-----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, LFraL1aFU8q2JIjYKwKX/9ZFY7Fr+LbVQJq5bjN/SimOl7py75W+XrNx27BhnhWc TkS+8iJGJTlfOqxr0uEanQ== 0000950152-04-005977.txt : 20040806 0000950152-04-005977.hdr.sgml : 20040806 20040806151732 ACCESSION NUMBER: 0000950152-04-005977 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040806 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13006 FILM NUMBER: 04957834 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-Q 1 l08884ae10vq.txt PARK NATIONAL CORPORATION 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ________________________ Commission File Number 1-13006 Park National Corporation - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 31-1179518 - -------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 50 North Third Street, Newark, Ohio 43055 - ------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (740) 349-8451 - ------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A - -------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [x] No [ ] 13,604,577 Common shares, no par value per share, outstanding at July 31, 2004. Page 1 of 29 PARK NATIONAL CORPORATION
CONTENTS Page PART I. FINANCIAL INFORMATION 3 Item 1. Financial Statements 3-12 Consolidated Condensed Balance Sheets as of June 30, 2004 and December 31, 2003 (unaudited) 3 Consolidated Condensed Statements of Income for the Three Months and Six Months ended June 30, 2004 and 2003 (unaudited) 4, 5 Consolidated Condensed Statements of Changes in Stockholders Equity for the Six Months ended June 30, 2004 and 2003 (unaudited) 6 Consolidated Condensed Statements of Cash Flows for the Six Months ended June 30, 2004 and 2003 (unaudited) 7, 8 Notes to Consolidated Financial Statements 9 -13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-24 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 Item 4. Controls and Procedures 25 PART II. OTHER INFORMATION 26 Item 1. Legal Proceedings 26 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of EquitySecurities 26 Item 3. Defaults Upon Senior Securities 27 Item 4. Submission of Matters to a Vote of Security Holders 27 Item 5. Other Information 27 Item 6. Exhibits and Reports on Form 8-K 28 SIGNATURES 29
-2- PARK NATIONAL CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) (dollars in thousands, except share data)
June 30, December 31, 2004 2003 - --------------------------------------------------------------------------------------- Assets: Cash and due from banks $ 145,063 $ 169,782 - --------------------------------------------------------------------------------------- Federal funds sold 20,000 0 - --------------------------------------------------------------------------------------- Interest bearing deposits 50 50 - --------------------------------------------------------------------------------------- Securities available-for-sale, at fair value (amortized cost of $1,927,615 and $1,899,537 at June 30, 2004 and December 31, 2003) 1,910,005 1,928,697 - --------------------------------------------------------------------------------------- Securities held-to-maturity, at amortized cost (fair value approximates $33,649 and $63,563 at June 30, 2004 and December 31, 2003) 33,145 62,529 - --------------------------------------------------------------------------------------- Loans (net of unearned interest) 2,803,590 2,730,803 - --------------------------------------------------------------------------------------- Allowance for possible loan losses 64,090 63,142 - --------------------------------------------------------------------------------------- Net loans 2,739,500 2,667,661 - --------------------------------------------------------------------------------------- Bank premises and equipment, net 35,695 36,746 - --------------------------------------------------------------------------------------- Bank owned life insurance 93,785 82,570 - --------------------------------------------------------------------------------------- Other assets 97,488 86,921 - --------------------------------------------------------------------------------------- Total assets $5,074,731 $5,034,956 - --------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity: Deposits: Noninterest bearing $ 551,072 $ 547,793 - --------------------------------------------------------------------------------------- Interest bearing 2,965,481 2,866,456 - --------------------------------------------------------------------------------------- Total deposits 3,516,553 3,414,249 - --------------------------------------------------------------------------------------- Short-term borrowings 476,312 516,759 - --------------------------------------------------------------------------------------- Long-term debt 508,094 485,977 - --------------------------------------------------------------------------------------- Other liabilities 58,025 74,930 - --------------------------------------------------------------------------------------- Total liabilities 4,558,984 4,491,915 - --------------------------------------------------------------------------------------- Stockholders' Equity: Common stock (No par value; 20,000,000 shares authorized; 14,543,614 shares issued in 2004 and 14,542,335 shares issued in 2003) 105,995 105,895 - --------------------------------------------------------------------------------------- Retained earnings 509,706 486,769 - --------------------------------------------------------------------------------------- Treasury stock (939,037 shares in 2004 and 775,643 shares in 2003) (88,505) (68,577) - --------------------------------------------------------------------------------------- Accumulated other comprehensive income (loss), net of taxes (11,449) 18,954 - --------------------------------------------------------------------------------------- Total stockholders' equity 515,747 543,041 - --------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $5,074,731 $5,034,956 - ---------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3 PARK NATIONAL CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands, except per share data)
Three Months Ended Six Months Ended June 30, June 30, - ---------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 - ---------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $43,319 $46,591 $ 86,932 $ 93,509 - ---------------------------------------------------------------------------------------------------- Interest on: Obligations of U.S. Government, its agencies and other securities 21,717 19,450 43,527 39,710 - ---------------------------------------------------------------------------------------------------- Obligations of states and political subdivisions 1,302 1,568 2,649 3,173 - ---------------------------------------------------------------------------------------------------- Other interest income 34 362 51 442 - ---------------------------------------------------------------------------------------------------- Total interest income 66,372 67,971 133,159 136,834 - ---------------------------------------------------------------------------------------------------- Interest expense: Interest on deposits: Demand and savings deposits 1,490 2,288 3,013 4,640 - ---------------------------------------------------------------------------------------------------- Time deposits 8,068 10,541 16,578 21,741 - ---------------------------------------------------------------------------------------------------- Interest on borrowings: Short-term borrowings 1,505 702 2,597 1,188 - ---------------------------------------------------------------------------------------------------- Long-term debt 2,787 2,844 5,833 5,464 - ---------------------------------------------------------------------------------------------------- Total interest expense 13,850 16,375 28,021 33,033 - ---------------------------------------------------------------------------------------------------- Net interest income 52,522 51,596 105,138 103,801 - ---------------------------------------------------------------------------------------------------- Provision for loan losses 1,905 2,836 3,370 6,269 - ---------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 50,617 48,760 101,768 97,532 - ---------------------------------------------------------------------------------------------------- Other income 14,046 17,400 26,918 32,855 - ---------------------------------------------------------------------------------------------------- Gain (loss) on sale of securities - 321 106 (913) - ----------------------------------------------------------------------------------------------------
Continued SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 PARK NATIONAL CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED) (CONTINUED) (dollars in thousands, except per share data)
Three Months Ended Six Months Ended June 30, June 30, - -------------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 - -------------------------------------------------------------------------------------------------------------- Other expense: Salaries and employee benefits $ 17,096 $ 16,517 $ 35,244 $ 34,053 - -------------------------------------------------------------------------------------------------------------- Occupancy expense 1,735 1,671 3,464 3,403 - -------------------------------------------------------------------------------------------------------------- Furniture and equipment expense 1,484 1,600 3,065 3,227 - -------------------------------------------------------------------------------------------------------------- Other expense 9,980 10,702 20,047 19,876 - -------------------------------------------------------------------------------------------------------------- Total other expense 30,295 30,490 61,820 60,559 - -------------------------------------------------------------------------------------------------------------- Income before federal income taxes 34,368 35,991 66,972 68,915 - -------------------------------------------------------------------------------------------------------------- Federal income taxes 10,283 10,868 19,909 20,626 - -------------------------------------------------------------------------------------------------------------- Net income $ 24,085 $ 25,123 $ 47,063 $ 48,289 ============================================================================================================== PER SHARE: Net income: Basic $ 1.76 $ 1.83 $ 3.43 $ 3.51 - -------------------------------------------------------------------------------------------------------------- Diluted $ 1.75 $ 1.81 $ 3.41 $ 3.49 ============================================================================================================== Weighted average Basic 13,658,212 13,761,117 13,707,153 13,770,973 Diluted 13,781,626 13,842,161 13,820,822 13,833,412 ============================================================================================================== Cash dividends declared $ 0.88 $ 0.83 $ 1.76 $ 1.66 ==============================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 PARK NATIONAL CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) (dollars in thousands, except share data)
Accumulated SIX MONTHS ENDED JUNE 30, 2004 AND 2003 Treasury Other Common Retained Stock Comprehensive Comprehensive Stock Earnings at Cost Income Income - --------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2002 $105,768 $446,300 ($ 65,194) $22,418 - --------------------------------------------------------------------------------------------------------------------------- Net Income 48,289 $ 48,289 - --------------------------------------------------------------------------------------------------------------------------- Accumulated other comprehensive income, Reverse additional minimum liability for pension plan, net of taxes $860 1,598 - --------------------------------------------------------------------------------------------------------------------------- Unrealized net holding gain on securities available-for-sale, net of taxes $2,966 5,508 7,106 - --------------------------------------------------------------------------------------------------------------------------- Total comprehensive income $ 55,395 - --------------------------------------------------------------------------------------------------------------------------- Cash dividends on common stock: Park at $1.66 per share (22,846) - --------------------------------------------------------------------------------------------------------------------------- Shares issued for stock options - 1,924 shares 68 - --------------------------------------------------------------------------------------------------------------------------- Tax benefit from exercise of stock options 62 - --------------------------------------------------------------------------------------------------------------------------- Treasury stock purchased - 74,467 shares (7,275) - --------------------------------------------------------------------------------------------------------------------------- Treasury stock reissued for exercise of stock options - 41,137 shares 3,526 - --------------------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 2003 $105,898 $471,743 ($ 68,943) $29,524 =========================================================================================================================== BALANCE AT DECEMBER 31, 2003 $105,895 $486,769 ($ 68,577) $18,954 - --------------------------------------------------------------------------------------------------------------------------- Net Income $ 47,063 $ 47,063 - --------------------------------------------------------------------------------------------------------------------------- Accumulated other comprehensive income, net of tax: - --------------------------------------------------------------------------------------------------------------------------- Unrealized net holding loss on securities available-for-sale, net of taxes ($16,367) (30,403) (30,403) - --------------------------------------------------------------------------------------------------------------------------- Total comprehensive income $ 16,660 - --------------------------------------------------------------------------------------------------------------------------- Cash dividends on common stock: Park at $1.76 per share (24,126) - --------------------------------------------------------------------------------------------------------------------------- Shares issued for stock options - 1,303 shares 46 - --------------------------------------------------------------------------------------------------------------------------- Tax benefit from exercise of stock options 57 - --------------------------------------------------------------------------------------------------------------------------- Cash paid for fractional shares - 24 shares (3) - --------------------------------------------------------------------------------------------------------------------------- Treasury stock purchased - 204,458 shares (23,699) - --------------------------------------------------------------------------------------------------------------------------- Treasury stock reissued for exercise of stock options - 41,064 shares 3,771 - --------------------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 2004 $105,995 $509,706 ($ 88,505) ($11,449) - ---------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 PARK NATIONAL CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands)
Six Months Ended June 30, -------------------------- 2004 2003 - ----------------------------------------------------------------------------------------- Operating activities: Net income $ 47,063 $ 48,289 - ----------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, accretion, and amortization 572 (3,946) - ----------------------------------------------------------------------------------------- Provision for loan losses 3,370 6,269 - ----------------------------------------------------------------------------------------- Amortization of the excess of cost over net assets of banks purchased 740 1,165 - ----------------------------------------------------------------------------------------- Realized investment security (gains) losses (106) 913 - ----------------------------------------------------------------------------------------- Changes in assets and liabilities: (Increase) decrease in other assets (6,155) 1,988 - ----------------------------------------------------------------------------------------- (Decrease) increase in other liabilities (4,774) 10,379 - ----------------------------------------------------------------------------------------- Net cash provided from operating activities 40,710 65,057 ------------------------------------------------------------------------------ Investing activities: Proceeds from sales of: Available-for-sale securities 429 149,087 - ----------------------------------------------------------------------------------------- Proceeds from maturity of: Available-for-sale securities 221,766 1,738,644 - ----------------------------------------------------------------------------------------- Held-to-maturity securities 39,081 480,521 - ----------------------------------------------------------------------------------------- Purchases of: Available-for-sale securities (249,424) (2,353,293) - ----------------------------------------------------------------------------------------- Held-to-maturity securities (9,697) (341,656) - ----------------------------------------------------------------------------------------- Net increase in securities purchased under resale agreements 0 (175,000) - ----------------------------------------------------------------------------------------- Net (increase) decrease in loans (73,703) 1,420 - ----------------------------------------------------------------------------------------- Purchases of premises and equipment, net (1,770) (2,180) - ----------------------------------------------------------------------------------------- Net cash used by investing activities (73,318) (502,457) -------------------------------------------------------------------------
Continued 7 PARK NATIONAL CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED) (dollars in thousands)
Six Months Ended June 30, ---------------------- 2004 2003 - ------------------------------------------------------------------------------------------ Financing activities: Net increase in deposits $ 102,304 $ 40,035 - ------------------------------------------------------------------------------------------ Net (decrease) increase in short-term borrowings (40,447) 315,816 - ------------------------------------------------------------------------------------------ Cash paid for fractional shares (3) - - ------------------------------------------------------------------------------------------ Exercise of stock options 103 130 - ------------------------------------------------------------------------------------------ Purchase of treasury stock, net (19,928) (3,749) - ------------------------------------------------------------------------------------------ Long-term debt issued 62,182 175,000 - ------------------------------------------------------------------------------------------ Repayment of long-term debt (40,065) (1,244) - ------------------------------------------------------------------------------------------ Cash dividends paid (36,257) (34,309) - ------------------------------------------------------------------------------------------ Net cash provided from financing activities 27,889 491,679 -------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (4,719) 54,279 -------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 169,782 238,788 -------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 165,063 $ 293,067 -------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid for: Interest $ 28,947 $ 33,977 ----------------------------------------------------------- Income taxes $ 19,750 $ 16,000 -----------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8 PARK NATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Three and Six Month Periods Ended June 30, 2004 and 2003. Note 1 - Basis of Presentation The consolidated financial statements included in this report have been prepared by Park National Corporation (the "Registrant", "Corporation", "Company", or "Park") without audit. In the opinion of management, all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation of results of operations for the interim periods included herein have been made. The results of operations for the periods ended June 30, 2004 are not necessarily indicative of the operating results to be anticipated for the fiscal year ended December 31, 2004. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q, and therefore, do not include all information and footnotes necessary for a fair presentation of the condensed balance sheets, condensed statements of income, condensed statements of changes in stockholders' equity and condensed statements of cash flows in conformity with generally accepted accounting principles. These financial statements should be read in conjunction with the financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2003. Park does not have any off-balance sheet derivative financial instruments such as interest-rate swap agreements. Note 2 - Intangible Assets In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the standards, goodwill and indefinite lived intangible assets are no longer amortized and are subject to annual impairment tests. Other intangible assets, such as core deposit intangibles, continue to be amortized over their useful lives. Park had approximately $7.53 million of goodwill included in other assets at June 30, 2004 and December 31, 2003. This goodwill was evaluated for impairment during the first quarter of each of 2003 and 2004 and a determination made that the goodwill was not impaired and that the book value of the goodwill would continue to be shown as $7.53 million. No amortization expense is being recorded on the goodwill in 2004 and none was recorded in 2003. Park also had core deposit intangibles included in other assets of $4.69 million at June 30, 2004 and $5.43 million at December 31, 2003. The core deposit intangibles are being amortized to expense, principally on the straight-line method, over periods ranging from six to eight years. Core deposit amortization expense was $370,000 for the second quarter of 2004 and $582,500 for the second quarter of 2003 and was $740,000 for the first six months of 2004 compared to $1,165,000 for the first half of 2003. -9- Note 3- Allowance for Loan Losses The allowance for loan losses is that amount believed adequate to absorb estimated credit losses in the loan portfolio based on management's evaluation of various factors including overall growth in the loan portfolio, an analysis of individual loans, prior and current loss experience, and current economic conditions. A provision for loan losses is charged to operations based on management's periodic evaluation of these and other pertinent factors.
(In Thousands) --------------- Three Months Ended, Six Months Ended, June 30, June 30, -------------------------- ------------------------ 2004 2003 2004 2003 Beginning of Period $63,934 $64,062 $63,142 $62,028 Provision for Loan Losses 1,905 2,836 3,370 6,269 Losses Charged to the Reserve <3,465> <3,328> <5,813> <6,182> Recoveries 1,716 1,955 3,391 3,410 End of Period $64,090 $65,525 $64,090 $65,525
Note 4 - Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share for the three and six month periods ended June 30, 2004 and 2003. (Dollars in Thousands, except per share data)
Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 2004 2003 2004 2003 Numerator: Net Income $ 24,085 $ 25,123 $ 47,063 $ 48,289 Denominator: Denominator for basic earnings per share (weighted-average shares) 13,658,212 13,761,117 13,707,153 13,770,973 Effect of dilutive securities 123,414 81,044 113,669 62,439 Denominator for diluted earnings per share (adjusted weighted-average shares & assumed) 13,781,626 13,842,161 13,820,822 13,833,412 Earnings per Share: Basic earnings per share $ 1.76 $ 1.83 $ 3.43 $ 3.51 Diluted earnings per share $ 1.75 $ 1.81 $ 3.41 $ 3.49
-10- Note 5 - Segment Information The Corporation is a multi-bank holding company headquartered in Newark, Ohio. The operating segments for the Corporation are its financial institution subsidiaries. The Corporation's financial institution subsidiaries are The Park National Bank (PNB), The Richland Trust Company (RTC), Century National Bank (CNB), The First-Knox National Bank of Mount Vernon (FKNB), United Bank N.A. (UB), Second National Bank (SNB), The Security National Bank and Trust Co. (SEC), and The Citizens National Bank of Urbana (CIT). Operating Results for the Three Months Ended June 30, 2004 (In Thousands)
All PNB RTC CNB FKNB UB SNB SEC CIT Other TOTAL --- --- --- ---- -- --- --- --- ----- ----- Net Interest Income $ 15,706 $ 5,361 $ 4,900 $ 8,070 $ 2,615 $ 3,872 $ 7,595 $ 1,853 $ 2,550 $ 52,522 Provision for Loan Losses 350 105 105 820 140 (10) 135 110 150 1,905 Other Income 5,889 1,302 1,350 1,701 449 591 2,193 378 193 14,046 Other Expense 9,166 2,626 2,940 4,054 1,475 1,793 4,898 1,138 2,205 30,295 Net Income 8,170 2,641 2,141 3,279 976 1,840 3,196 662 1,180 24,085 Balances at June 30 2004 Assets $1,639,183 $574,173 $ 526,525 $ 734,429 $ 242,343 $387,836 $ 897,275 $205,482 $(132,515) $5,074,731
Operating Results for the Three Months Ended June 30, 2003 (In Thousands)
All PNB RTC CNB FKNB UB SNB SEC CIT Other TOTAL --- --- --- ---- -- --- --- --- ----- ----- Net Interest Income $ 15,317 $ 5,469 $ 4,917 $ 7,915 $ 2,274 $ 3,488 $ 8,256 $ 1,739 $ 2,221 $ 51,596 Provision for Loan Losses 1,080 30 225 666 90 150 405 90 100 2,836 Other Income 7,632 1,497 1,729 1,854 729 902 2,746 461 171 17,721 Other Expense 9,246 2,483 2,736 4,053 1,462 1,790 4,716 1,090 2,914 30,490 Net Income $ 8,593 $ 2,930 $ 2,452 $ 3,450 $ 993 $ 1,705 $ 3,978 $ 689 $ 333 $ 25,123 Balances at June Assets $1,728,360 $528,387 $ 456,042 $ 746,119 $ 231,527 $371,082 $ 865,449 $173,699 $ (98,185) $5,002,480
Operating Results for the Six Months Ended June 30, 2004 (In Thousands)
All PNB RTC CNB FKNB UB SNB SEC CIT Other TOTAL --- --- --- ---- -- --- --- --- ----- ----- Net Interest Income $ 31,509 $ 10,745 $ 9,695 $ 16,028 $ 5,097 $ 7,738 $ 15,617 $ 3,726 $ 4,983 $ 105,138 Provision for Loan Losses 1,145 285 105 1,015 140 30 220 110 320 3,370 Other Income 11,038 2,461 2,774 3,394 909 1,108 4,124 746 470 27,024 Other Expense 18,509 5,727 5,949 8,187 3,014 3,876 9,965 2,271 4,322 61,820 Net Income $ 15,510 $ 4,834 $ 4,292 $ 6,862 $ 1,924 $ 3,412 $ 6,430 $ 1,412 $ 2,387 $ 47,063
Operating Results for the Six Months Ended June 30, 2003 (In Thousands)
All PNB RTC CNB FKNB UB SNB SEC CIT Other TOTAL --- --- --- ---- -- --- --- --- ----- ----- Net Interest Income $ 31,340 $ 11,027 $ 9,865 $ 15,751 $ 4,579 $ 7,024 $ 16,709 $ 3,361 $ 4,145 $103,801 Provision for Loan Losses 2,460 360 450 1,332 180 300 810 180 197 6,269 Other Income 13,903 2,690 3,174 3,306 1,295 1,486 4,916 851 321 31,942 Other Expense 18,563 5,080 5,600 8,074 2,942 3,662 9,739 2,238 4,661 60,559 Net Income $ 16,453 $ 5,450 $ 4,658 $ 6,605 $ 1,895 $ 3,183 $ 7,477 $ 1,219 $ 1,349 $ 48,289
-11- The operating results of the Parent Company and Guardian Finance Company (GFC) in the All Other column are used to reconcile the segment totals to the consolidated income statements for the periods ended June 30, 2004 and 2003. The reconciling amounts for consolidated total assets for both of the quarters ended June 30, 2004 and 2003 consist of the elimination of intersegment borrowings, and the assets of the Parent Company and GFC which are not eliminated. Note 6 - Stock Option Plan Park accounts for its incentive stock option plan under the recognition and measurement principles provided in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations. Under APB 25, because the exercise price of Park's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", as amended by SFAS 148, requires pro forma disclosures of net income and earnings per share for companies not adopting its fair value accounting method for stock-based employee compensation. The pro-forma disclosures below use the fair value method of SFAS 123 to measure compensation expense for stock-based employee compensation plans. (Dollars in thousands, except per share data)
Three Months Ended Six Months Ended June 30, June 30, -------- -------- 2004 2003 2004 2003 ---- ---- ---- ---- Net income as reported $ 24,085 $ 25,123 $ 47,063 $ 48,289 Deduct: Total stock-based employee compensation expense determined under fair value method, net of related tax effects (2,209) (1,706) (2,335) (1,812) Pro forma net income $ 21,876 $ 23,417 $ 44,728 $ 46,477 Basic earnings per share as reported $ 1.76 $ 1.83 $ 3.43 $ 3.51 Pro forma basic earnings per share $ 1.60 $ 1.70 $ 3.26 $ 3.37 Diluted earnings per share as reported $ 1.75 $ 1.81 $ 3.41 $ 3.49 Pro forma diluted earnings per share $ 1.59 $ 1.69 $ 3.24 $ 3.36
-12- Note 7 - Pending Acquisition On August 3, 2004, Park National Corporation ("Park") and First Federal Bancorp, Inc. ("First Federal") of Zanesville, Ohio jointly announced the signing of a definitive agreement and plan of merger. This merger agreement will result in the acquisition of First Federal by Park through the merger of a newly-formed subsidiary of Park with and into First Federal in an all cash transaction, immediately followed by the merger of the surviving corporation into Park. The merger transactions are anticipated to be completed in the fourth quarter of 2004, and require the approval of appropriate regulatory authorities and of the shareholders of First Federal. Under the terms of the merger agreement, shareholders of First Federal will receive cash in the amount of $13.25 per share for each common share of First Federal outstanding immediately prior to the closing. Each outstanding option granted under a First Federal stock option plan will be cancelled and extinguished and converted into the right to receive an amount of cash equal to the product of (1) (a) $13.25 minus (b) the exercise price of the option, multiplied by (2) the number of First Federal common shares subject to the unexercised portion of the option. As of August 3, 2004, First Federal had 3,286,221 common shares outstanding and options covering an aggregate of 335,925 common shares with a weighted average exercise price of $6.12 per share. Following completion of the merger transactions described above, First Federal Savings Bank of Eastern Ohio, which is currently a subsidiary of First Federal, will merge into Century National Bank, a subsidiary of Park. First Federal had $258 million of total assets and $23 million of stockholders' equity at June 30, 2004. The parent company of Park National Corporation will not need to secure any outside borrowings to pay for the acquisition. Funding for the acquisition is available from the affiliate banks. -13- ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance. The forward-looking statements are based on management's expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation, Park's ability to execute its business plan, changes in general economic and financial market conditions, changes in banking regulations or other regulatory or legislative requirements affecting bank holding companies and changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date hereof. Park does not undertake any obligation to publicly update any forward-looking statement except to the extent required by law. Critical Accounting Policies Note 1 of the Notes to Consolidated Financial Statements included in Park's 2003 Annual Report lists significant accounting policies used in the development and presentation of its financial statements. The accounting and reporting policies of Park conform with U. S. generally accepted accounting principles. The preparation of financial statements in conformity with U. S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. Park considers that the determination of the allowance for loan losses involves a higher degree of judgement and complexity than its other significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses in the loan portfolio. Management's determination of the adequacy of the allowance for loan losses is based on periodic evaluations of the loan portfolio and of current economic conditions. However, this evaluation is inherently subjective as it requires material estimates, including expected default probabilities, loss from default, expected commitment usage, the amounts and timing of expected future cash flows on impaired loans, and estimated losses on consumer loans and residential mortgage loans based on historical loss experience and the current economic conditions. All of those factors may be susceptible to significant change. To the extent that actual results differ from management estimates, additional loan loss provisions may be required that would adversely impact earnings for future periods. -14- Comparison of Results of Operations For the Three and Six Month Periods Ended June 30, 2004 and 2003 Summary Discussion of Results Net income decreased by $1.0 million or 4.1% to $24.1 million for the three months ended June 30, 2004 compared to $25.1 million for the same period in 2003. For the first half of 2004, net income decreased by $1.2 million or 2.5% to $47.1 million compared to $48.3 million for the same period in 2003. The annualized, net income to average asset ratio (ROA) was 1.92% for the second quarter of 2004 and 1.89% for the first half of 2004, compared to 2.01% for the second quarter of 2003 and 1.98% for the first six months of 2003. The annualized, net income to average equity ratio (ROE) was 18.26% for the second quarter of 2004 and 17.63% for the first half of 2004, compared to 19.37% for the second quarter of 2003 and 18.97% for the first half of 2003. Diluted earnings per share decreased by 3.3% to $1.75 for the second quarter of 2004 and decreased by 2.3% to $3.41 for the first half of 2004. The decrease in net income for both the three and six month periods ended June 30, 2004 was primarily due to the large decrease in total Other Income. Total Other Income decreased by $3.35 million or 19.3% to $14.05 million for the three months ended June 30, 2004 and decreased by $5.94 million or 18.1% to $26.92 million for the six months ended June 30, 2004. The large decrease for both periods was primarily due to the decrease in fee income earned from the origination and sale of fixed rate mortgage loans. Fixed rate mortgage loans totaling approximately $500 million were originated and sold during the first half of 2003 compared to approximately $130 million for the first half of 2004. Many mortgage loan customers took advantage of the low long-term interest rates during the first half of 2003 and refinanced their mortgage loan. The absence of the extraordinary large volume of fixed rate mortgage loan originations during the first half of 2004 accounts for the large decrease in total Other Income. Management expects that the amount of total Other Income generated during the first half of 2004 of $26.92 million would approximate the results for the second half of 2004. Net Interest Income Comparison for the Second Quarter of 2004 and 2003 Park's principal source of earnings is net interest income, the difference between total interest income and total interest expense. Net interest income was $52.5 million for the second quarter of 2004 and $51.6 million in 2003. The following table compares the average balance and tax equivalent yield/cost for interest earning assets and interest bearing liabilities for the second quarter of 2004 with the same quarter in 2003. -15- Three Months Ended June 30, (In Thousands)
2004 2003 Average Tax Average Tax Balance Equivalent Balance Equivalent % % ------- ---------- ------- ---------- Loans $2,791,973 6.26% $2,684,883 6.99% Taxable Investments 1,806,721 4.83% 1,754,466 4.45% Tax Exempt Investments 108,107 7.25% 128,931 7.28% Federal Funds Sold and Securities Purchased under Resale Agreements 12,621 1.10% 124,043 1.15% Interest Earning Assets $4,719,422 5.72% $4,692,323 5.89% Interest Bearing Deposits $2,931,331 1.31% $2,915,687 1.76% Short-term Borrowings 436,192 1.12% 676,099 .42% Long-term Debt 507,504 2.44% 334,573 3.41% Interest Bearing Liabilities $3,875,027 1.44% $3,926,359 1.67% Excess Interest Earning Assets $ 844,395 4.28% $ 765,964 4.22% Net Interest Margin 4.54% 4.49%
Average interest earning assets increased by $27.1 million or .6% to $4,719 million for the quarter ended June 30, 2004 compared to the same quarter in 2003. The average yield on interest earning assets decreased to 5.72% for the second quarter of 2004 compared to 5.89% for the second quarter of 2003. Average loan totals increased by $107.1 million or 4.0% to $2,792 million for the second quarter of 2004 compared to the same period in 2003. At June 30, 2004, total loans were $2,804 million compared to $2,731 million at December 31, 2003, an increase of $73 million or 2.7%. Total loans increased by $39 million or 1.4% for the year 2003 and decreased by $104 million or 3.7% for the year 2002 and decreased by $160 million or 5.4% for the year 2001. The demand for commercial and commercial real estate loans continued to improve during the second quarter of 2004. Management anticipates that total loans will continue to increase throughout the remainder of 2004 as the economy continues to improve. The average yield on the loan portfolio was 6.26% for the second quarter of 2004 compared to 6.99% for the same period in 2003. The average prime lending rate was 4.00% for the second quarter of 2004 compared to 4.25% for the second quarter of 2003. Approximately 25% of Park's loan portfolio reprices based on the prime lending rate. The Federal Reserve increased the federal funds rate by ..25% to 1.25% on June 30, 2004. The Federal Reserve is expected to continue to increase the federal funds rate during the second half of 2004 at a measured pace. The prime lending rate increased to 4.25% in July 2004 and is expected to increase during the second half of 2004 as a result of the expected increases in the federal funds rate. Management expects that the average yield on loans will increase during the second half of 2004. Average investment securities, including federal funds sold, decreased by $80 million or 4.0% to $1,927 million for the second quarter of 2004. During the second quarter of 2003, average investment securities included on average $442 million of short-term investments that were used to arbitrage short-term dollar-roll repo borrowings. Exclusive of the short-term arbitrage in 2003, average investment securities increased by $362 million or 23.1% in 2004 compared to 2003. -16- The average yield on taxable investment securities was 4.83% for the second quarter of 2004 compared to 4.45% for the second quarter of 2003. The average yield on taxable securities was lower in 2003 due to the short-term investments that were used to arbitrage the short-term dollar-roll repo borrowings in 2003. The tax equivalent yield on tax exempt investment securities was 7.25% for the second quarter of 2004 compared to 7.28% for the same period in 2003. No tax exempt investment securities were purchased during the past year. At June 30, 2004, the tax equivalent yield on the total investment portfolio was 4.96% and the average maturity was 4.9 years. U.S. Government Agency asset-backed securities were approximately 90% of the total investment portfolio at the end of the second quarter of 2004. This segment of the investment portfolio consists of fifteen-year mortgage-backed securities and collateralized mortgage obligations, which are backed by fifteen-year mortgage-backed securities. The average maturity of the investment portfolio would lengthen if long-term interest rates would increase as the principal repayments from mortgage-backed securities and collateralized mortgage obligations would be reduced. Management estimates that the average maturity of the investment portfolio would lengthen to 5.4 years with a 1.00% increase in long-term interest rates and to 5.6 years with a 2.00% increase in long-term interest rates. Average interest bearing liabilities decreased by $51 million or 1.3% to $3,875 million for the three months ended June 30, 2004 compared to the same period in 2003. The average cost of interest bearing liabilities decreased by .23% to 1.44% for the second quarter of 2004 compared to 1.67% for the same period in 2003. Average interest bearing deposits increased by $16 million or .5% to $2,931 million for the three months ended June 30, 2004 compared to the same period in 2003. The average cost of interest bearing deposits decreased by .45% to 1.31% for the second quarter of 2004 compared to 1.76% for the same period in 2003. Management expects that the average cost of interest bearing deposits will slowly increase during the second half of 2004. Average short-term borrowings decreased by $240 million to $436 million for the second quarter of 2004 compared to the same quarter of 2003. The average cost of short-term borrowings increased to 1.12% for the second quarter of 2004 compared to .42% for the same quarter in 2003. The decrease in the average balance of short-term borrowings was due to the absence of dollar-roll repo borrowings in 2004. The dollar-roll repo borrowings averaged $442 million for the second quarter of 2003 at an average cost of 0%. Excluding the dollar-roll repo borrowings from short-term borrowings in 2003 would have increased the average cost of short-term borrowings to 1.21%, which is slightly higher than the average cost of 1.12% for the second quarter of 2004. Average long-term borrowings increased by $173 million to $508 million for the second quarter of 2004 compared to the same period of 2003. The average cost of long-term borrowings decreased to 2.44% for the second quarter of 2004 compared to 3.41% for the same period last year. The additional average long-term borrowings in 2004 are priced on a variable rate basis and the borrowing cost changes monthly based on short-term money market rates. -17- Net interest income increased by $926,000 or 1.8% to $52.5 million for the second quarter of 2004 compared to $51.6 million for the same period of 2003. The net interest spread (the difference between the yield on interest earning assets and the cost of interest bearing liabilities) increased by .06% to 4.28% in 2004 compared to 4.22% in 2003. The tax equivalent net interest margin (defined as net interest income divided by average interest earning assets) increased by .05% to 4.54% in 2004 compared to 4.49% in 2003. The following table compares net interest income, the net interest margin, average interest earning assets, average interest bearing liabilities and average excess interest earning assets for the past five quarters. Three Months Ended (Dollars in Thousands)
June 30, March 31, December 31, September 30, June 30, 2004 2004 2003 2003 2003 ---- ---- ---- ---- ---- Net Interest Income $ 52,522 $ 52,616 $ 49,486 $ 49,350 $ 51,596 Net Interest Margin 4.54% 4.61% 4.49% 4.58% 4.49% Interest Earning Assets $4,719,422 $4,657,129 $4,452,153 $4,354,669 $4,692,323 Interest Bearing Liabilities $3,875,027 $3,817,747 $3,607,913 $3,548,607 $3,926,359 Excess Interest Earning Assets $ 844,395 $ 839,382 $ 844,240 $ 806,062 $ 765,964
Management expects that net interest income for the year 2004 will exceed net interest income for 2003 of $202.6 million by approximately 5%. This projection is dependent upon total loans and deposits increasing throughout the remainder of 2004 at the same growth rate that was achieved during the first half of 2004. This projection also assumes that interest rates will remain relatively stable. Management expects that an increase in interest rates will slightly improve the performance of net interest income and that a decrease in interest rates will slightly reduce the level of net interest income. -18- Net Interest Income Comparison for the First Half of 2004 and 2003 Net interest income increased by $1.3 million or 1.3% to $105.1 million for the six months ended June 30, 2004 compared to $103.8 million for the first half of 2003. The following table compares the average balance and tax equivalent yield/cost for interest earning assets and interest bearing liabilities for the first six months of 2004 with the same period in 2003. Six Months Ended June 30, (In Thousands)
2004 2003 Average Tax Average Tax Balance Equivalent Balance Equivalent ------- ---------- ------- ---------- % % Loans $2,768,048 6.34% $2,680,318 7.07% Taxable Investments 1,801,827 4.86% 1,696,630 4.72% Tax Exempt Investments 109,665 7.27% 130,780 7.29% Federal Funds Sold and Securities Purchased under Resale Agreements 8,732 1.19% 73,148 1.22% Interest Earning Assets $4,688,272 5.78% $4,580,876 6.11% Interest Bearing Deposits $2,929,244 1.34% $2,905,772 1.83% Short-term Borrowing 419,903 1.24% 612,080 .39% Long-term Debt 497,240 2.36% 303,408 3.63% Interest Bearing Liabilities $3,846,387 1.47% $3,821,260 1.74% Excess Interest Earning Assets $841,885 4.31% $759,616 4.37% Net Interest Margin 4.58% 4.66%
Average interest earning assets increased by $107 million or 2.3% to $4,688 million for the six months ended June 30, 2004 compared to the same period in 2003. The average yield on interest earning assets decreased to 5.78% for the first half of 2004 compared to 6.11% for the same period in 2003. Average loans increased by $88 million or 3.3% to $2,768 million for the first half of 2004 compared to the first six months of 2003. The average yield on loans decreased to 6.34% for the first half of 2004 compared to 7.07% for the same period in 2003. The average prime lending rate was 4.00% for the first half of 2004 and 4.25% for the first six months of 2003. Average investment securities, including federal funds sold and securities purchased under resale agreements, increased by $20 million or 1.0% to $1,920 million for the first half of 2004 compared to the same period in 2003. The yield on taxable investment securities was 4.86% for the six months ended June 30, 2004 compared to 4.72% for the same period in 2003. Average interest bearing liabilities increased by $25 million or .7% to $3,846 million for the first half of 2004 compared to the same period in 2003. Average interest bearing deposits increased by $23 million or .8% to $2,929 million for the first six months of 2004 compared to the same period in 2003. The average cost of interest bearing deposits decreased to 1.34% for the first half of 2004 compared to 1.83% for the first half of 2003. -19- Average short-term borrowings decreased by $192 million to $420 million for the first half of 2004 compared to $612 million for the same period in 2003. The average cost of short-term borrowings increased to 1.24% for the first half of 2004 compared to .39% for the same period in 2003. The decrease in the average balance of short-term borrowings was due to the absence of dollar-roll repo borrowings in 2004. The dollar-roll repo borrowings averaged $365 million for the first half of 2003 at an average cost of a negative .17%. Park did not have any dollar-roll repo borrowings in the first half of 2004. Average long-term borrowings were $497 million for the first six months of 2004 compared to $303 million for the first half of 2003. The average cost of long-term borrowings decreased to 2.36% for the first six months of 2004 compared to 3.63% for the same period in 2003. The additional average long-term borrowings in 2004 are priced on a variable rate basis and the borrowing cost changes monthly based on short-term money market rates. Provision for Loan Losses The provision for loan losses was $1.9 million and $3.4 million, respectively, for the second quarter and first half of 2004 compared to $2.8 million and $6.3 million for the same periods in 2003. Net loan charge-offs were $1.7 million and $2.4 million, respectively, for the three and six months periods ended June 30, 2004 compared to $1.4 million and $2.8 million for the same periods in 2003. Nonperforming loans defined as loans that are 90 days or more past due, renegotiated loans, and nonaccrual loans were $24.0 million or .86% of loans at June 30, 2004 compared to $25.7 million or .94% of loans at December 31, 2003 and $28.1 million or 1.04% of loans at June 30, 2003. The reserve for loan losses as a percentage of outstanding loans was 2.29% at June 30, 2004 compared to 2.31% at December 31, 2003 and 2.44% at June 30, 2003. See Note 3 of the Notes to Consolidated Financial statements for a discussion of the factors considered by management in determining the provision for loan losses. Total Other Income Total other income decreased by $3.4 million or 19.3% to $14.0 million for the three months ended June 30, 2004 and decreased by $5.9 million or 18.1% to $26.9 million for the six months ended June 30, 2004 compared to the same periods in 2003. The following table is a summary of the change in total other income.
(In Thousands) Three Months Ended Six Months Ended June 30, June 30, -------------------- ------------------ 2004 2003 Change 2004 2003 Change ---- ---- ------ ---- ---- ------ Fees from Fiduciary Activities $ 2,819 $ 2,446 $ 373 $ 5,542 $ 4,860 $ 682 Service Charges on Deposit Accounts 3,970 3,597 373 7,546 7,009 537 Other Service Income 2,811 7,280 (4,469) 5,463 12,865 (7,402) Other Income 4,446 4,077 369 8,367 8,121 246 Total $14,046 $17,400 ($3,354) $26,918 $32,855 ($5,937)
-20- The large decrease in fees earned from Other Service Income for both the second quarter of 2004 and the first six months of 2004 is due to the decrease in fee income earned from the origination and sale into the secondary market of fixed rate mortgage loans. Park originated and sold approximately $130 million of fixed rate mortgage loans during the first six months of 2004 compared to approximately $500 million for the first six months of 2003. Gain (Loss) on Sale of Securities A gain on the sale of investment securities of $106,000 was realized during the first quarter of 2004. The gain was from the sale of some equity investments. There were no sales of securities during the second quarter of 2004. A gain on the sale of investment securities of $321,000 was realized during the second quarter of 2003 due to the sale of $50 million of U.S. Agency Notes. During the first quarter of 2003, a loss of $1.2 million was realized from the sale of $100 million of U.S. Agency collateralized mortgage obligations. Other Expense Total other expense decreased by $195,000 or .6% to $30.3 million for the three months ended June 30, 2004 compared to $30.5 million for the second quarter of 2003. Salaries and employee benefits expense increased by $579,000 or 3.5% to $17.1 million for the second quarter of 2004 compared to $16.5 million for the second quarter of 2003. Equipment expense decreased by $116,000 or 7.3% for the second quarter of 2004 compared to the same period in 2003. This decrease was primarily due to a decrease in the depreciation expense on equipment as some equipment has become fully depreciated this year. The subcategory other expense decreased by $722,000 or 6.7% to $10.0 million for the quarter ended June 30, 2004 compared to $10.7 million for the second quarter of 2003. This decrease was primarily due to a decrease in charitable contribution expense of $909,000 to $15,000 for the second quarter of 2004 compared to $924,000 for the same period in 2003. For the entire year of 2003, charitable contribution expense was $984,000 compared to $703,000 for all of 2002. For the first half of 2004, charitable contribution expense was $31,000. Management expects that charitable contribution expense for the second half of 2004 would be approximately $500,000. Total other expense increased by $1.3 million or 2.1% to $61.8 million for the first six months of 2004 compared to the same period in 2003. Salaries and employee benefits expense increased by $1.2 million or 3.5% to $35.2 million for the fist half of 2004 compared to the first six months of 2003. Full time equivalent employees were 1,669 at June 30, 2004 compared to 1,629 at June 30, 2003. -21- Federal Income Taxes Federal income tax expense was $10.3 million and $19.9 million, respectively, for the three and six months periods ended June 30, 2004 compared to $10.9 million and $20.6 million for the same periods in 2003. The ratio of federal income tax expense to income before taxes was 29.9% for the three months ended June 30, 2004 and 29.7% for the six months ended June 30, 2004 compared to 30.2% for the second quarter of 2003 and 29.9% for the first half of 2003. The statutory federal income tax rate was 35% for both 2004 and 2003. The difference between the effective federal income tax rate and statutory rate is primarily due to tax-exempt interest income and low income housing tax credits. -22- COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2004 AND DECEMBER 31, 2003 Changes in Financial Condition and Liquidity Total assets increased by $40 million or .8% to $5,075 million at June 30, 2004 compared to $5,035 million at December 31, 2003. Total loans increased by $73 million or 2.7% to $2,804 million at June 30, 2004 as the demand for commercial and commercial real estate loans continued to improve during the first half of 2004. Management expects that loans will continue to grow at about the same pace during the second half of the year. Investment securities decreased by $48 million or 2.4% during the first half of 2004. The net unrealized gain on available-for-sale securities was $29.2 million at December 31, 2003 compared to a net unrealized loss on available-for-sale securities of $17.6 million at June 30, 2004. Purchases of investment securities totaled $259 million for the first six months of 2004 compared to proceeds from the maturity and repayment of investment securities of $260 million. Management expects that the purchase of investment securities during the second half of 2004 will approximate the proceeds received from maturities, repayments and sales of investment securities. Total liabilities increased by $67 million or 1.5% to $4,559 million at June 30, 2004 compared to $4,492 million at December 31, 2003. Total deposits increased by $102 million or 3.0% to $3,517 million at June 30, 2004. Total borrowed money decreased by $18 million or 1.8% to $984 million at June 30, 2004. Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as the operating cash needs of the Corporation, are met. Funds are available from a number of sources, including the securities portfolio, the core deposit base, Federal Home Loan Bank borrowings, and the capability to securitize or package loans for sale. The Corporation's loan to asset ratio was 55.2% at June 30, 2004 compared to 54.2% at December 31, 2003 and 53.8% at June 30, 2003. Cash and cash equivalents totaled $165 million at June 30, 2004 compared to $170 million at December 31, 2003 and $293 million at June 30, 2003. The present funding sources provide more than adequate liquidity for the Corporation to meet its cash flow needs. Capital Resources Stockholders' equity at June 30, 2004 was $516 million or 10.16% of total assets compared to $543 million or 10.79% of total assets at December 31, 2003 and $538 million or 10.76% of total assets at June 30, 2003. The decrease in stockholders' equity in 2004 is due to an increase in treasury stock and a decrease in accumulated other comprehensive income, net of taxes. The number of shares of treasury stock has increased by 163,394 shares in 2004 and the carrying value of treasury stock has increased by $20 million to a negative $89 million at June 30, 2004 compared to a negative $69 million at December 31, 2003. The carrying value of accumulated other comprehensive income, net of taxes has decreased by $30 million in 2004 from an unrealized gain of $19 million at year-end 2003 to an unrealized loss of $11 million at June 30, 2004. -23- Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts, and bank holding companies. The net unrealized gain or loss on available-for-sale securities is generally not included in computing regulatory capital. The minimum leverage capital ratio (defined as stockholders' equity less intangible assets divided by tangible assets) is 4% and the well capitalized ratio is greater than or equal to 5%. Park's leverage ratio was 10.23% at June 30, 2004 and 10.79% at December 31, 2003. The minimum Tier I risk-based capital ratio (defined as leverage capital divided by risk-adjusted assets) is 4% and the well capitalized ratio is greater than or equal to 6%. Park's Tier I risk-based capital ratio was 16.23% at June 30, 2004 and 16.51% at December 31, 2003. The minimum total risk-based capital ratio (defined as leverage capital plus supplemental capital divided by risk-adjusted assets) is 8% and the well capitalized ratio is greater than or equal to 10%. Park's total risk-based capital ratio was 17.50% at June 30, 2004 and 17.78% at December 31, 2003. The financial institution subsidiaries of Park each met the well capitalized capital ratio guidelines at June 30, 2004. The following table indicates the capital ratios for each subsidiary and Park at June 30, 2004:
TIER I TOTAL LEVERAGE RISK-BASED RISK-BASED -------- ---------- ---------- Park National Bank 6.36% 9.70% 12.87% Richland Trust Company 6.37% 11.21% 12.47% Century National Bank 5.83% 10.49% 12.79% First-Knox National Bank 6.52% 10.07% 13.60% Second National Bank 6.03% 10.40% 13.87% United Bank, N.A. 6.08% 11.83% 13.09% Security National Bank 5.87% 9.38% 13.34% Citizens National Bank 6.26% 12.86% 17.64% Park National Corporation 10.23% 16.23% 17.50% Minimum Capital Ratio 4.00% 4.00% 8.00% Well Capitalized Ratio 5.00% 6.00% 10.00%
At the July 19, 2004 Park National Corporation Board of Directors' meeting, a cash dividend of $.88 per share was declared payable on September 10, 2004 to stockholders of record on August 24, 2004. In the ordinary course of operations, Park enters into certain contractual obligations. Such obligations include the funding of operations through debt issuances as well as leases for premises. See Page 32 of Park's 2003 Annual Report for disclosure concerning contractual obligations and commitments. There has not been a material change in contractual obligations or commitments since year-end 2003, except for the pending acquisition of First Federal Bancorp, Inc. On August 3, 2004, Park jointly announced with First Federal Bancorp, Inc. the signing of a definitive agreement and plan of merger. See Note 7 of the Notes to the Consolidated Financial Statements for information on the pending acquisition. Under the terms of the agreement, Park anticipates paying approximately $45.9 million in cash to the shareholders of First Federal. The parent company of Park will not need to arrange any outside borrowing to fund the purchase of First Federal, but intends to fund it through working capital. -24- ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Note 1 of the Notes to Consolidated Financial Statements for disclosure that Park does not have any off-balance sheet derivative financial instruments. Management reviews interest rate sensitivity on a quarterly basis by modeling the financial statements under various interest rate scenarios. The primary reason for these efforts is to guard Park from adverse impacts of unforeseen changes in interest rates. Management continues to believe that further changes in interest rates will have a small impact on net income, consistent with the disclosure on pages 31 and 32 of our 2003 Annual Report, which is incorporated by reference into our 2003 Form 10-K. ITEM 4 - CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES With the participation of the President and Chief Executive Officer (the principal executive officer) and the Chief Financial Officer (the principal financial officer) of Park, Park's management has evaluated the effectiveness of Park's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, Park's President and Chief Executive Officer and Park's Chief Financial Officer have concluded that: - - information required to be disclosed by Park in this Quarterly Report on Form 10-Q would be accumulated and communicated to Park's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure; - - information required to be disclosed by Park in this Quarterly Report on Form 10-Q would be recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms; and - - Park's disclosure controls and procedures are effective as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q to ensure that material information relating to Park and its consolidated subsidiaries is made known to them, particularly during the period in which this Quarterly Report on Form 10-Q is being prepared. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in Park's internal control over financial reporting (as defined in Rule 13 a - 15 (f) under the Exchange Act) that occurred during Park's fiscal quarter ended June 30, 2004, that have materially affected or are reasonably likely to materially affect, Park's internal control over financial reporting. -25- PARK NATIONAL CORPORATION PART II - OTHER INFORMATION Item 1. Legal Proceedings Park National Corporation and subsidiaries are not engaged in any legal proceedings of a material nature at the present time. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities (a.) Not applicable (b.) Not applicable (c.) Not applicable (d.) Not applicable (e.) The following table provides information regarding Park's purchases of its common shares during the three months ended June 30, 2004:
Total Number of Average Price Total Number of Common Shares Maximum Number of Common Common Shares Paid Per Common Purchased as Part of Publicity Shares that May Yer be Purchased Period Purchased Share Announced Plans or Programs under the Plans or Programs (1) April 1 thru April 30, 2004 41,996 $114.85 41,996 (2) 752,943 May 1 thru May 31, 2004 57,723 $115.07 57,723 (2) 712,869 June 1 thru June 30, 2004 37,901 $122.63 37,901 (2) 676,642
(1) The number shown represents, as of the end of each period, the maximum aggregate number of common shares that may yet be purchased as part of Park's publicly announced repurchase program to fund the Park National Corporation 1995 Incentive Stock Option Plan as well as Park's publicly announced stock repurchase program. On November 18, 2002, Park announced a stock repurchase program under which up to an aggregate of 500,000 common shares may be repurchased from time to time over the three year period ending November 17, 2005. These repurchases may be made in open market transactions or through privately negotiated transactions. As of June 30, 2004, Park had the authority to still repurchase an aggregate of 488,300 common shares under this stock repurchase program. -26- The Park National Corporation 1995 Incentive Stock Option Plan (the "1995 Plan") was initially approved by the shareholders of Park on April 7, 1995 and 200,000 common shares were authorized for delivery upon exercise of incentive stock options granted under the 1995 plan. The shareholders approved an amendment to the 1995 Plan on April 20, 1998 to increase the number of common shares of Park available for delivery under the 1995 Plan to 735,000 common shares (after adjustment for stock dividends) and another amendment on April 16, 2001 to increase the number of common shares available for delivery under the 1995 Plan to 1,200,000 common shares. Pursuant to the terms of the 1995 Plan, all of the common shares delivered upon exercise of incentive stock options granted under the 1995 Plan are to be treasury shares. No incentive stock options may be granted under the 1995 Plan after January 16, 2005. As of June 30, 2004, incentive stock options covering 674,380 common shares were outstanding and 342,634 common shares were available for future grants. With 828,672 common shares held as treasury shares for purposes of the 1995 Plan at June 30, 2004, an additional 188,342 common shares remained authorized for repurchase for purposes of funding the 1995 Plan. (2) All of the common shares reported were purchased in the open market for the purpose of providing common shares for the 1995 Incentive Stock Option Plan, as publicly previously announced. Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other Information Not applicable. -27- Item 6. Exhibits and Reports on Form 8-K a. Exhibits 31.1 Rule 13a - 14(a) / 15d - 14(a) Certification (Principal Executive Officer) 31.2 Rule 13a - 14(a) / 15d - 14(a) Certification (Principal Financial Officer) 32.1 Section 1350 Certification (Principal Executive Officer) 32.2 Section 1350 Certification (Principal Financial Officer) b. Reports on Form 8-K On April 19, 2004, Park National Corporation furnished information regarding the news release announcing earnings for the three months ended March 31, 2004 for Park National Corporation under Item 12. Results of Operations and Financial Condition in a Current Report of Form 8-K, dated April 19, 2004. The news release was included as Exhibit 99. On July 19, 2004, Park National Corporation furnished information regarding the press release announcing earnings for the three and six months ended June 30, 2004 for Park National Corporation under Item 12. Results of Operations and Financial Condition in a Current Report on Form 8-K, dated July 19, 2004. The news release was included as Exhibit 99. On August 3, 2004, Park National Corporation filed a Current Report on Form 8-K reporting the issuance of news releases announcing the signing of a definitive agreement and plan of merger which will result in the acquisition of First Federal Bancorp, Inc. of Zanesville, Ohio under Item 5. Other Events and Regulation FD Disclosure in a Form 8-K. The news releases dated August 3, 2004 were included as Exhibits 99.1 and 99.2. -28- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PARK NATIONAL CORPORATION DATE: August 6, 2004 BY: /s/C. Daniel DeLawder --------------------- C. Daniel DeLawder President and Chief Executive Officer DATE: August 6, 2004 BY: /s/John W. Kozak --------------------- John W. Kozak Chief Financial Officer -29- EX-31.1 2 l08884aexv31w1.txt EXHIBIT 31.1 EXHIBIT 31.1 RULE 13A-14(A)/15D-14(A) CERTIFICATION I, C. Daniel DeLawder, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004, of Park National Corporation; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 6, 2004 /s/C. Daniel DeLawder ------------------------------- C. Daniel DeLawder President and Chief Executive Officer (Principal Executive Officer) EX-31.2 3 l08884aexv31w2.txt EXHIBIT 31.2 EXHIBIT 31.2 RULE 13a-14(a)/15d-14(a) CERTIFICATION I, John W. Kozak, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004, of Park National Corporation; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 6, 2004 /s/John W. Kozak ------------------------------- John W.Kozak Chief Financial Officer (Principal Financial Officer) EX-32.1 4 l08884aexv32w1.txt EXHIBIT 32.1 EXHIBIT 32.1 SECTION 1350 CERTIFICATION* In connection with the Quarterly Report of Park National Corporation (the "Company") on Form 10-Q for the quarterly period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, C. Daniel DeLawder, President and Chief Executive Officer of the Company, certify, pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my 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 Company. /s/C. Daniel DeLawder ----------------------- C.Daniel DeLawder President and Chief Executive Officer (Principal Executive Officer) August 6, 2004 * This certification is being furnished as required by Rule 13a - 14(b) under the Securities Exchange Act of 1934 (the "Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise stated in such filing. EX-32.2 5 l08884aexv32w2.txt EXHIBIT 32.2 EXHIBIT 32.2 SECTION 1350 CERTIFICATION* In connection with the Quarterly Report of Park National Corporation (the "Company") on Form 10-Q for the quarterly period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John W. Kozak, Chief Financial Officer of the Company, certify, pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my 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 Company. /s/John W. Kozak --------------------------- John W. Kozak Chief Financial Officer (Principal Financial Officer) August 6, 2004 *This certification is being furnished as required by Rule 13a - 14(b) under the Securities Exchange Act of 1934 (the "Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise stated in such filing. -----END PRIVACY-ENHANCED MESSAGE-----