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 June 30, 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 [ ]
13,604,577 Common shares, no par value per share, outstanding at July 31, 2004.
Page 1 of 29
PARK NATIONAL CORPORATION
CONTENTS
Page
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3-12
Consolidated Condensed Balance Sheets as of
June 30, 2004 and December 31, 2003 (unaudited) 3
Consolidated Condensed Statements of Income for the Three
Months and Six Months ended June 30, 2004 and
2003 (unaudited) 4, 5
Consolidated Condensed Statements of Changes
in Stockholders Equity for the Six Months ended
June 30, 2004 and 2003 (unaudited) 6
Consolidated Condensed Statements of Cash Flows for the Six
Months ended June 30, 2004 and 2003 (unaudited) 7, 8
Notes to Consolidated Financial Statements 9 -13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION 26
Item 1. Legal Proceedings 26
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of EquitySecurities 26
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
-2-
PARK NATIONAL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(dollars in thousands, except share data)
June 30, December 31,
2004 2003
- ---------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 145,063 $ 169,782
- ---------------------------------------------------------------------------------------
Federal funds sold 20,000 0
- ---------------------------------------------------------------------------------------
Interest bearing deposits 50 50
- ---------------------------------------------------------------------------------------
Securities available-for-sale, at fair value
(amortized cost of $1,927,615 and $1,899,537
at June 30, 2004 and December 31, 2003) 1,910,005 1,928,697
- ---------------------------------------------------------------------------------------
Securities held-to-maturity, at amortized cost
(fair value approximates $33,649 and $63,563
at June 30, 2004 and December 31, 2003) 33,145 62,529
- ---------------------------------------------------------------------------------------
Loans (net of unearned interest) 2,803,590 2,730,803
- ---------------------------------------------------------------------------------------
Allowance for possible loan losses 64,090 63,142
- ---------------------------------------------------------------------------------------
Net loans 2,739,500 2,667,661
- ---------------------------------------------------------------------------------------
Bank premises and equipment, net 35,695 36,746
- ---------------------------------------------------------------------------------------
Bank owned life insurance 93,785 82,570
- ---------------------------------------------------------------------------------------
Other assets 97,488 86,921
- ---------------------------------------------------------------------------------------
Total assets $5,074,731 $5,034,956
- ---------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Deposits:
Noninterest bearing $ 551,072 $ 547,793
- ---------------------------------------------------------------------------------------
Interest bearing 2,965,481 2,866,456
- ---------------------------------------------------------------------------------------
Total deposits 3,516,553 3,414,249
- ---------------------------------------------------------------------------------------
Short-term borrowings 476,312 516,759
- ---------------------------------------------------------------------------------------
Long-term debt 508,094 485,977
- ---------------------------------------------------------------------------------------
Other liabilities 58,025 74,930
- ---------------------------------------------------------------------------------------
Total liabilities 4,558,984 4,491,915
- ---------------------------------------------------------------------------------------
Stockholders' Equity:
Common stock (No par value; 20,000,000 shares
authorized; 14,543,614 shares issued in 2004
and 14,542,335 shares issued in 2003) 105,995 105,895
- ---------------------------------------------------------------------------------------
Retained earnings 509,706 486,769
- ---------------------------------------------------------------------------------------
Treasury stock (939,037 shares in 2004
and 775,643 shares in 2003) (88,505) (68,577)
- ---------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss),
net of taxes (11,449) 18,954
- ---------------------------------------------------------------------------------------
Total stockholders' equity 515,747 543,041
- ---------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $5,074,731 $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 Six Months Ended
June 30, June 30,
- ----------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $43,319 $46,591 $ 86,932 $ 93,509
- ----------------------------------------------------------------------------------------------------
Interest on:
Obligations of U.S. Government,
its agencies and other securities 21,717 19,450 43,527 39,710
- ----------------------------------------------------------------------------------------------------
Obligations of states
and political subdivisions 1,302 1,568 2,649 3,173
- ----------------------------------------------------------------------------------------------------
Other interest income 34 362 51 442
- ----------------------------------------------------------------------------------------------------
Total interest income 66,372 67,971 133,159 136,834
- ----------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits:
Demand and savings deposits 1,490 2,288 3,013 4,640
- ----------------------------------------------------------------------------------------------------
Time deposits 8,068 10,541 16,578 21,741
- ----------------------------------------------------------------------------------------------------
Interest on borrowings:
Short-term borrowings 1,505 702 2,597 1,188
- ----------------------------------------------------------------------------------------------------
Long-term debt 2,787 2,844 5,833 5,464
- ----------------------------------------------------------------------------------------------------
Total interest expense 13,850 16,375 28,021 33,033
- ----------------------------------------------------------------------------------------------------
Net interest income 52,522 51,596 105,138 103,801
- ----------------------------------------------------------------------------------------------------
Provision for loan losses 1,905 2,836 3,370 6,269
- ----------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 50,617 48,760 101,768 97,532
- ----------------------------------------------------------------------------------------------------
Other income 14,046 17,400 26,918 32,855
- ----------------------------------------------------------------------------------------------------
Gain (loss) on sale of securities - 321 106 (913)
- ----------------------------------------------------------------------------------------------------
Continued
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
PARK NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(CONTINUED)
(dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
- --------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------
Other expense:
Salaries and employee benefits $ 17,096 $ 16,517 $ 35,244 $ 34,053
- --------------------------------------------------------------------------------------------------------------
Occupancy expense 1,735 1,671 3,464 3,403
- --------------------------------------------------------------------------------------------------------------
Furniture and equipment expense 1,484 1,600 3,065 3,227
- --------------------------------------------------------------------------------------------------------------
Other expense 9,980 10,702 20,047 19,876
- --------------------------------------------------------------------------------------------------------------
Total other expense 30,295 30,490 61,820 60,559
- --------------------------------------------------------------------------------------------------------------
Income before federal income taxes 34,368 35,991 66,972 68,915
- --------------------------------------------------------------------------------------------------------------
Federal income taxes 10,283 10,868 19,909 20,626
- --------------------------------------------------------------------------------------------------------------
Net income $ 24,085 $ 25,123 $ 47,063 $ 48,289
==============================================================================================================
PER SHARE:
Net income:
Basic $ 1.76 $ 1.83 $ 3.43 $ 3.51
- --------------------------------------------------------------------------------------------------------------
Diluted $ 1.75 $ 1.81 $ 3.41 $ 3.49
==============================================================================================================
Weighted average
Basic 13,658,212 13,761,117 13,707,153 13,770,973
Diluted 13,781,626 13,842,161 13,820,822 13,833,412
==============================================================================================================
Cash dividends declared $ 0.88 $ 0.83 $ 1.76 $ 1.66
==============================================================================================================
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)
Accumulated
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 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 48,289 $ 48,289
- ---------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income,
Reverse additional minimum liability for
pension plan, net of taxes $860 1,598
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized net holding gain on securities
available-for-sale, net of taxes $2,966 5,508 7,106
- ---------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 55,395
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends on common stock:
Park at $1.66 per share (22,846)
- ---------------------------------------------------------------------------------------------------------------------------
Shares issued for stock options - 1,924 shares 68
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Tax benefit from exercise of stock options 62
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Treasury stock purchased - 74,467 shares (7,275)
- ---------------------------------------------------------------------------------------------------------------------------
Treasury stock reissued for exercise of
stock options - 41,137 shares 3,526
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2003 $105,898 $471,743 ($ 68,943) $29,524
===========================================================================================================================
BALANCE AT DECEMBER 31, 2003 $105,895 $486,769 ($ 68,577) $18,954
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $ 47,063 $ 47,063
- ---------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income, net of tax:
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized net holding loss on securities
available-for-sale, net of taxes ($16,367) (30,403) (30,403)
- ---------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 16,660
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends on common stock:
Park at $1.76 per share (24,126)
- ---------------------------------------------------------------------------------------------------------------------------
Shares issued for stock options - 1,303 shares 46
- ---------------------------------------------------------------------------------------------------------------------------
Tax benefit from exercise of stock options 57
- ---------------------------------------------------------------------------------------------------------------------------
Cash paid for fractional shares - 24 shares (3)
- ---------------------------------------------------------------------------------------------------------------------------
Treasury stock purchased - 204,458 shares (23,699)
- ---------------------------------------------------------------------------------------------------------------------------
Treasury stock reissued for exercise of stock
options - 41,064 shares 3,771
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2004 $105,995 $509,706 ($ 88,505) ($11,449)
- ---------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
PARK NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Six Months Ended
June 30,
--------------------------
2004 2003
- -----------------------------------------------------------------------------------------
Operating activities:
Net income $ 47,063 $ 48,289
- -----------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, accretion, and amortization 572 (3,946)
- -----------------------------------------------------------------------------------------
Provision for loan losses 3,370 6,269
- -----------------------------------------------------------------------------------------
Amortization of the excess of cost over
net assets of banks purchased 740 1,165
- -----------------------------------------------------------------------------------------
Realized investment security (gains) losses (106) 913
- -----------------------------------------------------------------------------------------
Changes in assets and liabilities:
(Increase) decrease in other assets (6,155) 1,988
- -----------------------------------------------------------------------------------------
(Decrease) increase in other liabilities (4,774) 10,379
- -----------------------------------------------------------------------------------------
Net cash provided from operating activities 40,710 65,057
------------------------------------------------------------------------------
Investing activities:
Proceeds from sales of:
Available-for-sale securities 429 149,087
- -----------------------------------------------------------------------------------------
Proceeds from maturity of:
Available-for-sale securities 221,766 1,738,644
- -----------------------------------------------------------------------------------------
Held-to-maturity securities 39,081 480,521
- -----------------------------------------------------------------------------------------
Purchases of:
Available-for-sale securities (249,424) (2,353,293)
- -----------------------------------------------------------------------------------------
Held-to-maturity securities (9,697) (341,656)
- -----------------------------------------------------------------------------------------
Net increase in securities purchased under resale agreements 0 (175,000)
- -----------------------------------------------------------------------------------------
Net (increase) decrease in loans (73,703) 1,420
- -----------------------------------------------------------------------------------------
Purchases of premises and equipment, net (1,770) (2,180)
- -----------------------------------------------------------------------------------------
Net cash used by investing activities (73,318) (502,457)
-------------------------------------------------------------------------
Continued
7
PARK NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
(dollars in thousands)
Six Months Ended
June 30,
----------------------
2004 2003
- ------------------------------------------------------------------------------------------
Financing activities:
Net increase in deposits $ 102,304 $ 40,035
- ------------------------------------------------------------------------------------------
Net (decrease) increase in short-term borrowings (40,447) 315,816
- ------------------------------------------------------------------------------------------
Cash paid for fractional shares (3) -
- ------------------------------------------------------------------------------------------
Exercise of stock options 103 130
- ------------------------------------------------------------------------------------------
Purchase of treasury stock, net (19,928) (3,749)
- ------------------------------------------------------------------------------------------
Long-term debt issued 62,182 175,000
- ------------------------------------------------------------------------------------------
Repayment of long-term debt (40,065) (1,244)
- ------------------------------------------------------------------------------------------
Cash dividends paid (36,257) (34,309)
- ------------------------------------------------------------------------------------------
Net cash provided from financing activities 27,889 491,679
--------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (4,719) 54,279
--------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 169,782 238,788
--------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 165,063 $ 293,067
--------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 28,947 $ 33,977
-----------------------------------------------------------
Income taxes $ 19,750 $ 16,000
-----------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8
PARK NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Month Periods Ended June 30, 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 periods ended June 30, 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
June 30, 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 $4.69 million
at June 30, 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 second quarter of 2004 and $582,500 for the second
quarter of 2003 and was $740,000 for the first six months of 2004 compared to
$1,165,000 for the first half 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)
---------------
Three Months Ended, Six Months Ended,
June 30, June 30,
-------------------------- ------------------------
2004 2003 2004 2003
Beginning of Period $63,934 $64,062 $63,142 $62,028
Provision for Loan Losses 1,905 2,836 3,370 6,269
Losses Charged to the Reserve <3,465> <3,328> <5,813> <6,182>
Recoveries 1,716 1,955 3,391 3,410
End of Period $64,090 $65,525 $64,090 $65,525
Note 4 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share for the three and six month periods ended June 30, 2004 and 2003.
(Dollars in Thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2004 2003 2004 2003
Numerator:
Net Income $ 24,085 $ 25,123 $ 47,063 $ 48,289
Denominator:
Denominator for basic earnings per share
(weighted-average shares) 13,658,212 13,761,117 13,707,153 13,770,973
Effect of dilutive securities 123,414 81,044 113,669 62,439
Denominator for diluted earnings per share
(adjusted weighted-average shares & assumed) 13,781,626 13,842,161 13,820,822 13,833,412
Earnings per Share:
Basic earnings per share $ 1.76 $ 1.83 $ 3.43 $ 3.51
Diluted earnings per share $ 1.75 $ 1.81 $ 3.41 $ 3.49
-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 June 30, 2004 (In Thousands)
All
PNB RTC CNB FKNB UB SNB SEC CIT Other TOTAL
--- --- --- ---- -- --- --- --- ----- -----
Net Interest Income $ 15,706 $ 5,361 $ 4,900 $ 8,070 $ 2,615 $ 3,872 $ 7,595 $ 1,853 $ 2,550 $ 52,522
Provision for
Loan Losses 350 105 105 820 140 (10) 135 110 150 1,905
Other Income 5,889 1,302 1,350 1,701 449 591 2,193 378 193 14,046
Other Expense 9,166 2,626 2,940 4,054 1,475 1,793 4,898 1,138 2,205 30,295
Net Income 8,170 2,641 2,141 3,279 976 1,840 3,196 662 1,180 24,085
Balances at June
30 2004
Assets $1,639,183 $574,173 $ 526,525 $ 734,429 $ 242,343 $387,836 $ 897,275 $205,482 $(132,515) $5,074,731
Operating Results for the Three Months Ended June 30, 2003 (In Thousands)
All
PNB RTC CNB FKNB UB SNB SEC CIT Other TOTAL
--- --- --- ---- -- --- --- --- ----- -----
Net Interest Income $ 15,317 $ 5,469 $ 4,917 $ 7,915 $ 2,274 $ 3,488 $ 8,256 $ 1,739 $ 2,221 $ 51,596
Provision for
Loan Losses 1,080 30 225 666 90 150 405 90 100 2,836
Other Income 7,632 1,497 1,729 1,854 729 902 2,746 461 171 17,721
Other Expense 9,246 2,483 2,736 4,053 1,462 1,790 4,716 1,090 2,914 30,490
Net Income $ 8,593 $ 2,930 $ 2,452 $ 3,450 $ 993 $ 1,705 $ 3,978 $ 689 $ 333 $ 25,123
Balances at June
Assets $1,728,360 $528,387 $ 456,042 $ 746,119 $ 231,527 $371,082 $ 865,449 $173,699 $ (98,185) $5,002,480
Operating Results for the Six Months Ended June 30, 2004 (In Thousands)
All
PNB RTC CNB FKNB UB SNB SEC CIT Other TOTAL
--- --- --- ---- -- --- --- --- ----- -----
Net Interest Income $ 31,509 $ 10,745 $ 9,695 $ 16,028 $ 5,097 $ 7,738 $ 15,617 $ 3,726 $ 4,983 $ 105,138
Provision for
Loan Losses 1,145 285 105 1,015 140 30 220 110 320 3,370
Other Income 11,038 2,461 2,774 3,394 909 1,108 4,124 746 470 27,024
Other Expense 18,509 5,727 5,949 8,187 3,014 3,876 9,965 2,271 4,322 61,820
Net Income $ 15,510 $ 4,834 $ 4,292 $ 6,862 $ 1,924 $ 3,412 $ 6,430 $ 1,412 $ 2,387 $ 47,063
Operating Results for the Six Months Ended June 30, 2003 (In Thousands)
All
PNB RTC CNB FKNB UB SNB SEC CIT Other TOTAL
--- --- --- ---- -- --- --- --- ----- -----
Net Interest Income $ 31,340 $ 11,027 $ 9,865 $ 15,751 $ 4,579 $ 7,024 $ 16,709 $ 3,361 $ 4,145 $103,801
Provision for
Loan Losses 2,460 360 450 1,332 180 300 810 180 197 6,269
Other Income 13,903 2,690 3,174 3,306 1,295 1,486 4,916 851 321 31,942
Other Expense 18,563 5,080 5,600 8,074 2,942 3,662 9,739 2,238 4,661 60,559
Net Income $ 16,453 $ 5,450 $ 4,658 $ 6,605 $ 1,895 $ 3,183 $ 7,477 $ 1,219 $ 1,349 $ 48,289
-11-
The operating results of the Parent Company and Guardian Finance Company (GFC)
in the All Other column are used to reconcile the segment totals to the
consolidated income statements for the periods ended June 30, 2004 and 2003. The
reconciling amounts for consolidated total assets for both of the quarters ended
June 30, 2004 and 2003 consist of the elimination of intersegment borrowings,
and the assets of the Parent Company and GFC which are not eliminated.
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.
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
Net income as reported $ 24,085 $ 25,123 $ 47,063 $ 48,289
Deduct:
Total stock-based employee compensation
expense determined under fair value method,
net of related tax effects (2,209) (1,706) (2,335) (1,812)
Pro forma net income $ 21,876 $ 23,417 $ 44,728 $ 46,477
Basic earnings per share as reported $ 1.76 $ 1.83 $ 3.43 $ 3.51
Pro forma basic earnings per share $ 1.60 $ 1.70 $ 3.26 $ 3.37
Diluted earnings per share as reported $ 1.75 $ 1.81 $ 3.41 $ 3.49
Pro forma diluted earnings per share $ 1.59 $ 1.69 $ 3.24 $ 3.36
-12-
Note 7 - Pending Acquisition
On August 3, 2004, Park National Corporation ("Park") and First Federal Bancorp,
Inc. ("First Federal") of Zanesville, Ohio jointly announced the signing of a
definitive agreement and plan of merger. This merger agreement will result in
the acquisition of First Federal by Park through the merger of a newly-formed
subsidiary of Park with and into First Federal in an all cash transaction,
immediately followed by the merger of the surviving corporation into Park. The
merger transactions are anticipated to be completed in the fourth quarter of
2004, and require the approval of appropriate regulatory authorities and of the
shareholders of First Federal. Under the terms of the merger agreement,
shareholders of First Federal will receive cash in the amount of $13.25 per
share for each common share of First Federal outstanding immediately prior to
the closing. Each outstanding option granted under a First Federal stock option
plan will be cancelled and extinguished and converted into the right to receive
an amount of cash equal to the product of (1) (a) $13.25 minus (b) the exercise
price of the option, multiplied by (2) the number of First Federal common shares
subject to the unexercised portion of the option. As of August 3, 2004, First
Federal had 3,286,221 common shares outstanding and options covering an
aggregate of 335,925 common shares with a weighted average exercise price of
$6.12 per share.
Following completion of the merger transactions described above, First Federal
Savings Bank of Eastern Ohio, which is currently a subsidiary of First Federal,
will merge into Century National Bank, a subsidiary of Park.
First Federal had $258 million of total assets and $23 million of stockholders'
equity at June 30, 2004.
The parent company of Park National Corporation will not need to secure any
outside borrowings to pay for the acquisition. Funding for the acquisition is
available from the affiliate banks.
-13-
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 U. S. generally accepted accounting principles. The
preparation of financial statements in conformity with U. S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the accompanying
notes. Actual results could differ from those estimates.
Park considers that the determination of the allowance for loan losses involves
a higher degree of judgement and complexity than its other significant
accounting policies. The allowance for loan losses is calculated with the
objective of maintaining a reserve level believed by management to be sufficient
to absorb 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 from 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.
-14-
Comparison of Results of Operations
For the Three and Six Month Periods Ended
June 30, 2004 and 2003
Summary Discussion of Results
Net income decreased by $1.0 million or 4.1% to $24.1 million for the three
months ended June 30, 2004 compared to $25.1 million for the same period in
2003. For the first half of 2004, net income decreased by $1.2 million or 2.5%
to $47.1 million compared to $48.3 million for the same period in 2003. The
annualized, net income to average asset ratio (ROA) was 1.92% for the second
quarter of 2004 and 1.89% for the first half of 2004, compared to 2.01% for the
second quarter of 2003 and 1.98% for the first six months of 2003. The
annualized, net income to average equity ratio (ROE) was 18.26% for the second
quarter of 2004 and 17.63% for the first half of 2004, compared to 19.37% for
the second quarter of 2003 and 18.97% for the first half of 2003.
Diluted earnings per share decreased by 3.3% to $1.75 for the second quarter of
2004 and decreased by 2.3% to $3.41 for the first half of 2004.
The decrease in net income for both the three and six month periods ended June
30, 2004 was primarily due to the large decrease in total Other Income. Total
Other Income decreased by $3.35 million or 19.3% to $14.05 million for the three
months ended June 30, 2004 and decreased by $5.94 million or 18.1% to $26.92
million for the six months ended June 30, 2004. The large decrease for both
periods was primarily due to the decrease in fee income earned from the
origination and sale of fixed rate mortgage loans. Fixed rate mortgage loans
totaling approximately $500 million were originated and sold during the first
half of 2003 compared to approximately $130 million for the first half of 2004.
Many mortgage loan customers took advantage of the low long-term interest rates
during the first half of 2003 and refinanced their mortgage loan. The absence of
the extraordinary large volume of fixed rate mortgage loan originations during
the first half of 2004 accounts for the large decrease in total Other Income.
Management expects that the amount of total Other Income generated during the
first half of 2004 of $26.92 million would approximate the results for the
second half of 2004.
Net Interest Income Comparison for the Second Quarter of 2004 and 2003
Park's principal source of earnings is net interest income, the difference
between total interest income and total interest expense. Net interest income
was $52.5 million for the second quarter of 2004 and $51.6 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 second quarter
of 2004 with the same quarter in 2003.
-15-
Three Months Ended June 30,
(In Thousands)
2004 2003
Average Tax Average Tax
Balance Equivalent Balance Equivalent
% %
------- ---------- ------- ----------
Loans $2,791,973 6.26% $2,684,883 6.99%
Taxable Investments 1,806,721 4.83% 1,754,466 4.45%
Tax Exempt Investments 108,107 7.25% 128,931 7.28%
Federal Funds Sold and Securities Purchased
under Resale Agreements 12,621 1.10% 124,043 1.15%
Interest Earning Assets $4,719,422 5.72% $4,692,323 5.89%
Interest Bearing Deposits $2,931,331 1.31% $2,915,687 1.76%
Short-term Borrowings 436,192 1.12% 676,099 .42%
Long-term Debt 507,504 2.44% 334,573 3.41%
Interest Bearing Liabilities $3,875,027 1.44% $3,926,359 1.67%
Excess Interest Earning Assets $ 844,395 4.28% $ 765,964 4.22%
Net Interest Margin 4.54% 4.49%
Average interest earning assets increased by $27.1 million or .6% to $4,719
million for the quarter ended June 30, 2004 compared to the same quarter in
2003. The average yield on interest earning assets decreased to 5.72% for the
second quarter of 2004 compared to 5.89% for the second quarter of 2003.
Average loan totals increased by $107.1 million or 4.0% to $2,792 million for
the second quarter of 2004 compared to the same period in 2003. At June 30,
2004, total loans were $2,804 million compared to $2,731 million at December 31,
2003, an increase of $73 million or 2.7%. 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
second quarter of 2004. Management anticipates that total loans will continue to
increase throughout the remainder of 2004 as the economy continues to improve.
The average yield on the loan portfolio was 6.26% for the second quarter of 2004
compared to 6.99% for the same period in 2003. The average prime lending rate
was 4.00% for the second quarter of 2004 compared to 4.25% for the second
quarter of 2003. Approximately 25% of Park's loan portfolio reprices based on
the prime lending rate. The Federal Reserve increased the federal funds rate by
..25% to 1.25% on June 30, 2004. The Federal Reserve is expected to continue to
increase the federal funds rate during the second half of 2004 at a measured
pace. The prime lending rate increased to 4.25% in July 2004 and is expected to
increase during the second half of 2004 as a result of the expected increases in
the federal funds rate. Management expects that the average yield on loans will
increase during the second half of 2004.
Average investment securities, including federal funds sold, decreased by $80
million or 4.0% to $1,927 million for the second quarter of 2004. During the
second quarter of 2003, average investment securities included on average $442
million of short-term investments that were used to arbitrage short-term
dollar-roll repo borrowings. Exclusive of the short-term arbitrage in 2003,
average investment securities increased by $362 million or 23.1% in 2004
compared to 2003.
-16-
The average yield on taxable investment securities was 4.83% for the second
quarter of 2004 compared to 4.45% for the second quarter of 2003. The average
yield on taxable securities was lower in 2003 due to the short-term investments
that were used to arbitrage the short-term dollar-roll repo borrowings in 2003.
The tax equivalent yield on tax exempt investment securities was 7.25% for the
second quarter of 2004 compared to 7.28% for the same period in 2003. No tax
exempt investment securities were purchased during the past year.
At June 30, 2004, the tax equivalent yield on the total investment portfolio was
4.96% and the average maturity was 4.9 years. U.S. Government Agency
asset-backed securities were approximately 90% of the total investment portfolio
at the end of the second 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 5.4 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 decreased by $51 million or 1.3% to $3,875
million for the three months ended June 30, 2004 compared to the same period in
2003. The average cost of interest bearing liabilities decreased by .23% to
1.44% for the second quarter of 2004 compared to 1.67% for the same period in
2003.
Average interest bearing deposits increased by $16 million or .5% to $2,931
million for the three months ended June 30, 2004 compared to the same period in
2003. The average cost of interest bearing deposits decreased by .45% to 1.31%
for the second quarter of 2004 compared to 1.76% for the same period in 2003.
Management expects that the average cost of interest bearing deposits will
slowly increase during the second half of 2004.
Average short-term borrowings decreased by $240 million to $436 million for the
second quarter of 2004 compared to the same quarter of 2003. The average cost of
short-term borrowings increased to 1.12% for the second quarter of 2004 compared
to .42% 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 $442 million for the second
quarter of 2003 at an average cost of 0%. Excluding the dollar-roll repo
borrowings from short-term borrowings in 2003 would have increased the average
cost of short-term borrowings to 1.21%, which is slightly higher than the
average cost of 1.12% for the second quarter of 2004.
Average long-term borrowings increased by $173 million to $508 million for the
second quarter of 2004 compared to the same period of 2003. The average cost of
long-term borrowings decreased to 2.44% for the second quarter of 2004 compared
to 3.41% 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.
-17-
Net interest income increased by $926,000 or 1.8% to $52.5 million for the
second quarter of 2004 compared to $51.6 million for the same period of 2003.
The net interest spread (the difference between the yield on interest earning
assets and the cost of interest bearing liabilities) increased by .06% to 4.28%
in 2004 compared to 4.22% in 2003. The tax equivalent net interest margin
(defined as net interest income divided by average interest earning assets)
increased by .05% to 4.54% in 2004 compared to 4.49% in 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)
June 30, March 31, December 31, September 30, June 30,
2004 2004 2003 2003 2003
---- ---- ---- ---- ----
Net Interest Income $ 52,522 $ 52,616 $ 49,486 $ 49,350 $ 51,596
Net Interest Margin 4.54% 4.61% 4.49% 4.58% 4.49%
Interest Earning Assets $4,719,422 $4,657,129 $4,452,153 $4,354,669 $4,692,323
Interest Bearing Liabilities $3,875,027 $3,817,747 $3,607,913 $3,548,607 $3,926,359
Excess Interest Earning Assets $ 844,395 $ 839,382 $ 844,240 $ 806,062 $ 765,964
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 half of 2004.
This projection also assumes that interest rates will remain relatively stable.
Management expects that an increase in interest rates will slightly improve the
performance of net interest income and that a decrease in interest rates will
slightly reduce the level of net interest income.
-18-
Net Interest Income Comparison for the First Half of 2004 and 2003
Net interest income increased by $1.3 million or 1.3% to $105.1 million for the
six months ended June 30, 2004 compared to $103.8 million for the first half of
2003. The following table compares the average balance and tax equivalent
yield/cost for interest earning assets and interest bearing liabilities for the
first six months of 2004 with the same period in 2003.
Six Months Ended June 30, (In Thousands)
2004 2003
Average Tax Average Tax
Balance Equivalent Balance Equivalent
------- ---------- ------- ----------
% %
Loans $2,768,048 6.34% $2,680,318 7.07%
Taxable Investments 1,801,827 4.86% 1,696,630 4.72%
Tax Exempt Investments 109,665 7.27% 130,780 7.29%
Federal Funds Sold and Securities Purchased
under Resale Agreements 8,732 1.19% 73,148 1.22%
Interest Earning Assets $4,688,272 5.78% $4,580,876 6.11%
Interest Bearing Deposits $2,929,244 1.34% $2,905,772 1.83%
Short-term Borrowing 419,903 1.24% 612,080 .39%
Long-term Debt 497,240 2.36% 303,408 3.63%
Interest Bearing Liabilities $3,846,387 1.47% $3,821,260 1.74%
Excess Interest Earning Assets $841,885 4.31% $759,616 4.37%
Net Interest Margin 4.58% 4.66%
Average interest earning assets increased by $107 million or 2.3% to $4,688
million for the six months ended June 30, 2004 compared to the same period in
2003. The average yield on interest earning assets decreased to 5.78% for the
first half of 2004 compared to 6.11% for the same period in 2003.
Average loans increased by $88 million or 3.3% to $2,768 million for the first
half of 2004 compared to the first six months of 2003. The average yield on
loans decreased to 6.34% for the first half of 2004 compared to 7.07% for the
same period in 2003. The average prime lending rate was 4.00% for the first half
of 2004 and 4.25% for the first six months of 2003.
Average investment securities, including federal funds sold and securities
purchased under resale agreements, increased by $20 million or 1.0% to $1,920
million for the first half of 2004 compared to the same period in 2003. The
yield on taxable investment securities was 4.86% for the six months ended June
30, 2004 compared to 4.72% for the same period in 2003.
Average interest bearing liabilities increased by $25 million or .7% to $3,846
million for the first half of 2004 compared to the same period in 2003. Average
interest bearing deposits increased by $23 million or .8% to $2,929 million for
the first six months of 2004 compared to the same period in 2003. The average
cost of interest bearing deposits decreased to 1.34% for the first half of 2004
compared to 1.83% for the first half of 2003.
-19-
Average short-term borrowings decreased by $192 million to $420 million for the
first half of 2004 compared to $612 million for the same period in 2003. The
average cost of short-term borrowings increased to 1.24% for the first half of
2004 compared to .39% for the same period 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 $365 million for
the first half of 2003 at an average cost of a negative .17%. Park did not have
any dollar-roll repo borrowings in the first half of 2004.
Average long-term borrowings were $497 million for the first six months of 2004
compared to $303 million for the first half of 2003. The average cost of
long-term borrowings decreased to 2.36% for the first six months of 2004
compared to 3.63% for the same period in 2003. 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.
Provision for Loan Losses
The provision for loan losses was $1.9 million and $3.4 million, respectively,
for the second quarter and first half of 2004 compared to $2.8 million and $6.3
million for the same periods in 2003. Net loan charge-offs were $1.7 million and
$2.4 million, respectively, for the three and six months periods ended June 30,
2004 compared to $1.4 million and $2.8 million for the same periods in 2003.
Nonperforming loans defined as loans that are 90 days or more past due,
renegotiated loans, and nonaccrual loans were $24.0 million or .86% of loans at
June 30, 2004 compared to $25.7 million or .94% of loans at December 31, 2003
and $28.1 million or 1.04% of loans at June 30, 2003. The reserve for loan
losses as a percentage of outstanding loans was 2.29% at June 30, 2004 compared
to 2.31% at December 31, 2003 and 2.44% at June 30, 2003. See Note 3 of the
Notes to Consolidated Financial statements for a discussion of the factors
considered by management in determining the provision for loan losses.
Total Other Income
Total other income decreased by $3.4 million or 19.3% to $14.0 million for the
three months ended June 30, 2004 and decreased by $5.9 million or 18.1% to $26.9
million for the six months ended June 30, 2004 compared to the same periods in
2003. The following table is a summary of the change in total other income.
(In Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
2004 2003 Change 2004 2003 Change
---- ---- ------ ---- ---- ------
Fees from Fiduciary
Activities $ 2,819 $ 2,446 $ 373 $ 5,542 $ 4,860 $ 682
Service Charges on
Deposit Accounts 3,970 3,597 373 7,546 7,009 537
Other Service
Income 2,811 7,280 (4,469) 5,463 12,865 (7,402)
Other Income 4,446 4,077 369 8,367 8,121 246
Total $14,046 $17,400 ($3,354) $26,918 $32,855 ($5,937)
-20-
The large decrease in fees earned from Other Service Income for both the second
quarter of 2004 and the first six months of 2004 is 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 approximately $130 million of
fixed rate mortgage loans during the first six months of 2004 compared to
approximately $500 million for the first six months of 2003.
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.
There were no sales of securities during the second quarter of 2004.
A gain on the sale of investment securities of $321,000 was realized during the
second quarter of 2003 due to the sale of $50 million of U.S. Agency Notes.
During the first quarter of 2003, a loss of $1.2 million was realized from the
sale of $100 million of U.S. Agency collateralized mortgage obligations.
Other Expense
Total other expense decreased by $195,000 or .6% to $30.3 million for the three
months ended June 30, 2004 compared to $30.5 million for the second quarter of
2003. Salaries and employee benefits expense increased by $579,000 or 3.5% to
$17.1 million for the second quarter of 2004 compared to $16.5 million for the
second quarter of 2003. Equipment expense decreased by $116,000 or 7.3% for the
second quarter of 2004 compared to the same period in 2003. This decrease was
primarily due to a decrease in the depreciation expense on equipment as some
equipment has become fully depreciated this year. The subcategory other expense
decreased by $722,000 or 6.7% to $10.0 million for the quarter ended June 30,
2004 compared to $10.7 million for the second quarter of 2003. This decrease was
primarily due to a decrease in charitable contribution expense of $909,000 to
$15,000 for the second quarter of 2004 compared to $924,000 for the same period
in 2003. For the entire year of 2003, charitable contribution expense was
$984,000 compared to $703,000 for all of 2002. For the first half of 2004,
charitable contribution expense was $31,000. Management expects that charitable
contribution expense for the second half of 2004 would be approximately
$500,000.
Total other expense increased by $1.3 million or 2.1% to $61.8 million for the
first six months of 2004 compared to the same period in 2003. Salaries and
employee benefits expense increased by $1.2 million or 3.5% to $35.2 million for
the fist half of 2004 compared to the first six months of 2003. Full time
equivalent employees were 1,669 at June 30, 2004 compared to 1,629 at June 30,
2003.
-21-
Federal Income Taxes
Federal income tax expense was $10.3 million and $19.9 million, respectively,
for the three and six months periods ended June 30, 2004 compared to $10.9
million and $20.6 million for the same periods in 2003. The ratio of federal
income tax expense to income before taxes was 29.9% for the three months ended
June 30, 2004 and 29.7% for the six months ended June 30, 2004 compared to 30.2%
for the second quarter of 2003 and 29.9% for the first half of 2003. The
statutory federal income tax rate was 35% for both 2004 and 2003. The difference
between the effective federal income tax rate and statutory rate is primarily
due to tax-exempt interest income and low income housing tax credits.
-22-
COMPARISON OF FINANCIAL CONDITION
AT JUNE 30, 2004 AND DECEMBER 31, 2003
Changes in Financial Condition and Liquidity
Total assets increased by $40 million or .8% to $5,075 million at June 30, 2004
compared to $5,035 million at December 31, 2003. Total loans increased by $73
million or 2.7% to $2,804 million at June 30, 2004 as the demand for commercial
and commercial real estate loans continued to improve during the first half of
2004. Management expects that loans will continue to grow at about the same pace
during the second half of the year. Investment securities decreased by $48
million or 2.4% during the first half of 2004. The net unrealized gain on
available-for-sale securities was $29.2 million at December 31, 2003 compared to
a net unrealized loss on available-for-sale securities of $17.6 million at June
30, 2004. Purchases of investment securities totaled $259 million for the first
six months of 2004 compared to proceeds from the maturity and repayment of
investment securities of $260 million. Management expects that the purchase of
investment securities during the second half of 2004 will approximate the
proceeds received from maturities, repayments and sales of investment
securities.
Total liabilities increased by $67 million or 1.5% to $4,559 million at June 30,
2004 compared to $4,492 million at December 31, 2003. Total deposits increased
by $102 million or 3.0% to $3,517 million at June 30, 2004. Total borrowed money
decreased by $18 million or 1.8% to $984 million at June 30, 2004.
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 55.2% at June 30, 2004 compared to 54.2% at December 31, 2003
and 53.8% at June 30, 2003. Cash and cash equivalents totaled $165 million at
June 30, 2004 compared to $170 million at December 31, 2003 and $293 million at
June 30, 2003. The present funding sources provide more than adequate liquidity
for the Corporation to meet its cash flow needs.
Capital Resources
Stockholders' equity at June 30, 2004 was $516 million or 10.16% of total assets
compared to $543 million or 10.79% of total assets at December 31, 2003 and $538
million or 10.76% of total assets at June 30, 2003.
The decrease in stockholders' equity in 2004 is due to an increase in treasury
stock and a decrease in accumulated other comprehensive income, net of taxes.
The number of shares of treasury stock has increased by 163,394 shares in 2004
and the carrying value of treasury stock has increased by $20 million to a
negative $89 million at June 30, 2004 compared to a negative $69 million at
December 31, 2003. The carrying value of accumulated other comprehensive income,
net of taxes has decreased by $30 million in 2004 from an unrealized gain of $19
million at year-end 2003 to an unrealized loss of $11 million at June 30, 2004.
-23-
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
10.23% at June 30, 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 16.23% at June 30, 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 17.50% at June 30, 2004 and 17.78% at December 31,
2003.
The financial institution subsidiaries of Park each met the well capitalized
capital ratio guidelines at June 30, 2004. The following table indicates the
capital ratios for each subsidiary and Park at June 30, 2004:
TIER I TOTAL
LEVERAGE RISK-BASED RISK-BASED
-------- ---------- ----------
Park National Bank 6.36% 9.70% 12.87%
Richland Trust Company 6.37% 11.21% 12.47%
Century National Bank 5.83% 10.49% 12.79%
First-Knox National Bank 6.52% 10.07% 13.60%
Second National Bank 6.03% 10.40% 13.87%
United Bank, N.A. 6.08% 11.83% 13.09%
Security National Bank 5.87% 9.38% 13.34%
Citizens National Bank 6.26% 12.86% 17.64%
Park National Corporation 10.23% 16.23% 17.50%
Minimum Capital Ratio 4.00% 4.00% 8.00%
Well Capitalized Ratio 5.00% 6.00% 10.00%
At the July 19, 2004 Park National Corporation Board of Directors' meeting, a
cash dividend of $.88 per share was declared payable on September 10, 2004 to
stockholders of record on August 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, except for the pending acquisition of First Federal Bancorp,
Inc.
On August 3, 2004, Park jointly announced with First Federal Bancorp, Inc. the
signing of a definitive agreement and plan of merger. See Note 7 of the Notes to
the Consolidated Financial Statements for information on the pending
acquisition. Under the terms of the agreement, Park anticipates paying
approximately $45.9 million in cash to the shareholders of First Federal. The
parent company of Park will not need to arrange any outside borrowing to fund
the purchase of First Federal, but intends to fund it through working capital.
-24-
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 2003 Annual Report, which is incorporated
by reference into our 2003 Form 10-K.
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 June 30, 2004, that have materially affected or are
reasonably likely to materially affect, Park's internal control over financial
reporting.
-25-
PARK NATIONAL CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Park National Corporation and subsidiaries are 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 June 30, 2004:
Total Number of Average Price Total Number of Common Shares Maximum Number of Common
Common Shares Paid Per Common Purchased as Part of Publicity Shares that May Yer be Purchased
Period Purchased Share Announced Plans or Programs under the Plans or Programs (1)
April 1 thru April 30, 2004 41,996 $114.85 41,996 (2) 752,943
May 1 thru May 31, 2004 57,723 $115.07 57,723 (2) 712,869
June 1 thru June 30, 2004 37,901 $122.63 37,901 (2) 676,642
(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
June 30, 2004, Park had the authority to still repurchase an
aggregate of 488,300 common shares under this stock repurchase
program.
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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 June 30, 2004,
incentive stock options covering 674,380 common shares were
outstanding and 342,634 common shares were available for future
grants. With 828,672 common shares held as treasury shares for
purposes of the 1995 Plan at June 30, 2004, an additional 188,342
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
Not applicable
Item 5. Other Information
Not applicable.
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Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
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 news release announcing earnings for
the three months ended March 31, 2004 for Park National
Corporation under Item 12. Results of Operations and Financial
Condition in a Current Report of Form 8-K, dated April 19,
2004. The news release was included as Exhibit 99.
On July 19, 2004, Park National Corporation furnished
information regarding the press release announcing earnings
for the three and six months ended June 30, 2004 for Park
National Corporation under Item 12. Results of Operations and
Financial Condition in a Current Report on Form 8-K, dated
July 19, 2004. The news release was included as Exhibit 99.
On August 3, 2004, Park National Corporation filed a Current
Report on Form 8-K reporting the issuance of news releases
announcing the signing of a definitive agreement and plan of
merger which will result in the acquisition of First Federal
Bancorp, Inc. of Zanesville, Ohio under Item 5. Other Events
and Regulation FD Disclosure in a Form 8-K. The news releases
dated August 3, 2004 were included as Exhibits 99.1 and 99.2.
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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: August 6, 2004 BY: /s/C. Daniel DeLawder
---------------------
C. Daniel DeLawder
President and Chief
Executive Officer
DATE: August 6, 2004 BY: /s/John W. Kozak
---------------------
John W. Kozak
Chief Financial Officer
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