Park National Corporation — Q3 2017 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 30, 2017; balance-sheet comparisons are against December 31, 2016. Park is an Ohio-based financial holding company, primarily operating through The Park National Bank. SE Property Holdings (SEPH) holds legacy Vision assets and is a run-off business.
Financial performance and condition
| Metric | Q3 / September 30, 2017 | Comparable period / prior date |
|---|---|---|
| Net income | $22.1 million; diluted EPS $1.44 | Q3 2016: $27.4 million; $1.78 |
| Nine-month net income / diluted EPS | $61.4 million / $3.99 | Nine months 2016: $66.1 million / $4.29 |
| Net interest income | Q3 $61.6 million; nine months $180.3 million | Q3 2016 $58.5 million; nine months 2016 $175.8 million |
| Net interest margin, tax-equivalent | Q3 3.40%; nine months 3.44% | Q3 2016 3.42%; nine months 2016 3.47% |
| Total assets / loans | $7.86 billion / $5.37 billion | December 31, 2016: $7.47 billion / $5.27 billion |
| Deposits | $5.97 billion | December 31, 2016: $5.52 billion |
| Cash and cash equivalents | $450.4 million | December 31, 2016: $146.4 million |
| Allowance for loan losses | $55.2 million; 1.03% of loans | December 31, 2016: $50.6 million; 0.96% |
| Shareholders’ equity | $759.4 million; 9.7% of assets | December 31, 2016: $742.2 million; 9.9% |
- Profitability and expenses: Q3 net income fell about 19% year over year; nine-month net income declined about 7%. Q3 net interest income rose 5.2%, while other income increased $1.6 million and other expense rose $3.1 million. The provision for loan losses was $3.3 million versus a $7.4 million recovery in Q3 2016. For nine months, net interest income increased 2.5%, other income 3.9%, and other expense 2.4%; the provision was $8.7 million versus a $3.8 million recovery in 2016.
- Cash flow: Nine-month operating cash flow was $66.7 million; investing activities used $82.4 million and financing activities provided $319.6 million. Deposit growth provided $452.4 million of financing cash; short-term borrowings declined by $201.9 million. Dividends paid were $43.1 million.
- Debt and liquidity: At September 30, short-term borrowings were $192.9 million, long-term debt $849.0 million, and subordinated notes $15.0 million. Management increased cash balances ahead of a $350 million long-term debt maturity in November 2017. Management said existing funding sources provide more than adequate liquidity; an undrawn $10 million revolving credit line was also available.
- Credit quality: Nonperforming assets were $126.3 million, or 1.61% of assets, versus $122.0 million at year-end 2016 and $131.8 million a year earlier. Nonaccrual loans were $90.6 million; nonperforming loans were $111.9 million. The allowance increase was mainly attributable to higher specific reserves, including a $3.6 million reserve on a commercial loan relationship to non-bank consumer finance companies.
- Capital: PNB met all well-capitalized regulatory ratio guidelines. At September 30, 2017, PNB’s total risk-based capital ratio was 11.63%; Park’s was 14.07%.
Material changes and management commentary
- Loan balances increased $94.0 million (1.8%) from year-end; deposits increased $452.4 million (8.2%), largely reflecting the Insured Cash Sweep deposit offering. Consumer lending drove much of loan growth.
- Deposit and borrowing costs rose: the nine-month average cost of interest-bearing deposits increased to 0.43% from 0.32%. Net interest margin eased to 3.44% from 3.47% for the comparable nine-month period.
- Other income benefited from higher fiduciary income and bank-owned life insurance income, including $478,000 from death benefits, and increased income from equity investments and check-card incentives. Lower deposit service charges and lower gains on OREO sales partly offset these items.
- Management provided no specific earnings or financial guidance. It stated that gradual interest-rate changes were expected to have a small impact on net income; its simulation projected net income declines of 2.6% in a rising-rate scenario and 5.1% in a declining-rate scenario over 12 months.
- Management expects adoption of the expected-credit-loss (CECL) standard on January 1, 2020 to materially increase the allowance for loan losses. Adoption of lease accounting is expected to increase assets and liabilities but not materially affect income.
Risks, contingencies, and unusual items
- Key disclosed risks include credit deterioration, interest-rate and liquidity sensitivity, deposit competition and possible deposit outflows, economic and real-estate conditions, regulatory and tax changes, litigation, cybersecurity and third-party operational risks. Management’s allowance estimates depend on judgments and could require additional future provisions.
- Loan commitments were $910.9 million and standby letters of credit were $11.1 million. These off-balance-sheet commitments may expose the bank to credit risk; not all commitments will be drawn.
- Park paid approximately $2.3 million during Q3 in full settlement of litigation for which charges had been accrued at June 30. The company also disclosed other ordinary-course legal proceedings, with outcomes potentially differing from current assessments.
- Repurchase-agreement borrowings totaled approximately $493 million and were collateralized by government and agency securities. Collateral value declines could require additional securities to be pledged.
Important facts for investors to verify
- Whether the November 2017 $350 million debt maturity was repaid, refinanced, or otherwise funded, and the resulting liquidity and interest expense.
- Subsequent loan performance, particularly the large commercial relationship requiring a specific reserve, consumer charge-offs, and trends in nonperforming assets.
- Whether deposit growth from Insured Cash Sweep and other interest-bearing accounts continues, and how higher deposit costs affect net interest margin.
- Future operating expenses and noninterest income, including data-processing and compensation costs, deposit fee trends, and any nonrecurring death-benefit or incentive income.
- Management’s CECL implementation progress and the eventual allowance impact; also monitor litigation developments and the sizeable unfunded loan commitments.