SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ________________________
Commission File Number 1-13006
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Park National Corporation
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(Exact name of registrant as specified in its charter)
Ohio 31-1179518
------------------------------ -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
50 North Third Street, Newark, Ohio 43055
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(Address of principal executive offices) (Zip Code)
(740) 349-8451
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
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 [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes [ X ] No [ ]
13,818,013 Common shares, no par value per share, outstanding at October 29,
2002.
Page 1 of 24
PARK NATIONAL CORPORATION
CONTENTS
Page
----
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3-12
Consolidated Condensed Balance Sheets as of September 30,
2002 and and December 31, 2001 (unaudited) 3
Consolidated Condensed Statements of Income for the
Three Months and Nine Months ended
September 30, 2002 and 2001 (unaudited) 4-5
Consolidated Condensed Statements of Changes in Stockholders'
Equity for the Nine Months ended September 30, 2002 and 2001
(unaudited) 6
Consolidated Condensed Statements of Cash Flows for the
Nine Months ended September 30, 2002 and 2001 (unaudited) 7-8
Notes to Consolidated Condensed Financial Statements 9-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION 20
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
CERTIFICATIONS 23-24
-2-
PARK NATIONAL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(dollars in thousands, except per share data)
September 30, December 31,
2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 161,516 $ 169,143
- ------------------------------------------------------------------------------------------------------------------------------
Federal funds sold 43,500 --
- ------------------------------------------------------------------------------------------------------------------------------
Interest bearing deposits 50 50
- ------------------------------------------------------------------------------------------------------------------------------
Securities available-for-sale, at fair value
(amortized cost of $1,316,635 and $1,423,268
at September 30, 2002 and December 31, 2001) 1,352,888 1,436,661
- ------------------------------------------------------------------------------------------------------------------------------
Securities held-to-maturity, at amortized cost
(fair value approximates $27,300 and $27,382
at September 30, 2002 and December 31, 2001) 26,133 27,518
- ------------------------------------------------------------------------------------------------------------------------------
Loans (net of unearned interest) 2,729,260 2,795,808
- ------------------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses 63,653 59,959
- ------------------------------------------------------------------------------------------------------------------------------
Net loans 2,665,607 2,735,849
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Bank premises and equipment, net 38,926 39,910
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Other assets 152,102 160,384
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Total assets $ 4,440,722 $ 4,569,515
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Liabilities and Stockholders' Equity:
Deposits:
Noninterest bearing $ 590,386 $ 515,333
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Interest bearing 2,901,925 2,798,870
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Total deposits 3,492,311 3,314,203
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Short-term borrowings 179,277 318,311
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Long-term debt 202,259 392,540
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Other liabilities 61,316 76,115
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Total liabilities 3,935,163 4,101,169
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Stockholders' Equity:
Common stock (No par value; 20,000,000 shares
authorized; 14,540,480 shares issued in 2002
and 14,540,498 issued in 2001) 105,770 105,771
- ------------------------------------------------------------------------------------------------------------------------------
Retained earnings 437,675 403,870
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Treasury stock (708,545 shares in 2002
and 599,697 shares in 2001) (61,462) (50,000)
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income,
net of taxes 23,576 8,705
- ------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 505,559 468,346
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 4,440,722 $ 4,569,515
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
PARK NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 51,596 $ 61,189 $ 156,294 $ 189,853
- ------------------------------------------------------------------------------------------------------------------------------
Interest on:
Obligations of U.S. Government,
its agencies and other securities 18,976 16,694 58,530 44,112
- ------------------------------------------------------------------------------------------------------------------------------
Obligations of states
and political subdivisions 1,719 1,937 5,277 5,934
- ------------------------------------------------------------------------------------------------------------------------------
Other interest income 111 82 274 698
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income 72,402 79,902 220,375 240,597
- ------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits:
Demand and savings deposits 3,275 5,739 9,728 18,323
- ------------------------------------------------------------------------------------------------------------------------------
Time deposits 13,829 19,943 43,363 64,215
- ------------------------------------------------------------------------------------------------------------------------------
Interest on borrowings:
Short-term borrowings 760 1,788 2,761 6,969
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Long-term debt 2,608 3,854 8,447 10,179
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense 20,472 31,324 64,299 99,686
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income 51,930 48,578 156,076 140,911
- ------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 3,194 2,957 11,357 7,608
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 48,736 45,621 144,719 133,303
- ------------------------------------------------------------------------------------------------------------------------------
Other income 12,229 11,145 35,198 32,660
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Gain (loss) on sale of securities -- (8) (210) 134
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Continued
4
PARK NATIONAL CORPORATION
Consolidated Condensed Statements of Income (Unaudited)
(Continued)
(dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------------
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
Other expense:
Salaries and employee benefits $ 16,039 $ 14,862 $ 47,982 $ 43,579
- -------------------------------------------------------------------------------------------------------------------------------
Occupancy expense 1,503 1,273 4,531 4,277
- -------------------------------------------------------------------------------------------------------------------------------
Furniture and equipment expense 1,493 1,557 4,499 4,440
- -------------------------------------------------------------------------------------------------------------------------------
Other expense 10,272 10,031 29,851 29,148
- -------------------------------------------------------------------------------------------------------------------------------
Total other expense 29,307 27,723 86,863 81,444
- -------------------------------------------------------------------------------------------------------------------------------
Income before federal income taxes 31,658 29,035 92,844 84,653
- -------------------------------------------------------------------------------------------------------------------------------
Federal income taxes 9,585 8,683 27,351 25,028
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 22,073 $ 20,352 $ 65,493 $ 59,625
===============================================================================================================================
PER SHARE:
Net income:
Basic $ 1.59 $ 1.46 $ 4.71 $ 4.25
===============================================================================================================================
Diluted $ 1.59 $ 1.45 $ 4.70 $ 4.24
===============================================================================================================================
Weighted average
Basic 13,847,583 14,001,286 13,901,345 14,041,836
===============================================================================================================================
Diluted 13,871,544 14,043,030 13,934,287 14,071,639
===============================================================================================================================
Cash dividends declared $ 0.76 $ 0.71 $ 2.28 $ 2.13
===============================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
PARK NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED) (dollars in thousands, except per share data)
Accumulated
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 Treasury Other
Common Retained Stock Comprehensive Comprehensive
Stock Earnings at Cost Income Income
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 $ 119,229 $ 365,975 ($ 46,583) $ 4,028
- ---------------------------------------------------------------------------------------------------------------------
Net Income 59,625 $ 59,625
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Accumulated other comprehensive income,
net of income taxes of $10,996 20,421 20,421
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Total comprehensive income $ 80,046
- --------------------------------------------------------------------------------------------------------------------- ===========
Cash dividends on common stock:
Park at $2.13 per share (27,507)
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Cash dividends paid by Security Banc Corporation
prior to merger (2,355)
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Retire treasury stock from Security Banc Corporation
merger - 259,280 shares (13,361) 13,361
- ---------------------------------------------------------------------------------------------------------------------
Cash payment for fractional shares in Security Banc Corporation
merger - 1,232 shares (96)
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Treasury stock purchased - 165,577 shares (14,539)
- ---------------------------------------------------------------------------------------------------------------------
Treasury stock reissued for stock options - 18,773 shares 1,034
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2001 $ 105,772 $ 395,738 ($ 46,727) $ 24,449
=====================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 $ 105,771 $ 403,870 ($ 50,000) $ 8,705
- ---------------------------------------------------------------------------------------------------------------------
Net Income $ 65,493 $ 65,493
- --------------------------------------------------------------------------------------------------------------------- -----------
Accumulated other comprehensive income,
net of income taxes of $8,007 14,871 14,871
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 80,364
- --------------------------------------------------------------------------------------------------------------------- ===========
Cash dividends on common stock:
Park at $2.28 per share (31,688)
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Cash paid for fractional shares - 18 shares (1)
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Treasury stock purchased - 153,404 shares (14,200)
- ---------------------------------------------------------------------------------------------------------------------
Treasury stock reissued for stock options - 44,556 shares 2,738
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2002 $ 105,770 $ 437,675 ($ 61,462) $ 23,576
=====================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
PARK NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Nine Months Ended
September 30,
--------------------------------
2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 65,493 $ 59,625
- -------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 4,049 5,119
- -------------------------------------------------------------------------------------------------------------------------
Amortization of loan fees and accretion of securities (6,574) (3,050)
- -------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 11,357 7,608
- -------------------------------------------------------------------------------------------------------------------------
Amortization of the excess of cost over
net assets of banks purchased 3,444 2,967
- -------------------------------------------------------------------------------------------------------------------------
Realized investment security losses (gains) 210 (134)
- -------------------------------------------------------------------------------------------------------------------------
Changes in assets and liabilities:
Decrease (increase) in other assets 892 (11,290)
- -------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in other liabilities (8,244) 12,401
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided from operating activities 70,627 73,246
------------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from sales of:
Available-for-sale securities 99,673 96,942
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Proceeds from maturity of:
Available-for-sale securities 775,311 259,946
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Held-to-maturity securities 1,436 821
- -------------------------------------------------------------------------------------------------------------------------
Purchases of:
Available-for-sale securities (764,794) (688,385)
- -------------------------------------------------------------------------------------------------------------------------
Net decrease in interest bearing deposits with other banks 0 1,088
- -------------------------------------------------------------------------------------------------------------------------
Net decrease in loans 61,641 89,026
- -------------------------------------------------------------------------------------------------------------------------
Purchases of premises and equipment, net (3,065) (5,342)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided from (used by) investing activities 170,202 (245,904)
------------------------------------------------------------------------------------------------------
Continued
7
PARK NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
(dollars in thousands)
Nine Months Ended
September 30,
--------------------------------------
2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Financing activities:
Net increase in deposits $178,108 $66,697
- --------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in short-term borrowings (139,034) 16,432
- --------------------------------------------------------------------------------------------------------------------------------
Cash paid for fractional shares (1) (96)
- --------------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock, net (11,462) (13,505)
- --------------------------------------------------------------------------------------------------------------------------------
Long-term debt issued 0 280,000
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Repayment of long-term debt (190,281) (172,540)
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Cash dividends paid (42,286) (37,532)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash (used by) provided from financing activities (204,956) 139,456
-------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 35,873 (33,202)
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Cash and cash equivalents at beginning of year 169,143 169,577
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $205,016 $136,375
=============================================================================================================
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $66,762 $101,925
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Income taxes $27,850 $16,463
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8
PARK NATIONAL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
For the Three and Nine Month Periods Ended September 30, 2002 and 2001.
Note 1 - BASIS OF PRESENTATION
The consolidated condensed 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, 2002 are not necessarily indicative of the operating results to be
anticipated for the fiscal year ended December 31, 2002.
The accompanying unaudited consolidated condensed 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 balance sheets, condensed statements of income, condensed statements of
changes in stockholders' equity and statements of cash flows in conformity with
accounting principles generally accepted in the United States. These financial
statements should be read in conjunction with the financial statements included
in the Annual Report on Form 10-K for the year ended December 31, 2001. Certain
amounts in 2001 have been reclassified to conform to the financial statement
presentation used for 2002.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date, but does not include all the information and
footnotes required by accounting principles generally accepted in the United
States.
Park does not have any off-balance sheet derivative financial instruments such
as interest-rate swap agreements.
Note 2 - ACQUISITIONS
On March 23, 2001, Park merged with Security Banc Corporation, a $995 million
bank holding company headquartered in Springfield, Ohio in a transaction
accounted for as a pooling-of-interests. Park issued approximately 3,350,000
shares of common stock to the stockholders of Security Banc Corporation based
upon an exchange ratio of .284436 shares of Park common stock for each
outstanding share of Security Banc Corporation common stock. The three financial
institution subsidiaries of Security Banc Corporation (The Security National
Bank and Trust Co., The Citizens National Bank of Urbana, and The Third Savings
and Loan Company) are being operated as two separate banking subsidiaries by
Park. The Third Savings and Loan Company is now being operated as a separate
division of The Security National Bank and Trust Co. under the name of Unity
National and The Citizens National Bank of Urbana is also being operated as a
separate banking subsidiary of Park.
On December 13, 2001, Security National Bank and Trust Company acquired a branch
office in Jamestown, Ohio. In addition to the fixed assets, the purchase
included $15 million in deposits and $3 million in loans. The excess of the cost
over net tangible assets purchased was $1 million and is being amortized using
the straight-line method over seven years.
-9-
Note 3 - INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new standards, goodwill and indefinite lived
intangible assets will no longer be amortized but will be subject to annual
impairment tests in accordance with the statements. Other intangible assets,
such as core deposit intangibles, will continue to be amortized over their
useful lives.
Park had approximately $7.5 million of goodwill on its balance sheet at December
31, 2001. This goodwill was evaluated for impairment during the first quarter of
2002 and a determination made that the goodwill was not impaired and that the
book value of the goodwill would continue to be shown as $7.5 million. No
amortization expense is being recorded on the goodwill in 2002 compared to
amortization expense of $94,000 for the third quarter of 2001, $282,000 for the
first nine months of 2001 and $375,000 for the year 2001. Application of the
non-amortization provisions of the new standards increased net income by $94,000
or $.01 per share in the third quarter of 2002, and $282,000 or $.02 for the
first nine months of 2002 and is expected to increase net income by $375,000 or
$.03 per share for the entire year.
Note 4 - ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is that amount believed adequate to absorb
estimated 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.
- ------------------------------------------------------ ----------------------------------------------------------------
(In Thousands)
- ------------------------------------------------------ ----------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
- ------------------------------------------------------ -----------------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------ ----------------------------------------------------------------
Beginning of Period $ 63,030 $ 59,827 $ 59,959 $ 57,473
- ------------------------------------------------------ ----------------------------------------------------------------
Provision for loan losses 3,194 2,957 11,357 7,608
- ------------------------------------------------------ -----------------------------------------------------------------
Losses charged to the reserve (3,998) (3,787) (12,704) (10,434)
- ------------------------------------------------------ -----------------------------------------------------------------
Recoveries 1,427 1,382 5,041 5,732
- ------------------------------------------------------ -----------------------------------------------------------------
- ------------------------------------------------------ -----------------------------------------------------------------
End of Period $ 63,653 $ 60,379 $ 63,653 $ 60,379
- ------------------------------------------------------ =================================================================
-10-
Note 5- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the three and nine-month periods ended September 30, 2002 and 2001.
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
- ---------------------------------------------------------------------- ----------- ----------- ----------- -----------
Numerator:
- ---------------------------------------------------------------------- ----------- ----------- ----------- -----------
Net Income $ 22,073 $ 20,352 $ 65,493 $ 59,625
- ---------------------------------------------------------------------- ----------- ----------- ----------- -----------
- ---------------------------------------------------------------------- ----------- ----------- ----------- -----------
Denominator:
- ---------------------------------------------------------------------- ----------- ----------- ----------- -----------
Denominator for basic earnings per share (weighted-average
shares) 13,847,583 14,001,286 13,901,345 14,041,836
- ---------------------------------------------------------------------- ----------- ----------- ----------- -----------
- ---------------------------------------------------------------------- ----------- ----------- ----------- -----------
Effect of dilutive securities 23,961 41,744 32,942 29,803
- ---------------------------------------------------------------------- ----------- ----------- ----------- -----------
- ---------------------------------------------------------------------- ----------- ----------- ----------- -----------
Denominator for diluted earnings per share (adjusted
weighted-average shares & assumed conversions)
13,871,544 14,043,030 13,934,287 14,071,639
- ---------------------------------------------------------------------- ----------- ----------- ----------- -----------
- ---------------------------------------------------------------------- ----------- ----------- ----------- -----------
Earnings per share:
- ---------------------------------------------------------------------- ----------- ----------- ----------- -----------
Basic earnings per share $ 1.59 $ 1.46 $ 4.71 $ 4.25
- ---------------------------------------------------------------------- ----------- ----------- ----------- -----------
Diluted earnings per share $ 1.59 $ 1.45 $ 4.70 $ 4.24
- ---------------------------------------------------------------------- ----------- ----------- ----------- -----------
Note 6 - 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).
- ----------------------------------------------------------------------------------------------------------------------------
Operating Results for the Three Months Ended September 30, 2002 (In Thousands)
- ----------------------------------------------------------------------------------------------------------------------------
PNB RTC CNB FKNB UB SNB SEC
- ------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest
Income $ 15,479 $ 5,553 $ 4,851 $ 7,832 $ 2,257 $ 3,489 $ 8,647
- ------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
Provision for
Loan Losses 1,095 360 240 624 90 150 420
- ------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
Other Income
5,260 932 1,309 1,450 442 509 1,860
- ------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
Other Expense
8,751 3,232 2,659 3,687 1,433 1,845 4,903
- ------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Income $ 7,299 $ 1,912 $ 2,168 $ 3,411 $ 798 $ 1,423 $ 3,497
- ------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances at September 30, 2002
Assets $1,411,458 $ 468,923 $ 436,623 $ 666,570 $ 196,863 $ 330,849 $ 849,815
- ------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
- ------------------------------------------------------------------------------
Operating Results for the Three Months Ended September 30, 2002 (In Thousands)
- ------------------------------------------------------------------------------
CIT All Other Total
- ------------------------------ ---------- ---------- ----------
Net Interest
Income $ 1,717 $ 2,105 $ 51,930
- ------------------------------ ---------- ---------- ----------
Provision for
Loan Losses 90 125 3,194
- ------------------------------ ---------- ---------- ----------
Other Income
359 108 12,229
- ------------------------------ ---------- ---------- ----------
Other Expense
1,228 1,569 29,307
- ------------------------------ ---------- ---------- ----------
Net Income $ 516 $ 1,049 $ 22,073
- ------------------------------ ---------- ---------- ----------
Balances at September 30, 2002
Assets $ 170,194 $ (90,573) $4,440,722
- ------------------------------ ---------- ---------- ----------
-11-
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Results for the Three Months Ended September 30, 2001 (In Thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
PNB RTC CNB FKNB UB SNB SEC
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 15,084 $ 5,192 $ 4,727 $ 7,256 $ 1,926 $ 2,983
- -----------------------------------------------------------------------------------------------------------------------------------
Provision for
Loan Losses 1,095 360 210 504 120 150
- -----------------------------------------------------------------------------------------------------------------------------------
Other Income 4,975 792 1,212 1,406 301 332
- -----------------------------------------------------------------------------------------------------------------------------------
Other Expense 8,894 2,679 2,646 3,840 1,423 1,711
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 6,961 $ 1,948 $ 2,054 $ 3,007 $ 516 $ 1,069
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Assets $1,340,445 $ 483,744 $ 428,468 $ 655,873 $ 211,611 $ 319,182
- -----------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Operating Results for the Three Months Ended September 30, 2001 (In Thousands)
- --------------------------------------------------------------------------------------------
CIT All Other Total
- --------------------------------------------------------------------------------------------
Net Interest Income $ 8,333 $ 1,709 $ 1,368 $ 48,578
- --------------------------------------------------------------------------------------------
Provision for
Loan Losses 375 50 93 2,957
- --------------------------------------------------------------------------------------------
Other Income 1,662 343 114 11,137
- --------------------------------------------------------------------------------------------
Other Expense 4,412 1,022 1,096 27,723
- --------------------------------------------------------------------------------------------
Net Income $ 3,498 $ 665 $ 634 $ 20,352
- --------------------------------------------------------------------------------------------
Balances at September 30, 2001
- --------------------------------------------------------------------------------------------
Assets $ 859,576 $ 177,243 $ (38,694) $4,437,448
- --------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Operating Results for the Nine Months Ended September 30, 2002 (In Thousands)
- ------------------------------------------------------------------------------------------------------------------------
PNB RTC CNB FKNB UB SNB
- ------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 46,819 $ 17,032 $ 14,936 $ 22,805 $ 6,633 $ 10,370
- ------------------------------------------------------------------------------------------------------------------------
Provision for
Loan Losses 4,010 1,355 720 2,297 270 575
- ------------------------------------------------------------------------------------------------------------------------
Other Income 15,136 2,495 3,539 4,375 1,059 1,137
- ------------------------------------------------------------------------------------------------------------------------
Other Expense 26,092 8,735 8,013 11,169 4,376 5,397
- ------------------------------------------------------------------------------------------------------------------------
Net Income $ 21,968 $ 6,232 $ 6,489 $ 9,465 $ 2,169 $ 3,967
- ------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
Operating Results for the Nine Months Ended
September 30, 2002 (In Thousands)
- -------------------------------------------------------------------------------------
SEC CIT All Other Total
- -------------------------------------------------------------------------------------
Net Interest Income $ 26,258 $ 5,185 $ 6,038 $156,076
- -------------------------------------------------------------------------------------
Provision for
Loan Losses 1,260 595 275 11,357
- -------------------------------------------------------------------------------------
Other Income 5,813 1,113 321 34,988
- -------------------------------------------------------------------------------------
Other Expense 14,529 3,423 5,129 86,863
- -------------------------------------------------------------------------------------
Net Income $ 11,088 $ 1,567 $ 2,548 $ 65,493
- -------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Operating Results for the Nine Months Ended September 30, 2001 (In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------
PNB RTC CNB FKNB UB SNB
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $43,927 $14,511 $13,588 $21,236 $5,411 $8,642
- ------------------------------------------------------------------------------------------------------------------------------
Provision for
Loan Losses 2,685 960 540 1,422 300 175
- ------------------------------------------------------------------------------------------------------------------------------
Other Income 14,477 2,305 3,215 4,162 898 1,076
- ------------------------------------------------------------------------------------------------------------------------------
Other Expense 25,541 8,043 7,622 11,158 4,280 5,151
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $20,857 $5,171 $5,769 $9,137 $1,313 $3,224
- ------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Operating Results for the Nine Months Ended
September 30, 2001 (In Thousands)
- ---------------------------------------------------------------------------------------------------------
SEC CIT All Other Total
- ---------------------------------------------------------------------------------------------------------
Net Interest Income $24,691 $5,032 $3,873 $140,911
- ---------------------------------------------------------------------------------------------------------
Provision for
Loan Losses 1,125 235 166 7,608
- ---------------------------------------------------------------------------------------------------------
Other Income 5,272 1,057 332 32,794
- ---------------------------------------------------------------------------------------------------------
Other Expense 13,594 3,161 2,894 81,444
- ---------------------------------------------------------------------------------------------------------
Net Income $10,269 $1,828 $2,057 $59,625
- ---------------------------------------------------------------------------------------------------------
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 three and nine month periods ended
September 30, 2002 and 2001. The reconciling amounts for consolidated total
assets at September 30, 2002 and 2001 consist of the elimination of intersegment
borrowings, and the assets of the Parent Company and GFC, which are not
eliminated.
-12-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis by management contains forward-looking statements
that are provided to assist in the understanding of anticipated future financial
performance. These forward-looking statements involve significant risks and
uncertainties including changes in general economic and financial market
conditions, Park's ability to execute its business plans, as well as other risks
such as changes in government regulations and policies affecting bank holding
companies. Although Park believes that the expectations reflected in such
forward-looking statements are reasonable, actual results may differ materially.
Undue reliance should not be placed on the forward-looking statements, which
speak only as of the date hereof.
CRITICAL ACCOUNTING POLICIES
Note 1 of the Notes to Consolidated Financial Statements included in Park's 2001
Annual Report lists significant accounting policies used in the development and
presentation of its financial statements. The accounting and reporting policies
of Park conform with accounting principles generally accepted in the United
States and general practices within the financial services industry. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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
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
estimated 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, expected commitment usage, 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.
Comparison of Results of Operations for
The Three and Nine Month Periods
Ended September 30, 2002 and 2001
SUMMARY DISCUSSION OF RESULTS
Net income increased by $1.7 million or 8.5% to $22.1 million for the three
months ended September 30, 2002 compared to $20.4 million for the same period in
2001. For the nine months ended September 30, 2002, net income increased by $5.9
million or 9.8% to $65.5 million compared to $59.6 million for the same period
in 2001. The annualized, net income to average assets ratios (ROA) were 1.96%
and 1.97%, respectively, for the three and nine month periods ended September
30, 2002 compared to 1.87% and 1.89% for the same periods in 2001. The
annualized, net income to average equity ratios (ROE) were 17.74% and 18.17%,
respectively, for the three and nine month periods ended September 30, 2002
compared to 17.56%and 17.71% for the same periods in 2001.
-13-
Diluted earnings per share increased by 9.7% to $1.59 for the third quarter of
2002 compared to $1.45 for the same quarter in 2001 and increased by 10.9% to
$4.70 for the first three quarters of 2002 compared to $4.24 for the same period
in 2001.
The increase in net income for both the three and nine month periods ended
September 30, 2002 was primarily due to the improvement in the net interest
margin. For the three months ended September 30, 2002, the net margin was 5.05%
compared to 4.85% in 2001 and for the nine months ended September 30, 2002, the
net interest margin was 5.12% compared to 4.86% in 2001.
Net Interest Income
The Corporation's principal source of earnings is net interest income, the
difference between total interest income and total interest expense. Net
interest income increased by $3.35 million or 6.9% to $51.9 million for the
three months ended September 30, 2002 compared to $48.6 million for the third
quarter of 2001. The following table compares the average balance and tax
equivalent yield/cost for interest earning assets and interest bearing
liabilities for the third quarter of 2002 with the same quarter in 2001.
- ----------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30,
(In Thousands)
- ------------------------------------ -------------------------------------- ------------------------------------------
2002 2001
- ------------------------------------ -------------------------------------- ------------------------------------------
Average Tax Average Tax
Balance Equivalent Balance Equivalent
% %
- ------------------------------------ ------------------- ------------------ --------------------- --------------------
- ------------------------------------ ------------------- ------------------ --------------------- --------------------
Loans $2,717,057 7.57% $2,872,698 8.53%
- ------------------------------------ ------------------- ------------------ --------------------- --------------------
Taxable Investments 1,279,559 5.88% 1,018,134 6.51%
- ------------------------------------ ------------------- ------------------ --------------------- --------------------
Tax Exempt Investments 142,895 7.03% 159,490 6.92%
- ------------------------------------ ------------------- ------------------ --------------------- --------------------
Federal Funds Sold 22,959 1.92% 8,127 4.05%
==================================== =================== ================== ===================== ====================
Interest Earning Assets $4,162,470 7.00% $4,058,449 7.95%
- ------------------------------------ ------------------- ------------------ --------------------- --------------------
- ------------------------------------ ------------------- ------------------ --------------------- --------------------
Interest Bearing Deposits $2,951,314 2.30% $2,737,323 3.72%
- ------------------------------------ ------------------- ------------------ --------------------- --------------------
Short-term Borrowings 210,780 1.43% $280,460 3.02%
- ------------------------------------ ------------------- ------------------ --------------------- --------------------
Long-term Debt 233,965 4.42% 343,931 4.45%
==================================== =================== ================== ===================== ====================
Interest Bearing Liabilities $3,396,059 2.39% $3,361,714 3.74%
- ------------------------------------ ------------------- ------------------ --------------------- --------------------
Excess Interest Earning Assets $766,411 4.61% $696,735 4.21%
- ------------------------------------ ------------------- ------------------ --------------------- --------------------
Net Interest Margin 5.05% 4.85%
- ------------------------------------ ------------------- ------------------ --------------------- --------------------
Average interest earning assets increased by $104 million or 2.6% for the
quarter ended September 30, 2002 compared to the same quarter in 2001. The
average yield on interest earning assets decreased to 7.00% for the third
quarter of 2002 compared to 7.95% for the third quarter of 2001.
Average loan totals decreased by $156 million or 5.4% to $2,717 million for the
quarter ended September 30, 2002 compared to the same quarter in 2001. The
demand for commercial, commercial real estate, and consumer loans and leases
secured by automobiles decreased sharply during the first quarter of 2001 and
remained weak for the remainder of 2001. The demand for commercial, commercial
real estate loans and consumer loans secured by automobiles improved during the
second and third quarters of 2002. The demand for fixed rate long-term
residential mortgage loans has been strong for the past several quarters, but
these loans are sold by Park in the secondary market. This activity, the
origination and sale of fixed rate mortgage loans, produced a significant
increase in fee income for the past several quarters, but did not increase loan
balances since the loans are sold. Many borrowers took advantage of the low
interest rate environment to refinance their adjustable rate mortgage loan into
a fixed rate mortgage loan, which reduces the loan balances reported on the
balance sheet.
-14-
Total loan balances increased by $24 million for the quarter ended September 30,
2002. This compares to a decrease in total loans of $20 million for the second
quarter of 2002 and $71 million for the first quarter of 2002. Total loan
balances also decreased by $160 million during 2001. As stated previously, the
demand for loans improved during the second quarter of 2002 and continued to
improve during the third quarter. Management is hopeful that loan balances will
continue to increase over the next several quarters if the economy continues to
recover from the recession, which started in 2001.
The average yield on the loan portfolio was 7.57% for the third quarter of 2002
compared to 8.53% for the same period in 2001. The average prime lending rate
was 4.75% for the second quarter of 2002 compared to 6.57% for the third quarter
of 2001. Approximately 25% of Park's loan portfolio adjusts with the prime rate.
The yield on the loan portfolio is expected to decrease next quarter as variable
rate loans reprice lower and new loan originations have an average rate that is
lower than the current loan portfolio rate.
Average investment securities including federal funds sold increased by $260
million or 21.9% to $1,445 million for the third quarter of 2002 compared to
$1,185 million for the third quarter of 2001. The increase in the investment
portfolio was funded by a decrease in loans and by an increase in deposits. The
average yield on taxable investment securities decreased to 5.88% for the third
quarter of 2002 compared to 6.51% for the same period in 2001. The yield on
taxable investment securities is expected to decrease next quarter as new
investment purchases yield less than the average rate on the taxable investment
portfolio. The yield on tax exempt investments was 7.03% for the third quarter
of 2002 and 6.92% for the same period last year. No tax exempt securities have
been purchased in the past year. The average maturity in the investment
portfolio was 1.9 years at September 30, 2002 compared to 3.3 years at December
31, 2001 and 3.0 years at September 30, 2001.
Average interest bearing liabilities increased by $34 million or 1.0% to $3,396
million for the quarter ended September 30, 2002 compared to the same quarter in
2001. Average interest bearing deposits increased by $214 million or 7.8% to
$2,951 million in 2002 compared to $2,737 million in 2001. Average total
borrowings decreased by $180 million or 28.8% to $445 million in 2002 compared
to $625 million in 2001.
The average cost of interest bearing liabilities decreased by 1.35% to 2.39% in
2002 compared to 3.74% in 2001. The average cost of interest bearing deposits
decreased by 1.42% to 2.30% in 2002 compared to 3.72% in 2001. The cost of
short-term borrowings decreased by 1.59% to 1.43% in 2002 compared to 3.02% in
2001, consistent with the decrease in the federal funds rate in 2002. The cost
of long-term debt was 4.42% in 2002 compared to 4.45% in 2001. The cost of
Park's interest bearing liabilities is expected to continue to slowly decrease
as the cost of new certificates of deposit is lower than the portfolio rate.
The increase in net interest income of $3.35 million or 6.9% to $51.9 million
for the quarter ended September 30, 2002 was primarily due to an increase in the
net interest spread (the difference between the yield on interest earning assets
and the cost of interest bearing liabilities) of .40% to 4.61% in 2002 compared
to 4.21% in 2001. The tax equivalent net interest margin (defined as net
interest income divided by average interest earning assets) increased by .20% to
5.05% for the third quarter of 2002 compared to 4.85% in 2001.
The net interest spread and margin are expected to decline during the fourth
quarter of 2002 as the reduction in the yield on earning assets is expected to
be larger than the reduction in the cost of interest bearing liabilities. This
reduction in the net interest margin is expected to continue into 2003.
Net interest income increased by $15.2 million or 10.8% to $156.1 million for
the nine months ended September 30, 2002 compared to $140.9 million for the same
period in 2001. The following table compares the average balance and tax
equivalent yield/cost for interest earning assets and interest bearing
liabilities for the first nine months of 2002 with the same period in 2001.
-15-
- --------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
(In Thousands)
- --------------------------------------------------------------------------------------------------------------------------------
2002 2001
- ------------------------------------------------------------------------------------- ------------------------------------------
Average Tax Equivalent Average Tax Equivalent
Balance % Balance %
- ---------------------------------------------------------------- -------------------- --------------------- --------------------
Loans $2,722,131 7.71% $2,899,435 8.84%
- ---------------------------------------------------------------- -------------------- --------------------- --------------------
Taxable Investments 1,272,988 6.15% 889,163 6.63%
- ---------------------------------------------------------------- -------------------- --------------------- --------------------
Tax Exempt Investments 145,786 7.10% 162,005 6.98%
- ---------------------------------------------------------------- -------------------- --------------------- --------------------
Federal Funds Sold 19,101 1.92% 16,789 5.55%
- -------------------------------------------------- ============= ==================== ===================== ====================
Interest Earning Assets $4,160,006 7.19% $3,967,392 8.25%
- ---------------------------------------------------------------- -------------------- --------------------- --------------------
- ---------------------------------------------------------------- -------------------- --------------------- --------------------
Interest Bearing Deposits $2,896,377 2.45% $2,722,608 4.05%
- ---------------------------------------------------------------- -------------------- --------------------- --------------------
Short-Term Borrowings 242,897 1.52% 281,763 3.80%
- ---------------------------------------------------------------- -------------------- --------------------- --------------------
Long-Term Borrowings 273,453 4.13% 274,755 4.95%
- -------------------------------------------------- ============= ==================== ===================== ====================
Interest Bearing Liabilities $3,412,727 2.52% $3,279,126 4.11%
- ---------------------------------------------------------------- -------------------- --------------------- --------------------
Excess Interest Earning Assets $747,279 4.67% $688,266 4.14%
- ---------------------------------------------------------------- -------------------- --------------------- --------------------
Net Interest Margin 5.12% 4.86%
- ---------------------------------------------------------------- -------------------- --------------------- --------------------
Average interest earning assets increased by $193 million or 4.9% to $4,160
million for the nine months ended September 30, 2002 compared to the same period
in 2001. Average loans decreased by $177 million or 6.1% to $2,722 million for
the first nine months of 2002 compared to the same period in 2001. The average
yield on loans was 7.71% for the first nine months of 2002 compared to 8.84% for
the first half of 2001.
Average investment securities including federal funds sold increased by $370
million or 34.6% to $1,438 million for the first nine months of 2002 compared to
the same period in 2001. The average yield on taxable investment securities was
6.15% for the first nine months of 2002 compared to 6.63% for the same period in
2001.
Average interest bearing liabilities increased by $134 million or 4.1% to $3,413
million for the first nine months of 2002 compared to the same period in 2001.
Average interest bearing deposits increased by $174 million or 6.4% to $2,896
million for the first nine months of 2002 compared to the same period in 2001.
Average total borrowings were $516 million at an average cost of 2.90% for the
first nine months of 2002 compared to average total borrowings of $557 million
at an average cost of 4.37% for the first nine months of 2001.
The average cost of interest bearing liabilities decreased by 1.59% to 2.52% in
2002 compared to 4.11% in 2001. The average cost of interest bearing deposits
decreased by 1.60% to 2.45% in 2002 compared to 4.05% in 2001.
The increase in net interest income of $15.2 million or 10.8% to $156.1 million
for the first nine months of 2002 was due to the 4.9% increase in interest
earning assets and the increase in the net interest spread. The net interest
spread (the difference between the yield on interest earning assets and the cost
of interest bearing liabilities) increased by .53% to 4.67% in 2002 compared to
4.14% in 2001. The tax equivalent net interest margin (defined as net interest
income divided by average interest earning assets) increased by .26% to 5.12%
for 2002 compared to 4.86% in 2001.
-16-
PROVISION FOR LOAN LOSSES
The provision for loan losses was $3.2 million and $11.4 million, respectively,
for the third quarter and first nine months of 2002 compared to $3.0 million and
$7.6 million for the same periods in 2001. Net charge-offs were $2.6 million and
$7.7 million, respectively, for the three and nine month periods ended September
30, 2002 compared to $2.4 million and $4.7 million for the same periods in 2001.
Non-performing loans defined as loans that are 90 days past due, renegotiated
loans, and nonaccrual loans were $26.4 million or .97% of loans at September 30,
2002 compared to $27.1 million or .97% of loans at December 31, 2001 and $26.1
million or .91% of loans at September 30, 2001. The reserve for loan losses as a
percentage of outstanding loans was 2.33% at September 30, 2002 compared to
2.14% at December 31, 2001 and 2.11% at September 30, 2001. See Note 4 of the
Notes to Consolidated Financial Statements for a discussion of the factors
considered by management in determining the provision for loan losses.
NONINTEREST INCOME
Noninterest income increased by $1.1 million or 9.7% to $12.2 million for the
three months ended September 30, 2002 and increased by $2.5 million or 7.8% to
$35.2 million for the nine months ended September 30, 2002 compared to the same
periods in 2001. The following is a summary of the change in noninterest income.
- --------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
- --------------------------------------------------------------------------------------------------------------------------------
2002 2001 Change 2002 2001 Change
- --------------------------------------------------------------------------------------------------------------------------------
Fees from fiduciary activities $1,963 $2,078 $(115) $6,481 $6,464 $17
- --------------------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts 3,636 3,339 297 10,226 9,931 295
- --------------------------------------------------------------------------------------------------------------------------------
Other service income 3,017 2,598 419 7,786 6,608 1,178
- --------------------------------------------------------------------------------------------------------------------------------
Other income 3,613 3,130 483 10,705 9,657 1,048
- --------------------------------------------------------------------------------------------------------------------------------
Total $12,229 11,145 $1,084 $35,198 $32,660 $2,538
- --------------------------------------------------------------------------------------------------------------------------------
A large portion of other service income is the fee income earned from the
origination and sale into the secondary market of fixed rate mortgage loans.
This source of noninterest income was strong during the third quarter of 2002
with interest rates at forty year lows and will also be quite strong during the
fourth quarter. At the end of September, the pipeline of approved mortgage loan
applications was at an all time high.
The increase in other income for both the three month and nine months periods
ended September 30, 2002 was primarily due to increases in check card and ATM
transactions.
On October 4, 2002, Century National Bank completed the sale of its Malta branch
office and realized a gain of $570,000 from the sale of $6.3 million in deposits
and $1.6 million in loans. This gain will boost other income in the fourth
quarter of 2002.
GAIN (LOSS) ON SALE OF SECURITIES
The loss on sale of securities of $210,000 for the first nine months of 2002 was
due to the sale of $100 million of U.S. Government Agency collateralized
mortgage obligations during the first quarter of 2002. These securities were
sold to reduce the maturity extension risk in the investment portfolio.
-17-
The gain on sale of securities was $134,000 for the nine months ended September
30, 2001. A gain on sale of securities of $142,000 was realized during the first
quarter of 2001 from the sale of United States Treasury Notes with the proceeds
reinvested in U.S. Government Agency mortgage-backed securities. During the
third quarter of 2001, $72 million of thirty year mortgage-backed securities
were sold at a loss of $8,000.
OTHER EXPENSE
Total other expense increased by $1.6 million or 5.7% to $29.3 million for the
quarter ended September 30, 2002 and increased by $5.4 million or 6.7% to $86.9
million for the nine months ended September 30, 2002 compared to the same
periods in 2001.
Salaries and employee benefits expense increased by $1.2 million or 7.9% to
$16.0 million for the quarter ended September 30, 2002 and increased by $4.4
million or 10.1% to $48.0 million for the first nine months of 2002 compared to
the same periods in 2001. Employee benefits expense increased by $359,000 or
14.0% to $2.9 million for the three months ended September 30, 2002 and
increased by $1.3 million or 15.9% to $9.4 million for the nine months ended
September 30, 2002 compared to the same periods in 2001. The large increase in
employee benefits expense is primarily due to the increase in the cost of the
pension plan and to a lesser extent an increase in the cost of health insurance.
Full time equivalent employees have remained stable at 1,590 at September 30,
2002 compared to 1,591 at September 30, 2001.
FEDERAL INCOME TAXES
Federal income tax expense was $9.6 million and $27.4 million, respectively, for
the three and nine month periods ended September 30, 2002 compared to $8.7
million and $25.0 million for the same periods in 2001. The ratio of federal
income tax expense to income before taxes was 30.3% for the three months ended
September 30, 2002 and 29.5% for the nine months ended September 30, 2002
compared to 29.9% and 29.6% for the same periods in 2001. The statutory rate was
35% for both 2002 and 2001. The difference between the effective federal income
tax rate and the statutory rate is primarily due to tax-exempt interest income
and low income housing tax credits.
-18-
COMPARISON OF FINANCIAL CONDITION
AT SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
CHANGES IN FINANCIAL CONDITION AND LIQUIDITY
Total assets decreased by $129 million or 2.8% to $4,441 million at September
30, 2002 compared to $4,570 million at December 31, 2001. Total loans decreased
by $67 million or 2.4% to $2,729 million during the first nine months of 2002.
The demand for loans improved during the second quarter with loan totals
increasing during the month of June and increasing during each month of the
third quarter. Management is hopeful that loans will increase during the next
several quarters if the economy continues to recover from the recession, which
started in 2001.
Total liabilities decreased by $166 million or 4.1% to $3,935 million at
September 30, 2002 compared to $4,101 million at December 31, 2001. Total
borrowed money decreased by $329 million or 46.5% to $382 million at September
30, 2002 compared to $711 million at December 31, 2001. Borrowed money was
repaid with excess available funds, which resulted from the increase in deposits
of $178 million or 5.4% during the first nine months of 2002 and from the
decrease in loans.
Effective liquidity management ensures that the cash flow requirements of
depositors and borrowers, as well as the operating cash needs of the
Corporation, are met.
Funds are available from a number of sources including the securities portfolio,
the core deposit base, Federal Home Loan Bank borrowings, and the capability to
securitize or package loans for sale. The Corporation's loan to asset ratio was
61.5% at September 30, 2002 compared to 61.2% at December 31, 2001 and 64.6% at
September 30, 2001. Cash and cash equivalents totaled $205 million at September
30, 2002 compared to $169 million at December 31, 2001 and $136 million at
September 30, 2001. The present funding sources provide more than adequate
liquidity for the Corporation to meet its cash flow needs.
CAPITAL RESOURCES
Stockholders' equity at September 30, 2002 was $506 million or 11.38% of total
assets compared to $468 million or 10.25% of total assets at December 31, 2001
and $479 million or 10.80% of total assets at September 30, 2001.
Financial institution regulators have established guidelines for minimum capital
ratios for banks, thrifts, and bank holding companies. The net unrealized gain
or loss on available-for-sale securities is generally not included in computing
regulatory capital. The minimum leverage capital ratio (defined as stockholders'
equity less intangible assets divided by tangible assets) is 4% and the well
capitalized ratio is greater than or equal to 5%. Park's leverage ratio was
10.45% at September 30, 2002 and 9.97% at December 31, 2001. The minimum Tier I
risk-based capital ratio (defined as leverage capital divided by risk-adjusted
assets) is 4% and the well capitalized ratio is greater than or equal to 6%.
Park's Tier I risk-based capital ratio was 15.85% at September 30, 2002 and
14.84% at December 31, 2001. The minimum total risk-based capital ratio (defined
as leverage capital plus supplemental capital divided by risk-adjusted assets)
is 8% and the well capitalized ratio is greater than or equal to 10%. Park's
total risk-based capital ratio was 17.11% at September 30, 2002 and 16.09% at
December 31, 2001.
-19-
The financial institution subsidiaries of Park each met the well capitalized
capital ratio guidelines at September 30, 2002. The following table indicates
the capital ratios for each subsidiary and Park at September 30, 2002:
TIER I TOTAL
LEVERAGE RISK-BASED RISK-BASED
- -------------------------------------------------------------------------------------------------
Park National Bank 7.04% 10.30% 13.73%
- -------------------------------------------------------------------------------------------------
Richland Trust Company 7.32% 12.19% 13.45%
- -------------------------------------------------------------------------------------------------
Century National Bank 6.98% 12.28% 14.75%
- -------------------------------------------------------------------------------------------------
First-Knox National Bank 7.09% 10.87% 14.63%
- -------------------------------------------------------------------------------------------------
Second National Bank 6.86% 10.58% 14.22%
- -------------------------------------------------------------------------------------------------
United Bank, N.A. 7.45% 13.03% 14.29%
- -------------------------------------------------------------------------------------------------
Security National Bank 6.97% 10.49% 14.31%
- -------------------------------------------------------------------------------------------------
Citizens National Bank 7.22% 13.39% 18.48%
- -------------------------------------------------------------------------------------------------
Park National Corporation 10.45% 15.85% 17.11%
- -------------------------------------------------------------------------------------------------
Minimum Capital Ratio 4.00% 4.00% 8.00%
- -------------------------------------------------------------------------------------------------
Well Capitalized Ratio 5.00% 6.00% 10.00%
- -------------------------------------------------------------------------------------------------
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Note 1 of the Notes to Consolidated Financial Statements for disclosure that
Park does not have any off-balance sheet derivative financial instruments.
Management reviews interest rate sensitivity on a quarterly basis by modeling
the financial statements under various interest rate scenarios. The primary
reason for these efforts is to guard Park from adverse impacts of unforeseen
changes in interest rates. Management continues to believe that further changes
in interest rates will have a small impact on net income, consistent with the
disclosure on pages 31 and 32 of our 2001 Annual Report, which is incorporated
by reference into our 2001 Form 10-K. However, as mentioned earlier in
management's analysis of net interest income, the net interest margin is
expected to decrease during the fourth quarter of 2002 and continue at a lower
level in 2003.
ITEM 4 - CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within the 90 day period prior to the filing date of this Quarterly Report on
Form 10-Q, the Corporation, under the supervision, and with the participation,
of its management, including its principal executive officer and principal
financial officer, performed an evaluation of the Corporation's disclosure
controls and procedures, as contemplated by Rule 13a-15 under the Securities
Exchange Act of 1934, as amended. Based on that evaluation, Park's principal
executive officer and principal financial officer concluded that such disclosure
controls and procedures are effective to ensure that material information
relating to Park, including its consolidated subsidiaries, is made known to
them, particularly during the period for which the periodic reports are being
prepared.
CHANGES IN INTERNAL CONTROLS
No significant changes were made in the Corporation's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation performed pursuant to Rule 13a-15 under the Securities
Exchange Act of 1934, as amended, referred to above.
-20-
PARK NATIONAL CORPORATION
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Park National Corporation is not engaged in any legal proceedings
of a material nature at the present time.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
Item 5. OTHER INFORMATION
Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
99.1 Certification Pursuant to Title 18, United States
Code, Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (Chief
Executive Officer)
99.2 Certification Pursuant to Title 18, United States
Code, Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley of Act of 2002 (Chief
Financial Officer).
b. REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 2002.
-21-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARK NATIONAL CORPORATION
DATE: November 6, 2002 BY: /s/ C. Daniel DeLawder
---------------- -------------------------------------
C. Daniel DeLawder
President and Chief Executive Officer
DATE: November 6, 2002 BY: /s/ John W. Kozak
---------------- -------------------------------------
John W. Kozak
Chief Financial Officer
-22-
CERTIFICATIONS
I, C. Daniel DeLawder, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Park National
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant' s
auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 6, 2002 /s/ C. Daniel DeLawder
-------------------------------------------
C. Daniel DeLawder
President and Chief Executive Officer
-23-
CERTIFICATIONS
I, John W. Kozak, certify that
1. I have reviewed this quarterly report on Form 10-Q of Park National
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made know to us by
others within those entities, particularly during the period
in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 6, 2001 /s/ John W. Kozak
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John W. Kozak
Chief Financial Officer
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