Park National (PRK) - 2023 Q4 - Annual Report

PART I ITEM 1. BUSINESS Park National Corporation is a financial holding company providing commercial banking and trust services through its subsidiary, Park National Bank, across four states - Park National Corporation is a financial holding company whose principal business is owning and supervising its subsidiaries, with its common shares listed on NYSE American under the symbol "PRK"[12] - The company's banking operations are conducted through its main subsidiary, Park National Bank, which operates 96 financial service offices across Ohio, Kentucky, North Carolina, and South Carolina[33] - Other significant subsidiaries include SE Property Holdings, LLC (SEPH) for managing other real estate owned (OREO) and problem loans, and Scope Leasing, Inc. (Scope Aircraft Finance) for aircraft financing[36][37] Loan Portfolio Composition as of December 31, 2023 | Loan Category | Amount (in millions) | Percentage of Total Loans | | :--- | :--- | :--- | | Commercial Loans & Leases | $3,196 | 42.7% | | Residential Real Estate & Construction | $2,335 | 31.2% | | Consumer Loans | $1,946 | 26.0% | Human Capital The company maintains a stable workforce with high retention, emphasizing professional development and employee benefits Associate Profile as of December 31, 2023 | Metric | Value | | :--- | :--- | | Total Active Associates | 1,799 | | Full-time Equivalent | 1,782 | | Gender Distribution | 68% female, 32% male | | Average Tenure | 9 years | | Voluntary Turnover (2023) | 14.9% | | Associates as Shareholders (via KSOP) | 87% | - The company emphasizes a culture of service, professional development, and belonging, offering benefits such as an employee stock ownership plan (KSOP), a defined benefit pension plan, and health insurance[16][23][25] - 35% of associates have been with the organization for 10 years or more as of the end of 2023, reflecting strong employee retention[31] Lending Activities The company manages a diversified loan portfolio with no significant industry concentrations, adhering to strict credit risk policies - At year-end 2023, the loan portfolio was diversified with no concentration to a single industry exceeding 10% of total loans[47] Lending Portfolio Breakdown (December 31, 2023) | Loan Type | Amount (in millions) | % of Total Portfolio | | :--- | :--- | :--- | | Commercial Loans & Leases | $3,196 | 42.7% | | Consumer Loans | $1,946 | 26.0% | | Residential Real Estate & Construction | $2,335 | 31.2% | | Total Loans | $7,477 | 100.0% | - Specialized lending includes $414 million in loans to non-bank consumer finance companies and $295 million in aircraft financing through its subsidiary, Scope Aircraft Finance[59][61] - The company manages credit risk through written loan policies, collateral requirements, an independent internal loan review program, and by generally limiting single-borrower exposure to $75.0 million, well below the regulatory limit of $150.0 million[48][56][57] Supervision and Regulation Park National Corporation and its subsidiaries are subject to extensive federal and state banking regulations, including capital and consumer protection rules - Park and its subsidiaries are subject to extensive regulation by multiple agencies, including the Federal Reserve Board (FRB), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Consumer Financial Protection Bureau (CFPB)[79][80][81][82] - The company is subject to Basel III Capital Rules, which mandate minimum capital ratios, including a common equity tier 1 ratio of 4.5% and a total capital ratio of 8.0%, plus a capital conservation buffer of 2.5%[110][111][117] - Dividend payments are subject to regulatory restrictions; Park National Bank must maintain its "well-capitalized" status and have a capital conservation buffer greater than 2.5% to pay dividends without limitation[127] - As of December 31, 2023, approximately $112.9 million was available for dividends to the parent company without OCC approval[128] - The company is subject to various consumer protection laws, anti-money laundering regulations (including the Patriot Act and AMLA), and cybersecurity standards, which require robust compliance programs and reporting[139][145][157] ITEM 1A. RISK FACTORS The company faces diverse risks including economic volatility, operational threats like cybersecurity, regulatory changes, and specific legal compliance obligations - Economic and Market Risks: The company's earnings are sensitive to inflation, changes in interest rates, and economic conditions in its primary markets of Ohio, Kentucky, and the Carolinas, which could affect loan demand, repayment ability, and collateral values[167][168][169] - Business Operations Risks: Significant risks include operational disruptions from cybersecurity attacks on its systems or third-party vendors, potential for credit losses if the allowance for credit losses (ACL) is insufficient, and intense competition from other financial institutions and fintech companies[177][180][194][208] - Legislative and Regulatory Risks: The company operates in a highly regulated industry, and changes in laws, accounting standards (like CECL), or regulatory actions could adversely impact operations and financial results[225][229] - Crossing the $10 billion asset threshold would subject the company to heightened regulatory requirements[237] - Specific Legal Risk: Park National Bank is subject to a DOJ Consent Order approved in March 2023, requiring a minimum investment of $9.0 million over five years to increase lending efforts in majority-minority census tracts in the Columbus, Ohio area[245][246][248][249] - Compliance requires significant management attention and could incur unanticipated costs[249] ITEM 1C. CYBERSECURITY Park manages cybersecurity risks through a multi-layered defense system aligned with NIST, overseen by the Board's Risk Committee - Park's cybersecurity risk management follows the National Institute of Standards and Technology (NIST) Cyber Security Framework and other regulatory guidelines[253] - The Board of Directors' Risk Committee is responsible for overseeing the company's Enterprise Risk Management program, which includes cybersecurity[254] - The board receives quarterly reports on cybersecurity status, trends, and incidents[255] - The company has a third-party risk management program to evaluate and monitor vendors, particularly those with access to sensitive information[252] - To date, risks from cybersecurity threats have not materially affected the company's business strategy, results of operations, or financial performance[257] ITEM 2. PROPERTIES Park National Bank operates 96 financial service offices across four states, with the majority being owned properties - As of the report date, Park National Bank operated 96 financial service offices in Ohio (86), Kentucky (1), North Carolina (4), and South Carolina (5)[259] - Of the 96 financial service offices, 16 are leased properties, while the remainder are owned by the company[259] ITEM 3. LEGAL PROCEEDINGS The company is involved in routine litigation, with management expecting no material impact on its financial position or operations - The company is routinely involved in various litigation incidental to its business, and management does not expect the outcomes to have a material effect on its financial condition or results[263] PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Park's common stock trades on NYSE American, demonstrating strong shareholder returns and active share repurchase programs - Park's common shares trade on the NYSE American under the symbol PRK, with 3,245 shareholders of record at December 31, 2023[266] Five-Year Cumulative Total Shareholder Return | Index | 12/31/18 | 12/31/23 | 5-Year Return | | :--- | :--- | :--- | :--- | | Park National Corporation | 100.00 | 191.04 | +91.04% | | NYSE Composite Index | 100.00 | 167.12 | +67.12% | | KBW NASDAQ Bank Index | 100.00 | 131.57 | +31.57% | | S&P U.S. SmallCap Banks Index | 100.00 | 140.55 | +40.55% | - As of December 31, 2023, the company had 996,088 common shares remaining that may be purchased under its publicly announced stock repurchase programs[271] ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net income decreased in 2023 due to lower other income and higher expenses, despite net interest income growth and strong capital position Key Financial Performance (2021-2023) | (In thousands) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net interest income | $373,113 | $347,059 | $329,893 | | Provision for (recovery of) credit losses | $2,904 | $4,557 | $(11,916) | | Other income | $92,634 | $135,935 | $129,944 | | Other expense | $309,239 | $297,978 | $283,518 | | Net income | $126,734 | $148,351 | $153,945 | - Net income decreased by $21.6 million (14.6%) in 2023 compared to 2022[294] - This was driven by a $43.3 million decrease in other income (largely from a $7.9 million loss on sale of debt securities and lower OREO-related gains) and an $11.3 million increase in other expense, partially offset by a $26.1 million increase in net interest income[297][380][393] SOURCE OF FUNDS Total deposits decreased in 2023, while shareholders' equity and tangible equity ratios improved, reflecting a stronger capital base Deposit Composition (Year-End) | (In millions) | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Non-interest bearing checking | $2,628.2 | $3,074.3 | $(446.1) | | Interest bearing transaction accounts | $2,064.5 | $1,988.1 | $76.4 | | Savings | $2,542.0 | $2,616.6 | $(74.6) | | Time deposits | $641.6 | $554.4 | $87.2 | | Brokered deposits | $165.0 | $0.0 | $165.0 | | Total Deposits | $8,042.6 | $8,234.7 | $(192.1) | - Total deposits, including off-balance sheet deposits, decreased by $386.9 million (4.6%) during 2023, primarily due to a decrease in retail deposits and a reduction in off-balance sheet balances[318] - Shareholders' equity to total assets ratio increased to 11.64% at year-end 2023 from 10.85% at year-end 2022[327] - The tangible equity to tangible assets ratio also improved to 10.14% from 9.33%[327] - Accumulated other comprehensive loss improved, decreasing from a loss of $102.4 million at YE 2022 to a loss of $66.2 million at YE 2023, mainly due to a smaller unrealized net holding loss on AFS debt securities[329][484] INVESTMENT OF FUNDS Total loans increased by 4.7% in 2023, primarily driven by residential real estate, with strategic sales of AFS debt securities to enhance liquidity Loan Portfolio by Type (Year-End) | (In millions) | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Commercial, financial and agricultural | $1,295.6 | $1,300.9 | -0.4% | | Construction real estate | $305.1 | $325.4 | -6.2% | | Residential real estate | $2,029.5 | $1,796.9 | +12.9% | | Commercial real estate | $1,876.0 | $1,794.1 | +4.6% | | Consumer | $1,945.9 | $1,905.0 | +2.1% | | Total loans | $7,476.2 | $7,141.9 | +4.7% | - Total loans increased by $334 million, or 4.7%, in 2023, driven primarily by a $232.7 million (12.9%) increase in residential real estate loans[336][340] - In 2023, the company sold $291.0 million in AFS debt securities, realizing a net pre-tax loss of $7.9 million to improve liquidity and net interest margin[297][348] - The investment portfolio is primarily composed of U.S. Government sponsored entities' asset-backed securities (44.4%), Collateralized Loan Obligations (30.7%), and obligations of states and political subdivisions (16.9%) as of year-end 2023[355] ANALYSIS OF EARNINGS Net interest income increased due to higher asset yields, but overall net income declined due to lower other income and increased operating expenses - Net interest income on a fully taxable equivalent (FTE) basis increased by $26.2 million to $376.8 million in 2023[358] - The FTE net interest margin expanded by 31 basis points to 4.11% in 2023 from 3.80% in 2022[378] - The increase in net interest income was driven by a 104 basis point increase in the average yield on interest-earning assets, which outpaced the 113 basis point increase in the average cost of interest-bearing liabilities[360][362] - Other income decreased significantly to $92.6 million in 2023 from $135.9 million in 2022[382] - The decline was primarily due to a $7.9 million loss on the sale of debt securities in 2023, compared to a $5.6 million gain on OREO sales and a $12.0 million OREO valuation markup in 2022[382] - Other expense increased by 3.8% to $309.2 million in 2023, driven by higher salaries (+$5.9 million) and data processing fees (+$5.0 million)[393][394] - The efficiency ratio deteriorated to 65.87% in 2023 from 61.24% in 2022, indicating a decrease in operational efficiency[406] CREDIT METRICS AND PROVISION FOR (RECOVERY OF) CREDIT LOSSES Credit quality remained stable with a decrease in nonperforming assets, influenced by a change in accounting standards for troubled debt restructurings Allowance for Credit Losses (ACL) Activity | (In thousands) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | ACL, beginning balance | $85,379 | $83,197 | $85,675 | | Net charge-offs (recoveries) | $4,921 | $2,375 | $(3,348) | | Provision for (recovery of) credit losses | $2,904 | $4,557 | $(11,916) | | ACL, ending balance | $83,745 | $85,379 | $83,197 | Key Credit Ratios (Year-End) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | ACL as a % of total loans | 1.12% | 1.20% | 1.21% | | Net charge-offs as a % of average loans | 0.07% | 0.03% | (0.05)% | | Nonperforming assets to total assets | 0.63% | 1.04% | 1.11% | - Total nonperforming assets decreased significantly to $62.1 million at year-end 2023 from $102.5 million at year-end 2022[425][442] - This was largely due to the adoption of ASU 2022-02, which eliminated the Troubled Debt Restructuring (TDR) classification, removing $20.1 million from nonperforming loans[445] CAPITAL RESOURCES Both Park and its subsidiary bank exceeded all 'well-capitalized' regulatory requirements, with total shareholders' equity increasing in 2023 Regulatory Capital Ratios (as of December 31, 2023) | Ratio | Park (Parent) | PNB (Bank) | Well-Capitalized Minimum (Bank) | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 | 12.79% | 10.95% | 6.50% | | Tier 1 Risk-Based | 12.97% | 10.95% | 8.00% | | Total Risk-Based | 16.19% | 12.35% | 10.00% | | Leverage | 10.74% | 9.11% | 5.00% | - Both Park National Corporation and its subsidiary bank, PNB, exceeded all "well-capitalized" regulatory requirements as of December 31, 2023[487][815] - Total shareholders' equity increased to $1,145.3 million at year-end 2023 from $1,069.2 million at year-end 2022[479] - This increase was driven by net income of $126.7 million and a $36.2 million increase in other comprehensive income, partially offset by $68.7 million in cash dividends[481][531] ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section presents the audited consolidated financial statements for 2023, including balance sheets, income statements, and notes, with an unqualified audit opinion Consolidated Balance Sheets The consolidated balance sheets highlight total assets, net loans, investment securities, deposits, and shareholders' equity for 2023 and 2022 Consolidated Balance Sheet Highlights (Year-End) | (In millions) | 2023 | 2022 | | :--- | :--- | :--- | | Total Assets | $9,836.5 | $9,855.0 | | Net Loans | $7,392.5 | $7,056.5 | | Total Investment Securities | $1,429.1 | $1,820.8 | | Total Deposits | $8,042.6 | $8,234.7 | | Total Shareholders' Equity | $1,145.3 | $1,069.2 | Consolidated Statements of Income The consolidated income statements summarize net interest income, credit loss provisions, other income/expense, net income, and diluted EPS for 2021-2023 Consolidated Income Statement Summary | (In millions, except per share data) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net Interest Income | $373.1 | $347.1 | $329.9 | | Provision for (Recovery of) Credit Losses | $2.9 | $4.6 | $(11.9) | | Total Other Income | $92.6 | $135.9 | $129.9 | | Total Other Expense | $309.2 | $298.0 | $283.5 | | Net Income | $126.7 | $148.4 | $153.9 | | Diluted EPS | $7.80 | $9.06 | $9.37 | Notes to Consolidated Financial Statements Detailed notes provide context on accounting policies, loan portfolio composition, allowance for credit losses, and regulatory capital compliance - The company adopted ASU 2022-02 on January 1, 2023, which eliminated the Troubled Debt Restructuring (TDR) accounting model and enhanced disclosure requirements for loan modifications to borrowers experiencing financial difficulty[610][612] - Note 5 provides a detailed breakdown of the $7.48 billion loan portfolio by class, including commercial, real estate, and consumer loans[642] - Note 6 details the Allowance for Credit Losses (ACL), showing a decrease in the ending balance to $83.7 million in 2023 from $85.4 million in 2022[685] - Note 28 confirms that both the parent company (Park) and the bank (PNB) met all well-capitalized ratio guidelines at year-end 2023[815] PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information on directors, executive officers, and corporate governance practices is incorporated by reference from the 2024 Proxy Statement - Information regarding directors, executive officers, corporate governance, and the audit committee is incorporated by reference from the company's definitive Proxy Statement for the 2024 Annual Meeting of Shareholders[839][840][848] ITEM 11. EXECUTIVE COMPENSATION Details on executive and director compensation are incorporated by reference from the company's 2024 definitive Proxy Statement - Information regarding executive compensation is incorporated by reference from the company's definitive Proxy Statement for the 2024 Annual Meeting[849] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information on beneficial ownership and equity compensation plans is incorporated by reference from the company's 2024 Proxy Statement - Information regarding security ownership by beneficial owners and management, and details on equity compensation plans, is incorporated by reference from the company's 2024 Proxy Statement[851][852] ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Details on related person transactions and director independence are incorporated by reference from the company's 2024 Proxy Statement - Information regarding certain relationships, related party transactions, and director independence is incorporated by reference from the company's 2024 Proxy Statement[853][854] ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding principal accountant fees and services is incorporated by reference from the company's 2024 Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the company's 2024 Proxy Statement[855] PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including key corporate documents - This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including key corporate documents and management compensation plans[859][863]