10-Q 1 l07361ae10vq.txt PARK NATIONAL CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ________________________ Commission File Number 1-13006 Park National Corporation -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 31-1179518 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 50 North Third Street, Newark, Ohio 43055 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (740) 349-8451 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No ____ 13,686,169 Common shares, no par value per share, outstanding at April 26, 2004. Page 1 of 25 PARK NATIONAL CORPORATION CONTENTS
Page ---- PART I. FINANCIAL INFORMATION 3 Item 1. Financial Statements 3-12 Consolidated Condensed Balance Sheets as of March 31, 2004 and December 31, 2003 (unaudited) 3 Consolidated Condensed Statements of Income for the Three Months ended March 31, 2004 and 2003 (unaudited) 4, 5 Consolidated Condensed Statements of Changes in Stockholders' Equity for the Three Months ended March 31, 2004 and 2003 (unaudited) 6 Consolidated Condensed Statements of Cash Flows for the Three Months ended March 31, 2004 and 2003 (unaudited) 7, 8 Notes to Consolidated Financial Statements 9-12 Item 2. Management's Discussion and analysis of Financial Condition and Results of Operations 13-20 Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 Item 4. Controls and Procedures 21 PART II. OTHER INFORMATION 22 Item 1. Legal Proceedings 22 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 22 Item 3. Defaults Upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 24 SIGNATURES 25
-2- PARK NATIONAL CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) (dollars in thousands, except share data)
March 31, December 31, 2004 2003 ----------- ------------ Assets: Cash and due from banks $ 146,398 $ 169,782 ----------- ------------ Federal funds sold 11,800 -- ----------- ------------ Interest bearing deposits 50 50 ----------- ------------ Securities available-for-sale, at fair value (amortized cost of $1,826,945 and $1,899,537 at March 31, 2004 and December 31, 2003) 1,872,441 1,928,697 ----------- ------------ Securities held-to-maturity, at amortized cost (fair value approximates $50,067 and $63,563 at March 31, 2004 and December 31, 2003) 49,065 62,529 ----------- ------------ Loans (net of unearned interest) 2,775,146 2,730,803 ----------- ------------ Allowance for loan losses 63,934 63,142 ----------- ------------ Net loans 2,711,212 2,667,661 ----------- ------------ Bank premises and equipment, net 36,033 36,746 ----------- ------------ Bank owned life insurance 83,598 82,570 ----------- ------------ Other assets 85,360 86,921 ----------- ------------ Total assets $ 4,995,957 $ 5,034,956 ----------- ------------ Liabilities and Stockholders' Equity: Deposits: Noninterest bearing $ 558,241 $ 547,793 ----------- ------------ Interest bearing 2,947,622 2,866,456 ----------- ------------ Total deposits 3,505,863 3,414,249 ----------- ------------ Short-term borrowings 357,777 516,759 ----------- ------------ Long-term debt 507,250 485,977 ----------- ------------ Other liabilities 66,690 74,930 ----------- ------------ Total liabilities 4,437,580 4,491,915 ----------- ------------ Stockholders' Equity: Common stock (No par value; 20,000,000 shares authorized; 14,542,335 shares issued) 105,895 105,895 ----------- ------------ Retained earnings 497,633 486,769 ----------- ------------ Treasury stock (826,807 shares in 2004 and 775,643 shares in 2003) (74,723) (68,577) ----------- ------------ Accumulated other comprehensive income, net of taxes 29,572 18,954 ----------- ------------ Total stockholders' equity 558,377 543,041 ----------- ------------ Total liabilities and stockholders' equity $ 4,995,957 $ 5,034,956 ----------- ------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3 PARK NATIONAL CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands, except per share data)
Three Months Ended March 31, ------------------- 2004 2003 -------- -------- Interest income: Interest and fees on loans $ 43,613 $ 46,918 -------- -------- Interest on: Obligations of U.S. Government, its agencies and other securities 21,810 20,260 -------- -------- Obligations of states and political subdivisions 1,347 1,605 -------- -------- Other interest income 17 80 -------- -------- Total interest income 66,787 68,863 -------- -------- Interest expense: Interest on deposits: Demand and savings deposits 1,523 2,352 -------- -------- Time deposits 8,510 11,200 -------- -------- Interest on borrowings: Short-term borrowings 1,092 486 -------- -------- Long-term debt 3,046 2,620 -------- -------- Total interest expense 14,171 16,658 -------- -------- Net interest income 52,616 52,205 -------- -------- Provision for loan losses 1,465 3,433 -------- -------- Net interest income after provision for loan losses 51,151 48,772 -------- -------- Other income 12,872 15,455 -------- -------- Gain (loss) on sale of securities 106 (1,234) -------- --------
Continued 4 PARK NATIONAL CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED) (CONTINUED) (dollars in thousands, except per share data)
Three Months Ended March 31, ------------------------ 2004 2003 ----------- ----------- Other expense: Salaries and employee benefits $ 18,148 $ 17,536 ----------- ----------- Occupancy expense 1,729 1,732 ----------- ----------- Furniture and equipment expense 1,581 1,627 ----------- ----------- Other expense 10,067 9,174 ----------- ----------- Total other expense 31,525 30,069 ----------- ----------- Income before federal income taxes 32,604 32,924 ----------- ----------- Federal income taxes 9,626 9,758 ----------- ----------- Net income $ 22,978 $ 23,166 =========== =========== PER SHARE: Net income: Basic $ 1.67 $ 1.68 =========== =========== Diluted $ 1.66 $ 1.68 =========== =========== Weighted average Basic 13,756,093 13,780,828 =========== =========== Diluted 13,860,018 13,824,663 =========== =========== Cash dividends declared $ 0.88 $ 0.83 =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 PARK NATIONAL CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) (dollars in thousands, except share data) THREE MONTHS ENDED MARCH 31, 2004 AND 2003
Accumulated Treasury Other Common Retained Stock Comprehensive Comprehensive Stock Earnings at Cost Income Income -------- -------- -------- ------------- ------------- BALANCE AT DECEMBER 31, 2002 $105,768 $446,300 ($65,194) $ 22,418 -------- -------- -------- ------------- Net Income 23,166 $ 23,166 -------- ------------- Accumulated other comprehensive income, net of tax: Reverse additional minimum liabilty for pension plan, net of taxes $860 1,598 1,598 ------------- ------------- Unrealized net holding gain on securities available-for-sale, net of taxes $267 496 496 ------------- ------------- Total comprehensive income $ 25,260 ============= Cash dividends on common stock: Park at $.83 per share (11,434) -------- Shares issued for stock options - 1,303 46 -------- Tax benefit from exercise of stock options 27 -------- Treasury stock purchased - 37,803 shares (3,712) -------- Treasury stock reissued for stock options - 20,165 shares 1,748 -------- BALANCE AT MARCH 31, 2003 $105,841 $458,032 ($67,158) $ 24,512 ======== ======== ======== ============= BALANCE AT DECEMBER 31, 2003 $105,895 $486,769 ($68,577) $ 18,954 -------- -------- -------- ------------- Net Income 22,978 $ 22,978 -------- ------------- Accumulated other comprehensive income, net of tax: Unrealized net holding gain on securities available-for-sale, net of taxes $5,717 10,618 10,618 ------------- ------------- Total comprehensive income $ 33,596 ============= Cash dividends on common stock: Park at $.88 per share (12,114) -------- Treasury stock purchased - 66,838 shares (7,586) -------- Treasury stock reissued for stock options - 15,674 shares 1,440 -------- BALANCE AT MARCH 31, 2004 $105,895 $497,633 ($74,723) $ 29,572 ======== ======== ======== =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 PARK NATIONAL CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands)
Three Months Ended March 31, -------------------------- 2004 2003 ----------- ----------- Operating activities: Net income $ 22,978 $ 23,166 ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, accretion and amortization 665 (2,123) ----------- ----------- Provision for loan losses 1,465 3,433 ----------- ----------- Amortization of the excess of cost over net assets of banks purchased 370 583 ----------- ----------- Realized investment security (gains) losses (106) 1,234 ----------- ----------- Changes in assets and liabilities: (Increase) decrease in other assets (5,555) 1,445 ----------- ----------- Increase (decrease) in other liabilities 3,891 (1,350) ----------- ----------- Net cash provided from operating activities 23,708 26,388 ----------- ----------- Investing activities: Proceeds from sales of: Available-for-sale securities 429 98,766 ----------- ----------- Proceeds from maturity of: Available-for-sale securities 74,031 631,535 ----------- ----------- Held-to-maturity securities 13,464 166,835 ----------- ----------- Purchases of: Available-for-sale securities (1,423) (1,269,876) ----------- ----------- Held-to-maturity securities 0 (341,656) ----------- ----------- Net (increase) decrease in loans (44,572) 8,822 ----------- ----------- Purchases of premises and equipment, net (735) (905) ----------- ----------- Net cash provided from (used by) investing activities 41,194 (706,479) ----------- -----------
Continued 7 PARK NATIONAL CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED) (dollars in thousands)
Three Months Ended March 31, ------------------ 2004 2003 --------- --------- Financing activities: Net increase (decrease) in deposits $ 91,614 ($ 9,058) --------- --------- Net (decrease) increase in short-term borrowings (158,982) 553,657 --------- --------- Exercise of stock options 0 73 --------- --------- Purchase of treasury stock, net (6,146) (1,964) --------- --------- Long-term debt issued 160,000 125,000 --------- --------- Repayment of long-term debt (138,727) (261) --------- --------- Cash dividends paid (24,245) (22,897) --------- --------- Net cash (used by) provided from financing activities (76,486) 644,550 --------- --------- Decrease in cash and cash equivalents (11,584) (35,541) --------- --------- Cash and cash equivalents at beginning of year 169,782 238,788 --------- --------- Cash and cash equivalents at end of period $ 158,198 $ 203,247 ========= ========= Supplemental disclosures of cash flow information: Cash paid for: Interest $ 14,487 $ 17,525 --------- --------- Income taxes $ 0 $ 0 --------- ---------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8 PARK NATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Three Months Ended March 31, 2004 and 2003. Note 1 - Basis of Presentation The consolidated financial statements included in this report have been prepared by Park National Corporation (the "Registrant", "Corporation", "Company", or "Park") without audit. In the opinion of management, all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation of results of operations for the interim periods included herein have been made. The results of operations for the period ended March 31, 2004 are not necessarily indicative of the operating results to be anticipated for the fiscal year ended December 31, 2004. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q, and therefore, do not include all information and footnotes necessary for a fair presentation of the condensed balance sheets, condensed statements of income, condensed statements of changes in stockholders' equity and condensed statements of cash flows in conformity with generally accepted accounting principles. These financial statements should be read in conjunction with the financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2003. Park does not have any off-balance sheet derivative financial instruments such as interest-rate swap agreements. Note 2 - Intangible Assets In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the standards, goodwill and indefinite lived intangible assets are no longer amortized and are subject to annual impairment tests. Other intangible assets, such as core deposit intangibles, continue to be amortized over their useful lives. Park had approximately $7.53 million of goodwill included in other assets at March 31, 2004 and December 31, 2003. This goodwill was evaluated for impairment during the first quarter of each of 2003 and 2004 and a determination made that the goodwill was not impaired and that the book value of the goodwill would continue to be shown as $7.53 million. No amortization expense is being recorded on the goodwill in 2004 and none was recorded in 2003. Park also had core deposit intangibles included in other assets of $5.06 million at March 31, 2004 and $5.43 million at December 31, 2003. The core deposit intangibles are being amortized to expense, principally on the straight-line method, over periods ranging from six to eight years. Core deposit amortization expense was $370,000 for the first quarter of 2004 and $583,000 for the first quarter of 2003. -9- Note 3- Allowance for Loan Losses The allowance for loan losses is that amount believed adequate to absorb estimated credit losses in the loan portfolio based on management's evaluation of various factors including overall growth in the loan portfolio, an analysis of individual loans, prior and current loss experience, and current economic conditions. A provision for loan losses is charged to operations based on management's periodic evaluation of these and other pertinent factors.
(In Thousands) -------------------- 2004 2003 --------- --------- Beginning of Quarter $ 63,142 $ 62,028 Provision for Loan Losses 1,465 3,433 Losses Charged to the Reserve <2,348> <2,854> Recoveries 1,675 1,455 End of Quarter $ 63,934 $ 64,062
Note 4 - Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share for the three month periods ended March 31, 2004 and 2003. (Dollars in Thousands, except per share data) Three Months Ended March 31,
2004 2003 ----------- ----------- Numerator: Net Income $ 22,978 $ 23,166 Denominator: Denominator for basic earnings per share (weighted-average shares) 13,756,093 13,780,828 Effect of dilutive securities 103,925 43,835 Denominator for diluted earnings per share (adjusted weighted-average shares & assumed) 13,860,018 13,824,663 Earnings per Share: Basic earnings per share $ 1.67 $ 1.68 Diluted earnings per share $ 1.66 $ 1.68
-10- Note 5 - Segment Information The Corporation is a multi-bank holding company headquartered in Newark, Ohio. The operating segments for the Corporation are its financial institution subsidiaries. The Corporation's financial institution subsidiaries are The Park National Bank (PNB), The Richland Trust Company (RTC), Century National Bank (CNB), The First-Knox National Bank of Mount Vernon (FKNB), United Bank N.A. (UB), Second National Bank (SNB), The Security National Bank and Trust Co. (SEC), and The Citizens National Bank of Urbana (CIT). Operating Results for the Three Months Ended March 31, 2004 (In Thousands)
PNB RTC CNB FKNB UB ---------- -------- -------- -------- -------- Net Interest Income $ 15,803 $ 5,384 $ 4,795 $ 7,958 $ 2,482 Provision for Loan Losses 795 180 -- 195 -- Other Income 5,149 1,159 1,424 1,693 460 Other Expense 9,343 3,101 3,009 4,133 1,539 Net Income $ 7,340 $ 2,193 $ 2,151 $ 3,583 $ 948 Balances at March 31, 2004 Assets 1,649,675 540,998 477,536 724,364 240,922 SNB SEC CIT All Other Total -------- --------- -------- --------- ---------- Net Interest Income $ 3,866 $ 8,022 $ 1,873 $ 2,433 $ 52,616 Provision for Loan Losses 40 85 -- 170 1,465 Other Income 517 1,931 368 277 12,978 Other Expense 2,083 5,067 1,133 2,117 31,525 Net Income $ 1,572 $ 3,234 $ 750 $ 1,207 $ 22,978 Balances at March 31, 2004 Assets 389,735 916,868 201,260 (145,401) 4,995,957
Operating Results for the Three Months Ended March 31, 2003
PNB RTC CNB FKNB UB ---------- -------- -------- -------- -------- Net Interest Income $ 15,813 $ 5,558 $ 4,948 $ 7,836 $ 2,305 Provision for Loan Losses 1,380 330 225 666 90 Other Income 6,271 1,193 1,445 1,452 566 Other Expense 9,317 2,597 2,864 4,021 1,480 Net Income 7,860 2,520 2,206 3,155 902 Balances at March 31, 2003 Assets 1,617,914 571,420 481,736 755,567 242,123 SNB SEC CIT All Other TOTAL -------- --------- -------- --------- ---------- Net Interest Income $ 3,536 $ 8,453 $ 1,622 $ 2,134 $ 52,205 Provision for Loan Losses 150 405 90 97 3,433 Other Income 584 2,170 390 150 14,221 Other Expense 1,872 5,023 1,148 1,747 30,069 Net Income 1,478 3,499 530 1,016 23,166 Balances at March 31, 2003 Assets 390,074 937,299 191,969 (74,615) $5,113,487
The operating results of the Parent Company and Guardian Finance Company (GFC) in the All Other column are used to reconcile the segment totals to the consolidated income statements for the quarters ended March 31, 2004 and 2003. The reconciling amounts for consolidated total assets for both of the quarters ended March 31, 2004 and 2003 consist of the elimination of intersegment borrowings, and the assets of the Parent Company and GFC which are not eliminated. -11- Note 6 - Stock Option Plan Park accounts for its incentive stock option plan under the recognition and measurement principles provided in Accounting Principles Board Opinion No. 25, "Accounting for Stock issued to Employees" (APB 25) and related interpretations. Under APB 25, because the exercise price of Park's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", as amended by SFAS 148, requires pro forma disclosures of net income and earnings per share for companies not adopting its fair value accounting method for stock-based employee compensation. The pro-forma disclosures below use the fair value method of SFAS 123 to measure compensation expense for stock-based employee compensation plans. Three Months Ended March 31 (In thousands, except per share data)
2004 2003 ---- ---- Net income as reported $ 22,978 $23,166 Deduct: Total stock-based employee compensation expense determined under fair value method, net of related tax effects <126> <106> Pro forma net income 22,852 $23,060 ======== ======= Basic earnings per share as reported $ 1.67 $ 1.68 Pro forma basic earnings per share $ 1.66 $ 1.67 Diluted earnings per share as reported $ 1.66 $ 1.68 Pro forma diluted earnings per share $ 1.65 $ 1.67
-12- ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance. The forward-looking statements are based on management's expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation, Park's ability to execute its business plan, changes in general economic and financial market conditions, changes in banking regulations or other regulatory or legislative requirements affecting bank holding companies and changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date hereof. Park does not undertake any obligation to publicly update any forward-looking statement except to the extent required by law. Critical Accounting Policies Note 1 of the Notes to Consolidated Financial Statements included in Park's 2003 Annual Report lists significant accounting policies used in the development and presentation of its financial statements. The accounting and reporting policies of Park conform with accounting principles generally accepted in the United States and general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. Park considers that the determination of the allowance for loan losses involves a higher degree of judgement and complexity than its other significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses in the loan portfolio. Management's determination of the adequacy of the allowance for loan losses is based on periodic evaluations of the loan portfolio and of current economic conditions. However, this evaluation is inherently subjective as it requires material estimates, including expected default probabilities, loss given default, expected commitment usage, the amounts and timing of expected future cash flows on impaired loans, and estimated losses on consumer loans and residential mortgage loans based on historical loss experience and the current economic conditions. All of those factors may be susceptible to significant change. To the extent that actual results differ from management estimates, additional loan loss provisions may be required that would adversely impact earnings for future periods. -13- Comparison of Results of Operations For the Quarters Ended March 31, 2004 and 2003 Summary Discussion of Results Net income decreased by $188,000 or .8% to $23.0 million for the three months ended March 31, 2004 compared to $23.2 million for the same period in 2003. The annualized, net income to average asset ratio (ROA) was 1.86% for the first quarter of 2004 compared to 1.96% for the first quarter of 2003. The annualized, net income to average equity ratio (ROE) was 16.99% for the first three months of 2004 compared to 18.56% for the same period in 2003. Diluted earnings per share decreased by 1.2% to $1.66 for the first quarter of 2004 compared to $1.68 for the first quarter of 2003. The decrease in net income for the first quarter of 2004 was primarily due to the $2.6 million or 16.7% decrease in Other Income to $12.87 million compared to $15.45 million in 2003. This large decrease was primarily due to the decrease in fee income earned from the origination and sale of fixed rate mortgage loans. During the first quarter of 2003, Park originated and sold fixed rate mortgage loans totaling $211.6 million compared to $53.1 million for the first quarter of 2004. Non yield loan fees (which includes the gain from the sale of fixed rate mortgage loans) decreased by $2.9 million to $2.7 million for the first quarter of 2004 compared to $5.6 million in 2003. The large decrease in the volume of fixed rate mortgage loans originated and sold in 2004 is primarily due to most borrowers that were able to refinance theirresidential mortgage loan did so in 2003. Net Interest Income Park's principal source of earnings is net interest income, the difference between total interest income and total interest expense. Net interest income was $52.6 million for the first quarter of 2004 and $52.2 million in 2003. The following table compares the average balance and tax equivalent yield/cost for interest earning assets and interest bearing liabilities for the first quarter of 2004 with the same quarter in 2003. Three Months Ended March 31, (In Thousands)
2004 2003 ----------------------- ------------------------- Tax Tax Average Equivalent Average Equivalent Balance % Balance % ---------- ---------- ---------- ---------- Loans $2,744,130 6.41% $2,675,702 7.14% Taxable Investments 1,796,932 4.88% 1,638,152 5.02% Tax Exempt Investments 111,223 7.29% 132,649 7.30% Federal Funds Sold 4,844 1.41% 21,688 1.50% Interest Earning Assets $4,657,129 5.84% $4,468,191 6.34% Interest Bearing Deposits $2,927,157 1.38% $2,895,747 1.90% Short-term Borrowings 403,613 1.09% 547,348 .36% Long-term Debt 486,977 2.52% 271,898 3.91% Interest Bearing Liabilities $3,817,747 1.49% $3,714,993 1.82% Excess Interest Earning Assets $ 839,382 4.35% $ 753,198 4.52% Net Interest Margin 4.61% 4.83%
-14- Average interest earning assets increased by $189 million or 4.2% to $4,657 million for the quarter ended March 31, 2004 compared to the same quarter in 2003. The average yield on interest earning assets decreased to 5.84% for the first quarter of 2004 compared to 6.34% for the first quarter of 2003. Average loan totals increased by $68 million or 2.6% to $2,744 million for the first quarter of 2004 compared to the first quarter of 2003. At March 31, 2004, total loans were $2,775 million compared to $2,731 million at December 31, 2003, an increase of $44 million or 1.6%. Total loans increased by $39 million or 1.4% for the year 2003 and decreased by $104 million or 3.7% for the year 2002 and decreased by $160 million or 5.4% for the year 2001. The demand for commercial and commercial real estate loans continued to improve during the first quarter of 2004. Management anticipates that total loans will continue to increase throughout the remainder of 2004. The average yield on the loan portfolio was 6.41% for the first quarter of 2004 compared to 7.14% for the same period in 2003. The average prime lending rate was 4.00% for the first quarter of 2004 compared to 4.25% for the first quarter of 2003. Approximately 25% of Park's loan portfolio reprices based on the prime lending rate. The average yield on the loan portfolio is expected to gradually decline if short-term interest rates remain at current levels. However, due to improved economic conditions, the Federal Reserve is expected to increase the federal funds rate later in 2004. An increase in short-term interest rates will cause the average yield on the loan portfolio to also increase. Average investment securities, including federal funds sold, increased by $121 million or 6.7% to $1,913 million for the first quarter of 2004. The increase in the investment portfolio was primarily funded by an increase in long-term borrowing. The average yield on taxable investment securities decreased to 4.88% for the first quarter of 2004 compared to 5.02% for the first quarter of 2003. The tax equivalent yield on tax exempt investment securities was 7.29% for the first quarter of 2004 compared to 7.30% for the same period in 2003. No tax exempt investment securities were purchased during the past year. At March 31, 2004, the tax equivalent yield on the total investment portfolio was 5.01% and the average maturity was 3.6 years. U.S. Government Agency asset-backed securities were approximately 90% of the total investment portfolio at the end of the first quarter of 2004. This segment of the investment portfolio consists of fifteen-year mortgage-backed securities and collateralized mortgage obligations, which are backed by fifteen-year mortgage-backed securities. The average maturity of the investment portfolio would lengthen if long-term interest rates would increase as the principal repayments from mortgage-backed securities and collateralized mortgage obligations would be reduced. Management estimates that the average maturity of the investment portfolio would lengthen to 5.1 years with a 1.00% increase in long-term interest rates and to 5.6 years with a 2.00% increase in long-term interest rates. Average interest bearing liabilities increased by $103 million or 2.8% to $3,818 million for the three months ended March 31, 2004 compared to the same period in 2003. The average cost of interest bearing liabilities decreased by .33% to 1.49% for the first quarter of 2004 compared to 1.82% for the same period in 2003. -15- Average interest bearing deposits increased by $31 million or 1.1% to $2,927 million for the three months ended March 31, 2004 compared to the same period in 2003. The average cost of interest bearing deposits decreased by .52% to 1.38% for the first quarter of 2004 compared to 1.90% for the same period in 2003. Average short-term borrowings decreased by $144 million to $404 million for the first quarter of 2004 compared to the first quarter of 2003. The average cost of short-term borrowings increased to 1.09% for the first quarter of 2004 compared to .36% for the same quarter in 2003. The decrease in the average balance of short-term borrowings was due to the absence of dollar-roll repo borrowings in 2004. The dollar-roll repo borrowings averaged $272 million for the first quarter of 2003 at an average cost of a negative .46%. Excluding the dollar-roll repo borrowings from short-term borrowings in 2003 would have increased the average cost of short-term borrowings to 1.17%, which is slightly higher than the average cost of 1.09% for the first quarter of 2004. Average long-term borrowings increased by $215 million to $487 million for the first quarter of 2004 compared to the first quarter of 2003. The average cost of long-term borrowings decreased to 2.52% for the first quarter of 2004 compared to 3.91% for the same period last year. The additional average long-term borrowings in 2004 are priced on a variable rate basis and the borrowing cost changes monthly based on short-term money market rates. Net interest income increased by $411,000 or .8% to $52.6 million in 2004 compared to $52.2 million in 2003. The net interest spread (the difference between the yield on interest earning assets and the cost of interest bearing liabilities) decreased by .17% to 4.35% in 2004 compared to 4.52% in 2003. The tax equivalent net interest margin (defined as net interest income divided by average interest earning assets) decreased by .22% to 4.61% in 2004 compared to 4.83% in 2003. However, the increase in average earning assets of 4.2% and the increase in the average excess earning assets of 11.4% enabled Park to earn $411,000 more in net interest income for the first quarter of 2004 compared to the first quarter of 2003. Management expects that the net interest margin will gradually decrease during 2004 if short-term interest rates remain unchanged. However, due to the expected growth in interest earning assets management anticipates that net interest income for each quarterly period in 2004 will exceed the net interest income earned in the comparable period of 2003. The following table compares net interest income, the net interest margin, average interest earning assets, average interest bearing liabilities and average excess interest earning assets for the past five quarters.
Three Months Ended (Dollars in Thousands) ------------------------------------------------------------------- March 31, December 31, September 30, June 30, March 31, 2004 2003 2003 2003 2003 ---------- ------------ ------------- ---------- ---------- Net Interest Income $ 52,616 $ 49,486 $ 49,350 $ 51,596 $ 52,205 Net Interest Margin 4.61% 4.49% 4.58% 4.49% 4.83% Interest Earning Assets $4,657,129 $ 4,452,153 $ 4,354,669 $4,692,323 $4,468,191 Interest Bearing Liabilities $3,817,747 $ 3,607,913 $ 3,548,607 $3,926,359 $3,714,993 Excess Interest Earning Assets $ 839,382 $ 844,240 $ 806,062 $ 765,964 $ 753,198
-16- Management expects that net interest income for the year 2004 will exceed net interest income for 2003 of $202.6 million by approximately 5%. This projection is dependent upon total loans and deposits increasing throughout the remainder of 2004 at the same growth rate that was achieved during the first quarter of 2004. This projection also assumes that interest rates will remain relatively stable. Management expects that an increase in interest rates will improve the performance of net interest income and that a decrease in interest rates will reduce the level of net interest income. Provision for Loan Losses The provision for loan losses decreased by $2.0 million or 57.3% to $1.47 million for the first quarter of 2004 compared to $3.43 million for the first quarter of 2003. Nonperforming loans, defined as loans that are 90 days past due, renegotiated loans, and nonaccrual loans were $24.2 million or .87% of loans at March 31, 2004 compared to $25.7 million or .94% of loans at December 31, 2003 and $30.9 million or 1.15% of loans at March 31, 2003. The reserve for loan losses as a percentage of outstanding loans was 2.30% at March 31, 2004 compared to 2.31% at December 31, 2003 and 2.39% at March 31, 2003. See Footnote 3 for a discussion of the factors considered by management in determining the provision for loan losses. Noninterest Income Noninterest income decreased by $2.6 million or 16.7% to $12.9 million for the first quarter of 2004 compared to $15.5 million for the first quarter of 2003. The following table compares noninterest income for the past five quarters.
Three Months Ended (In Thousands) ------------------------------------------------------------------- March 31, December 31, September 30, June 30, March 31, 2004 2003 2003 2003 2003 ---------- ------------ ------------- ---------- ---------- Fees from Fiduciary Activities $ 2,723 $ 2,694 $ 2,691 $ 2,446 $ 2,414 Service Charges on Deposit Accounts 3,576 3,595 3,665 3,597 3,412 Other Service Income 2,652 2,965 5,818 7,280 5,585 Other Income 3,921 3,334 3,966 4,077 4,044 Total $ 12,872 $ 12,588 $ 16,140 $ 17,400 $ 15,455
The large decrease in fees earned from Other Service Income of $2.9 million in the first quarter of 2004 compared to the first quarter of 2003, was primarily due to the decrease in fee income earned from the origination and sale into the secondary market of fixed rate mortgage loans. Park originated and sold $211.6 million of fixed rate mortgage loans during the first quarter of 2003 compared to $53.1 million of fixed rate mortgage loans during the first quarter of 2004. Management expects Other Service Income for the second quarter of 2004 to be approximately the same as the first quarter of 2004. Management anticipates an increase in the amount of service charges on deposit accounts for the second quarter of 2004. Some pricing increases on service charges on deposit accounts became effective during the second quarter. -17- Gain (Loss) on Sale of Securities A gain on the sale of investment securities of $106,000 was realized during the first quarter of 2004. The gain was from the sale of some equity investments. A loss on the sale of investment securities of $1.2 million was realized during the first quarter of 2003. The loss resulted from the sale of $100 million of U.S. Government Agency collateralized mortgage obligations. The proceeds from the sale were reinvested in fifteen year U.S. Government Agency mortgage-backed securities. Management expects that the net losses from the sale of investment securities will be earned back in approximately three years from the higher reinvestment rate on the mortgage-backed securities. Other Expense Total other expense increased by $1.46 million or 4.8% to $31.53 million for the quarter ended March 31, 2004 compared to $30.07 million for the same period in 2003. Salaries and employee benefits expense increased by $612,000 or 3.5% to $18.15 million for the first quarter of 2004 compared to $17.54 million for the first quarter of 2003. Full time equivalent employees were 1,657 at March 31, 2004 compared to 1,617 at March 31, 2003. The subcategory other expense increased by $893,000 or 9.7% to $10.1 million for the three months ended March 31, 2004 compared to $9.2 million for the first quarter of 2003. The increase in this expense was primarily due to increases in data processing expense of $225,000, legal and other professional fees of $204,000, marketing expense of $118,000 and losses from customer and employee fraud of $522,000. The losses from customer and employee fraud resulted from forgery involving checks and loan documents. Some of these losses may be recovered later this year. Management has implemented additional controls to reduce the risk of future losses from forgery of checks and loan documents. Federal Income Taxes Federal income tax expense was $9.63 million for the first quarter of 2004 and $9.76 million for the first quarter of 2003. The ratio of federal income tax expense to income before taxes was approximately 29.5% in 2004 and 29.6% in 2003. The difference between the effective federal income tax rate and the statutory rate of 35% is primarily due to tax-exempt interest income from state and municipal loans and investments and low income housing tax credits. -18- COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2004 AND DECEMBER 31, 2003 Changes in Financial Condition and Liquidity Total assets decreased by $39 million or .8% to $4,996 million at March 31, 2004 compared to $5,035 million at December 31, 2003. Investment securities decreased by $70 million or 3.5% during the first quarter of 2004, as only $1.4 million of investment securities were purchased during the first quarter. Management expects that investment securities will increase by approximately $70 million during the second quarter due to planned purchases of fifteen year U.S. Government Agency mortgage-backed securities. Total loans increased by $44 million or 1.6% to $2,775 million at March 31, 2004, as the demand for commercial and commercial real estate loans continued to improve in 2004. Management is optimistic that total loans will continue to grow by about the same amount during the second quarter of 2004. Total liabilities decreased by $54 million or 1.2% to $4,438 million at March 31, 2004 compared to $4,492 million at December 31, 2003. Total borrowed money decreased by $138 million to $865 million at March 31, 2004 compared to $1,003 million at December 31, 2003. Total deposits increased by $92 million or 2.7% to $3,506 million at March 31, 2004 compared to $3,414 million at December 31, 2003. Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as the operating cash needs of the Corporation, are met. Funds are available from a number of sources, including the securities portfolio, the core deposit base, Federal Home Loan Bank borrowings, and the capability to securitize or package loans for sale. The Corporation's loan to asset ratio was 55.5% at March 31, 2004 compared to 54.2% at December 31, 2003 and 52.5% at March 31, 2003. Cash and cash equivalents totaled $158 million at March 31, 2004 compared to $170 million at December 31, 2003 and $203 million at March 31, 2003. The present funding sources provide more than adequate liquidity for the Corporation to meet its cash flow needs. Capital Resources Stockholders' equity at March 31, 2004 was $558 million or 11.18% of total assets compared to $543 million or 10.79% of total assets at December 31, 2003 and $521 million or 10.19% of total assets at March 31, 2003. -19- Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts, and bank holding companies. The net unrealized gain or loss on available-for-sale securities is generally not included in computing regulatory capital. The minimum leverage capital ratio (defined as stockholders' equity less intangible assets divided by tangible assets) is 4% and the well capitalized ratio is greater than or equal to 5%. Park's leverage ratio was 10.38% at March 31, 2004 and 10.79% at December 31, 2003. The minimum Tier I risk-based capital ratio (defined as leverage capital divided by risk-adjusted assets) is 4% and the well capitalized ratio is greater than or equal to 6%. Park's Tier I risk-based capital ratio was 16.71% at March 31, 2004 and 16.51% at December 31, 2003. The minimum total risk-based capital ratio (defined as leverage capital plus supplemental capital divided by risk-adjusted assets) is 8% and the well capitalized ratio is greater than or equal to 10%. Park's total risk-based capital ratio was 17.98% at March 31, 2004 and 17.78% at December 31, 2003. The financial institution subsidiaries of Park each met the well capitalized capital ratio guidelines at March 31, 2004. The following table indicates the capital ratios for each subsidiary and Park at March 31, 2004:
TIER I TOTAL LEVERAGE RISK-BASED RISK-BASED -------- ---------- ---------- Park National Bank 5.87% 8.82% 12.13% Richland Trust Company 5.85% 10.82% 12.08% Century National Bank 5.87% 10.43% 12.80% First-Knox National Bank 6.06% 9.56% 13.29% Second National Bank 5.52% 9.64% 13.13% United Bank, N.A. 5.70% 11.52% 12.78% Security National Bank 5.46% 8.61% 12.65% Citizens National Bank 6.09% 12.91% 17.90% Park National Corporation 10.38% 16.71% 17.98% Minimum Capital Ratio 4.00% 4.00% 8.00% Well Capitalized Ratio 5.00% 6.00% 10.00%
At the April 19, 2004 Park National Corporation Board of Directors' meeting, a cash dividend of $.88 per share was declared payable on June 10, 2004 to stockholders of record on May 24, 2004. In the ordinary course of operations, Park enters into certain contractual obligations. Such obligations include the funding of operations through debt issuances as well as leases for premises. See Page 32 of Park's 2003 Annual Report for disclosure concerning contractual obligations and commitments. There has not been a material change in contractual obligations or commitments since year-end 2003. -20- ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Footnote 1 for disclosure that Park does not have any off-balance sheet derivative financial instruments. Management reviews interest rate sensitivity on a quarterly basis by modeling the financial statements under various interest rate scenarios. The primary reason for these efforts is to guard Park from adverse impacts of unforeseen changes in interest rates. Management continues to believe that further changes in interest rates will have a small impact on net income, consistent with the disclosure on pages 31 and 32 of our 2003 Annual Report, which is incorporated by reference into our 2003 Form 10-K. However, as mentioned earlier in management's analysis of net interest income, the net interest margin is expected to continue to gradually decrease in 2004 if short-term interest rates remain unchanged. An increase in short-term interest rates is expected to have a positive impact on the net interest margin and a decrease in short-term interest rates would have a negative impact. ITEM 4 - CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES With the participation of the President and Chief Executive Officer (the principal executive officer) and the Chief Financial Officer (the principal financial officer) of Park, Park's management has evaluated the effectiveness of Park's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, Park's President and Chief Executive Officer and Park's Chief Financial Officer have concluded that: - information required to be disclosed by Park in this Quarterly Report on Form 10-Q would be accumulated and communicated to Park's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure; - information required to be disclosed by Park in this Quarterly Report on Form 10-Q would be recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms; and - Park's disclosure controls and procedures are effective as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q to ensure that material information relating to Park and its consolidated subsidiaries is made known to them, particularly during the period in which this Quarterly Report on Form 10-Q is being prepared. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in Park's internal control over financial reporting (as defined in Rule 13 a - 15 (f) under the Exchange Act) that occurred during Park's fiscal quarter ended March 31, 2004, that have materially affected or are reasonably likely to materially affect, Park's internal control over financial reporting. However, as mentioned earlier in management's analysis of other expense, some additional controls were implemented during the second quarter of 2004 to reduce the risk of loss from forged checks and loan documents by customers and employees. -21- PARK NATIONAL CORPORATION PART II - OTHER INFORMATION Item 1. Legal Proceedings Park National Corporation is not engaged in any legal proceedings of a material nature at the present time. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities (a.) Not applicable (b.) Not applicable (c.) Not applicable (d.) Not applicable (e.) The following table provides information regarding Park's purchases of its common shares during the three months ended March 31, 2004:
Total Number of Average Price Total Number of Common Shares Maximum Number of Common Common Shares Paid per Purchased as Part of Publicly Shares that May Yet be Purchased Period Purchased Common Share Announced Plans or Programs under the Plans or Programs (1) ------------------------------------------------------------------------------------------------------------------------------------ January 1 thru January 31, 2004 -- -- -- 885,527 ---------------------------------------------------------------------------------------------------------------------------------- February 1 thru February 29, 2004 27,108 $113.53 27,108 (2) 858,419 ---------------------------------------------------------------------------------------------------------------------------------- March 1 thru March 31, 2004 39,730 $113.49 39,730 (2) 814,262
(1) The number shown represents, as of the end of each period, the maximum aggregate number of common shares that may yet be purchased as part of Park's publicly announced repurchase program to fund the Park National Corporation 1995 Incentive Stock Option Plan as well as Park's publicly announced stock repurchase program. On November 18, 2002, Park announced a stock repurchase program under which up to an aggregate of 500,000 common shares may be repurchased from time to time over the three year period ending November 17, 2005. These repurchases may be made in open market transactions or through privately negotiated transactions. As of March 31, 2004, Park had the authority to still repurchase an aggregate of 488,300 common shares under this stock repurchase program. -22- The Park National Corporation 1995 Incentive Stock Option Plan (the "1995 Plan") was initially approved by the shareholders of Park on April 7, 1995 and 200,000 common shares were authorized for delivery upon exercise of incentive stock options granted under the 1995 plan. The shareholders approved an amendment to the 1995 Plan on April 20, 1998 to increase the number of common shares of Park available for delivery under the 1995 Plan to 735,000 common shares (after adjustment for stock dividends) and another amendment on April 16, 2001 to increase the number of common shares available for delivery under the 1995 Plan to 1,200,000 common shares. Pursuant to the terms of the 1995 Plan, all of the common shares delivered upon exercise of incentive stock options granted under the 1995 Plan are to be treasury shares. No incentive stock options may be granted under the 1995 Plan after January 16, 2005. As of March 31, 2004, incentive stock options covering 571,588 common shares were outstanding 470,816 common shares are available for future grants. With 716,442 common shares held as treasury shares for purposes of the 1995 Plan at March 31, 2004, an additional 325,962 common shares remained authorized for repurchase for purposes of funding the 1995 Plan. (2) All of the common shares reported were purchased in the open market for the purpose of providing common shares for the 1995 Incentive Stock Option Plan, as publicly previously announced. Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders I. Annual Meeting of Shareholders - April 19, 2004: a. On April 19, 2004, Park National Corporation held its Annual Meeting of Shareholders. At the close of business on the February 23, 2004 record date, 13,765,320 Park National Corporation common shares were outstanding and entitled to vote. At the Annual Meeting, 12,706,284 or 92.31% of the outstanding common shares entitled to vote were represented by proxy or in person. b. Directors elected at the Annual Meeting for a three year term: Maureen Buchwald 12,562,183 For 43,221 Withheld 100,880 Abstain and Broker Non-Votes J. Gilbert Reese 11,698,226 For 39,525 Withheld 968,533 Abstain and Broker Non-Votes Rick R. Taylor 11,675,779 For 48,481 Withheld 982,024 Abstain and Broker Non-Votes Leon Zazworsky 12,614,048 For 31,942 Withheld 60,294 Abstain and Broker Non-Votes -23- Directors whose term of office continued after the Annual Meeting: James J. Cullers R. William Geyer C. Daniel DeLawder Harry O. Egger Howard E. LeFevre William T. McConnell John J. O'Neill William A. Phillips c. See Item (b.) for the voting results for directors. Proposal to approve Park National Corporation Stock Plan for Non-Employee Directors of Park National Corporation and Subsidiaries 10,641,296 For 492,463 withheld 1,572,525 Abstain and Broker Non-Votes d. Not applicable Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K a. Exhibits 10 Park National Corporation Stock Plan for Non-Employee Directors of Park National Corporation and Subsidiaries 31.1 Rule 13a - 14(a) / 15d - 14(a) Certification (Principal Executive Officer) 31.2 Rule 13a - 14(a) / 15d - 14(a) Certification (Principal Financial Officer) 32.1 Section 1350 Certification (Principal Executive Officer) 32.2 Section 1350 Certification (Principal Financial Officer) b. Reports on Form 8-K On April 19, 2004, Park National Corporation furnished information regarding the press release announcing first quarter 2004 earnings for Park National Corporation under Item 12 in a Form 8-K. The press release was included as Exhibit 99. -24- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PARK NATIONAL CORPORATION DATE: May 4, 2004 BY: /s/ C. Daniel DeLawder ----------------------- C. Daniel DeLawder President and Chief Executive Officer DATE: May 4, 2004 BY: /s/ John W. Kozak ------------------ John W. Kozak Chief Financial Officer -25-