The number shown represents, as of the end of each period, the maximum number of common shares that may yet be purchased as part of Park’s publicly announced stock repurchase authorization to fund the 2017 Employees LTIP which became effective on April 24, 2017, the 2017 Non-Employee Directors LTIP which became effective on April 24, 2017 and Park's publicly announced 2017 stock repurchase authorization which became effective on January 23, 2017.
At the 2013 Annual Meeting of Shareholders held on April 22, 2013, Park's shareholders approved the 2013 Incentive Plan. The aggregate number of common shares with respect to which awards couldCommon Shares that may yet be granted under the 2013 Incentive Plan was 600,000. The common shares to be issued and delivered under the 2013 Incentive Plan were to consistpurchased as part of either common shares currently held or common shares subsequently acquired by Park as treasury shares. As of April 24, 2017, the date on which the 2013 Incentive Plan was replaced with respect to the grant of future awards as discussed below, there were outstanding performance-based restrictedPark’s publicly announced stock unit awards covering a maximum of 119,587 common shares and 429,889 common shares available for future grants. As of April 24, 2017, Park held sufficient treasury shares to satisfy the outstanding awards under the 2013 Incentive Plan and, as a result, no additional common shares are to be repurchased in orderrepurchase authorizations to fund the 2013 Incentive Plan.2017 Employees LTIP and the 2017 Non-Employee Directors LTIP, both of which became effective on April 24, 2017; Park's publicly announced stock repurchase authorization covering 500,000 Common Shares which was announced on January 23, 2017; and Park's stock repurchase authorization covering 500,000 Common Shares which was announced on January 28, 2019 and as to which approval from the Federal Reserve was obtained in the form of correspondence from the Federal Reserve Bank of Cleveland dated April 19, 2019.
At the 2017 Annual Meeting of Shareholders held on April 24, 2017, Park's shareholders approved the 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP. The common sharesCommon Shares to be issued and delivered under the 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP may consist of either common sharesCommon Shares currently held or common sharesCommon Shares subsequently acquired by Park as treasury shares. No newly-issued common sharesCommon Shares will be delivered under the 2017 Employees LTIP or the 2017 Non-Employee Directors LTIP. On April 24, 2017, Park's Board of Directors authorized the purchase, from time to time, of up to 750,000 Park common sharesCommon Shares and 150,000 common shares,Park Common Shares, respectively, to be held as treasury shares for subsequent issuance and delivery under the 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP.
On January 23, 2017, Park announced that on that same day, the Park Board of Directors authorized Park to purchase, from time to time, up to an aggregate of 500,000 Park Common Shares. On January 28, 2019, Park announced that on that same day, the Park Board of Directors authorized Park to repurchase, from time to time following receipt of any required approval from the Federal Reserve, up to 500,000 Park Common Shares in addition to the 500,000 Park Common Shares which had been authorized for repurchase by the Park Board of Directors on January 23, 2017 and remained available for repurchase as of January 28, 2019. The required approval was received by Park in the form of correspondence from the Federal Reserve Bank of Cleveland dated April 19, 2019.
Purchases may be made through NYSE American, in the over-the-counter market or in privately negotiated transactions, in each case in compliance with the Ohio General Corporation Law, applicable federal and state securities laws, the rules applicable to issuers having securities listed on NYSE American, regulations promulgated by the Federal Reserve Board and all applicable laws and regulations, each as in effect at the time of each such purchase. Purchases will be made upon such terms and conditions and at such times and in such amounts as any one or more of the authorized officers of Park deem to be appropriate, subject to market conditions, regulatory requirements, any contractual obligations of Park and Park's subsidiaries and other factors, and in the best interest of Park and Park's shareholders. The January 23, 2017 stock repurchase authorization and the January 28, 2019 stock repurchase authorization are distinct from the stock repurchase authorizations to fund the 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP.
ITEM 6.[RESERVED]
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
Management's discussion and analysis addresses the financial condition and results of operations for Park National Corporation and our subsidiaries (unless the context otherwise requires, collectively, "Park" or the "Corporation"). This discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Management’s discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance. The forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements.
Risks and uncertainties that could cause actual results to differ materially include, without limitation:
•the ever-changing effects of the novel coronavirus (COVID-19) pandemic - - the duration, extent and severity of which are impossible to predict, including the possibility of further resurgence in the spread of COVID-19 or variants thereof - - on economies (local, national and international), supply chains and markets, on the labor market, including the potential for a sustained reduction in labor force participation, and on our customers, counterparties, employees and third-party service providers, as well as the effects of various responses of governmental and nongovernmental authorities to the COVID-19 pandemic, including public health actions directed toward the containment of the COVID-19 pandemic (such as quarantines, shut downs and other restrictions on travel and commercial, social or other activities), the availability, effectiveness and acceptance of vaccines, and the implementation of fiscal stimulus packages;
•the impact of future governmental and regulatory actions upon our participation in and execution of government programs related to the COVID-19 pandemic;
•Park's ability to execute our business plan successfully and within the expected timeframe as well as our ability to manage strategic initiatives in light of the impact of the COVID-19 pandemic and the various responses to the COVID-19 pandemic;
•general economic and financial market conditions, specifically in the real estate markets and the credit markets, either nationally or in the states in which Park and our subsidiaries do business, may experience a weaker recovery than anticipated, in addition to the continuing impact of the COVID-19 pandemic on our customers’ operations and financial condition, either of which may result in adverse impacts on the demand for loan, deposit and other financial services, delinquencies, defaults and counterparties' inability to meet credit and other obligations and the possible impairment of collectability of loans;
•factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our commercial borrowers and the success of construction projects that we finance, including any loans acquired in acquisition transactions;
•the effect of monetary and other fiscal policies (including the impact of money supply, interest rate policies and policies impacting inflation of the Federal Reserve Board, the U.S. Treasury and other governmental agencies) as well as disruption in the liquidity and functioning of U.S. financial markets, as a result of the COVID-19 pandemic and government policies implemented in response thereto, may adversely impact prepayment penalty income, mortgage banking income, income from fiduciary activities, the value of securities, deposits and other financial instruments, in addition to the loan demand and the performance of our loan portfolio, and the interest rate sensitivity of our consolidated balance sheet as well as reduce interest margins;
•changes in the federal, state, or local tax laws may adversely affect the fair values of net deferred tax assets and obligations of state and political subdivisions held in Park's investment securities portfolio and otherwise negatively impact our financial performance;
•the impact of the changes in federal, state and local governmental policy, including the regulatory landscape, capital markets, elevated government debt, potential changes in tax legislation that may increase tax rates, infrastructure spending and social programs;
•changes in laws or requirements imposed by Park's regulators impacting Park's capital actions, including dividend payments and stock repurchases;
•changes in consumer spending, borrowing and saving habits, whether due to changes in retail distribution strategies, consumer preferences and behavior, changes in business and economic conditions (including as a result of the COVID-19 pandemic and reactions thereto), legislative and regulatory initiatives (including those undertaken in response to the COVID-19 pandemic), or other factors may be different than anticipated;
•changes in unemployment levels in the states in which Park and our subsidiaries do business may be different than anticipated due to the continuing impact of the COVID-19 pandemic;
•changes in customers', suppliers', and other counterparties' performance and creditworthiness, and Park's expectations regarding future loan losses and our allowance for credit losses, may be different than anticipated due to the continuing impact of and the various responses to the COVID-19 pandemic;
•Park may have more credit risk and higher credit losses to the extent there are loan concentrations by location or industry of borrowers or collateral;
•the volatility from quarter to quarter of mortgage banking income, whether due to interest rates, demand, the fair value of mortgage loans, or other factors;
•the adequacy of our internal controls and risk management program in the event of changes in the market, economic, operational (including those which may result from more of our associates working remotely), asset/liability repricing, legal, compliance, strategic, cybersecurity, liquidity, credit and interest rate risks associated with Park's business;
•competitive pressures among financial services organizations could increase significantly, including product and pricing pressures (which could in turn impact our credit spreads), changes to third-party relationships and revenues, changes in the manner of providing services, customer acquisition and retention pressures, and Park's ability to attract, develop and retain qualified banking professionals;
•uncertainty regarding the nature, timing, cost and effect of changes in banking regulations or other regulatory or legislative requirements affecting the respective businesses of Park and our subsidiaries, including major reform of the regulatory oversight structure of the financial services industry and changes in laws and regulations concerning taxes, FDIC insurance premium levels, pensions, bankruptcy, consumer protection, rent regulation and housing, financial accounting and reporting, environmental protection, insurance, bank products and services, bank and bank holding company capital and liquidity standards, fiduciary standards, securities and other aspects of the financial services industry, specifically the reforms provided for in the Coronavirus Aid, Relief and Economic Security (CARES) Act and the follow-up legislation in the Consolidated Appropriations Act, 2021, the American Rescue Plan Act of 2021, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and the Basel III regulatory capital reforms, as well as regulations already adopted and which may be adopted in the future by the relevant regulatory agencies, including the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve Board, to implement the provisions of the CARES Act and the follow-up legislation in the Consolidated Appropriations Act, 2021, the provisions of the American Rescue Plan Act of 2021, the provisions of the Dodd-Frank Act, and the Basel III regulatory capital reforms;
•the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board (the "FASB"), the SEC, the Public Company Accounting Oversight Board and other regulatory agencies, may adversely affect Park's reported financial condition or results of operations;
•Park's assumptions and estimates used in applying critical accounting policies and modeling, including under the CECL model, which may prove unreliable, inaccurate or not predictive of actual results;
•the impact of Park's ability to anticipate and respond to technological changes on Park's ability to respond to customer needs and meet competitive demands;
•operational issues stemming from and/or capital spending necessitated by the potential need to adapt to industry changes in information technology systems on which Park and our subsidiaries are highly dependent;
•the ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks, including those of Park's third-party vendors and other service providers, which may prove inadequate, and could adversely affect customer confidence in Park and/or result in Park incurring a financial loss;
•a failure in or breach of Park's operational or security systems or infrastructure, or those of our third-party vendors and other service providers, resulting in failures or disruptions in customer account management, general ledger, deposit, loan, or other systems, including as a result of cyber attacks;
•the impact on Park's business and operating results of any costs associated with obtaining rights in intellectual property claimed by others and of adequacy of Park's intellectual property protection in general;
•the existence or exacerbation of general geopolitical instability and uncertainty as well as the effect of trade policies (including the impact of potential or imposed tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulations, closing of border crossings and changes in the relationship of the U.S. and its global trading partners);
•the impact on financial markets and the economy of any changes in the credit ratings of the U.S. Treasury obligations and other U.S. government-backed debt, as well as issues surrounding the levels of U.S., European and Asian government debt and concerns regarding the growth rates and financial stability of certain sovereign governments, supranationals and financial institutions in Europe and Asia and the risk they may face difficulties servicing their sovereign debt;
•the effect of a fall in stock market prices on Park's asset and wealth management businesses;
•our litigation and regulatory compliance exposure, including the costs and effects of any adverse developments in legal proceedings or other claims and the costs and effects of unfavorable resolution of regulatory and other governmental examinations or other inquiries;
•continued availability of earnings and excess capital sufficient for the lawful and prudent declaration of dividends;
•the impact on Park's business, personnel, facilities or systems of losses related to acts of fraud, scams and schemes of third parties;
•the impact of widespread natural and other disasters, pandemics (including the COVID-19 pandemic), dislocations, regional or national protests and civil unrest (including any resulting branch closures or damages), military or terrorist
activities or international hostilities on the economy and financial markets generally and on us or our counterparties specifically;
•any of the foregoing factors, or other cascading effects of the COVID-19 pandemic that are not currently foreseeable, could materially affect our business, including our customers' willingness to conduct banking transactions and their ability to pay on existing obligations;
•the effect of healthcare laws in the U.S. and potential changes for such laws, especially in light of the COVID-19 pandemic, which may increase our healthcare and other costs and negatively impact our operations and financial results;
•risk and uncertainties associated with Park's entry into new geographic markets with our recent acquisitions, including expected revenue synergies and cost savings from recent acquisitions not being fully realized or realized within the expected time frame;
•the discontinuation of the London Inter-Bank Offered Rate (LIBOR) and other reference rates which may result in increased expenses and litigation, and adversely impact the effectiveness of hedging strategies;
•and other risk factors relating to the banking industry as detailed from time to time in Park's reports filed with the SEC including those described in "Item 1A. Risk Factors" of this Annual Report on Form 10-K.
Park does not undertake, and specifically disclaims any obligation, to publicly release the results of any revisions that may be made to update any forward-looking statement to reflect the events or circumstances after the date on which the forward-looking statement was made, or reflect the occurrence of unanticipated events, except to the extent required by law.
NON-U.S. GAAP FINANCIAL MEASURES
Management's discussion and analysis contains non-U.S. GAAP financial measures where management believes it to be helpful in understanding Park’s results of operations or financial position. Where non-U.S. GAAP financial measures are used, the comparable U.S. GAAP financial measure, as well as the reconciliation to the comparable U.S. GAAP financial measure, can be found herein.
Items Impacting Comparability of Period Results
From time to time, revenue, expenses, and/or taxes are impacted by items judged by management of Park to be outside of ordinary banking activities and/or by items that, while they may be associated with ordinary banking activities, are so unusually large that their outsized impact is believed by management of Park at that time to be infrequent or short-term in nature. Most often, these items impacting comparability of period results are due to merger and acquisition activities, management restructuring, branch closures, a rebranding initiative, COVID-19 related expenses and revenue and expenses related to former Vision Bank loan relationships. In other cases, they may result from management's decisions associated with significant corporate actions outside of the ordinary course of business.
Even though certain revenue and expense items are naturally subject to more volatility than others due to changes in market and economic environment conditions, as a general rule volatility alone does not result in the inclusion of an item as one impacting comparability of period results. For example, changes in the provision for credit losses (aside from those related to former Vision Bank loan relationships), gains (losses) on equity securities, and asset valuation writedowns, reflect ordinary banking activities and are, therefore, typically excluded from consideration as items impacting comparability of period results.
Management believes the disclosure of items impacting comparability of period results provides a better understanding of our performance and trends and allows management to ascertain which of such items, if any, to include or exclude from an analysis of our performance; i.e., within the context of determining how that performance differed from expectations, as well as how, if at all, to adjust estimates of future performance taking such items into account.
Items impacting comparability of the results of particular periods are not intended to be a complete list of items that may materially impact current or future period performance.
Non-U.S. GAAP Ratios
Park's management uses certain non-U.S. GAAP financial measures to evaluate Park's performance. Specifically, management reviews the ratio of tangible equity to tangible assets.
Management has included in this Management's Discussion and Analysis of Financial Condition and Results of Operation, information relating to the ratio of tangible equity to tangible assets. For the purpose of calculating the ratio of tangible equity to tangible assets, a non-U.S. GAAP financial measure, tangible equity is divided by tangible assets. Tangible equity equals total shareholders' equity less goodwill and other intangible assets, in each case at period end. Tangible assets equals total assets less goodwill and other intangible assets, in each case at period end.
Management believes that the disclosure of the ratio of tangible equity to tangible assets presents additional information to the reader of the consolidated financial statements, which, when read in conjunction with the consolidated financial statements prepared in accordance with U.S. GAAP, assists in analyzing Park's operating performance, ensures comparability of operating performance from period to period, and facilitates comparisons with the performance of Park's peer financial holding companies and bank holding companies, while eliminating certain non-operational effects of acquisitions. Within the "CONTRACTUAL OBLIGATIONS - Capital" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations, Park has provided detail of the reconciliation of tangible equity to total shareholders' equity and of tangible assets to total assets solely for the purpose of complying with SEC Regulation G and not as an indication that the ratio of tangible equity to tangible assets is a substitute for the ratio of total shareholders' equity to total assets as determined in accordance with U.S. GAAP.
FTE (fully taxable equivalent) Ratios
Interest income, yields, and ratios on a FTE basis are considered non-U.S. GAAP financial measures. Management believes net interest income on a FTE basis provides an insightful picture of the interest margin for comparison purposes. The FTE basis also allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. The FTE basis assumes a federal statutory tax rate of 21%. In the tables included within the "ANALYSIS OF EARNINGS - Net Interest Income" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations, Park has provided detail of FTE interest income solely for the purpose of complying with SEC Regulation G and not as an indication that FTE interest income, yields and ratios are substitutes for interest income, yields and ratios, as determined in accordance with U.S. GAAP.
Paycheck Protection Program ("PPP") Loans
Through December 31, 2021, Park had originated $768.5 million in loans as part of the PPP. These loans are not typical of Park's loan portfolio in that they are part of a specific government program to support businesses during the COVID-19 pandemic and are 100% guaranteed by the Small Business Administration ("SBA"). As such, management considers growth in the loan portfolio excluding PPP loans, the total allowance for credit losses to total loans ratio (excluding PPP loans), and general reserve on collectively evaluated loans as a percentage of total collectively evaluated loans (excluding PPP loans) in addition to the related U.S. GAAP metrics which are not adjusted for PPP loans.
OVERVIEW
COVID-19 Considerations
Banking has been identified by federal and state governmental authorities to be an essential service and Park is fully committed to continue serving our customers and communities through the COVID-19 public health crisis. For those in our communities experiencing a financial hardship, Park has offered various methods of support including loan modifications, payment deferral programs, participation in the CARES Act PPP, participation in additional PPP loans authorized under the Consolidated Appropriations Act, 2021, and various other case by case accommodations. Throughout the pandemic, Park has implemented various physical distancing guidelines to help protect associates, such as allowing associates to work from home, where practical, while maintaining customer service via our online banking services, mobile app, and ATMs, by keeping drive-thru lanes open to serve customers, maintaining selective branch office openings, and offering other banking services by appointment when necessary. As of December 31, 2021, all branches had returned to normal operations.
During 2021 and 2020, Park provided calamity pay and special one-time bonuses to certain associates related to the COVID-19 pandemic. The cost of the calamity pay and special bonuses amounted to $2.1 million and $3.6 million for the years ended December 31, 2021 and 2020, respectively, and is included within salaries expense.
Paycheck Protection Program
During 2020, Park approved and funded 4,439 loans totaling $543.1 million under the PPP's first round of loans. These first round PPP loans had an average principal balance of $122,000. Of the $543.1 million in first round PPP loans, 21 loans totaling $68.2 million had a principal balance that was greater than $2 million. For its assistance in making and retaining the 4,439 loans, Park has received an aggregate of $20.2 million in fees from the SBA, of which $6.4 million and $13.7 million were recognized within loan interest income during the year ended December 31, 2021 and the year ended December 31, 2020, respectively. Park funded the PPP loans with excess on-balance sheet liquidity. At December 31, 2021, the remaining balance of the first round PPP loans funded in 2020 was $4.8 million.
During 2021, Park offered additional PPP loans as authorized under the Consolidated Appropriations Act, 2021. Through December 31, 2021, Park approved and funded 3,262 loans totaling $221.6 million under the second round of PPP loans. These additional second round PPP loans had an average principal balance of $68,000. None of the $221.6 million in additional second round PPP loans had a principal balance that was greater than $2 million. For its assistance in making and retaining the 3,262 second round of PPP loans, Park has received an aggregate of $12.9 million in fees from the SBA, of which $9.9 million was recognized within loan interest income during the year ended December 31, 2021. Park funded the second round PPP loans with excess on-balance sheet liquidity. At December 31, 2021, the remaining balance of second round PPP loans funded in 2021 was $72.3 million.
As of February 21, 2022, Park had submitted 6,953 repayment requests on behalf of borrowers under the PPP to the SBA and has received $707.9 million in payments from the SBA.
Loan Modifications
During the two years ended December 31, 2021, Park modified a total of 5,138 consumer loans, with an aggregate balance of $72.2 million, and modified a total of 1,406 commercial loans, with an aggregate balance of $488.1 million, in each case related to a hardship caused by the COVID-19 pandemic and responses thereto. Park has worked with borrowers and provided modifications in the form of either interest only deferral or principal and interest deferral, in each case, for initial periods of up to 90 days. As necessary, Park made available a second 90-day interest only deferral or principal and interest deferral bringing the total potential deferral period to six months. Modifications were structured in a manner to best address each individual customer's then current situation. A majority of these modifications were excluded from the troubled debt restructuring ("TDR") classification under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators. The modified loans are considered current and continue to accrue interest during the deferral period.
Of the $560.3 million of COVID-19 modifications during the two years ended December 31, 2021, $30.9 million, or 0.45% of total loans, remained in deferral as of December 31, 2021 and $7.1 million were greater than or equal to 30 days past due in accordance with the modified terms at December 31, 2021.
Financial Results by segment
The following table reflects the net income (loss) by segment for the years ended December 31, 2021, 2020 and 2019. Park's segments include PNB and "All Other" which primarily consists of Park as the "Parent Company", GFSC and SEPH. SEPH is a non-bank subsidiary of Park, holding former Vision Bank OREO property and non-performing loans.
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| Table 1 - Net Income (Loss) by Segment |
| | | | | | |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| PNB | | $ | 159,461 | | | $ | 123,730 | | | $ | 113,600 | |
| All Other | | (5,516) | | | 4,193 | | | (10,900) | |
| Total Park | | $ | 153,945 | | | $ | 127,923 | | | $ | 102,700 | |
Net income for the year ended December 31, 2021 of $153.9 million represented a $26.0 million, or 20.3%, increase compared to $127.9 million for the year ended December 31, 2020. Net income for both the year ended December 31, 2021 and the year ended December 31, 2020 included several items of income and expense that impact the comparability of period results. These items are detailed in the "ANALYSIS OF EARNINGS - Items Impacting Comparability" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion provides additional information regarding the PNB segment, followed by additional information regarding All Other, which consists of the Parent Company, GFSC and SEPH.
The Park National Bank (PNB)
The table below reflects PNB's net income for the years ended December 31, 2021, 2020 and 2019.
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| Table 2 - PNB Summary Income Statement | | | |
| (In thousands) | 2021 | 2020 | 2019 |
| Net interest income | $ | 328,398 | | $ | 326,375 | | $ | 293,130 | |
(Recovery of) provision for credit losses (1) | (8,554) | | 30,813 | | 8,356 | |
| Other income | 126,802 | | 124,231 | | 92,392 | |
| Other expense | 266,678 | | 268,938 | | 237,433 | |
| Income before income taxes | $ | 197,076 | | $ | 150,855 | | $ | 139,733 | |
| Income tax expense | 37,615 | | 27,125 | | 26,133 | |
| Net income | $ | 159,461 | | $ | 123,730 | | $ | 113,600 | |
(1) Park adopted ASU 2016-13 effective January 1, 2021. The allowance for credit losses as of December 31, 2021 and the related (recovery of) provision for credit losses for the year ended December 31, 2021 were calculated utilizing this new guidance.
Net interest income of $328.4 million for the year ended December 31, 2021 represented a $2.0 million, or 0.6%, increase compared to $326.4 million for the year ended December 31, 2020. The increase was a result of an $18.7 million decrease in interest expense, partially offset by a $16.7 million decrease in interest income.
The $16.7 million decrease in interest income was primarily due to a $312,000 decrease in investment income and a $16.3 million decrease in interest income on loans. The decrease in investment income was primarily the result of a decrease in the yield on investments, which decreased 43 basis points to 2.23% for the year ended December 31, 2021, compared to 2.66% for the year ended December 31, 2020, partially offset by a $200.5 million increase in average investments. The decrease in interest income on loans was primarily the result of a decrease in the yield on loans, which decreased 25 basis points to 4.41% for the year ended December 31, 2021, compared to 4.66% for the year ended December 31, 2020. The decrease in yield on loans was partially offset by a $35.5 million increase in average loans from $6.97 billion for the year ended December 31, 2020 to $7.01 billion for the year ended December 31, 2021. The increase in average loans was impacted by the addition of average PPP loans of approximately $257.4 million and $352.6 million for the years ended December 31, 2021 and 2020, respectively, and also resulted in interest and fee income of $18.0 million and $16.7 million for the year ended December 31, 2021 and 2020, respectively. Excluding the impact of PPP loans, the yield on loans was 4.31% for the year ended December 31, 2021, a decrease of 35 basis points compared to 4.66% for the year ended December 31, 2020.
The $18.7 million decrease in interest expense was primarily due to a $15.0 million decrease in interest expense on deposits as well as a $3.7 million decrease in interest expense on borrowings. The decrease in interest expense on deposits was partially the result of a decrease in the cost of deposits of 29 basis points, from 0.41% for the year ended December 31, 2020 to 0.12% for the year ended December 31, 2021. The decrease in the interest expense on deposits was partially offset by a $13.0 million increase in average on-balance sheet interest bearing deposits from $5.24 billion for the year ended December 31, 2020, to $5.25 billion for the year ended December 31, 2021. The increase in on-balance sheet interest bearing deposits was due to an increase in savings deposits, which was partially offset by declines in both higher-cost time deposits and transaction accounts. During the years ended December 31, 2021 and 2020, Park made the decision to participate in two programs to transfer deposits off balance sheet in order to manage growth of the balance sheet. This decision also minimized the increase in interest bearing deposits.
The decrease in interest expense on borrowings was partially the result of a $91.2 million decrease in average borrowings from $403.9 million for the year ended December 31, 2020, to $312.7 million for the year ended December 31, 2021. The cost of borrowings also decreased by 76 basis points, from 1.41% for the year ended December 31, 2020 to 0.65% for the year ended December 31, 2021.
The recovery of credit losses of $8.6 million for the year ended December 31, 2021 represented a difference of $39.4 million, compared to a provision for credit losses of $30.8 million for the year ended December 31, 2020. Refer to the “CREDIT METRICS AND (RECOVERY OF) PROVISION FOR CREDIT LOSSES" section for additional details regarding the level of the (recovery of) provision for credit losses recognized in each period presented above.
Other income of $126.8 million for the year ended December 31, 2021 represented an increase of $2.6 million, or 2.1%, compared to $124.2 million for the year ended December 31, 2020. The $2.6 million increase was primarily related to (i) a $5.6 million increase in income from fiduciary activities; (ii) a $3.7 million increase in debit card fee income; (iii) a $2.9 million increase in miscellaneous income, primarily related to refunds of a consumer insurance product, an increase in income
from printed check sales and an increase in gain on sale of assets; and (iv) a $1.4 million increase in gain (loss) on equity securities, net. These increases were partially offset by a $3.3 million decrease in gain on sale of debt securities and a $7.7 million decrease in other service income. The decline in other service income was primarily due to declines in investor rate locks, mortgage loans held for sale and fee income from mortgage loan originations, partially offset by an increase in the valuation of mortgage servicing rights.
A summary of mortgage loan originations for the years ended December 31, 2021 and 2020 follows.
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| Table 3 - PNB Mortgage Loan Originations | | | | |
| (In thousands) | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | YTD 2021 |
| Mortgage Loan Origination Volume | | | | | |
| Sold | $ | 191,116 | | $ | 142,398 | | $ | 123,757 | | $ | 98,007 | | $ | 555,278 | |
| Portfolio | 82,613 | | 74,670 | | 66,718 | | 60,685 | | 284,686 | |
| Construction | 28,987 | | 37,266 | | 28,486 | | 24,816 | | 119,555 | |
| Service released | 1,266 | | 2,204 | | 4,537 | | 5,795 | | 13,802 | |
| Total mortgage loan originations | $ | 303,982 | | $ | 256,538 | | $ | 223,498 | | $ | 189,303 | | $ | 973,321 | |
| | | | | |
| Refinances as a % of Total Mortgage Loan Originations | 71.1 | % | 50.0 | % | 44.8 | % | 44.2 | % | 54.2 | % |
| | | | | |
| Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | YTD 2020 |
| Mortgage Loan Origination Volume | | | | | |
| Sold | $ | 85,030 | | $ | 248,339 | | $ | 355,755 | | $ | 325,841 | | $ | 1,014,965 | |
| Portfolio | 56,018 | | 64,351 | | 61,227 | | 99,077 | | 280,673 | |
| Construction | 33,109 | | 33,754 | | 40,560 | | 29,825 | | 137,248 | |
| Service released | 3,794 | | 2,362 | | 2,275 | | 2,950 | | 11,381 | |
| Total mortgage loan originations | $ | 177,951 | | $ | 348,806 | | $ | 459,817 | | $ | 457,693 | | $ | 1,444,267 | |
| | | | | |
| Refinances as a % of Total Mortgage Loan Originations | 48.1 | % | 67.8 | % | 68.5 | % | 71.4 | % | 66.7 | % |
Total mortgage loan originations decreased $470.9 million, or 32.6%, to $973.3 million for the year ended December 31, 2021 compared to $1,444.3 million for the year ended December 31, 2020.
The table below reflects PNB's other expense for the years ended December 31, 2021 and 2020.
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| Table 4 - PNB Other Expense Information | | | | |
| (In thousands) | December 31, 2021 | December 31, 2020 | $ change | % change |
| Other expense: | | | | |
| Salaries | $ | 120,949 | | $ | 122,586 | | $ | (1,637) | | (1.3) | % |
| Employee benefits | 40,895 | | 36,282 | | 4,613 | | 12.7 | % |
| Occupancy expense | 12,555 | | 13,571 | | (1,016) | | (7.5) | % |
| Furniture and equipment expense | 10,880 | | 18,781 | | (7,901) | | (42.1) | % |
| Data processing fees | 30,202 | | 11,653 | | 18,549 | | 159.2 | % |
| Professional fees and services | 19,980 | | 24,444 | | (4,464) | | (18.3) | % |
| Marketing | 6,072 | | 5,825 | | 247 | | 4.2 | % |
| Insurance | 5,621 | | 5,804 | | (183) | | (3.2) | % |
| Communication | 3,498 | | 3,985 | | (487) | | (12.2) | % |
| State tax expense | 3,821 | | 3,293 | | 528 | | 16.0 | % |
| Amortization of intangible assets | 1,798 | | 2,263 | | (465) | | (20.5) | % |
| FHLB prepayment penalty | — | | 10,529 | | (10,529) | | N.M. |
| Foundation contributions | 4,000 | | 3,000 | | 1,000 | | 33.3 | % |
| Miscellaneous | 6,407 | | 6,922 | | (515) | | (7.4) | % |
| Total other expense | $ | 266,678 | | $ | 268,938 | | $ | (2,260) | | (0.8) | % |
Other expense of $266.7 million for the year ended December 31, 2021 represented a decrease of $2.3 million, or 0.8%, compared to $268.9 million for the year ended December 31, 2020. The decrease in salaries expense was primarily related to decreases in base salary expense, additional compensation expense and vacation accrual, partially offset by increases in officer incentive expense and share-based compensation expense. The increase in employee benefits expense was primarily related to increased pension plan expense, payroll tax expense and group insurance costs. The decrease in occupancy expense was primarily related to decreased lease expense. The decrease in furniture and equipment expense was primarily related to a change in the classification under which software and related maintenance costs were expensed, which are now classified under data processing fees. The impact of this decrease in furniture and equipment expense was partially offset by an increase in depreciation expense on equipment. The increase in data processing fees was related to increased debit card processing costs and other data processing and software costs, partially due to the previously mentioned change in classification from furniture and equipment expense and a change in expensing software costs from other fees within professional fees and services to data processing fees. The decrease in professional fees and services was primarily related to decreased legal expenses, title, appraisal and credit costs and decreases in other fees (due to the change to expensing software costs under data processing fees), partially offset by increases in management and consulting expenses. The decrease in the FHLB prepayment penalty was due to a $10.5 million prepayment penalty on FHLB borrowings of $150 million repaid during the year ended December 31, 2020; there was no similar prepayment during the year ended December 31, 2021. The increase in foundation contributions was due to a $4.0 million contribution to Park's charitable foundation during the year ended December 31, 2021, compared to a $3.0 million contribution made during the year ended December 31, 2020.
The table below provides certain balance sheet information and financial ratios for PNB as of or for the years ended December 31, 2021 and 2020.
| | | | | | | | | | | | | | |
| Table 5 - PNB Balance Sheet Information | | | | |
| (In thousands) | December 31, 2021 | December 31, 2020 | | % change from 12/31/20 |
| Loans | $ | 6,868,935 | | $ | 7,165,840 | | | (4.14) | % |
Loans less PPP loans (1) | 6,794,515 | | 6,834,269 | | | (0.58) | % |
Allowance for credit losses (2) | 83,111 | | 84,321 | | | (1.43) | % |
| Net loans | 6,785,824 | | 7,081,519 | | | (4.18) | % |
| Investment securities | 1,807,392 | | 1,114,742 | | | 62.14 | % |
| Total assets | 9,538,217 | | 9,236,915 | | | 3.26 | % |
| Total deposits | 8,157,720 | | 7,820,983 | | | 4.31 | % |
Average assets (3) | 9,814,766 | | 9,198,141 | | | 6.70 | % |
Efficiency ratio (4) | 58.21 | % | 59.31 | % | | (1.85) | % |
| Return on average assets | 1.62 | % | 1.35 | % | | 20.00 | % |
(1) Excludes $74.4 million of PPP loans at December 31, 2021 and $331.6 million of PPP loans at December 31, 2020.
(2) Park adopted ASU 2016-13 effective January 1, 2021. The allowance for credit losses as of December 31, 2021 and the related (recovery of) provision for credit losses for the year ended December 31, 2021 were calculated utilizing this new guidance.
(3) Average assets for the year ended December 31, 2021 and 2020.
(4) Calculated utilizing fully taxable equivalent net interest income which includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustments were $2.9 million for both the year ended December 31, 2021 and the year ended December 31, 2020.
Loans outstanding at December 31, 2021 were $6.87 billion, compared to $7.17 billion at December 31, 2020, a decrease of $296.9 million, or 4.1%. Excluding $74.4 million and $331.6 million of PPP loans at December 31, 2021 and December 31, 2020, respectively, loans outstanding were $6.79 billion at December 31, 2021, compared to $6.83 billion at December 31, 2020, a decrease of $39.8 million, or 0.6%. The table below breaks out the change in loans outstanding, by loan type.
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| Table 6 - PNB |
| (In thousands) | December 31, 2021 | December 31, 2020 | | change from 12/31/20 | % change from 12/31/20 |
| Home equity | $ | 165,691 | | $ | 182,131 | | | $ | (16,440) | | (9.0) | % |
| Installment | 1,685,687 | | 1,650,620 | | | 35,067 | | 2.1 | % |
| Real estate | 1,142,991 | | 1,213,820 | | | (70,829) | | (5.8) | % |
Commercial (excluding PPP loans) (1)(2) | 3,797,673 | | 3,784,153 | | | 13,520 | | 0.4 | % |
| PPP loans | 74,420 | | 331,571 | | | (257,151) | | N.M. |
| Other | 2,473 | | 3,545 | | | (1,072) | | (30.2) | % |
| Total loans | $ | 6,868,935 | | $ | 7,165,840 | | | $ | (296,905) | | (4.1) | % |
| Total loans (excluding PPP loans) | $ | 6,794,515 | | $ | 6,834,269 | | | $ | (39,754) | | (0.6) | % |
(1) Excludes $74.4 million of PPP loans at December 31, 2021 and $331.6 million of PPP loans at December 31, 2020.
(2) Commercial (excluding PPP loans) decreased by $58.8 million, or 1.6% (2.1% annualized), from December 31, 2020 to September 30, 2021 and grew by $72.3 million, or 1.9% (7.7% annualized), from September 30, 2021 to December 31, 2021.
PNB's allowance for credit losses decreased by $1.2 million, or 1.4%, to $83.1 million at December 31, 2021, compared to $84.3 million at December 31, 2020. This decrease included the impact of a $6.7 million increase to the allowance for credit losses as the result of the adoption of ASU 2016-13. Net recoveries were $640,000, or 0.01% of total average loans, for the year ended December 31, 2021 and net charge-offs were $1.2 million, or 0.02% of total average loans, for the year ended December 31, 2020. Refer to the “CREDIT METRICS AND (RECOVERY OF) PROVISION FOR CREDIT LOSSES" section for additional information regarding PNB's loan portfolio and the level of provision for credit losses recognized in each period presented.
Total deposits at December 31, 2021 were $8.16 billion, compared to $7.82 billion at December 31, 2020, an increase of $336.7 million, or 4.3%. During the years ended December 31, 2021 and 2020, Park made the decision to participate in two programs to transfer deposits off balance sheet in order to manage growth of the balance sheet, as deposits increased significantly throughout the COVID-19 pandemic. At December 31, 2021 and December 31, 2020, Park had $983.1 million and $710.1 million, respectively, in deposits which were off-balance sheet. Total deposits would have increased $609.7 million, or 7.1%, compared to December 31, 2020 had the $983.1 million and $710.1 million in deposits remained on the balance sheet at the respective dates. The table below breaks out the change in deposit balances, by deposit type.
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| Table 7 - PNB |
| (In thousands) | December 31, 2021 | December 31, 2020 | | change from 12/31/20 | % change from 12/31/20 |
| Non-interest bearing deposits | $ | 3,320,413 | | $ | 2,978,005 | | | $ | 342,408 | | 11.5 | % |
| Transaction accounts | 1,502,876 | | 1,381,479 | | | 121,397 | | 8.8 | % |
| Savings | 2,622,771 | | 2,596,926 | | | 25,845 | | 1.0 | % |
| Certificates of deposit | 711,660 | | 864,573 | | | (152,913) | | (17.7) | % |
| Total deposits | $ | 8,157,720 | | $ | 7,820,983 | | | $ | 336,737 | | 4.3 | % |
| Off balance sheet deposits | 983,053 | | 710,101 | | | 272,952 | | 38.4 | % |
| Total deposits including off balance sheet deposits | $ | 9,140,773 | | $ | 8,531,084 | | | $ | 609,689 | | 7.1 | % |
All Other
The table below summarizes the All Other net (loss) income for the years ended December 31, 2021, 2020, and 2019.
| | | | | | | | | | | |
| Table 8 - All Other Income Statement | | | |
| (In thousands) | 2021 | 2020 | 2019 |
| Net interest income | $ | 1,495 | | $ | 1,255 | | $ | 4,607 | |
Recovery of credit losses (1) | (3,362) | | (18,759) | | (2,185) | |
| Other income | 3,142 | | 1,433 | | 4,801 | |
| Other expense | 16,840 | | 17,657 | | 26,555 | |
| Net (loss) income before income tax benefit | $ | (8,841) | | $ | 3,790 | | $ | (14,962) | |
| Income tax benefit | (3,325) | | (403) | | (4,062) | |
| Net (loss) income | $ | (5,516) | | $ | 4,193 | | $ | (10,900) | |
(1) Park adopted ASU 2016-13 effective January 1, 2021. The allowance for credit losses as of December 31, 2021 and the related recovery of credit losses for the year ended December 31, 2021 were calculated utilizing this new guidance.
The net interest income for All Other included, for all periods presented, interest income on subordinated debt investments in PNB, which were eliminated in the consolidated Park National Corporation totals, as well as interest income on GFSC loans and SEPH nonaccrual loan relationships. The net interest income for All Other included for the years ended December 31, 2021 and 2020, interest expense on $175.0 million aggregate principal amount of 4.50% Fixed-to-Floating Rate Subordinated Notes due 2030 issued by Park in August 2020 (the "Park Subordinated Notes").
Net interest income reflected net interest income of $1.5 million for the year ended December 31, 2021, compared to net interest income of $1.3 million for the year ended December 31, 2020. The change was largely the result of an increase of $7.4 million in loan interest income related to payment collections at SEPH, offset by a decrease of $2.6 million in net interest income from GFSC, and by an increase in interest expense on borrowings of $4.4 million, mainly related to the Park Subordinated Notes.
SEPH had net recoveries of $2.7 million for the year ended December 31, 2021, compared to net recoveries of $19.0 million for the year ended December 31, 2020, and GFSC had net recoveries of $28,000 for the year ended December 31, 2021, compared to net charge-offs of $829,000 for the year ended December 31, 2020.
All Other had other income of $3.1 million for the year ended December 31, 2021, compared to $1.4 million for the year ended December 31, 2020. The change was largely due to an $878,000 increase in income related to partnership
investments, which went from a $21,000 loss for the year ended December 31, 2020 to an $857,000 gain for the year ended December 31, 2021, and a $410,000 difference in gain (loss) on equity securities, net, which went from a $226,000 loss for the year ended December 31, 2020 to a $184,000 gain for the year ended December 31, 2021.
All Other had other expense of $16.8 million for the year ended December 31, 2021, compared to $17.7 million for the year ended December 31, 2020. The decrease was largely due to a $625,000 decrease in expense at GFSC, as well as a $605,000 decrease in merger-related expenses associated with the Carolina Alliance acquisition.
The table below provides certain balance sheet information for All Other as of or for the years ended December 31, 2021 and 2020.
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| Table 9 - All Other | | | | |
| (Dollars in thousands) | December 31, 2021 | December 31, 2020 | | % change from 12/31/20 |
| Loans | $ | 2,187 | | $ | 11,945 | | | (81.69) | % |
Allowance for credit losses (1) | 86 | | 1,354 | | | (93.65) | % |
| Net loans | 2,101 | | 10,591 | | | (80.16) | % |
| Total assets | 22,037 | | 42,106 | | | (47.66) | % |
Average assets (2) | 32,692 | | 43,492 | | | (24.83) | % |
(1) Park adopted ASU 2016-13 effective January 1, 2021. The allowance for credit losses as of December 31, 2021 and the related recovery of credit losses for the year ended December 31, 2021 were calculated utilizing this new guidance.
(2) Average assets for the years ended December 31, 2021 and 2020, respectively.
Park National Corporation
The table below summarizes Park's net income for the years ended December 31, 2021, 2020, and 2019.
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| Table 10 - Park Summary Income Statement | | | |
| (In thousands) | 2021 | 2020 | 2019 |
| Net interest income | $ | 329,893 | | $ | 327,630 | | $ | 297,737 | |
| (Recovery of) provision for credit losses | (11,916) | | 12,054 | | 6,171 | |
| Other income | 129,944 | | 125,664 | | 97,193 | |
| Other expense | 283,518 | | 286,595 | | 263,988 | |
| Income before income taxes | $ | 188,235 | | $ | 154,645 | | $ | 124,771 | |
| Income tax expense | 34,290 | | 26,722 | | 22,071 | |
| Net income | $ | 153,945 | | $ | 127,923 | | $ | 102,700 | |
DIVIDENDS ON COMMON SHARES
Cash dividends declared on Park's common shares were $4.52 in 2021, $4.28 in 2020 and $4.24 in 2019. The quarterly cash dividend on Park's common shares was $1.23 per share for the first quarter of 2021, $1.03 per share for the second and third quarter of 2021, and $1.23 per share for the fourth quarter of 2021. The first and fourth quarters of 2021 included a one-time special cash dividend of $0.20 per share. This was the fourth year in a row that Park has declared a special cash dividend ($0.20 twice in 2021, $0.20 in both 2020 and 2019, and $0.25 in 2018), which began in 2018 when the corporate federal income tax rate was reduced from 35% to 21% and has continued each year that the tax rates have remained at the lower level. The quarterly cash dividend on Park's common shares was $1.22 per share for the first quarter of 2020, and $1.02 per share for the second, third, and fourth quarter of 2020. The first quarter of 2020 included a one-time special cash dividend of $0.20 per share. The quarterly cash dividend on Park's common shares was $1.21 per share for the first quarter of 2019, and $1.01 per share for the second, third, and fourth quarter of 2019. The first quarter of 2019 included a one-time special cash dividend of $0.20 per share. Please see the discussion of limitations on Park's ability to pay dividends in the section captioned "Supervision and Regulation of Park and its Subsidiaries – Limits on Dividends and Other Payments" in "ITEM 1. BUSINESS" of this Annual Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES
The significant accounting policies used in the development and presentation of Park’s consolidated financial statements are listed in "Note 1 - Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." The accounting and reporting policies of Park conform with U.S. GAAP and general practices within the financial services industry. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
The COVID-19 pandemic has caused significant unprecedented disruption around the world that has affected daily living and negatively impacted the global economy. The effects of the COVID-19 pandemic may meaningfully impact significant estimates such as the allowance for credit losses, goodwill, and pension plan obligations and related expenses.
Allowance for Credit Losses: Park believes the determination of the allowance for credit losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance for credit losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses over the life of an asset or an off-balance sheet credit exposure. Management’s determination of the adequacy of the allowance for credit losses is based on periodic evaluations of past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. However, this evaluation has subjective components requiring material estimates, including expected default probabilities, the expected loss given default, the amounts and timing of expected future cash flows on individually evaluated loans, and estimated losses based on historical loss experience and forecasted economic conditions. All of these factors may be susceptible to significant change. To the extent that actual results differ from management estimates, additional provisions for credit losses may be required that would adversely impact earnings in future periods.
One of the most significant judgments impacting the ACL estimate is the economic forecast for Ohio unemployment, Ohio GDP, and Ohio HPI. Changes in the economic forecasts could significantly affect the estimated credit losses which could potentially lead to materially different allowance levels from one reporting period to the next.
In calculating the ACL, management weighs several different scenarios, including a baseline (most likely) scenario and an adverse scenario. To create a hypothetical sensitivity analysis, management calculated a quantitative allowance using a 100% weighting applied to an adverse scenario. This scenario considers among other things that, (1) new cases, hospitalizations and deaths from COVID rise again, causing some state and local governments to impose restrictions, those that are not vaccinated continue to refuse the vaccines, and worries about the Omicron variant rises; (2) as a result of the unknown Omicron variant, consumers’ uncertainty about the safety of hotels, stores, restaurants and flights rise again and, therefore, spending on travel, retail and hotels decline; and (3) disagreements in the U.S. Congress prevent any additional fiscal support. The adverse scenario forecasts unemployment for the next twelve months to range from 6.6% to 9.4%. Excluding consideration of general reserve adjustments, this sensitivity analysis would result in a hypothetical increase in Park's ACL of $20.7 million as of December 31, 2021.
Refer to the “CREDIT METRICS AND (RECOVERY OF) PROVISION FOR CREDIT LOSSES” section within this "ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for additional discussion.
Goodwill: Management believes that the accounting for goodwill also involves a higher degree of judgment than most other significant accounting policies. U.S. GAAP establishes standards for the impairment assessment of goodwill. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in each business acquired. Park’s goodwill, as of December 31, 2021, relates to the value inherent in the banking industry and that value is dependent upon the ability of Park’s national bank subsidiary, PNB, to provide quality, cost-effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base, the inability to deliver cost-effective services over sustained periods or significant credit problems could lead to impairment of goodwill that could, in turn, adversely impact earnings in future periods.
U.S. GAAP requires an annual evaluation of goodwill for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Park evaluates goodwill for impairment during the second quarter of each year, with financial data as of March 31. Based on the qualitative analysis performed as of April 1, 2021, the Company
determined that goodwill for Park's reporting unit, PNB, was not impaired. Management continues to monitor economic factors, including economic conditions as a result of the COVID-19 pandemic and responses thereto, to evaluate goodwill impairment. The fair value of the goodwill, which resides on the books of PNB, is evaluated for potential impairment by reviewing the past and projected operating results for PNB, deposit and loan totals for PNB and banking industry comparable information.
Pension Plan: The determination of pension plan obligations and related expenses requires the use of assumptions to estimate the amount of benefits that employees will earn while working, as well as the present value of those benefits. Annual pension expense is principally based on four components: (1) the value of benefits earned by employees for working during the year (service cost), (2) the increase in the liability due to the passage of time (interest cost), and (3) other gains and losses, reduced by (4) the expected return on plan assets for our pension plan.
Assumptions used to measure our annual pension expense include:
•the interest rate used to determine the present value of liabilities (discount rate);
•certain employee-related factors, such as turnover, retirement age and mortality;
•the expected return on assets in our funded pension plan; and
•the rate of salary increases where benefits are based on earnings.
The most significant of these assumption are the discount rate and the expected return on assets. The discount rate utilized for the December 31, 2021 calculation was 3.23% and the expected return on plan assets was 6.92%. Presented below is the estimated impact on Park's projected benefit obligation ("PBO") and 2022 pension expense assuming changes in the significant assumptions.
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| Table 11-Pension Sensitivity |
| | Discount Rate | | Expected Return on Plan Assets |
| (In thousands) | | - 25 BPS | | +25 BPS | | - 50 BPS | | +50 BPS |
| Change in PBO | | $ | 5,560 | | | $ | (5,260) | | | N.A. | | N.A. |
| Change in Pension Expense | | 110 | | | (110) | | | $ | 1,290 | | | $ | (1,290) | |
Our assumptions reflect our historical experience and management’s best judgment regarding future expectations. Due to the significant management judgment involved, our assumptions could have a material impact on the measurement of our pension plan expense and obligation.
ABOUT OUR BUSINESS
Through our national bank subsidiary, PNB, Park is engaged in a general commercial banking and trust business, primarily in Ohio, Kentucky, North Carolina and South Carolina, with the exception of nationwide aircraft loans and nationwide asset-based lending to consumer finance companies. Management believes there are a significant number of consumers and businesses that seek long-term relationships with community-based financial institutions of quality and strength. While not engaging in activities such as foreign lending, nationally syndicated loans or investment banking, Park attempts to meet the needs of our customers for commercial, real estate and consumer loans, and investment, fiduciary and deposit services.
Park’s subsidiaries compete for deposits and loans with other banks, savings associations, credit unions and other types of financial institutions. At December 31, 2021, Park operated 96 financial service offices (including those of PNB and Scope Leasing, Inc. ("Scope Aircraft Finance")) and a network of 116 automated teller machines in 26 Ohio counties, three North Carolina counties, four South Carolina counties and one Kentucky county. SEPH and Guardian each operated one administrative office, located in Newark, Ohio.
SOURCE OF FUNDS
Deposits: Park’s major source of funds is deposits from individuals, businesses and local government entities. These deposits consist of non-interest bearing and interest bearing deposits.
Average total deposits were $8,187 million in 2021, compared to $7,633 million in 2020, and $6,905 million in 2019. The table below provides a summary of deposit balances as of December 31, 2021 and 2020, along with the change over the past year.
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| Table 12 - Year-End Deposits | | | | | | |
| December 31 (In thousands) | | 2021 | | 2020 | | Change |
| Non-interest bearing checking | | $ | 3,066,419 | | | $ | 2,727,100 | | | $ | 339,319 | |
| Interest bearing transaction accounts | | 1,502,876 | | | 1,381,479 | | | 121,397 | |
| Savings | | 2,622,108 | | | 2,597,827 | | | 24,281 | |
| All other time deposits | | 711,660 | | | 864,573 | | | (152,913) | |
| Other | | 1,465 | | | 1,379 | | | 86 | |
| Total | | $ | 7,904,528 | | | $ | 7,572,358 | | | $ | 332,170 | |
| Off balance sheet deposits | | 983,053 | | | 710,101 | | | 272,952 | |
| Total deposits including off balance sheet deposits | | $ | 8,887,581 | | | $ | 8,282,459 | | | $ | 605,122 | |
During the years ended December 31, 2021 and 2020, Park made the decision to participate in two programs in order to manage growth of the balance sheet, as deposits increased significantly throughout the COVID-19 pandemic. At December 31, 2021 and December 31, 2020, Park had $983.1 million and $710.1 million, respectively, in off balance sheet deposits. Total deposits would have increased $605.1 million, or 7.3%, compared to December 31, 2020 had the $983.1 million and $710.1 million in deposits remained on the balance sheet.
The average interest rate paid on interest bearing deposits was 0.12% in 2021, compared to 0.41% in 2020 and 1.01% in 2019. The average cost of interest bearing deposits for each quarter of 2021 was 0.09% for the fourth quarter, 0.11% for the third quarter, 0.13% for the second quarter and 0.16% for the first quarter.
As of December 31, 2021 and 2020, approximately $1.7 billion and $1.8 billion, respectively, of our deposit portfolio was uninsured. The uninsured amounts are estimates based on the methodologies used for the Corporation's regulatory reporting requirements.
The following table provides a summary of the portion of the Corporation's time deposits, by account, that are in excess of the FDIC insurance limit of $250,000, by remaining time until maturity, as of December 31, 2021:
| | | | | | | | |
| Table 13 - Maturities of Time Deposits in Excess of FDIC Insurance Limit | | |
| December 31 (In thousands) | | 2021 |
| 3 months or less | | $ | 12,030 | |
| Over 3 months through 6 months | | 12,835 | |
| Over 6 months through 12 months | | 21,595 | |
| Over 12 months | | 17,818 | |
| Total | | $ | 64,278 | |
Short-Term Borrowings: Short-term borrowings consist of securities sold under agreements to repurchase, Federal Home Loan Bank advances, Federal Funds purchased and other borrowings. These funds are used to manage the Corporation’s liquidity needs and interest rate sensitivity risk. The average rate paid on short-term borrowings generally moves closely with changes in market interest rates for short-term investments. The average rate paid on short-term borrowings was 0.27% in 2021, compared to 0.40% in 2020 and 1.15% in 2019. The year-end balance for short-term borrowings was $239 million at December 31, 2021, compared to $342 million at December 31, 2020 and $231 million at December 31, 2019.
Long-Term Debt: Long-term debt primarily consists of borrowings from the Federal Home Loan Bank. In addition, Park had a term note with another financial institution which was paid off on August 2, 2021. The average balance of long-term debt and the average cost of long-term debt include the subordinated notes discussed in the following section. In 2021, the average balance of long-term debit was $206 million, compared to $216 million in 2020 and $341 million in 2019. The average interest rate paid on long-term debt was 4.32% in 2021, compared to 3.55% in 2020 and 2.77% in 2019. Average total debt (long-term and short-term) was $493 million in 2021, compared to $495 million in 2020 and $557 million in 2019. Average total debt decreased by $2 million, or 0.3%, in 2021 compared to 2020, and decreased by $62 million, or 11.1%, in 2020
compared to 2019. Average long-term debt was 42% of average total debt in 2021, compared to 44% of average total debt in 2020 and 61% of average total debt in 2019.
Subordinated Notes: Park assumed, with the 2007 acquisition of Vision's parent holding company, $15.5 million of floating rate junior subordinated notes. The $15.5 million of junior subordinated notes were purchased by Vision Bancshares Trust I ("Trust I") following the issuance of Trust I's $15.0 million of floating rate preferred securities. The interest rate on these junior subordinated notes adjusts every quarter at 148 basis points above the three-month LIBOR interest rate. The maturity date for the junior subordinated notes is December 30, 2035 and the junior subordinated notes may be prepaid, without penalty, after December 30, 2010. These junior subordinated notes qualify as Tier 1 capital under current Federal Reserve Board guidelines.
On August 20, 2020, Park completed the issuance and sale of $175 million aggregate principal amount of its 4.50% Fixed-to-Floating Rate Subordinated Notes due 2030 (the "Subordinated Notes"). The Subordinated Notes initially bear a fixed interest rate of 4.50% per year, payable semi-annually in arrears on March 1 and September 1 of each year, commencing on March 1, 2021. Commencing on September 1, 2025, the Subordinated Notes will bear interest at a floating rate per annum equal to the Benchmark rate, which is expected to be Three-Month Term SOFR, plus a spread of 439 basis points for each quarterly interest period during the floating rate period, payable quarterly in arrears; provided, however, that if the Benchmark rate is less than zero, then the Benchmark rate will be deemed to be zero. The Company may, at its option, beginning with the interest payment date of September 1, 2025 and on any interest payment date thereafter, redeem the Subordinated Notes, in whole or in part, from time to time, subject to obtaining the prior approval of the Federal Reserve Board to the extent the approval of the Federal Reserve Board is then required under the capital adequacy rules of the Federal Reserve Board, at a redemption price equal to 100% of the principal amount of the Subordinated Notes being redeemed, plus accrued and unpaid interest thereon to but excluding the date of redemption. The Subordinated Notes qualify as Tier 2 capital for Park under the Federal Reserve Board's capital adequacy rules.
See "Note 16 - Subordinated Notes" of the Notes to Consolidated Financial Statements included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report on Form 10-K for additional information about the Subordinated Notes.
Shareholders' Equity: The ratio of total shareholders' equity to total assets was 11.62% at December 31, 2021, compared to 11.21% at December 31, 2020 and 11.32% at December 31, 2019. The ratio of tangible shareholders’ equity [shareholders' equity ($1,110.8 million) less goodwill ($159.6 million) and other intangible assets ($7.5 million)] to tangible assets [total assets ($9,560.3 million) less goodwill ($159.6 million) and other intangible assets ($7.5 million)] was 10.05% at December 31, 2021, compared to 9.57% at December 31, 2020 and 9.51% at December 31, 2019.
In accordance with U.S. GAAP, Park reflects any unrealized holding gain or loss on AFS debt securities, any unrealized net holding gain or loss on cash flow hedging derivatives and any change in the funded status of Park's pension plan, net of income taxes, as accumulated other comprehensive income (loss) which is part of Park’s shareholders’ equity.
The unrealized net holding gain, net of income taxes, on AFS debt securities was $21.2 million at year-end 2021, compared to $40.7 million at year-end 2020 and $17.5 million at year-end 2019.
The unrealized net holding loss, net of income taxes, on cash flow hedging derivatives was $206,000 at year-end 2021, compared to $698,000 at year-end 2020 and $454,000 at year-end 2019.
In accordance with U.S. GAAP, Park adjusts accumulated other comprehensive income to recognize the net actuarial gain or loss reflected in the funding status of Park’s pension plan. See "Note 19 - Benefit Plans" of the Notes to Consolidated Financial Statements included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report on Form 10-K for information on the accounting for Park’s pension plan. Pertaining to the funding status of the pension plan, Park recognized a net comprehensive gain of $28.6 million in 2021, compared to a net comprehensive loss of $7.7 million in 2020 and a net comprehensive gain of $3.0 million in 2019. The net comprehensive gain in 2021 was due to greater than expected investment returns on pension plan assets as well as a net decrease in the benefit obligation due to assumption changes. The net comprehensive loss in 2020 was due to changes in actuarial assumptions which were partially offset by increased investment returns on pension plan assets. The net comprehensive gain in 2019 was due to changes in actuarial assumptions being more than offset by increased investment returns on pension plan assets.
At year-end 2021, the balance in accumulated other comprehensive loss pertaining to the pension plan was an unrealized loss of $5.8 million, compared to $34.4 million at December 31, 2020 and $26.7 million at December 31, 2019.
INVESTMENT OF FUNDS
Loans: Average loans were $7,015 million in 2021, compared to $6,990 million in 2020 and $6,208 million in 2019. The average yield on average loan balances was 4.53% in 2021, compared to 4.71% in 2020 and 5.19% in 2019. Approximately 49% of Park’s loan balances mature or reprice within one year (see Table 38). The average yield on average loan balances for each quarter of 2021 was 4.58% for the fourth quarter, 4.47% for the third quarter, 4.60% for the second quarter and 4.48% for the first quarter.
Loan interest income for 2021, 2020, and 2019 included $8.0 million, $453,000 and $256,000, respectively, related to payments received on certain SEPH nonaccrual loan relationships, some of which are participated with PNB. In addition, loan interest income included $3.3 million, $4.4 million and $5.2 million, respectively, of the accretion of loan purchase accounting adjustments related to the acquisitions of NewDominion and Carolina Alliance. Loan interest income for 2021 and 2020 included interest and fee income related to PPP loans of $18.0 million and $16.7 million, respectively. Excluding the impact of the purchase accounting accretion, SEPH income, and PPP income, the average yield on loans was 4.27%, 4.63% and 5.09%, for the years ended December 31, 2021, 2020, and 2019. Excluding the impact of the purchase accounting accretion, SEPH income, and PPP income, the average yield on loans was 4.20% for the fourth quarter of 2021, 4.25% for the third quarter of 2021, 4.29% for the second quarter of 2021, and 4.34% for the first quarter of 2021.
At December 31, 2021, loan balances were $6,871 million, compared to $7,178 million at year-end 2020, a decrease of $307 million, or 4.3%. Excluding $74.4 million and $331.6 million of PPP loans at December 31, 2021 and 2020, respectively, loans outstanding at December 31, 2021 were $6,797 million, a decrease of $49 million, or 0.7%, compared to $6,846 million at December 31, 2020. At December 31, 2020, loan balances were $7,178 million, compared to $6,501 million at year-end 2019, an increase of $676 million, or 10.4%. Excluding $331.6 million of PPP loans at December 31, 2020, loans outstanding at December 31, 2020 were $6,846 million, compared to $6,501 million at December 31, 2019, an increase of $345 million, or 5.3%.
The table below reports year-end loan balances by type of loan for the past three years.
| | | | | | | | | | | | | | | | | | | | |
| Table 14 - Loans by Type | | | | | | |
| December 31, | | | | | | |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Commercial, financial and agricultural | | $ | 1,298,626 | | | $ | 1,588,989 | | | $ | 1,185,110 | |
| Construction real estate | | 321,786 | | | 343,421 | | | 331,699 | |
| Residential real estate | | 1,738,707 | | | 1,813,044 | | | 1,892,726 | |
| Commercial real estate | | 1,801,792 | | | 1,748,189 | | | 1,609,413 | |
| Consumer | | 1,689,679 | | | 1,659,704 | | | 1,452,375 | |
| Leases | | 20,532 | | | 24,438 | | | 30,081 | |
| Total loans | | $ | 6,871,122 | | | $ | 7,177,785 | | | $ | 6,501,404 | |
PPP loans (1) | | 74,420 | | | 331,571 | | | — | |
| Total loans less PPP loans | | $ | 6,796,702 | | | $ | 6,846,214 | | | $ | 6,501,404 | |
(1) PPP loans are included in Commercial, financial and agricultural above.
On a combined basis, year-end commercial, financial and agricultural loans, construction real estate loans and commercial real estate loans decreased by $258 million, or 7.0%, in 2021. The decrease in 2021 was due to a decrease in commercial, financial and agricultural loans of $290.4 million, a decrease in construction real estate loans of $21.6 million, and an increase in commercial real estate loans of $53.6 million. Included within commercial, financial and agricultural loans were $74.4 million of PPP loans. On a combined basis, year-end commercial, financial and agricultural loans, construction real estate loans and commercial real estate loans increased by $554 million, or 17.7%, in 2020. The increase in 2020 was due to an increase in commercial real estate loans of $138.8 million, an increase in construction real estate loans of $11.7 million and an increase in commercial, financial and agricultural loans of $403.9 million. Included within commercial, financial and agricultural loans were $331.6 million of PPP loans. Excluding $74.4 million and $331.6 million of PPP loans at December 31, 2021 and 2020, respectively, commercial, financial and agricultural loans decreased $33 million, or 2.6% in 2021 and increased $72 million, or 6.1% in 2020.
Consumer loans increased by $30.0 million, or 1.8%, in 2021 and increased $207.3 million, or 14.3%, in 2020. The increase in consumer loans in each of 2021 and 2020 was primarily due to an increase in automobile lending in Ohio.
Residential real estate loans decreased by $74.3 million, or 4.1%, in 2021 and decreased by $79.7 million, or 4.2%, in 2020. The decrease in 2021 was due to a decrease in mortgage loans secured by residential real estate of $62.7 million, a decrease in home equity loans secured by residential real estate of $16.4 million and a decrease in installment loans secured by residential real estate of $2.8 million, partially offset by an increase in commercial loans secured by residential real estate of $7.6 million.
Leases decreased by $3.9 million to $20.5 million in 2021 and decreased $5.6 million to $24.4 million in 2020.
The table below summarizes the distribution of maturities for loan segments as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Table 15 - Loan Maturity Distribution | | | | | | | |
| | One Year or Less (1) | | Over One Through Five Years | | Over Five Through Fifteen Years | Over
Fifteen
Years | | Total |
| December 31, 2021 | | | | |
| (In thousands) | | | | |
| Commercial, financial and agricultural | | $ | 331,606 | | | $ | 685,012 | | | $ | 184,208 | | $ | 97,800 | | | $ | 1,298,626 | |
| Construction real estate | | 80,560 | | | 86,056 | | | 58,565 | | 96,605 | | | 321,786 | |
| Residential real estate | | 66,352 | | | 155,785 | | | 846,938 | | 669,632 | | | 1,738,707 | |
| Commercial real estate | | 106,511 | | | 322,930 | | | 755,864 | | 616,487 | | | 1,801,792 | |
| Consumer | | 24,832 | | | 752,373 | | | 911,568 | | 906 | | | 1,689,679 | |
| Leases | | 4,406 | | | 14,873 | | | 1,253 | | — | | | 20,532 | |
| Total loans and leases | | $ | 614,267 | | | $ | 2,017,029 | | | $ | 2,758,396 | | $ | 1,481,430 | | | $ | 6,871,122 | |
(1) Nonaccrual loans of $72.7 millionare included within the one year or less classification above.
The table below summarizes the composition of the loan portfolio by fixed and adjustable rate as of December 31, 2021 that are contractually due after December 31, 2022:
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| Table 16 - Amounts Due After One Year | | | | |
| (In thousands) | | Fixed | | Adjustable | | Total |
| Commercial, financial and agricultural | | $ | 470,929 | | | $ | 496,091 | | | $ | 967,020 | |
| Construction real estate | | 55,356 | | | 185,870 | | | 241,226 | |
| Residential real estate | | 663,284 | | | 1,009,071 | | | 1,672,355 | |
| Commercial real estate | | 493,857 | | | 1,201,424 | | | 1,695,281 | |
| Consumer | | 1,641,927 | | | 22,920 | | | 1,664,847 | |
| Leases | | 16,126 | | | — | | | 16,126 | |
| Total loans and leases | | $ | 3,341,479 | | | $ | 2,915,376 | | | $ | 6,256,855 | |
Investment Securities: Park’s investment securities portfolio is structured to minimize credit risk, provide liquidity and contribute to earnings. As conditions change over time, Park’s overall interest rate risk, liquidity needs and potential return on the investment portfolio will change. Management regularly evaluates the securities in the investment portfolio as circumstances evolve. Circumstances that could result in the sale of a security include: to better manage interest rate risk; to meet liquidity needs; or to improve the overall yield in the investment portfolio.
AFS debt securities are carried on the books at their estimated fair value with the unrealized holding gain or loss, net of income taxes, accounted for as accumulated other comprehensive income (loss). The debt securities that are classified as AFS are free to be sold in future periods in carrying out Park’s investment strategies.
Beginning in 2021, Park began investing in the AAA and AA rated tranches of Collateralized Loan Obligations ("CLOs"). CLOs had a fair value as of December 31, 2021 of $498.7 million. Management closely monitors the credit status of these securities. At December 31, 2021 the market value over collateralization was greater than 120% for each CLO.
Prior to September 1, 2019, Park classified certain types of U.S. Government sponsored entity collateralized mortgage obligations (“CMOs”) and tax-exempt municipal securities that it purchased as Held-To-Maturity ("HTM"). These debt securities had been classified as HTM because they were generally not as liquid as the investment securities that Park classified as AFS. A classification of HTM meant that Park had the positive intent and the ability to hold these securities until maturity.
On September 1, 2019, Park adopted the portion of ASU 2019-04 which allowed for a one-time reclassification of securities from HTM to AFS. On that date, Park transferred HTM securities with a fair value of $373.9 million to the AFS classification. The transfer occurred at fair value and had a related unrealized gain, net of taxes, of $19.1 million recorded in other comprehensive income.
Average taxable debt investment securities were $1,060 million in 2021, compared to $858 million in 2020 and $1,052 million in 2019. The average yield on taxable debt investment securities was 1.84% in 2021, compared to 2.31% in 2020 and 2.49% in 2019. Average tax-exempt debt investment securities were $288 million in 2021, compared to $289 million in 2020 and $309 million in 2019. The average tax-equivalent yield on tax-exempt debt investment securities was 3.65% in 2021, compared to 3.69% in 2020 and 3.67% in 2019.
Total debt securities (at amortized cost) were $1,727 million at December 31, 2021, compared to $1,008 million at December 31, 2020 and $1,187 million at December 31, 2019. Management purchased debt securities totaling $954 million in 2021 and $354 million in 2020. There were no purchases of debt securities in 2019. Proceeds from repayments, redemptions and maturities of debt securities were $232 million in 2021, compared to $224 million in 2020 and $196 million in 2019.
There were no sales of AFS debt securities in 2021. During 2020, Park sold certain AFS debt securities with a book value of $112.5 million at a gross loss of $64,000, and sold certain AFS debt securities with a book value of $196.4 million at a gross gain of $3.4 million. During 2019, Park sold certain AFS debt investment securities with a book value of $62.4 million at a gross loss of $692,000, and sold certain AFS debt investment securities with a book value of $29.1 million at a gross gain of $271,000.
For the years ended December 31, 2021, 2020, and 2019, the average tax-equivalent yield on the total investment portfolio was 2.22%, 2.66% and 2.76%, respectively. The weighted average remaining maturity of the total investment portfolio was 4.8 years at December 31, 2021, 3.5 years at December 31, 2020 and 4.2 years at December 31, 2019. Obligations of the U.S. Treasury and other U.S. Government sponsored entities and U.S. Government sponsored entities' asset-backed securities were approximately 47.1% of the total investment portfolio at year-end 2021, 66.9% of the total investment portfolio at year-end 2020 and 69.5% of the total investment portfolio at year-end 2019.
Other investment securities (as shown on Park's Consolidated Balance Sheets) consist of stock investments in the FHLB, the FRB and equity securities which includes equity investments in limited partnerships which provide mezzanine funding. Total other investment securities were $61 million at December 31, 2021, compared to $65 million at December 31, 2020 and $70 million at December 31, 2019. Management purchased equity securities totaling $3.6 million in 2020, compared to $100,000 in 2019. There were no equity security purchases in 2021. Management purchased $6.4 million of FRB stock in 2019. There were no FRB stock purchases in 2021 or 2020. Proceeds from the redemption/repurchase of FHLB stock were $8.7 million in 2021, compared to $8.0 million in 2020 and $14.7 million in 2019.
"Gain on equity securities, net" on Park's Consolidated Statements of Income were $5.0 million, $2.2 million and $5.1 million for the years ended December 31, 2021, 2020 and 2019, respectively. These gains on equity securities were made up of gains (losses) on equity investments carried at fair value as well as gains (losses) on equity investments carried at NAV.
For the years ended December 31, 2021, 2020 and 2019, $552,000, $(239,000) and $345,000, respectively, of gains (losses) on equity investments carried at fair value were recorded within "Gain on equity securities, net" on Park's Consolidated Statements of Income.
For the years ended December 31, 2021, 2020 and 2019, $4.5 million, $2.4 million and $4.8 million, respectively, of gains on equity investments carried at NAV were recorded within "Gain on equity securities, net" on Park's Consolidated Statements of Income.
The average maturity of the investment portfolio would lengthen if long-term interest rates were to increase as principal repayments from mortgage-backed securities and CMOs would decrease and callable securities would price to their maturity dates. At year-end 2021, management estimated that the average maturity of the investment portfolio would lengthen to 4.9 years with a 100 basis point increase in long-term interest rates and would lengthen to 5.1 years with a 200 basis point increase in long-term interest rates. Likewise, the average maturity of the investment portfolio would shorten if long-term interest rates were to decrease as the principal repayments from mortgage-backed securities and CMOs would increase and callable securities would price to their call dates. At year-end 2021, management estimated that the average maturity of the investment portfolio would decrease to 4.1 years with a 100 basis point decrease in long-term interest rates and to 3.8 years with a 200 basis point decrease in long-term interest rates.
The table below sets forth the carrying value of investment securities, as well as the percentage held within each category at year-end 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | |
| Table 17 - Investment Securities | | | | | | |
| December 31, | | | | | | |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Corporate debt securities | | $ | 11,412 | | | $ | 2,014 | | | $ | — | |
| Obligations of states and political subdivisions | | 389,591 | | | 305,218 | | | 320,491 | |
| U.S. Government asset-backed securities | | 854,463 | | | 752,109 | | | 889,210 | |
| Collateralized loan obligations | | 498,674 | | | — | | | — | |
| FHLB stock | | 13,413 | | | 22,090 | | | 30,060 | |
| FRB stock | | 14,653 | | | 14,653 | | | 14,653 | |
| Equities | | 33,202 | | | 28,722 | | | 25,093 | |
| Total | | $ | 1,815,408 | | | $ | 1,124,806 | | | $ | 1,279,507 | |
| Investments by category as a percentage of total investment securities | | | | | | |
| Corporate debt securities | | 0.6 | % | | 0.2 | % | | — | % |
| Obligations of states and political subdivisions | | 21.5 | % | | 27.1 | % | | 25.0 | % |
| U.S. Government asset-backed securities | | 47.1 | % | | 66.9 | % | | 69.5 | % |
| Collateralized loan obligations | | 27.5 | % | | — | % | | — | % |
| FHLB stock | | 0.7 | % | | 2.0 | % | | 2.3 | % |
| FRB stock | | 0.8 | % | | 1.2 | % | | 1.2 | % |
| Equities | | 1.8 | % | | 2.6 | % | | 2.0 | % |
| Total | | 100.0 | % | | 100.0 | % | | 100.0 | % |
The carrying value of investments in debt securities at December 31, 2021, is shown in the following table by contractual maturity, except for asset-backed securities and collateralized loan obligations, which are shown as a single total, due to the unpredictability of the timing in principal repayments. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
| | | | | | | | | | | | | | | | | |
| Table 18 - Investment Maturity Distribution | | | | |
| | Over Five Through Ten Years | Over
Ten
Years | | Total |
| December 31, 2021 | | |
| (In thousands) | | |
| Corporate debt securities | | $ | 11,412 | | $ | — | | | $ | 11,412 | |
| Obligations of states and political subdivisions | | 213,154 | | 176,437 | | | 389,591 | |
| Total | | $ | 224,566 | | $ | 176,437 | | | $ | 401,003 | |
| | | | | |
| U.S. Government sponsored entities' asset-backed securities | | | | | $ | 854,463 | |
| Collateralized loan obligations | | | | | 498,674 | |
ANALYSIS OF EARNINGS
Net Interest Income: Park’s principal source of earnings is net interest income, the difference between total interest income and total interest expense. Net interest income results from average balances outstanding for interest earning assets and interest bearing liabilities in conjunction with the average rates earned and paid on them. (See the table below for three years of history on the average balances of the balance sheet categories as well as the average rates earned on interest earning assets and the average rates paid on interest bearing liabilities.)
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| Table 19 - Distribution of Assets, Liabilities and Shareholders' Equity |
| December 31, | 2021 | 2020 | 2019 |
| (In thousands) | Daily
Average | Interest | Average
Rate | Daily
Average | Interest | Average
Rate | Daily
Average | Interest | Average
Rate |
| ASSETS | | | | | | | | | |
| | | | | | | |
Loans (1)(2) | $ | 7,014,517 | | $ | 317,912 | | 4.53 | % | $ | 6,990,458 | | $ | 329,350 | | 4.71 | % | $ | 6,208,496 | | $ | 321,961 | | 5.19 | % |
| Taxable investment securities | 1,059,809 | | 19,458 | | 1.84 | % | 857,752 | | 19,818 | | 2.31 | % | 1,051,540 | | 26,213 | | 2.49 | % |
Tax-exempt investment securities (3) | 288,300 | | 10,514 | | 3.65 | % | 289,366 | | 10,679 | | 3.69 | % | 309,197 | | 11,335 | | 3.67 | % |
| Money market instruments | 665,714 | | 880 | | 0.13 | % | 280,952 | | 739 | | 0.26 | % | 169,703 | | 3,947 | | 2.33 | % |
| Total interest earning assets | 9,028,340 | | 348,764 | | 3.86 | % | 8,418,528 | | 360,586 | | 4.28 | % | 7,738,936 | | 363,456 | | 4.70 | % |
| Non-interest earning assets: | | | | | | | |
| Allowance for credit losses | (87,233) | | | | (71,221) | | | | (54,516) | | | |
| Cash and due from banks | 139,678 | | | | 127,214 | | | | 130,372 | | | |
| Premises and equipment, net | 89,758 | | | | 81,357 | | | | 69,710 | | | |
| Other assets | 676,915 | | | | 685,755 | | | | 589,527 | | | |
| TOTAL | $ | 9,847,458 | | | | $ | 9,241,633 | | | | $ | 8,474,029 | | | |
| | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | |
| Interest bearing liabilities: | | | | | | | |
| Transaction accounts | $ | 1,550,138 | | $ | 357 | | 0.02 | % | $ | 1,687,417 | | $ | 3,582 | | 0.21 | % | $ | 1,648,896 | | $ | 13,249 | | 0.80 | % |
| Savings deposits | 2,924,504 | | 1,238 | | 0.04 | % | 2,556,475 | | 5,560 | | 0.22 | % | 2,261,600 | | 20,099 | | 0.89 | % |
| Time deposits | 774,825 | | 4,711 | | 0.61 | % | 994,255 | | 12,186 | | 1.23 | % | 1,119,358 | | 17,494 | | 1.56 | % |
| Total interest bearing deposits | 5,249,467 | | 6,306 | | 0.12 | % | 5,238,147 | | 21,328 | | 0.41 | % | 5,029,854 | | 50,842 | | 1.01 | % |
| Federal funds purchased | 68 | | — | | 0.10 | % | 1,872 | | 2 | | 0.12 | % | 79 | | 2 | | 2.78 | % |
| Repurchase agreements | 261,967 | | 95 | | 0.04 | % | 250,265 | | 472 | | 0.19 | % | 168,450 | | 1,105 | | 0.66 | % |
| Short-term borrowings | 25,025 | | 672 | | 2.69 | % | 26,750 | | 636 | | 2.38 | % | 47,371 | | 1,369 | | 2.89 | % |
Long-term debt (4) | 205,883 | | 8,887 | | 4.32 | % | 215,645 | | 7,652 | | 3.55 | % | 340,664 | | 9,445 | | 2.77 | % |
| Total interest bearing liabilities | 5,742,410 | | 15,960 | | 0.28 | % | 5,732,679 | | 30,090 | | 0.52 | % | 5,586,418 | | 62,763 | | 1.12 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Table 19 - Distribution of Assets, Liabilities and Shareholders' Equity-continued |
| December 31, | 2021 | 2020 | 2019 |
| (In thousands) | Daily
Average | Interest | Average
Rate | Daily
Average | Interest | Average
Rate | Daily
Average | Interest | Average
Rate |
| Non-interest bearing liabilities: | | | | | | | |
| Demand deposits | 2,937,035 | | | | 2,394,717 | | | | 1,875,628 | | | |
| Other | 102,553 | | | | 105,135 | | | | 89,809 | | | |
| Total non-interest bearing liabilities | 3,039,588 | | | | 2,499,852 | | | | 1,965,437 | | | |
| Shareholders' equity | 1,065,460 | | | | 1,009,102 | | | | 922,174 | | | |
| TOTAL | $ | 9,847,458 | | | | $ | 9,241,633 | | | | $ | 8,474,029 | | | |
| Tax equivalent net interest income | | $ | 332,804 | | | | $ | 330,496 | | | | $ | 300,693 | | |
| Net interest spread | | | 3.58 | % | | | 3.76 | % | | | 3.58 | % |
| Net yield on interest earning assets (net interest margin) | | | 3.69 | % | | | 3.93 | % | | | 3.89 | % |
(1)Loan income includes net loan-related fee income, purchase accounting accretion and origination expense in the aggregate amount of $11.1 million in 2021, $12.9 million in 2020 and $0.6 million in 2019. Loan income also includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate in 2021, 2020 and 2019. The taxable equivalent adjustments were $704,000 in 2021, $623,000 in 2020 and $576,000 in 2019.
(2)For the purpose of the computation for loans, nonaccrual loans are included in the daily average loans outstanding.
(3)Interest income on tax-exempt investment securities includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate in 2021, 2020 and 2019. The taxable equivalent adjustments were $2.2 million in 2021, $2.2 million in 2020 and $2.4 million in 2019.
(4)Includes subordinated notes.
Average interest earning assets for 2021 increased by $610 million, or 7.2% to $9,028 million, compared to $8,419 million for 2020. Average interest earning assets for 2020 increased by $680 million, or 8.8%, to $8,419 million, compared to $7,739 million for 2019. The average yield on interest earning assets decreased by 42 basis points to 3.86% for 2021, compared to 4.28% for 2020 and 4.70% for 2019. For 2019, the acquisition of Carolina Alliance added average interest earning assets of $432.7 million.
Interest income for 2021, 2020, and 2019 included $8.0 million, $453,000 and $256,000, respectively, related to payments received on certain SEPH nonaccrual loan relationships, some of which are participated with PNB as well as $3.3 million, $4.4 million and $5.2 million of purchase accounting accretion for 2021, 2020 and 2019, respectively. Interest income for 2021 and 2020 included $18.0 million and $16.7 million, respectively, of income related to PPP loans. Excluding the impact of the purchase accounting accretion, SEPH income, and PPP income, the average yield on loans was 4.27%, 4.63% and 5.09%, for the years ended December 31, 2021, 2020 and 2019, respectively, the average yield on earning assets was 3.64%, 4.20% and 4.62%, for the years ended December 31, 2021, 2020 and 2019, respectively, and the net interest margin was 3.46%, 3.82% and 3.80%, for the years ended December 31, 2021, 2020 and 2019, respectively.
Average interest bearing liabilities for 2021 increased by $10 million, or 0.2%, to $5,742 million, compared to $5,733 million for 2020. Average interest bearing liabilities for 2020 increased by $146 million, or 2.6%, to $5,733 million for 2020, compared to $5,586 million for 2019. The average cost of interest bearing liabilities decreased by 24 basis points to 0.28% for 2021, compared to 0.52% for 2020 and 1.12% for 2019. For 2019, the acquisition of Carolina Alliance added average interest bearing liabilities of $368.8 million.
The table below shows for the years ended December 31, 2021, 2020, and 2019, the average balance and tax equivalent yield by type of loan.
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| Table 20 - Average Loans and Tax Equivalent Yield |
| Year Ended December 31, | | 2021 | | 2020 | | 2019 |
| (Dollars in thousands) | | Average
balance | | Tax
equivalent
yield | | Average
balance | | Tax
equivalent
yield | | Average
balance | | Tax
equivalent
yield |
| Home equity | | $ | 168,708 | | | 3.71 | % | | $ | 205,492 | | | 4.04 | % | | $ | 229,916 | | | 5.59 | % |
| Installment loans | | 1,688,966 | | | 4.80 | % | | 1,548,059 | | | 5.17 | % | | 1,379,111 | | | 5.34 | % |
| Real estate loans | | 1,176,885 | | | 3.73 | % | | 1,268,181 | | | 4.11 | % | | 1,246,209 | | | 4.36 | % |
Commercial loans (1) | | 3,977,165 | | | 4.69 | % | | 3,964,853 | | | 4.75 | % | | 3,348,599 | | | 5.39 | % |
| Other | | 2,793 | | | 12.07 | % | | 3,873 | | | 10.71 | % | | 4,661 | | | 11.70 | % |
| Total loans and leases before allowance for credit losses | | $ | 7,014,517 | | | 4.53 | % | | $ | 6,990,458 | | | 4.71 | % | | $ | 6,208,496 | | | 5.19 | % |
(1) Commercial loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate in 2021, 2020 and 2019. The taxable equivalent adjustments were $704,000 in 2021, $623,000 in 2020 and $576,000 in 2019.
Loan interest income for 2021, 2020, and 2019 included $8.0 million, $453,000 and $256,000, respectively, related to payments received on certain SEPH nonaccrual loan relationships, some of which are participated with PNB as well as $3.3 million, $4.4 million and $5.2 million of purchase accounting accretion for 2021, 2020 and 2019, respectively. Below is a summary of the impact of these items on the tax equivalent yield of loans.
•The amount of interest related to SEPH nonaccrual loan relationships and purchase accounting accretion included in home equity loan interest income for 2021, 2020 and 2019 was $479,000, $395,000 and $443,000, respectively. Excluding the impact of these items, the average tax equivalent yield on home equity loans was 3.41%, 3.83% and 5.37%, respectively.
•The amount of interest related to SEPH nonaccrual loan relationships and purchase accounting accretion included in real estate loan interest income for 2021, 2020 and 2019 was $243,000, $391,000 and $617,000. Excluding the impact of these items, the average tax equivalent yield on real estate loans was 3.71%, 4.08% and 4.30%, respectively.
•The amount of interest related to PPP income, SEPH nonaccrual loan relationships and purchase accounting accretion included in commercial loan interest income for 2021, 2020, and 2019 was $28.5 million, $19.9 million and $4.3 million, respectively. Excluding the impact of these items, the average tax equivalent yield on commercial loans was 4.24%, 4.66% and 5.26%, for 2021, 2020, and 2019, respectively.
•Excluding the impact of interest related to PPP income, SEPH nonaccrual loan relationships and purchase accounting accretion, the average tax equivalent yield on total loans and leases was 4.27%, 4.63% and 5.09%, for 2021, 2020, and 2019, respectively.
The table below shows for the years ended December 31, 2021, 2020, and 2019, the average balance and cost of funds by type of deposit.
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| Table 21 - Average Deposits and Cost of Funds |
| Year Ended December 31, | | 2021 | | 2020 | | 2019 |
| (Dollars in thousands) | | Average
balance | | Cost of funds | | Average
balance | | Cost of funds | | Average
balance | | Cost of funds |
| Transaction accounts | | $ | 1,550,138 | | | 0.02 | % | | $ | 1,687,417 | | | 0.21 | % | | $ | 1,648,896 | | | 0.80 | % |
| Savings deposits and clubs | | 2,924,504 | | | 0.04 | % | | 2,556,475 | | | 0.22 | % | | 2,261,600 | | | 0.89 | % |
Time deposits (1) | | 774,825 | | | 0.61 | % | | 994,255 | | | 1.23 | % | | 1,119,358 | | | 1.56 | % |
Total interest bearing deposits (1) | | $ | 5,249,467 | | | 0.12 | % | | $ | 5,238,147 | | | 0.41 | % | | $ | 5,029,854 | | | 1.01 | % |
(1) Time deposit interest expense for 2021, 2020 and 2019 benefited from $46,000, $226,000 and $593,000, respectively, of purchase accounting accretion related to the acquisition of NewDominion for all of 2021, 2020 and 2019 and Carolina Alliance for all of 2021 and 2020 and the second, third and fourth quarters of 2019. Excluding the impact of this accretion, the average cost of funds on time deposits for 2021, 2020 and 2019 was 0.61%, 1.25% and 1.62%, respectively, and the average cost of funds on total interest bearing deposits for 2021, 2020 and 2019 was 0.12%, 0.41% and 1.02%, respectively.
The following table displays (for each quarter of 2021) the average balance of interest earning assets, the net interest income and the tax equivalent net interest income and net interest margin.
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| Table 22 - Quarterly Net Interest Margin |
| (In thousands) | | Average Interest Earning Assets | | Net Interest Income (1) | | Tax Equivalent Net Interest Income (1) | | Tax Equivalent Net Interest Margin (1) |
| First Quarter | | $ | 8,786,301 | | | $ | 80,734 | | | $ | 81,448 | | | 3.76 | % |
| Second Quarter | | 9,062,368 | | | 83,851 | | | 84,569 | | | 3.74 | % |
| Third Quarter | | 9,250,939 | | | 81,602 | | | 82,319 | | | 3.53 | % |
| Fourth Quarter | | 9,008,863 | | | 83,706 | | | 84,468 | | | 3.72 | % |
| 2021 | | $ | 9,028,340 | | | $ | 329,893 | | | $ | 332,804 | | | 3.69 | % |
(1) Net interest income for the first, second, third and fourth quarters of 2021 included $105,000, $2.8 million, $414,000 and $4.6 million, respectively, related to payments received on certain SEPH nonaccrual loan relationships, some of which are participated with PNB. Net interest income for the first, second, third, and fourth quarters of 2021 included $1.1 million, $806,000, $807,000 and $559,000 of purchase accounting accretion related to the acquisition of NewDominion and Carolina Alliance. Net interest income for the first, second, third, and fourth quarters of 2021 included $5.2 million, $5.7 million, $4.6 million and $2.5 million, respectively, related to PPP loans. Excluding the impact of these loan payments and accretion, the tax equivalent net interest margin was 3.61%, 3.47%, 3.35%, and 3.42%, for the first, second, third, and fourth quarters of 2021, respectively, and 3.46% for the year ended December 31, 2021.
In the following table, the change in tax equivalent interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
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| Table 23 - Volume/Rate Variance Analysis | | |
| | Change from 2020 to 2021 | | Change from 2019 to 2020 |
| (In thousands) | | Volume | | Rate | | Total | | Volume | | Rate | | Total |
| Increase (decrease) in: | | | | | | | | | | | | |
| Interest income: | | | | | | | | | | | | |
| Total loans | | $ | 1,134 | | | $ | (12,572) | | | $ | (11,438) | | | $ | 40,552 | | | $ | (33,163) | | | $ | 7,389 | |
| Taxable investments | | 4,668 | | | (5,028) | | | (360) | | | (4,830) | | | (1,565) | | | (6,395) | |
| Tax-exempt investments | | (39) | | | (126) | | | (165) | | | (727) | | | 71 | | | (656) | |
| Money market instruments | | 1,014 | | | (873) | | | 141 | | | 2,587 | | | (5,795) | | | (3,208) | |
| Total interest income | | 6,777 | | | (18,599) | | | (11,822) | | | 37,582 | | | (40,452) | | | (2,870) | |
| Interest expense: | | | | | | | | | | | | |
| Transaction accounts | | $ | (291) | | | $ | (2,934) | | | $ | (3,225) | | | $ | 310 | | | $ | (9,977) | | | $ | (9,667) | |
| Savings accounts | | 800 | | (5,122) | | | (4,322) | | | 2,621 | | (17,160) | | | (14,539) | |
| Time deposits | | (2,690) | | | (4,785) | | | (7,475) | | | (1,955) | | | (3,353) | | | (5,308) | |
| Short-term borrowings | | 33 | | | (376) | | | (343) | | | 701 | | | (2,067) | | | (1,366) | |
| Long-term debt | | (346) | | | 1,581 | | | 1,235 | | | (3,467) | | | 1,674 | | | (1,793) | |
| Total interest expense | | (2,494) | | | (11,636) | | | (14,130) | | | (1,790) | | | (30,883) | | | (32,673) | |
| Net variance | | $ | 9,271 | | | $ | (6,963) | | | $ | 2,308 | | | $ | 39,372 | | | $ | (9,569) | | | $ | 29,803 | |
Other Income: Other income was $129.9 million in 2021, compared to $125.7 million in 2020 and $97.2 million in 2019.
The following table displays total other income for Park in 2021, 2020 and 2019.
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| Table 24 - Other Income |
| Year Ended December 31, | | |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Income from fiduciary activities | | $ | 34,449 | | | $ | 28,873 | | | $ | 27,768 | |
| Service charges on deposit accounts | | 8,832 | | | 8,445 | | | 10,835 | |
| Other service income | | 29,812 | | | 37,611 | | | 15,500 | |
| Debit card fee income | | 25,865 | | | 22,160 | | | 20,250 | |
| Bank owned life insurance income | | 4,897 | | | 4,789 | | | 4,557 | |
| ATM fees | | 2,379 | | | 1,773 | | | 1,828 | |
| (Loss) gain on the sale of OREO, net | | (4) | | | 1,207 | | | (222) | |
| Net gain (loss) on the sale of debt securities | | — | | | 3,286 | | | (421) | |
| Gain on equity securities, net | | 5,011 | | | 2,182 | | | 5,118 | |
| Other components of net periodic benefit income | | 8,152 | | | 7,952 | | | 4,732 | |
| Miscellaneous | | 10,551 | | | 7,386 | | | 7,248 | |
| Total other income | | $ | 129,944 | | | $ | 125,664 | | | $ | 97,193 | |
Income from fiduciary activities increased by $5.6 million, or 19.3%, to $34.4 million in 2021, compared to $28.9 million in 2020. The $28.9 million was an increase of $1.1 million, or 4.0%, compared to $27.8 million in 2019. The increases in fiduciary fee income in 2021 and 2020 were primarily due to improvements in equity market values and also due to an increase in the total account balances serviced by PNB’s Trust Department. PNB charges fiduciary fees largely based on the market value of the trust assets. The average market value of the trust assets managed by PNB was $7.45 billion in 2021, compared to $6.17 billion in 2020 and $5.85 billion in 2019.
Service charges on deposit accounts increased $387,000, or 4.6%, to $8.8 million in 2021, compared to $8.4 million in 2020 and decreased by $2.4 million, or 22.1%, in 2020 compared to $10.8 million in 2019. The increase in 2021 was related to an increase in other non-sufficient funds (NSF) fee income and service charges on demand deposit accounts. The decline in 2020 was related to declines in service charges on deposits, largely as a result of a decline in other NSF fee income and service charges on demand deposit accounts.
Other service income decreased $7.8 million, or 20.7%, to $29.8 million in 2021, compared to $37.6 million in 2020, and increased $22.1 million, or 142.7%, in 2020 compared to $15.5 million in 2019. The decrease in 2021 compared to 2020 was primarily related to a decrease in other service income related to mortgage loan originations, including a $6.4 million decrease in fee income related to a $457.3 million decrease in mortgage loan originations to be sold in the secondary market and a $3.7 million decrease in income related to investor rate locks and loans held for sale, partially offset by a $1.2 million increase in mortgage investor fees and a $927,000 increase in mortgage servicing rights income. The increase in 2020 compared to 2019 was primarily related to an increase in other service income related to mortgage loan originations, including a $17.2 million increase in fee income related to a $686.5 million increase in mortgage loan originations to be sold in the secondary market, a $1.7 million increase in income related to investor rate locks and loans held for sale, and a $2.3 million increase in mortgage servicing rights income.
Debit card fee income, which is generated from debit card transactions, increased $3.7 million, or 16.7%, to $25.9 million in 2021, compared to $22.2 million in 2020, and increased $1.9 million, or 9.4%, in 2020 compared to $20.3 million in 2019. The increases in 2021 and 2020 were attributable to continued increases in the volume of debit card transactions, which increased 10.0% in 2021 from 2020, and increased 4.4% in 2020 from 2019, and increases in total sale dollars of debit card transactions, which increased 17.1% in 2021 from 2020, and increased 12.5% in 2020 from 2019. In addition, the increase in 2020 was attributable to changes in our point of sale network. Park continues to focus on deposit offerings that provide incentives for our customers to use their debit card.
(Loss) gain on the sale of OREO, net, reflected a loss of $4,000 in 2021, a decrease of $1.2 million, compared to income of $1.2 million in 2020, and the income of $1.2 million in 2020 reflected an increase of $1.4 million, compared to a loss of $222,000 in 2019. The decrease in 2021 and the increase in 2020 were primarily due to a $1.2 million gain on the sale of two OREO properties during 2020, one of which was participated to PNB from SEPH.
During 2020, Park sold certain AFS debt securities with a book value of $112.5 million at a gross loss of $64,000, and sold certain AFS debt securities with a book value of $196.4 million at a gross gain of $3.4 million. During 2019, Park sold certain AFS debt securities with a book value of $62.4 million at a gross loss of $692,000, and sold certain AFS debt securities with a book value of $29.1 million at a gross gain of $271,000. No debt securities were sold in 2021.
During the years ended December 31, 2021, 2020 and 2019, $552,000, $(239,000) and $345,000, respectively, of gains (losses) on equity investments carried at fair value were recorded within "Gain on equity securities, net" on Park's Consolidated Statements of Income. For the years ended December 31, 2021, 2020 and 2019, $4.5 million, $2.4 million and $4.8 million, respectively, of gains on equity investments carried at NAV were recorded within "Gain on equity securities, net" on Park's Consolidated Statements of Income.
Other components of net periodic pension benefit income increased by $200,000, or 2.5% to $8.2 million in 2021, compared to $8.0 million in 2020, and increased $3.2 million, or 68.0%, to $8.0 million in 2020, compared to $4.7 million in 2019. The increases in 2021 and 2020 were largely due to an increase in the expected return on plan assets as a result of the increased value of plan assets.
Miscellaneous income increased by $3.2 million, or 42.9%, to $10.6 million in 2021, compared to $7.4 million in 2020, and increased $138,000, or 1.9%, to $7.4 million in 2020, compared to $7.2 million in 2019. The increase in 2021 was primarily related to refunds of a consumer insurance product, an increase in income from printed check sales and an increase in gain on sale of assets.
Other Expense: Other expense was $283.5 million in 2021, compared to $286.6 million in 2020 and $264.0 million in 2019. Other expense decreased by $3.1 million, or 1.1%, in 2021 and increased by $22.6 million, or 8.6% in 2020. The following table displays total other expense for Park for 2021, 2020 and 2019.
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| Table 25 - Other Expense |
| Year Ended December 31, | |
| (In thousands) | 2021 | | 2020 | | 2019 |
| Salaries | $ | 125,585 | | | $ | 128,040 | | | $ | 119,514 | |
| Employee benefits | 41,603 | | | 37,115 | | | 36,806 | |
| Occupancy expense | 13,039 | | | 13,802 | | | 12,815 | |
| Furniture and equipment expense | 10,887 | | | 18,805 | | | 17,032 | |
| Data processing fees | 30,539 | | | 11,659 | | | 10,750 | |
| Professional fees and services | 27,450 | | | 31,303 | | | 33,317 | |
| Marketing | 6,073 | | | 5,828 | | | 5,753 | |
| Insurance | 5,917 | | | 6,423 | | | 3,130 | |
| Communication | 3,539 | | | 4,084 | | | 5,351 | |
| State tax expense | 4,255 | | | 3,991 | | | 3,829 | |
| Amortization of intangible assets | 1,798 | | | 2,263 | | | 2,355 | |
| FHLB prepayment penalty | — | | | 10,529 | | | 612 | |
| Foundation contributions | 4,000 | | | 3,000 | | | 1,500 | |
| Miscellaneous | 8,833 | | | 9,753 | | | 11,224 | |
| Total other expense | $ | 283,518 | | | $ | 286,595 | | | $ | 263,988 | |
| Full-time equivalent employees | 1,685 | | | 1,755 | | | 1,907 | |
Salaries expense decreased by $2.5 million, to $125.6 million in 2021, compared to $128.0 million in 2020, and increased by $8.5 million, or 7.1%, in 2020 compared to $119.5 in 2019. The decrease in 2021 was due to a $4.2 million decrease in salary expense, primarily related to a $3.2 million decrease in severance and restructuring related expense, a $1.1
million decrease in expense related to the vacation accrual, a $1.0 million decrease in base salary expense and a $1.0 million decrease in additional compensation expense, partially offset by a $3.3 million increase in incentive compensation expense and a $347,000 increase in share-based compensation expenses related to PBRSU awards granted under the Park 2013 Long-Term Incentive Plan (the "2013 Incentive Plan") (prior to 2017) and both PBRSU and TBRSU awards granted under the Park 2017 Long-Term Incentive Plan for Employees (the "2017 Employee LTIP"). The increase in 2020 was due to a $4.6 million increase in salary expense, which was primarily related to increases in base salary and $3.6 million in severance and restructuring related expense, a $1.9 million increase in additional compensation expense, an $850,000 increase in expense related to the vacation accrual and a $1.0 million increase in share-based compensation expenses.
Park had 1,685 full-time equivalent employees at year-end 2021, compared to 1,755 full-time equivalent employees at year-end 2020 and 1,907 full-time equivalent employees at year-end 2019. During 2020, Park closed 23 offices, which resulted in the significant reduction in full-time equivalent employees during 2020.
Employee benefits expense increased $4.5 million, or 12.1%, to $41.6 million in 2021, compared to $37.1 million in 2020, and increased $309,000, or 0.8%, in 2020 compared to $36.8 million in 2019. The increase in 2021 was due to a $2.7 million increase in group insurance costs, a $1.6 million increase in pension plan expense and a $693,000 increase in payroll tax expense, partially offset by a $496,000 decrease in miscellaneous employee benefits. The increase in 2020 was due to a $2.4 million increase in pension plan expense, a $505,000 increase in miscellaneous employee benefits and a $300,000 increase in the KSOP match, partially offset by a $3.0 million decrease in group insurance costs.
Occupancy expense decreased $763,000, or 5.5%, to $13.0 million in 2021, compared to $13.8 million in 2020, and increased by $987,000, or 7.7%, in 2020 compared to $12.8 million in 2019. The $763,000 decrease in 2021 was primarily the result of decreased lease expense, which was mainly the result of the closure of some leased branches in 2020. The $987,000 increase in 2020 was primarily the result of increased depreciation on premises and a write-down in the right-of-use lease asset related to branches that closed September 30, 2020.
Furniture and equipment expense decreased $7.9 million, or 42.1%, to $10.9 million in 2021, compared to $18.8 million in 2020. and increased $1.8 million, or 10.4%, in 2020 compared to $17.0 million in 2019. The decrease in 2021 was primarily related to a change in the classification under which software and related maintenance costs are expensed, which are now classified under data processing fees, partially offset by increases in depreciation of furniture and equipment. The increase in 2020 was primarily related to increased expenses related to repairs and maintenance on equipment, which also included software maintenance and costs, as well as increased depreciation on furniture and equipment.
Data processing fees increased by $18.9 million, or 161.9%, to $30.5 million in 2021, compared to $11.7 million in 2020, and increased $909,000, or 8.5%, in 2020 compared to $10.8 million in 2019. The increase in 2021 was related to increased other data processing and software costs, partially due to the previously mentioned change in classification from furniture and equipment expense and a change in expensing software costs from other fees within professional fees and services to data processing fees. The increase was also impacted by changes in debit card processing costs, which increased $832,000. Overall data processing and software costs across all line items, excluding debit card processing costs, increased $2.3 million. The increase in 2020 was related to increased mortgage processing costs, debit card processing costs and other data processing and software costs.
Professional fees and services decreased $3.9 million, or 12.3%, to $27.5 million, compared to $31.3 million for 2020, and decreased by $2.0 million, or 6.0%, in 2020 compared to $33.3 million in 2019. This subcategory of total other expense includes legal fees, management consulting fees, directors' fees, audit fees, regulatory examination fees and memberships in industry associations. The decrease in professional fees and services expense in 2021 was primarily due to decreases in other fees (due to the change in expensing software costs under data processing fees), credit costs and title and appraisal costs, partially offset by increases in legal expense. The decrease in professional fees and services expense in 2020 was largely related to a $4.4 million decrease in fees related to the acquisition of Carolina Alliance and a $1.0 million decrease in legal expense, partially offset by a $2.1 million increase in management and consulting expense and a $1.2 million increase in title, appraisal and credit costs.
Insurance expense decreased by $506,000, or 7.9%, to $5.9 million, compared to $6.4 million in 2020, and increased by $3.3 million, or 105.2%, in 2020 compared to $3.1 million in 2019. The decrease in 2021 was impacted by a decrease in the average FDIC assessment rate compared to 2020. The increase in 2020 was primarily due to the utilization of a $2.2 million assessment credit to reduce the FDIC insurance expense during the third and fourth quarters of 2019. 2020 was also impacted by an increase in the assessment base compared to 2019.
Communication expense decreased by $545,000, or 13.3%, to $3.5 million in 2021, compared to $4.1 million in 2020, and decreased $1.3 million, or 23.7%, in 2020 compared to $5.4 million in 2019. The decrease in 2021 was primarily related to lower telephone, cable and data related communication costs. The decrease in 2020 was primarily related to a change in statement mailing and production costs, which resulted in lower direct postage expense, but was more than offset by an increase in supply expense which is included in miscellaneous expense.
The subcategory "Miscellaneous" other expense includes expenses for supplies, travel, and other miscellaneous expense. The subcategory Miscellaneous other expense decreased by $920,000, or 9.4%, to $8.8 million in 2021, compared to $9.8 million in 2020. The $9.8 million in 2020 was a decrease of $1.5 million, or 13.1%, compared to $11.2 million in 2019. The decrease in 2021 was primarily related to a decrease in supply expense, operating lease depreciation, OREO expense and training and travel related related expenses, partially offset by an increase in non-loan related losses. The decrease in 2020 was primarily due to a decrease in training and travel related expenses as well as a decrease in non-loan related losses.
Efficiency Ratio: The following table details the calculation of the efficiency ratio for the years ended December 31, 2021, 2020, and 2019.
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Table 26- Efficiency ratio(1) | | Year Ended December 31, |
| (in thousands) | | 2021 | 2020 | 2019 |
| Net interest income | | $ | 329,893 | | $ | 327,630 | | $ | 297,737 | |
Add: Tax equivalent adjustment (2) | | 2,911 | | 2,866 | | 2,956 | |
| Net interest income - Fully tax equivalent | | $ | 332,804 | | $ | 330,496 | | $ | 300,693 | |
| | | | |
| Total other income | | $ | 129,944 | | $ | 125,664 | | $ | 97,193 | |
| | | | |
| Total other expense | | $ | 283,518 | | $ | 286,595 | | $ | 263,988 | |
| | | | |
| Efficiency ratio | | 61.27 | % | 62.83 | % | 66.35 | % |
| (1) Calculated by dividing "Total other expense" by the sum of fully-tax equivalent net interest income and "Total other income." |
| (2) The tax equivalent adjustment to net interest income was calculated assuming a 21% corporate federal income tax rate for 2021, 2020 and 2019. |
Items Impacting Comparability: From time to time, revenue, expenses, and/or taxes are impacted by items judged by management of Park to be outside of ordinary banking activities and/or by items that, while they may be associated with ordinary banking activities, are so unusually large that their outsized impact is believed by management of Park at that time to be infrequent or short term in nature. Most often, these items impacting comparability of period results are due to merger and acquisition activities, management restructuring, branch closures, a rebranding initiative, COVID-19 related expenses and revenue and expenses related to former Vision Bank loan relationships. In other cases, they may result from management's decisions associated with significant corporate actions outside of the ordinary course of business.
The following table details those items which management believes impacts the comparability of current and prior period amounts.
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| Table 27 - Items impacting comparability | | Year Ended December 31, | | |
| (in thousands, except share and per share data) | | 2021 | 2020 | 2019 | | Affected Line Item |
| Net interest income | | $ | 329,893 | | $ | 327,630 | | $ | 297,737 | | | |
| less purchase accounting accretion related to NewDominion and Carolina Alliance acquisitions | | 3,257 | | 4,443 | | 5,193 | | | Interest and fees on loans |
| less purchase accounting accretion related to NewDominion and Carolina Alliance acquisitions | | 46 | | 226 | | 593 | | | Interest on deposits |
| less interest income on former Vision Bank relationships | | 7,985 | | 453 | | 256 | | | Interest and fees on loans |
| Net interest income - adjusted | | $ | 318,605 | | $ | 322,508 | | $ | 291,695 | | | |
| | | | | | |
| (Recovery of) provision for credit losses | | $ | (11,916) | | $ | 12,054 | | $ | 6,171 | | | |
| less recoveries on former Vision Bank relationships | | (3,169) | | (21,982) | | (3,042) | | | (Recovery of) provision for credit losses |
| (Recovery of) provision for credit losses - adjusted | | $ | (8,747) | | $ | 34,036 | | $ | 9,213 | | | |
| | | | | | |
| Other income | | $ | 129,944 | | $ | 125,664 | | $ | 97,193 | | | |
| less net gain (loss) on sale of former Vision Bank OREO properties | | — | | 1,208 | | (111) | | | (Loss) gain on the sale of OREO, net |
| | | | | | | | | | | | | | | | | | | | |
| Table 27 - Items impacting comparability (continued) | | Year Ended December 31, | | |
| (in thousands, except share and per share data) | | 2021 | 2020 | 2019 | | Affected Line Item |
| less other service income related to former Vision Bank relationships | | 525 | | 590 | | 52 | | | Other service income |
| less rebranding initiative related expenses | | — | | (572) | | — | | | Miscellaneous |
| less net gain (loss) on the sale of debt securities in the ordinary course of business | | | 3,286 | | (421) | | | Net gain (loss) on the sale of debt securities |
| Other income - adjusted | | $ | 129,419 | | $ | 121,152 | | $ | 97,673 | | | |
| | | | | | |
| Other expense | | $ | 283,518 | | $ | 286,595 | | $ | 263,988 | | | |
| less merger-related expenses related to NewDominion and Carolina Alliance acquisitions | | 8 | | 117 | | 3,567 | | | Salaries |
| less merger-related expenses related to NewDominion and Carolina Alliance acquisitions | | — | | — | | 1 | | | Occupancy expense |
| less merger-related expenses related to NewDominion and Carolina Alliance acquisitions | | — | | — | | 16 | | | Data processing fees |
| less merger-related expenses related to NewDominion and Carolina Alliance acquisitions | | — | | 496 | | 4,856 | | | Professional fees and services |
| less merger-related expenses related to NewDominion and Carolina Alliance acquisitions | | 16 | | 16 | | 16 | | | Insurance |
| less merger-related expenses related to NewDominion and Carolina Alliance acquisitions | | — | | — | | 421 | | | Miscellaneous |
| less core deposit intangible amortization related to NewDominion and Carolina Alliance acquisitions | | 1,798 | | 2,263 | | 2,355 | | | Amortization of intangible assets |
| less Foundation contributions | | 4,000 | | 3,000 | | 1,500 | | | Foundation contributions |
| less severance and restructuring charges | | 367 | | 3,596 | | 107 | | | Salaries |
| less severance and restructuring charges | | — | | 847 | | — | | | Employee benefits |
| less FDIC assessment credit | | — | | — | | (2,193) | | | Insurance |
| less rebranding initiative related expenses | | — | | 72 | | — | | | Employee benefits |
| less rebranding initiative related expenses | | 308 | | 47 | | — | | | Occupancy expense |
| less rebranding initiative related expenses | | 1,050 | | 75 | | — | | | Furniture and equipment expense |
| less rebranding initiative related expenses | | 591 | | — | | — | | | Data processing fees |
| less rebranding initiative related expenses | | — | | 23 | | — | | | Marketing |
| less rebranding initiative related expenses | | 136 | | 734 | | 1,073 | | | Professional fees and services |
| less rebranding initiative related expenses | | — | | 2 | | 90 | | | Communication |
| less rebranding initiative related expenses (including trade name intangible expense) | | — | | 87 | | 1,313 | | | Miscellaneous |
| less COVID-19 related expenses (bonuses and calamity pay) | | 2,122 | | 3,622 | | — | | | Salaries |
| less extra direct compensation related to collection of payments on former Vision Bank loan relationships | | — | | 1,900 | | — | | | Salaries |
| less management and consulting expenses related to collection of payments on former Vision Bank loan relationships | | 1,361 | | 2,383 | | 622 | | | Professional fees and services |
| less FHLB prepayment penalty | | — | | 10,529 | | 612 | | | FHLB prepayment penalty |
| Other expense - adjusted | | $ | 271,761 | | $ | 256,786 | | $ | 249,632 | | | |
| | | | | | |
Tax effect of adjustments to net income identified above (1) | | $ | (677) | | $ | (379) | | $ | 1,208 | | | |
| | | | | | |
| Net income - reported | | $ | 153,945 | | $ | 127,923 | | $ | 102,700 | | | |
| Net income - adjusted | | $ | 151,397 | | $ | 126,495 | | $ | 107,244 | | | |
| (1) The tax effect of adjustments to net income was calculated assuming a 21% corporate federal income tax rate for 2021, 2020 and 2019. |
Income Taxes: Income tax expense was $34.3 million in 2021, compared to $26.7 million in 2020 and $22.1 million in 2019. Income tax expense as a percentage of income before taxes was 18.2% in 2021, 17.3% in 2020 and 17.7% in 2019. The difference between the statutory federal corporate income tax rate of 21% for 2021 and Park’s effective tax rate reflected permanent tax differences, primarily consisting of tax-exempt interest income from municipal investments and loans, qualified affordable housing and historical tax credits, bank owned life insurance income, and dividends paid on common shares held within Park’s salary deferral plan, offset by the impact of state income taxes. Park's permanent federal tax differences for 2021 were approximately $6.3 million in 2021, compared to $6.7 million for 2020. Park expects permanent federal tax differences for 2022 will be approximately $5.8 million.
CREDIT METRICS AND (RECOVERY OF) PROVISION FOR CREDIT LOSSES
The (recovery of) provision for credit losses is the amount added to/subtracted from the allowance for credit losses to ensure the allowance is sufficient to absorb estimated credit losses over the life of a loan. The amount of the provision for credit losses is determined by management based on relevant information about past events, including historical credit loss experience
on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets.
Section 4014 of the CARES Act provided financial institutions with optional temporary relief from having to comply with ASU 2016-13 including the CECL methodology for estimating the allowance for credit losses. This temporary relief was set to expire on the earlier of the date on which the national emergency concerning COVID-19 terminated or December 31, 2020, with adoption being effective retrospectively as of January 1, 2020.
Section 540 of the Consolidated Appropriations Act, 2021, amended Section 4014 of the CARES Act by extending the relief period provided in the CARES Act. The Consolidated Appropriations Act, 2021, modified the CARES Act so that temporary relief was to expire on the earlier of the first day of the fiscal year that begins after the date on which the national emergency concerning COVID-19 terminates or January 1, 2022.
Park elected to delay the implementation of ASU 2016-13 following the approval of the CARES Act and continued to use the incurred loss methodology for estimating the allowance for credit losses in 2020. ASU 2016-13 requires financial institutions to calculate an allowance utilizing a reasonable and supportable forecast period which Park has established as a one-year period. In the unprecedented circumstances surrounding the COVID-19 pandemic and the response thereto, Park believed that adopting ASU 2016-13 in the first quarter of 2020 would have added an unnecessary level of subjectivity and volatility to the calculation of the allowance for credit losses. With the approval of the Consolidated Appropriations Act, 2021, management elected to further delay adoption of ASU 2016-13 to January 1, 2021. This allowed Park to utilize the CECL standard for the entire year of adoption.
The adoption of ASU 2016-13 on January 1, 2021 resulted in a $6.1 million increase to the allowance for credit losses and a $3.9 million increase to the allowance for unfunded credit losses. A cumulative effect adjustment resulting in an $8.0 million decrease to retained earnings and a $2.1 million increase to deferred tax assets was also recorded.
The table below provides additional information on the (recovery of) provision for credits losses and the ACL for 2021, 2020 and 2019.
| | | | | | | | | | | |
| Table 28 - ACL Activity | | | |
| (In thousands) | 2021 | 2020 | 2019 |
| ACL, beginning balance | $ | 85,675 | | $ | 56,679 | | $ | 51,512 | |
| Cumulative change in accounting principle; adoption of ASU 2016-13 | 6,090 | | — | | — | |
| Charge-offs | 5,093 | | 10,304 | | 11,177 | |
| Recoveries | (8,441) | | (27,246) | | (10,173) | |
| Net (recoveries) charge-offs | (3,348) | | (16,942) | | 1,004 | |
| (Recovery of) provision for credit losses: | (11,916) | | 12,054 | | 6,171 | |
| ACL, ending balance | $ | 83,197 | | $ | 85,675 | | $ | 56,679 | |
| Average loans | $ | 7,014,517 | | $ | 6,990,458 | | $ | 6,208,496 | |
| Net (recoveries) charge-offs as a percentage of average loans | (0.05) | % | (0.24) | % | 0.02 | % |
For the year ended December 31, 2021, gross income of $4.2 million would have been recognized on loans that were nonaccrual as of December 31, 2021 had these loans been current in accordance with their original terms. Interest income on nonaccrual loans may be recorded on a cash basis and be included in earnings only when Park expects to receive the entire recorded investment of the loan. Of the $4.2 million that would have been recognized, approximately $2.7 million was included in interest income for the year ended December 31, 2021.
Charge-offs for 2021 included the charge-off of $15,000 in specific reserves for which provision expense had been recognized in a prior year, compared to $283,000 for 2020 and $236,000 for 2019. Net (recoveries) charge-offs adjusted for changes in specific reserves as a percentage of average loans for the years ended December 31, 2021, 2020 and 2019 were (0.10)%, (0.24)%, and 0.06%, respectively.
SEPH, as a non-bank subsidiary of Park, does not carry an ACL balance, but recognizes a provision for credit losses when a charge-off is taken and recognizes a recovery of credit losses when a recovery is received.
At year-end 2021, the allowance for credit losses was $83.2 million, or 1.21%, of total loans outstanding, compared to $85.7 million, or 1.19%, of total loans outstanding at year-end 2020, and $56.7 million, or 0.87% of total loans outstanding at year-end 2019.
The following table provides additional information related to the allowance for credit losses for Park including information related to specific reserves and general reserves, at December 31, 2021, December 31, 2020 and December 31, 2019. Also included is the January 1, 2021 allowance for credit losses calculated under the CECL methodology prescribed in ASU 2016-13.
| | | | | | | | | | | | | | |
| Table 29- Allowance for Credit Losses Summary | | | | |
| (Dollars in thousands) | 12/31/2021 (CECL methodology) | 1/1/2021 (CECL methodology) | 12/31/2020 (Incurred Loss methodology) | 12/31/2019 (Incurred Loss methodology) |
| Total allowance for credit losses | $ | 83,197 | | $ | 91,764 | | $ | 85,675 | | $ | 56,679 | |
| Allowance on PCD loans (PCI loans for the periods ended in 2020 and 2019) | — | | 52 | | 167 | | 268 | |
| Allowance on purchased loans excluded from the general reserve | — | | — | | 678 | | — | |
| Specific reserves on individually evaluated loans | 1,616 | | 5,434 | | 5,434 | | 5,230 | |
| General reserves on collectively evaluated loans | $ | 81,581 | | $ | 86,278 | | $ | 79,396 | | $ | 51,181 | |
| | | | |
| Total loans | $ | 6,871,122 | | $ | 7,177,537 | | $ | 7,177,785 | | $ | 6,501,404 | |
| PCD loans (PCI loans for periods ended in 2020 and 2019) | 7,149 | | 10,903 | | 11,153 | | 14,331 | |
| Purchased loans excluded from collectively evaluated loans | — | | — | | 360,056 | | 548,436 | |
| Individually evaluated loans | 74,502 | | 108,274 | | 108,407 | | 77,459 | |
| Collectively evaluated loans | $ | 6,789,471 | | $ | 7,058,360 | | $ | 6,698,169 | | $ | 5,861,178 | |
| | | | |
| Allowance for credit losses as a % of period end loans | 1.21 | % | 1.28 | % | 1.19 | % | 0.87 | % |
Allowance for credit losses as a % of period end loans (excluding PPP loans) (1) | 1.22 | % | 1.34 | % | 1.25 | % | N.A |
| | | | |
| General reserve as a % of collectively evaluated loans | 1.20 | % | 1.22 | % | 1.19 | % | 0.87 | % |
General reserve as a % of collectively evaluated loans (excluding PPP loans) (1) | 1.21 | % | 1.28 | % | 1.24 | % | N.A |
(1) Excludes $74.4 million of PPP loans and $77,000 in related allowance at December 31, 2021; $331.6 million of PPP loans and $337,000 in related allowance at January 1, 2021; and $331.6 million of PPP loans and $337,000 in related allowance at December 31, 2020.
The allowance for credit losses of $83.2 million at December 31, 2021 represented an $8.6 million, or 9.3%, decrease compared to $91.8 million at January 1, 2021 as calculated under the CECL methodology. The decline since January 1, 2021 was largely due to a $4.7 million decrease in general reserves, taking into consideration improved economic forecasts while balancing the risks associated with the COVID-19 pandemic and the delta and omicron variants, particularly in high risk portfolios such as hotels and accommodations, restaurants and food service and strip shopping centers. Additionally, there was a $3.8 million decrease in specific reserves on individually evaluated loans from $5.4 million at January 1, 2021 to $1.6 million at December 31, 2021.
The allowance for credit losses of $85.7 million at December 31, 2020 represented a $29.0 million, or 51.2%, increase compared to $56.7 million at December 31, 2019. This increase was largely the result of a $28.2 million increase in general reserves on total originated loans and a $204,000 increase in specific reserves. As of December 31, 2020, a $678,000 allowance had been established for performing purchased loans and a $167,000 allowance had been established for PCI loans. In addition to the established allowance related to purchased loans, as of December 31, 2020, these loans had a remaining purchase accounting discount of $7.2 million. The $28.2 million increase in general reserves was the result of the estimated increase in incurred losses as a result of the impact of the COVID-19 pandemic. This estimate was established based on consideration of Park's then existing environmental loss factors, modification programs Park had put in place, and balances of high risk portfolios such as hotel and accommodations, restaurants and food service and strip shopping centers.
Management believes that the allowance for credit losses at year-end 2021 is adequate to absorb estimated life of loan credit losses in the loan portfolio. See "Note 1 - Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report on Form 10-K, and the discussion under the heading “CRITICAL ACCOUNTING POLICIES” earlier in this Management's Discussion and Analysis of Financial Condition and Results of Operations, for additional information on management’s evaluation of the adequacy of the allowance for credit losses.
ACL Detail by Loan Type: The following tables breakdown the allowance for credit losses and components by loan type.
The table below provides a summary of Park's loan loss experience over the past three years:
| | | | | | | | | | | | | | | | | | | | |
| Table 30 - Summary of Loan Credit Loss Experience | | | | |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| | | | | | |
| Average loans | | $ | 7,014,157 | | | $ | 6,990,458 | | | $ | 6,208,496 | |
| Allowance for credit losses: | | | | | | |
| Beginning balance | | 85,675 | | | 56,679 | | | 51,512 | |
| Adoption of ASU 2016-13 | | 6,090 | | | — | | | — | |
| | | | | | |
| Charge-offs: | | | | | | |
| Commercial, financial and agricultural | | 957 | | | 1,468 | | | 2,231 | |
| Construction real estate | | — | | | 6 | | | — | |
| Residential real estate | | 49 | | | 356 | | | 224 | |
| Commercial real estate | | 35 | | | 1,824 | | | 415 | |
| Consumer | | 4,052 | | | 6,634 | | | 8,307 | |
| Leases | | — | | | 16 | | | — | |
| Total charge-offs | | $ | 5,093 | | | $ | 10,304 | | | $ | 11,177 | |
| | | | | | |
| Recoveries: | | | | | | |
| Commercial financial, and agricultural | | $ | 639 | | | $ | 20,765 | | | $ | 1,241 | |
| Construction real estate | | 2,299 | | | 1,122 | | | 2,682 | |
| Residential real estate | | 941 | | | 991 | | | 787 | |
| Commercial real estate | | 802 | | | 738 | | | 720 | |
| Consumer | | 3,759 | | | 3,629 | | | 4,742 | |
| Leases | | 1 | | | 1 | | | 1 | |
| Total recoveries | | $ | 8,441 | | | $ | 27,246 | | | $ | 10,173 | |
| | | | | | |
| Net (recoveries) charge-offs | | $ | (3,348) | | | $ | (16,942) | | | $ | 1,004 | |
| (Recovery) provision included in earnings | | (11,916) | | | 12,054 | | | 6,171 | |
| Ending balance | | $ | 83,197 | | | $ | 85,675 | | | $ | 56,679 | |
| | | | | | |
| Ratio of net (recoveries) charge-offs to average loans | | (0.05) | % | | (0.24) | % | | 0.02 | % |
| Ratio of allowance for credit losses | | | | | | |
| to end of year loans | | 1.21 | % | | 1.19 | % | | 0.87 | % |
The follow table presents net-charge offs (recoveries), average loans outstanding, and net charge-offs as a percentage of average loans, by type of loan over the past three years:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Table 31- Net Charge-Offs (Recoveries) to Average Loans | | | | | | | | |
| Year Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| Net Charge-offs (Recoveries) | | Average Loans | | Net Charge-offs (Recoveries) as a % of Average Loans | | Net Charge-offs (Recoveries) | | Average Loans | | Net Charge-offs (Recoveries) as a % of Average Loans | | Net Charge-offs (Recoveries) | | Average Loans | | Net Charge-offs (Recoveries) as a % of Average Loans |
| Commercial, financial, and agricultural | $ | 318 | | | $ | 1,435,221 | | | 0.02 | % | | $ | (19,297) | | | $ | 1,545,426 | | | (1.25) | % | | $ | 990 | | | $ | 1,164,701 | | | 0.09 | % |
| Construction real estate | (2,299) | | | 331,882 | | | (0.69) | % | | (1,116) | | | 346,664 | | | (0.32) | % | | (2,682) | | | 295,538 | | | (0.91) | % |
| Residential real estate | (892) | | | 1,771,880 | | | (0.05) | % | | (635) | | | 1,867,956 | | | (0.03) | % | | (548) | | | 1,859,002 | | | (0.03) | % |
| Commercial real estate | (767) | | | 1,766,346 | | | (0.04) | % | | 1,086 | | | 1,655,747 | | | 0.07 | % | | (320) | | | 1,513,623 | | | (0.02) | % |
| Consumer | 293 | | | 1,686,849 | | | 0.02 | % | | 3,005 | | | 1,546,574 | | | 0.19 | % | | 3,565 | | | 1,367,045 | | | 0.26 | % |
| Leases | (1) | | | 22,339 | | | — | % | | 15 | | | 28,091 | | | 0.05 | % | | (1) | | | 8,587 | | | (0.01) | % |
| Total | $ | (3,348) | | | $ | 7,014,517 | | | (0.05) | % | | $ | (16,942) | | | $ | 6,990,458 | | | (0.24) | % | | $ | 1,004 | | | $ | 6,208,496 | | | 0.02 | % |
The following table summarizes Park's allocation of the allowance for credit losses for the past three years:
| | | | | | | | | | | | | | | | | | | | |
| Table 32- Allocation of Allowance for Credit Losses |
| December 31, | 2021 | 2020 | 2019 |
| (In thousands) | Allowance | Percent of Loans Per Category | Allowance | Percent of Loans Per Category | Allowance | Percent of Loans Per Category |
| Commercial, financial, and agricultural | $ | 14,025 | | 18.90 | % | $ | 25,608 | | 22.14 | % | $ | 20,203 | | 18.23 | % |
| Construction real estate | 5,758 | | 4.68 | % | 7,288 | | 4.78 | % | 5,311 | | 5.10 | % |
| Residential real estate | 11,424 | | 25.31 | % | 11,363 | | 25.26 | % | 8,610 | | 29.11 | % |
| Commercial real estate | 25,466 | | 26.22 | % | 23,480 | | 24.36 | % | 10,229 | | 24.76 | % |
| Consumer | 26,286 | | 24.59 | % | 17,418 | | 23.12 | % | 12,211 | | 22.34 | % |
| Leases | 238 | | 0.30 | % | 518 | | 0.34 | % | 115 | | 0.46 | % |
| Total | $ | 83,197 | | 100.00 | % | $ | 85,675 | | 100.00 | % | $ | 56,679 | | 100.00 | % |
As of December 31, 2021, Park had no concentrations of loans exceeding 10% to borrowers engaged in the same or similar industries nor did Park have any loans to foreign governments.
Nonperforming Assets: Nonperforming assets include: 1) loans whose interest is accounted for on a nonaccrual basis; 2) troubled debt restructurings (TDRs) on accrual status; 3) loans which are contractually past due 90 days or more as to principal or interest payments, where interest continues to accrue; 4) OREO which results from taking possession of property that served as collateral for a defaulted loan; and 5) other nonperforming assets. As of December 31, 2021, 2020 and 2019, other nonperforming assets consisted of aircraft acquired as part of a loan workout.
Generally, management obtains updated appraisal information for nonperforming loans and OREO annually. As new appraisal information is received, management performs an evaluation of the appraisal and applies a discount for anticipated disposition costs to determine the net realizable value of the collateral, which is compared to the outstanding principal balance to determine if additional write-downs are necessary.
The following is a summary of Park’s nonperforming assets at the end of each of the last three years:
| | | | | | | | | | | | | | | | | | | | |
| Table 33 - Nonperforming Assets | | | | | | |
| | December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Nonaccrual loans | | $ | 72,722 | | | $ | 117,368 | | | $ | 90,080 | |
| Accruing TDRs | | 28,323 | | | 20,788 | | | 21,215 | |
| Loans past due 90 days or more and accruing | | 1,607 | | | 1,458 | | | 2,658 | |
| Total nonperforming loans | | $ | 102,652 | | | $ | 139,614 | | | $ | 113,953 | |
| OREO | | 775 | | | 1,431 | | | 4,029 | |
| Other nonperforming assets | | 2,750 | | | 3,164 | | | 3,599 | |
| Total nonperforming assets | | $ | 106,177 | | | $ | 144,209 | | | $ | 121,581 | |
| Percentage of nonperforming loans to total loans | | 1.49 | % | | 1.95 | % | | 1.75 | % |
| Percentage of nonperforming assets to total loans | | 1.55 | % | | 2.01 | % | | 1.87 | % |
| Percentage of nonperforming assets to total assets | | 1.11 | % | | 1.55 | % | | 1.42 | % |
| Percentage of nonaccrual loans to total loans | | 1.06 | % | | 1.64 | % | | 1.39 | % |
| Allowance for credit losses to nonaccrual loans | | 114.40 | % | | 73.00 | % | | 62.92 | % |
Included in OREO totals above were $594,000 of SEPH OREO at both December 31, 2021 and December 31, 2020 and $929,000 of SEPH OREO at December 31, 2019.
Park classifies loans as nonaccrual when a loan 1) is maintained on a cash basis because of deterioration in the financial condition of the borrower, 2) payment in full of principal or interest is not expected, or 3) principal or interest has been in default for a period of 90 days for commercial loans and 120 days for all other loans. As a result, loans may be classified as nonaccrual despite being current with their contractual terms. The following table details the delinquency status of nonaccrual loans at December 31, 2021, 2020, and 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Table 34 - Delinquency Status of Nonaccrual Loans | | | | | | |
| | December 31, 2021 | | December 31, 2020 | | December 31, 2019 |
| (In thousands) | | Balance | | Percent of Total Loans | | Balance | | Percent of Total Loans | | Balance | | Percent of Total Loans |
| Nonaccrual loans - current | | $ | 53,259 | | | 0.78 | % | | $ | 92,600 | | | 1.29 | % | | $ | 66,282 | | | 1.02 | % |
| Nonaccrual loans - past due | | 19,463 | | | 0.28 | % | | 24,768 | | | 0.35 | % | | 23,798 | | | 0.37 | % |
| Total nonaccrual loans | | $ | 72,722 | | | 1.06 | % | | $ | 117,368 | | | 1.64 | % | | $ | 90,080 | | | 1.39 | % |
Credit Quality Indicators: When determining the quarterly credit loss provision, Park reviews the grades of commercial loans. These loans are graded from 1 to 8. A grade of 1 indicates little or no credit risk and a grade of 8 is considered a loss. Commercial loans that are pass-rated (graded an 1 through a 4) are considered to be of acceptable credit risk. Commercial loans graded a 5 (special mention) are considered to be watch list credits and a higher PD is applied to these loans. Commercial loans graded a 6 (substandard), also considered to be watch list credits, represent higher credit risk than those rated special mention and, as a result, a higher PD is applied to these loans. Commercial loans that are graded a 7 (doubtful) are shown as nonperforming and Park charges these loans down to their fair value by taking a partial charge-off or recording a specific reserve. Any commercial loan graded an 8 (loss) is completely charged-off.
The following table highlights the credit trends within the commercial loan portfolio.
| | | | | | | | | | | |
| Table 35- Commercial Credit Trends | | |
| Commercial loans * (In thousands) | December 31, 2021 | December 31, 2020 | December 31, 2019 |
| Pass rated | $ | 3,712,784 | | $ | 3,893,205 | | $ | 3,418,159 | |
| Special Mention | 75,397 | | 102,812 | | 27,367 | |
| Substandard | — | | 109 | | 973 | |
| Individually evaluated for impairment | 74,502 | | 108,407 | | 77,459 | |
| Accruing PCD (PCI loans for periods ended December 31, 2020 and 2019) | 6,630 | | 10,296 | | 13,364 | |
| Total | $ | 3,869,313 | | $ | 4,114,829 | | $ | 3,537,322 | |
*Commercial loans include: (1) commercial, financial and agricultural loans; (2) commercial real estate loans; (3) commercial related loans in the construction portfolio; (4) commercial related loans in the residential real estate portfolio; and (5) leases.
Park’s watch list includes all criticized and classified commercial loans, defined by Park as loans rated special mention or worse. Park had $75.4 million of collectively evaluated commercial loans included on the watch list at December 31, 2021, compared to $102.9 million at December 31, 2020, and $28.3 million at December 31, 2019. The existing conditions of these loans do not warrant classification as nonaccrual. However, these loans have shown some weakness and management performs additional analysis regarding each borrower's ability to comply with payment terms.
The $75.4 million of collectively evaluated commercial watch list loans as of December 31, 2021 is elevated compared to pre-pandemic levels, an increase of $48.6 million compared to $26.8 million at March 31, 2020. This $48.6 million increase was largely due to $54.1 million of hotels and accommodations loans that were downgraded to special mention or substandard as a result of the impact of COVID-19. In addition to the $54.1 million in hotels and accommodations loans that were downgraded to special mention, $15.3 million in hotels and accommodations loans were downgraded to impaired status. Park is closely monitoring the impact of COVID-19 on its borrowers' ability to repay their loans in accordance with contractual terms. As additional information becomes available, management will continue to evaluate loans to ensure appropriate risk classification.
Delinquencies have remained low over the past 36 months since January 1, 2019. Delinquent and accruing loans were $15.1 million, or 0.22% of total loans at December 31, 2021, compared to $20.1 million, or 0.28% of total loans at December 31, 2020, and $23.8 million, or 0.37% of total loans at December 31, 2019.
Individually Evaluated Loans: Loans that do not share risk characteristics are evaluated on an individual basis. Park has determined that any commercial loans which have been placed on nonaccrual status or classified as TDRs will be individually evaluated and are labeled as individually evaluated. Individual analysis will establish a specific reserve for loans in scope. Specific reserves on individually evaluated commercial loans are typically based on management’s best estimate of the fair value of collateral securing these loans. The amount ultimately charged off for these loans may be different from the specific reserve as the ultimate liquidation of the collateral may be for an amount different from management’s estimate.
Individually evaluated were $74.5 million at December 31, 2021, a decrease of $33.9 million, compared to $108.4 million at December 31, 2020, and a decrease of $3.0 million at December 31, 2020, compared to $77.5 million at December 31, 2019. The $74.5 million of individually evaluated commercial loans at December 31, 2021 included $17.5 million of loans modified in a TDR which were then currently on accrual status and performing in accordance with the restructured terms, up from $8.8 million at December 31, 2020.
At December 31, 2021, Park had taken partial charge-offs of $624,000 related to the $74.5 million of the individually evaluated commercial loans, compared to partial charge-offs of $655,000 related to the $108.4 million of individually evaluated commercial loans at December 31, 2020 and compared to partial charge-offs of $719,000 related to the $77.5 million of individually evaluated commercial loans at December 31, 2019.
The table below provides additional information related to Park's individually evaluated commercial loans at December 31, 2021, 2020, and 2019.
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| Table 36 - Individually Evaluated Commercial Loans |
| Years ended December 31, | | | | | | | |
| (In thousands) | | 2021 | | 2020 | | 2019 | |
| Unpaid principal balance | | $ | 75,126 | | | $ | 109,062 | | | $ | 78,178 | | |
| Prior charge-offs | | 624 | | | 655 | | | 719 | | |
| Remaining principal balance | | 74,502 | | | 108,407 | | | 77,459 | | |
| Specific reserves | | 1,616 | | | 5,434 | | | 5,230 | | |
| Book value, after specific reserves | | $ | 72,886 | | | $ | 102,973 | | | $ | 72,229 | | |
| | | | | | | |
Loans Acquired with Deteriorated Credit Quality:In conjunction with the NewDominion acquisition, Park acquired loans with a book value of $277.9 million as of the July 1, 2018 acquisition date. These loans were recorded at the initial fair value of $272.8 million. Loans acquired with deteriorated credit quality (ASC 310-30) with a book value of $5.1 million were recorded at the initial fair value of $4.9 million. In conjunction with the Carolina Alliance acquisition, Park acquired loans and leases with a book value of $589.7 million as of the April 1, 2019 acquisition date. These loans and leases were recorded at the initial fair value of $578.6 million. Loans and leases acquired with deteriorated credit quality (ASC 310-30) with a book value of $19.9 million were recorded at the initial fair value of $18.4 million
Upon adoption of CECL on January 1, 2021, $52,000 of the credit discount on PCD loans was reclassified to the allowance for credit losses. At December 31, 2021, there was no allowance for credit losses on PCD loans. The carrying amount of loans acquired with deteriorated credit quality at December 31, 2021 was $7.1 million. The carrying amount of loans acquired with deteriorated credit quality at December 31, 2020 was $11.2 million, of which none were considered impaired due to additional credit deterioration post acquisition. The carrying amount of loans acquired with deteriorated credit quality at December 31, 2019 was $14.3 million, of which $5,000 were considered impaired due to additional credit deterioration post acquisition.
Allowance for Credit Losses: The allowance for credit losses is calculated on a quarterly basis. The methodology for calculating the ACL and assumptions made as of December 31, 2021 are detailed below.
Quantitative Considerations
The ACL is primarily calculated utilizing a DCF model. Key inputs and assumptions used in this model are discussed below:
•Forecast model - For each portfolio segment, a loss driver analysis ("LDA") was performed in order to identify appropriate loss drivers and create a regression model for use in forecasting cash flows. The LDA analysis utilized Park's own FFIEC Call Report data for the commercial, financial and agricultural and residential real estate portfolio segments. Peer data was incorporated into the analysis for the commercial real estate, construction real estate, and consumer portfolio segments. Park plans to update the LDA annually; however, due to the impact of COVID-19, the LDA analysis was last updated in the fourth quarter of 2019.
•Probability of default – PD is the probability that an asset will be in default within a given time frame. Park has defined default to be when a charge-off has occurred, a loan is placed on nonaccrual, or a loan is greater than 90 days past due. Whenever possible, Park utilizes its own loan-level PDs for the reasonable and supportable forecast period. When loan-level data is not available reflecting the forecasted economic conditions, a forecast model is utilized to estimate PDs.
•Loss given default – LGD is the percentage of the asset not expected to be collected due to default. Whenever possible, Park utilizes its own loan-level LGDs for the reasonable and supportable forecast period. When it is not possible to use Park's own LGDs, the LGD is derived using a method referred to as Frye Jacobs.
•Prepayments and curtailments – Prepayments and curtailments are calculated based on Park’s own data utilizing a three-year average. This analysis is updated annually in the fourth quarter and was last updated in the fourth quarter of 2021.
•Forecast and reversion – Park has established a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average.
•Economic forecast - Park utilizes a third party to provide economic forecasts under various scenarios, which are weighted in order to reflect model risk in the current economic environment. The scenario weighting is evaluated by management on a quarterly basis.
◦As of January 1, 2021, the date of CECL adoption, Park weighted a "most likely" scenario 80%, a "slower near-term growth" scenario 10%, and a "moderate recession" scenario 10%. As of January 1, 2021, the "most likely" scenario forecasted Ohio unemployment to range between 5.31% and 5.79% during the next four quarters.
◦As of March 31, 2021, the "most likely" scenario forecasted Ohio unemployment to decrease significantly, to a range between 3.70% and 4.93% during the next four quarters. In determining the appropriate weighting of scenarios at March 31, 2021, management considered this improved economic forecast while balancing the risks associated with the COVID-19 pandemic, including the risk of pandemic-related losses lagging behind the projected improvement in unemployment. The calculation utilizing the 80% "most likely" scenario, 10% "slower near-term growth" scenario, and 10% "moderate recession scenario" resulted in a quantitative reserve of $58 million, which would have resulted in a decline of $17 million from the quantitative reserve of $75 million as of January 1, 2021. Management then considered the reason for this decline and whether or not it was appropriate given the economic environment at March 31, 2021. Upon review, management noted that the decline was the result of a significant decrease in forecasted unemployment. The March 31, 2021 "most likely" scenario forecasted unemployment rates lower than any post-1975 Ohio unemployment rates of record. Given the uncertainty at March 31, 2021 due to the COVID-19 pandemic, management did not believe that such a significant decrease in reserves was appropriate and sought to re-evaluate the weightings in order to calculate a more accurate life of loan loss estimate. Management determined it was appropriate to weight the "most likely" scenario 50% and the "moderate recession" scenario 50%.
◦As of December 31, 2021, the "most likely" scenario forecasted Ohio unemployment to decrease, to a range between 3.32% and 3.97%, during the next four quarters. In determining the appropriate weighting of scenarios at December 31, 2021, management considered the range of forecasted unemployment as well as a number of economic indicators. While some economic indications continued to be optimistic, the Omicron variant, rising inflation, volatility in consumer confidence, employment, supply chain and workforce challenges continued to cause uncertainty to the overall economic environment. Considering these factors, management determined it was appropriate to maintain the previous quarter weighting, and weigh the "most likely" scenario 50% and the "moderate recession" scenario 50% at December 31, 2021.
Qualitative Considerations
Park reviews various internal and external factors to consider the need for any qualitative adjustments to the quantitative model. Factors considered include the following:
•The nature and volume of Park’s financial assets; the existence, growth, and effect of any concentrations of credit and the volume and severity of past due financial assets, the volume of nonaccrual assets, and the volume and severity of adversely classified or graded assets. Specifically, management considers:
◦Trends (e.g., growth, reduction) in specific categories of the loan portfolio, as well as adjustments to the types of loans offered by Park.
◦Level of and trend in loan delinquencies, troubled loans, commercial watch list loans and nonperforming loans.
◦Level of and trend in new nonaccrual loans.
◦Level of and trend in loan charge-offs and recoveries.
•Park's lending policies and procedures, including changes in lending strategies, underwriting standards and practices for collections, write-offs, and recoveries.
•The quality of Park’s credit review function.
•The experience, ability, and depth of Park’s lending, investment, collection, and other relevant management and staff.
•The effect of other external factors such as the regulatory, legal and technological environments; competition; and events such as natural disasters or pandemics.
•Actual and expected changes in international, national, regional, and local economic and business conditions and developments in the markets in which Park operates that affect the collectibility of financial assets.
•Where the U.S. economy is within a given credit cycle.
•The extent that there is government assistance (stimulus).
During 2020, Park added an additional reserve for three industries at particularly high risk due to the COVID-19 pandemic: hotels and accommodations; restaurants and food service; and strip shopping centers. These industries have experienced high levels of deferrals and have been particularly impacted by shut downs of non-essential businesses, increased health department regulations, and changes in consumer behavior. Management expects that a relatively higher percentage of the 4-rated credits in these portfolios will eventually migrate to special mention, substandard, or impaired status. In adopting CECL, management determined it was appropriate to retain and maintain this qualitative adjustment throughout 2021 as this
adjustment takes into account the additional risk in these portfolios, which is not captured in the quantitative calculation. As of December 31, 2021, additional reserves totaling $5.2 million were added for these portfolios on top of the quantitative reserve already calculated. This represented an increase from $3.8 million as of December 31, 2020, which had been calculated under the previous incurred loss methodology.
A breakout of the 4-rated balances within these portfolios and the additional reserve related to these portfolios is detailed in the following table:
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| Table 37 - Additional COVID-19 Reserves | | | | |
| December 31, 2021 | | December 31, 2020 |
| (in thousands) | 4-Rated Balance | | Additional Reserve | | 4-Rated Balance | | Additional Reserve |
| Hotels and accommodations | $ | 148,018 | | | $ | 2,226 | | | $ | 96,909 | | | $ | 1,391 | |
| Restaurants and food service | 40,648 | | | 917 | | | 33,409 | | | 637 | |
| Strip shopping centers | 184,171 | | | 2,033 | | | 177,706 | | | 1,731 | |
| Total | $ | 372,837 | | | $ | 5,176 | | | $ | 308,024 | | | $ | 3,759 | |
Additionally, management applied a 1.00% reserve to all hotels and accommodations loans in the collectively evaluated population to account for increased valuation risk. This was consistent with 2020 year end and considered various economic conditions due to COVID-19 variants, continued volatility in the hotel industry, and travel trends, all of which impacted valuations. At December 31, 2021, Park's originated hotels and accommodation loans included in the population of collectively evaluated loans had a balance of $203.9 million with an additional reserve related to valuation risks of $2.0 million. At December 31, 2020, Park's originated hotels and accommodation loans included in the population of collectively evaluated loans had a balance of $181.4 million with an additional reserve related to valuation risks of $1.8 million.
There is still a significant amount of uncertainty related to the economic impact of COVID-19, including the duration of the pandemic, the risk related to new variants, future government programs that may be established in response to the pandemic, and the resiliency of the U.S. economy. Management will continue to evaluate its estimate of expected credit losses as new information becomes available.
As of December 31, 2021, Park had $74.4 million of PPP loans which were included in the commercial, financial and agricultural portfolio segment compared to $331.6 million as of December 31, 2020. These loans are guaranteed by the SBA and thus have not been reserved for using the same methodology as the rest of Park’s loan portfolio. A 10 basis point reserve was calculated for these loans to reflect minimal credit risk as of December 31, 2021 and 2020.
CAPITAL RESOURCES
Liquidity and Interest Rate Sensitivity Management: Park’s objective in managing its liquidity is to maintain the ability to continuously meet the cash flow needs of customers, such as borrowings or deposit withdrawals, while at the same time seeking higher yields from longer-term lending and investing activities.
Cash and cash equivalents decreased by $151.3 million during 2021 to $219.2 million at year end. Cash provided by operating activities was $157.3 million in 2021, $111.6 million in 2020 and $111.6 million in 2019. Net income was the primary source of cash provided by operating activities during each year.
Cash used in investing activities was $412.1 million in 2021 and $455.9 million in 2020, while cash provided by investing activities was $60.1 million in 2019. Investment securities transactions and loan originations/repayments are the major uses or sources of cash in investing activities. Proceeds from the sale, repayment or maturity of investment securities provide cash and purchases of investment securities use cash. Net investment securities transactions used cash of $709.5 million in 2021 and provided cash of $188.1 million in 2020 and $302.2 million in 2019. Cash provided by the net paydown in the loan portfolio was $312.2 million in 2021, and cash used by the net increase in the loan portfolio was $620.2 million in 2020 and $216.4 million in 2019.
Cash provided by financing activities was $103.5 million in 2021 and $554.8 million in 2020, while cash used in financing activities was $179.0 million in 2019. A major source of cash provided by or used in financing activities is the net change in deposits. Deposits increased and provided $332.2 million of cash in 2021, $520.0 million of cash in 2020 and $159.7 million of cash in 2019. Other major sources of cash from financing activities are short-term borrowings and long-term debt. In 2021, net short-term borrowings decreased and used $103.4 million in cash and net long-term debt decreased and used $32.5
million in cash. In 2020, net short-term borrowings increased and provided $111.6 million in cash and net long-term debt increased and provided $2.1 million in cash. In 2019, net short-term borrowings decreased and used $20.1 million in cash and net long-term debt decreased and used $208.1 million in cash. Cash used in the repurchase of common shares was $16.0 million in 2021, $7.5 million in 2020 and $40.5 million in 2019. Finally, cash declined by $74.3 million in 2021, $70.4 million in 2020 and $69.1 million in 2019, from the payment of cash dividends.
Funds are available from a number of sources, including the capital markets, the investment securities portfolio, the core deposit base, FHLB borrowings and the capability to securitize or package loans for sale. In the opinion of Park's management, the present funding sources provide more than adequate liquidity for Park to meet our cash flow needs.
The following table shows interest rate sensitivity data for five different time intervals as of December 31, 2021:
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| Table 38 - Interest Rate Sensitivity | | | | | | | | | | |
| | 0-3 | | 3-12 | | 1-3 | | 3-5 | | Over 5 | | |
| (In thousands) | | Months | | Months | | Years | | Years | | Years | | Total |
| Interest earning assets: | | | | | | | | | | | | |
Investment securities (1) | | $ | 557,903 | | | $ | 137,478 | | | $ | 271,734 | | | $ | 370,254 | | | $ | 451,262 | | | $ | 1,788,631 | |
| Money market instruments | | 74,673 | | | — | | | — | | | — | | | — | | | 74,673 | |
Loans (1) | | 1,853,301 | | | 1,498,476 | | | 2,004,159 | | | 1,056,642 | | | 458,544 | | | 6,871,122 | |
| Total interest earning assets | | 2,485,877 | | | 1,635,954 | | | 2,275,893 | | | 1,426,896 | | | 909,806 | | | 8,734,426 | |
| Interest bearing liabilities: | | | | | | | | | | | | |
Interest bearing transaction accounts (2) | | $ | 502,812 | | | $ | — | | | $ | 1,000,064 | | | $ | — | | | $ | — | | | $ | 1,502,876 | |
Savings accounts (2) | | 1,011,301 | | | — | | | 1,610,807 | | | — | | | — | | | 2,622,108 | |
| Time deposits | | 190,442 | | | 266,694 | | | 185,508 | | | 64,297 | | | 4,719 | | | 711,660 | |
| Other | | 1,465 | | | — | | | — | | | — | | | — | | | 1,465 | |
| Total deposits | | 1,706,020 | | | 266,694 | | | 2,796,379 | | | 64,297 | | | 4,719 | | | 4,838,109 | |
| Short-term borrowings | | 238,786 | | | — | | | — | | | — | | | — | | | 238,786 | |
| Subordinated notes | | 15,000 | | | — | | | — | | | 173,210 | | | — | | | 188,210 | |
| Total interest bearing liabilities | | 1,959,806 | | | 266,694 | | | 2,796,379 | | | 237,507 | | | 4,719 | | | 5,265,105 | |
| Interest rate sensitivity gap | | 526,071 | | | 1,369,260 | | | (520,486) | | | 1,189,389 | | | 905,087 | | | 3,469,321 | |
| Cumulative rate sensitivity gap | | 526,071 | | | 1,895,331 | | | 1,374,845 | | | 2,564,234 | | | 3,469,321 | | | |
| Cumulative gap as a | | | | | | | | | | | | |
| percentage of total | | | | | | | | | | | | |
| interest earning assets | | 6.02 | % | | 21.70 | % | | 15.74 | % | | 29.36 | % | | 39.72 | % | | |
(1)Investment securities and loans that are subject to prepayment are shown in the table by the earlier of their re-pricing date or their expected repayment date and not by their contractual maturity date. Nonaccrual loans of $72.7 million are included within the three-month to twelve-month maturity category.
(2)Management considers interest bearing transaction accounts and savings accounts to be core deposits and, therefore, not as rate sensitive as other deposit accounts and borrowed money. Accordingly, only 33% of interest bearing transaction accounts and 39% of savings accounts are considered to re-price within one year. If all of the interest bearing transaction accounts and savings accounts were considered to re-price within one year, the one-year cumulative gap would change from a positive 21.70% to a negative 8.19%.
The interest rate sensitivity gap analysis provides an overall picture of Park’s static interest rate risk position. At December 31, 2021, the cumulative interest earning assets maturing or repricing within twelve months were $4,122 million compared to the cumulative interest bearing liabilities maturing or repricing within twelve months of $2,227 million. For the twelve-month cumulative interest rate sensitivity gap position, rate sensitive assets exceeded rate sensitive liabilities by $1,895 million or 21.7% of interest earning assets.
A positive twelve-month cumulative rate sensitivity gap (assets exceed liabilities) would suggest that Park’s net interest margin would increase if interest rates were to increase. Conversely, a negative twelve-month cumulative rate sensitivity gap would suggest that Park’s net interest margin would decrease if interest rates were to increase. However, the usefulness of the interest rate sensitivity gap analysis as a forecasting tool in projecting net interest income is limited. The gap analysis does not consider the magnitude, timing or frequency by which assets or liabilities will reprice during a period and also
contains assumptions as to the repricing of interest bearing transaction accounts and savings accounts that may not prove to be correct.
The cumulative twelve-month interest rate sensitivity gap position at year-end 2020 was a positive $1,295 million or 15.29% of total interest earning assets. The percentage of interest earning assets maturing or repricing within one year was 47.2% at year-end 2021, compared to 45.7% at year-end 2020. The percentage of interest bearing liabilities maturing or repricing within one year was 42.3% at year-end 2021, compared to 47.7% at year-end 2020.
Management supplements the interest rate sensitivity gap analysis with periodic simulations of balance sheet sensitivity under various interest rate and what-if scenarios to better forecast and manage the net interest margin. Park’s management uses an earnings simulation model to analyze net interest income sensitivity to movements in interest rates. This model is based on actual cash flows and repricing characteristics for balance sheet instruments and incorporates market-based assumptions regarding the impact of changing interest rates on the prepayment rate of certain assets and liabilities. This model also includes management’s projections for activity levels of various balance sheet instruments and non-interest fee income and operating expense. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into this earnings simulation model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure net interest income and net income. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies.
Management uses a 50 basis point change in market interest rates per quarter for a total of 200 basis points per year in evaluating the impact of changing interest rates on net interest income and net income over a twelve-month horizon. At December 31, 2021, the earnings simulation model projected that net income would increase by 7.5% using a rising interest rate scenario and decrease by 15.1% using a declining interest rate scenario over the next year. At December 31, 2020, the earnings simulation model projected that net income would decrease by 2.9% using a rising interest rate scenario and decrease by 8.8% using a declining interest rate scenario over the next year. At December 31, 2019, the earnings simulation model projected that net income would decrease by 1.9% using a rising interest rate scenario and increase by 0.5% using a declining interest rate scenario over the next year. Consistently, over the past several years, Park’s earnings simulation model has projected that changes in interest rates would have only a small impact on net income and the net interest margin. Park’s net interest margin was 3.69% in 2021, 3.93% in 2020 and 3.89% in 2019.
CONTRACTUAL OBLIGATIONS
In the ordinary course of operations, Park enters into certain contractual obligations. The following table summarizes Park’s significant and determinable obligations by payment date at December 31, 2021.
Further discussion of the nature of each specified obligation is included in the referenced Note to the Consolidated Financial Statements included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report on Form 10-K.
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Table 39 - Contractual Obligations (1) |
| December 31, 2021 | | Payments Due In |
| | | | 0-1 | | 1-3 | | 3-5 | | Over 5 | | |
| (In thousands) | | Note | | Years | | Years | | Years | | Years | | Total |
| Deposits without stated maturity | | 12 | | $ | 7,192,868 | | | $ | — | | | $ | — | | | $ | — | | | $ | 7,192,868 | |
| Certificates of deposit | | 12 | | 450,374 | | | 199,396 | | | 61,757 | | | 133 | | | 711,660 | |
| Short-term borrowings | | 14 | | 238,786 | | | — | | | — | | | — | | | 238,786 | |
| Subordinated notes | | 16 | | — | | | — | | | — | | | 188,210 | | | 188,210 | |
| Operating leases | | 26 | | 3,108 | | | 4,858 | | | 2,992 | | | 4,496 | | | 15,454 | |
Defined benefit pension plan (2) | | 19 | | 12,775 | | | 23,602 | | | 24,765 | | | 61,702 | | | 122,844 | |
| Supplemental Executive Retirement Plan | | 19 | | 652 | | | 1,788 | | | 1,989 | | | 31,430 | | | 35,859 | |
| Total contractual obligations | | | | $ | 7,898,563 | | | $ | 229,644 | | | $ | 91,503 | | | $ | 285,971 | | | $ | 8,505,681 | |
(1) Amounts do not include associated interest payments.
(2) Pension payments reflect 10 years of payments, through 2031.
As of December 31, 2021, Park had $28.5 million in unfunded commitments related to investments in qualified affordable housing projects which are not included in "Table 39 - Contractual Obligations" above. Commitments are funded when capital calls are made by the general partner. Park expects that the current commitments will be funded between 2022 and 2032.
As of December 31, 2021, Park had $8.4 million in unfunded commitments related to certain equity investments which are not included in "Table 39 - Contractual Obligations" above. Commitments are funded when capital calls are made by the general partner.
The Corporation’s operating lease obligations represent short-term and long-term lease and rental payments for facilities and equipment.
Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements: In order to meet the financing needs of our customers, the Corporation issues loan commitments and standby letters of credit. At December 31, 2021, the Corporation had $1.4 billion of loan commitments for commercial, commercial real estate, and residential real estate loans and had $18.2 million of standby letters of credit. At December 31, 2020, the Corporation had $1.4 billion of loan commitments for commercial, commercial real estate, and residential real estate loans and had $17.0 million of standby letters of credit.
Commitments to extend credit under loan commitments and standby letters of credit do not necessarily represent future cash requirements. These commitments often expire without being drawn upon. However, all of the loan commitments and standby letters of credit were permitted to be drawn upon in 2021. See "Note 24 - Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk" of the Notes to Consolidated Financial Statements included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" in this Annual Report on Form 10-K, for additional information on loan commitments and standby letters of credit.
The Corporation did not have any unrecorded significant contingent liabilities at December 31, 2021.
Capital: Park’s primary means of maintaining capital adequacy is through retained earnings. At December 31, 2021, the Corporation’s total shareholders’ equity was $1,110.8 million, compared to $1,040.3 million at December 31, 2020. Total shareholders’ equity at December 31, 2021 was 11.62% of total assets, compared to 11.21% of total assets at December 31, 2020.
Tangible shareholders’ equity was $943.7 million [total shareholders' equity ($1,110.8 million) less goodwill ($159.6 million) and other intangible assets ($7.5 million)] at December 31, 2021, and was $871.4 million [total shareholders’ equity ($1,040.3 million) less goodwill ($159.6 million) and other intangible assets ($9.3 million)] at December 31, 2020. At December 31, 2021, tangible shareholders' equity was 10.05% of total tangible assets [total assets ($9,560 million) less goodwill ($159.6 million) and other intangible assets ($7.5 million)], compared to 9.57% of total tangible assets [total assets ($9,279 million) less goodwill ($159.6 million) and other intangible assets ($9.3 million)] at December 31, 2020.
Net income was $153.9 million in 2021, $127.9 million in 2020 and $102.7 million in 2019.
Cash dividends declared for Park's common shares were $74.6 million in 2021, $70.6 million in 2020 and $69.5 million in 2019. On a per share basis, the cash dividends declared were $4.52 per common share in 2021, $4.28 per common share in 2020 and $4.24 per common share in 2019.
The table below shows the repurchases and issuances of common shares and treasury shares for 2019 through 2021.
| | | | | | | | |
| Table 40 | | |
| (In thousands, except share data) | Treasury Shares | Number of Common Shares |
| Balance at January 1, 2019 | $ | (90,373) | | 15,698,178 | |
| Cash payment for fractional shares in dividend reinvestment plan | — | | (171) | |
| Common shares issued for the acquisition of CAB Financial Corporation | — | | 1,037,205 | |
| Treasury shares repurchased | (40,535) | | (421,253) | |
| Treasury shares reissued for share-based compensation awards | 1,926 | | 18,983 | |
| Treasury shares reissued for director grants | 1,349 | | 13,500 | |
| Balance at December 31, 2019 | $ | (127,633) | | 16,346,442 | |
| Cash payment for fractional shares in dividend reinvestment plan | — | | (36) | |
| Treasury shares repurchased | (7,507) | | (76,000) | |
| Treasury shares reissued for share-based compensation awards | 3,031 | | 30,341 | |
| Treasury shares reissued for director grants | 1,343 | | 13,450 | |
| Balance at December 31, 2020 | $ | (130,766) | | 16,314,197 | |
| Cash payment for fractional shares in dividend reinvestment plan | — | | (45) | |
| Treasury shares repurchased | (16,048) | | (137,659) | |
| Treasury shares reissued for share-based compensation awards | 2,964 | | 29,670 | |
| Treasury shares reissued for director grants | 1,360 | | 13,400 | |
| Balance at December 31, 2021 | $ | (142,490) | | 16,219,563 | |
Park issued 1,037,205 new common shares, which had not already been held as treasury shares, during 2019 in the acquisitions of CABF, but did not issue any new common shares, which had not already been held as treasury shares, in 2020 or 2021. Common shares had a balance of $461.8 million, $460.7 million and $459.4 million at December 31, 2021, 2020, and 2019, respectively.
Accumulated other comprehensive income (loss) (net) reflected income of $15.2 million at December 31, 2021 and $5.6 million at December 31, 2020, compared to a loss of $9.6 million at December 31, 2019. During 2021, the change in net unrealized holding gain (loss) on AFS debt securities, net of income tax, was a loss of $19.5 million. During the 2020 year, the change in net unrealized holding gain (loss) on AFS debt securities, net of income tax, was a gain of $23.2 million. During the 2019 year, the change in net unrealized holding gain (loss) on AFS debt securities, net of income tax, was a gain of $37.7 million. Additionally, Park recognized an other comprehensive gain of $28.6 million, net of tax, related to the change in pension plan assets and benefit obligations in 2021, compared to an other comprehensive loss of $7.7 million, net of income tax, related to the change in pension plan assets and benefit obligations in 2020, and an other comprehensive gain of $3.0 million, net of income tax, related to the change in pension plan assets and benefit obligations in 2019. Finally, during the 2021 year, Park recognized an other comprehensive gain of $492,000, net of income tax, related to an unrealized net holding gain on cash flow hedging derivatives, compared to an other comprehensive loss of $244,000, net of income tax, related to an unrealized net holding loss on cash flow hedging derivatives in 2020, and an other comprehensive loss of $454,000, net of income tax, related to an unrealized net holding loss on cash flow hedging derivatives in 2019.
Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank holding companies. Park has elected not to include the net unrealized gain or loss on AFS debt securities in computing regulatory capital. During the first quarter of 2015, Park adopted the Basel III regulatory capital framework as approved by the federal banking agencies. The adoption of this framework modified the calculation of the various capital ratios, added an additional ratio, common equity tier 1, and revised the adequately and well-capitalized thresholds under the prompt corrective action regulations applicable to PNB. Additionally, under this framework, in order to avoid limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers, Park must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was fully phased in at 2.50% on January 1, 2019. The amounts shown below as the adequately capitalized ratio plus capital conservation buffer includes the 2.50% buffer. The Federal Reserve Board also adopted capital requirements Park must maintain to be deemed "well capitalized" and remain a financial holding company.
Park and PNB met each of the well-capitalized ratio guidelines applicable to them at December 31, 2021. The following table indicates the capital ratios for PNB and Park at December 31, 2021 and December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | |
| Table 41 - PNB and Park Capital Ratios | | | | | | | |
| As of December 31, 2021 |
| | Leverage | | Tier 1
Risk-Based | | Common Equity Tier 1 | | Total
Risk-Based |
| PNB | 8.58 | % | | 11.05 | % | | 11.05 | % | | 12.56 | % |
| Park | 9.77 | % | | 12.57 | % | | 12.37 | % | | 16.05 | % |
| Adequately capitalized ratio | 4.00 | % | | 6.00 | % | | 4.50 | % | | 8.00 | % |
| Adequately capitalized ratio plus capital conservation buffer | 4.00 | % | | 8.50 | % | | 7.00 | % | | 10.50 | % |
| Well-capitalized ratio - PNB | 5.00 | % | | 8.00 | % | | 6.50 | % | | 10.00 | % |
| Well-capitalized ratio - Park | N/A | | 6.00 | % | | N/A | | 10.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| | Leverage | | Tier 1
Risk-Based | | Common Equity Tier 1 | | Total
Risk-Based |
| PNB | 8.59 | % | | 10.66 | % | | 10.66 | % | | 12.16 | % |
| Park | 9.63 | % | | 11.92 | % | | 11.72 | % | | 15.43 | % |
| Adequately capitalized ratio | 4.00 | % | | 6.00 | % | | 4.50 | % | | 8.00 | % |
| Adequately capitalized ratio plus capital conservation buffer | 4.00 | % | | 8.50 | % | | 7.00 | % | | 10.50 | % |
| Well-capitalized ratio - PNB | 5.00 | % | | 8.00 | % | | 6.50 | % | | 10.00 | % |
| Well-capitalized ratio - Park | N/A | | 6.00 | % | | N/A | | 10.00 | % |
Effects of Inflation: Balance sheets of financial institutions typically contain assets and liabilities that are monetary in nature and, therefore, differ greatly from most commercial and industrial companies which have significant investments in premises, equipment and inventory. During periods of inflation, financial institutions that are in a net positive monetary position will experience a decline in purchasing power, which does have an impact on growth. Another significant effect on internal equity growth is other expenses, which tend to rise during periods of inflation.
Management believes the most significant impact on financial results is the Corporation's ability to align our asset/liability management program to react to changes in interest rates.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As noted in "Table 19 - Distribution of Assets, Liabilities and Shareholders' Equity" included in "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Annual Report on Form 10-K, Park’s tax equivalent net interest margin decreased by twenty-four basis points in 2021 and increased four basis points in 2020. Consistently, over the last several years, Park’s earnings simulation model has projected that changes in interest rates would have only a small impact on net income and the tax equivalent net interest margin. The tax equivalent net interest margin was 3.69%, 3.93% and 3.89% for each of the years ended December 31, 2021, 2020 and 2019, respectively. The discussion of interest rate sensitivity included in "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Annual Report on Form 10-K is incorporated herein by reference. In addition, the discussion of Park’s commitments, contingent liabilities and off-balance sheet arrangements included in "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Annual Report on Form 10-K and in "Note 24 - Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk" of the Notes to Consolidated Financial Statements included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report on Form 10-K is incorporated herein by reference.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements
Audited Financial Statements Page
Management’s Report on Internal Control Over Financial Reporting 84 Report of Independent Registered Public Accounting Firm 85 Auditor Name: Crowe LLP
Auditor Location: Columbus, OH
Auditor Firm ID: 173
Consolidated Balance Sheets at December 31, 2021 and 2020 89 Consolidated Statements of Income for the Years Ended December 31, 2021, 2020 and 2019 91 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2021, 2020 and 2019 93 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2021, 2020 and 2019 94 Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019 96 Notes to Consolidated Financial Statements 97
Management’s Report on Internal Control Over Financial Reporting
Management’s Report on Internal Control Over Financial Reporting
To the Board of Directors and Shareholders
Park National Corporation
The management of Park National Corporation (the “Corporation”) is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, for the Corporation and its consolidated subsidiaries. The Corporation’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP"). The Corporation’s internal control over financial reporting includes those policies and procedures that:
a.pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation and its consolidated subsidiaries;
b.provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Corporation and its consolidated subsidiaries are being made only in accordance with authorizations of management and directors of the Corporation; and
c.provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the assets of the Corporation and its consolidated subsidiaries that could have a material effect on the financial statements.
The Corporation’s internal control over financial reporting as it relates to the consolidated financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even an effective system of internal control over financial reporting will provide only reasonable assurance with respect to financial statement preparation.
With the participation of our Chairman of the Board and Chief Executive Officer and our Chief Financial Officer, Secretary, and Treasurer, management evaluated the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2021, the end of the Corporation’s fiscal year. In making this assessment, management used the criteria set forth for effective internal control over financial reporting by the Committee of Sponsoring Organizations of the Treadway Commission's (COSO) Internal Control — Integrated Framework (2013).
Based on our assessment under the criteria described in the immediately preceding paragraph, management concluded that the
Corporation maintained effective internal control over financial reporting at a reasonable assurance level as of December 31, 2021. We reviewed the results of management's assessment with the Audit Committee of the Board of Directors of the Corporation.
The Corporation’s independent registered public accounting firm, Crowe LLP, has audited the Consolidated Balance Sheets of the Corporation and its subsidiaries as of December 31, 2021 and 2020 and the related Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Statements of Changes in Shareholders' Equity and Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2021, included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report on Form 10-K and the Corporation’s internal control over financial reporting as of December 31, 2021, and has issued their Report of Independent
Registered Public Accounting Firm, which appears in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report on Form 10-K.
| | | | | | | | |
| /s/ David L. Trautman | | /s/ Brady T. Burt |
| David L. Trautman | | Brady T. Burt |
| Chairman of the Board and Chief Executive Officer | | Chief Financial Officer, Secretary and Treasurer |
| | |
| February 24, 2022 | | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Park National Corporation
Newark, Ohio
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Park National Corporation (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2021 due to the adoption of ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter below.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses
In accordance with Accounting Standards Update (the “ASU”) 2016-13, Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the Company adopted Accounting Standards Codification (“ASC”) 326 as of January 1, 2021 as described in Notes 2 and 6 of the consolidated financial statements. See also the explanatory paragraph above. The allowance for credit losses (the “ACL”) is an accounting estimate of expected credit losses over the life of loans. The ASU requires the Company’s loan portfolio, measured at amortized cost, to be presented at the net amount expected to be collected. Estimates of expected credit losses for loans are based on historical experience, current conditions and reasonable and supportable forecasts over the life of the loans. In order to estimate the expected credit losses, the Company implemented a new loss estimation model. The Company disclosed the impact of adoption of this standard on January 1, 2021 with a $6.1 million increase to the allowance for credit losses and a $8.0 million decrease to retained earnings for the cumulative effect adjustment recorded upon adoption. Recovery of credit losses for the year ending December 31, 2021 was $11.9 million and the Allowance for credit losses at December 31, 2021 was $83.2 million.
The Company measures expected credit losses based on pooled loans when similar risk characteristics exist primarily utilizing a discounted cash flow (“DCF”) model. A loss driver analysis was performed to identify appropriate loss drivers to create a regression model for use in forecasting cash flows for each loan segment. Probability of default (“PD”) and loss given default (“LGD”) are assumptions in the model used to discount loan-level cash flows that are adjusted for prepayments and curtailments. A quantitative adjustment is made on top of the model using economic forecasts that are weighted to reflect model risk in the current economic environment. The Company adjusts its quantitative results for certain qualitative factors to reflect the extent to which management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated.
The allowance for credit losses was identified by us as a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management throughout the initial adoption and subsequent application processes, including the need to involve our valuation services specialists. The principal considerations resulting in our determination included the following:
•Significant auditor judgment and audit effort to evaluate the loss estimation model and significant assumptions related to the loss driver analysis, PD and LGD input into the DCF model.
•Significant auditor judgment and audit effort used in evaluating the quantitative adjustment made on top of the model that weight the economic scenarios to reflect model risk in the current economic environment.
The primary procedures performed to address the critical audit matter included:
•Testing the effectiveness of management's controls addressing:
◦Management’s selection of the DCF model, including evaluation of the appropriateness of the loss driver analysis and probability of default and loss given default curves input into the model.
◦Management’s review of the relevance and reliability of data used in the DCF model.
◦Management’s review over the Company’s judgments used in the determination of the quantitative adjustment made on top of the model that weight the economic scenarios used in the forecast.
•Substantive testing included:
◦Evaluating the appropriateness of the Company's methodology applied in the adoption of ASC 326.
◦Evaluating the appropriateness of the loss driver analysis and probability of default and loss given default curves into the DCF model, assisted by our valuation services specialists.
◦Evaluating the relevance and reliability of data used in the DCF model.
◦Evaluating management’s judgments for developing and applying a quantitative adjustment made on top of the model that weight the economic scenarios used in the forecast.
Crowe LLP
We have served as the Company's auditor since 2006.
Columbus, Ohio
February 24, 2022
Park National Corporation and Subsidiaries
Consolidated Balance Sheets
at December 31, 2021 and 2020
| | | | | | | | | | | | | | |
| (In thousands, except share and per share data) | | 2021 | | 2020 |
| | | | |
| Assets | | | | |
| Cash and due from banks | | $ | 144,507 | | | $ | 155,596 | |
| Money market instruments | | 74,673 | | | 214,878 | |
| Cash and cash equivalents | | 219,180 | | | 370,474 | |
| | | | |
| Investment securities: | | | | |
| Debt securities available-for-sale, at fair value (amortized cost of $1,727,363 and $1,007,834 at December 31, 2021 and 2020, respectively, and no allowance for credit losses at December 31, 2021) | | 1,754,140 | | | 1,059,341 | |
| Other investment securities | | 61,268 | | | 65,465 | |
| Total investment securities | | 1,815,408 | | | 1,124,806 | |
| | | | |
| Total loans | | 6,871,122 | | | 7,177,785 | |
| Allowance for credit losses | | (83,197) | | | (85,675) | |
| Net loans | | 6,787,925 | | | 7,092,110 | |
| | | | |
| Other assets: | | | | |
| Bank owned life insurance | | 215,792 | | | 216,225 | |
| Prepaid assets | | 144,124 | | | 103,523 | |
| Goodwill | | 159,595 | | | 159,595 | |
| Other intangible assets | | 7,462 | | | 9,260 | |
| Premises and equipment, net | | 89,008 | | | 88,660 | |
| Affordable housing tax credit investments | | 58,711 | | | 56,024 | |
| Accrued interest receivable | | 23,413 | | | 24,926 | |
| Other real estate owned | | 775 | | | 1,431 | |
| Mortgage loan servicing rights | | 15,264 | | | 12,210 | |
| Operating lease right-of-use assets | | 13,446 | | | 15,078 | |
| Other | | 10,151 | | | 4,699 | |
| Total other assets | | 737,741 | | | 691,631 | |
| | | | |
| Total assets | | $ | 9,560,254 | | | $ | 9,279,021 | |
The accompanying notes are an integral part of the consolidated financial statements.
Park National Corporation and Subsidiaries
Consolidated Balance Sheets
at December 31, 2021 and 2020
| | | | | | | | | | | | | | |
| (In thousands, except share and per share data) | | 2021 | | 2020 |
| | | | |
| Liabilities and shareholders’ equity | | | | |
| | | | |
| Deposits: | | | | |
| Non-interest bearing | | $ | 3,066,419 | | | $ | 2,727,100 | |
| Interest bearing | | 4,838,109 | | | 4,845,258 | |
| Total deposits | | 7,904,528 | | | 7,572,358 | |
| | | | |
| Borrowings: | | | | |
| Short-term borrowings | | 238,786 | | | 342,230 | |
| Long-term debt | | — | | | 32,500 | |
| Subordinated notes | | 188,210 | | | 187,774 | |
| Total borrowings | | 426,996 | | | 562,504 | |
| | | | |
| Other liabilities: | | | | |
| Operating lease liability | | 14,339 | | | 16,053 | |
| Accrued interest payable | | 3,116 | | | 3,860 | |
| Unfunded commitments in affordable housing tax credit investments | | 28,484 | | | 29,298 | |
| Allowance for credit losses on off-balance sheet commitments | | 4,282 | | | 116 | |
| Other | | 67,750 | | | 54,576 | |
| Total other liabilities | | 117,971 | | | 103,903 | |
| | | | |
| Total liabilities | | 8,449,495 | | | 8,238,765 | |
| | | | |
Commitments and contingencies
| | 0 | | 0 |
| | | | |
| Shareholders’ equity: | | | | |
| | | | |
| Preferred shares (200,000 preferred shares authorized; no preferred shares outstanding at December 31, 2021 and 2020) | | $ | — | | | $ | — | |
| Common shares, no par value (20,000,000 common shares authorized; 17,623,118 and 17,623,163 common shares issued at December 31, 2021 and 2020, respectively) | | 461,800 | | | 460,687 | |
| Accumulated other comprehensive income, net of taxes | | 15,155 | | | 5,571 | |
| Retained earnings | | 776,294 | | | 704,764 | |
| Less: Treasury shares (1,403,555 and 1,308,966 common shares at December 31, 2021 and 2020, respectively) | | (142,490) | | | (130,766) | |
| Total shareholders’ equity | | 1,110,759 | | | 1,040,256 | |
| Total liabilities and shareholders’ equity | | $ | 9,560,254 | | | $ | 9,279,021 | |
The accompanying notes are an integral part of the consolidated financial statements.
Park National Corporation and Subsidiaries
Consolidated Statements of Income
for years ended December 31, 2021, 2020 and 2019
| | | | | | | | | | | | | | | | | | | | |
| (In thousands, except per share data) | | 2021 | | 2020 | | 2019 |
| | | | | | |
| Interest and dividend income: | | | | | | |
| Interest and fees on loans | | $ | 317,208 | | | $ | 328,727 | | | $ | 321,385 | |
| Interest and dividends on: | | | | | | |
| Obligations of U.S. Government, its agencies and other securities - taxable | | 19,458 | | | 19,818 | | | 26,213 | |
| Obligations of states and political subdivisions - tax-exempt | | 8,307 | | | 8,436 | | | 8,955 | |
| Other interest income | | 880 | | | 739 | | | 3,947 | |
| Total interest and dividend income | | 345,853 | | | 357,720 | | | 360,500 | |
| | | | | | |
| Interest expense: | | | | | | |
| Interest on deposits: | | | | | | |
| Demand and savings deposits | | 1,595 | | | 9,142 | | | 33,348 | |
| Time deposits | | 4,711 | | | 12,186 | | | 17,494 | |
| Interest on short-term borrowings | | 767 | | | 1,110 | | | 2,476 | |
| Interest on long-term debt | | 8,887 | | | 7,652 | | | 9,445 | |
| Total interest expense | | 15,960 | | | 30,090 | | | 62,763 | |
| Net interest income | | 329,893 | | | 327,630 | | | 297,737 | |
| | | | | | |
| (Recovery of) provision for credit losses | | (11,916) | | | 12,054 | | | 6,171 | |
| Net interest income after (recovery of) provision for credit losses | | 341,809 | | | 315,576 | | | 291,566 | |
| | | | | | |
| Other income: | | | | | | |
| Income from fiduciary activities | | 34,449 | | | 28,873 | | | 27,768 | |
| Service charges on deposit accounts | | 8,832 | | | 8,445 | | | 10,835 | |
| Other service income | | 29,812 | | | 37,611 | | | 15,500 | |
| Debit card fee income | | 25,865 | | | 22,160 | | | 20,250 | |
| Bank owned life insurance income | | 4,897 | | | 4,789 | | | 4,557 | |
| ATM fees | | 2,379 | | | 1,773 | | | 1,828 | |
| (Loss) gain on the sale of OREO, net | | (4) | | | 1,207 | | | (222) | |
| Net gain (loss) on the sale of debt securities | | — | | | 3,286 | | | (421) | |
| Gain on equity securities, net | | 5,011 | | | 2,182 | | | 5,118 | |
| Other components of net periodic benefit income | | 8,152 | | | 7,952 | | | 4,732 | |
| Miscellaneous | | 10,551 | | | 7,386 | | | 7,248 | |
| Total other income | | $ | 129,944 | | | $ | 125,664 | | | $ | 97,193 | |
| | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
Park National Corporation and Subsidiaries
Consolidated Statements of Income
for years ended December 31, 2021, 2020 and 2019
| | | | | | | | | | | | | | | | | | | | |
| (In thousands, except per share data) | | 2021 | | 2020 | | 2019 |
| | | | | | |
| Other expense: | | | | | | |
| Salaries | | $ | 125,585 | | | $ | 128,040 | | | $ | 119,514 | |
| Employee benefits | | 41,603 | | | 37,115 | | | 36,806 | |
| Occupancy expense | | 13,039 | | | 13,802 | | | 12,815 | |
| Furniture and equipment expense | | 10,887 | | | 18,805 | | | 17,032 | |
| Data processing fees | | 30,539 | | | 11,659 | | | 10,750 | |
| Professional fees and services | | 27,450 | | | 31,303 | | | 33,317 | |
| Marketing | | 6,073 | | | 5,828 | | | 5,753 | |
| Insurance | | 5,917 | | | 6,423 | | | 3,130 | |
| Communication | | 3,539 | | | 4,084 | | | 5,351 | |
| State tax expense | | 4,255 | | | 3,991 | | | 3,829 | |
| Amortization of intangible assets | | 1,798 | | | 2,263 | | | 2,355 | |
| FHLB prepayment penalty | | — | | | 10,529 | | | 612 | |
| Foundation contributions | | 4,000 | | | 3,000 | | | 1,500 | |
| Miscellaneous | | 8,833 | | | 9,753 | | | 11,224 | |
| Total other expense | | 283,518 | | | 286,595 | | | 263,988 | |
| | | | | | |
| Income before income taxes | | 188,235 | | | 154,645 | | | 124,771 | |
| | | | | | |
| Income taxes | | 34,290 | | | 26,722 | | | 22,071 | |
| | | | | | |
| Net income | | $ | 153,945 | | | $ | 127,923 | | | $ | 102,700 | |
| | | | | | |
| | | | | | |
| Earnings per common share: | | | | | | |
| Basic | | $ | 9.45 | | | $ | 7.85 | | | $ | 6.33 | |
| Diluted | | $ | 9.37 | | | $ | 7.80 | | | $ | 6.29 | |
The accompanying notes are an integral part of the consolidated financial statements.
PARK NATIONAL CORPORATION
Consolidated Statements of Comprehensive Income
for years ended December 31, 2021, 2020 and 2019
| | | | | | | | | | | | | | | | | |
| |
| (In thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
| Net income | $ | 153,945 | | | $ | 127,923 | | | $ | 102,700 | |
| | | | | |
| Other comprehensive income (loss), net of income tax: | | | | | |
| Defined benefit pension plan: | | | | | |
| Amortization of net loss, net of income tax effect of $466, $247 and $395, for the years ended December 31, 2021, 2020, and 2019, respectively | 1,754 | | | 928 | | | 1,487 | |
| Unrealized net actuarial gain (loss) and prior service credit, net of income tax effect of $7,144, $(2,306) and $402, for the years ended December 31, 2021, 2020, and 2019, respectively | 26,875 | | | (8,675) | | | 1,511 | |
| Change in funded status of defined benefit pension plan, net of income tax effect | 28,629 | | | (7,747) | | | 2,998 | |
| | | | | |
| Debt securities available-for-sale: | | | | | |
| Net (gain) loss realized on sale of debt securities AFS, net of income tax effect of $(690) and $88 for the years ended December 31, 2020 and 2019, respectively | — | | | (2,596) | | | 333 | |
| Unrealized gains on debt securities transferred from HTM to AFS, net of income tax effect of $5,076 for the year ended December 31, 2019 | — | | | — | | | 19,095 | |
| Change in unrealized holding (loss) gain on debt securities AFS, net of income tax effect of $(5,193), $6,844 and $4,845, for the years ended December 31, 2021, 2020 and 2019, respectively | (19,537) | | | 25,747 | | | 18,227 | |
| Unrealized net holding (loss) gain on debt securities available-for-sale, net of income tax effect | (19,537) | | | 23,151 | | | 37,655 | |
| | | | | |
| Cash flow hedging derivatives: | | | | | |
| Unrealized gain (loss) on cash flow hedging derivatives, net of income tax effect of $131, $(65) and $(121) for the years ended December 31, 2021, 2020 and 2019, respectively | 492 | | | (244) | | | (454) | |
| Unrealized net holding gain (loss) on cash flow hedging derivatives, net of income tax effect | 492 | | | (244) | | | (454) | |
| | | | | |
| Other comprehensive income | $ | 9,584 | | | $ | 15,160 | | | $ | 40,199 | |
| | | | | |
| Comprehensive income | $ | 163,529 | | | $ | 143,083 | | | $ | 142,899 | |
The accompanying notes are an integral part of the consolidated financial statements.
Park National Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
for the years ended December 31, 2021, 2020 and 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred Shares | | Common Shares | | Retained Earnings | | Treasury Shares | | Accumulated Other Comprehensive (Loss) Income | | |
| (In thousands, except share and per share data) | | Shares Outstanding | | Amount | | Shares Outstanding | | Amount | | | | | |
| | | | | | | | | | | | | | | | |
| Balance, January 1, 2019, as previously presented | | — | | | — | | | 15,698,178 | | | 358,598 | | | 614,069 | | | (90,373) | | | (49,788) | | | |
| Cumulative effect of change in accounting principle for leases, net of income tax | | | | | | | | | | (143) | | | | | 0 | | |
| Balance at January 1, 2019 as adjusted | | — | | | $ | — | | | 15,698,178 | | | $ | 358,598 | | | $ | 613,926 | | | $ | (90,373) | | | $ | (49,788) | | | |
| Net income | | | | | | | | | | 102,700 | | | | | | | |
| Other comprehensive income, net of income tax | | | | | | | | | | | | | | 40,199 | | | |
| Cash dividends, $4.24 per common share | | | | | | | | | | (69,482) | | | | | | | |
| Cash payment for fractional shares in dividend reinvestment plan | | | | | | (171) | | | (3) | | | | | | | | | |
| Issuance of 1,037,205 common shares for the acquisition of CAB Financial Corporation | | | | | | 1,037,205 | | | 98,275 | | | | | | | | | |
| Share-based compensation expense | | | | | | | | 4,999 | | | | | | | | | |
| Issuance of 27,719 common shares under share-based compensation awards, net of 8,736 common shares withheld to pay employee income taxes | | | | | | 18,983 | | | (2,480) | | | (273) | | | 1,926 | | | | | |
| Treasury shares repurchased | | | | | | (421,253) | | | | | | | (40,535) | | | | | |
| Treasury shares reissued for director grants | | | | | | 13,500 | | | | | (24) | | | 1,349 | | | | | |
| Balance, December 31, 2019 | | — | | | $ | — | | | 16,346,442 | | | $ | 459,389 | | | $ | 646,847 | | | $ | (127,633) | | | $ | (9,589) | | | |
| Net income | | | | | | | | | | 127,923 | | | | | | | |
| Other comprehensive income, net of income tax | | | | | | | | | | | | | | 15,160 | | | |
| Cash dividends, $4.28 per common share | | | | | | | | | | (70,601) | | | | | | | |
| Cash payment for fractional shares in dividend reinvestment plan | | | | | | (36) | | | (3) | | | | | | | | | |
| Share-based compensation expense | | | | | | | | 5,998 | | | | | | | | | |
| Issuance of 30,341 common shares under share-based compensation awards, net of 14,038 common shares withheld to pay employee income taxes | | | | | | 30,341 | | | (4,697) | | | 664 | | | 3,031 | | | | | |
| Treasury shares repurchased | | | | | | (76,000) | | | | | | | (7,507) | | | | | |
| Treasury shares reissued for director grants | | | | | | 13,450 | | | | | (69) | | | 1,343 | | | | | |
| Balance, December 31, 2020 | | — | | | $ | — | | | 16,314,197 | | | $ | 460,687 | | | $ | 704,764 | | | $ | (130,766) | | | $ | 5,571 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred Shares | | Common Shares | | Retained Earnings | | Treasury Shares | | Accumulated Other Comprehensive (Loss) Income | | |
| (In thousands, except share and per share data) | | Shares Outstanding | | Amount | | Shares Outstanding | | Amount | | | | | |
| Balance at December 31, 2020 | | | | | | 16,314,197 | | | 460,687 | | | 704,764 | | | (130,766) | | | 5,571 | | | |
| Cumulative effect of change in accounting principle for credit losses, net of income tax | | | | | | | | | | (7,956) | | | | | | | |
| Balance, January 1, 2021, as adjusted | | $ | — | | | $ | — | | | 16,314,197 | | | $ | 460,687 | | | $ | 696,808 | | | $ | (130,766) | | | $ | 5,571 | | | |
| Net income | | | | | | | | | | 153,945 | | | | | | | |
| Other comprehensive income, net of income tax | | | | | | | | | | | | | | 9,584 | | | |
| Cash dividends, $4.52 per common share | | | | | | | | | | (74,634) | | | | | | | |
| Cash payment for fractional shares in dividend reinvestment plan | | | | | | (45) | | | (6) | | | | | | | | | |
| Share-based compensation expense | | | | | | | | 6,345 | | | | | | | | | |
| Issuance of 29,670 common shares under share-based compensation awards, net of 18,436 common shares withheld to pay employee income taxes | | | | | | 29,670 | | | (5,226) | | | (141) | | | 2,964 | | | | | |
| Treasury shares repurchased | | | | | | (137,659) | | | | | | | (16,048) | | | | | |
| Treasury shares reissued for director grants | | | | | | 13,400 | | | | | 316 | | | 1,360 | | | | | |
| Balance, December 31, 2021 | | — | | | $ | — | | | 16,219,563 | | | $ | 461,800 | | | $ | 776,294 | | | $ | (142,490) | | | $ | 15,155 | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
Park National Corporation and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 2021, 2020 and 2019
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| | | | | | |
| Operating activities: | | | | | | |
| Net income | | $ | 153,945 | | | $ | 127,923 | | | $ | 102,700 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| (Recovery of) provision for credit losses | | (11,916) | | | 12,054 | | | 6,171 | |
| Accretion of loan fees and costs, net | | (25,185) | | | (21,598) | | | (6,826) | |
| Net accretion of purchase accounting adjustments | | (1,519) | | | (2,403) | | | (3,373) | |
| Depreciation of premises and equipment | | 13,267 | | | 10,814 | | | 9,119 | |
| Amortization of investment securities, net | | 2,174 | | | 1,362 | | | 1,455 | |
| Borrowing prepayment penalty | | — | | | 10,529 | | | 612 | |
| Increase in deferred income tax | | (3,131) | | | (4,525) | | | (844) | |
| Realized net debt securities (gains) losses | | — | | | (3,286) | | | 421 | |
| Gain on equity securities, net | | (5,011) | | | (2,182) | | | (5,118) | |
| Share-based compensation expense | | 8,021 | | | 7,272 | | | 6,324 | |
| Loan originations to be sold in secondary market | | (569,080) | | | (1,026,346) | | | (338,437) | |
| Proceeds from sale of loans in secondary market | | 609,377 | | | 1,031,227 | | | 340,637 | |
| Gain on sale of loans in secondary market | | (18,018) | | | (24,269) | | | (7,198) | |
| Loss (gain) on sale of OREO, net | | 4 | | | (1,207) | | | 222 | |
| Bank owned life insurance income | | (4,897) | | | (4,789) | | | (4,557) | |
| Investment in qualified affordable housing tax credits amortization | | 7,313 | | | 7,046 | | | 6,927 | |
| Changes in assets and liabilities: | | | | | | |
| Increase in prepaid dealer premiums | | (2,415) | | | (8,890) | | | (5,358) | |
| Decrease in other assets | | 12,342 | | | 9,216 | | | 12,530 | |
| Decrease in other liabilities | | (7,939) | | | (6,302) | | | (3,781) | |
| Net cash provided by operating activities | | $ | 157,332 | | | $ | 111,646 | | | $ | 111,626 | |
| | | | | | |
| Investing activities: | | | | | | |
| Proceeds from redemption/repurchase of Federal Home Loan Bank stock | | 8,677 | | | 7,970 | | | 14,675 | |
| Proceeds from sales of investment securities | | 934 | | | 312,160 | | | 91,110 | |
| Proceeds from calls and maturities of: | | | | | | |
| HTM debt securities | | — | | | — | | | 475 | |
| AFS debt securities | | 232,197 | | | 223,728 | | | 195,989 | |
| Purchase of: | | | | | | |
| AFS debt securities | | (953,900) | | | (354,299) | | | — | |
| Equity securities | | — | | | (3,567) | | | (100) | |
| Federal Reserve Bank stock | | — | | | — | | | (6,428) | |
| Net decrease in other investments | | 2,597 | | | 2,120 | | | 6,429 | |
| Net loan paydowns (originations), portfolio loans | | 312,187 | | | (620,200) | | | (216,353) | |
| | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Park National Corporation and Subsidiaries |
| Consolidated Statements of Cash Flows |
| for the years ended December 31, 2021, 2020 and 2019 |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| | | | | | |
| Proceeds from the sale of non-mortgage loans | | 3,718 | | | 4,400 | | | — | |
| Proceeds from the sale of OREO | | 758 | | | 5,654 | | | 1,465 | |
| Life insurance death benefits | | 5,598 | | | 1,360 | | | 1,571 | |
| Purchases of bank owned life insurance | | — | | | — | | | (3,000) | |
| Investment in qualified affordable housing tax credits | | (10,814) | | | (6,596) | | | (6,038) | |
| Purchases of premises and equipment | | (14,093) | | | (28,632) | | | (14,885) | |
| Cash paid for acquisitions, net | | — | | | — | | | (4,831) | |
| Net cash (used in) provided by investing activities | | $ | (412,141) | | | $ | (455,902) | | | $ | 60,079 | |
| | | | | | |
| Financing activities | | | | | | |
| Net increase in deposits | | 605,168 | | | 1,230,073 | | | 159,696 | |
| Net increase in off-balance sheet deposits | | (272,952) | | | (710,101) | | | — | |
| Net (decrease) increase in short-term borrowings | | (103,444) | | | 111,573 | | | (20,072) | |
| Proceeds from issuance of long-term debt | | — | | | — | | | 50,000 | |
| Proceeds from issuance of subordinated notes | | — | | | 172,620 | | | — | |
| Repayment of long-term debt | | (32,500) | | | (170,529) | | | (258,112) | |
| Value of common shares withheld to pay employee income taxes | | (2,403) | | | (1,002) | | | (827) | |
| Repurchase of common shares to be held as treasury shares | | (16,048) | | | (7,507) | | | (40,535) | |
| Cash dividends paid | | (74,306) | | | (70,353) | | | (69,113) | |
| Net cash provided by (used in) financing activities | | $ | 103,515 | | | $ | 554,774 | | | $ | (178,963) | |
| (Decrease) increase in cash and cash equivalents | | (151,294) | | | 210,518 | | | (7,258) | |
| | | | | | |
| Cash and cash equivalents at beginning of year | | 370,474 | | | 159,956 | | | 167,214 | |
| Cash and cash equivalents at end of year | | $ | 219,180 | | | $ | 370,474 | | | $ | 159,956 | |
| | | | | | |
| Cash paid for: | | | | | | |
| Interest | | $ | 16,704 | | | $ | 29,157 | | | $ | 63,038 | |
| | | | | | |
| Federal income taxes | | 25,505 | | | 24,260 | | | 15,186 | |
| | | | | | |
| Non cash items: | | | | | | |
| Transfer of debt securities from HTM to AFS | | $ | — | | | $ | — | | | $ | 349,773 | |
| | | | | | |
| Loans transferred to OREO | | 150 | | | 1,790 | | | 1,671 | |
| | | | | | |
| Right-of-use assets obtained in exchange for lease obligations | | 1,190 | | | 7,821 | | | 11,475 | |
| | | | | | |
| New commitments in affordable housing tax credit investments | | 10,000 | | | 10,000 | | | 10,000 | |
| | | | | | |
| New commitments in other investment securities | | 3,000 | | — | | | — | |
The accompanying notes are an integral part of the consolidated financial statements.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed in the preparation of the consolidated financial statements:
Principles of Consolidation
The consolidated financial statements include the accounts of Park National Corporation and its subsidiaries (“Park”, the “Company” or the “Corporation”), unless the context otherwise requires. Material intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
The COVID-19 pandemic has caused significant, unprecedented disruption around the world that has affected daily living and negatively impacted the global economy. The effects of the COVID-19 pandemic may meaningfully impact significant estimates such as the allowance for credit losses, goodwill, mortgage servicing rights, and pension plan obligations and related expenses. Additionally, the COVID-19 pandemic may particularly impact certain loan concentrations in the hotel and accommodations, restaurant and food service, and strip shopping center industries.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current presentation. These reclassifications had no impact on net income or shareholders' equity.
Restrictions on Cash and Due from Banks
The Corporation’s national bank subsidiary, The Park National Bank ("PNB"), previously was required to maintain average reserve balances with the Federal Reserve Bank of Cleveland. The Federal Reserve Board announced on March 15, 2020 that the Federal Reserve Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions. There were no compensating balance arrangements in existence at December 31, 2021 or 2020.
Investment Securities
Debt securities are classified upon acquisition into one of three categories: HTM, AFS, or trading (see Note 4 - Investment Securities).
HTM securities are those debt securities that the Corporation has the positive intent and ability to hold to maturity and are recorded at amortized cost. AFS debt securities are those debt securities that would be available to be sold in the future in response to the Corporation’s liquidity needs, changes in market interest rates, and asset-liability management strategies, among other reasons. AFS debt securities are reported at fair value, with unrealized holding gains and losses excluded from earnings, but included in other comprehensive income (loss), net of applicable income taxes. The Corporation did not hold any trading securities during any period presented.
Interest income from debt securities includes amortization of purchase premium or discount. Premiums and discounts on investment securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Premiums on callable debt securities are amortized to their earliest call date. Gains and losses realized on the sale of debt securities are recorded on the trade date and determined using the specific identification method.
A debt security is placed on nonaccrual status at the time any principal or interest payments become 90 days past due. Interest accrued but not received for a security placed on nonaccrual status is reversed against interest income.
ACL - Debt Securities AFS
For debt securities AFS in an unrealized loss position, Park first assesses whether it intends to sell, or it is more likely than not that Park will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For debt securities AFS that do not meet the aforementioned criteria, Park evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized
cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes.
Changes in the ACL are recorded as a provision for (or recovery of) credit loss expense. Losses are charged against the ACL when management believes that uncollectibility of a debt security AFS is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Accrued interest receivable on debt securities AFS totaled $6.3 million at December 31, 2021 and is excluded from the estimate of credit losses.
ACL - HTM Debt Securities
Management measures expected credit losses on HTM debt securities on a collective basis by major security type. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Park does not currently hold any HTM debt securities.
Equity Securities
Equity securities, included within "Other investment securities" on the Consolidated Balance Sheets, are carried at fair value, with changes in fair value reported in net income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment.
Federal Home Loan Bank and Federal Reserve Bank of Cleveland Stock
PNB is a member of the FHLB and the FRB. Members are required to own a certain amount of stock based on their level of borrowings and other factors and may invest in additional amounts. FHLB stock and FRB stock are classified as restricted securities and are carried at their redemption value within "Other investment securities" on the Consolidated Balance Sheets. Impairment is evaluated based on the ultimate recovery of par value. Both cash and stock dividends are reported as income.
Bank Owned Life Insurance
Park has purchased insurance policies on the lives of directors and certain key officers. Bank owned life insurance is recorded at its cash surrender value (or the amount that can be realized).
Loans Held for Sale
Park has elected the fair value option for mortgage loans held for sale, which are carried at their fair value as of each balance sheet date.
Mortgage Banking Derivatives
Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. The fair value of an interest rate lock is recorded at the time the commitment to fund a mortgage loan is executed and is adjusted for the expected exercise of a commitment before a loan is funded. In order to hedge against a change in interest rates resulting from the Company's commitments to fund loans, the Company enters into forward commitments for the future delivery of mortgage loans. The fair value of Park's mortgage banking derivatives is estimated based on the change in mortgage interest rates from the date the interest on a loan is locked. The fair value of these mortgage banking derivatives is included in "Loans" in the Consolidated Balance Sheets. Changes in the fair values of these mortgage banking derivatives are included in "Other service income" in the Consolidated Statements of Income.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and deferred loan fees and costs. Interest income is accrued on the unpaid principal balance. Accrued interest receivable totaled $17.1 million at December 31, 2021 and was reported in "Accrued interest receivable" on the Consolidated Balance Sheets. Late charges on loans are recognized as income when they are collected. Net loan origination fees and costs are deferred and recognized in interest income using the level-yield method without anticipating prepayments.
Commercial loans include: (1) commercial, financial and agricultural loans; (2) commercial real estate loans; (3) those commercial loans in the construction real estate loan segment; (4) those commercial loans in the residential real estate loan segment; and (5) leases. Consumer loans include: (1) mortgage and installment loans included in the construction real estate segment; (2) mortgage, home equity lines of credit ("HELOCs"), and installment loans included in the residential real estate segment; and (3) all loans included in the consumer segment.
Generally, commercial loans are placed on nonaccrual status at 90 days past due and consumer and residential mortgage loans are placed on nonaccrual status at 120 days past due. The delinquency status of a loan is based on contractual terms and not on how recently payments have been received. Park’s charge-off policy for commercial loans requires management to establish a specific reserve or record a charge-off when collection is in doubt and there is, or likely will be, a collateral shortfall related to the estimated value of the collateral securing a loan. The Company’s charge-off policy for consumer loans is dependent on the class of the loan. Residential mortgage loans, HELOCs, and consumer loans secured by residential real estate are typically charged down to the value of the collateral, less estimated selling costs, at 180 days past due. The charge-off policy for other consumer loans, primarily installment loans, requires a monthly review of delinquent loans and a complete charge-off for any account that reaches 120 days past due. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful.
For loans which are on nonaccrual status, it is Park’s policy to reverse interest previously accrued on the loans against interest income. Interest on such loans may be recorded on a cash basis and be included in earnings only when Park expects to receive the entire recorded investment of the respective loans. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
A description of each segment of the loan portfolio, along with the risk characteristics of each segment, is included below:
Commercial, financial and agricultural:Commercial, financial and agricultural ("C&I") loans are made for a wide variety of general corporate purposes, including financing for commercial and industrial properties, financing for equipment, inventory and accounts receivable, acquisition financing, commercial leasing, and loans originated by consumer finance companies. The term of each commercial loan varies by its purpose. Repayment terms are structured such that commercial loans will be repaid within the economic useful life of the underlying asset. Risk of loss on C&I loans largely depends upon general economic cycles, as they may adversely impact certain industries, competency of the borrower's management team, the quality of the underlying assets supporting the loans including accounts receivable, inventory, and equipment, and the accuracy of the borrower's financial reporting. Such risks are mitigated by generally requiring the borrower's owners to guaranty the loans.
Commercial real estate:Commercial real estate (“CRE”) loans include mortgage loans to developers and owners of commercial real estate. The lending policy for CRE loans is designed to address the unique risk attributes of CRE lending. The collateral for these CRE loans is the underlying commercial real estate. Risk of loss on CRE loans largely depends upon the cash flow of the properties, which is influenced by the amount of vacancy experienced with respect to underlying real estate, the credit capacity of the tenants occupying the underlying real estate, and general economic trends, as they may adversely impact the value of a property. These risks are mitigated by generally requiring personal guarantees of the owners of the properties and by requiring appraisals pursuant to government regulations.
Construction real estate: The Company defines construction loans as both commercial construction loans and residential construction loans where the loan proceeds are used exclusively for the improvement of real estate. Construction loans may be in the form of a permanent loan or a short-term construction loan, depending on the needs of the individual borrower. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost (including interest) of construction. If the estimate of construction cost proves to be inaccurate, Park may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value proves inaccurate, Park may be confronted, at or prior to the maturity of the loan, with a project having a value insufficient to assure full repayment, should the borrower default. In the event that a default on a construction loan occurs and foreclosure follows, Park must take control of the project and attempt to either arrange for completion of construction or dispose of the unfinished project. Additional risks exist with respect to loans made to developers who do not have a buyer for the property, as the developer may lack funds to pay the loan if the property is not sold upon completion. Park attempts to reduce such risks on loans to developers by generally requiring personal guarantees and reviewing current personal financial statements and tax returns as well as other projects undertaken by the developer.
Residential real estate:The Company defines residential real estate loans as first mortgages on individuals’ primary residences or second mortgages on individuals’ primary residences in the form of HELOCs or installment loans. Credit approval for residential real estate loans requires demonstration of sufficient income to repay the principal and interest and the real estate
taxes and insurance, stable employment, an established credit record and a current independent third-party appraisal providing the market value of the real estate securing the loan. Residential real estate loans typically have longer terms and higher balances with lower yields as compared to consumer loans, but generally carry lower risks of default. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires creditors to make a reasonable and good faith determination of a consumer's ability to repay any consumer credit transaction secured by a dwelling. Documentation and verification of income within defined time frames and not-to-exceed limits are bases for affirming ability to repay. Risk of loss largely depends upon factors affecting the borrower's ability to repay as well as the general economic trends as they may adversely impact the value of the property. These risks are mitigated by completing a comprehensive underwriting of the borrower and by requiring appraisals pursuant to government regulations.
Consumer:The Company originates direct and indirect consumer loans, primarily automobile loans, to customers in the Company's primary market areas. Credit approval for consumer loans requires income sufficient to repay principal and interest due, stable employment, an established credit record and sufficient collateral for secured loans. Consumer loans typically have shorter terms and lower balances with higher yields as compared to real estate mortgage loans, but generally carry higher risks of default. Consumer loan collections are dependent on the borrower’s financial stability, and thus are more likely to be affected by adverse personal circumstances.
Leases: The Company originates financing leases primarily for the purchase of commercial vehicles, operating/manufacturing equipment, and municipal vehicles/equipment. Repayment terms are structured such that the lease will be repaid within the economic useful life of the leased asset. Risk of losses on financing leases largely depends upon general economic cycles, as they may adversely impact certain industries, competency of the borrower’s management team, the quality and residual value of the leased asset, and the accuracy of the borrower’s financial reporting. These risks are mitigated by underwriting leases considering primary and secondary sources of repayment and requiring guaranteed residual values.
Concentration of Credit Risk
Park's commercial loan portfolio includes loans to a wide variety of corporations and businesses across many industrial classifications in the 26 Ohio counties, three North Carolina counties, four South Carolina counties and one Kentucky county where PNB operates, with the exception of nationwide aircraft loans and nationwide asset-based lending to consumer finance companies. The primary industries represented by these customers include real estate rental and leasing, finance and insurance, construction, health care and social assistance, accommodation and food services, manufacturing, other services, retail trade, and agriculture, forestry, fishing and hunting.
PCD Loans
The Company has purchased loans, some of which have shown evidence of credit deterioration since origination. Upon adoption of ASC 326, Park elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a unit of account. Loans are only removed from the existing pools if they are written off, paid off, or sold. Upon adoption of ASC 326, the allowance for credit losses was determined for each pool and added to the pool's carrying amount to establish a new amortized cost basis. The difference between the unpaid principal balance of the pool and the new amortized cost basis is the noncredit premium or discount, which will be amortized into interest income over the remaining life of the pool. Changes to the allowance for credit losses after adoption are recorded through provision for credit loss expense.
ACL - Loans
The ACL is a valuation account that is deducted from the amortized cost of total loans to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes that the uncollectibility of a loan balance is confirmed. Expected recoveries cannot not exceed the aggregate of the amounts previously charged-off and expected to be charged-off.
Management estimates the allowance balance using relevant and available information from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical credit loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors.
ACL - Loans - Collectively Evaluated
The ACL is measured on a collective pool basis when similar risk characteristics exist. Park has identified the following portfolio segments and measures the allowance for credit losses using the following methods:
| | | | | | | | |
| Portfolio Segment | Measurement Method | Loss Driver |
| Commercial, financial and agricultural | | |
| Commercial, financial and agricultural | Discounted Cash Flow | Ohio Unemployment, Ohio GDP |
| PPP loans | Other | Not Applicable |
| Overdrafts | Historical Loss Experience | Not Applicable |
| Commercial real estate | Discounted Cash Flow | Ohio Unemployment, Ohio GDP |
| Construction real estate: | | |
| Commercial | Discounted Cash Flow | Ohio Unemployment, Ohio GDP |
| Retail | Discounted Cash Flow | Ohio Unemployment, Ohio GDP |
| Residential real estate: | | |
| Commercial | Discounted Cash Flow | Ohio Unemployment, Ohio HPI |
| Mortgage | Discounted Cash Flow | Ohio Unemployment, Ohio HPI |
| HELOC | Discounted Cash Flow | Ohio Unemployment, Ohio HPI |
| Installment | Discounted Cash Flow | Ohio Unemployment, Ohio HPI |
| Consumer: | | |
| Consumer | Discounted Cash Flow | Ohio Unemployment, Ohio GDP |
| GFSC | Discounted Cash Flow | Ohio Unemployment, Ohio GDP |
| Check loans | Historical Loss Experience | Not Applicable |
| Leases | Remaining Life | Not Applicable |
Expected credit losses are estimated over the contractual term of the loans, adjusted for prepayments when appropriate. The contractual term excludes extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by Park.
In general,Park utilized a DCF method to estimate the quantitative portion of the allowance for credit losses for loans evaluated on a collective pooled basis. For each segment, a LDA was performed in order to identify appropriate loss drivers and create a regression model for use in forecasting cash flows. The LDA utilized Park's own Federal Financial Institutions Examination Council's ("FFIEC") Call Report data for the commercial, financial and agricultural and residential real estate segments. Peer data was incorporated into the analysis for the commercial real estate, construction real estate, and consumer segments.
In creating the DCF model, Park established a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average. Park's policy is to utilize its own data, which includes loan-level loss data from 2013 through December 31, 2021, whenever possible. Park and peer FFIEC Call Report data are utilized when there are insufficient defaults for a statistically sound calculation, or if Park does not have its own loan-level detail reflecting similar economic conditions as the forecasted loss drivers.
Key inputs into the DCF model include loan-level detail, including the amortized cost basis of individual loans, payment structure, and loss history, and forecasted loss drivers. Park utilizes a third party to provide economic forecasts under various scenarios, which are weighted in order to reflect model risk in the current economic environment. The weighting of the scenarios is evaluated on a quarterly basis considering the various scenarios in the context of the current economic environment and presumed risk of loss.
Additional key assumptions in the DCF model include the PD, LGD, and prepayment/curtailment rates. When possible, Park utilizes its own PDs for the reasonable and supportable forecast period. When it is not possible to use Park's own PDs, the LDA is utilized to determine PDs based on the forecasted economic factors. In all cases, the LDA is then utilized to determine the long-term historical average, which is reached over the reversion period. When possible, Park's utilizes its own LGDs for the reasonable and supportable forecast period. When it is not possible to use Park's own LGDs, the LGD is derived using a
method referred to as Frye Jacobs. The Frye Jacobs method is a mathematical formula that traces the relationship between LGD and PD over time and projects the LGD based on the level of PD forecasted. In all cases, the Frye Jacobs method is utilized to calculate LGDs during the reversion period and long-term historical average. Prepayment and curtailment rates were calculated based on Park's own data utilizing a three-year average.
When the discounted cash flow method is used to determine the allowance for credit losses, management incorporates expected prepayments to determine the effective interest rate utilized to discount expected cash flow.
Park reviews various internal and external factors to consider the need for any qualitative adjustments to the quantitative model. Factors considered include the following:
•The nature and volume of Park’s financial assets;
•The existence, growth, and effect of any concentrations of credit;
•The volume and severity of past due financial assets, the volume of nonaccrual assets, and the volume and severity of adversely classified or graded assets;
•Park’s lending policies and procedures, including changes in lending strategies, underwriting standards and practices for collections, write-offs, and recoveries;
•The quality of Park's credit review function;
•The experience, ability, and depth of Park’s lending, investment, collection, and other relevant management and staff;
•The effect of other external factors such as the regulatory, legal and technological environments, competition, and events such as natural disasters or pandemics;
•Actual and expected changes in international, national, regional, and local economic and business conditions and developments in the markets in which Park operates that affect the collectibility of financial assets;
•Where the U.S. economy is within a given credit cycle; and
•The extent that there is government assistance (stimulus).
Allowance for Credit Losses - Loans - Individually Evaluated
Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. Park has determined that any commercial loans which have been placed on nonaccrual status or classified as TDRs will be individually evaluated and are labeled as individually evaluated. Individual analysis establishes a specific reserve for loans in scope. Specific reserves on individually evaluated commercial loans are typically based on management’s best estimate of the fair value of collateral securing these loans, adjusted for selling costs as appropriate.
Allowance for Credit Losses - Off-Balance Sheet Credit Exposures
Park estimates expected credit losses over the contractual period in which Park is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by Park. The allowance for credit losses on off-balance sheet credit exposures is adjusted within "Miscellaneous other expense" on the Consolidated Statements of Income. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over the commitments' respective estimated lives. Funding rates are based on a historical analysis of Park's portfolio, while estimates of credit losses are determined using the same loss rates as funded loans.
0Troubled Debt Restructurings ("TDRs")
Management classifies loans as TDRs when a borrower is experiencing financial difficulty and Park has granted a concession. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of the borrower's debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy. Management’s policy is to modify loans by extending the term or by granting a temporary or permanent contractual interest rate below the market rate, not by forgiving debt. A court's discharge of a borrower's debt in a Chapter 7 bankruptcy is considered a concession when the borrower does not reaffirm the discharged debt.
Additionally, Park has worked with borrowers impacted by the COVID-19 pandemic and provided modifications in the form of either interest only deferral or principal and interest deferral, in each case, for initial periods up to 90 days. As necessary, Park made available a second 90-day interest only deferral or principal and interest deferral bringing the total potential deferral period to six months. A majority of these modifications were excluded from TDR classification under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators. In accordance with this guidance, such modified loans will be considered current and will continue to accrue interest during the deferral period.
Premises and Equipment
Land is carried at cost and is not subject to depreciation. Premises and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation is generally provided on the straight-line method over the estimated useful lives of
the related assets. Leasehold improvements are amortized over the shorter of the remaining lease period or the estimated useful lives of the improvements. Upon the sale or other disposal of an asset, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is recognized. Maintenance and repairs are charged to expense as incurred while renewals and improvements that extend the useful life of an asset are capitalized. Premises and equipment are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of a particular asset may not be recoverable.
The range of depreciable lives over which premises and equipment are being depreciated are:
| | | | | |
| Buildings | 30 Years |
| Building improvements | 5 to 10 Years |
| Equipment, furniture and fixtures | 3 to 12 Years |
| Software | 3 Years |
| Leasehold improvements | Shorter of the remaining lease period or the estimated useful life of the improvement |
Other Real Estate Owned
Management transfers a loan to OREO at the time that Park takes deed/title to the asset. OREO is initially recorded at fair value less anticipated selling costs (net realizable value), establishing a new cost basis, and consists of property acquired through foreclosure and real estate held for sale. If the net realizable value is below the carrying value of the loan at the date of transfer, the difference is charged to the allowance for credit losses. These assets are subsequently accounted for at the lower of cost or fair value less costs to sell. Subsequent changes in the value of real estate are classified as OREO valuation adjustments, are reported as adjustments to the carrying amount of OREO, and recorded within the line item “Other income”. In certain circumstances where management believes the devaluation may not be permanent in nature, Park utilizes a valuation allowance to record OREO devaluations, which is also expensed through the line item “Other income”. Costs relating to development and improvement of such properties are capitalized (not in excess of fair value less estimated costs to sell), and costs relating to holding the properties are charged to the line item "Other expense".
Foreclosed Assets
Foreclosed assets include non-real estate assets where Park, as creditor, has received physical possession of a borrower’s assets, regardless of whether formal foreclosure proceedings take place. Additionally, TDRs in which Park obtains one of more of the debtor’s non-real estate assets in place of all or part of the receivable are accounted for as foreclosed assets. Foreclosed assets are initially recorded as fair value less costs to sell when acquired, establishing a new cost basis. Operating costs after acquisition are expensed as incurred. As of December 31, 2021 and 2020, Park had $3.3 million and $3.6 million, respectively, of foreclosed assets included within “Other assets.”
Mortgage Servicing Rights
When Park sells mortgage loans with servicing retained, MSRs are recorded at fair value with the income statement effect recorded in "Other service income". Capitalized MSRs are amortized in proportion to and over the period of the estimated future servicing income of the underlying loan and are included within “Other service income”.
MSRs are assessed for impairment quarterly, based on fair value, with any impairment recognized through a valuation allowance. The fair value of MSRs is determined by discounting estimated future cash flows from the servicing assets, using market discount rates and expected future prepayment rates. In order to calculate fair value, the sold loan portfolio is stratified into homogeneous pools of like categories. (See Note 25 - Loan Servicing.)
Fees received for servicing mortgage loans owned by investors are based on a percentage of the outstanding monthly principal balance of such loans and are included in income as loan payments are received. The amortization of MSRs is netted against loan servicing fee income, recorded in "Other service income".
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over net identifiable tangible and intangible assets acquired in a purchase business combination. Goodwill is not amortized to expense, but is subject to impairment tests annually, or more frequently, if events or changes in circumstances indicate that the asset might be impaired, by assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If after assessing these events or circumstances, it is concluded that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the performance of additional
analysis is unnecessary. If the carrying amount of the goodwill exceeds the fair value, an impairment charge must be recorded in an amount equal to the excess, not to exceed the total goodwill allocated to the reporting unit.
Other intangible assets consist of core deposit intangibles. Core deposit intangibles are amortized on an accelerated basis over a period of ten years.
Consolidated Statements of Cash Flows
Cash and cash equivalents include cash and cash items, amounts due from banks, and money market instruments. Generally, money market instruments are purchased and sold for one-day periods.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe that there are currently such matters that will have a material effect on the financial statements.
Income Taxes
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
An uncertain tax position is recognized as a benefit only if it is “more-likely-than-not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The benefit recognized for a tax position that meets the “more-likely-than-not” criteria is measured based on the largest benefit that is more than 50 percent likely to be realized, taking into consideration the amounts and probabilities of the outcome upon settlement. For tax positions not meeting the “more-likely-than-not” test, no tax benefit is recorded. Park recognizes any interest and penalties related to income tax matters in income tax expense.
Treasury Shares
The purchase of Park’s common shares to be held in treasury is recorded at cost. At the date of retirement or subsequent reissuance, the treasury shares account is reduced by the weighted average cost of the common shares retired or reissued.
Dividend Restriction
Banking regulations require the maintenance of certain capital levels and may limit the dividends paid by a bank to its parent holding company or by the parent holding company to its shareholders. (See Note 23 - Dividend Restrictions and Note 28 - Capital Ratios.)
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on debt securities available for sale, changes in the funded status of the Company’s defined benefit pension plan and unrealized gains and losses on cash flow hedges which are also recognized as separate components of equity.
Share-Based Compensation
Compensation cost is recognized for restricted stock units and stock awards issued to employees and directors, respectively, based on the fair value of these awards at the date of grant. The market price of Park’s common shares at the date of grant is used to estimate the fair value of restricted stock units and stock awards. Compensation cost is recognized on a straight-line basis over the required service period, generally defined as the vesting period and is recorded in "Salaries" expense. (See Note 18 - Share-Based Compensation.) The Company's accounting policy is to recognize forfeitures as they occur.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Fair Value Measurement
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 27 - Fair Value. Fair value estimates involve uncertainties and matters of significant judgment regarding
interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Derivatives
At the inception of a derivative contract, Park designates the derivative as one of three types based on Park's intentions and belief as to the likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”). Park does not have any fair value hedges. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as non-interest income.
Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income. Cash flows on hedges are classified in the Consolidated Statements of Cash Flow under the same item as the cash flows of the items being hedged.
Park formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. The documentation includes linking cash flow hedges to specific assets and liabilities on the Consolidated Balance Sheets. Park also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used are highly effective in offsetting changes in cash flows of the hedged items. Park discontinues hedge accounting when it determines that a derivative is no longer effective in offsetting cash flows of the hedged item, the derivative is settled or terminates, or treatment of the derivative as a hedge is no longer appropriate or intended.
When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income. When a cash flow hedge is discontinued but the hedged cash flows are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods that the hedged transactions will affect earnings.
The Company is exposed to losses if a counterparty fails to make its payments under a contract in which the Company is in the net receiving position. The Company anticipates that the counterparties will be able to fully satisfy their obligations under the outstanding agreements. All the contracts to which the Company is party settle monthly or quarterly.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Retirement Plans
Pension expense is the net of service and interest cost, return on plan assets and amortization of gains and losses not immediately recognized. The service cost component of pension expense is recorded within "Employee benefits" on the Consolidated Statements of Income. All other components of pension expense are recorded within "Other components of net periodic benefit income" on the Consolidated Statements of Income. Employee KSOP plan expense is the amount of matching contributions to Park's Employees Stock Ownership Plan. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service. (See Note 19 - Benefit Plans.)
Earnings Per Common Share
Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under restricted stock unit awards. (See Note 18 - Share-Based Compensation and Note 22 - Earnings Per Common Share.)
Operating Segments
The Corporation is a financial holding company headquartered in Newark, Ohio. The reportable segment for the Corporation is its chartered national bank subsidiary, PNB (headquartered in Newark, Ohio).
2. Adoption of New Accounting Pronouncements and Issued But Not Yet Effective Accounting Standards
The following is a summary of new accounting pronouncements impacting Park's consolidated financial statements, and accounting standards that have been issued but are not effective for Park as of December 31, 2021:
Adoption of New Accounting Pronouncements
ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments: Effective January 1, 2021, Park adoptedASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") ("ASC 326"), as amended. The new accounting guidance in ASU 2016-13 replaces the incurred loss methodology with an expected loss methodology, which is referred to as the current expected credit loss ("CECL") methodology. The CECL methodology is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, HTM debt securities, and reinsurance receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments), and net investments in leases recognized by a lessor. The CECL methodology requires an entity to estimate credit losses over the life of an asset or off-balance sheet credit exposure. The new accounting guidance was to have originally been effective for Park for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2019.
Section 4014 of the CARES Act provided financial institutions with optional temporary relief from having to comply with ASU 2016-13, including the CECL methodology for estimating the allowance for credit losses. This temporary relief was set to expire on the earlier of the date on which the national emergency concerning COVID-19 terminated or December 31, 2020, with adoption being effective retrospectively as of January 1, 2020.
Section 540 of the Consolidated Appropriations Act, 2021, amended Section 4014 of the CARES Act by extending the relief period provided in the CARES Act. The Consolidated Appropriations Act, 2021, modified the CARES Act so that temporary relief will expire on the earlier of the first day of the fiscal year that begins after the date on which the national emergency concerning COVID-19 terminates or January 1, 2022.
Park elected to delay the implementation of ASU 2016-13 following the approval of the CARES Act and continued to use the incurred loss methodology for estimating the allowance for credit losses in 2020. ASU 2016-13 requires financial institutions to calculate an allowance utilizing a reasonable and supportable forecast period which Park has established as a one-year period. In the unprecedented circumstances surrounding the COVID-19 pandemic and the response thereto, Park believed that adopting ASU 2016-13 in the first quarter of 2020 would have added an unnecessary level of subjectivity and volatility to the calculation of the allowance for credit losses. With the approval of the Consolidated Appropriations Act, 2021, management elected to further delay adoption of ASU 2016-13 to January 1, 2021. This allowed Park to utilize the CECL standard for the entire year of adoption.
Park adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning on and after after January 1, 2021 are presented under ASC 326, while prior period amounts continue to be reported in accordance with the then applicable U.S. GAAP. Park recorded a net decrease to retained earnings of $8.0 million as of January 1, 2021 for the cumulative effect of adopting ASC 326.
Park adopted ASC 326 using the prospective transition approach for financial assets PCD that were previously classified as PCI and accounted for under ASC 310-30. In accordance with ASC 326, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2021, the amortized cost basis of the PCD assets was adjusted to reflect the addition of $52,000 to the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2021.
As permitted by ASC 326, Park elected to maintain pools of loans accounted for under ASC 310-30. In accordance with ASC 326, management did not reassess whether modifications to individual acquired financial assets accounted for in pools were TDRs as of the date of adoption.
The following table illustrates the impact of ASC 326:
| | | | | | | | | | | | | | |
| | January 1, 2021 |
| (In thousands) | | As Reported Under ASC 326 | Pre-ASC 326 Adoption | Impact of ASC 326 Adoption |
| Assets: | | | | |
| Loans | | $ | 7,177,666 | | $ | 7,177,785 | | $ | (119) | |
| | | | |
| ACL on loans | | | | |
| Commercial, financial and agricultural | | 17,351 | | 25,608 | | (8,257) | |
| Commercial real estate | | 25,599 | | 23,480 | | 2,119 | |
| Construction real estate | | 5,390 | | 7,288 | | (1,898) | |
| Residential real estate | | 14,484 | | 11,363 | | 3,121 | |
| Consumer | | 28,343 | | 17,418 | | 10,925 | |
| Leases | | 598 | | 518 | | 80 | |
| Total ACL on loans | | $ | 91,765 | | $ | 85,675 | | $ | 6,090 | |
| | | | |
| Liabilities: | | | | |
| ACL on off-balance sheet commitments | | $ | 3,982 | | $ | 116 | | $ | 3,866 | |
| | | | |
| Net deferred tax liability | | 777 | | 2,892 | | (2,115) | |
| | | | |
| Shareholders' equity: | | $ | 1,032,300 | | $ | 1,040,256 | | $ | (7,956) | |
ASU 2018-14 - Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans: In August 2018, the FASB issued ASU 2018-14 - Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this ASU modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing disclosures that are no longer considered cost beneficial, clarifying the specific requirements of disclosures and adding disclosure requirements identified as relevant. The amendments in ASU 2018-14 were effective for fiscal years ended after December 15, 2020. The adoption of this guidance on January 1, 2021 did not have an impact on Park’s consolidated financial statements, but did impact disclosures.
ASU 2019-20 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes: In December 2019, the FASB issued ASU 2019-20 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-20 includes amendments to simplify accounting for income taxes by removing certain exceptions and adding requirements with the intention of simplifying and clarifying existing guidance. The amendments in ASU 2019-20 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The adoption of this guidance on January 1, 2021, did not have a material impact on Park's consolidated financial statements.
ASU 2020-01 - Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815: In January 2020, the FASB issued ASU 2020-01 - Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. ASU 2020-01 represents changes to clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815. These amendments improve current U.S. GAAP by reducing diversity in practice and increasing comparability of the accounting for these transactions. The amendments in ASU 2020-01 are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The adoption of this guidance on January 1, 2021, did not have a material impact on Park's consolidated financial statements.
ASU 2020-04 - Reference Rate Reform (Topic 848): Facilitation of the Effect of Reference Rate Reform on Financial Reporting: In March 2020, the FASB issued ASU 2020-04 - Reference Rate Reform (Topic 848): Facilitation of the Effect of Reference Rate Reform on Financial Reporting. The amendments in this ASU provide optional expedients and exceptions to applying GAAP to contracts, hedging relationships and other transactions impacted by reference rate reform if certain criteria are met. The amendments in this ASU are effective as of March 12, 2020 through December 31, 2022. The adoption of this guidance did not have a material impact on Park's consolidated financial statements, but Park will consider this guidance as contracts are transitioned from LIBOR to another reference rate.
ASU 2020-08 - Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs: In October 2020, the FASB issued ASU 2020-08 - Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs. ASU 2020-08 clarifies that an entity should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. The amendments in ASU 2020-08 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application was not permitted. The adoption of this guidance on January 1, 2021, did not have a material impact on Park's consolidated financial statements.
ASU 2021-01 - Reference Rate Reform (Topic 848): Scope: In January 2021, the FASB issued ASU 2021-01 - Reference Rate Reform (Topic 848): Scope. This ASU clarifies the scope of Topic 848 so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. The amendments in this ASU are elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The amendments in this ASU are effective immediately for all entities. The adoption of this guidance did not have a material impact on Park's consolidated financial statements, but Park will consider this guidance as contracts are transitioned from LIBOR to another reference rate.
ASU 2021-06 - Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): In August 2021, FASB issued ASU 2021-06 - Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946). ASU 2021-06 updates the codification to align with SEC Final Rule Releases No. 33-10786 and No. 33-10835. Specific to financial institutions, these SEC releases updated required annual statistical disclosures. The amendments in ASU 2021-06 were effective immediately. Park has updated the statistical disclosures in its Annual Report on Form 10-K for the fiscal year ending December 31, 2021, to align with this guidance.
Issued But Not Yet Effective Accounting Standards
There are no issued but not yet effective accounting standards impacting Park as of December 31, 2021.
3. Organization
Park National Corporation is a financial holding company headquartered in Newark, Ohio. Through PNB, Park is engaged in a general commercial banking and trust business, primarily in Ohio, Kentucky, North Carolina, and South Carolina, with the exception of nationwide aircraft loans and nationwide asset-based lending to consumer finance companies. PNB is headquartered in Newark, Ohio. A wholly-owned subsidiary of Park, GFSC is a consumer finance company located in Central Ohio.
Through February 16, 2012, Park operated a second banking subsidiary, Vision Bank ("Vision"), which was engaged in a general commercial banking business, primarily in Baldwin County, Alabama and the panhandle of Florida. Promptly following the sale of the Vision business to Centennial Bank (a wholly-owned subsidiary of Home BancShares, Inc.), Vision surrendered its Florida banking charter to the Florida Office of Financial Regulation and became a non-bank Florida corporation. Vision (the Florida corporation) merged with and into a wholly-owned, non-bank subsidiary of Park, SEPH, with SEPH being the surviving entity. SEPH holds the remaining assets and liabilities retained by Vision subsequent to the sale. SEPH also holds OREO that had previously been transferred to SEPH from Vision. SEPH's assets consist primarily of nonperforming loans and OREO. This non-bank subsidiary represents a run off portfolio of the legacy Vision assets.
PNB provides the following principal services: the acceptance of deposits for demand, savings and time accounts; commercial, industrial, consumer and real estate lending, including installment loans, credit cards (which are largely offered through a third party), home equity lines of credit and commercial leasing; trust and wealth management services; cash management; safe deposit operations; electronic funds transfers and a variety of additional banking-related services. See Note 29-Segment Information for financial information on the Corporation’s operating segments.
4. Investment Securities
"Debt securities" and "Other investment securities" are summarized below.
Debt Securities
The following table summarizes the amortized cost and fair value of debt securities at December 31, 2021 and December 31, 2020 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss). There was no related allowance for credit losses at December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Amortized Cost | | Gross Unrealized Holding Gains | | Gross Unrealized Holding Losses | | Fair Value |
| 2021: | | | | | | | | |
| Debt Securities Available-for-Sale | | | | | | | | |
| Obligations of states and political subdivisions | | $ | 366,933 | | | $ | 22,682 | | | $ | 24 | | | $ | 389,591 | |
| U.S. Government sponsored entities’ asset-backed securities | | 849,114 | | | 13,437 | | | 8,088 | | | 854,463 | |
| Collateralized loan obligations | | 500,066 | | | 3 | | | 1,395 | | | 498,674 | |
| Corporate debt securities | | 11,250 | | | 169 | | | 7 | | | 11,412 | |
| Total | | $ | 1,727,363 | | | $ | 36,291 | | | $ | 9,514 | | | $ | 1,754,140 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Amortized Cost | | Gross Unrealized Holding Gains | | Gross Unrealized Holding Losses | | Fair Value |
| 2020: | | | | | | | | |
| Debt Securities Available-for-Sale | | | | | | | | |
| Obligations of states and political subdivisions | | $ | 279,245 | | | $ | 25,973 | | | $ | — | | | $ | 305,218 | |
| U.S. Government sponsored entities’ asset-backed securities | | 726,589 | | | 26,248 | | | 728 | | | 752,109 | |
| Corporate debt securities | | 2,000 | | | 14 | | — | | | 2,014 | |
| Total | | $ | 1,007,834 | | | $ | 52,235 | | | $ | 728 | | | $ | 1,059,341 | |
On September 1, 2019, Park adopted the portion of ASU 2019-04 which allowed for a one-time reclassification of securities from HTM to AFS. On that date, Park transferred HTM securities with a fair value of $373.9 million to the AFS classification. The transfer occurred at fair value and had a related unrealized gain, net of taxes, of $19.1 million recorded in other comprehensive income. All debt securities were classified as AFS at December 31, 2021 and December 31, 2020.
The following table provides detail on investment securities in an unrealized loss position for which an allowance for credit losses has not been recorded at December 31, 2021, aggregated by major security type and length of time in a continuous unrealized loss position:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 Months | | 12 Months or Longer | | Total |
| (In thousands) | | Fair Value | Unrealized Losses | | Fair Value | Unrealized Losses | | Fair Value | | Unrealized Losses |
| 2021: | | | | | | | | | | |
| Debt Securities Available-for-Sale | | | | | | | | | | |
| Obligations of states and political subdivisions | | $ | 1,834 | | $ | 24 | | | $ | — | | $ | — | | | $ | 1,834 | | | $ | 24 | |
| U.S. Government sponsored entities’ asset-backed securities | | 333,653 | | 4,996 | | | 73,431 | | 3,092 | | | 407,084 | | | 8,088 | |
| Collateralized loan obligations | | 429,671 | | 1,395 | | | — | | — | | | 429,671 | | | 1,395 | |
| Corporate debt securities | | 2,243 | | 7 | | | — | | — | | | 2,243 | | | 7 | |
| Total | | $ | 767,401 | | $ | 6,422 | | | $ | 73,431 | | $ | 3,092 | | | $ | 840,832 | | | $ | 9,514 | |
Investment securities in an unrealized loss position at December 31, 2020, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 Months | | 12 Months or Longer | | Total |
| (In thousands) | | Fair Value | Unrealized Losses | | Fair Value | Unrealized Losses | | Fair Value | | Unrealized Losses |
| 2020: | | | | | | | | | | |
| Debt Securities Available-for-Sale | | | | | | | | | | |
| U.S. Government sponsored entities' asset-backed securities | | $ | 86,393 | | $ | 695 | | | $ | 4,727 | | $ | 33 | | | $ | 91,120 | | | $ | 728 | |
| Total | | $ | 86,393 | | $ | 695 | | | $ | 4,727 | | $ | 33 | | | $ | 91,120 | | | $ | 728 | |
At December 31, 2021, Park’s debt security portfolio consisted of $1.8 billion of securities, $840.8 million of which were in an unrealized loss position with unrealized losses of $9.5 million. Of the $840.8 million of securities in an unrealized loss position, $73.4 million were in an unrealized loss position for 12 months or longer. The majority of the unrealized losses were related to Park’s U.S. Government sponsored entities' asset-backed securities portfolio. Unrealized losses have not been recognized into earnings as they represent negative adjustments to fair value relative to the rate of interest paid on the securities and not losses related to the creditworthiness of the respective issuers. Management does not intend to sell, and it is not more likely than not that management would be required to sell, the securities prior to their anticipated recovery. Management believes the value will recover as the securities approach maturity or market rates change.
There was no allowance for credit losses recorded for debt securities AFS at December 31, 2021. Additionally, for the years ended December 31, 2021, 2020, and 2019, there were no credit-related investment impairment losses recognized.
The amortized cost and estimated fair value of investments in debt securities at December 31, 2021, are shown in the following table by contractual maturity, except for asset-backed securities and collateralized loan obligations, which are shown as a single total, due to the unpredictability of the timing in principal repayments. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Amortized Cost | | Fair Value | | Tax Equivalent Yield (1) |
| Debt Securities Available-for-Sale | | | | | | |
| Obligations of states and political subdivisions | | | | | | |
| Due five through ten years | | $ | 197,895 | | | $ | 213,154 | | | 3.75 | % |
| Due greater than ten years | | 169,038 | | | 176,437 | | | 2.91 | % |
| Total | | $ | 366,933 | | | $ | 389,591 | | | 3.36 | % |
| | | | | | |
| U.S. Government sponsored entities’ asset-backed securities | | $ | 849,114 | | | $ | 854,463 | | | 1.73 | % |
| | | | | | |
| Collateralized loan obligations | | $ | 500,066 | | | $ | 498,674 | | | 1.61 | % |
| | | | | | |
| Corporate debt securities | | | | | | |
| Due five through ten years | | $ | 11,250 | | | $ | 11,412 | | | 3.93 | % |
(1) The tax equivalent yield for obligations of states and political subdivisions includes the effects of a taxable equivalent adjustment using a 21% federal corporate income tax rate.
At December 31, 2021, investment securities with an amortized cost of $396.3 million were pledged for government and trust department deposits, $327.9 million were pledged to secure repurchase agreements and $9.5 million were pledged as collateral for FHLB advance borrowings. At December 31, 2020, investment securities with an amortized cost of $328.6 million were pledged for government and trust department deposits, $348.6 million were pledged to secure repurchase agreements and $13.9 million were pledged as collateral for FHLB advance borrowings.
At December 31, 2021, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.
There were no sales of AFS debt securities during 2021. During 2020, Park sold certain AFS debt securities with a book value of $112.5 million at a gross loss of $64,000, and sold certain AFS debt securities with a book value of $196.4 million at a gross gain of $3.4 million. During 2019, Park sold certain AFS debt securities with a book value of $62.4 million at a gross loss of $0.7 million and sold certain AFS debt securities with a book value of $29.1 million at a gross gain of $271,000.
Other Investment Securities
Other investment securities (as shown on the Consolidated Balance Sheets) consist of restricted stock investments in the FHLB and the FRB, and equity securities. The FHLB and FRB restricted stock investments are carried at their redemption value. Equity securities with a readily determinable fair value are carried at fair value. Equity securities without a readily determinable fair value are recorded at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions ("modified cost"). Park's portfolio of equity investments in limited partnerships which provide mezzanine funding ("Partnership Investments") are valued using the net asset value practical expedient in accordance with ASC 820.
The carrying amount of other investment securities at December 31, 2021 and 2020 was as follows:
| | | | | | | | | | | | | | |
| (In thousands) | | December 31, 2021 | | December 31, 2020 |
| FHLB stock | | $ | 13,413 | | | $ | 22,090 | |
| FRB stock | | 14,653 | | | 14,653 | |
| Equity investments carried at fair value | | 2,129 | | | 2,511 | |
Equity investments carried at modified cost (1) | | 4,689 | | | 4,689 | |
| Equity investments carried at net asset value | | 26,384 | | | 21,522 | |
| Total other investment securities | | $ | 61,268 | | | $ | 65,465 | |
(1) There have been no impairments, downward adjustments, or upward adjustments made to equity investments carried at modified cost.
During the year ended December 31, 2021, the FHLB repurchased 86,770 shares of FHLB stock with a book value of $8.7 million. No shares of FRB stock were purchased or sold in 2021. During the year ended December 31, 2020, the FHLB repurchased 79,697 shares of FHLB stock with a book value of $8.0 million. No shares of FRB stock were purchased or sold in 2020. During the year ended December 31, 2019, the FHLB repurchased 133,281 shares of FHLB stock with a book value of $13.3 million. Park purchased 128,553 shares of FRB stock with a book value of $6.4 million in 2019.
For the years ended December 31, 2021, 2020 and 2019, $552,000, $(239,000) and $345,000, respectively, of gains (losses) on equity investments carried at fair value were recorded within "Gain on equity securities, net" on the Consolidated Statements of Income.
For the years ended December 31, 2021, 2020 and 2019, $4.5 million, $2.4 million and $4.8 million, respectively, of gains on equity investments carried at NAV were recorded within "Gain on equity securities, net" on the Consolidated Statements of Income.
5. Loans
The composition of the loan portfolio at December 31, 2021 and December 31, 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | | December 31, 2020 |
| (In thousands) | Amortized Cost | | | Amortized Cost | Accrued Interest Receivable | Recorded Investment |
Commercial, financial and agricultural: (1) | | | | 1,588,989 | | $ | 6,528 | | $ | 1,595,517 | |
Commercial, financial and agricultural (1) | $ | 1,223,079 | | | | (2) | (2) | (2) |
| PPP loans | 74,420 | | | | (2) | (2) | (2) |
| Overdrafts | 1,127 | | | | (2) | (2) | (2) |
Commercial real estate (1) | 1,801,792 | | | | 1,748,189 | | $ | 6,017 | | $ | 1,754,206 | |
| Construction real estate: | | | | | | |
| Commercial | 214,561 | | | | 226,991 | | $ | 572 | | $ | 227,563 | |
| Retail | 107,225 | | | | 116,430 | | $ | 235 | | $ | 116,665 | |
| Residential real estate: | | | | | | |
| Commercial | 533,802 | | | | 526,222 | | $ | 1,161 | | $ | 527,383 | |
| Mortgage | 1,033,658 | | | | 1,096,358 | | $ | 947 | | $ | 1,097,305 | |
| HELOC | 165,605 | | | | 182,028 | | $ | 647 | | $ | 182,675 | |
| Installment | 5,642 | | | | 8,436 | | $ | 22 | | $ | 8,458 | |
| Consumer: | | | | 1,659,704 | | $ | 4,510 | | $ | 1,664,214 | |
| Consumer | 1,685,793 | | | | (2) | (2) | (2) |
| GFSC | 1,793 | | | | (2) | (2) | (2) |
| Check loans | 2,093 | | | | (2) | (2) | (2) |
| Leases | 20,532 | | | | 24,438 | | $ | 14 | | $ | 24,452 | |
| Total | $ | 6,871,122 | | | | $ | 7,177,785 | | $ | 20,653 | | $ | 7,198,438 | |
| Allowance for credit losses | (83,197) | | | | (85,675) | | | |
| Net loans | $ | 6,787,925 | | | | $ | 7,092,110 | | | |
(1) Included within each of commercial, financial and agricultural loans and commercial real estate loans is an immaterial amount of consumer loans that were not broken out by class.
(2) Results for reporting periods beginning after January 1, 2021 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. Category was not broken out as a separate class at December 31, 2020.
In order to support customers, Park participated in the CARES Act Paycheck Protection Program ("PPP"). PPP loans were broken out as a separate class as of December 31, 2021. Included within commercial, financial and agricultural loans as of December 31, 2020 were $331.6 million of PPP loans. For its assistance in originating the first round of PPP loans during 2020, Park received an aggregate of $20.2 million in fees from the SBA, and for its assistance in originating additional PPP loans during 2021, Park received an aggregate of $12.9 million in fees from the SBA. During the years ended December 31, 2021 and December 31, 2020, $16.3 million and $13.7 million, respectively, of PPP fee income was recognized within loan interest income. There was 0 PPP fee income earned during the year ended December 31, 2019.
Loans are shown net of deferred origination fees, costs and unearned income of $19.5 million at December 31, 2021, and of $23.6 million at December 31, 2020, which represented a net deferred income position in both years. At December 31, 2021 and December 31, 2020, included in the net deferred origination fees, costs and unearned income were $2.8 million and $6.5 million, respectively, in net origination fees related to PPP loans. At December 31, 2021 and December 31, 2020, loans included purchase accounting adjustments of $4.2 million and $7.2 million, respectively, which represented a net deferred income position at each date. This fair market value purchase accounting adjustment is expected to be recognized into interest income on a level yield basis over the remaining expected life of the loans.
Overdrawn deposit accounts of $1.1 million and $2.0 million were reclassified to loans at December 31, 2021 and December 31, 2020, respectively. As of December 31, 2021, overdrafts were within their own class and as of December 31, 2020, overdrafts were included in the commercial, financial and agricultural loan segment in the previous table.
Credit Quality
The following table presents the amortized cost of nonaccrual loans, accruing TDRs, and loans past due 90 days or more and still accruing, by class of loan, at December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 |
| (In thousands) | | Nonaccrual
Loans | | Accruing
TDRs | | Loans Past Due
90 Days
or More
and Accruing | | Total
Nonperforming
Loans |
| Commercial, financial and agricultural: | | | | | | | | |
| Commercial, financial and agricultural | | $ | 13,271 | | | $ | 9,396 | | | $ | — | | | $ | 22,667 | |
| PPP loans | | — | | | — | | | 793 | | | 793 | |
| Overdrafts | | — | | | — | | | — | | | — | |
| Commercial real estate | | 40,142 | | | 7,713 | | | — | | | 47,855 | |
| Construction real estate: | | | | | | | | |
| Commercial | | 52 | | | 169 | | | — | | | 221 | |
| Retail | | 716 | | | 9 | | | — | | | 725 | |
| Residential real estate: | | | | | | | | |
| Commercial | | 2,366 | | | 240 | | | — | | | 2,606 | |
| Mortgage | | 11,718 | | | 7,779 | | | 372 | | | 19,869 | |
| HELOC | | 1,590 | | | 803 | | | — | | | 2,393 | |
| Installment | | 82 | | | 1,508 | | | — | | | 1,590 | |
| Consumer: | | | | | | | | |
| Consumer | | 1,518 | | | 700 | | | 431 | | | 2,649 | |
| GFSC | | 79 | | | 6 | | | 11 | | | 96 | |
| Check loans | | — | | | — | | | — | | | — | |
| Leases | | 1,188 | | | — | | | — | | | 1,188 | |
| Total loans | | $ | 72,722 | | | $ | 28,323 | | | $ | 1,607 | | | $ | 102,652 | |
The following table presents the recorded investment in nonaccrual loans, accruing TDRs, and loans past due 90 days or more and still accruing, by class of loan, at December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2020 |
| (In thousands) | | Nonaccrual
Loans | | Accruing
TDRs | | Loans Past Due 90 Days or More and Accruing | | Total
Nonperforming
Loans |
| Commercial, financial and agricultural | | $ | 23,261 | | | 5,619 | | | $ | — | | | $ | 28,880 | |
| Commercial real estate | | 67,426 | | | 2,931 | | | 377 | | | 70,734 | |
| Construction real estate: | | | | | | | | |
| Commercial | | 3,110 | | | — | | | — | | | 3,110 | |
| Mortgage | | 14 | | 31 | | | — | | | 45 | |
| Residential real estate: | | | | | | | | |
| Commercial | | 4,304 | | | 253 | | | — | | | 4,557 | |
| Mortgage | | 14,016 | | | 8,400 | | | 416 | | | 22,832 | |
| HELOC | | 1,286 | | | 909 | | | 77 | | | 2,272 | |
| Installment | | 184 | | | 1,728 | | | — | | | 1,912 | |
| Consumer | | 2,172 | | | 1,017 | | | 724 | | | 3,913 | |
| Leases | | 1,595 | | | — | | | — | | | 1,595 | |
| Total loans | | $ | 117,368 | | | $ | 20,888 | | | $ | 1,594 | | | $ | 139,850 | |
The following table provides additional detail on nonaccrual loans and the related ACL, by class of loan, at December 31, 2021:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| (In thousands) | | Nonaccrual Loans With No ACL | | Nonaccrual Loans With an ACL | | Related ACL |
| Commercial, financial and agricultural: | | | | | | |
| Commercial, financial and agricultural | | 11,494 | | | 1,777 | | | 1,343 | |
| PPP loans | | — | | | — | | | — | |
| Overdrafts | | — | | | — | | | — | |
| Commercial real estate | | 39,151 | | | 991 | | | 188 | |
| Construction real estate: | | | | | | |
| Commercial | | 52 | | | — | | | — | |
| Retail | | — | | | 716 | | | 67 | |
| Residential real estate: | | | | | | |
| Commercial | | 2,366 | | | — | | | — | |
| Mortgage | | — | | | 11,718 | | | 73 | |
| HELOC | | — | | | 1,590 | | | 99 | |
| Installment | | — | | | 82 | | | 24 | |
| Consumer | | | | | | |
| Consumer | | — | | | 1,518 | | | 393 | |
| GFSC | | — | | | 79 | | | 10 | |
| Check loans | | — | | | — | | | — | |
| Leases | | 914 | | | 274 | | | 43 | |
| Total loans | | $ | 53,977 | | | $ | 18,745 | | | $ | 2,240 | |
Nonaccrual commercial loans are evaluated on an individual basis and are excluded from the collective evaluation. Management’s general practice is to proactively charge down loans individually evaluated to the fair value of the underlying collateral. Nonaccrual consumer loans are collectively evaluated based on similar risk characteristics.
The following table presents loans individually evaluated for impairment by class of loan as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| (In thousands) | | Unpaid Principal Balance | | Recorded Investment | | ACL Allocated |
| With no related allowance recorded | | | | |
| Commercial, financial and agricultural | | 23,316 | | | 22,970 | | | — | |
| Commercial real estate | | 63,639 | | | 63,467 | | | — | |
| Construction real estate: | | | | | | |
| Commercial | | 3,110 | | | 3,110 | | | — | |
| Residential real estate: | | | | | | |
| Commercial | | 4,522 | | | 4,448 | | | — | |
| Leases | | 568 | | | 568 | | | — | |
| With an allowance recorded | | | | | | |
| Commercial, financial and agricultural | | 5,881 | | | 5,866 | | | 3,758 | |
| Commercial real estate | | 6,890 | | | 6,890 | | | 1,316 | |
| Construction real estate: | | | | | | |
| Commercial | | — | | | — | | | — | |
| Residential real estate: | | | | | | |
| Commercial | | 109 | | | 109 | | | 16 | |
| Leases | | 1,027 | | | 1,027 | | | 344 | |
| Total | | $ | 109,062 | | | $ | 108,455 | | | $ | 5,434 | |
The following table provides the amortized cost basis of collateral-dependent loans by class of loan, as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 |
| (In thousands) | | Real Estate | | Business Assets | | Other | Total |
| Commercial, financial and agricultural | | | | | | | |
| Commercial, financial and agricultural | | $ | 9,321 | | | $ | 13,366 | | | $ | 156 | | $ | 22,843 | |
| Commercial real estate | | 52,901 | | | 37 | | | — | | 52,938 | |
| Construction real estate: | | | | | | | |
| Commercial | | 1,178 | | | — | | | — | | 1,178 | |
| Residential real estate: | | | | | | | |
| Commercial | | 2,906 | | | — | | | 57 | | 2,963 | |
| Mortgage | | 370 | | | — | | | — | | 370 | |
| HELOC | | 148 | | | — | | | — | | 148 | |
| Leases | | — | | | 1,211 | | | — | | 1,211 | |
| Total loans | | $ | 66,824 | | | $ | 14,614 | | | $ | 213 | | $ | 81,651 | |
Interest income on nonaccrual loans individually evaluated for impairment is recognized on a cash basis only when Park expects to receive the entire recorded investment in the loans. Interest income on accruing TDRs individually evaluated for impairment continues to be recorded on an accrual basis. The following table presents interest income recognized on nonaccrual loans for the year ended December 31, 2021:
| | | | | | | | | | | |
| | Interest Income Recognized |
| (In thousands) | | | December 31, 2021 |
| Commercial, financial and agricultural: | | | |
| Commercial, financial and agricultural | | | $ | 180 | |
| PPP loans | | | — | |
| Overdrafts | | | — | |
| Commercial real estate | | | 1,844 | |
| Construction real estate: | | | |
| Commercial | | | 39 | |
| Retail | | | 4 | |
| Residential real estate: | | | |
| Commercial | | | 204 | |
| Mortgage | | | 301 | |
| HELOC | | | 17 | |
| Installment | | | 2 | |
| Consumer: | | | |
| Consumer | | | 92 | |
| GFSC | | | 14 | |
| Check loans | | | 0 |
| Leases | | | 73 | |
| Total loans | | | $ | 2,770 | |
The following table presents the average recorded investment and interest income recognized subsequent to impairment on loans individually evaluated for impairment as of and for the years ended December 31, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | | December 31, 2019 |
| (In thousands) | | Recorded Investment | | Average Recorded Investment | | Interest Income Recognized | | | Recorded Investment | | Average Recorded Investment | | Interest Income Recognized |
| Commercial, financial and agricultural | | $ | 28,836 | | | $ | 30,280 | | | $ | 735 | | | | $ | 33,088 | | | $ | 21,415 | | | $ | 527 | |
| Commercial real estate | | 70,357 | | | 55,279 | | | 1,890 | | | | 41,791 | | | 32,132 | | | 1,241 | |
| Construction real estate: | | | | | | | | | | | | | |
| Commercial | | 3,110 | | | 1,291 | | | 50 | | | | 453 | | | 1,987 | | | 26 | |
| Residential real estate: | | | | | | | | | | | | | |
| Commercial | | 4,557 | | | 4,329 | | | 204 | | | | 2,025 | | | 2,175 | | | 99 | |
| Consumer | | — | | | — | | | — | | | | — | | | — | | | — | |
| Leases | | 1,595 | | | 1,115 | | | — | | | | 134 | | | 59 | | | — | |
| Total | | $ | 108,455 | | | $ | 92,294 | | | $ | 2,879 | | | | $ | 77,491 | | | $ | 57,768 | | | $ | 1,893 | |
The following table presents the aging of the amortized cost in past due loans at December 31, 2021 by class of loan:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| (In thousands) | Accruing Loans
Past Due 30-89
Days | | Past Due Nonaccrual Loans and Loans Past Due 90 Days or More and Accruing (1) | | Total Past Due | | Total Current (2) | | Total
Amortized Cost |
| Commercial, financial and agricultural: | | | | | | | | | |
| Commercial, financial and agricultural | $ | 2,908 | | | $ | 9,547 | | | $ | 12,455 | | | $ | 1,210,624 | | | $ | 1,223,079 | |
| PPP loans | 242 | | | 793 | | | 1,035 | | | 73,385 | | | 74,420 | |
| Overdrafts | — | | | — | | | — | | | 1,127 | | | 1,127 | |
| Commercial real estate | 65 | | | 1,461 | | | 1,526 | | | 1,800,266 | | | 1,801,792 | |
| Construction real estate: | | | | | | | | | |
| Commercial | — | | | — | | | — | | | 214,561 | | | 214,561 | |
| Retail | 346 | | | 660 | | | 1,006 | | | 106,219 | | | 107,225 | |
| Residential real estate: | | | | | | | | | |
| Commercial | 283 | | | 438 | | | 721 | | | 533,081 | | | 533,802 | |
| Mortgage | 6,170 | | | 5,933 | | | 12,103 | | | 1,021,555 | | | 1,033,658 | |
| HELOC | 565 | | | 1,011 | | | 1,576 | | | 164,029 | | | 165,605 | |
| Installment | 49 | | | 31 | | | 80 | | | 5,562 | | | 5,642 | |
| Consumer: | | | | | | | | | |
| Consumer | 2,614 | | | 618 | | | 3,232 | | | 1,682,561 | | | 1,685,793 | |
| GFSC | 153 | | | 52 | | | 205 | | | 1,588 | | | 1,793 | |
| Check loans | 10 | | | — | | | 10 | | | 2,083 | | | 2,093 | |
| Leases | 60 | | | 526 | | | 586 | | | 19,946 | | | 20,532 | |
| Total loans | $ | 13,465 | | | $ | 21,070 | | | $ | 34,535 | | | $ | 6,836,587 | | | $ | 6,871,122 | |
(1) Includes an aggregate of $1.6 million of loans past due 90 days or more and accruing. The remaining loans were past due nonaccrual loans.
(2) Includes an aggregate of $53.3 million of nonaccrual loans which were current in regards to contractual principal and interest payments.
The following table presents the aging of the recorded investment in past due loans at December 31, 2020 by class of loan:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| (in thousands) | Accruing Loans
Past Due 30-89
Days | | Past Due Nonaccrual Loans and Loans Past Due 90 Days or More and Accruing (1) | | Total Past Due | | Total Current (2) | | Total Recorded
Investment |
| Commercial, financial and agricultural | $ | 7,372 | | | $ | 13,968 | | | $ | 21,340 | | | $ | 1,574,177 | | | $ | 1,595,517 | |
| Commercial real estate | 82 | | | 972 | | | 1,054 | | | 1,753,152 | | | 1,754,206 | |
| Construction real estate: | | | | | | | | | |
| Commercial | — | | | 39 | | | 39 | | | 227,524 | | | 227,563 | |
| Mortgage | 77 | | | — | | | 77 | | | 115,647 | | | 115,724 | |
| Installment | 12 | | | — | | | 12 | | | 929 | | | 941 | |
| Residential real estate: | | | | | | | | | |
| Commercial | 17 | | | 493 | | | 510 | | | 526,873 | | | 527,383 | |
| Mortgage | 9,538 | | | 7,814 | | | 17,352 | | | 1,079,953 | | | 1,097,305 | |
| HELOC | 805 | | | 810 | | | 1,615 | | | 181,060 | | | 182,675 | |
| Installment | 67 | | | 71 | | | 138 | | | 8,320 | | | 8,458 | |
| Consumer | 5,496 | | | 1,213 | | | 6,709 | | | 1,657,505 | | | 1,664,214 | |
| Leases | 186 | | | 984 | | | 1,170 | | | 23,282 | | | 24,452 | |
| Total loans | $ | 23,652 | | | $ | 26,364 | | | $ | 50,016 | | | $ | 7,148,422 | | | $ | 7,198,438 | |
(1) Includes an aggregate of $1.6 million of loans past due 90 days or more and accruing. The remaining loans were past due nonaccrual loans.
(2) Includes an aggregate of $92.6 million of nonaccrual loans which were current in regards to contractual principal and interest payments.
Credit Quality Indicators
Management utilizes past due information as a credit quality indicator across the loan portfolio. Past due information at December 31, 2021 and December 31, 2020 is included in the previous tables. The past due information is the primary credit quality indicator within the following classes of loans: (1) overdrafts in the commercial, financial and agricultural portfolio segment; (2) retail loans in the construction real estate portfolio segment; (3) mortgage loans, HELOC and installment loans in the residential real estate portfolio segment; and (4) consumer loans, GFSC loans, and check loans in the consumer portfolio segment. The primary credit indicator for commercial loans is based on an internal grading system that grades all commercial loans on a scale from 1 to 8. Credit grades are continuously monitored by the responsible loan officer and adjustments are made when appropriate. A grade of 1 indicates little or no credit risk and a grade of 8 is considered a loss. Commercial loans that are pass-rated (graded an 1 through a 4) are considered to be of acceptable credit risk. Commercial loans graded a 5 (special mention) are considered to be watch list credits and a higher PD is applied to these loans. Loans classified as special mention have potential weaknesses that require management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of Park’s credit position at some future date. Commercial loans graded a 6 (substandard), also considered watch list credits, are considered to represent higher credit risk and, as a result, a higher PD is applied to these loans. Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or the value of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that Park will sustain some loss if the deficiencies are not corrected. Commercial loans graded a 7 (doubtful) are shown as nonaccrual and Park generally charges these loans down to their fair value by taking a partial charge-off or recording a specific reserve. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Certain 6-rated loans and all 7-rated loans are placed on nonaccrual status and included within the individually evaluated category. A loan is deemed impaired, and is individually evaluated, when management determines the borrower's ability to perform in accordance with the contractual loan agreement is in doubt. Any commercial loan graded an 8 (loss) is completely charged off.
Based on the most recent analysis performed, the risk category of loans by class of loans as of December 31, 2021 follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | Term Loans Amortized Cost Basis by Origination Year | | |
| (In thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving Loans Amortized Cost Basis | Total |
Commercial, financial and agricultural: Commercial, financial and agricultural (1) | | | | | | |
| Risk rating | | | | | | | | |
| Pass | 267,016 | | 208,078 | | 100,736 | | 52,705 | | 36,528 | | 59,909 | | 468,749 | | 1,193,721 | |
| Special Mention | 1,608 | | 1,592 | | 429 | | 59 | | 277 | | — | | 11,986 | | 15,951 | |
| Substandard | 106 | | 906 | | 401 | | 1,345 | | 549 | | 7,818 | | 484 | | 11,609 | |
| Doubtful | — | | 30 | | 465 | | 227 | | 463 | | 125 | | 488 | | 1,798 | |
| Total | 268,730 | | 210,606 | | 102,031 | | 54,336 | | 37,817 | | 67,852 | | 481,707 | | 1,223,079 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial, financial and agricultural: PPP | | | | | | |
| Risk rating | | | | | | | | |
| Pass | $ | 69,588 | | $ | 4,832 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 74,420 | |
| Special Mention | — | | — | | — | | — | | — | | — | | — | | — | |
| Substandard | — | | — | | — | | — | | — | | — | | — | | — | |
| Doubtful | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | $ | 69,588 | | $ | 4,832 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 74,420 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate (1) | | | | | | | | |
| Risk rating | | | | | | | | |
| Pass | 376,468 | | 445,780 | | 263,786 | | 154,637 | | 115,571 | | 317,371 | | 14,890 | | 1,688,503 | |
| Special Mention | 786 | | 6,206 | | 32,965 | | 9,354 | | 4,297 | | 17,829 | | 996 | | 72,433 | |
| Substandard | 3,897 | | 2,578 | | 1,385 | | 11,373 | | 5,967 | | 14,541 | | 450 | | 40,191 | |
| Doubtful | — | | — | | — | | — | | 47 | | 618 | | — | | 665 | |
| Total | 381,151 | | 454,564 | | 298,136 | | 175,364 | | 125,882 | | 350,359 | | 16,336 | | 1,801,792 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Construction real estate: Commercial | | | | | | |
| Risk rating | | | | | | | | |
| Pass | 96,929 | | 76,867 | | 7,003 | | 4,841 | | 1,856 | | 3,412 | | 22,444 | | 213,352 | |
| Special Mention | 202 | | — | | — | | 691 | | — | | — | | — | | 893 | |
| Substandard | — | | 52 | | — | | 264 | | — | | — | | — | | 316 | |
| Doubtful | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | 97,131 | | 76,919 | | 7,003 | | 5,796 | | 1,856 | | 3,412 | | 22,444 | | 214,561 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential Real Estate: Commercial | | | | | | |
| Risk rating | | | | | | | | |
| Pass | 138,801 | | 165,202 | | 67,921 | | 44,896 | | 26,583 | | 70,434 | | 15,507 | | 529,344 | |
| Special Mention | 95 | | 884 | | 106 | | 79 | | — | | 497 | | 135 | | 1,796 | |
| Substandard | 735 | | 22 | | 691 | | 41 | | 95 | | 993 | | 29 | | 2,606 | |
| Doubtful | 56 | | — | | — | | — | | — | | — | | — | | 56 | |
| Total | 139,687 | | 166,108 | | 68,718 | | 45,016 | | 26,678 | | 71,924 | | 15,671 | | 533,802 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Leases | | | | | | |
| Risk rating | | | | | | | | |
| Pass | 6,705 | | 5,729 | | 2,628 | | 2,151 | | 705 | | 845 | | — | | 18,763 | |
| Special Mention | 198 | | 111 | | 184 | | 67 | | 21 | | — | | — | | 581 | |
| Substandard | — | | 698 | | — | | 23 | | 19 | | 78 | | — | | 818 | |
| Doubtful | — | | — | | 332 | | 16 | | 22 | | — | | — | | 370 | |
| Total | 6,903 | | 6,538 | | 3,144 | | 2,257 | | 767 | | 923 | | — | | 20,532 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | Term Loans Amortized Cost Basis by Origination Year | | |
| (In thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving Loans Amortized Cost Basis | Total |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Commercial Loans | | | | | | |
| Risk rating | | | | | | | | |
| Pass | 955,507 | | 906,488 | | 442,074 | | 259,230 | | 181,243 | | 451,971 | | 521,590 | | 3,718,103 | |
| Special Mention | 2,889 | | 8,793 | | 33,684 | | 10,250 | | 4,595 | | 18,326 | | 13,117 | | 91,654 | |
| Substandard | 4,738 | | 4,256 | | 2,477 | | 13,046 | | 6,630 | | 23,430 | | 963 | | 55,540 | |
| Doubtful | 56 | | 30 | | 797 | | 243 | | 532 | | 743 | | 488 | | 2,889 | |
| Total | 963,190 | | 919,567 | | 479,032 | | 282,769 | | 193,000 | | 494,470 | | 536,158 | | 3,868,186 | |
(1) Included within each of commercial, financial and agricultural loans and commercial real estate loans is an immaterial amount of consumer loans that are not broken out by class.
The table below presents the recorded investment by loan grade at December 31, 2020 for all commercial loans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| (In thousands) | | 5 Rated | | 6 Rated | | Nonaccrual and Accruing TDRs | | PCI | | Pass-Rated | | Recorded
Investment |
Commercial, financial and agricultural (1) | | 14,638 | | | — | | | 28,880 | | | 337 | | | 1,551,662 | | | $ | 1,595,517 | |
Commercial real estate (1) | | 87,439 | | | 117 | | | 70,357 | | | 7,461 | | | 1,588,832 | | | 1,754,206 | |
| Construction real estate: | | | | | | | | | | | | |
| Commercial | | 164 | | | — | | | 3,110 | | | 1,002 | | | 223,287 | | | 227,563 | |
| Residential real estate: | | | | | | | | | | | | |
| Commercial | | 798 | | | 22 | | | 4,557 | | | 1,510 | | | 520,496 | | | 527,383 | |
| Leases | | 331 | | | — | | | 1,595 | | | 112 | | | 22,414 | | | 24,452 | |
| Total Commercial Loans | | $ | 103,370 | | | $ | 139 | | | $ | 108,499 | | | $ | 10,422 | | | $ | 3,906,691 | | | $ | 4,129,121 | |
(1) Included within each of commercial, financial and agricultural loans and commercial real estate loans is an immaterial amount of consumer loans that were not broken out by class.
Park considers the performance of the loan portfolio and its impact on the allowance for credit losses. For residential and consumer loan classes, Park also evaluates credit quality based on the aging status of the loan, which was previously presented, and by performing status. The following tables present the amortized cost in residential and consumer loans based on performing status. Park defines a loan as nonperforming if it is on nonaccrual status, designated as an accruing TDR, or is greater than 90 days past due and accruing.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | Term Loans Amortized Cost Basis by Origination Year | | |
| (In thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving Loans Amortized Cost Basis | Total |
| Commercial, financial and agricultural: Overdrafts | | | | | | |
| Performing | 1,127 | | — | | — | | — | | — | | — | | — | | 1,127 | |
| Nonperforming | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | 1,127 | | — | | — | | — | | — | | — | | — | | 1,127 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Construction Real Estate: Retail | | | | | | |
| Performing | 68,374 | | 26,247 | | 5,710 | | 2,743 | | 1,505 | | 1,842 | | 79 | | 106,500 | |
| Nonperforming | — | | 647 | | 57 | | — | | — | | 21 | | — | | 725 | |
| Total | 68,374 | | 26,894 | | 5,767 | | 2,743 | | 1,505 | | 1,863 | | 79 | | 107,225 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential Real Estate: Mortgage | | | | | | |
| Performing | 230,299 | | 217,022 | | 114,077 | | 68,774 | | 59,939 | | 323,678 | | — | | 1,013,789 | |
| Nonperforming | — | | 626 | | 785 | | 824 | | 574 | | 17,060 | | — | | 19,869 | |
| Total | 230,299 | | 217,648 | | 114,862 | | 69,598 | | 60,513 | | 340,738 | | — | | 1,033,658 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential Real Estate: HELOC | | | | | | |
| Performing | 400 | | — | | 121 | | 58 | | 41 | | 2,640 | | 159,952 | | 163,212 | |
| Nonperforming | 89 | | 40 | | — | | 37 | | 90 | | 1,811 | | 326 | | 2,393 | |
| Total | 489 | | 40 | | 121 | | 95 | | 131 | | 4,451 | | 160,278 | | 165,605 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential Real Estate: Installment | | | | | | |
| Performing | — | | 3 | | 418 | | 111 | | 1,049 | | 2,471 | | — | | 4,052 | |
| Nonperforming | — | | 12 | | 5 | | 26 | | 78 | | 1,469 | | — | | 1,590 | |
| Total | — | | 15 | | 423 | | 137 | | 1,127 | | 3,940 | | — | | 5,642 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer: Consumer | | | | | | | | |
| Performing | 649,638 | | 505,555 | | 259,230 | | 119,222 | | 64,699 | | 62,136 | | 22,664 | | 1,683,144 | |
| Nonperforming | 241 | | 506 | | 755 | | 399 | | 155 | | 593 | | — | | 2,649 | |
| Total | 649,879 | | 506,061 | | 259,985 | | 119,621 | | 64,854 | | 62,729 | | 22,664 | | 1,685,793 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer: GFSC | | | | | | | | |
| Performing | — | | 243 | | 986 | | 292 | | 63 | | 5 | | 108 | | 1,697 | |
| Nonperforming | — | | 9 | | 73 | | 5 | | 9 | | — | | — | | 96 | |
| Total | — | | 252 | | 1,059 | | 297 | | 72 | | 5 | | 108 | | 1,793 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer: Check loans | | | | | | | | |
| Performing | — | | — | | — | | — | | — | | — | | 2,093 | | 2,093 | |
| Nonperforming | — | | — | | — | | — | | — | | — | | — | | — | |
| Total | — | | — | | — | | — | | — | | — | | 2,093 | | 2,093 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Consumer Loans | | | | | | | | |
| Performing | 949,838 | | 749,070 | | 380,542 | | 191,200 | | 127,296 | | 392,772 | | 184,896 | | 2,975,614 | |
Nonperforming | 330 | | 1,840 | | 1,675 | | 1,291 | | 906 | | 20,954 | | 326 | | 27,322 | |
| Total | 950,168 | | 750,910 | | 382,217 | | 192,491 | | 128,202 | | 413,726 | | 185,222 | | 3,002,936 | |
Loans and Leases Acquired with Deteriorated Credit Quality
In conjunction with the NewDominion acquisition, Park acquired loans with a book value of $277.9 millionas of the July 1, 2018 acquisition date. These loans were recorded at the initial fair value of $272.8 million. NewDominion loans acquired with deteriorated credit quality (ASC 310-30) with a book value of $5.1 million were recorded at the initial fair value of $4.9 million. In conjunction with the Carolina Alliance acquisition, Park acquired loans and leases with a book value of $589.7 million as of the April 1, 2019 acquisition date.Carolina Alliance loans and leases were recorded at the initial fair value of $578.6 million. Loans and leases acquired with deteriorated credit quality (ASC 310-30) with a book value of $19.9 million were recorded at the initial fair value of $18.4 million.
Upon adoption of CECL on January 1, 2021, $52,000 of the credit discount on PCD loans was reclassified to the allowance for credit losses. At December 31, 2021, there was no allowance for credit losses on PCD loans. The carrying amount of loans acquired with deteriorated credit quality at December 31, 2021 and December 31, 2020 was $7.1 million and $11.2 million, respectively.
Troubled Debt Restructurings
Management typically classifies loans as TDRs when a borrower is experiencing financial difficulties and Park has granted a concession to the borrower as part of a modification or in the loan renewal process. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of the borrower's debt in the foreseeable future without the modification. This evaluation is performed in accordance with the Company’s internal underwriting policy. Management’s policy is to modify loans by extending the term or by granting a temporary or permanent contractual interest rate below the market rate, not by forgiving debt. A court's discharge of a borrower's debt in a Chapter 7 bankruptcy is considered a concession when the borrower does not reaffirm the discharged debt.
During the two years ended December 31, 2021, Park modified a total of 5,138 consumer loans, with an aggregate balance of $72.2 million, and modified a total of 1,406 commercial loans, with an aggregate balance of $488.1 million, in each case related to a hardship caused by the COVID-19 pandemic and responses thereto. Park has worked with borrowers and provided modifications in the form of either interest only deferral or principal and interest deferral, in each case, for initial periods of up to 90 days. As necessary, Park made available a second 90-day interest only deferral or principal and interest deferral bringing the total potential deferral period to six months. Modifications were structured in a manner to best address each individual customer's then current situation. A majority of these modifications were excluded from TDR classification under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators. The modified loans are considered current and continue to accrue interest during the deferral period.
Certain loans which were modified during the years ended December 31, 2021 and 2020 did not meet the definition of a TDR as the modification was a delay in a payment that was considered to be insignificant. Management considers a forbearance period of up to three months or a delay in payment of up to 30 days to be insignificant. TDRs may be classified as accruing if the borrower has been current for a period of at least six months with respect to loan payments and management expects that the borrower will be able to continue to make payments in accordance with the terms of the restructured note. Management reviews all accruing TDRs quarterly to ensure payments continue to be made in accordance with the modified terms.
The terms of certain other loans were modified during the years ended December 31, 2021 and 2020 that did not meet the definition of a TDR. Excluding COVID-19 related modifications, there were $0.2 million of substandard commercial loans modified during each of the years ended December 31, 2021 and December 31, 2020 which did not meet the definition of a TDR. Excluding COVID-19 related modifications, consumer loans modified during 2021 which did not meet the definition of a TDR had a total amortized cost as of December 31, 2021 of $32.9 million. Excluding COVID-19 related modifications, consumer loans modified during 2020 which did not meet the definition of a TDR had a total recorded investment as of December 31, 2020 of $57.9 million. Many of these loans were to borrowers who were not experiencing financial difficulties but who were looking to reduce their cost of funds.
At December 31, 2021 and 2020, there were $20.9 million and $25.8 million, respectively, of TDRs included in the nonaccrual loan totals. At December 31, 2021 and 2020, $10.5 million and $12.9 million, respectively, of these nonaccrual TDRs were performing in accordance with the terms of the restructured notes. At December 31, 2021 and 2020, loans totaling $28.3 million and $20.9 million, respectively, were included in accruing TDR loan totals. Management will continue to review the restructured loans and may determine it is appropriate to move certain nonaccrual TDRs to accrual status in the future.
At December 31, 2021 and 2020, Park had commitments to lend $3.0 million and $6.7 million, respectively, of additional funds to borrowers whose outstanding loan terms had been modified in a TDR.
At December 31, 2021 and 2020, there were $0.3 million and $0.2 million, respectively, of specific reserves related to TDRs. Modifications made in 2021 and 2020 were largely the result of renewals and extending the maturity date of the loans at terms consistent with the original notes. These modifications were deemed to be TDRs primarily due to Park’s conclusion that the borrower would likely not have qualified for similar terms through another lender. Many of the modifications deemed to be TDRs were previously identified as impaired loans, and thus were also previously evaluated for impairment under ASC 310. Additional specific reserves of $174,000 were recorded during the year ended December 31, 2021, as a result of TDRs identified in the 2021 year. Additional specific reserves of $7,000 were recorded during the year ended December 31, 2020, as a result of TDRs identified in the 2020 year. Additional specific reserves of $1,300 were recorded during the year ended December 31, 2019, as a result of TDRs identified in the 2019 year.
Quarterly, management reviews renewals/modifications of loans previously identified as TDRs to consider if it is appropriate to remove the TDR classification. If the borrower is no longer experiencing financial difficulty and the renewal/modification did not contain a concessionary interest rate or other concessionary terms and the terms of the renewal/modification are considered to be market terms based on the current risk characteristics of the borrower, management considers the potential removal of the TDR classification. If deemed appropriate, the TDR classification is removed if the borrower has complied with the terms of the loan at the date of the renewal/modification and there was a reasonable expectation that the borrower would continue to comply with the terms of the loan subsequent to the date of the renewal/modification. The majority of these TDRs were originally considered restructurings in a prior year as a result of a renewal/modification with an interest rate that was not commensurate with the risk of the underlying loan at the time of the renewal/modification. During the years ended December 31, 2021 and 2020, Park removed the TDR classification on $4.1 million and $2.3 million, respectively, of loans that met the requirements discussed above.
The following tables detail the number of contracts modified as TDRs during the years ended December 31, 2021, 2020 and 2019 as well as the amortized cost/ recorded investment of these contracts at December 31, 2021, 2020, and 2019. The amortized cost/ recorded investment pre- and post-modification is generally the same due to the fact that Park does not typically forgive principal.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended
December 31, 2021 |
| (In thousands) | | Number of Contracts | | Accruing | | Nonaccrual | | Amortized
Cost |
| Commercial, financial and agricultural | | | | | | | | |
| Commercial, financial and agricultural | | 10 | | $ | 1,356 | | | $ | 169 | | | $ | 1,525 | |
| PPP loans | | — | | | — | | | — | | | — | |
| Overdrafts | | — | | | — | | | — | | | — | |
| Commercial real estate | | 15 | | | 2,002 | | | 6,747 | | | 8,749 | |
| Construction real estate: | | | | | | | | |
| Commercial | | 1 | | | — | | | — | | | — | |
| Retail | | 2 | | | — | | | 705 | | | 705 | |
| Residential real estate: | | | | | | | | |
| Commercial | | 5 | | | 95 | | | 574 | | | 669 | |
| Mortgage | | 14 | | | 146 | | | 396 | | | 542 | |
| HELOC | | 8 | | | 211 | | | 105 | | | 316 | |
| Installment | | 8 | | | 120 | | | — | | | 120 | |
| Consumer: | | | | | | | | |
| Consumer | | 131 | | | 116 | | | 417 | | | 533 | |
| GFSC | | — | | | — | | | — | | | — | |
| Check loans | | — | | | — | | | — | | | — | |
| Leases | | 1 | | | — | | | 325 | | | 325 | |
| Total loans | | 195 | | $ | 4,046 | | | $ | 9,438 | | | $ | 13,484 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended
December 31, 2020 |
| (In thousands) | | Number of Contracts | | Accruing | | Nonaccrual | | Recorded Investment |
| Commercial, financial and agricultural | | 12 | | $ | 107 | | | $ | 3,706 | | | $ | 3,813 | |
| Commercial real estate | | 9 | | — | | | 3,235 | | | 3,235 | |
| Construction real estate: | | | | | | | | |
| Commercial | | — | | | — | | | — | | | — | |
| Mortgage | | 1 | | | 26 | | | — | | | 26 | |
| Installment | | 1 | | | — | | | 14 | | | 14 | |
| Residential real estate: | | | | | | | | |
| Commercial | | 3 | | 153 | | | 3 | | | 156 | |
| Mortgage | | 27 | | 888 | | | 1,068 | | | 1,956 | |
| HELOC | | 7 | | 14 | | | 52 | | | 66 | |
| Installment | | 18 | | 163 | | | 65 | | | 228 | |
| Consumer | | 214 | | 218 | | | 634 | | | 852 | |
| Total loans | | 292 | | $ | 1,569 | | | $ | 8,777 | | | $ | 10,346 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended
December 31, 2019 |
| (In thousands) | | Number of Contracts | | Accruing | | Nonaccrual | | Recorded Investment |
| Commercial, financial and agricultural | | 30 | | $ | 6,040 | | | $ | 7,821 | | | $ | 13,861 | |
| Commercial real estate | | 8 | | 415 | | | 7,855 | | | 8,270 | |
| Construction real estate: | | | | | | | | |
| Commercial | | 3 | | — | | | 415 | | | 415 | |
| Mortgage | | 2 | | | 77 | | | — | | | 77 | |
| Installment | | — | | | — | | | — | | | — | |
| Residential real estate: | | | | | | | | |
| Commercial | | 3 | | — | | | 100 | | | 100 | |
| Mortgage | | 21 | | 535 | | | 589 | | | 1,124 | |
| HELOC | | 18 | | 126 | | | 234 | | | 360 | |
| Installment | | 34 | | 1,047 | | | 28 | | | 1,075 | |
| Consumer | | 324 | | 225 | | | 1,166 | | | 1,391 | |
| Total loans | | 443 | | $ | 8,465 | | | $ | 18,208 | | | $ | 26,673 | |
Of those loans which were modified and determined to be a TDR during the year ended December 31, 2021, $5.4 million were on nonaccrual status as of December 31, 2020. Of those loans which were modified and determined to be a TDR during the year ended December 31, 2020, $0.4 million were on nonaccrual status as of December 31, 2019. Of those loans which were modified and determined to be a TDR during the year ended December 31, 2019, $2.1 million were on nonaccrual status as of December 31, 2018.
The following table presents the amortized cost/ recorded investment in financing receivables which were modified as TDRs within the previous 12 months and for which there was a payment default during the year ended December 31, 2021, December 31, 2020, and December 31, 2019. For this table, a loan is considered to be in default when it becomes 30 days
contractually past due under the modified terms. The additional allowance for credit loss resulting from the defaults on TDR loans was immaterial.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended
December 31, 2021 | | Year ended
December 31, 2020 | | Year ended
December 31, 2019 |
| (In thousands) | | Number of Contracts | | Amortized Cost | | Number of Contracts | | Recorded Investment | | Number of Contracts | | Recorded Investment |
| Commercial, financial and agricultural: | | | | | | 4 | | | $ | 2,776 | | | 1 | | | $ | 20 | |
| Commercial, financial and agricultural | | — | | | $ | — | | | (1) | | (1) | | (1) | | (1) |
| PPP loans | | — | | | — | | | (1) | | (1) | | (1) | | (1) |
| Overdrafts | | — | | | — | | | (1) | | (1) | | (1) | | (1) |
| Commercial real estate | | — | | | — | | | 1 | | | 223 | | | — | | | — | |
| Construction real estate: | | | | | | | | | | | | |
| Commercial | | — | | | — | | | — | | | — | | | — | | | — | |
| Retail | | 1 | | | 648 | | | 1 | | | 14 | | | — | | | — | |
| Residential real estate: | | | | | | | | | | | | |
| Commercial | | — | | | — | | | 1 | | | 3 | | | — | | | — | |
| Mortgage | | 4 | | | 280 | | | 11 | | | 993 | | | 7 | | | 665 | |
| HELOC | | 2 | | | 135 | | | — | | | — | | | 6 | | | 141 | |
| Installment | | 1 | | | 27 | | | 3 | | | 32 | | | — | | | — | |
| Consumer | | | | | | 34 | | | 360 | | | 56 | | | 539 | |
| Consumer | | 14 | | | 169 | | | (1) | | (1) | | (1) | | (1) |
| GFSC | | — | | | — | | | (1) | | (1) | | (1) | | (1) |
| Check loans | | — | | | — | | | (1) | | (1) | | (1) | | (1) |
| Leases | | — | | | — | | | — | | | — | | | — | | | — | |
| Total loans | | 22 | | | $ | 1,259 | | | 55 | | | $ | 4,401 | | | 70 | | | $ | 1,365 | |
(1) Results for reporting periods beginning after January 1, 2021 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. Category was not broken out as a separate class at December 31, 2020.
Of the $1.3 million in modified TDRs which defaulted during the year ended December 31, 2021, $115,000 were accruing loans and $1.1 million were nonaccrual loans. Of the $4.4 million in modified TDRs which defaulted during the year ended December 31, 2020, $706,000 were accruing loans and $3.7 million were nonaccrual loans. Of the $1.4 million in modified TDRs which defaulted during the year ended December 31, 2019, $350,000 were accruing loans and $1.0 million were nonaccrual loans.
Certain of the Corporation’s executive officers, directors and related entities of directors are loan customers of PNB. As of December 31, 2021 and 2020, credit exposure aggregating approximately $33.5 million and $51.3 million, respectively, was outstanding to such parties. Of this total exposure, approximately $27.1 million and $32.0 million was outstanding at December 31, 2021 and 2020, respectively, with the remaining balance representing available credit. During 2021, new loans and advances on existing loans were made to these executive officers, directors and related entities of directors totaling $1.2 million and $9.7 million, respectively. These extensions of credit were offset by principal payments of $12.6 million and the removal of loans from the related party listing totaling $3.2 million. During 2020, new loans and advances on existing loans were $0.6 million and $12.4 million, respectively. These extensions of credit were offset by principal payments of $9.7 million.
6. Allowance for Credit Losses
The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost, which is measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. A provision for credit losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors as discussed within Note 1-Summary of Significant Accounting Policies.
During the first quarter of 2021, Park adopted ASU 2016-13, including the CECL methodology for estimating the ACL. This standard was adopted prospectively on January 1, 2021, resulting in a $6.1 million increase to the ACL and a $3.9 million increase to the allowance for unfunded credit losses. A cumulative effect adjustment resulting in an $8.0 million decrease to retained earnings and a $2.1 million increase to deferred tax assets was also recorded as of the adoption of ASU 2016-13.
Quantitative Considerations
The ACL is primarily calculated utilizing a DCF model. Key inputs and assumptions used in this model are discussed below:
•Forecast model - For each portfolio segment, a LDA was performed in order to identify appropriate loss drivers and create a regression model for use in forecasting cash flows. The LDA analysis utilized Park's own FFIEC Call Report data for the commercial, financial and agricultural and residential real estate portfolio segments. Peer data was incorporated into the analysis for the commercial real estate, construction real estate, and consumer portfolio segments. Park plans to update the LDA annually; however, due to the impact of COVID-19, the LDA analysis was last updated in the fourth quarter of 2019.
•Probability of default – PD is the probability that an asset will be in default within a given time frame. Park has defined default to be when a charge-off has occurred, a loan is placed on nonaccrual, or a loan is greater than 90 days past due. Whenever possible, Park utilizes its own loan-level PDs for the reasonable and supportable forecast period. When loan-level data is not available reflecting the forecasted economic conditions, a forecast model is utilized to estimate PDs.
•Loss given default – LGD is the percentage of the asset not expected to be collected due to default. Whenever possible, Park utilizes its own loan-level LGDs for the reasonable and supportable forecast period. When it is not possible to use Park's own LGDs, the LGD is derived using a method referred to as Frye Jacobs.
•Prepayments and curtailments – Prepayments and curtailments are calculated based on Park’s own data utilizing a three-year average. This analysis is updated annually in the fourth quarter and was last updated in the fourth quarter of 2021.
•Forecast and reversion – Park has established a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average.
•Economic forecast - Park utilizes a third party to provide economic forecasts under various scenarios, which are weighted in order to reflect model risk in the current economic environment. The scenario weighting is evaluated by management on a quarterly basis.
◦As of January 1, 2021, the date of CECL adoption, Park weighted a "most likely" scenario 80%, a "slower near-term growth" scenario 10%, and a "moderate recession" scenario 10%. As of January 1, 2021, the "most likely" scenario forecasted Ohio unemployment to range between 5.31% and 5.79% during the next four quarters.
◦As of March 31, 2021, the "most likely" scenario forecasted Ohio unemployment to decrease significantly, to a range between 3.70% and 4.93% during the next four quarters. In determining the appropriate weighting of scenarios at March 31, 2021, management considered this improved economic forecast while balancing the risks associated with the COVID-19 pandemic, including the risk of pandemic-related losses lagging behind the projected improvement in unemployment. The calculation utilizing the 80% "most likely" scenario, 10% "slower near-term growth" scenario, and 10% "moderate recession scenario" resulted in a quantitative reserve of $57.9 million, which would have resulted in a decline of $17.0 million from the quantitative reserve of $74.9 million as of January 1, 2021. Management then considered the reason for this decline and whether or not it was appropriate given the economic environment at March 31, 2021. Upon review, management noted that the decline was the result of a significant decrease in forecasted unemployment. The March 31, 2021 "most likely" scenario forecasted unemployment rates lower than any post-1975 Ohio unemployment rates of record. Given the uncertainty at March 31, 2021 due to the COVID-19 pandemic, management did not believe that such a significant decrease in reserves was appropriate and sought to re-evaluate the weightings in order to calculate a more accurate life of loan loss estimate. Management determined it was appropriate to weight the "most likely" scenario 50% and the "moderate recession" scenario 50%.
◦As of December 31, 2021, the "most likely" scenario forecasted Ohio unemployment to decrease, to a range between 3.32% and 3.97%, during the next four quarters. In determining the appropriate weighting of scenarios at December 31, 2021, management considered the range of forecasted unemployment as well as a number of economic indicators. While some economic indications continued to be optimistic, the Omicron variant, rising inflation, volatility in consumer confidence, employment, supply chain and workforce challenges continued to cause uncertainty to the overall economic environment. Considering these factors, management determined it was appropriate to maintain the previous quarter weighting, and weigh the "most likely" scenario 50% and the "moderate recession" scenario 50% at December 31, 2021.
Qualitative Considerations
Park reviews various internal and external factors to consider the need for any qualitative adjustments to the quantitative model. Factors considered include the following:
•The nature and volume of Park’s financial assets; the existence, growth, and effect of any concentrations of credit and the volume and severity of past due financial assets, the volume of nonaccrual assets, and the volume and severity of adversely classified or graded assets. Specifically, management considers:
◦Trends (e.g., growth, reduction) in specific categories of the loan portfolio, as well as adjustments to the types of loans offered by Park.
◦Level of and trend in loan delinquencies, troubled loans, commercial watch list loans and nonperforming loans.
◦Level of and trend in new nonaccrual loans.
◦Level of and trend in loan charge-offs and recoveries.
•Park's lending policies and procedures, including changes in lending strategies, underwriting standards and practices for collections, write-offs, and recoveries.
•The quality of Park’s credit review function.
•The experience, ability, and depth of Park’s lending, investment, collection, and other relevant management and staff.
•The effect of other external factors such as the regulatory, legal and technological environments; competition; and events such as natural disasters or pandemics.
•Actual and expected changes in international, national, regional, and local economic and business conditions and developments in the markets in which Park operates that affect the collectibility of financial assets.
•Where the U.S. economy is within a given credit cycle.
•The extent that there is government assistance (stimulus).
During 2020, Park added an additional reserve for three industries at particularly high risk due to the COVID-19 pandemic: hotels and accommodations; restaurants and food service; and strip shopping centers. These industries have experienced high levels of deferrals and have been particularly impacted by shut downs of non-essential businesses, increased health department regulations, and changes in consumer behavior. Management expects that a relatively higher percentage of the 4-rated credits in these portfolios will eventually migrate to special mention, substandard, or impaired status. In adopting CECL, management determined it was appropriate to retain this qualitative adjustment as this adjustment takes into account the additional risk in these portfolios, which is not captured in the quantitative calculation. As of December 31, 2021, additional reserves totaling $5.2 million were added for these portfolios on top of the quantitative reserve already calculated. This is an increase from $3.8 million as of December 31, 2020, which had been calculated under the previous incurred loss methodology.
A breakout of the 4-rated balances within these portfolios and the additional reserve related to these portfolios is detailed in the following table:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| (in thousands) | 4-Rated Balance | | Additional Reserve | | 4-Rated Balance | | Additional Reserve |
| Hotels and accommodations | $ | 148,018 | | | $ | 2,226 | | | $ | 96,909 | | | $ | 1,391 | |
| Restaurants and food service | 40,648 | | | 917 | | | 33,409 | | | 637 | |
| Strip shopping centers | 184,171 | | | 2,033 | | | 177,706 | | | 1,731 | |
| Total | $ | 372,837 | | | $ | 5,176 | | | $ | 308,024 | | | $ | 3,759 | |
Additionally, management applied a 1.00% reserve to all hotels and accommodations loans in the collectively evaluated population to account for increased valuation risk. This was consistent with the 2020 year end and considered various economic conditions due to COVID-19 variants, continued volatility in the hotel industry, and travel trends, all of which impacted valuations. At December 31, 2021, Park's originated hotels and accommodation loans included in the population of collectively evaluated loans had a balance of $203.9 million with an additional reserve related to valuation risks of $2.0 million. At December 31, 2020, Park's originated hotels and accommodation loans included in the population of collectively evaluated loans had a balance of $181.4 million with an additional reserve related to valuation risks of $1.8 million.
There is still a significant amount of uncertainty related to the economic impact of COVID-19, including the duration of the pandemic, the risk related to new variants, future government programs that may be established in response to the pandemic, and the resiliency of the U.S. economy. Management will continue to evaluate its estimate of expected credit losses as new information becomes available.
At December 31, 2021 and 2020, Park had $74.4 million and $331.6 million, respectively, of PPP loans which were included in the commercial, financial and agricultural portfolio segment. These loans are guaranteed by the SBA and thus have not been
reserved for using the same methodology as the rest of Park’s loan portfolio. A 10 basis point reserve was calculated for these loans to reflect minimal credit risk at December 31, 2021 and December 31, 2020.
ACL Activity
The activity in the allowance for credit losses for the years ended December 31, 2021, 2020, and 2019 is summarized in the following tables.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2021 |
| (In thousands) | | Commercial, financial and agricultural | | Commercial real estate | | Construction real estate | | Residential real estate | | Consumer | | Leases | | Total |
| Allowance for credit losses: | | | | | | | | | | | | |
| Beginning balance | | $ | 25,608 | | | $ | 23,480 | | | $ | 7,288 | | | $ | 11,363 | | | $ | 17,418 | | | $ | 518 | | | $ | 85,675 | |
| Impact of adopting ASC 326 | | (8,257) | | | 2,119 | | | (1,898) | | | 3,121 | | | 10,925 | | | 80 | | | 6,090 | |
| Charge-offs | | 957 | | | 35 | | | — | | | 49 | | | 4,052 | | | — | | | 5,093 | |
| Recoveries | | (639) | | | (802) | | | (2,299) | | | (941) | | | (3,759) | | | (1) | | | (8,441) | |
| Net charge-offs (recoveries) | | 318 | | | (767) | | | (2,299) | | | (892) | | | 293 | | | (1) | | | (3,348) | |
| (Recovery) Provision | | (3,008) | | | (900) | | | (1,931) | | | (3,952) | | | (1,764) | | | (361) | | | (11,916) | |
| Ending balance | | $ | 14,025 | | | $ | 25,466 | | | $ | 5,758 | | | $ | 11,424 | | | $ | 26,286 | | | 238 | | | $ | 83,197 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2020 |
| (In thousands) | | Commercial, financial and agricultural | | Commercial real estate | | Construction real estate | | Residential real estate | | Consumer | | Leases | | Total |
| Allowance for credit losses: | | | | | | | | | | | | |
| Beginning balance | | $ | 20,203 | | | $ | 10,229 | | | $ | 5,311 | | | $ | 8,610 | | | $ | 12,211 | | | $ | 115 | | | $ | 56,679 | |
| Charge-offs | | 1,468 | | | 1,824 | | | 6 | | | 356 | | | 6,634 | | | 16 | | | 10,304 | |
| Recoveries | | (20,765) | | | (738) | | | (1,122) | | | (991) | | | (3,629) | | | (1) | | | (27,246) | |
| Net (recoveries) charge-offs | | (19,297) | | | 1,086 | | | (1,116) | | | (635) | | | 3,005 | | | 15 | | | (16,942) | |
| (Recovery) Provision | | (13,892) | | | 14,337 | | | 861 | | | 2,118 | | | 8,212 | | | 418 | | | 12,054 | |
| Ending balance | | $ | 25,608 | | | $ | 23,480 | | | $ | 7,288 | | | $ | 11,363 | | | $ | 17,418 | | | $ | 518 | | | $ | 85,675 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2019 |
| (In thousands) | | Commercial, financial and agricultural | | Commercial real estate | | Construction real estate | | Residential real estate | | Consumer | | Leases | | Total |
| Allowance for credit losses: | | | | | | | | | | | | |
| Beginning balance | | $ | 16,777 | | | $ | 9,768 | | | $ | 4,463 | | | $ | 8,731 | | | $ | 11,773 | | | $ | — | | | $ | 51,512 | |
| Charge-offs | | 2,231 | | | 400 | | | — | | | 239 | | | 8,307 | | | — | | | 11,177 | |
| Recoveries | | (1,241) | | | (720) | | | (2,682) | | | (787) | | | (4,742) | | | (1) | | | (10,173) | |
| Net charge-offs (recoveries) | | 990 | | | (320) | | | (2,682) | | | (548) | | | 3,565 | | | (1) | | | 1,004 | |
| Provision (Recovery) | | 4,416 | | | 141 | | | (1,834) | | | (669) | | | 4,003 | | | 114 | | | 6,171 | |
| Ending balance | | $ | 20,203 | | | $ | 10,229 | | | $ | 5,311 | | | $ | 8,610 | | | $ | 12,211 | | | $ | 115 | | | $ | 56,679 | |
ACL Summary
Loans collectively evaluated for impairment in the following tables include all performing loans at December 31, 2021 and December 31, 2020, as well as nonperforming loans internally classified as consumer loans. Nonperforming consumer loans are not typically individually evaluated for impairment, but receive a portion of the statistical allocation of the ACL. Loans individually evaluated for impairment include all impaired loans internally classified as commercial loans at December 31, 2021 and December 31, 2020, which are evaluated for impairment in accordance with U.S. GAAP (See Note 1-Significant Accounting Policies).
The composition of the ACL at December 31, 2021 and December 31, 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| (In thousands) | Commercial,
financial and
agricultural | | Commercial
real estate | | Construction
real estate | | Residential
real estate | | Consumer | | Leases | | Total |
| ACL: | | | | | | | | | | | | | |
| Ending allowance balance attributed to loans: | | | | | | | | | | | | | |
| Individually evaluated for impairment | $ | 1,385 | | $ | 188 | | $ | — | | $ | — | | $ | — | | $ | 43 | | $ | 1,616 |
| Collectively evaluated for impairment | 12,640 | | 25,278 | | 5,758 | | 11,424 | | 26,286 | | 195 | | $ | 81,581 |
| Acquired with deteriorated credit quality | — | | — | | — | | — | | — | | — | | $ | — |
| Total ending allowance balance | $ | 14,025 | | $ | 25,466 | | $ | 5,758 | | $ | 11,424 | | $ | 26,286 | | $ | 238 | | $ | 83,197 |
| | | | | | | | | | | | | |
| Loan balance: | | | | | | | | | | | | | |
| Loans individually evaluated for impairment | $ | 22,666 | | $ | 47,820 | | $ | 222 | | $ | 2,606 | | $ | — | | $ | 1,188 | | $ | 74,502 |
| Loans collectively evaluated for impairment | 1,275,783 | | 1,748,854 | | 320,608 | | 1,735,226 | | 1,689,679 | | 19,321 | | 6,789,471 |
| Loans acquired with deteriorated credit quality | 177 | | 5,118 | | 956 | | 875 | | — | | 23 | | 7,149 |
| Total ending loan balance | $ | 1,298,626 | | $ | 1,801,792 | | $ | 321,786 | | $ | 1,738,707 | | $ | 1,689,679 | | $ | 20,532 | | $ | 6,871,122 |
| | | | | | | | | | | | | |
| ACL as a percentage of loan balance: | | | | | | | | | | | | | |
| Loans individually evaluated for impairment | 6.11 | % | | 0.39 | % | | — | % | | — | % | | — | % | | 3.62 | % | | 2.17 | % |
| Loans collectively evaluated for impairment | 0.99 | % | | 1.45 | % | | 1.80 | % | | 0.66 | % | | 1.56 | % | | 1.01 | % | | 1.20 | % |
| Loans acquired with deteriorated credit quality | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % |
| Total | 1.08 | % | | 1.41 | % | | 1.79 | % | | 0.66 | % | | 1.56 | % | | 1.16 | % | | 1.21 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2020 |
| (In thousands) | | Commercial,
financial and
agricultural | | Commercial
real estate | | Construction
real estate | | Residential
real estate | | Consumer | | Leases | | Total |
| ACL: | | | | | | | | | | | | | | |
| Ending allowance balance attributed to loans: | | | | | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 3,758 | | $ | 1,316 | | $ | — | | $ | 16 | | $ | — | | $ | 344 | | $ | 5,434 |
| Collectively evaluated for impairment | | 21,809 | | 22,093 | | 7,288 | | 11,292 | | 17,418 | | 174 | | $ | 80,074 |
| Acquired with deteriorated credit quality | | 41 | | 71 | | — | | 55 | | — | | — | | 167 |
| Total ending allowance balance | | $ | 25,608 | | $ | 23,480 | | $ | 7,288 | | $ | 11,363 | | $ | 17,418 | | $ | 518 | | $ | 85,675 |
| | | | | | | | | | | | | | |
| Loan balance: | | | | | | | | | | | | | | |
| Loans individually evaluated for impairment | | $ | 28,811 | | $ | 70,334 | | $ | 3,110 | | $ | 4,557 | | $ | — | | $ | 1,595 | | $ | 108,407 |
| Loans collectively evaluated for impairment | | 1,559,842 | | 1,670,510 | | 339,312 | | 1,806,126 | | 1,659,704 | | 22,731 | | 7,058,225 |
Loans acquired with deteriorated credit quality | | 336 | | 7,345 | | 999 | | 2,361 | | — | | 112 | | 11,153 |
| Total ending loan balance | | $ | 1,588,989 | | $ | 1,748,189 | | $ | 343,421 | | $ | 1,813,044 | | $ | 1,659,704 | | $ | 24,438 | | $ | 7,177,785 |
| | | | | | | | | | | | | | |
| ACL as a percentage of loan balance: | | | | | | | | | | | | | | |
| Loans individually evaluated for impairment | | 13.04 | % | | 1.87 | % | | — | % | | 0.35 | % | | — | % | | 21.57 | % | | 5.01 | % |
| Loans collectively evaluated for impairment | | 1.40 | % | | 1.32 | % | | 2.15 | % | | 0.63 | % | | 1.05 | % | | 0.77 | % | | 1.13 | % |
| Loans acquired with deteriorated credit quality | | 12.20 | % | | 0.97 | % | | — | % | | 2.33 | % | | — | % | | — | % | | 1.50 | % |
| Total | | 1.61 | % | | 1.34 | % | | 2.12 | % | | 0.63 | % | | 1.05 | % | | 2.12 | % | | 1.19 | % |
| | | | | | | | | | | | | | |
| Recorded investment: | | | | | | | | | | | | | | |
| Loans individually evaluated for impairment | | $ | 28,836 | | $ | 70,357 | | $ | 3,110 | | $ | 4,557 | | $ | — | | $ | 1,595 | | $ | 108,455 |
| Loans collectively evaluated for impairment | | 1,566,344 | | 1,676,388 | | 340,116 | | 1,808,892 | | 1,664,214 | | 22,745 | | 7,078,699 |
| Loans acquired with deteriorated credit quality | | 337 | | 7,461 | | 1,002 | | 2,372 | | — | | 112 | | 11,284 |
| Total ending recorded investment | | $ | 1,595,517 | | $ | 1,754,206 | | $ | 344,228 | | $ | 1,815,821 | | $ | 1,664,214 | | $ | 24,452 | | $ | 7,198,438 |
0
7. Goodwill and Other Intangible Assets
The following table shows the activity in goodwill and other intangible assets for the years ended December 31, 2021, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Goodwill | | Other
Intangible Assets | | Total |
| January 1, 2019 | | $ | 112,739 | | | $ | 6,971 | | | $ | 119,710 | |
| Acquired goodwill and other intangible assets | | 46,856 | | | 8,207 | | | 55,063 | |
| Amortization | | — | | | 2,355 | | | 2,355 | |
| Trade name intangible impairment | | — | | | 1,300 | | | 1,300 | |
| December 31, 2019 | | $ | 159,595 | | | $ | 11,523 | | | $ | 171,118 | |
| Amortization | | — | | | 2,263 | | | 2,263 | |
| December 31, 2020 | | $ | 159,595 | | | $ | 9,260 | | | $ | 168,855 | |
| Amortization | | — | | | 1,798 | | | 1,798 | |
| December 31, 2021 | | $ | 159,595 | | | $ | 7,462 | | | $ | 167,057 | |
Goodwill
Goodwill impairment exists when a reporting unit's carrying value exceeds its fair value. Park evaluates goodwill for impairment on April 1 of each year, with financial data as of March 31. At April 1, 2021, the Company's reporting unit, PNB, had positive equity and the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. Management continues to monitor economic factors, including economic conditions as a result of the COVID-19 pandemic and responses thereto, to evaluate goodwill impairment.
Acquired Intangible Assets
The following table shows the balance of acquired intangible assets as of December 31, 2021 and 2020.
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
| (in thousands) | Gross Carrying Amount | | Accumulated Amortization/Impairment | | Gross Carrying Amount | | Accumulated Amortization |
| Other intangible assets: | | | | | | | |
| Core deposit intangibles | $ | 14,456 | | | $ | 6,994 | | | $ | 14,456 | | | $ | 5,196 | |
| Trade name intangible | 1,300 | | | 1,300 | | | 1,300 | | | 1,300 | |
| Total | $ | 15,756 | | | $ | 8,294 | | | $ | 15,756 | | | $ | 6,496 | |
During 2019, Park announced its 2020 rebranding initiative to operate all 12 banking divisions of PNB under one name. The NewDominion trade name intangible was initially recorded assuming an indefinite useful life. Considering Park's rebranding initiative, Park concluded that the trade name intangible represented a definite life asset, and impairment of $1.3 million was recorded during 2019.
Core deposit intangibles are being amortized, on an accelerated basis, over a period of ten years. Amortization expense for the core deposit intangibles was $1.8 million, $2.3 million and $2.4 million for the years ended December 31, 2021, 2020 and 2019, respectively.
The following is a schedule of estimated amortization expense for each of the next five years:
| | | | | | | | |
| (in thousands) | | Total |
| 2022 | | $ | 1,487 | |
| 2023 | | 1,323 | |
| 2024 | | 1,215 | |
| 2025 | | 1,042 | |
| 2026 | | 887 | |
8. Loans Held for Sale
Mortgage loans held for sale are carried at their fair value. Mortgage loans held for sale were $9.4 million and $31.7 million at December 31, 2021 and 2020, respectively. These amounts are included in "Loans" on the Consolidated Balance Sheets and in the residential real estate loan segments in Note 5 - Loans and Note 6 - Allowance for Credit Losses. The contractual balance was $9.2 million and $30.9 million at December 31, 2021 and 2020, respectively. The gain expected upon sale was $166,000 and $753,000 at December 31, 2021 and 2020, respectively. None of these loans were 90 days or more past due or on nonaccrual status as of December 31, 2021 or 2020.
During 2020, Park transferred a non-performing loan held for investment, with a book balance of $4.4 million, to the loans held for sale portfolio, and subsequently completed the sale of this non-performing loan held for sale, recognizing no gain or loss on sale. No non-performing loans were held for sale or sold during 2021 or 2019.
9. Foreclosed and Repossessed Assets
Park typically transfers a loan to OREO at the time that Park takes deed/title to the real estate property asset. The carrying amount of foreclosed properties held at December 31, 2021 and December 31, 2020 are listed below, as well as the recorded investment of loans secured by residential real estate properties for which formal foreclosure proceedings were in process at those dates.
| | | | | | | | | | | | | | |
| (in thousands) | | December 31, 2021 | | December 31, 2020 |
| OREO: | | | | |
| Commercial real estate | | $ | — | | | $ | 625 | |
| Residential real estate | | 775 | | | 806 | |
| Total OREO | | $ | 775 | | | $ | 1,431 | |
| | | | |
| Loans in process of foreclosure: | | | | |
| Residential real estate | | $ | 1,148 | | | $ | 1,643 | |
In addition to real estate, Park may also repossess different types of collateral. As of December 31, 2021 and December 31, 2020, Park had $3.3 million and $3.6 million in other repossessed assets which are included in "Other assets" on the Consolidated Balance Sheets. For both periods presented, the other repossessed assets largely consisted of an aircraft acquired as part of a loan workout.
10. Premises and Equipment
The major categories of premises and equipment and accumulated depreciation are summarized as follows:
| | | | | | | | | | | | | | |
| December 31 (In thousands) | | 2021 | | 2020 |
| Land | | $ | 21,992 | | | $ | 22,421 | |
| Buildings | | 97,128 | | | 97,351 | |
Equipment, furniture and fixtures(1) | | 76,675 | | | 89,390 | |
| Leasehold improvements | | 6,436 | | | 6,381 | |
Software(1) | | 24,698 | | | N.A. |
| Total | | $ | 226,929 | | | $ | 215,543 | |
| Less accumulated depreciation | | (137,921) | | | (126,883) | |
| Premises and equipment, net | | $ | 89,008 | | | $ | 88,660 | |
(1) Prior to 2021, software was included within equipment, furniture and fixtures
Depreciation expense amounted to $13.3 million, $10.8 million and $9.1 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Park records leased assets where Park acts as the lessor within "Other assets" on the Consolidated Balance Sheets. Equipment subject to lease agreements at December 31, 2021 and 2020 is summarized below:
| | | | | | | | | | | | | | |
| December 31 (In thousands) | | 2021 | | 2020 |
| Equipment | | $ | 7,298 | | | $ | 8,561 | |
| Less accumulated depreciation | | (4,860) | | | (4,665) | |
| Leased assets, net | | $ | 2,438 | | | $ | 3,896 | |
Depreciation expense on operating lease assets of $1.5 million, $1.8 million, and $1.3 million was recorded for the years ended December 31, 2021, 2020 and 2019, respectively.
11. Investments in Qualified Affordable Housing
Park makes certain equity investments in various limited partnerships that sponsor affordable housing projects. The purposes of these investments are to achieve a satisfactory return on capital, help create affordable housing opportunities, and assist the Company to achieve its goals associated with the Community Reinvestment Act.
As permitted by ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects, Park has elected the proportional amortization method of accounting. Under the proportional amortization method, amortization expense and tax benefits are recognized through the provision for income taxes.
The table below details the balances of Park’s affordable housing tax credit investments and related unfunded commitments as of December 31, 2021 and 2020.
| | | | | | | | | | | |
| (In thousands) | | December 31, 2021 | December 31, 2020 |
| Affordable housing tax credit investments | | $ | 58,711 | | $ | 56,024 | |
| Unfunded commitments | | 28,484 | | 29,298 | |
Commitments are funded when capital calls are made by the general partner of a limited partnership. Park expects that the commitments as of December 31, 2021 will be funded between 2022 and 2032.
During the years ended December 31, 2021, 2020 and 2019, Park recognized amortization expense of $7.3 million, $7.0 million and $6.9 million, respectively, which was included within the provision for income taxes. For the years ended December 31, 2021, 2020 and 2019, Park recognized tax credits and other benefits from its affordable housing tax credit investments of $8.8 million, $8.7 million and $8.8 million, respectively.
12. Deposits
At December 31, 2021 and 2020, non-interest bearing and interest bearing deposits were as follows:
| | | | | | | | | | | | | | |
| December 31 (In thousands) | | 2021 | | 2020 |
| Non-interest bearing | | $ | 3,066,419 | | | $ | 2,727,100 | |
| Interest bearing | | 4,838,109 | | | 4,845,258 | |
| Total | | $ | 7,904,528 | | | $ | 7,572,358 | |
At December 31, 2021, the maturities of time deposits were as follows:
| | | | | | | | |
| (In thousands) | | |
| 2022 | | $ | 450,374 | |
| 2023 | | 158,577 | |
| 2024 | | 40,819 | |
| 2025 | | 36,352 | |
| 2026 | | 25,405 | |
| After 5 years | | 133 | |
| Total | | $ | 711,660 | |
At December 31, 2021 and 2020, respectively, Park had approximately $29.6 million and $20.2 million of deposits received from Park's executive officers, Park directors and related entities of Park directors.
Time deposits that meet or exceed the FDIC insurance limit of $250,000 at December 31, 2021 and 2020 were $65.8 million and $77.2 million, respectively.
13. Repurchase Agreement Borrowings
Securities sold under agreements to repurchase ("repurchase agreements") with customers represent funds deposited by customers, generally on an overnight basis, that are collateralized by investment securities owned by Park. Repurchase agreements with customers are included in "Short-term borrowings" on the Consolidated Balance Sheets.
All repurchase agreements are subject to the terms and conditions of repurchase/security agreements between Park and the client and are accounted for as secured borrowings. Park's repurchase agreements consisted of customer accounts and securities which are pledged on an individual security basis.
At December 31, 2021 and December 31, 2020, Park's repurchase agreement borrowings totaled $213.8 million and $317.2 million, respectively. These borrowings were collateralized with U.S. government sponsored entities' asset-backed securities with a fair value of $334.9 million and $366.0 million at December 31, 2021 and December 31, 2020, respectively. Declines in the value of the collateral would require Park to pledge additional securities. As of December 31, 2021 and December 31, 2020, Park had $1,225 million and $438.6 million, respectively, of available unpledged securities.
The following table presents the carrying value of Park's repurchase agreement borrowings by remaining contractual maturity and collateral pledged at December 31, 2021 and December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| (In thousands) | | Remaining Contractual Maturity of the Agreements |
| | Overnight and Continuous | | Up to 30 days | | 30 - 90 days | | Greater than 90 days | | Total |
| U.S. government sponsored entities' asset-backed securities | | $ | 213,786 | | | $ | — | | | $ | — | | | $ | — | | | $ | 213,786 | |
| | | | | | | | | | |
| | December 31, 2020 |
| (In thousands) | | Remaining Contractual Maturity of the Agreements |
| | Overnight and Continuous | | Up to 30 days | | 30 - 90 days | | Greater than 90 days | | Total |
| U.S. government sponsored entities' asset-backed securities | | $ | 317,230 | | | $ | — | | | $ | — | | | $ | — | | | $ | 317,230 | |
See Note 14 - Short-Term Borrowings for additional information related to repurchase agreements.
14. Short-Term Borrowings
Short-term borrowings were as follows:
| | | | | | | | | | | | | | |
| December 31 (In thousands) | | 2021 | | 2020 |
| Securities sold under agreements to repurchase | | $ | 213,786 | | | $ | 317,230 | |
| FHLB advances | | 25,000 | | | 25,000 | |
| Total short-term borrowings | | $ | 238,786 | | | $ | 342,230 | |
The outstanding balances for all short-term borrowings as of December 31, 2021 and 2020 and the weighted-average interest rates as of and paid during each of the years then ended were as follows:
| | | | | | | | | | | | | | |
| (In thousands) | | Repurchase agreements | | FHLB Advances |
| 2021 | | | | |
| Ending balance | | $ | 213,786 | | | $ | 25,000 | |
| Highest month-end balance | | 297,118 | | | 25,000 | |
| Average daily balance | | 261,967 | | | 25,025 | |
| Weighted-average interest rate: | | | | |
| As of year-end | | 0.03 | % | | 0.23 | % |
Paid during the year (1) | | 0.04 | % | | 0.23 | % |
| 2020 | | | | |
| Ending balance | | $ | 317,230 | | | $ | 25,000 | |
| Highest month-end balance | | 317,230 | | | 25,000 | |
| Average daily balance | | 250,266 | | | 26,751 | |
| Weighted-average interest rate: | | | | |
| As of year-end | | 0.03 | % | | 0.26 | % |
Paid during the year (1) | | 0.19 | % | | 0.80 | % |
(1) Interest rate swaps with notional amounts totaling $25.0 million at both December 31, 2021 and December 31, 2020 were designated as cash flow hedges of certain FHLB advances. Including interest expense related to the swaps, the weighted average interest rate paid during the year on FHLB advances was 2.69% and 2.38% for 2021 and 2020, respectively.
During 2020 and 2021, outstanding FHLB advances were collateralized by investment securities owned by PNB and by various loans pledged under a blanket agreement by PNB. At December 31, 2021 and December 31, 2020, $9.5 million and $13.9 million, respectively, of investment securities were pledged as collateral for FHLB advances. At December 31, 2021 and December 31, 2020, $1,749.3 million and $1,520.5 million, respectively, of commercial real estate and residential mortgage loans were pledged under a blanket agreement to the FHLB by PNB. See Note 13 - Repurchase Agreement Borrowings for information related to investment securities collateralizing repurchase agreements.
15. Long-Term Debt
Long-term debt is listed below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | 2021 | | 2020 |
| (In thousands) | | Outstanding Balance | | Interest Rate | | Outstanding Balance | | Interest Rate |
| Total U.S. Bank term note by year of maturity: | | | | | | | | |
| 2022 | | $ | — | | | — | % | | 32,500 | | | 1.84 | % |
| Total | | $ | — | | | — | % | | 32,500 | | | 1.84 | % |
On February 18, 2020, Park prepaid $50 million of FHLB advances, incurring a $1.8 million prepayment penalty recognized within "FHLB prepayment penalty" on the Consolidated Statement of Income for the year ended December 31, 2020. These advances had an average interest rate of 3.01% and maturity dates of March 14, 2022 and September 15, 2022.
On December 3, 2020, Park prepaid $100 million of FHLB advances, incurring an $8.7 million prepayment penalty recognized within "FHLB prepayment penalty" on the Consolidated Statement of Income for the year ended December 31, 2020. These advances had an interest rate of 3.40% and a maturity date of December 1, 2023.
On June 20, 2019, Park issued a $50 million term note to U.S. Bank National Association. This term note had a maturity date of June 21, 2022 and accrued interest at a floating rate of one-month LIBOR plus 1.65%. On August 2, 2021, Park prepaid the outstanding balance of $27.5 million of the term note to U.S. Bank National Association.
16. Subordinated Notes
As part of the acquisition of Vision's parent bank holding company ("Vision Parent") on March 9, 2007, Park became the successor to Vision Parent under (i) the Amended and Restated Trust Agreement of Vision Bancshares Trust I (the “Trust”), dated as of December 5, 2005, (ii) the Junior Subordinated Indenture, dated as of December 5, 2005, and (iii) the Guarantee Agreement, also dated as of December 5, 2005.
On December 1, 2005, Vision Parent formed a wholly-owned Delaware statutory business trust, Vision Bancshares Trust I (“Trust I”), which issued $15.0 million of Trust I's floating rate preferred securities (the “Trust Preferred Securities”) to institutional investors. These Trust Preferred Securities qualify as Tier I capital under FRB guidelines. All of the common securities of Trust I are owned by Park. The proceeds from the issuance of the common securities and the Trust Preferred Securities were used by Trust I to purchase $15.5 million of junior subordinated notes, which carry a floating rate based on three-month LIBOR plus 148 basis points. The junior subordinated notes represent the sole asset of Trust I. The Trust Preferred Securities accrue and pay distributions at a floating rate of three-month LIBOR plus 148 basis points per annum. The Trust Preferred Securities are mandatorily redeemable upon maturity of the junior subordinated notes in December 2035, or upon earlier redemption as provided in the junior subordinated notes. Since December 30, 2010, Park has had the right to redeem the junior subordinated notes purchased by Trust I in whole or in part. As specified in the indenture, if the junior subordinated notes are redeemed prior to maturity, the redemption price will be the principal amount, plus any unpaid accrued interest. In accordance with U.S. GAAP, Trust I is not consolidated with Park’s financial statements, but rather the subordinated notes are reflected as a liability.
On August 20, 2020, Park completed the issuance and sale of $175 million aggregate principal amount of its 4.50% Fixed-to-Floating Rate Subordinated Notes due 2030 (the "Subordinated Notes"). The Subordinated Notes initially bear a fixed interest rate of 4.50% per year, payable semi-annually in arrears on March 1 and September 1 of each year, commencing on March 1, 2021. Commencing on September 1, 2025, the Subordinated Notes will bear interest at a floating rate per annum equal to the Benchmark rate, which is expected to be Three-Month Term SOFR, plus a spread of 439 basis points for each quarterly interest period during the floating rate period, payable quarterly in arrears; provided, however, that if the Benchmark rate is less than zero, then the Benchmark rate shall be deemed to be zero. The Company may, at its option, beginning with the interest payment date of September 1, 2025 and on any interest payment date thereafter, redeem the Subordinated Notes, in whole or in part, from time to time, subject to obtaining the prior approval of the holders of the Company’s senior indebtedness and of the Federal Reserve Board to the extent the approval of the Federal Reserve Board is then required under the capital adequacy rules of the Federal Reserve Board, at a redemption price equal to 100% of the principal amount of the Subordinated Notes being redeemed, plus accrued and unpaid interest thereon to but excluding the date of redemption. The issuance costs of the Subordinated Notes totaled $2.4 million, which is being amortized through the Subordinated Note call date. At December 31, 2021 and 2020, the Subordinated Notes, net of unamortized issuance costs, totaled $173.2 million and $172.8 million, and qualify as Tier 2 capital for Park under the Federal Reserve Board capital adequacy rules.
17. Derivatives
Park uses certain derivative financial instruments (or "derivatives") to meet the needs of Park's clients while managing the interest rate risk associated with certain transactions. Park does not use derivatives for speculative purposes. A summary of derivative financial instruments utilized by Park follows.
Interest Rate Swaps
Park utilizes interest rate swap agreements as part of Park's asset liability management strategy to help manage Park's interest rate risk position and as a means to meet the financing, interest rate and other risk management needs of qualifying commercial banking customers. The notional amount of the interest rate swaps does not represent the amount exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap
agreements.
Borrowing Derivatives: Interest rate swaps with notional amounts totaling $25.0 million at both December 31, 2021 and December 31, 2020 were designated as cash flow hedges of certain FHLB advances.
Loan Derivatives: In conjunction with the Carolina Alliance acquisition, Park acquired interest rate swaps related to certain commercial loans. Simultaneously with borrowers entering into interest rate swaps, Carolina Alliance entered into offsetting
interest rate swaps executed with a third party, such that Carolina Alliance minimized its net interest rate risk exposure resulting
from such transactions. These interest rate swaps had a notional amount totaling $29.7 million and $33.3 million as of December 31, 2021 and December 31, 2020, respectively.
All of the Company's interest rate swaps were determined to be fully effective during the years ended December 31, 2021 and 2020. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swaps is recorded in other assets and other liabilities with changes in fair value recorded in other comprehensive income. The amount included in accumulated other comprehensive income would be reclassified to current earnings should the hedges no longer be considered effective. Park expects the hedges to remain fully effective during the remaining respective terms of the interest rate swaps.
Summary information about Park's interest rate swaps as of December 31, 2021 and December 31, 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| (In thousands, except weighted average data) | | Borrowing Derivatives | Loan Derivatives | | Borrowing Derivatives | Loan Derivatives |
| Notional amounts | | $ | 25,000 | | $ | 29,651 | | | $ | 25,000 | | $ | 33,310 | |
| Weighted average pay rates | | 2.595 | % | 4.668 | % | | 2.595 | % | 4.695 | % |
| Weighted average receive rates | | 0.124 | % | 4.668 | % | | 0.218 | % | 4.695 | % |
| Weighted average maturity (years) | | 0.5 | 8.2 | | 1.5 | 9.3 |
| Unrealized losses | | $ | 262 | | $ | — | | | $ | 885 | | $ | — | |
Interest expense recorded on swap transactions was $614,000, $423,000 and $42,000 for the years ended December 31, 2021, 2020, and 2019, respectively.
Interest Rate Swaps
The following table presents the net gains (losses), net of income taxes, recorded in OCI and the Consolidated Statements of Income related to interest rate swaps for the years ended December 31, 2021, 2020 and 2019.
| | | | | | | | | | | | | | |
| | Year ended December 31, 2021 |
| (In thousands) | | Amount of Gain (Loss) Recognized in OCI (Effective Portion) | Amount of Gain (Loss) Reclassified from OCI to Interest Income | Amount of Gain (Loss) Recognized in Other Non-interest Income (Ineffective Portion) |
| Interest rate contracts | | $ | 492 | | $ | — | | $ | — | |
| | | | | | | | | | | | | | |
| | Year ended December 31, 2020 |
| (In thousands) | | Amount of Gain (Loss) Recognized in OCI (Effective Portion) | Amount of Gain (Loss) Reclassified from OCI to Interest Income | Amount of Gain (Loss) Recognized in Other Non-interest Income (Ineffective Portion) |
| Interest rate contracts | | $ | (244) | | $ | — | | $ | — | |
| | | | | | | | | | | | | | |
| | Year ended December 31, 2019 |
| (In thousands) | | Amount of Gain (Loss) Recognized in OCI (Effective Portion) | Amount of Gain (Loss) Reclassified from OCI to Interest Income | Amount of Gain (Loss) Recognized in Other Non-interest Income (Ineffective Portion) |
| Interest rate contracts | | $ | (454) | | $ | — | | $ | — | |
The following table reflects the interest rate swaps included in the Consolidated Balance Sheets as of December 31, 2021 and 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | December 31, 2021 | | December 31, 2020 |
| Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| Included in other assets: | | | | | | | | |
| Borrowing derivatives - interest rate swaps related to FHLB advances | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Loan derivatives - instruments associated with loans | | | | | | | | |
| Matched interest rate swaps with borrower | | 29,651 | | | 1,952 | | | 33,310 | | | 3,934 | |
| Matched interest rate swaps with counterparty | | — | | | — | | | — | | | — | |
| Total included in other assets | | $ | 29,651 | | | $ | 1,952 | | | $ | 33,310 | | | $ | 3,934 | |
| | | | | | | | |
| Included in other liabilities: | | | | | | | | |
| Borrowing derivatives - interest rate swaps related to FHLB advances | | $ | 25,000 | | | $ | (262) | | | $ | 25,000 | | | $ | (885) | |
| Loan derivatives - instruments associated with loans | | | | | | | | |
| Matched interest rate swaps with borrower | | — | | | — | | | — | | | — | |
| Matched interest rate swaps with counterparty | | 29,651 | | | (1,952) | | | 33,310 | | | (3,934) | |
| Total included in other liabilities | | $ | 54,651 | | | $ | (2,214) | | | $ | 58,310 | | | $ | (4,819) | |
Mortgage Banking Derivatives
Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. In order to hedge the change in interest rates resulting from the Company's commitments to fund the loans, the Company enters into forward commitments for
the future delivery of mortgage loans when interest rate locks are entered into. These mortgage banking derivatives are not designated in hedge relationships. The fair value of the interest rate locks is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted for the expected exercise of the commitment before the loan is funded. Fair values of these mortgage banking derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked. Changes in the fair values of these derivatives are included in "Other service income" in the Consolidated Statements of Income.
At December 31, 2021 and December 31, 2020, Park had $13.3 million and $58.2 million, respectively, of interest rate lock commitments. The fair value of these mortgage banking derivatives was reflected by a derivative asset of $0.3 million and $1.5 million at December 31, 2021 and December 31, 2020, respectively.
Other Derivatives
In connection with the sale of Park’s Class B Visa shares during 2009, Park entered into a swap agreement with the purchaser of the shares. The swap agreement adjusts for dilution in the conversion ratio of Class B Visa shares resulting from certain Visa litigation. At both December 31, 2021 and 2020, the fair value of the swap liability of $226,000 was an estimate of the exposure based upon probability-weighted potential Visa litigation losses.
18. Share-Based Compensation
The Park National Corporation 2013 Long-Term Incentive Plan (the "2013 Incentive Plan") was adopted by the Board of Directors of Park on January 28, 2013 and was approved by Park's shareholders at the Annual Meeting of Shareholders on April 22, 2013. The 2013 Incentive Plan made equity-based awards and cash-based awards available for grant to participants (who could have been employees or non-employee directors) in the form of incentive stock options (for employees only), nonqualified stock options, SARs, restricted common shares (“Restricted Stock”), restricted stock unit awards that may be settled in common shares, cash or a combination of the two (“Restricted Stock Units”), unrestricted common shares (“Other Stock-Based Awards”) and cash-based awards. Under the 2013 Incentive Plan, 600,000 common shares were authorized to be delivered in connection with grants under the 2013 Incentive Plan. The common shares to be delivered under the 2013 Incentive Plan were to consist of either common shares currently held or common shares subsequently acquired by Park as treasury shares, including common shares purchased in the open market or in private transactions. At December 31, 2021, there were no common shares available to be issued under the 2013 Incentive Plan.
The Park National Corporation 2017 Long-Term Incentive Plan for Employees (the "2017 Employees LTIP") was adopted by the Board of Directors of Park on January 23, 2017 and was approved by Park's shareholders at the Annual Meeting of Shareholders on April 24, 2017. The 2017 Employees LTIP makes equity-based awards and cash-based awards available for grant to employee participants in the form of incentive stock options, nonqualified stock options, SARs, Restricted Stock, Restricted Stock Units, Other Stock-Based Awards and cash-based awards. Under the 2017 Employees LTIP, 750,000 common shares are authorized to be delivered in connection with grants under the 2017 Employees LTIP. The common shares to be delivered under the 2017 Employees LTIP are to consist of either common shares currently held or common shares subsequently acquired by Park as treasury shares, including common shares purchased in the open market or in private transactions. At December 31, 2021, 450,000 common shares were available for future grants under the 2017 Employee LTIP.
The Park National Corporation 2017 Long-Term Incentive Plan for Non-Employee Directors (the "2017 Non-Employee Directors LTIP") was adopted by the Board of Directors of Park on January 23, 2017 and was approved by Park's shareholders at the Annual Meeting of Shareholders on April 24, 2017. The 2017 Non-Employee Directors LTIP makes equity-based awards and cash-based awards available for grant to non-employee director participants in the form of nonqualified stock options, SARs, Restricted Stock, Restricted Stock Units, Other Stock-Based Awards, and cash-based awards. Under the 2017 Non-Employee Directors LTIP, 150,000 common shares are authorized to be delivered in connection with grants under the 2017 Non-Employee Directors LTIP. The common shares to be delivered under the 2017 Non-Employee Directors LTIP are to consist of either common shares currently held or common shares subsequently acquired by Park as treasury shares, including common shares purchased in the open market or in private transactions. At December 31, 2021, 86,850 common shares were available for future grants under the 2017 Non-Employee Directors LTIP.
The 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP have replaced the provisions of the 2013 Incentive Plan with respect to the grant of future awards. As a result of the approval of the 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP, Park willdid not grant any additional awards under the 2013 Incentive Plan after April 24, 2017. Awards made under the 2013 Incentive Plan priorhave either vested or expired.
During 2021, 2020 and 2019, Park granted 13,400, 13,450 and 13,500 common shares, respectively, to April 24,directors of Park and to directors of PNB (and its divisions) under the 2017 will remainNon-Employee Directors LTIP. The common shares granted to directors were not subject to a vesting period and resulted in effectexpense of $1.7 million, $1.3 million, and $1.3 million in accordance with their respective terms.2021, 2020, and 2019, respectively, which is included in professional fees and services on the Consolidated Statements of Income.
On January 23, 2017,
During 2021, 2020 and 2019, the ParkCompensation Committee of the Board of Directors authorized Park to purchase, from time to time, up to an aggregate of 500,000 Common Shares. Purchases may be made through NYSE AMERICAN, in the over-the-counter market or in privately negotiated transactions, in each case in compliance with applicable laws and regulations and the rules applicable to issuers having securities listed on NYSE AMERICAN. Purchases will be made upon such terms and conditions and at such times and in such amounts as any one or more of the authorized officers of Park deem to be appropriate, subject to market conditions, regulatory requirements and other factors, and in the best interestgranted awards of Park and Park's shareholders. The January 23, 2017 stock repurchase authorization is distinct from the stock repurchase authorizations to fundPBRSUs, under the 2017 Employees LTIP, covering an aggregate of 61,890, 62,265 and 58,740 common shares, respectively, to certain employees of Park and its subsidiaries. Additionally, during 2019, Park granted awards of TBRSUs, under the 2017 Non-Employee Directors LTIP.Employees LTIP, covering an aggregate of 15,700 shares to Carolina Alliance Division employees. The number of PBRSUs earned or settled will depend on the level of achievement with respect to certain performance criteria and are also subject to subsequent service-based vesting. The number of TBRSUs earned or settled are subject to service-based vesting.
| |
ITEM 6. | SELECTED FINANCIAL DATA. |
The information called for in this Item 6 is incorporated herein by reference from “Table 41 – Consolidated Five-Year Selected Financial Data” and the accompanying disclosureA summary of changes in the section of Park’s 2017 Annual Report captioned “MANAGEMENT'S DISCUSSION AND ANALYSIS.”
| |
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The information calledcommon shares subject to nonvested PBRSUs and TBRSUs for in this Item 7 is incorporated herein by reference from the section of Park’s 2017 Annual Report captioned “MANAGEMENT'S DISCUSSION AND ANALYSIS.”
| |
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
As noted in Table 17 included in the section of Park’s 2017 Annual Report captioned “MANAGEMENT'S DISCUSSION AND ANALYSIS,” Park’s tax equivalent net interest margin decreased by 4 basis points in 2017 and increased by 13 basis points in 2016. Consistently, over the last several years, Park’s earnings simulation model has projected that changes in interest rates would have only a small impact on net income and the tax equivalent net interest margin. The tax equivalent net interest margin was 3.48%, 3.52% and 3.39% for each of the fiscal years ended December 31, 2017, 20162021 and 2015,2020 follows:
| | | | | |
| Common shares subject to PBRSUs and TBRSUs |
| Nonvested at January 1, 2020 | 194,722 | |
| Granted | 62,265 | |
| Vested | (44,379) | |
| Forfeited | (3,101) | |
Adjustment for performance conditions of PBRSUs (1) | (5,399) | |
| Nonvested at January 1, 2021 | 204,108 | |
| Granted | 61,890 | |
| Vested | (48,106) | |
| Forfeited | (3,522) | |
Adjustment for performance conditions of PBRSUs (1) | (2,551) | |
Nonvested at December 31, 2021 (2) | 211,819 | |
(1) The number of PBRSUs earned depends on the level of achievement with respect to certain performance criteria. Adjustment herein represents the difference between the maximum number of common shares which could be earned and the actual number earned for those PBRSUs as to which the performance period was completed.
(2) Nonvested amount herein represents the maximum number of nonvested PBRSUs and TBRSUs. As of December 31, 2021, an aggregate of 206,827 PBRSUs and TBRSUs are expected to vest.
A summary of awards vested during the twelve months ended December 31, 2021 and 2020 follows:
| | | | | | | | | | | | | | |
| | Twelve Months Ended
December 31, |
| | 2021 | | 2020 |
| PBRSU and TBRSU vested | | 48,106 | | 44,379 |
| Common shares withheld to satisfy employee income tax withholding obligations | | 18,436 | | 14,038 |
| Net common shares issued | | 29,670 | | | 30,341 | |
Share-based compensation expense of $6.3 million, $6.0 million and $5.0 million was recognized for the years ended December 31, 2021, 2020 and 2019, respectively, related to PBRSU and TBRSU awards to employees. The following table details expected additional share-based compensation expense related to PBRSUs and TBRSUs currently outstanding:
| | | | | | | | |
| (In thousands) | | |
| 2022 | | $ | 4,091 | |
| 2023 | | 2,658 | |
| 2024 | | 1,107 | |
| 2025 | | 178 | |
| Total | | $ | 8,034 | |
19. Benefit Plans
The Corporation has a noncontributory Defined Benefit Pension Plan (the “Pension Plan”) covering substantially all of the employees of Park National Corporation and its subsidiaries. The Pension Plan provides benefits based on an employee’s years of service and compensation.
There was no pension contribution in 2021 or 2020 and there is no contribution expected to be made in 2022.
Using accrual measurement dates of December 31, 2021 and 2020, plan assets and benefit obligation activity for the Pension Plan are listed below:
| | | | | | | | | | | | | | |
| (In thousands) | | 2021 | | 2020 |
| Change in fair value of plan assets | | | | |
| Fair value at beginning of measurement period | | $ | 230,442 | | | $ | 210,623 | |
| Actual return on plan assets | | 48,138 | | | 27,800 | |
| Benefits paid | | (15,107) | | | (7,981) | |
| Fair value at end of measurement period | | $ | 263,473 | | | $ | 230,442 | |
| Change in benefit obligation | | | | |
| Projected benefit obligation at beginning of measurement period | | $ | 184,410 | | | $ | 154,419 | |
| Service cost | | 9,916 | | | 8,319 | |
| Interest cost | | 5,359 | | | 5,283 | |
| Actuarial loss | | (1,614) | | | 24,370 | |
| Benefits paid | | (15,107) | | | (7,981) | |
| Projected benefit obligation at the end of measurement period | | $ | 182,964 | | | $ | 184,410 | |
| Funded status at end of year (fair value of plan assets less benefit obligation) | | $ | 80,509 | | | $ | 46,032 | |
The decrease in the projected benefit obligation ("PBO") from $184.4 million as of December 31, 2020 to $183.0 million as of December 31, 2021, was largely the result of an increase in the discount rate from 3.00% to 3.23%. The decrease in the PBO was partially offset by changes due to mortality assumption updates and demographic losses driven by salary increases greater than assumed.
The asset allocation for the Pension Plan as of each measurement date, by asset category, was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | Percentage of Plan Assets |
| Asset category | | Target Allocation | | 2021 | | 2020 |
| Equity securities | | 50% - 100% | | 82 | % | | 84 | % |
| Fixed income and cash equivalents | | remaining balance | | 18 | % | | 16 | % |
| Total | | | | 100 | % | | 100 | % |
The investment policy, as established by the Retirement Plan Committee, is to invest assets according to the target allocation stated above. Assets will be reallocated periodically based on the investment strategy of the Retirement Plan Committee. The investment policy is reviewed periodically.
The expected long-term rate of return on plan assets used to measure the benefit obligation was 6.92% and 7.00% at December 31, 2021 and December 31, 2020, respectively. This return was based on the expected long-term return of each of the asset categories, weighted based on the median of the target allocation for each class.
The accumulated benefit obligation for the Pension Plan was $146.2 million and $149.5 million at December 31, 2021 and 2020, respectively.
On November 17, 2009, the Park Pension Plan completed the purchase of 115,800 common shares of Park for $7.0 million or $60.45 per share. At December 31, 2021 and 2020, the fair value of the 115,800 common shares held by the Pension Plan was $15.9 million, or $137.31 per share and $12.2 million, or $105.01 per share, respectively.
The weighted average assumptions used to determine benefit obligations at December 31, 2021, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| Discount rate | | 3.23 | % | | 3.00 | % | | 3.53 | % |
| Rate of compensation increase | | | | | | |
| Under age 30 | | 8.25 | % | | 8.25 | % | | 10.00 | % |
| Ages 30-39 | | 6.00 | % | | 6.00 | % | | 6.00 | % |
| Ages 40-49 | | 5.00 | % | | 5.00 | % | | 4.00 | % |
| Ages 50-54 | | 4.25 | % | | 4.25 | % | | 3.00 | % |
| Ages 55-59 | | 3.75 | % | | 3.75 | % | | 3.00 | % |
| Ages 60-64 | | 3.50 | % | | 3.50 | % | | 3.00 | % |
| Ages 65 and over | | 3.25 | % | | 3.25 | % | | 3.00 | % |
The estimated future pension benefit payments reflecting expected future service for the next ten years are shown below (in thousands):
| | | | | |
| 2022 | $ | 12,775 | |
| 2023 | 11,500 | |
| 2024 | 12,102 | |
| 2025 | 12,405 | |
| 2026 | 12,360 | |
| 2027-2031 | 61,702 | |
| Total | $ | 122,844 | |
The following table shows ending balances of accumulated other comprehensive loss at December 31, 2021 and 2020.
| | | | | | | | | | | | | | |
| (In thousands) | | 2021 | | 2020 |
| Prior service credit | | $ | 137 | | | $ | 152 | |
| Net actuarial loss | | (7,469) | | | (43,723) | |
| Total | | (7,332) | | | (43,571) | |
| Deferred taxes | | 1,540 | | | 9,150 | |
| Accumulated other comprehensive loss | | $ | (5,792) | | | $ | (34,421) | |
Using actuarial measurement dates of December 31 for 2021, 2020 and 2019, components of net periodic benefit income and other amounts recognized in other comprehensive income (loss) were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | 2021 | | 2020 | | 2019 | Affected Line Item in the Consolidated Statements of Income |
| Components of net periodic benefit income (loss) and other amounts recognized in other comprehensive income (loss) |
| Service cost | | $ | (9,916) | | | $ | (8,319) | | | $ | (5,873) | | Employee benefits |
| Interest cost | | (5,359) | | | (5,283) | | | (5,491) | | Other components of net periodic benefit income |
| Expected return on plan assets | | 15,731 | | | 14,410 | | | 12,105 | | Other components of net periodic benefit income |
| Recognized net actuarial loss and prior service credit | | (2,220) | | | (1,175) | | | (1,882) | | Other components of net periodic benefit income |
| Net periodic benefit loss | | $ | (1,764) | | | $ | (367) | | | $ | (1,141) | | |
| Net actuarial gain (loss) and prior service credit | | $ | 34,019 | | | $ | (10,981) | | | $ | 1,913 | | |
| Amortization of net loss | | 2,220 | | | 1,175 | | | 1,882 | | |
| Total recognized in other comprehensive income (loss) | | 36,239 | | | (9,806) | | | 3,795 | | |
| Total recognized in net benefit income (loss) and other comprehensive income (loss) | | $ | 34,475 | | | $ | (10,173) | | | $ | 2,654 | | |
The weighted average assumptions used to determine net periodic benefit loss for the years ended December 31, 2021, 2020 and 2019 are listed below:
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| Discount rate | | 3.00 | % | | 3.53 | % | | 4.60 | % |
| Rate of compensation increase | | | | | | |
| Under age 30 | | 8.25 | % | | 10.00 | % | | 10.00 | % |
| Ages 30-39 | | 6.00 | % | | 6.00 | % | | 6.00 | % |
| Ages 40-49 | | 5.00 | % | | 4.00 | % | | 4.00 | % |
| Ages 50-54 | | 4.25 | % | | 3.00 | % | | 3.00 | % |
| Ages 55-59 | | 3.75 | % | | 3.00 | % | | 3.00 | % |
| Ages 60-64 | | 3.50 | % | | 3.00 | % | | 3.00 | % |
| Ages 65 and over | | 3.25 | % | | 3.00 | % | | 3.00 | % |
| Expected long-term return on plan assets | | 7.00 | % | | 7.00 | % | | 7.00 | % |
U.S. GAAP defines fair value as the price that would be received by Park for an asset or paid by Park to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date, using the most advantageous market for the asset or liability. The fair values of equity securities, consisting of mutual fund investments and common stock held by the Pension Plan, are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs). Additionally, due to their short-term nature, the fair value of interest bearing demand deposits is determined by reference to their face value (Level 1 inputs). Interest bearing time deposits, United States Government agency obligations and corporate bonds are valued by the trustee based on yields available on comparable securities of issuers with similar credit ratings as of the end of the year (Level 2 inputs). No investments were categorized as Level 3 inputs.
The fair value of the plan assets at December 31, 2021 and December 31, 2020, by asset class, is as follows.
| | | | | | | | | | | | | | |
| Fair Value Measurements | Fair Value Measurements |
| at December 31, 2021, Using | at December 31, 2020, Using |
| (In thousands) | (Level 1) | (Level 2) | (Level 1) | (Level 2) |
| Interest-bearing account | $ | 3,222 | | $ | 4,731 | | $ | 2,785 | | $ | 4,837 | |
| Mutual funds | 60,987 | | — | | 54,461 | | — | |
| U.S. Government agency obligations | — | | 15,254 | | — | | 5,530 | |
| Corporate bonds | — | | 16,815 | | — | | 24,986 | |
| Common stocks | 162,464 | | — | | 137,843 | | — | |
| $ | 226,673 | | $ | 36,800 | | $ | 195,089 | | $ | 35,353 | |
Salary Deferral Plan
The Corporation has a voluntary salary deferral plan (the Corporation's Employees Stock Ownership Plan) covering substantially all of the employees of the Corporation and its subsidiaries. Eligible employees may contribute a portion of their compensation subject to a maximum statutory limitation. The Corporation provides a matching contribution established annually by the Corporation. Contribution expense for the Corporation was $4.3 million, $4.2 million, and $3.9 million for 2021, 2020 and 2019, respectively.
Supplemental Executive Retirement Plan
The Corporation has entered into Supplemental Executive Retirement Plan Agreements (the "SERP Agreements") with certain key officers of Park National Corporation and its subsidiaries which provide defined pension benefits in excess of limits imposed by federal income tax law. The accrued benefit cost for the SERP Agreements totaled $13.4 million and $12.3 million for 2021 and 2020, respectively, and is recorded within "Other liabilities" on the Consolidated Balance Sheets . The expense for the Corporation was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | 2021 | | 2020 | | 2019 | | Affected Line Item in the Consolidated
Statements of Income |
| Service cost | | $ | 1,345 | | | $ | 1,680 | | | $ | 816 | | | Employee benefits |
| Interest cost | | 510 | | | 403 | | | 484 | | | Miscellaneous expense |
| Total SERP expense | | $ | 1,855 | | | $ | 2,083 | | | $ | 1,300 | | | |
20. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Corporation’s deferred tax assets and liabilities are as follows:
| | | | | | | | | | | | | | |
| December 31 (In thousands) | | 2021 | | 2020 |
| Deferred tax assets: | | |
| Allowance for credit losses | | $ | 18,153 | | | $ | 19,512 | |
| Accumulated other comprehensive loss – Pension Plan | | 1,540 | | | 9,150 | |
| Accumulated other comprehensive loss – Unrealized losses on swaps | | 55 | | | 186 | |
| Deferred compensation | | 6,294 | | | 3,887 | |
| OREO valuation adjustments | | 909 | | | 1,012 | |
| Net deferred loan fees | | 2,569 | | | 3,283 | |
| Deferred contract bonus | | 432 | | | 571 | |
| Nonvested equity-based compensation | | 2,694 | | | 2,567 | |
| Net operating loss ("NOL") carryforward | | 3,197 | | | 3,629 | |
| Fixed assets | | 249 | | | — | |
| Operating lease liability | | 3,111 | | | 3,561 | |
| Partnership adjustments | | 69 | | | — | |
| Other | | 1,854 | | | 1,424 | |
| Total deferred tax assets | | $ | 41,126 | | | $ | 48,782 | |
| Deferred tax liabilities: | | | | |
| Accumulated other comprehensive loss - Unrealized gains on securities | | $ | 5,623 | | | $ | 10,507 | |
| Fixed assets | | — | | | 3,360 | |
| Deferred investment income | | 6,363 | | | 6,637 | |
| Pension Plan | | 19,182 | | | 20,407 | |
| MSRs | | 3,333 | | | 2,781 | |
| Partnership adjustments | | — | | | 204 | |
| Purchase accounting adjustments | | 880 | | | 604 | |
| Operating lease right-of-use asset | | 2,917 | | | 3,343 | |
| Lessor adjustments | | 2,764 | | | 3,433 | |
| Other | | 514 | | | 398 | |
| Total deferred tax liabilities | | $ | 41,576 | | | $ | 51,674 | |
| Net deferred tax liability | | $ | (450) | | | $ | (2,892) | |
As of December 31, 2021 and 2020, Park had a net deferred tax asset balance related to federal NOL carryforwards of approximately $2.8 million and $3.1 million, respectively, which expire at various dates from 2031-2039. Park also had a net deferred tax asset balance related to state NOL carryforwards of approximately $0.4 million and $0.5 million at December 31, 2021 and 2020, respectively, which expire at various dates from 2030-2039.
Park performs an analysis to determine if a valuation allowance against deferred tax assets is required in accordance with U.S. GAAP. Management determined that it was not required to establish a valuation allowance against the December 31, 2021 or 2020 deferred tax assets in accordance with U.S. GAAP since it was more likely than not that the deferred tax asset will be fully utilized in future periods.
The components of the provision for federal income taxes are shown below:
| | | | | | | | | | | | | | | | | | | | |
| December 31, (In thousands) | | 2021 | | 2020 | | 2019 |
| Currently payable | | | | | | |
| Federal | | $ | 28,726 | | | $ | 22,769 | | | $ | 14,797 | |
| State | | 1,382 | | | 1,432 | | | 1,191 | |
| Amortization of qualified affordable housing projects | | 7,313 | | | 7,046 | | | 6,927 | |
| | | | | | |
| Deferred | | | | | | |
| Federal | | (3,006) | | | (4,812) | | | (815) | |
| State | | (125) | | | 287 | | | (29) | |
| | | | | | |
| Total | | $ | 34,290 | | | $ | 26,722 | | | $ | 22,071 | |
The following is a reconciliation of income tax expense to the amount computed at the statutory federal corporate income tax rate of 21% for the years ended December 31, 2021, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| Statutory federal corporate income tax rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
| Changes in rates resulting from: | | | | | | |
| Tax exempt interest income, net of disallowed interest | | (1.2) | % | | (1.5) | % | | (2.0) | % |
| Bank owned life insurance | | (0.5) | % | | (0.7) | % | | (0.8) | % |
| Investments in qualified affordable housing projects, net of tax benefits | | (0.8) | % | | (1.1) | % | | (1.5) | % |
| KSOP dividend deduction | | (0.5) | % | | (0.6) | % | | (0.6) | % |
| Other | | 0.2 | % | | 0.2 | % | | 1.6 | % |
| Effective Tax Rate | | 18.2 | % | | 17.3 | % | | 17.7 | % |
Park National Corporation and its subsidiaries do not pay state income tax to the state of Ohio, but pay a franchise tax based on equity. The franchise tax expense is included in "State tax expense" on Park’s Consolidated Statements of Income. Park is also subject to state income tax in various states, including North Carolina and South Carolina. State income tax expense is included in “Income taxes” on Park’s Consolidated Statements of Income. Park’s state income tax expense was $1.0 million, $1.1 million and $1.2 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Unrecognized Tax Benefits
The following is a reconciliation of the beginning and ending amount of unrecognized tax benefits.
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| January 1 Balance | | $ | 633 | | | $ | 954 | | | $ | 1,226 | |
| Additions based on tax positions related to the current year | | 10 | | | 12 | | | 12 | |
| Additions for tax positions of prior years | | — | | | — | | | 2 | |
| Reductions for tax positions of prior years | | — | | | — | | | (3) | |
| Reductions due to statute of limitations | | (304) | | | (333) | | | (283) | |
| December 31 Balance | | $ | 339 | | | $ | 633 | | | $ | 954 | |
The amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in the future periods at December 31, 2021, 2020 and 2019 was $0.3 million, $0.6 million and $0.9 million, respectively. Park does not expect the total amount of unrecognized tax benefits to significantly increase or decrease during the next year.
The income related to interest and penalties recorded on unrecognized tax benefits in the Consolidated Statements of Income for the years ended December 31, 2021, 2020, and 2019 was $45,500, $35,000, and $7,500, respectively. The discussionamount accrued for interest and penalties at December 31, 2021, 2020 and 2019 was $65,500, $111,000 and $146,000, respectively.
Park National Corporation and its subsidiaries are subject to U.S. federal income tax and income tax in various state jurisdictions. The Corporation is subject to routine audits of interest rate sensitivity includedtax returns by the Internal Revenue Service and states in which we conduct business. No material adjustments have been made on closed federal and state tax audits. Generally, all tax years ended prior to December 31, 2018 are closed to examination by federal and state taxing authorities.
21. Accumulated Other Comprehensive Income (Loss)
Other comprehensive income (loss) components, net of income tax, are shown in the sectionfollowing table for the years ended December 31, 2021, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Changes in Pension Plan assets and benefit obligations | | Unrealized gains (losses) on AFS debt securities | | Unrealized net holding loss on cash flow hedge | | Total |
| Beginning balance at January 1, 2021 | | $ | (34,421) | | | $ | 40,690 | | | $ | (698) | | | $ | 5,571 | |
| Other comprehensive income (loss) before reclassifications | | 26,875 | | | (19,537) | | | 492 | | | $ | 7,830 | |
| Amounts reclassified from accumulated other comprehensive loss | | 1,754 | | | — | | | — | | | $ | 1,754 | |
| Net current period other comprehensive income (loss) income | | $ | 28,629 | | | $ | (19,537) | | | $ | 492 | | | $ | 9,584 | |
| Ending balance at December 31, 2021 | | $ | (5,792) | | | $ | 21,153 | | | $ | (206) | | | $ | 15,155 | |
| | | | | | | | | |
| Beginning balance at January 1, 2020 | | $ | (26,674) | | | $ | 17,539 | | | $ | (454) | | | $ | (9,589) | |
| Other comprehensive (loss) income before reclassifications | | (8,675) | | | 25,747 | | | (244) | | | $ | 16,828 | |
| Amounts reclassified from accumulated other comprehensive loss (income) | | 928 | | | (2,596) | | | — | | | $ | (1,668) | |
| Net current period other comprehensive (loss) income | | $ | (7,747) | | | $ | 23,151 | | | $ | (244) | | | $ | 15,160 | |
| Ending balance at December 31, 2020 | | $ | (34,421) | | | $ | 40,690 | | | $ | (698) | | | $ | 5,571 | |
| | | | | | | | | |
| Beginning balance at January 1, 2019 | | $ | (29,672) | | | $ | (20,116) | | | $ | — | | | $ | (49,788) | |
| Other comprehensive income (loss) before reclassifications (1) | | 1,511 | | | 37,322 | | | (454) | | | $ | 38,379 | |
| Amounts reclassified from accumulated other comprehensive loss | | 1,487 | | | 333 | | | — | | | $ | 1,820 | |
| Net current period other comprehensive income (loss) | | $ | 2,998 | | | $ | 37,655 | | | $ | (454) | | | $ | 40,199 | |
| Ending balance at December 31, 2019 | | $ | (26,674) | | | $ | 17,539 | | | $ | (454) | | | $ | (9,589) | |
(1) During the year ended December 31, 2019, Park transferred HTM securities with a fair value of Park’s 2017 Annual Report captioned “MANAGEMENT'S DISCUSSION AND ANALYSIS – CAPITAL RESOURCES – Liquidity$373.9 million to AFS classification. The transfer occurred at fair value and Interest Rate Sensitivity Management” is incorporated hereinhad a related unrealized gain of $24.2 million ($19.1 million net of taxes), recorded in other comprehensive income.
The following table provides information concerning amounts reclassified out of accumulated other comprehensive income (loss) for the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Amount Reclassified from Accumulated Other Comprehensive Income (Loss) | | Affected Line Item in the Consolidated Statements of Income |
| (In thousands) | | 2021 | 2020 | 2019 | | |
| Amortization of defined benefit pension items | | | | | | |
| Amortization of net loss | | $ | 2,220 | | $ | 1,175 | | $ | 1,882 | | | Employee benefits |
| Income before income taxes | | 2,220 | | 1,175 | | 1,882 | | | Income before income taxes |
| Income taxes | | 466 | | 247 | | 395 | | | Income taxes |
| Net of income tax | | $ | 1,754 | | $ | 928 | | $ | 1,487 | | | Net income |
| | | | | | | |
| Unrealized gains & losses on AFS debt securities | | | | | | |
| (Gain) loss on the sale of debt securities | | $ | — | | $ | (3,286) | | $ | 421 | | | Net gain (loss) on the sale of debt securities |
| (Income) loss before income taxes | | — | | (3,286) | | 421 | | | Income before income taxes |
| Income tax (benefit) expense | | — | | (690) | | 88 | | | Income taxes |
| Net of income (benefit) tax | | $ | — | | $ | (2,596) | | $ | 333 | | | Net income |
22. Earnings Per Common Share
U.S. GAAP requires the reporting of basic and diluted earnings per common share. Basic earnings per common share excludes any dilutive effects of PBRSUs and TBRSUs.
The following table sets forth the computation of basic and diluted earnings per common share:
| | | | | | | | | | | | | | | | | | | | |
Year ended December 31
(In thousands, except share data) | | 2021 | | 2020 | | 2019 |
| Numerator: | | | | | | |
| Net income | | $ | 153,945 | | | $ | 127,923 | | | $ | 102,700 | |
| Denominator: | | | | | | |
| Weighted-average common shares outstanding | | 16,291,016 | | | 16,302,825 | | | 16,234,342 | |
| Effect of dilutive PBRSUs and TBRSUs | | 134,190 | | | 104,677 | | | 95,114 | |
| Weighted-average common shares outstanding adjusted for the effect of dilutive PBRSUs and TBRSUs | | 16,425,206 | | | 16,407,502 | | | 16,329,456 | |
| Earnings per common share: | | | | | | |
| Basic earnings per common share | | $ | 9.45 | | | $ | 7.85 | | | $ | 6.33 | |
| Diluted earnings per common share | | $ | 9.37 | | | $ | 7.80 | | | $ | 6.29 | |
Park awarded 61,890, 62,265 and 58,740 PBRSUs to certain employees during the years ended December 31, 2021, 2020 and 2019, respectively. Park awarded 15,700 TBRSUs to Carolina Alliance Division employees during the year ended December 31, 2019.
On April 1, 2019, Park issued 1,037,205 common shares to complete its acquisition of Carolina Alliance.
During the years ended December 31, 2021, 2020 and 2019, Park repurchased 75,000, 76,000 and 86,650 common shares, respectively, to fund the PBRSUs, TBRSUs and common shares awarded to directors of Park and to directors of PNB (and its divisions) and repurchased 62,659 and 334,603 common shares during the years ended December 31, 2021 and 2019, respectively, pursuant to Park's previously announced stock repurchase authorizations. There were no common shares repurchased during the year ended December 31, 2020 pursuant to Park's previously announced stock repurchase authorizations.
23. Dividend Restrictions
Bank regulators limit the amount of dividends a subsidiary bank can declare in any calendar year without obtaining prior approval. At December 31, 2021, approximately $116.8 million of the total shareholders’ equity of PNB was available for the payment of dividends to Park National Corporation, without approval by reference. In addition, the discussion of Park’s commitments, contingent liabilities and off-balance sheet arrangements included in Park’s 2017 Annual Report under the caption “MANAGEMENT'S DISCUSSION AND ANALYSIS – CONTRACTUAL OBLIGATIONS – Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements,” and in Note 23 -applicable regulatory authorities.
24. Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk
The Corporation is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments and standby letters of credit. The financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the Notes to Consolidated Financial Statements includedamount recognized in Park’s 2017 Annual Report, is incorporated herein by reference.
the consolidated financial statements.
| |
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
The Consolidated Balance SheetsCorporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those financial instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.
The total amounts of off-balance sheet financial instruments with credit risk were as follows:
| | | | | | | | | | | | | | |
| December 31 (In thousands) | | 2021 | | 2020 |
| Loan commitments | | $ | 1,364,224 | | | $ | 1,372,182 | |
| Standby letters of credit | | 18,216 | | | 17,015 | |
The loan commitments are generally for variable rates of interest.
The Corporation grants retail, commercial and commercial real estate loans to customers primarily located in Ohio, Kentucky, North Carolina and South Carolina with the exception of nationwide aircraft loans and nationwide asset-based lending to consumer finance companies. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon the extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and real estate.
Although the Corporation has a diversified loan portfolio, a substantial portion of the borrowers’ ability to honor their contracts is dependent upon the economic conditions of the borrowers' respective geographic locations and industries.
25. Loan Servicing
Park and its subsidiariesserviced sold mortgage loans of $2,132 million at December 31, 20172021, compared to $1,972 million at December 31, 2020 and 2016,$1,447 million at December 31, 2019. At December 31, 2021, $3.3 million of the relatedsold mortgage loans were sold with recourse compared to $1.7 million at December 31, 2020 and $2.3 million at December 31, 2019. Management closely monitors the delinquency rates on the mortgage loans sold with recourse. As of December 31, 2021 and 2020, management had established a reserve of $57,000 and $30,000, respectively, to account for future loan repurchases.
When Park sells mortgage loans with servicing rights retained, servicing rights are initially recorded at fair value. Park selected the “amortization method” as permissible within U.S. GAAP, whereby the servicing rights capitalized are amortized in proportion to and over the period of estimated future servicing income of the underlying loan. At the end of each reporting period, the carrying value of MSRs is assessed for impairment with a comparison to fair value. MSRs are carried at the lower of their amortized cost or fair value. The amortization of MSRs is included within "Other service income" in the Consolidated Statements of Income,Income.
Activity for MSRs and the related valuation allowance follows:
| | | | | | | | | | | | | | | | | | | | |
| December 31 (In thousands) | | 2021 | | 2020 | | 2019 |
| MSRs: | | | | | | |
| Carrying amount, net, beginning of year | | $ | 12,210 | | | $ | 10,070 | | | $ | 10,178 | |
| Additions | | 4,945 | | | 8,627 | | | 2,355 | |
| Amortization | | (3,512) | | | (4,123) | | | (1,870) | |
| Change in valuation allowance | | 1,621 | | | (2,364) | | | (593) | |
| Carrying amount, net, end of year | | $ | 15,264 | | | $ | 12,210 | | | $ | 10,070 | |
| Valuation allowance: | | | | | | |
| Beginning of year | | $ | 3,189 | | | $ | 825 | | | $ | 232 | |
| Change in valuation allowance | | (1,621) | | | 2,364 | | | 593 | |
| End of year | | $ | 1,568 | | | $ | 3,189 | | | $ | 825 | |
The fair value of Comprehensive Income,MSRs was $15.3 million and $12.2 million at December 31, 2021 and 2020, respectively. The fair value of ChangesMSRs at December 31, 2021 was established using a discount rate of 12% and constant prepayment speeds ranging from 11.10% to 27.90%. The fair value of MSRs at December 31, 2020 was established using a discount rate of 12% and constant prepayment speeds ranging from 13.20% to 27.54%.
Servicing fees included in Shareholders’ Equityother service income were $5.3 million, $4.1 million and of Cash Flows$3.6 million for the years ended December 31, 2017, 20162021, 2020 and 2015,2019, respectively.
26. Leases
Park is a lessee in several noncancellable operating lease arrangements, primarily for retail branches, administrative and warehouse buildings, ATMs, and certain office equipment within its Ohio, Kentucky, North Carolina, South Carolina,markets. Certain of these leases contain renewal options for periods ranging from one year to five years. Park’s leases generally do not include termination options for either party to the lease or restrictive financial or other covenants. Payments due under the lease contracts include fixed payments plus, for many of Park’s real estate leases, variable payments such as Park's proportionate share of property taxes, insurance, and common area maintenance.
Park elected the practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease components. Additionally, Park has elected not to recognize ROU assets and lease liabilities for short-term leases that have a lease term of 12 months or less. The Company recognizes the lease payments associated with its short-term leases as an expense on a cash basis.
Management determines if an arrangement is or contains a lease at contract inception. If an arrangement is determined to be or contain a lease, Park recognizes a ROU asset and a lease liability at the lease commencement date. Leases are classified as operating or finance leases at the lease commencement date. At December 31, 2021 and 2020, all of Park's leases were classified as operating leases.
Park’s lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. Key estimates and judgments related Notes to Consolidated Financial Statementsthe lease liability include how management determines (1) the discount rate it uses to discount the unpaid lease payments to present value, (2) the lease term, and (3) lease payments.
•ASC 842 requires a lessee to discount its unpaid lease payments using the Reportinterest rate implicit in the lease or, if that interest rate cannot be readily determined, its incremental borrowing rate.Generally, management cannot determine the interest rate implicit in the lease because it does not have access to the lessor’s estimated residual value or the amount of Independent Registered Public Accounting Firm (Crowe Horwath LLP) inthe lessor’s deferred initial direct costs. Therefore, Park utilizes its incremental borrowing rate as the discount rate for leases. Park’s 2017 Annual Report,incremental borrowing rate for a lease is the rate of interest Park would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. To manage its capital and liquidity needs, Park periodically obtains wholesale funding from the FHLB on an over-collateralized basis. The impact of utilizing an interest rate on an over-collateralized borrowing versus a fully collateralized borrowing is not material. Therefore, the FHLB yield curve was selected by management as a baseline to determine Park’s discount rates for leases.
•The lease term for all of the Company’s leases includes the noncancellable period of the lease plus any additional periods covered by either Park's option to extend (or not to terminate) the lease that the Company is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor. If a lease contract contains multiple renewal options, management generally models lease cash flows through the first renewal option period unless the contract contains economic incentives or other conditions that increase the likelihood that additional renewals are incorporated herein by reference. Quarterly Financial Data provided in “Table 42 – Quarterly Financial Data” and the accompanying disclosurereasonably certain to be exercised.
•Lease payments included in the sectionmeasurement of Park’s 2017 Annual Report captioned “MANAGEMENT'S DISCUSSION AND ANALYSIS,”the lease liability are also incorporated hereincomprised of the following:
–Fixed payments, including in-substance fixed payments, owed over the lease term;
–For certain of Park's gross real estate leases, non-lease components such as real estate taxes, insurance, and common area maintenance; and
–Variable lease payments that depend on an index or rate, initially measured using the index or rate at the lease commencement date.
The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Park's operating lease ROU asset and lease liability are presented in “Operating lease right-of-use asset" and "Operating lease liability," respectively, on Park's Consolidated Balance Sheets. The carrying amounts of Park's ROU asset and lease liability at December 31, 2021 were $13.4 million and $14.3 million, respectively. At December 31, 2020, the carrying amounts of Park's ROU assets and lease liability were $15.1 million and $16.1 million, respectively. Park's operating lease expense is recorded in "Occupancy expense" on the Company's Consolidated Statements of Income.
Other information related to operating leases for the years ended December 31, 2021, 2020 and 2019 follows:
| | | | | | | | | | | | | | | | | |
| (in thousands) | Year ended December 31, 2021 | | Year ended December 31, 2020 | | Year ended December 31, 2019 |
| Lease cost | | | | | |
| Operating lease cost | $ | 2,827 | | | $ | 3,463 | | | $ | 3,165 | |
| Sublease income | (253) | | | (352) | | | (383) | |
| Total lease cost | $ | 2,574 | | | $ | 3,111 | | | $ | 2,782 | |
| | | | | |
| Other information | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
| Operating cash flows from operating leases | $ | 3,199 | | | $ | 3,553 | | | $ | 3,192 | |
| ROU assets obtained in exchange for new operating lease liabilities | 1,190 | | | 7,821 | | | 505 | |
| Reductions to ROU assets resulting from reductions to lease obligations | $ | (2,865) | | | $ | (3,084) | | | $ | (2,855) | |
Park's operating leases had a weighted average remaining term of 6.8 years and 7.2 years at December 31, 2021 and 2020, respectively. At both December 31, 2021 and 2020, the weighted average discount rate of Park's operating leases was 2.3%.
Undiscounted cash flows included in lease liabilities at December 31, 2021 have expected contractual payments as follows:
| | | | | |
| (in thousands) | December 31, 2021 |
| 2022 | $ | 3,108 | |
| 2023 | 2,978 | |
| 2024 | 1,880 | |
| 2025 | 1,540 | |
| 2026 | 1,452 | |
| Thereafter | 4,496 | |
| Total undiscounted minimum lease payments | $ | 15,454 | |
| Less: imputed interest | (1,115) | |
| Total lease liabilities | $ | 14,339 | |
In September 2021, the Company entered into a noncancellable operating lease for an additional retail office for an initial term of 12 years, with two five-year renewal options. The lease commences on July 1, 2022, and therefore, is not recognized as of December 31, 2021. The fixed payments due on an undiscounted basis over the noncancellable 12-year period of the lease are $3.5 million. The Company will assess the lease term at the lease commencement date, but does not presently expect that either of the five-year renewal periods will be exercised.
In December 2021, the Company entered into a noncancellable operating lease for an additional retail office for an initial term of 10 years, with two five-year renewal options. The lease is expected to commence sometime during June 2022 and September 2022, and therefore, is not recognized as of December 31, 2021. The fixed payments due on an undiscounted basis over the noncancellable 10-year period of the lease are $3.5 million. The Company will assess the lease term at the lease commencement date, but does not presently expect that either of the five-year renewal periods will be exercised.
27. Fair Value
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that Park uses to measure fair value are as follows:
•Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that Park has the ability to access as of the measurement date.
•Level 2: Level 1 inputs for assets or liabilities that are not actively traded. Also consists of an observable market price for a similar asset or liability. This includes the use of “matrix pricing” to value debt securities absent the exclusive use of quoted prices.
•Level 3: Consists of unobservable inputs that are used to measure fair value when observable market inputs are not available. This could include the use of internally developed models, financial forecasting and similar inputs.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the balance sheet date. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to observable market data for similar assets and liabilities. However, certain assets and liabilities are not traded in observable markets and Park must use other valuation methods to develop a fair value. The fair value of individually evaluated collateral dependent loans is typically based on the fair value of the underlying collateral, which is estimated through third-party appraisals in accordance with Park's valuation requirements under its commercial and real estate loan policies.
Assets and Liabilities Measured at Fair Value on a Recurring Basis:
The following table presents assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2021 using: |
| (In thousands) | | Level 1 | | Level 2 | | Level 3 | | Balance at December 31, 2021 |
| Assets | | | | | | | | |
| Investment securities: | | | | | | | | |
| Obligations of states and political subdivisions | | $ | — | | | $ | 389,591 | | | $ | — | | | $ | 389,591 | |
| U.S. Government sponsored entities’ asset-backed securities | | — | | | 854,463 | | | — | | | 854,463 | |
| Collateralized loan obligations | | — | | | 498,674 | | | — | | | 498,674 | |
| Corporate debt securities | | — | | | 11,412 | | | — | | | 11,412 | |
| Equity securities | | 1,630 | | | — | | | 499 | | | 2,129 | |
| Mortgage loans held for sale | | — | | | 9,387 | | | — | | | 9,387 | |
| Mortgage IRLCs | | — | | | 333 | | | — | | | 333 | |
| Loan interest rate swaps | | — | | | 1,952 | | | — | | | 1,952 | |
| | | | | | | | |
| Liabilities | | | | | | | | |
| Fair value swap | | $ | — | | | $ | — | | | $ | 226 | | | $ | 226 | |
| Borrowing interest rate swap | | — | | | 262 | | | — | | | 262 | |
| Loan interest rate swaps | | — | | | 1,952 | | | — | | | 1,952 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2020 using: |
| (In thousands) | | Level 1 | | Level 2 | | Level 3 | | Balance at December 31, 2020 |
| Assets | | | | | | | | |
| Investment securities: | | | | | | | | |
| Obligations of states and political subdivisions | | $ | — | | | $ | 305,218 | | | $ | — | | | $ | 305,218 | |
| U.S. Government sponsored entities’ asset-backed securities | | — | | | 752,109 | | | — | | | 752,109 | |
| Corporate debt securities | | — | | | 2,014 | | | — | | | 2,014 | |
| Equity securities | | 2,026 | | | — | | | 485 | | | 2,511 | |
| Mortgage loans held for sale | | — | | | 31,666 | | | — | | | 31,666 | |
| Mortgage IRLCs | | — | | | 1,545 | | | — | | | 1,545 | |
| Loan interest rate swaps | | — | | | 3,934 | | | — | | | 3,934 | |
| | | | | | | | |
| Liabilities | | | | | | | | |
| Fair value swap | | $ | — | | | $ | — | | | $ | 226 | | | $ | 226 | |
| Borrowing interest rate swap | | — | | | 885 | | | — | | | 885 | |
| Loan interest rate swaps | | — | | | 3,934 | | | — | | | 3,934 | |
The following methods and assumptions were used by reference.the Company in determining the fair value of the financial assets and liabilities discussed above:
Interest rate swaps:The fair values of interest rate swaps are based on valuation models using observable market data as of the measurement date (Level 2).
Investment securities: Fair values for investment securities are based on quoted market prices, where available (Level 1). If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows (Level 3).
Fair value swap: The fair value of the swap agreement entered into with the purchaser of the Visa Class B shares represents an internally developed estimate of the exposure based upon probability-weighted potential Visa litigation losses and are classified as Level 3..
Mortgage Interest Rate Lock Commitments: Mortgage IRLCs are based on current secondary market pricing and are classified as Level 2.
Mortgage loans held for sale: Mortgage loans held for sale are carried at their fair value. Mortgage loans held for sale are estimated using market prices for similar product types and, therefore, are classified in Level 2.
The table below is a reconciliation of the beginning and ending balances of the Level 3 inputs for the years ended December 31, 2021 and 2020, for financial instruments measured on a recurring basis and classified as Level 3:
| | | | | | | | | | | | | | |
| Level 3 Fair Value Measurements |
| (In thousands) | | Equity Securities | | Fair Value Swap |
| Balance at January 1, 2021 | | $ | 485 | | | $ | (226) | |
| Total Gains | | | | |
| Included in other income | | 14 | | | — | |
| Balance at December 31, 2021 | | $ | 499 | | | $ | (226) | |
| | | | |
| Balance at January 1, 2020 | | $ | 456 | | | $ | (226) | |
| Total Gains | | | | |
| Included in other income | | 29 | | | — | |
| Balance at December 31, 2020 | | $ | 485 | | | $ | (226) | |
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis:
The following methods and assumptions were used by the Company in determining the fair value of assets and liabilities measured at fair value on a nonrecurring basis as described below:
Individually evaluated collateral dependent loans: When a loan is individually evaluated, it is valued at the lower of cost or fair value. Collateral dependent loans which are individually evaluated and carried at fair value have been partially charged off or receive specific allocations of the allowance for credit losses. For collateral dependent loans, fair value is generally based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales approach and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments result in a Level 3 classification of the inputs for determining fair value. Collateral is then adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and the client’s business, resulting in a Level 3 fair value classification. Individually evaluated loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. Additionally, updated independent valuations are obtained annually for all collateral dependent loans in accordance with Company policy.
OREO: Assets acquired through or in lieu of loan foreclosure are initially recorded at fair value less costs to sell when acquired. The carrying value of OREO is not re-measured to fair value on a recurring basis, but is subject to fair value adjustments when the carrying value exceeds the fair value, less estimated selling costs. Fair value is based on recent real estate appraisals and is updated at least annually. These appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales approach and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments result in a Level 3 classification of the inputs for determining fair value.
Appraisals for both individually evaluated collateral dependent loans and OREO are performed by licensed appraisers. Appraisals are generally obtained to support the fair value of collateral. In general, there are three types of appraisals received by the Company: real estate appraisals, income approach appraisals, and lot development loan appraisals. These are discussed below:
•Real estate appraisals typically incorporate measures such as recent sales prices for comparable properties. Appraisers may make adjustments to the sales prices of the comparable properties as deemed appropriate based on the age, condition or general characteristics of the subject property. Management generally applies a 15% discount to real estate appraised values which management expects will cover all disposition costs (including selling costs). This 15% discount is based on historical discounts to appraised values on sold OREO properties.
•Income approach appraisals typically incorporate the annual net operating income of the business divided by an appropriate capitalization rate, as determined by the appraiser. Management generally applies a 15% discount to income approach appraised values which management expects will cover all disposition costs (including selling costs).
•Lot development loan appraisals are typically performed using a discounted cash flow analysis. Appraisers determine an anticipated absorption period and a discount rate that takes into account an investor’s required rate of return based on recent comparable sales. Management generally applies a 6% discount to lot development appraised values, which is an additional discount above the net present value calculation included in the appraisal, to account for selling costs.
Other repossessed assets: Other repossessed assets are initially recorded at fair value less costs to sell when acquired. The carrying value of other repossessed assets is not re-measured to fair value on a recurring basis, but is subject to fair value adjustments when the carrying value exceeds the fair value, less estimated selling costs. As of December 31, 2021 and 2020, other repossessed assets primarily consisted of aircraft acquired as part of a loan workout. Fair value is based on Aircraft Bluebook and VREF Aircraft Value Reference values based on the model of aircraft and adjustments for flight hours, features and other variables. Such adjustments result in a Level 3 classification of the inputs for determining fair value.
MSRs: MSRs are carried at the lower of cost or fair value. MSRs do not trade in active, open markets with readily observable prices. For example, sales of MSRs do occur, but precise terms and conditions typically are not readily available. As such, management, with the assistance of a third-party specialist, determines fair value based on the discounted value of the future cash flows estimated to be received. Significant inputs include the discount rate and assumed prepayment speeds. The calculated fair value is then compared to market values where possible to ascertain the reasonableness of the valuation in relation to current market expectations for similar products. Accordingly, MSRs are classified as Level 2.
The following tables present assets and liabilities measured at fair value on a nonrecurring basis. Individually evaluated collateral dependent loans secured by real estate are carried at fair value if they have been charged down to fair value or if a specific valuation allowance has been established. As of December 31, 2021 and 2020, there were no PCD loans carried at fair value. A new cost basis is established at the time a property is initially recorded in OREO. OREO properties are carried at fair value if a devaluation has been taken with respect to the property's value subsequent to the initial measurement.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2021 Using: |
| (In thousands) | | Level 1 | | Level 2 | | Level 3 | | Balance at December 31, 2021 |
| Individually evaluated collateral dependent loans recorded at fair value: | | | | | | | | |
| Commercial real estate | | $ | — | | | $ | — | | | $ | 831 | | | $ | 831 | |
| Residential real estate | | — | | | — | | | 272 | | | 272 | |
| Total individually evaluated collateral dependent loans recorded at fair value | | $ | — | | | $ | — | | | $ | 1,103 | | | $ | 1,103 | |
| | | | | | | | |
| MSRs | | $ | — | | | $ | 13,482 | | | $ | — | | | $ | 13,482 | |
| | | | | | | | |
| OREO recorded at fair value: | | | | | | | | |
| Residential real estate | | — | | | — | | | 775 | | | 775 | |
| Total OREO recorded at fair value | | $ | — | | | $ | — | | | $ | 775 | | | $ | 775 | |
| | | | | | | | |
| Other repossessed assets | | $ | — | | | $ | — | | | $ | 2,750 | | | $ | 2,750 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2020 Using: |
| (In thousands) | | Level 1 | | Level 2 | | Level 3 | | Balance at December 31, 2020 |
| Impaired loans recorded at fair value: | | | | | | | | |
| Commercial real estate | | $ | — | | | $ | — | | | $ | 6,749 | | | $ | 6,749 | |
| Residential real estate | | — | | | — | | | 175 | | | 175 | |
| Total impaired loans recorded at fair value | | $ | — | | | $ | — | | | $ | 6,924 | | | $ | 6,924 | |
| | | | | | | | |
| MSRs | | $ | — | | | $ | 12,179 | | | $ | — | | | $ | 12,179 | |
| | | | | | | | |
| OREO recorded at fair value: | | | | | | | | |
| Residential real estate | | — | | | — | | | 735 | | | 735 | |
| Total OREO recorded at fair value | | $ | — | | | $ | — | | | $ | 735 | | | $ | 735 | |
| | | | | | | | |
| Other repossessed assets | | $ | — | | | $ | — | | | $ | 3,164 | | | $ | 3,164 | |
The table below provides additional detail on those individually evaluated loans which are recorded at fair value as well as the remaining individually evaluated loan portfolio not included above. The remaining individually evaluated loans consist of 1) loans which are not collateral dependent, 2) loans which are not secured by real estate, and 3) loans carried at cost as the fair value of the underlying collateral or the present value of expected future cash flows on each of the loans exceeded the book value for each respective credit.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| (In thousands) | | Loan
Balance | | Prior Charge-Offs | | Specific Valuation Allowance | | Carrying Balance |
| Total individually evaluated collateral dependent loans recorded at fair value | | $ | 1,291 | | | $ | 240 | | | $ | 188 | | | $ | 1,103 | |
| Remaining individually evaluated loans | | 73,211 | | | 384 | | | 1,428 | | | 71,783 | |
| Total individually evaluated loans | | $ | 74,502 | | | $ | 624 | | | $ | 1,616 | | | $ | 72,886 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| (In thousands) | | Recorded Investment | | Prior Charge-Offs | | Specific Valuation Allowance | | Carrying Balance |
| Impaired loans recorded at fair value | | $ | 8,256 | | | $ | 269 | | | $ | 1,332 | | | $ | 6,924 | |
| Remaining impaired loans | | 100,199 | | | 386 | | | 4,102 | | | 96,097 | |
| Total impaired loans | | $ | 108,455 | | | $ | 655 | | | $ | 5,434 | | | $ | 103,021 | |
The income (expense) from credit adjustments related to individually evaluated/impaired loans carried at fair value for the years ended December 31, 2021, 2020 and 2019 was $0.5 million, $(4.7) million, and $(0.2) million, respectively.
MSRs totaled $15.3 million at December 31, 2021. Of this $15.3 million MSR carrying balance, $13.5 million was recorded at fair value and included a valuation allowance of $1.6 million. The remaining $1.8 million was recorded at cost, as the fair value exceeded cost at December 31, 2021. At December 31, 2020, MSRs totaled $12.2 million. Of this $12.2 million MSR carrying balance, $12.2 million was recorded at fair value and included a valuation allowance of $3.2 million. The remaining $31,000 was recorded at cost, as the fair value exceeded cost at December 31, 2020. The income (expense) related to MSRs carried at fair value for the years ended December 31, 2021, 2020 and 2019 was $1.6 million, $(2.4) million and $(0.6) million, respectively.
Total OREO held by Park at December 31, 2021 and 2020 was $0.8 million and $1.4 million, respectively. Approximately 100% and 51% of OREO held by Park at December 31, 2021 and 2020, respectively, was carried at fair value due to fair value adjustments made subsequent to the initial OREO measurement. At December 31, 2021 and 2020, OREO held at fair value,
less estimated selling costs, amounted to $0.8 million and $0.7 million, respectively. The net (expense) income related to OREO fair value adjustments was $(32,000), $0.1 million and $(0.2) million for the years ended December 31, 2021, 2020 and 2019, respectively.
Other repossessed assets totaled $3.3 million at December 31, 2021, of which $2.8 million were recorded at fair value. Other repossessed asset totaled $3.6 million at December 31, 2020, of which $3.2 million were recorded at fair value. The net expense related to fair value adjustments on other repossessed assets was $414,000 and $435,000 for the years ended December 31, 2021 and 2020, respectively. There was no expense related to fair value adjustments on other repossessed assets for the year ended December 31, 2019.
The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2021 and December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
ITEM 9.December 31, 2021 |
| (In thousands) | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. | Fair Value | | Valuation Technique | | Unobservable Input(s) | | Range (Weighted Average) |
| Individually evaluated collateral dependent loans: | | | | | | | | |
| Commercial real estate | | $ | 831 | | | Sales comparison approach | | Adj to comparables | | 0.0% - 232.0% (28.3%) |
| | | | | | | | |
| Residential real estate | | $ | 272 | | | Sales comparison approach | | Adj to comparables | | 0.5% - 78.6% (11.6%) |
| | | | Cost approach | | Accumulated depreciation | | 8.3% (8.3%) |
| | | | | | | | |
| Other real estate owned: | | | | | | | | |
| Residential real estate | | $ | 775 | | | Sales comparison approach | | Adj to comparables | | 5.0% - 32.5% (19.1%) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| (In thousands) | | Fair Value | | Valuation Technique | | Unobservable Input(s) | | Range (Weighted Average) |
| Impaired loans: | | | | | | | | |
| Commercial real estate | | $ | 6,749 | | | Sales comparison approach | | Adj to comparables | | 0.0% - 139.0% (11.8%) |
| | | | Income approach | | Capitalization rate | | 9.3% - 20.0% (10.3%) |
| | | | Cost approach | | Entrepreneurial profit | | 10.0% (10.0%) |
| | | | Cost approach | | Accumulated depreciation | | 2.6% (2.6%) |
| | | | | | | | |
| Residential real estate | | $ | 175 | | | Sales comparison approach | | Adj to comparables | | 2.0% - 47.8% (11.9%) |
| | | | | | | | |
| Other real estate owned: | | | | | | | | |
| Residential real estate | | $ | 735 | | | Sales comparison approach | | Adj to comparables | | 7.8% - 9.9% (8.9%) |
| | | | | | | | |
Assets Measured at Net Asset Value:
Park's portfolio of equity investments in limited partnerships which provide mezzanine funding ("Partnership Investments") are valued using the NAV practical expedient in accordance with ASC 820.
As of December 31, 2021 and December 31, 2020, Park had Partnerships Investments with a NAV of $18.0 million and $15.4 million, respectively. As of December 31, 2021 and December 31, 2020, Park had $8.4 million and $6.2 million in unfunded commitments related to these Partnership Investments. For the years ended December 31, 2021, 2020 and 2019, Park recognized income of $4.5 million, $2.4 million and $4.8 million, respectively, related to these Partnership Investments.
The fair value of financial instruments at December 31, 2021 and December 31, 2020, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | | | | Fair Value Measurements |
| (In thousands) | | Carrying value | | Level 1 | | Level 2 | | Level 3 | | Total fair value |
| Financial assets: | | | | | | | | | | |
| Cash and money market instruments | | $ | 219,180 | | | $ | 219,180 | | | $ | — | | | $ | — | | | $ | 219,180 | |
Investment securities (1) | | 1,754,140 | | | — | | | 1,754,140 | | | — | | | 1,754,140 | |
Other investment securities (2) | | 2,129 | | | 1,630 | | | — | | | 499 | | | 2,129 | |
| | | | | | | | | | |
| Mortgage loans held for sale | | 9,387 | | | — | | | 9,387 | | | — | | | 9,387 | |
| Mortgage IRLCs | | 333 | | | — | | | 333 | | | — | | | 333 | |
| Individually evaluated loans carried at fair value | | 1,103 | | | — | | | — | | | 1,103 | | | 1,103 | |
| Other loans, net | | 6,777,102 | | | — | | | — | | | 6,783,848 | | | 6,783,848 | |
| Loans receivable, net | | $ | 6,787,925 | | | $ | — | | | $ | 9,720 | | | $ | 6,784,951 | | | $ | 6,794,671 | |
| | | | | | | | | | |
| Financial liabilities: | | | | | | | | | | |
| Time deposits | | $ | 711,660 | | | $ | — | | | $ | 714,307 | | | $ | — | | | $ | 714,307 | |
| Other | | 1,465 | | | 1,465 | | | — | | | — | | | 1,465 | |
| Deposits (excluding demand deposits) | | $ | 713,125 | | | $ | 1,465 | | | $ | 714,307 | | | $ | — | | | $ | 715,772 | |
| | | | | | | | | | |
| Short-term borrowings | | $ | 238,786 | | | $ | — | | | $ | 238,786 | | | $ | — | | | $ | 238,786 | |
| Subordinated notes | | 188,210 | | | — | | | 207,912 | | | — | | | 207,912 | |
| | | | | | | | | | |
| Derivative financial instruments - assets: | | | | | | | | | | |
| Loan interest rate swaps | | 1,952 | | | — | | | 1,952 | | | — | | | 1,952 | |
| | | | | | | | | | |
| Derivative financial instruments - liabilities: | | | | | | | | | | |
| Fair value swap | | $ | 226 | | | $ | — | | | $ | — | | | $ | 226 | | | $ | 226 | |
| Borrowing interest rate swap | | 262 | | | — | | | 262 | | | — | | | 262 | |
| Loan interest rate swaps | | 1,952 | | | — | | | 1,952 | | | — | | | 1,952 | |
(1) Includes debt securities AFS.
(2) Excludes FHLB stock and FRB stock which are carried at their respective redemption values, investment securities accounted for at modified cost as these investments do not have a readily determinable fair value, and Partnership Investments valued using the NAV practical expedient.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | | | | Fair Value Measurements |
| (In thousands) | | Carrying value | | Level 1 | | Level 2 | | Level 3 | | Total fair value |
| Financial assets: | | | | | | | | | | |
| Cash and money market instruments | | $ | 370,474 | | | $ | 370,474 | | | $ | — | | | $ | — | | | $ | 370,474 | |
Investment securities (1) | | 1,059,341 | | | — | | | 1,059,341 | | | — | | | 1,059,341 | |
Other investment securities (2) | | 2,511 | | | 2,026 | | | — | | | 485 | | | 2,511 | |
| | | | | | | | | | |
| Loans held for sale | | 31,666 | | | — | | | 31,666 | | | — | | | 31,666 | |
| Mortgage IRLCs | | 1,545 | | | — | | | 1,545 | | | — | | | 1,545 | |
| Impaired loans carried at fair value | | 6,924 | | | — | | | — | | | 6,924 | | | 6,924 | |
| Other loans, net | | 7,051,975 | | | — | | | — | | | 7,072,339 | | | 7,072,339 | |
| Loans receivable, net | | $ | 7,092,110 | | | $ | — | | | $ | 33,211 | | | $ | 7,079,263 | | | $ | 7,112,474 | |
| | | | | | | | | | |
| Financial liabilities: | | | | | | | | | | |
| Time deposits | | $ | 864,573 | | | $ | — | | | $ | 870,804 | | | $ | — | | | $ | 870,804 | |
| Other | | 1,379 | | | 1,379 | | | — | | | — | | | 1,379 | |
| Deposits (excluding demand deposits) | | $ | 865,952 | | | $ | 1,379 | | | $ | 870,804 | | | $ | — | | | $ | 872,183 | |
| | | | | | | | | | |
| Short-term borrowings | | $ | 342,230 | | | $ | — | | | $ | 342,230 | | | $ | — | | | $ | 342,230 | |
| Long-term debt | | 32,500 | | | — | | | 31,376 | | | — | | | 31,376 | |
| Subordinated notes | | 187,774 | | | — | | | 179,147 | | | — | | | 179,147 | |
| | | | | | | | | | |
| Derivative financial instruments - assets: | | | | | | | | | | |
| Loan interest rate swaps | | 3,934 | | | — | | | 3,934 | | | — | | | 3,934 | |
| | | | | | | | | | |
| Derivative financial instruments - liabilities: | | | | | | | | | | |
| Fair value swap | | $ | 226 | | | $ | — | | | $ | — | | | $ | 226 | | | $ | 226 | |
| Borrowing interest rate swap | | 885 | | | — | | | 885 | | | — | | | 885 | |
| Loan interest rate swaps | | 3,934 | | | — | | | 3,934 | | | — | | | 3,934 | |
(1) Includes debt securities AFS.
(2) Excludes FHLB stock and FRB stock which are carried at their respective redemption values, investment securities accounted for at modified cost as these investments do not have a readily determinable fair value, and Partnership Investments valued using the NAV practical expedient.
28. Capital Ratios
Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank holding companies. During the first quarter of 2015, Park adopted the Basel III regulatory capital framework as approved by the federal banking agencies. The adoption of this framework modified the calculation of the various capital ratios, added an additional ratio, common equity tier 1, and revised the adequately and well-capitalized thresholds under the prompt corrective action regulations applicable to PNB. Additionally, under this framework, in order to avoid limitations on capital distributions, including dividend payments and stock repurchases, Park must hold a capital conservation buffer of 2.50% above the adequately capitalized risk-based capital ratios. The Federal Reserve Board also adopted requirements Park must maintain to be deemed "well-capitalized" and to remain a financial holding company.
Each of PNB and Park met all of the well-capitalized ratio guidelines applicable to it at December 31, 2021. The following table indicates the capital ratios for PNB and Park at December 31, 2021 and 2020.
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| | Leverage | | Tier 1
Risk-Based | | Common Equity Tier 1 | | Total
Risk-Based |
| PNB | 8.58 | % | | 11.05 | % | | 11.05 | % | | 12.56 | % |
| Park | 9.77 | % | | 12.57 | % | | 12.37 | % | | 16.05 | % |
| Adequately capitalized ratio | 4.00 | % | | 6.00 | % | | 4.50 | % | | 8.00 | % |
| Adequately capitalized ratio plus capital conservation buffer | 4.00 | % | | 8.50 | % | | 7.00 | % | | 10.50 | % |
| Well-capitalized ratio - PNB | 5.00 | % | | 8.00 | % | | 6.50 | % | | 10.00 | % |
| Well-capitalized ratio - Park | N/A | | 6.00 | % | | N/A | | 10.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| | Leverage | | Tier 1
Risk-Based | | Common Equity Tier 1 | | Total
Risk-Based |
| PNB | 8.59 | % | | 10.66 | % | | 10.66 | % | | 12.16 | % |
| Park | 9.63 | % | | 11.92 | % | | 11.72 | % | | 15.43 | % |
| Adequately capitalized ratio | 4.00 | % | | 6.00 | % | | 4.50 | % | | 8.00 | % |
| Adequately capitalized ratio plus capital conservation buffer | 4.00 | % | | 8.50 | % | | 7.00 | % | | 10.50 | % |
| Well-capitalized ratio - PNB | 5.00 | % | | 8.00 | % | | 6.50 | % | | 10.00 | % |
| Well-capitalized ratio - Park | N/A | | 6.00 | % | | N/A | | 10.00 | % |
The following table reflects various measures of capital for Park and PNB:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | To Be Adequately Capitalized | | To Be Well-Capitalized |
| (In thousands) | | Actual Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| At December 31, 2021 | | | | | | | | | | | | |
Total Risk-Based Capital
(to risk-weighted assets) | | | | | | | | | | | | |
| PNB | | $ | 937,438 | | | 12.56 | % | | $ | 597,094 | | | 8.00 | % | | $ | 746,368 | | | 10.00 | % |
| Park | | 1,202,225 | | | 16.05 | % | | 599,102 | | | 8.00 | % | | 748,878 | | | 10.00 | % |
Tier 1 Risk-Based Capital
(to risk-weighted assets) | | | | | | | | | | | | |
| PNB | | $ | 825,045 | | | 11.05 | % | | $ | 447,821 | | | 6.00 | % | | $ | 597,094 | | | 8.00 | % |
| Park | | 941,536 | | | 12.57 | % | | 449,327 | | | 6.00 | % | | 449,327 | | | 6.00 | % |
Leverage Ratio
(to average total assets) | | | | | | | | | | | | |
| PNB | | $ | 825,045 | | | 8.58 | % | | $ | 384,582 | | | 4.00 | % | | $ | 480,728 | | | 5.00 | % |
| Park | | 941,536 | | | 9.77 | % | | 385,313 | | | 4.00 | % | | N/A | | N/A |
Common Equity Tier 1
(to risk-weighted assets) | | | | | | | | | | | | |
| PNB | | $ | 825,045 | | | 11.05 | % | | $ | 335,866 | | | 4.50 | % | | $ | 485,139 | | | 6.50 | % |
| Park | | 926,536 | | | 12.37 | % | | 336,995 | | | 4.50 | % | | N/A | | N/A |
| | | | | | | | | | | | |
| At December 31, 2020 | | | | | | | | | | | | |
Total Risk-Based Capital
(to risk-weighted assets) | | | | | | | | | | | | |
| PNB | | $ | 891,585 | | | 12.16 | % | | $ | 586,764 | | | 8.00 | % | | $ | 733,455 | | | 10.00 | % |
| Park | | 1,137,305 | | | 15.43 | % | | 589,619 | | | 8.00 | % | | 737,023 | | | 10.00 | % |
Tier 1 Risk-Based Capital
(to risk-weighted assets) | | | | | | | | | | | | |
| PNB | | $ | 782,148 | | | 10.66 | % | | $ | 440,073 | | | 6.00 | % | | $ | 586,764 | | | 8.00 | % |
| Park | | 878,740 | | | 11.92 | % | | 442,214 | | | 6.00 | % | | 442,214 | | | 6.00 | % |
Leverage Ratio
(to average total assets) | | | | | | | | | | | | |
| PNB | | $ | 782,148 | | | 8.59 | % | | $ | 364,079 | | | 4.00 | % | | $ | 455,098 | | | 5.00 | % |
| Park | | 878,740 | | | 9.63 | % | | 365,143 | | | 4.00 | % | | N/A | | N/A |
Common Equity Tier 1
(to risk-weighted assets) | | | | | | | | | | | | |
| PNB | | 782,148 | | | 10.66 | % | | 330,055 | | | 4.50 | % | | 476,746 | | | 6.50 | % |
| Park | | 863,740 | | | 11.72 | % | | 331,661 | | | 4.50 | % | | N/A | | N/A |
29. Segment Information
The Corporation is a financial holding company headquartered in Newark, Ohio. The reportable segment for the Corporation is its chartered national bank subsidiary, PNB (headquartered in Newark, Ohio). "All Other", which primarily consists of Park as the "Parent Company", SEPH and GFSC, is shown to reconcile the segment totals to the Consolidated Statements of Income.
U.S. GAAP requires management to disclose information about the different types of business activities in which a company engages and also information on the different economic environments in which a company operates, so that the users of the financial statements can better understand a company’s performance, better understand the potential for future cash flows, and make more informed judgments about the company as a whole. Park has one reportable segment as: (i) discrete financial information is available for this reportable segment and (ii) this segment is aligned with internal reporting to Park’s Chief Executive Officer, who is the chief operating decision-maker.
| | | | | | | | | | | | | | | | | | | | |
| Operating results for the year ended December 31, 2021 (In thousands) |
| | PNB | | All Other | | Total |
| Net interest income | | $ | 328,398 | | | $ | 1,495 | | | $ | 329,893 | |
| Recovery of credit losses | | (8,554) | | | (3,362) | | | (11,916) | |
| Other income | | 126,802 | | | 3,142 | | | 129,944 | |
| Other expense | | 266,678 | | | 16,840 | | | 283,518 | |
| Income before income taxes | | 197,076 | | | (8,841) | | | 188,235 | |
| Income tax expense (benefit) | | 37,615 | | | (3,325) | | | 34,290 | |
| Net income (loss) | | $ | 159,461 | | | $ | (5,516) | | | $ | 153,945 | |
| Balances at December 31, 2021 |
| Assets | | $ | 9,538,217 | | | $ | 22,037 | | | $ | 9,560,254 | |
| Loans | | 6,868,935 | | | 2,187 | | | 6,871,122 | |
| Deposits | | 8,157,720 | | | (253,192) | | | 7,904,528 | |
| | | | | | | | | | | | | | | | | | | | |
| Operating results for the year ended December 31, 2020 (In thousands) |
| | PNB | | All Other | | Total |
| Net interest income | | $ | 326,375 | | | $ | 1,255 | | | $ | 327,630 | |
| Provision for (recovery of) credit losses | | 30,813 | | | (18,759) | | | 12,054 | |
| Other income | | 124,231 | | | 1,433 | | | 125,664 | |
| Other expense | | 268,938 | | | 17,657 | | | 286,595 | |
| Income before income taxes | | 150,855 | | | 3,790 | | | 154,645 | |
| Income tax expense (benefit) | | 27,125 | | | (403) | | | 26,722 | |
| Net income | | $ | 123,730 | | | $ | 4,193 | | | $ | 127,923 | |
| Balances at December 31, 2020 |
| Assets | | $ | 9,236,915 | | | $ | 42,106 | | | $ | 9,279,021 | |
| Loans | | 7,165,840 | | | 11,945 | | | 7,177,785 | |
| Deposits | | 7,820,983 | | | (248,625) | | | 7,572,358 | |
| | | | | | | | | | | | | | | | | | | | |
| Operating results for the year ended December 31, 2019 (In thousands) |
| | PNB | | All Other | | Total |
| Net interest income | | $ | 293,130 | | | $ | 4,607 | | | $ | 297,737 | |
| Provision for (recovery of) credit losses | | 8,356 | | | (2,185) | | | 6,171 | |
| Other income | | 92,392 | | | 4,801 | | | 97,193 | |
| Other expense | | 237,433 | | | 26,555 | | | 263,988 | |
| Income (loss) before income taxes | | 139,733 | | | (14,962) | | | 124,771 | |
| Income tax expense (benefit) | | 26,133 | | | (4,062) | | | 22,071 | |
| Net income (loss) | | $ | 113,600 | | | $ | (10,900) | | | $ | 102,700 | |
| Balances at December 31, 2019 | | | | | | |
| Assets | | $ | 8,521,537 | | | $ | 36,840 | | | $ | 8,558,377 | |
| Loans | | 6,481,644 | | | 19,760 | | | 6,501,404 | |
| Deposits | | 7,125,111 | | | (72,499) | | | 7,052,612 | |
The operating results in the "All Other" column are used to reconcile the segment totals to the Consolidated Statements of Income. The reconciling amounts for consolidated total assets, loans and deposits consist of the elimination of intersegment borrowings, intersegment loans, intersegment deposits, and the assets of the Parent Company, SEPH and GFSC which were not eliminated.
The following is a reconciliation of financial information for the reportable segments to the Corporation’s consolidated totals:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 |
| (In thousands) | | Net Interest Income | | Depreciation Expense | | Other Expense | | Income Taxes | | Assets | | Deposits |
| Totals for reportable segments | | $ | 328,398 | | | $ | 13,265 | | | $ | 253,413 | | | $ | 37,615 | | | $ | 9,538,217 | | | $ | 8,157,720 | |
| Elimination of intersegment items | | 1,250 | | | — | | | — | | | — | | | (1,413) | | | (254,060) | |
| All other totals - not eliminated | | 245 | | | 2 | | | 16,838 | | | (3,325) | | | 23,450 | | | 868 | |
| Totals | | $ | 329,893 | | | $ | 13,267 | | | $ | 270,251 | | | $ | 34,290 | | | $ | 9,560,254 | | | $ | 7,904,528 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 |
| (In thousands) | | Net Interest Income | | Depreciation Expense | | Other Expense | | Income Taxes | | Assets | | Deposits |
| Totals for reportable segments | | $ | 326,375 | | | $ | 10,803 | | | $ | 258,135 | | | $ | 27,125 | | | $ | 9,236,915 | | | $ | 7,820,983 | |
| Elimination of intersegment items | | 1,250 | | | — | | | — | | | — | | | (1,028) | | | (250,965) | |
| All other totals - not eliminated | | 5 | | | 11 | | | 17,646 | | | (403) | | | 43,134 | | | 2,340 | |
| Totals | | $ | 327,630 | | | $ | 10,814 | | | $ | 275,781 | | | $ | 26,722 | | | $ | 9,279,021 | | | $ | 7,572,358 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2019 |
| (In thousands) | | Net Interest Income | | Depreciation Expense | | Other Expense | | Income Taxes | | Assets | | Deposits |
| Totals for reportable segments | | $ | 293,130 | | | $ | 9,089 | | | $ | 228,344 | | | $ | 26,133 | | | $ | 8,521,537 | | | $ | 7,125,111 | |
| Elimination of intersegment items | | 1,250 | | | — | | | — | | | — | | | (18,910) | | | (76,418) | |
| All other totals - not eliminated | | 3,357 | | | 23 | | | 26,532 | | | (4,062) | | | 55,750 | | | 3,919 | |
| Totals | | $ | 297,737 | | | $ | 9,112 | | | $ | 254,876 | | | $ | 22,071 | | | $ | 8,558,377 | | | $ | 7,052,612 | |
30. Parent Company Statements
The Parent Company statements should be read in conjunction with the consolidated financial statements and the information set forth below. Investments in subsidiaries are accounted for using the equity method of accounting.
Cash represents non-interest bearing deposits with PNB. Net cash provided by operating activities reflects cash payments (received from subsidiaries) partially offset by cash payments to government entities for income taxes of $4.3 million, $5.6 million and $5.3 million in 2021, 2020 and 2019, respectively.
| | | | | | | | | | | | | | |
| Condensed Balance Sheets |
| December 31, 2021 and 2020 |
| (In thousands) | | 2021 | | 2020 |
| Assets: | | | | |
| Cash | | $ | 243,531 | | | $ | 248,814 | |
| Investment in subsidiaries | | 1,020,556 | | | 969,054 | |
| Debentures receivable from PNB | | 25,000 | | | 25,000 | |
| Other receivables from subsidiaries | | — | | | 1,823 | |
| Other investments | | 3,327 | | | 5,375 | |
| Other assets | | 16,909 | | | 23,333 | |
| Total assets | | $ | 1,309,323 | | | $ | 1,273,399 | |
| Liabilities: | | | | |
| Long-term debt | | $ | — | | | $ | 32,500 | |
| Subordinated notes | | 188,210 | | | 187,774 | |
| Other payables to subsidiaries | | — | | | 132 | |
| Other liabilities | | 10,354 | | | 12,737 | |
| Total liabilities | | $ | 198,564 | | | $ | 233,143 | |
| Total shareholders’ equity | | $ | 1,110,759 | | | $ | 1,040,256 | |
| Total liabilities and shareholders’ equity | | $ | 1,309,323 | | | $ | 1,273,399 | |
| | | | | | | | | | | | | | | | | | | | |
| Condensed Statements of Income |
| for the years ended December 31, 2021, 2020 and 2019 |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Income: | | | | | | |
| Dividends from subsidiaries | | $ | 115,500 | | | $ | 97,000 | | | $ | 97,500 | |
| Interest and dividends | | 1,250 | | | 1,250 | | | 1,250 | |
| Other | | 2,016 | | | 98 | | | 4,634 | |
| Total income | | 118,766 | | | 98,348 | | | 103,384 | |
| Expense: | | | | | | |
| Interest expense | | 8,887 | | | 4,311 | | | 1,950 | |
| Other, net | | 10,707 | | | 12,234 | | | 19,804 | |
| Total expense | | 19,594 | | | 16,545 | | | 21,754 | |
| Income before income taxes and equity in undistributed income of subsidiaries | | $ | 99,172 | | | $ | 81,803 | | | $ | 81,630 | |
| Income tax benefit | | 4,897 | | | 4,390 | | | 4,242 | |
| Income before equity in undistributed income of subsidiaries | | 104,069 | | | 86,193 | | | 85,872 | |
| Equity in undistributed income of subsidiaries | | 49,876 | | | 41,730 | | | 16,828 | |
| Net income | | $ | 153,945 | | | $ | 127,923 | | | $ | 102,700 | |
Other comprehensive income (1) | | 9,584 | | | 15,160 | | | 40,199 | |
| Comprehensive income | | $ | 163,529 | | | $ | 143,083 | | | $ | 142,899 | |
(1) See Consolidated Statements of Comprehensive Income for other comprehensive income (loss) detail.
| | | | | | | | | | | | | | | | | | | | |
| Statements of Cash Flows |
| for the years ended December 31, 2021, 2020 and 2019 |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Operating activities: | | | | | | |
| Net income | | $ | 153,945 | | | $ | 127,923 | | | $ | 102,700 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Undistributed income of subsidiaries | | (49,876) | | | (41,730) | | | (16,828) | |
| Compensation expense for issuance of treasury shares to directors | | 1,676 | | | 1,274 | | | 1,325 | |
| Share-based compensation expense | | 6,345 | | | 5,998 | | | 4,999 | |
| (Loss) gain on equity securities, net | | (1,218) | | | 245 | | | (4,204) | |
| Decrease (increase) in other assets | | 8,249 | | | 6,632 | | | (8,544) | |
| (Decrease) increase in other liabilities | | (2,407) | | | (6,325) | | | 10,006 | |
| Net cash provided by operating activities | | 116,714 | | | 94,017 | | | 89,454 | |
| Investing activities: | | | | | | |
| Proceeds from sales of securities | | 934 | | | — | | | — | |
| Outlays for business acquisitions | | — | | | — | | | (28,630) | |
| Other, net | | 2,332 | | | (2,621) | | | 5,723 | |
| Net cash provided by (used in) investing activities | | 3,266 | | | (2,621) | | | (22,907) | |
| Financing activities: | | | | | | |
| Cash dividends paid | | (74,306) | | | (70,353) | | | (69,113) | |
| Proceeds from issuance of long-term debt | | — | | | 172,620 | | | 50,000 | |
| Repayment of long-term debt | | (32,500) | | | (10,000) | | | (7,500) | |
| Repurchase of treasury shares | | (16,048) | | | (7,507) | | | (40,535) | |
| Cash payment for fractional shares | | (6) | | | (3) | | | (3) | |
| Value of common shares withheld to pay employee income taxes | | (2,403) | | | (1,002) | | | (827) | |
| Net cash (used in) provided by financing activities | | (125,263) | | | 83,755 | | | (67,978) | |
| (Decrease) increase in cash | | (5,283) | | | 175,151 | | | (1,431) | |
| | | | | | |
| Cash at beginning of year | | 248,814 | | | 73,663 | | | 75,094 | |
| Cash at end of year | | $ | 243,531 | | | $ | 248,814 | | | $ | 73,663 | |
31. Revenue from Contracts with Customers
All of Park's revenue from contracts with customers within the scope of ASC 606 is recognized within "Other income" in the Consolidated Statements of Income. The following table presents the Corporation's sources of other income by revenue stream and operating segment for the years ended December 31, 2021, 2020, and 2019
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2021 |
| Revenue by Operating Segment (in thousands) | | PNB | | All Other | | Total |
| Income from fiduciary activities | | | | | | |
| Personal trust and agency accounts | | $ | 10,264 | | | $ | — | | | $ | 10,264 | |
| Employee benefit and retirement-related accounts | | 9,705 | | | — | | | 9,705 | |
| Investment management and investment advisory agency accounts | | 12,620 | | | — | | | 12,620 | |
| Other | | 1,860 | | | — | | | 1,860 | |
| Service charges on deposit accounts | | | | | | |
| Non-sufficient funds (NSF) fees | | 5,244 | | | — | | | 5,244 | |
| Demand deposit account (DDA) charges | | 3,074 | | | — | | | 3,074 | |
| Other | | 514 | | | — | | | 514 | |
Other service income (1) | | | | | | |
| Credit card | | 2,559 | | | 4 | | | 2,563 | |
| HELOC | | 389 | | | — | | | 389 | |
| Installment | | 148 | | | — | | | 148 | |
| Real estate | | 24,907 | | | — | | | 24,907 | |
| Commercial | | 1,280 | | | 525 | | | 1,805 | |
| Debit card fee income | | 25,865 | | | — | | | 25,865 | |
Bank owned life insurance income (2) | | 4,202 | | | 695 | | | 4,897 | |
| ATM fees | | 2,379 | | | — | | | 2,379 | |
| Loss on the sale of OREO, net | | (4) | | | — | | | (4) | |
Gain on equity securities, net (2) | | 3,793 | | | 1,218 | | | 5,011 | |
Other components of net periodic pension benefit income (2) | | 7,946 | | | 206 | | | 8,152 | |
Miscellaneous (3) | | 10,057 | | | 494 | | | 10,551 | |
| Total other income | | $ | 126,802 | | | $ | 3,142 | | | $ | 129,944 | |
(1) Of the $29.8 million of revenue included within "Other service income", approximately $5.3 million is within the scope of ASC 606, with the remaining $24.5 million consisting primarily of residential real estate loan fees which are out of scope.
(2) Not within the scope of ASC 606.
(3) "Miscellaneous" income includes brokerage income, safe deposit box rentals, and miscellaneous bank fees totaling $10.6 million, all of which are within the scope of ASC 606.
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2020 |
| Revenue by Operating Segment (in thousands) | | PNB | | All Other | | Total |
| Income from fiduciary activities | | | | | | |
| Personal trust and agency accounts | | $ | 8,761 | | | $ | — | | | $ | 8,761 | |
| Employee benefit and retirement-related accounts | | 7,921 | | | — | | | 7,921 | |
| Investment management and investment advisory agency accounts | | 10,652 | | | — | | | 10,652 | |
| Other | | 1,539 | | | — | | | 1,539 | |
| Service charges on deposit accounts | | | | | | |
| Non-sufficient funds (NSF) fees | | 4,999 | | | — | | | 4,999 | |
| Demand deposit account (DDA) charges | | 2,920 | | | — | | | 2,920 | |
| Other | | 526 | | | — | | | 526 | |
Other service income (1) | | | | | | |
| Credit card | | 2,108 | | | 4 | | | 2,112 | |
| HELOC | | 424 | | | — | | | 424 | |
| Installment | | 165 | | | — | | | 165 | |
| Real estate | | 32,827 | | | 62 | | | 32,889 | |
| Commercial | | 1,493 | | | 528 | | | 2,021 | |
| Debit card fee income | | 22,160 | | | — | | | 22,160 | |
Bank owned life insurance income (2) | | 4,521 | | | 268 | | | 4,789 | |
| ATM fees | | 1,773 | | | — | | | 1,773 | |
| Gain on the sale of OREO, net | | 836 | | | 371 | | | 1,207 | |
Net gain on sale of investment securities (2) | | 3,286 | | | — | | | 3,286 | |
Gain (loss) on equity securities, net (2) | | 2,429 | | | (247) | | | 2,182 | |
Other components of net periodic pension benefit income (2) | | 7,759 | | | 193 | | | 7,952 | |
Miscellaneous (3) | | 7,132 | | | 254 | | | 7,386 | |
| Total other income | | $ | 124,231 | | | $ | 1,433 | | | $ | 125,664 | |
(1) Of the $37.6 million of revenue included within "Other service income", approximately $5.2 million is within the scope of ASC 606, with the remaining $32.4 million consisting primarily of residential real estate loan fees which are out of scope.
(2) Not within the scope of ASC 606.
(3) "Miscellaneous" income includes brokerage income, safe deposit box rentals, and miscellaneous bank fees totaling $7.4 million, all of which are within the scope of ASC 606.
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2019 |
| Revenue by Operating Segment (in thousands) | | PNB | | All Other | | Total |
| Income from fiduciary activities | | | | | | |
| Personal trust and agency accounts | | $ | 9,001 | | | $ | — | | | $ | 9,001 | |
| Employee benefit and retirement-related accounts | | 7,178 | | | — | | | 7,178 | |
| Investment management and investment advisory agency accounts | | 10,024 | | | — | | | 10,024 | |
| Other | | 1,565 | | | — | | | 1,565 | |
| Service charges on deposit accounts | | | | | | |
| Non-sufficient funds (NSF) fees | | 7,073 | | | — | | | 7,073 | |
| Demand deposit account (DDA) charges | | 3,105 | | | — | | | 3,105 | |
| Other | | 657 | | | — | | | 657 | |
Other service income (1) | | | | | | |
| Credit card | | 2,354 | | | 7 | | | 2,361 | |
| HELOC | | 403 | | | 4 | | | 407 | |
| Installment | | 256 | | | (83) | | | 173 | |
| Real estate | | 11,167 | | | (9) | | | 11,158 | |
| Commercial | | 1,259 | | | 142 | | | 1,401 | |
| Debit card fee income | | 20,250 | | | — | | | 20,250 | |
Bank owned life insurance income (2) | | 4,168 | | | 389 | | | 4,557 | |
| ATM fees | | 1,828 | | | — | | | 1,828 | |
| Loss on the sale of OREO, net | | (110) | | | (112) | | | (222) | |
Net loss on sale of investment securities (2) | | (421) | | | — | | | (421) | |
Gain on equity securities, net (2) | | 913 | | | 4,205 | | | 5,118 | |
Other components of net periodic pension benefit income (2) | | 4,587 | | | 145 | | | 4,732 | |
Miscellaneous (3) | | 7,135 | | | 113 | | | 7,248 | |
| Total other income | | $ | 92,392 | | | $ | 4,801 | | | $ | 97,193 | |
(1) Of the $15.5 million of revenue included within "Other service income", approximately $4.9 million is within the scope of ASC 606, with the remaining $10.6 million consisting primarily of residential real estate loan fees which are out of scope.
(2) Not within the scope of ASC 606.
(3) "Miscellaneous" income includes brokerage income, safe deposit box rentals, and miscellaneous bank fees totaling $7.2 million, all of which are within the scope of ASC 606.
A description of Park's material revenue streams accounted for under ASC 606 follows:
Income from fiduciary activities (gross): Park earns fiduciary fee income and investment brokerage fees from Park's contracts with trust customers for various fiduciary and investment-related services. These fees are earned over time as the Company provides the contracted monthly and quarterly services and are generally assessed based on the market value of the trust assets.
Service charges on deposit accounts and ATM fees: The Corporation earns fees from the Corporation's deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Corporation fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are generally recognized at the end of the month, representing the period over which the Corporation satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance.
Other service income: Other service income includes income from (1) the sale and servicing of loans sold to the secondary market, (2) incentive income from third-party credit card issuers, and (3) loan customers for various loan-related activities and services. Income related to the sale and servicing of loans sold to the secondary market is included within Other service income, but is not within the scope of ASC 606. Services that fall within the scope of ASC 606 are recognized as revenue when the Company satisfies the Company's performance obligation to the customer.
Debit card fee income: Park earns interchange fees from debit cardholder transactions conducted primarily through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, net of card network fees, concurrently with the transaction processing services provided to the cardholder.
Gain or loss on sale of OREO, net: The Corporation records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of delivery of an executed deed. When Park finances the sale of OREO to the buyer, the Corporation assesses whether the buyer is committed to perform the buyer's obligation under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain is recorded upon the transfer of control of the property to the buyer. In determining the gain on the sale, the Corporation adjusts the transaction price and related gain on sale if a significant financing component is present.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
No response required.
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ITEM 9A. | CONTROLS AND PROCEDURES. |
ITEM 9A.CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
With the participation of the Chairman of the Board and Chief Executive Officer and President (the principal executive officer) and the Chief Financial Officer, Secretary and Treasurer (the principal financial officer) of Park, Park’s management has evaluated the effectiveness of Park’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the fiscal year covered by this Annual Report on Form 10-K. Based on that evaluation, Park’s Chairman of the Board and Chief Executive Officer and President and Park’s Chief Financial Officer, Secretary and Treasurer have concluded that:
•information required to be disclosed by Park in this Annual Report on Form 10-K and the other reports that Park files or submits under the Exchange Act would be accumulated and communicated to Park’s management, including itsPark's principal executive officer and Park's principal financial officer, as appropriate to allow timely decisions regarding required disclosure;
•information required to be disclosed by Park in this Annual Report on Form 10-K and the other reports that Park files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and
•Park’s disclosure controls and procedures were effective as of the end of the fiscal year covered by this Annual Report on Form 10-K.
Management’s Annual Report on Internal Control over Financial Reporting
The “MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING” is included in Park’s 2017"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report is incorporated herein by reference.on Form 10-K.
AttestationAudit Report of the Registered Public Accounting Firm
The “REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM” is included in Park’s 2017"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report is incorporated herein by reference.on Form 10-K.
Changes in Internal Control over Financial Reporting
Effective January 1, 2021, Park adopted the CECL accounting guidance under ASU 2016-13 and ASC 326. The Company designed new controls and modified existing controls as part of this adoption to ensure compliance with the revised accounting and disclosure requirements. These additional controls over financial reporting included controls over model creation and design, model governance, assumptions, and expanded controls over loan level data. There were no other changes in Park’sPark's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during Park’s fiscal quarter ended December 31, 2017,the period covered by this report that have materially affected, or are reasonably likely to materially affect, Park’sPark's internal control over financial reporting.
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ITEM 9B. | OTHER INFORMATION. |
ITEM 9B.OTHER INFORMATION.
No response required.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
PART III
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ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors, Executive Officers and Persons Nominated or Chosen to Become Directors or Executive Officers
The information required by Item 401 of SEC Regulation S-K concerning the directors of Park and the nominees for election as directors of Park at the Annual Meeting of Shareholders to be held on April 23, 201825, 2022 (the “2018“2022 Annual Meeting”) is incorporated herein by reference from the disclosure to be included under the caption “ELECTION OF DIRECTORS (Proposal 1)” in Park’s definitive Proxy Statement relating to the 20182022 Annual Meeting to be filed pursuant to SEC Regulation 14A (“Park’s 20182022 Proxy Statement”).
The information required by Item 401 of SEC Regulation S-K concerning the executive officers of Park is incorporated herein by reference from the disclosure to be included under the caption “EXECUTIVE OFFICERS” in Park’s 20182022 Proxy Statement.
Compliance with Section 16(a) of the Exchange Act
TheNo information is required byto be disclosed in this Annual Report on Form 10-K under Item 405 of SEC Regulation S-K is incorporated herein by reference from the disclosure to be includedregarding delinquent reports required under the caption “BENEFICIAL OWNERSHIP OF PARK COMMON SHARES – Section 16(a) Beneficial Ownership Reporting Compliance” in Park’s 2018 Proxy Statement.of the Securities Exchange Act of 1934, as amended, with respect to the 2021 fiscal year.
Committee Charters; Corporate Governance Guidelines; Code of Business Conduct and Ethics
Park’s Board of Directors has adopted charters for each of the Audit Committee, the Compensation Committee, the Executive Committee, the Investment Committee, the Nominating and Corporate Governance Committee and the Risk Committee. Park's Board of Directors has also adopted Corporate Governance Guidelines which are included as Exhibit A to the charter of the Nominating and Corporate Governance Committee.
In accordance with the requirements of Section 807 of the NYSE AMERICANAmerican Company Guide, the Board of Directors of Park has adopted a Code of Business Conduct and Ethics covering the directors, officers and employees of Park and Park's affiliates,subsidiaries, including Park’s Chairman of the Board Park'sand Chief Executive Officer and President (the principal executive officer), Park's President, Park’s Chief Financial Officer, Secretary and Treasurer (the principal financial officer) and Park’s Chief Accounting Officer (the principal accounting officer). Park intends to disclose the following events, if they occur, in a current report on Form 8-K within four business days following their occurrence: (A) the date and nature of any amendment to a provision of Park’s Code of Business Conduct and Ethics that (i) applies to Park’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, (ii) relates to any element of the code of ethics definition enumerated in Item 406(b) of SEC Regulation S-K, and (iii) is not a technical, administrative or other non-substantive amendment; and (B) a description of any waiver (including the nature of the waiver, the name of the person to whom the waiver was granted and the date of the waiver), including an implicit waiver, from a provision of the Code of Business Conduct and Ethics granted to Park’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions that relates to one or more of the elements of the code of ethics definition set forth in Item 406(b) of SEC Regulation S-K. In addition, Park will disclose any waivers from the provisions of the Code of Business Conduct and Ethics granted to a director or an executive officer of Park in a current report on Form 8-K within four business days following their occurrence in accordance with the requirements of the Commentary to Section 807 of the NYSE AMERICANAmerican Company Guide.
The text of each of the Code of Business Conduct and Ethics, the Audit Committee Charter, the Compensation Committee Charter, the Executive Committee Charter, the Investment Committee Charter, the Nominating and Corporate Governance Committee Charter (including the Corporate Governance Guidelines) and the Risk Committee Charter is posted on the “Governance“Corporate Information - Governance Documents” section of the “Investor Relations” page of Park’s Internet site located at http://www.parknationalcorp.com. Interested persons may also obtain copies of the Code of Business Conduct and Ethics, the Audit Committee Charter, the Compensation Committee Charter, the Executive Committee Charter, the Investment Committee Charter, the Nominating and Corporate Governance Committee Charter and the Risk Committee Charter, without charge, by writing to the Chief Financial Officer,
Secretary and Treasurer of Park at Park National Corporation, 50 North Third Street, P.O. Box 3500, Newark, Ohio 43058-3500, Attention: Brady T. Burt.
Procedures for Recommending Director Nominees
Information concerning the procedures by which shareholders of Park may recommend nominees to Park's Nominating and Corporate Governance Committee and Park’s full Board of Directors is incorporated herein by reference from the disclosure to be included under the caption “CORPORATE GOVERNANCE – Nominating Procedures” in Park’s 20182022 Proxy Statement. These procedures have not materially changed from those described in Park’s definitive Proxy Statement for the 20172021 Annual Meeting of Shareholders held on April 24, 2017.26, 2021.
Audit Committee
The information required by Items 407(d)(4) and 407(d)(5) of SEC Regulation S-K is incorporated herein by reference from the disclosure to be included under the caption “STRUCTURE AND MEETINGS OF BOARD OF DIRECTORS – Committees of the Board – Audit Committee” in Park’s 20182022 Proxy Statement.
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ITEM 11. | EXECUTIVE COMPENSATION. |
ITEM 11.EXECUTIVE COMPENSATION.
The information required by Item 402 of SEC Regulation S-K is incorporated herein by reference from the disclosure to be included under the captions “EXECUTIVE COMPENSATION” and “DIRECTOR COMPENSATION” in Park’s 20182022 Proxy Statement.
The information required by Item 407(e)(4) of SEC Regulation S-K is incorporated herein by reference from the disclosure to be included under the caption “COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION” in Park’s 20182022 Proxy Statement.
The information required by Item 407(e)(5) of SEC Regulation S-K is incorporated herein by reference from the disclosure to be included under the caption “EXECUTIVE COMPENSATION – Compensation Committee Report” in Park’s 20182022 Proxy Statement.
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ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Beneficial Ownership of Common Shares of Park
The information required by Item 403 of SEC Regulation S-K is incorporated herein by reference from the disclosure to be included under the caption “BENEFICIAL OWNERSHIP OF PARK COMMON SHARES” in Park’s 20182022 Proxy Statement.
Equity Compensation Plan Information
The information required by Item 201(d) of SEC Regulation S-K is incorporated herein by reference from the disclosure to be included under the caption "EQUITY COMPENSATION PLAN INFORMATION" in Park's 20182022 Proxy Statement.
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ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Certain Relationships and Related Person Transactions
The information required by Item 404 of SEC Regulation S-K is incorporated herein by reference from the disclosure to be included under the captions “CORPORATE GOVERNANCE – Independence of Directors,” “CORPORATE
GOVERNANCE – Transactions with Related Persons” and “COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION” in Park’s 20182022 Proxy Statement.
Director Independence
The information required by Item 407(a) of SEC Regulation S-K is incorporated herein by reference from the disclosure to be included under the caption “CORPORATE GOVERNANCE – Independence of Directors” in Park’s 20182022 Proxy Statement.
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ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information called for in this Item 14 is incorporated herein by reference from the disclosure to be included under the captions “AUDIT COMMITTEE MATTERS – Pre-Approval of Services Performed by Independent Registered Public Accounting Firm” and “AUDIT COMMITTEE MATTERS – Fees of Independent Registered Public Accounting Firm” in Park’s 20182022 Proxy Statement.
PART IV
ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The consolidated financial statements (and report thereon) listed belowfollowing documents are incorporated herein by reference from Park's 2017filed as part of this Annual Report as noted:on Form 10-K:
(1) Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm (Crowe Horwath LLP) -- Incorporated herein by reference from Park's 2017included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report
on Form 10-K
Consolidated Balance Sheets at December 31, 20172021 and 20162020 -- Incorporated herein by reference from Park's 2017included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report
on Form 10-K
Consolidated Statements of Income for the years ended December 31, 2017, 20162021, 2020 and 20152019 -- Incorporated herein by reference from Park's 2017included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report
on Form 10-K
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 20162021, 2020 and 20152019 -- Incorporated herein by reference from Park's 2017included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report
on Form 10-K
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2017, 20162021, 2020 and 20152019 -- Incorporated herein by reference from Park's 2017included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report
on Form 10-K
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 20162021, 2020 and 20152019 -- Incorporated herein by reference from Park's 2017included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report
on Form 10-K
Notes to Consolidated Financial Statements -- Incorporated herein by reference from Park's 2017included in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this Annual Report on Form 10-K
(a)(2)Financial Statement Schedules.Schedules.
All schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and have been omitted.
(a)(3) Exhibits.Exhibits.
The documents listed in the Index to Exhibits that immediately precedes the Signature"Signatures" pages of this Annual Report on Form 10-K are filed/filed or furnished with this Annual Report on Form 10-K as exhibits or incorporated into this Annual Report on Form 10-K by reference, in each case as noted. Each management contract or compensatory plan or arrangement is identified as such in the Index to Exhibits.
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(b) | The documents listed in the Index to Exhibits that immediately precedes the Signatures pages of this Annual Report on Form 10-K are filed/furnished with this Annual Report on Form 10-K as exhibits or incorporated into this Annual Report on Form 10-K by reference. |
(b) The documents listed in the Index to Exhibits that immediately precedes the "Signatures" pages of this Annual Report on Form 10-K are filed or furnished with this Annual Report on Form 10-K as exhibits or incorporated into this Annual Report on Form 10-K by reference.
(c) Financial Statement Schedules.
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(c) | Financial Statement Schedules |
None.
ITEM 16.FORM 10-K SUMMARY.
Not applicable.None.
Index to Exhibits
Exhibit No.Description of Exhibit
2.1Agreement and Plan of Merger and Reorganization by and among Park National Corporation, The Park National Bank and NewDominion Bank, dated as of January 22, 2018 (incorporated herein by reference to Exhibit 2.1 to Park National Corporation's Current Report on Form 8-K dated and filed on January 26, 2018 (File No. 1-13006))*
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3.1(a) | Articles of Incorporation of Park National Corporation as filed with the Ohio Secretary of State on March 24, 1992 (incorporated herein by reference to Exhibit 3(a) to Park National Corporation's Form 8-B, filed on May 20, 1992 (File No. 0-18772) (“Park's Form 8-B”)) |
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3.1(b) | Certificate of Amendment to the Articles of Incorporation of Park National Corporation as filed with the Ohio Secretary of State on May 6, 1993 (incorporated herein by reference to Exhibit 3(b) to Park National Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-18772)) |
2.2 Agreement and Plan of Merger and Reorganization by and between Park National Corporation and CAB Financial Corporation, dated as of September 12, 2018 (incorporated herein by reference to Exhibit 2.1 to Park National Corporation's Current Report on Form 8-K dated and filed on September 14, 2018 (File No. 1-13006))*
3.1(a) Articles of Incorporation of Park National Corporation as filed with the Ohio Secretary of State on March 24, 1992 (incorporated herein by reference to Exhibit 3(a) to Park National Corporation's Form 8-B, filed on May 20, 1992 (File No. 0-18772) (“Park's Form 8-B”)) P
3.1(b) Certificate of Amendment to the Articles of Incorporation of Park National Corporation as filed with the Ohio Secretary of State on May 6, 1993 (incorporated herein by reference to Exhibit 3(b) to Park National Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-18772)) P
3.1(c)Certificate of Amendment to the Articles of Incorporation of Park National Corporation as filed with the Ohio Secretary of State on April 16, 1996 (incorporated herein by reference to Exhibit 3(a) to Park National Corporation's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996 (File No. 1-13006))
3.1(d)Certificate of Amendment by Shareholders to the Articles of Incorporation of Park National Corporation as filed with the Ohio Secretary of State on April 22, 1997 (incorporated herein by reference to Exhibit 3(a)(1) to Park National Corporation's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997 (File No. 1-13006) (“Park's June 30, 1997 Form 10-Q”))
3.1(e)Certificate of Amendment by Shareholders as filed with the Ohio Secretary of State of the State of Ohio on December 18, 2008 in order to evidence the adoption by the shareholders of Park National Corporation on December 18, 2008 of an amendment to Article FOURTH of Park National Corporation's Articles of Incorporation to authorize Park National Corporation to issue up to 200,000 preferred shares, without par value (incorporated herein by reference to Exhibit 3.1 to Park National Corporation's Current Report on Form 8-K dated and filed on December 19, 2008 (File No. 1-13006))
3.1(f)Certificate of Amendment by Directors to Articles as filed with the Ohio Secretary of State of the State of Ohio on December 19, 2008, evidencing the adoption of an amendment by the Board of Directors of Park National Corporation to Article FOURTH of Park National Corporation's Articles of Incorporation to establish the express terms of Fixed Rate Cumulative Perpetual Preferred Shares, Series A, each without par value, of Park National Corporation (incorporated herein by reference to Exhibit 3.1 to Park National Corporation's Current Report on Form 8-K dated and filed on December 23, 2008 (File No. 1-13006) (“Park's December 23, 2008 Form 8-K”))
3.1(g)Certificate of Amendment by Shareholders as filed with the Ohio Secretary of State of the State of Ohio on April 18, 2011 in order to evidence the adoption by Park National Corporation's shareholders of an amendment to Article SIXTH of Park National Corporation's Articles of Incorporation in order to provide that shareholders do not have preemptive rights (incorporated herein by reference to Exhibit 3.1 to Park National Corporation's Current Report on Form 8-K dated and filed on April 19, 2011 (File No. 1-13006))
3.1(h)Articles of Incorporation of Park National Corporation [This document represents the Articles of Incorporation of Park National Corporation in compiled form incorporating all amendments. This compiled document has not been filed with the Ohio Secretary of State.] (incorporated herein by reference to Exhibit 3.1(h) to Park National Corporation's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011 (File No. 1-13006))
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3.2(a) | Regulations of Park National Corporation (incorporated herein by reference to Exhibit 3(b) to Park's Form 8-B) |
Exhibit No.Description of Exhibit
3.2(a) Regulations of Park National Corporation (incorporated herein by reference to Exhibit 3(b) to Park's Form 8-B) P
3.2(b)Certified Resolution regarding Adoption of Amendment to Subsection 2.02(A) of the Regulations of Park National Corporation by Shareholders on April 21, 1997 (incorporated herein by reference to Exhibit 3(b)(1) to Park's June 30, 1997 Form 10-Q)
3.2(c)Certificate Regarding Adoption of Amendments to Sections 1.04 and 1.11 of Park National Corporation's Regulations by the Shareholders on April 17, 2006 (incorporated herein by reference to Exhibit 3.1 to Park National Corporation's Current Report on Form 8-K dated and filed on April 18, 2006 (File No. 1-13006))
3.2(d)Certificate Regarding Adoption by the Shareholders of Park National Corporation on April 21, 2008 of Amendment to Regulations to Add New Section 5.10 to Article FIVE (incorporated herein by reference to Exhibit 3.2(d) to Park National Corporation's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008 (File No. 1-13006) (“Park's March 31, 2008 Form 10-Q”))
3.2(e)Regulations of Park National Corporation [This document represents the Regulations of Park National Corporation in compiled form incorporating all amendments.] (incorporated herein by reference to Exhibit 3.2 (e)3.2(e) to Park's March 31, 2008 Form 10-Q)
4.1(a)Junior Subordinated Indenture, dated as of December 5, 2005, between Vision Bancshares, Inc. and Wilmington Trust Company, as Trustee (incorporated herein by reference to Exhibit 10.16 to Vision Bancshares, Inc.'s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005 (File No. 000-50719))
4.1(b)First Supplemental Indenture, dated to be effective as of 6:00 p.m., Eastern Standard Time, on March 9, 2007, by and among Wilmington Trust Company, as Trustee; Park National Corporation; and Vision Bancshares, Inc. (incorporated herein by reference to Exhibit 4.1(b) to Park National Corporation's Current Report on Form 8-K dated and filed on March 15, 2007 (File No. 1-13006) (“Park's March 15, 2007 Form 8-K”))
4.2(a)Amended and Restated Trust Agreement, dated as of December 5, 2005, among Vision Bancshares, Inc., as Depositor; Wilmington Trust Company, as Property Trustee and as Delaware Trustee; and the Administrative Trustees named therein, in respect of Vision Bancshares Trust I (incorporated herein by reference to Exhibit 10.15 to Vision Bancshares, Inc.'s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005 (File No. 000-50719))
Note: Pursuant to the First Supplemental Indenture, dated to be effective as of 6:00 p.m., Eastern Standard Time, on March 9, 2007, by and among Wilmington Trust Company, as Trustee; Park National Corporation; and Vision Bancshares, Inc., Park National Corporation succeeded to and was substituted for Vision Bancshares, Inc. as “Depositor”
4.2(b)Notice of Resignation of Administrative Trustees and Appointment of Successors, dated March 9, 2007, delivered to Wilmington Trust Company by the Resigning Administrative Trustees named therein, the Successor Administrative Trustees named therein and Park National Corporation (incorporated herein by reference to Exhibit 4.2(b) to Park's March 15, 2007 Form 8-K)
4.2(c)Notice of Removal of Administrative Trustee and Appointment of Successor, dated February 21, 2013, delivered to Wilmington Trust Company by the continuing Administrative Trustees named therein, the successor Administrative Trustee named therein and Park National Corporation (incorporated herein by reference to Exhibit 4.2(c) to Park National Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (File No. 1-13006) ("Park's 2012 Form 10-K"))
Exhibit No.Description of Exhibit
4.2(d)Notice of Resignation of Administrative Trustee and Appointment of Successor, dated July 1, 2021, delivered to Wilmington Trust Company by the Resigning Administrative Trustee named therein, the Successor Administrative Trustee named therein, the continuing Current Administrative Trustees named therein and Park National Corporation (filed herewith)
4.3Guarantee Agreement, dated as of December 5, 2005, between Vision Bancshares, Inc., as Guarantor, and Wilmington Trust Company, as Guarantee Trustee, in respect of Vision Bancshares Trust I (incorporated herein by reference to Exhibit 10.17 to Vision Bancshares, Inc.'s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005 (File No. 000-50719))
Note: Pursuant to the First Supplemental Indenture, dated to be effective as of 6:00 p.m., Eastern Standard Time, on March 9, 2007, by and among Wilmington Trust Company, as Trustee; Park National Corporation; and Vision Bancshares, Inc., Park National Corporation succeeded to and was substituted for Vision Bancshares, Inc. as “Guarantor”
4.4Note Purchase Agreement to furnish instruments and agreements defining rights of holders of long-term debt (filed herewith)
4.5 Description of Capital Stock of Park National Corporation (filed herewith)
4.6(a) Credit Agreement, dated April 20, 2012,as of May 18, 2016, by and between Park National Corporation and 56 accredited investorsU.S. Bank National Association (incorporated herein by reference to Exhibit 10.1 to Park National Corporation's Current Report on Form 8-K dated and filed on May 23, 2016 (File No. 1-13006)). NOTE: Credit Agreement, as amended, was terminated on August 2, 2021. 4.6(b) First Amendment to Credit Agreement, made and entered into as of June 15, 2017, by and between Park National Corporation and U.S. Bank National Association (incorporated herein by reference to Exhibit 10.1 to Park National Corporation's Current Report on Form 8-K dated and filed on June 16, 2017 (File No. 1-13006)). NOTE: Credit Agreement, as amended, was terminated on August 2, 2021. 4.6(c) Second Amendment to Credit Agreement, made and entered into as of May 17, 2018, by and between Park National Corporation and U.S. Bank National Association (incorporated herein by reference to Exhibit 10.1 to Park National Corporation's Current Report on Form 8-K dated and filed on May 21, 2018 (File No. 1-13006)). NOTE: Credit Agreement, as amended, was terminated on August 2, 2021. 4.6(d) Third Amendment to Credit Agreement, made and entered into as of June 22, 2018, by and between Park National Corporation and U.S. Bank National Association (incorporated herein by reference to Exhibit 10.1 to Park National Corporation's Current Report on Form 8-K dated and filed on June 28, 2018 (File No. 1-13006)). NOTE: Credit Agreement, as amended, was terminated on August 2, 2021. 4.6(e) Fourth Amendment to Credit Agreement, made and entered into as of June 30, 2019, by and between Park National Corporation and U.S. Bank National Association (incorporated herein by reference to Exhibit 4.1 to Park National Corporation's Current Report on Form 8-K dated and filed on April 20, 2012June 26, 2019 (File No. 1-13006) (“("Park's AprilJune 26, 2019 Form 8-K")). NOTE: Credit Agreement, as amended, was terminated on August 2, 2021. 4.6 (f) Fifth Amendment to Credit Agreement, made and entered into as of June 17, 2020, by and between Park National Corporation and U.S. Bank National Association (incorporated herein by reference to Exhibit 4.1 to Park National Corporation's Current Report on Form 8-K dated and filed on June 18, 2020 (File No. 1-13006). NOTE: Credit Agreement, as amended, was terminated on August 2, 2021. 4.6(g) Revolving Note, dated June 20, 2012 Form 8-K”))
Note: 7% Subordinated Notes due April2019, in the principal amount of $15,000,000 and with a maturity date of June 20, 2022 were repaid in full on April 24, 2017 and Note Purchase Agreement terminated2021 (reflecting the defined Termination Date), issued by its terms.
4.5Form of 7% Subordinated Note due April 20, 2022Park National Corporation to U.S. Bank National Association (incorporated herein by reference to Exhibit 4.2 to Park's AprilJune 26, 2019 Form 8-K). NOTE: Revolving Note expired, by its terms, on June 20, 20122021.
Exhibit No.Description of Exhibit
4.6(h) Term Note, dated June 20, 2019, in the principal amount of $50,000,000 and with a maturity date of June 20, 2022 (reflecting the defined Term Loan Termination Date), issued by Park National Corporation to U.S. Bank National Association (incorporated herein by reference to Exhibit 4.3 to Park's June 26, 2019 Form 8-K). NOTE: Term Note was paid in full on August 2, 2021. 4.7(a) Indenture, dated as of August 20, 2020, between Park National Corporation, as Issuer, and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to Park National Corporation's Current Report on Form 8-K dated and filed on August 20, 2020 (File No. 1-13006)("Park's August 20, 2020 Form 8-K")) Note: 7%4.7(b) First Supplemental Indenture, dated as of August 20, 2020, between Park National Corporation, as Issuer, and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.2 to Park's August 20, 2020 Form 8-K")4.7(c) Form of 4.50% Fixed-to-Floating Rate Subordinated Notes due April2030 issued by Park National Corporation (included in Exhibit 4.7(b) to this Annual Report on Form 10-K)(incorporated herein by reference to Exhibit 4.2 to Park's August 20, 2022 were repaid in full on April 24, 2017.2020 Form 8-K)
4.6Agreement to furnish instruments and agreements defining rights of holders of long-term debt (filed herewith)
10.1†Summary of Base Salaries for Executive Officers of Park National Corporation (filed herewith)
10.2†Amended and Restated Split-Dollar Agreement, made and entered into effective as of June 15, 2015, by and between The Park National Bank and David L. Trautman (incorporated by reference to Exhibit 10.2(a) to Park National Corporation's Current Report on Form 8-K dated and filed on June 19, 2015 (File No. 1-13006) ("Park's June 19, 2015 Form 8-K"))
10.3†Split-Dollar Agreement, made and entered into effective as of June 15, 2015, by and between The Park National Bank and Brady T. Burt (incorporated herein by reference to Exhibit 10.3 to Park's June 19, 2015 Form 8-K)
10.4†Amended and Restated Split-Dollar Agreement, made and entered into effective as of June 15, 2015, by and between The Park National Bank, Park National Corporation and C. Daniel DeLawder (incorporated by reference to Exhibit 10.2(b) to Park's June 19, 2015 Form 8-K)
10.5†Amended and Restated Split-Dollar Agreement, made and entered into effective as of June 15, 2015, by and between The Park National Bank and David L. Trautman (incorporated herein by reference to Exhibit 10.5 to Park National Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (File No.1-13006) ("Park's 2015 Form 10-K"))
10.6†Amended and Restated Split-Dollar Agreement, made and entered into effective as of June 15, 2015, by and between The Park National Bank and Brady T. Burt (incorporated by reference to Exhibit 10.4 to Park's June 19, 2015 Form 8-K)
10.7†Amended and Restated Split-Dollar Agreement, made and entered into effective as of June 15, 2015, by and between The Park National Bank and C. Daniel Delawder (incorporated herein by reference to Exhibit 10.7 to Park's 2015 Form 10-K)
10.8† Amended and Restated Split-Dollar Agreement, made and entered into effective as of January 27, 2020, by and between The Park National Bank and Matthew R. Miller (incorporated herein by reference to Exhibit 10.2 to Park National Corporation's Current Report on Form 8-K dated and filed on January 27, 2020 (File No.1-13006)("Park's January 27, 2020 Form 8-K"))
10.9(a)† Amended and Restated Split-Dollar Agreement, made and entered into effective as of August 4, 2015, by and between The Park National Bank and Matthew R. Miller (incorporated herein by reference to Exhibit 10.4(a) to Park's January 27, 2020 Form 8-K)
Exhibit No.Description of Exhibit
10.9(b)† First Amendment to the Amended and Restated Split-Dollar Agreement, made and entered into effective as of January 27, 2020, by and between The Park National Bank and Matthew R. Miller (incorporated herein by reference to Exhibit 10.4(b) to Park's January 27, 2020 Form 8-K)
10.10†Supplemental Executive Retirement Benefits Agreement, made as of June 15, 2015, by and between The Park National Bank and David L. Trautman (incorporated herein by reference to Exhibit 10.1(a) to Park's June 19, 2015 Form 8-K)
10.9†10.11†Supplemental Executive Retirement Benefits Agreement, made as of June 15, 2015, by and between The Park National Bank and Brady T. Burt (incorporated herein by reference to Exhibit 10.1(b) to Park's June 19, 2015 Form 8-K)
10.10†10.12(a)†Supplemental Executive Retirement Benefits Agreement, made as of June 15, 2015, by and between The Park National Bank and C. Daniel DeLawder (incorporated herein by reference to Exhibit 10.1(c) to Park's June 19, 2015 Form 8-K)
10.11†10.12(b)† Amendment to the Supplemental Executive Retirement Benefits Agreement, entered into December 3, 2019, effective as of October 1, 2019, by and between The Park National Bank and C. Daniel DeLawder (incorporated herein by reference to Exhibit 10.2 to Park National Corporation's Current Report on Form 8-K dated and filed on December 5, 2019 (File No.1-13006)("Park's December 5, 2019 Form 8-K"))
10.13†Supplemental Executive Retirement Benefits Agreement, made as of February 18, 2008, by and between The Park National Corporation and David L. Trautman (incorporated herein by reference to Exhibit 10.1 to Park National Corporation's Current Report on Form 8-K dated and filed on February 19, 2008 (File No. 1-13006)("Park's February 19, 2008 Form 8-K"))
10.12†10.14(a)†Form of Amended and Restated Supplemental Executive Retirement Benefits Agreement, made as of February 18, 2008, by and between Park National Corporation and C. Daniel DeLawder (incorporated herein by reference to Exhibit 10.210.14(a) to Park National Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (File No. 1-13006))
10.14(b)† Amendment to the Amended and Restated Supplemental Executive Retirement Benefits Agreement, entered into December 3, 2019, effective as of October 1, 2019, by and between The Park National Bank and C. Daniel DeLawder (incorporated herein by reference to Exhibit 10.1 to Park's February 19, 2008December 5, 2019 Form 8-K)
10.13†10.15† Supplemental Executive Retirement Benefits Agreement, made as of June 15, 2015, by and between The Park National Bank and Matthew R. Miller (incorporated herein by reference to Exhibit 10.3 to Park's January 27, 2020 Form 8-K)
10.16† Supplemental Executive Retirement Benefits Agreement, made and entered into effective as of January 27, 2020, by and between The Park National Bank and Matthew R. Miller (incorporated herein by reference to Exhibit 10.1 to Park's January 27, 2020 Form 8-K)
10.17†Summary of Certain Compensation for Directors of Park National Corporation (filed herewith)
10.14(a)10.18(a)†Form of Split-Dollar Agreement, made and entered into effective as of December 28, 2007, covering certain Non-Employee Directors of Park National Corporation (incorporated herein by reference to Exhibit 10.2(a) to Park National Corporation's Current Report on Form 8-K dated and filed on January 2, 2008 (File No. 1-13006))
10.14(b)10.18(b)†Schedule identifying Non-Employee Directors of Park National Corporation covered by form of Split-Dollar Agreement, made and entered into effective as of December 28, 2007 (filed herewith)(incorporated herein by reference to Exhibit 10.18(b) to Park National Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (File No. 1-3006))
10.15†10.19†Park National Corporation 2013 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.1 to Park National Corporation’s Current Report on Form 8-K dated and filed on April 23, 2013 (File No. 1-13006))
Exhibit No.Description of Exhibit
10.16†10.20†Form of Park National Corporation 2013 Long-Term Incentive Plan Performance-Based Restricted Stock Unit Award Agreement used to evidence awards of Performance-Based Restricted Stock Units to employees of Park National Corporation and of its subsidiaries granted on and after January 24, 2014 and prior to December 5, 2016 (incorporated herein by reference to Exhibit 10.1 to Park National Corporation’s Current Report on Form 8-K dated and filed on January 27, 2014 (File No. 1-13006))10.17†10.21†Form of Park National Corporation 2013 Long-Term Incentive Plan Performance-Based Restricted Stock Unit Award Agreement used and to be used to evidence awards of Performance-Based Restricted Stock Units to employees of Park National Corporation and of its subsidiaries granted on and after December 5, 2016 and prior to April 24, 2017 (incorporated herein by reference to Exhibit 10.1 to Park National Corporation's Current Report on Form 8-K dated and filed on December 8, 2016 (File No. 1-13006))10.18†10.22†Park National Corporation 2017 Long-Term Incentive Plan for Non-Employee Directors (incorporated herein by reference to Exhibit 10.2 to Park National Corporation's Current Report on Form 8-K dated and filed on April 26, 2017 (File No. 1-13006)) ("Park's April 26, 2017 Form 8-K")10.19†10.23†Park National Corporation 2017 Long-Term Incentive Plan for Employees (incorporated herein by reference to Exhibit 10.1 to Park's April 26, 2017 Form 8-K)10.20†10.24†Form of Park National Corporation 2017 Long-Term Incentive Plan for Employees Performance-Based Restricted Stock Unit Award Agreement used and to be used to evidence awards of Performance-Based Restricted Stock Units to employees of Park National Corporation and of its subsidiaries granted after December 4, 2017 and prior to November 19, 2018 (incorporated herein by reference to Exhibit 10.1 to Park National Corporation's Current Report on Form 8-K dated and filed on December 5, 2017 (File No. 1-13006))10.2110.25†Credit Form of Park National Corporation 2017 Long-Term Incentive Plan for Employees Performance-Based Restricted Stock Unit Award Agreement dated asused to evidence awards of May 18, 2016, by and betweenPerformance-Based Restricted Stock Units to employees of Park National Corporation and U.S. Bank National Associationof its subsidiaries granted after November 19, 2018 and prior to January 1, 2020 (incorporated herein by reference to Exhibit 10.1 to Park National Corporation's Current Report on Form 8-K dated and filed on May 23, 2016November 20, 2018 (File No. 1-13006) ("Park's May 23, 2016)10.22Note issued byof Park National Corporation on May 18, 20162017 Long-Term Incentive Plan for Employees Amendment No. 1 to U.S. BankPerformance-Based Restricted Stock Unit Award Agreement, made effective as of January 1, 2019, entered into with employees of Park National AssociationCorporation and of its subsidiaries with respect to performance-based restricted stock unit awards granted effective January 1, 2019 (incorporated herein by reference to Exhibit 10.210.3 to Park National Corporation's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 (File No. 1-13006)("Park's March 31, 2020 Form 10-Q"))10.27† Form of Park National Corporation 2017 Long-Term Incentive Plan for Employees Performance-Based Restricted Stock Unit Award Agreement used to evidence awards of performance-based restricted stock units to employees of Park National Corporation and of its subsidiaries granted effective as of January 1, 2020 and to be used to evidence such awards granted after January 1, 2020 (incorporated herein by reference to Exhibit 10.4 to Park's May 23, 2016March 31, 2020 Form 8-K)10-Q) 10.2310.2First8† Park National Corporation 2017 Long-Term Incentive Plan for Employees Amendment No. 1 to Credit Agreement, made andCertain Performance-Based Restricted Stock Unit Award Agreements, entered into as of June 15, 2017,30, 2021, between Park National Corporation and U.S. Bank National AssociationC. Daniel DeLawder (incorporated herein by reference to Exhibit 10.1 to Park National Corporation's Current Report on Form 8-K dated and filed on June 16, 2017July 9, 2021 (File No. 1-13006)1-3006))132017 Annual Report (not deemed filed except for portions thereof which are specifically incorporated by reference in this Annual Report on Form 10-K) (specified portions filed herewith)
14Code of Business Conduct and Ethics, as amended January 19, 2018most recently approved by the Park National Corporation Board of Directors on April 23, 2021 (filed herewith)
21Subsidiaries of Park National Corporation (filed herewith)
23Consent of Independent Registered Public Accounting Firm (Crowe Horwath LLP) (filed herewith)
24Powers Power of Attorney of Directors and Executive Officers of Park National Corporation (filed herewith)
Exhibit No.Description of Exhibit
31.1Rule 13a-14(a)/15d-14(a) Certifications - Principal Executive Officer (filed herewith)
31.2Rule 13a-14(a)/15d-14(a) Certifications - Principal Financial Officer (filed herewith)
32Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code - Principal Executive Officer and Principal Financial Officer (furnished herewith)
101The following materialsinformation from Park National Corporation's 2017 Annual Report and incorporated therefrom into Park National Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2017,2021, formatted in Inline XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as ofat December 31, 20172021 and 2016;2020; (ii) the Consolidated Statements of Income for the years ended December 31, 2017, 20162021, 2020 and 2015;2019; (iii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 20162021, 2020 and 2015;2019; (iv) the Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2017, 20162021, 2020 and 2015;2019; (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2017, 20162021, 2020 and 2015;2019; and (vi) the Notes to Consolidated Financial Statements (electronically submitted herewith)**
104 Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document with applicable taxonomy extension information contained in Exhibit 101) ** ___________________
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* | Schedules have been omitted pursuant to Item 601(b)(2) of SEC Regulation S-K. A copy of any omitted schedules will be furnished supplementally to the SEC upon its request. |
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† | Management contract or compensatory plan or arrangement. |
* Annexes, schedules and exhibits have been omitted pursuant to Item 601(b)(2) of SEC Regulation S-K, as in effect at the time of filing of the Agreement and Plan of Merger and Reorganization. A copy of any omitted attachment will be furnished supplementally by Park National Corporation to the SEC on a confidential basis upon request.
** The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
† Management contract or compensatory plan or arrangement.
P Park National Corporation filed this exhibit with the SEC in paper form originally and this exhibit has not been filed with the SEC in electronic format.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| PARK NATIONAL CORPORATION |
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Date: February 27, 201824, 2022 | By: | /s/ David L. Trautman |
| | David L. Trautman, |
| | Chairman of the Board and Chief Executive Officer and President |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 27th24th day of February, 2018.
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| Name | Capacity |
/s/ David L. Trautman David L. Trautman | Chief Executive Officer, President and Director
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/s/ C. Daniel DeLawder
C. Daniel DeLawder
| Chairman of the Board, Chief Executive Officer and Director |
/s/ Matthew R. Miller Matthew R. Miller | President and Director |
/s/ Brady T. Burt Brady T. Burt |
Chief Financial Officer, Secretary and Treasurer |
/s/ Kelly A. EddsHerreman Kelly A. EddsHerreman |
Chief Accounting Officer |
/s/ Donna M. Alvarado* Donna M. Alvarado |
Director |
/s/ James R. DeRoberts*
James R. DeRobertsFrederic M. Bertley, Ph.D.*
Frederic M. Bertley, Ph.D. |
Director |
/s/ C. Daniel DeLawder* C. Daniel DeLawder | Director |
/s/ F. William Englefield IV* F. William Englefield IV |
Director |
/s/ Alicia J. Hupp*
Alicia J. Hupp |
Director |
/s/ Jason N. Judd* Jason N. Judd |
Director |
/s/ Stephen J. Kambeitz* Stephen J. Kambeitz |
Director |
/s/ Timothy S. McLain* Timothy S. McLain |
Director |
| | | | | |
| Name | Capacity |
/s/ D. Byrd Miller III* D. Byrd Miller III | Director |
/s/ Robert E. O’Neill* Robert E. O’Neill | Director |
/s/ Mark R. Ramser* Mark R. Ramser |
Director |
/s/ Lee Zazworsky*
Leon "Lee" Zazworsky | Director |
__________________________
|
| | | | |
Name* | Capacity |
/s/ Julia A. Sloat*
Julia A. Sloat
|
Director |
/s/ Rick R. Taylor*
Rick R. Taylor
| Director
|
/s/ Leon Zazworsky*
Leon Zazworsky
| Director |
__________________________
|
| |
* | The above-named directors of the Registrantundersigned, by signing his name hereto, does hereby sign this Annual Report on Form 10-K by David L. Trautman, their attorney-in-fact,on behalf of each of the directors of the Registrant identified above pursuant to Powersa Power of Attorney signedexecuted by the above-named directors of the Registrant identified above, which PowersPower of Attorney areis filed with this Annual Report on Form 10-K in Exhibit 24, in the capacities indicated and on the 27th day of February, 2018.24. |
|
| | | | |
| By: | /s/ David L. TrautmanMatthew R. Miller |
| David L. TrautmanMatthew R. Miller |
| Chief Executive Officer and President |
| Attorney-in-Fact |
