PARK NATIONAL CORP /OH/ - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________________ to __________________________


Commission File Number			1-13006


PARK NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)


Ohio						31-1179518
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

50 North Third Street,

P.O. Box 3500

Newark,

Ohio

43058-3500

(Address of principal executive offices) (Zip Code)


(740)			349-8451
(Registrant’s telephone number, including area code)


N/A
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common shares, without par value	PRK	NYSE American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”,

“smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 16,219,572 Common Shares, no par value per share, outstanding at November 2, 2021.

PARK NATIONAL CORPORATION

CONTENTS


			Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Condensed Balance Sheets a t September 30 , 20 21 and December 31, 20 20 (unaudited)			5

Consolidated Condensed Statements of Income for the three months and nine months ended September 30, 2021 and 20 20 (unaudited)			7

Consolidated Condensed Statements of Comprehensive Income for the three months and nine months ended September 30 , 20 21 and 20 20 (unaudited)			9

Consolidated Condensed Statements of Changes in Shareholders’ Equity for the three months and nine months ended September 30 , 20 21 and 20 20 (unaudited)			10

Consolidated Condensed Statements of Cash Flows for the nine months ended Septem ber 30 , 20 21 and 20 20 (unaudited)			12

Notes to Unaudited Consolidated Condensed Financial Statements			14

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			70

Item 3. Quantitative and Qualitative Disclosures About Market Risk			106

Item 4. Controls and Procedures			106

PART II. OTHER INFORMATION			107

Item 1. Legal Proceedings			107

Item 1A. Risk Factors			107

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			107

Item 3. Defaults Upon Senior Securities			108

Item 4. Mine Safety Disclosures			108

Item 5. Other Information			108

Item 6. Exhibits			108

SIGNATURES			111

Glossary of Abbreviations and Acronyms

Park has identified the following list of abbreviations and acronyms that are used in the Notes to Unaudited Consolidated Condensed Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations.

AFS

Available-for-sale

LIBOR

London Inter-Bank Offered Rate

ACL

Allowance for credit losses

MSRs

Mortgage servicing rights

Allowance

Allowance for credit losses

NAV

Net asset value

AOCI

Accumulated other comprehensive income

NewDominion

NewDominion Bank

ASC

Accounting Standards Codification

OCI

Other comprehensive income

ASU

Accounting Standards Update

OREO

Other real estate owned

AUCL

Allowance for unfunded credit losses

OWS

One-way sell

CABF

CAB Financial Corporation and its subsidiaries

Park

Park National Corporation and its subsidiaries

CARES Act

Coronavirus Aid, Relief, and Economic Security Act

PBRSUs

Performance-based restricted stock units

Carolina Alliance

CAB Financial Corporation and its subsidiaries

PCD

Purchased credit deteriorated

CECL

Current expected credit loss

PCI

Purchased credit impaired

COVID-19

Novel coronavirus

Probability of default

DCF

Discounted cash flow

PNB

The Park National Bank

FASB

Financial Accounting Standards Board

PPP

Paycheck Protection Program

FHLB

Federal Home Loan Bank

ROU

Right-of-use

FRB

Federal Reserve Bank

SARs

Stock appreciation rights

GDP

Gross domestic product

SBA

Small Business Administration

GFSC

Guardian Financial Services Company

SEPH

SE Property Holdings, LLC

HPI

Home price index

TBRSUs

Time-based restricted stock units

HTM

Held-to-maturity

TDRs

Troubled debt restructurings

IRLC

Interest rate lock commitment

U.S. GAAP

United States Generally Accepted Accounting Principles

LDA

Loss driver analysis

U.S.

United States

LGD

Loss given default

Table of Contents

PARK NATIONAL CORPORATION AND SUBSIDIARIES

Consolidated Condensed Balance Sheets (Unaudited)

(in thousands, except share and per share data)


	September 30, 2021		December 31, 2020
Assets:
Cash and due from banks	$	127,685	$	155,596
Money market instruments	749,710		214,878
Cash and cash equivalents	877,395		370,474
Investment securities:
Debt securities available-for-sale, at fair value (amortized cost of $1,519,098 and $1,007,834 at September 30, 2021 and December 31, 2020, respectively, and no allowance for credit losses at September 30, 2021)	1,553,218		1,059,341
Other investment securities	56,085		65,465
Total investment securities	1,609,303		1,124,806

Loans	6,908,417		7,177,785
Allowance for credit losses	(88,129)		(85,675)
Net loans	6,820,288		7,092,110

Bank owned life insurance	215,401		216,225
Prepaid assets	116,228		103,523
Goodwill	159,595		159,595
Other intangible assets	7,882		9,260
Premises and equipment, net	88,909		88,660
Affordable housing tax credit investments	60,457		56,024
OREO	813		1,431
Accrued interest receivable	23,628		24,926
Operating lease right-of-use asset	13,426		15,078
Mortgage loan servicing rights	14,556		12,210
Other	26,137		4,699
Total assets	$	10,034,018	$	9,279,021

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PARK NATIONAL CORPORATION AND SUBSIDIARIES

Consolidated Condensed Balance Sheets (Unaudited) (Continued)

(in thousands, except share and per share data)


	September 30, 2021		December 31, 2020
Liabilities and Shareholders' Equity:
Deposits:
Non-interest bearing	$	2,981,928	$	2,727,100
Interest bearing	5,382,457		4,845,258
Total deposits	8,364,385		7,572,358

Short-term borrowings	235,979		342,230
Long-term debt	—		32,500
Subordinated notes	188,099		187,774
Unfunded commitments in affordable housing tax credit investments	33,116		29,298
Operating lease liability	14,480		16,053
Allowance for credit losses on off-balance sheet commitments	4,642		116
Accrued interest payable	1,330		3,860
Unsettled investment commitments	52,508		—
Other	71,567		54,576
Total liabilities	$	8,966,106	$	8,238,765

Shareholders' equity:
Preferred shares (200,000 shares authorized; 0 shares issued)	$	—	$	—
Common shares (No par value; 20,000,000 shares authorized; 17,623,132 shares issued at September 30, 2021 and 17,623,163 shares issued at December 31, 2020)	459,953		460,687
Retained earnings	759,619		704,764
Treasury shares (1,416,955 shares at September 30, 2021 and 1,308,966 shares at December 31, 2020)	(143,850)		(130,766)
Accumulated other comprehensive (loss) income, net of taxes	(7,810)		5,571
Total shareholders' equity	1,067,912		1,040,256
Total liabilities and shareholders’ equity	$	10,034,018	$	9,279,021

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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PARK NATIONAL CORPORATION AND SUBSIDIARIES

Consolidated Condensed Statements of Income (Unaudited)

(in thousands, except share and per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Interest and dividend income:

Interest and fees on loans	$	78,127	$	82,617	$	238,040	$	243,459

Interest and dividends on:
Obligations of U.S. Government sponsored entities' and other securities - taxable	4,904		4,841		13,760		15,398
Obligations of states and political subdivisions - tax-exempt	2,029		2,045		6,098		6,396
Other interest income	360		63		689		667
Total interest and dividend income	85,420		89,566		258,587		265,920

Interest expense:

Interest on deposits:
Demand and savings deposits	435		803		1,222		8,652
Time deposits	1,011		2,662		3,880		10,293

Interest on borrowings:
Short-term borrowings	187		217		552		912
Long-term debt	2,185		2,044		6,746		4,754

Total interest expense	3,818		5,726		12,400		24,611

Net interest income	81,602		83,840		246,187		241,309

Provision for (recovery of) credit loss	1,972		13,836		(6,923)		31,213
Net interest income after provision for (recovery of) credit loss	79,630		70,004		253,110		210,096

Other income:
Income from fiduciary activities	8,820		7,335		25,562		21,241
Service charges on deposit accounts	2,389		2,118		6,475		6,322
Other service income	6,668		13,047		23,444		25,571
Debit card fee income	6,453		5,853		19,297		16,373
Bank owned life insurance income	1,462		1,192		3,776		3,619
ATM fees	622		491		1,807		1,341
Gain (loss) on sale of OREO, net	3		569		(26)		1,214
Net (loss) gain on sale of debt securities	—		(27)		—		3,286
Gain (loss) on equity securities, net	609		1,201		2,886		(749)
Other components of net periodic pension benefit income	2,038		1,988		6,114		5,964
Miscellaneous	3,347		2,791		8,403		5,826
Total other income	32,411		36,558		97,738		90,008

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PARK NATIONAL CORPORATION AND SUBSIDIARIES

Consolidated Condensed Statements of Income (Unaudited) (Continued)

(in thousands, except share and per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Other expense:
Salaries	$	29,433	$	31,632	$	89,632	$	90,760
Employee benefits	10,640		10,676		30,897		29,799
Occupancy expense	3,211		3,835		9,878		10,571
Furniture and equipment expense	2,797		4,687		8,163		13,856
Data processing fees	7,817		3,275		22,679		8,344
Professional fees and services	6,973		7,977		19,610		21,944
Marketing	1,574		1,454		4,355		4,076
Insurance	1,403		1,541		4,370		4,568
Communication	796		958		2,688		2,987
State tax expense	1,113		1,125		3,324		3,386
Amortization of intangible assets	420		525		1,378		1,738
Foundation contribution	—		—		4,000		—
Miscellaneous	2,312		2,174		6,780		8,905
Total other expense	68,489		69,859		207,754		200,934

Income before income taxes	43,552		36,703		143,094		99,170

Income taxes	8,118		5,857		25,697		16,447

Net income	$	35,434	$	30,846	$	117,397	$	82,723

Earnings per common share:
Basic	$	2.17	$	1.89	$	7.20	$	5.07
Diluted	$	2.16	$	1.88	$	7.14	$	5.04

Weighted average common shares outstanding:
Basic	16,292,312		16,300,720		16,315,996		16,300,250
Diluted	16,423,912		16,393,792		16,445,568		16,398,350

Cash dividends declared per common share	$	1.03	$	1.02	$	3.29	$	3.26

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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PARK NATIONAL CORPORATION AND SUBSIDIARIES

Consolidated Condensed Statements of Comprehensive Income (Unaudited)

(in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net income	$	35,434	$	30,846	$	117,397	$	82,723

Other comprehensive (loss) income, net of tax:
Net loss (gain) realized on sale of securities, net of income tax effect of $6 for the three months ended September 30, 2020, and $(690) for the nine months ended September 30, 2020	—		21		—		(2,596)
Unrealized net holding (loss) gain on debt securities available-for-sale, net of income tax effect of $(1,328) and $55 for the three months ended September 30, 2021 and 2020, respectively, and $(3,650) and $7,109 for the nine months ended September 30, 2021 and 2020, respectively	(4,997)		207		(13,736)		26,742
Unrealized gain (loss) on cash flow hedging derivatives, net of income tax effect of $31 and $30 for the three months ended September 30, 2021 and 2020, respectively, and $94 and $(94) for the nine months ended September 30, 2021 and 2020, respectively	117		111		355		(357)
Other comprehensive (loss) income	$	(4,880)	$	339	$	(13,381)	$	23,789

Comprehensive income	$	30,554	$	31,185	$	104,016	$	106,512

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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PARK NATIONAL CORPORATION AND SUBSIDIARIES

Consolidated Condensed Statements of Changes in Shareholders' Equity (Unaudited)

(in thousands, except share and per share data)


	Preferred Shares		Common Shares		Retained Earnings		Treasury Shares		Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2020	$	—	$	460,687	$	704,764	$	(130,766)	$	5,571
Cumulative change in accounting principle					(7,956)
Balance at January 1, 2021	$	—	$	460,687	$	696,808	$	(130,766)	$	5,571
Net income					42,831
Other comprehensive loss, net of tax									(13,472)
Dividends on common shares at $1.23 per share					(20,365)
Cash payment for fractional common shares in dividend reinvestment plan			(1)
Issuance of 21,764 common shares under share-based compensation awards, net of 14,108 common shares withheld to pay employee income taxes			(3,988)		(44)		2,174
Share-based compensation expense			1,836
Balance at March 31, 2021	$	—	$	458,534	$	719,230	$	(128,592)	$	(7,901)
Net income					39,132
Other comprehensive income, net of tax									4,971
Dividends on common shares at $1.03 per share					(17,081)
Cash payment for fractional common shares in dividend reinvestment plan			(2)
Issuance of 4,834 common shares under share-based compensation awards, net of 2,973 common shares withheld to pay employee income taxes			(743)		(126)		483
Share-based compensation expense			1,487
Balance at June 30, 2021	$	—	$	459,276	$	741,155	$	(128,109)	$	(2,930)
Net income					35,434
Other comprehensive loss, net of tax									(4,880)
Dividends on common shares at $1.03 per share					(16,999)
Cash payment for fractional common shares in dividend reinvestment plan			(1)
Issuance of 3,079 common shares under share-based compensation awards, net of 1,348 common shares withheld to pay employee income taxes			(495)		29		307
Repurchase of 137,659 common shares to be held as treasury shares							(16,048)
Share-based compensation expense			1,173
Balance at September 30, 2021	$	—	$	459,953	$	759,619	$	(143,850)	$	(7,810)

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PARK NATIONAL CORPORATION AND SUBSIDIARIES

Consolidated Condensed Statements of Changes in Shareholders' Equity (Unaudited) (Continued)

(in thousands, except share and per share data)


	Preferred Shares		Common Shares		Retained Earnings		Treasury Shares		Accumulated Other Comprehensive Income (Loss)
Balance at January 1, 2020	$	—	$	459,389	$	646,847	$	(127,633)	$	(9,589)
Net income					22,372
Other comprehensive income, net of tax									17,693
Dividends on common shares at $1.22 per share					(20,111)
Cash payment for fractional common shares in dividend reinvestment plan			(1)
Issuance of 25,028 common shares under share-based compensation awards, net of 11,646 common shares withheld to pay employee income taxes			(3,865)		528		2,500
Repurchase of 76,000 common shares to be held as treasury shares							(7,507)
Share-based compensation expense			1,254
Balance at March 31, 2020	$	—	$	456,777	$	649,636	$	(132,640)	$	8,104
Net income					29,505
Other comprehensive income, net of tax									5,757
Dividends on common shares at $1.02 per share					(16,837)
Issuance of 970 common shares under share-based compensation awards, net of 530 common shares withheld to pay employee income taxes			(142)		7		96
Share-based compensation expense			1,331
Balance at June 30, 2020	$	—	$	457,966	$	662,311	$	(132,544)	$	13,861
Net income					30,846
Other comprehensive income, net of tax									339
Dividends on common shares at $1.02 per share					(16,821)
Issuance of 4,345 common shares under share-based compensation awards, net of 1,860 common shares withheld to pay employee income taxes			(690)		129		435
Share-based compensation expense			1,164
Balance at September 30, 2020	$	—	$	458,440	$	676,465	$	(132,109)	$	14,200

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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PARK NATIONAL CORPORATION AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows (Unaudited)

(in thousands)


	Nine Months Ended September 30,
	2021		2020
Operating activities:
Net income	$	117,397	$	82,723

Adjustments to reconcile net income to net cash provided by operating activities:
(Recovery of) provision for credit losses	(6,923)		31,213
Accretion of loan fees and costs, net	(20,601)		(12,191)
Depreciation of premises and equipment	9,951		7,888
Amortization of investment securities, net	1,442		1,064
Net accretion of purchase accounting adjustments	(1,375)		(2,005)
Realized net debt securities gains	—		(3,286)
(Gain) loss on equity securities, net	(2,886)		749
Loan originations to be sold in secondary market	(465,278)		(697,555)
Proceeds from sale of loans in secondary market	503,032		676,275
Gain on sale of loans in secondary market	(15,032)		(14,707)
Share-based compensation expense	4,496		3,749
Loss (gain) on sale of OREO, net	26		(1,214)
Bank owned life insurance income	(3,776)		(3,619)
Investment in qualified affordable housing tax credits amortization	5,567		5,487

Changes in assets and liabilities:
Increase in prepaid dealer premiums	(3,370)		(7,889)
Increase in other assets	(11,021)		(5,794)
Increase (decrease) in other liabilities	986		(8,452)
Net cash provided by operating activities	$	112,635	$	52,436

Investing activities:
Proceeds from the redemption/repurchase of Federal Home Loan Bank stock	$	8,677	$	7,639
Proceeds from sales of investment securities	934		312,159
Proceeds from calls and maturities of:
Debt securities AFS	176,926		164,725
Purchases of:
Debt securities AFS	(637,123)		(267,210)
Equity securities	—		(3,567)
Net decrease in other investments	2,655		201
Net loan paydowns (originations), portfolio loans	269,353		(727,387)
Proceeds from the sale of non-mortgage loans	3,688		—
Investment in qualified affordable housing tax credits	(6,182)		(4,301)
Proceeds from the sale of OREO	659		5,595
Life insurance death benefits	4,862		1,196
Purchases of premises and equipment	(10,670)		(20,820)
Net cash used in investing activities	$	(186,221)	$	(531,770)

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PARK NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Condensed Statements of Cash Flows (Unaudited) (Continued) (in thousands)
	Nine Months Ended September 30,
	2021		2020
Financing activities:
Net increase in deposits	$	900,305	$	1,196,684
Net increase in OWS deposits	(108,239)		(773,273)
Net (decrease) increase in short-term borrowings	(106,251)		89,778
Proceeds from issuance of subordinated notes	—		172,620
Repayment of long-term debt	(32,500)		(57,500)
Value of common shares withheld to pay employee income taxes	(2,403)		(1,002)
Repurchase of common shares to be held as treasury shares	(16,048)		(7,507)
Cash dividends paid	(54,357)		(53,713)
Net cash provided by financing activities	$	580,507	$	566,087

Increase in cash and cash equivalents	506,921		86,753

Cash and cash equivalents at beginning of year	370,474		159,956

Cash and cash equivalents at end of period	$	877,395	$	246,709

Supplemental disclosures of cash flow information:

Cash paid for:
Interest	$	14,930	$	24,600

Federal income tax	16,430		17,400

Non-cash items:
Loans transferred to OREO	$	78	$	1,124

Right-of-use assets obtained in exchange for lease obligations	547		7,794

New commitments in affordable housing tax credit investments	10,000		10,000

Debt securities AFS purchase commitment	52,508		—

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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PARK NATIONAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

The accompanying unaudited consolidated condensed financial statements included in this report have been prepared for Park National Corporation (sometimes also referred to as the “Registrant”) and its subsidiaries. Unless the context otherwise requires, references to "Park", the "Corporation" or the "Company" and similar terms mean Park National Corporation and its subsidiaries. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of operations for the interim periods included herein have been made. The results of operations for the three-month and nine-month periods ended September 30, 2021 are not necessarily indicative of the operating results to be anticipated for the year ending December 31, 2021.

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of the consolidated condensed balance sheets, consolidated condensed statements of income, consolidated condensed statements of comprehensive income, consolidated condensed statements of changes in shareholders’ equity and consolidated condensed statements of cash flows in conformity with U.S. GAAP. These financial statements should be read in conjunction with the consolidated financial statements included in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA in the Annual Report on Form 10-K of Park National Corporation for the fiscal year ended December 31, 2020 ("Park's 2020 Form 10-K"). Certain prior period amounts have been reclassified to conform to the current period presentation.

Park’s significant accounting policies are described in Note 1. Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Park’s 2020 Form 10-K. For interim reporting purposes, Park follows the same basic accounting policies, as updated by the information contained in this report, and considers each interim period an integral part of an annual period.

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 hotels and accommodations, restaurants and food service, and strip shopping centers industries.

Note 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:

Adoption of New Accounting Pronouncements

ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments: Effective January 1, 2021, Park adopted ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") ("ASC 326"), as amended. The new accounting guidance in ASU 2016-13 replaces the incurred loss methodology with an expected loss methodology, which is referred to as the current expected credit loss ("CECL") methodology. The CECL methodology is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, HTM debt securities, and reinsurance receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments), and net investments in leases recognized by a lessor. The CECL methodology requires an entity to estimate credit losses over the life of an asset or off-balance sheet credit exposure. The new accounting guidance was to have originally been effective for Park for annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2019.

Section 4014 of the CARES Act provided financial institutions with optional temporary relief from having to comply with ASU 2016-13, including the CECL methodology for estimating the allowance for credit losses. This temporary relief was set to expire on the earlier of the date on which the national emergency concerning COVID-19 terminated or December 31, 2020, with adoption being effective retrospectively as of January 1, 2020.

Section 540 of the Consolidated Appropriations Act, 2021, amended Section 4014 of the CARES Act by extending the relief period provided in the CARES Act. The Consolidated Appropriations Act, 2021, modifies the CARES Act so that temporary

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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 ASU 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 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)

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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 it 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 $5.3 million at September 30, 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.

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 do 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 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.

Accrued interest receivable on loans totaled $18.4 million at September 30, 2021 and is excluded from the estimate of credit losses.

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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	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 has 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 September 30, 2021, whenever possible. Park and peer FFIEC call report data are utilized when there are not sufficient 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

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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 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).

ACL - 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 impaired. Individual analysis establishes a specific reserve for loans in scope. Specific reserves on impaired 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.

ACL - Purchased Credit Deteriorated 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 - 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 as a provision for credit loss expense. 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.

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.

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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 2020-08 - 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. The adoption of this guidance on January 1, 2021, did not have a material impact on Park's consolidated financial statements.

Issued But Not Yet Effective Accounting Standards

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 will update the statistical disclosures in its Annual Report on Form 10-K for the fiscal year ending December 31, 2021, to align with this guidance.

Note 3 – Investment Securities

Investment securities at September 30, 2021 and December 31, 2020, were as follows:


Debt securities AFS (In thousands)	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses		Fair Value
September 30, 2021:
Obligations of states and political subdivisions	$	277,527	$	21,567	$	—	$	299,094
U.S. Government sponsored entities' asset-backed securities	844,128		17,876		4,855		857,149
Collateralized loan obligations	388,193		146		657		387,682
Corporate debt securities	9,250		43		—		9,293
Total	$	1,519,098	$	39,632	$	5,512	$	1,553,218


Debt securities AFS (In thousands)	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses		Fair Value
December 31, 2020:
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

Park’s U.S. Government sponsored entities' asset-backed securities consist primarily of 15-year residential mortgage-backed securities and collateralized mortgage obligations.

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Investment securities in an unrealized loss position at September 30, 2021, were as follows:


	Unrealized loss position for less than 12 months				Unrealized loss position for 12 months or longer				Total
(In thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Debt securities AFS
U.S. Government sponsored entities' asset-backed securities	$	296,586	$	4,855	$	—	$	—	$	296,586	$	4,855
Collateralized loan obligations	239,804		657		—		—		239,804		657
Total	$	536,390	$	5,512	$	—	$	—	$	536,390	$	5,512

Investment securities in an unrealized loss position at December 31, 2020, were as follows:


	Unrealized loss position for less than 12 months				Unrealized loss position for 12 months or longer				Total
(In thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Debt securities AFS
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

Unrealized losses on U.S. Government sponsored entities' asset-based securities and collateralized loan obligations have not been recognized into income 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 September 30, 2021. Additionally, for the three-months and nine-months ended September 30, 2021 and 2020, there were no credit-related investment impairment losses recognized.

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The amortized cost and estimated fair value of investments in debt securities AFS at September 30, 2021, are shown in the following table by contractual maturity, except for asset-backed securities and collateral loan obligations, which are shown as a single total, due to the unpredictability of the timing of principal repayments.


Debt securities AFS (In thousands)	Amortized cost		Fair value		Tax equivalent yield (1)

U.S. Government sponsored entities' asset-backed securities	$	844,128	$	857,149	1.73	%

Collateralized loan obligations	$	388,193	$	387,682	1.45	%

Corporate debt securities
Due five through ten years	$	9,250	$	9,293	4.10	%

Obligations of state and political subdivisions:
Due five through ten years	$	136,029	$	146,481	3.71	%
Due over ten years	141,498		152,613		3.68	%
Total (1)	$	277,527	$	299,094	3.70	%

(1) The tax equivalent yield for certain obligations of state and political subdivisions includes the effects of a taxable equivalent adjustment using a 21% federal corporate income tax rate.

There were no sales of debt securities AFS during the three-month or nine-month periods ended September 30, 2021. During the three months ended September 30, 2020, Park sold certain debt securities AFS with a book value of $140.9 million at a gross gain of $37,000 and sold certain debt securities AFS with a book value of $112.5 million at a gross loss of $64,000. During the nine months ended September 30, 2020, Park sold certain debt securities AFS with a book value of $196.4 million at a gross gain of $3.4 million and sold certain debt securities AFS with a book value of $112.5 million at a gross loss of $64,000.

Investment securities having an amortized cost of $717.5 million and $691.0 million at September 30, 2021 and December 31, 2020, respectively, were pledged to collateralize government and trust department deposits in accordance with federal and state requirements, to secure repurchase agreements sold and as collateral for FHLB advance borrowings.

Note 4 – Other Investment Securities

Other investment securities consist of stock investments in the FHLB, the FRB, and equity securities. The FHLB and FRB 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 NAV practical expedient in accordance with ASC 820.

The carrying amounts of other investment securities at September 30, 2021 and December 31, 2020 were as follows:


(In thousands)	September 30, 2021		December 31, 2020
FHLB stock	$	13,413	$	22,090
FRB stock	14,653		14,653
Equity investments carried at fair value	2,070		2,511
Equity investments carried at modified cost (1)	4,689		4,689
Equity investments carried at NAV	21,260		21,522
Total other investment securities	$	56,085	$	65,465

(1) There have been no impairments, downward adjustments, or upward adjustments made to equity investments carried at modified cost.

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During the three months ended September 30, 2021 and 2020, the FHLB repurchased 21,286 and 13,971 shares, respectively, of FHLB stock with a book value of $2.1 million and $1.4 million, respectively. During the nine months ended September 30, 2021 and 2020, the FHLB repurchased 86,770 and 76,394 shares, respectively, of FHLB stock with a book value of $8.7 million and $7.6 million, respectively. No shares of FRB stock were purchased during the three months or the nine months ended September 30, 2021 or 2020.

During the three months ended September 30, 2021 and 2020, $97,000 and $(89,000), respectively, of gains (losses) on equity investments carried at fair value were recorded within "Gain (loss) on equity securities, net" on the Consolidated Condensed Statements of Income. During the nine months ended September 30, 2021 and 2020, $492,000 and $(708,000), respectively, of gains (losses) on equity investments carried at fair value were recorded within "Gain (loss) on equity securities, net" on the Consolidated Condensed Statements of Income.

During the three months ended September 30, 2021 and 2020, $0.5 million and $1.3 million, respectively, of gains on equity investments carried at NAV were recorded within “Gain (loss) on equity securities, net” on the Consolidated Condensed Statements of Income. During the nine months ended September 30, 2021 and 2020, $2.4 million and $(41,000), respectively, of gains (losses) on equity investments carried at NAV were recorded within “Gain (loss) on equity securities, net” on the Consolidated Condensed Statements of Income.

Note 5 – Loans

The composition of the loan portfolio at September 30, 2021 and December 31, 2020 was as follows:


	September 30, 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)	$	1,179,354	(2)		(2)		(2)
PPP loans	131,483		(2)		(2)		(2)
Overdrafts	4,033		(2)		(2)		(2)
Commercial real estate (1)	1,761,596		1,748,189		6,017		1,754,206
Construction real estate:
Commercial	231,210		226,991		572		227,563
Retail	111,677		116,430		235		116,665
Residential real estate:
Commercial	527,151		526,222		1,161		527,383
Mortgage	1,052,093		1,096,358		947		1,097,305
HELOC	166,454		182,028		647		182,675
Installment	6,410		8,436		22		8,458
Consumer:			1,659,704		4,510		1,664,214
Consumer	1,710,608		(2)		(2)		(2)
GFSC	2,624		(2)		(2)		(2)
Check loans	2,092		(2)		(2)		(2)
Leases	21,632		24,438		14		24,452
Total	$	6,908,417	$	7,177,785	$	20,653	$	7,198,438
Allowance for credit losses	(88,129)		(85,675)
Net loans	$	6,820,288	$	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.

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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 September 30, 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 three months ended September 30, 2021 and September 30, 2020, $4.3 million and $3.8 million, respectively, of PPP fee income were recognized within loan interest income. During the nine months ended September 30, 2021 and September 30, 2020, $14.0 million and $6.6 million, respectively, of PPP fee income were recognized within loan interest income.

Loans are shown net of deferred origination fees, costs and unearned income of $22.7 million at September 30, 2021, and of $23.6 million at December 31, 2020, which represented a net deferred income position in both years. At September 30, 2021 and December 31, 2020, included in the net deferred origination fees, costs and unearned income were $5.2 million and $6.5 million, respectively, in net origination fees related to PPP loans. At September 30, 2021 and December 31, 2020, loans included purchase accounting adjustments of $4.8 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 $4.0 million and $2.0 million were reclassified to loans at September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021, overdrafts were within their own class and as of December 31, 2020, 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 September 30, 2021:


	September 30, 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	$	18,245	$	3,812	$	—	$	22,057
PPP loans	—		—		—		—
Overdrafts	—		—		—		—
Commercial real estate	46,803		3,740		—		50,543
Construction real estate:
Commercial	61		380		—		441
Retail	12		10		—		22
Residential real estate:
Commercial	4,614		243		—		4,857
Mortgage	13,122		7,387		—		20,509
HELOC	1,683		697		—		2,380
Installment	113		1,661		29		1,803
Consumer:
Consumer	1,650		857		243		2,750
GFSC	82		10		12		104
Check loans	—		—		—		—
Leases	1,406		—		—		1,406
Total loans	$	87,791	$	18,797	$	284	$	106,872

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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 September 30, 2021:


	September 30, 2021
(In thousands)	Nonaccrual Loans With No ACL		Nonaccrual Loans With an ACL		Related ACL
Commercial, financial and agricultural:
Commercial, financial and agricultural	$	13,270	$	4,975	$	3,190
PPP loans	—		—		—
Overdrafts	—		—		—
Commercial real estate	46,121		682		180
Construction real estate:
Commercial	61		—		—
Retail	—		12		—
Residential real estate:
Commercial	4,614		—		—
Mortgage	—		13,122		84
HELOC	—		1,683		110
Installment	—		113		26
Consumer
Consumer	—		1,650		470
GFSC	—		82		12
Check loans	—		—		—
Leases	930		476		103
Total loans	$	64,996	$	22,795	$	4,175

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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:


	12/31/2020
(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 September 30, 2021:


	September 30, 2021
(In thousands)	Real Estate		Business Assets		Other		Total
Commercial, financial and agricultural
Commercial, financial and agricultural	$	9,386	$	12,232	$	651	$	22,269
Commercial real estate	56,722		300		47		57,069
Construction real estate:
Commercial	1,407		—		—		1,407
Residential real estate:
Commercial	5,250		—		—		5,250
Mortgage	375		—		—		375
HELOC	144		—		—		144
Leases	—		1,455		—		1,455
Total loans	$	73,284	$	13,987	$	698	$	87,969

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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 three-month and nine-month periods ended September 30, 2021:


	Interest Income Recognized
(In thousands)	Three months ended September 30, 2021		Nine months ended September 30, 2021
Commercial, financial and agricultural:
Commercial, financial and agricultural	$	40	$	147
PPP loans	—		—
Overdrafts	—		—
Commercial real estate	458		1,480
Construction real estate:
Commercial	1		38
Retail	—		1
Residential real estate:
Commercial	60		180
Mortgage	90		233
HELOC	2		12
Installment	—		2
Consumer:
Consumer	23		71
GFSC	3		11
Check loans	—		—
Leases	17		61
Total loans	$	694	$	2,236

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 three months and nine months ended September 30, 2020:


			Three months ended September 30, 2020				Nine months ended September 30, 2020
(In thousands)	Recorded Investment as of September 30, 2020		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial, financial and agricultural	$	33,098	$	29,481	$	159	30,426		543
Commercial real estate	72,519		58,195		526		50,479		1,416
Construction real estate:
Commercial	3,142		1,212		6		743		14
Residential real estate:
Commercial	4,897		5,061		65		4,271		166
Leases	2,524		2,079		—		909		—
Total	$	116,180	$	96,028	$	756	$	86,828	$	2,139

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The following table presents the aging of the amortized cost in past due loans at September 30, 2021 by class of loan:


	September 30, 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	$	3,210	$	10,909	$	14,119	$	1,165,235	$	1,179,354
PPP loans	1		—		1		131,482		131,483
Overdrafts	—		—		—		4,033		4,033
Commercial real estate	—		1,009		1,009		1,760,587		1,761,596
Construction real estate:
Commercial	815		—		815		230,395		231,210
Retail	1,202		12		1,214		110,463		111,677
Residential real estate:
Commercial	—		413		413		526,738		527,151
Mortgage	5,931		5,884		11,815		1,040,278		1,052,093
HELOC	487		997		1,484		164,970		166,454
Installment	37		93		130		6,280		6,410
Consumer:
Consumer	2,436		404		2,840		1,707,768		1,710,608
GFSC	196		57		253		2,371		2,624
Check loans	8		—		8		2,084		2,092
Leases	53		576		629		21,003		21,632
Total loans	$	14,376	$	20,354	$	34,730	$	6,873,687	$	6,908,417

(1) Includes an aggregate of $0.3 million of loans past due 90 days or more and accruing. The remaining loans were past due nonaccrual loans.

(2) Includes an aggregate of $67.7 million of nonaccrual loans which were current in regards to contractual principal and interest payments.

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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 September 30, 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 a 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 impaired 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.

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Based on the most recent analysis performed, the risk category of loans by class of loans as of September 30, 2021 follows:


September 30, 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	$	195,565	$	225,189	$	111,003	$	58,680	$	47,081	$	74,703	$	439,145	$	1,151,366
Special Mention	—		1,711		477		390		101		—		6,916		9,595
Substandard	612		787		593		1,371		680		8,084		404		12,531
Doubtful	1,167		912		372		321		1,903		496		691		5,862
Total	$	197,344	$	228,599	$	112,445	$	60,762	$	49,765	$	83,283	$	447,156	$	1,179,354


Commercial, financial and agricultural: PPP
Risk rating
Pass	$	117,405	$	14,078	$	—	$	—	$	—	$	—	$	—	$	131,483
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—
Total	$	117,405	$	14,078	$	—	$	—	$	—	$	—	$	—	$	131,483


Commercial real estate (1)
Risk rating
Pass	$	274,406	$	453,316	$	251,647	$	167,526	$	120,190	$	345,899	$	11,767	$	1,624,751
Special Mention	1,571		12,615		34,376		10,602		7,725		18,777		3,590		89,256
Substandard	1,429		3,866		4,679		12,175		8,486		15,587		439		46,661
Doubtful	—		—		245		—		47		636		—		928
Total	$	277,406	$	469,797	$	290,947	$	190,303	$	136,448	$	380,899	$	15,796	$	1,761,596


Construction real estate: Commercial
Risk rating
Pass	$	65,351	$	85,633	$	43,410	$	5,308	$	1,900	$	5,250	$	22,951	$	229,803
Special Mention	—		—		98		699		—		—		282		1,079
Substandard	—		54		7		267		—		—		—		328
Doubtful	—		—		—		—		—		—		—		—
Total	$	65,351	$	85,687	$	43,515	$	6,274	$	1,900	$	5,250	$	23,233	$	231,210


Residential Real Estate: Commercial
Risk rating
Pass	$	106,322	$	172,182	$	65,248	$	46,258	$	29,798	$	86,348	$	14,615	$	520,771
Special Mention	96		—		413		80		—		507		337		1,433
Substandard	615		22		809		1,977		64		1,026		166		4,679
Doubtful	—		—		—		—		244		24		—		268
Total	$	107,033	$	172,204	$	66,470	$	48,315	$	30,106	$	87,905	$	15,118	$	527,151


Leases
Risk rating
Pass	$	5,179	$	6,398	$	4,017	$	2,652	$	907	$	1,057	$	—	$	20,210
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		792		—		41		—		75		—		908
Doubtful	—		76		354		21		47		16		—		514
Total	$	5,179	$	7,266	$	4,371	$	2,714	$	954	$	1,148	$	—	$	21,632

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September 30, 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	$	764,228	$	956,796	$	475,325	$	280,424	$	199,876	$	513,257	$	488,478	$	3,678,384
Special Mention	1,667		14,326		35,364		11,771		7,826		19,284		11,125		101,363
Substandard	2,656		5,521		6,088		15,831		9,230		24,772		1,009		65,107
Doubtful	1,167		988		971		342		2,241		1,172		691		7,572
Total	$	769,718	$	977,631	$	517,748	$	308,368	$	219,173	$	558,485	$	501,303	$	3,852,426

(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.

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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.


September 30, 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	$	4,033	$	—	$	—	$	—	$	—	$	—	$	—	$	4,033
Nonperforming	—		—		—		—		—		—		—		—
Total	$	4,033	$	—	$	—	$	—	$	—	$	—	$	—	$	4,033


Construction Real Estate: Retail
Performing	$	47,057	$	49,942	$	7,649	$	3,045	$	1,556	$	2,326	$	80	$	111,655
Nonperforming	—		—		—		—		—		22		—		22
Total	$	47,057	$	49,942	$	7,649	$	3,045	$	1,556	$	2,348	$	80	$	111,677


Residential Real Estate: Mortgage
Performing	$	195,203	$	217,391	$	123,465	$	75,441	$	63,593	$	356,491	$	—	$	1,031,584
Nonperforming	—		629		814		861		841		17,364		—		20,509
Total	$	195,203	$	218,020	$	124,279	$	76,302	$	64,434	$	373,855	$	—	$	1,052,093


Residential Real Estate: HELOC
Performing	$	299	$	—	$	158	$	22	$	43	$	2,490	$	161,062	$	164,074
Nonperforming	—		—		—		39		70		1,878		393		2,380
Total	$	299	$	—	$	158	$	61	$	113	$	4,368	$	161,455	$	166,454


Residential Real Estate: Installment
Performing	$	—	$	7	$	553	$	142	$	1,231	$	2,674	$	—	$	4,607
Nonperforming	—		13		2		43		85		1,660		—		1,803
Total	$	—	$	20	$	555	$	185	$	1,316	$	4,334	$	—	$	6,410


Consumer: Consumer
Performing	$	544,465	$	558,784	$	293,738	$	138,496	$	77,438	$	72,314	$	22,623	$	1,707,858
Nonperforming	129		482		772		426		243		698		—		2,750
Total	$	544,594	$	559,266	$	294,510	$	138,922	$	77,681	$	73,012	$	22,623	$	1,710,608


Consumer: GFSC
Performing	$	—	$	333	$	1,581	$	452	$	110	$	(81)	$	125	$	2,520
Nonperforming	—		—		70		19		15		—		—		104
Total	$	—	$	333	$	1,651	$	471	$	125	$	(81)	$	125	$	2,624


Consumer: Check loans
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	2,092	$	2,092
Nonperforming	—		—		—		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	—	$	—	$	2,092	$	2,092


Total Consumer Loans
Performing	$	791,057	$	826,457	$	427,144	$	217,598	$	143,971	$	436,214	$	185,982	$	3,028,423
Nonperforming	129		1,124		1,658		1,388		1,254		21,622		393		27,568
Total	$	791,186	$	827,581	$	428,802	$	218,986	$	145,225	$	457,836	$	186,375	$	3,055,991

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Loans and Leases Acquired with Deteriorated Credit Quality

In conjunction with the NewDominion acquisition, Park acquired loans with a book value of $277.9 million as of the July 1, 2018 acquisition date. These loans were recorded at the initial fair value of $272.8 million. 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 September 30, 2021, there was no allowance for credit losses on PCD loans. The carrying amount of loans acquired with deteriorated credit quality at September 30, 2021 and December 31, 2020 was $8.7 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 twenty-one months ended September 30, 2021, Park modified 5,131 consumer loans, with an aggregate balance of $79.5 million, and modified 1,406 commercial loans, with an aggregate balance of $513.3 million, in each case related to a hardship caused by the COVID-19 pandemic and responses thereto. Park has worked with borrowers impacted by the COVID-19 pandemic and provided modifications to include 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. 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 are considered current and continue to accrue interest during the deferral period.

Certain other loans which were modified during the three-month and nine-month periods ended September 30, 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.

At September 30, 2021 and December 31, 2020, there were $26.1 million and $25.8 million, respectively, of TDRs included in the nonaccrual loan totals. At September 30, 2021 and December 31, 2020, $16.2 million and $12.9 million, respectively, of these nonaccrual TDRs were performing in accordance with the terms of the restructured notes. At September 30, 2021 and December 31, 2020, loans totaling $18.8 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 September 30, 2021 and December 31, 2020, Park had commitments to lend $6.8 million and $6.7 million, respectively, of additional funds to borrowers whose outstanding loan terms had been modified in a TDR.

At September 30, 2021 and December 31, 2020, there were $0.5 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 respective borrowers 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. There were $156,000 and $174,000 of additional specific reserves recorded during the three-month and nine-month periods ended September 30, 2021, respectively, as a result of TDRs identified in the period. There were no

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additional specific reserves recorded during either the three-month or nine-month periods ended September 30, 2020 as a result of TDRs identified in the period.

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 will 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. There were $58,000 and $4.0 million of TDR classifications removed during the three-month and nine-month periods ended September 30, 2021, respectively. The TDR classification was removed on $709,000 and $1.6 million of loans during the three-month and nine-month periods ended September 30, 2020, respectively.

The terms of certain other loans were modified during the three-month and nine-month periods ended September 30, 2021 and 2020 that did not meet the definition of a TDR. Excluding COVID-19 related modifications, there were no substandard commercial loans modified during the three-month and nine-month periods ended September 30, 2021 and September 30, 2020, which did not meet the definition of a TDR. Excluding COVID-19 related modifications, consumer loans modified during the three-month and nine-month periods ended September 30, 2021 which did not meet the definition of a TDR had a total recorded investment of $2.0 million and $4.8 million, respectively. Excluding COVID-19 related modifications, consumer loans modified during the three-month and nine-month periods ended September 30, 2020 which did not meet the definition of a TDR had a total recorded investment of $16.7 million and $58.2 million, respectively. Many of these loans were to borrowers who were not experiencing financial difficulties but who were looking to reduce their cost of funds.

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The following tables detail the number of contracts modified as TDRs during the three-month periods ended September 30, 2021 and 2020, as well as the amortized cost/recorded investment of these contracts at September 30, 2021 and 2020. The amortized cost/recorded investment pre- and post-modification is generally the same due to the fact that Park does not typically forgive principal.


	Three Months Ended September 30, 2021
(In thousands)	Number of Contracts	Accruing		Nonaccrual		Total Amortized Cost
Commercial, financial and agricultural
Commercial, financial and agricultural	5	$	383	$	868	$	1,251
PPP loans	—	—		—		—
Overdrafts	—	—		—		—
Commercial real estate	5	—		5,053		5,053
Construction real estate:
Commercial	—	—		—		—
Retail	—	—		—		—
Residential real estate:
Commercial	2	96		125		221
Mortgage	3	—		102		102
HELOC	1	33		—		33
Installment	1	55		—		55
Consumer:
Consumer	28	15		250		265
GFSC	—	—		—		—
Check loans	—	—		—		—
Leases	—	—		—		—
Total loans	45	$	582	$	6,398	$	6,980


	Three Months Ended September 30, 2020
(In thousands)	Number of Contracts	Accruing		Nonaccrual		Total Recorded Investment
Commercial, financial and agricultural	3	$	35	$	117	$	152
Commercial real estate	4	—		359		359
Construction real estate:
Commercial	—	—		—		—
Mortgage	—	—		—		—
Installment	—	—		—		—
Residential real estate:
Commercial	—	—		—		—
Mortgage	5	258		109		367
HELOC	1	21		—		21
Installment	3	12		7		19
Consumer	64	109		479		588
Total loans	80	$	435	$	1,071	$	1,506

Of those loans which were modified and determined to be a TDR during the three-month period ended September 30, 2021, $4.5 million were on nonaccrual status at December 31, 2020. Of those loans which were modified and determined to be a TDR during the three-month period ended September 30, 2020, $0.1 million were on nonaccrual status at December 31, 2019.

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The following tables detail the number of contracts modified as TDRs during the nine-month periods ended September 30, 2021 and 2020, as well as the amortized cost/recorded investment of these contracts at September 30, 2021 and 2020. The amortized cost/recorded investment pre- and post-modification is generally the same due to the fact that Park does not typically forgive principal.


	Nine Months Ended September 30, 2021
(In thousands)	Number of Contracts	Accruing		Nonaccrual		Total Amortized Cost
Commercial, financial and agricultural
Commercial, financial and agricultural	9	$	383	$	899	$	1,282
PPP loans	—	—		—		—
Overdrafts	—	—		—		—
Commercial real estate	13	1,571		6,137		7,708
Construction real estate:						—
Commercial	1	98		—		98
Retail	—	—		—		—
Residential real estate:						—
Commercial	5	96		528		624
Mortgage	13	148		377		525
HELOC	5	80		106		186
Installment	7	93		27		120
Consumer:						—
Consumer	104	137		379		516
GFSC	—			—		—
Check loans	—			—		—
Leases	1			351		351
Total loans	158	$	2,606	$	8,804	$	11,410


	Nine Months Ended September 30, 2020
(In thousands)	Number of Contracts	Accruing		Nonaccrual		Total Recorded Investment
Commercial, financial and agricultural	10	$	117	$	1,110	$	1,227
Commercial real estate	8	1,136		2,068		3,204
Construction real estate:
Commercial	—	—		—		—
Mortgage	1	10		—		10
Installment	1	—		14		14
Residential real estate:
Commercial	1	—		8		8
Mortgage	24	735		1,005		1,740
HELOC	6	25		18		43
Installment	16	191		63		254
Consumer	177	235		655		890
Total loans	244	$	2,449	$	4,941	$	7,390

Of those loans which were modified and determined to be a TDR during the nine-month period ended September 30, 2021, $6.1 million were on nonaccrual status at December 31, 2020. Of those loans which were modified and determined to be a TDR during the nine-month period ended September 30, 2020, $0.4 million were on nonaccrual status at December 31, 2019.

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The following tables present the amortized cost/recorded investment in loans which were modified as TDRs within the previous 12 months and for which there was a payment default during the three-month and nine-month periods ended September 30, 2021 and 2020, respectively. For these tables, a loan is considered to be in default when it becomes 30 days contractually past due under the modified terms. The additional ACL resulting from the defaults on TDR loans was immaterial.


	Three Months Ended September 30, 2021			Three Months Ended September 30, 2020
(In thousands)	Number of Contracts	Amortized Cost		Number of Contracts	Recorded Investment
Commercial, financial and agricultural:				—	$	—
Commercial, financial and agricultural	—	$	—	(1)	(1)
PPP loans	—	—		(1)	(1)
Overdrafts	—	—		(1)	(1)
Commercial real estate	—	—		1	50
Construction real estate:
Commercial	—	—		—	—
Retail	—	—		1	14
Residential real estate:
Commercial	—	—		—	—
Mortgage	4	330		4	365
HELOC	1	95		1	16
Installment	1	4		1	16
Consumer				26	263
Consumer	15	122		(1)	(1)
GFSC	—	—		(1)	(1)
Check loans	—	—		(1)	(1)
Leases	—	—		—	—
Total loans	21	$	551	34	$	724

(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 $0.6 million in modified TDRs which defaulted during the three-month period ended September 30, 2021, $29,000 were accruing loans and $0.5 million were nonaccrual loans. Of the $0.7 million in modified TDRs which defaulted during the three-month period ended September 30, 2020, $65,000 were accruing loans and $0.7 million were nonaccrual loans.

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	Nine Months Ended September 30, 2021			Nine Months Ended September 30, 2020
(In thousands)	Number of Contracts	Amortized Cost		Number of Contracts	Recorded Investment
Commercial, financial and agricultural:				2	89
Commercial, financial and agricultural	—	—		(1)	(1)
PPP loans	—	—		(1)	(1)
Overdrafts	—	—		(1)	(1)
Commercial real estate	—	—		2	278
Construction real estate:
Commercial	—	—		—	—
Retail	—	—		1	14
Residential real estate:
Commercial	—	—		1	8
Mortgage	6	396		8	768
HELOC	1	95		1	16
Installment	2	32		2	28
Consumer				32	365
Consumer	16	128		(1)	(1)
GFSC	—	—		(1)	(1)
Check loans	—	—		(1)	(1)
Leases	1	351		—	—
Total loans	26	$	1,002	49	$	1,566

Of the $1.0 million in modified TDRs which defaulted during the nine-month period ended September 30, 2021, $29,000 were accruing loans and $1.0 million were nonaccrual loans. Of the $1.6 million in modified TDRs which defaulted during the nine-month period ended September 30, 2020, $621,000 were accruing loans and $945,000 were nonaccrual loans.

Note 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 2 – Adoption of New Accounting Pronouncements and Issued But Not Yet Effective Accounting Standards of the Notes to the Consolidated Condensed Financial Statements included in this Form 10-Q.

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.

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•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 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 2020.

•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. Management determined it was appropriate to weight the "most likely" scenario 50% and the "moderate recession" scenario 50%.

◦As of June 30, 2021, the "most likely" scenario forecasted Ohio unemployment to decrease significantly, to a range between 2.85% and 3.92% during the next four quarters. In determining the appropriate weighting of scenarios at June 30, 2021, management considered this improved economic forecast and other positive economic indicators while balancing the risks associated with the COVID-19 pandemic, including the continued risk of pandemic-related losses lagging behind the projected improvement in unemployment. Management determined it was appropriate to weight the "most likely" scenario 55% and the "moderate recession" scenario 45% at June 30, 2021. Management believed that the resulting quantitative reserve appropriately balanced economic improvement with the ongoing risks.

◦As of September 30, 2021, the "most likely" scenario forecasted Ohio unemployment to decrease, to a range between 3.03% and 4.02%, during the next four quarters. In determining the appropriate weighting of scenarios at September 30, 2021, management considered a number of less optimistic economic indicators, including: a slight uptick in Ohio unemployment, which was contrary to the forecast; increased COVID cases; decreased consumer confidence; and decreased occupancy, among others. Considering these factors, management determined it was appropriate to return to the March 31, 2021 weighting and weigh the "most likely" scenario 50% and the "moderate recession" scenario 50% at September 30, 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.

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•The effect of other external factors such as the regulatory, legal and technological environments; competition; and events such as natural disasters or pandemics.

•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 September 30, 2021, additional reserves totaling $4.6 million were added for these portfolios on top of the quantitative reserve already calculated. This is an increase from $3.4 million as of June 30, 2021 and $4.5 million as of March 31, 2021 and reflects the previously discussed uncertainty regarding sustained economic improvement due to COVID-19. The $4.6 million in additional COVID-19-related reserves as of September 30, 2021 is also an increase compared to $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.


	September 30, 2021
(in thousands)	4-Rated Balance		Additional Reserve
Hotels and accommodations	$	123,249	$	1,854
Restaurants and food service	33,373		754
Strip shopping centers	177,635		1,961
Total	$	334,257	$	4,569

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 is an increase from 0.50% at June 30, 2021 and considers some decline in various economic conditions due to the Delta variant and a decline in hotel occupancy rates. At September 30, 2021, Park's originated hotels and accommodation loans had a balance of $193.8 million with an additional reserve related to valuation risks of $1.9 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 September 30, 2021, Park had $131.5 million 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.

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ACL Activity

The activity in the ACL for the three-month and nine-month periods ended September 30, 2021 and September 30, 2020 is summarized in the following tables.


	Three Months Ended September 30, 2021
(In thousands)	Commercial, financial and agricultural		Commercial real estate		Construction real estate		Residential real estate		Consumer		Leases		Total
ACL:
Beginning balance	$	15,222	$	22,749	$	5,670	$	13,113	$	26,261	$	562	$	83,577
Charge-offs	221		—		—		—		781		—		1,002
Recoveries	132		428		1,597		729		696		—		3,582
Net charge-offs/(recoveries)	$	89	$	(428)	$	(1,597)	$	(729)	$	85	$	—	$	(2,580)
Provision for (recovery of) credit loss	843		2,991		(1,003)		(2,080)		1,483		(262)		1,972
Ending balance	$	15,976	$	26,168	$	6,264	$	11,762	$	27,659	$	300	$	88,129


	Three Months Ended September 30, 2020
(In thousands)	Commercial, financial and agricultural		Commercial real estate		Construction real estate		Residential real estate		Consumer		Leases		Total
ACL:
Beginning balance	$	23,476	$	16,469	$	6,828	$	10,507	$	15,624	$	572	$	73,476
Charge-offs	241		45		—		34		1,208		1		1,529
Recoveries	181		47		35		189		803		—		1,255
Net charge-offs/(recoveries)	$	60	$	(2)	$	(35)	$	(155)	$	405	$	1	$	274
Provision for credit loss	3,571		6,417		1,544		546		1,750		8		13,836
Ending balance	$	26,987	$	22,888	$	8,407	$	11,208	$	16,969	$	579	$	87,038


	Nine Months Ended September 30, 2021
(In thousands)	Commercial, financial and agricultural		Commercial real estate		Construction real estate		Residential real estate		Consumer		Leases		Total
ACL:
Beginning balance, prior to adoption of ASC 326	$	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	675		—		—		37		3,061		—		3,773
Recoveries	487		724		2,078		859		2,912		—		7,060
Net charge-offs/(recoveries)	$	188	$	(724)	$	(2,078)	$	(822)	$	149	$	—	$	(3,287)
Recovery of credit loss	(1,187)		(155)		(1,204)		(3,544)		(535)		(298)		(6,923)
Ending balance	$	15,976	$	26,168	$	6,264	$	11,762	$	27,659	$	300	$	88,129


	Nine Months Ended September 30, 2020
(In thousands)	Commercial, financial and agricultural		Commercial real estate		Construction real estate		Residential real estate		Consumer		Leases		Total
ACL:
Beginning balance	$	20,203	$	10,229	$	5,311	$	8,610	$	12,211	$	115	$	56,679
Charge-offs	1,041		45		6		176		5,060		16		6,344
Recoveries	1,061		690		628		457		2,654		—		5,490
Net (recoveries)/charge-offs	$	(20)	$	(645)	$	(622)	$	(281)	$	2,406	$	16	$	854
Provision for credit loss	6,764		12,014		2,474		2,317		7,164		480		31,213
Ending balance	$	26,987	$	22,888	$	8,407	$	11,208	$	16,969	$	579	$	87,038

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ACL Summary

Loans collectively evaluated for impairment in the following tables include all performing loans at September 30, 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 September 30, 2021 and December 31, 2020, which are evaluated for impairment in accordance with U.S. GAAP (see Note 1 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Park’s 2020 Form 10-K).

The composition of the ACL at September 30, 2021 and December 31, 2020 was as follows:


	September 30, 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	$	3,183		$	180		$	—		$	—		$	—		$	103		$	3,466
Collectively evaluated for impairment	12,793			25,988			6,264			11,762			27,659			197			84,663
Acquired with deteriorated credit quality	—			—			—			—			—			—			—
Total ending allowance balance	$	15,976		$	26,168		$	6,264		$	11,762		$	27,659		$	300		$	88,129

Loan balance:
Loans individually evaluated for impairment	$	22,018		$	50,541		$	442		$	4,857		$	—		$	1,406		$	79,264
Loans collectively evaluated for impairment	1,292,601			1,704,527			341,480			1,746,339			1,715,324			20,177			6,820,448
Loans acquired with deteriorated credit quality	251			6,528			965			912			—			49			8,705
Total ending loan balance	$	1,314,870		$	1,761,596		$	342,887		$	1,752,108		$	1,715,324		$	21,632		$	6,908,417

ACL as a percentage of loan balance:
Loans individually evaluated for impairment	14.46		%	0.36		%	—		%	—		%	—		%	7.33		%	4.37		%
Loans collectively evaluated for impairment	0.99		%	1.52		%	1.83		%	0.67		%	1.61		%	0.98		%	1.24		%
Loans acquired with deteriorated credit quality	—		%	—		%	—		%	—		%	—		%	—		%	—		%
Total	1.22		%	1.49		%	1.83		%	0.67		%	1.61		%	1.39		%	1.28		%

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	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

Note 7 – Loans Held For Sale

Mortgage loans held for sale are carried at their fair value. At September 30, 2021 and December 31, 2020, respectively, Park had $8.9 million and $31.7 million in mortgage loans held for sale. These amounts are included in loans on the Consolidated Condensed Balance Sheets and in the residential real estate loan portfolio segment in Note 5 - Loans, and Note 6 - Allowance for Credit Losses. The contractual balance was $8.8 million and $30.9 million at September 30, 2021 and December 31, 2020, respectively. The gain expected upon sale was $175,000 and $753,000 at September 30, 2021 and December 31, 2020, respectively. None of these loans were 90 days or more past due or on nonaccrual status at September 30, 2021 or December 31, 2020.

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Note 8 – Goodwill and Other Intangible Assets

The following tables show the activity in goodwill and other intangible assets for the three-month and nine-month periods ended September 30, 2021 and 2020.


(in thousands)	Goodwill		Other intangible assets		Total
July 1, 2020	$	159,595	$	10,310	$	169,905
Amortization	—		525		525
September 30, 2020	$	159,595	$	9,785	$	169,380

July 1, 2021	$	159,595	$	8,302	$	167,897
Amortization	—		420		420
September 30, 2021	$	159,595	$	7,882	$	167,477


(in thousands)	Goodwill		Other intangible assets		Total
December 31, 2019	$	159,595	$	11,523	$	171,118
Amortization	—		1,738		1,738
September 30, 2020	$	159,595	$	9,785	$	169,380

December 31, 2020	$	159,595	$	9,260	$	168,855
Amortization	—		1,378		1,378
September 30, 2021	$	159,595	$	7,882	$	167,477

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.

Acquired Intangible Assets

The following table shows the balance of acquired intangible assets as of September 30, 2021 and December 31, 2020.


	September 30, 2021				December 31, 2020
(in thousands)	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Other intangible assets:
Core deposit intangible assets	$	14,456	$	6,574	$	14,456	$	5,196
Trade name intangible assets	1,300		1,300		1,300		1,300
Total	$	15,756	$	7,874	$	15,756	$	6,496

Core deposit intangible assets are being amortized, on an accelerated basis, over a period of ten years. Aggregate amortization expense was $420,000 and $525,000 for the three months ended September 30, 2021 and 2020, respectively, and was $1.4 million and $1.7 million for the nine months ended September 30, 2021 and 2020, respectively.

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Estimated amortization expense related to core deposit intangible assets for each of the next five years follows:


(in thousands)	Total
Three months ending December 31, 2021	$	420
2022	1,487
2023	1,323
2024	1,215
2025	1,042

Note 9 – Investment 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.

The table below details the balances of Park’s affordable housing tax credit investments and related unfunded commitments at September 30, 2021 and December 31, 2020.


(in thousands)	September 30, 2021		December 31, 2020
Affordable housing tax credit investments	$	60,457	$	56,024
Unfunded commitments	33,116		29,298

Commitments are funded when capital calls are made by the general partner. Park expects that the current commitments will be funded between 2021 and 2031.

Park recognized amortization expense of $1.9 million and $1.8 million, respectively, for the three months ended September 30, 2021 and 2020, and recognized $5.6 million and $5.5 million for each of the nine months ended September 30, 2021 and 2020, which were included within the provision for income taxes. Additionally, during the three months ended September 30, 2021 and 2020, Park recognized tax credits and other benefits from its affordable housing tax credit investments of $1.9 million and $2.3 million, respectively, and during the nine months ended September 30, 2021 and 2020, recognized $7.2 million and $6.9 million, respectively, which were included within the provision for income taxes.

Note 10 – 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 amounts of foreclosed real estate properties held at September 30, 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)	September 30, 2021		December 31, 2020
OREO:
Commercial real estate	$	—	$	625
Residential real estate	813		806
Total OREO	$	813	$	1,431

Loans in process of foreclosure:
Residential real estate	$	1,397	$	1,643

In addition to real estate, Park may also repossess different types of collateral. At both September 30, 2021 and December 31, 2020, Park had $3.6 million in other repossessed assets which are included in "Other assets" on the Consolidated Condensed Balance Sheets. At both dates presented, the other repossessed assets largely consisted of an aircraft acquired as part of a loan workout.

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Note 11 – Loan Servicing

Park serviced sold mortgage loans of $2.12 billion at September 30, 2021, $1.97 billion at December 31, 2020 and $1.79 billion at September 30, 2020. At September 30, 2021, $3.5 million of the sold mortgage loans were sold with recourse, compared to $1.7 million at December 31, 2020 and $2.0 million at September 30, 2020. Management closely monitors the delinquency rates on the mortgage loans sold with recourse. At September 30, 2021 and December 31, 2020, management had established reserves of $39,000 and $30,000, respectively, to account for expected losses on loan repurchases.

When Park sells mortgage loans with servicing rights retained, these servicing rights are initially recorded at fair value. Park has 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 with respect to 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 Condensed Statements of Income.

Activity for MSRs and the related valuation allowance follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2021		2020		2021		2020
Mortgage servicing rights:
Carrying amount, net, beginning of period	$	14,316	$	9,505	$	12,210	$	10,070
Additions	1,114		2,987		4,061		5,796
Amortization	(835)		(1,254)		(2,753)		(2,853)
Change in valuation allowance	(39)		(198)		1,038		(1,973)
Carrying amount, net, end of period	$	14,556	$	11,040	$	14,556	$	11,040

Valuation allowance:
Beginning of period	$	2,112	$	2,600	$	3,189	$	825
Change in valuation allowance	39		198		(1,038)		1,973
End of period	$	2,151	$	2,798	$	2,151	$	2,798

Servicing fees included in other service income were $1.4 million and $1.0 million for the three months ended September 30, 2021 and 2020, respectively, and were $4.0 million and $2.9 million for the nine months ended September 30, 2021 and 2020, respectively.

Note 12 - 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, North Carolina, South Carolina, and Kentucky markets. Certain of these leases contain renewal options for periods ranging from one 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 September 30, 2021 and December 31, 2020, all of Park's leases were classified as operating leases.

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Park’s lease liability is initially and subsequently measured as the present value of the unpaid lease payments at the lease commencement date. Key estimates and judgments related to the lease liability include how management determines (1) the discount rate it uses to discount the unpaid lease payments to present value, (2) the lease term, and (3) lease payments.

•ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. Generally, management cannot determine the interest rate implicit in the lease because it does not have access to the lessor’s estimated residual value or the amount of the lessor’s deferred initial direct costs. Therefore, Park utilizes its incremental borrowing rate as the discount rate for leases. Park’s incremental borrowing rate for a lease is the rate of interest Park would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. To manage its capital and liquidity needs, Park periodically obtains wholesale funding from the FHLB on an over-collateralized basis. The impact of utilizing an interest rate on an over-collateralized borrowing versus a fully collateralized borrowing is not material. Therefore, the FHLB yield curve was selected by management as a baseline to determine Park’s discount rates for leases.

•The lease term for all of the Company’s leases includes the noncancellable period of the lease plus any additional periods covered by either Park's option to extend (or not to terminate) the lease that the Company is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor. If a lease contract contains multiple renewal options, management generally models lease cash flows through the first renewal option period unless the contract contains economic incentives or other conditions that increase the likelihood that additional renewals are reasonably certain to be exercised.

•Lease payments included in the measurement of the lease liability are comprised of the following:

–Fixed payments, including in-substance fixed payments, owed over the lease term;

–For certain of Park's gross real estate leases, non-lease components such as real estate taxes, insurance, and common area maintenance; and

–Variable lease payments that depend on an index or rate, initially measured using the index or rate at the lease commencement date.

The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Park's operating lease ROU asset and lease liability are presented in “Operating lease right-of-use asset" and "Operating lease liability," respectively, on Park's Consolidated Condensed Balance Sheets. The carrying amounts of Park's ROU asset and lease liability at September 30, 2021 were $13.4 million and $14.5 million, respectively. At December 31, 2020, the carrying amounts of Park's ROU asset 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 Condensed Statements of Income.

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Other information related to operating leases for the three months and nine months ended September 30, 2021 and 2020 was as follows:


	Three Months Ended				Nine Months Ended
(in thousands)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Lease cost
Operating lease cost	$	705	$	905	$	2,124	$	2,671
Sublease income	(63)		(95)		(189)		(289)
Total lease cost	$	642	$	810	$	1,935	$	2,382

Other information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	777	$	906	$	2,329	$	2,710
ROU assets obtained in exchange for new operating lease liabilities	$	367	$	25	$	547	$	7,794
Reductions to ROU assets resulting from reductions to lease obligations	$	(695)	$	(789)	$	(2,074)	$	(2,347)

At September 30, 2021 and December 31, 2020, Park's operating leases had a weighted average remaining term of 6.8 years and 7.2 years, respectively. The weighted average discount rate of Park's operating leases was 2.3% at both September 30, 2021 and December 31, 2020.

Undiscounted cash flows included in lease liabilities have expected contractual payments as follows:


(in thousands)	September 30, 2021
3 months ending December 31, 2021	$	783
2022	3,085
2023	2,944
2024	1,791
2025	1,451
Thereafter	5,602
Total undiscounted minimum lease payments	$	15,656
Present value adjustment	(1,176)
Total lease liabilities	$	14,480

Note 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 Condensed Balance Sheets.

All repurchase agreements are subject to 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 September 30, 2021 and December 31, 2020, Park's repurchase agreement borrowings totaled $211 million and $317 million, respectively. These borrowings were collateralized with U.S. government and agency securities with a fair value of $319 million and $366 million at September 30, 2021 and December 31, 2020, respectively. Declines in the value of the collateral would require Park to pledge additional securities. As of September 30, 2021 and December 31, 2020, Park had $909 million and $439 million, respectively, of available unpledged securities.

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The table below shows the remaining contractual maturity of repurchase agreements by collateral pledged at September 30, 2021 and December 31, 2020:


	September 30, 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 and agency securities	$	210,979	$	—	$	—	$	—	$	210,979

	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 and agency securities	$	317,230	$	—	$	—	$	—	$	317,230

Note 14 - Derivatives

Park uses certain derivative financial instruments (or "derivatives") to meet the needs of its 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 its asset-liability management strategy to help manage its 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 September 30, 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 $30.1 million and $33.3 million at September 30, 2021 and December 31, 2020, respectively.

All of the Company's interest rate swaps were determined to be fully effective during each of the three-month and nine-month periods ended September 30, 2021 and September 30, 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 swaps.

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Summary information about Park's interest rate swaps as of September 30, 2021 and December 31, 2020 follows:


	September 30, 2021						December 31, 2020
(In thousands, except weighted average data)	Borrowing Derivatives			Loan Derivatives			Borrowing Derivatives			Loan Derivatives
Notional amounts	$	25,000		$	30,118		$	25,000		$	33,310
Weighted average pay rates	2.595		%	4.664		%	2.595		%	4.695		%
Weighted average receive rates	0.134		%	4.664		%	0.218		%	4.695		%
Weighted average maturity (years)	0.7			8.5			1.5			9.3
Unrealized losses	$	436		$	—		$	885		$	—

Interest expense recorded on swap transactions was $157,000 and $140,000 for the three-month periods ended September 30, 2021 and 2020, respectively, and was $457,000 and $272,000 for the nine-month periods ended September 30, 2021 and 2020, respectively.

Interest Rate Swaps

The following table presents the net gains (losses), net of income taxes, recorded in OCI and the Consolidated Condensed Statements of Income related to interest rate swaps for the three-month and nine-month periods ended September 30, 2021 and 2020.


	Three Months Ended September 30, 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	$	117	$	—	$	—


	Three Months Ended September 30, 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	$	111	$	—	$	—


	Nine Months Ended September 30, 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	$	355	$	—	$	—


	Nine Months Ended September 30, 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	$	(357)	$	—	$	—

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The following tables reflect the interest rate swaps included in the Consolidated Condensed Balance Sheets as of September 30, 2021 and December 31, 2020.


(In thousands)	September 30, 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	30,118		2,258		33,310		3,934
Matched interest rate swaps with counterparty	—		—		—		—
Total included in other assets	$	30,118	$	2,258	$	33,310	$	3,934

Included in other liabilities:
Borrowing derivatives - interest rate swaps related to FHLB advances	$	25,000	$	(436)	$	25,000	$	(885)
Loan derivatives - instruments associated with loans
Matched interest rate swaps with borrower	—		—		—		—
Matched interest rate swaps with counterparty	30,118		(2,258)		33,310		(3,934)
Total included in other liabilities	$	55,118	$	(2,694)	$	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 its 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 as hedge relationships. The fair value of an interest rate lock 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 Condensed Consolidated Statements of Income.

At September 30, 2021 and December 31, 2020, Park had $15.9 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 $0.4 million and $1.5 million at September 30, 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 September 30, 2021 and December 31, 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.

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Note 15 – Accumulated Other Comprehensive Income (Loss)

Other comprehensive income (loss) components, net of income tax, are shown in the following table for the three-month and nine-month periods ended September 30, 2021 and 2020:


(in thousands)		Changes in pension plan assets and benefit obligations		Unrealized net holding gain (loss) on cash flow hedge		Unrealized gains (losses) on debt securities AFS		Total
Beginning balance at July 1, 2021		$	(34,421)	$	(460)	$	31,951	$	(2,930)
	Other comprehensive income (loss) before reclassifications	—		117		(4,997)		(4,880)
Net current period other comprehensive income (loss)		—		117		(4,997)		(4,880)
Ending balance at September 30, 2021		$	(34,421)	$	(343)	$	26,954	$	(7,810)

Beginning balance at July 1, 2020		$	(26,674)	$	(922)	$	41,457	$	13,861
	Amounts reclassified from accumulated other comprehensive income	—		—		21		21
	Other comprehensive income before reclassifications	—		111		207		318
Net current period other comprehensive income		—		111		228		339
Ending balance at September 30, 2020		$	(26,674)	$	(811)	$	41,685	$	14,200


(in thousands)		Changes in pension plan assets and benefit obligations		Unrealized net holding gain (loss) on cash flow hedge		Unrealized gains (losses) on debt securities AFS		Total
Beginning balance at January 1, 2021		$	(34,421)	$	(698)	$	40,690	$	5,571
	Other comprehensive income (loss) before reclassifications	—		355		(13,736)		(13,381)
Net current period other comprehensive income (loss)		—		355		(13,736)		(13,381)
Ending balance at September 30, 2021		$	(34,421)	$	(343)	$	26,954	$	(7,810)

Beginning balance at January 1, 2020		$	(26,674)	$	(454)	$	17,539	$	(9,589)
	Amounts reclassified from accumulated other comprehensive income	—		—		(2,596)		(2,596)
	Other comprehensive (loss) income before reclassifications	—		(357)		26,742		26,385
Net current period other comprehensive (loss) income		—		(357)		24,146		23,789
Ending balance at September 30, 2020		$	(26,674)	$	(811)	$	41,685	$	14,200

During the three-month and nine-month periods ended September 30, 2021, there were no reclassifications out of accumulated other comprehensive income (loss). During the three-month period ended September 30, 2020, there was $27,000 ($21,000 net of tax) reclassified out of accumulated other comprehensive income due to net losses on the sale of debt securities AFS. During the nine-month period ended September 30, 2020, there was $3.3 million ($2.6 million net of tax) reclassified out of accumulated other comprehensive income due to net gains on the sale of debt securities AFS. These gains were recorded within "Net gain on the sale of debt securities" on the Consolidated Condensed Statements of Income.

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Note 16 – Earnings Per Common Share

The following table sets forth the computation of basic and diluted earnings per common share for the three months and nine months ended September 30, 2021 and 2020.


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except share and per common share data)	2021		2020		2021		2020
Numerator:
Net income	$	35,434	$	30,846	$	117,397	$	82,723
Denominator:
Weighted-average common shares outstanding	16,292,312		16,300,720		16,315,996		16,300,250
Effect of dilutive PBRSUs and TBRSUs	131,600		93,072		129,572		98,100
Weighted-average common shares outstanding adjusted for the effect of dilutive PBRSUs and TBRSUs	16,423,912		16,393,792		16,445,568		16,398,350
Earnings per common share:
Basic earnings per common share	$	2.17	$	1.89	$	7.20	$	5.07
Diluted earnings per common share	$	2.16	$	1.88	$	7.14	$	5.04

Park awarded 61,890 and 62,265 PBRSUs to certain employees during the nine months ended September 30, 2021 and 2020, respectively. No PBRSU's were awarded during either of the three months ended September 30, 2021 or 2020.

Park repurchased an aggregate of 137,659 common shares during both the three months and nine months ended September 30, 2021, to fund the PBRSUs, the TBRSUs and common shares to be awarded to directors of Park and to directors of Park's subsidiary PNB (and its divisions) and pursuant to Park's previously announced stock repurchase authorizations. Park repurchased an aggregate of 76,000 common shares during the nine months ended September 30, 2020, to fund the PBRSUs, the TBRSUs and common shares to be awarded to directors of Park and to directors of Park's subsidiary PNB (and its divisions). No common shares were repurchased during the three months ended September 30, 2020.

Note 17 – 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", GFSC and SEPH, is shown to reconcile the segment totals to the Consolidated Condensed Statements of Income.

Management is required 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 the 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

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is available for this reportable segment and (ii) the segment is aligned with internal reporting to Park’s Chief Executive Officer, who is the chief operating decision maker.


	Operating Results for the three months ended September 30, 2021
(In thousands)	PNB		All Other		Total
Net interest income (expense)	$	82,835	$	(1,233)	$	81,602
Provision for (recovery of) credit losses	4,276		(2,304)		1,972
Other income	31,332		1,079		32,411
Other expense	64,663		3,826		68,489
Income (loss) before income taxes	$	45,228	$	(1,676)	$	43,552
Income tax expense (benefit)	8,777		(659)		8,118
Net income (loss)	$	36,451	$	(1,017)	$	35,434

Assets (at September 30, 2021)	$	10,012,868	$	21,150	$	10,034,018


	Operating Results for the three months ended September 30, 2020
(In thousands)	PNB		All Other		Total
Net interest income	$	83,795	$	45	$	83,840
Provision for (recovery of) loan losses	13,839		(3)		13,836
Other income	35,430		1,128		36,558
Other expense	65,590		4,269		69,859
Income (loss) before income taxes	$	39,796	$	(3,093)	$	36,703
Income tax expense (benefit)	6,908		(1,051)		5,857
Net income (loss)	$	32,888	$	(2,042)	$	30,846

Assets (at September 30, 2020)	$	9,195,911	$	44,095	$	9,240,006


	Operating Results for the nine months ended September 30, 2021
(In thousands)	PNB		All Other		Total
Net interest income (expense)	$	247,596	$	(1,409)	$	246,187
Recovery of credit losses	(3,670)		(3,253)		(6,923)
Other income	95,258		2,480		97,738
Other expense	195,361		12,393		207,754
Income (loss) before income taxes	$	151,163	$	(8,069)	$	143,094
Income tax expense (benefit)	28,694		(2,997)		25,697
Net income (loss)	$	122,469	$	(5,072)	$	117,397


	Operating Results for the nine months ended September 30, 2020
(In thousands)	PNB		All Other		Total
Net interest income	$	238,900	$	2,409	$	241,309
Provision for (recovery of) loan losses	32,256		(1,043)		31,213
Other income	89,920		88		90,008
Other expense	187,661		13,273		200,934
Income (loss) before income taxes	$	108,903	$	(9,733)	$	99,170
Income tax expense (benefit)	19,357		(2,910)		16,447
Net income (loss)	$	89,546	$	(6,823)	$	82,723

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The operating results in the “All Other” column are used to reconcile the segment totals to the Consolidated Condensed Statements of Income for the three-month and nine-month periods ended September 30, 2021 and 2020. The reconciling amounts for consolidated total assets for the periods ended September 30, 2021 and 2020 consisted of the elimination of intersegment borrowings and the assets of the Parent Company, GFSC and SEPH which were not eliminated.

Note 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, 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. As of September 30, 2021, there were no common shares subject to PBRSUs issued under the 2013 Incentive Plan outstanding.

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 September 30, 2021, 463,110 common shares were available for future grants under the 2017 Employees 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 September 30, 2021, 100,250 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 has not granted and will not grant any additional awards under the 2013 Incentive Plan after April 24, 2017. Awards made under the 2013 Incentive Plan have vested or have expired.

During the nine months ended September 30, 2021 and 2020, the Compensation Committee of the Board of Directors of Park granted awards of PBRSUs, under the 2017 Employees LTIP, covering an aggregate of 61,890 and 62,265 common shares, respectively, to certain employees of Park and its subsidiaries. No awards were granted during either of the three months ended September 30, 2021 or 2020.

As of September 30, 2021, Park has nonvested PBRSUs as well as TBRSUs. The number of PBRSUs earned or settled will depend on the level of achievement with respect to certain performance criteria over a three-year period and are also subject to subsequent service-based vesting. The number of TBRSUs earned or settled will be subject to service-based vesting.

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A summary of changes in the common shares subject to nonvested PBRSUs and TBRSUs for the nine months ended September 30, 2021 follows:


			Common shares subject to PBRSUs and TBRSUs
Nonvested at January 1, 2021			204,108
Granted			61,890
Vested			(48,106)
Forfeited			(1,458)
Adjustment for performance conditions of PBRSUs (1)			(2,551)
Nonvested at September 30, 2021 (2)			213,883

(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 September 30, 2021, an aggregate of 197,311 PBRSUs and TBRSUs are expected to vest.

A summary of awards vested during the three months and nine months ended September 30, 2021 and 2020 follows:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2021	2020	2021	2020
PBRSU and TBRSU vested	4,427	6,205	48,106	44,379
Common shares withheld to satisfy employee income tax withholding obligations	1,348	1,860	18,429	14,036
Net common shares issued	3,079	4,345	29,677	30,343

Share-based compensation expense of $1.2 million was recognized for each of the three-month periods ended September 30, 2021 and 2020, and share-based compensation expense of $4.5 million and $3.7 million was recognized for the nine-month periods ended September 30, 2021 and 2020, respectively.

The following table details expected additional share-based compensation expense related to PBRSUs and TBRSUs outstanding at September 30, 2021:


(In thousands)
Three months ending December 31, 2021	$	1,204
2022	3,971
2023	2,563
2024	1,059
2025	169
Total	$	8,966

Note 19 – Benefit Plans

Park has a noncontributory defined benefit pension plan (the "Pension Plan") covering substantially all of its employees. The Pension Plan provides benefits based on an employee’s years of service and compensation.

There were no Pension Plan contributions for any of the three-month or nine-month periods ended September 30, 2021 and 2020.

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The following table shows the components of net periodic pension benefit expense:


	Three Months Ended September 30,				Nine Months Ended September 30,				Affected Line Item in the Consolidated Condensed Statements of Income
(In thousands)	2021		2020		2021		2020
Service cost	$	2,479	$	2,080	$	7,437	$	6,240	Employee benefits
Interest cost	1,340		1,320		4,020		3,960		Other components of net periodic pension benefit income
Expected return on plan assets	(3,933)		(3,602)		(11,799)		(10,806)		Other components of net periodic pension benefit income
Recognized net actuarial loss and prior service costs	555		294		1,665		882		Other components of net periodic pension benefit income
Net periodic pension benefit expense	$	441	$	92	$	1,323	$	276

Park has entered into Supplemental Executive Retirement Plan Agreements (the “SERP Agreements”) with certain key officers of the Corporation and its subsidiaries which provide defined pension benefits in excess of limits imposed by federal tax law. The expense for the Corporation related to the SERP Agreements for the three months and nine months ended September 30, 2021 and 2020 was as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,				Affected Line Item in the Consolidated Condensed Statements of Income
(In thousands)	2021		2020		2021		2020
Service cost	$	203	$	218	$	611	$	801	Employee benefits
Interest cost	150		134		448		401		Miscellaneous expense
Total SERP expense	$	353	$	352	$	1,059	$	1,202

Note 20 – 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.

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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 September 30, 2021 using:
(In thousands)	Level 1		Level 2		Level 3		Balance at September 30, 2021
Assets
Investment securities:
Obligations of states and political subdivisions	$	—	$	299,094	$	—	$	299,094
U.S. Government sponsored entities’ asset-backed securities	—		857,149		—		857,149
Collateralized loan obligations	387,682		—		—		387,682
Corporate debt securities	—		9,293		—		9,293
Equity securities	1,579		—		491		2,070
Mortgage loans held for sale	—		8,944		—		8,944
Mortgage IRLCs	—		404		—		404
Loan interest rate swaps	—		2,258		—		2,258

Liabilities
Fair value swap	$	—	$	—	$	226	$	226
Borrowing interest rate swap	—		436		—		436
Loan interest rate swaps	—		2,258		—		2,258


Fair Value Measurements at December 31, 2020 using:
(In thousands)	Level 1		Level 2		Level 3		Balance at December 31, 2020
Assets
Investment securities:
Obligations of states and political subdivisions	$	—	$	305,218	$	—	$	305,218
U.S. Government sponsored entities’ asset-backed securities	—		752,109		—		752,109
Corporate debt securities	—		2,014		—		2,014
Equity securities	2,026		—		485		2,511
Mortgage loans held for sale	—		31,666		—		31,666
Mortgage IRLCs	—		1,545		—		1,545
Loan interest rate swaps	—		3,934		—		3,934

Liabilities
Fair value swap	$	—	$	—	$	226	$	226
Borrowing interest rate swap	—		885		—		885
Loan interest rate swaps	—		3,934		—		3,934

The following methods and assumptions were used by the Company in determining the fair value of the financial assets and liabilities discussed above:

Interest rate swaps: The fair values of interest rate swaps are based on valuation models using observable market data as of the measurement date (Level 2).

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).

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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.

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 tables below present a reconciliation of the beginning and ending balances of the Level 3 inputs for the three-month and nine-month periods ended September 30, 2021 and 2020, for financial instruments measured on a recurring basis and classified as Level 3:


Level 3 Fair Value Measurements
Three months ended September 30, 2021 and 2020
(In thousands)	Equity Securities		Fair value swap
Balance at July 1, 2021	$	490	$	(226)
Total gains
Included in other income	1		—
Balance at September 30, 2021	$	491	$	(226)

Balance at July 1, 2020	$	471	$	(226)
Total gains
Included in other income	13		—
Balance at September 30, 2020	$	484	$	(226)


Level 3 Fair Value Measurements
Nine months ended September 30, 2021 and 2020
(In thousands)	Equity Securities		Fair value swap
Balance at January 1, 2021	$	485	$	(226)
Total gains
Included in other income	6		—
Balance at September 30, 2021	$	491	$	(226)

Balance at January 1, 2020	$	456	$	(226)
Total gains
Included in other income	28		—
Balance at September 30, 2020	$	484	$	(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:

Impaired Loans: When a loan is considered impaired, it is valued at the lower of cost or fair value. Collateral dependent impaired loans 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.

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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. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. Additionally, updated independent valuations are obtained annually for all impaired 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 collateral dependent impaired 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 September 30, 2021 and December 31, 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.

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The following tables present assets and liabilities measured at fair value on a nonrecurring basis. Collateral dependent impaired 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 September 30, 2021 and December 31, 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 September 30, 2021 using:
(In thousands)	Level 1		Level 2		Level 3		Balance at September 30, 2021
Impaired loans recorded at fair value:
Commercial real estate	$	—	$	—	$	571	$	571
Residential real estate	—		—		277		277
Total impaired loans recorded at fair value	$	—	$	—	$	848	$	848

MSRs	$	—	$	14,286	$	—	$	14,286

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


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

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The table below provides additional detail on those impaired loans which are recorded at fair value as well as the remaining impaired loan portfolio not included above. The remaining impaired 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.


	September 30, 2021
(In thousands)	Loan Balance		Prior Charge-Offs		Specific Valuation Allowance		Carrying Balance
Impaired loans recorded at fair value	$	1,028	$	240	$	180	$	848
Remaining impaired loans	78,236		448		3,286		74,950
Total impaired loans	$	79,264	$	688	$	3,466	$	75,798


	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 (expense) income from credit adjustments related to impaired loans carried at fair value was $(83,000) and $(3.1) million for the three-month periods ended September 30, 2021 and 2020, respectively, and was $462,000 and $(3.5) million for the nine-month periods ended September 30, 2021 and 2020, respectively.

MSRs totaled $14.6 million at September 30, 2021. Of this $14.6 million MSR carrying balance, $14.3 million was recorded at fair value and included a valuation allowance of $2.2 million. The remaining $0.3 million was recorded at cost, as the fair value exceeded cost at September 30, 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 (expense) income related to MSRs carried at fair value during the three months ended September 30, 2021 and 2020 was $(39,000) and $(198,000), respectively, and was $1.0 million and $(2.0) million for the nine months ended September 30, 2021 and 2020, respectively.

Total OREO held by Park at September 30, 2021 and December 31, 2020 was $0.8 million and $1.4 million, respectively. Approximately 90% and 51% of OREO held by Park at September 30, 2021 and December 31, 2020, respectively, was carried at fair value due to fair value adjustments made subsequent to the initial OREO measurement. At both September 30, 2021 and December 31, 2020, OREO held at fair value, less estimated selling costs, amounted to $735,000. There was no expense related to OREO fair value adjustments for either of the three-month or nine-month periods ended September 30, 2021. The net income related to OREO fair value adjustments was $115,000 and $80,000 for the three-month and nine-month periods ended September 30, 2020, respectively

Other repossessed assets totaled $3.6 million at September 30, 2021, of which $3.2 million were recorded at fair value. Other repossessed assets totaled $3.6 million at December 31, 2020, of which $3.2 million were recorded at fair value. There was no expense related to fair value adjustments on other repossessed assets during either of the three-month or nine-month periods ended September 30, 2021. There was $207,000 of expense related to fair value adjustments on other repossessed assets during the three-month and nine month periods ended September 30, 2020.

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The following tables present qualitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at September 30, 2021 and December 31, 2020:

September 30, 2021

(In thousands)

Fair Value

Valuation Technique

Unobservable Input(s)

Range
(Weighted Average)

Impaired loans:

Commercial real estate

571

Sales comparison approach

Adj to comparables

0.0% - 232.0% (25.9%)

Residential real estate

277

Sales comparison approach

Adj to comparables

0.5% - 64.3% (9.5%)

Cost approach

Accumulated depreciation

8.3% (8.3%)

Other real estate owned:

Residential real estate

735

Sales comparison approach

Adj to comparables

5.0% - 32.5% (19.1%)

Balance at 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%)

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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.

At September 30, 2021 and December 31, 2020, Park had Partnership Investments with a NAV of $15.6 million and $15.4 million, respectively. At September 30, 2021 and December 31, 2020, Park had $5.7 million and $6.2 million, respectively, in unfunded commitments related to these Partnership Investments. For the three-month periods ended September 30, 2021 and 2020, Park recognized income of $513,000 and $1.3 million, respectively, and for the nine-month periods September 30, 2021 and 2020, Park recognized income (expense) of $2.4 million and $(41,000), respectively, related to these Partnership Investments.

The fair value of certain financial instruments at September 30, 2021 and December 31, 2020, was as follows:


	September 30, 2021
			Fair Value Measurements
(In thousands)	Carrying value		Level 1		Level 2		Level 3		Total fair value
Financial assets:
Cash and money market instruments	$	877,395	$	877,395	$	—	$	—	$	877,395
Investment securities (1)	1,553,218		387,682		1,165,536		—		1,553,218
Other investment securities (2)	2,070		1,579		—		491		2,070

Mortgage loans held for sale	8,944		—		8,944		—		8,944
Mortgage IRLCs	404		—		404		—		404
Impaired loans carried at fair value	848		—		—		848		848
Other loans, net	6,810,092		—		—		6,834,592		6,834,592
Loans receivable, net	$	6,820,288	$	—	$	9,348	$	6,835,440	$	6,844,788

Financial liabilities:
Time deposits	$	725,203	$	—	$	749,710	$	—	$	749,710
Other	5,389		5,389		—		—		5,389
Deposits (excluding demand deposits)	$	730,592	$	5,389	$	749,710	$	—	$	755,099

Short-term borrowings	$	235,979	$	—	$	235,979	$	—	$	235,979
Subordinated notes	188,099		—		197,119		—		197,119

Derivative financial instruments - assets:
Loan interest rate swaps	2,258		—		2,258		—		2,258

Derivative financial instruments - liabilities:
Fair value swap	226		—		—		226		226
Borrowing interest rate swap	436		—		436		—		436
Loan interest rate swaps	2,258		—		2,258		—		2,258

(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.

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	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

Mortgage 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.

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Note 21 - 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 Condensed Statements of Income. The following table presents the Corporation's sources of other income by revenue stream and operating segment for the three-month and nine-month periods ended September 30, 2021 and September 30, 2020.


	Three Months Ended September 30, 2021
Revenue by Operating Segment (in thousands)	PNB		All Other		Total
Income from fiduciary activities
Personal trust and agency accounts	$	2,637	$	—	$	2,637
Employee benefit and retirement-related accounts	2,506		—		2,506
Investment management and investment advisory agency accounts	3,220		—		3,220
Other	457		—		457
Service charges on deposit accounts
Non-sufficient funds (NSF) fees	1,498		—		1,498
Demand deposit account (DDA) charges	762		—		762
Other	129		—		129
Other service income (1)
Credit card	690		2		692
HELOC	100		—		100
Installment	34		—		34
Real estate	5,418		—		5,418
Commercial	281		143		424
Debit card fee income	6,453		—		6,453
Bank owned life insurance income (2)	1,022		440		1,462
ATM fees	622		—		622
Gain on sale of OREO, net	3		—		3
Gain on equity securities, net (2)	429		180		609
Other components of net periodic pension benefit income (2)	1,987		51		2,038
Miscellaneous (3)	3,084		263		3,347
Total other income	$	31,332	$	1,079	$	32,411

(1) Of the $6.7 million of aggregate revenue included within "Other service income", approximately $1.3 million is within the scope of ASC 606, with the remaining $5.4 million consisting primarily of certain 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 $3.3 million, all of which are within scope of ASC 606.

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	Three Months Ended September 30, 2020
Revenue by Operating Segment (in thousands)	PNB		All Other		Total
Income from fiduciary activities
Personal trust and agency accounts	$	2,290	$	—	$	2,290
Employee benefit and retirement-related accounts	1,967		—		1,967
Investment management and investment advisory agency accounts	2,695		—		2,695
Other	383		—		383
Service charges on deposit accounts
Non-sufficient funds (NSF) fees	1,201		—		1,201
Demand deposit account (DDA) charges	787		—		787
Other	130		—		130
Other service income (1)
Credit card	487		1		488
HELOC	108		—		108
Installment	43		—		43
Real estate	11,806		—		11,806
Commercial	567		35		602
Debit card fee income	5,853		—		5,853
Bank owned life insurance income (2)	1,109		83		1,192
ATM fees	491		—		491
Gain on sale of OREO, net	198		371		569
Net loss on sale of debt securities (2)	(27)		—		(27)
Gain on equity securities, net (2)	739		462		1,201
Other components of net periodic pension benefit income (2)	1,940		48		1,988
Miscellaneous (3)	2,663		128		2,791
Total other income	$	35,430	$	1,128	$	36,558

(1) Of the $13.0 million of aggregate revenue included within "Other service income", approximately $1.3 million is within the scope of ASC 606, with the remaining $11.7 million consisting primarily of certain 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 $2.8 million, all of which are within scope of ASC 606.

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	Nine Months Ended September 30, 2021
Revenue by Operating Segment (in thousands)	PNB		All Other		Total
Income from fiduciary activities
Personal trust and agency accounts	$	7,650	$	—	$	7,650
Employee benefit and retirement-related accounts	7,170		—		7,170
Investment management and investment advisory agency accounts	9,345		—		9,345
Other	1,397		—		1,397
Service charges on deposit accounts
Non-sufficient funds (NSF) fees	3,776		—		3,776
Demand deposit account (DDA) charges	2,325		—		2,325
Other	374		—		374
Other service income (1)
Credit card	1,906		2		1,908
HELOC	288		—		288
Installment	114		—		114
Real estate	19,867		—		19,867
Commercial	1,063		204		1,267
Debit card fee income	19,297		—		19,297
Bank owned life insurance income (2)	3,169		607		3,776
ATM fees	1,807		—		1,807
Loss on sale of OREO, net	(26)		—		(26)
Gain on equity securities, net (2)	1,758		1,128		2,886
Other components of net periodic pension benefit income (2)	5,960		154		6,114
Miscellaneous (3)	8,018		385		8,403
Total other income	$	95,258	$	2,480	$	97,738

(1) Of the $23.4 million of aggregate revenue included within "Other service income", approximately $3.8 million is within the scope of ASC 606, with the remaining $19.6 million consisting primarily of certain 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 $8.4 million, all of which are within scope of ASC 606.

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	Nine Months Ended September 30, 2020
Revenue by Operating Segment (in thousands)	PNB		All Other		Total
Income from fiduciary activities
Personal trust and agency accounts	$	6,550	$	—	$	6,550
Employee benefit and retirement-related accounts	5,702		—		5,702
Investment management and investment advisory agency accounts	7,852		—		7,852
Other	1,137		—		1,137
Service charges on deposit accounts
Non-sufficient funds (NSF) fees	3,644		—		3,644
Demand deposit account (DDA) charges	2,289		—		2,289
Other	389		—		389
Other service income (1)
Credit card	1,544		4		1,548
HELOC	319		—		319
Installment	144		—		144
Real estate	22,228		—		22,228
Commercial	1,245		87		1,332
Debit card fee income	16,373		—		16,373
Bank owned life insurance income (2)	3,452		167		3,619
ATM fees	1,341		—		1,341
Gain on sale of OREO, net	843		371		1,214
Net gain on sale of debt securities (2)	3,286		—		3,286
Gain (loss) on equity securities, net (2)	113		(862)		(749)
Other components of net periodic pension benefit income (2)	5,820		144		5,964
Miscellaneous (3)	5,649		177		5,826
Total other income	$	89,920	$	88	$	90,008

(1) Of the $25.6 million of aggregate revenue included within "Other service income", approximately $3.7 million is within the scope of ASC 606, with the remaining $21.9 million consisting primarily of certain 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 $5.8 million, all of which are within 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 its 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 its 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 its performance obligation to the customer.

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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 or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Corporation adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.

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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance. The forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements.

Risks and uncertainties that could cause actual results to differ materially include, without limitation:

•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) and markets, 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 and effectiveness 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 and interest rate policies of the Federal Reserve Board) 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 results of the 2020 U.S. elections, including on the regulatory landscape, capital markets, tax policy, infrastructure spending and social programs;

•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 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;

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•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 our 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 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 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;

•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;

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•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 Part I of Park's Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

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.

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Non-GAAP Financial Measures

This Management's Discussion and Analysis (or "MD&A") contains non-U.S. GAAP financial measures where management believes it to be helpful in understanding Park’s results of operations or financial position. Where non-U.S. GAAP financial measures are used, the comparable U.S. GAAP financial measure, as well as the reconciliation to the comparable U.S. GAAP financial measure, can be found herein.

Items Impacting Comparability of Period Results

From time to time, revenue, expenses, and/or taxes are impacted by items judged by management of Park to be outside of ordinary banking activities and/or by items that, while they may be associated with ordinary banking activities, are so unusually large that their outsized impact is believed by management of Park at that time to be infrequent or short-term in nature. Most often, these items impacting comparability of period results are due to merger and acquisition activities and revenue and expenses related to former Vision Bank loan relationships. In other cases, they may result from management's decisions associated with significant corporate actions outside of the ordinary course of business.

Even though certain revenue and expense items are naturally subject to more volatility than others due to changes in market and economic environment conditions, as a general rule volatility alone does not result in the inclusion of an item as one impacting comparability of period results. For example, changes in the provision for credit losses (aside from those related to former Vision Bank loan relationships), gain (loss) 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 Park's performance and trends and allows management to ascertain which of such items, if any, to include or exclude from an analysis of Park's performance; i.e., within the context of determining how that performance differed from expectations, as well as how, if at all, to adjust estimates of future performance taking such items into account.

Items impacting comparability of the results of particular periods are not intended to be a complete list of items that may materially impact current or future period performance.

Non-GAAP Ratios

Park's management uses certain non-GAAP financial measures to evaluate Park's performance. Specifically, management reviews the return on average tangible equity, the return on average tangible assets, the tangible equity to tangible assets ratio and the tangible book value per share.

Management has included in the tables included within the "Items Impacting Comparability" section of this MD&A information relating to the annualized return on average tangible equity and the annualized return on average tangible assets, for the three months and nine months ended and at September 30, 2021 and September 30, 2020. For purposes of calculating the annualized return on average tangible equity, a non-GAAP financial measure, net income for each period is divided by average tangible equity during the period. Average tangible equity equals average shareholders' equity during the applicable period less average goodwill and other intangible assets during the applicable period. For the purpose of calculating the annualized return on average tangible assets, a non-GAAP financial measure, net income for each period is divided by average tangible assets during the period. Average tangible assets equals average assets during the applicable period less average goodwill and other intangible assets during the applicable period. Tangible equity equals total shareholders' equity less goodwill and other intangible assets, in each case at period end. Tangible assets equal total assets less goodwill and other intangible assets, in each case at period end.

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Management believes that the disclosure of the annualized return on average tangible equity, the annualized return on average tangible assets, the tangible equity to tangible assets ratio and the tangible book value per share 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. In the tables included within the "Items Impacting Comparability" section of this MD&A, Park has provided a reconciliation of average tangible equity to average shareholders' equity, average tangible assets to average assets, tangible equity to total shareholders' equity and tangible assets to total assets solely for the purpose of complying with SEC Regulation G and not as an indication that the annualized return on average tangible equity, the annualized return on average tangible assets, the tangible equity to tangible assets ratio and the tangible book value per share are substitutes for the annualized return on average equity, the annualized return on average assets, the total shareholders' equity to total assets ratio and the book value per share, respectively, 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 corporate income tax rate of 21 percent. In the tables included within the "Items Impacting Comparability" section of this MD&A, 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 September 30, 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 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.

Critical Accounting Policies

Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2020 Form 10-K, as updated in Note 2 of the Notes to Unaudited Consolidated Condensed Financial Statements in this Quarterly Report on Form 10-Q, lists significant accounting policies used in the development and presentation of Park’s consolidated financial statements. The accounting and reporting policies of Park conform with U.S. GAAP and general practices within the financial services industry. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.

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 impaired 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. Refer to the “Credit Metrics and Provision for (Recovery of) Credit Losses” section within this MD&A for additional discussion.

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Fair Value: U.S. GAAP requires management to establish a fair value hierarchy, which has the objective of maximizing the use of observable market inputs. U.S. GAAP also requires enhanced disclosures regarding the inputs used to calculate fair value. These are classified as Level 1, Level 2, and Level 3. Level 3 inputs are those with significant unobservable inputs that reflect a company’s own assumptions about the market for a particular instrument. Some of these inputs could be based on internal models and cash flow analyses. The large majority of Park’s assets whose fair value is determined using Level 2 inputs consists of debt securities AFS. The fair value of these debt securities AFS is calculated largely through the use of matrix pricing, which is a mathematical technique widely used in the financial services industry to value debt securities without relying exclusively on quoted market prices for the specific debt securities but rather relying on the debt securities’ relationship to other benchmark quoted debt securities. Please see Note 20 - Fair Value of the Notes to Unaudited Consolidated Condensed Financial Statements in this Quarterly Report on Form 10-Q for additional information on fair value.

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 September 30, 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 estimated 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.

Significant assumptions used to measure our annual pension expense include:

•the interest rate used to determine the present value of liabilities (discount rate);

•certain employee-related factors, such as turnover, retirement age and mortality;

•the expected return on assets in our funded pension plan; and

•the rate of salary increases where benefits are based on earnings.

Our assumptions reflect our historical experience and management’s best judgment regarding future expectations. Due to the significant management judgment involved, our assumptions could have a material impact on the measurement of our pension plan expense and obligation.

Comparison of Results of Operations

For the Three and Nine Months Ended September 30, 2021 and 2020

Summary Discussion of Results

Net income for the three months ended September 30, 2021 was $35.4 million, compared to $30.8 million for the third quarter of 2020. Diluted earnings per common share were $2.16 for the third quarter of 2021, compared to $1.88 for the third quarter of 2020. Weighted average diluted common shares outstanding were 16,423,912 for the third quarter of 2021, compared to 16,393,792 weighted average diluted common shares outstanding for the third quarter of 2020.

Net income for the nine months ended September 30, 2021 was $117.4 million, compared to $82.7 million for the first nine months of 2020. Diluted earnings per common share were $7.14 for the first nine months of 2021, compared to $5.04 for the

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first nine months of 2020. Weighted average diluted common shares outstanding were 16,445,568 for the first nine months of 2021, compared to 16,398,350 weighted average diluted common shares outstanding for the first nine months of 2020.

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 September 30, 2021, all branches have 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 $744,000 for the three-month period ended September 30, 2020, and $1.5 million and $2.9 million for the nine-month periods ended September 30, 2021 and 2020, respectively, and is included within salaries expense. There was no calamity pay or special bonus paid during the three-month period ended September 30, 2021.

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 nine months ended September 30, 2021 and the twelve months ended December 31, 2020, respectively. Park funded the PPP loans with excess on-balance sheet liquidity. At September 30, 2021, the remaining balance of the first round PPP loans funded in 2020 was $14.1 million.

During 2021, Park offered additional PPP loans as authorized under the Consolidated Appropriations Act, 2021, signed into law on December 27, 2020. Through September 30, 2021, Park had 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 $7.6 million was recognized within loan interest income during the nine months ended September 30, 2021. Park funded the second round PPP loans with excess on-balance sheet liquidity. At September 30, 2021, the remaining balance of second round PPP loans funded in 2021 was $122.3 million.

As of October 29, 2021, Park has submitted approximately 6,458 repayment requests on behalf of borrowers under the PPP to the SBA and has received $653.4 million in payments from the SBA.

Loan Modifications: During the twenty-one months ended September 30, 2021, Park modified a total of 5,131 consumer loans, with an aggregate balance of $79.5 million, and modified a total of 1,406 commercial loans, with an aggregate balance of $513.3 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. Modified loans are considered current and continue to accrue interest during the deferral period.

Of the $592.8 million of COVID-19 modifications during the twenty-one months ended September 30, 2021, $30.8 million, or 0.45% of total loans, remained in deferral as of September 30, 2021 and $6.8 million were at least 30 days past due in accordance with the modified terms at September 30, 2021.

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Financial Results by Segment

The table below reflects the net income (loss) by segment for the first, second and third quarters of 2021, for the first nine months of each of 2021 and 2020 and for the years ended December 31, 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.


(In thousands)	Q3 2021		Q2 2021		Q1 2021		Nine months YTD 2021		Nine months YTD 2020		2020		2019
PNB	$	36,451	$	40,896	$	45,122	$	122,469	$	89,546	$	123,730	$	113,600
All Other	(1,017)		(1,764)		(2,291)		(5,072)		(6,823)		4,193		(10,900)
Total Park	$	35,434	$	39,132	$	42,831	$	117,397	$	82,723	$	127,923	$	102,700

Net income for the nine months ended September 30, 2021 of $117.4 million represented a $34.7 million, or 41.9%, increase compared to $82.7 million for the nine months ended September 30, 2020. Net income for each of the three and nine months ended September 30, 2021 and 2020 included several items of income and expense that impact comparability of period results. These items are detailed in the "Items Impacting Comparability" section within this MD&A.

During the first quarter of 2021, Park adopted FASB Accounting Standards Update 2016-13, Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 established the CECL methodology for estimating the allowance for credit losses. This standard was adopted prospectively on January 1, 2021, resulting 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 a $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. Refer to the “Credit Metrics and Provision for (Recovery of) Credit Losses” section for further detail.

The following discussion provides additional information regarding the segment that is made up of PNB, 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 first, second and third quarters of 2021, for the first nine months of each of 2021 and 2020 and for the years ended December 31, 2020 and 2019.


(In thousands)	Q3 2021		Q2 2021		Q1 2021		Nine months YTD 2021		Nine months YTD 2020		2020		2019
Net interest income	$	82,835	$	82,675	$	82,086	$	247,596	$	238,900	$	326,375	$	293,130
Provision for (recovery of) credit losses (1)	4,276		(3,752)		(4,194)		(3,670)		32,256		30,813		8,356
Other income	31,332		31,126		32,800		95,258		89,920		124,231		92,392
Other expense	64,663		67,122		63,576		195,361		187,661		268,938		237,433
Income before income taxes	$	45,228	$	50,431	$	55,504	$	151,163	$	108,903	$	150,855	$	139,733
Income tax expense	8,777		9,535		10,382		28,694		19,357		27,125		26,133
Net income	$	36,451	$	40,896	$	45,122	$	122,469	$	89,546	$	123,730	$	113,600

(1) Park adopted ASU 2016-13 effective January 1, 2021. The allowance for credit losses as of September 30, 2021 and the related provision for (recovery of) credit losses for the three months ended March 31, 2021, June 30, 2021, and September 30, 2021 and the nine months ended September 30, 2021 were calculated utilizing this new guidance.

Net interest income of $247.6 million for the nine months ended September 30, 2021 represented a $8.7 million, or 3.6%, increase compared to $238.9 million for the nine months ended September 30, 2020. The increase was a result of a $16.9 million decrease in interest expense, partially offset by a $8.2 million decrease in interest income.

The $8.2 million decrease in interest income was primarily due to a $1.9 million decrease in investment income and a $6.3 million decrease in interest income on loans. The decrease in investment income was primarily the result of a decrease in the

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yield on investments, which decreased 31 basis points to 2.31% for the nine months ended September 30, 2021, compared to 2.62% for the nine months ended September 30, 2020. The decrease in interest income on loans was primarily the result of a decrease in the yield on loans, which decreased 22 basis points to 4.44% for the nine months ended September 30, 2021, compared to 4.66% for the nine months ended September 30, 2020. The decrease in yield on loans was partially offset by a $169.4 million increase in average loans from $6.89 billion for the nine months ended September 30, 2020 to $7.06 billion for the nine months ended September 30, 2021. The increase in average loans was impacted by the addition of average PPP loans of approximately $309.0 million and $312.2 million for the nine months ended September 30, 2021 and 2020, respectively, and also resulted in interest and fee income of $15.5 million and $8.7 million for the nine months ended September 30, 2021 and 2020, respectively. Excluding the impact of PPP loans, the yield on loans was 4.33% for the nine months ended September 30, 2021, a decrease of 38 basis points compared to 4.71% for the nine months ended September 30, 2020.

The $16.9 million decrease in interest expense was primarily due to a $13.8 million decrease in interest expense on deposits as well as a $3.1 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 34 basis points, from 0.47% for the nine months ended September 30, 2020 to 0.13% for the nine months ended September 30, 2021. The decrease was also the result of a $63.7 million decrease in average on-balance sheet interest bearing deposits from $5.35 billion for the nine months ended September 30, 2020, to $5.28 billion for the nine months ended September 30, 2021. The decrease in on-balance sheet interest bearing deposits consisted of declines in both higher-cost time deposits and transaction accounts and was partially offset by an increase in savings deposits. During the nine months ended September 30, 2021 and the year ended December 31, 2020, Park made the decision to participate in a one-way sell (OWS) program in order to manage the balance sheet. This decision also contributed to a decline in interest bearing deposits.

The decrease in interest expense on borrowings was partially the result of a $78.3 million decrease in average borrowings from $400.1 million for the nine months ended September 30, 2020, to $321.8 million for the nine months ended September 30, 2021. The cost of borrowings also decreased by 91 basis points, from 1.53% for the nine months ended September 30, 2020 to 0.62% for the nine months ended September 30, 2021.

The recovery of credit losses of $3.7 million for the nine months ended September 30, 2021 represented a difference of $35.9 million, compared to a provision for credit losses of $32.3 million for the nine months ended September 30, 2020. Refer to the “Credit Metrics and Provision for (Recovery of) Credit Losses” section for additional details regarding the level of the provision for (recovery of) credit losses recognized in each period presented above.

Other income of $95.3 million for the nine months ended September 30, 2021 represented an increase of $5.3 million, or 5.9%, compared to $89.9 million for the nine months ended September 30, 2020. The $5.3 million increase was primarily related to (i) a $4.3 million increase in income from fiduciary activities; (ii) a $2.9 million increase in debit card fee income; (iii) a $2.4 million increase in miscellaneous income, primarily related to a refund 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 $1.6 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 $2.2 million decrease in other service income, which was primarily due to a decline in investor rate locks and mortgage loans held for sale, partially offset by an increase in fee income from mortgage loan originations and the valuation of mortgage servicing rights.

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A summary of mortgage originations for the nine months ended September 30, 2021 and 2020, as well as the quarters within each nine-month period, as follows.


(In thousands)	Q1 2021			Q2 2021			Q3 2021			Nine months ended September 30, 2021			Q1 2020			Q2 2020			Q3 2020			Nine months ended September 30, 2020
Mortgage Origination Volume
Sold	$	191,116		$	142,398		$	123,757		$	457,271		$	85,030		$	248,339		$	355,755		$	689,124
Portfolio	82,613			74,670			66,718			224,001			56,018			64,351			61,227			181,596
Construction	28,987			37,266			28,486			94,739			33,109			33,754			40,560			107,423
Service released	1,266			2,204			4,537			8,007			3,794			2,362			2,275			8,431
Total mortgage originations	$	303,982		$	256,538		$	223,498		$	784,018		$	177,951		$	348,806		$	459,817		$	986,574

Refinances as a % of Total Originations	71.1		%	50.0		%	44.8		%	56.7		%	48.1		%	67.8		%	68.5		%	64.6		%

Total mortgage loan originations decreased $202.6 million, or 20.5%, to $784.0 million for the nine months ended September 30, 2021 compared to $986.6 million for the nine months ended September 30, 2020.

The table below reflects PNB's other expense for the nine months ended September 30, 2021 and 2020.


(Dollars in thousands)	2021		2020		change		% change
Other expense:
Salaries	$	86,194	$	86,736	$	(542)	(0.6)	%
Employee benefits	30,451		29,113		1,338		4.6	%
Occupancy expense	9,440		10,395		(955)		(9.2)	%
Furniture and equipment expense	8,157		13,834		(5,677)		(41.0)	%
Data processing fees	22,426		8,338		14,088		169.0	%
Professional fees and services	14,332		16,961		(2,629)		(15.5)	%
Marketing	4,354		4,073		281		6.9	%
Insurance	4,080		4,090		(10)		(0.2)	%
Communication	2,650		2,894		(244)		(8.4)	%
State tax expense	2,986		2,792		194		6.9	%
Amortization of intangible assets	1,378		1,738		(360)		(20.7)	%
FHLB prepayment penalty	—		1,793		(1,793)		N.M.
Foundation contributions	4,000		—		4,000		N.M.
Miscellaneous	4,913		4,904		9		0.2	%
Total other expense	$	195,361	$	187,661	$	7,700	4.1	%

Other expense of $195.4 million for the nine months ended September 30, 2021 represented an increase of $7.7 million, or 4.1%, compared to $187.7 million for the nine months ended September 30, 2020. The decrease in salaries expense was primarily related to a decrease in base salary expense and additional compensation expense, 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 a decrease in 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 are 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

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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 title, appraisal and credit costs and decreases in other fees (due to the change in 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 $1.8 prepayment penalty on FHLB borrowings of $50 million repaid during the nine months ended September 30, 2020; there was no similar prepayment in the same period of 2021. The increase in foundation contributions was due to a $4.0 million contribution to Park's charitable foundation during the nine months ended September 30, 2021, with no similar contribution made during the nine months ended September 30, 2020. The 2020 contribution to Park's charitable foundation was made during the fourth quarter of 2020. Park does not expect to make any additional contributions to Park's charitable foundation in 2021.

The table below provides certain balance sheet information and financial ratios for PNB as of or for the nine months ended September 30, 2021 and 2020 and as of or for the year ended December 31, 2020.


(Dollars in thousands)	September 30, 2021			December 31, 2020			September 30, 2020			% change from 12/31/20		% change from 9/30/20
Loans less PPP	$	6,773,762		$	6,834,269		$	6,720,619		(0.89)	%	0.79	%
Loans	6,905,245			7,165,840			7,263,380			(3.64)	%	(4.93)	%
Allowance for credit losses (1)	87,992			84,321			85,249			4.35	%	3.22	%
Net loans	6,817,253			7,081,519			7,178,131			(3.73)	%	(5.03)	%
Investment securities	1,601,376			1,114,742			1,088,149			43.65	%	47.17	%
Total assets	10,012,868			9,236,915			9,195,911			8.40	%	8.88	%
Total deposits	8,603,171			7,820,983			7,725,562			10.00	%	11.36	%
Average assets (2)	9,819,220			9,198,141			9,171,998			6.75	%	7.06	%
Efficiency ratio (3)	56.63		%	59.31		%	56.70		%	(4.52)	%	(0.12)	%
Return on average assets (4)	1.67		%	1.35		%	1.30		%	23.70	%	28.46	%

(1) Park adopted ASU 2016-13 effective January 1, 2021. The allowance for credit losses as of September 30, 2021 and the related provision for (recovery of) credit losses for the nine months ended September 30, 2021 were calculated utilizing this new guidance.

(2) Average assets for the nine months ended September 30, 2021 and 2020 and for the year ended December 31, 2020.

(3) 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 $2.1 million for the nine months ended September 30, 2021, $2.2 million for the nine months ended September 30, 2020 and $2.9 million for the year ended December 31, 2020.

(4) Annualized for the nine months ended September 30, 2021 and 2020.

Loans outstanding at September 30, 2021 were $6.91 billion, compared to $7.17 billion at December 31, 2020, a decrease of $260.6 million, or 3.6%. Loans outstanding at September 30, 2021 were $6.91 billion, compared to $7.26 billion at September 30, 2020, a decrease of $358.1 million, or 4.9%. Excluding $131.5 million, $331.6 million and $542.8 million of PPP loans at September 30, 2021, December 31, 2020 and September 30, 2020, respectively, loans outstanding were $6.77 billion at September 30, 2021, compared to $6.83 billion at December 31, 2020, a decrease of $60.5 million, or 0.9%, and an increase of

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$53.1 million, or 0.8%, compared to $6.72 billion at September 30, 2020. The table below breaks out the change in loans outstanding, by loan type.


(Dollars in thousands)	September 30, 2021		December 31, 2020		September 30, 2020		change from 12/31/20		% change from 12/31/20		change from 9/30/20		% change from 9/30/20
Home equity	$	166,557	$	182,131	$	194,445	$	(15,574)	(8.55)	%	$	(27,888)	(14.34)	%
Installment	1,711,781		1,650,620		1,633,730		61,161		3.71	%	78,051		4.78	%
Real estate	1,165,045		1,213,820		1,232,196		(48,775)		(4.02)	%	(67,151)		(5.45)	%
Commercial (excluding PPP)	3,725,362		3,784,153		3,654,342		(58,791)		(1.55)	%	71,020		1.94	%
PPP loans	131,483		331,571		542,761		(200,088)		(60.35)	%	(411,278)		(75.78)	%
Other	5,017		3,545		5,906		1,472		41.52	%	(889)		(15.05)	%
Total loans	$	6,905,245	$	7,165,840	$	7,263,380	$	(260,595)	(3.64)	%	$	(358,135)	(4.93)	%
Total loans (excluding PPP)	$	6,773,762	$	6,834,269	$	6,720,619	$	(60,507)	(0.89)	%	$	53,143	0.79	%

PNB's allowance for credit losses increased by $3.7 million, or 4.4%, to $88.0 million at September 30, 2021, compared to $84.3 million at December 31, 2020. This increase included a $6.7 million increase to the allowance for credit losses as the result of the adoption of ASU 2016-13. Net recoveries were $638,000, or 0.01% of total average loans, for the nine months ended September 30, 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 Provision for (Recovery of) Credit Losses” section for additional information regarding PNB's loan portfolio and the level of provision for (recovery of) credit losses recognized in each period presented.

Total deposits at September 30, 2021 were $8.60 billion, compared to $7.82 billion at December 31, 2020, an increase of $782.2 million, or 10.0%. During the nine months ended September 30, 2021 and the year ended December 31, 2020, Park made the decision to participate in a one-way sell (OWS) program in order to manage growth of the balance sheet, as deposits increased significantly throughout the COVID-19 pandemic. At September 30, 2021, December 31, 2020 and September 30, 2020, Park had $818.3 million, $710.1 million and $773.3 million, respectively, in OWS insured cash sweep deposits which were off-balance sheet. Total deposits would have increased $890.4 million, or 10.4%, compared to December 31, 2020 had the $818.3 million and $710.1 million remained on the balance sheet at the respective dates. Total deposits would have increased $922.7 million, or 10.9%, compared to September 30, 2020 had the $818.3 million and $773.3 million remained on the balance sheet at the respective dates. The table below breaks out the change in deposit balances, by deposit type.


(Dollars in thousands)	September 30, 2021		December 31, 2020		September 30, 2020		change from 12/31/20		% change from 12/31/20		change from 9/30/20		% change from 9/30/20
Non-interest bearing deposits	$	3,221,859	$	2,978,005	$	2,831,767	$	243,854	8.2	%	$	390,092	13.8	%
Transaction accounts	1,620,375		1,381,479		1,365,783		238,896		17.3	%	254,592		18.6	%
Savings	3,035,734		2,596,926		2,596,811		438,808		16.9	%	438,923		16.9	%
Certificates of deposits	725,203		864,573		931,201		(139,370)		(16.1)	%	(205,998)		(22.1)	%
Total deposits	$	8,603,171	$	7,820,983	$	7,725,562	$	782,188	10.0	%	$	877,609	11.4	%
OWS insured cash sweep deposits	818,340		710,101		773,273		108,239		15.2	%	45,067		5.8	%
Total deposits including OWS deposits	$	9,421,511	$	8,531,084	$	8,498,835	$	890,427	10.4	%	$	922,676	10.9	%

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All Other

The table below reflects All Other net (loss) income for the first, second and third quarters of 2021, for the first nine months of each of 2021 and 2020 and for the years ended December 31, 2020 and 2019.


(In thousands)	Q3 2021		Q2 2021		Q1 2021		Nine months YTD 2021		Nine months YTD 2020		2020		2019
Net interest (expense) income	$	(1,233)	$	1,176	$	(1,352)	$	(1,409)	$	2,409	$	1,255	$	4,607
Recovery of credit losses (1)	(2,304)		(288)		(661)		(3,253)		(1,043)		(18,759)		(2,185)
Other income	1,079		112		1,289		2,480		88		1,433		4,801
Other expense	3,826		4,278		4,289		12,393		13,273		17,657		26,555
Net (loss) income before income tax benefit	$	(1,676)	$	(2,702)	$	(3,691)	$	(8,069)	$	(9,733)	$	3,790	$	(14,962)
Income tax benefit	(659)		(938)		(1,400)		(2,997)		(2,910)		(403)		(4,062)
Net (loss) income	$	(1,017)	$	(1,764)	$	(2,291)	$	(5,072)	$	(6,823)	$	4,193	$	(10,900)

The net interest (expense) 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 impaired loan relationships. The net interest (expense) income for All Other included for the nine months ended September 30, 2021 and 2020 and the year ended December 31, 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 (expense) income reflected net interest expense of $1.4 million for the nine months ended September 30, 2021, compared to net interest income of $2.4 million for the nine months ended September 30, 2020. The change was largely the result of an increase in interest expense on borrowings of $4.6 million, mainly related to the Park Subordinated Notes, and a decrease of $2.0 million in net interest income from GFSC, which were partially offset by an increase of $3.0 million in loan interest income.

SEPH had net recoveries of $2.6 million for the nine months ended September 30, 2021, compared to net recoveries of $1.4 million for the nine months ended September 30, 2020, and GFSC had net recoveries of $11,000 for the nine months ended September 30, 2021, compared to net charge-offs of $536,000 for the nine months ended September 30, 2020. Refer to the “Credit Metrics and Provision for (Recovery of) Credit Losses” section for additional information regarding the All Other loan portfolio and the level of recovery of credit losses recognized in each period presented.

All Other had other income of $2.5 million for the nine months ended September 30, 2021, compared to $88,000 for the nine months ended September 30, 2020. The change was largely due to a $1.0 million increase in income related to Partnership Investments, which went from a $203,000 loss for the nine months ended September 30, 2020 to a $767,000 gain for the nine months ended September 30, 2021, and a $844,000 difference in gain (loss) on equity securities, net, which went from a $659,000 loss for the nine months ended September 30, 2020 to a $185,000 gain for the nine months ended September 30, 2021.

All Other had other expense of $12.4 million for the nine months ended September 30, 2021, compared to $13.3 million for the nine months ended September 30, 2020. The decrease was largely due to a $600,000 decrease in merger-related expenses associated with the Carolina Alliance acquisition.

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The table below provides certain balance sheet information for All Other as of or for the nine months ended September 30, 2021 and 2020 and as of or for the year ended December 31, 2020.


(Dollars in thousands)	September 30, 2021		December 31, 2020		September 30, 2020		% change from 12/31/20		% change from 9/30/20
Loans	$	3,172	$	11,945	$	15,166	(73.44)	%	(79.08)	%
Allowance for credit losses (1)	137		1,354		1,789		(89.88)	%	(92.34)	%
Net loans	3,035		10,591		13,377		(71.34)	%	(77.31)	%
Total assets	21,150		42,106		44,095		(49.77)	%	(52.04)	%
Average assets (2)	34,237		43,492		44,497		(21.28)	%	(23.06)	%

(2) Average assets for the nine months ended September 30, 2021 and 2020 and for the year ended December 31, 2020.

Park National Corporation

The table below reflects Park's consolidated net income for the first, second and third quarters of 2021, for the first nine months of each of 2021 and 2020 and for the years ended December 31, 2020 and 2019.


(In thousands)	Q3 2021		Q2 2021		Q1 2021		Nine months YTD 2021		Nine months YTD 2020		2020		2019
Net interest income	$	81,602	$	83,851	$	80,734	$	246,187	$	241,309	$	327,630	$	297,737
Provision for (recovery of) credit losses (1)	1,972		(4,040)		(4,855)		(6,923)		31,213		12,054		6,171
Other income	32,411		31,238		34,089		97,738		90,008		125,664		97,193
Other expense	68,489		71,400		67,865		207,754		200,934		286,595		263,988
Income before income taxes	$	43,552	$	47,729	$	51,813	$	143,094	$	99,170	$	154,645	$	124,771
Income tax expense	8,118		8,597		8,982		25,697		16,447		26,722		22,071
Net income	$	35,434	$	39,132	$	42,831	$	117,397	$	82,723	$	127,923	$	102,700

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Net Interest Income

Park’s principal source of earnings is net interest income, the difference between total interest income and total interest expense. Net interest income results from average balances outstanding for interest earning assets and interest bearing liabilities in conjunction with the average rates earned and paid on them.

Comparison for the Third Quarters of 2021 and 2020

Net interest income decreased by $2.2 million, or 2.7%, to $81.6 million for the third quarter of 2021, compared to $83.8 million for the third quarter of 2020. See the discussion under the table below.


	Three months ended September 30, 2021						Three months ended September 30, 2020
(Dollars in thousands)	Average balance		Interest		Tax equivalent yield/cost		Average balance		Interest		Tax equivalent yield/cost
Loans (1)	$	6,956,064	$	78,304	4.47	%	$	7,247,021	$	82,780	4.54	%
Taxable investments	1,121,281		4,904		1.74	%	976,389		4,841		1.97	%
Tax-exempt investments (2)	277,810		2,569		3.67	%	280,085		2,588		3.68	%
Money market instruments	895,784		360		0.16	%	223,563		63		0.11	%
Interest earning assets	$	9,250,939	$	86,137	3.69	%	$	8,727,058	$	90,272	4.12	%

Interest bearing deposits	$	5,459,400	1,446		0.11	%	$	5,309,718	3,465		0.26	%
Short-term borrowings	273,538		187		0.27	%	320,871		217		0.27	%
Long-term debt	197,610		2,185		4.39	%	231,581		2,044		3.51	%
Interest bearing liabilities	$	5,930,548	$	3,818	0.26	%	$	5,862,170	$	5,726	0.39	%
Excess interest earning assets	$	3,320,391					$	2,864,888
Tax equivalent net interest income			$	82,319					$	84,546
Net interest spread					3.43	%					3.73	%
Net interest margin					3.53	%					3.85	%

(1) Loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $177,000 for the three months ended September 30, 2021 and $163,000 for the same period of 2020.

(2) Interest income on tax-exempt investment securities includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $540,000 for the three months ended September 30, 2021 and $543,000 for the same period of 2020.

Average interest earning assets for the third quarter of 2021 increased by $523.9 million, or 6.0%, to $9,251 million, compared to $8,727 million for the third quarter of 2020. The average yield on interest earning assets decreased by 43 basis points to 3.69% for the third quarter of 2021, compared to 4.12% for the third quarter of 2020.

Interest income for the three months ended September 30, 2021 and 2020 included purchase accounting accretion of $799,000 and $1.0 million, respectively, related to the acquisitions of NewDominion and Carolina Alliance, as well as $414,000 and $8,000, respectively, of interest income related to payments received on certain SEPH impaired loan relationships, some of which are participated with PNB. Interest income for the three months ended September 30, 2021 and 2020 also included $4.6 million and $5.1 million, respectively, of income related to PPP loans. Excluding the impact of the purchase accounting accretion, SEPH income, and PPP income, the yield on loans was 4.25% and 4.54% for the three months ended September 30, 2021 and 2020, respectively, and the yield on earning assets was 3.52% and 4.08% for the three months ended September 30, 2021 and 2020, respectively.

Average interest bearing liabilities for the third quarter of 2021 increased by $68.4 million, or 1.2%, to $5,931 million, compared to $5,862 million for the third quarter of 2020. The average cost of interest bearing liabilities decreased by 13 basis points to 0.26% for the third quarter of 2021, compared to 0.39% for the third quarter of 2020. During the three months ended September 30, 2020, Park made the decision to participate in a OWS program in order to manage growth of the balance sheet. At September 30, 2021 and 2020, Park had $818.3 million and $773.3 million, respectively, in OWS insured cash sweep deposits which were off-balance sheet. Excluding the impact of these off-balance sheet OWS deposits, the average cost of interest bearing liabilities would have been 0.22% and 0.34% for the third quarter of 2021 and 2020, respectively.

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Interest expense for the three months ended September 30, 2021 and 2020 included a benefit from purchase accounting accretion of $8,000 and $42,000, respectively, related to the acquisitions of NewDominion and Carolina Alliance. Excluding the impact of this income, the average cost of interest bearing liabilities was unchanged at 0.26% for the three months ended September 30, 2021 and 0.39% for the three months ended September 30, 2020.

Removing the impacts of the accretion of purchase accounting adjustments related to the acquisitions of NewDominion and Carolina Alliance, the interest income related to payments on certain SEPH impaired loan relationships and the interest income related to PPP loans, the net interest margin was 3.35% and 3.80% for the three months ended September 30, 2021 and 2020, respectively.

Yield on Loans: Average loan balances decreased $291.0 million, or 4.0%, to $6,956 million for the third quarter of 2021, compared to $7,247 million for the third quarter of 2020. The average yield on the loan portfolio decreased by 7 basis points to 4.47% for the third quarter of 2021, compared to 4.54% for the third quarter of 2020. Average loans for the third quarters of 2021 and 2020 included $194.8 million and $542.8 million, respectively, of PPP loans.

The table below shows the average balance and tax equivalent yield by type of loan for the three months ended September 30, 2021 and 2020.


	Three months ended September 30, 2021				Three months ended September 30, 2020
(Dollars in thousands)	Average balance		Tax equivalent yield		Average balance		Tax equivalent yield
Home equity loans	$	166,796	3.67	%	$	199,299	3.78	%
Installment loans	1,711,240		4.76	%	1,599,373		5.13	%
Real estate loans	1,173,116		3.69	%	1,284,116		4.02	%
Commercial loans (1)	3,901,243		4.60	%	4,160,079		4.51	%
Other	3,669		9.15	%	4,154		9.28	%
Total loans and leases before allowance	$	6,956,064	4.47	%	$	7,247,021	4.54	%

(1) Commercial loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $177,000 for the three months ended September 30, 2021 and $163,000 for the same period of 2020.

Loan interest income for the three months ended September 30, 2021 and 2020 included the accretion of purchase accounting adjustments related to the acquisitions of NewDominion and Carolina Alliance, interest income related to payments on certain SEPH impaired loan relationships and interest income related to PPP loans. Excluding the impact of the purchase accounting accretion, SEPH income, and PPP income, (a) the yield on home equity loans was 3.38%, the yield on installment loans was unchanged at 4.76%, the yield on real estate loans was 3.65%, the yield on commercial loans was 4.24% and the yield on total loans and leases before allowance was 4.25% for the three months ended September 30, 2021; and (b) the yield on home equity loans was 3.61%, the yield on installment loans was unchanged at 5.13%, the yield on real estate loans was 4.00%, the yield on commercial loans was 4.52% and the yield on total loans and leases before allowance was unchanged at 4.54% for the three months ended September 30, 2020.

Cost of Deposits: Average interest bearing deposit balances increased $149.7 million, or 2.8%, to $5,459 million for the third quarter of 2021, compared to $5,310 for the third quarter of 2020. The average cost of funds on deposit balances decreased by 15 basis points to 0.11% for the third quarter of 2021, compared to 0.26% for the third quarter of 2020.

The table below shows for the three months ended September 30, 2021 and 2020, the average balance and cost of funds by type of deposit.


	Three months ended September 30, 2021				Three months ended September 30, 2020
(Dollars in thousands)	Average balance		Cost of funds		Average balance		Cost of funds
Transaction accounts	$	1,643,234	0.02	%	$	1,732,893	0.07	%
Savings deposits and clubs	3,071,014		0.04	%	2,609,808		0.08	%
Time deposits	745,152		0.54	%	967,017		1.10	%
Total interest bearing deposits	$	5,459,400	0.11	%	$	5,309,718	0.26	%

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Deposit interest expense for the three months ended September 30, 2021 and 2020 included the accretion of purchase accounting adjustments related to the acquisitions of NewDominion and Carolina Alliance of $8,000 and $42,000, respectively. Excluding this income, the cost of funds for time deposits was unchanged 0.54% and the cost of total interest bearing deposits was unchanged at 0.11% for the three months ended September 30, 2021, and the cost of funds for time deposits was 1.11% and the cost of total interest bearing deposits was unchanged at 0.26% for the three months ended September 30, 2020.

Comparison for the First Nine Months of 2021 and 2020

Net interest income increased by $4.9 million, or 2.0%, to $246.2 million for the first nine months of 2021, compared to $241.3 million for the first nine months of 2020. See the discussion under the table below.


	Nine months ended September 30, 2021						Nine months ended September 30, 2020
(Dollars in thousands)	Average balance		Interest		Tax equivalent yield/cost		Average balance		Interest		Tax equivalent yield/cost
Loans (1)	$	7,062,336	$	238,568	4.52	%	$	6,904,900	$	243,913	4.72	%
Taxable investments	969,628		13,760		1.90	%	905,665		15,398		2.27	%
Tax-exempt investments (2)	278,379		7,719		3.71	%	292,672		8,096		3.69	%
Money market instruments	724,561		689		0.13	%	286,909		667		0.31	%
Interest earning assets	$	9,034,904	$	260,736	3.86	%	$	8,390,146	$	268,074	4.27	%

Interest bearing deposits	$	5,284,664	5,102		0.13	%	$	5,350,009	18,945		0.47	%
Short-term borrowings	296,132		552		0.25	%	264,842		912		0.46	%
Long-term debt	211,857		6,746		4.26	%	190,285		4,754		3.34	%
Interest bearing liabilities	$	5,792,653	$	12,400	0.29	%	$	5,805,136	$	24,611	0.57	%
Excess interest earning assets	$	3,242,251					$	2,585,010
Tax equivalent net interest income			$	248,336					$	243,463
Net interest spread					3.57	%					3.70	%
Net interest margin					3.67	%					3.88	%

(1) Loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $528,000 for the nine months ended September 30, 2021 and $454,000 for the same period of 2020.

(2) Interest income on tax-exempt investment securities includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $1.6 million for the nine months ended September 30, 2021 and $1.7 million for the same period of 2020.

Average interest earning assets for the first nine months of 2021 increased by $644.8 million, or 7.7%, to $9,035 million, compared to $8,390 million for the first nine months of 2020. The average yield on interest earning assets decreased by 41 basis points to 3.86% for the first nine months of 2021, compared to 4.27% for the first nine months of 2020.

Interest income for the nine months ended September 30, 2021 and 2020 included purchase accounting accretion of $2.7 million and $3.6 million, respectively, related to the acquisitions of NewDominion and Carolina Alliance, as well as $3.4 million and $351,000, respectively, of interest income related to payments received on certain SEPH impaired loan relationships, some of which are participated with PNB. Interest income for the nine months ended September 30, 2021 and 2020 also included $15.5 million and $8.7 million, respectively, of income related to PPP loans. Excluding the impact of the purchase accounting accretion, SEPH income, and PPP income, the yield on loans was 4.29% and 4.68% for the nine months ended September 30, 2021 and 2020, respectively, and the yield on earning assets was 3.66% and 4.22% for the nine months ended September 30, 2021 and 2020, respectively.

Average interest bearing liabilities for the first nine months of 2021 decreased by $12.5 million, or 0.2%, to $5,793 million, compared to $5,805 million for the first nine months of 2020. The average cost of interest bearing liabilities decreased by 28 basis points to 0.29% for the first nine months of 2021, compared to 0.57% for the first nine months of 2020. During the nine months ended September 30, 2020, Park made the decision to participate in a OWS program in order to manage the growth of the balance sheet. At September 30, 2021 and 2020, Park had $818.3 million and $773.3 million, respectively, in OWS insured cash sweep deposits which were off-balance sheet. Excluding the impact of these off-balance sheet OWS deposits, the average cost of interest bearing liabilities would have been 0.25% and 0.55% for the first nine months of 2021 and 2020, respectively.

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Interest expense for the nine months ended September 30, 2021 and 2020 included a benefit from purchase accounting accretion of $39,000 and $194,000, respectively, related to the acquisitions of NewDominion and Carolina Alliance. Excluding the impact of this income, the average cost of interest bearing liabilities was unchanged at 0.13% for the nine months ended September 30, 2021 and 0.48% for the nine months ended September 30, 2020.

Removing the impacts of the accretion of purchase accounting adjustments related to the acquisitions of NewDominion and Carolina Alliance, the interest income related to payments on certain SEPH impaired loan relationships and the interest income related to PPP loans, the net interest margin was 3.47% and 3.81% for the nine months ended September 30, 2021 and 2020, respectively.

Yield on Loans: Average loan balances increased $157 million, or 2.3%, to $7,062 million for the first nine months of 2021, compared to $6,905 million for the first nine months of 2020. The average yield on the loan portfolio decreased by 20 basis points to 4.52% for the first nine months of 2021, compared to 4.72% for the first nine months of 2020. Average loans for the first nine months of 2021 and 2020 included $309.0 million and $312.2 million, respectively, of PPP loans.

The table below shows the average balance and tax equivalent yield by type of loan for the nine months ended September 30, 2021 and 2020.


	Nine months ended September 30, 2021				Nine months ended September 30, 2020
(Dollars in thousands)	Average balance		Tax equivalent yield		Average balance		Tax equivalent yield
Home equity loans	$	169,892	3.79	%	$	211,421	4.11	%
Installment loans	1,684,026		4.83	%	1,510,580		5.23	%
Real estate loans	1,185,141		3.79	%	1,284,858		4.14	%
Commercial loans (1)	4,020,498		4.63	%	3,893,807		4.74	%
Other	2,779		12.21	%	4,234		10.10	%
Total loans and leases before allowance	$	7,062,336	4.52	%	$	6,904,900	4.72	%

(1) Commercial loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $528,000 for the nine months ended September 30, 2021 and $454,000 for the same period of 2020.

Loan interest income for the nine months ended September 30, 2021 and 2020 included the accretion of purchase accounting adjustments related to the acquisitions of NewDominion and Carolina Alliance, interest income related to payments on certain SEPH impaired loan relationships and interest income related to PPP loans. Excluding the impact of the purchase accounting accretion, SEPH income, and PPP income, (a) the yield on home equity loans was 3.43%, the yield on installment loans was unchanged at 4.83%, the yield on real estate loans was 3.76%, the yield on commercial loans was 4.25% and the yield on total loans and leases before allowance was 4.29% for the nine months ended September 30, 2021; and (b) the yield on home equity loans was 3.93%, the yield on installment loans was unchanged at 5.23%, the yield on real estate loans was 4.10%, the yield on commercial loans was 4.69% and the yield on total loans and leases before allowance was 4.68% for the nine months ended September 30, 2020.

Cost of Deposits: Average interest bearing deposit balances decreased $65.3 million, or 1.2%, to $5,285 million for the first nine months of 2021, compared to $5,350 for the first nine months of 2020. The average cost of funds on deposit balances decreased by 34 basis points to 0.13% for the first nine months of 2021, compared to 0.47% for the first nine months of 2020.

The table below shows for the nine months ended September 30, 2021 and 2020, the average balance and cost of funds by type of deposit.


	Nine months ended September 30, 2021				Nine months ended September 30, 2020
(Dollars in thousands)	Average balance		Cost of funds		Average balance		Cost of funds
Transaction accounts	$	1,543,451	0.02	%	$	1,780,253	0.26	%
Savings deposits and clubs	2,947,088		0.04	%	2,538,193		0.27	%
Time deposits	794,125		0.65	%	1,031,563		1.33	%
Total interest bearing deposits	$	5,284,664	0.13	%	$	5,350,009	0.47	%

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Deposit interest expense for the nine months ended September 30, 2021 and 2020 included the accretion of purchase accounting adjustments related to the acquisitions of NewDominion and Carolina Alliance of $39,000 and $194,000, respectively. Excluding this income, the cost of funds for time deposits was 0.66% and the cost of total interest bearing deposits was unchanged at 0.13% for the nine months ended September 30, 2021, and the cost of funds for time deposits was 1.36% and the cost of total interest bearing deposits was 0.48% for the nine months ended September 30, 2020.

Yield on Average Interest Earning Assets: The following table shows the tax equivalent yield on average interest earning assets for the nine months ended September 30, 2021 and for the years ended December 31, 2020, 2019 and 2018.


	Loans (1) (3)		Investments (2)		Money Market Instruments		Total(3)
2018 - year	4.98	%	2.72	%	1.93	%	4.46	%
2019 - year	5.19	%	2.76	%	2.33	%	4.70	%
2020 - year	4.71	%	2.66	%	0.26	%	4.28	%
2021 - first nine months	4.52	%	2.30	%	0.13	%	3.86	%

(2) Interest income on tax-exempt investment securities includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $1.6 million for the nine months ended September 30, 2021, and $2.2 million, $2.4 million and $2.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.

(3) Interest income for the nine months ended September 30, 2021 and for the years ended December 31, 2020, 2019 and 2018 included $3.4 million, $453,000, $256,000 and $3.4 million, respectively, related to payments received on certain SEPH impaired loan relationships, some of which are participated with PNB, as well as $2.7 million, $4.4 million, $5.2 million and $1.1 million, respectively, of the accretion of purchase accounting adjustments related to the acquisitions of NewDominion and Carolina Alliance. Interest income for the nine months ended September 30, 2021 and for the year ended December 31, 2020 included $15.5 million and $16.7 million, respectively, of income related to PPP loans. Excluding all of these sources of income, the yield on loans was 4.29%, 4.63%, 5.09% and 4.89%, for the nine months ended September 30, 2021, and for the years ended December 31, 2020, 2019 and 2018, respectively, and the yield on earning assets was 3.66%, 4.20%, 4.62% and 4.40%, for the nine months ended September 30, 2021 and for the years ended December 31, 2020, 2019 and 2018, respectively.

Cost of Average Interest Bearing Liabilities: The following table shows the cost of funds on average interest bearing liabilities for the nine months ended September 30, 2021 and for the years ended December 31, 2020, 2019 and 2018.


	Interest bearing deposits (1)		Short-term borrowings		Long-term debt		Total (1)
2018 - year	0.72	%	0.74	%	2.38	%	0.86	%
2019 - year	1.01	%	1.15	%	2.77	%	1.12	%
2020 - year	0.41	%	0.40	%	3.55	%	0.52	%
2021 - first nine months	0.13	%	0.25	%	4.26	%	0.29	%

(1) Interest expense for the nine months ended September 30, 2021 and the years ended December 31, 2020, 2019 and 2018 included $39,000, $226,000, $593,000 and $287,000, respectively, of the accretion of purchase accounting adjustments related to the acquisitions of NewDominion (for all of these periods) and Carolina Alliance (for the nine months ended September 30, 2021 and the years ended December 31, 2020 and 2019). Excluding this income, for the nine months ended September 30, 2021 and the years ended December 31, 2020, 2019 and 2018, the cost of funds on interest bearing deposits was 0.13%, 0.41%, 1.02% and 0.73%, respectively, and the cost of interest bearing liabilities was 0.29%, 0.53%, 1.13% and 0.86%, respectively.

Credit Metrics and Provision for (Recovery of) Credit Losses

The provision for credit losses is the amount added to 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.

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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.

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 provision for (recovery of) credit losses for the three-month and nine-month periods ended September 30, 2021 and 2020.


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2021			2020			2021			2020
Allowance for credit losses:
Beginning balance	$	83,577		$	73,476		$	85,675		$	56,679
Cumulative change in accounting principle; adoption of ASU 2016-13	—			—			6,090			—
Charge-offs	1,002			1,529			3,773			6,344
Recoveries	3,582			1,255			7,060			5,490
Net (recoveries) charge-offs	(2,580)			274			(3,287)			854
Provision for (recovery of) credit losses	1,972			13,836			(6,923)			31,213
Ending balance	$	88,129		87,038			$	88,129		87,038

Net (recoveries) charge-offs as a % of average loans (annualized)	(0.15)		%	0.02		%	(0.06)		%	0.02		%

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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 September 30, 2021, December 31, 2020 and September 30, 2020. Also included is the January 1, 2021 allowance for credit losses calculated under the CECL methodology prescribed in ASU 2016-13.


Park - Allowance for Credit Losses
(Dollars in thousands)	9/30/2021 (CECL methodology)			1/1/2021 (CECL methodology)			12/31/2020 (Incurred Loss methodology)			9/30/2020 (Incurred Loss methodology)
Total allowance for credit losses	$	88,129		$	91,764		$	85,675		$	87,038
Allowance on PCD loans (PCI loans for the periods ended in 2020)	—			52			167			103
Allowance on purchased loans excluded from the general reserve	—			—			678			371
Specific reserves on individually evaluated loans	3,466			5,434			5,434			8,666
General reserves on collectively evaluated loans	$	84,663		$	86,278		$	79,396		$	77,898

Total loans	$	6,908,417		$	7,177,537		$	7,177,785		$	7,278,546
PCD loans (PCI loans for periods ended in 2020)	8,705			10,903			11,153			11,877
Purchased loans excluded from collectively evaluated loans	—			—			360,056			393,752
Individually evaluated loans	79,264			108,274			108,407			116,138
Collectively evaluated loans	$	6,820,448		$	7,058,360		$	6,698,169		$	6,756,779

Allowance for credit losses as a % of period end loans	1.28		%	1.28		%	1.19		%	1.20		%
Allowance for credit losses as a % of period end loans (excluding PPP loans) (1)	1.30		%	1.34		%	1.25		%	1.28		%

General reserve as a % of collectively evaluated loans	1.24		%	1.22		%	1.19		%	1.15		%
General reserve as a % of collectively evaluated loans (excluding PPP loans) (1)	1.27		%	1.28		%	1.24		%	1.24		%

(1) Excludes $131.5 million of PPP loans and $136,000 in related allowance at September 30, 2021; $331.6 million of PPP loans and $337,000 in related allowance at January 1, 2021; $331.6 million of PPP loans and $337,000 in related allowance at December 31, 2020; and $542.8 million of PPP loans and $543,000 related allowance at September 30, 2020.

The allowance for credit losses of $88.1 million at September 30, 2021 represented a $3.6 million, or 4.0%, 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 $1.6 million decrease in general reserves, taking into consideration improved economic forecasts while balancing the risks associated with the COVID-19 pandemic and the Delta variant, particularly in high risk portfolios such as hotels and accommodations, restaurants and food service and strip shopping centers. Additionally, there was a $2.0 million decrease in specific reserves on individually evaluated loans from $5.4 million at January 1, 2021 to $3.5 million at September 30, 2021. See the section entitled "Allowance for Credit Losses" for further details.

Generally, management obtains updated valuations for all nonperforming loans at least annually. As new valuation information is received, management performs an evaluation and applies a discount for anticipated disposition costs to determine the net realizable value of the collateral, which is compared against the outstanding principal balance to determine if additional write-downs are necessary.

Nonperforming Assets: Nonperforming assets include: (1) loans whose interest is accounted for on a nonaccrual basis; (2) TDRs on accrual status; (3) loans which are contractually past due 90 days or more as to principal or interest payments but whose interest continues to accrue; (4) OREO which results from taking possession of property that served as collateral for a defaulted loan; and (5) other nonperforming assets. At September 30, 2021, December 31, 2020 and September 30, 2020, other nonperforming assets consisted of aircraft acquired as part of a loan workout.

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The following table compares Park’s nonperforming assets at September 30, 2021, December 31, 2020 and September 30, 2020.

Park National Corporation - Nonperforming Assets


(In thousands)	September 30, 2021			December 31, 2020			September 30, 2020
Nonaccrual loans	$	87,791		$	117,368		$	123,050
Accruing TDRs	18,797			20,788			23,774
Loans past due 90 days or more	284			1,458			1,618
Total nonperforming loans	$	106,872		$	139,614		$	148,442

OREO	813			1,431			836
Other nonperforming assets	3,164			3,164			3,392
Total nonperforming assets	$	110,849		$	144,209		$	152,670

Percentage of nonaccrual loans to total loans	1.27		%	1.64		%	1.69		%
Percentage of nonperforming loans to total loans	1.55		%	1.95		%	2.04		%
Percentage of nonperforming assets to total loans	1.60		%	2.01		%	2.10		%
Percentage of nonperforming assets to total assets	1.10		%	1.55		%	1.65		%

Included in the OREO totals above were $594,000 of SEPH OREO at each of September 30, 2021, December 31, 2020 and September 30, 2020.

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 September 30, 2021, December 31, 2020 and September 30, 2020. Loans are classified as current if they are less than 30 days past due.


	September 30, 2021				December 31, 2020				September 30, 2020
(In thousands)	Balance		Percent of Total Loans		Balance		Percent of Total Loans		Balance		Percent of Total Loans
Nonaccrual loans - current	$	67,722	0.98	%	$	92,600	1.29	%	$	101,551	1.39	%
Nonaccrual loans - past due	20,069		0.29	%	24,768		0.35	%	21,499		0.30	%
Total nonaccrual loans	$	87,791	1.27	%	$	117,368	1.64	%	$	123,050	1.69	%

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.

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The following table highlights the credit trends within the commercial loan portfolio.


Commercial loans * (In thousands)	September 30, 2021		December 31, 2020		September 30, 2020
Pass-rated	$	3,676,310	$	3,893,205	$	3,959,026
Special mention	92,659		102,812		103,570
Substandard	39		109		1,147
Impaired	79,264		108,407		116,138
Accruing PCI	8,187		10,296		11,018
Total	$	3,856,459	$	4,114,829	$	4,190,899

* Commercial loans include (1) Commercial, financial and agricultural loans, (2) Commercial real estate loans, (3) Commercial related loans in the construction real estate portfolio, (4) Commercial related loans in the residential real estate portfolio and (5) Leases.

Park had $92.7 million of collectively evaluated commercial loans included on the watch list at September 30, 2021, compared to $102.9 million at December 31, 2020, and $104.7 million at September 30, 2020. 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 $92.7 million of collectively evaluated commercial watch list loans as of September 30, 2021 is elevated compared to pre-pandemic levels, an increase of $65.9 million compared to $26.8 million at March 31, 2020. This $65.9 million increase was largely due to $68.3 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 $68.3 million in hotels and accommodations loans that were downgraded to special mention, $15.6 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 33 months since January 1, 2019. Delinquent and accruing loans were $14.3 million, or 0.21% of total loans at September 30, 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 impaired. Individual analysis will establish a specific reserve for loans in scope. Specific reserves on impaired 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.

Impaired commercial loans were $79.3 million at September 30, 2021, a decrease of $29.1 million, compared to $108.4 million at December 31, 2020 and a decrease of $36.9 million, compared to $116.1 million at September 30, 2020. The $79.3 million of impaired commercial loans at September 30, 2021 included $8.2 million of loans modified in a TDR which were then currently on accrual status and performing in accordance with the restructured terms, down from $8.8 million at December 31, 2020.

At September 30, 2021, Park had taken partial charge-offs of $688,000 related to the $79.3 million of commercial loans considered to be impaired, compared to partial charge-offs of $655,000 related to the $108.4 million of impaired commercial loans at December 31, 2020.

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

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acquired with deteriorated credit quality at September 30, 2021 and December 31, 2020 was $8.7 million and $11.2 million, respectively.

Allowance for Credit Losses: The allowance for credit losses is calculated on a quarterly basis. The methodology for calculating the ACL and assumptions made as of September 30, 2021 are detailed below.

Quantitative Considerations

The ACL is primarily calculated utilizing a DCF model. Key inputs and assumption used in this model are discussed below:

•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.

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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:

◦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.

•Where the U.S. economy is within a given credit cycle.

•The extent that there is government assistance (stimulus).

A breakout of the 4-rated balances within these portfolios and the additional reserve related to these portfolios is detailed in the following table.


	September 30, 2021
(in thousands)	4-Rated Balance		Additional Reserve
Hotels and accommodations	$	123,249	$	1,854
Restaurants and food service	33,373		754
Strip shopping centers	177,635		1,961
Total	$	334,257	$	4,569

Additionally, management applied a 1.00% reserve to all hotels and accommodations loans in the general reserve population to account for increased valuation risk. This is an increase from 0.50% at June 30, 2021 and considers some decline in various conditions due to the Delta variant and a decline in hotel occupancy rates. At September 30, 2021, Park's originated hotels and accommodation loans had a balance of $193.8 million with an additional reserve related to valuation risks of $1.9 million.

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Other Income

Other income decreased by $4.1 million to $32.4 million for the quarter ended September 30, 2021, compared to $36.6 million for the third quarter of 2020 and increased by $7.7 million to $97.7 million for the first nine months of 2021, compared to $90.0 million for the first nine months of 2020.

The decrease for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was primarily due: (a) to decreases in other service income; gains on sale of OREO, net; and gains on equity securities, net; (b) partially offset by increases in income from fiduciary activities; service charges on deposit accounts; debit card fee income; bank owned life insurance income; and miscellaneous income.

The increase for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to: (a) increases in income from fiduciary activities; gain (loss) on equity securities, net; debit card fee income; ATM fees; and miscellaneous income; (b) partially offset by declines in other service income; gain (loss) on sale of OREO, net; and net (loss) gain on sale of debt securities.

The following table is a summary of the changes in the components of other income:


	Three months ended September 30,						Nine months ended September 30,
(In thousands)	2021		2020		Change		2021		2020		Change
Income from fiduciary activities	$	8,820	$	7,335	$	1,485	$	25,562	$	21,241	$	4,321
Service charges on deposit accounts	2,389		2,118		271		6,475		6,322		153
Other service income	6,668		13,047		(6,379)		23,444		25,571		(2,127)
Debit card fee income	6,453		5,853		600		19,297		16,373		2,924
Bank owned life insurance income	1,462		1,192		270		3,776		3,619		157
ATM fees	622		491		131		1,807		1,341		466
Gain (loss) on sale of OREO, net	3		569		(566)		(26)		1,214		(1,240)
Net (loss) gain on sale of debt securities	—		(27)		27		—		3,286		(3,286)
Gain (loss) on equity securities, net	609		1,201		(592)		2,886		(749)		3,635
Other components of net periodic pension benefit income	2,038		1,988		50		6,114		5,964		150
Miscellaneous	3,347		2,791		556		8,403		5,826		2,577
Total other income	$	32,411	$	36,558	$	(4,147)	$	97,738	$	90,008	$	7,730

Income from fiduciary activities increased by $1.5 million, or 20.2%, to $8.8 million for the three months ended September 30, 2021, compared to $7.3 million for the same period of 2020 and increased $4.3 million, or 20.3%, to $25.6 million for the nine months ended September 30, 2021, compared to $21.2 million for the same period in 2020. Fiduciary fees charged are generally based on the market value of customer accounts. The average market value of assets under management for the three months ended September 30, 2021 was $7,548 million compared to $6,301 million for the same period in 2020. The average market value of assets under management for the first nine months of 2021 was $7,355 million compared to $6,023 million for the same period in 2020.

Service charges on deposit accounts increased by $271,000, or 12.8%, to $2.4 million for the three months ended September 30, 2021, compared to $2.1 million for the same period of 2020 and increased $153,000, or 2.4%, to $6.5 million for the nine months ended September 30, 2021, compared to $6.3 million for the same period of 2020. The changes for both the three and nine month periods ended September 30, 2021 compared to September 30, 2020 were due mostly to increases in NSF income. Park implemented an NSF fee increase in December 2020.

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Other service income decreased by $6.4 million, or 48.9%, to $6.7 million for the three months ended September 30, 2021, compared to $13.0 million for the same period of 2020, and decreased $2.1 million, or 8.3%, to $23.4 million for the nine months ended September 30, 2021, compared to $25.6 million for the same period in 2020. The primary reasons for the decrease for the three months ended September 30, 2021 compared to the same period of 2020 was a decrease in fee income from mortgage loan originations of $5.0 million, and a decrease in mortgage servicing rights income of $1.3 million. The primary reason for the decrease for the nine months ended September 30, 2021 compared to the same period of 2020 was a $5.1 million decrease in income related to investor rate locks and loans held for sale, offset by a $1.4 million increase in mortgage servicing rights income and a $324,000 increase in fee income from mortgage loan originations.

Debit card fee income increased $600,000, or 10.3%, to $6.5 million for the three months ended September 30, 2021, compared to $5.9 million for the same period of 2020 and increased $2.9 million, or 17.9%, to $19.3 million for the nine months ended September 30, 2021, compared to $16.4 million for the same period in 2020. The increases in 2021 for the three-month and nine-month periods were attributable to a continued increase in the sales volume and dollar value of debit card transactions. The volume of debit card transactions for the nine months ended September 30, 2021 increased by 10.3% compared to the same period in 2020 and the dollar value of transactions increased 17.7% compared to the same period in 2020.

ATM fees increased $131,000, or 26.7%, to $622,000 for the three months ended September 30, 2021, compared to $491,000 for the same period of 2020, and increased $466,000, or 34.8%, to $1.8 million for the nine months ended September 30, 2021, compared to $1.3 million for the first nine months of 2020. The increase in ATM fee income was primarily due to Park implementing additional charges for ATM balance inquiries and transfers during the second quarter of 2021.

Gain (loss) on sale of OREO, net decreased by $566,000, to a net gain of $3,000 for the three months ended September 30, 2021, compared to a net gain of $569,000 for the same period of 2020, and decreased by $1.2 million, to a net loss of $26,000 for the nine months ended September 30, 2021, compared to a net gain of $1.2 million for the same period of 2020. The decrease for the three months ended September 30, 2021 was primarily due to a $379,000 gain on the sale of one OREO property at SEPH during the three months ended September 30, 2020 that did not occur in the three months ended September 30, 2021, and the decrease during first nine months of 2021 was due to minimal OREO sale activity during the first nine months of 2021 compared to a $1.2 million gain on the sale of two OREO properties during the first nine months of 2020, one of which was participated to PNB from SEPH.

There were no sales of debt securities during the three and nine months ended September 30, 2021. During the three months ended September 30, 2020, investment securities with a book value of $253.4 million were sold at a net loss of $27,000. During the nine months ended September 30, 2020, investment securities with a book value of $308.9 million were sold at a net gain of $3.3 million.

Gain (loss) on equity securities, net decreased $592,000, to a net gain of $609,000 for the three months ended September 30, 2021, compared to a net gain of $1.2 million for the same period in 2020 and increased $3.6 million to a net gain of $2.9 million for the nine months ended September 30, 2021 compared to a net loss of $749,000 during the same time period in 2020. The $592,000 decrease for the three months ended September 30, 2021 was related to a $778,000 decrease in the gain (loss) on equity securities held at NAV, which went from a $1.3 million gain for the three months ended September 30, 2020 to a $512,000 gain for the three months ended September 30, 2021, offset by a $186,000 increase in unrealized gain (loss) on equity securities, which went from an $89,000 unrealized loss for the three months ended September 30, 2020 to a $97,000 unrealized gain for the three months ended September 30, 2021. The $3.6 million increase for the nine months ended September 30, 2021 was related to a $2.4 million increase in the gain (loss) on equity securities held at NAV, which went from a $40,000 loss for the nine months ended September 30, 2020 to a $2.4 million gain for the nine months ended September 30, 2021, and a $1.0 million increase in unrealized gain (loss) on equity securities, which went from a $708,000 unrealized loss for the nine months ended September 30, 2020 to a $316,000 unrealized gain for the nine months ended September 30, 2021. During the nine months ended September 30, 2021, equity securities with a book value of $757,000 were sold at a gain of $177,000. There were no equity securities sold during the three months ended September 30, 2021 and 2020 and during the nine months ended September 30, 2020.

Miscellaneous income increased $556,000, or 19.9%, to $3.3 million for the three months ended September 30, 2021, compared to $2.8 million for the same period of 2020 and increased $2.6 million, or 44.2%, to $8.4 million for the nine months ended September 30, 2021 compared to $5.9 million for the same period of 2020 The increase for the three months period ended September 30, 2021 was primarily a result of an increase in printed check sales income, an increase in wire transfer fees, an increase in VISA incentive income, and a decrease in the loss on sales of assets. The increase for the nine months period ended September 30, 2021 was primarily the result of an increase in printed check sales income, an insurance refund received on a consumer loan insurance product, an increase in VISA incentive income, and an increase in wire transfer fees.

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Other Expense

Other expense decreased by $1.4 million to $68.5 million for the three months ended September 30, 2021, compared to $69.9 million for the same period of 2020 and increased $6.8 million to $207.8 million for the nine months ended September 30, 2021, compared to $200.9 million for the first nine months of 2020.

The following table is a summary of the changes in the components of other expense:


	Three months ended September 30,						Nine months ended September 30,
(In thousands)	2021		2020		Change		2021		2020		Change
Salaries	$	29,433	$	31,632	$	(2,199)	$	89,632	$	90,760	$	(1,128)
Employee benefits	10,640		10,676		(36)		30,897		29,799		1,098
Occupancy expense	3,211		3,835		(624)		9,878		10,571		(693)
Furniture and equipment expense	2,797		4,687		(1,890)		8,163		13,856		(5,693)
Data processing fees	7,817		3,275		4,542		22,679		8,344		14,335
Professional fees and services	6,973		7,977		(1,004)		19,610		21,944		(2,334)
Marketing	1,574		1,454		120		4,355		4,076		279
Insurance	1,403		1,541		(138)		4,370		4,568		(198)
Communication	796		958		(162)		2,688		2,987		(299)
State tax expense	1,113		1,125		(12)		3,324		3,386		(62)
Amortization of intangible assets	420		525		(105)		1,378		1,738		(360)
Foundation contribution	—		—		—		4,000		—		4,000
Miscellaneous	2,312		2,174		138		6,780		8,905		(2,125)
Total other expense	$	68,489	$	69,859	$	(1,370)	$	207,754	$	200,934	$	6,820

Salaries decreased by $2.2 million, or 7.0%, to $29.4 million for the three months ended September 30, 2021, compared to $31.6 million for the same period in 2020. The decrease was due to a $1.1 million decrease in officer incentive compensation, and a $934,000 decrease in additional compensation expense, primarily related to calamity pay and special one-time bonuses to certain associates as a result of the COVID-19 public health crisis.

Salaries decreased by $1.1 million, or 1.2%, to $89.6 million for the nine months ended September 30, 2021, compared to $90.8 million for the same period in 2020. The decrease was due to a $1.7 million decrease in base salary expense and a $906,000 decrease in additional compensation expense, partially offset by a $1.0 million increase in officer incentive compensation expense and a $746,000 increase in share-based compensation expense.

Employee benefits decreased $36,000, or 0.3%, to $10.6 million for the three months ended September 30, 2021, compared to $10.7 million for the same period in 2020, and increased $1.1 million, or 3.7%, to $30.9 million for the nine months ended September 30, 2021, compared to $29.8 million for the same period in 2020. The $36,000 decrease for the three months ended September 30, 2021 was due to a $365,000 decrease in group insurance costs and a $87,000 decrease in employer payroll taxes partially offset by an increase of $399,000 in pension service cost expense. The $1.1 million increase for the nine months ended September 30, 2021 was due to a $1.2 million increase in pension service cost expense and a $112,000 increase in group insurance cost, partially offset by a $201,000 decrease in miscellaneous employee benefits expense.

Furniture and equipment expense decreased by $1.9 million, or 40.3%, to $2.8 million for the three months ended September 30, 2021, compared to $4.7 million for the same period in 2020, and decreased $5.7 million, or 41.1%, to $8.2 million for the nine months ended September 30, 2021, compared to $13.9 million for the same period in 2020. The decrease for both periods 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.

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Data processing fees increased by $4.5 million, to $7.8 million for the three months ended September 30, 2021, compared to $3.3 million for the same period of 2020, and increased by $14.3 million, to $22.7 million for the nine months ended September 30, 2021, compared to $8.3 million for the same period of 2020. The increase for both periods 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 change in data processing fees was also impacted by changes in debit card processing costs. During the three months ended September 30, 2021, debit card processing costs declined $68,000 compared to the same period of 2020 and increased by $770,000 for the nine months ended September 30, 2021 compared to the same period of 2020.

Professional fees and services decreased $1.0 million, or 12.6%, to $7.0 million for the three months ended September 30, 2021, compared to $8.0 million for the same period of 2020 and decreased $2.3 million, or 10.6%, to $19.6 million for the nine months ended September 30, 2021 compared to $21.9 million for the same period of 2020. The $1.0 million decrease for the three months ended September 30, 2021 was primarily due to decreases in other fees (due to the change in expensing software costs under data processing fees), credit costs and recruiting expense, partially offset by increases in legal expense, appraisal fees, consulting fees, and filing fees. The $2.3 million decrease for the nine months ended September 30, 2021 was primarily due to decreases in other fees (due to the change in expensing software costs under data processing fees), decreased title and credit costs and ICS promontory fees, partially offset by increases in consulting fees, recruiting expense, legal expense and membership dues.

The Foundation contribution increase for the nine months ended September 30, 2021, compared to the same period of 2020, was due to a $4.0 million contribution to Park's charitable foundation during the nine months ended September 30, 2021 and no similar contribution during the nine months ended September 30, 2020. The 2020 contribution was made during the fourth quarter of 2020. Park does not expect to make any additional contributions to Park's charitable foundation in 2021.

The subcategory "miscellaneous" other expense includes expenses for supplies, travel and other miscellaneous expense. The subcategory miscellaneous other expense decreased $2.1 million, or 23.9%, to $6.8 million for the nine months period ended September 30, 2021, compared to $8.9 million for the same period of 2020. The $2.1 million decrease was primarily due to a $1.8 million prepayment penalty on FHLB borrowings paid during the nine months ended September 30, 2020 and no similar prepayment during the first nine months of 2021 partially offset by an increase in expense related to the allowance for unfunded credit losses and an increase in non-loan related losses.

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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 result from merger and acquisition activities and revenue and expenses related to former Vision Bank loan relationships. In other cases, they may result from management's decisions associated with significant corporate actions outside of the ordinary course of business.

The following table details those items which management believes impact the comparability of current and prior period amounts.


	THREE MONTHS ENDED				NINE MONTHS ENDED
(in thousands, except share and per share data)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020		Affected Line Item
Net interest income	$	81,602	$	83,840	$	246,187	$	241,309
less purchase accounting accretion related to NewDominion and Carolina Alliance acquisitions	799		1,029		2,704		3,556		Interest and fees on loans
less purchase accounting accretion related to NewDominion and Carolina Alliance acquisitions	8		42		40		194		Interest on deposits
less interest income on former Vision Bank relationships	414		8		3,357		351		Interest and fees on loans
Net interest income - adjusted	$	80,381	$	82,761	$	240,086	$	237,208

Provision for (recovery of) credit losses	$	1,972	$	13,836	$	(6,923)	$	31,213
less recoveries on former Vision Bank relationships	(2,231)		(37)		(2,640)		(1,486)		Provision for (recovery of) credit losses
Provision for (recovery of) credit losses - adjusted	$	4,203	$	13,873	$	(4,283)	$	32,699

Total other income	$	32,411	$	36,558	$	97,738	$	90,008
less net (loss) gain on the sale of debt securities in the ordinary course of business	—		(27)		—		3,286		Net (loss) gain on sale of debt securities
less rebranding initiative related expenses	—		—		—		(274)		Miscellaneous income
less net gain on sale of former Vision Bank OREO properties	—		371		—		1,208		Gain (loss) on sale of OREO, net
less other service income related to former Vision Bank relationships	143		36		204		88		Other service income
Total other income - adjusted	$	32,268	$	36,178	$	97,534	$	85,700

Total other expense	$	68,489	$	69,859	$	207,754	$	200,934
less merger-related expenses related to NewDominion and Carolina Alliance acquisitions	—		7		8		117		Salaries
less merger-related expenses related to NewDominion and Carolina Alliance acquisitions	—		152		—		491		Professional fees and services
less merger-related expenses related to NewDominion and Carolina Alliance acquisitions	4		4		12		12		Insurance
less COVID-19 related expenses	—		744		1,535		2,884		Salaries
less severance and restructuring charges	140		67		294		403		Salaries
less management and consulting expenses related to collection of payments on former Vision Bank loan relationships	254		232		661		232		Professional fees and services
less rebranding initiative related expenses	—		—		—		72		Employee benefits
less rebranding initiative related expenses	79		47		231		47		Occupancy expense
less rebranding initiative related expenses	263		—		786		75		Furniture and equipment expense
less rebranding initiative related expenses	—		—		591		—		Data processing fees
less rebranding initiative related expenses	95		372		126		531		Professional fees and services
less rebranding initiative related expenses	—		—		—		25		Marketing
less rebranding initiative related expenses	—		—		—		2		Communication
less rebranding initiative related expenses	—		10		—		85		Miscellaneous
less core deposit intangible amortization related to NewDominion and Carolina Alliance acquisitions	420		525		1,378		1,738		Amortization of intangible assets

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	THREE MONTHS ENDED						NINE MONTHS ENDED
(in thousands, except share and per share data)	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020			Affected Line Item
less Foundation contribution				—			4,000			—			Foundation contribution
less FHLB prepayment penalty	—			—			—			1,793			Miscellaneous
Total other expense - adjusted	$	67,234		$	67,699		$	198,132		$	192,427

Tax effect of adjustments to net income identified above (7)	$	(491)		$	139		$	142		$	(291)

Net income - reported	$	35,434		$	30,846		$	117,397		$	82,723
Net income - adjusted	$	33,585		$	31,371		$	117,932		$	81,626

Diluted EPS	$	2.16		$	1.88		$	7.14		$	5.04
Diluted EPS, adjusted (6)	$	2.04		$	1.91		$	7.17		$	4.98

Annualized return on average assets (1)(2)	1.40		%	1.28		%	1.59		%	1.20		%
Annualized return on average assets, adjusted (1)(2)(6)	1.32		%	1.31		%	1.60		%	1.18		%

Annualized return on average tangible assets (1)(2)(4)	1.42		%	1.31		%	1.62		%	1.22		%
Annualized return on average tangible assets, adjusted (1)(2)(4)(6)	1.35		%	1.33		%	1.63		%	1.21		%

Annualized return on average shareholders' equity (1)(2)	13.04		%	12.03		%	14.79		%	11.05		%
Annualized return on average shareholders' equity, adjusted (1)(2)(6)	12.36		%	12.23		%	14.86		%	10.90		%

Annualized return on average tangible equity (1)(2)(3)	15.44		%	14.43		%	17.58		%	13.31		%
Annualized return on average tangible equity, adjusted (1)(2)(3)(6)	14.63		%	14.67		%	17.66		%	13.14		%

Efficiency ratio (5)	59.70		%	57.69		%	60.03		%	60.26		%
Efficiency ratio, adjusted (5)(6)	59.31		%	56.58		%	58.31		%	59.20		%

Annualized net interest margin (5)	3.53		%	3.85		%	3.67		%	3.88		%
Annualized net interest margin, adjusted (5)(6)	3.48		%	3.80		%	3.58		%	3.81		%

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THREE MONTHS ENDED

NINE MONTHS ENDED

(in thousands, except share and per share data)

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

Affected Line Item


Financial Reconciliations

(1) Reported measure uses net income
(2) Averages are for the three months and nine months ended September 30, 2021 and September 30, 2020
(3) Net income for each period divided by average tangible equity during the period. Average tangible equity equals average shareholders' equity during the applicable period less average goodwill and other intangible assets during the applicable period.

RECONCILIATION OF AVERAGE SHAREHOLDERS' EQUITY TO AVERAGE TANGIBLE EQUITY:
	THREE MONTHS ENDED				NINE MONTHS ENDED
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
AVERAGE SHAREHOLDERS' EQUITY	$	1,078,465	$	1,020,239	$	1,061,066	$	1,000,241
Less: Average goodwill and other intangible assets	167,754		169,726		168,215		170,311
AVERAGE TANGIBLE EQUITY	$	910,711	$	850,513	$	892,851	$	829,930

(4) Net income for each period divided by average tangible assets during the period. Average tangible assets equals average assets less average goodwill and other intangible assets, in each case during the applicable period.

RECONCILIATION OF AVERAGE ASSETS TO AVERAGE TANGIBLE ASSETS
	THREE MONTHS ENDED				NINE MONTHS ENDED
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
AVERAGE ASSETS	$	10,070,716	$	9,557,682	$	9,583,457	$	9,216,495
Less: Average goodwill and other intangible assets	167,754		169,726		168,215		170,311
AVERAGE TANGIBLE ASSETS	$	9,902,962	$	9,387,956	$	9,415,242	$	9,046,184

(5) Efficiency ratio is calculated by dividing total other expense by the sum of fully taxable equivalent net interest income and other income. Fully taxable equivalent net interest income reconciliation is shown assuming a 21% federal corporate income tax rate. Additionally, net interest margin is calculated on a fully taxable equivalent basis by dividing fully taxable equivalent net interest income by average interest earning assets.

RECONCILIATION OF FULLY TAXABLE EQUIVALENT NET INTEREST INCOME TO NET INTEREST INCOME
	THREE MONTHS ENDED				NINE MONTHS ENDED
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Interest income	$	85,420	$	89,566	$	258,587	$	265,920
Fully taxable equivalent adjustment	717		706		2,149		2,154
Fully taxable equivalent interest income	$	86,137	$	90,272	$	260,736	$	268,074
Interest expense	3,818		5,726		12,400		24,611
Fully taxable equivalent net interest income	$	82,319	$	84,546	$	248,336	$	243,463

(6) Adjustments to net income for each period presented are detailed in the non-GAAP reconciliations of net interest income, provision for (recovery of) credit losses, total other income and total other expense.
(7) The tax effect of adjustments to net income was calculated assuming a 21% federal corporate income tax rate.

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Income Tax

Income tax expense was $8.1 million for the third quarter of 2021 and consisted of federal income tax expense of $7.9 million and state income tax expense of $264,000. This compares to income tax expense of $5.9 million for the third quarter of 2020 which consisted of federal income tax expense of $5.6 million and state income tax expense of $271,000. The effective income tax rate for the third quarter of 2021 was 18.6%, compared to 16.0% for the same period in 2020.

Income tax expense was $25.7 million for the first nine months of 2021 and consisted of federal income tax expense of $24.9 million and state income tax expense of $793,000. This compares to income tax expense of $16.4 million for the first nine months of 2020 which consisted of federal income tax expense of $15.6 million and state income tax expense of $814,000. The effective income tax rate for the first nine months of 2021 was 18.0%, compared to 16.6% for the same period in 2020.

The difference between the statutory federal corporate income tax rate of 21% and Park's effective income tax rate reflects permanent tax differences, primarily consisting of tax-exempt interest income from municipal investments and loans, qualified affordable housing and historical tax credits, bank owned life insurance income, and dividends paid on the common shares held within Park's salary deferral plan offset by the impact of state income taxes. Park expects permanent federal income tax differences for the 2021 year will be approximately $6.3 million.

Comparison of Financial Condition

At September 30, 2021 and December 31, 2020

Changes in Financial Condition

Total assets increased by $755.0 million, or 8.1%, during the first nine months of 2021 to $10,034 million at September 30, 2021, compared to $9,279 million at December 31, 2020. This increase was primarily due to the following:

•Cash and cash equivalents increased by $506.9 million, or 136.8%, to $877.4 million at September 30, 2021, compared to $370.5 million at December 31, 2020. Money market instruments were $749.7 million at September 30, 2021, compared to $214.9 million at December 31, 2020 and cash and due from banks were $127.7 million at September 30, 2021, compared to $155.6 million at December 31, 2020.

•Investment securities increased $484.5 million, or 43.1%, to $1,609 million at September 30, 2021, compared to $1,125 million at December 31, 2020.

•Other assets increased by $21.4 million, or 456.2%, to $26.1 million at September 30, 2021, compared to $4.7 million at December 31, 2020. This was primarily related to a re-classification of deferred items and tax payables between assets and liabilities.

•Prepaid assets increased by $12.7 million, or 12.3%, to $116.2 million at September 30, 2021, compared to $103.5 million at December 31, 2020.

•Loans decreased by $269.4 million, or 3.8%, to $6,908 million at September 30, 2021, compared to $7,178 million at December 31, 2020. PPP loans were $131.5 million at September 30, 2021 compared to $331.6 million at December 31, 2020.

Total liabilities increased by $727.3 million, or 8.8%, during the first nine months of 2021 to $8,966 million at September 30, 2021, compared to $8,239 million at December 31, 2020. This increase was primarily due to the following:

•Total deposits increased by $792.0 million, or 10.5%, to $8,364 million at September 30, 2021, compared to $7,572 million at December 31, 2020. During 2020, Park made the decision to participate in a OWS program in order to manage the balance sheet. At September 30, 2021 and December 31, 2020, Park had $818.3 million and $710.1 million, respectively, in OWS insured cash sweep deposits which were off-balance sheet.

•Unsettled investment commitments were $52.5 million at September 30, 2021. There were no unsettled investment commitments at December 31, 2020. This liability relates to a purchase commitment of debt securities AFS.

•Other liabilities increased $17.0 million, or 31.1%, to $71.6 million at September 30, 2021, compared to $54.6 million at December 31, 2020. This was primarily related to a re-classification of deferred items and tax payables between assets and liabilities.

•The allowance for credit loss on off-balance sheet commitments increased by $4.5 million to $4.6 million at September 30, 2021, compared to $116,000 at December 31, 2020. This increase was due to the adoption of ASU 2016-13 effective January 1, 2021.

•Short-term borrowings decreased by $106.3 million, or 31.0%, to $236.0 million at September 30, 2021, compared to $342.2 million at December 31, 2020.

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•Long-term borrowings decreased by $32.5 million, or 100%. There were no long-term borrowings at September 30, 2021, compared to $32.5 million at December 31, 2020.

Total shareholders’ equity increased by $27.7 million, or 2.7%, to $1,067.9 million at September 30, 2021, from $1,040.3 million at December 31, 2020. This increase was primarily due to the following:

•Retained earnings increased by $54.9 million during the period primarily as a result of net income of $117.4 million, partially offset by common share dividends of $54.4 million and the impact of the adoption of ASU 2016-13 of $8.0 million.

•Treasury shares decreased by $13.1 million during the period as a result of the repurchase of treasury shares partially offset by the issuance of treasury shares under share-based compensation awards (net of common shares withheld to pay employee income taxes).

•Accumulated other comprehensive (loss) income, net of taxes declined by $13.4 million, from a positive $5.6 million at December 31, 2020, to a negative $7.8 million at September 30, 2021, as a result of unrealized net holding losses on debt securities AFS, net of taxes, of $13.7 million, partially offset by an unrealized gain on cash flow hedging derivatives, net of taxes, of $355,000.

Increases or decreases in the investment securities portfolio, short-term borrowings and long-term debt are greatly dependent upon the growth in loans and deposits. The primary objective of management is to grow loan and deposit totals. To the extent that management is unable to grow loan totals at a desired growth rate, additional investment securities may be acquired. Likewise, both short-term borrowings and long-term debt are utilized to fund the growth in earning assets if the growth in deposits and cash flow from operations are not sufficient to do so.

Liquidity

Cash provided by operating activities was $112.6 million and $52.4 million for the nine months ended September 30, 2021 and 2020, respectively. Net income was the primary source of cash from operating activities for each of the nine-month periods ended September 30, 2021 and 2020.

Cash used in investing activities was $186.2 million and $531.8 million for the nine months ended September 30, 2021 and 2020, respectively. 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 $447.9 million for the nine months ended September 30, 2021 and provided cash of $213.9 million for the nine months ended September 30, 2020. Another major use or source of cash in investing activities is the net increase or decrease in the loan portfolio. Cash provided by the net decrease in the loan portfolio was $269.4 million for the nine months ended September 30, 2021 and cash used by the net increase in the loan portfolio was $727.4 million for the nine months ended September 30, 2020.

Cash provided by financing activities was $580.5 million and $566.1 million for the nine months ended September 30, 2021 and 2020, respectively. A major source of cash for financing activities is the net change in deposits. Deposits increased and provided $792.1 million (net of OWS) and $423.4 million of cash for the nine months ended September 30, 2021 and 2020, respectively. Another major source/use of cash from financing activities is borrowings in the form of short-term borrowings, long-term debt and subordinated notes. For the nine months ended September 30, 2021, net short-term borrowings decreased and used $106.3 million in cash and net long-term borrowings decreased and used $32.5 million in cash. For the nine months ended September 30, 2020, net short-term borrowings increased and provided $89.8 million in cash and net long-term borrowings decreased and used $57.5 million in cash. In addition, the proceeds from the issuance of subordinated notes provided $172.6 million in cash. Finally, cash declined by $54.4 million and $53.7 million for the nine months ended September 30, 2021 and 2020, respectively, from the payment of dividends.

Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as the operating cash needs of the Corporation, are met. Funds are available from a number of sources, including the capital markets, the investment securities portfolio, the core deposit base, FHLB borrowings and the capability to securitize or package loans for sale. The Corporation’s loan to asset ratio was 68.85% at September 30, 2021, compared to 77.35% at December 31, 2020 and 78.77% at September 30, 2020. Cash and cash equivalents were $877.4 million at September 30, 2021, compared to $370.5 million at December 31, 2020 and $246.7 million at September 30, 2020. Management believes that the present funding sources provide more than adequate liquidity for the Corporation to meet its cash flow needs.

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Capital Resources

Shareholders’ equity at September 30, 2021 was $1,067.9 million, or 10.6% of total assets, compared to $1,040.3 million, or 11.2% of total assets, at December 31, 2020 and $1,017.0 million, or 11.0% of total assets, at September 30, 2020.

Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank holding companies. Park has elected not to include the net unrealized gain or loss on debt securities AFS in computing regulatory capital. 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 September 30, 2021. The following table indicates the capital ratios for PNB and Park at September 30, 2021 and December 31, 2020.


	At September 30, 2021
	Leverage		Tier 1 Risk-Based		Common Equity Tier 1		Total Risk-Based
The Park National Bank	8.28	%	11.04	%	11.04	%	12.63	%
Park National Corporation	9.32	%	12.40	%	12.19	%	15.97	%
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	%


	At December 31, 2020
	Leverage		Tier 1 Risk-Based		Common Equity Tier 1		Total Risk-Based
The Park National Bank	8.59	%	10.66	%	10.66	%	12.16	%
Park National Corporation	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	%

Contractual Obligations and Commitments

In the ordinary course of operations, Park enters into certain contractual obligations. Such obligations include the funding of operations through debt issuances as well as leases for premises. See page 83 of Park’s 2020 Form 10-K (Table 42) for disclosure concerning contractual obligations and commitments at December 31, 2020. There were no other significant changes in contractual obligations and commitments during the first nine months of 2021.

Financial Instruments with Off-Balance Sheet Risk

PNB is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements.

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The exposure to credit loss (for PNB) in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. PNB uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.

The total amounts of off-balance sheet financial instruments with credit risk were as follows:


(In thousands)	September 30, 2021		December 31, 2020
Loan commitments	$	1,379,838	$	1,372,182
Standby letters of credit	$	19,641	$	17,015

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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Management reviews interest rate sensitivity on a monthly basis by modeling the consolidated financial statements under various interest rate scenarios. The primary reason for these efforts is to guard Park from adverse impacts of unforeseen changes in interest rates. Management continues to believe that further changes in interest rates will have a small impact on net income, consistent with the disclosure on page 83 of Park’s 2020 Form 10-K.

On page 81 (Table 41) of Park’s 2020 Form 10-K, management reported that Park’s twelve-month cumulative rate sensitivity gap was a positive (assets exceeding liabilities) $1,294.6 million or 15.29% of total interest earning assets at December 31, 2020. At September 30, 2021, Park’s twelve-month cumulative rate sensitivity gap was a positive (assets exceeding liabilities) $1,871.8 million or 20.3% of total interest earning assets.

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. 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.

On page 83 of Park’s 2020 Form 10-K, management reported that 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 September 30, 2021, the earnings simulation model projected that net income would increase by 6.6% using a rising interest rate scenario and would decrease by 13.5% in a declining interest rate scenario. At September 30, 2021, management continues to believe that gradual changes in interest rates (50 basis points per quarter for a total of 200 basis points per year) will have a small impact on net income.

ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

With the participation of the Chairman of the Board and Chief Executive Officer (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 Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, Park’s Chairman of the Board and Chief Executive Officer and Park’s Chief Financial Officer, Secretary and Treasurer have concluded that:

•information required to be disclosed by Park in this Quarterly Report on Form 10-Q and the other reports that Park files or submits under the Exchange Act would be accumulated and communicated to Park’s management, including its principal executive officer and its principal financial officer, as appropriate to allow timely decisions regarding required disclosure;

•information required to be disclosed by Park in this Quarterly Report on Form 10-Q 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 quarterly period covered by this Quarterly Report on Form 10-Q.

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 changes in Park's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during Park's quarter ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, Park's internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

There are no pending legal proceedings to which Park or any of its subsidiaries is a party or to which any of their property is subject, except for routine legal proceedings which Park's subsidiaries are parties to incidental to their respective businesses. Park considers none of those proceedings to be material.

Item 1A. Risk Factors

There are certain risks and uncertainties in our business that could cause Park's actual results to differ materially from those anticipated. In “ITEM 1A. RISK FACTORS” of Part I of Park’s 2020 Form 10-K, we included a detailed discussion of our risk factors. All of these risk factors should be read carefully in connection with evaluating Park's business and in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q. Any of the risks described in Park's 2020 Form 10-K could materially adversely affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. These are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)Not applicable

(b)Not applicable

(c)The following table provides information concerning purchases of Park’s common shares ("Common Shares") made by or on behalf of Park or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Exchange Act, during the three months ended September 30, 2021, as well as the maximum number of common shares that may be purchased under Park’s previously announced stock repurchase authorizations to fund the 2017 Long-Term Incentive Plan for Employees (the "2017 Employees LTIP") and the 2017 Long-Term Incentive Plan for Non-Employee Directors (the "2017 Non-Employee Directors LTIP") and Park's previously announced 2017 and 2019 stock repurchase authorizations:


Period	Total number of common shares purchased	Average price paid per common share		Total number of common shares purchased as part of publicly announced plans or programs	Maximum number of common shares that may yet be purchased under the plans or programs (1)
July 1 through July 31, 2021	—	$	—	—	1,332,747
August 1 through August 31, 2021	75,000	118.21		75,000	1,257,747
September 1 through September 30, 2021	62,659	114.60		62,659	1,195,088
Total	137,659	$	116.57	137,659	1,195,088

(1)The number shown represents, as of the end of each period, the maximum number of Common Shares that may yet be purchased as part of Park’s publicly announced stock repurchase authorizations to fund the 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP, both of which became effective on April 24, 2017; Park's publicly announced stock repurchase authorization covering 500,000 Common Shares which was announced on January 23, 2017; and Park's stock repurchase authorization covering 500,000 Common Shares which was announced on January 28, 2019 and as to which approval from the Federal Reserve was obtained in the form of correspondence from the Federal Reserve Bank of Cleveland dated April 19, 2019.

At the 2017 Annual Meeting of Shareholders held on April 24, 2017, Park's shareholders approved the 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP. The Common Shares to be issued and delivered under the 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP may consist of either Common Shares currently held or Common Shares subsequently acquired by Park as treasury shares. No newly-issued Common Shares will be delivered under the 2017 Employees LTIP or the 2017 Non-Employee Directors LTIP. On April 24, 2017, Park's Board of Directors authorized the purchase, from time to time, of up to 750,000 Park Common Shares and 150,000 Park Common Shares, respectively, to be held

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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 3. Defaults Upon Senior Securities

(a), (b) Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

(a), (b) Not applicable.

Item 6. Exhibits


			2.1			Agreement and Plan of Merger and Reorganization 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))*

			2.2			Agreement and Plan of Merger and Reorganization, dated as of September 12, 2018, by and between Park National Corporation and CAB Financial Corporation (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))

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			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 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 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 on December 19, 2008, evidencing adoption of amendment by Board of Directors of Park National Corporation to Article FOURTH of Articles of Incorporation to establish 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 December 23, 2008 (File No. 1-13006))

			3.1(g)			Certificate of Amendment by Shareholders as filed with the Ohio Secretary of State 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 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))

			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) to Park’s March 31, 2008 Form 10-Q)

			31.1			Rule 13a – 14(a) / 15d – 14(a) Certifications (Principal Executive Officer) (Filed herewith)

			31.2			Rule 13a – 14(a) / 15d – 14(a) Certifications (Principal Financial Officer) (Filed herewith)

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			32.1			Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (Principal Executive Officer) (Furnished herewith)

			32.2			Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (Principal Financial Officer) (Furnished herewith)

			101			The following information from Park’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021 formatted in Inline XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Condensed Balance Sheets as of September 30, 2021 and December 31, 2020 (unaudited); (ii) the Consolidated Condensed Statements of Income for the three months and nine months ended September 30, 2021 and 2020 (unaudited); (iii) the Consolidated Condensed Statements of Comprehensive Income for the three months and nine months ended September 30, 2021 and 2020 (unaudited); (iv) the Consolidated Condensed Statements of Changes in Shareholders’ Equity for the three months and nine months ended September 30, 2021 and 2020 (unaudited); (v) the Consolidated Condensed Statements of Cash Flows for the nine months ended September 30 , 2021 and 2020 (unaudited); and (vi) the Notes to Unaudited Consolidated Condensed 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)

________________________________________

*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, and Item 601(a)(5) of SEC Regulation S-K, as currently in effect. A copy of any omitted attachment will be furnished supplementally to the SEC upon its request.

** The instance document does not appear in the interactive data file because its XBRL tags are imbedded within the Inline XBRL document.

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.

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SIGNATURES

Pursuant to the requirements 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.


						PARK NATIONAL CORPORATION

DATE: November 3, 2021						/s/ David L. Trautman
						David L. Trautman
						Chairman of the Board and Chief Executive Officer
						(Principal Executive Officer and Duly Authorized Officer)

DATE: November 3, 2021						/s/ Brady T. Burt
						Brady T. Burt
						Chief Financial Officer, Secretary and Treasurer
						(Principal Financial Officer and Duly Authorized Officer)

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