Park National Corporation (NYSE American: PRK) — 2019 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019; it is not a standalone fourth-quarter filing. Park is an Ohio-based financial holding company whose principal business is community banking through The Park National Bank, with operations primarily in Ohio, Kentucky, North Carolina and South Carolina. It also operates Guardian Financial Services, a consumer-finance subsidiary, and other smaller subsidiaries.
Park acquired CAB Financial Corporation, parent of Carolina Alliance Bank, on April 1, 2019, for approximately $126.9 million in cash and stock. The acquired bank contributed nine months of results. Park also completed its acquisition of NewDominion Bank in 2018. Management planned a 2020 initiative to unify the 12 banking divisions under the Park National Bank brand. Park said it would no longer seek new loans through Guardian Finance.
Key financial results
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Net interest income | $297.7 million | $266.9 million | Up 11.6% |
| Other income | $97.2 million | $101.1 million | Down 3.9% |
| Net income | $102.7 million | $110.4 million | Down 7.0% |
| Diluted earnings per share | $6.29 | $7.07 | Down 11.0% |
| Net interest margin (tax-equivalent) | 3.89% | 3.84% | Up 5 basis points |
| Efficiency ratio | 66.35% | 61.68% | Higher ratio reflects increased expenses |
| Return on average assets | 1.21% | 1.45% | Lower year over year |
| Return on average common equity | 11.14% | 14.08% | Lower year over year |
| Operating cash flow | $111.0 million | $131.8 million | Down $20.8 million |
Net interest income growth reflected higher average loan balances and loan yields, including acquisition contributions and purchase-accounting accretion. Average loan yield was 5.19%, versus 4.98%. Funding costs rose: the average cost of interest-bearing deposits increased to 1.01% from 0.72%, while total interest expense increased to $62.8 million from $43.9 million.
Other income declined chiefly because 2018 included a $4.2 million OREO sale gain, a $2.8 million gain on nonperforming loan sales, and a $3.5 million gain from remeasuring Park’s pre-existing NewDominion investment. In 2019, debit-card fee income and fiduciary income increased, but these items did not fully offset the prior-year gains and lower bank-owned life insurance income.
Management’s non-GAAP adjusted net income, excluding items it considered to affect period comparability, was $105.5 million in 2019 versus $104.9 million in 2018. This measure is not GAAP net income and depends on management’s adjustments.
Financial position, credit, and liquidity
- Assets and lending: Total assets were $8.56 billion at year-end, up from $7.80 billion. Loans were $6.50 billion, up 14.2%; excluding the acquired Carolina Alliance portfolio, loan growth was about 4.4%. Commercial real estate loans increased $326 million, and consumer loans increased $160 million.
- Deposits: Deposits totaled $7.05 billion, up from $6.26 billion. The Carolina Alliance acquisition added approximately $639.8 million of deposits; excluding those acquired balances, deposits grew about 2.4%.
- Credit quality: The allowance for loan losses was $56.7 million, or 0.87% of loans, compared with $51.5 million, or 0.90%, in 2018. Net charge-offs fell to $1.0 million, or 0.02% of average loans, from $6.4 million, or 0.12%. However, nonperforming loans rose to $114.0 million from $85.4 million, and their share of loans increased to 1.75% from 1.50%. Impaired commercial loans increased to $77.5 million from $48.1 million.
- Cash and cash flows: Cash and cash equivalents were $160.0 million, down from $167.2 million. Investing activities provided $60.1 million; financing activities used $178.4 million, including $207.5 million of net long-term debt reductions, $40.5 million of share repurchases, and $69.1 million of cash dividends paid.
- Debt and liquidity: Borrowings were $438.2 million at year-end, down from $637.0 million, including $230.7 million of short-term borrowings, $192.5 million of long-term debt and $15.0 million of subordinated notes. Management said available funding sources provided more than adequate liquidity; Park also had an undrawn $15 million revolving credit line.
- Capital: Shareholders’ equity was $969.0 million, or 11.32% of assets, compared with $832.5 million, or 10.67%. Park’s common equity Tier 1 ratio was 12.11% and total risk-based capital ratio was 13.19%; the bank and holding company met applicable well-capitalized thresholds.
Material changes, outlook, and risks
- Other expense rose 15.4% to $264.0 million, reflecting acquisitions, higher compensation and benefits, data-processing and professional costs, core-deposit intangible amortization, merger expenses, and a $1.3 million write-down of the NewDominion trade name. Merger-related expenses were $8.9 million in 2019 versus $5.2 million in 2018. Management said Carolina Alliance cost savings were not realized until the fourth quarter, following systems conversion.
- Park reclassified $373.9 million of held-to-maturity securities to available-for-sale in September 2019 under a new accounting-standard option. The transfer generated a $19.1 million after-tax unrealized gain in other comprehensive income; it did not represent an equivalent realized earnings gain.
- Park adopted lease accounting in 2019, recognizing a $13.7 million right-of-use asset and $14.5 million lease liability at year-end. The adoption’s effect on beginning retained earnings was a $143,000 decrease.
- Park adopted CECL on January 1, 2020. The filing’s preliminary analysis anticipated a higher allowance, particularly for residential mortgage, home-equity and installment loans, and for unfunded commitments; some commercial and commercial real estate allowances were expected to decline. Management estimated the transition adjustment would not produce an allowance-to-loans ratio more than 120% of the existing recorded allowance, but said the final effect depended on model validation, portfolio composition and economic forecasts. The exact final adjustment is not provided in this filing.
- Park intended to maintain quarterly dividends comparable to 2019, subject to board review and regulatory limits. Declared dividends were $4.24 per share in 2019, including a one-time $0.20 special dividend. Park repurchased $40.5 million of shares during 2019.
- Principal stated risks include economic and regional real-estate weakness, borrower repayment and collateral risk, rising deposit costs and interest-rate sensitivity, competition, acquisitions and integration, cybersecurity and third-party service disruptions, regulatory and accounting changes, and the adequacy of credit-loss estimates. Park disclosed approximately $344 million of LIBOR exposure and did not expect the transition to a replacement benchmark to have a material effect.
- The filing discussed the emerging coronavirus outbreak: management cited limited direct exposure and did not then expect disruption to have a material effect, while warning that broader U.S. spread could materially affect customers, collateral, revenue and results. This assessment is time-specific to the February 2020 filing.
- No material pending legal proceedings or significant unrecorded contingent liabilities were reported. The independent auditor gave unqualified opinions on the financial statements and internal control; the allowance’s subjective environmental loss factors were identified as a critical audit matter.
Most important facts for investors to verify
- Whether higher nonperforming loans and impaired commercial credits continue to rise, and whether the allowance remains adequate under updated economic conditions.
- The actual CECL adoption adjustment and its effect on retained earnings, regulatory capital, and provisions after model validation.
- Whether Carolina Alliance integration delivers the expected cost savings and revenue benefits, and how acquisition-related expenses and purchase-accounting accretion affect reported earnings.
- Whether deposit costs, loan yields and net interest margin remain favorable as balances and rates reprice.
- Whether dividends and share repurchases remain supportable under capital, liquidity and regulatory constraints, and how coronavirus-related disruption affects borrowers and markets.