Park National Corp. — Q1 2019 Form 10-Q
Business context and period. Unaudited consolidated results for the three months ended March 31, 2019, compared with Q1 2018; balance-sheet comparisons are principally with December 31, 2018. Park is a financial holding company whose principal operations are The Park National Bank (PNB) and Guardian Financial Services Company (GFSC). The NewDominion Bank acquisition, completed July 1, 2018, is included in current-period results. The filing states interim results are not necessarily indicative of full-year results.
Financial performance and condition
| Metric | Q1 2019 / March 31, 2019 | Comparable period / change |
|---|---|---|
| Net interest income | $67.8 million | $64.9 million; up 4.5% |
| Net interest margin | 3.86% (tax-equivalent) | 3.87% in Q1 2018 |
| Other income | $22.0 million | $26.9 million; down $4.9 million |
| Provision for loan losses | $2.5 million | $0.3 million in Q1 2018 |
| Other expense | $56.8 million | $54.3 million; up 4.6% |
| Income before taxes | $30.5 million | $37.2 million |
| Net income / diluted EPS | $25.5 million / $1.62 | $31.1 million / $2.02 |
| Cash and cash equivalents | $187.5 million | $167.2 million at year-end 2018 |
| Total assets / loans | $7.85 billion / $5.74 billion | Assets up 0.6%; loans up 0.9% from year-end |
| Deposits | $6.33 billion | $6.26 billion at year-end; up 1.0% |
| Borrowings and subordinated notes | $602.6 million combined | Includes $212.6 million short-term, $375.0 million long-term and $15.0 million subordinated notes |
| Shareholders’ equity | $845.0 million; 10.8% of assets | $832.5 million; 10.7% at year-end |
- Net cash from operations was $24.7 million; investing activities used $5.8 million and financing activities provided $1.4 million. Cash increased $20.3 million during the quarter.
- Allowance for loan losses was $53.4 million, or 0.93% of loans, versus $51.5 million and 0.90% at year-end. Net charge-offs were $0.6 million, or 0.05% of average loans annualized, versus $1.3 million and 0.10% in Q1 2018.
- Nonperforming loans were $86.5 million, or 1.51% of loans, compared with $86.2 million and 1.63% at March 31, 2018. Nonperforming assets totaled $94.6 million, or 1.20% of assets, down from $99.1 million and 1.32% a year earlier.
- PNB and Park met applicable well-capitalized guidelines. At March 31, Park’s total risk-based capital ratio was 14.08%; PNB’s was 12.36%.
- Cash dividends declared were $1.21 per share, compared with $0.94 in Q1 2018. Park repurchased 86,650 shares during the quarter.
Material changes versus Q1 2018
- Net income declined 18.2% and diluted EPS fell from $2.02 to $1.62. Net interest income improved, reflecting loan growth and higher asset yields, but higher funding costs, increased credit-loss provision, higher expenses and lower other income offset that improvement.
- Average loan yield rose to 5.14% from 4.94%; average cost of interest-bearing deposits rose to 0.97% from 0.54%. The tax-equivalent net interest margin was nearly unchanged.
- Other income was lower in part because Q1 2018 included a $4.1 million OREO sale gain, a $3.5 million equity-security gain associated with NewDominion, and a $1.0 million recovery of fees on SEPH impaired loans. Q1 2018 also included a $2.3 million securities-sale loss; no securities were sold in Q1 2019.
- Loans and deposits were higher year over year, partly reflecting NewDominion. Excluding NewDominion, PNB loans rose 2.9% and deposits were approximately flat versus March 2018.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said gradual interest-rate changes were expected to have a small impact on net income. Its March 31 simulation projected net income down 1.4% in a rising-rate scenario and down 0.6% in a declining-rate scenario over 12 months.
- Management expects adoption of the CECL credit-loss standard, effective for Park in 2020, to materially increase the allowance for loan losses; implementation work was ongoing.
- On April 1, 2019, Park completed the CAB Financial Corporation acquisition. Disclosed pre-acquisition balances were $757.1 million of assets, $590.8 million of loans and leases, and $631.5 million of deposits. Consideration was valued at $126.9 million, comprising 1,037,205 Park shares and $28.6 million cash. Fair-value accounting was incomplete when this filing was prepared.
- Other risks identified include credit and economic conditions, interest-rate and funding-cost changes, competition, regulatory and accounting changes, cybersecurity and operational disruptions, acquisition integration, and potential shareholder dilution. Management reported effective disclosure controls and no material change in internal control over financial reporting. No material legal proceedings were reported.
- Lease accounting adopted January 1, 2019 added an $11.0 million right-of-use asset and an $11.2 million liability and reduced opening retained earnings by $143,000, with no material income-statement impact.
Important facts for investors to verify
- Whether loan growth, deposit trends and net interest margin hold up as deposit costs rise.
- Credit quality, including the increase in provision and allowance, commercial loan grades, and nonperforming-loan trends.
- The extent of CAB’s final purchase-accounting adjustments, integration costs, realized synergies and any resulting dilution.
- CECL implementation assumptions and the eventual impact on reserves, capital and reported earnings.
- Liquidity and funding capacity: the filing cites a $50 million revolving credit line with $30 million outstanding at March 31, 2019, alongside other funding sources.
- Unfunded exposures, including $1.06 billion of loan commitments, $15.0 million of standby letters of credit, and $19.6 million of affordable-housing investment commitments.