Commercial Loans
Commercial loans are made for a wide variety of general corporate purposes,
including financing for industrial and commercial properties, financing for
equipment, inventories and accounts receivable, acquisition financing, commercial
leasing, and to consumer finance companies. The term of each commercial loan
varies by its purpose. Repayment terms are structured such that commercial loans
will be repaid within the economic useful life of the underlying asset.
Commercial loans are evaluated for the adequacy of repayment sources at the
time of approval and are regularly reviewed for any possible deterioration in
the ability of the borrower to repay the loan. The credit information required
generally includes, depending on the amount of money lent, fully completed financial
statements, third-party prepared financial statements, two years of federal
income tax returns and a current credit report. Loan terms include amortization
schedules commensurate with the purpose of each loan, identification of the
source of each repayment and the risk involved. In most instances, collateral
is required to provide an additional source of repayment in the event of default
by a commercial borrower. The structure of the collateral package, including
the type and amount of the collateral, varies from loan to loan depending on
the financial strength of the borrower, the amount and terms of the loan and
the collateral available to be pledged by the borrower. Most often, the collateral
is inventory, machinery, accounts receivable and/or real estate. The guarantee
of the business owners/principals is generally required on loans made to closely-held
business entities.
Commercial real estate loans (“CRE loans”) include mortgage loans
to developers and owners of commercial real estate. The lending policy for CRE
loans is designed to address the unique risk attributes of CRE lending. The
collateral for these CRE loans is the underlying commercial real estate. Park
National Bank generally requires that the CRE loan amount be no more than 85%
of the purchase price or the appraised value of the commercial real estate securing
the CRE loan, whichever is less. CRE loans made for Park National Bank’s
portfolio generally have a variable interest rate.
Park has an independent, internal loan review program which annually evaluates
substantially all (generally, about 90%) loan relationships with an outstanding
balance greater than $300,000. If deterioration has occurred, the lending subsidiary
takes prompt action designed to increase the likelihood of payment of the loan.
Upon detection of the reduced ability of a borrower to service interest and/or
principal on a loan, the subsidiary may downgrade the loan and, under certain
circumstances, place the loan on nonaccrual status. The subsidiary then works
with the borrower to develop a payment schedule which the subsidiary anticipates
will permit service of the principal and interest on the loan by the borrower.
Commercial loans are generally viewed as having a higher credit risk than consumer
loans because commercial loans usually involve larger loan balances to a single
borrower and are more susceptible to a risk of default during an economic downturn.
Commercial loans generally have variable interest rates. Park uses several indices
for commercial loans. However, the national prime rate is the most common index
Park uses. Credit risk for commercial loans arises from borrowers lacking the
ability or willingness to pay principal or interest and, in the case of secured
loans, by a shortfall in the collateral value in relation to the outstanding
loan balance in the event of a default and subsequent liquidation of collateral.
The underwriting of all commercial loans, regardless of type, includes cash
flow analyses with rates shocked by 400 basis points.
Aircraft Financing
Scope Aircraft Finance specializes in aircraft financing. The customers of Scope
Aircraft Finance include small businesses and entrepreneurs intending to use
the aircraft for business or pleasure. The customers of Scope Aircraft Finance
are located throughout the United States. The lending officers of Scope Aircraft
Finance are experienced in the aircraft financing industry and rely upon that
experience and industry guides in determining whether to grant an aircraft loan
or lease. At December 31, 2015, Scope Aircraft Finance had outstanding approximately
$232 million in loans primarily secured by aircraft (which are included in the
commercial loan portfolio).
Consumer Loans
Park's subsidiaries had outstanding consumer loans (including automobile loans
and leases and home equity lines of credit) in an aggregate amount of approximately
$967 million, constituting approximately 19.1% of their aggregate total loan
portfolio. These subsidiaries make installment credit available to customers
and prospective customers in their primary market areas of central and southern
Ohio.
Credit approval for consumer loans requires income sufficient to repay principal
and interest due, stability of employment, an established credit record and
sufficient collateral for secured loans. It is the policy of Park’s subsidiaries
to adhere strictly to all laws and regulations governing consumer lending. A
compliance officer is responsible for monitoring each subsidiary’s performance
and advising and updating loan personnel in this area. Each subsidiary reviews
its consumer loan portfolio monthly and charges off loans which do not meet
Park’s standards. Information about Park’s policy for placing loans
on nonaccrual status is included under the caption “Loans” in Note
1 of the Notes to Consolidated Financial Statements in Park’s 2015 Annual
Report, and is incorporated herein by reference. Park National Bank and its
divisions also offer home equity lines of credit through the consumer lending
department. These accounts are administered under the same standards as other
consumer loans and leases.
Consumer loans typically have shorter terms and lower balances with higher yields
as compared to real estate mortgage loans, but generally carry higher risks
of default. Consumer loan collections are dependent on the borrower’s
continuing financial stability, and thus are more likely to be affected by adverse
personal circumstances. Furthermore, the application of various federal and
state laws, including bankruptcy and insolvency laws, may limit the amount that
can be recovered on these loans.