Park National Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. The unaudited consolidated statements cover Park National Corporation and its subsidiaries; balance-sheet comparisons are to December 31, 2012. Amounts below are in U.S. dollars and generally millions unless stated otherwise.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net interest income | $54.7 | $58.7 | $110.2 | $120.4 |
| Provision for loan losses | $0.7 | $5.2 | $1.0 | $13.6 |
| Other income | $19.3 | $17.5 | $38.1 | $57.1 |
| Other expense | $46.6 | $45.8 | $92.7 | $94.3 |
| Net income | $20.0 | $18.9 | $40.7 | $50.4 |
| Net income available to common shareholders | $20.0 | $16.9 | $40.7 | $46.9 |
| Diluted EPS | $1.30 | $1.10 | $2.64 | $3.05 |
- Q2 net interest margin was 3.61%, down from 3.87% a year earlier; the first-half margin was 3.66%, versus 3.92%. Lower asset yields in the continued low-rate environment were the main pressure.
- For the first half, net income included no Vision Bank sale gain. First-half 2012 included a $22.2 million pretax gain ($14.4 million after tax) on the sale of the Vision business. Excluding that gain, 2012 first-half net income was $36.0 million and diluted EPS was $2.11, compared with $40.7 million and $2.64 in 2013.
- Q2 fee income was helped by lower OREO valuation charges than a year earlier. First-half other income excluding the Vision gain was $38.1 million, compared with $35.0 million in 2012.
Financial position, liquidity and credit
- Total assets were $6.64 billion, essentially unchanged from year-end. Loans were $4.51 billion, up $60.4 million; deposits were $4.85 billion, up $135.3 million.
- Cash and cash equivalents rose to $353.9 million from $201.3 million. Investment securities fell to $1.35 billion from $1.58 billion as Park chose not to reinvest some repayments in longer-duration securities amid low rates, holding more funds in money-market instruments.
- Short-term borrowings declined to $223.5 million from $344.2 million. Long-term debt was $783.1 million and subordinated debentures and notes were $80.3 million. Stockholders’ equity was $639.2 million, down from $650.4 million.
- Operating cash flow was $50.4 million for the first half; investing activities provided $117.5 million and financing activities used $15.3 million. Cash increased $152.6 million.
- The allowance for loan losses was $55.1 million, or 1.22% of loans, versus $55.5 million and 1.25% at year-end. First-half net charge-offs were $1.4 million, compared with $23.5 million in 2012; the prior-year amount included a $12.1 million charge-off on retained Vision loans.
- Nonperforming loans were $169.3 million, down from $188.3 million at year-end; nonperforming assets were $205.0 million, down from $224.0 million. Nonperforming loans were 3.75% of total loans, versus 4.23% at year-end. OREO was $35.7 million.
- Capital ratios at June 30 were 9.38% leverage, 13.28% Tier 1 risk-based and 15.90% total risk-based for Park. PNB met the well-capitalized thresholds; its ratios were 7.05%, 10.05% and 11.91%, respectively.
- Unrealized losses on available-for-sale securities drove a $22.9 million after-tax other comprehensive loss for the first half, taking accumulated other comprehensive loss to $40.4 million.
Changes, outlook and risks
- Management’s current 2013 projection is pretax, pre-provision income of $108–$114 million, provision for loan losses of $6–$10 million, pretax income of $98–$108 million and net income of $73.7–$80.4 million. The original projections were $113–$131 million, $15–$20 million, $93–$116 million and $69.8–$85.8 million, respectively.
- Management attributed the lower projected pretax, pre-provision income to the continued low-rate environment and lower-than-previously-expected net interest income; it expects lower loan-loss provision because of positive credit experience at PNB and SEPH. The filing cautions that interim results are not necessarily indicative of full-year results.
- SEPH, which holds runoff legacy Vision assets, reported a $1.4 million first-half net loss, including $4.7 million of net loan recoveries. Its legacy nonperforming assets declined to $64.6 million from $70.0 million at March 31.
- Other expense included higher salaries and employee benefits; management also cited increased miscellaneous expense, largely due to reserves for ongoing litigation. The filing reports no material pending legal proceedings, apart from routine matters.
- Management described liquidity as more than adequate and targets at least $900 million of daily available liquidity from borrowing capacity, federal funds sold and unpledged agency securities. Loan commitments were $845.3 million and standby letters of credit $21.2 million.
- Management’s interest-rate simulation projected net income would decline 0.25% under a rising-rate scenario and 10.53% under a declining-rate scenario over the next year. These are model estimates, not earnings guidance.
- Risks include credit quality and collateral valuations, interest-rate and liquidity exposure, competition, economic and real-estate conditions, regulatory changes, operational or cyber-security failures, and litigation. Basel III rules adopted in July 2013 were not expected by management to materially affect Park’s or PNB’s capital ratios.
Important facts for investors to verify
- Whether margin compression and the shift toward cash and money-market instruments continue to weigh on earnings, and how actual results compare with the 2013 projection.
- Whether credit improvement persists, especially in nonperforming loans, OREO, TDRs and the runoff SEPH portfolio, and whether current reserves remain adequate.
- The extent and timing of realized or further unrealized securities losses, given the increase in accumulated other comprehensive loss.
- Whether litigation-related reserves, operating costs and the stated liquidity and capital positions change materially in subsequent filings.