August 18, 2009 - 2:16pm EST by
2009 2010
Price: 61.63 EPS $0.00 $0.00
Shares Out. (in M): 14 P/E 0.0x 0.0x
Market Cap (in $M): 863 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x
Borrow Cost: NA

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I recommend a short position in PRK.  PRK is one of the most expensive regional banks at 1.9x tangible book.  This valuation ranks in the 95th percentile of all banks.  Moreover, of banks with 15% loan exposure to Florida, PRK likely ranks as the single most expensive bank.  Based on this, one would assume that PRK has pristine credit quality and a superior management team.

Yet, PRK's loan book is seriously impaired and marked at clearly inflated values. PRK underwrote loans extremely poorly and aggressively with average LTVs (loan-to-value) at origination of roughly 90%.  Given the massive decline in residential and commercial property prices, current LTVs are well over 100%.  PRK was also a serial acquirer and has purchased 14 banks in the past 20 years.  PRK acquired perhaps the worst lender in Florida and southern Alabama (Vision Bank) at the peak of the real estate market in 2006.

I estimate cumulative losses could reach 68% of tangible book value.  Even after including 2 years of pre-provision earnings, losses could reach 41% of tangible book.  This would clearly necessitate a large capital raise by PRK.


Vision lent primarily in Florida and partially in Alabama. PRK acquired it at the peak of the real estate market in Sept 06. Vision was one of the worst underwriters in Florida, and this exposure alone will be devastating for PRK.

  • Vision's loan book was underwritten extremely poorly and aggressively

The loan mix at Vision Bank is extremely risky with very high exposure to C&D (38% of total loans) and commercial RE and C&I (33%). 

Exhibit 1: Vision Bank Loan Mix

  Loans ($ Mil) % of Vision Loans
Construction & Development               261 38%
Commercial RE               148 22%
Residential RE               149 22%
Commercial & Industrial                 76 11%
Home Equity                 44 6%
Consumer                  6 1%
Total               684 100%


On top of this, Vision was an extremely aggressive underwriter.  From county records, I pulled roughly 20% of the Vision loan book in Florida (see Exhibit 2).  At origination, the LTV on these FL loans was 89% (this is based on the price paid by the owner).  Even worse, the median date of origination was mid 2005 (near the peak of the real estate market). 

Since the median origination date, residential property prices are down 25% in their counties in FL/AL and commercial RE prices are down 23% nationally (there are no regional comm. RE price indices).  Adjusting for these price declines, I estimate the current LTV (marked-to-market) at 109% for commercial RE and 153% for residential RE!

Exhibit 2: Vision Bank LTV Summary

  Mark-to-Mkt   Average Max Min   Date
Construction & Development     85% 390% 43%   1/28/2005
Commercial Real Estate 109%   84% 390% 54%   7/27/2005
Residential Real Estate 153%   115% 390% 58%   6/7/2005
Total Florida Loan Book     89%        


Here are 2 telling quotes from commercial brokers based on several calls I made on PRK:

"If you couldn't get a loan from Vision, you couldn't get a loan from anyone"

"I'm sure they [Vision] would be gone if they hadn't been acquired"

Given the loose lending that took place in Florida, the first statement is amazing.


  • The severity of realized losses will be extremely high for Vision Bank

Vision is one of the few banks that publishes its foreclosed loan list (REO) along with asking prices:

Exhibit 3 shows loss severity on the first 5 foreclosed residential lots in Florida.  I did not cherry pick these loans and simply picked the first 5 on their list.  On 4 of the 5 loans, the loss severity is staggering, ranging from 48% to 61%. 

Importantly, these loss severities are based on PRK's asking price rather than the prices PRK could actually realize in the market today.  In several instances (see below in Exhibit 5), I believe their asking prices are significantly inflated; e.g., loans 4 & 5 are listed at a whopping $5.6-$5.8 million per acre for Florida panhandle beach front property.

Exhibit 3: Loss Severity of Vision REO Properties

Property Type City Asking Price Acres Asking Price per Acre   Original Loan Amount Loss Severity Property Price Change LTV at Orgination Loan Origination Date
Res Lot Panama City Beach $179,500     1.14 $157,456            
Bay01L           143,100 0% 13% 90% 2/6/2007
Res Lot Panama City Beach $175,000     0.48 $364,583            
Bay02L           449,900 -61% -65% 90% 8/16/2004
Res Lot Panama City Beach $149,900     0.24 $624,583            
Bay03L           359,910 -58% -63% 90% 10/7/2004
Res Lot Panama City Beach $849,000     0.15 $5,660,000            
         1,640,000 -48% -48% 100% 8/15/2005
Res Lot Panama City Beach $699,000     0.12 $5,825,000            
         1,500,000 -53% -80% 43% 8/16/2004


  • Estimated losses at Vision Bank alone are significant and could approach 15%-20% of total PRK tangible book value

Vision already has 22.9% NPAs (non-performing assets) to loans vs. the industry average of roughly 3%.  NPAs continue to grow at a significant rate and were up 37% YTD (Exhibit 4).

Exhibit 4: NPA Growth Rate for Vision Bank 

  4Q07 4Q08 2Q09
Non-Performing Assets $70.5 $114.4 $157.1
   Percent of Loans 11.0% 16.6% 22.9%
   Growth Rate   62% 37%

Assuming 50% severity on these NPAs (based on REO date above), total losses at Vision would equal 12%-30% of total PRK tangible book (see column 4 in Exhibit 5 below).  I include losses at several higher NPA levels as NPAs are likely to increase given the risk in the loan book.  This does not even include losses on the remaining 85% of the loan book.

Exhibit 5: Estimated Vision Losses as a Percent of Total PRK Tangible Book  

NPAs to Loans Loss Severity Losses ($ Mil) After-Tax Losses ($ Mil) Loss: % of PRK Book   NPAs Loans
[2 / 3] [1] [1 * 2]   [4]   [2] [3]
22.9% 50% $79 $56 12%   $157 $684
30.0% 50%        103                 73 15%           205         684
40.0% 50%        137                 98 20%           274         684
50.0% 50%        171               122 25%           342         684
60.0% 50%        205               147 30%           411         684


  • Vision Bank clearly is delaying loss recognition and marking loans at inflated values

Here are the 3 largest REO (foreclosed) loans in FL/AL from Vision's website.  These 3 loans represent 30% of the value of all the REO at PRK.

Exhibit 6: Largest REO Loans at Vision Bank

Property Type Description City Asking Price   Foreclosure Date Notes
A&D: WA11C 4.75 Acres Commercial Tract Santa Rosa Beach $7,500,000   Jul-07 NA
Acquisition and Development 103 lots Crimson Ridge S/D; +/- 41.38 acres Gulf Shores $3,000,000.00   Sep-08 PRK tried to auction in Sept 08 and only received 1 offer for $550K. Unclear what mortgage amount is but bid was 82% below asking price
Lots (2) West Beach; (1) 50x370 gulf front; (2) 100x230 Gulf Shores $1,875,000.00   Aug-08 PRK tried to auction in Aug 08 and only received 1 offer for ~$750K ($500-$650K for gulf lot and $200K for other).  63% less than asking price


Rather than sell these assets quickly like some banks, PRK has kept the largest foreclosed loan on the books for over 2 years (since July 2007).  The other 2 REO loans in Alabama have been held for about 1 year each.  According to brokers, PRK failed to auction the 2 loans in Alabama in Aug/Sept '08.  They received 1 offer on each at 82% and 60% below the asking price.  Yet, PRK continues to maintain the asking price at the inflated values.  My speculation is that PRK is delaying loss recognition given the large size of these loans.  Notice how the loan amounts in Exhibit 3 (where PRK is willing to realize ~50% losses) are all significantly small than the amounts in Exhibit 6.

Also, the extent of the over-building was so enormous that it is unlikely PRK will ever recoup the value on the 2 AL loans.  One commercial broker told me that: "Gulf Shores and Foley collectively have a population of 17K - at the peak of the boom, there were permits in place for 20K new residential lots in Gulf Shores and Foley"

Here is yet another example of a foreclosed loan that Vision Bank clearly has not recognized.  Vision lent $21 million for a water park/dolphin show/condo complex/retail center called 'Bama Bayou.  The following article discusses the foreclosure:  Vision was the only bidder at auction and purchased Bayou for $103.M in April 09 (or a loss of $10.7M).  Yet, Vision did not charge off the loan in 1Q or 2Q of this year. Total Vision net charge-offs were only $8.0M and $6.7M respectively.  This would be a significant NCO for PRK overall as it would virtually double the annualized NCO rate in 2Q from the reported 1.08% to 2.03%.

I believe part of the reason PRK is able to hold these loans at inflated values and delay loss recognition is that their auditor is Crowe Horwath.  In case you haven't heard of Crowe Horwath, it's the 9th ranked auditing firm in the country according to Accounting Today and is roughly 1/20th the size of the Big 4 accounting firms.


Vision Bank was not an isolated mistake. The core PRK market is in Ohio and includes numerous banks serially acquired over the years.  PRK was very aggressive underwriting the Ohio loan book. The loan mix is heavily commercial with 43% of loans to commercial RE and C&I and 7% of loans to C&D. 

Exhibit 7: Core Ohio Loan Mix

  Loans ($ Mil) % of Ohio Loans
Construction & Development               254 7%
Commercial RE            1,088 28%
Residential RE            1,017 26%
Commercial & Industrial               588 15%
Home Equity               233 6%
Consumer               678 18%
Total            3,858 100%

Exhibit 8 shows that the average LTV at origination was 93%. Conservative banks are typically in the 60%-70% range, especially on risky C&D and commercial RE loans. Since the median date of origination, residential RE prices are down 10% in their main counties and commercial RE down 6% nationally.  Adjusted for these price declines, the current LTVs are 92% for commercial and 110% for residential.  While the data in Exhibit 8 only represent 7.6% of the loan book in Ohio, it represents every loan I found over $500K for PRK.

Unfortunately, PRK does not disclose the REO loans in Ohio so it is difficult to estimate the loss severity on its loans with the same specificity as with Vision.

Exhibit 8: Ohio LTV Summary

  Mark-to-Mkt   Average Max Min   Date
Construction & Development     109% 400% 56%   7/6/2005
Farmland     103% 400% 56%   12/8/2005
Commercial Real Estate 92%   87% 294% 45%   8/15/2004
Residential Real Estate 110%   99% 328% 70%   9/19/2005
Total Ohio Loan Book     93%        


I believe cumulative losses at PRK will be quite severe.  Under the "more adverse" case of the government stress test, PRK would see a 68% impairment of book value before any pre-provision earnings (column 3 in Exhibit 9).  The Fed did not disclose the loss assumptions for home equity and consumer loans so I made some estimates. 

Exhibit 9: PRK Stress Test Cumulative Losses

Loan Type Pre-Tax Losses After-Tax Losses Loss: % of PRK Book   Loans Loss Severity Notes
  ($ Mil) ($ Mil)     ($ Mil)    
  [1 * 2]   [3]   [1] [2]  
Construction & Development       103.0          73.6 15%             515 20.0% 20% given FL exposure vs. 16.5% stress test
Commercial RE       105.1          75.1 15%          1,236 8.5%  
Residential RE: First Lien         94.5          67.6 14%          1,074 8.8%  
Residential RE: Second Lien         12.7            9.1 2%               92 13.8%  
Commercial & Industrial         40.5          28.9 6%             664 6.1%  
Home Equity         38.3          27.4 6%             278 13.8% No stress test estimate. Use second lien loss
Consumer         68.4          48.9 10%             684 10.0% No stress test estimate. Just use 10%
Total       462.4        330.6 68%          4,542 10.2%  

Analyst estimates of pre-provision earnings (after-tax) are roughly $105 million for 2009.  Even after including 2 years of pre-provision earnings, PRK would see 41% impairment ($197 million or $14/share) to tangible book value (Exhibit 10). This generously assumes PRK releases 30% of its reserves to 1.43% of loans; the 5-year industry average of reserves to loans was 1.43% (during the bull years of 2003-2007).  After 2 years, tangible common equity would decline from 7.0% of assets to 4.1%.  4.1% is clearly insufficient as regulators have suggested that required capital ratios will go up over time and a ratio of over 6% is more appropriate.  This would require a significant capital raise for PRK.

Exhibit 10: Reduction in Tangible Book Value

Cumulative Loan Losses (After Tax)         (331)
   2 Years Dividend         (105)
   2 Years Pre-provision EPS          210
   PRK Reserves (to 1.4% of loans)           28
Reduction in PRK Equity         (197)
   % of Total Book Value 41%

Given the extremely high valuation of its stock, one would imagine PRK has been aggressive in reserving against the loan book. To the contrary, I estimate the Vision loan book is currently marked at roughly 86% of book value (vs. my loss estimate of as high as 30% and BBT write-down of CNB's Florida-centric loan book by 37% this week). Vision includes just 5% of total reserves and 9% charge-offs through 2Q09. Vision reserves are clearly insufficient and cover only 20% of non-performing assets. The 2Q09 industry average according to the FDIC is 80%.  For all of PRK, reserves are only 42% of NPAs.  If PRK were to bring its reserves up to just the industry average, it would wipe out 14% of tangible book (~$4.80/share).


  • PRK is extremely expensive compared to comparable regional banks with similar exposure to Florida.

Exhibit 11 below shows the price to tangible-book value of regional banks with exposure to FL.  The list is sorted from lowest to highest percent of total loans in Florida.  While this is certainly not a complete list, every bank with over 10% of loan exposure to FL trades at a significant discount to PRK and mostly below 1.0x book.  This is rightfully so as Florida is perhaps the second worst real estate market in the US.

Based on market cap, loan exposure and credit quality, WTNY is the most comparable bank and trades at a mere 0.9x.

Exhibit 11: Price-to-Tangible-Book Valuation for Banks with Florida Exposure

        Florida Loan Exposure   Overall Loan Performance (2Q09)
  Market Cap Price/TBV   FL Loans FL Loans   NPA's Net Charge-Off Reserves
        % of Total % of TBV   % of Assets % of Loans % of Loans
PRK             856 1.8x   15% 141%   3.54% 1.08% 2.27%
BBT        17,130 1.8x   5% 53%   2.27% 1.81% 2.10%
FITB          7,762 1.0x   10% 104%   3.68% 2.95% 4.11%
CSFL             190 1.4x   11% 769%   2.47% 0.52% 1.77%
TIBB               25 0.4x   11% 1897%   3.85% 1.89% 2.05%
WTNY             611 0.9x   16% 187%   3.81% 2.08% 2.48%
BBX               59 1.3x   16% 2684%   NA 2.76% 4.09%
CCBG             250 0.2x   19% 1077%   5.69% 1.38% 2.11%
TSFG             314 0.4x   19% 227%   4.59% 4.89% 3.05%
SAMB                3 0.5x   22% 2258%   NA 4.65% 3.27%
SBCF               48 0.4x   24% 1689%   7.71% 3.70% 2.72%
BUSE             221 0.8x   25% 429%   NA 5.89% 2.80%
CNB               84 0.4x   38% 1969%   6.62% 5.83% 2.99%


  •   Why is PRK trading at such a premium to its comparables if there are so many problems?

PRK has a very high retail ownership and the dividend yield is artificially high. According to Bloomberg, 41.5% of shares are held by institutions including 17.2% held through PRK's trust and asset management arm for employees and others.  So excluding the trust shares, 71% of the shares (58.5% / 82.8%) are held by retail investors.  These investors likely find the 6% dividend yield appealing.

Yet, the dividend payout is extremely high at 94% of core earnings in 2Q09 (excluding one-time security gains).  As credit continues to deteriorate, PRK will have a tough time paying this dividend.  Management has openly stated that they will do whatever they can to maintain the dividend and would rather issue equity via the current ATM (at-the-market) offering than lower the dividend.  This is clearly not an optimal allocation of capital.


  • Recognition of further credit deterioration
  • Capital Raise. We believe regulators will require PRK to raise equity to shore up capital at some point over the next 2 years. PRK is currently trying to raise $70 million in an ATM offering (at the market). PRK announced the offering on May 27 and through July 20 was only able to raise $10.5 million at $61.18/share.
  • Future dividend cut seems likely as credit continues to deteriorate
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