Fair Value

9 Months Ended

Sep. 30, 2022

Fair Value Disclosures [Abstract]

Fair Value

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.

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 September 30, 2022 using:
(In thousands)	Level 1		Level 2		Level 3		Balance at September 30, 2022
Assets
Investment securities:
Obligations of U.S. Treasury and other U.S. Government sponsored entities	$	—	$	38,122	$	—	$	38,122
Obligations of states and political subdivisions	—		393,918		—		393,918
U.S. Government sponsored entities’ asset-backed securities	—		784,863		—		784,863
Collateralized loan obligations	—		509,058		—		509,058
Corporate debt securities	—		16,162		—		16,162
Equity securities	1,277		—		469		1,746
Mortgage loans held for sale	—		1,928		—		1,928
Mortgage IRLCs	—		102		—		102
Loan interest rate swaps	—		1,622		—		1,622
Liabilities
Fair value swap	$	—	$	—	$	243	$	243
Borrowing interest rate swap	—		—		—		—
Loan interest rate swaps	—		1,622		—		1,622

 

Fair Value Measurements at December 31, 2021 using:
(In thousands)	Level 1		Level 2		Level 3		Balance at December 31, 2021
Assets
Investment securities:
Obligations of states and political subdivisions	$	—	$	389,591	$	—	$	389,591
U.S. Government sponsored entities’ asset-backed securities	—		854,463		—		854,463
Collateralized loan obligations	—		498,674		—		498,674
Corporate debt securities	—		11,412		—		11,412
Equity securities	1,630		—		499		2,129
Mortgage loans held for sale	—		9,387		—		9,387
Mortgage IRLCs	—		333		—		333
Loan interest rate swaps	—		1,952		—		1,952
Liabilities
Fair value swap	$	—	$	—	$	226	$	226
Borrowing interest rate swap	—		262		—		262
Loan interest rate swaps	—		1,952		—		1,952

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). 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 and is classified as Level 3.

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 following tables present a reconciliation of the beginning and ending balances of the Level 3 inputs for the three-month and nine-month periods ended September 30, 2022 and 2021, for financial instruments measured on a recurring basis and classified as Level 3:

Level 3 Fair Value Measurements
Three months ended September 30, 2022 and 2021
(In thousands)	Equity securities		Fair value swap
Balance at July 1, 2022	$	491	$	(447)
Total losses
Included in other income / expense	(22)		—
Purchases, sales, issuances and settlements, other, net	—		204
Balance at September 30, 2022	$	469	$	(243)
Balance at July 1, 2021	$	490	$	(226)
Total gains
Included in other income	1		—
Balance at September 30, 2021	$	491	$	(226)

Level 3 Fair Value Measurements
Nine months ended September 30, 2022 and 2021
(In thousands)	Equity securities			Fair value swap
Balance at January 1, 2022	$	499		$	(226)
Total losses
Included in other income / expense	(30)			(221)
Purchases, sales, issuances and settlements, other, net	—			204
Balance at September 30, 2022	$	469		$	(243)
Balance at January 1, 2021	$	485		$	(226)
Total gains
Included in other income	6			—
Balance at September 30, 2021	$	491	491	$	(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:

Individually evaluated collateral dependent loans: When a loan is individually evaluated, it is valued at the lower of cost or fair value. Collateral dependent loans which are individually evaluated and 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. Individually evaluated loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. Additionally, updated independent valuations are obtained annually for all collateral dependent 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 individually evaluated collateral dependent 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. At December 31, 2021, 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. There were no repossessed assets carried at fair value at September 30, 2022.

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. Individually evaluated collateral dependent 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 September 30, 2022 and December 31, 2021, 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 September 30, 2022 using:
(In thousands)	Level 1		Level 2		Level 3		Balance at September 30, 2022
Individually evaluated collateral dependent loans recorded at fair value:
Commercial real estate	$	—	$	—	$	4,685	$	4,685
Residential real estate	—		—		204		204
Total individually evaluated collateral dependent loans recorded at fair value	$	—	$	—	$	4,889	$	4,889
MSRs	$	—	$	1,673	$	—	$	1,673
OREO recorded at fair value:
Residential real estate	—		—		—		—
Total OREO recorded at fair value	$	—	$	—	$	—	$	—
Other repossessed assets	$	—	$	—	$	—	$	—

 

Fair Value Measurements at December 31, 2021 using:
(In thousands)	Level 1		Level 2		Level 3		Balance at December 31, 2021
Individually evaluated collateral dependent loans recorded at fair value:
Commercial real estate	$	—	$	—	$	831	$	831
Residential real estate	—		—		272		272
Total individually evaluated collateral dependent loans recorded at fair value	$	—	$	—	$	1,103	$	1,103
MSRs	$	—	$	13,482	$	—	$	13,482
OREO recorded at fair value:
Residential real estate	—		—		775		775
Total OREO recorded at fair value	$	—	$	—	$	775	$	775
Other repossessed assets	$	—	$	—	$	2,750	$	2,750

The table below provides additional detail on those individually evaluated loans which are recorded at fair value as well as the remaining individually evaluated loan portfolio not included above. The remaining individually evaluated 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.

	September 30, 2022
(In thousands)	Loan Balance		Prior Charge-Offs		Specific Valuation Allowance		Carrying Balance
Total individually evaluated collateral dependent loans recorded at fair value	$	6,042	$	543	$	1,153	$	4,889
Remaining individually evaluated loans	37,628		252		597		37,031
Total individually evaluated loans	$	43,670	$	795	$	1,750	$	41,920

	December 31, 2021
(In thousands)	Loan Balance		Prior Charge-Offs		Specific Valuation Allowance		Carrying Balance
Total individually evaluated collateral dependent loans recorded at fair value	$	1,291	$	240	$	188	$	1,103
Remaining individually evaluated loans	73,211		384		1,428		71,783
Total individually evaluated loans	$	74,502	$	624	$	1,616	$	72,886

The income (expense) from credit adjustments related to individually evaluated loans carried at fair value was $7,000 and $(83,000) for the three-month periods ended September 30, 2022 and 2021, respectively, and was $(1.0) million and $462,000 for the nine-month periods ended September 30, 2022 and 2021, respectively.

MSRs totaled $16.2 million at September 30, 2022. Of this $16.2 million MSR carrying balance, $1.7 million were recorded at fair value and included a valuation allowance of $0.2 million. The remaining $14.5 million were recorded at cost, as the fair value exceeded cost at September 30, 2022. At December 31, 2021, MSRs totaled $15.3 million. Of this $15.3 million MSR carrying balance, $13.5 million were recorded at fair value and included a valuation allowance of $1.6 million. The remaining $1.8 million were recorded at cost, as the fair value exceeded cost at December 31, 2021. The income (expense) related to MSRs carried at fair value during the three-month periods ended September 30, 2022 and 2021 was $59,000 and $(39,000), respectively, and was $1.4 million and $1.0 million for the nine-month periods ended September 30, 2022 and 2021, respectively.

Total OREO held by Park at September 30, 2022 and December 31, 2021 was $1.4 million and $775,000 respectively. At September 30, 2022, there was no OREO held by Park that was carried at fair value due to fair value adjustments made subsequent to the initial OREO measurement. At December 31, 2021, all of Park's OREO was carried at fair value. There was $12.0 million and $11.3 million of income related to OREO fair value adjustments for the three-month and the nine-month periods ended September 30, 2022, respectively. There was no income or expense related to OREO fair value adjustments for the three-month period ended September 30, 2021. There was $13,000 of income related to OREO fair value adjustments for the nine-month period ended September 30, 2021.

Other repossessed assets totaled $0.4 million at September 30, 2022, of which there were no repossessed assets recorded at fair value. Other repossessed assets totaled $3.3 million at December 31, 2021, of which $2.8 million were recorded at fair value. There was no expense related to fair value adjustments on other repossessed assets during any of the three-month periods or the nine-month periods ended September 30, 2022 and 2021.

The following tables present qualitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at September 30, 2022 and December 31, 2021:

September 30, 2022
(In thousands)	Fair Value		Valuation Technique	Unobservable Input(s)	Range (Weighted Average)
Individually evaluated collateral dependent loans:
Commercial real estate	$	4,685	Sales comparison approach	Adj to comparables	0.0% - 85.7% (11.9%)
			Income approach	Capitalization rate	7.5% - 8.3% (8.1%)
			Cost approach	Accumulated depreciation	26.0% (26.0%)
Residential real estate	$	204	Sales comparison approach	Adj to comparables	1.9% - 119.8% (17.4%)

December 31, 2021
(In thousands)	Fair Value		Valuation Technique	Unobservable Input(s)	Range (Weighted Average)
Individually evaluated collateral dependent loans:
Commercial real estate	$	831	Sales comparison approach	Adj to comparables	0.0% - 232.0% (28.3%)
Residential real estate	$	272	Sales comparison approach	Adj to comparables	0.5% - 78.6% (11.6%)
			Cost approach	Accumulated depreciation	8.3% (8.3%)
Other real estate owned:
Residential real estate	$	775	Sales comparison approach	Adj to comparables	5.0% - 32.5% (19.1%)

Assets Measured at Net Asset Value:

Park's portfolio of Partnership Investments are valued using the NAV practical expedient in accordance with ASC 820.

At September 30, 2022 and December 31, 2021, Park had Partnership Investments with a NAV of $23.6 million and $18.0 million, respectively. At September 30, 2022 and December 31, 2021, Park had $20.0 million and $8.4 million, respectively, in unfunded commitments related to these Partnership Investments. For the three-month periods ended September 30, 2022 and 2021, Park recognized income of $97,000 and $512,000, respectively, and for the nine-month periods ended September 30, 2022 and 2021, Park recognized income of $2.6 million and $2.4 million, respectively, related to these Partnership Investments.

The fair value of certain financial instruments at September 30, 2022 and December 31, 2021, was as follows:

	September 30, 2022
			Fair Value Measurements
(In thousands)	Carrying value		Level 1		Level 2		Level 3		Total fair value
Financial assets:
Cash and money market instruments	$	207,433	$	207,433	$	—	$	—	$	207,433
Investment securities (1)	1,742,123		—		1,742,123		—		1,742,123
Other investment securities (2)	1,746		1,277		—		469		1,746
Mortgage IRLCs	102		—		102		—		102
Mortgage loans held for sale	1,928		—		1,928		—		1,928
Individually evaluated loans carried at fair value	4,889		—		—		4,889		4,889
Other loans, net	7,012,366		—		—		6,910,287		6,910,287
Loans receivable, net	$	7,019,285	$	—	$	2,030	$	6,915,176	$	6,917,206
Financial liabilities:
Time deposits	$	613,222	$	—	$	615,544	$	—	$	615,544
Other	5,280		5,280		—		—		5,280
Deposits (excluding demand deposits)	$	618,502	$	5,280	$	615,544	$	—	$	620,824
Short-term borrowings	$	189,493	$	—	$	189,493	$	—	$	189,493
Subordinated notes	188,551		—		178,812		—		178,812
Derivative financial instruments - assets:
Loan interest rate swaps	$	1,622	$	—	$	1,622	$	—	$	1,622
Derivative financial instruments - liabilities:
Fair value swap	$	243	$	—	$	—	$	243	$	243
Borrowing interest rate swap	—		—		—		—		—
Loan interest rate swaps	1,622		—		1,622		—		1,622

(1) Includes debt securities AFS.

(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, 2021
			Fair Value Measurements
(In thousands)	Carrying value		Level 1		Level 2		Level 3		Total fair value
Financial assets:
Cash and money market instruments	$	219,180	$	219,180	$	—	$	—	$	219,180
Investment securities (1)	1,754,140		—		1,754,140		—		1,754,140
Other investment securities (2)	2,129		1,630		—		499		2,129
Mortgage loans held for sale	9,387		—		9,387		—		9,387
Mortgage IRLCs	333		—		333		—		333
Individually evaluated loans carried at fair value	1,103		—		—		1,103		1,103
Other loans, net	6,777,102		—		—		6,783,848		6,783,848
Loans receivable, net	$	6,787,925	$	—	$	9,720	$	6,784,951	$	6,794,671
Financial liabilities:
Time deposits	$	711,660	$	—	$	714,307	—		$	714,307
Other	1,465		1,465		—		—		1,465
Deposits (excluding demand deposits)	$	713,125	$	1,465	$	714,307	$	—	$	715,772
Short-term borrowings	$	238,786	$	—	$	238,786	$	—	$	238,786
Subordinated notes	188,210		—		207,912		—		207,912
Derivative financial instruments - assets:
Loan interest rate swaps	$	1,952	$	—	$	1,952	$	—	$	1,952
Derivative financial instruments - liabilities:
Fair value swap	$	226	$	—	$	—	$	226	$	226
Borrowing interest rate swap	262		—		262		—		262
Loan interest rate swaps	1,952		—		1,952		—		1,952

(1) Includes debt securities AFS.

(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.