-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J/x0LMhLFP6WeYe6JdELLAkntqL3pYzcsvUPqaFELZoZV4A+i4Z8s6MUMXNOdWfO qO/6ZSkeIgRQ9hTDbqE0EQ== 0000950152-03-003448.txt : 20030326 0000950152-03-003448.hdr.sgml : 20030325 20030326140611 ACCESSION NUMBER: 0000950152-03-003448 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARK NATIONAL CORP /OH/ CENTRAL INDEX KEY: 0000805676 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 311179518 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13006 FILM NUMBER: 03617849 BUSINESS ADDRESS: STREET 1: 50 NORTH THIRD ST CITY: NEWARK STATE: OH ZIP: 43055 BUSINESS PHONE: 6143498451 MAIL ADDRESS: STREET 1: P O BOX 3500 CITY: NEWARK STATE: OH ZIP: 43058-3500 10-K 1 l99435ae10vk.txt PARK NATIONAL BANK | FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ____________ Commission File Number 1-13006 PARK NATIONAL CORPORATION ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Ohio 31-1179518 - -------------------------------------------------------------- ------------------------------------ (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 50 North Third Street, P.O. Box 3500, Newark, Ohio 43058-3500 - -------------------------------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (740) 349-8451 ------------------------------------ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------------------------ Common Shares, without par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No --- --- State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant's most recently completed second fiscal quarter: $1,039,031,618 as of June 28, 2002 (for this purpose, common shares held by the Registrant's banking subsidiaries in fiduciary accounts are not considered to be held by affiliates). Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: 13,781,447 common shares, without par value, as of February 21, 2003. Documents Incorporated by Reference: (1) Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 2002, are incorporated by reference into Parts I and II of this Annual Report on Form 10-K. (2) Portions of the Registrant's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on April 21, 2003, are incorporated by reference into Part III of this Annual Report on Form 10-K. Exhibit Index on Page E-1 2 PART I ITEM 1. BUSINESS. GENERAL Park National Corporation ("Park") is a bank holding company under the Bank Holding Company Act of 1956 and is subject to regulation by the Federal Reserve Board. Park was incorporated under Ohio law in 1992. Park's principal executive offices are located at 50 North Third Street, Newark, Ohio 43055, and its telephone number is (740) 349-8451. Park's common shares are listed on the American Stock Exchange under the symbol "PRK." Park maintains an Internet website at www.parknationalcorp.com (this uniform resource locator, or URL, is an inactive textual reference only and is not intended to incorporate Park's website into this Annual Report on Form 10-K). Park makes available free of charge on or through its website, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as soon as reasonably practicable after Park electronically files such material with, or furnishes it to, the Securities and Exchange Commission (the "SEC"). Through its subsidiaries, The Park National Bank, Newark, Ohio, a national banking association, The Richland Trust Company, Mansfield, Ohio, an Ohio state-chartered bank, Century National Bank, Zanesville, Ohio, a national banking association, The First-Knox National Bank of Mount Vernon, a national banking association, United Bank, N.A., Bucyrus, Ohio, a national banking association, Second National Bank, Greenville, Ohio, a national banking association, The Security National Bank and Trust Co., Springfield, Ohio, a national banking association, and The Citizens National Bank of Urbana, Urbana, Ohio, a national banking association, Park engages in a general commercial banking and trust business in small and medium population Ohio communities. Park National Bank operates through two banking divisions with the Park National Division headquartered in Newark, Ohio and the Fairfield National Division headquartered in Lancaster, Ohio. First-Knox National Bank also operates through two banking divisions with the First-Knox National Division headquartered in Mount Vernon, Ohio and the Farmers and Savings Division headquartered in Loudonville, Ohio. Security National Bank also operates through two divisions with the Security National Division headquartered in Springfield, Ohio and the Unity National Division (formerly The Third Savings and Loan Company) headquartered in Piqua, Ohio. Park's banking subsidiaries and their respective divisions comprise Park's segments. Financial information about Park's reportable segments is included in Note 19 of the Notes to Consolidated Financial Statements located on pages 48 and 49 of Park's Annual Report to Shareholders for the fiscal year ended December 31, 2002. That financial information is incorporated herein by reference. Guardian Financial Services Company, an Ohio consumer finance company based in Hilliard, Ohio, also operates as a separate subsidiary of Park. Guardian Finance provides consumer finance services in the central Ohio area. 3 SERVICES PROVIDED BY PARK'S SUBSIDIARIES Park National Bank, Richland Trust Company, Century National Bank, First-Knox National Bank, United Bank, Second National Bank, Security National Bank and Citizens National Bank provide the following principal services: - the acceptance of deposits for demand, savings and time accounts and the servicing of those accounts; - commercial, industrial, consumer and real estate lending, including installment loans and automobile leasing, credit cards, home equity lines of credit and commercial and auto leasing; - trust services; - cash management; - safe deposit operations; - electronic funds transfers; - online Internet banking with bill pay service; and - a variety of additional banking-related services tailored to the needs of individual customers. Park believes that the deposit mix of its banking subsidiaries is such that no material portion has been obtained from a single customer and, consequently, the loss of any one customer of any banking subsidiary would not have a materially adverse effect on the business of that banking subsidiary or Park. Park's banking subsidiaries deal with a wide cross-section of businesses and corporations located primarily in Ashland, Athens, Champaign, Clark, Coshocton, Crawford, Darke, Fairfield, Fayette, Franklin, Greene, Hamilton, Hocking, Holmes, Knox, Licking, Madison, Marion, Mercer, Miami, Montgomery, Morrow, Muskingum, Perry and Richland Counties in Ohio. Few loans are made to borrowers outside these counties. Each banking subsidiary makes lending decisions in accordance with written loan policies designed to maintain loan quality. Each banking subsidiary originates and retains for its own portfolio commercial and commercial real estate loans, variable rate residential real estate loans, home equity lines of credit, installment loans and credit card loans. Each banking subsidiary also generates fixed rate residential real estate loans for the secondary market. The loans of each banking subsidiary are spread over a broad range of industrial classifications. Park believes that its banking subsidiaries have no significant concentrations of loans to borrowers engaged in the same or similar industries and have no loans to foreign entities. There are certain risks inherent in making loans. These risks include interest rate changes over the time period in which the loans may be repaid, risks resulting from changes in the economy, risks inherent in dealing with borrowers and, in the case of loans secured by collateral, risks resulting from uncertainties about the future value of the collateral. 4 Commercial loans generally are viewed as having a higher credit risk than residential real estate or consumer loans because they usually involve larger loan balances to a single borrower and are more susceptible to a risk of default during an economic downturn. The primary technique used in determining whether to grant a commercial loan is the review of a schedule of cash flows to evaluate whether anticipated future cash flows will be adequate to service both interest and principal due. Commercial loans may also be based on the underlying collateral provided by the borrower. Most often, the collateral is inventory, machinery, real estate or accounts receivable. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing other loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on success of the business. At December 31, 2002, Park's banking subsidiaries had outstanding approximately $1,096.4 million in commercial loans (including commercial real estate loans) and commercial leases, representing approximately 40.7% of their total aggregate loan portfolio as of that date. The regulatory limits for loans made to one borrower by Park National Bank, Richland Trust Company, Century National Bank, First-Knox National Bank, United Bank, Second National Bank, Security National Bank and Citizens National Bank were $17.8 million, $5.0 million, $5.0 million, $8.7 million, $2.1 million, $4.1 million, $10.9 million and $2.3 million, respectively, at December 31, 2002. However, participations in loans of amounts larger than $10.0 million are generally sold to other banks or financial institutions. Loan terms include amortization schedules commensurate with the purpose of each loan, the source of each repayment and the risk involved. Approval by the Executive Committee of Park is required for loans to existing borrowers whose aggregate total debt, including the principal amount of the proposed loan, exceeds $8.0 million. For new borrowers, a loan of $4.0 million or more requires the approval of the Executive Committee. Park has a loan review program which re-evaluates annually all loans with an outstanding balance greater than $250,000. If deterioration has occurred, the lender subsidiary takes effective and prompt action designed to assure payment of the loan. Upon detection of the reduced ability of a borrower to service interest and/or principal on a loan, the subsidiary downgrades the loan and places it on non-accrual status. The subsidiary then works with the borrower to develop a payment schedule which they anticipate will permit service of the principal and interest on the loan by the borrower. Loans which deteriorate and show the inability of a borrower to repay principal and do not meet the subsidiary's standards are charged off quarterly. Park National Bank and its subsidiaries also lease equipment under terms similar to the commercial lending policies described above. Park Commercial Leasing, a division of Park National Bank, originates and services direct leases of equipment which it acquires with no outside financing. Scope Leasing, Inc., a wholly-owned subsidiary of Park National Bank, specializes in aircraft financing. At December 31, 2002, Scope Leasing had approximately $64.1 million of loans and operating leases secured by aircraft. Since September 2001, the resale value of many aircraft has decreased more significantly than had historically been the case. As a result, to the extent the other party to an aircraft financing arrangement fails to satisfy its payment obligations, Scope Leasing is more likely to incur a loss on the sale of the underlying collateral. At December 31, 2002, Park's subsidiaries had outstanding consumer loans (including automobile leases and credit cards) in an aggregate amount of approximately $498.5 million, 5 constituting approximately 18.5% of their aggregate total loan portfolio. The subsidiaries make installment credit available to customers and prospective customers in their primary market area of Ashland, Athens, Champaign, Clark, Coshocton, Crawford, Darke, Fairfield, Fayette, Franklin, Greene, Hamilton, Hocking, Holmes, Knox, Licking, Madison, Marion, Mercer, Miami, Montgomery, Morrow, Muskingum, Perry and Richland Counties in Ohio. Park Leasing Company, a wholly-owned subsidiary of Park National Bank, has an automobile leasing program with a major national insurance company under which automobile leases may be entered into with lessees throughout several states including the State of Ohio. Park Leasing Company had approximately $12.1 million of automobile leases outstanding under this program at December 31, 2002. Credit approval for consumer loans requires demonstration of sufficient income to repay principal and interest due, stability of employment, a positive credit record and sufficient collateral for secured loans. It is the policy of Park's subsidiaries to adhere strictly to all laws and regulations governing consumer lending. A qualified compliance officer is responsible for monitoring each subsidiary's performance in this area and for advising and updating loan personnel. Park's subsidiaries make credit life insurance and health and accident insurance available to all qualified buyers, thus reducing their risk of loss when a borrower's income is terminated or interrupted. Each subsidiary reviews its consumer loan portfolio monthly and charges off loans which do not meet that subsidiary's standards. Each banking subsidiary also offers VISA and MasterCard accounts through its consumer lending department. These accounts are administered under the same standards as other consumer loans and leases. Consumer loans generally have a higher risk of default than real estate mortgage loans. Consumer loans typically have shorter terms and lower balances with higher yields as compared to real estate mortgage loans, but generally carry higher risks of default. Consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans. At December 31, 2002, Park's banking subsidiaries had outstanding approximately $1,097.3 million in residential real estate, home equity lines of credit and construction mortgages, representing approximately 40.8% of total loans outstanding. The market area for real estate lending by the banking subsidiaries is concentrated in Ashland, Athens, Champaign, Clark, Coshocton, Crawford, Darke, Fairfield, Fayette, Franklin, Greene, Hamilton, Hocking, Holmes, Knox, Licking, Madison, Marion, Mercer, Miami, Montgomery, Morrow, Muskingum, Perry and Richland Counties in Ohio. Each banking subsidiary generally requires that the residential real estate loan amount be no more than 80% of the purchase price or the appraised value of the real estate securing the loan, unless private mortgage insurance is obtained by the borrower. Loans made for each banking subsidiary's portfolio in this lending category are generally adjustable rate, fully amortized mortgages. Each banking subsidiary also originates fixed rate real estate loans for the secondary market. These loans are generally sold immediately after closing. All real estate loans are secured by first mortgages with evidence of title in favor of the banking subsidiary in the form of an attorney's opinion of title or a title insurance policy. Each banking subsidiary also requires proof of hazard insurance with the banking subsidiary named as the mortgagee and as the loss payee. Independent appraisals are generally obtained for consumer real estate loans. 6 Home equity lines of credit are generally made as second mortgages by Park's banking subsidiaries. The maximum amount of a home equity line of credit is generally limited to 85% of the appraised value of the property less the balance of the first mortgage. The home equity lines of credit are written with ten-year terms but are subject to review and reappraisal every three years. A variable interest rate is generally charged on the home equity lines of credit. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property's value at completion of construction and the estimated cost (including interest) of construction. If the estimate of construction cost proves to be inaccurate, the banking subsidiary making the loan may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value proves inaccurate, the banking subsidiary may be confronted, at or prior to the maturity of the loan, with a project having a value insufficient to assure full repayment, should the borrower default. COMPETITION Park's subsidiaries compete for deposits and loans with other banks, savings associations, credit unions and other types of financial institutions and operate 113 financial service offices and a network of 115 automatic banking center locations in 25 central and southern Ohio counties. Competitors now include securities dealers, brokers, mortgage bankers, investment advisors, finance companies, insurance companies and financial services subsidiaries of commercial and manufacturing companies. Many of these competitors enjoy the benefits of advanced technology, fewer regulatory constraints, and lower cost structures. Many of the newer competitors offer one-stop financial services to their customers that may include services that banks may not have been able or legally permitted to offer their customers in the past. The primary factors in competing for loans are interest rates charged and overall services provided to borrowers. The primary factors in competing for deposits are interest rates paid on deposits, account liquidity and convenience of office locations. EMPLOYEES As of December 31, 2002, Park and its subsidiaries had 1,600 full-time equivalent employees. SUPERVISION AND REGULATION Park, as a bank holding company, is regulated extensively under federal law. Park National Bank, Century National Bank, First-Knox National Bank, United Bank, Second National Bank, Security National Bank and Citizens National Bank, as national banks, and Richland Trust Company, as an Ohio state-chartered bank, are regulated extensively under federal and state law. Guardian Finance, as an Ohio state-chartered consumer finance company, is regulated under state law. Park is subject to regulation, supervision and examination by the Federal Reserve Board. Park National Bank, Century National Bank, First-Knox National Bank, United Bank, Second National Bank, Security National Bank and Citizens National Bank are subject to regulation by the Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC"). 7 Richland Trust Company is subject to regulation, supervision and examination by the Ohio Division of Financial Institutions and the FDIC and Guardian Finance is subject to regulation, supervision and examination by the Ohio Division of Financial Institutions. The following information describes selected federal and Ohio statutory and regulatory provisions and is qualified in its entirety by reference to the full text of the particular statutory or regulatory provisions. These statutes and regulations are continually under review by Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations or regulatory policies applicable to Park and its subsidiaries could have a material effect on their respective businesses. REGULATION OF BANK HOLDING COMPANIES Park is registered with the Federal Reserve Board as a bank holding company under the Bank Holding Company Act. Bank holding companies and their activities are subject to extensive regulation by the Federal Reserve Board. Bank holding companies are required to file reports with the Federal Reserve Board and such additional information as the Federal Reserve Board may require, and are subject to regular examinations by the Federal Reserve Board. The Federal Reserve Board also has extensive enforcement authority over bank holding companies, including, among other things, the ability to: - assess civil money penalties; - issue cease and desist or removal orders; and - require that a bank holding company divest subsidiaries (including its bank subsidiaries). In general, the Federal Reserve Board may initiate enforcement actions for violations of law and regulations and unsafe or unsound practices. Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support those subsidiary banks. Under this policy, the Federal Reserve Board may require a bank holding company to contribute additional capital to an undercapitalized subsidiary bank. The Bank Holding Company Act requires the prior approval of the Federal Reserve Board in any case where a bank holding company proposes to: - acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that is not already majority-owned by it; - acquire all or substantially all of the assets of another bank or bank holding company; or - merge or consolidate with any other bank holding company. 8 Section 4 of the Bank Holding Company Act also prohibits a bank holding company, with certain exceptions, from acquiring more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than banking or managing or controlling banks. The primary exception allows the ownership of shares by a bank holding company in any company the activities of which the Federal Reserve Board had determined as of November 19, 1999 to be so closely related to banking as to be a proper incident thereto. The Federal Reserve Board by regulation had determined that the following activities, among others, were so closely related to banking: - operating a savings association, mortgage company, finance company, credit card company or factoring company; - performing certain data processing operations; - providing investment and financial advice; and - acting as an insurance agent for certain types of credit-related insurance. Since March 11, 2000, subject to certain conditions, bank holding companies that elect to become financial holding companies have been permitted to affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. Also since March 11, 2000, no regulatory approval has been required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. As of the date of this Annual Report on Form 10-K, Park has not elected to become a financial holding company. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on maintenance of reserves against deposits, extensions of credit to the bank holding company or any of its subsidiaries, investments in the stock or other securities of the bank holding company or its subsidiaries and the taking of such stock or securities as collateral for loans to any borrower. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property or furnishing of any services. Various consumer laws and regulations also affect the operations of these subsidiaries. TRANSACTIONS WITH AFFILIATES, DIRECTORS, EXECUTIVE OFFICERS AND SHAREHOLDERS On October 31, 2002, the Federal Reserve Board approved Regulation W which comprehensively implements Sections 23A and 23B of the Federal Reserve Act. Sections 23A and 23B and Regulation W restrict transactions by banks and their subsidiaries with their affiliates. An affiliate of a bank is any company or entity which controls, is controlled by or is under common control with the bank. 9 Generally, Sections 23A and 23B and Regulation W: - limit the extent to which a bank or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of that bank's capital stock and surplus (i.e., tangible capital); - limit the extent to which a bank or its subsidiaries may engage in "covered transactions" with all affiliates to 20% of that bank's capital stock and surplus; and - require that all such transactions be on terms substantially the same, or at least as favorable to the bank or subsidiary, as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and other similar types of transactions. Regulation W will become effective on April 1, 2003 and upon its effective date, all existing Federal Reserve Board interpretations of Sections 23A and 23B will be rescinded. A bank's authority to extend credit to executive officers, directors and greater than 10% shareholders, as well as entities such persons control, is subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder by the Federal Reserve Board. Among other things, these loans must be made on terms substantially the same as those offered to unaffiliated individuals and must not involve a greater than normal risk of repayment. In addition, the amount of loans a bank may make to these persons is based, in part, on the bank's capital position, and specified approval procedures must be followed in making loans which exceed specified amounts. REGULATION OF NATIONALLY-CHARTERED BANKS As national banking associations, Park National Bank, Century National Bank, First-Knox National Bank, United Bank, Second National Bank, Security National Bank and Citizens National Bank are subject to regulation under the National Banking Act and are periodically examined by the OCC. They are subject, as member banks, to the rules and regulations of the Federal Reserve Board. Each is an insured institution. Park National Bank, First-Knox National Bank, United Bank, Second National Bank, Security National Bank and Citizens National Bank are members of the Bank Insurance Fund, and Century National Bank is a member of the Savings Association Insurance Fund. As a result, they are subject to regulation by the FDIC. The establishment of branches of each of Park National Bank, Century National Bank, First-Knox National Bank, United Bank, Second National Bank, Security National Bank and Citizens National Bank is subject to prior approval of the OCC. REGULATION OF OHIO STATE-CHARTERED BANKS AND CONSUMER FINANCE COMPANIES The FDIC is the primary federal regulator of Richland Trust Company. The FDIC issues regulations governing the operations of Richland Trust Company and examines Richland Trust Company. The FDIC may initiate enforcement actions against insured depository institutions and 10 persons affiliated with them for violations of laws and regulations or for engaging in unsafe or unsound practices. If the grounds provided by law exist, the FDIC may appoint a conservator or a receiver for a nonmember bank. As a bank incorporated under Ohio law, Richland Trust Company is subject to regulation and supervision by the Ohio Division of Financial Institutions. Division regulation and supervision affects the internal organization of Richland Trust Company, as well as its savings, mortgage lending and other investment activities. The Division of Financial Institutions may initiate supervisory measures or formal enforcement actions against Ohio commercial banks. Ultimately, if the grounds provided by law exist, the Division of Financial Institutions may place an Ohio bank in conservatorship or receivership. Whenever the Superintendent of Financial Institutions considers it necessary or appropriate, the Superintendent may also examine the affairs of any holding company or any affiliate or subsidiary of an Ohio bank. As a consumer finance company incorporated under Ohio law, Guardian Finance is also subject to regulation and supervision by the Division of Financial Institutions. Division regulation and supervision affect the lending activities of Guardian Finance. If grounds provided by law exist, the Division of Financial Institutions may suspend or revoke an Ohio consumer finance company's ability to make loans. FEDERAL DEPOSIT INSURANCE CORPORATION The FDIC is an independent federal agency which insures the deposits, up to prescribed statutory limits, of federally-insured banks and savings associations and safeguards the safety and soundness of the financial institution industry. Two separate insurance funds are maintained and administered by the FDIC. In general, banking institutions are members of the "BIF," and savings associations are "SAIF" members. The insurance fund conversion provisions do not prohibit a SAIF member from either converting to a bank charter, as long as the resulting bank remains a SAIF member (as Century National Bank did when it converted to a national bank charter in April 1998), or merging with a bank, as long as the bank continues to pay the SAIF insurance assessments on the deposits acquired. Exit and entrance fees must be paid to the FDIC in full conversions. Insurance Premiums. Insurance premiums for SAIF and BIF members are determined during each semi-annual assessment period based upon the members' respective categorization as well capitalized, adequately capitalized or undercapitalized. The FDIC assigns banks to one of three supervisory subgroups within each capital group. The supervisory subgroup to which a bank is assigned is based on a supervisory evaluation provided to the FDIC by the bank's primary federal regulator and information which the FDIC determines to be relevant to the bank's financial condition and the risk posed to the deposit insurance funds (which may include, if applicable, information provided by the bank's state supervisor). A bank's assessment rate depends on the capital category and supervisory category to which it is assigned. Effective January 1, 2000, the BIF assessment rate and the SAIF assessment rate became the same. This assessment (which includes the FICO assessment) currently ranges from 1.68 to 28.68 cents per $100 of domestic deposits. Each of Park's banking subsidiaries is currently paying an 11 assessment rate of 1.68 cents per $100 of domestic deposits. An increase in this assessment rate could have a material adverse effect on the earnings of the affected banks, depending on the amount of the increase. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition enacted or imposed by the bank's regulatory agency. Depositor Preference. The Federal Deposit Insurance Act provides that, in the event of the "liquidation or other resolution" of a bank, the claims of depositors of the bank, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver will have priority over other general unsecured claims against the bank. If a bank fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, nondeposit creditors. Liability of Commonly Controlled Banks. Under the Federal Deposit Insurance Act, a bank is generally liable for any loss incurred, or reasonably expected to be incurred, by the FDIC in connection with (a) the default of a commonly controlled bank or (b) any assistance provided by the FDIC to a commonly controlled bank in danger of default. "Default" means generally the appointment of a conservator or receiver. "In danger of default" means generally the existence of conditions indicating that a default is likely to occur in the absence of regulatory assistance. FEDERAL HOME LOAN BANK The Federal Home Loan Banks ("FHLBs") provide credit to their members in the form of advances. As a member of the FHLB of Cincinnati, each of the banking subsidiaries of Park must maintain an investment in the capital stock of the FHLB of Cincinnati. Each of Park's banking subsidiaries is in compliance with this requirement, with the following investments in stock of the FHLB of Cincinnati at December 31, 2002: Park National Bank - $7.2 million; Richland Trust Company - $4.2 million; Century National Bank - $5.5 million; First-Knox National Bank - $10.0 million; United Bank - $1.1 million; Second National Bank - - $2.0 million; Security National Bank - $7.0 million; and Citizens National Bank - $1.3 million. Generally, the FHLBs are not permitted to make new advances to a member without positive tangible capital. Upon the origination or renewal of a loan or advance, each FHLB is required by law to obtain and maintain a security interest in collateral in one or more of the following categories: fully disbursed, whole first mortgage loans on improved residential property or securities representing a whole interest in such loans; securities issued, insured or guaranteed by the United States Government or an agency thereof; deposits in any FHLB; or other real estate related collateral acceptable to the applicable FHLB, if such collateral has a readily ascertainable value and the FHLB can perfect its security interest in the collateral. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLB. The standards take into account a member's performance under the Community Reinvestment Act and its record 12 of lending to first-time home buyers. All long-term advances by each FHLB must be made only to provide funds for residential housing finance. REGULATORY CAPITAL The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies and state member banks. The OCC and the FDIC have adopted risk-based capital guidelines for national banks and state non-member banks, respectively. The guidelines provide a systematic analytical framework which makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures expressly into account in evaluating capital adequacy, and minimizes disincentives to holding liquid, low-risk assets. Capital levels as measured by these standards also are used to categorize financial institutions for purposes of certain prompt corrective action regulatory provisions. The minimum guideline for the ratio of total capital to risk-weighted assets (including certain off-balance sheet items such as standby letters of credit) is 8%. This total risk-based capital ratio must be at least 10% for a bank holding company to be considered well capitalized. At least half of the minimum total risk-based capital ratio (4%) must be composed of common shareholders' equity, minority interests in the equity accounts of consolidated subsidiaries, a limited amount of qualifying preferred stock, less goodwill and certain other deductions, including the unrealized net gains and losses, after applicable taxes, on available-for-sale securities carried at fair value (commonly known as "Tier 1" risk-based capital). To be considered well capitalized, the Tier 1 risk-based capital ratio must be at least 6%. The remainder of total risk-based capital (commonly known as "Tier 2" risk-based capital) may consist of mandatory convertible debt, subordinated debt, preferred stock not qualifying as Tier 1 capital, a limited amount of the loan and lease loss allowance and net unrealized gains, after applicable taxes, on available-for-sale equity securities with readily determinable fair values, subject to limitations established by the guidelines. Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of four risk weights (0%, 20%, 50% and 100%) is applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. For example, claims guaranteed by the U.S. government or one of its agencies are risk-weighted at 0%. Off-balance sheet items, such as loan commitments and derivative financial instruments, are also assigned one of the above risk weights after calculating balance sheet equivalent amounts. For example, certain loan commitments are converted at 50% and then risk-weighted at 100%. Derivative financial instruments are converted to balance sheet equivalents based on notional values, replacement costs and remaining contractual terms. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. The Federal Reserve Board guidelines provide for a minimum ratio of Tier 1 risk-based capital to average assets (excluding the loan and lease loss allowance, goodwill and certain other intangibles), or "leverage ratio," of 3% for bank holding companies that meet certain criteria, including having the highest regulatory rating, and 4% for all other bank holding companies. To be considered well capitalized, the leverage ratio for a bank holding company must be at least 5%. The guidelines further provide that bank holding companies making acquisitions will be 13 expected to maintain strong capital positions substantially above the minimum levels. The OCC and the FDIC have each also adopted minimum leverage ratio guidelines for national banks and for state non-member banks, respectively. Park is in compliance with the current applicable capital guideline ratios. As of December 31, 2002, Park had a total risk-based capital ratio of 17.78%, Tier 1 risk-based capital ratio of 16.51% and a leverage ratio of 10.72%. Park's management believes that each of its subsidiary banks is "well capitalized" according to the guidelines described above. See Table 12 included in the section of Park's Annual Report to Shareholders for the fiscal year ended December 31, 2002 captioned "Financial Review" on page 32, which is incorporated herein by reference. FISCAL AND MONETARY POLICIES The business and earnings of Park are affected significantly by the fiscal and monetary policies of the federal government and its agencies. Park is particularly affected by the policies of the Federal Reserve Board, which regulates the supply of money and credit in the United States. Among the instruments of monetary policy available to the Federal Reserve Board are - conducting open market operations in United States government securities; - changing the discount rates of borrowings of depository institutions; - imposing or changing reserve requirements against depository institutions' deposits; and - imposing or changing reserve requirements against certain borrowing by banks and their affiliates. These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. For that reason alone, the policies of the Federal Reserve Board have a material effect on the earnings of Park. PROMPT CORRECTIVE REGULATORY ACTION The federal banking agencies have established a system of prompt corrective action to resolve certain of the problems of undercapitalized institutions. This system is based on five capital level categories for insured depository institutions: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." The federal banking agencies may (or in some cases must) take certain supervisory actions depending upon a bank's capital level. For example, the banking agencies must appoint a receiver or conservator for a bank within 90 days after it becomes "critically undercapitalized" unless the bank's primary regulator determines, with the concurrence of the FDIC, that other action would better achieve regulatory purposes. Banking operations otherwise may be significantly affected depending on a bank's capital category. For example, a bank that is not "well capitalized" generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher than the 14 prevailing rate in its market, and the holding company of any undercapitalized depository institution must guarantee, in part, specific aspects of the bank's capital plan for the plan to be acceptable. As noted above, Park's management believes that each of its subsidiary banks qualifies as "well capitalized." LIMITS ON DIVIDENDS AND OTHER PAYMENTS There are various legal limitations on the extent to which subsidiary banks may finance or otherwise supply funds to their parent holding companies. Under federal and Ohio law, subsidiary banks may not, subject to certain limited exceptions, make loans or extensions of credit to, or investments in the securities of, their bank holding companies. Subsidiary banks are also subject to collateral security requirements for any loans or extension of credit permitted by such exceptions. None of the Park banking subsidiaries may pay dividends out of its surplus if, after paying these dividends, it would fail to meet the required minimum levels under the risk-based capital guidelines and minimum leverage ratio requirements established by the OCC and the FDIC. In addition, each bank must have the approval of its regulatory authority if a dividend in any year would cause the total dividends for that year to exceed the sum of the bank's current year's "net profits" (or net income, less dividends declared during the period based on regulatory accounting principles) and the retained net profits for the preceding two years, less required transfers to surplus. Payment of dividends by any of the Park banking subsidiaries may be restricted at any time at the discretion of its regulatory authorities, if such regulatory authorities deem such dividends to constitute unsafe and/or unsound banking practices or if necessary to maintain adequate capital. The ability of Park to obtain funds for the payment of dividends and for other cash requirements is largely dependent on the amount of dividends which may be declared by its subsidiary banks. However, the Federal Reserve Board expects Park to serve as a source of strength to its subsidiary banks, which may require Park to retain capital for further investment in its subsidiary banks, rather than pay dividends to the Park shareholders. Payment of dividends by one of Park's banking subsidiaries may be restricted at any time at the discretion of its applicable regulatory authorities, if they deem such dividends to constitute an unsafe and/or unsound banking practice. These provisions could have the effect of limiting Park's ability to pay dividends on its common shares. GRAMM-LEACH-BLILEY ACT On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act (also known as the Financial Services Modernization Act of 1999) which, effective March 11, 2000, permits bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized, is well managed, and has at least a satisfactory rating under the Community Reinvestment Act, by filing a declaration that the bank holding company wishes to become a financial holding company. No regulatory approval will be required for a financial holding 15 company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. The Gramm-Leach-Bliley Act defines "financial in nature" to include: - securities underwriting, dealing and market making; - sponsoring mutual funds and investment companies; - insurance underwriting and agency; - merchant banking activities; - and activities that the Federal Reserve Board has determined to be closely related to banking. A national bank also may engage, subject to limitations on investment, in activities that are financial in nature (other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment) through a financial subsidiary of the bank, if the bank is well capitalized and well managed, has at least a satisfactory Community Reinvestment Act rating and has received the prior approval of the OCC to engage in such activities. Subsidiary banks of a financial holding company or national banks with financial subsidiaries must continue to be well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions, which could include divestiture of the financial in nature subsidiary or subsidiaries. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has a Community Reinvestment Act rating of satisfactory or better. RECENT LEGISLATION On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws. The changes are intended to allow shareholders to monitor the performance of companies and directors more easily and efficiently. The Sarbanes-Oxley Act generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the SEC under the Exchange Act. Further, the Sarbanes-Oxley Act includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC, securities exchanges and The NASDAQ Stock Market to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues by the SEC and the Comptroller General of the United States. Given the extensive SEC role in implementing rules relating to many of the Sarbanes-Oxley Act's new requirements, the final scope of many of these requirements remains to be determined. 16 The Sarbanes-Oxley Act addresses, among other matters: audit committees; corporate responsibility for financial reports; a requirement that chief executive and chief financial officers forfeit certain bonuses and profits if their companies issue an accounting restatement as a result of misconduct; a prohibition on insider trading during pension fund black out periods; disclosure of off-balance sheet transactions; conditions for the use of pro forma financial information; a prohibition on personal loans to directors and executive officers (excluding loans by insured depository institutions that are subject to the insider lending restrictions of the Federal Reserve Act); expedited filing requirements for stock transaction reports by officers and directors; the formation of the Public Company Accounting Oversight Board; auditor independence; and various increased criminal penalties for violations of securities laws. The Board of Directors of Park is in the process of reviewing the requirements of the Sarbanes-Oxley Act and the rules and regulations promulgated by the SEC implementing the Sarbanes-Oxley Act as well as the rules proposed by the American Stock Exchange related to corporate governance matters. The Board of Directors intends to take appropriate action to comply with the American Stock Exchange and SEC rules as those rules are finalized and implemented. STATISTICAL DISCLOSURE The statistical disclosure relating to Park and its subsidiaries required under the SEC's Industry Guide 3, "Statistical Disclosure by Bank Holding Companies," is included in the section of Park's Annual Report to Shareholders for the fiscal year ended December 31, 2002 captioned "Financial Review," on pages 25 through 33 and in Note 4 of the Notes to Consolidated Financial Statements located on page 42 of that Annual Report to Shareholders, which is incorporated herein by reference. This statistical disclosure is incorporated herein by reference. EFFECT OF ENVIRONMENTAL REGULATION Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures, earnings or competitive position of Park and its subsidiaries. Park believes the nature of the operations of its subsidiaries has little, if any, environmental impact. Park, therefore, anticipates no material capital expenditures for environmental control facilities for its current fiscal year or for the foreseeable future. Park believes its primary exposure to environmental risk is through the lending activities of its subsidiaries. In cases where management believes environmental risk potentially exists, Park's subsidiaries mitigate their environmental risk exposures by requiring environmental site assessments at the time of loan origination to confirm collateral quality as to commercial real estate parcels posing higher than normal potential for environmental impact, as determined by reference to present and past uses of the subject property and adjacent sites. Environmental assessments are typically required prior to any foreclosure activity involving non-residential real estate collateral. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION Certain statements contained in this Annual Report on Form 10-K which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, the statements specifically 17 identified as forward-looking statements within this document. In addition, certain statements in future filings by Park with the SEC, in press releases, and in oral and written statements made by or with the approval of Park which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Examples of forward-looking statements include: (i) projections of revenues, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure and other financial items; (ii) statements of plans and objectives of Park or its management or board of directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as "believes", "anticipates", "expects", "intends", "targeted", and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying those statements. Forward-looking statements involve risks and uncertainties. Actual results may differ materially from those predicted by the forward-looking statements because of various factors and possible events, including the following: - the costs of providing compensation and benefits to Park's employees increase; - competitive pressures among depository institutions increase significantly; - costs or difficulties related to the integration of acquired businesses are greater than expected; - general economic conditions, either national or in the geographic areas in which Park's subsidiaries do business, are less favorable than expected; - prepayment speeds, loan origination and sale volumes, change-offs and loan loss provisions are less favorable than expected; - technological changes are more difficult or expensive to implement than anticipated; - changes in the interest rate environment reduce interest margins; - legislative or regulatory changes adversely affect financial services companies; - there are adverse changes in the securities markets; and - Park suffers the loss of key personnel. There is also the risk that we incorrectly analyze these risks and forces, or that the strategies we develop to address them are unsuccessful. Forward-looking statements speak only as of the date on which they are made, and Park undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made to reflect unanticipated events. All subsequent written and oral forward-looking statements attributable to Park or any person acting on our behalf are qualified by the cautionary statements in this section. 18 ITEM 2. PROPERTIES. Park's principal executive offices are located at 50 North Third Street, Newark, Ohio 43055. Park does not lease or own any physical property, real or personal. Park National Bank, in addition to having six financial service offices (including the main office) and the operations center in Newark, has financial service offices in Granville, Heath (two offices), Hebron, Johnstown, Kirkersville, Pataskala and Utica in Licking County, financial service offices in Canal Winchester, Gahanna, Worthington and Columbus in Franklin County, a financial service office in Cincinnati in Hamilton County, a financial service office in Dayton in Montgomery County and financial service offices in Baltimore, Pickerington and Lancaster (seven offices) in Fairfield County. The financial service offices in Canal Winchester and Fairfield County comprise the Fairfield National Division. Park National Bank also operates seven off-site automatic banking center locations. Richland Trust Company, in addition to eight financial service offices in Mansfield (including the main office), has financial service offices in Butler, Lexington, Ontario and Shelby (two offices) in Richland County. Richland Trust Company also operates three off-site automatic banking center locations. Century National Bank, in addition to having five financial service offices (including the main office) and a mortgage lending office in Zanesville, has financial service offices in New Concord and Dresden in Muskingum County, a financial service office in New Lexington in Perry County, a financial service office in Logan in Hocking County, a financial service office in Athens in Athens County and a financial service office in Coshocton in Coshocton County. Century National Bank also operates three off-site automatic banking center locations. First-Knox National Bank, in addition to having two financial service offices (including the main office) in Mount Vernon, has financial service offices in Loudonville and Perrysville in Ashland County, two financial service offices in Millersburg in Holmes County, financial service offices in Centerburg, Danville and Fredericktown in Knox County, two financial service offices in Mount Gilead in Morrow County and a financial service office in Bellville in Richland County. The financial service offices in Ashland County comprise the Farmers and Savings Division. First-Knox National Bank also operates nine off-site automatic banking center locations. United Bank, in addition to its main office in Bucyrus, has financial service offices in Crestline and Galion in Crawford County and financial service offices in Waldo, Marion, Caledonia and Prospect in Marion County. United Bank also operates two off-site automatic banking center locations. Second National Bank, in addition to having five financial service offices (including the main office) in Greenville, has two financial service offices in Arcanum and a financial service office in Versailles in Darke County and a financial service office in Fort Recovery in Mercer County. Second National Bank also operates an off-site automatic banking center location. Security National Bank, in addition to having five financial service offices (including the main office) in Springfield, has financial service offices in Enon, Medway, South Charleston and New Carlisle (two offices) in Clark County, two financial service offices in Jamestown and two 19 financial services offices in Xenia in Greene County, a financial service office in Jeffersonville in Fayette County and financial service offices in Troy, Tipp City and Piqua (three offices including an administrative building) in Miami County. The financial service offices in Miami County comprise the Unity National Division. Security National Bank also operates three off-site automatic banking center locations. Citizens National Bank, in addition to having two financial service offices (including the main office) in Urbana, has a financial service office in Mechanicsburg and North Lewisburg in Champaign County and a financial service office in Plain City in Madison County. Citizens National Bank also operates one off-site automatic banking center location. Guardian Finance has its main office in Hilliard in Franklin County, a financial service office in Columbus, a financial service office in Mansfield where it leases space from Richland Trust Company, a financial service office in Lancaster where it leases space from the Fairfield National Division of Park National Bank, a financial service office in Heath and a financial service office in Springfield. ITEM 3. LEGAL PROCEEDINGS. There are no pending legal proceedings to which Park or any of its subsidiaries is a party or to which any of their property is subject, except routine legal proceedings to which Park's banking subsidiaries are parties incidental to their respective banking businesses. Park considers none of those proceedings to be material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT. The following table lists the names and ages of the executive officers of Park as of February 21, 2003, the positions presently held by those individuals and their individual business experience during the past five years. 20
Positions Held with Park and its Name Age Principal Subsidiaries and Principal Occupation - ---- --- ----------------------------------------------- William T. McConnell 69 Chairman of the Board since 1994, Chief Executive Officer from 1986 to 1999, President from 1986 to 1994 and a Director since 1986, of Park; Chairman of the Board since 1993, Chief Executive Officer from 1983 to 1999, President from 1979 to 1993, and a Director since 1977 of Park National Bank Harry O. Egger 63 Vice Chairman of the Board and a Director of Park since March 2001; Chairman of the Board and Chief Executive Officer since 1997, President from 1981 to 1997, and a Director since 1997 of Security National Bank; Chairman of the Board, President and Chief Executive Officer of Security Banc Corporation from 1997 until its merger with Park in March 2001 C. Daniel DeLawder 53 Chief Executive Officer since January 1999, President since 1994 and Director since 1994, of Park; Chief Executive Officer since January 1999, President since 1993, Executive Vice President from 1992 to 1993, and a Director since 1992 of Park National Bank; Chairman of Advisory Board since 1989 and President from 1985 to 1992 of the Fairfield National Division of Park National Bank; a Director of Richland Trust Company since 1997; a Director of Second National Bank since 2000 David L. Trautman 41 Secretary of Park since July 2002; Executive Vice President since February 2002, Vice President from 1993 to May 1997, and a Director since February 2002, of Park National Bank; Chairman of the Board since March 2001, President and Chief Executive from May 1997 to February 2002, and a Director since May 1997, of First-Knox National Bank; a Director of United Bank, N.A. since 2000 John W. Kozak 47 Chief Financial Officer of Park since April 1998, Senior Vice President and Chief Financial Officer since 1998, and Vice President from 1991 to 1998, of Park National Bank; Chief Financial Officer from 1980 to 1991 and a Director since 1988 of Century National Bank
The executive officers serve at the pleasure of the Board of Directors of Park and in the case of Mr. Egger, pursuant to an employment agreement. 21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information called for in Items 201(a) through (c) of Regulation S-K is incorporated herein by reference to page 33 of Park's Annual Report to Shareholders for the fiscal year ended December 31, 2002 ("Park's 2002 Annual Report to Shareholders"). On October 31, 2002, Park issued (a) 150 common shares to each of the ten non-employee directors of Park (for an aggregate of 1,500 common shares), (b) 50 common shares to each of 69 non-employee directors of one of Park's banking subsidiaries or non-employee members of the advisory board of a division of a banking subsidiary, who is not also a director of Park (for an aggregate of 3,450 common shares) and (c) 100 common shares to one individual who serves as a non-employee director of one of Park's banking subsidiaries and as a member of the advisory board of a division of that banking subsidiary. These common shares were issued in lieu of an annual cash retainer for serving as a director or advisory board member. The common shares had a market value of $89.50 per share. Park issued the common shares in reliance upon the exemptions from registration provided by Sections 4(2) and 4(6) under the Securities Act of 1933 based upon the limited number of individuals to whom the common shares were "sold" and the status of each individual as a director of Park or of one of its subsidiaries. ITEM 6. SELECTED FINANCIAL DATA. The information called for in this Item 6 is incorporated herein by reference to page 33 of Park's 2002 Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The information called for in this Item 7 is incorporated herein by reference to pages 25 through 33 of Park's 2002 Annual Report to Shareholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As noted on page 29 of Park's 2002 Annual Report to Shareholders, during 2002, 2001 and 2000, Park and its subsidiaries had no investment in off-balance sheet derivative instruments. The discussion of interest rate sensitivity included on pages 31 and 32 of Park's 2002 Annual Report to Shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Consolidated Balance Sheets of Park and its subsidiaries at December 31, 2002 and 2001, the related Consolidated Statements of Income, of Changes in Stockholders' Equity and of Cash Flows for each of the fiscal years in the three-year period ended December 31, 2002, the related Notes to Consolidated Financial Statements, and the Report of Independent Auditors appearing on pages 34 through 51 of Park's 2002 Annual Report to Shareholders, are incorporated 22 herein by reference. Quarterly Financial Data set forth on page 33 of Park's 2002 Annual Report to Shareholders are also incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. No response required. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information called for in this Item 10 is incorporated herein by reference to Park's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 21, 2003, under the captions "PRINCIPAL SHAREHOLDERS OF PARK - Section 16(a) Beneficial Ownership Reporting Compliance" and "ELECTION OF DIRECTORS." In addition, certain information concerning the executive officers of Park is set forth in the portion of Part I of this Annual Report on Form 10-K entitled "SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT." ITEM 11. EXECUTIVE COMPENSATION. The information called for in this Item 11 is incorporated herein by reference to Park's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 21, 2003, under the captions "ELECTION OF DIRECTORS--Compensation of Directors," "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" and "COMPENSATION OF EXECUTIVE OFFICERS." Such incorporation by reference shall not be deemed to specifically incorporate by reference the information referred to in Item 402(a)(8) of Regulation S-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The information called for in this Item 12 regarding the security ownership of certain beneficial owners and management is incorporated herein by reference to Park's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 21, 2003, under the caption "PRINCIPAL SHAREHOLDERS OF PARK." The information called for in this Item 12 regarding securities authorized for issuance under equity compensation plans is included in the following section. EQUITY COMPENSATION PLAN INFORMATION Park has one compensation plan (excluding plans assumed by Park in mergers) under which common shares of Park are authorized for issuance to officers or employees of Park and its subsidiaries in exchange for consideration in the form of goods or services: the Park National Corporation 1995 Incentive Stock Option (the "1995 Plan"). The 1995 Plan has been approved by Park's shareholders. In addition, as described further below, each non-employee director of Park or 23 one of its banking subsidiaries receives a specified number of common shares of Park as an annual retainer. This arrangement has not been approved by the shareholders. The following table shows for the 1995 Plan, the number of common shares issuable upon exercise of options outstanding at December 31, 2002, the weighted average exercise price of those options and the number of common shares remaining available for future issuance at December 31, 2002, excluding common shares issuable upon exercise of outstanding options. The table does not include common shares subject to outstanding options granted under equity compensation plans assumed by Park in mergers. Footnote (1) to the table sets forth the total number of common shares issuable upon exercise of options granted under plans assumed in mergers and outstanding at December 31, 2002, and the weighted average exercise price of those options. Park cannot grant additional awards under the assumed plans.
NUMBER OF COMMON SHARES NUMBER OF COMMON SHARES REMAINING AVAILABLE FOR TO BE ISSUED UPON WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER EXERCISE OF OUTSTANDING EXERCISE PRICE OF EQUITY COMPENSATION PLANS OPTIONS, WARRANTS AND OUTSTANDING OPTIONS, (EXCLUDING COMMON SHARES RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a)) PLAN CATEGORY (1) (a) (b) (c) - ------------------------------------ -------------------------- -------------------------- --------------------------- Equity compensation plans approved by shareholders............ 512,148 $91.24 551,420 - ------------------------------------ -------------------------- -------------------------- --------------------------- Equity compensation plans not approved by shareholders........................ 0 n/a (2) - ------------------------------------ -------------------------- -------------------------- --------------------------- Total............................... 512,148 $91.24 551,420 - ------------------------------------ -------------------------- -------------------------- ---------------------------
(1) The table does not include information for equity compensation plans assumed by Park in mergers. A total of 40,058 common shares were issuable upon exercise of options granted under plans assumed in mergers and outstanding at December 31, 2002, including 33,704 common shares issuable upon exercise of options granted under plans assumed by Park in the merger with Security Banc Corporation effective March 23, 2001 and 6,354 common shares issuable upon exercise of options granted under plans assumed by Park in the merger with First-Knox Banc Corp. effective May 5, 1997. The weighted average exercise price of all options granted under plans assumed in mergers and outstanding at December 31, 2002, was $96.62. Park cannot grant additional awards under these assumed plans. (2) The board of directors of Park and each of its banking subsidiaries as well as the advisory board for certain divisions of those banking subsidiaries with two divisions, have determined that each of the 24 non-employee directors or non-employee advisory board members, as appropriate, is to receive the annual retainer for service as a board member in the form of Park common shares. Each director of Park who is not an employee of Park or one of its subsidiaries receives an annual retainer for service as a member of the Park board of directors in the form of 100 Park common shares. Each non-employee director of one of Park's banking subsidiaries receives an annual retainer for service as a member of that subsidiary's board of directors in the form of 50 Park common shares. Each non-employee member of an advisory board for a division of a banking subsidiary receives an annual retainer for service as a member of that advisory board in the form of 50 Park common shares. These common shares are issued in the fourth quarter of the fiscal year. The aggregate number of common shares issuable in respect of any fiscal year will depend on the number of individuals then serving as non-employee directors of Park and its banking subsidiaries and as non-employee members of the advisory boards of those banking subsidiaries with two divisions. As of March 26, 2003, there were 8 non-employee directors of Park, a total of 61 non-employee directors of Park's banking subsidiaries and a total of 15 non-employee members of advisory boards for divisions of Park's banking subsidiaries. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information called for in this Item 13 is incorporated herein by reference to Park's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 21, 2003, under the captions "ELECTION OF DIRECTORS - Committees and Meetings of the Board of Directors," "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" and "TRANSACTIONS INVOLVING MANAGEMENT." ITEM 14. CONTROLS AND PROCEDURES. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Within the 90 day period prior to the filing date of this Annual Report on Form 10-K, Park, under the supervision, and with the participation, of its management, including its principal executive officer and principal financial officer, performed an evaluation of Park's disclosure controls and procedures, as contemplated by Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based on that evaluation, Park's principal executive officer and principal financial officer concluded that such disclosure controls and procedures are effective to ensure that material information relating to Park, including its consolidated subsidiaries, is made known to them, particularly during the period for which the periodic reports are being prepared. CHANGES IN INTERNAL CONTROLS No significant changes were made in Park's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation performed pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended, referred to above. 25 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) Financial Statements. -------------------- For a list of all financial statements included with this Annual Report on Form 10-K, see "Index to Financial Statements" at page 33. (a)(2) Financial Statement Schedules. ----------------------------- All schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and have been omitted. (a)(3) Exhibits. -------- Exhibits filed with this Annual Report on Form 10-K are attached hereto. For a list of such exhibits, see the Index to Exhibits beginning at page E-1. (b) Reports on Form 8-K. ------------------- No Current Reports on Form 8-K were filed during the fiscal quarter ended December 31, 2002. (c) Exhibits. -------- Exhibits filed with this Annual Report on Form 10-K are attached hereto. For a list of such exhibits, see the Index to Exhibits beginning at page E-1. (d) Financial Statement Schedules. ----------------------------- None 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: March 26, 2003 By: /s/ C. Daniel DeLawder --------------------------------------- C. Daniel DeLawder President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 26th day of March, 2003. Name Capacity ---- -------- * Chairman of the Board and Director - ------------------------------ William T. McConnell /s/ C. Daniel DeLawder President, Chief Executive Officer and - ------------------------------ Director C. Daniel DeLawder * Vice Chairman of the Board and Director - ------------------------------ Harry O. Egger /s/ John W. Kozak Chief Financial Officer and Principal - ------------------------------ Accounting Officer John W. Kozak * Director - ------------------------------ Maureen Buchwald * Director - ------------------------------ James J. Cullers * Director - ------------------------------ Dominick C. Fanello * Director - ------------------------------ R. William Geyer * Director - ------------------------------ Howard E. LeFevre * Director - ------------------------------ John J. O'Neill 27 * Director - ------------------------------ William A. Phillips * Director - ------------------------------ J. Gilbert Reese * Director - ------------------------------ Rick R. Taylor - ---------------- * By C. Daniel DeLawder pursuant to Powers of Attorney executed by the directors and executive officers listed above, which Powers of Attorney have been filed with the Securities and Exchange Commission. /s/ C. Daniel DeLawder - ---------------------------- C. Daniel DeLawder President and Chief Executive Officer 28 CERTIFICATION I, C. Daniel DeLawder, certify that: 1. I have reviewed this annual report on Form 10-K of Park National Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 29 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: March 26, 2003 By: /s/ C. Daniel DeLawder --------------------------------------- C. Daniel DeLawder President and Chief Executive Officer 30 CERTIFICATION I, John W. Kozak, certify that: 1. I have reviewed this annual report on Form 10-K of Park National Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 31 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: March 26, 2003 By: /s/ John W. Kozak ----------------------------- John W. Kozak Chief Financial Officer 32 PARK NATIONAL CORPORATION ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2002 INDEX TO FINANCIAL STATEMENTS
PAGE(S) IN 2002 ANNUAL REPORT TO DESCRIPTION SHAREHOLDERS - ----------- ------------ Consolidated Balance Sheets at December 31, 2002 and 2001........................................ 34-35 Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000........... 36-37 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000........................................................................... 38 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000....... 39 Notes to Consolidated Financial Statements....................................................... 40-50 Report of Independent Auditors (Ernst & Young LLP)............................................... 51
33 PARK NATIONAL CORPORATION ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2002 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION OF EXHIBIT ----------- ---------------------- 3.1 Articles of Incorporation of Park National Corporation ("Park") as filed with the Ohio Secretary of State on March 24, 1992 (incorporated herein by reference to Exhibit 3(a) to Park's Form 8-B, filed on May 20, 1992 (File No. 0-18772) ("Park's Form 8-B")) 3.2 Certificate of Amendment to the Articles of Incorporation of Park as filed with the Ohio Secretary of State on May 6, 1993 (incorporated herein by reference to Exhibit 3(b) to Park's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-18772)) 3.3 Certificate of Amendment to the Articles of Incorporation of Park as filed with the Ohio Secretary of State on April 16, 1996 (incorporated herein by reference to Exhibit 3(a) to Park's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996 (File No. 1-13006)) 3.4 Certificate of Amendment by Shareholders to the Articles of Incorporation of Park as filed with the Ohio Secretary of State on April 22, 1997 (incorporated herein by reference to Exhibit 3(a)(1) to Park's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997 (File No. 1-13006)("Park's June 1997 Form 10-Q")) 3.5 Articles of Incorporation of Park (reflecting amendments through April 22, 1997) [for SEC reporting compliance purposes only - not filed with Ohio Secretary of State] (incorporated herein by reference to Exhibit 3(a)(2) to Park's June 1997 Form 10-Q) 3.6 Regulations of Park (incorporated herein by reference to Exhibit 3(b) to Park's Form 8-B) 3.7 Certified Resolution regarding adoption of amendment to Subsection 2.02(A) of the Regulations of Park by Shareholders on April 22, 1997 (incorporated herein by reference to Exhibit 3(b)(1) to Park's June 1997 Form 10-Q) 3.8 Regulations of Park (reflecting amendments through April 22, 1997) [for SEC reporting compliance purposes only] (incorporated herein by reference to Exhibit 3(b)(2) to Park's June 1997 Form 10-Q) E-1 EXHIBIT NO. DESCRIPTION OF EXHIBIT ----------- ---------------------- 4.1 Agreement to furnish instruments defining rights of holders of long-term debt ** *10.1 Summary of Incentive Bonus Plan of Park National Corporation** *10.2 Split-Dollar Agreement, dated May 17, 1993, between William T. McConnell and The Park National Bank (incorporated herein by reference to Exhibit 10(f) to Park's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-18772)); and Schedule A to Exhibit 10.2 identifying other identical Split-Dollar Agreements between subsidiaries of Park and executive officers of such subsidiaries who are directors or executive officers of Park ** *10.3 Split-Dollar Agreement dated September 29, 1993, between Dominick C. Fanello and The Richland Trust Company (incorporated herein by reference to Exhibit 10(g) to Park's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-18772)); and Schedule A to Exhibit 10.3 identifying other identical Split-Dollar Agreements between directors of Park and The Park National Bank, The Richland Trust Company, Century National Bank or The First-Knox National Bank of Mount Vernon as identified in such Schedule A ** *10.4 Park National Corporation 1995 Incentive Stock Option Plan (reflects amendments and share dividends through April 16, 2001) (incorporated herein by reference to Exhibit 10 to Park's Registration Statement on Form S-8 filed April 23, 2001 (Registration No. 333-59360)) *10.5 Form of Stock Option Agreement executed in connection with the grant of options under the Park National Corporation 1995 Incentive Stock Option Plan, as amended (incorporated herein by reference to Exhibit 10(i) to Park's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 1-13006)) *10.6 Description of Park National Corporation Supplemental Executive Retirement Plan ** *10.7 Security Banc Corporation 1987 Stock Option Plan, which was assumed by Park (incorporated herein by reference to Exhibit 10(a) to Park's Registration Statement on Form S-8 filed April 23, 2001 (Registration No. 333-59378)) *10.8 Security Banc Corporation 1995 Stock Option Plan, which was assumed by Park (incorporated herein by reference to Exhibit 10(b) to Park's Registration Statement on Form S-8 filed April 23, 2001 (Registration No. 333-59378)) *10.9 Security Banc Corporation 1998 Stock Option Plan, which was assumed by Park (incorporated herein by reference to Exhibit 10(c) to Park's Registration Statement on Form S-8 filed April 23, 2001 (Registration No. 333-59378)) E-2 EXHIBIT NO. DESCRIPTION OF EXHIBIT ----------- ---------------------- *10.10 Employment Agreement, made and entered into as of December 22, 1999, and the Amendment thereto, dated March 23, 2001, between The Security National Bank and Trust Co. (also known as Security National Bank and Trust Co.) and Harry O. Egger (incorporated herein by reference to Exhibit 10(e) to Park's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2001 (File No. 1-13006)) *10.11 First-Knox Banc Corp. 1990 Non-Qualified Stock Option and Stock Appreciation Rights Plan (incorporated herein by reference to Exhibit A to Exhibit 23 to the Annual Report on Form 10-K for the fiscal year ended December 31, 1989 of First-Knox Banc Corp. (File No. 0-13161)) *10.12 Resolution Regarding Amendment to First-Knox Banc Corp. 1990 Non-Qualified Stock Option and Stock Appreciation Rights Plan on May 14, 1996 (incorporated herein by reference to Exhibit 10(h) to the Annual Report on Form 10-K for the fiscal year ended December 31, 1996 of First-Knox Banc Corp. (File No. 0-13161)) *10.13 Description of Annual Retainer for Service as Member of Board of Directors of Park National Corporation or of a Banking Subsidiary of Park National Corporation or as Member of Advisory Board for a Division of a Banking Subsidiary** 13 Annual Report to Shareholders for the fiscal year ended December 31, 2002 (not deemed filed except for portions thereof which are specifically incorporated by reference in this Annual Report on Form 10-K) (incorporated by reference to the financial statements portion of this Annual Report on Form 10-K beginning at page 33) ** 21 Subsidiaries of Park National Corporation** 23 Consent of Ernst & Young LLP ** 24 Powers of Attorney of Directors and Executive Officers of Park ** 99.1 Certification Pursuant to Title 18, United States Code, Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ** - -------------- *Management contract or compensatory plan or arrangement **Filed herewith E-3 EX-4.1 3 l99435aexv4w1.txt EX-4.1 AGREEMENT TO FURNISH EXHIBIT 4.1 [Park National Corporation Letterhead] March 26, 2003 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Park National Corporation - Annual Report on Form 10-K for the fiscal year ended December 31, 2002 Ladies and Gentlemen: Park National Corporation, an Ohio corporation ("Park"), is today executing and filing an Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (the "Form 10-K"). Pursuant to the instructions to Item 601(b)(4)(iii) of Regulation S-K, Park hereby agrees to furnish to the Commission, upon request, copies of instruments and agreements defining the rights of holders of long-term debt of Park and its consolidated subsidiaries, which are not being filed as exhibits to the Form 10-K. Such long-term debt does not exceed 10% of the total assets of Park and its subsidiaries on a consolidated basis. Very truly yours, PARK NATIONAL CORPORATION /s/ John W. Kozak ------------------------- John W. Kozak Chief Financial Officer EX-10.1 4 l99435aexv10w1.txt EX-10.1 SUMMARY OF INCENTIVE BONUS PLAN EXHIBIT 10.1 SUMMARY OF INCENTIVE BONUS PLAN OF PARK NATIONAL CORPORATION The Executive Committee of the Board of Directors of Park National Corporation ("Park") administers Park's incentive bonus plan which enables the officers of The Park National Bank, The Richland Trust Company, Century National Bank, The First-Knox National Bank of Mount Vernon, Second National Bank, United Bank, N.A., The Security National Bank and Trust Co., The Citizens National Bank of Urbana, Scope Leasing, Inc. and Guardian Financial Services Company to share in any above-average return on equity (net income divided by average equity) which Park and its subsidiaries on a consolidated basis may generate during a fiscal year. Above-average return on equity is defined as the amount by which the net income to average equity ratio of Park and its subsidiaries on a consolidated basis exceeds the median net income to average equity ratio of all U.S. bank holding companies of similar asset size ($3 billion to $10 billion). A formula determines the amount, if any, by which Park's return on equity ratio exceeds the median return on equity ratio of these peer bank holding companies. Twenty percent (20%) of that amount on a before-tax equivalent basis is available for incentive compensation. If Park's return on equity ratio is equal to or less than that of the peer group, no incentive compensation will be available with respect to that year. The President and Chief Executive Officer of Park receives a fixed percentage of the amount available for incentive compensation as determined by the Board of Directors of Park. After deducting that amount, the remaining amount is distributed to the officers of Park National Bank, Richland Trust Company, Century National Bank, First-Knox National Bank, Second National Bank, United Bank, Security National Bank, Citizens National Bank, Scope Leasing and Guardian Financial on the basis of their respective contributions to Park's meeting its short-term and long-term financial goals during the fiscal year, which contributions are subjectively determined by the Chairman of the Board and the President and Chief Executive Officer of Park and approved by the Executive Committee of the Board of Directors of Park. Recommendations of the presidents of Park's subsidiaries are considered when determining incentive bonus amounts for officers of those subsidiaries. The determination of the amounts of incentive bonus to be paid for a fiscal year and the payment of those amounts are made during the first two quarters of the next fiscal year. EX-10.2 5 l99435aexv10w2.txt EX-10.2 SCHEDULE A TO EX-10.2 SCHEDULE A TO EXHIBIT 10.2 The following individuals entered into Split-Dollar Agreements with the subsidiaries of Park National Corporation ("Park") identified below which are identical to the Split-Dollar Agreement, dated May 17, 1993, between William T. McConnell, Chairman of the Board and a Director of Park and of The Park National Bank ("Park National Bank") and Park National Bank filed as Exhibit 10(f) to Park's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-18772):
Subsidiary of Park Name and Positions Held With Park Date of Split- which is Party to and/or Principal Subsidiaries of Park Dollar Agreement Split-Dollar Agreement - ------------------------------------- ---------------- ---------------------- David C. Bowers - Retired Secretary of June 2, 1993 Park National Bank Park; Retired Executive Vice President and a Director of Park National Bank C. Daniel DeLawder - President, Chief May 26, 1993 Park National Bank Executive Officer and a Director of Park and of Park National Bank; Director of The Richland Trust Company; Director of Second National Bank John W. Kozak - Chief Financial Officer June 2, 1993 Park National Bank of Park; Senior Vice President and Chief Financial Officer of Park National Bank; a Director of Century National Bank William A. Phillips - a Director of Park; May 22, 1998 Century National Bank Chairman of Board and a Director of Century National Bank David L. Trautman - Secretary of Park; September 23, 1993 Park National Bank Executive Vice President and a Director of Park National Bank; Chairman of the Board and a Director of The First-Knox National Bank of Mount Vernon; a Director of United Bank, N.A.
EX-10.3 6 l99435aexv10w3.txt EX-10.3 SCHEDULE A TO EX-10.3 SCHEDULE A TO EXHIBIT 10.3 The following directors of Park National Corporation ("Park") entered into Split-Dollar Agreements with the subsidiaries of Park identified below which are identical to the Split-Dollar Agreement, dated September 29, 1993, between Dominick C. Fanello and The Richland Trust Company ("Richland Trust") filed as Exhibit 10(g) to Park's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-18772):
Subsidiary of Park which is a Party to Date of Split-Dollar Name of Director Split-Dollar Agreement Agreement - ---------------- -------------------------------------- -------------------- Maureen Buchwald The First-Knox National Bank of Mount Vernon May 22, 1998 ("First-Knox National Bank") James J. Cullers First-Knox National Bank May 22, 1998 R. William Geyer Century National Bank (formerly Mutual Federal Savings October 4, 1993 Bank) ("Century National") Howard E. LeFevre The Park National Bank ("Park National Bank") September 7, 1993 John J. O'Neill Park National Bank September 2, 1993 J. Gilbert Reese Park National Bank September 8, 1993 Rick R. Taylor Richland Trust September 29, 1993
EX-10.6 7 l99435aexv10w6.txt EX-10.6 DESCRIPTION OF RETIREMENT PLAN EXHIBIT 10.6 DESCRIPTION OF PARK NATIONAL CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Park National Corporation ("Park") adopted the Park National Corporation Supplemental Executive Retirement Plan or "SERP" in December 1996. The SERP currently benefits 29 officers of Park and its subsidiaries, including William T. McConnell, C. Daniel DeLawder, David C. Bowers and John W. Kozak. Harry O. Egger does not participate in the SERP but is provided with supplemental retirement benefits under the terms of his employment agreement with The Security National Bank and Trust Co. David L. Trautman does not participate in the SERP. The SERP is a non-qualified benefit plan designed to restore benefits lost due to limitations under the Internal Revenue Code of 1986, as amended, on the amount of compensation covered by and the benefits payable under a defined benefit plan such as the Park National Corporation Defined Benefit Pension Plan. Park has purchased life insurance contracts to fund the SERP. The SERP is designed to provide a monthly retirement benefit of approximately $5,000, $10,500, $5,000 and $500 for Messrs. McConnell, DeLawder, Bowers and Kozak, respectively. These additional benefits are not guaranteed and are dependent upon the earnings from the related life insurance contracts compared to the average yield on three-month Treasury bills. The SERP also provides a life insurance benefit for officers of Park and its subsidiaries participating in the SERP who die before age 86. EX-10.13 8 l99435aexv10w13.txt EX-10.13 DESCRIPTION OF ANNUAL RETAINER EXHIBIT 10.13 DESCRIPTION OF ANNUAL RETAINER FOR SERVICES AS MEMBER OF BOARD OF DIRECTORS OF PARK NATIONAL CORPORATION OR OF A BANKING SUBSIDIARY OF PARK NATIONAL CORPORATION OR AS A MEMBER OF ADVISORY BOARD FOR A DIVISION OF A BANKING SUBSIDIARY The board of directors of Park National Corporation ("Park") and each of its banking subsidiaries as well as the advisory board for certain divisions of those banking subsidiaries with two divisions have determined that each of the non-employee directors or non-employee advisory board members, as appropriate, is to receive the annual retainer for service as a board member in the form of Park common shares. Each director of Park who is not an employee of Park or one of its subsidiaries receives an annual retainer for service as a member of the Park board of directors in the form of 100 Park common shares. Each non-employee director of one of Park's banking subsidiaries receives an annual retainer for service as a member of that subsidiary's board of directors in the form of 50 Park common shares. Each non-employee member of an advisory board for a division of a banking subsidiary receives an annual retainer for service as a member of that advisory board in the form of 50 Park common shares. These common shares are issued in the fourth quarter of the fiscal year. EX-13 9 l99435aexv13.txt EX-13 ANNUAL REPORT FINANCIAL REVIEW This financial review presents management's discussion and analysis of the financial condition and results of operations for Park National Corporation ("Park" or the "Corporation"). This discussion should be read in conjunction with the consolidated financial statements and related notes and the five-year summary of selected financial data. Management's discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. These forward-looking statements involve significant risks and uncertainties including changes in general economic and financial market conditions, Park's ability to execute its business plans, as well as other risks such as changes in government regulations and policies affecting bank holding companies. Although Park believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date hereof. Park does not undertake any obligation to publicly update any forward-looking statement. OVERVIEW Net income for 2002 was $85.6 million, the highest in Park's sixteen year history as a bank holding company. This represents a 9.2% increase over net income of $78.4 million for 2001. Diluted earnings per share increased by 10.2% to $6.15 for 2002, compared to $5.58 for 2001. The increase in earnings per share is larger than the increase in net income due to the purchase of shares of Park's common stock in the open market for the stock option plan and under the separate stock repurchase program. The number of shares of common stock outstanding at December 31, 2002 was 13,791,966, a decrease of 148,835 shares or 1.1% compared to 13,940,801 shares of common stock outstanding at December 31, 2001. Net income for 2001 of $78.4 million, increased by 14.3% over net income of $68.5 million for 2000. Diluted earnings per share of $5.58 for 2001 increased by 16.0% compared to $4.81 for 2000. These large increases for 2001 can be misleading as 2000 results have been restated to reflect the merger transaction with Security Banc Corporation on March 23, 2001. Park merged with Security Banc Corporation, a $995 million bank holding company headquartered in Springfield, Ohio, in a transaction accounted for as a pooling-of-interests. Park issued approximately 3,350,000 shares of common stock to the stockholders of Security Banc Corporation based upon an exchange ratio of .284436 shares of Park common stock for each outstanding share of Security Banc Corporation common stock. The historical financial statements of Park have been restated to show Security Banc Corporation and Park on a combined basis. Management believes that a better indication of the improvement in earnings for 2001 is a comparison to Park's originally reported earnings per share. Diluted earnings per share of $5.58 for 2001 increased by 9.4% compared to the originally reported diluted earnings per share of $5.10 for 2000. The following table compares the originally reported earnings per share with the restated earnings per share for the past five years.
- ------------------------------------------------------------ Originally Percent Restated Percent Reported EPS Increase EPS Increase - ------------------------------------------------------------ 2002 $6.15 10.2% $6.15 10.2% 2001 $5.58 9.4% $5.58 16.0% 2000 $5.10 9.2% $4.81 8.6% 1999 $4.67 10.7% $4.43 2.3% 1998 $4.22 10.8% $4.33 9.1% - ------------------------------------------------------------
The restated earnings per share take into account all of the merger transactions that Park has been involved in during the past five years. Please note that the originally reported earnings per share were higher for 2000 and 1999 and lower for 1998. Management believes that merger transactions should be accretive after the first full year of combined operations. Originally reported earnings per share increased at an annual compound growth rate of 10.0% over the past five years, which management believes is the best indication of performance. Effective with the fourth quarter of 2002, the quarterly cash dividend on common stock was increased to $.83 per share. The new annualized cash dividend of $3.32 per share is 9.2% greater than the cash dividend paid in 2002. Park has paid quarterly dividends since becoming a holding company in early 1987. The annual compound growth rate for the Corporation's per share dividend for the last five years is 14.2%. Park's business strategy is geared toward maximizing the return to stockholders. The Corporation's common stock value has appreciated 6.1% annually on a compounded, total return basis for the last five years and 12.8% annually for the past ten years. The December 31, 2002 value of a $1,000 investment on December 31, 1997 and a $1,000 investment on December 31, 1992 would be $1,347 and $3,330, respectively, inclusive of the reinvestment of dividends in the Corporation's stock. By comparison, the stock index of the Dow Jones Industrial Average has a 2.9% annual compound total rate of return for the past five years and 12.0% for the past ten years. CRITICAL ACCOUNTING POLICIES The significant accounting policies used in the development and presentation of Park's financial statements are listed in Note 1 of the Notes to Consolidated Financial Statements. The accounting and reporting policies of Park conform with accounting principles generally accepted in the United States and general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. Park considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses in the loan portfolio. Management's determination of the adequacy of the allowance for loan losses is based on periodic evaluations of the loan portfolio and of current economic conditions. However, this evaluation is inherently subjective as it requires material estimates, including expected default probabilities, loss given default, expected commitment usage, the amounts and timing of expected future cash flows on impaired loans, and estimated losses on consumer loans and residential mortgage loans based on historical loss experience and the current economic conditions. All of those factors may be susceptible to significant change. To the extent that actual results differ from management estimates, additional loan loss provisions may be required that would adversely impact earnings for future periods. ABOUT OUR BUSINESS Through its banking subsidiaries, Park is engaged in the commercial banking and trust business, generally in small to medium population Ohio communities. Management believes there is a significant number of consumers and businesses which seek long-term relationships with community-based financial institutions of quality and strength. While not engaging in activities such as foreign lending, nationally syndicated loans and investment banking operations, Park attempts to meet the needs of its customers for commercial, real estate and consumer loans, consumer and commercial leases, and investment, fiduciary and deposit services. Familiarity with the local market, coupled with conservative loan underwriting standards, has allowed Park to achieve solid financial results even in periods where there have been weak economic conditions. 25 FINANCIAL REVIEW Park has produced performance ratios which compare favorably to peer bank holding companies in terms of equity and asset returns, capital adequacy and asset quality. Continued strong results are contingent upon economic conditions in Ohio and competitive factors, among other things. The Corporation's subsidiaries compete for deposits and loans with other banks, savings associations, credit unions and other types of financial institutions. Park and its subsidiaries operate one hundred thirteen financial service offices and a network of one hundred fifteen automatic teller machines in twenty-five Ohio counties. A table of financial data of the Corporation's affiliates for 2002, 2001, and 2000 is shown below. See Note 19 of the Notes to Consolidated Financial Statements for additional financial information on the Corporation's affiliates. Table 1 - Park National Corporation Affiliate Financial Data
2002 2001 2000 Average Net Average Net Average Net (In Thousands) Assets Income Assets Income Assets Income - ---------------------------------------------------------------------------------------------- Park National Bank: Park National Division $1,177,063 $21,322 $1,010,407 $22,330 $ 963,176 $22,111 Fairfield National Division 308,563 6,986 293,782 5,670 288,477 4,777 Richland Trust Company 475,482 7,509 447,654 7,252 448,029 5,667 Century National Bank 437,134 8,837 416,970 8,256 399,814 7,023 First-Knox National Bank: First-Knox National Division 585,456 10,729 562,275 10,627 541,570 9,755 Farmers & Savings National Division 74,501 1,917 75,625 1,735 69,084 1,363 United Bank N.A. 195,173 3,145 189,010 1,909 179,495 851 Second National Bank 323,314 5,625 307,081 5,681 303,110 2,915 Security National Bank: Security National Division 702,903 12,530 661,046 10,114 632,517 9,298 Unity National Division 174,108 2,077 184,850 111 195,634 1,389 Citizens National Bank 170,189 2,019 175,263 1,998 166,210 2,061 Parent Company, including consolidating entries (188,724) 2,883 (53,959) 2,679 (45,282) 1,337 - ---------------------------------------------------------------------------------------------- Consolidated Totals $4,435,162 $85,579 $4,270,004 $78,362 $4,141,834 $68,547 - ----------------------------------------------------------------------------------------------
RETURN ON EQUITY Park's primary financial goal is to achieve a superior, long-term return on stockholders' equity. The Corporation measures performance in its attempts to achieve this goal against its peers, defined as all U.S. bank holding companies between $3 billion and $10 billion in assets. At year-end 2002 there were approximately 74 bank holding companies in this peer group. The Corporation's net income to average equity ratio (ROE) was 17.56%, 17.33% and 16.55% in 2002, 2001, and 2000, respectively. The return on equity ratio has averaged 16.63% over the past five years compared to 14.22% for the peer group. HISTORICAL COMPARISION OF RETURN ON AVERAGE EQUITY [BAR CHART]
Park Peer Mean 1998 16.11% 13.40% 1999 15.60% 14.72% 2000 16.55% 14.97% 2001 17.33% 13.39% 2002 17.56% 14.64%*
* as of 09/30/2002 BALANCE SHEET COMPOSITION Park functions as a financial intermediary. The following section discusses the sources of funds and the manner in which management has invested these funds. SOURCE OF FUNDS Deposits: The Corporation's major source of funds is provided by core deposits from individuals, businesses, and local government units. These core deposits consist of all noninterest bearing and interest bearing deposits, excluding certificates of deposit of $100,000 and over which were less than 15% of total deposits for each of the last three years. In 2002, year-end total deposits increased by $181 million or 5.5% compared to an increase of $162 million or 5.1% for 2001. Approximately $15 million of the 2001 increase resulted from the purchase of a bank branch office in Jamestown, Ohio in December 2001. The banking industry experienced larger deposit increases in 2002 and 2001 as consumers shifted funds from the equity markets to deposits and fixed income securities. Noninterest bearing deposits increased by 15.3% in 2002 and by 4.3% in 2001. Interest bearing transaction accounts increased by 8.4% in 2002 and by 9.6% in 2001. Balances in time certificates of deposit have remained stable the past two years as depositors have invested in transaction accounts. Management expects that deposit growth may be slower in 2003 as some depositors shift funds back into the equity markets. Maturity of time certificates of deposit and other time deposits of $100,000 and over as of December 31, 2002 were: Table 2 - $100,000 and Over Maturity Schedule
December 31, 2002 Time Certificates (in thousands) of Deposit - ------------------------------------------------------ 3 months or less $168,723 Over 3 months through 6 months 88,677 Over 6 months through 12 months 96,689 Over 12 months 80,038 - -------------------------------------------------- Total $434,127 ==================================================
Short-Term Borrowings: Short-term borrowings consist of securities sold under agreements to repurchase, Federal Home Loan Bank advances, federal funds purchased, and other borrowings. These funds are used to manage the Corporation's liquidity needs and interest rate sensitivity risk. The average rate paid on short-term borrowings generally moves closely with changes in market interest rates for short-term investments. The average rate paid on short-term borrowings was 1.46%, 3.33% and 5.66% for 2002, 2001 and 2000, respectively. By comparison, the average federal funds rate was 1.67%, 3.89% and 6.24% for 2002, 2001 and 2000, respectively. In 2002, average short-term borrowings were $226 million 26 FINANCIAL REVIEW compared to $279 million in 2001 and $295 million in 2000. Average short-term borrowings were 5.1% of average assets in 2002 compared to 6.5% in 2001 and 7.1% in 2000. Long-Term Debt: Long-term debt is a result of borrowings from the Federal Home Loan Bank. The average rate paid on long-term debt was 4.29% for 2002 compared to 4.67% for 2001 and 5.84% for 2000. At December 31, 2002, long-term debt was $187 million with a weighted average fixed interest rate of 5.04% and a weighted average remaining term of 4.8 years. In 2002, average long-term debt was $253 million compared to $296 million in 2001 and $267 million in 2000. Average long-term debt was 5.7% of average assets in 2002 compared to 6.9% in 2001 and 6.5% in 2000. Stockholders' Equity: Average stockholders' equity to average total assets was 10.99% in 2002, 10.59% in 2001 and 10.00% in 2000. In accordance with Statement of Financial Accounting Standards No. 115, the Corporation reflects any unrealized holding gain/(loss) on available-for-sale securities, net of federal taxes as accumulated other comprehensive income which is part of the Corporation's equity. While the effects of this accounting are not recognized for calculation of regulatory capital adequacy ratios, it does impact the Corporation's equity as reported in the audited financial statements. The unrealized holding gain on available-for-sale securities, net of federal taxes, was $24.0, $8.7, and $4.0 million at year- end 2002, 2001 and 2000, respectively. Additionally, at year-end 2002, the Corporation had recorded $1.6 million, net of federal taxes, as a minimum pension liability that was included in accumulated other comprehensive income. INVESTMENT OF FUNDS Loans: Average loans, net of unearned income, were $2,720 million in 2002 compared to $2,882 million in 2001 and $2,874 million in 2000. The average yield on loans was 7.64% in 2002 compared to 8.69% in 2001 and 9.02% in 2000. The average prime lending rate in 2002 was 4.68% compared to 6.92% in 2001 and 9.19% in 2000. Approximately 74% of loan balances mature or reprice within one year (see Table 11). This results in the interest rate yield on the loan portfolio adjusting with changes in interest rates, but on a delayed basis. Year-end loan balances, net of unearned income, decreased by $104 million or 3.7% in 2002 and decreased by $160 million or 5.4% in 2001. Residential real estate loans decreased by $76 million or 7.0% to $998 million at year-end 2002 and decreased by $88 million or 7.6% in 2001. With long-term interest rates at relatively low levels throughout 2002 and 2001, the demand for fixed rate residential mortgage loans was very strong. However, Park sells the long-term fixed rate mortgage loans in the secondary market and retains the servicing on these loans. This activity, the origination and sale of fixed rate mortgage loans, produced a significant increase in fee income during 2002 and 2001, but did not increase loan balances since the loans were sold. In fact, many borrowers took advantage of the low interest rate environment to refinance their adjustable rate mortgage loan into a fixed rate mortgage loan which further reduces the loan balances reported on the balance sheet. Demand for consumer loans and automobile leasing was weak in 2002 and 2001. Consumer loans decreased by 7.5% in 2002 and by 6.6% in 2001. Leases decreased by 19.7% in 2002 and by 13.5% in 2001. The special low rate financing offered by automobile manufacturers has reduced demand for new bank automobile loans and leases. Demand for commercial and commercial real estate loans remained relatively weak in 2002, but did improve compared to 2001. Management expects that the demand for commercial and commercial real estate loans will continue to improve in 2003, as the economy continues to expand. Management hopes to increase loan totals in 2003 through increased marketing of Park's loan products. Table 3 reports year-end loan balances by type of loan for the past five years. Table 3 - Loans by Type
December 31, (in thousands) 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------- Commercial, financial and agricultural $ 440,030 $ 440,336 $ 479,167 $ 440,166 $ 413,773 Real estate - construction 99,102 89,235 95,310 99,519 103,508 Real estate - residential 998,202 1,073,801 1,161,498 1,076,352 1,039,866 Real estate - commercial 617,270 595,567 570,969 514,590 442,818 Consumer, net 441,747 477,579 511,310 529,577 454,698 Leases, net 95,836 119,290 137,950 120,246 63,485 - ------------------------------------------------------------------------------- Total Loans $2,692,187 $2,795,808 $2,956,204 $2,780,450 $2,518,148 - -------------------------------------------------------------------------------
Table 4 - Selected Loan Maturity Distribution
Over One Over December 31, 2002 One Year Through Five (In thousands) or Less Five Years Years Total - --------------------------------------------------------------------------------- Commercial, financial and agricultural $221,273 $119,386 $ 99,371 $440,030 Real estate - construction 53,427 9,469 36,206 99,102 - --------------------------------------------------------------------------------- Total $274,700 $128,855 $135,577 $539,132 - --------------------------------------------------------------------------------- Total of these selected loans due after one year with: Fixed interest rate $109,312 Floating interest rate $155,120 - ---------------------------------------------------------------------------------
Investment Securities: The Corporation's securities portfolio is structured to provide liquidity and contribute to earnings. Park's investment strategy is dynamic. As conditions change over time, Park's overall interest rate risk, liquidity needs, and potential return on the investment portfolio will change. Management regularly reevaluates the securities in its portfolio based on circumstances as they evolve. Circumstances that may precipitate a sale of a security would be to better manage interest rate risk, meet liquidity needs, or to improve the overall yield on the investment portfolio. Park realized a net security loss of $182,000 in 2002, compared to a net security gain of $140,000 in 2001 and a net security loss of $889,000 in 2000. Park classifies most of its securities as available-for-sale (see Note 4 of the Notes to Consolidated Financial Statements). These securities are carried on the books at their estimated fair value with the unrealized holding gain or loss, net of taxes, accounted for as accumulated other comprehensive income which is part of the Corporation's equity. Management classified approximately 75% of the securities portfolio as available-for-sale at December 31, 2002. These securities are available to be sold in future periods in carrying out Park's investment strategies. The remaining securities are classified as held-to-maturity and are accounted for at amortized cost. Average taxable investment securities were $1,240 million in 2002 compared to $945 million in 2001 and $829 million in 2000. The average yield on taxable investments was 5.94% in 2002 compared to 6.58% in 2001 and 6.65% in 2000. Average tax-exempt investment securities were $144 million in 2002 compared to $160 million in 2001 and $173 million in 2000. The average tax-equivalent yield on tax-exempt investment securities was 7.10% in 2002 compared to 6.97% in 2001 and 6.85% in 2000. On a combined basis, the total of the average balance of taxable and tax-exempt securities was 31.2% of average total assets in 2002 compared to 25.9% in 2001 and 24.2% in 2000. Average investment securities have increased in 2002 and 2001 to compensate for the decrease in average loan balances in 2002 and the small increase in 2001. Management expects that the average balance of investment securities will further increase in 2003. 27 FINANCIAL REVIEW At year-end 2002 and 2001, the average tax-equivalent yield on the total investment portfolio was 5.74% and 6.37% respectively. The weighted average remaining maturity was 2.4 years at December 31, 2002 and was 2.8 years at December 31, 2001. U.S. Government asset-backed securities were 74.9% of the total investment portfolio at year-end 2002 and were 73.3% of the entire portfolio at year-end 2001. 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 cash flow from mortgage-backed securities and collateralized mortgage obligations would be reduced. Management estimates that the average maturity of the investment portfolio would lengthen to 4.0 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. The following table sets forth the book value of investment securities at year-end: Table 5 - Investment Securities
- --------------------------------------------------------------------------------------- December 31, (in thousands) 2002 2001 2000 - --------------------------------------------------------------------------------------- Obligations of U.S. Treasury and other U.S. Government agencies $ 161,635 $ 197,502 $332,428 Obligations of states and political subdivisions 142,234 153,954 168,970 U.S. Government asset-backed securities and other asset-backed securities 1,036,082 1,071,445 416,406 Other securities 43,191 41,278 38,167 - --------------------------------------------------------------------------------------- Total $ 1,383,142 $ 1,464,179 $955,971 - ---------------------------------------------------------------------------------------
EARNING RESULTS The Corporation's principal source of earnings is net interest income, the difference between total interest income and total interest expense. Net interest income results from average balances outstanding for interest earning assets and interest bearing liabilities in conjunction with the average rates earned and paid on them. Table 6 - Distribution of Assets, Liabilities and Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------ December 31, 2002 2001 (Dollars in thousands) Daily Average Daily Average Average Interest Rate Average Interest Rate - ------------------------------------------------------------------------------------------------------------ ASSETS Interest earning assets: Loans (1) (2) $2,719,805 $ 207,717 7.64% $2,881,551 $250,465 8.69% Taxable investment securities 1,240,463 73,625 5.94% 945,333 62,197 6.58% Tax-exempt investment securities (3) 144,287 10,247 7.10% 160,374 11,173 6.97% Federal funds sold 36,679 621 1.69% 21,021 872 4.15% - ----------------------------------------------------------------------------------------------------------- Total interest earning assets 4,141,234 292,210 7.06% 4,008,279 324,707 8.10% - ----------------------------------------------------------------------------------------------------------- Noninterest earning assets: Allowance for possible loan losses (62,703) (59,761) Cash and due from banks 129,820 123,424 Premises and equipment, net 39,416 39,967 Other assets 187,395 158,095 - ----------------------------------------------------------------------------------------------------------- TOTAL $4,435,162 $4,270,004 - ----------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS'EQUITY Interest bearing liabilities: Transaction accounts $ 771,507 $ 6,944 0.90% $ 649,831 $ 11,824 1.82% Savings deposits 545,657 5,577 1.02% 514,194 10,781 2.10% Time deposits 1,584,292 55,906 3.53% 1,571,021 81,707 5.20% - ----------------------------------------------------------------------------------------------------------- Total interest bearing deposits 2,901,456 68,427 2.36% 2,735,046 104,312 3.81% - ----------------------------------------------------------------------------------------------------------- Short-term borrowings 226,238 3,310 1.46% 279,244 9,296 3.33% Long-term debt 252,834 10,851 4.29% 295,669 13,796 4.67% - ----------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 3,380,528 82,588 2.44% 3,309,959 127,404 3.85% - ----------------------------------------------------------------------------------------------------------- Noninterest bearing liabilities: Demand deposits 502,400 460,219 Other 64,918 47,539 - ----------------------------------------------------------------------------------------------------------- Total noninterest bearing liabilities 567,318 507,758 - ----------------------------------------------------------------------------------------------------------- Shareholders' equity 487,316 452,287 - ----------------------------------------------------------------------------------------------------------- TOTAL $4,435,162 $4,270,004 - ----------------------------------------------------------------------------------------------------------- Net interest earnings $ 209,622 $197,303 Net interest spread 4.62% 4.25% Net yield on interest earning assets 5.06% 4.92% - -----------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------- December 31, 2000 (Dollars in thousands) Daily Average Average Interest Rate - ---------------------------------------------------------------------------- ASSETS Interest earning assets: Loans (1) (2) $2,873,939 $ 259,094 9.02% Taxable investment securities 828,550 55,076 6.65% Tax-exempt investment securities (3) 173,390 11,872 6.85% Federal funds sold 24,144 1,404 5.82% - --------------------------------------------------------------------------- Total interest earning assets 3,900,023 327,446 8.40% - --------------------------------------------------------------------------- Noninterest earning assets: Allowance for possible loan losses (53,645) Cash and due from banks 126,720 Premises and equipment, net 40,319 Other assets 128,417 - --------------------------------------------------------------------------- TOTAL $4,141,834 - --------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: Transaction accounts $ 628,353 $ 14,633 2.33% Savings deposits 516,382 12,243 2.37% Time deposits 1,521,378 83,164 5.47% - --------------------------------------------------------------------------- Total interest bearing deposits 2,666,113 110,040 4.13% - --------------------------------------------------------------------------- Short-term borrowings 295,162 16,700 5.66% Long-term debt 267,147 15,599 5.84% - --------------------------------------------------------------------------- Total interest bearing liabilities 3,228,422 142,339 4.41% - --------------------------------------------------------------------------- Noninterest bearing liabilities: Demand deposits 460,360 Other 38,957 - --------------------------------------------------------------------------- Total noninterest bearing liabilities 499,317 - --------------------------------------------------------------------------- Shareholders' equity 414,095 - --------------------------------------------------------------------------- TOTAL $4,141,834 - --------------------------------------------------------------------------- Net interest earnings $ 185,107 Net interest spread 3.99% Net yield on interest earning assets 4.75% - ---------------------------------------------------------------------------
(1) Loan income includes net loan fee income of $4,309 in 2002, $3,605 in 2001 and $809 in 2000. Loan income also includes the effects of taxable equivalent adjustments using a 35% rate in 2002, 2001 and 2000. The taxable equivalent adjustment was $1,018 in 2002, $1,028 in 2001 and $1,020 in 2000. (2) For purposes of this computation, non-accrual loans are included in the daily average loans outstanding. (3) Interest income on tax-exempt securities includes the effect of taxable equivalent adjustments using a 35% rate in 2002, 2001 and 2000. The taxable equivalent adjustment was $3,272 in 2002, $3,331 in 2001 $3,454 in 2000. 28 FINANCIAL REVIEW Net interest income increased by $12.4 million or 6.4% to $205.3 million for 2002 compared to an increase of $12.2 million or 6.7% to $192.9 million for 2001. The net yield on interest earning assets increased to 5.06% for 2002 compared to 4.92% for 2001 and 4.75% for 2000. Similarly, the net interest rate spread--the difference between rates received for interest earning assets and the rates paid for interest bearing liabilities increased to 4.62% for 2002 compared to 4.25% for 2001 and 3.99% for 2000. The increase in net interest income for both 2002 and 2001 was due to an increase in the net interest spread and an increase in average interest earning assets. The yield on average interest earning assets was 7.06% in 2002 compared to 8.10% in 2001 and 8.40% in 2000. The average prime lending rate was approximately 4.68% for 2002 compared to 6.92% for 2001 and 9.19% for 2000. The Federal Reserve Board decreased the federal funds rate from 6.50% to 1.75% during 2001 and further reduced the federal funds rate to 1.25% in November 2002. Short-term interest rates are expected to stay low during 2003. About one-third of Park's loan portfolio is indexed to the prime lending rate and as a result, the average yield on interest earning assets is expected to further decrease in 2003 as these loans reprice and other interest earning assets mature and are replaced with lower yielding assets. Average interest earning assets increased by $133 million or 3.3% to $4,141 million in 2002 compared to an increase of $108 million or 2.8% to $4,008 million in 2001. The average rate paid on average interest bearing liabilities was 2.44% in 2002 compared to 3.85% in 2001 and 4.41% in 2000. The average rate paid on deposits was 2.36% for 2002 compared to 3.81% for 2001 and 4.13% for 2000. Management expects that the average rate paid on deposits and borrowed funds will continue to decrease in 2003 as a result of the large decrease in short-term market rates during 2001 and the further reduction in November 2002. Average interest bearing liabilities increased by $71 million or 2.1% to $3,381 million in 2002 compared to an increase of $82 million or 2.5% to $3,310 million in 2001. Average interest bearing deposits as a percentage of average interest bearing liabilities were 85.8% in 2002 compared to 82.6% in both 2001 and 2000. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. Table 7 - Volume/Rate Variance Analysis
- ---------------------------------------------------------------------------------------- Change from 2001 to 2002 Change from 2000 to 2001 (in thousands) Volume Rate Total Volume Rate Total - ---------------------------------------------------------------------------------------- Increase (decrease) in: Interest income: - ---------------------------------------------------------------------------------------- Total loans $(13,560) $(29,188) $(42,748) $ 698 $(9,327) $(8,629) - ---------------------------------------------------------------------------------------- Taxable investments 17,939 (6,511) 11,428 7,706 (585) 7,121 Tax-exempt investments (1,132) 206 (926) (904) 205 (699) Federal funds sold 638 (889) (251) (165) (367) (532) - ---------------------------------------------------------------------------------------- Total interest income 3,885 (36,382) (32,497) 7,335 (10,074) (2,739) - ---------------------------------------------------------------------------------------- Interest expense: Transaction accounts 1,913 (6,793) (4,880) 486 (3,295) (2,809) Savings accounts 628 (5,832) (5,204) (52) (1,410) (1,462) Time deposits 684 (26,485) (25,801) 2,690 (4,147) (1,457) Short-term borrowings (1,512) (4,474) (5,986) (858) (6,546) (7,404) Long-term debt (1,886) (1,059) (2,945) 1,546 (3,349) (1,803) - ---------------------------------------------------------------------------------------- Total interest expense (173) (44,643) (44,816) 3,812 (18,747) (14,935) - ---------------------------------------------------------------------------------------- Net variance $ 4,058 $ 8,261 $ 12,319 $3,523 $8,673 $12,196 - ----------------------------------------------------------------------------------------
Other Income: Total other income, exclusive of security gains or losses, increased by $5.9 million or 13.2% to $51.0 million in 2002 and increased by $6.7 million or 17.6% to $45.1 million in 2001 compared to $38.4 million for 2000. Fee income earned from the origination and sale into the secondary market of fixed rate mortgage loans is included with other non-yield related loan fees in the subcategory other service income. Other service income increased by $3.0 million or 29.9% to $12.9 million in 2002 and increased by $4.7 million or 90.7% to $9.9 million in 2001 due primarily to the increase in fixed rate mortgage loan volume. Fixed rate mortgage loan volume is greatly dependent on the level of long-term interest rates which were low in 2002 and 2001. Other service income was $5.2 million for 2000. Management expects that fixed rate mortgage loan volume will continue to be strong in 2003 but less than the record volume in 2002. The subcategory of "other income" increased by $2.4 million or 18.5% to $15.3 million in 2002 and increased by $629,000 or 5.1% to $12.9 million in 2001. The increase in 2002, was primarily due to increased fees from check card and ATM services, commissions earned from title insurance policies and a $575,000 gain from the sale of a branch office. The increase in 2001 was primarily due to increased fees from check card and ATM services. Service charges on deposit accounts increased by $447,000 or 3.3% in 2002 and by $733,000 or 5.8% in 2001 due to both fee increases and increases in the number of transaction accounts. Income from fiduciary activities increased by $128,000 or 1.5% in 2002 and by $647,000 or 7.9% in 2001 due primarily to increases in assets under management for new trust department customers. Income from fiduciary activities for 2002 was hampered by the poor performance of the equity markets as fiduciary fees are generally based on the market value of the assets under management. Losses on sale of securities were $182,000 in 2002 and $889,000 in 2000 compared to a gain of $140,000 in 2001. The proceeds from the sales of securities in 2000 were generally invested in higher yielding, longer maturity securities. During 2002, 2001, and 2000, the Corporation had no investment in off-balance sheet derivative instruments. Other Expense: Total other expense increased by $5.8 million or 5.0% to $120.0 million in 2002 and increased by $7.3 million or 6.9% to $114.2 million in 2001 compared to $106.9 million for 2000. Salaries and employee benefits increased by $5.4 million or 9.0% in 2002 compared to an increase of $4.3 million or 7.8% in 2001. Full-time equivalent employees at year-end were 1,600 in 2002, and 1,588 in 2001. Salaries increased by 7.3% in 2002 and by 9.2% in 2001. Employee benefit expense increased by 16.8% in 2002 and by 1.8% in 2001. The large increase in employee benefit expense in 2002 was primarily due to a 52.5% increase in pension plan expense. See Note 12 of the Notes to Consolidated Financial Statements for additional information on Park's pension plan. The expense for amortization of intangibles was $5.3 million in 2002 compared to $4.1 million for 2001 and $4.0 million for 2000. The increase in 2002 was primarily due to the write-off of the remaining core deposit intangible at the Richland Trust Company pertaining to branch acquisitions in 1996. The expense for amortization of intangibles is expected to be $2.5 million in 2003. The subcategory "other expense" was $9.2 million in 2002 compared to $10.7 million in 2001 and $8.4 million in 2000. The increase in other expense of $2.3 million in 2001 was primarily due to a charge of $2.0 million to increase the reserve for auto lease residuals. The residual reserve for auto leases was approximately $3.1 million at year-end 2002 and 2001. Actual losses on auto lease residuals were $1.0 million in 2002 compared to $502,000 in 2001 and $258,000 in 2000. Management expects that the losses on auto lease residuals will increase in 2003, but believes that the reserve is adequate to absorb future losses. Income Taxes: Federal income tax expense as a percentage of income before taxes was 29.4% in 2002 and 2001 compared to 29.0% in 2000. A lower tax 29 FINANCIAL REVIEW percentage rate than the statutory rate of thirty-five percent is primarily due to tax-exempt interest income from state and municipal investments and loans and low income housing tax credits. CREDIT EXPERIENCE Provision for Loan Losses: The provision for loan losses is the amount added to the allowance for loan losses to absorb possible future loan charge-offs. The amount of the loan loss provision is determined by management after reviewing the risk characteristics of the loan portfolio, historical loan loss experience and projections of future economic conditions. The allowance for loan losses at December 31, 2002 totaled $62.0 million and represented 2.30% of total loans outstanding at December 31, 2002 compared to $60.0 million or 2.14% of total loans outstanding at December 31, 2001 and $57.5 million or 1.94% of total loans outstanding at December 31, 2000. The provision for loan losses was $15.0 million for 2002 compared to $13.1 million for 2001 and $14.8 million for 2000. Net charge-offs were $13.0 million for 2002 compared to $10.6 million for 2001 and $9.5 million for 2000. Management believes that the allowance for loan losses at year-end 2002 is adequate to absorb estimated credit losses in the loan portfolio. See Note 1 of the Notes to Consolidated Financial Statements for additional information on management's evaluation of the adequacy of the allowance for loan losses. The following table summarizes the loan loss provision, charge-offs and recoveries for the last five years: Table 8 - Summary of Loan Loss Experience
- --------------------------------------------------------------------------------------- (In thousands) 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------- Average loans (net of unearned interest) $2,719,805 $2,881,551 $2,873,939 $2,618,162 $2,443,119 Allowance for possible loan losses: Beginning Balance $ 59,959 $ 57,473 $ 52,140 $ 48,098 $ 45,018 Charge-offs: Commercial 7,210 3,770 5,077 5,055 1,443 Real estate 2,409 2,623 1,161 1,907 1,862 Consumer 8,606 9,908 6,825 5,361 6,275 Lease financing 1,602 1,519 933 268 184 - --------------------------------------------------------------------------------------- Total charge-offs 19,827 17,820 13,996 12,591 9,764 - --------------------------------------------------------------------------------------- Recoveries: Commercial 1,812 2,453 788 445 1,271 Real estate 1,534 656 573 1,484 1,074 Consumer 2,891 3,426 2,772 2,123 1,890 Lease financing 616 712 406 112 91 - --------------------------------------------------------------------------------------- Total recoveries 6,853 7,247 4,539 4,164 4,326 - --------------------------------------------------------------------------------------- Net charge-offs 12,974 10,573 9,457 8,427 5,438 - --------------------------------------------------------------------------------------- Provision charged to earnings 15,043 13,059 14,790 12,469 8,518 - --------------------------------------------------------------------------------------- Ending balance $ 62,028 $ 59,959 $ 57,473 $ 52,140 $ 48,098 - --------------------------------------------------------------------------------------- Ratio of net charge-offs to average Loans 0.48% 0.37% 0.33% 0.32% 0.22% Ratio of allowance for possible loan losses to end of year loans, net of unearned interest 2.30% 2.14% 1.94% 1.88% 1.91% - ---------------------------------------------------------------------------------------
The following table summarizes the allocation of allowance for possible loan losses: Table 9 - Allocation of Allowance for Loan Losses
- -------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 December 31, Percent of Percent of Percent of Percent of Percent of (Dollars in Loans Per Loans Per Loans Per Loans Per Loans Per Thousands) Allowance Category Allowance Category Allowance Category Allowance Category Allowance Category - -------------------------------------------------------------------------------------------------------------------------------- Commercial $ 17,049 16.34% $ 15,853 15.75% $ 15,573 16.20% $ 13,645 15.83% $ 12,827 16.43% Real estate 23,375 63.78% 21,695 62.90% 20,222 61.83% 18,280 60.80% 17,448 62.99% Consumer 18,322 16.40% 19,131 17.08% 17,886 17.30% 17,212 19.05% 15,923 18.06% Leases 3,282 3.48% 3,280 4.27% 3,792 4.67% 3,003 4.32% 1,900 2.52% - -------------------------------------------------------------------------------------------------------------------------------- Total $ 62,028 100.00% $ 59,959 100.00% $ 57,473 100.00% $ 52,140 100.00% $ 48,098 100.00% - --------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2002, the Corporation had no significant concentrations of loans to borrowers engaged in the same or similar industries nor did the Corporation have any loans to foreign governments. Nonperforming Assets: Nonperforming loans include: l) loans whose interest is accounted for on a nonaccrual basis; 2) loans whose terms have been renegotiated; and 3) loans which are contractually past due 90 days or more as to principal or interest payments but whose interest continues to accrue. Other real estate owned results from taking title to property used as collateral for a defaulted loan. The following is a summary of the nonaccrual, past due and renegotiated loans and other real estate owned for the last five years: Table 10 - Nonperforming Assets
- ----------------------------------------------------------------------------- December 31, (Dollars in thousands) 2002 2001 2000 1999 1998 - ----------------------------------------------------------------------------- Nonaccrual loans $ 17,579 $ 17,303 $ 10,204 $ 6,446 $ 5,606 Renegotiated loans 2,599 2,254 6,440 740 814 Loans past due 90 days or more 6,290 7,550 5,093 5,191 4,283 - ----------------------------------------------------------------------------- Total nonperforming loans 26,468 27,107 21,737 12,377 10,703 - ----------------------------------------------------------------------------- Other real estate owned 3,206 3,425 1,716 2,486 1,769 - ----------------------------------------------------------------------------- Total nonperforming assets $ 29,674 $ 30,532 $ 23,453 $14,863 $12,472 - ----------------------------------------------------------------------------- Percentage of nonperforming loans to loans, net of unearned interest 0.98% 0.97% 0.74% 0.45% 0.43% Percentage of nonperforming assets to loans, net of unearned interest 1.10% 1.09% 0.79% 0.53% 0.50% Percentage of nonperforming assets to total assets 0.67% 0.67% 0.56% 0.36% 0.35% - -----------------------------------------------------------------------------
Tax equivalent interest income from loans of $207.7 million for 2002 would have increased by $1.4 million if all loans had been current in accordance with their original terms. Interest income for the year ended December 31, 2002 in the approximate amount of $833,000 is included in interest income for those loans in accordance with original terms. The Corporation had $149.5 million of loans included on the Corporation's watch list of potential problem loans at December 31, 2002 compared to $101.6 million at year-end 2001 and $83.3 million at year-end 2000. The existing conditions of these loans do not warrant classification as nonaccrual. Management undertakes additional surveillance regarding a borrower's ability to comply with payment terms for watch list loans. 30 FINANCIAL REVIEW CAPITAL RESOURCES Liquidity and Interest Rate Sensitivity Management: The Corporation's objective in managing its liquidity is to maintain the ability to continuously meet the cash flow needs of customers, such as borrowings or deposit withdrawals, while at the same time seeking higher yields from lending and investing activities. Cash and cash equivalents increased by $69.6 million during 2002 to $238.8 million at year end. Cash provided by operating activities was $80.4 million in 2002, $98.2 million in 2001, and $76.9 million in 2000. Net income was the primary source of cash for operating activities during each year. Cash provided by investing activities was $200.6 million in 2002 and cash used in investing activities was $351.0 million in 2001 and $115.4 million in 2000. A major use or source of cash in investing activities is the net increase or decrease in the loan portfolio. Cash provided by the net decrease in the loan portfolio was $95.0 million in 2002 and $156.1 million in 2001. Cash used for the net increase in loans was $184.0 million in 2000. Security transactions are the other major use or source of cash in investing activities. Proceeds from the sale or maturity of securities provide cash and purchases of securities use cash. Net security transactions provided $110.1 million of cash in 2002, used $499.0 million of cash in 2001 and provided $71.9 million of cash in 2000. Cash used by financing activities was $211.3 million in 2002 and cash provided by financing activities was $252.5 million in 2001 and $22.1 million in 2000. A major source of cash for financing activities is the net increase in deposits. Cash provided from the net increase in deposits was $180.9 million in 2002, $147.0 million in 2001 and $47.6 million in 2000. The purchase of deposits with the branch office in 2001 provided cash of $15.0 million. Changes in short-term borrowings or long-term debt is another major source or use of cash for financing activities. The net decrease in short-term borrowings used cash of $129.4 million in 2002 and used cash of $120.4 in 2000. The net increase in short-term borrowings provided cash of $42.6 million in 2001. Cash was used by the net decrease in long-term debt of $205.3 million in 2002. Cash was provided by the net increase in long-term debt of $102.4 million in 2001 and $149.6 million in 2000. 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 present funding sources provide more than adequate liquidity for the Corporation to meet its cash flow needs. Liquidity is enhanced by assets maturing or repricing within one year. Assets maturing or repricing within one year were $2,733 million or 65.8% of interest earning assets at year-end 2002. Liquidity is also enhanced by a significant amount of stable core deposits from a variety of customers in several Ohio markets served by the Corporation. An asset/liability committee monitors and forecasts rate-sensitive assets and liabilities and develops strategies and pricing policies to influence the acquisition of certain assets and liabilities. The purpose of these efforts is to guard the Corporation from adverse impacts of unforeseen swings in interest rates and to enhance the net income of the Corporation by accepting a limited amount of interest rate risk, based on interest rate projections. The following table shows interest sensitivity data for five different time intervals as of December 31, 2002: Table 11 - Interest Rate Sensitivity
- --------------------------------------------------------------------------------------------- (Dollars 0-3 3-12 1-3 3-5 Over 5 in thousands) Months Months Years Years Years Total - --------------------------------------------------------------------------------------------- Interest rate sensitive assets: Federal funds sold $ 81,700 -- -- -- -- $ 81,700 Investment securities (1) 201,038 $ 461,300 $ 426,931 $ 218,964 $ 74,959 1,383,192 Loans (1) 808,088 1,181,163 582,710 82,289 37,937 2,692,187 - --------------------------------------------------------------------------------------------- Total interest earning assets 1,090,826 1,642,463 1,009,641 301,253 112,896 4,157,079 - --------------------------------------------------------------------------------------------- Interest bearing liabilities: Interest bearing checking (2) 120,279 -- 360,838 -- -- 481,117 Savings accounts (2) 272,789 -- 272,789 -- -- 545,578 Money market checking 310,032 -- -- -- -- 310,032 Time deposits 458,578 545,940 437,717 119,193 1,258 1,562,686 Other 1,565 -- -- -- -- 1,565 - --------------------------------------------------------------------------------------------- Total deposits 1,163,243 545,940 1,071,344 119,193 1,258 2,900,978 - --------------------------------------------------------------------------------------------- Short-term borrowings 188,878 -- -- -- -- 188,878 Long-term debt 0 0 4,631 75,000 107,595 187,226 - --------------------------------------------------------------------------------------------- Total interest bearing liabilities 1,352,121 545,940 1,075,975 194,193 108,853 3,277,082 - --------------------------------------------------------------------------------------------- Interest rate Sensitivity gap (261,295) 1,096,523 (66,334) 107,060 4,043 879,997 Cumulative rate Sensitivity gap (261,295) 835,228 768,894 875,954 879,997 -- Cumulative gap as a percentage of total interest earning assets -6.29% 20.09% 18.50% 21.07% 21.17% - ---------------------------------------------------------------------------------------------
(1) Investment securities and loans that are subject to prepayment are shown in the table by the earlier of their repricing date or their expected repayment dates and not by their contractual maturity. (2) Management considers interest bearing checking accounts and savings accounts to be core deposits and therefore, not as rate sensitive as other deposit accounts and borrowed money. Accordingly, only 25% of interest bearing checking accounts and 50% of savings accounts are considered to reprice within one year. If all of the interest bearing checking accounts and savings accounts were considered to reprice within one year, the one year cumulative gap would change from a positive 20.09% to a positive 4.85%. The interest rate sensitivity gap analysis provides a good overall picture of the Corporation's static interest rate risk position. The Corporation's policy is that the twelve month cumulative gap position should not exceed fifteen percent of interest earning assets for three consecutive quarters. At December 31, 2002, the cumulative interest earning assets maturing or repricing within twelve months were $2,733 million compared to the cumulative interest bearing liabilities maturing or repricing within twelve months of $1,898 million. For the twelve months, rate sensitive assets exceed rate sensitive liabilities by $835 million or 20.1% of earning assets. The twelve month rate sensitivity gap has exceeded fifteen percent of interest earning assets for the past two quarters. Management expects that the interest rate sensitivity gap will drop below fifteen percent of interest earning assets at March 31, 2003 due to investment purchases being funded by short-term borrowings. A positive twelve month cumulative rate sensitivity gap would suggest that the Corporation's net interest margin would increase if interest rates were to rise. However, the usefulness of the interest sensitivity gap analysis as a forecasting tool in projecting net interest income is limited. The gap analysis does not consider the magnitude by which assets or liabilities will reprice during a period and also contains assumptions as to the repricing of transaction and savings accounts that may not prove to be correct. 31 FINANCIAL REVIEW The cumulative twelve month interest rate sensitivity gap position at December 31, 2001 was a positive $256 million or 6.0% of interest earning assets compared to a positive $835 million or a positive 20.1% of interest earning assets at December 31, 2002. This change in the cumulative twelve month interest rate sensitivity gap of a positive $579 million was primarily due to an decrease in the amount of short-term borrowings and long-term debt repricing or maturing in one year to $189 million at year-end 2002 compared to $526 million at year-end 2001. Management supplements the interest rate sensitivity gap analysis with periodic simulations of balance sheet sensitivity under various interest rate scenarios to better forecast and manage the net interest margin. The Corporation uses an earnings simulation model to analyze net interest income sensitivity to movements in interest rates. This model is based on actual cash flows and repricing characteristics for balance sheet instruments and incorporates market-based assumptions regarding the impact of changing interest rates on the prepayment rate of certain assets and liabilities. This model also includes management's projections for activity levels of various balance sheet instruments and noninterest fee income and operating expense. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into this earnings simulation model. These assumptions are inherently uncertain and as a result, the model cannot precisely measure net interest income or precisely predict the impact of changes in interest rates on net interest income and net income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies. Management uses a .50% change in market interest rates per quarter for a total of 2.00% per year in evaluating the impact of changing interest rates on net interest income and net income over a twelve month horizon. At December 31, 2002, the earnings simulation model projected that net income would increase by ..6% using a rising interest rate scenario and decrease by 1.2% using a declining interest rate scenario over the next year. At December 31, 2001, the earnings simulation model projected that net income would decrease by .5% using a rising interest rate scenario and increase by .7% using a declining interest rate scenario over the next year and at December 31, 2000, the earnings simulation model projected that net income would decrease by 1.5% using a rising interest rate scenario and increase by 1.1% using a declining interest rate scenario over the next year. Consistently, over the past several years the earnings simulation model has projected that changes in interest rates would have only a small impact on net income and the net interest margin. The net interest margin has been relatively stable over the past five years at 5.06% in 2002, 4.92% in 2001, 4.75% in 2000, 4.87% in 1999 and 4.96% in 1998. A major goal of the asset/liability committee is to have a relatively stable net interest margin regardless of the level of interest rates. Capital: The Corporation's primary means of maintaining capital adequacy is through net retained earnings. At December 31, 2002, the Corporation's equity capital was $509.3 million, an increase of 8.7% over the equity capital at December 31, 2001. Stockholders' equity at December 31, 2002 was 11.45% of total assets compared to 10.25% of total assets at December 31, 2001. Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank holding companies. The unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. The capital standard of risk-based capital to risk-based assets is 8.00% at December 31, 2002. At year-end 2002, the Corporation had a risk-based capital ratio of 17.78% or capital above the minimum required by $278 million. The capital standard of tier l capital to risk-based assets is 4.00% at December 31, 2002. Tier l capital includes stockholders' equity net of goodwill and other intangible assets. At year-end 2002, the Corporation had a tier l capital to risk-based assets ratio of 16.51% or capital above the minimum required by $355 million. Bank regulators have also established a leverage capital ratio of 4%, consisting of tier 1 capital to total assets, not risk adjusted. At year-end 2002, the Corporation had a leverage capital ratio of 10.72% or capital above the minimum required by $294 million. Regulatory guidelines also establish capital ratio requirements for "well capitalized" bank holding companies. The capital ratios are 10% for risk-based capital, 6% for tier 1 capital to risk-based assets and 5% for tier 1 capital to total assets. The Corporation exceeds these higher capital standards and therefore is classified as "well capitalized." The financial institution subsidiaries of the Corporation each met the well capitalized capital ratio guidelines at December 31, 2002. The table below indicates the capital ratios for each subsidiary and the Corporation at December 31, 2002: Table 12 - Capital Ratios
- ---------------------------------------------------------------- Tier 1 Total December 31, 2002 Leverage Risk-based Risk-based - ---------------------------------------------------------------- Park National Bank 5.17% 7.99% 11.90% Richland Trust Company 5.89% 9.84% 11.10% Century National Bank 5.79% 9.95% 12.44% First-Knox National Bank 5.53% 8.24% 12.43% United Bank N.A. 6.49% 11.53% 12.79% Second National Bank 5.67% 9.13% 12.80% Security National Bank 5.50% 8.34% 12.53% Citizens National Bank 6.15% 11.25% 16.34% Park National Corporation 10.72% 16.51% 17.78% Minimum Capital Ratio 4.00% 4.00% 8.00% Well Capitalized Ratio 5.00% 6.00% 10.00% - -------------------------------------------------------------
RISK-BASED CAPITAL RATIOS (December 31, 2002) [BAR CHART]
Leverage Tier 1 Total Park 10.72% 16.51% 17.78% Well Capitalized 5% 6% 10% Regulatory minimum 4% 4% 8%
AVERAGE STOCKHOLDERS' EQUITY (millions) [BAR CHART] 2002 $487.3 2001 $452.3 2000 $414.1 1999 $409.1 1998 $388.7
Effects of Inflation: Balance sheets of financial institutions typically contain assets and liabilities that are monetary in nature and therefore, differ greatly from most commercial and industrial companies which have significant investments in premises, equipment and inventory. During periods 32 FINANCIAL REVIEW of inflation, financial institutions that are in a net positive monetary position will experience a decline in purchasing power, which does have an impact on growth. Another significant effect on internal equity growth is other expenses, which tend to rise during periods of inflation. Management believes the most significant impact on financial results is the Corporation's ability to align its asset/liability management program to react to changes in interest rates. The following table summarizes five-year financial information. All per share data have been retroactively restated for the 5% stock dividend paid on December 15, 1999. Table 13 - Consolidated Five-year Selected Financial Data
- ------------------------------------------------------------------------------------------------------------- December 31, (Dollars in thousands, except per share data) 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------- Results of Operations: Interest income $ 287,920 $ 320,348 $ 323,131 $ 293,034 $ 281,480 Interest expense 82,588 127,404 142,339 119,238 118,063 Net interest income 205,332 192,944 180,792 173,796 163,417 Gain/(loss) on sale of securities (182) 140 (889) (4,639) 527 Noninterest income 51,032 45,098 38,353 36,736 34,417 Noninterest expense 119,964 114,207 106,862 103,460 98,297 Provision for loan losses 15,043 13,059 14,790 12,469 8,518 Net income 85,579 78,362 68,547 63,805 62,628 Per share: Net income - basic 6.17 5.59 4.82 4.45 4.36 Net income - diluted 6.15 5.58 4.81 4.43 4.33 Cash dividends declared 3.11 2.89 2.66 2.36 1.94 Average Balances: Loans $ 2,719,805 $ 2,881,551 $ 2,873,939 $ 2,618,162 $ 2,443,119 Investment securities 1,384,750 1,105,707 1,001,940 1,025,599 865,437 Money market instruments and other 36,679 21,021 24,144 28,420 64,790 - ------------------------------------------------------------------------------------------------------------- Total earning assets 4,141,234 4,008,279 3,900,023 3,672,181 3,373,346 - ------------------------------------------------------------------------------------------------------------- Noninterest bearing deposits 502,400 460,219 460,360 451,723 412,702 Interest bearing deposits 2,901,456 2,735,046 2,666,113 2,606,173 2,514,660 - ------------------------------------------------------------------------------------------------------------- Total deposits 3,403,856 3,195,265 3,126,473 3,057,896 2,927,362 - ------------------------------------------------------------------------------------------------------------- Short-term borrowings 226,238 279,244 295,162 359,639 234,335 Long-term debt 252,834 295,669 267,147 89,399 37,714 Stockholders' equity 487,316 452,287 414,095 409,079 388,704 Total assets 4,435,162 4,270,004 4,141,834 3,949,655 3,633,136 Ratios: Return on average assets 1.93% 1.84% 1.65% 1.62% 1.72% Return on average equity 17.56% 17.33% 16.55% 15.60% 16.11% Net interest margin (1) 5.06% 4.92% 4.75% 4.87% 4.96% Noninterest expense to net revenue (1) 46.02% 47.11% 47.82% 47.98% 48.72% Dividend payout ratio 50.42% 51.64% 52.73% 49.50% 42.40% Average stockholders' equity to average total assets 10.99% 10.59% 10.00% 10.36% 10.70% Leveraged capital 10.72% 9.97% 9.91% 9.80% 9.87% Tier 1 capital 16.51% 14.84% 15.01% 14.42% 14.86% Risk-based capital 17.78% 16.09% 16.27% 15.64% 16.09% - -------------------------------------------------------------------------------------------------------------
(1)Computed on a fully taxable equivalent basis The following table is a summary of selected quarterly results of operations for the years ended December 31, 2002 and 2001. Certain quarterly amounts have been reclassified to conform to the year-end financial statement presentation. Table 14 - Quarterly Financial Data
- ----------------------------------------------------------------------------------------------- Three Months Ended (Dollars in thousands, ---------------------------------------------------------- except per share data) March 31 June 30 Sept. 30 Dec. 31 - ----------------------------------------------------------------------------------------------- 2002: Interest income $ 74,874 $ 73,099 $ 72,402 $ 67,545 Interest expense 22,627 21,200 20,472 18,289 Net interest income 52,247 51,899 51,930 49,256 Provision for loan losses 4,519 3,644 3,194 3,686 Gain (loss) on sale of securities (210) -- -- 28 Income before income taxes 30,097 31,089 31,658 28,331 Net income 21,448 21,972 22,073 20,086 Per share data: Net income - basic 1.53 1.58 1.59 1.45 Net income - diluted 1.53 1.57 1.59 1.45 Weighted-average common stock outstanding - basic 13,936,340 13,920,111 13,847,583 13,810,087 Weighted-average common stock equivalent - diluted 13,973,050 13,958,268 13,871,544 13,835,833 - ----------------------------------------------------------------------------------------------- 2001: Interest income $ 81,154 $ 80,225 $ 80,242 $ 78,727 Interest expense 35,723 33,323 31,664 26,694 Net interest income 45,431 46,902 48,578 52,033 Provision for loan losses 2,259 2,392 2,957 5,451 Gain (loss) on sale of securities 142 -- (8) 6 Income before income taxes 26,500 29,118 29,035 26,263 Net income 18,890 20,383 20,352 18,737 Per share data: Net income - basic 1.34 1.45 1.46 1.34 Net income - diluted 1.34 1.45 1.45 1.34 Weighted-average common stock outstanding - basic 14,090,337 14,033,886 14,001,286 13,955,703 Weighted-average common stock equivalent - diluted 14,116,226 14,055,661 14,043,030 13,989,892 - -----------------------------------------------------------------------------------------------
The Corporation's common stock (symbol:PRK) is traded on the American Stock Exchange (AMEX). At December 31, 2002, the Corporation had 5,006 stockholders of record. The following table sets forth the high, low and closing sale prices of, and dividends declared on the common stock for each quarterly period for the years ended December 31, 2002 and 2001, as reported by AMEX. Table 15 - Market and Dividend Information
- ------------------------------------------------------------- Cash Dividend Last Declared High Low Price Per Share - ------------------------------------------------------------- 2002: First Quarter $ 99.00 $ 89.50 $ 98.75 $ 0.76 Second Quarter 102.10 86.00 86.00 0.76 Third Quarter 97.71 84.01 93.70 0.76 Fourth Quarter 99.25 88.30 98.80 0.83 - ------------------------------------------------------------ 2001: First Quarter $ 91.00 $ 80.80 $ 86.75 $ 0.71 Second Quarter 102.50 75.10 102.50 0.71 Third Quarter 101.00 84.00 96.75 0.71 Fourth Quarter 98.75 88.00 92.75 0.76 - ------------------------------------------------------------
33 CONSOLIDATED BALANCE SHEETS PARK NATIONAL CORPORATION AND SUBSIDIARIES at December 31, 2002 and 2001 (Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------- ASSETS 2002 2001 - ---------------------------------------------------------------------------------------------------------------- Cash and due from banks $ 157,088 $ 169,143 Federal funds sold 81,700 -- Interest bearing deposits with other banks 50 50 Investment securities: Securities available-for-sale, at fair value (amortized cost of $993,317 and $1,423,268 at December 31, 2002 and 2001, respectively) 1,030,264 1,436,661 Securities held-to-maturity, at amortized cost (fair value of $360,688 and $27,383 at December 31, 2002 and 2001, respectively) 352,878 27,518 - ---------------------------------------------------------------------------------------------------------------- Total investment securities 1,383,142 1,464,179 - ---------------------------------------------------------------------------------------------------------------- Loans 2,701,206 2,806,301 Unearned loan interest (9,019) (10,493) - ---------------------------------------------------------------------------------------------------------------- Total loans 2,692,187 2,795,808 - ---------------------------------------------------------------------------------------------------------------- Allowance for loan losses (62,028) (59,959) - ---------------------------------------------------------------------------------------------------------------- Net loans 2,630,159 2,735,849 - ---------------------------------------------------------------------------------------------------------------- Other assets: Bank owned life insurance 74,355 63,892 Premises and equipment, net 38,734 39,910 Accrued interest receivable 20,189 23,837 Other 61,208 72,655 - ---------------------------------------------------------------------------------------------------------------- Total other assets 194,486 200,294 - ---------------------------------------------------------------------------------------------------------------- Total assets $ 4,446,625 $ 4,569,515 - ----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 34 CONSOLIDATED BALANCE SHEETS (CONTINUED) PARK NATIONAL CORPORATION AND SUBSIDIARIES at December 31, 2002 and 2001 (Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001 - ------------------------------------------------------------------------------------------------------------------------- Deposits: Noninterest bearing $ 594,157 $ 515,333 Interest bearing 2,900,978 2,798,870 - ------------------------------------------------------------------------------------------------------------------------- Total deposits 3,495,135 3,314,203 - ------------------------------------------------------------------------------------------------------------------------- Short-term borrowings 188,878 318,311 Long-term debt 187,226 392,540 Other liabilities: Accrued interest payable 8,074 10,772 Other 58,020 65,343 - ------------------------------------------------------------------------------------------------------------------------- Total other liabilities 66,094 76,115 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities 3,937,333 4,101,169 - ------------------------------------------------------------------------------------------------------------------------- Stockholders' equity: Common stock, no par value (20,000,000 shares authorized; 14,540,449 shares issued in 2002 and 14,540,498 issued in 2001) 105,768 105,771 Accumulated other comprehensive income, net 22,418 8,705 Retained earnings 446,300 403,870 Less: Treasury stock (748,483 shares in 2002 and 599,697 shares in 2001) (65,194) (50,000) - ------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 509,292 468,346 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 4,446,625 $ 4,569,515 - -------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 35 CONSOLIDATED STATEMENTS OF INCOME PARK NATIONAL CORPORATION AND SUBSIDIARIES for the years ended December 31, 2002, 2001 and 2000 (Dollars in thousands, except per share data)
2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $ 206,699 $ 249,437 $ 258,074 Interest and dividends on: Obligations of U.S. Government, its agencies and other securities 73,625 62,197 55,076 Obligations of states and political subdivisions 6,975 7,842 8,418 Other interest income 621 872 1,563 - --------------------------------------------------------------------------------------------------------------------- Total interest income 287,920 320,348 323,131 - --------------------------------------------------------------------------------------------------------------------- Interest expense: Interest on deposits: Demand and savings deposits 12,521 22,605 26,876 Time deposits 55,906 81,707 83,164 Interest on short-term borrowings 3,310 9,296 16,700 Interest on long-term debt 10,851 13,796 15,599 - --------------------------------------------------------------------------------------------------------------------- Total interest expense 82,588 127,404 142,339 - --------------------------------------------------------------------------------------------------------------------- Net interest income 205,332 192,944 180,792 - --------------------------------------------------------------------------------------------------------------------- Provision for loan losses 15,043 13,059 14,790 - --------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 190,289 179,885 166,002 - --------------------------------------------------------------------------------------------------------------------- Other income: Income from fiduciary activities 8,942 8,814 8,167 Service charges on deposit accounts 13,868 13,421 12,688 Gain/(loss) on sales of securities (182) 140 (889) Other service income 12,936 9,959 5,223 Other 15,286 12,904 12,275 - --------------------------------------------------------------------------------------------------------------------- Total other income $ 50,850 $ 45,238 $ 37,464 - ---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 36 CONSOLIDATED STATEMENTS OF INCOME (CONTINUED) PARK NATIONAL CORPORATION AND SUBSIDIARIES for the years ended December 31, 2002, 2001 and 2000 (Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------- Other expense: Salaries and employee benefits $ 65,464 $ 60,042 $ 55,721 Data processing fees 8,302 8,247 7,823 Fees and service charges 7,709 6,536 7,397 Net occupancy expense of bank premises 6,262 5,771 5,599 Amortization of intangibles 5,276 4,097 3,970 Furniture and equipment expense 6,177 6,139 6,053 Insurance 1,190 1,257 1,283 Marketing 3,512 3,371 3,141 Postage and telephone 4,560 4,661 4,548 State taxes 2,287 3,339 2,912 Other 9,225 10,747 8,415 - --------------------------------------------------------------------------------------------------------------------- Total other expense 119,964 114,207 106,862 - --------------------------------------------------------------------------------------------------------------------- Income before federal income taxes 121,175 110,916 96,604 Federal income taxes 35,596 32,554 28,057 - --------------------------------------------------------------------------------------------------------------------- Net income $ 85,579 $ 78,362 $ 68,547 - --------------------------------------------------------------------------------------------------------------------- Earnings per share: Basic $ 6.17 $ 5.59 $ 4.82 Diluted $ 6.15 $ 5.58 $ 4.81 - ---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 37 CONSOLIDATED STATEMENTS OF CHANGES IN STOCK HOLDERS' EQUITY PARK NATIONAL CORPORATION AND SUBSIDIARIES for the years ended December 31, 2002, 2001 and 2000 (Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------------------------------------------------------- Common Stock Accumulated ---------------------- Other Shares Retained Comprehensive Treasury Outstanding Amount Earnings Income Stock Total - -------------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 2000 14,333,230 $121,210 $333,572 $(16,304) $(29,295) $409,183 - -------------------------------------------------------------------------------------------------------------------------------- Treasury stock purchased (240,340) -- -- -- (20,844) (20,844) Treasury stock reissued primarily for stock options exercised 20,408 -- -- -- 1,310 1,310 Shares issued for stock options 11,825 304 -- -- -- 304 Retire treasury stock from U.B. Bancshares and SNB Corp. mergers -- (2,246) -- -- 2,246 -- Cash payment for fractional shares in U.B. Bancshares and SNB Corp. mergers (406) (39) -- -- -- (39) Net income -- -- 68,547 -- -- 68,547 Other comprehensive income, net of tax: Unrealized net holding gain on securities available-for-sale, net of income taxes of$10,948 20,332 20,332 - -------------------------------------------------------------------------------------------------------------------------------- Total other comprehensive income 20,332 - -------------------------------------------------------------------------------------------------------------------------------- Comprehensive income 88,879 Cash dividends: Corporation at $2.66 per share -- -- (28,074) -- -- (28,074) Cash dividends declared at SNB Corp., U.B. Bancshares, and Security Banc Corporation prior to the merger -- -- (8,070) -- -- (8,070) - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 14,124,717 $119,229 $365,975 $ 4,028 $(46,583) $442,649 - -------------------------------------------------------------------------------------------------------------------------------- Treasury stock purchased (207,330) -- -- -- (18,336) (18,336) Treasury stock reissued primarily for stock options exercised 24,646 -- -- -- 1,558 1,558 Retire treasury stock from Security Banc Corporation merger -- (13,361) -- -- 13,361 -- Cash payment for fractional shares in Security Banc Corporation merger (1,232) (97) -- -- -- (97) Net income -- -- 78,362 -- -- 78,362 Other comprehensive income, net of tax: Unrealized net holding gain on securities available-for-sale, net of income taxes of $2,518 4,677 4,677 - -------------------------------------------------------------------------------------------------------------------------------- Total other comprehensive income 4,677 - -------------------------------------------------------------------------------------------------------------------------------- Comprehensive income 83,039 Cash dividends: Corporation at $2.89 per share -- -- (38,112) -- -- (38,112) Cash dividends declared at Security Banc Corporation prior to the merger -- -- (2,355) -- -- (2,355) - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2001 13,940,801 $105,771 $403,870 $ 8,705 $(50,000) $468,346 - -------------------------------------------------------------------------------------------------------------------------------- Treasury stock purchased (203,562) -- -- -- (18,793) (18,793) Treasury stock reissued primarily for stock options exercised 54,776 -- -- -- 3,599 3,599 Cash payment for fractional shares in dividend reinvestment plan (49) (3) -- -- -- (3) Net income -- -- 85,579 -- -- 85,579 Other comprehensive income, net of tax: Unrealized net holding gain on securities available-for-sale, net of income taxes of $8,243 15,311 15,311 Additional minimum liability for pension plan, net of income taxes of $(860) (1,598) -- (1,598) - -------------------------------------------------------------------------------------------------------------------------------- Total other comprehensive income 13,713 - -------------------------------------------------------------------------------------------------------------------------------- Comprehensive income 99,292 Cash dividends: Corporation at $3.11 per share -- -- (43,149) -- -- (43,149) - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2002 13,791,966 $105,768 $446,300 $ 22,418 $(65,194) $509,292 - --------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 38 CONSOLIDATED STATEMENTS OF CASH FLOWS PARK NATIONAL CORPORATION AND SUBSIDIARIES for the years ended December 31, 2002, 2001 and 2000 (Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------- Operating activities: Net Income $ 85,579 $ 78,362 $ 68,547 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 15,043 13,059 14,790 Amortization of loan fees and cost, net (4,309) (3,655) (809) Provision for depreciation and amortization 5,630 5,515 5,452 Amortization of intangible assets 5,276 4,097 3,970 (Accretion) amortization of investment securities (5,666) (1,570) (383) Deferred income taxes (3,519) 763 3,950 Realized investment security losses (gains) 182 (140) 889 Changes in assets and liabilities: Increase in other assets (5,368) (26,808) (4,506) (Decrease) increase in other liabilities (12,476) 28,558 (14,998) - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 80,372 98,181 76,902 - ---------------------------------------------------------------------------------------------------------------------------- Investing Activities: Proceeds from sales of available-for-sale securities 99,673 97,138 44,251 Proceeds from maturities of securities: Held-to-maturity 1,989 2,956 2,192 Available-for-sale 1,971,411 392,406 127,291 Purchase of securities: Held-to-maturity (327,348) -- (650) Available-for-sale (1,635,650) (991,540) (101,210) Net decrease (increase) in interest bearing deposits with other banks -- 1,588 (29) Net decrease (increase) in loans 94,956 156,082 (184,007) Purchase of loans -- (2,604) -- Cash paid for branches -- (1,362) -- Purchases of premises and equipment, net (4,454) (5,651) (3,196) - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 200,577 (350,987) (115,358) - ---------------------------------------------------------------------------------------------------------------------------- Financing activities: Purchase of deposits -- 14,992 -- Net Increase in Deposits 180,932 146,960 47,643 Net (decrease) increase in short-term borrowings (129,433) 42,612 (120,393) Cash payment for fractional shares of common stock (3) (97) (39) Exercise of stock options -- -- 304 Purchase of treasury stock, net (15,194) (16,778) (19,534) Proceeds from long-term debt -- 380,000 165,000 Repayment of long-term debt (205,314) (277,587) (15,415) Cash dividends paid (42,292) (37,585) (35,429) - ---------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (211,304) 252,517 22,137 - ---------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 69,645 (289) (16,319) Cash and cash equivalents at beginning of year 169,143 169,432 185,751 - ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 238,788 $ 169,143 $169,432 - ----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed in the preparation of the consolidated financial statements: Principles of Consolidation The consolidated financial statements include the accounts of Park National Corporation (the Corporation or Park) and all of its subsidiaries. Material intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications Certain prior year amounts have been reclassified to conform with current year presentation. Investment Securities Investment securities are classified upon acquisition into one of three categories: Held-to-maturity, available-for-sale, or trading (see Note 4). Held-to-maturity securities are those securities that the Corporation has the positive intent and ability to hold to maturity and are recorded at amortized cost. Available-for-sale securities are those securities that would be available to be sold in the future in response to the Corporation's liquidity needs, changes in market interest rates, and asset-liability management strategies, among others. Available-for-sale securities are reported at fair value, with unrealized holding gains and losses excluded from earnings and are included in other comprehensive income, net of applicable taxes. At December 31, 2002 and 2001, the Corporation did not hold any trading securities. Gains and losses realized on the sale of investment securities have been accounted for on the trade date in the year of sale on an "identified certificate" basis. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is generally provided on the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the lives of the respective leases or the estimated useful lives of the improvements, whichever are the shorter periods. Upon the sale or other disposal of the assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is recognized. Maintenance and repairs are charged to expense as incurred while renewals and improvements are capitalized. Other Real Estate Owned Other real estate owned is recorded at the lower of cost or fair market value (which is not in excess of estimated net realizable value) and consists of property acquired through foreclosure, and real estate held for sale. Subsequent to acquisition, allowances for losses are established if carrying values exceed fair value less estimated costs to sell. Costs relating to development and improvement of such properties are capitalized (not in excess of fair value less estimated costs to sell), whereas costs relating to holding the properties are charged to expense. Income Recognition Income earned by the Corporation and its subsidiaries is recognized principally on the accrual basis of accounting. Loan origination fees are amortized over the life of the loans using the interest method on a loan by loan basis, and origination costs are deferred and amortized if material. Certain fees, principally service, are recognized as income when billed or collected. The Corporation's subsidiaries suspend the accrual of interest when, in management's opinion, the collection of all or a portion of interest has become doubtful. Generally, when a loan is placed on non-accrual, the Corporation's subsidiaries charge all previously accrued and unpaid interest against income. In future periods, interest will be included in income to the extent received only if complete principal recovery is reasonably assured. 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. Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosure" requires an allowance to be established as a component of the allowance for loan losses for certain loans when it is probable that all amounts due pursuant to the contractual terms of the loan will not be collected, and the recorded investment in the loan exceeds the fair value. Fair value is measured using either the present value of expected future cash flows based upon the initial effective interest rate on the loan, the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent. Commercial loans are individually risk graded. Where appropriate, reserves are allocated to individual loans based on management's estimate of the borrower's ability to repay the loan given the availability of collateral and other sources of cash flow. Homogenous loans, such as consumer installment, residential mortgage loans, and automobile leases are not individually risk graded. Reserves are established for each pool of loans based on historical loan loss experience, current economic conditions and loan delinquency. Mortgage Servicing Rights When Park sells mortgage loans with servicing rights retained, the total cost of the mortgage loan is allocated to the servicing rights and the loans based on their relative fair values. The servicing rights capitalized are amortized in proportion to and over the period of estimated servicing income. Capitalized mortgage servicing rights are included in other assets and totaled $5,543,000 and $3,139,000 at December 31, 2002 and 2001, respectively. Servicing rights are assessed for impairment periodically. Fees received for servicing mortgage loans owned by investors are based on a percentage of the outstanding monthly principal balance of such loans and are included in income as loan payments are received. The cost of servicing loans is charged to expense as incurred. Lease Financing Leases of equipment, automobiles, and aircraft to customers generally are direct leases in which the Corporation's subsidiaries have acquired the equipment, automobiles, or aircraft with no outside financing. Such leases are accounted for as direct financing leases for financial reporting purposes. Under the direct financing method, a receivable is recorded for the total amount of the lease payments to be received. Unearned lease income, representing the excess of the sum of the aggregate rentals of the equipment, automobile or aircraft over its cost is included in income over the term of the lease under the interest method. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Intangible Assets In June 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new standards, goodwill and indefinite lived intangible assets are no longer amortized and are subject to annual impairment tests. Park had $7,529,000 of goodwill included in other assets at December 31, 2002 and 2001. This goodwill was evaluated for impairment during the first quarter of 2002 and a determination made that the goodwill was not impaired. No amortization expense was recorded on the goodwill in 2002 compared to amortization expense of $375,000 in 2001. Application of the non-amortization provisions of the new standards increased net income by $375,000 and increased earnings per share by $.03 in 2002. Park also had core deposit intangibles included in other assets of $8,539,000 at December 31, 2002 and $13,815,000 at December 31, 2001. The core deposit intangibles are being amortized to expense, principally on the straight-line method, over periods ranging from six to twelve years. Consolidated Statement of Cash Flows Cash and cash equivalents include cash and cash items, amounts due from banks and federal funds sold. Generally federal funds are purchased and sold for one day periods. Net cash provided by operating activities reflects cash payments as follows:
December 31, (Dollars in Thousands) 2002 2001 2000 - --------------------------------------------------------------------- Interest paid on deposits and other borrowings $ 85,286 $ 130,524 $ 140,318 Income taxes paid $ 39,650 $ 31,559 $ 24,796 - ---------------------------------------------------------------------
Income Taxes The Corporation accounts for income taxes using the asset and liability approach. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Derivative Instruments In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The provisions of this statement require that derivative instruments be carried at fair value on the balance sheet. The statement continues to allow derivative instruments to be used to hedge various risks and sets forth specific criteria to be used to determine when hedge accounting can be used. The statement also provided for offsetting changes in fair value or cash flows of both the derivative and the hedged asset or liability to be recognized in earnings in the same period; however, any changes in fair value or cash flow that represent the ineffective portion of a hedge are required to be recognized in earnings and cannot be deferred. For derivative instruments not accounted for as hedges, changes in fair value are required to be recognized in earnings. The provisions of this statement became effective for quarterly and annual reporting beginning January 1, 2001. The Corporation did not use any derivative instruments in 2002 and 2001 and as a result, the adoption of this statement has had no impact on the Corporation's financial position, results of operations and cash flows. Accounting Changes In October 2002, the FASB issued SFAS No. 147, Acquisition of Certain Financial Institutions. This Statement provides guidance on the accounting for the acquisition of a financial institution, which had previously been addressed in FASB Statement No. 72, Accounting for Certain Acquisitions of Banking and Thrift Institutions. Statement No. 147 requires the excess of the fair value of liabilities assumed over the fair value of the tangible and identifiable assets acquired in a business combination to be recognized as an unidentifiable intangible asset in accordance with Statement No. 141 and No. 142. In addition, any long-term customer-relationship intangible assets, such as depositor-relationship, borrower-relationship, and credit cardholder intangible assets, will be required to be tested for impairment in accordance with Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, as amended. The provisions of Statement No. 147 became effective October 1, 2002. In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. This Statement amends Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to Statement No. 123's fair value method of accounting for stock-based employee compensation. Statement No. 148 also amends the disclosure provisions of Statement 123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. Statement No. 148 does not amend Statement No. 123 or the intrinsic value method of APB Opinion No. 25, which is the method used by Park. See Note 11 for accounting for stock options. Park does not have any plans to change from using APB Opinion No. 25 for accounting for its employee stock options. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. This Interpretation of Accounting Research Bulletin No. 51 (ARB 51), Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities or, in many cases, special-purpose entities (SPEs). These entities must have certain characteristics for the required consolidation and financial reporting. ARB 51 requires that an enterprise's consolidated financial statements include subsidiaries in which the enterprise has a controlling financial interest. This Interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. An enterprise that holds significant variable interests in a variable interest entity but is not the primary beneficiary is required to disclose certain information regarding its interest in variable interest entities. This Interpretation applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that is acquired before February 1, 2003. It also applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. This Interpretation may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. The adoption of SFAS No. 147 and No. 148 and Interpretation No. 46 will not have a material impact on Park's results of operation or financial condition. 2. ORGANIZATION AND ACQUISITIONS Park National Corporation is a multi-bank holding company headquartered in Newark, Ohio. Through its banking subsidiaries, 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), Park is engaged in a general commercial banking and trust business, primarily in Central Ohio. A wholly owned subsidiary of Park, Guardian Finance Company (GFC) began operating in May 1999. GFC is a consumer finance company located in Central Ohio. PNB operates through two banking divisions with the Park National Division headquartered in Newark, Ohio and the Fairfield National Division headquartered in Lancaster, Ohio. FKNB also operates through two banking divisions with the First-Knox National Division headquartered in Mount Vernon, Ohio and the Farmers and Savings Division headquartered in Loudonville, Ohio. SEC also operates through two banking divisions with 41 the Security National Division headquartered in Springfield, Ohio and The Unity National Division (formerly The Third Savings and Loan Company) headquartered in Piqua, Ohio. All of the banking subsidiaries and their respective divisions generally provide the following principal services: the acceptance of deposits for demand, savings, and time accounts; commercial, industrial, consumer and real estate lending, including installment loans, credit cards, home equity lines of credit and commercial and auto leasing; trust services; cash management; safe deposit operations; electronic funds transfers; online internet banking with bill pay service; and a variety of additional banking-related services. See Note 19 for financial information on the Corporation's banking subsidiaries. On March 23, 2001, Park merged with Security Banc Corporation, a $995 million bank holding company headquartered in Springfield, Ohio, in a transaction accounted for as a pooling-of-interests. Park issued approximately 3,350,000 shares of common stock to the stockholders of Security Banc Corporation based upon an exchange ratio of .284436 shares of Park common stock for each outstanding share of Security Banc Corporation common stock. The three financial institution subsidiaries of Security Banc Corporation (The Security National Bank and Trust Co., The Citizens National Bank of Urbana, and The Third Savings and Loan Company) are being operated as two separate subsidiaries by Park. The Third Savings and Loan Company is now being operated as a separate division of The Security National Bank and Trust Co. under the name of Unity National and The Citizens National Bank of Urbana is also being operated as a separate banking subsidiary of Park. The historical financial statements of Park have been restated to show Security Banc Corporation and Park on a combined basis. Separate results of operations for Park and Security Banc Corporation follow:
Twelve Months Ended December 31, (Dollars in Thousands) 2000 - ------------------------------------------------ Net interest income Park $ 138,895 Security Banc Corporation 41,897 Combined $ 180,792 - ------------------------------------------- Net income Park $ 55,405 Security Banc Corporation 13,142 Combined $ 68,547 - ------------------------------------------- Basic earnings per share Park $ 5.11 Security Banc Corporation 1.11 Combined $ 4.82 - ------------------------------------------- Diluted Earnings Per Share Park $ 5.10 Security Banc Corporation 1.10 Combined $ 4.81 - -------------------------------------------
On April 30, 2000, Park merged with U.B. Bancshares, Inc., a $180 million one bank holding company headquartered in Bucyrus, Ohio in a transaction accounted for as a pooling-of-interests. Park issued approximately 325,000 shares of common stock to the stockholders of U.B. Bancshares, Inc. based upon an exchange ratio of .577209 shares of Park common stock for each outstanding share of U.B. Bancshares, Inc. common stock. United Bank, N.A., the wholly owned subsidiary of U.B. Bancshares, Inc. is being operated as a separate banking subsidiary by Park. Park also merged with SNB Corp., a $300 million one bank holding company headquartered in Greenville, Ohio, on April 30, 2000 in a transaction accounted for as a pooling-of-interests. Park issued approximately 835,000 shares of common stock to the stockholders of SNB Corp. based upon an exchange ratio of 5.367537 shares of Park common stock for each outstanding share of SNB Corp. common stock. Second National Bank, the wholly owned subsidiary of SNB Corp., is being operated as a separate banking subsidiary by Park. On December 13, 2001, Security National Division acquired a branch office in Jamestown, Ohio. In addition to the fixed assets, the purchase included $15 million in deposits and $3 million in loans. The excess of the cost over net tangible assets purchased, core deposit intangible, was $1 million and is being amortized using the straight-line method over seven years. 3. RESTRICTIONS ON CASH AND DUE FROM BANKS The Corporation's banking subsidiaries are required to maintain average reserve balances with the Federal Reserve Bank. The average required reserve balance was approximately $25,814,000 and $37,959,000 at December 31, 2002 and 2001, respectively. No other compensating balance arrangements were in existence at year end. 4. INVESTMENT SECURITIES The amortized cost and fair values of investment securities at December 31 are as follows: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------------------------------- Gross Gross Unrealized Unrealized Amortized Holding Holding Estimated (In thousands) Cost Gains Losses Fair Value - ----------------------------------------------------------------------------------------------------- 2002: Securities Available-for-Sale Obligations of U.S. Treasury and other U.S. Government agencies $ 158,122 $ 3,513 $ -- $ 161,635 Obligations of states and political subdivisions 111,019 6,387 7 117,399 U.S. Government agencies' asset-backed securities and other asset-backed securities 681,316 26,723 -- 708,039 Other equity securities 42,860 331 -- 43,191 - --------------------------------------------------------------------------------------------------- Total $ 993,317 $ 36,954 $ 7 $ 1,030,264 - --------------------------------------------------------------------------------------------------- 2002: Securities Held-to-Maturity Obligations of states and political subdivisions $ 24,835 $ 777 $ -- $ 25,612 U.S. Government agencies' asset-backed securities and other asset-backed securities 328,043 7,033 -- 335,076 - --------------------------------------------------------------------------------------------------- Total $ 352,878 $ 7,810 $ -- $ 360,688 - --------------------------------------------------------------------------------------------------- 2001: Securities Available-for-Sale Obligations of U.S. Treasury and other U.S. Government agencies $ 190,390 $ 7,112 $ -- $ 197,502 Obligations of states and political subdivisions 124,345 3,156 165 127,336 U.S. Government agencies' asset-backed securities and other asset-backed securities 1,067,219 12,603 9,277 1,070,545 Other equity securities 41,314 211 247 41,278 - --------------------------------------------------------------------------------------------------- Total $ 1,423,268 $ 23,082 $ 9,689 $ 1,436,661 - --------------------------------------------------------------------------------------------------- 2001: Securities Held-to-Maturity Obligations of states and political subdivisions $ 26,618 $ 180 $ 326 $ 26,472 Other asset-backed securities 900 10 -- 910 - --------------------------------------------------------------------------------------------------- Total $ 27,518 $ 190 $ 326 $ 27,382 - ---------------------------------------------------------------------------------------------------
The amortized cost and estimated fair value of investments in debt securities at December 31, 2002 are shown below by contractual maturity or the expected call date, except for asset-backed securities which are shown based on expected maturities. The average yield is computed on a tax equivalent basis using a 35 percent tax rate. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------------------------- Weighted Amortized Estimated Average Average (Dollars in thousands) Cost Fair Value Maturity Yield - -------------------------------------------------------------------------------------------------- Securities Available-for-Sale U.S. Treasury and agencies' notes: Due within one year $ 134,749 $ 136,311 .1 years 3.76% Due one through five years 23,373 25,324 1.7 years 7.18% - ----------------------------------------------------------------------------------------------- Total $ 158,122 $ 161,635 .5 Years 4.27% - ----------------------------------------------------------------------------------------------- Obligations of states and political subdivisions: Due within one year $ 19,874 $ 20,316 .6 years 7.53% Due one through five years 60,815 64,933 3.2 years 7.30% Due five through ten years 29,827 31,609 5.9 years 7.14% Due over ten years 503 541 10.7 years 6.85% - ----------------------------------------------------------------------------------------------- Total $ 111,019 $ 117,399 3.5 Years 7.30% - ----------------------------------------------------------------------------------------------- U.S. Government agencies' asset-backed securities and other asset-backed securities: Due within one year $ 148,045 $ 150,216 .4 years 6.72% Due one through five years 527,573 551,893 4.1 years 5.74% Due five through ten years 5,698 5,930 6.1 years 5.84% - ----------------------------------------------------------------------------------------------- Total $ 681,316 $ 708,039 3.3 Years 5.95% - ----------------------------------------------------------------------------------------------- Securities Held-to-Maturity Obligations of state and political subdivisions: Due within one year $ 3,557 $ 3,583 .6 years 6.89% Due one through five years 13,771 14,202 3.2 years 6.87% Due five through ten years 7,507 7,827 5.9 years 6.66% - ----------------------------------------------------------------------------------------------- Total $ 24,835 $ 25,612 3.7 Years 6.81% - ----------------------------------------------------------------------------------------------- U.S. Government agencies' asset-backed securities and other asset-backed securities: Due within one year $ 223,397 $ 227,515 .8 years 5.60% Due one through five years 104,646 107,561 1.4 years 5.43% - ----------------------------------------------------------------------------------------------- Total $ 328,043 $ 335,076 1.0 Years 5.55% - -----------------------------------------------------------------------------------------------
Investment securities having a book value of $988,538,000 and $918,102,000 at December 31, 2002 and 2001, respectively, were pledged to collateralize government and trust department deposits in accordance with federal and state requirements and to secure repurchase agreements sold. In 2002, 2001, and 2000, gross gains of $113,000, $192,000, and -0- and gross losses of $295,000, $52,000 and $889,000 were realized, respectively. Tax benefits related to net securities losses were $64,000 in 2002, and $311,000 in 2000. Tax expense related to net securities gains in 2001 was $49,000. 5. LOANS The composition of the loan portfolio is as follows:
- -------------------------------------------------------------------------- December 31 (Dollars in thousands) 2002 2001 - -------------------------------------------------------------------------- Commercial, financial and agricultural $ 440,030 $ 440,336 Real estate: Construction 99,102 89,235 Residential 998,202 1,073,801 Commercial 617,270 595,567 Consumer, net 441,747 477,579 Leases, net 95,836 119,290 - -------------------------------------------------------------------------- Total loans $ 2,692,187 $ 2,795,808 - --------------------------------------------------------------------------
Under the Corporation's credit policies and practices, all nonaccrual and restructured commercial, financial, agricultural, construction and commercial real estate loans meet the definition of impaired loans under SFAS No. 114 and 118. Impaired loans as defined by SFAS No. 114 and 118 exclude certain consumer loans, residential real estate loans and lease financing classified as nonaccrual. The majority of the loans deemed impaired were evaluated using the fair value of the collateral as the measurement method. Nonaccrual and restructured loans are summarized as follows:
- --------------------------------------------------------------------------- December 31 (Dollars in Thousands) 2002 2001 - --------------------------------------------------------------------------- Impaired loans: Nonaccrual $ 17,579 $ 17,303 Restructured 2,599 2,254 Total impaired loans 20,178 19,557 Other nonaccrual loans -- -- - --------------------------------------------------------------------------- Total nonaccrual and restructured loans $ 20,178 $ 19,557 - ---------------------------------------------------------------------------
The allowance for credit losses related to impaired loans at December 31, 2002 and 2001 was $4,036,000 and $3,911,000, respectively. All impaired loans for both periods were subject to a related allowance for credit losses. The average balance of impaired loans was $20,427,000, $21,560,000 and $13,372,000 for 2002, 2001, and 2000, respectively. Interest income on impaired loans is recognized after all past due and current principal payments have been made, and collectibility is no longer doubtful. For the years ended December 31, 2002, 2001, and 2000, the Corporation recognized $1,080,000, $1,626,000 and $858,000, respectively, of interest income on impaired loans, which included $833,000, $1,188,000 and $425,000, respectively, of interest income recognized using the cash basis method of income recognition. Certain of the Corporation's executive officers, directors and their affiliates are loan customers of the Corporation's banking subsidiaries. As of December 31, 2002 and 2001, loans aggregating approximately $86,111,000 and $79,958,000, respectively, were outstanding to such parties. These loans were made in the ordinary course of business under normal credit terms and do not represent more than the normal risk of collection. 6. ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses is summarized as follows:
- --------------------------------------------------------------------------------------- (Dollars in thousands) 2002 2001 2000 - --------------------------------------------------------------------------------------- Balance, January 1 $ 59,959 $ 57,473 $ 52,140 Provision for loan losses 15,043 13,059 14,790 Losses charged to the reserve (19,827) (17,820) (13,996) Recoveries 6,853 7,247 4,539 - --------------------------------------------------------------------------------------- Balance, December 31 $ 62,028 $ 59,959 $ 57,473 - ---------------------------------------------------------------------------------------
7. INVESTMENT IN FINANCING LEASES The following is a summary of the components of the Corporation's net investment in direct financing leases, which are included in loans.
- ------------------------------------------------------------------------------ December 31 (Dollars in thousands) 2002 2001 - ------------------------------------------------------------------------------ Total minimum payments to be received $ 63,864 $ 79,066 Estimated unguaranteed residual value of leased property 36,182 47,527 Less unearned income (4,210) (7,303) - ------------------------------------------------------------------------------ TOTAL $ 95,836 $ 119,290 - ------------------------------------------------------------------------------
Minimum lease payments to be received as of December 31, 2002 are:
- ----------------------------------------------- (In thousands) - ----------------------------------------------- 2003 $ 31,079 2004 15,251 2005 8,126 2006 5,349 2007 3,020 Thereafter 1,039 - ----------------------------------------------- TOTAL $ 63,864 - -----------------------------------------------
43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. PREMISES AND EQUIPMENT The major categories of premises and equipment and accumulated depreciation are summarized as follows:
- --------------------------------------------------------------------------------- December 31 (Dollars in thousands) 2002 2001 - --------------------------------------------------------------------------------- Land $ 9,777 $ 9,715 Buildings 45,198 44,368 Equipment, furniture and fixtures 45,949 43,989 Leasehold improvements 2,022 1,779 - --------------------------------------------------------------------------------- Total 102,946 99,851 - --------------------------------------------------------------------------------- Less accumulated depreciation and amortization (64,212) (59,941) - --------------------------------------------------------------------------------- Premises and Equipment, net $ 38,734 $ 39,910 - ---------------------------------------------------------------------------------
Depreciation and amortization expense amounted to $5,630,000, $5,515,000 and $5,452,000 for the three years ended December 31, 2002, 2001 and 2000, respectively. The Corporation and its subsidiaries lease certain premises and equipment accounted for as operating leases. The following is a schedule of the future minimum rental payments required for the next five years under such leases with initial terms in excess of one year:
- ------------------------------------------------ (in thousands) - ------------------------------------------------ 2003 $ 967,000 2004 842,000 2005 598,000 2006 409,000 2007 277,000 Thereafter 481,000 - ----------------------------------------------- Total $3,574,000 - -----------------------------------------------
Rent expense amounted to $1,120,000, $972,000 and $830,000, for the three years ended December 31, 2002, 2001 and 2000, respectively. 9. SHORT-TERM BORROWINGS Short-term borrowings are as follows:
- --------------------------------------------------------------------------------- December 31 (Dollars in thousands) 2002 2001 - --------------------------------------------------------------------------------- Securities sold under agreements to repurchase and federal funds purchased $ 174,086 $ 276,467 Federal Home Loan Bank advances 0 40,000 Other short-term borrowings 14,792 1,844 - --------------------------------------------------------------------------------- Total short-term borrowings $ 188,878 $ 318,311 - ---------------------------------------------------------------------------------
The outstanding balances for all short-term borrowings as of December 31, 2002, 2001 and 2000 and the weighted-average interest rates as of and paid during each of the years then ended are as follows:
- -------------------------------------------------------------------------------- Repurchase Demand Agreements Federal Notes and Federal Home Loan Due U.S. Funds Bank Treasury (Dollars in thousands) Purchased Advances and Other - -------------------------------------------------------------------------------- 2002: Ending balance $ 174,086 $ 0 $ 14,792 Highest month-end balance 293,551 70,000 14,792 Average daily balance 206,637 14,923 4,678 Weighted-average interest rate: As of year-end 1.13% -- 1.25% Paid during the year 1.42% 1.80% 2.18% - ------------------------------------------------------------------------------- 2001: Ending balance $ 276,467 $ 40,000 $ 1,844 Highest month-end balance 276,467 117,500 13,649 Average daily balance 235,447 38,493 5,304 Weighted-average interest rate: As of year-end 1.67% 1.65% 1.40% Paid during the year 3.16% 4.29% 3.96% - -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Repurchase Demand Agreements Federal Notes and Federal Home Loan Due U.S. Funds Bank Treasury (Dollars in thousands) Purchased Advances and Other - -------------------------------------------------------------------------------- 2000: Ending balance $ 215,307 $ 55,600 $ 4,792 Highest month-end balance 219,100 144,100 12,605 Average daily balance 197,270 93,162 4,730 Weighted-average interest rate: As of year-end 5.22% 6.56% 6.50% Paid during the year 5.27% 6.46% 6.36% - -------------------------------------------------------------------------------
At December 31, 2002 and 2001, Federal Home Loan Bank (FHLB) advances were collateralized by the FHLB stock owned by the Corporation's affiliate banks and by residential mortgage loans pledged under a blanket agreement by the Corporation's affiliate banks. 10. LONG-TERM DEBT Long-term debt is listed below:
- --------------------------------------------------------------------------------- December 31 (Dollars in thousands) 2002 2001 - --------------------------------------------------------------------------------- Fixed rate Federal Home Loan Bank advances with monthly principal and interest payments: 5.63% Advance due February 2004 $ 117 $ 227 6.32% Advance due February 2005 229 231 6.95% Advance due May 2007 64 120 6.56% Advance due December 2007 67 80 6.55% Advance due February 2008 179 310 2.00% Advance due November 2027 35 36 2.00% Advance due January 2028 35 36 - --------------------------------------------------------------------------------- December 31 (Dollars in Thousands) 2002 2001 - --------------------------------------------------------------------------------- Fixed Rate Federal Home Loan Bank advances with Monthly interest payments: 7.01% Advance due February 2002 $ -- $ 5,000 7.01% Advance due June 2002 -- 5,000 5.91% Advance due April 2003 1,000 1,000 5.99% Advance due February 2005 3,000 3,000 5.96% Advance due June 2005 2,000 2,000 5.85% Advance due September 2005 3,000 3,000 4.80% Advance due January 2006 75,000 75,000 4.76% Advance due November 2008 9,500 9,500 4.61% Advance due December 2008 3,000 3,000 4.98% Advance due January 2009 50,000 50,000 5.20% Advance due March 2009 20,000 20,000 6.14% Advance due September 2010 10,000 10,000 5.80% Advance due November 2010 5,000 5,000 4.75% Advance due January 2011 5,000 5,000 Adjustable rate Federal Home Loan Bank advances With monthly interest payments: 1.91% Advance due June 2003 -- 95,000 1.99% Advance due December 2003 -- 100,000 - --------------------------------------------------------------------------------- Total long-term debt $ 187,226 $ 392,540 - ---------------------------------------------------------------------------------
At December 31, 2002 and 2001, Federal Home Loan Bank (FHLB) advances were collateralized by the FHLB stock owned by the Corporation's affiliate banks and by residential mortgage loans pledged under a blanket agreement by the Corporation's affiliate banks. 11. STOCK OPTION PLAN The Park National Corporation 1995 Incentive Stock Option Plan ("the Park Plan") was adopted April 17, 1995, amended April 20, 1998, and April 16, 2001. The Park Plan is intended as an incentive to encourage stock ownership by the key employees of the affiliates of the Corporation. The maximum number of common shares with respect to which incentive stock options may be granted under the Park Plan is 1,200,000. At December 31, 2002, 551,420 options were available for future grants under this plan. Incentive 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS stock options may be granted at a price not less than the fair market value at the date of the grant, and for an option term of up to five years. No incentive stock options may be granted under the Park Plan after January 16, 2005. The stock option plans of SNB Corp., U.B. Bancshares, Inc., and Security Banc Corporation are included in Park's stock option activity and related information summarized below. All data have been restated, as applicable, for subsequent stock dividends.
Stock Options ---------------------------------- Outstanding ----------- Weighted Average Exercise Price per Number Share - ------------------------------------------------------------------- January 1, 2000 308,596 $ 78.33 Granted 100,351 94.75 Exercised (41,069) 45.64 Forfeited/Expired (12,141) 97.80 - ------------------------------------------------------------------- December 31, 2000 355,737 86.23 Granted 125,383 88.09 Exercised (19,496) 55.54 Forfeited/Expired (11,852) 89.87 - ------------------------------------------------------------------- December 31, 2001 449,772 87.98 Granted 164,376 92.69 Exercised (49,726) 63.28 Forfeited/Expired (12,216) 86.76 =================================================================== December 31, 2002 552,206 $ 91.63 - -------------------------------------------------------------------
Range of exercise prices: $33.04 - $161.72 Weighted-average remaining contractual life: 2.9 Years Exerciseable at year end: 537,837 Weighted-average exercise price of exerciseable options: $91.62 - ------------------------------------------------------------------------------
The Corporation has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock Based Compensation," requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Corporation's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The fair value of these options was estimated at the date of grant using a Black-Scholes options pricing model with the following weighted-average assumptions for 2002, 2001 and 2000 respectively: risk-free interest rates of 3.82%, 4.82% and 6.15%; a dividend yield of 3.00% for 2002 and 2.50% for 2001 and 2000, a volatility factor of the expected market price of the Corporation's common stock of .145, .211 and .195 and a weighted- average expected option life of 4.0 years. The weighted-average fair value of options granted were $10.50, $16.32 and $18.97 for 2002, 2001 and 2000, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, options valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Corporation's employee stock options have characteristics significantly different from those traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The following table presents pro forma net income and net income per share had compensation costs for the Corporation's stock option plans been determined consistent with SFAS No. 123.
- -------------------------------------------------------------------------------- (Dollars in thousands, except per share data) 2002 2001 2000 - -------------------------------------------------------------------------------- Net income as reported $85,579 $78,362 $68,547 Pro-forma net income 83,852 76,315 66,718 Basic earnings per share as reported 6.17 5.59 4.82 Pro-forma basic earnings per share 6.04 5.44 4.69 Diluted earnings per share as reported 6.15 5.58 4.81 Pro-forma diluted earnings per share 6.03 5.43 4.68 - --------------------------------------------------------------------------------
12. BENEFIT PLANS The Corporation 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. The Corporation'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.
(Dollars in thousands) 2002 2001 2000 - ----------------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of year $31,642 $27,595 $26,137 Service cost 2,047 1,861 1,605 Interest cost 2,261 2,144 1,959 Actuarial (gain) or loss (211) 1,132 (888) Benefits paid (1,854) (1,090) (1,218) Benefit obligation at end of year 33,885 31,642 27,595 - ----------------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year 27,750 30,733 30,004 Actual return on plan assets (3,948) (1,893) 1,488 Company contributions 2,292 - 460 Benefits paid (1,854) (1,090) (1,219) Fair value of plan assets at end of year 24,240 27,750 30,733 - ----------------------------------------------------------------------------------- Funded status of the plan (underfunded) (9,645) (3,892) 3,138 Unrecognized net actuarial loss (gain) 7,802 2,124 (3,639) Unrecognized prior service cost 274 11 3 Unrecognized net transition asset - - 121 Additional minimum liability (2,458) - - Accrued benefit cost $(4,027) $(1,757) $ (377) - -----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------- December 31 (Dollars in thousands) 2002 2001 2000 - ----------------------------------------------------------------------------------- Weighted average assumptions: Discount rate 7.00% 7.28% 7.72% Expected return on plan assets 8.00% 8.00% 8.00% Rate of compensation increase 4.00% 5.00% 4.83% - ----------------------------------------------------------------------------------- (Dollars in thousands) 2002 2001 2000 - ----------------------------------------------------------------------------------- Components of net periodic benefit cost: Service cost $ 2,047 $ 1,861 $ 1,605 Interest cost 2,261 2,144 1,959 Expected return on plan assets (2,197) (2,440) (2,431) Amortization of prior service cost (7) (8) (50) Recognized net actuarial loss - (177) (64) Benefit cost $ 2,104 $ 1,380 $ 1,019 - ----------------------------------------------------------------------------------
The Corporation has a voluntary salary deferral plan covering substantially all of its employees. Eligible employees may contribute a portion of their compensation subject to a maximum statutory limitation. The Corporation provides a matching contribution established annually by the Corporation. Contribution expense for the Corporation was $1,240,000, $1,139,000 and $1,070,000 for 2002, 2001 and 2000, respectively. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Corporation has a Supplemental Executive Retirement Plan (SERP) covering certain key officers of the Corporation and its subsidiaries with defined pension benefits in excess of limits imposed by federal tax law. At December 31, 2002 and 2001, the accrued benefit cost for this plan totaled $3,369,000 and $2,784,000, respectively. The expense for the Corporation was $660,000, $320,000, and $1,015,000 for 2002, 2001, and 2000, respectively. 13. FEDERAL INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Corporation's deferred tax assets and liabilities are as follows:
- ------------------------------------------------------------------------- December 31 (Dollars in thousands) 2002 2001 - ------------------------------------------------------------------------- Deferred tax assets: Allowance for loan losses $21,479 $20,623 Intangible assets 3,615 2,531 Deferred compensation 3,369 2,553 Other 2,127 2,589 - ------------------------------------------------------------------------- Total deferred tax assets $30,590 $28,296 - ------------------------------------------------------------------------- Deferred tax liabilities: Lease revenue reporting $14,046 $17,726 Accumulated other comprehensive income 12,071 4,688 Deferred investment income 7,573 5,795 Other 2,127 1,450 - ------------------------------------------------------------------------- Total deferred tax liabilities 35,817 29,659 - ------------------------------------------------------------------------- Net deferred tax (liability) assets $(5,227) $(1,363) - -------------------------------------------------------------------------
The components of the provision for federal income taxes are shown below:
- ----------------------------------------------------------------------------------- (Dollars in thousands) 2002 2001 2000 - ----------------------------------------------------------------------------------- Currently payable $39,115 $31,791 $24,107 Deferred (3,519) 763 3,950 - ----------------------------------------------------------------------------------- Total $35,596 $32,554 $28,057 - -----------------------------------------------------------------------------------
The following is a reconcilement of federal income tax expense to the amount computed at the statutory rate of 35% for the years ended December 31, 2002, 2001 and 2000.
- ----------------------------------------------------------------------------------- December 31 2002 2001 2000 - ----------------------------------------------------------------------------------- Statutory corporate tax rate 35.0% 35.0% 35.0% Changes in rates resulting from: Tax-exempt interest income (2.4%) (2.8%) (3.4%) Tax credits (low income housing) (1.9%) (1.9%) (1.7%) Other (1.3%) (.9%) (.9%) - ----------------------------------------------------------------------------------- Effective tax rate 29.4% 29.4% 29.0% - -----------------------------------------------------------------------------------
14. EARNINGS PER SHARE SFAS No. 128, "Earnings Per Share" requires the reporting of basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. The following table sets forth the computation of basic and diluted earnings per share:
- ------------------------------------------------------------------------------------------ Year ended December 31 (Dollars in thousands, except per share data) 2002 2001 2000 - ------------------------------------------------------------------------------------------ Numerator: Net income $ 85,579 $ 78,362 $ 68,547 Denominator: Basic earnings per share: Weighted-average shares 13,878,530 14,020,303 14,212,401 Effect of dilutive securities - stock options 31,144 30,899 39,203 Diluted earnings per share: Adjusted weighted-average shares and assumed conversions 13,909,674 14,051,202 14,251,604 Earnings per share: Basic earnings per share $ 6.17 $ 5.59 $ 4.82 Diluted earnings per share $ 6.15 $ 5.58 $ 4.81 - ------------------------------------------------------------------------------------------
15. DIVIDEND RESTRICTIONS Bank regulators limit the amount of dividends a subsidiary bank can declare in any calendar year without obtaining prior approval. At December 31, 2002, approximately $616,000 of the total stockholders' equity of the bank subsidiaries is available for the payment of dividends to the Corporation, without approval by the applicable regulatory authorities. 16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK The Corporation is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers. The total amounts of off-balance sheet financial instruments with credit risk are as follows:
- ---------------------------------------------------------------------------------- December 31 (Dollars in thousands) 2002 2001 - ---------------------------------------------------------------------------------- Loan commitments $498,762 $442,371 Unused credit card limits 150,821 148,064 Standby letters of credit 13,224 8,233 - ----------------------------------------------------------------------------------
The loan commitments are generally for variable rates of interest. The Corporation grants retail, commercial and commercial real estate loans to customers primarily located in Central Ohio. The Corporation evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Although the Corporation has a diversified loan portfolio, a substantial portion of the borrowers' ability to honor their contracts is dependent upon the economic conditions in each borrower's geographic location. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (the Interpretation). The Interpretation will change current practice in the accounting for, and disclosure of, guarantees, which for Park generally applies to its standby letters of credit. The Interpretation requires certain guarantees to be recorded at fair value, which differs from the current practice of recording a liability when a loss is probable and reasonably estimable, as those terms are defined in SFAS No. 5, Accounting for Contingencies. The Interpretation's initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Park estimates that the implementation of this new Interpretation will be immaterial to Park's results of operations in 2003. 17. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets' fair values. Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for certain mortgage loans (e.g., one-to-four family residential) are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Off-balance sheet instruments: Fair values for the Corporation's loan commitments and standby letters of credit are based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counter parties' credit standing. Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term certificates of deposit approximate their fair values at the reporting date. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Short-term borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings approximate their fair values. Long-term debt: Fair values for long-term debt are estimated using a discounted cash flow calculation that applies interest rates currently being offered on long-term debt to a schedule of monthly maturities. The fair value of financial instruments at December 31, 2002 and 2001 is as follows:
- ----------------------------------------------------------------------------------- 2002 2001 December 31, Carrying Fair Carrying Fair (in thousands) Amount Value Amount Value - ----------------------------------------------------------------------------------- Financial Assets: Cash and federal funds sold $ 238,788 $ 238,788 $ 169,143 $ 169,143 Interest bearing deposits with other banks 50 50 50 50 Investment securities 1,383,142 1,390,952 1,464,179 1,464,043 Loans: Commercial, financial and agricultura 440,030 440,030 440,336 440,336 Real estate: Construction 99,102 99,102 89,235 89,235 Residential 998,202 1,013,554 1,073,801 1,085,463 Commercial 617,270 626,276 595,567 601,511 Consumer, net 441,747 447,680 477,579 482,632 - ----------------------------------------------------------------------------------- Total Loans 2,596,351 2,626,642 2,676,518 2,699,177 - ----------------------------------------------------------------------------------- Allowance for loan losses (62,028) - (59,959) 0 - ----------------------------------------------------------------------------------- Loans receivable, net $2,534,323 $2,626,642 $2,616,559 $2,699,177 - ----------------------------------------------------------------------------------- Financial liabilities: Noninterest bearing checking $ 594,157 $ 594,157 $ 515,333 $ 515,333 Interest bearing checking 481,117 481,117 418,815 418,815 Savings 545,578 545,578 525,682 525,682 Money market accounts 310,032 310,032 288,039 288,039 Time deposits 1,562,686 1,581,954 1,564,801 1,579,870 Other 1,565 1,565 1,533 1,533 - ----------------------------------------------------------------------------------- Total deposits $3,495,135 $3,514,403 $3,314,203 $3,329,272 - ----------------------------------------------------------------------------------- Short-term borrowings 188,878 188,878 318,311 318,311 Long-term debt 187,226 205,617 392,540 402,004 Unrecognized financial instruments: Loan commitments - (499) - (422) Standby letters of credit - (66) - (41) - -----------------------------------------------------------------------------------
18. CAPITAL RATIOS The following table reflects various measures of capital at December 31, 2002 and December 31, 2001:
- ------------------------------------------------------------------------------- December 31, 2002 2001 (Dollars in thousands) Amount Ratio Amount Ratio - ------------------------------------------------------------------------------- Total equity (1) $ 509,292 11.45% $ 468,346 10.25% Tier 1 capital (2) 468,794 16.51% 437,876 14.84% Total risk-based capital (3) 504,642 17.78% 474,908 16.09% Leverage (4) 468,794 10.72% 437,876 9.97% - -------------------------------------------------------------------------------
(1) Computed in accordance with generally accepted accounting principles, including accumulated other comprehensive income. (2) Stockholders' equity less certain intangibles and accumulated other comprehensive income; computed as a ratio to risk-adjusted assets as defined. (3) Tier 1 capital plus qualifying loan loss allowance; computed as a ratio to risk-adjusted assets, as defined. (4) Tier 1 capital computed as a ratio to average total assets less certain intangibles. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Corporation's Tier 1, total risk-based capital and leverage ratios are well above both the required minimum levels of 4.00%, 8.00% and 4.00%, respectively, and the well-capitalized levels of 6.00%, 10.00% and 5.00%, respectively. At December 31, 2002, and 2001, all of the Corporation's subsidiary financial institutions met the well-capitalized levels under the capital definitions prescribed in the FDIC Improvement Act of 1991. 19. SEGMENT INFORMATION The Corporation's segments are its banking subsidiaries. The operating results of the banking subsidiaries are monitored closely by senior management and each president of the subsidiary and division are held accountable for their results. Information about reportable segments follows. See Note 2 for a detailed description of the individual banking subsidiaries.
- ----------------------------------------------------------------------------------------------------------------------- Operating Results for the year ended December 31, 2002(In thousands) PNB RTC CNB FKNB UB - ----------------------------------------------------------------------------------------------------------------------- Net interest income $ 61,793 $ 22,277 $ 19,599 $ 30,484 $ 8,762 Provision for loan losses 6,590 1,995 880 2,963 205 Other income 21,550 3,662 5,561 6,055 1,834 Depreciation and amortization 2,026 378 455 669 257 Other expense 33,895 12,214 10,553 14,607 5,694 - ----------------------------------------------------------------------------------------------------------------------- Income before taxes 40,832 11,352 13,272 18,300 4,440 - ----------------------------------------------------------------------------------------------------------------------- Federal income taxes 12,524 3,844 4,435 5,654 1,295 - ----------------------------------------------------------------------------------------------------------------------- Net income $ 28,308 $ 7,508 $ 8,837 $ 12,646 $ 3,145 - ----------------------------------------------------------------------------------------------------------------------- Balances at December 31, 2002: Assets $1,509,224 $ 470,775 $ 427,107 $ 661,338 $ 192,574 Loans 872,341 257,535 278,644 461,014 97,001 Deposits 1,167,628 374,094 335,318 484,411 167,887 - ----------------------------------------------------------------------------------------------------------------------- Operating Results for the year ended December 31, 2001 Net interest income $ 59,933 $ 20,257 $ 18,669 $ 28,927 $ 7,640 Provision for loan losses 4,025 1,255 270 1,673 520 Other income 20,128 3,182 4,410 5,759 1,335 Depreciation and amortization 1,761 424 503 658 268 Other expense 33,800 10,801 9,919 14,901 5,649 - ----------------------------------------------------------------------------------------------------------------------- Income before taxes 40,475 10,959 12,387 17,454 2,538 - ----------------------------------------------------------------------------------------------------------------------- Federal income taxes 12,475 3,707 4,131 5,092 629 - ----------------------------------------------------------------------------------------------------------------------- Net income $ 28,000 $ 7,252 $ 8,256 $ 12,362 $ 1,909 - ----------------------------------------------------------------------------------------------------------------------- Balances at December 31, 2001: Assets $1,430,184 $ 487,638 $ 443,353 $ 669,384 $ 202,301 Loans 885,086 266,913 279,148 459,087 94,453 Deposits 967,842 374,905 316,225 492,018 164,421 - ----------------------------------------------------------------------------------------------------------------------- Operating Results for the year ended December 31, 2000 Net interest income $ 56,405 $ 18,118 $ 17,087 $ 26,803 $ 7,053 Provision for loan losses 2,099 1,462 391 1,465 880 Other income 16,805 2,534 3,091 5,157 559 Depreciation and amortization 1,518 458 503 837 273 Other expense 30,979 10,205 9,073 13,907 5,467 - ----------------------------------------------------------------------------------------------------------------------- Income before taxes 38,614 8,527 10,211 15,751 992 - ----------------------------------------------------------------------------------------------------------------------- Federal income taxes 11,726 2,860 3,188 4,633 141 - ----------------------------------------------------------------------------------------------------------------------- Net income $ 26,888 $ 5,667 $ 7,023 $ 11,118 $ 851 - ----------------------------------------------------------------------------------------------------------------------- Balances at December 31, 2000: Assets $1,299,046 $ 452,209 $ 392,457 $ 611,650 $ 180,704 Loans 923,116 269,971 293,071 479,252 96,210 Deposits 922,704 330,242 314,245 466,487 152,618 - -----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------- Operating Results for the year ended December 31, 2002(In thousands) All SNB SEC CIT Other Total - ------------------------------------------------------------------------------------------------------------------------- Net interest income $ 13,582 $ 34,031 $ 6,643 $ 8,161 $ 205,332 Provision for loan losses 225 1,090 705 390 15,043 Other income 1,950 8,269 1,505 464 50,850 Depreciation and amortization 443 933 277 192 5,630 Other expense 6,940 18,846 4,251 7,334 114,334 - ------------------------------------------------------------------------------------------------------------------------- Income before taxes 7,924 21,431 2,915 709 121,175 - ------------------------------------------------------------------------------------------------------------------------- Federal income taxes 2,299 6,824 896 (2,175) 35,596 - ------------------------------------------------------------------------------------------------------------------------- Net income $ 5,625 $ 14,607 $ 2,019 $ 2,884 $ 85,579 - ------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 2002: Assets $ 333,374 $ 829,928 $ 166,424 $ (144,119) $4,446,625 Loans 176,501 467,049 80,257 1,845 2,692,187 Deposits 269,024 593,783 128,096 (25,106) 3,495,135 - ------------------------------------------------------------------------------------------------------------------------- Operating Results for the year ended December 31, 2001 Net interest income $ 12,028 $ 33,396 $ 6,754 $ 5,340 $ 192,944 Provision for loan losses (1,565) 5,800 819 262 13,059 Other income 1,619 6,960 1,398 447 45,238 Depreciation and amortization 627 791 300 183 5,515 Other expense 6,602 18,777 4,112 4,131 108,692 - ------------------------------------------------------------------------------------------------------------------------- Income before taxes 7,983 14,988 2,921 1,211 110,916 - ------------------------------------------------------------------------------------------------------------------------- Federal income taxes 2,302 4,763 923 (1,468) 32,554 - ------------------------------------------------------------------------------------------------------------------------- Net income $ 5,681 $ 10,225 $ 1,998 $ 2,679 $ 78,362 - ------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 2001: Assets $ 334,354 $ 897,741 $ 175,967 $ (71,407) $4,569,515 Loans 191,958 527,545 90,626 992 2,795,808 Deposits 249,733 631,105 137,944 (19,990) 3,314,203 - ------------------------------------------------------------------------------------------------------------------------- Operating Results for the year ended December 31, 2000 Net interest income $ 11,314 $ 33,734 $ 6,653 $ 3,625 $ 180,792 Provision for loan losses 2,334 5,521 540 98 14,790 Other income 944 6,543 1,229 602 37,464 Depreciation and amortization 555 813 333 162 5,452 Other expense 5,737 18,181 3,973 3,888 101,410 - ------------------------------------------------------------------------------------------------------------------------- Income before taxes 3,632 15,762 3,036 79 96,604 - ------------------------------------------------------------------------------------------------------------------------- Federal income taxes 717 5,075 975 (1,258) 28,057 - ------------------------------------------------------------------------------------------------------------------------- Net income $ 2,915 $ 10,687 $ 2,061 $ 1,337 $ 68,547 - ------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 2000: Assets $ 314,404 $ 839,571 $ 169,943 $ (54,583) $4,205,401 Loans 215,880 571,730 106,288 686 2,956,204 Deposits 239,079 604,859 132,072 (10,055) 3,152,251 - -------------------------------------------------------------------------------------------------------------------------
48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Reconciliation of financial information for the reportable segments to the Corporation's consolidated totals follow:
- ------------------------------------------------------------------------------------------------------------------------- Net Interest Depreciation Other Income (In thousands) Income Expense Expense Taxes Assets Deposits - ------------------------------------------------------------------------------------------------------------------------- 2002: Totals for reportable segments $ 197,171 $ 5,438 $ 107,000 $ 37,771 $ 4,590,744 $ 3,520,241 Elimination of intersegment items -- -- -- -- (198,364) (25,106) Parent Co. and GFC totals - not eliminated 8,161 42 7,334 (2,175) 54,245 -- Other items -- 150 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- Totals $ 205,332 $ 5,630 $ 114,334 $ 35,596 $ 4,446,625 $ 3,495,135 - ------------------------------------------------------------------------------------------------------------------------- 2001: Totals for reportable segments $ 187,604 $ 5,332 $ 104,561 $ 34,022 $ 4,640,922 $ 3,334,193 Elimination of intersegment items -- -- -- -- (110,620) (19,990) Parent Co. and GFC totals - not eliminated 5,340 33 4,131 (1,468) 39,213 -- Other items -- 150 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- Totals $ 192,944 $ 5,515 $ 108,692 $ 32,554 $ 4,569,515 $ 3,314,203 - ------------------------------------------------------------------------------------------------------------------------- 2000: Totals for reportable segments $ 177,167 $ 5,290 $ 97,522 $ 29,315 $ 4,259,984 $ 3,162,306 Elimination of intersegment items -- -- -- -- (71,775) (10,055) Parent Co. and GFC totals - not eliminated 3,625 12 3,888 (1,258) 17,192 -- Other items -- 150 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- Totals $ 180,792 $ 5,452 $ 101,410 $ 28,057 $ 4,205,401 $ 3,152,251 - -------------------------------------------------------------------------------------------------------------------------
20. PARENT COMPANY STATEMENTS The Parent Company statements should be read in conjunction with the consolidated financial statements and the information set forth below. Investments in subsidiaries are accounted for using the equity method of accounting. The effective tax rate for the Parent Company is substantially less than the statutory rate due principally to tax-exempt dividends from subsidiaries. Cash represents noninterest bearing deposits with a bank subsidiary. Net cash provided by operating activities reflects cash payments for income taxes of $1,621,000, $1,422,000, and $652,000 in 2002, 2001, and 2000, respectively. At December 31, 2002 and 2001, stockholders' equity reflected in the Parent Company balance sheet includes $127.9 million and $129.1 million, respectively, of undistributed earnings of the Corporation's subsidiaries which are restricted from transfer as dividends to the Corporation. Balance Sheets at December 31, 2002 and 2001
- ------------------------------------------------------------------------------ (In thousands) 2002 2001 - ------------------------------------------------------------------------------ Assets: Cash $ 71,315 $ 63,029 Investment in subsidiaries 302,886 290,315 Debentures receivable from subsidiary banks 56,000 56,000 Other investments 1,873 1,625 Dividends receivable from subsidiaries 76,775 58,500 Other assets 38,722 28,956 - ------------------------------------------------------------------------------ Total assets $547,571 $498,425 - ------------------------------------------------------------------------------ Liabilities: Dividends payable $ 11,463 $ 10,606 Other liabilities 26,816 19,473 - ------------------------------------------------------------------------------ Total liabilities 38,279 30,079 Total stockholders' equity 509,292 468,346 - ------------------------------------------------------------------------------ Total liabilities and stockholders' equity $547,571 $498,425 - ------------------------------------------------------------------------------
Statements of Income for the years ended December 31, 2002, 2001 and 2000
- ---------------------------------------------------------------------------------------------- (In thousands) 2002 2001 2000 - ---------------------------------------------------------------------------------------------- Income: Dividends from subsidiaries $ 85,300 $ 106,500 $ 76,099 Interest and dividends 6,443 4,309 3,075 Other 436 426 597 - ---------------------------------------------------------------------------------------------- Total income 92,179 111,235 79,771 - ---------------------------------------------------------------------------------------------- Expense: Other, net 6,452 3,649 3,466 - ---------------------------------------------------------------------------------------------- Total expense 6,452 3,649 3,466 - ---------------------------------------------------------------------------------------------- Income before federal taxes and equity in undistributed earnings of subsidiaries 85,727 107,586 76,305 Federal income tax benefit (expense) 2,327 1,513 1,266 - ---------------------------------------------------------------------------------------------- Income before equity in undistributed earnings of subsidiaries 88,054 109,099 77,571 Equity in undistributed earnings of subsidiaries (2,475) (30,737) (9,024) - ---------------------------------------------------------------------------------------------- Net income $ 85,579 $ 78,362 $ 68,547 - ----------------------------------------------------------------------------------------------
49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000
- ----------------------------------------------------------------------------------------------- (In thousands) 2002 2001 2000 - ----------------------------------------------------------------------------------------------- Operating activities: Net income $ 85,579 $ 78,362 $ 68,547 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of subsidiaries 2,475 30,737 9,024 Decrease (increase) in dividends receivable from subsidiaries (18,275) 2,125 (34,502) (Increase) decrease in other assets (9,239) (18,600) 20,025 Increase (decrease) in other liabilities 4,885 18,943 (1,282) - ----------------------------------------------------------------------------------------------- Net cash provided by operating activities 65,425 111,567 61,812 - ----------------------------------------------------------------------------------------------- Investing activities: Repayment (purchase) of debenture from subsidiary bank -- 5,000 (12,000) Capital contribution to subsidiary -- (32,960) -- Sale (purchase) of investment securities 161 -- (250) Other, net 189 191 - ----------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 350 (27,769) (12,250) - ----------------------------------------------------------------------------------------------- Financing activities: Cash dividends paid (42,292) (37,585) (35,429) Proceeds from issuance of common stock -- -- 304 Cash payment for fractional shares (3) (97) (39) Purchase of treasury stock, net (15,194) (16,778) (19,534) - ----------------------------------------------------------------------------------------------- Net cash used in financing activities (57,489) (54,460) (54,698) - ----------------------------------------------------------------------------------------------- Increase (decrease) in cash 8,286 29,338 (5,136) Cash at beginning of year 63,029 33,691 38,827 - ----------------------------------------------------------------------------------------------- Cash at end of year $ 71,315 $ 63,029 $ 33,691 - -----------------------------------------------------------------------------------------------
50 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders Park National Corporation We have audited the accompanying consolidated balance sheets of Park National Corporation and Subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Park National Corporation and Subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Columbus, Ohio January 21, 2003 51 EX-21 10 l99435aexv21.txt EX-21 SUBSIDIARIES OF PNC . . . EXHIBIT 21 SUBSIDIARIES OF PARK NATIONAL CORPORATION
Name of Subsidiary Jurisdiction of Incorporation - ------------------ ----------------------------- The Park National Bank ("PNB") United States (federally-chartered national banking association) Park Investments, Inc. (NOTE: is a wholly-owned Delaware subsidiary of PNB) Scope Leasing, Inc. (NOTE: is a wholly-owned subsidiary Ohio of PNB) Park Leasing Company (NOTE: is a wholly-owned Ohio subsidiary of PNB) Park Insurance Group, Inc. (NOTE: is a wholly-owned Ohio subsidiary of PNB) The Richland Trust Company ("Richland") Ohio Richland Investments, Inc. (NOTE: is a wholly-owned Delaware subsidiary of Richland) Century National Bank ("Century") United States (federally-chartered banking association) Zane-Fed Services, Incorporated (NOTE: is a Ohio wholly-owned subsidiary of Century) MFS Investments, Inc. (NOTE: is a wholly-owned Delaware subsidiary of Century) The First-Knox National Bank of Mount Vernon ("FKNB") United States (federally-chartered banking association) Guardian Financial Services Company Ohio United Bank, N.A. United States (federally-chartered banking association) Second National Bank United States (federally-chartered banking association) The Security National Bank and Trust Co. ("Security United States (federally-chartered banking association) National") The Citizens National Bank of Urbana United States (federally-chartered banking association) Park Capital Investments, Inc. ("Park Capital") Delaware Park National Capital LLC (NOTE: members are Park Delaware Capital and PNB) Security National Capital LLC (NOTE: members are Park Delaware Capital and Security National) First-Knox National Capital LLC (NOTE: members are Park Delaware Capital and FKNB)
EX-23 11 l99435aexv23.txt EX-23 CONSENT OF E&Y Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement No. 333-20417, Registration Statement No. 333-30858, and Registration Statement No. 333-53038, all on Form S-4, Registration Statement No. 33-92060, Registration Statement No. 333-52653, Registration Statement No. 333-59360, Registration Statement No. 333-59378, and Registration Statement No. 333-91178, all on Form S-8, of our report dated January 21, 2003, with respect to the consolidated financial statements of Park National Corporation incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission. /s/ Ernst & Young, LLP Columbus, Ohio March 26, 2003 EX-24 12 l99435aexv24.txt EX-24 POWERS OF ATTORNEY Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer and director of Park National Corporation, an Ohio corporation (the "Company"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Company on Form 10-K for the fiscal year ended December 31, 2002, hereby constitutes and appoints C. Daniel DeLawder and David L. Trautman as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both the Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or either of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 21st day of January, 2003. /s/ William T. McConnell ----------------------------------- William T. McConnell POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer and director of Park National Corporation, an Ohio corporation (the "Company"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Company on Form 10-K for the fiscal year ended December 31, 2002, hereby constitutes and appoints William T. McConnell and David L. Trautman as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both the Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or either of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 21st day of January, 2003. /s/ C. Daniel DeLawder ----------------------------------- C. Daniel DeLawder POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer and director of Park National Corporation, an Ohio corporation (the "Company"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Company on Form 10-K for the fiscal year ended December 31, 2002, hereby constitutes and appoints William T. McConnell, C. Daniel DeLawder and David L. Trautman as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both the Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 21st day of January, 2003. /s/ Harry O. Egger ----------------------------------- Harry O. Egger POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer of Park National Corporation, an Ohio corporation (the "Company"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Company on Form 10-K for the fiscal year ended December 31, 2002, hereby constitutes and appoints William T. McConnell, C. Daniel DeLawder and David L. Trautman as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both the Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 21st day of January, 2003. /s/ John W. Kozak ----------------------------------- John W. Kozak POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Park National Corporation, an Ohio corporation (the "Company"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Company on Form 10-K for the fiscal year ended December 31, 2002, hereby constitutes and appoints William T. McConnell, C. Daniel DeLawder and David L. Trautman as her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for her and in her name, place and stead, in any and all capacities, to sign both the Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as she might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set her hand this 21st day of January, 2003. /s/ Maureen Buchwald ----------------------------------- Maureen Buchwald POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Park National Corporation, an Ohio corporation (the "Company"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Company on Form 10-K for the fiscal year ended December 31, 2002, hereby constitutes and appoints William T. McConnell, C. Daniel DeLawder and David L. Trautman as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both the Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 21st day of January, 2003. /s/ James J. Cullers ----------------------------------- James J. Cullers POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Park National Corporation, an Ohio corporation (the "Company"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Company on Form 10-K for the fiscal year ended December 31, 2002, hereby constitutes and appoints William T. McConnell, C. Daniel DeLawder and David L. Trautman as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both the Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 21st day of January, 2003. /s/ Dominick C. Fanello ----------------------------------- Dominick C. Fanello POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Park National Corporation, an Ohio corporation (the "Company"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Company on Form 10-K for the fiscal year ended December 31, 2002, hereby constitutes and appoints William T. McConnell, C. Daniel DeLawder and David L. Trautman as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both the Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 21st day of January, 2003. /s/ R. William Geyer ----------------------------------- R. William Geyer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Park National Corporation, an Ohio corporation (the "Company"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Company on Form 10-K for the fiscal year ended December 31, 2002, hereby constitutes and appoints William T. McConnell, C. Daniel DeLawder and David L. Trautman as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both the Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 21st day of January, 2003. /s/ Howard E. LeFevre ----------------------------------- Howard E. LeFevre POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Park National Corporation, an Ohio corporation (the "Company"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Company on Form 10-K for the fiscal year ended December 31, 2002, hereby constitutes and appoints William T. McConnell, C. Daniel DeLawder and David L. Trautman as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both the Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 21st day of January, 2003. /s/ John J. O'Neill ----------------------------------- John J. O'Neill POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Park National Corporation, an Ohio corporation (the "Company"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Company on Form 10-K for the fiscal year ended December 31, 2002, hereby constitutes and appoints William T. McConnell, C. Daniel DeLawder and David L. Trautman as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both the Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 21st day of January, 2003. /s/ William A. Phillips ----------------------------------- William A. Phillips POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Park National Corporation, an Ohio corporation (the "Company"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Company on Form 10-K for the fiscal year ended December 31, 2002, hereby constitutes and appoints William T. McConnell, C. Daniel DeLawder and David L. Trautman as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both the Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 21st day of January, 2003. /s/ J. Gilbert Reese ----------------------------------- J. Gilbert Reese POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Park National Corporation, an Ohio corporation (the "Company"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Company on Form 10-K for the fiscal year ended December 31, 2002, hereby constitutes and appoints William T. McConnell, C. Daniel DeLawder and David L. Trautman as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both the Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 21st day of January, 2003. /s/ Rick R. Taylor ----------------------------------- Rick R. Taylor EX-99.1 13 l99435aexv99w1.txt EX-99.1 906 CERTIFICATIONS EXHIBIT 99.1 Certification Pursuant to Title 18, United States Code, Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 CERTIFICATION PURSUANT TO TITLE 18, UNITED STATES CODE, SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Park National Corporation (the "Corporation") on Form 10-K for the fiscal year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned C. Daniel DeLawder, President and Chief Executive Officer of the Corporation, and John W. Kozak, Chief Financial Officer of the Corporation, certify, pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of their knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. /s/ C. Daniel DeLawder * /s/ John W. Kozak * - --------------------------------- --------------------------------- C. Daniel DeLawder John W. Kozak President and Chief Executive Officer Chief Financial Officer Dated: March 26, 2003 Dated: March 26, 2003 * A signed original of this written statement required by Section 906 has been provided to Park National Corporation and will be retained by Park National Corporation and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----