10-Q 1 l10302ae10vq.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 September 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ________________________ Commission File Number 1-13006 ---------------------------------------------------------- Park National Corporation -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 31-1179518 --------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 50 North Third Street, Newark, Ohio 43055 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (740) 349-8451 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A -------------------------------------------------------------------------------- (Former name,former address and former fiscal year,if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [x] No [ ] 13,616,740 Common shares, no par value per share, outstanding at October 29, 2004. Page 1 of 28 PARK NATIONAL CORPORATION
Page PART I. FINANCIAL INFORMATION 3 Item 1. Financial Statements 3-12 Consolidated Condensed Balance Sheets as of September 30, 2004 and December 31, 2003 (unaudited) 3 Consolidated Condensed Statements of Income for the Three Months and Nine Months ended September 30, 2004 and 2003 (unaudited) 4,5 Consolidated Condensed Statements of Changes in Stockholders' Equity for the Nine Months ended September 30, 2004 and 2003 (unaudited) 6 Consolidated Condensed Statements of Cash Flows for the Nine Months ended September 30, 2004 and 2003 (unaudited) 7,8 Notes to Consolidated Financial Statements 9-15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16-24 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 Item 4. Controls and Procedures 25 PART II. OTHER INFORMATION 26 Item 1. Legal Proceedings 26 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26 Item 3. Defaults Upon Senior Securities 27 Item 4. Submission of Matters to a Vote of Security Holders 27 Item 5. Other Information 27 Item 6. Exhibits 27 SIGNATURES 28
-2- PARK NATIONAL CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) (dollars in thousands, except share data)
September 30, December 31, 2004 2003 ------------- ----------- Assets: Cash and due from banks $ 141,530 $ 169,782 ---------- ---------- Interest bearing deposits 0 50 ---------- ---------- Securities available-for-sale, at fair value (amortized cost of $1,855,940 and $1,899,537 at September 30, 2004 and December 31, 2003) 1,876,927 1,928,697 ---------- ---------- Securities held-to-maturity, at amortized cost (fair value approximates $80,145 and $63,563 at September 30, 2004 and December 31, 2003) 78,516 62,529 ---------- ---------- Loans (net of unearned interest) 2,873,433 2,730,803 ---------- ---------- Allowance for possible loan losses 64,739 63,142 ---------- ---------- Net loans 2,808,694 2,667,661 ---------- ---------- Bank premises and equipment, net 37,179 36,746 ---------- ---------- Bank owned life insurance 94,135 82,570 ---------- ---------- Other assets 98,589 86,921 ---------- ---------- Total assets $5,135,570 $5,034,956 ---------- ---------- Liabilities and Stockholders' Equity: Deposits: Noninterest bearing $ 567,708 $ 547,793 ---------- ---------- Interest bearing 2,967,697 2,866,456 ---------- ---------- Total deposits 3,535,405 3,414,249 ---------- ---------- Short-term borrowings 472,342 516,759 ---------- ---------- Long-term debt 508,763 485,977 ---------- ---------- Other liabilities 65,743 74,930 ---------- ---------- Total liabilities 4,582,253 4,491,915 ---------- ---------- Stockholders' Equity: Common stock (No par value; 20,000,000 shares authorized; 14,544,266 shares issued in 2004 and 14,542,335 shares issued in 2003) 106,036 105,895 ---------- ---------- Retained earnings 521,275 486,769 ---------- ---------- Treasury stock (929,476 shares in 2004 and 775,643 shares in 2003) (87,632) (68,577) ---------- ---------- Accumulated other comprehensive income (loss), net of taxes 13,638 18,954 ---------- ---------- Total stockholders' equity 553,317 543,041 ---------- ---------- Total liabilities and stockholders' equity $5,135,570 $5,034,956 ---------- ----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3 PARK NATIONAL CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, --------------------- ---------------------- 2004 2003 2004 2003 --------- --------- --------- --------- Interest income: Interest and fees on loans $ 45,130 $ 45,696 $ 132,062 $ 139,205 --------- --------- --------- --------- Interest on: Obligations of U.S. Government, its agencies and other securities 22,187 16,615 65,714 56,325 --------- --------- --------- --------- Obligations of states and political subdivisions 1,255 1,533 3,904 4,706 --------- --------- --------- --------- Other interest income 32 207 83 649 --------- --------- --------- --------- Total interest income 68,604 64,051 201,763 200,885 --------- --------- --------- --------- Interest expense: Interest on deposits: Demand and savings deposits 1,821 1,763 4,834 6,403 --------- --------- --------- --------- Time deposits 8,181 9,743 24,759 31,484 --------- --------- --------- --------- Interest on borrowings: Short-term borrowings 1,552 685 4,149 1,873 --------- --------- --------- --------- Long-term debt 3,240 2,510 9,073 7,974 --------- --------- --------- --------- Total interest expense 14,794 14,701 42,815 47,734 --------- --------- --------- --------- Net interest income 53,810 49,350 158,948 153,151 --------- --------- --------- --------- Provision for loan losses 2,745 3,156 6,115 9,425 --------- --------- --------- --------- Net interest income after provision for loan losses 51,065 46,194 152,833 143,726 --------- --------- --------- --------- Other income 13,009 16,140 39,927 48,995 --------- --------- --------- --------- Gain (loss) on sale of securities - (4,474) 106 (5,387) --------- --------- --------- ---------
Continued SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 PARK NATIONAL CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED) (CONTINUED) (dollars in thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- --------------------------- 2004 2003 2004 2003 ----------- ----------- ----------- ----------- Other expense: Salaries and employee benefits $ 17,838 $ 16,566 $ 53,082 $ 50,619 ----------- ----------- ----------- ----------- Occupancy expense 1,803 1,775 5,267 5,178 ----------- ----------- ----------- ----------- Furniture and equipment expense 1,333 1,610 4,398 4,837 ----------- ----------- ----------- ----------- Other expense 10,118 9,407 30,165 29,283 ----------- ----------- ----------- ----------- Total other expense 31,092 29,358 92,912 89,917 ----------- ----------- ----------- ----------- Income before federal income taxes 32,982 28,502 99,954 97,417 ----------- ----------- ----------- ----------- Federal income taxes 9,435 8,302 29,344 28,928 ----------- ----------- ----------- ----------- Net income $ 23,547 $ 20,200 $ 70,610 $ 68,489 =========== =========== =========== =========== PER SHARE: Net income: Basic $ 1.73 $ 1.47 $ 5.16 $ 4.97 =========== =========== =========== =========== Diluted $ 1.71 $ 1.46 $ 5.12 $ 4.95 =========== =========== =========== =========== Weighted average Basic 13,608,629 13,764,381 13,674,311 13,768,775 =========== =========== =========== =========== Diluted 13,740,925 13,880,422 13,794,190 13,849,082 =========== =========== =========== =========== Cash dividends declared $ 0.88 $ 0.83 $ 2.64 $ 2.49 =========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 PARK NATIONAL CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) (dollars in thousands, except share data)
Accumulated Treasury Other Common Retained Stock Comprehensive Comprehensive NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 Stock Earnings at Cost Income Income ------------------------------------------------------------------------ --------- -------- --------- ------------- ------------- BALANCE AT DECEMBER 31, 2002 $ 105,768 $446,300 ($ 65,194) $ 22,418 --------- -------- --------- --------- Net Income 68,489 $ 68,489 --------- -------- --------- --------- --------- Accumulated other comprehensive income, Reverse additional minimum liability for pension plan, net of taxes $860 1,598 --------- -------- --------- --------- --------- Unrealized net holding loss on securities available-for-sale, net of taxes ($3,466) (6,437) (4,839) --------- -------- --------- --------- --------- Total comprehensive income $ 63,650 --------- -------- --------- --------- ========= Cash dividends on common stock: Park at $2.49 per share (34,282) --------- -------- --------- --------- Shares issued for stock options - 1,924 shares 68 --------- -------- --------- --------- Tax benefit from exercise of stock options 62 --------- -------- --------- --------- Treasury stock purchased - 74,467 shares (7,275) --------- -------- --------- --------- Treasury stock reissued for exercise of stock options - 41,137 shares 4,251 --------- -------- --------- --------- BALANCE AT SEPTEMBER 30, 2003 $ 105,898 $480,507 ($ 68,218) $ 17,579 ========= ======== ========= ========= BALANCE AT DECEMBER 31, 2003 $ 105,895 $486,769 ($ 68,577) $ 18,954 --------- -------- --------- --------- Net Income $ 70,610 $ 70,610 --------- -------- --------- --------- --------- Accumulated other comprehensive income, net of tax: Unrealized net holding loss on securities available-for-sale, net of taxes ($2,862) (5,316) (5,316) --------- -------- --------- --------- --------- Total comprehensive income $ 65,294 --------- -------- --------- --------- ========= Cash dividends on common stock: Park at $2.64 per share (36,104) --------- -------- --------- --------- Shares issued for stock options - 1,955 shares 67 --------- -------- --------- --------- Tax benefit from exercise of stock options 77 --------- -------- --------- --------- Cash paid for fractional shares - 24 shares (3) --------- -------- --------- --------- Treasury stock purchased - 204,458 shares (23,699) --------- -------- --------- --------- Treasury stock reissued for exercise of stock options - 50,625 shares 4,644 --------- -------- --------- --------- BALANCE AT SEPTEMBER 30, 2004 $ 106,036 $521,275 ($ 87,632) $ 13,638 ========= ======== ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 PARK NATIONAL CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands)
Nine Months Ended September 30, ---------------------------- 2004 2003 ----------- ----------- Operating activities: Net income $ 70,610 $ 68,489 ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, accretion, and amortization 517 (4,677) ----------- ----------- Provision for loan losses 6,115 9,425 ----------- ----------- Amortization of the excess of cost over net assets of banks purchased 1,109 1,748 ----------- ----------- Realized investment security (gains) losses (106) 5,387 ----------- ----------- Changes in assets and liabilities: Increase in other assets (21,482) (7,336) ----------- ----------- Increase in other liabilities 2,944 1,789 ----------- ----------- Net cash provided from operating activities 59,707 74,825 ----------- ----------- Investing activities: Proceeds from sales of: Available-for-sale securities 429 487,944 ----------- ----------- Proceeds from maturity of: Available-for-sale securities 305,344 2,153,513 ----------- ----------- Held-to-maturity securities 46,672 607,830 ----------- ----------- Purchases of: Available-for-sale securities (260,831) (3,210,590) ----------- ----------- Held-to-maturity securities (62,659) (341,656) ----------- ----------- Net decrease in interest bearing deposits with other banks 50 0 ----------- ----------- Net increase in loans (144,790) (22,504) ----------- ----------- Purchases of premises and equipment, net (4,547) (2,989) ----------- ----------- Net cash used by investing activities (120,332) (328,452) ----------- -----------
Continued 7 PARK NATIONAL CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED) (dollars in thousands)
Nine Months Ended September 30, ------------------------ 2004 2003 --------- --------- Financing activities: Net increase (decrease) in deposits $ 121,156 ($ 91,082) --------- --------- Net (decrease) increase in short-term borrowings (44,417) 316,309 --------- --------- Cash paid for fractional shares (3) - --------- --------- Exercise of stock options 141 130 --------- --------- Purchase of treasury stock, net (19,055) (3,024) --------- --------- Long-term debt issued 162,897 175,000 --------- --------- Repayment of long-term debt (140,111) (176,272) --------- --------- Cash dividends paid (48,235) (45,745) --------- --------- Net cash provided from financing activities 32,373 175,316 --------- --------- Decrease in cash and cash equivalents (28,252) (78,311) --------- --------- Cash and cash equivalents at beginning of year 169,782 238,788 --------- --------- Cash and cash equivalents at end of period $ 141,530 $ 160,477 ========= ========= Supplemental disclosures of cash flow information: Cash paid for: Interest $ 43,621 $ 49,432 --------- --------- Income taxes $ 30,207 $ 28,800 --------- ---------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8 PARK NATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Three and Nine Month Periods Ended September 30, 2004 and 2003. Note 1 - Basis of Presentation The consolidated financial statements included in this report have been prepared by Park National Corporation (the "Registrant", "Corporation", "Company", or "Park") without audit. In the opinion of management, all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation of results of operations for the interim periods included herein have been made. The results of operations for the periods ended September 30, 2004 are not necessarily indicative of the operating results to be anticipated for the fiscal year ended December 31, 2004. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q, and therefore, do not include all information and footnotes necessary for a fair presentation of the condensed balance sheets, condensed statements of income, condensed statements of changes in stockholders' equity and condensed statements of cash flows in conformity with generally accepted accounting principles. These financial statements should be read in conjunction with the financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2003. Park does not have any off-balance sheet derivative financial instruments such as interest-rate swap agreements. Note 2 - Intangible Assets In September 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the standards, goodwill and indefinite lived intangible assets are no longer amortized and are subject to annual impairment tests. Other intangible assets, such as core deposit intangibles, continue to be amortized over their useful lives. Park had approximately $7.53 million of goodwill included in other assets at September 30, 2004 and December 31, 2003. This goodwill was evaluated for impairment during the first quarter of each of 2003 and 2004 and a determination made that the goodwill was not impaired and that the book value of the goodwill would continue to be shown as $7.53 million. No amortization expense is being recorded on the goodwill in 2004 and none was recorded in 2003. Park also had core deposit intangibles included in other assets of $4.32 million at September 30, 2004 and $5.43 million at December 31, 2003. The core deposit intangibles are being amortized to expense, principally on the straight-line method, over periods ranging from six to eight years. Core deposit amortization expense was $369,764 for the third quarter of 2004 and $582,500 for the third quarter of 2003 and was $1,109,000 for the first nine months of 2004 compared to $1,748,000 for the first nine months of 2003. -9- Note 3- Allowance for Loan Losses The allowance for loan losses is that amount believed adequate to absorb estimated credit losses in the loan portfolio based on management's evaluation of various factors including overall growth in the loan portfolio, an analysis of individual loans, prior and current loss experience, and current economic conditions. A provision for loan losses is charged to operations based on management's periodic evaluation of these and other pertinent factors.
(In Thousands) ------------------------------------------------- Three Months Ended, Nine Months Ended, September 30, September 30, ---------------------- --------------------- 2004 2003 2004 2003 -------- ------- ------- ------- Beginning of Period $64,090 $65,525 $63,142 $62,028 Provision for Loan Losses 2,745 3,156 6,115 9,425 Losses Charged to the Reserve <3,714> <5,921> <9,527> <12,103> Recoveries 1,618 1,716 5,009 5,126 ------- ------- ------- ------- End of Period $64,739 $64,476 $64,739 $64,476 ======= ======= ======= =======
Note 4 - Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share for the three and nine month periods ended September 30, 2004 and 2003. (Dollars in Thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- --------------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Numerator: Net Income $23,547 $20,200 $70,610 $68,489 Denominator: Denominator for basic earnings per share (weighted-average shares) 13,608,629 13,764,381 13,674,311 13,768,775 Effect of dilutive securities 132,296 116,041 119,879 80,307 Denominator for diluted earnings per share (adjusted weighted-average shares & assumed) 13,740,925 13,880,422 13,794,190 13,849,082 Earnings per Share: Basic earnings per share $1.73 $1.47 $5.16 $4.97 Diluted earnings per share $1.71 $1.46 $5.12 $4.95
-10- Note 5 - Segment Information The Corporation is a multi-bank holding company headquartered in Newark, Ohio. The operating segments for the Corporation are its financial institution subsidiaries. The Corporation's financial institution subsidiaries are The Park National Bank (PNB), The Richland Trust Company (RTC), Century National Bank (CNB), The First-Knox National Bank of Mount Vernon (FKNB), United Bank, N.A. (UB), Second National Bank (SNB), The Security National Bank and Trust Co. (SEC), and The Citizens National Bank of Urbana (CIT). Operating Results for the Three Months Ended September 30, 2004 (In Thousands)
All PNB RTC CNB FKNB UB SNB SEC CIT Other TOTAL Net Interest Income $ 15,796 $ 5,639 $ 5,066 $ 8,188 $ 2,502 $ 3,880 $ 8,275 $ 1,798 $ 2,666 $ 53,810 Provision for Loan Losses 1,170 255 180 495 90 90 255 60 150 2,745 Other Income 5,323 1,051 1,245 1,805 434 524 2,062 404 160 13,009 Other Expense 9,467 2,581 2,972 4,086 1,487 1,835 4,984 1,119 2,561 31,092 Net Income $ 7,105 $ 2,540 $ 2,113 $ 3,605 $ 919 $ 1,706 $ 3,474 $ 688 $ 1,397 $ 23,547 Balances at September 30, 2004 Assets $1,667,675 $562,451 $503,169 $746,617 $242,282 $392,802 $912,286 $200,906 $<92,619> $5,135,570
Operating Results for the Three Months Ended September 30, 2003 (In Thousands)
All PNB RTC CNB FKNB UB SNB SEC CIT Other TOTAL Net Interest Income $ 15,029 $ 5,003 $ 4,688 $ 7,838 $ 1,907 $ 3,370 $ 7,708 $ 1,534 $ 2,273 $ 49,350 Provision for Loan Losses 1,080 330 225 666 90 150 405 90 120 3,156 Other Income 3,870 1,095 1,250 1,950 848 607 1,795 84 167 11,666 Other Expense 8,799 2,508 2,876 3,966 1,454 1,825 5,030 1,138 1,762 29,358 Net Income $ 6,256 $ 2,153 $ 1,902 $ 3,495 $ 828 $ 1,413 $ 2,780 $ 278 $ 1,095 $ 20,200 Balances at September 30, 2003 Assets $1,612,904 $483,801 $446,193 $742,036 $222,206 $360,969 $849,885 $194,247 $<226,459> $4,685,782
Operating Results for the Nine Months Ended September 30, 2004 (In Thousands)
All PNB RTC CNB FKNB UB SNB SEC CIT Other TOTAL Net Interest Income $ 47,305 $ 16,384 $ 14,761 $ 24,216 $ 7,599 $ 11,618 $ 23,892 $ 5,524 $ 7,649 $158,948 Provision for Loan Losses 2,315 540 285 1,510 230 120 475 170 470 6,115 Other Income 16,361 3,512 4,019 5,199 1,343 1,632 6,186 1,150 630 40,033 Other Expense 27,976 8,308 8,921 12,273 4,501 5,711 14,949 3,390 6,883 92,912 Net Income $ 22,615 $ 7,374 $ 6,405 $ 10,467 $ 2,843 $ 5,118 $ 9,904 $ 2,100 $ 3,784 $ 70,610
Operating Results for the Nine Months Ended September 30, 2003 (In Thousands)
All PNB RTC CNB FKNB UB SNB SEC CIT Other TOTAL Net Interest Income $ 46,159 $ 16,030 $ 14,553 $ 23,589 $ 6,486 $ 10,394 $ 24,417 $ 4,895 $ 6,628 $153,151 Provision for Loan Losses 3,540 690 675 1,998 270 450 1,215 270 317 9,425 Other Income 17,773 3,785 4,424 5,256 2,143 2,093 6,711 935 488 43,608 Other Expense 27,362 7,588 8,476 12,040 4,396 5,487 14,769 3,376 6,423 89,917 Net Income $ 22,709 $ 7,603 $ 6,560 $ 10,100 $ 2,723 $ 4,596 $ 10,257 $ 1,497 $ 2,444 $ 68,489
-11- The operating results of the Parent Company and Guardian Finance Company (GFC) in the All Other column are used to reconcile the segment totals to the consolidated income statements for the periods ended September 30, 2004 and 2003. The reconciling amounts for consolidated total assets for both of the quarters ended September 30, 2004 and 2003 consist of the elimination of intersegment borrowings, and the assets of the Parent Company and GFC which are not eliminated. Note 6 - Stock Option Plan Park accounts for its incentive stock option plan under the recognition and measurement principles provided in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations. Under APB 25, because the exercise price of Park's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", as amended by SFAS 148, requires pro forma disclosures of net income and earnings per share for companies not adopting its fair value accounting method for stock-based employee compensation. The pro-forma disclosures below use the fair value method of SFAS 123 to measure compensation expense for stock-based employee compensation plans. (Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ------------------------ 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Net income as reported $ 23,547 $ 20,200 $ 70,610 $ 68,489 Deduct: Total stock-based employee compensation expense determined under fair value method, net of related tax effects <646> <40> <2,981> <1,852> Pro forma net income $ 22,901 $ 20,160 $ 67,629 $ 66,637 Basic earnings per share as reported $ 1.73 $ 1.47 $ 5.16 $ 4.97 Pro forma basic earnings per share $ 1.68 $ 1.46 $ 4.95 $ 4.84 Diluted earnings per share as reported $ 1.71 $ 1.46 $ 5.12 $ 4.95 Pro forma diluted earnings per share $ 1.67 $ 1.45 $ 4.90 $ 4.81
-12- Note 7 - Pending Acquisitions On August 3, 2004, Park National Corporation ("Park") and First Federal Bancorp, Inc. ("First Federal") of Zanesville, Ohio jointly announced the signing of a definitive agreement and plan of merger. This merger agreement will result in the acquisition of First Federal by Park through the merger of a newly-formed subsidiary of Park with and into First Federal in an all cash transaction, immediately followed by the merger of the surviving corporation into Park. The merger transactions are anticipated to be completed by the first quarter of 2005, and require the approval of appropriate regulatory authorities and of the shareholders of First Federal. Under the terms of the merger agreement, shareholders of First Federal will receive cash in the amount of $13.25 per share for each common share of First Federal outstanding immediately prior to the closing. Each outstanding option granted under a First Federal stock option plan will be cancelled and extinguished and converted into the right to receive an amount of cash equal to the product of (1) (a) $13.25 minus (b) the exercise price of the option, multiplied by (2) the number of First Federal common shares subject to the unexercised portion of the option. As of August 3, 2004, First Federal had 3,286,221 common shares outstanding and options covering an aggregate of 335,925 common shares with a weighted average exercise price of $6.12 per share. Following completion of the merger transactions described above, First Federal Savings Bank of Eastern Ohio, which is currently a subsidiary of First Federal, will merge with Century National Bank, a subsidiary of Park. First Federal had $258 million of total assets and $23 million of stockholders' equity at June 30, 2004. On September 24, 2004 Park announced the signing of a stock purchase agreement whereby Park will acquire First Clermont Bank (Clermont County, Ohio) in an all cash transaction for $52.5 million. Following this acquisition, First Clermont Bank will merge with The Park National Bank, a subsidiary of Park. The acquisition of First Clermont Bank is expected to be completed by the first quarter of 2005 and requires the approval of appropriate regulatory authorities. First Clermont Bank had $202 million of total assets and $25 million of stockholders' equity at June 30, 2004. The parent company of Park National Corporation will not need to secure any outside borrowings to pay for these acquisitions. Funding for the acquisitions is available from Park's affiliate banks. -13- Note 8 - Loans The composition of the loan portfolio is as follows:
(In Thousands) September 30, December 31 2004 2003 ------------ ----------- Commercial, Financial and Agricultural $ 448,945 $ 441,165 Real Estate: Construction 143,749 121,160 Residential 1,055,051 983,702 Commercial 713,145 670,082 Consumer 461,244 450,145 Leases 51,299 64,549 ---------- ---------- Total Loans $2,873,433 $2,730,803 ---------- ----------
Note 9 - Investment Securities The amortized cost and fair values of investment securities are shown below. Management evaluates investment securities on a quarterly basis for other than temporary impairment. No impairment charges have been deemed necessary in 2004 and 2003.
(In Thousands) Gross September 30, 2004 Unrealized Gross Unrealized Estimated Securities Available-for-Sale Amortized Cost Holding Gains Holding Losses Fair Value -------------- ------------- -------------- ---------- Obligations of U.S. Treasury $ 11,012 $ 135 $ 3 $ 11,145 and other U.S. Government agencies Obligation of States and Political Subdivisions 85,183 4,669 7 89,845 U.S. Government Agencies' Asset- Backed Securities and Other Asset- Backed Securities 1,714,725 18,821 3,125 1,730,420 Other Equity Securities 45,020 497 - 45,517 ---------- ---------- ---------- ---------- Total $1,855,940 $ 24,122 $ 3,135 $1,876,927 ---------- ---------- ---------- ---------- September 30, 2004 Securities Held-to-Maturity Obligations of States and Political Subdivisions $ 19,626 $ 842 $ - $ 20,468 U.S. Government Agencies' asset- backed securities and Other Asset- Backed Securities 58,890 787 - 59,677 ---------- ---------- ---------- ---------- Total $ 78,516 $ 1,629 $ - $ 80,145 ---------- ---------- ---------- ----------
-14-
(In Thousands) Gross December 31, 2003 Unrealized Gross Unrealized Estimated Securities Available-for -Sale Amortized Cost Holding Gains Holding Losses Fair Value -------------- ------------- ---------------- ---------- Obligations of U.S. Treasury and other U.S. Government Agencies $ 24,389 $ 965 $ - $ 25,354 Obligations of State and Political Subdivisions 93,936 5,598 6 99,528 U.S. Government agencies' asset-backed securities and 1,737,215 23,393 1,305 1,759,303 other asset-backed securities Other Equity Securities 43,997 522 7 44,512 ---------- ---------- ---------- ---------- Total $1,899,537 $ 30,478 $ 1,318 $1,928,697 ---------- ---------- ---------- ----------
Gross December 31, 2003 Unrealized Gross Unrealized Estimated Securities Held-to-Maturity Amortized Cost Holding Gains Holding Losses Fair Value -------------- ------------- ---------------- ---------- Obligations of States and Political Subdivisions $ 21,480 $ 863 $ - $ 22,343 Other Asset-Backed Securities 41,049 171 - 41,220 ---------- ---------- ---------- ---------- Total $ 62,529 $ 1,034 $ - $ 63,563 ---------- ---------- ---------- ----------
Note 10 - Benefit Plans Park has a noncontributory defined benefit pension plan covering substantially all of its employees. The plan provides benefits based on an employee's years of service and compensation. Park's funding policy is to contribute annually an amount that can be deducted for federal income tax purposes using a different actuarial cost method and different assumptions from those used for financial reporting purposes. The following table shows the components of net periodic benefit expenses.
Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 2004 2003 2004 2003 ------ ------ ------ ------ Service Cost $ 625 $ 524 $1,876 $1,571 Interest Cost 644 587 1,933 1,760 Expected Return on Plan Assets <697> <535> <2,092> <1,604> Amortization of Prior Service Cost 3 3 9 9 Recognized Net Actuarial Loss (Gain) 124 85 373 254 ------ ------ ------ ------ Benefit Expense $ 699 $ 664 $2,099 $1,990 ====== ====== ====== ======
-15- ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance. The forward-looking statements are based on management's expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation, Park's ability to execute its business plan, changes in general economic and financial market conditions, changes in banking regulations or other regulatory or legislative requirements affecting bank holding companies and changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date hereof. Park does not undertake any obligation to publicly update any forward-looking statement except to the extent required by law. Critical Accounting Policies Note 1 of the Notes to Consolidated Financial Statements included in Park's 2003 Annual Report lists significant accounting policies used in the development and presentation of its financial statements. The accounting and reporting policies of Park conform with accounting principles generally accepted in the United States and general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the Untied States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. Park considers that the determination of the allowance for loan losses involves a higher degree of judgement and complexity than its other significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses in the loan portfolio. Management's determination of the adequacy of the allowance for loan losses is based on periodic evaluations of the loan portfolio and of current economic conditions. However, this evaluation is inherently subjective as it requires material estimates, including expected default probabilities, loss from default, expected commitment usage, the amounts and timing of expected future cash flows on impaired loans, and estimated losses on consumer loans and residential mortgage loans based on historical loss experience and the current economic conditions. All of those factors may be susceptible to significant change. To the extent that actual results differ from management estimates, additional loan loss provisions may be required that would adversely impact earnings for future periods. -16- Comparison of Results of Operations For the Three and Nine Month Periods Ended September 30, 2004 and 2003 Summary Discussion of Results Net income increased by $3.3 million or 16.6% to $23.5 million for the three months ended September 30, 2004 compared to $20.2 million for the same period in 2003. For the first nine months of 2004, net income increased by $2.1 million or 3.1% to $70.6 million compared to $68.5 million for the same period in 2003. The increase in net income for both the three and nine month periods ended September 30, 2004 was primarily due to the absence of losses from the sale of investment securities in 2004 compared to 2003. The loss from the sale of investment securities was $4.5 million for the third quarter of 2003 and $5.4 million for the first nine months of 2003. There were no investment securities sold during the third quarter of 2004 and there was a gain from the sale of investment securities of $106,000 for the first nine months of 2004. The annualized net income to average asset ratio (ROA) was 1.84% for the third quarter of 2004 and 1.87% for the first nine months of 2004, compared to 1.72% for the third quarter of 2003 and 1.90% for the first nine months of 2003. The annualized net income to average equity ratio (ROE) was 17.81% for the third quarter of 2004 and 17.70% for the first nine months of 2004, compared to 15.37% for the third quarter of 2003 and 17.75% for the first nine months of 2003. Diluted earnings per share increased by 17.1% to $1.71 from $1.46 for the third quarter of 2004 and increased by 3.4% to $5.12 from $4.95 for the nine months ended September 30, 2004. Park announced two pending acquisitions during the third quarter of 2004. See Note 7 of the Notes to Consolidated Financial Statements for information on these acquisitions. Management expects that both acquisitions will be immediately accretive to earnings in 2005. The acquisitions will be funded through working capital. Net Interest Income Comparison for the Third Quarter of 2004 and 2003 Park's principal source of earnings is net interest income, the difference between total interest income and total interest expense. Net interest income increased by $4.5 million or 9.0% to $53.81 million for the third quarter of 2004 compared to $49.35 million for the third quarter of 2003. The following table compares the average balance and tax equivalent yield/cost for interest earning assets and interest bearing liabilities for the third quarter of 2004 with the same quarter in 2003. -17- Three Months Ended September 30, (In Thousands)
2004 2003 ------------------------ ---------------------- Average Tax Average Tax Balance Equivalent Balance Equivalent % % ---------- ---------- ---------- ---------- Loans $2,836,341 6.35% $2,700,373 6.74% Taxable Investments 1,837,694 4.80% 1,495,549 4.43% Tax Exempt Investments 105,113 7.09% 127,011 7.15% Federal Funds Sold and Securities Purchased under Resale Agreements 4,961 2.49% 31,736 1.36% Interest Earning Assets $4,784,109 5.77% $4,354,669 5.92% Interest Bearing Deposits 2,981,788 1.33% $2,911,736 1.57% Short-term Borrowings 440,758 1.40% 400,626 .68% Long-term Debt 513,785 2.51% 236,245 4.21% Interest Bearing Liabilities $3,936,331 1.50% $3,548,607 1.64% Excess Interest Earning Assets 847,778 4.27% $ 806,062 4.28% Net Interest Margin 4.54% 4.58%
Average interest earning assets increased by $429 million or 9.9% to $4,784 million for the quarter ended September 30, 2004 compared to the same quarter in 2003. The average yield on interest earning assets decreased to 5.77% for the third quarter of 2004 compared to 5.92% for the third quarter of 2003. Average loan totals increased by $136 million or 5.0% to $2,836 million for the third quarter of 2004 compared to the same period in 2003. At September 30, 2004, total loans were $2,873 million compared to $2,731 million at December 31, 2003, an increase of $142 million or 5.2%. Total loans increased by $39 million or 1.4% for the year 2003, decreased by $104 million or 3.7% for the year 2002 and decreased by $160 million or 5.4% for the year 2001. The demand for commercial and commercial real estate loans continued to improve during the third quarter of 2004. Management anticipates that total loans will continue to increase during the fourth quarter of 2004. The average yield on the loan portfolio was 6.35% for the third quarter of 2004 compared to 6.74% for the same period in 2003. The average prime lending rate was 4.47% for the third quarter of 2004 compared to 4.00% for the third quarter of 2003. Approximately 25% of Park's loan portfolio reprices based on the prime lending rate. The Federal Reserve has increased the federal funds rate by .75% to 1.75% in 2004 from 1.00%. An additional increase in the federal funds rate is expected during the fourth quarter of 2004. The average yield on the loan portfolio was 6.41% for the first quarter of 2004 and 6.26% for the second quarter of 2004. Management expects that the average yield on the loan portfolio will increase in the fourth quarter of 2004. -18- Average investment securities, including federal funds sold and securities purchased under resale agreements, increased by $293 million or 17.7% to $1,948 million for the third quarter of 2004. During the third quarter of 2003, average investment securities included $183 million of short-term investments that were used to arbitrage short-term dollar-roll repo borrowings. Exclusive of the short-term arbitrage in 2003, average investment securities for the third quarter increased by $476 million or 32.4% in 2004 compared to 2003. The average yield on taxable investment securities was 4.80% for the third quarter of 2004 compared to 4.43% for the third quarter of 2003. The average yield on taxable securities was lower in 2003 due to the short-term investments that were used to arbitrage the short-term dollar-roll repo borrowings in 2003. The tax equivalent yield on tax exempt investment securities was 7.09% for the third quarter of 2004 compared to 7.15% for the same period in 2003. No tax exempt investment securities were purchased during the past year. At September 30, 2004, the tax equivalent yield on the total investment portfolio was 4.98% and the average maturity was 4.2 years. U.S. Government Agency asset-backed securities were approximately 90% of the total investment portfolio at the end of the third quarter of 2004. This segment of the investment portfolio consists of fifteen-year mortgage-backed securities and collateralized mortgage obligations, which are backed by fifteen-year mortgage-backed securities. The average maturity of the investment portfolio would lengthen if long-term interest rates would increase as the principal repayments from mortgage-backed securities and collateralized mortgage obligations would be reduced. Management estimates that the average maturity of the investment portfolio would lengthen to 5.2 years with a 1.00% increase in long-term interest rates and to 5.5 years with a 2.00% increase in long-term interest rates. Average interest bearing liabilities increased by $388 million or 10.9% to $3,936 million for the three months ended September 30, 2004 compared to the same period in 2003. The average cost of interest bearing liabilities decreased by .14% to 1.50% for the third quarter of 2004 compared to 1.64% for the same period in 2003. Average interest bearing deposits increased by $70 million or 2.4% to $2,982 million for the three months ended September 30, 2004 compared to the same period in 2003. The average cost of interest bearing deposits decreased by .24% to 1.33% for the third quarter of 2004 compared to 1.57% for the same period in 2003. Average short-term borrowings increased by $40 million to $441 million for the third quarter of 2004 compared to the same quarter of 2003. The average cost of short-term borrowings increased to 1.40% for the third quarter in 2004 compared to .68% for the same quarter in 2003. Average long-term borrowings increased by $278 million to $514 million for the third quarter of 2004 compared to the same period in 2003. The average cost of long-term borrowings decreased to 2.51% for the third quarter of 2004 compared to 4.21% for the same period last year. The additional average long-term borrowings in 2004 are priced on a variable rate basis and the borrowing cost changes monthly based on short-term money market rates. -19- Net Interest Income Comparison for the First Nine Months of 2004 and 2003 Net interest income increased by $5.8 million or 3.8% to $158.95 million for the nine months ended September 30, 2004 compared to $153.15 million for the same period in 2003. The following table compares the average balance and tax equivalent yield/cost for interest earning assets and interest bearing liabilities for the first nine months of 2004 with the same period in 2003. Nine Months Ended September 30, (In Thousands)
2004 2003 ------------------------ ---------------------- Average Tax Average Tax Balance Equivalent Balance Equivalent % % ---------- ---------- ---------- ---------- Loans $2,790,978 6.34% $2,687,076 6.96% Taxable Investments 1,813,857 4.84% 1,656,431 4.57% Tax Exempt Investments 108,137 7.21% 129,510 7.24% Federal Funds Sold and Securities Purchased under Resale Agreements 7,466 1.48% 31,628 1.28% Interest Earning Assets $4,720,438 5.78% $4,504,645 6.05% Interest Bearing Deposits $2,946,887 1.34% $2,907,782 1.74% Short-term Borrowing 426,905 1.30% 540,821 .46% Long-term Debt 502,795 2.41% 280,774 3.80% Interest Bearing Liabilities $3,876,587 1.48% $3,729,377 1.71% Excess Interest Earning Assets $ 843,851 4.30% $ 775,268 4.34% Net Interest Margin 4.56% 4.63%
Average interest earnings assets increased by $216 million or 4.8% to $4,720 million for the nine months ended September 30, 2004 compared to the same period in 2003. The average yield on interest earning assets decreased to 5.78% for the first nine months of 2004 compared to 6.05% for the same period in 2003. Average loans increased by $104 million or 3.9% to $2,791 million for the first nine months of 2004 compared to the first nine months of 2003. The average yield on loans decreased to 6.34% for the first nine months of 2004 compared to 6.96% for the same period in 2003. The average prime lending rate was 4.16% for the first nine months of 2004 and the first nine months of 2003. Average investment securities, including federal funds sold and securities purchased under resale agreements, increased by $112 million or 6.2% to $1,929 million for the first nine months of 2004 compared to the same period in 2003. The yield on taxable investment securities was 4.84% for the first nine months of 2004 compared to 4.57% for the same period in 2003. Average interest bearing liabilities increased by $147 million or 3.9% to $3,877 million for the first nine months of 2004 compared to the same period in 2003. Average interest bearing deposits increased by $39 million or 1.3% to $2,947 million for the first nine months of 2004 compared to the same period in 2003. The average cost of interest bearing deposits decreased to 1.34% for the first nine months of 2004 compared to 1.74% for the same period in 2003. -20- Average short-term borrowings decreased by $114 million to $427 million for the first nine months of 2004 compared to $541 million for the same period in 2003. The average cost of short-term borrowings increased to 1.30% for the first nine months of 2004 compared to .46% for the same period in 2003. The decrease in the average balance of short-term borrowings was due to the absence of dollar-roll repo borrowings in 2004. The dollar-roll repo borrowings averaged $304 million for the first nine months of 2003 at an average cost of .04%. Park did not have any dollar-roll repo borrowings during the first nine months of 2004. Average long-term borrowings were $503 million for the first nine months of 2004 compared to $281 million for the same period in 2003. The average cost of long-term borrowings decreased to 2.41% for the first nine months of 2004 compared to 3.80% for the same period in 2003. The additional average long-term borrowings in 2004 are priced on a variable rate basis and the borrowing cost changes monthly based on short-term money market rates. Provision for Loan Losses The provision for loan losses was $2.7 million and $6.1 million, respectively, for the third quarter and the first nine months of 2004 compared to $3.2 million and $9.4 million for the same periods in 2003. Net loan charge-offs were $2.1 million and $4.5 million, respectively, for the three and nine month periods ended September 30, 2004 compared to $4.2 million and $7.0 million for the same periods in 2003. Nonperforming loans defined as loans that are 90 days or more past due, renegotiated loans and nonaccrual loans were $27.5 million or .96% of loans at September 30, 2004 compared to $25.7 million or .94% of loans at December 31, 2003 and $25.0 million or .92% of loans at September 30, 2003. The reserve for loan losses as a percentage of outstanding loans was 2.25% at September 30, 2004 compared to 2.31% at December 31, 2003 and 2.38% at September 30, 2003. Total Other Income Total other income decreased by $3.1 million or 19.4% to $13.0 million for the three months ended September 30, 2004 and decreased by $9.1 million or 18.5% to $39.9 million for the nine months ended September 30, 2004 compared to the same periods in 2003. The following table is a summary of the change in total other income.
(In Thousands) Three Months Ended Nine Months Ended September 30, September 30, -------------------------------- ------------------------------- 2004 2003 Change 2004 2003 Change ------- ------- -------- ------- ------- ------- Fees from Fiduciary Activities $ 2,701 $ 2,691 $ 10 $ 8,243 $ 7,551 $ 692 Service Charges on Deposit Accounts 4,125 3,665 460 11,671 10,674 997 Other Service Income 2,281 5,818 <3,537> 7,744 18,683 <10,939> Other Income 3,902 3,966 <64> 12,269 12,087 182 ------- ------- -------- ------- ------- ------- Total $13,009 $16,140 $ <3,131> $39,927 $48,995 $<9,068> ------- ------- -------- ------- ------- -------
-21- The large decrease in fees earned from Other Service Income for both the third quarter of 2004 and the first nine months of 2004 is due to the decrease in fee income earned from the origination and sale into the secondary market of fixed rate mortgage loans. Park originated and sold approximately $174 million of fixed rate mortgage loans during the first nine months of 2004 compared to approximately $768 million for the first nine months of 2003. Management expects that the fee income generated from the origination and sale of fixed rate mortgage loans will continue at the same pace as the first nine months in the fourth quarter of 2004. Gain (Loss) on Sale of Securities A gain on the sale of investment securities of $106,000 was realized during the first quarter of 2004. The gain was from the sale of approximately $400,000 of equity investments. There were no sales of securities during the second and third quarters of 2004. The net loss from the sale of investment securities was $4.5 million for the three months ended September 30, 2003. The proceeds from the sale of $339 million of U.S. Government Agency collateralized mortgage obligations and mortgage-backed securities were reinvested in higher yielding fifteen-year U.S. Government Agency mortgage-backed securities. For the nine months ended September 30, 2003, the net loss from the sale of investment securities was $5.4 million. Other Expense Total other expense increased by $1.7 million or 5.9% to $31.1 million for the three months ended September 30, 2004 compared to $29.4 million for the same period in 2003. Salaries and employee benefits expense increased by $1.3 million or 7.7% to $17.8 million for the third quarter of 2004 compared to the same period in 2003. Full time equivalent employees were 1,705 at September 30, 2004 compared to 1,650 at September 30, 2003. Total other expense increased by $3.0 million or 3.3% to $92.9 million for the nine months ended September 30, 2004 compared to $89.9 million for the same period in 2003. Salaries and employee benefits expense increased by $2.5 million or 4.9% to $53.1 million for the first nine months of 2004 compared to $50.6 million for the same period in 2003. Federal Income Taxes Federal income tax expense was $9.4 million and $29.3 million for the three and nine month periods ended September 30, 2004 compared to $8.3 million and $28.9 million for the same periods in 2003. The ratio of federal income tax expense to income before taxes was 28.6% for the three months ended September 30, 2004 and 29.4% for the nine months ended September 30, 2004 compared to 29.1% for the third quarter of 2003 and 29.7% for the first nine months of 2003. The difference between the effective federal income tax rate and the statutory rate of 35% is primarily due to tax-exempt interest income and low income housing tax credits. -22- COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2004 AND DECEMBER 31, 2003 Changes in Financial Condition and Liquidity Total assets increased by $101 million or 2.0% to $5,136 million at September 30, 2004 compared to $5,035 million at December 31, 2003. Total loans increased by $143 million or 5.2% to $2,873 million at September 30, 2004 as the demand for commercial and commercial real estate loans continued to be relatively strong during the first nine months of 2004. Management has placed an increased emphasis on the generation of commercial and commercial real estate loans in 2004. Investment securities decreased by $36 million or 1.8% during the first nine months of 2004. Total liabilities increased by $90 million or 2.0% to $4,582 million at September 30, 2004 compared to $4,492 million at December 31, 2003. Total deposits increased by $121 million or 3.5% to $3,535 million at September 30, 2004. Total borrowed money decreased by $22 million or 2.2% to $981 million at September 30, 2004. Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as the operating cash needs of the Corporation, are met. Funds are available from a number of sources, including the securities portfolio, the core deposit base, Federal Home Loan Bank borrowings, and the capability to securitize or package loans for sale. The Corporation's loan to asset ratio was 56.0% at September 30, 2004 compared to 54.2% at December 31, 2003 and 57.9% at September 30, 2003. Cash and cash equivalents totaled $142 million at September 30, 2004 compared to $170 million at December 31, 2003 and $160 million at September 30, 2003. The present funding sources provide more than adequate liquidity for the Corporation to meet its cash flow needs. Capital Resources Stockholders' equity at September 30, 2004 was $553 million or 10.77% of total assets compared to $543 million or 10.79% of total assets at December 31, 2003 and $536 million or 11.43% of total assets at September 30, 2003. Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts, and bank holding companies. The net unrealized gain or loss on available-for-sale securities is generally not included in computing regulatory capital. The minimum leverage capital ratio (defined as stockholders' equity less intangible assets divided by tangible assets) is 4% and the well capitalized ratio is greater than or equal to 5%. Park's leverage ratio was 10.36% at September 30, 2004 and 10.79% at December 31, 2003. The minimum Tier I risk-based capital ratio (defined as leverage capital divided by risk-adjusted assets) is 4% and the well capitalized ratio is greater than or equal to 6%. Park's Tier I risk-based capital ratio was 16.40% at September 30, 2004 and 16.51% at December 31, 2003. The minimum total risk-based capital ratio (defined as leverage capital plus supplemental capital divided by risk-adjusted assets) is 8% and the well capitalized ratio is greater than or equal to 10%. Park's total risk-based capital ratio was 17.65% at September 30, 2004 and 17.78% at December 31, 2003. -23- The financial institution subsidiaries of Park each met the well capitalized capital ratio guidelines at September 30, 2004. The following table indicates the capital ratios for each subsidiary and Park at September 30, 2004:
TIER I TOTAL LEVERAGE RISK-BASED RISK-BASED Park National Bank 6.79% 10.12% 13.17% Richland Trust Company 6.44% 11.97% 13.23% Century National Bank 6.42% 11.18% 13.48% First-Knox National Bank 6.97% 11.00% 14.40% Second National Bank 6.39% 11.04% 14.49% United Bank, N.A. 6.59% 12.37% 13.63% Security National Bank 6.34% 10.29% 14.18% Citizens National Bank 6.53% 14.12% 19.05% Park National Corporation 10.36% 16.40% 17.65% Minimum Capital Ratio 4.00% 4.00% 8.00% Well Capitalized Ratio 5.00% 6.00% 10.00%
In the ordinary course of operations, Park enters into certain contractual obligations. Such obligations include the funding of operations through debt issuances as well as leases for premises. See Page 32 of Park's 2003 Annual Report for disclosure concerning contractual obligations and commitments. There has not been a material change in contractual obligations or commitments since year-end 2003, except for the pending acquisitions of First Federal Bancorp, Inc. and First Clermont Bank. On August 3, 2004, Park jointly announced with First Federal Bancorp, Inc. the signing of a definitive agreement and plan of merger. Under the terms of the agreement, Park anticipates paying approximately $45.9 million in cash to the shareholders of First Federal. On September 24, 2004, Park announced the signing of a stock purchase agreement whereby Park will acquire First Clermont Bank in an all cash transaction for $52.5 million. See Note 7 of the Notes to the Consolidated Financial Statements for information on the pending acquisitions. Both acquisitions are expected to be completed by the first quarter of 2005. The parent company of Park will not need to arrange any outside borrowing to fund the purchase of First Federal and First Clermont Bank, but intends to fund the acquisitions through working capital. -24- ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Note 1 of the Notes to Consolidated Financial Statements for disclosure that Park does not have any off-balance sheet derivative financial instruments. Management reviews interest rate sensitivity on a quarterly basis by modeling the financial statements under various interest rate scenarios. The primary reason for these efforts is to guard Park from adverse impacts of unforeseen changes in interest rates. Management continues to believe that further changes in interest rates will have a small impact on net income, consistent with the disclosure on pages 31 and 32 of our 2003 Annual Report, which is incorporated by reference into our 2003 Form 10-K. ITEM 4 - CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES With the participation of the President and Chief Executive Officer (the principal executive officer) and the Chief Financial Officer (the principal financial officer) of Park, Park's management has evaluated the effectiveness of Park's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, Park's President and Chief Executive Officer and Park's Chief Financial Officer have concluded that: - information required to be disclosed by Park in this Quarterly Report on Form 10-Q and other reports which Park files or submits under the Exchange Act would be accumulated and communicated to Park's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure; - information required to be disclosed by Park in this Quarterly Report on Form 10-Q and other reports which Park files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms; and - Park's disclosure controls and procedures are effective as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q to ensure that material information relating to Park and its consolidated subsidiaries is made known to them, particularly during the period in which this Quarterly Report on Form 10-Q is being prepared. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in Park's internal control over financial reporting (as defined in Rule 13a - 15 (f) under the Exchange Act) that occurred during Park's fiscal quarter ended September 30, 2004, that have materially affected or are reasonably likely to materially affect, Park's internal control over financial reporting. -25- PARK NATIONAL CORPORATION PART II - OTHER INFORMATION Item 1. Legal Proceedings Park National Corporation and subsidiaries are not engaged in any legal proceedings of a material nature at the present time. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (a.) Not applicable (b.) Not applicable (c.) Not applicable (d.) Not applicable (e.) The following table provides information regarding Park's purchases of its common shares during the three months ended September 30, 2004:
Total Number of Common Average Price Total Number of Common Shares Maximum Number of Common Shares Paid per Common Purchased as Part of Publicly Shares that May Yet be Purchased Period Purchased Share Announced Plans or Programs under the Plans or Programs (1) -------------------------- --------------- --------------- ----------------------------- --------------------------------- July 1 thru July 31, 2004 -0- -0- -0- 695,923 August 1 thru August 31, 2004 -0- -0- -0- 695,923 September 1 thru September 30, 2004 -0- -0- -0- 695,923
(1) The number shown represents, as of the end of each period, the maximum aggregate number of common shares that may yet be purchased as part of Park's publicly announced repurchase program to fund the Park National Corporation 1995 Incentive Stock Option Plan as well as Park's publicly announced stock repurchase program. On November 18, 2002, Park announced a stock repurchase program under which up to an aggregate of 500,000 common shares may be repurchased from time to time over the three year period ending November 17, 2005. These repurchases may be made in open market transactions or through privately negotiated transactions. As of September 30, 2004, Park had the authority to still repurchase an aggregate of 488,300 common shares under this stock repurchase program. -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 September 30, 2004, incentive stock options covering 698,405 common shares were outstanding and 328,329 common shares were available for future grants. With 819,111 common shares held as treasury shares for purposes of the 1995 Plan at September 30, 2004, an additional 207,623 common shares remained authorized for repurchase for purposes of funding the 1995 Plan. Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other Information In connection with Park's acquisition of First Federal Bancorp, Inc., Park filed a letter dated November 2, 2004 with the Federal Reserve Board indicating its willingness to sell a branch office in Roseville, Ohio. Park has agreed to sell the deposits, loans, and fixed assets of the branch to an out of market purchaser. At June 30, 2004, the branch had $12.98 million in deposits. Item 6. Exhibits a. Exhibits 31.1 Rule 13a - 14(a) / 15d - 14(a) Certification (Principal Executive Officer) 31.2 Rule 13a - 14(a) / 15d - 14(a) Certification (Principal Financial Officer) 32.1 Section 1350 Certification (Principal Executive Officer) 32.2 Section 1350 Certification (Principal Financial Officer) -27- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PARK NATIONAL CORPORATION DATE: November 3, 2004 BY: /s/C. Daniel DeLawder ------------------------- C. Daniel DeLawder President and Chief Executive Officer DATE: November 3, 2004 BY: /s/John W. Kozak ------------------ John W. Kozak Chief Financial Officer -28-