-----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, QNH5/JItIU/vC+HE7p6eReAfQGcve1c7XUvcHi+7UumXbmIXkx9jXOGhdEldnuDQ JhWVSCb7rAlQJs/8QzuTMg== 0000950152-05-001979.txt : 20050311 0000950152-05-001979.hdr.sgml : 20050311 20050311100717 ACCESSION NUMBER: 0000950152-05-001979 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050311 DATE AS OF CHANGE: 20050311 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARK NATIONAL CORP /OH/ CENTRAL INDEX KEY: 0000805676 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 311179518 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13006 FILM NUMBER: 05674058 BUSINESS ADDRESS: STREET 1: 50 NORTH THIRD ST CITY: NEWARK STATE: OH ZIP: 43055 BUSINESS PHONE: 6143498451 MAIL ADDRESS: STREET 1: P O BOX 3500 CITY: NEWARK STATE: OH ZIP: 43058-3500 10-K 1 l12650ae10vk.txt PARK NATIONAL CORPORATION 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 incorporation or organization) Identification No.)
50 North Third Street, P.O. Box 3500, Newark, Ohio 43058-3500 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (740) 349-8451 Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered ------------------- --------------------- Common Shares, without par value American Stock Exchange LLC
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No ----- ----- State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant's most recently completed second fiscal quarter: $1,598,518,504 as of June 30, 2004 (the common shares represent the only common equity of the Registrant -- for the purpose of this computation, common shares held by the Registrant's banking subsidiaries in fiduciary accounts are not considered to be held by affiliates). Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: 14,335,205 common shares, without par value, as of February 22, 2005. Documents Incorporated by Reference: (1) Portions of the Registrant's 2004 Annual Report to Shareholders are incorporated by reference into Parts I and II of this Annual Report on Form 10-K. (2) Portions of the Registrant's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on April 18, 2005, are incorporated by reference into Part III of this Annual Report on Form 10-K. Exhibit Index on Page E-1 -2- PART I ITEM 1. BUSINESS. GENERAL Park National Corporation ("Park") is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"). Park was incorporated under Ohio law in 1992. Park's principal executive offices are located at 50 North Third Street, Newark, Ohio 43055, and its telephone number is (740) 349-8451. Park's common shares are listed on the American Stock Exchange LLC ("AMEX") under the symbol "PRK." Park maintains an Internet website at www.parknationalcorp.com (this uniform resource locator, or URL, is an inactive textual reference only and is not intended to incorporate Park's website into this Annual Report on Form 10-K). Park makes available free of charge on or through its website, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as soon as reasonably practicable after Park electronically files such material with, or furnishes it to, the Securities and Exchange Commission (the "SEC"). Park's principal business consists of owning and supervising its subsidiaries. Although Park directs the overall policies of its subsidiaries, including lending policies and financial resources, most day-to-day affairs are managed by their respective offices. BANKING SUBSIDIARIES Through its banking subsidiaries: - The Park National Bank ("Park National Bank"), a national banking association with its main office in Newark, Ohio and financial service offices in Clermont, Delaware, Fairfield, Franklin, Hamilton, Licking and Montgomery Counties; - The Richland Trust Company ("Richland Trust Company"), an Ohio state-chartered bank with its main office in Mansfield, Ohio and financial service offices in Richland County; - Century National Bank, a national banking association with its main office in Zanesville, Ohio and financial service offices in Athens, Coshocton, Hocking, Muskingum, Perry and Tuscarawas Counties; - The First-Knox National Bank of Mount Vernon ("First-Knox National Bank"), a national banking association with its main office in Mount Vernon, Ohio and financial service offices in Ashland, Holmes, Knox, Morrow and Richland Counties; - United Bank, N.A. ("United Bank"), a national banking association with its main office in Bucyrus, Ohio and financial service offices in Crawford and Marion Counties; -3- - Second National Bank, a national banking association with its main office in Greenville, Ohio and offices in Darke and Mercer Counties; - The Security National Bank and Trust Co. ("Security National Bank"), a national banking association with its main office in Springfield, Ohio and financial service offices in Clark, Fayette, Greene and Miami Counties; and - The Citizens National Bank of Urbana ("Citizens National Bank"), a national banking association with its main office in Urbana, Ohio and financial service offices in Champaign and Madison Counties, Park engages in a general commercial banking and trust business in small and medium population Ohio communities. Park National Bank operates through three banking divisions with the Park National Division headquartered in Newark, Ohio; the Fairfield National Division headquartered in Lancaster, Ohio; and the First Clermont Division headquartered in Milford, Ohio. First-Knox National Bank operates through two banking divisions with the First-Knox National Division headquartered in Mount Vernon, Ohio and the Farmers and Savings Division headquartered in Loudonville, Ohio. Security National Bank also operates through two banking divisions with the Security National Division headquartered in Springfield, Ohio and the Unity National Division (formerly The Third Savings and Loan Company) headquartered in Piqua, Ohio. Park's banking subsidiaries and their respective divisions comprise Park's segments. Financial information about Park's reportable segments is included in Note 20 of the Notes to Consolidated Financial Statements located on pages 56 and 57 of Park's 2004 Annual Report to Shareholders. That financial information is incorporated herein by reference. At December 31, 2004, Park's banking subsidiaries operated 117 financial service offices and a network of 124 automated teller machines. With the January 3, 2005 acquisition of First Clermont Bank, described below under "RECENT ACQUISITIONS," Park's banking subsidiaries operated 124 financial service offices and a network of 131 automated teller machines as of the date of this Annual Report on Form 10-K. These financial service offices span 28 Ohio counties -- Ashland, Athens, Champaign, Clark, Clermont, Coshocton, Crawford, Darke, Delaware, Fairfield, Fayette, Franklin, Greene, Hamilton, Hocking, Holmes, Knox, Licking, Madison, Marion, Mercer, Miami, Montgomery, Morrow, Muskingham, Perry, Richland and Tuscarawas. Consolidated Computer Center, a division of Park National Bank, handles the data processing needs of Park's subsidiaries. CONSUMER FINANCE SUBSIDIARY Guardian Financial Services Company ("Guardian Finance"), an Ohio consumer finance company based in Hilliard, Ohio, also operates as a separate subsidiary of Park. Guardian Finance provides consumer finance services in the central Ohio area. As of the date of this Annual Report on Form 10-K, Guardian Finance had eight financial service offices spanning seven counties, including Clark, Delaware, Fairfield, Franklin, Licking, Montgomery and Richland. -4- LEASING SUBSIDIARIES Scope Leasing, Inc., a subsidiary of Park National Bank, specializes in aircraft financing. Scope Leasing's customers include small businesses and entrepreneurs intending to use the aircraft for business or pleasure. Another subsidiary of Park National Bank, Park Leasing Company ("Park Leasing"), was formed in 2001 for the purpose of participating in an automobile leasing program with a major national insurance company. However, that program was terminated during the fourth quarter of 2004 and Park Leasing is winding down its operations. INSURANCE AGENCY SUBSIDIARY Park National Bank also has an insurance agency subsidiary, Park Insurance Group, Inc. Park Insurance Group was formed in 2002 and offers life insurance and other insurance products through licensed representatives who work for Park's banking subsidiaries. However, Park Insurance Group's results to date have not been material. TITLE AGENCY SUBSIDIARY Park National Bank holds 80% of the voting membership interest of Park Title Agency, LLC. Park Title Agency is a traditional title agency serving the central Ohio area. OTHER SUBSIDIARIES Park Investments, Inc., a subsidiary of Park National Bank; Richland Investments, Inc., a subsidiary of Richland Trust Company; and MFS Investments, Inc., a subsidiary of Century National Bank, operate as asset management companies. Their operations are not significant to the consolidated entity. Park Capital Investments, Inc., a subsidiary of Park ("Park Capital"); Park National Capital LLC, whose members are Park Capital and Park National Bank; First-Knox National Capital LLC, whose members are Park Capital and First-Knox National Bank; and Security National Capital LLC, whose members are Park Capital and Security National Bank, operate as capital management companies. Their operations are also not significant to the consolidated entity. The remaining subsidiaries are inactive. RECENT ACQUISITIONS On December 31, 2004, Park acquired First Federal Bancorp, Inc. ("First Federal"), a savings and loan holding company headquartered in Zanesville, Ohio, 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. Following those merger transactions, Century National Bank, a subsidiary of Park, merged into First Federal Savings Bank of Eastern Ohio, which had been a subsidiary of First Federal, and First Federal Savings Bank of Eastern Ohio changed its name to "Century National Bank." Park paid a total of $46.6 million to the shareholders of First Federal in connection with the acquisition. The Roseville, Ohio office of -5- First Federal Savings Bank of Eastern Ohio was subsequently sold on February 11, 2005 to The Peoples National Bank of New Lexington, Ohio. On January 3, 2005, Park acquired all of the stock of First Clermont Bank ("First Clermont") of Milford, Ohio for $52.5 million in an all cash transaction. Immediately following Park's stock acquisition, First Clermont merged with Park National Bank and is operated as the First Clermont Division. SERVICES PROVIDED BY PARK'S SUBSIDIARIES All of Park's banking subsidiaries and their respective divisions provide the following principal services: - the acceptance of deposits for demand, savings and time accounts and the servicing of those accounts; - commercial, industrial, consumer and real estate lending, including installment loans, credit cards, home equity lines of credit and commercial and auto leasing; - trust services; - cash management; - safe deposit operations; - electronic funds transfers; - online Internet banking with bill pay service; and - a variety of additional banking-related services tailored to the needs of individual customers. Park believes that the deposit mix of its banking subsidiaries is such that no material portion has been obtained from a single customer and, consequently, the loss of any one customer of any banking subsidiary would not have a materially adverse effect on the business of that banking subsidiary or Park. Guardian Finance also provides consumer finance services. LENDING ACTIVITIES Park's banking subsidiaries deal with consumers as well as with a wide cross-section of businesses and corporations located primarily in the 28 Ohio counties served by their financial service offices. Relatively few loans are made to borrowers outside these counties. Each banking subsidiary makes lending decisions in accordance with the written loan policy adopted by Park which is designed to maintain loan quality. Each banking subsidiary originates and retains for its own portfolio commercial and commercial real estate loans, variable rate residential real estate -6- loans, home equity lines of credit, installment loans and credit card loans. Each banking subsidiary also generates fixed rate residential real estate loans for the secondary market. Guardian Finance originates and retains for its own portfolio consumer installment loans. Guardian Finance also makes lending decisions in accordance with the written loan policy adopted by Park. There are certain risks inherent in making loans. These risks include interest rate changes over the time period in which the loans may be repaid, risks resulting from changes in the economy, risks inherent in dealing with borrowers and, in the case of loans secured by collateral, risks resulting from uncertainties about the future value of the collateral. COMMERCIAL LOANS. At December 31, 2004, Park's banking subsidiaries had approximately $1,253.1 million in commercial loans outstanding (including commercial real estate loans) and commercial leases, representing approximately 40.2% of their total aggregate loan portfolio as of that date. Of this amount, approximately $469.4 million represented commercial loans, $752.4 million represented commercial real estate loans and $31.3 million represented commercial leases. Commercial loans are made for a wide variety of general corporate purposes, including financing for industrial and commercial properties, financing for equipment, inventories and accounts receivable and acquisition financing as well as commercial leasing. The term of each commercial loan varies by its purpose. Repayment terms are structured such that commercial loans will be repaid within the economic useful life of the underlying asset. Information concerning the loan maturity distribution within the commercial loan portfolio is provided in Table 4 included in the section of Park's 2004 Annual Report to Shareholders captioned "FINANCIAL REVIEW," on page 29, and is incorporated herein by reference. The commercial loan portfolio includes loans to a wide variety of corporations and businesses across many industrial classifications in the 28 counties throughout Ohio where Park's banking subsidiaries operate. The primary industries represented by these customers include commercial real estate leasing, commercial real estate construction, manufacturing, finance and insurance, health care and other services. Commercial loans are evaluated for the adequacy of repayment sources at the time of approval and are regularly reviewed for any possible deterioration in the ability of the borrower to repay the loan. The credit information required generally includes fully completed financial statements, two years of federal income tax returns and a current credit report. Loan terms include amortization schedules commensurate with the purpose of each loan, the source of each repayment and the risk involved. In certain instances, collateral is required to provide an additional source of repayment in the event of default by a commercial borrower. The structure of the collateral package, including the type and amount of the collateral, varies from loan to loan depending on the financial strength of the borrower, the amount and terms of the loan, and the collateral available to be pledged by the borrower. Most often, the collateral is inventory, machinery, accounts receivable or real estate. The guarantee of the principals will generally be required on loans made to closely held business entities. -7- Commercial real estate loans include mortgage loans to developers and owners of commercial real estate. The lending policy for commercial real estate loans is the same as that for the commercial loan portfolio. The collateral for these loans is the underlying commercial real estate. Each banking subsidiary generally requires that the commercial real estate loan amount be no more than 85% of the purchase price or the appraised value of the real estate securing the loan. Commercial real estate loans made for each banking subsidiary's portfolio generally have a variable interest rate although occasionally a commercial real estate loan may be made with a fixed interest rate for a term generally not exceeding five years. The regulatory limits for loans made to one borrower by Park National Bank, Richland Trust Company, Century National Bank, First-Knox National Bank, United Bank, Second National Bank, Security National Bank and Citizens National Bank were $19.7 million, $5.4 million, $8.2 million, $9.3 million, $2.3 million, $4.6 million, $11.0 million and $2.4 million, respectively, at December 31, 2004. However, participations in loans of amounts larger than $20.0 million are generally sold to other banks or financial institutions. Park has a loan review program which evaluates annually all loans with an outstanding balance greater than $250,000. If deterioration has occurred, the lender subsidiary takes effective and prompt action designed to increase the likelihood of payment of the loan. Upon detection of the reduced ability of a borrower to service interest and/or principal on a loan, the subsidiary may downgrade the loan and, under certain circumstances, place it on non-accrual status. The subsidiary then works with the borrower to develop a payment schedule which they anticipate will permit service of the principal and interest on the loan by the borrower. Loans which deteriorate and show the inability of a borrower to repay principal and do not meet the subsidiary's standards are charged off quarterly. Commercial loans are generally viewed as having a higher credit risk than residential real estate or consumer loans because commercial loans usually involve larger loan balances to a single borrower and are more susceptible to a risk of default during an economic downturn. The total indebtedness of the largest single borrower within the commercial portfolio was $19.6 million at December 31, 2004. Since commercial loans generally have variable interest rates, an increase in interest rates increases the debt service requirement for the borrowing. Credit risk for commercial loans arises from borrowers lacking the ability or willingness to pay principal or interest, and in the case of secured loans, by a shortfall in the collateral value in relation to the outstanding loan balance in the event of a default and subsequent liquidation of collateral. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Other collateral securing loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on success of the business. Information concerning the loan loss experience and allowance for loan losses related to the commercial loan portfolio and commercial real estate portfolio is provided in Tables 8 and 9 included in the section of Park's 2004 Annual Report to Shareholders captioned "FINANCIAL REVIEW," on pages 32 and 33, and is incorporated herein by reference. Park National Bank also leases equipment under terms similar to the commercial lending policies described above. Park Commercial Leasing, a division of Park National Bank, originates and services direct leases of equipment which it acquires with no outside financing. Commercial leases are primarily secured by equipment and have little residual risk since the residual values are -8- generally ten percent or less of the financed amount. The estimated residual values of equipment leases are established at inception by determining the estimated residual value for the equipment from the appropriate industry leasing guide. Management re-evaluates the estimated residual values of equipment leases on a quarterly basis from a review of the industry leasing guides. AIRCRAFT FINANCING. Scope Leasing specializes in aircraft financing. Scope Leasing's customers include small businesses and entrepreneurs intending to use the aircraft for business or pleasure. The lending officers of Scope Leasing are experienced in the aircraft financing industry and rely upon that experience and industry guides in determining whether to grant an aircraft loan or lease. At December 31, 2004, Scope Leasing had outstanding approximately $49.5 million in loans secured by aircraft (which are included in the commercial loan portfolio) and $6.9 million in aircraft operating leases. The estimated residual values of aircraft leases are established at inception using published used aircraft value references. Management re-evaluates the estimated residual values of aircraft leases on a quarterly basis using published used aircraft value references. CONSUMER LOANS. At December 31, 2004, Park's banking subsidiaries, Park Leasing and Guardian Finance had outstanding consumer loans (including automobile leases and credit cards) in an aggregate amount of approximately $521.9 million, constituting approximately 16.7% of their aggregate total loan portfolio. Of this amount, approximately $505.1 million represented consumer loans and $16.8 million represented automobile leases. These subsidiaries make installment credit available to customers and prospective customers in their primary market area of central and southern Ohio. Park Leasing had participated in an automobile leasing program with a major national insurance company. However, that program was terminated during the fourth quarter of 2004 and automobile lease lending is not emphasized. Park Leasing had approximately $7.7 million of automobile leases outstanding at December 31, 2004. Credit approval for consumer loans requires demonstration of sufficient income to repay principal and interest due, stability of employment, a positive credit record and sufficient collateral for secured loans. It is the policy of Park's subsidiaries to adhere strictly to all laws and regulations governing consumer lending. A qualified compliance officer is responsible for monitoring each subsidiary's performance in this area and for advising and updating loan personnel. Each subsidiary reviews its consumer loan portfolio monthly and charges off loans which do not meet that subsidiary's standards. Each banking subsidiary (other than the First Clermont Division of Park National Bank) also offers credit card accounts through its consumer lending department. These accounts are administered under the same standards as other consumer loans and leases. Consumer loans generally have a higher risk of default than real estate mortgage loans. Consumer loans typically have shorter terms and lower balances with higher yields as compared to real estate mortgage loans, but generally carry higher risks of default. Consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans. Information concerning the loan loss experience and allowance for loan losses related to the consumer loan portfolio is provided in Tables 8 and 9 included in the section of Park's 2004 Annual Report to Shareholders captioned "FINANCIAL REVIEW," on pages 32 and 33, and is incorporated herein by reference. -9- RESIDENTIAL REAL ESTATE AND CONSTRUCTION LOANS. At December 31, 2004, Park's banking subsidiaries had outstanding approximately $1,345.6 million in residential real estate, home equity lines of credit and construction mortgages, representing approximately 43.1% of total loans outstanding. Of this amount, approximately $987.1 million represented residential real estate loans, $203.2 million represented home equity lines of credit and $155.3 million represented construction loans. The market area for real estate lending by the banking subsidiaries is concentrated in central and southern Ohio. Credit approval for residential real estate loans requires demonstration of sufficient income to repay the principal and interest and the real estate taxes and insurance, stability of employment, a positive credit record and the appropriate appraised value of the real estate securing the loan. Each banking subsidiary generally requires that the residential real estate loan amount be no more than 80% of the purchase price or the appraised value of the real estate securing the loan, unless private mortgage insurance is obtained by the borrower. Loans made for each banking subsidiary's portfolio in this lending category are generally adjustable rate, fully amortized mortgages. Each banking subsidiary also originates fixed rate real estate loans for the secondary market. These loans are generally sold immediately after closing. All real estate loans are secured by first mortgages with evidence of title in favor of the banking subsidiary in the form of an attorney's opinion of title or a title insurance policy. Each banking subsidiary also requires proof of hazard insurance with the banking subsidiary named as the mortgagee and as the loss payee. Independent appraisals are generally obtained for consumer real estate loans. Home equity lines of credit are generally made as second mortgages by Park's banking subsidiaries. The maximum amount of a home equity line of credit is generally limited to 85% of the appraised value of the property less the balance of the first mortgage. The home equity lines of credit are written with ten-year terms. A variable interest rate is generally charged on the home equity lines of credit. Information concerning the loan loss experience and allowance for loan losses related to the residential real estate portfolio is provided in Tables 8 and 9 included in the section of Park's 2004 Annual Report to Shareholders captioned "FINANCIAL REVIEW," on pages 32 and 33, and is incorporated herein by reference. Construction loans include commercial construction loans as well as residential construction loans. Construction loans may be in the form of a permanent loan or a short-term construction loan, depending on the needs of the individual borrower. Generally, the permanent construction loans have a variable interest rate although occasionally a permanent construction loan may be made with a fixed interest rate for a term generally not exceeding five years. Short-term construction loans are made with variable interest rates. Information concerning the loan maturity distribution within the construction financing portfolio is provided in Table 4 included in the section of Park's 2004 Annual Report to Shareholders captioned "FINANCIAL REVIEW," on page 29, and is incorporated herein by reference. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property's value at completion of -10- construction and the estimated cost (including interest) of construction. If the estimate of construction cost proves to be inaccurate, the banking subsidiary making the loan may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value proves inaccurate, the banking subsidiary may be confronted, at or prior to the maturity of the loan, with a project having a value insufficient to assure full repayment, should the borrower default. In the event a default on a construction loan occurs and foreclosure follows, the banking subsidiary must take control of the project and attempt either to arrange for completion of construction or dispose of the unfinished project. Additional risk exists with respect to loans made to developers who do not have a buyer for the property, as the developer may lack funds to pay the loan if the property is not sold upon completion. Park's banking subsidiaries attempt to reduce such risks on loans to developers by requiring personal guarantees and reviewing current personal financial statements and tax returns as well as other projects undertaken by the developer. Information concerning the loan loss experience and allowance for loan losses related to the construction financing portfolio is provided in Tables 8 and 9 included in the section of Park's 2004 Annual Report to Shareholders captioned "FINANCIAL REVIEW," on pages 32 and 33, and is incorporated herein by reference. INSURANCE AGENCY Park Insurance Group offers life insurance and other insurance products to its customers through licensed representatives who work for Park's banking subsidiaries. Park Insurance Group's customers include current customers of Park's banking subsidiaries and other residents in the 28 Ohio counties served by those subsidiaries. Park Insurance Group's results to date have not been material. TITLE AGENCY Park Title Agency is a traditional title agency serving the central Ohio area. Customers include residential and commercial customers seeking title insurance for purchases, construction and refinancing of real estate. Park Title Agency's customers include current customers of Park's banking subsidiaries and other residents primarily in the 28 Ohio counties served by those subsidiaries. COMPETITION The financial services industry is highly competitive. Park's subsidiaries compete with other local, regional and national service providers, including banks, savings associations, credit unions and other types of financial institutions, finance companies, insurance agencies and title agencies. Other competitors include securities dealers, brokers, mortgage bankers, investment advisors, insurance companies and financial services subsidiaries of commercial and manufacturing companies. Many of these competitors enjoy the benefits of advanced technology, fewer regulatory constraints and lower cost structures. Many of the newer competitors offer one-stop financial services to their customers that may include services that banks and their subsidiaries may not have been able or legally permitted to offer their customers in the past. The primary factors in competing for loans are interest rates charged and overall services provided to borrowers. The primary factors in competing for deposits are interest rates paid on deposits, account liquidity, convenience and hours of office locations as well as having trained and competent staff to deliver services. -11- EMPLOYEES As of December 31, 2004, Park and its subsidiaries had 1,749 full-time equivalent employees. SUPERVISION AND REGULATION Park, its banking subsidiaries and many of its non-banking subsidiaries are subject to extensive regulation by federal and state agencies. The regulation of bank holding companies and their subsidiaries is intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole and not for the protection of shareholders. As a bank holding company, Park is subject to regulation under the Bank Holding Company Act and to inspection, examination and supervision by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). Park is also under the jurisdiction of the SEC and certain state securities commissions related to the offering and sale of its securities. Park is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Exchange Act, as administered by the SEC. Park's common shares are listed on AMEX under the trading symbol "PRK," and Park is subject to the AMEX rules for listed companies. Park National Bank, Century National Bank, First-Knox National Bank, United Bank, Second National Bank, Security National Bank and Citizens National Bank, as national banking associations, are subject to regulation, supervision and examination primarily by the Office of the Comptroller of the Currency ("OCC") and secondarily by the Federal Deposit Insurance Corporation ("FDIC"). Richland Trust Company, as an Ohio state-chartered bank, is subject to regulation, supervision and examination primarily by the Ohio Division of Financial Institutions and secondarily the FDIC. Guardian Finance, as an Ohio state-chartered consumer finance company, is subject to regulation, supervision and examination by the Ohio Division of Financial Institutions. Park Insurance Group, as an Ohio state-chartered insurance agency, and Park Title Agency, as an Ohio state-chartered title agency, are subject to regulation, supervision and examination by the Ohio Department of Insurance. The following information describes selected federal and Ohio statutory and regulatory provisions and is qualified in its entirety by reference to the full text of the particular statutory or regulatory provisions. These statutes and regulations are continually under review by Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations or regulatory policies applicable to Park and its subsidiaries could have a material effect on their respective businesses. REGULATION OF BANK HOLDING COMPANIES Park is registered with the Federal Reserve Board as a bank holding company under the Bank Holding Company Act. Bank holding companies and their activities are subject to extensive -12- regulation by the Federal Reserve Board. Bank holding companies are required to file reports with the Federal Reserve Board and such additional information as the Federal Reserve Board may require, and are subject to regular examinations by the Federal Reserve Board. The Federal Reserve Board also has extensive enforcement authority over bank holding companies, including, among other things, the ability to: - assess civil money penalties; - issue cease and desist or removal orders; and - require that a bank holding company divest subsidiaries (including its banking subsidiaries). In general, the Federal Reserve Board may initiate enforcement actions for violations of laws and regulations and unsafe or unsound practices. Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support those subsidiary banks. Under this policy, the Federal Reserve Board may require a bank holding company to contribute additional capital to an undercapitalized subsidiary bank. The Bank Holding Company Act requires the prior approval of the Federal Reserve Board in any case where a bank holding company proposes to: - acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that is not already majority-owned by it; - acquire all or substantially all of the assets of another bank or bank holding company; or - merge or consolidate with any other bank holding company. Section 4 of the Bank Holding Company Act also prohibits a bank holding company, with certain exceptions, from acquiring more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than banking or managing or controlling banks. The primary exception allows the ownership of shares by a bank holding company in any company the activities of which the Federal Reserve Board had determined as of November 19, 1999 to be so closely related to banking as to be a proper incident thereto. The Federal Reserve Board by regulation had determined that the following activities, among others, were so closely related to banking: - operating a savings association, mortgage company, finance company, credit card company or factoring company; - performing certain data processing operations; - providing investment and financial advice; and -13- - acting as an insurance agent for certain types of credit-related insurance. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on the maintenance of reserves against deposits, extensions of credit to the bank holding company or any of its subsidiaries, investments in the stock or other securities of the bank holding company or its subsidiaries and the taking of such stock or securities as collateral for loans to any borrower. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property or furnishing of any services. Various consumer laws and regulations also affect the operations of these subsidiaries. TRANSACTIONS WITH AFFILIATES, DIRECTORS, EXECUTIVE OFFICERS AND SHAREHOLDERS Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Board Regulation W restrict transactions by banks and their subsidiaries with their affiliates. An affiliate of a bank is any company or entity which controls, is controlled by or is under common control with the bank. Generally, Sections 23A and 23B and Regulation W: - limit the extent to which a bank or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of that bank's capital stock and surplus (i.e., tangible capital); - limit the extent to which a bank or its subsidiaries may engage in "covered transactions" with all affiliates to 20% of that bank's capital stock and surplus; and - require that all such transactions be on terms substantially the same, or at least as favorable to the bank or subsidiary, as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and other similar types of transactions. A bank's authority to extend credit to executive officers, directors and greater than 10% shareholders, as well as entities such persons control, is subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder by the Federal Reserve Board. Among other things, these loans must be made on terms substantially the same as those offered to unaffiliated individuals or be made as part of a benefit or compensation program and on terms widely available to employees, and must not involve a greater than normal risk of repayment. In addition, the amount of loans a bank may make to these persons is based, in part, on the bank's capital position, and specified approval procedures must be followed in making loans which exceed specified amounts. REGULATION OF NATIONALLY-CHARTERED BANKS As national banking associations, Park National Bank, Century National Bank, First-Knox National Bank, United Bank, Second National Bank, Security National Bank and Citizens National Bank are subject to regulation under the National Banking Act and are periodically examined by the -14- OCC. Furthermore, they are subject, as member banks, to the rules and regulations of the Federal Reserve Board. Each is an insured institution. Park National Bank, First-Knox National Bank, United Bank, Second National Bank, Security National Bank and Citizens National Bank are members of the Bank Insurance Fund, and Century National Bank is a member of the Savings Association Insurance Fund. As a result, they are subject to regulation by the FDIC. In addition, the establishment of branches by each of Park National Bank, Century National Bank, First-Knox National Bank, United Bank, Second National Bank, Security National Bank and Citizens National Bank is subject to prior approval of the OCC. REGULATION OF OHIO STATE-CHARTERED BANKS AND CONSUMER FINANCE COMPANIES The FDIC is the primary federal regulator of Richland Trust Company. The FDIC issues regulations governing the operations of Richland Trust Company and examines Richland Trust Company. The FDIC may initiate enforcement actions against insured depository institutions and persons affiliated with them for violations of laws and regulations or for engaging in unsafe or unsound practices. If the grounds provided by law exist, the FDIC may appoint a conservator or a receiver for a nonmember bank. As a bank incorporated under Ohio law, Richland Trust Company is subject to regulation and supervision by the Ohio Division of Financial Institutions. Division regulation and supervision affects the internal organization of Richland Trust Company, as well as its savings, mortgage lending and other investment activities. The Division of Financial Institutions may initiate supervisory measures or formal enforcement actions against Ohio commercial banks. Ultimately, if the grounds provided by law exist, the Division of Financial Institutions may place an Ohio bank in conservatorship or receivership. Whenever the Superintendent of Financial Institutions considers it necessary or appropriate, the Superintendent may also examine the affairs of any holding company or any affiliate or subsidiary of an Ohio bank. As a consumer finance company incorporated under Ohio law, Guardian Finance is also subject to regulation and supervision by the Division of Financial Institutions. Division regulation and supervision affect the lending activities of Guardian Finance. If grounds provided by law exist, the Division of Financial Institutions may suspend or revoke an Ohio consumer finance company's ability to make loans. FEDERAL DEPOSIT INSURANCE CORPORATION The FDIC is an independent federal agency which insures the deposits, up to prescribed statutory limits, of federally-insured banks and savings associations and safeguards the safety and soundness of the financial institution industry. Two separate insurance funds are maintained and administered by the FDIC. In general, banking institutions are members of the "BIF", and savings associations are "SAIF" members. The insurance fund conversion provisions do not prohibit a SAIF member from either converting to a bank charter, as long as the resulting bank remains a SAIF member (as First Federal Savings Bank of Eastern Ohio did when it converted to a national bank charter in December 2004 prior to its merger with Century National Bank), or merging with a bank, as long as the bank continues to pay the SAIF insurance assessments on the deposits acquired. Exit and entrance fees must be paid to the FDIC in full conversions. -15- INSURANCE PREMIUMS. Insurance premiums for SAIF and BIF members are determined during each semi-annual assessment period based upon the members' respective categorization as well capitalized, adequately capitalized or undercapitalized. The FDIC assigns banks to one of three supervisory subgroups within each capital group. The supervisory subgroup to which a bank is assigned is based on a supervisory evaluation provided to the FDIC by the bank's primary federal regulator and information which the FDIC determines to be relevant to the bank's financial condition and the risk posed to the deposit insurance funds (which may include, if applicable, information provided by the bank's state supervisor). A bank's assessment rate depends on the capital category and supervisory category to which it is assigned. Since January 1, 2000, the BIF assessment rate and the SAIF assessment rate have been the same. This assessment (which includes the FICO assessment) currently ranges from 1.44 to 28.44 cents per $100 of domestic deposits. Each of Park's banking subsidiaries is currently paying an assessment rate of 1.44 cents per $100 of domestic deposits. An increase in this assessment rate could have a material adverse effect on the earnings of the affected banks, depending on the amount of the increase. Insurance of deposits may be terminated by the FDIC upon a finding that the insured institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition enacted or imposed by the bank's regulatory agency. DEPOSITOR PREFERENCE. The Federal Deposit Insurance Act provides that, in the event of the "liquidation or other resolution" of a bank, the claims of depositors of the bank, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver will have priority over other general unsecured claims against the bank. If a bank fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-depositor creditors. LIABILITY OF COMMONLY CONTROLLED BANKS. Under the Federal Deposit Insurance Act, a bank is generally liable for any loss incurred, or reasonably expected to be incurred, by the FDIC in connection with (a) the default of a commonly controlled bank or (b) any assistance provided by the FDIC to a commonly controlled bank in danger of default. "Default" means generally the appointment of a conservator or receiver. "In danger of default" means generally the existence of conditions indicating that a default is likely to occur in the absence of regulatory assistance. FEDERAL HOME LOAN BANK The Federal Home Loan Banks ("FHLBs") provide credit to their members in the form of advances. As a member of the FHLB of Cincinnati, each of the banking subsidiaries of Park must maintain an investment in the capital stock of the FHLB of Cincinnati. Each of Park's banking subsidiaries is in compliance with this requirement, with the following investments in the capital stock of the FHLB of Cincinnati at December 31, 2004: Park National Bank - $8.0 million; Richland Trust Company - $4.4 million; Century National Bank - $11.0 million; First-Knox National Bank - $10.9 million; United Bank - $1.2 million; Second National Bank - $2.7 million; Security National Bank - $7.5 million; and Citizens National Bank - $1.4 million. -16- Upon the origination or renewal of a loan or advance, each FHLB is required by law to obtain and maintain a security interest in collateral in one or more of the following categories: fully-disbursed, whole first mortgage loans on improved residential property not more than 90 days delinquent or securities representing a whole interest in such loans; securities issued, insured or guaranteed by the United States Government or an agency thereof; deposits in any FHLB; or other real estate related collateral acceptable to the applicable FHLB, if such collateral has a readily ascertainable value and the FHLB can perfect its security interest in the collateral. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLB. The standards take into account a member's performance under the Community Reinvestment Act and its record of lending to first-time home buyers. All long-term advances by each FHLB must be made only to provide funds for residential housing finance. REGULATORY CAPITAL The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies and state member banks. The OCC and the FDIC have adopted risk-based capital guidelines for national banks and state non-member banks, respectively. The guidelines provide a systematic analytical framework which makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures expressly into account in evaluating capital adequacy, and minimizes disincentives to holding liquid, low-risk assets. Capital levels as measured by these standards are also used to categorize financial institutions for purposes of certain prompt corrective action regulatory provisions. The minimum guideline for the ratio of total capital to risk-weighted assets (including certain off-balance sheet items such as standby letters of credit) is 8%. This total risk-based capital ratio must be at least 10% for a bank holding company to be considered well capitalized. At least half of the minimum total risk-based capital ratio (4%) must be composed of common shareholders' equity, minority interests in the equity accounts of consolidated subsidiaries, a limited amount of qualifying preferred stock, less goodwill and certain other deductions, including the unrealized net gains and losses, after applicable taxes, on available-for-sale securities carried at fair value (commonly known as "Tier 1" risk-based capital). To be considered well capitalized, the Tier 1 risk-based capital ratio must be at least 6%. The remainder of total risk-based capital (commonly known as "Tier 2" risk-based capital) may consist of certain amounts of mandatory convertible debt, subordinated debt, preferred stock not qualifying as Tier 1 capital, loan and lease loss allowance and net unrealized gains, after applicable taxes, on available-for-sale equity securities with readily determinable fair values, all subject to limitations established by the guidelines. Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of four risk weights (0%, 20%, 50% and 100%) is applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. The Federal Reserve Board guidelines provide for a minimum ratio of Tier 1 -17- risk-based capital to average assets (excluding the loan and lease loss allowance, goodwill and certain other intangibles), or "leverage ratio," of 3% for bank holding companies that meet certain criteria, including having the highest regulatory rating, and 4% for all other bank holding companies. To be considered well capitalized, the leverage ratio for a bank holding company must be at least 5%. The guidelines further provide that bank holding companies making acquisitions will be expected to maintain strong capital positions substantially above the minimum levels. The OCC and the FDIC have each also adopted minimum leverage ratio guidelines for national banks and for state non-member banks, respectively. The federal banking agencies have established a system of prompt corrective action to resolve certain of the problems of undercapitalized institutions. This system is based on five capital level categories for insured depository institutions: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." The federal banking agencies may (or in some cases must) take certain supervisory actions depending upon a bank's capital level. For example, the banking agencies must appoint a receiver or conservator for a bank within 90 days after it becomes "critically undercapitalized" unless the bank's primary regulator determines, with the concurrence of the FDIC, that other action would better achieve regulatory purposes. Banking operations otherwise may be significantly affected depending on a bank's capital category. For example, a bank that is not "well capitalized" generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market, and the holding company of any undercapitalized depository institution must guarantee, in part, specific aspects of the bank's capital plan for the plan to be acceptable. Park is in compliance with the current applicable capital guideline ratios. As of December 31, 2004, Park had a total risk-based capital ratio of 16.43%, Tier 1 risk-based capital ratio of 15.16% and a leverage ratio of 10.10%. Park's management believes that each of its subsidiary banks is "well capitalized" according to the guidelines described above. See Note 19 of the Notes to Consolidated Financial Statements located on page 56 of Park's 2004 Annual Report to Shareholders, which is incorporated herein by reference. FISCAL AND MONETARY POLICIES The business and earnings of Park are affected significantly by the fiscal and monetary policies of the Federal Government and its agencies. Park is particularly affected by the policies of the Federal Reserve Board, which regulates the supply of money and credit in the United States. These policies are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. LIMITS ON DIVIDENDS AND OTHER PAYMENTS There are various legal limitations on the extent to which subsidiary banks may finance or otherwise supply funds to their parent holding companies. Under federal and Ohio law, subsidiary banks may not, subject to certain limited exceptions, make loans or extensions of credit to, or investments in the securities of, their bank holding companies. Subsidiary banks are also subject to collateral security requirements for any loans or extension of credit permitted by such exceptions. -18- None of the Park banking subsidiaries may pay dividends out of its surplus if, after paying these dividends, it would fail to meet the required minimum levels under the risk-based capital guidelines and minimum leverage ratio requirements established by the OCC and the FDIC. In addition, each bank must have the approval of its regulatory authority if a dividend in any year would cause the total dividends for that year to exceed the sum of the bank's current year's "net profits" (or net income, less dividends declared during the period based on regulatory accounting principles) and the retained net profits for the preceding two years, less required transfers to surplus. Payment of dividends by any of the Park banking subsidiaries may be restricted at any time at the discretion of its regulatory authorities, if such regulatory authorities deem such dividends to constitute unsafe and/or unsound banking practices or if necessary to maintain adequate capital. The ability of Park to obtain funds for the payment of dividends and for other cash requirements is largely dependent on the amount of dividends which may be declared by its subsidiary banks. However, the Federal Reserve Board expects Park to serve as a source of strength to its subsidiary banks, which may require Park to retain capital for further investment in its subsidiary banks, rather than pay dividends to the Park shareholders. Payment of dividends by one of Park's banking subsidiaries may be restricted at any time at the discretion of its applicable regulatory authorities, if they deem such dividends to constitute an unsafe and/or unsound banking practice. These provisions could have the effect of limiting Park's ability to pay dividends on its common shares. FINANCIAL ACTIVITIES PERMITTED Bank holding companies may become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized, is well managed, and has at least a satisfactory rating under the Community Reinvestment Act, by filing a declaration that the bank holding company wishes to become a financial holding company. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. "Financial in nature" is defined to include: - securities underwriting, dealing and market making; - sponsoring mutual funds and investment companies; - insurance underwriting and agency; - merchant banking activities; and - activities that the Federal Reserve Board has determined to be closely related to banking. -19- A national bank also may engage, subject to limitations on investment, in activities that are financial in nature (other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment) through a financial subsidiary of the bank, if the bank is well capitalized and well managed, has at least a satisfactory Community Reinvestment Act rating and has received the prior approval of the OCC to engage in such activities. Subsidiary banks of a financial holding company or national banks with financial subsidiaries must continue to be well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions, which could include divestiture of the financial-in-nature subsidiary or subsidiaries. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has a Community Reinvestment Act rating of satisfactory or better. As of the date of this Annual Report on Form 10-K, Park had not elected to become a financial holding company. PRIVACY PROVISIONS OF GRAMM-LEACH-BLILEY ACT Under the Gramm-Leach-Bliley Act, federal banking regulators were required to adopt rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. FUTURE LEGISLATION Various legislation affecting financial institutions and the financial industry is from time to time introduced in Congress. Such legislation may change banking statutes and the operating environment of Park and its subsidiaries in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions. Park cannot predict whether any of this potential legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of Park or any of its subsidiaries. SARBANES-OXLEY ACT OF 2002 AND RELATED RULES AFFECTING CORPORATE GOVERNANCE On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws. The changes are intended to allow shareholders to monitor the performance of companies and directors more easily and efficiently. The Sarbanes-Oxley Act addresses, among other matters: increased responsibilities of audit committees; corporate responsibility for financial reports; a requirement that chief executive and chief financial officers forfeit certain bonuses and profits if their companies issue an accounting restatement as a result of misconduct; a prohibition on insider trading during pension fund blackout -20- periods; disclosure of off-balance sheet transactions; conditions for the use of pro forma financial information; a prohibition on personal loans to directors and executive officers (excluding loans by insured depository institutions that are subject to the insider lending restrictions of the Federal Reserve Act); expedited filing requirements for stock transaction reports by officers and directors; the formation of the Public Company Accounting Oversight Board; auditor independence; and various increased criminal penalties for violations of securities laws. As mandated by the Sarbanes-Oxley Act, the SEC has adopted rules and regulations governing, among other issues, corporate governance, auditing and accounting, executive compensation and enhanced and timely disclosure of corporate information. AMEX has also adopted corporate governance rules. The Board of Directors of Park has taken a series of actions to strengthen and improve Park's already strong corporate governance practices in light of the rules of the SEC and AMEX. At its January 20, 2004 meeting, the Board of Directors created the Compensation Committee and the Nominating Committee, each of which is comprised of directors who qualify as independent under the applicable sections of AMEX Company Guide. The Board of Directors has adopted charters for the Audit Committee, the Compensation Committee and the Nominating Committee and a Code of Business Conduct and Ethics governing the directors, officers and associates of Park and its affiliates. In addition, Park has implemented a "whistleblower" hotline called the "PRK Improvement Line." Calls that relate to accounting, internal accounting controls or auditing matters or that relate to possible wrongdoing by associates of Park or one of its affiliates can be made anonymously through this hotline. The calls are received by an independent third party service and forwarded directly to the Chair of the Audit Committee and the Head of Internal Audit. The PRK Improvement Line number is 1-800-418-6423, Ext. PRK (775). The text of each of the Audit Committee Charter, the Nominating Committee Charter, the Compensation Committee Charter and the Code of Business Conduct and Ethics is posted on the "Governance Documents (Corporate Governance)" page of Park's website located at www.parknationalcorp.com. Interested persons may also obtain copies of these documents, without charge, by writing to the President of Park at Park National Corporation, 50 North Third Street, P.O. Box 3500, Newark, Ohio 43058-3500, Attention: David L. Trautman. STATISTICAL DISCLOSURE The statistical disclosure relating to Park and its subsidiaries required under the SEC's Industry Guide 3, "Statistical Disclosure by Bank Holding Companies," is included in the section of Park's 2004 Annual Report to Shareholders captioned "FINANCIAL REVIEW," on pages 26 through 36, and in Note 1 of the Notes to Consolidated Financial Statements located on pages 46 and 47 of Park's 2004 Annual Report to Shareholders, Note 4 of the Notes to Consolidated Financial Statements located on pages 49 and 50 of Park's 2004 Annual Report to Shareholders and Note 9 of the Notes to Consolidated Financial Statements located on pages 51 and 52 of Park's 2004 Annual Report to Shareholders. This statistical disclosure is incorporated herein by reference. EFFECT OF ENVIRONMENTAL REGULATION Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a -21- material effect upon the capital expenditures, earnings or competitive position of Park and its subsidiaries. Park believes the nature of the operations of its subsidiaries has little, if any, environmental impact. Park, therefore, anticipates no material capital expenditures for environmental control facilities for its current fiscal year or for the foreseeable future. Park believes its primary exposure to environmental risk is through the lending activities of its subsidiaries. In cases where management believes environmental risk potentially exists, Park's subsidiaries mitigate their environmental risk exposures by requiring environmental site assessments at the time of loan origination to confirm collateral quality as to commercial real estate parcels posing higher than normal potential for environmental impact, as determined by reference to present and past uses of the subject property and adjacent sites. Environmental assessments are typically required prior to any foreclosure activity involving non-residential real estate collateral. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION Certain statements contained in this Annual Report on Form 10-K which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, the statements specifically identified as forward-looking statements within this document. In addition, certain statements in future filings by Park with the SEC, in press releases, and in oral and written statements made by or with the approval of Park which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Examples of forward-looking statements include: (i) projections of income or expense, earnings per share, the payment or non-payment of dividends, capital structure and other financial items; (ii) statements of plans and objectives of Park or its management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as "believes", "anticipates", "expects", "intends", "targeted", and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying those statements. Forward-looking statements involve risks and uncertainties. Actual results may differ materially from those predicted by the forward-looking statements because of various factors and possible events, including the following: - the costs of providing compensation and benefits to employees of Park and its subsidiaries increase; - the costs or difficulties related to the integration of Park's recent acquisitions is greater than expected or the cost savings or any revenue synergies of the combined entities are lower or take longer to realize than expected; - competitive pressures among depository institutions increase significantly; - consolidation in the financial services industry continues; - general economic conditions, either national or in the geographic areas in which Park's subsidiaries do business, are less favorable than expected; -22- - prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions are less favorable than expected; - technological changes are more difficult or expensive to implement than anticipated; - changes in the interest rate environment reduce interest margins; - legislative or regulatory changes adversely affect financial services companies; - changes in Park's accounting policies or procedures are required by the Public Company Accounting Oversight Board or other regulatory agencies; - there are adverse changes in the securities markets; and - Park suffers the loss of key personnel. There is also the risk that Park's management or Board of Directors incorrectly analyzes these risks and forces, or that the strategies Park develops to address them are unsuccessful. Forward-looking statements speak only as of the date on which they are made, and, except as may be required by law, Park undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made to reflect unanticipated events. All subsequent written and oral forward-looking statements attributable to Park or any person acting on our behalf are qualified by the cautionary statements in this section. ITEM 2. PROPERTIES. Park's principal executive offices are located at 50 North Third Street, Newark, Ohio 43055. Park does not lease or own any physical property, real or personal. PARK NATIONAL BANK As of December 31, 2004, Park National Bank had six financial service offices (including its main office) and its operations center in Newark (Licking County). Park National Bank also had financial service offices in Granville, Heath (two offices), Hebron, Johnstown, Kirkersville, Pataskala and Utica in Licking County, financial service offices in Canal Winchester, Columbus, Gahanna and Worthington in Franklin County, a financial service office in Cincinnati in Hamilton County, a financial service office in Dayton in Montgomery County, a financial service office in Delaware in Delaware County and financial service offices in Baltimore, Pickerington (two offices) and Lancaster (seven offices) in Fairfield County. The financial service offices in Canal Winchester and Fairfield County comprise the Fairfield National Division. Park National Bank also operated eight off-site automated teller machines, three of which are operated by the Fairfield National Division. With the January 3, 2005 acquisition of First Clermont Bank, Park National Bank added seven financial service offices located in Amelia, Cincinnati (two offices), Milford (two offices), New Richmond and Owensville in Clermont County and three off-site automated teller machines. These financial service offices comprise the First Clermont Division. Accordingly, as of the date of -23- this Annual Report on Form 10-K, Park National Bank and its divisions have a total of 38 financial service offices and ten off-site automated teller machines, three of which are operated by the Fairfield National Division and two of which are operated by the First Clermont Division. Of these financial service offices, 17 are leased and the remainder are owned. RICHLAND TRUST COMPANY As of the date of this Annual Report on Form 10-K, Richland Trust Company has eight financial service offices in Mansfield (including its main office) as well as financial service offices in Butler, Lexington, Ontario and Shelby (two offices) in Richland County. Of these financial service offices, three are leased and the remainder are owned. Richland Trust Company also operates two off-site automated teller machines. CENTURY NATIONAL BANK As of the date of this Annual Report on Form 10-K, Century National Bank has eight financial service offices (including its main office) and a mortgage lending office in Zanesville (Muskingum County). Century National Bank also has financial service offices in New Concord and Dresden in Muskingum County, a financial service office in New Lexington in Perry County, a financial service office in Logan in Hocking County, a financial service office in Athens in Athens County, two financial service offices in Coshocton in Coshocton County and a financial service office in Newcomerstown in Tuscarawas County. Of these financial service offices, three are leased and the remainder are owned. Century National Bank also operates three off-site automated teller machines. FIRST-KNOX NATIONAL BANK As of the date of this Annual Report on Form 10-K, First-Knox National Bank has three financial service offices (including its main office) and its operations center in Mount Vernon (Knox County). First-Knox National Bank also has financial service offices in Ashland, Loudonville and Perrysville in Ashland County, two financial service offices in Millersburg in Holmes County, financial service offices in Centerburg, Danville and Fredericktown in Knox County, two financial service offices in Mount Gilead in Morrow County and a financial service office in Bellville in Richland County. The financial service offices in Ashland County comprise the Farmers and Savings Division. Of these financial service offices, two are leased and the remainder are owned. First-Knox National Bank also operates 11 off-site automated teller machines, one of which is operated by the Farmers and Savings Division. UNITED BANK As of the date of this Annual Report on Form 10-K, United Bank has its main office in Bucyrus and financial service offices in Crestline and Galion in Crawford County and financial service offices in Caledonia, Marion (two offices), Prospect and Waldo in Marion County. Of these financial service offices, three are leased and the remainder are owned. United Bank also operates one off-site automated teller machine. -24- SECOND NATIONAL BANK As of the date of this Annual Report on Form 10-K, Second National Bank has five financial service offices (including its main office) in Greenville (Darke County). Second National Bank also has two financial service offices in Arcanum (two offices) and Versailles in Darke County and a financial service office in Fort Recovery in Mercer County. Of these financial service offices, two are leased and the remainder are owned. SECURITY NATIONAL BANK As of the date of this Annual Report on Form 10-K, Security National Bank has six financial service offices (including its main office) in Springfield (Clark County). Security National Bank also has financial service offices in Enon, Medway, New Carlisle (two offices) and South Charleston in Clark County, financial service offices in Jamestown (two offices) and Xenia (two offices) in Greene County, a financial service office in Jeffersonville in Fayette County and financial service offices in Piqua (three offices including an administrative building), Tipp City and Troy (two offices) in Miami County. The financial service offices in Miami County comprise the Unity National Division. Of these financial service offices, three are leased and the remainder are owned. Security National Bank also operates four off-site automated teller machines. CITIZENS NATIONAL BANK As of the date of this Annual Report on Form 10-K, Citizens National Bank has two financial service offices (including its main office) in Urbana (Champaign County). In addition, Citizens National Bank has financial service offices in Mechanicsburg and North Lewisburg in Champaign County and a financial service office in Plain City in Madison County. All of Citizens National Bank's financial service offices are owned. Citizens National Bank also operates two off-site automated teller machines. GUARDIAN FINANCE As of the date of this Annual Report on Form 10-K, Guardian Finance has its main office in Hilliard and a financial service office in Columbus in Franklin County, a financial service office in Mansfield in Richland County where it leases space from Richland Trust Company, a financial service office in Lancaster in Fairfield County where it leases space from the Fairfield National Division of Park National Bank, a financial service office in Heath in Licking County, a financial service office in Springfield in Clark County, a financial service office in Delaware in Delaware County, and a financial service office in Centerville in Montgomery County. All of Guardian Finance's financial service offices are leased. ITEM 3. LEGAL PROCEEDINGS. There are no pending legal proceedings to which Park or any of its subsidiaries is a party or to which any of their property is subject, except routine legal proceedings to which Park's banking subsidiaries are parties incidental to their respective banking businesses. Park considers none of those proceedings to be material. -25- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of the security holders of Park during the fourth quarter of the fiscal year ended December 31, 2004. SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT. The following table lists the names and ages of the executive officers of Park as of February 22, 2005, the positions presently held by those individuals with Park and its principal subsidiaries and their individual business experience during the past five years.
Positions Held with Park and its Name Age Principal Subsidiaries and Principal Occupation - ---- --- ----------------------------------------------- C. Daniel DeLawder 55 Chairman of the Board since January 1, 2005, Chief Executive Officer since 1999, President from 1994 until December 31, 2004, and a Director since 1994, of Park; Chairman of the Board since January 1, 2005, Chief Executive Officer since January 1999, President from 1993 until December 31, 2004, Executive Vice President from 1992 to 1993, and a Director since 1992, of Park National Bank; Member of Advisory Board since 1985, Chairman of Advisory Board from 1989 to 2003, and President from 1985 to 1992, of the Fairfield National Division of Park National Bank; a Director of Richland Trust Company since 1997; a Director of Second National Bank since 2000 David L. Trautman 43 President since January 1, 2005, Secretary since July 2002, and a Director since January 1, 2005, of Park; President since January 1, 2005, Executive Vice President from February 2002 until December 31, 2004, Vice President from 1993 to May 1997, and a Director since February 2002, of Park National Bank; Chairman of the Board since March 2001, President and Chief Executive from May 1997 to February 2002, and a Director since May 1997, of First-Knox National Bank; a Director of United Bank, N.A. since 2000 John W. Kozak 49 Chief Financial Officer of Park since 1998 (became an executive officer of Park on July 22, 2002); Senior Vice President and Chief Financial Officer since 1998, and Vice President from 1991 to 1998, of Park National Bank; Chief Financial Officer from 1980 to 1991, and a Director since 1988, of Century National Bank
The executive officers serve at the pleasure of the Board of Directors of Park. -26- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. The information called for in this Item 5 by Items 201(a) through (c) of SEC Regulation S-K is incorporated herein by reference from the section of Park's 2004 Annual Report to Shareholders captioned "FINANCIAL REVIEW," on page 36. No purchases of common shares were made by or on behalf of Park, or any "affiliated purchaser" as defined in Rule 10b-18(a)(3) under the Exchange Act during the fiscal quarter ended December 31, 2004. 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 December 31, 2004, Park had the authority to still repurchase an aggregate of 488,300 common shares under this stock repurchase program. 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 the 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. In connection with the 5% stock dividend distributed on December 15, 2004, this number was adjusted to 1,260,000 common shares. Pursuant to the terms of the 1995 Plan, all of the common shares delivered upon the 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 December 31, 2004, incentive stock options covering 695,348 common shares were outstanding and 394,358 common shares were available for future grants; however, no further grants were made prior to January 16, 2005. Upon recommendation by the Compensation Committee, on January 18, 2005, the Board of Directors of Park adopted, subject to shareholder approval, the Park National Corporation 2005 Incentive Stock Option Plan (the "2005 Plan"). The Board of Directors of Park is proposing the 2005 Plan for consideration and approval by the shareholders at the Annual Meeting of Shareholders to be held on April 18, 2005. If the 2005 Plan is approved by the shareholders, 1,500,000 common shares will be authorized for delivery upon the exercise of incentive stock options granted in the future under the 2005 Plan. Pursuant to the terms of the 2005 Plan, all of the common shares delivered upon the exercise of incentive stock options granted under the 2005 Plan are to be treasury shares. -27- At December 31, 2004, 844,875 common shares were held as treasury shares for purposes of Park's stock option plans, including the 1995 Plan and, if approved by Park's shareholders, the 2005 Plan. ITEM 6. SELECTED FINANCIAL DATA. The information called for in this Item 6 is incorporated herein by reference from the section of Park's 2004 Annual Report to Shareholders captioned "FINANCIAL REVIEW," on page 35. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The information called for in this Item 7 is incorporated herein by reference from the section of Park's 2004 Annual Report to Shareholders captioned "FINANCIAL REVIEW," on pages 26 through 36. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As noted in Note 1 of the Notes to Consolidated Financial Statements under the caption "Derivative Instruments" on page 48 of Park's 2004 Annual Report to Shareholders, Park and its subsidiaries did not use any derivative instruments in 2004 or 2003. The discussion of interest rate sensitivity included in the section of Park's 2004 Annual Report to Shareholders captioned "FINANCIAL REVIEW - - Liquidity and Interest Rate Sensitivity Management," on pages 33 and 34, is incorporated herein by reference. In addition, the discussion of Park's commitments, contingent liabilities and off-balance sheet arrangements included on page 35 of Park's 2004 Annual Report to Shareholders under the caption "FINANCIAL REVIEW - Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements," and in Note 17 of the Notes to Consolidated Financial Statements included on pages 54 and 55 of Park's 2004 Annual Report to Shareholders, is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Consolidated Balance Sheets of Park and its subsidiaries at December 31, 2004 and 2003, the related Consolidated Statements of Income, of Changes in Stockholders' Equity and of Cash Flows for each of the fiscal years in the three-year period ended December 31, 2004, the related Notes to Consolidated Financial Statements, and the Report of Independent Registered Public Accounting Firm appearing on pages 39 through 58 of Park's 2004 Annual Report to Shareholders, are incorporated herein by reference. Quarterly Financial Data included in the section of Park's 2004 Annual Report to Shareholders captioned "FINANCIAL REVIEW," on page 36, are also incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. No response required. -28- ITEM 9A. CONTROLS AND PROCEDURES. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES With the participation of the Chairman of the Board 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 fiscal year covered by this Annual Report on Form 10-K. Based on that evaluation, Park's Chairman of the Board and Chief Executive Officer and Park's Chief Financial Officer have concluded that: - information required to be disclosed by Park in this Annual Report on Form 10-K and the other reports that 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 Annual Report on Form 10-K and the other reports that 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 fiscal year covered by this Annual Report on Form 10-K to ensure that material information relating to Park and its consolidated subsidiaries is made known to them, particularly during the period for which the periodic reports of Park, including this Annual Report on Form 10-K, are being prepared. MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The "MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING" on page 37 of Park's 2004 Annual Report to Shareholders is incorporated herein by reference. ATTESTATION REPORT OF THE REGISTERED PUBLIC ACCOUNTING FIRM The "REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM" on page 38 of Park's 2004 Annual Report to Shareholders is incorporated herein by reference. 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 December 31, 2004, that have materially affected, or are reasonably likely to materially affect, Park's internal control over financial reporting. -29- ITEM 9B. OTHER INFORMATION. No response required. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information concerning (a) directors of Park, (b) the Board of Directors' determination that Park has an "audit committee financial expert" serving on its Audit Committee, (c) the Audit Committee of Park's Board of Directors and (d) the procedures by which shareholders of Park may recommend nominees to Park's Board of Directors required by Item 401 of SEC Regulation S-K is incorporated herein by reference from Park's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 18, 2005 ("Park's 2005 Proxy Statement"), under the caption "ELECTION OF DIRECTORS (Item 1 on Proxy)". The information concerning the executive officers of Park required by Item 401 of SEC Regulation S-K is set forth in the portion of Part I of this Annual Report on Form 10-K entitled "SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT." The information required by Item 405 of SEC Regulation S-K is incorporated herein by reference from Park's 2005 Proxy Statement under the caption "PRINCIPAL SHAREHOLDERS OF PARK - Section 16(a) Beneficial Ownership Reporting Compliance." Park's Board of Directors has adopted charters for each of the Audit Committee, the Nominating Committee and the Compensation Committee. In accordance with the requirements of Section 807 of the AMEX Company Guide, the Board of Directors of Park has adopted a Code of Business Conduct and Ethics covering the directors, officers and employees of Park and its affiliates, including Park's Chairman of the Board and Chief Executive Officer (the principal executive officer) and Park's Chief Financial Officer (the principal financial officer and principal accounting officer). Park intends to disclose the following on the "Governance Documents (Corporate Governance)" page of its website located at www.parknationalcorp.com within the required four business days following their occurrence: (A) the date and nature of any amendment to a provision of its Code of Business Conduct and Ethics that (i) applies to Park's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, (ii) relates to any element of the code of ethics definition enumerated in Item 406(b) of SEC Regulation S-K, and (iii) is not a technical, administrative or other non-substantive amendment; and (B) a description of any waiver (including the nature of the waiver, the name of the person to whom the waiver was granted and the date of the waiver), including an implicit waiver, from a provision of the Code of Business Conduct and Ethics granted to Park's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions that relates to one or more of the elements of the code of ethics definition set forth in Item 406(b) of SEC Regulation S-K. In addition, Park will disclose any waivers of the Code of Business Conduct and Ethics granted to a director or an executive officer of Park in a current report on Form 8-K within four business days. -30- The text of each of the Code of Business Conduct and Ethics, the Audit Committee Charter, the Nominating Committee Charter and the Compensation Committee Charter is posted on the "Governance Documents (Corporate Governance)" page of Park's website located at www.parknationalcorp.com. Interested persons may also obtain copies of the Code of Business Conduct and Ethics, the Audit Committee Charter, the Nominating Committee Charter and the Compensation Committee Charter, without charge, by writing to the President of Park at Park National Corporation, 50 North Third Street, P.O. Box 3500, Newark, Ohio 43058-3500, Attention: David L. Trautman. In addition, Park's Code of Business Conduct and Ethics is incorporated by reference in Exhibit 14 to this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. The information called for in this Item 11 is incorporated herein by reference from Park's 2005 Proxy Statement, under the captions "ELECTION OF DIRECTORS (Item 1 on Proxy) - Compensation of Directors", "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION", and "COMPENSATION OF EXECUTIVE OFFICERS." Such incorporation by reference shall not be deemed to specifically incorporate by reference the information referred to in Item 402(a)(8) of SEC Regulation S-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The information called for in this Item 12 regarding the security ownership of certain beneficial owners and management is incorporated herein by reference from Park's 2005 Proxy Statement, under the caption "PRINCIPAL SHAREHOLDERS OF PARK." The information called for in this Item 12 regarding securities authorized for issuance under equity compensation plans is incorporated herein by reference from Park's 2005 Proxy Statement, under the caption "COMPENSATION OF EXECUTIVE OFFICERS - Equity Compensation Plan Information." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information called for in this Item 13 is incorporated herein by reference from Park's 2005 Proxy Statement, under the captions "ELECTION OF DIRECTORS (Item 1 on Proxy) ," "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION," and "TRANSACTIONS INVOLVING MANAGEMENT." ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information called for in this Item 14 is incorporated herein by reference from Park's 2005 Proxy Statement, under the captions "AUDIT COMMITTEE MATTERS - Pre-Approval of Services Performed by Independent Registered Public Accounting Firm" and "AUDIT COMMITTEE MATTERS - Fees of Independent Registered Public Accounting Firm." -31- PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a)(1) Financial Statements. For a list of all financial statements included with this Annual Report on Form 10-K, see "Index to Financial Statements" at page 35. (a)(2) Financial Statement Schedules. All schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and have been omitted. (a)(3) Exhibits. Exhibits filed with this Annual Report on Form 10-K are attached hereto. For a list of such exhibits, see the Index to Exhibits beginning at page E-1. (b) Exhibits. Exhibits filed with this Annual Report on Form 10-K are attached hereto. For a list of such exhibits, see the Index to Exhibits beginning at page E-1. (c) Financial Statement Schedules. None -32- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. PARK NATIONAL CORPORATION Date: March 11, 2005 By: /s/ C. Daniel DeLawder ------------------------------------------------- C. DanielDeLawder, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 11th day of March, 2005.
Name Capacity ---- -------- /s/ C. Daniel DeLawder Chairman of the Board, - -------------------------------------- Chief Executive Officer and Director C. Daniel DeLawder /s/ David L. Trautman President and Director - -------------------------------------- David L. Trautman /s/ John W. Kozak Chief Financial Officer and - -------------------------------------- Principal Accounting Officer John W. Kozak * Director - -------------------------------------- Maureen Buchwald * Director - -------------------------------------- James J. Cullers * Director - -------------------------------------- Harry O. Egger * Director - -------------------------------------- F. William Englefield IV
-33-
Name Capacity ---- -------- * Director - -------------------------------------- R. William Geyer * Director - -------------------------------------- William T. McConnell * Director - -------------------------------------- Michael J. Menzer * Director - -------------------------------------- John J. O'Neill * Director - -------------------------------------- William A. Phillips * Director - -------------------------------------- J. Gilbert Reese * Director - -------------------------------------- Rick R. Taylor * Director - -------------------------------------- Leon Zazworsky
- ---------- * By C. Daniel DeLawder pursuant to Powers of Attorney executed by the directors listed above, which Powers of Attorney have been filed with the Securities and Exchange Commission. /s/ C. Daniel DeLawder - -------------------------------------- C. Daniel DeLawder Chairman of the Board and Chief Executive Officer -34- PARK NATIONAL CORPORATION ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2004 INDEX TO FINANCIAL STATEMENTS
PAGE(S) IN 2004 ANNUAL REPORT TO DESCRIPTION SHAREHOLDERS - ----------- ------------ Report of Independent Registered Public Accounting Firm (Ernst & Young LLP) .................................................... 39 Consolidated Balance Sheets at December 31, 2004 and 2003 ............................................................... 40-41 Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002 ....................................... 42-43 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2004, 2003 and 2002 ............ 44 Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 ....................................... 45 Notes to Consolidated Financial Statements ................................ 46-58
-35- PARK NATIONAL CORPORATION ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2004 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- 3.1 Articles of Incorporation of Park National Corporation ("Park") as filed with the Ohio Secretary of State on March 24, 1992 (incorporated herein by reference to Exhibit 3(a) to Park's Form 8-B, filed on May 20, 1992 (File No. 0-18772) ("Park's Form 8-B")) 3.2 Certificate of Amendment to the Articles of Incorporation of Park as filed with the Ohio Secretary of State on May 6, 1993 (incorporated herein by reference to Exhibit 3(b) to Park's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-18772)) 3.3 Certificate of Amendment to the Articles of Incorporation of Park as filed with the Ohio Secretary of State on April 16, 1996 (incorporated herein by reference to Exhibit 3(a) to Park's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996 (File No. 1-13006)) 3.4 Certificate of Amendment by Shareholders to the Articles of Incorporation of Park as filed with the Ohio Secretary of State on April 22, 1997 (incorporated herein by reference to Exhibit 3(a)(1) to Park's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997 (File No. 1-13006)("Park's June 1997 Form 10-Q")) 3.5 Articles of Incorporation of Park (reflecting amendments through April 22, 1997) [for SEC reporting compliance purposes only - not filed with Ohio Secretary of State] (incorporated herein by reference to Exhibit 3(a)(2) to Park's June 1997 Form 10-Q) 3.6 Regulations of Park (incorporated herein by reference to Exhibit 3(b) to Park's Form 8-B) 3.7 Certified Resolution regarding adoption of amendment to Subsection 2.02(A) of the Regulations of Park by Shareholders on April 22, 1997 (incorporated herein by reference to Exhibit 3(b)(1) to Park's June 1997 Form 10-Q) 3.8 Regulations of Park (reflecting amendments through April 22, 1997) [for SEC reporting compliance purposes only] (incorporated herein by reference to Exhibit 3(b)(2) to Park's June 1997 Form 10-Q) 4 Agreement to furnish instruments defining rights of holders of long-term debt **
E-1
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- *10.1 Summary of Base Salaries for Executive Officers of Park National Corporation** *10.2 Summary of Incentive Compensation Plan of Park National Corporation** *10.3 Split-Dollar Agreement, dated May 17, 1993, between William T. McConnell and The Park National Bank (incorporated herein by reference to Exhibit 10(f) to Park's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-18772)); and Schedule A to Exhibit 10.3 identifying other identical Split-Dollar Agreements between subsidiaries of Park and executive officers of such subsidiaries who are directors or executive officers of Park ** *10.4 Split-Dollar Agreement, dated September 3, 1993, between Leon Zazworsky and The Park National Bank (incorporated herein by reference to Exhibit 10.3 to Park's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (File No. 1-13006) ("Park's 2003 Form 10-K")); and Schedule A to Exhibit 10.4 identifying other identical Split-Dollar Agreements between directors of Park and The Park National Bank, The Richland Trust Company, Century National Bank or The First-Knox National Bank of Mount Vernon as identified in such Schedule A ** *10.5 Park National Corporation 1995 Incentive Stock Option Plan (reflects amendments and share dividends through December 15, 2004)** *10.6 Form of Stock Option Agreement executed in connection with the grant of options under the Park National Corporation 1995 Incentive Stock Option Plan, as amended (incorporated herein by reference to Exhibit 10(i) to Park's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 1-13006)) *10.7 Description of Park National Corporation Supplemental Executive Retirement Plan ** *10.8 Security Banc Corporation 1987 Stock Option Plan, which was assumed by Park (incorporated herein by reference to Exhibit 10(a) to Park's Registration Statement on Form S-8 filed April 23, 2001 (Registration No. 333-59378)) *10.9 Security Banc Corporation 1995 Stock Option Plan, which was assumed by Park (incorporated herein by reference to Exhibit 10(b) to Park's Registration Statement on Form S-8 filed April 23, 2001 (Registration No. 333-59378)) *10.10 Security Banc Corporation 1998 Stock Option Plan, which was assumed by Park (incorporated herein by reference to Exhibit 10(c) to Park's Registration Statement on Form S-8 filed April 23, 2001 (Registration No. 333-59378))
E-2
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- *10.11 Employment Agreement, made and entered into as of December 22, 1999, and the Amendment thereto, dated March 23, 2001, between The Security National Bank and Trust Co. (also known as Security National Bank and Trust Co.) and Harry O. Egger (incorporated herein by reference to Exhibit 10(e) to Park's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001 (File No. 1-13006)) *10.12 First-Knox Banc Corp. 1990 Non-Qualified Stock Option and Stock Appreciation Rights Plan, which was assumed by Park (incorporated herein by reference to Exhibit A to Exhibit 23 to the Annual Report on Form 10-K for the fiscal year ended December 31, 1989 of First-Knox Banc Corp. (File No. 0-13161)) *10.13 Resolution Regarding Amendment to First-Knox Banc Corp. 1990 Non-Qualified Stock Option and Stock Appreciation Rights Plan on May 14, 1996, which was assumed by Park (incorporated herein by reference to Exhibit 10(h) to the Annual Report on Form 10-K for the fiscal year ended December 31, 1996 of First-Knox Banc Corp. (File No. 0-13161)) *10.14 Park National Corporation Stock Plan for Non-Employee Directors of Park National Corporation and Subsidiaries (incorporated herein by reference to Exhibit 10 to Park's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004 (File No. 1-13006)) *10.15 Summary of Compensation for Directors of Park National Corporation** *10.16 Security National Bank and Trust Co. Amended and Restated 1988 Deferred Compensation Plan ** 13 2004 Annual Report to Shareholders (not deemed filed except for portions thereof which are specifically incorporated by reference in this Annual Report on Form 10-K) (incorporated by reference to the financial statements portion of this Annual Report on Form 10-K beginning at page 35) ** 14 Code of Business Conduct and Ethics (incorporated herein by reference to Exhibit 14 to Park's 2003 Form 10-K) 21 Subsidiaries of Park National Corporation** 23 Consent of Ernst & Young LLP ** 24 Powers of Attorney of Directors and Executive Officers of Park ** 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**
E-3
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- 32 Section 1350 Certification -- Principal Executive Officer and Principal Financial Officer**
- ---------- * Management contract or compensatory plan or arrangement ** Filed herewith E-4 EX-4 2 l12650aexv4.txt EXHIBIT 4 EXHIBIT 4 [Park National Corporation Letterhead] March 11, 2005 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Park National Corporation - Annual Report on Form 10-K for the fiscal year ended December 31, 2004 Ladies and Gentlemen: Park National Corporation, an Ohio corporation ("Park"), is today filing its Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (the "Form 10-K"). Pursuant to the provisions of Item 601(b)(4)(iii) of Regulation S-K, Park hereby agrees to furnish to the Commission, upon request, copies of instruments and agreements defining the rights of holders of long-term debt of Park and of holders of long-term debt of Park's consolidated subsidiaries, which are not being filed as exhibits to the Form 10-K. The long-term debt evidenced by each such instrument is less than 10% of the total assets of Park and its subsidiaries on a consolidated basis. Very truly yours, PARK NATIONAL CORPORATION /s/ John W. Kozak John W. Kozak Chief Financial Officer EX-10.1 3 l12650aexv10w1.txt EXHIBIT 10.1 EXHIBIT 10.1 SUMMARY OF BASE SALARIES FOR EXECUTIVE OFFICERS OF PARK NATIONAL CORPORATION For services rendered during the fiscal year ended December 31, 2004, the executive officers of Park National Corporation ("Park") received the following base salaries: - C. Daniel DeLawder, President and Chief Executive Officer of Park and The Park National Bank ("Park National Bank") - $318,750 - David L. Trautman, Secretary of Park and Executive Vice President of Park National Bank - $210,577 - John W. Kozak, Chief Financial Officer of Park and Senior Vice President and Chief Financial Officer of Park National Bank - $152,500 On January 18, 2005, upon recommendation of the Compensation Committee, the Board of Directors approved the following base salaries for the fiscal year ending December 31, 2005 (the "2005 fiscal year") for the executive officers of Park: - C. Daniel DeLawder, Chairman of the Board and Chief Executive Officer of Park and Park National Bank - $464,240 - David L. Trautman, President and Secretary of Park and President of Park National Bank - $307,108 - John W. Kozak, Chief Financial Officer of Park and Senior Vice President and Chief Financial Officer of Park National Bank - $200,500 The Compensation Committee also recommended to the Board of Directors that the cash compensation paid to the three executive officers of Park during the 2005 fiscal year be split at 50% base salary and 50% incentive compensation. Messrs. DeLawder, Trautman and Kozak historically have received the majority of their total cash compensation in incentive compensation. The Compensation Committee reviewed independently generated peer group information of similarly sized bank holding companies developed by SNL Securities which revealed that people holding their positions typically receive a majority of their cash compensation in base salary. To be more consistent with peers, and at management's suggestion, the Compensation Committee considered and then approved a 50/50 split between base salary and cash incentive compensation. Management also suggested that Messrs. DeLawder and Trautman receive no increase in the aggregate amount of cash compensation paid to them during the 2005 fiscal year, but that the proportion of total cash compensation allocated to base salary for the 2005 fiscal year and incentive compensation in respect of Park's performance for the 2004 fiscal year should change. Management suggested, and the Compensation Committee concurred after reviewing peer data, to increase Mr. Kozak's total cash compensation. Accordingly, the base salaries for the 2005 fiscal year will be those shown above. EX-10.2 4 l12650aexv10w2.txt EXHIBIT 10.2 EXHIBIT 10.2 SUMMARY OF INCENTIVE COMPENSATION PLAN OF PARK NATIONAL CORPORATION The Compensation Committee of the Board of Directors of Park National Corporation ("Park") administers Park's incentive compensation plan which enables the officers of The Park National Bank (the Park National Division, the Fairfield National Division, the Consolidated Computer Center Division and, since January 3, 2005, the First Clermont Division), The Richland Trust Company, Century National Bank, The First-Knox National Bank of Mount Vernon (the First-Knox National Division and the Farmers and Savings Division), Second National Bank, United Bank, N.A., The Security National Bank and Trust Co. (the Security National Division and the Unity National Division), The Citizens National Bank of Urbana, Scope Leasing, Inc. and Guardian Financial Services Company (collectively, "Park's Principal Subsidiaries") to share in any above-average return on equity (net income divided by average equity) which Park and its subsidiaries on a consolidated basis may generate during a fiscal year. During the fiscal year ended December 31, 2004 (the "2004 fiscal year"), all officers of Park's Principal Subsidiaries (other than the First Clermont Division), including C. Daniel DeLawder (who served as President and Chief Executive Officer of Park and Park National Bank during the 2004 fiscal year and since January 1, 2005, has served as Chairman of the Board and Chief Executive Officer of Park and Park National Bank), David L. Trautman (who served as Secretary of Park and as Executive Vice President of Park National Bank during the 2004 fiscal year and since January 1, 2005, has served as President and Secretary of Park and as President of Park National Bank) and John W. Kozak, who served as Chief Financial Officer of Park and as Senior Vice President and Chief Financial Officer of Park National Bank during the 2004 fiscal year and continues to so serve) were eligible to participate in the incentive compensation plan. For the fiscal year ending December 31, 2005 (the "2005 fiscal year"), all officers of Park's Principal Subsidiaries (including Messrs. DeLawder, Trautman and Kozak) will also be eligible to participate. Above-average return on equity is defined as the amount by which the net income to average equity ratio of Park and its subsidiaries on a consolidated basis exceeds the median net income to average equity ratio of all U.S. bank holding companies of similar asset size ($3 billion to $10 billion). A formula determines the amount, if any, by which Park's return on equity ratio exceeds the median return on equity ratio of these peer bank holding companies. Twenty percent (20%) of that amount on a before-tax equivalent basis is available for incentive compensation. If Park's return on equity ratio is equal to or less than that of the peer group, no incentive compensation will be available with respect to that year. The President and Chief Executive Officer of Park and Park National Bank has historically received a fixed percentage of the amount available for incentive compensation as determined by the Board of Directors of Park. Although Park's return on equity ratio for the 2004 fiscal year exceeded the median return on equity ratio of its peer bank holding companies, Mr. DeLawder recommended to the Compensation Committee that, because of the modest increase in net income earned by Park in the 2004 fiscal year, the fixed percentage available for the President and Chief Executive Officer be waived. Messrs. DeLawder, Trautman and Kozak historically have received the majority of their total cash compensation in incentive compensation. The Compensation Committee reviewed independently generated peer group information of similarly sized bank holding companies developed by SNL Securities which revealed that people holding their positions typically receive a majority of their cash compensation in base salary. To be more consistent with peers, and at management's suggestion, on January 18, 2005, the Compensation Committee considered and then approved a 50/50 split between base salary and cash incentive compensation. Management also suggested that Messrs. DeLawder and Trautman receive no increase in the aggregate amount of cash compensation paid to them during the 2005 fiscal year, but that the proportion of total cash compensation allocated to base salary for the 2005 fiscal year and incentive compensation in respect of Park's performance for the 2004 fiscal year should change. Management suggested, and the Compensation Committee concurred after reviewing peer data, to increase Mr. Kozak's total cash compensation. On January 18, 2005, the Compensation Committee recommended, and the Board of Directors approved, the cash compensation ratio change to 50% base salary and 50% incentive compensation for Messrs. DeLawder, Trautman and Kozak. The Compensation Committee also recommended, and the Board of Directors approved, base salaries for the 2005 fiscal year of $464,240 for Mr. DeLawder, $307,108 for Mr. Trautman and $200,500 for Mr. Kozak and cash incentive compensation in respect of Park's performance for the 2004 fiscal year of $464,240 for Mr. DeLawder, $307,108 for Mr. Trautman and $200,500 for Mr. Kozak. The remaining amount available for incentive compensation pay was distributed to the officers of Park's Principal Subsidiaries on the basis of their respective contributions to Park's meeting its short-term and long-term financial goals during the 2004 fiscal year, which contributions were subjectively determined by the Chairman of the Board, the Chief Executive Officer and the President of Park and approved by the Board of Directors, upon recommendation of the Compensation Committee. Recommendations of the presidents of Park's Principal Subsidiaries were considered when determining incentive compensation amounts for officers of those subsidiaries. The payment of the incentive compensation amounts in respect of Park's performance for the 2004 fiscal year will be made during the first quarter of the 2005 fiscal year. -2- EX-10.3 5 l12650aexv10w3.txt EXHIBIT 10.3 SCHEDULE A TO EXHIBIT 10.3 The following individuals entered into Split-Dollar Agreements with the subsidiaries of Park National Corporation ("Park") identified below which are identical to the Split-Dollar Agreement, dated May 17, 1993, between William T. McConnell, Chairman of the Executive Committee of the Board of Directors and a Director of each of Park and The Park National Bank ("Park National Bank") and Park National Bank filed as Exhibit 10(f) to Park's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 0-18772):
Name and Positions Held With Park Subsidiary of Park and/or Principal Date of Split- which is Party to Subsidiaries of Park Dollar Agreement Split-Dollar Agreement - ---------------------------------- ------------------ ---------------------- C. Daniel DeLawder - Chairman of May 26, 1993 Park National Bank the Board, Chief Executive Officer and a Director of each of Park and Park National Bank; a Director of The Richland Trust Company; a Director of Second National Bank; a Member of the Advisory Board of the Fairfield National Division of Park National Bank John W. Kozak - Chief Financial June 2, 1993 Park National Bank Officer of Park; Senior Vice President and Chief Financial Officer of Park National Bank; a Director of Century National Bank William A. Phillips - a Director May 22, 1998 Century National Bank of Park; Chairman of Board and a Director of Century National Bank David L. Trautman - President, September 23, 1993 Park National Bank Secretary and a Director of Park; President and a Director of Park National Bank; Chairman of the Board and a Director of The First-Knox National Bank of Mount Vernon; a Director of United Bank, N.A.
EX-10.4 6 l12650aexv10w4.txt EXHIBIT 10.4 SCHEDULE A TO EXHIBIT 10.4 The following directors of Park National Corporation ("Park") entered into Split-Dollar Agreements with the subsidiaries of Park identified below which are identical to the Split-Dollar Agreement, dated September 3, 1993, between Leon Zazworsky and The Park National Bank ("Park National Bank") filed as Exhibit 10.3 to Park's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (File No. 1-13006):
Subsidiary of Park which is a Party to Date of Split-Dollar Name of Director Split-Dollar Agreement Agreement - ---------------- -------------------------------------- -------------------- Maureen Buchwald The First-Knox National Bank of Mount Vernon May 22, 1998 ("First-Knox National Bank") James J. Cullers First-Knox National Bank May 22, 1998 F. William Englefield IV Park National Bank September 2, 1993 R. William Geyer Century National Bank October 4, 1993 Michael J. Menzer Park National Bank April 28, 1999 John J. O'Neill Park National Bank September 2, 1993 J. Gilbert Reese Park National Bank September 8, 1993 Rick R. Taylor The Richland Trust Company September 29, 1993
EX-10.5 7 l12650aexv10w5.txt EXHIBIT 10.5 EXHIBIT 10.5 PARK NATIONAL CORPORATION 1995 INCENTIVE STOCK OPTION PLAN (REFLECTS AMENDMENTS AND SHARE DIVIDENDS THROUGH DECEMBER 15, 2004) 1. Purpose. This 1995 Incentive Stock Option Plan (the "Plan") is intended as an incentive to encourage stock ownership by key employees of Park National Corporation, an Ohio corporation (the "Company"), and its subsidiaries by granting such key employees incentive stock options to purchase Common Shares of the Company so that they may acquire or increase and retain a proprietary interest in the long-term growth and financial success of the Company and its subsidiaries. The Plan is intended to promote and advance the interests of the Company and its shareholders by encouraging such key employees to enter into or remain in the employment of the Company and/or its subsidiaries and to put forth maximum efforts for the long-term growth and financial success of the Company and its subsidiaries. 2. Definitions. For purposes of this Plan, the following terms when capitalized shall have the meanings designated herein unless a different meaning is plainly required by the context. Where applicable, the masculine pronouns shall include the feminine and the singular shall include the plural. (a) "Board" shall mean the Board of Directors of the Company. (b) A "Change in Control" shall be deemed to have occurred on the date the shareholders of the Company approve a definitive agreement (i) to merger or consolidate the Company with or into another corporation, in which the Company is not the continuing or surviving corporation or pursuant to which any Common Shares would be converted into cash, securities or other property of another corporation, other than a merger of the Company in which holders of Common Shares immediately prior to the merger have the same proportionate ownership of shares of the surviving corporation immediately after the merger as immediately before, or (ii) to sell or otherwise dispose of substantially all the assets of the Company. (c) "Code" shall mean the Internal Revenue Code of 1986, as amended, and the regulations and rulings thereunder. References to a particular section of the Code shall include references to successor provisions. (d) "Committee" shall mean the Executive Committee of the Board or such other committee of at least three persons, as may be appointed by the Board from time to time to serve at the pleasure of the Board. (e) "Common Shares" shall mean the common shares, without par value, of the Company. (f) "Company" shall mean Park National Corporation. (g) "Disability" shall mean a disability within the meaning of Section 22(e)(3) of the Code. (h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any successor statute. (i) The "Fair Market Value" of a Common Share on any relevant date for purposes of any provision of this Plan shall mean the closing sale price for the Company's Common Shares as shown on the American Stock Exchange - Composite Transactions on that date or, if no such sale occurred on that date, then for the next preceding day on which a sale was made. If the Common Shares shall no longer be traded on the American Stock Exchange, the Fair Market Value shall mean the last reported sales price of a Common Share of the Company on The Nasdaq Stock Market or on any securities exchange on which the Common Shares may be listed on such date or, if there are no reported sales on such date, then the last reported sales price on the next preceding day on which such a sale was transacted. (j) "Incentive Option" shall mean an option granted under this Plan which is an incentive stock option under the provisions of Section 422 of the Code; and any provisions elsewhere in this Plan or in any such Incentive Option which would prevent such option from being an incentive stock option may be deleted and/or voided retroactively to the date of the granting of such option, by the action of the Committee; and the Committee may retroactively add provisions to this Plan or to any Incentive Option if necessary to qualify such option as an incentive stock option. (k) "Key Employee" shall mean any employee of the Company and/or its Subsidiaries who in the opinion of the Committee has demonstrated a capacity for contributing in substantial measure to the success of the Company and its Subsidiaries. (l) "Normal Retirement" shall mean separation from employment with the Company and each of its Subsidiaries on or after the date a person has attained age sixty-two (62). (m) "Participant" shall mean a Key Employee selected by the Committee to receive Incentive Options granted under this Plan. (n) "Plan" shall mean the Park National Corporation 1995 Incentive Stock Option Plan, as amended. (o) "Subsidiary" shall mean a corporation which is a subsidiary corporation of the Company as that term is defined in Subsection 424(f) of the Code. 3. Eligibility. Any Key Employee, including those who are officers of the Company, shall be eligible to receive Incentive Options pursuant to the Plan if selected as a Participant. More than one Incentive Option may be granted to a Key Employee. 2 4. Common Shares Subject to the Plan. Incentive Options may be granted under this Plan only for Common Shares of the Company. The Common Shares to be issued and delivered by the Company upon exercise of Incentive Options granted under this Plan shall be treasury shares. The aggregate number of Common Shares for which Incentive Options may be granted under the Plan shall be 1,260,000. If, during the term of this Plan, there shall be a stock split, stock dividend, combination or exchange of shares or other similar change in the Company's capitalization, the aggregate number of Common Shares for which Incentive Options may be granted under this Plan, the number of Common Shares subject to outstanding Incentive Options and the option price per Common Share of outstanding Incentive Options shall be appropriately and proportionately adjusted to reflect the same. If any outstanding Incentive Option under this Plan for any reason expires or is terminated without having been exercised in full, the Common Shares allocable to the unexercised portion of such Incentive Option shall (unless the Plan shall have been terminated) become available for subsequent grants of Incentive Options under the Plan. No Incentive Option may be granted under this Plan which could cause the maximum limit to be exceeded. 5. Administration of the Plan. (a) The Plan shall be administered by the Committee. (b) The Committee shall select the Participants to receive Incentive Options from among the Key Employees and shall grant to such Participants Incentive Options under, and in accordance with, the provisions of this Plan. (c) Subject to the express provisions of this Plan, the Committee shall have the authority to adopt administrative regulations and procedures which are consistent with the terms of this Plan; to adopt and amend such option agreements as it deems it advisable; to determine the terms and provisions of such option agreements (including the number of Common Shares with respect to which Incentive Options are granted to a Participant who is a Key Employee, the option price for Common Shares and the date or dates when each Incentive Option or parts of it may be exercised) -- which terms shall comply with the requirements of Section 6 below; to construe and interpret such option agreements; to impose such limitations and restrictions as are deemed necessary or advisable by counsel for the Company so that compliance with the Federal securities laws and with the securities laws of the various states may be assured; and to make all other determinations necessary or advisable for administering this Plan. Decisions by the Committee may be made either by a majority of its members at a meeting of the Committee duly called and held or without a meeting by a writing signed by all of the members of the Committee. All decisions and interpretations made by the Committee shall be binding and conclusive on all Participants, their legal representatives and beneficiaries. No member of the Board or of the Committee shall be liable for any action or determination made in good faith with respect to this Plan or any Incentive Option granted under it. (d) With respect to persons subject to Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 under the Exchange Act. To the extent any provision of this Plan or action by the Committee fails 3 to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. (e) The Committee may designate any officers or employees of the Company or its Subsidiaries to assist the Committee in the administration of this Plan but the Committee may not delegate to them duties imposed on the Committee under this Plan. 6. Terms and Conditions of Incentive Options. Incentive Options granted under this Plan shall contain such terms as the Committee shall determine subject to the following limitations and requirements: (a) Option Price: Subject to the limitations of Subsection 6(g) below, the option price per Common Share of each Incentive Option shall be equal to the Fair Market Value of the Company's Common Shares on the date of grant of such Incentive Option. (b) Period within which Incentive Option may be exercised: Subject to the limitations of Subsections 6(c) and 6(g) below, each Incentive Option granted under this Plan shall terminate (become non-exercisable) on the fifth anniversary of the day immediately preceding the date of grant of such Incentive Option. (c) Termination of Incentive Options by reason of termination of employment: If a Participant's employment with the Company and its Subsidiaries terminates for any reason other than the death, Disability or Normal Retirement of the Participant, all of such Participant's Incentive Options shall terminate effective immediately upon termination of employment. If the termination of employment was due to the Normal Retirement of the Participant, such Incentive Options may be exercised in full, whether or not then exercisable by their terms, and the right of the Participant to exercise the Incentive Options shall terminate upon the earlier to occur of the expiration of the term of the Incentive Options or three months after the date of termination of employment. If the termination of employment was due to the death of a Participant who was an employee of the Company and/or any Subsidiary at the time of his death, such Incentive Options may be exercised in full, whether or not then exercisable by their terms, and the right of the representative or representatives of the Participant's estate (or the person or persons who acquire (by bequest or inheritance) the rights to exercise the Participant's Incentive Options) to exercise the Incentive Options shall terminate upon the earlier to occur of the expiration of the term of the Incentive Options or one year after the date of death. If the termination of employment was due to the Disability of the Participant, such Incentive Options may be exercised in full, whether or not then exercisable by their terms, and the right of the Participant to exercise the Incentive Options shall terminate upon the earlier to occur of the expiration of the term of the Incentive Options or one year after the date of termination of employment. For purposes of this Subsection 6(c), the date of termination of employment shall be the last day of employment. (d) Non-transferability: No Incentive Option granted under this Plan shall be assignable or transferable except, in the event of the death of a Participant, by his will or by the laws of descent and distribution. An Incentive Option granted under this Plan shall be exercisable, during a Participant's lifetime, only by him. In the event the death of a Participant occurs, the 4 representative or representatives of his estate, or the person or persons who acquire (by bequest or inheritance) the rights to exercise his Incentive Options granted under this Plan, may exercise any of the unexercised Incentive Options or parts thereof prior to the expiration of the applicable exercise period, as specified in Subsection 6(b), 6(c) or 6(g) of this Plan. (e) Aggregate annual limit on Incentive Options: The aggregate Fair Market Value (determined at the time of the grant of the Incentive Option) of the Common Shares with respect to which Incentive Options are first exercisable by any Key Employee in any calendar year under this Plan and all other plans of the Company and its Subsidiaries shall not exceed $100,000. (f) Partial Exercise: Unless otherwise provided in the applicable option agreement, any exercise of an Incentive Option granted under this Plan may be made in whole or in part; provided, however, that no single purchase of Common Shares upon exercise of an Incentive Option shall be for less than the lesser of (i) 200 Common Shares or (ii) the number of Common Shares covered by the Incentive Option. (g) 10% Shareholder: If a Participant owns (including constructive ownership pursuant to Section 424(d) of the Code) more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries, then each Incentive Option granted under this Plan to such Participant shall by its terms fix the option price per Common Share to be at least 110% of the Fair Market Value of the Common Shares on the date of grant of such Incentive Option and such Incentive Option shall terminate (become non-exercisable) on the fifth anniversary of the day immediately preceding the date of grant of such Incentive Option. (h) Exercisability: Incentive Options granted to Key Employees under the Plan shall be exercisable at such times and subject to such restrictions and conditions as the Committee may impose at the time of grant of such Incentive Options. (i) Restrictions on resale or other disposition: At the time of exercise of any Incentive Option, the Participant exercising such Incentive Option shall enter into an agreement with the Company pursuant to which the Common Shares acquired upon the exercise of the Incentive Option may not be sold or otherwise disposed of by the Participant to any person other than the Company for a period of five years after the date of exercise; provided, however, that this restriction shall not apply in the event of the exercise of an Incentive Option following the death, Disability or Normal Retirement of a Participant. In the event that a Participant who acquired Common Shares upon the exercise of an Incentive Option subsequently leaves the employ of the Company and/or its Subsidiaries for any reason other than death, Disability or Normal Retirement, and such Participant desires to sell or otherwise dispose of the Common Shares so acquired prior to the termination of the five-year restriction period, such Participant shall submit a written request to the Company to purchase such Common Shares at a purchase price equal to the lesser of the option price at which such Common Shares were purchased or the Fair Market Value of the Common Shares on the date such individual's employment terminated. (j) Reload Options: Upon the exercise by a Participant of an Incentive Option (the "Original Option") in full or in part, the Committee shall automatically grant to such 5 Participant a new Incentive Option (a "Reload Option") covering the same number of Common Shares as were the subject of the exercise; provided, however, that (I) no Participant may be granted Reload Options in any one year of the term of the Original Option as established on the date of grant of the Original Option covering, with respect to all Reload Options granted in such one year, more than the number of Common Shares which were subject to the Original Option on the date of grant of such Original Option; and (II) the number of Common Shares which would otherwise be covered by a Reload Option granted to a Participant (whether upon exercise of an Original Option or upon exercise of a previously-granted Reload Option) shall be reduced to the extent necessary to ensure that the aggregate annual limit on Incentive Options specified in Subsection 6(e) of this Plan is not exceeded. Notwithstanding anything in this Section to the contrary, no Participant, or person who has acquired the right to exercise a Participant's Incentive Options upon the Participant's death, who exercises an Incentive Option upon or after termination of the Participant's employment by reason of death, Disability or Normal Retirement, shall be granted any Reload Options in connection with such exercise. In addition, no Reload Options shall be granted with respect to Original Options exercised on or after January 16, 2005. 7. Period for Granting Incentive Options. No Incentive Options shall be granted under this Plan subsequent to the tenth anniversary of the day prior to the date on which this Plan is adopted by the Board. 8. No Effect Upon Employment Status. The fact that an employee has been designated a Key Employee or selected as a Participant shall not limit or otherwise qualify the right of his employer to terminate his employment at any time. 9. Method of Exercise. An Incentive Option granted under this Plan may be exercised only by written notice to the Committee, signed by the Participant, or in the event of his death, by such other person as is entitled to exercise such Incentive Option. The notice of exercise shall state the number of Common Shares in respect of which the Incentive Option is being exercised, and shall be accompanied by the payment in cash or in check payable to the order of the Company of an amount equal to the option price for the Common Shares being purchased, all in accordance with such regulations, procedures and determinations as may be adopted by the Committee pursuant to Subsection 5(c) above. A certificate or certificates for the Common Shares purchased through the exercise of an Incentive Option shall be issued in regular course after the exercise of the Incentive Option and payment therefor. During the option period, no person entitled to exercise any Incentive Option granted under this Plan shall have any of the rights or privileges of a shareholder with respect to any Common Shares issuable upon exercise of such Incentive Option until certificates representing such Common Shares shall have been issued and delivered. 10. Implied Consent of Participants. Every Participant, by his acceptance of an Incentive Option under this Plan, shall be deemed to have consented to be bound, on his own behalf and on behalf of his heirs, permitted assigns and legal representatives, by all of the terms and conditions of this Plan. 6 11. Change in Control. Upon the occurrence of a Change in Control, all Incentive Options then outstanding under this Plan shall become exercisable in full, whether or not then otherwise exercisable. 12. Company Responsibility. All expenses of this Plan, including the cost of maintaining records, shall be borne by the Company. The Company shall have no responsibility or liability (other than under applicable securities laws) for any act or thing done or left undone with respect to the price, time, quantity or other conditions and circumstances of the purchase of Common Shares under the terms of this Plan, so long as the Company acts in good faith. 13. Securities Law Restrictions. The Committee shall take all necessary or appropriate action to ensure that all option grants and all exercises of options under this Plan are in full compliance with all Federal and state securities laws. No Incentive Option granted under this Plan shall be exercisable before the Common Shares subject to this Plan have been registered or qualified for sale under appropriate Federal and state securities laws. 14. Option Agreement. Each Participant receiving an Incentive Option under this Plan shall enter into an agreement with the Company in a form specified by the Committee agreeing to the terms and conditions of the Incentive Option and such related matters as the Committee shall, in its sole discretion, determine. 15. Amendment and Termination of the Plan. The Committee, with the approval of the Board, may amend the Plan from time to time or terminate the Plan at any time without the approval of the shareholders of the Company except as such shareholder approval may be required (a) to satisfy the requirements of Rule 16b-3 under the Exchange Act, (b) to satisfy applicable requirements of the Code or (c) to satisfy applicable requirements of any securities exchange on which are listed any of the Company's equity securities. No such action to amend or terminate the Plan shall reduce the then existing number of any Participant's Incentive Options or adversely change the term or conditions thereof without the Participant's consent. If the Plan is terminated, any unexercised Incentive Option shall continue to be exercisable in accordance with its terms. Any amendment to this Plan requiring shareholder approval shall only become effective as of the date it is approved by the affirmative vote of the holders of three-fourths of the issued and outstanding shares of the Company. 16. Effective Date. This Plan was adopted by the Board on January 17, 1995, and shall be effective on such date, provided it is approved by the affirmative vote of the holders of three-fourths of the issued and outstanding shares of the Company within twelve (12) months thereafter. Should the shareholders of the Company fail to approve this Plan within such twelve (12) months, this Plan and all outstanding Incentive Options shall thereafter be deemed null and void and shall be of no further force or effect. No Incentive Options granted under this Plan may be exercised prior to the approval of this Plan by the shareholders of the Company. 17. Governing Law. This Plan and all actions taken hereunder shall be governed by and construed in accordance with the laws of the State of Ohio. 7 EX-10.7 8 l12650aexv10w7.txt EXHIBIT 10.7 EXHIBIT 10.7 DESCRIPTION OF PARK NATIONAL CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Park National Corporation ("Park") adopted the Park National Corporation Supplemental Executive Retirement Plan or "SERP" in December 1996. The SERP currently benefits 31 current and former officers of Park and its subsidiaries, including: (a) William T. McConnell, who serves as Chairman of the Executive Committee of the Board of Directors of each of Park and The Park National Bank, a subsidiary of Park ("PNB"), and had served as Chairman of the Board of each of Park and PNB from 1994 until December 31, 2004; (b) C. Daniel DeLawder, who serves as Chairman of the Board and Chief Executive Officer of each of Park and PNB, and had served as President of each of Park and PNB from 1994 until December 31, 2004; and (c) John W. Kozak, who serves as Chief Financial Officer of Park and as Senior Vice President and Chief Financial Officer of PNB. David L. Trautman, who serves as President and Secretary of Park and as President of PNB, and had served as Executive Vice President of PNB from February 2002 until December 31, 2004, does not participate in the SERP. The SERP is a non-qualified benefit plan designed to restore benefits lost due to limitations under the Internal Revenue Code of 1986, as amended, on the amount of compensation covered by and the benefits payable under a defined benefit plan such as the Park National Corporation Defined Benefit Pension Plan. Park has purchased life insurance contracts to fund the SERP. The SERP is designed to provide a monthly retirement benefit of approximately $5,000, $10,500 and $500 for Messrs. McConnell, DeLawder and Kozak, respectively. These additional benefits are not guaranteed and are dependent upon the earnings from the related life insurance contracts compared to the average yield on three-month Treasury bills. The SERP also provides a life insurance benefit to a current or former officer of Park or one of its subsidiaries participating in the SERP who dies before age 86. The amount of this life insurance benefit will be equal to the present value of the stream of future benefits which would have been paid to the individual until age 86 but had not been paid at the time of the individual's death. EX-10.15 9 l12650aexv10w15.txt EXHIBIT 10.15 EXHIBIT 10.15 SUMMARY OF COMPENSATION FOR DIRECTORS OF PARK NATIONAL CORPORATION Each director of Park National Corporation ("Park") who is not an employee of Park or one of its subsidiaries (a "non-employee director") receives, on the date of the regular meeting of the Park Board of Directors held during the fourth fiscal quarter, an annual retainer in the form of 120 common shares awarded under the Park National Corporation Stock Plan for Non-Employee Directors of Park National Corporation and Subsidiaries (the "Directors' Stock Plan"). Each non-employee director also receives $750 for each meeting of the Board of Directors of Park attended and $300 for each meeting of a committee of the Board of Directors attended. If the date of a meeting of the Board of Directors is changed from that provided for by resolution of the Board of Directors and a non-employee director is unable to attend the rescheduled meeting, he or she receives $750 as though he or she had attended the meeting. Each non-employee director of Park also serves on the board of directors of one of Park's banking subsidiaries, and receives, on the date of the regular meeting of the Park Board of Directors held during the fourth fiscal quarter, an annual retainer in the form of 60 common shares of Park awarded under the Directors' Stock Plan and, in some cases, a specified amount of cash for such service as well as fees for attendance at meetings of the board of directors of the appropriate Park banking subsidiary (and committees of that board). EX-10.16 10 l12650aexv10w16.txt EXHIBIT 10.16 EXHIBIT 10.16 SECURITY NATIONAL BANK AND TRUST CO. AMENDED AND RESTATED 1988 DEFERRED COMPENSATION PLAN Adopted effective June 30, 1988 Amended and restated effective March, 1996 SECURITY NATIONAL BANK AND TRUST CO. AMENDED AND RESTATED 1988 DEFERRED COMPENSATION PLAN SECURITY NATIONAL BANK AND TRUST CO. (the "Bank") established the 1988 Deferred Compensation Plan (the "Plan") for the benefit of eligible officers and directors, effective June 30, 1988. The Bank hereby amends and restates the Plan, effective as of March __, 1996, as follows: Section 1. Administration. The Plan shall be administered by the Executive Committee of the Board of Directors of the Bank. The term "Committee" as used in this Plan document and any amendments to it shall mean such committee. The Committee shall have full power to administer this Plan; and all determinations and actions of the Committee shall be made by a majority of its members. Section. 2. Participation. Any director of the Bank and any officer of the Bank designated by the Committee shall be eligible to elect to become a Participant in this Plan; except that the Board of Directors of the Bank at any time and for any period may exclude any such individual from participating (other than with respect to amounts already credited or elected to be credited to his Deferred Compensation Account under this Plan). Any person who becomes a Participant shall become a former Participant upon termination of service with the Bank (or its Board of Directors) and receipt of the benefits to which he is entitled under the terms of this Plan. Section 3. Annual Election. Each eligible officer and director may elect in writing, in the manner prescribed by the Committee, on or before December 31 of each calendar year (or, in the case of a person who has not previously been an eligible officer or director, on or before the date such person becomes an eligible officer or director) (the "Deferral Election Date"), to become a Participant and defer the Bank's payment to him of any percentage of salary, director's fees or other compensation that will be earned by him in the 12-month period following (or, in the case of any such newly eligible person, in the remainder of the calendar year following) the Deferral Election Date (the "Service Period"); provided, however, that the minimum allowable deferral amount for any Service Period shall be an amount no less than $100 times the number of months in that period. Such election shall be irrevocable; and the deferred portion of the salary, director's fees, or other compensation will not be paid to the Participant until the time or times prescribed in Section 9 below. At the time of making any such election, the Participant shall designate, in accordance with procedures specified by the Committee, the Eligible Investment (as defined in Section 6) or Eligible Investments in which the deferred amount shall be treated as having been invested in accordance with the options made available by the Committee as provided in Section 6. Section 4. Deferred Compensation Accounts. The amounts deferred with respect to a Participant shall be credited, as specified in Section 5 and/or Section 6 below, to his Deferred Compensation Account, established within the Bank's books and records reflecting all such amounts deferred by the Participant under this Plan. Section 5. Credits to Deferred Compensation Accounts. All amounts credited to a Participant's Deferred Compensation Account shall be treated as though invested and reinvested in one or more Eligible Investments designated by the Participant from time to time in accordance with procedures specified by the Committee. In addition, all dividends, interest, gains and distributions of any nature earned with respect to the Eligible Investment(s) in which a Participant's Deferred Compensation Account is treated as being invested (collectively, "Earnings") shall be credited to the Participant's Deferred Compensation Account as though reinvested in the Eligible Investruent with respect to which such Earnings were earned. A Participant's Deferred Compensation Account also shall be reduced by the amount of any fees or expenses associated with the Eligible Investment(s) in which the account is treated as being invested. The Bank shall provide Participants with periodic reports showing the value of their Deferred Compensation Accounts, as adjusted to reflect fluctuations in the value of the Eligible Investments in which the account is treated as being invested and the addition of any Earnings credited to the account, at such times and in such format as the Committee shall determine. Section 6. Eligible Investments. The Committee from time to time may select one or more investment options ("Eligible Investments") in which a Participant may elect to have amounts allocated to the Participant's Deferred Compensation Account treated as being invested which may include, without limitation: (i) interest rates specified by, or determined in the manner specified by the Committee, (ii) a rate of return based upon the annual positive total rate of return on shares of common stock of Security Banc Corporation, (iii) an investment in hypothetical shares of common stock of Security Banc Corporation, and (iv) investments in securities, mutual funds, indexes or other investment vehicles or investment measures with readily determinable performance results which are offered by third parties. The Committee shall be under no obligation, however, to provide any Eligible Investment as an option or to continue to provide any Eligible Investment once provided. If the Committee does not provide for any Eligible Investment, all amounts in Participants' Deferred Compensation Accounts shall be treated as if invested during each calendar year at a rate of interest which is .25% greater than the average bond equivalent yield to maturity on one-year United States Treasury Bills in effect for the first five business days in the December immediately proceeding the calendar year (as published in The Wall Street Journal) or such alternate rate as may be set by the Committee for that year at least 15 days before the beginning of the year (the "Cash Deferral Rate"), and the Cash Deferral Rate shall be deemed to be the Eligible Investment for purposes of the other provisions of the Plan. Section 7. Investment Elections. If the Committee provides one or more Eligible Investments pursuant to Section 6, elections by Participants with respect to the Eligible Investment or Eligible Investments in which their Deferred Compensation Accounts shall be treated as being invested and changes in such elections shall be made at such time or times, with such prior notice, and in such manner, as the Committee may specify, subject to such limitations and restrictions as the Committee may provide. Unless the Committee otherwise provides, if a Participant fails to make an election with respect to all or any part of the Participant's Deferred Compensation Account, the account shall be treated as having been invested at the Cash Deferral Rate. -2- Section 8. Corresponding Investments by the Bank. In order to accumulate assets comparable to the Bank's liability to Participants which accrues under the Plan, the Bank may, but in no event shall be required to, invest assets in such a manner as to correspond to the hypothetical investment elections made by Participants (other than with respect to any common stock of Security Banc Corporation, if such Investment Option is made available by the Committee or otherwise. Any such investment may be transferred to the Benefit Protection Trust established by the Bank. In no event, however, shall any Participant have any claim to or interest in any such investment by the Bank. Section 9. Distributions. (a) A Participant shall receive payment of the amounts credited to his Deferred Compensation Account following his termination of service with the Bank (or its Board of Directors) and, unless he has become disabled, his attainment of at least age 55 (early retirement age); except that if the service of a Participant with the Bank (or its Board of Directors) terminates before his 55th birthday, and if either the Participant elects (with or without consent of the Committee) to receive the lump sum payment described in this sentence or the Committee, in its sole discretion, determines that such lump-sum payment shall be made to the Participant with or without his consent, then within sixty (60) days after such election or determination there shall be paid in lump sum to the Participant, in full satisfaction of his rights under this Plan, the value of the Eligible Investment(s) in which his Deferred Compensation Account is treated as being invested minus all Earnings (as defined in Section 5) credited during the one-year period immediately preceding the date of such lump sum payment; provided, however, that the Committee, in its sole discretion, may waive all or part of such penalty in such cases as it deems appropriate. For these purposes a Participant shall be considered "disabled" if, because of physical, mental, or emotional reasons, he is unable to perform his normal duties for the Bank and in the Committee's opinion such condition is likely to continue for at least one year. (b) Other than for the lump-sum payment with penalty described in (a) above, or the hardship distribution permitted in (e) below, all payments under this Plan shall be on account of the Participant's retirement, and the form of payment shall be in lump sum (if consented to by the Participant), or in installments over a 5, 10 or 15-year period, as determined by the Committee in its sole and absolute discretion. If an installment method is selected, "interest" and/or "dividend" additions shall continue to be made to the unpaid portion of the Participant's Deferred Compensation Account until such payment is completed. (c) Payments under this Plan shall be made in cash. (d) In the event a Participant dies before his Deferred Compensation Account has been fully distributed, any undistributed portion of his Deferred Compensation Account shall be paid to the beneficiary and in the manner he has designated under this Plan form provided by, and delivered to, the Committee, or if such beneficiary has not been properly designated or for any reason payment cannot be made to such beneficiary, then payment shall be made to the Participant's estate. The determination of the Committee as to who is a proper payee of benefits hereunder shall be conclusive on all persons claiming under or through any Participant. -3- (e) In the event a Participant, a former Participant, or a beneficiary of a deceased Participant demonstrates to the satisfaction of the Committee the existence of a serious financial hardship, the Committee, in its sole and absolute discretion, may direct an immediate payment of deferred amounts to such individual, with appropriate adjustment (without penalty) being made to the Participant's, or former or deceased Participant's, Deferred Compensation Account. (f) The Bank shall withhold from any payments under this Plan the amount of any taxes required to be withheld under federal, state or local law. Section 10. No Fund. Except as provided under the Benefit Protection Trust adopted by the Bank in connection with this Plan, the obligations under this Plan are those of the Bank only, and this Plan imposes no obligation on the Bank to provide for payment of benefits hereunder through any specific source or fund; and neither the Participant nor any person claiming under or through him shall have any interest in any specific asset or assets owned or held by the Bank by reason of this Plan. Section 11. No Assignment. To the extent permitted by law, none of the benefits payable hereunder shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge shall be void; nor shall benefits be subject to the claims of creditors or others, nor to legal process. Section 12. Amendment and Termination. The Bank reserves the right, through action of its Board of Directors, front time to time to amend, supplement, or terminate this Plan in any manner it chooses, except that no amendment, supplement, or termination without the consent of a Participant shall affect the payment to him of any amount credited to his Deferred Compensation Account (or elected by him to be so credited) prior to the time he is given written notice by the Committee of the adoption of such amendment, supplement, or termination; and in the event the Plan is terminated, amounts credited to Deferred Compensation Accounts under the Plan will be distributed as provided in Section 9 until the last Participant has received distribution in full. [Remainder of page intentionally left blank; signatures on following page.] -4- IN WITNESS WHEREOF, SECURITY NATIONAL BANK AND TRUST CO. has caused this instrument to be executed by its officers hereunto duly authorized this ___ day of _____________, 1996. SECURITY NATIONAL BANK AND TRUST CO. By ------------------------------------- Name: Title: And ------------------------------------ Name: Title: Participant: - ------------------------------------- -5- SECURITY NATIONAL BANK AND TRUST CO. EXECUTIVE COMMITTEE RESOLUTION WHEREAS, Security National Bank and Trust Co. (the "Bank") has amended and restated its 1988 Deferred Compensation Plan ("Amended Plan"); and WHEREAS, the Amended Plan provides that certain administrative decisions with respect to the Plan shall or may be made by the Executive Committee of the Board of Directors of the Bank; RESOLVED, that there shall be two Eligible Investments (as defined in the Amended Plan) which shall be (i) the Cash Deferral Rate (as defined in the Plan), and (ii) a rate of return based on the annual positive total return on the shares of common stock of Security Banc Corporation; and FURTHER RESOLVED, that investment elections for future deferrals and for existing account balances may be made at the time the Amended Plan is adopted and thereafter changes may be made only once each calendar year, effective on the following January 1; and FURTHER RESOLVED, that investment elections must be made in increments of no less than 25% in any one of the two Eligible Investments. CERTIFICATE I, J. William Stapleton, hereby certify that I am the Vice President/CFO/Cashier of The Security National Bank and Trust Co. of Springfield, Ohio, a Corporation organized under the laws of the United States, and that the foregoing is a true copy of an excerpt from the Minutes of the Meeting of the Board of Directors held on July 16, 1996 at 1:00 p.m. at which a quorum for the transaction of business was present and at which meeting the above resolution was passed. I further certify that the foregoing Resolution has not been rescinded or changed and is now in full force and effect. IN WITNESS WHEREOF, I have hereunto set my hand on behalf of the Corporation, this 16th day of July, 1996. THE SECURITY NATIONAL BANK AND TRUST CO. By /s/ J. William Stapleton -------------------------------------- J. William Stapleton, Vice President EX-13 11 l12650aexv13.txt EXHIBIT 13 EXHIBIT 13 FINANCIAL REVIEW This financial review presents management's discussion and analysis of the financial condition and results of operations for Park National Corporation ("Park" or the "Corporation"). This discussion should be read in conjunction with the consolidated financial statements and related notes and the five-year summary of selected financial data. Management's discussion and analysis contains forward-looking statements that are provided to assist in the under- standing of anticipated future financial performance. Forward-looking state- ments 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. Park's Board of Directors approved a 5% stock dividend in November 2004. The additional common shares resulting from the dividend were distributed on December 15, 2004 to stockholders of record as of December 1, 2004. The consolidated financial statements, notes and other references to share and per share data have been retroactively restated for the stock dividend. OVERVIEW Net income for 2004 was $91.5 million. This represents a 5.3% increase over net income of $86.9 million for 2003. Diluted earnings per share increased by 5.9% to $6.32 for 2004 compared to $5.97 for 2003. The primary reason for the increase in net income in 2004 was due to a $9.7 million or 4.8% increase in net interest income. Average loan balances were $2,813 million in 2004 compared to $2,696 million in 2003 and $2,720 million in 2002. Net income for 2003 increased by only 1.5% to $86.9 million compared to $85.6 million for 2002. Diluted earnings per share increased by 1.9% to $5.97 for 2003 compared to $5.86 for 2002. The small increase in net income in 2003 was primarily due to net losses from the sale of investment securities of $6.1 million. The proceeds from the sale of investment securities were reinvested in higher yielding U.S. Government Agency fifteen-year mortgage-backed securities. The annualized net income to average asset ratio (ROA) was 1.81% for both 2004 and 2003 and 1.93% for 2002. The annualized net income to average equity ratio (ROE) was 17.00% for 2004, 16.69% for 2003 and 17.56% for 2002. Effective with the fourth quarter of 2004, the quarterly cash dividend on common stock was increased to $.90 per share. The new annualized cash dividend of $3.60 per share is 7.4% greater than the sum of the cash dividends declared for the four previous quarters. Park has paid quarterly cash dividends since becoming a holding company in early 1987. The annual compound growth rate for the Corporation's per share dividend for the last five years is 8.7%. Park's business strategy is geared toward maximizing long-term return to stockholders. The Corporation's common stock value (inclusive of the rein- vestment of dividends) has appreciated 11.4% annually on a compounded total return basis for the last five years and 16.4% annually for the past ten years. By comparison, the stock index of the Dow Jones Industrial Average (inclusive of the reinvestment of dividends) had a .7% annual compound total rate of return for the past five years and 13.1% for the past ten years. ACQUISITION AND PENDING ACQUISITION On December 31, 2004, Park acquired First Federal Bancorp, Inc., ("First Federal") a savings and loan holding company headquartered in Zanesville, Ohio in an all cash transaction accounted for as a purchase. Park paid a total of $46.6 million to the stockholders of First Federal. The savings and loan subsidiary of First Federal, First Federal Savings Bank of Eastern Ohio, merged with Park's subsidiary bank, Century National Bank. The goodwill recognized as a result of this acquisition was $26.7 million. The fair value of the acquired assets of First Federal were $252.7 million and the fair value of the liabilities assumed were $232.7 million at December 31, 2004. The total assets and total liabilities of First Federal are included in Park's year-end balance sheet but have very little impact on average balances since the acquisition was completed on December 31, 2004. In this financial review, we will indicate the impact that the First Federal acquisition had on year-end balances but will ignore the impact on average balances. On January 3, 2005, Park acquired First Clermont Bank ("First Clermont") of Milford, Ohio for $52.5 million in an all cash transaction. First Clermont Bank merged with The Park National Bank (Park's lead subsidiary bank) and will be operated as a separate division of The Park National Bank. At December 31, 2004, First Clermont had total assets of $185 million. The two acquisitions were funded through the working capital of Park and its subsidiary banks. Management expects that the two acquisitions will add approximately $3 to $4 million to earnings in 2005. The projected earnings are net of the cost of carry on the combined purchase prices of $99.1 million. CRITICAL ACCOUNTING POLICIES The significant accounting policies used in the development and presentation of Park's financial statements are listed in Note 1 of the Notes to Consolidated Financial Statements. The accounting and reporting policies of Park conform with accounting principles generally accepted in the United States and general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. Park considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses in the loan portfolio. Management's determination of the adequacy of the allowance for loan losses is based on periodic evaluations of the loan portfolio and of current economic conditions. However, this evaluation is inherently subjective as it requires material estimates, including expected default probabilities, loss given default, expected commitment usage, the amounts and timing of expected future cash flows on impaired loans, and estimated losses on consumer loans and residential mortgage loans based on historical loss experience and the current economic conditions. All of those factors may be susceptible to significant change. To the extent that actual results differ from management estimates, additional loan loss provisions may be required that would adversely impact earnings for future periods. Statement of Financial Accounting Standard (SFAS) No. 142, "Accounting for Goodwill and Other Intangible Assets" establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill. At December 31, 2004, Park had core deposit intangibles of $6.7 26 ' FINANCIAL REVIEW million subject to amortization and $34.2 million of goodwill, which was not subject to periodic amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Park's goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Park's banking subsidiaries to provide quality, cost effective banking services in a competitive marketplace. The goodwill value of $34.2 million is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely impact earnings in future periods. SFAS No. 142 requires an annual evaluation of goodwill for impairment. The fair value of the goodwill, which resides on the books of Park's subsidiary banks, is estimated by reviewing the past and projected operating results for the Park subsidiary banks, deposit and loan totals for the Park affiliate banks and banking indus- try comparable information. Park has concluded in each of the past three years that the recorded value of goodwill was not impaired. ABOUT OUR BUSINESS Through its banking subsidiaries, Park is engaged in the commercial banking and trust business, generally in small to medium population Ohio communities. Management believes there is a significant number of consumers and businesses which seek long-term relationships with community-based financial institutions of quality and strength. While not engaging in activities such as foreign lending, nationally syndicated loans and investment banking operations, Park attempts to meet the needs of its customers for commercial, real estate and consumer loans, consumer and commercial leases, and investment, fiduciary and deposit services. Familiarity with its local markets, coupled with conservative loan underwriting standards, has allowed Park to achieve solid financial results even in periods when there have been weak economic conditions. Park has produced performance ratios which compare favorably to peer bank holding companies in terms of equity and asset returns, capital adequacy and asset quality. Continued strong results are contingent upon economic conditions in Ohio and competitive factors, among other things. The Corporation's subsidiaries compete for deposits and loans with other banks, savings associations, credit unions and other types of financial institutions. At December 31, 2004, Park and its subsidiaries operated one hundred seventeen full service offices and a network of one hundred twenty-four automatic teller machines in twenty-seven Ohio counties. The acquisition of First Clermont Bank added seven additional full service offices. A table of financial data of Park's affiliates for 2004, 2003, and 2002 is shown below. See Note 20 of the Notes to Consolidated Financial Statements for addi- tional financial information on the Corporation's affiliates. TABLE 1 - PARK NATIONAL CORPORATION AFFILIATE FINANCIAL DATA
2004 2003 2002 AVERAGE NET Average Net Average Net (IN THOUSANDS) ASSETS INCOME Assets Income Assets Income -------------- ------- ------ ------- ------ ------- ------ Park National Bank: Park National Division $ 1,380,568 $ 21,569 $ 1,330,713 $ 22,460 $ 1,177,063 $ 21,322 Fairfield National Division 335,006 7,309 333,095 5,965 308,563 6,986 Richland Trust Company 546,710 9,753 509,609 9,748 475,482 7,508 Century National Bank 503,239 8,065 458,440 7,629 437,134 8,837 First-Knox National Bank: First-Knox National Division 665,116 11,049 649,851 11,242 585,456 10,729 Farmers & Savings National Division 79,442 2,799 82,019 2,386 74,501 1,917 United Bank,N.A 240,988 3,523 226,741 3,467 195,173 3,145 Second National Bank 390,906 6,859 372,152 6,201 323,314 5,625 Security National Bank: Security National Division 773,710 12,290 719,043 11,091 702,903 12,530 Unity National Division 170,829 1,159 164,535 1,275 174,108 2,077 Citizens National Bank 201,916 2,332 188,446 2,261 170,189 2,019 Parent Company, including consolidating entries (239,349) 4,800 (231,381) 3,153 (188,724) 2,884 ----------- ----------- ----------- ----------- ----------- ----------- CONSOLIDATED TOTALS $ 5,049,081 $ 91,507 $ 4,803,263 $ 86,878 $ 4,435,162 $ 85,579 =========== =========== =========== =========== =========== ===========
RETURN ON EQUITY Park's primary financial goal is to achieve a superior long-term return on stockholders' equity. The Corporation measures performance in its attempts to achieve this goal against its peers, defined as all U.S. bank holding companies between $3 billion and $10 billion in assets. At year-end 2004, there were approximately 84 bank holding companies in this peer group. The Corporation's net income to average equity ratio (ROE) was 17.00%, 16.69% and 17.56% in 2004, 2003, and 2002, respectively. The return on equity ratio has averaged 17.03% over the past five years compared to 14.00% of the peer group. HISTORICAL COMPARISON OF RETURN ON AVERAGE EQUITY [BAR CHART]
Park Peer Mean 2000 16.55% 14.97% 2001 17.33% 13.39% 2002 17.56% 14.46% 2003 16.69% 13.54% 2004 17.00% 13.63%*
* as of 09/30/2004 27 FINANCIAL REVIEW BALANCE SHEET COMPOSITION Park functions as a commercial bank holding company. The following section discusses the balance sheet for the Corporation. SOURCE OF FUNDS DEPOSITS: Park's major source of funds is provided by core deposits from individuals, businesses and local government units. These core deposits consist of all noninterest bearing and interest bearing deposits, excluding certificates of deposit of $100,000 and over which were less than 13% of total deposits for each of the last three years. In 2004, year-end total deposits increased by $103 million or 3.0% exclusive of the $172 million of deposits that were acquired in the First Federal acqui- sition. In 2003, year-end total deposits decreased by $81 million or 2.3% compared to an increase of $181 million or 5.5% for 2002. Average total deposits were $3,521 million in 2004 compared to $3,424 million in 2003 and $3,404 million in 2002. Average noninterest bearing deposits were $575 million in 2004 compared to $522 million in 2003 and $502 million in 2002. Management expects that deposits will increase by approximately 2.5% in 2005. Emphasis will continue to be placed on growing noninterest bearing deposit accounts. A year ago, management projected that deposits would increase by approximately 3.0% during 2004 which turned out to be accurate due largely to the emphasis placed on increasing noninterest bearing deposits. Maturity of time certificates of deposit and other time deposits of $100,000 and over as of December 31, 2004 were: TABLE 2 - $100,000 AND OVER MATURITY SCHEDULE
DECEMBER 31,2004 TIME CERTIFICATES (IN THOUSANDS) OF DEPOSIT ---------------- ----------------- 3 months or less $164,691 Over 3 months through 6 months 55,519 Over 6 months through 12 months 98,515 Over 12 months 120,666 -------- TOTAL $439,391 ========
SHORT-TERM BORROWINGS: Short-term borrowings consist of securities sold under agreements to repurchase, Federal Home Loan Bank advances, federal funds purchased and other borrowings. These funds are used to manage the Corporation's liquidity needs and interest rate sensitivity risk. The average rate paid on short-term borrowings generally moves closely with changes in market interest rates for short-term investments. The average rate paid on short-term borrowings was 1.33%, .53% and 1.46% for 2004, 2003 and 2002, respectively. By comparison, the average federal funds rate was 1.36%, 1.13% and 1.67% for 2004, 2003 and 2002, respectively. In 2004, average short-term borrowings were $401 million compared to $515 million and $226 million in 2003 and 2002, respectively. The federal funds rate increased from 1.00% to 2.25% during the second half of 2004. The Federal Reserve Board is expected to continue to increase the federal funds rate on a measured pace during the first half of 2005. Management expects that the average cost of short-term borrowings in 2005 will approximate the average federal funds rate for the year. The average rate paid on short-term borrowings was .53% in 2003 compared to the average federal funds rate of 1.13% for the year. The primary reason for the unusually low borrowing rate in 2003 was due to dollar-roll repo borrowings, which averaged $264 million for the year at an average borrowing rate of a negative .03%. The dollar-roll repo borrowings were secured by U.S. Government Agency fifteen-year mortgage-backed securities. This very attractive borrowing rate was due to an overall market shortage of 5.00% fifteen-year mortgage-backed securities during the first half of 2003. This attractive borrowing rate was not available in 2004 and management does not expect that it will be available in 2005. The proceeds from the dollar-roll repo borrowings were used to purchase short-term U.S. Government Agency securities which on average yielded 1.15%. This arbitrage generated $3.1 million in net interest income for 2003. The average borrowing rate for short-term borrowings, excluding the dollar-roll repos, was 1.12% for 2003. LONG-TERM DEBT: Long-term debt primarily consists of borrowings from the Federal Home Loan Bank and repurchase agreements with investment banking firms. The average rate paid on long-term debt was 2.57% for 2004 compared to 3.78% for 2003 and 4.29% for 2002. In 2004, average long-term debt was $520 million compared to $282 million in 2003 and $253 million in 2002. Average long-term debt was 10.3% of average assets in 2004 compared to 5.9% in 2003 and 5.7% in 2002. Management increased the use of long-term debt in 2004. Approximately $200 million of fixed rate funding was obtained for a term of three years. STOCKHOLDERS' EQUITY: Average stockholders' equity to average total assets was 10.66% in 2004, 10.83% in 2003 and 10.99% in 2002. In accordance with Statement of Financial Accounting Standards No. 115, the Corporation reflects any unrealized holding gain/(loss) on available-for-sale securities, net of federal taxes as accumulated other comprehensive income which is part of the Corporation's equity. While the effects of this accounting are not recognized for calculation of regulatory capital adequacy ratios, it does impact the Corporation's equity as reported in the audited financial statements. The unrealized holding gain on available-for-sale securities, net of federal taxes, was $12.4 million at year-end 2004, $19.0 million at year-end 2003 and $24.0 million at year-end 2002. Additionally, at year-end 2002, the Corporation had recorded $1.6 million, net of federal taxes, as a minimum pension liability that was included in accumulated other comprehensive income. The minimum pension liability was reversed in 2003. INVESTMENT OF FUNDS LOANS: Average loans, net of unearned income, were $2,813 million in 2004 compared to $2,696 million in 2003 and $2,720 million in 2002. The average yield on loans was 6.38% in 2004 compared to 6.85% in 2003 and 7.64% in 2002. The average prime lending rate in 2004 was 4.35% compared to 4.12% in 2003 and 4.68% in 2002. Approximately 79% of loan balances mature or reprice within one year (see Table 11). This results in the interest rate yield on the loan portfolio adjusting with changes in interest rates, but on a delayed basis. Management expects that the yield on the loan portfolio will increase in 2005 as variable rate loans reprice at higher interest rates. Year-end loan balances, net of unearned income, increased by $167 million or 6.1% in 2004 exclusive of $223 million of loans that were acquired in the First Federal acquisition. In 2003, loans increased by $39 million or 1.4% compared to a decrease of $104 million or 3.7% in 2002 and a decrease of $160 million or 5.4% in 2001. Management expects that the growth in loans in 2005 will be a little stronger than 2004 as the economy continues to expand. Park has added several additional commercial lenders over the past year and they have made a nice contribution to the growth in the loan portfolio in 2004 and are expected to do so again in 2005. A year ago, management projected that the growth in loan balances would significantly improve in 2004 which turned out to be accurate due to a relatively strong economy. Residential real estate loans increased by $78 million or 7.9% at year-end 2004 exclusive of $129 million of loans from the First Federal acquisition. Residential real estate loans decreased by $15 million or 1.5% at year-end 2003 and decreased by $76 million or 7.00% in 2002. The long-term fixed 28 FINANCIAL REVIEW rate mortgage loans that Park originates are sold in the secondary market and Park retains the servicing on these loans. This activity, the origination and the sale of fixed rate mortgage loans produced a significant increase in fee income during 2003 and 2002, but did not increase loan balances since the loans were sold. The sold fixed rate mortgage loans being serviced were $1,266 million (which includes $78 million from First Federal) at year-end 2004 compared to $1,166 million at year-end 2003 and $833 million at year- end 2002. Management expects that the growth in residential real estate loans for 2005 will approximate the increase experienced in 2004. The demand for home equity lines of credit continues to be strong. Consumer loans increased by $3 million or .6% at year-end 2004 exclusive of $52 million of loans from the acquisition of First Federal. Consumer loans increased by $8 million or 1.9% in 2003 and decreased by $36 million or 7.5% in 2002. Management expects that the growth in the consumer loan portfolio will continue to be small in 2005 as the consumer prefers to borrow using the home equity line product. Leases decreased by $18 million or 26.7% in 2004 and decreased by $31 million or 32.6% in 2003. Management expects that lease balances will continue to decrease in 2005 as consumers have preferred automobile loans and management has deemphasized leases. The demand for construction loans, commercial loans and commercial real estate loans continued to improve in 2004. On a combined basis, these loan totals increased by $105 million or 8.5% at year-end 2004 exclusive of $40 million of loans from the acquisition of First Federal. On a combined basis, these loan totals increased by $76 million or 6.6% in 2003 and increased by $31 million or 2.8% in 2002. Management expects that the growth in the commercial loan and commercial real estate portfolio will be stronger in 2005 as the economy continues to improve and the additional commercial lenders that have been added in the past year will generate more loan volume. Table 3 reports year-end loan balances by type of loan for the past five years. TABLE 3 - LOANS BY TYPE
DECEMBER 31, (IN THOUSANDS) 2004 2003 2002 2001 2000 -------------- ---- ---- ---- ---- ---- Commercial,financial and agricultural $ 469,382 $ 441,165 $ 440,030 $ 440,336 $ 479,167 Real estate - construction 155,326 121,160 99,102 89,235 95,310 Real estate - residential 1,190,275 983,702 998,202 1,073,801 1,161,498 Real estate - commercial 752,428 670,082 617,270 595,567 570,969 Consumer,net of unearned income 505,151 450,145 441,747 477,579 511,310 Leases,net of unearned income 48,046 64,549 95,836 119,290 137,950 ---------- ---------- ---------- ---------- ---------- TOTAL LOANS $3,120,608 $2,730,803 $2,692,187 $2,795,808 $2,956,204 ========== ========== ========== ========== ==========
TABLE 4 - SELECTED LOAN MATURITY DISTRIBUTION
Over One Over DECEMBER 31, 2004 One Year Through Five (IN THOUSANDS) or Less Five Years Years TOTAL - ------------------------- -------- ---------- ----- ----- Commercial,financial and agricultural $234,578 $136,823 $ 97,981 $469,382 Real estate - construction 77,910 39,100 38,316 155,326 -------- -------- -------- -------- TOTAL $312,488 $175,923 $136,297 $624,708 -------- -------- -------- -------- Total of these selected loans due after one year with: Fixed interest rate $116,813 Floating interest rate $195,407 --------
INVESTMENT SECURITIES: The Corporation's securities portfolio is structured to provide liquidity and contribute to earnings. Park's investment strategy is dynamic. As conditions change over time, Park's overall interest rate risk, liquidity needs and potential return on the investment portfolio will change. Management regularly reevaluates the securities in its portfolio based on circumstances as they evolve. Circumstances that may precipitate a sale of a security would be to better manage interest rate risk, meet liquidity needs, or to improve the overall yield on the investment portfolio. Park realized net security losses of $793,000 in 2004, $6.1 million in 2003 and $182,000 in 2002. During the third quarter and fourth quarter of 2003, long-term interest rates increased. The increase in interest rates provided Park an opportunity to restructure the investment portfolio to improve earnings. The proceeds from the sale of investment securities were reinvested in higher yielding U.S. Government Agency fifteen-year mortgage-backed securities. Management expects that the net losses from the sale of investment securities will be earned back in approximately three years from the higher reinvestment rate on the mortgage-backed securities. Park classifies most of its securities as available-for-sale (see Note 4 of the Notes to Consolidated Financial Statements). These securities are carried on the books at their estimated fair value with the unrealized holding gain or loss, net of taxes, accounted for as accumulated other comprehensive income which is part of the Corporation's equity. Management classified approximately 96% of the securities portfolio as available-for-sale at December 31, 2004. These securities are available to be sold in future periods in carrying out Park's investment strategies. The remaining securities are classified as held-to-maturity and are accounted for at amortized cost. Average taxable investment securities were $1,795 million in 2004 compared to $1,633 million in 2003 and $1,240 million in 2002. The average yield on taxable investments was 4.84% in 2004 compared to 4.54% in 2003 and 5.94% in 2002. Average tax-exempt investment securities were $107 million in 2004 compared to $127 million in 2003 and $144 million in 2002. The average tax-equivalent yield on tax-exempt investment securities was 7.17% in 2004 compared to 7.23% in 2003 and 7.10% in 2002. On a combined basis, the total of the average balance of taxable and tax-exempt securities was 37.7% of average total assets in 2004 compared to 36.6% in 2003 and 31.2% in 2002. Average investment securities as a percentage of average total assets increased in both 2004 and 2003. Management expects that this will change in 2005. At year-end 2004, total investment securities were 35.6% of total assets and this percentage is expected to decrease during 2005 as loan growth for 2005 is expected to be higher than the 6.1% loan growth in 2004. Management views this as an opportunity to increase the yield on average earning assets as the average yield on loans is higher than the average yield on investment securities. At year-end 2004 and 2003, the average tax-equivalent yield on the total investment portfolio was 4.97% and 5.01%, respectively. The weighted average remaining maturity was 4.1 years at December 31, 2004 and was 4.7 years at December 31, 2003. U.S. Government Agency asset-backed securities were 91.1% of the total investment portfolio at year-end 2004 and were 90.4% of the total portfolio at year-end 2003. 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. At year-end 2004, management estimates that the average maturity of the investment portfolio would lengthen to 4.8 years with a 1.00% increase in long-term interest rates and to 5.1 years with a 2.00% increase in long-term interest rates. 29 FINANCIAL REVIEW The following table sets forth the book value of investment securities at year-end: TABLE 5 - INVESTMENT SECURITIES
DECEMBER 31, (IN THOUSANDS) 2004 2003 2002 -------------- ---- ---- ---- Obligations of U.S. Treasury and other U.S. Government agencies $ 15,206 $ 25,354 $ 161,635 Obligations of states and political subdivisions 103,740 121,008 142,234 U.S. Government asset-backed securities and other asset-backed securities 1,754,851 1,800,352 1,036,082 Other securities 52,985 44,512 43,191 ----------- ---------- ---------- TOTAL $ 1,926,782 $1,991,226 $1,383,142 =========== ========== ==========
EARNING RESULTS The Corporation's principal source of earnings is net interest income, the difference between total interest income and total interest expense. Net interest income results from average balances outstanding for interest earning assets and interest bearing liabilities in conjunction with the average rates earned and paid on them. Net interest income increased by $9.7 million or 4.8% to $212.3 million for 2004 compared to a decrease of $2.7 million or 1.3% to $202.6 million for 2003. The net yield on interest earning assets was 4.56% for 2004 compared to 4.60% for 2003 and 5.06% for 2002. The net interest rate spread -- the difference between rates received for interest earning assets and the rates paid for interest bearing liabilities -- was 4.28% for 2004 compared to 4.30% for 2003 and 4.62% for 2002. The increase in net interest income in 2004 was primarily due to the increase in average earning assets of $232 million or 5.2%. The decrease in net interest income for 2003 was due to a decrease in the net interest spread. The average yield on average interest earning assets was 5.80% in 2004 compared to 5.98% in 2003 and 7.06% in 2002. The Federal Reserve Board increased the federal funds rate from 1.00% at June 30, 2004 to 2.25% at year-end 2004. The average yield on interest earning assets on a quarterly basis in 2004 was 5.84% for the first quarter, 5.72% for the second quarter, 5.77% for the third quarter and 5.88% for the fourth quarter. About one-third of Park's loan portfolio is indexed to the prime lending rate and as a result, the average yield on interest earning assets is expected to increase in 2005 as these loans and other loans reprice or mature and are replaced with higher yielding loans. TABLE 6 - DISTRIBUTION OF ASSETS,LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, DAILY 2004 AVERAGE Daily 2003 Average Daily 2002 Average (DOLLARS IN THOUSANDS) AVERAGE INTEREST RATE Average Interest Rate Average Interest Rate ---------------------- ------- -------- ------- ------- -------- ------- ------- -------- ------- ASSETS INTEREST EARNING ASSETS: Loans (1) (2) $2,813,069 $ 179,459 6.38% $2,695,830 $ 184,676 6.85% $2,719,805 $ 207,717 7.64% Taxable investment securities 1,794,544 86,806 4.84% 1,632,565 74,089 4.54% 1,240,463 73,625 5.94% Tax-exempt investment securities (3) 106,585 7,637 7.17% 127,251 9,199 7.23% 144,287 10,247 7.10% Federal funds sold 9,366 218 2.33% 35,768 443 1.24% 36,679 621 1.69% ---------- --------- ---- ---------- --------- ---- ---------- --------- ---- TOTAL INTEREST EARNING ASSETS 4,723,564 274,120 5.80% 4,491,414 268,407 5.98% 4,141,234 292,210 7.06% ---------- --------- ---- ---------- --------- ---- ---------- --------- ---- NONINTEREST EARNING ASSETS: Allowance for possible loan losses (64,676) (64,735) (62,703) Cash and due from banks 142,102 133,157 129,820 Premises and equipment,net 36,540 38,077 39,416 Other assets 211,551 205,350 187,395 ---------- ---------- ---------- TOTAL $5,049,081 $4,803,263 $4,435,162 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY INTEREST BEARING LIABILITIES: Transaction accounts $ 871,264 $ 4,458 0.51% $ 797,421 $ 4,437 0.56% $ 771,507 $ 6,944 0.90% Savings deposits 598,181 2,437 0.41% 571,448 3,589 0.63% 545,657 5,577 1.02% Time deposits 1,476,915 33,103 2.24% 1,532,966 40,574 2.65% 1,584,292 55,906 3.53% ---------- --------- ---- ---------- --------- ---- ---------- --------- ---- TOTAL INTEREST BEARING DEPOSITS 2,946,360 39,998 1.36% 2,901,835 48,600 1.67% 2,901,456 68,427 2.36% ---------- --------- ---- ---------- --------- ---- ---------- --------- ---- Short-term borrowings 401,299 5,319 1.33% 515,328 2,738 0.53% 226,238 3,310 1.46% Long-term debt 519,979 13,385 2.57% 281,599 10,654 3.78% 252,834 10,851 4.29% ---------- --------- ---- ---------- --------- ---- ---------- --------- ---- TOTAL INTEREST BEARING LIABILITIES 3,867,638 58,702 1.52% 3,698,762 61,992 1.68% 3,380,528 82,588 2.44% ---------- --------- ---- ---------- --------- ---- ---------- --------- ---- NONINTEREST BEARING LIABILITIES: Demand deposits 574,560 522,456 502,400 Other 68,608 61,654 64,918 ---------- ---------- ---------- Total noninterest bearing liabilities 643,168 584,110 567,318 ---------- ---------- ---------- Stockholders' equity 538,275 520,391 487,316 ---------- ---------- ---------- TOTAL $5,049,081 $4,803,263 $4,435,162 ========== ========= ==== ========== ========= ==== ========== ========= ==== Net interest earnings $ 215,418 $ 206,415 $ 209,622 Net interest spread 4.28% 4.30% 4.62% Net yield on interest earning assets 4.56% 4.60% 5.06% ---- ---- ----
(1) Loan income includes loan related fee income of $3,336 in 2004, $4,882 in 2003 and $4,309 in 2002. Loan income also includes the effects of taxable equivalent adjustments using a 35% tax rate in 2004, 2003 and 2002. The taxable equivalent adjustment was $606 in 2004, $747 in 2003 and $1,018 in 2002. (2) For the purpose of this computation, non-accrual loans are included in the daily average loans outstanding. (3) Interest income on tax-exempt investment securities includes the effect of taxable equivalent adjustments using a 35% tax rate in 2004, 2003 and 2002. The taxable equivalent adjustments were $2,522 in 2004, $3,031 in 2003 and $3,272 in 2002. 30 FINANCIAL REVIEW The average rate paid on average interest bearing liabilities was 1.52% in 2004 compared to 1.68% in 2003 and 2.44% in 2002. The average rate paid on deposits was 1.36% in 2004 compared to 1.67% in 2003 and 2.36% in 2002. The average rate paid on interest bearing liabilities on a quarterly basis in 2004 was 1.49% for the first quarter, 1.44% for the second quarter, 1.50% for the third quarter and 1.65% for the fourth quarter. The average rate paid on deposits on a quarterly basis in 2004 was 1.38% for the first quarter, 1.31% for the second quarter, 1.33% for the third quarter and 1.41% for the fourth quarter. Management expects that the average cost of interest bearing liabilities and the average rate paid on deposits will increase in 2005. Management expects that net interest income will increase during 2005 due to the anticipated growth in interest earning assets. At year-end 2004, the amortized cost of interest earning assets was $5,037 million compared to $4,724 million on average during 2004. The acquisition of First Clermont on January 3, 2005 added approximately $180 million of interest earning assets. Average interest earning assets should be approximately $5,375 million in 2005 and average interest bearing liabilities should be approximately $4,485 million in 2005. Management expects that the net interest margin will be approximately 4.35% in 2005. The acquisitions of First Federal and First Clermont were all cash transactions. The total purchase price was approximately $99 million. Both of these acquisitions will increase net interest income but will reduce the net interest margin. A year ago, management projected that the net interest margin would be 4.50% for 2004. The actual results for 2004 were a little better at 4.56%. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. TABLE 7 - VOLUME/RATE VARIANCE ANALYSIS
CHANGE FROM 2003 TO 2004 Change from 2002 to 2003 (IN THOUSANDS) VOLUME RATE TOTAL Volume Rate Total -------------- ------ ---- ----- ------ ---- ----- Increase (decrease) in: Interest income: -------- -------- -------- -------- -------- -------- TOTAL LOANS $ 7,807 $(13,024) $ (5,217) $ (1,810) $(21,231) $(23,041) -------- -------- -------- -------- -------- -------- Taxable investments 7,633 5,084 12,717 20,163 (19,699) 464 Tax-exempt investments (1,486) (76) (1,562) (1,232) 184 (1,048) Federal funds sold (459) 234 (225) (15) (163) (178) -------- -------- -------- -------- -------- -------- TOTAL INTEREST INCOME 13,495 (7,782) 5,713 17,106 (40,909) (23,803) -------- -------- -------- -------- -------- -------- Interest expense: Transaction accounts $ 417 $ (396) $ 21 $ 224 $ (2,731) $ (2,507) Savings accounts 161 (1,313) (1,152) 250 (2,238) (1,988) Time deposits (1,428) (6,043) (7,471) (1,763) (13,569) (15,332) Short-term borrowings (724) 3,305 2,581 2,426 (2,998) (572) Long-term debt 6,926 (4,195) 2,731 1,165 (1,362) (197) -------- -------- -------- -------- -------- -------- TOTAL INTEREST EXPENSE 5,352 (8,642) (3,290) 2,302 (22,898) (20,596) -------- -------- -------- -------- -------- -------- NET VARIANCE $ 8,143 $ 860 $ 9,003 $ 14,804 $(18,011) $ (3,207) ======== ======== ======== ======== ======== ========
OTHER INCOME: Total other income, exclusive of security gains or losses, decreased by $8.9 million or 14.5% to $52.6 million in 2004 compared to an increase of $10.6 million or 20.7% in 2003 and an increase of $5.9 million or 13.2% in 2002. Fee income earned from the origination and sale into the secondary market of fixed rate mortgage loans is included with other non-yield related loan fees in the subcategory "other service income." Other service income decreased by $11.3 million or 52.3% to $10.3 million in 2004 compared to other service income of $21.6 million in 2003 and $12.9 million in 2002. Fixed rate mortgage loan volume is greatly dependent on the level of long-term interest rates. Although long-term interest rates continue to be relatively low (ten-year U.S. Government Treasury Note at 4.10%), most consumers have already refinanced their mortgage loans in the last three years at interest rates that on average are less than current fixed rate mortgage loan rates. Management expects that other service income will remain relatively stable in 2005, but will also include the additional fee income from the First Federal and First Clermont operations. Other service income is estimated to be approximately $11.5 million for 2005. A year ago, management projected that other service income would decrease significantly from $21.6 million in 2003. Income from fiduciary activities increased by $892,000 or 8.7% to $11.1 million in 2004 and increased by $1.3 million or 14.6% in 2003. Fiduciary fees are generally based on the market value of assets under management. The strong performance of the equity markets in 2003 contributed to the large increase in fee income for 2003. Management expects that the increase in fee income from fiduciary activities for 2005 will be similar to 2004. First Federal and First Clermont did not have any fee income from fiduciary activities. Service charges on deposit accounts increased by $1.3 million or 9.2% to $15.6 million in 2004 and increased by $401,000 or 2.9% to $14.3 million in 2003. Including the service charge income from First Federal and First Clermont, management expects that service charges on deposit accounts will be approximately $18 million in 2005. The subcategory of "other income" increased by $173,000 or 1.1% to $15.6 million in 2004 and increased by $135,000 or .9% in 2003. This subcategory includes fees earned from check card and ATM services, fee income from bank owned life insurance, fee income earned from the sale of investment and insurance products, rental fee income from safety deposit boxes and fees earned from the sale of official and printed checks. Management expects that fee income earned from these products and services will increase modestly in 2005. With the inclusion of the operations of First Federal and First Clermont, management expects that other income will be approximately $18 million in 2005. OTHER EXPENSE: Total other expense increased by $3.9 million or 3.2% to $126.3 million in 2004 and increased by $2.4 million or 2.0% to $122.4 million in 2003, compared to $120.0 million in 2002. Salaries and employee benefits increased by $3.4 million or 5.0% to $71.5 million in 2004 and increased by $2.6 million or 4.0% in 2003. Full-time equivalent employees at year-end were 1,749 (which includes 56 from First Federal) compared to 1,645 at year-end 2003 and 1,600 at year-end 2002. Salary expense increased by 5.7% in 2004 and by 1.9% in 2003. Employee benefit expense increased by 2.3% in 2004 and by 12.5% in 2003. The large increase in employee benefit expense for 2003 was primarily due to a large increase in expense for the defined benefit pension plan and for the supplemental executive retirement plan. See Note 12 of the Notes to Consolidated Financial Statements for additional information on Park's benefit plans. With the inclusion of the operations of First Federal and First Clermont, management expects that salaries and employee benefits expense will be approximately $81 million in 2005. A year ago, management had projected an increase of 4.0% in salaries and benefits expense for 2004 and the actual result was a 5.0% increase. The additional expense was primarily due to adding several commercial lenders during 2004. The expense for amortization of intangibles was $1.5 million in 2004, $3.1 million in 2003 and $5.3 million in 2002. The expense for amortization of intangibles is expected to increase to $2.5 million in 2005 due to the addition of First Federal and First Clermont. The reduction in the amortization of intangibles in 2004 was due to the completion of the amortization of core deposit intangibles at the Fairfield National Division in 2003. The reduction in the amortization of intangibles in 2003 was due to completion of the amortization of core deposit intangibles at The Richland Trust Company in 2002. 31 FINANCIAL REVIEW Data processing expense was $8.9 million in 2004 compared to $7.8 million in 2003 and $8.3 million in 2002. The increase in data processing expense of $1.1 million or 13.8% was due to an upgrade in the wide area network and to some additional expense related to the conversion of three of Park's affiliate banks to the same core processing system. The subcategory "other expense" was $10.9 million in 2004, compared to $10.3 million in 2003 and $9.2 million in 2002. The increase in other expense of $1.1 million in 2003 was primarily due to a loss from an overdraft on a commercial checking account of $600,000 and an increase in losses from customer fraud. Management expects that total other expense will be approximately $143 million in 2005 with the addition of the operating expense from First Federal and First Clermont. A year ago, management projected that total other expense would be $122 million for 2004 compared to actual results of $126.3 million. This variance was primarily due to the addition of several commercial lenders, additional professional fees (pertaining to the recruitment of the commercial lenders, the acquisitions of First Federal and First Clermont and compliance with the Sarbanes-Oxley Act) and finally due to the payment of $500,000 in prepayment penalties on Federal Home Loan Bank advances. See Note 1 of the Notes to Consolidated Financial Statements for a discussion of the accounting for Park's incentive stock option plan. Park is required to adopt SFAS No. 123r "Accounting for Stock Based Compensation" for all stock options granted or that become vested after June 30, 2005. SFAS No. 123r requires Park to recognize stock-based employee compensation expense for options granted after June 30, 2005. Management does not expect that adoption of SFAS No. 123r will have a significant impact on earnings in 2005 since stock options are primarily granted during the second quarter of each year and are immediately exercisable. Management intends to adopt SFAS No. 123r on July 1, 2005 on a prospective basis. The pro-forma impact on earnings for 2004, 2003 and 2002 are shown to decrease earnings by $3.2 million, $1.9 million and $1.7 million, respectively. Management expects that the adoption of SFAS No. 123r will have a similar impact on earnings in 2006. INCOME TAXES: Federal income tax expense as a percentage of income before taxes was 29.2% in 2004, 29.5% in 2003 and 29.4% in 2002. A lower effective tax percentage rate than the statutory rate of thirty-five percent is primarily due to tax-exempt interest income from state and municipal investments and loans and low income housing tax credits. Park and its subsidiary banks do not pay state income tax to the state of Ohio, but pay a franchise tax based on their year-end equity. The franchise tax expense is included in "state taxes" on Park's Consolidated Statement of Income. State tax expense was $2.5 million in 2004, $2.5 million in 2003 and $2.3 million in 2002. CREDIT EXPERIENCE PROVISION FOR LOAN LOSSES: The provision for loan losses is the amount added to the allowance for loan losses to absorb future loan charge-offs. The amount of the loan loss provision is determined by management after reviewing the risk characteristics of the loan portfolio, historical loan loss experience and projections of future economic conditions. The allowance for loan losses at December 31, 2004 totaled $68.3 million and represented 2.19% of total loans outstanding at December 31, 2004, compared to $63.1 million or 2.31% of total loans outstanding at December 31, 2003 and $62.0 million or 2.30% of total loans outstanding at December 31, 2002. The provision for loan losses was $8.6 million for 2004, compared to $12.6 million for 2003 and $15.0 million for 2002. Net charge-offs were $7.9 million for 2004, compared to $11.5 million for 2003 and $13.0 million for 2002. First Federal's allowance for loan losses of $4.45 million was added to Park's allowance for loan losses at year-end 2004. The ratio of net charge-offs to average loans was .28% in 2004, .43% in 2003 and .48% in 2002. Management expects that the ratio of net charge-offs to average loans for 2005 will be similar to the level of 2004 as the local economies where Park's subsidiary banks operate continue to improve. A year ago, management projected that the net charge-offs to average loans ratio would improve in 2004 which turned out to be accurate. Management believes that the allowance for loan losses at year-end 2004 is adequate to absorb estimated credit losses in the loan portfolio. See Note 1 of the Notes to Consolidated Financial Statements for additional information on management's evaluation of the adequacy of the allowance for loan losses. The following table summarizes the loan loss provision, charge-offs and recoveries for the last five years: TABLE 8 - SUMMARY OF LOAN LOSS EXPERIENCE
(IN THOUSANDS) 2004 2003 2002 2001 2000 -------------- ---- ---- ---- ---- ---- AVERAGE LOANS (NET OF UNEARNED INTEREST) $2,813,069 $2,695,830 $2,719,805 $2,881,551 $2,873,939 ALLOWANCE FOR LOAN LOSSES: Beginning balance $ 63,142 $ 62,028 $ 59,959 $ 57,473 $ 52,140 CHARGE-OFFS: Commercial, financial and agricultural 2,557 4,698 7,210 3,770 5,077 Real estate - construction 613 -- 317 180 -- Real estate - residential 1,476 1,173 1,208 1,262 728 Real estate - commercial 1,951 1,947 884 1,181 433 Consumer 8,111 9,233 8,606 9,908 6,825 Lease financing 465 985 1,602 1,519 933 ---------- ---------- ---------- ---------- ---------- TOTAL CHARGE-OFFS 15,173 18,036 19,827 17,820 13,996 ---------- ---------- ---------- ---------- ---------- RECOVERIES: Commercial,financial and agricultural $ 2,138 $ 1,543 $ 1,812 $ 2,453 $ 788 Real estate - construction 67 175 -- -- -- Real estate - residential 650 549 969 433 331 Real estate - commercial 292 407 565 223 242 Consumer 3,633 3,236 2,891 3,426 2,772 Lease financing 529 645 616 712 406 ---------- ---------- ---------- ---------- ---------- TOTAL RECOVERIES 7,309 6,555 6,853 7,247 4,539 ---------- ---------- ---------- ---------- ---------- NET CHARGE-OFFS 7,864 11,481 12,974 10,573 9,457 ---------- ---------- ---------- ---------- ---------- Provision charged to earnings 8,600 12,595 15,043 13,059 14,790 ---------- ---------- ---------- ---------- ---------- Allowance for loan losses of acquired bank 4,450 -- -- -- -- ---------- ---------- ---------- ---------- ---------- ENDING BALANCE $ 68,328 $ 63,142 $ 62,028 $ 59,959 $ 57,473 ---------- ---------- ---------- ---------- ---------- RATIO OF NET CHARGE-OFFS TO AVERAGE LOANS 0.28% 0.43% 0.48% 0.37% 0.33% RATIO OF ALLOWANCE FOR LOAN LOSSES TO END OF YEAR LOANS,NET OF UNEARNED INTEREST 2.19% 2.31% 2.30% 2.14% 1.94% ---------- ---------- ---------- ---------- ----------
32 FINANCIAL REVIEW The following table summarizes the allocation of allowance for possible loan losses: TABLE 9 - ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
2004 2003 2002 2001 2000 DECEMBER 31, PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF (DOLLARS IN LOANS PER LOANS PER LOANS PER LOANS PER LOANS PER THOUSANDS) ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY ----------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- Commercial, financial and agricultural $17,837 15.04% $17,117 16.16% $17,049 16.34% $15,853 15.75% $15,573 16.20% Real estate - construction 3,107 4.98% 2,423 4.44% 1,982 3.68% 1,562 3.19% 1,430 3.23% Real estate - residential 8,926 38.14% 7,378 36.02% 7,504 37.17% 8,053 38.41% 8,130 39.29% Real estate - commercial 16,930 24.11% 15,412 24.54% 13,889 22.93% 12,080 21.30% 10,662 19.31% Consumer 20,206 16.19% 18,681 16.48% 18,322 16.40% 19,131 17.08% 17,886 17.30% Leases 1,322 1.54% 2,131 2.36% 3,282 3.48% 3,280 4.27% 3,792 4.67% ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ TOTAL $68,328 100.00% $63,142 100.00% $62,028 100.00% $59,959 100.00% $57,473 100.00% ======= ====== ======= ====== ======= ====== ======= ====== ======= ======
As of December 31, 2004, the Corporation had no significant concentrations of loans to borrowers engaged in the same or similar industries nor did the Corporation have any loans to foreign governments. NONPERFORMING ASSETS: Nonperforming loans include: l) loans whose interest is accounted for on a nonaccrual basis; 2) loans whose terms have been renegotiated; and 3) loans which are contractually past due 90 days or more as to principal or interest payments but whose interest continues to accrue. Other real estate owned results from taking title to property used as collateral for a defaulted loan. The following is a summary of the nonaccrual, past due and renegotiated loans and other real estate owned for the last five years: TABLE 10 - NONPERFORMING ASSETS
DECEMBER 31, (DOLLARS IN THOUSANDS) 2004 2003 2002 2001 2000 - ---------------------- ---- ---- ---- ---- ---- Nonaccrual loans $17,873 $15,921 $17,579 $17,303 $10,204 Renegotiated loans 5,461 5,452 2,599 2,254 6,440 Loans past due 90 days or more 5,439 4,367 6,290 7,550 5,093 ------- ------- ------- ------- ------- TOTAL NONPERFORMING LOANS 28,773 25,740 26,468 27,107 21,737 ------- ------- ------- ------- ------- Other real estate owned 2,680 2,319 3,206 3,425 1,716 ------- ------- ------- ------- ------- TOTAL NONPERFORMING ASSETS $31,453 $28,059 $29,674 $30,532 $23,453 ------- ------- ------- ------- ------- PERCENTAGE OF NONPERFORMING LOANS TO LOANS, NET OF UNEARNED INTEREST 0.92% 0.94% 0.98% 0.97% 0.74% PERCENTAGE OF NONPERFORMING ASSETS TO LOANS, NET OF UNEARNED INTEREST 1.01% 1.03% 1.10% 1.09% 0.79% PERCENTAGE OF NONPERFORMING ASSETS TO TOTAL ASSETS 0.58% 0.56% 0.67% 0.67% 0.56% ------- ------- ------- ------- -------
Tax equivalent interest income from loans of $179.5 million for 2004 would have increased by $1.9 million if all loans had been current in accordance with their original terms. Interest income for the year ended December 31, 2004 in the approximate amount of $984,000 is included in interest income for those loans in accordance with original terms. The Corporation had $131.8 million of loans included on the Corporation's watch list of potential problem loans at December 31, 2004 compared to $177.7 million at year-end 2003 and $159.0 million at year-end 2002. The existing conditions of these loans do not warrant classification as nonaccrual. Management undertakes additional surveillance regarding a borrower's ability to comply with payment terms for watch list loans. As a percentage of year-end loans, the Corporation's watch list of potential problem loans was 4.2% in 2004, 6.5% in 2003 and 5.9% in 2002. Management expects that the Corporation's watch list of potential problem loans at year-end 2005 will be similar to year-end 2004 as economic conditions continue to improve. A year ago, management projected a reduction in the amount of watch list loans at year-end 2004 which turned out to be accurate. CAPITAL RESOURCES LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT: The Corporation's objective in managing its liquidity is to maintain the ability to continuously meet the cash flow needs of customers, such as borrowings or deposit withdrawals, while at the same time seeking higher yields from longer-term lending and investing activities. Cash and cash equivalents decreased by $8.0 million during 2004 to $161.8 million at year end. Cash provided by operating activities was $86.7 million in 2004, $99.2 million in 2003, and $80.4 million in 2002. Net income was the primary source of cash for operating activities during each year. Cash used in investing activities was $147.8 million in 2004 and $665.0 million in 2003. Cash provided by investing activities was $200.6 million in 2002. Security transactions are the major use or source of cash in investing activities. Proceeds from the sale or maturity of securities provide cash and purchases of securities use cash. Net security transactions used $64.6 million of cash in 2004 and used $615.9 million of cash in 2003. Net security trans- actions provided $110.1 million of cash in 2002. The other major use or source of cash in investing activities is the net increase or decrease in the loan portfolio. Cash used by the net increase in the loan portfolio was $171.8 million in 2004 and was $45.2 million in 2003. Cash provided by the net decrease in the loan portfolio was $95.0 million in 2002. Cash provided by financing activities was $53.2 million in 2004 and $496.7 million in 2003. Cash used by financing activities was $211.3 million in 2002. A major source of cash for financing activities is the net change in deposits. Cash provided by the net increase in deposits was $103.3 million in 2004 and $180.9 million in 2002. Cash used by the net decrease in deposits was $80.9 million in 2003. Changes in short-term borrowings or long-term debt are another major source or use of cash for financing activities. The net decrease in short-term borrowings used cash of $256.8 million in 2004 and $129.4 million in 2002. The net increase in short-term borrowings provided cash of $327.9 million in 2003. Cash was provided by the net increase in long-term debt of $271.4 million in 2004 and $298.8 million in 2003. Cash was used by the net decrease in long-term debt of $205.3 million in 2002. Funds are available from a number of sources, including the securities portfolio, the core deposit base, Federal Home Loan Bank borrowings, and the capability to securitize or package loans for sale. The present funding sources provide more than adequate liquidity for the Corporation to meet its cash flow needs. The increase or decrease in the investment portfolio and short- and long-term debt is greatly dependent upon the growth in loans and deposits. The primary objective of management is to grow loan and deposit totals. To the extent that management is unable to grow loan totals at a desired growth rate, additional investment securities are added to the balance sheet. Likewise, short- and long-term debt are utilized to fund the growth in earning assets if the growth in deposits and the cash flow from operations is not sufficient to do so. Liquidity is enhanced by assets maturing or repricing within one year. Assets maturing or repricing within one year were $2,848 million or 56.3% of interest earning assets at year-end 2004. Liquidity is also enhanced by a significant amount of stable core deposits from a variety of customers in several Ohio markets served by the Corporation. 33 FINANCIAL REVIEW An asset/liability committee monitors and forecasts rate-sensitive assets and rate-sensitive liabilities and develops strategies and pricing policies to influence the acquisition of certain assets and liabilities. The purpose of these efforts is to guard the Corporation from adverse impacts of unforeseen swings in interest rates and to enhance the net income of the Corporation by accepting a limited amount of interest rate risk, based on interest rate projections. The following table shows interest rate sensitivity data for five different time intervals as of December 31, 2004. TABLE 11 - INTEREST RATE SENSITIVITY
(DOLLARS 0-3 3-12 1-3 3-5 Over 5 IN THOUSANDS) Months Months Years Years Years TOTAL ------------- ------ ------ ----- ----- ------ ----- INTEREST RATE SENSITIVE ASSETS: Investment securities (1) $ 109,413 $ 265,175 $ 666,032 $ 605,866 $ 282,392 $ 1,928,878 Federal funds sold 6,300 -- -- -- -- 6,300 Loans (1) 1,095,529 1,371,178 450,075 127,748 76,078 3,120,608 ----------- ----------- ----------- ----------- ----------- ----------- TOTAL INTEREST EARNING ASSETS 1,211,242 1,636,353 1,116,107 733,614 358,470 5,055,786 ----------- ----------- ----------- ----------- ----------- ----------- INTEREST BEARING LIABILITIES: Interest bearing checking (2) 148,719 -- 446,156 -- -- 594,875 Savings accounts (2) 316,471 -- 316,471 -- -- 632,942 Money market checking 303,701 -- -- -- -- 303,701 Time deposits 381,410 572,115 470,147 100,320 1,621 1,525,613 Other 1,849 -- -- -- -- 1,849 ----------- ----------- ----------- ----------- ----------- ----------- TOTAL DEPOSITS 1,152,150 572,115 1,232,774 100,320 1,621 3,058,980 ----------- ----------- ----------- ----------- ----------- ----------- Short-term borrowings 278,231 -- -- -- -- 278,231 Long-term debt 378,000 14,150 164,344 216,409 22,890 795,793 ----------- ----------- ----------- ----------- ----------- ----------- TOTAL INTEREST BEARING LIABILITIES 1,808,381 586,265 1,397,118 316,729 24,511 4,133,004 ----------- ----------- ----------- ----------- ----------- ----------- INTEREST RATE SENSITIVITY GAP (597,139) 1,050,088 (281,011) 416,885 333,959 922,782 CUMULATIVE RATE SENSITIVITY GAP (597,139) 452,949 171,938 588,823 922,782 -- CUMULATIVE GAP AS A PERCENTAGE OF TOTAL INTEREST EARNING ASSETS 11.81% 8.96% 3.40% 11.65% 18.25% -- ----------- ----------- ----------- ----------- ----------- -----------
(1) Investment securities and loans that are subject to prepayment are shown in the table by the earlier of their repricing date or their expected repayment dates and not by their contractual maturity. (2) Management considers interest bearing checking accounts and savings accounts to be core deposits and therefore, not as rate sensitive as other deposit accounts and borrowed money. Accordingly, only 25% of interest bearing checking accounts and 50% of savings accounts are considered to reprice within one year. If all of the interest bearing checking accounts and savings accounts were considered to reprice within one year, the one year cumulative gap would change from a positive 8.96% to a negative 6.13%. The interest rate sensitivity gap analysis provides a good overall picture of the Corporation's static interest rate risk position. The Corporation's policy is that the twelve month cumulative gap position should not exceed fifteen percent of interest earning assets for three consecutive quarters. At December 31, 2004, the cumulative interest earning assets maturing or repricing within twelve months were $2,848 million compared to the cumulative interest bearing liabilities maturing or repricing within twelve months of $2,395 million. For the twelve-month cumulative gap position, rate sensitive assets exceed rate sensitive liabilities by $453 million or 9.0% of earning assets. Management expects that the twelve month interest rate sensitivity gap will become less positive (assets exceeding liabilities) by year-end 2005. A positive twelve month cumulative rate sensitivity gap would suggest that the Corporation's net interest margin would increase if interest rates were to rise. However, the usefulness of the interest sensitivity gap analysis as a forecasting tool in projecting net interest income is limited. The gap analysis does not consider the magnitude by which assets or liabilities will reprice during a period and also contains assumptions as to the repricing of transaction and savings accounts that may not prove to be correct. The cumulative twelve month interest rate sensitivity gap position at December 31, 2003 was a negative $36 million or a negative .8% of interest earning assets compared to a positive $453 million or a positive 9.0% of interest earning assets at December 31, 2004. This change in the cumulative twelve month interest rate sensitivity gap of a positive $489 million was primarily due to an increase in the amount of long-term debt repricing or maturing in longer than one year to $404 million at year-end 2004 compared to $111 million at year-end 2003. Management supplements the interest rate sensitivity gap analysis with periodic simulations of balance sheet sensitivity under various interest rate and what-if scenarios to better forecast and manage the net interest margin. The Corporation uses an earnings simulation model to analyze net interest income sensitivity to movements in interest rates. This model is based on actual cash flows and repricing characteristics for balance sheet instruments and incorporates market-based assumptions regarding the impact of changing interest rates on the prepayment rate of certain assets and liabilities. This model also includes management's projections for activity levels of various balance sheet instruments and noninterest fee income and operating expense. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into this earnings simulation model. These assumptions are inherently uncertain and as a result, the model cannot precisely measure net interest income or precisely predict the impact of changes in interest rates on net interest income and net income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies. Management uses a .50% change in market interest rates per quarter for a total of 2.00% per year in evaluating the impact of changing interest rates on net interest income and net income over a twelve month horizon. At December 31, 2004, the earnings simulation model projected that net income would increase by ..9% using a rising interest rate scenario and decrease by .9% using a declining interest rate scenario over the next year. At December 31, 2003, the earnings simulation model projected that net income would increase by .1% using a rising interest rate scenario and decrease by 1.3% using a declining interest rate scenario over the next year and at December 31, 2002, the earnings simulation model projected that net income would increase by .6% using a rising interest rate scenario and decrease by 1.2% using a declining interest rate scenario over the next year. Consistently, over the past several years the earnings simulation model has projected that changes in interest rates would have only a small impact on net income and the net interest margin. The net interest margin has been relatively stable over the past five years at 4.56% in 2004, 4.60% in 2003, 5.06% in 2002, 4.92% in 2001 and 4.75% in 2000. By comparison, the net interest margin for Park's peer group (all bank holding companies with $3 to $10 billion in assets) was 3.87% in 2004, 3.92% in 2003, 4.16% in 2002, 4.18% in 2001 and 4.17% in 2000. A major goal of the asset/liability committee is to have a relatively stable net interest margin regardless of the level of interest rates. Management expects that the net interest margin will be approximately 4.35% in 2005. The projected decrease in the net interest margin for 2005 is largely due to the acquisition of First Federal and First Clermont. 34 FINANCIAL REVIEW CONTRACTUAL OBLIGATIONS 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. The following table summarizes Park's significant and determinable obligations by payment date at December 31, 2004. Further discussion of the nature of each obligation is included in the referenced Note to the Consolidated Financial Statements. TABLE 12 - CONTRACTUAL OBLIGATIONS
DECEMBER 31,2004 PAYMENTS DUE IN ---------------- --------------- (DOLLARS 0-1 1-3 3-5 Over 5 IN THOUSANDS) Note Years Years Years Years TOTAL ---------------- ---- ----- ----- ----- ------ ----- Deposits without stated maturity $2,164,248 $ -- $ -- $ -- $2,164,248 Certificates of deposit 953,525 470,147 100,320 1,621 1,525,613 Short-term borrowings 9 278,231 -- -- -- 278,231 Long-term debt 10 22,300 475,771 275,889 21,833 795,793 Operating leases 8 1,312 1,972 1,329 440 5,053 Purchase obligations 55,335 -- -- -- 55,335 ---------- -------- --------- ------- ---------- TOTAL CONTRACTUAL OBLIGATIONS $3,474,951 $947,890 $ 377,538 $23,894 $4,824,273 ---------- -------- --------- ------- ----------
The Corporation's operating lease obligations represent short- and long-term lease and rental payments for facilities and equipment. Purchase obligations represent obligations under agreements to purchase goods or services that are enforceable and legally binding on the Corporation. The purchase obligation shown in the table relates primarily to the acquisition of First Clermont on January 3, 2005. COMMITMENTS, CONTINGENT LIABILITIES, AND OFF-BALANCE SHEET ARRANGEMENTS: In order to meet the financing needs of its customers, the Corporation issues loan commitments and standby letters of credit. At December 31, 2004, the Corporation had $630 million of loan commitments for commercial, commercial real estate, and residential real estate loans and had $139 million of commitments for revolving home equity and credit card lines. Standby letters of credit totaled $15 million at December 31, 2004. Commitments to extend credit for loan commitments and standby letters of credit do not necessarily represent future cash requirements. These commitments often expire without being drawn upon. However, all of the loan commitments and standby letters of credit are permitted to be drawn upon in 2005. See Note 17 of the Notes to Consolidated Financial Statements for additional information on loan commitments and standby letters of credit. The Corporation did not have any significant contingent liabilities at December 31, 2004, and did not have any off-balance sheet arrangements at year-end 2004. CAPITAL: The Corporation's primary means of maintaining capital adequacy is through net retained earnings. At December 31, 2004, the Corporation's equity capital was $562.6 million, an increase of 3.6% over the equity capital at December 31, 2003. Stockholders' equity at December 31, 2004 was 10.39% of total assets compared to 10.79% of total assets at December 31, 2003. Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank holding companies. The unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. The capital standard of risk-based capital to risk-based assets is 8.00% at December 31, 2004. At year-end 2004, the Corporation had a risk-based capital ratio of 16.43% or capital above the minimum required by $282 million. The capital standard of tier l capital to risk-based assets is 4.00% at December 31, 2004. Tier l capital includes stockholders' equity net of goodwill and other intangible assets. At year-end 2004, the Corporation had a tier l capital to risk-based assets ratio of 15.16% or capital above the minimum required by $374 million. Bank regulators have also established a leverage capital ratio of 4.00%, consisting of tier 1 capital to total assets, not risk adjusted. At year-end 2004, the Corporation had a leverage capital ratio of 10.10% or capital above the minimum required by $307 million. Regulatory guidelines also establish capital ratio requirements for "well capitalized" bank holding companies. The capital ratios are 10.00% for risk-based capital, 6.00% for tier 1 capital to risk-based assets and 5.00% for tier 1 capital to total assets. The Corporation exceeds these higher capital standards and therefore is classified as "well capitalized." The financial institution subsidiaries of the Corporation each met the well capitalized capital ratio guidelines at December 31, 2004. See Note 19 of the Notes to Consolidated Financial Statements for the capital ratios for the Corporation and its financial institution subsidiaries. EFFECTS OF INFLATION: Balance sheets of financial institutions typically contain assets and liabilities that are monetary in nature and therefore, differ greatly from most commercial and industrial companies which have significant investments in premises, equipment and inventory. During periods of inflation, financial institutions that are in a net positive monetary position will experience a decline in purchasing power, which does have an impact on growth. Another significant effect on internal equity growth is other expenses, which tend to rise during periods of inflation. Management believes the most significant impact on financial results is the Corporation's ability to align its asset/liability management program to react to changes in interest rates. The following table summarizes five-year financial information. All per share data have been retroactively restated for the 5% stock dividend paid on December 15, 2004. TABLE 13-CONSOLIDATED FIVE-YEAR SELECTED FINANCIAL DATA
DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003 2002 2001 2000 ---------------------- ---- ---- ---- ---- ---- RESULTS OF OPERATIONS: Interest income $ 270,993 $ 264,629 $ 287,920 $ 320,348 $ 323,131 Interest expense 58,702 61,992 82,588 127,404 142,339 Net interest income 212,291 202,637 205,332 192,944 180,792 Provision for loan losses 8,600 12,595 15,043 13,059 14,790 Net interest income after provision for loan losses 203,691 190,042 190,289 179,885 166,002 Gain/(loss) on sale of securities (793) (6,060) (182) 140 (889) Noninterest income 52,641 61,583 51,032 45,098 38,353 Noninterest expense 126,290 122,376 119,964 114,207 106,862 Net income 91,507 86,878 85,579 78,362 68,547 PER SHARE: Net income - basic 6.38 6.01 5.87 5.32 4.59 Net income - diluted 6.32 5.97 5.86 5.31 4.58 Cash dividends declared 3.414 3.209 2.962 2.752 2.533 AVERAGE BALANCES: Loans $ 2,813,069 $ 2,695,830 $ 2,719,805 $ 2,881,551 $ 2,873,939 Investment securities 1,901,129 1,759,816 1,384,750 1,105,707 1,001,940 Money market instruments and other 9,366 35,768 36,679 21,021 24,144 ----------- ----------- ----------- ----------- ----------- TOTAL EARNING ASSETS 4,723,564 4,491,414 4,141,234 4,008,279 3,900,023 ----------- ----------- ----------- ----------- -----------
35 FINANCIAL REVIEW
DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003 2002 2001 2000 ---------------------- ---- ---- ---- ---- ---- Noninterest bearing deposits 574,560 522,456 502,400 460,219 460,360 Interest bearing deposits 2,946,360 2,901,835 2,901,456 2,735,046 2,666,113 --------- --------- --------- --------- --------- TOTAL DEPOSITS 3,520,920 3,424,291 3,403,856 3,195,265 3,126,473 --------- --------- --------- --------- --------- Short-term borrowings 401,299 515,328 226,238 279,244 295,162 Long-term debt 519,979 281,599 252,834 295,669 267,147 Stockholders' equity 538,275 520,391 487,316 452,287 414,095 Total assets 5,049,081 4,803,263 4,435,162 4,270,004 4,141,834 RATIOS: Return on average assets 1.81% 1.81% 1.93% 1.84% 1.65% Return on average equity 17.00% 16.69% 17.56% 17.33% 16.55% Net interest margin (1) 4.56% 4.60% 5.06% 4.92% 4.75% Noninterest expense to net revenue (1) 47.11% 45.66% 46.02% 47.11% 47.82% Dividend payout ratio 53.54% 53.42% 50.42% 51.64% 52.73% Average stockholders' equity to average total assets 10.66% 10.83% 10.99% 10.59% 10.00% Leverage capital 10.10% 10.79% 10.72% 9.97% 9.91% Tier 1 capital 15.16% 16.51% 16.51% 14.84% 15.01% Risk-based capital 16.43% 17.78% 17.78% 16.09% 16.27% --------- --------- --------- --------- ---------
(1) Computed on fully taxable equivalent basis The following table is a summary of selected quarterly results of operations for the years ended December 31, 2004 and 2003. Certain quarterly amounts have been reclassified to conform to the year-end financial statement presentation. TABLE 14 - QUARTERLY FINANCIAL DATA
THREE MONTHS ENDED (DOLLARS IN THOUSANDS, ------------------------------------------------------ EXCEPT PER SHARE DATA) MARCH 31 JUNE 30 SEPT. 30 DEC. 31 ---------------------- -------- ------- -------- ------- 2004: Interest income $ 66,787 $ 66,372 $ 68,604 $ 69,230 Interest expense 14,171 13,850 14,794 15,887 Net interest income 52,616 52,522 53,810 53,343 Provision for loan losses 1,465 1,905 2,745 2,485 Gain (loss) on sale of securities 106 -- -- (899) Income before income taxes 32,604 34,368 32,982 29,295 Net income 22,978 24,085 23,547 20,897 Per share data: Net income - basic 1.59 1.68 1.65 1.46 Net income - diluted 1.58 1.67 1.63 1.44 Weighted-average common stock outstanding - basic 14,443,898 14,341,123 14,289,060 14,305,004 Weighted-average common stock equivalent - diluted 14,553,019 14,464,537 14,427,971 14,499,782 ----------- ----------- ----------- ----------- 2003: Interest income $ 68,863 $ 67,971 $ 64,051 $ 63,744 Interest expense 16,658 16,375 14,701 14,258 Net interest income 52,205 51,596 49,350 49,486 Provision for loan losses 3,433 2,836 3,156 3,170 Gain (loss) on sale of securities (1,234) 321 (4,474) (673) Income before income taxes 32,924 35,991 28,502 25,772 Net income 23,166 25,123 20,200 18,389 Per share data: Net income - basic 1.60 1.74 1.40 1.27 Net income - diluted 1.60 1.73 1.39 1.26 Weighted-average common stock outstanding - basic 14,469,869 14,449,173 14,452,600 14,463,954 Weighted-average common stock equivalent - diluted 14,515,896 14,534,269 14,574,443 14,581,080 ----------- ----------- ----------- -----------
The Corporation's common stock (symbol: PRK) is traded on the American Stock Exchange (AMEX). At December 31, 2004, the Corporation had 5,006 stockholders of record. The following table sets forth the high, low and closing sale prices of, and dividends declared on the common stock for each quarterly period for the years ended December 31, 2004 and 2003, as reported by AMEX. All per share data have been retroactively restated for the 5% stock dividend paid on December 15, 2004. TABLE 15 - MARKET AND DIVIDEND INFORMATION
CASH DIVIDEND LAST DECLARED HIGH LOW PRICE PER SHARE ---- --- ----- --------- 2004: FIRST QUARTER $110.24 $105.33 $107.90 $0.838 SECOND QUARTER 124.76 107.52 121.63 0.838 THIRD QUARTER 125.08 108.48 121.17 0.838 FOURTH QUARTER 141.25 119.29 135.50 0.900 ------- ------- ------- ------ 2003: First Quarter $ 98.52 $ 88.86 $ 88.86 $0.790 Second Quarter 108.86 91.00 108.81 0.790 Third Quarter 114.29 106.04 106.57 0.790 Fourth Quarter 113.81 100.97 107.76 0.838 ------- ------- ------- ------
36 MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING To the Board of Directors and Stockholders Park National Corporation The management of Park National Corporation (the "Corporation") is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Corporation's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. The Corporation's internal control over financial reporting includes those policies and procedures that: a.) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; b.) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation; and c.) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation's assets that could have a material effect on the financial statements. The Corporation's internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even an effective system of internal control over financial reporting will provide only reasonable assurance with respect to financial statement preparation. With the supervision and participation of our President and Chief Executive Officer and our Chief Financial Officer, management assessed the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment and those criteria, management concluded that the Corporation maintained effective internal control over financial reporting as of December 31, 2004. Park's independent registered public accounting firm (Ernst & Young LLP) have issued an attestation report on management's assessment of the Corporation's internal control over financial reporting which follows this report. /s/ C. Daniel DeLawder /s/ John W. Kozak - ---------------------- ----------------- C. Daniel DeLawder John W. Kozak President and Chief Executive Officer Chief Financial Officer 37 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders Park National Corporation We have audited management's assessment, included in the accompanying Report of Management, that Park National Corporation maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Park National Corporation management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Park National Corporation maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Park National Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Park National Corporation as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2004 and our report dated February 25, 2005 expressed an unqualified opinion thereon. Ernst & young LLP Columbus, Ohio February 25, 2005 38 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders Park National Corporation We have audited the accompanying consolidated balance sheets of Park National Corporation and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2004. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Park National Corporation and subsidiaries at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Park National Corporation and subsidiaries internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2005 expressed an unqualified opinion thereon. Ernst & young LLP Columbus, Ohio February 25, 2005 39 CONSOLIDATED BALANCE SHEETS PARK NATIONAL CORPORATION AND SUBSIDIARIES at December 31, 2004 and 2003 (Dollars in thousands)
ASSETS 2004 2003 - --------------------------------------------------------------------------------- ----------- ----------- Cash and due from banks $ 155,529 $ 169,782 Federal funds sold 6,300 -- Interest bearing deposits with other banks 2,096 50 INVESTMENT SECURITIES: Securities available-for-sale, at fair value (amortized cost of $1,835,194 and $1,899,537 at December 31, 2004 and 2003, respectively) 1,854,335 1,928,697 Securities held-to-maturity, at amortized cost (fair value of $73,613 and $63,563 at December 31, 2004 and 2003, respectively) 72,447 62,529 ----------- ----------- TOTAL INVESTMENT SECURITIES 1,926,782 1,991,226 ----------- ----------- Loans 3,125,829 2,737,520 Unearned loan interest (5,221) (6,717) ----------- ----------- TOTAL LOANS 3,120,608 2,730,803 ----------- ----------- Allowance for loan losses (68,328) (63,142) ----------- ----------- NET LOANS 3,052,280 2,667,661 ----------- ----------- OTHER ASSETS: Bank owned life insurance 94,909 82,570 Premises and equipment,net 43,179 36,746 Accrued interest receivable 20,548 19,794 Other 110,961 67,127 ----------- ----------- TOTAL OTHER ASSETS 269,597 206,237 ----------- ----------- TOTAL ASSETS $ 5,412,584 $ 5,034,956 =========== ===========
The accompanying notes are an integral part of the financial statements. 40 CONSOLIDATED BALANCE SHEETS (CONTINUED) PARK NATIONAL CORPORATION AND SUBSIDIARIES at December 31, 2004 and 2003 (Dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2003 - ------------------------------------ ----------- ----------- DEPOSITS: Noninterest bearing $ 630,882 $ 547,793 Interest bearing 3,058,979 2,866,456 ----------- ----------- TOTAL DEPOSITS 3,689,861 3,414,249 ----------- ----------- Short-term borrowings 278,231 516,759 Long-term debt 795,793 485,977 OTHER LIABILITIES: Accrued interest payable 6,411 6,437 Other 79,727 68,493 ----------- ----------- TOTAL OTHER LIABILITIES 86,138 74,930 ----------- ----------- TOTAL LIABILITIES 4,850,023 4,491,915 ----------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock,no par value (20,000,000 shares authorized; 15,269,707 shares issued in 2004 and 15,269,452 issued in 2003) 208,251 105,895 Accumulated other comprehensive income,net 12,442 18,954 Retained earnings 433,260 486,769 Less:Treasury stock (949,480 shares in 2004 and 814,425 shares in 2003) (91,392) (68,577) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 562,561 543,041 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,412,584 $ 5,034,956 =========== ===========
The accompanying notes are an integral part of the financial statements. 41 CONSOLIDATED STATEMENTS OF INCOME PARK NATIONAL CORPORATION AND SUBSIDIARIES for the years ended December 31, 2004, 2003 and 2002 (Dollars in thousands, except per share data)
2004 2003 2002 --------- --------- --------- INTEREST INCOME: Interest and fees on loans $ 178,853 $ 183,929 $ 206,699 Interest and dividends on: Obligations of U.S.Government,its agencies and other securities 86,806 73,753 73,625 Obligations of states and political subdivisions 5,115 6,168 6,975 Other interest income 219 779 621 --------- --------- --------- TOTAL INTEREST INCOME 270,993 264,629 287,920 --------- --------- --------- INTEREST EXPENSE: Interest on deposits: Demand and savings deposits 6,895 8,026 12,521 Time deposits 33,103 40,574 55,906 Interest on short-term borrowings 5,319 2,738 3,310 Interest on long-term debt 13,385 10,654 10,851 --------- --------- --------- TOTAL INTEREST EXPENSE 58,702 61,992 82,588 --------- --------- --------- NET INTEREST INCOME 212,291 202,637 205,332 --------- --------- --------- Provision for loan losses 8,600 12,595 15,043 --------- --------- --------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 203,691 190,042 190,289 --------- --------- --------- OTHER INCOME: Income from fiduciary activities 11,137 10,245 8,942 Service charges on deposit accounts 15,585 14,269 13,868 Gain/(loss) on sales of securities (793) (6,060) (182) Other service income 10,325 21,648 12,936 Other 15,594 15,421 15,286 --------- --------- --------- TOTAL OTHER INCOME $ 51,848 $ 55,523 $ 50,850 --------- --------- ---------
The accompanying notes are an integral part of the financial statements. 42 CONSOLIDATED STATEMENTS OF INCOME (CONTINUED) PARK NATIONAL CORPORATION AND SUBSIDIARIES for the years ended December 31, 2004, 2003 and 2002 (Dollars in thousands, except per share data)
2004 2003 2002 -------- -------- -------- OTHER EXPENSE: Salaries and employee benefits $ 71,464 $ 68,093 $ 65,464 Data processing fees 8,900 7,819 8,302 Fees and service charges 8,784 7,830 7,709 Net occupancy expense of bank premises 7,024 6,917 6,262 Amortization of intangibles 1,479 3,110 5,276 Furniture and equipment expense 5,749 6,434 6,177 Insurance 1,030 1,090 1,190 Marketing 3,972 3,585 3,512 Postage and telephone 4,482 4,691 4,560 State taxes 2,468 2,518 2,287 Other 10,938 10,289 9,225 -------- -------- -------- TOTAL OTHER EXPENSE 126,290 122,376 119,964 -------- -------- -------- INCOME BEFORE FEDERAL INCOME TAXES 129,249 123,189 121,175 Federal income taxes 37,742 36,311 35,596 -------- -------- -------- NET INCOME $ 91,507 $ 86,878 $ 85,579 ======== ======== ======== EARNINGS PER SHARE: BASIC $ 6.38 $ 6.01 $ 5.87 DILUTED $ 6.32 $ 5.97 $ 5.86 -------- -------- --------
The accompanying notes are an integral part of the financial statements. 43 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY PARK NATIONAL CORPORATION AND SUBSIDIARIES for the years ended December 31, 2004, 2003 and 2002 (Dollars in thousands, except per share data)
COMMON STOCK ACCUMULATED -------------------- OTHER SHARES RETAINED COMPREHENSIVE TREASURY OUTSTANDING AMOUNT EARNINGS INCOME STOCK TOTAL ----------- ------ -------- ------------- -------- ----- BALANCE, JANUARY 1, 2002 14,637,841 $ 105,771 $ 403,870 $ 8,705 $ (50,000) $ 468,346 ---------- --------- --------- ----------- --------- --------- Treasury stock purchased (213,740) -- -- -- (18,793) (18,793) Treasury stock reissued primarily for stock options 57,515 -- -- -- 3,599 3,599 exercised Cash payment for fractional shares in dividend reinvestment plan (52) (3) -- -- -- (3) Net income -- -- 85,579 -- -- 85,579 Other comprehensive income,net of tax: Unrealized net holding gain on securities available-for-sale,net of income taxes of $8,243 15,311 15,311 Additional minimum liability for pension plan, net of income taxes of $(860) (1,598) (1,598) ---------- --------- --------- ----------- --------- --------- Total other comprehensive income 13,713 ---------- --------- --------- ----------- --------- --------- Comprehensive income 99,292 Cash dividends: Corporation at $2.962 per share -- -- (43,149) -- -- (43,149) ---------- --------- --------- ----------- --------- --------- BALANCE, DECEMBER 31, 2002 14,481,564 $ 105,768 $ 446,300 $ 22,418 $ (65,194) $ 509,292 ========== ========= ========= =========== ========= ========= Treasury stock purchased (92,913) -- -- -- (8,907) (8,907) Treasury stock reissued primarily for stock options 64,396 -- -- -- 5,524 5,524 exercised Cash payment for fractional shares in dividend reinvestment plan (40) (3) -- -- -- (3) Shares issued for stock options 2,020 130 130 Net income -- -- 86,878 -- -- 86,878 Other comprehensive income,net of tax: Unrealized net holding loss on securities available-for-sale,net of income taxes of $(2,725) (5,062) (5,062) Reverse additional minimum liability for pension plan, net of income taxes of $860 1,598 -- 1,598 ---------- --------- --------- ----------- --------- --------- Total other comprehensive income (3,464) ---------- --------- --------- ----------- --------- --------- Comprehensive income 83,414 Cash dividends: Corporation at $3.209 per share -- -- (46,409) -- -- (46,409) ---------- --------- --------- ----------- --------- --------- BALANCE, DECEMBER 31, 2003 14,455,027 $ 105,895 $ 486,769 $ 18,954 $ (68,577) $ 543,041 ========== ========= ========= =========== ========= ========= Treasury stock purchased (214,681) -- -- -- (23,699) (23,699) Treasury stock reissued primarily for stock options 79,626 -- -- -- 7,323 7,323 exercised Cash payment for fractional shares in dividend reinvestment plan (25) (3) -- -- -- (3) Shares issued for stock options 2,052 144 144 Stock dividend at 5% -- 102,464 (96,025) (6,439) -- Cash payment for fractional shares for 5% stock dividend (1,772) (249) (249) Net income -- -- 91,507 -- -- 91,507 Other comprehensive income,net of tax: Unrealized net holding loss on securities available-for-sale,net of income taxes of $(3,506) (6,512) (6,512) ---------- --------- --------- ----------- --------- --------- Total other comprehensive income (6,512) ---------- --------- --------- ----------- --------- --------- Comprehensive income 84,995 Cash dividends: Corporation at $3.414 per share -- -- (48,991) -- -- (48,991) ---------- --------- --------- ----------- --------- --------- BALANCE, DECEMBER 31, 2004 14,320,227 $ 208,251 $ 433,260 $ 12,442 $ (91,392) $ 562,561 ========== ========= ========= =========== ========= =========
The accompanying notes are an integral part of the financial statements. 44 CONSOLIDATED STATEMENTS OF CASH FLOWS PARK NATIONAL CORPORATION AND SUBSIDIARIES for the years ended December 31, 2004, 2003 and 2002 (Dollars in thousands)
2004 2003 2002 ---- ---- ---- OPERATING ACTIVITIES: Net income $ 91,507 $ 86,878 $ 85,579 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 8,600 12,595 15,043 Amortization of loan fees and costs,net (3,336) (4,882) (4,309) Provision for depreciation and amortization 5,436 5,866 5,630 Amortization of intangible assets 1,479 3,110 5,276 Accretion of investment securities (1,756) (6,063) (5,666) Deferred income taxes (2,542) (3,661) (3,519) Realized investment security losses 793 6,060 182 Changes in assets and liabilities: Increase in other assets (20,219) (10,463) (5,368) Increase (decrease) in other liabilities 6,750 9,767 (12,476) ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 86,712 99,207 80,372 ----------- ----------- ----------- INVESTING ACTIVITIES: Proceeds from sales of available-for-sale securities 58,438 754,474 99,673 Proceeds from maturities of securities: Held-to-maturity 52,741 632,005 1,989 Available-for-sale 384,087 3,013,785 1,971,411 Purchase of securities: Held-to-maturity (62,659) (341,656) (327,348) Available-for-sale (367,974) (4,674,476) (1,635,650) Net decrease in interest bearing deposits with other banks 50 -- -- Net (increase) decrease in loans (171,784) (45,215) 94,956 Cash paid for acquisition,net (34,693) -- -- Purchases of premises and equipment, net (6,047) (3,878) (4,454) ----------- ----------- ----------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (147,841) (664,961) 200,577 ----------- ----------- ----------- FINANCING ACTIVITIES: Net increase (decrease) in deposits 103,273 (80,886) 180,932 Net (decrease) increase in short-term borrowings (256,756) 327,881 (129,433) Cash payment for fractional shares of common stock (252) (3) (3) Exercise of stock options 144 130 -- Purchase of treasury stock,net (16,376) (3,383) (15,194) Proceeds from long-term debt 477,915 475,000 -- Repayment of long-term debt (206,541) (176,249) (205,314) Cash dividends paid (48,231) (45,742) (42,292) ----------- ----------- ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 53,176 496,748 (211,304) ----------- ----------- ----------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (7,953) (69,006) 69,645 Cash and cash equivalents at beginning of year 169,782 238,788 169,143 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 161,829 $ 169,782 $ 238,788 =========== =========== =========== SUPPLEMENTAL DISCLOSURE Summary of business acquisition: Fair value of assets acquired $ 252,687 Cash paid for the purchase of First Federal Bancorp Inc.common stock (46,638) Fair value of liabilities assumed (232,707) ----------- Goodwill recognized $ (26,658) -----------
The accompanying notes are an integral part of the financial statements. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed in the preparation of the consolidated financial statements: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Park National Corporation (the Corporation or Park) and all of its subsidiaries. Material intercompany accounts and transactions have been eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with current year presentation. INVESTMENT SECURITIES Investment securities are classified upon acquisition into one of three categories: Held-to-maturity, available-for-sale, or trading (see Note 4). Held-to-maturity securities are those securities that the Corporation has the positive intent and ability to hold to maturity and are recorded at amortized cost. Available-for-sale securities are those securities that would be available to be sold in the future in response to the Corporation's liquidity needs, changes in market interest rates, and asset-liability management strategies, among others. Available-for-sale securities are reported at fair value, with unrealized holding gains and losses excluded from earnings and are included in other comprehensive income, net of applicable taxes. At December 31, 2004 and 2003, the Corporation did not hold any trading securities. Gains and losses realized on the sale of investment securities have been accounted for on the trade date in the year of sale on a specific identification basis. MORTGAGE LOANS HELD-FOR-SALE Mortgage loans held-for-sale are carried at the lower of cost or fair value, determined using an aggregate basis. Write-downs to fair value are recognized as a charge to earnings at the time the decline in value occurs. Mortgage loans held-for-sale were $2.9 million at December 31, 2004 and $4.5 million at December 31, 2003. These amounts are included in loans on the balance sheet and not shown separately, because they are not material. Forward commitments to sell mortgage loans are acquired to reduce market risk on mortgage loans in the process of origination and mortgage loans held-for-sale. Gains and losses resulting from sales of mortgage loans are recognized when the respective loans are sold to investors. Gains and losses are determined by the difference between the selling price and the carrying amount of the loans sold, net of discounts collected or paid and considering a normal servicing rate. Fees received from borrowers to guarantee the funding of mortgage loans held-for-sale and fees paid to investors to ensure the ultimate sale of such mortgage loans are recognized as income or expense when the loans are sold or when it becomes evident that the commitment will not be used. LOANS Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for any charge-offs, any deferred fees or costs on originated loans, and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Generally, loans are placed on nonaccrual status at 90 days past due and interest is considered a loss, unless the loan is well-secured and in the process of collection. Consumer loans are generally not placed on nonaccrual status, but are charged-off when they are 120 days past due. For loans which are on nonaccrual status, it is Park's policy to reverse interest previously accrued on the loan against interest income. Interest on such loans is thereafter recorded on a cash basis and is included in earnings only when actually received in cash and when full payment of principal is no longer doubtful. The delinquency status of a loan is based on contractual terms and not on how recently payments have been received. Loans are removed from nonaccrual status when loan payments have been received to cure the delinquency status and the loan is deemed to be well-secured by management. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is that amount believed adequate to absorb estimated credit losses in the loan portfolio based on management's evaluation of various factors including overall growth in the loan portfolio, an analysis of individual loans, prior and current loss experience, and current economic conditions. A provision for loan losses is charged to operations based on management's periodic evaluation of these and other pertinent factors. Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosure" requires an allowance to be established as a component of the allowance for loan losses for certain loans when it is probable that all amounts due pursuant to the contractual terms of the loan will not be collected, and the recorded investment in the loan exceeds the fair value. Fair value is measured using either the present value of expected future cash flows based upon the initial effective interest rate on the loan, the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent. Commercial loans are individually risk graded. Where appropriate, reserves are allocated to individual loans based on management's estimate of the borrower's ability to repay the loan given the availability of collateral and other sources of cash flow. Homogenous loans, such as consumer installment, residential mortgage loans, and automobile leases are not individually risk graded. Reserves are established for each pool of loans based on historical loan loss experience, current economic conditions and loan delinquency. INCOME RECOGNITION Income earned by the Corporation and its subsidiaries is recognized on the accrual basis of accounting, except for late charges on loans which are recognized as income when they are collected. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is generally provided on the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the lives of the respective leases or the estimated useful lives of the improvements, whichever are the shorter periods. Upon the sale or other disposal of the assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is recognized. Maintenance and repairs are charged to expense as incurred while renewals and improvements are capitalized. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The range of depreciable lives that premises and equipment are being depreciated over are: Buildings 5 to 50 Years Equipment, furniture and fixtures 3 to 20 Years Leasehold improvements 1 to 10 Years
Buildings that are currently placed in service are depreciated over 20 to 30 years. Equipment and furniture and fixtures that are currently placed in service are depreciated over 3 to 10 years. Leasehold improvements are depreciated over the life of the leases which range from 1 to 10 years. OTHER REAL ESTATE OWNED Other real estate owned is recorded at the lower of cost or fair market value (which is not in excess of estimated net realizable value) and consists of property acquired through foreclosure, and real estate held for sale. Subsequent to acquisition, allowances for losses are established if carrying values exceed fair value less estimated costs to sell. Costs relating to development and improvement of such properties are capitalized (not in excess of fair value less estimated costs to sell), whereas costs relating to holding the properties are charged to expense. MORTGAGE SERVICING RIGHTS When Park sells mortgage loans with servicing rights retained, the total cost of the mortgage loan is allocated to the servicing rights and the loans based on their relative fair values. The servicing rights capitalized are amortized in proportion to and over the period of estimated servicing income. Capitalized mortgage servicing rights are included in other assets and totaled $9,523,000 at December 31, 2004 and $9,184,000 at December 31, 2003. The estimated fair values of capitalized mortgage servicing rights are $9.5 million and $9.2 million at December 31, 2004 and 2003, respectively. The fair value of mortgage servicing rights is determined by discounting estimated future cash flows from the servicing assets, using market discount rates, and using expected future prepayment rates. In 2004, 2003 and 2002, Park capitalized $1.97 million, $7.88 million and $4.59 million in mortgage servicing rights, respectively. In 2004, 2003 and 2002, Park's amortization of mortgage servicing rights was $1.95 million, $4.24 million and $2.19 million, respectively. Generally, mortgage servicing rights are capitalized and amortized on an individual sold loan basis. When a sold mortgage loan is paid off, the related mortgage servicing rights are fully amortized. Mortgage servicing rights also increased in 2004 by $315,000 as a result of the acquisition of First Federal Bancorp, Inc. on December 31, 2004. Mortgage servicing rights are assessed for impairment periodically, based on fair value, with any impairment recognized through a valuation allowance. Fees received for servicing mortgage loans owned by investors are based on a percentage of the outstanding monthly principal balance of such loans and are included in income as loan payments are received. The cost of servicing loans is charged to expense as incurred. Park serviced sold mortgage loans of $1,266 million at December 31, 2004, $1,166 million at December 31, 2003 and $833 million at December 31, 2002. At December 31, 2004, $102 million of the sold mortgage loans were sold with recourse. Management closely monitors the delinquency rates on the mortgage loans sold with recourse and due to the low delinquency rate and the favorable loan to value ratios does not anticipate any significant loss on the mortgage loans sold with recourse. LEASE FINANCING Leases of equipment, automobiles, and aircraft to customers generally are direct leases in which the Corporation's subsidiaries have acquired the equipment, automobiles, or aircraft with no outside financing. Such leases are accounted for as direct financing leases for financial reporting purposes. Under the direct financing method, a receivable is recorded for the total amount of the lease payments to be received. Unearned lease income, representing the excess of the sum of the aggregate rentals of the equipment, automobiles or aircraft over its cost is included in income over the term of the lease under the interest method. The estimated residual values of leases are established at inception by determining the estimated residual value for the equipment, automobiles, or aircraft from the particular industry leasing guide. Management re-evaluates the estimated residual values of leases on a quarterly basis from review of the leasing guides and charges operating expense for any write-down of the estimated residual values of leases. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents the excess of the purchase price over net identifiable tangible and intangible assets acquired in a purchase business combination. Other intangible assets represent purchased assets that have no physical property but represent some future economic benefit to its owner and are capable of being sold or exchanged on their own or in combination with a related asset or liability. Goodwill and indefinite-lived intangible assets are not amortized to expense, but are subject to annual impairment tests. Intangible assets with definitive useful lives (such as core deposit intangibles) are amortized to expense over their estimated useful life. Management considers several factors when performing the annual impairment tests on goodwill. The factors considered include the operating results for the particular Park affiliate bank for the past year and the operating results projected for future years, the purchase prices being paid for financial institutions in the Midwest, the deposit and loan totals of the particular Park affiliate bank and the economic conditions in the markets served by the Park affiliate bank. Park had $7,529,000 of goodwill included in other assets at December 31, 2003. This goodwill was evaluated for impairment during the first quarter of 2004, 2003 and 2002 and a determination was made that the goodwill was not impaired for each year. On December 31, 2004, Park acquired First Federal Bancorp, Inc. and added $26,658,000 of goodwill (See Note 2 of the Notes to Consolidated Financial Statements for details on this acquisition.) A total of $34,187,000 of goodwill is included in other assets at December 31, 2004. Park had core deposit intangibles of $5,429,000 at December 31, 2003. Core deposit intangible amortization expense was $1,479,000 in 2004 pertaining to this asset. An additional core deposit intangible asset of $2,750,000 was added from the acquisition of First Federal Bancorp, Inc. A total of $6,700,000 of core deposit intangibles are included in other assets at December 31, 2004. The core deposit intangibles are being amortized to expense principally on the straight-line method, over periods ranging from six to twelve years. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CASH FLOWS Cash and cash equivalents include cash and cash items, amounts due from banks and federal funds sold. Generally federal funds are purchased and sold for one day periods. Net cash provided by operating activities reflects cash payments as follows:
DECEMBER 31, (DOLLARS IN THOUSANDS) 2004 2003 2002 - ---------------------- ---- ---- ---- Interest paid on deposits and other borrowings $ 58,986 $ 63,608 $ 85,286 Income taxes paid $ 41,884 $ 36,400 $ 39,650 -------- -------- --------
INCOME TAXES The Corporation accounts for income taxes using the asset and liability approach. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. STOCK DIVIDEND Park's Board of Directors approved a 5% stock dividend in November 2004. The additional shares resulting from the dividend were distributed on December 15, 2004 to stockholders of record as of December 1, 2004. The consolidated financial statements, notes and other references to share and per share data have been retroactively restated for the stock dividend. TREASURY STOCK The purchase of Park's common stock is recorded at cost. At the date of retirement or subsequent reissuance, the treasury stock account is reduced by the cost of such stock. STOCK OPTIONS At December 31, 2004, Park had an incentive stock option plan, which is described more fully in Note 11 of the Notes to Consolidated Financial Statements. Park accounts for this plan under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 "Accounting for Stock issued to Employees" (APB 25) and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan have an exercise price that equalled the market value of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share as if Park had applied the fair value provisions of SFAS No. 123, "Accounting for Stock Based Compensation," to stock-based employee compensation.
DECEMBER 31, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003 2002 - -------------------------------------------- ---- ---- ---- Net income as reported $ 91,507 $ 86,878 $ 85,579 Pro-forma net income $ 88,284 $ 84,989 $ 83,852 -------- -------- -------- Basic earnings per share as reported 6.38 6.01 5.88 Pro-forma basic earnings per share 6.15 5.88 5.75 -------- -------- -------- Diluted earnings per share as reported 6.32 5.97 5.86 Pro-forma diluted earnings per share 6.09 5.84 5.74 -------- -------- --------
SFAS No. 123, "Accounting for Stock Based Compensation" was revised in December 2004 (SFAS No. 123r) and prohibits Park from using APB 25 for the accounting for stock-based compensation for all stock options granted or that become vested after June 30, 2005. Companies are permitted to adopt SFAS No. 123r earlier than July 1, 2005, but the management of Park intends to adopt SFAS No. 123r on July 1, 2005 on a prospective basis. DERIVATIVE INSTRUMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The provisions of this statement require that derivative instruments be carried at fair value on the balance sheet. The statement continues to allow derivative instruments to be used to hedge various risks and sets forth specific criteria to be used to determine when hedge accounting can be used. The statement also provided for offsetting changes in fair value or cash flows of both the derivative and the hedged asset or liability to be recognized in earnings in the same period; however, any changes in fair value or cash flow that represent the ineffective portion of a hedge are required to be recognized in earnings and cannot be deferred. For derivative instruments not accounted for as hedges, changes in fair value are required to be recognized in earnings. The provisions of this statement became effective for quarterly and annual reporting beginning January 1, 2001. The Corporation did not use any derivative instruments in 2004, 2003 and 2002 and as a result the adoption of this statement has had no impact on the Corporation's financial position, results of operations and cash flows. ACCOUNTING CHANGES EMERGING ISSUES TASK FORCE 03-1 (EITF 03-1), THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS: In March 2004, FASB reached a consensus on EITF 03-1, which clarifies the application of an impairment model to determine whether investments are other-than-temporarily impaired. The provisions of EITF 03-1 must be applied prospectively to all current and future investments accounted for in accordance with SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." On September 15, September 30, and November 15, 2004, the FASB issued proposed staff positions to provide guidance on the application and scope of certain paragraphs and to defer the effective date of the impairment measurement and recognition provisions contained in specific paragraphs of EITF 03-1. This deferral will be superseded in FASB's final issuance of the staff position. The management of Park does not expect the revised EITF 03-1 to have a material impact on its results of operations or financial condition at the time of the adoption. SEC STAFF ACCOUNTING BULLETIN (SAB) NO. 105, APPLICATION OF ACCOUNTING PRINCIPLES TO LOAN COMMITMENTS: SAB 105 summarizes the views of the staff of the SEC regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments. SAB 105 provides that the fair value of recorded loan commitments that are accounted for as derivatives should not incorporate the expected future cash flows related to the associated servicing of the future loan. The provisions of SAB 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. The adoption of this accounting standard did not have a material impact on Park's results of operations or financial condition. 2. ORGANIZATION, ACQUISITIONS AND PENDING ACQUISITION Park National Corporation is a multi-bank holding company headquartered in Newark, Ohio. Through its banking subsidiaries, The Park National Bank (PNB), The Richland Trust Company (RTC), Century National Bank (CNB), The First-Knox National Bank of Mount Vernon (FKNB), United Bank, N.A. (UB), Second National Bank (SNB), The Security National Bank and Trust Co. (SEC), and The Citizens National Bank of Urbana (CIT), Park is engaged in a general commercial banking and trust business, primarily in Central Ohio. A wholly-owned subsidiary of Park, Guardian Finance Company (GFC) began operating in May 1999. GFC is a consumer finance company located in Central Ohio. PNB operates through two banking divisions with the Park National Division headquartered in Newark, Ohio and the Fairfield National Division headquartered in Lancaster, Ohio. FKNB also operates through two banking divisions with the First-Knox National Division headquartered in Mount Vernon, Ohio and the Farmers and Savings Division headquartered in Loudonville, Ohio. SEC also operates through two banking divisions with the Security National Division headquartered in Springfield, Ohio and The Unity 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS National Division (formerly The Third Savings and Loan Company) headquartered in Piqua, Ohio. All of the banking subsidiaries and their respective divisions provide the following principal services: the acceptance of deposits for demand, savings, and time accounts; commercial, industrial, consumer and real estate lending, including installment loans, credit cards, home equity lines of credit and commercial and auto leasing; trust services; cash management; safe deposit operations; electronic funds transfers; and a variety of additional banking-related services. See Note 20 for financial information on the Corporation's banking subsidiaries. On December 31, 2004, Park acquired First Federal Bancorp, Inc., ("First Federal") a savings and loan holding company headquartered in Zanesville, Ohio, in an all cash transaction accounted for as a purchase. The stockholders of First Federal received $13.25 in cash for each outstanding common share of First Federal common stock. Park paid a total of $46,638,000 to the stockholders of First Federal. The savings and loan subsidiary of First Federal, First Federal Savings Bank of Eastern Ohio, merged with Century National Bank. The goodwill recognized as a result of this acquisition was $26,658,000. The fair value of the acquired assets of First Federal were $252,687,000 and the fair value of the liabilities assumed were $232,707,000 at December 31, 2004. On March 23, 2001, Park merged with Security Banc Corporation, a $995 million bank holding company headquartered in Springfield, Ohio, in a transaction accounted for as a pooling-of-interests. Park issued approximately 3,350,000 shares of common stock to the stockholders of Security Banc Corporation based upon an exchange ratio of .284436 shares of Park common stock for each outstanding share of Security Banc Corporation common stock. The three financial institution subsidiaries of Security Banc Corporation (The Security National Bank and Trust Co., The Citizens National Bank of Urbana, and The Third Savings and Loan Company) are being operated as two separate subsidiaries by Park. The Third Savings and Loan Company is now being operated as a separate division of The Security National Bank and Trust Co. under the name of Unity National and The Citizens National Bank of Urbana is also being operated as a separate banking subsidiary of Park. The historical financial statements of Park have been restated to show Security Banc Corporation and Park on a combined basis. PENDING ACQUISITION On January 3, 2005, Park acquired First Clermont Bank of Milford, Ohio for $52,500,000 in an all cash purchase. First Clermont Bank merged with The Park National Bank and will be operated as a separate division of The Park National Bank. At December 31, 2004, First Clermont Bank had total assets of $185 million. 3. RESTRICTIONS ON CASH AND DUE FROM BANKS The Corporation's banking subsidiaries are required to maintain average reserve balances with the Federal Reserve Bank. The average required reserve balance was approximately $30,827,000 and $28,928,000 at December 31, 2004 and 2003, respectively. No other compensating balance arrangements were in existence at year-end. 4. INVESTMENT SECURITIES The amortized cost and fair value of investment securities are shown below. Management evaluates the investment securities on a quarterly basis for permanent impairment. No impairment charges have been deemed necessary in 2004 and 2003.
GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING ESTIMATED (IN THOUSANDS) COST GAINS LOSSES FAIR VALUE - -------------------------------- ----------- ---------- ---------- ------------ 2004: SECURITIES AVAILABLE-FOR-SALE Obligations of U.S.Treasury and other U.S.Government agencies $ 15,201 $ 8 $ 3 $ 15,206 Obligations of states and political subdivisions 81,738 3,851 23 85,566 U.S.Government agencies' asset-backed securities and other asset-backed securities 1,685,760 16,043 1,225 1,700,578 Other equity securities 52,495 501 11 52,985 ----------- ------- ------- ------------ TOTAL $ 1,835,194 $20,403 $ 1,262 $ 1,854,335 =========== ======= ======= ============ 2004: SECURITIES HELD-TO-MATURITY Obligations of states and political subdivisions $ 18,173 $ 703 $ -- $ 18,876 U.S.Government agencies' asset-backed securities and other asset-backed securities 54,274 470 7 54,737 ----------- ------- ------- ------------ TOTAL $ 72,447 $ 1,173 $ 7 $ 73,613 =========== ======= ======= ============
Management does not believe any individual unrealized loss as of December 31, 2004 represents an other-than-temporary impairment. The unrealized losses relate primarily to the impact of increases in market interest rates on U.S. Government agencies asset-backed securities. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. Securities with unrealized losses at December 31, 2004 were as follows:
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL -------------------- -------------------- -------------------- FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED (IN THOUSANDS) VALUE LOSSES VALUE LOSSES VALUE LOSSES -------- ---------- -------- ---------- -------- ---------- 2004: SECURITIES AVAILABLE-FOR-SALE Obligations of U.S. Treasury and other U.S. Government agencies $ 5,198 $ 3 $ -- $ -- $ 5,198 $ 3 Obligations of states and political subdivisions 1,019 23 -- -- 1,019 23 U.S.Government agencies' asset- backed securities and other asset- backed securities 208,643 363 24,136 862 232,779 1,225 Other equity securities 189 11 -- -- 189 11 -------- ------- -------- ---------- -------- ---------- TOTAL $215,049 $ 400 $ 24,136 $ 862 $239,185 $ 1,262 ======== ======= ======== ========== ======== ========== 2004: SECURITIES HELD-TO-MATURITY U.S.Government agencies' asset- backed securities and other asset- backed securities $ 4,715 $ 7 $ -- $ -- $ 4,715 $ 7 -------- ------- -------- ---------- -------- ----------
49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING ESTIMATED (IN THOUSANDS) COST GAINS LOSSES FAIR VALUE - --------------------------------- ---------- ---------- ---------- ---------- 2003: SECURITIES AVAILABLE-FOR-SALE Obligations of U.S. Treasury and other U.S. Government agencies $ 24,389 $ 965 $ -- $ 25,354 Obligations of states and political subdivisions 93,936 5,598 6 99,528 U.S. Government agencies' asset-backed securities and other asset-backed securities 1,737,215 23,393 1,305 1,759,303 Other equity securities 43,997 522 7 44,512 ---------- ------- ------ ---------- TOTAL $1,899,537 $30,478 $1,318 $1,928,697 ========== ======= ====== ========== 2003: SECURITIES HELD-TO-MATURITY Obligations of states and political subdivisions $ 21,480 $ 863 $ -- $ 22,343 U.S. Government agencies' asset-backed securities and other asset-backed securities 41,049 171 -- 41,220 ---------- ------- ------ ---------- TOTAL $ 62,529 $ 1,034 $ -- $ 63,563 ========== ======= ====== ==========
The amortized cost and estimated fair value of investments in debt securities at December 31, 2004 are shown below by contractual maturity or the expected call date, except for asset-backed securities which are shown based on expected principal repayments. The average yield is computed on a tax equivalent basis using a 35 percent tax rate.
WEIGHTED AMORTIZED ESTIMATED AVERAGE AVERAGE (DOLLARS IN THOUSANDS) COST FAIR VALUE MATURITY YIELD - --------------------------------- --------- ---------- ------------ ------- SECURITIES AVAILABLE-FOR-SALE U.S. Treasury and agencies' notes: Due within one year $ 15,201 $ 15,206 0.04 YEARS 5.60% --------- ---------- ----------- ---- Obligations of states and political subdivisions: Due within one year 17,239 17,572 0.63 YEARS 7.20% Due one through five years 61,567 64,820 2.82 YEARS 7.18% Due five through ten years 2,932 3,174 6.70 YEARS 7.06% --------- ---------- ----------- ---- TOTAL $ 81,738 $ 85,566 2.49 YEARS 7.18% ========= ========== =========== ==== U.S. Government agencies' asset-backed securities and other asset-backed securities: Due within one year $ 306,853 $ 309,550 0.52 YEARS 4.78% Due one through five years 790,646 797,596 2.81 YEARS 4.77% Due five through ten years 451,000 454,964 7.17 YEARS 4.72% Due over ten years 137,261 138,468 11.59 YEARS 4.69% --------- ---------- ----------- ---- TOTAL $1,685,76 $1,700,578 4.27 YEARS 4.75% ========= ========== =========== ==== SECURITIES HELD-TO-MATURITY Obligations of state and political subdivisions: Due within one year $ 1,203 $ 1,214 0.63 YEARS 6.45% Due one through five years 16,488 17,142 2.70 YEARS 6.52% Due five through ten years 482 520 5.74 YEARS 7.25% --------- ---------- ----------- ---- TOTAL $ 18,173 $ 18,876 2.64 YEARS 6.55% ========= ========== =========== ==== U.S. Government agencies' asset-backed securities and other asset-backed securities: Due within one year $ 34,597 $ 34,876 0.49 YEARS 5.67% Due one through five years 19,433 19,617 1.71 YEARS 5.69% Due five through ten years 74 74 6.99 YEARS 3.85% Due over ten years 170 170 11.64 YEARS 4.11% --------- ---------- ----------- ---- TOTAL $ 54,274 $ 54,737 0.97 YEARS 5.67% ========= ========== =========== ====
Investment securities having a book value of $1,367 million and $1,260 million at December 31, 2004 and 2003, respectively, were pledged to collateralize government and trust department deposits in accordance with federal and state requirements and to secure repurchase agreements sold, and as collateral for Federal Home Loan Bank (FHLB) advance borrowings. At December 31, 2004, $530 million was pledged for government and trust department deposits, $441 million was pledged to secure repurchase agreements and $396 million was pledged as collateral for FHLB advance borrowings. At December 31, 2003, $543 million was pledged for government and trust department deposits, $470 million was pledged to secure repurchase agreements and $247 million was pledged as collateral for FHLB advance borrowings. In 2004, 2003, and 2002, gross gains of $140,000, $1,507,000 and $113,000, and gross losses of $933,000, $7,567,000 and $295,000 were realized, respectively. Tax benefits related to net securities losses were $278,000 in 2004, $2,121,000 in 2003 and $64,000 in 2002. 5. LOANS The composition of the loan portfolio is as follows:
DECEMBER 31 (DOLLARS IN THOUSANDS) 2004 2003 - -------------------------------------- ---------- ---------- Commercial, financial and agricultural $ 469,382 $ 441,165 Real estate: Construction 155,326 121,160 Residential 1,190,275 983,702 Commercial 752,428 670,082 Consumer, net 505,151 450,145 Leases, net 48,046 64,549 ---------- ---------- TOTAL LOANS $3,120,608 $2,730,803 ========== ==========
Under the Corporation's credit policies and practices, all nonaccrual and restructured commercial, financial, agricultural, construction and commercial real estate loans meet the definition of impaired loans under SFAS No. 114 and 118. Impaired loans as defined by SFAS No. 114 and 118 exclude certain consumer loans, residential real estate loans and lease financing classified as nonaccrual. The majority of the loans deemed impaired were evaluated using the fair value of the collateral as the measurement method. Nonaccrual and restructured loans are summarized as follows:
DECEMBER 31 (DOLLARS IN THOUSANDS) 2004 2003 - ------------------------------------------------- ------- ------- Impaired loans: Nonaccrual $17,873 $15,921 Restructured 5,461 5,452 Total impaired loans 23,334 21,373 Other nonaccrual loans -- -- ------- ------- TOTAL NONACCRUAL AND RESTRUCTURED LOANS $23,334 $21,373 ======= =======
The allowance for credit losses related to impaired loans at December 31, 2004 and 2003 was $4,667,000 and $4,275,000, respectively. All impaired loans for both periods were subject to a related allowance for credit losses. The average balance of impaired loans was $22,378,000, $19,913,000 and $20,427,000 for 2004, 2003, and 2002, respectively. Interest income on impaired loans is recognized after all past due and current principal payments have been made, and collectibility is no longer doubtful. For the years ended December 31, 2004, 2003, and 2002, the Corporation recognized $900,000, $924,000 and $1,080,000, respectively, of interest income on impaired loans, which included $984,000, $632,000 and $833,000, respectively, of interest income recognized using the cash basis method of income recognition. 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Certain of the Corporation's executive officers, directors and their affiliates are loan customers of the Corporation's banking subsidiaries. As of December 31, 2004 and 2003, loans aggregating approximately $120,917,000 and $94,541,000, respectively, were outstanding to such parties. During 2004, $77,195,000 of new loans were made and repayments totaled $50,819,000. These loans were made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other persons and involve no unusual risk of collectibility. 6. ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses is summarized as follows:
(DOLLARS IN THOUSANDS) 2004 2003 2002 - --------------------------------------------- --------- --------- --------- Balance, January 1 $ 63,142 $ 62,028 $ 59,959 Allowance for loan losses of acquired bank 4,450 -- -- Provision for loan losses 8,600 12,595 15,043 Losses charged to the reserve (15,173) (18,036) (19,827) Recoveries 7,309 6,555 6,853 -------- -------- -------- BALANCE, DECEMBER 31 $ 68,328 $ 63,142 $ 62,028 ======== ======== ========
7. INVESTMENT IN FINANCING LEASES The following is a summary of the components of the Corporation's affiliates' net investment in direct financing leases:
DECEMBER 31 (DOLLARS IN THOUSANDS) 2004 2003 - ---------------------------------------- --------- --------- Total minimum payments to be received $ 38,606 $ 42,695 Estimated unguaranteed residual value of leased property 11,953 24,288 Less unearned income (2,513) (2,434) -------- -------- TOTAL $ 48,046 $ 64,549 ======== ========
Minimum lease payments, in thousands, to be received as of December 31, 2004 are:
(IN THOUSANDS) - -------------- 2005 $24,410 2006 6,087 2007 3,648 2008 2,496 2009 1,510 Thereafter 455 ------- TOTAL $38,606 =======
8. PREMISES AND EQUIPMENT The major categories of premises and equipment and accumulated depreciation are summarized as follows:
DECEMBER 31 (DOLLARS IN THOUSANDS) 2004 2003 - ----------------------------------- ---------- ---------- Land $ 13,258 $ 10,105 Buildings 54,256 46,095 Equipment, furniture and fixtures 52,284 46,932 Leasehold improvements 3,248 2,436 --------- --------- TOTAL 123,046 105,568 --------- --------- Less accumulated depreciation and amortization (79,867) (68,822) --------- --------- PREMISES AND EQUIPMENT, NET $ 43,179 $ 36,746 ========= =========
Depreciation and amortization expense amounted to $5,436,000, $5,866,000 and $5,630,000 for the three years ended December 31, 2004, 2003 and 2002, respectively. The Corporation and its subsidiaries lease certain premises and equipment accounted for as operating leases. The following is a schedule of the future minimum rental payments required for the next five years under such leases with initial terms in excess of one year:
(IN THOUSANDS) - -------------- 2005 $1,331 2006 1,070 2007 905 2008 763 2009 566 Thereafter 440 ------ TOTAL $5,075 ======
Rent expense amounted to $1,362,000, $1,307,000 and $1,120,000, for the three years ended December 31, 2004, 2003 and 2002, respectively. 9. SHORT-TERM BORROWINGS Short-term borrowings are as follows:
DECEMBER 31 (DOLLARS IN THOUSANDS) 2004 2003 - ---------------------------------------------- -------- -------- Securities sold under agreements to repurchase and federal funds purchased $192,483 $367,082 Federal Home Loan Bank advances 78,228 145,050 Other short-term borrowings 7,520 4,627 -------- -------- TOTAL SHORT-TERM BORROWINGS $278,231 $516,759
The outstanding balances for all short-term borrowings as of December 31, 2004, 2003 and 2002 (in thousands) and the weighted-average interest rates as of year-end and paid during each of the years then ended are as follows:
REPURCHASE DEMAND AGREEMENTS FEDERAL NOTES AND FEDERAL HOME LOAN DUE U.S. FUNDS BANK TREASURY (DOLLARS IN THOUSANDS) PURCHASED ADVANCES AND OTHER - -------------------------------- ----------- ---------- ---------- 2004: ENDING BALANCE $192,483 $ 78,228 $ 7,520 HIGHEST MONTH-END BALANCE 354,195 160,050 7,520 AVERAGE DAILY BALANCE 323,978 74,043 3,278 WEIGHTED-AVERAGE INTEREST RATE: AS OF YEAR-END 1.29% 2.31% 2.25% PAID DURING THE YEAR 1.17% 2.01% 1.13% -------- -------- ------- 2003: Ending balance $367,082 $145,050 $ 4,627 Highest month-end balance 777,707 145,050 9,914 Average daily balance 495,704 16,011 3,613 Weighted-average interest rate: As of year-end 1.09% 1.01% 1.00% Paid during the year 0.50% 1.24% 1.12% -------- -------- ------- 2002: Ending balance $174,086 $ -- $14,792 Highest month-end balance 293,551 70,000 14,792 Average daily balance 206,637 14,923 4,678 Weighted-average interest rate: As of year-end 1.13% -- 1.25% Paid during the year 1.42% 1.80% 2.18% -------- -------- -------
At December 31, 2004 and 2003, Federal Home Loan Bank (FHLB) advances were collateralized by investment securities owned by the Corporation's affiliate banks and by residential mortgage loans pledged under a blanket agreement by the Corporation's affiliate banks. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS See Note 4 of the Notes to Consolidated Financial Statements for the amount of investment securities that are pledged. At December 31, 2004, $797 million of residential mortgage loans were pledged under a blanket agreement to the FHLB by Park's affiliate banks. At December 31, 2003, $738 million of residential mortgage loans were pledged to the FHLB. 10. LONG-TERM DEBT Long-term debt is listed below:
DECEMBER 31 (DOLLARS IN THOUSANDS) 2004 2003 - ---------------------------------- ----------------- ------------------- TOTAL FEDERAL HOME LOAN BANK ADVANCES BY YEAR OF MATURITY: 2004 $ -- -- $ 22 5.63% 2005 22,300 5.73% 208,100 1.41% 2006 187,581 2.65% -- -- 2007 188,190 2.83% 84 6.69% 2008 117,379 4.03% 87,594 4.79% 2009 73,510 4.98% 70,000 5.04% Thereafter 21,833 5.52% 20,177 5.69% ---------- ---- ------------ ---- TOTAL $ 610,793 3.47% $ 385,977 3.06% ---------- ---- ------------ ---- TOTAL BROKER REPURCHASE AGREEMENTS BY YEAR OF MATURITY: 2007 $ 100,000 3.62% $ 100,000 1.14% 2009 85,000 2.56% -- -- ---------- ---- ------------ ---- TOTAL $ 185,000 3.13% $ 100,000 1.14% ---------- ---- ------------ ---- TOTAL COMBINED LONG-TERM DEBT BY YEAR OF MATURITY: 2004 $ -- -- $ 22 5.63% 2005 22,300 5.73% 208,100 1.41% 2006 187,581 2.65% -- -- 2007 288,190 3.10% 100,084 1.14% 2008 117,379 4.03% 87,594 4.79% 2009 158,510 3.68% 70,000 5.04% Thereafter 21,833 5.52% 20,177 5.69% ---------- ---- ------------ ---- TOTAL $ 795,793 3.39% $ 485,977 2.67% ========== ==== ============ ====
At December 31, 2004 and 2003, Federal Home Loan Bank (FHLB) advances were collateralized by investment securities owned by the Corporation's affiliate banks and by residential mortgage loans pledged under a blanket agreement by the Corporation's affiliate banks. See Note 4 of the Notes to Consolidated Financial Statements for the amount of investment securities that are pledged. See Note 9 of the Notes to Consolidated Financial Statements for the amount of residential mortgage loans that are pledged to the FHLB. 11. STOCK OPTION PLAN The Park National Corporation 1995 Incentive Stock Option Plan ("the Park Plan") was adopted April 17, 1995, amended April 20, 1998, and April 16, 2001. The Park Plan is intended as an incentive to encourage stock ownership by the key employees of the Corporation. The maximum number of common shares with respect to which incentive stock options may be granted under the Park Plan is 1.2 million. Generally, stock options granted under the Park Plan vest immediately. At December 31, 2004, 400,311 options were available for future grants under this plan. Incentive stock options may be granted at a price not less than the fair market value at the date of the grant, and for an option term of up to five years. No additional incentive stock options were granted under this plan in 2005. The plan expired on January 17, 2005. The Board of Directors of Park approved a new ten year incentive stock option plan at its meeting on January 18, 2005. The new plan would permit a maximum of 1.5 million common shares with respect to which incentive stock options may be granted. To become effective, the new plan must be approved by shareholders at the Park Annual Meeting of Shareholders on April 18, 2005. All data has been restated, as applicable, for subsequent stock dividends.
STOCK OPTIONS ---------------------------------- WEIGHTED AVERAGE EXERCISE PRICE PER NUMBER SHARE -------- ---------------- January 1, 2002 472,261 $ 83.79 Granted 172,594 88.28 Exercised (52,212) 60.27 Forfeited/Expired (12,827) 82.63 ------- ------- December 31, 2002 579,816 87.27 Granted 179,125 92.10 Exercised (60,431) 81.41 Forfeited/Expired (78,414) 88.82 ------- ------- December 31, 2003 620,096 89.04 Granted 232,178 109.48 Exercised (75,653) 87.46 Forfeited/Expired (56,513) 91.48 ------- ------- DECEMBER 31, 2004 720,108 $ 95.60 ======= ======= Range of exercise prices: $31.47 - $154.02 Weighted-average remaining contractual life: 2.9 Years Exercisable at year end: 699,860 Weighted-average exercise price of exercisable options: $95.25
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------- ---------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE RANGE OF AS OF CONTRACTUAL EXERCISE AS OF EXERCISE EXERCISE PRICES 12/31/04 LIFE PRICE 12/31/04 PRICE - ----------------- ----------- ----------- ----------- ----------- --------- $30.00 - $80.00 18,313 1.2 $ 64.83 18,313 $ 64.83 $80.01 - $90.00 224,045 2.0 86.41 224,045 86.41 $90.01 - $100.00 231,977 2.3 91.41 231,977 91.41 $100.01 - $110.00 204,599 4.3 107.74 184,351 107.75 $110.01 - $120.00 13,040 4.4 114.03 13,040 114.03 $120.01 - $160.00 28,134 4.1 126.51 28,134 126.51 ------- --- ----------- ------- ------- 720,108 2.9 $ 95.60 699,860 $ 95.25 ------- --- ----------- ------- -------
The Corporation has elected to follow Accounting Principles Board Opinion No. 25 "Accounting for Stock issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options. The alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock Based Compensation," requires the use of option valuation models to value employee stock options. Under APB 25, because the exercise price of the Corporation's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The fair value of these options was estimated at the date of grant using a Black-Scholes options pricing model with the following weighted-average assumptions for 2004, 2003 and 2002 respectively: risk-free interest rates of 3.36%, 2.74% and 3.82%; a dividend yield of 3.00% for 2004, 2003 and 2002, a volatility factor of the expected market price of the Corporation's common stock of .175%, .170% and .145% and a weighted-average expected option life of 4.0 years. The weighted-average fair value of options granted were $13.88, $10.55 and $10.00 for 2004, 2003 and 2002, respectively. 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. BENEFIT PLANS The Corporation has a noncontributory defined benefit pension plan covering substantially all of its employees. The plan provides benefits based on an employee's years of service and compensation. The Corporation's funding policy is to contribute annually an amount that can be deducted for federal income tax purposes using a different actuarial cost method and different assumptions from those used for financial reporting purposes. Using an accrual measurement date of September 30, plan assets for the pension plan are listed below:
(DOLLARS IN THOUSANDS) 2004 2003 - ----------------------------------------------- --------- --------- CHANGE IN FAIR VALUE OF PLAN ASSETS: Fair value at beginning of measurement period $ 36,355 $ 24,240 Actual return on plan assets 3,830 5,114 Company contributions -- 9,880 Benefits paid (2,844) (2,879) -------- -------- FAIR VALUE AT END OF MEASUREMENT PERIOD $ 37,341 $ 36,355 -------- --------
The asset allocation for the defined benefit pension plan as of the measure- ment date, by asset category, is as follows:
PERCENTAGE OF PLAN ASSETS ASSET CATEGORY TARGET ALLOCATION 2004 2003 - --------------------------------- ----------------- ---- ---- Equity securities 50% - 100% 84% 81% Fixed income and cash equivalents remaining balance 16% 19% Other -- -- -- ----------------- --- --- TOTAL -- 100% 100% ----------------- --- ---
The investment policy, as established by the Retirement Plan Committee, is to invest assets per the target allocation stated above. Assets will be reallocated periodically based on the investment strategy of the Retirement Plan Committee. The investment policy is reviewed periodically. The expected long-term rate of return on plan assets is 7.75% in 2004 and 2003. This return is based on the expected return of each of the asset categories, weighted based on the median of the target allocation for each class. Using an actuarial measurement date of September 30, benefit obligation activity is listed as follows:
(DOLLARS IN THOUSANDS) 2004 2003 - ---------------------------------------------- --------- --------- CHANGE IN BENEFIT OBLIGATION: Projected benefit obligation at beginning of measurement period $ 39,948 $ 33,885 Service cost 2,502 2,095 Interest cost 2,577 2,347 Actuarial loss or (gain) 2,986 4,500 Benefits paid (2,844) (2,879) -------- -------- PROJECTED BENEFIT OBLIGATION AT THE END OF MEASUREMENT PERIOD $ 45,169 $ 39,948 -------- --------
The accumulated benefit obligation for the defined benefit pension plan was $37,167,000 at September 30, 2004 and $33,148,000 at September 30, 2003. The weighted average assumptions used to determine benefit obligations at September 30, were as follows:
2004 2003 ----- ----- Discount rate 6.00% 6.25% Rate of compensation increase 3.75% 4.00%
The estimated future pension benefit payments reflecting expected future service for the next ten years are shown below in thousands: 2005 $ 1,118 2006 1,338 2007 1,561 2008 1,741 2009 1,947 2010 - 2014 16,252 ------- TOTAL $23,957 =======
The following table displays the funded status of the defined benefit pension plan which is computed by taking the difference between the fair value of the plan assets and the projected benefit obligation at the measurement date of September 30. The following table also provides information on the prepaid benefit cost at September 30.
(DOLLARS IN THOUSANDS) 2004 2003 - ------------------------------- --------- -------- Funded status $ (7,828) $(3,593) Unrecognized prior service cost 250 262 Unrecognized net actuarial loss 10,435 8,987 -------- ------- PREPAID BENEFIT COST $ 2,857 $ 5,656 -------- -------
Using an actuarial measurement date of September 30, components of net periodic benefit cost are as follows:
(DOLLARS IN THOUSANDS) 2004 2003 2002 - ---------------------------------- -------- -------- -------- COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost $ 2,502 $ 2,095 $ 2,047 Interest cost 2,577 2,347 2,261 Expected return on plan assets (2,789) (2,138) (2,197) Amortization of prior service cost 12 12 (7) Recognized net actuarial loss/(gain) 497 339 -- ------- ------- ------- BENEFIT COST $ 2,799 $ 2,655 $ 2,104 ------- ------- -------
The weighted average assumptions used to determine net periodic benefit cost for the years ended December 31, follows:
2004 2003 ----- ----- Discount rate 6.25% 7.00% Rate of compensation increase 4.00% 4.00% Expected long-term return on plan assets 7.75% 8.00%
The Corporation has a voluntary salary deferral plan covering substantially all of its employees. Eligible employees may contribute a portion of their compensation subject to a maximum statutory limitation. The Corporation provides a matching contribution established annually by the Corporation. Contribution expense for the Corporation was $1,452,000, $1,393,000 and $1,240,000 for 2004, 2003 and 2002, respectively. The Corporation has a Supplemental Executive Retirement Plan (SERP) covering certain key officers of the Corporation and its subsidiaries with defined pension benefits in excess of limits imposed by federal tax law. At December 31, 2004 and 2003, the accrued benefit cost for this plan totaled $4,441,000 and $4,212,000, respectively. The expense for the Corporation was $636,000, $1,236,000, and $660,000 for 2004, 2003, and 2002, respectively. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. FEDERAL INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Corporation's deferred tax assets and liabilities are as follows:
DECEMBER 31 (DOLLARS IN THOUSANDS) 2004 2003 - ---------------------------------- ------- ------- DEFERRED TAX ASSETS: Allowance for loan losses $23,915 $22,070 Intangible assets 2,743 3,946 Deferred compensation 3,638 3,723 Other 3,270 2,650 ------- ------- TOTAL DEFERRED TAX ASSETS $33,566 $32,389 ------- ------- DEFERRED TAX LIABILITIES: Lease revenue reporting $ 6,293 $10,756 Accumulated other comprehensive income 6,700 10,206 Deferred investment income 9,998 7,642 Mortgage servicing rights 3,333 3,214 Other 830 272 ------- ------- TOTAL DEFERRED TAX LIABILITIES 27,154 32,090 ------- ------- NET DEFERRED TAX ASSETS $ 6,412 $ 299 ------- -------
The components of the provision for federal income taxes are shown below:
(DOLLARS IN THOUSANDS) 2004 2003 2002 - ---------------------- --------- --------- --------- Currently payable $ 40,284 $ 39,972 $ 39,115 Deferred (2,542) (3,661) (3,519) -------- -------- -------- TOTAL $ 37,742 $ 36,311 $ 35,596 -------- -------- --------
The following is a reconcilement of federal income tax expense to the amount computed at the statutory rate of 35% for the years ended December 31, 2004, 2003 and 2002.
DECEMBER 31 2004 2003 2002 - ---------------------------------- ------ ------ ------ Statutory corporate tax rate 35.0% 35.0% 35.0% Changes in rates resulting from: Tax-exempt interest income (1.7%) (2.1%) (2.4%) Tax credits (low income housing) (2.2%) (2.1%) (1.9%) Other (1.9%) (1.3%) (1.3%) ---- ---- ---- EFFECTIVE TAX RATE 29.2% 29.5% 29.4% ---- ---- ----
Park and its subsidiary banks do not pay state income tax to the State of Ohio, but pay a franchise tax based on their year-end equity. The franchise tax expense is included in state tax expense and was $2.5 million in 2004, $2.5 million in 2003 and $2.3 million in 2002. 14. OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income components and related taxes are shown in the following table for the years ended December 31, 2004, 2003 and 2002.
YEAR ENDED DECEMBER 31 BEFORE-TAX TAX NET-OF-TAX (DOLLARS IN THOUSANDS) AMOUNT EXPENSE AMOUNT - ------------------------------- ---------- -------- ---------- 2004: Unrealized losses on available-for-sale securities $(10,811) $(3,784) $(7,027) Reclassification adjustment for losses realized in net income 793 278 515 -------- ------- ------- OTHER COMPREHENSIVE LOSS $(10,018) $(3,506) $(6,512) -------- ------- ------- 2003: Reverse additional minimum liability for pension plan $ 2,458 $ 860 $ 1,598 Unrealized losses on available-for-sale securities (13,847) (4,846) (9,001) Reclassification adjustment for losses realized in net income 6,060 2,121 3,939 -------- ------- ------- OTHER COMPREHENSIVE LOSS $ (5,329) $(1,865) $(3,464) -------- ------- -------
YEAR ENDED DECEMBER 31 BEFORE-TAX TAX NET-OF-TAX (DOLLARS IN THOUSANDS) AMOUNT EXPENSE AMOUNT - ---------------------- ---------- -------- ---------- 2002: Additional minimum liability for pension plan $ (2,458) $ (860) $ (1,598) Unrealized gains on available-for-sale securities 23,372 8,179 15,193 Reclassification adjustment for losses realized in net income 182 64 118 -------- ------- -------- OTHER COMPREHENSIVE INCOME $ 21,096 $ 7,383 $ 13,713 -------- ------- --------
15. EARNINGS PER SHARE SFAS No. 128, "Earnings Per Share" requires the reporting of basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. The following table sets forth the computation of basic and diluted earnings per share:
YEAR ENDED DECEMBER 31 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003 2002 - ---------------------- ----------- ------------ ------------ NUMERATOR: Net income $ 91,507 $ 86,878 $ 85,579 DENOMINATOR: Basic earnings per share: Weighted-average shares 14,344,771 14,458,899 14,572,456 Effect of dilutive securities - stock options 141,556 92,523 32,701 Diluted earnings per share: Adjusted weighted-average shares and assumed conversions 14,486,327 14,551,422 14,605,157 EARNINGS PER SHARE: Basic earnings per share $ 6.38 $ 6.01 $ 5.87 Diluted earnings per share $ 6.32 $ 5.97 $ 5.86
16. DIVIDEND RESTRICTIONS Bank regulators limit the amount of dividends a subsidiary bank can declare in any calendar year without obtaining prior approval. At December 31, 2004, approximately $16,258,000 of the total stockholders' equity of the bank sub- sidiaries is available for the payment of dividends to the Corporation, without approval by the applicable regulatory authorities. 17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK The Corporation is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers. 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The total amounts of off-balance sheet financial instruments with credit risk are as follows:
DECEMBER 31 (DOLLARS IN THOUSANDS) 2004 2003 - ---------------------------------- --------- --------- Loan commitments $ 630,041 $ 577,998 Unused credit card limits 139,056 141,442 Standby letters of credit 15,179 22,300
The loan commitments are generally for variable rates of interest. The Corporation grants retail, commercial and commercial real estate loans to customers primarily located in Central Ohio. The Corporation evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Although the Corporation has a diversified loan portfolio, a substantial portion of the borrowers' ability to honor their contracts is dependent upon the economic conditions in each borrower's geographic location. 18. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments: CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets' fair values. INTEREST BEARING DEPOSITS WITH OTHER BANKS: The carrying amounts reported in the balance sheet for interest bearing deposits with other banks approximate those assets' fair values. INVESTMENT SECURITIES: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. BANK OWNED LIFE INSURANCE: The carrying amounts reported in the balance sheet for bank owned life insurance approximate those assets' fair values. LOANS RECEIVABLE: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for certain mortgage loans (e.g., one-to-four family residential) are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. OFF-BALANCE SHEET INSTRUMENTS: Fair values for the Corporation's loan com- mitments and standby letters of credit are based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counter parties' credit standing. DEPOSIT LIABILITIES: The fair values disclosed for demand deposits (e.g., interest and noninterest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term certificates of deposit approximate their fair values at the reporting date. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. SHORT-TERM BORROWINGS: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings approximate their fair values. LONG-TERM DEBT: Fair values for long-term debt are estimated using a discounted cash flow calculation that applies interest rates currently being offered on long-term debt to a schedule of monthly maturities. The fair value of financial instruments at December 31, 2004 and 2003 is as follows:
2004 2003 DECEMBER 31, CARRYING FAIR Carrying Fair (IN THOUSANDS) AMOUNT VALUE Amount Value - ---------------------- ----------- -------------- ----------- ------------ FINANCIAL ASSETS: Cash and federal funds sold $ 161,829 $ 161,829 $ 169,782 $ 169,782 Interest bearing deposits with other banks 2,096 2,096 50 50 Investment securities 1,926,782 1,927,948 1,991,226 1,992,260 Bank owned life 94,909 94,909 82,570 82,570 insurance Loans: Commercial, financial and agricultural 469,382 469,382 441,165 441,165 Real estate: Construction 155,326 155,326 121,160 121,160 Residential 1,190,275 1,188,930 983,702 990,145 Commercial 752,428 747,289 670,082 673,319 Consumer, net 505,151 499,933 450,145 457,725 ---------- ------------- ---------- ----------- TOTAL LOANS 3,072,562 3,060,860 2,666,254 2,683,514 ---------- ------------- ---------- ----------- Allowance for loan losses (68,328) -- (63,142) -- ---------- ------------- ---------- ----------- LOANS RECEIVABLE, NET $3,004,234 $ 3,060,860 $2,603,112 $ 2,683,514 ---------- ------------- ---------- ----------- FINANCIAL LIABILITIES: Noninterest bearing checking $ 630,882 $ 630,882 $ 547,793 $ 547,793 Interest bearing checking 594,874 594,874 555,230 555,230 Savings 632,942 632,942 573,893 573,893 Money market accounts 303,701 303,701 233,170 233,170 Time deposits 1,525,613 1,520,609 1,502,619 1,515,196 Other 1,849 1,849 1,544 1,544 ---------- ------------- ---------- ----------- TOTAL DEPOSITS $3,689,861 $ 3,684,857 $3,414,249 $ 3,426,826 ---------- ------------- ---------- ----------- Short-term borrowings 278,231 278,231 516,759 516,759 Long-term debt 795,793 801,315 485,977 498,632 UNRECOGNIZED FINANCIAL INSTRUMENTS: Loan commitments -- (630) -- (578) Standby letters of credit -- (76) -- (112) ---------- ------------- ---------- -----------
55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. CAPITAL RATIOS The following table reflects various measures of capital at December 31, 2004 and December 31, 2003.
DECEMBER 31, 2004 2003 (DOLLARS IN THOUSANDS) AMOUNT RATIO Amount Ratio - --------------------------- --------- -------- --------- ------ Total equity (1) $ 562,561 10.39% $ 543,041 10.79% Tier 1 capital (2) 508,279 15.16% 510,456 16.51% Total risk-based capital(3) 550,675 16.43% 549,650 17.78% Leverage (4) 508,279 10.10% 510,456 10.79%
(1) Computed in accordance with generally accepted accounting principles, including accumulated other comprehensive income. (2) Stockholders' equity less certain intangibles and accumulated other comprehensive income; computed as a ratio to risk-adjusted assets as defined. (3) Tier 1 capital plus qualifying loan loss allowance; computed as a ratio to risk-adjusted assets, as defined. (4) Tier 1 capital computed as a ratio to average total assets less certain intangibles. At December 31, 2004 and 2003, the Corporation's Tier 1 capital, total risk- based capital and leverage ratios were well above both the required minimum levels of 4.00%, 8.00% and 4.00%, respectively and the well-capitalized levels of 6.00%, 10.00% and 5.00%, respectively. At December 31, 2004, and 2003, all of the Corporation's subsidiary financial institutions met the well-capitalized levels under the capital definitions prescribed in the FDIC Improvement Act of 1991. The following table indicates the capital ratios for each subsidiary at December 31, 2004 and December 31, 2003.
2004 2003 ----------------------------------------- ----------------------------------------- TIER 1 TOTAL TIER 1 TOTAL RISK- RISK- RISK- RISK- December 31 BASED BASED LEVERAGE BASED BASED LEVERAGE - ------------------------ ------ ----- -------- ------ ----- -------- Park National Bank 7.71% 11.04% 5.24% 8.16% 11.63% 5.38% Richland Trust Company 10.23% 11.49% 5.64% 9.94% 11.20% 5.77% Century National Bank 8.40% 10.29% 8.02% 9.48% 11.83% 5.81% First-Knox National Bank 8.44% 12.26% 5.37% 8.71% 12.60% 5.46% United Bank,N.A 10.88% 12.14% 5.70% 10.38% 11.64% 5.56% Second National Bank 8.84% 12.17% 5.48% 8.89% 12.36% 5.43% Security National Bank 9.43% 13.84% 5.10% 7.94% 12.11% 5.34% Citizens National Bank 11.76% 16.67% 5.68% 11.72% 16.59% 5.80%
20. SEGMENT INFORMATION The Corporation's segments are its banking subsidiaries. The operating results of the banking subsidiaries are monitored closely by senior management and each president of the subsidiary and division are held accountable for their results. Information about reportable segments follows. See Note 2 for a detailed description of individual banking subsidiaries.
OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31,2004 (IN THOUSANDS) ALL PNB RTC CNB FKNB UB SNB SEC CIT OTHERS TOTAL ---------- -------- -------- -------- -------- -------- --------- -------- --------- ---------- Net interest income $ 63,050 $ 21,992 $ 19,725 $ 32,329 $ 10,074 $ 15,477 $ 31,939 $ 7,252 $ 10,453 $ 212,291 Provision for loan losses 3,230 735 965 1,695 320 (15) 430 580 660 8,600 Other income 21,401 4,339 5,210 6,766 1,722 2,079 8,257 1,253 821 51,848 Depreciation and amortization 1,708 388 520 693 197 334 1,183 197 216 5,436 Other expense 36,827 10,549 11,413 15,995 6,071 7,282 18,649 4,284 9,784 120,854 ---------- -------- -------- -------- -------- -------- --------- -------- --------- ---------- Income before taxes 42,686 14,659 12,037 20,712 5,208 9,955 19,934 3,444 614 129,249 ---------- -------- -------- -------- -------- -------- --------- -------- --------- ---------- Federal income taxes 13,808 4,906 3,972 6,864 1,685 3,096 6,485 1,112 (4,186) 37,742 ---------- -------- -------- -------- -------- -------- --------- -------- --------- ---------- NET INCOME $ 28,878 $ 9,753 $ 8,065 $ 13,848 $ 3,523 $ 6,859 $ 13,449 $ 2,332 $ 4,800 $ 91,507 ========== ======== ======== ======== ======== ======== ========= ======== ========= ========== BALANCES AT DECEMBER 31, 2004: Assets $1,662,200 $511,681 $782,393 $756,454 $236,658 $445,158 $ 917,084 $200,795 $ (99,839) $5,412,584 Loans 1,011,912 277,812 540,607 479,348 101,628 196,577 436,718 69,830 6,176 3,120,608 Deposits 1,182,804 386,652 530,082 488,748 182,578 262,271 571,580 131,873 (46,727) 3,689,861 ---------- -------- -------- -------- -------- -------- --------- -------- --------- ---------- Operating Results for the year ended December 31, 2003 (In thousands) Net interest income $ 61,254 $ 21,081 $ 19,180 $ 31,459 $ 8,615 $ 13,962 $ 31,631 $ 6,493 $ 8,962 $ 202,637 Provision for loan losses 5,385 845 2,025 1,997 110 360 1,471 (35) 437 12,595 Other income 22,980 4,713 5,584 6,801 2,492 2,541 8,437 1,272 703 55,523 Depreciation and 1,988 406 506 685 245 435 1,164 238 199 5,866 amortization Other expense 35,575 9,759 10,850 15,547 5,705 6,853 19,175 4,236 8,810 116,510 ---------- -------- -------- -------- -------- -------- --------- -------- --------- ---------- Income before taxes 41,286 14,784 11,383 20,031 5,047 8,855 18,258 3,326 219 123,189 ---------- -------- -------- -------- -------- -------- --------- -------- --------- ---------- Federal income taxes 12,861 5,036 3,754 6,403 1,580 2,654 5,892 1,065 (2,934) 36,311 ---------- -------- -------- -------- -------- -------- --------- -------- --------- ---------- Net income $ 28,425 $ 9,748 $ 7,629 $ 13,628 $ 3,467 $ 6,201 $ 12,366 $ 2,261 $ 3,153 $ 86,878 ========== ======== ======== ======== ======== ======== ========= ======== ========= ========== Balances at December 31, 2003: Assets $1,636,753 $576,461 $495,594 $727,543 $245,175 $400,233 $ 922,334 $204,691 $(173,828) $5,034,956 Loans 927,663 260,726 293,242 462,758 93,669 182,980 436,873 69,652 3,240 2,730,803 Deposits 1,084,537 386,507 340,657 478,207 181,259 276,267 572,031 131,853 (37,069) 3,414,249 ---------- -------- -------- -------- -------- -------- --------- -------- --------- ----------
56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating Results for the year ended December 31, 2002 (In thousands) ALL PNB RTC CNB FKNB UB SNB SEC CIT OTHERS TOTAL ---------- -------- -------- -------- -------- -------- --------- -------- --------- ---------- Net interest income $ 61,793 $ 22,277 $ 19,599 $ 30,484 $ 8,762 $ 13,582 $ 34,031 $ 6,643 $ 8,161 $ 205,332 Provision for loan losses 6,590 1,995 880 2,963 205 225 1,090 705 390 15,043 Other income 21,550 3,662 5,561 6,055 1,834 1,950 8,269 1,505 464 50,850 Depreciation and 2,026 378 455 669 257 443 933 277 192 5,630 amortization Other expense 33,895 12,214 10,553 14,607 5,694 6,940 18,846 4,251 7,334 114,334 ---------- -------- -------- -------- -------- -------- --------- -------- --------- ---------- Income before taxes 40,832 11,352 13,272 18,300 4,440 7,924 21,431 2,915 709 121,175 ---------- -------- -------- -------- -------- -------- --------- -------- --------- ---------- Federal income taxes 12,524 3,844 4,435 5,654 1,295 2,299 6,824 896 (2,175) 35,596 ---------- -------- -------- -------- -------- -------- --------- -------- --------- ---------- Net income $ 28,308 $ 7,508 $ 8,837 $ 12,646 $ 3,145 $ 5,625 $ 14,607 $ 2,019 $ 2,884 $ 85,579 ========== ======== ======== ======== ======== ======== ========= ======== ========= ========== Balances at December 31, 2002: Assets $1,509,224 $470,775 $427,107 $661,338 $192,574 $333,374 $ 829,928 $166,424 $(144,119) $4,446,625 Loans 872,341 257,535 278,644 461,014 97,001 176,501 467,049 80,257 1,845 2,692,187 Deposits 1,167,628 374,094 335,318 484,411 167,887 269,024 593,783 128,096 (25,106) 3,495,135 ---------- -------- -------- -------- -------- -------- --------- -------- --------- ----------
Reconciliation of financial information for the reportable segments to the Corporation's consolidated totals.
NET INTEREST DEPRECIATION OTHER INCOME (IN THOUSANDS) INCOME EXPENSE EXPENSE TAXES ASSETS DEPOSITS ------------- -------- --------- -------- ------- --------- ---------- 2004: Totals for reportable segments $ 201,838 $ 5,220 $ 111,070 $ 41,928 $5,512,423 $ 3,736,588 Elimination of intersegment items -- -- -- -- (173,856) (46,727) Parent Co.and GFC totals - not eliminated 10,453 65 9,784 (4,186) 74,017 -- Other items -- 151 -- -- -- -- --------- -------- --------- -------- ---------- ----------- TOTALS $ 212,291 $ 5,436 $ 120,854 $ 37,742 $5,412,584 $ 3,689,861 ========= ======== ========= ======== ========== =========== 2003: Totals for reportable segments $ 193,675 $ 5,667 $ 107,702 $ 39,245 $5,208,784 $ 3,451,318 Elimination of intersegment items -- -- -- -- (237,240) (37,069) Parent Co.and GF totals - not eliminated 8,962 48 8,808 (2,934) 63,412 -- Other items -- 151 -- -- -- -- --------- -------- --------- -------- ---------- ----------- Totals $ 202,637 $ 5,866 $ 116,510 $ 36,311 $5,034,956 $ 3,414,249 ========= ======== ========= ======== ========== =========== 2002: Totals for reportable segments $ 197,171 $ 5,438 $ 107,000 $ 37,771 $4,590,744 $ 3,520,241 Elimination of intersegment items -- -- -- -- (198,364) (25,106) Parent Co.and GFC totals - not eliminated 8,161 42 7,334 (2,175) 54,245 -- Other items -- 150 -- -- -- -- --------- -------- --------- -------- ---------- ----------- Totals $ 205,332 $ 5,630 $ 114,334 $ 35,596 $4,446,625 $ 3,495,135 ========= ======== ========= ======== ========== ===========
21. PARENT COMPANY STATEMENTS The Parent Company statements should be read in conjunction with the consolidated financial statements and the information set forth below. Investments in subsidiaries are accounted for using the equity method of accounting. The effective tax rate for the Parent Company is substantially less than the statutory rate due principally to tax-exempt dividends from subsidiaries. Cash represents noninterest bearing deposits with a bank subsidiary. Net cash provided by operating activities reflects cash payments for income taxes of $4,537,000, $3,339,000 and $1,621,000 in 2004, 2003, and 2002, respectively. At December 31, 2004 and 2003, stockholders' equity reflected in the Parent Company balance sheet includes $130.5 million and $136.8 million, respectively, of undistributed earnings of the Corporation's subsidiaries which are restricted from transfer as dividends to the Corporation. BALANCE SHEETS at December 31, 2004 and 2003
(IN THOUSANDS) 2004 2003 ------------- ---------- ---------- ASSETS: Cash $ 123,418 $ 119,318 Investment in subsidiaries 353,966 312,677 Debentures receivable from subsidiary banks 56,000 56,000 Other investments 1,308 1,590 Dividends receivable from subsidiaries 26,400 51,900 Other assets 47,027 43,192 ---------- ---------- TOTAL ASSETS $ 608,119 $ 584,677 ========== ========== LIABILITIES: Dividends payable $ 12,891 $ 12,131 Other liabilities 32,667 29,505 ---------- ---------- TOTAL LIABILITIES 45,558 41,636 TOTAL STOCKHOLDERS' EQUITY 562,561 543,041 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 608,119 $ 584,677 ---------- ----------
STATEMENTS OF INCOME for the years ended December 31, 2004, 2003 and 2002
(IN THOUSANDS) 2004 2003 2002 ------------- -------- -------- -------- INCOME: Dividends from subsidiaries $ 83,000 $ 69,200 $ 85,300 Interest and dividends 6,461 6,448 6,443 Other 774 684 436 -------- -------- -------- TOTAL INCOME 90,235 76,332 92,179 -------- -------- -------- EXPENSE: Other net 8,199 7,668 6,452 -------- -------- -------- TOTAL EXPENSE 8,199 7,668 6,452 -------- -------- -------- INCOME BEFORE FEDERAL TAXES AND EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES 82,036 68,664 85,727 Federal income tax benefit 4,791 3,253 2,327 -------- -------- -------- INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES 86,827 71,917 88,054 Equity in undistributed earnings of subsidiaries 4,680 14,961 (2,475) -------- -------- -------- NET INCOME $ 91,507 $ 86,878 $ 85,579 ======== ======== ========
57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STATEMENTS OF CASH FLOWS for the years ended December 31, 2004, 2003 and 2002
(IN THOUSANDS) 2004 2003 2002 -------------- ---------- ------------ ------------ OPERATING ACTIVITIES: Net income $ 91,507 $ 86,878 $ 85,579 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of subsidiaries (4,680) (14,961) 2,475 Decrease (increase) in dividends receivable from subsidiaries 25,500 24,875 (18,275) Increase in other assets (3,833) (5,385) (9,239) Increase in other liabilities 3,689 5,147 4,885 ---------- ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 112,183 96,554 65,425 ---------- ------------ ------------ INVESTING ACTIVITIES: Cash paid for acquisition,net (43,645) -- -- Sale of investment securities 277 447 161 Other, net -- -- 189 ---------- ------------ ------------ NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (43,368) 447 350 ---------- ------------ ------------ FINANCING ACTIVITIES: Cash dividends paid (48,231) (45,742) (42,292) Proceeds from issuance of common stock 144 130 -- Cash payment for fractional shares (252) (3) (3) Purchase of treasury stock, net (16,376) (3,383) (15,194) ---------- ------------ ------------ NET CASH USED IN FINANCING ACTIVITIES (64,715) (48,998) (57,489) ---------- ------------ ------------ Increase in cash 4,100 48,003 8,286 Cash at beginning of year 119,318 71,315 63,029 ---------- ------------ ------------ CASH AT END OF YEAR $ 123,418 $ 119,318 $ 71,315 ========== ============ ============
58 EX-21 12 l12650aexv21.txt EXHIBIT 21 . . . EXHIBIT 21 SUBSIDIARIES OF PARK NATIONAL CORPORATION
Name of Subsidiary Jurisdiction of Incorporation or Formation - ------------------ ------------------------------------------ The Park National Bank ("PNB") United States (federally-chartered national banking association) Park Investments, Inc. (NOTE: is a wholly-owned Delaware subsidiary of PNB) Scope Leasing, Inc. (NOTE: is a wholly-owned Ohio subsidiary of PNB) Park Leasing Company (NOTE: is a wholly-owned Ohio subsidiary of PNB) Park Insurance Group, Inc. (NOTE: is a Ohio wholly-owned subsidiary of PNB) Park Title Agency, LLC. (NOTE: PNB holds 80% Ohio of voting membership interest) The Richland Trust Company ("Richland") Ohio Richland Investments, Inc. (NOTE: is a Delaware wholly-owned subsidiary of Richland) Century National Bank ("Century") United States (federally-chartered banking association) Zane-Fed Services, Incorporated (NOTE: is a Ohio wholly-owned subsidiary of Century)* MFS Investments, Inc. (NOTE: is a wholly-owned Delaware subsidiary of Century) Firstfedco Agency, Inc. (NOTE: is a wholly Ohio - -owned subsidiary of Century National Bank)* MCT Development Corporation (NOTE: is a wholly Ohio - -owned subsidiary of Century National Bank)* The First-Knox National Bank of Mount Vernon United States (federally-chartered banking association) ("FKNB") Guardian Financial Services Company Ohio United Bank, N.A. United States (federally-chartered banking association) Second National Bank United States (federally-chartered banking association)
- ---------- * Inactive
Name of Subsidiary Jurisdiction of Incorporation or Formation - ------------------ ------------------------------------------ The Security National Bank and Trust Co. United States (federally-chartered banking association) ("Security National") The Citizens National Bank of Urbana United States (federally-chartered banking association) Park Capital Investments, Inc. ("Park Capital") Delaware Park National Capital LLC (NOTE: members are Delaware Park Capital and PNB) Security National Capital LLC (NOTE: members Delaware are Park Capital and Security National) First-Knox National Capital LLC (NOTE: members Delaware are Park Capital and FKNB)
-2- EX-23 13 l12650aexv23.txt EXHIBIT 23 Exhibit 23 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in this Annual Report (Form 10-K) of Park National Corporation ("Park") of our reports dated February 25, 2005 with respect to the consolidated financial statements of Park and its subsidiaries, Park management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting of Park, included in the 2004 Annual Report to Shareholders of Park. We consent to the incorporation by reference in the following Registration Statements of Park: Form S-4 No. 333-20417, Form S-8 No. 33-92060, Form S-8 No. 333-52653, Form S-8 No. 333-59360, Form S-8 No. 333-59378, Form S-8 No. 333-91178, Form S-8 No. 333-115136 of our reports dated February 25, 2005, with respect to the consolidated financial statements of Park and its subsidiaries, Park management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting of Park, included in the 2004 Annual Report to Shareholders of Park, which is incorporated by reference in the Annual Report (Form 10-K) of Park. /s/ Ernst & Young LLP Columbus, Ohio March 11, 2005 EX-24 14 l12650aexv24.txt EXHIBIT 24 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer and director of Park National Corporation, an Ohio corporation (the "Corporation"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Corporation on Form 10-K for the fiscal year ended December 31, 2004, hereby constitutes and appoints David L. Trautman and John W. Kozak as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both said Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or either of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th day of January, 2005. /s/ C. Daniel DeLawder ---------------------------------------- C. Daniel DeLawder POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer and director of Park National Corporation, an Ohio corporation (the "Corporation"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Corporation on Form 10-K for the fiscal year ended December 31, 2004, hereby constitutes and appoints C. Daniel DeLawder and John W. Kozak as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both said Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or either of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th day of January, 2005. /s/ David L. Trautman ---------------------------------------- David L. Trautman POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer of Park National Corporation, an Ohio corporation (the "Corporation"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Corporation on Form 10-K for the fiscal year ended December 31, 2004, hereby constitutes and appoints C. Daniel DeLawder and David L. Trautman as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both said Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or either of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th day of January, 2005. /s/ John W. Kozak ---------------------------------------- John W. Kozak POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Park National Corporation, an Ohio corporation (the "Corporation"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Corporation on Form 10-K for the fiscal year ended December 31, 2004, hereby constitutes and appoints C. Daniel DeLawder, David L. Trautman and John W. Kozak as her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for her and in her name, place and stead, in any and all capacities, to sign both said Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as she might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set her hand this 18th day of January, 2005. /s/ Maureen Buchwald ---------------------------------------- Maureen Buchwald POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Park National Corporation, an Ohio corporation (the "Corporation"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Corporation on Form 10-K for the fiscal year ended December 31, 2004, hereby constitutes and appoints C. Daniel DeLawder, David L. Trautman and John W. Kozak as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both said Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th day of January, 2005. /s/ James J. Cullers ---------------------------------------- James J. Cullers POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Park National Corporation, an Ohio corporation (the "Corporation"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Corporation on Form 10-K for the fiscal year ended December 31, 2004, hereby constitutes and appoints C. Daniel DeLawder, David L. Trautman and John W. Kozak as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both said Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or either of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th day of January, 2005. /s/ Harry O. Egger ---------------------------------------- Harry O. Egger POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Park National Corporation, an Ohio corporation (the "Corporation"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Corporation on Form 10-K for the fiscal year ended December 31, 2004, hereby constitutes and appoints C. Daniel DeLawder, David L. Trautman and John W. Kozak as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both said Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th day of January, 2005. /s/ F. William Englefield IV ---------------------------------------- F. William Englefield IV POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Park National Corporation, an Ohio corporation (the "Corporation"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Corporation on Form 10-K for the fiscal year ended December 31, 2004, hereby constitutes and appoints C. Daniel DeLawder, David L. Trautman and John W. Kozak as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both said Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th day of January, 2005. /s/ R. William Geyer ---------------------------------------- R. William Geyer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Park National Corporation, an Ohio corporation (the "Corporation"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Corporation on Form 10-K for the fiscal year ended December 31, 2004, hereby constitutes and appoints C. Daniel DeLawder, David L. Trautman and John W. Kozak as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both said Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th day of January, 2005. /s/ William T. McConnell ---------------------------------------- William T. McConnell POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Park National Corporation, an Ohio corporation (the "Corporation"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Corporation on Form 10-K for the fiscal year ended December 31, 2004, hereby constitutes and appoints C. Daniel DeLawder, David L. Trautman and John W. Kozak as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both said Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th day of January, 2005. /s/ Michael J. Menzer ---------------------------------------- Michael J. Menzer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Park National Corporation, an Ohio corporation (the "Corporation"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Corporation on Form 10-K for the fiscal year ended December 31, 2004, hereby constitutes and appoints C. Daniel DeLawder, David L. Trautman and John W. Kozak as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both said Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th day of January, 2005. /s/ John J. O'Neill ---------------------------------------- John J. O'Neill POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Park National Corporation, an Ohio corporation (the "Corporation"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Corporation on Form 10-K for the fiscal year ended December 31, 2004, hereby constitutes and appoints C. Daniel DeLawder, David L. Trautman and John W. Kozak as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both said Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th day of January, 2005. /s/ William A. Phillips ---------------------------------------- William A. Phillips POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Park National Corporation, an Ohio corporation (the "Corporation"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Corporation on Form 10-K for the fiscal year ended December 31, 2004, hereby constitutes and appoints C. Daniel DeLawder, David L. Trautman and John W. Kozak as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both said Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th day of January, 2005. /s/ J. Gilbert Reese ---------------------------------------- J. Gilbert Reese POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Park National Corporation, an Ohio corporation (the "Corporation"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Corporation on Form 10-K for the fiscal year ended December 31, 2004, hereby constitutes and appoints C. Daniel DeLawder, David L. Trautman and John W. Kozak as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both said Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th day of January, 2005. /s/ Rick R. Taylor ---------------------------------------- Rick R. Taylor POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Park National Corporation, an Ohio corporation (the "Corporation"), which is about to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, the Annual Report of the Corporation on Form 10-K for the fiscal year ended December 31, 2004, hereby constitutes and appoints C. Daniel DeLawder, David L. Trautman and John W. Kozak as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign both said Annual Report on Form 10-K and any and all amendments and documents related thereto, and to file the same, and any and all exhibits, financial statements and schedules related thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the American Stock Exchange, and grants unto each of said attorneys-in-fact and agents, and substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and agents, or any of them or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th day of January, 2005. /s/ Leon Zazworsky ---------------------------------------- Leon Zazworsky EX-31.1 15 l12650aexv31w1.txt EXHIBIT 31.1 EXHIBIT 31.1 RULE 13A-14(A)/15D-14(A) CERTIFICATION (PRINCIPAL EXECUTIVE OFFICER) I, C. Daniel DeLawder, certify that: 1. I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. 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 d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth 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 (or persons performing the equivalent functions): 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. Dated: March 11, 2005 By: /s/ C. Daniel DeLawder --------------------------------- Printed Name: C. Daniel DeLawder Title: Chairman of the Board and Chief Executive Officer 2 EX-31.2 16 l12650aexv31w2.txt EXHIBIT 31.2 EXHIBIT 31.2 RULE 13A-14(A)/15D-14(A) CERTIFICATION (PRINCIPAL FINANCIAL OFFICER) I, John W. Kozak, certify that: 1. I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. 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 d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth 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 (or persons performing the equivalent functions): 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. Dated: March 11, 2005 By: /s/ John W. Kozak ----------------------------- Printed Name: John W. Kozak Title: Chief Financial Officer 2 EX-32 17 l12650aexv32.txt EXHIBIT 32 EXHIBIT 32 SECTION 1350 CERTIFICATION* In connection with the Annual Report of Park National Corporation (the "Corporation") on Form 10-K for the fiscal year ended December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned C. Daniel DeLawder, Chairman of the Board and Chief Executive Officer of the Corporation, and John W. Kozak, Chief Financial Officer of the Corporation, 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 their knowledge: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. /s/ C. Daniel DeLawder /s/ John W. Kozak - -------------------------------------- --------------------- C. Daniel DeLawder John W. Kozak Chairman of the Board and Chief Chief Financial Officer Executive Officer Dated: March 11, 2005 Dated: March 11, 2005 * This certification is being furnished as required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended (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 to the extent that the Corporation specifically incorporates it by reference. -----END PRIVACY-ENHANCED MESSAGE-----