Park National Corp - 10-Q quarterly report FY

 

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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.

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

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14,588,263 Common shares, no par value per share, outstanding at April 30, 2007.

 

 

PARK NATIONAL CORPORATION

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PARK NATIONAL CORPORATION
Consolidated Condensed Statements of Income (Unaudited)
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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 quarter ended March 31, 2007 are not necessarily indicative of the operating results to be anticipated for the fiscal year ending December 31, 2007.

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, 2006 from Park’s 2006 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 2006 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.

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

On March 9, 2007, Park acquired all of the stock and outstanding stock options of Vision Bancshares, Inc. (“Vision”) for $87.8 million in cash and 792,937 shares of Park common stock valued at $83.3 million or $105.00 per share. The goodwill recognized as a result of this acquisition was $108.8 million. The fair value of the acquired assets of Vision was $686.7 million and the fair value of the liabilities assumed was $624.4 million at March 9, 2007.

Vision operated two bank subsidiaries (both named Vision Bank) which became bank subsidiaries of Park on March 9, 2007. One bank is headquartered in Gulf Shores, Alabama and the other in Panama City, Florida. These banks operate fifteen branch locations in the Gulf Coast communities in Alabama and in the Florida panhandle. The markets that the two Vision Banks operate in are expected to grow much faster than many of the non-metro markets in which Park’s subsidiary banks operate in Ohio. Management expects that the acquisition of the two Vision Banks will improve the future growth rate for Park’s loans and deposits.

The following table shows the activity in goodwill and core deposit intangibles during the first quarter of 2007.

The core deposit intangibles are being amortized to expense principally on the straight-line method, over periods ranging from six to ten years. The amortization period for the Vision core deposit intangibles is six years. One month of core deposit amortization expense of $176,000 was recognized from the Vision acquisition during the quarter. Management expects that the core deposit amortization expense will be $1.04 million for the second and third quarter of 2007 and $975,000 for the fourth quarter of 2007.

Core deposit amortization expense is projected to be as follows for each of the following years:

Goodwill is evaluated on an annual basis for impairment and otherwise when circumstances warrant. Goodwill was evaluated during the first quarter of 2007, and no impairment charge was necessary.

The allowance for loan losses is that amount believed adequate to absorb probable incurred 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 months ended March 31, 2007 and 2006.

The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2007 and 2006.

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), The Citizens National Bank of Urbana (CIT), Vision Bank (Alabama) (VAL) and Vision Bank (Florida) (VFL).

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 March 31, 2007 and 2006. The reconciling amounts for consolidated total assets for both of the periods ended March 31, 2007 and 2006 consist of the elimination of intersegment borrowings, and the assets of the Parent Company and GFC which are not eliminated.

Park did not grant any stock options during the first quarter of 2007 or the first quarter of 2006. Additionally, no stock options became vested during the first quarter of 2007 or the first quarter of 2006.

The following table summarizes stock option activity during the first quarter of 2007.

All of the stock options outstanding at March 31, 2007 were exercisable. The aggregate intrinsic value of the outstanding stock options at March 31, 2007 was $1,200,000.

The intrinsic value of the stock options exercised during the first quarter of 2007 was $47,000 and the intrinsic value of the stock options exercised during the first quarter of 2006 was $400,000. The weighted average contractual remaining term was 1.9 years for the stock options outstanding at March 31, 2007.

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 March 31, 2007, incentive stock options (granted under both the 2005 Plan and 1995 Plan) covering 657,403 common shares were outstanding. The remaining outstanding stock options at March 31, 2007 of 12,007 pertain to a stock option plan assumed by Park in the acquisition of Security Banc Corporation in 2001. At March 31, 2007, Park held 918,871 treasury shares that are allocated for the stock option plans (including the Security Plan). Management anticipates that few, if any, additional shares of Park common stock will be repurchased within the next twelve months for the stock option plans.

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

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 2007 or 2006. 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.

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.

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. Management does not expect to make a pension plan contribution in 2007. A pension plan contribution of $9,117,417 was paid during the first quarter of 2006.

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

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of Statement of Financial Standard (“SFAS”) No. 109 (FIN 48),” which prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. The benefit recognized for a tax position that meets the more-likely-than-not criteria is measured based on the largest benefit that is more than 50 percent likely to be realized, taking into consideration the amounts and probabilities of the outcome upon settlement. FIN 48 also provides guidance on disclosures and other issues. Effective January 1, 2007, Park adopted the provisions of FIN 48 and there was no material effect on the financial statements. As a result, there was no cumulative effect related to adopting FIN 48. As of January 1, 2007, Park had provided a liability of $789,000 for unrecognized tax benefits related to various federal and state income tax matters. Park recognizes interest and penalties through the income tax provision. The total amount of interest and penalties on the date of adoption was $76,000. Management does not expect the total amount of unrecognized tax benefits to significantly increase in the next three quarters. Park is no longer subject to examination by federal taxing authorities for the year 2002 and the years prior.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 159 gives entities the option to measure eligible financial assets and financial liabilities at fair value on an instrument by instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability. Subsequent changes in fair value must be reported in earnings. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Management does not expect that the adoption of this standard on January 1, 2008 will have a material impact on Park’s financial statements.

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 on January 1, 2008 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 Arrangements”. 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 March 31, 2007, Park and its subsidiary banks owned $117 million of bank owned life insurance policies. 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. Park’s management has not completed its evaluation of the impact of the adoption of EITF Issue No. 06-4 on Park’s financial statements. Without an adjustment to the postretirement benefits provided by the endorsement split-dollar life insurance agreements, Park’s management has concluded that the adoption of EITF Issue No. 06-4 may 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. Risk and uncertainties that could cause actual results to differ materially include without limitation, Park’s ability to execute its business plan, Park’s ability to successfully integrate acquisitions into Park’s operations, Park’s ability to achieve the anticipated cost savings and revenue synergies from acquisitions, changes in general economic and financial market conditions, changes in interest rates, changes in the competitive environment, changes in banking regulations or other regulatory or legislative requirements affecting the respective businesses 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, demand for loans in the respective market areas served by Park and its subsidiaries, and other risk factors relating to the banking industry as detailed from time to time in Park’s reports filed with the Securities and Exchange Commission including those described in “Item 1A. Risk Factors” of Park’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 and in “Item 1A. Risk Factors” of Part II of this Quarterly Report on Form 10-Q. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date hereof. Park does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions that may be made to update any forward-looking statement to reflect the events or circumstances after the date on which the forward-looking statement is made, or reflect the occurrence of unanticipated events, except to the extent required by law.

Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2006 Annual Report to Shareholders lists significant accounting policies used in the development and presentation of Park’s 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.

Park considers that the determination of the allowance for loan losses involves a higher degree of judgement and complexity than its other significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb probable incurred credit losses in the loan portfolio. Management’s determination of the adequacy of the allowance for loan losses is based on periodic evaluations of the loan portfolio and of current economic conditions. However, this evaluation is inherently subjective as it requires material estimates, including expected default probabilities, loss given default, the amounts and timing of expected future cash flows on impaired loans and estimated losses on consumer loans and residential mortgage loans based on historical loss experience and the current economic conditions. All of those factors may be susceptible to significant change. To the extent that actual results differ from management estimates, additional loan loss provisions may be required that would adversely impact earnings for future periods.

Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgement than most other significant accounting policies. Statement of Financial Accounting Standards (“SFAS”) No. 142, “Accounting for Goodwill and Other Intangible Assets” establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill. At March 31, 2007, Park had core deposit intangibles of $17.7 million subject to amortization and $181.1 million of goodwill, which was not subject to periodic amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Park’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Park’s banking subsidiaries to provide quality, cost effective banking services in a competitive marketplace. The goodwill value of $181.1 million is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost-effective services over sustained periods can lead to impairment of goodwill that could adversely impact earnings in future periods. SFAS No. 142 requires an annual evaluation of goodwill for impairment. This evaluation was performed during the first quarter of 2007 and no impairment charge was deemed necessary.

Park acquired Vision on March 9, 2007. (See Note 2 of the Notes to Consolidated Financial Statements for information concerning this acquisition.) The following table displays (for selected balance sheet items at March 31, 2007) the consolidated balance sheet item, the total for the balance sheet item for the two Vision Banks and the total for the balance sheet item without the two Vision Banks.

The following table compares the income statement for the first quarter of 2007 with the income statement for the first quarter of 2006. The 2007 income statement has been adjusted to display the impact of the two Vision Banks from March 9, 2007 through March 31, 2007.

Net income decreased by $2.7 million or 11.5% to $21.1 million for the three months ended March 31, 2007 compared to $23.8 million in net income for the first quarter of 2006. The annualized, net income to average asset ratio (ROA) was 1.51% for the first quarter of 2007 compared to 1.78% for the first quarter of 2006. The annualized, net income to average equity ratio (ROE) was 14.58% for the first three months of 2007 compared to 17.65% for the same period in 2006.

Diluted earnings per share decreased by 11.8% to $1.49 for the first quarter of 2007 compared to $1.69 for the first quarter of 2006.

For the first quarter of 2007 compared to the first quarter of 2006, income before income taxes benefited from an increase in net interest income of $1.5 million and an increase in total other income of $781,000. However, the provision for loan losses increased by $2.2 million and total other expense increased by $4.3 million. The net result was a decrease in income before income taxes of $4.2 million in 2007 compared to 2006. Income tax expense decreased by $1.5 million in 2007 compared to 2006.

Park’s principal source of earnings is net interest income, the difference between total interest income and total interest expense. Net interest income increased by $1.5 million or 2.8% to $54.9 million for the first quarter of 2007 compared to $53.4 million for the first quarter of 2006. The following table compares the average balance and tax equivalent yield/cost for interest earning assets and interest bearing liabilities for the first quarter of 2007 with the same quarter in 2006.

Average interest earning assets increased by $211 million or 4.2% to $5,216 million for the three months ended March 31, 2007 compared to the same quarter in 2006.

Average loan balances increased by $320 million or 9.7% to $3,631 million in the first quarter of 2007 compared to the same period in 2006. The following table shows the growth in total loans outstanding for each of the past four quarters.

For the past four quarters, total loans outstanding increased by $122 million or 3.7% (exclusive of the loans acquired from the acquisitions of banks).

The average yield on the loan portfolio was 7.97% for the first quarter of 2007 compared to 7.35% for the first quarter of 2006. Management expects that the average yield on the loan portfolio will be approximately 8.10% during the second quarter of 2007 and will increase slightly during the second half of the year. This projection assumes that the federal funds rate will remain at 5.25% for the remainder of 2007.

Average investment securities, including money market instruments, were $1,585 million for the first quarter of 2007 compared to $1,693 million for the first quarter of 2006. The following table compares the average balance of total investment securities, including money market instruments, for the past five quarters. The table also includes the average federal funds rate and average five year U.S. Treasury rate for the past five quarters.