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 September 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 [ ]
13,616,740 Common shares, no par value per share, outstanding at October 29,
2004.
Page 1 of 28
PARK NATIONAL CORPORATION
Page
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3-12
Consolidated Condensed Balance Sheets as of September 30, 2004 and December 31, 2003 (unaudited) 3
Consolidated Condensed Statements of Income for the Three Months and Nine Months ended September 30, 2004
and 2003 (unaudited) 4,5
Consolidated Condensed Statements of Changes in Stockholders' Equity for the Nine Months ended September
30, 2004 and 2003 (unaudited) 6
Consolidated Condensed Statements of Cash Flows for the Nine Months ended September 30, 2004 and 2003
(unaudited) 7,8
Notes to Consolidated Financial Statements 9-15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 16-24
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. Unregistered Sales of Equity Securities and Use of Proceeds 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 27
SIGNATURES 28
-2-
PARK NATIONAL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(dollars in thousands, except share data)
September 30, December 31,
2004 2003
------------- -----------
Assets:
Cash and due from banks $ 141,530 $ 169,782
---------- ----------
Interest bearing deposits 0 50
---------- ----------
Securities available-for-sale, at fair value
(amortized cost of $1,855,940 and $1,899,537
at September 30, 2004 and December 31, 2003) 1,876,927 1,928,697
---------- ----------
Securities held-to-maturity, at amortized cost
(fair value approximates $80,145 and $63,563
at September 30, 2004 and December 31, 2003) 78,516 62,529
---------- ----------
Loans (net of unearned interest) 2,873,433 2,730,803
---------- ----------
Allowance for possible loan losses 64,739 63,142
---------- ----------
Net loans 2,808,694 2,667,661
---------- ----------
Bank premises and equipment, net 37,179 36,746
---------- ----------
Bank owned life insurance 94,135 82,570
---------- ----------
Other assets 98,589 86,921
---------- ----------
Total assets $5,135,570 $5,034,956
---------- ----------
Liabilities and Stockholders' Equity:
Deposits:
Noninterest bearing $ 567,708 $ 547,793
---------- ----------
Interest bearing 2,967,697 2,866,456
---------- ----------
Total deposits 3,535,405 3,414,249
---------- ----------
Short-term borrowings 472,342 516,759
---------- ----------
Long-term debt 508,763 485,977
---------- ----------
Other liabilities 65,743 74,930
---------- ----------
Total liabilities 4,582,253 4,491,915
---------- ----------
Stockholders' Equity:
Common stock (No par value; 20,000,000 shares
authorized; 14,544,266 shares issued in 2004
and 14,542,335 shares issued in 2003) 106,036 105,895
---------- ----------
Retained earnings 521,275 486,769
---------- ----------
Treasury stock (929,476 shares in 2004
and 775,643 shares in 2003) (87,632) (68,577)
---------- ----------
Accumulated other comprehensive income (loss),
net of taxes 13,638 18,954
---------- ----------
Total stockholders' equity 553,317 543,041
---------- ----------
Total liabilities and
stockholders' equity $5,135,570 $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 Nine Months Ended
September 30, September 30,
--------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Interest income:
Interest and fees on loans $ 45,130 $ 45,696 $ 132,062 $ 139,205
--------- --------- --------- ---------
Interest on:
Obligations of U.S. Government,
its agencies and other securities 22,187 16,615 65,714 56,325
--------- --------- --------- ---------
Obligations of states
and political subdivisions 1,255 1,533 3,904 4,706
--------- --------- --------- ---------
Other interest income 32 207 83 649
--------- --------- --------- ---------
Total interest income 68,604 64,051 201,763 200,885
--------- --------- --------- ---------
Interest expense:
Interest on deposits:
Demand and savings deposits 1,821 1,763 4,834 6,403
--------- --------- --------- ---------
Time deposits 8,181 9,743 24,759 31,484
--------- --------- --------- ---------
Interest on borrowings:
Short-term borrowings 1,552 685 4,149 1,873
--------- --------- --------- ---------
Long-term debt 3,240 2,510 9,073 7,974
--------- --------- --------- ---------
Total interest expense 14,794 14,701 42,815 47,734
--------- --------- --------- ---------
Net interest income 53,810 49,350 158,948 153,151
--------- --------- --------- ---------
Provision for loan losses 2,745 3,156 6,115 9,425
--------- --------- --------- ---------
Net interest income after
provision for loan losses 51,065 46,194 152,833 143,726
--------- --------- --------- ---------
Other income 13,009 16,140 39,927 48,995
--------- --------- --------- ---------
Gain (loss) on sale of securities - (4,474) 106 (5,387)
--------- --------- --------- ---------
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 Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Other expense:
Salaries and employee benefits $ 17,838 $ 16,566 $ 53,082 $ 50,619
----------- ----------- ----------- -----------
Occupancy expense 1,803 1,775 5,267 5,178
----------- ----------- ----------- -----------
Furniture and equipment expense 1,333 1,610 4,398 4,837
----------- ----------- ----------- -----------
Other expense 10,118 9,407 30,165 29,283
----------- ----------- ----------- -----------
Total other expense 31,092 29,358 92,912 89,917
----------- ----------- ----------- -----------
Income before federal income taxes 32,982 28,502 99,954 97,417
----------- ----------- ----------- -----------
Federal income taxes 9,435 8,302 29,344 28,928
----------- ----------- ----------- -----------
Net income $ 23,547 $ 20,200 $ 70,610 $ 68,489
=========== =========== =========== ===========
PER SHARE:
Net income:
Basic $ 1.73 $ 1.47 $ 5.16 $ 4.97
=========== =========== =========== ===========
Diluted $ 1.71 $ 1.46 $ 5.12 $ 4.95
=========== =========== =========== ===========
Weighted average
Basic 13,608,629 13,764,381 13,674,311 13,768,775
=========== =========== =========== ===========
Diluted 13,740,925 13,880,422 13,794,190 13,849,082
=========== =========== =========== ===========
Cash dividends declared $ 0.88 $ 0.83 $ 2.64 $ 2.49
=========== =========== =========== ===========
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
Treasury Other
Common Retained Stock Comprehensive Comprehensive
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 Stock Earnings at Cost Income Income
- ------------------------------------------------------------------------ --------- -------- --------- ------------- -------------
BALANCE AT DECEMBER 31, 2002 $ 105,768 $446,300 ($ 65,194) $ 22,418
--------- -------- --------- ---------
Net Income 68,489 $ 68,489
--------- -------- --------- --------- ---------
Accumulated other comprehensive income,
Reverse additional minimum liability for pension plan,
net of taxes $860 1,598
--------- -------- --------- --------- ---------
Unrealized net holding loss on securities available-for-sale,
net of taxes ($3,466) (6,437) (4,839)
--------- -------- --------- --------- ---------
Total comprehensive income $ 63,650
--------- -------- --------- --------- =========
Cash dividends on common stock:
Park at $2.49 per share (34,282)
--------- -------- --------- ---------
Shares issued for stock options - 1,924 shares 68
--------- -------- --------- ---------
Tax benefit from exercise of stock options 62
--------- -------- --------- ---------
Treasury stock purchased - 74,467 shares (7,275)
--------- -------- --------- ---------
Treasury stock reissued for exercise of stock options - 41,137 shares 4,251
--------- -------- --------- ---------
BALANCE AT SEPTEMBER 30, 2003 $ 105,898 $480,507 ($ 68,218) $ 17,579
========= ======== ========= =========
BALANCE AT DECEMBER 31, 2003 $ 105,895 $486,769 ($ 68,577) $ 18,954
--------- -------- --------- ---------
Net Income $ 70,610 $ 70,610
--------- -------- --------- --------- ---------
Accumulated other comprehensive income, net of tax:
Unrealized net holding loss on securities available-for-sale,
net of taxes ($2,862) (5,316) (5,316)
--------- -------- --------- --------- ---------
Total comprehensive income $ 65,294
--------- -------- --------- --------- =========
Cash dividends on common stock:
Park at $2.64 per share (36,104)
--------- -------- --------- ---------
Shares issued for stock options - 1,955 shares 67
--------- -------- --------- ---------
Tax benefit from exercise of stock options 77
--------- -------- --------- ---------
Cash paid for fractional shares - 24 shares (3)
--------- -------- --------- ---------
Treasury stock purchased - 204,458 shares (23,699)
--------- -------- --------- ---------
Treasury stock reissued for exercise of stock options - 50,625 shares 4,644
--------- -------- --------- ---------
BALANCE AT SEPTEMBER 30, 2004 $ 106,036 $521,275 ($ 87,632) $ 13,638
========= ======== ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
PARK NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Nine Months Ended
September 30,
----------------------------
2004 2003
----------- -----------
Operating activities:
Net income $ 70,610 $ 68,489
----------- -----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, accretion, and amortization 517 (4,677)
----------- -----------
Provision for loan losses 6,115 9,425
----------- -----------
Amortization of the excess of cost over
net assets of banks purchased 1,109 1,748
----------- -----------
Realized investment security (gains) losses (106) 5,387
----------- -----------
Changes in assets and liabilities:
Increase in other assets (21,482) (7,336)
----------- -----------
Increase in other liabilities 2,944 1,789
----------- -----------
Net cash provided from operating activities 59,707 74,825
----------- -----------
Investing activities:
Proceeds from sales of:
Available-for-sale securities 429 487,944
----------- -----------
Proceeds from maturity of:
Available-for-sale securities 305,344 2,153,513
----------- -----------
Held-to-maturity securities 46,672 607,830
----------- -----------
Purchases of:
Available-for-sale securities (260,831) (3,210,590)
----------- -----------
Held-to-maturity securities (62,659) (341,656)
----------- -----------
Net decrease in interest bearing deposits with other banks 50 0
----------- -----------
Net increase in loans (144,790) (22,504)
----------- -----------
Purchases of premises and equipment, net (4,547) (2,989)
----------- -----------
Net cash used by investing activities (120,332) (328,452)
----------- -----------
Continued
7
PARK NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
(dollars in thousands)
Nine Months Ended
September 30,
------------------------
2004 2003
--------- ---------
Financing activities:
Net increase (decrease) in deposits $ 121,156 ($ 91,082)
--------- ---------
Net (decrease) increase in short-term borrowings (44,417) 316,309
--------- ---------
Cash paid for fractional shares (3) -
--------- ---------
Exercise of stock options 141 130
--------- ---------
Purchase of treasury stock, net (19,055) (3,024)
--------- ---------
Long-term debt issued 162,897 175,000
--------- ---------
Repayment of long-term debt (140,111) (176,272)
--------- ---------
Cash dividends paid (48,235) (45,745)
--------- ---------
Net cash provided from financing activities 32,373 175,316
--------- ---------
Decrease in cash and cash equivalents (28,252) (78,311)
--------- ---------
Cash and cash equivalents at beginning of year 169,782 238,788
--------- ---------
Cash and cash equivalents at end of period $ 141,530 $ 160,477
========= =========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 43,621 $ 49,432
--------- ---------
Income taxes $ 30,207 $ 28,800
--------- ---------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8
PARK NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Month Periods Ended September 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 September 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 September 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
September 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 $4.32 million
at September 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 $369,764 for the third quarter of 2004 and $582,500 for the third
quarter of 2003 and was $1,109,000 for the first nine months of 2004 compared to
$1,748,000 for the first nine months 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, Nine Months Ended,
September 30, September 30,
---------------------- ---------------------
2004 2003 2004 2003
-------- ------- ------- -------
Beginning of Period $64,090 $65,525 $63,142 $62,028
Provision for Loan Losses 2,745 3,156 6,115 9,425
Losses Charged to the Reserve <3,714> <5,921> <9,527> <12,103>
Recoveries 1,618 1,716 5,009 5,126
------- ------- ------- -------
End of Period $64,739 $64,476 $64,739 $64,476
======= ======= ======= =======
Note 4 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share for the three and nine month periods ended September 30, 2004 and 2003.
(Dollars in Thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Numerator:
Net Income $23,547 $20,200 $70,610 $68,489
Denominator:
Denominator for basic earnings per share
(weighted-average shares) 13,608,629 13,764,381 13,674,311 13,768,775
Effect of dilutive securities 132,296 116,041 119,879 80,307
Denominator for diluted earnings per share
(adjusted weighted-average shares & assumed) 13,740,925 13,880,422 13,794,190 13,849,082
Earnings per Share:
Basic earnings per share $1.73 $1.47 $5.16 $4.97
Diluted earnings per share $1.71 $1.46 $5.12 $4.95
-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 September 30, 2004 (In Thousands)
All
PNB RTC CNB FKNB UB SNB SEC CIT Other TOTAL
Net Interest Income $ 15,796 $ 5,639 $ 5,066 $ 8,188 $ 2,502 $ 3,880 $ 8,275 $ 1,798 $ 2,666 $ 53,810
Provision for
Loan Losses 1,170 255 180 495 90 90 255 60 150 2,745
Other Income 5,323 1,051 1,245 1,805 434 524 2,062 404 160 13,009
Other Expense 9,467 2,581 2,972 4,086 1,487 1,835 4,984 1,119 2,561 31,092
Net Income $ 7,105 $ 2,540 $ 2,113 $ 3,605 $ 919 $ 1,706 $ 3,474 $ 688 $ 1,397 $ 23,547
Balances at September
30, 2004
Assets $1,667,675 $562,451 $503,169 $746,617 $242,282 $392,802 $912,286 $200,906 $<92,619> $5,135,570
Operating Results for the Three Months Ended September 30, 2003 (In Thousands)
All
PNB RTC CNB FKNB UB SNB SEC CIT Other TOTAL
Net Interest Income $ 15,029 $ 5,003 $ 4,688 $ 7,838 $ 1,907 $ 3,370 $ 7,708 $ 1,534 $ 2,273 $ 49,350
Provision for
Loan Losses 1,080 330 225 666 90 150 405 90 120 3,156
Other Income 3,870 1,095 1,250 1,950 848 607 1,795 84 167 11,666
Other Expense 8,799 2,508 2,876 3,966 1,454 1,825 5,030 1,138 1,762 29,358
Net Income $ 6,256 $ 2,153 $ 1,902 $ 3,495 $ 828 $ 1,413 $ 2,780 $ 278 $ 1,095 $ 20,200
Balances at September
30, 2003
Assets $1,612,904 $483,801 $446,193 $742,036 $222,206 $360,969 $849,885 $194,247 $<226,459> $4,685,782
Operating Results for the Nine Months Ended September 30, 2004 (In Thousands)
All
PNB RTC CNB FKNB UB SNB SEC CIT Other TOTAL
Net Interest Income $ 47,305 $ 16,384 $ 14,761 $ 24,216 $ 7,599 $ 11,618 $ 23,892 $ 5,524 $ 7,649 $158,948
Provision for
Loan Losses 2,315 540 285 1,510 230 120 475 170 470 6,115
Other Income 16,361 3,512 4,019 5,199 1,343 1,632 6,186 1,150 630 40,033
Other Expense 27,976 8,308 8,921 12,273 4,501 5,711 14,949 3,390 6,883 92,912
Net Income $ 22,615 $ 7,374 $ 6,405 $ 10,467 $ 2,843 $ 5,118 $ 9,904 $ 2,100 $ 3,784 $ 70,610
Operating Results for the Nine Months Ended September 30, 2003 (In Thousands)
All
PNB RTC CNB FKNB UB SNB SEC CIT Other TOTAL
Net Interest Income $ 46,159 $ 16,030 $ 14,553 $ 23,589 $ 6,486 $ 10,394 $ 24,417 $ 4,895 $ 6,628 $153,151
Provision for
Loan Losses 3,540 690 675 1,998 270 450 1,215 270 317 9,425
Other Income 17,773 3,785 4,424 5,256 2,143 2,093 6,711 935 488 43,608
Other Expense 27,362 7,588 8,476 12,040 4,396 5,487 14,769 3,376 6,423 89,917
Net Income $ 22,709 $ 7,603 $ 6,560 $ 10,100 $ 2,723 $ 4,596 $ 10,257 $ 1,497 $ 2,444 $ 68,489
-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 September 30, 2004 and
2003. The reconciling amounts for consolidated total assets for both of the
quarters ended September 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 Nine Months Ended
September 30, September 30,
------------------------- ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income as reported $ 23,547 $ 20,200 $ 70,610 $ 68,489
Deduct:
Total stock-based employee compensation
expense determined under fair value method,
net of related tax effects <646> <40> <2,981> <1,852>
Pro forma net income $ 22,901 $ 20,160 $ 67,629 $ 66,637
Basic earnings per share as reported $ 1.73 $ 1.47 $ 5.16 $ 4.97
Pro forma basic earnings per share $ 1.68 $ 1.46 $ 4.95 $ 4.84
Diluted earnings per share as reported $ 1.71 $ 1.46 $ 5.12 $ 4.95
Pro forma diluted earnings per share $ 1.67 $ 1.45 $ 4.90 $ 4.81
-12-
Note 7 - Pending Acquisitions
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 by the first quarter of
2005, 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 with 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.
On September 24, 2004 Park announced the signing of a stock purchase agreement
whereby Park will acquire First Clermont Bank (Clermont County, Ohio) in an all
cash transaction for $52.5 million. Following this acquisition, First Clermont
Bank will merge with The Park National Bank, a subsidiary of Park. The
acquisition of First Clermont Bank is expected to be completed by the first
quarter of 2005 and requires the approval of appropriate regulatory authorities.
First Clermont Bank had $202 million of total assets and $25 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 these acquisitions. Funding for the acquisitions
is available from Park's affiliate banks.
-13-
Note 8 - Loans
The composition of the loan portfolio is as follows:
(In Thousands)
September 30, December 31
2004 2003
------------ -----------
Commercial, Financial and Agricultural $ 448,945 $ 441,165
Real Estate:
Construction 143,749 121,160
Residential 1,055,051 983,702
Commercial 713,145 670,082
Consumer 461,244 450,145
Leases 51,299 64,549
---------- ----------
Total Loans $2,873,433 $2,730,803
---------- ----------
Note 9 - Investment Securities
The amortized cost and fair values of investment securities are shown below.
Management evaluates investment securities on a quarterly basis for other than
temporary impairment. No impairment charges have been deemed necessary in 2004
and 2003.
(In Thousands) Gross
September 30, 2004 Unrealized Gross Unrealized Estimated
Securities Available-for-Sale Amortized Cost Holding Gains Holding Losses Fair Value
-------------- ------------- -------------- ----------
Obligations of U.S. Treasury $ 11,012 $ 135 $ 3 $ 11,145
and other U.S. Government agencies
Obligation of States and Political
Subdivisions 85,183 4,669 7 89,845
U.S. Government Agencies' Asset-
Backed Securities and Other Asset-
Backed Securities 1,714,725 18,821 3,125 1,730,420
Other Equity Securities 45,020 497 - 45,517
---------- ---------- ---------- ----------
Total $1,855,940 $ 24,122 $ 3,135 $1,876,927
---------- ---------- ---------- ----------
September 30, 2004
Securities Held-to-Maturity
Obligations of States and Political Subdivisions $ 19,626 $ 842 $ - $ 20,468
U.S. Government Agencies' asset-
backed securities and Other Asset-
Backed Securities 58,890 787 - 59,677
---------- ---------- ---------- ----------
Total $ 78,516 $ 1,629 $ - $ 80,145
---------- ---------- ---------- ----------
-14-
(In Thousands) Gross
December 31, 2003 Unrealized Gross Unrealized Estimated
Securities Available-for -Sale Amortized Cost Holding Gains Holding Losses Fair Value
-------------- ------------- ---------------- ----------
Obligations of U.S. Treasury and other U.S.
Government Agencies $ 24,389 $ 965 $ - $ 25,354
Obligations of State and Political Subdivisions 93,936 5,598 6 99,528
U.S. Government agencies' asset-backed securities and 1,737,215 23,393 1,305 1,759,303
other asset-backed securities
Other Equity Securities 43,997 522 7 44,512
---------- ---------- ---------- ----------
Total $1,899,537 $ 30,478 $ 1,318 $1,928,697
---------- ---------- ---------- ----------
Gross
December 31, 2003 Unrealized Gross Unrealized Estimated
Securities Held-to-Maturity Amortized Cost Holding Gains Holding Losses Fair Value
-------------- ------------- ---------------- ----------
Obligations of States and Political Subdivisions $ 21,480 $ 863 $ - $ 22,343
Other Asset-Backed Securities 41,049 171 - 41,220
---------- ---------- ---------- ----------
Total $ 62,529 $ 1,034 $ - $ 63,563
---------- ---------- ---------- ----------
Note 10 - Benefit Plans
Park has a noncontributory defined benefit pension plan covering substantially
all of its employees. The plan provides benefits based on an employee's years of
service and compensation.
Park's funding policy is to contribute annually an amount that can be deducted
for federal income tax purposes using a different actuarial cost method and
different assumptions from those used for financial reporting purposes.
The following table shows the components of net periodic benefit expenses.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2004 2003 2004 2003
------ ------ ------ ------
Service Cost $ 625 $ 524 $1,876 $1,571
Interest Cost 644 587 1,933 1,760
Expected Return on Plan Assets <697> <535> <2,092> <1,604>
Amortization of Prior Service Cost 3 3 9 9
Recognized Net Actuarial Loss (Gain) 124 85 373 254
------ ------ ------ ------
Benefit Expense $ 699 $ 664 $2,099 $1,990
====== ====== ====== ======
-15-
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 Untied 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 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.
-16-
Comparison of Results of Operations
For the Three and Nine Month Periods Ended
September 30, 2004 and 2003
Summary Discussion of Results
Net income increased by $3.3 million or 16.6% to $23.5 million for the three
months ended September 30, 2004 compared to $20.2 million for the same period in
2003. For the first nine months of 2004, net income increased by $2.1 million or
3.1% to $70.6 million compared to $68.5 million for the same period in 2003.
The increase in net income for both the three and nine month periods ended
September 30, 2004 was primarily due to the absence of losses from the sale of
investment securities in 2004 compared to 2003. The loss from the sale of
investment securities was $4.5 million for the third quarter of 2003 and $5.4
million for the first nine months of 2003. There were no investment securities
sold during the third quarter of 2004 and there was a gain from the sale of
investment securities of $106,000 for the first nine months of 2004.
The annualized net income to average asset ratio (ROA) was 1.84% for the third
quarter of 2004 and 1.87% for the first nine months of 2004, compared to 1.72%
for the third quarter of 2003 and 1.90% for the first nine months of 2003. The
annualized net income to average equity ratio (ROE) was 17.81% for the third
quarter of 2004 and 17.70% for the first nine months of 2004, compared to 15.37%
for the third quarter of 2003 and 17.75% for the first nine months of 2003.
Diluted earnings per share increased by 17.1% to $1.71 from $1.46 for the third
quarter of 2004 and increased by 3.4% to $5.12 from $4.95 for the nine months
ended September 30, 2004.
Park announced two pending acquisitions during the third quarter of 2004. See
Note 7 of the Notes to Consolidated Financial Statements for information on
these acquisitions. Management expects that both acquisitions will be
immediately accretive to earnings in 2005. The acquisitions will be funded
through working capital.
Net Interest Income Comparison for the Third 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
increased by $4.5 million or 9.0% to $53.81 million for the third quarter of
2004 compared to $49.35 million for the third quarter of 2003. The following
table compares the average balance and tax equivalent yield/cost for interest
earning assets and interest bearing liabilities for the third quarter of 2004
with the same quarter in 2003.
-17-
Three Months Ended September 30,
(In Thousands)
2004 2003
------------------------ ----------------------
Average Tax Average Tax
Balance Equivalent Balance Equivalent
% %
---------- ---------- ---------- ----------
Loans $2,836,341 6.35% $2,700,373 6.74%
Taxable Investments 1,837,694 4.80% 1,495,549 4.43%
Tax Exempt Investments 105,113 7.09% 127,011 7.15%
Federal Funds Sold and Securities Purchased
under Resale Agreements 4,961 2.49% 31,736 1.36%
Interest Earning Assets $4,784,109 5.77% $4,354,669 5.92%
Interest Bearing Deposits 2,981,788 1.33% $2,911,736 1.57%
Short-term Borrowings 440,758 1.40% 400,626 .68%
Long-term Debt 513,785 2.51% 236,245 4.21%
Interest Bearing Liabilities $3,936,331 1.50% $3,548,607 1.64%
Excess Interest Earning Assets 847,778 4.27% $ 806,062 4.28%
Net Interest Margin 4.54% 4.58%
Average interest earning assets increased by $429 million or 9.9% to $4,784
million for the quarter ended September 30, 2004 compared to the same quarter in
2003. The average yield on interest earning assets decreased to 5.77% for the
third quarter of 2004 compared to 5.92% for the third quarter of 2003.
Average loan totals increased by $136 million or 5.0% to $2,836 million for the
third quarter of 2004 compared to the same period in 2003. At September 30,
2004, total loans were $2,873 million compared to $2,731 million at December 31,
2003, an increase of $142 million or 5.2%. Total loans increased by $39 million
or 1.4% for the year 2003, 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
third quarter of 2004. Management anticipates that total loans will continue to
increase during the fourth quarter of 2004.
The average yield on the loan portfolio was 6.35% for the third quarter of 2004
compared to 6.74% for the same period in 2003. The average prime lending rate
was 4.47% for the third quarter of 2004 compared to 4.00% for the third quarter
of 2003. Approximately 25% of Park's loan portfolio reprices based on the prime
lending rate. The Federal Reserve has increased the federal funds rate by .75%
to 1.75% in 2004 from 1.00%. An additional increase in the federal funds rate is
expected during the fourth quarter of 2004. The average yield on the loan
portfolio was 6.41% for the first quarter of 2004 and 6.26% for the second
quarter of 2004. Management expects that the average yield on the loan portfolio
will increase in the fourth quarter of 2004.
-18-
Average investment securities, including federal funds sold and securities
purchased under resale agreements, increased by $293 million or 17.7% to $1,948
million for the third quarter of 2004. During the third quarter of 2003, average
investment securities included $183 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 for the third
quarter increased by $476 million or 32.4% in 2004 compared to 2003.
The average yield on taxable investment securities was 4.80% for the third
quarter of 2004 compared to 4.43% for the third 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 7.09% for the
third quarter of 2004 compared to 7.15% for the same period in 2003. No tax
exempt investment securities were purchased during the past year.
At September 30, 2004, the tax equivalent yield on the total investment
portfolio was 4.98% and the average maturity was 4.2 years. U.S. Government
Agency asset-backed securities were approximately 90% of the total investment
portfolio at the end of the third 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 5.2 years with a 1.00% increase in long-term interest rates and to 5.5 years
with a 2.00% increase in long-term interest rates.
Average interest bearing liabilities increased by $388 million or 10.9% to
$3,936 million for the three months ended September 30, 2004 compared to the
same period in 2003. The average cost of interest bearing liabilities decreased
by .14% to 1.50% for the third quarter of 2004 compared to 1.64% for the same
period in 2003.
Average interest bearing deposits increased by $70 million or 2.4% to $2,982
million for the three months ended September 30, 2004 compared to the same
period in 2003. The average cost of interest bearing deposits decreased by .24%
to 1.33% for the third quarter of 2004 compared to 1.57% for the same period in
2003.
Average short-term borrowings increased by $40 million to $441 million for the
third quarter of 2004 compared to the same quarter of 2003. The average cost of
short-term borrowings increased to 1.40% for the third quarter in 2004 compared
to .68% for the same quarter in 2003.
Average long-term borrowings increased by $278 million to $514 million for the
third quarter of 2004 compared to the same period in 2003. The average cost of
long-term borrowings decreased to 2.51% for the third quarter of 2004 compared
to 4.21% 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.
-19-
Net Interest Income Comparison for the First Nine Months of 2004 and 2003
Net interest income increased by $5.8 million or 3.8% to $158.95 million for the
nine months ended September 30, 2004 compared to $153.15 million for the same
period 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 nine months of 2004 with the same period in 2003.
Nine Months Ended September 30, (In Thousands)
2004 2003
------------------------ ----------------------
Average Tax Average Tax
Balance Equivalent Balance Equivalent
% %
---------- ---------- ---------- ----------
Loans $2,790,978 6.34% $2,687,076 6.96%
Taxable Investments 1,813,857 4.84% 1,656,431 4.57%
Tax Exempt Investments 108,137 7.21% 129,510 7.24%
Federal Funds Sold and Securities
Purchased under Resale Agreements 7,466 1.48% 31,628 1.28%
Interest Earning Assets $4,720,438 5.78% $4,504,645 6.05%
Interest Bearing Deposits $2,946,887 1.34% $2,907,782 1.74%
Short-term Borrowing 426,905 1.30% 540,821 .46%
Long-term Debt 502,795 2.41% 280,774 3.80%
Interest Bearing Liabilities $3,876,587 1.48% $3,729,377 1.71%
Excess Interest Earning Assets $ 843,851 4.30% $ 775,268 4.34%
Net Interest Margin 4.56% 4.63%
Average interest earnings assets increased by $216 million or 4.8% to $4,720
million for the nine months ended September 30, 2004 compared to the same period
in 2003. The average yield on interest earning assets decreased to 5.78% for the
first nine months of 2004 compared to 6.05% for the same period in 2003.
Average loans increased by $104 million or 3.9% to $2,791 million for the first
nine months of 2004 compared to the first nine months of 2003. The average yield
on loans decreased to 6.34% for the first nine months of 2004 compared to 6.96%
for the same period in 2003. The average prime lending rate was 4.16% for the
first nine months of 2004 and the first nine months of 2003.
Average investment securities, including federal funds sold and securities
purchased under resale agreements, increased by $112 million or 6.2% to $1,929
million for the first nine months of 2004 compared to the same period in 2003.
The yield on taxable investment securities was 4.84% for the first nine months
of 2004 compared to 4.57% for the same period in 2003.
Average interest bearing liabilities increased by $147 million or 3.9% to $3,877
million for the first nine months of 2004 compared to the same period in 2003.
Average interest bearing deposits increased by $39 million or 1.3% to $2,947
million for the first nine months of 2004 compared to the same period in 2003.
The average cost of interest bearing deposits decreased to 1.34% for the first
nine months of 2004 compared to 1.74% for the same period in 2003.
-20-
Average short-term borrowings decreased by $114 million to $427 million for the
first nine months of 2004 compared to $541 million for the same period in 2003.
The average cost of short-term borrowings increased to 1.30% for the first nine
months of 2004 compared to .46% 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 $304 million
for the first nine months of 2003 at an average cost of .04%. Park did not have
any dollar-roll repo borrowings during the first nine months of 2004.
Average long-term borrowings were $503 million for the first nine months of 2004
compared to $281 million for the same period in 2003. The average cost of
long-term borrowings decreased to 2.41% for the first nine months of 2004
compared to 3.80% 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 $2.7 million and $6.1 million, respectively,
for the third quarter and the first nine months of 2004 compared to $3.2 million
and $9.4 million for the same periods in 2003. Net loan charge-offs were $2.1
million and $4.5 million, respectively, for the three and nine month periods
ended September 30, 2004 compared to $4.2 million and $7.0 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 $27.5 million or .96% of
loans at September 30, 2004 compared to $25.7 million or .94% of loans at
December 31, 2003 and $25.0 million or .92% of loans at September 30, 2003. The
reserve for loan losses as a percentage of outstanding loans was 2.25% at
September 30, 2004 compared to 2.31% at December 31, 2003 and 2.38% at September
30, 2003.
Total Other Income
Total other income decreased by $3.1 million or 19.4% to $13.0 million for the
three months ended September 30, 2004 and decreased by $9.1 million or 18.5% to
$39.9 million for the nine months ended September 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 Nine Months Ended
September 30, September 30,
-------------------------------- -------------------------------
2004 2003 Change 2004 2003 Change
------- ------- -------- ------- ------- -------
Fees from Fiduciary
Activities $ 2,701 $ 2,691 $ 10 $ 8,243 $ 7,551 $ 692
Service Charges on
Deposit Accounts 4,125 3,665 460 11,671 10,674 997
Other Service
Income 2,281 5,818 <3,537> 7,744 18,683 <10,939>
Other Income 3,902 3,966 <64> 12,269 12,087 182
------- ------- -------- ------- ------- -------
Total $13,009 $16,140 $ <3,131> $39,927 $48,995 $<9,068>
------- ------- -------- ------- ------- -------
-21-
The large decrease in fees earned from Other Service Income for both the third
quarter of 2004 and the first nine 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 $174 million of
fixed rate mortgage loans during the first nine months of 2004 compared to
approximately $768 million for the first nine months of 2003. Management expects
that the fee income generated from the origination and sale of fixed rate
mortgage loans will continue at the same pace as the first nine months in the
fourth quarter of 2004.
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 approximately $400,000 of
equity investments. There were no sales of securities during the second and
third quarters of 2004.
The net loss from the sale of investment securities was $4.5 million for the
three months ended September 30, 2003. The proceeds from the sale of $339
million of U.S. Government Agency collateralized mortgage obligations and
mortgage-backed securities were reinvested in higher yielding fifteen-year U.S.
Government Agency mortgage-backed securities. For the nine months ended
September 30, 2003, the net loss from the sale of investment securities was $5.4
million.
Other Expense
Total other expense increased by $1.7 million or 5.9% to $31.1 million for the
three months ended September 30, 2004 compared to $29.4 million for the same
period in 2003. Salaries and employee benefits expense increased by $1.3 million
or 7.7% to $17.8 million for the third quarter of 2004 compared to the same
period in 2003. Full time equivalent employees were 1,705 at September 30, 2004
compared to 1,650 at September 30, 2003.
Total other expense increased by $3.0 million or 3.3% to $92.9 million for the
nine months ended September 30, 2004 compared to $89.9 million for the same
period in 2003. Salaries and employee benefits expense increased by $2.5 million
or 4.9% to $53.1 million for the first nine months of 2004 compared to $50.6
million for the same period in 2003.
Federal Income Taxes
Federal income tax expense was $9.4 million and $29.3 million for the three and
nine month periods ended September 30, 2004 compared to $8.3 million and $28.9
million for the same periods in 2003. The ratio of federal income tax expense to
income before taxes was 28.6% for the three months ended September 30, 2004 and
29.4% for the nine months ended September 30, 2004 compared to 29.1% for the
third quarter of 2003 and 29.7% for the first nine months of 2003. The
difference between the effective federal income tax rate and the statutory rate
of 35% is primarily due to tax-exempt interest income and low income housing tax
credits.
-22-
COMPARISON OF FINANCIAL CONDITION
AT SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
Changes in Financial Condition and Liquidity
Total assets increased by $101 million or 2.0% to $5,136 million at September
30, 2004 compared to $5,035 million at December 31, 2003. Total loans increased
by $143 million or 5.2% to $2,873 million at September 30, 2004 as the demand
for commercial and commercial real estate loans continued to be relatively
strong during the first nine months of 2004. Management has placed an increased
emphasis on the generation of commercial and commercial real estate loans in
2004. Investment securities decreased by $36 million or 1.8% during the first
nine months of 2004.
Total liabilities increased by $90 million or 2.0% to $4,582 million at
September 30, 2004 compared to $4,492 million at December 31, 2003. Total
deposits increased by $121 million or 3.5% to $3,535 million at September 30,
2004. Total borrowed money decreased by $22 million or 2.2% to $981 million at
September 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 56.0% at September 30, 2004 compared to 54.2% at December 31,
2003 and 57.9% at September 30, 2003. Cash and cash equivalents totaled $142
million at September 30, 2004 compared to $170 million at December 31, 2003 and
$160 million at September 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 September 30, 2004 was $553 million or 10.77% of total
assets compared to $543 million or 10.79% of total assets at December 31, 2003
and $536 million or 11.43% of total assets at September 30, 2003.
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
10.36% at September 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 16.40% at September 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 17.65% at September 30, 2004 and 17.78% at
December 31, 2003.
-23-
The financial institution subsidiaries of Park each met the well capitalized
capital ratio guidelines at September 30, 2004. The following table indicates
the capital ratios for each subsidiary and Park at September 30, 2004:
TIER I TOTAL
LEVERAGE RISK-BASED RISK-BASED
Park National Bank 6.79% 10.12% 13.17%
Richland Trust Company 6.44% 11.97% 13.23%
Century National Bank 6.42% 11.18% 13.48%
First-Knox National Bank 6.97% 11.00% 14.40%
Second National Bank 6.39% 11.04% 14.49%
United Bank, N.A. 6.59% 12.37% 13.63%
Security National Bank 6.34% 10.29% 14.18%
Citizens National Bank 6.53% 14.12% 19.05%
Park National Corporation 10.36% 16.40% 17.65%
Minimum Capital Ratio 4.00% 4.00% 8.00%
Well Capitalized Ratio 5.00% 6.00% 10.00%
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 acquisitions of First Federal Bancorp,
Inc. and First Clermont Bank.
On August 3, 2004, Park jointly announced with First Federal Bancorp, Inc. the
signing of a definitive agreement and plan of merger. Under the terms of the
agreement, Park anticipates paying approximately $45.9 million in cash to the
shareholders of First Federal.
On September 24, 2004, Park announced the signing of a stock purchase agreement
whereby Park will acquire First Clermont Bank in an all cash transaction for
$52.5 million.
See Note 7 of the Notes to the Consolidated Financial Statements for information
on the pending acquisitions. Both acquisitions are expected to be completed by
the first quarter of 2005. The parent company of Park will not need to arrange
any outside borrowing to fund the purchase of First Federal and First Clermont
Bank, but intends to fund the acquisitions 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 and other reports which Park files or submits under the Exchange
Act 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 and other reports which Park files or submits under the Exchange
Act 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 13a - 15 (f) under the Exchange Act) that occurred during Park's
fiscal quarter ended September 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. Unregistered Sales of Equity Securities and Use of Proceeds
(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 September 30,
2004:
Total Number of
Common Average Price Total Number of Common Shares Maximum Number of Common
Shares Paid per Common Purchased as Part of Publicly Shares that May Yet be Purchased
Period Purchased Share Announced Plans or Programs under the Plans or Programs (1)
- -------------------------- --------------- --------------- ----------------------------- ---------------------------------
July 1 thru July 31, 2004 -0- -0- -0- 695,923
August 1 thru August
31, 2004 -0- -0- -0- 695,923
September 1 thru September
30, 2004 -0- -0- -0- 695,923
(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
September 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 September 30,
2004, incentive stock options covering 698,405 common shares were
outstanding and 328,329 common shares were available for future
grants. With 819,111 common shares held as treasury shares for
purposes of the 1995 Plan at September 30, 2004, an additional
207,623 common shares remained authorized for repurchase for
purposes of funding the 1995 Plan.
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
In connection with Park's acquisition of First Federal Bancorp, Inc., Park
filed a letter dated November 2, 2004 with the Federal Reserve Board
indicating its willingness to sell a branch office in Roseville, Ohio.
Park has agreed to sell the deposits, loans, and fixed assets of the
branch to an out of market purchaser. At June 30, 2004, the branch had
$12.98 million in deposits.
Item 6. Exhibits
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)
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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: November 3, 2004 BY: /s/C. Daniel DeLawder
-------------------------
C. Daniel DeLawder
President and Chief Executive Officer
DATE: November 3, 2004 BY: /s/John W. Kozak
------------------
John W. Kozak
Chief Financial Officer
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