Park National Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited consolidated results; balance-sheet comparisons are to December 31, 2016 unless noted. Park is an Ohio-based financial holding company, primarily operating through The Park National Bank.
Financial results and key metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Interest and dividend income | $70.5 million | $67.0 million | $139.2 million | $136.3 million |
| Net interest income | $59.8 million | $57.5 million | $118.7 million | $117.3 million |
| Other income | $19.3 million | $18.7 million | $36.8 million | $36.1 million |
| Provision for loan losses | $4.6 million | $2.6 million | $5.5 million | $3.5 million |
| Net income | $19.0 million | $20.0 million | $39.3 million | $38.7 million |
| Diluted earnings per share | $1.24 | $1.30 | $2.55 | $2.51 |
| Tax-equivalent net interest margin | 3.42% | 3.43% | 3.46% | 3.49% |
- At June 30, total assets were $7.83 billion; loans were $5.37 billion, up 1.8% from year-end; deposits were $5.96 billion, up 8.0%.
- Allowance for loan losses was $53.8 million, or 1.00% of loans, versus $50.6 million, or 0.96%, at year-end. Six-month net charge-offs were $2.3 million, or 0.09% of average loans, annualized.
- Nonperforming assets were $125.8 million (1.61% of assets), compared with $122.0 million at year-end and $149.0 million a year earlier. Nonperforming loans were $110.9 million, or 2.07% of loans.
- Cash and cash equivalents were $411.1 million, up from $146.4 million at year-end. Shareholders’ equity was $752.2 million, or 9.6% of assets.
- For the first half, operating cash flow was $40.0 million, investing cash outflow was $89.5 million, and financing cash inflow was $314.1 million. The financing inflow included $439.6 million of deposit growth, partly offset by lower short-term borrowings and dividends.
- At June 30, short-term borrowings were $183.8 million, long-term debt $847.4 million, and subordinated notes $15.0 million. Park prepaid $30.0 million of subordinated notes in April and issued $150.0 million of long-term debt during the first half.
Changes versus comparable periods
- Q2 net income declined 4.8% year over year; first-half net income rose 1.6%. Q2 diluted EPS fell from $1.30 to $1.24, while first-half diluted EPS increased from $2.51 to $2.55.
- Net interest income increased 4.0% in Q2 and 1.2% for the first half. Loan growth supported interest income, but deposit and other funding costs rose; the first-half net interest margin eased to 3.46% from 3.49%.
- First-half provision expense rose to $5.5 million from $3.5 million, and total expenses edged up to $95.6 million from $95.2 million. Salary and data-processing costs increased; lower miscellaneous and professional expenses partly offset those increases.
- Deposits grew substantially, particularly savings and transaction accounts; management attributed much of first-half growth to the Insured Cash Sweep deposit offering. Short-term borrowings decreased while long-term debt increased.
Outlook, risks and unusual items
- The filing gives no earnings or revenue guidance. Management said gradual interest-rate changes were expected to have a small effect on net income; its model projected net income decreases of 2.6% in a rising-rate scenario and 4.0% in a declining-rate scenario over 12 months.
- Management expects adoption of the CECL credit-loss standard in 2020 to materially increase the allowance for loan losses; implementation work is underway. Management expects lease accounting to increase assets and liabilities, but not materially affect income.
- Key risks include credit quality and real-estate conditions, interest-rate and liquidity sensitivity, deposit competition, regulatory and tax changes, litigation, and cybersecurity or operational failures. Forward-looking statements are subject to these and other risks.
- Park reported approximately $2.3 million accrued for legal contingencies. The filing describes ordinary-course lawsuits and proceedings; outcomes could differ from management’s estimates.
- Park’s commercial loan portfolio includes $225.3 million of loans to non-bank consumer finance companies, including lending tied primarily to subprime consumer receivables. The filing reports a $2.8 million specific reserve established on one loan in this portfolio.
- PNB met the reported well-capitalized guidelines. At June 30, its total risk-based capital ratio was 11.54%; Park’s was 13.98%.
Important facts for investors to verify
- Whether the increase in nonperforming loans and specific reserves signals deterioration, particularly in commercial and consumer-finance-related exposures.
- Whether deposit growth is durable and what its pricing means for funding costs and net interest margin.
- How loan growth, credit provisioning, and the allowance develop in subsequent quarters, including CECL implementation assumptions.
- Debt structure, collateral requirements on repurchase agreements, and sensitivity of earnings and liquidity to changing rates.
- Developments in litigation and other contingencies, and any change to the approximately $2.3 million accrued amount.