Park National (US:PRK)2021-05-06 20:15PART I. FINANCIAL INFORMATION This section presents the company's financial statements, management's analysis, market risk disclosures, and internal controls Financial Statements The company's Q1 2021 financial statements reflect significant growth in assets and deposits, with net income surging to $42.8 million Consolidated Condensed Balance Sheets Total assets grew to $9.91 billion, driven by a $572.8 million increase in cash, while deposits rose $663.8 million to $8.24 billion Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2021 ($ thousands) | December 31, 2020 ($ thousands) | Change ($ thousands) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Assets | | | | | | Cash and cash equivalents | $943,275 | $370,474 | $572,801 | 154.6% | | Net loans | $7,081,859 | $7,092,110 | ($10,251) | -0.1% | | Total assets | $9,914,069 | $9,279,021 | $635,048 | 6.8% | | Liabilities & Equity | | | | | | Total deposits | $8,236,199 | $7,572,358 | $663,841 | 8.8% | | Total liabilities | $8,872,798 | $8,238,765 | $634,033 | 7.7% | | Total shareholders' equity | $1,041,271 | $1,040,256 | $1,015 | 0.1% | Consolidated Condensed Statements of Income Q1 2021 net income surged to $42.8 million, up 91.4%, driven by higher net interest income and a credit loss provision recovery Q1 2021 vs Q1 2020 Income Statement (in thousands, except per share data) | Metric | Q1 2021 ($ thousands) | Q1 2020 ($ thousands) | Change ($ thousands) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $80,734 | $76,283 | $4,451 | 5.8% | | (Recovery of) Provision for Credit Loss | ($4,855) | $5,153 | ($10,008) | N/A | | Total Other Income | $34,089 | $22,486 | $11,603 | 51.6% | | Total Other Expense | $67,865 | $66,276 | $1,589 | 2.4% | | Net Income | $42,831 | $22,372 | $20,459 | 91.4% | | Diluted EPS | $2.61 | $1.36 | $1.25 | 91.9% | Consolidated Condensed Statements of Comprehensive Income Comprehensive income decreased to $29.4 million in Q1 2021, primarily due to a $13.5 million other comprehensive loss on AFS debt securities - Other comprehensive (loss) income was $(13.5) million in Q1 2021, compared to $17.7 million in Q1 202021 - The change in OCI was primarily driven by unrealized net holding losses on available-for-sale debt securities of $13.6 million in Q1 2021, versus a gain of $18.2 million in Q1 202021 Consolidated Condensed Statements of Changes in Shareholders' Equity Shareholders' equity slightly increased to $1.041 billion, impacted by net income, dividends, OCI, and an $8.0 million CECL adjustment - A cumulative change in accounting principle reduced retained earnings by $8.0 million upon the adoption of CECL on January 1, 20212337 - Dividends of $1.23 per share, totaling $20.4 million, were declared and paid during Q1 202123 Consolidated Condensed Statements of Cash Flows Cash and cash equivalents increased by $572.8 million, primarily from $602.4 million in financing activities, driven by a $762.9 million deposit increase Cash Flow Summary (in thousands) | Activity | Q1 2021 ($ thousands) | Q1 2020 ($ thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $45,865 | $8,762 | | Net cash (used in) provided by investing activities | ($75,481) | $32,743 | | Net cash provided by financing activities | $602,417 | $119,459 | | Increase in cash and cash equivalents | $572,801 | $160,964 | Notes to Unaudited Consolidated Condensed Financial Statements Notes detail CECL adoption, loan portfolio composition including PPP loans, improved credit quality, financial instrument valuation, and segment performance Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong Q1 2021 performance to increased net interest income, credit loss recovery, and other income, supported by CECL adoption and robust capital COVID-19 Considerations The company provided $749.9 million in PPP loans and modified $669.6 million in loans, with $51.1 million still deferred, heavily impacting hotels - Originated a total of $749.9 million in PPP loans through March 31, 2021, receiving $20.2 million in fees for the first round and expecting $11.4 million for the second249250 - Provided loan modifications related to COVID-19 hardship on an aggregate balance of $669.6 million through March 31, 2021252255 - The hotel and accommodations portfolio had the highest percentage of modifications, with 72.5% of its total balance modified due to the pandemic256 Financial Results by Segment PNB, the primary segment, drove performance with net income rising to $45.1 million due to higher net interest income and credit loss recovery Net Income (Loss) by Segment (in thousands) | Segment | Q1 2021 ($ thousands) | Q1 2020 ($ thousands) | | :--- | :--- | :--- | | PNB | $45,122 | $25,908 | | All Other | ($2,291) | ($3,536) | | Total Park | $42,831 | $22,372 | - PNB's loan portfolio remained stable at $7.16 billion at March 31, 2021, but was up 10.1% YoY, influenced by $387.0 million in PPP loans283 - PNB's total deposits grew 8.5% to $8.49 billion since year-end 2020, and 15.4% year-over-year285 Net Interest Income Consolidated net interest income increased 5.8% to $80.7 million, driven by reduced interest expense, despite a slight net interest margin compression to 3.76% Net Interest Margin Analysis | Metric | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Tax-equivalent Net Interest Income ($ thousands) | $81,448 | $77,008 | | Average Interest Earning Assets ($ thousands) | $8,786,301 | $7,889,043 | | Yield on Earning Assets (%) | 3.96% | 4.57% | | Cost of Interest Bearing Liabilities (%) | 0.32% | 0.90% | | Net Interest Spread (%) | 3.64% | 3.67% | | Net Interest Margin (%) | 3.76% | 3.93% | - The average cost of interest-bearing deposits dropped sharply to 0.16% in Q1 2021 from 0.81% in Q1 2020315317 Credit Metrics and (Recovery of) Provision for Credit Losses Q1 2021 saw a $4.9 million credit loss recovery, improving ACL to $86.9 million and reducing nonperforming assets to $134.3 million - Adoption of CECL on Jan 1, 2021 resulted in a $6.1 million increase to the ACL and a $3.9 million increase to the allowance for unfunded credit losses328 Nonperforming Assets (in thousands) | Category | March 31, 2021 ($ thousands) | Dec 31, 2020 ($ thousands) | March 31, 2020 ($ thousands) | | :--- | :--- | :--- | :--- | | Nonaccrual loans | $114,708 | $117,368 | $90,354 | | Total nonperforming loans | $130,327 | $139,614 | $119,311 | | Total nonperforming assets | $134,335 | $144,209 | $126,510 | | NPA / Total Assets (%) | 1.35% | 1.55% | 1.45% | - Commercial watch list loans increased to $110.0 million from $26.8 million YoY, largely due to downgrades in the hotel and accommodation portfolio344 Other Income Other income increased by $11.6 million (51.6%) to $34.1 million, driven by higher other service income and equity securities gains Components of Other Income (in thousands) | Category | Q1 2021 ($ thousands) | Q1 2020 ($ thousands) | Change ($ thousands) | | :--- | :--- | :--- | :--- | | Income from fiduciary activities | $8,173 | $7,113 | $1,060 | | Other service income | $9,617 | $3,766 | $5,851 | | Debit card fee income | $6,086 | $4,960 | $1,126 | | Gain (loss) on equity securities, net | $1,810 | ($973) | $2,783 | | Total other income | $34,089 | $22,486 | $11,603 | Other Expense Total other expense increased by $1.6 million to $67.9 million, primarily due to higher data processing fees and salaries, partially offset by other reductions Components of Other Expense (in thousands) | Category | Q1 2021 ($ thousands) | Q1 2020 ($ thousands) | Change ($ thousands) | | :--- | :--- | :--- | :--- | | Salaries | $29,896 | $28,429 | $1,467 | | Data processing fees | $7,712 | $2,492 | $5,220 | | Professional fees and services | $5,664 | $7,066 | ($1,402) | | Miscellaneous | $2,251 | $4,505 | ($2,254) | | Total other expense | $67,865 | $66,276 | $1,589 | Financial Condition, Liquidity, and Capital Resources Financial condition strengthened with total assets growing to $9.9 billion, robust liquidity, and capital levels well above regulatory minimums - Total assets increased by $635.0 million (6.8%) in Q1 2021, primarily due to a $572.8 million increase in cash and cash equivalents385386 - Liquidity is strong, with cash provided by financing activities of $602.4 million, mainly from a net deposit increase of $663.9 million390 Regulatory Capital Ratios (as of March 31, 2021) | Ratio | Park National Corp. (%) | The Park National Bank (%) | Well Capitalized Minimum (PNB) (%) | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 | 12.02% | 10.98% | 6.50% | | Tier 1 Risk-Based | 12.22% | 10.98% | 8.00% | | Total Risk-Based | 15.83% | 12.56% | 10.00% | | Leverage | 9.49% | 8.50% | 5.00% | Quantitative and Qualitative Disclosures About Market Risk The company is asset-sensitive with a $1.55 billion rate sensitivity gap, projecting minor net income changes from gradual interest rate shifts - The twelve-month cumulative rate sensitivity gap was a positive $1.55 billion (17.0% of total interest earning assets) at March 31, 2021, an increase from $1.29 billion at year-end 2020402 - An earnings simulation model at March 31, 2021 projected that a gradual 200 bps increase in rates over one year would decrease net income by 2.2%, while a 200 bps decrease would lower net income by 11.9%404 Controls and Procedures Management confirmed effective disclosure controls, with new and modified internal controls implemented for CECL accounting guidance - The CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the quarter405 - New and modified controls over financial reporting were implemented to comply with the CECL accounting guidance (ASU 2016-13), focusing on model design, governance, assumptions, and data406 PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, and a list of exhibits filed with the report Legal Proceedings The company is not involved in any material legal proceedings beyond routine business litigation - There are no pending legal proceedings considered to be material, except for routine proceedings incidental to business408 Risk Factors No material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for FY2020 - The report refers to the detailed discussion of risk factors in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020409 Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase common shares in Q1 2021, with 1,332,747 shares remaining available under existing repurchase plans - No common shares were repurchased during the first quarter of 2021411 - As of March 31, 2021, 1,332,747 common shares may yet be purchased under existing publicly announced repurchase plans411 Exhibits This section lists exhibits filed with the Form 10-Q, including CEO/CFO certifications and XBRL data files - Exhibits filed include CEO/CFO certifications under Rule 13a-14(a) and Section 1350, as well as Inline XBRL financial data419