PRK - Park National: High-Quality Regional Bank But Valuation Still A Bit Pricey

Summary

• Park National Corporation has pulled back sharply over the past month.
• The selloff has continued after a weak Q4 earnings report.
• Park National has been a strong long-term performer and there's plenty of merit to the bank as a buy-and-hold investment.
• However, I'd wait for another 10% decline before taking a position in Park National Corporation.

Park National Corporation ( PRK ) is a large regional bank based out of Ohio. It has more than 100 branches in Ohio, and it also operates a number of branches across states in the southern part of the United States. Specifically, Park is the largest community bank in both the state of Ohio and the Columbus metropolitan area.

The bank has delivered strong total returns over the years. This can likely be attributed to the bank's strong loan performance, compared to peers, along with a management team that has been with the bank for a long time and has proven its merit. Zooming out, Park has been in business for more than a century and has performed acceptably through other economic setbacks such as the 2008 financial crisis.

Specifically, $10,000 invested in Park back in 1995 would be worth $285,000 today, including dividends:

As the chart shows, however, Park shares have recently pulled back. The stock has dropped 13% over the past month, and close to 20% from its recent 52-week highs. As such, I thought I'd take a look at whether this long-term regional bank outperformer is worth picking up on this dip.

Park's Q4 Earnings: Well Short of Expectations

Park National reported its Q4 earnings on January 23. Results came in significantly below analyst expectations. Revenues of $120 million missed the mark by $3.5 million. Meanwhile, EPS of $1.94 fell far short of the analyst consensus of $2.26. An earnings shortfall of 32 cents per share, in particular, was quite noteworthy, and it's not surprising that Park shares fell sharply following the release.

Net income also fell year-over-year, with Q4's results dropping 9.5% from the same quarter of 2021.

Like quite a few regional banks this earnings cycle, the problem wasn't in core lending operations. Indeed, Park is benefitting from higher interest rates and a favorable lending demand environment. For Q4 '22, Park's net interest income jumped to $95 million from $84 million in the same quarter of 2021.

So, what went wrong? Two main things. One, Park added a significant sum to its loan provisions, setting aside $3 million. This was a reversal from 2021, when the company was enjoying recoveries from its Covid-induced loan provision allowances. Given the rising economic risk, this is an understandable turn of events, and Park is far from the only bank increasing its loan loss provisions now.

Another concern was that the company's other income dropped significantly. Digging into the footnotes, this was primarily due to a large drop in fees for mortgage originations and mortgage servicing rights. Given where interest rates and the housing market are right now, it seems unlikely that Park will see these ancillary income streams return to 2021 levels any time in the near future.

I'd point out that there were significant positives in earnings. Park grew its net interest margin by another 11 basis points this quarter and is reasonably well-positioned for the current interest rate environment. And the bank's core loan and deposit metrics look fine.

Park's Valuation Metrics

Park shares are currently trading around 14 times forward earnings. That's not a terrible valuation in isolation, but it's pretty expensive given how many regional banks have fallen to 10 times earnings or less in the recent selloff. It's worth noting that Park offers a fairly generous 3.5% dividend yield now after its recent selloff.

On a price-to-tangible book value basis, Park National is now at 2.2x. This is slightly above average, compared to its 10-year valuation range, however, it's hardly out of the ordinary:

That said, I'd highlight that until a few weeks ago, Park was up at almost 3x price-to-tangible book, which was its highest level since prior to the 2008 financial crisis.

As such, I'd urge readers to put the recent 20% decline in Park's stock price in perspective. The sudden 20% drop since November may seem like a big move in isolation. However, when zooming out, it merely dropped Park National Corporation shares from the highest valuation in a decade to slightly overvalued compared to the historical average.

I doubt shares will go back under 1.5x, where they briefly traded during the Covid-19 shock. That said, Park shares have been offered at or around 2.0x price-to-tangible book value on many occasions over the past decade. For investors that really like Park's story, management team, or want specific Ohio exposure, Park shares might be attractive at 2x tangible book value. That would be another 10% share price decline from here.

I'd also note that Park's usual pattern of sharply rising tangible book value broke over the past year:

Park holds securities and investments equal to roughly 20% of the bank's total assets. As such, it is vulnerable to seeing the mark-to-market value of its securities decline during rising interest rate environments, such as we saw in 2022. If interest rates start increasing once again, it would put near-term pressure on Park's book value which would, in turn, probably limit share price upside in the intermediate term.

Park National's Bottom Line

There are a lot of regional banks selling off lately. This isn't too surprising. The rapid change in interest rates and valuations of fixed income securities has created a ton of moving parts for regional banks. Some banks are structured to see big profitability increases from higher rates. Others, like Park National Corporation, have a more mixed exposure to rising rates, and thus earnings haven't quite matched investor expectations.

Despite the big selloff in Park National Corporation shares over the past two months, however, I don't see particular value here yet. Like I mentioned, there are a bunch of regional banks that have dropped sharply during this earnings season. Investors can be pickier; Park National Corporation at 2.2x tangible book value isn't a bargain in either absolute or relative terms just yet.

For longer-term shareholders of Park National Corporation, I understand the appeal. Ohio has been a good market, and the state's prospects are improving thanks to reshoring and major new manufacturing plant announcements we've heard about in recent quarters. And Park's management team has a commendable track record. There's a lot to like about this bank.

That said, I'd want to see Park National Corporation shares drop by at least another 10% if not 15% to put money to work in this name today. Given the declines we've seen in many peers and the overall volatility in the market, patience should be rewarded in finding entry points for Park National Corporation and other higher-valuation regional banks.

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