Park National Corporation — Q2 2021 Form 10-Q
Business context and reporting period. Park National Corporation is a bank holding company whose principal operating segment is The Park National Bank. This unaudited filing covers the quarter and six months ended June 30, 2021; comparisons are with 2020 unless otherwise noted. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $83.9 million | $81.2 million | $164.6 million | $157.5 million |
| Other income | $31.2 million | $31.0 million | $65.3 million | $53.5 million |
| Net income | $39.1 million | $29.5 million | $82.0 million | $51.9 million |
| Diluted EPS | $2.38 | $1.80 | $4.98 | $3.16 |
| Net interest margin, FTE | 3.74% | 3.84% | 3.75% | 3.89% |
| Efficiency ratio, reported | 61.65% | 57.41% | 60.20% | 61.72% |
For the first half, net income rose 58.0%. Net interest income increased 4.5%, principally as lower deposit and borrowing costs more than offset reduced interest income. Other income increased 22.2% for the half, including growth in fiduciary, mortgage-related, debit-card and equity investment income. First-half credit-loss recovery was $8.9 million, versus a $17.4 million provision in 2020.
- Balance sheet at June 30: total assets were $9.95 billion, up 7.2% from year-end 2020. Loans were $7.04 billion, down 2.0%; excluding PPP loans, loans declined 0.8% from year-end and increased 2.1% year over year.
- Deposits and liquidity: on-balance-sheet deposits were $8.21 billion, up 8.5% from year-end. An additional $812.2 million of insured cash-sweep deposits was held off balance sheet through the one-way-sell program. Cash and cash equivalents were $807.4 million, versus $370.5 million at year-end; management said available funding sources provided more than adequate liquidity.
- Credit: the allowance for credit losses was $83.6 million, or 1.19% of loans (1.23% excluding PPP loans). Nonperforming loans were $114.7 million, down from $139.6 million at year-end; nonperforming assets were $118.7 million, or 1.19% of assets.
- Debt and capital: short-term borrowings were $285.9 million, long-term debt $27.5 million, and subordinated notes $188.0 million. Shareholders’ equity was $1.07 billion, or 10.7% of assets. Park and its bank subsidiary met applicable well-capitalized guidelines.
- Cash flow, first half: operating activities provided $80.2 million, investing activities used $184.4 million, and financing activities provided $541.2 million. Cash increased $437.0 million.
Material changes and notable items
- Park adopted CECL on January 1, 2021. Adoption increased the loan allowance by $6.1 million and the off-balance-sheet allowance by $3.9 million, and reduced retained earnings by $8.0 million after tax. Subsequent credit-loss recoveries reflected improved forecasts, though management retained a recession scenario and pandemic-related qualitative reserves.
- Q2 expenses included a $4.0 million charitable foundation contribution; management said no further contribution was expected in 2021. First-half data-processing fees rose substantially, partly because of expense classification changes and higher processing and software costs. First-half 2020 included a $1.8 million FHLB prepayment penalty; Q2 and first-half 2020 also included a $3.3 million securities-sale gain.
- PPP balances were $248.9 million at quarter-end. Park reported $12.9 million in aggregate SBA fees for its second-round PPP originations, with fee income recognized as loans were forgiven or otherwise earned.
- On August 2, 2021, after quarter-end, Park repaid the remaining $27.5 million balance on its U.S. Bank term loan and terminated the related credit agreement without an early-termination penalty.
Outlook, commentary and risks
The filing provides no specific earnings or revenue guidance. Management described improving economic indicators but emphasized uncertainty around COVID-19, variants, government assistance and the timing of credit losses. Hotels and accommodations, restaurants and food service, and strip shopping centers remained identified risk concentrations. At June 30, $33.5 million of pandemic-modified loans remained in deferral, and $8.4 million of modified loans were at least 30 days past due under modified terms.
Management’s interest-rate simulation estimated that a rising-rate scenario would increase net income 2.2% over the next year, while a declining-rate scenario would reduce it 13.8%; management characterized gradual rate changes as having a small effect. Other disclosed risks include loan and real-estate credit quality, interest-rate and market exposure, competitive and regulatory pressures, cybersecurity and operational risks, and possible tax-law changes. Park identified a proposed increase in the federal corporate tax rate from 21% to 28% as a risk if enacted. The annual goodwill review found no impairment.
Important facts for investors to verify
- Whether net income growth persists after credit-loss recoveries and PPP-related fee income, and as lower asset yields weigh on net interest margin.
- CECL assumptions and reserve adequacy, including the effect of the COVID-19 outlook and the hotel, restaurant and shopping-center exposures.
- Progress in reducing nonperforming assets, watch-list loans and remaining payment deferrals; compare subsequent delinquency and charge-off trends.
- Deposit growth and funding costs, including off-balance-sheet one-way-sell deposits and the liquidity implications of balance-sheet growth.
- Expense trends, particularly data processing, employee benefits, and whether the reported efficiency ratio improves after unusual and classification-related items.
- Effect of the August 2021 debt repayment on cash, interest expense and available liquidity, and any developments in the proposed corporate tax changes.