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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- ------------------------
Commission File Number 1-13006
Park National Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1179518
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
50 North Third Street, Newark, Ohio 43055
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(740) 349-8451
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes X No
13,762,340 Common shares, no par value, outstanding at July 30, 2003.
Page 1 of 26
PARK NATIONAL CORPORATION
CONTENTS
Page
----
PART I. FINANCIAL INFORMATION ........................................................... 3
Item 1. Financial Statements ......................................................... 3-12
Consolidated Condensed Balance Sheets as of June 30, 2003
and December 31, 2002 (unaudited) ............................................ 3
Consolidated Condensed Statements of Income for the
Three Months and Six Months ended June 30, 2003 and 2002 (unaudited) ......... 4,5
Consolidated Condensed Statements of Changes in Stockholders'
Equity for the Six Months ended June 30, 2003 and 2002 (unaudited) ........... 6
Consolidated Condensed Statements of Cash Flows for the Six Months
ended June 30, 2003 and 2002 (unaudited) ..................................... 7-8
Notes to Consolidated Financial Statements ................................... 9-13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ................................................................ 13-23
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................... 24
Item 4. Controls and Procedures ...................................................... 24
PART II. OTHER INFORMATION ............................................................... 25
Item 1. Legal Proceedings ............................................................ 25
Item 2. Changes in Securities and Use of Proceeds .................................... 25
Item 3. Defaults Upon Senior Securities .............................................. 25
Item 4. Submission of Matters to a Vote of Security Holders .......................... 25
Item 5. Other Information ............................................................ 25
Item 6. Exhibits and Reports on Form 8-K ............................................. 25
SIGNATURES ................................................................................ 26
-2-
PARK NATIONAL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(dollars in thousands, except share data)
June 30, December 31,
2003 2002
---- ----
Assets:
Cash and due from banks ........................... $ 222,467 $ 157,088
----------- -----------
Federal funds sold ................................ 70,600 81,700
----------- -----------
Securities purchased under resale agreements ...... 175,000 --
----------- -----------
Interest bearing deposits ......................... 50 50
----------- -----------
Securities available-for-sale, at fair value
(amortized cost of $1,462,463 and $993,317
at June 30, 2003 and December 31, 2002) ......... 1,506,806 1,030,264
----------- -----------
Securities held-to-maturity, at amortized cost
(fair value approximates $216,490 and $360,688
at June 30, 2003 and December 31, 2002) ......... 214,013 352,878
----------- -----------
Loans (net of unearned interest) .................. 2,690,329 2,692,187
----------- -----------
Allowance for possible loan losses ................ 65,525 62,028
----------- -----------
Net loans ................................... 2,624,804 2,630,159
----------- -----------
Bank premises and equipment, net .................. 38,029 38,734
----------- -----------
Bank owned life insurance ......................... 76,343 74,355
----------- -----------
Other assets ...................................... 74,368 81,397
----------- -----------
Total assets ............................ $ 5,002,480 $ 4,446,625
----------- -----------
Liabilities and Stockholders' Equity:
Deposits:
Noninterest bearing ............................. $ 577,819 $ 594,157
----------- -----------
Interest bearing ................................ 2,957,351 2,900,978
----------- -----------
Total deposits .......................... 3,535,170 3,495,135
----------- -----------
Short-term borrowings ............................. 504,694 188,878
----------- -----------
Long-term debt .................................... 360,982 187,226
----------- -----------
Other liabilities ................................. 63,412 66,094
----------- -----------
Total liabilities ....................... 4,464,258 3,937,333
----------- -----------
Stockholders' Equity:
Common stock (No par value; 20,000,000 shares
authorized; 14,542,373 shares issued in 2003
and 14,540,449 issued in 2002) ................ 105,898 105,768
----------- -----------
Retained earnings ............................... 471,743 446,300
----------- -----------
Treasury stock (781,813 shares in 2003
and 748,483 shares in 2002) ................... (68,943) (65,194)
----------- -----------
Accumulated other comprehensive income,
net of taxes .................................. 29,524 22,418
----------- -----------
Total stockholders' equity .............. 538,222 509,292
----------- -----------
Total liabilities and
stockholders' equity .............. $ 5,002,480 $ 4,446,625
----------- -----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
PARK NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
Interest income:
Interest and fees on loans ............. $46,591 $51,506 $ 93,509 $ 104,698
------- ------- --------- ---------
Interest on:
Obligations of U.S. Government,
its agencies and other securities .. 19,450 19,803 39,710 39,554
------- ------- --------- ---------
Obligations of states
and political subdivisions ......... 1,568 1,757 3,173 3,558
------- ------- --------- ---------
Other interest income .................. 362 33 442 163
------- ------- --------- ---------
Total interest income ............ 67,971 73,099 136,834 147,973
------- ------- --------- ---------
Interest expense:
Interest on deposits:
Demand and savings deposits .......... 2,288 3,193 4,640 6,453
------- ------- --------- ---------
Time deposits ........................ 10,541 14,375 21,741 29,534
------- ------- --------- ---------
Interest on borrowings:
Short-term borrowings ................ 702 888 1,188 2,000
------- ------- --------- ---------
Long-term debt ....................... 2,844 2,744 5,464 5,840
------- ------- --------- ---------
Total interest expense ....... 16,375 21,200 33,033 43,827
------- ------- --------- ---------
Net interest income .............. 51,596 51,899 103,801 104,146
------- ------- --------- ---------
Provision for loan losses ................ 2,836 3,644 6,269 8,163
------- ------- --------- ---------
Net interest income after
provision for loan losses . 48,760 48,255 97,532 95,983
------- ------- --------- ---------
Other income ............................. 17,400 11,174 32,855 22,969
------- ------- --------- ---------
Gain (loss) on sale of securities ........ 321 -- (913) (210)
------- ------- --------- ---------
Continued
4
PARK NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(CONTINUED)
(dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
Other expense:
Salaries and employee benefits ........... $ 16,517 $ 15,692 $ 34,053 $ 31,943
----------- ----------- ----------- -----------
Occupancy expense ........................ 1,671 1,489 3,403 3,028
----------- ----------- ----------- -----------
Furniture and equipment expense .......... 1,600 1,477 3,227 3,006
----------- ----------- ----------- -----------
Other expense ............................ 10,702 9,682 19,876 19,579
----------- ----------- ----------- -----------
Total other expense .................... 30,490 28,340 60,559 57,556
----------- ----------- ----------- -----------
Income before federal income taxes . 35,991 31,089 68,915 61,186
----------- ----------- ----------- -----------
Federal income taxes ....................... 10,868 9,117 20,626 17,766
----------- ----------- ----------- -----------
Net income ......................... $ 25,123 $ 21,972 $ 48,289 $ 43,420
=========== =========== =========== ===========
PER SHARE:
Net income:
Basic .................................. $ 1.83 $ 1.58 $ 3.51 $ 3.12
=========== =========== =========== ===========
Diluted ................................ $ 1.81 $ 1.57 $ 3.49 $ 3.11
=========== =========== =========== ===========
Weighted average
Basic .................................. 13,761,117 13,920,111 13,770,973 13,928,226
=========== =========== =========== ===========
Diluted ................................ 13,842,161 13,958,268 13,833,412 13,965,659
=========== =========== =========== ===========
Cash dividends declared .................. $ 0.83 $ 0.76 $ 1.66 $ 1.52
=========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
PARK NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(dollars in thousands, except share data)
Accumulated
SIX MONTHS ENDED JUNE 30, 2003 AND 2002 Treasury Other
Common Retained Stock Comprehensive Comprehensive
Stock Earnings at Cost Income Income
----- -------- ------- ------ ------
BALANCE AT DECEMBER 31, 2001 ..................................... $ 105,771 $403,870 ($50,000) $ 8,705
--------- -------- -------- -------
Net Income ..................................................... 43,420 $43,420
--------- -------- -------- ------- -------
Accumulated other comprehensive income,
net of income taxes of $ 7,095 ............................. 13,177 13,177
--------- -------- -------- ------- -------
Total comprehensive income .................................. $56,597
--------- -------- -------- ------- -------
Cash dividends on common stock:
Park at $1.52 per share ...................................... (21,161)
--------- -------- -------- -------
Cash paid for fractional shares - 18 shares .................... (1)
--------- -------- -------- -------
Treasury stock purchased - 82,181 shares ....................... (7,813)
--------- -------- -------- -------
Treasury stock reissued for stock options - 38,906 shares ...... 2,328
--------- -------- -------- -------
BALANCE AT JUNE 30, 2002 ......................................... $ 105,770 $426,129 ($55,485) $21,882
========= ======== ======== =======
BALANCE AT DECEMBER 31, 2002 ..................................... $ 105,768 $446,300 ($65,194) $22,418
--------- -------- -------- -------
Net Income ..................................................... $ 48,289 $48,289
--------- -------- -------- ------- -------
Accumulated other comprehensive income, net of tax:
Reverse additional minimum liability for pension plan,
net of taxes $860 ........................................ 1,598
--------- -------- -------- -------
Unrealized net holding gain on securities available-for-sale,
net of taxes $2,966 ...................................... 5,508 7,106
--------- -------- -------- ------- -------
Total comprehensive income ................................... $55,395
--------- -------- -------- ------- =======
Cash dividends on common stock:
Park at $1.66 per share ...................................... (22,846)
--------- -------- -------- -------
Shares issued for stock options - 1,924 ...................... 68
--------- -------- -------- -------
Tax benefit from exercise of stock options ................... 62
--------- -------- -------- -------
Treasury stock purchased - 74,467 shares ....................... (7,275)
--------- -------- -------- -------
Treasury stock reissued for stock options - 41,137 shares ...... 3,526
--------- -------- -------- -------
BALANCE AT JUNE 30, 2003 ......................................... $ 105,898 $471,743 $(68,943) $29,524
========= ======== ======== =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
PARK NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Six Months Ended
June 30,
--------
2003 2002
Operating activities:
Net income .................................................... $ 48,289 $ 43,420
----------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Accretion, depreciation and amortization .................... (3,946) (969)
----------- ---------
Provision for loan losses ................................... 6,269 8,163
----------- ---------
Amortization of the excess of cost over
net assets of banks purchased ............................. 1,165 1,950
----------- ---------
Realized investment security losses (gains) ................. 913 210
----------- ---------
Changes in assets and liabilities:
Decrease (increase) in other assets ....................... 1,988 (12,805)
----------- ---------
Increase (decrease) in other liabilities .................. 10,379 (16,911)
----------- ---------
Net cash provided from operating activities ........... 65,057 23,058
----------- ---------
Investing activities:
Proceeds from sales of:
Available-for-sale securities ............................... 149,087 99,673
----------- ---------
Proceeds from maturity of:
Available-for-sale securities ............................... 1,738,644 353,230
----------- ---------
Held-to-maturity securities ................................. 480,521 674
----------- ---------
Purchases of:
Available-for-sale securities .............................. (2,353,293) (454,199)
----------- ---------
Held-to-maturity securities ................................ (341,656) --
----------- ---------
Net increase in securities purchased under resale agreements .. (175,000) --
----------- ---------
Net decrease in loans ........................................ 1,420 87,635
----------- ---------
Purchases of premises and equipment, net ...................... (2,180) (1,888)
----------- ---------
Net cash (used by) provided from investing activities . (502,457) 85,125
----------- ---------
Continued
7
PARK NATIONAL CORPORATION
Consolidated Condensed Statements of Cash Flows (Unaudited)
(CONTINUED)
(dollars in thousands)
Six Months Ended
June 30,
--------
2003 2002
---- ----
Financing activities:
Net increase in deposits .................................. $ 40,035 $ 149,311
--------- ---------
Net increase (decrease) in short-term borrowings .......... 315,816 (90,323)
--------- ---------
Cash paid for fractional shares ........................... -- (1)
--------- ---------
Exercise of stock options ................................. 130 --
--------- ---------
Purchase of treasury stock, net ........................... (3,749) (5,485)
--------- ---------
Long-term debt issued ..................................... 175,000 --
--------- ---------
Repayment of long-term debt ............................... (1,244) (140,084)
--------- ---------
Cash dividends paid ....................................... (34,309) (31,767)
--------- ---------
Net cash provided from (used by) financing activities . 491,679 (118,349)
--------- ---------
Increase (decrease) in cash and cash equivalents ...... 54,279 (10,166)
--------- ---------
Cash and cash equivalents at beginning of year ........ 238,788 169,143
--------- ---------
Cash and cash equivalents at end of period ............ $ 293,067 $ 158,977
========= =========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest .......................................... $ 33,977 $ 45,552
--------- ---------
Income taxes ...................................... $ 16,000 $ 18,350
--------- ---------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8
PARK NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Month Periods Ended June 30, 2003 and 2002.
Note 1 - Basis of Presentation
The consolidated financial statements included in this report have been prepared
by Park National Corporation (the "Registrant", "Corporation", "Company", or
"Park") without audit. In the opinion of management, all adjustments (consisting
solely of normal recurring accruals) necessary for a fair presentation of
results of operations for the interim periods included herein have been made.
The results of operations for the periods ended June 30, 2003 are not
necessarily indicative of the operating results to be anticipated for the fiscal
year ended December 31, 2003.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions for Form 10-Q, and therefore, do not include
all information and footnotes necessary for a fair presentation of the condensed
balance sheets, condensed statements of income, condensed statements of changes
in stockholders' equity and condensed statements of cash flows in conformity
with accounting principles generally accepted in the United States. 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, 2002.
Certain amounts in 2002 have been reclassified to conform to the financial
statement presentation used for 2003.
The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date, but does not include all the information and
footnotes required by accounting principles generally accepted in the United
States.
Park does not have any off-balance sheet derivative financial instruments such
as interest-rate swap agreements.
Note 2 - Intangible Assets
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the standards, goodwill and indefinite lived intangible
assets are no longer amortized and are subject to annual impairment tests. Other
intangible assets, such as core deposit intangibles, continue to be amortized
over their useful lives.
Park had approximately $7.5 million of goodwill included in other assets at June
30, 2003 and December 31, 2002. This goodwill was evaluated for impairment
during the first quarter of each of 2002 and 2003 and a determination made that
the goodwill was not impaired and that the book value of the goodwill would
continue to be shown as $7.5 million. No amortization expense is being recorded
on the goodwill in 2003 and none was recorded in 2002.
-9-
Park also had core deposit intangibles included in other assets of $7.37 million
at June 30, 2003 and $8.54 million at December 31, 2002. The core deposit
intangibles are being amortized to expense, principally on the straight-line
method, over periods ranging from six to eight years. Core deposit amortization
expense was $582,500 for the second quarter of 2003 and $975,000 for the second
quarter of 2002 and was $1,165,000 for the first half of 2003 compared to
$1,950,000 for the first half of 2002.
Note 3 - Allowance for Loan Losses
The allowance for loan losses is that amount believed adequate to absorb
estimated credit losses in the loan portfolio based on management's evaluation
of various factors including overall growth in the loan portfolio, an analysis
of individual loans, prior and current loss experience, and current economic
conditions. A provision for loan losses is charged to operations based on
management's periodic evaluation of these and other pertinent factors.
(In Thousands)
--------------
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
Beginning of Period ............. $64,062 $60,693 $62,028 $59,959
Provision for loan losses ..... 2,836 3,644 6,269 8,163
Losses charged to the reserve . <3,328> <3,501> <6,182> <8,706>
Recoveries .................... 1,955 2,194 3,410 3,614
------- ------- ------- -------
End of Period ................. $65,525 $63,030 $65,525 $63,030
======= ======= ======= =======
-10-
Note 4- Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share for the three and six month periods ended June 30, 2003 and 2002.
(Dollars in thousands, except per share data)
---------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Numerator:
Net Income .................................. $ 25,123 $ 21,972 $ 48,289 $ 43,420
Denominator:
Denominator for basic earnings per share
(weighted-average shares) ................... 13,761,117 13,920,111 13,770,973 13,928,226
Effect of dilutive securities ............... 81,044 38,157 62,439 37,433
Denominator for diluted earnings per share
(adjusted weighted-average shares & assumed
conversions) ................................ 13,842,161 13,958,268 13,833,412 13,965,659
Earnings per share:
Basic earnings per share .................... $ 1.83 $ 1.58 $ 3.51 $ 3.12
Diluted earnings per share .................. $ 1.81 $ 1.57 $ 3.49 $ 3.11
Note 5 - Segment Information
The Corporation is a multi-bank holding company headquartered in Newark, Ohio.
The operating segments for the Corporation are its financial institution
subsidiaries. The Corporation's financial institution subsidiaries are The Park
National Bank (PNB), The Richland Trust Company (RTC), Century National Bank
(CNB), The First-Knox National Bank of Mount Vernon (FKNB), United Bank N.A.
(UB), Second National Bank (SNB), The Security National Bank and Trust Co. (SEC)
and The Citizens National Bank of Urbana (CIT).
Operating Results for the Three Months Ended June 30, 2003 (In Thousands)
-------------------------------------------------------------------------
All
PNB RTC CNB FKNB UB SNB SEC CIT Other Total
--- --- --- ---- -- --- --- --- ----- -----
Net Interest Income ..... $ 15,317 $ 5,469 $ 4,917 $ 7,915 $ 2,274 $ 3,488 $ 8,256 $ 1,739 $ 2,221 $ 51,596
Provision for Loan Losses 1,080 30 225 666 90 150 405 90 100 2,836
Other Income ............ 7,632 1,497 1,729 1,854 729 902 2,746 461 171 17,721
Other Expense ........... 9,246 2,483 2,736 4,053 1,462 1,790 4,716 1,090 2,914 30,490
Net Income .............. $ 8,593 $ 2,930 $ 2,452 $ 3,450 $ 993 $ 1,705 $ 3,978 $ 689 $ 333 $ 25,123
Balances at June 30, 2003
Assets .................. $1,728,360 $528,387 $456,042 $746,119 $231,527 $371,082 $865,449 $173,699 $(98,185) $5,002,480
-11-
Operating Results for the Three Months Ended June 30, 2002 (In Thousands)
-------------------------------------------------------------------------
All
PNB RTC CNB FKNB UB SNB SEC CIT Other Total
--- --- --- ---- -- --- --- --- ----- -----
Net Interest Income ..... $ 15,479 $ 5,702 $ 4,980 $ 7,655 $ 2,229 $ 3,384 $ 8,742 $ 1,717 $ 2,011 $ 51,899
Provision for Loan Losses 1,370 410 240 799 90 150 420 90 75 3,644
Other Income ............ 4,684 874 1,032 1,430 328 284 2,002 438 102 11,174
Other Expense ........... 8,668 2,698 2,608 3,705 1,459 1,778 4,682 1,086 1,656 28,340
Net Income .............. $ 7,080 $ 2,287 $ 2,112 $ 3,161 $ 736 $ 1,255 $ 3,813 $ 674 $ 854 $ 21,972
Balances at June 30, 2002
Assets .................. $1,468,586 $496,064 $443,395 $664,610 $197,440 $322,692 $870,363 $168,914 $(137,622) $4,494,442
Operating Results for the Six Months Ended June 30, 2003 (In Thousands)
-----------------------------------------------------------------------
All
PNB RTC CNB FKNB UB SNB SEC CIT Other Total
--- --- --- ---- -- --- --- --- ----- -----
Net Interest Income ..... $31,130 $11,027 $9,865 $15,751 $4,579 $7,024 $16,709 $3,361 $4,355 $103,801
Provision for Loan Losses 2,460 360 450 1,332 180 300 810 180 197 6,269
Other Income ............ 13,903 2,690 3,174 3,306 1,295 1,486 4,916 851 321 31,942
Other Expense ........... 18,563 5,080 5,600 8,074 2,942 3,662 9,739 2,238 4,661 60,559
Net Income .............. $16,453 $ 5,450 $4,658 $ 6,605 $1,895 $3,183 $ 7,477 $1,219 $1,349 $ 48,289
Operating Results for the Six Months Ended June 30, 2002 (In Thousands)
-----------------------------------------------------------------------
All
PNB RTC CNB FKNB UB SNB SEC CIT Other Total
--- --- --- ---- -- --- --- --- ----- -----
Net Interest Income ..... $31,340 $11,479 $10,085 $14,973 $4,376 $6,881 $17,611 $3,468 $3,933 $104,146
Provision for Loan Losses 2,915 995 480 1,673 180 425 840 505 150 8,163
Other Income ............ 9,876 1,563 2,230 2,925 617 628 3,953 754 213 22,759
Other Expense ........... 17,341 5,503 5,354 7,482 2,943 3,552 9,626 2,195 3,560 57,556
Net Income .............. $14,669 $ 4,320 $ 4,321 $ 6,054 $1,371 $2,544 $ 7,591 $1,051 $1,499 $ 43,420
The operating results of the Parent Company and Guardian Finance Company (GFC)
in the All Other column are used to reconcile the segment totals to the
consolidated income statements for the three and six month periods ended June
30, 2003 and 2002. The reconciling amounts for consolidated total assets at June
30, 2003 and 2002 consist of the elimination of intersegment borrowings, and the
assets of the Parent Company and GFC which are not eliminated.
Note 6 - Stock Option Plan
Park accounts for its incentive stock option plan under the recognition and
measurement principles provided in Accounting Principles Board Opinion No. 25,
"Accounting for Stock issued to Employees" (APB 25) and related interpretations.
Under APB 25, because the exercise price of Park's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
-12-
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation", as amended by SFAS 148, requires pro forma
disclosures of net income and earnings per share for companies not adopting its
fair value accounting method for stock-based employee compensation. The
pro-forma disclosures below use the fair value method of SFAS 123 to measure
compensation expense for stock based employee compensation plans.
(Dollars in thousands, except per share data)
---------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
Net income as reported ........................... $ 25,123 $ 21,972 $ 48,289 $ 43,420
Deduct:
Total stock-based employee compensation expense
determined under fair value method, net of
related tax effects ............................ <1,706> <1,580> <1,812> <1,690>
Pro forma net income ............................. $ 23,417 $ 20,392 $ 46,477 $ 41,730
Basic earnings per share as reported ............. $ 1.83 $ 1.58 $ 3.51 $ 3.12
Pro forma basic earnings per share ............... $ 1.70 $ 1.46 $ 3.37 $ 3.00
Diluted earnings per share as reported ........... $ 1.81 $ 1.57 $ 3.49 $ 3.11
Pro forma diluted earnings per share ............. $ 1.69 $ 1.46 $ 3.36 $ 2.99
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis by management contains forward-looking statements
that are provided to assist in the understanding of anticipated future financial
performance. The forward-looking statements involve significant risks and
uncertainties including changes in general economic and financial market
conditions, Park's ability to execute its business plans, as well as other risks
such as changes in government regulations and policies affecting bank holding
companies. Although Park believes that the expectations reflected in such
forward-looking statements are reasonable, actual results may differ materially.
Undue reliance should not be placed on the forward-looking statements, which
speak only as of the date hereof.
-13-
Critical Accounting Policies
Note 1 of the Notes to Consolidated Financial Statements included in Park's 2002
Annual Report lists significant accounting policies used in the development and
presentation of Park's financial statements. The accounting and reporting
policies of Park conform with accounting principles generally accepted in the
United States and general practices within the financial services industry. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ from those estimates.
Park considers that the determination of the allowance for loan losses involves
a higher degree of judgement and complexity than its other significant
accounting policies. The allowance for loan losses is calculated with the
objective of maintaining a reserve level believed by management to be sufficient
to absorb estimated credit losses in the loan portfolio. Management's
determination of the adequacy of the allowance for loan losses is based on
periodic evaluations of the loan portfolio and of current economic conditions.
However, this evaluation is inherently subjective as it requires material
estimates, including expected default probabilities, loss given default,
expected commitment usage, the amounts and timing of expected future cash flows
on impaired loans, and estimated losses on consumer loans and residential
mortgage loans based on historical loss experience and the current economic
conditions. All of those factors may be susceptible to significant change. To
the extent that actual results differ from management estimates, additional loan
loss provisions may be required that would adversely impact earnings for future
periods.
Comparison of Results of Operations for the Three and Six Month Periods
Ended June 30, 2003 and 2002.
Summary Discussion of Results
Net income increased by $3.15 million or 14.3% to $25.12 million for the three
months ended June 30, 2003 compared to $21.97 million for the same period in
2002. For the first half of 2003, net income increased by $4.9 million or 11.2%
to $48.3 million compared to $43.4 million for the same period in 2002. The
annualized, net income to average asset ratio (ROA) was 2.01% for the second
quarter of 2003 and 1.98% for the first half of 2003, compared to 1.99% for the
second quarter of 2002 and 1.97% for the first six months of 2002. The
annualized, net income to average equity ratio (ROE) was 19.37% for the second
quarter of 2003 and 18.97% for the first half of 2003, compared to 18.32% for
the second quarter of 2002 and 18.40% for the first half of 2002.
Diluted earnings per share increased by 15.3% to $1.81 for the second quarter of
2003 and increased by 12.2% to $3.49 for the first half of 2003.
The increase in net income for both the three and six month periods ended June
30, 2003 was primarily due to the large increase in total Other Income. Total
Other Income increased by $6.2 million or 55.7% to $17.4 million for the three
months ended June 30, 2003 and increased by $9.9 million or 43.0% for the six
months ended June 30, 2003. The large increase for both periods was primarily
due to the increase in fee income earned from the origination and sale of fixed
rate mortgage loans. Long-term interest rates continued to be low throughout the
first six months of 2003, and management was able to reallocate resources so
that mortgage loan customers were able to generally close on their mortgage loan
within thirty days from application to closing. Fixed rate mortgage loans
totaling approximately $500 million were originated and sold during the first
half of 2003, compared to approximately $167 million for the first half of 2002.
-14-
Net Interest Income Comparison for the Second Quarter of 2003 and 2002
Park's principal source of earnings is net interest income, the difference
between total interest income and total interest expense. Net interest income
decreased by $303,000 or .6% to $51.6 million for the three months ended June
30, 2003 compared to $51.9 million for the second quarter of 2002. The following
table compares the average balance and tax equivalent yield/cost for interest
earning assets and interest bearing liabilities for the second quarter of 2003
with the same quarter in 2002.
Three Months Ended June 30,
(In Thousands)
2003 2002
----------------------- ------------------------
Average Tax Average Tax
Balance Equivalent Balance Equivalent
% %
------- ---------- ------- ----------
Loans $2,684,883 6.99% $2,702,648 7.68%
Taxable Investments 1,754,466 4.45% 1,292,480 6.15%
Tax Exempt Investments 128,931 7.28% 145,499 7.09%
Federal Funds Sold and Securities Purchased under Resale
Agreements 124,043 1.15% 4,790 2.21%
---------- ---- ---------- ----
Interest Earning Assets $4,692,323 5.89% $4,145,417 7.18%
Interest Bearing Deposits $2,915,687 1.76% $2,907,553 2.42%
Short-term Borrowings 676,099 .42% 237,240 1.50%
Long-term Debt 334,573 3.41% 256,163 4.30%
---------- ---- ---------- ----
Interest Bearing Liabilities $3,926,359 1.67% $3,400,956 2.50%
Excess Interest Earning Assets $765,964 4.22% $744,461 4.68%
Net Interest Margin 4.49% 5.12%
Average interest earning assets increased by $547 million or 13.2% for the
quarter ended June 30, 2003 compared to the same quarter in 2002. The average
yield on interest earning assets decreased to 5.89% for the second quarter of
2003 compared to 7.18% for the second quarter of 2002.
Average loan totals decreased by $18 million or .7% to $2,685 million for the
quarter ended June 30, 2003 compared to the same quarter in 2002. At June 30,
2003, total loans outstanding were $2,690 million compared to $2,692 million at
December 31, 2002, a decrease of $2 million. During the year 2002, total loans
decreased by $104 million or 3.7%. Total loans also decreased by $160 million or
5.4% for the year 2001. The demand for commercial and commercial real estate
loans has improved during the first half of 2003. The demand for consumer loans
and leases secured by automobiles improved during the second quarter of 2003.
Management expects continued improvement in the demand for commercial and
consumer loans during the second half of 2003.
The demand for fixed rate long-term residential mortgage loans has been strong
for the past several quarters and was especially strong during the first half of
2003. This activity, the origination and sale of fixed rate mortgage loans,
produced a significant increase in fee income during the past few quarters, but
did not increase loan totals since the loans are sold. Many borrowers have taken
advantage of low long-term interest rates to refinance their adjustable rate
mortgage loan into a fixed rate mortgage loan which reduces the loan balances
reported on Park's balance sheet. Residential real estate loans decreased by $32
million or 3.2% during the first half of 2003, compared to a decrease of $76
million or 7.0% for the year 2002 and a decrease of $88 million or 7.6% for the
year 2001.
-15-
During the month of July 2003, long-term interest rates increased sharply and
reduced the demand for fixed rate residential mortgage loans. Mortgage loan
origination volume will still be quite strong during the months of July and
August as borrowers locked in their mortgage rate during June and the first half
of July. If long-term interest rates remain at these higher levels, the demand
for adjustable rate mortgage loans will increase.
The average yield on the loan portfolio was 6.99% for the second quarter of 2003
compared to 7.68% for the same period in 2002. The average prime lending rate
was 4.25% for the second quarter of 2003 compared to 4.75% for the same period
in 2002. Approximately 25% of Park's loan portfolio adjusts with the prime rate
and the prime rate was lowered from 4.25% to 4.00% on June 27, 2003. The yield
on the loan portfolio is expected to decrease next quarter as variable rate
loans reprice lower and new loan originations have an average rate that is lower
than the current loan portfolio rate.
Average investment securities including federal funds sold increased by $564
million or 39.1% to $2,007 million for the second quarter of 2003 compared to
$1,443 million for the same period in 2002. The increase in the investment
portfolio was primarily funded by an increase in short-term borrowings.
The average yield on taxable investment securities decreased to 4.45% for the
second quarter of 2003 compared to 6.15% for the same quarter in 2002. The
average yield on tax exempt investments increased to 7.28% for the second
quarter of 2003 compared to 7.09% for the same period in 2002. No tax exempt
securities were purchased in the past year and the tax exempt securities that
matured yielded less than the average portfolio rate. The average yield on
federal funds sold and securities purchased under resale agreements was 1.15%
for the three months ended June 30, 2003 as the average federal funds rate was
1.23% for the quarter.
During the second quarter of 2003, Park borrowed on average $442 million of
short-term borrowings (dollar-roll repos) at a 0% interest rate and reinvested
the funds in short-term taxable securities and securities purchased under resale
agreements at an average yield of 1.19%. The large investment in short-term
securities reduced the yield on investments and earning assets for the quarter
but contributed approximately $1.3 million to net interest income for the
quarter.
Market conditions have changed in the third quarter, and management expects to
borrow on average about $150 million of short-term borrowings (dollar-roll
repos) during the quarter at an average cost of .25%. The related investment
arbitrage is expected to earn 1.00% and generate approximately $290,000 of net
interest income during the third quarter.
At June 30, 2003, Park's investment portfolio had an average tax equivalent
yield of 4.51% and a weighted average life of 2.8 years. Excluding the
short-term securities that were being used to arbitrage the dollar-roll repos,
the average tax equivalent yield on the investment portfolio was 5.10% and the
average life was 3.0 years. As mentioned previously, long-term interest rates
increased sharply during the month of July 2003. Park may take advantage of the
higher interest rates and sell some investments at a loss during the third
quarter and reinvest in longer maturity securities at a higher interest rate.
This type of transaction would decrease third quarter earnings but increase
future earnings. Management expects that security losses of approximately $4
million could be realized during the second half of 2003.
-16-
Average interest bearing liabilities increased by $525 million or 15.4% to
$3,926 million for the quarter ended June 30, 2003 compared to the same quarter
in 2002. Average interest bearing deposits increased by $8 million or .3% to
$2,916 million for the second quarter of 2003 compared to the second quarter of
2002.
Average short-term borrowings increased by $439 million to $676 million for the
second quarter of 2003 compared to $237 million for the second quarter of 2002.
The large increase was due to the dollar-roll repo borrowings at a weighted
average rate of 0% for the quarter. The borrowings were secured by 5.00% coupon
Government Agency fifteen year mortgage-backed securities.
Average long-term debt was $335 million for the quarter ended June 30, 2003,
compared to $256 million for the same period in 2002. The additional long-term
debt was borrowed from the Federal Home Loan Bank on a variable rate basis.
The average cost of interest bearing liabilities decreased by .83% to 1.67% in
2003 compared to 2.50% in 2002. The average cost of interest bearing deposits
decreased by .66% to 1.76% in 2003 compared to 2.42% in 2002.
The average cost of short-term borrowings decreased by 1.08% to .42% in 2003
compared to 1.50% in 2002 as the average cost of the dollar-roll repos was 0%
for the quarter. The average cost of long-term debt was 3.41% in 2003 and 4.30%
in 2002.
Net interest income decreased by $303,000 to $51.6 million in the second quarter
of 2003 compared to $51.9 million for the same period in 2002. The net interest
spread (the difference between the yield on interest earning assets and the cost
of interest bearing liabilities) decreased by .46% to 4.22% for the second
quarter of 2003 compared to 4.68% in 2002. The tax equivalent net interest
margin (defined as net interest income divided by average interest earning
assets) decreased by .63% to 4.49% in 2003 compared to 5.12% in 2002.
The net interest margin for the quarter was negatively impacted by the
short-term arbitrage involving the dollar-roll repo borrowings. Management
expects that the net interest margin will increase during the third quarter as
the arbitrage involving dollar-roll repo borrowings is expected to be much
smaller.
Net Interest Income Comparison for the First Half of 2003 and 2002
Net interest income decreased by $345,000 or .3% to $103.8 million for the six
months ended June 30, 2003 compared to $104.1 million for the same period in
2002. The following table compares the average balance and tax equivalent
yield/cost for interest earning assets and interest bearing liabilities for the
first six months of 2003 with the same period in 2002.
-17-
Six Months Ended June 30, (In Thousands)
----------------------------------------------------------
2003 2002
------------------------ -----------------------
Average Tax Average Tax
Balance Equivalent Balance Equivalent
% %
------- ---------- ------- ----------
Loans $2,680,318 7.07% $2,724,710 7.79%
Taxable Investments 1,696,630 4.72% 1,269,649 6.28%
Tax Exempt Investments 130,780 7.29% 147,255 7.13%
Federal Funds Sold and Securities Purchased Under Resale
Agreements 73,148 1.22% 17,210 1.89%
Interest Earning Assets $4,580,876 6.11% $4,158,824 7.28%
Interest Bearing Deposits $2,905,772 1.83% $2,868,453 2.53%
Short-Term Borrowings 612,080 .39% 259,222 1.56%
Long-Term Borrowings 303,408 3.63% 293,525 4.01%
Interest Bearing Liabilities $3,821,260 1.74% $3,421,200 2.58%
Excess Interest-Earning Assets $759,616 4.37% $737,624 4.70%
Net Interest Margin 4.66% 5.15%
Average interest earning assets increased by $422 million or 10.1% to $4,581
million for the six months ended June 30, 2003 compared to the same period in
2002. Average loans decreased by $44 million or 1.6% to $2,680 million for the
first half of 2003 compared to the same period in 2002. The yield on loans
declined to 7.07% for the first half of 2003 compared to 7.79% for the same
period in 2002. The average prime lending rate was 4.25% for the first half of
2003 compared to 4.75% for the first six months of 2002.
Average investment securities including federal funds sold and securities
purchased under resale agreements increased by $466 million or 32.5% to $1,900
million for the first half of 2003 compared to the same period in 2002. The
large increase was primarily due to the purchase of short-term investment
securities to arbitrage the dollar-roll repo borrowings which averaged $365
million for the first six months of 2003. The yield on taxable investment
securities was 4.72% for the first half of 2003 compared to 6.28% for the same
period in 2002.
Average interest bearing liabilities increased by $400 million or 11.7% to
$3,821 million for the first six months compared to the same period in 2002.
Average interest bearing deposits increased by $37 million or 1.3% to $2,906
million for the first half of 2003 compared to the same period in 2002. The
average cost of interest bearing deposits decreased to 1.83% for the first half
of 2003 compared to 2.53% for the same period in 2002.
Average short-term borrowings increased by $353 million to $612 million for the
first half of 2003 compared to $259 million for the same period in 2002. The
average cost of short-term borrowings decreased to .39% for the first half of
2003 compared to 1.56% for the same period in 2002. The increase in average
short-term borrowings in 2003 was due to the dollar-roll repos, which had an
average balance of $365 million for the first half of the year at an average
cost of a negative .17% for the first half of 2003. Park did not have any
dollar-roll repo borrowings in 2002.
-18-
The average cost of interest bearing liabilities decreased by .84% to 1.74% for
the first half of 2003 compared to 2.58% for the same period in 2002. However,
the yield on average earning assets decreased by 1.17% to 6.11% for the first
half of 2003 compared to 7.28% for the same period in 2002. The net interest
spread (the difference between the yield on interest earning assets and the cost
of interest bearing liabilities) decreased by .33% to 4.37% in 2003 compared to
4.70% in 2002. The tax equivalent net interest margin (defined as net interest
income divided by average interest earning assets) decreased by .49% to 4.66% in
2003 from 5.15% in 2002.
As previously mentioned, the Federal Reserve lowered the federal funds rate by
..25% to 1.00% during the last week of June 2003 and the prime lending rate was
also reduced by .25% to 4.00%. In response to the lower short-term interest
rates, Park reduced most of its deposit rates by .25% effective on July 1, 2003.
Management expects that the net interest margin will stabilize at approximately
the 4.66% level that was achieved during the first half of the year.
Provision for Loan Losses
The provision for loan losses was $2.8 million and $6.3 million, respectively,
for the second quarter and first half of 2003 compared to $3.6 million and $8.2
million for the same periods in 2002. Net charge-offs were $1.4 million and $2.8
million, respectively, for the three and six month periods ended June 30, 2003
compared to $1.3 million and $5.1 million for the same periods in 2002.
Nonperforming loans defined as loans that are 90 days or more past due,
renegotiated loans, and nonaccrual loans were $28.1 million or 1.04% of loans
at June 30, 2003 compared to $26.5 million or .98% of loans at December 31,
2002 and $27.6 million or 1.02% of loans at June 30, 2002. The reserve for loan
losses as a percentage of outstanding loans was 2.44% at June 30, 2003 compared
to 2.30% at December 31, 2002 and 2.33% at June 30, 2002. See Note 3 of the
Notes to Consolidated Financial Statements for a discussion of the factors
considered by management in determining the provision for loan losses.
Noninterest Income
Noninterest income increased by $6.2 million or 55.7% to $17.4 million for the
three months ended June 30, 2003 and increased by $9.9 million or 43.0% to $32.9
million for the six months ended June 30, 2003 compared to the same periods in
2002. The following is a summary of the change in noninterest income.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
2003 2002 Change 2003 2002 Change
---- ---- ------ ---- ---- ------
Fees from Fiduciary
Activities $2,446 $2,317 $129 $4,860 $4,518 $342
Service Charges on Deposit
Accounts 3,597 3,374 223 7,009 6,590 419
Other Service Income
7,280 1,901 5,379 12,865 4,769 8,096
Other Income 4,077 3,582 495 8,121 7,092 1,029
Total $17,400 $11,174 $6,226 $32,855 $22,969 $9,886
-19-
The large increase in Other Service Income for both the three and six month
periods ended June 30, 2003, was primarily due to the large increase in fee
income earned from the origination and sale into the secondary market of fixed
rate mortgage loans. During the first half of 2003, approximately $500 million
of fixed rate mortgage loans were originated and sold, compared to $167 million
for the first half of 2002.
Management expects that fixed rate mortgage loan volume will continue to be
strong in the months of July and August, but will soften during the month of
September due to the increase in long-term interest rates. Other Service Income
is expected to decrease from the second quarter level of $7.3 million and
approximate the first quarter amount of $5.6 million.
Fees from Fiduciary Activities and Service Charges on Deposits are expected to
continue to increase during the third quarter of 2003 due to both an increase in
the expected number of customers and an increase in the fees charged for those
services.
The increase in Other Income was primarily due to increases in check card and
ATM transactions for both the three and six month periods ended June 30, 2003.
The fees earned from check card transactions will decrease in August as a result
of a settlement that Visa reached with a number of retailers. Other Income
increased by 13.8% for the quarter ended June 30, 2003 and increased by 14.5%
for the first six months of 2003 compared to the same periods in 2002. The
reduction in check card fee income is expected to be about $90,000 per month as
a result of the Visa settlement, and as a result, Other Income is expected to
produce a small increase in fee income for the second half of 2003.
Gain (Loss) on Sale of Securities
The gain on sale of securities of $321,000 for the second quarter of 2003 was
due to the sale of $50 million of U.S. Agency Notes, with the proceeds
reinvested in U.S. Agency collateralized mortgage obligations.
During the first quarter of 2003, a loss of $1.2 million was realized from the
sale of $100 million of U.S. Agency collateralized mortgage obligations. The
proceeds were reinvested in fifteen year U.S. Agency mortgage-backed securities.
The increased interest income from the mortgage-backed securities is expected to
earn back the loss in twenty-two months.
During the first quarter of 2002, a loss of $210,000 was realized from the sale
of $100 million of U.S. Agency collateralized mortgage obligations. These
securities were sold to reduce the maturity extension risk in the investment
portfolio.
Management expects that investment securities will be sold at a loss during the
second half of 2003 with the proceeds reinvested in fifteen year U.S. Agency
mortgage-backed securities. Long-term interest rates increased by 1.00% during
the month of July and management is anticipating realizing security losses of
approximately $4 million during the second half of 2003. These losses are
expected to be earned back over three years. Park has a history of restructuring
the investment portfolio when interest rates increase, to take advantage of
higher reinvestment opportunities.
-20-
Other Expense
Total other expense increased by $2.2 million or 7.6% to $30.5 million for the
quarter ended June 30, 2003 compared to $28.3 million for the same period in
2002. Salaries and employee benefits expense increased by $825,000 or 5.3% to
$16.5 million for the second quarter of 2003 compared to $15.7 million for the
same period in 2002. The subcategory other expense increased by $1.0 million or
10.5% to $10.7 million for the three months ended June 30, 2003 compared to $9.7
million for the same period in 2002. This increase was primarily due to an
increase in charitable contributions of $836,000 to $924,000 in 2003 compared to
$88,000 in 2002. Charitable contribution expense for the first half of 2003 was
$938,000 compared to $167,000 for the first six months in 2002. For the entire
year 2002, charitable contribution expense was $703,000. Management anticipates
that charitable contribution expense will be small during the second half of
2003.
Total other expense increased by $3.0 million or 5.2% to $60.6 million for the
first half of 2003 compared to $57.6 million for the same period in 2002.
Salaries and employee benefits expense increased by $2.1 million or 6.6% to
$34.1 million for the first six months of 2003 compared to the same period in
2002. Full time equivalent employees were 1,629 at June 30, 2003 compared to
1,595 at June 30, 2002.
Federal Income Taxes
Federal income tax expense was $10.9 million and $20.6 million, respectively,
for the three and six month periods ended June 30, 2003 compared to $9.1 million
and $17.8 million for the same periods in 2002. The ratio of federal income tax
expense to income before taxes was 30.2% for the three months ended June 30,
2003 and 29.9% for the six months ended June 30, 2003 compared to 29.3% and
29.0% for the same periods in 2002. The statutory rate was 35% for both 2003 and
2002. The difference between the effective federal income tax rate and the
statutory rate is primarily due to tax-exempt interest income and low income
housing tax credits.
-21-
COMPARISON OF FINANCIAL CONDITION
AT JUNE 30, 2003 AND DECEMBER 31, 2002
Changes in Financial Condition and Liquidity
Total assets increased by $556 million or 12.5% to $5,002.5 million at June 30,
2003 compared to $4,446.6 million at December 31, 2002. Total loans decreased by
$2 million or .1% to $2,690 million at June 30, 2003. The demand for commercial
and commercial real estate loans improved during the first half of 2003 and the
demand for consumer loans improved during the second quarter. Management is
hopeful that total loans will increase during the second half of the year.
Investment securities including federal funds sold and securities purchased
under resale agreements increased by $502 million to $1,966 million at June 30,
2003. Part of this increase ($210 million) was due to the purchase of short-term
investments to arbitrage the increase in short-term borrowings from the
dollar-roll repos.
Total liabilities increased by $527 million or 13.4% to $4,464 million at June
30, 2003 compared to $3,937 million at December 31, 2002. Total borrowed money
increased by $490 million to $866 million at June 30, 2003 compared to $376
million at December 31, 2002. Part of the increase in borrowed money was due to
$210 million in short-term dollar-roll repos. Total deposits increased by $40
million to $3,535 million at June 30, 2003 compared to $3,495 million at
December 31, 2002.
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. Park's loan to asset ratio
was 53.78% at June 30, 2003 compared to 60.54% at December 31, 2002 and 60.18%
at June 30, 2002. Cash and cash equivalents totaled $293 million at June 30,
2003 compared to $239 million at December 31, 2002 and $159 million at June 30,
2002. The present funding sources provide more than adequate liquidity for the
Corporation to meet its cash flow needs.
-22-
Capital Resources
Stockholders' equity at June 30, 2003 was $538 million or 10.76% of total assets
compared to $509 million or 11.45% of total assets at December 31, 2002 and $498
million or 11.09% of total assets at June 30, 2002.
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
9.85% at June 30, 2003 and 10.72% at December 31, 2002. The minimum Tier I
risk-based capital ratio (defined as leverage capital divided by risk-adjusted
assets) is 4% and the well capitalized ratio is greater than or equal to 6%.
Park's Tier I risk-based capital ratio was 16.32% at June 30, 2003 and 16.51% at
December 31, 2002. The minimum total risk-based capital ratio (defined as
leverage capital plus supplemental capital divided by risk-adjusted assets) is
8% and the well capitalized ratio is greater than or equal to 10%. Park's total
risk-based capital ratio was 17.59% at June 30, 2003 and 17.78% at December 31,
2002.
The financial institution subsidiaries of Park each met the well capitalized
capital ratio guidelines at June 30, 2003. The following table indicates the
capital ratios for each subsidiary and Park at June 30, 2003:
TIER I TOTAL
LEVERAGE RISK-BASED RISK-BASED
-------- ---------- ----------
Park National Bank 5.96% 9.27% 12.66%
Richland Trust Company 6.28% 11.41% 12.67%
Century National Bank 6.10% 11.26% 13.69%
First-Knox National Bank 5.86% 9.48% 13.25%
Second National Bank 5.62% 10.16% 13.73%
United Bank, N.A. 6.03% 12.67% 13.93%
Security National Bank 5.62% 10.16% 13.73%
Citizens National Bank 5.97% 12.81% 17.98%
Park National Corporation 9.85% 16.32% 17.59%
Minimum Capital Ratio 4.00% 4.00% 8.00%
Well Capitalized Ratio 5.00% 6.00% 10.00%
At the July 21, 2003 Park National Corporation Board of Director's meeting, a
cash dividend of $.83 per share was declared payable on September 10, 2003 to
stockholders of record on August 25, 2003.
-23-
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Note 1 of the Notes to Consolidated Financial Statements for disclosure that
Park does not have any off-balance sheet derivative financial instruments.
Management reviews interest rate sensitivity on a quarterly basis by modeling
the financial statements under various interest rate scenarios. The primary
reason for these efforts is to guard Park from adverse impacts of unforeseen
changes in interest rates. Management continues to believe that further changes
in interest rates will have a small impact on net income, consistent with the
disclosure on pages 31 and 32 of our 2002 Annual Report, which is incorporated
by reference into our 2002 Form 10-K. However, as mentioned earlier in
management's analysis of net interest income, the net interest margin for the
first six months of 2003 was 4.66% and it is expected to be relatively stable at
that level for the remainder of 2003.
ITEM 4 - CONTROLS AND PROCEDURES
With the participation of our management, including our principal
executive officer and principal financial officer, we have evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15 and 15d-15 of the Securities Exchange Act of 1934 (the "Exchange Act"))
as of the end of the period covered by this Quarterly Report on Form 10-Q. Based
upon that evaluation, our principal executive officer and principal financial
officer have concluded that such disclosure controls and procedures are
effective as of the end of the period covered by this Quarterly Report on Form
10-Q to ensure that material information relating to Park National Corporation
and its consolidated subsidiaries is made known to them, particularly during the
period for which our periodic reports, including this Quarterly Report on Form
10-Q, are being prepared.
In addition, there were no significant changes during the period
covered by this Quarterly Report on Form 10-Q in our internal control over
financial reporting (as defined in Rules 13a-15 and 15d-15 of the Exchange Act)
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
-24-
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
31.1 Rule 13a - 14(a) / 15d - 14(a) Certification
(Chief Executive Officer)
31.2 Rule 13a - 14(a) / 15d - 14(a) Certification
(Chief Financial Officer)
32.1 Section 1350 Certification
(Chief Executive Officer)
32.2 Section 1350 Certification (Chief Financial Officer)
b. Reports on Form 8-K
On April 21, 2003, Park National Corporation furnished
information regarding the press release announcing first
quarter earnings for Park National Corporation, under Item 9
(which was also deemed provided under Item 12) in a Form 8-K.
The press release was included as Exhibit 99.
On July 14, 2003, Park National Corporation furnished
information regarding the press release announcing second
quarter earnings for Park National Corporation under Item 9
(which was also deemed provided under Item 12) in a Form 8-K.
The press release was included as Exhibit 99.
-25-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PARK NATIONAL CORPORATION
DATE: August 8, 2003 BY: /s/C. Daniel DeLawder
-------------- ---------------------
C. Daniel DeLawder
President and Chief Executive
Officer
DATE: August 8, 2003 BY: /s/John W. Kozak
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John W. Kozak
Chief Financial Officer
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