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 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 impaired 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 in accordance with its commercial and real estate loan policies.

Assets and Liabilities Measured at Fair Value on a Recurring Basis:

The following table presents assets and liabilities measured at fair value on a recurring basis:



Fair Value Measurements at June 30, 2016 using:
(In thousands)	Level 1		Level 2		Level 3		Balance at June 30, 2016
Assets
Investment securities:
Obligations of U.S. Treasury and other U.S. Government sponsored entities	$	—	$	360,367	$	—	$	360,367
U.S. Government sponsored entities’ asset-backed securities	—		942,579		—		942,579
Equity securities	1,807		—		821		2,628
Mortgage loans held for sale	—		12,125		—		12,125
Mortgage IRLCs	—		277		—		277

Liabilities
Fair value swap	$	—	$	—	$	226	$	226



Fair Value Measurements at December 31, 2015 using:
(In thousands)	Level 1		Level 2		Level 3		Balance at December 31, 2015
Assets
Investment securities:
Obligations of U.S. Treasury and other U.S. Government sponsored entities	$	—	$	522,063	$	—	$	522,063
U.S. Government sponsored entities’ asset-backed securities	—		911,493		—		911,493
Equity securities	1,941		—		769		2,710
Mortgage loans held for sale	—		7,306		—		7,306
Mortgage IRLCs	—		165		—		165

Liabilities
Fair value swap	$	—	$	—	$	226	$	226

There were no transfers between Level 1 and Level 2 during the three or six months ended June 30, 2016 or 2015. Management’s policy is to transfer assets or liabilities from one level to another when the methodology to obtain the fair value changes such that there are more or fewer unobservable inputs as of the end of the reporting period.

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

Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows.

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 (IRLCs): 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 security prices for similar product types and, therefore, are classified in Level 2.

The tables below are a reconciliation of the beginning and ending balances of the Level 3 inputs for the three and six months ended June 30, 2016 and 2015, for financial instruments measured on a recurring basis and classified as Level 3:

Level 3 Fair Value Measurements

Three months ended June 30, 2016 and 2015



(In thousands)	Equity Securities		Fair value swap
Balance at April 1, 2016	$	813	$	(226	)
Total gains/(losses)
Included in earnings – realized	—		—
Included in earnings – unrealized	—		—
Included in other comprehensive income	8		—
Purchases, sales, issuances and settlements, other	—		—
Re-evaluation of fair value swap, recorded in other expense	—		—
Balance at June 30, 2016	$	821	$	(226	)

Balance at April 1, 2015	$	739	$	(226	)
Total gains/(losses)
Included in earnings – realized	—		—
Included in earnings – unrealized	—		—
Included in other comprehensive income	5		—
Purchases, sales, issuances and settlements, other	—		—
Re-evaluation of fair value swap	—		—
Balance at June 30, 2015	$	744	$	(226	)

Level 3 Fair Value Measurements

Six months ended June 30, 2016 and 2015



(In thousands)	Equity Securities			Fair value swap
Balance at January 1, 2016	$	769		$	(226	)
Total gains/(losses)
Included in earnings – realized	—			—
Included in earnings – unrealized	—			—
Included in other comprehensive income	52			—
Purchases, sales, issuances and settlements, other	—			—
Re-evaluation of fair value swap, recorded in other expense	—			—
Balance at June 30, 2016	$	821		$	(226	)

Balance at January 1, 2015	$	776		$	(226	)
Total gains/(losses)
Included in earnings – realized	—			—
Included in earnings – unrealized	—			—
Included in other comprehensive income	(32		)	—
Purchases, sales, issuances and settlements, other	—			—
Re-evaluation of fair value swap	—			—
Balance at June 30, 2015	$	744		$	(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 described below:

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value have been partially charged-off or receive specific allocations of the allowance for loan 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 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.

Other Real Estate Owned (OREO): Assets acquired through or in lieu of loan foreclosure are initially recorded at fair value less costs to sell when acquired. The carrying value of OREO is not re-measured to fair value on a recurring basis, but is subject to fair value adjustments when the carrying value exceeds the fair value, less estimated selling costs. Fair value is based on recent real estate appraisals and is updated at least annually. These appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales approach and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral dependent impaired loans and OREO are performed by licensed appraisers. Appraisals are generally obtained to support the fair value of collateral. In general, there are three types of appraisals, real estate appraisals, income approach appraisals, and lot development loan appraisals, received by the Company. 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.

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 are carried at fair value if they have been charged down to fair value or if a specific valuation allowance has been established. 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 to the property's value subsequent to the initial measurement.



Fair Value Measurements at June 30, 2016 using:
(In thousands)	Level 1		Level 2		Level 3		Balance at June 30, 2016
Impaired loans recorded at fair value:
Commercial real estate	$	—	$	—	$	2,465	$	2,465
Construction real estate:
SEPH commercial land and development	—		—		1,700		1,700
Remaining commercial	—		—		1,422		1,422
Residential real estate	—		—		1,929		1,929
Total impaired loans recorded at fair value	$	—	$	—	$	7,516	$	7,516

Mortgage servicing rights	$	—	$	4,872	$	—	$	4,872

OREO:
Commercial real estate	—		—		3,184		3,184
Construction real estate	—		—		3,419		3,419
Residential real estate	—		—		1,516		1,516
Total OREO	$	—	$	—	$	8,119	$	8,119



Fair Value Measurements at December 31, 2015 using:
(In thousands)	Level 1		Level 2		Level 3		Balance at December 31, 2015
Impaired loans recorded at fair value:
Commercial real estate	$	—	$	—	$	3,698	$	3,698
Construction real estate:
SEPH commercial land and development	—		—		2,044		2,044
Remaining commercial	—		—		1,872		1,872
Residential real estate	—		—		1,882		1,882
Total impaired loans recorded at fair value	$	—	$	—	$	9,496	$	9,496

Mortgage servicing rights	$	—	$	1,867	$	—	$	1,867

OREO:
Commercial real estate	—		—		2,796		2,796
Construction real estate	—		—		3,387		3,387
Residential real estate	—		—		2,332		2,332
Total OREO	$	—	$	—	$	8,515	$	8,515

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 loans which are not collateral dependent as well as 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.



	June 30, 2016
(In thousands)	Recorded Investment		Prior Charge-Offs		Specific Valuation Allowance		Carrying Balance
Impaired loans recorded at fair value	$	9,508	$	6,118	$	1,992	$	7,516
Remaining impaired loans	81,336		18,240		4,295		77,041
Total impaired loans	$	90,844	$	24,358	$	6,287	$	84,557



	December 31, 2015
(In thousands)	Recorded Investment		Prior Charge-Offs		Specific Valuation Allowance		Carrying Balance
Impaired loans recorded at fair value	$	11,783	$	10,512	$	2,287	$	9,496
Remaining impaired loans	68,881		18,193		1,904		66,977
Total impaired loans	$	80,664	$	28,705	$	4,191	$	76,473

The expense from credit adjustments related to impaired loans carried at fair value during the three months ended June 30, 2016 and 2015 was $0.4 million and $0.9 million, respectively. The expense of credit adjustments related to impaired loans carried at fair value during the six months ended June 30, 2016 and 2015 was $1.0 million and $1.9 million, respectively.

MSRs totaled $8.9 million at June 30, 2016. Of this $8.9 million MSR carrying balance, $4.9 million was recorded at fair value and included a valuation allowance of $0.8 million. The remaining $4.0 million was recorded at cost, as the fair value of the MSRs exceeded cost at June 30, 2016. At December 31, 2015, MSRs totaled $9.0 million. Of this $9.0 million MSR carrying balance, $1.9 million was recorded at fair value and included a valuation allowance of $0.5 million. The remaining $7.1 million was recorded at cost, as the fair value exceeded cost at December 31, 2015. The (expense) income related to MSRs carried at fair value during the three-month periods ended June 30, 2016 and 2015 was $(209,000) and $193,000, respectively. The expense related to MSRs carried at fair value during the six-month periods ended June 30, 2016 and 2015 was $(209,000) and $29,000, respectively.

Total OREO held by Park at June 30, 2016 and December 31, 2015 was $17.6 million and $18.7 million, respectively. Approximately 46% of OREO held by Park at both June 30, 2016 and December 31, 2015 was carried at fair value due to fair value adjustments made subsequent to the initial OREO measurement. At June 30, 2016 and December 31, 2015, OREO held at fair value, less estimated selling costs, amounted to $8.1 million and $8.5 million, respectively. The net expense related to OREO fair value adjustments was $0.2 million and $0.3 million for the three-month periods ended June 30, 2016 and 2015, respectively and $0.3 million and $0.6 million for the six-month periods ended June 30, 2016 and 2015, respectively.

The following tables present qualitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2016 and December 31, 2015:



June 30, 2016
(In thousands)	Fair Value		Valuation Technique	Unobservable Input(s)	Range (Weighted Average)
Impaired loans:
Commercial real estate	$	2,465	Sales comparison approach	Adj to comparables	0.0% - 90.0% (20.1%)
			Income approach	Capitalization rate	7.0% - 9.2% (8.3%)
			Cost approach	Accumulated depreciation	50.0% (50.0%)

Construction real estate:
SEPH commercial land and development	$	1,700	Sales comparison approach	Adj to comparables	5.0% - 40.0% (22.5%)

Remaining commercial	$	1,422	Sales comparison approach	Adj to comparables	0.0% - 15.6% (1.0%)
			Bulk sale approach	Discount rate	10.0% (10.0%)

Residential real estate	$	1,929	Sales comparison approach	Adj to comparables	0.0% - 87.4% (16.8%)
			Income approach	Capitalization rate	10.0% - 10.1% (10.0%)
			Cost approach	Accumulated depreciation	50.0% (50.0%)

Other real estate owned:
Commercial real estate	$	3,184	Sales comparison approach	Adj to comparables	0.0% - 69.0% (22.6%)
			Income approach	Capitalization rate	9.5% - 14.0% (9.9%)

Construction real estate	$	3,419	Sales comparison approach	Adj to comparables	0.0% - 85.0% (27.2%)
			Bulk sale approach	Discount rate	15.0% (15.0%)

Residential real estate	$	1,516	Sales comparison approach	Adj to comparables	0.1% - 61.8% (26.0%)



Balance at December 31, 2015
(In thousands)	Fair Value		Valuation Technique	Unobservable Input(s)	Range (Weighted Average)
Impaired loans:
Commercial real estate	$	3,698	Sales comparison approach	Adj to comparables	0.0% - 45.9% (20.3%)
			Income approach	Capitalization rate	7.0% - 13.3% (9.5%)
			Cost approach	Accumulated depreciation	50.0% (50.0%)

Construction real estate:
SEPH commercial land and development	$	2,044	Sales comparison approach	Adj to comparables	5.0% - 40.0% (22.1%)
			Bulk sale approach	Discount rate	10.7% (10.7%)

Remaining commercial	$	1,872	Sales comparison approach	Adj to comparables	0.0% - 25.3% (1.0%)
			Bulk sale approach	Discount rate	10.0% - 10.7% (10.0%)

Residential real estate	$	1,882	Sales comparison approach	Adj to comparables	0.0% - 96.7% (12.5%)
			Income approach	Capitalization rate	3.8% - 10.1% (9.1%)
			Cost approach	Accumulated depreciation	33.3% - 50.0% (43.4%)

Other real estate owned:
Commercial real estate	$	2,796	Sales comparison approach	Adj to comparables	2.0% - 71.0% (26.9%)
			Income approach	Capitalization rate	9.5% (9.5%)

Construction real estate	$	3,387	Sales comparison approach	Adj to comparables	0.0% - 85.0% (24.3%)
			Bulk sale approach	Discount rate	15.0% (15.0%)

Residential real estate	$	2,332	Sales comparison approach	Adj to comparables	0.1% - 61.8% (23.0%)

The following methods and assumptions were used by Park in estimating its fair value disclosures for assets and liabilities not discussed above:

Cash and cash equivalents: The carrying amounts reported in the consolidated condensed balance sheets for cash and short-term instruments approximate those assets’ fair values.

FHLB Stock and FRB Stock: These assets are carried at their respective redemption values as it is not practicable to calculate their fair values.

Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for certain mortgage loans (e.g., one-to-four family residential) are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values for other loans are estimated using discounted cash flow analyses, based upon interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The methods utilized to estimate the fair value do not necessarily represent an exit price.

Off-balance sheet instruments: Fair values for Park’s loan commitments and standby letters of credit are based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The carrying amount and fair value are not material.

Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and money market accounts) are, by definition, equal to the amounts payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities of time deposits.

Short-term borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements and other short-term borrowings approximate their fair values.

Long-term debt: Fair values for long-term debt are estimated using a discounted cash flow calculation that applies interest rates currently being offered on long-term debt to a schedule of monthly maturities.

Subordinated debentures and notes: Fair values for subordinated debentures and notes are estimated using a discounted cash flow calculation that applies interest rate spreads currently being offered on similar debt structures to a schedule of monthly maturities.

The fair value of financial instruments at June 30, 2016 and December 31, 2015, was as follows:



	June 30, 2016
			Fair Value Measurements
(In thousands)	Carrying value		Level 1		Level 2		Level 3		Total fair value
Financial assets:
Cash and money market instruments	$	315,889	$	315,889	$	—	$	—	$	315,889
Investment securities	1,489,695		1,807		1,494,503		821		1,497,131
Accrued interest receivable - securities	3,481		—		3,481		—		3,481
Accrued interest receivable - loans	14,016		—		—		14,016		14,016

Loans held for sale	12,125		—		12,125		—		12,125
Mortgage IRLCs	277		—		277		—		277
Impaired loans carried at fair value	7,516		—		—		7,516		7,516
Other loans, net	5,049,027		—		—		5,030,111		5,030,111
Loans receivable, net	$	5,068,945	$	—	$	12,402	$	5,037,627	$	5,050,029

Financial liabilities:
Noninterest bearing checking accounts	$	1,378,053	$	1,378,053	$	—	$	—	$	1,378,053
Interest bearing transactions accounts	1,227,177		1,227,177		—		—		1,227,177
Savings accounts	1,763,907		1,763,907		—		—		1,763,907
Time deposits	1,250,676		—		1,257,108		—		1,257,108
Other	4,066		4,066		—		—		4,066
Total deposits	$	5,623,879	$	4,373,203	$	1,257,108	$	—	$	5,630,311

Short-term borrowings	$	210,731	$	—	$	210,731	$	—	$	210,731
Long-term debt	741,174		—		781,862		—		781,862
Subordinated debentures/notes	45,000		—		40,857		—		40,857
Accrued interest payable – deposits	1,023		72		951		—		1,023
Accrued interest payable – debt/borrowings	1,313		—		1,313		—		1,313

Derivative financial instruments:
Fair value swap	$	226	$	—	$	—	$	226	$	226



	December 31, 2015
			Fair Value Measurements
(In thousands)	Carrying value		Level 1		Level 2		Level 3		Total fair value
Financial assets:
Cash and money market instruments	$	149,459	$	149,459	$	—	$	—	$	149,459
Investment securities	1,585,568		1,941		1,584,984		769		1,587,694
Accrued interest receivable - securities	4,436		—		4,436		—		4,436
Accrued interest receivable - loans	14,239		—		—		14,239		14,239

Loans held for sale	7,306		—		7,306		—		7,306
Mortgage IRLCs	165		—		165		—		165
Impaired loans carried at fair value	9,496		—		—		9,496		9,496
Other loans, net	4,994,624		—		—		4,997,318		4,997,318
Loans receivable, net	$	5,011,591	$	—	$	7,471	$	5,006,814	$	5,014,285

Financial liabilities:
Noninterest bearing checking accounts	$	1,404,032	$	1,404,032	$	—	$	—	$	1,404,032
Interest bearing transactions accounts	1,107,200		1,107,200		—		—		1,107,200
Savings accounts	1,544,708		1,544,708		—		—		1,544,708
Time deposits	1,290,412		—		1,295,329		—		1,295,329
Other	1,290		1,290		—		—		1,290
Total deposits	$	5,347,642	$	4,057,230	$	1,295,329	$	—	$	5,352,559

Short-term borrowings	$	394,242	$	—	$	394,242	$	—	$	394,242
Long-term debt	738,105		—		771,420		—		771,420
Subordinated debentures/notes	45,000		—		41,596		—		41,596
Accrued interest payable – deposits	987		66		921		—		987
Accrued interest payable – debt/borrowings	1,351		4		1,347		—		1,351

Derivative financial instruments:
Fair value swap	$	226	$	—	$	—	$	226	$	226