Park National Corporation — Q3 2011 Form 10-Q
Business context and reporting period. Park National Corporation is an Ohio bank holding company with two operating bank subsidiaries, The Park National Bank and Vision Bank. This unaudited filing covers the quarter and nine months ended September 30, 2011; balance-sheet comparisons are with December 31, 2010. Dollar figures below are in millions unless indicated otherwise.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $67.6 | $69.4 | $207.0 | $205.5 |
| Provision for loan losses | $18.5 | $14.7 | $55.9 | $44.5 |
| Other income, excluding securities gains | $16.9 | $17.5 | $43.3 | $50.9 |
| Gain on sale of securities | $3.5 | — | $25.5 | $11.8 |
| Other expense | $45.6 | $45.7 | $139.0 | $140.6 |
| Net income | $18.3 | $19.6 | $60.0 | $61.5 |
| Net income available to common shareholders | $16.8 | $18.1 | $55.6 | $57.2 |
| Diluted earnings per common share | $1.09 | $1.19 | $3.61 | $3.79 |
- Third-quarter net income fell 6.5% year over year; nine-month net income declined 2.5%. Diluted EPS fell 8.4% for Q3 and 4.7% for the nine-month period.
- Q3 net interest margin was 4.09%, down from 4.28%; nine-month margin was 4.16%, versus 4.26%. Lower asset yields were partly offset by reduced funding costs.
- Net loan charge-offs were $28.5 million in Q3 and $77.1 million for the first nine months, versus $17.9 million and $43.8 million, respectively, in 2010. The allowance for loan losses was $100.2 million, or 2.14% of loans, at September 30, compared with $121.4 million, or 2.57%, at year-end 2010.
Financial position, cash flow and capital
- Total assets were $7.10 billion, down 2.7% from year-end 2010. Loans were $4.68 billion, down 1.1%; investment securities were $1.71 billion, down 16.2%.
- Deposits were $5.09 billion, essentially flat overall. Noninterest-bearing deposits rose $63 million and NOW/money-market deposits rose $150 million, while brokered deposits fell $110 million to zero and certificates of deposit declined $158 million.
- Cash and cash equivalents increased to $272.1 million from $133.8 million. Nine-month operating cash flow was $77.1 million, investing cash flow provided $348.2 million, and financing activities used $287.0 million. Investing cash flow included substantial securities sales and maturities.
- Short-term borrowings fell to $243.1 million from $663.7 million; long-term debt rose to $823.7 million from $636.7 million. Subordinated debentures and notes were $75.3 million. Total liabilities declined to $6.34 billion.
- Stockholders’ equity was $759.6 million, or 10.7% of assets. Park’s leverage, Tier 1 risk-based and total risk-based capital ratios were 9.73%, 14.04% and 16.52%, respectively; subsidiary banks met the stated “well capitalized” thresholds.
- Management reported strong liquidity and targeted at least $800 million of readily available liquidity capacity. The company also reported $837.3 million of loan commitments and $20.2 million of standby letters of credit at September 30.
Material changes and operating trends
- Vision Bank remained the main source of credit stress. It reported a $5.7 million Q3 net loss and a $26.3 million nine-month net loss, compared with a $19.5 million loss in the first nine months of 2010. Its nine-month loan-loss provision increased to $35.4 million from $27.7 million.
- Park-wide nonperforming loans were $232.0 million, or 4.96% of loans, versus $292.9 million, or 6.19%, at year-end 2010. Vision Bank’s nonperforming loans were $107.7 million, or 19.61% of its loans, down from $171.8 million, or 26.82%, at year-end. The filing attributes some improvement to charge-offs, collections, resolutions and transfers to accrual status; it does not represent a uniform improvement across the company, as Ohio-based nonperforming assets increased.
- Vision Bank’s commercial land-and-development portfolio fell to $102.3 million from $171.3 million at year-end. It included $42.0 million of impaired loans; cumulative charge-offs plus specific reserves on impaired loans were $63.8 million.
- Other real estate owned was $46.9 million, up from $44.3 million at year-end. OREO devaluations were $11.3 million for the first nine months, versus $4.6 million in 2010. Park established SE Property Holdings to acquire and market Vision Bank OREO; approximately $34.3 million was held there at September 30.
- Security-sale gains were $25.5 million for the first nine months, compared with $11.8 million in 2010. Management said it did not currently plan further securities sales in Q4, though additional gains remained possible. Excluding the after-tax impact of securities gains, Ohio-based nine-month net income was $70.9 million, versus $73.4 million in 2010.
Outlook, risks and unusual items
- 2011 consolidated outlook: Management maintained net interest income guidance of $268–$278 million (current forecast about $272 million) and other expense guidance of $183–$187 million. It raised expected loan-loss provision to $65–$70 million and revised expected other income to $58–$62 million, mainly reflecting Vision Bank credit costs and OREO devaluations. Management’s federal effective tax-rate estimate remained 26%–28%.
- 2012 Vision Bank outlook: Management projected a $13 million provision, $4.7 million of other income and a $7.1 million net loss. It expected credit costs to decline, but stated profitability would require provision expense below 1% of average loans and lower operating expenses. These are forecasts, not guarantees.
- Regulatory examination: The FDIC and Florida Office of Financial Regulation challenged approximately $18 million of guarantor support used in Vision Bank’s December 2010 impaired-loan analysis. The disputed support had fallen to $9.0 million by September 30, 2011. Park appealed the findings; it said an unsuccessful appeal could require Vision Bank to re-file its December 2010 call report.
- Internal controls: Park disclosed a material weakness identified at December 31, 2010 involving collateral valuations and supporting documentation for certain Vision Bank impaired loans and OREO. Management reported process improvements, including reliance on current appraisals by licensed external appraisers, but said remediation was ongoing. Disclosure controls were deemed effective with this exception.
- Other exposures: Credit quality depends heavily on real-estate collateral and economic conditions in Ohio and Gulf Coast markets. Management also cited interest-rate, funding, competition and regulatory risks. Participation in the U.S. Treasury Capital Purchase Program carries preferred dividends and restricts certain common dividends and repurchases. Routine legal proceedings were reported as not material.
Important facts for investors to verify
- Whether Vision Bank’s nonperforming-loan reduction and lower new nonaccrual activity persist, and how much results from charge-offs, resolutions or reclassification rather than improved borrower performance.
- Whether collateral values, OREO sale proceeds and future appraisals support management’s forecast of lower 2012 provisions and reduced devaluations.
- The outcome of the FDIC/OFR appeal and any effect on Vision Bank’s historical regulatory reporting, allowance or capital requirements.
- Whether the material weakness is fully remediated and whether updated valuation controls operate effectively in subsequent reporting periods.
- How much future earnings depend on securities gains, given the $25.5 million recorded in the first nine months, and whether core earnings offset declining margins and fee income.
- Progress against the 2011 guidance and the assumptions underlying management’s Vision Bank 2012 loss and credit-cost projections.