		Q2 2019		Q1 2019		Nine months YTD 2019		Nine months YTD 2018		2018		2017
Net interest income	$	77,101	$	75,851	$	67,776	$	220,728	$	197,268	$	266,898	$	243,759
Provision for loan losses	1,967		1,919		2,498		6,384		4,586		7,945		8,557
Other income	28,136		22,808		22,025		72,969		74,209		101,101		86,429
Other expense	65,738		70,192		56,827		192,757		166,158		228,755		203,162
Income before income taxes	$	37,532	$	26,548	$	30,476	$	94,556	$	100,733	$	131,299	$	118,469
Income tax expense	6,386		4,385		5,021		15,792		16,607		20,912		34,227
Net income	$	31,146	$	22,163	$	25,455	$	78,764	$	84,126	$	110,387	$	84,242

Net Interest Income

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

Comparison for the Third Quarters of 2019 and 2018

Net interest income increased by $9.4 million, or 13.9%, to $77.1 million for the third quarter of 2019, compared to $67.7 million for the third quarter of 2018. See the discussion under the table below.



	Three months ended September 30, 2019						Three months ended September 30, 2018
(Dollars in thousands)	Average balance		Interest		Tax equivalent yield/cost		Average balance		Interest		Tax equivalent yield/cost
Loans⁽¹⁾	$	6,371,323	$	84,365	5.25	%	$	5,609,813	$	70,034	4.95	%
Taxable investments	1,027,115		6,326		2.44	%	1,205,206		7,691		2.53	%
Tax-exempt investments ⁽²⁾	306,867		2,817		3.64	%	303,949		2,792		3.64	%
Money market instruments	298,441		1,825		2.43	%	87,143		428		1.95	%
Interest earning assets	$	8,003,746	$	95,333	4.73	%	$	7,206,111	$	80,945	4.46	%

Interest bearing deposits	$	5,287,851	14,343		1.08	%	$	4,642,530	9,740		0.83	%
Short-term borrowings	180,470		478		1.05	%	179,109		288		0.64	%
Long-term debt	373,125		2,667		2.84	%	415,000		2,525		2.42	%
Interest bearing liabilities	$	5,841,446	$	17,488	1.19	%	$	5,236,639	$	12,553	0.95	%
Excess interest earning assets	$	2,162,300					$	1,969,472
Tax equivalent net interest income			$	77,845					$	68,392
Net interest spread					3.54	%					3.51	%
Net interest margin					3.86	%					3.77	%

(1) Loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $152,000 for the three months ended September 30, 2019 and $129,000 for the same period of 2018.

(2) Interest income on tax-exempt investment securities includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $592,000 for the three months ended September 30, 2019 and $587,000 for the same period of 2018.

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Average interest earnings assets for the third quarter of 2019 increased by $798 million, or 11.1%, to $8,004 million, compared to $7,206 million for the third quarter of 2018. The average yield on interest earning assets increased by 27 basis points to 4.73% for the third quarter of 2019, compared to 4.46% for the third quarter of 2018.

Interest income for the three months ended September 30, 2019 included purchase accounting accretion of $1.8 million related to the acquisitions of NewDominion and Carolina Alliance. Interest income for the three months ended September 30, 2018 included purchase accounting accretion of $439,000 related to the acquisition of NewDominion and also included $119,000 related to payments received on former Vision Bank impaired loan relationships, some of which were participated with PNB. Excluding the impact of these items, the yield on loans was 5.13% and 4.91% for the three months ended September 30, 2019 and 2018, respectively, and the yield on earning assets was 4.63% and 4.42% for the three months ended September 30, 2019 and 2018, respectively.

Average interest bearing liabilities for the third quarter of 2019 increased by $605 million, or 11.5%, to $5,841 million, compared to $5,237 million for the third quarter of 2018. The average cost of interest bearing liabilities increased by 24 basis points to 1.19% for the third quarter of 2019, compared to 0.95% for the third quarter of 2018.

Interest expense for the three months ended September 30, 2019 included a benefit from purchase accounting accretion of $182,000 related to the acquisitions of NewDominion and Carolina Alliance. Interest expense for the three months ended September 30, 2018 included approximately $608,000 of interest expense related to an accrual for an interest rate adjustment on an interest bearing deposit product and $143,000 of purchase accounting accretion related to the acquisition of NewDominion. Excluding the impact of these items, the average cost of interest bearing liabilities was 1.20% for the three months ended September 30, 2019 and was 0.92% for the three months ended September 30, 2018.

Removing the impacts of interest income related to payments on former Vision Bank loan relationships, the accretion of purchase accounting adjustments related to the acquisitions of NewDominion and Carolina Alliance and the accrual for an interest rate adjustment on an interest bearing deposit product, the net interest margin was 3.76% for both the three months ended September 30, 2019 and 2018, respectively.

Yield on Loans: Average loan balances increased $762 million, or 13.6%, to $6,371 million for the third quarter of 2019, compared to $5,610 million for the third quarter of 2018. The average yield on the loan portfolio increased by 30 basis points to 5.25% for the third quarter of 2019, compared to 4.95% for the third quarter of 2018.

The table below shows the average balance and tax equivalent yield by type of loan for the three months ended September 30, 2019 and 2018.



	Three months ended September 30, 2019				Three months ended September 30, 2018
(Dollars in thousands)	Average balance		Tax equivalent yield		Average balance		Tax equivalent yield
Home equity	$	234,887	5.79	%	$	223,460	5.28	%
Installment loans	1,407,812		5.34	%	1,306,405		5.07	%
Real estate loans	1,262,851		4.45	%	1,205,812		4.21	%
Commercial loans⁽¹⁾	3,460,626		5.47	%	2,869,221		5.17	%
Other	5,147		10.83	%	4,915		12.41	%
Total loans and leases before allowance	$	6,371,323	5.25	%	$	5,609,813	4.95	%

(1) Commercial loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $152,000 for the three months ended September 30, 2019 and $129,000 for the same period of 2018.

Loan interest income for the three months ended September 30, 2019 included the accretion of purchase accounting adjustments related to the acquisitions of NewDominion and Carolina Alliance. Excluding this income, the yield on home equity loans was 5.38%, the yield on installment loans was 5.33%, the yield on real estate loans was 4.39%, the yield on commercial loans was 5.29% and the yield on total loans and leases before allowance was 5.13%.

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Loan interest income for the three months ended September 30, 2018 includes income related to payments received on former Vision Bank impaired loan relationships, some of which are participated with PNB as well as the accretion of purchase accounting adjustments related to the acquisition of NewDominion. Excluding this income, the yield on home equity loans was 5.12%, the yield on real estate loans was 4.10%, the yield on commercial loans was 5.15% and the yield on total loans and leases before allowance was 4.91%.

Cost of Deposits: Average interest bearing deposit balances increased $645 million, or 13.9%, to $5,288 million for the third quarter of 2019, compared to $4,643 for the third quarter of 2018. The average cost of funds on deposit balances increased by 25 basis points to 1.08% for the third quarter of 2019, compared to 0.83% for the third quarter of 2018.

The table below shows for the three months ended September 30, 2019 and 2018, the average balance and cost of funds by type of deposit.



	Three months ended September 30, 2019				Three months ended September 30, 2018
(Dollars in thousands)	Average balance		Cost of funds		Average balance		Cost of funds
Transaction accounts	$	1,784,784	0.88	%	$	1,483,691	0.81	%
Savings deposits and clubs	2,354,172		0.96	%	2,063,376		0.65	%
Time deposits	1,148,895		1.62	%	1,095,463		1.21	%
Total interest bearing deposits	$	5,287,851	1.08	%	$	4,642,530	0.83	%

Deposit interest expense for the three months ended September 30, 2019 included the accretion of purchase accounting adjustments related to the acquisitions of NewDominion and Carolina Alliance. Excluding this income, the cost of funds for time deposits was 1.68% and the cost of total interest bearing deposits was 1.09%.

Deposit interest expense for the three months ended September 30, 2018, included a $608,000 accrual for an interest rate adjustment on an interest bearing deposit product and $143,000 of purchase accounting accretion related to the acquisition of NewDominion. Excluding these items, the cost of funds for transaction accounts was 0.65%, the cost of time deposits was 1.26% and the cost of total interest bearing deposits was 0.79%.

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Comparison for the First Nine Months of 2019 and 2018

Net interest income increased by $23.5 million, or 11.9%, to $220.7 million for the first nine months of 2019, compared to $197.3 million for the first nine months of 2018. See the discussion under the table below.



	Nine months ended September 30, 2019						Nine months ended September 30, 2018
(Dollars in thousands)	Average balance		Interest		Tax equivalent yield/cost		Average balance		Interest		Tax equivalent yield/cost
Loans⁽¹⁾	$	6,133,386	$	239,122	5.21	%	$	5,401,631	$	199,181	4.93	%
Taxable investments	1,077,566		20,240		2.51	%	1,205,747		22,204		2.46	%
Tax-exempt investments ⁽²⁾	311,213		8,545		3.67	%	301,501		8,301		3.68	%
Money market instruments	158,395		2,994		2.53	%	79,256		1,070		1.80	%
Interest earning assets	$	7,680,560	$	270,901	4.72	%	$	6,988,135	$	230,756	4.41	%

Interest bearing deposits	$	4,967,106	38,381		1.03	%	$	4,467,206	22,574		0.68	%
Short-term borrowings	218,939		1,977		1.21	%	225,310		1,283		0.76	%
Long-term debt	380,284		7,585		2.67	%	424,615		7,509		2.36	%
Interest bearing liabilities	$	5,566,329	$	47,943	1.15	%	$	5,117,131	$	31,366	0.82	%
Excess interest earning assets	$	2,114,231					$	1,871,004
Tax equivalent net interest income			$	222,958					$	199,390
Net interest spread					3.57	%					3.59	%
Net interest margin					3.88	%					3.81	%

(1) Loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $435,000 for the nine months ended September 30, 2019 and $378,000 for the same period of 2018.

(2) Interest income on tax-exempt investment securities includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $1.8 million for the nine months ended September 30, 2019 and $1.7 million for the same period of 2018.

Average interest earnings assets for the first nine months of 2019 increased by $693 million, or 9.9%, to $7,681 million, compared to $6,988 million for the first nine months of 2018. The average yield on interest earning assets increased by 31 basis points to 4.72% for the first nine months of 2019, compared to 4.41% for the first nine months of 2018.

Interest income for the nine months ended September 30, 2019 included purchase accounting accretion of $3.4 million related to the acquisitions of NewDominion and Carolina Alliance. Interest income for the nine months ended September 30, 2018 included $3.4 million related to payments received on former Vision Bank impaired loan relationships, some of which were participated with PNB, as well as $439,000 related to the accretion of purchase accounting adjustments related to the acquisition of NewDominion. Excluding the impact of these items, the yield on loans was 5.13% and 4.84% for the nine months ended September 30, 2019 and 2018, respectively, and the yield on earning assets was 4.65% and 4.34% for the nine months ended September 30, 2019 and 2018, respectively.

Average interest bearing liabilities for the first nine months of 2019 increased by $449 million, or 8.8%, to $5,566 million, compared to $5,117 million for the first nine months of 2018. The average cost of interest bearing liabilities increased by 33 basis points to 1.15% for the first nine months of 2019, compared to 0.82% for the first nine months of 2018.

Interest expense for the nine months ended September 30, 2019 included a benefit from purchase accounting accretion of $456,000 related to the acquisitions of NewDominion and Carolina Alliance. Excluding the impact of this item, the average cost of interest bearing liabilities was 1.16% for the nine months ended September 30, 2019. Interest expense for the nine months ended September 30, 2018 included a benefit from purchase accounting accretion of $143,000 related to the acquisition of NewDominion. This accretion did not impact the average cost of interest bearing liabilities for the nine months ended September 30, 2018.

Removing the impacts of interest income related to payments on former Vision Bank loan relationships and the accretion of purchase accounting adjustments related to the acquisitions of NewDominion and Carolina Alliance, the net interest margin was 3.81% and 3.74% for the nine months ended September 30, 2019 and 2018, respectively.

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Yield on Loans: Average loan balances increased $731 million, or 13.5%, to $6,133 million for the first nine months of 2019, compared to $5,402 million for the first nine months of 2018. The average yield on the loan portfolio increased by 28 basis points to 5.21% for the first nine months of 2019, compared to 4.93% for the first nine months of 2018.

The table below shows the average balance and tax equivalent yield by type of loan for the nine months ended September 30, 2019 and 2018.



	Nine months ended September 30, 2019				Nine months ended September 30, 2018
(Dollars in thousands)	Average balance		Tax equivalent yield		Average balance		Tax equivalent yield
Home equity	$	230,570	5.75	%	$	204,550	5.06	%
Installment loans	1,354,589		5.33	%	1,289,192		5.01	%
Real estate loans	1,237,805		4.35	%	1,170,162		4.08	%
Commercial loans⁽¹⁾	3,305,559		5.44	%	2,733,077		5.23	%
Other	4,863		11.45	%	4,650		12.85	%
Total loans and leases before allowance	$	6,133,386	5.21	%	$	5,401,631	4.93	%

(1) Commercial loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $435,000 for the nine months ended September 30, 2019 and $378,000 for the same period of 2018.

Loan interest income for the nine months ended September 30, 2019 included the accretion of purchase accounting adjustments related to the acquisitions of NewDominion and Carolina Alliance. Excluding this income, the yield on home equity loans was 5.53%, the yield on installment loans was 5.32%, the yield on real estate loans was 4.31%, the yield on commercial loans was 5.32% and the yield on total loans and leases before allowance was 5.13%.

Loan interest income for the nine months ended September 30, 2018 includes income related to payments received on former Vision Bank impaired loan relationships, some of which were participated with PNB, as well as the accretion of purchase accounting adjustments related to the acquisition of NewDominion. Excluding this income, the yield on home equity loans was 4.99%, the yield on real estate loans was 4.04%, the yield on commercial loans was 5.07% and the yield on total loans and leases before allowance was 4.84%.

Cost of Deposits: Average interest bearing deposit balances increased $500 million, or 11.2%, to $4,967 million for the first nine months of 2019, compared to $4,467 for the first nine months of 2018. The average cost of funds on deposit balances increased by 35 basis points to 1.03% for the first nine months of 2019, compared to 0.68% for the first nine months of 2018.

The table below shows for the nine months ended September 30, 2019 and 2018, the average balance and cost of funds by type of deposit.



	Nine months ended September 30, 2019				Nine months ended September 30, 2018
(Dollars in thousands)	Average balance		Cost of funds		Average balance		Cost of funds
Transaction accounts	$	1,626,095	0.81	%	$	1,388,097	0.55	%
Savings deposits and clubs	2,233,237		0.94	%	2,027,438		0.54	%
Time deposits	1,107,774		1.55	%	1,051,671		1.11	%
Total interest bearing deposits	$	4,967,106	1.03	%	$	4,467,206	0.68	%

Deposit interest expense for the nine months ended September 30, 2019 included the accretion of purchase accounting adjustments related to the acquisitions of NewDominion and Carolina Alliance. Excluding this income, the cost of funds on time deposits was 1.60% and the cost of total interest bearing deposits was 1.05%. Deposit interest expense for the nine months ended September 30, 2018 included the accretion of purchase accounting adjustments related to the acquisition of NewDominion. Excluding this income, the cost of funds on time deposits was 1.13% and the cost of total interest bearing deposits was 0.68%.

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Yield on Average Interest Earning Assets: The following table shows the tax equivalent yield on average interest earning assets for the nine months ended September 30, 2019 and for the years ended December 31, 2018, 2017 and 2016.



	Loans ^{(1) (3)}		Investments⁽²⁾		Money Market Instruments		Total⁽³⁾
2016 - year	4.74	%	2.30	%	0.51	%	4.08	%
2017 - year	4.69	%	2.47	%	1.18	%	4.08	%
2018 - year	4.98	%	2.72	%	1.93	%	4.46	%
2019 - first nine months	5.21	%	2.77	%	2.53	%	4.72	%

(1) Loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate for 2019 and 2018 and a 35% federal corporate income tax rate for 2017 and 2016. The taxable equivalent adjustment was $435,000 for the nine months ended September 30, 2019, and $528,000, $1.1 million and $1.0 million for the years ended December 31, 2018, 2017 and 2016, respectively.

(2) Interest income on tax-exempt investment securities includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate for 2019 and 2018 and a 35% federal corporate income tax rate for 2017 and 2016. The taxable equivalent adjustment was $1.8 million for the nine months ended September 30, 2019, and $2.3 million, $3.9 million and $1.4 million for the years ended December 31, 2018, 2017 and 2016, respectively.

(3) Interest income for the years ended December 31, 2018, 2017 and 2016 included $3.4 million, $2.3 million and $6.2 million, respectively, related to payments received on former Vision Bank impaired loan relationships, some of which are participated with PNB, as well as $3.4 million and $1.1 million of the accretion of purchase accounting adjustments related to the acquisitions of NewDominion and Carolina Alliance for the nine months ended September 30, 2019 and the year ended December 31, 2018. Excluding these sources of income, the yield on loans was 5.13%, 4.89%, 4.66% and 4.64%, for the nine months ended September 30, 2019, and for the years ended December 31, 2018, 2017, and 2016, respectively, and the yield on earning assets was 4.65%, 4.40%, 4.05% and 4.00%, for the nine months ended September 30, 2019 and for the years ended December 31, 2018, 2017 and 2016, respectively.

Cost of Average Interest Bearing Liabilities: The following table shows the cost of funds on average interest bearing liabilities for the nine months ended September 30, 2019 and for the years ended December 31, 2018, 2017 and 2016.



	Interest bearing deposits ⁽¹⁾		Short-term borrowings		Long-term debt		Total ⁽¹⁾
2016 - year	0.32	%	0.19	%	3.13	%	0.74	%
2017 - year	0.44	%	0.43	%	2.86	%	0.80	%
2018 - year	0.72	%	0.74	%	2.38	%	0.86	%
2019 - first nine months	1.03	%	1.21	%	2.67	%	1.15	%

(1) Interest expense for the nine months ended September 30, 2019 and the year ended December 31, 2018 included $456,000 and $287,000 of the accretion of purchase accounting adjustments related to the acquisitions of NewDominion (for both periods) and Carolina Alliance (for the nine months ended September 30, 2019). Excluding this income, the cost of funds on interest bearing deposits was 1.05% and 0.73%, respectively, and the cost of interest bearing liabilities was 1.16% and 0.86%, respectively.

Credit Metrics and Provision for Loan Losses

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

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The table below provides additional information on the provision for loan losses for the three-month and nine-month periods ended September 30, 2019 and 2018.



	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2019			2018			2019			2018
Allowance for loan losses:
Beginning balance	$	54,003		$	49,452		$	51,512		$	49,988
Charge-offs	2,479			3,474			8,394			9,640
Recoveries	2,362			1,328			6,351			5,312
Net charge-offs	117			2,146			2,043			4,328
Provision for loan losses	1,967			2,940			6,384			4,586
Ending balance	$	55,853		50,246			$	55,853		$	50,246

Net charge-offs as a % of average loans (annualized)	0.01		%	0.15		%	0.04		%	0.11		%

Loans acquired as part of the acquisitions of NewDominion and Carolina Alliance were recorded at fair value on the date of acquisition. An allowance is only established on these loans as a result of credit deterioration post acquisition. As of September 30, 2019, there was no allowance related to performing acquired loans. Commercial acquired loans totaling $3.6 million have had credit deterioration since acquisition and have been placed on nonaccrual status. A specific reserve of $400,000 has been established related to these credits.

SEPH, as a non-bank subsidiary of Park, does not carry an ALLL balance, but recognizes a provision for loan losses when a charge-off is taken and recognizes a recovery of loan losses when a recovery is received.

The following table provides additional information related to the allowance for loan losses for Park including information related to specific reserves and general reserves, at September 30, 2019, December 31, 2018 and September 30, 2018.



Park - Allowance for Loan Losses
(In thousands)	September 30, 2019			December 31, 2018			September 30, 2018
Total allowance for loan losses	$	55,853		$	51,512		$	50,246
Specific reserves	3,083			2,273			1,846
General reserves	$	52,770		$	49,239		$	48,400

Total loans	$	6,403,647		$	5,692,132		$	5,625,323
Impaired commercial loans	74,424			48,135			46,698
Total loans less impaired commercial loans	$	6,329,223		$	5,643,997		$	5,578,625

Total allowance for loan losses to total loans ratio	0.87		%	0.90		%	0.89		%
General reserves as a % of total loans less impaired commercial loans	0.83		%	0.87		%	0.87		%
General reserves as a % of total loans less impaired commercial loans (excluding performing acquired loans)	0.93		%	0.91		%	0.91		%

The allowance for loan losses of $55.9 million at September 30, 2019 represented a $4.3 million, or 8.4%, increase compared to $51.5 million at December 31, 2018. This increase was the result of a $3.5 million increase in general reserves and a $810,000 increase in specific reserves.

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

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Nonperforming Assets: Nonperforming assets include: (1) loans whose interest is accounted for on a nonaccrual basis; (2) TDRs on accrual status; (3) loans which are contractually past due 90 days or more as to principal or interest payments but whose interest continues to accrue; (4) OREO which results from taking possession of property that served as collateral for a defaulted loan; and (5) other nonperforming assets. As of September 30, 2019, December 31, 2018 and September 30, 2018, other nonperforming assets consisted of aircraft acquired as part of a loan workout.

The following table compares Park’s nonperforming assets at September 30, 2019, December 31, 2018 and September 30, 2018.

Park National Corporation - Nonperforming Assets



(In thousands)	September 30, 2019			December 31, 2018			September 30, 2018
Nonaccrual loans	$	89,555		$	67,954		$	66,654
Accruing TDRs	18,382			15,173			14,602
Loans past due 90 days or more	3,247			2,243			2,025
Total nonperforming loans	$	111,184		$	85,370		$	83,281

OREO	3,779			4,303			5,276
Other nonperforming assets - PNB	3,598			3,464			7,170
Total nonperforming assets	$	118,561		$	93,137		$	95,727

Percentage of nonaccrual loans to total loans	1.40		%	1.19		%	1.18		%
Percentage of nonperforming loans to total loans	1.74		%	1.50		%	1.48		%
Percentage of nonperforming assets to total loans	1.85		%	1.64		%	1.70		%
Percentage of nonperforming assets to total assets	1.36		%	1.19		%	1.23		%

Included in the nonaccrual loan totals above is $1.6 million of SEPH nonaccrual loans at each of September 30, 2019, December 31, 2018 and September 30, 2018. Included in the OREO totals above is $797,000 of SEPH OREO at September 30, 2019, $1.5 million at December 31, 2018 and $2.2 million at September 30, 2018.

Impaired Loans: Park’s allowance for loan losses includes an allocation for loans specifically identified as impaired under U.S. GAAP. At September 30, 2019, loans considered to be impaired consisted substantially of commercial loans graded as "substandard" or “doubtful” and placed on non-accrual status. Specific reserves on impaired commercial loans are typically based on management’s best estimate of the fair value of collateral securing these loans. The amount ultimately charged off for these loans may be different from the specific reserve as the ultimate liquidation of the collateral may be for an amount different from management’s estimate.

When determining the quarterly loan loss provision, Park reviews the grades of commercial loans. These loans are graded from 1 to 8. A grade of 1 indicates little or no credit risk and a grade of 8 is considered a loss. Commercial loans that are pass-rated (graded an 1 through a 4) are considered to be of acceptable credit risk. Commercial loans graded a 5 (special mention) are considered to be watch list credits and a higher loan loss reserve percentage is allocated to these loans. Commercial loans graded a 6 (substandard), also considered to be watch list credits, represent higher credit risk than those rated special mention and, as a result, a higher loan loss reserve percentage is allocated to these loans. Commercial loans that are graded a 7 (doubtful) are shown as nonperforming and Park charges these loans down to their fair value by taking a partial charge-off or recording a specific reserve. Certain 6-rated loans and all 7-rated loans are included within the impaired category. A loan is deemed impaired when management determines that the borrower's ability to perform in accordance with the contractual loan agreement is in doubt. Any commercial loan graded an 8 (loss) is completely charged-off.

As of September 30, 2019, Park had taken partial charge-offs of $5.6 million related to the $74.4 million of commercial loans considered to be impaired, compared to partial charge-offs of $11.2 million related to the $48.1 million of impaired commercial loans at December 31, 2018.

Loans Acquired with Deteriorated Credit Quality: In conjunction with the NewDominion acquisition, Park acquired loans with deteriorated credit quality with a book value of $5.1 million which were recorded at the initial fair value of $4.9 million. In conjunction with the Carolina Alliance acquisition, Park acquired loans with deteriorated credit quality with a book value of $21.8 million which were recorded at the initial fair value of $19.9 million. The carrying amount of loans acquired with

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deteriorated credit quality at September 30, 2019 was $20.5 million, of which $11,000 was considered impaired due to additional credit deterioration or modification post acquisition. The remaining $20.5 million are not included in impaired loan totals. The carrying amount of loans acquired with deteriorated credit quality at December 31, 2018 was $4.4 million, of which $475,000 was considered impaired due to additional credit deterioration or modification post acquisition. The remaining $3.9 million are not included in impaired loan totals.

Allowance for loan losses: Loss factors are reviewed quarterly and updated at least annually to reflect recent loan loss history and incorporate current risks and trends which may not be recognized in historical data. The historical loss factors were last updated in the fourth quarter of 2018 to incorporate losses through December 31, 2018.

Excluding acquired loans, the allowance for loan losses related to performing commercial loans was $35.4 million, or 1.23% of the outstanding principal balance of performing commercial loans at September 30, 2019. Excluding acquired loans, at September 30, 2019, the coverage level within the commercial loan portfolio was approximately 3.48 years compared to 3.39 years at December 31, 2018. Historical loss experience, defined as charge-offs plus changes in specific reserves, over the 108-month period ended December 31, 2018, for the commercial loan portfolio was 0.35%. This 108-month loss experience includes only the performance of the PNB loan portfolio and excludes the impact of PNB participations in Vision Bank loans.

Excluding acquired loans, the overall reserve of 1.23% for other accruing commercial loans breaks down as follows: pass-rated commercial loans are reserved at 1.17%; special mention commercial loans are reserved at 5.46%; and substandard commercial loans are reserved at 3.92%. The reserve levels for pass-rated, special mention and substandard commercial loans in excess of the 108-month loss experience of 0.35% are due to the following factors which management reviews on a quarterly or annual basis:

•

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 108 months, through December 31, 2018. Management generally considers a one-year coverage period (the “Historical Loss Factor”) appropriate because the probable loss on any given loan in the consumer loan pool should ordinarily become apparent in that time frame. However, management may incorporate adjustments to the Historical Loss Factor as circumstances warrant additional reserves (e.g., increased loan delinquencies, improving or deteriorating economic conditions, changes in lending management and changes in underwriting standards). Excluding acquired loans, at September 30, 2019, the coverage level within the consumer loan portfolio was approximately 1.87 years compared to 1.87 years at December 31, 2018. Historical loss experience, over the 108-month period ended December 31, 2018, for the consumer loan portfolio was 0.33%.

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

Other Income

Other income increased by $4.1 million to $28.1 million for the quarter ended September 30, 2019, compared to $24.1 million for the third quarter of 2018 and decreased $1.2 million to $73.0 million for the first nine months of 2019, compared to $74.2 million for the first nine months of 2018.

The increase for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 was primarily due to increases in gain on equity securities, net; other service income; debit card fee income; and income from fiduciary activities, partially offset by declines in bank owned life insurance income; and other components of net periodic pension benefit income. The decrease for the first nine months of 2019 compared to the first nine months of 2018 was primarily due to declines in (loss) gain on the sale of OREO, net (from a net gain to a net loss); other components of net periodic pension benefit income; and bank owned life insurance income, partially offset by increases in debit card fee income; a reduction in net loss on the sale of investment securities; and an increase in income from fiduciary activities.

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



	Three months ended September 30,									Nine months ended September 30,
(In thousands)	2019			2018			Change			2019			2018			Change
Income from fiduciary activities	$	6,842		$	6,418		$	424		$	20,500		$	19,479		$	1,021
Service charges on deposit accounts	2,864			2,861			3			8,078			8,609			(531		)
Other service income	4,260			3,246			1,014			11,118			10,890			228
Debit card fee income	5,313			4,352			961			14,909			12,736			2,173
Bank owned life insurance income	1,107			2,585			(1,478		)	3,399			4,625			(1,226		)
ATM fees	482			500			(18		)	1,382			1,534			(152		)
OREO valuation adjustments	(41		)	(77		)	36			(123		)	(398		)	275
(Loss) gain on sale of OREO, net	(53		)	(81		)	28			(224		)	4,093			(4,317		)
Net gain (loss) on the sale of investment securities	186			—			186			(421		)	(2,271		)	1,850
Gain on equity securities, net	3,335			89			3,246			5,309			4,633			676
Other components of net periodic pension benefit income	1,183			1,705			(522		)	3,549			5,115			(1,566		)
Miscellaneous	2,658			2,466			192			5,493			5,164			329
Total other income	$	28,136		$	24,064		$	4,072		$	72,969		$	74,209		$	(1,240	)

Income from fiduciary activities, which represents revenue earned from Park's trust activities, increased by $424,000, or 6.6%, to $6.9 million for the three months ended September 30, 2019, compared to $6.4 million for the same period in 2018, and increased $1.0 million, or 5.2%, to $20.5 million for the nine months ended September 30, 2019, compared to $19.5 million for the same period in 2018. Fiduciary fees charged are generally based on the market value of customer accounts. The average market value for assets under management for the nine months ended September 30, 2019 was $5,756 million compared to $5,492 million for the nine months ended September 30, 2018.

Service charges on deposits decreased by $531,000, or 6.2%, to $8.1 million for the nine months ended September 30, 2019, compared to $8.6 million for the same period in 2018. The decline was largely as a result of a decline in non-sufficient funds (NSF) fee income and service charges on demand deposit accounts.

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Other service income increased by $1.0 million, or 31.2%, to $4.3 million for the three months ended September 30, 2019, compared to $3.2 million for the same period of 2018, and increased $228,000, or 2.1%, to $11.1 million for the nine months ended September 30, 2019, compared to $10.9 million for the same period in 2018. The primary reason for the increases was an increase in sold mortgage loan originations.

Debit card fee income increased $961,000, or 22.1%, to $5.3 million for the three months ended September 30, 2019, compared to $4.4 million for the same period in 2018, and increased $2.2 million, or 17.1%, to $14.9 million for the nine months ended September 30, 2019, compared to $12.7 million for the same period in 2018. The increases in 2019 were attributable to continued increases in the volume of debit card transactions and changes in our point of sale network. The number of transactions for the nine months ended September 30, 2019 increased 7.1% from the same period in 2018.

Bank owned life insurance income decreased $1.5 million, or 57.2%, to $1.1 million for the three months ended September 30, 2019, compared to $2.6 million for the same period in 2018 and decreased $1.2 million, or 26.5%, to $3.4 million for the nine months ended September 30, 2019, compared to $4.6 million for the same period in 2019. The decreases were primarily related to income from death benefits paid on policies in 2018. Park recorded no income from death benefits paid on policies for the three months ended September 30, 2019, and recorded $208,000 of income from death benefits paid on policies for the nine months ended September 30, 2019. Park recorded $1.5 million of income from death benefits paid on policies for both the three months and nine months ended September 30, 2018.

(Loss) gain on sale of OREO, net, decreased $4.3 million, or 105.5%, to a net loss of $224,000 for the nine months ended September 30, 2019, compared to a net gain of $4.1 million for the same period in 2018. The decrease for the nine months ended September 30, 2019 relative to the same period in 2018 was primarily due to a $4.1 million gain on the sale of one OREO property during the first nine months of 2018, which was partially participated to PNB from SEPH.

During the three months ended September 30, 2019, Park sold investment securities with a book value of $34.5 million at a net gain of $186,000. During the nine months ended September 30, 2019, Park sold investment securities with a book value of $91.5 million at a net loss of $421,000. During the nine months ended September 30, 2018, investment securities with a book value of $254.3 million were sold at a net loss of $2.3 million. There were no securities sold during the three months ended September 30, 2018.

Gain on equity securities, net increased $3.2 million, to $3.3 million for the three months ended September 30, 2019, compared to $89,000 for the same period in 2018, and increased $676,000, or 14.6%, to $5.3 million for the nine months ended September 30, 2019, compared to $4.6 million for the same period in 2018. The $3.2 million increase for the three months ended September 30, 2019 was primarily related to an increase in the gain on equity securities held at NAV, and the $676,000 increase for the nine months ended was primarily related to an increase in the gain in equity securities held at NAV, partially offset by a decrease related to a $3.5 million gain on equity securities for the nine months ended September 30, 2018, related to Park’s investment in NewDominion prior to the acquisition of the remaining 91.45% in the merger completed on July 1, 2018.

Other components of net periodic benefit income decreased by $522,000, or 30.6%, to $1.2 million for the three months ended September 30, 2019, compared to $1.7 million for the same period in 2018, and decreased $1.6 million, or 30.6%, to $3.5 million for the nine months ended September 30, 2019, compared to $5.1 million for the same period in 2018. The decrease was largely due to a decrease in the expected return on plan assets.

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Other Expense

Other expense increased by $6.4 million to $65.7 million for the quarter ended September 30, 2019, compared to $59.3 million for the third quarter of 2018 and increased by $26.6 million to $192.8 million for the first nine months of 2019, compared to $166.2 million for the first nine months of 2018.

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



	Three months ended September 30,							Nine months ended September 30,
(In thousands)	2019		2018		Change			2019		2018		Change
Salaries	$	30,713	$	27,229	$	3,484		$	88,611	$	76,652	$	11,959
Employee benefits	10,389		7,653		2,736			27,833		22,312		5,521
Occupancy expense	3,226		2,976		250			9,460		8,482		978
Furniture and equipment expense	4,177		3,807		370			12,713		11,969		744
Data processing fees	2,935		2,580		355			7,973		6,255		1,718
Professional fees and services	6,702		8,065		(1,363		)	22,814		20,378		2,436
Marketing	1,604		1,364		240			4,285		3,767		518
Insurance	276		1,388		(1,112		)	2,813		4,012		(1,199		)
Communication	1,387		1,207		180			4,095		3,646		449
State tax expense	746		1,000		(254		)	2,805		3,063		(258		)
Amortization of intangible assets	741		289		452			1,732		289		1,443
Miscellaneous	2,842		1,758		1,084			7,623		5,333		2,290
Total other expense	$	65,738	$	59,316	$	6,422		$	192,757	$	166,158	$	26,599

Salaries increased by $3.5 million, or 12.8%, to $30.7 million for the three months ended September 30, 2019, compared to $27.2 million for the same period in 2018, and increased by $12.0 million, or 15.6%, to $88.6 million for the nine months ended September 30, 2019, compared to $76.7 million for the same period in 2018. The increase for the three months was due to a $4.3 million increase in salary expense, of which $2.2 million was related to the addition of employees of the Carolina Alliance Bank Division, as well as a $186,000 increase in share-based compensation expense related to PBRSU awards granted under the 2013 Incentive Plan (prior to 2017) and both PBRSU and TBRSU awards granted under the 2017 Employee LTIP, offset by a decrease of $831,000 in additional incentive compensation expense, mostly related to a decrease in one-time merger-related expenses.

The $12.0 million increase for the nine months ended September 30, 2019 compared to the same period of 2018 was due to a $877,000 increase in additional compensation incentive expense, mostly related to a $1.6 million increase in one-time merger-related expenses, offset by a $1.1 million decrease in additional incentive compensation expense that was due to a one-time incentive paid out to certain associates of Park in March 2018, and a $10.5 million increase in salary expense, of which $6.0 million was related to the addition of employees of both the NewDominion and Carolina Alliance Bank Divisions, as well as a $687,000 increase in share-based compensation expense related to PBRSU awards granted under the 2013 Incentive Plan (prior to 2017) and both PBRSU and TBRSU awards granted under the 2017 Employee LTIP.

Excluding the addition of employees of the NewDominion and Carolina Alliance Bank Divisions, as well as related one-time merger-related expenses, salaries increased by $2.4 million, or 10.0%, for the three months ended September 30, 2019, and increased $3.8 million, or 5.1%, for the nine months ended September 30, 2019.

Employee benefits increased $2.7 million, or 35.8%, to $10.4 million for the three months ended September 30, 2019, compared to $7.7 million for the same period in 2018, and increased $5.5 million, or 24.7%, to $27.8 million for the nine months ended September 30, 2019, compared to $22.3 million for the same period in 2018. The $2.7 million increase for the three months ended September 30, 2019 was due to a $2.2 million increase in group insurance costs, and a $447,000 increase in payroll taxes. The $5.5 million increase for the nine months ended September 30, 2019 was due to a $4.1 million increase in group insurance costs, a $1.2 million increase in payroll taxes, and a $808,000 increase related to Park's voluntary salary deferral plan, offset by a $505,000 decrease in pension service cost expense.

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Occupancy expense increased $250,000, or 8.4%, to $3.2 million for the three months ended September 30, 2019, compared to $3.0 million for the same period in 2018, and increased $978,000, or 11.5%, to $9.5 million for the nine months ended September 30, 2019, compared to $8.5 million for the same period in 2018. The increase for the three months ended September 30, 2019 was primarily related to the addition of banking locations of the Carolina Alliance Bank Division, and the increase for the nine months ended September 30, 2019 was primarily related to the addition of banking locations of both the NewDominion and Carolina Alliance Bank Divisions.

Furniture and equipment expense increased $370,000, or 9.7%, to $4.2 million for the three months ended September 30, 2019, compared to $3.8 million for the same period in 2018, and increased $744,000, or 6.2%, to $12.7 million for the nine months ended September 30, 2019, compared to $12.0 million for the same period in 2018. The increase for the three months ended September 30, 2019 was primarily related to the addition of banking locations of the Carolina Alliance Bank Division, and the increase for the nine months ended September 30, 2019 was primarily related to the addition of banking locations of both the NewDominion and Carolina Alliance Bank Divisions.

Data processing fees increased $355,000, or 13.8%, to $2.9 million for the three months ended September 30, 2019, compared to $2.6 million for the same period in 2018, and increased $1.7 million, or 27.5%, to $8.0 million for the nine months ended September 30, 2019, compared to $6.3 million for the same period in 2018. The increases were related to both increased data processing costs related to an increase in volume of debit card transactions and the addition of both the NewDominion and Carolina Alliance Bank Divisions.

Professional fees and services decreased $1.4 million, or 16.9%, to $6.7 million for the three months ended September 30, 2019, compared to $8.1 million for the same period in 2018, and increased $2.4 million, or 12.0%, to $22.8 million for the nine months ended September 30, 2019, compared to $20.4 million for the same period in 2018. The $1.4 million decrease for the three months ended September 30, 2019 was primarily related to a $1.6 million decrease in one-time merger related costs. The $2.4 million increase for the nine months ended September 30, 2019 was primarily related to a $1.4 million increase in one-time merger-related costs, a $808,000 increase related to the addition of both the NewDominion and Carolina Alliance Bank Divisions, a $610,000 increase in other fees and a $242,000 increase in wages paid to temporary employment agencies, offset by a $1.3 million decrease in management and consulting expenses related to collection of payments on former Vision Bank loan relationships.

Insurance expense decreased by $1.1 million, or 80.1%, to $276,000 for the three months ended September 30, 2019, compared to $1.4 million for the same period of 2018, and decreased $1.2 million, or 29.9%, to $2.8 million for the nine months ended September 30, 2019, compared to $4.0 million for the same period in 2018. The primary reason for the decrease for both the three-month and nine-month periods ended September 30, 2019 was the utilization of a $1.1 million assessment credit to reduce the quarterly FDIC insurance expense during the month of September.

Amortization of intangible assets was $741,000 for the three months ended September 30, 2019 and was $1.7 million for the nine months ended September 30, 2019. There was $289,000 of amortization of intangible assets for both the three and nine months ended September 30, 2018. The amortization of intangible assets was due to the core deposit intangibles from the acquisitions of both NewDominion and Carolina Alliance.

The subcategory "miscellaneous" other expense includes expenses for supplies, travel, charitable contributions, and other miscellaneous expense. The subcategory miscellaneous other expense increased $1.0 million, or 61.7%, to $2.8 million for the three months ended September 30, 2019, compared to $1.8 million for the same period in 2018, and increased $2.3 million, or 42.9%, to $7.6 million for the nine months ended September 30, 2019, compared to $5.3 million for the same period in 2018. The $1.1 million increase for the three months ended September 30, 2019 was related to a $439,000 increase in operating lease depreciation, a $157,000 increase in fraud losses and a $91,000 increase in training and travel related expenses. The $2.3 million increase for the nine months ended September 30, 2019 was related to an $886,000 increase in operating lease depreciation, a $470,000 increase in fraud losses, a $226,000 increase in training and travel related expenses and a $254,000 benefit due to a reduction in repurchase reserves during the nine months ended September 30, 2018 compared to a benefit of $35,000 during the nine months ended September 30, 2019.

Items Impacting Comparability

From time to time, revenue, expenses, and/or taxes are impacted by items judged by management of Park to be outside of ordinary banking activities and/or by items that, while they may be associated with ordinary banking activities, are so unusually large that their outsized impact is believed by management of Park at that time to be infrequent or short-term in nature. Most often, these items impacting comparability of period results result from merger and acquisition activities and revenue and

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expenses related to former Vision Bank relationships. In other cases, they may result from management's decisions associated with significant corporate actions outside of the ordinary course of business.

The following table details those items which management believes impact the comparability of current and prior period amounts.



	THREE MONTHS ENDED						NINE MONTHS ENDED
(in thousands, except share and per share data)	September 30, 2019			September 30, 2018			September 30, 2019			September 30, 2018			Affected Line Item
Net interest income	$	77,101		$	67,676		$	220,728		$	197,268
less purchase accounting accretion related to NewDominion and Carolina Alliance acquisitions	1,785			439			3,383			439			Interest and fees on loans
less purchase accounting accretion related to NewDominion and Carolina Alliance acquisitions	182			143			456			143			Interest on deposits
less interest income on former Vision Bank relationships	—			119			7			3,429			Interest and fees on loans
Net interest income - adjusted	$	75,134		$	66,975		$	216,882		$	193,257

Provision for loan losses	$	1,967		$	2,940		$	6,384		$	4,586
less recoveries on former Vision Bank relationships	(575		)	(179		)	(740		)	(684		)	Provision for loan losses
Provision for loan losses - adjusted	$	2,542		$	3,119		$	7,124		$	5,270

Other income	$	28,136		$	24,064		$	72,969		$	74,209
less net (loss) gain on sale of former Vision Bank OREO properties	$	—		$	(118	)	$	(139	)	$	4,084		(Loss) gain on ale of OREO, net
less gain on 8.55% prior investment in NewDominion	—			—			—			3,500			Gain on equity securities, net
less other service income related to former Vision Bank relationships	52			24			52			1,081			Other service income
less net gain (loss) on the sale of debt securities in the ordinary course of business	186			—			(421		)	(2,271		)	Net gain (loss) on the sale of investment securities
Other income - adjusted	$	27,898		$	24,158		$	73,477		$	67,815

Other expense	$	65,738		$	59,316		$	192,757		$	166,158
less merger-related expenses related to NewDominion and Carolina Alliance acquisitions	545			1,586			3,158			1,586			Salaries
less one-time incentive expense	—			—			—			1,128			Salaries
less merger-related expenses related to NewDominion and Carolina Alliance acquisitions	—			78			—			78			Employee benefits
less merger-related expenses related to NewDominion and Carolina Alliance acquisitions	—			—			16			—			Data processing fees
less merger-related expenses related to NewDominion and Carolina Alliance acquisitions	(38		)	1,586			3,487			2,053			Professional fees and services
less merger-related expenses related to NewDominion and Carolina Alliance acquisitions	4			4			12			4			Insurance
less FDIC assessment credit	(1,057		)	—			(1,057		)	—			Insurance
less merger-related expenses related to NewDominion and Carolina Alliance acquisitions	147			69			319			197			Miscellaneous
less core deposit intangible amortization related to NewDominion and Carolina Alliance acquisitions	741			289			1,732			289			Amortization of intangible assets
less management and consulting expenses related to collection of payments on former Vision Bank loan relationships	—			36			—			1,272			Professional fees and services
Other expense - adjusted	$	65,396		$	55,668		$	185,090		$	159,551

Tax effect of adjustments to net income identified above ⁽¹⁾	$	(512	)	$	601		$	754		$	(941	)

Net income - reported	$	31,146		$	24,762		$	78,764		$	84,126
Net income - adjusted	$	29,220		$	27,023		$	81,599		$	80,585

(1) The tax effect of adjustments to net income was calculated assuming a 21% corporate federal income tax rate.

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Income Tax

Income tax expense was $6.4 million for the third quarter of 2019, compared to $4.7 million for the third quarter of 2018. The effective income tax rate for the third quarter was 17.0%, compared to 16.0% for the same period in 2018. Income tax expense was $15.8 million for the first nine months of 2019, compared to $16.6 million for the same period in 2018. The effective income tax rate was 16.7% for the first nine months of 2019, compared to 16.5% for the same period in 2018. The difference between the statutory federal corporate income tax rate of 21% and Park's effective tax rate reflects permanent tax differences, primarily consisting of tax-exempt interest income from municipal investments and loans, qualified affordable housing and historical tax credits, bank owned life insurance income, and dividends paid on the common shares held within Park's salary deferral plan, as well as accelerated depreciation in 2018. Park expects permanent federal tax differences for the 2019 year will be approximately $5.9 million.

Comparison of Financial Condition

At September 30, 2019 and December 31, 2018

Changes in Financial Condition

Total assets increased by $919.3 million, or 11.8%, during the first nine months of 2019 to $8,724 million at September 30, 2019, compared to $7,804 million at December 31, 2018. This increase was primarily due to the following:


•	Loans increased by $711.5 million, or 12.5%, of which $570.5 million was due to the acquisition of Carolina Alliance, to $6,404 million at September 30, 2019, compared to $5,692 million at December 31, 2018.


•	Cash and cash equivalents increased by $205.5 million, to $372.7 million at September 30, 2019, compared to $167.2 million at December 31, 2018. Money market instruments were $182.4 million at September 30, 2019, compared to $25.3 million at December 31, 2018 and cash and due from banks were $190.4 million at September 30, 2019, compared to $141.9 million at December 31, 2018.


•	Goodwill increased by $45.3 million, or 40.1%, to $158.0 million at September 30, 2019, compared to $112.7 million at December 31, 2018. The increase was due to the acquisition of Carolina Alliance.


•	Premises and equipment, net, increased $13.0 million, or 21.8%, to $72.8 million at September 30, 2019, compared to $59.8 million at December 31, 2018. The increase was primarily due to the acquisition of Carolina Alliance.


•	Other intangible assets increased by $8.5 million, to $15.5 million at September 30, 2019, compared to $7.0 million at December 31, 2018. The increase was due to the acquisition of Carolina Alliance.


•	Investment securities decreased $99.2 million, or 6.9%, to $1,329 million at September 30, 2019, compared to $1,428 million at December 31, 2018.


•	Operating lease ROU assets were $14.4 million at September 30, 2019, compared to no operating lease ROU assets at December 31, 2018. The increase was the result of the adoption of ASU 2016-02.

Total liabilities increased by $795.7 million, or 11.4%, during the first nine months of 2019 to $7,767 million at September 30, 2019, from $6,972 million at December 31, 2018. This increase was primarily due to the following:


•	Total deposits increased by $907.4 million, or 14.5%, of which $632.4 million was due to the acquisition of Carolina Alliance, to $7,168 million at September 30, 2019, compared to $6,261 million at December 31, 2018.


•	Long-term borrowings decreased by $102.5 million, or 25.6%, to $297.5 million at September 30, 2019, compared to $400.0 million at December 31, 2018.


•	Short-term borrowings decreased by $36.1 million, or 16.3%, to $185.8 million at September 30, 2019, compared to $222.0 million at December 31, 2018.


•	Operating lease liabilities were $15.2 million at September 30, 2019, compared to no operating lease liabilities at December 31, 2018. The increase was the result of the adoption of ASU 2016-02.

Total shareholders’ equity increased by $123.6 million, or 14.9%, to $956.1 million at September 30, 2019, from $832.5 million at December 31, 2018.


•	Retained earnings increased by $25.5 million during the period primarily as a result of net income of $78.8 million, offset by common share dividends of $52.8 million.


•	Treasury shares increased by $38.6 million during the period as a result of the repurchase of treasury shares, offset by the issuance of treasury shares.


•	Common shares increased by $99.5 million during the period largely as a result of the issuance of common shares in connection with the acquisition of Carolina Alliance.

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•

Accumulated other comprehensive loss, net of taxes improved by $37.2 million during the period as a result of unrealized net holding gains on AFS debt securities, net of taxes, of $18.3 million, unrealized net holding gains on HTM debt securities, net of taxes, of $19.1 million, which were transferred to AFS, partially offset by a loss on sale of AFS debt securities, net of taxes, of $333,000, and an unrealized loss on cash flow hedging derivatives, net of taxes, of $556,000.

Increases or decreases in the investment securities portfolio, short-term borrowings and long-term debt are greatly dependent upon the growth in loans and deposits. The primary objective of management is to grow loan and deposit totals. To the extent that management is unable to grow loan totals at a desired growth rate, additional investment securities may be acquired. Likewise, both short-term borrowings and long-term debt are utilized to fund the growth in earning assets if the growth in deposits and cash flow from operations are not sufficient to do so.

Liquidity

Cash provided by operating activities was $74.0 million and $97.0 million for the nine months ended September 30, 2019 and 2018, respectively. Net income was the primary source of cash from operating activities for each nine-month period.

Cash provided by investing activities was $117.7 million and $66.7 million for the nine months ended September 30, 2019 and 2018, respectively. Proceeds from the sale, repayment, or maturity of investment securities provide cash and purchases of investment securities use cash. Net investment securities transactions provided cash of $248.4 million for the nine months ended September 30, 2019 and provided cash of $33.6 million for the nine months ended September 30, 2018. Another major use or source of cash in investing activities is the net increase or decrease in the loan portfolio. Cash used by the net increase in the loan portfolio was $112.8 million for the nine months ended September 30, 2019 and cash provided by the net decrease in the loan portfolio was $12.0 million for the nine months ended September 30, 2018.

Cash provided by financing activities was $13.8 million and cash used in financing activities was $188.2 million for the nine months ended September 30, 2019 and 2018, respectively. A major source of cash for financing activities is the net change in deposits. Deposits increased and provided $275.2 million and $177.6 million of cash for the nine months ended September 30, 2019 and 2018, respectively. Another major source/use of cash from financing activities is borrowings in the form of short-term borrowings and long-term debt. For the nine months ended September 30, 2019, net short-term borrowings decreased and used $64.9 million in cash and net long-term borrowings decreased and used $102.5 million in cash. For the nine months ended September 30, 2018, net short-term borrowings decreased and used $211.5 million in cash, and net long-term borrowings decreased and used $100.0 million in cash. Finally, cash declined by $52.6 million and $47.9 million for the nine months ended September 30, 2019 and 2018, respectively, from the payment of dividends.

Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as the operating cash needs of the Corporation, are met. Funds are available from a number of sources, including the securities portfolio, the core deposit base, FHLB borrowings, the capability to securitize or package loans for sale, and a $15.0 million revolving line of credit with another financial institution, which had no outstanding balance as of September 30, 2019. The Corporation’s loan to asset ratio was 73.41% at September 30, 2019, compared to 72.94% at December 31, 2018 and 72.52% at September 30, 2018. Cash and cash equivalents were $372.7 million at September 30, 2019, compared to $167.2 million at December 31, 2018 and $144.6 million at September 30, 2018. Management believes that the present funding sources provide more than adequate liquidity for the Corporation to meet its cash flow needs.

Capital Resources

Shareholders’ equity at September 30, 2019 was $956.1 million, or 11.0% of total assets, compared to $832.5 million, or 10.7% of total assets, at December 31, 2018 and $809.1 million, or 10.4% of total assets, at September 30, 2018.

Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank holding companies. Park has elected not to include the net unrealized gain or loss on AFS debt securities in computing regulatory capital. During the first quarter of 2015, Park adopted the Basel III regulatory capital framework as approved by the federal banking agencies. The adoption of this framework modified the calculation of the various capital ratios, added an additional ratio, common equity tier 1, and revised the adequately and well capitalized thresholds under the prompt corrective action regulations applicable to PNB. Additionally, under this framework, in order to avoid limitations on capital distributions, including dividend payments and repurchases of common shares, Park must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was phased in from 0.0% for 2015 to being fully phased in at 2.50% at January 1, 2019. The amounts shown below as the adequately capitalized ratio plus capital conservation buffer includes the fully phased-in 2.50% buffer. The Federal Reserve Board has also adopted requirements Park must satisfy to be deemed "well capitalized" and to remain a financial holding company.

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Park and PNB met each of the well capitalized ratio guidelines applicable to them at September 30, 2019. The following table indicates the capital ratios for PNB and Park at September 30, 2019 and December 31, 2018.



	As of September 30, 2019
	Leverage		Tier 1 Risk-Based		Common Equity Tier 1		Total Risk-Based
The Park National Bank	8.53	%	11.22	%	11.22	%	12.43	%
Park National Corporation	9.37	%	12.30	%	12.07	%	13.15	%
Adequately capitalized ratio	4.00	%	6.00	%	4.50	%	8.00	%
Adequately capitalized ratio plus capital conservation buffer	4.00	%	8.50	%	7.00	%	10.50	%
Well capitalized ratio (PNB)	5.00	%	8.00	%	6.50	%	10.00	%
Well capitalized ratio (Park)	N/A		6.00	%	N/A		10.00	%



	As of December 31, 2018
	Leverage		Tier 1 Risk-Based		Common Equity Tier 1		Total Risk-Based
The Park National Bank	8.29	%	11.01	%	11.01	%	12.30	%
Park National Corporation	10.04	%	13.30	%	13.04	%	14.19	%
Adequately capitalized ratio	4.00	%	6.00	%	4.50	%	8.00	%
Adequately capitalized ratio plus capital conservation buffer	4.00	%	8.50	%	7.00	%	10.50	%
Well capitalized ratio (PNB)	5.00	%	8.00	%	6.50	%	10.00	%
Well capitalized ratio (Park)	N/A		6.00	%	N/A		10.00	%

Contractual Obligations and Commitments

In the ordinary course of operations, Park enters into certain contractual obligations. Such obligations include the funding of operations through debt issuances as well as leases for premises. See page 45 of Park’s 2018 Annual Report (Table 37) for disclosure concerning contractual obligations and commitments at December 31, 2018. There were no significant changes in contractual obligations and commitments during the first nine months of 2019.

Financial Instruments with Off-Balance Sheet Risk

PNB is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements.

The exposure to credit loss (for PNB) in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. PNB uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.

The total amounts of off-balance sheet financial instruments with credit risk were as follows:



(In thousands)	September 30, 2019		December 31, 2018
Loan commitments	$	1,316,670	$	1,012,820
Standby letters of credit	$	18,588	$	13,334

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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Management reviews interest rate sensitivity on a monthly basis by modeling the consolidated financial statements under various interest rate scenarios. The primary reason for these efforts is to guard Park from adverse impacts of unforeseen changes in interest rates. Management continues to believe that further changes in interest rates will have a small impact on net income, consistent with the disclosure on page 45 of Park’s 2018 Annual Report.

On page 45 (Table 36) of Park’s 2018 Annual Report, management reported that Park’s twelve-month cumulative rate sensitivity gap was a positive (assets exceeding liabilities) $308.2 million or 4.31% of total interest earning assets at December 31, 2018. At September 30, 2019, Park’s twelve-month cumulative rate sensitivity gap was a positive (assets exceeding liabilities) $334.5 million or 4.24% of total interest earning assets.

Management supplements the interest rate sensitivity gap analysis with periodic simulations of balance sheet sensitivity under various interest rate and what-if scenarios to better forecast and manage the net interest margin. Management uses a 50 basis point change in market interest rates per quarter for a total of 200 basis points per year in evaluating the impact of changing interest rates on net interest income and net income over a twelve-month horizon.

On page 45 of Park’s 2018 Annual Report, management reported that at December 31, 2018, the earnings simulation model projected that net income would decrease by 0.4% using a rising interest rate scenario and decrease by 3.1% using a declining interest rate scenario over the next year. At September 30, 2019, the earnings simulation model projected that net income would decrease by 2.2% using a rising interest rate scenario and would increase by 0.3% in a declining interest rate scenario. At September 30, 2019, management continues to believe that gradual changes in interest rates (50 basis points per quarter for a total of 200 basis points per year) will have a small impact on net income.

ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

With the participation of the Chief Executive Officer (the principal executive officer) and the Chief Financial Officer, Secretary and Treasurer (the principal financial officer) of Park, Park’s management has evaluated the effectiveness of Park’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, Park’s Chief Executive Officer and Park’s Chief Financial Officer, Secretary and Treasurer have concluded that:


•	information required to be disclosed by Park in this Quarterly Report on Form 10-Q and other reports that Park files or submits under the Exchange Act would be accumulated and communicated to Park’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure;


•	information required to be disclosed by Park in this Quarterly Report on Form 10-Q and the other reports that Park files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and


•	Park’s disclosure controls and procedures were effective as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Control Over Financial Reporting

There were no changes in Park’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during Park’s quarter ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, Park’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There are certain risks and uncertainties in our business that could cause our actual results to differ materially from those anticipated. In “ITEM 1A. RISK FACTORS” of Part I of Park’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “2018 Form 10-K”), we included a detailed discussion of our risk factors. All of these risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q. Any of the risks described in the 2018 Form 10-K could materially adversely affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. These are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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


(a)	Not applicable


(b)	Not applicable

(c)

The following table provides information concerning purchases of Park’s common shares made by or on behalf of Park or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, during the three months ended September 30, 2019, as well as the maximum number of common shares that may be purchased under Park’s previously announced stock repurchase authorizations to fund the 2017 Long-Term Incentive Plan for Employees (the "2017 Employees LTIP") and the 2017 Long-Term Incentive Plan for Non-Employee Directors (the "2017 Non-Employee Directors LTIP") and Park's previously announced 2017 and 2019 stock repurchase authorizations:



Period	Total number of common shares purchased	Average price paid per common share		Total number of common shares purchased as part of publicly announced plans or programs	Maximum number of common shares that may yet be purchased under the plans or programs (1)
July 1 through July 31, 2019	3,942	$	88.28	3,942	1,489,408
August 1 through August 31, 2019	56,068	89.73		56,068	1,433,340
September 1 through September 30, 2019	24,593	89.61		24,593	1,408,747
Total	84,603	$	89.62	84,603	1,408,747

(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 authorizations to fund the 2017 Employees LTIP and to fund the 2017 Non-Employee Directors LTIP, both of which became effective on April 24, 2017; Park's stock repurchase authorization covering 500,000 common shares which was announced on January 23, 2017; and Park's stock repurchase authorization covering 500,000 common shares which was announced on January 28, 2019 and as to which approval from the Federal Reserve was obtained in the form of correspondence from the Federal Reserve Bank of Cleveland dated April 19, 2019.

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

On January 23, 2017, the Park Board of Directors authorized Park to purchase, from time to time, up to an aggregate of 500,000 Common Shares. On January 28, 2019, the Park Board of Directors authorized Park to repurchase, from time to time following receipt of any required approval from the Federal Reserve, up to 500,000 Park common shares in addition to the 500,000 Park common shares which had been authorized for repurchase by the Park Board of Directors on January 23, 2017 and remained available for repurchase as of December 31, 2018 and January 28, 2019. The required approval was received by Park in the form of correspondence from the Federal Reserve Bank of Cleveland dated April 19, 2019.

Purchases may be made through NYSE AMERICAN, in the over-the-counter market or in privately negotiated transactions, in each case in compliance with applicable laws and regulations and the rules applicable to issuers having securities listed on NYSE AMERICAN. Purchases will be made upon such terms and conditions and at such times and in such amounts as any one or more of the authorized officers of Park deem to be appropriate, subject to market conditions, regulatory requirements and other factors, and in the best interest of Park and Park's shareholders. The January 23, 2017 stock repurchase authorization and the January 28, 2019 stock repurchase authorization are distinct from the stock repurchase authorizations to fund the 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP.

Item 3. Defaults Upon Senior Securities

(a), (b) Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

(a), (b) Not applicable.

Item 6. Exhibits



	2.1	Agreement and Plan of Merger and Reorganization among Park National Corporation, The Park National Bank and NewDominion Bank, dated as of January 22, 2018 (Incorporated herein by reference to Exhibit 2.1 to Park National Corporation's Current Report on Form 8-K dated and filed on January 26, 2018 (File No. 1-13006))*

	2.2	Agreement and Plan of Merger and Reorganization, dated as of September 12, 2018, by and between Park National Corporation and CAB Financial Corporation (Incorporated herein by reference to Exhibit 2.1 to Park National Corporation's Current Report on Form 8-K dated and filed on September 14, 2018 (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”)) P

	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)) P

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	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 as filed with the Ohio Secretary of State on December 18, 2008 in order to evidence the adoption by the shareholders of Park National Corporation on December 18, 2008 of an amendment to Article FOURTH of Park National Corporation’s Articles of Incorporation to authorize Park National Corporation to issue up to 200,000 preferred shares, without par value (Incorporated herein by reference to Exhibit 3.1 to Park National Corporation’s Current Report on Form 8-K dated and filed December 19, 2008 (File No. 1-13006))

	3.1(f)	Certificate of Amendment by Directors to Articles as filed with the Ohio Secretary of State on December 19, 2008, evidencing adoption of amendment by Board of Directors of Park National Corporation to Article FOURTH of Articles of Incorporation to establish express terms of Fixed Rate Cumulative Perpetual Preferred Shares, Series A, each without par value, of Park National Corporation (Incorporated herein by reference to Exhibit 3.1 to Park National Corporation’s Current Report on Form 8-K dated and filed December 23, 2008 (File No. 1-13006))

	3.1(g)	Certificate of Amendment by Shareholders as filed with the Ohio Secretary of State on April 18, 2011 in order to evidence the adoption by Park National Corporation’s shareholders of an amendment to Article SIXTH of Park National Corporation’s Articles of Incorporation in order to provide that shareholders do not have preemptive rights (Incorporated herein by reference to Exhibit 3.1 to Park National Corporation’s Current Report on Form 8-K dated and filed April 19, 2011 (File No. 1-13006))

	3.1(h)	Articles of Incorporation of Park National Corporation [This document represents the Articles of Incorporation of Park National Corporation in compiled form incorporating all amendments. This compiled document has not been filed with the 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) P

	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 [This document represents the Regulations of Park National Corporation in compiled form incorporating all amendments] (Incorporated herein by reference to Exhibit 3.2(e) to Park’s March 31, 2008 Form 10-Q)

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	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 Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019 formatted in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Condensed Balance Sheets as of September 30, 2019 and December 31, 2018 (unaudited); (ii) the Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2019 and 2018 (unaudited); (iii) the Consolidated Condensed Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and 2018 (unaudited); (iv) the Consolidated Condensed Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2019 and 2018 (unaudited); (v) the Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited); and (vi) the Notes to Unaudited Consolidated Condensed Financial Statements (electronically submitted herewith). **

	104	Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document with applicable taxonomy extension information contained in Exhibit 101) **

________________________________________

*Schedules were omitted pursuant to Item 601(b)(2) of SEC Regulation S-K, as in effect at the time of filing of the Agreement and Plan of Merger and Reorganization. A copy of any omitted schedules will be furnished supplementally to the SEC upon its request.

**The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.

P Park National Corporation filed this exhibit with the SEC in paper form originally and this exhibit has not been filed with the SEC in electronic format.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		PARK NATIONAL CORPORATION

DATE: November 04, 2019		/s/ David L. Trautman
		David L. Trautman
		Chief Executive Officer
		(Principal Executive Officer and Duly Authorized Officer)

DATE: November 04, 2019		/s/ Brady T. Burt
		Brady T. Burt
		Chief Financial Officer, Secretary and Treasurer
		(Principal Financial Officer and Duly Authorized Officer)