-----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, U3iLkc3IBtGLil9MLNCLhaFytnJR4UWRyCOxeN/+8QdD8/Ru6AQpZ/2IBSDdVcJR fYcCLw2yMdVyY65ap7pgiA== 0000950152-99-008765.txt : 19991110 0000950152-99-008765.hdr.sgml : 19991110 ACCESSION NUMBER: 0000950152-99-008765 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991109 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: 99744368 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 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ________________________ Commission File Number 1-13006 ------- Park National Corporation ------------------------------------------------------ (Exact name of registrant as specified in its charter) Ohio 31-1179518 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 50 North Third Street, Newark, Ohio 43055 --------------------------------------------------- (Address of principal executive offices) (Zip Code) (740) 349-8451 ---------------------------------------------------- (Registrant's telephone number, including area code) N/A ------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- 9,270,434 common shares, no par value per share, outstanding at October 31, 1999. Page 1 of 25 Exhibit Index at Page 23 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, 1999 and December 31, 1998 (unaudited) 3 Consolidated Condensed Statements of Income for the Three Months and Nine Months ended September 30, 1999 and 1998 (unaudited) 4,5 Consolidated Condensed Statements of Changes in Stockholders' Equity for the Nine Months ended September 30, 1999 and 1998 (unaudited) 6 Consolidated Statements of Cash Flows for the Nine Months ended September 30, 1999 and 1998 (unaudited) 7,8 Notes to Consolidated Financial Statements 9-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-22 Item 3. Quantitative and Qualitative Disclosure About Market Risk 22 PART II. OTHER INFORMATION 23 Item 1. Legal Proceedings 23 Item 2. Changes in Securities and Use of Proceeds 23 Item 3. Defaults Upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 23 Item 6. Exhibits and Reports on Form 8-K 23 SIGNATURES 24 EXHIBIT 27 25
-2- 3 PARK NATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED) (dollars in thousands, except per share data)
September 30, December 31, 1999 1998 ------------- ------------ Assets: Cash and due from banks $ 93,127 $ 100,291 Securities available-for-sale, at fair value (amortized cost of $641,178 and $634,809 at September 30, 1999 and December 31, 1998) 634,857 646,403 Securities held-to-maturity, at amortized cost (fair value approximates $5,605 and $6,347 at September 30, 1999 and December 31, 1998) 5,441 6,064 Loans (net of unearned interest) 1,790,472 1,641,512 Allowance for possible loan losses 40,697 37,989 Net loans 1,749,775 1,603,523 Bank premises and equipment, net 26,593 26,755 Other assets 88,806 77,743 Total assets $2,598,599 $2,460,779 Liabilities and Stockholders' Equity: Deposits: Noninterest bearing $ 269,260 $ 285,574 Interest bearing 1,709,196 1,654,204 Total deposits 1,978,456 1,939,778 Short-term borrowings 358,385 246,659 Long-term debt 76 8,430 Other liabilities 22,937 30,222 Total liabilities 2,359,854 2,225,089 Stockholders' Equity: Common stock (No par value; 20,000,000 shares authorized; 9,554,028 shares issued in 1999 and 9,553,407 issued in 1998) 68,433 68,398 Retained earnings 195,721 177,050 Treasury stock (282,294 shares in 1999 and 245,491 shares in 1998) (21,300) (17,294) Accumulated other comprehensive income, net of taxes (4,109) 7,536 Total stockholders' equity 238,745 235,690 Total liabilities and stockholders' equity $2,598,599 $2,460,779
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 Ended Nine Months Ended September 30, September 30, ----------------------------------------- 1999 1998 1999 1998 ------- ------- -------- -------- Interest income: Interest and fees on loans $38,025 $37,155 $110,709 $110,464 Interest on: Obligations of U.S. Government, its agencies and other securities 8,984 8,517 26,746 24,849 Obligations of states and political subdivisions 1,316 1,252 3,982 3,492 Other interest income 4 15 17 144 Total interest income 48,329 46,939 141,454 138,949 Interest expense: Interest on deposits: Demand and savings deposits 3,190 4,030 9,654 12,234 Time deposits 12,274 13,264 36,465 39,332 Interest on borrowings: Short-term borrowings 3,762 2,588 9,475 6,648 Long-term debt 0 207 120 714 Total interest expense 19,226 20,089 55,714 58,928 Net interest income 29,103 26,850 85,740 80,021 Provision for loan losses 1,555 1,674 5,109 5,022 Net interest income after provision for loan losses 27,548 25,176 80,631 74,999 Other income 6,491 5,797 19,443 17,626 Gain/(loss) on sale of securities (707) 0 (962) 97
Continued 4 5 PARK NATIONAL CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED) (CONTINUED) (dollars in thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Other expense: Salaries and employee benefits $ 8,563 $ 7,948 $ 25,398 $ 23,568 Occupancy expense 902 827 2,733 2,540 Furniture and equipment expense 952 984 2,926 2,918 Other expense 6,228 5,653 17,972 17,015 Total other expense 16,645 15,412 49,029 46,041 Income before federal income taxes 16,687 15,561 50,083 46,681 Federal income taxes 4,887 4,795 14,682 14,383 Net income $ 11,800 $ 10,766 $ 35,401 $ 32,298 PER SHARE: Net income: Basic $ 1.27 $ 1.15 $ 3.81 $ 3.45 Diluted $ 1.27 $ 1.15 $ 3.80 $ 3.44 Weighted average Basic 9,279,290 9,316,955 9,294,647 9,352,184 Diluted 9,314,296 9,366,363 9,329,115 9,398,729 Cash dividends declared $ 0.60 $ 0.48 $ 1.80 $ 1.44
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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 Treasury Other Common Retained Stock Comprehensive Comprehensive Stock Earnings at Cost Income Income - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 $68,275 $154,535 $ (7,712) $ 7,019 Net Income 32,298 $ 32,298 Net unrealized losses 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) Shares issued for stock options - 1,613 shares 121 Treasury stock purchased - 115,583 shares (10,969) Treasury stock reissued for stock options - 27,669 shares 1,538 BALANCE AT SEPTEMBER 30, 1998 $68,396 $173,361 $(17,143) $ 10,248 ================================================================================================================ BALANCE AT DECEMBER 31, 1998 $68,398 $177,050 $(17,294) $ 7,536 Net Income $ 35,401 $ 35,401 Net unrealized losses on securities available-for-sale net of income taxes of ($6,270) (11,645) (11,645) Total comprehensive income $ 23,756 ======== Cash dividends on common stock: Park at $1.80 per share (16,730) Shares issued for stock options - 621 shares 35 Treasury stock purchased - 48,221 shares (4,645) Treasury stock reissued for stock options - 11,418 shares 639 BALANCE AT SEPTEMBER 30, 1999 $68,433 $195,721 $(21,300) $ (4,109) ================================================================================================================ THREE MONTHS ENDED SEPTEMBER 30, 1999 1998 - -------------------------------- ------- -------- Net Income $11,800 $ 10,766 Accumulated other comprehensive income, net of income taxes of ($17) in 1999 and ($2,094) in 1998 (31) 3,889 Total comprehensive income $11,769 $ 14,655 ======= ========
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, ------------------------ 1999 1998 --------- --------- Operating activities: Net income $ 35,401 $ 32,298 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion 1,617 1,115 Provision for loan losses 5,109 5,022 Amortization of the excess of cost over net assets of banks purchased 1,726 2,090 Realized investment security loss (gain) 962 (97) Changes in assets and liabilities: Increase in other assets (6,519) (12,781) Decrease in other liabilities (1,700) (875) Net cash provided from operating activities 36,596 26,772 Investing activities: Proceeds from sales of: Available-for-sale securities 56,563 51,839 Proceeds from maturity of: Available-for-sale securities 154,627 94,043 Held-to-maturity securities 622 1,045 Purchases of: Available-for-sale securities (218,180) (202,610) Net increase in loans (150,676) (36,025) Purchases of premises and equipment, net (2,480) (2,389) Net cash used by investing activities (159,524) (94,097)
Continued 7 8 PARK NATIONAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (CONTINUED) (dollars in thousands)
Nine Months Ended September 30, ---------------------- 1999 1998 --------- -------- Financing activities: Net increase in deposits $ 38,678 $ 17,286 Net increase in short-term borrowings 111,726 89,996 Exercise of stock options 35 121 Purchase of treasury stock, net (4,006) (9,431) Repayment of long-term debt (8,354) (16,554) Cash dividends paid (22,315) (17,984) Net cash provided from financing activities 115,764 63,434 Increase/(decrease) in cash and cash equivalents (7,164) (3,891) Cash and cash equivalents at beginning of year 100,291 93,585 Cash and cash equivalents at end of period $ 93,127 $ 89,694 Supplemental disclosures of cash flow information: Cash paid for: Interest $ 55,975 $ 58,488 Income taxes $ 13,450 $ 15,350
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, 1999 and 1998. 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, 1999 are not necessarily indicative of the operating results to be anticipated for the fiscal year ended December 31, 1999. 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, 1998. Certain amounts in 1998 have been reclassified to conform to the financial statement presentation used for 1999. Park does not have any off-balance sheet derivative financial instruments such as interest-rate swap agreements. Note 2 - 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 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, 1999 1998 1999 1998 - ----------------------------------------- ------- ------- ------- ------- Beginning of Period $40,763 $38,279 $37,989 $35,595 Provision for loan losses 1,555 1,674 5,109 5,022 Losses charged to the reserve (2,095) (2,284) (5,027) (4,945) Recoveries 474 469 2,626 2,466 End of Period $40,697 $38,138 $40,697 $38,138 - -------------------------------------------------------------------------------------------
-9- 10 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, 1999 and 1998.
- ----------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) - ----------------------------------------------------------------------------------------------------- Three Months Ended Sept. 30, Nine Months Ended Sept. 30, 1999 1998 1999 1998 ----------- ---------- ---------- ---------- Numerator: Net Income $ 11,800 $ 10,766 $ 35,401 $ 32,298 Denominator: Denominator for basic earnings per 9,279,290 9,316,955 9,294,647 9,352,184 share-weighted-average shares Effect of dilutive securities 35,006 49,408 34,468 46,545 Denominator for diluted earnings per share-adjusted weighted-average shares & assumed conversions 9,314,296 9,366,363 9,329,115 9,398,729 Earnings per share: Basic earnings per share $ 1.27 $ 1.15 $ 3.81 $ 3.45 Diluted earnings per share $ 1.27 $ 1.15 $ 3.80 $ 3.44
Note 4 - Segment Information ------------------- The Corporation is a multi-bank holding company headquartered in Newark, Ohio. The operating segments for the Corporation are its banking subsidiaries and their respective divisions. The Corporation's banking subsidiaries are The Park National Bank (PNB), The Richland Trust Company (RTC), Century National Bank (CNB), and The First-Knox National Bank of Mount Vernon (FKNB). PNB operates through two banking divisions with the Park National Division (PND) headquartered in Newark, Ohio and the Fairfield National Division (FND) headquartered in Lancaster, Ohio. FKNB also operates through two banking divisions with the First-Knox National Division (FKND) headquartered in Mount Vernon, Ohio and the Farmers and Savings Division (FSD) headquartered in Loudonville, Ohio. Information about reportable segments follows: -10- 11 OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPT. 30, 1999 (IN THOUSANDS)
PND FND RTC CNB FKND FSD All Other Total ------- ------ ------ ------ ------ ---- --------- ------- Net $10,371 $3,197 $4,379 $4,220 $5,839 $812 $285 $29,103 Interest Income Provision 735 150 225 120 279 36 10 1,555 for Loan Losses Other 3,236 274 626 456 1,049 81 62 5,784 Income Other 5,921 2,064 2,502 2,296 3,098 391 373 16,645 Expense Net Income $ 4,857 $ 861 $1,508 $1,564 $2,471 $329 $210 $11,800
OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPT. 30, 1998 (IN THOUSANDS)
PND FND RTC CNB FKND FSD All Other Total ------ ------ ------ ------ ------ ---- --------- ------- Net $9,926 $2,927 $3,985 $3,880 $5,213 $687 $232 $26,850 Interest Income Provision 720 150 375 120 279 30 -- 1,674 for Loan Losses Other 2,862 579 643 721 926 66 -- 5,797 Income Other 5,308 1,715 2,459 2,147 3,130 394 259 15,412 Expense Net Income $4,617 $1,104 $1,196 $1,593 $1,962 $236 $ 58 $10,766
OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPT. 30, 1999 (IN THOUSANDS)
PND FND RTC CNB FKND FSD All Other Total -------- -------- -------- -------- -------- ------- --------- ---------- Net $ 30,624 $ 9,394 $ 13,100 $ 12,317 $ 17,173 $ 2,358 $ 774 $ 85,740 Interest Income Provision 2,205 450 574 460 1,087 283 50 5,109 for Loan Losses Other 9,542 1,357 1,868 1,950 3,312 271 181 18,481 Income Other 17,410 5,844 7,687 6,697 9,029 1,221 1,141 49,029 Expense Net Income $ 14,307 $ 3,031 $ 4,442 $ 4,902 $ 7,317 $ 810 $ 592 $ 35,401 Balances at September 30, 1999: Assets $917,735 $281,273 $431,672 $395,317 $532,663 $61,329 $(21,390) $2,598,599
-11- 12 OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPT. 30, 1998 (IN THOUSANDS)
PND FND RTC CNB FKND FSD All Other Total -------- -------- -------- -------- -------- ------- --------- ---------- Net $ 29,560 $ 8,610 $ 12,014 $ 11,499 $ 15,554 $ 2,092 $ 692 $ 80,021 Interest Income Provision 2,160 450 1,125 360 837 90 -- 5,022 for Loan Losses Other 8,649 1,726 2,064 2,296 2,788 200 -- 17,723 Income Other 15,736 5,166 7,382 6,400 9,308 1,166 883 46,041 Expense Net Income $ 13,898 $ 3,186 $ 3,696 $ 4,773 $ 5,900 $ 742 $ 103 $ 32,298 Balances at September 30, 1998: Assets $844,907 $265,788 $419,076 $360,785 $485,653 $60,109 $(49,848) $2,386,470
The operating results for the Parent Company and Guardian Finance Company, which began operating in May, 1999, are included in the category "all other" to reconcile the segment totals to the consolidated income statements for all periods. The reconciling amounts for consolidated total assets as of September 30, 1999 and 1998 consist of the elimination of intersegment borrowings and the Parent Company and Guardian Finance Company assets which are not eliminated. -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, 1999 and 1998 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 $2.3 million or 8.4% to $29.10 million for the three months ended September 30, 1999 compared to $26.85 million for the third quarter of 1998. 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 1999 with the same quarter in 1998. THREE MONTHS ENDED SEPTEMBER 30, (IN THOUSANDS)
1999 1998 ------------------------- ---------------------- Average Tax Average Tax Balance Equivalent Balance Equivalent % % ---------- ---------- ---------- ---------- LOANS $1,738,400 8.73% $1,605,354 9.21% TAXABLE INVESTMENTS 549,115 6.50% 494,290 6.85% TAX EXEMPT INVESTMENTS 102,286 7.22% 97,450 7.15% FEDERAL FUNDS SOLD 204 5.27% 848 5.51% INTEREST EARNING ASSETS $2,390,005 8.15% $2,197,942 8.58% INTEREST BEARING DEPOSITS $1,692,159 3.63% $1,619,529 4.24% SHORT-TERM BORROWINGS 319,236 4.68% 209,399 4.90% LONG-TERM DEBT 76 1.98% 14,410 5.70% INTEREST BEARING LIABILITIES $2,011,471 3.79% $1,843,338 4.32% EXCESS INTEREST EARNING ASSETS $ 378,534 4.36% 354,604 4.26% NET INTEREST MARGIN 4.96% 4.96%
Average interest earning assets increased by $192 million or 8.7% to $2,390 million for the quarter ended September 30, 1999 compared to the same quarter in 1998. Average loan totals increased by $133 million or 8.3% to $1,738 million for the third quarter of 1999 compared to the third quarter in 1998. The demand for commercial, commercial real estate, and consumer loans and leases secured by automobiles has continued to be relatively strong and accounts for the growth in average loan balances for the third quarter of 1999 compared to the same period in 1998. The average yield on the loan portfolio was 8.73% for the third quarter of 1999 compared to 9.21% for the same period in 1998. The average prime lending rate for Park's affiliate banks was 8.10% for the third quarter of 1999 compared to 8.50% for the same period in 1998. -13- 14 Park lowered its prime lending rate by .75% during the fourth quarter of 1998 and increased it by .50% during the third quarter of 1999. These changes in the prime lending rate matched changes by the Federal Reserve in the federal funds rate. The increase in market interest rates during the third quarter of 1999 is expected to increase the average yield on the loan portfolio for the fourth quarter of 1999. Average investment securities including federal funds sold increased by $59 million or 10.0% to $652 million for the third quarter of 1999 compared to the same quarter in 1998. The increase in average investment securities resulted primarily from the purchase of mortgage-backed securities and premium callable agency securities with an average life of approximately four years. The yield on taxable investment securities decreased to 6.50% in 1999 compared to 6.84% in 1998. Long-term interest rates decreased over the last quarter of 1998 and the first quarter of 1999 and as a result, purchases of investment securities generally yielded less than the average yield of the portfolio. The average life of the investment portfolio was approximately 5.1 years at September 30, 1999 and 3.4 years at September 30, 1998. Long-term interest rates have increased the past two quarters and as a result the expected average life of most of the callable agency securities has extended from their call date to their maturity date. This extension has added about 1.5 years to the expected average life of the investment portfolio. Average interest bearing liabilities increased by $168 million or 9.1% to $2,011 million for the quarter ended September 30, 1999 compared to the same quarter in 1998. Average interest bearing deposits increased by $73 million or 4.5% to $1,692 million for the third quarter of 1999 compared to the same period in 1998. Average short-term borrowings increased by $110 million or 52.5% to $319 million and average long-term debt decreased by $14 million to $76,000 for the third quarter of 1999 compared to the same period in 1998. The increase in short-term borrowings was used to help fund the increase in interest earning assets and for the repayment of long-term debt. Higher rate long-term debt was repaid from lower rate short-term borrowings. The average cost of interest bearing liabilities decreased by .53% to 3.79% in 1999 compared to 4.32% in 1998. The average cost of interest bearing deposits decreased by .61% to 3.63% in 1999 compared to 4.24% in 1998 and the average cost of short-term borrowings decreased by .22% to 4.68% in 1999 compared to 4.90% in 1998. The decrease in the cost of interest bearing liabilities in 1999 compared to 1998 is due to the .75% decrease in short-term market interest rates in the fourth quarter of 1998. The .50% increase in short-term market interest rates during the third quarter of 1999 will increase the average cost of interest bearing liabilities for the fourth quarter of 1999. The increase in net interest income of $2.3 million or 8.4% to $29.10 million for the quarter ended September 30, 1999 was due to both increases in the net interest spread and interest earning assets. The net interest spread (the difference between the yield on interest earning assets and the cost of interest bearing liabilities) improved by .10% to 4.36% in 1999 compared to 4.26% in 1998. Average interest earning assets increased by $192 million or 8.7% in 1999 compared to 1998 and excess interest earning assets increased by $24 million or 6.8% in 1999 compared to 1998. The tax equivalent net interest margin (defined as net interest income divided by average interest earning assets) was unchanged at 4.96% for the third quarter of 1999 and 1998. -14- 15 Net interest income increased by $5.7 million or 7.2% to $85.7 million for the nine months ended September 30, 1999 compared to $80.0 million for the same period in 1998. 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 1999 with the same period in 1998. NINE MONTHS ENDED SEPTEMBER 30, (IN THOUSANDS)
1999 1998 ---------------------- ------------------------ Average Tax Average Tax Balance Equivalent Balance Equivalent % % ---------- ---------- ---------- ---------- LOANS $1,683,086 8.84% $1,591,691 9.31% TAXABLE INVESTMENTS 541,636 6.60% 476,273 6.98% TAX EXEMPT INVESTMENTS 103,634 7.28% 89,144 7.35% FEDERAL FUNDS SOLD 371 5.60% 3,324 5.63% INTEREST EARNING ASSETS $2,328,727 8.25% $2,160,432 8.71% INTEREST BEARING DEPOSITS $1,668,071 3.70% $1,613,036 4.27% SHORT-TERM BORROWINGS 284,925 4.47% 182,268 4.88% LONG-TERM BORROWINGS 1,651 6.28% 16,493 5.79% INTEREST BEARING LIABILITIES $1,954,647 3.81% $1,811,797 4.35% EXCESS INTEREST EARNING ASSETS $374,080 4.44% $348,635 4.36% NET INTEREST MARGIN 5.05% 5.06%
Average interest earning assets increased by $168 million or 7.8% to $2,329 million for the nine months ended September 30, 1999 compared to the same period in 1998. Average loans increased by $91 million or 5.7% to $1,683 million for the first nine months of 1999 compared to the same period in 1998. Loan demand continues to be relatively strong for commercial, commercial real estate, and consumer loans and leases secured by automobiles. The yield on loans was 8.84% for the first nine months of 1999 compared to 9.31% for the same period in 1998. Average investment securities including federal funds sold increased by $77 million or 13.5% to $646 million for the first nine months of 1999 compared to the same period in 1998. The yield on taxable investment securities decreased to 6.60% for the first nine months of 1999 compared to 6.98% for the same period in 1998. Average interest bearing liabilities increased by $143 million or 7.9% to $1,955 million for the first nine months of 1999 compared to the same period in 1998. Average interest bearing deposits increased by $55 million or 3.4% to $1,668 million for the first nine months of 1999 compared to the same period in 1998. Average short-term borrowings increased by $103 million or 56.3% to $285 million and average long-term debt decreased by $15 million to $1.7 million for the first nine months of 1999 compared to the same period in 1998. The increase in short-term borrowings was used to fund the increase in interest earning assets and for the repayment of long-term debt. Short-term market interest rates decreased by .75% during the fourth quarter of 1998 and Park was able to decrease the average cost of interest bearing liabilities by .54% to 3.81% for the first nine months of 1999 compared to 4.35% for the same period in 1998. The average cost of -15- 16 interest bearing deposits decreased by .57% to 3.70% and the average cost of short-term borrowings decreased by .41% to 4.47% for the first nine months of 1999 compared to the same period in 1998. The increase in net interest income of $5.7 million or 7.2% to $85.7 million for the first nine months of 1999 was due to both increases in the net interest spread and interest earnings assets. The net interest spread improved by .08% to 4.44% in 1999 compared to 4.36% in 1998. Average interest earning assets increased by $168 million or 7.8% in 1999 compared to 1998 and excess interest earning assets increased by $25 million or 7.3% to $374 million in 1999 compared to 1998. The tax equivalent net interest margin was 5.05% for the first nine months of 1999 compared to 5.06% for the same period in 1998. Provision for Loan Losses - ------------------------- The provision for loan losses decreased by $119,000 to $1.55 million for the three months ended September 30, 1999 and increased by $87,000 to $5.1 million for the nine months ended September 30, 1999 compared to the same periods in 1998. Net charge-offs were $1.6 million and $2.4 million respectively, for the three and nine month periods ended September 30, 1999 compared to $1.8 million and $2.5 million for the same periods in 1998. Nonperforming loans, defined as loans that are 90 days past due, renegotiated loans and nonaccrual loans were $5.1 million or .28% of loans at September 30, 1999 compared to $5.0 million or .30% of loans at December 31, 1998 and $6.3 million or .39% of loans at September 30, 1998. The reserve for loans losses as a percentage of outstanding loans was 2.27% at September 30, 1999 compared to 2.31% at December 31, 1998 and 2.35% at September 30, 1998. See Footnote 2 for a discussion of the factors considered by management in determining the provision for loan losses. Noninterest Income - ------------------ Noninterest income increased by $694,000 or 12.0% to $6.5 million for the three months ended September 30, 1999 and increased by $1.8 million or 10.3% to $19.4 million for the nine months ended September 30, 1999 compared to the same periods in 1998. The following is a summary of the change in noninterest income. SEPTEMBER 30, THREE MONTHS ENDED NINE MONTHS ENDED ------------------------ ------------------------- 1999 1998 Change 1999 1998 Change ------ ------ ------ ------- ------- ------ Fees from fiduciary activities $1,441 $1,202 $ 239 $ 4,075 $ 3,673 $ 402 Service charges on deposit accounts 1,983 1,714 269 5,533 4,991 542 Other service income 1,000 1,100 (100) 3,484 3,762 (278) Other income 2,067 1,781 286 6,351 5,200 1,151 ------ ------ ----- ------- ------- ------ Total $6,491 $5,797 $ 694 $19,443 $17,626 $1,817 ====== ====== ===== ======= ======= ======
-16- 17 The increase in fees from fiduciary activities for both periods was primarily due to an increase in fiduciary accounts. The increase in service charges on deposits for both periods was due to both an increase in our fee schedule and an increase in the number of deposit accounts. The decrease in other service income for both periods was primarily due to a reduction in fee income earned from the origination and sale in the secondary market of fixed-rate residential mortgage loans. With the recent increase in interest rates, this trend is expected to continue for the fourth quarter of 1999. The increase in the subcategory other income for both periods was primarily due to increases in fee income from automatic teller machines and debit cards and from an increase in rental fees from operating leases. Gains (losses) on Sale of Securities - ------------------------------------ Losses from the sale of securities were $707,000 for the three months ended September 30, 1999 and $1.0 million for the nine months ended September 30, 1999 compared to a gain of $97,000 for the first nine months of 1998. Longer term interest rates increased during the second and third quarters of 1999 and as a result the market value of the investment portfolio decreased. The net unrealized holding loss on available-for-sale securities (accumulated other comprehensive income) was $4.1 million at September 30, 1999 compared to a net unrealized gain of $5.5 million at March 31, 1999 and a net unrealized gain of $7.5 million at December 31, 1998. Mortgage-backed securities with an average book yield of 6.00% and an average life of about 4 years were sold at losses, and the proceeds were reinvested in callable U.S. Agency securities and mortgage-backed securities with a yield of 7.00% and an average life of about 4.5 years. Increased losses will be realized from the sale of investment securities during the fourth quarter of 1999 and the proceeds from the sales will be reinvested at higher book yields with a similar average life. Other Expense - ------------- Total other expense increased by $1.2 million or 8.0% to $16.6 million for the quarter ended September 30, 1999 and increased by $3.0 million or 6.5% to $49.0 million for the nine months ended September 30, 1999 compared to the same periods in 1998. Salaries and employee benefits expense increased by $615,000 or 7.7% to $8.6 million for the quarter ended September 30, 1999 and increased by $1.8 million or 7.8% to $25.4 million for the first nine months of 1999 compared to the same periods in 1998. Salaries increased by $529,000 or 7.9% for the quarter ended September 30, 1999 and increased by $1.4 million or 7.0% for the nine months ended September 30, 1999 compared to the same periods in 1998. Full time equivalent employees were 1,041 at September 30, 1999 compared to 1,005 at September 30, 1998. Benefits expense increased by $86,000 or 6.8% for the three months ended September 30, 1999 and increased by $466,000 or 11.6% for the nine months ended September 30, 1999 compared to the same periods in 1998. The increase in benefits expense was primarily due to a 20% increase in medical insurance for employees. The subcategory other expense which includes data processing expense, fees and service charges, supplies, marketing, telephone, postage, deposit insurance premiums, state franchise taxes, and amortization of intangibles increased by $575,000 or 10.2% to $6.2 million for the quarter ended -17- 18 September 30, 1999 and increased by $1.0 million or 5.6% to $18.0 million for the first nine months of 1999 compared to the same periods in 1998. The increase for both periods was due to increases in data processing expense, supplies expense, and other miscellaneous expense. Federal Income Taxes - -------------------- Federal income tax expense was $4.9 million and $14.7 million respectively, for the three and nine month periods ended September 30, 1999 compared to $4.8 million and $14.4 million for the same periods in 1998. The ratio of federal income tax expense to income before taxes was approximately 29% for both the three and nine month periods ended September 30, 1999 compared to approximately 31% for the same periods in 1998. The statutory rate was 35% for both 1999 and 1998. The primary difference between the effective federal income tax rate and the statutory rate is due to tax-exempt interest income and low income housing tax credits, which have both increased in 1999. Net Income - ---------- Net income increased by $1.0 million or 9.6% to $11.8 million for the three months ended September 30, 1999 compared to $10.8 million for the same period in 1998. For the nine months ended September 30, 1999, net income increased by $3.1 million or 9.6% to $35.4 million compared to $32.3 million for the same period in 1998. The annualized, net income to average assets ratio (ROA) was 1.84% for the third quarter of 1999 and 1.90% for the nine month periods ended September 30, 1999 compared to 1.81% for the third quarter of 1998 and 1.87% for the first nine months of 1998. The annualized, net income to average equity ratio (ROE) was 20.33% and 20.16%, respectively, for the three and nine month periods ended September 30, 1999 compared to 18.87% and 19.31% for the same periods in 1998. Diluted earnings per share increased by 10.4% to $1.27 for the third quarter of 1999 compared to $1.15 for the same quarter in 1998 and increased by 10.5% to $3.80 for the first nine months of 1999 compared to $3.44 for the same period in 1998. -18- 19 COMPARISON OF FINANCIAL CONDITION FOR SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 Changes in Financial Condition and Liquidity - -------------------------------------------- Total assets increased by $138 million or 5.6% to $2,599 million at September 30, 1999 compared to $2,461 million at December 31, 1998. Loans increased by $149 million or 9.1% to $1,790 million and investment securities decreased by $12 million or 1.9% to $640 million. The demand for commercial, commercial real estate, and consumer loans secured by automobiles continues to be relatively strong. Total liabilities increased by $135 million or 6.1% to $2,360 million at September 30, 1999 compared to $2,225 million at December 31, 1998. Short-term borrowings increased by $112 million or 45.3% to $358 million and total deposits increased by $39 million or 2.0% to $1,978 million. The increase in short-term borrowings was needed to fund the increase in assets and to repay $8 million of higher rate long-term debt. The increase in deposits was partially due to the purchase of a branch office in Utica, Ohio on September 24, 1999 with approximately $15 million in deposits. 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 68.9% at September 30, 1999 compared to 66.7% at December 31, 1998 and 68.1% at September 30, 1998. Cash and cash equivalents totaled $93 million at September 30, 1999 compared to $100 million at December 31, 1998 and $90 million at September 30, 1998. 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, 1999 was $239 million or 9.19% of total assets compared to $236 million or 9.58% of total assets at December 31, 1998 and $235 million or 9.84% of total assets at September 30, 1998. 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 9.10% at September 30, 1999 and 9.06% at December 31, 1998. 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 13.19% at September 30, 1999 and 13.64% at December 31, 1998. The minimum total risk-based capital -19- 20 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 14.45% at September 30, 1999 and 14.92% at December 31, 1998. The financial institution subsidiaries of Park each met the well capitalized capital ratio guidelines at September 30, 1999. The following table indicates the capital ratios for each subsidiary and Park at September 30, 1999:
TIER I TOTAL LEVERAGE RISK-BASED RISK-BASED -------- ---------- ---------- Park National Bank 7.04% 9.61% 12.03% Richland Trust Company 7.71% 13.63% 14.90% Century National Bank 6.87% 11.67% 12.93% First-Knox National Bank 7.21% 10.15% 11.89% Park National Corporation 9.10% 13.19% 14.45% Minimum Capital Ratio 4.00% 4.00% 8.00% Well Capitalized Ratio 5.00% 6.00% 10.00%
Year 2000 Compliance Issues - --------------------------- Park National Corporation ("Park" or the "Corporation") intends this information to constitute notice under the Year 2000 Information and Readiness Disclosure Act as a "Y2K Readiness Disclosure". In early 1997, Park formed a Year 2000 project team made up of key Corporation Affiliate officers to identify and remediate software systems and computer-related equipment 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 is monitored by the Board on a quarterly basis. The Corporation's project team and business units are in the final stages of completing this plan. The plan follows a five phase approach recommended by bank regulators and others: awareness, assessment, renovation, validation, and implementation. Park's State of Readiness - ------------------------- With regard to information technology ("IT") systems, Park uses standard hardware and off-the-shelf, widely-used banking software packages to satisfy internal and customer needs. The software is purchased without source programming code. As a result, Park runs the software "as is" without program modifications, thereby eliminating the need for a line by line review of custom programming. Testing and selected replacement of mission critical software - identified as 79 software packages by the Year 2000 project team - has been satisfactorily completed. Mission critical processing services provided by vendors -- identified as 10 processing services by the Year 2000 project team - are used to assist Park in serving customers. Testing of all processing services has been satisfactorily completed. -20- 21 For non-IT systems, primarily buildings and banking equipment, microcontrollers or embedded chips are generally not present due to the age and design simplicity of such buildings and equipment. Upgrades of a small number of Automated Teller Machines and building security systems are complete. Non-IT systems are Y2K compliant. Y2K readiness inquiries of Park's major borrowers and major funds providers have been performed. In management's judgment, the result of these inquiries indicates that the risk to the Corporation from Y2K failures related to these entities is low. There can be no guarantee, but management's judgment is that loan losses or liquidity problems attributed to the Y2K issue will not materially impact the Corporation's financial condition or results of operations. Costs to Address Park's Year 2000 Issues - ---------------------------------------- Due to the importance of IT systems to Park's business, management has not deferred critical systems enhancements or conversions to become Y2K ready. The Corporation has incurred expenses throughout 1998 and the nine months of 1999 related to its Y2K project and will continue to incur expenses through 1999. Depreciation expenses related to Y2K fixed asset purchases will continue through 2002. These expenses are not expected to materially impact operating results in any one quarter or year, with a significant portion of these expenses represented by existing staff that have been assigned to this project. Park does not expect its staff redeployments to have a material impact on the Corporation's financial condition or results of operations. Estimates are that Y2K expenses for 1998 and 1999 will be $1,000,000 and for redeployed staff $2,000,000. From January 1, 1998 through September 30, 1999, incremental expenses are approximately $467,000 and redeployment expenses are approximately $1,600,000. Risks of the Corporation's Year 2000 Issues - ------------------------------------------- Park cannot determine the consequences of Y2K problems, if any, on its results of operations, liquidity and financial condition due to its reliance on third parties to facilitate service delivery to the Corporation's customers. These third parties would include utility companies, the federal government, processing service providers and various critical vendors. Park is engaged in discussions with its third parties and has obtained information as to their Y2K readiness state. Park does not, however, have sufficient information at the current time to predict whether they will be Y2K ready. While management has executed steps to assure Y2K compliance with systems over which it has control, it cannot be assured that third parties upon which Park relies for service delivery 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 have made and will continue to make on-site examinations to determine Y2K readiness. Park's Contingency Plan and Event Plan - -------------------------------------- As the testing and remediation work was completed for each of the mission critical software packages, a contingency plan was written in case of an unforeseen Y2K failure. Park has prepared a comprehensive Y2K contingency plan which is designed to identify alternative processing -21- 22 methods and problem resolution procedures. Board of Director approval and testing of the plan is complete. Park has also developed and is executing a year-end event plan to assure banking services will be delivered in a normal manner at year-end and in the new year. 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 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. -22- 23 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 Not applicable 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 25 b. Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 1999. -23- 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PARK NATIONAL CORPORATION DATE: November 5, 1999 BY: /s/ C. Daniel DeLawder ---------------- ---------------------- C. Daniel DeLawder President and CEO DATE: November 5, 1999 BY: /s/John W. Kozak ---------------- ---------------- John W. Kozak Chief Financial Officer -24- EX-27 2 EXHIBIT 27
9 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 93,127 0 0 0 634,857 5,441 5,605 1,790,472 40,697 2,598,599 1,978,456 358,385 22,937 76 0 0 68,433 170,312 2,598,599 110,709 30,728 17 141,454 46,119 55,714 85,740 5,109 (962) 49,029 50,083 35,401 0 0 35,401 3.81 3.80 5.05 1,795 2,565 719 0 37,989 5,027 2,626 40,697 40,697 0 0
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