Park National Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited consolidated results. Park is an Ohio-based financial holding company whose principal business is banking through The Park National Bank. SE Property Holdings (SEPH) holds a run-off portfolio of legacy Vision assets.
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 or comparison |
|---|---|---|
| Net interest income | $64.9 million | $59.0 million; up 10.0% |
| Net interest margin, tax-equivalent | 3.87% | 3.49% |
| Other income | $26.9 million | $19.0 million |
| Other expense | $54.3 million | $48.9 million |
| Provision for loan losses | $0.3 million | $0.9 million |
| Net income | $31.1 million | $20.3 million; up 53.6% |
| Diluted EPS | $2.02 | $1.31 |
| Operating cash flow | $22.0 million | $23.1 million |
Net interest income benefited from higher loan yields and lower borrowing costs, partly offset by higher deposit costs. The reported margin includes elevated interest received on certain SEPH impaired loan relationships; excluding that income, management reported a 3.73% margin versus 3.49% a year earlier. Other income included a $4.3 million net gain on OREO sales, a $3.5 million unrealized gain on equity securities, and a $2.3 million net loss on investment-security sales. Other expense rose 11.0%, including a one-time $1.1 million incentive payment and higher salaries, benefits, professional fees, and equipment costs.
Financial position, liquidity, and credit
- At March 31, total assets were $7.52 billion, down 0.2% from year-end 2017. Loans were $5.29 billion, down 1.5%; investment securities were $1.46 billion, down 3.2%.
- Deposits were $6.08 billion, up $267.0 million from December 31. Cash and cash equivalents increased to $276.6 million from $169.1 million.
- Short-term borrowings fell to $184.1 million from $391.3 million; long-term debt fell to $425.0 million from $500.0 million. Shareholders’ equity was $752.8 million, or 10.0% of assets.
- Investing activities provided $115.7 million, substantially reflecting loan paydowns and securities cash flows; financing activities used $30.2 million, including debt and short-term borrowing reductions. Cash increased $107.5 million during the quarter.
- The allowance for loan losses was $49.0 million, or 0.93% of loans, versus $50.0 million and 0.93% at year-end. Nonperforming assets were $99.1 million (1.32% of assets), down from $113.0 million (1.50%) at year-end and $121.0 million a year earlier. Nonperforming loans were $86.2 million, or 1.63% of loans.
- Park and its bank subsidiary met applicable well-capitalized guidelines. Park’s total risk-based capital ratio was 14.68%; the bank’s was 12.11%. Management stated that available funding sources provided more than adequate liquidity.
Changes, outlook, and risks
- Q1 earnings benefited from the lower federal corporate tax rate, effective January 1, 2018. The effective federal tax rate was 16.3%, compared with 27.9% in Q1 2017.
- Accounting changes affected presentation and timing: adoption of the equity-investment standard moved subsequent fair-value changes into earnings, while pension-cost presentation changes had no effect on net income. The company also early-adopted guidance allowing reclassification of certain tax effects from accumulated other comprehensive loss.
- Available-for-sale securities’ unrealized losses contributed to accumulated other comprehensive loss increasing to $52.6 million from $26.5 million at year-end. Management said it did not consider the reported security losses other-than-temporary.
- No full-year earnings or revenue guidance is provided in the filing. Management said gradual interest-rate changes were expected to have a small impact on net income; its model projected a 1.3% decrease under a rising-rate scenario and a 3.8% decrease under a declining-rate scenario over the following year.
- Risks highlighted include credit and real-estate conditions, interest-rate and funding sensitivity, competition and deposit retention, regulation and tax changes, litigation, cybersecurity and operational disruptions, and execution and integration risks associated with the proposed NewDominion Bank transaction. Completion depends on required shareholder approval and other conditions; expected synergies and integration outcomes are uncertain.
- Management expects CECL adoption on January 1, 2020 to materially increase the allowance for loan losses. It was evaluating the impact and planned to run the existing and CECL models concurrently for 12 months before adoption.
- After quarter-end, the board declared a $0.96 regular quarterly dividend and a $0.25 special dividend per common share, payable June 8, 2018.
Investor verification priorities
- Separate recurring earnings from the OREO sale gain, equity fair-value gain, SEPH-related interest and fee recoveries, and securities-sale loss.
- Assess the sustainability of margin improvement as deposit costs rise, and review loan trends, credit deterioration, nonperforming assets, and allowance assumptions.
- Confirm liquidity and funding composition, including deposit growth, borrowing reductions, pledged securities, and off-balance-sheet loan commitments of $945.3 million.
- Review the impact of securities valuation losses on equity and capital, and monitor the proposed NewDominion transaction, CECL implementation, and special dividend.