Park National (US:PRK)2022-11-08 21:17PART I. FINANCIAL INFORMATION Financial Statements This section presents Park National Corporation's unaudited consolidated condensed financial statements for Q3 and nine months ended September 30, 2022, including balance sheets, income statements, and cash flows, along with detailed accounting notes Consolidated Condensed Balance Sheets Total assets increased to $9.86 billion by September 30, 2022, driven by loan growth, while total liabilities also rose due to deposits, and shareholders' equity decreased to $1.04 billion primarily from unrealized losses on securities Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | Sep 30, 2022 | Dec 31, 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Assets | $9,855,047 | $9,560,254 | $294,793 | 3.1% | | Net Loans | $7,019,285 | $6,787,925 | $231,360 | 3.4% | | Total Investment Securities | $1,828,068 | $1,815,408 | $12,660 | 0.7% | | Total Liabilities | $8,818,875 | $8,449,495 | $369,380 | 4.4% | | Total Deposits | $8,309,927 | $7,904,528 | $405,399 | 5.1% | | Total Shareholders' Equity | $1,036,172 | $1,110,759 | ($74,587) | (6.7%) | | Accumulated Other Comprehensive (Loss) Income | ($125,343) | $15,155 | ($140,498) | (927.1%) | Consolidated Condensed Statements of Income Q3 2022 net income rose to $42.1 million due to higher net interest income and OREO gains, while nine-month net income slightly decreased to $115.3 million, with diluted EPS at $2.57 for Q3 and $7.05 for the nine months Income Statement Summary (in thousands, except per share data) | Metric | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $90,828 | $81,602 | $252,453 | $246,187 | | Provision for Credit Losses | $3,190 | $1,972 | $1,576 | ($6,923) | | Total Other Income | $46,694 | $32,411 | $109,543 | $97,738 | | Total Other Expense | $82,903 | $68,489 | $220,324 | $207,754 | | Net Income | $42,068 | $35,434 | $115,267 | $117,397 | | Diluted EPS | $2.57 | $2.16 | $7.05 | $7.14 | Consolidated Condensed Statements of Cash Flows Cash and cash equivalents decreased by $11.7 million for the nine months ended September 30, 2022, with operating activities providing $89.6 million, investing activities using $403.2 million, and financing activities providing $301.8 million Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $89,613 | $112,622 | | Net Cash used in Investing Activities | ($403,153) | ($186,208) | | Net Cash from Financing Activities | $301,793 | $580,507 | | Net (Decrease) Increase in Cash | ($11,747) | $506,921 | Notes to Unaudited Consolidated Condensed Financial Statements This section details accounting policies and financial data, covering investment securities, loans, credit quality, ACL methodology, goodwill, intangibles, derivatives, fair value, and segment information Management's Discussion and Analysis (MD&A) Management discusses the company's financial condition and results for Q3 and nine months of 2022, analyzing net interest income, credit quality, non-interest income/expense, and changes in balance sheet, liquidity, and capital - Net income for Q3 2022 was $42.1 million ($2.57 diluted EPS), an increase from $35.4 million ($2.16 diluted EPS) in Q3 2021252 - Net income for the nine months ended Sep 30, 2022 was $115.3 million ($7.05 diluted EPS), a slight decrease from $117.4 million ($7.14 diluted EPS) in the prior year period253 - Significant items impacting comparability in Q3 2022 include a $5.6 million gain on sale of OREO and a $12.0 million OREO valuation markup, both related to former Vision Bank relationships259 Net Interest Income Net interest income for Q3 2022 increased 11.3% to $90.8 million, with net interest margin expanding to 3.81%, while nine-month net interest income grew 2.5% to $252.5 million Net Interest Income and Margin Analysis | Metric | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income (tax-equiv.) | $91,760K | $82,319K | $255,076K | $248,336K | | Net Interest Margin | 3.81% | 3.53% | 3.74% | 3.67% | | Yield on Earning Assets | 4.18% | 3.69% | 3.98% | 3.86% | | Cost of Interest-Bearing Liabilities | 0.60% | 0.26% | 0.40% | 0.29% | - Excluding impacts from purchase accounting, SEPH income, and PPP loans, the adjusted net interest margin was 3.75% for Q3 2022, compared to 3.35% for Q3 2021306 Credit Metrics and Provision for (Recovery of) Credit Losses A $3.2 million provision for credit losses was recorded in Q3 2022, with nonperforming assets decreasing to $66.6 million (0.68% of total assets), and the allowance for credit losses (ACL) at 1.18% of total loans Nonperforming Assets (in thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | Sep 30, 2021 | | :--- | :--- | :--- | :--- | | Nonaccrual loans | $44,612 | $72,722 | $87,791 | | Total nonperforming loans | $65,233 | $102,652 | $106,872 | | Total nonperforming assets | $66,587 | $106,177 | $110,849 | | Nonperforming assets to total assets | 0.68% | 1.11% | 1.10% | Allowance for Credit Losses (ACL) Summary | Metric | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | ACL (in thousands) | $83,961 | $83,197 | | ACL as % of total loans | 1.18% | 1.21% | | Net charge-offs (recoveries) to avg. loans (annualized, 9M) | 0.02% | (0.01)% (FY 2021) | - The ACL increase in Q3 2022 was driven by deteriorating economic forecasts, inflation, and rising rates, balanced by reduced risk in COVID-19-im pacted portfolios like hotels and restaurants339 Other Income Other income significantly increased to $46.7 million in Q3 2022, primarily driven by a $5.6 million gain on OREO sale and a $12.0 million OREO valuation markup, partially offset by lower mortgage banking fees Other Income Components (in thousands) | Component | Q3 2022 | Q3 2021 | Change ($) | | :--- | :--- | :--- | :--- | | Other service income | $2,956 | $6,668 | ($3,712) | | Gain (loss) on sale of OREO, net | $5,607 | $3 | $5,604 | | OREO valuation markup | $12,009 | $0 | $12,009 | | Total other income | $46,694 | $32,411 | $14,283 | - The decrease in other service income was driven by a $3.4 million decline in fee income from mortgage loan originations, as total originations fell 31.0% year-over-year in the third quarter370 Other Expense Other expense increased 21.1% to $82.9 million in Q3 2022, primarily due to an $8.5 million rise in salaries, including one-time bonuses, and a $4.0 million foundation contribution Other Expense Components (in thousands) | Component | Q3 2022 | Q3 2021 | Change ($) | | :--- | :--- | :--- | :--- | | Salaries | $37,889 | $29,433 | $8,456 | | Professional fees and services | $8,359 | $6,973 | $1,386 | | Foundation contribution | $4,000 | $0 | $4,000 | | Total other expense | $82,903 | $68,489 | $14,414 | - The Q3 2022 salary increase included $1.8 million in one-time bonuses paid and a $1.5 million accrual for future one-time bonuses379 Financial Condition, Liquidity, and Capital Resources Total assets reached $9.86 billion as of September 30, 2022, with deposits at $8.31 billion, while shareholders' equity decreased to $1.04 billion due to unrealized losses, maintaining a 16.00% Total Risk-Based Capital ratio - Total assets increased by $294.8 million (3.1%) during the first nine months of 2022, primarily due to a $232.1 million increase in loans406 - Shareholders' equity decreased by $74.6 million (6.7%), largely due to a $140.7 million increase in unrealized net holding losses on available-for-sale debt securities407 Regulatory Capital Ratios (Park National Corporation) | Ratio | Sep 30, 2022 | Dec 31, 2021 | Well Capitalized Requirement | | :--- | :--- | :--- | :--- | | Tier 1 Leverage | 9.76% | 9.77% | N/A | | Common Equity Tier 1 | 12.51% | 12.37% | N/A | | Tier 1 Risk-Based | 12.70% | 12.57% | 6.00% | | Total Risk-Based | 16.00% | 16.05% | 10.00% | Quantitative and Qualitative Disclosures About Market Risk The company's earnings simulation projects a 5.8% increase in net income under rising interest rates and an 8.8% decrease under declining rates, indicating asset sensitivity with a $1.25 billion cumulative rate sensitivity gap - At September 30, 2022, a rising interest rate scenario is projected to increase net income by 5.8% over the next year426 - A declining interest rate scenario is projected to decrease net income by 8.8% over the next year, indicating the company is asset-sensitive426 - The twelve-month cumulative rate sensitivity gap was a positive $1.245 billion, representing 13.62% of total interest-earning assets424 Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2022427428 - No material changes to internal control over financial reporting occurred during the third quarter of 2022429 PART II. OTHER INFORMATION Legal Proceedings The company reports no material pending legal proceedings beyond routine litigation incidental to its business - Park National Corporation and its subsidiaries are not party to any material legal proceedings, other than routine proceedings incidental to their business431 Risk Factors No material changes to the risk factors previously disclosed in the company's 2021 Annual Report on Form 10-K have occurred - The company states there are no material changes from the risk factors detailed in its 2021 Form 10-K432 Unregistered Sales of Equity Securities and Use of Proceeds Park National Corporation did not repurchase common shares in Q3 2022, with 1,195,088 shares remaining available for repurchase under existing authorizations - No common shares were repurchased by the company during the three months ended September 30, 2022434 - As of the end of Q3 2022, 1,195,088 common shares remained available for purchase under existing repurchase authorizations434 Exhibits This section lists exhibits filed with the Form 10-Q, including CEO/CFO certifications and XBRL data files