-----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, K6Q1DC6+HRbsSMPcJ3v96OHI6/1pR4dP2FjLARVqMd5gDNSqbYJN4yNneGcKRf3P 4hhoe00f4RjfaliycyTVxQ== 0000950152-98-008640.txt : 19981110 0000950152-98-008640.hdr.sgml : 19981110 ACCESSION NUMBER: 0000950152-98-008640 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARK NATIONAL CORP /OH/ CENTRAL INDEX KEY: 0000805676 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 311179518 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13006 FILM NUMBER: 98740813 BUSINESS ADDRESS: STREET 1: 50 NORTH THIRD ST CITY: NEWARK STATE: OH ZIP: 43055 BUSINESS PHONE: 6143498451 MAIL ADDRESS: STREET 1: P O BOX 3500 CITY: NEWARK STATE: OH ZIP: 43058-3500 10-Q 1 PARK NATIONAL CORPORATION FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------------- -------------------- Commission File Number 1-13006 -------------------------------------------------------- Park National Corporation ------------------------------------------------------ (Exact name of registrant as specified in its charter) Ohio 31-1179518 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 50 North Third Street, Newark, Ohio 43055 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (614) 349-8451 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- 9,300,613 common shares, no par value per share, outstanding at --------------- October 30, 1998. Page 1 of 24 Exhibit Index at Page 22 2 PARK NATIONAL CORPORATION CONTENTS --------
Page ---- PART I. FINANCIAL INFORMATION 3-11 Item 1. Financial Statements 3-11 Consolidated Balance Sheets as of September 30, 1998 and and December 31, 1997 (unaudited) 3 Consolidated Condensed Statements of Income for the Three Months and Nine Months ended September 30, 1998 and 1997 (unaudited) 4,5 Consolidated Condensed Statements of Changes in Stockholders' Equity for the Nine Months ended September 30, 1998 and 1997 (unaudited) 6 Consolidated Statements of Cash Flows for the Nine Months ended September 30, 1998 and 1997 (unaudited) 7,8 Notes to Consolidated Financial Statements 9-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-21 Item 3. Quantitative and Qualitative Disclosure About Market Risk 21 PART II. OTHER INFORMATION 22 Item 1. Legal Proceedings 22 Item 2. Changes in Securities and Use of Proceeds 22 Item 3. Defaults Upon Senior Securities 22 Item 4. Submission of Matters to a Vote of Security Holders 22 Item 5. Other Information 22 Item 6. Exhibits and Reports on Form 8-K 22 SIGNATURES 23 EXHIBIT 27 24
-2- 3 PARK NATIONAL CORPORATION Consolidated Balance Sheets (Unaudited) (dollars in thousands, except per share data)
September 30, December 31, 1998 1997 ------------- ------------ Assets: Cash and due from banks $ 89,694 $ 93,585 Securities available-for-sale, at fair value (amortized cost of $580,098 and $522,179 at September 30, 1998 and December 31,1997) 595,808 532,922 Securities held-to-maturity, at amortized cost (fair value approximates $7,062 and $8,156 at September 30, 1998 and December 31,1997) 6,764 7,808 Loans (net of unearned interest) 1,626,040 1,591,927 Allowance for possible loan losses 38,138 35,595 Net loans 1,587,902 1,556,332 Bank premises and equipment, net 27,418 27,805 Other assets 78,884 69,931 ---------- ---------- Total assets $2,386,470 $2,288,383 Liabilities and Stockholders' Equity: Deposits: Noninterest bearing $ 251,191 $ 257,867 Interest bearing 1,621,059 1,597,097 Total deposits 1,872,250 1,854,964 Short-term borrowings 241,620 151,624 Long-term debt 14,314 30,868 Other liabilities 23,424 28,810 ---------- ---------- Total liabilities 2,151,608 2,066,266 Stockholders' Equity: Common stock (No par value; 20,000,000 shares authorized; 9,552,816 shares issued in 1998 and 9,551,203 issued in 1997) 68,396 68,275 Retained earnings 173,361 154,535 Treasury stock (246,778 shares in 1998 and 158,864 in 1997) (17,143) (7,712) Accumulated other comprehensive income net of taxes 10,248 7,019 ---------- ---------- Total stockholders' equity 234,862 222,117 ---------- ---------- Total liabilities and stockholders' equity $2,386,470 $2,288,383
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -3- 4 PARK NATIONAL CORPORATION Consolidated Condensed Statements of Income (Unaudited) (dollars in thousands, except per share data)
Three Months Nine Months Ended September 30, Ended September 30, 1998 1997 1998 1997 ------- ------- -------- -------- Interest income: Interest and fees on loans $37,155 $36,370 $110,464 $105,494 Interest on: Obligations of U.S. Gov't, its agencies and other securities 8,517 8,142 24,849 25,326 Obligations of states and political subdivisions 1,252 1,150 3,492 2,958 Other interest income 15 3 144 429 ------- ------- -------- -------- Total interest income 46,939 45,665 138,949 134,207 Interest expense: Interest on deposits: Demand and savings deposits 4,030 4,227 12,234 12,589 Time deposits 13,264 12,413 39,332 36,950 Interest on borrowings: Short-term borrowings 2,588 2,334 6,648 5,759 Long-term debt 207 476 714 2,395 ------- ------- -------- -------- Total interest expense 20,089 19,450 58,928 57,693 ------- ------- -------- -------- Net interest income 26,850 26,215 80,021 76,514 Provision for loan losses 1,674 1,521 5,022 4,169 ------- ------- -------- -------- Net interest income after provision for loan losses 25,176 24,694 74,999 72,345 Other income 5,797 5,246 17,626 15,538 Gain on sale of securities 0 (7) 97 (7)
Continued -4- 5 PARK NATIONAL CORPORATION Consolidated Condensed Statements of Income (Unaudited) - Continued (dollars in thousands, except per share data)
Three Months Nine Months Ended September 30, Ended September 30, 1998 1997 1998 1997 ---------- ---------- ---------- ----------- Other expense: Salaries and employee benefits $ 7,948 $ 7,477 $ 23,568 $ 22,864 Occupancy expense 827 830 2,540 2,482 Furniture and equipment 984 908 2,918 2,697 Other expense 5,653 5,678 17,015 17,928 ---------- ---------- ---------- ---------- Total other expense 15,412 14,893 46,041 45,971 ---------- ---------- ---------- ---------- Income before federal income taxes 15,561 15,040 46,681 41,905 Federal income taxes 4,795 4,656 14,383 12,980 ---------- ---------- ---------- ---------- Net income $ 10,766 $ 10,384 $ 32,298 $ 28,925 ========== ========== ========== ========== PER SHARE: Net income: Basic $ 1.15 $ 1.11 $ 3.45 $ 3.09 Diluted 1.15 1.10 3.44 3.07 ========== ========== ========== ========== Weighted average common shares outstanding: Basic 9,316,955 9,410,162 9,352,184 9,385,469 Diluted 9,366,363 9,448,032 9,398,729 9,419,641 ========== ========== ========== ========== Cash dividends declared $ 0.48 $ 0.40 $ 1.44 $ 1.20
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -5- 6 PARK NATIONAL CORPORATION Consolidated Condensed Statements of Changes in Stockholders' Equity (Unaudited) (dollars in thousands, except per share data)
Accumulated Treasury Other Common Retained Stock Comprehensive Comprehensive Stock Earnings at Cost Income Income ------- -------- -------- ------------- ------------- BALANCE AT DECEMBER 31, 1996 $64,611 $132,648 ($2,985) $4,687 Net income 28,925 $28,925 Net unrealized gain on securities available- for-sale net of income taxes of ($967) 1,796 1,796 ------- Total comprehensive income $30,721 Cash dividends on common stock: Park at $1.20 per share (10,392) First-Knox prior to merger (902) Shares issued for stock options - 107,319 shares 2,301 Cash payment for fractional shares in merger - 600 shares (40) Tax benefit from exercise of stock options 1,366 Treasury stock purchased - 85,571 shares (5,281) Treasury stock reissued for options - 12,600 shares 610 BALANCE AT SEPTEMBER 30, 1997 $68,238 $150,279 ($7,656) $6,483 ========================================================================================================================== BALANCE AT DECEMBER 31, 1997 $68,275 $154,535 ($7,712) $7,019 Net income 32,298 $32,298 Net unrealized gain on securities available-for sale net of income taxes of ($1,739) 3,229 3,229 ------- Total comprehensive income $35,527 Cash dividends on common stock: Park at $1.44 per share (13,472) Tax benefit from exercise of stock options 32 Shares issued for stock options - 1,613 shares 89 Treasury stock purchased - 115,583 shares (10,969) Treasury stock reissued for options - 27,669 shares 1,538 BALANCE AT SEPTEMBER 30, 1998 $68,396 $173,361 ($17,143) $10,248 ========================================================================================================================== THREE MONTHS ENDED SEPTEMBER 30, 1998 1997 ------- ------- Net income $10,766 $10,384 Accumulated other comprehensive income, net of income taxes of ($2,094) in 1998 and ($1,258) in 1997 3,889 2,337 Total comprehensive income $14,655 $12,721
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -6- 7 PARK NATIONAL CORPORATION Consolidated Statements of Cash Flows (Unaudited) (dollars in thousands)
Nine Months Ended September 30, 1998 1997 --------- --------- Operating activities: Net income $ 32,298 $ 28,925 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion 1,115 528 Provision for loan losses 5,022 4,169 Amortization of the excess of cost over net assets of banks purchased 2,090 1,463 Realized net investment security (gain) loss (97) 7 Changes in assets and liabilities: Increase in other assets (12,781) (6,540) (Decrease) increase in other liabilities (875) 1,514 --------- --------- Net cash provided from operating activities 26,772 30,066 Investing activities: Proceeds from sales of: Available-for-sale securities 51,839 45,083 Proceeds from maturity of: Available-for-sale securities 94,043 117,274 Held-to-maturity securities 1,045 2,178 Purchases of: Available-for-sale securities (202,610) (132,586) Net increase in loans (36,025) (91,516) Purchases of premises and equipment, net (2,389) (2,160) --------- --------- Net cash used by investing activities (94,097) (61,727)
-7- 8 PARK NATIONAL CORPORATION Consolidated Statements of Cash Flows (Unaudited) - Continued (dollars in thousands)
Nine Months Ended September 30, 1998 1997 -------- -------- Financing activities: Net increase in deposits $ 17,286 $ 47,458 Net increase in short-term borrowings 89,996 43,431 Exercise of stock options 121 3,626 Purchase of treasury stock, net (9,431) (4,671) Repayment of long-term debt (16,554) (31,306) Cash dividends paid (17,984) (15,047) -------- -------- Net cash provided from financing activities 63,434 43,491 -------- -------- (Decrease) increase in cash and cash equivalents (3,891) 11,830 Cash and cash equivalents at beginning of year 93,585 81,765 -------- -------- Cash and cash equivalents at end of period $ 89,694 $ 93,595 ======== ======== Supplemental disclosure of cash flow information: Cash paid for: Interest $ 58,488 $ 57,753 ======== ======== Income taxes $ 15,350 $ 9,455 ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -8- 9 PARK NATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Three and Nine Month Periods Ended September 30, 1998 and 1997. Note 1 - Basis of Presentation --------------------- The consolidated financial statements included in this report have been prepared by Park National Corporation (the "Registrant", "Corporation", "Company", or "Park") without audit. In the opinion of management, all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation of results of operations for the interim periods included herein have been made. The results of operations for the periods ended September 30, 1998 are not necessarily indicative of the operating results to be anticipated for the fiscal year ended December 31, 1998. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q, and therefore, do not include all information and footnotes necessary for a fair presentation of the balance sheets, condensed statements of income, condensed statements of changes in stockholders' equity and statements of cash flows in conformity with generally accepted accounting principles. These financial statements should be read in conjunction with the financial statements included in the Annual Report on Form 10-K for the year ended December 31, 1997. Certain amounts in 1997 have been reclassified to conform to the financial statement presentation used for 1998. Park does not have any off-balance sheet derivative financial instruments such as interest-rate swap agreements. As of January 1, 1998, Park adopted Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes reporting and display standards for comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances arising from nonowner sources. The new statement requires Park's unrealized gains or losses on securities available-for-sale, which prior to adoption were reported as a separate component of stockholders' equity, to be included in other comprehensive income. Since SFAS No. 130 only requires additional information, it had no impact on Park's financial position or results of operation. Prior year financial statements have been reclassified to conform with the new requirements. Comprehensive income is presented in the Statements of Changes in Stockholders' Equity on page 6. Note 2 - Acquisition ----------- On May 5, 1997, Park merged with First-Knox Banc Corp. ("First-Knox"), a $569 million bank holding company headquartered in Mount Vernon, Ohio, in a transaction accounted for as a pooling of interests. Park issued approximately 2.3 million shares of common stock to the stockholders of First-Knox based upon an exchange ratio of .5914 shares of Park common stock for each outstanding share of First-Knox common stock. The historical financial statements of -9- 10 Park have been restated to show Park and First-Knox on a combined basis. Separate results of operations for Park and First-Knox follow:
Three Months Ended March 31, 1997 -------------------- Net Interest Income Park $19,077 First-Knox 5,544 ------- Combined $24,621 Net Income Park $ 7,296 First-Knox 1,693 ------- Combined $ 8,989 Basic Net Income Per Share Park $ 1.02 First-Knox .45 ------- Combined $ .96 Diluted Net Income Per Share Park $ 1.02 First-Knox .44 ------- Combined $ .96
Certain amounts in 1997 have been reclassified to conform to the financial statement presentation used in 1998. Note 3 - Allowance for Possible Loan Losses ---------------------------------- The allowance for possible 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 and anticipated economic conditions. A provision for loan losses is charged to operations based on management's periodic evaluation of these and other pertinent factors.
(In Thousands) Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ---- ---- ---- ---- Beginning of Period $38,279 $34,325 $35,595 $32,347 Provision for loan losses 1,674 1,521 5,022 4,169 Losses charged to the reserve (2,284) (1,398) (4,945) (3,500) Recoveries 469 572 2,466 2,004 ------- ------- ------- ------- End of Period $38,138 $35,020 $38,138 $35,020 ======= ======= ======= =======
-10- 11 Note 4 - Long-Term Debt --------------
DESCRIPTION (IN THOUSANDS) SEPTEMBER 30, DECEMBER 31, 1998 1997 FIXED RATE FEDERAL HOME LOAN BANK ADVANCES WITH MONTHLY PRINCIPAL AND INTEREST PMTS.: 5.60% ADVANCE DUE AUGUST 1, 2003 $1,683 $1,902 6.35% ADVANCE DUE AUGUST 1, 2013 -0- 2,628 5.95% ADVANCE DUE MARCH 1, 2004 -0- 519 5.70% ADVANCE DUE MAY 1, 2004 3,811 4,230 5.85% ADVANCE DUE JANUARY 1, 2016 3,742 4,259 2.00% ADVANCE DUE NOVEMBER 1, 2027 39 40 2.00% ADVANCE DUE JANUARY 1, 2028 39 40 FIXED RATE FEDERAL HOME LOAN BANK ADVANCES WITH MONTHLY INTEREST PMTS.: 5.35% ADVANCE DUE FEBRUARY 1, 1999 5,000 5,000 5.60% ADVANCE DUE APRIL 1, 1999 -0- 5,000 5.70% ADVANCE DUE JUNE 1, 1999 -0- 7,000 6.35% ADVANCE DUE MARCH 1, 2004 -0- 250 $14,314 $30,868 ======= =======
Federal Home Loan Bank (FHLB) advances are collateralized by the FHLB stock owned by Park's affiliate banks and by residential mortgage loans pledged under a blanket agreement by Park's affiliate banks. Note 5 - Earnings Per Share ------------------ The following table sets forth the computation of basic and diluted earnings per share for the three and nine month periods ended September 30, 1998 and 1997.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED SEPTEMBER 30, 1998 1997 NUMERATOR: NET INCOME $10,766 $10,384 DENOMINATOR: DENOMINATOR FOR BASIC EARNINGS PER SHARE WEIGHTED-AVG. SHARES 9,316,955 9,410,162 EFFECT OF DILUTIVE SECURITIES 49,408 37,870 DENOMINATOR FOR DILUTED EARNINGS PER SHARE-ADJUSTED WEIGHTED- AVERAGE SHARES AND ASSUMED CONVERSIONS 9,366,363 9,448,032 EARNINGS PER SHARE: BASIC EARNINGS PER SHARE $1.15 $1.11 DILUTED EARNINGS PER SHARE $1.15 $1.10
-11- 12
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 NUMERATOR: NET INCOME $32,298 $28,925 DENOMINATOR: DENOMINATOR FOR BASIC EARNINGS PER SHARE WEIGHTED-AVERAGE SHARES 9,352,184 9,385,469 EFFECT OF DILUTIVE SECURITIES 46,545 34,172 DENOMINATOR FOR DILUTED EARNINGS PER SHARE-ADJUSTED WEIGHTED- AVERAGE SHARES AND ASSUMED CONVERSIONS 9,398,729 9,419,641 EARNINGS PER SHARE: BASIC EARNINGS PER SHARE $3.45 $3.09 DILUTED EARNINGS PER SHARE $3.44 $3.07
-12- 13 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Comparison of Results of Operations for the Three and Nine Month Periods Ended September 30, 1998 and 1997 Net Interest Income - ------------------- The Corporation's principal source of earnings is net interest income, the difference between total interest income and total interest expense. Net interest income increased by $635,000 or 2.4% to $26.85 million for the three months ended September 30, 1998 compared to $26.22 million for the third quarter of 1997. The following table compares the average balance and tax equivalent yield/cost for interest earning assets and interest bearing liabilities for the third quarter of 1998 with the same quarter in 1997.
THREE MONTHS ENDED SEPTEMBER 30, (IN THOUSANDS) 1998 1997 Average Tax Average Tax Balance Equivalent Balance Equivalent % % LOANS $1,605,331 9.21% $1,544,201 9.37% TAXABLE INVESTMENTS $ 494,286 6.84% $ 465,000 6.95% TAX EXEMPT INVESTMENTS $ 97,430 7.16% $ 82,729 7.69% FEDERAL FUNDS SOLD $ 862 5.51% $ 450 3.26% ------------------------------------------------------ INTEREST EARNING ASSETS $2,197,909 8.58% $2,092,380 8.77% INTEREST BEARING DEPOSITS $1,619,540 4.24% $1,542,799 4.28% SHORT-TERM BORROWINGS $ 209,345 4.91% $ 186,586 4.96% LONG-TERM DEBT $ 14,410 5.70% $ 33,097 5.71% ------------------------------------------------------ INTEREST BEARING LIABILITIES $1,843,295 4.32% $1,762,482 4.38% EXCESS INTEREST EARNING ASSETS $ 354,614 4.26% $ 329,898 4.39% NET INTEREST MARGIN 4.96% 5.08%
Average interest earning assets increased by $106 million or 5.0% to $2,198 million for the quarter ended September 30, 1998 compared to the same quarter in 1997. Average loans outstanding increased by $61 million or 4.0% to $1,605 million for the third quarter of 1998 compared to the same quarter in 1997. Approximately $12 million of this increase was due to loans acquired as part of the purchase of branch offices in Lancaster, Ohio in December, 1997. The demand for fixed-rate residential real estate loans has been quite strong during 1998 due to relatively low longer term interest rates. A large percentage of the fixed-rate loan originations are refinances of existing mortgages, some of which are adjustable rate mortgage loans. Park sells in the secondary market all fixed-rate mortgage loans that are originated and as a result has experienced a decrease of $13 million in residential real estate loans during the first nine months of 1998. This trend in residential real estate loans may continue at current interest rate levels. The demand for commercial, commercial real estate, and consumer loans secured by automobiles has continued to be relatively strong and accounts for the 4.0% growth in average -13- 14 loan balances for the third quarter of 1998 compared to the same period in 1997. The average yield on the loan portfolio was 9.21% for the third quarter of 1998 compared to 9.37% for the same period in 1997. The Federal Reserve lowered the federal funds rate by .25% in September, 1998 and by another .25% in October, 1998. Park's affiliate banks lowered their prime rates by .25% in both September and October, 1998. This action will cause the yield on the loan portfolio to decrease as approximately 25% of the loan portfolio reprices based on the prime lending rate. Average investment securities including federal funds sold increased by $44 million to $593 million for the third quarter of 1998 compared to the same quarter in 1997. The yield on taxable investment securities was 6.84% in 1998 compared to 6.95% in 1997 while the tax equivalent yield on tax-exempt investments decreased to 7.16% in 1998 compared to 7.69% in 1997. The decrease in the yield on tax-exempt investments was primarily due to purchases of lower yielding securities. Long-term interest rates have decreased over the past year and as a result, purchases of investment securities generally yield less than the average yield of the portfolio. Average interest bearing liabilities increased by $81 million or 4.6% to $1,843 million for the quarter ended September 30, 1998 compared to the same quarter in 1997. Average interest bearing deposits increased by $77 million or 5.0% to $1,620 million for the third quarter of 1998 compared to the same period in 1997. This increase in deposits was primarily due to $49 million of deposits acquired as part of the purchase of branch offices in Lancaster, Ohio in December, 1997. The average rate paid on deposits was 4.24% for the third quarter of 1998 compared to 4.28% for the same period in 1997. Average short-term borrowings increased by $23 million to $209 million for the third quarter of 1998 compared to the same period in 1997, while average long-term borrowings decreased to $14 million in 1998 compared to $33 million in 1997. Higher rate long-term debt was repaid from additional short-term borrowings and the proceeds from the sale of taxable investment securities. The increase in net interest income of $635,000 or 2.4% to $26.85 million for the quarter ended September 30, 1998 was primarily due to an increase in average interest earning assets. Average interest earning assets increased by $106 million or 5.0% to $2,198 million and excess interest earning assets increased by $25 million to $355 million for the quarter ended September 30, 1998 compared to the same period in 1997. The net interest spread (the difference between the yield on interest earning assets and the cost of interest bearing liabilities) decreased by .13% to 4.26% in 1998 compared to 4.39% in 1997. The yield on interest earning assets decreased by .19% to 8.58% for the third quarter of 1998 compared to 8.77% for the same period in 1997 and the cost of interest bearing liabilities decreased by .06% to 4.32% for the third quarter of 1998 compared to 4.38% for the same period in 1997. The decrease in the average yield on interest earning assets will continue in the fourth quarter of 1998 due to the recent declines in the prime rate. Management is aggressively decreasing the rates paid on deposits to try and maintain the net interest spread. Net interest income increased by $3.5 million or 4.6% to $80.0 million for the nine months ended September 30, 1998 compared to $76.5 million for the same period in 1997. The following table compares the average balance and tax equivalent yield/cost for interest earning assets and interest bearing liabilities for the first nine months of 1998 with the same period in 1997. -14- 15
NINE MONTHS ENDED SEPTEMBER 30, (IN THOUSANDS) 1998 1997 AVERAGE TAX EQUIVALENT AVERAGE TAX EQUIVALENT BALANCE % BALANCE % LOANS $1,591,691 9.31% $1,512,038 9.36% TAXABLE INVESTMENTS $ 476,272 6.98% $ 484,569 6.99% TAX EXEMPT INVESTMENTS $ 89,145 7.35% $ 70,182 7.92% FEDERAL FUNDS SOLD $ 3,324 5.63% $ 10,815 5.30% INTEREST EARNING ASSETS $2,160,432 8.71% $2,077,604 8.73% INTEREST BEARING DEPOSITS $1,613,036 4.27% $1,548,229 4.28% SHORT-TERM BORROWINGS $ 182,268 4.88% $ 158,679 4.85% LONG-TERM BORROWINGS $ 16,493 5.79% $ 53,917 5.94% INTEREST BEARING LIABILITIES $1,811,797 4.35% $1,760,825 4.38% EXCESS INTEREST-EARNING ASSETS $ 348,635 4.36% $ 316,779 4.35% NET INTEREST MARGIN 5.06% 5.02%
Average interest earning assets increased by $83 million or 4.0% to $2,160 million for the nine months ended September 30, 1998 compared to the same period in 1997. Average loans increased by $80 million or 5.3% to $1,592 million for the first nine months of 1998 compared to the same period in 1997. Approximately $12 million of this increase was due to loans acquired as part of the purchase of branch offices in Lancaster, Ohio in December, 1997. Loan demand continues to be relatively strong for commercial, commercial real estate, consumer loans secured by automobiles and for fixed-rate residential mortgage loans. Park sells the fixed-rate mortgage loans in the secondary market and although this activity doesn't add to loan growth, it does produce fee income. The yield on loans was 9.31% for the first nine months of 1998 compared to 9.36% for the same period in 1997. Average investment securities including federal funds sold increased by $3 million or .6% to $569 million for the first nine months of 1998 compared to the same period in 1997. Taxable investment securities were sold in 1997 to provide funds to repay long-term debt. Average interest bearing liabilities increased by $51 million or 2.9% to $1,812 million for the first nine months of 1998 compared to the same period in 1997. Average interest bearing deposits increased by $65 million or 4.2% to $1,613 million for the first three quarters of 1998 compared to the same period in 1997. Approximately $49 million of this increase was due to deposits acquired as part of the purchase of branch offices in Lancaster, Ohio in December, 1997. The average rate paid on deposits was 4.27% for the first nine months of 1998 compared to 4.28% for the same period in 1997. Average short-term borrowings increased by $24 million or 14.9% to $182 million for the first three quarters of 1998 compared to the same period in 1997. This increase in short-term borrowings was used to assist in funding the repayment of long-term debt. Average long-term debt decreased by $37 million to $16 million for the first nine months of 1998 compared to the same period in 1997. Higher rate long-term debt was repaid from additional short-term borrowings and the proceeds from the sale of taxable investment securities. The increase in net interest income of $3.5 million or 4.6% to $80.0 million for the first nine -15- 16 months of 1998 was primarily due to an increase in average interest earning assets and to a lesser extent an increase in the net interest spread. Average interest earning assets increased by $83 million or 4.0% to $2,160 million and excess interest earning assets increased by $32 million to $349 million for the first three quarters of 1998 compared to the same period in 1997. The net interest spread (the difference between the yield on interest earning assets and the cost of interest bearing liabilities) increased by .01% to 4.36% in 1998 compared to 4.35% in 1997. The yield on interest earning assets decreased by .02% to 8.71% for the first three quarters of 1998 compared to 8.73% for the same period in 1997 and the cost of interest bearing liabilities decreased by .03% to 4.35% for the first three quarters of 1998 compared to 4.38% for the first three quarters of 1997. Provision for Loan Losses - ------------------------- The provision for loan losses increased by $153,000 to $1.67 million for the three months ended September 30, 1998 and increased by $853,000 to $5.02 million for the nine months ended September 30, 1998 compared to the same periods in 1997. Net charge-offs were $1.8 million and $2.5 million respectively, for the three and nine month periods ended September 30, 1998 compared to net charge-offs of $826,000 and $1.5 million respectively, for the same periods in 1997. Nonperforming loans, defined as loans that are 90 days past due, renegotiated loans and nonaccrual loans were $6.2 million or .38% of loans at September 30, 1998 compared to $6.2 million or .39% of loans at December 31, 1997 and $6.8 million or .43% of loans at September 30, 1997. The reserve for loans losses as a percentage of outstanding loans was 2.35% at September 30, 1998 compared to 2.24% at December 31, 1997 and September 30, 1997. See Footnote 3 for a discussion of the factors considered by management in determining the provision for loan losses. Noninterest Income - ------------------ Noninterest income increased by $551,000 or 10.5% to $5.80 million for the three months ended September 30, 1998 and increased by $2.1 million or 13.4% to $17.63 million for the nine months ended September 30, 1998 compared to the same periods in 1997. The following is a summary of the change in noninterest income.
SEPTEMBER 30, THREE MONTHS ENDED NINE MONTHS ENDED 1998 1997 Change 1998 1997 Change Fees from fiduciary activities $1,203 $1,265 $(62) $ 3,673 $ 3,848 $ (175) Service charges on deposit accounts 1,714 1,582 132 4,991 4,688 303 Other service income 1,100 857 243 3,762 2,636 1,126 Other income 1,780 1,542 238 5,200 4,366 834 ------ ------ ---- ------- ------- ------ Total $5,797 $5,246 $551 $17,626 $15,538 $2,088 ====== ====== ==== ======= ======= ======
The increase in other service income for both periods was primarily due to fee income earned from the origination and sale in the secondary market of fixed-rate residential mortgage loans. -16- 17 The increase in the subcategory other income for both periods was primarily due to increases in fees from usage of automatic teller machines and fee income from official check sales. Security Gains - -------------- Investment security gains were $97,000 for the nine months ended September 30, 1998 compared to a $7,000 loss for the same period in 1997. Securities sold for gains in 1998, were due to mature later in 1998 and the proceeds from the sales were used to purchase mortgage-backed securities with an average life of approximately 4.5 years. At September 30, 1998, the net unrealized holding gain on available-for-sale securities was $10.2 million compared to a net unrealized gain of $7.0 million at December 31, 1997. The average maturity of the investment portfolio was approximately 3.5 years at September 30, 1998 and December 31, 1997. Other Expense - ------------- Total other expense increased by $519,000 or 3.5% to $15.4 million for the three months ended September 30, 1998 and increased by $70,000 or .2% to $46.0 million for the nine months ended September 30, 1998 compared to the same periods in 1997. Salaries and employee benefits expense increased by $471,000 or 6.3% to $7.95 million for the quarter ended September 30, 1998 and increased by $704,000 or 3.1% to $23.57 million for the nine months ended September 30, 1998 compared to the same periods in 1997. Full time equivalent employees increased by 34 or 3.5% to 1,005 at September 30, 1998 compared to 971 at September 30, 1997. The increase of 6.3% in salaries and employee benefits expense for the third quarter of 1998 was due to the 3.5% increase in full time equivalent employees and normal salary increases. The smaller increase of 3.1% in salaries and employee benefits expense for the nine months ended September 30, 1998 was due to the six months ended June 30, 1997 including $437,000 of expense pertaining to the exercise of stock appreciation rights and stock options by First-Knox employees during May, 1997 after the merger with Park was completed. See Footnote 2 for information about the merger. The subcategory other expense which includes data processing expense, fees and service charges, supplies, marketing, telephone, postage, deposit insurance premiums, amortization of intangibles and expenses pertaining to other real estate owned, decreased by $25,000 or .4% for the quarter ended September 30, 1998 and decreased by $913,000 or 5.1% for the nine months ended September 30, 1998 compared to the same periods in 1997. Park has achieved some expense savings in 1998 from the elimination of First-Knox's separate data processing system and from the consolidation of other back office functions. Federal Income Taxes - -------------------- Federal income tax expense increased by $139,000 to $4.80 million and by $1.40 million to $14.38 million for the three and nine month periods ended September 30, 1998, respectively, compared to the same periods in 1997. The ratio of federal income tax expense to income before taxes was approximately 31% for both periods in 1998 and 1997. -17- 18 Net Income - ---------- Net income increased by $382,000 or 3.7% to $10.77 million for the three months ended September 30, 1998 compared to $10.38 million for the same period in 1997. For the nine months ended September 30, 1998, net income increased by $3.4 million or 11.7% to $32.30 million compared to $28.93 million for the same period in 1997. The annualized, net income to average assets ratio (ROA) was 1.81% and 1.87%, respectively, for the three and nine month periods ended September 30, 1998 compared to 1.85% and 1.75%, respectively, for the same periods in 1997. The annualized, net income to average equity ratios (ROE) was 18.87% and 19.31%, respectively, for the three and nine month periods ended September 30, 1998 compared to 19.46% and 19.04%, respectively, for the same periods in 1997. COMPARISON OF FINANCIAL CONDITION FOR SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 Changes in Financial Condition and Liquidity - -------------------------------------------- Total assets increased by $98 million or 4.3% to $2,386 million at September 30, 1998 compared to $2,288 million at December 31, 1997. Investment securities increased by $62 million to $603 million and loan balances increased by $34 million to $1,626 million. The small increase in loan balances was due to the strong demand for fixed-rate mortgage loans which when originated, are sold in the secondary market. Some of the fixed-rate mortgage loan originations were refinances of adjustable-rate mortgage loan balances. Total liabilities increased by $85 million or 4.1% to $2,152 million at September 30, 1998 compared to $2,066 million at December 31, 1997. Total deposits increased by $17 million to $1,872 million and total borrowed money increased by $73 million to $256 million. During the first nine months of 1998, $17 million of long-term debt was repaid and replaced with lower rate short-term debt. Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as the operating cash needs of the Corporation, are met. Funds are available from a number of sources, including the securities portfolio, the core deposit base, Federal Home Loan Bank borrowings, and the capability to securitize or package loans for sale. The Corporation's loan to asset ratio was 68.1% at September 30, 1998 compared to 69.6% at December 31, 1997 and 69.1% at September 30, 1997. Cash and cash equivalents totaled $90 million at September 30, 1998 compared to $94 million at December 31, 1997 and September 30, 1997. The present funding sources provide more than adequate liquidity for the Corporation to meet its cash flow needs. Capital Resources - ----------------- Stockholders' equity at September 30, 1998 was $234.9 million or 9.84% of total assets -18- 19 compared to $222.1 million or 9.71% of total assets at December 31, 1997 and $217.3 million or 9.61% of total assets at September 30, 1997. Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts, and bank holding companies. The net unrealized gain or loss on available-for-sale securities is generally not included in computing regulatory capital. The minimum leverage capital ratio (defined as stockholders' equity less intangible assets divided by tangible assets) is 4% and the well capitalized ratio is greater than or equal to 5%. Park's leverage ratio was 9.03% at September 30, 1998 and 8.91% at December 31, 1997. The minimum Tier I risk-based capital ratio (defined as leverage capital divided by risk-adjusted assets) is 4% and the well capitalized ratio is greater than or equal to 6%. Park's Tier I risk-based capital ratio was 13.63% at September 30, 1998 and 13.46% at December 31, 1997. The minimum total risk-based capital ratio (defined as leverage capital plus supplemental capital divided by risk-adjusted assets) is 8% and the well capitalized ratio is greater than or equal to 10%. Park's total risk-based capital ratio was 14.90% at September 30, 1998 and 14.72% at December 31, 1997. The financial institution subsidiaries of Park each met the well capitalized capital ratio guidelines at September 30, 1998. The following table indicates the capital ratios for each subsidiary and Park at September 30, 1998:
TIER I TOTAL LEVERAGE RISK-BASED RISK-BASED -------- ---------- ---------- Park National Bank 7.30% 10.13% 12.68% Richland Trust Company 6.96% 12.38% 13.64% Century National Bank 7.16% 12.28% 13.54% First-Knox National Bank 7.33% 11.14% 12.96% Park National Corporation 9.03% 13.63% 14.90% Minimum Capital Ratio 4.00% 4.00% 8.00% Well Capitalized Ratio 5.00% 6.00% 10.00%
Year 2000 Compliance Issues - --------------------------- In early 1997, Park formed a Year 2000 (Y2K) project team to identify and remediate software systems and computer-related devices that require modification for the Year 2000. A project plan has been developed with goals and target dates. It has been approved by Park's Board of Directors and will be monitored by the Board on a quarterly basis. The Corporation's business units are in various stages of completing this project plan. The project plan follows a five phase approach recommended by regulators and others: awareness, assessment, renovation, validation, and implementation. Park's State of Readiness - ------------------------- With regard to information technology (IT) systems, Park uses off-the-shelf banking software packages to satisfy most internal and customer requirements. These software packages are purchased without source code, which prevents Park from making program modifications. All software and hardware vendors have been asked and indicated their products' Y2K readiness. In the majority of cases, the vendor has indicated its software or hardware is Y2K compliant. This -19- 20 requires testing by Park to confirm the state of readiness for all mission-critical systems. In those cases when the software or hardware is not Y2K compliant, an upgrade or another vendor's replacement software will be purchased, tested for Y2K compliance and installed. Testing and replacement of all internal software and hardware systems should be completed by December 31, 1998. Testing and replacement of out-sourced systems will be completed by March 31, 1999. For non-IT systems vendor inquiries and tests have been completed. The age and complexity of Park's buildings and equipment are such that microcontrollers are generally not present. Upgrades of selected Automated Teller Machines (ATMs) and selected building security systems have been ordered and will be installed and tested by December 31, 1998. Y2K readiness inquiries of Park's major borrowers, funds providers and third party suppliers of products and services are being performed. This is particularly challenging considering the number and complexity of such entities. The Y2K readiness inquiries of these entities to date have not indicated significant concern. Costs to Address Park's Year 2000 Issues - ---------------------------------------- The Corporation has incurred expenses throughout 1998 related to this project and will continue to incur expenses over the next two years. These expenses are not expected to materially impact operating results in any one period, with a significant portion of these expenses represented by existing staff that has been redeployed to this project. Estimates are that incremental expenses in each of 1998, 1999 and 2000 for remediation will be $500,000 and for redeployed staff $1,000,000. Incremental expenses thru September 30, 1998 are approximately $185,000 and redeployment expenses are approximately $400,000 through September 30, 1998. Risks of the Company's Year 2000 Issues - --------------------------------------- Park cannot determine the consequences of Y2K problems, if any, on its results of operations, liquidity and financial condition. While management is executing steps to assure compliance with systems over which it has control, it cannot be assured that third parties upon which Park relies will not have business interruptions due to Y2K problems. The Corporation and its banking affiliates are regulated by both state and federal bank regulatory agencies. These agencies have issued numerous directives with respect to the Year 2000 issue, with which Park is acting to comply. Additionally, these regulatory agencies make on-site examinations to determine Y2K readiness. Park's Contingency Plan - ----------------------- Park currently has a business resumption contingency plan for the IT function. The plan is being modified to address Y2K risks. Additionally, other non-IT business functions are being included in the business resumption plan. The modification of this plan will be completed by March 31, 1999. Safe Harbor Statement Under the Private Securities Litigation Report Act of 1995 - -------------------------------------------------------------------------------- This Management's Discussion and Analysis of Financial Condition and Results of Operations, including the discussion under "Year 2000 Compliance Issues," contains forward-looking statements within the meaning of federal securities laws. Actual results are subject to risks and uncertainties, including those specific to the Company and those specific to the industry which -20- 21 could cause results to differ materially from those contemplated. The risks and uncertainties include, but are not limited to third-party or Company failures to achieve timely, effective remediation of Year 2000 issues, general economic conditions, actions of competitors, regulatory actions, changes in legislation and technology changes. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date of this Form 10-Q. The Company does not undertake any obligation to publicly update any forward-looking statement. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK See Footnote 1 for disclosure that Park does not have any off-balance sheet derivative financial instruments. -21- 22 PARK NATIONAL CORPORATION PART II - OTHER INFORMATION Item 1. Legal Proceedings ----------------- Park National Corporation is not engaged in any legal proceedings of a material nature at the present time. Item 2. Changes in Securities and Use of Proceeds ----------------------------------------- Not applicable Item 3. Defaults Upon Senior Securities ------------------------------- Not applicable Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- As discussed in the Company's Proxy Statement for the 1998 Annual Meeting of Shareholders, any qualified shareholder of the Company who intends to submit a proposal to the Company at the 1999 Annual Meeting of Shareholders (the "1999 Annual Meeting") must submit such proposal to the Company not later than November 9, 1998 to be considered for inclusion in the Company's Proxy Statement and form of Proxy (the "Proxy Materials") relating to that meeting. If a shareholder intends to present a proposal at the 1999 Annual Meeting of Shareholders, but has not sought the inclusion of such proposal in the Company's Proxy Materials, such proposal must be received by the Company prior to January 23, 1999 or the Company's management proxies for the 1999 Annual Meeting will be entitled to use their discretionary voting authority should such proposal then be raised, without any discussion of the matter in the Company's Proxy Materials. Item 5. Other Information ----------------- Not applicable Item 6. Exhibits and Reports on Form 8-K -------------------------------- a. Exhibits -------- See Exhibit 27, Financial Data Schedule on Page 24 b. Reports on Form 8-K ------------------- No reports on Form 8-K were filed during the quarter ended September 30, 1998. -22- 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PARK NATIONAL CORPORATION DATE: November 6, 1998 BY: /s/C. Daniel DeLawder ---------------- ---------------------- C. Daniel DeLawder President DATE: November 6, 1998 BY: /s/John W. Kozak ---------------- ----------------------- John W. Kozak Chief Financial Officer -23- EX-27 2 EXHIBIT 27
9 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 89,694 0 0 0 595,808 6,764 7,062 1,626,040 38,138 2,386,470 1,872,250 241,620 23,424 14,314 0 0 68,396 166,466 2,386,470 110,464 28,341 144 138,949 51,566 58,928 80,021 5,022 97 46,041 46,681 32,298 0 0 32,298 3.45 3.44 5.06 2,655 2,993 576 0 35,595 4,945 2,446 38,138 38,138 0 0
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