XML 42 R30.htm IDEA: XBRL DOCUMENT

Fair Value

3 Months Ended

Mar. 31, 2019

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 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 under 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 March 31, 2019 using:
(In thousands)	Level 1		Level 2		Level 3		Balance at March 31, 2019
Assets
Investment securities:
U.S. Government sponsored entities’ asset-backed securities	$	—	$	977,990	$	—	$	977,990
Equity securities	1,336		—		433		1,769
Mortgage loans held for sale	—		4,276		—		4,276
Mortgage IRLCs	—		175		—		175

Liabilities
Fair value swap	$	—	$	—	$	226	$	226
Interest rate swap	—		261		—		261



Fair Value Measurements at December 31, 2018 using:
(In thousands)	Level 1		Level 2		Level 3		Balance at December 31, 2018
Assets
Investment securities:
U.S. Government sponsored entities’ asset-backed securities	$	—	$	1,003,421	$	—	$	1,003,421
Equity securities	1,225		—		424		1,649
Mortgage loans held for sale	—		4,158		—		4,158
Mortgage IRLCs	—		87		—		87

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

There were no transfers between Level 1 and Level 2 during either of the three-month periods ended March 31, 2019 or 2018. 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 the 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 (Level 1). If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments (Level 2). 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 (IRLCs): 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 security prices for similar product types and, therefore, are classified in Level 2.

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

The table below presents a reconciliation of the beginning and ending balances of the Level 3 inputs for the three months ended March 31, 2019 and 2018, for financial instruments measured on a recurring basis and classified as Level 3:

Level 3 Fair Value Measurements

Three months ended March 31, 2019 and 2018



(In thousands)	Equity Securities		Fair value swap
Balance at January 1, 2019	$	424	$	(226	)
Total gains/(losses)
Included in other income	9		—
Balance at March 31, 2019	$	433	$	(226	)

Balance at January 1, 2018	$	417	$	(226	)
Total gains/(losses)
Included in other comprehensive income	3		—
Balance at March 31, 2018	$	420	$	(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. Collateral dependent 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 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, 2019 and December 31, 2018, other repossessed assets 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 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, 2019, there were no PCI 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 to the property's value subsequent to the initial measurement.



Fair Value Measurements at March 31, 2019 using:
(In thousands)	Level 1		Level 2		Level 3		Balance at March 31, 2019
Impaired loans recorded at fair value:
Commercial real estate	$	—	$	—	$	3,691	$	3,691
Construction real estate	—		—		1,635		1,635
Residential real estate	—		—		136		136
Total impaired loans recorded at fair value	$	—	$	—	$	5,462	$	5,462

Mortgage servicing rights	$	—	$	1,788	$	—	$	1,788

OREO:
Commercial real estate	—		—		2,475		2,475
Construction real estate	—		—		728		728
Residential real estate	—		—		620		620
Total OREO recorded at fair value	$	—	$	—	$	3,823	$	3,823

Other repossessed assets	$	—	$	—	$	3,496	$	3,496



Fair Value Measurements at December 31, 2018 using:
(In thousands)	Level 1		Level 2		Level 3		Balance at December 31, 2018
Impaired loans recorded at fair value:
Commercial real estate	$	—	$	—	$	4,059	$	4,059
Construction real estate	—		—		1,635		1,635
Residential real estate	—		—		705		705
Total impaired loans recorded at fair value	$	—	$	—	$	6,399	$	6,399

Mortgage servicing rights	$	—	$	1,169	$	—	$	1,169

OREO:
Commercial real estate	—		—		2,295		2,295
Construction real estate	—		—		729		729
Residential real estate	—		—		650		650
Total OREO recorded at fair value	$	—	$	—	$	3,674	$	3,674

Other repossessed assets	$	—	$	—	$	3,464	$	3,464

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.



	March 31, 2019
(In thousands)	Recorded Investment		Prior Charge-Offs		Specific Valuation Allowance		Carrying Balance
Impaired loans recorded at fair value	$	5,527	$	3,341	$	65	$	5,462
Remaining impaired loans	45,380		7,616		2,403		42,977
Total impaired loans	$	50,907	$	10,957	$	2,468	$	48,439



	December 31, 2018
(In thousands)	Recorded Investment		Prior Charge-Offs		Specific Valuation Allowance		Carrying Balance
Impaired loans recorded at fair value	$	6,503	$	3,630	$	104	$	6,399
Remaining impaired loans	41,641		7,616		2,169		39,472
Total impaired loans	$	48,144	$	11,246	$	2,273	$	45,871

The expense from credit adjustments related to impaired loans carried at fair value during the three months ended March 31, 2019 and 2018 was $33,000 and $50,000, respectively.

MSRs totaled $10.1 million at March 31, 2019. Of this $10.1 million MSR carrying balance, $1.8 million was recorded at fair value and included a valuation allowance of $0.3 million. The remaining $8.3 million was recorded at cost, as the fair value of the MSRs exceeded cost at March 31, 2019. At December 31, 2018, MSRs totaled $10.2 million. Of this $10.2 million MSR carrying balance, $1.2 million was recorded at fair value and included a valuation allowance of $0.2 million. The remaining $9.0 million was recorded at cost, as the fair value exceeded cost at December 31, 2018. The expense (income) related to MSRs carried at fair value during the three months ended March 31, 2019 and 2018 was $57,000 and $(305,000), respectively.

Total OREO held by Park at March 31, 2019 and December 31, 2018 was $4.6 million and $4.3 million, respectively. Approximately 83% and 85% of OREO held by Park at March 31, 2019 and December 31, 2018, respectively, was carried at fair value due to fair value adjustments made subsequent to the initial OREO measurement. At March 31, 2019 and

December 31, 2018, OREO held at fair value, less estimated selling costs, amounted to $3.8 million and $3.7 million, respectively. The net expense related to OREO fair value adjustments was $27,000 and $207,000 for the three-month periods ended March 31, 2019 and 2018, respectively.

Other repossessed assets totaled $3.9 million at March 31, 2019, of which $3.5 million was recorded at fair value. Other repossessed assets totaled $4.0 million at December 31, 2018, of which $3.5 million was recorded at fair value. There was no expense related to fair value adjustments on other repossessed assets for either of the three-month periods ended March 31, 2019 and 2018.

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, 2019 and December 31, 2018:



March 31, 2019
(In thousands)	Fair Value		Valuation Technique	Unobservable Input(s)	Range (Weighted Average)
Impaired loans:
Commercial real estate	$	3,691	Sales comparison approach	Adj to comparables	0.0% - 107.5% (34.1%)
			Income approach	Capitalization rate	10.8% (10.8%)
			Cost approach	Accumulated depreciation	4.2% - 90.1% (10.7%)

Construction real estate	$	1,635	Sales comparison approach	Adj to comparables	1.7% - 60.7% (34.6%)

Residential real estate	$	136	Sales comparison approach	Adj to comparables	1.0% - 26.4% (10.3%)

Other real estate owned:
Commercial real estate	$	2,475	Sales comparison approach	Adj to comparables	0.9% - 68.4% (28.4%)
			Income approach	Capitalization rate	10.0 - 13.0% (12.7%)
Construction real estate	$	728	Sales comparison approach	Adj to comparables	0.0% - 45.0% (21.8%)

Residential real estate	$	620	Sales comparison approach	Adj to comparables	30.4% - 54.6% (42.5%)



Balance at December 31, 2018
(In thousands)	Fair Value		Valuation Technique	Unobservable Input(s)	Range (Weighted Average)
Impaired loans:
Commercial real estate	$	4,059	Sales comparison approach	Adj to comparables	0.0% - 107.5% (31.1%)
			Income approach	Capitalization rate	9.5% - 10.8% (10.6%)
			Cost approach	Accumulated depreciation	4.2% - 90.1% (11.0%)

Construction real estate	$	1,635	Sales comparison approach	Adj to comparables	5.0% - 90.0% (26.1%)


Residential real estate	$	705	Sales comparison approach	Adj to comparables	0.0% - 40.0% (13.2%)
			Income approach	Capitalization rate	10.5% (10.5%)

Other real estate owned:
Commercial real estate	$	2,295	Sales comparison approach	Adj to comparables	0.9% - 68.4% (34.7%)
			Income approach	Capitalization rate	13.0% (13.0%)

Construction real estate	$	729	Sales comparison approach	Adj to comparables	0.0% - 45.0% (21.7%)

Residential real estate	$	650	Sales comparison approach	Adj to comparables	30.4% - 54.6% (42.5%)

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 net asset value ("NAV") practical expedient in accordance with ASC 820.

As of March 31, 2019 and December 31, 2018, Park had Partnership Investments with a NAV of $13.3 million and $11.0 million, respectively. As of March 31, 2019 and December 31, 2018, Park had $5.4 million and $6.1 million in unfunded commitments related to these Partnership Investments. For the three-month periods ended March 31, 2019 and 2018, Park had recognized income (expense) of $1.6 million and $(0.3) million, respectively, related to these Partnership Investments.

The fair value of certain financial instruments at March 31, 2019 and December 31, 2018, was as follows:



	March 31, 2019
			Fair Value Measurements
(In thousands)	Carrying value		Level 1		Level 2		Level 3		Total fair value
Financial assets:
Cash and money market instruments	$	187,479	$	187,479	$	—	$	—	$	187,479
Investment securities ⁽¹⁾	1,349,149		—		1,357,610		—		1,357,610
Other investment securities ⁽²⁾	1,769		1,336		—		433		1,769

Loans held for sale	4,276		—		4,276		—		4,276
Mortgage IRLCs	175		—		175		—		175
Impaired loans carried at fair value	5,462		—		—		5,462		5,462
Other loans, net	5,677,479		—		—		5,622,367		5,622,367
Loans receivable, net	$	5,687,392	$	—	$	4,451	$	5,627,829	$	5,632,280

Financial liabilities:
Time deposits	982,983		—		985,542		—		985,542
Other	2,633		2,633		—		—		2,633
Deposits (excluding demand deposits)	$	985,616	$	2,633	$	985,542	$	—	$	988,175

Short-term borrowings	$	212,569	$	—	$	212,569	$	—	$	212,569
Long-term debt	375,000		—		377,428		—		377,428
Subordinated notes	15,000		—		12,791		—		12,791

Derivative financial instruments:
Fair value swap	$	226	$	—	$	—	$	226	$	226
Interest rate swap	261		—		261		—		261

(1) Includes AFS debt securities and HTM debt securities.

(2) Excludes FHLB stock and FRB stock which are carried at their respective redemption values. Additionally, excludes investment securities accounted for at modified cost, as these investments do not have a readily determinable fair value.



	December 31, 2018
			Fair Value Measurements
(In thousands)	Carrying value		Level 1		Level 2		Level 3		Total fair value
Financial assets:
Cash and money market instruments	$	167,214	$	167,214	$	—	$	—	$	167,214
Investment securities ⁽¹⁾	1,355,229		—		1,354,843		—		1,354,843
Other investment securities ⁽²⁾	1,649		1,225		—		424		1,649

Loans held for sale	4,158		—		4,158		—		4,158
Mortgage IRLCs	87		—		87		—		87
Impaired loans carried at fair value	6,399		—		—		6,399		6,399
Other loans, net	5,629,976		—		—		5,570,136		5,570,136
Loans receivable, net	$	5,640,620	$	—	$	4,245	$	5,576,535	$	5,580,780

Financial liabilities:
Time deposits	$	1,043,177	$	—	$	1,044,620	—		$	1,044,620
Other	1,267		1,267		—		—		1,267
Total deposits	$	1,044,444	$	1,267	$	1,044,620	$	—	$	1,045,887

Short-term borrowings	$	221,966	$	—	$	221,966	$	—	$	221,966
Long-term debt	400,000		—		400,203		—		400,203
Subordinated notes	15,000		—		12,959		—		12,959

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

(1) Includes AFS debt securities and HTM debt securities.

(2) Excludes FHLB stock and FRB stock which are carried at their respective redemption values. Additionally, excludes investment securities accounted for at modified cost as these investments do not have a readily determinable fair value.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details