Leases

3 Months Ended

Mar. 31, 2019

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, 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 its proportionate share of property taxes, insurance, and common area maintenance.

The Company adopted ASU 2016-02, Leases (ASC 842), using the modified retrospective method as of the date of adoption (i.e. January 1, 2019) as permitted by the amendments in ASU 2018-11. As a result, the Company was not required to adjust its comparative period financial information for effects of the standard or make the new required lease disclosures for periods prior to the effective date. Upon adoption of this lease guidance on January 1, 2019, Park recorded an initial right-of-use ("ROU") asset of $11.0 million, a lease liability of $11.8 million, and reclassified an existing deferred rent liability of $0.6 million. The impact to the Company's retained earnings, net of the tax impact, was $143,000.

Management elected to adopt the package of transition practical expedients and, therefore, has not reassessed (1) whether existing or expired contracts contain a lease, (2) lease classification for existing or expired leases or (3) the accounting for initial direct costs that were previously capitalized. The Company did not elect the practical expedient to use hindsight for leases existing at the adoption date. 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.

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 it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. To manage its capital and liquidity needs, Park periodically obtains wholesale funding from the FHLB on an over-collateralized basis. The impact of utilizing an interest rate on an over-collateralized borrowing versus a fully collateralized borrowing is not material. Therefore, the FHLB yield curve was selected by management as a baseline to determine Park’s discount rates for leases.

•

The lease term for all of the Company’s leases includes the noncancellable period of the lease plus any additional periods covered by either Park's option to extend (or not to terminate) the lease that the Company is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor. If a lease contract contains multiple renewal options, management generally models lease cash flows through the first renewal option 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 comprise 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 “Other assets" and "Other liabilities", respectively, on Park's consolidated condensed balance sheet. The carrying amount of Park's ROU asset and lease liability at March 31, 2019 was $10.6 million and $11.4 million, respectively. Park's operating lease expense is recorded in "Occupancy expense" on the Company's consolidated condensed statements on income.

Other information related to operating leases as of March 31, 2019 was as follows:



	Three Months Ended March 31,
(Dollars in thousands)	2019
Lease cost
Operating lease cost	$	663
Sublease income	(93		)
Total lease cost	$	570

Other information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	656
Weighted-average remaining lease term - operating leases (years)	6.6
Weighted-average discount rate - operating leases	3.1		%

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



	Three Months Ended March 31,
(in thousands)	2019
2019	$	2,025
2020	2,168
2021	1,892
2022	1,797
2023	1,709
Thereafter	3,098
Total undiscounted minimum lease payments	$	12,689
Present value adjustment	(1,301		)
Total lease liabilities	$	11,388