Business context and reporting period
Park National Corporation (PRK), an Ohio-based financial holding company whose reportable segment is The Park National Bank, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. Comparisons are with the corresponding 2021 periods; balance-sheet comparisons are primarily with December 31, 2021.
Financial performance and condition
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $83.9 million | $83.9 million | $161.6 million | $164.6 million |
| Provision for (recovery of) credit losses | $3.0 million | $(4.0) million | $(1.6) million | $(8.9) million |
| Other income | $31.2 million | $31.2 million | $62.8 million | $65.3 million |
| Other expense | $70.0 million | $71.4 million | $137.4 million | $139.3 million |
| Net income | $34.3 million | $39.1 million | $73.2 million | $82.0 million |
| Diluted EPS | $2.10 | $2.38 | $4.48 | $4.98 |
| Net interest margin, fully taxable equivalent | 3.84% | 3.74% | 3.70% | 3.75% |
At June 30, total assets were $9.83 billion, loans were $6.96 billion, and total deposits on the consolidated balance sheet were $8.30 billion. Cash and cash equivalents were $246.4 million. Short-term borrowings were $171.8 million and subordinated notes were $188.4 million. Shareholders’ equity was $1.05 billion, or 10.7% of assets. Park and its bank subsidiary met applicable well-capitalized ratio guidelines; Park’s total risk-based capital ratio was 15.95% and the bank’s was 12.30%.
For the first half, operating cash flow was $56.5 million; investing activities used $318.4 million and financing activities provided $289.2 million. Cash and cash equivalents increased $27.3 million from year-end. Management stated that available funding sources provided more than adequate liquidity. The bank reported $809.8 million of off-balance-sheet deposits at June 30; MD&A reported total deposits including those deposits of $9.39 billion.
The allowance for credit losses was $81.4 million, or 1.17% of loans, versus $83.2 million and 1.21% at year-end. Nonperforming loans were $64.6 million; including $5.6 million of commercial loans held for sale previously classified as nonperforming, nonperforming loans totaled $70.2 million. Nonperforming assets were $71.6 million, or 0.73% of assets.
Material changes versus comparable periods
- Net income declined 12.3% in Q2 and 10.7% for the first half; first-half diluted EPS fell from $4.98 to $4.48. The change reflected, among other factors, smaller credit-loss recoveries, lower other income, and reduced PPP-related interest income.
- First-half net interest income declined 1.8%. Loan interest income fell, including as PPP fees wound down, while investment income increased. The first-half reported net interest margin decreased five basis points year over year; Q2 margin increased ten basis points.
- Other service income fell $7.0 million for the first half, primarily due to lower mortgage origination fees and mortgage servicing income. Mortgage originations fell 44.4% to $311.9 million; refinances were 25.9% of originations in Q2 versus 50.0% a year earlier.
- Loans increased 1.3% from year-end; excluding PPP loans, they increased 2.2%. Deposits on the consolidated balance sheet increased 5.0%, while short-term borrowings decreased 28.1%.
- Shareholders’ equity declined $60.7 million from year-end, largely because after-tax unrealized losses on available-for-sale securities reduced accumulated other comprehensive income by $100.6 million. The securities portfolio had $102.5 million of gross unrealized losses; management said it did not intend, and was not likely to be required, to sell before recovery.
- First-half other expense was lower by $1.8 million, including because the prior-year period included a $4.0 million foundation contribution. Compensation, data processing and equipment costs increased.
Outlook, commentary, risks and unusual items
- The filing gives no specific earnings, revenue, margin or loan-growth guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Management cited inflation, rising interest rates, declining consumer confidence, supply-chain and workforce challenges, and Russia-Ukraine-related uncertainty. Its June 30 credit-loss forecast used a 50% “most likely” and 50% “moderate recession” scenario weighting. A hypothetical 100% adverse-scenario weighting would increase the allowance by $20.7 million; a 100% baseline weighting would reduce it by the same amount, before general reserve adjustments.
- Management retained added reserves for hotels and accommodations, restaurants and food service, and strip shopping centers, while reducing those industry reserves to $2.6 million from $5.2 million at year-end. It also cited residual pandemic-related risk. The filing notes that the credit-loss model’s loss-driver analysis had last been updated in Q4 2019.
- Park transferred $6.3 million of commercial loans to held-for-sale status and reported $1.2 million of related credit-loss expense before transfer. Management’s stated risks include credit concentration and collateral values, interest-rate and market changes, economic conditions, cybersecurity and operational risks, regulation, and effects of the pandemic and geopolitical events.
- Goodwill was assessed in Q2 and management concluded it was not impaired. The company reported no material legal proceedings and no material change in internal controls. ASU 2022-02 adoption is planned for January 1, 2023; management does not expect a material financial-statement impact, though disclosures will change.
Important facts for investors to verify
- Whether loan growth, deposit trends and funding costs continue to support net interest income as rates change and PPP balances run off.
- Whether mortgage production and related fee income stabilize after the substantial year-over-year decline.
- Credit quality trends, including commercial watch-list exposures, hospitality and retail-related concentrations, and adequacy of the $81.4 million allowance under worsening economic scenarios.
- The implications of $102.5 million in unrealized AFS securities losses for reported equity and future capital, particularly if liquidity needs require securities sales.
- How off-balance-sheet deposits, commitment funding needs, and the reported liquidity position evolve; loan commitments totaled $1.42 billion and standby letters of credit $23.3 million.
- Whether reported earnings remain resilient given lower credit-loss recoveries, changing deposit costs, and expense pressures.