Park National Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021, compared principally with FY2020. This is an annual filing; the supplied text does not provide a clear standalone fourth-quarter income statement.
Business context
Park is an Ohio-based financial holding company whose principal business is community banking through The Park National Bank, operating primarily in Ohio, Kentucky, North Carolina and South Carolina. It also has smaller consumer-finance and legacy workout subsidiaries. At year-end, Park operated 96 financial service offices and reported approximately 1,685 full-time-equivalent associates.
Financial performance and position
| Metric | FY2021 / Dec. 31, 2021 | FY2020 / Dec. 31, 2020 |
|---|---|---|
| Net income | $153.9 million | $127.9 million |
| Diluted earnings per share | $9.37 | $7.80 |
| Net interest income | $329.9 million | $327.6 million |
| Other income | $129.9 million | $125.7 million |
| Net interest margin, tax-equivalent | 3.69% | 3.93% |
| Efficiency ratio | 61.27% | 62.83% |
| Net cash from operating activities | $157.3 million | $111.6 million |
| Cash and cash equivalents | $219.2 million | $370.5 million |
| Total assets | $9.56 billion | $9.28 billion |
| Total loans | $6.87 billion | $7.18 billion |
| Consolidated deposits | $7.90 billion | $7.57 billion |
| Total borrowings | $427.0 million | $562.5 million |
| Shareholders’ equity | $1.11 billion | $1.04 billion |
Net income rose 20.3%. Lower credit-loss expense was a major contributor: Park recorded an $11.9 million recovery of credit losses in 2021, versus a $12.1 million provision in 2020. Net interest income increased modestly as lower funding costs more than offset reduced interest income. The tax-equivalent net interest margin contracted 24 basis points. Operating cash flow increased; cash and cash equivalents declined as investing activity, including substantial securities purchases, used cash.
Loans fell 4.3% year over year, or approximately 0.7% excluding Paycheck Protection Program (PPP) loans. Deposits increased about 4.4% on the consolidated balance sheet. Park also reported $983.1 million of deposits transferred off balance sheet through deposit programs; including those balances, deposits grew more than reported on-balance-sheet deposits. Short-term borrowings declined, and the $32.5 million term note was repaid in August 2021. Year-end subordinated notes were approximately $188.2 million.
At December 31, 2021, Park’s and its bank subsidiary’s total risk-based capital ratios were 16.05% and 12.56%, respectively; both were reported as meeting applicable well-capitalized guidelines. The bank had approximately $116.8 million available for dividends to the parent without OCC approval. Uninsured deposits were estimated at approximately $1.7 billion.
Material changes and unusual items
- Park adopted the CECL expected-credit-loss standard on January 1, 2021. Adoption reduced retained earnings by $8.0 million; the 2021 recovery of credit losses was $11.9 million. Prior-year results were not restated.
- Nonperforming assets declined to $106.2 million from $144.2 million; nonaccrual loans fell to $72.7 million from $117.4 million. The allowance for credit losses was $83.2 million, or 1.21% of loans, at year-end.
- Other income increased, supported by fiduciary fees and debit-card fees, but mortgage-related service income declined as mortgage originations fell. Total mortgage originations decreased 32.6% to $973.3 million.
- Other expense decreased 1.1% to $283.5 million. Lower FHLB prepayment penalties and certain expense reductions were partly offset by higher employee benefits and data-processing costs. The 2020 comparison included a $10.5 million FHLB prepayment penalty.
- Management’s adjusted net income measure was $151.4 million for 2021 versus $126.5 million for 2020; this non-GAAP adjustment excludes items management identifies as affecting period comparability.
- Cash dividends declared were $4.52 per share, including two $0.20 special dividends. Park said it intended to continue quarterly dividends comparable to 2021, subject to regulatory and other restrictions. It repurchased $16.0 million of shares during 2021.
Outlook, commentary and risks
The filing provides no specific earnings, revenue or margin forecast. Management described liquidity as more than adequate for current cash-flow needs and said it would continue evaluating expected credit losses as economic information develops. Its year-end CECL estimate weighted a most-likely and a moderate-recession scenario equally; a hypothetical adverse-scenario sensitivity indicated a $20.7 million higher allowance, excluding general-reserve adjustments.
Management highlighted continuing uncertainty from COVID-19 and variants, inflation, supply-chain and workforce challenges, and potential weakness in borrowers and collateral values. Areas of credit sensitivity include hotels and accommodations, restaurants and food service, strip shopping centers, and auto-related lending. Other key risks include interest-rate and net-interest-margin sensitivity, cybersecurity and third-party service disruptions, competition and technology change, regulatory requirements, and the adequacy of credit-loss estimates. The filing reports $1.4 billion of loan commitments and $18.2 million of standby letters of credit at year-end; management stated there were no unrecorded significant contingent liabilities.
Most important facts for investors to verify
- How much of the 2021 earnings increase came from the credit-loss recovery and other nonrecurring or comparability adjustments, versus ongoing operating performance.
- The status and risk profile of watch-list and nonperforming credits, especially COVID-sensitive commercial real estate and auto-related exposures, and the assumptions supporting the $83.2 million allowance.
- Deposit growth and liquidity after accounting for off-balance-sheet deposits, uninsured balances, and the decline in cash and cash equivalents.
- The outlook for net interest margin and loan yields as rates change; the filing’s simulation projected net income up 7.5% in a rising-rate scenario and down 15.1% in a declining-rate scenario over the following year.
- The sustainability of dividends and buybacks given regulatory limits, capital needs, and the company’s stated intention regarding future dividends.