Park National Corporation — Q1 2017 Form 10-Q
Business context and reporting period
Park National Corporation is an Ohio-based financial holding company. This unaudited report covers the three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. The company’s principal operation is The Park National Bank (PNB), alongside Guardian Financial Services Company (GFSC) and SE Property Holdings (SEPH), which is winding down legacy Vision assets. Unless noted otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Comparable period / change |
|---|---|---|
| Net interest income | $59.0 | $59.8 in Q1 2016; down 1.4% |
| Net interest margin | 3.49% | 3.55% in Q1 2016 |
| Other income | $17.5 | $17.4 in Q1 2016 |
| Other expense | $47.5 | $49.9 in Q1 2016; down $2.4 |
| Provision for loan losses | $0.9 | $0.9 in Q1 2016 |
| Net income | $20.3 | $18.7 in Q1 2016 |
| Diluted EPS | $1.31 | $1.21 in Q1 2016 |
| Total assets | $7,744.7 | $7,467.6 at Dec. 31, 2016 |
| Loans / deposits | $5,313.6 / $5,920.6 | Loans up 0.8%; deposits up 7.2% from year-end |
| Cash and cash equivalents | $391.8 | $146.4 at Dec. 31, 2016 |
| Shareholders’ equity | $744.1; 9.6% of assets | $742.2; 9.9% of assets at year-end |
Interest income was $68.8 million and interest expense was $9.8 million. Average interest-earning assets increased 2.2% year over year, while their average yield declined to 4.06% from 4.11%; the cost of interest-bearing liabilities rose to 0.76% from 0.73%. The reported 2016 loan yield and margin included a $1.7 million payment on a SEPH impaired-loan relationship; excluding it, management reported a 2016 net interest margin of 3.45%.
Operating cash flow was $23.1 million, investing cash flow was negative $31.3 million, and financing cash flow was positive $253.5 million. Cash increased $245.3 million during the quarter. Deposits supplied $398.6 million of financing cash, while short-term borrowings declined $174.9 million. Total liabilities were $7,000.6 million, including $219.9 million of short-term borrowings, $745.8 million of long-term debt and $45.0 million of subordinated notes.
The allowance for loan losses was $49.9 million, or 0.94% of loans, versus $50.6 million, or 0.96%, at year-end. Nonperforming assets were $121.0 million, 1.56% of total assets, versus $122.0 million and 1.63% at year-end. Annualized net charge-offs were 0.12% of average loans. Capital ratios at March 31 included PNB total risk-based capital of 11.27% and Park’s 14.22%; PNB met each well-capitalized guideline.
Material changes versus comparable periods
- Net income rose $1.6 million year over year, although consolidated net interest income fell $0.9 million and net interest margin narrowed by six basis points.
- Other expense declined mainly because Q1 2016 included $3.5 million of litigation-related accruals in miscellaneous expense. In Q1 2017, salaries, employee benefits and data-processing costs increased; professional fees and legal costs declined.
- Loan growth was modest from year-end, while deposits rose substantially, largely attributed to Promontory Insured Cash Sweep deposits. Cash and money-market balances increased, and short-term borrowing fell.
- Nonperforming assets improved from March 2016’s $136.7 million, though accruing troubled debt restructurings increased from $15.0 million to $21.2 million year over year.
Outlook, risks, contingencies and unusual items
The filing provides no specific earnings or revenue guidance. Management’s stated priorities include growing quality loans and deposits, and it believes current funding sources provide more than adequate liquidity. Its interest-rate simulation projected net income declines over the next 12 months of 2.4% in a rising-rate scenario and 5.3% in a declining-rate scenario; management characterized gradual rate changes as having a small impact.
Management identifies credit, interest-rate and liquidity risks; economic and real-estate market conditions; competition and deposit retention; regulatory and tax changes; litigation; and cybersecurity and third-party operational risks. The allowance depends on estimates and judgment, and actual losses could require additional provision. Management expects adoption of the CECL credit-loss standard, effective for Park in 2020, to materially increase the allowance; the amount is not specified. Adoption of the lease standard is expected to increase assets and liabilities but not materially affect income.
At March 31, the company had accrued approximately $2.3 million for legal contingencies. In a subsequent event, Park prepaid $30.0 million of 7% subordinated notes on April 24, 2017, plus $140,000 accrued interest. That repayment was after quarter-end and is not reflected in the March 31 debt balances. The quarter also included a $5.4 million share repurchase, and a $0.94-per-share dividend was declared.
Important facts for investors to verify
- Whether deposit growth, particularly Insured Cash Sweep deposits, is sustained and how its cost affects funding and net interest margin.
- Loan growth, credit quality trends and the adequacy of the allowance, including the increase in accruing TDRs and management’s expected CECL impact.
- Whether expense savings from lower legal and professional costs persist, given increases in compensation, benefits and data-processing expense.
- The effect of the April 2017 subordinated-note repayment on subsequent debt, interest expense and liquidity.
- Developments in the accrued legal matters and other litigation or regulatory proceedings.