Park National Corporation — Q3 2018 Form 10-Q
Business context and reporting period. This unaudited report covers the three and nine months ended September 30, 2018; balance-sheet comparisons are with December 31, 2017. Park is a bank holding company whose primary operating subsidiary is The Park National Bank. NewDominion Bank merged into the bank on July 1, 2018, expanding Park’s North Carolina presence. Its results are included from that date.
Financial results and condition
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $67.7 million | $61.6 million | $197.3 million | $180.3 million |
| Provision for loan losses | $2.9 million | $3.3 million | $4.6 million | $8.7 million |
| Other income | $24.1 million | $23.5 million | $74.2 million | $63.2 million |
| Other expense | $59.3 million | $51.3 million | $166.2 million | $149.7 million |
| Net income | $24.8 million | $22.1 million | $84.1 million | $61.4 million |
| Diluted EPS | $1.56 | $1.44 | $5.41 | $3.99 |
- Net income rose about 12% in Q3 and 37% year to date. Net interest margin was 3.77% in Q3 and 3.81% for the first nine months, compared with 3.40% and 3.44%, respectively, a year earlier. These are reported tax-equivalent margins; management also provides adjusted measures excluding specified items.
- For the first nine months, net interest income increased 9.4%; higher loan yields and lower borrowing costs contributed, while deposit costs rose. Other expense increased 11.0%, reflecting higher salaries, benefits, professional fees and acquisition-related costs.
- The federal corporate tax rate fell from 35% to 21% effective January 1, 2018. The effective federal tax rate was 16.5% for the first nine months, versus 27.8% in 2017, contributing to earnings growth.
Balance sheet, liquidity and credit
- Total assets were $7.76 billion, up 2.9% from year-end 2017. Loans were $5.63 billion, up 4.7%; management attributed $273.8 million of the increase to NewDominion. Deposits were $6.28 billion, up 7.9%, including $268.6 million from the acquisition.
- Cash and cash equivalents were $144.6 million, down from $169.1 million at year-end. Shareholders’ equity was $809.1 million, or 10.4% of assets. The allowance for loan losses was $50.2 million, 0.89% of loans.
- Nine-month operating cash flow was $98.1 million; investing activities provided $65.6 million and financing activities used $188.2 million. Cash and cash equivalents declined $24.5 million during the period. Park reported a $50 million unused revolving credit line and said available funding sources provided more than adequate liquidity.
- Short-term borrowings were $179.8 million, long-term debt $400.0 million and subordinated notes $15.0 million, compared with $391.3 million, $500.0 million and $15.0 million, respectively, at year-end 2017. Park and its bank subsidiary met applicable well-capitalized guidelines; Park’s total risk-based capital ratio was 14.06% and the bank’s was 12.28%.
- Nonperforming loans were $83.3 million, or 1.48% of loans, down from $94.0 million, or 1.75%, at year-end. Nonperforming assets were $95.7 million, or 1.23% of assets. Acquired NewDominion loans had no allowance recorded at quarter-end; the filing says an allowance will be established if post-acquisition credit deterioration occurs.
Material changes and unusual items
- NewDominion consideration included 435,457 Park shares valued at $48.5 million and $30.7 million cash; Park recorded $40.4 million of preliminary goodwill and $3.5 million of remeasurement gain on its previously held interest. Fair-value estimates remain subject to refinement, including for loans, intangibles and deferred taxes, through July 2019. Merger-related expenses were $3.6 million for the first nine months.
- Q3 and year-to-date earnings included purchase-accounting loan accretion of $439,000. Year-to-date other income included a $3.5 million equity-security gain and a $4.1 million gain on sale of OREO, partly offset by a $2.3 million net securities-sale loss. Bank-owned life insurance income also reflected death-benefit fluctuations.
- Available-for-sale securities had $42.6 million of gross unrealized losses at September 30. Accumulated other comprehensive loss was $60.2 million, versus $26.5 million at year-end, largely reflecting securities valuation changes. Management did not consider the securities losses other-than-temporary.
- Park entered an agreement in September to acquire CAB Financial Corporation. The proposed consideration is $3.80 cash plus 0.1378 Park shares per CAB share. Closing is subject to shareholder, regulatory and other customary conditions; completion is not assured.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management stated that gradual interest-rate changes were expected to have a small effect on net income. Its September 30 simulation projected net income declines of 2.4% under a rising-rate scenario and 1.8% under a declining-rate scenario over the next year.
- Management expects adoption of the current expected credit loss (CECL) standard on January 1, 2020 to materially increase the allowance for loan losses; the amount is not provided. Lease-standard adoption was expected to increase assets and liabilities but not materially affect income.
- Key disclosed risks include credit deterioration and loan-loss estimation, deposit competition and rising funding costs, interest-rate and securities valuation exposure, liquidity and market disruption, cybersecurity and operational dependence on third parties, regulatory and tax changes, and acquisition integration and execution risks.
- Park reported no material pending legal proceedings, no material changes in internal control over financial reporting, and effective disclosure controls as of quarter-end.
Investor verification priorities
- Review subsequent disclosures on NewDominion purchase-accounting adjustments, integration costs and the acquired loan portfolio.
- Track CAB transaction approvals, closing conditions, expected synergies, integration costs and potential shareholder dilution.
- Assess loan-quality trends, charge-offs, specific reserves and the expected CECL allowance increase, particularly given the acquired loans’ zero allowance at quarter-end.
- Monitor deposit pricing, funding mix and net interest margin as rates and competitive conditions change.
- Evaluate the effects of securities unrealized losses and accumulated other comprehensive loss on reported equity and capital, and distinguish recurring earnings from acquisition, securities, OREO and insurance-related items.