Park National Corporation — Q3 2020 Form 10-Q
Business context and reporting period. Park National Corporation is a bank holding company, principally operating through The Park National Bank (PNB), with a smaller consumer-finance subsidiary, GFSC. This unaudited filing covers the quarter and nine months ended September 30, 2020; balance-sheet comparisons are to December 31, 2019. Results reflect the pandemic, customer relief programs, and strong mortgage activity.
Financial performance and condition
| Metric | Q3 2020 / Sep. 30, 2020 | Comparable period / prior date |
|---|---|---|
| Net income | $30.8 million; diluted EPS $1.88 | Q3 2019: $31.1 million; $1.89 |
| Nine-month net income | $82.7 million; diluted EPS $5.04 | 2019: $78.8 million; $4.84 |
| Net interest income | Q3: $83.8 million; nine months: $241.3 million | Q3 2019: $77.1 million; nine months 2019: $220.7 million |
| Net interest margin, tax-equivalent | Q3: 3.85%; nine months: 3.88% | Q3 2019: 3.86%; nine months 2019: 3.88% |
| Provision for loan losses | Q3: $13.8 million; nine months: $31.2 million | 2019 comparable periods: $2.0 million and $6.4 million |
| Total assets / loans | $9.24 billion / $7.28 billion | Dec. 31, 2019: $8.56 billion / $6.50 billion |
| Deposits / cash and equivalents | $7.48 billion / $246.7 million | Dec. 31, 2019: $7.05 billion / $160.0 million |
| Allowance for loan losses | $87.0 million; 1.20% of loans | Dec. 31, 2019: $56.7 million; 0.87% |
| Shareholders’ equity | $1.02 billion; 11.0% of assets | Dec. 31, 2019: $969.0 million; 11.3% |
- Revenue, earnings and margins: Nine-month net income rose 5.0% year over year, while Q3 net income edged down. Lower funding costs supported net interest income growth; lower asset yields partly offset this benefit. Q3 other income increased to $36.6 million from $28.1 million, substantially reflecting mortgage-related fees. Nine-month other income increased to $90.0 million from $73.0 million. Nine-month other expense rose to $200.9 million from $192.8 million.
- Cash flow: For the first nine months, operating activities provided $52.4 million, investing activities used $531.8 million, and financing activities provided $566.1 million. Cash and cash equivalents increased $86.8 million from year-end.
- Debt and liquidity: At September 30, short-term borrowings were $320.4 million, long-term debt $135.0 million, and subordinated notes $187.7 million. Park issued $175 million principal amount of subordinated notes in August. Management stated available funding sources were more than adequate for liquidity needs. The company reported $773.3 million of insured cash-sweep deposits placed off balance sheet through a one-way-sell program; reported deposit balances therefore do not include that amount.
- Capital: Park and PNB met applicable well-capitalized standards. Park’s total risk-based capital ratio was 15.21%; PNB’s was 11.86%.
Material changes versus prior periods
- Loan growth included $542.8 million of Paycheck Protection Program loans. Excluding PPP, PNB loans were up 3.7% from year-end.
- The loan-loss allowance increased $30.4 million from year-end, primarily reflecting higher estimated pandemic-related losses. Nonperforming loans were $148.4 million, up from $114.0 million at year-end; nonperforming loans were 2.04% of loans versus 1.75%.
- Mortgage originations reached $986.6 million for the nine months, compared with $448.8 million in 2019, lifting mortgage-related service income. Deposit service-charge income declined, primarily due to lower overdraft and NSF fees.
- Available-for-sale securities declined to $1.03 billion fair value from $1.21 billion at year-end; accumulated other comprehensive income improved by $23.8 million, mainly from unrealized securities gains.
Outlook, risks and unusual items
- COVID-19 and credit risk: Park modified $694.7 million of loans during the first nine months, or 9.5% of loans. Hotels and accommodations were particularly exposed: $160.7 million of commercial hotel loans had been modified, and $51.0 million remained in deferral at September 30. Management reported uncertainty about the pandemic’s duration, economic recovery and timing of credit losses, and warned that further provisions could reduce future earnings. Non-impaired commercial watch-list loans increased materially, including hotel downgrades.
- PPP: Park originated 4,439 PPP loans totaling $543.1 million and received $20.2 million in SBA fees, recognizing $6.6 million through September. As of November 3, the bank had received $51.1 million in SBA repayment payments on submitted requests.
- CECL: Park elected CARES Act relief to defer adoption of the expected-credit-loss standard and was developing and validating its model. Management expected adoption could increase the allowance and reduce equity, but the eventual effect depends on portfolio composition and economic forecasts.
- Interest-rate exposure: Management’s simulation projected net income declines of 3.7% in a rising-rate scenario and 9.6% in a declining-rate scenario over 12 months, while describing gradual rate changes as having a small expected impact.
- Other items: COVID-related associate pay and bonuses were $2.9 million for the nine months. A $1.8 million FHLB prepayment penalty and $3.3 million net securities-sale gains also affected nine-month results. Management’s non-GAAP adjusted net income was $81.4 million for the nine months, versus $82.0 million in 2019; this measure excludes selected items and is not a substitute for GAAP results.
- The filing provides no formal earnings or financial guidance. Management identified significant pandemic, credit, market, liquidity, operational and regulatory uncertainties. It reported no material pending legal proceedings and effective disclosure controls.
Key facts investors should verify
- Whether pandemic-related deferrals, especially in hotels, restaurants and strip shopping centers, convert into delinquencies, downgrades or charge-offs as relief expires.
- The adequacy of the $87.0 million allowance and the ultimate CECL transition adjustment, including effects on earnings, equity and regulatory capital.
- The sustainability of mortgage-fee income and lower funding costs, and the effects of low interest rates on future margins and earnings.
- How the off-balance-sheet insured cash-sweep deposits and increased borrowings affect funding stability and liquidity measures.
- Whether capital ratios remain comfortably above regulatory requirements as credit costs, loan growth and subordinated debt develop.