Derivatives

3 Months Ended

Mar. 31, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Derivatives

Park uses certain derivative financial instruments (or "derivatives") to meet the needs of Park's clients while managing the interest rate risk associated with certain transactions. Park does not use derivatives for speculative purposes. A summary of derivative financial instruments utilized by Park follows.

Interest Rate Swaps

Park utilizes interest rate swap agreements as part of its asset-liability management strategy to help manage its interest rate risk position and as a means to meet the financing, interest rate and other risk management needs of qualifying commercial banking customers. The notional amount of the interest rate swaps does not represent the amount exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.

Borrowing Derivatives: At March 31, 2023 and December 31, 2022, Park had no borrowing derivatives. During the three-month period ended March 31, 2022, Park recognized interest expense of $148,000 related to borrowing swaps. Additionally, during the three-month period ended March 31, 2022, Park recognized a gain of $139,000, net of income taxes, related to borrowing swaps that was recorded in "Other comprehensive income (loss)" on the Consolidated Condensed Statements of Comprehensive Income.

Loan Derivatives: In conjunction with the Carolina Alliance acquisition, Park acquired interest rate swaps related to certain commercial loans. Simultaneously with borrowers entering into interest rate swaps, Carolina Alliance entered into offsetting interest rate swaps executed with a third party, such that Carolina Alliance minimized its net interest rate risk exposure resulting from such transactions. These interest rate swaps had a notional amount totaling $21.3 million and $21.7 million at March 31, 2023 and December 31, 2022, respectively.

All of the Company's interest rate swaps were determined to be fully effective during each of the three-month periods ended March 31, 2023 and March 31, 2022. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swaps is recorded in "Other assets" and "Other liabilities" with changes in fair value recorded in "Other comprehensive income (loss)". The amount included in "Accumulated other comprehensive loss, net of tax" would be

reclassified to net income should the hedges no longer be considered effective. Park expects the outstanding hedges to remain fully effective during the remaining respective terms of the swaps.

Summary information about Park's interest rate swaps at March 31, 2023 and at December 31, 2022 follows:

	March 31, 2023			December 31, 2022
(In thousands, except weighted average data)	Loan Derivatives			Loan Derivatives
Notional amounts	$	21,277		$	21,700
Weighted average pay rates	4.555		%	4.553		%
Weighted average receive rates	4.555		%	4.553		%
Weighted average maturity (years)	7.7			7.9
Unrealized losses	$	—		$	—

Interest Rate Swaps

The following table reflects the interest rate swaps included in the Consolidated Condensed Balance Sheets at March 31, 2023 and at December 31, 2022.

(In thousands)	March 31, 2023				December 31, 2022
	Notional Amount		Fair Value		Notional Amount		Fair Value
Included in "Other assets":
Loan derivatives - instruments associated with loans
Matched interest rate swaps with borrower	$	—	$	—	$	—	$	—
Matched interest rate swaps with counterparty	21,277		1,119		21,700		1,508
Total included in "Other assets"	$	21,277	$	1,119	$	21,700	$	1,508
Included in "Other liabilities":
Loan derivatives - instruments associated with loans
Matched interest rate swaps with borrower	$	21,277	$	(1,119)	$	21,700	$	(1,508)
Matched interest rate swaps with counterparty	—		—		—		—
Total included in "Other liabilities"	$	21,277	$	(1,119)	$	21,700	$	(1,508)

Mortgage Banking Derivatives

Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. In order to hedge the change in interest rates resulting from its commitments to fund the loans, the Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into. These mortgage banking derivatives are not designated as hedge relationships. The fair value of an interest rate lock is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted for the expected exercise of the commitment before the loan is funded. Fair values of these mortgage banking derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked. Changes in the fair values of these derivatives are included in "Other service income" in the Condensed Consolidated Statements of Income.

At March 31, 2023 and December 31, 2022, Park had $3.9 million and $2.1 million, respectively, of interest rate lock commitments. The fair value of these mortgage banking derivatives was reflected by a derivative asset of $77,000 and $46,000 at March 31, 2023 and December 31, 2022, respectively.

Other Derivatives

In connection with the sale of Park’s Class B Visa shares during 2009, Park entered into a swap agreement with the purchaser of the shares. The swap agreement adjusts for dilution in the conversion ratio of Class B Visa shares resulting from certain Visa litigation. At March 31, 2023 and December 31, 2022, the fair value of the swap liability of $121,000 and $243,000, respectively, represented an estimate of the exposure based upon probability-weighted potential Visa litigation losses.