Park National Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Park is a bank holding company; its principal reportable segment is The Park National Bank. Figures below are consolidated unless noted. Dollar amounts are in U.S. dollars.
Financial performance and position
| Metric | Q2 2023 / June 30, 2023 | Comparison |
|---|---|---|
| Net interest income | $91.6 million | Up 9.1% from Q2 2022 |
| Net interest margin, fully taxable equivalent | 4.07% | 3.84% in Q2 2022 |
| Net income | $31.6 million; diluted EPS $1.94 | Net income down 8.0%; diluted EPS was $2.10 in Q2 2022 |
| Six-month net income | $65.3 million; diluted EPS $4.01 | Net income down 10.8%; diluted EPS was $4.48 in first-half 2022 |
| Other income / other expense | $25.0 million / $75.9 million | Q2 2022: $31.2 million / $70.0 million |
| Loans / allowance for credit losses | $7.21 billion / $87.2 million | Loans up 0.9% from year-end 2022; allowance was $85.4 million |
| Deposits | $8.36 billion | Up 1.5% from year-end 2022 on balance sheet; including off-balance-sheet deposits, down 0.8% |
| Cash and cash equivalents | $230.4 million | $189.7 million at year-end 2022 |
| Debt and borrowings | $143.9 million short-term borrowings; $188.9 million subordinated notes | Short-term borrowings decreased from $227.3 million at year-end 2022 |
| Shareholders’ equity | $1.09 billion; 11.00% of assets | 10.85% at year-end 2022 |
For the first six months, operating cash flow was $57.7 million, investing cash use was $2.0 million, and financing cash use was $15.0 million. Cash increased $40.7 million from year-end. The bank reported a 61.31% efficiency ratio for the first half, compared with 57.98% for the comparable period.
Management reported $2.53 billion of readily accessible liquidity, including Fed funds sold, off-balance-sheet deposits, unpledged securities and available FHLB borrowing capacity. Park and its bank subsidiary met applicable “well capitalized” regulatory thresholds. At June 30, consolidated AFS debt securities had $115.8 million of gross unrealized losses; management said it did not intend, and was not likely required, to sell them before recovery.
Material changes versus comparable periods
- Higher asset yields lifted interest income, but deposit costs rose sharply. First-half average deposit cost increased to 1.31% from 0.12% a year earlier; average cost of interest-bearing liabilities rose to 1.44% from 0.29%.
- Net interest income improved, while earnings fell as other income declined and expenses and credit provisioning increased. First-half other income fell $13.4 million, including lower mortgage-related service income, weaker equity-security results and lower pension benefit income. Other expense rose $15.0 million, with increases in salaries, data processing, professional fees and FDIC insurance assessments.
- Mortgage originations declined 47.3% year over year to $164.5 million for the first half; mortgage-related fee income also fell.
- Loans grew 0.9% from year-end, while total deposits including off-balance-sheet balances declined 0.8%. Retail and non-interest-bearing deposits weakened, partly offset by growth in commercial deposits.
- Nonperforming loans were $58.2 million, or 0.81% of loans, at June 30, versus $101.1 million, or 1.42%, at year-end. Comparability is affected by the January 2023 adoption of ASU 2022-02, which eliminated the TDR category and reduced reported nonperforming loans by $20.1 million at adoption.
- The allowance was 1.21% of loans, compared with 1.20% at year-end. First-half net charge-offs were $1.2 million; annualized net charge-offs were 0.03% of average loans.
Outlook, risks and unusual items
- Management described capital and liquidity as strong and said available funding sources were more than adequate. It expected gradual interest-rate changes to have a modest net-income impact; its simulation projected net income up 0.3% in a rising-rate scenario and down 0.8% in a declining-rate scenario over the next year.
- Credit-loss estimates remain sensitive to economic assumptions. Management weighted its “most likely” and “moderate recession” scenarios equally. A hypothetical adverse-only scenario would increase the allowance by $28.5 million, excluding general reserve adjustments; a baseline-only scenario would decrease it by the same amount.
- Management cited inflation, potential further rate increases, volatile consumer confidence, financial-system stress and geopolitical uncertainty. It also flagged commercial watch-list growth: $103.3 million at June 30, up from $81.8 million at year-end, including a hotel loan and a non-bank consumer finance company loan downgraded to special mention. Both were current under their contractual terms.
- Park had approximately $1.4 billion of uninsured deposits, 17.0% of deposits; $301 million of deposits above $250,000 were fully collateralized. The filing identifies possible deposit outflows and forced securities sales as risks.
- Park National Bank’s DOJ consent order requires at least $9.0 million of commitments over five years for lending subsidies, community programs, outreach and new local lending facilities and staffing in the Columbus, Ohio area. The company cautioned that compliance may require management attention and create unanticipated costs.
- The filing reports routine litigation and unresolved matters; management said related losses, if any, are not likely to be material. No significant changes in contractual obligations were reported for the first half.
- Park adopted ASU 2022-02 on January 1, 2023, recording a $383,000 increase in the allowance and a $303,000 decrease in retained earnings. The filing also reported $17.9 million of share repurchases and $35.1 million of dividends paid during the first half.
Important facts for investors to verify
- Whether deposit levels and mix remain stable, especially non-interest-bearing and retail deposits, and how funding costs affect net interest margin.
- Current liquidity availability and the amount and composition of uninsured deposits; distinguish on-balance-sheet deposits from off-balance-sheet balances.
- Credit trends, including watch-list loans, office-property exposure, nonperforming loans, charge-offs and allowance assumptions; account for the TDR accounting change when comparing periods.
- Whether unrealized AFS securities losses, interest-rate movements or deposit needs could require securities sales or affect capital.
- The costs and progress of the DOJ consent order, and whether mortgage activity and non-interest income recover as expenses continue to rise.