Park National Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated results; comparison periods are Q3 and first nine months of 2022 unless noted.
Financial performance and condition
| Metric | Q3 2023 / September 30, 2023 | Comparable period / prior year-end |
|---|---|---|
| Interest and dividend income | $120.9 million | $99.9 million in Q3 2022 |
| Net interest income | $94.3 million; FTE net interest margin 4.12% | $90.8 million; margin 3.81% in Q3 2022 |
| Net income / diluted EPS | $36.9 million / $2.28 | $42.1 million / $2.57 in Q3 2022 |
| Net income / diluted EPS, nine months | $102.2 million / $6.29 | $115.3 million / $7.05 in 2022 |
| Loans / net loans | $7.350 billion / $7.265 billion | Loans up 2.9% from December 31, 2022 |
| Deposits, consolidated balance sheet | $8.245 billion | $8.235 billion at December 31, 2022 |
| Cash and cash equivalents | $223.6 million | $189.7 million at December 31, 2022 |
| Allowance for credit losses (ACL) | $84.6 million; 1.15% of loans | $85.4 million; 1.20% at December 31, 2022 |
| Shareholders’ equity | $1.086 billion; 10.85% of assets | $1.069 billion; 10.85% at December 31, 2022 |
For the first nine months, net interest income rose 10.1% to $278.0 million, while net income fell 11.3%. Higher loan and investment yields supported interest income, but deposit interest expense rose sharply: nine-month deposit interest expense was $58.7 million versus $9.7 million in 2022. Q3’s net interest margin improvement also reflected repricing, while management’s adjusted FTE margin, excluding specified acquisition, legacy-loan and PPP effects, was 4.11% versus 3.76%.
Nine-month operating cash flow was $96.9 million; investing activities used $120.5 million and financing activities provided $57.6 million. Cash increased $33.9 million during the period. The company reported $189.0 million of subordinated notes and $352.8 million of short-term borrowings, up from $227.3 million at year-end 2022. Management reported $2.17 billion of readily accessible liquidity sources. Park and its bank subsidiary exceeded applicable well-capitalized regulatory ratios.
Material changes and notable items
- Q3 net income declined 12.2% year over year despite higher net interest income. Nine-month net income declined 11.3%.
- Other income fell $19.0 million in Q3 and $32.4 million year to date. The 2022 comparison included $17.6 million of OREO sale gain and valuation markup tied to a former Vision Bank relationship; these did not recur in Q3 2023. Nine-month 2022 other income also included those items.
- Loan origination volume was $291.9 million for the first nine months, down 37.4% from 2022, mainly reflecting lower mortgage activity. Other service income declined $4.8 million, including lower mortgage origination and servicing-related fees.
- Nine-month other expense increased 4.5% to $230.2 million. Higher salaries, data processing and FDIC insurance assessment costs contributed; the comparison benefited from no repeat of a $4.0 million charitable foundation contribution made in 2022.
- Total deposits including deposits transferred off balance sheet decreased 2.2% from year-end 2022. Non-interest-bearing deposits on the balance sheet fell 10.4%, while transaction and savings balances increased. Management’s deposit disclosures also describe off-balance-sheet transfers used to manage asset growth.
- Available-for-sale securities had $138.3 million in gross unrealized losses at September 30, 2023, versus $122.8 million at year-end 2022. Management stated it did not intend, and was not more likely than not required, to sell these securities before recovery; no credit-loss allowance was recorded on them.
Outlook, risks and contingencies
- Management expects total assets to be below $10.0 billion at December 31, 2023, citing balance-sheet management tools such as moving deposits off balance sheet, moderating loan growth, securitizing or selling loans, and selling securities. Period-end assets were approximately $10.001 billion.
- Management described liquidity as more than adequate and its interest-rate risk profile as relatively neutral. Its September 2023 simulation projected net income down 3.0% under a rising-rate scenario and up 2.6% under a declining-rate scenario over 12 months; management expected gradual rate changes to have a modest overall effect.
- Credit risks include persistent inflation, elevated interest rates, economic and geopolitical uncertainty, real estate values and borrower performance. Park’s ACL scenario sensitivity indicated a hypothetical $26.4 million increase if only the adverse scenario were used, or a $26.4 million decrease if only the baseline scenario were used; these are sensitivities, not forecasts. Management weighted baseline and moderate-recession scenarios equally.
- Nonperforming assets were $57.0 million, or 0.57% of assets, at September 30, 2023. The reported comparison with 2022 is affected by adoption of ASU 2022-02, which eliminated TDR classification. Commercial watch-list loans were $87.7 million, up from $81.8 million at year-end; management cited downgraded hotel and consumer-finance-company loans, both current on contractual terms.
- Park had approximately $1.4 billion of uninsured deposits, equal to 17.2% of total deposits; $300 million of amounts exceeding the FDIC limit were fully collateralized by securities. The filing identifies deposit outflows and possible securities sales at a loss as risks.
- Under a February 2023 DOJ consent order resolving allegations concerning mortgage lending in the Columbus, Ohio area, Park National Bank committed to invest at least $9.0 million over five years in lending subsidies, community programs, outreach and related initiatives, and to establish a loan production office and branch. The company warned of management demands and potentially unanticipated costs. Routine legal matters were not considered likely to be material.
- Other unusual item: the company accrued a potential tax penalty of $592,000 in 2023 miscellaneous expense. No formal earnings guidance was provided. Management also disclosed adoption of SEC cybersecurity disclosure requirements beginning December 2023.
Most important facts for investors to verify
- Whether deposit pricing, mix and total funding stabilize, particularly given the year-over-year rise in interest expense and the use of short-term borrowings.
- Whether loan growth and credit performance remain sound; monitor watch-list balances, nonperforming assets, charge-offs and office-property exposure ($212.7 million, of which $210.1 million was accruing).
- How the $138.3 million unrealized securities loss position evolves, and whether liquidity needs could require sales before recovery.
- Progress and actual costs under the DOJ consent order, including the minimum $9.0 million five-year commitment.
- Whether Park achieves its stated year-end asset target below $10.0 billion and how balance-sheet actions affect deposits, liquidity and earnings.
- Reconcile deposit and asset figures across the filing: management discusses on- and off-balance-sheet deposits, and some subsidiary-level deposit disclosures differ from consolidated balance-sheet totals.