Park National Corporation (NYSE: PRK) — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The filing was signed March 1, 2023. Park is a financial holding company whose principal business is community banking through The Park National Bank, serving Ohio, Kentucky, North Carolina and South Carolina.
Financial performance
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net interest income | $347.1 million | $329.9 million | +5.2% |
| Provision for credit losses | $4.6 million | Recovery of $11.9 million | Provision increased |
| Other income | $135.9 million | $129.9 million | +4.6% |
| Other expense | $298.0 million | $283.5 million | +5.1% |
| Income before taxes | $180.5 million | $188.2 million | -4.1% |
| Net income | $148.4 million | $153.9 million | -3.6% |
| Diluted earnings per share | $9.06 | $9.37 | -3.3% |
| Net interest margin, fully taxable equivalent | 3.80% | 3.69% | +11 basis points |
| Efficiency ratio | 61.24% | 61.27% | Nearly unchanged |
Pre-tax, pre-provision net income, a non-GAAP measure, rose 4.9% to $185.0 million. Reported results included $12.0 million of OREO valuation markup and $5.6 million of OREO sale gains, both related to former Vision Bank relationships. Park’s adjusted net income was $134.2 million versus $147.8 million in 2021, and adjusted diluted EPS was $8.20 versus $9.00; these are management-defined non-GAAP measures.
Balance sheet, credit and liquidity
- Total assets were $9.855 billion at year-end, up 3.1% from $9.560 billion. Loans were $7.142 billion, up 3.9%; excluding PPP loans, loan growth was 5.0%.
- Deposits reported on the consolidated balance sheet were $8.235 billion, up from $7.905 billion. Including off-balance-sheet deposits, the year-end total was $8.431 billion, down 5.1% from $8.888 billion a year earlier. Management used off-balance-sheet deposit programs to manage balance-sheet growth.
- Cash and cash equivalents were $189.7 million, down $29.5 million. Operating cash flow was $134.9 million, compared with $157.3 million in 2021. Investing activities used $403.7 million; financing activities provided $239.4 million.
- Total borrowings were $416.0 million, comprising $227.3 million of short-term borrowings and $188.7 million of subordinated notes. Park had no long-term borrowings at year-end. Management stated that available funding sources provided more than adequate liquidity.
- The allowance for credit losses was $85.4 million, or 1.20% of loans, versus $83.2 million, or 1.21%, in 2021. Net charge-offs were $2.4 million (0.03% of average loans), versus net recoveries of $3.3 million in 2021. Nonperforming assets were $102.5 million, down from $106.2 million; nonperforming loans were 1.42% of total loans.
- Capital remained above regulatory well-capitalized thresholds. Park’s total risk-based capital ratio was 16.07%; the bank’s was 12.15%. Shareholders’ equity was $1.069 billion, down from $1.111 billion, substantially reflecting a $116.9 million after-tax AFS securities valuation loss in other comprehensive income. The tangible equity-to-tangible-assets ratio declined to 9.33% from 10.05%.
- Cash dividends declared were $4.66 per share, including a $0.50 special dividend in the fourth quarter. Park intends to continue quarterly dividends at levels comparable to 2022, subject to regulatory and other constraints. No shares were repurchased in 2022.
Changes and management commentary
- Higher asset yields lifted net interest income: the average yield on interest-earning assets increased to 4.14% from 3.86%. Higher funding costs partly offset this benefit; the average cost of interest-bearing liabilities rose to 0.54% from 0.28%.
- Mortgage originations fell 42.7% to $558.0 million as higher rates reduced activity. Other service income declined by $14.5 million, mainly from lower mortgage origination and servicing income. Consumer loans, chiefly automobile lending, increased.
- Average trust assets under management declined to $7.22 billion from $7.45 billion, contributing to lower fiduciary income. Total expenses increased, with salaries, data processing and professional fees among the drivers.
- PPP loan balances declined to $4.2 million from $74.4 million; PPP-related interest and fee income fell to $3.1 million from $18.0 million. Park had originated $764.7 million of PPP loans in total.
- COVID-era additional qualitative credit reserves for certain hotel, restaurant and shopping-center exposures were reduced to zero by year-end as management cited improving conditions. However, its CECL allowance scenarios continued to assign 50% weight to a “moderate recession” scenario and 50% to the most likely scenario. A hypothetical adverse-only scenario would increase the allowance by $27.5 million, excluding general reserve adjustments.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management’s outlook highlights uncertainty from inflation, rising interest rates, regional economic and property conditions, borrower repayment capacity, competition, and deposit pricing and retention. Its year-end rate-sensitivity model projected net income up 3.69% in a rising-rate scenario and down 5.38% in a declining-rate scenario over the next year; management cautioned that such modeling relies on uncertain assumptions.
- Park had $2.4 billion of estimated uninsured deposits at year-end, compared with $1.7 billion in 2021. Deposit competition and further increases in funding costs could pressure margins and liquidity.
- Park disclosed $516.5 million of CLOs and $1.6 billion of AFS debt securities in unrealized loss positions, with aggregate unrealized losses of $122.8 million. Management said it did not intend, and did not expect to be required, to sell the securities before recovery; it recorded no AFS credit-loss allowance. The unrealized AFS losses reduced reported equity through accumulated other comprehensive income.
- On February 28, 2023, after year-end, Park National Bank reached a proposed DOJ consent order resolving U.S. allegations concerning mortgage lending in the Columbus, Ohio area. Court approval was still required. Park committed to spend at least $9.0 million over five years on lending subsidies, community programs, outreach, a new loan production office and branch, and related staffing. Compliance may require additional costs and management attention.
- Other notable exposures include $1.417 billion of loan commitments, $30.5 million of standby letters of credit, $28.1 million of unfunded affordable-housing investment commitments and $20.3 million of unfunded equity-investment commitments. Management said no unrecorded significant contingent liabilities existed at year-end. Routine litigation was not expected by management to be material.
- LIBOR-linked exposure was approximately $608.4 million at year-end, including loans, securities and subordinated notes. Park expected the transition to SOFR not to have a material effect, but disclosed transition and operational risk. Cybersecurity, third-party vendor, credit, interest-rate, regulatory and potential growth past the $10 billion asset threshold are also identified risks.
Most important facts for investors to verify
- Whether the proposed DOJ consent order received court approval, and the timing and actual costs of the required commitments.
- Subsequent deposit trends, including uninsured and off-balance-sheet deposits, and the effect of deposit repricing on net interest margin.
- Loan performance and reserve adequacy, particularly the $23 million non-bank consumer finance company loan placed on nonaccrual at year-end, commercial real estate exposures and CECL scenario assumptions.
- Whether AFS securities valuation losses recover, remain unrealized, or affect capital or liquidity through any future sales.
- Future earnings excluding unusual Vision Bank OREO gains and other comparability items, alongside mortgage-related fee trends and expense growth.
- Regulatory capital, dividend capacity and the consequences if consolidated assets exceed $10 billion.
Audit: Crowe LLP issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. The allowance for credit losses was identified as a critical audit matter due to the judgment involved in economic forecasts and model assumptions.