PARK NATIONAL CORPORATION Management's discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance. The forward-looking statements are based on management's expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements.
Risks and uncertainties that could cause actual results to differ materially include, without limitation:
•Park's ability to execute our business plan successfully and within the expected timeframe as well as our ability to manage strategic initiatives; •current and future economic and financial market conditions, either nationally or in the states in which Park and our subsidiaries do business, that may reflect deterioration in business and economic conditions, including the effects of higher unemployment rates, an acceleration in the pace of inflation, interest rate fluctuations, changes in the economy or global supply chain, supply-demand imbalances affecting local real estate prices,U.S. fiscal debt, budget and tax matters, geopolitical matters (including the impact of 58
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theRussia -Ukraine conflict and associated sanctions and export controls), and any slowdown in global economic growth, in addition to the continuing impact of the COVID pandemic and recovery therefrom on our customers' operations and financial condition, any of which may result in adverse impacts on the demand for loan, deposit and other financial services, delinquencies, defaults and counterparties' inability to meet credit and other obligations and the possible impairment of collectability of loans; •factors that can impact the performance of our loan portfolio, including changes in real estate values and liquidity in our primary market areas, the financial health of our commercial borrowers and the success of construction projects that we finance, including any loans acquired in acquisition transactions; •the effect of monetary and other fiscal policies (including the impact of money supply, market interest rate policies and policies impacting inflation, of theFederal Reserve Board , theU.S. Treasury and other governmental agencies) as well as disruption in the liquidity and functioning ofU.S. financial markets, may adversely impact prepayment penalty income, mortgage banking income, income from fiduciary activities, the value of securities, deposits and other financial instruments, in addition to the loan demand and the performance of our loan portfolio, and the interest rate sensitivity of our consolidated balance sheet as well as reduce net interest margins; •changes in the federal, state, or local tax laws may adversely affect the fair values of net deferred tax assets and obligations of state and political subdivisions held in Park's investment securities portfolio and otherwise negatively impact our financial performance; •the impact of the changes in federal, state and local governmental policy, including the regulatory landscape, capital markets, elevated government debt, potential changes in tax legislation that may increase tax rates, infrastructure spending and social programs; •changes in laws or requirements imposed by Park's regulators impacting Park's capital actions, including dividend payments and stock repurchases; •changes in consumer spending, borrowing and saving habits, whether due to changes in retail distribution strategies, consumer preferences and behaviors, changes in business and economic conditions, legislative and regulatory initiatives, or other factors may be different than anticipated; •changes in customers', suppliers', and other counterparties' performance and creditworthiness, and Park's expectations regarding future credit losses and our allowance for credit losses, may be different than anticipated due to the continuing impact of and the various responses to inflationary pressures; •Park may have more credit risk and higher credit losses to the extent there are loan concentrations by location or industry of borrowers or collateral; •the volatility from quarter to quarter of mortgage banking income, whether due to interest rates, demand, the fair value of mortgage loans, or other factors; •the adequacy of our internal controls and risk management program in the event of changes in the market, economic, operational (including those which may result from our associates working remotely), asset/liability repricing, legal, compliance, strategic, cybersecurity, liquidity, credit and interest rate risks associated with Park's business; •competitive pressures among financial services organizations could increase significantly, including product and pricing pressures (which could in turn impact our credit spreads), changes to third-party relationships and revenues, changes in the manner of providing services, customer acquisition and retention pressures, and Park's ability to attract, develop and retain qualified banking professionals; •uncertainty regarding the nature, timing, cost and effect of changes in banking regulations or other regulatory or legislative requirements affecting the respective businesses of Park and our subsidiaries, including major reform of the regulatory oversight structure of the financial services industry and changes in laws and regulations concerning taxes,FDIC insurance premium levels, pensions, bankruptcy, consumer protection, rent regulation and housing, financial accounting and reporting, environmental protection, insurance, bank products and services, bank and bank holding company capital and liquidity standards, fiduciary standards, securities and other aspects of the financial services industry, specifically the reforms provided for in the CARES Act and the follow-up legislation in the Consolidated Appropriations Act, 2021, the American Rescue Plan Act of 2021, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") and the Basel III regulatory capital reforms, as well as regulations already adopted and which may be adopted in the future by the relevant regulatory agencies, including theConsumer Financial Protection Bureau , theOffice of the Comptroller of the Currency , theFederal Deposit Insurance Corporation , and theFederal Reserve Board , to implement the provisions of the CARES Act and the follow-up legislation in the Consolidated Appropriations Act, 2021, the provisions of the American Rescue Plan Act of 2021, the provisions of the Dodd-Frank Act, and the Basel III regulatory capital reforms; •Park's ability to meet heightened supervisory requirements and expectations; •the effect of changes in accounting policies and practices, as may be adopted by theFinancial Accounting Standards Board (the "FASB"), theSEC , thePublic Company Accounting Oversight Board and other regulatory agencies, may adversely affect Park's reported financial condition or results of operations; •Park's assumptions and estimates used in applying critical accounting policies and modeling, including under the CECL model, which may prove unreliable, inaccurate or not predictive of actual results; •the possibility that future credit losses may be higher than currently expected due to changes in economic assumptions; •the impact of Park's ability to anticipate and respond to technological changes on Park's ability to respond to customer needs and meet competitive demands; •operational issues stemming from and/or capital spending necessitated by the potential need to adapt to industry changes in information technology systems on which Park and our subsidiaries are highly dependent; •the ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks, including those of Park's third-party vendors and other service providers, which may prove inadequate, and could adversely affect customer confidence in Park and/or result in Park incurring a financial loss; 59
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•a failure in or breach of Park's operational or security systems or infrastructure, or those of our third-party vendors and other service providers, resulting in failures or disruptions in customer account management, general ledger, deposit, loan, or other systems, including as a result of cyber attacks; •the impact on Park's business and operating results of any costs associated with obtaining rights in intellectual property claimed by others and of the adequacy of Park's intellectual property protection in general; •the existence or exacerbation of general geopolitical instability and uncertainty as well as the effect of trade policies (including the impact of potential or imposed tariffs, aU.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulations, closing of border crossings and changes in the relationship of theU.S. and its global trading partners); •the impact on financial markets and the economy of any changes in the credit ratings of theU.S. Treasury obligations and otherU.S. government-backed debt, as well as issues surrounding the levels ofU.S. , European and Asian government debt and concerns regarding the growth rates and financial stability of certain sovereign governments, supranationals and financial institutions inEurope andAsia and the risk they may face difficulties servicing their sovereign debt; •the effect of a fall in stock market prices on Park's asset and wealth management businesses; •our litigation and regulatory compliance exposure, including the costs and effects of any adverse developments in legal proceedings or other claims, the costs and effects of unfavorable resolution of regulatory and other governmental examinations or other inquiries, and liabilities and business restrictions resulting from litigation and regulatory investigations; •continued availability of earnings and excess capital sufficient for the lawful and prudent declaration of dividends; •the impact on Park's business, personnel, facilities or systems of losses related to acts of fraud, scams and schemes of third parties; •the impact of widespread natural and other disasters, pandemics (including the COVID pandemic), dislocations, regional or national protests and civil unrest (including any resulting branch closures or damages), military or terrorist activities or international hostilities (especially in light of theRussia -Ukraine conflict) on the economy and financial markets generally and on us or our counterparties specifically; •a worsening of theU.S. economy due to financial, political, or other shocks; •the effect of healthcare laws in theU.S. and potential changes for such laws, especially in light of the COVID pandemic, which may increase our healthcare and other costs and negatively impact our operations and financial results; •risk and uncertainties associated with Park's entry into new geographic markets with our most recent acquisitions, including expected revenue synergies and cost savings from recent acquisitions not being fully realized or realized within the expected time frame; •uncertainty surrounding the transition from the LIBOR to an alternate reference rate; •a continuation of recent turmoil in the financial services industry, and the impact of responsive measures to mitigate and manage such turmoil, including potential increased supervisory and regulatory actions and costs; •and other risk factors relating to the financial services industry as detailed from time to time in Park's reports filed with theSEC including those described in "Item 1A. Risk Factors" of Part I of Park's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2022 and "Item 1A. Risk Factors" of Part II of this Quarterly Report on Form 10-Q. Park does not undertake, and specifically disclaims any obligation, to publicly release the results of any revisions that may be made to update any forward-looking statement to reflect the events or circumstances after the date on which the forward-looking statement was made, or reflect the occurrence of unanticipated events, except to the extent required by applicable law.
Non-
This Management's Discussion and Analysis (or "MD&A") contains non-U.S. GAAP financial measures where management believes it to be helpful in understanding Park's results of operations or financial position. Where non-U.S. GAAP financial measures are used, the comparableU.S. GAAP financial measure, as well as the reconciliation to the comparableU.S. GAAP financial measure, can be found herein. Items Impacting Comparability of Period Results From time to time, revenue, expenses and/or taxes are impacted by items judged by management of Park to be outside of ordinary banking activities and/or by items that, while they may be associated with ordinary banking activities, are so unusually large that their outsized impact is believed by management of Park at that time to be infrequent or short-term in nature. Most often, these items impacting comparability of period results are due to merger and acquisition activities and revenue and expenses related to former Vision Bank loan relationships. In other cases, they may result from management's decisions associated with significant corporate actions outside of the ordinary course of business. Even though certain revenue and expense items are naturally subject to more volatility than others due to changes in market and economic environment conditions, as a general rule volatility alone does not result in the inclusion of an item as one impacting comparability of period results. For example, changes in the provision for / (recovery of) credit losses (aside from those related to former Vision Bank loan relationships), gains (losses) on equity securities, net, and asset valuation adjustments, reflect ordinary banking activities and are, therefore, typically excluded from consideration as items impacting comparability of period results. 60
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Management believes the disclosure of items impacting comparability of period results provides a better understanding of Park's performance and trends and allows management to ascertain which of such items, if any, to include or exclude from an analysis of Park's performance; i.e., within the context of determining how that performance differed from expectations, as well as how, if at all, to adjust estimates of future performance taking such items into account.
Items impacting comparability of the results of particular periods are not intended to be a complete list of items that may materially impact current or future period performance.
Non-U.S. GAAP Financial Measures Park's management uses certain non-U.S. GAAP financial measures to evaluate Park's performance. Specifically, management reviews the return on average tangible equity, the return on average tangible assets, the tangible equity to tangible assets ratio, tangible book value per common share and pre-tax, pre-provision net income. Management has included in the tables included within the "Items Impacting Comparability" section of this MD&A information relating to the annualized return on average tangible equity, the annualized return on average tangible assets, the tangible equity to tangible assets ratio, tangible book value per common share and pre-tax, pre-provision net income for the three months ended and atMarch 31, 2023 andMarch 31, 2022 . For the purpose of calculating the annualized return on average tangible equity, a non-U.S.GAAP financial measure, net income for each period is divided by average tangible equity during the period. Average tangible equity equals average shareholders' equity during the applicable period less average goodwill and other intangible assets during the applicable period. For the purpose of calculating the annualized return on average tangible assets, a non-U.S. GAAP financial measure, net income for each period is divided by average tangible assets during the period. Average tangible assets equals average assets during the applicable period less average goodwill and other intangible assets during the applicable period. For the purpose of calculating the tangible equity to tangible assets ratio, a non-U.S. GAAP financial measure, tangible equity is divided by tangible assets. Tangible equity equals total shareholders' equity less goodwill and other intangible assets, in each case at period end. Tangible assets equal total assets less goodwill and other intangible assets, in each case at period end. For the purpose of calculating tangible book value per common share, a non-U.S. GAAP financial measure, tangible equity is divided by the number of common shares outstanding, in each case at period end. For the purpose of calculating pre-tax, pre-provision net income, a non-U.S. GAAP financial measure, income taxes and the provision for (recovery of) credit losses are added back to net income, in each case during the applicable period. Management believes that the disclosure of the annualized return on average tangible equity, the annualized return on average tangible assets, the tangible equity to tangible assets ratio, tangible book value per common share and pre-tax, pre-provision net income presents additional information to the reader of the condensed consolidated financial statements, which, when read in conjunction with the condensed consolidated financial statements prepared in accordance withU.S. GAAP, assists in analyzing Park's operating performance, ensures comparability of operating performance from period to period, and facilitates comparisons with the performance of Park's peer financial holding companies and bank holding companies, while eliminating certain non-operational effects of acquisitions. In the tables included within the "Items Impacting Comparability" section of this MD&A, Park has provided a reconciliation of average tangible equity to average shareholders' equity, average tangible assets to average assets, tangible equity to total shareholders' equity, tangible assets to total assets, and pre-tax, pre-provision net income to net income solely for the purpose of complying with SEC Regulation G and not as an indication that the annualized return on average tangible equity, the annualized return on average tangible assets, the tangible equity to tangible assets ratio, tangible book value per common share and pre-tax, pre-provision net income are substitutes for the annualized return on average equity, the annualized return on average assets, the total shareholders' equity to total assets ratio, book value per common share and net income, respectively, as determined in accordance withU.S. GAAP. FTE (fully taxable equivalent) Financial Measures Interest income, yields, and ratios on a FTE basis are considered non-U.S. GAAP financial measures. Management believes net interest income on a FTE basis provides an insightful picture of the interest margin for comparison purposes. The FTE basis also allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. The FTE basis assumes a federal corporate income tax rate of 21 percent. In the tables included within the "Items Impacting Comparability" section of this MD&A, Park has provided a reconciliation of FTE interest income solely for the purpose of complying with SEC Regulation G and not as an indication that FTE interest income, yields and ratios are substitutes for interest income, yields and ratios, as determined in accordance withU.S. GAAP. Paycheck Protection Program ("PPP") Loans Park originated an aggregate of$764.7 million in loans as part of the PPP. For its assistance in making and retaining these loans, Park received an aggregate of$33.1 million in fees from the SBA. These loans are not typical of Park's loan portfolio in that they are part of a specific government program to support businesses during the COVID pandemic and are 100% guaranteed by SBA. As such, management considers growth in the loan portfolio excluding PPP loans, the total allowance for 61
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credit losses to total loans ratio (excluding PPP loans), and general reserve on collectively evaluated loans as a percentage of total collectively evaluated loans (excluding PPP loans) in addition to the relatedU.S. GAAP metrics which are not adjusted for PPP loans.
Critical Accounting Policies
Note 1 of the Notes to Consolidated Financial Statements included in Park's 2022 Form 10-K lists significant accounting policies used in the development and presentation of Park's consolidated financial statements. The accounting and reporting policies of Park conform withU.S. GAAP and general practices within the financial services industry. The preparation of financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. Recent bank failures have called into question the stability of the financial services industry. While Park is well capitalized and has significant available liquidity, the effects of these failures and potential future failures may meaningfully impact significant estimates such as the allowance for credit losses, goodwill, and pension plan obligations and related expenses. Allowance for Credit Losses: Park believes the determination of the allowance for credit losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance for credit losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses over the life of an asset or an off-balance sheet credit exposure. Management's determination of the adequacy of the allowance for credit losses is based on periodic evaluations of past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. However, this evaluation has subjective components requiring material estimates, including expected default probabilities, the expected LGD, the amounts and timing of expected future cash flows on individually evaluated loans, and estimated losses based on historical loss experience and forecasted economic conditions. All of these factors may be susceptible to significant change. To the extent that actual results differ from management estimates, additional provisions for credit losses may be required that would adversely impact earnings in future periods. One of the most significant judgments impacting the ACL estimate is the economic forecast forOhio unemployment, Ohio GDP, and Ohio HPI. Changes in the economic forecast could significantly affect the estimated credit losses which could potentially lead to materially different allowance levels from one reporting period to the next. In calculating the ACL, management weighs several different scenarios, including a baseline (most likely) scenario and an adverse scenario. To create hypothetical sensitivity analyses, management calculated a quantitative allowance using a 100% weighting applied to a baseline scenario and a quantitative allowance using a 100% weighting applied to an adverse scenario. The adverse scenario assumes among other things that: (1) the military conflict betweenRussia andUkraine persists longer than anticipated worsening supply-chain conditions and increasing shortages of many goods; (2) supply-chain shortages weaken manufacturing; (3) inflation remains elevated, though slightly below the baseline amid persistent shortages and concerns about a wage price spiral; (4) theFederal Reserve Board initially keeps the fed funds rate elevated, though a bit less than in the baseline because of weakening economy; (5) recent bank failures raise fears of further collapse in the banking industry, reducing consumer confidence and causing banks to tighten lending standards; and (6) the economy falls into recession in the second quarter of 2023. The adverse scenario forecastsOhio unemployment for the next twelve months to range from 6.5% to 9.1%. Excluding consideration of general reserve adjustments, this sensitivity analysis would result in a hypothetical increase in Park's ACL of$27.7 million as ofMarch 31, 2023 if only the adverse scenario was used. Excluding consideration of general reserve adjustments, a corresponding$27.7 million decrease in Park's ACL would occur in a hypothetical scenario if only the baseline (most likely) scenario was used.
Refer to the "Credit Metrics and Provision for (Recovery of) Credit Losses" section of this MD&A for additional discussion.
Goodwill : Management believes that the accounting for goodwill also involves a higher degree of judgment than most other significant accounting policies.U.S. GAAP establishes standards for the impairment assessment of goodwill.Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in each business acquired. Park's goodwill, as ofMarch 31, 2023 , relates to the value inherent in the financial services industry and that value is dependent upon the ability of Park's national bank subsidiary, PNB, to provide quality, cost-effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base, the inability to deliver cost-effective services over sustained periods or significant credit problems could lead to impairment of goodwill that could, in turn, adversely impact earnings in future periods. 62
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U.S. GAAP requires an annual evaluation of goodwill for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Park evaluates goodwill for impairment during the second quarter of each year, with financial data as of the immediately precedingMarch 31 . Based on the qualitative analysis performed as ofApril 1, 2022 , the Company determined that goodwill for Park's reporting unit, PNB, was not impaired. The fair value of the goodwill, which resides on the books of PNB, is evaluated for potential impairment by reviewing the past and projected operating results for PNB, deposit and loan totals for PNB and financial services industry comparable information. Pension Plan: The determination of pension plan obligations and related expenses requires the use of assumptions to estimate the amount of benefits that employees will earn while working, as well as the present value of those benefits. Annual pension expense is principally based on four components: (1) the value of benefits earned by employees for working during the year (service cost), (2) the increase in the liability due to the passage of time (interest cost), and (3) other gains and losses, reduced by (4) the expected return on plan assets for our pension plan.
Significant assumptions used to measure our annual pension expense include:
•the interest rate used to determine the present value of liabilities (discount
rate);
•certain employee-related factors, such as turnover, retirement age and
mortality;
•the expected return on assets in our funded pension plan; and
•the rate of salary increases where benefits are based on earnings.
Our assumptions reflect our historical experience and management's best judgment
regarding future expectations. Due to the significant management judgment
involved, our assumptions could have a material impact on the measurement of our
pension plan expense and obligation.
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Comparison of Results of Operations
For the Three Months Ended March 31, 2023 and 2022Summary Discussion of Results
Net income for the three months endedMarch 31, 2023 was$33.7 million , compared to$38.9 million for the first quarter of 2022. Diluted earnings per common share were$2.07 for the first quarter of 2023, compared to$2.38 for the first quarter of 2022. Weighted average diluted common shares outstanding were 16,324,823 for the first quarter of 2023, compared to 16,331,031 weighted average diluted common shares outstanding for the first quarter of 2022.
Liquidity and Capital
Park continues to maintain strong capital and liquidity. Funds are available from a number of sources, including the capital markets, the investment securities portfolio, the core deposit base, FHLB borrowings and the capability to securitize or package loans for sale. The most easily accessible forms of liquidity, Fed Funds Sold, off balance sheet deposits, unpledged investment securities and available FHLB borrowing capacity, totaled$2.74 billion atMarch 31, 2023 . Park's debt securities portfolio is classified as available-for-sale ("AFS") and these debt securities are available to be sold in the future in response to Park's liquidity needs, changes in market interest rates, and asset-liability management strategies, among other reasons. AFS debt securities are reported at fair value, with unrealized holding gains and losses excluded from earnings, but included in other comprehensive loss, net of applicable income taxes. The table below provides additional detail on Park's debt securities portfolio and capital position. % change from % change from (Dollars in thousands) March 31, 2023 December 31, 2022 March 31, 2022 12/31/22 03/31/22 Net unrealized losses on debt securities 105,510 121,156 43,809 (12.91) % 140.84 % Net unrealized losses on debt securities as a percentage of period end total assets 1.07 % 1.23 % 0.46 % (13.01) % 132.61 % Total shareholders' equity / Period end total assets 10.98 % 10.85 % 11.24 % 1.20 % (2.31) % Tangible equity / Tangible assets (1) 9.46 % 9.33 % 9.67 % 1.39 % (2.17) %
(1) Tangible equity equals total shareholders' equity less goodwill and other intangible assets, in each case at period end. Tangible assets equal total assets less goodwill and other intangible assets, in each case at period end.
Park's deposits grew during the COVID pandemic and normalized throughout 2022.
In order to manage the impact of this growth on its balance sheet, Park has
utilized a program where certain deposit balances are transferred off balance
sheet while maintaining the customer relationship. Park is able to increase or
decrease the amount off balance sheet based on its balance sheet management
strategies and liquidity needs. The balance of deposits transferred off balance
sheet has declined as deposit
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balances have returned to normalized levels. The table below breaks out the
change in deposit balances, by deposit type, for
December 31 ,
(Dollars in thousands)
December 31, 2021 December 31, 2020 2019 Retail Deposits Non-interest bearing deposits$ 1,176,545 $ 1,193,807 $ 1,195,530 $ 1,077,107 $ 801,035 Transaction accounts 939,026 994,717 1,004,532 900,093 760,640 Savings 1,702,824 1,744,713 1,669,373 1,427,687 1,461,347 Certificates of deposit 445,552 455,157 546,793 620,965 725,017 Total retail deposits$ 4,263,947 $ 4,388,394
(2.8) % (0.6) % 9.7 % 7.4 %
Commercial Deposits
Non-interest bearing deposits $ 1,745,697 $ 1,880,469 $ 1,870,889 $ 1,649,992 $ 1,158,900
Transaction accounts 1,231,790 993,388 498,344 481,386 868,102
Savings 966,712 873,176 954,200 1,171,521 863,458
Certificates of deposit 86,298 99,288 164,867 243,607 414,113
Total commercial deposits $ 4,030,497 $ 3,846,321
4.8 % 10.3 % (1.6) % 7.3 %
Total deposits 8,294,444 8,234,715 7,904,528 7,572,358 7,052,612
$ change from prior period end
0.7 % 4.2 % 4.4 % 7.4 %
Off balance sheet deposits 164,600 195,937 983,053 710,101 -
Total deposits including off balance
sheet deposits $ 8,459,044 $ 8,430,652
0.3 % (5.1) % 7.3 % 17.4 %
During the three months ended March 31, 2023 , total deposits including off
balance sheet deposits increased by $28.4 million , or 0.3%. This increase
consisted of a $184.2 million increase in total commercial deposits offset by a
$124.4 million decrease in total retail deposits and a $31.3 million decrease in
off balance sheet deposits. Of the $184.2 million increase in total commercial
deposits, $182.9 million was a result of an increase in public fund deposits.
This increase is consistent with historical seasonality. As of March 31, 2023 ,
Park had approximately $1.5 billion of uninsured deposits, which was 18.6% of
total deposits. Uninsured deposits of $1.5 billion included $288 million of
deposits which were over $250,000 but were fully collateralized by Park's
investment securities portfolio.
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Table of Contents Financial Results by Segment The table below reflects the net income (loss) by segment for the first quarters (the three months endedMarch 31 ) of 2023 and 2022 and for the years endedDecember 31, 2022 and 2021. Park's segments includeThe Park National Bank ("PNB") and "All Other" which primarily consists of Park as the "Parent Company",Guardian Financial Services Company ("GFSC") andSE Property Holdings, LLC ("SEPH"). (In thousands) Q1 2023 Q1 2022 2022 2021 PNB$ 36,269 $ 41,468 $ 143,243 $ 159,461 All Other (2,536) (2,593) 5,108 (5,516)Total Park $ 33,733 $ 38,875 $ 148,351 $ 153,945
Highlights from the three-month periods ended
•Net income for the three months endedMarch 31, 2023 of$33.7 million represented a$5.1 million , or 13.2%, decrease compared to$38.9 million for the three months endedMarch 31, 2022 and a$649,000 , or 2.0%, increase compared to$33.1 million for the three months endedDecember 31, 2022 . •Pre-tax, pre-provision net income for the three months endedMarch 31, 2023 of$40.1 million represented a$1.9 million , or 4.5%, decrease compared to$42.0 million for the three months endedMarch 31, 2022 and a$3.3 million , or 7.5%, decrease compared to$43.3 million for the three months endedDecember 31, 2022 . •During the three months endedMarch 31, 2023 , Park recorded interest income of$26,000 related to PPP loans, compared to$1.6 million for the three months endedMarch 31, 2022 and$78,000 for the three months endedDecember 31, 2022 . •PNB loans outstanding atMarch 31, 2023 increased 4.0%, compared to atMarch 31, 2022 , and decreased 0.7% compared to atDecember 31, 2022 . •Park's loan portfolio reflected continued good credit quality with net loan recoveries as a percentage of average loans of 0.00% for the three months endedMarch 31, 2023 , compared to net loan charge-offs as a percentage of average loans of 0.09% for the three months endedDecember 31, 2022 , and net loan recoveries as a percentage of average loans of 0.02% for the three months endedMarch 31, 2022 . Net income for each of the three months endedMarch 31, 2023 andMarch 31, 2022 included several items of income and expense that impacted comparability of period results. These items are detailed in the "Items Impacting Comparability" section within this MD&A.
The following discussion provides additional information regarding the PNB segment, followed by additional information regarding All Other.
The table below reflects PNB's net income for the first quarters (the three
months ended
(In thousands) Q1 2023 Q1 2022 2022 2021
Net interest income$ 93,589 $ 79,372 $ 350,646 $ 328,398 Provision for (recovery of) credit losses 915 (4,547) 5,834 (8,554) Other income 24,262 31,247 115,211 126,802 Other expense 72,997 64,216 283,670 266,678 Income before income taxes$ 43,939 $ 50,950 $ 176,353 $ 197,076 Income tax expense 7,670 9,482 33,110 37,615 Net income$ 36,269 $ 41,468 $ 143,243 $ 159,461 Net interest income of$93.6 million for the three months endedMarch 31, 2023 represented a$14.2 million , or 17.9%, increase compared to$79.4 million for the three months endedMarch 31, 2022 . The increase was a result of a$29.3 million increase in interest income, partially offset by a$15.1 million increase in interest expense. 66
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The$29.3 million increase in interest income was due to a$18.7 million increase in interest income on loans and a$10.6 million increase in investment income. The$18.7 million increase in interest income on loans was primarily the result of a$271.3 million increase in average loans, from$6.83 billion for the three months endedMarch 31, 2022 to$7.10 billion for the three months endedMarch 31, 2023 , as well as an increase in the yield on loans, which increased 91 basis points to 5.21% for the three months endedMarch 31, 2023 , compared to 4.30% for the three months endedMarch 31, 2022 . The$10.6 million increase in investment income was partially the result of a$28.4 million increase in average investments, including money market instruments, from$2.12 billion for the three months endedMarch 31, 2022 to$2.15 billion for the three months endedMarch 31, 2023 . The increase in investment income was also impacted by an increase in the yield on investments, which increased 198 basis points to 3.77% for the three months endedMarch 31, 2023 , compared to 1.79% for the three months endedMarch 31, 2022 . The$15.1 million increase in interest expense was due to a$14.5 million increase in interest expense on deposits, as well as a$581,000 increase in interest expense on borrowings. The increase in interest expense on deposits was the result of a$306.8 million increase in average on-balance sheet interest bearing deposits from$5.17 billion for the three months endedMarch 31, 2022 , to$5.48 billion for the three months endedMarch 31, 2023 as well as an increase in the cost of deposits of 107 basis points, from 0.08% for the three months endedMarch 31, 2022 to 1.15% for the three months endedMarch 31, 2023 . The increase in on-balance sheet interest bearing deposits was due to an increase in transaction accounts, which was partially offset by decreases in both savings and time deposits. During the three months endedMarch 31, 2023 and 2022, Park made the decision to continue its participation in a program to transfer deposits off-balance sheet in order to manage growth of the balance sheet. The provision for credit losses of$915,000 for the three months endedMarch 31, 2023 represented a difference of$5.5 million , compared to a recovery of credit losses of$4.5 million for the three months endedMarch 31, 2022 . Refer to the "Credit Metrics and Provision for (Recovery of) Credit Losses" section for additional details regarding the level of the provision for (recovery of) credit losses recognized in each period presented above. Other income of$24.3 million for the three months endedMarch 31, 2023 represented a decrease of$7.0 million , or 22.4%, compared to$31.2 million for the three months endedMarch 31, 2022 . The$7.0 million decrease was primarily related to (i) a$2.5 million change in (loss) gain on equity securities, net, from a$2.2 million gain for the three months endedMarch 31, 2022 to a$307,000 loss for the three months endedMarch 31, 2023 ; (ii) a$2.3 million decrease in other service income, which was primarily due to declines in fee income from mortgage loan originations and mortgage servicing rights, partially offset increases in investor rate locks and mortgage loans held for sale; (iii) a$1.4 million decrease in other miscellaneous income, which was primarily due to decreases in the net gain on the sale of other assets and decreases in other fee income; and (iv) a$1.1 million decrease in other components of net periodic benefit income. These decreases were partially offset by a$330,000 increase in debit card fee income.
A summary of mortgage loan originations for the first quarters of 2023 and 2022
and the years ended
(In thousands) Q1 2023 Q1 2022 2022 2021
Mortgage Loan Origination Volume
Sold $ 13,756 $ 69,053 $ 159,142 $ 555,278
Portfolio 32,743 53,498 263,287 284,686
Construction 13,124 32,928 120,794 119,555
Service released 1,576 4,660 14,738 13,802
Total mortgage loan originations $
61,199
Refinances as a % of Total Mortgage Loan Originations 24.7 % 41.7 % 29.4 % 54.2 % Total mortgage loan originations decreased$98.9 million , or 61.8%, to$61.2 million for the three months endedMarch 31, 2023 compared to$160.1 million for the three months endedMarch 31, 2022 . 67
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The table below reflects PNB's total other expense for the three months endedMarch 31, 2023 and 2022. (Dollars in thousands) Q1 2023 Q1 2022 $ change % change Other expense: Salaries$ 33,833 $ 29,320 $ 4,513 15.4 % Employee benefits 10,799 10,413 386 3.7 % Occupancy expense 3,343 3,230 113 3.5 % Furniture and equipment expense 3,245 2,936 309 10.5 % Data processing fees 8,680 7,423 1,257 16.9 % Professional fees and services 5,679 4,698 981 20.9 % Marketing 1,296 1,315 (19) (1.4) % Insurance 1,810 1,400 410 29.3 % Communication 1,017 874 143 16.4 % State tax expense 1,129 1,123 6 0.5 % Amortization of intangible assets 327 402 (75) (18.7) % Miscellaneous 1,839 1,082 757 70.0 % Total other expense$ 72,997 $ 64,216 $ 8,781 13.7 % Total other expense of$73.0 million for the three months endedMarch 31, 2023 represented an increase of$8.8 million , or 13.7%, compared to$64.2 million for the three months endedMarch 31, 2022 . The increase in salaries expense was primarily related to increases in base salary expense, incentive compensation expense and share-based compensation expense, partially offset by a decrease in additional compensation expense. The increase in employee benefits expense was primarily related to increases in group insurance expense and payroll tax expense, partially offset by a decrease in retirement benefit expense. The increase in furniture and equipment expense was primarily related to increases in depreciation expense and maintenance and repairs on equipment expense. The increase in data processing fees was primarily related to increases in software data processing expense and debit card processing expense. The increase in professional fees and services expense was primarily due to increases in other fees, temporary wages, legal expense and directors' fees. The increase in insurance expense was due to an increase inFDIC insurance assessment expense. The increase in miscellaneous expense was due to increased expense for the allowance for unfunded lines of credit and increased training and travel-related expenses, which were partially offset by a decrease in operating lease depreciation expense. 68
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The table below provides certain balance sheet information and financial ratios for PNB as of or for the three months endedMarch 31, 2023 and 2022 and as of or for the year endedDecember 31, 2022 . % change from %
change from
(Dollars in thousands) March 31, 2023 December 31, 2022 March 31, 2022 12/31/22 03/31/22
Loans 7,093,498 7,141,362 6,820,090 (0.67) % 4.01 %
Loans less PPP loans (1) 7,090,053 7,137,156 6,782,666 (0.66) % 4.53 %
Allowance for credit losses 85,941 85,370 78,808 0.67 % 9.05 %
Net loans 7,007,557 7,055,992 6,741,282 (0.69) % 3.95 %
Investment securities 1,774,137 1,796,613 1,817,493 (1.25) % (2.39) %
Total assets 9,817,967 9,815,951 9,544,545 0.02 % 2.86 %
Total deposits 8,583,204 8,534,320 8,255,304 0.57 % 3.97 %
Average assets (2) 10,021,362 10,011,932 9,798,555 0.09 % 2.27 %
Efficiency ratio (3) 61.46 % 60.43 % 57.63 % 1.70 % 6.65 %
Return on average assets (4) 1.47 % 1.43 % 1.72 % 2.80 % (14.53) %
(1) Excludes $3.4 million , $4.2 million and $37.4 million of PPP loans at March
31, 2023 , December 31, 2022 and March 31, 2022 .
(2) Average assets for the three months ended March 31, 2023 and 2022 and for
the year ended December 31, 2022 .
(3) Efficiency ratio is calculated by dividing total other expense by the sum of
fully taxable equivalent net interest income and other income. Fully taxable
equivalent net interest income includes the effects of taxable equivalent
adjustments using a 21% federal corporate income tax rate. The taxable
equivalent adjustments were $926,000 for the three months ended March 31, 2023 ,
$3.5 million for the year ended December 31 2022 and $819,000 for the three
months ended March 31 2022.
(4) Annualized for the three months ended March 31, 2023 and 2022.
Loans outstanding at March 31, 2023 were $7.09 billion , compared to (i) $7.14
billion at December 31, 2022 , a decrease of $47.9 million , and (ii) $6.82
billion at March 31, 2022 , an increase of $273.4 million . Excluding $3.4
million , $4.2 million and $37.4 million of PPP loans at March 31, 2023 , December
31, 2022 and March 31, 2022 , respectively, loans outstanding were $7.09 billion
at March 31, 2023 , compared to (i) $7.14 billion at December 31, 2022 , a
decrease of $47.1 million , and (ii) $6.78 billion at March 31, 2022 , an increase
of $307.4 million . The table below breaks out the change in loans outstanding,
by loan type.
December 31, $ change from % change from $ change from % change from
(Dollars in thousands) March 31, 2023 2022 March 31, 2022 12/31/22 12/31/22 3/31/22 3/31/22
Home equity $ 164,736 $ 167,232 $ 159,667 $ (2,496) (1.5) % $ 5,069 3.2 %
Installment 1,914,781 1,921,059 1,685,627 (6,278) (0.3) % 229,154 13.6 %
Real estate 1,210,045 1,195,037 1,126,666 15,008 1.3 % 83,379 7.4 %
Commercial (excluding PPP
loans) (1) 3,800,284 3,850,477 3,807,310 (50,193) (1.3) % (7,026) (0.2) %
PPP loans 3,445 4,206 37,424 (761) (18.1) % (33,979) (90.8) %
Other 207 3,351 3,396 (3,144) (93.8) % (3,189) (93.9) %
Total loans $ 7,093,498 $ 7,141,362 $ 6,820,090 (47,864) (0.7) % 273,408 4.0 %
Total loans (excluding PPP
loans) (1) $ 7,090,053 $ 7,137,156 $ 6,782,666 $ (47,103) (0.7) % $ 307,387 4.5 %
(1) Excludes
PNB's allowance for credit losses was$85.9 million atMarch 31, 2023 , compared to (i)$85.4 million atDecember 31, 2022 , an increase of$571,000 , or 0.7%, and (ii)$78.9 million atMarch 31, 2022 , an increase of$7.1 million , or 9.1%. Net charge-offs were$727,000 , or 0.04% of total average loans, for the three months endedMarch 31, 2023 and were$3.6 million , or 0.05% of total average loans, for the year endedDecember 31 2022 . Net recoveries were$245,000 , or 0.01% of total average loans, for the three months endedMarch 31, 2022 . Refer to the "Credit Metrics and Provision for (Recovery of) Credit Losses" section for additional information regarding PNB's loan portfolio and the level of provision for (recovery of) credit losses recognized in each period presented. 69
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Total deposits atMarch 31, 2023 were$8.58 billion , compared to (i)$8.53 billion atDecember 31, 2022 , an increase of$48.9 million , or 0.6%, and (ii)$8.26 billion atMarch 31, 2022 , an increase of$327.9 million , or 4.0%. During the three months endedMarch 31, 2023 and 2022 and the year endedDecember 31, 2022 , Park made the decision to continue participation in a program to transfer deposits off-balance sheet in order to manage growth of the balance sheet, as deposits increased significantly throughout the COVID pandemic. AtMarch 31, 2023 ,December 31, 2022 andMarch 31, 2022 , Park had$164.6 million ,$195.9 million , and$1,149.2 million , respectively, in deposits which were off-balance sheet. Total deposits would have increased$17.5 million , or 0.2%, compared to atDecember 31, 2022 had the$164.6 million and$195.9 million in deposits remained on the balance sheet at the respective dates. Total deposits would have decreased$656.7 million , or 7.0%, compared to atMarch 31, 2022 had the$164.6 million and$1,149.2 million in deposits remained on the balance sheet at the respective dates. The table below breaks out the change in deposit balances, by deposit type.
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