2023-05-11 12:44:16 ET
Summary
- Real estate valuation increases propped up the non-interest income last year. This growth is unlikely to recur this year.
- Slight margin expansion and muted loan growth will keep the earnings from falling too low.
- The year-end target price suggests a small upside from the current market price. Further, PRK is offering a good dividend yield.
Earnings of Park National Corporation ( PRK ) will most likely dip this year due to lower non-interest income. However, topline growth will offer some support to the earnings. Overall, I'm expecting Park National to report earnings of $8.11 per share for 2023, down 10.5% year-over-year. Despite the recent stock price rout, the current stock price is still very close to the year-end target price. As a result, I'm adopting a hold rating on Park National Corporation.
Topline's Outlook is Somewhat Positive
The loan portfolio size declined by 0.7% during the first quarter. This fall was broad-based across the loan segments. Fortunately, the deposit book grew by 0.7% during the quarter, so the deposit run that hurt SVB Financial ( SIVBQ ) and First Republic Bank ( FRCB ) in March does not appear to have affected Park National. Deposit growth has, in fact, outpaced loan growth since 2021. Considering the trend, I think deposits can continue to grow for the remainder of the year. Easy fund availability will be conducive to loan growth going forward.
Further, strong labor markets bode well for loan growth in the near term. Park National operates in Ohio, Kentucky, and the Carolinas. Although most of these states have worse unemployment rates than the national average, their rates are very low from a historical perspective.
Moreover, the trend of the economic activity index for all four states is currently gently upward-sloping.
Considering the state-level economic factors, I believe loan growth will remain positive in the year ahead, unlike the first quarter. I'm expecting the loan portfolio to grow by 0.8% in 2023. The following table shows my balance sheet estimates.
Financial Position | FY18 | FY19 | FY20 | FY21 | FY22 | FY23E |
Net Loans | 5,641 | 6,445 | 7,092 | 6,810 | 7,057 | 7,114 |
Growth of Net Loans | 6.0% | 14.3% | 10.0% | (4.0)% | 3.6% | 0.8% |
Other Earning Assets | 1,436 | 1,304 | 1,340 | 1,890 | 1,854 | 1,945 |
Deposits | 6,261 | 7,053 | 7,572 | 7,905 | 8,235 | 8,419 |
Borrowings and Sub-Debt | 637 | 438 | 563 | 441 | 435 | 385 |
Common equity | 833 | 969 | 1,040 | 1,111 | 1,069 | 1,021 |
Book Value Per Share ($) | 53.3 | 59.3 | 63.4 | 67.6 | 65.3 | 62.6 |
Tangible BVPS ($) | 45.7 | 48.9 | 53.1 | 57.5 | 55.2 | 52.4 |
Source: SEC Filings, Earnings Releases, Author's Estimates (In USD million unless otherwise specified) |
Park National's net interest margin expanded by 10 basis points in the first quarter, which isn't too bad considering it grew by 17 basis points in the fourth quarter and shrank by three basis points in the third quarter of 2022. The topline's reaction to the rate hikes in the second quarter will be muted as the company has reduced its interest rate sensitivity over the first quarter. According to the results of management's rate-simulation model given in the 10-Q filing , as of March 31, 2023, a 200 basis points hike in interest rates could increase the net interest income by just 2.6%. In comparison, as of December 31, 2022, a 200-basis points hike could have increased the net interest income by 3.7%.
The reduction in the net interest income's rate sensitivity was partly attributable to an increase in the deposit beta (rate sensitivity). The higher deposit beta was, in turn, attributable to a deterioration of the deposit mix as the proportion of non-interest-bearing deposits dropped to 35.2% by the end of March 2023 from 37.3% at the end of December 2022.
I'm expecting the Fed funds rate to increase by a further 25 basis points in June before stabilizing. Considering the change in the topline's rate sensitivity and my interest rate outlook, I'm expecting the margin to increase by just two basis points in the second quarter and then remain unchanged in the second half of this year.
Based on my outlook for subdued loan growth and slight margin expansion, I'm expecting Park National to report net interest income of $372 million in 2023, up 7% year-over-year.
Lower Non-Interest Income to Hurt Earnings
Earnings of Park National Corporation will likely fall this year because of non-interest income. The non-interest income will be lower this year because, unlike last year, I'm not expecting a big real estate valuation increase in 2023. This is because house price indices have started to flatten since the second half of last year.
The muted loan growth and slight margin expansion will support earnings. Overall, I'm expecting Park National Corporation to report earnings of $8.11 per share for 2023, down 10.5% year-over-year. The following table shows my income statement estimates.
Income Statement | FY18 | FY19 | FY20 | FY21 | FY22 | FY23E |
Net interest income | 267 | 298 | 328 | 330 | 347 | 372 |
Provision for loan losses | 8 | 6 | 12 | (12) | 5 | 5 |
Non-interest income | 101 | 97 | 126 | 130 | 136 | 103 |
Non-interest expense | 229 | 264 | 287 | 284 | 298 | 311 |
Net income - Common Sh. | 110 | 103 | 128 | 154 | 148 | 132 |
EPS - Diluted ($) | 7.07 | 6.29 | 7.80 | 9.37 | 9.06 | 8.11 |
Source: SEC Filings, Earnings Releases, Author's Estimates (In USD million unless otherwise specified) |
The Risk Level Appears Satisfactory
Amid the recent bank failures, I believe Park National is a relatively safe investment because of the following two reasons.
- Unrealized losses on the available-for-sale securities portfolio amounted to $109.5 million at the end of March 2023, which is just 10% of total equity and 90% of the net income reported for 2022.
- Uninsured and uncollateralized deposits amounted to $1.2 billion at the end of March 2023, representing 14.6% of total deposits, according to details given in the 10-Q filing. This isn't worrisome as the unutilized funding available through various sources, including Fed Funds sold and FHLB borrowing capacity, totaled $2.74 billion at the end of the last quarter.
Adopting a Hold Rating
Park National is offering a dividend yield of 4.6% at the current quarterly dividend rate of $1.05 per share and an annual special dividend of $0.50 per share. The earnings and dividend estimates suggest a payout ratio of 58% for 2023, which is in line with the five-year average of 56%. Therefore, the dividend appears secure despite the earnings outlook.
I'm using the historical price-to-tangible book ("P/TB") and price-to-earnings ("P/E") multiples to value Park National. The stock has traded at an average P/TB ratio of 2.04 in the past, as shown below.
FY19 | FY20 | FY21 | FY22 | Average | |
T. Book Value per Share ($) | 48.9 | 53.1 | 57.5 | 55.2 | |
Average Market Price ($) | 96.7 | 86.4 | 124.2 | 131.3 | |
Historical P/TB | 1.98x | 1.63x | 2.16x | 2.38x | 2.04x |
Source: Company Financials, Yahoo Finance, Author's Estimates |
Multiplying the average P/TB multiple with the forecast tangible book value per share of $52.40 gives a target price of $106.80 for the end of 2023. This price target implies a 4.3% upside from the May 10 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
P/TB Multiple | 1.84x | 1.94x | 2.04x | 2.14x | 2.24x |
TBVPS - Dec 2023 ($) | 52.4 | 52.4 | 52.4 | 52.4 | 52.4 |
Target Price ($) | 96.3 | 101.5 | 106.8 | 112.0 | 117.3 |
Market Price ($) | 102.4 | 102.4 | 102.4 | 102.4 | 102.4 |
Upside/(Downside) | (6.0)% | (0.8)% | 4.3% | 9.4% | 14.5% |
Source: Author's Estimates |
The stock has traded at an average P/E ratio of around 13.5x in the past, as shown below.
FY19 | FY20 | FY21 | FY22 | Average | |
Earnings per Share ($) | 6.29 | 7.80 | 9.37 | 9.06 | |
Average Market Price ($) | 96.7 | 86.4 | 124.2 | 131.3 | |
Historical P/E | 15.4x | 11.1x | 13.2x | 14.5x | 13.5x |
Source: Company Financials, Yahoo Finance, Author's Estimates |
Multiplying the average P/E multiple with the forecast earnings per share of $8.11 gives a target price of $109.90 for the end of 2023. This price target implies a 7.3% upside from the May 10 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
P/E Multiple | 11.5x | 12.5x | 13.5x | 14.5x | 15.5x |
EPS 2023 ($) | 8.11 | 8.11 | 8.11 | 8.11 | 8.11 |
Target Price ($) | 93.7 | 101.8 | 109.9 | 118.0 | 126.1 |
Market Price ($) | 102.4 | 102.4 | 102.4 | 102.4 | 102.4 |
Upside/(Downside) | (8.5)% | (0.6)% | 7.3% | 15.2% | 23.1% |
Source: Author's Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $108.30 , which implies a 5.8% upside from the current market price. Adding the forward dividend yield gives a total expected return of 10.4%.
Park National's stock price has dropped by 18% since March 8, 2023, when the collapse of Silvergate Capital ( SI ) first triggered panic in the banking sector.
Despite the rout, the market price is still only slightly above the year-end target price. Based on the total expected return and the risk level, I'm adopting a hold rating on Park National Corporation.
For further details see:
Park National: Still A Hold Despite The Recent Correction