Park National Corporation — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; balance-sheet comparisons are to December 31, 2009. Figures below are unaudited. Dollar amounts are in millions unless otherwise stated.
Business context and key financial metrics
Park is an Ohio-based bank holding company operating The Park National Bank and Vision Bank, which serves Gulf Coast markets in Alabama and Florida.
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Net interest income | $68.7 | $68.0 | $136.1 | $136.2 |
| Provision for loan losses | $13.3 | $15.9 | $29.8 | $28.1 |
| Net income | $21.2 | $21.3 | $41.9 | $42.7 |
| Net income available to common shareholders | $19.7 | $19.9 | $39.0 | $39.8 |
| Diluted EPS | $1.30 | $1.42 | $2.60 | $2.85 |
| Net interest margin, tax-equivalent | 4.29% | 4.21% | 4.25% | 4.24% |
- Revenue and operating trends: Q2 net interest income rose 1.1%, while first-half net interest income was essentially flat. First-half other income, excluding securities gains, fell 14.4% to $33.4 million, mainly reflecting lower mortgage loan fees and deposit service charges. Securities-sale gains were $11.8 million in the first half, versus $7.3 million a year earlier.
- Expenses and credit costs: First-half noninterest expense declined 1.2% to $94.9 million. Lower salaries and FDIC insurance costs were partly offset by higher professional fees, largely related to Vision Bank’s troubled loans and foreclosed real estate.
- Cash flow: First-half operating cash flow was $49.0 million, compared with $65.2 million in 2009. Cash and cash equivalents increased $42.5 million to $201.5 million; reported investing cash flow was $67.3 million, largely reflecting securities activity. Financing activities used $73.8 million.
- Balance sheet and funding: Total assets were $7.09 billion, up 0.8% from year-end 2009. Loans were $4.66 billion, up $15.6 million; deposits were $5.17 billion, down $19.2 million. Cash and cash equivalents were $201.5 million. Short-term borrowings were $280.8 million, long-term debt $652.7 million, and subordinated debentures and notes $75.3 million. Stockholders’ equity was $749.9 million, or 10.6% of assets.
- Capital and dividends: Park’s leverage, Tier 1 risk-based, and total risk-based capital ratios were 9.56%, 13.28%, and 15.75%, respectively; both bank subsidiaries met the stated “well capitalized” guidelines. Common dividends declared were $0.94 per share in Q2 and $1.88 for the first half.
Material changes versus prior periods
- Net income declined 0.7% in Q2 and 1.8% in the first half. Diluted EPS fell 8.5% and 8.8%, respectively, in part because weighted-average common shares increased 8.0% in Q2 and 7.2% in the first half following share and warrant issuances.
- Credit quality deteriorated: nonperforming loans rose to $255.1 million, or 5.48% of loans, from $248.5 million at year-end 2009 and $211.0 million a year earlier. Nonperforming assets were $301.6 million, or 4.25% of assets. The allowance was $120.7 million, equal to 2.59% of loans, versus 2.27% a year earlier.
- Vision Bank remained the principal earnings and credit concern. It reported a first-half net loss of $14.2 million, compared with a $10.6 million loss in 2009; its nonperforming loans were $162.3 million, or 24.16% of its loans. Park’s Ohio-based operations reported first-half net income of $56.2 million, up 5.4%.
- Other real estate owned increased to $46.5 million from $41.2 million at year-end. The filing reports $3.1 million of OREO devaluation adjustments in the first half.
- Park raised $21.3 million net from warrant exercises during Q2. After quarter-end, further exercises produced approximately $6.3 million net proceeds.
Guidance, outlook, risks and unusual items
- Management maintained 2010 guidance for net interest income of $265–$275 million, other income of approximately $68 million, and other expense of approximately $191 million. It expects second-half results for net interest income, other income, and expense to be similar to the first half; loan growth is expected to remain slow.
- Management increased its 2010 loan-loss provision estimate to $55–$60 million, from earlier guidance of $45–$55 million. First-half provision of $29.8 million already exceeded the midpoint-year amount implied by the earlier range. Vision Bank’s provision estimate increased to $38–$40 million for 2010.
- Management expects a federal effective tax rate of approximately 28%–29%. It does not expect additional securities sales in the second half. The filing states that the impact of Regulation E on overdraft-related income was not yet estimable.
- Key risks include further deterioration in real estate values, borrower repayment capacity, and credit conditions in Ohio and the Gulf Coast; the Gulf of Mexico oil spill’s potential effect on borrowers; interest-rate and securities valuation changes; and regulatory changes, including implementation of the Dodd-Frank Act. Management expects OREO to continue increasing as it works through nonperforming loans.
- Park contributed $36 million of capital to Vision Bank in the first half and agreed to maintain Vision Bank’s leverage ratio at 12% and total risk-based capital ratio at 16%. A $14.5 million loan that was past due at quarter-end was renewed after quarter-end; management expected this to reduce past-due loans in Q3.
- Other notable items: an $86 million securities-purchase payable at June 30 settled in early July; the filing reports no material pending legal proceedings beyond routine matters. Park’s $100 million Treasury preferred stock carries a 5% dividend through February 2014, then resets to 9%, and restricts certain common dividends and repurchases.
Important facts for investors to verify
- Whether Vision Bank’s credit quality, losses, and OREO stabilize, and whether its capital targets remain achievable without further parent-company support.
- Whether the $55–$60 million full-year provision outlook remains sufficient given nonperforming assets, charge-offs, and economic conditions.
- Whether management achieves its 2010 operating guidance, particularly as mortgage-related fees are lower and Regulation E may affect fee income.
- How securities portfolio valuation, callable-note behavior, and interest-rate changes affect future margins and earnings.
- The effects of the Gulf oil spill, Dodd-Frank implementation, and the Treasury preferred-stock dividend reset and restrictions on future capital allocation.