•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.

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.


Fair Value Measurements at September 30, 2020 using:
(In thousands)	Level 1		Level 2		Level 3		Balance at September 30, 2020
Assets
Investment securities:
Obligations of states and political subdivisions	—		304,506				304,506
U.S. Government sponsored entities’ asset-backed securities	—		726,297		—		726,297
Corporate debt securities	—		2,011		—		2,011
Equity securities	1,558		—		484		2,042
Mortgage loans held for sale	—		48,265		—		48,265
Mortgage IRLCs	—		2,878		—		2,878
Loan interest rate swaps	—		4,503		—		4,503

Liabilities
Fair value swap	$	—	$	—	$	226	$	226
Borrowing interest rate swap	—		1,026		—		1,026
Loan interest rate swaps	—		4,503		—		4,503


Fair Value Measurements at December 31, 2019 using:
(In thousands)	Level 1		Level 2		Level 3		Balance at December 31, 2019
Assets
Investment securities:
Obligations of states and political subdivisions	$	—	$	320,491	$	—	$	320,491
U.S. Government sponsored entities’ asset-backed securities	—		889,210		—		889,210
Equity securities	1,537		—		456		1,993
Mortgage loans held for sale	—		12,278		—		12,278
Mortgage IRLCs	—		221		—		221
Loan interest rate swaps	—		1,870		—		1,870

Liabilities
Fair value swap	$	—	$	—	$	226	$	226
Borrowing interest rate swap	—		575		—		575
Loan interest rate swaps	—		1,870		—		1,870

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).

The tables below present a reconciliation of the beginning and ending balances of the Level 3 inputs for the three months and nine months ended September 30, 2020 and 2019, for financial instruments measured on a recurring basis and classified as Level 3:


(In thousands)	Equity Securities		Fair value swap
Balance at July 1, 2020	$	471	$	(226)
Total gains
Included in other income	13		—
Balance at September 30, 2020	$	484	$	(226)

Balance at July 1, 2019	$	433	$	(226)
Total gains
Included in other income	5		—
Balance at September 30, 2019	$	438	$	(226)


(In thousands)	Equity Securities		Fair value swap
Balance at January 1, 2020	$	456	$	(226)
Total gains
Included in other income	28		—
Balance at September 30, 2020	$	484	$	(226)

Balance at January 1, 2019	$	424	$	(226)
Total gains
Included in other income	14		—
Balance at September 30, 2019	$	438	$	(226)

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 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.

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 September 30, 2020 and December 31, 2019, 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 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 September 30, 2020, 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 with respect to the property's value subsequent to the initial measurement.


Fair Value Measurements at September 30, 2020 using:
(In thousands)	Level 1		Level 2		Level 3		Balance at September 30, 2020
Impaired loans recorded at fair value:
Commercial real estate	$	—	$	—	$	16,054	$	16,054
Residential real estate	—		—		172		172
Total impaired loans recorded at fair value	$	—	$	—	$	16,226	$	16,226

MSRs	$	—	$	11,029	$	—	$	11,029

OREO recorded at fair value:
Residential real estate	—		—		767		767
Total OREO recorded at fair value	$	—	$	—	$	767	$	767

Other repossessed assets	$	—	$	—	$	3,392	$	3,392


Fair Value Measurements at December 31, 2019 using:
(In thousands)	Level 1		Level 2		Level 3		Balance at December 31, 2019
Impaired loans recorded at fair value:
Commercial real estate	$	—	$	—	$	1,873	$	1,873
Residential real estate	—		—		217		217
Total impaired loans recorded at fair value	$	—	$	—	$	2,090	$	2,090

MSRs	$	—	$	5,797	$	—	$	5,797

OREO recorded at fair value:
Commercial real estate	—		—		2,295		2,295
Residential real estate	—		—		738		738
Total OREO recorded at fair value	$	—	$	—	$	3,033	$	3,033

Other repossessed assets	$	—	$	—	$	3,599	$	3,599

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.


	September 30, 2020
(In thousands)	Recorded Investment		Prior Charge-Offs		Specific Valuation Allowance		Carrying Balance
Impaired loans recorded at fair value	$	19,395	$	247	$	3,169	$	16,226
Remaining impaired loans	96,785		316		5,497		91,288
Total impaired loans	$	116,180	$	563	$	8,666	$	107,514


	December 31, 2019
(In thousands)	Recorded Investment		Prior Charge-Offs		Specific Valuation Allowance		Carrying Balance
Impaired loans recorded at fair value	$	2,167	$	313	$	77	$	2,090
Remaining impaired loans	75,324		406		5,153		70,171
Total impaired loans	$	77,491	$	719	$	5,230	$	72,261

The expense from credit adjustments related to impaired loans carried at fair value was $3.1 million and $135,000 for the three-month periods ended September 30, 2020 and 2019, respectively, and was $3.5 million and $174,000 for the nine-month periods ended September 30, 2020 and 2019, respectively.

MSRs totaled $11.0 million at September 30, 2020. Of this $11.0 million MSR carrying balance, $11.0 million was recorded at fair value and included a valuation allowance of $2.8 million. The remaining $11,000 was recorded at cost, as the fair value exceeded cost at September 30, 2020. At December 31, 2019, MSRs totaled $10.1 million. Of this $10.1 million MSR carrying balance, $5.8 million was recorded at fair value and included a valuation allowance of $825,000. The remaining $4.3 million was recorded at cost, as the fair value exceeded cost at December 31, 2019. The expense related to MSRs carried at fair value during the three months ended September 30, 2020 and 2019 was $198,000 and $332,000, respectively, and was $2.0 million and $421,000 for the nine months ended September 30, 2020 and 2019, respectively.

Total OREO held by Park at September 30, 2020 and December 31, 2019 was $836,000 and $4.0 million, respectively. Approximately 92% and 75% of OREO held by Park at September 30, 2020 and December 31, 2019, respectively, was carried at fair value due to fair value adjustments made subsequent to the initial OREO measurement. At September 30, 2020 and December 31, 2019, OREO held at fair value, less estimated selling costs, amounted to $767,000 and $3.0 million, respectively. The net income (expense) related to OREO fair value adjustments was $115,000 and $(41,000) for the three-month periods ended September 30, 2020 and 2019, respectively, and was $80,000 and $(123,000) for the nine-month periods ended September 30, 2020 and 2019, respectively.

Other repossessed assets totaled $3.6 million at September 30, 2020, of which $3.4 million was recorded at fair value. Other repossessed assets totaled $4.2 million at December 31, 2019, of which $3.6 million was recorded at fair value. Expense related to fair value adjustments on other repossessed assets for each of the three-month periods and nine-month periods ended September 30, 2020 was $207,000. There was no expense related to fair value adjustments on other repossessed assets for either of the three-month periods or nine-month periods ended September 30, 2019.

September 30, 2020

(In thousands)

Fair Value

Valuation Technique

Unobservable Input(s)

Range

(Weighted Average) (1)

Impaired loans:

Commercial real estate

16,054

Sales comparison approach

Adj to comparables

0.0% - 139.0% (20.6%)

Income approach

Capitalization rate

9.0% - 20.0% (9.6%)

Residential real estate

172

Sales comparison approach

Adj to comparables

2.7% - 47.8% (10.6%)

Other real estate owned:

Residential real estate

767

Sales comparison approach

Adj to comparables

7.6% - 11.2% (8.9%)

Balance at December 31, 2019

(In thousands)

Fair Value

Valuation Technique

Unobservable Input(s)

Range

(Weighted Average) (1)

Impaired loans:

Commercial real estate

1,873

Sales comparison approach

Adj to comparables

0.0% - 56.0% (26.5%)

Cost approach

Accumulated depreciation

93.1% (93.1%)

Residential real estate

217

Sales comparison approach

Adj to comparables

0.0% - 53.5% (10.8%)

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%)

Residential real estate

738

Sales comparison approach

Adj to comparables

4.6% - 54.6% (39.2%)

At September 30, 2020 and December 31, 2019, Park had Partnership Investments with a NAV of $14.0 million and $11.9 million, respectively. At September 30, 2020 and December 31, 2019, Park had $7.0 million and $8.5 million, respectively, in unfunded commitments related to these Partnership Investments. For the three-month periods ended September 30, 2020 and 2019, Park recognized income of $1.3 million and $3.3 million, respectively, and for the nine-month periods ended September 30, 2020 and 2019, Park recognized a loss of $41,000 and income of $5.1 million, respectively, related to these Partnership Investments.


	September 30, 2020
			Fair Value Measurements
(In thousands)	Carrying value		Level 1		Level 2		Level 3		Total fair value
Financial assets:
Cash and money market instruments	$	246,709	$	246,709	$	—	$	—	$	246,709
Investment securities (1)	1,032,814		—		1,032,814		—		1,032,814
Other investment securities (2)	2,042		1,558		—		484		2,042

Loans held for sale	48,265		—		48,265		—		48,265
Mortgage IRLCs	2,878		—		2,878		—		2,878
Impaired loans carried at fair value	16,226		—		—		16,226		16,226
Other loans, net	7,124,139		—		—		7,168,180		7,168,180
Loans receivable, net	$	7,191,508	$	—	$	51,143	$	7,184,406	$	7,235,549

Financial liabilities:
Time deposits	$	931,201	$	—	$	938,492	$	—	$	938,492
Other	5,374		5,374		—		—		5,374
Deposits (excluding demand deposits)	$	936,575	$	5,374	$	938,492	$	—	$	943,866

Short-term borrowings	$	320,435	$	—	$	320,435	$	—	$	320,435
Long-term debt	135,000		—		142,849		—		142,849
Subordinated notes	187,668		—		180,209		—		180,209

Derivative financial instruments - assets:
Loan interest rate swaps	$	4,503	$	—	$	4,503	$	—	$	4,503

Derivative financial instruments - liabilities:
Fair value swap	$	226	$	—	$	—	$	226	$	226
Borrowing interest rate swap	1,026		—		1,026		—		1,026
Loan interest rate swaps	4,503		—		4,503		—		4,503

(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.


	December 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	$	159,956	$	159,956	$	—	$	—	$	159,956
Investment securities (1)	1,209,701		—		1,209,701		—		1,209,701
Other investment securities (2)	1,993		1,537		—		456		1,993

Loans held for sale	12,278		—		12,278		—		12,278
Mortgage IRLCs	221		—		221		—		221
Impaired loans carried at fair value	2,090		—		—		2,090		2,090
Other loans, net	6,430,136		—		—		6,426,869		6,426,869
Loans receivable, net	$	6,444,725	$	—	$	12,499	$	6,428,959	$	6,441,458

Financial liabilities:
Time deposits	$	1,139,131	$	—	$	1,145,537	—		$	1,145,537
Other	1,273		1,273		—		—		1,273
Deposits (excluding demand deposits)	$	1,140,404	$	1,273	$	1,145,537	$	—	$	1,146,810

Short-term borrowings	$	230,657	$	—	$	230,657	$	—	$	230,657
Long-term debt	192,500		—		200,726		—		200,726
Subordinated notes	15,000		—		14,372		—		14,372

Derivative financial instruments - assets:
Loan interest rate swaps	1,870		—		1,870		—		1,870

Derivative financial instruments - liabilities:
Fair value swap	$	226	$	—	$	—	$	226	$	226
Borrowing interest rate swap	575		—		575		—		575
Loan interest rate swaps	1,870		—		1,870		—		1,870