Park National Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The unaudited consolidated results include Carolina Alliance from its April 1, 2019 acquisition; NewDominion has been included since July 1, 2018.
Financial results and condition
- Profit: Q2 net income was $22.2 million, down 21.5% from $28.2 million; diluted EPS was $1.33 versus $1.83. First-half net income was $47.6 million, down 19.8% from $59.4 million; diluted EPS was $2.94 versus $3.85.
- Interest income and margin: Q2 net interest income rose 17.2% to $75.9 million; first-half net interest income rose 10.8% to $143.6 million. Tax-equivalent net interest margin was 3.92% in Q2 versus 3.81% a year earlier, and 3.89% for the half versus 3.84%. Management’s adjusted margin, excluding specified acquisition accounting and former Vision Bank items, was 3.84% for both first-half 2019 and 2018.
- Other income and expenses: Q2 other income was $22.8 million versus $23.2 million; first-half other income fell to $44.8 million from $50.1 million. Other expense increased 33.6% in Q2 to $70.2 million and 18.9% for the half to $127.0 million. Drivers included merger costs, acquired operations, higher salaries and benefits, data processing, professional fees, and intangible amortization.
- Loans and credit: Loans were $6.38 billion at June 30, up 12.0% from year-end, including $576 million acquired with Carolina Alliance. The allowance for loan losses was $54.0 million, or 0.85% of loans, versus $51.5 million and 0.90% at year-end. First-half provision was $4.4 million versus $1.6 million; net charge-offs were $1.9 million versus $2.2 million.
- Asset quality: Nonperforming loans were $86.8 million, or 1.36% of loans, compared with $85.4 million and 1.50% at year-end and $98.9 million and 1.86% a year earlier. Nonperforming assets were $94.2 million, or 1.09% of assets, versus $104.6 million and 1.40% a year earlier.
- Deposits, debt, and liquidity: Deposits totaled $7.03 billion, up 12.3% from year-end, largely reflecting Carolina Alliance. Short-term borrowings were $180.6 million, long-term debt $400.0 million, and subordinated notes $15.0 million. Cash and cash equivalents were $259.5 million, up from $167.2 million at year-end. First-half operating cash flow was $46.2 million, investing cash flow $47.2 million, and financing cash flow was a $1.1 million use of cash. Management said funding sources were more than adequate; a $15 million revolving credit line was undrawn.
- Capital: Shareholders’ equity was $934.4 million, or 10.8% of assets. Park and its bank subsidiary met applicable “well capitalized” thresholds. Park’s total risk-based capital ratio was 13.02%; the bank’s was 12.33%.
Changes, outlook, and risks
- Acquisitions and comparability: Carolina Alliance added $578.6 million of loans and $632.7 million of deposits at acquisition, and $45.3 million of goodwill. Merger-related expenses were approximately $6.1 million in Q2 and $6.3 million for the first half. Management expects Carolina Alliance cost savings to be fully realized after its core banking system conversion in Q4 2019. Acquisition fair values remain preliminary and may be refined through April 2020.
- Unusual prior-year items: First-half 2018 included a $4.2 million OREO sale gain and a $3.5 million gain on remeasurement of Park’s prior NewDominion investment. These and other specified items affect comparisons. Management’s non-GAAP adjusted net income was $26.8 million for Q2 2019 versus $27.7 million for Q2 2018, and $52.4 million for the first half versus $53.6 million; these are management-adjusted measures, not GAAP results.
- Outlook and accounting: The filing provides no specific earnings or revenue guidance. Management anticipated that adopting CECL, effective for Park in 2020, would materially increase the allowance for loan losses; implementation work was underway, with preliminary models anticipated in Q3 2019.
- Risk factors: Management cites economic and credit conditions, interest-rate and funding-cost movements, acquisition integration and realization of expected synergies, competition, cybersecurity and operational risks, regulation, and changes to benchmark rates including LIBOR discontinuation. Interest-rate simulations projected net income down 2.0% in a rising-rate scenario and up 0.1% in a declining-rate scenario over 12 months. No material legal proceedings were reported; disclosure controls were deemed effective.
Important facts for investors to verify
- Whether Carolina Alliance integration, the Q4 2019 system conversion, and planned cost savings proceed as expected.
- Whether loan growth, deposit costs, and net interest margin trends support future earnings as acquisition-related effects fade.
- Whether credit quality and the allowance remain adequate, especially given acquired loan portfolios and the anticipated CECL increase.
- How much of the year-over-year earnings decline reflects recurring operating costs versus merger and other comparability items.
- Regulatory capital and liquidity headroom, and the effects of share repurchases, dividends, and acquisition funding on capital.