UNITED STATES
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 March 31, 2004
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
Park National Corporation
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(740) 349-8451
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(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 ____
13,686,169 Common shares, no par value per share, outstanding at April 26, 2004.
Page 1 of 25
PARK NATIONAL CORPORATION
CONTENTS
Page
----
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3-12
Consolidated Condensed Balance Sheets as of March 31, 2004 and
December 31, 2003 (unaudited) 3
Consolidated Condensed Statements of Income for the Three Months
ended March 31, 2004 and 2003 (unaudited) 4, 5
Consolidated Condensed Statements of Changes in Stockholders'
Equity for the Three Months ended March 31, 2004 and 2003
(unaudited) 6
Consolidated Condensed Statements of Cash Flows for the Three
Months ended March 31, 2004 and 2003 (unaudited) 7, 8
Notes to Consolidated 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 21
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION 22
Item 1. Legal Proceedings 22
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities 22
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
-2-
PARK NATIONAL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(dollars in thousands, except share data)
March 31, December 31,
2004 2003
----------- ------------
Assets:
Cash and due from banks $ 146,398 $ 169,782
----------- ------------
Federal funds sold 11,800 --
----------- ------------
Interest bearing deposits 50 50
----------- ------------
Securities available-for-sale, at fair value
(amortized cost of $1,826,945 and $1,899,537
at March 31, 2004 and December 31, 2003) 1,872,441 1,928,697
----------- ------------
Securities held-to-maturity, at amortized cost
(fair value approximates $50,067 and $63,563
at March 31, 2004 and December 31, 2003) 49,065 62,529
----------- ------------
Loans (net of unearned interest) 2,775,146 2,730,803
----------- ------------
Allowance for loan losses 63,934 63,142
----------- ------------
Net loans 2,711,212 2,667,661
----------- ------------
Bank premises and equipment, net 36,033 36,746
----------- ------------
Bank owned life insurance 83,598 82,570
----------- ------------
Other assets 85,360 86,921
----------- ------------
Total assets $ 4,995,957 $ 5,034,956
----------- ------------
Liabilities and Stockholders' Equity:
Deposits:
Noninterest bearing $ 558,241 $ 547,793
----------- ------------
Interest bearing 2,947,622 2,866,456
----------- ------------
Total deposits 3,505,863 3,414,249
----------- ------------
Short-term borrowings 357,777 516,759
----------- ------------
Long-term debt 507,250 485,977
----------- ------------
Other liabilities 66,690 74,930
----------- ------------
Total liabilities 4,437,580 4,491,915
----------- ------------
Stockholders' Equity:
Common stock (No par value; 20,000,000 shares
authorized; 14,542,335 shares issued) 105,895 105,895
----------- ------------
Retained earnings 497,633 486,769
----------- ------------
Treasury stock (826,807 shares in 2004
and 775,643 shares in 2003) (74,723) (68,577)
----------- ------------
Accumulated other comprehensive income,
net of taxes 29,572 18,954
----------- ------------
Total stockholders' equity 558,377 543,041
----------- ------------
Total liabilities and
stockholders' equity $ 4,995,957 $ 5,034,956
----------- ------------
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
March 31,
-------------------
2004 2003
-------- --------
Interest income:
Interest and fees on loans $ 43,613 $ 46,918
-------- --------
Interest on:
Obligations of U.S. Government,
its agencies and other securities 21,810 20,260
-------- --------
Obligations of states and political
subdivisions 1,347 1,605
-------- --------
Other interest income 17 80
-------- --------
Total interest income 66,787 68,863
-------- --------
Interest expense:
Interest on deposits:
Demand and savings deposits 1,523 2,352
-------- --------
Time deposits 8,510 11,200
-------- --------
Interest on borrowings:
Short-term borrowings 1,092 486
-------- --------
Long-term debt 3,046 2,620
-------- --------
Total interest expense 14,171 16,658
-------- --------
Net interest income 52,616 52,205
-------- --------
Provision for loan losses 1,465 3,433
-------- --------
Net interest income after
provision for loan losses 51,151 48,772
-------- --------
Other income 12,872 15,455
-------- --------
Gain (loss) on sale of securities 106 (1,234)
-------- --------
Continued
4
PARK NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(CONTINUED)
(dollars in thousands, except per share data)
Three Months Ended
March 31,
------------------------
2004 2003
----------- -----------
Other expense:
Salaries and employee benefits $ 18,148 $ 17,536
----------- -----------
Occupancy expense 1,729 1,732
----------- -----------
Furniture and equipment expense 1,581 1,627
----------- -----------
Other expense 10,067 9,174
----------- -----------
Total other expense 31,525 30,069
----------- -----------
Income before federal income taxes 32,604 32,924
----------- -----------
Federal income taxes 9,626 9,758
----------- -----------
Net income $ 22,978 $ 23,166
=========== ===========
PER SHARE:
Net income:
Basic $ 1.67 $ 1.68
=========== ===========
Diluted $ 1.66 $ 1.68
=========== ===========
Weighted average
Basic 13,756,093 13,780,828
=========== ===========
Diluted 13,860,018 13,824,663
=========== ===========
Cash dividends declared $ 0.88 $ 0.83
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
PARK NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(dollars in thousands, except share data)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
Accumulated
Treasury Other
Common Retained Stock Comprehensive Comprehensive
Stock Earnings at Cost Income Income
-------- -------- -------- ------------- -------------
BALANCE AT DECEMBER 31, 2002 $105,768 $446,300 ($65,194) $ 22,418
-------- -------- -------- -------------
Net Income 23,166 $ 23,166
-------- -------------
Accumulated other comprehensive income, net of tax:
Reverse additional minimum liabilty for pension plan,
net of taxes $860 1,598 1,598
------------- -------------
Unrealized net holding gain on securities
available-for-sale, net of taxes $267 496 496
------------- -------------
Total comprehensive income $ 25,260
=============
Cash dividends on common stock:
Park at $.83 per share (11,434)
--------
Shares issued for stock options - 1,303 46
--------
Tax benefit from exercise of stock options 27
--------
Treasury stock purchased - 37,803 shares (3,712)
--------
Treasury stock reissued for stock options - 20,165 shares 1,748
--------
BALANCE AT MARCH 31, 2003 $105,841 $458,032 ($67,158) $ 24,512
======== ======== ======== =============
BALANCE AT DECEMBER 31, 2003 $105,895 $486,769 ($68,577) $ 18,954
-------- -------- -------- -------------
Net Income 22,978 $ 22,978
-------- -------------
Accumulated other comprehensive income, net of tax:
Unrealized net holding gain on securities
available-for-sale, net of taxes $5,717 10,618 10,618
------------- -------------
Total comprehensive income $ 33,596
=============
Cash dividends on common stock:
Park at $.88 per share (12,114)
--------
Treasury stock purchased - 66,838 shares (7,586)
--------
Treasury stock reissued for stock options - 15,674 shares 1,440
--------
BALANCE AT MARCH 31, 2004 $105,895 $497,633 ($74,723) $ 29,572
======== ======== ======== =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
PARK NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Three Months Ended
March 31,
--------------------------
2004 2003
----------- -----------
Operating activities:
Net income $ 22,978 $ 23,166
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, accretion and amortization 665 (2,123)
----------- -----------
Provision for loan losses 1,465 3,433
----------- -----------
Amortization of the excess of cost over net assets
of banks purchased 370 583
----------- -----------
Realized investment security (gains) losses (106) 1,234
----------- -----------
Changes in assets and liabilities:
(Increase) decrease in other assets (5,555) 1,445
----------- -----------
Increase (decrease) in other liabilities 3,891 (1,350)
----------- -----------
Net cash provided from operating activities 23,708 26,388
----------- -----------
Investing activities:
Proceeds from sales of:
Available-for-sale securities 429 98,766
----------- -----------
Proceeds from maturity of:
Available-for-sale securities 74,031 631,535
----------- -----------
Held-to-maturity securities 13,464 166,835
----------- -----------
Purchases of:
Available-for-sale securities (1,423) (1,269,876)
----------- -----------
Held-to-maturity securities 0 (341,656)
----------- -----------
Net (increase) decrease in loans (44,572) 8,822
----------- -----------
Purchases of premises and equipment, net (735) (905)
----------- -----------
Net cash provided from (used by) investing
activities 41,194 (706,479)
----------- -----------
Continued
7
PARK NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
(dollars in thousands)
Three Months Ended
March 31,
------------------
2004 2003
--------- ---------
Financing activities:
Net increase (decrease) in deposits $ 91,614 ($ 9,058)
--------- ---------
Net (decrease) increase in short-term borrowings (158,982) 553,657
--------- ---------
Exercise of stock options 0 73
--------- ---------
Purchase of treasury stock, net (6,146) (1,964)
--------- ---------
Long-term debt issued 160,000 125,000
--------- ---------
Repayment of long-term debt (138,727) (261)
--------- ---------
Cash dividends paid (24,245) (22,897)
--------- ---------
Net cash (used by) provided from financing activities (76,486) 644,550
--------- ---------
Decrease in cash and cash equivalents (11,584) (35,541)
--------- ---------
Cash and cash equivalents at beginning of year 169,782 238,788
--------- ---------
Cash and cash equivalents at end of period $ 158,198 $ 203,247
========= =========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 14,487 $ 17,525
--------- ---------
Income taxes $ 0 $ 0
--------- ---------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8
PARK NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2004 and 2003.
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 period ended March 31, 2004 are not
necessarily indicative of the operating results to be anticipated for the fiscal
year ended December 31, 2004.
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 generally accepted accounting principles. 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, 2003.
Park does not have any off-balance sheet derivative financial instruments such
as interest-rate swap agreements.
Note 2 - 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 standards, goodwill and indefinite lived intangible
assets are no longer amortized and are subject to annual impairment tests. Other
intangible assets, such as core deposit intangibles, continue to be amortized
over their useful lives.
Park had approximately $7.53 million of goodwill included in other assets at
March 31, 2004 and December 31, 2003. This goodwill was evaluated for impairment
during the first quarter of each of 2003 and 2004 and a determination made that
the goodwill was not impaired and that the book value of the goodwill would
continue to be shown as $7.53 million. No amortization expense is being recorded
on the goodwill in 2004 and none was recorded in 2003.
Park also had core deposit intangibles included in other assets of $5.06 million
at March 31, 2004 and $5.43 million at December 31, 2003. The core deposit
intangibles are being amortized to expense, principally on the straight-line
method, over periods ranging from six to eight years. Core deposit amortization
expense was $370,000 for the first quarter of 2004 and $583,000 for the first
quarter of 2003.
-9-
Note 3- 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)
--------------------
2004 2003
--------- ---------
Beginning of Quarter $ 63,142 $ 62,028
Provision for Loan Losses 1,465 3,433
Losses Charged to the Reserve <2,348> <2,854>
Recoveries 1,675 1,455
End of Quarter $ 63,934 $ 64,062
Note 4 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share for the three month periods ended March 31, 2004 and 2003.
(Dollars in Thousands, except per share data)
Three Months Ended March 31,
2004 2003
----------- -----------
Numerator:
Net Income $ 22,978 $ 23,166
Denominator:
Denominator for basic earnings per share
(weighted-average shares) 13,756,093 13,780,828
Effect of dilutive securities 103,925 43,835
Denominator for diluted earnings per share
(adjusted weighted-average shares & assumed) 13,860,018 13,824,663
Earnings per Share:
Basic earnings per share $ 1.67 $ 1.68
Diluted earnings per share $ 1.66 $ 1.68
-10-
Note 5 - Segment Information
The Corporation is a multi-bank holding company headquartered in Newark, Ohio.
The operating segments for the Corporation are its financial institution
subsidiaries. The Corporation's financial institution subsidiaries are The Park
National Bank (PNB), The Richland Trust Company (RTC), Century National Bank
(CNB), The First-Knox National Bank of Mount Vernon (FKNB), United Bank N.A.
(UB), Second National Bank (SNB), The Security National Bank and Trust Co.
(SEC), and The Citizens National Bank of Urbana (CIT).
Operating Results for the Three Months Ended March 31, 2004 (In Thousands)
PNB RTC CNB FKNB UB
---------- -------- -------- -------- --------
Net Interest Income $ 15,803 $ 5,384 $ 4,795 $ 7,958 $ 2,482
Provision for Loan Losses 795 180 -- 195 --
Other Income 5,149 1,159 1,424 1,693 460
Other Expense 9,343 3,101 3,009 4,133 1,539
Net Income $ 7,340 $ 2,193 $ 2,151 $ 3,583 $ 948
Balances at March 31, 2004
Assets 1,649,675 540,998 477,536 724,364 240,922
SNB SEC CIT All Other Total
-------- --------- -------- --------- ----------
Net Interest Income $ 3,866 $ 8,022 $ 1,873 $ 2,433 $ 52,616
Provision for Loan Losses 40 85 -- 170 1,465
Other Income 517 1,931 368 277 12,978
Other Expense 2,083 5,067 1,133 2,117 31,525
Net Income $ 1,572 $ 3,234 $ 750 $ 1,207 $ 22,978
Balances at March 31, 2004
Assets 389,735 916,868 201,260 (145,401) 4,995,957
Operating Results for the Three Months Ended March 31, 2003
PNB RTC CNB FKNB UB
---------- -------- -------- -------- --------
Net Interest Income $ 15,813 $ 5,558 $ 4,948 $ 7,836 $ 2,305
Provision for
Loan Losses 1,380 330 225 666 90
Other Income 6,271 1,193 1,445 1,452 566
Other Expense 9,317 2,597 2,864 4,021 1,480
Net Income 7,860 2,520 2,206 3,155 902
Balances at March 31, 2003
Assets 1,617,914 571,420 481,736 755,567 242,123
SNB SEC CIT All Other TOTAL
-------- --------- -------- --------- ----------
Net Interest Income $ 3,536 $ 8,453 $ 1,622 $ 2,134 $ 52,205
Provision for
Loan Losses 150 405 90 97 3,433
Other Income 584 2,170 390 150 14,221
Other Expense 1,872 5,023 1,148 1,747 30,069
Net Income 1,478 3,499 530 1,016 23,166
Balances at March 31, 2003
Assets 390,074 937,299 191,969 (74,615) $5,113,487
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 quarters ended March 31, 2004 and 2003.
The reconciling amounts for consolidated total assets for both of the quarters
ended March 31, 2004 and 2003 consist of the elimination of intersegment
borrowings, and the assets of the Parent Company and GFC which are not
eliminated.
-11-
Note 6 - Stock Option Plan
Park accounts for its incentive stock option plan under the recognition and
measurement principles provided in Accounting Principles Board Opinion No. 25,
"Accounting for Stock issued to Employees" (APB 25) and related interpretations.
Under APB 25, because the exercise price of Park's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation", as amended by SFAS 148, requires pro forma
disclosures of net income and earnings per share for companies not adopting its
fair value accounting method for stock-based employee compensation. The
pro-forma disclosures below use the fair value method of SFAS 123 to measure
compensation expense for stock-based employee compensation plans.
Three Months Ended March 31
(In thousands, except per share data)
2004 2003
---- ----
Net income as reported $ 22,978 $23,166
Deduct:
Total stock-based employee compensation expense determined
under fair value method, net of related tax effects <126> <106>
Pro forma net income 22,852 $23,060
======== =======
Basic earnings per share as reported $ 1.67 $ 1.68
Pro forma basic earnings per share $ 1.66 $ 1.67
Diluted earnings per share as reported $ 1.66 $ 1.68
Pro forma diluted earnings per share $ 1.65 $ 1.67
-12-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis contains forward-looking statements that
are provided to assist in the understanding of anticipated future financial
performance. Forward-looking statements provide current expectations or
forecasts of future events and are not guarantees of future performance. The
forward-looking statements are based on management's expectations and are
subject to a number of risks and uncertainties. Although management believes
that the expectations reflected in such forward-looking statements are
reasonable, actual results may differ materially from those expressed or implied
in such statements. Risks and uncertainties that could cause actual results to
differ materially include, without limitation, Park's ability to execute its
business plan, changes in general economic and financial market conditions,
changes in banking regulations or other regulatory or legislative requirements
affecting bank holding companies and changes in accounting policies or
procedures as may be required by the Financial Accounting Standards Board or
other regulatory agencies. Undue reliance should not be placed on the
forward-looking statements, which speak only as of the date hereof. Park does
not undertake any obligation to publicly update any forward-looking statement
except to the extent required by law.
Critical Accounting Policies
Note 1 of the Notes to Consolidated Financial Statements included in Park's 2003
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
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 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.
-13-
Comparison of Results of Operations
For the Quarters Ended
March 31, 2004 and 2003
Summary Discussion of Results
Net income decreased by $188,000 or .8% to $23.0 million for the three months
ended March 31, 2004 compared to $23.2 million for the same period in 2003. The
annualized, net income to average asset ratio (ROA) was 1.86% for the first
quarter of 2004 compared to 1.96% for the first quarter of 2003. The annualized,
net income to average equity ratio (ROE) was 16.99% for the first three months
of 2004 compared to 18.56% for the same period in 2003.
Diluted earnings per share decreased by 1.2% to $1.66 for the first quarter of
2004 compared to $1.68 for the first quarter of 2003.
The decrease in net income for the first quarter of 2004 was primarily due to
the $2.6 million or 16.7% decrease in Other Income to $12.87 million compared to
$15.45 million in 2003. This large decrease was primarily due to the decrease in
fee income earned from the origination and sale of fixed rate mortgage loans.
During the first quarter of 2003, Park originated and sold fixed rate mortgage
loans totaling $211.6 million compared to $53.1 million for the first quarter of
2004. Non yield loan fees (which includes the gain from the sale of fixed rate
mortgage loans) decreased by $2.9 million to $2.7 million for the first quarter
of 2004 compared to $5.6 million in 2003. The large decrease in the volume of
fixed rate mortgage loans originated and sold in 2004 is primarily due to most
borrowers that were able to refinance theirresidential mortgage loan did so in
2003.
Net Interest Income
Park's principal source of earnings is net interest income, the difference
between total interest income and total interest expense. Net interest income
was $52.6 million for the first quarter of 2004 and $52.2 million in 2003. 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 2004 with the same quarter in 2003.
Three Months Ended March 31,
(In Thousands)
2004 2003
----------------------- -------------------------
Tax Tax
Average Equivalent Average Equivalent
Balance % Balance %
---------- ---------- ---------- ----------
Loans $2,744,130 6.41% $2,675,702 7.14%
Taxable Investments 1,796,932 4.88% 1,638,152 5.02%
Tax Exempt Investments 111,223 7.29% 132,649 7.30%
Federal Funds Sold 4,844 1.41% 21,688 1.50%
Interest Earning Assets $4,657,129 5.84% $4,468,191 6.34%
Interest Bearing Deposits $2,927,157 1.38% $2,895,747 1.90%
Short-term Borrowings 403,613 1.09% 547,348 .36%
Long-term Debt 486,977 2.52% 271,898 3.91%
Interest Bearing Liabilities $3,817,747 1.49% $3,714,993 1.82%
Excess Interest Earning Assets $ 839,382 4.35% $ 753,198 4.52%
Net Interest Margin 4.61% 4.83%
-14-
Average interest earning assets increased by $189 million or 4.2% to $4,657
million for the quarter ended March 31, 2004 compared to the same quarter in
2003. The average yield on interest earning assets decreased to 5.84% for the
first quarter of 2004 compared to 6.34% for the first quarter of 2003.
Average loan totals increased by $68 million or 2.6% to $2,744 million for the
first quarter of 2004 compared to the first quarter of 2003. At March 31, 2004,
total loans were $2,775 million compared to $2,731 million at December 31, 2003,
an increase of $44 million or 1.6%. Total loans increased by $39 million or 1.4%
for the year 2003 and decreased by $104 million or 3.7% for the year 2002 and
decreased by $160 million or 5.4% for the year 2001. The demand for commercial
and commercial real estate loans continued to improve during the first quarter
of 2004. Management anticipates that total loans will continue to increase
throughout the remainder of 2004.
The average yield on the loan portfolio was 6.41% for the first quarter of 2004
compared to 7.14% for the same period in 2003. The average prime lending rate
was 4.00% for the first quarter of 2004 compared to 4.25% for the first quarter
of 2003. Approximately 25% of Park's loan portfolio reprices based on the prime
lending rate. The average yield on the loan portfolio is expected to gradually
decline if short-term interest rates remain at current levels. However, due to
improved economic conditions, the Federal Reserve is expected to increase the
federal funds rate later in 2004. An increase in short-term interest rates will
cause the average yield on the loan portfolio to also increase.
Average investment securities, including federal funds sold, increased by $121
million or 6.7% to $1,913 million for the first quarter of 2004. The increase in
the investment portfolio was primarily funded by an increase in long-term
borrowing.
The average yield on taxable investment securities decreased to 4.88% for the
first quarter of 2004 compared to 5.02% for the first quarter of 2003. The tax
equivalent yield on tax exempt investment securities was 7.29% for the first
quarter of 2004 compared to 7.30% for the same period in 2003. No tax exempt
investment securities were purchased during the past year.
At March 31, 2004, the tax equivalent yield on the total investment portfolio
was 5.01% and the average maturity was 3.6 years. U.S. Government Agency
asset-backed securities were approximately 90% of the total investment portfolio
at the end of the first quarter of 2004. This segment of the investment
portfolio consists of fifteen-year mortgage-backed securities and collateralized
mortgage obligations, which are backed by fifteen-year mortgage-backed
securities.
The average maturity of the investment portfolio would lengthen if long-term
interest rates would increase as the principal repayments from mortgage-backed
securities and collateralized mortgage obligations would be reduced. Management
estimates that the average maturity of the investment portfolio would lengthen
to 5.1 years with a 1.00% increase in long-term interest rates and to 5.6 years
with a 2.00% increase in long-term interest rates.
Average interest bearing liabilities increased by $103 million or 2.8% to $3,818
million for the three months ended March 31, 2004 compared to the same period in
2003. The average cost of interest bearing liabilities decreased by .33% to
1.49% for the first quarter of 2004 compared to 1.82% for the same period in
2003.
-15-
Average interest bearing deposits increased by $31 million or 1.1% to $2,927
million for the three months ended March 31, 2004 compared to the same period in
2003. The average cost of interest bearing deposits decreased by .52% to 1.38%
for the first quarter of 2004 compared to 1.90% for the same period in 2003.
Average short-term borrowings decreased by $144 million to $404 million for the
first quarter of 2004 compared to the first quarter of 2003. The average cost of
short-term borrowings increased to 1.09% for the first quarter of 2004 compared
to .36% for the same quarter in 2003. The decrease in the average balance of
short-term borrowings was due to the absence of dollar-roll repo borrowings in
2004. The dollar-roll repo borrowings averaged $272 million for the first
quarter of 2003 at an average cost of a negative .46%. Excluding the dollar-roll
repo borrowings from short-term borrowings in 2003 would have increased the
average cost of short-term borrowings to 1.17%, which is slightly higher than
the average cost of 1.09% for the first quarter of 2004.
Average long-term borrowings increased by $215 million to $487 million for the
first quarter of 2004 compared to the first quarter of 2003. The average cost of
long-term borrowings decreased to 2.52% for the first quarter of 2004 compared
to 3.91% for the same period last year. The additional average long-term
borrowings in 2004 are priced on a variable rate basis and the borrowing cost
changes monthly based on short-term money market rates.
Net interest income increased by $411,000 or .8% to $52.6 million in 2004
compared to $52.2 million in 2003. The net interest spread (the difference
between the yield on interest earning assets and the cost of interest bearing
liabilities) decreased by .17% to 4.35% in 2004 compared to 4.52% in 2003. The
tax equivalent net interest margin (defined as net interest income divided by
average interest earning assets) decreased by .22% to 4.61% in 2004 compared to
4.83% in 2003. However, the increase in average earning assets of 4.2% and the
increase in the average excess earning assets of 11.4% enabled Park to earn
$411,000 more in net interest income for the first quarter of 2004 compared to
the first quarter of 2003.
Management expects that the net interest margin will gradually decrease during
2004 if short-term interest rates remain unchanged. However, due to the expected
growth in interest earning assets management anticipates that net interest
income for each quarterly period in 2004 will exceed the net interest income
earned in the comparable period of 2003.
The following table compares net interest income, the net interest margin,
average interest earning assets, average interest bearing liabilities and
average excess interest earning assets for the past five quarters.
Three Months Ended
(Dollars in Thousands)
-------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
2004 2003 2003 2003 2003
---------- ------------ ------------- ---------- ----------
Net Interest Income $ 52,616 $ 49,486 $ 49,350 $ 51,596 $ 52,205
Net Interest Margin 4.61% 4.49% 4.58% 4.49% 4.83%
Interest Earning Assets $4,657,129 $ 4,452,153 $ 4,354,669 $4,692,323 $4,468,191
Interest Bearing Liabilities $3,817,747 $ 3,607,913 $ 3,548,607 $3,926,359 $3,714,993
Excess Interest Earning Assets $ 839,382 $ 844,240 $ 806,062 $ 765,964 $ 753,198
-16-
Management expects that net interest income for the year 2004 will exceed net
interest income for 2003 of $202.6 million by approximately 5%. This projection
is dependent upon total loans and deposits increasing throughout the remainder
of 2004 at the same growth rate that was achieved during the first quarter of
2004. This projection also assumes that interest rates will remain relatively
stable. Management expects that an increase in interest rates will improve the
performance of net interest income and that a decrease in interest rates will
reduce the level of net interest income.
Provision for Loan Losses
The provision for loan losses decreased by $2.0 million or 57.3% to $1.47
million for the first quarter of 2004 compared to $3.43 million for the first
quarter of 2003. Nonperforming loans, defined as loans that are 90 days past
due, renegotiated loans, and nonaccrual loans were $24.2 million or .87% of
loans at March 31, 2004 compared to $25.7 million or .94% of loans at December
31, 2003 and $30.9 million or 1.15% of loans at March 31, 2003. The reserve for
loan losses as a percentage of outstanding loans was 2.30% at March 31, 2004
compared to 2.31% at December 31, 2003 and 2.39% at March 31, 2003. See Footnote
3 for a discussion of the factors considered by management in determining the
provision for loan losses.
Noninterest Income
Noninterest income decreased by $2.6 million or 16.7% to $12.9 million for the
first quarter of 2004 compared to $15.5 million for the first quarter of 2003.
The following table compares noninterest income for the past five quarters.
Three Months Ended
(In Thousands)
-------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
2004 2003 2003 2003 2003
---------- ------------ ------------- ---------- ----------
Fees from Fiduciary Activities $ 2,723 $ 2,694 $ 2,691 $ 2,446 $ 2,414
Service Charges on Deposit Accounts 3,576 3,595 3,665 3,597 3,412
Other Service Income 2,652 2,965 5,818 7,280 5,585
Other Income 3,921 3,334 3,966 4,077 4,044
Total $ 12,872 $ 12,588 $ 16,140 $ 17,400 $ 15,455
The large decrease in fees earned from Other Service Income of $2.9 million in
the first quarter of 2004 compared to the first quarter of 2003, was primarily
due to the decrease in fee income earned from the origination and sale into the
secondary market of fixed rate mortgage loans. Park originated and sold $211.6
million of fixed rate mortgage loans during the first quarter of 2003 compared
to $53.1 million of fixed rate mortgage loans during the first quarter of 2004.
Management expects Other Service Income for the second quarter of 2004 to be
approximately the same as the first quarter of 2004.
Management anticipates an increase in the amount of service charges on deposit
accounts for the second quarter of 2004. Some pricing increases on service
charges on deposit accounts became effective during the second quarter.
-17-
Gain (Loss) on Sale of Securities
A gain on the sale of investment securities of $106,000 was realized during the
first quarter of 2004. The gain was from the sale of some equity investments.
A loss on the sale of investment securities of $1.2 million was realized during
the first quarter of 2003. The loss resulted from the sale of $100 million of
U.S. Government Agency collateralized mortgage obligations. The proceeds from
the sale were reinvested in fifteen year U.S. Government Agency mortgage-backed
securities. Management expects that the net losses from the sale of investment
securities will be earned back in approximately three years from the higher
reinvestment rate on the mortgage-backed securities.
Other Expense
Total other expense increased by $1.46 million or 4.8% to $31.53 million for the
quarter ended March 31, 2004 compared to $30.07 million for the same period in
2003. Salaries and employee benefits expense increased by $612,000 or 3.5% to
$18.15 million for the first quarter of 2004 compared to $17.54 million for the
first quarter of 2003. Full time equivalent employees were 1,657 at March 31,
2004 compared to 1,617 at March 31, 2003.
The subcategory other expense increased by $893,000 or 9.7% to $10.1 million for
the three months ended March 31, 2004 compared to $9.2 million for the first
quarter of 2003. The increase in this expense was primarily due to increases in
data processing expense of $225,000, legal and other professional fees of
$204,000, marketing expense of $118,000 and losses from customer and employee
fraud of $522,000. The losses from customer and employee fraud resulted from
forgery involving checks and loan documents. Some of these losses may be
recovered later this year. Management has implemented additional controls to
reduce the risk of future losses from forgery of checks and loan documents.
Federal Income Taxes
Federal income tax expense was $9.63 million for the first quarter of 2004 and
$9.76 million for the first quarter of 2003. The ratio of federal income tax
expense to income before taxes was approximately 29.5% in 2004 and 29.6% in
2003. The difference between the effective federal income tax rate and the
statutory rate of 35% is primarily due to tax-exempt interest income from state
and municipal loans and investments and low income housing tax credits.
-18-
COMPARISON OF FINANCIAL CONDITION
AT MARCH 31, 2004 AND DECEMBER 31, 2003
Changes in Financial Condition and Liquidity
Total assets decreased by $39 million or .8% to $4,996 million at March 31, 2004
compared to $5,035 million at December 31, 2003. Investment securities decreased
by $70 million or 3.5% during the first quarter of 2004, as only $1.4 million of
investment securities were purchased during the first quarter. Management
expects that investment securities will increase by approximately $70 million
during the second quarter due to planned purchases of fifteen year U.S.
Government Agency mortgage-backed securities. Total loans increased by $44
million or 1.6% to $2,775 million at March 31, 2004, as the demand for
commercial and commercial real estate loans continued to improve in 2004.
Management is optimistic that total loans will continue to grow by about the
same amount during the second quarter of 2004.
Total liabilities decreased by $54 million or 1.2% to $4,438 million at March
31, 2004 compared to $4,492 million at December 31, 2003. Total borrowed money
decreased by $138 million to $865 million at March 31, 2004 compared to $1,003
million at December 31, 2003. Total deposits increased by $92 million or 2.7% to
$3,506 million at March 31, 2004 compared to $3,414 million at December 31,
2003.
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 55.5% at March 31, 2004 compared to 54.2% at December 31, 2003
and 52.5% at March 31, 2003. Cash and cash equivalents totaled $158 million at
March 31, 2004 compared to $170 million at December 31, 2003 and $203 million at
March 31, 2003. The present funding sources provide more than adequate liquidity
for the Corporation to meet its cash flow needs.
Capital Resources
Stockholders' equity at March 31, 2004 was $558 million or 11.18% of total
assets compared to $543 million or 10.79% of total assets at December 31, 2003
and $521 million or 10.19% of total assets at March 31, 2003.
-19-
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
10.38% at March 31, 2004 and 10.79% at December 31, 2003. 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 16.71% at March 31, 2004 and 16.51%
at December 31, 2003. 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 17.98% at March 31, 2004 and 17.78% at December 31,
2003.
The financial institution subsidiaries of Park each met the well capitalized
capital ratio guidelines at March 31, 2004. The following table indicates the
capital ratios for each subsidiary and Park at March 31, 2004:
TIER I TOTAL
LEVERAGE RISK-BASED RISK-BASED
-------- ---------- ----------
Park National Bank 5.87% 8.82% 12.13%
Richland Trust Company 5.85% 10.82% 12.08%
Century National Bank 5.87% 10.43% 12.80%
First-Knox National Bank 6.06% 9.56% 13.29%
Second National Bank 5.52% 9.64% 13.13%
United Bank, N.A. 5.70% 11.52% 12.78%
Security National Bank 5.46% 8.61% 12.65%
Citizens National Bank 6.09% 12.91% 17.90%
Park National Corporation 10.38% 16.71% 17.98%
Minimum Capital Ratio 4.00% 4.00% 8.00%
Well Capitalized Ratio 5.00% 6.00% 10.00%
At the April 19, 2004 Park National Corporation Board of Directors' meeting, a
cash dividend of $.88 per share was declared payable on June 10, 2004 to
stockholders of record on May 24, 2004.
In the ordinary course of operations, Park enters into certain contractual
obligations. Such obligations include the funding of operations through debt
issuances as well as leases for premises. See Page 32 of Park's 2003 Annual
Report for disclosure concerning contractual obligations and commitments. There
has not been a material change in contractual obligations or commitments since
year-end 2003.
-20-
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Footnote 1 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 2003 Annual Report, which is incorporated
by reference into our 2003 Form 10-K. However, as mentioned earlier in
management's analysis of net interest income, the net interest margin is
expected to continue to gradually decrease in 2004 if short-term interest rates
remain unchanged. An increase in short-term interest rates is expected to have a
positive impact on the net interest margin and a decrease in short-term interest
rates would have a negative impact.
ITEM 4 - CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
With the participation of the President and Chief Executive Officer (the
principal executive officer) and the Chief Financial Officer (the principal
financial officer) of Park, Park's management has evaluated the effectiveness of
Park's disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based
on that evaluation, Park's President and Chief Executive Officer and Park's
Chief Financial Officer have concluded that:
- - information required to be disclosed by Park in this Quarterly Report on
Form 10-Q would be accumulated and communicated to Park's management,
including its principal executive officer and principal financial officer,
as appropriate to allow timely decisions regarding required disclosure;
- - information required to be disclosed by Park in this Quarterly Report on
Form 10-Q would be recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms; and
- - Park's disclosure controls and procedures are effective as of the end of
the quarterly period covered by this Quarterly Report on Form 10-Q to
ensure that material information relating to Park and its consolidated
subsidiaries is made known to them, particularly during the period in
which this Quarterly Report on Form 10-Q is being prepared.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in Park's internal control over financial reporting (as
defined in Rule 13 a - 15 (f) under the Exchange Act) that occurred during
Park's fiscal quarter ended March 31, 2004, that have materially affected or are
reasonably likely to materially affect, Park's internal control over financial
reporting. However, as mentioned earlier in management's analysis of other
expense, some additional controls were implemented during the second quarter of
2004 to reduce the risk of loss from forged checks and loan documents by
customers and employees.
-21-
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, Use of Proceeds and Issuer Purchases of Equity
Securities
(a.) Not applicable
(b.) Not applicable
(c.) Not applicable
(d.) Not applicable
(e.) The following table provides information regarding Park's purchases
of its common shares during the three months ended March 31, 2004:
Total Number of Average Price Total Number of Common Shares Maximum Number of Common
Common Shares Paid per Purchased as Part of Publicly Shares that May Yet be Purchased
Period Purchased Common Share Announced Plans or Programs under the Plans or Programs (1)
- ------------------------------------------------------------------------------------------------------------------------------------
January 1 thru
January 31, 2004 -- -- -- 885,527
- ----------------------------------------------------------------------------------------------------------------------------------
February 1 thru
February 29, 2004 27,108 $113.53 27,108 (2) 858,419
- ----------------------------------------------------------------------------------------------------------------------------------
March 1 thru March
31, 2004 39,730 $113.49 39,730 (2) 814,262
(1) The number shown represents, as of the end of each period, the
maximum aggregate number of common shares that may yet be purchased
as part of Park's publicly announced repurchase program to fund the
Park National Corporation 1995 Incentive Stock Option Plan as well
as Park's publicly announced stock repurchase program.
On November 18, 2002, Park announced a stock repurchase program
under which up to an aggregate of 500,000 common shares may be
repurchased from time to time over the three year period ending
November 17, 2005. These repurchases may be made in open market
transactions or through privately negotiated transactions. As of
March 31, 2004, Park had the authority to still repurchase an
aggregate of 488,300 common shares under this stock repurchase
program.
-22-
The Park National Corporation 1995 Incentive Stock Option Plan (the
"1995 Plan") was initially approved by the shareholders of Park on
April 7, 1995 and 200,000 common shares were authorized for delivery
upon exercise of incentive stock options granted under the 1995
plan. The shareholders approved an amendment to the 1995 Plan on
April 20, 1998 to increase the number of common shares of Park
available for delivery under the 1995 Plan to 735,000 common shares
(after adjustment for stock dividends) and another amendment on
April 16, 2001 to increase the number of common shares available for
delivery under the 1995 Plan to 1,200,000 common shares. Pursuant to
the terms of the 1995 Plan, all of the common shares delivered upon
exercise of incentive stock options granted under the 1995 Plan are
to be treasury shares. No incentive stock options may be granted
under the 1995 Plan after January 16, 2005. As of March 31, 2004,
incentive stock options covering 571,588 common shares were
outstanding 470,816 common shares are available for future grants.
With 716,442 common shares held as treasury shares for purposes of
the 1995 Plan at March 31, 2004, an additional 325,962 common shares
remained authorized for repurchase for purposes of funding the 1995
Plan.
(2) All of the common shares reported were purchased in the open market
for the purpose of providing common shares for the 1995 Incentive
Stock Option Plan, as publicly previously announced.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
I. Annual Meeting of Shareholders - April 19, 2004:
a. On April 19, 2004, Park National Corporation held its Annual Meeting of
Shareholders. At the close of business on the February 23, 2004 record
date, 13,765,320 Park National Corporation common shares were outstanding
and entitled to vote. At the Annual Meeting, 12,706,284 or 92.31% of the
outstanding common shares entitled to vote were represented by proxy or in
person.
b. Directors elected at the Annual Meeting for a three year term:
Maureen Buchwald
12,562,183 For 43,221 Withheld 100,880 Abstain and Broker Non-Votes
J. Gilbert Reese
11,698,226 For 39,525 Withheld 968,533 Abstain and Broker Non-Votes
Rick R. Taylor
11,675,779 For 48,481 Withheld 982,024 Abstain and Broker Non-Votes
Leon Zazworsky
12,614,048 For 31,942 Withheld 60,294 Abstain and Broker Non-Votes
-23-
Directors whose term of office continued after the Annual Meeting:
James J. Cullers
R. William Geyer
C. Daniel DeLawder
Harry O. Egger
Howard E. LeFevre
William T. McConnell
John J. O'Neill
William A. Phillips
c. See Item (b.) for the voting results for directors.
Proposal to approve Park National Corporation Stock Plan for
Non-Employee Directors of Park National Corporation and Subsidiaries
10,641,296 For 492,463 withheld 1,572,525 Abstain and Broker Non-Votes
d. Not applicable
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10 Park National Corporation Stock Plan for Non-Employee
Directors of Park National Corporation and Subsidiaries
31.1 Rule 13a - 14(a) / 15d - 14(a) Certification (Principal
Executive Officer)
31.2 Rule 13a - 14(a) / 15d - 14(a) Certification (Principal
Financial Officer)
32.1 Section 1350 Certification (Principal Executive Officer)
32.2 Section 1350 Certification (Principal Financial Officer)
b. Reports on Form 8-K
On April 19, 2004, Park National Corporation furnished information
regarding the press release announcing first quarter 2004 earnings
for Park National Corporation under Item 12 in a Form 8-K. The press
release was included as Exhibit 99.
-24-
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: May 4, 2004 BY: /s/ C. Daniel DeLawder
-----------------------
C. Daniel DeLawder
President and Chief Executive Officer
DATE: May 4, 2004 BY: /s/ John W. Kozak
------------------
John W. Kozak
Chief Financial Officer
-25-