Park National Corporation (NYSE: PRK) — Q3 2022 Form 10-Q
Business context and period: Park National Corporation is an Ohio-based bank holding company; its principal reportable segment is The Park National Bank. This unaudited quarterly report covers the three and nine months ended September 30, 2022. Balance-sheet comparisons are to December 31, 2021.
Financial performance and position
- Third-quarter earnings: Net income was $42.1 million, up from $35.4 million a year earlier; diluted EPS was $2.57 versus $2.16. Total interest and dividend income was $99.9 million and other income was $46.7 million.
- Nine-month earnings: Net income was $115.3 million, down 1.8% from $117.4 million; diluted EPS was $7.05 versus $7.14. Interest and dividend income was $269.4 million and other income was $109.5 million.
- Net interest income and margin: Net interest income rose 11.3% to $90.8 million in Q3 and 2.5% to $252.5 million for nine months. Fully taxable-equivalent net interest margin was 3.81% in Q3 (3.53% in 2021) and 3.74% for nine months (3.67%).
- Costs and efficiency: Q3 other expense increased 21.0% to $82.9 million; nine-month expense rose 6.1% to $220.3 million. The reported efficiency ratio was 59.88% for Q3 and 60.43% for nine months; the adjusted nine-month ratio was 62.44%.
- Loans and credit: Loans were $7.10 billion, up 3.4% from year-end; excluding PPP loans, growth was 4.45%. The allowance for credit losses was $84.0 million, or 1.18% of loans. Nine-month provision was $1.6 million, compared with a $6.9 million recovery in 2021. Annualized net charge-offs were 0.02% of average loans.
- Asset quality: Nonperforming loans were $65.2 million (0.92% of loans), down from $102.7 million (1.49%) at year-end. Commercial watch-list loans were $77.2 million, above pre-pandemic levels; management identified hotels, restaurants and strip shopping centers as continuing areas of residual pandemic-related risk.
- Funding, liquidity and debt: The consolidated balance sheet reported deposits of $8.31 billion, short-term borrowings of $189.5 million and subordinated notes of $188.6 million. Cash and cash equivalents were $207.4 million. Management said available funding sources provided more than adequate liquidity. Separately, the MD&A reports $766.2 million in off-balance-sheet deposits and presents PNB deposit figures of $8.61 billion; definitions differ and should be reconciled.
- Cash flow and capital: For nine months, operating cash flow was $89.6 million, investing cash outflow $403.2 million and financing cash inflow $301.8 million; cash declined $11.7 million. Shareholders’ equity was $1.04 billion, or 10.5% of assets. Park and PNB met applicable well-capitalized guidelines; Park’s total risk-based capital ratio was 16.00% and PNB’s was 12.12%.
Material changes versus comparable periods
- Q3 net interest income benefited from higher yields on loans and investments, while deposit and other funding costs also rose. Q3 average cost of interest-bearing liabilities increased to 0.60% from 0.26% a year earlier.
- Nine-month net interest income improved, but net income declined as noninterest income and credit-loss provision comparisons offset some of the gain. Mortgage originations fell 40.6% to $466.0 million, contributing to a $10.7 million reduction in other service income.
- Other income included a $12.0 million OREO valuation markup and a $5.6 million gain on OREO sale, both related to former Vision Bank relationships. These unusual items materially boosted reported Q3 and year-to-date results. Management’s adjusted nine-month net income was $102.3 million versus $115.1 million in 2021, and adjusted diluted EPS was $6.26 versus $7.00.
- Available-for-sale securities had $151.4 million of gross unrealized losses at quarter-end. Nine-month other comprehensive loss was $140.5 million, largely from securities valuation changes; AOCI shifted from positive $15.2 million at year-end to negative $125.3 million, reducing reported equity.
- Deposits increased on the consolidated balance sheet from year-end, while off-balance-sheet deposits declined. Loans grew, and PPP balances decreased sharply to $5.7 million from $74.4 million at year-end.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results.
- Management described uncertainty from inflation, rising interest rates, geopolitical conflict including Russia-Ukraine, supply-chain and labor challenges, and the continuing effects of COVID-19. These factors may affect borrowers, credit losses, security values and estimates such as the allowance for credit losses.
- The allowance scenario analysis indicated a hypothetical $23.5 million increase under a 100% adverse-scenario weighting, or a $23.5 million decrease under a 100% baseline weighting, before general reserve adjustments. Actual allowance outcomes depend on forecasts and management assumptions.
- Interest-rate modeling projected net income could rise 5.8% in a rising-rate scenario or fall 8.8% in a declining-rate scenario over the next year. Management characterized the expected impact of gradual rate changes as modest and noted greater exposure to falling rates than previously.
- Other notable items included a $4.0 million charitable foundation contribution in Q3, one-time employee bonuses, increased costs to collect former Vision Bank relationships, and a $66,000 expense from early termination of a borrowing swap during the nine-month period.
- Management reported effective disclosure controls, no material change in internal control over financial reporting, and no material pending legal proceedings. Park intends to adopt ASU 2022-02 in 2023 and does not expect a material financial-statement impact, though disclosures will change.
Key facts for investors to verify
- Reconcile the consolidated balance-sheet deposit amount of $8.31 billion with the MD&A’s $8.61 billion deposit discussion and its treatment of off-balance-sheet deposits.
- Assess how much Q3 and nine-month earnings depended on the Vision Bank OREO markup and sale gains, and compare reported results with management’s adjusted measures.
- Track deposit pricing and funding costs as market rates change, alongside net interest margin and the disclosed down-rate sensitivity.
- Monitor unrealized securities losses, AOCI and regulatory capital, including the potential effects if securities are sold or values do not recover as expected.
- Review loan growth, nonperforming and watch-list exposures, and allowance assumptions—especially commercial real estate and the identified pandemic-sensitive industries.