Park National Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Park is a bank holding company whose principal operating segment is The Park National Bank. Financial statements are unaudited. Unless noted otherwise, amounts below are in U.S. dollars.
Financial results and condition
- Q3 earnings: Net income was $35.4 million, up 14.9% from $30.8 million in Q3 2020. Diluted EPS was $2.16, versus $1.88.
- Nine-month earnings: Net income was $117.4 million, up 41.9% from $82.7 million; diluted EPS was $7.14, versus $5.04. The improvement primarily reflects lower credit-loss expense, including a $6.9 million recovery in 2021 versus $31.2 million provision in 2020.
- Interest income and margin: Q3 net interest income fell 2.7% to $81.6 million; nine-month net interest income rose 2.0% to $246.2 million. Tax-equivalent net interest margin was 3.53% in Q3 and 3.67% for nine months, compared with 3.85% and 3.88%, respectively, in 2020. Lower asset yields were partly offset by lower funding costs.
- Other income and expenses: Other income declined $4.1 million to $32.4 million in Q3, chiefly because mortgage-related service income fell; it increased $7.7 million to $97.7 million for nine months, supported by fiduciary and debit-card income and equity-security gains. Other expense was $68.5 million in Q3, down $1.4 million, and $207.8 million for nine months, up $6.8 million. The nine-month comparison includes a $4.0 million charitable foundation contribution and higher data-processing costs, partly reflecting expense reclassification.
- Assets, loans and deposits: Total assets were $10.03 billion, up 8.1% from December 31, 2020. Loans were $6.91 billion, down 3.8%; excluding PPP loans, loans declined 0.9%. Consolidated deposits were $8.36 billion, up 10.5%. Cash and cash equivalents rose to $877.4 million from $370.5 million. Available-for-sale debt securities were $1.55 billion at fair value.
- Credit quality: Allowance for credit losses was $88.1 million, or 1.28% of loans, versus $85.7 million at year-end 2020. Nonperforming loans were $106.9 million, down from $139.6 million at year-end; nonperforming assets were $110.8 million. Net recoveries were $3.3 million for the first nine months.
- Cash flow and liquidity: Nine-month operating cash flow was $112.6 million; investing activities used $186.2 million; financing activities provided $580.5 million. Period-end cash and equivalents were $877.4 million. Management said funding sources provided more than adequate liquidity.
- Debt and capital: Short-term borrowings were $236.0 million; long-term debt was zero, compared with $32.5 million at year-end 2020. Subordinated notes were $188.1 million. Park and its bank subsidiary met applicable well-capitalized guidelines; Park’s total risk-based capital ratio was 15.97% and the bank’s was 12.63%.
Material changes and unusual items
- Park adopted CECL on January 1, 2021, recording an $8.0 million reduction to retained earnings, a $6.1 million increase in the loan allowance and a $3.9 million increase in the allowance for unfunded commitments. Prior-year credit-loss results use the earlier incurred-loss method.
- COVID-19-related qualitative reserves for hotels and accommodations, restaurants and food service, and strip shopping centers totaled $4.6 million at September 30. Management also applied a 1.00% reserve to originated hotel and accommodation loans for valuation risk, up from 0.50% at June 30.
- Accumulated other comprehensive income moved from positive $5.6 million at year-end to a loss of $7.8 million, mainly due to unrealized losses on available-for-sale securities. The nine-month other comprehensive loss was $13.4 million.
- Park repurchased 137,659 shares for $16.0 million during the first nine months and declared dividends of $3.29 per share. A $52.5 million unsettled commitment to purchase available-for-sale debt securities was reported at quarter-end.
Outlook, commentary and risks
The filing provides no formal earnings or revenue guidance. Management said gradual interest-rate changes were expected to have a small impact on net income, while its simulation projected a 6.6% increase under a rising-rate scenario and a 13.5% decrease under a declining-rate scenario over the next year. Management emphasized uncertainty around COVID-19, variants, economic recovery and borrower performance. It identified hotels and accommodations, restaurants, and strip shopping centers as credit-sensitive concentrations. Other disclosed risks include credit and real-estate conditions, interest-rate and liquidity changes, competition, regulatory and accounting changes, cybersecurity and operational disruptions, and execution of strategic initiatives. Management reported no material pending legal proceedings and concluded disclosure controls were effective.
Important facts for investors to verify
- How much of the 2021 earnings increase reflects the unusually low credit-loss provision or recovery, and how sustainable is that contribution?
- Whether credit performance in hotel, restaurant and strip-shopping-center exposures—and the $4.6 million sector reserve—adequately reflect continuing pandemic and valuation risks.
- How loan yields, deposit costs and net interest margin respond to interest-rate changes; the disclosed rate-sensitivity simulation shows materially different outcomes for rising and falling rates.
- How PPP fee recognition and loan forgiveness affect reported interest income and loan balances; PPP loans outstanding were $131.5 million at quarter-end.
- The effect of available-for-sale securities valuation changes on equity, and the funding and timing of the $52.5 million unsettled securities purchase commitment.
- Reconcile consolidated deposits of $8.36 billion with the MD&A’s Park National Bank deposit figure of $8.60 billion and its off-balance-sheet one-way-sell deposits; confirm the relevant definitions and scope.