PARK NATIONAL CORP /OH/ 10-K

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: Proceeds from redemption/repurchase of Federal Home Loan Bank stock 8,677 7,970 14,675 Proceeds from sales of investment securities 934 312,160 91,110 Proceeds from calls and maturities of: HTM debt securities — — 475 AFS debt securities 232,197 223,728 195,989 Purchase of: AFS debt securities ( 953,900 ) ( 354,299 ) — Equity securities — ( 3,567 ) ( 100 ) Federal Reserve Bank stock — — ( 6,428 ) Net decrease in other investments 2,597 2,120 6,429 Net loan paydowns (originations), portfolio loans 312,187 ( 620,200 ) ( 216,353 ) -96- 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 Proceeds from the sale of non-mortgage loans 3,718 4,400 — Proceeds from the sale of OREO 758 5,654 1,465 Life insurance death benefits 5,598 1,360 1,571 Purchases of bank owned life insurance — — ( 3,000 ) Investment in qualified affordable housing tax credits ( 10,814 ) ( 6,596 ) ( 6,038 ) Purchases of premises and equipment ( 14,093 ) ( 28,632 ) ( 14,885 ) Cash paid for acquisitions, net — — ( 4,831 ) Net cash (used in) provided by investing activities $ ( 412,141 ) $ ( 455,902 ) $ 60,079 Financing activities Net increase in deposits 605,168 1,230,073 159,696 Net increase in off-balance sheet deposits ( 272,952 ) ( 710,101 ) — Net (decrease) increase in short-term borrowings ( 103,444 ) 111,573 ( 20,072 ) Proceeds from issuance of long-term debt — — 50,000 Proceeds from issuance of subordinated notes — 172,620 — Repayment of long-term debt ( 32,500 ) ( 170,529 ) ( 258,112 ) Value of common shares withheld to pay employee income taxes ( 2,403 ) ( 1,002 ) ( 827 ) Repurchase of common shares to be held as treasury shares ( 16,048 ) ( 7,507 ) ( 40,535 ) Cash dividends paid ( 74,306 ) ( 70,353 ) ( 69,113 ) Net cash provided by (used in) financing activities $ 103,515 $ 554,774 $ ( 178,963 ) (Decrease) increase in cash and cash equivalents ( 151,294 ) 210,518 ( 7,258 ) Cash and cash equivalents at beginning of year 370,474 159,956 167,214 Cash and cash equivalents at end of year $ 219,180 $ 370,474 $ 159,956 Cash paid for: Interest $ 16,704 $ 29,157 $ 63,038 Federal income taxes 25,505 24,260 15,186 Non cash items: Transfer of debt securities from HTM to AFS $ — $ — $ 349,773 Loans transferred to OREO 150 1,790 1,671 Right-of-use assets obtained in exchange for lease obligations 1,190 7,821 11,475 New commitments in affordable housing tax credit investments 10,000 10,000 10,000 New commitments in other investment securities 3,000 — — The accompanying notes are an integral part of the consolidated financial statements. -97- Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies The following is a summary of significant accounting policies followed in the preparation of the consolidated financial statements: Principles of Consolidation The consolidated financial statements include the accounts of Park National Corporation and its subsidiaries (“Park”, the “Company” or the “Corporation”), unless the context otherwise requires. Material intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and 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, mortgage servicing rights, and pension plan obligations and related expenses. Additionally, the COVID-19 pandemic may particularly impact certain loan concentrations in the hotel and accommodations, restaurant and food service, and strip shopping center industries. Reclassifications Certain prior year amounts have been reclassified to conform with the current presentation. These reclassifications had no impact on net income or shareholders' equity. Restrictions on Cash and Due from Banks The Corporation’s national bank subsidiary, The Park National Bank ("PNB"), previously was required to maintain average reserve balances with the Federal Reserve Bank of Cleveland. The Federal Reserve Board announced on March 15, 2020 that the Federal Reserve Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions. There were no compensating balance arrangements in existence at December 31, 2021 or 2020. Investment Securities Debt securities are classified upon acquisition into one of three categories: HTM, AFS, or trading (see Note 4 - Investment Securities). HTM securities are those debt securities that the Corporation has the positive intent and ability to hold to maturity and are recorded at amortized cost. AFS debt securities are those debt securities that would be available to be sold in the future in response to the Corporation’s liquidity needs, changes in market interest rates, and asset-liability management strategies, among other reasons. AFS debt securities are reported at fair value, with unrealized holding gains and losses excluded from earnings, but included in other comprehensive income (loss), net of applicable income taxes. The Corporation did not hold any trading securities during any period presented. Interest income from debt securities includes amortization of purchase premium or discount. Premiums and discounts on investment securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Premiums on callable debt securities are amortized to their earliest call date. Gains and losses realized on the sale of debt securities are recorded on the trade date and determined using the specific identification method. A debt security is placed on nonaccrual status at the time any principal or interest payments become 90 days past due. Interest accrued but not received for a security placed on nonaccrual status is reversed against interest income. ACL - Debt Securities AFS For debt securities AFS in an unrealized loss position, Park first assesses whether it intends to sell, or it is more likely than not that Park will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For debt securities AFS that do not meet the aforementioned criteria, Park evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized -98- cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. Changes in the ACL are recorded as a provision for (or recovery of) credit loss expense. Losses are charged against the ACL when management believes that uncollectibility of a debt security AFS is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable on debt securities AFS totaled $ 6.3 million at December 31, 2021 and is excluded from the estimate of credit losses. ACL - HTM Debt Securities Management measures expected credit losses on HTM debt securities on a collective basis by major security type. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Park does not currently hold any HTM debt securities. Equity Securities Equity securities, included within "Other investment securities" on the Consolidated Balance Sheets, are carried at fair value, with changes in fair value reported in net income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment. Federal Home Loan Bank and Federal Reserve Bank of Cleveland Stock PNB is a member of the FHLB and the FRB. Members are required to own a certain amount of stock based on their level of borrowings and other factors and may invest in additional amounts. FHLB stock and FRB stock are classified as restricted securities and are carried at their redemption value within "Other investment securities" on the Consolidated Balance Sheets. Impairment is evaluated based on the ultimate recovery of par value. Both cash and stock dividends are reported as income. Bank Owned Life Insurance Park has purchased insurance policies on the lives of directors and certain key officers. Bank owned life insurance is recorded at its cash surrender value (or the amount that can be realized). Loans Held for Sale Park has elected the fair value option for mortgage loans held for sale, which are carried at their fair value as of each balance sheet date. Mortgage Banking Derivatives Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. The fair value of an interest rate lock is recorded at the time the commitment to fund a mortgage loan is executed and is adjusted for the expected exercise of a commitment before a loan is funded. In order to hedge against a change in interest rates resulting from the Company's commitments to fund loans, the Company enters into forward commitments for the future delivery of mortgage loans. The fair value of Park's mortgage banking derivatives is estimated based on the change in mortgage interest rates from the date the interest on a loan is locked. The fair value of these mortgage banking derivatives is included in "Loans" in the Consolidated Balance Sheets. Changes in the fair values of these mortgage banking derivatives are included in "Other service income" in the Consolidated Statements of Income. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and deferred loan fees and costs. Interest income is accrued on the unpaid principal balance. Accrued interest receivable totaled $ 17.1 million at December 31, 2021 and was reported in "Accrued interest receivable" on the Consolidated Balance Sheets. Late charges on loans are recognized as income when they are collected. Net loan origination fees and costs are deferred and recognized in interest income using the level-yield method without anticipating prepayments. -99- Commercial loans include: (1) commercial, financial and agricultural loans; (2) commercial real estate loans; (3) those commercial loans in the construction real estate loan segment; (4) those commercial loans in the residential real estate loan segment; and (5) leases. Consumer loans include: (1) mortgage and installment loans included in the construction real estate segment; (2) mortgage, home equity lines of credit ("HELOCs"), and installment loans included in the residential real estate segment; and (3) all loans included in the consumer segment. Generally, commercial loans are placed on nonaccrual status at 90 days past due and consumer and residential mortgage loans are placed on nonaccrual status at 120 days past due. The delinquency status of a loan is based on contractual terms and not on how recently payments have been received. Park’s charge-off policy for commercial loans requires management to establish a specific reserve or record a charge-off when collection is in doubt and there is, or likely will be, a collateral shortfall related to the estimated value of the collateral securing a loan. The Company’s charge-off policy for consumer loans is dependent on the class of the loan. Residential mortgage loans, HELOCs, and consumer loans secured by residential real estate are typically charged down to the value of the collateral, less estimated selling costs, at 180 days past due. The charge-off policy for other consumer loans, primarily installment loans, requires a monthly review of delinquent loans and a complete charge-off for any account that reaches 120 days past due. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. For loans which are on nonaccrual status, it is Park’s policy to reverse interest previously accrued on the loans against interest income. Interest on such 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 respective loans. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. A description of each segment of the loan portfolio, along with the risk characteristics of each segment, is included below: Commercial, financial and agricultural: Commercial, financial and agricultural ("C&I") loans are made for a wide variety of general corporate purposes, including financing for commercial and industrial 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. Risk of loss on C&I loans largely depends upon general economic cycles, as they may adversely impact certain industries, competency of the borrower's management team, the quality of the underlying assets supporting the loans including accounts receivable, inventory, and equipment, and the accuracy of the borrower's financial reporting. Such risks are mitigated by generally requiring the borrower's owners to guaranty the loans. Commercial real estate: Commercial real estate (“CRE”) loans include mortgage loans to developers and owners of commercial real estate. The lending policy for CRE loans is designed to address the unique risk attributes of CRE lending. The collateral for these CRE loans is the underlying commercial real estate. Risk of loss on CRE loans largely depends upon the cash flow of the properties, which is influenced by the amount of vacancy experienced with respect to underlying real estate, the credit capacity of the tenants occupying the underlying real estate, and general economic trends, as they may adversely impact the value of a property. These risks are mitigated by generally requiring personal guarantees of the owners of the properties and by requiring appraisals pursuant to government regulations. Construction real estate : The Company defines construction loans as both commercial construction loans and residential construction loans where the loan proceeds are used exclusively for the improvement of real estate. 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. 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 construction cost proves to be inaccurate, Park 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 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 that a default on a construction loan occurs and foreclosure follows, Park must take control of the project and attempt to either arrange for completion of construction or dispose of the unfinished project. Additional risks exist with respect to loans made to developers who do 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 attempts to reduce such risks on loans to developers by generally requiring personal guarantees and reviewing current personal financial statements and tax returns as well as other projects undertaken by the developer. Residential real estate: The Company defines residential real estate loans as first mortgages on individuals’ primary residences or second mortgages on individuals’ primary residences in the form of HELOCs or installment loans. Credit approval for residential real estate loans requires demonstration of sufficient income to repay the principal and interest and the real estate -100- taxes and insurance, stable 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 typically have longer terms and higher balances with lower yields as compared to consumer loans, but generally carry lower risks of default. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires creditors to make a reasonable and good faith determination of a consumer's ability to repay any consumer credit transaction secured by a dwelling. Documentation and verification of income within defined time frames and not-to-exceed limits are bases for affirming ability to repay. Risk of loss largely depends upon factors affecting the borrower's ability to repay as well as the general economic trends as they may adversely impact the value of the property. These risks are mitigated by completing a comprehensive underwriting of the borrower and by requiring appraisals pursuant to government regulations. Consumer: The Company originates direct and indirect consumer loans, primarily automobile loans, to customers in the Company's primary market areas. Credit approval for consumer loans requires income sufficient to repay principal and interest due, stable employment, an established credit record and sufficient collateral for secured loans. Consumer loans typically have shorter terms and lower balances with higher yields as compared to real estate mortgage loans, but generally carry higher risks of default. Consumer loan collections are dependent on the borrower’s financial stability, and thus are more likely to be affected by adverse personal circumstances. Leases : The Company originates financing leases primarily for the purchase of commercial vehicles, operating/manufacturing equipment, and municipal vehicles/equipment. Repayment terms are structured such that the lease will be repaid within the economic useful life of the leased asset. Risk of losses on financing leases largely depends upon general economic cycles, as they may adversely impact certain industries, competency of the borrower’s management team, the quality and residual value of the leased asset, and the accuracy of the borrower’s financial reporting. These risks are mitigated by underwriting leases considering primary and secondary sources of repayment and requiring guaranteed residual values. Concentration of Credit Risk Park's commercial loan portfolio includes loans to a wide variety of corporations and businesses across many industrial classifications in the 26 Ohio counties, three North Carolina counties, four South Carolina counties and one Kentucky county where PNB 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. PCD Loans The Company has purchased loans, some of which have shown evidence of credit deterioration since origination. Upon adoption of ASC 326, Park elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a unit of account. Loans are only removed from the existing pools if they are written off, paid off, or sold. Upon adoption of ASC 326, the allowance for credit losses was determined for each pool and added to the pool's carrying amount to establish a new amortized cost basis. The difference between the unpaid principal balance of the pool and the new amortized cost basis is the noncredit premium or discount, which will be amortized into interest income over the remaining life of the pool. Changes to the allowance for credit losses after adoption are recorded through provision for credit loss expense. ACL - Loans The ACL is a valuation account that is deducted from the amortized cost of total loans to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes that the uncollectibility of a loan balance is confirmed. Expected recoveries cannot not exceed the aggregate of the amounts previously charged-off and expected to be charged-off. Management estimates the allowance balance using relevant and available information from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical credit loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors. -101- ACL - Loans - Collectively Evaluated The ACL is measured on a collective pool basis when similar risk characteristics exist. Park has identified the following portfolio segments and measures the allowance for credit losses using the following methods: Portfolio Segment Measurement Method Loss Driver Commercial, financial and agricultural Commercial, financial and agricultural Discounted Cash Flow Ohio Unemployment, Ohio GDP PPP loans Other Not Applicable Overdrafts Historical Loss Experience Not Applicable Commercial real estate Discounted Cash Flow Ohio Unemployment, Ohio GDP Construction real estate: Commercial Discounted Cash Flow Ohio Unemployment, Ohio GDP Retail Discounted Cash Flow Ohio Unemployment, Ohio GDP Residential real estate: Commercial Discounted Cash Flow Ohio Unemployment, Ohio HPI Mortgage Discounted Cash Flow Ohio Unemployment, Ohio HPI HELOC Discounted Cash Flow Ohio Unemployment, Ohio HPI Installment Discounted Cash Flow Ohio Unemployment, Ohio HPI Consumer: Consumer Discounted Cash Flow Ohio Unemployment, Ohio GDP GFSC Discounted Cash Flow Ohio Unemployment, Ohio GDP Check loans Historical Loss Experience Not Applicable Leases Remaining Life Not Applicable Expected credit losses are estimated over the contractual term of the loans, adjusted for prepayments when appropriate. The contractual term excludes extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by Park. In general, Park utilized a DCF method to estimate the quantitative portion of the allowance for credit losses for loans evaluated on a collective pooled basis. For each segment, a LDA was performed in order to identify appropriate loss drivers and create a regression model for use in forecasting cash flows. The LDA utilized Park's own Federal Financial Institutions Examination Council's ("FFIEC") Call Report data for the commercial, financial and agricultural and residential real estate segments. Peer data was incorporated into the analysis for the commercial real estate, construction real estate, and consumer segments. In creating the DCF model, Park established a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average. Park's policy is to utilize its own data, which includes loan-level loss data from 2013 through December 31, 2021, whenever possible. Park and peer FFIEC Call Report data are utilized when there are insufficient defaults for a statistically sound calculation, or if Park does not have its own loan-level detail reflecting similar economic conditions as the forecasted loss drivers. Key inputs into the DCF model include loan-level detail, including the amortized cost basis of individual loans, payment structure, and loss history, and forecasted loss drivers. 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 weighting of the scenarios is evaluated on a quarterly basis considering the various scenarios in the context of the current economic environment and presumed risk of loss. Additional key assumptions in the DCF model include the PD, LGD, and prepayment/curtailment rates. When possible, Park utilizes its own PDs for the reasonable and supportable forecast period. When it is not possible to use Park's own PDs, the LDA is utilized to determine PDs based on the forecasted economic factors. In all cases, the LDA is then utilized to determine the long-term historical average, which is reached over the reversion period. When possible, Park's utilizes its own 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 -102- method referred to as Frye Jacobs. The Frye Jacobs method is a mathematical formula that traces the relationship between LGD and PD over time and projects the LGD based on the level of PD forecasted. In all cases, the Frye Jacobs method is utilized to calculate LGDs during the reversion period and long-term historical average. Prepayment and curtailment rates were calculated based on Park's own data utilizing a three-year average. When the discounted cash flow method is used to determine the allowance for credit losses, management incorporates expected prepayments to determine the effective interest rate utilized to discount expected cash flow. 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; • 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; • 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; and • The extent that there is government assistance (stimulus). Allowance for Credit Losses - Loans - Individually Evaluated Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. 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 establishes 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, adjusted for selling costs as appropriate. Allowance for Credit Losses - Off-Balance Sheet Credit Exposures Park estimates expected credit losses over the contractual period in which Park is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by Park. The allowance for credit losses on off-balance sheet credit exposures is adjusted within "Miscellaneous other expense" on the Consolidated Statements of Income. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over the commitments' respective estimated lives. Funding rates are based on a historical analysis of Park's portfolio, while estimates of credit losses are determined using the same loss rates as funded loans. Troubled Debt Restructurings ("TDRs") Management classifies loans as TDRs when a borrower is experiencing financial difficulty and Park has granted a concession. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of the borrower's debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy. Management’s policy is to modify loans by extending the term or by granting a temporary or permanent contractual interest rate below the market rate, not by forgiving debt. A court's discharge of a borrower's debt in a Chapter 7 bankruptcy is considered a concession when the borrower does not reaffirm the discharged debt. Additionally, Park has worked with borrowers impacted by the COVID-19 pandemic and provided modifications in the form of either interest only deferral or principal and interest deferral, in each case, for initial periods 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. A majority of these modifications were excluded from TDR classification under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators. In accordance with this guidance, such modified loans will be considered current and will continue to accrue interest during the deferral period. Premises and Equipment Land is carried at cost and is not subject to depreciation. Premises and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation is generally provided on the straight-line method over the estimated useful lives of -103- the related assets. Leasehold improvements are amortized over the shorter of the remaining lease period or the estimated useful lives of the improvements. Upon the sale or other disposal of an asset, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is recognized. Maintenance and repairs are charged to expense as incurred while renewals and improvements that extend the useful life of an asset are capitalized. Premises and equipment are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of a particular asset may not be recoverable. The range of depreciable lives over which premises and equipment are being depreciated are: Buildings 30 Years Building improvements 5 to 10 Years Equipment, furniture and fixtures 3 to 12 Years Software 3 Years Leasehold improvements Shorter of the remaining lease period or the estimated useful life of the improvement Other Real Estate Owned Management transfers a loan to OREO at the time that Park takes deed/title to the asset. OREO is initially recorded at fair value less anticipated selling costs (net realizable value), establishing a new cost basis, and consists of property acquired through foreclosure and real estate held for sale. If the net realizable value is below the carrying value of the loan at the date of transfer, the difference is charged to the allowance for credit losses. These assets are subsequently accounted for at the lower of cost or fair value less costs to sell. Subsequent changes in the value of real estate are classified as OREO valuation adjustments, are reported as adjustments to the carrying amount of OREO, and recorded within the line item “Other income”. In certain circumstances where management believes the devaluation may not be permanent in nature, Park utilizes a valuation allowance to record OREO devaluations, which is also expensed through the line item “Other income”. Costs relating to development and improvement of such properties are capitalized (not in excess of fair value less estimated costs to sell), and costs relating to holding the properties are charged to the line item "Other expense". Foreclosed Assets Foreclosed assets include non-real estate assets where Park, as creditor, has received physical possession of a borrower’s assets, regardless of whether formal foreclosure proceedings take place. Additionally, TDRs in which Park obtains one of more of the debtor’s non-real estate assets in place of all or part of the receivable are accounted for as foreclosed assets. Foreclosed assets are initially recorded as fair value less costs to sell when acquired, establishing a new cost basis. Operating costs after acquisition are expensed as incurred. As of December 31, 2021 and 2020, Park had $ 3.3 million and $ 3.6 million, respectively, of foreclosed assets included within “Other assets.” Mortgage Servicing Rights When Park sells mortgage loans with servicing retained, MSRs are recorded at fair value with the income statement effect recorded in "Other service income". Capitalized MSRs are amortized in proportion to and over the period of the estimated future servicing income of the underlying loan and are included within “Other service income”. MSRs are assessed for impairment quarterly, based on fair value, with any impairment recognized through a valuation allowance. The fair value of MSRs is determined by discounting estimated future cash flows from the servicing assets, using market discount rates and expected future prepayment rates. In order to calculate fair value, the sold loan portfolio is stratified into homogeneous pools of like categories. (See Note 25 - Loan Servicing.) Fees received for servicing mortgage loans owned by investors are based on a percentage of the outstanding monthly principal balance of such loans and are included in income as loan payments are received. The amortization of MSRs is netted against loan servicing fee income, recorded in "Other service income". Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price over net identifiable tangible and intangible assets acquired in a purchase business combination. Goodwill is not amortized to expense, but is subject to impairment tests annually, or more frequently, if events or changes in circumstances indicate that the asset might be impaired, by assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If after assessing these events or circumstances, it is concluded that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the performance of additional -104- analysis is unnecessary. If the carrying amount of the goodwill exceeds the fair value, an impairment charge must be recorded in an amount equal to the excess, not to exceed the total goodwill allocated to the reporting unit. Other intangible assets consist of core deposit intangibles. Core deposit intangibles are amortized on an accelerated basis over a period of ten years. Consolidated Statements of Cash Flows Cash and cash equivalents include cash and cash items, amounts due from banks, and money market instruments. Generally, money market instruments are purchased and sold for one-day periods. Loss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe that there are currently such matters that will have a material effect on the financial statements. I ncome Taxes Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. An uncertain tax position is recognized as a benefit only if it is “more-likely-than-not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The benefit recognized for a tax position that meets the “more-likely-than-not” criteria is measured based on the largest benefit that is more than 50 percent likely to be realized, taking into consideration the amounts and probabilities of the outcome upon settlement. For tax positions not meeting the “more-likely-than-not” test, no tax benefit is recorded. Park recognizes any interest and penalties related to income tax matters in income tax expense. Treasury Shares The purchase of Park’s common shares to be held in treasury is recorded at cost. At the date of retirement or subsequent reissuance, the treasury shares account is reduced by the weighted average cost of the common shares retired or reissued. Dividend Restriction Banking regulations require the maintenance of certain capital levels and may limit the dividends paid by a bank to its parent holding company or by the parent holding company to its shareholders. (See Note 23 - Dividend Restrictions and Note 28 - Capital Ratios.) Comprehensive Income Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on debt securities available for sale, changes in the funded status of the Company’s defined benefit pension plan and unrealized gains and losses on cash flow hedges which are also recognized as separate components of equity. Share-Based Compensation Compensation cost is recognized for restricted stock units and stock awards issued to employees and directors, respectively, based on the fair value of these awards at the date of grant. The market price of Park’s common shares at the date of grant is used to estimate the fair value of restricted stock units and stock awards. Compensation cost is recognized on a straight-line basis over the required service period, generally defined as the vesting period and is recorded in "Salaries" expense. (See Note 18 - Share-Based Compensation.) The Company's accounting policy is to recognize forfeitures as they occur. Loan Commitments and Related Financial Instruments Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Fair Value Measurement Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 27 - Fair Value. Fair value estimates involve uncertainties and matters of significant judgment regarding -105- interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Derivatives At the inception of a derivative contract, Park designates the derivative as one of three types based on Park's intentions and belief as to the likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”). Park does not have any fair value hedges. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as non-interest income. Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income. Cash flows on hedges are classified in the Consolidated Statements of Cash Flow under the same item as the cash flows of the items being hedged. Park formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. The documentation includes linking cash flow hedges to specific assets and liabilities on the Consolidated Balance Sheets. Park also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used are highly effective in offsetting changes in cash flows of the hedged items. Park discontinues hedge accounting when it determines that a derivative is no longer effective in offsetting cash flows of the hedged item, the derivative is settled or terminates, or treatment of the derivative as a hedge is no longer appropriate or intended. When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income. When a cash flow hedge is discontinued but the hedged cash flows are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods that the hedged transactions will affect earnings. The Company is exposed to losses if a counterparty fails to make its payments under a contract in which the Company is in the net receiving position. The Company anticipates that the counterparties will be able to fully satisfy their obligations under the outstanding agreements. All the contracts to which the Company is party settle monthly or quarterly. Transfers of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Retirement Plans Pension expense is the net of service and interest cost, return on plan assets and amortization of gains and losses not immediately recognized. The service cost component of pension expense is recorded within "Employee benefits" on the Consolidated Statements of Income. All other components of pension expense are recorded within "Other components of net periodic benefit income" on the Consolidated Statements of Income. Employee KSOP plan expense is the amount of matching contributions to Park's Employees Stock Ownership Plan. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service. (See Note 19 - Benefit Plans.) Earnings Per Common Share Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under restricted stock unit awards. (See Note 18 - Share-Based Compensation and Note 22 - Earnings Per Common Share.) Operating Segments The Corporation is a financial holding company headquartered in Newark, Ohio. The reportable segment for the Corporation is its chartered national bank subsidiary, PNB (headquartered in Newark, Ohio). -106- 2. Adoption of New Accounting Pronouncements and Issued But Not Yet Effective Accounting Standards The following is a summary of new accounting pronouncements impacting Park's consolidated financial statements, and accounting standards that have been issued but are not effective for Park as of December 31, 2021: Adoption of New Accounting Pronouncements ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments: Effective January 1, 2021, Park adopted ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") ("ASC 326"), as amended. The new accounting guidance in ASU 2016-13 replaces the incurred loss methodology with an expected loss methodology, which is referred to as the current expected credit loss ("CECL") methodology. The CECL methodology is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, HTM debt securities, and reinsurance receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments), and net investments in leases recognized by a lessor. The CECL methodology requires an entity to estimate credit losses over the life of an asset or off-balance sheet credit exposure. The new accounting guidance was to have originally been effective for Park for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2019. 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 will 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. Park adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning on and after after January 1, 2021 are presented under ASC 326, while prior period amounts continue to be reported in accordance with the then applicable U.S. GAAP. Park recorded a net decrease to retained earnings of $ 8.0 million as of January 1, 2021 for the cumulative effect of adopting ASC 326. Park adopted ASC 326 using the prospective transition approach for financial assets PCD that were previously classified as PCI and accounted for under ASC 310-30. In accordance with ASC 326, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2021, the amortized cost basis of the PCD assets was adjusted to reflect the addition of $ 52,000 to the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2021. As permitted by ASC 326, Park elected to maintain pools of loans accounted for under ASC 310-30. In accordance with ASC 326, management did not reassess whether modifications to individual acquired financial assets accounted for in pools were TDRs as of the date of adoption. -107- The following table illustrates the impact of ASC 326: January 1, 2021 (In thousands) As Reported Under ASC 326 Pre-ASC 326 Adoption Impact of ASC 326 Adoption Assets: Loans $ 7,177,666 $ 7,177,785 $ ( 119 ) ACL on loans Commercial, financial and agricultural 17,351 25,608 ( 8,257 ) Commercial real estate 25,599 23,480 2,119 Construction real estate 5,390 7,288 ( 1,898 ) Residential real estate 14,484 11,363 3,121 Consumer 28,343 17,418 10,925 Leases 598 518 80 Total ACL on loans $ 91,765 $ 85,675 $ 6,090 Liabilities: ACL on off-balance sheet commitments $ 3,982 $ 116 $ 3,866 Net deferred tax liability 777 2,892 ( 2,115 ) Shareholders' equity: $ 1,032,300 $ 1,040,256 $ ( 7,956 ) ASU 2018-14 - Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans: In August 2018, the FASB issued ASU 2018-14 - Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans . The amendments in this ASU modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing disclosures that are no longer considered cost beneficial, clarifying the specific requirements of disclosures and adding disclosure requirements identified as relevant. The amendments in ASU 2018-14 were effective for fiscal years ended after December 15, 2020. The adoption of this guidance on January 1, 2021 did not have an impact on Park’s consolidated financial statements, but did impact disclosures. ASU 2019-20 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes: In December 2019, the FASB issued ASU 2019-20 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . ASU 2019-20 includes amendments to simplify accounting for income taxes by removing certain exceptions and adding requirements with the intention of simplifying and clarifying existing guidance. The amendments in ASU 2019-20 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The adoption of this guidance on January 1, 2021, did not have a material impact on Park's consolidated financial statements. ASU 2020-01 - Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815: In January 2020, the FASB issued ASU 2020-01 - Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 . ASU 2020-01 represents changes to clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815. These amendments improve current U.S. GAAP by reducing diversity in practice and increasing comparability of the accounting for these transactions. The amendments in ASU 2020-01 are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The adoption of this guidance on January 1, 2021, did not have a material impact on Park's consolidated financial statements. -108- ASU 2020-04 - Reference Rate Reform (Topic 848): Facilitation of the Effect of Reference Rate Reform on Financial Reporting : In March 2020, the FASB issued ASU 2020-04 - Reference Rate Reform (Topic 848): Facilitation of the Effect of Reference Rate Reform on Financial Reporting . The amendments in this ASU provide optional expedients and exceptions to applying GAAP to contracts, hedging relationships and other transactions impacted by reference rate reform if certain criteria are met. The amendments in this ASU are effective as of March 12, 2020 through December 31, 2022. The adoption of this guidance did not have a material impact on Park's consolidated financial statements, but Park will consider this guidance as contracts are transitioned from LIBOR to another reference rate. ASU 2020-08 - Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs: In October 2020, the FASB issued ASU 2020-08 - Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs. ASU 2020-08 clarifies that an entity should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. The amendments in ASU 2020-08 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application was not permitted. The adoption of this guidance on January 1, 2021, did not have a material impact on Park's consolidated financial statements. ASU 2021-01 - Reference Rate Reform (Topic 848): Scope: In January 2021, the FASB issued A SU 2021-01 - Reference Rate Reform (Topic 848): Scope . This ASU clarifies the scope of Topic 848 so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. The amendments in this ASU are elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The amendments in this ASU are effective immediately for all entities. The adoption of this guidance did not have a material impact on Park's consolidated financial statements, but Park will consider this guidance as contracts are transitioned from LIBOR to another reference rate. ASU 2021-06 - Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): In August 2021, FASB issued ASU 2021-06 - Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946) . ASU 2021-06 updates the codification to align with SEC Final Rule Releases No. 33-10786 and No. 33-10835. Specific to financial institutions, these SEC releases updated required annual statistical disclosures. The amendments in ASU 2021-06 were effective immediately. Park has updated the statistical disclosures in its Annual Report on Form 10-K for the fiscal year ending December 31, 2021, to align with this guidance. Issued But Not Yet Effective Accounting Standards There are no issued but not yet effective accounting standards impacting Park as of December 31, 2021. 3. Organization Park National Corporation is a financial holding company headquartered in Newark, Ohio. Through 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. PNB is headquartered in Newark, Ohio. A wholly-owned subsidiary of Park, GFSC is a consumer finance company located in Central Ohio. Through February 16, 2012, Park operated a second banking subsidiary, Vision Bank ("Vision"), which was engaged in a general commercial banking business, primarily in Baldwin County, Alabama and the panhandle of Florida. Promptly following the sale of the Vision business to Centennial Bank (a wholly-owned subsidiary of Home BancShares, Inc.), Vision surrendered its Florida banking charter to the Florida Office of Financial Regulation and became a non-bank Florida corporation. Vision (the Florida corporation) merged with and into a wholly-owned, non-bank subsidiary of Park, SEPH, with SEPH being the surviving entity. SEPH holds the remaining assets and liabilities retained by Vision subsequent to the sale. SEPH also holds OREO that had previously been transferred to SEPH from Vision. SEPH's assets consist primarily of nonperforming loans and OREO. This non-bank subsidiary represents a run off portfolio of the legacy Vision assets. PNB provides the following principal services: the acceptance of deposits for demand, savings and time accounts; commercial, industrial, consumer and real estate lending, including installment loans, credit cards (which are largely offered through a third party), home equity lines of credit and commercial leasing; trust and wealth management services; cash management; safe deposit operations; electronic funds transfers and a variety of additional banking-related services. See Note 29-Segment Information for financial information on the Corporation’s operating segments. -109- 4. Investment Securities "Debt securities" and "Other investment securities" are summarized below. Debt Securities The following table summarizes the amortized cost and fair value of debt securities at December 31, 2021 and December 31, 2020 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss). There was no related allowance for credit losses at December 31, 2021. (In thousands) Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value 2021: Debt Securities Available-for-Sale Obligations of states and political subdivisions $ 366,933 $ 22,682 $ 24 $ 389,591 U.S. Government sponsored entities’ asset-backed securities 849,114 13,437 8,088 854,463 Collateralized loan obligations 500,066 3 1,395 498,674 Corporate debt securities 11,250 169 7 11,412 Total $ 1,727,363 $ 36,291 $ 9,514 $ 1,754,140 (In thousands) Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value 2020: Debt Securities Available-for-Sale Obligations of states and political subdivisions $ 279,245 $ 25,973 $ — $ 305,218 U.S. Government sponsored entities’ asset-backed securities 726,589 26,248 728 752,109 Corporate debt securities 2,000 14 — 2,014 Total $ 1,007,834 $ 52,235 $ 728 $ 1,059,341 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. All debt securities were classified as AFS at December 31, 2021 and December 31, 2020. The following table provides detail on investment securities in an unrealized loss position for which an allowance for credit losses has not been recorded at December 31, 2021, aggregated by major security type and length of time in a continuous unrealized loss position: Less than 12 Months 12 Months or Longer Total (In thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses 2021: Debt Securities Available-for-Sale Obligations of states and political subdivisions $ 1,834 $ 24 $ — $ — $ 1,834 $ 24 U.S. Government sponsored entities’ asset-backed securities 333,653 4,996 73,431 3,092 407,084 8,088 Collateralized loan obligations 429,671 1,395 — — 429,671 1,395 Corporate debt securities 2,243 7 — — 2,243 7 Total $ 767,401 $ 6,422 $ 73,431 $ 3,092 $ 840,832 $ 9,514 -110- Investment securities in an unrealized loss position at December 31, 2020, were as follows: Less than 12 Months 12 Months or Longer Total (In thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses 2020: Debt Securities Available-for-Sale U.S. Government sponsored entities' asset-backed securities $ 86,393 $ 695 $ 4,727 $ 33 $ 91,120 $ 728 Total $ 86,393 $ 695 $ 4,727 $ 33 $ 91,120 $ 728 At December 31, 2021, Park’s debt security portfolio consisted of $ 1.8 billion of securities, $ 840.8 million of which were in an unrealized loss position with unrealized losses of $ 9.5 million. Of the $ 840.8 million of securities in an unrealized loss position, $ 73.4 million were in an unrealized loss position for 12 months or longer. The majority of the unrealized losses were related to Park’s U.S. Government sponsored entities' asset-backed securities portfolio. Unrealized losses have not been recognized into earnings as they represent negative adjustments to fair value relative to the rate of interest paid on the securities and not losses related to the creditworthiness of the respective issuers. Management does not intend to sell, and it is not more likely than not that management would be required to sell, the securities prior to their anticipated recovery. Management believes the value will recover as the securities approach maturity or market rates change. There was no allowance for credit losses recorded for debt securities AFS at December 31, 2021. Additionally, for the years ended December 31, 2021, 2020, and 2019, there were no credit-related investment impairment losses recognized. The amortized cost and estimated fair value of investments in debt securities at December 31, 2021, are 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. (In thousands) Amortized Cost Fair Value Tax Equivalent Yield (1) Debt Securities Available-for-Sale Obligations of states and political subdivisions Due five through ten years $ 197,895 $ 213,154 3.75 % Due greater than ten years 169,038 176,437 2.91 % Total $ 366,933 $ 389,591 3.36 % U.S. Government sponsored entities’ asset-backed securities $ 849,114 $ 854,463 1.73 % Collateralized loan obligations $ 500,066 $ 498,674 1.61 % Corporate debt securities Due five through ten years $ 11,250 $ 11,412 3.93 % (1) The tax equivalent yield for obligations of states and political subdivisions includes the effects of a taxable equivalent adjustment using a 21% federal corporate income tax rate. At December 31, 2021, investment securities with an amortized cost of $ 396.3 million were pledged for government and trust department deposits, $ 327.9 million were pledged to secure repurchase agreements and $ 9.5 million were pledged as collateral for FHLB advance borrowings. At December 31, 2020, investment securities with an amortized cost of $ 328.6 million were pledged for government and trust department deposits, $ 348.6 million were pledged to secure repurchase agreements and $ 13.9 million were pledged as collateral for FHLB advance borrowings. At December 31, 2021, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10 % of shareholders’ equity. -111- There were no sales of AFS debt securities during 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 securities with a book value of $ 62.4 million at a gross loss of $ 0.7 million and sold certain AFS debt securities with a book value of $ 29.1 million at a gross gain of $ 271,000 . Other Investment Securities Other investment securities (as shown on the Consolidated Balance Sheets) consist of restricted stock investments in the FHLB and the FRB, and equity securities. The FHLB and FRB restricted stock investments are carried at their redemption value. Equity securities with a readily determinable fair value are carried at fair value. Equity securities without a readily determinable fair value are recorded at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions ("modified cost"). Park's portfolio of equity investments in limited partnerships which provide mezzanine funding ("Partnership Investments") are valued using the net asset value practical expedient in accordance with ASC 820. The carrying amount of other investment securities at December 31, 2021 and 2020 was as follows: (In thousands) December 31, 2021 December 31, 2020 FHLB stock $ 13,413 $ 22,090 FRB stock 14,653 14,653 Equity investments carried at fair value 2,129 2,511 Equity investments carried at modified cost (1) 4,689 4,689 Equity investments carried at net asset value 26,384 21,522 Total other investment securities $ 61,268 $ 65,465 (1) There have been no impairments, downward adjustments, or upward adjustments made to equity investments carried at modified cost. During the year ended December 31, 2021, the FHLB repurchased 86,770 shares of FHLB stock with a book value of $ 8.7 million. No shares of FRB stock were purchased or sold in 2021. During the year ended December 31, 2020, the FHLB repurchased 79,697 shares of FHLB stock with a book value of $ 8.0 million. No shares of FRB stock were purchased or sold in 2020. During the year ended December 31, 2019, the FHLB repurchased 133,281 shares of FHLB stock with a book value of $ 13.3 million. Park purchased 128,553 shares of FRB stock with a book value of $ 6.4 million in 2019. 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 the 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 the Consolidated Statements of Income. -112- 5. Loans The composition of the loan portfolio at December 31, 2021 and December 31, 2020 was as follows: December 31, 2021 December 31, 2020 (In thousands) Amortized Cost Amortized Cost Accrued Interest Receivable Recorded Investment Commercial, financial and agricultural: (1) 1,588,989 $ 6,528 $ 1,595,517 Commercial, financial and agricultural (1) $ 1,223,079 (2) (2) (2) PPP loans 74,420 (2) (2) (2) Overdrafts 1,127 (2) (2) (2) Commercial real estate (1) 1,801,792 1,748,189 $ 6,017 $ 1,754,206 Construction real estate: Commercial 214,561 226,991 $ 572 $ 227,563 Retail 107,225 116,430 $ 235 $ 116,665 Residential real estate: Commercial 533,802 526,222 $ 1,161 $ 527,383 Mortgage 1,033,658 1,096,358 $ 947 $ 1,097,305 HELOC 165,605 182,028 $ 647 $ 182,675 Installment 5,642 8,436 $ 22 $ 8,458 Consumer: 1,659,704 $ 4,510 $ 1,664,214 Consumer 1,685,793 (2) (2) (2) GFSC 1,793 (2) (2) (2) Check loans 2,093 (2) (2) (2) Leases 20,532 24,438 $ 14 $ 24,452 Total $ 6,871,122 $ 7,177,785 $ 20,653 $ 7,198,438 Allowance for credit losses ( 83,197 ) ( 85,675 ) Net loans $ 6,787,925 $ 7,092,110 (1) Included within each of commercial, financial and agricultural loans and commercial real estate loans is an immaterial amount of consumer loans that were not broken out by class. (2) Results for reporting periods beginning after January 1, 2021 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. Category was not broken out as a separate class at December 31, 2020. In order to support customers, Park participated in the CARES Act Paycheck Protection Program ("PPP"). PPP loans were broken out as a separate class as of December 31, 2021. Included within commercial, financial and agricultural loans as of December 31, 2020 were $ 331.6 million of PPP loans. For its assistance in originating the first round of PPP loans during 2020, Park received an aggregate of $ 20.2 million in fees from the SBA, and for its assistance in originating additional PPP loans during 2021, Park received an aggregate of $ 12.9 million in fees from the SBA. During the years ended December 31, 2021 and December 31, 2020, $ 16.3 million and $ 13.7 million, respectively, of PPP fee income was recognized within loan interest income. There was no PPP fee income earned during the year ended December 31, 2019. Loans are shown net of deferred origination fees, costs and unearned income of $ 19.5 million at December 31, 2021, and of $ 23.6 million at December 31, 2020, which represented a net deferred income position in both years. At December 31, 2021 and December 31, 2020, included in the net deferred origination fees, costs and unearned income were $ 2.8 million and $ 6.5 million, respectively, in net origination fees related to PPP loans. At December 31, 2021 and December 31, 2020, loans included purchase accounting adjustments of $ 4.2 million and $ 7.2 million, respectively, which represented a net deferred income position at each date. This fair market value purchase accounting adjustment is expected to be recognized into interest income on a level yield basis over the remaining expected life of the loans. Overdrawn deposit accounts of $ 1.1 million and $ 2.0 million were reclassified to loans at December 31, 2021 and December 31, 2020, respectively. As of December 31, 2021, overdrafts were within their own class and as of December 31, 2020, overdrafts were included in the commercial, financial and agricultural loan segment in the previous table. -113- Credit Quality The following table presents the amortized cost of nonaccrual loans, accruing TDRs, and loans past due 90 days or more and still accruing, by class of loan, at December 31, 2021: December 31, 2021 (In thousands) Nonaccrual Loans Accruing TDRs Loans Past Due 90 Days or More and Accruing Total Nonperforming Loans Commercial, financial and agricultural: Commercial, financial and agricultural $ 13,271 $ 9,396 $ — $ 22,667 PPP loans — — 793 793 Overdrafts — — — — Commercial real estate 40,142 7,713 — 47,855 Construction real estate: Commercial 52 169 — 221 Retail 716 9 — 725 Residential real estate: Commercial 2,366 240 — 2,606 Mortgage 11,718 7,779 372 19,869 HELOC 1,590 803 — 2,393 Installment 82 1,508 — 1,590 Consumer: Consumer 1,518 700 431 2,649 GFSC 79 6 11 96 Check loans — — — — Leases 1,188 — — 1,188 Total loans $ 72,722 $ 28,323 $ 1,607 $ 102,652 -114- The following table presents the recorded investment in nonaccrual loans, accruing TDRs, and loans past due 90 days or more and still accruing, by class of loan, at December 31, 2020: December 31, 2020 (In thousands) Nonaccrual Loans Accruing TDRs Loans Past Due 90 Days or More and Accruing Total Nonperforming Loans Commercial, financial and agricultural $ 23,261 5,619 $ — $ 28,880 Commercial real estate 67,426 2,931 377 70,734 Construction real estate: Commercial 3,110 — — 3,110 Mortgage 14 31 — 45 Residential real estate: Commercial 4,304 253 — 4,557 Mortgage 14,016 8,400 416 22,832 HELOC 1,286 909 77 2,272 Installment 184 1,728 — 1,912 Consumer 2,172 1,017 724 3,913 Leases 1,595 — — 1,595 Total loans $ 117,368 $ 20,888 $ 1,594 $ 139,850 The following table provides additional detail on nonaccrual loans and the related ACL, by class of loan, at December 31, 2021: December 31, 2021 (In thousands) Nonaccrual Loans With No ACL Nonaccrual Loans With an ACL Related ACL Commercial, financial and agricultural: Commercial, financial and agricultural 11,494 1,777 1,343 PPP loans — — — Overdrafts — — — Commercial real estate 39,151 991 188 Construction real estate: Commercial 52 — — Retail — 716 67 Residential real estate: Commercial 2,366 — — Mortgage — 11,718 73 HELOC — 1,590 99 Installment — 82 24 Consumer Consumer — 1,518 393 GFSC — 79 10 Check loans — — — Leases 914 274 43 Total loans $ 53,977 $ 18,745 $ 2,240 -115- Nonaccrual commercial loans are evaluated on an individual basis and are excluded from the collective evaluation. Management’s general practice is to proactively charge down loans individually evaluated to the fair value of the underlying collateral. Nonaccrual consumer loans are collectively evaluated based on similar risk characteristics. The following table presents loans individually evaluated for impairment by class of loan as of December 31, 2020: December 31, 2020 (In thousands) Unpaid Principal Balance Recorded Investment ACL Allocated With no related allowance recorded Commercial, financial and agricultural 23,316 22,970 — Commercial real estate 63,639 63,467 — Construction real estate: Commercial 3,110 3,110 — Residential real estate: Commercial 4,522 4,448 — Leases 568 568 — With an allowance recorded Commercial, financial and agricultural 5,881 5,866 3,758 Commercial real estate 6,890 6,890 1,316 Construction real estate: Commercial — — — Residential real estate: Commercial 109 109 16 Leases 1,027 1,027 344 Total $ 109,062 $ 108,455 $ 5,434 The following table provides the amortized cost basis of collateral-dependent loans by class of loan, as of December 31, 2021: December 31, 2021 (In thousands) Real Estate Business Assets Other Total Commercial, financial and agricultural Commercial, financial and agricultural $ 9,321 $ 13,366 $ 156 $ 22,843 Commercial real estate 52,901 37 — 52,938 Construction real estate: Commercial 1,178 — — 1,178 Residential real estate: Commercial 2,906 — 57 2,963 Mortgage 370 — — 370 HELOC 148 — — 148 Leases — 1,211 — 1,211 Total loans $ 66,824 $ 14,614 $ 213 $ 81,651 -116- Interest income on nonaccrual loans individually evaluated for impairment is recognized on a cash basis only when Park expects to receive the entire recorded investment in the loans. Interest income on accruing TDRs individually evaluated for impairment continues to be recorded on an accrual basis. The following table presents interest income recognized on nonaccrual loans for the year ended December 31, 2021: Interest Income Recognized (In thousands) December 31, 2021 Commercial, financial and agricultural: Commercial, financial and agricultural $ 180 PPP loans — Overdrafts — Commercial real estate 1,844 Construction real estate: Commercial 39 Retail 4 Residential real estate: Commercial 204 Mortgage 301 HELOC 17 Installment 2 Consumer: Consumer 92 GFSC 14 Check loans Leases 73 Total loans $ 2,770 The following table presents the average recorded investment and interest income recognized subsequent to impairment on loans individually evaluated for impairment as of and for the years ended December 31, 2020 and 2019: December 31, 2020 December 31, 2019 (In thousands) Recorded Investment Average Recorded Investment Interest Income Recognized Recorded Investment Average Recorded Investment Interest Income Recognized Commercial, financial and agricultural $ 28,836 $ 30,280 $ 735 $ 33,088 $ 21,415 $ 527 Commercial real estate 70,357 55,279 1,890 41,791 32,132 1,241 Construction real estate: Commercial 3,110 1,291 50 453 1,987 26 Residential real estate: Commercial 4,557 4,329 204 2,025 2,175 99 Consumer — — — — — — Leases 1,595 1,115 — 134 59 — Total $ 108,455 $ 92,294 $ 2,879 $ 77,491 $ 57,768 $ 1,893 -117- The following table presents the aging of the amortized cost in past due loans at December 31, 2021 by class of loan: December 31, 2021 (In thousands) Accruing Loans Past Due 30-89 Days Past Due Nonaccrual Loans and Loans Past Due 90 Days or More and Accruing (1) Total Past Due Total Current (2) Total Amortized Cost Commercial, financial and agricultural: Commercial, financial and agricultural $ 2,908 $ 9,547 $ 12,455 $ 1,210,624 $ 1,223,079 PPP loans 242 793 1,035 73,385 74,420 Overdrafts — — — 1,127 1,127 Commercial real estate 65 1,461 1,526 1,800,266 1,801,792 Construction real estate: Commercial — — — 214,561 214,561 Retail 346 660 1,006 106,219 107,225 Residential real estate: Commercial 283 438 721 533,081 533,802 Mortgage 6,170 5,933 12,103 1,021,555 1,033,658 HELOC 565 1,011 1,576 164,029 165,605 Installment 49 31 80 5,562 5,642 Consumer: Consumer 2,614 618 3,232 1,682,561 1,685,793 GFSC 153 52 205 1,588 1,793 Check loans 10 — 10 2,083 2,093 Leases 60 526 586 19,946 20,532 Total loans $ 13,465 $ 21,070 $ 34,535 $ 6,836,587 $ 6,871,122 (1) Includes an aggregate of $ 1.6 million of loans past due 90 days or more and accruing. The remaining loans were past due nonaccrual loans. (2) Includes an aggregate of $ 53.3 million of nonaccrual loans which were current in regards to contractual principal and interest payments. -118- The following table presents the aging of the recorded investment in past due loans at December 31, 2020 by class of loan: December 31, 2020 (in thousands) Accruing Loans Past Due 30-89 Days Past Due Nonaccrual Loans and Loans Past Due 90 Days or More and Accruing (1) Total Past Due Total Current (2) Total Recorded Investment Commercial, financial and agricultural $ 7,372 $ 13,968 $ 21,340 $ 1,574,177 $ 1,595,517 Commercial real estate 82 972 1,054 1,753,152 1,754,206 Construction real estate: Commercial — 39 39 227,524 227,563 Mortgage 77 — 77 115,647 115,724 Installment 12 — 12 929 941 Residential real estate: Commercial 17 493 510 526,873 527,383 Mortgage 9,538 7,814 17,352 1,079,953 1,097,305 HELOC 805 810 1,615 181,060 182,675 Installment 67 71 138 8,320 8,458 Consumer 5,496 1,213 6,709 1,657,505 1,664,214 Leases 186 984 1,170 23,282 24,452 Total loans $ 23,652 $ 26,364 $ 50,016 $ 7,148,422 $ 7,198,438 (1) Includes an aggregate of $ 1.6 million of loans past due 90 days or more and accruing. The remaining loans were past due nonaccrual loans. (2) Includes an aggregate of $ 92.6 million of nonaccrual loans which were current in regards to contractual principal and interest payments. Credit Quality Indicators Management utilizes past due information as a credit quality indicator across the loan portfolio. Past due information at December 31, 2021 and December 31, 2020 is included in the previous tables. The past due information is the primary credit quality indicator within the following classes of loans: (1) overdrafts in the commercial, financial and agricultural portfolio segment; (2) retail loans in the construction real estate portfolio segment; (3) mortgage loans, HELOC and installment loans in the residential real estate portfolio segment; and (4) consumer loans, GFSC loans, and check loans in the consumer portfolio segment. The primary credit indicator for commercial loans is based on an internal grading system that grades all commercial loans on a scale from 1 to 8. Credit grades are continuously monitored by the responsible loan officer and adjustments are made when appropriate. A grade of 1 indicates little or no credit risk and a grade of 8 is considered a loss. Commercial loans that are pass-rated (graded an 1 through a 4) are considered to be of acceptable credit risk. Commercial loans graded a 5 (special mention) are considered to be watch list credits and a higher PD is applied to these loans. Loans classified as special mention have potential weaknesses that require management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of Park’s credit position at some future date. Commercial loans graded a 6 (substandard), also considered watch list credits, are considered to represent higher credit risk and, as a result, a higher PD is applied to these loans. Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or the value of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that Park will sustain some loss if the deficiencies are not corrected. Commercial loans graded a 7 (doubtful) are shown as nonaccrual and Park generally charges these loans down to their fair value by taking a partial charge-off or recording a specific reserve. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Certain 6-rated loans and all 7-rated loans are placed on nonaccrual status and included within the individually evaluated category. A loan is deemed impaired, and is individually evaluated, when management determines the borrower's ability to perform in accordance with the contractual loan agreement is in doubt. Any commercial loan graded an 8 (loss) is completely charged off. -119- Based on the most recent analysis performed, the risk category of loans by class of loans as of December 31, 2021 follows: December 31, 2021 Term Loans Amortized Cost Basis by Origination Year (In thousands) 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total Commercial, financial and agricultural: Commercial, financial and agricultural (1) Risk rating Pass 267,016 208,078 100,736 52,705 36,528 59,909 468,749 1,193,721 Special Mention 1,608 1,592 429 59 277 — 11,986 15,951 Substandard 106 906 401 1,345 549 7,818 484 11,609 Doubtful — 30 465 227 463 125 488 1,798 Total 268,730 210,606 102,031 54,336 37,817 67,852 481,707 1,223,079 Commercial, financial and agricultural: PPP Risk rating Pass $ 69,588 $ 4,832 $ — $ — $ — $ — $ — $ 74,420 Special Mention — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Total $ 69,588 $ 4,832 $ — $ — $ — $ — $ — $ 74,420 Commercial real estate (1) Risk rating Pass 376,468 445,780 263,786 154,637 115,571 317,371 14,890 1,688,503 Special Mention 786 6,206 32,965 9,354 4,297 17,829 996 72,433 Substandard 3,897 2,578 1,385 11,373 5,967 14,541 450 40,191 Doubtful — — — — 47 618 — 665 Total 381,151 454,564 298,136 175,364 125,882 350,359 16,336 1,801,792 Construction real estate: Commercial Risk rating Pass 96,929 76,867 7,003 4,841 1,856 3,412 22,444 213,352 Special Mention 202 — — 691 — — — 893 Substandard — 52 — 264 — — — 316 Doubtful — — — — — — — — Total 97,131 76,919 7,003 5,796 1,856 3,412 22,444 214,561 Residential Real Estate: Commercial Risk rating Pass 138,801 165,202 67,921 44,896 26,583 70,434 15,507 529,344 Special Mention 95 884 106 79 — 497 135 1,796 Substandard 735 22 691 41 95 993 29 2,606 Doubtful 56 — — — — — — 56 Total 139,687 166,108 68,718 45,016 26,678 71,924 15,671 533,802 Leases Risk rating Pass 6,705 5,729 2,628 2,151 705 845 — 18,763 Special Mention 198 111 184 67 21 — — 581 Substandard — 698 — 23 19 78 — 818 Doubtful — — 332 16 22 — — 370 Total 6,903 6,538 3,144 2,257 767 923 — 20,532 -120- December 31, 2021 Term Loans Amortized Cost Basis by Origination Year (In thousands) 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total Total Commercial Loans Risk rating Pass 955,507 906,488 442,074 259,230 181,243 451,971 521,590 3,718,103 Special Mention 2,889 8,793 33,684 10,250 4,595 18,326 13,117 91,654 Substandard 4,738 4,256 2,477 13,046 6,630 23,430 963 55,540 Doubtful 56 30 797 243 532 743 488 2,889 Total 963,190 919,567 479,032 282,769 193,000 494,470 536,158 3,868,186 (1) Included within each of commercial, financial and agricultural loans and commercial real estate loans is an immaterial amount of consumer loans that are not broken out by class. The table below presents the recorded investment by loan grade at December 31, 2020 for all commercial loans: December 31, 2020 (In thousands) 5 Rated 6 Rated Nonaccrual and Accruing TDRs PCI Pass-Rated Recorded Investment Commercial, financial and agricultural (1) 14,638 — 28,880 337 1,551,662 $ 1,595,517 Commercial real estate (1) 87,439 117 70,357 7,461 1,588,832 1,754,206 Construction real estate: Commercial 164 — 3,110 1,002 223,287 227,563 Residential real estate: Commercial 798 22 4,557 1,510 520,496 527,383 Leases 331 — 1,595 112 22,414 24,452 Total Commercial Loans $ 103,370 $ 139 $ 108,499 $ 10,422 $ 3,906,691 $ 4,129,121 (1) Included within each of commercial, financial and agricultural loans and commercial real estate loans is an immaterial amount of consumer loans that were not broken out by class. -121- Park considers the performance of the loan portfolio and its impact on the allowance for credit losses. For residential and consumer loan classes, Park also evaluates credit quality based on the aging status of the loan, which was previously presented, and by performing status. The following tables present the amortized cost in residential and consumer loans based on performing status. Park defines a loan as nonperforming if it is on nonaccrual status, designated as an accruing TDR, or is greater than 90 days past due and accruing. December 31, 2021 Term Loans Amortized Cost Basis by Origination Year (In thousands) 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total Commercial, financial and agricultural: Overdrafts Performing 1,127 — — — — — — 1,127 Nonperforming — — — — — — — — Total 1,127 — — — — — — 1,127 Construction Real Estate: Retail Performing 68,374 26,247 5,710 2,743 1,505 1,842 79 106,500 Nonperforming — 647 57 — — 21 — 725 Total 68,374 26,894 5,767 2,743 1,505 1,863 79 107,225 Residential Real Estate: Mortgage Performing 230,299 217,022 114,077 68,774 59,939 323,678 — 1,013,789 Nonperforming — 626 785 824 574 17,060 — 19,869 Total 230,299 217,648 114,862 69,598 60,513 340,738 — 1,033,658 Residential Real Estate: HELOC Performing 400 — 121 58 41 2,640 159,952 163,212 Nonperforming 89 40 — 37 90 1,811 326 2,393 Total 489 40 121 95 131 4,451 160,278 165,605 Residential Real Estate: Installment Performing — 3 418 111 1,049 2,471 — 4,052 Nonperforming — 12 5 26 78 1,469 — 1,590 Total — 15 423 137 1,127 3,940 — 5,642 Consumer: Consumer Performing 649,638 505,555 259,230 119,222 64,699 62,136 22,664 1,683,144 Nonperforming 241 506 755 399 155 593 — 2,649 Total 649,879 506,061 259,985 119,621 64,854 62,729 22,664 1,685,793 Consumer: GFSC Performing — 243 986 292 63 5 108 1,697 Nonperforming — 9 73 5 9 — — 96 Total — 252 1,059 297 72 5 108 1,793 Consumer: Check loans Performing — — — — — — 2,093 2,093 Nonperforming — — — — — — — — Total — — — — — — 2,093 2,093 Total Consumer Loans Performing 949,838 749,070 380,542 191,200 127,296 392,772 184,896 2,975,614 Nonperforming 330 1,840 1,675 1,291 906 20,954 326 27,322 Total 950,168 750,910 382,217 192,491 128,202 413,726 185,222 3,002,936 -122- Loans and Leases 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. NewDominion 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.Carolina Alliance 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 and December 31, 2020 was $ 7.1 million and $ 11.2 million, respectively. Troubled Debt Restructurings Management typically classifies loans as TDRs when a borrower is experiencing financial difficulties and Park has granted a concession to the borrower as part of a modification or in the loan renewal process. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of the borrower's debt in the foreseeable future without the modification. This evaluation is performed in accordance with the Company’s internal underwriting policy. Management’s policy is to modify loans by extending the term or by granting a temporary or permanent contractual interest rate below the market rate, not by forgiving debt. A court's discharge of a borrower's debt in a Chapter 7 bankruptcy is considered a concession when the borrower does not reaffirm the discharged debt. 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 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. Certain loans which were modified during the years ended December 31, 2021 and 2020 did not meet the definition of a TDR as the modification was a delay in a payment that was considered to be insignificant. Management considers a forbearance period of up to three months or a delay in payment of up to 30 days to be insignificant. TDRs may be classified as accruing if the borrower has been current for a period of at least six months with respect to loan payments and management expects that the borrower will be able to continue to make payments in accordance with the terms of the restructured note. Management reviews all accruing TDRs quarterly to ensure payments continue to be made in accordance with the modified terms. The terms of certain other loans were modified during the years ended December 31, 2021 and 2020 that did not meet the definition of a TDR. Excluding COVID-19 related modifications, there were $ 0.2 million of substandard commercial loans modified during each of the years ended December 31, 2021 and December 31, 2020 which did not meet the definition of a TDR. Excluding COVID-19 related modifications, consumer loans modified during 2021 which did not meet the definition of a TDR had a total amortized cost as of December 31, 2021 of $ 32.9 million. Excluding COVID-19 related modifications, consumer loans modified during 2020 which did not meet the definition of a TDR had a total recorded investment as of December 31, 2020 of $ 57.9 million. Many of these loans were to borrowers who were not experiencing financial difficulties but who were looking to reduce their cost of funds. At December 31, 2021 and 2020, there were $ 20.9 million and $ 25.8 million, respectively, of TDRs included in the nonaccrual loan totals. At December 31, 2021 and 2020, $ 10.5 million and $ 12.9 million, respectively, of these nonaccrual TDRs were performing in accordance with the terms of the restructured notes. At December 31, 2021 and 2020, loans totaling $ 28.3 million and $ 20.9 million, respectively, were included in accruing TDR loan totals. Management will continue to review the restructured loans and may determine it is appropriate to move certain nonaccrual TDRs to accrual status in the future. At December 31, 2021 and 2020, Park had commitments to lend $ 3.0 million and $ 6.7 million, respectively, of additional funds to borrowers whose outstanding loan terms had been modified in a TDR. -123- At December 31, 2021 and 2020, there were $ 0.3 million and $ 0.2 million, respectively, of specific reserves related to TDRs. Modifications made in 2021 and 2020 were largely the result of renewals and extending the maturity date of the loans at terms consistent with the original notes. These modifications were deemed to be TDRs primarily due to Park’s conclusion that the borrower would likely not have qualified for similar terms through another lender. Many of the modifications deemed to be TDRs were previously identified as impaired loans, and thus were also previously evaluated for impairment under ASC 310. Additional specific reserves of $ 174,000 were recorded during the year ended December 31, 2021, as a result of TDRs identified in the 2021 year. Additional specific reserves of $ 7,000 were recorded during the year ended December 31, 2020, as a result of TDRs identified in the 2020 year. Additional specific reserves of $ 1,300 were recorded during the year ended December 31, 2019, as a result of TDRs identified in the 2019 year. Quarterly, management reviews renewals/modifications of loans previously identified as TDRs to consider if it is appropriate to remove the TDR classification. If the borrower is no longer experiencing financial difficulty and the renewal/modification did not contain a concessionary interest rate or other concessionary terms and the terms of the renewal/modification are considered to be market terms based on the current risk characteristics of the borrower, management considers the potential removal of the TDR classification. If deemed appropriate, the TDR classification is removed if the borrower has complied with the terms of the loan at the date of the renewal/modification and there was a reasonable expectation that the borrower would continue to comply with the terms of the loan subsequent to the date of the renewal/modification. The majority of these TDRs were originally considered restructurings in a prior year as a result of a renewal/modification with an interest rate that was not commensurate with the risk of the underlying loan at the time of the renewal/modification. During the years ended December 31, 2021 and 2020, Park removed the TDR classification on $ 4.1 million and $ 2.3 million, respectively, of loans that met the requirements discussed above. The following tables detail the number of contracts modified as TDRs during the years ended December 31, 2021, 2020 and 2019 as well as the amortized cost/ recorded investment of these contracts at December 31, 2021, 2020, and 2019. The amortized cost/ recorded investment pre- and post-modification is generally the same due to the fact that Park does not typically forgive principal. Year ended December 31, 2021 (In thousands) Number of Contracts Accruing Nonaccrual Amortized Cost Commercial, financial and agricultural Commercial, financial and agricultural 10 $ 1,356 $ 169 $ 1,525 PPP loans — — — — Overdrafts — — — — Commercial real estate 15 2,002 6,747 8,749 Construction real estate: Commercial 1 — — — Retail 2 — 705 705 Residential real estate: Commercial 5 95 574 669 Mortgage 14 146 396 542 HELOC 8 211 105 316 Installment 8 120 — 120 Consumer: Consumer 131 116 417 533 GFSC — — — — Check loans — — — — Leases 1 — 325 325 Total loans 195 $ 4,046 $ 9,438 $ 13,484 -124- Year ended December 31, 2020 (In thousands) Number of Contracts Accruing Nonaccrual Recorded Investment Commercial, financial and agricultural 12 $ 107 $ 3,706 $ 3,813 Commercial real estate 9 — 3,235 3,235 Construction real estate: Commercial — — — — Mortgage 1 26 — 26 Installment 1 — 14 14 Residential real estate: Commercial 3 153 3 156 Mortgage 27 888 1,068 1,956 HELOC 7 14 52 66 Installment 18 163 65 228 Consumer 214 218 634 852 Total loans 292 $ 1,569 $ 8,777 $ 10,346 Year ended December 31, 2019 (In thousands) Number of Contracts Accruing Nonaccrual Recorded Investment Commercial, financial and agricultural 30 $ 6,040 $ 7,821 $ 13,861 Commercial real estate 8 415 7,855 8,270 Construction real estate: Commercial 3 — 415 415 Mortgage 2 77 — 77 Installment — — — — Residential real estate: Commercial 3 — 100 100 Mortgage 21 535 589 1,124 HELOC 18 126 234 360 Installment 34 1,047 28 1,075 Consumer 324 225 1,166 1,391 Total loans 443 $ 8,465 $ 18,208 $ 26,673 Of those loans which were modified and determined to be a TDR during the year ended December 31, 2021, $ 5.4 million were on nonaccrual status as of December 31, 2020. Of those loans which were modified and determined to be a TDR during the year ended December 31, 2020, $ 0.4 million were on nonaccrual status as of December 31, 2019. Of those loans which were modified and determined to be a TDR during the year ended December 31, 2019, $ 2.1 million were on nonaccrual status as of December 31, 2018. The following table presents the amortized cost/ recorded investment in financing receivables which were modified as TDRs within the previous 12 months and for which there was a payment default during the year ended December 31, 2021, December 31, 2020, and December 31, 2019. For this table, a loan is considered to be in default when it becomes 30 days -125- contractually past due under the modified terms. The additional allowance for credit loss resulting from the defaults on TDR loans was immaterial. Year ended December 31, 2021 Year ended December 31, 2020 Year ended December 31, 2019 (In thousands) Number of Contracts Amortized Cost Number of Contracts Recorded Investment Number of Contracts Recorded Investment Commercial, financial and agricultural: 4 $ 2,776 1 $ 20 Commercial, financial and agricultural — $ — (1) (1) (1) (1) PPP loans — — (1) (1) (1) (1) Overdrafts — — (1) (1) (1) (1) Commercial real estate — — 1 223 — — Construction real estate: Commercial — — — — — — Retail 1 648 1 14 — — Residential real estate: Commercial — — 1 3 — — Mortgage 4 280 11 993 7 665 HELOC 2 135 — — 6 141 Installment 1 27 3 32 — — Consumer 34 360 56 539 Consumer 14 169 (1) (1) (1) (1) GFSC — — (1) (1) (1) (1) Check loans — — (1) (1) (1) (1) Leases — — — — — — Total loans 22 $ 1,259 55 $ 4,401 70 $ 1,365 (1) Results for reporting periods beginning after January 1, 2021 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. Category was not broken out as a separate class at December 31, 2020. Of the $ 1.3 million in modified TDRs which defaulted during the year ended December 31, 2021, $ 115,000 were accruing loans and $ 1.1 million were nonaccrual loans. Of the $ 4.4 million in modified TDRs which defaulted during the year ended December 31, 2020, $ 706,000 were accruing loans and $ 3.7 million were nonaccrual loans. Of the $ 1.4 million in modified TDRs which defaulted during the year ended December 31, 2019, $ 350,000 were accruing loans and $ 1.0 million were nonaccrual loans. Certain of the Corporation’s executive officers, directors and related entities of directors are loan customers of PNB. As of December 31, 2021 and 2020, credit exposure aggregating approximately $ 33.5 million and $ 51.3 million, respectively, was outstanding to such parties. Of this total exposure, approximately $ 27.1 million and $ 32.0 million was outstanding at December 31, 2021 and 2020, respectively, with the remaining balance representing available credit. During 2021, new loans and advances on existing loans were made to these executive officers, directors and related entities of directors totaling $ 1.2 million and $ 9.7 million, respectively. These extensions of credit were offset by principal payments of $ 12.6 million and the removal of loans from the related party listing totaling $ 3.2 million. During 2020, new loans and advances on existing loans were $ 0.6 million and $ 12.4 million, respectively. These extensions of credit were offset by principal payments of $ 9.7 million. 6. Allowance for Credit Losses The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost, which is measured using relevant information about 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. A provision for credit losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors as discussed within Note 1-Summary of Significant Accounting Policies. -126- During the first quarter of 2021, Park adopted ASU 2016-13, including the CECL methodology for estimating the ACL. This standard was adopted prospectively on January 1, 2021, resulting in a $ 6.1 million increase to the ACL 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 as of the adoption of ASU 2016-13. 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 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. • 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 $ 57.9 million, which would have resulted in a decline of $ 17.0 million from the quantitative reserve of $ 74.9 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. -127- 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 this qualitative adjustment as this 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 is 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: 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 the 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. At December 31, 2021 and 2020, Park had $ 74.4 million and $ 331.6 million, respectively, of PPP loans which were included in the commercial, financial and agricultural portfolio segment. These loans are guaranteed by the SBA and thus have not been -128- 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 at December 31, 2021 and December 31, 2020. ACL Activity The activity in the allowance for credit losses for the years ended December 31, 2021, 2020, and 2019 is summarized in the following tables. Year ended December 31, 2021 (In thousands) Commercial, financial and agricultural Commercial real estate Construction real estate Residential real estate Consumer Leases Total Allowance for credit losses: Beginning balance $ 25,608 $ 23,480 $ 7,288 $ 11,363 $ 17,418 $ 518 $ 85,675 Impact of adopting ASC 326 ( 8,257 ) 2,119 ( 1,898 ) 3,121 10,925 80 6,090 Charge-offs 957 35 — 49 4,052 — 5,093 Recoveries ( 639 ) ( 802 ) ( 2,299 ) ( 941 ) ( 3,759 ) ( 1 ) ( 8,441 ) Net charge-offs (recoveries) 318 ( 767 ) ( 2,299 ) ( 892 ) 293 ( 1 ) ( 3,348 ) (Recovery) Provision ( 3,008 ) ( 900 ) ( 1,931 ) ( 3,952 ) ( 1,764 ) ( 361 ) ( 11,916 ) Ending balance $ 14,025 $ 25,466 $ 5,758 $ 11,424 $ 26,286 238 $ 83,197 Year ended December 31, 2020 (In thousands) Commercial, financial and agricultural Commercial real estate Construction real estate Residential real estate Consumer Leases Total Allowance for credit losses: Beginning balance $ 20,203 $ 10,229 $ 5,311 $ 8,610 $ 12,211 $ 115 $ 56,679 Charge-offs 1,468 1,824 6 356 6,634 16 10,304 Recoveries ( 20,765 ) ( 738 ) ( 1,122 ) ( 991 ) ( 3,629 ) ( 1 ) ( 27,246 ) Net (recoveries) charge-offs ( 19,297 ) 1,086 ( 1,116 ) ( 635 ) 3,005 15 ( 16,942 ) (Recovery) Provision ( 13,892 ) 14,337 861 2,118 8,212 418 12,054 Ending balance $ 25,608 $ 23,480 $ 7,288 $ 11,363 $ 17,418 $ 518 $ 85,675 Year ended December 31, 2019 (In thousands) Commercial, financial and agricultural Commercial real estate Construction real estate Residential real estate Consumer Leases Total Allowance for credit losses: Beginning balance $ 16,777 $ 9,768 $ 4,463 $ 8,731 $ 11,773 $ — $ 51,512 Charge-offs 2,231 400 — 239 8,307 — 11,177 Recoveries ( 1,241 ) ( 720 ) ( 2,682 ) ( 787 ) ( 4,742 ) ( 1 ) ( 10,173 ) Net charge-offs (recoveries) 990 ( 320 ) ( 2,682 ) ( 548 ) 3,565 ( 1 ) 1,004 Provision (Recovery) 4,416 141 ( 1,834 ) ( 669 ) 4,003 114 6,171 Ending balance $ 20,203 $ 10,229 $ 5,311 $ 8,610 $ 12,211 $ 115 $ 56,679 ACL Summary Loans collectively evaluated for impairment in the following tables include all performing loans at December 31, 2021 and December 31, 2020, as well as nonperforming loans internally classified as consumer loans. Nonperforming consumer loans are not typically individually evaluated for impairment, but receive a portion of the statistical allocation of the ACL. Loans individually evaluated for impairment include all impaired loans internally classified as commercial loans at December 31, 2021 and December 31, 2020, which are evaluated for impairment in accordance with U.S. GAAP (See Note 1-Significant Accounting Policies). -129- The composition of the ACL at December 31, 2021 and December 31, 2020 was as follows: December 31, 2021 (In thousands) Commercial, financial and agricultural Commercial real estate Construction real estate Residential real estate Consumer Leases Total ACL: Ending allowance balance attributed to loans: Individually evaluated for impairment $ 1,385 $ 188 $ — $ — $ — $ 43 $ 1,616 Collectively evaluated for impairment 12,640 25,278 5,758 11,424 26,286 195 $ 81,581 Acquired with deteriorated credit quality — — — — — — $ — Total ending allowance balance $ 14,025 $ 25,466 $ 5,758 $ 11,424 $ 26,286 $ 238 $ 83,197 Loan balance: Loans individually evaluated for impairment $ 22,666 $ 47,820 $ 222 $ 2,606 $ — $ 1,188 $ 74,502 Loans collectively evaluated for impairment 1,275,783 1,748,854 320,608 1,735,226 1,689,679 19,321 6,789,471 Loans acquired with deteriorated credit quality 177 5,118 956 875 — 23 7,149 Total ending loan balance $ 1,298,626 $ 1,801,792 $ 321,786 $ 1,738,707 $ 1,689,679 $ 20,532 $ 6,871,122 ACL as a percentage of loan balance: Loans individually evaluated for impairment 6.11 % 0.39 % — % — % — % 3.62 % 2.17 % Loans collectively evaluated for impairment 0.99 % 1.45 % 1.80 % 0.66 % 1.56 % 1.01 % 1.20 % Loans acquired with deteriorated credit quality — % — % — % — % — % — % — % Total 1.08 % 1.41 % 1.79 % 0.66 % 1.56 % 1.16 % 1.21 % -130- December 31, 2020 (In thousands) Commercial, financial and agricultural Commercial real estate Construction real estate Residential real estate Consumer Leases Total ACL: Ending allowance balance attributed to loans: Individually evaluated for impairment $ 3,758 $ 1,316 $ — $ 16 $ — $ 344 $ 5,434 Collectively evaluated for impairment 21,809 22,093 7,288 11,292 17,418 174 $ 80,074 Acquired with deteriorated credit quality 41 71 — 55 — — 167 Total ending allowance balance $ 25,608 $ 23,480 $ 7,288 $ 11,363 $ 17,418 $ 518 $ 85,675 Loan balance: Loans individually evaluated for impairment $ 28,811 $ 70,334 $ 3,110 $ 4,557 $ — $ 1,595 $ 108,407 Loans collectively evaluated for impairment 1,559,842 1,670,510 339,312 1,806,126 1,659,704 22,731 7,058,225 Loans acquired with deteriorated credit quality 336 7,345 999 2,361 — 112 11,153 Total ending loan balance $ 1,588,989 $ 1,748,189 $ 343,421 $ 1,813,044 $ 1,659,704 $ 24,438 $ 7,177,785 ACL as a percentage of loan balance: Loans individually evaluated for impairment 13.04 % 1.87 % — % 0.35 % — % 21.57 % 5.01 % Loans collectively evaluated for impairment 1.40 % 1.32 % 2.15 % 0.63 % 1.05 % 0.77 % 1.13 % Loans acquired with deteriorated credit quality 12.20 % 0.97 % — % 2.33 % — % — % 1.50 % Total 1.61 % 1.34 % 2.12 % 0.63 % 1.05 % 2.12 % 1.19 % Recorded investment: Loans individually evaluated for impairment $ 28,836 $ 70,357 $ 3,110 $ 4,557 $ — $ 1,595 $ 108,455 Loans collectively evaluated for impairment 1,566,344 1,676,388 340,116 1,808,892 1,664,214 22,745 7,078,699 Loans acquired with deteriorated credit quality 337 7,461 1,002 2,372 — 112 11,284 Total ending recorded investment $ 1,595,517 $ 1,754,206 $ 344,228 $ 1,815,821 $ 1,664,214 $ 24,452 $ 7,198,438 -131- 7. Goodwill and Other Intangible Assets The following table shows the activity in goodwill and other intangible assets for the years ended December 31, 2021, 2020 and 2019. (in thousands) Goodwill Other Intangible Assets Total January 1, 2019 $ 112,739 $ 6,971 $ 119,710 Acquired goodwill and other intangible assets 46,856 8,207 55,063 Amortization — 2,355 2,355 Trade name intangible impairment — 1,300 1,300 December 31, 2019 $ 159,595 $ 11,523 $ 171,118 Amortization — 2,263 2,263 December 31, 2020 $ 159,595 $ 9,260 $ 168,855 Amortization — 1,798 1,798 December 31, 2021 $ 159,595 $ 7,462 $ 167,057 Goodwill Goodwill impairment exists when a reporting unit's carrying value exceeds its fair value. Park evaluates goodwill for impairment on April 1 of each year, with financial data as of March 31. At April 1, 2021, the Company's reporting unit, PNB, had positive equity and the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. Management continues to monitor economic factors, including economic conditions as a result of the COVID-19 pandemic and responses thereto, to evaluate goodwill impairment. Acquired Intangible Assets The following table shows the balance of acquired intangible assets as of December 31, 2021 and 2020. 2021 2020 (in thousands) Gross Carrying Amount Accumulated Amortization/Impairment Gross Carrying Amount Accumulated Amortization Other intangible assets: Core deposit intangibles $ 14,456 $ 6,994 $ 14,456 $ 5,196 Trade name intangible 1,300 1,300 1,300 1,300 Total $ 15,756 $ 8,294 $ 15,756 $ 6,496 During 2019, Park announced its 2020 rebranding initiative to operate all 12 banking divisions of PNB under one name. The NewDominion trade name intangible was initially recorded assuming an indefinite useful life. Considering Park's rebranding initiative, Park concluded that the trade name intangible represented a definite life asset, and impairment of $ 1.3 million was recorded during 2019. Core deposit intangibles are being amortized, on an accelerated basis, over a period of ten years. Amortization expense for the core deposit intangibles was $ 1.8 million, $ 2.3 million and $ 2.4 million for the years ended December 31, 2021, 2020 and 2019, respectively. -132- The following is a schedule of estimated amortization expense for each of the next five years: (in thousands) Total 2022 $ 1,487 2023 1,323 2024 1,215 2025 1,042 2026 887 8 . Loans Held for Sale Mortgage loans held for sale are carried at their fair value. Mortgage loans held for sale were $ 9.4 million and $ 31.7 million at December 31, 2021 and 2020, respectively. These amounts are included in "Loans" on the Consolidated Balance Sheets and in the residential real estate loan segments in Note 5 - Loans and Note 6 - Allowance for Credit Losses. The contractual balance was $ 9.2 million and $ 30.9 million at December 31, 2021 and 2020, respectively. The gain expected upon sale was $ 166,000 and $ 753,000 at December 31, 2021 and 2020, respectively. None of these loans were 90 days or more past due or on nonaccrual status as of December 31, 2021 or 2020. During 2020, Park transferred a non-performing loan held for investment, with a book balance of $ 4.4 million, to the loans held for sale portfolio, and subsequently completed the sale of this non-performing loan held for sale, recognizing no gain or loss on sale. No non-performing loans were held for sale or sold during 2021 or 2019. 9. Foreclosed and Repossessed Assets Park typically transfers a loan to OREO at the time that Park takes deed/title to the real estate property asset. The carrying amount of foreclosed properties held at December 31, 2021 and December 31, 2020 are listed below, as well as the recorded investment of loans secured by residential real estate properties for which formal foreclosure proceedings were in process at those dates. (in thousands) December 31, 2021 December 31, 2020 OREO: Commercial real estate $ — $ 625 Residential real estate 775 806 Total OREO $ 775 $ 1,431 Loans in process of foreclosure: Residential real estate $ 1,148 $ 1,643 In addition to real estate, Park may also repossess different types of collateral. As of December 31, 2021 and December 31, 2020, Park had $ 3.3 million and $ 3.6 million in other repossessed assets which are included in "Other assets" on the Consolidated Balance Sheets. For both periods presented, the other repossessed assets largely consisted of an aircraft acquired as part of a loan workout. -133- 10. Premises and Equipment The major categories of premises and equipment and accumulated depreciation are summarized as follows: December 31 (In thousands) 2021 2020 Land $ 21,992 $ 22,421 Buildings 97,128 97,351 Equipment, furniture and fixtures (1) 76,675 89,390 Leasehold improvements 6,436 6,381 Software (1) 24,698 N.A. Total $ 226,929 $ 215,543 Less accumulated depreciation ( 137,921 ) ( 126,883 ) Premises and equipment, net $ 89,008 $ 88,660 (1) Prior to 2021, software was included within equipment, furniture and fixtures Depreciation expense amounted to $ 13.3 million, $ 10.8 million and $ 9.1 million for the years ended December 31, 2021, 2020 and 2019, respectively. Park records leased assets where Park acts as the lessor within "Other assets" on the Consolidated Balance Sheets. Equipment subject to lease agreements at December 31, 2021 and 2020 is summarized below: December 31 (In thousands) 2021 2020 Equipment $ 7,298 $ 8,561 Less accumulated depreciation ( 4,860 ) ( 4,665 ) Leased assets, net $ 2,438 $ 3,896 Depreciation expense on operating lease assets of $ 1.5 million, $ 1.8 million, and $ 1.3 million was recorded for the years ended December 31, 2021, 2020 and 2019, respectively. 11. Investments in Qualified Affordable Housing Park makes certain equity investments in various limited partnerships that sponsor affordable housing projects. The purposes of these investments are to achieve a satisfactory return on capital, help create affordable housing opportunities, and assist the Company to achieve its goals associated with the Community Reinvestment Act. As permitted by ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects , Park has elected the proportional amortization method of accounting. Under the proportional amortization method, amortization expense and tax benefits are recognized through the provision for income taxes. The table below details the balances of Park’s affordable housing tax credit investments and related unfunded commitments as of December 31, 2021 and 2020. (In thousands) December 31, 2021 December 31, 2020 Affordable housing tax credit investments $ 58,711 $ 56,024 Unfunded commitments 28,484 29,298 Commitments are funded when capital calls are made by the general partner of a limited partnership. Park expects that the commitments as of December 31, 2021 will be funded between 2022 and 2032. During the years ended December 31, 2021, 2020 and 2019, Park recognized amortization expense of $ 7.3 million, $ 7.0 million and $ 6.9 million, respectively, which was included within the provision for income taxes. For the years ended December 31, 2021, 2020 and 2019, Park recognized tax credits and other benefits from its affordable housing tax credit investments of $ 8.8 million, $ 8.7 million and $ 8.8 million, respectively. -134- 12. Deposits At December 31, 2021 and 2020, non-interest bearing and interest bearing deposits were as follows: December 31 (In thousands) 2021 2020 Non-interest bearing $ 3,066,419 $ 2,727,100 Interest bearing 4,838,109 4,845,258 Total $ 7,904,528 $ 7,572,358 At December 31, 2021, the maturities of time deposits were as follows: (In thousands) 2022 $ 450,374 2023 158,577 2024 40,819 2025 36,352 2026 25,405 After 5 years 133 Total $ 711,660 At December 31, 2021 and 2020, respectively, Park had approximately $ 29.6 million and $ 20.2 million of deposits received from Park's executive officers, Park directors and related entities of Park directors. Time deposits that meet or exceed the FDIC insurance limit of $250,000 at December 31, 2021 and 2020 were $ 65.8 million and $ 77.2 million, respectively. 13. Repurchase Agreement Borrowings Securities sold under agreements to repurchase ("repurchase agreements") with customers represent funds deposited by customers, generally on an overnight basis, that are collateralized by investment securities owned by Park. Repurchase agreements with customers are included in "Short-term borrowings" on the Consolidated Balance Sheets. All repurchase agreements are subject to the terms and conditions of repurchase/security agreements between Park and the client and are accounted for as secured borrowings. Park's repurchase agreements consisted of customer accounts and securities which are pledged on an individual security basis. At December 31, 2021 and December 31, 2020, Park's repurchase agreement borrowings totaled $ 213.8 million and $ 317.2 million, respectively. These borrowings were collateralized with U.S. government sponsored entities' asset-backed securities with a fair value of $ 334.9 million and $ 366.0 million at December 31, 2021 and December 31, 2020, respectively. Declines in the value of the collateral would require Park to pledge additional securities. As of December 31, 2021 and December 31, 2020, Park had $ 1,225 million and $ 438.6 million, respectively, of available unpledged securities. -135- The following table presents the carrying value of Park's repurchase agreement borrowings by remaining contractual maturity and collateral pledged at December 31, 2021 and December 31, 2020: December 31, 2021 (In thousands) Remaining Contractual Maturity of the Agreements Overnight and Continuous Up to 30 days 30 - 90 days Greater than 90 days Total U.S. government sponsored entities' asset-backed securities $ 213,786 $ — $ — $ — $ 213,786 December 31, 2020 (In thousands) Remaining Contractual Maturity of the Agreements Overnight and Continuous Up to 30 days 30 - 90 days Greater than 90 days Total U.S. government sponsored entities' asset-backed securities $ 317,230 $ — $ — $ — $ 317,230 See Note 14 - Short-Term Borrowings for additional information related to repurchase agreements. 14. Short-Term Borrowings Short-term borrowings were as follows: December 31 (In thousands) 2021 2020 Securities sold under agreements to repurchase $ 213,786 $ 317,230 FHLB advances 25,000 25,000 Total short-term borrowings $ 238,786 $ 342,230 The outstanding balances for all short-term borrowings as of December 31, 2021 and 2020 and the weighted-average interest rates as of and paid during each of the years then ended were as follows: (In thousands) Repurchase agreements FHLB Advances 2021 Ending balance $ 213,786 $ 25,000 Highest month-end balance 297,118 25,000 Average daily balance 261,967 25,025 Weighted-average interest rate: As of year-end 0.03 % 0.23 % Paid during the year (1) 0.04 % 0.23 % 2020 Ending balance $ 317,230 $ 25,000 Highest month-end balance 317,230 25,000 Average daily balance 250,266 26,751 Weighted-average interest rate: As of year-end 0.03 % 0.26 % Paid during the year (1) 0.19 % 0.80 % (1) Interest rate swaps with notional amounts totaling $ 25.0 million at both December 31, 2021 and December 31, 2020 were designated as cash flow hedges of certain FHLB advances. Including interest expense related to the swaps, the weighted average interest rate paid during the year on FHLB advances was 2.69 % and 2.38 % for 2021 and 2020, respectively. -136- During 2020 and 2021, outstanding FHLB advances were collateralized by investment securities owned by PNB and by various loans pledged under a blanket agreement by PNB. At December 31, 2021 and December 31, 2020, $ 9.5 million and $ 13.9 million, respectively, of investment securities were pledged as collateral for FHLB advances. At December 31, 2021 and December 31, 2020, $ 1,749.3 million and $ 1,520.5 million, respectively, of commercial real estate and residential mortgage loans were pledged under a blanket agreement to the FHLB by PNB. See Note 13 - Repurchase Agreement Borrowings for information related to investment securities collateralizing repurchase agreements. 15. Long-Term Debt Long-term debt is listed below: December 31, 2021 2020 (In thousands) Outstanding Balance Interest Rate Outstanding Balance Interest Rate Total U.S. Bank term note by year of maturity: 2022 $ — — % 32,500 1.84 % Total $ — — % 32,500 1.84 % On February 18, 2020, Park prepaid $ 50 million of FHLB advances, incurring a $ 1.8 million prepayment penalty recognized within "FHLB prepayment penalty" on the Consolidated Statement of Income for the year ended December 31, 2020. These advances had an average interest rate of 3.01 % and maturity dates of March 14, 2022 and September 15, 2022. On December 3, 2020, Park prepaid $ 100 million of FHLB advances, incurring an $ 8.7 million prepayment penalty recognized within "FHLB prepayment penalty" on the Consolidated Statement of Income for the year ended December 31, 2020. These advances had an interest rate of 3.40 % and a maturity date of December 1, 2023. On June 20, 2019, Park issued a $ 50 million term note to U.S. Bank National Association. This term note had a maturity date of June 21, 2022 and accrued interest at a floating rate of one-month LIBOR plus 1.65%. On August 2, 2021, Park prepaid the outstanding balance of $ 27.5 million of the term note to U.S. Bank National Association. 16. Subordinated Notes As part of the acquisition of Vision's parent bank holding company ("Vision Parent") on March 9, 2007, Park became the successor to Vision Parent under (i) the Amended and Restated Trust Agreement of Vision Bancshares Trust I (the “Trust”), dated as of December 5, 2005, (ii) the Junior Subordinated Indenture, dated as of December 5, 2005, and (iii) the Guarantee Agreement, also dated as of December 5, 2005. On December 1, 2005, Vision Parent formed a wholly-owned Delaware statutory business trust, Vision Bancshares Trust I (“Trust I”), which issued $ 15.0 million of Trust I's floating rate preferred securities (the “Trust Preferred Securities”) to institutional investors. These Trust Preferred Securities qualify as Tier I capital under FRB guidelines. All of the common securities of Trust I are owned by Park. The proceeds from the issuance of the common securities and the Trust Preferred Securities were used by Trust I to purchase $ 15.5 million of junior subordinated notes, which carry a floating rate based on three-month LIBOR plus 148 basis points. The junior subordinated notes represent the sole asset of Trust I. The Trust Preferred Securities accrue and pay distributions at a floating rate of three-month LIBOR plus 148 basis points per annum. The Trust Preferred Securities are mandatorily redeemable upon maturity of the junior subordinated notes in December 2035, or upon earlier redemption as provided in the junior subordinated notes. Since December 30, 2010, Park has had the right to redeem the junior subordinated notes purchased by Trust I in whole or in part. As specified in the indenture, if the junior subordinated notes are redeemed prior to maturity, the redemption price will be the principal amount, plus any unpaid accrued interest. In accordance with U.S. GAAP, Trust I is not consolidated with Park’s financial statements, but rather the subordinated notes are reflected as a liability. -137- 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 shall 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 holders of the Company’s senior indebtedness and 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 issuance costs of the Subordinated Notes totaled $ 2.4 million, which is being amortized through the Subordinated Note call date. At December 31, 2021 and 2020, the Subordinated Notes, net of unamortized issuance costs, totaled $ 173.2 million and $ 172.8 million, and qualify as Tier 2 capital for Park under the Federal Reserve Board capital adequacy rules. 17. Derivatives Park uses certain derivative financial instruments (or "derivatives") to meet the needs of Park's clients while managing the interest rate risk associated with certain transactions. Park does not use derivatives for speculative purposes. A summary of derivative financial instruments utilized by Park follows. Interest Rate Swaps Park utilizes interest rate swap agreements as part of Park's asset liability management strategy to help manage Park's interest rate risk position and as a means to meet the financing, interest rate and other risk management needs of qualifying commercial banking customers. The notional amount of the interest rate swaps does not represent the amount exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. Borrowing Derivatives : Interest rate swaps with notional amounts totaling $ 25.0 million at both December 31, 2021 and December 31, 2020 were designated as cash flow hedges of certain FHLB advances. Loan Derivatives : In conjunction with the Carolina Alliance acquisition, Park acquired interest rate swaps related to certain commercial loans. Simultaneously with borrowers entering into interest rate swaps, Carolina Alliance entered into offsetting interest rate swaps executed with a third party, such that Carolina Alliance minimized its net interest rate risk exposure resulting from such transactions. These interest rate swaps had a notional amount totaling $ 29.7 million and $ 33.3 million as of December 31, 2021 and December 31, 2020, respectively. All of the Company's interest rate swaps were determined to be fully effective during the years ended December 31, 2021 and 2020 . As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swaps is recorded in other assets and other liabilities with changes in fair value recorded in other comprehensive income. The amount included in accumulated other comprehensive income would be reclassified to current earnings should the hedges no longer be considered effective. Park expects the hedges to remain fully effective during the remaining respective terms of the interest rate swaps. Summary information about Park's interest rate swaps as of December 31, 2021 and December 31, 2020 was as follows: December 31, 2021 December 31, 2020 (In thousands, except weighted average data) Borrowing Derivatives Loan Derivatives Borrowing Derivatives Loan Derivatives Notional amounts $ 25,000 $ 29,651 $ 25,000 $ 33,310 Weighted average pay rates 2.595 % 4.668 % 2.595 % 4.695 % Weighted average receive rates 0.124 % 4.668 % 0.218 % 4.695 % Weighted average maturity (years) 0.5 8.2 1.5 9.3 Unrealized losses $ 262 $ — $ 885 $ — Interest expense recorded on swap transactions was $ 614,000 , $ 423,000 and $ 42,000 for the years ended December 31, 2021, 2020, and 2019, respectively. -138- Interest Rate Swaps The following table presents the net gains (losses), net of income taxes, recorded in OCI and the Consolidated Statements of Income related to interest rate swaps for the years ended December 31, 2021, 2020 and 2019 . Year ended December 31, 2021 (In thousands) Amount of Gain (Loss) Recognized in OCI (Effective Portion) Amount of Gain (Loss) Reclassified from OCI to Interest Income Amount of Gain (Loss) Recognized in Other Non-interest Income (Ineffective Portion) Interest rate contracts $ 492 $ — $ — Year ended December 31, 2020 (In thousands) Amount of Gain (Loss) Recognized in OCI (Effective Portion) Amount of Gain (Loss) Reclassified from OCI to Interest Income Amount of Gain (Loss) Recognized in Other Non-interest Income (Ineffective Portion) Interest rate contracts $ ( 244 ) $ — $ — Year ended December 31, 2019 (In thousands) Amount of Gain (Loss) Recognized in OCI (Effective Portion) Amount of Gain (Loss) Reclassified from OCI to Interest Income Amount of Gain (Loss) Recognized in Other Non-interest Income (Ineffective Portion) Interest rate contracts $ ( 454 ) $ — $ — The following table reflects the interest rate swaps included in the Consolidated Balance Sheets as of December 31, 2021 and 2020. (In thousands) December 31, 2021 December 31, 2020 Notional Amount Fair Value Notional Amount Fair Value Included in other assets: Borrowing derivatives - interest rate swaps related to FHLB advances $ — $ — $ — $ — Loan derivatives - instruments associated with loans Matched interest rate swaps with borrower 29,651 1,952 33,310 3,934 Matched interest rate swaps with counterparty — — — — Total included in other assets $ 29,651 $ 1,952 $ 33,310 $ 3,934 Included in other liabilities: Borrowing derivatives - interest rate swaps related to FHLB advances $ 25,000 $ ( 262 ) $ 25,000 $ ( 885 ) Loan derivatives - instruments associated with loans Matched interest rate swaps with borrower — — — — Matched interest rate swaps with counterparty 29,651 ( 1,952 ) 33,310 ( 3,934 ) Total included in other liabilities $ 54,651 $ ( 2,214 ) $ 58,310 $ ( 4,819 ) Mortgage Banking Derivatives Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. In order to hedge the change in interest rates resulting from the Company's commitments to fund the loans, the Company enters into forward commitments for -139- the future delivery of mortgage loans when interest rate locks are entered into. These mortgage banking derivatives are not designated in hedge relationships. The fair value of the interest rate locks is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted for the expected exercise of the commitment before the loan is funded. Fair values of these mortgage banking derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked. Changes in the fair values of these derivatives are included in "Other service income" in the Consolidated Statements of Income. At December 31, 2021 and December 31, 2020 , Park had $ 13.3 million and $ 58.2 million, respectively, of interest rate lock commitments. The fair value of these mortgage banking derivatives was reflected by a derivative asset of $ 0.3 million and $ 1.5 million at December 31, 2021 and December 31, 2020 , respectively. Other Derivatives In connection with the sale of Park’s Class B Visa shares during 2009, Park entered into a swap agreement with the purchaser of the shares. The swap agreement adjusts for dilution in the conversion ratio of Class B Visa shares resulting from certain Visa litigation. At both December 31, 2021 and 2020, the fair value of the swap liability of $ 226,000 was an estimate of the exposure based upon probability-weighted potential Visa litigation losses. 18. Share-Based Compensation The Park National Corporation 2013 Long-Term Incentive Plan (the "2013 Incentive Plan") was adopted by the Board of Directors of Park on January 28, 2013 and was approved by Park's shareholders at the Annual Meeting of Shareholders on April 22, 2013. The 2013 Incentive Plan made equity-based awards and cash-based awards available for grant to participants (who could have been employees or non-employee directors) in the form of incentive stock options (for employees only), nonqualified stock options, SARs, restricted common shares (“Restricted Stock”), restricted stock unit awards that may be settled in common shares, cash or a combination of the two (“Restricted Stock Units”), unrestricted common shares (“Other Stock-Based Awards”) and cash-based awards. Under the 2013 Incentive Plan, 600,000 common shares were authorized to be delivered in connection with grants under the 2013 Incentive Plan. The common shares to be delivered under the 2013 Incentive Plan were to consist of either common shares currently held or common shares subsequently acquired by Park as treasury shares, including common shares purchased in the open market or in private transactions. At December 31, 2021, there were no common shares available to be issued under the 2013 Incentive Plan. The Park National Corporation 2017 Long-Term Incentive Plan for Employees (the "2017 Employees LTIP") was adopted by the Board of Directors of Park on January 23, 2017 and was approved by Park's shareholders at the Annual Meeting of Shareholders on April 24, 2017. The 2017 Employees LTIP makes equity-based awards and cash-based awards available for grant to employee participants in the form of incentive stock options, nonqualified stock options, SARs, Restricted Stock, Restricted Stock Units, Other Stock-Based Awards and cash-based awards. Under the 2017 Employees LTIP, 750,000 common shares are authorized to be delivered in connection with grants under the 2017 Employees LTIP. The common shares to be delivered under the 2017 Employees LTIP are to consist of either common shares currently held or common shares subsequently acquired by Park as treasury shares, including common shares purchased in the open market or in private transactions. At December 31, 2021, 450,000 common shares were available for future grants under the 2017 Employee LTIP. The Park National Corporation 2017 Long-Term Incentive Plan for Non-Employee Directors (the "2017 Non-Employee Directors LTIP") was adopted by the Board of Directors of Park on January 23, 2017 and was approved by Park's shareholders at the Annual Meeting of Shareholders on April 24, 2017. The 2017 Non-Employee Directors LTIP makes equity-based awards and cash-based awards available for grant to non-employee director participants in the form of nonqualified stock options, SARs, Restricted Stock, Restricted Stock Units, Other Stock-Based Awards, and cash-based awards. Under the 2017 Non-Employee Directors LTIP, 150,000 common shares are authorized to be delivered in connection with grants under the 2017 Non-Employee Directors LTIP. The common shares to be delivered under the 2017 Non-Employee Directors LTIP are to consist of either common shares currently held or common shares subsequently acquired by Park as treasury shares, including common shares purchased in the open market or in private transactions. At December 31, 2021, 86,850 common shares were available for future grants under the 2017 Non-Employee Directors LTIP. The 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP have replaced the provisions of the 2013 Incentive Plan with respect to the grant of future awards. As a result of the approval of the 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP, Park did not grant any additional awards under the 2013 Incentive Plan after April 24, 2017. Awards made under the 2013 Incentive Plan have either vested or expired. During 2021, 2020 and 2019, Park granted 13,400 , 13,450 and 13,500 common shares, respectively, to directors of Park and to directors of PNB (and its divisions) under the 2017 Non-Employee Directors LTIP. The common shares granted to directors were not subject to a vesting period and resulted in expense of $ 1.7 million, $ 1.3 million, and $ 1.3 million in 2021, 2020, and 2019, respectively, which is included in professional fees and services on the Consolidated Statements of Income. -140- During 2021, 2020 and 2019, the Compensation Committee of the Board of Directors of Park granted awards of PBRSUs, under the 2017 Employees LTIP, covering an aggregate of 61,890 , 62,265 and 58,740 common shares, respectively, to certain employees of Park and its subsidiaries. Additionally, during 2019, Park granted awards of TBRSUs, under the 2017 Employees LTIP, covering an aggregate of 15,700 shares to Carolina Alliance Division employees. The number of PBRSUs earned or settled will depend on the level of achievement with respect to certain performance criteria and are also subject to subsequent service-based vesting. The number of TBRSUs earned or settled are subject to service-based vesting. A summary of changes in the common shares subject to nonvested PBRSUs and TBRSUs for the years ended December 31, 2021 and 2020 follows: Common shares subject to PBRSUs and TBRSUs Nonvested at January 1, 2020 194,722 Granted 62,265 Vested ( 44,379 ) Forfeited ( 3,101 ) Adjustment for performance conditions of PBRSUs (1) ( 5,399 ) Nonvested at January 1, 2021 204,108 Granted 61,890 Vested ( 48,106 ) Forfeited ( 3,522 ) Adjustment for performance conditions of PBRSUs (1) ( 2,551 ) Nonvested at December 31, 2021 (2) 211,819 (1) The number of PBRSUs earned depends on the level of achievement with respect to certain performance criteria. Adjustment herein represents the difference between the maximum number of common shares which could be earned and the actual number earned for those PBRSUs as to which the performance period was completed. (2) Nonvested amount herein represents the maximum number of nonvested PBRSUs and TBRSUs. As of December 31, 2021, an aggregate of 206,827 PBRSUs and TBRSUs are expected to vest. A summary of awards vested during the twelve months ended December 31, 2021 and 2020 follows: Twelve Months Ended December 31, 2021 2020 PBRSU and TBRSU vested 48,106 44,379 Common shares withheld to satisfy employee income tax withholding obligations 18,436 14,038 Net common shares issued 29,670 30,341 Share-based compensation expense of $ 6.3 million, $ 6.0 million and $ 5.0 million was recognized for the years ended December 31, 2021, 2020 and 2019, respectively, related to PBRSU and TBRSU awards to employees. The following table details expected additional share-based compensation expense related to PBRSUs and TBRSUs currently outstanding: (In thousands) 2022 $ 4,091 2023 2,658 2024 1,107 2025 178 Total $ 8,034 -141- 19. Benefit Plans The Corporation has a noncontributory Defined Benefit Pension Plan (the “Pension Plan”) covering substantially all of the employees of Park National Corporation and its subsidiaries. The Pension Plan provides benefits based on an employee’s years of service and compensation. There was no pension contribution in 2021 or 2020 and there is no contribution expected to be made in 2022. Using accrual measurement dates of December 31, 2021 and 2020, plan assets and benefit obligation activity for the Pension Plan are listed below: (In thousands) 2021 2020 Change in fair value of plan assets Fair value at beginning of measurement period $ 230,442 $ 210,623 Actual return on plan assets 48,138 27,800 Benefits paid ( 15,107 ) ( 7,981 ) Fair value at end of measurement period $ 263,473 $ 230,442 Change in benefit obligation Projected benefit obligation at beginning of measurement period $ 184,410 $ 154,419 Service cost 9,916 8,319 Interest cost 5,359 5,283 Actuarial loss ( 1,614 ) 24,370 Benefits paid ( 15,107 ) ( 7,981 ) Projected benefit obligation at the end of measurement period $ 182,964 $ 184,410 Funded status at end of year (fair value of plan assets less benefit obligation) $ 80,509 $ 46,032 The decrease in the projected benefit obligation ("PBO") from $ 184.4 million as of December 31, 2020 to $ 183.0 million as of December 31, 2021, was largely the result of an increase in the discount rate from 3.00 % to 3.23 %. The decrease in the PBO was partially offset by changes due to mortality assumption updates and demographic losses driven by salary increases greater than assumed. The asset allocation for the Pension Plan as of each measurement date, by asset category, was as follows: Percentage of Plan Assets Asset category Target Allocation 2021 2020 Equity securities 50% - 100% 82 % 84 % Fixed income and cash equivalents remaining balance 18 % 16 % Total 100 % 100 % The investment policy, as established by the Retirement Plan Committee, is to invest assets according to the target allocation stated above. Assets will be reallocated periodically based on the investment strategy of the Retirement Plan Committee. The investment policy is reviewed periodically. The expected long-term rate of return on plan assets used to measure the benefit obligation was 6.92 % and 7.00 % at December 31, 2021 and December 31, 2020, respectively. This return was based on the expected long-term return of each of the asset categories, weighted based on the median of the target allocation for each class. The accumulated benefit obligation for the Pension Plan was $ 146.2 million and $ 149.5 million at December 31, 2021 and 2020, respectively. -142- On November 17, 2009, the Park Pension Plan completed the purchase of 115,800 common shares of Park for $ 7.0 million or $ 60.45 per share. At December 31, 2021 and 2020, the fair value of the 115,800 common shares held by the Pension Plan was $ 15.9 million, or $ 137.31 per share and $ 12.2 million, or $ 105.01 per share, respectively. The weighted average assumptions used to determine benefit obligations at December 31, 2021, 2020 and 2019 were as follows: 2021 2020 2019 Discount rate 3.23 % 3.00 % 3.53 % Rate of compensation increase Under age 30 8.25 % 8.25 % 10.00 % Ages 30-39 6.00 % 6.00 % 6.00 % Ages 40-49 5.00 % 5.00 % 4.00 % Ages 50-54 4.25 % 4.25 % 3.00 % Ages 55-59 3.75 % 3.75 % 3.00 % Ages 60-64 3.50 % 3.50 % 3.00 % Ages 65 and over 3.25 % 3.25 % 3.00 % The estimated future pension benefit payments reflecting expected future service for the next ten years are shown below (in thousands): 2022 $ 12,775 2023 11,500 2024 12,102 2025 12,405 2026 12,360 2027-2031 61,702 Total $ 122,844 The following table shows ending balances of accumulated other comprehensive loss at December 31, 2021 and 2020. (In thousands) 2021 2020 Prior service credit $ 137 $ 152 Net actuarial loss ( 7,469 ) ( 43,723 ) Total ( 7,332 ) ( 43,571 ) Deferred taxes 1,540 9,150 Accumulated other comprehensive loss $ ( 5,792 ) $ ( 34,421 ) -143- Using actuarial measurement dates of December 31 for 2021, 2020 and 2019, components of net periodic benefit income and other amounts recognized in other comprehensive income (loss) were as follows: (In thousands) 2021 2020 2019 Affected Line Item in the Consolidated Statements of Income Components of net periodic benefit income (loss) and other amounts recognized in other comprehensive income (loss) Service cost $ ( 9,916 ) $ ( 8,319 ) $ ( 5,873 ) Employee benefits Interest cost ( 5,359 ) ( 5,283 ) ( 5,491 ) Other components of net periodic benefit income Expected return on plan assets 15,731 14,410 12,105 Other components of net periodic benefit income Recognized net actuarial loss and prior service credit ( 2,220 ) ( 1,175 ) ( 1,882 ) Other components of net periodic benefit income Net periodic benefit loss $ ( 1,764 ) $ ( 367 ) $ ( 1,141 ) Net actuarial gain (loss) and prior service credit $ 34,019 $ ( 10,981 ) $ 1,913 Amortization of net loss 2,220 1,175 1,882 Total recognized in other comprehensive income (loss) 36,239 ( 9,806 ) 3,795 Total recognized in net benefit income (loss) and other comprehensive income (loss) $ 34,475 $ ( 10,173 ) $ 2,654 The weighted average assumptions used to determine net periodic benefit loss for the years ended December 31, 2021, 2020 and 2019 are listed below: 2021 2020 2019 Discount rate 3.00 % 3.53 % 4.60 % Rate of compensation increase Under age 30 8.25 % 10.00 % 10.00 % Ages 30-39 6.00 % 6.00 % 6.00 % Ages 40-49 5.00 % 4.00 % 4.00 % Ages 50-54 4.25 % 3.00 % 3.00 % Ages 55-59 3.75 % 3.00 % 3.00 % Ages 60-64 3.50 % 3.00 % 3.00 % Ages 65 and over 3.25 % 3.00 % 3.00 % Expected long-term return on plan assets 7.00 % 7.00 % 7.00 % U.S. GAAP defines fair value as the price that would be received by Park for an asset or paid by Park to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date, using the most advantageous market for the asset or liability. The fair values of equity securities, consisting of mutual fund investments and common stock held by the Pension Plan, are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs). Additionally, due to their short-term nature, the fair value of interest bearing demand deposits is determined by reference to their face value (Level 1 inputs). Interest bearing time deposits, United States Government agency obligations and corporate bonds are valued by the trustee based on yields available on comparable securities of issuers with similar credit ratings as of the end of the year (Level 2 inputs). No investments were categorized as Level 3 inputs. -144- The fair value of the plan assets at December 31, 2021 and December 31, 2020, by asset class, is as follows. Fair Value Measurements Fair Value Measurements at December 31, 2021, Using at December 31, 2020, Using (In thousands) (Level 1) (Level 2) (Level 1) (Level 2) Interest-bearing account $ 3,222 $ 4,731 $ 2,785 $ 4,837 Mutual funds 60,987 — 54,461 — U.S. Government agency obligations — 15,254 — 5,530 Corporate bonds — 16,815 — 24,986 Common stocks 162,464 — 137,843 — $ 226,673 $ 36,800 $ 195,089 $ 35,353 Salary Deferral Plan The Corporation has a voluntary salary deferral plan (the Corporation's Employees Stock Ownership Plan) covering substantially all of the employees of the Corporation and its subsidiaries. Eligible employees may contribute a portion of their compensation subject to a maximum statutory limitation. The Corporation provides a matching contribution established annually by the Corporation. Contribution expense for the Corporation was $ 4.3 million, $ 4.2 million, and $ 3.9 million for 2021, 2020 and 2019, respectively. Supplemental Executive Retirement Plan The Corporation has entered into Supplemental Executive Retirement Plan Agreements (the "SERP Agreements") with certain key officers of Park National Corporation and its subsidiaries which provide defined pension benefits in excess of limits imposed by federal income tax law. The accrued benefit cost for the SERP Agreements totaled $ 13.4 million and $ 12.3 million for 2021 and 2020, respectively, and is recorded within "Other liabilities" on the Consolidated Balance Sheets . The expense for the Corporation was as follows: (In thousands) 2021 2020 2019 Affected Line Item in the Consolidated Statements of Income Service cost $ 1,345 $ 1,680 $ 816 Employee benefits Interest cost 510 403 484 Miscellaneous expense Total SERP expense $ 1,855 $ 2,083 $ 1,300 -145- 20. Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Corporation’s deferred tax assets and liabilities are as follows: December 31 (In thousands) 2021 2020 Deferred tax assets: Allowance for credit losses $ 18,153 $ 19,512 Accumulated other comprehensive loss – Pension Plan 1,540 9,150 Accumulated other comprehensive loss – Unrealized losses on swaps 55 186 Deferred compensation 6,294 3,887 OREO valuation adjustments 909 1,012 Net deferred loan fees 2,569 3,283 Deferred contract bonus 432 571 Nonvested equity-based compensation 2,694 2,567 Net operating loss ("NOL") carryforward 3,197 3,629 Fixed assets 249 — Operating lease liability 3,111 3,561 Partnership adjustments 69 — Other 1,854 1,424 Total deferred tax assets $ 41,126 $ 48,782 Deferred tax liabilities: Accumulated other comprehensive loss - Unrealized gains on securities $ 5,623 $ 10,507 Fixed assets — 3,360 Deferred investment income 6,363 6,637 Pension Plan 19,182 20,407 MSRs 3,333 2,781 Partnership adjustments — 204 Purchase accounting adjustments 880 604 Operating lease right-of-use asset 2,917 3,343 Lessor adjustments 2,764 3,433 Other 514 398 Total deferred tax liabilities $ 41,576 $ 51,674 Net deferred tax liability $ ( 450 ) $ ( 2,892 ) As of December 31, 2021 and 2020, Park had a net deferred tax asset balance related to federal NOL carryforwards of approximately $ 2.8 million and $ 3.1 million, respectively, which expire at various dates from 2031-2039 . Park also had a net deferred tax asset balance related to state NOL carryforwards of approximately $ 0.4 million and $ 0.5 million at December 31, 2021 and 2020, respectively, which expire at various dates from 2030-2039. Park performs an analysis to determine if a valuation allowance against deferred tax assets is required in accordance with U.S. GAAP. Management determined that it was not required to establish a valuation allowance against the December 31, 2021 or 2020 deferred tax assets in accordance with U.S. GAAP since it was more likely than not that the deferred tax asset will be fully utilized in future periods. -146- The components of the provision for federal income taxes are shown below: December 31, (In thousands) 2021 2020 2019 Currently payable Federal $ 28,726 $ 22,769 $ 14,797 State 1,382 1,432 1,191 Amortization of qualified affordable housing projects 7,313 7,046 6,927 Deferred Federal ( 3,006 ) ( 4,812 ) ( 815 ) State ( 125 ) 287 ( 29 ) Total $ 34,290 $ 26,722 $ 22,071 The following is a reconciliation of income tax expense to the amount computed at the statutory federal corporate income tax rate of 21 % for the years ended December 31, 2021, 2020 and 2019. 2021 2020 2019 Statutory federal corporate income tax rate 21.0 % 21.0 % 21.0 % Changes in rates resulting from: Tax exempt interest income, net of disallowed interest ( 1.2 ) % ( 1.5 ) % ( 2.0 ) % Bank owned life insurance ( 0.5 ) % ( 0.7 ) % ( 0.8 ) % Investments in qualified affordable housing projects, net of tax benefits ( 0.8 ) % ( 1.1 ) % ( 1.5 ) % KSOP dividend deduction ( 0.5 ) % ( 0.6 ) % ( 0.6 ) % Other 0.2 % 0.2 % 1.6 % Effective Tax Rate 18.2 % 17.3 % 17.7 % Park National Corporation and its subsidiaries do not pay state income tax to the state of Ohio, but pay a franchise tax based on equity. The franchise tax expense is included in "State tax expense" on Park’s Consolidated Statements of Income. Park is also subject to state income tax in various states, including North Carolina and South Carolina. State income tax expense is included in “Income taxes” on Park’s Consolidated Statements of Income. Park’s state income tax expense was $ 1.0 million, $ 1.1 million and $ 1.2 million for the years ended December 31, 2021, 2020 and 2019, respectively. Unrecognized Tax Benefits The following is a reconciliation of the beginning and ending amount of unrecognized tax benefits. (In thousands) 2021 2020 2019 January 1 Balance $ 633 $ 954 $ 1,226 Additions based on tax positions related to the current year 10 12 12 Additions for tax positions of prior years — — 2 Reductions for tax positions of prior years — — ( 3 ) Reductions due to statute of limitations ( 304 ) ( 333 ) ( 283 ) December 31 Balance $ 339 $ 633 $ 954 The amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in the future periods at December 31, 2021, 2020 and 2019 was $ 0.3 million, $ 0.6 million and $ 0.9 million, respectively. Park does not expect the total amount of unrecognized tax benefits to significantly increase or decrease during the next year. The income related to interest and penalties recorded on unrecognized tax benefits in the Consolidated Statements of Income for the years ended December 31, 2021, 2020, and 2019 was $ 45,500 , $ 35,000 , and $ 7,500 , respectively. The amount accrued for interest and penalties at December 31, 2021, 2020 and 2019 was $ 65,500 , $ 111,000 and $ 146,000 , respectively. -147- Park National Corporation and its subsidiaries are subject to U.S. federal income tax and income tax in various state jurisdictions. The Corporation is subject to routine audits of tax returns by the Internal Revenue Service and states in which we conduct business. No material adjustments have been made on closed federal and state tax audits. Generally, all tax years ended prior to December 31, 2018 are closed to examination by federal and state taxing authorities. 21. Accumulated Other Comprehensive Income (Loss) Other comprehensive income (loss) components, net of income tax, are shown in the following table for the years ended December 31, 2021, 2020 and 2019. (in thousands) Changes in Pension Plan assets and benefit obligations Unrealized gains (losses) on AFS debt securities Unrealized net holding loss on cash flow hedge Total Beginning balance at January 1, 2021 $ ( 34,421 ) $ 40,690 $ ( 698 ) $ 5,571 Other comprehensive income (loss) before reclassifications 26,875 ( 19,537 ) 492 $ 7,830 Amounts reclassified from accumulated other comprehensive loss 1,754 — — $ 1,754 Net current period other comprehensive income (loss) income $ 28,629 $ ( 19,537 ) $ 492 $ 9,584 Ending balance at December 31, 2021 $ ( 5,792 ) $ 21,153 $ ( 206 ) $ 15,155 Beginning balance at January 1, 2020 $ ( 26,674 ) $ 17,539 $ ( 454 ) $ ( 9,589 ) Other comprehensive (loss) income before reclassifications ( 8,675 ) 25,747 ( 244 ) $ 16,828 Amounts reclassified from accumulated other comprehensive loss (income) 928 ( 2,596 ) — $ ( 1,668 ) Net current period other comprehensive (loss) income $ ( 7,747 ) $ 23,151 $ ( 244 ) $ 15,160 Ending balance at December 31, 2020 $ ( 34,421 ) $ 40,690 $ ( 698 ) $ 5,571 Beginning balance at January 1, 2019 $ ( 29,672 ) $ ( 20,116 ) $ — $ ( 49,788 ) Other comprehensive income (loss) before reclassifications (1) 1,511 37,322 ( 454 ) $ 38,379 Amounts reclassified from accumulated other comprehensive loss 1,487 333 — $ 1,820 Net current period other comprehensive income (loss) $ 2,998 $ 37,655 $ ( 454 ) $ 40,199 Ending balance at December 31, 2019 $ ( 26,674 ) $ 17,539 $ ( 454 ) $ ( 9,589 ) (1) During the year ended December 31, 2019, Park transferred HTM securities with a fair value of $ 373.9 million to AFS classification. The transfer occurred at fair value and had a related unrealized gain of $ 24.2 million ($ 19.1 million net of taxes), recorded in other comprehensive income. -148- The following table provides information concerning amounts reclassified out of accumulated other comprehensive income (loss) for the years ended December 31, 2021, 2020 and 2019: Amount Reclassified from Accumulated Other Comprehensive Income (Loss) Affected Line Item in the Consolidated Statements of Income (In thousands) 2021 2020 2019 Amortization of defined benefit pension items Amortization of net loss $ 2,220 $ 1,175 $ 1,882 Employee benefits Income before income taxes 2,220 1,175 1,882 Income before income taxes Income taxes 466 247 395 Income taxes Net of income tax $ 1,754 $ 928 $ 1,487 Net income Unrealized gains & losses on AFS debt securities (Gain) loss on the sale of debt securities $ — $ ( 3,286 ) $ 421 Net gain (loss) on the sale of debt securities (Income) loss before income taxes — ( 3,286 ) 421 Income before income taxes Income tax (benefit) expense — ( 690 ) 88 Income taxes Net of income (benefit) tax $ — $ ( 2,596 ) $ 333 Net income 22. Earnings Per Common Share U.S. GAAP requires the reporting of basic and diluted earnings per common share. Basic earnings per common share excludes any dilutive effects of PBRSUs and TBRSUs. The following table sets forth the computation of basic and diluted earnings per common share: Year ended December 31 (In thousands, except share data) 2021 2020 2019 Numerator: Net income $ 153,945 $ 127,923 $ 102,700 Denominator: Weighted-average common shares outstanding 16,291,016 16,302,825 16,234,342 Effect of dilutive PBRSUs and TBRSUs 134,190 104,677 95,114 Weighted-average common shares outstanding adjusted for the effect of dilutive PBRSUs and TBRSUs 16,425,206 16,407,502 16,329,456 Earnings per common share: Basic earnings per common share $ 9.45 $ 7.85 $ 6.33 Diluted earnings per common share $ 9.37 $ 7.80 $ 6.29 Park awarded 61,890 , 62,265 and 58,740 PBRSUs to certain employees during the years ended December 31, 2021, 2020 and 2019, respectively. Park awarded 15,700 TBRSUs to Carolina Alliance Division employees during the year ended December 31, 2019. On April 1, 2019, Park issued 1,037,205 common shares to complete its acquisition of Carolina Alliance. During the years ended December 31, 2021, 2020 and 2019, Park repurchased 75,000 , 76,000 and 86,650 common shares, respectively, to fund the PBRSUs, TBRSUs and common shares awarded to directors of Park and to directors of PNB (and its divisions) and repurchased 62,659 and 334,603 common shares during the years ended December 31, 2021 and 2019, respectively, pursuant to Park's previously announced stock repurchase authorizations. There were no common shares repurchased during the year ended December 31, 2020 pursuant to Park's previously announced stock repurchase authorizations. -149- 23. Dividend Restrictions Bank regulators limit the amount of dividends a subsidiary bank can declare in any calendar year without obtaining prior approval. At December 31, 2021, approximately $ 116.8 million of the total shareholders’ equity of PNB was available for the payment of dividends to Park National Corporation, without approval by the applicable regulatory authorities. 24. Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk The Corporation is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments and standby letters of credit. The financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those financial instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers. The total amounts of off-balance sheet financial instruments with credit risk were as follows: December 31 (In thousands) 2021 2020 Loan commitments $ 1,364,224 $ 1,372,182 Standby letters of credit 18,216 17,015 The loan commitments are generally for variable rates of interest. The Corporation grants retail, commercial and commercial real estate loans to customers primarily located in Ohio, Kentucky, North Carolina and South Carolina with the exception of nationwide aircraft loans and nationwide asset-based lending to consumer finance companies. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon the extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and real estate. Although the Corporation has a diversified loan portfolio, a substantial portion of the borrowers’ ability to honor their contracts is dependent upon the economic conditions of the borrowers' respective geographic locations and industries. 25. Loan Servicing Park serviced sold mortgage loans of $ 2,132 million at December 31, 2021, compared to $ 1,972 million at December 31, 2020 and $ 1,447 million at December 31, 2019. At December 31, 2021, $ 3.3 million of the sold mortgage loans were sold with recourse compared to $ 1.7 million at December 31, 2020 and $ 2.3 million at December 31, 2019. Management closely monitors the delinquency rates on the mortgage loans sold with recourse. As of December 31, 2021 and 2020, management had established a reserve of $ 57,000 and $ 30,000 , respectively, to account for future loan repurchases. When Park sells mortgage loans with servicing rights retained, servicing rights are initially recorded at fair value. Park selected the “amortization method” as permissible within U.S. GAAP, whereby the servicing rights capitalized are amortized in proportion to and over the period of estimated future servicing income of the underlying loan. At the end of each reporting period, the carrying value of MSRs is assessed for impairment with a comparison to fair value. MSRs are carried at the lower of their amortized cost or fair value. The amortization of MSRs is included within "Other service income" in the Consolidated Statements of Income. -150- Activity for MSRs and the related valuation allowance follows: December 31 (In thousands) 2021 2020 2019 MSRs: Carrying amount, net, beginning of year $ 12,210 $ 10,070 $ 10,178 Additions 4,945 8,627 2,355 Amortization ( 3,512 ) ( 4,123 ) ( 1,870 ) Change in valuation allowance 1,621 ( 2,364 ) ( 593 ) Carrying amount, net, end of year $ 15,264 $ 12,210 $ 10,070 Valuation allowance: Beginning of year $ 3,189 $ 825 $ 232 Change in valuation allowance ( 1,621 ) 2,364 593 End of year $ 1,568 $ 3,189 $ 825 The fair value of MSRs was $ 15.3 million and $ 12.2 million at December 31, 2021 and 2020, respectively. The fair value of MSRs at December 31, 2021 was established using a discount rate of 12 % and constant prepayment speeds ranging from 11.10 % to 27.90 %. The fair value of MSRs at December 31, 2020 was established using a discount rate of 12 % and constant prepayment speeds ranging from 13.20 % to 27.54 %. Servicing fees included in other service income were $ 5.3 million, $ 4.1 million and $ 3.6 million for the years ended December 31, 2021, 2020 and 2019, respectively. 26. Leases Park is a lessee in several noncancellable operating lease arrangements, primarily for retail branches, administrative and warehouse buildings, ATMs, and certain office equipment within its Ohio, Kentucky, North Carolina, South Carolina,markets. Certain of these leases contain renewal options for periods ranging from one year to five years. Park’s leases generally do not include termination options for either party to the lease or restrictive financial or other covenants. Payments due under the lease contracts include fixed payments plus, for many of Park’s real estate leases, variable payments such as Park's proportionate share of property taxes, insurance, and common area maintenance. Park elected the practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease components. Additionally, Park has elected not to recognize ROU assets and lease liabilities for short-term leases that have a lease term of 12 months or less. The Company recognizes the lease payments associated with its short-term leases as an expense on a cash basis. Management determines if an arrangement is or contains a lease at contract inception. If an arrangement is determined to be or contain a lease, Park recognizes a ROU asset and a lease liability at the lease commencement date. Leases are classified as operating or finance leases at the lease commencement date. At December 31, 2021 and 2020, all of Park's leases were classified as operating leases. Park’s lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. Key estimates and judgments related to the lease liability include how management determines (1) the discount rate it uses to discount the unpaid lease payments to present value, (2) the lease term, and (3) lease payments. • ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that interest rate cannot be readily determined, its incremental borrowing rate.Generally, management cannot determine the interest rate implicit in the lease because it does not have access to the lessor’s estimated residual value or the amount of the lessor’s deferred initial direct costs. Therefore, Park utilizes its incremental borrowing rate as the discount rate for leases. Park’s incremental borrowing rate for a lease is the rate of interest Park would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. To manage its capital and liquidity needs, Park periodically obtains wholesale funding from the FHLB on an over-collateralized basis. The impact of utilizing an interest rate on an over-collateralized borrowing versus a fully collateralized borrowing is not material. Therefore, the FHLB yield curve was selected by management as a baseline to determine Park’s discount rates for leases. -151- • The lease term for all of the Company’s leases includes the noncancellable period of the lease plus any additional periods covered by either Park's option to extend (or not to terminate) the lease that the Company is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor. If a lease contract contains multiple renewal options, management generally models lease cash flows through the first renewal option period unless the contract contains economic incentives or other conditions that increase the likelihood that additional renewals are reasonably certain to be exercised. • Lease payments included in the measurement of the lease liability are comprised of the following: – Fixed payments, including in-substance fixed payments, owed over the lease term; – For certain of Park's gross real estate leases, non-lease components such as real estate taxes, insurance, and common area maintenance; and – Variable lease payments that depend on an index or rate, initially measured using the index or rate at the lease commencement date. The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Park's operating lease ROU asset and lease liability are presented in “Operating lease right-of-use asset" and "Operating lease liability," respectively, on Park's Consolidated Balance Sheets. The carrying amounts of Park's ROU asset and lease liability at December 31, 2021 were $ 13.4 million and $ 14.3 million, respectively. At December 31, 2020, the carrying amounts of Park's ROU assets and lease liability were $ 15.1 million and $ 16.1 million, respectively. Park's operating lease expense is recorded in "Occupancy expense" on the Company's Consolidated Statements of Income. Other information related to operating leases for the years ended December 31, 2021, 2020 and 2019 follows: (in thousands) Year ended December 31, 2021 Year ended December 31, 2020 Year ended December 31, 2019 Lease cost Operating lease cost $ 2,827 $ 3,463 $ 3,165 Sublease income ( 253 ) ( 352 ) ( 383 ) Total lease cost $ 2,574 $ 3,111 $ 2,782 Other information Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 3,199 $ 3,553 $ 3,192 ROU assets obtained in exchange for new operating lease liabilities 1,190 7,821 505 Reductions to ROU assets resulting from reductions to lease obligations $ ( 2,865 ) $ ( 3,084 ) $ ( 2,855 ) Park's operating leases had a weighted average remaining term of 6.8 years and 7.2 years at December 31, 2021 and 2020, respectively. At both December 31, 2021 and 2020, the weighted average discount rate of Park's operating leases was 2.3 %. -152- Undiscounted cash flows included in lease liabilities at December 31, 2021 have expected contractual payments as follows: (in thousands) December 31, 2021 2022 $ 3,108 2023 2,978 2024 1,880 2025 1,540 2026 1,452 Thereafter 4,496 Total undiscounted minimum lease payments $ 15,454 Less: imputed interest ( 1,115 ) Total lease liabilities $ 14,339 In September 2021, the Company entered into a noncancellable operating lease for an additional retail office for an initial term of 12 years, with two five-year renewal options. The lease commences on July 1, 2022, and therefore, is not recognized as of December 31, 2021. The fixed payments due on an undiscounted basis over the noncancellable 12-year period of the lease are $ 3.5 million. The Company will assess the lease term at the lease commencement date, but does not presently expect that either of the five-year renewal periods will be exercised. In December 2021, the Company entered into a noncancellable operating lease for an additional retail office for an initial term of 10 years, with two five-year renewal options. The lease is expected to commence sometime during June 2022 and September 2022, and therefore, is not recognized as of December 31, 2021. The fixed payments due on an undiscounted basis over the noncancellable 10-year period of the lease are $ 3.5 million. The Company will assess the lease term at the lease commencement date, but does not presently expect that either of the five-year renewal periods will be exercised. 27. Fair Value The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that Park uses to measure fair value are as follows: • Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that Park has the ability to access as of the measurement date. • Level 2: Level 1 inputs for assets or liabilities that are not actively traded. Also consists of an observable market price for a similar asset or liability. This includes the use of “matrix pricing” to value debt securities absent the exclusive use of quoted prices. • Level 3: Consists of unobservable inputs that are used to measure fair value when observable market inputs are not available. This could include the use of internally developed models, financial forecasting and similar inputs. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the balance sheet date. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to observable market data for similar assets and liabilities. However, certain assets and liabilities are not traded in observable markets and Park must use other valuation methods to develop a fair value. The fair value of individually evaluated collateral dependent loans is typically based on the fair value of the underlying collateral, which is estimated through third-party appraisals in accordance with Park's valuation requirements under its commercial and real estate loan policies. -153- Assets and Liabilities Measured at Fair Value on a Recurring Basis : The following table presents assets and liabilities measured at fair value on a recurring basis: Fair Value Measurements at December 31, 2021 using: (In thousands) Level 1 Level 2 Level 3 Balance at December 31, 2021 Assets Investment securities: Obligations of states and political subdivisions $ — $ 389,591 $ — $ 389,591 U.S. Government sponsored entities’ asset-backed securities — 854,463 — 854,463 Collateralized loan obligations — 498,674 — 498,674 Corporate debt securities — 11,412 — 11,412 Equity securities 1,630 — 499 2,129 Mortgage loans held for sale — 9,387 — 9,387 Mortgage IRLCs — 333 — 333 Loan interest rate swaps — 1,952 — 1,952 Liabilities Fair value swap $ — $ — $ 226 $ 226 Borrowing interest rate swap — 262 — 262 Loan interest rate swaps — 1,952 — 1,952 Fair Value Measurements at December 31, 2020 using: (In thousands) Level 1 Level 2 Level 3 Balance at December 31, 2020 Assets Investment securities: Obligations of states and political subdivisions $ — $ 305,218 $ — $ 305,218 U.S. Government sponsored entities’ asset-backed securities — 752,109 — 752,109 Corporate debt securities — 2,014 — 2,014 Equity securities 2,026 — 485 2,511 Mortgage loans held for sale — 31,666 — 31,666 Mortgage IRLCs — 1,545 — 1,545 Loan interest rate swaps — 3,934 — 3,934 Liabilities Fair value swap $ — $ — $ 226 $ 226 Borrowing interest rate swap — 885 — 885 Loan interest rate swaps — 3,934 — 3,934 The following methods and assumptions were used by the Company in determining the fair value of the financial assets and liabilities discussed above: Interest rate swaps: The fair values of interest rate swaps are based on valuation models using observable market data as of the measurement date (Level 2). -154- Investment securities: Fair values for investment securities are based on quoted market prices, where available (Level 1). If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows (Level 3). Fair value swap: The fair value of the swap agreement entered into with the purchaser of the Visa Class B shares represents an internally developed estimate of the exposure based upon probability-weighted potential Visa litigation losses and are classified as Level 3.. Mortgage Interest Rate Lock Commitments: Mortgage IRLCs are based on current secondary market pricing and are classified as Level 2. Mortgage loans held for sale: Mortgage loans held for sale are carried at their fair value. Mortgage loans held for sale are estimated using market prices for similar product types and, therefore, are classified in Level 2. The table below is a reconciliation of the beginning and ending balances of the Level 3 inputs for the years ended December 31, 2021 and 2020, for financial instruments measured on a recurring basis and classified as Level 3: Level 3 Fair Value Measurements (In thousands) Equity Securities Fair Value Swap Balance at January 1, 2021 $ 485 $ ( 226 ) Total Gains Included in other income 14 — Balance at December 31, 2021 $ 499 $ ( 226 ) Balance at January 1, 2020 $ 456 $ ( 226 ) Total Gains Included in other income 29 — Balance at December 31, 2020 $ 485 $ ( 226 ) Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis: The following methods and assumptions were used by the Company in determining the fair value of assets and liabilities measured at fair value on a nonrecurring basis as described below: Individually evaluated collateral dependent loans: When a loan is individually evaluated, it is valued at the lower of cost or fair value. Collateral dependent loans which are individually evaluated and carried at fair value have been partially charged off or receive specific allocations of the allowance for credit losses. For collateral dependent loans, fair value is generally based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales approach and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments result in a Level 3 classification of the inputs for determining fair value. Collateral is then adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and the client’s business, resulting in a Level 3 fair value classification. Individually evaluated loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. Additionally, updated independent valuations are obtained annually for all collateral dependent loans in accordance with Company policy. OREO: Assets acquired through or in lieu of loan foreclosure are initially recorded at fair value less costs to sell when acquired. The carrying value of OREO is not re-measured to fair value on a recurring basis, but is subject to fair value adjustments when the carrying value exceeds the fair value, less estimated selling costs. Fair value is based on recent real estate appraisals and is updated at least annually. These appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales approach and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments result in a Level 3 classification of the inputs for determining fair value. -155- Appraisals for both individually evaluated collateral dependent loans and OREO are performed by licensed appraisers. Appraisals are generally obtained to support the fair value of collateral. In general, there are three types of appraisals received by the Company: real estate appraisals, income approach appraisals, and lot development loan appraisals. These are discussed below: • Real estate appraisals typically incorporate measures such as recent sales prices for comparable properties. Appraisers may make adjustments to the sales prices of the comparable properties as deemed appropriate based on the age, condition or general characteristics of the subject property. Management generally applies a 15 % discount to real estate appraised values which management expects will cover all disposition costs (including selling costs). This 15 % discount is based on historical discounts to appraised values on sold OREO properties. • Income approach appraisals typically incorporate the annual net operating income of the business divided by an appropriate capitalization rate, as determined by the appraiser. Management generally applies a 15 % discount to income approach appraised values which management expects will cover all disposition costs (including selling costs). • Lot development loan appraisals are typically performed using a discounted cash flow analysis. Appraisers determine an anticipated absorption period and a discount rate that takes into account an investor’s required rate of return based on recent comparable sales. Management generally applies a 6 % discount to lot development appraised values, which is an additional discount above the net present value calculation included in the appraisal, to account for selling costs. Other repossessed assets: Other repossessed assets are initially recorded at fair value less costs to sell when acquired. The carrying value of other repossessed assets is not re-measured to fair value on a recurring basis, but is subject to fair value adjustments when the carrying value exceeds the fair value, less estimated selling costs. As of December 31, 2021 and 2020, other repossessed assets primarily consisted of aircraft acquired as part of a loan workout. Fair value is based on Aircraft Bluebook and VREF Aircraft Value Reference values based on the model of aircraft and adjustments for flight hours, features and other variables. Such adjustments result in a Level 3 classification of the inputs for determining fair value. MSRs: MSRs are carried at the lower of cost or fair value. MSRs do not trade in active, open markets with readily observable prices. For example, sales of MSRs do occur, but precise terms and conditions typically are not readily available. As such, management, with the assistance of a third-party specialist, determines fair value based on the discounted value of the future cash flows estimated to be received. Significant inputs include the discount rate and assumed prepayment speeds. The calculated fair value is then compared to market values where possible to ascertain the reasonableness of the valuation in relation to current market expectations for similar products. Accordingly, MSRs are classified as Level 2. The following tables present assets and liabilities measured at fair value on a nonrecurring basis. Individually evaluated collateral dependent loans secured by real estate are carried at fair value if they have been charged down to fair value or if a specific valuation allowance has been established. As of December 31, 2021 and 2020, there were no PCD loans carried at fair value. A new cost basis is established at the time a property is initially recorded in OREO. OREO properties are carried at fair value if a devaluation has been taken with respect to the property's value subsequent to the initial measurement. Fair Value Measurements at December 31, 2021 Using: (In thousands) Level 1 Level 2 Level 3 Balance at December 31, 2021 Individually evaluated collateral dependent loans recorded at fair value: Commercial real estate $ — $ — $ 831 $ 831 Residential real estate — — 272 272 Total individually evaluated collateral dependent loans recorded at fair value $ — $ — $ 1,103 $ 1,103 MSRs $ — $ 13,482 $ — $ 13,482 OREO recorded at fair value: Residential real estate — — 775 775 Total OREO recorded at fair value $ — $ — $ 775 $ 775 Other repossessed assets $ — $ — $ 2,750 $ 2,750 -156- Fair Value Measurements at December 31, 2020 Using: (In thousands) Level 1 Level 2 Level 3 Balance at December 31, 2020 Impaired loans recorded at fair value: Commercial real estate $ — $ — $ 6,749 $ 6,749 Residential real estate — — 175 175 Total impaired loans recorded at fair value $ — $ — $ 6,924 $ 6,924 MSRs $ — $ 12,179 $ — $ 12,179 OREO recorded at fair value: Residential real estate — — 735 735 Total OREO recorded at fair value $ — $ — $ 735 $ 735 Other repossessed assets $ — $ — $ 3,164 $ 3,164 The table below provides additional detail on those individually evaluated loans which are recorded at fair value as well as the remaining individually evaluated loan portfolio not included above. The remaining individually evaluated loans consist of 1) loans which are not collateral dependent, 2) loans which are not secured by real estate, and 3) loans carried at cost as the fair value of the underlying collateral or the present value of expected future cash flows on each of the loans exceeded the book value for each respective credit. December 31, 2021 (In thousands) Loan Balance Prior Charge-Offs Specific Valuation Allowance Carrying Balance Total individually evaluated collateral dependent loans recorded at fair value $ 1,291 $ 240 $ 188 $ 1,103 Remaining individually evaluated loans 73,211 384 1,428 71,783 Total individually evaluated loans $ 74,502 $ 624 $ 1,616 $ 72,886 December 31, 2020 (In thousands) Recorded Investment Prior Charge-Offs Specific Valuation Allowance Carrying Balance Impaired loans recorded at fair value $ 8,256 $ 269 $ 1,332 $ 6,924 Remaining impaired loans 100,199 386 4,102 96,097 Total impaired loans $ 108,455 $ 655 $ 5,434 $ 103,021 The income (expense) from credit adjustments related to individually evaluated/impaired loans carried at fair value for the years ended December 31, 2021, 2020 and 2019 was $ 0.5 million, $( 4.7 ) million, and $( 0.2 ) million, respectively. MSRs totaled $ 15.3 million at December 31, 2021. Of this $ 15.3 million MSR carrying balance, $ 13.5 million was recorded at fair value and included a valuation allowance of $ 1.6 million. The remaining $ 1.8 million was recorded at cost, as the fair value exceeded cost at December 31, 2021. At December 31, 2020, MSRs totaled $ 12.2 million. Of this $ 12.2 million MSR carrying balance, $ 12.2 million was recorded at fair value and included a valuation allowance of $ 3.2 million. T he remaining $ 31,000 was recorded at cost, as the fair value exceeded cost at December 31, 2020. The income (expense) related to MSRs carried at fair value for the years ended December 31, 2021, 2020 and 2019 was $ 1.6 million, $( 2.4 ) million and $( 0.6 ) million, respectively. Total OREO held by Park at December 31, 2021 and 2020 was $ 0.8 million and $ 1.4 million, respectively. Approximately 100 % and 51 % of OREO held by Park at December 31, 2021 and 2020, respectively, was carried at fair value due to fair value adjustments made subsequent to the initial OREO measurement. At December 31, 2021 and 2020, OREO held at fair value, -157- less estimated selling costs, amounted to $ 0.8 million and $ 0.7 million, respectively. The net (expense) income related to OREO fair value adjustments was $( 32,000 ) , $ 0.1 million and $( 0.2 ) million for the years ended December 31, 2021, 2020 and 2019, respectively. Other repossessed assets totaled $ 3.3 million at December 31, 2021, of which $ 2.8 million were recorded at fair value. Other repossessed asset totaled $ 3.6 million at December 31, 2020, of which $ 3.2 million were recorded at fair value. The net expense related to fair value adjustments on other repossessed assets was $ 414,000 and $ 435,000 for the years ended December 31, 2021 and 2020, respectively. There was no expense related to fair value adjustments on other repossessed assets for the year ended December 31, 2019. The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2021 and December 31, 2020: December 31, 2021 (In thousands) Fair Value Valuation Technique Unobservable Input(s) Range (Weighted Average) Individually evaluated collateral dependent loans: Commercial real estate $ 831 Sales comparison approach Adj to comparables 0.0 % - 232.0 % ( 28.3 %) Residential real estate $ 272 Sales comparison approach Adj to comparables 0.5 % - 78.6 % ( 11.6 %) Cost approach Accumulated depreciation 8.3 % ( 8.3 %) Other real estate owned: Residential real estate $ 775 Sales comparison approach Adj to comparables 5.0 % - 32.5 % ( 19.1 %) December 31, 2020 (In thousands) Fair Value Valuation Technique Unobservable Input(s) Range (Weighted Average) Impaired loans: Commercial real estate $ 6,749 Sales comparison approach Adj to comparables 0.0 % - 139.0 % ( 11.8 %) Income approach Capitalization rate 9.3 % - 20.0 % ( 10.3 %) Cost approach Entrepreneurial profit 10.0 % ( 10.0 %) Cost approach Accumulated depreciation 2.6 % ( 2.6 %) Residential real estate $ 175 Sales comparison approach Adj to comparables 2.0 % - 47.8 % ( 11.9 %) Other real estate owned: Residential real estate $ 735 Sales comparison approach Adj to comparables 7.8 % - 9.9 % ( 8.9 %) Assets Measured at Net Asset Value: Park's portfolio of equity investments in limited partnerships which provide mezzanine funding ("Partnership Investments") are valued using the NAV practical expedient in accordance with ASC 820. -158- As of December 31, 2021 and December 31, 2020, Park had Partnerships Investments with a NAV of $ 18.0 million and $ 15.4 million, respectively. As of December 31, 2021 and December 31, 2020, Park had $ 8.4 million and $ 6.2 million in unfunded commitments related to these Partnership Investments. For the years ended December 31, 2021, 2020 and 2019, Park recognized income of $ 4.5 million, $ 2.4 million and $ 4.8 million, respectively, related to these Partnership Investments. The fair value of financial instruments at December 31, 2021 and December 31, 2020, was as follows: December 31, 2021 Fair Value Measurements (In thousands) Carrying value Level 1 Level 2 Level 3 Total fair value Financial assets: Cash and money market instruments $ 219,180 $ 219,180 $ — $ — $ 219,180 Investment securities (1) 1,754,140 — 1,754,140 — 1,754,140 Other investment securities (2) 2,129 1,630 — 499 2,129 Mortgage loans held for sale 9,387 — 9,387 — 9,387 Mortgage IRLCs 333 — 333 — 333 Individually evaluated loans carried at fair value 1,103 — — 1,103 1,103 Other loans, net 6,777,102 — — 6,783,848 6,783,848 Loans receivable, net $ 6,787,925 $ — $ 9,720 $ 6,784,951 $ 6,794,671 Financial liabilities: Time deposits $ 711,660 $ — $ 714,307 $ — $ 714,307 Other 1,465 1,465 — — 1,465 Deposits (excluding demand deposits) $ 713,125 $ 1,465 $ 714,307 $ — $ 715,772 Short-term borrowings $ 238,786 $ — $ 238,786 $ — $ 238,786 Subordinated notes 188,210 — 207,912 — 207,912 Derivative financial instruments - assets: Loan interest rate swaps 1,952 — 1,952 — 1,952 Derivative financial instruments - liabilities: Fair value swap $ 226 $ — $ — $ 226 $ 226 Borrowing interest rate swap 262 — 262 — 262 Loan interest rate swaps 1,952 — 1,952 — 1,952 (1) Includes debt securities AFS. (2) Excludes FHLB stock and FRB stock which are carried at their respective redemption values, investment securities accounted for at modified cost as these investments do not have a readily determinable fair value, and Partnership Investments valued using the NAV practical expedient. -159- December 31, 2020 Fair Value Measurements (In thousands) Carrying value Level 1 Level 2 Level 3 Total fair value Financial assets: Cash and money market instruments $ 370,474 $ 370,474 $ — $ — $ 370,474 Investment securities (1) 1,059,341 — 1,059,341 — 1,059,341 Other investment securities (2) 2,511 2,026 — 485 2,511 Loans held for sale 31,666 — 31,666 — 31,666 Mortgage IRLCs 1,545 — 1,545 — 1,545 Impaired loans carried at fair value 6,924 — — 6,924 6,924 Other loans, net 7,051,975 — — 7,072,339 7,072,339 Loans receivable, net $ 7,092,110 $ — $ 33,211 $ 7,079,263 $ 7,112,474 Financial liabilities: Time deposits $ 864,573 $ — $ 870,804 $ — $ 870,804 Other 1,379 1,379 — — 1,379 Deposits (excluding demand deposits) $ 865,952 $ 1,379 $ 870,804 $ — $ 872,183 Short-term borrowings $ 342,230 $ — $ 342,230 $ — $ 342,230 Long-term debt 32,500 — 31,376 — 31,376 Subordinated notes 187,774 — 179,147 — 179,147 Derivative financial instruments - assets: Loan interest rate swaps 3,934 — 3,934 — 3,934 Derivative financial instruments - liabilities: Fair value swap $ 226 $ — $ — $ 226 $ 226 Borrowing interest rate swap 885 — 885 — 885 Loan interest rate swaps 3,934 — 3,934 — 3,934 (1) Includes debt securities AFS. (2) Excludes FHLB stock and FRB stock which are carried at their respective redemption values, investment securities accounted for at modified cost as these investments do not have a readily determinable fair value, and Partnership Investments valued using the NAV practical expedient. 28. Capital Ratios Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank holding companies. 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, Park must hold a capital conservation buffer of 2.50 % above the adequately capitalized risk-based capital ratios. The Federal Reserve Board also adopted requirements Park must maintain to be deemed "well-capitalized" and to remain a financial holding company. -160- Each of PNB and Park met all of the well-capitalized ratio guidelines applicable to it at December 31, 2021. The following table indicates the capital ratios for PNB and Park at December 31, 2021 and 2020. 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 % -161- The following table reflects various measures of capital for Park and PNB: To Be Adequately Capitalized To Be Well-Capitalized (In thousands) Actual Amount Ratio Amount Ratio Amount Ratio At December 31, 2021 Total Risk-Based Capital (to risk-weighted assets) PNB $ 937,438 12.56 % $ 597,094 8.00 % $ 746,368 10.00 % Park 1,202,225 16.05 % 599,102 8.00 % 748,878 10.00 % Tier 1 Risk-Based Capital (to risk-weighted assets) PNB $ 825,045 11.05 % $ 447,821 6.00 % $ 597,094 8.00 % Park 941,536 12.57 % 449,327 6.00 % 449,327 6.00 % Leverage Ratio (to average total assets) PNB $ 825,045 8.58 % $ 384,582 4.00 % $ 480,728 5.00 % Park 941,536 9.77 % 385,313 4.00 % N/A N/A Common Equity Tier 1 (to risk-weighted assets) PNB $ 825,045 11.05 % $ 335,866 4.50 % $ 485,139 6.50 % Park 926,536 12.37 % 336,995 4.50 % N/A N/A At December 31, 2020 Total Risk-Based Capital (to risk-weighted assets) PNB $ 891,585 12.16 % $ 586,764 8.00 % $ 733,455 10.00 % Park 1,137,305 15.43 % 589,619 8.00 % 737,023 10.00 % Tier 1 Risk-Based Capital (to risk-weighted assets) PNB $ 782,148 10.66 % $ 440,073 6.00 % $ 586,764 8.00 % Park 878,740 11.92 % 442,214 6.00 % 442,214 6.00 % Leverage Ratio (to average total assets) PNB $ 782,148 8.59 % $ 364,079 4.00 % $ 455,098 5.00 % Park 878,740 9.63 % 365,143 4.00 % N/A N/A Common Equity Tier 1 (to risk-weighted assets) PNB 782,148 10.66 % 330,055 4.50 % 476,746 6.50 % Park 863,740 11.72 % 331,661 4.50 % N/A N/A 29. Segment Information The Corporation is a financial holding company headquartered in Newark, Ohio. The reportable segment for the Corporation is its chartered national bank subsidiary, PNB (headquartered in Newark, Ohio). "All Other", which primarily consists of Park as the "Parent Company", SEPH and GFSC, is shown to reconcile the segment totals to the Consolidated Statements of Income. U.S. GAAP requires management to disclose information about the different types of business activities in which a company engages and also information on the different economic environments in which a company operates, so that the users of the financial statements can better understand a company’s performance, better understand the potential for future cash flows, and make more informed judgments about the company as a whole. Park has one reportable segment as: (i) discrete financial information is available for this reportable segment and (ii) this segment is aligned with internal reporting to Park’s Chief Executive Officer, who is the chief operating decision-maker. -162- Operating results for the year ended December 31, 2021 (In thousands) PNB All Other Total Net interest income $ 328,398 $ 1,495 $ 329,893 Recovery of credit losses ( 8,554 ) ( 3,362 ) ( 11,916 ) Other income 126,802 3,142 129,944 Other expense 266,678 16,840 283,518 Income before income taxes 197,076 ( 8,841 ) 188,235 Income tax expense (benefit) 37,615 ( 3,325 ) 34,290 Net income (loss) $ 159,461 $ ( 5,516 ) $ 153,945 Balances at December 31, 2021 Assets $ 9,538,217 $ 22,037 $ 9,560,254 Loans 6,868,935 2,187 6,871,122 Deposits 8,157,720 ( 253,192 ) 7,904,528 Operating results for the year ended December 31, 2020 (In thousands) PNB All Other Total Net interest income $ 326,375 $ 1,255 $ 327,630 Provision for (recovery of) credit losses 30,813 ( 18,759 ) 12,054 Other income 124,231 1,433 125,664 Other expense 268,938 17,657 286,595 Income before income taxes 150,855 3,790 154,645 Income tax expense (benefit) 27,125 ( 403 ) 26,722 Net income $ 123,730 $ 4,193 $ 127,923 Balances at December 31, 2020 Assets $ 9,236,915 $ 42,106 $ 9,279,021 Loans 7,165,840 11,945 7,177,785 Deposits 7,820,983 ( 248,625 ) 7,572,358 Operating results for the year ended December 31, 2019 (In thousands) PNB All Other Total Net interest income $ 293,130 $ 4,607 $ 297,737 Provision for (recovery of) credit losses 8,356 ( 2,185 ) 6,171 Other income 92,392 4,801 97,193 Other expense 237,433 26,555 263,988 Income (loss) before income taxes 139,733 ( 14,962 ) 124,771 Income tax expense (benefit) 26,133 ( 4,062 ) 22,071 Net income (loss) $ 113,600 $ ( 10,900 ) $ 102,700 Balances at December 31, 2019 Assets $ 8,521,537 $ 36,840 $ 8,558,377 Loans 6,481,644 19,760 6,501,404 Deposits 7,125,111 ( 72,499 ) 7,052,612 The operating results in the "All Other" column are used to reconcile the segment totals to the Consolidated Statements of Income. The reconciling amounts for consolidated total assets, loans and deposits consist of the elimination of intersegment borrowings, intersegment loans, intersegment deposits, and the assets of the Parent Company, SEPH and GFSC which were not eliminated. -163- The following is a reconciliation of financial information for the reportable segments to the Corporation’s consolidated totals: 2021 (In thousands) Net Interest Income Depreciation Expense Other Expense Income Taxes Assets Deposits Totals for reportable segments $ 328,398 $ 13,265 $ 253,413 $ 37,615 $ 9,538,217 $ 8,157,720 Elimination of intersegment items 1,250 — — — ( 1,413 ) ( 254,060 ) All other totals - not eliminated 245 2 16,838 ( 3,325 ) 23,450 868 Totals $ 329,893 $ 13,267 $ 270,251 $ 34,290 $ 9,560,254 $ 7,904,528 2020 (In thousands) Net Interest Income Depreciation Expense Other Expense Income Taxes Assets Deposits Totals for reportable segments $ 326,375 $ 10,803 $ 258,135 $ 27,125 $ 9,236,915 $ 7,820,983 Elimination of intersegment items 1,250 — — — ( 1,028 ) ( 250,965 ) All other totals - not eliminated 5 11 17,646 ( 403 ) 43,134 2,340 Totals $ 327,630 $ 10,814 $ 275,781 $ 26,722 $ 9,279,021 $ 7,572,358 2019 (In thousands) Net Interest Income Depreciation Expense Other Expense Income Taxes Assets Deposits Totals for reportable segments $ 293,130 $ 9,089 $ 228,344 $ 26,133 $ 8,521,537 $ 7,125,111 Elimination of intersegment items 1,250 — — — ( 18,910 ) ( 76,418 ) All other totals - not eliminated 3,357 23 26,532 ( 4,062 ) 55,750 3,919 Totals $ 297,737 $ 9,112 $ 254,876 $ 22,071 $ 8,558,377 $ 7,052,612 30. Parent Company Statements The Parent Company statements should be read in conjunction with the consolidated financial statements and the information set forth below. Investments in subsidiaries are accounted for using the equity method of accounting. Cash represents non-interest bearing deposits with PNB. Net cash provided by operating activities reflects cash payments (received from subsidiaries) partially offset by cash payments to government entities for income taxes of $ 4.3 million, $ 5.6 million and $ 5.3 million in 2021, 2020 and 2019, respectively. -164- Condensed Balance Sheets December 31, 2021 and 2020 (In thousands) 2021 2020 Assets: Cash $ 243,531 $ 248,814 Investment in subsidiaries 1,020,556 969,054 Debentures receivable from PNB 25,000 25,000 Other receivables from subsidiaries — 1,823 Other investments 3,327 5,375 Other assets 16,909 23,333 Total assets $ 1,309,323 $ 1,273,399 Liabilities: Long-term debt $ — $ 32,500 Subordinated notes 188,210 187,774 Other payables to subsidiaries — 132 Other liabilities 10,354 12,737 Total liabilities $ 198,564 $ 233,143 Total shareholders’ equity $ 1,110,759 $ 1,040,256 Total liabilities and shareholders’ equity $ 1,309,323 $ 1,273,399 Condensed Statements of Income for the years ended December 31, 2021, 2020 and 2019 (In thousands) 2021 2020 2019 Income: Dividends from subsidiaries $ 115,500 $ 97,000 $ 97,500 Interest and dividends 1,250 1,250 1,250 Other 2,016 98 4,634 Total income 118,766 98,348 103,384 Expense: Interest expense 8,887 4,311 1,950 Other, net 10,707 12,234 19,804 Total expense 19,594 16,545 21,754 Income before income taxes and equity in undistributed income of subsidiaries $ 99,172 $ 81,803 $ 81,630 Income tax benefit 4,897 4,390 4,242 Income before equity in undistributed income of subsidiaries 104,069 86,193 85,872 Equity in undistributed income of subsidiaries 49,876 41,730 16,828 Net income $ 153,945 $ 127,923 $ 102,700 Other comprehensive income (1) 9,584 15,160 40,199 Comprehensive income $ 163,529 $ 143,083 $ 142,899 (1) See Consolidated Statements of Comprehensive Income for other comprehensive income (loss) detail. -165- 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: Undistributed income of subsidiaries ( 49,876 ) ( 41,730 ) ( 16,828 ) Compensation expense for issuance of treasury shares to directors 1,676 1,274 1,325 Share-based compensation expense 6,345 5,998 4,999 (Loss) gain on equity securities, net ( 1,218 ) 245 ( 4,204 ) Decrease (increase) in other assets 8,249 6,632 ( 8,544 ) (Decrease) increase in other liabilities ( 2,407 ) ( 6,325 ) 10,006 Net cash provided by operating activities 116,714 94,017 89,454 Investing activities: Proceeds from sales of securities 934 — — Outlays for business acquisitions — — ( 28,630 ) Other, net 2,332 ( 2,621 ) 5,723 Net cash provided by (used in) investing activities 3,266 ( 2,621 ) ( 22,907 ) Financing activities: Cash dividends paid ( 74,306 ) ( 70,353 ) ( 69,113 ) Proceeds from issuance of long-term debt — 172,620 50,000 Repayment of long-term debt ( 32,500 ) ( 10,000 ) ( 7,500 ) Repurchase of treasury shares ( 16,048 ) ( 7,507 ) ( 40,535 ) Cash payment for fractional shares ( 6 ) ( 3 ) ( 3 ) Value of common shares withheld to pay employee income taxes ( 2,403 ) ( 1,002 ) ( 827 ) Net cash (used in) provided by financing activities ( 125,263 ) 83,755 ( 67,978 ) (Decrease) increase in cash ( 5,283 ) 175,151 ( 1,431 ) Cash at beginning of year 248,814 73,663 75,094 Cash at end of year $ 243,531 $ 248,814 $ 73,663 -166- 31. Revenue from Contracts with Customers All of Park's revenue from contracts with customers within the scope of ASC 606 is recognized within "Other income" in the Consolidated Statements of Income. The following table presents the Corporation's sources of other income by revenue stream and operating segment for the years ended December 31, 2021, 2020, and 2019 Year ended December 31, 2021 Revenue by Operating Segment (in thousands) PNB All Other Total Income from fiduciary activities Personal trust and agency accounts $ 10,264 $ — $ 10,264 Employee benefit and retirement-related accounts 9,705 — 9,705 Investment management and investment advisory agency accounts 12,620 — 12,620 Other 1,860 — 1,860 Service charges on deposit accounts Non-sufficient funds (NSF) fees 5,244 — 5,244 Demand deposit account (DDA) charges 3,074 — 3,074 Other 514 — 514 Other service income (1) Credit card 2,559 4 2,563 HELOC 389 — 389 Installment 148 — 148 Real estate 24,907 — 24,907 Commercial 1,280 525 1,805 Debit card fee income 25,865 — 25,865 Bank owned life insurance income (2) 4,202 695 4,897 ATM fees 2,379 — 2,379 Loss on the sale of OREO, net ( 4 ) — ( 4 ) Gain on equity securities, net (2) 3,793 1,218 5,011 Other components of net periodic pension benefit income (2) 7,946 206 8,152 Miscellaneous (3) 10,057 494 10,551 Total other income $ 126,802 $ 3,142 $ 129,944 (1) Of the $ 29.8 million of revenue included within "Other service income", approximately $ 5.3 million is within the scope of ASC 606, with the remaining $ 24.5 million consisting primarily of residential real estate loan fees which are out of scope. (2) Not within the scope of ASC 606. (3) "Miscellaneous" income includes brokerage income, safe deposit box rentals, and miscellaneous bank fees totaling $ 10.6 million, all of which are within the scope of ASC 606 . -167- Year ended December 31, 2020 Revenue by Operating Segment (in thousands) PNB All Other Total Income from fiduciary activities Personal trust and agency accounts $ 8,761 $ — $ 8,761 Employee benefit and retirement-related accounts 7,921 — 7,921 Investment management and investment advisory agency accounts 10,652 — 10,652 Other 1,539 — 1,539 Service charges on deposit accounts Non-sufficient funds (NSF) fees 4,999 — 4,999 Demand deposit account (DDA) charges 2,920 — 2,920 Other 526 — 526 Other service income (1) Credit card 2,108 4 2,112 HELOC 424 — 424 Installment 165 — 165 Real estate 32,827 62 32,889 Commercial 1,493 528 2,021 Debit card fee income 22,160 — 22,160 Bank owned life insurance income (2) 4,521 268 4,789 ATM fees 1,773 — 1,773 Gain on the sale of OREO, net 836 371 1,207 Net gain on sale of investment securities (2) 3,286 — 3,286 Gain (loss) on equity securities, net (2) 2,429 ( 247 ) 2,182 Other components of net periodic pension benefit income (2) 7,759 193 7,952 Miscellaneous (3) 7,132 254 7,386 Total other income $ 124,231 $ 1,433 $ 125,664 (1) Of the $ 37.6 million of revenue included within "Other service income", approximately $ 5.2 million is within the scope of ASC 606, with the remaining $ 32.4 million consisting primarily of residential real estate loan fees which are out of scope. (2) Not within the scope of ASC 606. (3) "Miscellaneous" income includes brokerage income, safe deposit box rentals, and miscellaneous bank fees totaling $ 7.4 million, all of which are within the scope of ASC 606. -168- Year ended December 31, 2019 Revenue by Operating Segment (in thousands) PNB All Other Total Income from fiduciary activities Personal trust and agency accounts $ 9,001 $ — $ 9,001 Employee benefit and retirement-related accounts 7,178 — 7,178 Investment management and investment advisory agency accounts 10,024 — 10,024 Other 1,565 — 1,565 Service charges on deposit accounts Non-sufficient funds (NSF) fees 7,073 — 7,073 Demand deposit account (DDA) charges 3,105 — 3,105 Other 657 — 657 Other service income (1) Credit card 2,354 7 2,361 HELOC 403 4 407 Installment 256 ( 83 ) 173 Real estate 11,167 ( 9 ) 11,158 Commercial 1,259 142 1,401 Debit card fee income 20,250 — 20,250 Bank owned life insurance income (2) 4,168 389 4,557 ATM fees 1,828 — 1,828 Loss on the sale of OREO, net ( 110 ) ( 112 ) ( 222 ) Net loss on sale of investment securities (2) ( 421 ) — ( 421 ) Gain on equity securities, net (2) 913 4,205 5,118 Other components of net periodic pension benefit income (2) 4,587 145 4,732 Miscellaneous (3) 7,135 113 7,248 Total other income $ 92,392 $ 4,801 $ 97,193 (1) Of the $ 15.5 million of revenue included within "Other service income", approximately $ 4.9 million is within the scope of ASC 606, with the remaining $ 10.6 million consisting primarily of residential real estate loan fees which are out of scope. (2) Not within the scope of ASC 606. (3) "Miscellaneous" income includes brokerage income, safe deposit box rentals, and miscellaneous bank fees totaling $ 7.2 million, all of which are within the scope of ASC 606. A description of Park's material revenue streams accounted for under ASC 606 follows: Income from fiduciary activities (gross) : Park earns fiduciary fee income and investment brokerage fees from Park's contracts with trust customers for various fiduciary and investment-related services. These fees are earned over time as the Company provides the contracted monthly and quarterly services and are generally assessed based on the market value of the trust assets. Service charges on deposit accounts and ATM fees : The Corporation earns fees from the Corporation's deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Corporation fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are generally recognized at the end of the month, representing the period over which the Corporation satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance. Other service income : Other service income includes income from (1) the sale and servicing of loans sold to the secondary market, (2) incentive income from third-party credit card issuers, and (3) loan customers for various loan-related activities and services. Income related to the sale and servicing of loans sold to the secondary market is included within Other service income, but is not within the scope of ASC 606. Services that fall within the scope of ASC 606 are recognized as revenue when the Company satisfies the Company's performance obligation to the customer. Debit card fee income : Park earns interchange fees from debit cardholder transactions conducted primarily through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, net of card network fees, concurrently with the transaction processing services provided to the cardholder. -169- Gain or loss on sale of OREO, net : The Corporation records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of delivery of an executed deed. When Park finances the sale of OREO to the buyer, the Corporation assesses whether the buyer is committed to perform the buyer's obligation under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain is recorded upon the transfer of control of the property to the buyer. In determining the gain on the sale, the Corporation adjusts the transaction price and related gain on sale if a significant financing component is present. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. No response required.