Item 2. Management’s Discussion and Analysis
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements as that term is used in the Private Securities Litigation Reform Act of 1995, as amended. Such forward-looking statements are provided to assist in the understanding of anticipated future financial performance. Forward-looking statements provide current expectations, estimates, 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 does business, that may reflect deterioration in business and economic conditions, including the effects of higher unemployment rates or labor shortages, the impact of persistent inflation, the impact of continued elevated interest rates, 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 the Russia-Ukraine conflict and associated sanctions and export controls as well as the Israel-Hamas conflict), and any slowdown in global economic growth, 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;
• the effect of monetary and other fiscal policies (including the impact of money supply, ongoing increasing market interest rate policies and policies impacting inflation, of the Federal Reserve Board, the U.S. Treasury and other governmental agencies) as well as disruption in the liquidity and functioning of U.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, government shutdown, 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 and continued elevated interest rates;
• 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;
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• 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, 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;
• Park's ability to meet heightened supervisory requirements and expectations;
• the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board, the SEC, the Public 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 estimates and modeling 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;
• Park's ability to anticipate and respond to technological changes and Park's reliance on, and the potential failure of, a number of third-party vendors to perform as expected, including Park's primary core banking system provider, which can impact 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 is highly dependent;
• Park's 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;
• 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, a U.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 the U.S. and its global trading partners);
• the impact on financial markets and the economy of any changes in the credit ratings of the U.S. Treasury obligations and other U.S. government-backed debt, as well as issues surrounding the levels of U.S., European and Asian government debt and concerns regarding the growth rates and financial stability of certain sovereign governments, supranationals and financial institutions in Europe and Asia 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, 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 the Russia-Ukraine conflict and the Israel-Hamas conflict) on the economy and financial markets generally and on us or our counterparties specifically;
• the potential further deterioration of the U.S. economy due to financial, political, or other shocks;
• the effect of healthcare laws in the U.S. and potential changes for such laws which may increase our healthcare and other costs and negatively impact our operations and financial results;
• the impact of larger or similar-sized financial institutions encountering problems which may adversely affect the banking industry and/or Park's business generation and retention, funding and liquidity, including potential increased regulatory requirements and increased reputational risk and potential impacts to macroeconomic conditions;
• Park's continued ability to grow deposits or maintain adequate deposit levels due to changing customer behaviors;
• unexpected outflows of deposits which may require Park to sell assets at a loss; and
• other risk factors included in the current and periodic reports filed by Park with the SEC from time to time.
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Forward-looking statements should be construed in the light of such risks. It is impossible to predict or identify all potential risk factors. Consequently, readers should not consider the foregoing list to be a complete set of all potential risks and uncertainties. Readers are cautioned not to place undue reliance on any forward-looking statements. Any forward looking statement in this Form 10-Q are based on current information as of the date of this Form 10-Q, and 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 whether as a result of new information, future developments or otherwise, or reflect the occurrence of unanticipated events, except to the extent required by law.
Non-U.S. GAAP Financial Measures
This Management's Discussion and Analysis of Financial Condition and Results of Operations (or "MD&A") contains non-U.S. GAAP financial measures where management believes them to be helpful in understanding Park’s results of operations or financial position. Where non-U.S. GAAP financial measures are used, the comparable U.S. GAAP financial measures, as well as the reconciliation from the comparable U.S. GAAP financial measures, 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 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 credit losses (aside from those related to former Vision Bank loan relationships), (losses) gains 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.
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 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 and pre-tax, pre-provision net income for the three months ended and at March 31, 2024 and March 31, 2023. 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 pre-tax, pre-provision net income, a non-U.S. GAAP financial measure, income taxes and the provision for 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 and 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 with U.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
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included within the "Items Impacting Comparability" section of this MD&A, Park has provided a reconciliation of average tangible equity from average shareholders' equity, average tangible assets from average assets and pre-tax, pre-provision net income from 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 and pre-tax, pre-provision net income are substitutes for the annualized return on average equity, the annualized return on average assets and net income, respectively, as determined in accordance with U.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 with U.S. GAAP.
Critical Accounting Estimates
The preparation of financial statements in conformity with U.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.
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 loss given default, 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 significant judgments impacting the ACL is the economic forecasts for Ohio unemployment, Ohio GDP, and Ohio HPI. These economic forecasts inform the regression model used to calculate cash flows during the reasonable and supportable forecast period. Additionally, multiple economic forecast scenarios are weighted to arrive at the quantitative reserve. Changes in the economic forecast or weighting could significantly affect the estimated credit losses which could potentially lead to materially different allowance levels from one reporting period to the next.
As noted above, in calculating the ACL, management weighs different scenarios, including a baseline (most likely) scenario and an adverse scenario. At March 31, 2024, management applied a 50% weighting to the baseline scenario and applied a 50% weighting to the 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) tensions with China and Taiwan increase, China briefly interrupts trade through the Taiwan Strait, the Russian invasion lasts longer than expected, and the Hamas-Israel conflict will lead to a wider conflict; (2) the FRB keeps the fed funds rate at the terminal range of 5.25-5.50% through the second quarter of 2024 and, as a downturn persists, the FRB begins to lower rates; (3) Europe goes into a recession. Populism in Europe rises, raising uncertainties about the longevity of the Euro and causes financial stress to highly indebted nations; (4) risk of an extended government shutdown increases, causing consumer and business confidence to fall; (5) concerns about bank failures raise fears of further collapse in the banking industry, reducing consumer confidence and causing banks to tighten lending standards; (6) a recession occurs in the second quarter of 2024 and lasts through the fourth quarter of 2024 resulting in real GDP declining by 2.6%, unemployment rates rising to a peak of 7.7% in the second quarter of 2025, and the stock market falling 37% from the second quarter of 2024 to the fourth quarter of 2024. The adverse scenario also forecasts Ohio unemployment for the next twelve months to range from 6.4% to 9.0%. Excluding consideration of qualitative adjustments, this sensitivity analysis would result in a hypothetical increase in Park's ACL of $24.2 million as of March 31, 2024 if only the adverse scenario was used. Excluding consideration of qualitative adjustments, a corresponding $24.2 million decrease in Park's ACL would occur in a hypothetical scenario if only the baseline (most likely) scenario was used.
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Refer to the "Credit Metrics and Provision for Credit Losses" section of this MD&A for additional discussion.
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.
Comparison of Results of Operations
For the Three Months Ended March 31, 2024 and 2023
Summary Discussion of Results
Net income for the three months ended March 31, 2024 was $35.2 million, compared to $33.7 million for the first quarter of 2023. Pre-tax, pre-provision net income (non-U.S. GAAP) for the three months ended March 31, 2024 was $44.6 million, compared to $40.1 million for the first quarter of 2023. Diluted earnings per common share were $2.17 for the first quarter of 2024, compared to $2.07 for the first quarter of 2023. Weighted average diluted common shares outstanding were 16,191,065 for the first quarter of 2024, compared to 16,324,823 weighted average diluted common shares outstanding for the first quarter of 2023.
The following discussion provides additional information regarding Park.
Park National Corporation (Park)
The following table reflects the net income for the first quarters (the three months ended March 31) of 2024 and 2023, and for the years ended December 31, 2023 and 2022.
(In thousands) Q1 2024 Q1 2023 2023 2022
Net interest income $ 95,623 $ 92,198 $ 373,113 $ 347,059
Provision for credit losses 2,180 183 2,904 4,557
Other income 26,200 24,387 92,634 135,935
Other expense 77,228 76,503 309,239 297,978
Income before income taxes $ 42,415 $ 39,899 $ 153,604 $ 180,459
Income tax expense 7,211 6,166 26,870 32,108
Net income $ 35,204 $ 33,733 $ 126,734 $ 148,351
Net interest income of $95.6 million for the three months ended March 31, 2024 represented a $3.4 million, or 3.7%, increase compared to $92.2 million for the three months ended March 31, 2023. The increase was a result of a $15.7 million increase in interest income, partially offset by a $12.3 million increase in interest expense.
The $15.7 million increase in interest income was due to a $19.6 million increase in interest income on loans partially offset by a $3.9 million decrease in investment income. The $19.6 million increase in interest income on loans was primarily the result of a $383.4 million (or 5.40%) increase in average loans, from $7.10 billion for the three months ended March 31, 2023 to $7.48 billion for the three months ended March 31, 2024, as well as an increase in the yield on loans, which increased 75 basis points to 5.99% for the three months ended March 31, 2024, compared to 5.24% for the three months ended March 31, 2023. The $3.9
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million decrease in investment income was primarily the result of a decrease in average investments, including money market investments, from $2.17 billion for the three months ended March 31, 2023 to $1.57 billion for the three months ended March 31, 2024. The decrease in average investments was partially offset by an increase in the yield on investments, including money market investments, which increased 31 basis points to 4.06% for the three months ended March 31, 2024, compared to 3.75% for the three months ended March 31, 2023.
The $12.3 million increase in interest expense was due to a $11.6 million increase in interest expense on deposits, as well as a $0.7 million increase in interest expense on borrowings. The increase in interest expense on deposits was the result of a $167.4 million (or 3.06%) increase in average on-balance sheet interest bearing deposits from $5.48 billion for the three months ended March 31, 2023, to $5.64 billion for the three months ended March 31, 2024, as well as an increase in the cost of deposits of 79 basis points, from 1.15% for the three months ended March 31, 2023 to 1.94% for the three months ended March 31, 2024. The increase in on-balance sheet interest bearing deposits was due to an increase in brokered deposits, bid CD deposits, time deposits and transaction accounts, which was partially offset by decreases in savings accounts. During the three months ended March 31, 2024 and 2023, Park continued to participate in a program to transfer deposits off-balance sheet in order to manage growth of the balance sheet.
The provision for credit losses of $2.2 million for the three months ended March 31, 2024 represented an increase of $2.0 million, compared to $183,000 for the three months ended March 31, 2023. Refer to the “Credit Metrics and Provision for Credit Losses” section for additional details regarding the level of the provision for credit losses recognized in each period presented.
The table below reflects Park's total other income for the three months ended March 31, 2024 and 2023.
(Dollars in thousands) 2024 2023 $ change % change
Other income:
Income from fiduciary activities $ 10,024 $ 8,615 $ 1,409 16.4 %
Service charges on deposit accounts 2,106 2,241 (135) (6.0) %
Other service income 2,524 2,697 (173) (6.4) %
Debit card fee income 6,243 6,457 (214) (3.3) %
Bank owned life insurance income 2,629 1,185 1,444 N.M.
ATM fees 496 533 (37) (6.9) %
Gain (loss) on the sale of OREO, net 121 (9) 130 N.M.
Loss on sale of debt securities, net (398) — (398) N.M.
Loss on equity securities, net (687) (405) (282) N.M.
Other components of net periodic benefit income 2,204 1,893 311 16.4 %
Miscellaneous 938 1,180 (242) (20.5) %
Total other income $ 26,200 $ 24,387 $ 1,813 7.4 %
Other income of $26.2 million for the three months ended March 31, 2024 represented an increase of $1.8 million, or 7.4%, compared to $24.4 million for the three months ended March 31, 2023. The $1.4 million increase in income from fiduciary activity was largely due to an increase in the market value of assets under management. The $1.4 million increase in bank owned life insurance income was primarily related to death benefits received during the three months ended March 31, 2024. The change in loss on sale of debt securities, net was due to net losses on the sale of debt securities of $398,000 recorded during the three months ended March 31, 2024. No loss on sale of debt securities, net was recorded during the three months ended March 31, 2023. The $282,000 change in loss on equity securities, net, was due to fair value adjustments on equity securities. The $311,000 increase in other components of net periodic benefit income was largely due to an increase in the expected return on plan assets, and was partially offset by an increase in interest cost.
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The table below reflects Park's total other expense for the three months ended March 31, 2024 and 2023.
(Dollars in thousands) 2024 2023 $ change % change
Other expense:
Salaries $ 35,733 $ 34,871 $ 862 2.5 %
Employee benefits 11,560 10,816 744 6.9 %
Occupancy expense 3,181 3,353 (172) (5.1) %
Furniture and equipment expense 2,583 3,246 (663) (20.4) %
Data processing fees 8,808 8,750 58 0.7 %
Professional fees and services 6,817 7,221 (404) (5.6) %
Marketing 1,741 1,319 422 32.0 %
Insurance 1,718 1,814 (96) (5.3) %
Communication 1,036 1,037 (1) (0.1) %
State tax expense 1,110 1,278 (168) (13.1) %
Amortization of intangible assets 320 327 (7) (2.1) %
Miscellaneous 2,621 2,471 150 6.1 %
Total other expense $ 77,228 $ 76,503 $ 725 0.9 %
Total other expense of $77.2 million for the three months ended March 31, 2024 represented an increase of $725,000, or 0.9%, compared to $76.5 million for the three months ended March 31, 2023. The increase in salaries expense was primarily related to increases in base salary expense, partially offset by decreases in share-based compensation expense, additional compensation expense and officer incentive compensation expense. The increase in employee benefits expense was primarily related to increases in group insurance expense and retirement benefit expense. The decrease in furniture and equipment expense was primarily due to decreases in depreciation expense and maintenance and repairs expense. The decrease in professional fees and services expense was primarily due to decreases in legal expenses and other fees expense, partially offset by increases in credit services expense.
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The table below provides certain balance sheet information and financial ratios for Park as of or for the three months ended March 31, 2024 and 2023 and the year ended December 31, 2023.
(Dollars in thousands) March 31, 2024 December 31, 2023 March 31, 2023 % change from 12/31/23 % change from 3/31/23
Loans 7,525,005 7,476,221 7,093,857 0.65 % 6.08 %
Allowance for credit losses 85,084 83,745 85,946 1.60 % (1.00) %
Net loans 7,439,921 7,392,476 7,007,911 0.64 % 6.16 %
Investment securities 1,339,747 1,429,144 1,800,410 (6.26) % (25.59) %
Total assets 9,881,077 9,836,453 9,856,981 0.45 % 0.24 %
Total deposits 8,306,032 8,042,566 8,294,444 3.28 % 0.14 %
Average assets (1)
9,863,378 9,957,554 10,058,880 (0.95) % (1.94) %
Efficiency ratio (2)
63.07 % 65.87 % 65.10 % (4.25) % (3.12) %
Return on average assets (3)
1.44 % 1.27 % 1.36 % 13.39 % 5.88 %
(1) Average assets for the three months ended March 31, 2024 and 2023 and for the year ended December 31, 2023.
(2) 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 $616,000 and $926,000 for the three months ended March 31, 2024 and 2023 and $3.7 million for the year ended December 31, 2023.
(3) Annualized for the three months ended March 31, 2024 and 2023.
Loans
Loans outstanding at March 31, 2024 were $7.53 billion, compared to (i) $7.48 billion at December 31, 2023, an increase of $48.8 million, and (ii) $7.09 billion at March 31, 2023, an increase of $431.1 million. The table below breaks out the change in loans outstanding, by loan type.
(Dollars in thousands) March 31, 2024 December 31, 2023 March 31, 2023 $ change from 12/31/23 % change from 12/31/23 $ change from 3/31/23 % change from 3/31/23
Home equity $ 177,094 $ 174,621 $ 164,736 $ 2,473 1.4 % $ 12,358 7.5 %
Installment 1,947,215 1,950,304 1,914,921 (3,089) (0.2) % 32,294 1.7 %
Real estate 1,359,193 1,340,169 1,210,045 19,024 1.4 % 149,148 12.3 %
Commercial 4,038,327 4,007,941 3,803,948 30,386 0.8 % 234,379 6.2 %
Other 3,176 3,186 207 (10) (0.3) % 2,969 N.M.
Total loans
$ 7,525,005 $ 7,476,221 $ 7,093,857 $ 48,784 0.7 % $ 431,148 6.1 %
Park's allowance for credit losses was $85.1 million at March 31, 2024, compared to $83.7 million at December 31, 2023, an increase of $1.3 million, or 1.6%. Refer to the “Credit Metrics and Provision for Credit Losses” section for additional information regarding Park's loan portfolio and the level of provision for credit losses recognized in each period presented.
Deposits
Total deposits at March 31, 2024 were $8.31 billion, compared to (i) $8.04 billion at December 31, 2023, an increase of $263.5 million and (ii) $8.29 billion at March 31, 2023, an increase of $11.6 million. During the three months ended March 31, 2024 and 2023 and the year ended December 31, 2023, Park participated 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-19 pandemic. At March 31, 2024, December 31, 2023 and March 31, 2023, Park had $2.3 million, $1.2 million and $164.6 million, respectively, in deposits which were off-balance sheet. Total deposits would have increased $264.6 million, or 3.3%, compared to December 31, 2023
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and would have decreased $150.7 million, or 1.8%, had the $2.3 million, $1.2 million and $164.6 million in deposits remained on the balance sheet at the respective dates.
(Dollars in thousands) March 31, 2024 December 31, 2023 March 31, 2023 $ change from 12/31/23 % change from 12/31/23 $ change from 3/31/23 % change from 3/31/23
Non-interest bearing deposits $ 2,587,152 $ 2,628,234 $ 2,922,242 $ (41,082) (1.6) % $ (335,090) (11.5) %
Transaction accounts 2,270,677 2,064,512 2,170,814 206,165 10.0 % 99,863 4.6 %
Savings 2,604,012 2,543,220 2,669,537 60,792 2.4 % (65,525) (2.5) %
Certificates of deposit 663,859 641,615 531,851 22,244 3.5 % 132,008 24.8 %
Brokered and bid cd deposits 180,332 164,985 — 15,347 9.3 % 180,332 N.M.
Total deposits $ 8,306,032 $ 8,042,566 $ 8,294,444 $ 263,466 3.3 % $ 11,588 0.1 %
Off balance sheet deposits 2,279 1,185 164,600 1,094 92.3 % (162,321) (98.6) %
Total deposits including off balance sheet deposits $ 8,308,311 $ 8,043,751 $ 8,459,044 $ 264,560 3.3 % $ (150,733) (1.8) %
Park's deposits grew during the COVID-19 pandemic and have declined toward pre-pandemic levels throughout 2022 and 2023. As previously noted, 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 of deposit balances transferred 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 balances have declined toward pre-pandemic levels.
The table below breaks out the change in deposit balances, by deposit type, for Park.
(Dollars in thousands) March 31, 2024 December 31, 2023 December 31, 2022 December 31, 2021 December 31, 2020 December 31, 2019
Retail deposits $ 4,027,777 $ 4,080,372 $ 4,388,394 $ 4,416,228 $ 4,025,852 $ 3,748,039
Commercial deposits 4,097,923 3,797,209 3,846,321 3,488,300 3,535,578 3,233,269
Brokered and bid CD deposits 180,332 164,985 — — 10,928 71,304
Total deposits $ 8,306,032 $ 8,042,566 $ 8,234,715 $ 7,904,528 $ 7,572,358 $ 7,052,612
Off balance sheet deposits 2,279 1,185 195,937 983,053 710,101 —
Total deposits including off balance sheet deposits $ 8,308,311 $ 8,043,751 $ 8,430,652 $ 8,887,581 $ 8,282,459 $ 7,052,612
$ change from prior period end $ 264,560 $ (386,901) $ (456,929) $ 605,122 $ 1,229,847
% change from prior period end 3.3 % (4.6) % (5.1) % 7.3 % 17.4 %
During the three months ended March 31, 2024, total deposits including off balance sheet deposits increased by $264.6 million, or 3.3%. This increase consisted of a $300.7 million increase in total commercial deposits, a $15.3 million increase in brokered and bid CD deposits and a $1.1 million increase in off balance sheet deposits, partially offset by a $52.6 million decrease in total retail deposits. The majority of off balance sheet deposits are commercial and thus impact the increase in commercial deposits as the deposits are moved back onto the balance sheet.
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The table below breaks out the change in deposit balance, by deposit type, for March 31, 2024 compared to March 31, 2023.
(Dollars in thousands) March 31, 2024 March 31, 2023 $ change from 3/31/23 % change from 3/31/23
Retail deposits $ 4,027,777 $ 4,263,947 $ (236,170) (5.5) %
Commercial deposits 4,097,923 4,030,497 67,426 1.7 %
Brokered and bid CD deposits 180,332 — 180,332 N.M.
Total deposits $ 8,306,032 $ 8,294,444 $ 11,588 0.1 %
Off balance sheet deposits 2,279 164,600 (162,321) (98.6) %
Total deposits including off balance sheet deposits $ 8,308,311 $ 8,459,044 $ (150,733) (1.8) %
At March 31, 2024, total deposits including off balance sheet deposits decreased by $150.7 million, or 1.8%, to $8.31 billion compared to $8.46 billion at March 31, 2023. This decrease consisted of a $236.2 million decrease in total retail deposits and a $162.3 million decrease in off balance sheet deposits, partially offset by a $180.3 million increase in brokered and bid CD deposits and a $67.4 million increase in total commercial deposits. The majority of off balance sheet deposits are commercial and thus impact the increase in commercial deposits as the deposits are moved back onto the balance sheet.
Included in the total commercial deposits and off balance sheet deposits shown in the previous tables are public fund deposits. These balances fluctuate based on seasonality and the cycle of collection and remittance of tax funds. The following table details the change in public fund deposits.
(Dollars in thousands) March 31, 2024 December 31, 2023 March 31, 2023 December 31, 2022 December 31, 2021 December 31, 2020 December 31, 2019
Total public fund deposits $ 1,603,490 $ 1,213,418 $ 1,518,319 $ 1,335,400 $ 1,548,217 $ 1,406,101 $ 1,293,090
$ change from prior period end $ 390,072 $ (304,901) $ 182,919 $ (212,817) $ 142,116 $ 113,011
% change from prior period end 32.1 % (20.1) % 13.7 % (13.7) % 10.1 % 8.7 %
As of March 31, 2024, Park had approximately $1.4 billion of uninsured deposits, which was 16.8% of total deposits. Uninsured deposits of $1.4 billion included $410.0 million of deposits that were over $250,000 but were fully collateralized by Park's investment securities portfolio.
Net Interest Income
Park’s principal source of earnings is net interest income, the difference between total interest income and total interest expense. Net interest income results from average balances outstanding for interest earning assets and interest bearing liabilities in conjunction with the average rates earned and paid on them.
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Comparison for the First Quarters of 2024 and 2023
Net interest income increased by $3.4 million, or 3.7%, to $95.6 million for the first quarter of 2024, compared to $92.2 million for the first quarter of 2023. See the discussion under the table below.
Three months ended
March 31, 2024 Three months ended
March 31, 2023
(Dollars in thousands) Average
balance Interest Tax
equivalent
yield/cost Average
balance Interest Tax
equivalent
yield/cost
Loans (1)
$ 7,482,650 $ 111,452 5.99 % $ 7,099,240 $ 91,766 5.24 %
Taxable investments 1,186,510 11,899 4.03 % 1,452,398 12,979 3.62 %
Tax-exempt investments (2)
223,533 1,785 3.21 % 422,832 3,686 3.54 %
Money market instruments 155,511 2,120 5.48 % 292,948 3,396 4.70 %
Interest earning assets $ 9,048,204 $ 127,256 5.66 % $ 9,267,418 $ 111,827 4.89 %
Interest bearing deposits $ 5,644,088 $ 27,193 1.94 % $ 5,476,661 $ 15,559 1.15 %
Short-term borrowings 172,493 1,464 3.41 % 204,471 824 1.64 %
Long-term debt 189,210 2,360 5.02 % 188,727 2,320 4.99 %
Interest bearing liabilities $ 6,005,791 $ 31,017 2.08 % $ 5,869,859 $ 18,703 1.29 %
Excess interest earning assets $ 3,042,413 $ 3,397,559
Tax equivalent net interest income $ 96,239 $ 93,124
Net interest spread 3.58 % 3.60 %
Net interest margin 4.28 % 4.08 %
(1) Loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $241,000 for the three months ended March 31, 2024 and $152,000 for the same period of 2023.
(2) Interest income on tax-exempt investment securities includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $375,000 for the three months ended March 31, 2024 and $774,000 for the same period of 2023.
Average interest earning assets for the first quarter of 2024 decreased by $219.2 million, or 2.4%, to $9,048 million for the first quarter of 2024, compared to $9,267 million for the first quarter of 2023. The average yield on interest earning assets increased by 77 basis points to 5.66% for the first quarter of 2024, compared to 4.89% for the first quarter of 2023.
Average interest bearing liabilities for the first quarter of 2024 increased by $135.9 million, or 2.3%, to $6,006 million, compared to $5,870 million for the first quarter of 2023. The average cost of interest bearing liabilities increased by 79 basis points to 2.08% for the first quarter of 2024, compared to 1.29% for the first quarter of 2023.
Yield on Loans: Average loan balances increased $383.4 million, or 5.4%, to $7,483 million for the first quarter of 2024, compared to $7,099 million for the first quarter of 2023. The average yield on the loan portfolio increased by 75 basis points to 5.99% for the first quarter of 2024, compared to 5.24% for the first quarter of 2023.
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The table below shows the average balance and tax equivalent yield by type of loan for the three months ended March 31, 2024 and 2023.
Three months ended
March 31, 2024 Three months ended
March 31, 2023
(Dollars in thousands) Average
balance Tax
equivalent
yield Average
balance Tax
equivalent
yield
Home equity loans $ 174,894 8.55 % $ 166,648 7.74 %
Installment loans 1,944,321 6.17 % 1,911,708 5.03 %
Real estate loans 1,345,036 4.85 % 1,197,827 4.12 %
Commercial loans (1)
4,014,186 6.17 % 3,818,741 5.59 %
Other 4,213 8.15 % 4,316 8.37 %
Total loans before allowance $ 7,482,650 5.99 % $ 7,099,240 5.24 %
(1) Commercial loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $241,000 for the three months ended March 31, 2024 and $152,000 for the same period of 2023.
Cost of Deposits: Average interest bearing deposit balances increased $167.4 million, or 3.1%, to $5,644 million for the first quarter of 2024, compared to $5,477 million for the first quarter of 2023. The average cost of funds on deposit balances increased by 79 basis points to 1.94% for the first quarter of 2024, compared to 1.15% for the first quarter of 2023. The table below shows for the three months ended March 31, 2024 and 2023, the average balance and cost of funds by type of deposit.
Three months ended
March 31, 2024 Three months ended
March 31, 2023
(Dollars in thousands) Average
balance Cost of funds Average
balance Cost of funds
Transaction accounts $ 2,168,763 1.70 % $ 2,156,473 1.15 %
Savings deposits and clubs 2,632,699 1.64 % 2,777,518 1.18 %
Time deposits 658,364 3.01 % 542,670 1.01 %
Brokered/bid CD deposits 184,262 5.26 % — — %
Total interest bearing deposits $ 5,644,088 1.94 % $ 5,476,661 1.15 %
Yield on Average Interest Earning Assets: The following table shows the tax equivalent yield on average interest earning assets for the three months ended March 31, 2024 and for the years ended December 31, 2023, 2022 and 2021.
Loans (1)
Investments (2)
Money Market
Instruments Total
2021 - year 4.53 % 2.22 % 0.13 % 3.86 %
2022 - year 4.65 % 2.66 % 2.07 % 4.14 %
2023 - year 5.55 % 3.73 % 5.00 % 5.18 %
2024 - first three months 5.99 % 3.90 % 5.48 % 5.66 %
(1) Loan interest income includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $241,000 for the three months ended March 31, 2024, and $811,000, $627,000, and $704,000 for the years ended December 31, 2023, 2022 and 2021, respectively.
(2) Interest income on tax-exempt investment securities includes the effects of taxable equivalent adjustments using a 21% federal corporate income tax rate. The taxable equivalent adjustment was $375,000 for the three months ended March 31, 2024, and $2.9 million, $2.9 million, and $2.2 million for the years ended December 31, 2023, 2022 and 2021, respectively.
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Cost of Average Interest Bearing Liabilities: The following table shows the cost of funds on average interest bearing liabilities for the three months ended March 31, 2024 and for the years ended December 31, 2023, 2022 and 2021.
Interest bearing deposits (1)
Short-term borrowings Long-term debt Total
2021 - year 0.12 % 0.27 % 4.32 % 0.28 %
2022 - year 0.39 % 0.67 % 4.69 % 0.54 %
2023 - year 1.52 % 2.58 % 4.97 % 1.67 %
2024 - first three months 1.94 % 3.41 % 5.02 % 2.08 %
Credit Metrics and Provision for Credit Losses
The provision for credit losses is the amount subtracted from/added to the allowance for credit losses to ensure the allowance is sufficient to absorb estimated credit losses over the life of a loan. The amount of the provision for credit losses is determined by management based on relevant information about 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.
The adoption of ASU 2022-02 on January 1, 2023 resulted in a $383,000 increase to the allowance for credit losses. A cumulative effect adjustment resulting in a $303,000 decrease to retained earnings and an $80,000 increase to deferred tax assets was also recorded. Additionally, as a result of the adoption of this ASU and elimination of the concept of TDRs, total nonperforming loans decreased by $20.1 million effective January 1, 2023 and individually evaluated loans decreased by $11.5 million effective January 1, 2023.
The table below provides additional information on the provision for credit losses for the three-month periods ended March 31, 2024 and 2023.
Three Months Ended
March 31,
(Dollars in thousands) 2024 2023
Allowance for credit losses:
Beginning balance $ 83,745 $ 85,379
Cumulative change in accounting principle; adoption of ASU 2022-02 — 383
Charge-offs
3,240 2,235
Recoveries 2,399 2,236
Net charge-offs (recoveries) 841 (1)
Provision for credit losses 2,180 183
Ending balance $ 85,084 $ 85,946
Net charge-offs (recoveries) as a % of average loans (annualized) 0.05 % — %
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The following table provides additional information related to the allowance for credit losses for Park including information related to individual reserves and general reserves, at March 31, 2024, December 31, 2023, and March 31, 2023.
(Dollars in thousands) 3/31/2024 12/31/2023 3/31/2023
Total allowance for credit losses $ 85,084 $ 83,745 $ 85,946
Allowance on accruing PCD loans — — —
Reserves on individually evaluated loans 5,032 4,983 4,318
General reserves on collectively evaluated loans $ 80,052 $ 78,762 $ 81,628
Total loans $ 7,525,005 $ 7,476,221 $ 7,093,857
Accruing PCD loans 2,454 2,835 4,555
Individually evaluated loans 54,742 45,215 59,384
Collectively evaluated loans $ 7,467,809 $ 7,428,171 $ 7,029,918
Allowance for credit losses as a % of period end loans 1.13 % 1.12 % 1.21 %
General reserve as a % of collectively evaluated loans 1.07 % 1.06 % 1.16 %
The total allowance for credit losses of $85.1 million at March 31, 2024 represented a $1.3 million, or 1.6%, increase compared to $83.7 million at December 31, 2023. The increase was due to a $1.3 million increase in general reserves and a $49,000 increase in specific reserves.
Generally, valuations for all nonperforming loans are updated at least annually, either through independent valuations by a licensed appraiser or a VOV performed by an internal licensed appraiser, in accordance with Company policy. A VOV can only be used in select circumstances and verifies that the original appraised value has not deteriorated through property inspection, consideration of market conditions, and performance of all valuation methods utilized in a prior valuation. As new valuation information is received, management performs an evaluation and applies a discount for anticipated disposition costs to determine the net realizable value of the collateral, which is compared against the outstanding principal balance to determine if additional write-downs are necessary.
Nonperforming Assets: Non-performing assets include: (1) loans whose interest is accounted for on a nonaccrual basis; (2) loans which are contractually past due 90 days or more as to principal or interest payments but whose interest continues to accrue; and (3) OREO which results from taking possession of property that served as collateral for a defaulted loan.
The following table compares Park’s nonperforming assets at March 31, 2024, December 31, 2023 and March 31, 2023.
(In thousands) March 31, 2024 December 31, 2023 March 31, 2023
Nonaccrual loans $ 70,189 $ 60,259 $ 73,114
Loans past due 90 days or more 1,570 859 1,251
Total nonperforming loans $ 71,759 $ 61,118 $ 74,365
OREO 1,674 983 1,468
Total nonperforming assets $ 73,433 $ 62,101 $ 75,833
Percentage of nonaccrual loans to total loans 0.93 % 0.81 % 1.03 %
Percentage of nonperforming loans to total loans 0.95 % 0.82 % 1.05 %
Percentage of nonperforming assets to total loans 0.98 % 0.83 % 1.07 %
Percentage of nonperforming assets to total assets 0.74 % 0.63 % 0.77 %
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Park classifies loans as nonaccrual when a loan (1) is maintained on a cash basis because of deterioration in the financial condition of the borrower, (2) payment in full of principal or interest is not expected, or (3) principal or interest has been in default for a period of 90 days for commercial loans and 120 days for all other loans. As a result, loans may be classified as nonaccrual despite being current with their contractual terms. The following table details the delinquency status of nonaccrual loans at March 31, 2024, December 31, 2023 and March 31, 2023. Loans are classified as current if they are less than 30 days past due.
March 31, 2024 December 31, 2023 March 31, 2023
(In thousands) Balance Percent of Total Loans Balance Percent of Total Loans Balance Percent of Total Loans
Nonaccrual loans - current $ 50,532 0.67 % $ 38,956 0.52 % 1 $ 32,813 0.46 %
Nonaccrual loans - past due 19,657 0.26 % 21,303 0.29 % 40,301 0.57 %
Total nonaccrual loans $ 70,189 0.93 % $ 60,259 0.81 % $ 73,114 1.03 %
Credit Quality Indicators: When determining the quarterly credit loss provision, Park reviews the grades of commercial loans. These loans are graded from 1 to 8. A grade of 1 indicates little or no credit risk and a grade of 8 is considered a loss. Commercial loans that are pass-rated (graded an 1 through a 4) are considered to be of acceptable credit risk. Commercial loans graded a 5 (special mention) are considered to be watch list credits and a higher PD is applied to these loans. Commercial loans graded a 6 (substandard), also considered to be watch list credits, represent higher credit risk than those rated special mention and, as a result, a higher PD is applied to these loans. Commercial loans that are graded a 7 (doubtful) are shown as nonperforming and Park charges these loans down to their fair value by taking a partial charge-off or recording an individual reserve. Certain 6-rated loans and all 7-rated loans are placed on nonaccrual status and included within the individually evaluated category. Any commercial loan graded an 8 (loss) is completely charged off.
The following table highlights the credit trends within the commercial loan portfolio.
Commercial loans * (In thousands) March 31, 2024 December 31, 2023 March 31, 2023
Pass-rated $ 3,945,112 $ 3,905,673 $ 3,664,298
Special mention 57,934 57,236 87,431
Substandard 1,598 3,414 2,176
Individually evaluated for impairment 54,742 45,215 59,384
Accruing PCD 2,372 2,760 4,469
Total $ 4,061,758 $ 4,014,298 $ 3,817,758
* Commercial loans include (1) Commercial, financial and agricultural loans, (2) Commercial real estate loans, (3) Commercial related loans in the construction real estate portfolio, (4) Commercial related loans in the residential real estate portfolio and (5) Leases.
Park's watch list includes all criticized and classified commercial loans defined by Park as loans rated special mention or worse. Park had $59.5 million of collectively evaluated commercial loans included on the watch list at March 31, 2024, compared to $60.7 million at December 31, 2023, and $89.6 million at March 31, 2023. The existing conditions of these loans do not warrant classification as nonaccrual. However, these loans have shown some weakness and management performs additional analysis regarding each borrower's ability to comply with payment terms.
Park considers a loan delinquent when it reaches 30 days past due. Delinquent and accruing loans were $21.6 million, or 0.29%, of total loans at March 31, 2024, compared to $23.5 million, or 0.31% of total loans at December 31, 2023, and $14.0 million or 0.20% of total loans at March 31, 2023.
Individually Evaluated Loans: Loans that do not share risk characteristics are evaluated on an individual basis. Park has determined that any commercial loans which have been placed on nonaccrual status will be individually evaluated. Individual analysis will establish a reserve for loans in scope. Reserves on individually evaluated commercial loans are typically based on management’s best estimate of the fair value of collateral securing these loans. The amount ultimately charged off for these loans may be different from the reserve as the ultimate liquidation of the collateral may be for an amount different from management’s estimate.
Individually evaluated commercial loans were $54.7 million at March 31, 2024, an increase of $9.5 million, compared to $45.2 million at December 31, 2023 and a decrease of $4.7 million, compared to $59.4 million at March 31, 2023.
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At March 31, 2024, Park had taken partial charge-offs of $2.3 million related to the $54.7 million of individually evaluated commercial loans, compared to partial charge-offs of $2.3 million related to the $45.2 million of individually evaluated commercial loans at December 31, 2023.
Loans Acquired with Deteriorated Credit Quality: PCD loans are individually evaluated on a quarterly basis to determine if a reserve is necessary. At March 31, 2024 and at December 31, 2023, there was no allowance for credit losses on PCD loans. The carrying amount of accruing loans acquired with deteriorated credit quality at March 31, 2024 and at December 31, 2023 was $2.5 million and $2.8 million, respectively. The carrying amount of nonaccrual loans acquired with deteriorated credit quality at March 31, 2024 and at December 31, 2023 was $544,000 and $534,000, respectively.
Additional Considerations: As part of its quarterly allowance process, Park evaluates certain industries which are more likely to be under economic stress in the current environment. The office sector continues to face challenges as it adjusts to the new normal of work from home brought on by the pandemic. Nationally, office properties in downtown and urban business districts are seeing the most stress. As of March 31, 2024, Park had $224.2 million of loans which were fully or partially secured by non-owner-occupied office space, $222.6 million of which were accruing. This portfolio is not currently exhibiting signs of stress, but Park continues to monitor this portfolio, and others, for signs of deterioration.
Other Income
Other income increased by $1.8 million to $26.2 million for the quarter ended March 31, 2024, compared to $24.4 million for the first quarter of 2023.
The increase for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 was primarily due to increases in income from fiduciary activities, bank owned life insurance income, and other components of net periodic pension benefit income, partially offset by decreases in debit card fee income, a loss on the sale of debt securities, net, loss on equity securities, net, and a decrease in miscellaneous income.
The following table provides a summary of the changes in the components of other income:
Three months ended
March 31,
(In thousands) 2024 2023 Change
Income from fiduciary activities $ 10,024 $ 8,615 $ 1,409
Service charges on deposit accounts 2,106 2,241 (135)
Other service income 2,524 2,697 (173)
Debit card fee income 6,243 6,457 (214)
Bank owned life insurance income 2,629 1,185 1,444
ATM fees 496 533 (37)
Gain (loss) on sale of OREO, net 121 (9) 130
Loss on the sale of debt securities, net (398) — (398)
Loss on equity securities, net (687) (405) (282)
Other components of net periodic pension benefit income 2,204 1,893 311
Miscellaneous 938 1,180 (242)
Total other income $ 26,200 $ 24,387 $ 1,813
Income from fiduciary activities increased by $1.4 million, or 16.4%, to $10.0 million for the three months ended March 31, 2024, compared to $8.6 million for the same period of 2023. The majority of fiduciary fees are calculated on a lag, based on the market value of the assets under management. The average market value of assets under management for the three months ended March 31, 2024 was $8,373 million compared to $7,463 million for the same period in 2023.
Bank owned life insurance income increased by $1.4 million to $2.6 million for the three months ended March 31, 2024, compared to $1.2 million for the same period of 2023. The increase for the three-month period ended March 31, 2024 compared to March 31, 2023 was due to an increase in received death benefits.
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During the three-month period ended March 31, 2024, Park sold certain AFS debt securities with a book value of $31.2 million at a gross loss of $398,000. There were no sales of debt securities during the three-month period ended March 31, 2023.
Loss on equity securities, net, changed by $282,000, to a net loss of $687,000 for the three months ended March 31, 2024 compared to a net loss of $405,000 for the same period in 2023. The $282,000 change for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 was related to a $30,000 change in the gain (loss) on other equity securities which went from a net loss of $27,000 for the three months ended March 31, 2023 to a net gain of $3,000 for the three months ended March 31, 2024, and a $312,000 increase in the loss on equity securities held at NAV, which went from a $378,000 net loss for the three months ended March 31, 2023 to a $690,000 net loss for the three months ended March 31, 2024.
Other components of net periodic pension benefit income increased $311,000, or 16.4%, to $2.2 million for the three months ended March 31, 2024 compared to $1.9 million for the same period in 2023. The increase was largely due to an increase in the expected return on plan assets, partially offset by an increase in interest cost.
Other Expense
Other expense increased by $725,000 to $77.2 million for the three months ended March 31, 2024 compared to $76.5 million for the same period of 2023.
The following table is a summary of the changes in the components of other expense:
Three months ended
March 31,
(In thousands) 2024 2023 Change
Salaries $ 35,733 $ 34,871 $ 862
Employee benefits 11,560 10,816 744
Occupancy expense 3,181 3,353 (172)
Furniture and equipment expense 2,583 3,246 (663)
Data processing fees 8,808 8,750 58
Professional fees and services 6,817 7,221 (404)
Marketing 1,741 1,319 422
Insurance 1,718 1,814 (96)
Communication 1,036 1,037 (1)
State tax expense 1,110 1,278 (168)
Amortization of intangible assets 320 327 (7)
Miscellaneous 2,621 2,471 150
Total other expense $ 77,228 $ 76,503 $ 725
Salaries increased by $862,000, or 2.5%, to $35.7 million for the three months ended March 31, 2024, compared to $34.9 million for the same period in 2023. The increase for the three months ended March 31, 2024 compared to the same period of 2023 was due to an increase of $1.6 million in base salary expense. These increases were partially offset by a decrease in share-based compensation expense of $383,000 and a decrease of $154,000 in additional compensation incentives.
Employee benefits increased $744,000, or 6.9%, to $11.6 million for the three months ended March 31, 2024, compared to $10.8 million for the same period in 2023.The $744,000 increase for the three months ended March 31, 2024 compared to the same period in 2023 was primarily due to an increase in group insurance costs of $458,000, an increase in payroll tax expense of $175,000, and an increase in pension plan expense of $191,000, partially offset by a decrease in other employee benefits of $193,000.
Furniture and equipment expense decreased $663,000, or 20.4%, to $2.6 million for the three months ended March 31, 2024 compared to $3.2 million for the same period in 2023. The decrease for the three-months ended March 31, 2024 compared to the same period in 2023 related to decreases in depreciation and maintenance and repairs expense.
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Professional fees and services expense decreased $404,000, or 5.6%, to $6.8 million for the three months ended March 31, 2024 compared to $7.2 million for the same period in 2023. The decrease for the three-month period ended March 31, 2024 compared to the same period in 2023 related to a $756,000 decrease in legal expenses and a $332,000 decrease in other fees, partially offset by (i) an increase of $132,000 in temporary wages; (ii) an increase of $119,000 in credit services expense; (iii) an increase of $114,000 in ICS fees; (iv) an increase of $103,000 in consulting fees; and (v) an increase of $103,000 in appraisal and title expenses.
Marketing expense increased $422,000, or 32.0%, to $1.7 million for the three months ended March 31, 2024 compared to $1.3 million for the same period in 2023. The increase for the three-month period ended March 31, 2024 compared to the same period in 2023 related to an increase in advertising expense.
Items Impacting Comparability (Non-U.S. GAAP)
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 relate 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.
The following table details those items which management believes impact the comparability of current and prior period amounts.
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THREE MONTHS ENDED
(in thousands except per common share data) March 31, 2024 March 31, 2023 Affected Line Item
Net interest income $ 95,623 $ 92,198
less purchase accounting accretion related to NewDominion and Carolina Alliance acquisitions 352 200 Interest and fees on loans
less interest income on former Vision Bank relationships 2 574 Interest and fees on loans
Net interest income - adjusted $ 95,269 $ 91,424
Provision for credit losses $ 2,180 $ 183
less recoveries on former Vision Bank relationships (953) (723) Provision for credit losses
Provision for credit losses - adjusted $ 3,133 $ 906
Total other income $ 26,200 $ 24,387
less loss on sale of debt securities, net (398) — Loss on the sale of debt securities, net
less write-downs on strategic initiatives (155) — Miscellaneous
less Vision related gain on the sale of OREO, net 121 — Gain (loss) on sale of OREO, net
less other service income related to former Vision Bank relationships 7 135 Other service income
Total other income - adjusted $ 26,625 $ 24,252
Total other expense $ 77,228 $ 76,503
less direct expenses related to collection of payments on former Vision Bank loan relationships — 100 Professional fees and services
less core deposit intangible amortization related to NewDominion and Carolina Alliance acquisitions 320 327 Amortization of intangible assets
Total other expense - adjusted $ 76,908 $ 76,076
Tax effect of adjustments to net income identified above (7)
$ (118) $ (253)
Net income - reported $ 35,204 $ 33,733
Net income - adjusted (6)
$ 34,760 $ 32,781
Diluted EPS $ 2.17 $ 2.07
Diluted EPS- adjusted (6)
$ 2.15 $ 2.01
Annualized return on average assets (1)(2)
1.44 % 1.36 %
Annualized return on average assets- adjusted (1)(2)(6)
1.42 % 1.32 %
Annualized return on average tangible assets (1)(2)(4)
1.46 % 1.38 %
Annualized return on average tangible assets- adjusted (1)(2)(4)(6)
1.44 % 1.34 %
Annualized return on average shareholders' equity (1)(2)
12.23 % 12.54 %
Annualized return on average shareholders' equity- adjusted (1)(2)(6)
12.07 % 12.19 %
Annualized return on average tangible equity (1)(2)(3)
14.24 % 14.78 %
Annualized return on average tangible equity- adjusted (1)(2)(3)(6)
14.06 % 14.36 %
Efficiency ratio (5)
63.07 % 65.10 %
Efficiency ratio- adjusted (5)(6)
62.78 % 65.24 %
Annualized net interest margin (5)
4.28 % 4.08 %
Annualized net interest margin- adjusted (5)(6)
4.26 % 4.04 %
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Financial Reconciliations
(1) Reported measure uses net income.
(2) Averages are for the three months ended March 31, 2024 and March 31, 2023, as appropriate.
(3) Net income for each period 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.
RECONCILIATION TO AVERAGE SHAREHOLDERS' EQUITY OF AVERAGE TANGIBLE EQUITY:
THREE MONTHS ENDED
March 31, 2024 March 31, 2023
AVERAGE SHAREHOLDERS' EQUITY $ 1,158,184 $ 1,090,952
Less: Average goodwill and other intangible assets 164,137 165,457
AVERAGE TANGIBLE EQUITY $ 994,047 $ 925,495
(4) Net income for each period divided by average tangible assets during the period. Average tangible assets equals average assets less average goodwill and other intangible assets, in each case during the applicable period.
RECONCILIATION TO AVERAGE ASSETS OF AVERAGE TANGIBLE ASSETS
THREE MONTHS ENDED
March 31, 2024 March 31, 2023
AVERAGE ASSETS $ 9,363,378 $ 10,058,880
Less: Average goodwill and other intangible assets 164,137 165,457
AVERAGE TANGIBLE ASSETS $ 9,199,241 $ 9,893,423
(5) Efficiency ratio is calculated by dividing total other expense by the sum of FTE net interest income and other income. The reconciliation of FTE net interest income to net interest income is shown below assuming a 21% federal corporate income tax rate. Additionally, net interest margin is calculated on a fully taxable equivalent basis by dividing FTE net interest income by average interest earning assets, in each case during the applicable period.
RECONCILIATION TO FTE NET INTEREST INCOME OF NET INTEREST INCOME
THREE MONTHS ENDED
March 31, 2024 March 31, 2023
Interest income $ 126,640 $ 110,901
FTE adjustment 616 926
FTE interest income $ 127,256 $ 111,827
Interest expense 31,017 18,703
FTE net interest income $ 96,239 $ 93,124
(6) Adjustments to net income for each period presented are detailed in the non-GAAP reconciliations of net interest income, provision for credit losses, total other income, and total other expense, as well as the disclosure of the "Tax effect of adjustments to net income identified above."
(7) The tax effect of adjustments to net income was calculated assuming a 21% federal corporate income tax rate.
(8) Pre-tax, pre-provision ("PTPP") net income is calculated as net income, plus income taxes, plus the provision for credit losses, in each case during the applicable period. PTPP net income is a common industry metric utilized in capital analysis and review. PTPP is used to assess the operating performance of Park while excluding the impact of the provision for credit losses.
RECONCILIATION TO NET INCOME OF PRE-TAX, PRE-PROVISION NET INCOME
THREE MONTHS ENDED
March 31, 2024 March 31, 2023
Net income $ 35,204 $ 33,733
Plus: Income taxes 7,211 6,166
Plus: Provision for credit losses 2,180 183
Pre-tax, pre-provision net income $ 44,595 $ 40,082
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Income Tax
Income tax expense was $7.2 million for the first quarter of 2024 and consisted of federal income tax expense of $6.9 million and state income tax expense of $321,000. This compares to income tax expense of $6.2 million for the first quarter of 2023, which consisted of federal income tax expense of $6.4 million and state income tax benefit of $234,000, as a result of a refund. The effective income tax rate for the first quarter of 2024 was 17.0%, compared to 15.5% for the same period in 2023.
The difference between the statutory federal corporate income tax rate of 21% and Park's effective income tax rate reflects permanent tax differences, primarily consisting of tax-exempt interest income from municipal investments and loans, qualified affordable housing and historical tax credits, bank owned life insurance income, and dividends paid on the common shares held within Park's KSOP, offset by the impact of state income taxes. Park expects permanent federal income tax differences for the 2024 year will be approximately $6.4 million.
Comparison of Financial Condition
At March 31, 2024 and at December 31, 2023
Changes in Financial Condition
Total assets increased by $44.6 million during the first three months of 2024 to $9,881 million at March 31, 2024, compared to $9,836 million at December 31, 2023. This increase was primarily due to the following:
• Cash and cash equivalents increased by $87.8 million, or 40.2%, to $306.1 million at March 31, 2024, compared to $218.3 million at December 31, 2023. Money market instruments increased by $136.2 million and cash and due from banks decreased by $48.4 million.
• Loans increased by $48.8 million, or 0.7%, to $7,525 million at March 31, 2024, compared to $7,476 million at December 31, 2023.
• Total investment securities decreased by $89.4 million, or 6.3%, to $1,340 million at March 31, 2024, compared to $1,429 million at December 31, 2023.
Total liabilities increased by $27.9 million, or 0.3%, during the first three months of 2024 to $8,719 million at March 31, 2024, compared to $8,691 million at December 31, 2023. This increase was primarily due to the following:
• Total deposits increased by $263.5 million, or 3.3%, to $8,306 million at March 31, 2024, compared to $8,043 million at December 31, 2023.
• Short-term borrowings decreased by $222.3 million, or 67.7%, to $105.9 million at March 31, 2024, compared to $328.2 million at December 31, 2023.
• Other liabilities decreased by $7.7 million, or 10.4%, to $66.2 million at March 31, 2024, compared to $73.9 million at December 31, 2023.
Total shareholders’ equity increased by $16.7 million, or 1.5%, to $1,162 million at March 31, 2024, from $1,145 million at December 31, 2023. This increase was primarily due to the following:
• Retained earnings increased by $17.2 million during the period primarily as a result of net income of $35.2 million, partially offset by cash dividends on common shares of $17.3 million.
• Treasury shares decreased by $3.4 million during the period as a result of the issuance of treasury shares under share-based compensation awards (net of common shares withheld to pay employee income taxes).
• Common shares decreased by $3.7 million during the period as a result of the issuance of treasury shares under share-based compensation awards (net of common shares withheld to pay employee income taxes), partially offset by an increase due to share-based compensation expense.
Increases or decreases in the investment securities portfolio, short-term borrowings and long-term debt are greatly dependent upon the growth in loans and deposits. The primary objective of management is to grow loan and deposit totals. To the extent that management is unable to grow loan totals at a desired growth rate, additional investment securities may be acquired. Likewise, both short-term borrowings and long-term debt are utilized to fund the growth in earning assets if the growth in deposits and cash flow from operations are not sufficient to do so.
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Liquidity
Cash provided by operating activities was $34.7 million and $24.4 million for the three months ended March 31, 2024 and 2023, respectively. Net income was the primary source of cash from operating activities for each of the three-month periods ended March 31, 2024 and 2023.
Cash provided by investing activities was $32.4 million and $78.7 million for the three months ended March 31, 2024 and 2023, respectively. Proceeds from the sale, repayment, or maturity of investment securities provide cash and purchases of investment securities use cash. Net investment securities transactions provided cash of $87.6 million for the three months ended March 31, 2024 and $34.8 million for the three months ended March 31, 2023. Another major use or source of cash in investing activities is the net increase or decrease in the loan portfolio. Cash used by the net increase in the loan portfolio was $49.2 million and cash provided by the net decrease in the loan portfolio was $50.2 million for the three months ended March 31, 2024 and 2023, respectively.
Cash provided by financing activities was $20.8 million and cash used in financing activities was $30.9 million for the three months ended March 31, 2024 and 2023, respectively. A major source of cash for financing activities is the net change in deposits. Deposits (net of off-balance sheet deposits) increased and provided $263.5 million and $59.7 million of cash for the three months ended March 31, 2024 and 2023, respectively. Another major source/use of cash from financing activities is borrowings in the form of short-term borrowings, long-term debt and subordinated notes. For the three months ended March 31, 2024 and 2023, net short-term borrowings decreased and used $222.3 million and $55.3 million in cash, respectively. For the three months ended March 31, 2023, cash declined by $15.3 million due to the repurchase of common shares to be held as treasury shares; while there were no repurchases of common shares during the three months ended March 31, 2024. Finally, cash declined by $17.4 million for both the three months ended March 31, 2024 and 2023, respectively, from the payment of dividends.
Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as the operating cash needs of the Corporation, are met. 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, unpledged investment securities and available FHLB borrowing capacity, totaled $2.15 billion at March 31, 2024. The Corporation’s loan to asset ratio was 76.16% at March 31, 2024, compared to 76.01% at December 31, 2023 and 71.97% at March 31, 2023. Cash and cash equivalents were $306.1 million at March 31, 2024, compared to $218.3 million at December 31, 2023 and $261.9 million at March 31, 2023. Management believes that the present funding sources provide more than adequate liquidity for the Corporation to meet its cash flow needs.
Capital Resources
Total shareholders’ equity at March 31, 2024 was $1,162 million, or 11.8% of total assets, compared to $1,145 million, or 11.6% of total assets, at December 31, 2023 and $1,082 million, or 11.0% of total assets, at March 31, 2023.
Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank holding companies. Park has elected not to include the net unrealized gain or loss on debt securities AFS in computing regulatory capital. Park has adopted the Basel III regulatory capital framework as approved by the federal banking agencies. Under the Basel III regulatory capital framework, in order to avoid limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers, Park must hold a capital conservation buffer of 2.5% above the adequately capitalized risk-based capital ratios. The amounts shown below as the adequately capitalized ratio plus capital conservation buffer include the 2.50% buffer. The Federal Reserve Board has also adopted capital requirements Park must maintain to be deemed "well capitalized" and remain a financial holding company.
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Park and PNB met each of the well capitalized ratio guidelines applicable to them at March 31, 2024. The following table indicates the capital ratios for PNB and Park at March 31, 2024 and December 31, 2023.
At March 31, 2024
Leverage Tier 1
Risk-Based Common Equity Tier 1 Total
Risk-Based
The Park National Bank 9.34 % 11.11 % 11.11 % 12.52 %
Park National Corporation 11.00 % 13.12 % 12.94 % 16.34 %
Adequately capitalized ratio 4.00 % 6.00 % 4.50 % 8.00 %
Adequately capitalized ratio plus capital conservation buffer 4.00 % 8.50 % 7.00 % 10.50 %
Well capitalized ratio (PNB) 5.00 % 8.00 % 6.50 % 10.00 %
Well capitalized ratio (Park) N/A 6.00 % N/A 10.00 %
At December 31, 2023
Leverage Tier 1
Risk-Based Common Equity Tier 1 Total
Risk-Based
The Park National Bank 9.11 % 10.95 % 10.95 % 12.35 %
Park National Corporation 10.74 % 12.97 % 12.79 % 16.19 %
Adequately capitalized ratio 4.00 % 6.00 % 4.50 % 8.00 %
Adequately capitalized ratio plus capital conservation buffer 4.00 % 8.50 % 7.00 % 10.50 %
Well capitalized ratio (PNB) 5.00 % 8.00 % 6.50 % 10.00 %
Well capitalized ratio (Park) N/A 6.00 % N/A 10.00 %
Contractual Obligations and Commitments
In the ordinary course of operations, Park enters into certain contractual obligations. Such obligations include the funding of operations through debt issuances as well as leases for premises. See page 70 of Park’s 2023 Form 10-K (Table 32) for disclosure concerning contractual obligations and commitments at December 31, 2023. There were no significant changes in contractual obligations and commitments during the first three months of 2024.
Financial Instruments with Off-Balance Sheet Risk
PNB is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements.
The exposure to credit loss (for PNB) in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. PNB uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.
The total amounts of off-balance sheet financial instruments with credit risk were as follows:
(In thousands) March 31,
2024 December 31, 2023
Loan commitments $ 1,613,500 $ 1,527,577
Standby letters of credit $ 31,431 $ 31,261
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.