PARK NATIONAL CORP /OH/ 10-Q

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance. The forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation: • Park's ability to execute our business plan successfully and within the expected timeframe as well as our ability to manage strategic initiatives; • current and future economic and financial market conditions, either nationally or in the states in which Park and our subsidiaries do business, that may reflect deterioration in business and economic conditions, including the effects of higher unemployment rates, an acceleration in the pace of inflation, interest rate fluctuations, changes in the economy or global supply chain, supply-demand imbalances affecting local real estate prices, U.S. fiscal debt, budget and tax matters, geopolitical matters (including the impact of 58 Table of Contents the Russia-Ukraine conflict and associated sanctions and export controls), and any slowdown in global economic growth, in addition to the continuing impact of the COVID pandemic and recovery therefrom on our customers’ operations and financial condition, any of which may result in adverse impacts on the demand for loan, deposit and other financial services, delinquencies, defaults and counterparties' inability to meet credit and other obligations and the possible impairment of collectability of loans; • factors that can impact the performance of our loan portfolio, including changes in real estate values and liquidity in our primary market areas, the financial health of our commercial borrowers and the success of construction projects that we finance, including any loans acquired in acquisition transactions; • the effect of monetary and other fiscal policies (including the impact of money supply, market interest rate policies and policies impacting inflation, of the Federal Reserve Board, the U.S. Treasury and other governmental agencies) as well as disruption in the liquidity and functioning of U.S. financial markets, may adversely impact prepayment penalty income, mortgage banking income, income from fiduciary activities, the value of securities, deposits and other financial instruments, in addition to the loan demand and the performance of our loan portfolio, and the interest rate sensitivity of our consolidated balance sheet as well as reduce net interest margins; • changes in the federal, state, or local tax laws may adversely affect the fair values of net deferred tax assets and obligations of state and political subdivisions held in Park's investment securities portfolio and otherwise negatively impact our financial performance; • the impact of the changes in federal, state and local governmental policy, including the regulatory landscape, capital markets, elevated government debt, potential changes in tax legislation that may increase tax rates, infrastructure spending and social programs; • changes in laws or requirements imposed by Park's regulators impacting Park's capital actions, including dividend payments and stock repurchases; • changes in consumer spending, borrowing and saving habits, whether due to changes in retail distribution strategies, consumer preferences and behaviors, changes in business and economic conditions, legislative and regulatory initiatives, or other factors may be different than anticipated; • changes in customers', suppliers', and other counterparties' performance and creditworthiness, and Park's expectations regarding future credit losses and our allowance for credit losses, may be different than anticipated due to the continuing impact of and the various responses to inflationary pressures; • Park may have more credit risk and higher credit losses to the extent there are loan concentrations by location or industry of borrowers or collateral; • the volatility from quarter to quarter of mortgage banking income, whether due to interest rates, demand, the fair value of mortgage loans, or other factors; • the adequacy of our internal controls and risk management program in the event of changes in the market, economic, operational (including those which may result from our associates working remotely), asset/liability repricing, legal, compliance, strategic, cybersecurity, liquidity, credit and interest rate risks associated with Park's business; • competitive pressures among financial services organizations could increase significantly, including product and pricing pressures (which could in turn impact our credit spreads), changes to third-party relationships and revenues, changes in the manner of providing services, customer acquisition and retention pressures, and Park's ability to attract, develop and retain qualified banking professionals; • uncertainty regarding the nature, timing, cost and effect of changes in banking regulations or other regulatory or legislative requirements affecting the respective businesses of Park and our subsidiaries, including major reform of the regulatory oversight structure of the financial services industry and changes in laws and regulations concerning taxes, FDIC insurance premium levels, pensions, bankruptcy, consumer protection, rent regulation and housing, financial accounting and reporting, environmental protection, insurance, bank products and services, bank and bank holding company capital and liquidity standards, fiduciary standards, securities and other aspects of the financial services industry, specifically the reforms provided for in the CARES Act and the follow-up legislation in the Consolidated Appropriations Act, 2021, the American Rescue Plan Act of 2021, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and the Basel III regulatory capital reforms, as well as regulations already adopted and which may be adopted in the future by the relevant regulatory agencies, including the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve Board, to implement the provisions of the CARES Act and the follow-up legislation in the Consolidated Appropriations Act, 2021, the provisions of the American Rescue Plan Act of 2021, the provisions of the Dodd-Frank Act, and the Basel III regulatory capital reforms; • Park's ability to meet heightened supervisory requirements and expectations; • the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board (the "FASB"), the SEC, the Public Company Accounting Oversight Board and other regulatory agencies, may adversely affect Park's reported financial condition or results of operations; • Park's assumptions and estimates used in applying critical accounting policies and modeling, including under the CECL model, which may prove unreliable, inaccurate or not predictive of actual results; • the possibility that future credit losses may be higher than currently expected due to changes in economic assumptions; • the impact of Park's ability to anticipate and respond to technological changes on Park's ability to respond to customer needs and meet competitive demands; • operational issues stemming from and/or capital spending necessitated by the potential need to adapt to industry changes in information technology systems on which Park and our subsidiaries are highly dependent; • the ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks, including those of Park's third-party vendors and other service providers, which may prove inadequate, and could adversely affect customer confidence in Park and/or result in Park incurring a financial loss; 59 Table of Contents • a failure in or breach of Park's operational or security systems or infrastructure, or those of our third-party vendors and other service providers, resulting in failures or disruptions in customer account management, general ledger, deposit, loan, or other systems, including as a result of cyber attacks; • the impact on Park's business and operating results of any costs associated with obtaining rights in intellectual property claimed by others and of the adequacy of Park's intellectual property protection in general; • the existence or exacerbation of general geopolitical instability and uncertainty as well as the effect of trade policies (including the impact of potential or imposed tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulations, closing of border crossings and changes in the relationship of the U.S. and its global trading partners); • the impact on financial markets and the economy of any changes in the credit ratings of the U.S. Treasury obligations and other U.S. government-backed debt, as well as issues surrounding the levels of U.S., European and Asian government debt and concerns regarding the growth rates and financial stability of certain sovereign governments, supranationals and financial institutions in Europe and Asia and the risk they may face difficulties servicing their sovereign debt; • the effect of a fall in stock market prices on Park's asset and wealth management businesses; • our litigation and regulatory compliance exposure, including the costs and effects of any adverse developments in legal proceedings or other claims, the costs and effects of unfavorable resolution of regulatory and other governmental examinations or other inquiries, and liabilities and business restrictions resulting from litigation and regulatory investigations; • continued availability of earnings and excess capital sufficient for the lawful and prudent declaration of dividends; • the impact on Park's business, personnel, facilities or systems of losses related to acts of fraud, scams and schemes of third parties; • the impact of widespread natural and other disasters, pandemics (including the COVID pandemic), dislocations, regional or national protests and civil unrest (including any resulting branch closures or damages), military or terrorist activities or international hostilities (especially in light of the Russia-Ukraine conflict) on the economy and financial markets generally and on us or our counterparties specifically; • a worsening of the U.S. economy due to financial, political, or other shocks; • the effect of healthcare laws in the U.S. and potential changes for such laws, especially in light of the COVID pandemic, which may increase our healthcare and other costs and negatively impact our operations and financial results; • risk and uncertainties associated with Park's entry into new geographic markets with our most recent acquisitions, including expected revenue synergies and cost savings from recent acquisitions not being fully realized or realized within the expected time frame; • uncertainty surrounding the transition from the LIBOR to an alternate reference rate; • a continuation of recent turmoil in the financial services industry, and the impact of responsive measures to mitigate and manage such turmoil, including potential increased supervisory and regulatory actions and costs; • and other risk factors relating to the financial services industry as detailed from time to time in Park's reports filed with the SEC including those described in "Item 1A. Risk Factors" of Part I of Park's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and "Item 1A. Risk Factors" of Part II of this Quarterly Report on Form 10-Q. Park does not undertake, and specifically disclaims any obligation, to publicly release the results of any revisions that may be made to update any forward-looking statement to reflect the events or circumstances after the date on which the forward-looking statement was made, or reflect the occurrence of unanticipated events, except to the extent required by applicable law. Non-U.S. GAAP Financial Measures This Management's Discussion and Analysis (or "MD&A") contains non-U.S. GAAP financial measures where management believes it to be helpful in understanding Park’s results of operations or financial position. Where non-U.S. GAAP financial measures are used, the comparable U.S. GAAP financial measure, as well as the reconciliation to the comparable U.S. GAAP financial measure, can be found herein. Items Impacting Comparability of Period Results From time to time, revenue, expenses and/or taxes are impacted by items judged by management of Park to be outside of ordinary banking activities and/or by items that, while they may be associated with ordinary banking activities, are so unusually large that their outsized impact is believed by management of Park at that time to be infrequent or short-term in nature. Most often, these items impacting comparability of period results are due to merger and acquisition activities and revenue and expenses related to former Vision Bank loan relationships. In other cases, they may result from management's decisions associated with significant corporate actions outside of the ordinary course of business. Even though certain revenue and expense items are naturally subject to more volatility than others due to changes in market and economic environment conditions, as a general rule volatility alone does not result in the inclusion of an item as one impacting comparability of period results. For example, changes in the provision for / (recovery of) credit losses (aside from those related to former Vision Bank loan relationships), gains (losses) on equity securities, net, and asset valuation adjustments, reflect ordinary banking activities and are, therefore, typically excluded from consideration as items impacting comparability of period results. 60 Table of Contents Management believes the disclosure of items impacting comparability of period results provides a better understanding of Park's performance and trends and allows management to ascertain which of such items, if any, to include or exclude from an analysis of Park's performance; i.e., within the context of determining how that performance differed from expectations, as well as how, if at all, to adjust estimates of future performance taking such items into account. Items impacting comparability of the results of particular periods are not intended to be a complete list of items that may materially impact current or future period performance. Non-U.S. GAAP Financial Measures Park's management uses certain non-U.S. GAAP financial measures to evaluate Park's performance. Specifically, management reviews the return on average tangible equity, the return on average tangible assets, the tangible equity to tangible assets ratio, tangible book value per common share and pre-tax, pre-provision net income. Management has included in the tables included within the "Items Impacting Comparability" section of this MD&A information relating to the annualized return on average tangible equity, the annualized return on average tangible assets, the tangible equity to tangible assets ratio, tangible book value per common share and pre-tax, pre-provision net income for the three months ended and at March 31, 2023 and March 31, 2022. For the purpose of calculating the annualized return on average tangible equity, a non-U.S.GAAP financial measure, net income for each period is divided by average tangible equity during the period. Average tangible equity equals average shareholders' equity during the applicable period less average goodwill and other intangible assets during the applicable period. For the purpose of calculating the annualized return on average tangible assets, a non-U.S. GAAP financial measure, net income for each period is divided by average tangible assets during the period. Average tangible assets equals average assets during the applicable period less average goodwill and other intangible assets during the applicable period. For the purpose of calculating the tangible equity to tangible assets ratio, a non-U.S. GAAP financial measure, tangible equity is divided by tangible assets. Tangible equity equals total shareholders' equity less goodwill and other intangible assets, in each case at period end. Tangible assets equal total assets less goodwill and other intangible assets, in each case at period end. For the purpose of calculating tangible book value per common share, a non-U.S. GAAP financial measure, tangible equity is divided by the number of common shares outstanding, in each case at period end. For the purpose of calculating pre-tax, pre-provision net income, a non-U.S. GAAP financial measure, income taxes and the provision for (recovery of) credit losses are added back to net income, in each case during the applicable period. Management believes that the disclosure of the annualized return on average tangible equity, the annualized return on average tangible assets, the tangible equity to tangible assets ratio, tangible book value per common share and pre-tax, pre-provision net income presents additional information to the reader of the condensed consolidated financial statements, which, when read in conjunction with the condensed consolidated financial statements prepared in accordance with U.S. GAAP, assists in analyzing Park's operating performance, ensures comparability of operating performance from period to period, and facilitates comparisons with the performance of Park's peer financial holding companies and bank holding companies, while eliminating certain non-operational effects of acquisitions. In the tables included within the "Items Impacting Comparability" section of this MD&A, Park has provided a reconciliation of average tangible equity to average shareholders' equity, average tangible assets to average assets, tangible equity to total shareholders' equity, tangible assets to total assets, and pre-tax, pre-provision net income to net income solely for the purpose of complying with SEC Regulation G and not as an indication that the annualized return on average tangible equity, the annualized return on average tangible assets, the tangible equity to tangible assets ratio, tangible book value per common share and pre-tax, pre-provision net income are substitutes for the annualized return on average equity, the annualized return on average assets, the total shareholders' equity to total assets ratio, book value per common share and net income, respectively, as determined in accordance with U.S. GAAP. FTE (fully taxable equivalent) Financial Measures Interest income, yields, and ratios on a FTE basis are considered non-U.S. GAAP financial measures. Management believes net interest income on a FTE basis provides an insightful picture of the interest margin for comparison purposes. The FTE basis also allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. The FTE basis assumes a federal corporate income tax rate of 21 percent. In the tables included within the "Items Impacting Comparability" section of this MD&A, Park has provided a reconciliation of FTE interest income solely for the purpose of complying with SEC Regulation G and not as an indication that FTE interest income, yields and ratios are substitutes for interest income, yields and ratios, as determined in accordance with U.S. GAAP. Paycheck Protection Program ("PPP") Loans Park originated an aggregate of $764.7 million in loans as part of the PPP. For its assistance in making and retaining these loans, Park received an aggregate of $33.1 million in fees from the SBA. These loans are not typical of Park's loan portfolio in that they are part of a specific government program to support businesses during the COVID pandemic and are 100% guaranteed by SBA. As such, management considers growth in the loan portfolio excluding PPP loans, the total allowance for 61 Table of Contents credit losses to total loans ratio (excluding PPP loans), and general reserve on collectively evaluated loans as a percentage of total collectively evaluated loans (excluding PPP loans) in addition to the related U.S. GAAP metrics which are not adjusted for PPP loans. Critical Accounting Policies Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2022 Form 10-K lists significant accounting policies used in the development and presentation of Park’s consolidated financial statements. The accounting and reporting policies of Park conform with U.S. GAAP and general practices within the financial services industry. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. Recent bank failures have called into question the stability of the financial services industry. While Park is well capitalized and has significant available liquidity, the effects of these failures and potential future failures may meaningfully impact significant estimates such as the allowance for credit losses, goodwill, and pension plan obligations and related expenses. Allowance for Credit Losses: Park believes the determination of the allowance for credit losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance for credit losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses over the life of an asset or an off-balance sheet credit exposure. Management’s determination of the adequacy of the allowance for credit losses is based on periodic evaluations of past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. However, this evaluation has subjective components requiring material estimates, including expected default probabilities, the expected LGD, the amounts and timing of expected future cash flows on individually evaluated loans, and estimated losses based on historical loss experience and forecasted economic conditions. All of these factors may be susceptible to significant change. To the extent that actual results differ from management estimates, additional provisions for credit losses may be required that would adversely impact earnings in future periods. One of the most significant judgments impacting the ACL estimate is the economic forecast for Ohio unemployment, Ohio GDP, and Ohio HPI. Changes in the economic forecast could significantly affect the estimated credit losses which could potentially lead to materially different allowance levels from one reporting period to the next. In calculating the ACL, management weighs several different scenarios, including a baseline (most likely) scenario and an adverse scenario. To create hypothetical sensitivity analyses, management calculated a quantitative allowance using a 100% weighting applied to a baseline scenario and a quantitative allowance using a 100% weighting applied to an adverse scenario. The adverse scenario assumes among other things that: (1) the military conflict between Russia and Ukraine persists longer than anticipated worsening supply-chain conditions and increasing shortages of many goods; (2) supply-chain shortages weaken manufacturing; (3) inflation remains elevated, though slightly below the baseline amid persistent shortages and concerns about a wage price spiral; (4) the Federal Reserve Board initially keeps the fed funds rate elevated, though a bit less than in the baseline because of weakening economy; (5) recent bank failures raise fears of further collapse in the banking industry, reducing consumer confidence and causing banks to tighten lending standards; and (6) the economy falls into recession in the second quarter of 2023. The adverse scenario forecasts Ohio unemployment for the next twelve months to range from 6.5% to 9.1%. Excluding consideration of general reserve adjustments, this sensitivity analysis would result in a hypothetical increase in Park's ACL of $27.7 million as of March 31, 2023 if only the adverse scenario was used. Excluding consideration of general reserve adjustments, a corresponding $27.7 million decrease in Park's ACL would occur in a hypothetical scenario if only the baseline (most likely) scenario was used. Refer to the "Credit Metrics and Provision for (Recovery of) Credit Losses" section of this MD&A for additional discussion. Goodwill: Management believes that the accounting for goodwill also involves a higher degree of judgment than most other significant accounting policies. U.S. GAAP establishes standards for the impairment assessment of goodwill. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in each business acquired. Park’s goodwill, as of March 31, 2023, relates to the value inherent in the financial services industry and that value is dependent upon the ability of Park’s national bank subsidiary, PNB, to provide quality, cost-effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base, the inability to deliver cost-effective services over sustained periods or significant credit problems could lead to impairment of goodwill that could, in turn, adversely impact earnings in future periods. 62 Table of Contents U.S. GAAP requires an annual evaluation of goodwill for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Park evaluates goodwill for impairment during the second quarter of each year, with financial data as of the immediately preceding March 31. Based on the qualitative analysis performed as of April 1, 2022, the Company determined that goodwill for Park's reporting unit, PNB, was not impaired. The fair value of the goodwill, which resides on the books of PNB, is evaluated for potential impairment by reviewing the past and projected operating results for PNB, deposit and loan totals for PNB and financial services industry comparable information. Pension Plan: The determination of pension plan obligations and related expenses requires the use of assumptions to estimate the amount of benefits that employees will earn while working, as well as the present value of those benefits. Annual pension expense is principally based on four components: (1) the value of benefits earned by employees for working during the year (service cost), (2) the increase in the liability due to the passage of time (interest cost), and (3) other gains and losses, reduced by (4) the expected return on plan assets for our pension plan. Significant assumptions used to measure our annual pension expense include: • the interest rate used to determine the present value of liabilities (discount rate); • certain employee-related factors, such as turnover, retirement age and mortality; • the expected return on assets in our funded pension plan; and • the rate of salary increases where benefits are based on earnings. Our assumptions reflect our historical experience and management’s best judgment regarding future expectations. Due to the significant management judgment involved, our assumptions could have a material impact on the measurement of our pension plan expense and obligation. 63 Table of Contents Comparison of Results of Operations For the Three Months Ended March 31, 2023 and 2022 Summary Discussion of Results Net income for the three months ended March 31, 2023 was $33.7 million, compared to $38.9 million for the first quarter of 2022. Diluted earnings per common share were $2.07 for the first quarter of 2023, compared to $2.38 for the first quarter of 2022. Weighted average diluted common shares outstanding were 16,324,823 for the first quarter of 2023, compared to 16,331,031 weighted average diluted common shares outstanding for the first quarter of 2022. Liquidity and Capital Park continues to maintain strong capital and liquidity. Funds are available from a number of sources, including the capital markets, the investment securities portfolio, the core deposit base, FHLB borrowings and the capability to securitize or package loans for sale. The most easily accessible forms of liquidity, Fed Funds Sold, off balance sheet deposits, unpledged investment securities and available FHLB borrowing capacity, totaled $2.74 billion at March 31, 2023. Park's debt securities portfolio is classified as available-for-sale ("AFS") and these debt securities are available to be sold in the future in response to Park'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 loss, net of applicable income taxes. The table below provides additional detail on Park's debt securities portfolio and capital position. (Dollars in thousands) March 31, 2023 December 31, 2022 March 31, 2022 % change from 12/31/22 % change from 03/31/22 Net unrealized losses on debt securities 105,510 121,156 43,809 (12.91) % 140.84 % Net unrealized losses on debt securities as a percentage of period end total assets 1.07 % 1.23 % 0.46 % (13.01) % 132.61 % Total shareholders' equity / Period end total assets 10.98 % 10.85 % 11.24 % 1.20 % (2.31) % Tangible equity / Tangible assets (1) 9.46 % 9.33 % 9.67 % 1.39 % (2.17) % (1) Tangible equity equals total shareholders' equity less goodwill and other intangible assets, in each case at period end. Tangible assets equal total assets less goodwill and other intangible assets, in each case at period end. Park's deposits grew during the COVID pandemic and normalized throughout 2022. In order to manage the impact of this growth on its balance sheet, Park has utilized a program where certain deposit balances are transferred off balance sheet while maintaining the customer relationship. Park is able to increase or decrease the amount off balance sheet based on its balance sheet management strategies and liquidity needs. The balance of deposits transferred off balance sheet has declined as deposit 64 Table of Contents balances have returned to normalized levels. The table below breaks out the change in deposit balances, by deposit type, for Park National Corporation. (Dollars in thousands) March 31, 2023 December 31, 2022 December 31, 2021 December 31, 2020 December 31, 2019 Retail Deposits Non-interest bearing deposits $ 1,176,545 $ 1,193,807 $ 1,195,530 $ 1,077,107 $ 801,035 Transaction accounts 939,026 994,717 1,004,532 900,093 760,640 Savings 1,702,824 1,744,713 1,669,373 1,427,687 1,461,347 Certificates of deposit 445,552 455,157 546,793 620,965 725,017 Total retail deposits $ 4,263,947 $ 4,388,394 $ 4,416,228 $ 4,025,852 $ 3,748,039 $ change from prior period end $ (124,447) $ (27,834) $ 390,376 $ 277,813 % change from prior period end (2.8) % (0.6) % 9.7 % 7.4 % Commercial Deposits Non-interest bearing deposits $ 1,745,697 $ 1,880,469 $ 1,870,889 $ 1,649,992 $ 1,158,900 Transaction accounts 1,231,790 993,388 498,344 481,386 868,102 Savings 966,712 873,176 954,200 1,171,521 863,458 Certificates of deposit 86,298 99,288 164,867 243,607 414,113 Total commercial deposits $ 4,030,497 $ 3,846,321 $ 3,488,300 $ 3,546,506 $ 3,304,573 $ change from prior period end $ 184,176 $ 358,021 $ (58,206) $ 241,933 % change from prior period end 4.8 % 10.3 % (1.6) % 7.3 % Total deposits 8,294,444 8,234,715 7,904,528 7,572,358 7,052,612 $ change from prior period end $ 59,729 $ 330,187 $ 332,170 $ 519,746 % change from prior period end 0.7 % 4.2 % 4.4 % 7.4 % Off balance sheet deposits 164,600 195,937 983,053 710,101 — Total deposits including off balance sheet deposits $ 8,459,044 $ 8,430,652 $ 8,887,581 $ 8,282,459 $ 7,052,612 $ change from prior period end $ 28,392 $ (456,929) $ 605,122 $ 1,229,847 % change from prior period end 0.3 % (5.1) % 7.3 % 17.4 % During the three months ended March 31, 2023, total deposits including off balance sheet deposits increased by $28.4 million, or 0.3%. This increase consisted of a $184.2 million increase in total commercial deposits offset by a $124.4 million decrease in total retail deposits and a $31.3 million decrease in off balance sheet deposits. Of the $184.2 million increase in total commercial deposits, $182.9 million was a result of an increase in public fund deposits. This increase is consistent with historical seasonality. As of March 31, 2023, Park had approximately $1.5 billion of uninsured deposits, which was 18.6% of total deposits. Uninsured deposits of $1.5 billion included $288 million of deposits which were over $250,000 but were fully collateralized by Park's investment securities portfolio. 65 Table of Contents Financial Results by Segment The table below reflects the net income (loss) by segment for the first quarters (the three months ended March 31) of 2023 and 2022 and for the years ended December 31, 2022 and 2021. Park's segments include The Park National Bank ("PNB") and "All Other" which primarily consists of Park as the "Parent Company", Guardian Financial Services Company ("GFSC") and SE Property Holdings, LLC ("SEPH"). (In thousands) Q1 2023 Q1 2022 2022 2021 PNB $ 36,269 $ 41,468 $ 143,243 $ 159,461 All Other (2,536) (2,593) 5,108 (5,516) Total Park $ 33,733 $ 38,875 $ 148,351 $ 153,945 Highlights from the three-month periods ended March 31, 2023 and 2022 included: • Net income for the three months ended March 31, 2023 of $33.7 million represented a $5.1 million, or 13.2%, decrease compared to $38.9 million for the three months ended March 31, 2022 and a $649,000, or 2.0%, increase compared to $33.1 million for the three months ended December 31, 2022. • Pre-tax, pre-provision net income for the three months ended March 31, 2023 of $40.1 million represented a $1.9 million, or 4.5%, decrease compared to $42.0 million for the three months ended March 31, 2022 and a $3.3 million, or 7.5%, decrease compared to $43.3 million for the three months ended December 31, 2022. • During the three months ended March 31, 2023, Park recorded interest income of $26,000 related to PPP loans, compared to $1.6 million for the three months ended March 31, 2022 and $78,000 for the three months ended December 31, 2022. • PNB loans outstanding at March 31, 2023 increased 4.0%, compared to at March 31, 2022, and decreased 0.7% compared to at December 31, 2022. • Park's loan portfolio reflected continued good credit quality with net loan recoveries as a percentage of average loans of 0.00% for the three months ended March 31, 2023, compared to net loan charge-offs as a percentage of average loans of 0.09% for the three months ended December 31, 2022, and net loan recoveries as a percentage of average loans of 0.02% for the three months ended March 31, 2022. Net income for each of the three months ended March 31, 2023 and March 31, 2022 included several items of income and expense that impacted comparability of period results. These items are detailed in the "Items Impacting Comparability" section within this MD&A. The following discussion provides additional information regarding the PNB segment, followed by additional information regarding All Other. The Park National Bank (PNB) The table below reflects PNB's net income for the first quarters (the three months ended March 31) of 2023 and 2022 and for the years ended December 31, 2022 and 2021. (In thousands) Q1 2023 Q1 2022 2022 2021 Net interest income $ 93,589 $ 79,372 $ 350,646 $ 328,398 Provision for (recovery of) credit losses 915 (4,547) 5,834 (8,554) Other income 24,262 31,247 115,211 126,802 Other expense 72,997 64,216 283,670 266,678 Income before income taxes $ 43,939 $ 50,950 $ 176,353 $ 197,076 Income tax expense 7,670 9,482 33,110 37,615 Net income $ 36,269 $ 41,468 $ 143,243 $ 159,461 Net interest income of $93.6 million for the three months ended March 31, 2023 represented a $14.2 million, or 17.9%, increase compared to $79.4 million for the three months ended March 31, 2022. The increase was a result of a $29.3 million increase in interest income, partially offset by a $15.1 million increase in interest expense. 66 Table of Contents The $29.3 million increase in interest income was due to a $18.7 million increase in interest income on loans and a $10.6 million increase in investment income. The $18.7 million increase in interest income on loans was primarily the result of a $271.3 million increase in average loans, from $6.83 billion for the three months ended March 31, 2022 to $7.10 billion for the three months ended March 31, 2023, as well as an increase in the yield on loans, which increased 91 basis points to 5.21% for the three months ended March 31, 2023, compared to 4.30% for the three months ended March 31, 2022. The $10.6 million increase in investment income was partially the result of a $28.4 million increase in average investments, including money market instruments, from $2.12 billion for the three months ended March 31, 2022 to $2.15 billion for the three months ended March 31, 2023. The increase in investment income was also impacted by an increase in the yield on investments, which increased 198 basis points to 3.77% for the three months ended March 31, 2023, compared to 1.79% for the three months ended March 31, 2022. The $15.1 million increase in interest expense was due to a $14.5 million increase in interest expense on deposits, as well as a $581,000 increase in interest expense on borrowings. The increase in interest expense on deposits was the result of a $306.8 million increase in average on-balance sheet interest bearing deposits from $5.17 billion for the three months ended March 31, 2022, to $5.48 billion for the three months ended March 31, 2023 as well as an increase in the cost of deposits of 107 basis points, from 0.08% for the three months ended March 31, 2022 to 1.15% for the three months ended March 31, 2023. The increase in on-balance sheet interest bearing deposits was due to an increase in transaction accounts, which was partially offset by decreases in both savings and time deposits. During the three months ended March 31, 2023 and 2022, Park made the decision to continue its participation in a program to transfer deposits off-balance sheet in order to manage growth of the balance sheet. The provision for credit losses of $915,000 for the three months ended March 31, 2023 represented a difference of $5.5 million, compared to a recovery of credit losses of $4.5 million for the three months ended March 31, 2022. Refer to the “Credit Metrics and Provision for (Recovery of) Credit Losses” section for additional details regarding the level of the provision for (recovery of) credit losses recognized in each period presented above. Other income of $24.3 million for the three months ended March 31, 2023 represented a decrease of $7.0 million, or 22.4%, compared to $31.2 million for the three months ended March 31, 2022. The $7.0 million decrease was primarily related to (i) a $2.5 million change in (loss) gain on equity securities, net, from a $2.2 million gain for the three months ended March 31, 2022 to a $307,000 loss for the three months ended March 31, 2023; (ii) a $2.3 million decrease in other service income, which was primarily due to declines in fee income from mortgage loan originations and mortgage servicing rights, partially offset increases in investor rate locks and mortgage loans held for sale; (iii) a $1.4 million decrease in other miscellaneous income, which was primarily due to decreases in the net gain on the sale of other assets and decreases in other fee income; and (iv) a $1.1 million decrease in other components of net periodic benefit income. These decreases were partially offset by a $330,000 increase in debit card fee income. A summary of mortgage loan originations for the first quarters of 2023 and 2022 and the years ended December 31, 2022 and 2021 follows. (In thousands) Q1 2023 Q1 2022 2022 2021 Mortgage Loan Origination Volume Sold $ 13,756 $ 69,053 $ 159,142 $ 555,278 Portfolio 32,743 53,498 263,287 284,686 Construction 13,124 32,928 120,794 119,555 Service released 1,576 4,660 14,738 13,802 Total mortgage loan originations $ 61,199 $ 160,139 $ 557,961 $ 973,321 Refinances as a % of Total Mortgage Loan Originations 24.7 % 41.7 % 29.4 % 54.2 % Total mortgage loan originations decreased $98.9 million, or 61.8%, to $61.2 million for the three months ended March 31, 2023 compared to $160.1 million for the three months ended March 31, 2022. 67 Table of Contents The table below reflects PNB's total other expense for the three months ended March 31, 2023 and 2022. (Dollars in thousands) Q1 2023 Q1 2022 $ change % change Other expense: Salaries $ 33,833 $ 29,320 $ 4,513 15.4 % Employee benefits 10,799 10,413 386 3.7 % Occupancy expense 3,343 3,230 113 3.5 % Furniture and equipment expense 3,245 2,936 309 10.5 % Data processing fees 8,680 7,423 1,257 16.9 % Professional fees and services 5,679 4,698 981 20.9 % Marketing 1,296 1,315 (19) (1.4) % Insurance 1,810 1,400 410 29.3 % Communication 1,017 874 143 16.4 % State tax expense 1,129 1,123 6 0.5 % Amortization of intangible assets 327 402 (75) (18.7) % Miscellaneous 1,839 1,082 757 70.0 % Total other expense $ 72,997 $ 64,216 $ 8,781 13.7 % Total other expense of $73.0 million for the three months ended March 31, 2023 represented an increase of $8.8 million, or 13.7%, compared to $64.2 million for the three months ended March 31, 2022. The increase in salaries expense was primarily related to increases in base salary expense, incentive compensation expense and share-based compensation expense, partially offset by a decrease in additional compensation expense. The increase in employee benefits expense was primarily related to increases in group insurance expense and payroll tax expense, partially offset by a decrease in retirement benefit expense. The increase in furniture and equipment expense was primarily related to increases in depreciation expense and maintenance and repairs on equipment expense. The increase in data processing fees was primarily related to increases in software data processing expense and debit card processing expense. The increase in professional fees and services expense was primarily due to increases in other fees, temporary wages, legal expense and directors' fees. The increase in insurance expense was due to an increase in FDIC insurance assessment expense. The increase in miscellaneous expense was due to increased expense for the allowance for unfunded lines of credit and increased training and travel-related expenses, which were partially offset by a decrease in operating lease depreciation expense. 68 Table of Contents The table below provides certain balance sheet information and financial ratios for PNB as of or for the three months ended March 31, 2023 and 2022 and as of or for the year ended December 31, 2022. (Dollars in thousands) March 31, 2023 December 31, 2022 March 31, 2022 % change from 12/31/22 % change from 03/31/22 Loans 7,093,498 7,141,362 6,820,090 (0.67) % 4.01 % Loans less PPP loans (1) 7,090,053 7,137,156 6,782,666 (0.66) % 4.53 % Allowance for credit losses 85,941 85,370 78,808 0.67 % 9.05 % Net loans 7,007,557 7,055,992 6,741,282 (0.69) % 3.95 % Investment securities 1,774,137 1,796,613 1,817,493 (1.25) % (2.39) % Total assets 9,817,967 9,815,951 9,544,545 0.02 % 2.86 % Total deposits 8,583,204 8,534,320 8,255,304 0.57 % 3.97 % Average assets (2) 10,021,362 10,011,932 9,798,555 0.09 % 2.27 % Efficiency ratio (3) 61.46 % 60.43 % 57.63 % 1.70 % 6.65 % Return on average assets (4) 1.47 % 1.43 % 1.72 % 2.80 % (14.53) % (1) Excludes $3.4 million, $4.2 million and $37.4 million of PPP loans at March 31, 2023, December 31, 2022 and March 31, 2022. (2) Average assets for the three months ended March 31, 2023 and 2022 and for the year ended December 31, 2022. (3) Efficiency ratio is calculated by dividing total other expense by the sum of fully taxable equivalent net interest income and other income. Fully taxable equivalent net interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustments were $926,000 for the three months ended March 31, 2023, $3.5 million for the year ended December 31 2022 and $819,000 for the three months ended March 31 2022. (4) Annualized for the three months ended March 31, 2023 and 2022. Loans outstanding at March 31, 2023 were $7.09 billion, compared to (i) $7.14 billion at December 31, 2022, a decrease of $47.9 million, and (ii) $6.82 billion at March 31, 2022, an increase of $273.4 million. Excluding $3.4 million, $4.2 million and $37.4 million of PPP loans at March 31, 2023, December 31, 2022 and March 31, 2022, respectively, loans outstanding were $7.09 billion at March 31, 2023, compared to (i) $7.14 billion at December 31, 2022, a decrease of $47.1 million, and (ii) $6.78 billion at March 31, 2022, an increase of $307.4 million. The table below breaks out the change in loans outstanding, by loan type. (Dollars in thousands) March 31, 2023 December 31, 2022 March 31, 2022 $ change from 12/31/22 % change from 12/31/22 $ change from 3/31/22 % change from 3/31/22 Home equity $ 164,736 $ 167,232 $ 159,667 $ (2,496) (1.5) % $ 5,069 3.2 % Installment 1,914,781 1,921,059 1,685,627 (6,278) (0.3) % 229,154 13.6 % Real estate 1,210,045 1,195,037 1,126,666 15,008 1.3 % 83,379 7.4 % Commercial (excluding PPP loans) (1) 3,800,284 3,850,477 3,807,310 (50,193) (1.3) % (7,026) (0.2) % PPP loans 3,445 4,206 37,424 (761) (18.1) % (33,979) (90.8) % Other 207 3,351 3,396 (3,144) (93.8) % (3,189) (93.9) % Total loans $ 7,093,498 $ 7,141,362 $ 6,820,090 (47,864) (0.7) % 273,408 4.0 % Total loans (excluding PPP loans) (1) $ 7,090,053 $ 7,137,156 $ 6,782,666 $ (47,103) (0.7) % $ 307,387 4.5 % (1) Excludes $3.4 million of PPP loans at March 31, 2023, $4.2 million of PPP loans at December 31, 2022, and $37.4 million of PPP loans at March 31, 2022. PNB's allowance for credit losses was $85.9 million at March 31, 2023, compared to (i) $85.4 million at December 31, 2022, an increase of $571,000, or 0.7%, and (ii) $78.9 million at March 31, 2022, an increase of $7.1 million, or 9.1%. Net charge-offs were $727,000, or 0.04% of total average loans, for the three months ended March 31, 2023 and were $3.6 million, or 0.05% of total average loans, for the year ended December 31 2022. Net recoveries were $245,000, or 0.01% of total average loans, for the three months ended March 31, 2022. Refer to the “Credit Metrics and Provision for (Recovery of) Credit Losses” section for additional information regarding PNB's loan portfolio and the level of provision for (recovery of) credit losses recognized in each period presented. 69 Table of Contents Total deposits at March 31, 2023 were $8.58 billion, compared to (i) $8.53 billion at December 31, 2022, an increase of $48.9 million, or 0.6%, and (ii) $8.26 billion at March 31, 2022, an increase of $327.9 million, or 4.0%. During the three months ended March 31, 2023 and 2022 and the year ended December 31, 2022, Park made the decision to continue participation in a program to transfer deposits off-balance sheet in order to manage growth of the balance sheet, as deposits increased significantly throughout the COVID pandemic. At March 31, 2023, December 31, 2022 and March 31, 2022, Park had $164.6 million, $195.9 million, and $1,149.2 million, respectively, in deposits which were off-balance sheet. Total deposits would have increased $17.5 million, or 0.2%, compared to at December 31, 2022 had the $164.6 million and $195.9 million in deposits remained on the balance sheet at the respective dates. Total deposits would have decreased $656.7 million, or 7.0%, compared to at March 31, 2022 had the $164.6 million and $1,149.2 million in deposits remained on the balance sheet at the respective dates. The table below breaks out the change in deposit balances, by deposit type. (Dollars in thousands) March 31, 2023 December 31, 2022 March 31, 2022 $ change from 12/31/22 % change from 12/31/22 $ change from 3/31/22 % change from 3/31/22 Non-interest bearing deposits $ 3,211,327 $ 3,374,269 $ 3,315,210 $ (162,942) (4.8) % $ (103,883) (3.1) % Transaction accounts 2,170,814 1,988,106 1,587,856 182,708 9.2 % 582,958 36.7 % Savings 2,669,212 2,617,500 2,657,694 51,712 2.0 % 11,518 0.4 % Certificates of deposit 531,851 554,445 694,544 (22,594) (4.1) % (162,693) (23.4) % Total deposits $ 8,583,204 $ 8,534,320 $ 8,255,304 $ 48,884 0.6 % $ 327,900 4.0 % Off balance sheet deposits 164,600 195,937 1,149,187 (31,337) (16.0) % (984,587) (85.7) % Total deposits including off balance sheet deposits $ 8,747,804 $ 8,730,257 $ 9,404,491 $ 17,547 0.2 % $ (656,687) (7.0) % All Other The table below reflects All Other net (loss) income for the first quarters (the three months ended March 31) of 2023 and 2022 and for the years ended December 31, 2022, and 2021. (In thousands) Q1 2023 Q1 2022 2022 2021 Net interest (expense) income $ (1,391) $ (1,686) $ (3,587) $ 1,495 Recovery of credit losses (732) (58) (1,277) (3,362) Other income 125 409 20,724 3,142 Other expense 3,506 3,157 14,308 16,840 Net (loss) income before income tax benefit $ (4,040) $ (4,376) $ 4,106 $ (8,841) Income tax benefit (1,504) (1,783) (1,002) (3,325) Net (loss) income $ (2,536) $ (2,593) $ 5,108 $ (5,516) The net interest (expense) income for All Other included, for all periods presented, interest income on subordinated debt investments in PNB, which was eliminated in the consolidated Park National Corporation totals, as well as interest income on GFSC loans and SEPH impaired loan relationships. The net interest (expense) income for All Other also included interest expense on $175.0 million aggregate principal amount of 4.50% Fixed-to-Floating Rate Subordinated Notes due 2030 issued by Park in August 2020 (the "Park Subordinated Notes"). Net interest (expense) income reflected net interest expense of $1.4 million for the three months ended March 31, 2023, compared to net interest expense of $1.7 million for the three months ended March 31, 2022. The change was largely the result of an increase of $565,000 in loan interest income related to payment collections at SEPH, partially offset by a decrease of $96,000 in net interest income from GFSC and a decrease in interest expense on borrowings of $174,000. Refer to the “Credit Metrics and Provision for (Recovery of) Credit Losses” section for additional information regarding the All Other loan portfolio and the level of recovery of credit losses recognized in each period presented. All Other had other expense of $3.5 million for the three months ended March 31, 2023, compared to $3.2 million for the three months ended March 31, 2022. The increase was largely due to a $382,000 increase in professional fees and services expense which was partially offset by a $162,000 decrease in salaries expense. 70 Table of Contents Park National Corporation The table below reflects Park's consolidated net income for the first quarters (the three months ended March 31) of 2023 and 2022 and for the years ended December 31, 2022 and 2021. (In thousands) Q1 2023 Q1 2022 2022 2021 Net interest income $ 92,198 $ 77,686 $ 347,059 $ 329,893 Provision for (recovery of) credit losses 183 (4,605) 4,557 (11,916) Other income 24,387 31,656 135,935 129,944 Other expense 76,503 67,373 297,978 283,518 Income before income taxes $ 39,899 $ 46,574 $ 180,459 $ 188,235 Income tax expense 6,166 7,699 32,108 34,290 Net income $ 33,733 $ 38,875 $ 148,351 $ 153,945 Net Interest Income Park’s principal source of earnings is net interest income, the difference between total interest income and total interest expense. Net interest income results from average balances outstanding for interest earning assets and interest bearing liabilities in conjunction with the average rates earned and paid on them. Comparison for the First Quarters of 2023 and 2022 Net interest income increased by $14.5 million, or 18.7%, to $92.2 million for the first quarter of 2023, compared to $77.7 million for the first quarter of 2022. See the discussion under the table below. Three months ended March 31, 2023 Three months ended March 31, 2022 (Dollars in thousands) Average balance Interest Tax equivalent yield/cost Average balance Interest Tax equivalent yield/cost Loans (1) $ 7,099,240 $ 91,766 5.24 % $ 6,829,336 $ 72,584 4.31 % Taxable investments 1,452,398 12,979 3.62 % 1,397,975 6,130 1.78 % Tax-exempt investments (2) 422,832 3,686 3.54 % 371,695 3,098 3.38 % Money market instruments 292,948 3,396 4.70 % 360,103 153 0.17 % Interest earning assets $ 9,267,418 $ 111,827 4.89 % $ 8,959,109 $ 81,965 3.71 % Interest bearing deposits $ 5,476,661 15,559 1.15 % $ 5,170,296 1,071 0.08 % Short-term borrowings 204,471 824 1.64 % 223,157 244 0.44 % Long-term debt 188,727 2,320 4.99 % 188,267 2,145 4.62 % Interest bearing liabilities $ 5,869,859 $ 18,703 1.29 % $ 5,581,720 $ 3,460 0.25 % Excess interest earning assets $ 3,397,559 $ 3,377,389 Tax equivalent net interest income $ 93,124 $ 78,505 Net interest spread 3.60 % 3.46 % Net interest margin 4.08 % 3.55 % (1) Loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $152,000 for the three months ended March 31, 2023 and $168,000 for the same period of 2022. (2) Interest income on tax-exempt investment securities includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $774,000 for the three months ended March 31, 2023 and $651,000 for the same period of 2022. Average interest earning assets for the first quarter of 2023 increased by $308.3 million, or 3.4%, to $9,267 million for the first quarter of 2023, compared to $8,959 million for the first quarter of 2022. The average yield on interest earning assets increased by 118 basis points to 4.89% for the first quarter of 2023, compared to 3.71% for the first quarter of 2022. 71 Table of Contents Interest income for the three months ended March 31, 2023 and 2022 included purchase accounting accretion of $200,000 and $477,000, respectively, related to the acquisitions of NewDominion and Carolina Alliance, as well as $574,000 and $42,000, respectively, of interest income related to payments received on certain SEPH nonaccrual loan relationships, some of which are participated with PNB. Interest income for the three months ended March 31, 2023 and 2022 also included $26,000 and $1.6 million, respectively, of income related to PPP loans. Excluding the impact of the purchase accounting accretion, SEPH-related income, and PPP income, the yield on loans was 5.20% and 4.22% for the three months ended March 31, 2023 and 2022, respectively, and the yield on earning assets was 4.86% and 3.64% for the three months ended March 31, 2023 and 2022, respectively. Average interest bearing liabilities for the first quarter of 2023 increased by $288.1 million, or 5.2%, to $5,870 million, compared to $5,582 million for the first quarter of 2022. The average cost of interest bearing liabilities increased by 104 basis points to 1.29% for the first quarter of 2023, compared to 0.25% for the first quarter of 2022. During the three months ended March 31, 2023 and 2022, Park continued to participate in a OWS program in order to manage growth of the balance sheet. At March 31, 2023 and 2022, Park had $164.6 million and $1,149.2 million, respectively, in OWS insured cash sweep deposits which were off-balance sheet. Management from time to time has elected to move these funds both on and off the balance sheet throughout the quarter due to favorable interest rate conditions and other factors. When on the balance sheet, these deposits are included in the average interest bearing liabilities and related interest expense. Removing the impacts of the accretion of purchase accounting adjustments related to the acquisitions of NewDominion and Carolina Alliance, the interest income related to payments on certain SEPH nonaccrual loan relationships and the interest income related to PPP loans, the net interest margin was 4.04% and 3.48% for the three months ended March 31, 2023 and 2022, respectively. Yield on Loans: Average loan balances increased $269.9 million, or 4.0%, to $7,099 million for the first quarter of 2023, compared to $6,829 million for the first quarter of 2022. The average yield on the loan portfolio increased by 93 basis points to 5.24% for the first quarter of 2023, compared to 4.31% for the first quarter of 2022. Average loans for the first quarters of 2023 and 2022 included $3.8 million and $60.0 million, respectively, of PPP loans. The table below shows the average balance and tax equivalent yield by type of loan for the three months ended March 31, 2023 and 2022. Three months ended March 31, 2023 Three months ended March 31, 2022 (Dollars in thousands) Average balance Tax equivalent yield Average balance Tax equivalent yield Home equity loans $ 166,648 7.74 % $ 161,827 3.53 % Installment loans 1,911,708 5.03 % 1,680,738 4.67 % Real estate loans 1,197,827 4.12 % 1,130,635 3.69 % Commercial loans (1) 3,818,741 5.59 % 3,853,302 4.36 % Other 4,316 8.37 % 2,834 11.73 % Total loans before allowance $ 7,099,240 5.24 % $ 6,829,336 4.31 % (1) Commercial loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $152,000 for the three months ended March 31, 2023 and $168,000 for the same period of 2022. Loan interest income for the three months ended March 31, 2023 and 2022 included the accretion of purchase accounting adjustments related to the acquisitions of NewDominion and Carolina Alliance, interest income related to payments on certain SEPH nonaccrual loan relationships and interest income related to PPP loans. Excluding the impact of the purchase accounting accretion, SEPH-related income, and PPP income, (a) the yield on home equity loans was 7.67%, the yield on installment loans was unchanged at 5.03%, the yield on real estate loans was unchanged at 4.12%, the yield on commercial loans was 5.51% and the yield on total loans before allowance was 5.20% for the three months ended March 31, 2023; and (b) the yield on home equity loans was 3.40%, the yield on installment loans was unchanged at 4.67%, the yield on real estate loans was 3.67%, the 72 Table of Contents yield on commercial loans was 4.21% and the yield on total loans before allowance was 4.22% for the three months ended March 31, 2022. Cost of Deposits: Average interest bearing deposit balances increased $306.4 million, or 5.9%, to $5,477 million for the first quarter of 2023, compared to $5,170 million for the first quarter of 2022. The average cost of funds on deposit balances increased by 107 basis points to 1.15% for the first quarter of 2023, compared to 0.08% for the first quarter of 2022. The table below shows for the three months ended March 31, 2023 and 2022, the average balance and cost of funds by type of deposit. Three months ended March 31, 2023 Three months ended March 31, 2022 (Dollars in thousands) Average balance Cost of funds Average balance Cost of funds Transaction accounts $ 2,156,473 1.15 % $ 1,639,828 0.02 % Savings deposits and clubs 2,777,518 1.18 % 2,829,331 0.04 % Time deposits 542,670 1.01 % 701,137 0.42 % Total interest bearing deposits $ 5,476,661 1.15 % $ 5,170,296 0.08 % Yield on Average Interest Earning Assets: The following table shows the tax equivalent yield on average interest earning assets for the three months ended March 31, 2023 and for the years ended December 31, 2022, 2021 and 2020. Loans (1) (3) Investments (2) Money Market Instruments Total (3) 2020 - year 4.71 % 2.66 % 0.26 % 4.28 % 2021 - year 4.53 % 2.22 % 0.13 % 3.86 % 2022 - year 4.65 % 2.66 % 2.07 % 4.14 % 2023 - first three months 5.24 % 3.60 % 4.70 % 4.89 % (1) Loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $152,000 for the three months ended March 31, 2023, and $627,000, $704,000, and $623,000 for the years ended December 31, 2022, 2021 and 2020, respectively. (2) Interest income on tax-exempt investment securities includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $774,000 for the three months ended March 31, 2023, and $2.9 million, $2.2 million and $2.2 million for the years ended December 31, 2022, 2021 and 2020, respectively. (3) Interest income for the three months ended March 31, 2023 and for the years ended December 31, 2022, 2021 and 2020 included $574,000, $3.7 million, $8.0 million, and $453,000, respectively, related to payments received on certain SEPH nonaccrual loan relationships, some of which are participated with PNB, as well as $200,000, $1.8 million, $3.3 million, and $4.4 million, respectively, of the accretion of purchase accounting adjustments related to the acquisitions of NewDominion and Carolina Alliance. Interest income for the three months ended March 31, 2023 and for the years ended December 31, 2022 2021, and 2020 included $26,000, $3.1 million, $18.0 million and $16.7 million, respectively, of income related to PPP loans. Excluding all of these sources of income described in the preceding sentences of this footnote, the yield on loans was 5.20%, 4.55%, 4.27%, and 4.63% for the three months ended March 31, 2023, and for the years ended December 31, 2022, 2021 and 2020, respectively, and the yield on total earning assets was 4.86%, 4.06%, 3.64%, and 4.20% for the three months ended March 31, 2023 and for the years ended December 31, 2022, 2021 and 2020, respectively. Cost of Average Interest Bearing Liabilities: The following table shows the cost of funds on average interest bearing liabilities for the three months ended March 31, 2023 and for the years ended December 31, 2022, 2021 and 2020. Interest bearing deposits (1) Short-term borrowings Long-term debt Total (1) 2020 - year 0.41 % 0.40 % 3.55 % 0.52 % 2021 - year 0.12 % 0.27 % 4.32 % 0.28 % 2022 - year 0.39 % 0.67 % 4.69 % 0.54 % 2023 - first three months 1.15 % 1.64 % 4.99 % 1.29 % (1) Interest expense for the years ended December 31, 2022, 2021 and 2020 included $7,000, $46,000, and $226,000, respectively, of the accretion of purchase accounting adjustments related to the acquisitions of NewDominion and Carolina Alliance. Excluding this income, for the years ended December 31, 2022, 2021 and 2020, the cost of funds on interest bearing deposits was 0.39%, 0.12%, and 0.41%,, respectively, and the cost of total interest bearing liabilities was 0.54%, 0.28%, and 0.53%, respectively. There was no accretion of purchase accounting adjustments related to the acquisitions of NewDominion and Carolina Alliance for the three months ended March 31, 2023. 73 Table of Contents Credit Metrics and Provision for (Recovery of) Credit Losses The provision for (recovery of) credit losses is the amount added to/subtracted from the allowance for credit losses to ensure the allowance is sufficient to absorb estimated credit losses over the life of a loan. The amount of the provision for (recovery of) credit losses is determined by management based on 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. The adoption of ASU 2022-02 on January 1, 2023 resulted in a $383,000 increase to the allowance for credit losses. A cumulative effect adjustment resulting in a $303,000 decrease to retained earnings and an $80,000 increase to deferred tax assets was also recorded. Additionally, as a result of the adoption of this ASU and elimination of the concept of TDRs, total nonperforming loans decreased by $20.1 million during the three months ended March 31, 2023 and individually evaluated loans decreased by $11.5 million. The table below provides additional information on the recovery of credit losses for the three-month periods ended March 31, 2023 and 2022. Three Months Ended March 31, (Dollars in thousands) 2023 2022 Allowance for credit losses: Beginning balance $ 85,379 $ 83,197 Cumulative change in accounting principle; adoption of ASU 2022-02 383 — Charge-offs 2,235 1,347 Recoveries 2,236 1,616 Net recoveries (1) (269) Provision for (recovery of) credit losses 183 (4,605) Ending balance $ 85,946 $ 78,861 Net charge-offs (recoveries) as a % of average loans (annualized) — % (0.02) % The following table provides additional information related to the allowance for credit losses for Park including information related to specific reserves and general reserves, at March 31, 2023, December 31, 2022, and March 31, 2022. (Dollars in thousands) 3/31/2023 12/31/2022 3/31/2022 Total allowance for credit losses $ 85,946 $ 85,379 $ 78,861 Allowance on PCD loans — — — Specific reserves on individually evaluated loans 4,318 3,566 1,513 General reserves on collectively evaluated loans $ 81,628 $ 81,813 $ 77,348 Total loans $ 7,093,857 $ 7,141,891 $ 6,821,606 PCD loans 4,555 4,653 6,987 Individually evaluated loans (1) 59,384 78,341 63,209 Collectively evaluated loans $ 7,029,918 $ 7,058,897 $ 6,751,410 Allowance for credit losses as a % of period end loans 1.21 % 1.20 % 1.16 % General reserve as a % of collectively evaluated loans 1.16 % 1.16 % 1.15 % (1) After the adoption of ASU 2022-02 on January 1, 2023, loans individually evaluated for impairment include all internally classified commercial nonaccrual loans. Prior to the adoption of ASU 2022-02, loans individually evaluated for impairment included all internally classified commercial nonaccrual loans and accruing TDRs. The allowance for credit losses of $85.9 million at March 31, 2023 represented a $567,000, or 0.7%, increase compared to $85.4 million at December 31, 2022, The increase was largely due to a $752,000 increase in specific reserves, offset by a 74 Table of Contents decline of $185,000 in general reserves. Generally, valuations for all nonperforming loans are updated at least annually, either through independent valuations by a licensed appraiser or a verification of value ("VOV") performed by an internal licensed appraiser, in accordance with Company policy. A VOV can only be used in select circumstances and verifies that the original appraised value has not deteriorated through property inspection, consideration of market conditions, and performance of all valuation methods utilized in a prior valuation. As new valuation information is received, management performs an evaluation and applies a discount for anticipated disposition costs to determine the net realizable value of the collateral, which is compared against the outstanding principal balance to determine if additional write-downs are necessary. Nonperforming Assets: After the adoption of ASU 2022-02 on January 1, 2023, which eliminated the TDR classification , non-performing assets include: (1) loans whose interest is accounted for on a nonaccrual basis; (2) loans which are contractually past due 90 days or more as to principal or interest payments but whose interest continues to accrue; and (3) OREO which results from taking possession of property that served as collateral for a defaulted loan. Prior to the adoption of ASU 2022-02 on January 1, 2023, nonperforming assets included: (1) loans whose interest is accounted for on a nonaccrual basis; (2) TDRs on accrual status; (3) loans which are contractually past due 90 days or more as to principal or interest payments but whose interest continues to accrue; and (4) OREO which results from taking possession of property that served as collateral for a defaulted loan. The following table compares Park’s nonperforming assets at March 31, 2023, December 31, 2022 and March 31, 2022. (In thousands) March 31, 2023 December 31, 2022 March 31, 2022 Nonaccrual loans $ 73,114 $ 79,696 $ 54,018 Accruing TDRs (for years 2022 and prior) (1) N.A. 20,134 32,428 Loans past due 90 days or more 1,251 1,281 445 Total nonperforming loans $ 74,365 $ 101,111 $ 86,891 OREO 1,468 1,354 760 Total nonperforming assets $ 75,833 $ 102,465 $ 87,651 Percentage of nonaccrual loans to total loans 1.03 % 1.12 % 0.79 % Percentage of nonperforming loans to total loans (1) 1.05 % 1.42 % 1.27 % Percentage of nonperforming assets to total loans (1) 1.07 % 1.43 % 1.28 % Percentage of nonperforming assets to total assets (1) 0.77 % 1.04 % 0.92 % (1) Effective January 1, 2023, Park adopted ASU 2022-02. Among other things, this ASU eliminated the concept of TDRs. Included in the OREO totals above were $1.4 million of SEPH OREO at both March 31, 2023 and December 31, 2022, and $594,000 of SEPH OREO at March 31, 2022. Park classifies loans as nonaccrual when a loan (1) is maintained on a cash basis because of deterioration in the financial condition of the borrower, (2) payment in full of principal or interest is not expected, or (3) principal or interest has been in default for a period of 90 days for commercial loans and 120 days for all other loans. As a result, loans may be classified as nonaccrual despite being current with their contractual terms. The following table details the delinquency status of nonaccrual loans at March 31, 2023, December 31, 2022 and March 31, 2022. Loans are classified as current if they are less than 30 days past due. March 31, 2023 December 31, 2022 March 31, 2022 (In thousands) Balance Percent of Total Loans Balance Percent of Total Loans Balance Percent of Total Loans Nonaccrual loans - current $ 32,813 0.46 % $ 58,893 0.83 % 1 $ 36,415 0.53 % Nonaccrual loans - past due 40,301 0.57 % 20,803 0.29 % 17,603 0.26 % Total nonaccrual loans $ 73,114 1.03 % $ 79,696 1.12 % $ 54,018 0.79 % 75 Table of Contents Credit Quality Indicators: When determining the quarterly credit loss provision, Park reviews the grades of commercial loans. These loans are graded from 1 to 8. A grade of 1 indicates little or no credit risk and a grade of 8 is considered a loss. Commercial loans that are pass-rated (graded an 1 through a 4) are considered to be of acceptable credit risk. Commercial loans graded a 5 (special mention) are considered to be watch list credits and a higher PD is applied to these loans. Commercial loans graded a 6 (substandard), also considered to be watch list credits, represent higher credit risk than those rated special mention and, as a result, a higher PD is applied to these loans. Commercial loans that are graded a 7 (doubtful) are shown as nonperforming and Park charges these loans down to their fair value by taking a partial charge-off or recording a specific reserve. Certain 6-rated loans and all 7-rated loans are placed on nonaccrual status and included within the individually evaluated category. Any commercial loan graded an 8 (loss) is completely charged-off. The following table highlights the credit trends within the commercial loan portfolio. Commercial loans * (In thousands) March 31, 2023 December 31, 2022 March 31, 2022 Pass-rated $ 3,664,298 $ 3,709,065 $ 3,696,217 Special mention 87,431 79,855 78,432 Substandard 2,176 1,965 75 Individually evaluated for impairment (1) 59,384 78,341 63,209 Accruing PCD 4,469 4,563 6,497 Total $ 3,817,758 $ 3,873,789 $ 3,844,430 (1) Prior to the adoption of ASU 2002-02 on January 1, 2023, accruing TDRs were also included in individually evaluated for impairment loans totals. * Commercial loans include (1) Commercial, financial and agricultural loans, (2) Commercial real estate loans, (3) Commercial related loans in the construction real estate portfolio, (4) Commercial related loans in the residential real estate portfolio and (5) Leases. Park's watch list includes all criticized and classified commercial loans, defined by Park as loans rated special mention or worse. Park had $89.6 million of collectively evaluated commercial loans included on the watch list at March 31, 2023, compared to $81.8 million at December 31, 2022, and $78.5 million at March 31, 2022. The existing conditions of these loans do not warrant classification as nonaccrual. However, these loans have shown some weakness and management performs additional analysis regarding each borrower's ability to comply with payment terms. Individually Evaluated Loans: Loans that do not share risk characteristics are evaluated on an individual basis. Park has determined that any commercial loans which have been placed on nonaccrual status will be individually evaluated. Individual analysis will establish a specific reserve for loans in scope. Specific reserves on individually evaluated commercial loans are typically based on management’s best estimate of the fair value of collateral securing these loans. The amount ultimately charged off for these loans may be different from the specific reserve as the ultimate liquidation of the collateral may be for an amount different from management’s estimate. Prior to the elimination of TDRs with the adoption of ASU 2022-02 on January 1, 2023, Park also included commercial accruing TDRs as individually evaluated loans. Individually evaluated commercial loans were $59.4 million at March 31, 2023, a decrease of $19.0 million, compared to $78.3 million at December 31, 2022 and a decrease of $3.8 million, compared to $63.2 million at March 31, 2022. The $78.3 million of individually evaluated commercial loans at December 31, 2022 included $11.5 million of loans modified in a TDR which were on accrual status and performing in accordance with the restructured terms, down from $22.9 million at March 31, 2022. At March 31, 2023, Park had taken partial charge-offs of $1.5 million related to the $59.4 million of individually evaluated commercial loans, compared to partial charge-offs of $1.8 million related to the $78.3 million of individually evaluated commercial loans at December 31, 2022. Loans Acquired with Deteriorated Credit Quality: In conjunction with the NewDominion acquisition, Park acquired loans with a book value of $277.9 million as of the July 1, 2018 acquisition date. These loans were recorded at the initial fair value of $272.8 million. Loans acquired with deteriorated credit quality (ASC 310-30) with a book value of $5.1 million were recorded at the initial fair value of $4.9 million. In conjunction with the Carolina Alliance acquisition, Park acquired loans and leases with a book value of $589.7 million as of the April 1, 2019 acquisition date. These loans and leases were recorded at the initial fair value of $578.6 million. Loans and leases acquired with deteriorated credit quality (ASC 310-30) with a book value of $19.9 million were recorded at the initial fair value of $18.4 million. Upon adoption of CECL on January 1, 2021, $52,000 of the credit discount on PCD loans was reclassified to the allowance for credit losses. PCD loans are individually evaluated on a quarterly basis to determine if a specific reserve is necessary. At March 31, 2023 and December 31, 2022, there was no allowance for credit losses on PCD loans. The carrying amount of loans 76 Table of Contents acquired with deteriorated credit quality at March 31, 2023 and December 31, 2022 was $4.6 million and $4.7 million, respectively. Allowance for Credit Losses: The allowance for credit losses is calculated on a quarterly basis. The methodology for calculating the ACL and assumptions made as of March 31, 2023 are detailed below. Quantitative Considerations The ACL is primarily calculated utilizing a DCF model. Key inputs and assumptions used in this model are discussed below: • Forecast model - For each portfolio segment, a 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 updated the LDA in the fourth quarter of 2022 with data through September 30, 2022. After considering the impact of the inclusion of periods impacted by COVID, as well as analysis of the ongoing applicability of the selected peer group, management decided it was appropriate to continue to utilize the LDA analysis from the fourth quarter of 2019 as the correlation of the LDA was higher. • 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 2022. • 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. ◦ A s of December 31, 2022, the "most likely" scenario forecasted Ohio unemployment between 4.14% and 4.36% during the next four quarters. In determining the appropriate weighting of scenarios at December 31, 2022, management considered the range of forecasted unemployment as well as a number of economic indicators. The continued high level of inflation, historically low consumer confidence, rising interest rates, geopolitical conflict (including the conflict between Russia and Ukraine), and workforce and supply chain challenges continued to cause uncertainty as to the overall economic environment. Considering these factors, management determined it was appropriate to maintain the existing weighting, and weigh the "most likely" scenario 50% and the "moderate recession" scenario 50% at December 31, 20 22. ◦ A s of March 31, 2023 the "most likely" scenario forecasted Ohio unemployment between 4.15% and 4.51% during the next four quarters. In determining the appropriate weighting of scenarios at March 31, 2023, management considered the range of forecasted unemployment as well as a number of economic indicators. The continued high level of inflation, historically low consumer confidence, rising interest rates, financial system stress related to recent bank failures, geopolitical conflict, and workforce challenges continued to cause uncertainty as to the overall economic environment. Considering these factors, management determined it was appropriate to maintain the existing weighting, and weigh the "most likely" scenario 50% and the "moderate recession" scenario 50% at March 31, 2023 . 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. 77 Table of Contents ◦ 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; geopolitical conflict; 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). As of March 31, 2023 and December 31, 2022, Park had $3.4 million and $4.2 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 reserved for using the same methodology as the rest of Park’s loan portfolio. A 10 basis point reserve at both March 31, 2023 and December 31, 2022 was calculated for these loans to reflect minimal credit risk. Other Income Other income decreased by $7.3 million to $24.4 million for the quarter ended March 31, 2023, compared to $31.7 million for the first quarter of 2022. The decrease for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to decreases in income from fiduciary activities, other service income, other components of net periodic pension benefit income, miscellaneous income, and a change in (loss) gain on equity securities, net, partially offset by increases in service charges on deposit accounts and debit card fee income. The following table provides a summary of the changes in the components of other income: Three months ended March 31, (In thousands) 2023 2022 Change Income from fiduciary activities $ 8,615 $ 8,797 $ (182) Service charges on deposit accounts 2,241 2,074 167 Other service income 2,697 4,819 (2,122) Debit card fee income 6,457 6,126 331 Bank owned life insurance income 1,185 1,175 10 ATM fees 533 532 1 Loss on sale of OREO, net (9) — (9) OREO valuation markup 15 30 (15) (Loss) gain on equity securities, net (405) 2,353 (2,758) Other components of net periodic pension benefit income 1,893 3,027 (1,134) Miscellaneous 1,165 2,723 (1,558) Total other income $ 24,387 $ 31,656 $ (7,269) Other service income decreased by $2.1 million, or 44.0%, to $2.7 million for the three months ended March 31, 2023, compared to $4.8 million for the same period of 2022. The primary reasons for the decrease for the three months ended March 31, 2023 compared to the same period of 2022 were a decrease in fee income related to mortgage loan originations to be sold in the secondary market of $1.6 million and a decrease in mortgage servicing rights income of $731,000. Mortgage origination volume decreased by $98.9 million, or 61.8%, to $61.2 million for the three months ended March 31, 2023 from $160.1 million for the three months ended March 31, 2022. 78 Table of Contents (Loss) gain on equity securities, net, changed by $2.8 million, to a net loss of $405,000 for the three months ended March 31, 2023, compared to a net gain of $2.4 million for the same period in 2022. The $2.8 million change for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was related to $2.8 million change in the gain (loss) on equity securities held at NAV which went from a net gain of $2.4 million for the three months ended March 31, 2022 to a net loss of $377,000 for the the three months ended March 31, 2023. Other components of net periodic pension benefit income decreased $1.1 million to $1.9 million for the three months ended March 31, 2023 compared to $3.0 million for the same period in 2022. The decrease was largely due to a decrease in the expected return on plan assets and an increase in interest cost. Miscellaneous income decreased $1.6 million, or 57.2%, to $1.2 million for the three months ended March 31, 2023 compared to $2.7 million for the same period of 2022. The decrease for the three-month period ended March 31, 2023 compared to the same period of 2022 was primarily a result of decreases in brokerage income of $212,000 and operating lease income of $191,000, as well as a decrease of $434,000 in wire transfer and ACH fees as a result of the reclassification of these fees to service charges on deposit accounts. Also contributing to the decline in miscellaneous income was a decrease in gains on sales of assets. During the first quarter of 2022, a branch location was sold, resulting in a gain of $731,000. There were no comparable sales during the first quarter of 2023. Other Expense Other expense increased by $9.1 million to $76.5 million for the three months ended March 31, 2023 compared to $67.3 million for the same period of 2022. The following table is a summary of the changes in the components of other expense: Three months ended March 31, (In thousands) 2023 2022 Change Salaries $ 34,871 $ 30,521 $ 4,350 Employee benefits 10,816 10,499 317 Occupancy expense 3,353 3,214 139 Furniture and equipment expense 3,246 2,937 309 Data processing fees 8,750 7,504 1,246 Professional fees and services 7,221 5,858 1,363 Marketing 1,319 1,317 2 Insurance 1,814 1,405 409 Communication 1,037 890 147 State tax expense 1,278 1,192 86 Amortization of intangible assets 327 402 (75) Miscellaneous 2,471 1,634 837 Total other expense $ 76,503 $ 67,373 $ 9,130 Salaries increased by $4.4 million, or 14.3%, to $34.9 million for the three months ended March 31, 2023, compared to $30.5 million for the same period in 2022. The increase for the three months ended March 31, 2023 compared to the same period of 2022 was due to an increase of $3.5 million in base salary expense as full-time equivalent employees increased from 1,679 as of March 31, 2022 to 1,766 as of March 31, 2023. Also contributing to the increase in the first quarter of 2023 compared to the same period in 2022 was an increase in long term incentive expense of $356,000, and an increase in officer incentive compensation of $875,000, partially offset by a decrease in additional compensation expense of $449,000. Employee benefits increased $317,000, or 3.0%, to $10.8 million for the three months ended March 31, 2023, compared to $10.5 million for the same period in 2022. The $317,000 increase for the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to an increase in group insurance costs of $337,000 and increased payroll tax expense of $646,000, partially offset by decreased pension plan expense of $878,000. 79 Table of Contents Data processing expense increased $1.2 million, or 16.6%, to $8.8 million for the three months ended March 31, 2023 compared to $7.5 million for the same period in 2022. The increase for the three-month period ended March 31, 2023 compared to the same period in 2022 related to a $938,000 increase in software expenses and a $262,000 increase in debit card processing costs. Professional fees and services expense increased $1.4 million, or 23.3%, to $7.2 million for the three months ended March 31, 2023 compared to $5.8 million for the same period in 2022. The increase for the three-month period ended March 31, 2023 compared to the same period in 2022 related to a $314,000 increase in director fees, a $347,000 increase in management consulting fees, and a $198,000 increase in legal expenses, as well as smaller increases in credit services expense, temporary wages, and other fees, partially offset by decreases in filing fees, appraisal costs, recruiting expenses, and supervisory examination costs. Insurance expense increased $409,000, or 29.1%, to $1.8 million for the three months ended March 31, 2023 compared to $1.4 million for the same period in 2022. The increase for the three-month period ended March 31, 2023 compared to the period ended March 31, 2022 related to an increase in FDIC assessments. The subcategory "miscellaneous" other expense includes expenses for supplies, travel and other miscellaneous expense. The subcategory miscellaneous other expense increased $837,000, or 51.2%, to $2.5 million for the three-month period ended March 31, 2023, compared to the same period in 2022. The $837,000 increase in expense for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily related to an increase in travel expense of $328,000, and an increase of $626,000 in the provision for the allowance for unfunded credit losses, partially offset by a $186,000 decrease in operating lease depreciation. Items Impacting Comparability From time to time, revenue, expenses, and/or taxes are impacted by items judged by management of Park to be outside of ordinary banking activities and/or by items that, while they may be associated with ordinary banking activities, are so unusually large that their outsized impact is believed by management of Park at that time to be infrequent or short-term in nature. Most often, these items impacting comparability of period results relate to merger and acquisition activities and revenue and expenses related to former Vision Bank loan relationships. In other cases, they may result from management's decisions associated with significant corporate actions outside of the ordinary course of business. 80 Table of Contents The following table details those items which management believes impact the comparability of current and prior period amounts. THREE MONTHS ENDED (in thousands) March 31, 2023 March 31, 2022 Affected Line Item Net interest income $ 92,198 $ 77,686 less purchase accounting accretion related to NewDominion and Carolina Alliance acquisitions 200 477 Interest and fees on loans less purchase accounting accretion related to NewDominion and Carolina Alliance acquisitions — 3 Interest on deposits less interest income on former Vision Bank relationships 574 42 Interest and fees on loans Net interest income - adjusted $ 91,424 $ 77,164 Provision for (recovery of) credit losses $ 183 $ (4,605) less recoveries on former Vision Bank relationships (723) (1) Provision for (recovery of) credit losses Provision for (recovery of) credit losses - adjusted $ 906 $ (4,604) Total other income $ 24,387 $ 31,656 less other service income related to former Vision Bank relationships 135 — Other service income Total other income - adjusted $ 24,252 $ 31,656 Total other expense $ 76,503 $ 67,373 less direct expenses related to collection of payments on former Vision Bank loan relationships 100 — Professional fees and services less core deposit intangible amortization related to NewDominion and Carolina Alliance acquisitions 327 402 Amortization of intangible assets Total other expense - adjusted $ 76,076 $ 66,971 Tax effect of adjustments to net income identified above (7) $ (253) $ (25) Net income - reported $ 33,733 $ 38,875 Net income - adjusted (6) $ 32,781 $ 38,779 Diluted EPS $ 2.07 $ 2.38 Diluted EPS, adjusted (6) $ 2.01 $ 2.37 Annualized return on average assets (1)(2) 1.36 % 1.60 % Annualized return on average assets, adjusted (1)(2)(6) 1.32 % 1.60 % Annualized return on average tangible assets (1)(2)(4) 1.38 % 1.63 % Annualized return on average tangible assets, adjusted (1)(2)(4)(6) 1.34 % 1.63 % Annualized return on average shareholders' equity (1)(2) 12.54 % 14.26 % Annualized return on average shareholders' equity, adjusted (1)(2)(6) 12.19 % 14.23 % Annualized return on average tangible equity (1)(2)(3) 14.78 % 16.80 % Annualized return on average tangible equity, adjusted (1)(2)(3)(6) 14.36 % 16.76 % Efficiency ratio (5) 65.10 % 61.16 % Efficiency ratio, adjusted (5)(6) 65.24 % 61.08 % Annualized net interest margin (5) 4.08 % 3.55 % Annualized net interest margin, adjusted (5)(6) 4.04 % 3.53 % 81 Table of Contents Financial Reconciliations (1) Reported measure uses net income. (2) Averages are for the three months ended March 31, 2023 and March 31, 2022, as appropriate. (3) Net income for each period divided by average tangible equity during the period. Average tangible equity equals average shareholders' equity during the applicable period less average goodwill and other intangible assets during the applicable period. RECONCILIATION OF AVERAGE SHAREHOLDERS' EQUITY TO AVERAGE TANGIBLE EQUITY: THREE MONTHS ENDED March 31, 2023 March 31, 2022 AVERAGE SHAREHOLDERS' EQUITY $ 1,090,952 $ 1,105,540 Less: Average goodwill and other intangible assets 165,457 166,918 AVERAGE TANGIBLE EQUITY $ 925,495 $ 938,622 (4) Net income for each period divided by average tangible assets during the period. Average tangible assets equals average assets less average goodwill and other intangible assets, in each case during the applicable period. RECONCILIATION OF AVERAGE ASSETS TO AVERAGE TANGIBLE ASSETS THREE MONTHS ENDED March 31, 2023 March 31, 2022 AVERAGE ASSETS $ 10,058,880 $ 9,825,382 Less: Average goodwill and other intangible assets 165,457 166,918 AVERAGE TANGIBLE ASSETS $ 9,893,423 $ 9,658,464 (5) Efficiency ratio is calculated by dividing total other expense by the sum of fully taxable equivalent net interest income and other income. Fully taxable equivalent net interest income reconciliation to net interest income is shown below assuming a 21% federal corporate income tax rate. Additionally, net interest margin is calculated on a fully taxable equivalent basis by dividing fully taxable equivalent net interest income by average interest earning assets, in each case during the applicable period. RECONCILIATION OF FULLY TAXABLE EQUIVALENT NET INTEREST INCOME TO NET INTEREST INCOME THREE MONTHS ENDED March 31, 2023 March 31, 2022 Interest income $ 110,901 $ 81,146 FTE adjustment 926 819 FTE interest income $ 111,827 $ 81,965 Interest expense 18,703 3,460 FTE net interest income $ 93,124 $ 78,505 (6) Adjustments to net income for each period presented are detailed in the non-GAAP reconciliations of net interest income, provision for (recovery of) credit losses, total other income, and total other expense, as well as the disclosure of the "Tax effect of adjustments to net income identified above." (7) The tax effect of adjustments to net income was calculated assuming a 21% federal corporate income tax rate. (8) Pre-tax, pre-provision ("PTPP") net income is calculated as net income, plus income taxes, plus the provision for (recovery of) credit losses, in each case during the applicable period. PTPP net income is a common industry metric utilized in capital analysis and review. PTPP is used to assess the operating performance of Park while excluding the impact of the provision for (recovery of) credit losses. RECONCILIATION OF PRE-TAX, PRE-PROVISION NET INCOME THREE MONTHS ENDED March 31, 2023 March 31, 2022 Net income $ 33,733 $ 38,875 Plus: Income taxes 6,166 7,699 Plus: Provision for (recovery of) credit losses 183 (4,605) Pre-tax, pre-provision net income $ 40,082 $ 41,969 82 Table of Contents Income Tax Income tax expense was $6.2 million for the first quarter of 2023 and consisted of federal income tax expense of $6.4 million and state income tax benefits of $234,000, as the result of a refund. This compares to income tax expense of $7.7 million for the first quarter of 2022 which consisted of federal income tax expense of $7.4 million and state income tax expense of $305,000. The effective income tax rate for the first quarter of 2023 was 15.5%, compared to 16.5% for the same period in 2022. The difference between the statutory federal corporate income tax rate of 21% and Park's effective income tax rate reflects permanent tax differences, primarily consisting of tax-exempt interest income from municipal investments and loans, qualified affordable housing and historical tax credits, bank owned life insurance income, and dividends paid on the common shares held within Park's KSOP, offset by the impact of state income taxes. Park expects permanent federal income tax differences for the 2023 year will be approximately $6.7 million. 83 Table of Contents Comparison of Financial Condition At March 31, 2023 and December 31, 2022 Changes in Financial Condition Total assets increased by $2.0 million during the first three months of 2023 to $9,857 million at March 31, 2023, compared to $9,855 million at December 31, 2022. This increase was primarily due to the following: • Cash and cash equivalents increased by $72.2 million, or 38.0%, to $261.9 million at March 31, 2023, compared to $189.7 million at December 31, 2022. Money market instruments increased by $82.8 million and cash and due from banks decreased by $10.6 million. • Total investment securities decreased by $20.4 million, or 1.1%, to $1,800 million at March 31, 2023, compared to $1,821 million at December 31, 2022. • Loans decreased by $48.0 million, or 0.7%, to $7,094 million at March 31, 2023, compared to $7,142 million at December 31, 2022. Total liabilities decreased by $10.9 million, or 0.1%, during the first three months of 2023 to $8,775 million at March 31, 2023, compared to $8,786 million at December 31, 2022. This decrease was primarily due to the following: • Short-term borrowings decreased by $55.3 million, or 24.3%, to $172.1 million at March 31, 2023, compared to $227.3 million at December 31, 2022 due to a decrease in securities sold under agreements to repurchase. • Other liabilities decreased by $11.7 million, or 14.9%, to $67.2 million at March 31, 2023, compared to $78.9 million at December 31, 2022. This was primarily related to a decrease in accrued expenses payable. • Total deposits increased by $59.7 million, or 0.7%, to $8,294 million at March 31, 2023, compared to $8,235 million at December 31, 2022. During 2020, Park made the decision to participate in an OWS program in order to manage the balance sheet. At March 31, 2023 and December 31, 2022, Park had $164.6 million and $195.9 million, respectively, in off-balance sheet deposits. Total shareholders’ equity increased by $12.9 million, or 1.2%, to $1,082 million at March 31, 2023, from $1,069 million at December 31, 2022. This increase was primarily due to the following: • Accumulated other comprehensive loss, net of taxes changed by $12.4 million, from a negative $102.4 million at December 31, 2022, to a negative $90.0 million at March 31, 2023, and is largely comprised of unrealized net holding losses on debt securities AFS, net of taxes, of $83.4 million at March 31, 2023 compared to unrealized net holding losses on debt securities AFS, net of of taxes of $95.7 million at December 31, 2022. • Retained earnings increased by $15.3 million during the period primarily as a result of net income of $33.7 million, partially offset by cash dividends on common shares of $17.3 million. • Treasury shares increased by $11.7 million during the period as a result of the repurchase of 124,000 treasury shares, partially offset by the issuance of treasury shares under share-based compensation awards (net of common shares withheld to pay employee income taxes). Increases or decreases in the investment securities portfolio, short-term borrowings and long-term debt are greatly dependent upon the growth in loans and deposits. The primary objective of management is to grow loan and deposit totals. To the extent that management is unable to grow loan totals at a desired growth rate, additional investment securities may be acquired. Likewise, both short-term borrowings and long-term debt are utilized to fund the growth in earning assets if the growth in deposits and cash flow from operations are not sufficient to do so. Liquidity Cash provided by operating activities was $24.4 million and $28.3 million for the three months ended March 31, 2023 and 2022, respectively. Net income was the primary source of cash from operating activities for each of the three-month periods ended March 31, 2023 and 2022. Cash provided by investing activities was $78.7 million and cash used in investing activities was $40.0 million for the three months ended March 31, 2023 and 2022, respectively. Proceeds from the sale, repayment, or maturity of investment securities provide cash and purchases of investment securities use cash. Net investment securities transactions provided cash of $34.8 million for the three months ended March 31, 2023 and used cash of $76.0 million for the three months ended March 31, 2022. Another major use or source of cash in investing activities is the net increase or decrease in the loan portfolio. Cash provided by 84 Table of Contents the net decrease in the loan portfolio was $50.2 million for the three months ended March 31, 2023 and $52.5 million for the three months ended March 31, 2022. Cash used in financing activities was $30.9 million and cash provided by financing activities was $39.4 million for the three months ended March 31, 2023 and 2022, respectively. A major source of cash for financing activities is the net change in deposits. Deposits (net of off-balance sheet deposits) increased and provided $59.7 million and $91.8 million of cash for the three months ended March 31, 2023 and 2022, respectively. Another major source/use of cash from financing activities is borrowings in the form of short-term borrowings, long-term debt and subordinated notes. For the three months ended March 31, 2023, net short-term borrowings decreased and used $55.3 million in cash. For the three months ended March 31, 2022, net short-term borrowings decreased and used $32.9 million in cash. For the three months ended March 31, 2023, cash declined by $15.3 million due to the repurchase of common shares to be held as treasury shares; while there were no repurchases of common shares during the three months ended March 31, 2022. Finally, cash declined by $17.4 million and $17.1 million for the three months ended March 31, 2023 and 2022, respectively, from the payment of dividends. Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as the operating cash needs of the Corporation, are met. Funds are available from a number of sources, including the capital markets, the investment securities portfolio, the core deposit base, FHLB borrowings and the capability to securitize or package loans for sale. The most easily accessible forms of liquidity, Fed Funds Sold, off balance sheet deposits, unpledged investment securities and available FHLB borrowing capacity, totaled $2.74 billion at March 31, 2023. The Corporation’s loan to asset ratio was 71.97% at March 31, 2023, compared to 72.47% at December 31, 2022 and 71.23% at March 31, 2022. Cash and cash equivalents were $261.9 million at March 31, 2023, compared to $189.7 million at December 31, 2022 and $246.9 million at March 31, 2022. Management believes that the present funding sources provide more than adequate liquidity for the Corporation to meet its cash flow needs. Capital Resources Total shareholders’ equity at March 31, 2023 was $1,082.2 million, or 11.0% of total assets, compared to $1,069.2 million, or 10.9% of total assets, at December 31, 2022 and $1,076.4 million, or 11.2% of total assets, at March 31, 2022. Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank holding companies. Park has elected not to include the net unrealized gain or loss on debt securities AFS in computing regulatory capital. Park has adopted the Basel III regulatory capital framework as approved by the federal banking agencies. Under the Basel III regulatory capital framework, in order to avoid limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers, Park must hold a capital conservation buffer of 2.5% above the adequately capitalized risk-based capital ratios. The amounts shown below as the adequately capitalized ratio plus capital conservation buffer include the 2.50% buffer. The Federal Reserve Board has also adopted capital requirements Park must maintain to be deemed "well capitalized" and remain a financial holding company. Park and PNB met each of the well capitalized ratio guidelines applicable to them at March 31, 2023. The following table indicates the capital ratios for PNB and Park at March 31, 2023 and December 31, 2022. At March 31, 2023 Leverage Tier 1 Risk-Based Common Equity Tier 1 Total Risk-Based The Park National Bank 8.61 % 10.89 % 10.89 % 12.31 % Park National Corporation 10.17 % 12.91 % 12.72 % 16.26 % 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 % 85 Table of Contents At December 31, 2022 Leverage Tier 1 Risk-Based Common Equity Tier 1 Total Risk-Based The Park National Bank 8.34 % 10.69 % 10.69 % 12.15 % Park National Corporation 9.90 % 12.76 % 12.57 % 16.07 % Adequately capitalized ratio 4.00 % 6.00 % 4.50 % 8.00 % Adequately capitalized ratio plus capital conservation buffer 4.00 % 8.50 % 7.00 % 10.50 % Well capitalized ratio (PNB) 5.00 % 8.00 % 6.50 % 10.00 % Well capitalized ratio (Park) N/A 6.00 % N/A 10.00 % Contractual Obligations and Commitments In the ordinary course of operations, Park enters into certain contractual obligations. Such obligations include the funding of operations through debt issuances as well as leases for premises. See page 79 of Park’s 2022 Form 10-K (Table 39) for disclosure concerning contractual obligations and commitments at December 31, 2022. There were no significant changes in contractual obligations and commitments during the first three months of 2023. Financial Instruments with Off-Balance Sheet Risk PNB is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. The exposure to credit loss (for PNB) in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. PNB uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers. The total amounts of off-balance sheet financial instruments with credit risk were as follows: (In thousands) March 31, 2023 December 31, 2022 Loan commitments $ 1,450,247 $ 1,416,699 Standby letters of credit $ 32,292 $ 30,468