Park National Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited consolidated results. Park is an Ohio-based financial holding company whose principal operating segment is The Park National Bank.
Financial results and position
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior date |
|---|---|---|
| Net interest income | $92.2 million | $77.7 million, Q1 2022; up 18.7% |
| Net interest margin, fully taxable equivalent | 4.08% | 3.55%, Q1 2022 |
| Other income | $24.4 million | $31.7 million, Q1 2022 |
| Provision for credit losses | $0.2 million expense | $4.6 million recovery, Q1 2022 |
| Other expense | $76.5 million | $67.4 million, Q1 2022 |
| Net income / diluted EPS | $33.7 million / $2.07 | $38.9 million / $2.38, Q1 2022 |
| Total assets | $9.86 billion | $9.85 billion, Dec. 31, 2022 |
| Loans / allowance for credit losses | $7.09 billion / $85.9 million | $7.14 billion / $85.4 million, Dec. 31, 2022 |
| Deposits / short-term borrowings | $8.29 billion / $172.1 million | $8.23 billion / $227.3 million, Dec. 31, 2022 |
| Cash and cash equivalents | $261.9 million | $189.7 million, Dec. 31, 2022 |
| Shareholders’ equity | $1.08 billion; 10.98% of assets | $1.07 billion; 10.85%, Dec. 31, 2022 |
Operating cash flow was $24.4 million, investing activities provided $78.7 million, and financing activities used $30.9 million. Cash increased $72.2 million during the quarter. The company reported $2.74 billion of readily accessible liquidity and said it had significant available liquidity. Park and its bank subsidiary met applicable “well capitalized” regulatory ratios; Park’s total risk-based capital ratio was 16.26% and PNB’s was 12.31%.
Material changes versus Q1 2022
- Net income fell 13.2% and diluted EPS declined from $2.38 to $2.07, despite higher net interest income. The net interest margin expanded as asset yields rose, but deposit costs climbed sharply: average interest-bearing deposit cost increased to 1.15% from 0.08%.
- Interest and dividend income rose to $110.9 million from $81.1 million, while interest expense increased to $18.7 million from $3.5 million.
- Other income declined $7.3 million, reflecting lower mortgage-related income, a $2.8 million swing in equity-security results, lower pension benefit income, and the absence of a prior-year branch-sale gain. Mortgage originations dropped 61.8% to $61.2 million.
- Other expense increased $9.1 million, including higher salaries, data processing, professional fees, and FDIC insurance assessments.
- Gross unrealized losses on available-for-sale debt securities were $109.5 million at quarter-end, versus $122.8 million at year-end 2022. The filing says management does not intend, and is not more likely than not required, to sell the securities before recovery.
Outlook, risks, and unusual items
- Outlook: The filing provides no specific earnings or revenue guidance. Management says the quarter’s results are not necessarily indicative of full-year results and expects gradual interest-rate changes to have a modest net-income impact, while noting greater sensitivity to falling rates. Its March 31 simulation projected net income up 2.6% under rising rates and down 3.2% under declining rates over the following year.
- Credit and economic uncertainty: Management cited inflation, rising rates, financial-system stress following bank failures, geopolitical risks, and workforce challenges. Its credit-loss estimate weights the “most likely” and “moderate recession” scenarios equally. A hypothetical adverse-only scenario would increase the allowance by $27.7 million, excluding general-reserve adjustments.
- Credit quality: Nonperforming assets were $75.8 million, or 0.77% of assets, versus $102.5 million, or 1.04%, at year-end 2022. The decline partly reflects adoption of ASU 2022-02, which eliminated TDR classification and reduced reported nonperforming loans by $20.1 million. Commercial watch-list loans increased to $89.6 million from $81.8 million at year-end.
- Deposit and securities risk: Uninsured deposits were approximately $1.5 billion, or 18.6% of deposits; $288 million of that amount was fully collateralized. The securities portfolio included $1.4 billion in unrealized-loss positions, including $1.1 billion held in a loss position for at least 12 months. Management reports adequate liquidity and capital, but securities values, deposit behavior, and funding costs remain important to monitor.
- DOJ consent order: Park National Bank agreed to invest at least $9.0 million over five years in lending subsidies, community programs, outreach, staffing, and facilities serving specified Columbus-area communities. Related expenses will be recorded as activities occur. The order resolves federal claims alleging violations of fair-housing and equal-credit-opportunity laws; the company warns compliance may require management attention and unanticipated costs.
- Other items: Park adopted ASU 2022-02 on January 1, 2023, increasing the allowance by $383,000 and reducing retained earnings by $303,000 after tax. It repurchased 124,000 shares for $15.3 million and declared $1.05 per share in dividends. Management identified recent bank failures as a factor that could affect estimates including credit losses, goodwill, and pension obligations.
Important facts for investors to verify
- How deposit balances and mix evolve, including uninsured deposits, off-balance-sheet deposits, and the effect of rising deposit costs on net interest margin.
- Whether the unrealized AFS securities losses recover as management expects, and whether liquidity or collateral needs require securities sales or additional pledging.
- Whether commercial watch-list balances, nonaccrual loans, charge-offs, and the allowance remain consistent with the company’s economic assumptions; account for the ASU 2022-02 comparability change.
- The pace and financial impact of the DOJ consent-order commitments, including the minimum $9.0 million five-year investment and required operating changes.
- Whether expense growth and weaker mortgage-related and equity-security income persist, and how these factors affect earnings alongside higher net interest income.