Park National Corp - 10-Q quarterly report FY

 

(Exact name of registrant as specified in its charter)

50 North Third Street, Newark, Ohio 43055

(740) 349-8451

N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ          Accelerated filer o          Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o Noþ

13,828,469 Common shares, no par value per share, outstanding at October 27, 2006.

Page 1 of 40

 

 

PARK NATIONAL CORPORATION

-2-

Consolidated Condensed Balance Sheets (Unaudited)
(dollars in thousands)

Consolidated Condensed Statements of Income (Unaudited)
(dollars in thousands, except per share data)

Continued

PARK NATIONAL CORPORATION
Consolidated Condensed Statements of Income (Unaudited)
(Continued)
(dollars in thousands, except per share data)

Consolidated Condensed Statements of Changes in Stockholders’ Equity (Unaudited)
(dollars in thousands, except share data)

Consolidated Condensed Statements of Cash Flows (Unaudited)
(dollars in thousands)

Continued

PARK NATIONAL CORPORATION
Consolidated Condensed Statements of Cash Flows (Unaudited)
(Continued)
(dollars in thousands)

For the Three and Nine Months Ended September 30, 2006 and 2005.

Note 1 — Basis of Presentation

The consolidated financial statements included in this report have been prepared by Park National Corporation (the “Registrant”, “Corporation”, “Company”, or “Park”) without audit. In the opinion of management, all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation of results of operations for the interim periods included herein have been made. The results of operations for the periods ended September 30, 2006 are not necessarily indicative of the operating results to be anticipated for the fiscal year ending December 31, 2006.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q, and therefore, do not include all information and footnotes necessary for a fair presentation of the condensed balance sheets, condensed statements of income, condensed statements of changes in stockholders’ equity and condensed statements of cash flows in conformity with U.S. generally accepted accounting principles. These financial statements should be read in conjunction with the financial statements incorporated by reference in the Annual Report on Form 10-K of Park for the fiscal year ended December 31, 2005 from Park’s 2005 Annual Report to Shareholders.

Park’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2005 Annual Report to Shareholders. For interim reporting purposes, Park follows the same basic accounting policies and considers each interim period as an integral part of an annual period.

Effective January 1, 2006, Park adopted Financial Accounting Standards Board Statement No. 123R (revised 2004), “Share-Based Payment” (“SFAS 123R”) which amends SFAS 123, “Accounting for Stock-Based Compensation”, and supercedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. SFAS 123R permits public companies to adopt its requirements using one of two methods. The “modified prospective” method recognizes compensation for all stock options granted after the date of adoption and for all previously granted stock options that become vested after the date of adoption. The “modified retrospective” method includes the requirements of the “modified prospective” method described above, but also permits entities to restate prior period results based on the amounts previously recognized under SFAS 123 for purposes of pro-forma disclosures. Park has elected to adopt SFAS 123R using the “modified prospective” method and accordingly will not restate prior period results. See Note 6 for a more detailed description of Park’s adoption of SFAS 123R.

Park does not have any off-balance sheet derivative financial instruments such as interest-rate swap agreements.

Note 2 — Acquisition, Branch Sale and Intangible Assets

On January 3, 2005, Park acquired all of the stock of First Clermont Bank (“First Clermont”) of Milford, Ohio for $52,500,000 in an all cash transaction accounted for as a purchase. Immediately following Park’s stock acquisition, First Clermont merged with Park’s subsidiary, The Park National Bank. First Clermont is being operated as a separate division of The Park National Bank and is now operating under the name of The Park National Bank of Southwest Ohio & Northern Kentucky. The goodwill recognized as a result of this acquisition was $28,369,000. The fair value of the acquired assets of First Clermont was $185,372,000 and the fair value of the liabilities assumed was $161,241,000 at January 3, 2005.

On February 11, 2005, Park’s subsidiary, Century National Bank, sold its Roseville, Ohio branch office. The Roseville branch office was acquired in connection with the acquisition of First Federal Bancorp, Inc. (“First Federal”) on December 31, 2004. The Federal Reserve Board required that the Roseville branch office be sold as a condition of their approval of the merger transactions involving Park and First Federal. The deposits sold with the Roseville branch office totaled $12,419,000 and the loans sold with the branch office totaled $5,273,000. Century National Bank received a premium of $1,184,000 from the sale of the deposits.

The following table shows the activity in goodwill and core deposit intangibles during the first nine months of 2006.

Goodwill is evaluated on an annual basis for impairment and otherwise when circumstances warrant. Goodwill was evaluated for impairment during the first quarter of 2006, and no impairment charge was necessary.

Core deposit intangibles are being amortized to expense using the straight-line method over periods ranging from six to twelve years. Core deposit intangibles amortization expense was $637,000 for both the third quarter of 2006 and the third quarter of 2005 and was $1,911,000 for both the first nine months of 2006 and the first nine months of 2005.

Note 3 — Allowance for Loan Losses

The allowance for loan losses is that amount believed adequate to absorb probable credit losses in the loan portfolio based on management’s evaluation of various factors including overall growth in the loan portfolio, an analysis of individual loans, prior and current loss experience, and current economic conditions. A provision for loan losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors.

Commercial loans are individually risk graded. Where appropriate, reserves are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral and other sources of cash flow. Homogenous loans, such as consumer installment loans, residential mortgage loans and automobile leases are not individually risk graded. Reserves are established for each pool of loans based on historical loan loss experience, current economic conditions and loan delinquency.

The following table shows the activity in the allowance for loan losses for the three and nine months ended September 30, 2006 and 2005.

Note 4 — Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2006 and 2005.

Note 5 — Segment Information

The Corporation is a multi-bank holding company headquartered in Newark, Ohio. The operating segments for the Corporation are its financial institution subsidiaries. The Corporation’s financial institution subsidiaries are The Park National Bank (PNB), The Richland Trust Company (RTC), Century National Bank (CNB), The First-Knox National Bank of Mount Vernon (FKNB), United Bank, N.A. (UB), Second National Bank (SNB), The Security National Bank and Trust Co. (SEC), and The Citizens National Bank of Urbana (CIT).

The operating results of the Parent Company and Guardian Finance Company (GFC) in the “All Other” column are used to reconcile the segment totals to the consolidated income statements for the periods ended September 30, 2006 and 2005. The reconciling amounts for consolidated total assets for both of the periods ended September 30, 2006 and 2005 consist of the elimination of intersegment borrowings, and the assets of the Parent Company and GFC which are not eliminated.

Note 6 — Stock Option Plans

Effective January 1, 2006, Park adopted SFAS 123R using the “modified prospective” method and accordingly will not restate prior period results. SFAS 123R requires that compensation expense be recognized for all stock options granted after the date of adoption and for all previously granted stock options that become vested after the date of adoption. Prior to January 1, 2006, Park accounted for its stock option plans under the recognition and measurement principles of APB 25 and related interpretations. Under APB 25, no stock-based employee compensation cost was reflected in net income as all stock options granted under the Park stock option plans had an exercise price equal to the market value of the underlying common stock on the grant date.

Park did not grant any stock options during the first nine months of 2006. Additionally, no stock options became vested during the first nine months of 2006. The adoption of SFAS 123R on January 1, 2006 had no impact on Park’s net income for the first nine months of 2006.

The following table summarizes stock option activity during the first nine months of 2006.

All of the stock options outstanding at September 30, 2006 were exercisable. The aggregate intrinsic value of the outstanding stock options at September 30, 2006 was $2,683,000.

The intrinsic value of the stock options exercised during the third quarter of 2006 was $28,000 and $703,000 for the first nine months of 2006 compared to $66,000 for the third quarter of 2005 and $930,000 for the first nine months of 2005. The weighted average contractual remaining term was 2.6 years for the stock options outstanding at September 30, 2006.

Park granted 227,000 incentive stock options during the second quarter of 2005. The following table illustrates the effect on net income and earnings per share had Park applied fair value recognition to stock-based employee compensation in 2005.

The fair value was computed at the date of grant (in the second quarter of 2005) using a Black-Scholes option pricing model with the assumptions listed below.

Note 6 — Stock Option Plans — (Continued)

All of the common shares delivered upon exercise of incentive stock options granted under the Park National Corporation 2005 and 1995 Incentive Stock Option Plans are to be treasury shares. At September 30, 2006, incentive stock options (granted under both the 2005 Plan and the 1995 Plan) covering 679,044 common shares were outstanding. The remaining outstanding stock options at September 30, 2006 covering 13,896 common shares pertain to a stock option plan assumed by Park in the acquisition of Security Banc Corporation in 2001. At September 30, 2006, Park held 925,532 treasury shares that are allocated for the stock option plans (including the Security Plan). Management anticipates that very few, if any, additional shares of Park common stock will be repurchased within the next twelve months for the stock option plans.

Note 7 — Loans

The composition of the loan portfolio was as follows at the dates shown:

Note 8 — Investment Securities

The amortized cost and fair values of investment securities are shown in the following table. Management evaluates investment securities on a quarterly basis for other-than-temporary impairment. No impairment charges have been deemed necessary in 2006 and 2005. The unrealized losses are primarily the result of changes in interest rates and will not prohibit Park from receiving its contractual principal and interest payments.

Note 9 — Other Investment Securities

Other investment securities consist of stock investments in the Federal Home Loan Bank and the Federal Reserve Bank. These restricted stock investments are carried at their amortized costs.

Note 10 — Benefit Plans

Park has a noncontributory defined benefit pension plan covering substantially all of its employees. The plan provides benefits based on an employee’s years of service and compensation.

Park’s funding policy is to contribute annually an amount that can be deducted for federal income tax purposes using a different actuarial cost method and different assumptions from those used for financial reporting purposes. A pension plan contribution of $9,117,417 was paid during the first quarter of 2006 and a pension plan contribution of $9,688,096 was paid during the first quarter of 2005.

The following table shows the components of net periodic benefit expense.

Note 11 — Pending Acquisitions

Park announced the signing of two separate definitive agreements in the third quarter of 2006. On August 14, 2006, Park entered into a definitive agreement and plan of merger (the “Anderson Merger Agreement”) providing for the acquisition of Anderson Bank Company (“Anderson”) headquartered in Anderson Township near Cincinnati, Ohio, through the merger of Anderson with and into Park’s subsidiary The Park National Bank (the “Anderson Merger Transaction”). Anderson had approximately $70 million in total assets as of June 30, 2006. Under the terms of the Anderson Merger Agreement, Park will pay approximately $9.05 million in cash and 86,137 common shares of Park to the shareholders of Anderson in the Anderson Merger Transaction. Anderson shareholders will be entitled to elect to receive, in exchange for each Anderson common share they own, Park common shares, cash or a combination of Park common shares and cash.

The exact number of Park common shares and exact amount of cash to be received in exchange for each Anderson common share will be calculated using formulas set forth in the Anderson Merger Agreement. The elections of Anderson shareholders will be subject to allocation procedures to ensure that the aggregate consideration received by the Anderson shareholders in the Anderson Merger Transaction consists of the number of Park common shares and the amount of cash described above.

As of August 14, 2006, Anderson had 533,550 common shares outstanding and 16,250 Anderson common shares were subject to outstanding stock options. The Anderson Merger Transaction is anticipated to close in the fourth quarter of 2006, and is subject to the satisfaction of customary conditions in the Anderson Merger Agreement and the approval of appropriate regulatory authorities and of the shareholders of Anderson. Upon completion of the Anderson Merger Transaction, the two offices of Anderson will become part of the division of The Park National Bank known as The Park National Bank of Southwest Ohio & Northern Kentucky.

On September 14, 2006, Park entered into a definitive agreement and plan of merger (the “Vision Merger Agreement”) with Vision Bancshares, Inc. (“Vision”) providing for the merger of Vision into Park (the “Vision Merger Transaction”). Vision had approximately $696 million in total assets as of June 30, 2006. Under the terms of the Vision Merger Agreement, the shareholders of Vision will receive either $25.00 in cash or .2475 Park common shares for each share of Vision common stock. The Vision shareholders will have the option of receiving cash or Park common shares for their shares of Vision common stock (or any combination thereof), subject to the election and allocation procedures in the Vision Merger Agreement. However, Park has reserved the right to allocate the Vision shareholder elections on a pro-rata basis so that 50 percent of the total Vision shares of common stock outstanding at the time of the Vision Merger Transaction are converted into the right to receive cash and 50 percent are converted into the right to receive Park common shares. As of September 14, 2006, Vision had 6,066,624 shares of common stock outstanding and outstanding stock options covering an aggregate of 884,834 shares of common stock with a weighted average exercise price of $8.09 per share. Each stock option (that is not exercised) granted under one of Vision’s equity-based compensation plans will be cancelled and extinguished and converted into the right to receive an amount of cash equal to the product of (a) $25.00 minus the exercise price of the stock option, multiplied by (b) the number of Vision shares of common stock subject to the unexercised portion of the stock option. The Vision Merger Transaction is expected to close during the first quarter of 2007, and is subject to the satisfaction of customary conditions in the Vision Merger Agreement and the approval of appropriate regulatory authorities and the shareholders of Vision. Upon completion of the Vision Merger Transaction, Vision’s two community bank subsidiaries – Vision Bank, an Alabama state banking corporation headquartered in Gulf Shores, Alabama and Vision Bank, a Florida state banking corporation headquartered in Panama City, Florida – will become wholly-owned subsidiaries of Park.

Management does not expect that the parent company of Park National Corporation will need to secure any outside borrowings to pay for these acquisitions. Funding for the acquisitions is available from Park’s affiliate banks.

Note 12 — Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)”. SFAS No. 158 requires employers to fully recognize the obligations associated with single-employer defined benefit pension, retiree healthcare and other postretirement plans in their financial statements. SFAS No. 158 requires an employer to (a) recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, (b) measure a plan’s assets and its obligations that determine its funded status at the end of the employer’s fiscal year and (c) recognize changes in the funded status of a defined postretirement plan in the year in which the changes occur. Those changes will be reported in the comprehensive income of a business entity. The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the fiscal year ending after December 15, 2006, for publicly traded companies like Park. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. Management has not determined the impact that SFAS No. 158 will have on Park’s statement of financial position at December 31, 2006 or on Park’s comprehensive income for the twelve months ended December 31, 2006. If Park would have been required to implement SFAS No. 158 at December 31, 2005, the impact on Park's financial statements would have been to decrease assets by $6.6 million, decrease stockholders' equity by $6.6 million and decrease comprehensive income by $6.6 million.

In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Management does not expect that the adoption of this standard will have a material impact on Park’s financial statements.

In July 2006, the Emerging Issues Task Force (“EITF”) of FASB issued a draft abstract for EITF Issue No. 06-04, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangement”. This draft abstract from EITF reached a consensus that for an endorsement split-dollar life insurance arrangement within the scope of this Issue, an employer should recognize a liability for future benefits in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”. The Task Force concluded that a liability for the benefit obligation under SFAS No. 106 has not been settled through the purchase of an endorsement type life insurance policy. In September 2006, FASB agreed to ratify the consensus reached in EITF Issue No. 06-04. This new accounting standard will be effective for fiscal years beginning after December 15, 2007. At September 30, 2006, Park and its subsidiary banks owned $112 million of bank owned life insurance. These life insurance policies are generally subject to endorsement split-dollar life insurance arrangements. These arrangements were designed to provide a pre-and postretirement benefit for senior officers and directors of Park and its subsidiary banks. The management of Park believes that the adoption of EITF Issue No. 06-4 may have a material impact on Park’s financial statements. Park’s management will closely monitor the accounting guidance from FASB on computing the postretirement benefit liability. Park may amend its split-dollar life insurance arrangements to eliminate some of the postretirement benefits.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108. This SAB expresses the SEC’s views regarding the process of quantifying financial statement misstatements. SAB No. 108 provides guidance on the consideration of the effects of prior year misstatements for the purpose of a materiality assessment. SAB No. 108 is effective for fiscal years ending after November 15, 2006. Management has not determined if the adoption of SAB No. 108 will have an impact on Park’s financial statements at December 31, 2006.

In July 2006, the FASB issued Financial Accounting Standards Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises’ financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”.

FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. Management does not expect that the adoption of this standard will have a material impact on Park’s financial statements.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets-an amendment of SFAS No. 140”, which changes the accounting for all loan servicing rights which are recorded as the result of selling a loan where the seller undertakes an obligation to service the loan, usually in exchange for compensation. SFAS No. 156 amends current accounting guidance by permitting the servicing right to be recorded initially at fair value and also permits the subsequent reporting of these assets at fair value. SFAS No. 156 is effective beginning January 1, 2007. Management does not expect that the adoption of this standard will have a material impact on Park’s financial statements.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”, an amendment of SFAS Nos. 133 and 140. This Statement changes the accounting for various derivatives and securitized financial assets. This Statement will be effective for all financial instruments acquired, issued, or subject to a remeasurement (new basis) event occurring after January 1, 2007. Management does not expect that the adoption of this standard will have a material impact on Park’s financial statements.

Management’s discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance. The forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation, Park’s ability to execute its business plan; the impact of competition and changes in the competitive environment; changes in economic conditions in the market area served by Park and its subsidiaries; changes in general economic and financial market conditions; changes in banking regulations or other regulatory or legislative requirements affecting the business of Park and its subsidiaries; changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies; fluctuations in interest rates; demand for loans in the market area served by Park and its subsidiaries; the ability to obtain regulatory approvals and Anderson shareholder approval of the Anderson Merger Transaction on the proposed terms and schedule; the ability to obtain regulatory approvals and Vision shareholder approval of the Vision Merger Transaction on the proposed terms and schedule; the ability of Park and its subsidiaries to manage the growth from the pending Anderson Merger Transaction and the pending Vision Merger Transaction; the possibility that costs or difficulties related to the integration of the respective businesses of Anderson and Vision with the businesses of Park and its subsidiaries will be greater than expected or that the cost savings and any revenue synergies of the combined organizations following the Anderson Merger Transaction and the Vision Merger Transaction, respectively, may be lower or take longer to realize than expected; and disruptions from the Anderson Merger Transaction and/or the Vision Merger Transaction may make it more difficult to maintain relationships with customers, employees or suppliers. Additional detailed information concerning a number of important factors which could cause actual results to differ materially from the forward-looking statements contained in management’s discussion and analysis is available in Park’s filings with the Securities and Exchange Commission, under the Securities Exchange Act of 1934, including the disclosure under the heading “Item 1A. Risk Factors” of Part I of Park’s 2005 Form 10-K. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date hereof. Park does not undertake any obligation to publicly update any forward-looking statements except to the extent required by law.

Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2005 Annual Report to Shareholders lists significant accounting policies used in the development and presentation of its financial statements. The accounting and reporting policies of Park conform with U.S. generally accepted accounting principles and general practices within the financial services industry. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.