Companies: 10,796     total market cap: $140.801 T
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Park National Corp
PRK
#3992
Rank
$3.12 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$173.13
Share price
0.27%
Change (1 day)
23.11%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Park National Corp
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2021 Q1

Park National Corp - 10-Q quarterly report FY2021 Q1


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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 March 31, 2021
OR

☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to __________________________

  
Commission File Number1-13006
 
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 3500Newark,Ohio43058-3500
(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 classTrading Symbol(s)Name of each exchange on which registered
Common shares, without par valuePRKNYSE 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: 16,340,644 Common Shares, no par value per share, outstanding at May 05, 2021.



PARK NATIONAL CORPORATION
 
CONTENTS
 Page
PART I.   FINANCIAL INFORMATION 
  
Item 1.  Financial Statements 
  
Consolidated Condensed Balance Sheets at March 31, 2021 and December 31, 2020 (unaudited)
4
  
Consolidated Condensed Statements of Income for the three months ended March 31, 2021 and 2020 (unaudited)
6
  
Consolidated Condensed Statements of Comprehensive Income for the three months ended March 31, 2021 and 2020 (unaudited)
8
  
Consolidated Condensed Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2021 and 2020 (unaudited)
9
  
Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (unaudited)
10
  
Notes to Unaudited Consolidated Condensed Financial Statements
12
  
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
58
  
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
91
  
Item 4.  Controls and Procedures
91
  
92 
  
Item 1.  Legal Proceedings
92
  
Item 1A. Risk Factors
92
  
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
92
  
Item 3.  Defaults Upon Senior Securities
93
  
Item 4.  Mine Safety Disclosures
93
  
Item 5.  Other Information
93
  
Item 6.  Exhibits
93
  
96

2

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.

AFSAvailable-for-saleLIBORLondon Inter-Bank Offered Rate
ACLAllowance for credit lossesMSRsMortgage servicing rights
AllowanceAllowance for credit lossesNAVNet asset value
AOCIAccumulated other comprehensive incomeNewDominionNewDominion Bank
ASCAccounting Standards CodificationOCIOther comprehensive income
ASUAccounting Standards UpdateOREOOther real estate owned
AUCLAllowance for unfunded credit lossesOWSOne way sell
CABFCAB Financial Corporation and its subsidiariesParkPark National Corporation and its subsidiaries
CARES ActCoronavirus Aid, Relief, and Economic Security ActPBRSUsPerformance-based restricted stock units
Carolina AllianceCAB Financial Corporation and its subsidiariesPCDPurchased credit deteriorated
CECLCurrent expected credit lossPCIPurchased credit impaired
COVID-19Novel coronavirusPDProbability of default
DCFDiscounted cash flowPNBThe Park National Bank
FASBFinancial Accounting Standards BoardPPPPaycheck Protection Program
FHLBFederal Home Loan BankROURight-of-use
FRBFederal Reserve BankSARsStock appreciation rights
GDPGross domestic productSBASmall Business Administration
GFSCGuardian Financial Services CompanySEPHSE Property Holdings, LLC
HPIHome price indexTBRSUsTime-based restricted stock units
HTMHeld-to-maturityTDRsTroubled debt restructurings
IRLCInterest rate lock commitmentU.S. GAAPUnited States Generally Accepted Accounting Principles
LDALoss driver analysisU.S.United States
LGDLoss given default

3
PARK NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets (Unaudited)
(in thousands, except share and per share data)    
                
March 31,
2021		December 31, 2020
Assets:  
Cash and due from banks$131,357 $155,596 
Money market instruments811,918 214,878 
Cash and cash equivalents943,275 370,474 
Investment securities:  
Debt securities available-for-sale, at fair value (amortized cost of $1,080,988 and $1,007,834 at March 31, 2021 and December 31, 2020, respectively, and no allowance for credit losses at March 31, 2021)
1,115,284 1,059,341 
Other investment securities60,956 65,465 
Total investment securities1,176,240 1,124,806 
Loans7,168,745 7,177,785 
Allowance for credit losses(86,886)(85,675)
Net loans7,081,859 7,092,110 
Bank owned life insurance216,716 216,225 
Prepaid assets110,629 103,523 
Goodwill159,595 159,595 
Other intangible assets8,781 9,260 
Premises and equipment, net89,533 88,660 
Affordable housing tax credit investments54,168 56,024 
Other real estate owned844 1,431 
Accrued interest receivable23,562 24,926 
Operating lease right-of-use asset14,177 15,078 
Mortgage loan servicing rights13,635 12,210 
Other21,055 4,699 
Total assets$9,914,069 $9,279,021 

4
PARK NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets (Unaudited) (Continued)
(in thousands, except share and per share data)

March 31,
2021		December 31, 2020
Liabilities and Shareholders' Equity:  
Deposits:  
Non interest bearing$2,907,020 $2,727,100 
Interest bearing5,329,179 4,845,258 
Total deposits8,236,199 7,572,358 
Short-term borrowings305,385 342,230 
Long-term debt30,000 32,500 
Subordinated notes187,881 187,774 
Unfunded commitments in affordable housing tax credit investments23,204 29,298 
Operating lease liability15,359 16,053 
Allowance for credit losses on off-balance sheet commitments4,066 116 
Accrued interest payable1,554 3,860 
Other69,150 54,576 
Total liabilities$8,872,798 $8,238,765 
Shareholders' equity:  
Preferred shares (200,000 shares authorized; 0 shares issued)
$— $— 
Common shares (No par value; 20,000,000 shares authorized; 17,623,154 shares issued at March 31, 2021 and 17,623,163 shares issued at December 31, 2020)
458,534 460,687 
Retained earnings719,230 704,764 
Treasury shares (1,287,203 shares at March 31, 2021 and 1,308,966 shares at December 31, 2020)
(128,592)(130,766)
Accumulated other comprehensive (loss) income, net of taxes(7,901)5,571 
Total shareholders' equity1,041,271 1,040,256 
Total liabilities and shareholders’ equity$9,914,069 $9,279,021 

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
5
PARK NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Income (Unaudited)
(in thousands, except share and per share data)

Three Months Ended
March 31,
 20212020
Interest and dividend income:  
Interest and fees on loans$78,737 $80,687 
Interest and dividends on:  
Obligations of U.S. Government sponsored entities' and other securities - taxable4,256 5,531 
Obligations of states and political subdivisions - tax-exempt2,037 2,200 
Other interest income143 491 
Total interest and dividend income85,173 88,909 
Interest expense:  
Interest on deposits:  
Demand and savings deposits386 6,342 
Time deposits1,584 4,285 
Interest on borrowings:  
Short-term borrowings183 462 
Long-term debt2,286 1,537 
Total interest expense4,439 12,626 
Net interest income80,734 76,283 
(Recovery of) provision for credit loss(4,855)5,153 
Net interest income after (recovery of) provision for credit loss85,589 71,130 
Other income:  
Income from fiduciary activities8,173 7,113 
Service charges on deposit accounts2,054 2,528 
Other service income9,617 3,766 
Debit card fee income6,086 4,960 
Bank owned life insurance income1,165 1,248 
ATM fees530 412 
Loss on sale of OREO, net(33)(196)
Gain (loss) on equity securities, net1,810 (973)
Other components of net periodic pension benefit income2,038 1,988 
Miscellaneous2,649 1,640 
Total other income34,089 22,486 
 

6
PARK NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Income (Unaudited) (Continued)
(in thousands, except share and per share data)

Three Months Ended
March 31,
 20212020
Other expense:  
Salaries$29,896 $28,429 
Employee benefits10,201 10,043 
Occupancy expense3,640 3,480 
Furniture and equipment expense2,610 4,319 
Data processing fees7,712 2,492 
Professional fees and services5,664 7,066 
Marketing1,491 1,486 
Insurance1,691 1,550 
Communication1,122 1,155 
State tax expense1,108 1,145 
Amortization of intangible assets479 606 
Miscellaneous2,251 4,505 
Total other expense67,865 66,276 
Income before income taxes51,813 27,340 
Income taxes8,982 4,968 
Net income$42,831 $22,372 
Earnings per common share:
Basic$2.63 $1.37 
Diluted$2.61 $1.36 
Weighted average common shares outstanding:  
Basic16,314,987 16,303,602 
Diluted16,439,920 16,425,881 
Cash dividends declared per common share$1.23 $1.22 
 
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 


7

PARK NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Comprehensive Income (Unaudited)
(in thousands)

Three Months Ended
March 31,
 20212020
Net income$42,831 $22,372 
Other comprehensive (loss) income, net of tax:
Unrealized net holding (loss) gain on debt securities available-for-sale, net of income tax effect of $(3,614) and $4,832 for the three months ended March 31, 2021 and 2020, respectively.
(13,597)18,176 
Unrealized gain (loss) on cash flow hedging derivatives, net of income tax effect of $33 and $(128) for the three months ended March 31, 2021 and 2020, respectively.
125 (483)
Other comprehensive (loss) income $(13,472)$17,693 
Comprehensive income$29,359 $40,065 
 
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

8

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 income42,831 
Other comprehensive loss, net of tax(13,472)
Dividends on common shares at $1.23 per share
(20,365)
Cash payment for fractional common shares in dividend reinvestment plan(1)
Issuance of 21,764 common shares under share-based compensation awards, net of 14,108 common shares withheld to pay employee income taxes
(3,988)(44)2,174 
Share-based compensation expense1,836 
Balance at March 31, 2021$— $458,534 $719,230 $(128,592)$(7,901)


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 $1.22 per share
  (20,111)
Cash payment for fractional common shares in dividend reinvestment plan (1) 
Issuance of 25,028 common shares under share-based compensation awards, net of 11,646 common shares withheld to pay employee income taxes
(3,865)528 2,500 
Repurchase of 76,000 common shares to be held as treasury shares
(7,507)
Share-based compensation expense1,254 
Balance at March 31, 2020$— $456,777 $649,636 $(132,640)$8,104 

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

9
PARK NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows (Unaudited)
(in thousands)

Three Months Ended
March 31,
 20212020
Operating activities:  
Net income$42,831 $22,372 
Adjustments to reconcile net income to net cash provided by operating activities:  
(Recovery of) provision for credit losses(4,855)5,153 
Accretion of loan fees and costs, net(6,334)(1,866)
Depreciation of premises and equipment3,216 2,507 
Amortization of investment securities, net354 388 
Net accretion of purchase accounting adjustments(655)(766)
(Gain) loss on equity securities, net(1,810)973 
Loan originations to be sold in secondary market(192,382)(88,824)
Proceeds from sale of loans in secondary market212,880 79,139 
Gain on sale of loans in secondary market(6,598)(1,938)
Share-based compensation expense1,836 1,254 
Loss on sale of OREO, net33 196 
Bank owned life insurance income(1,165)(1,248)
Investment in qualified affordable housing tax credits amortization1,856 1,829 
Changes in assets and liabilities:  
Increase in prepaid dealer premiums(508)(219)
Increase in other assets(13,000)(4,593)
Increase (decrease) in other liabilities10,166 (5,595)
Net cash provided by operating activities$45,865 $8,762 
Investing activities:  
Proceeds from the redemption/repurchase of Federal Home Loan Bank stock$4,283 $1,216 
Proceeds from sales of investment securities934 — 
Proceeds from calls and maturities of:  
Available-for-sale debt securities58,344 47,922 
Purchases of:  
Available-for-sale debt securities(131,852)— 
Equity securities— (1,071)
Net decrease in other investments1,102 — 
Net loan originations, portfolio loans(2,922)(6,818)
Proceeds from the sale of GFSC loans3,538 — 
Investment in qualified affordable housing tax credits(6,094)(2,546)
Proceeds from the sale of OREO626 383 
Life insurance death benefits674 — 
Purchases of premises and equipment(4,114)(6,343)
Net cash (used in) provided by investing activities$(75,481)$32,743 
10
PARK NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows (Unaudited) (Continued)
(in thousands)
Three Months Ended
March 31,
 20212020
Financing activities:  
Net increase in deposits$762,896 $237,611 
Net increase in OWS deposits(99,034)— 
Net decrease in short-term borrowings(36,845)(37,284)
Repayment of long-term debt(2,500)(52,500)
Value of common shares withheld to pay employee income taxes(1,858)(837)
Repurchase of common shares to be held as treasury shares— (7,507)
Cash dividends paid(20,242)(20,024)
Net cash provided by financing activities$602,417 $119,459 
Increase in cash and cash equivalents572,801 160,964 
Cash and cash equivalents at beginning of year370,474 159,956 
Cash and cash equivalents at end of period$943,275 $320,920 
Supplemental disclosures of cash flow information:  
Cash paid for:  
Interest$6,745 $12,723 
Non-cash items:
Loans transferred to OREO$78 $151 
Right-of-use assets obtained in exchange for lease obligations$— $7,755 

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

11

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 period ended March 31, 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 pandemic may particularly impact certain loan concentrations in the hotel and accommodations, restaurant and food service, and strip shopping center 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 this ASU 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 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 circumstance 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 the standard, 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 326Pre-ASC 326 AdoptionImpact 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 
Consumer28,343 17,418 10,925 
Leases598 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 - AFS Debt Securities
For AFS debt securities 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 AFS debt securities 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 are 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 allowance when management believes that uncollectibility of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on AFS debt securities totaled $3.9 million at March 31, 2021 and is excluded from the estimate of credit losses.

ACL - HTM Debt Securities
Management measures expected credit losses on HTM debt securities on a collective basis by major security type. The estimate
of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Park does not currently hold any HTM debt securities.

ACL - Loans
The ACL is a valuation account that is deducted from the loans' amortized cost basis 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 amounts previously charged-off and expected to be charged-off.

Management estimates the allowance balance using relevant 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 $19.7 million at March 31, 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 SegmentMeasurement MethodLoss Driver
Commercial, financial and agricultural Discounted Cash FlowOhio Unemployment, Ohio GDP
PPP loansOtherN/A
OverdraftsHistorical Loss ExperienceN/A
Commercial real estate Discounted Cash FlowOhio Unemployment, Ohio GDP
Construction real estate:
CommercialDiscounted Cash FlowOhio Unemployment, Ohio GDP
RetailDiscounted Cash FlowOhio Unemployment, Ohio GDP
Residential real estate:
CommercialDiscounted Cash FlowOhio Unemployment, Ohio HPI
MortgageDiscounted Cash FlowOhio Unemployment, Ohio HPI
HELOCDiscounted Cash FlowOhio Unemployment, Ohio HPI
InstallmentDiscounted Cash FlowOhio Unemployment, Ohio HPI
ConsumerDiscounted Cash FlowOhio Unemployment, Ohio GDP
GFSCDiscounted Cash FlowOhio Unemployment, Ohio GDP
Check loansHistorical Loss ExperienceN/A
LeasesRemaining LifeN/A

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 polled 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 analysis utilized Park's own Federal Financial Institutions Examination Councils'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 March 31, 2021, whenever possible. Peer data is 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
15
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 adjusts the effective interest rate used to discount expected cash flows to incorporate expected prepayments.

Qualitative factors considered in the ACL methodology 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; and
•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.

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 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, 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 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 exposure 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 its estimated life. 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 2018-14 - Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans: In August 2018, the FASB issued ASU 2018-14 - Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this ASU modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing disclosures that are no longer considered cost beneficial, clarifying the specific requirements of disclosures and adding disclosure requirements identified as relevant. The amendments in ASU 2018-14 are effective for fiscal years ending after December 15, 2020. The adoption of this guidance on January 1, 2021 did not have an impact on Park’s consolidated financial statements, but will impact annual disclosures.

ASU 2019-20 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes: In December 2019, the FASB issued ASU 2019-20 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-20 includes amendments to simplify accounting for income taxes by removing certain exceptions and adding requirements with the intention of simplifying and clarifying existing guidance. The amendments in ASU 2019-20 are effective for fiscal years, and
16
interim periods within those fiscal years, beginning after December 15, 2020. The adoption of this guidance on January 1, 2021, did not have a material impact on Park's consolidated financial statements.

ASU 2020-01 - Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815: In January 2020, the FASB issued ASU 2020-01 - Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. ASU 2020-01 represents changes to clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815. These amendments improve current U.S. GAAP by reducing diversity in practice and increasing comparability of the accounting for these transactions. The amendments in ASU 2020-01 are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The adoption of this guidance on January 1, 2021 did not have a material impact on Park's consolidated financial statements.

ASU 2020-08 - Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs: In October 2020, the FASB issued ASU 2020-08 - Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs. ASU 2020-08 clarifies that an entity should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. The amendments in ASU 2020-08 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application was not permitted. The adoption of this guidance on January 1, 2021, did not have a material impact on Park's consolidated financial statements.

Issued But Not Yet Effective Accounting Standards

There are no issued by not yet effective accounting standards impacting Park as of March 31, 2021.

Note 3 – Investment Securities
 
Investment securities at March 31, 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
March 31, 2021:
Obligations of states and political subdivisions$278,676 $19,637 $— $298,313 
U.S. Government sponsored entities' asset-backed securities800,312 20,955 6,358 814,909 
Corporate debt securities2,000 62 — 2,062 
Total$1,080,988 $40,654 $6,358 $1,115,284 
 
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 securities726,589 26,248 728 752,109 
Corporate debt securities2,000 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 March 31, 2021, were as follows:

Unrealized loss position for less than 12 monthsUnrealized loss position for 12 months or longerTotal
(In thousands)Fair valueUnrealized
losses		Fair valueUnrealized
losses		Fair
value		Unrealized
losses
Debt securities AFS
U.S. Government sponsored entities' asset-backed securities$220,681 $6,326 $4,255 $32 $224,936 $6,358 
Total$220,681 $6,326 $4,255 $32 $224,936 $6,358 
 
 Investment securities in an unrealized loss position at December 31, 2020, were as follows:
 
Unrealized loss position for less than 12 monthsUnrealized loss position for 12 months or longerTotal
(In thousands)Fair valueUnrealized
losses		Fair valueUnrealized
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 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 issuer. 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 AFS debt securities at March 31, 2021. Additionally, for the three-months ended March 31, 2021 and 2020, there were no credit-related investment impairment losses recognized.

The amortized cost and estimated fair value of investments in debt securities at March 31, 2021, are shown in the following table by contractual maturity, except for asset-backed securities, 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$800,312 $814,909 1.92 %
Corporate debt securities
Due five through ten years$2,000 $2,062 4.00 %
Obligations of state and political subdivisions:
Due five through ten years$96,354 $103,192 3.75 %
Due over ten years182,322 195,121 3.67 %
Total (1)
$278,676 $298,313 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 AFS debt securities during the three-month periods ended March 31, 2021 or 2020.

18
Investment securities having an amortized cost of $747 million and $691 million at March 31, 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 March 31, 2021 and December 31, 2020 were as follows:
 
(In thousands)March 31, 2021December 31, 2020
FHLB stock$17,807 $22,090 
FRB stock14,653 14,653 
Equity investments carried at fair value2,012 2,511 
Equity investments carried at modified cost (1)
4,689 4,689 
Equity investments carried at NAV21,795 21,522 
Total other investment securities$60,956 $65,465 

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

During the three months ended March 31, 2021 and 2020, the FHLB repurchased 42,833 and 12,163 shares, respectively, of FHLB stock with a book value of $4.3 million and $1.2 million, respectively. No shares of FRB stock were purchased during the three months ended March 31, 2021 or 2020.

During the three months ended March 31, 2021 and 2020, $435,000 and $(769,000), 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 March 31, 2021 and 2020, $1.4 million and $(204,000), 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.

19
Note 5 – Loans
 
The composition of the loan portfolio, by class of loan, at March 31, 2021 and December 31, 2020 was as follows:
 
March 31, 2021December 31, 2020
(In thousands)Amortized CostAmortized CostAccrued Interest ReceivableRecorded Investment
Commercial, financial and agricultural: (1)
$1,588,989 $6,528 $1,595,517 
Commercial, financial and agricultural (1)
$1,198,615 (2)(2)(2)
PPP loans386,990 (2)(2)(2)
Overdrafts2,373 (2)(2)(2)
Commercial real estate (1)
1,756,921 1,748,189 6,017 1,754,206 
Construction real estate:  
Commercial223,318 226,991 572 227,563 
Retail114,110 116,430 235 116,665 
Residential real estate:  
Commercial541,968 526,222 1,161 527,383 
Mortgage1,077,696 1,096,358 947 1,097,305 
HELOC171,388 182,028 647 182,675 
Installment7,601 8,436 22 8,458 
Consumer:1,659,704 4,510 1,664,214 
Consumer1,657,874 (2)(2)(2)
Guardian ("GFSC")5,225 (2)(2)(2)
Check loans2,109 (2)(2)(2)
Leases22,557 24,438 14 24,452 
Total$7,168,745 $7,177,785 $20,653 $7,198,438 
Allowance for credit losses(86,886)(85,675)
Net loans$7,081,859 $7,092,110 

(1) Included within each of commercial, financial and agricultural loans and commercial real estate loans is an immaterial amount of consumer loans that were not broken out by class.
(2) Results for reporting periods beginning after January 1, 2021 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. Category was not broken out as a separate class at December 31, 2020.

In order to support customers, Park participated in the CARES Act Paycheck Protection Program ("PPP"). PPP loans were broken out as a separate class as of March 31, 2021. Included within commercial, financial and agricultural loans as of December 31, 2020 were $331.6 million 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, of which $4.2 million and $13.7 million were recognized during the three months ended March 31, 2021 and the twelve months ended December 31, 2020, respectively. There were no PPP related fees recognized during the three months ended March 31, 2020. For its assistance in originating additional PPP loans during 2021, Park expects to receive an aggregate of $11.4 million in fees from the SBA, of which $397,000 was recognized within interest income during the three months ended March 31, 2021.

Loans are shown net of deferred origination fees, costs and unearned income of $28.1 million at March 31, 2021, and of $23.6 million at December 31, 2020, which represented a net deferred income position in both years. At March 31, 2021 and December 31, 2020, included in the net deferred origination fees, costs and unearned income was $10.0 million and $6.5 million, respectively, in net origination fees related to PPP loans. At March 31, 2021 and December 31, 2020, loans included purchase accounting adjustments of $6.4 million and $7.2 million, respectively, which represented a net deferred income position at each date. This fair market value purchase accounting adjustment related to loans which are not PCI, is expected to be recognized into interest income on a level yield basis over the remaining expected life of the loans.

20
Overdrawn deposit accounts of $2.4 million and $2.0 million had been reclassified to loans at March 31, 2021 and December 31, 2020, respectively. As of March 31, 2021, overdrafts were within their own class and as of December 31, 2020, were included in the commercial, financial and agricultural loan class above.

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 March 31, 2021:
 
 March 31, 2021
(In thousands)Nonaccrual
Loans		Accruing
TDRs		Loans Past Due
90 Days
 or More
and Accruing		Total
Nonperforming
Loans
Commercial, financial and agricultural:
Commercial, financial and agricultural$21,121 $590 $— $21,711 
PPP loans— — 18 18 
Overdrafts— — — — 
Commercial real estate66,353 2,545 24 68,922 
Construction real estate:    
Commercial2,962 — — 2,962 
Retail13 28 — 41 
Residential real estate:    
Commercial5,119 284 — 5,403 
Mortgage14,090 7,806 491 22,387 
HELOC1,438 825 — 2,263 
Installment185 1,772 — 1,957 
Consumer:
Consumer1,754 949 239 2,942 
GFSC198 18 30 246 
Check loans— — — — 
Leases1,475 — — 1,475 
Total loans$114,708 $14,817 $802 $130,327 
 

21
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 AccruingTotal
Nonperforming
Loans
Commercial, financial and agricultural$23,261 $5,619 $— $28,880 
Commercial real estate67,426 2,931 377 70,734 
Construction real estate:   
Commercial3,110 — — 3,110 
Mortgage14 31 — 45 
Residential real estate:    
Commercial4,304 253 — 4,557 
Mortgage14,016 8,400 416 22,832 
HELOC1,286 909 77 2,272 
Installment184 1,728 — 1,912 
Consumer2,172 1,017 724 3,913 
Leases1,595 — — 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 March 31, 2021:

March 31, 2021
(In thousands)Nonaccrual Loans With No ACLNonaccrual Loans With an ACLRelated ACL
Commercial, financial and agricultural:
Commercial, financial and agricultural$15,166 $5,955 $4,276 
PPP loans— — — 
Overdrafts— — — 
Commercial real estate59,563 6,790 384 
Construction real estate:
Commercial2,962 — — 
Retail— 13 — 
Residential real estate:
Commercial4,815 304 22 
Mortgage— 14,090 136 
HELOC— 1,438 194 
Installment— 185 39 
Consumer
Consumer— 1,754 570 
GFSC— 198 23 
Check loans— — — 
Leases558 917 232 
Total loans$83,064 $31,644 $5,876 

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.

22
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 BalanceRecorded InvestmentACL Allocated
With no related allowance recorded
Commercial, financial and agricultural$23,316 $22,970 $— 
Commercial real estate63,639 63,467 — 
Construction real estate:
Commercial3,110 3,110 — 
Residential real estate:
Commercial4,522 4,448 — 
Leases568 568 — 
With an allowance recorded
Commercial, financial and agricultural5,881 5,866 3,758 
Commercial real estate6,890 6,890 1,316 
Construction real estate:
Commercial— — — 
Residential real estate:
Commercial109 109 16 
Leases1,027 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 March 31, 2021:

 March 31, 2021
(In thousands)Real EstateBusiness AssetsOtherTotal
Commercial, financial and agricultural
Commercial, financial and agricultural$8,482 $12,288 $1,204 $21,974 
Commercial real estate67,253 8,482 60 75,795 
Construction real estate:
Commercial3,946 — — 3,946 
Residential real estate:
Commercial6,880 — — 6,880 
Mortgage383 — — 383 
HELOC136 — — 136 
Leases— 1,577 — 1,577 
Total loans$87,080 $22,347 $1,264 $110,691 

23
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 period ended March 31, 2021:

(In thousands)Interest Income Recognized
Commercial, financial and agricultural:
Commercial, financial and agricultural$57 
PPP loans— 
Overdrafts— 
Commercial real estate515 
Construction real estate:
Commercial33 
Retail1 
Residential real estate:
Commercial46 
Mortgage79 
HELOC4 
Installment1 
Consumer:
Consumer23 
GFSC5 
Check loans— 
Leases20 
Total loans$784 

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 ended March 31, 2020:
  
Three months ended
March 31, 2020
(In thousands)Recorded Investment as of March 31, 2020Average Recorded InvestmentInterest Income Recognized
Commercial, financial and agricultural$29,542 $31,657 $204 
Commercial real estate50,147 44,457 481 
Construction real estate:
   Commercial452 424 4 
Residential real estate:
   Commercial5,581 2,925 23 
Leases129 132 — 
Total$85,851 $79,595 $712 


24
The following table presents the aging of the amortized cost in past due loans at March 31, 2021 by class of loan:

 March 31, 2021
(In thousands)Accruing Loans
Past Due 30-89
Days
Past Due 
Nonaccrual
Loans and Loans Past
Due 90 Days or
More and 
Accruing (1)
Total Past Due
Total Current (2)
Total 
Amortized Cost
Commercial, financial and agricultural:
Commercial, financial and agricultural$4,197 $11,328 $15,525 $1,183,090 $1,198,615 
PPP loans— 18 18 386,972 386,990 
Overdrafts— — — 2,373 2,373 
Commercial real estate2,099 795 2,894 1,754,027 1,756,921 
Construction real estate:
Commercial— 25 25 223,293 223,318 
Retail— — — 114,110 114,110 
Residential real estate:
Commercial16 395 411 541,557 541,968 
Mortgage4,491 6,902 11,393 1,066,303 1,077,696 
HELOC57 663 720 170,668 171,388 
Installment71 68 139 7,462 7,601 
Consumer:
Consumer1,854 543 2,397 1,655,477 1,657,874 
GFSC241 160 401 4,824 5,225 
Check loans6 — 6 2,103 2,109 
Leases133 41 174 22,383 22,557 
Total loans$13,165 $20,938 $34,103 $7,134,642 $7,168,745 

(1) Includes an aggregate of $0.8 million of loans past due 90 days or more and accruing. The remaining loans were past due nonaccrual loans.
(2) Includes an aggregate of $94.6 million of nonaccrual loans which were current in regards to contractual principal and interest payments.

The following table presents the aging of the recorded investment in past due loans at December 31, 2020 by class of loan:

 December 31, 2020
(in thousands)Accruing Loans
Past Due 30-89
Days
Past Due 
Nonaccrual
Loans and Loans Past
Due 90 Days or
More and 
Accruing (1)
Total Past Due
Total Current (2)
Total Recorded
Investment
Commercial, financial and agricultural$7,372 $13,968 $21,340 $1,574,177 $1,595,517 
Commercial real estate82 972 1,054 1,753,152 1,754,206 
Construction real estate:    
Commercial— 39 39 227,524 227,563 
Mortgage77 — 77 115,647 115,724 
Installment12 — 12 929 941 
Residential real estate:     
Commercial17 493 510 526,873 527,383 
Mortgage9,538 7,814 17,352 1,079,953 1,097,305 
HELOC805 810 1,615 181,060 182,675 
Installment67 71 138 8,320 8,458 
Consumer5,496 1,213 6,709 1,657,505 1,664,214 
Leases186 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.

25
Credit Quality Indicators
Management utilizes past due information as a credit quality indicator across the loan portfolio. Past due information at March 31, 2021 and December 31, 2020 is included in the previous tables. The past due information is the primary credit quality indicator within the following classes of loans: (1) overdrafts in the commercial, financial and agricultural portfolio segment; (2) retail loans in the construction real estate portfolio segment; (3) mortgage loans, HELOC and installment loans in the residential real estate portfolio segment; (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.

Based on the most recent analysis performed, the risk category of loans by class of loans as of March 31, 2021 follows:

March 31, 2021Term Loans Amortized Cost Basis by Origination Year
(In thousands)20212020201920182017PriorRevolving Loans Amortized Cost BasisTotal
Commercial, financial and agricultural: Commercial, financial and agricultural (1)
Risk rating
Pass$64,238 $274,617 $152,264 $81,010 $57,500 $101,673 $431,548 $1,162,850 
Special Mention— 2,650 906 485 675 48 9,612 14,376 
Substandard671 983 2,110 2,665 735 7,750 797 15,711 
Doubtful1,490 34 — 240 2,028 1,386 500 5,678 
Total $66,399 $278,284 $155,280 $84,400 $60,938 $110,857 $442,457 $1,198,615 

Commercial, financial and agricultural: PPP
Risk rating
Pass$198,993 $187,997 $— $— $— $— $— $386,990 
Special Mention— — — — — — — — 
Substandard— — — — — — — — 
Doubtful— — — — — — — — 
Total$198,993 $187,997 $— $— $— $— $— $386,990 

Commercial real estate (1)
Risk rating
Pass$78,310 $461,291 $284,715 $203,496 $132,084 $419,891 $14,667 $1,594,454 
Special Mention272 8,999 36,259 9,666 8,265 24,458 3,589 91,508 
Substandard— 5,656 15,227 4,900 15,347 17,835 536 59,501 
Doubtful— — — 6,258 — 5,200 — 11,458 
Total$78,582 $475,946 $336,201 $224,320 $155,696 $467,384 $18,792 $1,756,921 

26
March 31, 2021Term Loans Amortized Cost Basis by Origination Year
(In thousands)20212020201920182017PriorRevolving Loans Amortized Cost BasisTotal
Construction real estate: Commercial
Risk rating
Pass$14,483 $113,857 $50,274 $11,832 $2,679 $7,100 $16,012 $216,237 
Special Mention— 2,971 — 163 — — — 3,134 
Substandard— 96 8 1,010 — — 256 1,370 
Doubtful— — — 2,577 — — — 2,577 
Total$14,483 $116,924 $50,282 $15,582 $2,679 $7,100 $16,268 $223,318 

Residential Real Estate: Commercial
Risk rating
Pass$40,074 $194,242 $77,477 $60,448 $35,732 $108,139 $16,402 $532,514 
Special Mention— 150 — — 2,131 336 281 2,898 
Substandard— — 1,140 3,522 320 1,054 — 6,036 
Doubtful— — — 43 216 30 231 520 
Total$40,074 $194,392 $78,617 $64,013 $38,399 $109,559 $16,914 $541,968 

Leases
Risk rating
Pass$1,263 $7,397 $5,391 $3,665 $1,378 $1,576 $— $20,670 
Special Mention— 245 66 — 42 — — 353 
Substandard— 477 — 60 26 54 — 617 
Doubtful— 519 213 45 64 76 — 917 
Total$1,263 $8,638 $5,670 $3,770 $1,510 $1,706 $— $22,557 

Total Commercial Loans
Risk rating
Pass$397,361 $1,239,401 $570,121 $360,451 $229,373 $638,379 $478,629 $3,913,715 
Special Mention272 15,015 37,231 10,314 11,113 24,842 13,482 112,269 
Substandard671 7,212 18,485 12,157 16,428 26,693 1,589 83,235 
Doubtful1,490 553 213 9,163 2,308 6,692 731 21,150 
Total$399,794 $1,262,181 $626,050 $392,085 $259,222 $696,606 $494,431 $4,130,369 

 (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:
 
12/31/2020
(In thousands)5 Rated6 RatedNonaccrual and Accruing TDRsPurchased Credit ImpairedPass-RatedRecorded
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:
  Commercial164 — 3,110 1,002 223,287 227,563 
Residential real estate:
  Commercial798 22 4,557 1,510 520,496 527,383 
Leases331 — 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.
27
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.

March 31, 2021Term Loans Amortized Cost Basis by Origination Year
(In thousands)20212020201920182017PriorRevolving Loans Amortized Cost BasisTotal
Commercial, financial and agricultural: Overdrafts
Performing$2,373 $— $— $— $— $— $— $2,373 
Nonperforming— — — — — — — — 
Total $2,373 $— $— $— $— $— $— $2,373 

Construction Real Estate: Retail
Performing$7,246 $85,363 $12,652 $3,888 $2,061 $2,783 $76 $114,069 
Nonperforming— — — — 17 24 — 41 
Total $7,246 $85,363 $12,652 $3,888 $2,078 $2,807 $76 $114,110 

Residential Real Estate: Mortgage
Performing$83,060 $220,655 $154,818 $96,678 $78,671 $421,427 $— $1,055,309 
Nonperforming— — 640 724 990 20,033 — 22,387 
Total $83,060 $220,655 $155,458 $97,402 $79,661 $441,460 $— $1,077,696 

Residential Real Estate: HELOC
Performing$— $— $151 $23 $231 $3,502 $165,218 $169,125 
Nonperforming— — — — 83 1,419 761 2,263 
Total $— $— $151 $23 $314 $4,921 $165,979 $171,388 

Residential Real Estate: Installment
Performing$— $100 $713 $180 $1,453 $3,198 $— $5,644 
Nonperforming— 16 2 49 97 1,793 — 1,957 
Total $— $116 $715 $229 $1,550 $4,991 $— $7,601 

Consumer: Consumer
Performing$162,761 $684,477 $377,476 $186,795 $112,054 $107,435 $23,934 $1,654,932 
Nonperforming27 327 796 576 374 842 — 2,942 
Total $162,788 $684,804 $378,272 $187,371 $112,428 $108,277 $23,934 $1,657,874 

Consumer: GFSC
Performing$— $535 $3,008 $1,061 $293 $(99)$181 $4,979 
Nonperforming— 4 130 71 34 7 — 246 
Total $— $539 $3,138 $1,132 $327 $(92)$181 $5,225 

Consumer: Check loans
Performing$— $— $— $— $— $— $2,109 $2,109 
Nonperforming— — — — — — — — 
Total $— $— $— $— $— $— $2,109 $2,109 

Total Consumer Loans
Performing$255,440 $991,130 $548,818 $288,625 $194,763 $538,246 $191,518 $3,008,540 
Nonperforming
27 347 1,568 1,420 1,595 24,118 — 29,075 
Total $255,467 $991,477 $550,386 $290,045 $196,358 $562,364 $191,518 $3,037,615 
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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 credit mark on PCD loans was reclassified to the allowance for credit losses. At March 31, 2021, there was no allowance for credit losses on PCD loans. The carrying amount of loans acquired with deteriorated credit quality at March 31, 2021 and December 31, 2020 was $10.3 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.

Additionally, Park is working with borrowers impacted by the COVID-19 pandemic and providing modifications to include either interest only deferral or principal and interest deferral, in each case, for initial periods up to 90 days. As necessary, Park is making 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 are excluded from TDR classification under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators. In accordance with this guidance, such modified loans will be considered current and will continue to accrue interest during the deferral period.

Certain other loans which were modified during the three-month periods ended March 31, 2021 and 2020 did not meet the definition of a TDR as the modification was a delay in a payment that was considered to be insignificant. Management considers a forbearance period of up to three months or a delay in payment of up to 30 days to be insignificant. TDRs may be classified as accruing if the borrower has been current for a period of at least six months with respect to loan payments and management expects that the borrower will be able to continue to make payments in accordance with the terms of the restructured note. Management reviews all accruing TDRs quarterly to ensure payments continue to be made in accordance with the modified terms.

At March 31, 2021 and December 31, 2020, there were $23.8 million and $25.8 million, respectively, of TDRs included in the nonaccrual loan totals. At March 31, 2021 and December 31, 2020, $13.9 million and $12.9 million, respectively, of these nonaccrual TDRs were performing in accordance with the terms of the restructured notes. At March 31, 2021 and December 31, 2020, loans totaling $14.8 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 March 31, 2021 and December 31, 2020, Park had commitments to lend $10.3 million and $6.7 million, respectively, of additional funds to borrowers whose outstanding loan terms had been modified in a TDR.
 
At March 31, 2021 and December 31, 2020, there were $0.3 million and $0.2 million, respectively, of specific reserves related to TDRs. Modifications made in 2021 and 2020 were largely the result of renewals and extending the maturity date of the loans at terms consistent with the original notes. These modifications were deemed to be TDRs primarily due to Park’s conclusion that the borrower would likely not have qualified for similar terms through another lender. Many of the modifications deemed to be TDRs were previously identified as impaired loans, and thus were also previously evaluated for impairment under ASC 310. There were no additional specific reserves recorded during either the three-month period ended March 31, 2021 or 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
29
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. The TDR classification was removed on $3.9 million of loans during the three-month period ended March 31, 2021. There were no TDR classifications removed during the three-month period ended March 31, 2020.

The terms of certain other loans were modified during the three-month period ended March 31, 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 period ended March 31, 2021, which did not meet the definition of a TDR. There were $0.1 million of substandard commercial loans modified during the three-month period ended March 31, 2020 which did not meet the definition of a TDR. Excluding COVID-19 related modifications, consumer loans modified during the three-month periods ended March 31, 2021 and 2020 which did not meet the definition of a TDR had a total recorded investment of $9.8 million and $12.2 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.

During the fifteen months ended March 31, 2021, Park modified 5,120 consumer loans, with an aggregate balance of $96.3 million, and modified 1,405 commercial loans, with an aggregate balance of $573.3 million, in each case related to a hardship caused by the COVID-19 pandemic and responses thereto. Of the $96.3 million in consumer COVID-19 related modifications, $2.1 million were already classified as TDRs due to previous modifications and $974,000 were classified as TDRs due to the COVID-19 modification. Of the $573.3 million in commercial COVID-19 related modifications, $6.4 million were already classified as TDRs due to previous modifications and $77,000 were classified as TDRs due to the COVID-19 modification. The remaining loans met the exclusion criteria for TDR accounting either in Section 4013 of the CARES Act or in applicable interagency guidance.

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The following tables detail the number of contracts modified as TDRs during the three-month periods ended March 31, 2021 and 2020, as well as the amortized cost/recorded investment of these contracts at March 31, 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
March 31, 2021
(In thousands)Number of
Contracts		AccruingNonaccrualTotal Amortized Cost
Commercial, financial and agricultural
Commercial, financial and agricultural1 $— $200 $200 
PPP loans— — — — 
Overdrafts— — — — 
Commercial real estate5 272 1,353 1,625 
Construction real estate:    
  Commercial— — — — 
  Retail— — — — 
Residential real estate:    
  Commercial— — — — 
  Mortgage6 137 139 276 
  HELOC— — — — 
  Installment5 118 28 146 
Consumer:
Consumer34 72 287 359 
GFSC— — — — 
Check loans— — — — 
Leases— — — — 
Total loans51 $599 $2,007 $2,606 

 Three Months Ended
March 31, 2020
(In thousands)Number of
Contracts		AccruingNonaccrualTotal
Recorded
Investment
Commercial, financial and agricultural4 $— $1,094 $1,094 
Commercial real estate2 1,136 60 1,196 
Construction real estate:    
  Commercial— — — — 
  Mortgage1 11 — 11 
  Installment1 15 — 15 
Residential real estate:   
  Commercial— — — — 
  Mortgage6 111 280 391 
  HELOC3 101 9 110 
  Installment8 110 17 127 
Consumer57 112 352 464 
Total loans82 $1,596 $1,812 $3,408 

Of those loans which were modified and determined to be a TDR during the three-month period ended March 31, 2021, $1.7 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 March 31, 2020, $0.3 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 periods ended March 31, 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
March 31, 2021		Three Months Ended
March 31, 2020
(In thousands)Number of
Contracts		Amortized CostNumber of
Contracts		Recorded
Investment
Commercial, financial and agricultural:2 $4,068 
Commercial, financial and agricultural— $— (1)(1)
PPP loans— — (1)(1)
Overdrafts— — (1)(1)
Commercial real estate— — — — 
Construction real estate:
Commercial— — — — 
Mortgage— — 2 92 
Residential real estate:
Commercial— — — — 
Mortgage10 763 4 443 
HELOC— — 4 71 
Installment2 36 1 17 
Consumer36 369 
Consumer19 210 (1)(1)
GFSC5 25 (1)(1)
Check loans— — (1)(1)
Leases— — — — 
Total loans 36 $1,034 49 $5,060 

(1) Results for reporting periods beginning after January 1, 2021 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. Category was not broken out as a separate class at December 31, 2020.

Of the $1.0 million in modified TDRs which defaulted during the three-month period ended March 31, 2021, $0.3 million were accruing loans and $0.7 million were nonaccrual loans. Of the $5.1 million in modified TDRs which defaulted during the three-month period ended March 31, 2020, $4.5 million were accruing loans and $0.5 million 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.

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Quantitative Considerations
The ACL is primarily calculated utilizing a DCF model. Key inputs and assumptions used in this model are discussed below:
•Forecast model - For each portfolio segment, a LDA was performed in order to identify appropriate loss drivers and create a regression model for use in forecasting cash flows. The LDA analysis utilized Park's own FFIEC Call Report data for the commercial, financial and agricultural and residential real estate portfolio segments. Peer data was incorporated into the analysis for the commercial real estate, construction real estate, and consumer portfolio segments. Park plans to update the LDA annually; however, due to the impact of COVID-19, the LDA analysis was last updated in the fourth quarter of 2019.
•Probability of default – PD is the probability that an asset will be in default within a given time frame. Park has defined default as 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. 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 risk 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%. Management believes that the resulting quantitative reserve appropriately balances economic improvement with the ongoing risks.

Qualitative Considerations
In addition to the quantitative model, management considers the need for qualitative adjustment for risks not considered in the DCF. Factors that are considered by management in determining loan collectability and the appropriate level of the ACL are listed below:
•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 PNB and GFSC.
◦Level of and trend in loan delinquencies, troubled loans, commercial watch list 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 the 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.
•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 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
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regulations, and changes in consumer behavior. Management expects that a high 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 March 31, 2021, additional reserves totaling $4.5 million were added for these portfolios on top of the quantitative reserve already calculated. A breakout of the 4-rated balances within these portfolios and the additional reserve related to these portfolios is detailed in the following table.

March 31, 2021
(in thousands)4-Rated BalanceAdditional Reserve
Hotels and accommodations$116,076 $1,745 
Restaurants and food service30,414 687 
Strip shopping centers185,159 2,045 
Total$331,649 $4,477 

Additionally, management applied a 1% reserve to all hotels and accommodations loans in the collectively evaluated population to account for increased valuation risk. At March 31, 2021, Park's originated hotels and accommodation loans had a balance of $189.0 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, 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 March 31, 2021, Park had $387.0 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.

ACL Activity
The activity in the ACL for the three-month periods ended March 31, 2021 and March 31, 2020 is summarized in the following tables.

 Three Months Ended
March 31, 2021
(In thousands)Commercial,
financial and
agricultural		Commercial
real estate		Construction
real estate		Residential
real estate		ConsumerLeasesTotal
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-offs146 — — 11 1,544 — 1,701 
Recoveries123 86 252 62 1,154 — 1,677 
Net charge-offs/(recoveries)$23 $(86)$(252)$(51)$390 $— $24 
(Recovery of) provision for credit loss (1,049)(1,198)171 (498)(2,224)(57)(4,855)
Ending balance$16,279 $24,487 $5,813 $14,037 $25,729 $541 $86,886 
 
 Three Months Ended
March 31, 2020
(In thousands)Commercial,
financial and
agricultural		Commercial
real estate		Construction
real estate		Residential
real estate		ConsumerLeasesTotal
ACL:       
Beginning balance$20,203 $10,229 $5,311 $8,610 $12,211 $115 $56,679 
Charge-offs523 — 6 71 2,085 — 2,685 
Recoveries700 300 230 96 1,030 — 2,356 
Net (recoveries)/charge-offs$(177)$(300)$(224)$(25)$1,055 $— $329 
Provision for (recovery of) credit loss1,164 1,062 (42)382 2,572 15 5,153 
Ending balance$21,544 $11,591 $5,493 $9,017 $13,728 $130 $61,503 
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ACL Summary
Loans collectively evaluated for impairment in the following tables include all performing loans at March 31, 2021 and December 31, 2020, as well as nonperforming loans internally classified as consumer loans. Nonperforming consumer loans are not typically individually evaluated for impairment, but receive a portion of the statistical allocation of the ACL. Loans individually evaluated for impairment include all impaired loans internally classified as commercial loans at March 31, 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 March 31, 2021 and December 31, 2020 was as follows:
 
 March 31, 2021
(In thousands)Commercial,
financial and
agricultural		Commercial
real estate		Construction
real estate		Residential
real estate		ConsumerLeasesTotal
ACL:       
Ending allowance balance attributed to loans:       
Individually evaluated for impairment$4,324 $384 $— $22 $— $232 $4,962 
Collectively evaluated for impairment11,955 24,103 5,813 14,015 25,729 309 81,924 
Acquired with deteriorated credit quality— — — — — — — 
Total ending allowance balance$16,279 $24,487 $5,813 $14,037 $25,729 $541 $86,886 
Loan balance:       
Loans individually evaluated for impairment$21,670 $68,898 $2,961 $5,403 $— $1,475 $100,407 
Loans collectively evaluated for impairment1,566,004 1,681,126 333,482 1,791,254 1,665,208 20,980 7,058,054 
Loans acquired with deteriorated credit quality304 6,897 985 1,996 — 102 10,284 
Total ending loan balance$1,587,978 $1,756,921 $337,428 $1,798,653 $1,665,208 $22,557 $7,168,745 
ACL as a percentage of loan balance:       
Loans individually evaluated for impairment19.95 %0.56 %— %0.41 %— %15.73 %4.94 %
Loans collectively evaluated for impairment0.76 %1.43 %1.74 %0.78 %1.55 %1.47 %1.16 %
Loans acquired with deteriorated credit quality— %— %— %— %— %— %— %
Total1.03 %1.39 %1.72 %0.78 %1.55 %2.40 %1.21 %

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 December 31, 2020
(In thousands)Commercial,
financial and
agricultural		Commercial
real estate		Construction
real estate		Residential
real estate		ConsumerLeasesTotal
ACL:       
Ending allowance balance attributed to loans:       
Individually evaluated for impairment$3,758 $1,316 $— $16 $— $344 $5,434 
Collectively evaluated for impairment21,809 22,093 7,288 11,292 17,418 174 80,074 
Acquired with deteriorated credit quality41 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 impairment1,559,842 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 impairment13.04 %1.87 %— %0.35 %— %21.57 %5.01 %
Loans collectively evaluated for impairment1.40 %1.32 %2.15 %0.63 %1.05 %0.77 %1.13 %
Loans acquired with deteriorated credit quality12.20 %0.97 %— %2.33 %— %— %1.50 %
Total1.61 %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 impairment1,566,344 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 March 31, 2021 and December 31, 2020, respectively, Park had $17.8 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 $17.5 million and $30.9 million at March 31, 2021 and December 31, 2020, respectively. The gain expected upon sale was $247,000 and $753,000 at March 31, 2021 and December 31, 2020, respectively. None of these loans were 90 days or more past due or on nonaccrual status as of March 31, 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 periods ended March 31, 2021 and 2020.
(in thousands)GoodwillOther
intangible assets		Total
December 31, 2019$159,595 $11,523 $171,118 
Amortization— 606 606 
March 31, 2020$159,595 $10,917 $170,512 
December 31, 2020$159,595 $9,260 $168,855 
Amortization— 479 479 
March 31, 2021$159,595 $8,781 $168,376 
   
Park evaluates goodwill for impairment during the second quarter of each year, with financial data as of March 31. Based on the analysis performed as of April 1, 2020, the Company determined that goodwill for Park's reporting unit, PNB, was not impaired. During each of the second, third and fourth quarters of 2020, management determined that the deterioration in general economic conditions as a result of the COVID-19 pandemic and responses thereto represented a triggering event prompting an evaluation of goodwill impairment. Based on the qualitative analysis performed during each of the second, third and fourth quarters of 2020, the Company determined that goodwill 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 March 31, 2021 and December 31, 2020.

March 31, 2021December 31, 2020
(in thousands)Gross Carrying AmountAccumulated AmortizationGross Carrying AmountAccumulated Amortization
Other intangible assets:
Core deposit intangible assets$14,456 $5,675 $14,456 $5,196 
Trade name intangible assets1,300 1,300 1,300 1,300 
Total$15,756 $6,975 $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 $479,000 and $606,000 for the three months ended March 31, 2021 and 2020, respectively.

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

(in thousands)Total
Nine months ending December 31, 2021$1,319 
20221,487 
20231,323 
20241,215 
20251,042 

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.

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

(in thousands)March 31, 2021December 31, 2020
Affordable housing tax credit investments$54,168 $56,024 
Unfunded commitments23,204 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 for the three months ended March 31, 2021 and 2020, respectively, which was included within the provision for income taxes. Additionally, during the three months ended March 31, 2021 and 2020, Park recognized tax credits and other benefits from its affordable housing tax credit investments of $2.9 million and $1.7 million, respectively, which was 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 March 31, 2021 and December 31, 2020 are listed below, as well as the recorded investment of loans secured by residential real estate properties for which formal foreclosure proceedings were in process at those dates.

(in thousands)March 31, 2021December 31, 2020
OREO:
Commercial real estate$31 $625 
Construction real estate— — 
Residential real estate813 806 
Total OREO$844 $1,431 
Loans in process of foreclosure:
Residential real estate$1,129 $1,643 

In addition to real estate, Park may also repossess different types of collateral. As of March 31, 2021 and December 31, 2020, Park had $3.8 million and $3.6 million, respectively, in other repossessed assets which are included in "Other assets" on the Consolidated Condensed Balance Sheets. As of both dates presented, the other repossessed assets largely consisted of an aircraft acquired as part of a loan workout.

Note 11 – Loan Servicing
 
Park serviced sold mortgage loans of $2.04 billion at March 31, 2021, $1.97 billion at December 31, 2020 and $1.47 billion at March 31, 2020. At March 31, 2021, $2.3 million of the sold mortgage loans were sold with recourse, compared to $1.7 million at December 31, 2020 and $2.3 million at March 31, 2020. Management closely monitors the delinquency rates on the mortgage loans sold with recourse. At March 31, 2021 and December 31, 2020, management had established reserves of $61,000 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.

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Activity for MSRs and the related valuation allowance follows:
 
Three Months Ended
March 31,
(In thousands)20212020
Mortgage servicing rights: 
Carrying amount, net, beginning of period$12,210 $10,070 
Additions1,678 731 
Amortization(1,105)(507)
Change in valuation allowance852 (1,526)
Carrying amount, net, end of period$13,635 $8,768 
Valuation allowance: 
Beginning of period$3,189 $825 
Change in valuation allowance(852)1,526 
End of period$2,337 $2,351 
 
Servicing fees included in other service income were $1.3 million and $0.9 million for the three months ended March 31, 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 March 31, 2021 and December 31, 2020, all of Park's leases were classified as operating leases.

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

•ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that 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
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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 March 31, 2021 were $14.2 million and $15.4 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.

Other information related to operating leases for the three months ended March 31, 2021 and 2020 was as follows:

Three Months Ended
(in thousands)March 31, 2021March 31, 2020
Lease cost
Operating lease cost$721 $848 
Sublease income(63)(97)
Total lease cost$658 $751 
Other information
Cash paid for amounts included in the measurement of lease liabilities:
      Operating cash flows from operating leases$782 $872 
ROU assets obtained in exchange for new operating lease liabilities$— $7,755 
Reductions to ROU assets resulting from reductions to lease obligations$(694)$(756)

At March 31, 2021 and December 31, 2020, Park's operating leases had a weighted average remaining term of 7.1 years and 7.2 years, respectively. The weighted average discount rate of Park's operating leases was 2.3% at both March 31, 2021 and December 31, 2020.

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

(in thousands)March 31, 2021
9 months ending December 31, 2021$2,281 
20222,955 
20232,840 
20241,755 
20251,415 
Thereafter5,404 
Total undiscounted minimum lease payments$16,650 
Present value adjustment(1,291)
Total lease liabilities$15,359 

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 March 31, 2021 and December 31, 2020, Park's repurchase agreement borrowings totaled $280 million and $317 million, respectively. These borrowings were collateralized with U.S. government and agency securities with a fair value of $333 million and $366 million at March 31, 2021 and December 31, 2020, respectively. Declines in the value of the collateral would require Park to pledge additional securities. As of March 31, 2021 and December 31, 2020, Park had $462 million and $439 million, respectively, of available unpledged securities.

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

March 31, 2021
(in thousands)Remaining Contractual Maturity of the Agreements
Overnight and ContinuousUp to 30 days30 - 90 daysGreater than 90 daysTotal
U.S. government and agency securities$280,385 $— $— $— $280,385 
December 31, 2020
(in thousands)Remaining Contractual Maturity of the Agreements
Overnight and ContinuousUp to 30 days30 - 90 daysGreater than 90 daysTotal
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 instruments utilized by Park follows.


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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 March 31, 2021 and December 31, 2020 were designated as cash flow hedges of certain FHLB advances.

Loan Derivatives: In conjunction with the Carolina Alliance acquisition, Park acquired interest rate swaps related to certain commercial loans. These interest rate swaps were simultaneously hedged by offsetting interest rate swaps that Carolina Alliance 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 $32.8 million and $33.3 million at March 31, 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 periods ended March 31, 2021 and March 31, 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.

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

March 31, 2021December 31, 2020
(In thousands, except weighted average data)Borrowing DerivativesLoan DerivativesBorrowing DerivativesLoan Derivatives
Notional amounts$25,000 $32,827 $25,000 $33,310 
Weighted average pay rates2.595 %4.698 %2.595 %4.695 %
Weighted average receive rates0.223 %4.698 %0.218 %4.695 %
Weighted average maturity (years)1.29.11.59.3
Unrealized losses$727 $— $885 $— 

Interest expense recorded on swap transactions was $148,000 and $46,000 for the three-month periods ended March 31, 2021 and 2020, respectively.

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Interest Rate Swaps

The following table presents the net gains (losses), net of income taxes, recorded in AOCI and the Consolidated Condensed Statements of Income related to interest rate swaps for the three-month periods ended March 31, 2021 and 2020.

Three Months Ended
March 31, 2021
(In thousands)Amount of Gain (Loss) Recognized in OCI (Effective Portion)Amount of Gain (Loss) Reclassified from OCI to Interest IncomeAmount of Gain (Loss) Recognized in Other Non-interest Income (Ineffective Portion)
Interest rate contracts$125 $— $— 

Three Months Ended
March 31, 2020
(In thousands)Amount of Gain (Loss) Recognized in OCI (Effective Portion)Amount of Gain (Loss) Reclassified from OCI to Interest IncomeAmount of Gain (Loss) Recognized in Other Non-interest Income (Ineffective Portion)
Interest rate contracts$(483)$— $— 


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

(In thousands)March 31, 2021December 31, 2020
Notional AmountFair ValueNotional AmountFair 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 32,827 2,278 33,310 3,934 
 Matched interest rate swaps with counterparty— — — — 
   Total included in other assets$32,827 $2,278 $33,310 $3,934 
Included in other liabilities:
Borrowing derivatives - interest rate swaps related to FHLB advances$25,000 $(727)$25,000 $(885)
Loan derivatives - instruments associated with loans
 Matched interest rate swaps with borrower — — — — 
 Matched interest rate swaps with counterparty32,827 (2,278)33,310 (3,934)
    Total included in other liabilities$57,827 $(3,005)$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 the 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.

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At March 31, 2021 and December 31, 2020, Park had $41.5 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 $1.1 million and $1.5 million at March 31, 2021 and December 31, 2020, respectively.

Other Derivatives
In connection with the sale of Park’s Class B Visa shares during 2009, Park entered into a swap agreement with the purchaser of the shares. The swap agreement adjusts for dilution in the conversion ratio of Class B Visa shares resulting from certain Visa litigation. At both March 31, 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.

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 periods ended March 31, 2021 and 2020:

(in thousands)		Changes in pension plan assets and benefit obligationsUnrealized net holding gain (loss) on cash flow hedgeUnrealized gains (losses) on AFS debt securitiesTotal
Beginning balance at January 1, 2021$(34,421)$(698)$40,690 $5,571 
Other comprehensive income (loss) before reclassifications— 125 (13,597)(13,472)
Net current period other comprehensive income (loss)— 125 (13,597)(13,472)
Ending balance at March 31, 2021$(34,421)$(573)$27,093 $(7,901)
Beginning balance at January 1, 2020$(26,674)$(454)$17,539 $(9,589)
Other comprehensive (loss) income before reclassifications — (483)18,176 17,693 
Net current period other comprehensive (loss) income— (483)18,176 17,693 
Ending balance at March 31, 2020$(26,674)$(937)$35,715 $8,104 

During the three-month periods ended March 31, 2021 and 2020, there were no reclassifications out of accumulated other comprehensive income (loss).

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 ended March 31, 2021 and 2020.
 
Three Months Ended
March 31,
(In thousands, except share and per common share data)20212020
Numerator:  
Net income$42,831 $22,372 
Denominator:  
Weighted-average common shares outstanding16,314,987 16,303,602 
Effect of dilutive PBRSUs and TBRSUs124,933 122,279 
Weighted-average common shares outstanding adjusted for the effect of dilutive PBRSUs and TBRSUs16,439,920 16,425,881 
Earnings per common share:  
Basic earnings per common share$2.63 $1.37 
Diluted earnings per common share$2.61 $1.36 

Park awarded 61,890 and 62,265 PBRSUs to certain employees during the three months ended March 31, 2021 and 2020, respectively.

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Park repurchased an aggregate of 76,000 common shares during the three months ended March 31, 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) and pursuant to Park's previously announced stock repurchase authorizations. No common shares were repurchased during the three months ended March 31, 2021.

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 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 March 31, 2021
(In thousands)PNBAll OtherTotal
Net interest income (expense)$82,086 $(1,352)$80,734 
Recovery of credit losses(4,194)(661)(4,855)
Other income32,800 1,289 34,089 
Other expense63,576 4,289 67,865 
Income (loss) before income taxes$55,504 $(3,691)$51,813 
Income tax expense (benefit)10,382 (1,400)8,982 
Net income (loss)$45,122 $(2,291)$42,831 
Assets (at March 31, 2021)$9,884,055 $30,014 $9,914,069 
 
 Operating Results for the three months ended March 31, 2020
(In thousands)PNBAll OtherTotal
Net interest income $75,214 $1,069 $76,283 
Provision for (recovery of) loan losses5,534 (381)5,153 
Other income (loss)23,481 (995)22,486 
Other expense61,368 4,908 66,276 
Income (loss) before income taxes$31,793 $(4,453)$27,340 
Income tax expense (benefit)5,885 (917)4,968 
Net income (loss)$25,908 $(3,536)$22,372 
Assets (at March 31, 2020)$8,673,683 $45,608 $8,719,291 

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 periods ended March 31, 2021 and 2020. The reconciling amounts for consolidated total assets for the periods ended March 31, 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
45
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 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. As of March 31, 2021, there were 2,130 common shares subject to PBRSUs issued under the 2013 Incentive Plan, which represented the only awards outstanding under the 2013 Incentive Plan.

The Park National Corporation 2017 Long-Term Incentive Plan for Employees (the "2017 Employees LTIP") was adopted by the Board of Directors of Park on January 23, 2017 and was approved by Park's shareholders at the Annual Meeting of Shareholders on April 24, 2017. The 2017 Employees LTIP makes equity-based awards and cash-based awards available for grant to employee participants in the form of incentive stock options, nonqualified stock options, SARs, Restricted Stock, Restricted Stock Units, Other Stock-Based Awards and cash-based awards. Under the 2017 Employees LTIP, 750,000 common shares are authorized to be delivered in connection with grants under the 2017 Employees LTIP. The common shares to be delivered under the 2017 Employees LTIP are to consist of either common shares currently held or common shares subsequently acquired by Park as treasury shares, including common shares purchased in the open market or in private transactions. At March 31, 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 March 31, 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 prior to April 24, 2017 will remain in effect in accordance with their respective terms.

During the three months ended March 31, 2021, 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 common shares to certain employees of Park and its subsidiaries. During the three months ended March 31, 2020, the Compensation Committee of the Board of Directors of Park granted awards of PBRSUs, under the 2017 Employees LTIP, covering an aggregate of 62,265 common shares to certain employees of Park and its subsidiaries.

As of March 31, 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 three months ended March 31, 2021 follows:

Common shares subject to PBRSUs and TBRSUs
Nonvested at January 1, 2021204,108 
Granted61,890 
Vested(35,872)
Forfeited(843)
Adjustment for performance conditions of PBRSUs (1)
(2,535)
Nonvested at March 31, 2021 (2)
226,748 

(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 March 31, 2021, an aggregate of 210,110 PBRSUs and TBRSUs are expected to vest.

During the three months ended March 31, 2021, an aggregate of 35,872 of the PBRSUs granted in 2017 and 2018 vested in full due to the level of achievement with respect to certain performance criteria and the satisfaction of the service-based vesting requirement. A total of 14,108 common shares were withheld to satisfy employee income tax withholding obligations. This resulted in a net number of 21,764 common shares being issued to employees of Park. During the three months ended March 31, 2020, 36,674 of the PBRSUs granted in 2016 and 2017 vested in full due to the level of achievement with respect to certain performance criteria and the satisfaction of the service-based vesting requirement. A total of 11,646 common shares were withheld to satisfy employee income tax withholding obligations. This resulted in a net number of 25,028 common shares being issued to employees of Park.

Share-based compensation expense of $1.8 million and $1.3 million was recognized for the three-month periods ended March 31, 2021 and 2020, respectively.

The following table details expected additional share-based compensation expense related to PBRSUs and TBRSUs outstanding at March 31, 2021:

(In thousands)
Nine months ending December 31, 2021$3,741 
20224,089 
20232,612 
20241,069 
2025170 
Total$11,681 

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 either of the three-month periods ended March 31, 2021 and 2020.
 
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The following table shows the components of net periodic pension benefit expense:

Three Months Ended
March 31,		Affected Line Item in the Consolidated
Condensed Statements of Income
(In thousands)20212020
Service cost$2,479 $2,080 Employee benefits
Interest cost1,340 1,320 Other components of net
periodic pension benefit income
Expected return on plan assets(3,933)(3,602)Other components of net
periodic pension benefit income
Recognized net actuarial loss and prior service costs555 294 Other components of net
periodic pension benefit income
Net periodic pension benefit expense$441 $92 

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 ended March 31, 2021 and 2020 was as follows:

Three Months Ended
March 31,		Affected Line Item in the Consolidated
Condensed Statement of Income
(In thousands)20212020
Service cost$204 $364 Employee benefits
Interest cost149 134 Miscellaneous expense
Total SERP expense$353 $498 

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 March 31, 2021 using:
(In thousands)Level 1Level 2Level 3Balance at March 31, 2021
Assets    
Investment securities:    
Obligations of states and political subdivisions$— $298,313 $298,313 
U.S. Government sponsored entities’ asset-backed securities— 814,909 — 814,909 
Corporate debt securities— 2,062 — 2,062 
Equity securities1,522 — 490 2,012 
Mortgage loans held for sale— 17,766 — 17,766 
Mortgage IRLCs— 1,080 — 1,080 
Loan interest rate swaps— 2,278 — 2,278 
Liabilities    
Fair value swap$— $— $226 $226 
Borrowing interest rate swap— 727 — 727 
Loan interest rate swaps— 2,278 — 2,278 
 
Fair Value Measurements at December 31, 2020 using:
(In thousands)Level 1Level 2Level 3Balance at December 31, 2020
Assets    
Investment securities:    
Obligations of states and political subdivisions$— $305,218 $— $305,218 
U.S. Government sponsored entities’ asset-backed securities— 752,109 — 752,109 
Corporate debt securities— 2,014 — 2,014 
Equity securities2,026 — 485 2,511 
Mortgage loans held for sale— 31,666 — 31,666 
Mortgage IRLCs— 1,545 — 1,545 
Loan interest rate swaps— 3,934 — 3,934 
Liabilities    
Fair value swap$— $— $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 months ended March 31, 2021 and 2020, for financial instruments measured on a recurring basis and classified as Level 3:
Level 3 Fair Value Measurements
Three months ended March 31, 2021 and 2020
(In thousands)Equity
Securities		Fair value
swap
Balance at January 1, 2021$485 $(226)
Total gains (losses)  
Included in other income5 — 
Balance at March 31, 2021$490 $(226)
Balance at January 1, 2020$456 $(226)
Total gains (losses)  
Included in other income7 — 
Balance at March 31, 2020$463 $(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. 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.
 
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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 March 31, 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.
 
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 March 31, 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 March 31, 2021 using:
(In thousands)Level 1Level 2Level 3Balance at March 31, 2021
Impaired loans recorded at fair value:    
Commercial real estate$— $— $7,151 $7,151 
Residential real estate— — 333 333 
Total impaired loans recorded at fair value$— $— $7,484 $7,484 
MSRs$— $13,307 $— $13,307 
OREO recorded at fair value:
Residential real estate— — 735 735 
Total OREO recorded at fair value$— $— $735 $735 
Other repossessed assets$— $— $3,164 $3,164 
 
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Fair Value Measurements at December 31, 2020 using:
(In thousands)Level 1Level 2Level 3Balance at December 31, 2020
Impaired loans recorded at fair value:    
Commercial real estate$— $— $6,749 $6,749 
Residential real estate— — 175 175 
Total impaired loans recorded at fair value$— $— $6,924 $6,924 
MSRs$— $12,179 $— $12,179 
OREO recorded at fair value:
Residential real estate— — 735 735 
Total OREO recorded at fair value$— $— $735 $735 
Other repossessed assets$— $— $3,164 $3,164 

The table below provides additional detail on those 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.

March 31, 2021
(In thousands)Loan BalancePrior Charge-OffsSpecific Valuation AllowanceCarrying Balance
Impaired loans recorded at fair value$7,890 $203 $406 $7,484 
Remaining impaired loans 92,517 386 4,556 87,961 
Total impaired loans$100,407 $589 $4,962 $95,445 

December 31, 2020
(In thousands)Recorded InvestmentPrior Charge-OffsSpecific Valuation AllowanceCarrying Balance
Impaired loans recorded at fair value$8,256 $269 $1,332 $6,924 
Remaining impaired loans 100,199 386 4,102 96,097 
Total impaired loans$108,455 $655 $5,434 $103,021 

The income (expense) from credit adjustments related to impaired loans carried at fair value was $0.9 million and $(57,000) for the three-month periods ended March 31, 2021 and 2020, respectively.

MSRs totaled $13.6 million at March 31, 2021. Of this $13.6 million MSR carrying balance, $13.3 million was recorded at fair value and included a valuation allowance of $2.3 million. The remaining $328,000 was recorded at cost, as the fair value exceeded cost at March 31, 2021. At December 31, 2020, MSRs totaled $12.2 million. Of this $12.2 million MSR carrying balance, $12.2 million was recorded at fair value and included a valuation allowance of $3.2 million. The remaining $31,000 was recorded at cost, as the fair value exceeded cost at December 31, 2020. The income/(expense) related to MSRs carried at fair value during the three months ended March 31, 2021 and 2020 was $852,000 and $(1.5) million, respectively.

Total OREO held by Park at March 31, 2021 and December 31, 2020 was $844,000 and $1.4 million, respectively. Approximately 87% and 51% of OREO held by Park at March 31, 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 March 31, 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 the three-month period ended March 31, 2021. The net expense related to OREO fair value adjustments was $2,000 for the three-month period ended March 31, 2020.

Other repossessed assets totaled $3.8 million at March 31, 2021, of which $3.2 million was recorded at fair value. Other repossessed assets totaled $3.6 million at December 31, 2020, of which $3.2 million was recorded at fair value. There was no
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expense related to fair value adjustments on other repossessed assets for either of the three-month periods ended March 31, 2021 and 2020.

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

March 31, 2021
(In thousands)Fair ValueValuation TechniqueUnobservable Input(s)Range
(Weighted Average)
Impaired loans:    
Commercial real estate$7,151 Sales comparison approachAdj to comparables
0.0% - 139.0% (12.2%)
Income approachCapitalization rate
8.5% (8.5%)
Cost approachEntrepreneurial profit
10.0% (10.0%)
Cost approachAccumulated depreciation
1.0% - 4.3% (1.7%)
Residential real estate$333 Sales comparison approachAdj to comparables
2.0% - 47.8% (22.1%)
Other real estate owned:
Residential real estate$735 Sales comparison approachAdj to comparables
1.2% - 54.1% (31.4%)

Balance at December 31, 2020
(In thousands)Fair ValueValuation TechniqueUnobservable Input(s)Range
(Weighted Average)
Impaired loans:    
Commercial real estate$6,749 Sales comparison approachAdj to comparables
0.0% - 139.0% (11.8%)
Income approachCapitalization rate
9.3% - 20.0% (10.3%)
Cost approachEntrepreneurial profit
10.0% (10.0%)
Cost approachAccumulated depreciation
2.6% (2.6%)
Residential real estate$175 Sales comparison approachAdj to comparables
2.0% - 47.8% (11.9%)
Other real estate owned:
Residential real estate$735 Sales comparison approachAdj 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 March 31, 2021 and December 31, 2020, Park had Partnership Investments with a NAV of $15.6 million and $15.4 million, respectively. At both March 31, 2021 and December 31, 2020, Park had $6.2 million in unfunded commitments related to these Partnership Investments. For the three-month periods ended March 31, 2021 and 2020, Park recognized income (expense) of $1.4 million and $(0.2) million, respectively, related to these Partnership Investments.

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

March 31, 2021
  Fair Value Measurements
(In thousands)Carrying valueLevel 1Level 2Level 3Total fair value
Financial assets:
Cash and money market instruments$943,275 $943,275 $— $— $943,275 
Investment securities (1)
1,115,284 — 1,115,284 — 1,115,284 
Other investment securities (2)
2,012 1,522 — 490 2,012 
Mortgage loans held for sale17,766 — 17,766 — 17,766 
Mortgage IRLCs1,080 — 1,080 — 1,080 
Impaired loans carried at fair value7,484 — — 7,484 7,484 
Other loans, net7,055,529 — — 7,079,812 7,079,812 
Loans receivable, net$7,081,859 $— $18,846 $7,087,296 $7,106,142 
Financial liabilities:     
Time deposits$822,195 $— $827,039 $— $827,039 
Other2,776 2,776 — — 2,776 
Deposits (excluding demand deposits)$824,971 $2,776 $827,039 $— $829,815 
Short-term borrowings$305,385 $— $305,385 $— $305,385 
Long-term debt30,000 — $29,413 $— $29,413 
Subordinated notes187,881 — 186,951 — 186,951 
Derivative financial instruments - assets:
Loan interest rate swaps2,278 — 2,278 — 2,278 
Derivative financial instruments - liabilities:     
Fair value swap226 — — 226 226 
Borrowing interest rate swap727 — 727 — 727 
Loan interest rate swaps2,278 — 2,278 — 2,278 

(1) Includes AFS debt securities.
(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 valueLevel 1Level 2Level 3Total 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 sale31,666 — 31,666 — 31,666 
Mortgage IRLCs1,545 — 1,545 — 1,545 
Impaired loans carried at fair value6,924 — — 6,924 6,924 
Other loans, net7,051,975 — — 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 
Other1,379 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 debt32,500 — 31,376 — 31,376 
Subordinated notes187,774 — 179,147 — 179,147 
Derivative financial instruments - assets:     
Loan interest rate swaps3,934 — 3,934 — 3,934 
Derivative financial instruments - liabilities:
Fair value swap$226 $— $— $226 $226 
Borrowing interest rate swap885 — 885 — 885 
Loan interest rate swaps3,934 — 3,934 — 3,934 

(1) Includes AFS debt securities.
(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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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 periods ended March 31, 2021 and March 31, 2020.

Three Months Ended
March 31, 2021
Revenue by Operating Segment (in thousands)PNBAll OtherTotal
Income from fiduciary activities
   Personal trust and agency accounts$2,387 $— $2,387 
   Employee benefit and retirement-related accounts2,301 — 2,301 
   Investment management and investment advisory agency accounts3,009 — 3,009 
   Other476 — 476 
Service charges on deposit accounts
    Non-sufficient funds (NSF) fees1,134 — 1,134 
    Demand deposit account (DDA) charges789 — 789 
    Other131 — 131 
Other service income (1)
    Credit card580 — 580 
    HELOC89 — 89 
    Installment34 — 34 
    Real estate8,438 — 8,438 
    Commercial418 58 476 
Debit card fee income6,086 — 6,086 
Bank owned life insurance income (2)
1,085 80 1,165 
ATM fees530 — 530 
Loss on sale of OREO, net(33)— (33)
Gain on equity securities, net (2)
834 976 1,810 
Other components of net periodic pension benefit income (2)
1,987 51 2,038 
Miscellaneous (3)
2,525 124 2,649 
Total other income$32,800 $1,289 $34,089 

(1) Of the $9.6 million of aggregate revenue included within "Other service income", approximately $1.3 million is within the scope of ASC 606, with the remaining $8.3 million consisting primarily of residential real estate loan fees which are out of scope.
(2) Not within the scope of ASC 606.
(3) "Miscellaneous" income includes brokerage income, safe deposit box rentals, and miscellaneous bank fees totaling $2.6 million, all of which are within scope of ASC 606.
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Three Months Ended
March 31, 2020
Revenue by Operating Segment (in thousands)PNBAll OtherTotal
Income from fiduciary activities
   Personal trust and agency accounts$2,171 $— $2,171 
   Employee benefit and retirement-related accounts1,916 — 1,916 
   Investment management and investment advisory agency accounts2,642 — 2,642 
   Other384 — 384 
Service charges on deposit accounts
    Non-sufficient funds (NSF) fees1,615 — 1,615 
    Demand deposit account (DDA) charges761 — 761 
    Other152 — 152 
Other service income (1)
    Credit card596 1 597 
    HELOC98 — 98 
    Installment53 — 53 
    Real estate2,647 — 2,647 
    Commercial371 — 371 
Debit card fee income4,960 — 4,960 
Bank owned life insurance income (2)
1,166 82 1,248 
ATM fees412 — 412 
Loss on sale of OREO, net(196)— (196)
Gain (loss) on equity securities, net (2)
166 (1,139)(973)
Other components of net periodic pension benefit income (2)
1,940 48 1,988 
Miscellaneous (3)
1,627 13 1,640 
Total other income$23,481 $(995)$22,486 

(1) Of the $3.8 million of aggregate revenue included within "Other service income", approximately $1.3 million is within the scope of ASC 606, with the remaining $2.5 million consisting primarily of residential real estate loan fees which are out of scope.
(2) Not within the scope of ASC 606.
(3) "Miscellaneous" income includes brokerage income, safe deposit box rentals, and miscellaneous bank fees totaling $1.6 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.

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 - - 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 development, 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 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 the COVID-19 pandemic;
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•Park may have more credit risk and higher credit losses to the extent there are loan concentrations by location or industry of borrowers or collateral;
•the volatility from quarter to quarter of mortgage banking income, whether due to interest rates, demand, the fair value of mortgage loans, or other factors;
•the adequacy of our internal controls and risk management program in the event of changes in the market, economic, operational (including those which may result from more of our associates working remotely), asset/liability repricing, legal, compliance, strategic, cybersecurity, liquidity, credit and interest rate risks associated with Park's business;
•competitive pressures among financial services organizations could increase significantly, including product and pricing pressures (which could in turn impact our credit spreads), changes to third-party relationships and revenues, changes in the manner of providing services, customer acquisition and retention pressures, and 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 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 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;
•significant changes in the tax laws, which 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;
•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);
•uncertainty regarding the impact of changes to the U.S. presidential administration and Congress on the regulatory landscape, capital markets, elevated U.S. government debt, potential changes in tax legislation that may increase tax rates and the response to and management of the COVID-19 pandemic;
•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;
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•the impact on Park's business, personnel, facilities or systems of losses related to acts of fraud, scams and schemes of third parties;
•the impact of widespread natural and other disasters, pandemics (including the COVID-19 pandemic), dislocations, regional or national protests and civil unrest (including any resulting branch closures or damages), military or terrorist activities or international hostilities on the economy and financial markets generally and on us or our counterparties specifically;
•any of the foregoing factors, or other cascading effects of the COVID-19 pandemic that are not currently foreseeable, could materially affect our business, including our customers' willingness to conduct banking transactions and their ability to pay on existing obligations;
•the effect of healthcare laws in the U.S. and potential changes for such laws, especially in light of the COVID-19 pandemic, which may increase our healthcare and other costs and negatively impact our operations and financial results;
•risk and uncertainties associated with Park's entry into new geographic markets with our recent acquisitions, including expected revenue synergies and cost savings from recent acquisitions not being fully realized or realized within the expected time frame;
•the discontinuation of the London Inter-Bank Offered Rate (LIBOR) and other reference rates which may result in increased expenses and litigation, and adversely impact the effectiveness of hedging strategies;
•and other risk factors relating to the banking industry as detailed from time to time in Park's reports filed with the SEC including those described in "Item 1A. Risk Factors" of 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

Item 2 of Part I of of this Quarterly Report on Form 10-Q 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), gains (losses) on equity securities, and asset valuation writedowns, reflect ordinary banking activities and are, therefore, typically excluded from consideration as items impacting comparability of period results.

Management believes the disclosure of items impacting comparability of period results provides a better understanding of 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, the annualized return on average tangible assets, the tangible equity to tangible assets ratio and the tangible book value per share for the three months ended and at March 31, 2021 and March 31, 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. For the purpose of calculating the tangible equity to tangible assets ratio, a non-GAAP financial measure, tangible equity is divided by tangible assets. Tangible equity equals total shareholders' equity less goodwill and other intangible assets, in each case at period end. Tangible assets equal total assets less goodwill and other intangible assets, in each case at period end. For the purpose of calculating the tangible book value per share, a non-GAAP financial measure, tangible equity is divided by the number of common shares outstanding, 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 March 31, 2021, Park had originated $749.9 million in loans as part of the PPP. These loans are not typical of Park's loan portfolio in that they are part of a specific government program to support businesses during the COVID-19 pandemic and are 100% guaranteed by the Small Business Administration ("SBA"). As such, management considers growth in the loan portfolio excluding PPP loans, the total allowance for credit losses to total loans ratio (excluding PPP loans), and general reserve on collectively evaluated loans as a percentage of total collectively evaluated loans (excluding PPP loans) in addition to the related U.S. GAAP metrics which are not adjusted for PPP loans.

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.

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 COVID-19 pandemic may meaningfully impact significant estimates such as the allowance for credit losses, goodwill, and pension plan obligations and related expenses.
 
Allowance for Credit Losses: Park believes the determination of the allowance for credit losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance for credit losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses over the life of an asset or 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 (Recovery of) Provision for 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 AFS debt securities. The fair value of these AFS debt securities 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 March 31, 2021, relates to the value inherent in the banking industry and that value is dependent upon the ability of Park’s national bank subsidiary, PNB to provide quality, cost-effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base, the inability to deliver cost-effective services over sustained periods or significant credit problems can lead to impairment of goodwill that could 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 analysis performed as of April 1, 2020, the Company determined that goodwill for Park's reporting unit, PNB, was not impaired. During each of the second, third and fourth quarters of 2020, management determined that the deterioration in general economic conditions as a result of the COVID-19 pandemic and responses thereto represented a triggering event prompting an evaluation of goodwill impairment. Based on the qualitative analysis performed during each of the second, third and fourth quarters of 2020, the Company determined that goodwill 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 Months Ended March 31, 2021 and 2020
 
Summary Discussion of Results

Net income for the three months ended March 31, 2021 was $42.8 million, compared to $22.4 million for the first quarter of 2020. Diluted earnings per common share were $2.61 for the first quarter of 2021, compared to $1.36 for the first quarter of 2020. Weighted average diluted common shares outstanding were 16,439,920 for the first quarter of 2021, compared to 16,425,881 weighted average diluted common shares outstanding for the first quarter of 2020.

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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 Paycheck Protection Program ("PPP"), participation in additional PPP loans authorized under the Consolidated Appropriations Act, 2021, and various other case by case accommodations. 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.

During 2021 and 2020, Park provided calamity pay and special one-time bonuses to certain associates. The cost of the calamity pay and special bonuses amounted to $634,000 and $262,000 for the three-month periods ended March 31, 2021 and 2020, respectively, and is included within salaries expense.

Paycheck Protection Program: During 2020, Park approved and funded 4,439 loans totaling $543.1 million under the PPP's first round of loans. These first round PPP loans had an average principal balance of $122,000. Of the $543.1 million in 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 $4.2 million and $13.7 million were recognized within loan interest income during the three months ended March 31, 2021 and the twelve months ended December 31, 2020, respectively. Park funded the PPP loans with excess on-balance sheet liquidity. At March 31, 2021, the remaining balance of PPP loans from those funded in 2020 was $190.1 million.

During 2021, Park offered additional PPP loans as authorized under the Consolidated Appropriations Act, 2021, signed into law on December 27, 2020. Through March 31, 2021, Park had approved and funded 2,773 loans totaling $206.8 million under the second round of PPP loans. These additional PPP loans had an average principal balance of $75,000. None of the $206.8 million in additional PPP loans had a principal balance that was greater than $2 million. For its assistance in making and retaining the 2,773 second round of loans, Park expects to receive an aggregate of $11.4 million in fees from the SBA, of which $397,000 was recognized within loan interest income during the three months ended March 31, 2021. Park funded the PPP loans with excess on-balance sheet liquidity. At March 31, 2021, the remaining balance of PPP loans from 2021 was $206.8 million.

As of May 4, 2021, Park has submitted approximately 3,872 repayment requests on behalf of borrowers under the PPP to the SBA and has received $374.4 million in payments from the SBA.

Loan Modifications: During the fifteen months ended March 31, 2021, Park had modified a total of 5,120 consumer loans, with an aggregate balance of $96.3 million, and modified a total of 1,405 commercial loans, with an aggregate balance of $573.3 million, in each case related to a hardship caused by the COVID-19 pandemic and responses thereto. Park is working with borrowers and providing 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 is making available a second 90-day interest only deferral or principal and interest deferral bringing the total potential deferral period to six months. Modifications are structured in a manner to best address each individual customer's current situation. A majority of these modifications are excluded from TDR classification under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators.
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Modified loans will be considered current and will continue to accrue interest during the deferral period.

Detail of COVID-19 modifications on Park's loan portfolios during the fifteen months ended March 31, 2021 follows:

(Dollars in thousands)March 31, 2021 Total BalanceMarch 31, 2021 Balance ModifiedPercent Modified
Commercial$4,137,097 $573,319 13.9 %
Home equity171,495 3,020 1.8 %
Installment1,657,140 40,592 2.4 %
Real estate1,192,978 51,466 4.3 %
GFSC5,225 1,175 22.5 %
Other4,810 — — %
Total Loans$7,168,745 $669,572 9.3 %

Of the $669.6 million of COVID-19 modifications during the fifteen months ended March 31, 2021, $6.8 million were greater than or equal to 30 days past due in accordance with the modified terms at March 31, 2021.

Detail of COVID-19 modifications on selected commercial loan portfolios during the fifteen months ended March 31, 2021 follows:

(Dollars in thousands)March 31, 2021 Total BalanceMarch 31, 2021 Balance ModifiedPercent Modified
Non-bank consumer finance companies$279,615 $— — %
Hotel and accommodations213,882 155,121 72.5 %
Restaurants and food service48,174 10,310 21.4 %
Arts and recreation42,994 13,077 30.4 %
Healthcare and social assistance250,630 62,400 24.9 %
Strip shopping centers251,985 69,466 27.6 %
Other real estate rental and leasing1,213,223 153,772 12.7 %
PPP loans386,990 — — %
Other commercial loans1,449,604 109,173 7.5 %
Total commercial loans$4,137,097 $573,319 13.9 %


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Many of the initial interest only deferrals or principal and interest deferrals were for an initial period of three months. Park has received requests for additional deferrals. Loans which have had multiple COVID-19 modifications through March 31, 2021 are detailed below.

(Dollars in thousands)March 31, 2021 Balance - Multiple Modifications
Weighted Average Risk Grade (1)
Hotel and accommodations$67,419 5.04 
Restaurants and food service1,128 4.29 
Arts and recreation3,923 4.50 
Strip shopping centers1,864 4.00 
Other real estate rental and leasing6,152 5.88 
Other commercial loans18,398 5.14 
Total commercial loans$98,884 5.05
Home equity$273 N.A.
Installment6,291 N.A.
Real estate15,374 N.A.
GFSC713 N.A.
Other— N.A.
Total loans$121,535 N.A.

(1) Commercial 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 (1 through 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 watch list credits, are considered to represent higher credit risk and, as a result, a higher PD is applied to these loans. Generally, commercial loans that are graded a 6 are considered for partial charge-off or have been charged down to the net realizable value of the underlying collateral. Commercial loans 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.

Park considers a loan out of deferral when the first regular payment is due and that payment is subsequently made. The table below details the current status of loans with COVID-19 deferrals.

(Dollars in thousands)March 31, 2021 Balance - Out of DeferralMarch 31, 2021 Balance - In DeferralLoans in Deferral as a Percent of Total DeferredLoans in Deferral as a Percent of Total Loans
Hotel and accommodations$142,944 $12,177 7.9 %5.7 %
Restaurants and food service10,269 41 0.4 %0.1 %
Arts and recreation12,573 504 3.9 %1.2 %
Healthcare and social assistance34,945 27,455 44.0 %11.0 %
Strip shopping centers69,466 — — %— %
Other real estate rental and leasing149,185 4,587 3.0 %0.4 %
Other commercial loans105,029 4,144 3.8 %0.3 %
Total commercial loans$524,411 $48,908 8.5 %1.2 %
Home equity$3,020 $— — %— %
Installment40,337 255 0.6 %— %
Real estate49,551 1,915 3.7 %0.2 %
GFSC1,143 32 2.7 %0.6 %
Total loans$618,462 $51,110 7.6 %0.7 %



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Financial Results by Segment

The table below reflects the net income (loss) by segment for the first quarters (the three months ended March 31) of 2021 and 2020 and for the years ended December 31, 2020 and 2019. Park's segments include The Park National Bank ("PNB") and "All Other" which primarily consists of Park as the "Parent Company", GFSC and SE Property Holdings, LLC ("SEPH"). SEPH is a non-bank subsidiary of Park, holding former Vision Bank other real estate owned ("OREO") property and non-performing loans.
Net income (loss) by segment
(In thousands)Q1 2021Q1 202020202019
PNB$45,122 $25,908 $123,730 $113,600 
All Other(2,291)(3,536)4,193 (10,900)
   Total Park$42,831 $22,372 $127,923 $102,700 

Net income for the three months ended March 31, 2021 of $42.8 million represented a $20.5 million, or 91.4%, increase compared to $22.4 million for the three months ended March 31, 2020. Net income for each of the three months ended March 31, 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 management's discussion and analysis.

During the first quarter of 2021, Park adopted Financial Accounting Standards Board Accounting Standards Update 2016-13, Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 established the current expected credit loss ("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 (Recovery of) Provision for Credit Losses” section for further detail.

The following discussion provides additional information regarding the segment that is made up of Park National Bank, 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 quarters (the three months ended March 31) of 2021 and 2020 and for the years ended December 31, 2020 and 2019.

(In thousands)Q1 2021Q1 202020202019
Net interest income$82,086 $75,214 $326,375 $293,130 
(Recovery of) provision for credit losses (1)
(4,194)5,534 30,813 8,356 
Other income32,800 23,481 124,231 92,392 
Other expense63,576 61,368 268,938 237,433 
Income before income taxes$55,504 $31,793 $150,855 $139,733 
Income tax expense10,382 5,885 27,125 26,133 
Net income$45,122 $25,908 $123,730 $113,600 

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

Net interest income of $82.1 million for the three months ended March 31, 2021 represented a $6.9 million, or 9.1%, increase compared to $75.2 million for the three months ended March 31, 2020. The increase was a result of a $10.0 million decrease in interest expense, partially offset by a $3.1 million decrease in interest income.

The $3.1 million decrease in interest income was due to a $1.8 million decrease in investment income and a $1.3 million decrease in interest income on loans. The decrease in investment income was partially the result of a $134.9 million decrease in average investments from $1.222 billion for the three months ended March 31, 2020 to $1.09 billion for the three months ended March 31, 2021. The decrease in investment income was also the result of a decrease in the yield on investments, which decreased 19 basis points to 2.54% for the three months ended March 31, 2021, compared to 2.73% for the three months ended
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March 31, 2020. The decrease in interest income on loans was partially the result of a decrease in the yield on loans, which decreased 50 basis points to 4.45% for the three months ended March 31, 2021, compared to 4.95% for the three months ended March 31, 2020. The decrease in yield on loans was partially offset by a $666.4 million increase in average loans from $6.46 billion for the three months ended March 31, 2020 to $7.13 billion for the three months ended March 31, 2021. The increase in average loans was impacted by the addition of average PPP loans of approximately $369.1 million which also resulted in interest and fee income of $5.2 million for the three months ended March 31, 2021. Excluding the impact of PPP loan interest and fee income, the yield on loans was 4.38%, a decrease of 57 basis points, for the three months ended March 31, 2021, compared to 4.95% for the three months ended March 31, 2020.

The $10.0 million decrease in interest expense was primarily due to an $8.7 million decrease in interest expense on deposits as well as a $1.3 million decrease in interest expense on borrowings. The decrease in interest expense on deposits was the result of a decrease in the cost of deposits of 65 basis points from 0.81% for the three months ended March 31, 2020 to 0.16% for the three months ended March 31, 2021. The decrease was also the result of a $129.2 million decrease in average interest-bearing deposits from $5.26 billion for the three months ended March 31, 2020, to $5.13 billion for the three months ended March 31, 2021. The decrease in interest expense on borrowings was partially the result of a $13.3 million decrease in average borrowings from $357.4 million for the three months ended March 31, 2020, to $344.1 million for the three months ended March 31, 2021. The cost of borrowings also decreased by 147 basis points, from 2.05% for the three months ended March 31, 2020 to 0.58% for the three months ended March 31, 2021.

The recovery of credit losses of $4.2 million for the three months ended March 31, 2021 represented a difference of $9.7 million, compared to a provision for credit losses of $5.5 million for the three months ended March 31, 2020. Refer to the “Credit Metrics and (Recovery of) Provision for Credit Losses” section for additional details regarding the level of the (recovery of) provision for credit losses recognized in each period presented above.

Other income of $32.8 million for the three months ended March 31, 2021 represented an increase of $9.3 million, or 39.7%, compared to $23.5 million for the three months ended March 31, 2020. The $9.3 million increase was primarily related to (i) a $5.8 million increase in other service income, which was primarily due to an increase in fee income from mortgage loan originations and the valuation of mortgage servicing rights, partially offset by a decline in investor rate locks and mortgage loans held for sale; (ii) a $1.1 million increase in debit card fee income; (iii) a $1.1 million increase in income from fiduciary activities; (iv) a $900,000 increase in miscellaneous income, primarily related to a refund of a consumer insurance product and an increase in income from printed check sales; and (v) a $668,000 increase in unrealized gains on equity securities. These increases were partially offset by a $473,000 decrease in service charges on deposit accounts.

A summary of mortgage originations for the three months ended March 31, 2021 and 2020 follows. Of total mortgage originations shown below for 2021 and 2020, refinances comprised 44.8% in the first quarter of 2021 and 48.1% in the first quarter of 2020.

(In thousands)Q1 2021Q1 2020
Mortgage Origination Volume
Sold$191,116 $85,030 
Portfolio82,613 56,018 
Construction28,987 33,109 
Service released1,266 3,794 
Total mortgage originations$303,982 $177,951 


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The table below reflects PNB's other expense for the three months ended March 31, 2021 and 2020.

(In thousands)20212020change% change
Other expense:
Salaries$28,579 $26,897 $1,682 6.3 %
Employee benefits10,087 9,731 356 3.7 %
Occupancy expense3,317 3,421 (104)(3.0)%
Furniture and equipment expense2,607 4,304 (1,697)(39.4)%
Data processing fees7,625 2,485 5,140 206.8 %
Professional fees and services4,136 5,129 (993)(19.4)%
Marketing1,491 1,483 8 0.5 %
Insurance1,551 1,379 172 12.5 %
Communication1,100 1,086 14 1.3 %
State tax expense989 935 54 5.8 %
Amortization of intangible assets479 606 (127)(21.0)%
FHLB prepayment penalty— 1,793 (1,793)N.M.
Miscellaneous1,615 2,119 (504)(23.8)%
Total other expense$63,576 $61,368 $2,208 3.6 %

Other expense of $63.6 million for the three months ended March 31, 2021 represented an increase of $2.2 million, or 3.6%, compared to $61.4 million for the three months ended March 31, 2020. The increase in salaries expense was primarily related to increases in officer incentive expense, additional compensation incentives, including COVID-19 special one-time bonuses, and share-based compensation expense, partially offset by a decrease in base salary expense. The increase in employee benefits expense was primarily related to increased pension plan expense and payroll tax expense, partially offset by a decrease in group insurance costs. 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 mortgage processing costs as a result of increased volume, debit card processing costs and other data processing and software costs, partially due to the previously mentioned change in classification from furniture and equipment expense and a change in expensing software costs from other fees within professional fees and services to data processing fees. The decrease in professional fees and services was primarily related to decreased title, appraisal and credit costs and decreases in other fees (due to the change in expensing software costs under data processing fees). The increase in insurance expense was primarily due to an increase in the FDIC assessment base for the three months ended March 31, 2021, compared to the same period of 2020. The decrease in the FHLB prepayment penalty was due to a $1.8 prepayment penalty on FHLB borrowings of $50 million repaid during the three months ended March 31, 2020; there was no similar prepayment in the same period of 2021. The decrease in miscellaneous expense was primarily related to a decrease in training and travel related expenses and supplies expense.

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

(In thousands)March 31, 2021December 31, 2020March 31, 2020% change from 12/31/20% change from 3/31/20
Loans $7,162,807 $7,165,840 $6,503,053 (0.04)%10.15 %
Allowance for credit losses (1)
86,560 84,321 59,484 2.66 %45.52 %
Net loans7,076,247 7,081,519 6,443,569 (0.07)%9.82 %
Investment securities1,167,225 1,114,742 1,245,778 4.71 %(6.31)%
Total assets9,884,055 9,236,915 8,673,683 7.01 %13.95 %
Total deposits8,485,798 7,820,983 7,355,407 8.50 %15.37 %
Average assets (2)
9,573,763 9,198,141 8,637,420 4.08 %10.84 %
Efficiency ratio (3)
55.00 %59.31 %61.73 %(7.27)%(10.90)%
Return on average assets (4)
1.91 %1.35 %1.21 %41.48 %57.85 %

(1) Park adopted ASU 2016-13 effective January 1, 2021. The allowance for credit losses as of March 31, 2021 and the related (recovery of) provision for credit losses for the three months ended March 31, 2021 were calculated utilizing this new guidance.
(2) Average assets for the three months ended March 31, 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 $714,000 for the three months ended March 31, 2021, $725,000 for the three months ended March 31, 2020 and $2.9 million for the year ended December 31, 2020.
(4) Annualized for the three months ended March 31, 2021 and 2020.

Loans outstanding at March 31, 2021 were $7.16 billion, compared to $7.17 billion at December 31, 2020, a decrease of $3.0 million. Loans outstanding at March 31, 2021 were $7.16 billion, compared to $6.50 billion at March 31, 2020, an increase of $659.8 million, or 10.1%. Excluding $387.0 million and $331.6 million of PPP loans at March 31, 2021 and December 31, 2020, respectively, loans outstanding were $6.78 billion at March 31, 2021, compared to $6.83 billion at December 31, 2020, a decrease of $58.5 million, or 0.9%, and an increase of $272.8 million, or 4.2%, compared to $6.50 billion at March 31, 2020. The table below breaks out the change in loans outstanding, by loan type.

(In thousands)March 31, 2021December 31, 2020March 31, 2020change from 12/31/20% change from 12/31/20change from 3/31/20% change from 3/31/20
Home equity$171,495 $182,131 $220,668 $(10,636)(5.84)%$(49,173)(22.28)%
Installment1,657,140 1,650,620 1,438,842 6,520 0.40 %218,298 15.17 %
Real estate1,192,978 1,213,820 1,282,279 (20,842)(1.72)%(89,301)(6.96)%
Commercial (excluding PPP)3,749,153 3,784,153 3,558,669 (35,000)(0.92)%190,484 5.35 %
PPP loans386,990 331,571 — 55,419 16.71 %386,990 N.M.
Other5,051 3,545 2,595 1,506 42.48 %2,456 94.64 %
Total loans$7,162,807 $7,165,840 $6,503,053 $(3,033)(0.04)%$659,754 10.15 %
Total loans (excluding PPP)$6,775,817 $6,834,269 $6,503,053 $(58,452)(0.86)%$272,764 4.19 %

PNB's ACL increased by $2.2 million, or 2.7%, to $86.6 million at March 31, 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 charge-offs were $270,000, or 0.02% of total average loans, for the three months ended March 31, 2021 and were $1.2 million, or 0.02% of total average loans, for the year ended December 31, 2020. Refer to the “Credit Metrics and (Recovery of) Provision for Credit Losses” section for additional information regarding PNB's loan portfolio and the level of (recovery of) provision for credit losses recognized in each period presented.

Total deposits at March 31, 2020 were $8.49 billion, compared to $7.82 billion at December 31, 2020, an increase of $664.8 million, or 8.5%. During the three months ended March 31, 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. At March 31, 2021 and December 31, 2020, Park had $809.1 million and $710.1 million, respectively, in OWS insured cash sweep deposits which were off-balance sheet. Total deposits would have increased $763.8 million, or 9.0%, compared to December 31, 2020 had the
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$809.1 million and $710.1 million remained on the balance sheet at the respective dates. The table below breaks out the change in deposit balances, by deposit type.

(In thousands)March 31, 2021December 31, 2020March 31, 2020change from 12/31/20% change from 12/31/20change from 3/31/20% change from 3/31/20
Non-interest bearing deposits$3,158,237 $2,978,005 $2,045,377 $180,232 6.1 %$1,112,860 54.4 %
Transaction accounts1,598,437 1,381,479 1,798,721 216,958 15.7 %(200,284)(11.1)%
Savings2,906,929 2,596,926 2,450,474 310,003 11.9 %456,455 18.6 %
Certificates of deposits822,195 864,573 1,060,835 (42,378)(4.9)%(238,640)(22.5)%
Total deposits$8,485,798 $7,820,983 $7,355,407 $664,815 8.5 %$1,130,391 15.4 %
OWS insured cash sweep deposit809,135 710,101 — 99,034 13.9 %809,135 N.M.
Total deposits including OWS deposits$9,294,933 $8,531,084 $7,355,407 $763,849 9.0 %$1,939,526 26.4 %

All Other

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

(In thousands)Q1 2021Q1 202020202019
Net interest (expense) income$(1,352)$1,069 $1,255 $4,607 
Recovery of credit losses (1)
(661)(381)(18,759)(2,185)
Other income (loss)1,289 (995)1,433 4,801 
Other expense4,289 4,908 17,657 26,555 
Net (loss) income before income tax benefit$(3,691)$(4,453)$3,790 $(14,962)
    Income tax benefit(1,400)(917)(403)(4,062)
Net (loss) income$(2,291)$(3,536)$4,193 $(10,900)

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

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 three months ended March 31, 2021 and 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 in August 2020.

Net interest (expense) income reflected net interest expense of $1.4 million for the three months ended March 31, 2021, compared to net interest income of $1.1 million for the three months ended March 31, 2020. The change was largely the result of an increase in borrowing interest expense, partially offset by an increase in loan interest income related to payment collections at SEPH.

SEPH had net recoveries of $257,000 for the three months ended March 31, 2021, compared to net recoveries of $658,000 for the three months ended March 31, 2020, and GFSC had net charge-offs of $11,000 for the three months ended March 31, 2021, compared to net charge-offs of $245,000 for the three months ended March 31, 2020. Refer to the “Credit Metrics and (Recovery of) Provision for Credit Losses” section for additional information regarding All Other's loan portfolio and the level of (recovery of) provision for credit losses recognized in each period presented.

All Other had other income of $1.3 million for the three months ended March 31, 2021, compared to an other loss of $995,000 for the three months ended March 31, 2020. The change was largely due to a $1.0 million increase in income related to Partnership Investments, which went from a $455,000 loss for the three months ended March 31, 2020 to a $634,000 gain for the three months ended March 31, 2021, and a $1.0 million difference in gain (loss) on equity securities, net, which went from a $683,000 loss for the three months ended March 31, 2020 to a $343,000 gain for the three months ended March 31, 2021.

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All Other had other expense of $4.3 million for the three months ended March 31, 2021, compared to $4.9 million for the three months ended March 31, 2020. The decrease was largely due to a $231,000 decrease in merger related expenses related to the NewDominion and Carolina Alliance acquisitions as well as a decrease in professional fees and services expense.

The table below provides certain balance sheet information and financial ratios for All Other as of or for the three months ended March 31, 2021 and 2020 and as of or for the year ended December 31, 2020.

(In thousands)March 31, 2021December 31, 2020March 31, 2020% change from 12/31/20% change from 3/31/20
Loans$5,938 $11,945 $19,466 (50.29)%(69.50)%
Allowance for credit losses (1)
326 1,354 2,019 (75.92)%(83.85)%
Net loans5,612 10,591 17,447 (47.01)%(67.83)%
Total assets30,014 42,106 45,608 (28.72)%(34.19)%
Average assets (2)
38,779 43,492 42,369 (10.84)%(8.47)%

(1) Park adopted ASU 2016-13 effective January 1, 2021. The allowance for credit losses as of March 31, 2021 and the related (recovery of) provision for credit losses for the three months ended March 31, 2021 were calculated utilizing this new guidance.
(2) Average assets for the three months ended March 31, 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 quarters (the three months ended March 31) of 2021 and 2020 and for the years ended December 31, 2020 and 2019.

(In thousands)Q1 2021Q1 202020202019
Net interest income$80,734 $76,283 $327,630 $297,737 
(Recovery of) provision for credit losses (1)
(4,855)5,153 12,054 6,171 
Other income34,089 22,486 125,664 97,193 
Other expense67,865 66,276 286,595 263,988 
Income before income taxes$51,813 $27,340 $154,645 $124,771 
    Income tax expense8,982 4,968 26,722 22,071 
Net income$42,831 $22,372 $127,923 $102,700 

(1) Park adopted ASU 2016-13 effective January 1, 2021. The allowance for credit losses as of March 31, 2021 and the related (recovery of) provision for credit losses for the three months ended March 31, 2021 were calculated utilizing this new guidance.
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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 First Quarters of 2021 and 2020
 
Net interest income increased by $4.5 million, or 5.8%, to $80.7 million for the first quarter of 2021, compared to $76.3 million for the first quarter of 2020. See the discussion under the table below.
 
Three months ended 
March 31, 2021		Three months ended 
March 31, 2020
(Dollars in thousands)Average
balance		InterestTax
equivalent 
yield/cost		Average
balance		InterestTax
equivalent 
yield/cost
Loans (1)
$7,138,854 $78,910 4.48 %$6,482,137 $80,827 5.02 %
Taxable investments814,586 4,256 2.12 %927,479 5,531 2.40 %
Tax-exempt investments (2)
278,955 2,578 3.75 %302,622 2,785 3.70 %
Money market instruments553,906 143 0.11 %176,805 491 1.12 %
Interest earning assets$8,786,301 $85,887 3.96 %$7,889,043 $89,634 4.57 %
Interest bearing deposits$5,129,357 1,970 0.16 %$5,260,385 10,627 0.81 %
Short-term borrowings318,406 183 0.23 %202,665 462 0.92 %
Long-term debt220,300 2,286 4.21 %183,846 1,537 3.36 %
Interest bearing liabilities$5,668,063 $4,439 0.32 %$5,646,896 $12,626 0.90 %
Excess interest earning assets$3,118,238 $2,242,147  
Tax equivalent net interest income$81,448 $77,008 
Net interest spread 3.64 % 3.67 %
Net interest margin 3.76 % 3.93 %
(1) Loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $173,000 for the three months ended March 31, 2021 and $140,000 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 $541,000 for the three months ended March 31, 2021 and $585,000 for the same period of 2020.
 
Average interest earning assets for the first quarter of 2021 increased by $897 million, or 11.4%, to $8,786 million, compared to $7,889 million for the first quarter of 2020. The average yield on interest earning assets decreased by 61 basis points to 3.96% for the first quarter of 2021, compared to 4.57% for the first quarter of 2020.

Interest income for the three months ended March 31, 2021 and 2020 included purchase accounting accretion of $1.1 million and $1.3 million, respectively, related to the acquisitions of NewDominion and Carolina Alliance, as well as $105,000 and $77,000, respectively, of interest income related to payments received on certain SEPH impaired loan relationships, some of which are participated with PNB. Interest income for 2021 included $5.2 million of income related to PPP loans. Excluding the impact of this income, the yield on loans was 4.34% and 4.92% for the three months ended March 31, 2021 and 2020, respectively, and the yield on earning assets was 3.82% and 4.49% for the three months ended March 31, 2021 and 2020, respectively.

Average interest bearing liabilities for the first quarter of 2021 increased by $21 million, or 0.4%, to $5,668 million, compared to $5,647 million for the first quarter of 2020. The average cost of interest bearing liabilities decreased by 58 basis points to 0.32% for the first quarter of 2021, compared to 0.90% for the first 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 the balance sheet. At March 31, 2021, Park had $809.1 million 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 0.28% for the first quarter of 2021.

Interest expense for the three months ended March 31, 2021 and 2020 included a benefit from purchase accounting accretion of $21,000 and $90,000, respectively, related to the acquisitions of NewDominion and Carolina Alliance. Excluding the impact of
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this income, the average cost of interest bearing liabilities was unchanged at 0.32% for the three months ended March 31, 2021 and was 0.91% for the three months ended March 31, 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 3.61% and 3.85% for the three months ended March 31, 2021 and 2020, respectively.

Yield on Loans: Average loan balances increased $657 million, or 10.1%, to $7,139 million for the first quarter of 2021, compared to $6,482 million for the first quarter of 2020. The average yield on the loan portfolio decreased by 54 basis points to 4.48% for the first quarter of 2021, compared to 5.02% for the first quarter of 2020. Average loans for the first quarter of 2021 included $369.1 million of PPP loans.

The table below shows the average balance and tax equivalent yield by type of loan for the three months ended March 31, 2021 and 2020.
Three months ended 
March 31, 2021		Three months ended 
March 31, 2020
(Dollars in thousands)Average
balance		Tax
equivalent 
yield		Average
balance		Tax
equivalent 
yield
Home equity loans$175,496 3.91 %$223,069 4.77 %
Installment loans1,658,098 4.91 %1,459,790 5.35 %
Real estate loans1,197,687 3.89 %1,267,754 4.27 %
Commercial loans (1)
4,104,900 4.50 %3,527,269 5.15 %
Other2,673 13.32 %4,255 11.54 %
Total loans and leases before allowance$7,138,854 4.48 %$6,482,137 5.02 %

(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 $173,000 for the three months ended March 31, 2021 and $140,000 for the same period of 2020.

Loan interest income for the three months ended March 31, 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, for the three months ended March 31, 2021 only, interest income related to PPP loans. Excluding this income, the yield on home equity loans was 3.49%, the yield on installment loans was unchanged at 4.91%, the yield on real estate loans was 3.85%, the yield on commercial loans was 4.27% and the yield on total loans and leases before allowance was 4.34% for the three months ended March 31, 2021, and the yield on home equity loans was 4.60%, the yield on installment loans was 5.34%, the yield on real estate loans was 4.24%, the yield on commercial loans was 5.00% and the yield on total loans and leases before allowance was 4.92% for the three months ended March 31, 2020.

Cost of Deposits: Average interest bearing deposit balances decreased $131 million, or 2.5%, to $5,129 million for the first quarter of 2021, compared to $5,260 for the first quarter of 2020. The average cost of funds on deposit balances decreased by 65 basis points to 0.16% for the first quarter of 2021, compared to 0.81% for the first quarter of 2020.

The table below shows for the three months ended March 31, 2021 and 2020, the average balance and cost of funds by type of deposit.

Three months ended 
March 31, 2021		Three months ended 
March 31, 2020
(Dollars in thousands)Average
balance		Cost of fundsAverage
balance		Cost of funds
Transaction accounts$1,457,617 0.02 %$1,714,506 0.59 %
Savings deposits and clubs2,823,920 0.04 %2,435,260 0.63 %
Time deposits847,820 0.76 %1,110,619 1.55 %
Total interest bearing deposits$5,129,357 0.16 %$5,260,385 0.81 %

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Deposit interest expense for the three months ended March 31, 2021 and 2020 included the accretion of purchase accounting adjustments related to the acquisitions of NewDominion and Carolina Alliance. Excluding this income, the cost of funds for time deposits was 0.77% and the cost of total interest bearing deposits was unchanged at 0.16% for the three months ended March 31, 2021, and the cost of funds for time deposits was 1.58% and the cost of total interest bearing deposits was 0.82% for the three months ended March 31, 2020.

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

Loans (1) (3)
Investments (2)
Money Market
Instruments
Total(3)
2018 - year4.98 %2.72 %1.93 %4.46 %
2019 - year5.19 %2.76 %2.33 %4.70 %
2020 - year4.71 %2.66 %0.26 %4.28 %
2021 - first three months4.48 %2.53 %0.11 %3.96 %
(1) Loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $173,000 for the three months ended March 31, 2021, and $623,000, $576,000 and $528,000 for the years ended December 31, 2020, 2019 and 2018, respectively.
(2) Interest income on tax-exempt investment securities includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $541,000 for the three months ended March 31, 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 three months ended March 31, 2021 and for the years ended December 31, 2020, 2019 and 2018 included $105,000, $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 $1.1 million, $4.4 million, $5.2 million and $1.1 million of the accretion of purchase accounting adjustments related to the acquisitions of NewDominion and Carolina Alliance. Interest income for the three months ended March 31, 2021 and for the year ended December 31, 2020 included $5.2 million and $16.7 million of income related to PPP loans. Excluding all of these sources of income, the yield on loans was 4.34%, 4.63%, 5.09% and 4.89%, for the three months ended March 31, 2021, and for the years ended December 31, 2020, 2019 and 2018, respectively, and the yield on earning assets was 3.82%, 4.20%, 4.62% and 4.40%, for the three months ended March 31, 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 three months ended March 31, 2021 and for the years ended December 31, 2020, 2019 and 2018.

Interest bearing deposits (1)
Short-term borrowingsLong-term debt
Total (1)
2018 - year0.72 %0.74 %2.38 %0.86 %
2019 - year1.01 %1.15 %2.77 %1.12 %
2020 - year0.41 %0.40 %3.55 %0.52 %
2021 - first three months0.16 %0.23 %4.21 %0.32 %
(1) Interest expense for the three months ended March 31, 2021 and the years ended December 31, 2020, 2019 and 2018 included $21,000, $226,000, $593,000 and $287,000 of the accretion of purchase accounting adjustments related to the acquisitions of NewDominion (for all of these periods) and Carolina Alliance (for the three months ended March 31, 2021 and the years ended December 31, 2020 and 2019). Excluding this income, for the three months ended March 31, 2021 and the years ended December 31, 2020, 2019 and 2018, the cost of funds on interest bearing deposits was 0.16%, 0.41%, 1.02% and 0.73%, respectively, and the cost of interest bearing liabilities was 0.32%, 0.53%, 1.13% and 0.86%, respectively.

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Credit Metrics and (Recovery of) Provision for 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.

Section 540 of the Consolidated Appropriations Act, 2021, amended Section 4014 of the CARES Act by extending the relief period provided in the CARES Act. The Consolidated Appropriations Act, 2021, modified the CARES Act so that temporary relief will expire on the earlier of the first day of the fiscal year that begins after the date on which the national emergency concerning COVID-19 terminates or January 1, 2022.

Park elected to delay the implementation of ASU 2016-13 following the approval of the CARES Act and continued to use the incurred loss methodology for estimating the allowance for credit losses in 2020. ASU 2016-13 requires financial institutions to calculate an allowance utilizing a reasonable and supportable forecast period which Park has established as a one-year period. In the unprecedented circumstance surrounding the COVID-19 pandemic and the response thereto, Park believed that adopting ASU 2016-13 in the first quarter of 2020 would have added an unnecessary level of subjectivity and volatility to the calculation of the allowance for credit losses. With the approval of the Consolidated Appropriations Act, 2021, management elected to further delay adoption of ASU 2016-13 to January 1, 2021. This allowed Park to utilize the CECL standard for the entire year of adoption.

The adoption of ASU 2016-13 on January 1, 2021 resulted in a $6.1 million increase to the allowance for credit losses and a $3.9 million increase to the allowance for unfunded credit losses. A cumulative effect adjustment resulting in a $8.0 million decrease to retained earnings and a $2.1 million increase to deferred tax assets was also recorded.

The table below provides additional information on the (recovery of) provision for credit losses for the three-month periods ended March 31, 2021 and 2020.

Three Months Ended
March 31,
(Dollars in thousands)20212020
Allowance for credit losses:
Beginning balance$85,675 $56,679 
Cumulative change in accounting principle; adoption of ASU 2016-136,090 — 
Charge-offs1,701 2,685 
Recoveries1,677 2,356 
Net charge-offs24 329 
(Recovery of) provision for credit losses(4,855)5,153 
Ending balance$86,886 61,503 
Net charge-offs as a % of average loans (annualized)— %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 March 31, 2021, December 31, 2020 and March 31, 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)3/31/2021 (CECL methodology)1/1/2021 (CECL methodology)12/31/2020 (Incurred Loss methodology)3/31/2020 (Incurred Loss methodology)
Total allowance for credit losses$86,886 $91,764 $85,675 $61,503 
Allowance on PCD loans (PCI loans for years 2020 and prior)— 52 167 119 
Allowance on purchased loans excluded from the general reserve— — 678 — 
Specific reserves on individually evaluated loans4,962 5,434 5,434 5,531 
General reserves on collectively evaluated loans$81,924 $86,278 $79,396 $55,853 
Total loans$7,168,745 $7,177,537 $7,177,785 $6,522,519 
PCD loans (PCI loans for years 2020 and prior) (1)
10,284 10,903 11,153 13,765 
Purchased loans excluded from collectively evaluated loans— — 360,056 489,843 
Individually evaluated loans100,407 108,274 108,407 85,646 
Collectively evaluated loans$7,058,054 $7,058,360 $6,698,169 $5,933,265 
Allowance for credit losses as a % of period end loans1.21 %1.28 %1.19 %0.94 %
Allowance for credit losses as a % of period end loans (excluding PPP loans) (2)
1.28 %1.34 %1.25 %N.A.
General reserve as a % of collectively evaluated loans 1.16 %1.22 %1.19 %0.94 %
General reserve as a % of collectively evaluated loans (excluding PPP loans) (2)
1.22 %1.28 %1.24 %N.A.

(1) Excludes PCI/PCD loans which are individually evaluated for impairment due to additional credit deterioration post acquisition. These loans had a balance of $0 at each of March 31, 2021, January 1, 2021, and December 31, 2020, and a balance of $1,000 at March 31, 2020.
(2) Excludes $387.0 million of PPP loans and $389,000 in related allowance at March 31, 2021, $331.6 million of PPP loans and $337,000 in related allowance at January 1, 2021, and $331.6 million of PPP loans and $337,000 in related allowance at December 31, 2020. No PPP loans were outstanding at March 31, 2020.

The allowance for credit losses of $86.9 million at March 31, 2021 represented a $1.2 million, or 1.4%, increase compared to $85.7 million at December 31, 2020. This increase was largely due to the adoption of ASU 2016-13, offset by a decline in the general reserves on collectively evaluated loans since January 1, 2021. The decline since January 1, 2021 was largely due to consideration of improved economic forecasts while balancing the risks associated with the COVID-19 pandemic, particularly in high risk portfolios such as hotel and accommodations, restaurants and food service and strip shopping centers. Much is still unknown about the long-term economic impact of the COVID-19 pandemic and management will continue to evaluate this estimate of expected losses as new information becomes available. 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 March 31, 2021, December 31, 2020 and March 31, 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 March 31, 2021, December 31, 2020 and March 31, 2020.
 
Park National Corporation - Nonperforming Assets 
(In thousands)March 31, 2021December 31, 2020March 31, 2020
Nonaccrual loans$114,708 $117,368 $90,354 
Accruing TDRs14,817 20,788 27,168 
Loans past due 90 days or more802 1,458 1,789 
Total nonperforming loans$130,327 $139,614 $119,311 
OREO844 1,431 3,600 
Other nonperforming assets3,164 3,164 3,599 
Total nonperforming assets$134,335 $144,209 $126,510 
Percentage of nonaccrual loans to total loans1.60 %1.64 %1.39 %
Percentage of nonperforming loans to total loans1.82 %1.95 %1.83 %
Percentage of nonperforming assets to total loans1.87 %2.01 %1.94 %
Percentage of nonperforming assets to total assets1.35 %1.55 %1.45 %
 
Included in the OREO totals above were $594,000 of SEPH OREO at both March 31, 2021 and December 31, 2020 and $929,000 of SEPH OREO at March 31, 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 day for commercial loans and 120 days for all other loans. As a result, loans may be classified as nonaccrual despite being current with their contractual terms. The following table details the delinquency status of nonaccrual loans at March 31, 2021, December 31, 2020 and March 31, 2020. Loans are classified as current if they are less than 30 days past due.

March 31, 2021December 31, 2020March 31, 2020
(In thousands)BalancePercent of Total LoansBalancePercent of Total LoansBalancePercent of Total Loans
Nonaccrual loans - current$94,572 1.32 %$92,600 1.29 %$66,773 1.02 %
Nonaccrual loans - past due20,136 0.28 %24,768 0.35 %23,581 0.36 %
Total nonaccrual loans$114,708 1.60 %$117,368 1.64 %$90,354 1.39 %
 
Credit Quality Indicators: When determining the quarterly credit loss provision, Park reviews the grades of commercial loans. These loans are graded from 1 to 8. A grade of 1 indicates little or no credit risk and a grade of 8 is considered a loss. Commercial loans that are pass-rated (graded an 1 through a 4) are considered to be of acceptable credit risk. Commercial loans graded a 5 (special mention) are considered to be watch list credits and a higher PD is applied to these loans. Commercial loans graded a 6 (substandard), also considered to be watch list credits, represent higher credit risk than those rated special mention and, as a result, a higher PD is applied to these loans. Commercial loans that are graded a 7 (doubtful) are shown as nonperforming and Park charges these loans down to their fair value by taking a partial charge-off or recording a specific reserve. Any commercial loan graded an 8 (loss) is completely charged-off.

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

Commercial loans * (In thousands)March 31, 2021December 31, 2020March 31, 2020
Pass-rated$3,912,572 $3,893,205 $3,432,227 
Special mention109,561 102,812 26,624 
Substandard436 109 203 
Impaired100,407 108,407 85,646 
Accruing PCI9,766 10,296 12,804 
Total $4,132,742 $4,114,829 $3,557,504 

* 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 $110.0 million of collectively evaluated commercial loans included on the watch list at March 31, 2021, compared to $102.9 million at December 31, 2020, and $26.8 million at March 31, 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 $83.2 million increase in collectively evaluated commercial watch list loans from March 31, 2020 to March 31, 2021 was largely due to $71.3 million of hotels and accommodation loans that were downgraded to special mention or substandard as a result of the impact of COVID-19. In addition to the $71.3 million in hotels and accommodation loans that were downgraded to special mention, $22.8 million in hotels and accommodation 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 27 months. Delinquent and accruing loans were $13.8 million, or 0.19% of total loans at March 31, 2021, compared to $20.1 million, or 0.28% of total loans at December 31, 2020, and $23.8 million, or 0.37% of total loans at December 31, 2019.

Individually Evaluated Loans: Loans that do not share risk characteristics are evaluated on an individual basis. Park has determined that any commercial loans which have been placed on nonaccrual status or classified as TDRs will be individually evaluated and are labeled as 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 estimates.

Impaired commercial loans were $100.4 million at March 31, 2021, an decrease of $8.0 million, compared to $108.4 million at December 31, 2020 and an increase of $14.8 million, compared to $85.6 million at March 31, 2020. The $100.4 million of impaired commercial loans at March 31, 2021 included $3.4 million of loans modified in a TDR which are currently on accrual status and performing in accordance with the restructured terms, down from $8.8 million at December 31, 2020.

At March 31, 2021, Park had taken partial charge-offs of $589,000 related to the $100.4 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

Upon adoption of CECL on January 1, 2021, $52,000 of credit mark on PCD loans was reclassified to the allowance for credit losses. At March 31, 2021, there was no allowance for credit losses on PCD loans. The carrying amount of loans acquired with deteriorated credit quality at March 31, 2021 and December 31, 2020 was $10.3 million and $11.2 million, respectively.
 
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Allowance for Credit Losses: The allowance for credit losses is calculated on a quarterly basis. The methodology for calculating the ACL and assumptions made as of March 31, 2021 are detailed below.

Quantitative Considerations
The ACL is primarily calculated utilizing a discounted cash flow (“DCF”) model. Key inputs and assumption used in this model are discussed below:
•Forecast model - For each portfolio segment, a LDA was performed in order to identify appropriate loss drivers and create a regression model for use in forecasting cash flows. The LDA analysis utilized Park's own FFIEC Call Report data for the commercial, financial and agricultural and residential real estate portfolio segments. Peer data was incorporated into the analysis for the commercial real estate, construction real estate, and consumer portfolio segments. Park plans to update the LDA annually; however, due to the impact of COVID-19, the LDA analysis was last updated in the fourth quarter of 2019.
•Probability of default – PD is the probability that an asset will be in default within a given time frame. Park has defined default as 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. 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 risk 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%. Management believes that the resulting quantitative reserve appropriately balances economic improvement with the ongoing risks.

Qualitative Considerations
In addition to the quantitative model, management considers the need for qualitative adjustment for risks not considered in the DCF. Factors that are considered by management in determining loan collectability and the appropriate level of the ACL are listed below:
•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 PNB and GFSC.
◦Level of and trend in loan delinquencies, troubled loans, commercial watch list 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 the 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.
•The extent that there is government assistance (stimulus).
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During 2020, Park added an additional reserve for three industries at particularly high risk due to the 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 high 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 March 31, 2021, additional reserves totaling $4.5 million were added for these portfolios on top of the quantitative reserve already calculated. A breakout of the 4-rated balances within these portfolios and the additional reserve related to these portfolios is detailed in the following table.

March 31, 2021
(in thousands)4-Rated BalanceAdditional Reserve
Hotels and accommodations$116,076 $1,745 
Restaurants and food service30,414 687 
Strip shopping centers185,159 2,045 
Total$331,649 $4,477 

Additionally, management applied a 1% reserve to all hotels and accommodations loans in the general reserve population to account for increased valuation risk. At March 31, 2021, Park's originated hotels and accommodation loans had a balance of $189.0 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, 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 March 31, 2021, Park had $387.0 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.

Other Income
 
Other income increased by $11.6 million to $34.1 million for the quarter ended March 31, 2021, compared to $22.5 million for the first quarter of 2020. The increase for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily due to increases in other service income; gain (loss) on equity securities, net; debit card fee income; income from fiduciary activities and miscellaneous income, partially offset by declines in service charges on deposit accounts.

The following table is a summary of the changes in the components of other income:
 
Three months ended
March 31,
(In thousands)20212020Change
Income from fiduciary activities$8,173 $7,113 $1,060 
Service charges on deposit accounts2,054 2,528 (474)
Other service income9,617 3,766 5,851 
Debit card fee income6,086 4,960 1,126 
Bank owned life insurance income1,165 1,248 (83)
ATM fees530 412 118 
Loss on sale of OREO, net(33)(196)163 
Gain (loss) on equity securities, net1,810 (973)2,783 
Other components of net periodic pension benefit income2,038 1,988 50 
Miscellaneous2,649 1,640 1,009 
Total other income$34,089 $22,486 $11,603 
 
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Income from fiduciary activities increased by $1.1 million, or 14.9%, to $8.2 million for the three months ended March 31, 2021, compared to $7.1 million for the same period of 2020. Fiduciary fees charged are generally based on the market value of customer accounts. The average market value for assets under management for the three months ended March 31, 2021 was $7,066 million compared to $5,860 million for the three months ended March 31, 2020.

Service charges on deposit accounts decreased by $474,000, or 18.8%, to $2.1 million for the three months ended March 31, 2021, compared to $2.5 million for the same period of 2020. The declines were largely a result of a decline in non-sufficient funds (NSF) fee income.

Other service income increased by $5.9 million, or 155.4%, to $9.6 million for the three months ended March 31, 2021, compared to $3.8 million for the same period of 2020. The primary reasons for the increase were a $2.7 million increase in fee income related to mortgage loan originations to be sold in the secondary market, and a $2.8 million increase in mortgage servicing rights income, which included an $852,000 increase in income due to a decrease in the mortgage servicing rights valuation allowance. Mortgage origination volume increased by $126.0 million for the three months ended March 31, 2021, compared to the same period of 2020.

Debit card fee income increased $1.1 million, or 22.7%, to $6.1 million for the three months ended March 31, 2021, compared to $5.0 million for the same period of 2020. The increase in 2021 was attributable to a continued increase in the volume of debit card transactions. The sales volume of debit card transactions for the three months ended March 31, 2021 increased 24.1% from the same period in 2020.

During the three months ended March 31, 2020, investment securities with a book value of $757,000 were sold at a net gain of $177,000.

Gain (loss) on equity securities, net increased $2.8 million, to a net gain of $1.8 million for the three months ended March 31, 2021, compared to a net loss of $973,000 for the same period in 2020. The $2.8 million increase for the three months ended March 31, 2021 was related to a $1.6 million increase in the gain (loss) on equity securities held at NAV, which went from a $204,000 loss for the three months ended March 31, 2020 to a $1.4 million gain for the three months ended March 31, 2021, and a $1.2 million increase in unrealized gain (loss) on equity securities, which went from a $769,000 unrealized loss for the three months ended March 31, 2020 to a $435,000 unrealized gain for the three months ended March 31, 2021.

Miscellaneous income increased $1.0 million, or 61.5%, to $2.6 million for the three months ended March 31, 2021, compared to $1.6 million for the same period of 2020. The increase was primarily the result of increases in printed check sales income, an insurance refund received on a consumer loan insurance product and increases in wire transfer fees.

Other Expense

Other expense increased by $1.6 million to $67.9 million for the three months ended March 31, 2021, compared to $66.3 million for the same period of 2020.

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

 Three months ended
March 31,
(In thousands)20212020Change
Salaries$29,896 $28,429 $1,467 
Employee benefits10,201 10,043 158 
Occupancy expense3,640 3,480 160 
Furniture and equipment expense2,610 4,319 (1,709)
Data processing fees7,712 2,492 5,220 
Professional fees and services5,664 7,066 (1,402)
Marketing1,491 1,486 5 
Insurance1,691 1,550 141 
Communication1,122 1,155 (33)
State tax expense1,108 1,145 (37)
Amortization of intangible assets479 606 (127)
Miscellaneous2,251 4,505 (2,254)
Total other expense$67,865 $66,276 $1,589 

Salaries increased by $1.5 million, or 5.2%, to $29.9 million for the three months ended March 31, 2021, compared to $28.4 million for the same period in 2020. The increase was due to a $1.1 million increase in officer incentive compensation expense, a $630,000 increase 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, and a $582,000 increase in share-based compensation expense, partially offset by a $806,000 decrease in base salary expense.

Furniture and equipment expense decreased by $1.7 million, or 39.6%, to $2.6 million for the three months ended March 31, 2021, compared to $4.3 million for the same period in 2020. The decrease 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.

Data processing fees increased by $5.2 million, to $7.7 million for the three months ended March 31, 2021, compared to $2.5 million for the same period of 2020. The increase was related to increased mortgage processing costs as a result of increased volume, debit card processing costs and other data processing and software costs, partially due to the previously mentioned change in classification from furniture and equipment expense and a change in expensing software costs from other fees within professional fees and services to data processing fees.

Professional fees and services decreased $1.4 million, or 19.8%, to $5.7 million for the three months ended March 31, 2021, compared to $7.1 million for the same period of 2020. The decrease in professional fees and services was primarily related to decreased title, appraisal and credit costs, decreases in other fees (due to the change in expensing software costs under data processing fees) and decreased audit and exams cost.

The subcategory "miscellaneous" other expense includes expenses for supplies, travel, charitable contributions, and other miscellaneous expense. The subcategory miscellaneous other expense decreased $2.3 million, to $2.3 million for the three months period ended March 31, 2021, compared to $4.5 million for the same period of 2020. The $2.3 million decrease was related to a $1.8 million prepayment penalty on FHLB borrowings paid during the three months ended March 31, 2020, as well as decreases in training and travel expenses and supplies, partially offset by 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
(in thousands, except share and per share data)March 31, 2021March 31, 2020Affected Line Item
Net interest income$80,734 $76,283 
less purchase accounting accretion related to NewDominion and Carolina Alliance acquisitions1,110 1,288 Interest and fees on loans
less purchase accounting accretion related to NewDominion and Carolina Alliance acquisitions21 90 Interest on deposits
less interest income on former Vision Bank relationships105 77 Interest and fees on loans
Net interest income - adjusted$79,498 $74,828 
(Recovery of) provision for credit losses$(4,855)$5,153 
less recoveries on former Vision Bank relationships(257)(764)Provision for credit losses
(Recovery of) provision for credit losses - adjusted$(4,598)$5,917 
Other income$34,089 $22,486 
less other service income related to former Vision Bank relationships58 — Miscellaneous income
Other income - adjusted$34,031 $22,486 
Other expense$67,865 $66,276 
less merger-related expenses related to NewDominion and Carolina Alliance acquisitions8 87 Salaries
less merger-related expenses related to NewDominion and Carolina Alliance acquisitions— 9 Furniture and equipment expense
less merger-related expenses related to NewDominion and Carolina Alliance acquisitions— 143 Professional fees and services
less merger-related expenses related to NewDominion and Carolina Alliance acquisitions4 4 Insurance
less COVID-19 related expenses634 262 Salaries
less severance and restructuring charges108 88 Salaries
less management and consulting expenses related to collection of payments on former Vision Bank loan relationships107 — Professional fees and services
less rebranding initiative related expenses— 75 Furniture and equipment expense
less rebranding initiative related expenses589 — Data processing fees
less rebranding initiative related expenses29 117 Professional fees and services
less rebranding initiative related expenses— 2 Communication
less rebranding initiative related expenses— 76 Miscellaneous
less core deposit intangible amortization related to NewDominion and Carolina Alliance acquisitions479 606 Amortization of intangible assets
less FHLB prepayment penalty— 1,793 Miscellaneous
Other expense - adjusted$65,907 $63,014 
Tax effect of adjustments to net income identified above (7)
$85 $219 
Net income - reported$42,831 $22,372 
Net income - adjusted$43,153 $23,196 
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THREE MONTHS ENDED
(in thousands, except share and per share data)March 31, 2021March 31, 2020Affected Line Item
Diluted EPS$2.61 $1.36 
Diluted EPS, adjusted (6)
$2.62 $1.41 
Annualized return on average assets (1)(2)
1.81 %1.04 %
Annualized return on average assets, adjusted (1)(2)(6)
1.82 %1.07 %
Annualized return on average tangible assets (1)(2)(4)
1.84 %1.06 %
Annualized return on average tangible assets, adjusted (1)(2)(4)(6)
1.85 %1.10 %
Annualized return on average shareholders' equity (1)(2)
16.63 %9.16 %
Annualized return on average shareholders' equity, adjusted (1)(2)(6)
16.76 %9.50 %
Annualized return on average tangible equity (1)(2)(3)
19.84 %11.09 %
Annualized return on average tangible equity, adjusted (1)(2)(3)(6)
19.98 %11.50 %
Efficiency ratio (5)
58.74 %66.61 %
Efficiency ratio, adjusted (5)(6)
57.69 %64.27 %
Annualized net interest margin (5)
3.76 %3.93 %
Annualized net interest margin, adjusted (5)(6)
3.70 %3.86 %
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Financial Reconciliations
(1) Reported measure uses net income
(2) Averages are for the three months ended March 31, 2021 and March 31, 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
March 31, 2021March 31, 2020
AVERAGE SHAREHOLDERS' EQUITY$1,044,412 $981,976 
Less: Average goodwill and other intangible assets168,690 170,909 
AVERAGE TANGIBLE EQUITY$875,722 $811,067 
(4) Net income for each period divided by average tangible assets during the period. Average tangible assets equals average assets less average goodwill and other intangible assets, in each case during the applicable period.
RECONCILIATION OF AVERAGE ASSETS TO AVERAGE TANGIBLE ASSETS
THREE MONTHS ENDED
March 31, 2021March 31, 2020
AVERAGE ASSETS$9,612,542 $8,679,789 
Less: Average goodwill and other intangible assets168,690 170,909 
AVERAGE TANGIBLE ASSETS$9,443,852 $8,508,880 
(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% corporate federal 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
March 31, 2021March 31, 2020
Interest income$85,173 $88,909 
Fully taxable equivalent adjustment714 725 
Fully taxable equivalent interest income$85,887 $89,634 
Interest expense4,439 12,626 
Fully taxable equivalent net interest income$81,448 $77,008 
(6) Adjustments to net income for each period presented are detailed in the non-GAAP reconciliations of net interest income, (recovery of) provision for credit losses, other income and other expense.
(7) The tax effect of adjustments to net income was calculated assuming a 21% corporate federal income tax rate.

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Income Tax
 
Income tax expense was $9.0 million for the first quarter of 2021 and $5.0 million the first quarter of 2020. The effective income tax rate for the first quarter of 2021 was 17.3%, compared to 18.2% 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. Park expects permanent federal income tax differences for the 2021 year will be approximately $5.8 million.

Comparison of Financial Condition
At March 31, 2021 and December 31, 2020
 
Changes in Financial Condition
 
Total assets increased by $635.0 million, or 6.8%, during the first three months of 2021 to $9,914 million at March 31, 2021, compared to $9,279 million at December 31, 2020. This increase was primarily due to the following:

•Cash and cash equivalents increased by $572.8 million, or 154.6%, to $943.3 million at March 31, 2021, compared to $370.5 million at December 31, 2020. Money market instruments were $811.9 million at March 31, 2021, compared to $214.9 million at December 31, 2020 and cash and due from banks were $131.4 million at March 31, 2021, compared to $155.6 million at December 31, 2020.
•Investment securities increased $51.4 million, or 4.6%, to $1,176 million at March 31, 2021, compared to $1,125 million at December 31, 2020.
•Other assets increased by $16.4 million, or 348.1%, to $21.1 million at March 31, 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 $7.1 million, or 6.9%, to $110.6 million at March 31, 2021, compared to $103.5 million at December 31, 2020.
•Loans decreased by $9.0 million, or 0.1%, to $7,169 million at March 31, 2021, compared to $7,178 million at December 31, 2020. PPP loans were $387.0 million at March 31, 2021 compared to $331.6 million at December 31, 2020.

Total liabilities increased by $634.0 million, or 7.7%, during the three months of 2021 to $8,873 million at March 31, 2021, from $8,239 million at December 31, 2020. This increase was primarily due to the following:

•Total deposits increased by $663.8 million, or 8.8%, to $8,236 million at March 31, 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 March 31, 2021 and December 31, 2020, Park had $809.1 million and $710.1 million, respectively, in OWS insured cash sweep deposits which were off-balance sheet.
•Other liabilities increased $14.6 million, or 26.7%, to $69.2 million at March 31, 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 $4.0 million to $4.1 million at March 31, 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 $36.8 million, or 10.8%, to $305.4 million at March 31, 2021, compared to $342.2 million at December 31, 2020.
•Unfunded commitments in affordable housing tax credit investments decreased by $6.1 million, or 20.8%, to $23.2 million at March 31, 2021, compared to $29.3 million at December 31, 2020.
•Long-term borrowings decreased by $2.5 million, or 7.7%, to $30.0 million at March 31, 2021, compared to $32.5 million at December 31, 2020.



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Total shareholders’ equity increased by $1.0 million, or 0.1%, to $1,041.3 million at March 31, 2021, from $1,040.3 million at December 31, 2020. This increase was primarily due to the following:

•Retained earnings increased by $14.5 million during the period primarily as a result of net income of $42.8 million, partially offset by common share dividends of $20.4 million and the impact of the adoption of ASU 2016-13 of $8.0 million.
•Treasury shares increased by $2.2 million during the period as a result of 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 $13.5 million during the period as a result of unrealized net holding losses on AFS debt securities, net of taxes, of $13.5 million, partially offset by an unrealized gain on cash flow hedging derivatives, net of taxes, of $125,000.
 
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 $45.9 million and $8.8 million for the three months ended March 31, 2021 and 2020, respectively. Net income was the primary source of cash from operating activities for each of the three-month periods ended March 31, 2021 and 2020.

Cash used in investing activities was $75.5 million and cash provided by investing activities was $32.7 million for the three months ended March 31, 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 $67.2 million for the three months ended March 31, 2021 and provided cash of $48.1 million for the three months ended March 31, 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 $616,000 for the three months ended March 31, 2021 and cash used by the net increase in the loan portfolio was $6.8 million for the three months ended March 31, 2020.

Cash provided by financing activities was $602.4 million and $119.5 million for the three months ended March 31, 2021 and 2020, respectively. A major source of cash for financing activities is the net change in deposits. Deposits increased and provided $663.9 million and $237.6 million of cash for the three months ended March 31, 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 three months ended March 31, 2021, net short-term borrowings decreased and used $36.8 million in cash and net long-term borrowings decreased and used $2.5 million in cash. For the three months ended March 31, 2020, net short-term borrowings decreased and used $37.3 million in cash and net long-term borrowings decreased and used $52.5 million in cash. Finally, cash declined by $20.2 million and $20.0 million for the three months ended March 31, 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, the capability to securitize or package loans for sale, and a $15.0 million revolving line of credit with another financial institution, which had no outstanding balance as of March 31, 2021. The Corporation’s loan to asset ratio was 72.31% at March 31, 2021, compared to 77.35% at December 31, 2020 and 74.81% at March 31, 2020. Cash and cash equivalents were $943.3 million at March 31, 2021, compared to $370.5 million at December 31, 2020 and $320.9 million at March 31, 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 March 31, 2021 was $1,041.3 million, or 10.5% of total assets, compared to $1,040.3 million, or 11.2% of total assets, at December 31, 2020 and $981.9 million, or 11.3% of total assets, at March 31, 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 AFS debt securities in computing regulatory capital. During the first quarter of 2015, Park adopted the Basel III regulatory capital framework as approved by the federal banking agencies. The adoption of this framework modified the calculation of the various capital ratios, added an additional ratio, common equity tier 1, and revised the adequately and well-capitalized thresholds under the prompt corrective action regulations applicable to PNB. Additionally, under this framework, in order to avoid limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers, Park must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was fully phased in at 2.50% on January 1, 2019. The amounts shown below as the adequately capitalized ratio plus capital conservation buffer includes the 2.50% buffer. The Federal Reserve Board also adopted capital requirements Park must maintain to be deemed "well-capitalized" and remain a financial holding company.

Park and PNB met each of the well capitalized ratio guidelines applicable to them at March 31, 2021. The following table indicates the capital ratios for PNB and Park at March 31, 2021 and December 31, 2020.

As of March 31, 2021
 LeverageTier 1
Risk-Based		Common Equity Tier 1Total
Risk-Based
The Park National Bank8.50 %10.98 %10.98 %12.56 %
Park National Corporation9.49 %12.22 %12.02 %15.83 %
Adequately capitalized ratio4.00 %6.00 %4.50 %8.00 %
Adequately capitalized ratio plus capital conservation buffer4.00 %8.50 %7.00 %10.50 %
Well capitalized ratio (PNB)5.00 %8.00 %6.50 %10.00 %
Well capitalized ratio (Park)N/A6.00 %N/A10.00 %

As of December 31, 2020
 LeverageTier 1
Risk-Based		Common Equity Tier 1Total
Risk-Based
The Park National Bank8.59 %10.66 %10.66 %12.16 %
Park National Corporation9.63 %11.92 %11.72 %15.43 %
Adequately capitalized ratio4.00 %6.00 %4.50 %8.00 %
Adequately capitalized ratio plus capital conservation buffer4.00 %8.50 %7.00 %10.50 %
Well capitalized ratio (PNB)5.00 %8.00 %6.50 %10.00 %
Well capitalized ratio (Park)N/A6.00 %N/A10.00 %

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 three 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)March 31,
2021		December 31, 2020
Loan commitments$1,343,116 $1,372,182 
Standby letters of credit$16,237 $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 March 31, 2021, Park’s twelve-month cumulative rate sensitivity gap was a positive (assets exceeding liabilities) $1,548.5 million or 17.0% 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 March 31, 2021, the earnings simulation model projected that net income would decrease by 2.2% using a rising interest rate scenario and would decrease by 11.9% in a declining interest rate scenario. At March 31, 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 other changes in Park's internal control over financial reporting that occurred during the period covered by this report 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 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 March 31, 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:
PeriodTotal 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)
January 1 through January 31, 2021— $— — 1,332,747 
February 1 through February 28, 2021— — — 1,332,747 
March 1 though March 31, 2021— — — 1,332,747 
Total— $— — 1,332,747 
(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 as treasury shares for subsequent issuance and delivery under the 2017 Employees LTIP and the 2017 Non-Employee Directors LTIP.
92

    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
2.2
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)
93
Table of Contents
3.1(d)
3.1(e)
3.1(f)
3.1(g)
3.1(h)
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)
3.2(c)
3.2(d)
3.2(e)
10.1
10.2
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Table of Contents
31.1
31.2
32.1
32.2
101The following information from Park’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 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 March 31, 2021 and December 31, 2020 (unaudited); (ii) the Consolidated Condensed Statements of Income for the three months ended March 31, 2021 and 2020 (unaudited); (iii) the Consolidated Condensed Statements of Comprehensive Income for the three months ended March 31, 2021 and 2020 (unaudited); (iv) the Consolidated Condensed Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2021 and 2020 (unaudited); (v) the Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (unaudited); and (vi) the Notes to Unaudited Consolidated Condensed Financial Statements (electronically submitted herewith). **
104Cover 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. A copy of any omitted attachment will be furnished supplementally to the SEC upon its request.

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.





95
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: May 6, 2021 /s/ David L. Trautman
  David L. Trautman
  Chairman of the Board and Chief Executive Officer
  (Principal Executive Officer and Duly Authorized Officer)
   
DATE: May 6, 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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