Park National (PRK) - 2021 Q4 - Annual Report

PART I Business Park National Corporation is an Ohio-based financial holding company providing commercial banking, trust, and consumer finance services through its subsidiary, The Park National Bank - Park National Corporation (Park) is a financial holding company incorporated in Ohio, with its common shares listed on NYSE American under the symbol "PRK"[13] - The company's banking operations are conducted through The Park National Bank (PNB), which operates 96 financial service offices in Ohio, Kentucky, North Carolina, and South Carolina as of the report date[33] Human Capital As of December 31, 2021, Park had 1,733 associates, with 70% female and 30% male, and an average tenure of nine years Associate Profile as of December 31, 2021 | Metric | Value | | :--- | :--- | | Total Active Associates | 1,733 | | Full-time Associates | 1,573 | | Part-time Associates | 160 | | Female Associates | 70% | | Male Associates | 30% | | Average Tenure | 9 years | | Voluntary Turnover (2021) | 21% | | Associates with 10+ years tenure | 36% | - Over 85% of associates participated in the company's KSOP plan as of October 1, 2021, making them shareholders[31] - In 2021, the company conducted unconscious bias training for 576 managers and leaders to support its Diversity, Equity, and Inclusion (DEI) initiatives[28] Operations and Subsidiaries Park's primary operations are through The Park National Bank, with subsidiaries managing OREO and providing specialized aircraft financing - The Park National Bank (PNB) is the Corporation's main reportable segment, conducting commercial banking and trust business[33][34] - SE Property Holdings, LLC (SEPH) was established to manage and sell OREO and work out problem loans from the former Vision Bank[36] - Scope Aircraft Finance, a subsidiary of PNB, provides specialized aircraft financing to customers across the United States and Canada[37] Recent Developments and COVID-19 Considerations Park implemented COVID-19 support, incurred $2.1 million in associate bonuses, and closed one branch in 2021 to adapt to customer behavior and reduce expenses - Park provided various forms of support to customers experiencing financial hardship due to COVID-19, including loan modifications and participation in the PPP[46] - The company incurred $2.1 million in calamity pay and special bonuses for associates in 2021 related to the pandemic[47] - Park continued its focus on reducing operating expenses by closing one branch in 2021, after closing 23 branches in 2020[50] Lending Activities As of December 31, 2021, Park's total loan portfolio was approximately $6.87 billion, with commercial loans at 45.4%, residential real estate at 30.0%, and consumer loans at 24.6% Loan Portfolio Composition as of December 31, 2021 | Loan Category | Amount (in millions) | Percentage of Total Loans | | :--- | :--- | :--- | | Commercial Loans & Leases | $3,121 | 45.4% | | Residential Real Estate & Construction | $2,060 | 30.0% | | Consumer Loans | $1,690 | 24.6% | - The commercial loan portfolio includes specialized national lending for aircraft financing ($328 million) and asset-based loans to non-bank consumer finance companies ($323 million)[67][68] - The company's lending decisions are guided by written policies to maintain loan quality, with an independent internal loan review program that annually evaluates all loans greater than $1 million[55][65] Supervision and Regulation Park and its subsidiaries are extensively regulated by federal and state agencies, subject to Basel III capital rules, adopted CECL in 2021, and maintain a 'well-capitalized' status - Park is regulated as a financial holding company by the Federal Reserve Board, while its subsidiary, The Park National Bank, is primarily regulated by the OCC[89][90] - The company is subject to Basel III capital rules, which include minimum ratios for common equity tier 1 (4.5%), tier 1 (6.0%), total capital (8.0%), and leverage (4.0%), plus a capital conservation buffer of 2.5%[122][128] - Management believes that The Park National Bank meets the ratio requirements to be deemed "well-capitalized" under regulatory guidelines[134] - Park adopted the Current Expected Credit Loss (CECL) accounting standard on January 1, 2021, after electing to delay implementation as permitted by the CARES Act[129][225] Risk Factors The company faces significant risks from COVID-19 economic impacts, credit losses, interest rate changes, LIBOR transition, operational threats, CECL model insufficiency, and intense competition - The economic impact of the COVID-19 pandemic is a significant risk, potentially leading to increased credit losses, especially in higher-risk loan portfolios such as hotels, restaurants, and strip shopping centers[179][180] Loan Portfolio Exposure to High-Risk Sectors (as of Dec 31, 2021, excluding PPP) | Sector | Exposure (in millions) | % of PNB's Loan Portfolio | | :--- | :--- | :--- | | Hotel and accommodations | $220.1 | 3.2% | | Restaurants and food service | $53.3 | 0.8% | | Strip shopping centers | $265.5 | 3.9% | | Automobile-based loans | $1,800.0 | 26.3% | - The company faces operational risks from system disruptions, cyber-attacks, and reliance on third-party vendors, which could lead to reputational damage and financial loss[198][204] - The adoption of the CECL model for the allowance for credit losses introduces risk, as the model's assumptions may prove incorrect, potentially requiring additional provisions that could adversely impact financial results[222][226] Properties Park National Bank operates 96 financial service offices across Ohio, Kentucky, and the Carolinas, with 16 leased and the remainder owned, and its principal executive offices in Newark, Ohio - Park National Bank and its subsidiary operate a total of 96 financial service offices, of which 16 are leased and the remainder are owned[269] PART II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Park's common stock (PRK) trades on NYSE American, yielding a 7.1% annual compound total return over five years, with 3,420 shareholders of record and 1,195,088 shares available for repurchase Five-Year Annual Compound Total Return (2016-2021) | Index | Annual Compound Total Return | | :--- | :--- | | Park National Corporation (PRK) | 7.1% | | NYSE Composite Index | 11.9% | | KBW NASDAQ Bank Index | 10.5% | | S&P U.S. SmallCap Banks Index | 6.7% | - As of December 31, 2021, Park had 3,420 shareholders of record[277] - As of December 31, 2021, a maximum of 1,195,088 common shares may yet be purchased under the company's publicly announced stock repurchase programs[284] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Park reported $153.9 million net income in 2021, a 20.3% increase, driven by a credit loss recovery; total loans decreased 4.3% to $6.87 billion, while deposits grew 4.3% to $8.16 billion Consolidated Financial Highlights | (In thousands) | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $329,893 | $327,630 | 0.7% | | (Recovery of) Provision for Credit Losses | $(11,916) | $12,054 | N/A | | Other Income | $129,944 | $125,664 | 3.4% | | Other Expense | $283,518 | $286,595 | (1.1)% | | Net Income | $153,945 | $127,923 | 20.3% | - The company adopted the CECL accounting standard on January 1, 2021, which resulted in a $6.1 million increase to the allowance for credit losses and an $8.0 million decrease to retained earnings[468] - Total loans decreased 4.3% to $6.87 billion at year-end 2021, primarily due to the forgiveness of PPP loans; excluding PPP loans, the portfolio decreased by 0.7%[386] - Total deposits increased by 4.3% to $8.16 billion; the company also utilized off-balance sheet deposit programs, which held $983.1 million at year-end 2021[339] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2021, with Crowe LLP providing an unqualified opinion and identifying CECL adoption as a critical audit matter - The independent auditor, Crowe LLP, issued an unqualified opinion on the financial statements and internal controls over financial reporting for the year ended December 31, 2021[559] - The auditor identified the adoption and application of the new Allowance for Credit Losses (CECL) standard as a critical audit matter due to the significant and complex judgments made by management[567][569] Controls and Procedures Management concluded disclosure controls were effective as of December 31, 2021, with new internal controls implemented for CECL accounting standard compliance - The CEO and CFO concluded that Park's disclosure controls and procedures were effective as of the end of the fiscal year[907] - Changes were made to internal controls over financial reporting during the period to accommodate the adoption of the CECL accounting standard, including new controls over model governance, assumptions, and data[910] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement - Information required for this item concerning directors, executive officers, and corporate governance is incorporated by reference from the company's 2022 Proxy Statement[914][915] Executive Compensation Executive and director compensation details are incorporated by reference from the 2022 Proxy Statement - Information required for this item concerning executive compensation is incorporated by reference from the company's 2022 Proxy Statement[923] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and equity compensation plan details are incorporated by reference from the 2022 Proxy Statement - Information required for this item concerning security ownership and equity compensation plans is incorporated by reference from the company's 2022 Proxy Statement[925][926] Certain Relationships and Related Transactions, and Director Independence Related person transactions and director independence information is incorporated by reference from the 2022 Proxy Statement - Information required for this item concerning related transactions and director independence is incorporated by reference from the company's 2022 Proxy Statement[927][929] Principal Accountant Fees and Services Principal accountant fees and services information is incorporated by reference from the 2022 Proxy Statement - Information required for this item concerning principal accountant fees and services is incorporated by reference from the company's 2022 Proxy Statement[930] PART IV Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed with the Form 10-K, including certifications - This section contains the index of all financial statements and exhibits filed with the Form 10-K, including certifications from the Principal Executive Officer and Principal Financial Officer[933][950]