Park National Corporation NYSE:PRK Valuation Analysis

Ryan Flynn, Ahmad Aldarrak, Maria Surina, Kyle Willner

Ratios (2011) Spread Return on Equity Return on Assets Charge-off ratio NPL ratio Reserve ratio Efficiency ratio Loss-Provisions Ratio 4.7% 11.7% 1% 2.9% 5.3% 1.6% 60.6% 1.5% Valuation Predictions Actual Current Price FCFE Valuation P/E Valuation P/TBV Valuation $ 61.51 $ 66.65 $ 65.45 $72.78

Industry

BANKS

Park National Corporations main strategy is to grow through bank acquisitions, while maintaining autonomy to better serve the local customers. PRK mainly operates in Ohio, and attempted to expand to Florida through the acquisition of Vision Barcshares in 2007. Acquisition of Vision was ill-timed at the beginning of the financial crisis, resulting in significant drop in earnings. Even with the toxic loans of Vision, PRK managed to remain profitable through its operations in Ohio. PRK had significant recovery in 2009, and is selling Vision in 2012. Going forward, we expect slow recovery as PRK resolves all of the remaining problems from Vision. Loans will slowly grow along with Ohios slowly recovering economies. Loans profitability is expected to improve in the next few years along with increasing interest rates. Overall, PRK is on its way to recover from the financial turmoil and is looking forward to better operating results and improved profitability.

Bank Overview Park National Corporation is a holding company based in Ohio that owns the Park National Bank. It grew mostly through acquisition of other banks, and now consists of 11 community banking divisions and 2 specialty finance companies. These acquired banks/divisions enjoy a high level of autonomy in managing their services to meet the local customer needs. The company provides commercial banking services, including checking accounts, saving accounts, loans and credit cards, in addition to trust and investments services. They provide their services to individuals, businesses and institutional customers. The company mostly operates in Ohio, but in 2007 it got out of its area of expertise and acquired Vision Barcshares, a bank in Florida. The acquisition was ill-timed at the peak of the housing prices, resulting in significant reductions in earnings through the financial crisis in 2007 and 2008. Earnings recovered in 2009, and the firm is selling the Vision bank in 2012. Going forward, slow economic recovery in Ohio is likely to slow loan growth, and low interest rates are likely to lower loan profits. And once the Vision problems are completely resolved and the bank resumes the acquisitions strategy, risk is likely to increase in fear of a Vision-like failed acquisition.

SWOT Analysis Strengths

o o o

Strong capital levels, low cost deposits and well-controlled expense base. Strong local management Local decision makers have increased customer service and have built a loyal consumer base.

Weaknesses
o o

Decentralized bank charters, each with their own board of directors, is inefficient from a cost standpoint. Acquisition of Vision Bancshares in 2007 was a disaster and the company still holds problem assets from the acquisition. These problem assets total $80.7 million, down from $205.1 million in 2010. The company is concentrated in slower growth Ohio markets.

Opportunities
o o

The sooner the company can get rid of the remaining toxic assets, the sooner it can clean up its balance sheet. Additional cost savings could be realized through the consolidation of regional banks.

Threats
o o o

The remaining Vision Bancshares assets might continue to weigh on the companys earnings in resulting charge-offs. Low interest rates will continue to have a negative impact on top-line revenue. The potential of another Vision-like failed acquisition.

Ratios Analysis Average interest received on gross loans. As the domestic macroeconomy continues to improve we expect a gradual rise of interest rates leading to an aggregate increase in average interest received on gross loans increasing over the intermediate time-horizon of 3-5 years going forward. The slow, persistent increase in this percentage is expected for Park as the larger overall banking sector should be able to garner greater spreads on loans in the future. Park National with a 2.3% average interest to over gross loans percentage should incrementally increase over the next 5 years and reach 3.00% by 2016. Average interest and dividend yield received on investments. We believe that Parks average interest and dividend yield received on investments at 3.4% at 2011 year end will slowly improve over the next 5 years eventually reaching 5.00% by 2016. This belief is largely derived from what we see as a management team that will have more focus with the Vision merger largely behind them and an improving investment environment domestically where the majority of Parks investments are made. Average interest paid on deposits. As a result of our belief of a more robust economy moving forward and the idea that the domestic banking sector is procyclical we are confident that as the economy recovers that Parks ability to pay its depositors will increase moderately over the intermediate term as with a better economy Park should have more flexibility and ultimately capital to pay its customers slightly more for their deposits. Hence, we believe that the increase of 0.9% at 2011 year end to an eventual 2.25% figure on average interest paid on deposits at Park by 2016 is well justified. Estimated interest spread. The spread represents the difference between the Interest in the Prior Year Loans and Interest on the Prior Year Deposits and Borrowing, or, in other words, the difference between the yield on assets and the costs of funds. The bigger is the spread, the higher is the banks interest income. The latter is also affected by the growth rates of interest-earning assets, and credit quality. Lately, the recent fall in market interest rates and intense competition has compressed the spread. Going forward, we would expect the spread to remain relatively stable (in the range of 4.7% with some minor upside potential (up to 5%). Efficiency ratio. Efficiency ratio, defined as Non-Interest Expense (excluding Goodwill)/ (Net Interest Income + Non-Interest Expense) illustrates a banks operational efficiency. While a size of the bank tends to improve the efficiency due to the economies of scale, a greater variety of fee-generating activities (brokerage, insurance, credit cards that require significant customer service) tends to push the efficiency ratio higher. Therefore, in assessing a banks efficiency, it is important to compare it with the right peers. An industry average is in the mid 5 0%. PRKs performance was worse than that, in the range of 62%, in 2011, but consistent with its peer group of medium-sized banks ($1 to $10 billion in assets). Going forward, we expect this ratio to improve (to about 55%) due to consolidations of PRK branches and improved operational efficiencies. Return on assets. From 2002 to 2006, PRK has average a return on assets of roughly 1.8%. However, it dropped to the 0.2%-0.4% in the two years after the Vision acquisition, and now they are rebounding to roughly 1%. Going forward, along the lines of the improvements of the efficiency ratio, we expect it to improve slightly over the next few years to the 1.1%-1.2% range.

Return on equity. Similar to the return on assets, return on assets has been average 17% before it drops to the 3% range post acquisition. Now with ROE at 11.7%, we expect it to grow slightly up to 12.5% over the next few years especially as the equity/asset and the charge-off ratios go down. Loan to asset ratio. The industry defines leverage ratio (which does not have a risk-weighted denominator) as [Common and Preferred equity]/Total assets. The Feds requires at least 5% capital ratio for a bank to be considered well capitalized. With regard to PKRs Loan/Asset ratio, which is similar to [1-Capital Ratio], we expect it to increase slightly in the next five years, according to the 10K and Morningstar analyst report. Deposits (liability side will likely grow at 3.5% in 2012, and then, as the economy picks up, at 4% going forward); loans (asset side) wil increase by 1.5% in 2012, and will stabilize at a 3% annual growth rate. Loan loss provisions ratio. The loan loss provisions ratio has been relatively high since the acquisition of Vision, averaging at 1.6% over the last four years. Going forward, however, we expect this ratio to drop to roughly 1% as the company gets rid of Visions toxic assets. Charge-off ratio. We expect the charge off ratio to increase to 2.1% due to charges from remaining problem assets from the Vision Bancshares acquisition, and then flatten off to a more normal level of 1.7% from 2014-16. NPL ratio. We believe that Park National has provided a sufficient loan loss reserve to cover charge offs. Therefore, we believe that the NPL ratio will gradually decrease from 2012-16 as loan quality improves and recoveries from NPLs increase. Leverage ratio. We believe that Park National is well-capitalized at the moment and will continue this trend into the near future. Recently, the companys leverage has hovered around 10 times equity, slightly less than the 2007-08 crisis periods. We foresee only slightly lower capital levels going forward as the economy improves of around 11 times equity.

Multiples Valuation
As of day end 12/30/2011, adjusted close share price Comparable Firms Ticker Price per Share Earnings per Share Chemical Financial CHFC $20.74 First Financial Bancorp(OH) FFBC $15.45 First Financial Corp Ind THFF $32.74 AVERAGE $22.98 FirstMerit Corporation potential fit in edited analysis Ticker PRK Price/Earnings Ratio Tangible Book Value Common Shares Outstanding Price/Tangible Book Value 13.21 $446,843,000 27,455,000 $1.27 13.55 $606,327,000 58,693,000 $1.50 11.57 $304,922,000 13,163,000 $1.41 12.44 $452,697,333 33,103,667 $1.68

$1.57 $1.14 $2.83 $1.85

Park National Corporation

Price per Share Earnings per Share Price/Earnings Ratio Tangible Book Value Common Shares Outstanding Price/Tangible Book Value $61.51 $5.26 11.69 $667,521,000 15,410,909 $1.42

Implied Price Per Share (from P/E Multiple of peers) Implied Price Per Share (from P/TBV Multiple of peers)

$65.45 --->

Implied Value of Equity

$1,008,585,021

$72.78 --->

Implied Value of Equity

$1,121,553,825

FCFE Valuation
FCFE and DCF Income available to common shareholders Change in liabilities Change in assets (except cash and allowance) FCFE Discount Factor PV(FCFE) SUM(PV(FCFE)) Comon Shares Outstanding (as of 12/30/2011) Price Per Share (Intrinsic Value Using our model) 2008 Y 13,566 506,967 604,739 (84,206) 2009 Y 68,430 (104,992) (1,591) (34,971) 2010Y 52,294 229,488 294,101 (12,319) 2011Y 76,284 (322,672) (408,853) 162,465 2012E 69,455 237,621 157,308 149,768 0.90 134,950 2013E 2014E 2015E 2016E Terminal 69,979 76,305 82,763 89,394 223,917 232,687 266,563 277,911 235,619 244,482 253,700 263,289 58,277 64,510 95,626 104,016 1,257,263 0.81 0.73 0.66 0.59 0.54 47,316 47,194 63,037 61,784 672,911

$1,027,193 15,411 $66.65

Actual Market Price Per Share (as of 12/30/2011 Adjusted $61.51 Close) $ var ($5.14) % var -8%

Ratios and Assumptions Prime rate

Average Interest on prior year loans Relative to prime

Average interest and dividends on prior year investments Relative to prime Average interest on prior year deposits and borrowings Relative to prime Spread Loss-provisions ratio

2008 Y 2009 Y 2010Y 2011Y 2012E 2013E 2014E 2015E 2016E Description 5.00% 3.25% 3.25% 3.25% 4.00% 3.25% 3.75% 4.00% 4.25% As Economy Improves We Expect Fed to gradually increase fed fund rate and this will directly increase the prime rate 7.1% 6.1% 5.8% 5.5% 6.50% 5.75% 6.50% 7.00% 7.25% 2.1% 2.9% 2.5% 2.3% 2.50% 2.50% 2.75% 3.00% 3.00% Gradual slow increase as economy recovers and ultimately improves banking sector including Park should be able to garner greater spread 5.3% 4.5% 4.2% 3.4% 4.50% 3.75% 4.50% 5.00% 5.50% 0.3% 2.3% -2.7% 4.8% 1.6% 1.2% 1.5% -1.8% 4.7% 1.5% 0.9% 1.1% -2.1% 4.6% 1.8% 0.2% 0.9% -2.4% 4.7% 1.5% 0.50% 1.80% -2.20% 4.7% 1.0% 0.50% 1.25% -2.00% 4.5% 1.0% 0.75% 1.75% -2.00% 4.8% 1.0% 1.00% 2.00% -2.00% 5.0% 1.0% 1.25% Improving Performance justifies increase in interest income 2.25% -2.00% With Better economy bank should have more flexibility to bank customers slightly more for deposits 5.0% 1.0% As the bank gets rid of Vision, bad loans are likely to go down. We forcast 1%, a bit higher than the 10k, but closer to Morningstar estimate. 45,727 0.9% 215,983 Gradual Decrease as loan quality gets better and recoveries increase for NPL. Annual underwriting standards get tighter 4.4% 2.5% Due to stricter regulations and tighter operational discipline with respect underwriting standards this number will gradually increase 55% Due to operational efficiencies and consolidations of branch banks, per Morningstar note 3.0% Consistent with Management Discussion in 10k and Morningstar and overall projections for US economic growth 5.0% Per bank's core competency we see Park becoming more conservative going forward with investment income 3.0% 4.0% Based on loan growth and Morningstar estimates of Loan-to-Deposit Ratio these figures are consistent 5% Consistent with Tangible Asset Growth Forecasted 0% 30.0% Consistent with Interest Income Projections and Historical Performance 0 0 30% Due current state and administration in power we it difficult to justify a decline in the corporate tax rate

Net Charge-offs Charge-off ratio Non-performing loans (from 10-K, Table 9) NPL ratio Reserve ratio

57,501 52,192 60,222 125,084 (6,048) 50,610 43,102 44,395 1.3% 1.1% 1.3% 2.9% -0.1% 1.1% 0.9% 0.9% 167,778 248,459 292,961 227,350 227,350 222,803 220,530 218,256

3.7% 2.2%

5.4% 2.5%

6.2% 3.0%

5.3% 1.6%

5.2% 2.7%

4.9% 2.5%

4.7% 2.5%

4.6% 2.5%

NPL coverage ratio Efficiency ratio Loans grow at an annual rate of

59.7% 64.9% 6.3%

47.0% 64.7% 3.3%

49.0% 70.2% 2.0%

30.1% 60.6% -8.8%

60% 1.5%

58% 3.0%

56% 3.0%

55% 3.0%

Investments grow at an annual rate of

20.9%

-9.5%

9.5%

-16.2%

5.0%

5.0%

5.0%

5.0%

Other assets grow at a rate of Deposits grow at an annual rate of

-3.9% 7.3%

10.0% 9.0%

23.0% -1.8%

-52.3% -12.4%

1.5% 3.5%

3.0% 3.5%

3.0% 3.5%

3.0% 4.0%

Borrowings grow at a rate Other liabilities grow at a rate Other income to net interest income ratio Goodwill impairment Amortization of intangible assets Tax rate

11.9% 21.1% 33.2% 54,986 4,025 61.6%

-32.2% -27.2% 29.7% 0 3,746 23.6%

30.5% -15.5% 0.4% 639.7% 27.3% 34.7% 0 3,422 22.3% 0 3,534 29.5%

7% 0% 30.0% 0 0 30%

5% 0% 30.0% 0 0 30%

5% 0% 30.0% 0 0 30%

5% 0% 30.0% 0 0 30%

CAPM ( re, cost of equity) re = rf + Be*(rm-rf) re = rf +Be*MP rf Be MP re Terminal Growth Rate

4.1% 0.98 7.0% 11.0% 0.025

Sensitivity Analysis To test the impact of the interest rate spread on the equity value, we created a 2-way data table, where one variable represents an interest on the loans, and the other variable stands for the interest on the deposits. The bigger is the interest spread, the higher is the interest income, the higher is the valuation.
assumed interest spread 1.1 1.05 1 $78.90 $75.15 $71.40 $77.32 $73.57 $69.82 $75.74 $71.99 $68.24 $74.16 $70.40 $66.65 $72.57 $68.82 $65.07 $70.99 $67.24 $63.49 $69.41 $65.66 $61.91

$66.65 0.85 0.9 0.95 1 1.05 1.1 1.15

1.15 $82.65 $81.07 $79.49 $77.91 $76.32 $74.74 $73.16

0.95 $67.65 $66.07 $64.48 $62.90 $61.32 $59.74 $58.16

0.9 $63.90 $62.32 $60.73 $59.15 $57.57 $55.99 $54.41

0.85 $60.15 $58.57 $56.98 $55.40 $53.82 $52.24 $50.65

The lower is the efficiency ratio, the higher is the valuation (indirect relation)
efficiency ratio 0.9 0.95 1 $75.53 $71.09 $66.65

1 $66.65

0.85 $79.97

1.05 $62.21

1.1 $57.78

1.15 $53.34

The lower is the loan loss provision ratio, the higher is the valuation (indirect relation)
loan loss provision ratio 0.9 0.95 1 $67.54 $67.10 $66.65

1 $66.65

0.85 $67.99

1.05 $66.21

1.1 $65.76

1.15 $65.32

The stronger is the growth in deposits, the higher is the valuation (direct relation)
growth in deposits 0.9 0.95 1 $52.77 $59.67 $66.65

1 $66.65

0.85 $45.94

1.05 $73.71

1.1 $80.85

1.15 $88.06

The stronger is the growth in loans, the lower is the valuation (indirect relation)
growth in loans 0.95 1 $71.72 $66.65

1 $66.65

0.85 $81.73

0.9 $76.75

1.05 $61.54

1.1 $56.39

1.15 $51.19

The lower is the tax rate, the higher is the valuation (indirect relation)
tax rate 0.225 0.25 0.275 0.3 0.325 0.35 0.375 72.9946314 70.8809701 68.76731 66.653647 64.53999 62.42632 60.31266

30% $66.65

The cheaper is the equity, the higher is the valuation (direct relation)
cost of equity 0.09 0.1 $87.58 $75.60

0.1098 $66.65

0.07 $127.79

0.08 $103.98

0.11 $66.49

0.12 $59.34

0.13 $53.58

The higher is the terminal growth rate, the higher is valuation (direct relation)
terminal growth rate 0.02 0.025 $64.02 $66.65

0.025 $66.65

0.01 $59.55

0.015 $61.67

0.03 $69.62

0.035 $72.97

0.04 $76.81