PARK NATIONAL CORP /OH/ 10-K

prk-20211231 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2021 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number 1-13006 PARK NATIONAL CORPORATION (Exact name of registrant as specified in its charter) Ohio 31-1179518 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) 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) 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 Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes ¨ No Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No 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. x 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). x 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262 (b)) by the registered public accounting firm that prepared or issued its audit report. ☒ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes x No State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter: As of June 30, 2021, the aggregate market value of the Registrant’s common shares (the only common equity of the Registrant) held by non-affiliates of the Registrant was $ 1,869,456,331 based on the closing sale price as reported on NYSE American. For this purpose, executive officers and directors of the Registrant are considered affiliates. Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date: 16,219,554 Common Shares, no par value per share, outstanding at February 23, 2022. DOCUMENT INCORPORATED BY REFERENCE Document Part Into Which Incorporated Portions of the Registrant’s Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 25, 2022 Part III Glossary of Abbreviations and Acronyms Park has identified the following list of abbreviations and acronyms that are used in this Annual Report on Form 10-K ACL Allowance for credit losses LGD Loss given default AFS Available-for-sale LIBOR London Inter-bank Offered Rate Allowance Allowance for credit losses MSRs Mortgage servicing rights AOCI Accumulated other comprehensive income NAV Net asset value ASC Accounting standards codification NewDominion NewDominion Bank ASU Accounting standards update OCI Other comprehensive income AUCL Allowance for unfunded credit losses OREO Other real estate owned CABF CAB Financial Corporation and its subsidiaries OWS One-way sell CARES Act Coronavirus Act, Relief, and Economic Security Act Park Park National Corporation and its subsidiaries unless context otherwise requires Carolina Alliance CAB Financial Corporation and its subsidiaries Park National Bank The Park National Bank CECL Current expected credit loss PBRSUs Performance-based restricted stock units Corporation Park National Corporation and its subsidiaries PCD Purchased credit deteriorated COVID-19 Novel coronavirus PCI Purchased credit impaired DCF Discounted cash flow PD Probability of default FASB Financial Accounting Standards Board PNB The Park National Bank Federal Reserve Board Board of Governors of Federal Reserve System PPP CARES Act Paycheck Protection Program FHLB Federal Home Loan Bank ROU Right-of-use FRB Federal Reserve Bank SARs Stock appreciation rights GDP Gross domestic product SBA Small Business Administration GFSC Guardian Financial Services Company SEPH SE Property Holdings, LLC Guardian Finance Guardian Financial Services Company TBRSUs Time-based restricted stock units HPI Home price index TDRs Troubled debt restructurings HTM Held-to-maturity U.S. United States IRLC Interest rate lock commitment U.S. GAAP United States Generally Accepted Accounting Principles LDA Loss driver analysis Vision Vision Bancshares, Inc. PART I ITEM 1. BUSINESS. The disclosures set forth in this Item are qualified by "ITEM 1A. RISK FACTORS" and the section captioned "FORWARD-LOOKING STATEMENTS" in "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Annual Report on Form 10-K and other cautionary statements set forth elsewhere in this Annual Report on Form 10-K. General Park National Corporation (“Park”) is a financial holding company subject to regulation under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). Park was initially incorporated under Delaware law in 1986 and began operations as a bank holding company in 1987. In 1992, Park changed its state of incorporation to Ohio. Park’s principal executive offices are located at 50 North Third Street, Newark, Ohio 43055, and its telephone number is (740) 349-8451. Park’s common shares, each without par value (the “Common Shares”), are listed on NYSE American, under the symbol “PRK.” Park maintains an internet site which can be accessed at http://www.parknationalcorp.com . Information contained in Park’s internet site does not constitute part of, and is not incorporated into, this Annual Report on Form 10-K. Park makes available free of charge on or through its internet site Park’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as Park’s definitive proxy statements filed pursuant to Section 14 of the Exchange Act, in each case as soon as reasonably practicable after Park electronically files such material with, or furnishes it to, the Securities and Exchange Commission (the “SEC”). Park’s principal business consists of owning and supervising its subsidiaries. Although Park directs the overall policies of its subsidiaries, including lending policies and financial resources, most day-to-day affairs are managed by the respective officers of Park’s subsidiaries. Human Capital Park National Corporation is a family of community banking teams that deliver an exceptional breadth and depth of resources to individuals and businesses. Our culture is deeply rooted in the values of service and philanthropy, and we believe strong communities are built with local volunteers, donations and leadership. We believe the way we treat our clients, associates, and communities is what sets us apart from the competition and sustains our success. Our associates are our most valued resource. We provide opportunities for growth and advancement by empowering our associates and offering ongoing training to develop knowledge and skills. We strive to provide a safe, fair, caring and courteous work environment. Associate Profile We operate 98 financial service offices in Ohio, northern Kentucky, and the Carolinas, with support staff located throughout our footprint and at various administration offices. As of December 31, 2021, we had 1,733 active associates, consisting of 1,573 full-time and 160 part-time. Our branch delivery channels employ 32% of those associates. At December 31, 2021, our associate population was 70% female and 30% male, with an average tenure of nine years. Talent We are committed to providing equal employment opportunities for all individuals. Our policy is to hire and promote individuals who best meet the requirements of available positions and who have the best potential for advancement. Our Performance Management philosophy is to reward for performance. We have an annual goal setting process, with prompts for quarterly updates for supervisors and associates to review progress. We conduct an annual associate evaluation -1- process that directly correlates with annual base salary reviews. Associates are encouraged to seek opportunities for improvement, both personally and professionally. We rely on their experience and knowledge to help us identify areas for improvement. We have a Management Associate training program for exceptional college graduates. Selected candidates spend two years working through different areas of the bank, learning about the financial industry from a variety of perspectives, including customer-facing and operational support roles. Through Learning & Development (L&D), we work to foster professional growth by providing development opportunities to maximize associate performance and engagement, and drive our competitive advantage. In 2021, our L&D team continued building a strategic infrastructure for the development of associates aligned with overall business outcomes. This included streamlining training, orientation, and onboarding; overseeing associate development; and supporting training needs across all lines of business. Compensation & Benefits Our compensation plan includes market-aligned salary grades, an annual incentive compensation program for eligible associates, referral and rewards incentive programs available to associates based on job function, a long-term incentive plan (LTIP) for select associates, and premium pay for associates working extended hours. We are in the process of reviewing and updating our compensation strategy to ensure we conduct regular reviews and comparisons to current market data. Comprehensive benefit options are available to associates to encourage healthy and financially secure lives. Available benefits include an Employees Stock Ownership Plan (KSOP) with a company matching contribution and a defined benefit pension plan; health and life insurance; dependent care assistance and health flexible spending plans; long-term disability; paid time off (including vacation for part-time associates); tuition reimbursement for qualified schooling; financial hardship resources; and an employee assistance program. A project is currently underway to review all benefits offered to ensure we continue to have competitive options to attract and retain top talent. Health and Safety We are committed to providing a safe environment for associates and customers, and the safe preservation and maintenance of our facilities and equipment. Many of the initiatives deployed in 2020 were continued into 2021 and evolved to ensure the safety of our associates and customers. Initiatives included remote work for applicable positions; providing over $400,000 in calamity pay for associates with COVID-related absences; and continuing an incentive recognition program that paid over $1.7 million to associates for their extraordinary efforts in serving our customers during the COVID-19 pandemic. D&I Diversity and inclusion are embedded in Park National Bank’s values and culture. We respect excellence, character and integrity – and we believe these virtues transcend culture, race, gender and age. We abhor prejudice on any level or any grounds. Our commitment to diversity and inclusion means providing every client or prospective client an equal opportunity to succeed financially. We believe it also means supporting a wide variety of community organizations and programs, and hiring associates from different backgrounds, locations and experiences. In 2021, we held multiple virtual sessions of unconscious bias training entitled “Redefining Diversity and Exercising Inclusion”, which were attended by 576 managers and leaders. The DEI consultant that led those sessions also recorded three short videos on the concepts covered which were uploaded to our Learning Management System for on-demand viewing. In 2021, the Diversity Equity and Inclusion ("DEI") Taskforce met monthly and held open discussion sessions two times a month. Goals were created by the DEI Task Force around DEI topics and initiatives. Summary Our organization is a wonderful blend of promising rookies, top draft picks, and seasoned veterans. Each of us has a different story for why we came here and why we remain. A couple common threads knit us together: we love to serve, and we value an environment where we can grow personally and professionally. Bound by these ideals, our colleagues tend to stay around for a long time. -2- Our voluntary turnover was 21% for 2021. At the end of our KSOP plan year, October 1, 2021, over 85% of our associates were shareholders through participation in our KSOP plan, under which we provide a discretionary 50% match for each associate’s regular contribution. Our associate tenure reflects the effect of our efforts -- by the end of 2021, 36% of our associates had been with our organization 10 years or more. Banking Operations Park’s banking operations are conducted through The Park National Bank, a national banking association ("Park National Bank" or "PNB"). Park National Bank engages in the commercial banking and trust business, generally in small and medium population areas in Ohio, North Carolina and South Carolina communities in addition to operations within the metropolitan areas of Columbus and Cincinnati, Ohio, Charlotte, North Carolina, and Louisville, Kentucky. As of the date of this Annual Report on Form 10-K, Park National Bank operated 96 financial service offices, including 93 branches, in Ohio, Kentucky, North Carolina and South Carolina. Park National Bank delivers financial products and services through its 96 financial service offices and a network of 116 automated teller machines, as well as telephone and internet-based banking through both personal computers and mobile devices, including ParkDirect, a mobile bank experience. The reportable segment for the Corporation is PNB. Consumer Finance Subsidiary Guardian Finance, an Ohio consumer finance company based in Hilliard, Ohio, operates as a separate subsidiary of Park. Guardian Finance provides consumer finance services in the central Ohio area. As of the date of this Annual Report on Form 10-K, Guardian Finance had one administrative office in Licking County, Ohio. During 2019, Guardian Finance stopped seeking new loans. SE Property Holdings, LLC ("SEPH") SEPH is a limited liability company, organized in 2011 under the laws of the State of Ohio, and a direct subsidiary of Park. The initial purpose of SEPH was to purchase other real estate owned (“OREO”) from Vision Bank, a bank subsidiary of Park until February 16, 2012, and continue to market such properties for sale. By letter dated January 30, 2012, the Federal Reserve Board authorized Park to engage in the business of extending credit through SEPH. As a result, SEPH is permitted to engage in lending activities and was able to succeed to the rights and obligations of Vision Bank in respect of the loans held by Vision Bank when Vision Bank merged into SEPH on February 16, 2012 (the "Vision Bank-SEPH Merger"). SEPH has operations in Ohio, with the sole purpose of such operations being to sell OREO in an effective and efficient manner and work out or sell problem loan situations with the respective borrowers. Scope Leasing, Inc. Scope Leasing, Inc. (which does business as “Scope Aircraft Finance”), a subsidiary of Park National Bank, specializes in aircraft financing. The customers of Scope Aircraft Finance include small businesses and entrepreneurs who utilize the aircraft for business or pleasure. Scope Aircraft Finance serves customers throughout the United States of America (the “United States”) and Canada. Vision Bancshares Trust I In connection with the merger of Vision Bancshares, Inc. (“Vision”) into Park in March of 2007 (the “Vision Merger”), Park became the successor to Vision under (i) the Junior Subordinated Indenture, dated as of December 5, 2005 (the “Indenture”), pursuant to which Vision issued $15.5 million of junior subordinated notes to Vision Bancshares Trust I, a Delaware statutory trust (the “Vision Trust”). The junior subordinated notes were issued by Vision in connection with the sale by the Vision Trust of $15.0 million of floating rate preferred securities to institutional investors on December 5, 2005. Park also became the successor to Vision (i) in the Amended and Restated Trust Agreement of the Vision Trust, dated as of December 5, 2005 (the “Trust Agreement”), and (ii) in the Guarantee Agreement, dated as of December 5, 2005 (the “Guarantee Agreement”). Through these contractual obligations, Park has fully and unconditionally guaranteed all of the Vision Trust’s obligations with respect to the floating rate preferred securities. Both the junior subordinated notes and the floating rate preferred securities mature on December 30, 2035 (which maturity may be shortened), and carry a floating interest rate per annum, reset quarterly, equal to the sum of three-month -3- LIBOR plus 148 basis points. Payment of interest on the junior subordinated notes, and payment of cash distributions on the floating rate preferred securities, may be deferred at any time or from time to time for a period not to exceed 20 consecutive quarters, subject to specified conditions. Under the terms of the Indenture and the related Guarantee Agreement, Park, as successor to Vision, is prohibited, subject to limited exceptions, from declaring or paying dividends or distributions on, or redeeming, repurchasing, acquiring or making any liquidation payments with respect to, any shares of Park’s capital stock (i) if an event of default under the Indenture has occurred and continues; (ii) if Park is in default with respect to the payment of any obligations under the Guarantee Agreement; or (iii) during any period in which the payment of interest on the junior subordinated notes by Park (and the payment of cash distributions on the floating rate preferred securities by the Vision Trust) is being deferred. The floating rate preferred securities are considered Tier 1 Capital under regulatory capital standards. Other Subsidiaries Park Investments, Inc. ("PII"), which is a subsidiary of Park National Bank, operates as an asset management company. Commencing in 2015, Park began purchasing and holding municipal bonds within PII. As of December 31, 2021, PII held municipal securities with an amortized cost of $366.9 million. NSCB 2, LLC, River Park Properties, LLC, and Park ABQ, LLC, and X Holdings, LLC are subsidiaries of Park National Bank that hold certain OREO properties or other nonperforming assets. The operations of these subsidiaries are not significant to the consolidated Park entity. 87A Orange Beach, LLC, Morningside Holding, LLC, Swindall Holdings, LLC, Swindall Partnership Holdings, LLC, Marina Holdings Z, LLC, Marina Holding WE, LLC, Alabama Apartment Holdings, LLC and Vision-Park Properties, L.L.C. are subsidiaries of SEPH that hold certain OREO properties. The operations of these subsidiaries are not significant to the consolidated Park entity. Recent Developments COVID-19 Considerations Banking has been identified by federal and state governmental authorities to be an essential service and Park is fully committed to continuing serving our customers and communities through the COVID-19 public health crisis. For those in our communities experiencing a financial hardship, Park has offered various methods of support including loan modifications, payment deferral programs, participation in the CARES Act Paycheck Protection Program ("PPP"), participation in additional PPP loans authorized under the Consolidated Appropriations Act, 2021, and various other case by case accommodations. Park has implemented various guidelines to help protect associates, such as allowing associates to work from home where practical and required physical distancing, masks if working on-site. COVID vaccines and boosters have also been encouraged for all associates. During 2021, Park provided calamity pay and special one-time bonuses to certain associates. Calamity pay was used to encourage those who are sick to stay home without any financial impact. The bonus program was used to recognize those associates who consistently worked on-site or played vital roles in keeping our offices open. The aggregate cost of calamity pay and special bonuses amounted to $2.1 million for the year ended December 31, 2021, and is included within salaries expense. While all current retail offices remained fully open for the duration of 2021, customers were encouraged to continue utilizing our online banking services, the mobile app, including Park Direct, ATMs, and drive-thru services to safely do their banking. Due to the uncertainty of the COVID-19 pandemic, on August 20, 2020, Park completed the issuance and sale of $175 million aggregate principal amount of its 4.50% Fixed-to-Floating Rate Subordinated Notes due 2030 (the "Subordinated Notes"). The net proceeds from the sale of the Subordinated Notes provide Park with additional flexibility in managing its liquidity. Park intends to use the net proceeds for general corporate purposes, which may include providing capital to support Park's growth organically or through strategic acquisitions, repaying other indebtedness, financing investments, capital expenditures, repurchasing Park Common Shares and making investments in PNB as regulatory capital. In order to adapt to changing customer behavior, lower transaction volume, service area overlap and to continue to focus on reducing operating expenses, Park closed 23 branches during 2020 and one branch during 2021. -4- Services Provided by Park’s Subsidiaries Park National Bank provides the following principal services: • the acceptance of deposits for demand, savings and time accounts and the servicing of those accounts; • commercial, industrial, consumer and real estate lending, including installment loans, credit cards (which are offered through a third party), home equity lines of credit and commercial leasing; • a national portfolio of loans to non-bank consumer finance companies; • trust and wealth management services; • aircraft financing; • cash management; • safe deposit operations; • electronic funds transfers; • internet and mobile banking solutions with bill pay service; and • ParkDirect, a personal banking app. Park believes that the deposit mix of Park National Bank is currently such that no material portion has been obtained from a single customer and, consequently, the loss of any one customer of Park National Bank would not have a materially adverse effect on the business of Park National Bank. Guardian Finance provides consumer finance services. Lending Activities Park National Bank deals with consumers and a wide cross-section of businesses and corporations located primarily in the 26 Ohio counties, one Kentucky county, three North Carolina counties and four South Carolina counties served by the financial service offices of Park National Bank. For those in our communities experiencing a financial hardship related to the COVID-19 public health crisis, Park has offered various methods of support including loan modifications, payment deferral programs, participation in the PPP, participation in additional PPP loans authorized under the Consolidated Appropriations Act, 2021, and various other case by case accommodations. At December 31, 2021, Park National Bank had no concentration of loans to borrowers engaged in the same or similar industries that exceeded 10% of total loans nor did it have any loans outstanding to persons domiciled outside the United States. As a result of the Vision Bank-SEPH Merger, SEPH holds loans originated by Vision Bank previously serviced by the financial service offices of Vision Bank. It is expected that SEPH will originate loans only to further the collection efforts with respect to the loans transferred to SEPH by operation of law as a result of the Vision Bank-SEPH Merger. Such origination (or modification) volume has been and is expected to continue to be insignificant to the consolidated Park entity. Park National Bank makes lending decisions in accordance with the written loan policies adopted by Park which are designed to maintain acceptable loan quality. Park National Bank originates and retains for its own portfolio commercial and commercial real estate loans, commercial leases, residential real estate loans, home equity lines of credit, and installment loans. Park National Bank also originates fixed-rate residential real estate loans for sale to the secondary market. There are certain risks inherent in making loans. These risks include changes in the credit worthiness of borrowers over the time period in which loans may be repaid, interest rate changes over the time period in which loans may be repaid, risks resulting from changes in the national and local economies, risks inherent in dealing with borrowers and, in the case of loans secured by collateral, risks resulting from uncertainties about the future value of the collateral. -5- Commercial Loans At December 31, 2021, Park’s subsidiaries (including Scope Aircraft Finance) had approximately $3,121 million in commercial loans (commercial, financial and agricultural loans and commercial real estate loans) and commercial leases outstanding, representing approximately 45.4% of their total aggregate loan portfolio as of that date. Of this amount, approximately $1,299 million represented commercial, financial and agricultural loans, $1,802 million represented commercial real estate loans, and $21 million represented commercial leases. Commercial loans are made for a wide variety of general corporate purposes, including financing for industrial and commercial properties, financing for equipment, inventory and accounts receivable, acquisition financing, commercial leasing, and loans originated by 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. Information concerning the loan maturity distribution within the commercial loan portfolio is provided in "Table 15 - Loan Maturity Distribution" included in "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Annual Report on Form 10-K. The commercial loan portfolio of Park’s current subsidiaries includes loans to a wide variety of corporations and businesses across many industrial classifications in the 26 Ohio counties, one Kentucky county, three North Carolina counties and four South Carolina counties where Park National Bank operates, with the exception of nationwide aircraft loans and nationwide asset-based lending to consumer finance companies. The primary industries represented by these customers include real estate rental and leasing, finance and insurance, construction, health care and social assistance, accommodation and food services, manufacturing, other services, retail trade, and agriculture, forestry, fishing and hunting. 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, 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 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. For more information concerning the loan maturity distribution in the CRE loan portfolio, please see "Table 15 - Loan Maturity Distribution" included in "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Annual Report on Form 10-K. The regulatory limit for loans made to one borrower by Park National Bank was $140.0 million at December 31, 2021. Participations in a loan by Park National Bank in an amount larger than $46.0 million are generally sold to third-party banks or financial institutions. While Park National Bank has a loan limit of $140.0 million, the total exposure of the largest single borrower within the commercial portfolio was $75.0 million at December 31, 2021. Park has an independent, internal loan review program which annually evaluates all loans greater than $1 million, all new loans greater than $500,000 and a risk-based sample of loans less than $1 million. If a loan has deteriorated, the lending subsidiary takes prompt action designed to increase the likelihood that it will be repaid. 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. Loans which deteriorate and show the inability of a borrower to repay principal are charged down to the net realizable value of collateral. A collection specialist/work-out officer is available to assist each subsidiary when a credit deteriorates. Information about Park’s policy for placing loans on nonaccrual status is included under the caption “Loans” in "Note 1 - Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements found in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report on Form 10-K. -6- Commercial loans are generally viewed as having a higher credit risk than consumer loans because commercial loans typically involve larger loan balances to a single borrower and are more susceptible to a risk of default during an economic downturn. Commercial loans also generally have variable interest rates. Park uses several indices for commercial loans that help determine loan interest rates, but the national prime rate is the most common index used. 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 generally all commercial loans, regardless of type, includes cash flow analyses with rates shocked by 400 basis points. In the case of commercial loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of each borrower to collect amounts due from the borrower's customers. In the case of Park's commercial loans to non-bank consumer finance companies, the underlying cash flows are supported at times by sub-prime individual borrowers and present a higher level of risk compared to a more typical commercial loan to a business. Other collateral securing commercial loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the borrower’s business. Information concerning the loan loss experience and the allocation of the allowance for credit losses related to the commercial, financial and agricultural loan portfolio, the commercial real estate portfolio and the commercial lease portfolio is provided in "Table 30 - Summary of Loan Credit Loss Experience" and "Table 32 - Allocation of Allowance for Credit Losses", respectively, included in "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" found in Annual Report on Form 10-K. Loans to Non-Bank Consumer Finance Companies At December 31, 2021, Park National Bank had $323 million in loans outstanding to non-bank consumer finance companies. This is a national lending unit of Park National Bank. These asset-based loans are collateralized by cash flows from individuals, typically auto loans issued by a consumer finance company that is, in turn, a borrower of Park National Bank. These loans typically present a higher level of risk due to the underlying collateral and such risks are mitigated by more conservative underwriting and an intensive loan monitoring regimen commensurate with asset-based lending. 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 such experience and certain industry guides in determining whether to grant an aircraft loan or lease. At December 31, 2021, Scope Aircraft Finance had $328 million in loans outstanding, primarily secured by aircraft (which are included in the commercial loan portfolio). Consumer Loans At December 31, 2021, Park's subsidiaries had outstanding consumer loans (including automobile loans) in an aggregate amount of $1,690 million, constituting approximately 24.6% of their aggregate total loan portfolio. Park makes installment credit available to customers and prospective customers in their primary market areas through direct and indirect loans. Indirect loans are facilitated through an automobile and other vehicle dealer; whereas, direct loans are originated through direct customer interaction with Park's regions. For both direct and indirect loans, the final credit decisions are made by Park with the assistance of an automated underwriting system. At December 31, 2021, of the $1,690 million in consumer loans, $1,485 million were originated through indirect lending, while the remaining $205 million were considered direct loans. At December 31, 2021, of the $1,690 million in consumer loans, GFSC had outstanding consumer loans of $2 million and Park National Bank held the balance. Credit approval for direct and indirect 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 to adhere strictly to all laws and regulations governing consumer lending. A compliance officer, along with the appropriate line of business leaders, is responsible for monitoring each subsidiary’s performance and advising and updating loan personnel in this area. Loans are charged off in accordance with Park's policy. Information about Park’s policy for placing loans on nonaccrual status and charging off loans is included under the caption “Loans” in "Note 1 - Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements found in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report on Form 10-K. 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 borrowers' continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of -7- various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans. Information concerning the loan credit loss experience and the allocation of the allowance for credit losses related to the consumer loan portfolio is provided in "Table 30 - Summary of Loan Credit Loss Experience" and "Table 32 - Allocation of Allowance for Credit Losses", respectively, included in "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Annual Report on Form 10-K. Residential Real Estate and Construction Loans At December 31, 2021, Park's subsidiaries had outstanding approximately $2,060 million in construction real estate loans and residential real estate loans, representing approximately 30.0% of total loans outstanding. Of the $2,060 million, approximately $1,739 million was included within the residential real estate loan segment, which included $534 million of commercial loans secured by residential real estate, $1,034 million of mortgage loans, $166 million of home equity lines of credit and $6 million of installment loans. The remaining $322 million was included within the construction real estate loan segment, which included $215 million of commercial land and development loans and $107 million of 1-4 family residential construction loans. The market area for real estate lending by Park National Bank is concentrated in Ohio, Kentucky, North Carolina and South Carolina. Credit approval for residential real estate loans requires demonstration of sufficient income to repay the principal and interest and the real estate taxes and insurance, stability of employment, an established credit record and a current independent third-party appraisal providing the market value of the real estate securing the loan. Residential real estate loans are generally analyzed through an automated underwriting platform (system) to determine a risk classification. All loans receiving a risk classification of caution require review by a senior lender and generally require additional documentation if the loan is approved. Park National Bank generally requires that the residential real estate loan amount be no more than 80% of the purchase price or the appraised value of the real estate securing the loan, whichever is less, unless private mortgage insurance is obtained by the borrower. Loans in this lending category that are made to be held in Park National Bank's portfolio are both fixed-rate and adjustable-rate, fully amortized mortgages. The rates used are generally fully-indexed rates. From time to time, Park may offer a limited-time promotional rate on funds advanced on newly-originated home equity lines of credit. Park National Bank also originates fixed-rate real estate loans for sale to the secondary market. Park’s management may decide to retain certain 15-year, fixed-rate residential mortgage loans, rather than sell in the secondary market. Park's management made a decision to retain certain 15-year, fixed-rate residential mortgage loans in 2021. At December 31, 2021 and 2020, Park reported $573 million and $592 million, respectively, of 15-year, fixed-rate residential mortgage loans on Park's Consolidated Balance Sheets. Real estate loans are typically secured by first mortgages with evidence of title in favor of the lender in the form of an attorney’s opinion of title or a title insurance policy. Park National Bank has also required proof of hazard insurance with the lender named as the mortgagee and as the loss payee. Independent third-party appraisals are generally obtained for consumer real estate loans. Home equity lines of credit are generally secured by second mortgages in favor of Park National Bank. The maximum amount of a home equity line of credit is generally limited to 85% of the appraised value of the property less the balance of the first mortgage. The home equity lines of credit are written with ten-year terms. A variable interest rate is generally charged on the home equity lines of credit. Information concerning the loan credit loss experience and the allocation of the allowance for credit losses related to the residential real estate portfolio is provided in "Table 30 - Summary of Loan Credit Loss Experience" and "Table 32 - Allocation of Allowance for Credit Losses", respectively, included in "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Annual Report on Form 10-K. Construction loans include commercial construction loans as well as residential construction loans. Construction loans may be in the form of a permanent loan or a short-term construction loan, depending on the needs of the individual borrower. Generally, the permanent construction loans have a variable interest rate although a permanent construction loan may be made with a fixed interest rate for a term generally not exceeding five years. Short-term construction loans are generally made with variable interest rates. Information concerning the loan maturity distribution within the construction financing portfolio is provided in "Table 15 - Loan Maturity Distribution" included in "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS of this Annual Report on Form 10-K. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost (including interest) of construction. If the estimate of -8- construction cost proves to be inaccurate, Park National Bank may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value proves inaccurate, Park National Bank may be confronted, at or prior to the maturity of the loan, with a project having a value insufficient to assure full repayment, should the borrower default. In the event a default on a construction loan occurs and foreclosure follows, Park National Bank must take control of the project and attempt either to arrange for completion of construction or to dispose of the unfinished project. Additional risk exists with respect to a loan made to a developer who does not have a buyer for the property, as the developer may lack funds to pay the loan if the property is not sold upon completion. Park National Bank attempts to reduce such risks on loans to developers by requiring personal guarantees and reviewing current personal financial statements and tax returns as well as other projects undertaken by the developer. For additional information concerning the loan credit loss experience, please see “ITEM 1A. RISK FACTORS – Economic, Political and Market Risks – Changes in economic and political conditions could adversely affect our earnings and capital through declines in deposits, quality of investment securities, loan demand, our borrowers’ ability to repay loans, and the value of the collateral securing our loans.” and “– Business Operations Risks – Our allowance for credit losses may prove to be insufficient to absorb the expected, lifetime losses in our loan portfolio.” in this Annual Report on Form 10-K. Information concerning the loan credit loss experience and the allocation of the allowance for credit losses related to the construction financing portfolio is provided in "Table 30 - Summary of Loan Credit Loss Experience" and "Table 32 - Allocation of Allowance for Credit Losses", respectively, included in "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Annual Report on Form 10-K. SEPH SEPH is a non-bank subsidiary of Park that holds OREO property and non-performing loans. In addition to approximately $594,000 in OREO property, SEPH also held non-performing loans that were fully charged off as of December 31, 2021, all of which were on nonaccrual status. SEPH has one office in Licking County, Ohio. The SEPH employees work with a third-party work-out specialist to ensure effective and efficient resolution to the non-performing loans and OREO, while working closely with the borrowers of the loans to maximize collection efforts. Park expects that the OREO will reduce over time and result in cash inflow to Park. Competition The financial services industry is highly competitive. Park’s subsidiaries compete with other local, regional and national service providers, including banks, savings associations, credit unions and other types of financial institutions and finance companies. Other competitors include securities dealers, brokers, mortgage bankers, investment advisors and financial services subsidiaries of commercial and manufacturing companies. Competition for quality customers has intensified as a result of changes in regulations, mergers and acquisitions, advances in technology and product delivery systems, consolidation among financial service providers, bank failures and the conversion of former investment banks to bank holding companies. The primary factors in competing for loans are the terms of the loan, interest rates charged and overall services provided to borrowers. The primary factors in competing for deposits are interest rates paid on deposits, account liquidity, convenience and hours of office locations, convenience and availability of mobile banking options, and accessibility to trained and competent staff. Competitors of Park may have greater resources and, as such, additional technology offerings and higher lending limits, which may adversely affect the ability of Park to compete. In addition, certain nonfinancial institutions with which Park competes enjoy the benefits of fewer regulatory constraints, broader geographic service areas, greater capital and lower cost structures. Financial technology companies, or "fintechs," are also providing nontraditional, but increasingly strong competition for our borrowers, depositors and other customers. Associates At December 31, 2021, Park and its subsidiaries had 1,685 full-time equivalent associates. Supervision and Regulation of Park and its Subsidiaries Park, Park National Bank and Park’s other subsidiaries are subject to extensive regulation by federal and state agencies. The regulation of financial holding companies and their subsidiaries is intended primarily for the protection of consumers, depositors, borrowers, the Deposit Insurance Fund (the "DIF") of the Federal Deposit Insurance Corporation (the "FDIC") and the banking system as a whole and not for the protection of shareholders. Applicable laws and regulations restrict permissible activities and investments and require actions to protect loan, deposit, brokerage, fiduciary and other customers, as well as the DIF. Such laws and regulations may also restrict Park’s ability to repurchase its Common Shares or to receive dividends from Park National Bank and may impose capital adequacy and liquidity requirements. -9- As a financial holding company, Park is subject to regulation by the Federal Reserve Board under the Bank Holding Company Act and to inspection, examination and supervision by the Federal Reserve Board. Park is also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the Exchange Act, as administered by the SEC. Park’s Common Shares are listed on NYSE American under the trading symbol “PRK,” which subjects Park to the requirements under the applicable sections of the NYSE American Company Guide for listed companies. Park National Bank, as a national banking association, is subject to regulation, supervision and examination primarily by the Office of the Comptroller of the Currency (the "OCC") and secondarily by the FDIC. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as amended (the "Dodd-Frank Act"), established the Consumer Financial Protection Bureau (the "CFPB"), which regulates consumer financial products and services and certain financial services providers. The CFPB is authorized to prevent unfair, deceptive or abusive acts or practices and ensures consistent enforcement of laws so that consumers have access to fair, transparent and competitive markets for consumer financial products and services. Since its establishment, the CFPB has extensively exercised its rulemaking and interpretative authority. Guardian Finance, a subsidiary of Park and an Ohio state-chartered consumer finance company, is subject to regulation, supervision and examination by the Ohio Division of Financial Institutions (the "ODFI") and the Federal Reserve Board. As a subsidiary of Park, SEPH is also subject to inspection, examination and supervision by the Federal Reserve Board. The following information describes selected federal and state statutory and regulatory provisions and is qualified in its entirety by reference to the full text of such provisions. These statutes and regulations are continually under review by the U.S. Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations or regulatory policies applicable to Park and its subsidiaries could have a material effect on their respective businesses. Regulation of Financial Holding Companies As a financial holding company, Park’s activities are subject to regulation by the Federal Reserve Board. Park is subject to regular examinations by the Federal Reserve Board and is required to file reports and such additional information as the Federal Reserve Board may require. The Federal Reserve Board also has enforcement authority over financial holding companies, including, but not limited to, the ability to: • assess civil money penalties; • issue cease and desist or removal orders; and • require that a financial holding company divest subsidiaries (including a subsidiary bank). In general, the Federal Reserve Board may initiate enforcement actions for violations of laws and regulations and unsafe or unsound practices. A financial holding company is required by law and Federal Reserve Board policy to act as a source of financial and managerial strength to each subsidiary bank and to commit resources to support each such subsidiary bank. The Federal Reserve Board may require a financial holding company to contribute additional capital to an undercapitalized subsidiary bank and may disapprove of the payment of dividends to shareholders if the Federal Reserve Board believes the payment of such dividends would be an unsafe or unsound practice. The Bank Holding Company Act requires the prior approval of the Federal Reserve Board in any case where a financial holding company proposes to: • acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that is not already majority-owned by the financial holding company; -10- • acquire all or substantially all of the assets of another bank or another financial or bank holding company; or • merge or consolidate with any other financial or bank holding company. A qualifying bank holding company may elect to become a financial holding company and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature and not otherwise permissible for a bank holding company, if: (i) the holding company is "well managed" and "well capitalized" and (ii) each of its subsidiary banks (a) is well capitalized under the Federal Deposit Insurance Corporation Act of 1991 prompt corrective action provisions, (b) is well managed, and (c) has at least a "satisfactory" rating under the Community Reinvestment Act (the “CRA”). Park became a financial holding company in 2014. No regulatory approval is required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. The Financial Services Modernization Act defines “financial in nature” to include: • securities underwriting, dealing and market making; • sponsoring mutual funds and investment companies; • insurance underwriting and agency; • merchant banking; and • activities that the Federal Reserve Board has determined to be closely related to banking. A national bank also may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank, if the bank is well capitalized and well managed and has at least a satisfactory CRA rating. If a financial holding company or a subsidiary bank fails to maintain all requirements for the holding company to maintain financial holding company status, material restrictions may be placed on the activities of the holding company and its subsidiaries and on the ability of the holding company to enter into certain transactions and obtain regulatory approvals for new activities and transactions. The holding company could also be required to divest itself of subsidiaries that engage in activities that are not permitted for bank holding companies that are not financial holding companies. If restrictions are imposed on the activities of a financial holding company, the existence of such restrictions may not be made publicly available pursuant to confidentiality regulations of the bank regulatory agencies. Each subsidiary bank of a financial holding company is subject to certain restrictions on the maintenance of reserves against deposits, extensions of credit to the financial holding company and its subsidiaries, investments in the stock and other securities of the financial holding company and its subsidiaries and the taking of such stock and securities as collateral for loans to borrowers. Further, a financial holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property or furnishing of any services. Various consumer laws and regulations also affect the operations of these subsidiaries. In April 2020, the Federal Reserve Board adopted a final rule to revise its regulations related to determinations of whether a company has the ability to exercise a controlling influence over another company for purposes of the Bank Holding Company Act. The final rule expands and codifies the presumptions for use in such determinations. By codifying the presumptions, the final rule provides greater transparency on the types of relationships that the Federal Reserve Board generally views as supporting a facts-and-circumstances determination that one company controls another company. The Federal Reserve Board’s final rule applies to questions of control under the Bank Holding Company Act, but does not extend to the Change in Bank Control Act. Economic Growth, Regulatory Relief and Consumer Protection Act On May 25, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the "Regulatory Relief Act") was enacted, which repealed or modified certain provisions of the Dodd-Frank Act and eased restrictions on all but the largest banks (those with consolidated assets in excess of $250 billion). Bank holding companies with consolidated assets of less than $100 billion, including Park, are no longer subject to enhanced prudential standards. The Regulatory Relief Act also relieves bank holding companies and banks with consolidated assets of less than $100 billion, including Park, from certain record-keeping, reporting and disclosure requirements. Certain other regulatory requirements applied only to banks with -11- consolidated assets in excess of $50 billion and so did not apply to Park even before the enactment of the Regulatory Relief Act. Transactions with Affiliates, Directors, Executive Officers and Shareholders Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Board Regulation W generally: • limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10.0% of the bank's capital stock and surplus; • limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with all affiliates to an amount equal to 20.0% of the bank's capital stock and surplus; and • require that all such transactions be on terms substantially the same, or at least as favorable to the bank or subsidiary, as those provided to a non-affiliate. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. The term “covered transaction” includes the making of loans to the affiliate, the purchase of assets from the affiliate, the issuance of a guarantee on behalf of the affiliate, the purchase of securities issued by the affiliate and other similar types of transactions. A bank’s authority to extend credit to executive officers, directors and greater than 10.0% shareholders, as well as entities such persons control, is subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder by the Federal Reserve Board. Among other things, these loans must be made on terms (including interest rates charged and collateral required) substantially similar to those offered to unaffiliated individuals or be made as part of a benefit or compensation program on terms widely available to employees and must not involve a greater than normal risk of repayment. In addition, the amount of loans a bank may make to these persons is based, in part, on the bank’s capital position, and specified approval procedures must be followed in making loans which exceed specified amounts. Regulation of Nationally-Chartered Banks As a national banking association, Park National Bank is subject to regulation under the National Bank Act and is periodically examined by the OCC. OCC regulations govern permissible activities, capital requirements, dividend limitations, investments, loans and other matters. Furthermore, Park National Bank is subject, as a member bank, to certain rules and regulations of the Federal Reserve Board, many of which restrict activities and prescribe documentation to protect consumers. Park National Bank is an insured depository institution and a member of the DIF. As a result, it is subject to regulation and deposit insurance assessments by the FDIC. In addition, the establishment of branches by Park National Bank is subject to prior approval of the OCC. The OCC has broad enforcement powers over national banks, including the power to impose fines and other civil and criminal penalties and to appoint a conservator or receiver if any of a number of conditions are met. The CFPB regulates consumer financial products and services provided by Park National Bank through regulations designed to protect consumers. Federal Deposit Insurance The FDIC is an independent federal agency which insures the deposits, up to prescribed statutory limits, of federally-insured banks and savings associations and safeguards the safety and soundness of the financial institution industry. The general insurance limit is $250,000 per separately insured depositor. This insurance is backed by the full faith and credit of the United States government. As insurer, the FDIC is authorized to conduct examinations of and to require reporting by insured institutions, including Park National Bank, to prohibit any insured institution from engaging in any activity the FDIC determines by regulation or order to pose a threat to the DIF, and to take enforcement actions against insured institutions. The FDIC may terminate insurance of deposits of any insured institution if the FDIC finds that the insured institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or any other regulatory agency. The FDIC assesses a quarterly deposit insurance premium on each insured institution based on risk characteristics of the insured institution and may also impose special assessments in emergency situations. The premiums fund the DIF. -12- Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the designated reserve ratio ("DRR"), which is the amount in the DIF as a percentage of all DIF insured deposits. In March 2016, the FDIC adopted final rules designed to meet the statutory minimum DRR of 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act. The Dodd-Frank Act requires the FDIC to offset the effect on insured institutions with assets of less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%. Although the FDIC's rules reduced assessment rates on all banks, they imposed a surcharge on banks with assets of $10 billion or more to be paid until the DRR reached 1.35%. The DRR reached 1.35% on September 30, 2018. As a result, the previous surcharge imposed on banks with assets of $10 billion or more was lifted. In addition, preliminary assessment credits were determined by the FDIC for banks with assets of less than $10 billion for the portion of their assessments that contributed to the increase of the DRR to 1.35%. On June 30, 2019, the DRR reached 1.40%, and the FDIC applied credits for banks with assets of less than $10 billion ("small bank credits") beginning September 30, 2019. As of June 30, 2020, the DRR fell below the minimum DRR to 1.30%. As a result, the FDIC adopted a restoration plan requiring the restoration of the DRR to 1.35% within eight years of the plan establishment, by September 30, 2028. This restoration plan maintained the scheduled assessments rates for all insured institutions. The DRR was 1.27% as of September 30, 2021. The FDIC rules further changed the method of determining risk-based assessment rates for established banks with less than $10 billion in assets to better ensure that banks taking on greater risks pay more for deposit insurance than banks that take on less risk. Federal Home Loan Bank The Federal Home Loan Banks (“FHLBs”) provide credit to their members in the form of advances. Park National Bank is a member of the FHLB of Cincinnati. As an FHLB member, Park National Bank must maintain an investment in the capital stock of the FHLB of Cincinnati. Upon the origination or renewal of a loan or advance, each FHLB is required by law to obtain and maintain a security interest in certain types of collateral. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLB. The standards take into account a member’s performance under the CRA, and the member’s record of lending to first-time home buyers. The Coronavirus Aid, Relief, and Economic Security Act of 2020 and Initiatives Related to COVID-19 In response to the COVID-19 pandemic, the CARES Act, was signed into law on March 27, 2020, to provide national emergency economic relief measures. Many of the CARES Act’s programs are dependent upon the direct involvement of U.S. financial institutions, such as Park and Park National Bank, and have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve Board and other federal banking agencies, including those with direct supervisory jurisdiction over Park and Park National Bank. Furthermore, as the ongoing COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for COVID-19. In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including amendments to the CARES Act or new bills comparable in scope to the CARES Act. Park is continuing to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic. Section 1102 of the CARES Act amended the loan program of the SBA, in which Park National Bank participates, to create a guaranteed, unsecured loan program, the PPP, to fund operational costs of eligible businesses, organizations and self-employed persons during the COVID-19 pandemic. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. In June 2020, the Paycheck Protection Program Flexibility Act was enacted, which, among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. After previously being extended by Congress, the application deadline for PPP loans expired on May 31, 2021. No collateral or personal guarantees were required for PPP loans. In addition, neither the government nor lenders have been permitted to charge the recipients of PPP loans any fees. On December 27, 2020, the President signed into law omnibus federal spending and economic stimulus legislation titled the "Consolidated Appropriations Act, 2021" that included the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the "HHSB Act"). Among other things, the HHSB Act renewed the PPP, allocating $284.45 billion for both new first-time PPP loans under the existing PPP and the expansion of existing PPP loans for certain qualified, existing PPP borrowers. In addition to extending and amending the PPP, the HHSB Act also creates a new grant program for "shuttered venue operators". As a participating lender in the PPP, Park National Bank continues to monitor legislative, regulatory, and supervisory developments related thereto. On September 29, 2020, the federal bank regulatory agencies issued a final rule that neutralizes the regulatory capital and liquidity coverage ratio effects of participating in certain COVID-19 liquidity facilities due to the fact there is no credit or -13- market risk in association with exposures pledged to such facilities. As a result, the final rule supports the flow of credit to households and businesses affected by COVID-19. On December 2, 2020, the federal bank regulatory agencies announced an interim final rule that provides temporary relief for specified community banking organizations related to certain regulations and reporting requirements as a result, in large part, of their growth in size from the response to COVID-19. Community banking organizations are subject to different rules and requirements based on their risk profile and asset size. Due to their involvement in federal COVID-19 response programs (such as the PPP) and other lending that supports the U.S. economy, many community banking organizations experienced rapid and unexpected increases in their sizes, which were generally expected to be temporary. The temporary increase in size could have subjected community banking organizations to new regulations or reporting requirements. However, community banking organizations, such as Park and Park National Bank, under $10.0 billion in total assets as of December 31, 2019 were permitted to use asset data as of December 31, 2019, to determine the applicability of various regulatory asset thresholds during calendar years 2020 and 2021. As such, it was not until January 1, 2022 that asset growth again triggered new regulatory requirements for these community banking organizations. Regulatory Capital The Federal Reserve Board has adopted risk-based capital guidelines for financial holding companies and other bank holding companies as well as state member banks. The OCC and the FDIC have adopted risk-based capital guidelines for national banks and state non-member banks, respectively. The guidelines provide a systematic analytical framework which makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures expressly into account in evaluating capital adequacy, and minimizes disincentives to holding liquid, low-risk assets. Capital levels, as measured by these standards, are also used to categorize financial institutions for purposes of certain prompt corrective action regulatory provisions. In July 2013, the U.S. banking regulators issued capital rules applicable to smaller banking organizations which also implement certain of the provisions of the Dodd-Frank Act (the “Basel III Capital Rules”). Community banking organizations, including Park and Park National Bank, began transitioning to the new rules on January 1, 2015. The minimum capital requirements became effective on January 1, 2015; whereas, the capital conservation buffer and deductions from common equity capital phased in from January 1, 2016 through January 1, 2019, and most deductions from common equity tier 1 capital phased in from January 1, 2015 through January 1, 2019. The Basel III Capital Rules include: (i) a minimum common equity tier 1 capital ratio of 4.5%; (ii) a minimum tier 1 capital ratio of 6.0%; (iii) a minimum total capital ratio of 8.0%; and (iv) a minimum leverage ratio of 4.0%. Common equity for the common equity tier 1 capital ratio generally consists of common stock (plus related surplus), retained earnings, accumulated other comprehensive income (unless an institution elects to exclude such income from regulatory capital), and limited amounts of minority interests in the form of common stock, subject to applicable regulatory adjustments and deductions. Tier 1 capital generally consists of common equity as defined for the common equity tier 1 capital ratio, plus certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related surplus, trust preferred securities that have been grandfathered (but which are not otherwise permitted), and limited amounts of minority interests in the form of additional tier 1 capital instruments, less certain deductions. Tier 2 capital, which can be included in the total capital ratio, generally consists of other preferred stock and subordinated debt meeting certain conditions plus limited amounts of the allowance for credit losses, subject to specified eligibility criteria, less applicable deductions. The deductions from common equity tier 1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels). Under the guidelines, capital is compared to the relative risk included in the balance sheet. To derive the risk included in the balance sheet, one of several risk weights is applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. -14- The Basel III Capital Rules also place restrictions on the payment of capital distributions, including dividends and stock repurchases, and certain discretionary bonus payments to executive officers if the banking organization does not hold a capital conservation buffer of greater than 2.5% composed of common equity tier 1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. In December 2018, the federal banking agencies issued a final rule to address regulatory treatment of credit loss allowances under CECL. The rule revised the federal banking agencies’ regulatory capital rules to identify which credit loss allowances under the CECL model are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in over three years the day-one adverse effects on regulatory capital that may result from the adoption of the CECL model. Concurrent with the enactment of the CARES Act, in March 2020, federal banking agencies issued an interim final rule that delayed the estimated impact on regulatory capital resulting from the adoption of CECL. The interim final rule provided banking organizations that implemented CECL prior to the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay. On August 26, 2020, the federal banking agencies issued a final rule that made certain technical changes to the interim final rule, including expanding the pool of eligible institutions. The changes in the final rule applied only to those banking organizations that elected the CECL transition relief provided for under the rule. Under the Consolidated Appropriations Act, 2021, bank holding companies and their affiliates have the option of postponing implementation of CECL until the earlier of (i) the first day of the fiscal year that begins after the date on which the national emergency concerning COVID-19 terminates or (ii) January 1, 2022. Congress provided this reprieve for a variety of reasons, including the fact that COVID-19 has created a volatile, uncertain lending environment that may result in significant credit losses for banks. Park adopted CECL on January 1, 2021. In September 2019, consistent with Section 201 of the Regulatory Relief Act, the Federal Reserve Board, along with the other federal bank regulatory agencies, issued a final rule, effective January 1, 2020, that gave community banks, including Park National Bank, the option to calculate a simple leverage ratio to measure capital adequacy, if the community banks met certain requirements. Under the rule, a community bank was eligible to elect the Community Bank Leverage Ratio (“CBLR”) framework if it had less than $10 billion in total consolidated assets, limited amounts of certain trading assets and liabilities, limited amounts of off-balance sheet exposures and a leverage ratio greater than 9.0%. The final rule adopted tier 1 capital and the existing leverage ratio into the CBLR framework. The tier 1 numerator took into account the modifications made in relation to the capital simplifications and CECL methodology transition rules as of the compliance dates of those rules. Qualifying institutions that elected to use the CBLR framework (each, a “CBLR Bank”) and that maintained a leverage ratio of greater than 9.0% were considered to have satisfied the risk-based and leverage capital requirements in the regulatory agencies’ generally applicable capital rules and to have met the well-capitalized ratio requirements. No CBLR Bank was required to calculate or report risk-based capital, and each CBLR Bank could opt out of the framework at any time, without restriction, by reverting to the generally applicable risk-based capital rule. Pursuant to the CARES Act, on August 26, 2020, the federal banking agencies adopted a final rule that temporarily lowered the CBLR threshold and provided a gradual transition back to the prior level. Specifically, the CBLR threshold was reduced to 8.0% for the remainder of 2020, increased to 8.5% for 2021, and returned to 9.0% on January 1, 2022. This final rule became effective on October 1, 2020. Park did not utilize the CBLR in assessing capital adequacy. In October 2021, effective in November 2021, the FDIC issued a final rule to incorporate the CBLR rule into the Real Estate Lending Standards. This rule calculates the ratio of loans in excess of the supervisory loan-to-value limits (“LTV Limits”) using tier 1 capital plus the appropriate allowance for credit losses in the denominator. This rule was adopted to allow a consistent approach for calculating the ratio of loans in excess of the supervisory LTV Limits at all FDIC supervised institutions, and to avoid any regulatory burden that could arise if an FDIC supervised institution subsequently decides to switch between different capital frameworks. The federal banking agencies have established a system of prompt corrective action to resolve certain of the problems of undercapitalized depository institutions. This system is based on five capital level categories for insured depository institutions: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” The federal banking agencies may (or in some cases must) take certain supervisory actions depending upon a bank’s capital level. For example, the banking agencies must appoint a receiver or conservator for a bank within 90 days after the bank becomes “critically undercapitalized” unless the bank’s primary regulator determines, with the concurrence of the FDIC, that other action would better achieve regulatory purposes. Banking operations otherwise may be significantly affected depending on a bank’s capital category. For example, a bank that is not “well capitalized” generally is prohibited from accepting brokered -15- deposits and offering interest rates on deposits higher than the prevailing rate in its market, and the holding company of any undercapitalized depository institution must guarantee, in part, specific aspects of the bank’s capital plan for the plan to be acceptable. In order to be “well-capitalized,” a bank must have a common equity tier I capital ratio of at least 6.5%, a total risk-based capital of at least 10.0%, a tier 1 risk-based capital ratio of at least 8.0% and a leverage ratio of at least 5.0%, and the bank must not be subject to any written agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. Park’s management believes that Park National Bank meets the ratio requirements to be deemed “well-capitalized” according to the guidelines described above. See "Note 28 - Capital Ratios" of the Notes to Consolidated Financial Statements found in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report on Form 10-K. Fiscal and Monetary Policies The business and earnings of Park and its subsidiaries are affected significantly by the fiscal policies of the U.S. government and its agencies. Park National Bank is particularly affected by the monetary policies of the Federal Reserve Board, which regulates the supply of money and credit in the United States primarily through open market operations in U.S. government securities, changes in the discount rate on bank borrowings, and changes in the reserve requirements against deposits of depository institutions. These policies are used in varying degrees and combinations to directly affect the overall growth and distribution of bank loans, investments and deposits, as well as the interest rates charged on loans and paid on deposits. In light of the changing conditions in the U.S. economy, including changes brought about by COVID-19, the money markets and the activities of fiscal and monetary authorities, Park can make no definitive predictions as to future changes in interest rates, credit availability or deposit levels. Limits on Dividends and Other Payments There are various legal limitations on the extent to which a subsidiary bank may finance or otherwise supply funds to its parent holding company. Under applicable federal and state laws, a subsidiary bank may not, subject to certain limited exceptions, make loans or extensions of credit to, or investments in the securities of, its parent holding company. A subsidiary bank is also subject to collateral security requirements for any loan or extension of credit permitted by such exceptions. The ability of Park to obtain funds for the payment of dividends and for other cash requirements is largely dependent on the amount of dividends which may be declared by Park National Bank. The Federal Reserve Board also expects Park to serve as a source of strength to Park National Bank, which may require Park to retain capital for further investment in Park National Bank, rather than pay dividends to the Park shareholders. Park National Bank may not pay dividends out of its surplus if, after paying these dividends, Park National Bank would fail to satisfy all of the capital adequacy regulations and guidelines established by the OCC, including having a capital conservation buffer that is greater than 2.5%. In addition, Park National Bank must have the approval of the OCC if a dividend in any year would cause the total dividends for that year to exceed the sum of Park National Bank’s net income for the current year and the retained net income for the preceding two years, less required transfers to surplus. Payment of dividends by Park National Bank may be restricted at any time at the discretion of its regulatory authorities, if such regulatory authorities deem such dividends to constitute unsafe and/or unsound banking practices or if necessary to maintain adequate capital. These provisions could have the effect of limiting Park’s ability to pay dividends on Park's Common Shares. At December 31, 2021, approximately $116.8 million of the total shareholders’ equity of Park National Bank was available for payment to Park without the approval of the OCC. See "Note 23 - Dividend Restrictions" of the Notes to Consolidated Financial Statements found in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report on Form 10-K. The Federal Reserve Board has also issued a policy statement with regard to the payment of cash dividends by financial holding companies and other bank holding companies. The policy statement provides that, as a matter of prudent banking, a financial holding company or bank holding company should not maintain a rate of cash dividends unless its net income available to common shareholders over the past year has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears to be consistent with the financial holding company's or bank holding company’s capital needs, asset quality, and overall financial condition. Accordingly, a financial holding company or a bank holding company should not pay cash dividends that exceed its net income or that can only be funded in ways that weaken the financial holding company's or bank holding company’s financial health, such as by borrowing. In addition, Park may not pay dividends that -16- would cause Park to fail to satisfy the capital adequacy regulations applicable to bank holding companies which qualify as financial holding companies, including having a capital conservation buffer that is greater than 2.5%. Park is subject to contractual restrictions on the declaration and payment of dividends under the terms of certain of Park's debt instruments. Under the terms of the Indenture governing the $15.5 million of junior subordinated notes issued by Vision to the Vision Trust and the related Guarantee Agreement, Park, as successor to Vision in accordance with the First Supplemental Indenture, is prohibited, subject to limited exceptions, from declaring or paying any dividends or distributions on any shares of its capital stock: (i) if an event of default under the Indenture has occurred and continues; (ii) if Park is in default with respect to the payment of any obligations under the Guarantee Agreement; or (iii) during any period in which the payment of interest on the junior subordinated notes by Park (and the payment of cash distributions on the floating rate preferred securities of the Vision Trust) is being deferred. Volcker Rule In December 2013, five federal agencies adopted a final regulation implementing the Volcker Rule provision of the Dodd-Frank Act (the "Volcker Rule"). The Volcker Rule placed limits on the trading activity of insured depository institutions and entities affiliated with depository institutions, subject to certain exceptions. Such trading activity included the purchase or sale as principal of a security, derivative, commodity, future, option or similar instrument in order to benefit from short-term price movements or to realize short-term profits. The Volcker Rule exempted trading in specified U.S. government, agency, state and/or municipal obligations. The Volcker Rule also excepted (i) trading conducted in certain capacities, including as a broker or other agent, through a deferred compensation or pension plan, as a fiduciary on behalf of customers; (ii) trading to satisfy a debt previously contracted; (iii) trading under certain repurchase and securities lending agreements; and (iv) trading in connection with risk-mitigating hedging activities. In addition, the Volcker Rule prohibited a banking entity from having an ownership interest in, or certain relationships with, a hedge fund or private equity fund, also known as “covered funds,” subject to a number of exceptions. In July 2019, the federal bank regulatory agencies that adopted the Volcker Rule adopted a final rule to exempt certain community banks, including Park National Bank, from such rule consistent with the Regulatory Relief Act. Under the final rule, community banks with $10 billion or less in total consolidated assets and total trading assets and liabilities of 5.0% or less of total consolidated assets were excluded from the restrictions of the Volcker Rule. On June 25, 2020, the federal bank regulatory agencies also finalized a rule modifying the Volcker Rule’s prohibition on banking entities investing in or sponsoring covered funds. Such rule permits certain banking entities to offer financial services and engage in other activities that do not raise concerns that the Volcker Rule was originally intended to address. To the extent that Park National Bank engages in any of the trading activities or has any ownership interest in or relationship with any of the types of funds regulated by the Volcker Rule, Park National Bank believes that its activities and relationships comply with such rule, as amended. Financial Privacy Provisions Federal and state regulations limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a non-affiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. Park National Bank is also subject to regulatory guidelines establishing standards for safeguarding customer information. These guidelines describe the federal bank regulatory agencies' expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer. -17- Cybersecurity In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish several lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the financial institution’s operations after a cyber attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the financial institution or its critical service providers fall victim to this type of cybersecurity attack. If Park National Bank fails to observe the regulatory guidance, it could be subject to various regulatory sanctions, including financial penalties. In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations. In November 2021, the OCC, the Federal Reserve Board and the FDIC issued a final rule requiring banking organizations that experience a computer-security incident to notify certain entities. A computer-security incident occurs when actual or potential harm to the confidentiality, integrity or availability of an information system or the information occurs, or there is a violation or imminent threat of a violation to banking security policies and procedures. The affected bank must notify its respective federal regulator of the computer-security incident as soon as possible and no later than 36 hours after the bank determines a computer-security incident has occurred. These notifications are intended to promote early awareness of threats to banking organizations and will help banks react to those threats before they manifest into bigger incidents. This rule also requires bank service providers to notify their customers of a computer-security incident. State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements. Park expects this trend of state-level activity in those areas to continue, and continues to monitor developments in the states in which our customers are located. In the ordinary course of business, Park relies on electronic communications and information systems to conduct its operations and to store sensitive data. Park employs an in-depth, layered, defensive approach that leverages people, processes, encryption and multi-factor authentication technology to manage and maintain cybersecurity controls. Park employs a variety of preventative and detective tools to monitor, block and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of Park’s defensive measures, the threat from cybersecurity attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date, Park has not detected a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, Park’s systems and those of its customers and third-party service providers are under constant threat and it is possible that Park could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of internet banking, mobile banking and other technology-based products and services by us and our customers. See “ITEM 1A. RISK FACTORS” for a further discussion of risks related to cybersecurity. Anti-Money Laundering and the Patriot Act A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, as amended (the “Patriot Act”), substantially broadened the scope of U.S. anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The Patriot Act gives the U.S. government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. Title III of the Patriot Act encourages information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions. Among other requirements, Title III and related regulations require regulated financial institutions to establish a program specifying procedures for obtaining identifying information from customers seeking to open new accounts and establish enhanced due diligence policies, procedures and controls designed to -18- detect and report suspicious activity. Park National Bank has established policies and procedures that Park National Bank believes comply with the requirements of the Patriot Act. The Anti-Money Laundering Act of 2020 (the "AMLA"), which amends the Bank Secrecy Act of 1970 (the "BSA"), was enacted in January 2021. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal processes for BSA compliance; and expands enforcement-related and investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower initiatives and protections. Office of Foreign Assets Control Regulation The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. Park is responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious financial, legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations. Community Reinvestment Act The CRA requires Park National Bank's primary federal regulatory agency, the OCC, to assess Park National Bank's record in meeting the credit needs of the communities served by Park National Bank consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market area by, among other things, providing credit to low-income and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings that must be publically disclosed. The OCC assigns one of four ratings: outstanding, satisfactory, needs to improve or substantial noncompliance. The rating assigned to a financial institution is considered in connection with various applications submitted by the financial institution or its holding company to its banking regulators, including applications to acquire another financial institution or to open or close a branch office. In addition, all subsidiary banks of a financial holding company must maintain a satisfactory or outstanding rating in order for the financial holding company to avoid limitations on its activities. Park National Bank received a rating of "satisfactory" in its latest CRA examination. Corporate Governance As mandated by the Sarbanes-Oxley Act of 2002, as amended, the SEC has adopted rules and regulations governing, among other issues, corporate governance, auditing and accounting, executive compensation and enhanced and timely disclosure of corporate information. NYSE American has also adopted corporate governance rules. The Board of Directors of Park has taken a series of actions to strengthen and improve Park’s already strong corporate governance practices in light of the rules of the SEC and NYSE American. The Board of Directors has adopted and annually reviews charters for the Audit Committee, the Compensation Committee, the Executive Committee, the Nominating and Corporate Governance Committee (including as Exhibit A thereto, Corporate Governance Guidelines) and the Risk Committee, as well as a Code of Business Conduct and Ethics governing the directors, officers and associates of Park and its subsidiaries. -19- Executive and Incentive Compensation The Dodd-Frank Act requires that the federal bank regulatory agencies, including the Federal Reserve Board and the OCC, establish joint regulations or guidelines related to incentive-based compensation. No final rule implementing this provision of the Dodd-Frank Act has, as of the date of the filing of this Annual Report on Form 10-K, been adopted, but a proposed rule was published in 2016 that expanded upon a prior proposed rule published in 2011. The proposed rule is intended to: (i) prohibit incentive-based payment arrangements that the bank regulatory agencies determine could encourage certain financial institutions to take inappropriate risks by providing excessive compensation or that could lead to material financial loss; (ii) require the board of directors of those financial institutions to take certain oversight actions related to incentive-based compensation; and (iii) require those financial institutions to disclose information concerning incentive-based compensation arrangements to the appropriate federal regulator. Although a final rule has not been issued, Park and Park National Bank have undertaken efforts to ensure that their incentive compensation plans do not encourage inappropriate risks, consistent with the principles identified above. In June 2010, the Federal Reserve Board, the OCC and the FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization's incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization's ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management and (iii) be supported by strong corporate governance, including active and effective oversight by the organization's board of directors. These three principles are incorporated into the proposed joint compensation regulations under the Dodd-Frank Act, described above. The Federal Reserve Board and the OCC review, as part of their respective regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as Park and Park National Bank, that are not "large, complex banking organizations." These reviews are tailored to each organization based on the scope and complexity of the organization's activities and the prevalence of incentive compensation arrangements. Deficiencies will be incorporated into the organization's supervisory ratings, which can affect the organization's ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization's safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies. Public company compensation committee members must meet heightened independence requirements and consider the independence of compensation consultants, legal counsel and other advisors to the compensation committee. A compensation committee must have the authority to hire advisors and the public company must fund the reasonable compensation of such advisors. SEC regulations require public companies to provide various disclosures about executive compensation in annual reports and proxy statements and to present to their shareholders a non-binding vote on the approval of executive compensation. Public companies will be required, once stock exchanges adopt additional listing requirements under the Dodd-Frank Act, to implement "clawback" procedures for incentive compensation payments and to disclose the details of the procedures which allow recovery of incentive compensation that was paid on the basis of erroneous financial information necessitating an accounting restatement due to material noncompliance with financial reporting requirements. This clawback policy is intended to apply to compensation paid within a three-year look-back window of the restatement and would cover all executives (including former executives) who received incentive awards. Consumer Protection Laws and Regulations Banks are subject to regular examination to ensure compliance with federal consumer protection statutes and regulations, including, but not limited to, the following: • Equal Credit Opportunity Act (prohibiting discrimination in any credit transaction on the basis of any of various criteria) • Truth in Lending Act (requiring that credit terms be disclosed in a manner that permits a consumer to understand and compare credit terms more readily and knowledgeably) -20- • Fair Housing Act (making it unlawful for a lender to discriminate in its housing-related lending activities against any person on the basis of certain criteria) • Home Mortgage Disclosure Act (requiring financial institutions to collect data that enables regulatory agencies to determine whether financial institutions are serving the housing credit needs of the communities in which they are located) • Real Estate Settlement Procedures Act (requiring that lenders provide borrowers with disclosures regarding the nature and cost of real estate settlements and prohibits abusive practices that increase borrowers' costs) • Fair Credit Reporting Act (governing the provision of consume information to credit reporting agencies and the use of consumer information) • Fair Debt Collection Practices Act (governing the manner in which consumer debts may be collected by collection agencies) • Truth in Savings Act (requiring disclosure of deposit terms to consumers) • Electronic Funds Transfer Act (governing automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of ATMs and other electronic banking services) The bank regulators also use their authority under the Federal Trade Commission Act to take supervisory or enforcement action with respect to unfair or deceptive acts or practices by banks that may not necessarily fall within the scope of a specific banking or consumer finance law. In October 2017, the OCC rescinded its guidance on deposit advance products in light of the CFPB’s pending small dollar loan rule related to payday, vehicle title and certain high cost installment loans that was issued in November 2013 (the “Small Dollar Rule”). The Small Dollar Rule, however, has been the subject of further regulatory review and a court order staying compliance in connection with a legal challenge. The CFPB issued its final Small Dollar Rule on July 22, 2020, which became fully effective on October 20, 2020. Specifically, the CFPB revoked provisions that: (i) provide that it is an unfair and abusive practice for a lender to make a covered short-term or longer term balloon-payment loan, including payday and vehicle title loans, without reasonably determining that consumers have the ability to repay those loans according to their terms; (ii) prescribe mandatory underwriting requirements for making the ability-to-repay determination; (iii) exempt certain loans from the mandatory underwriting requirements; and (iv) establish related definitions, reporting, and recordkeeping requirements. In August 2021, the court overseeing the litigation challenging the Small Dollar Rule found in the CFPB’s favor, and ordered the compliance date to be 286 days after the final judgment. Lenders are required to comply by June 13, 2022. Separately, in May 2018, the OCC published guidance that encourages national banks and federal savings associations to offer responsible short-term, small-dollar installment loans with terms between two and twelve months and equal amortizing payments. Pursuant to the OCC’s guidance on this issue, banks are encouraged to offer these products in a manner that is consistent with sound risk management principles and clear, documented underwriting guidelines. Further, the federal bank regulatory agencies issued interagency guidance on May 20, 2020, to encourage banks, savings associations, and credit unions to offer responsible small-dollar loans to customers for consumer and small business purposes. As of the date of the filing of this Annual Report on Form 10-K, Park National Bank has not decided to offer such products, although this position may change as Park National Bank refines its business plan in the future. As a consumer finance company incorporated under Ohio law, Guardian Finance is subject to regulation and supervision by the ODFI. ODFI regulation and supervision are designed to protect consumers and can affect the lending activities of Guardian Finance, including interest rates, loan terms, advertising and record retention. If grounds provided by law exist, the ODFI may suspend or revoke an Ohio consumer finance company’s ability to make loans. Legislative and Regulatory Initiatives From time to time, various legislative and regulatory initiatives are introduced in the U.S. Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of Park and Park National Bank in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial -21- institutions. Park cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of Park. A change in statutes, regulations or regulatory policies applicable to Park or any of its subsidiaries could have a material effect on Park's business, financial condition and results of operations. Effect of Environmental Regulation Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures, earnings or competitive position of Park and its subsidiaries. Park believes the nature of the operations of its subsidiaries has little, if any, environmental impact. As a result, Park, anticipates no material capital expenditures for environmental control facilities for Park's current fiscal year or for the foreseeable future. Park believes its primary exposure to environmental risk is through the lending activities of its subsidiaries. In cases where management believes environmental risk potentially exists, Park’s subsidiaries mitigate their environmental risk exposures by requiring environmental site assessments at the time of loan origination to confirm collateral quality as to commercial real estate parcels posing higher than normal potential for environmental impact, as determined by reference to present and past uses of the subject property and adjacent sites. In addition, environmental assessments are typically required prior to any foreclosure activity involving non-residential real estate collateral. ITEM 1A. RISK FACTORS. Cautionary Statement Regarding Forward-Looking Information Certain statements contained in this Annual Report on Form 10-K and the documents incorporated herein by reference that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, the statements specifically identified as forward-looking statements within this Annual Report on Form 10-K. In addition, certain statements in future filings by Park with the SEC, in press releases, and in oral and written statements made by or with the approval of Park which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include: (i) projections of income or expense, earnings per share, the payment or non-payment of dividends, capital structure and other financial items; (ii) statements of plans and objectives of Park or our management or Board of Directors, including those relating to products or services or to potential or pending acquisitions; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the forward-looking statements. Park desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties. Actual results may differ materially from those predicted by the forward-looking statements because of various factors and possible events, including those factors and events identified below. There is also the risk that Park’s management or Park's Board of Directors incorrectly analyzes these risks and uncertainties or that the strategies Park develops to address such risks and uncertainties are unsuccessful. Forward-looking statements speak only as of the date on which they are made, and, except as may be required by law, Park undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made. All subsequent written and oral forward-looking statements attributable to Park or any person acting on Park’s behalf are qualified in their entirety by the preceding cautionary statements. Economic, Political and Market Risks The economic impact of COVID-19 or any other pandemic could adversely affect our business, financial condition, liquidity, and results of operations. COVID-19 has negatively impacted global, national and local economies, disrupted global and national supply chains, lowered equity market valuations, and created significant volatility and disruption in financial markets. In addition, the pandemic resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities and may result in the same or similar restrictions in the future. As a result, the demand for our products and services have been and may continue to be significantly impacted, which could adversely affect -22- our revenue and results of operations. Furthermore, the pandemic could continue to result in the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses, particularly if businesses remain required to operate at diminished capacities or are required to close again, the impact on the global, national and local economies worsens, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. The effects of COVID-19 could be particularly pronounced with respect to certain of the higher risk portions of PNB's loan portfolio: • Strip shopping centers , due to declining interest in such spaces by their users and declining interest in visiting shared spaces. As of December 31, 2021, excluding PPP loans, this portfolio was $265.5 million, or 3.9% of PNB's loan portfolio. • Restaurants and food service , due to stay at home orders and requirements that restaurants provide carry-out only service. As of December 31, 2021, excluding PPP loans, this portfolio was $53.3 million, or 0.8% of PNB's loan portfolio. • Hotel and accommodations , due to travel limitations implemented by governments and businesses as well as declining interest in travel, generally. As of December 31, 2021, excluding PPP loans, this portfolio was $220.1 million, or 3.2% of PNB's loan portfolio. Additionally, there is risk in our non-bank consumer finance companies and indirect consumer (auto) lending, due to the impact of the disrupted global supply chains on the availability and price of automobiles--both new and used. As of December 31, 2021, excluding PPP loans, the portions of these portfolios dedicated to automobile-based loans aggregated to $1.8 billion, or 26.3% of PNB's loan portfolio. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with COVID-19. The extent to which COVID-19 impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic. As of December 31, 2021, we hold and service PPP loans. These PPP loans are subject to the provisions of the CARES Act and to complex and evolving rules and guidance issued by the SBA and other government agencies. While a large number of our PPP borrowers have applied for and received full or partial forgiveness of their loan obligations, we still have credit risk on the remaining PPP loans in the event the SBA determines that there is a deficiency in the manner in which we originated, funded or serviced such PPP loans, including any issue with the eligibility of a borrower to receive funding. We could face additional risks in our administrative capabilities to service our PPP loans and to properly determine loan forgiveness. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which we originated, funded or serviced the PPP loan, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if the SBA has already paid under the guaranty, seek recovery of any loss related to the deficiency. The spread of COVID-19, including new variants thereof, has also caused us to modify our business practices, including associate travel, associate work locations, and cancellation of physical participation in meetings, events and conferences. Further, technology in associates’ homes may not be as robust as in our offices and could cause the networks, information systems, applications and other tools available to such employees to be more limited or less reliable. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk from phishing, malware and other cybersecurity attacks, all of which could expose us to risks of data or financial loss and could seriously disrupt our operations and the operations of any impacted customers. COVID-19, the rise of new strains thereof, or a new pandemic could subject us to any of the following risks, any of which could, individually or in the aggregate, have a material adverse effect on our business, financial condition, liquidity and results of operations: • demand for our products and services may decline, making it difficult to grow assets and income; • if the economy continues to be unable to fully re-open, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; • collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; • our allowance for credit losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income; • the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; • a prolonged weakness in economic conditions resulting in a reduction of future projected earnings could result in our recording a valuation allowance against our current outstanding deferred tax assets; -23- • we rely on third-party vendors for certain services and the unavailability of a critical service due to COVID-19 could have an adverse effect on us; and • continued adverse economic conditions could result in protracted volatility in the price of our Common Shares. Moreover, our future success and profitability substantially depend on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key associates due to COVID-19, including new variants thereof, or any similar pandemic could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability. Even after the COVID-19 pandemic subsides, the U.S. economy will likely require time to recover, the length of which is unknown and during which the United States may experience a recession or market correction. Our business could be materially and adversely affected by any such recession or market correction. We continue to closely monitor COVID-19 and related risks as they evolve. To the extent the effects of COVID-19 adversely impact our business, financial condition, liquidity or results of operations, it may also have the effect of heightening many of the other risks described in this Item. Changes in economic and political conditions could adversely affect our earnings and capital through declines in deposits, quality of investment securities, loan demand, our borrowers’ ability to repay loans, and the value of the collateral securing our loans. Our success depends, to a certain extent, upon local and national economic and political conditions, as well as governmental fiscal and monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy, tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars, and other factors beyond our control may adversely affect our deposit levels and composition, the quality of our assets including investment securities available for purchase and the demand for loans, which, in turn, may adversely affect our earnings and capital. Recent political developments have resulted in substantial changes in economic and political conditions for the United States and the remainder of the world. Disruptions in United States and global financial markets and changes in oil production in the Middle East affect the economy and stock prices in the United States, which can affect our earnings and our capital, as well as the ability of our customers to repay loans. Because we have a significant number of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral and our ability to sell the collateral upon foreclosure. Adverse changes in the economy, including those resulting from COVID-19, including new variants thereof, may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings and cash flows. Changes in interest rates could have a material adverse effect on our financial condition, results of operations and cash flows. Our earnings and cash flows depend substantially on our interest rate spread, which is the difference between: (i) the rates we earn on loans, investment securities and other interest earning assets; and (ii) the interest rates we pay on deposits and our borrowings. These rates are highly sensitive to many factors beyond our control, including general economic conditions and the policies of various governmental and regulatory authorities and, in particular, the Federal Reserve Board. Changes in monetary policy influence the origination of loans, the prepayment speed of loans, the purchase of investments, the generation of deposits and rates of interest received and paid. If market interest rates rise, Park will have competitive pressure to increase the rates that Park pays on deposits, which could result in a decrease of Park's net interest income. If market rates decline, Park could experience fixed-rate loan prepayments and higher investment portfolio cash flows, resulting in a lower yield on earning assets. Park's earnings can also be impacted by the spread between short-term and long-term market interest rates. While we have taken measures intended to manage the risks of operating in a changing interest rate environment, there can be no assurance that such measures will be effective in avoiding undue interest rate risk, especially in light of the continued economic effects of COVID-19. Information pertaining to the impact changes in interest rates could have on our net income is included in "Table 38 - Interest Rate Sensitivity" in "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Annual Report on Form 10-K, and is incorporated herein by reference. -24- Changes in the general economic conditions and real estate valuations in our primary market areas could adversely impact results of operations, financial condition and cash flows. Our lending and deposit gathering activities are concentrated primarily in Ohio, Kentucky, North Carolina and South Carolina. Our success depends on the general economic conditions of our primary market areas, particularly given that a significant portion of our lending relates to real estate located in these regions. Adverse changes in the regional and general economic conditions could reduce our growth rate, impair our ability to collect payments on loans, increase loan delinquencies, increase problem assets and foreclosures, increase claims and lawsuits, increase devaluations recognized within our OREO portfolio, decrease the demand for our products and services and decrease the value of collateral for loans, especially real estate values, which could have a material adverse effect on our financial condition, results of operations and cash flows. The transition away from the London Interbank Offered Rate ("LIBOR") as a reference rate for financial instruments could negatively affect our income and expenses and the value of various financial instruments. LIBOR is used extensively in the United States and globally as a benchmark for various commercial and financial contracts, including adjustable rate mortgages, corporate debt, interest rate swaps and other derivatives. LIBOR is set based on interest rate information reported by certain banks, which may stop reporting such information after 2021. On July 27, 2017, the United Kingdom’s Financial Conduct Authority ("FCA") announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. On November 30, 2020, to facilitate an orderly LIBOR transition, the OCC, the FDIC, and the Federal Reserve Board jointly announced that entering into new contracts using LIBOR as a reference rate after December 31, 2021, would create a safety and soundness risk. On March 5, 2021, the FCA announced that all LIBOR settings will either cease to be provided by any administrator or no longer be representative immediately after December 31, 2021, in the case of one-week and two-month LIBOR, and immediately after June 30, 2023, in the case of the remaining LIBOR settings. In the United States, efforts to identify a set of alternative U.S. dollar reference interest rates are ongoing, and the Alternative Reference Rate Committee ("ARRC") has recommended the use of a Secured Overnight Funding Rate ("SOFR"). SOFR is different from LIBOR in that it is a backward-looking secured rate rather than a forward-looking unsecured rate. These differences could lead to a greater disconnect between our costs to raise funds for SOFR as compared to LIBOR. For cash products and loans, ARRC has also recommended Term SOFR, which is a forward-looking SOFR based on SOFR futures and may in part reduce differences between SOFR and LIBOR. There are operational issues which may create a delay in the transition to SOFR or other substitute indices, leading to uncertainty across the industry. These consequences cannot be entirely predicted and could have an adverse impact on the market value for or value of LIBOR-linked securities, loans, and other financial obligations or extensions of credit. Park has limited exposure to LIBOR, with total exposure as of December 31, 2021 of approximately $686.4 million. We do not believe the change to a benchmark like SOFR will have a material impact on our financial condition, results of operations or cash flows. Business Operations Risks We are exposed to operational risk. Similar to any large organization, we are exposed to many types of operational risk, including those discussed in more detail elsewhere in this Item, such as reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems. These risks are heightened in light of COVID-19. We may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control, which may include, for example, computer viruses, cyber-attacks, spikes in transaction volume and/or customer activity, electrical or telecommunications outages, or natural disasters. We could be adversely affected by operating systems disruptions if new or upgraded business management systems are defective, not installed properly or not properly integrated into existing operating systems. Although we have programs in place related to business continuity, disaster recovery and information security to maintain the confidentiality, integrity and availability of our operating systems, business applications and customer information, such disruptions may give rise to interruptions in service to customers, loss of data privacy, and loss or liability to us. Any failure or interruption in our operating or information systems, or any security or data breach, could cause reputational damage, jeopardize the confidentiality of customer information, result in a loss of customer business, subject us to -25- regulatory intervention or expose us to civil litigation and financial loss or liability, any of which could have a material adverse effect on us. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions, social media and other marketing activities, the implementation of environmental, social, and governance practices, and from actions taken by governmental regulators and community organizations in response to any of the foregoing. Negative public opinion could adversely affect our ability to attract and keep customers, could expose us to potential litigation or regulatory action, and could have a material adverse effect on the price of our Common Shares or result in heightened volatility. Given the volume of transactions we process, certain errors may be repeated or compounded before they are discovered and successfully rectified. Our necessary dependence upon automated systems to record and process our transaction volume may further increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect, which may give rise to disruption of service to customers and to financial loss or liability. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as we are) or that our (or our vendors’) consumer compliance, business continuity, and data security systems will prove to be inadequate. Our business could be adversely affected by third-party service providers, data breaches and cyber-attacks. We face the risk of operational disruption, failure or capacity constraints due to our dependency on third-party vendors for components of our business infrastructure. While we have selected these third-party vendors through our vendor management process, we do not control their operations. Further, the operations of our third-party vendors could fail or otherwise become delayed as a result of COVID-19 and any new variants thereof. As such, our business and operations could be adversely affected in the event these vendors are unable to perform their various responsibilities and we are unable to timely and cost-effectively identify acceptable substitute providers. Regulatory guidance adopted by federal bank regulatory agencies addressing how banks select, engage and manage their third-party relationships could affect the circumstances and conditions under which we work with third-party service providers and the costs of managing such relationships. Our assets at risk for cyber-attacks include financial assets and non-public information belonging to customers. We use several third-party vendors who have access to our assets via electronic media. Certain cybersecurity risks arise due to this access, including cyber espionage, blackmail, ransom, malware, and theft. We employ many preventive and detective controls to protect our assets, and we provide mandatory recurring information security training to all employees. To date, we have not experienced any material losses relating to cyber-attacks or other information security breaches, but there can be no assurance that we will not suffer such attacks or attempted breaches, or incur resulting losses in the future. Our risk and exposure to these matters remains heightened due to, among other factors, the evolving nature of these threats, our plans to continue to implement or expand Internet and mobile banking to meet customer demand, the continuing impact of COVID-19 and the governmental and other responses thereto and the current economic and political environment. As cybersecurity and other data security threats continue to evolve, we may be required to expend significant additional resources to continue to modify and enhance our protective measures or to investigate and remediate any security vulnerabilities. Failures or material breaches in security of our systems, or those of third-party service providers, may have a material adverse effect on our results of operations and financial condition and the price of our Common Shares. We collect, process and store sensitive consumer data by utilizing computer systems and telecommunications networks operated by both us and third-party service providers. Our dependence upon automated systems to record and process our transactions poses the risk that technical system flaws, employee errors, tampering or manipulation of those systems, or attacks by third parties will result in losses and may be difficult to detect. We have security and backup and recovery systems in place, as well as a business continuity plan, to ensure the computer systems will not become inoperable, to the extent possible. We also routinely review documentation of such controls and backups related to third-party service providers. Our inability to use or access these information systems at critical points in time could unfavorably impact the timeliness and efficiency of our business operations. In recent years, several banks have experienced denial of service attacks in which individuals or organizations flood the bank's website with extraordinarily high volumes of traffic, with the goal and effect of disrupting the ability of the bank to process transactions. Other businesses have been victims of ransomware attacks in which the business becomes unable to access its own information and is presented with a demand to pay a ransom in order to once again have access to its information. We could be adversely affected if one of our employees or a third-party service provider causes a significant operational break-down or failure, either as a result of human error or where the individual purposefully sabotages or -26- fraudulently manipulates our operations or systems. We may not be able to prevent employee or third-party errors or misconduct, and the precautions we take to detect this type of activity might prove ineffective. We are further exposed to the risk that the third-party service providers may be unable to fulfill their contractual obligations (or will be subject to the same risks that we are). These disruptions may interfere with service to our customers, cause additional regulatory scrutiny and result in a financial loss or liability. We are also at risk of the impact of natural disasters, terrorism and international hostilities on our systems or for the effects of outages or other failures involving power or communications systems operated by others. In addition, there have been instances where financial institutions have been victims of fraudulent activity in which criminals pose as customers to initiate wire and automated clearinghouse transactions out of customer accounts. Although we have policies and procedures in place to verify the authenticity of our customers, we cannot assure that such policies and procedures will prevent all fraudulent transfers. We have implemented security controls to prevent unauthorized access to our computer systems, and we require that our third-party service providers maintain similar controls. However, Park's management cannot be certain that these measures will be successful. A security breach of the computer systems and loss of confidential information, such as customer account numbers and related information, could result in a loss of customers’ confidence and, thus, loss of business. We could also lose revenue if competitors gain access to confidential information about our business operations and use it to compete with us. While we maintain specific "cyber" insurance coverage, which would apply in the event of various breach scenarios, the amount of coverage may not be adequate in any particular case. Furthermore, because cyber threat scenarios are inherently difficult to predict and can take many forms, some breaches may not be covered under our cyber insurance coverage. Further, we may be affected by data breaches at retailers and other third parties who participate in data interchanges with us and our customers that involve the theft of customer credit and debit card data, which may include the theft of our debit card PIN numbers and commercial card information used to make purchases at such retailers and other third parties. Such data breaches could result in us incurring significant expenses to reissue debit cards and cover losses, which could result in a material adverse effect on our results of operations. All of the types of cyber incidents discussed above could result in damage to our reputation, loss of customer business, increased costs of incentives to customers or business partners in order to maintain their relationships, litigation, increased regulatory scrutiny and potential enforcement actions, repairs of system damage, increased investments in cybersecurity (such as obtaining additional technology, making organizational changes, deploying additional personnel, training personnel and engaging consultants), increased insurance premiums, and loss of investor confidence and a reduction in the price of our Common Shares, all of which could result in financial loss and material adverse effects on our results of operations and financial condition. We extend credit to a variety of customers based on certain internal standards and the judgment of our loan officers. Our credit standards and on-going process of credit assessment might not protect us from significant credit losses. We take credit risk by virtue of making loans and leases, extending loan commitments and letters of credit and, to a lesser degree, purchasing municipal bonds and purchasing collateralized loan obligations. Our exposure to credit risk is managed through the use of consistent underwriting standards that emphasize “in-market” lending while avoiding highly leveraged transactions as well as excessive industry and other concentrations. Our loans to non-bank consumer finance companies are made nationally and present different risks than our "in-market" lending due to the variability of cash flows that support the asset-based loans. Our credit administration function employs risk management techniques to ensure that loans and leases adhere to corporate policy and problem loans and leases are promptly identified. While these procedures are designed to provide us with the information needed to implement policy adjustments where necessary, and to take proactive corrective actions, there can be no assurance that such measures will be effective in avoiding undue credit risk. Our business and financial results are subject to risks associated with the creditworthiness of our customers and counterparties. Credit risk is inherent in the financial services business and results from, among other factors, extending credit to customers, purchasing non-governmental securities, and entering into certain guarantee contracts. Credit risk is one of the most significant risks to our business, particularly given the high percentage of our assets represented directly and indirectly by loans and the importance of lending to our overall business. As discussed in the immediately preceding risk factor, many factors -27- impact credit risk, and we manage this by periodically assessing and monitoring the creditworthiness of our customers and by diversifying our loan portfolio. A borrower's ability to repay a loan can be adversely affected by individual factors, such as business performance, job losses or health issues. A weak or deteriorating economy and changes in the United States or global markets and changes in interest rates also could adversely impact the ability of our borrowers to repay outstanding loans. Any decrease in our borrowers' ability to repay loans would result in higher levels of nonperforming loans, net charge-offs and provision for credit losses. Financial services institutions are interrelated as a result of trading, clearing and other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. Despite maintaining a diversified portfolio, our operations may result in concentrated credit exposure to a particular person, entity, industry or counterparty. Events adversely affecting specific customers, industries, or markets, a decrease in the credit quality of a customer base, or an adverse change in the risk profile of a market, industry, or group of customers could adversely affect our results of operations. Our credit risk may be exacerbated when collateral held by us to secure obligations to us cannot be realized upon or is liquidated at prices that are not sufficient to recover the full amount of the loan. Up until 2020, Park's provision for credit losses had declined since the end of the most recent recession, which ended in June 2009, primarily due to improvement in general economic conditions, as well as actions taken by us to better manage our loan portfolio. During 2020, Park experienced elevated provision for credit losses primarily due to the impact of COVID-19. If we were to experience higher levels of provision for credit losses, it could result in lower levels of net income. Our expansion into Kentucky, South Carolina and North Carolina may also exposes Park to additional geographic risk. Our allowance for credit losses may prove to be insufficient to absorb the expected, lifetime losses in our loan portfolio. We maintain an allowance for credit losses that we believe is a reasonable estimate of the expected losses within the CECL model, based on management’s quarterly analysis of our loan portfolio. The determination of the allowance for credit losses requires management to make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of real estate and other assets serving as collateral for the repayment of loans. Additional information regarding our allowance for credit losses methodology and the sensitivity of the estimates can be found in the discussion of “CRITICAL ACCOUNTING POLICIES” included in “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” of this Annual Report on Form 10-K. Our estimation of future credit losses is susceptible to changes in economic, operating and other conditions, including changes in regulations and interest rates, which may be beyond our control, and the losses may exceed current estimates. We cannot be assured of the amount of timing of losses, nor whether the allowance for credit losses will be adequate in the future. If our assumptions prove to be incorrect, our allowance for credit losses may not be sufficient to cover the expected losses from our loan portfolio, resulting in the need for additions to the allowance for credit losses which could have a material adverse impact on our financial condition and results of operations. In addition, bank regulators periodically review our allowance for credit losses as part of their examination process and may require management to increase the allowance or recognize further loan charge-offs based on judgments different than those of management. In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13 “Financial Instruments – Credit Losses,” which replaced the incurred loss model with the CECL model, an expected loss model. The new accounting guidance was to have been adopted by Park as of January 1, 2020. However, Section 4014 of the CARES Act provided financial institutions with optional temporary relief from having to comply with the CECL methodology which would have expired on December 31, 2020, and Section 540 of the Consolidated Appropriations Act, 2021, further extended the relief period to the earlier of the first day of the fiscal year that begins after the date on which the national emergency concerning COVID-19 terminates or January 1, 2022. Park elected to delay the implementation of CECL following the approval of the CARES Act and Consolidated Appropriations Act, 2021, and adopted CECL as of January 1, 2021. -28- The accounting guidance under the CECL model requires banks to record, at the time of origination, credit losses expected throughout the life of financial assets measured at amortized cost, including loan receivables, HTM debt securities and reinsurance receivables, and 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. Under the CECL model, we are required to use historical information, current conditions and reasonable and supportable forecasts to estimate the expected credit losses. If the methodologies and assumptions we use in the CECL model prove to be incorrect, or inadequate, the allowance for credit losses may not be sufficient, resulting in the need for additional provisions for credit losses to be recorded, which could have a material adverse impact on our financial condition and results of operations. The adoption of the CECL model by Park resulted in a net decrease to retained earnings of $8.0 million as of January 1, 2021 for the cumulative effect of adopting ASC 326 and a net recovery of credit losses of $11.9 million for the year ended December 31, 2021. As a result of the implementation of the CECL model, the time horizon over which we are required to estimate future credit losses expanded, which could result in increased volatility in future provisions for credit losses. We may also experience a higher or more volatile provision for credit losses due to higher levels of nonperforming loans and net charge-offs if commercial and consumer customers are unable to make scheduled loan payments. We depend upon the accuracy and completeness of information about customers and counterparties. In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information provided to us by customers and counterparties, including financial statements and other financial information. We may also rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to a business, we may assume that the customer’s audited financial statements conform with U.S. GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. We may also rely on the audit report covering those financial statements. Our financial condition, results of operations and cash flows could be negatively impacted to the extent that we rely on financial statements that do not comply with U.S. GAAP or on financial statements and other financial information that are materially misleading. We may be required to repurchase loans we have sold or to indemnify loan purchasers under the terms of the sale agreements, which could adversely affect our liquidity, results of operations and financial condition. When we sell a mortgage loan, we may agree to repurchase or substitute a mortgage loan if we are later found to have breached any representation or warranty we made about the loan or if the borrower is later found to have committed fraud in connection with the origination of the loan. While we have underwriting policies and procedures designed to avoid breaches of representations and warranties we have made and borrower fraud, there can be no assurance that no breach or fraud will ever occur. Required repurchases, substitutions or indemnifications could have an adverse effect on our liquidity, results of operations and financial condition. We are subject to environmental liability risk associated with lending activities. A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws and evolving regulation may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws and regulations or more stringent interpretations or enforcement policies with respect to existing laws or regulations may increase our exposure to environmental liability. Environmental reviews of real property before initiating foreclosure actions may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our business, financial condition and results of operations. Noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations could cause us to experience a material financial loss. The Bank Secrecy Act of 1970 (the “BSA”) and the Patriot Act contain anti-money laundering and financial transparency provisions intended to detect and prevent the use of the U.S. financial system for money laundering and terrorist financing activities. The BSA, as amended by the Patriot Act and the Anti-Money Laundering Act of 2020 (the “AMLA”), requires depository institutions and their holding companies to undertake activities including maintaining an anti-money laundering program, verifying the identity of clients, monitoring for and reporting suspicious transactions, reporting on cash -29- transactions exceeding specified thresholds, and responding to requests for information by regulatory authorities and law enforcement agencies. Financial Crimes Enforcement Network (also known as FinCEN), a unit of the Treasury Department that administers the BSA, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the federal bank regulatory agencies, as well as the U.S. Department of Justice, the Drug Enforcement Administration, and the Internal Revenue Service. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal processes for BSA compliance; and expands enforcement-related and investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower incentives and protections. There is also increased scrutiny of compliance with the rules enforced by OFAC. If our policies, procedures and systems are deemed deficient, or if the policies, procedures and systems of the financial institutions that we have already acquired or may acquire in the future are deficient, we may be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain planned business activities, including acquisition plans, which could negatively impact our business, financial condition and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. We operate in a highly competitive environment, in terms of the products and services we offer and the geographic markets in which we conduct business, as well as in our labor markets where we compete for talented employees. Competition could adversely impact our customer acquisition, growth and retention, as well as our credit spreads and product pricing, causing us to lose market share and deposits and revenues. We are subject to intense competition from various financial institutions as well as from non-bank entities that engage in many similar activities without being subject to bank regulatory supervision and restrictions. This competition is described in " ITEM 1. BUSINESS" of this Annual Report on Form 10-K under the caption "Competition." Competition in our industry could intensify as a result of the increasing consolidation of financial services companies, in connection with current market conditions, or otherwise. Consumers may also move money out of bank deposits in favor of other investments, including digital or cryptocurrency. Customers have increasingly used bill payment services that do not utilize banks, and these trends may result in losses of deposits and fee income. The principal bases for competition are pricing (including the interest rates charged on loans or paid on interest bearing deposits), product structure, the range of products and services offered, and the quality of customer service (including convenience and responsiveness to customer needs and concerns). Digital or cryptocurrencies, blockchain, and other “fintech” technologies are designed to enhance transactional security and have the potential to disrupt the financial industry, change the way banks do business, and reduce the need for banks as financial deposit-keepers and intermediaries. The ability to access and use technology is an increasingly important competitive factor in the financial services industry, and it is a critically important component to customer satisfaction as it affects our ability to deliver the right products and services. Another increasingly competitive factor in the financial services industry is the competition to attract and retain talented associates across many of our business and support areas. This competition leads to increased expenses in many business areas and can also cause us to not pursue certain business opportunities. A failure to adequately address the competitive pressures we face could make it harder for us to attract and retain customers across our businesses. On the other hand, meeting these competitive pressures could require us to incur significant additional expense, to reevaluate the number of branches through which we serve our customers, or to accept risk beyond what we would otherwise view as desirable under the circumstances. In addition, in our interest rate sensitive businesses, pressures to increase rates on deposits or decrease rates on loans could reduce our net interest margin with a resulting negative impact on our net interest income. We may not be able to adapt to technological change. The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers while reducing costs. Our future success depends, in part, upon our ability to address customer needs by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. This could include the development, implementation, and adaptation of digital or cryptocurrency, blockchain, and other “fintech” technology. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully -30- keep pace with technological changes affecting the financial services industry could negatively affect our growth, revenue and net income. We may elect or be compelled to seek additional capital in the future, but that capital may not be available when it is needed. We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. Federal bank regulatory agencies have adopted extensive changes to their capital requirements, including raising required amounts and eliminating the inclusion of certain instruments from the calculation of capital. If we experience significant loan losses, additional capital may need to be infused. In addition, we may elect to raise additional capital to support our business or to finance acquisitions, if any, or we may otherwise elect or be required to raise additional capital. Our ability to raise additional capital, if needed, will depend on our financial performance, conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control. Accordingly, there can be no assurance that we will be able to raise additional capital if needed or that the terms of available capital will be acceptable to us. If we cannot raise additional capital when needed, it may have a material adverse effect on our financial condition, results of operations and prospects. In addition, prior debt offerings could potentially have important consequences to us and our debt and equity investors, including: • requiring a substantial portion of our cash flow from operations to make interest payments; • making it more difficult to satisfy debt service and other obligations; • increasing the risk of a future credit ratings downgrade of our debt, which could increase future debt costs and limit the future availability of debt financing; • increasing our vulnerability to general adverse economic and industry conditions; • reducing the cash flow available to fund capital expenditures and other corporate purposes and to grow our business; • limiting our flexibility in planning for, or reacting to, changes in our business and the industry; • placing us at a competitive disadvantage relative to our competitors that may not be as highly leveraged with debt; and • limiting our ability to borrow additional funds as needed or take advantage of business opportunities as they arise, pay cash dividends or repurchase securities. We continue to evaluate these risks on an ongoing basis. Our ability to pay dividends on our Common Shares is limited. Although we have paid a dividend on our Common Shares every quarter since becoming a public company, our Board of Directors reviews the dividend on a quarterly basis and establishes the dividend rate based on our financial condition, results of operations, capital and other regulatory requirements, and other factors that our Board of Directors deems relevant. As a financial holding company, we are a legal entity separate and distinct from our subsidiaries and affiliates. Our principal source of funds to pay dividends on our Common Shares and service our debt is dividends from our subsidiaries. In the event our subsidiaries become unable to pay dividends to us, we may not be able to service our debt, pay our other obligations or pay dividends on our Common Shares. Accordingly, our inability to receive dividends from our subsidiaries could also have a material adverse effect on our business, financial condition and results of operations. Various federal and state statutory provisions and regulations limit the amount of dividends that Park National Bank and our other subsidiaries may pay to us without regulatory approval. In addition, the Federal Reserve Board and the OCC have issued policy statements that provide that insured banks as well as financial holding companies and other bank holding companies should generally only pay dividends out of current operating earnings. Thus, the ability of Park National Bank to pay dividends in the future is currently influenced, and could be further influenced, by bank regulatory policies and capital guidelines and may restrict our ability to declare and pay dividends to our shareholders. Payment of dividends could also be subject to regulatory limitations if Park National Bank were to become “undercapitalized” for purposes of the applicable “prompt corrective action” regulations. Throughout 2021 and 2022 to date, Park National Bank has been in compliance with all regulatory capital requirements and had sufficient capital under the “prompt corrective action” regulations to be deemed “well-capitalized.” There are also restrictions on the ability of Park National Bank to pay dividends if it does not hold the applicable capital conservation buffer. If any of our subsidiaries becomes insolvent, the direct creditors of that subsidiary will have a prior claim on that subsidiary’s assets. Our rights and the rights of our creditors will be subject to that prior claim, unless we are also a direct creditor of that subsidiary. -31- Derivative transactions may expose us to unexpected risk and potential losses. We are party to a number of derivative transactions. Many of these derivative instruments are individually negotiated and non-standardized, which can make exiting, transferring or settling the position difficult. We carry borrowings which contain embedded derivatives. These borrowing arrangements require that we deliver underlying securities to the counterparty as collateral. We are dependent on the creditworthiness of the counterparties and are therefore susceptible to credit and operational risk in these situations. Derivative instruments and other transactions entered into with third parties are not always confirmed by the counterparties on a timely basis. While the transaction remains unconfirmed, we are subject to heightened credit and operational risk and, in the event of a default, we may find it more difficult to enforce the underlying derivative instrument. In addition, as new and more complex derivative products are created, covering a wider array of underlying credit and other instruments, disputes about the terms of the underlying derivative instruments could arise, which could impair our ability to effectively manage our risk exposures from these products and subject us to increased costs. Any regulatory effort to create an exchange or trading platform for credit derivatives and other over-the-counter derivative instruments, or a market shift toward standardized derivative instruments, could reduce the risk associated with such transactions, but under certain circumstances could also limit our ability to develop derivative instruments that best suit our needs and those of our clients and adversely affect our profitability. Legislative, Regulatory and Accounting Change Risks Legislative or regulatory changes or actions could adversely impact us or the businesses in which we are engaged. The financial services industry is extensively regulated. We are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of our operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors, borrowers, the DIF and the banking system as a whole, and not to benefit our shareholders. Regulations affecting banks and financial services businesses are undergoing continuous change, especially in light of COVID-19 and the stimulus programs implemented in connection therewith, and management cannot predict the effect of these changes. While such changes are generally intended to lessen the regulatory burden on financial institutions, the impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact us or our ability to increase the value of our business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of a financial institution, the classification of assets held by a financial institution, the adequacy of a financial institution’s allowance for credit losses and the ability to complete acquisitions. Additionally, actions by regulatory agencies against us could cause us to devote significant time and resources to defending our business and may lead to penalties that materially affect us and our shareholders. Even the reduction of regulatory restrictions could have an adverse effect on us and our shareholders if such lessening of restrictions increases competition within our industry or our market area. In light of conditions in the global financial markets and the global economy that occurred in the last decade, regulators have increased their focus on the regulation of the financial services industry. Most recently, the U.S. Congress and the federal agencies regulating the financial services industry have acted on an unprecedented scale in responding to the stresses experienced in the global financial markets. Some of the laws enacted by the U.S. Congress and regulations promulgated by federal bank regulatory agencies subject us, and other financial institutions to which such laws and regulations apply, to additional restrictions, oversight and costs that may have an impact on our business, results of operations or the trading price of our Common Shares. In addition to laws, regulations and supervisory and enforcement actions directed at the operations of financial institutions, proposals to reform the housing finance market consider significant changes to Fannie Mae and Freddie Mac, which could negatively affect our sales of loans. Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks. Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to their environmental, social and governance ("ESG") practices and disclosure. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions and human rights. Increased ESG-related compliance costs for us as well as among our third-party suppliers, vendors and various other parties within our supply chain could result in increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could -32- negatively impact our reputation, ability to do business with certain partners, access to capital, and the price of our Common Shares. Deposit insurance premiums assessed on Park National Bank may increase and have a negative effect on Park’s results of operations. We have limited ability to control the amount of premiums we are required to pay for FDIC insurance. The DIF is funded by fees assessed on insured depository institutions. If the costs of future bank failures increase, deposit insurance premiums may also increase. The FDIC has adopted rules revising its assessments in a manner benefiting banks with assets totaling less than $10 billion. There can be no assurance, however, that assessments will not be changed in the future. Federal deposit insurance is described in more detail in the section captioned "Supervision and Regulation of Park and its Subsidiaries – Federal Deposit Insurance" in "ITEM 1. BUSINESS" of this Annual Report on Form 10-K. Changes in accounting standards, policies, estimates or procedures could impact our reported financial condition or results of operations. The entities responsible for setting accounting standards, including the FASB, the SEC and other regulatory bodies, periodically change the financial accounting and reporting guidance that governs the preparation of our consolidated financial statements. The pace of change continues to accelerate and changes in accounting standards can be hard to predict and could materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively, resulting in the restatement of prior period financial statements. The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make significant estimates that affect the financial statements. Due to the inherent nature of these estimates, actual results may vary materially from management’s estimates. Additional information regarding Park’s critical accounting policies and the sensitivity of estimates can be found in our discussion of “CRITICAL ACCOUNTING POLICIES” in "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Annual Report on Form 10-K. Our accounting estimates and risk management processes rely on analytical and forecasting models. The processes we use to estimate our credit losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depends upon the use of analytical and, in some cases, forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models we use for interest rate risk and asset-liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the model we use for determining our expected credit losses is inadequate, the allowance for credit losses may not be sufficient to support charge-offs. If the models we use to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon sale or settlement of such financial instruments. Any such failure in our analytical or forecasting models could have a material adverse effect on our business, financial condition and results of operations. Strategic Risks Future expansion may adversely affect our financial condition and results of operations as well as dilute the interests of our shareholders and negatively affect the price of our Common Shares. We may acquire other financial institutions, or branches or assets of other financial institutions, in the future. We may also open new branches and enter into new lines of business or offer new products or services. Any such expansion of our business will involve a number of expenses and risks, which may include: • the time and expense associated with identifying and evaluating potential expansions; • the potential inaccuracy of estimates and judgments used to evaluate credit, operations, management and market risk with respect to target financial institutions; • potential exposure to unknown or contingent liabilities of the target financial institution; • exposure to potential asset quality issues of the target financial institution; -33- • the time and costs of evaluating new markets, hiring local management and opening new offices, and the delay between commencing these activities and the generation of profits from the expansion; • our financing of the expansion; • the diversion of management’s attention to the negotiation of a transaction and the integration of the operations and personnel of the combining businesses; • risks associated with entry into unfamiliar markets; • the introduction of new products and services into our existing business; • the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations; • the risk of loss of key employees and customers; • the risk associated with differing company cultures; and • difficulty in receiving appropriate regulatory approval for any proposed transaction. We may incur substantial costs to expand, and such expansion may not result in the levels of profits we expect. Integration efforts for any future acquisitions may not be successful. We may issue equity securities in connection with acquisitions, which could dilute the economic and voting interests of our existing shareholders. Any merger or acquisition opportunity that we decide to pursue will ultimately be subject to regulatory approval or other closing conditions. We may expend substantial time and resources pursing potential acquisitions which may not be consummated because regulatory approval or other closing conditions are not satisfied. Changes in retail distribution strategies and consumer behavior may adversely impact our investments in our financial service office premises and equipment and other assets and may lead to increased expenditures to change our retail distribution channel. We have significant investments in financial service office premises and equipment for our financial service office network, including 96 financial service offices as well as our retail work force and other financial service office banking assets. Advances in technology such as e-commerce, telephone, internet and mobile banking, and in-branch self-service technologies including automatic teller machines and other equipment, as well as changing customer preferences for these other methods of accessing our products and services, could affect the value of our financial service office network or other retail distribution assets and may cause us to change our retail distribution strategy, close and/or sell certain financial service offices and restructure or reduce our remaining financial service offices and work force. Further advances in technology and/or changes in customer preferences including those related to social media, digital or cryptocurrency, blockchain, and other “fintech” technologies could result in additional changes in our retail distribution strategy and/or financial service office network. These actions could lead to losses on these assets or could adversely impact the carrying value of other long-lived assets and may lead to increased expenditures to renovate and reconfigure remaining financial service offices or to otherwise reform our retail distribution channel. General Risk Factors We may be a defendant from time to time in a variety of litigation and other actions, which could have a material adverse effect on our financial condition, results of operations and cash flows. We may be involved from time to time in a variety of litigation arising out of our business. The risk of litigation increases in times of increased troubled loan collection activity. Our insurance may not cover all claims that may be asserted against us, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation. Should the ultimate judgments or settlements in any litigation exceed our insurance coverage, they could have a material adverse effect on our financial condition, results of operations and cash flows. In addition, we may not be able to obtain appropriate types or levels of insurance in the future or obtain adequate replacement policies with acceptable terms. A default by another larger financial institution could adversely affect financial markets generally. Many financial institutions and their related operations are closely intertwined, and the soundness of such financial institutions may, to some degree, be interdependent. As a result, concerns about, or a default or threatened default by, one financial institution could lead to significant market-wide liquidity and credit problems and/or losses or defaults by other financial institutions. This “systemic risk” may adversely affect our business. We are at risk of increased losses from fraud. Criminals are committing fraud at an increasing rate and are using more sophisticated techniques. In some cases, these individuals are part of larger criminal rings, which allow them to be more effective. Such fraudulent activity has taken many -34- forms, ranging from wire fraud, debit card fraud, check fraud, mechanical devices attached to ATM machines, social engineering and phishing attacks to obtain personal information, or impersonation of clients through the use of falsified or stolen credentials. Additionally, an individual or business entity may properly identify itself, yet seek to establish a business relationship for the purpose of perpetrating fraud. An emerging type of fraud even involves the creation of synthetic identification in which fraudsters "create" individuals for the purpose of perpetrating fraud. In addition to fraud committed directly against us, we may suffer losses as a result of fraudulent activity committed against third parties. Increased deployment of technologies, such as chip card technology, defray and reduce certain aspects of fraud; however, criminals are turning to other sources to steal personally identifiable information, such as unaffiliated healthcare providers and government entities, in order to impersonate consumers and thereby commit fraud. Changes in tax laws could adversely affect our performance. We are subject to extensive federal, state and local taxes, including income, excise, sales/use, payroll, franchise, withholding and ad valorem taxes. Changes to our taxes could have a material adverse effect on our results of operations, fair values of net deferred tax assets and obligations of states and political subdivisions held in our investment securities portfolio. In addition, our customers are subject to a wide variety of federal, state and local taxes. Changes in taxes paid by our customers may adversely affect their ability to purchase homes or consumer products, which could adversely affect their demand for our loans and deposit products. In addition, such negative effects on our customers could result in defaults on the loans we have made and decrease the value of mortgage-backed securities in which we have invested. Adverse changes in the financial markets may adversely impact our results of operations. While we generally invest in securities issued by U.S. government agencies and sponsored entities and domestic state and local governments with limited credit risk, certain investment securities we hold possess higher credit risk since they represent beneficial interests in structured investments collateralized by residential mortgages, debt obligations and other similar asset-backed assets. Even securities issued by U.S. governmental agencies and sponsored entities may entail risk depending on political and economic changes. Regardless of the level of credit risk, all investment securities are subject to changes in market value due to changing interest rates, implied credit spreads and credit ratings. ITEM 1B. UNRESOLVED STAFF COMMENTS. No response required. ITEM 2. PROPERTIES. Park’s principal executive offices are located at 50 North Third Street, Newark, Ohio 43055. Park National Bank As of the date of this Annual Report on Form 10-K, Park National Bank and its subsidiary Scope Leasing, Inc. had a total of 96 financial service offices in Ohio, Kentucky, North Carolina and South Carolina. Park National Bank has three financial service offices (including its main office) and three operations centers in Newark in Licking County. We operate a total of 87 financial service offices in Ohio, one financial service office in Kentucky, three financial service offices in North Carolina and five financial service offices in South Carolina. Of the financial service offices described above, 16 are leased and the remainder are owned. Park National Bank also operates 25 off-site automated teller machines. Scope Leasing, Inc. has an office located in Columbus in Franklin County, Ohio, which it leases. Guardian Finance As of the date of this Annual Report on Form 10-K, Guardian Finance had one administrative office in Newark in Licking County, which it leases from PNB. SE Property Holdings, LLC SEPH has one administrative office located in Newark in Licking County, Ohio, which it leases from PNB. -35- ITEM 3. LEGAL PROCEEDINGS. There are no pending legal proceedings which Park or any of its subsidiaries is a party to or which any of their property is subject to, except for routine legal proceedings to which Park's subsidiaries are parties incidental to their respective businesses. Park considers none of those proceedings to be material. ITEM 4. MINE SAFETY DISCLOSURES. Not applicable. -36- PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Park's Common Shares (symbol: PRK) are traded on NYSE American. At December 31, 2021, Park had 3,420 shareholders of record. Park currently intends to continue to pay quarterly cash dividends comparable to the regular quarterly cash dividends paid during the year ended December 31, 2021, subject to the regulatory restrictions described in "Note 23 - Dividend Restrictions" of the Notes to Consolidated Financial Statements included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA," as well as in the section captioned "Supervision and Regulation of Park and its Subsidiaries – Limits on Dividends and Other Payments" in "ITEM 1. BUSINESS" of this Annual Report on Form 10-K. Performance Graph The following graph compares the cumulative total shareholder return performance for Park's Common Shares with the NYSE Composite Index, the KBW NASDAQ Bank Index, and the S&P U.S. SmallCap Banks Index for the five-year period from December 31, 2016 to December 31, 2021. The NYSE Composite Index is a market capitalization-weighted index of the stocks listed on NYSE. The KBW NASDAQ Bank Index is comprised of 24 banking stocks representing the large U.S. national money centers, regional banks and thrift institutions. The S&P U.S. SmallCap Banks Index is a market capitalization-weighted index comprised of common stocks of U.S. financial services companies that are principally engaged in the business of providing services and products, including banking, investment services, insurance and real estate finance services. Prior to 2021, Park utilized the NYSE Composite Index, SNL Bank and Thrift Index and SNL U.S. Bank NYSE Index in comparing market performance. The SNL Bank and Thrift Index and the SNL U.S. Bank NYSE Index were retired as of August 7, 2021 and Park selected the KBW NASDAQ Bank Index and the S&P U.S. SmallCap Banks Index as replacement indices. The performance of the SNL Bank and Thrift Index and SNL U.S. Bank NYSE Index are included in the following graph for the 4-year period from December 31, 2016 to December 31, 2020 for comparative purposes. The NYSE Financial Stocks Index includes the stocks of bank holding companies, thrift holding companies, finance companies and securities broker-dealers. Park believes that the KBW NASDAQ Bank Index and the S&P U.S. SmallCap Banks Index are more appropriate industry indices for Park to use for the five-year total shareholder return performance comparison given the nature of the services provided by the financial services companies included in each. -37- Total Return Performance Period Ended Index 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21 Park National Corporation 100.00 90.13 76.55 96.39 103.72 140.60 NYSE Composite Index 100.00 118.73 108.10 135.68 145.16 175.17 KBW NASDAQ Bank Index 100.00 118.59 97.58 132.84 119.14 164.80 S&P U.S. SmallCap Banks Index 100.00 104.33 87.06 109.22 99.19 138.09 SNL Bank and Thrift Index 100.00 117.59 97.68 132.02 114.55 N.A. SNL U.S. Bank NYSE Index 100.00 121.05 100.33 138.19 118.05 N.A. The annual compound total return on Park’s Common Shares for the past five years was a positive 7.1%. By comparison, the annual compound total returns for the past five years on the NYSE Composite Index, the KBW NASDAQ Bank Index, and the S&P U.S. SmallCap Banks Index were a positive 11.9%, a positive 10.5% and a positive 6.7%, respectively. Issuer Purchases of Equity Securities The following table provides information regarding 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 Exchange Act during the fiscal quarter ended December 31, 2021, 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 -38- 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) October 1 through October 31, 2021 — — — 1,195,088 November 1 through November 30, 2021 — — — 1,195,088 December 1 through December 31, 2021 — — — 1,195,088 Total — — — 1,195,088 (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 the 2017 Non-Employee Directors LTIP, both of which became effective on April 24, 2017; Park's publicly announced 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. At the 2017 Annual Meeting of Shareholders held on April 24, 2017, Park's shareholders approved the 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP. The Common Shares to be issued and delivered under the 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP may consist of either Common Shares currently held or Common Shares subsequently acquired by Park as treasury shares. No newly-issued Common Shares will be delivered under the 2017 Employees LTIP or the 2017 Non-Employee Directors LTIP. On April 24, 2017, Park's Board of Directors authorized the purchase, from time to time, of up to 750,000 Park Common Shares and 150,000 Park 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, Park announced that on that same day, the Park Board of Directors authorized Park to purchase, from time to time, up to an aggregate of 500,000 Park Common Shares. On January 28, 2019, Park announced that on that same day, 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 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 the Ohio General Corporation Law, applicable federal and state securities laws, the rules applicable to issuers having securities listed on NYSE American, regulations promulgated by the Federal Reserve Board and all applicable laws and regulations, each as in effect at the time of each such purchase. 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, any contractual obligations of Park and Park's subsidiaries 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 6. [RESERVED] -39- ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FORWARD-LOOKING STATEMENTS Management's discussion and analysis addresses the financial condition and results of operations for Park National Corporation and our subsidiaries (unless the context otherwise requires, collectively, "Park" or the "Corporation"). This discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Management’s discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance. The forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation: • the ever-changing effects of the novel coronavirus (COVID-19) pandemic - - the duration, extent and severity of which are impossible to predict, including the possibility of further resurgence in the spread of COVID-19 or variants thereof - - on economies (local, national and international), supply chains and markets, on the labor market, including the potential for a sustained reduction in labor force participation, and on our customers, counterparties, employees and third-party service providers, as well as the effects of various responses of governmental and nongovernmental authorities to the COVID-19 pandemic, including public health actions directed toward the containment of the COVID-19 pandemic (such as quarantines, shut downs and other restrictions on travel and commercial, social or other activities), the availability, effectiveness and acceptance of vaccines, and the implementation of fiscal stimulus packages; • the impact of future governmental and regulatory actions upon our participation in and execution of government programs related to the COVID-19 pandemic; • Park's ability to execute our business plan successfully and within the expected timeframe as well as our ability to manage strategic initiatives in light of the impact of the COVID-19 pandemic and the various responses to the COVID-19 pandemic; • 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 weaker recovery than anticipated, in addition to the continuing impact of the COVID-19 pandemic on our customers’ operations and financial condition, either of which may result 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; • factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our commercial borrowers and the success of construction projects that we finance, including any loans acquired in acquisition transactions; • the effect of monetary and other fiscal policies (including the impact of money supply, interest rate policies and policies impacting inflation of the Federal Reserve Board, the U.S. Treasury and other governmental agencies) as well as disruption in the liquidity and functioning of U.S. financial markets, as a result of the COVID-19 pandemic and government policies implemented in response thereto, may adversely impact prepayment penalty income, mortgage banking income, income from fiduciary activities, the value of securities, deposits and other financial instruments, in addition to the loan demand and the performance of our loan portfolio, and the interest rate sensitivity of our consolidated balance sheet as well as reduce interest margins; • changes in the federal, state, or local tax laws 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 and otherwise negatively impact our financial performance; • the impact of the changes in federal, state and local governmental policy, including the regulatory landscape, capital markets, elevated government debt, potential changes in tax legislation that may increase tax rates, infrastructure spending and social programs; • changes in laws or requirements imposed by Park's regulators impacting Park's capital actions, including dividend payments and stock repurchases; • changes in consumer spending, borrowing and saving habits, whether due to changes in retail distribution strategies, consumer preferences and behavior, changes in business and economic conditions (including as a result of the COVID-19 pandemic and reactions thereto), legislative and regulatory initiatives (including those undertaken in response to the COVID-19 pandemic), or other factors may be different than anticipated; • changes in unemployment levels in the states in which Park and our subsidiaries do business may be different than anticipated due to the continuing impact of the COVID-19 pandemic; -40- • changes in customers', suppliers', and other counterparties' performance and creditworthiness, and Park's expectations regarding future loan losses and our allowance for credit losses, may be different than anticipated due to the continuing impact of and the various responses to the COVID-19 pandemic; • Park may have more credit risk and higher credit losses to the extent there are loan concentrations by location or industry of borrowers or collateral; • the volatility from quarter to quarter of mortgage banking income, whether due to interest rates, demand, the fair value of mortgage loans, or other factors; • the adequacy of our internal controls and risk management program in the event of changes in the market, economic, operational (including those which may result from more of our associates working remotely), asset/liability repricing, legal, compliance, strategic, cybersecurity, liquidity, credit and interest rate risks associated with Park's business; • competitive pressures among financial services organizations could increase significantly, including product and pricing pressures (which could in turn impact our credit spreads), changes to third-party relationships and revenues, changes in the manner of providing services, customer acquisition and retention pressures, and Park's ability to attract, develop and retain qualified banking professionals; • 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, FDIC insurance premium levels, pensions, bankruptcy, consumer protection, rent regulation and housing, financial accounting and reporting, environmental protection, insurance, bank products and services, bank and bank holding company capital and liquidity standards, fiduciary standards, securities and other aspects of the financial services industry, specifically the reforms provided for in the Coronavirus Aid, Relief and Economic Security (CARES) Act and the follow-up legislation in the Consolidated Appropriations Act, 2021, the American Rescue Plan Act of 2021, 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 provisions of the CARES Act and the follow-up legislation in the Consolidated Appropriations Act, 2021, the provisions of the American Rescue Plan Act of 2021, the provisions of the Dodd-Frank Act, and the Basel III regulatory capital reforms; • the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board (the "FASB"), the SEC, the Public Company Accounting Oversight Board and other regulatory agencies, may adversely affect Park's reported financial condition or results of operations; • Park's assumptions and estimates used in applying critical accounting policies and modeling, including under the CECL model, which may prove unreliable, inaccurate or not predictive of actual results; • the impact of Park's ability to anticipate and respond to technological changes on Park's 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, including those of Park's third-party vendors and other service providers, which may prove inadequate, and could adversely affect customer confidence in Park and/or result in Park incurring a financial loss; • a failure in or breach of Park's 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 impact on Park's business and operating results of any costs associated with obtaining rights in intellectual property claimed by others and of adequacy of Park's intellectual property protection in general; • the existence or exacerbation of general geopolitical instability and uncertainty as well as 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, closing of border crossings and changes in the relationship of the U.S. and its global trading partners); • 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 growth rates and financial stability of certain sovereign governments, supranationals and financial institutions in Europe and Asia and the risk they may face difficulties servicing their sovereign debt; • the effect of a fall in stock market prices on Park's asset and wealth management businesses; • 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; • the impact on Park's business, personnel, facilities or systems of losses related to acts of fraud, scams and schemes of third parties; • the impact of widespread natural and other disasters, pandemics (including the COVID-19 pandemic), dislocations, regional or national protests and civil unrest (including any resulting branch closures or damages), military or terrorist -41- activities or international hostilities on the economy and financial markets generally and on us or our counterparties specifically; • any of the foregoing factors, or other cascading effects of the COVID-19 pandemic that are not currently foreseeable, could materially affect our business, including our customers' willingness to conduct banking transactions and their ability to pay on existing obligations; • the effect of healthcare laws in the U.S. and potential changes for such laws, especially in light of the COVID-19 pandemic, which may increase our healthcare and other costs and negatively impact our operations and financial results; • risk and uncertainties associated with Park's entry into new geographic markets with our recent acquisitions, including expected revenue synergies and cost savings from recent acquisitions not being fully realized or realized within the expected time frame; • the discontinuation of the London Inter-Bank Offered Rate (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 this Annual Report on Form 10-K. 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-U.S. GAAP FINANCIAL MEASURES Management's discussion and analysis 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, management restructuring, branch closures, a rebranding initiative, COVID-19 related expenses 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 those related to 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. 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. Non-U.S. GAAP Ratios Park's management uses certain non-U.S. GAAP financial measures to evaluate Park's performance. Specifically, management reviews the ratio of tangible equity to tangible assets. Management has included in this Management's Discussion and Analysis of Financial Condition and Results of Operation, information relating to the ratio of tangible equity to tangible assets. For the purpose of calculating the ratio of tangible equity to tangible assets, a non-U.S. GAAP financial measure, tangible equity is divided by tangible assets. Tangible equity equals total shareholders' equity less goodwill and other intangible assets, in each case at period end. Tangible assets equals total assets less goodwill and other intangible assets, in each case at period end. -42- Management believes that the disclosure of the ratio of tangible equity to tangible assets presents additional information to the reader of the consolidated financial statements, which, when read in conjunction with the consolidated financial statements prepared in accordance with U.S. GAAP, assists in analyzing Park's operating performance, ensures comparability of operating performance from period to period, and facilitates comparisons with the performance of Park's peer financial holding companies and bank holding companies, while eliminating certain non-operational effects of acquisitions. Within the "CONTRACTUAL OBLIGATIONS - Capital" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations, Park has provided detail of the reconciliation of tangible equity to total shareholders' equity and of tangible assets to total assets solely for the purpose of complying with SEC Regulation G and not as an indication that the ratio of tangible equity to tangible assets is a substitute for the ratio of total shareholders' equity to total assets as determined in accordance with U.S. GAAP. 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%. In the tables included within the "ANALYSIS OF EARNINGS - Net Interest Income" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations, 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. Paycheck Protection Program ("PPP") Loans Through December 31, 2021, Park had originated $768.5 million in loans as part of the PPP. These loans are not typical of Park's loan portfolio in that they are part of a specific government program to support businesses during the COVID-19 pandemic and are 100% guaranteed by the Small Business Administration ("SBA"). As such, management considers growth in the loan portfolio excluding PPP loans, the total allowance for credit losses to total loans ratio (excluding PPP loans), and general reserve on collectively evaluated loans as a percentage of total collectively evaluated loans (excluding PPP loans) in addition to the related U.S. GAAP metrics which are not adjusted for PPP loans. OVERVIEW COVID-19 Considerations Banking has been identified by federal and state governmental authorities to be an essential service and Park is fully committed to continue serving our customers and communities through the COVID-19 public health crisis. For those in our communities experiencing a financial hardship, Park has offered various methods of support including loan modifications, payment deferral programs, participation in the CARES Act PPP, participation in additional PPP loans authorized under the Consolidated Appropriations Act, 2021, and various other case by case accommodations. Throughout the pandemic, Park has implemented various physical distancing guidelines to help protect associates, such as allowing associates to work from home, where practical, while maintaining customer service via our online banking services, mobile app, and ATMs, by keeping drive-thru lanes open to serve customers, maintaining selective branch office openings, and offering other banking services by appointment when necessary. As of December 31, 2021, all branches had returned to normal operations. During 2021 and 2020, Park provided calamity pay and special one-time bonuses to certain associates related to the COVID-19 pandemic. The cost of the calamity pay and special bonuses amounted to $2.1 million and $3.6 million for the years ended December 31, 2021 and 2020, respectively, and is included within salaries expense. Paycheck Protection Program During 2020, Park approved and funded 4,439 loans totaling $543.1 million under the PPP's first round of loans. These first round PPP loans had an average principal balance of $122,000. Of the $543.1 million in first round PPP loans, 21 loans totaling $68.2 million had a principal balance that was greater than $2 million. For its assistance in making and retaining the 4,439 loans, Park has received an aggregate of $20.2 million in fees from the SBA, of which $6.4 million and $13.7 million were recognized within loan interest income during the year ended December 31, 2021 and the year ended December 31, 2020, respectively. Park funded the PPP loans with excess on-balance sheet liquidity. At December 31, 2021, the remaining balance of the first round PPP loans funded in 2020 was $4.8 million. -43- During 2021, Park offered additional PPP loans as authorized under the Consolidated Appropriations Act, 2021. Through December 31, 2021, Park approved and funded 3,262 loans totaling $221.6 million under the second round of PPP loans. These additional second round PPP loans had an average principal balance of $68,000. None of the $221.6 million in additional second round PPP loans had a principal balance that was greater than $2 million. For its assistance in making and retaining the 3,262 second round of PPP loans, Park has received an aggregate of $12.9 million in fees from the SBA, of which $9.9 million was recognized within loan interest income during the year ended December 31, 2021. Park funded the second round PPP loans with excess on-balance sheet liquidity. At December 31, 2021, the remaining balance of second round PPP loans funded in 2021 was $72.3 million. As of February 21, 2022, Park had submitted 6,953 repayment requests on behalf of borrowers under the PPP to the SBA and has received $707.9 million in payments from the SBA. Loan Modifications During the two years ended December 31, 2021, Park modified a total of 5,138 consumer loans, with an aggregate balance of $72.2 million, and modified a total of 1,406 commercial loans, with an aggregate balance of $488.1 million, in each case related to a hardship caused by the COVID-19 pandemic and responses thereto. Park has worked with borrowers and provided modifications in the form of either interest only deferral or principal and interest deferral, in each case, for initial periods of up to 90 days. As necessary, Park made available a second 90-day interest only deferral or principal and interest deferral bringing the total potential deferral period to six months. Modifications were structured in a manner to best address each individual customer's then current situation. A majority of these modifications were excluded from the troubled debt restructuring ("TDR") classification under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators. The modified loans are considered current and continue to accrue interest during the deferral period. Of the $560.3 million of COVID-19 modifications during the two years ended December 31, 2021, $30.9 million, or 0.45% of total loans, remained in deferral as of December 31, 2021 and $7.1 million were greater than or equal to 30 days past due in accordance with the modified terms at December 31, 2021. Financial Results by segment The following table reflects the net income (loss) by segment for the years ended December 31, 2021, 2020 and 2019. Park's segments include PNB and "All Other" which primarily consists of Park as the "Parent Company", GFSC and SEPH. SEPH is a non-bank subsidiary of Park, holding former Vision Bank OREO property and non-performing loans. Table 1 - Net Income (Loss) by Segment (In thousands) 2021 2020 2019 PNB $ 159,461 $ 123,730 $ 113,600 All Other (5,516) 4,193 (10,900) Total Park $ 153,945 $ 127,923 $ 102,700 Net income for the year ended December 31, 2021 of $153.9 million represented a $26.0 million, or 20.3%, increase compared to $127.9 million for the year ended December 31, 2020. Net income for both the year ended December 31, 2021 and the year ended December 31, 2020 included several items of income and expense that impact the comparability of period results. These items are detailed in the "ANALYSIS OF EARNINGS - Items Impacting Comparability" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion provides additional information regarding the PNB segment, followed by additional information regarding All Other, which consists of the Parent Company, GFSC and SEPH. -44- The Park National Bank (PNB) The table below reflects PNB's net income for the years ended December 31, 2021, 2020 and 2019. Table 2 - PNB Summary Income Statement (In thousands) 2021 2020 2019 Net interest income $ 328,398 $ 326,375 $ 293,130 (Recovery of) provision for credit losses (1) (8,554) 30,813 8,356 Other income 126,802 124,231 92,392 Other expense 266,678 268,938 237,433 Income before income taxes $ 197,076 $ 150,855 $ 139,733 Income tax expense 37,615 27,125 26,133 Net income $ 159,461 $ 123,730 $ 113,600 (1) Park adopted ASU 2016-13 effective January 1, 2021. The allowance for credit losses as of December 31, 2021 and the related (recovery of) provision for credit losses for the year ended December 31, 2021 were calculated utilizing this new guidance. Net interest income of $328.4 million for the year ended December 31, 2021 represented a $2.0 million, or 0.6%, increase compared to $326.4 million for the year ended December 31, 2020. The increase was a result of an $18.7 million decrease in interest expense, partially offset by a $16.7 million decrease in interest income. The $16.7 million decrease in interest income was primarily due to a $312,000 decrease in investment income and a $16.3 million decrease in interest income on loans. The decrease in investment income was primarily the result of a decrease in the yield on investments, which decreased 43 basis points to 2.23% for the year ended December 31, 2021, compared to 2.66% for the year ended December 31, 2020, partially offset by a $200.5 million increase in average investments. The decrease in interest income on loans was primarily the result of a decrease in the yield on loans, which decreased 25 basis points to 4.41% for the year ended December 31, 2021, compared to 4.66% for the year ended December 31, 2020. The decrease in yield on loans was partially offset by a $35.5 million increase in average loans from $6.97 billion for the year ended December 31, 2020 to $7.01 billion for the year ended December 31, 2021. The increase in average loans was impacted by the addition of average PPP loans of approximately $257.4 million and $352.6 million for the years ended December 31, 2021 and 2020, respectively, and also resulted in interest and fee income of $18.0 million and $16.7 million for the year ended December 31, 2021 and 2020, respectively. Excluding the impact of PPP loans, the yield on loans was 4.31% for the year ended December 31, 2021, a decrease of 35 basis points compared to 4.66% for the year ended December 31, 2020. The $18.7 million decrease in interest expense was primarily due to a $15.0 million decrease in interest expense on deposits as well as a $3.7 million decrease in interest expense on borrowings. The decrease in interest expense on deposits was partially the result of a decrease in the cost of deposits of 29 basis points, from 0.41% for the year ended December 31, 2020 to 0.12% for the year ended December 31, 2021. The decrease in the interest expense on deposits was partially offset by a $13.0 million increase in average on-balance sheet interest bearing deposits from $5.24 billion for the year ended December 31, 2020, to $5.25 billion for the year ended December 31, 2021. The increase in on-balance sheet interest bearing deposits was due to an increase in savings deposits, which was partially offset by declines in both higher-cost time deposits and transaction accounts. During the years ended December 31, 2021 and 2020, Park made the decision to participate in two programs to transfer deposits off balance sheet in order to manage growth of the balance sheet. This decision also minimized the increase in interest bearing deposits. The decrease in interest expense on borrowings was partially the result of a $91.2 million decrease in average borrowings from $403.9 million for the year ended December 31, 2020, to $312.7 million for the year ended December 31, 2021. The cost of borrowings also decreased by 76 basis points, from 1.41% for the year ended December 31, 2020 to 0.65% for the year ended December 31, 2021. The recovery of credit losses of $8.6 million for the year ended December 31, 2021 represented a difference of $39.4 million, compared to a provision for credit losses of $30.8 million for the year ended December 31, 2020. Refer to the “CREDIT METRICS AND (RECOVERY OF) PROVISION FOR CREDIT LOSSES" section for additional details regarding the level of the (recovery of) provision for credit losses recognized in each period presented above. Other income of $126.8 million for the year ended December 31, 2021 represented an increase of $2.6 million, or 2.1%, compared to $124.2 million for the year ended December 31, 2020. The $2.6 million increase was primarily related to (i) a $5.6 million increase in income from fiduciary activities; (ii) a $3.7 million increase in debit card fee income; (iii) a $2.9 million increase in miscellaneous income, primarily related to refunds of a consumer insurance product, an increase in income -45- from printed check sales and an increase in gain on sale of assets; and (iv) a $1.4 million increase in gain (loss) on equity securities, net. These increases were partially offset by a $3.3 million decrease in gain on sale of debt securities and a $7.7 million decrease in other service income. The decline in other service income was primarily due to declines in investor rate locks, mortgage loans held for sale and fee income from mortgage loan originations, partially offset by an increase in the valuation of mortgage servicing rights. A summary of mortgage loan originations for the years ended December 31, 2021 and 2020 follows. Table 3 - PNB Mortgage Loan Originations (In thousands) Q1 2021 Q2 2021 Q3 2021 Q4 2021 YTD 2021 Mortgage Loan Origination Volume Sold $ 191,116 $ 142,398 $ 123,757 $ 98,007 $ 555,278 Portfolio 82,613 74,670 66,718 60,685 284,686 Construction 28,987 37,266 28,486 24,816 119,555 Service released 1,266 2,204 4,537 5,795 13,802 Total mortgage loan originations $ 303,982 $ 256,538 $ 223,498 $ 189,303 $ 973,321 Refinances as a % of Total Mortgage Loan Originations 71.1 % 50.0 % 44.8 % 44.2 % 54.2 % Q1 2020 Q2 2020 Q3 2020 Q4 2020 YTD 2020 Mortgage Loan Origination Volume Sold $ 85,030 $ 248,339 $ 355,755 $ 325,841 $ 1,014,965 Portfolio 56,018 64,351 61,227 99,077 280,673 Construction 33,109 33,754 40,560 29,825 137,248 Service released 3,794 2,362 2,275 2,950 11,381 Total mortgage loan originations $ 177,951 $ 348,806 $ 459,817 $ 457,693 $ 1,444,267 Refinances as a % of Total Mortgage Loan Originations 48.1 % 67.8 % 68.5 % 71.4 % 66.7 % Total mortgage loan originations decreased $470.9 million, or 32.6%, to $973.3 million for the year ended December 31, 2021 compared to $1,444.3 million for the year ended December 31, 2020. -46- The table below reflects PNB's other expense for the years ended December 31, 2021 and 2020. Table 4 - PNB Other Expense Information (In thousands) December 31, 2021 December 31, 2020 $ change % change Other expense: Salaries $ 120,949 $ 122,586 $ (1,637) (1.3) % Employee benefits 40,895 36,282 4,613 12.7 % Occupancy expense 12,555 13,571 (1,016) (7.5) % Furniture and equipment expense 10,880 18,781 (7,901) (42.1) % Data processing fees 30,202 11,653 18,549 159.2 % Professional fees and services 19,980 24,444 (4,464) (18.3) % Marketing 6,072 5,825 247 4.2 % Insurance 5,621 5,804 (183) (3.2) % Communication 3,498 3,985 (487) (12.2) % State tax expense 3,821 3,293 528 16.0 % Amortization of intangible assets 1,798 2,263 (465) (20.5) % FHLB prepayment penalty — 10,529 (10,529) N.M. Foundation contributions 4,000 3,000 1,000 33.3 % Miscellaneous 6,407 6,922 (515) (7.4) % Total other expense $ 266,678 $ 268,938 $ (2,260) (0.8) % Other expense of $266.7 million for the year ended December 31, 2021 represented a decrease of $2.3 million, or 0.8%, compared to $268.9 million for the year ended December 31, 2020. The decrease in salaries expense was primarily related to decreases in base salary expense, additional compensation expense and vacation accrual, partially offset by increases in officer incentive expense and share-based compensation expense. The increase in employee benefits expense was primarily related to increased pension plan expense, payroll tax expense and group insurance costs. The decrease in occupancy expense was primarily related to decreased lease expense. The decrease in furniture and equipment expense was primarily related to a change in the classification under which software and related maintenance costs were expensed, which are now classified under data processing fees. The impact of this decrease in furniture and equipment expense was partially offset by an increase in depreciation expense on equipment. The increase in data processing fees was related to increased debit card processing costs and other data processing and software costs, partially due to the previously mentioned change in classification from furniture and equipment expense and a change in expensing software costs from other fees within professional fees and services to data processing fees. The decrease in professional fees and services was primarily related to decreased legal expenses, title, appraisal and credit costs and decreases in other fees (due to the change to expensing software costs under data processing fees), partially offset by increases in management and consulting expenses. The decrease in the FHLB prepayment penalty was due to a $10.5 million prepayment penalty on FHLB borrowings of $150 million repaid during the year ended December 31, 2020; there was no similar prepayment during the year ended December 31, 2021. The increase in foundation contributions was due to a $4.0 million contribution to Park's charitable foundation during the year ended December 31, 2021, compared to a $3.0 million contribution made during the year ended December 31, 2020. -47- The table below provides certain balance sheet information and financial ratios for PNB as of or for the years ended December 31, 2021 and 2020. Table 5 - PNB Balance Sheet Information (In thousands) December 31, 2021 December 31, 2020 % change from 12/31/20 Loans $ 6,868,935 $ 7,165,840 (4.14) % Loans less PPP loans (1) 6,794,515 6,834,269 (0.58) % Allowance for credit losses (2) 83,111 84,321 (1.43) % Net loans 6,785,824 7,081,519 (4.18) % Investment securities 1,807,392 1,114,742 62.14 % Total assets 9,538,217 9,236,915 3.26 % Total deposits 8,157,720 7,820,983 4.31 % Average assets (3) 9,814,766 9,198,141 6.70 % Efficiency ratio (4) 58.21 % 59.31 % (1.85) % Return on average assets 1.62 % 1.35 % 20.00 % (1) Excludes $74.4 million of PPP loans at December 31, 2021 and $331.6 million of PPP loans at December 31, 2020. (2) Park adopted ASU 2016-13 effective January 1, 2021. The allowance for credit losses as of December 31, 2021 and the related (recovery of) provision for credit losses for the year ended December 31, 2021 were calculated utilizing this new guidance. (3) Average assets for the year ended December 31, 2021 and 2020. (4) 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 $2.9 million for both the year ended December 31, 2021 and the year ended December 31, 2020. Loans outstanding at December 31, 2021 were $6.87 billion, compared to $7.17 billion at December 31, 2020, a decrease of $296.9 million, or 4.1%. Excluding $74.4 million and $331.6 million of PPP loans at December 31, 2021 and December 31, 2020, respectively, loans outstanding were $6.79 billion at December 31, 2021, compared to $6.83 billion at December 31, 2020, a decrease of $39.8 million, or 0.6%. The table below breaks out the change in loans outstanding, by loan type. Table 6 - PNB (In thousands) December 31, 2021 December 31, 2020 change from 12/31/20 % change from 12/31/20 Home equity $ 165,691 $ 182,131 $ (16,440) (9.0) % Installment 1,685,687 1,650,620 35,067 2.1 % Real estate 1,142,991 1,213,820 (70,829) (5.8) % Commercial (excluding PPP loans) (1)(2) 3,797,673 3,784,153 13,520 0.4 % PPP loans 74,420 331,571 (257,151) N.M. Other 2,473 3,545 (1,072) (30.2) % Total loans $ 6,868,935 $ 7,165,840 $ (296,905) (4.1) % Total loans (excluding PPP loans) $ 6,794,515 $ 6,834,269 $ (39,754) (0.6) % (1) Excludes $74.4 million of PPP loans at December 31, 2021 and $331.6 million of PPP loans at December 31, 2020. (2) Commercial (excluding PPP loans) decreased by $58.8 million, or 1.6% (2.1% annualized), from December 31, 2020 to September 30, 2021 and grew by $72.3 million, or 1.9% (7.7% annualized), from September 30, 2021 to December 31, 2021. PNB's allowance for credit losses decreased by $1.2 million, or 1.4%, to $83.1 million at December 31, 2021, compared to $84.3 million at December 31, 2020. This decrease included the impact of a $6.7 million increase to the allowance for credit losses as the result of the adoption of ASU 2016-13. Net recoveries were $640,000, or 0.01% of total average loans, for the year ended December 31, 2021 and net charge-offs were $1.2 million, or 0.02% of total average loans, for the year ended December 31, 2020. Refer to the “CREDIT METRICS AND (RECOVERY OF) PROVISION FOR CREDIT LOSSES" section for additional information regarding PNB's loan portfolio and the level of provision for credit losses recognized in each period presented. -48- Total deposits at December 31, 2021 were $8.16 billion, compared to $7.82 billion at December 31, 2020, an increase of $336.7 million, or 4.3%. During the years ended December 31, 2021 and 2020, Park made the decision to participate in two programs to transfer deposits off balance sheet in order to manage growth of the balance sheet, as deposits increased significantly throughout the COVID-19 pandemic. At December 31, 2021 and December 31, 2020, Park had $983.1 million and $710.1 million, respectively, in deposits which were off-balance sheet. Total deposits would have increased $609.7 million, or 7.1%, compared to December 31, 2020 had the $983.1 million and $710.1 million in deposits remained on the balance sheet at the respective dates. The table below breaks out the change in deposit balances, by deposit type. Table 7 - PNB (In thousands) December 31, 2021 December 31, 2020 change from 12/31/20 % change from 12/31/20 Non-interest bearing deposits $ 3,320,413 $ 2,978,005 $ 342,408 11.5 % Transaction accounts 1,502,876 1,381,479 121,397 8.8 % Savings 2,622,771 2,596,926 25,845 1.0 % Certificates of deposit 711,660 864,573 (152,913) (17.7) % Total deposits $ 8,157,720 $ 7,820,983 $ 336,737 4.3 % Off balance sheet deposits 983,053 710,101 272,952 38.4 % Total deposits including off balance sheet deposits $ 9,140,773 $ 8,531,084 $ 609,689 7.1 % All Other The table below summarizes the All Other net (loss) income for the years ended December 31, 2021, 2020, and 2019. Table 8 - All Other Income Statement (In thousands) 2021 2020 2019 Net interest income $ 1,495 $ 1,255 $ 4,607 Recovery of credit losses (1) (3,362) (18,759) (2,185) Other income 3,142 1,433 4,801 Other expense 16,840 17,657 26,555 Net (loss) income before income tax benefit $ (8,841) $ 3,790 $ (14,962) Income tax benefit (3,325) (403) (4,062) Net (loss) income $ (5,516) $ 4,193 $ (10,900) (1) Park adopted ASU 2016-13 effective January 1, 2021. The allowance for credit losses as of December 31, 2021 and the related recovery of credit losses for the year ended December 31, 2021 were calculated utilizing this new guidance. The net interest 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 GFSC loans and SEPH nonaccrual loan relationships. The net interest income for All Other included for the years ended December 31, 2021 and 2020, interest expense on $175.0 million aggregate principal amount of 4.50% Fixed-to-Floating Rate Subordinated Notes due 2030 issued by Park in August 2020 (the "Park Subordinated Notes"). Net interest income reflected net interest income of $1.5 million for the year ended December 31, 2021, compared to net interest income of $1.3 million for the year ended December 31, 2020. The change was largely the result of an increase of $7.4 million in loan interest income related to payment collections at SEPH, offset by a decrease of $2.6 million in net interest income from GFSC, and by an increase in interest expense on borrowings of $4.4 million, mainly related to the Park Subordinated Notes. SEPH had net recoveries of $2.7 million for the year ended December 31, 2021, compared to net recoveries of $19.0 million for the year ended December 31, 2020, and GFSC had net recoveries of $28,000 for the year ended December 31, 2021, compared to net charge-offs of $829,000 for the year ended December 31, 2020. All Other had other income of $3.1 million for the year ended December 31, 2021, compared to $1.4 million for the year ended December 31, 2020. The change was largely due to an $878,000 increase in income related to partnership -49- investments, which went from a $21,000 loss for the year ended December 31, 2020 to an $857,000 gain for the year ended December 31, 2021, and a $410,000 difference in gain (loss) on equity securities, net, which went from a $226,000 loss for the year ended December 31, 2020 to a $184,000 gain for the year ended December 31, 2021. All Other had other expense of $16.8 million for the year ended December 31, 2021, compared to $17.7 million for the year ended December 31, 2020. The decrease was largely due to a $625,000 decrease in expense at GFSC, as well as a $605,000 decrease in merger-related expenses associated with the Carolina Alliance acquisition. The table below provides certain balance sheet information for All Other as of or for the years ended December 31, 2021 and 2020. Table 9 - All Other (Dollars in thousands) December 31, 2021 December 31, 2020 % change from 12/31/20 Loans $ 2,187 $ 11,945 (81.69) % Allowance for credit losses (1) 86 1,354 (93.65) % Net loans 2,101 10,591 (80.16) % Total assets 22,037 42,106 (47.66) % Average assets (2) 32,692 43,492 (24.83) % (1) Park adopted ASU 2016-13 effective January 1, 2021. The allowance for credit losses as of December 31, 2021 and the related recovery of credit losses for the year ended December 31, 2021 were calculated utilizing this new guidance. (2) Average assets for the years ended December 31, 2021 and 2020, respectively. Park National Corporation The table below summarizes Park's net income for the years ended December 31, 2021, 2020, and 2019. Table 10 - Park Summary Income Statement (In thousands) 2021 2020 2019 Net interest income $ 329,893 $ 327,630 $ 297,737 (Recovery of) provision for credit losses (11,916) 12,054 6,171 Other income 129,944 125,664 97,193 Other expense 283,518 286,595 263,988 Income before income taxes $ 188,235 $ 154,645 $ 124,771 Income tax expense 34,290 26,722 22,071 Net income $ 153,945 $ 127,923 $ 102,700 DIVIDENDS ON COMMON SHARES Cash dividends declared on Park's common shares were $4.52 in 2021, $4.28 in 2020 and $4.24 in 2019. The quarterly cash dividend on Park's common shares was $1.23 per share for the first quarter of 2021, $1.03 per share for the second and third quarter of 2021, and $1.23 per share for the fourth quarter of 2021. The first and fourth quarters of 2021 included a one-time special cash dividend of $0.20 per share. This was the fourth year in a row that Park has declared a special cash dividend ($0.20 twice in 2021, $0.20 in both 2020 and 2019, and $0.25 in 2018), which began in 2018 when the corporate federal income tax rate was reduced from 35% to 21% and has continued each year that the tax rates have remained at the lower level. The quarterly cash dividend on Park's common shares was $1.22 per share for the first quarter of 2020, and $1.02 per share for the second, third, and fourth quarter of 2020. The first quarter of 2020 included a one-time special cash dividend of $0.20 per share. The quarterly cash dividend on Park's common shares was $1.21 per share for the first quarter of 2019, and $1.01 per share for the second, third, and fourth quarter of 2019. The first quarter of 2019 included a one-time special cash dividend of $0.20 per share. Please see the discussion of limitations on Park's ability to pay dividends in the section captioned "Supervision and Regulation of Park and its Subsidiaries – Limits on Dividends and Other Payments" in "ITEM 1. BUSINESS" of this Annual Report on Form 10-K. -50- CRITICAL ACCOUNTING POLICIES The significant accounting policies used in the development and presentation of Park’s consolidated financial statements are listed in "Note 1 - Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." 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. The COVID-19 pandemic has caused significant unprecedented disruption around the world that has affected daily living and negatively impacted the global economy. The effects of the COVID-19 pandemic may meaningfully impact significant estimates such as the allowance for credit losses, goodwill, and pension plan obligations and related expenses. Allowance for Credit Losses: Park believes the determination of the allowance for credit losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance for credit losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses over the life of an asset or an off-balance sheet credit exposure. Management’s determination of the adequacy of the allowance for credit losses is based on periodic evaluations of past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. 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 individually evaluated loans, and estimated losses based on historical loss experience and forecasted economic conditions. All of these factors may be susceptible to significant change. To the extent that actual results differ from management estimates, additional provisions for credit losses may be required that would adversely impact earnings in future periods. One of the most significant judgments impacting the ACL estimate is the economic forecast for Ohio unemployment, Ohio GDP, and Ohio HPI. Changes in the economic forecasts could significantly affect the estimated credit losses which could potentially lead to materially different allowance levels from one reporting period to the next. In calculating the ACL, management weighs several different scenarios, including a baseline (most likely) scenario and an adverse scenario. To create a hypothetical sensitivity analysis, management calculated a quantitative allowance using a 100% weighting applied to an adverse scenario. This scenario considers among other things that, (1) new cases, hospitalizations and deaths from COVID rise again, causing some state and local governments to impose restrictions, those that are not vaccinated continue to refuse the vaccines, and worries about the Omicron variant rises; (2) as a result of the unknown Omicron variant, consumers’ uncertainty about the safety of hotels, stores, restaurants and flights rise again and, therefore, spending on travel, retail and hotels decline; and (3) disagreements in the U.S. Congress prevent any additional fiscal support. The adverse scenario forecasts unemployment for the next twelve months to range from 6.6% to 9.4%. Excluding consideration of general reserve adjustments, this sensitivity analysis would result in a hypothetical increase in Park's ACL of $20.7 million as of December 31, 2021. Refer to the “CREDIT METRICS AND (RECOVERY OF) PROVISION FOR CREDIT LOSSES” section within this "ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for additional discussion. Goodwill: 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 each business acquired. Park’s goodwill, as of December 31, 2021, relates to the value inherent in the banking industry and that value is dependent upon the ability of Park’s national bank subsidiary, PNB, to provide quality, cost-effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base, the inability to deliver cost-effective services over sustained periods or significant credit problems could lead to impairment of goodwill that could, in turn, 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 evaluates goodwill for impairment during the second quarter of each year, with financial data as of March 31. Based on the qualitative analysis performed as of April 1, 2021, the Company -51- determined that goodwill for Park's reporting unit, PNB, was not impaired. Management continues to monitor economic factors, including economic conditions as a result of the COVID-19 pandemic and responses thereto, to evaluate goodwill impairment. The fair value of the goodwill, which resides on the books of PNB, is evaluated for potential impairment by reviewing the past and projected operating results for PNB, deposit and loan totals for PNB and banking industry comparable information. Pension Plan: 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. 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. The most significant of these assumption are the discount rate and the expected return on assets. The discount rate utilized for the December 31, 2021 calculation was 3.23% and the expected return on plan assets was 6.92%. Presented below is the estimated impact on Park's projected benefit obligation ("PBO") and 2022 pension expense assuming changes in the significant assumptions. Table 11-Pension Sensitivity Discount Rate Expected Return on Plan Assets (In thousands) - 25 BPS +25 BPS - 50 BPS +50 BPS Change in PBO $ 5,560 $ (5,260) N.A. N.A. Change in Pension Expense 110 (110) $ 1,290 $ (1,290) 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. ABOUT OUR BUSINESS Through our national bank subsidiary, PNB, Park is engaged in a general commercial banking and trust business, primarily in Ohio, Kentucky, North Carolina and South Carolina, with the exception of nationwide aircraft loans and nationwide asset-based lending to consumer finance companies. Management believes there are a significant number of consumers and businesses that seek long-term relationships with community-based financial institutions of quality and strength. While not engaging in activities such as foreign lending, nationally syndicated loans or investment banking, Park attempts to meet the needs of our customers for commercial, real estate and consumer loans, and investment, fiduciary and deposit services. Park’s subsidiaries compete for deposits and loans with other banks, savings associations, credit unions and other types of financial institutions. At December 31, 2021, Park operated 96 financial service offices (including those of PNB and Scope Leasing, Inc. ("Scope Aircraft Finance")) and a network of 116 automated teller machines in 26 Ohio counties, three North Carolina counties, four South Carolina counties and one Kentucky county. SEPH and Guardian each operated one administrative office, located in Newark, Ohio. SOURCE OF FUNDS Deposits: Park’s major source of funds is deposits from individuals, businesses and local government entities. These deposits consist of non-interest bearing and interest bearing deposits. -52- Average total deposits were $8,187 million in 2021, compared to $7,633 million in 2020, and $6,905 million in 2019. The table below provides a summary of deposit balances as of December 31, 2021 and 2020, along with the change over the past year. Table 12 - Year-End Deposits December 31 (In thousands) 2021 2020 Change Non-interest bearing checking $ 3,066,419 $ 2,727,100 $ 339,319 Interest bearing transaction accounts 1,502,876 1,381,479 121,397 Savings 2,622,108 2,597,827 24,281 All other time deposits 711,660 864,573 (152,913) Other 1,465 1,379 86 Total $ 7,904,528 $ 7,572,358 $ 332,170 Off balance sheet deposits 983,053 710,101 272,952 Total deposits including off balance sheet deposits $ 8,887,581 $ 8,282,459 $ 605,122 During the years ended December 31, 2021 and 2020, Park made the decision to participate in two programs in order to manage growth of the balance sheet, as deposits increased significantly throughout the COVID-19 pandemic. At December 31, 2021 and December 31, 2020, Park had $983.1 million and $710.1 million, respectively, in off balance sheet deposits. Total deposits would have increased $605.1 million, or 7.3%, compared to December 31, 2020 had the $983.1 million and $710.1 million in deposits remained on the balance sheet. The average interest rate paid on interest bearing deposits was 0.12% in 2021, compared to 0.41% in 2020 and 1.01% in 2019. The average cost of interest bearing deposits for each quarter of 2021 was 0.09% for the fourth quarter, 0.11% for the third quarter, 0.13% for the second quarter and 0.16% for the first quarter. As of December 31, 2021 and 2020, approximately $1.7 billion and $1.8 billion, respectively, of our deposit portfolio was uninsured. The uninsured amounts are estimates based on the methodologies used for the Corporation's regulatory reporting requirements. The following table provides a summary of the portion of the Corporation's time deposits, by account, that are in excess of the FDIC insurance limit of $250,000, by remaining time until maturity, as of December 31, 2021: Table 13 - Maturities of Time Deposits in Excess of FDIC Insurance Limit December 31 (In thousands) 2021 3 months or less $ 12,030 Over 3 months through 6 months 12,835 Over 6 months through 12 months 21,595 Over 12 months 17,818 Total $ 64,278 Short-Term Borrowings: Short-term borrowings consist of securities sold under agreements to repurchase, Federal Home Loan Bank advances, Federal Funds purchased and other borrowings. These funds are used to manage the Corporation’s liquidity needs and interest rate sensitivity risk. The average rate paid on short-term borrowings generally moves closely with changes in market interest rates for short-term investments. The average rate paid on short-term borrowings was 0.27% in 2021, compared to 0.40% in 2020 and 1.15% in 2019. The year-end balance for short-term borrowings was $239 million at December 31, 2021, compared to $342 million at December 31, 2020 and $231 million at December 31, 2019. Long-Term Debt: Long-term debt primarily consists of borrowings from the Federal Home Loan Bank. In addition, Park had a term note with another financial institution which was paid off on August 2, 2021. The average balance of long-term debt and the average cost of long-term debt include the subordinated notes discussed in the following section. In 2021, the average balance of long-term debit was $206 million, compared to $216 million in 2020 and $341 million in 2019. The average interest rate paid on long-term debt was 4.32% in 2021, compared to 3.55% in 2020 and 2.77% in 2019. Average total debt (long-term and short-term) was $493 million in 2021, compared to $495 million in 2020 and $557 million in 2019. Average total debt decreased by $2 million, or 0.3%, in 2021 compared to 2020, and decreased by $62 million, or 11.1%, in 2020 -53- compared to 2019. Average long-term debt was 42% of average total debt in 2021, compared to 44% of average total debt in 2020 and 61% of average total debt in 2019. Subordinated Notes: Park assumed, with the 2007 acquisition of Vision's parent holding company, $15.5 million of floating rate junior subordinated notes. The $15.5 million of junior subordinated notes were purchased by Vision Bancshares Trust I ("Trust I") following the issuance of Trust I's $15.0 million of floating rate preferred securities. The interest rate on these junior subordinated notes adjusts every quarter at 148 basis points above the three-month LIBOR interest rate. The maturity date for the junior subordinated notes is December 30, 2035 and the junior subordinated notes may be prepaid, without penalty, after December 30, 2010. These junior subordinated notes qualify as Tier 1 capital under current Federal Reserve Board guidelines. On August 20, 2020, Park completed the issuance and sale of $175 million aggregate principal amount of its 4.50% Fixed-to-Floating Rate Subordinated Notes due 2030 (the "Subordinated Notes"). The Subordinated Notes initially bear a fixed interest rate of 4.50% per year, payable semi-annually in arrears on March 1 and September 1 of each year, commencing on March 1, 2021. Commencing on September 1, 2025, the Subordinated Notes will bear interest at a floating rate per annum equal to the Benchmark rate, which is expected to be Three-Month Term SOFR, plus a spread of 439 basis points for each quarterly interest period during the floating rate period, payable quarterly in arrears; provided, however, that if the Benchmark rate is less than zero, then the Benchmark rate will be deemed to be zero. The Company may, at its option, beginning with the interest payment date of September 1, 2025 and on any interest payment date thereafter, redeem the Subordinated Notes, in whole or in part, from time to time, subject to obtaining the prior approval of the Federal Reserve Board to the extent the approval of the Federal Reserve Board is then required under the capital adequacy rules of the Federal Reserve Board, at a redemption price equal to 100% of the principal amount of the Subordinated Notes being redeemed, plus accrued and unpaid interest thereon to but excluding the date of redemption. The Subordinated Notes qualify as Tier 2 capital for Park under the Federal Reserve Board's capital adequacy rules. See "Note 16 - Subordinated Notes" of the Notes to Consolidated Financial Statements included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report on Form 10-K for additional information about the Subordinated Notes. Shareholders' Equity: The ratio of total shareholders' equity to total assets was 11.62% at December 31, 2021, compared to 11.21% at December 31, 2020 and 11.32% at December 31, 2019. The ratio of tangible shareholders’ equity [shareholders' equity ($1,110.8 million) less goodwill ($159.6 million) and other intangible assets ($7.5 million)] to tangible assets [total assets ($9,560.3 million) less goodwill ($159.6 million) and other intangible assets ($7.5 million)] was 10.05% at December 31, 2021, compared to 9.57% at December 31, 2020 and 9.51% at December 31, 2019. In accordance with U.S. GAAP, Park reflects any unrealized holding gain or loss on AFS debt securities, any unrealized net holding gain or loss on cash flow hedging derivatives and any change in the funded status of Park's pension plan, net of income taxes, as accumulated other comprehensive income (loss) which is part of Park’s shareholders’ equity. The unrealized net holding gain, net of income taxes, on AFS debt securities was $21.2 million at year-end 2021, compared to $40.7 million at year-end 2020 and $17.5 million at year-end 2019. The unrealized net holding loss, net of income taxes, on cash flow hedging derivatives was $206,000 at year-end 2021, compared to $698,000 at year-end 2020 and $454,000 at year-end 2019. In accordance with U.S. GAAP, Park adjusts accumulated other comprehensive income to recognize the net actuarial gain or loss reflected in the funding status of Park’s pension plan. See "Note 19 - Benefit Plans" of the Notes to Consolidated Financial Statements included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report on Form 10-K for information on the accounting for Park’s pension plan. Pertaining to the funding status of the pension plan, Park recognized a net comprehensive gain of $28.6 million in 2021, compared to a net comprehensive loss of $7.7 million in 2020 and a net comprehensive gain of $3.0 million in 2019. The net comprehensive gain in 2021 was due to greater than expected investment returns on pension plan assets as well as a net decrease in the benefit obligation due to assumption changes. The net comprehensive loss in 2020 was due to changes in actuarial assumptions which were partially offset by increased investment returns on pension plan assets. The net comprehensive gain in 2019 was due to changes in actuarial assumptions being more than offset by increased investment returns on pension plan assets. At year-end 2021, the balance in accumulated other comprehensive loss pertaining to the pension plan was an unrealized loss of $5.8 million, compared to $34.4 million at December 31, 2020 and $26.7 million at December 31, 2019. -54- INVESTMENT OF FUNDS Loans: Average loans were $7,015 million in 2021, compared to $6,990 million in 2020 and $6,208 million in 2019. The average yield on average loan balances was 4.53% in 2021, compared to 4.71% in 2020 and 5.19% in 2019. Approximately 49% of Park’s loan balances mature or reprice within one year (see Table 38). The average yield on average loan balances for each quarter of 2021 was 4.58% for the fourth quarter, 4.47% for the third quarter, 4.60% for the second quarter and 4.48% for the first quarter. Loan interest income for 2021, 2020, and 2019 included $8.0 million, $453,000 and $256,000, respectively, related to payments received on certain SEPH nonaccrual loan relationships, some of which are participated with PNB. In addition, loan interest income included $3.3 million, $4.4 million and $5.2 million, respectively, of the accretion of loan purchase accounting adjustments related to the acquisitions of NewDominion and Carolina Alliance. Loan interest income for 2021 and 2020 included interest and fee income related to PPP loans of $18.0 million and $16.7 million, respectively. Excluding the impact of the purchase accounting accretion, SEPH income, and PPP income, the average yield on loans was 4.27%, 4.63% and 5.09%, for the years ended December 31, 2021, 2020, and 2019. Excluding the impact of the purchase accounting accretion, SEPH income, and PPP income, the average yield on loans was 4.20% for the fourth quarter of 2021, 4.25% for the third quarter of 2021, 4.29% for the second quarter of 2021, and 4.34% for the first quarter of 2021. At December 31, 2021, loan balances were $6,871 million, compared to $7,178 million at year-end 2020, a decrease of $307 million, or 4.3%. Excluding $74.4 million and $331.6 million of PPP loans at December 31, 2021 and 2020, respectively, loans outstanding at December 31, 2021 were $6,797 million, a decrease of $49 million, or 0.7%, compared to $6,846 million at December 31, 2020. At December 31, 2020, loan balances were $7,178 million, compared to $6,501 million at year-end 2019, an increase of $676 million, or 10.4%. Excluding $331.6 million of PPP loans at December 31, 2020, loans outstanding at December 31, 2020 were $6,846 million, compared to $6,501 million at December 31, 2019, an increase of $345 million, or 5.3%. The table below reports year-end loan balances by type of loan for the past three years. Table 14 - Loans by Type December 31, (In thousands) 2021 2020 2019 Commercial, financial and agricultural $ 1,298,626 $ 1,588,989 $ 1,185,110 Construction real estate 321,786 343,421 331,699 Residential real estate 1,738,707 1,813,044 1,892,726 Commercial real estate 1,801,792 1,748,189 1,609,413 Consumer 1,689,679 1,659,704 1,452,375 Leases 20,532 24,438 30,081 Total loans $ 6,871,122 $ 7,177,785 $ 6,501,404 PPP loans (1) 74,420 331,571 — Total loans less PPP loans $ 6,796,702 $ 6,846,214 $ 6,501,404 (1) PPP loans are included in Commercial, financial and agricultural above. On a combined basis, year-end commercial, financial and agricultural loans, construction real estate loans and commercial real estate loans decreased by $258 million, or 7.0%, in 2021. The decrease in 2021 was due to a decrease in commercial, financial and agricultural loans of $290.4 million, a decrease in construction real estate loans of $21.6 million, and an increase in commercial real estate loans of $53.6 million. Included within commercial, financial and agricultural loans were $74.4 million of PPP loans. On a combined basis, year-end commercial, financial and agricultural loans, construction real estate loans and commercial real estate loans increased by $554 million, or 17.7%, in 2020. The increase in 2020 was due to an increase in commercial real estate loans of $138.8 million, an increase in construction real estate loans of $11.7 million and an increase in commercial, financial and agricultural loans of $403.9 million. Included within commercial, financial and agricultural loans were $331.6 million of PPP loans. Excluding $74.4 million and $331.6 million of PPP loans at December 31, 2021 and 2020, respectively, commercial, financial and agricultural loans decreased $33 million, or 2.6% in 2021 and increased $72 million, or 6.1% in 2020. Consumer loans increased by $30.0 million, or 1.8%, in 2021 and increased $207.3 million, or 14.3%, in 2020. The increase in consumer loans in each of 2021 and 2020 was primarily due to an increase in automobile lending in Ohio. -55- Residential real estate loans decreased by $74.3 million, or 4.1%, in 2021 and decreased by $79.7 million, or 4.2%, in 2020. The decrease in 2021 was due to a decrease in mortgage loans secured by residential real estate of $62.7 million, a decrease in home equity loans secured by residential real estate of $16.4 million and a decrease in installment loans secured by residential real estate of $2.8 million, partially offset by an increase in commercial loans secured by residential real estate of $7.6 million. Leases decreased by $3.9 million to $20.5 million in 2021 and decreased $5.6 million to $24.4 million in 2020. The table below summarizes the distribution of maturities for loan segments as of December 31, 2021: Table 15 - Loan Maturity Distribution One Year or Less (1) Over One Through Five Years Over Five Through Fifteen Years Over Fifteen Years Total December 31, 2021 (In thousands) Commercial, financial and agricultural $ 331,606 $ 685,012 $ 184,208 $ 97,800 $ 1,298,626 Construction real estate 80,560 86,056 58,565 96,605 321,786 Residential real estate 66,352 155,785 846,938 669,632 1,738,707 Commercial real estate 106,511 322,930 755,864 616,487 1,801,792 Consumer 24,832 752,373 911,568 906 1,689,679 Leases 4,406 14,873 1,253 — 20,532 Total loans and leases $ 614,267 $ 2,017,029 $ 2,758,396 $ 1,481,430 $ 6,871,122 (1) Nonaccrual loans of $72.7 million are included within the one year or less classification above. The table below summarizes the composition of the loan portfolio by fixed and adjustable rate as of December 31, 2021 that are contractually due after December 31, 2022: Table 16 - Amounts Due After One Year (In thousands) Fixed Adjustable Total Commercial, financial and agricultural $ 470,929 $ 496,091 $ 967,020 Construction real estate 55,356 185,870 241,226 Residential real estate 663,284 1,009,071 1,672,355 Commercial real estate 493,857 1,201,424 1,695,281 Consumer 1,641,927 22,920 1,664,847 Leases 16,126 — 16,126 Total loans and leases $ 3,341,479 $ 2,915,376 $ 6,256,855 Investment Securities: Park’s investment securities portfolio is structured to minimize credit risk, provide liquidity and contribute to earnings. As conditions change over time, Park’s overall interest rate risk, liquidity needs and potential return on the investment portfolio will change. Management regularly evaluates the securities in the investment portfolio as circumstances evolve. Circumstances that could result in the sale of a security include: to better manage interest rate risk; to meet liquidity needs; or to improve the overall yield in the investment portfolio. AFS debt securities are carried on the books at their estimated fair value with the unrealized holding gain or loss, net of income taxes, accounted for as accumulated other comprehensive income (loss). The debt securities that are classified as AFS are free to be sold in future periods in carrying out Park’s investment strategies. Beginning in 2021, Park began investing in the AAA and AA rated tranches of Collateralized Loan Obligations ("CLOs"). CLOs had a fair value as of December 31, 2021 of $498.7 million. Management closely monitors the credit status of these securities. At December 31, 2021 the market value over collateralization was greater than 120% for each CLO. Prior to September 1, 2019, Park classified certain types of U.S. Government sponsored entity collateralized mortgage obligations (“CMOs”) and tax-exempt municipal securities that it purchased as Held-To-Maturity ("HTM"). These debt securities had been classified as HTM because they were generally not as liquid as the investment securities that Park classified as AFS. A classification of HTM meant that Park had the positive intent and the ability to hold these securities until maturity. -56- 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 that date, Park transferred HTM securities with a fair value of $373.9 million to the 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. Average taxable debt investment securities were $1,060 million in 2021, compared to $858 million in 2020 and $1,052 million in 2019. The average yield on taxable debt investment securities was 1.84% in 2021, compared to 2.31% in 2020 and 2.49% in 2019. Average tax-exempt debt investment securities were $288 million in 2021, compared to $289 million in 2020 and $309 million in 2019. The average tax-equivalent yield on tax-exempt debt investment securities was 3.65% in 2021, compared to 3.69% in 2020 and 3.67% in 2019. Total debt securities (at amortized cost) were $1,727 million at December 31, 2021, compared to $1,008 million at December 31, 2020 and $1,187 million at December 31, 2019. Management purchased debt securities totaling $954 million in 2021 and $354 million in 2020. There were no purchases of debt securities in 2019. Proceeds from repayments, redemptions and maturities of debt securities were $232 million in 2021, compared to $224 million in 2020 and $196 million in 2019. There were no sales of AFS debt securities in 2021. During 2020, Park sold certain AFS debt securities with a book value of $112.5 million at a gross loss of $64,000, and sold certain AFS debt securities with a book value of $196.4 million at a gross gain of $3.4 million. During 2019, Park sold certain AFS debt investment securities with a book value of $62.4 million at a gross loss of $692,000, and sold certain AFS debt investment securities with a book value of $29.1 million at a gross gain of $271,000. For the years ended December 31, 2021, 2020, and 2019, the average tax-equivalent yield on the total investment portfolio was 2.22%, 2.66% and 2.76%, respectively. The weighted average remaining maturity of the total investment portfolio was 4.8 years at December 31, 2021, 3.5 years at December 31, 2020 and 4.2 years at December 31, 2019. Obligations of the U.S. Treasury and other U.S. Government sponsored entities and U.S. Government sponsored entities' asset-backed securities were approximately 47.1% of the total investment portfolio at year-end 2021, 66.9% of the total investment portfolio at year-end 2020 and 69.5% of the total investment portfolio at year-end 2019. Other investment securities (as shown on Park's Consolidated Balance Sheets) consist of stock investments in the FHLB, the FRB and equity securities which includes equity investments in limited partnerships which provide mezzanine funding. Total other investment securities were $61 million at December 31, 2021, compared to $65 million at December 31, 2020 and $70 million at December 31, 2019. Management purchased equity securities totaling $3.6 million in 2020, compared to $100,000 in 2019. There were no equity security purchases in 2021. Management purchased $6.4 million of FRB stock in 2019. There were no FRB stock purchases in 2021 or 2020. Proceeds from the redemption/repurchase of FHLB stock were $8.7 million in 2021, compared to $8.0 million in 2020 and $14.7 million in 2019. "Gain on equity securities, net" on Park's Consolidated Statements of Income were $5.0 million, $2.2 million and $5.1 million for the years ended December 31, 2021, 2020 and 2019, respectively. These gains on equity securities were made up of gains (losses) on equity investments carried at fair value as well as gains (losses) on equity investments carried at NAV. For the years ended December 31, 2021, 2020 and 2019, $552,000, $(239,000) and $345,000, respectively, of gains (losses) on equity investments carried at fair value were recorded within "Gain on equity securities, net" on Park's Consolidated Statements of Income. For the years ended December 31, 2021, 2020 and 2019, $4.5 million, $2.4 million and $4.8 million, respectively, of gains on equity investments carried at NAV were recorded within "Gain on equity securities, net" on Park's Consolidated Statements of Income. The average maturity of the investment portfolio would lengthen if long-term interest rates were to increase as principal repayments from mortgage-backed securities and CMOs would decrease and callable securities would price to their maturity dates. At year-end 2021, management estimated that the average maturity of the investment portfolio would lengthen to 4.9 years with a 100 basis point increase in long-term interest rates and would lengthen to 5.1 years with a 200 basis point increase in long-term interest rates. Likewise, the average maturity of the investment portfolio would shorten if long-term interest rates were to decrease as the principal repayments from mortgage-backed securities and CMOs would increase and callable securities would price to their call dates. At year-end 2021, management estimated that the average maturity of the investment portfolio would decrease to 4.1 years with a 100 basis point decrease in long-term interest rates and to 3.8 years with a 200 basis point decrease in long-term interest rates. -57- The table below sets forth the carrying value of investment securities, as well as the percentage held within each category at year-end 2021, 2020 and 2019: Table 17 - Investment Securities December 31, (In thousands) 2021 2020 2019 Corporate debt securities $ 11,412 $ 2,014 $ — Obligations of states and political subdivisions 389,591 305,218 320,491 U.S. Government asset-backed securities 854,463 752,109 889,210 Collateralized loan obligations 498,674 — — FHLB stock 13,413 22,090 30,060 FRB stock 14,653 14,653 14,653 Equities 33,202 28,722 25,093 Total $ 1,815,408 $ 1,124,806 $ 1,279,507 Investments by category as a percentage of total investment securities Corporate debt securities 0.6 % 0.2 % — % Obligations of states and political subdivisions 21.5 % 27.1 % 25.0 % U.S. Government asset-backed securities 47.1 % 66.9 % 69.5 % Collateralized loan obligations 27.5 % — % — % FHLB stock 0.7 % 2.0 % 2.3 % FRB stock 0.8 % 1.2 % 1.2 % Equities 1.8 % 2.6 % 2.0 % Total 100.0 % 100.0 % 100.0 % The carrying value of investments in debt securities at December 31, 2021, is shown in the following table by contractual maturity, except for asset-backed securities and collateralized loan obligations, which are shown as a single total, due to the unpredictability of the timing in principal repayments. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Table 18 - Investment Maturity Distribution Over Five Through Ten Years Over Ten Years Total December 31, 2021 (In thousands) Corporate debt securities $ 11,412 $ — $ 11,412 Obligations of states and political subdivisions 213,154 176,437 389,591 Total $ 224,566 $ 176,437 $ 401,003 U.S. Government sponsored entities' asset-backed securities $ 854,463 Collateralized loan obligations 498,674 ANALYSIS OF EARNINGS 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. (See the table below for three years of history on the average balances of the balance sheet categories as well as the average rates earned on interest earning assets and the average rates paid on interest bearing liabilities.) -58- Table 19 - Distribution of Assets, Liabilities and Shareholders' Equity December 31, 2021 2020 2019 (In thousands) Daily Average Interest Average Rate Daily Average Interest Average Rate Daily Average Interest Average Rate ASSETS Loans (1)(2) $ 7,014,517 $ 317,912 4.53 % $ 6,990,458 $ 329,350 4.71 % $ 6,208,496 $ 321,961 5.19 % Taxable investment securities 1,059,809 19,458 1.84 % 857,752 19,818 2.31 % 1,051,540 26,213 2.49 % Tax-exempt investment securities (3) 288,300 10,514 3.65 % 289,366 10,679 3.69 % 309,197 11,335 3.67 % Money market instruments 665,714 880 0.13 % 280,952 739 0.26 % 169,703 3,947 2.33 % Total interest earning assets 9,028,340 348,764 3.86 % 8,418,528 360,586 4.28 % 7,738,936 363,456 4.70 % Non-interest earning assets: Allowance for credit losses (87,233) (71,221) (54,516) Cash and due from banks 139,678 127,214 130,372 Premises and equipment, net 89,758 81,357 69,710 Other assets 676,915 685,755 589,527 TOTAL $ 9,847,458 $ 9,241,633 $ 8,474,029 LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing liabilities: Transaction accounts $ 1,550,138 $ 357 0.02 % $ 1,687,417 $ 3,582 0.21 % $ 1,648,896 $ 13,249 0.80 % Savings deposits 2,924,504 1,238 0.04 % 2,556,475 5,560 0.22 % 2,261,600 20,099 0.89 % Time deposits 774,825 4,711 0.61 % 994,255 12,186 1.23 % 1,119,358 17,494 1.56 % Total interest bearing deposits 5,249,467 6,306 0.12 % 5,238,147 21,328 0.41 % 5,029,854 50,842 1.01 % Federal funds purchased 68 — 0.10 % 1,872 2 0.12 % 79 2 2.78 % Repurchase agreements 261,967 95 0.04 % 250,265 472 0.19 % 168,450 1,105 0.66 % Short-term borrowings 25,025 672 2.69 % 26,750 636 2.38 % 47,371 1,369 2.89 % Long-term debt (4) 205,883 8,887 4.32 % 215,645 7,652 3.55 % 340,664 9,445 2.77 % Total interest bearing liabilities 5,742,410 15,960 0.28 % 5,732,679 30,090 0.52 % 5,586,418 62,763 1.12 % -59- Table 19 - Distribution of Assets, Liabilities and Shareholders' Equity-continued December 31, 2021 2020 2019 (In thousands) Daily Average Interest Average Rate Daily Average Interest Average Rate Daily Average Interest Average Rate Non-interest bearing liabilities: Demand deposits 2,937,035 2,394,717 1,875,628 Other 102,553 105,135 89,809 Total non-interest bearing liabilities 3,039,588 2,499,852 1,965,437 Shareholders' equity 1,065,460 1,009,102 922,174 TOTAL $ 9,847,458 $ 9,241,633 $ 8,474,029 Tax equivalent net interest income $ 332,804 $ 330,496 $ 300,693 Net interest spread 3.58 % 3.76 % 3.58 % Net yield on interest earning assets (net interest margin) 3.69 % 3.93 % 3.89 % (1) Loan income includes net loan-related fee income, purchase accounting accretion and origination expense in the aggregate amount of $11.1 million in 2021, $12.9 million in 2020 and $0.6 million in 2019. Loan income also includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate in 2021, 2020 and 2019. The taxable equivalent adjustments were $704,000 in 2021, $623,000 in 2020 and $576,000 in 2019. (2) For the purpose of the computation for loans, nonaccrual loans are included in the daily average loans outstanding. (3) Interest income on tax-exempt investment securities includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate in 2021, 2020 and 2019. The taxable equivalent adjustments were $2.2 million in 2021, $2.2 million in 2020 and $2.4 million in 2019. (4) Includes subordinated notes. Average interest earning assets for 2021 increased by $610 million, or 7.2% to $9,028 million, compared to $8,419 million for 2020. Average interest earning assets for 2020 increased by $680 million, or 8.8%, to $8,419 million, compared to $7,739 million for 2019. The average yield on interest earning assets decreased by 42 basis points to 3.86% for 2021, compared to 4.28% for 2020 and 4.70% for 2019. For 2019, the acquisition of Carolina Alliance added average interest earning assets of $432.7 million. Interest income for 2021, 2020, and 2019 included $8.0 million, $453,000 and $256,000, respectively, related to payments received on certain SEPH nonaccrual loan relationships, some of which are participated with PNB as well as $3.3 million, $4.4 million and $5.2 million of purchase accounting accretion for 2021, 2020 and 2019, respectively. Interest income for 2021 and 2020 included $18.0 million and $16.7 million, respectively, of income related to PPP loans. Excluding the impact of the purchase accounting accretion, SEPH income, and PPP income, the average yield on loans was 4.27%, 4.63% and 5.09%, for the years ended December 31, 2021, 2020 and 2019, respectively, the average yield on earning assets was 3.64%, 4.20% and 4.62%, for the years ended December 31, 2021, 2020 and 2019, respectively, and the net interest margin was 3.46%, 3.82% and 3.80%, for the years ended December 31, 2021, 2020 and 2019, respectively. Average interest bearing liabilities for 2021 increased by $10 million, or 0.2%, to $5,742 million, compared to $5,733 million for 2020. Average interest bearing liabilities for 2020 increased by $146 million, or 2.6%, to $5,733 million for 2020, compared to $5,586 million for 2019. The average cost of interest bearing liabilities decreased by 24 basis points to 0.28% for 2021, compared to 0.52% for 2020 and 1.12% for 2019. For 2019, the acquisition of Carolina Alliance added average interest bearing liabilities of $368.8 million. -60- The table below shows for the years ended December 31, 2021, 2020, and 2019, the average balance and tax equivalent yield by type of loan. Table 20 - Average Loans and Tax Equivalent Yield Year Ended December 31, 2021 2020 2019 (Dollars in thousands) Average balance Tax equivalent yield Average balance Tax equivalent yield Average balance Tax equivalent yield Home equity $ 168,708 3.71 % $ 205,492 4.04 % $ 229,916 5.59 % Installment loans 1,688,966 4.80 % 1,548,059 5.17 % 1,379,111 5.34 % Real estate loans 1,176,885 3.73 % 1,268,181 4.11 % 1,246,209 4.36 % Commercial loans (1) 3,977,165 4.69 % 3,964,853 4.75 % 3,348,599 5.39 % Other 2,793 12.07 % 3,873 10.71 % 4,661 11.70 % Total loans and leases before allowance for credit losses $ 7,014,517 4.53 % $ 6,990,458 4.71 % $ 6,208,496 5.19 % (1) Commercial loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate in 2021, 2020 and 2019. The taxable equivalent adjustments were $704,000 in 2021, $623,000 in 2020 and $576,000 in 2019. Loan interest income for 2021, 2020, and 2019 included $8.0 million, $453,000 and $256,000, respectively, related to payments received on certain SEPH nonaccrual loan relationships, some of which are participated with PNB as well as $3.3 million, $4.4 million and $5.2 million of purchase accounting accretion for 2021, 2020 and 2019, respectively. Below is a summary of the impact of these items on the tax equivalent yield of loans. • The amount of interest related to SEPH nonaccrual loan relationships and purchase accounting accretion included in home equity loan interest income for 2021, 2020 and 2019 was $479,000, $395,000 and $443,000, respectively. Excluding the impact of these items, the average tax equivalent yield on home equity loans was 3.41%, 3.83% and 5.37%, respectively. • The amount of interest related to SEPH nonaccrual loan relationships and purchase accounting accretion included in real estate loan interest income for 2021, 2020 and 2019 was $243,000, $391,000 and $617,000. Excluding the impact of these items, the average tax equivalent yield on real estate loans was 3.71%, 4.08% and 4.30%, respectively. • The amount of interest related to PPP income, SEPH nonaccrual loan relationships and purchase accounting accretion included in commercial loan interest income for 2021, 2020, and 2019 was $28.5 million, $19.9 million and $4.3 million, respectively. Excluding the impact of these items, the average tax equivalent yield on commercial loans was 4.24%, 4.66% and 5.26%, for 2021, 2020, and 2019, respectively. • Excluding the impact of interest related to PPP income, SEPH nonaccrual loan relationships and purchase accounting accretion, the average tax equivalent yield on total loans and leases was 4.27%, 4.63% and 5.09%, for 2021, 2020, and 2019, respectively. The table below shows for the years ended December 31, 2021, 2020, and 2019, the average balance and cost of funds by type of deposit. Table 21 - Average Deposits and Cost of Funds Year Ended December 31, 2021 2020 2019 (Dollars in thousands) Average balance Cost of funds Average balance Cost of funds Average balance Cost of funds Transaction accounts $ 1,550,138 0.02 % $ 1,687,417 0.21 % $ 1,648,896 0.80 % Savings deposits and clubs 2,924,504 0.04 % 2,556,475 0.22 % 2,261,600 0.89 % Time deposits (1) 774,825 0.61 % 994,255 1.23 % 1,119,358 1.56 % Total interest bearing deposits (1) $ 5,249,467 0.12 % $ 5,238,147 0.41 % $ 5,029,854 1.01 % (1) Time deposit interest expense for 2021, 2020 and 2019 benefited from $46,000, $226,000 and $593,000, respectively, of purchase accounting accretion related to the acquisition of NewDominion for all of 2021, 2020 and 2019 and Carolina Alliance for all of 2021 and 2020 and the second, third and fourth quarters of 2019. Excluding the impact of this accretion, the average cost of funds on time deposits for 2021, 2020 and 2019 was 0.61%, 1.25% and 1.62%, respectively, and the average cost of funds on total interest bearing deposits for 2021, 2020 and 2019 was 0.12%, 0.41% and 1.02%, respectively. The following table displays (for each quarter of 2021) the average balance of interest earning assets, the net interest income and the tax equivalent net interest income and net interest margin. -61- Table 22 - Quarterly Net Interest Margin (In thousands) Average Interest Earning Assets Net Interest Income (1) Tax Equivalent Net Interest Income (1) Tax Equivalent Net Interest Margin (1) First Quarter $ 8,786,301 $ 80,734 $ 81,448 3.76 % Second Quarter 9,062,368 83,851 84,569 3.74 % Third Quarter 9,250,939 81,602 82,319 3.53 % Fourth Quarter 9,008,863 83,706 84,468 3.72 % 2021 $ 9,028,340 $ 329,893 $ 332,804 3.69 % (1) Net interest income for the first, second, third and fourth quarters of 2021 included $105,000, $2.8 million, $414,000 and $4.6 million, respectively, related to payments received on certain SEPH nonaccrual loan relationships, some of which are participated with PNB. Net interest income for the first, second, third, and fourth quarters of 2021 included $1.1 million, $806,000, $807,000 and $559,000 of purchase accounting accretion related to the acquisition of NewDominion and Carolina Alliance. Net interest income for the first, second, third, and fourth quarters of 2021 included $5.2 million, $5.7 million, $4.6 million and $2.5 million, respectively, related to PPP loans. Excluding the impact of these loan payments and accretion, the tax equivalent net interest margin was 3.61%, 3.47%, 3.35%, and 3.42%, for the first, second, third, and fourth quarters of 2021, respectively, and 3.46% for the year ended December 31, 2021. In the following table, the change in tax equivalent interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. Table 23 - Volume/Rate Variance Analysis Change from 2020 to 2021 Change from 2019 to 2020 (In thousands) Volume Rate Total Volume Rate Total Increase (decrease) in: Interest income: Total loans $ 1,134 $ (12,572) $ (11,438) $ 40,552 $ (33,163) $ 7,389 Taxable investments 4,668 (5,028) (360) (4,830) (1,565) (6,395) Tax-exempt investments (39) (126) (165) (727) 71 (656) Money market instruments 1,014 (873) 141 2,587 (5,795) (3,208) Total interest income 6,777 (18,599) (11,822) 37,582 (40,452) (2,870) Interest expense: Transaction accounts $ (291) $ (2,934) $ (3,225) $ 310 $ (9,977) $ (9,667) Savings accounts 800 (5,122) (4,322) 2,621 (17,160) (14,539) Time deposits (2,690) (4,785) (7,475) (1,955) (3,353) (5,308) Short-term borrowings 33 (376) (343) 701 (2,067) (1,366) Long-term debt (346) 1,581 1,235 (3,467) 1,674 (1,793) Total interest expense (2,494) (11,636) (14,130) (1,790) (30,883) (32,673) Net variance $ 9,271 $ (6,963) $ 2,308 $ 39,372 $ (9,569) $ 29,803 -62- Other Income: Other income was $129.9 million in 2021, compared to $125.7 million in 2020 and $97.2 million in 2019. The following table displays total other income for Park in 2021, 2020 and 2019. Table 24 - Other Income Year Ended December 31, (In thousands) 2021 2020 2019 Income from fiduciary activities $ 34,449 $ 28,873 $ 27,768 Service charges on deposit accounts 8,832 8,445 10,835 Other service income 29,812 37,611 15,500 Debit card fee income 25,865 22,160 20,250 Bank owned life insurance income 4,897 4,789 4,557 ATM fees 2,379 1,773 1,828 (Loss) gain on the sale of OREO, net (4) 1,207 (222) Net gain (loss) on the sale of debt securities — 3,286 (421) Gain on equity securities, net 5,011 2,182 5,118 Other components of net periodic benefit income 8,152 7,952 4,732 Miscellaneous 10,551 7,386 7,248 Total other income $ 129,944 $ 125,664 $ 97,193 Income from fiduciary activities increased by $5.6 million, or 19.3%, to $34.4 million in 2021, compared to $28.9 million in 2020. The $28.9 million was an increase of $1.1 million, or 4.0%, compared to $27.8 million in 2019. The increases in fiduciary fee income in 2021 and 2020 were primarily due to improvements in equity market values and also due to an increase in the total account balances serviced by PNB’s Trust Department. PNB charges fiduciary fees largely based on the market value of the trust assets. The average market value of the trust assets managed by PNB was $7.45 billion in 2021, compared to $6.17 billion in 2020 and $5.85 billion in 2019. Service charges on deposit accounts increased $387,000, or 4.6%, to $8.8 million in 2021, compared to $8.4 million in 2020 and decreased by $2.4 million, or 22.1%, in 2020 compared to $10.8 million in 2019. The increase in 2021 was related to an increase in other non-sufficient funds (NSF) fee income and service charges on demand deposit accounts. The decline in 2020 was related to declines in service charges on deposits, largely as a result of a decline in other NSF fee income and service charges on demand deposit accounts. Other service income decreased $7.8 million, or 20.7%, to $29.8 million in 2021, compared to $37.6 million in 2020, and increased $22.1 million, or 142.7%, in 2020 compared to $15.5 million in 2019. The decrease in 2021 compared to 2020 was primarily related to a decrease in other service income related to mortgage loan originations, including a $6.4 million decrease in fee income related to a $457.3 million decrease in mortgage loan originations to be sold in the secondary market and a $3.7 million decrease in income related to investor rate locks and loans held for sale, partially offset by a $1.2 million increase in mortgage investor fees and a $927,000 increase in mortgage servicing rights income. The increase in 2020 compared to 2019 was primarily related to an increase in other service income related to mortgage loan originations, including a $17.2 million increase in fee income related to a $686.5 million increase in mortgage loan originations to be sold in the secondary market, a $1.7 million increase in income related to investor rate locks and loans held for sale, and a $2.3 million increase in mortgage servicing rights income. Debit card fee income, which is generated from debit card transactions, increased $3.7 million, or 16.7%, to $25.9 million in 2021, compared to $22.2 million in 2020, and increased $1.9 million, or 9.4%, in 2020 compared to $20.3 million in 2019. The increases in 2021 and 2020 were attributable to continued increases in the volume of debit card transactions, which increased 10.0% in 2021 from 2020, and increased 4.4% in 2020 from 2019, and increases in total sale dollars of debit card transactions, which increased 17.1% in 2021 from 2020, and increased 12.5% in 2020 from 2019. In addition, the increase in 2020 was attributable to changes in our point of sale network. Park continues to focus on deposit offerings that provide incentives for our customers to use their debit card. -63- (Loss) gain on the sale of OREO, net, reflected a loss of $4,000 in 2021, a decrease of $1.2 million, compared to income of $1.2 million in 2020, and the income of $1.2 million in 2020 reflected an increase of $1.4 million, compared to a loss of $222,000 in 2019. The decrease in 2021 and the increase in 2020 were primarily due to a $1.2 million gain on the sale of two OREO properties during 2020, one of which was participated to PNB from SEPH. During 2020, Park sold certain AFS debt securities with a book value of $112.5 million at a gross loss of $64,000, and sold certain AFS debt securities with a book value of $196.4 million at a gross gain of $3.4 million. During 2019, Park sold certain AFS debt securities with a book value of $62.4 million at a gross loss of $692,000, and sold certain AFS debt securities with a book value of $29.1 million at a gross gain of $271,000. No debt securities were sold in 2021. During the years ended December 31, 2021, 2020 and 2019, $552,000, $(239,000) and $345,000, respectively, of gains (losses) on equity investments carried at fair value were recorded within "Gain on equity securities, net" on Park's Consolidated Statements of Income. For the years ended December 31, 2021, 2020 and 2019, $4.5 million, $2.4 million and $4.8 million, respectively, of gains on equity investments carried at NAV were recorded within "Gain on equity securities, net" on Park's Consolidated Statements of Income. Other components of net periodic pension benefit income increased by $200,000, or 2.5% to $8.2 million in 2021, compared to $8.0 million in 2020, and increased $3.2 million, or 68.0%, to $8.0 million in 2020, compared to $4.7 million in 2019. The increases in 2021 and 2020 were largely due to an increase in the expected return on plan assets as a result of the increased value of plan assets. Miscellaneous income increased by $3.2 million, or 42.9%, to $10.6 million in 2021, compared to $7.4 million in 2020, and increased $138,000, or 1.9%, to $7.4 million in 2020, compared to $7.2 million in 2019. The increase in 2021 was primarily related to refunds of a consumer insurance product, an increase in income from printed check sales and an increase in gain on sale of assets. Other Expense: Other expense was $283.5 million in 2021, compared to $286.6 million in 2020 and $264.0 million in 2019. Other expense decreased by $3.1 million, or 1.1%, in 2021 and increased by $22.6 million, or 8.6% in 2020. The following table displays total other expense for Park for 2021, 2020 and 2019. Table 25 - Other Expense Year Ended December 31, (In thousands) 2021 2020 2019 Salaries $ 125,585 $ 128,040 $ 119,514 Employee benefits 41,603 37,115 36,806 Occupancy expense 13,039 13,802 12,815 Furniture and equipment expense 10,887 18,805 17,032 Data processing fees 30,539 11,659 10,750 Professional fees and services 27,450 31,303 33,317 Marketing 6,073 5,828 5,753 Insurance 5,917 6,423 3,130 Communication 3,539 4,084 5,351 State tax expense 4,255 3,991 3,829 Amortization of intangible assets 1,798 2,263 2,355 FHLB prepayment penalty — 10,529 612 Foundation contributions 4,000 3,000 1,500 Miscellaneous 8,833 9,753 11,224 Total other expense $ 283,518 $ 286,595 $ 263,988 Full-time equivalent employees 1,685 1,755 1,907 Salaries expense decreased by $2.5 million, to $125.6 million in 2021, compared to $128.0 million in 2020, and increased by $8.5 million, or 7.1%, in 2020 compared to $119.5 in 2019. The decrease in 2021 was due to a $4.2 million decrease in salary expense, primarily related to a $3.2 million decrease in severance and restructuring related expense, a $1.1 -64- million decrease in expense related to the vacation accrual, a $1.0 million decrease in base salary expense and a $1.0 million decrease in additional compensation expense, partially offset by a $3.3 million increase in incentive compensation expense and a $347,000 increase in share-based compensation expenses related to PBRSU awards granted under the Park 2013 Long-Term Incentive Plan (the "2013 Incentive Plan") (prior to 2017) and both PBRSU and TBRSU awards granted under the Park 2017 Long-Term Incentive Plan for Employees (the "2017 Employee LTIP"). The increase in 2020 was due to a $4.6 million increase in salary expense, which was primarily related to increases in base salary and $3.6 million in severance and restructuring related expense, a $1.9 million increase in additional compensation expense, an $850,000 increase in expense related to the vacation accrual and a $1.0 million increase in share-based compensation expenses. Park had 1,685 full-time equivalent employees at year-end 2021, compared to 1,755 full-time equivalent employees at year-end 2020 and 1,907 full-time equivalent employees at year-end 2019. During 2020, Park closed 23 offices, which resulted in the significant reduction in full-time equivalent employees during 2020. Employee benefits expense increased $4.5 million, or 12.1%, to $41.6 million in 2021, compared to $37.1 million in 2020, and increased $309,000, or 0.8%, in 2020 compared to $36.8 million in 2019. The increase in 2021 was due to a $2.7 million increase in group insurance costs, a $1.6 million increase in pension plan expense and a $693,000 increase in payroll tax expense, partially offset by a $496,000 decrease in miscellaneous employee benefits. The increase in 2020 was due to a $2.4 million increase in pension plan expense, a $505,000 increase in miscellaneous employee benefits and a $300,000 increase in the KSOP match, partially offset by a $3.0 million decrease in group insurance costs. Occupancy expense decreased $763,000, or 5.5%, to $13.0 million in 2021, compared to $13.8 million in 2020, and increased by $987,000, or 7.7%, in 2020 compared to $12.8 million in 2019. The $763,000 decrease in 2021 was primarily the result of decreased lease expense, which was mainly the result of the closure of some leased branches in 2020. The $987,000 increase in 2020 was primarily the result of increased depreciation on premises and a write-down in the right-of-use lease asset related to branches that closed September 30, 2020. Furniture and equipment expense decreased $7.9 million, or 42.1%, to $10.9 million in 2021, compared to $18.8 million in 2020. and increased $1.8 million, or 10.4%, in 2020 compared to $17.0 million in 2019. The decrease in 2021 was primarily related to a change in the classification under which software and related maintenance costs are expensed, which are now classified under data processing fees, partially offset by increases in depreciation of furniture and equipment. The increase in 2020 was primarily related to increased expenses related to repairs and maintenance on equipment, which also included software maintenance and costs, as well as increased depreciation on furniture and equipment. Data processing fees increased by $18.9 million, or 161.9%, to $30.5 million in 2021, compared to $11.7 million in 2020, and increased $909,000, or 8.5%, in 2020 compared to $10.8 million in 2019. The increase in 2021 was related to increased other data processing and software costs, partially due to the previously mentioned change in classification from furniture and equipment expense and a change in expensing software costs from other fees within professional fees and services to data processing fees. The increase was also impacted by changes in debit card processing costs, which increased $832,000. Overall data processing and software costs across all line items, excluding debit card processing costs, increased $2.3 million. The increase in 2020 was related to increased mortgage processing costs, debit card processing costs and other data processing and software costs. Professional fees and services decreased $3.9 million, or 12.3%, to $27.5 million, compared to $31.3 million for 2020, and decreased by $2.0 million, or 6.0%, in 2020 compared to $33.3 million in 2019. This subcategory of total other expense includes legal fees, management consulting fees, directors' fees, audit fees, regulatory examination fees and memberships in industry associations. The decrease in professional fees and services expense in 2021 was primarily due to decreases in other fees (due to the change in expensing software costs under data processing fees), credit costs and title and appraisal costs, partially offset by increases in legal expense. The decrease in professional fees and services expense in 2020 was largely related to a $4.4 million decrease in fees related to the acquisition of Carolina Alliance and a $1.0 million decrease in legal expense, partially offset by a $2.1 million increase in management and consulting expense and a $1.2 million increase in title, appraisal and credit costs. Insurance expense decreased by $506,000, or 7.9%, to $5.9 million, compared to $6.4 million in 2020, and increased by $3.3 million, or 105.2%, in 2020 compared to $3.1 million in 2019. The decrease in 2021 was impacted by a decrease in the average FDIC assessment rate compared to 2020. The increase in 2020 was primarily due to the utilization of a $2.2 million assessment credit to reduce the FDIC insurance expense during the third and fourth quarters of 2019. 2020 was also impacted by an increase in the assessment base compared to 2019. -65- Communication expense decreased by $545,000, or 13.3%, to $3.5 million in 2021, compared to $4.1 million in 2020, and decreased $1.3 million, or 23.7%, in 2020 compared to $5.4 million in 2019. The decrease in 2021 was primarily related to lower telephone, cable and data related communication costs. The decrease in 2020 was primarily related to a change in statement mailing and production costs, which resulted in lower direct postage expense, but was more than offset by an increase in supply expense which is included in miscellaneous expense. The subcategory "Miscellaneous" other expense includes expenses for supplies, travel, and other miscellaneous expense. The subcategory Miscellaneous other expense decreased by $920,000, or 9.4%, to $8.8 million in 2021, compared to $9.8 million in 2020. The $9.8 million in 2020 was a decrease of $1.5 million, or 13.1%, compared to $11.2 million in 2019. The decrease in 2021 was primarily related to a decrease in supply expense, operating lease depreciation, OREO expense and training and travel related related expenses, partially offset by an increase in non-loan related losses. The decrease in 2020 was primarily due to a decrease in training and travel related expenses as well as a decrease in non-loan related losses. Efficiency Ratio: The following table details the calculation of the efficiency ratio for the years ended December 31, 2021, 2020, and 2019. Table 26- Efficiency ratio (1) Year Ended December 31, (in thousands) 2021 2020 2019 Net interest income $ 329,893 $ 327,630 $ 297,737 Add: Tax equivalent adjustment (2) 2,911 2,866 2,956 Net interest income - Fully tax equivalent $ 332,804 $ 330,496 $ 300,693 Total other income $ 129,944 $ 125,664 $ 97,193 Total other expense $ 283,518 $ 286,595 $ 263,988 Efficiency ratio 61.27 % 62.83 % 66.35 % (1) Calculated by dividing "Total other expense" by the sum of fully-tax equivalent net interest income and "Total other income." (2) The tax equivalent adjustment to net interest income was calculated assuming a 21% corporate federal income tax rate for 2021, 2020 and 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 are due to merger and acquisition activities, management restructuring, branch closures, a rebranding initiative, COVID-19 related expenses 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. The following table details those items which management believes impacts the comparability of current and prior period amounts. Table 27 - Items impacting comparability Year Ended December 31, (in thousands, except share and per share data) 2021 2020 2019 Affected Line Item Net interest income $ 329,893 $ 327,630 $ 297,737 less purchase accounting accretion related to NewDominion and Carolina Alliance acquisitions 3,257 4,443 5,193 Interest and fees on loans less purchase accounting accretion related to NewDominion and Carolina Alliance acquisitions 46 226 593 Interest on deposits less interest income on former Vision Bank relationships 7,985 453 256 Interest and fees on loans Net interest income - adjusted $ 318,605 $ 322,508 $ 291,695 (Recovery of) provision for credit losses $ (11,916) $ 12,054 $ 6,171 less recoveries on former Vision Bank relationships (3,169) (21,982) (3,042) (Recovery of) provision for credit losses (Recovery of) provision for credit losses - adjusted $ (8,747) $ 34,036 $ 9,213 Other income $ 129,944 $ 125,664 $ 97,193 less net gain (loss) on sale of former Vision Bank OREO properties — 1,208 (111) (Loss) gain on the sale of OREO, net -66- Table 27 - Items impacting comparability (continued) Year Ended December 31, (in thousands, except share and per share data) 2021 2020 2019 Affected Line Item less other service income related to former Vision Bank relationships 525 590 52 Other service income less rebranding initiative related expenses — (572) — Miscellaneous less net gain (loss) on the sale of debt securities in the ordinary course of business 3,286 (421) Net gain (loss) on the sale of debt securities Other income - adjusted $ 129,419 $ 121,152 $ 97,673 Other expense $ 283,518 $ 286,595 $ 263,988 less merger-related expenses related to NewDominion and Carolina Alliance acquisitions 8 117 3,567 Salaries less merger-related expenses related to NewDominion and Carolina Alliance acquisitions — — 1 Occupancy expense 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 — 496 4,856 Professional fees and services less merger-related expenses related to NewDominion and Carolina Alliance acquisitions 16 16 16 Insurance less merger-related expenses related to NewDominion and Carolina Alliance acquisitions — — 421 Miscellaneous less core deposit intangible amortization related to NewDominion and Carolina Alliance acquisitions 1,798 2,263 2,355 Amortization of intangible assets less Foundation contributions 4,000 3,000 1,500 Foundation contributions less severance and restructuring charges 367 3,596 107 Salaries less severance and restructuring charges — 847 — Employee benefits less FDIC assessment credit — — (2,193) Insurance less rebranding initiative related expenses — 72 — Employee benefits less rebranding initiative related expenses 308 47 — Occupancy expense less rebranding initiative related expenses 1,050 75 — Furniture and equipment expense less rebranding initiative related expenses 591 — — Data processing fees less rebranding initiative related expenses — 23 — Marketing less rebranding initiative related expenses 136 734 1,073 Professional fees and services less rebranding initiative related expenses — 2 90 Communication less rebranding initiative related expenses (including trade name intangible expense) — 87 1,313 Miscellaneous less COVID-19 related expenses (bonuses and calamity pay) 2,122 3,622 — Salaries less extra direct compensation related to collection of payments on former Vision Bank loan relationships — 1,900 — Salaries less management and consulting expenses related to collection of payments on former Vision Bank loan relationships 1,361 2,383 622 Professional fees and services less FHLB prepayment penalty — 10,529 612 FHLB prepayment penalty Other expense - adjusted $ 271,761 $ 256,786 $ 249,632 Tax effect of adjustments to net income identified above (1) $ (677) $ (379) $ 1,208 Net income - reported $ 153,945 $ 127,923 $ 102,700 Net income - adjusted $ 151,397 $ 126,495 $ 107,244 (1) The tax effect of adjustments to net income was calculated assuming a 21% corporate federal income tax rate for 2021, 2020 and 2019. Income Taxes: Income tax expense was $34.3 million in 2021, compared to $26.7 million in 2020 and $22.1 million in 2019. Income tax expense as a percentage of income before taxes was 18.2% in 2021, 17.3% in 2020 and 17.7% in 2019. The difference between the statutory federal corporate income tax rate of 21% for 2021 and Park’s effective tax rate reflected 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 common shares held within Park’s salary deferral plan, offset by the impact of state income taxes. Park's permanent federal tax differences for 2021 were approximately $6.3 million in 2021, compared to $6.7 million for 2020. Park expects permanent federal tax differences for 2022 will be approximately $5.8 million. CREDIT METRICS AND (RECOVERY OF) PROVISION FOR CREDIT LOSSES The (recovery of) provision for credit losses is the amount added to/subtracted from the allowance for credit losses to ensure the allowance is sufficient to absorb estimated credit losses over the life of a loan. The amount of the provision for credit losses is determined by management based on relevant information about past events, including historical credit loss experience -67- on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. Section 4014 of the CARES Act provided financial institutions with optional temporary relief from having to comply with ASU 2016-13 including the CECL methodology for estimating the allowance for credit losses. This temporary relief was set to expire on the earlier of the date on which the national emergency concerning COVID-19 terminated or December 31, 2020, with adoption being effective retrospectively as of January 1, 2020. Section 540 of the Consolidated Appropriations Act, 2021, amended Section 4014 of the CARES Act by extending the relief period provided in the CARES Act. The Consolidated Appropriations Act, 2021, modified the CARES Act so that temporary relief was to expire on the earlier of the first day of the fiscal year that begins after the date on which the national emergency concerning COVID-19 terminates or January 1, 2022. Park elected to delay the implementation of ASU 2016-13 following the approval of the CARES Act and continued to use the incurred loss methodology for estimating the allowance for credit losses in 2020. ASU 2016-13 requires financial institutions to calculate an allowance utilizing a reasonable and supportable forecast period which Park has established as a one-year period. In the unprecedented circumstances surrounding the COVID-19 pandemic and the response thereto, Park believed that adopting ASU 2016-13 in the first quarter of 2020 would have added an unnecessary level of subjectivity and volatility to the calculation of the allowance for credit losses. With the approval of the Consolidated Appropriations Act, 2021, management elected to further delay adoption of ASU 2016-13 to January 1, 2021. This allowed Park to utilize the CECL standard for the entire year of adoption. The adoption of ASU 2016-13 on January 1, 2021 resulted in a $6.1 million increase to the allowance for credit losses and a $3.9 million increase to the allowance for unfunded credit losses. A cumulative effect adjustment resulting in an $8.0 million decrease to retained earnings and a $2.1 million increase to deferred tax assets was also recorded. The table below provides additional information on the (recovery of) provision for credits losses and the ACL for 2021, 2020 and 2019. Table 28 - ACL Activity (In thousands) 2021 2020 2019 ACL, beginning balance $ 85,675 $ 56,679 $ 51,512 Cumulative change in accounting principle; adoption of ASU 2016-13 6,090 — — Charge-offs 5,093 10,304 11,177 Recoveries (8,441) (27,246) (10,173) Net (recoveries) charge-offs (3,348) (16,942) 1,004 (Recovery of) provision for credit losses: (11,916) 12,054 6,171 ACL, ending balance $ 83,197 $ 85,675 $ 56,679 Average loans $ 7,014,517 $ 6,990,458 $ 6,208,496 Net (recoveries) charge-offs as a percentage of average loans (0.05) % (0.24) % 0.02 % For the year ended December 31, 2021, gross income of $4.2 million would have been recognized on loans that were nonaccrual as of December 31, 2021 had these loans been current in accordance with their original terms. Interest income on nonaccrual loans may be recorded on a cash basis and be included in earnings only when Park expects to receive the entire recorded investment of the loan. Of the $4.2 million that would have been recognized, approximately $2.7 million was included in interest income for the year ended December 31, 2021. Charge-offs for 2021 included the charge-off of $15,000 in specific reserves for which provision expense had been recognized in a prior year, compared to $283,000 for 2020 and $236,000 for 2019. Net (recoveries) charge-offs adjusted for changes in specific reserves as a percentage of average loans for the years ended December 31, 2021, 2020 and 2019 were (0.10)%, (0.24)%, and 0.06%, respectively. SEPH, as a non-bank subsidiary of Park, does not carry an ACL balance, but recognizes a provision for credit losses when a charge-off is taken and recognizes a recovery of credit losses when a recovery is received. -68- At year-end 2021, the allowance for credit losses was $83.2 million, or 1.21%, of total loans outstanding, compared to $85.7 million, or 1.19%, of total loans outstanding at year-end 2020, and $56.7 million, or 0.87% of total loans outstanding at year-end 2019. The following table provides additional information related to the allowance for credit losses for Park including information related to specific reserves and general reserves, at December 31, 2021, December 31, 2020 and December 31, 2019. Also included is the January 1, 2021 allowance for credit losses calculated under the CECL methodology prescribed in ASU 2016-13. Table 29- Allowance for Credit Losses Summary (Dollars in thousands) 12/31/2021 (CECL methodology) 1/1/2021 (CECL methodology) 12/31/2020 (Incurred Loss methodology) 12/31/2019 (Incurred Loss methodology) Total allowance for credit losses $ 83,197 $ 91,764 $ 85,675 $ 56,679 Allowance on PCD loans (PCI loans for the periods ended in 2020 and 2019) — 52 167 268 Allowance on purchased loans excluded from the general reserve — — 678 — Specific reserves on individually evaluated loans 1,616 5,434 5,434 5,230 General reserves on collectively evaluated loans $ 81,581 $ 86,278 $ 79,396 $ 51,181 Total loans $ 6,871,122 $ 7,177,537 $ 7,177,785 $ 6,501,404 PCD loans (PCI loans for periods ended in 2020 and 2019) 7,149 10,903 11,153 14,331 Purchased loans excluded from collectively evaluated loans — — 360,056 548,436 Individually evaluated loans 74,502 108,274 108,407 77,459 Collectively evaluated loans $ 6,789,471 $ 7,058,360 $ 6,698,169 $ 5,861,178 Allowance for credit losses as a % of period end loans 1.21 % 1.28 % 1.19 % 0.87 % Allowance for credit losses as a % of period end loans (excluding PPP loans) (1) 1.22 % 1.34 % 1.25 % N.A General reserve as a % of collectively evaluated loans 1.20 % 1.22 % 1.19 % 0.87 % General reserve as a % of collectively evaluated loans (excluding PPP loans) (1) 1.21 % 1.28 % 1.24 % N.A (1) Excludes $74.4 million of PPP loans and $77,000 in related allowance at December 31, 2021; $331.6 million of PPP loans and $337,000 in related allowance at January 1, 2021; and $331.6 million of PPP loans and $337,000 in related allowance at December 31, 2020. -69- The allowance for credit losses of $83.2 million at December 31, 2021 represented an $8.6 million, or 9.3%, decrease compared to $91.8 million at January 1, 2021 as calculated under the CECL methodology. The decline since January 1, 2021 was largely due to a $4.7 million decrease in general reserves, taking into consideration improved economic forecasts while balancing the risks associated with the COVID-19 pandemic and the delta and omicron variants, particularly in high risk portfolios such as hotels and accommodations, restaurants and food service and strip shopping centers. Additionally, there was a $3.8 million decrease in specific reserves on individually evaluated loans from $5.4 million at January 1, 2021 to $1.6 million at December 31, 2021. The allowance for credit losses of $85.7 million at December 31, 2020 represented a $29.0 million, or 51.2%, increase compared to $56.7 million at December 31, 2019. This increase was largely the result of a $28.2 million increase in general reserves on total originated loans and a $204,000 increase in specific reserves. As of December 31, 2020, a $678,000 allowance had been established for performing purchased loans and a $167,000 allowance had been established for PCI loans. In addition to the established allowance related to purchased loans, as of December 31, 2020, these loans had a remaining purchase accounting discount of $7.2 million. The $28.2 million increase in general reserves was the result of the estimated increase in incurred losses as a result of the impact of the COVID-19 pandemic. This estimate was established based on consideration of Park's then existing environmental loss factors, modification programs Park had put in place, and balances of high risk portfolios such as hotel and accommodations, restaurants and food service and strip shopping centers. Management believes that the allowance for credit losses at year-end 2021 is adequate to absorb estimated life of loan credit losses in the loan portfolio. See "Note 1 - Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report on Form 10-K, and the discussion under the heading “CRITICAL ACCOUNTING POLICIES” earlier in this Management's Discussion and Analysis of Financial Condition and Results of Operations, for additional information on management’s evaluation of the adequacy of the allowance for credit losses. -70- ACL Detail by Loan Type: The following tables breakdown the allowance for credit losses and components by loan type. The table below provides a summary of Park's loan loss experience over the past three years: Table 30 - Summary of Loan Credit Loss Experience (In thousands) 2021 2020 2019 Average loans $ 7,014,157 $ 6,990,458 $ 6,208,496 Allowance for credit losses: Beginning balance 85,675 56,679 51,512 Adoption of ASU 2016-13 6,090 — — Charge-offs: Commercial, financial and agricultural 957 1,468 2,231 Construction real estate — 6 — Residential real estate 49 356 224 Commercial real estate 35 1,824 415 Consumer 4,052 6,634 8,307 Leases — 16 — Total charge-offs $ 5,093 $ 10,304 $ 11,177 Recoveries: Commercial financial, and agricultural $ 639 $ 20,765 $ 1,241 Construction real estate 2,299 1,122 2,682 Residential real estate 941 991 787 Commercial real estate 802 738 720 Consumer 3,759 3,629 4,742 Leases 1 1 1 Total recoveries $ 8,441 $ 27,246 $ 10,173 Net (recoveries) charge-offs $ (3,348) $ (16,942) $ 1,004 (Recovery) provision included in earnings (11,916) 12,054 6,171 Ending balance $ 83,197 $ 85,675 $ 56,679 Ratio of net (recoveries) charge-offs to average loans (0.05) % (0.24) % 0.02 % Ratio of allowance for credit losses to end of year loans 1.21 % 1.19 % 0.87 % -71- The follow table presents net-charge offs (recoveries), average loans outstanding, and net charge-offs as a percentage of average loans, by type of loan over the past three years: Table 31- Net Charge-Offs (Recoveries) to Average Loans Year Ended December 31, (in thousands) 2021 2020 2019 Net Charge-offs (Recoveries) Average Loans Net Charge-offs (Recoveries) as a % of Average Loans Net Charge-offs (Recoveries) Average Loans Net Charge-offs (Recoveries) as a % of Average Loans Net Charge-offs (Recoveries) Average Loans Net Charge-offs (Recoveries) as a % of Average Loans Commercial, financial, and agricultural $ 318 $ 1,435,221 0.02 % $ (19,297) $ 1,545,426 (1.25) % $ 990 $ 1,164,701 0.09 % Construction real estate (2,299) 331,882 (0.69) % (1,116) 346,664 (0.32) % (2,682) 295,538 (0.91) % Residential real estate (892) 1,771,880 (0.05) % (635) 1,867,956 (0.03) % (548) 1,859,002 (0.03) % Commercial real estate (767) 1,766,346 (0.04) % 1,086 1,655,747 0.07 % (320) 1,513,623 (0.02) % Consumer 293 1,686,849 0.02 % 3,005 1,546,574 0.19 % 3,565 1,367,045 0.26 % Leases (1) 22,339 — % 15 28,091 0.05 % (1) 8,587 (0.01) % Total $ (3,348) $ 7,014,517 (0.05) % $ (16,942) $ 6,990,458 (0.24) % $ 1,004 $ 6,208,496 0.02 % The following table summarizes Park's allocation of the allowance for credit losses for the past three years: Table 32- Allocation of Allowance for Credit Losses December 31, 2021 2020 2019 (In thousands) Allowance Percent of Loans Per Category Allowance Percent of Loans Per Category Allowance Percent of Loans Per Category Commercial, financial, and agricultural $ 14,025 18.90 % $ 25,608 22.14 % $ 20,203 18.23 % Construction real estate 5,758 4.68 % 7,288 4.78 % 5,311 5.10 % Residential real estate 11,424 25.31 % 11,363 25.26 % 8,610 29.11 % Commercial real estate 25,466 26.22 % 23,480 24.36 % 10,229 24.76 % Consumer 26,286 24.59 % 17,418 23.12 % 12,211 22.34 % Leases 238 0.30 % 518 0.34 % 115 0.46 % Total $ 83,197 100.00 % $ 85,675 100.00 % $ 56,679 100.00 % As of December 31, 2021, Park had no concentrations of loans exceeding 10% to borrowers engaged in the same or similar industries nor did Park have any loans to foreign governments. Nonperforming Assets: Nonperforming assets include: 1) loans whose interest is accounted for on a nonaccrual basis; 2) troubled debt restructurings (TDRs) on accrual status; 3) loans which are contractually past due 90 days or more as to principal or interest payments, where 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 December 31, 2021, 2020 and 2019, other nonperforming assets consisted of aircraft acquired as part of a loan workout. Generally, management obtains updated appraisal information for nonperforming loans and OREO annually. As new appraisal information is received, management performs an evaluation of the appraisal and applies a discount for anticipated disposition costs to determine the net realizable value of the collateral, which is compared to the outstanding principal balance to determine if additional write-downs are necessary. -72- The following is a summary of Park’s nonperforming assets at the end of each of the last three years: Table 33 - Nonperforming Assets December 31, (In thousands) 2021 2020 2019 Nonaccrual loans $ 72,722 $ 117,368 $ 90,080 Accruing TDRs 28,323 20,788 21,215 Loans past due 90 days or more and accruing 1,607 1,458 2,658 Total nonperforming loans $ 102,652 $ 139,614 $ 113,953 OREO 775 1,431 4,029 Other nonperforming assets 2,750 3,164 3,599 Total nonperforming assets $ 106,177 $ 144,209 $ 121,581 Percentage of nonperforming loans to total loans 1.49 % 1.95 % 1.75 % Percentage of nonperforming assets to total loans 1.55 % 2.01 % 1.87 % Percentage of nonperforming assets to total assets 1.11 % 1.55 % 1.42 % Percentage of nonaccrual loans to total loans 1.06 % 1.64 % 1.39 % Allowance for credit losses to nonaccrual loans 114.40 % 73.00 % 62.92 % Included in OREO totals above were $594,000 of SEPH OREO at both December 31, 2021 and December 31, 2020 and $929,000 of SEPH OREO at December 31, 2019. Park classifies loans as nonaccrual when a loan 1) is maintained on a cash basis because of deterioration in the financial condition of the borrower, 2) payment in full of principal or interest is not expected, or 3) principal or interest has been in default for a period of 90 days for commercial loans and 120 days for all other loans. As a result, loans may be classified as nonaccrual despite being current with their contractual terms. The following table details the delinquency status of nonaccrual loans at December 31, 2021, 2020, and 2019. Table 34 - Delinquency Status of Nonaccrual Loans December 31, 2021 December 31, 2020 December 31, 2019 (In thousands) Balance Percent of Total Loans Balance Percent of Total Loans Balance Percent of Total Loans Nonaccrual loans - current $ 53,259 0.78 % $ 92,600 1.29 % $ 66,282 1.02 % Nonaccrual loans - past due 19,463 0.28 % 24,768 0.35 % 23,798 0.37 % Total nonaccrual loans $ 72,722 1.06 % $ 117,368 1.64 % $ 90,080 1.39 % Credit Quality Indicators: When determining the quarterly credit 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 PD is applied 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 PD is applied 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. Any commercial loan graded an 8 (loss) is completely charged-off. -73- The following table highlights the credit trends within the commercial loan portfolio. Table 35- Commercial Credit Trends Commercial loans * (In thousands) December 31, 2021 December 31, 2020 December 31, 2019 Pass rated $ 3,712,784 $ 3,893,205 $ 3,418,159 Special Mention 75,397 102,812 27,367 Substandard — 109 973 Individually evaluated for impairment 74,502 108,407 77,459 Accruing PCD (PCI loans for periods ended December 31, 2020 and 2019) 6,630 10,296 13,364 Total $ 3,869,313 $ 4,114,829 $ 3,537,322 *Commercial loans include: (1) commercial, financial and agricultural loans; (2) commercial real estate loans; (3) commercial related loans in the construction portfolio; (4) commercial related loans in the residential real estate portfolio; and (5) leases. Park’s watch list includes all criticized and classified commercial loans, defined by Park as loans rated special mention or worse. Park had $75.4 million of collectively evaluated commercial loans included on the watch list at December 31, 2021, compared to $102.9 million at December 31, 2020, and $28.3 million at December 31, 2019. The existing conditions of these loans do not warrant classification as nonaccrual. However, these loans have shown some weakness and management performs additional analysis regarding each borrower's ability to comply with payment terms. The $75.4 million of collectively evaluated commercial watch list loans as of December 31, 2021 is elevated compared to pre-pandemic levels, an increase of $48.6 million compared to $26.8 million at March 31, 2020. This $48.6 million increase was largely due to $54.1 million of hotels and accommodations loans that were downgraded to special mention or substandard as a result of the impact of COVID-19. In addition to the $54.1 million in hotels and accommodations loans that were downgraded to special mention, $15.3 million in hotels and accommodations loans were downgraded to impaired status. Park is closely monitoring the impact of COVID-19 on its borrowers' ability to repay their loans in accordance with contractual terms. As additional information becomes available, management will continue to evaluate loans to ensure appropriate risk classification. Delinquencies have remained low over the past 36 months since January 1, 2019. Delinquent and accruing loans were $15.1 million, or 0.22% of total loans at December 31, 2021, compared to $20.1 million, or 0.28% of total loans at December 31, 2020, and $23.8 million, or 0.37% of total loans at December 31, 2019. Individually Evaluated Loans: Loans that do not share risk characteristics are evaluated on an individual basis. Park has determined that any commercial loans which have been placed on nonaccrual status or classified as TDRs will be individually evaluated and are labeled as individually evaluated. Individual analysis will establish a specific reserve for loans in scope. Specific reserves on individually evaluated 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. Individually evaluated were $74.5 million at December 31, 2021, a decrease of $33.9 million, compared to $108.4 million at December 31, 2020, and a decrease of $3.0 million at December 31, 2020, compared to $77.5 million at December 31, 2019. The $74.5 million of individually evaluated commercial loans at December 31, 2021 included $17.5 million of loans modified in a TDR which were then currently on accrual status and performing in accordance with the restructured terms, up from $8.8 million at December 31, 2020. At December 31, 2021, Park had taken partial charge-offs of $624,000 related to the $74.5 million of the individually evaluated commercial loans, compared to partial charge-offs of $655,000 related to the $108.4 million of individually evaluated commercial loans at December 31, 2020 and compared to partial charge-offs of $719,000 related to the $77.5 million of individually evaluated commercial loans at December 31, 2019. -74- The table below provides additional information related to Park's individually evaluated commercial loans at December 31, 2021, 2020, and 2019. Table 36 - Individually Evaluated Commercial Loans Years ended December 31, (In thousands) 2021 2020 2019 Unpaid principal balance $ 75,126 $ 109,062 $ 78,178 Prior charge-offs 624 655 719 Remaining principal balance 74,502 108,407 77,459 Specific reserves 1,616 5,434 5,230 Book value, after specific reserves $ 72,886 $ 102,973 $ 72,229 Loans Acquired with Deteriorated Credit Quality: In conjunction with the NewDominion acquisition, Park acquired loans with a book value of $277.9 million as of the July 1, 2018 acquisition date. These loans were recorded at the initial fair value of $272.8 million. Loans acquired with deteriorated credit quality (ASC 310-30) with a book value of $5.1 million were recorded at the initial fair value of $4.9 million. In conjunction with the Carolina Alliance acquisition, Park acquired loans and leases with a book value of $589.7 million as of the April 1, 2019 acquisition date. These loans and leases were recorded at the initial fair value of $578.6 million. Loans and leases acquired with deteriorated credit quality (ASC 310-30) with a book value of $19.9 million were recorded at the initial fair value of $18.4 million Upon adoption of CECL on January 1, 2021, $52,000 of the credit discount on PCD loans was reclassified to the allowance for credit losses. At December 31, 2021, there was no allowance for credit losses on PCD loans. The carrying amount of loans acquired with deteriorated credit quality at December 31, 2021 was $7.1 million. The carrying amount of loans acquired with deteriorated credit quality at December 31, 2020 was $11.2 million, of which none were considered impaired due to additional credit deterioration post acquisition. The carrying amount of loans acquired with deteriorated credit quality at December 31, 2019 was $14.3 million, of which $5,000 were considered impaired due to additional credit deterioration post acquisition. Allowance for Credit Losses: The allowance for credit losses is calculated on a quarterly basis. The methodology for calculating the ACL and assumptions made as of December 31, 2021 are detailed below. Quantitative Considerations The ACL is primarily calculated utilizing a DCF model. Key inputs and assumptions used in this model are discussed below: • Forecast model - For each portfolio segment, a loss driver analysis ("LDA") was performed in order to identify appropriate loss drivers and create a regression model for use in forecasting cash flows. The LDA analysis utilized Park's own FFIEC Call Report data for the commercial, financial and agricultural and residential real estate portfolio segments. Peer data was incorporated into the analysis for the commercial real estate, construction real estate, and consumer portfolio segments. Park plans to update the LDA annually; however, due to the impact of COVID-19, the LDA analysis was last updated in the fourth quarter of 2019. • Probability of default – PD is the probability that an asset will be in default within a given time frame. Park has defined default to be when a charge-off has occurred, a loan is placed on nonaccrual, or a loan is greater than 90 days past due. Whenever possible, Park utilizes its own loan-level PDs for the reasonable and supportable forecast period. When loan-level data is not available reflecting the forecasted economic conditions, a forecast model is utilized to estimate PDs. • Loss given default – LGD is the percentage of the asset not expected to be collected due to default. Whenever possible, Park utilizes its own loan-level LGDs for the reasonable and supportable forecast period. When it is not possible to use Park's own LGDs, the LGD is derived using a method referred to as Frye Jacobs. • Prepayments and curtailments – Prepayments and curtailments are calculated based on Park’s own data utilizing a three-year average. This analysis is updated annually in the fourth quarter and was last updated in the fourth quarter of 2021. • Forecast and reversion – Park has established a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average. -75- • Economic forecast - Park utilizes a third party to provide economic forecasts under various scenarios, which are weighted in order to reflect model risk in the current economic environment. The scenario weighting is evaluated by management on a quarterly basis. ◦ As of January 1, 2021, the date of CECL adoption, Park weighted a "most likely" scenario 80%, a "slower near-term growth" scenario 10%, and a "moderate recession" scenario 10%. As of January 1, 2021, the "most likely" scenario forecasted Ohio unemployment to range between 5.31% and 5.79% during the next four quarters. ◦ As of March 31, 2021, the "most likely" scenario forecasted Ohio unemployment to decrease significantly, to a range between 3.70% and 4.93% during the next four quarters. In determining the appropriate weighting of scenarios at March 31, 2021, management considered this improved economic forecast while balancing the risks associated with the COVID-19 pandemic, including the risk of pandemic-related losses lagging behind the projected improvement in unemployment. The calculation utilizing the 80% "most likely" scenario, 10% "slower near-term growth" scenario, and 10% "moderate recession scenario" resulted in a quantitative reserve of $58 million, which would have resulted in a decline of $17 million from the quantitative reserve of $75 million as of January 1, 2021. Management then considered the reason for this decline and whether or not it was appropriate given the economic environment at March 31, 2021. Upon review, management noted that the decline was the result of a significant decrease in forecasted unemployment. The March 31, 2021 "most likely" scenario forecasted unemployment rates lower than any post-1975 Ohio unemployment rates of record. Given the uncertainty at March 31, 2021 due to the COVID-19 pandemic, management did not believe that such a significant decrease in reserves was appropriate and sought to re-evaluate the weightings in order to calculate a more accurate life of loan loss estimate. Management determined it was appropriate to weight the "most likely" scenario 50% and the "moderate recession" scenario 50%. ◦ As of December 31, 2021, the "most likely" scenario forecasted Ohio unemployment to decrease, to a range between 3.32% and 3.97%, during the next four quarters. In determining the appropriate weighting of scenarios at December 31, 2021, management considered the range of forecasted unemployment as well as a number of economic indicators. While some economic indications continued to be optimistic, the Omicron variant, rising inflation, volatility in consumer confidence, employment, supply chain and workforce challenges continued to cause uncertainty to the overall economic environment. Considering these factors, management determined it was appropriate to maintain the previous quarter weighting, and weigh the "most likely" scenario 50% and the "moderate recession" scenario 50% at December 31, 2021. Qualitative Considerations Park reviews various internal and external factors to consider the need for any qualitative adjustments to the quantitative model. Factors considered include the following: • The nature and volume of Park’s financial assets; the existence, growth, and effect of any concentrations of credit and the volume and severity of past due financial assets, the volume of nonaccrual assets, and the volume and severity of adversely classified or graded assets. Specifically, management considers: ◦ Trends (e.g., growth, reduction) in specific categories of the loan portfolio, as well as adjustments to the types of loans offered by Park. ◦ Level of and trend in loan delinquencies, troubled loans, commercial watch list loans and nonperforming loans. ◦ Level of and trend in new nonaccrual loans. ◦ Level of and trend in loan charge-offs and recoveries. • Park's lending policies and procedures, including changes in lending strategies, underwriting standards and practices for collections, write-offs, and recoveries. • The quality of Park’s credit review function. • The experience, ability, and depth of Park’s lending, investment, collection, and other relevant management and staff. • The effect of other external factors such as the regulatory, legal and technological environments; competition; and events such as natural disasters or pandemics. • Actual and expected changes in international, national, regional, and local economic and business conditions and developments in the markets in which Park operates that affect the collectibility of financial assets. • Where the U.S. economy is within a given credit cycle. • The extent that there is government assistance (stimulus). During 2020, Park added an additional reserve for three industries at particularly high risk due to the COVID-19 pandemic: hotels and accommodations; restaurants and food service; and strip shopping centers. These industries have experienced high levels of deferrals and have been particularly impacted by shut downs of non-essential businesses, increased health department regulations, and changes in consumer behavior. Management expects that a relatively higher percentage of the 4-rated credits in these portfolios will eventually migrate to special mention, substandard, or impaired status. In adopting CECL, management determined it was appropriate to retain and maintain this qualitative adjustment throughout 2021 as this -76- adjustment takes into account the additional risk in these portfolios, which is not captured in the quantitative calculation. As of December 31, 2021, additional reserves totaling $5.2 million were added for these portfolios on top of the quantitative reserve already calculated. This represented an increase from $3.8 million as of December 31, 2020, which had been calculated under the previous incurred loss methodology. A breakout of the 4-rated balances within these portfolios and the additional reserve related to these portfolios is detailed in the following table: Table 37 - Additional COVID-19 Reserves December 31, 2021 December 31, 2020 (in thousands) 4-Rated Balance Additional Reserve 4-Rated Balance Additional Reserve Hotels and accommodations $ 148,018 $ 2,226 $ 96,909 $ 1,391 Restaurants and food service 40,648 917 33,409 637 Strip shopping centers 184,171 2,033 177,706 1,731 Total $ 372,837 $ 5,176 $ 308,024 $ 3,759 Additionally, management applied a 1.00% reserve to all hotels and accommodations loans in the collectively evaluated population to account for increased valuation risk. This was consistent with 2020 year end and considered various economic conditions due to COVID-19 variants, continued volatility in the hotel industry, and travel trends, all of which impacted valuations. At December 31, 2021, Park's originated hotels and accommodation loans included in the population of collectively evaluated loans had a balance of $203.9 million with an additional reserve related to valuation risks of $2.0 million. At December 31, 2020, Park's originated hotels and accommodation loans included in the population of collectively evaluated loans had a balance of $181.4 million with an additional reserve related to valuation risks of $1.8 million. There is still a significant amount of uncertainty related to the economic impact of COVID-19, including the duration of the pandemic, the risk related to new variants, future government programs that may be established in response to the pandemic, and the resiliency of the U.S. economy. Management will continue to evaluate its estimate of expected credit losses as new information becomes available. As of December 31, 2021, Park had $74.4 million of PPP loans which were included in the commercial, financial and agricultural portfolio segment compared to $331.6 million as of December 31, 2020. These loans are guaranteed by the SBA and thus have not been reserved for using the same methodology as the rest of Park’s loan portfolio. A 10 basis point reserve was calculated for these loans to reflect minimal credit risk as of December 31, 2021 and 2020. CAPITAL RESOURCES Liquidity and Interest Rate Sensitivity Management: Park’s objective in managing its liquidity is to maintain the ability to continuously meet the cash flow needs of customers, such as borrowings or deposit withdrawals, while at the same time seeking higher yields from longer-term lending and investing activities. Cash and cash equivalents decreased by $151.3 million during 2021 to $219.2 million at year end. Cash provided by operating activities was $157.3 million in 2021, $111.6 million in 2020 and $111.6 million in 2019. Net income was the primary source of cash provided by operating activities during each year. Cash used in investing activities was $412.1 million in 2021 and $455.9 million in 2020, while cash provided by investing activities was $60.1 million in 2019. Investment securities transactions and loan originations/repayments are the major uses or sources of cash in investing activities. Proceeds from the sale, repayment or maturity of investment securities provide cash and purchases of investment securities use cash. Net investment securities transactions used cash of $709.5 million in 2021 and provided cash of $188.1 million in 2020 and $302.2 million in 2019. Cash provided by the net paydown in the loan portfolio was $312.2 million in 2021, and cash used by the net increase in the loan portfolio was $620.2 million in 2020 and $216.4 million in 2019. Cash provided by financing activities was $103.5 million in 2021 and $554.8 million in 2020, while cash used in financing activities was $179.0 million in 2019. A major source of cash provided by or used in financing activities is the net change in deposits. Deposits increased and provided $332.2 million of cash in 2021, $520.0 million of cash in 2020 and $159.7 million of cash in 2019. Other major sources of cash from financing activities are short-term borrowings and long-term debt. In 2021, net short-term borrowings decreased and used $103.4 million in cash and net long-term debt decreased and used $32.5 -77- million in cash. In 2020, net short-term borrowings increased and provided $111.6 million in cash and net long-term debt increased and provided $2.1 million in cash. In 2019, net short-term borrowings decreased and used $20.1 million in cash and net long-term debt decreased and used $208.1 million in cash. Cash used in the repurchase of common shares was $16.0 million in 2021, $7.5 million in 2020 and $40.5 million in 2019. Finally, cash declined by $74.3 million in 2021, $70.4 million in 2020 and $69.1 million in 2019, from the payment of cash dividends. Funds are available from a number of sources, including the capital markets, the investment securities portfolio, the core deposit base, FHLB borrowings and the capability to securitize or package loans for sale. In the opinion of Park's management, the present funding sources provide more than adequate liquidity for Park to meet our cash flow needs. The following table shows interest rate sensitivity data for five different time intervals as of December 31, 2021: Table 38 - Interest Rate Sensitivity 0-3 3-12 1-3 3-5 Over 5 (In thousands) Months Months Years Years Years Total Interest earning assets: Investment securities (1) $ 557,903 $ 137,478 $ 271,734 $ 370,254 $ 451,262 $ 1,788,631 Money market instruments 74,673 — — — — 74,673 Loans (1) 1,853,301 1,498,476 2,004,159 1,056,642 458,544 6,871,122 Total interest earning assets 2,485,877 1,635,954 2,275,893 1,426,896 909,806 8,734,426 Interest bearing liabilities: Interest bearing transaction accounts (2) $ 502,812 $ — $ 1,000,064 $ — $ — $ 1,502,876 Savings accounts (2) 1,011,301 — 1,610,807 — — 2,622,108 Time deposits 190,442 266,694 185,508 64,297 4,719 711,660 Other 1,465 — — — — 1,465 Total deposits 1,706,020 266,694 2,796,379 64,297 4,719 4,838,109 Short-term borrowings 238,786 — — — — 238,786 Subordinated notes 15,000 — — 173,210 — 188,210 Total interest bearing liabilities 1,959,806 266,694 2,796,379 237,507 4,719 5,265,105 Interest rate sensitivity gap 526,071 1,369,260 (520,486) 1,189,389 905,087 3,469,321 Cumulative rate sensitivity gap 526,071 1,895,331 1,374,845 2,564,234 3,469,321 Cumulative gap as a percentage of total interest earning assets 6.02 % 21.70 % 15.74 % 29.36 % 39.72 % (1) Investment securities and loans that are subject to prepayment are shown in the table by the earlier of their re-pricing date or their expected repayment date and not by their contractual maturity date. Nonaccrual loans of $72.7 million are included within the three-month to twelve-month maturity category. (2) Management considers interest bearing transaction accounts and savings accounts to be core deposits and, therefore, not as rate sensitive as other deposit accounts and borrowed money. Accordingly, only 33% of interest bearing transaction accounts and 39% of savings accounts are considered to re-price within one year. If all of the interest bearing transaction accounts and savings accounts were considered to re-price within one year, the one-year cumulative gap would change from a positive 21.70% to a negative 8.19%. The interest rate sensitivity gap analysis provides an overall picture of Park’s static interest rate risk position. At December 31, 2021, the cumulative interest earning assets maturing or repricing within twelve months were $4,122 million compared to the cumulative interest bearing liabilities maturing or repricing within twelve months of $2,227 million. For the twelve-month cumulative interest rate sensitivity gap position, rate sensitive assets exceeded rate sensitive liabilities by $1,895 million or 21.7% of interest earning assets. A positive twelve-month cumulative rate sensitivity gap (assets exceed liabilities) would suggest that Park’s net interest margin would increase if interest rates were to increase. Conversely, a negative twelve-month cumulative rate sensitivity gap would suggest that Park’s net interest margin would decrease if interest rates were to increase. However, the usefulness of the interest rate sensitivity gap analysis as a forecasting tool in projecting net interest income is limited. The gap analysis does not consider the magnitude, timing or frequency by which assets or liabilities will reprice during a period and also -78- contains assumptions as to the repricing of interest bearing transaction accounts and savings accounts that may not prove to be correct. The cumulative twelve-month interest rate sensitivity gap position at year-end 2020 was a positive $1,295 million or 15.29% of total interest earning assets. The percentage of interest earning assets maturing or repricing within one year was 47.2% at year-end 2021, compared to 45.7% at year-end 2020. The percentage of interest bearing liabilities maturing or repricing within one year was 42.3% at year-end 2021, compared to 47.7% at year-end 2020. 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. Park’s management uses an earnings simulation model to analyze net interest income sensitivity to movements in interest rates. This model is based on actual cash flows and repricing characteristics for balance sheet instruments and incorporates market-based assumptions regarding the impact of changing interest rates on the prepayment rate of certain assets and liabilities. This model also includes management’s projections for activity levels of various balance sheet instruments and non-interest fee income and operating expense. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into this earnings simulation model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure net interest income and net income. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies. 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. At December 31, 2021, the earnings simulation model projected that net income would increase by 7.5% using a rising interest rate scenario and decrease by 15.1% using a declining interest rate scenario over the next year. At December 31, 2020, the earnings simulation model projected that net income would decrease by 2.9% using a rising interest rate scenario and decrease by 8.8% using a declining interest rate scenario over the next year. At December 31, 2019, the earnings simulation model projected that net income would decrease by 1.9% using a rising interest rate scenario and increase by 0.5% using a declining interest rate scenario over the next year. Consistently, over the past several years, Park’s earnings simulation model has projected that changes in interest rates would have only a small impact on net income and the net interest margin. Park’s net interest margin was 3.69% in 2021, 3.93% in 2020 and 3.89% in 2019. CONTRACTUAL OBLIGATIONS In the ordinary course of operations, Park enters into certain contractual obligations. The following table summarizes Park’s significant and determinable obligations by payment date at December 31, 2021. Further discussion of the nature of each specified obligation is included in the referenced Note to the Consolidated Financial Statements included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report on Form 10-K. Table 39 - Contractual Obligations (1) December 31, 2021 Payments Due In 0-1 1-3 3-5 Over 5 (In thousands) Note Years Years Years Years Total Deposits without stated maturity 12 $ 7,192,868 $ — $ — $ — $ 7,192,868 Certificates of deposit 12 450,374 199,396 61,757 133 711,660 Short-term borrowings 14 238,786 — — — 238,786 Subordinated notes 16 — — — 188,210 188,210 Operating leases 26 3,108 4,858 2,992 4,496 15,454 Defined benefit pension plan (2) 19 12,775 23,602 24,765 61,702 122,844 Supplemental Executive Retirement Plan 19 652 1,788 1,989 31,430 35,859 Total contractual obligations $ 7,898,563 $ 229,644 $ 91,503 $ 285,971 $ 8,505,681 (1) Amounts do not include associated interest payments. (2) Pension payments reflect 10 years of payments, through 2031. -79- As of December 31, 2021, Park had $28.5 million in unfunded commitments related to investments in qualified affordable housing projects which are not included in "Table 39 - Contractual Obligations" above. Commitments are funded when capital calls are made by the general partner. Park expects that the current commitments will be funded between 2022 and 2032. As of December 31, 2021, Park had $8.4 million in unfunded commitments related to certain equity investments which are not included in "Table 39 - Contractual Obligations" above. Commitments are funded when capital calls are made by the general partner. The Corporation’s operating lease obligations represent short-term and long-term lease and rental payments for facilities and equipment. Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements : In order to meet the financing needs of our customers, the Corporation issues loan commitments and standby letters of credit. At December 31, 2021, the Corporation had $1.4 billion of loan commitments for commercial, commercial real estate, and residential real estate loans and had $18.2 million of standby letters of credit. At December 31, 2020, the Corporation had $1.4 billion of loan commitments for commercial, commercial real estate, and residential real estate loans and had $17.0 million of standby letters of credit. Commitments to extend credit under loan commitments and standby letters of credit do not necessarily represent future cash requirements. These commitments often expire without being drawn upon. However, all of the loan commitments and standby letters of credit were permitted to be drawn upon in 2021. See "Note 24 - Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk" of the Notes to Consolidated Financial Statements included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" in this Annual Report on Form 10-K, for additional information on loan commitments and standby letters of credit. The Corporation did not have any unrecorded significant contingent liabilities at December 31, 2021. Capital : Park’s primary means of maintaining capital adequacy is through retained earnings. At December 31, 2021, the Corporation’s total shareholders’ equity was $1,110.8 million, compared to $1,040.3 million at December 31, 2020. Total shareholders’ equity at December 31, 2021 was 11.62% of total assets, compared to 11.21% of total assets at December 31, 2020. Tangible shareholders’ equity was $943.7 million [total shareholders' equity ($1,110.8 million) less goodwill ($159.6 million) and other intangible assets ($7.5 million)] at December 31, 2021, and was $871.4 million [total shareholders’ equity ($1,040.3 million) less goodwill ($159.6 million) and other intangible assets ($9.3 million)] at December 31, 2020. At December 31, 2021, tangible shareholders' equity was 10.05% of total tangible assets [total assets ($9,560 million) less goodwill ($159.6 million) and other intangible assets ($7.5 million)], compared to 9.57% of total tangible assets [total assets ($9,279 million) less goodwill ($159.6 million) and other intangible assets ($9.3 million)] at December 31, 2020. Net income was $153.9 million in 2021, $127.9 million in 2020 and $102.7 million in 2019. Cash dividends declared for Park's common shares were $74.6 million in 2021, $70.6 million in 2020 and $69.5 million in 2019. On a per share basis, the cash dividends declared were $4.52 per common share in 2021, $4.28 per common share in 2020 and $4.24 per common share in 2019. -80- The table below shows the repurchases and issuances of common shares and treasury shares for 2019 through 2021. Table 40 (In thousands, except share data) Treasury Shares Number of Common Shares Balance at January 1, 2019 $ (90,373) 15,698,178 Cash payment for fractional shares in dividend reinvestment plan — (171) Common shares issued for the acquisition of CAB Financial Corporation — 1,037,205 Treasury shares repurchased (40,535) (421,253) Treasury shares reissued for share-based compensation awards 1,926 18,983 Treasury shares reissued for director grants 1,349 13,500 Balance at December 31, 2019 $ (127,633) 16,346,442 Cash payment for fractional shares in dividend reinvestment plan — (36) Treasury shares repurchased (7,507) (76,000) Treasury shares reissued for share-based compensation awards 3,031 30,341 Treasury shares reissued for director grants 1,343 13,450 Balance at December 31, 2020 $ (130,766) 16,314,197 Cash payment for fractional shares in dividend reinvestment plan — (45) Treasury shares repurchased (16,048) (137,659) Treasury shares reissued for share-based compensation awards 2,964 29,670 Treasury shares reissued for director grants 1,360 13,400 Balance at December 31, 2021 $ (142,490) 16,219,563 Park issued 1,037,205 new common shares, which had not already been held as treasury shares, during 2019 in the acquisitions of CABF, but did not issue any new common shares, which had not already been held as treasury shares, in 2020 or 2021. Common shares had a balance of $461.8 million, $460.7 million and $459.4 million at December 31, 2021, 2020, and 2019, respectively. Accumulated other comprehensive income (loss) (net) reflected income of $15.2 million at December 31, 2021 and $5.6 million at December 31, 2020, compared to a loss of $9.6 million at December 31, 2019. During 2021, the change in net unrealized holding gain (loss) on AFS debt securities, net of income tax, was a loss of $19.5 million. During the 2020 year, the change in net unrealized holding gain (loss) on AFS debt securities, net of income tax, was a gain of $23.2 million. During the 2019 year, the change in net unrealized holding gain (loss) on AFS debt securities, net of income tax, was a gain of $37.7 million. Additionally, Park recognized an other comprehensive gain of $28.6 million, net of tax, related to the change in pension plan assets and benefit obligations in 2021, compared to an other comprehensive loss of $7.7 million, net of income tax, related to the change in pension plan assets and benefit obligations in 2020, and an other comprehensive gain of $3.0 million, net of income tax, related to the change in pension plan assets and benefit obligations in 2019. Finally, during the 2021 year, Park recognized an other comprehensive gain of $492,000, net of income tax, related to an unrealized net holding gain on cash flow hedging derivatives, compared to an other comprehensive loss of $244,000, net of income tax, related to an unrealized net holding loss on cash flow hedging derivatives in 2020, and an other comprehensive loss of $454,000, net of income tax, related to an unrealized net holding loss on cash flow hedging derivatives in 2019. 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 stock repurchases, and certain discretionary bonus payments to executive officers, Park must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was fully phased in at 2.50% on January 1, 2019. The amounts shown below as the adequately capitalized ratio plus capital conservation buffer includes the 2.50% buffer. The Federal Reserve Board also adopted capital requirements Park must maintain to be deemed "well capitalized" and remain a financial holding company. -81- Park and PNB met each of the well-capitalized ratio guidelines applicable to them at December 31, 2021. The following table indicates the capital ratios for PNB and Park at December 31, 2021 and December 31, 2020. Table 41 - PNB and Park Capital Ratios As of December 31, 2021 Leverage Tier 1 Risk-Based Common Equity Tier 1 Total Risk-Based PNB 8.58 % 11.05 % 11.05 % 12.56 % Park 9.77 % 12.57 % 12.37 % 16.05 % 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, 2020 Leverage Tier 1 Risk-Based Common Equity Tier 1 Total Risk-Based PNB 8.59 % 10.66 % 10.66 % 12.16 % Park 9.63 % 11.92 % 11.72 % 15.43 % 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 % Effects of Inflation : Balance sheets of financial institutions typically contain assets and liabilities that are monetary in nature and, therefore, differ greatly from most commercial and industrial companies which have significant investments in premises, equipment and inventory. During periods of inflation, financial institutions that are in a net positive monetary position will experience a decline in purchasing power, which does have an impact on growth. Another significant effect on internal equity growth is other expenses, which tend to rise during periods of inflation. Management believes the most significant impact on financial results is the Corporation's ability to align our asset/liability management program to react to changes in interest rates. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As noted in "Table 19 - Distribution of Assets, Liabilities and Shareholders' Equity" included in "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Annual Report on Form 10-K, Park’s tax equivalent net interest margin decreased by twenty-four basis points in 2021 and increased four basis points in 2020. Consistently, over the last several years, Park’s earnings simulation model has projected that changes in interest rates would have only a small impact on net income and the tax equivalent net interest margin. The tax equivalent net interest margin was 3.69%, 3.93% and 3.89% for each of the years ended December 31, 2021, 2020 and 2019, respectively. The discussion of interest rate sensitivity included in "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Annual Report on Form 10-K is incorporated herein by reference. In addition, the discussion of Park’s commitments, contingent liabilities and off-balance sheet arrangements included in "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Annual Report on Form 10-K and in "Note 24 - Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk" of the Notes to Consolidated Financial Statements included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report on Form 10-K is incorporated herein by reference. -82- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Index to Financial Statements Audited Financial Statements Page Management’s Report on Internal Control Over Financial Reporting 84 Report of Independent Registered Public Accounting Firm 85 Auditor Name: Crowe LLP Auditor Location: Columbus, OH Auditor Firm ID: 173 Consolidated Balance Sheets at December 31, 2021 and 2020 89 Consolidated Statements of Income for the Years Ended December 31, 2021, 2020 and 2019 91 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2021, 2020 and 2019 93 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2021, 2020 and 2019 94 Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019 96 Notes to Consolidated Financial Statements 97 -83- Management’s Report on Internal Control Over Financial Reporting Management’s Report on Internal Control Over Financial Reporting To the Board of Directors and Shareholders Park National Corporation The management of Park National Corporation (the “Corporation”) is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, for the Corporation and its consolidated subsidiaries. The Corporation’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP"). The Corporation’s internal control over financial reporting includes those policies and procedures that: a. pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation and its consolidated subsidiaries; b. provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Corporation and its consolidated subsidiaries are being made only in accordance with authorizations of management and directors of the Corporation; and c. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the assets of the Corporation and its consolidated subsidiaries that could have a material effect on the financial statements. The Corporation’s internal control over financial reporting as it relates to the consolidated financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even an effective system of internal control over financial reporting will provide only reasonable assurance with respect to financial statement preparation. With the participation of our Chairman of the Board and Chief Executive Officer and our Chief Financial Officer, Secretary, and Treasurer, management evaluated the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2021, the end of the Corporation’s fiscal year. In making this assessment, management used the criteria set forth for effective internal control over financial reporting by the Committee of Sponsoring Organizations of the Treadway Commission's (COSO) Internal Control — Integrated Framework (2013). Based on our assessment under the criteria described in the immediately preceding paragraph, management concluded that the Corporation maintained effective internal control over financial reporting at a reasonable assurance level as of December 31, 2021. We reviewed the results of management's assessment with the Audit Committee of the Board of Directors of the Corporation. The Corporation’s independent registered public accounting firm, Crowe LLP, has audited the Consolidated Balance Sheets of the Corporation and its subsidiaries as of December 31, 2021 and 2020 and the related Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Statements of Changes in Shareholders' Equity and Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2021, included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report on Form 10-K and the Corporation’s internal control over financial reporting as of December 31, 2021, and has issued their Report of Independent -84- Registered Public Accounting Firm, which appears in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report on Form 10-K. /s/ David L. Trautman /s/ Brady T. Burt David L. Trautman Brady T. Burt Chairman of the Board and Chief Executive Officer Chief Financial Officer, Secretary and Treasurer February 24, 2022 -85- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Shareholders and the Board of Directors of Park National Corporation Newark, Ohio Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Park National Corporation (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. Change in Accounting Principle As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2021 due to the adoption of ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter below. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. -86- Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses In accordance with Accounting Standards Update (the “ASU”) 2016-13, Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the Company adopted Accounting Standards Codification (“ASC”) 326 as of January 1, 2021 as described in Notes 2 and 6 of the consolidated financial statements. See also the explanatory paragraph above. The allowance for credit losses (the “ACL”) is an accounting estimate of expected credit losses over the life of loans. The ASU requires the Company’s loan portfolio, measured at amortized cost, to be presented at the net amount expected to be collected. Estimates of expected credit losses for loans are based on historical experience, current conditions and reasonable and supportable forecasts over the life of the loans. In order to estimate the expected credit losses, the Company implemented a new loss estimation model. The Company disclosed the impact of adoption of this standard on January 1, 2021 with a $6.1 million increase to the allowance for credit losses and a $8.0 million decrease to retained earnings for the cumulative effect adjustment recorded upon adoption. Recovery of credit losses for the year ending December 31, 2021 was $11.9 million and the Allowance for credit losses at December 31, 2021 was $83.2 million. The Company measures expected credit losses based on pooled loans when similar risk characteristics exist primarily utilizing a discounted cash flow (“DCF”) model. A loss driver analysis was performed to identify appropriate loss drivers to create a regression model for use in forecasting cash flows for each loan segment. Probability of default (“PD”) and loss given default (“LGD”) are assumptions in the model used to discount loan-level cash flows that are adjusted for prepayments and curtailments. A quantitative adjustment is made on top of the model using economic forecasts that are weighted to reflect model risk in the current economic environment. The Company adjusts its quantitative results for certain qualitative factors to reflect the extent to which management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated. The allowance for credit losses was identified by us as a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management throughout the initial adoption and subsequent application processes, including the need to involve our valuation services specialists. The principal considerations resulting in our determination included the following: • Significant auditor judgment and audit effort to evaluate the loss estimation model and significant assumptions related to the loss driver analysis, PD and LGD input into the DCF model. • Significant auditor judgment and audit effort used in evaluating the quantitative adjustment made on top of the model that weight the economic scenarios to reflect model risk in the current economic environment. -87- The primary procedures performed to address the critical audit matter included: • Testing the effectiveness of management's controls addressing: ◦ Management’s selection of the DCF model, including evaluation of the appropriateness of the loss driver analysis and probability of default and loss given default curves input into the model. ◦ Management’s review of the relevance and reliability of data used in the DCF model. ◦ Management’s review over the Company’s judgments used in the determination of the quantitative adjustment made on top of the model that weight the economic scenarios used in the forecast. • Substantive testing included: ◦ Evaluating the appropriateness of the Company's methodology applied in the adoption of ASC 326. ◦ Evaluating the appropriateness of the loss driver analysis and probability of default and loss given default curves into the DCF model, assisted by our valuation services specialists. ◦ Evaluating the relevance and reliability of data used in the DCF model. ◦ Evaluating management’s judgments for developing and applying a quantitative adjustment made on top of the model that weight the economic scenarios used in the forecast. Crowe LLP We have served as the Company's auditor since 2006. Columbus, Ohio February 24, 2022 -88- Park National Corporation and Subsidiaries Consolidated Balance Sheets at December 31, 2021 and 2020 (In thousands, except share and per share data) 2021 2020 Assets Cash and due from banks $ 144,507 $ 155,596 Money market instruments 74,673 214,878 Cash and cash equivalents 219,180 370,474 Investment securities: Debt securities available-for-sale, at fair value (amortized cost of $ 1,727,363 and $ 1,007,834 at December 31, 2021 and 2020, respectively, and no allowance for credit losses at December 31, 2021) 1,754,140 1,059,341 Other investment securities 61,268 65,465 Total investment securities 1,815,408 1,124,806 Total loans 6,871,122 7,177,785 Allowance for credit losses ( 83,197 ) ( 85,675 ) Net loans 6,787,925 7,092,110 Other assets: Bank owned life insurance 215,792 216,225 Prepaid assets 144,124 103,523 Goodwill 159,595 159,595 Other intangible assets 7,462 9,260 Premises and equipment, net 89,008 88,660 Affordable housing tax credit investments 58,711 56,024 Accrued interest receivable 23,413 24,926 Other real estate owned 775 1,431 Mortgage loan servicing rights 15,264 12,210 Operating lease right-of-use assets 13,446 15,078 Other 10,151 4,699 Total other assets 737,741 691,631 Total assets $ 9,560,254 $ 9,279,021 The accompanying notes are an integral part of the consolidated financial statements. -89- Park National Corporation and Subsidiaries Consolidated Balance Sheets at December 31, 2021 and 2020 (In thousands, except share and per share data) 2021 2020 Liabilities and shareholders’ equity Deposits: Non-interest bearing $ 3,066,419 $ 2,727,100 Interest bearing 4,838,109 4,845,258 Total deposits 7,904,528 7,572,358 Borrowings: Short-term borrowings 238,786 342,230 Long-term debt — 32,500 Subordinated notes 188,210 187,774 Total borrowings 426,996 562,504 Other liabilities: Operating lease liability 14,339 16,053 Accrued interest payable 3,116 3,860 Unfunded commitments in affordable housing tax credit investments 28,484 29,298 Allowance for credit losses on off-balance sheet commitments 4,282 116 Other 67,750 54,576 Total other liabilities 117,971 103,903 Total liabilities 8,449,495 8,238,765 Commitments and contingencies Shareholders’ equity: Preferred shares ( 200,000 preferred shares authorized; no preferred shares outstanding at December 31, 2021 and 2020) $ — $ — Common shares, no par value ( 20,000,000 common shares authorized; 17,623,118 and 17,623,163 common shares issued at December 31, 2021 and 2020, respectively) 461,800 460,687 Accumulated other comprehensive income, net of taxes 15,155 5,571 Retained earnings 776,294 704,764 Less: Treasury shares ( 1,403,555 and 1,308,966 common shares at December 31, 2021 and 2020, respectively) ( 142,490 ) ( 130,766 ) Total shareholders’ equity 1,110,759 1,040,256 Total liabilities and shareholders’ equity $ 9,560,254 $ 9,279,021 The accompanying notes are an integral part of the consolidated financial statements. -90- Park National Corporation and Subsidiaries Consolidated Statements of Income for years ended December 31, 2021, 2020 and 2019 (In thousands, except per share data) 2021 2020 2019 Interest and dividend income: Interest and fees on loans $ 317,208 $ 328,727 $ 321,385 Interest and dividends on: Obligations of U.S. Government, its agencies and other securities - taxable 19,458 19,818 26,213 Obligations of states and political subdivisions - tax-exempt 8,307 8,436 8,955 Other interest income 880 739 3,947 Total interest and dividend income 345,853 357,720 360,500 Interest expense: Interest on deposits: Demand and savings deposits 1,595 9,142 33,348 Time deposits 4,711 12,186 17,494 Interest on short-term borrowings 767 1,110 2,476 Interest on long-term debt 8,887 7,652 9,445 Total interest expense 15,960 30,090 62,763 Net interest income 329,893 327,630 297,737 (Recovery of) provision for credit losses ( 11,916 ) 12,054 6,171 Net interest income after (recovery of) provision for credit losses 341,809 315,576 291,566 Other income: Income from fiduciary activities 34,449 28,873 27,768 Service charges on deposit accounts 8,832 8,445 10,835 Other service income 29,812 37,611 15,500 Debit card fee income 25,865 22,160 20,250 Bank owned life insurance income 4,897 4,789 4,557 ATM fees 2,379 1,773 1,828 (Loss) gain on the sale of OREO, net ( 4 ) 1,207 ( 222 ) Net gain (loss) on the sale of debt securities — 3,286 ( 421 ) Gain on equity securities, net 5,011 2,182 5,118 Other components of net periodic benefit income 8,152 7,952 4,732 Miscellaneous 10,551 7,386 7,248 Total other income $ 129,944 $ 125,664 $ 97,193 The accompanying notes are an integral part of the consolidated financial statements. -91- Park National Corporation and Subsidiaries Consolidated Statements of Income for years ended December 31, 2021, 2020 and 2019 (In thousands, except per share data) 2021 2020 2019 Other expense: Salaries $ 125,585 $ 128,040 $ 119,514 Employee benefits 41,603 37,115 36,806 Occupancy expense 13,039 13,802 12,815 Furniture and equipment expense 10,887 18,805 17,032 Data processing fees 30,539 11,659 10,750 Professional fees and services 27,450 31,303 33,317 Marketing 6,073 5,828 5,753 Insurance 5,917 6,423 3,130 Communication 3,539 4,084 5,351 State tax expense 4,255 3,991 3,829 Amortization of intangible assets 1,798 2,263 2,355 FHLB prepayment penalty — 10,529 612 Foundation contributions 4,000 3,000 1,500 Miscellaneous 8,833 9,753 11,224 Total other expense 283,518 286,595 263,988 Income before income taxes 188,235 154,645 124,771 Income taxes 34,290 26,722 22,071 Net income $ 153,945 $ 127,923 $ 102,700 Earnings per common share: Basic $ 9.45 $ 7.85 $ 6.33 Diluted $ 9.37 $ 7.80 $ 6.29 The accompanying notes are an integral part of the consolidated financial statements. -92- PARK NATIONAL CORPORATION Consolidated Statements of Comprehensive Income for years ended December 31, 2021, 2020 and 2019 (In thousands) 2021 2020 2019 Net income $ 153,945 $ 127,923 $ 102,700 Other comprehensive income (loss), net of income tax: Defined benefit pension plan: Amortization of net loss, net of income tax effect of $ 466 , $ 247 and $ 395 , for the years ended December 31, 2021, 2020, and 2019, respectively 1,754 928 1,487 Unrealized net actuarial gain (loss) and prior service credit, net of income tax effect of $ 7,144 , $( 2,306 ) and $ 402 , for the years ended December 31, 2021, 2020, and 2019, respectively 26,875 ( 8,675 ) 1,511 Change in funded status of defined benefit pension plan, net of income tax effect 28,629 ( 7,747 ) 2,998 Debt securities available-for-sale: Net (gain) loss realized on sale of debt securities AFS, net of income tax effect of $( 690 ) and $ 88 for the years ended December 31, 2020 and 2019, respectively — ( 2,596 ) 333 Unrealized gains on debt securities transferred from HTM to AFS, net of income tax effect of $5,076 for the year ended December 31, 2019 — — 19,095 Change in unrealized holding (loss) gain on debt securities AFS, net of income tax effect of $( 5,193 ), $ 6,844 and $ 4,845 , for the years ended December 31, 2021, 2020 and 2019, respectively ( 19,537 ) 25,747 18,227 Unrealized net holding (loss) gain on debt securities available-for-sale, net of income tax effect ( 19,537 ) 23,151 37,655 Cash flow hedging derivatives: Unrealized gain (loss) on cash flow hedging derivatives, net of income tax effect of $ 131 , $( 65 ) and $( 121 ) for the years ended December 31, 2021, 2020 and 2019, respectively 492 ( 244 ) ( 454 ) Unrealized net holding gain (loss) on cash flow hedging derivatives, net of income tax effect 492 ( 244 ) ( 454 ) Other comprehensive income $ 9,584 $ 15,160 $ 40,199 Comprehensive income $ 163,529 $ 143,083 $ 142,899 The accompanying notes are an integral part of the consolidated financial statements. -93- Park National Corporation and Subsidiaries Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2021, 2020 and 2019 Preferred Shares Common Shares Retained Earnings Treasury Shares Accumulated Other Comprehensive (Loss) Income (In thousands, except share and per share data) Shares Outstanding Amount Shares Outstanding Amount Balance, January 1, 2019, as previously presented — — 15,698,178 358,598 614,069 ( 90,373 ) ( 49,788 ) Cumulative effect of change in accounting principle for leases, net of income tax ( 143 ) Balance at January 1, 2019 as adjusted — $ — 15,698,178 $ 358,598 $ 613,926 $ ( 90,373 ) $ ( 49,788 ) Net income 102,700 Other comprehensive income, net of income tax 40,199 Cash dividends, $ 4.24 per common share ( 69,482 ) Cash payment for fractional shares in dividend reinvestment plan ( 171 ) ( 3 ) Issuance of 1,037,205 common shares for the acquisition of CAB Financial Corporation 1,037,205 98,275 Share-based compensation expense 4,999 Issuance of 27,719 common shares under share-based compensation awards, net of 8,736 common shares withheld to pay employee income taxes 18,983 ( 2,480 ) ( 273 ) 1,926 Treasury shares repurchased ( 421,253 ) ( 40,535 ) Treasury shares reissued for director grants 13,500 ( 24 ) 1,349 Balance, December 31, 2019 — $ — 16,346,442 $ 459,389 $ 646,847 $ ( 127,633 ) $ ( 9,589 ) Net income 127,923 Other comprehensive income, net of income tax 15,160 Cash dividends, $ 4.28 per common share ( 70,601 ) Cash payment for fractional shares in dividend reinvestment plan ( 36 ) ( 3 ) Share-based compensation expense 5,998 Issuance of 30,341 common shares under share-based compensation awards, net of 14,038 common shares withheld to pay employee income taxes 30,341 ( 4,697 ) 664 3,031 Treasury shares repurchased ( 76,000 ) ( 7,507 ) Treasury shares reissued for director grants 13,450 ( 69 ) 1,343 Balance, December 31, 2020 — $ — 16,314,197 $ 460,687 $ 704,764 $ ( 130,766 ) $ 5,571 -94- Preferred Shares Common Shares Retained Earnings Treasury Shares Accumulated Other Comprehensive (Loss) Income (In thousands, except share and per share data) Shares Outstanding Amount Shares Outstanding Amount Balance at December 31, 2020 16,314,197 460,687 704,764 ( 130,766 ) 5,571 Cumulative effect of change in accounting principle for credit losses, net of income tax ( 7,956 ) Balance, January 1, 2021, as adjusted $ — $ — 16,314,197 $ 460,687 $ 696,808 $ ( 130,766 ) $ 5,571 Net income 153,945 Other comprehensive income, net of income tax 9,584 Cash dividends, $ 4.52 per common share ( 74,634 ) Cash payment for fractional shares in dividend reinvestment plan ( 45 ) ( 6 ) Share-based compensation expense 6,345 Issuance of 29,670 common shares under share-based compensation awards, net of 18,436 common shares withheld to pay employee income taxes 29,670 ( 5,226 ) ( 141 ) 2,964 Treasury shares repurchased ( 137,659 ) ( 16,048 ) Treasury shares reissued for director grants 13,400 316 1,360 Balance, December 31, 2021 — $ — 16,219,563 $ 461,800 $ 776,294 $ ( 142,490 ) $ 15,155 The accompanying notes are an integral part of the consolidated financial statements. -95- Park National Corporation and Subsidiaries Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 (In thousands) 2021 2020 2019 Operating activities: Net income $ 153,945 $ 127,923 $ 102,700 Adjustments to reconcile net income to net cash provided by operating activities: (Recovery of) provision for credit losses ( 11,916 ) 12,054 6,171 Accretion of loan fees and costs, net ( 25,185 ) ( 21,598 ) ( 6,826 ) Net accretion of purchase accounting adjustments ( 1,519 ) ( 2,403 ) ( 3,373 ) Depreciation of premises and equipment 13,267 10,814 9,119 Amortization of investment securities, net 2,174 1,362 1,455 Borrowing prepayment penalty — 10,529 612 Increase in deferred income tax ( 3,131 ) ( 4,525 ) ( 844 ) Realized net debt securities (gains) losses — ( 3,286 ) 421 Gain on equity securities, net ( 5,011 ) ( 2,182 ) ( 5,118 ) Share-based compensation expense 8,021 7,272 6,324 Loan originations to be sold in secondary market ( 569,080 ) ( 1,026,346 ) ( 338,437 ) Proceeds from sale of loans in secondary market 609,377 1,031,227 340,637 Gain on sale of loans in secondary market ( 18,018 ) ( 24,269 ) ( 7,198 ) Loss (gain) on sale of OREO, net 4 ( 1,207 ) 222 Bank owned life insurance income ( 4,897 ) ( 4,789 ) ( 4,557 ) Investment in qualified affordable housing tax credits amortization 7,313 7,046 6,927 Changes in assets and liabilities: Increase in prepaid dealer premiums ( 2,415 ) ( 8,890 ) ( 5,358 ) Decrease in other assets 12,342 9,216 12,530 Decrease in other liabilities ( 7,939 ) ( 6,302 ) ( 3,781 ) Net cash provided by operating activities $ 157,332 $ 111,646 $ 111,626 Investing activities: