Park National Corporation — Q3 2019 Form 10-Q
Business context and period: Ohio-based financial holding company Park National Corporation reported unaudited results for the three and nine months ended September 30, 2019. Its principal business is banking through The Park National Bank, alongside Guardian Financial Services Company. Results include Carolina Alliance beginning April 1, 2019; NewDominion was acquired in July 2018.
Financial performance and condition
| Metric | Q3 2019 / September 30, 2019 | Comparable period / prior date |
|---|---|---|
| Net income | $31.1 million; diluted EPS $1.89 | Q3 2018: $24.8 million; $1.56 diluted EPS |
| Net income, nine months | $78.8 million; diluted EPS $4.84 | Nine months 2018: $84.1 million; $5.41 diluted EPS |
| Net interest income | Q3: $77.1 million; nine months: $220.7 million | Q3 2018: $67.7 million; nine months 2018: $197.3 million |
| Net interest margin, fully taxable equivalent | Q3: 3.86%; nine months: 3.88% | Q3 2018: 3.77%; nine months 2018: 3.81% |
| Loans | $6.40 billion | $5.69 billion at December 31, 2018 |
| Deposits | $7.17 billion | $6.26 billion at December 31, 2018 |
| Cash and cash equivalents | $372.7 million | $167.2 million at December 31, 2018 |
| Allowance for loan losses | $55.9 million; 0.87% of loans | $51.5 million; 0.90% at December 31, 2018 |
| Nonperforming loans | $111.2 million; 1.74% of loans | $85.4 million; 1.50% at December 31, 2018 |
| Total assets / shareholders’ equity | $8.72 billion / $956.1 million | $7.80 billion / $832.5 million at December 31, 2018 |
| Borrowings and subordinated notes | Short-term: $185.8 million; long-term: $297.5 million; subordinated notes: $15.0 million | Short-term: $222.0 million; long-term: $400.0 million; subordinated notes: $15.0 million at December 31, 2018 |
For the first nine months, operating cash flow was $74.0 million, investing cash flow was $117.7 million, and financing cash flow was $13.8 million; cash and equivalents increased $205.5 million. Park declared dividends of $1.01 per share in Q3 and $3.23 per share year to date.
Material changes and drivers
- Q3 net income increased about 26% year over year, while nine-month net income declined about 6%. Nine-month net interest income rose 11.9%, supported by higher average loan balances and loan yields; higher deposit costs and other funding expenses partly offset the gain.
- Reported nine-month diluted EPS fell to $4.84 from $5.41. Management’s non-GAAP adjusted net income was $81.6 million versus $80.6 million in 2018; the adjustment excludes selected items affecting period comparability and is not a substitute for GAAP results.
- Carolina Alliance added approximately $570.5 million of loans and $632.4 million of deposits at September 30. The acquisition also contributed to higher expenses, including $6.9 million of merger-related costs for the first nine months. Management expected cost savings to be fully realized after the fourth-quarter 2019 core-system conversion.
- Other expense rose 16.0% year to date, with increases in salaries, employee benefits, data processing, and intangible amortization. Other income declined modestly year to date, partly because 2018 included a $4.1 million gain on an OREO sale and higher bank-owned life insurance income from death benefits.
- Nonperforming loans rose to $111.2 million from $85.4 million at year-end, and nonperforming assets rose to $118.6 million from $93.1 million. Net charge-offs were $2.0 million year to date, compared with $4.3 million in the 2018 period.
Outlook, risks, and unusual items
- Park provided no specific earnings or revenue guidance in the supplied filing text. Management said existing funding sources provide more than adequate liquidity and characterized the expected effect of gradual interest-rate changes on net income as small.
- Management anticipated that adoption of the expected-credit-loss standard (CECL), effective for Park in 2020, would materially increase the allowance for loan losses; the amount was not specified.
- In September 2019, Park transferred debt securities with a reported fair value of $373.9 million from held-to-maturity to available-for-sale. The transfer generated a $19.1 million after-tax unrealized gain in other comprehensive income, not net income.
- Park reported capital ratios above applicable well-capitalized thresholds. Its 12-month cumulative interest-rate gap was positive $334.5 million; simulation projected net income would decline 2.2% in a rising-rate scenario and increase 0.3% in a declining-rate scenario.
- Key disclosed risks include credit deterioration, economic and real-estate conditions, changing interest rates and deposit costs, acquisition integration and realization of synergies, liquidity and funding competition, cybersecurity and operational disruptions, regulation, and CECL implementation. Management reported no material pending legal proceedings and stated disclosure controls were effective.
Important facts for investors to verify
- Whether growth in loans, deposits, and earnings can continue excluding the acquired Carolina Alliance and NewDominion businesses, and whether integration savings arrive as expected.
- Whether rising nonperforming loans and nonaccrual loans lead to higher provisions, charge-offs, or additional allowance needs.
- How deposit pricing and funding costs affect net interest margin as interest rates and competition change.
- The eventual CECL allowance increase and its effect on capital and reported earnings.
- The sustainability and volatility of noninterest income, including equity-security gains, OREO-related items, and bank-owned life insurance income.