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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-13006
PARK NATIONAL CORPORATION
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(Exact name of Registrant as specified in its charter)
Ohio 31-1179518
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
50 North Third Street, Newark, Ohio 43055
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (740) 349-8451
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Shares, without par value (9,391,648 common shares American Stock Exchange
outstanding on February 27, 1998)
Securities registered pursuant to Section 12(g) of the Act: None
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based upon the closing price reported on the American Stock Exchange on February
27, 1998, the aggregate market value of the Common Shares of the Registrant held
by non-affiliates on that date was $576,589,375.
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Documents Incorporated by Reference:
(1) Portions of the Registrant's Annual Report to Shareholders for the
fiscal year ended December 31, 1997, are incorporated by reference
into Part II of this Annual Report on Form 10-K.
(2) Portions of the Registrant's definitive Proxy Statement for its
Annual Meeting of Shareholders to be held on April 20, 1998, are
incorporated by reference into Part III of this Annual Report on Form
10-K.
Exhibit Index on Page 92
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PART I
Item 1. Business.
General
Park National Corporation, an Ohio corporation (the "Company"), is a
bank holding company under the Bank Holding Company Act of 1956, as amended, and
is subject to regulation by the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"). The executive offices of the Company are located
in Newark, Ohio.
Through its subsidiaries, The Park National Bank, Newark, Ohio, a
national banking association ("PNB"), The Richland Trust Company, Mansfield,
Ohio, an Ohio state-chartered bank ("Richland"), Century National Bank,
Zanesville, Ohio, a national banking association ("Century"), and The First-Knox
National Bank of Mount Vernon, a national banking association ("FKNB"), the
Company is engaged in a general commercial banking and trust business, in
fifteen counties in central and southern Ohio. PNB operates through two banking
divisions with the Park Division headquartered in Newark, Ohio and the Fairfield
National Division headquartered in Lancaster, Ohio. FKNB also operates through
two banking divisions with the First-Knox Division headquartered in Mount
Vernon, Ohio and the Farmers and Savings Bank Division headquartered in
Loudonville, Ohio (formerly The Farmers and Savings Bank).
Effective April 7, 1997, Mutual Federal Savings Bank converted from a
federal savings association charter to a national bank charter and, in
connection therewith, changed its name to "Century National Bank."
On May 5, 1997, the Company merged with First-Knox Banc Corp., a $569
million bank holding company headquartered in Mount Vernon, Ohio ("First-Knox"),
in a transaction accounted for as a pooling of interests (the "Merger"). Upon
effectiveness of the Merger, pursuant to the terms of an Agreement and Plan of
Merger, dated as of October 28, 1996, as amended by an Amendment to Agreement
and Plan of Merger, dated as of January 10, 1997 (collectively, the "Merger
Agreement"), each of the outstanding common shares of First-Knox was converted
into the right to receive .5914 common shares of the Company (the "Exchange
Ratio"). As a result of the Merger, approximately 2.3 million common shares of
the Company were issued to the former First-Knox shareholders.
On December 8, 1997, the Fairfield National Division of PNB acquired
three branch offices in Lancaster, Ohio from KeyBank National Association
pursuant to a Branch Purchase and Assumption Agreement, dated as of May 23,
1997, as amended by an Amendment No. 1 to Branch Purchase and Assumption
Agreement, dated as of September 24, 1997. In addition to the fixed assets of
such branches, the purchase included approximately $49 million of deposits and
approximately $12 million of loans. The banking business of these three branches
has been consolidated into the operations of the Fairfield National Division.
Effective December 30, 1997, The Farmers and Savings Bank, an Ohio
state-charted bank which had been a subsidiary of First-Knox and became a
subsidiary of the Company as a result of the Merger, merged into FKNB, a former
subsidiary of First-Knox which also became a subsidiary of the
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Company as a result of the Merger. The operations of The Farmers and Savings
Bank are now conducted through the Farmers and Savings Bank Division of FKNB.
Services Provided by the Company's Subsidiaries
PNB, Richland, Century and FKNB provide the following principal
services: the acceptance of deposits for demand, savings and time accounts and
the servicing of such accounts; commercial, industrial, consumer and real estate
lending, including installment loans, credit cards, home equity lines of credit
and commercial and auto leasing; safe deposit operations; trust services; cash
management; electronic funds transfers; and a variety of additional
banking-related services tailored to the needs of individual customers. The
Company believes that the deposit mix of its subsidiaries is such that no
material portion thereof has been obtained from a single customer and,
consequently, the loss of any one customer of any subsidiary of the Company
would not have a materially adverse effect on the business of that subsidiary or
the Company.
The Company's subsidiaries deal with a wide cross-section of
businesses and corporations which are located primarily in Ashland, Athens,
Coshocton, Fairfield, Franklin, Hamilton, Hocking, Holmes, Knox, Licking,
Morgan, Morrow, Muskingum, Perry and Richland Counties in Ohio. Few loans are
made to borrowers outside these counties. Lending decisions at each of the
Company's subsidiaries are made in accordance with written loan policies
designed to maintain loan quality. Each of the Company's subsidiaries originates
and retains for its own portfolio commercial and commercial real estate loans,
variable rate residential real estate loans, home equity lines of credit,
installment loans and credit card loans. Fixed rate residential real estate
loans are also generated for the secondary market. The loans of each of the
Company's subsidiaries are spread over a broad range of industrial
classifications. The Company believes that its subsidiaries have no significant
concentrations of loans to borrowers engaged in the same or similar industries
and such subsidiaries do not have any loans to foreign entities.
Commercial lending entails significant additional risks as compared
with consumer lending -- i.e., single-family residential mortgage lending, home
equity lines of credit, installment lending, credit card loans and automobile
leasing. In addition, the payment experience on commercial loans is typically
dependent on adequate cash flow of a business and thus may be subject, to a
greater extent, to adverse conditions in the economy generally or adverse
conditions in a specific industry.
At December 31, 1997, the Company's subsidiaries had outstanding
approximately $481.3 million in commercial loans (including commercial real
estate loans) and commercial leases, representing approximately 30.2% of their
total aggregate loan portfolio as of that date. PNB's, Richland's, Century's and
FKNB's regulatory limits for loans made to one borrower were $13.1 million, $4.3
million, $4.0 million and $6.5 million, respectively, at December 31, 1997.
However, participations in loans of amounts larger than $5.0 million are
generally sold to other banks. Loan terms include amortization schedules
commensurate with the purpose of each loan, the source of each repayment and the
risk involved. Executive Committee approval is required for loans to borrowers
whose aggregate total debt, including the principal amount of the proposed loan,
exceeds $2.0 million. The primary analysis technique used in determining whether
to grant a commercial loan is the review of a schedule of cash flows in order to
evaluate whether anticipated future cash flows will be adequate to service both
interest and principal due.
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The Company has a loan review program which reevaluates annually all
loans with an outstanding amount greater than $100,000. If it is determined that
deterioration has occurred, effective and prompt action is taken by the
responsible subsidiary. Upon detection of a reduced ability of a borrower to
service interest and/or principal on a loan, the loan is downgraded and placed
on non-accrual status. The subsidiary then works with the borrower to develop a
payment schedule which they anticipate will permit the principal and interest on
the loan to be serviced by the borrower. Loans which deteriorate and show an
inability of a borrower to repay principal and do not meet the subsidiary's
standards are charged off quarterly.
PNB also leases equipment under terms similar to its commercial
lending policies. Park Leasing Company, a division of PNB, originates and
services direct leases of equipment which PNB acquires with no outside
financing. In addition, Scope Leasing, Inc., a wholly-owned subsidiary of PNB,
specializes in the direct leasing of aircraft with no outside financing.
At December 31, 1997, the Company's subsidiaries had outstanding
consumer loans (including automobile leases and credit cards) in an aggregate
amount of approximately $336.3 million constituting approximately 21.1% of their
aggregate total loan portfolio. The Company's subsidiaries make installment
credit available to customers and prospective customers in their primary market
area of Ashland, Athens, Coshocton, Fairfield, Franklin, Hamilton, Hocking,
Holmes, Knox, Licking, Morgan, Morrow, Muskingum, Perry and Richland Counties,
Ohio. In addition, the Company's subsidiaries are participants in an automobile
installment loan program sponsored by an insurance company as a result of which
automobile installment loans may be made to borrowers in other counties located
in the State of Ohio. Credit approval for consumer loans requires demonstration
of sufficiency of income to repay principal and interest due, stability of
employment, a positive credit record and sufficient collateral for secured
loans. It is the policy of the Company's subsidiaries to adhere strictly to all
laws and regulations governing consumer lending. A qualified compliance officer
is responsible for monitoring each subsidiary's performance in this area and for
advising and updating loan personnel. The Company's subsidiaries make credit
life insurance and health and accident insurance available to all qualified
buyers, thus reducing their risk of loss when a borrower's income is terminated
or interrupted. It is the policy of each of the Company's subsidiaries to review
its consumer loan portfolio monthly and to charge off loans which do not meet
that subsidiary's standards. Each subsidiary also offers VISA and MasterCard
accounts through their consumer lending departments. These accounts are
administered in accordance with the same standards as applied to other consumer
loans and leases.
Consumer loans generally involve more risk as to collectibility than
mortgage loans because of the type and nature of the collateral and, in certain
instances, the absence of collateral. As a result, consumer lending collections
are dependent upon the borrower's continued financial stability, and thus are
more likely to be adversely affected by job loss, divorce or personal bankruptcy
and by adverse economic conditions.
At December 31, 1997, there were approximately $774.3 million in
residential real estate, home equity lines of credit and construction mortgages
outstanding, representing approximately 48.6% of total loans outstanding. The
market area for real estate lending by the Company's subsidiaries is
concentrated in Ashland, Athens, Coshocton, Fairfield, Franklin, Hamilton,
Hocking, Holmes, Knox, Licking, Morgan, Morrow, Muskingum, Perry and Richland
Counties, Ohio. The Company's subsidiaries generally require that the loan
amount with respect to residential real estate loans be no
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more than 80% of the purchase price or the appraisal value of the real estate
securing the loan, unless private mortgage insurance is obtained by the borrower
with respect to the percentage exceeding such 80%. Loans made for each
subsidiary's portfolio in this lending category are generally one year
adjustable rate, fully amortized mortgages. Each subsidiary also originates
fixed rate real estate loans for the secondary market. The standards applicable
to these loans permit a higher loan to value ratio and a longer loan term. These
loans are generally sold immediately after closing. All real estate loans are
secured by first mortgages with evidence of title in favor of the subsidiary in
the form of an attorney's opinion of title or a title insurance policy. The
Company's subsidiaries also require proof of hazard insurance with the
appropriate subsidiary named as the mortgagee and as the loss payee. Independent
appraisals are required in the case of loans in excess of $250,000.
Home equity lines of credit are generally made as second mortgages by
the Company's subsidiaries. The maximum amount of a home equity line of credit
is generally limited to 80% of the appraised value of the property less the
balance of the first mortgage. The home equity lines of credit are written with
ten year terms but are subject to review and reappraisal every three years. A
variable interest rate is generally charged on the home equity lines of credit.
Construction financing is generally considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction and the estimated cost (including interest) of construction. If the
estimate of construction cost proves to be inaccurate, the Company's subsidiary
making the loan may be required to advance funds beyond the amount originally
committed to permit completion of the project. If the estimate of value proves
inaccurate, the subsidiary may be confronted, at or prior to the maturity of the
loan, with a project having a value which is insufficient to assure full
repayment, should the borrower default.
Competition
The Company's subsidiaries compete for deposits and loans with other
banks, savings associations, credit unions and other types of financial
institutions. The primary factors in competing for loans are interest rates
charged and overall services provided to borrowers. The primary factors in
competing for deposits are interest rates paid on deposits, account liquidity
and the convenience of office locations.
Employees
As of December 31, 1997, the Company and its subsidiaries had 978
full-time equivalent employees.
Supervision and Regulation
The following is a summary of certain statutes and regulations
affecting the Company and its subsidiaries. The summary is qualified in its
entirety by reference to such statutes and regulations.
The Company is a bank holding company under the Bank Holding Company
Act of 1956, as amended, which restricts the activities of the Company and the
acquisition by the Company of voting shares or assets of any bank, savings
association or other company. The Company is also subject to
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the reporting requirements of, and examination and regulation by, the Federal
Reserve Board. Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on transactions with affiliates,
including any loans or extensions of credit to the bank holding company or any
of its subsidiaries, investments in the stock or other securities thereof and
the taking of such stock or securities as collateral for loans or extensions of
credit to any borrower; the issuance of guarantees, acceptances or letters of
credit on behalf of the bank holding company and its subsidiaries; purchases or
sales of securities or other assets; and the payment of money or furnishing of
services to the bank holding company and other subsidiaries. Bank holding
companies are prohibited from acquiring direct or indirect control of more than
5% of any class of voting stock or substantially all of the assets of any bank
holding company without the prior approval of the Federal Reserve Board. A bank
holding company and its subsidiaries are prohibited from engaging in certain
tying arrangements in connection with extensions of credit and/or the provision
of other property or services to a customer by the bank holding company or its
subsidiaries. In addition, any savings association acquired by a bank holding
company must conform its activities to those permissible for a bank holding
company under the Bank Holding Company Act.
As national banks, PNB, Century and FKNB are supervised and regulated
by the Comptroller of the Currency (the "Comptroller"). As an Ohio
state-chartered bank, Richland is supervised and regulated by the Ohio Division
of Financial Institutions (the "ODFI").
The deposits of PNB, Richland, Century and FKNB are insured by the
Federal Deposit Insurance Corporation (the "FDIC") and those entities are
subject to the applicable provisions of the Federal Deposit Insurance Act. See
"Deposit Insurance Assessments and Recent Legislation" below. A subsidiary of a
bank holding company can be liable to reimburse the FDIC if the FDIC incurs or
anticipates a loss because of a default of another FDIC-insured subsidiary of
the bank holding company or in connection with FDIC assistance provided to such
subsidiary in danger of default. In addition, the holding company of any insured
financial institution that submits a capital plan under the federal banking
agencies' regulations on prompt corrective action guarantees a portion of the
institution's capital shortfall, as discussed below.
Various requirements and restrictions under the laws of the United
States and the State of Ohio affect the operations of PNB, Richland, Century and
FKNB including requirements to maintain reserves against deposits, restrictions
on the nature and amount of loans which may be made and the interest that may be
charged thereon, restrictions relating to investments and other activities,
limitations on credit exposure to correspondent banks, limitations on activities
based on capital and surplus, limitations on payment of dividends, and
limitations on branching. Since June 1997, pursuant to federal legislation, PNB,
Century and FKNB have been authorized to branch across state lines, unless the
law of the other state specifically prohibits the interstate branching authority
granted by federal law.
The Federal Reserve Board has adopted risk-based capital guidelines
for bank holding companies and for state member banks. The risk-based capital
guidelines include both a definition of capital and a framework for calculating
weighted risk assets by assigning assets and off-balance sheet items to broad
risk categories. The minimum ratio of capital to weighted risk assets (including
certain off-balance sheet items, such as standby letters of credit) is 8%. At
least 4.0 percentage points is to be comprised of common stockholders' equity
(including retained earnings but excluding treasury stock), noncumulative
perpetual preferred stock, a limited amount of cumulative perpetual preferred
stock,
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and minority interests in equity accounts of consolidated subsidiaries, less
goodwill and certain other intangible assets ("Tier 1 capital"). The remainder
("Tier 2 capital") may consist, among other things, of mandatory convertible
debt securities, a limited amount of subordinated debt, other preferred stock
and a limited amount of allowance for loan and lease losses. The Federal Reserve
Board also imposes a minimum leverage ratio (Tier 1 capital to total assets) of
3% for bank holding companies and state member banks that meet certain specified
conditions, including no operational, financial or supervisory deficiencies, and
including having the highest regulatory rating. The minimum leverage ratio is
100-200 basis points higher for other bank holding companies and state member
banks based on their particular circumstances and risk profiles and those
experiencing or anticipating significant growth. National bank subsidiaries,
such as PNB, Century and FKNB, are subject to similar capital requirements
adopted by the Comptroller and state non-member bank subsidiaries, such as
Richland, are subject to similar capital requirements adopted by the FDIC.
The Company and its subsidiaries currently satisfy all capital
requirements. Failure to meet applicable capital guidelines could subject a
banking institution to a variety of enforcement remedies available to federal
and state regulatory authorities, including the termination of deposit insurance
by the FDIC.
The federal banking regulators have established regulations
governing prompt corrective action to resolve capital deficient banks and
savings associations. Under these regulations, institutions which become
undercapitalized become subject to mandatory regulatory scrutiny and
limitations, which increase as capital continues to decrease. Such institutions
are also required to file capital plans with their primary federal regulator,
and their holding companies must guarantee the capital shortfall up to 5% of the
assets of the capital deficient institution at the time it becomes
undercapitalized.
The ability of a bank holding company to obtain funds for the payment
of dividends and for other cash requirements is largely dependent on the amount
of dividends which may be declared by its subsidiary banks and other
subsidiaries. However, the Federal Reserve Board expects the Company to serve as
a source of strength to PNB, Richland, Century and FKNB which may require it to
retain capital for further investment in the subsidiaries, rather than use such
funds for dividends for shareholders of the Company. PNB, Richland, Century and
FKNB may not pay dividends to the Company if, after paying such dividends, they
would fail to meet the required minimum levels under the risk-based capital
guidelines and the minimum leverage ratio requirements. PNB, Richland, Century
and FKNB must have the approval of their respective regulatory authorities if a
dividend in any year would cause the total dividends for that year to exceed the
sum of the current year's net profits and the retained net profits for the
preceding two years, less required transfers to surplus. Payment of dividends by
the bank subsidiaries may be restricted at any time at the discretion of the
regulatory authorities, if they deem such dividends to constitute an unsafe
and/or unsound banking practice or if necessary to maintain adequate capital for
the bank. These provisions could have the effect of limiting the Company's
ability to pay dividends on its outstanding common shares.
Deposit Insurance Assessments and Recent Legislation
The FDIC is authorized to establish separate annual assessment rates
for deposit insurance for members of the Bank Insurance Fund ("BIF") and members
of the Savings Association Insurance Fund ("SAIF"). PNB, Richland and FKNB are
members of the BIF and Century is a member of the
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SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to its target level
within a reasonable time and may decrease such rates if such target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary based on the risk the
institution poses to its deposit insurance fund. The risk level is based on the
institution's capital level and the FDIC's level of supervisory concern about
the institution.
Monetary Policy and Economic Conditions
The business of commercial banks is affected not only by general
economic conditions, but also by the policies of various governmental regulatory
authorities, including the Federal Reserve Board. The Federal Reserve Board
regulates money and credit conditions and interest rates in order to influence
general economic conditions primarily through open market operations in U.S.
Government securities, changes in the discount rate on bank borrowings and
changes in reserve requirements against bank deposits. These policies and
regulations significantly affect the overall growth and distribution of bank
loans, investments and deposits and the interest rates charged on loans as well
as the interest rates paid on deposits and accounts.
The monetary policies of the Federal Reserve Board have had a
significant effect on the operating results of commercial banks in the past and
are expected to have significant effects in the future. In view of the changing
conditions in the economy and the money market and the activities of monetary
and fiscal authorities, no definitive predictions can be made as to future
changes in interest rates, credit availability or deposit levels.
Effect of Environmental Regulation
Compliance with federal, state and local provisions regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, has not had a material effect upon the capital
expenditures, earnings or competitive position of the Company and its
subsidiaries. The Company believes that the nature of the operations of its
subsidiaries has little, if any, environmental impact. The Company, therefore,
anticipates no material capital expenditures for environmental control
facilities for its current fiscal year or for the foreseeable future. The
Company's subsidiaries may be required to make capital expenditures for
environmental control facilities related to properties which they may acquire
through foreclosure proceedings in the future; however, the amount of such
capital expenditures, if any, is not currently determinable.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K which
are not statements of historical fact constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Act"), including, without limitation, the statements specifically identified as
forward-looking statements within this document. In addition, certain statements
in future filings by the Company with the Securities and Exchange Commission, in
press releases, and in oral and written statements made by or with the approval
of the Company which are not statements of historical fact constitute
forward-looking statements within the meaning of the Act. Examples of
forward-looking statements include, but are not limited to: (i) projections of
revenues, income or loss, earnings
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or loss per share, the payment or non-payment of dividends, capital structure
and other financial items; (ii) statements of plans and objectives of the
Company or its management or Board of Directors, including those relating to
products or services; (iii) statements of future economic performance; and (iv)
statements of assumptions underlying such statements. Words such as "believes",
anticipates", expects", "intends", "targeted", and similar expressions are
intended to identify forward-looking statements but are not the exclusive means
of identifying such statements.
Forward-looking statements involve risks and uncertainties which may
cause actual results to differ materially from those in such statements. Factors
that could cause actual results to differ from those discussed in the
forward-looking statements include, but are not limited to: (i) the strength of
the U.S. economy in general and the strength of the local economies in which
operations of the Company's subsidiaries are conducted; (ii) the effects of and
changes in trade, monetary and fiscal policies and laws, including interest rate
policies of the Federal Reserve Board; (iii) inflation, interest rate, market
and monetary fluctuations; (iv) the timely development of and acceptance of new
products and services and perceived overall value of these products and services
by customers; (v) changes in consumer spending, borrowing and saving habits;
(vi) technological changes; (vii) acquisitions and the ability to successfully
integrate their operations; (viii) the ability to increase market share and
control expenses; (ix) the effect of changes in laws and regulations (including
laws and regulations concerning taxes, banking, securities and insurance) with
which the Company and its subsidiaries must comply; (x) the effect of changes in
accounting policies and practices, as may be adopted by the regulatory agencies
as well as the Financial Accounting Standards Board; (xi) changes in the
Company's organization, compensation and benefit plans; (xii) the costs and
effects of litigation and of unexpected or adverse outcomes in such litigation;
and (xiii) the success of the Company at managing the risks involved in the
foregoing.
Such forward-looking statements speak only as of the date on which
such statements are made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect the occurrence of unanticipated events.
Item 2. Properties.
The Company's principal executive offices are located at 50 North
Third Street, Newark, Ohio 43055. The Company neither leases nor owns any
physical property, real or personal.
The principal offices of PNB are located in its two-story main office
building at 50 North Third Street, Newark, Ohio 43055. PNB occupies all of this
building. PNB's Operations Center is located in a three-story building owned by
it at 21 South First Street, Newark, Ohio 43055. PNB occupies approximately
36,000 square feet of this building, with the remaining 4,000 square feet leased
to outside tenants. PNB, in addition to having six offices in Newark (including
the main office and the Operations Center), has offices in Granville, Heath (two
offices), Hebron, Johnstown, Kirkersville, Pataskala and Utica in Licking
County, an office in Columbus in Franklin County, an office in Cincinnati in
Hamilton County and offices in Baltimore, Pickerington and Lancaster (seven
offices) in Fairfield County. The offices in Fairfield County comprise the
Fairfield National Division. PNB also operates eight stand-alone automatic
banking center locations. The properties occupied by ten of PNB's Licking County
offices (including the main office and the Operations Center) and by four
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Fairfield County offices are owned by PNB. The remaining three offices in
Licking County, five offices in Fairfield County and PNB's Franklin County and
Hamilton County offices are leased under leases with various expiration dates
through 2006. Certain of the leases contain renewal options. PNB owes no
mortgage debt on any of its property.
The principal offices of Richland are located in its eight-story main
office building located at 3 North Main Street, Mansfield, Ohio. Richland
occupies 22,166 square feet out of the total 42,969 square feet of the building,
with the remaining portion leased to tenants not affiliated with Richland.
Richland, in addition to six offices in Mansfield (including the main office),
has offices in Butler, Lexington, Ontario and Shelby (two offices) in Richland
County. Richland also operates three stand-alone automatic banking center
locations. Richland owns the property occupied by all of these offices, with the
exception of one branch office in Mansfield which is leased through 2000.
Richland owes no mortgage debt on any of its property.
The principal offices of Century are located in a two-story building
owned by it at 14 South Fifth Street, Zanesville, Ohio. Century occupies all of
this building. Century, in addition to having four offices (including the main
office) and a mortgage lending office in Zanesville, has offices in New Concord
in Muskingum County, Malta in Morgan County, New Lexington in Perry County,
Logan in Hocking County, Athens in Athens County and Coshocton in Coshocton
County. Century also operates three stand-alone automatic banking center
locations and a lending office in Dresden in Muskingum County. All of the
properties occupied by Century's offices are owned by Century, with the
exception of the office located in Coshocton which is leased under a lease which
expires in November, 1999 and the lending office in Dresden which is leased
month-to-month. Century owes no mortgage debt on any of its properties.
The principal offices of FKNB are located in its four-story main
office building located at One South Main Street, Mount Vernon, Ohio. FKNB
occupies all of this building. FKNB's Operations Center is located in a
two-story building owned by it at 105 West Vine Street, Mount Vernon, Ohio. FKNB
occupies all of this building. FKNB, in addition to having three offices
(including the main office and the Operations Center) in Mount Vernon, has
offices in Loudonville and Perrysville in Ashland County, an office in
Millersburg in Holmes County, offices in Centerburg, Danville and Fredericktown
in Knox County, two offices in Mount Gilead in Morrow County and offices in
Bellville and Lexington in Richland County. The offices in Ashland County
comprise the Farmers and Savings Bank Division. FKNB also operates five
stand-alone automatic banking center locations. FKNB owns the property occupied
by all of these offices, with the exception of the branch in Millersburg where a
portion of this branch is leased through 2000. FKNB owes no mortgage debt on any
of its property.
Item 3. Legal Proceedings.
There are no pending legal proceedings to which the Company or any of
its subsidiaries is a party or to which any of their property is subject, except
routine legal proceedings to which the Company's subsidiaries are parties
incidental to their respective banking businesses. None of such proceedings are
considered by the Company to be material.
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Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant.
The following table lists the names and ages of the executive
officers of the Company as of the date of this Annual Report on Form 10-K, the
positions presently held by each such executive officer and the positions held
by each such executive officer during his tenure as an executive officer of the
Company and its subsidiaries. All executive officers serve at the pleasure of
the Board of Directors of the Company.
Position(s) Held with the Company
Name Age and its Principal Subsidiaries
- ---- --- ------------------------------
William T. McConnell 64 Chairman of the Board since 1994, Chief Executive Officer and
Director since 1986, and President from 1986 to 1994, of the
Company; Chairman of the Board since 1993, Chief Executive
Officer since 1983, President from 1979 to 1993, and Director
since 1977, of PNB; Director of Century since 1990; Director of
FKNB since 1997
C. Daniel DeLawder 48 President and Director of the Company since 1994; President since
1993, Executive Vice President from 1992 to 1993, and Director
since 1992, of PNB; Chairman of Advisory Board since 1989, and
President from 1985 to 1992, of the Fairfield National Division
of PNB; Director of Richland since 1997
David C. Bowers 61 Secretary since 1987, Chief Financial Officer and Chief
Accounting Officer since 1990, and Director from 1989 to 1990, of
the Company; Senior Vice President since 1986, and Director since
1989, of PNB
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
In accordance with General Instruction G(2), the information called
for in Item 201 of Regulation S-K is incorporated herein by reference to page 39
of the Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1997.
On November 11, 1997, the Company issued to (a) each of the thirteen
non-employee directors of the Company 150 common shares (for an aggregate of
1,950 common shares) in lieu of an annual cash retainer for serving as a
director of the Company and its subsidiaries, and (b) each of the 33
non-employee directors of one of the Company's subsidiaries who is not also a
director of the Company 50 common shares (for an aggregate of 1,650 common
shares) in lieu of an annual cash retainer for serving as a director of the
subsidiary. The common shares had a market value of
-11-
12
$89.31 per share on the date of issuance. The common shares were issued in
reliance upon the exemptions from registration provided by Sections 4(2) and
4(6) under the Securities Act of 1933 based upon the limited number of persons
to whom the common shares were "sold" and the status of each of such
individuals as a director of the Company or of one of its subsidiaries.
Item 6. Selected Financial Data.
In accordance with General Instruction G(2), the information called
for in this Item 6 is incorporated herein by reference to page 37 of the
Company's Annual Report to Shareholders for the fiscal year ended December 31,
1997.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
In accordance with General Instruction G(2), the information called
for in this Item 7 is incorporated herein by reference to pages 23 through 36 of
the Company's Annual Report to Shareholders for the fiscal year ended December
31, 1997.
Item 7A. Quantitive and Qualitative Disclosure About Market Risk.
As noted on page 29 of the Company's Annual Report to Shareholders
for the fiscal year ended December 31, 1997, during 1997, 1996 and 1995, the
Company and its subsidiaries had no investment in off-balance sheet derivative
instruments.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Balance Sheets of the Company and its subsidiaries
at December 31, 1997 and December 31, 1996, the related Consolidated Statements
of Income, of Changes in Stockholders' Equity and of Cash Flows for each of the
fiscal years in the three-year period ended December 31, 1997, the related Notes
to the Consolidated Financial Statements, and the Report of Independent
Auditors, appearing on pages 41 through 68 of the Company's Annual Report to
Shareholders for the fiscal year ended December 31, 1997, are incorporated
herein by reference. Quarterly Financial Data set forth on page 38 of the
Company's Annual Report to Shareholders for the fiscal year ended December 31,
1997 are also incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
No response required.
PART III
Item 10. Directors and Executive Officers of the Registrant.
In accordance with General Instruction G(3), the information called
for in this Item 10 is incorporated herein by reference to the Company's
definitive Proxy Statement, filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934, relating to the Company's Annual Meeting of
Shareholders to be held on April 20, 1998, under the captions "ELECTION OF
DIRECTORS" and "SECURITY
-12-
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OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -- Section 16(a)
Beneficial Ownership Reporting Compliance." In addition, certain information
concerning the executive officers of the Company called for in this Item 10 is
set forth in the portion of Part I of this Annual Report on Form 10-K entitled
"Executive Officers of the Registrant" in accordance with General Instruction
G(3).
Item 11. Executive Compensation.
In accordance with General Instruction G(3), the information called
for in this Item 11 is incorporated herein by reference to the Company's
definitive Proxy Statement, filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934, relating to the Company's Annual Meeting of
Shareholders to be held on April 20, 1998, under the captions "ELECTION OF
DIRECTORS -- Compensation of Directors," "COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION" and "COMPENSATION OF EXECUTIVE OFFICERS." Neither the
report on executive compensation nor the performance graph included in the
Company's definitive Proxy Statement relating to the Company's Annual Meeting of
Shareholders to be held on April 20, 1998, shall be deemed to be incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
In accordance with General Instruction G(3), the information called
for in this Item 12 is incorporated herein by reference to the Company's
definitive Proxy Statement, filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934, relating to the Company's Annual Meeting of
Shareholders to be held on April 20, 1998, under the caption "SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
Item 13. Certain Relationships and Related Transactions.
In accordance with General Instruction G(3), the information called
for in this Item 13 is incorporated herein by reference to the Company's
definitive Proxy Statement, filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934, relating to the Company's Annual Meeting of
Shareholders to be held on April 20, 1998, under the caption "TRANSACTIONS
INVOLVING MANAGEMENT."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Financial Statements.
For a list of all financial statements included with this Annual
Report on Form 10-K, see "Index to Financial Statements" at page 18.
-13-
14
(a)(2) Financial Statement Schedules.
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and,
therefore, have been omitted.
(a)(3) Exhibits.
Exhibits filed with this Annual Report on Form 10-K are attached
hereto. For a list of such exhibits, see "Index to Exhibits"
beginning at page 92. The following table provides certain
information concerning the executive compensation plans and
arrangements required to be filed as exhibits to this Annual Report
on Form 10-K.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
Exhibit
No. Description Location
- ------- ----------- --------
10(a) Certified Copy of Resolutions Adopted by Incorporated herein by reference to the
Board of Directors of Park National Company's Annual Report on Form 10-K for the
Corporation on July 17, 1995 Affecting Park fiscal year ended December 31, 1995 (File No.
National Corporation Defined Benefit Pension 1-13006) (the "1995 Form 10-K") [Exhibit
Plan and Trust 10(a)]
10(b) Park National Corporation Defined Benefit Incorporated herein by reference to the
Pension Plan Company's 1995 Form 10-K [Exhibit 10(b)]
10(c) Park National Corporation Employees Voluntary Incorporated herein by reference to the
Salary Deferral Plan and Trust Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 (File No.
0-18772) [Exhibit 10(d)]
10(d) Summary of Incentive Bonus Plan of Park Incorporated herein by reference to the
National Corporation Company's Registration Statement on Form S-4,
filed on January 24, 1997 (Registration No.
333-20417) (the "Company's Form S-4")
[Exhibit 10(d)]
-14-
15
Exhibit
No. Description Location
- ------- ----------- --------
10(e) Split-Dollar Agreement, dated May 17, 1993, Incorporated herein by reference to: (a) the
between William T. McConnell and The Park Company's Annual Report on Form 10-K for the
National Bank; and Schedule A to Exhibit fiscal year ended December 31, 1993 (File No.
10(f) identifying other identical 0-18772) [Exhibit 10(f)]; and (b) the
Split-Dollar Agreements between The Park Company's Annual Report on Form 10-K for the
National Bank and executive officers of the fiscal year ended December 31, 1994 (File No.
Company 1-13006) [Exhibit 10(g)]
10(f) Split-Dollar Agreement, dated September 29, Incorporated herein by reference to the
1993, between Dominic C. Fanello and The Company's Annual Report on Form 10-K for the
Richland Trust Company; and Schedule A to fiscal year ended December 31, 1993 (File No.
Exhibit 10(f) identifying other identical 0-18772 [Exhibit 10(g)]; Schedule A to
Split-Dollar Agreements between directors of Exhibit 10(f) is being filed herewith
the Company and The Park National Bank, The
Richland Trust Company or Century National
Bank, as identified in such Schedule A
10(g) Park National Corporation 1995 Incentive Incorporated herein by reference to the
Stock Option Plan Company's Registration Statement on Form S-8
filed May 9, 1995 (Registration No. 33-92060)
[Exhibit 4(d)]
10(h) Form of Stock Option Agreement executed in Incorporated herein by reference to the
connection with the grant of options under Company's 1995 Form 10-K [Exhibit 10(i)]
Park National Corporation 1995 Incentive
Stock Option Plan
10(i) Description of Park National Corporation Incorporated herein by reference to the
Supplemental Executive Retirement Plan Company's Form S-4 [Exhibit 10(i)]
(b) Reports on Form 8-K.
There were no Current Reports on Form 8-K filed during the fiscal
quarter ended December 31, 1997.
-15-
16
(c) Exhibits.
Exhibits filed with this Annual Report on Form 10-K are attached
hereto. For a list of such exhibits, see "Index to Exhibits"
beginning at page 92.
(d) Financial Statement Schedules.
None
-16-
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PARK NATIONAL CORPORATION
Date: March 19, 1998 By David C. Bowers,
-- Secretary, Chief Financial Officer
and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Date Capacity
---- ---- --------
*William T. McConnell * Chairman of the Board, Chief Executive Officer,
Principal Executive Officer and Director
*C. Daniel DeLawder * President and Director
*David C. Bowers * Secretary, Chief Financial Officer and Chief Accounting
Officer
*Maureen Buchwald * Director
*James J. Cullers * Director
*Dominic C. Fanello * Director
*R. William Geyer * Director
*Philip H. Jordan, Jr. * Director
*Tamala Longaberger Kaido * Director
*By: David C. Bowers,
Attorney-in-Fact
Date: March 19, 1998
-17-
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Name Date Capacity
---- ---- --------
*Howard E. LeFevre * Director
*Phillip T. Leitnaker * Director
*James A. McElroy * Director
*John J. O'Neill * Director
*William A. Phillips * Director
*J. Gilbert Reese * Director
*Rick R. Taylor * Director
*John L. Warner * Director
*By: David C. Bowers,
Attorney-in-Fact
Date: March 19, 1998
-18-
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PARK NATIONAL CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1997
INDEX TO FINANCIAL STATEMENTS
PAGE(S)
DESCRIPTION IN FORM 10-K
- ----------- ------------
Report of Independent Auditors (Ernst & Young LLP)............................................... 62
Consolidated Balance Sheets at December 31, 1997 and 1996........................................ 63-64
Consolidated Statements of Income for the years ended December 31, 1997, 1996
and 1995................................................................................ 65-66
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995........................................................ 67
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995........................................................................... 68
Notes to the Consolidated Financial Statements................................................... 69-89
-19-
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FINANCIAL REVIEW
This financial review presents management's discussion and analysis of financial
condition and results of operations for Park National Corporation ("Park" or the
"Corporation"). This discussion should be read in conjunction with the
consolidated financial statements and related footnotes and the five-year
summary of selected financial data. Management's discussion and analysis
contains forward-looking statements that are provided to assist in the
understanding of anticipated future financial performance. However, such
performance involves risks and uncertainties which may cause actual results to
differ materially from those in such statements. For a discussion of certain
factors that may cause such forward-looking statements to differ materially from
Park's actual results see Park's Annual Report on Form 10-K for the year ended
December 31, 1997.
OVERVIEW
On May 5, 1997, Park merged with First-Knox Banc Corp. ("First-Knox"), a $569
million bank holding company headquartered in Mount Vernon, Ohio, in a
transaction accounted for as a pooling-of-interests. Park issued approximately
2.3 million shares of common stock to the stockholders of First-Knox based upon
an exchange ratio of .5914 shares of Park common stock for each outstanding
share of First-Knox common stock. The historical financial statements of Park
have been restated to show Park and First-Knox on a combined basis.
Net income for 1997 was $37.7 million, the highest in Park's ten- year history
as a bank holding company. This represents an 18.9% increase over net income of
$31.7 million for 1996. Net income per share-diluted was $4.00 for 1997, up by
18.3% over the $3.38 net income per share-diluted for 1996. Net income has
increased at an annual compound growth rate of 12.99% over the last five years,
and net income per share has grown at an annual compound growth rate of 12.40%
over the same period.
Effective with the fourth quarter of 1997, the quarterly cash dividend on common
stock was increased to $.48 per share. The new annualized dividend of $1.92 per
share is 20.0% greater than the dividend paid in 1997. The Corporation has paid
quarterly dividends since becoming a holding company in early 1987. The annual
compound growth rate for the Corporation's per share dividend for the last five
years is 13.81% and the dividends declared to net income ratio has averaged
38.4% over that same period.
Park's business strategy is geared toward maximizing the return to stockholders.
The Corporation's common stock value has appreciated 19.8% annually on a
compounded, total return basis for the last five years. The December 31, 1997
value of a $100 investment on December 31, 1992 would be $247, inclusive of the
reinvestment of dividends in the Corporation's stock.
ABOUT OUR BUSINESS
Through its banking subsidiaries, Park is engaged in the commercial banking and
trust business, generally in small to medium population Ohio communities.
Management believes there is a significant number of consumers and businesses
which seek long-term relationships with community-based financial institutions
of quality and strength. While not engaging in activities such as foreign
lending, nationally syndicated loans and investment banking operations, the
Corporation attempts to meet the needs of its customers for commercial, real
estate and consumer loans, and investment and deposit services. Familiarity with
the local market, coupled with conservative loan underwriting standards, has
allowed the Corporation to achieve solid financial results even in periods where
there have been changes in economic conditions and the general level of interest
rates.
The Corporation has produced performance ratios which compare favorably to peer
bank holding companies in terms of equity and asset returns, capital adequacy
and asset quality. Continued satisfactory results are contingent upon economic
conditions in Ohio and competitive factors, among other things.
The Corporation's subsidiaries compete for deposits and loans with other banks,
savings associations, credit unions and other types of financial institutions.
The Corporation and its subsidiaries operate fifty-seven full-service banking
offices and a network of fifty-eight automatic teller machines in fifteen
central and southern Ohio counties.
23
21
A table of financial data of the Corporation's affiliates for 1997, 1996, and
1995 is shown below:
TABLE 1 - PARK NATIONAL CORPORATION AFFILIATE FINANCIAL DATA
- -----------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
AVERAGE NET Average Net Average Net
(In thousands) ASSETS INCOME Assets Income Assets Income
- -----------------------------------------------------------------------------------------------------------------------
Park National Bank:
Park National Division $ 716,356 $20,013 $ 672,374 $15,900 $ 637,211 $13,716
- -----------------------------------------------------------------------------------------------------------------------
Fairfield National Division 202,681 3,893 187,226 3,564 171,572 3,315
- -----------------------------------------------------------------------------------------------------------------------
Richland Trust Company 385,469 5,195 275,287 3,747 255,311 3,642
- -----------------------------------------------------------------------------------------------------------------------
Century National Bank 348,861 5,805 346,512 3,401 329,848 2,016
- -----------------------------------------------------------------------------------------------------------------------
First-Knox National Bank:
First-Knox
National Division 502,723 2,516 471,046 5,646 423,925 5,036
- -----------------------------------------------------------------------------------------------------------------------
Farmers and Savings
Division 60,189 512 56,718 827 53,247 695
- -----------------------------------------------------------------------------------------------------------------------
Parent Company,
including consolidating
entries 3,303 (241) 2,632 (1,385) 1,885 (591)
- -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED TOTALS $2,219,582 $37,693 $2,011,795 $31,700 $1,872,999 $27,829
- -----------------------------------------------------------------------------------------------------------------------
RETURN ON EQUITY
The Corporation's primary financial goal is to achieve a superior, long-term
return on stockholders' equity. The Corporation measures performance in its
attempts to achieve this goal against its peers, defined as all U.S. bank
holding companies between $1 billion and $3 billion in assets. At year-end 1997
there were 126 peer bank holding companies. The Corporation's net income to
average equity was 18.21%, 16.88% and 16.52% in 1997, 1996, and 1995,
respectively. In the past five years, the Corporation's net income to average
equity exceeded the mean and median return of the peer group by a substantial
margin.
The return on equity ratio has averaged 17.19% over the past five years.
Maintaining the Corporation's favorable equity return on an ever increasing
equity base is a continual challenge for management.
HISTORICAL COMPARISON OF RETURN ON AVERAGE EQUITY
[GRAPHIC]
1993 1994 1995 1996 1997
Park 17.61% 16.72% 16.52% 16.88% 18.21%
Peer Median 12.41% 12.27% 12.58% 13.55% 14.42%*
*as of 09/30/97
BALANCE SHEET COMPOSITION
Park functions as a financial intermediary. The following section discusses the
sources of funds and the manner in which management has invested these funds.
24
22
SOURCE OF FUNDS
DEPOSITS: The Corporation's major source of funds is provided by core deposits
from individuals, businesses, and local government units. These core deposits
consist of all noninterest bearing and interest bearing deposits, excluding
certificates of deposit of $100,000 and over which were less than 12.2% of total
deposits for the last three years. In 1997, year-end total deposits increased by
$92 million or 5.2%. Approximately $49.2 million of this increase was a result
of the purchase of three bank branches in Lancaster, Ohio from KeyBank,
Cleveland, Ohio in December, 1997. The mix of core deposits shifted toward core
certificates of deposit as more aggressive pricing and more flexible withdrawal
options were offered. Increases in noninterest bearing deposits were experienced
in all three years, primarily from commercial and public fund depositors.
Maturity of time certificates of deposit and other time deposits of $100,000 and
over as of December 31, 1997 were:
TABLE 2 - OVER $100,000 MATURITY SCHEDULE
- -------------------------------------------------------------------------------
TIME CERTIFICATES
DECEMBER 31, 1997 (IN THOUSANDS) OF DEPOSIT
- -------------------------------------------------------------------------------
3 months or less $ 97,176
- -------------------------------------------------------------------------------
Over 3 months through 6 months 27,009
- -------------------------------------------------------------------------------
Over 6 months through 12 months 45,373
- -------------------------------------------------------------------------------
Over 12 months 36,599
- -------------------------------------------------------------------------------
TOTAL $206,157
- -------------------------------------------------------------------------------
SHORT-TERM BORROWINGS: Short-term borrowings primarily result from securities
sold under agreements to repurchase but also include Federal Home Loan Bank
advances and federal funds purchased. These funds are also used to manage the
Corporation's liquidity needs and interest rate sensitivity risk. They are
subject to short-term price swings as the Corporation's needs change or the
overall market rates for short-term investment funds change. In 1997, average
short-term borrowings were $162.6 million compared to $126.7 million in 1996 and
$139.0 million in 1995. Average short-term borrowings were less than 7.5% of
average assets in all years.
LONG-TERM DEBT: Long-term debt is a result of borrowings from the Federal Home
Loan Bank. These borrowings were reduced in late 1997 as more attractive rates
were available in short-term markets.
STOCKHOLDERS' EQUITY: Average stockholders' equity to average total assets
increased to 9.33% in both 1997 and 1996 from 8.99% in 1995. In accordance with
Statement of Financial Accounting Standards No. 115, the Corporation reflects
any unrealized holding gain/(loss) on available-for-sale securities, net of
federal taxes as an adjustment to the Corporation's equity. While the effects of
this accounting is not recognized for calculation of regulatory capital adequacy
ratios, it does impact the Corporation's equity as reported in the audited
financial statements. The unrealized holding gain/(loss) on available-for-sale
securities, net of federal taxes, was $7.0, $4.7, and $7.8 million at year-end
1997, 1996, and 1995, respectively.
INVESTMENT OF FUNDS
Loans: Average loans, net of unearned income, were $1,528 million in 1997
compared to $1,380 million in 1996 and $1,318 million in 1995. The average yield
on loans was reasonably stable at 9.37% in 1997 compared to 9.41% in 1996 and
9.26% in 1995. Approximately 73% of loan balances mature or reprice within one
year. This results in the interest rate yield on the loan portfolio adjusting
with changes in interest rates, but on a delayed basis.
25
23
Year-end loan balances, net of unearned income, increased by $120 million or
8.2% in 1997 and by $116.7 million or 8.6% in 1996. The growth in 1997, includes
$11.6 million of loans acquired from the purchase of three branches in Lancaster
in December, 1997. As a percentage of assets, year-end loan balances were 69.6%,
67.4%, and 68.7% in 1997, 1996, and 1995, respectively.
Year-end real estate loans, both commercial and residential, increased to $965
million from $832 million in 1996, an increase of 16.0% . The growth in real
estate loans was principally due to the strength of the economy in Central Ohio.
Table 3 reports year-end loan balances by type of loan for the past five years.
TABLE 3 - LOANS BY TYPE
- -----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, (IN THOUSANDS) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
Commercial, financial and
agriculture $ 212,970 $ 224,912 $ 211,535 $ 189,303 $ 203,005
- -----------------------------------------------------------------------------------------------------------------------
Real estate - construction 65,548 70,359 52,084 42,485 32,037
- -----------------------------------------------------------------------------------------------------------------------
Real estate - residential 708,768 617,018 585,739 565,663 509,107
- -----------------------------------------------------------------------------------------------------------------------
Real estate - commercial 256,074 215,372 200,675 187,936 157,199
- -----------------------------------------------------------------------------------------------------------------------
Consumer, net 313,517 320,831 282,618 278,427 249,141
- -----------------------------------------------------------------------------------------------------------------------
Leases, net 35,050 23,532 22,717 21,494 12,807
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LOANS $1,591,927 $1,472,024 $1,355,368 $1,285,308 $1,163,296
- -----------------------------------------------------------------------------------------------------------------------
TABLE 4 - SELECTED LOAN MATURITY DISTRIBUTION
- ----------------------------------------------------------------------------------------------------------------------
Over One Over
One Year Through Five
DECEMBER 31, 1997 (IN THOUSANDS) or Less Five Years Years TOTAL
- ----------------------------------------------------------------------------------------------------------------------
Commercial, financial and
agriculture $105,449 $62,239 $45,282 $212,970
- ----------------------------------------------------------------------------------------------------------------------
Real estate - construction 28,423 4,595 32,530 65,548
- ----------------------------------------------------------------------------------------------------------------------
TOTAL $133,872 $66,834 $77,812 $278,518
- ----------------------------------------------------------------------------------------------------------------------
Total of these selected loans due after one year with:
Fixed interest rate $ 37,165
- ----------------------------------------------------------------------------------------------------------------------
Floating interest rate 107,481
- ----------------------------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES: The Corporation's securities portfolio is structured to
provide liquidity and contribute to earnings. The Corporation classifies
approximately 98% of its securities as available-for-sale -- see Footnote 4 to
the financial statements. These securities are carried on the books at the
estimated fair value with the unrealized holding gain/(loss), net of taxes,
accounted for as an adjustment to the Corporation's equity. Management
classifies a large portion of the securities portfolio as available-for-sale so
that these securities will be available to be sold in future periods in carrying
out the Corporation's investment strategies. The remaining securities are
classified as held-to-maturity and are accounted for at amortized cost.
26
24
The Corporation's investment strategy is dynamic. As conditions change over
time, the Corporation's overall interest rate risk, liquidity needs, and
potential return on the investment portfolio will change. The Corporation
regularly re-evaluates the securities in its portfolio based on circumstances as
they evolve. Circumstances that may precipitate a sale of a security would be to
better manage interest rate risk, meet liquidity needs, or to improve the
overall yield from the investment portfolio. There were negligible security
losses in 1997, $1.3 million, and $.6 million in 1996, and 1995, respectively.
The Corporation's strategy has generally been to reinvest the proceeds from the
sale of securities at a loss into higher yielding securities with modest
extension of maturities. Generally lower overall interest rates in 1997
prevented this strategy from being executed.
The average yield on taxable investment securities was 7.00%, 6.85%, and 6.69%
for 1997, 1996, and 1995, respectively. The average maturity or repricing of the
taxable investment portfolio was approximately 3.1 years at year-end 1997
compared to 3.2 years at year-end 1996 and 3.4 years at year-end 1995.
The Corporation's nontaxable investment securities as a percent of total
securities was increased to 16.2% in 1997 as more favorable tax-effective rates
were available. The average tax-equivalent yield on the tax-exempt securities
portfolio was 7.82%, 8.56%, and 8.61% for 1997, 1996, and 1995, respectively.
The average maturity of the tax-exempt portfolio was approximately 7.1 years at
year-end 1997 and year-end 1996 compared to 7.6 years at year-end 1995.
The following table sets forth the book value of investment securities at year
end:
TABLE 5 - INVESTMENT SECURITIES
- ---------------------------------------------------------------------------------------------------------------------
DECEMBER 31, (IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
Obligations of U.S. Treasury and other
U.S. Government agencies $159,248 $222,034 $192,263
- ---------------------------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions 87,367 67,357 64,763
- ---------------------------------------------------------------------------------------------------------------------
U.S. Government asset-backed securities
and other asset-backed securities 274,234 270,003 191,883
- ---------------------------------------------------------------------------------------------------------------------
Other securities 19,881 14,999 11,809
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $540,730 $574,393 $460,718
- ---------------------------------------------------------------------------------------------------------------------
EARNING RESULTS
The Corporation's principal source of earnings is net interest income, the
difference between total interest income and total interest expense. Net
interest income results from average balances outstanding for interest earning
assets and interest bearing liabilities in conjunction with the average rates
earned and paid on them.
The net yield on interest earning assets was relatively stable at 5.07% for 1997
compared to 5.09% for 1996 and 5.02% in 1995. Similarly, the net interest rate
spread -- the difference between rates received for interest earning assets and
the rates paid for interest bearing liabilities was within the narrow range of
4.36% to 4.41% for all three years.
The yield on average interest earning assets was 8.76% in 1997 compared to 8.75%
in 1996 and 8.68% in 1995. Average interest earning assets increased by $193
million or 10.2% to $2,084 million in 1997 compared to an increase of $135
million or 7.7% to $1,892 million in 1996.
The rate paid on average interest bearing liabilities was 4.38% in 1997 compared
to 4.34% in 1996 and 4.32% in 1995. Average interest bearing liabilities
increased by $166.0 million or 10.4% to $1,760.1 million in 1997 compared to an
increase of $104.4 million or 7.0% to $1,594.1 million in 1996. Average interest
bearing deposits as a percentage of average interest bearing liabilities were
88.1% in 1997, 89.1% in 1996, and 88.4% in 1995.
27
25
TABLE 6 - DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996 1995
(Dollars in thousands) DAILY AVERAGE Daily Average Daily Average
AVERAGE INTEREST RATE Average Interest Rate Average Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
INTEREST EARNING ASSETS:
Loans (1) (2) $1,527,694 $143,157 9.37% $1,379,973 $129,843 9.41% $1,318,275 $122,121 9.26%
- ----------------------------------------------------------------------------------------------------------------------------
Taxable investment
securities 474,707 33,229 7.00% 410,339 28,125 6.85% 360,539 24,119 6.69%
- ----------------------------------------------------------------------------------------------------------------------------
Tax-exempt investment
securities (3) 73,613 5,757 7.82% 61,768 5,288 8.56% 60,550 5,212 8.61%
- ----------------------------------------------------------------------------------------------------------------------------
Interest bearing deposits
in banks -- -- -- -- -- -- 157 8 5.10%
- ----------------------------------------------------------------------------------------------------------------------------
Federal funds sold 8,132 461 5.67% 39,573 2,184 5.52% 17,168 1,001 5.83%
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EARNING
ASSETS 2,084,146 182,604 8.76% 1,891,653 165,440 8.75% 1,756,689 152,461 8.68%
- ----------------------------------------------------------------------------------------------------------------------------
NONINTEREST EARNING ASSETS:
Allowance for possible
loan losses (34,346) (30,816) (27,171)
- ----------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 71,244 69,396 70,231
- ----------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 27,361 27,742 27,541
- ----------------------------------------------------------------------------------------------------------------------------
Other assets 71,177 53,820 45,709
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL $2,219,582 $2,011,795 $1,872,999
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
INTEREST BEARING LIABILITIES:
Transaction accounts $ 364,776 $ 8,927 2.45% $ 354,944 $ 8,450 2.38% $ 268,568 $ 6,180 2.30%
- ----------------------------------------------------------------------------------------------------------------------------
Savings deposits 278,371 7,863 2.82% 269,991 7,599 2.81% 358,490 10,658 2.97%
- ----------------------------------------------------------------------------------------------------------------------------
Time deposits 907,718 49,659 5.47% 795,984 44,612 5.60% 690,267 38,385 5.56%
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING
DEPOSITS 1,550,865 66,449 4.28% 1,420,919 60,661 4.27% 1,317,325 55,223 4.19%
- ----------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 162,626 7,738 4.76% 126,721 5,694 4.49% 139,035 7,173 5.16%
- ----------------------------------------------------------------------------------------------------------------------------
Long-term debt 46,652 2,846 6.10% 46,497 2,800 6.02% 33,413 1,951 5.84%
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING
LIABILITIES 1,760,143 77,033 4.38% 1,594,137 69,155 4.34% 1,489,773 64,347 4.32%
- ----------------------------------------------------------------------------------------------------------------------------
NONINTEREST BEARING LIABILITIES:
Demand deposits 228,598 207,262 196,406
- ----------------------------------------------------------------------------------------------------------------------------
Other 23,842 22,641 18,388
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST BEARING
LIABILITIES 252,440 229,903 214,794
- ----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 206,999 187,755 168,432
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL $2,219,582 $2,011,795 $1,872,999
- ----------------------------------------------------------------------------------------------------------------------------
Net interest earnings $105,571 $ 96,285 $ 88,114
- ----------------------------------------------------------------------------------------------------------------------------
Net interest spread 4.38% 4.41% 4.36%
- ----------------------------------------------------------------------------------------------------------------------------
Net yield on interest
earning assets 5.07% 5.09% 5.02%
- ----------------------------------------------------------------------------------------------------------------------------
(1) Loan income includes net fee loan income of $1,670 in 1997, $1,905 in 1996
and $1,577 in 1995. Loan income also includes the effects of taxable
equivalent adjustments using a 35% rate in 1997, 1996 and 1995. The
taxable equivalent adjustment was $435 in 1997, $459 in 1996 and $395 in
1995.
(2) For purposes of this computation, nonaccrual loans are included in the
daily average loans outstanding.
(3) Interest income on tax-exempt securities includes the effect of taxable
equivalent adjustments using a 35% rate in 1997, 1996 and 1995. The
taxable equivalent adjustment was $1,658 in 1997, $1,788 in 1996 and
$1,778 in 1995.
28
26
The change in interest due to both volume and rate has been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
TABLE 7 - VOLUME/RATE VARIANCE ANALYSIS
- ----------------------------------------------------------------------------------------------------------------------
Change from 1996 to 1997 Change from 1995 to 1996
----------------------------------------------------------------------------
(IN THOUSANDS) Volume Rate TOTAL Volume Rate Total
- ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in:
Interest income:
TOTAL LOANS $13,867 $ (553) $13,314 $ 5,737 $1,985 $ 7,722
- ----------------------------------------------------------------------------------------------------------------------
Taxable investments 4,479 625 5,104 3,415 591 4,006
- ----------------------------------------------------------------------------------------------------------------------
Tax-exempt investments 953 (484) 469 106 (30) 76
- ----------------------------------------------------------------------------------------------------------------------
Federal funds sold (1,781) 58 (1,723) 1,239 (56) 1,183
- ----------------------------------------------------------------------------------------------------------------------
Interest bearing deposits
in banks -- -- -- (4) (4) (8)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 17,518 (354) 17,164 10,493 2,486 12,979
- ----------------------------------------------------------------------------------------------------------------------
Interest expense:
Transaction accounts 231 246 477 2,048 222 2,270
- ----------------------------------------------------------------------------------------------------------------------
Savings accounts 237 27 264 (2,511) (548) (3,059)
- ----------------------------------------------------------------------------------------------------------------------
Time deposits 6,107 (1,060) 5,047 5,948 279 6,227
- ----------------------------------------------------------------------------------------------------------------------
Short-term borrowings 1,686 358 2,044 (600) (879) (1,479)
- ----------------------------------------------------------------------------------------------------------------------
Long-term debt 9 37 46 787 62 849
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 8,270 (392) 7,878 5,672 (864) 4,808
- ----------------------------------------------------------------------------------------------------------------------
NET VARIANCE $ 9,248 $ 38 $ 9,286 $ 4,821 $3,350 $ 8,171
- ----------------------------------------------------------------------------------------------------------------------
OTHER INCOME: Total other income, exclusive of security losses, increased by
13.9% to $20.5 million in 1997 and increased by 7.8% to $18.0 million in 1996
compared to $16.7 million for 1995. Income from fiduciary activities increased
by 26.7% to $5.2 million in 1997 primarily due to increases in assets under
management for new Trust Department customers. The Other subcategory increased
in 1997 due to rental income from operating leases originated by Scope Leasing,
Inc., an aircraft leasing company acquired by the Corporation in May, 1994 and
increased fees from check card and ATM products.
Losses on sale of securities were $1.3 million in 1996 compared to $.6 million
in 1995. The proceeds from these sales of securities were generally invested in
higher yielding, longer maturity securities to take advantage of an upward
sloping yield curve. Generally lower overall interest rates and a flat yield
curve prevented sales for losses and related reinvestments in 1997. During 1997,
1996, and 1995, the Corporation had no investment in off-balance sheet
derivative instruments.
OTHER EXPENSE: Total Other Expense increased by 5.6% to $62.4 million in 1997
and increased by 4.6% to $59.1 million in 1996 compared to $56.5 million in
1995. Increases in Total Other Expense of approximately $2.0 million in 1997 and
$1.4 million in 1996 were due to one-time expenses related to the May, 1997
merger with First-Knox. These expenses were absorbed by First-Knox in 1997 and
1996.
Salaries and employee benefits increased by 10.1% in 1997 and by 5.4% in 1996
compared to the prior years. The increase in 1997 was primarily due to one-time
expenses related to the First-Knox merger of approximately $1.9 million for
deferred employee payments, stock appreciation rights, and employee benefits
expense. The increase in 1996 was due to normal merit increases and staff
increases to accommodate new banking offices, extended hours in selected banking
offices, and annuity/mutual fund
29
27
alternative investment product sales. Full-time equivalent employees at year-end
were 978 in 1997, 961 in 1996 and 944 in 1995. Amortization of intangibles
expense increased sharply in 1997 to $2.0 million due to the increased
amortization of goodwill resulting from branch purchases in 1997 and 1996.
Insurance expense decreased in 1997 and 1996 as Park's deposit insurance premium
expense was sharply reduced. The Corporation's thrift subsidiary -- Mutual
Federal Savings -- incurred a one-time FDIC recapitalization expense in 1996.
Mutual Federal Savings converted to a national bank charter in the second
quarter of 1997 and now operates under the name of Century National Bank.
The subcategory Other Expense decreased from 1995 in 1996 and 1997 primarily due
to a decrease in depreciation expense from operating leases.
INCOME TAXES: Federal income tax expense as a percentage of income before taxes
was 30.9% in 1997, 31.5% in 1996 and 30.8% in 1995. A lower tax percentage rate
than the statutory rate of thirty-five percent is primarily due to tax-exempt
interest income from state and municipal bond investments.
CREDIT EXPERIENCE
PROVISION FOR LOAN LOSSES: The provision for loan losses is the amount added to
the allowance for loan losses to absorb possible future loan charge-offs. The
amount of the loan loss provision is determined by management after reviewing
the risk characteristics of the loan portfolio, historical loan loss experience
and projections of future economic conditions. In 1997, First-Knox absorbed a
significant increase in the loan loss provision charged to earnings in order to
bring its allowance for possible loan losses into alignment with other
Corporation affiliates. The impact of this was partially offset by a reduced
loan loss provision at Park National Division.
The allowance for possible loan losses at December 31, 1997 totaled $35.6
million and represented 2.24% of total loans outstanding at December 31, 1997
compared to $32.3 million or 2.20% of total loans outstanding at December 31,
1996 and $29.2 million or 2.16% of total loans outstanding at December 31, 1995.
The provision for loan losses increased by $1.7 million to $7.0 million for 1997
compared to $5.3 million for 1996 and $5.2 million for 1995. Net charge-offs
increased by $1.6 million to $3.8 million for 1997 compared to $2.2 million for
1996 and $1.4 million for 1995.
The allowance for possible loan losses as a percentage of ending loans
represents one measure of adequacy. The allowance for possible loan losses
expressed as a percentage of nonperforming loans is another. On this basis, the
December 31, 1997 allowance for possible loan losses represented 573% of
nonperforming loans up from 425% at December 31, 1996 and 444% at December 31,
1995. It is management's opinion that the allowance for possible loan losses at
year-end 1997 is adequate to absorb estimated credit losses in the loan
portfolio.
30
28
The following table summarizes the loan loss provision, charge-offs and
recoveries for the last five years:
TABLE 8 - SUMMARY OF LOAN LOSS EXPERIENCE
- ----------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
(DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
AVERAGE LOANS
(NET OF UNEARNED INTEREST) $1,527,694 $1,379,973 $1,318,275 $1,220,333 $1,112,873
- ----------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR POSSIBLE LOAN LOSSES:
Beginning balance $ 32,347 $ 29,239 $ 25,438 $ 23,775 $ 21,564
- ----------------------------------------------------------------------------------------------------------------------
CHARGE-OFFS:
Commercial 1,332 868 407 1,131 1,374
- ----------------------------------------------------------------------------------------------------------------------
Real estate 1,265 185 471 60 398
- ----------------------------------------------------------------------------------------------------------------------
Consumer 3,530 2,971 2,019 1,777 1,748
- ----------------------------------------------------------------------------------------------------------------------
Lease financing 144 414 55 103 92
- ----------------------------------------------------------------------------------------------------------------------
TOTAL CHARGE-OFFS 6,271 4,438 2,952 3,071 3,612
- ----------------------------------------------------------------------------------------------------------------------
RECOVERIES:
Commercial 400 420 175 1,035 1,088
- ----------------------------------------------------------------------------------------------------------------------
Real estate 696 365 171 164 118
- ----------------------------------------------------------------------------------------------------------------------
Consumer 1,198 1,404 1,074 984 622
- ----------------------------------------------------------------------------------------------------------------------
Lease financing 226 63 85 73 61
- ----------------------------------------------------------------------------------------------------------------------
TOTAL RECOVERIES 2,520 2,252 1,505 2,256 1,889
- ----------------------------------------------------------------------------------------------------------------------
NET CHARGE-OFFS 3,751 2,186 1,447 815 1,723
- ----------------------------------------------------------------------------------------------------------------------
Provision charged to earnings 6,999 5,294 5,248 2,478 3,934
- ----------------------------------------------------------------------------------------------------------------------
ENDING BALANCE $ 35,595 $ 32,347 $ 29,239 $ 25,438 $ 23,775
- ----------------------------------------------------------------------------------------------------------------------
RATIO OF NET CHARGE-OFFS TO
AVERAGE LOANS 0.25% 0.16% 0.11% 0.07% 0.15%
- ----------------------------------------------------------------------------------------------------------------------
RATIO OF ALLOWANCE FOR POSSIBLE
LOAN LOSSES TO END OF YEAR LOANS,
NET OF UNEARNED INTEREST 2.24% 2.20% 2.16% 1.98% 2.04%
- ----------------------------------------------------------------------------------------------------------------------
The following table summarizes the allocation of allowance for possible loan
losses:
TABLE 9 - ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES
-----------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------------------------------------------
PERCENT OF Percent of Percent of Percent of Percent of
(Dollars in LOANS PER Loans Per Loans Per Loans Per Loans Per
thousands) ALLOWANCE CATEGORY Allowance Category Allowance Category Allowance Category Allowance Category
-----------------------------------------------------------------------------------------------------------------------
Commercial $10,116 13.38% $ 8,996 15.28% $ 8,779 15.61% $ 7,572 14.73% $ 8,120 17.45%
-----------------------------------------------------------------------------------------------------------------------
Real estate 11,420 64.73% 9,902 61.32% 8,071 61.86% 7,252 61.94% 6,238 60.03%
-----------------------------------------------------------------------------------------------------------------------
Consumer 12,541 19.69% 12,513 21.80% 11,474 20.85% 9,772 21.66% 8,894 21.42%
-----------------------------------------------------------------------------------------------------------------------
Leases 1,518 2.20% 936 1.60% 915 1.68% 842 1.67% 523 1.10%
-----------------------------------------------------------------------------------------------------------------------
TOTAL $35,595 100.00% $32,347 100.00% $29,239 100.00% $25,438 100.00% $23,775 100.00%
-----------------------------------------------------------------------------------------------------------------------
As of December 31, 1997, the Corporation had no significant concentrations of
loans to borrowers engaged in the same or similar industries nor did the
Corporation have any loans to foreign governments.
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29
NONPERFORMING ASSETS: Nonperforming loans include: l) loans whose interest is
accounted for on a nonaccrual basis; 2) loans whose terms have been
renegotiated; and 3) loans which are contractually past due 90 days or more as
to principal or interest payments but whose interest continues to accrue. Other
real estate owned results from taking title to property used as collateral for a
defaulted loan.
The following is a summary of the nonaccrual, past due and renegotiated loans
and other real estate owned for the last five years:
TABLE 10 - NONPERFORMING ASSETS
- ----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, (DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
Nonaccrual loans $2,060 $2,301 $2,425 $2,677 $2,718
- ----------------------------------------------------------------------------------------------------------------------
Renegotiated loans 1,642 2,348 2,525 1,365 1,285
- ----------------------------------------------------------------------------------------------------------------------
Loans past due 90 days or more 2,512 2,963 1,640 1,090 2,035
- ----------------------------------------------------------------------------------------------------------------------
TOTAL NONPERFORMING LOANS 6,214 7,612 6,590 5,132 6,038
- ----------------------------------------------------------------------------------------------------------------------
Other real estate owned 300 329 183 406 1,386
- ----------------------------------------------------------------------------------------------------------------------
TOTAL NONPERFORMING ASSETS $6,514 $7,941 $6,773 $5,538 $7,424
- ----------------------------------------------------------------------------------------------------------------------
PERCENTAGE OF NONPERFORMING LOANS TO
LOANS, NET OF UNEARNED INTEREST 0.39% 0.52% 0.49% 0.40% 0.52%
- ----------------------------------------------------------------------------------------------------------------------
PERCENTAGE OF NONPERFORMING ASSETS TO
LOANS, NET OF UNEARNED INTEREST 0.41% 0.54% 0.50% 0.43% 0.64%
- ----------------------------------------------------------------------------------------------------------------------
PERCENTAGE OF NONPERFORMING ASSETS TO
TOTAL ASSETS 0.28% 0.36% 0.34% 0.30% 0.43%
- ----------------------------------------------------------------------------------------------------------------------
Tax equivalent interest income from loans of $143.2 million for 1997 would have
increased by $87,000 if all loans had been current in accordance with their
original terms. Interest income for the year ended December 31, 1997 in the
approximate amount of $373,000 is included in interest income for those loans in
accordance with original terms.
The Corporation had $17.6 million of loans included on the Corporation's watch
list of potential problem loans at December 31, 1997 compared to $19.8 million
at year-end 1996 and $18.9 million at year-end 1995. The existing conditions of
these loans do not warrant classification as nonaccrual. Management undertakes
additional surveillance regarding a borrower's ability to comply with payment
terms for watch list loans.
TECHNOLOGY RISK - YEAR 2000 COMPLIANCE ISSUES
In early 1997, the Corporation formed a Year 2000 project team to identify
software systems and computer-related devices that require modification for the
year 2000. A project plan has been developed with goals and target dates. The
Corporation's business areas are in various stages of completing this project
plan. The Corporation has incurred expenses throughout 1997 related to this
project and will continue to incur expenses over the next two years. These
expenses are not expected to materially impact operating results in any one
period, with a significant portion of these expenses represented by existing
staff that has been redeployed to this project. Many of the Corporation's
systems are vendor-supplied. All the vendors have been contacted and most have
provided certification or a delivery commitment letter for compliance with Year
2000. Management presently believes with the planned modifications to existing
systems, conversion to new systems, and vendor delivery of millenium-compliant
systems, the year 2000 compliance issues will be resolved on a timely basis, and
any related costs will not have a material impact on the operations, cash flows,
or financial condition of future periods.
32
30
CAPITAL RESOURCES
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT: The Corporation's objective
in managing its liquidity is to maintain the ability to continuously meet the
cash flow needs of customers, such as borrowings or deposit withdrawals, while
at the same time seeking higher yields from longer-term lending and investing
activities.
Cash and cash equivalents increased by $11.8 million during 1997 to $93.6
million at year end. Cash provided by operating activities was $44.8 million in
1997, $35.2 million in 1996, and $39.3 million in 1995. Net income was the
primary source of such cash during each year.
Cash used in investing activities was $93.4 million in 1997, $249.5 million in
1996, and $103.0 million in 1995. The primary use of cash in investing
activities was the net increase in the loan portfolio. Cash used for the net
increase in loans was $111.3 million in 1997, $87.6 million in 1996, and $71.4
million in 1995. Cash of $6.7 million was used in 1997 to purchase branch
offices and $11.6 million was used to acquire the related loans. During 1996,
$10.9 million in cash was used to purchase branch offices and $30.8 million was
invested to acquire the related loans.
Security transactions are the other major source or use of cash in investing
activities. Proceeds from the sale or maturity of securities provide cash and
purchases of securities use cash. Net security transactions provided $38.9
million of cash in 1997 and used $118.2 million and $27.7 million of cash in
1996 and 1995, respectively.
Cash provided by financing activities was $60.4 million in 1997, $183.0 million
in 1996, and $94.6 million in 1995. A major source of cash for financing
activities is the net increase in deposits. Cash provided from the net increase
in deposits was $42.3 million in 1997, $54.9 million in 1996 and $155.1 million
in 1995. The purchase of deposits with the branch offices in 1997 and 1996
provided cash of $49.2 million and $97.9 million, respectively.
Changes in short-term borrowings or long-term debt is a major source or use of
cash for financing activities. The net increase in short-term borrowings
provided cash of $16.5 million in 1997 and $13.1 million in 1996. The net
decrease in short-term borrowings used cash of $44.7 million in 1995. Proceeds
from long-term debt provided cash of $30.0 million in 1996 and $5.0 million in
1995. Cash was used to repay long-term debt of $31.5 million in 1997, $1.0
million in 1996, and $6.3 million in 1995.
Funds are available from a number of sources, including the securities
portfolio, the core deposit base, Federal Home Loan Bank borrowings, and the
capability to securitize or package loans for sale. The present funding sources
provide more than adequate liquidity for the Corporation to meet its cash flow
needs.
Liquidity is enhanced by assets maturing or repricing within one year. Assets
maturing or repricing within one year were $1,273 million or 59.7% of interest
earning assets at year-end 1997. Liquidity is also enhanced by a significant
amount of stable core deposits from a variety of customers in several Ohio
markets served by the Corporation.
An asset/liability committee monitors and forecasts rate-sensitive assets and
liabilities and develops strategies and pricing policies to influence the
acquisition of certain assets and liabilities. The purpose of these efforts is
to guard the Corporation from adverse impacts of unforeseen swings in interest
rates and to enhance the net income of the Corporation by accepting a limited
amount of interest rate risk, based on interest rate projections.
The following table shows interest sensitivity data for five different time
intervals as of December 31, 1997:
33
31
TABLE 11 - INTEREST RATE SENSITIVITY
- ----------------------------------------------------------------------------------------------------------------------
0-3 3-12 1-3 3-5 Over 5
(DOLLARS IN THOUSANDS) Months Months Years Years Years TOTAL
- ----------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVE ASSETS:
Investment securities (1) $ 31,607 $ 78,547 $146,826 $ 60,239 $223,511 $ 540,730
- ----------------------------------------------------------------------------------------------------------------------
Loans (1) 544,828 618,389 271,157 115,459 42,094 1,591,927
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EARNING ASSETS 576,435 696,936 417,983 175,698 265,605 2,132,657
- ----------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES:
Interest bearing checking (2) 31,022 -- 93,065 -- -- 124,087
- ----------------------------------------------------------------------------------------------------------------------
Savings accounts (2) 137,013 -- 137,012 -- -- 274,025
- ----------------------------------------------------------------------------------------------------------------------
Money market checking 242,854 -- -- -- -- 242,854
- ----------------------------------------------------------------------------------------------------------------------
Time deposits 201,715 449,682 255,841 44,000 3,326 954,564
- ----------------------------------------------------------------------------------------------------------------------
Other 1,567 -- -- -- -- 1,567
- ----------------------------------------------------------------------------------------------------------------------
Total deposits 614,171 449,682 485,918 44,000 3,326 1,597,097
- ----------------------------------------------------------------------------------------------------------------------
Short-term borrowings 149,824 1,800 -- -- -- 151,624
- ----------------------------------------------------------------------------------------------------------------------
Long-term debt 731 1,080 20,984 2,398 5,675 30,868
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING
LIABILITIES 764,726 452,562 506,902 46,398 9,001 1,779,589
- ----------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY GAP (188,291) 244,374 (88,919) 129,300 256,604 353,068
- ----------------------------------------------------------------------------------------------------------------------
CUMULATIVE RATE SENSITIVITY GAP (188,291) 56,083 (32,836) 96,464 353,068
- ----------------------------------------------------------------------------------------------------------------------
CUMULATIVE GAP AS A PERCENTAGE
OF TOTAL INTEREST EARNING ASSETS -8.83% 2.63% -1.54% 4.52% 16.56%
- ----------------------------------------------------------------------------------------------------------------------
(1) Investment securities and loans that are subject to prepayment are shown in
the table by the earlier of their repricing date or their expected
repayment dates and not by their contractual maturity.
(2) Management considers interest bearing checking accounts and savings
accounts to be core deposits; therefore, not as rate sensitive as other
deposit accounts and borrowed money. Accordingly, only 25% of interest
bearing checking accounts and 50% of savings accounts are considered to
reprice within one year. If all of the interest bearing checking accounts
and savings accounts were considered to reprice within one year, the
one-year cumulative gap would change from a positive 2.63% to a negative
8.16%.
For the first three months, there was a cumulative excess of rate-sensitive
liabilities over rate-sensitive assets while in the next period (three to twelve
months), the reverse was true. For the year, rate-sensitive assets are greater
than rate-sensitive liabilities, by 2.63% of interest earning assets, which
indicates that the Corporation's interest rate risk position is somewhat
balanced. A positive one-year cumulative gap would suggest that the
Corporation's net interest margin would modestly increase, if interest rates
were to rise. The interest rate sensitivity gap analysis does provide a good
overall picture of the Corporation's static interest rate risk position.
The Corporation's current policy is that the one-year cumulative gap should not
exceed fifteen percent of earning assets for three consecutive quarters. Trying
to manage this gap within an acceptable percentage range of earning assets is a
continual challenge in a changing interest rate environment and one of the
objectives of the Corporation's Asset/Liability Committee.
The usefulness of the interest sensitivity gap analysis as a forecasting tool in
projecting net interest income is limited. The gap analysis does not consider
the magnitude by which assets or liabilities will reprice during a period and
also contains assumptions as to the repricing of transaction and savings
accounts that
34
32
may not prove to be correct. Management supplements the interest rate
sensitivity gap analysis with periodic simulations of balance sheet sensitivity
under various interest rate and what-if scenarios to better forecast and manage
the net interest margin.
The Corporation uses an earnings simulation model to analyze net interest income
sensitivity to movements in interest rates. This model is based on actual cash
flows and repricing characteristics for balance sheet instruments and
incorporates market-based assumptions regarding the impact of changing interest
rates on the prepayment rate of certain assets and liabilities. This model also
includes management's projections for activity levels of various balance sheet
instruments and noninterest fee income and operating expense. Assumptions based
on the historical behavior of deposit rates and balances in relation to changes
in interest rates are also incorporated into this earnings simulation model.
These assumptions are inherently uncertain and, as a result, the model can not
precisely measure net interest income or precisely predict the impact of changes
in interest rates on net interest income and net income. Actual results will
differ from simulated results due to timing, magnitude, and frequency of
interest rate changes as well as changes in market conditions and management
strategies.
Management uses a .50% change in market interest rates per quarter for a total
of 2.00% per year in evaluating the impact of changing interest rates on net
interest income and net income over a one-year horizon. At December 31, 1997,
the earnings simulation model projected that net income would increase by 2.2%
using a rising interest rate scenario and decrease by 2.2% using a declining
interest rate scenario over the next year. At December 31, 1996, the earnings
simulation model projected that net income would increase by 2.8% using a rising
interest rate scenario and decrease by 3.2% using a declining interest rate
scenario over a one-year horizon. Management believes that at December 31, 1997
the balance sheet reflects a slight asset sensitive rate risk position for the
one-year horizon.
CAPITAL: The Corporation's primary means of maintaining capital adequacy is
through net retained earnings. At December 31, 1997, the Corporation's equity
capital was $222.1 million, an increase of 11.6% over the equity capital at
December 31, 1996. Exclusive of the unrealized gain on available-for-sale
securities, equity capital increased 10.7% in 1997 compared to 1996.
Financial institution regulators have established guidelines for minimum capital
ratios for banks, thrifts and bank holding companies. In 1990, the banking
industry began to phase in new capital requirements based on "risk-based"
assets. The unrealized gain or loss on available-for-sale securities is not
included in computing regulatory capital. The capital standard of risk-based
capital to risk-based assets is 8.00% at December 31, 1997. At year-end 1997,
the Corporation had a risk-based capital ratio of 14.72% or capital above the
minimum required by $99.4 million. The capital standard of Tier 1 capital to
risk-based assets is 4% at December 31, 1997. Tier 1 capital includes
stockholders' equity net of goodwill and any other intangible assets.
At year-end 1997, the Corporation had a Tier 1 capital to risk-based assets
ratio of 13.46% or capital above the minimum required by $139.8 million. Bank
regulators have also established a leverage capital ratio of 4%, consisting of
Tier 1 capital to total assets, not risk adjusted. At year-end 1997, the
Corporation had a leverage capital ratio of 8.91% or capital above the minimum
required by $109.7 million. Regulatory guidelines also establish capital ratio
requirements for "well capitalized" bank holding companies. The capital ratios
are 10% for risk-based capital, 6% for Tier 1 capital to risk-based assets and
5% for Tier 1 capital to total assets. The Corporation exceeds these higher
capital standards and therefore is classified as "well capitalized."
35
33
The financial institution subsidiaries of the Corporation each met the well
capitalized capital ratio guidelines at December 31, 1997. The table below
indicates the capital ratios for each subsidiary and the Corporation at December
31, 1997:
TABLE 12 - CAPITAL RATIOS
- -------------------------------------------------------------------------------------------------------------------
TIER 1 TOTAL
DECEMBER 31, 1997 LEVERAGE RISK-BASED RISK-BASED
- -------------------------------------------------------------------------------------------------------------------
Park National Bank 6.17% 8.55% 11.22%
- -------------------------------------------------------------------------------------------------------------------
Richland Trust Company 5.97% 10.43% 11.69%
- -------------------------------------------------------------------------------------------------------------------
Century National Bank 5.93% 10.03% 11.30%
- -------------------------------------------------------------------------------------------------------------------
First-Knox National Bank 6.67% 9.63% 11.49%
- -------------------------------------------------------------------------------------------------------------------
Park National Corporation 8.91% 13.46% 14.72%
- -------------------------------------------------------------------------------------------------------------------
Minimum Capital Ratio 4.00% 4.00% 8.00%
- -------------------------------------------------------------------------------------------------------------------
Well Capitalized Ratio 5.00% 6.00% 10.00%
- -------------------------------------------------------------------------------------------------------------------
RISK-BASED CAPITAL RATIOS December 31, 1997
[GRAPHIC]
Park
Well Capitalized
Regulatory Minimum
AVERAGE STOCKHOLDERS' EQUITY (millions)
1997 $207.0
1996 $187.8
1995 $168.4
1994 $150.6
1993 $134.6
EFFECTS OF INFLATION: Balance sheets of financial institutions typically contain
assets and liabilities that are monetary in nature and therefore, differ greatly
from most commercial and industrial companies which have significant investments
in premises, equipment and inventory. During periods of inflation, financial
institutions that are in a net positive monetary position will experience a
decline in purchasing power, which does have an impact on growth. Another
significant effect on internal equity growth is other expenses, which tend to
rise during periods of inflation.
Management believes the most significant impact on financial results is the
Corporation's ability to align its asset/liability management program to react
to changes in interest rates.
36
34
The following table summarizes five-year financial information:
TABLE 13 - CONSOLIDATED FIVE-YEAR SELECTED FINANCIAL DATA
- ----------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
(DOLLARS IN THOUSANDS, 1997 1996 1995 1994 1993
EXCEPT PER SHARE DATA)
- ----------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
Interest income $ 180,511 $ 163,193 $ 150,288 $ 127,411 $ 121,676
- ----------------------------------------------------------------------------------------------------------------------
Interest expense 77,033 69,155 64,347 48,791 46,520
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 103,478 94,038 85,941 78,620 75,156
- ----------------------------------------------------------------------------------------------------------------------
Noninterest income 20,479 16,660 16,049 11,783 13,375
- ----------------------------------------------------------------------------------------------------------------------
Noninterest expense 62,408 59,112 56,501 52,512 52,959
- ----------------------------------------------------------------------------------------------------------------------
Provision for losses 6,999 5,294 5,248 2,478 3,934
- ----------------------------------------------------------------------------------------------------------------------
Income before extraordinary item and
cumulative effect of a change in
accounting principle 37,693 31,700 27,829 25,181 22,211
- ----------------------------------------------------------------------------------------------------------------------
Net income 37,693 31,700 27,829 25,181 23,711
- ----------------------------------------------------------------------------------------------------------------------
PER SHARE:
Income before extraordinary item and
cumulative effect of a change in
accounting principle - basic $4.02 $3.39 $2.96 $2.68 $2.42
- ----------------------------------------------------------------------------------------------------------------------
Income before extraordinary item and
cumulative effect of a change in
accounting principle - diluted 4.00 3.38 2.95 2.67 2.39
- ----------------------------------------------------------------------------------------------------------------------
Net income - basic 4.02 3.39 2.96 2.68 2.58
- ----------------------------------------------------------------------------------------------------------------------
Net income - diluted 4.00 3.38 2.95 2.67 2.55
- ----------------------------------------------------------------------------------------------------------------------
Cash dividends declared 1.68 1.45 1.25 0.98 1.05
- ----------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES:
Loans $1,527,694 $1,379,973 $1,318,275 $1,221,333 $1,112,873
- ----------------------------------------------------------------------------------------------------------------------
Investment securities 548,320 472,107 421,089 429,572 434,963
- ----------------------------------------------------------------------------------------------------------------------
Money market instruments and other 8,132 39,573 17,325 8,612 18,473
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EARNING ASSETS 2,084,146 1,891,653 1,756,689 1,659,517 1,566,309
- ----------------------------------------------------------------------------------------------------------------------
Noninterest bearing deposits 228,598 207,262 196,406 186,508 169,498
- ----------------------------------------------------------------------------------------------------------------------
Interest bearing deposits 1,550,865 1,420,919 1,317,325 1,264,862 1,229,858
- ----------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 1,779,463 1,628,181 1,513,731 1,451,370 1,399,356
- ----------------------------------------------------------------------------------------------------------------------
Short-term borrowings 162,626 126,721 139,035 130,831 110,973
- ----------------------------------------------------------------------------------------------------------------------
Long-term debt 46,652 46,497 33,413 27,246 4,773
- ----------------------------------------------------------------------------------------------------------------------
Stockholders' equity 206,999 187,755 168,432 150,640 134,642
- ----------------------------------------------------------------------------------------------------------------------
Total assets 2,219,582 2,011,795 1,872,999 1,772,848 1,662,533
- ----------------------------------------------------------------------------------------------------------------------
RATIOS:
Return on average assets 1.70% 1.58% 1.49% 1.42% 1.43%
- ----------------------------------------------------------------------------------------------------------------------
Return on average equity 18.21% 16.88% 16.52% 16.72% 17.61%
- ----------------------------------------------------------------------------------------------------------------------
Net interest margin (1) 5.07% 5.09% 5.02% 4.88% 4.94%
- ----------------------------------------------------------------------------------------------------------------------
Noninterest expense to
net revenue (1) 49.51% 52.34% 54.24% 56.59% 58.38%
- ----------------------------------------------------------------------------------------------------------------------
Dividend payout ratio 41.93% 40.66% 38.45% 33.95% 36.87%
- ----------------------------------------------------------------------------------------------------------------------
Average stockholders' equity to
average total assets 9.33% 9.33% 8.99% 8.50% 8.10%
- ----------------------------------------------------------------------------------------------------------------------
Leveraged capital 8.91% 8.73% 9.06% 8.62% 8.14%
- ----------------------------------------------------------------------------------------------------------------------
Tier 1 capital 13.46% 13.16% 14.06% 13.37% 13.47%
- ----------------------------------------------------------------------------------------------------------------------
Risk-based capital 14.72% 14.42% 15.30% 14.61% 14.70%
- ----------------------------------------------------------------------------------------------------------------------
(1) Computed on a fully taxable equivalent basis
37
35
The following table is a summary of selected quarterly results of operations for
the years ended December 31, 1997 and 1996. Certain quarterly amounts have been
reclassified to conform to the year-end financial statement presentation.
TABLE 14 - QUARTERLY FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, THREE MONTHS ENDED
EXCEPT PER SHARE DATA) --------------------------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ------------------------------------------------------------------------------------------------------------------------
1997:
Interest income $43,461 $45,214 $45,731 $46,105
- ------------------------------------------------------------------------------------------------------------------------
Interest expense 18,777 19,466 19,451 19,339
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 24,684 25,748 26,280 26,766
- ------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 1,194 1,454 1,521 2,830
- ------------------------------------------------------------------------------------------------------------------------
Loss on the sale of securities -- -- (7) --
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes 13,016 13,849 15,040 12,645
- ------------------------------------------------------------------------------------------------------------------------
Net income 8,989 9,552 10,384 8,768
- ------------------------------------------------------------------------------------------------------------------------
Per share data:
Net income - basic 0.96 1.02 1.11 0.93
- ------------------------------------------------------------------------------------------------------------------------
Net income - diluted 0.96 1.01 1.10 0.93
- ------------------------------------------------------------------------------------------------------------------------
Weighted-average common
stock outstanding - basic 9,343,358 9,402,886 9,410,162 9,386,903
- ------------------------------------------------------------------------------------------------------------------------
Weighted-average common
stock equivalent - diluted 9,390,650 9,420,240 9,448,032 9,436,164
- ------------------------------------------------------------------------------------------------------------------------
1996:
Interest income $39,511 $39,640 $41,074 $42,968
- ------------------------------------------------------------------------------------------------------------------------
Interest expense 16,933 16,629 17,483 18,110
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 22,578 23,011 23,591 24,858
- ------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 1,086 1,256 1,216 1,736
- ------------------------------------------------------------------------------------------------------------------------
Loss on the sale of securities (300) (400) (168) (456)
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes 10,930 12,174 12,971 10,217
- ------------------------------------------------------------------------------------------------------------------------
Net income 7,589 8,423 8,947 6,741
- ------------------------------------------------------------------------------------------------------------------------
Per share data:
Net income - basic 0.81 0.90 0.96 0.72
- ------------------------------------------------------------------------------------------------------------------------
Net income - diluted 0.81 0.90 0.95 0.72
- ------------------------------------------------------------------------------------------------------------------------
Weighted-average common
stock outstanding - basic 9,346,853 9,354,309 9,353,594 9,352,853
- ------------------------------------------------------------------------------------------------------------------------
Weighted-average common
stock equivalent - diluted 9,380,518 9,385,471 9,393,742 9,386,219
- ------------------------------------------------------------------------------------------------------------------------
38
36
The Corporation's common stock (symbol:PRK) is traded on the American Stock
Exchange (AMEX). At December 31, 1997, the Corporation had 2,691 stockholders of
record. The following table sets forth the high, low and closing sale prices of,
and dividends declared on the common stock for each quarterly period for the
years ended December 31, 1997 and 1996, as reported by AMEX.
TABLE 15 - MARKET AND DIVIDEND INFORMATION
- ---------------------------------------------------------------------------------------------------------------------
CASH
DIVIDEND
LAST DECLARED
HIGH LOW PRICE PER SHARE
- ---------------------------------------------------------------------------------------------------------------------
1997:
First Quarter $54 5/8 $51 1/8 $54 5/8 $0.40
- ---------------------------------------------------------------------------------------------------------------------
Second Quarter 79 3/4 54 1/8 79 3/4 0.40
- ---------------------------------------------------------------------------------------------------------------------
Third Quarter 80 7/8 66 5/8 80 7/8 0.40
- ---------------------------------------------------------------------------------------------------------------------
Fourth Quarter 98 80 88 1/8 0.48
- ---------------------------------------------------------------------------------------------------------------------
1996:
First Quarter $50 1/4 $47 3/8 $48 3/8 $0.35
- ---------------------------------------------------------------------------------------------------------------------
Second Quarter 49 1/2 46 3/8 49 1/2 0.35
- ---------------------------------------------------------------------------------------------------------------------
Third Quarter 49 5/8 47 7/8 48 1/4 0.35
- ---------------------------------------------------------------------------------------------------------------------
Fourth Quarter 53 48 53 0.40
- ---------------------------------------------------------------------------------------------------------------------
TEN-YEAR RETURN (December 31, 1987 - December 31, 1997)
[GRAPHIC]
87 $ 1,000
88
89
90
91
92
93
94
95
96
97 $11,687
Assumes initial investment of $1,000 with reinvestment of dividends in the
common stock of Park.
39
37
STOCKHOLDERS' INFORMATION
STOCK LISTING:
AMEX Symbol - PRK
CUSIP #700658107
GENERAL STOCKHOLDER INQUIRIES:
Park National Corporation
David C. Bowers, Secretary
50 North Third Street
Post Office Box 3500
Newark, Ohio 43058-3500
740/349-3708
DIVIDEND REINVESTMENT PLAN:
The Corporation offers a plan whereby participating stockholders can
purchase additional shares of Park National Corporation common stock
through automatic reinvestment of their regular quarterly cash dividends.
All commissions and fees connected with the purchase and safekeeping of
the shares are paid by the Corporation. Details of the Plan and an
enrollment card can be obtained by contacting the Secretary as indicated
above.
DIRECT DEPOSIT OF DIVIDENDS:
The Corporation's stockholders may have their dividend payments directly
deposited into their checking, savings or money market account. This
direct deposit of dividends is free for all stockholders. If you have any
questions or need an enrollment form, please contact the Corporation's
Stock Transfer Agent and Registrar indicated below.
STOCK TRANSFER AGENT AND REGISTRAR:
First-Knox National Bank
P.O. Box 871
One South Main Street
Mount Vernon, Ohio 43050-0871
800/837-5266
FORM 10-K:
Copies of Park National Corporation's Form 10-K for 1997, including
financial statements and inserts, may be obtained by contacting the
Secretary as indicated above.
INTERNET ADDRESS:
http://www.parknationalbank.com/corp.htm
E-MAIL:
main@parknationalbank.com
40
38
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Park National Corporation
We have audited the accompanying consolidated balance sheets of Park National
Corporation and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated financial statements give retroactive effect to the
merger of Park National Corporation and First-Knox Banc Corp. (First-Knox),
which has been accounted for using the pooling of interests accounting method as
described in Note 2 to the consolidated financial statements. We did not audit
the 1996 and 1995 financial statements of First-Knox, which statements reflect
total assets constituting 26% for 1996 and net income constituting 19% for 1996
and 21% for 1995 of the related consolidated financial statement totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts for First-Knox, is based
solely on the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, and for 1996 and 1995, the report of other
auditors, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Park National
Corporation and Subsidiaries at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Columbus, Ohio
January 20, 1998
41
39
CONSOLIDATED BALANCE SHEETS
PARK NATIONAL CORPORATION AND SUBSIDIARIES
at December 31, 1997 and 1996 (Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 93,585 $ 81,765
- -----------------------------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES:
Securities available-for-sale, at fair value
(amortized cost of $522,179 and $556,436 at
December 31, 1997 and 1996, respectively) 532,922 563,613
- -----------------------------------------------------------------------------------------------------------------------
Securities held-to-maturity, at amortized
cost (fair value approximates $8,156 and
$11,217 at December 31, 1997 and 1996, respectively) 7,808 10,780
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES 540,730 574,393
- -----------------------------------------------------------------------------------------------------------------------
Loans 1,603,648 1,483,387
- -----------------------------------------------------------------------------------------------------------------------
Unearned loan interest (11,721) (11,363)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LOANS 1,591,927 1,472,024
- -----------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses (35,595) (32,347)
- -----------------------------------------------------------------------------------------------------------------------
LOANS, NET 1,556,332 1,439,677
- -----------------------------------------------------------------------------------------------------------------------
OTHER ASSETS:
Premises and equipment, net 27,805 27,548
- -----------------------------------------------------------------------------------------------------------------------
Accrued interest receivable 13,923 12,790
- -----------------------------------------------------------------------------------------------------------------------
Other 56,008 48,797
- -----------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 97,736 89,135
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,288,383 $2,184,970
- -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
42
40
CONSOLIDATED BALANCE SHEETS (continued)
PARK NATIONAL CORPORATION AND SUBSIDIARIES
at December 31, 1997 and 1996 (Dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------------
DEPOSITS:
Noninterest bearing $ 257,867 $ 225,424
- -----------------------------------------------------------------------------------------------------------------------
Interest bearing 1,597,097 1,537,994
- -----------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 1,854,964 1,763,418
- -----------------------------------------------------------------------------------------------------------------------
BORROWINGS:
Short-term borrowings 151,624 135,111
- -----------------------------------------------------------------------------------------------------------------------
Long-term debt 30,868 62,375
- -----------------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES:
Accrued interest payable 6,548 6,620
- -----------------------------------------------------------------------------------------------------------------------
Other 22,262 18,485
- -----------------------------------------------------------------------------------------------------------------------
TOTAL OTHER LIABILITIES 28,810 25,105
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,066,266 1,986,009
- -----------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock, no par value (20,000,000 shares authorized;
9,551,203 shares issued in 1997 and 9,443,864
issued in 1996) 68,275 64,611
- -----------------------------------------------------------------------------------------------------------------------
Unrealized holding gain on
available-for-sale securities, net 7,019 4,687
- -----------------------------------------------------------------------------------------------------------------------
Retained earnings 154,535 132,648
- -----------------------------------------------------------------------------------------------------------------------
Less: Treasury stock (158,864 shares in 1997 and
89,426 shares in 1996) (7,712) (2,985)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 222,117 198,961
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,288,383 $2,184,970
- -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
43
41
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1997, 1996 and 1995 (Dollars in thousands,
except per share data)
- ----------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $142,722 $129,384 $121,726
- ----------------------------------------------------------------------------------------------------------------------
Interest and dividends on:
Obligations of U.S. Government, its agencies
and other securities 33,229 28,125 24,119
- ----------------------------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions 4,099 3,500 3,434
- ----------------------------------------------------------------------------------------------------------------------
Other interest income 461 2,184 1,009
- ----------------------------------------------------------------------------------------------------------------------
Total interest income 180,511 163,193 150,288
- ----------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits:
Demand and savings deposits 16,790 16,049 16,838
- ----------------------------------------------------------------------------------------------------------------------
Time deposits 49,659 44,612 38,385
- ----------------------------------------------------------------------------------------------------------------------
Interest on short-term borrowings 7,738 5,694 7,173
- ----------------------------------------------------------------------------------------------------------------------
Interest on long-term debt 2,846 2,800 1,951
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense 77,033 69,155 64,347
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 103,478 94,038 85,941
- ----------------------------------------------------------------------------------------------------------------------
Provision for loan losses 6,999 5,294 5,248
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 96,479 88,744 80,693
- ----------------------------------------------------------------------------------------------------------------------
Other income:
Income from fiduciary activities 5,192 4,099 3,583
- ----------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts 6,308 5,849 5,388
- ----------------------------------------------------------------------------------------------------------------------
Loss on sales of securities (7) (1,324) (634)
- ----------------------------------------------------------------------------------------------------------------------
Other service income 3,376 3,236 2,805
- ----------------------------------------------------------------------------------------------------------------------
Other 5,610 4,800 4,907
- ----------------------------------------------------------------------------------------------------------------------
Total other income $ 20,479 $ 16,660 $ 16,049
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
44
42
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1997, 1996 and 1995 (Dollars in thousands,
except per share data)
- ----------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
OTHER EXPENSE:
Salaries and employee benefits $31,888 $28,966 $27,476
- ----------------------------------------------------------------------------------------------------------------------
Data processing fees 5,306 5,183 4,836
- ----------------------------------------------------------------------------------------------------------------------
Fees and service charges 3,732 4,874 3,272
- ----------------------------------------------------------------------------------------------------------------------
Net occupancy expense of bank premises 3,339 3,063 2,933
- ----------------------------------------------------------------------------------------------------------------------
Amortization of intangibles 2,019 635 603
- ----------------------------------------------------------------------------------------------------------------------
Furniture and equipment expense 3,680 3,589 3,256
- ----------------------------------------------------------------------------------------------------------------------
Insurance 774 1,785 2,325
- ----------------------------------------------------------------------------------------------------------------------
Marketing 2,182 1,925 1,796
- ----------------------------------------------------------------------------------------------------------------------
Postage and telephone 2,747 2,539 2,446
- ----------------------------------------------------------------------------------------------------------------------
State taxes 1,957 2,022 2,027
- ----------------------------------------------------------------------------------------------------------------------
Other 4,784 4,531 5,531
- ----------------------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE 62,408 59,112 56,501
- ----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE FEDERAL INCOME TAXES 54,550 46,292 40,241
- ----------------------------------------------------------------------------------------------------------------------
Federal income taxes 16,857 14,592 12,412
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $37,693 $31,700 $27,829
- ----------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
BASIC $4.02 $3.39 $2.96
- ----------------------------------------------------------------------------------------------------------------------
DILUTED $4.00 $3.38 $2.95
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
45
43
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1997, 1996 and 1995 (Dollars in thousands,
except share data)
- -----------------------------------------------------------------------------------------------------------------------------------
UNREALIZED
HOLDING
GAIN/(LOSS) ON
COMMON STOCK AVAILABLE- TREASURY STOCK
--------------------- FOR-SALE ------------------------
SHARES RETAINED SECURITIES,
ISSUED AMOUNT EARNINGS NET SHARES AMOUNT TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1995 9,373,236 $ 56,336 $ 106,260 $ (7,350) 32,960 $ (255) $ 154,991
- -----------------------------------------------------------------------------------------------------------------------------------
Treasury stock purchased -- -- -- -- 112,977 (4,675) (4,675)
- -----------------------------------------------------------------------------------------------------------------------------------
Treasury stock reissued primarily for
stock options exercised -- -- -- -- (5,345) 212 212
- -----------------------------------------------------------------------------------------------------------------------------------
Shares issued for dividend
reinvestment
plan and stock options 8,116 239 -- -- -- -- 239
- -----------------------------------------------------------------------------------------------------------------------------------
Net income -- -- 27,829 -- -- -- 27,829
- -----------------------------------------------------------------------------------------------------------------------------------
Cash dividends:
Corporation at $1.25 per share -- -- (8,950) -- -- -- (8,950)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared First-Knox,
prior to merger -- -- (1,751) -- -- -- (1,751)
- -----------------------------------------------------------------------------------------------------------------------------------
Two-for-one stock split in the
form of a 100% stock dividend
at First-Knox, prior to merger -- 5,693 (5,693) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Unrealized net holding gain on
available-for-sale securities -- -- -- 15,188 -- -- 15,188
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 9,381,352 62,268 117,695 7,838 140,592 (4,718) 183,083
- -----------------------------------------------------------------------------------------------------------------------------------
Treasury stock purchased -- -- -- -- 13,000 (640) (640)
- -----------------------------------------------------------------------------------------------------------------------------------
Treasury stock reissued primarily for
stock options exercised -- 38 (15,628) 650 688
- -----------------------------------------------------------------------------------------------------------------------------------
Shares issued for dividend
reinvestment
plan and stock options 5,540 171 -- -- -- -- 171
- -----------------------------------------------------------------------------------------------------------------------------------
Net income -- -- 31,700 -- -- -- 31,700
- -----------------------------------------------------------------------------------------------------------------------------------
Cash dividends:
Corporation at $1.45 per share -- -- (10,354) -- -- -- (10,354)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared First-Knox,
prior to merger -- -- (2,536) -- -- -- (2,536)
- -----------------------------------------------------------------------------------------------------------------------------------
5% stock dividend at First-Knox,
prior to merger 56,972 2,134 (3,857) -- (48,538) 1,723 --
- -----------------------------------------------------------------------------------------------------------------------------------
Unrealized net holding loss on
available-for-sale securities -- -- -- (3,151) -- -- (3,151)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 9,443,864 64,611 132,648 4,687 89,426 (2,985) 198,961
- -----------------------------------------------------------------------------------------------------------------------------------
Treasury stock purchased -- -- -- -- 96,721 (6,249) (6,249)
- -----------------------------------------------------------------------------------------------------------------------------------
Treasury stock reissued primarily for
stock options exercised -- -- -- -- (27,283) 1,522 1,522
- -----------------------------------------------------------------------------------------------------------------------------------
Shares issued for dividend
reinvestment
plan and stock options 107,939 2,325 -- -- -- -- 2,325
- -----------------------------------------------------------------------------------------------------------------------------------
Cash payment for fractional
shares in merger (600) (40) -- -- -- -- (40)
- -----------------------------------------------------------------------------------------------------------------------------------
Tax benefit from exercise of
stock options -- 1,379 -- -- -- -- 1,379
- -----------------------------------------------------------------------------------------------------------------------------------
Net income -- -- 37,693 -- -- -- 37,693
- -----------------------------------------------------------------------------------------------------------------------------------
Cash dividends:
Corporation at $1.68 per share -- -- (14,905) -- -- -- (14,905)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared First-Knox,
prior to merger -- -- (901) -- -- -- (901)
- -----------------------------------------------------------------------------------------------------------------------------------
Unrealized net holding gain on
available-for-sale securities -- -- -- 2,332 -- -- 2,332
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 9,551,203 $ 68,275 $ 154,535 $ 7,019 158,864 $ (7,712) $ 222,117
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
46
44
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995 (Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 37,693 $ 31,700 $ 27,829
- -----------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 6,999 5,294 5,248
- -----------------------------------------------------------------------------------------------------------------------
Amortization of loan costs and fees, net (788) (475) (161)
- -----------------------------------------------------------------------------------------------------------------------
Provision for depreciation and amortization 3,273 3,005 2,929
- -----------------------------------------------------------------------------------------------------------------------
Market loss on loans held-for-sale -- 59 --
- -----------------------------------------------------------------------------------------------------------------------
Amortization of the excess of cost over net assets
of banks purchased 2,019 380 363
- -----------------------------------------------------------------------------------------------------------------------
Accretion of investment security discounts, net (1,726) (1,658) (1,083)
- -----------------------------------------------------------------------------------------------------------------------
Deferred income taxes (378) (213) (770)
- -----------------------------------------------------------------------------------------------------------------------
Realized investment security losses 7 1,324 634
- -----------------------------------------------------------------------------------------------------------------------
Loan sale gain -- -- (27)
- -----------------------------------------------------------------------------------------------------------------------
Changes in assets and liabilities:
Increase in other assets (5,264) (4,521) (742)
- -----------------------------------------------------------------------------------------------------------------------
Increase in other liabilities 2,949 223 5,121
- -----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 44,784 35,118 39,341
- -----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sales of securities:
Available-for-sale 45,083 85,717 48,923
- -----------------------------------------------------------------------------------------------------------------------
Proceeds from maturities of securities:
Held-to-maturity 2,973 2,110 6,032
- -----------------------------------------------------------------------------------------------------------------------
Available-for-sale 141,765 86,150 53,363
- -----------------------------------------------------------------------------------------------------------------------
Purchases of securities:
Held-to-maturity -- (1,575) (2,265)
- -----------------------------------------------------------------------------------------------------------------------
Available-for-sale (150,873) (290,580) (133,789)
- -----------------------------------------------------------------------------------------------------------------------
Net increase in loans (111,284) (87,612) (71,356)
- -----------------------------------------------------------------------------------------------------------------------
Purchase of loans (11,582) (30,755) --
- -----------------------------------------------------------------------------------------------------------------------
Cash paid for branches (6,748) (10,857) --
- -----------------------------------------------------------------------------------------------------------------------
Purchases of premises and equipment, net (2,740) (2,072) (3,881)
- -----------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (93,406) (249,474) (102,973)
- -----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Purchase of deposits 49,192 97,928 --
- -----------------------------------------------------------------------------------------------------------------------
Net increase in deposits 42,354 54,883 155,121
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in short-term borrowings 16,513 13,133 (44,740)
- -----------------------------------------------------------------------------------------------------------------------
Issuance of common stock -- 337 247
- -----------------------------------------------------------------------------------------------------------------------
Exercise of stock options 3,664 -- --
- -----------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock, net (4,727) (118) (4,471)
- -----------------------------------------------------------------------------------------------------------------------
Proceeds from long-term debt -- 30,000 5,000
- -----------------------------------------------------------------------------------------------------------------------
Repayment of long-term debt (31,507) (1,040) (6,305)
- -----------------------------------------------------------------------------------------------------------------------
Cash dividends paid (15,047) (12,166) (10,282)
- -----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 60,442 182,957 94,570
- -----------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,820 (31,399) 30,938
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 81,765 113,164 82,226
- -----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 93,585 $ 81,765 $ 113,164
- -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
47
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed in the
preparation of the consolidated financial statements:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Park National
Corporation (the Corporation or Park) and all of its subsidiaries. Material
intercompany accounts and transactions have been eliminated.
ORGANIZATION
The Corporation is a multi-bank holding company headquartered in Newark, Ohio.
Through its banking subsidiaries, The Park National Bank (PNB), The Richland
Trust Company (Richland), Century National Bank (Century), and The First-Knox
National Bank of Mount Vernon (FKNB), the Corporation is engaged in a general
commercial banking and trust business, primarily in Central Ohio. PNB operates
through two banking divisions with the Park National Division headquartered in
Newark, Ohio and the Fairfield National Division headquartered in Lancaster,
Ohio. FKNB also operates through two banking divisions with the First-Knox
National Division headquartered in Mount Vernon, Ohio and the Farmers and
Savings Division headquartered in Loudonville, Ohio. All of the banking
subsidiaries and their respective divisions provide the following principal
services: the acceptance of deposits for demand, savings, and time accounts;
commercial, industrial, consumer and real estate lending, including installment
loans, credit cards, home equity lines of credit and commercial and auto
leasing; trust services; cash management; safe deposit operations; electronic
funds transfers; and a variety of additional banking-related services.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with current year
presentation.
INVESTMENT SECURITIES
Investment securities are classified upon acquisition into one of three
categories: Held-to-maturity, available-for-sale, or trading (see Note 4).
Held-to-maturity securities are those securities that the Corporation has the
positive intent and ability to hold to maturity and are recorded at amortized
cost. Available-for-sale securities are those securities that would be available
to be sold in the future in response to the Corporation's liquidity needs,
changes in market interest rates, and asset-liability management strategies,
among others. Available-for-sale securities are reported at fair value, with
unrealized holding gains and losses excluded from earnings and reported as a
separate component of stockholders' equity, net of applicable taxes. At December
31, 1997 and 1996, the Corporation did not hold any trading securities.
Gains and losses realized on the sale of investment securities have been
accounted for on the completed transaction method in the year of sale on an
"identified certificate" basis.
48
46
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is generally provided on the straight-line method over the
estimated useful lives of the related assets. Leasehold improvements are
amortized over the lives of the respective leases or the estimated useful lives
of the improvements, whichever are the shorter periods. Upon the sale or other
disposal of the assets, the cost and related accumulated depreciation are
removed from the accounts and the resulting gain or loss is recognized.
Maintenance and repairs are charged to expense as incurred while renewals and
improvements are capitalized.
OTHER REAL ESTATE OWNED
Other real estate owned is recorded at the lower of cost or fair market value
(which is not in excess of estimated net realizable value) and consists of
property acquired through foreclosure, loans in judgment and subject to
redemption, and real estate held for sale. Subsequent to acquisition, allowances
for losses are established if carrying values exceed fair value less estimated
costs to sell. Costs relating to development and improvement of such properties
are capitalized (not in excess of fair value less estimated costs to sell),
whereas costs relating to holding the properties are charged to expense.
INCOME RECOGNITION
Income earned by the Corporation and its subsidiaries is recognized principally
on the accrual basis of accounting. Loan origination fees are amortized over the
life of the loans using the interest method on a loan by loan basis, and
origination costs are deferred and amortized if material. Certain fees,
principally service, are recognized as income when billed or collected.
The Corporation's subsidiaries suspend the accrual of interest when, in
management's opinion, the collection of all or a portion of interest has become
doubtful. Generally, when a loan is placed on non-accrual, the Corporation's
subsidiaries charge all previously accrued and unpaid interest against income.
In future periods, interest will be included in income to the extent received
only if complete principal recovery is reasonably assured.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is that amount believed adequate to
absorb estimated credit losses in the loan portfolio based on management's
evaluation of various factors including overall growth in the loan portfolio, an
analysis of individual loans, prior and current loss experience, and current and
anticipated economic conditions. A provision for loan losses is charged to
operations based on management's periodic evaluation of these and other
pertinent factors.
Effective January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosure." These standards require an
allowance to be established as a component of the allowance for loan losses for
certain loans when it is probable that all amounts due pursuant to the
contractual terms of the loan will not be collected, and the recorded investment
in the loan exceeds the fair value. Fair value is measured using either the
present value of expected future cash flows based upon the initial effective
interest rate on the loan, the observable market price of the loan or the fair
value of the collateral if the loan is collateral dependent. The adoption of
these standards did not have a material impact on the overall allowance for loan
losses and did not affect the Corporation's charge-off or income recognition
policies.
49
47
LEASE FINANCING
Leases of equipment, automobiles, and aircraft to customers generally are direct
leases in which the Corporation's subsidiaries have acquired the equipment,
automobiles, or aircraft with no outside financing.
Such leases are accounted for as direct financing leases for financial reporting
purposes. Under the direct financing method, a receivable is recorded for the
total amount of the lease payments to be received.
Unearned lease income, representing the excess of the sum of the aggregate
rentals of the equipment, automobiles or aircraft over its cost is included in
income over the term of the lease under the interest method.
EXCESS OF COST OVER NET ASSETS OF BANKS PURCHASED
The excess of cost over net assets of the banks purchased is being amortized,
principally on the straight-line method, over periods ranging from seven to
fifteen years.
CONSOLIDATED STATEMENT OF CASH FLOWS
Cash and cash equivalents include cash and cash items, amounts due from banks
and federal funds sold. Generally federal funds are purchased and sold for one
day periods.
Net cash provided by operating activities reflects cash payments as follows:
- ---------------------------------------------------------------------------------------------------------------------
DECEMBER 31, (IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
Interest paid on deposits and other borrowings $77,105 $68,541 $62,238
- ---------------------------------------------------------------------------------------------------------------------
Income taxes paid 14,104 15,808 10,177
- ---------------------------------------------------------------------------------------------------------------------
INCOME TAXES
The Corporation accounts for income taxes using the asset and liability
approach. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
ACCOUNTING CHANGES
In 1997, SFAS No. 128, "Earnings per Share" replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to SFAS No. 128
requirements.
2. ACQUISITIONS
On May 5, 1997, the Corporation merged with First-Knox Banc Corp. (First-Knox),
a $569 million bank holding company headquartered in Mount Vernon, Ohio, in a
transaction accounted for as a pooling of interests. Park issued approximately
2.3 million shares of common stock to the stockholders of First-Knox based upon
an exchange ratio of .5914 shares of Park common stock for each outstanding
share of First-Knox common stock. The historical financial statements of the
Corporation have been restated to show Park and First-Knox on a combined basis.
Separate results of operations for Park and First-Knox are as follows:
50
48
- --------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED Twelve Months Ended
(IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 December 31
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME:
Park $19,077 $72,271 $66,352
- --------------------------------------------------------------------------------------------------------------------
First-Knox 5,607 21,767 19,589
- --------------------------------------------------------------------------------------------------------------------
COMBINED $24,684 $94,038 $85,941
- --------------------------------------------------------------------------------------------------------------------
NET INCOME:
Park $7,296 $25,664 $22,120
- --------------------------------------------------------------------------------------------------------------------
First-Knox 1,693 6,036 5,709
- --------------------------------------------------------------------------------------------------------------------
COMBINED $8,989 $31,700 $27,829
- --------------------------------------------------------------------------------------------------------------------
BASIC NET INCOME PER SHARE:
Park $1.02 $3.60 $3.09
- --------------------------------------------------------------------------------------------------------------------
First-Knox 0.45 1.61 1.51
- --------------------------------------------------------------------------------------------------------------------
COMBINED $0.96 $3.39 $2.96
- --------------------------------------------------------------------------------------------------------------------
DILUTED NET INCOME PER SHARE:
Park $1.02 $3.60 $3.09
- --------------------------------------------------------------------------------------------------------------------
First-Knox 0.44 1.59 1.50
- --------------------------------------------------------------------------------------------------------------------
COMBINED $0.96 $3.38 $2.95
- --------------------------------------------------------------------------------------------------------------------
On December 8, 1997, Fairfield National Division acquired three branch offices
in Lancaster, Ohio from KeyBank National Association. In addition to the fixed
assets, the purchase included $49 million of deposits and $12 million of loans.
The excess of the cost over net assets purchased was $6 million and is being
amortized using the straight-line method over seven years.
On December 6, 1996, Richland Trust Company acquired five branch offices in
Richland County from Peoples National Bank. In addition to the fixed assets, the
purchase included $98 million of deposits and $31 million of loans. The banking
business of the five branches was consolidated into Richland Trust Company's
operations. The excess of the cost over net assets purchased was $10 million and
is being amortized using the straight-line method over seven years.
Proforma information for the branch acquisitions has not been provided as the
impact on the consolidated financial statements of the Corporation is not
material.
3. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Corporation's banking subsidiaries are required to maintain average reserve
balances with the Federal Reserve Bank. The average required reserve balance was
approximately $19,493,000 and $19,224,000 at December 31, 1997 and 1996,
respectively. No other compensating balance arrangements were in existence at
year end.
51
49
4. INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities at
December 31 are as follows:
- ----------------------------------------------------------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
(IN THOUSANDS) AMORTIZED HOLDING HOLDING ESTIMATED
COST GAINS LOSSES FAIR VALUE
- ----------------------------------------------------------------------------------------------------------------------
1997:
SECURITIES AVAILABLE-FOR-SALE:
Obligations of U.S. Treasury and other
U.S. Government agencies $ 155,780 $ 3,468 $ -- $159,248
- ----------------------------------------------------------------------------------------------------------------------
Obligations of states and
political subdivisions 76,803 3,192 62 79,933
- ----------------------------------------------------------------------------------------------------------------------
U.S. Government agencies'
asset-backed securities and
other asset-backed securities 270,708 3,628 102 274,234
- ----------------------------------------------------------------------------------------------------------------------
Other equity securities 18,888 619 -- 19,507
- ----------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE-FOR-SALE $522,179 $10,907 $164 $532,922
- ----------------------------------------------------------------------------------------------------------------------
SECURITIES HELD-TO-MATURITY:
Obligations of states and
political subdivisions $ 7,434 $ 349 $ 5 $ 7,778
- ----------------------------------------------------------------------------------------------------------------------
Other asset-backed securities 374 4 -- 378
- ----------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES HELD-TO-MATURITY $ 7,808 $ 353 $ 5 $ 8,156
- ----------------------------------------------------------------------------------------------------------------------
1996:
SECURITIES AVAILABLE-FOR-SALE:
Obligations of U.S. Treasury and other
U.S. Government agencies $ 218,201 $ 3,969 $ 136 $ 222,034
- ----------------------------------------------------------------------------------------------------------------------
Obligations of states and
political subdivisions 56,493 1,337 257 57,573
- ----------------------------------------------------------------------------------------------------------------------
U.S. Government agencies'
asset-backed securities and
other asset-backed securities 267,406 2,371 442 269,335
- ----------------------------------------------------------------------------------------------------------------------
Other equity securities 14,336 335 -- 14,671
- ----------------------------------------------------------------------------------------------------------------------
Total Securities Available-for-Sale $ 556,436 $ 8,012 $ 835 $ 563,613
- ----------------------------------------------------------------------------------------------------------------------
SECURITIES HELD-TO-MATURITY:
Obligations of states and
political subdivisions $ 9,784 $ 453 $ 8 $ 10,229
- ----------------------------------------------------------------------------------------------------------------------
Other asset-backed securities 668 3 11 660
- ----------------------------------------------------------------------------------------------------------------------
Other securities 328 -- -- 328
- ----------------------------------------------------------------------------------------------------------------------
Total Securities Held-to-Maturity $ 10,780 $ 456 $ 19 $ 11,217
- ----------------------------------------------------------------------------------------------------------------------
52
50
The amortized cost and estimated fair value of investments in debt securities at
December 31, 1997 are shown below (in thousands) by contractual maturity except
for asset-backed securities which are shown based on expected maturities. The
average yield is computed on a tax equivalent basis using a 35 percent tax rate:
- ---------------------------------------------------------------------------------------------------
WEIGHTED
AMORTIZED ESTIMATED AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) COST FAIR VALUE MATURITY YIELD
- ---------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE-FOR-SALE:
U.S. Treasury and agencies' notes:
Due within one year $ 43,829 $ 44,201 0.5 years 7.33%
- ---------------------------------------------------------------------------------------------------
Due one through five years 111,951 115,047 2.0 years 7.43%
- ---------------------------------------------------------------------------------------------------
Total $155,780 $159,248 1.6 years 7.40%
- ---------------------------------------------------------------------------------------------------
Obligations of state and political subdivisions:
Due within one year $ 4,861 $ 4,926 0.5 years 9.75%
- ---------------------------------------------------------------------------------------------------
Due one through five years 17,206 17,798 3.3 years 7.87%
- ---------------------------------------------------------------------------------------------------
Due five through ten years 29,677 30,943 7.6 years 7.47%
- ---------------------------------------------------------------------------------------------------
Due over ten years 25,059 26,266 11.2 years 7.57%
- ---------------------------------------------------------------------------------------------------
Total $ 76,803 $ 79,933 7.4 years 7.74%
- ---------------------------------------------------------------------------------------------------
U.S. Government agencies' asset-backed
securities and other asset-backed securities:
Due within one year $ 23,940 $ 23,995 0.5 years 6.17%
- ---------------------------------------------------------------------------------------------------
Due one through five years 134,156 136,161 3.3 years 7.03%
- ---------------------------------------------------------------------------------------------------
Due five through ten years 112,612 114,078 5.5 years 6.96%
- ---------------------------------------------------------------------------------------------------
Total $270,708 $274,234 4.0 years 6.92%
- ---------------------------------------------------------------------------------------------------
SECURITIES HELD-TO-MATURITY:
Obligations of state and political subdivisions:
Due within one year $ 1,685 $ 1,694 0.5 years 8.29%
- ---------------------------------------------------------------------------------------------------
Due one through five years 4,477 4,812 3.0 years 10.08%
- ---------------------------------------------------------------------------------------------------
Due five through ten years 852 852 7.5 years 8.03%
- ---------------------------------------------------------------------------------------------------
Due over ten years 420 420 11.9 years 7.63%
- ---------------------------------------------------------------------------------------------------
Total $ 7,434 $ 7,778 3.5 years 9.30%
- ---------------------------------------------------------------------------------------------------
Other asset-backed securities:
Due one through five years $ 61 $ 65 4.2 years 8.73%
- ---------------------------------------------------------------------------------------------------
Due over ten years 313 313 14.1 years 7.63%
- ---------------------------------------------------------------------------------------------------
Total $ 374 $ 378 12.5 years 6.50%
- ---------------------------------------------------------------------------------------------------
Investment securities having a book value of $378,469,000 and $363,054,000 at
December 31, 1997 and 1996, respectively, were pledged to collateralize
government and trust department deposits in accordance with federal and state
requirements and to secure repurchase agreements sold.
53
51
In 1997, 1996, and 1995, gross gains of $64,000, $234,000, and $73,000 and gross
losses of $71,000, $1,558,000, and $707,000 were realized, respectively. Tax
benefits related to net securities losses were $2,000 in 1997, $463,000 in 1996,
and $222,000 in 1995.
5. LOANS
The composition of the loan portfolio is as follows:
- ----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, (IN THOUSANDS) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural $ 212,970 $ 224,912
- ----------------------------------------------------------------------------------------------------------------------
Real estate - construction 65,548 70,359
- ----------------------------------------------------------------------------------------------------------------------
Real estate - residential 708,768 617,018
- ----------------------------------------------------------------------------------------------------------------------
Real estate - commercial 256,074 215,372
- ----------------------------------------------------------------------------------------------------------------------
Consumer, net 313,517 320,831
- ----------------------------------------------------------------------------------------------------------------------
Leases, net 35,050 23,532
- ----------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,591,927 $ 1,472,024
- ----------------------------------------------------------------------------------------------------------------------
The financial review section provides detail regarding nonperforming loans.
Under the Corporation's credit policies and practices, all nonaccrual and
restructured commercial, financial, agricultural, construction and commercial
real estate loans meet the definition of impaired loans under SFAS No. 114 and
118. Impaired loans as defined by SFAS No. 114 and 118 exclude certain consumer
loans, residential real estate loans and lease financing classified as
nonaccrual. The majority of the loans deemed impaired were evaluated using the
fair value of the collateral as the measurement method.
Nonaccrual and restructured loans are summarized as follows:
- --------------------------------------------------------------------------------------------------------------------
DECEMBER 31, (IN THOUSANDS) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Impaired loans:
Nonaccrual $ 1,070 $ 1,042
- --------------------------------------------------------------------------------------------------------------------
Restructured 1,642 2,348
- --------------------------------------------------------------------------------------------------------------------
Total impaired loans 2,712 3,390
- --------------------------------------------------------------------------------------------------------------------
Other nonaccrual loans 990 1,259
- --------------------------------------------------------------------------------------------------------------------
TOTAL NONACCRUAL AND RESTRUCTURED LOANS $ 3,702 $ 4,649
- --------------------------------------------------------------------------------------------------------------------
The allowance for credit losses related to impaired loans at December 31, 1997
and 1996 was $406,000 and $403,000, respectively. All impaired loans for both
periods were subject to a related allowance for credit losses.
The average balance of impaired loans was $3,599,000 for 1997 and $3,663,000 for
1996.
Interest income on impaired loans is recognized after all past due and current
principal payments have been made, and collectibility is no longer doubtful. For
the years ended December 31, 1997 and 1996, the Corporation recognized $283,000
and $353,000, respectively, of interest income on impaired loans, which included
$290,000 and $344,000, respectively, of interest income recognized using the
cash basis method of income recognition.
54
52
Certain of the Corporation's executive officers, directors and their affiliates
are loan customers of the Corporation's banking subsidiaries. As of December 31,
1997 and 1996, loans aggregating approximately $43,555,000 and $39,806,000,
respectively, were outstanding to such parties.
6. ALLOWANCE FOR POSSIBLE LOAN LOSSES
Activity in the allowance for possible loan losses is summarized as follows:
- ---------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
Balance, January 1 $32,347 $29,239 $25,438
- ---------------------------------------------------------------------------------------------------------------------
Provision for loan losses 6,999 5,294 5,248
- ---------------------------------------------------------------------------------------------------------------------
Losses charged to the reserve (6,271) (4,438) (2,952)
- ---------------------------------------------------------------------------------------------------------------------
Recoveries 2,520 2,252 1,505
- ---------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31 $35,595 $32,347 $29,239
- ---------------------------------------------------------------------------------------------------------------------
7. INVESTMENT IN FINANCING LEASES
The following is a summary of the components of the Corporation's affiliates'
net investment in direct financing leases:
- -----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, (IN THOUSANDS) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Total minimum payments to be received $26,294 $19,534
- -----------------------------------------------------------------------------------------------------------------------
Estimated unguaranteed residual value of leased property 14,712 7,409
- -----------------------------------------------------------------------------------------------------------------------
Less: unearned income (5,956) (3,411)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL $35,050 $23,532
- -----------------------------------------------------------------------------------------------------------------------
Minimum lease payments, in thousands, to be received as of December 31, 1997
are:
- ---------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------
1998 $ 7,114
- ---------------------------------------------------------------------------------------------------------------------
1999 6,523
- ---------------------------------------------------------------------------------------------------------------------
2000 5,832
- ---------------------------------------------------------------------------------------------------------------------
2001 3,790
- ---------------------------------------------------------------------------------------------------------------------
2002 3,035
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $ 26,294
- ---------------------------------------------------------------------------------------------------------------------
55
53
8. PREMISES AND EQUIPMENT
The major categories of premises and equipment and accumulated depreciation are
summarized as follows:
- -----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, (IN THOUSANDS) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Land $ 6,524 $ 6,269
- -----------------------------------------------------------------------------------------------------------------------
Buildings 25,851 25,543
- -----------------------------------------------------------------------------------------------------------------------
Equipment, furniture and fixtures 24,720 22,501
- -----------------------------------------------------------------------------------------------------------------------
Leasehold improvements 1,144 967
- -----------------------------------------------------------------------------------------------------------------------
TOTAL 58,239 55,280
- -----------------------------------------------------------------------------------------------------------------------
Less: accumulated depreciation and amortization (30,434) (27,732)
- -----------------------------------------------------------------------------------------------------------------------
PREMISES AND EQUIPMENT, NET $ 27,805 $ 27,548
- -----------------------------------------------------------------------------------------------------------------------
Depreciation and amortization expense amounted to $3,273,000, $3,005,000, and
$2,929,000 for the three years ended December 31, 1997, 1996 and 1995,
respectively.
The Corporation and its subsidiaries lease certain premises and equipment
accounted for as operating leases. The following is a schedule of the future
minimum rental payments required for the next five years under such leases with
initial terms in excess of one year (in thousands):
- ---------------------------------------------------------------------------------------------------------------------
DECEMBER 31, (IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------
1998 $ 417
- ---------------------------------------------------------------------------------------------------------------------
1999 410
- ---------------------------------------------------------------------------------------------------------------------
2000 294
- ---------------------------------------------------------------------------------------------------------------------
2001 195
- ---------------------------------------------------------------------------------------------------------------------
2002 195
- ---------------------------------------------------------------------------------------------------------------------
Thereafter 370
- ---------------------------------------------------------------------------------------------------------------------
Total $1,881
- ---------------------------------------------------------------------------------------------------------------------
Rent expense amounted to $639,000, $609,000 and $593,000, for the three years
ended December 31, 1997, 1996 and 1995, respectively.
9. SHORT-TERM BORROWINGS
Short-term borrowings are as follows:
- ----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, (IN THOUSANDS) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Securities sold under agreements to
repurchase and federal funds purchased $127,587 $119,959
- ----------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank advances 18,900 10,000
- ----------------------------------------------------------------------------------------------------------------------
Other short-term borrowings 5,137 5,152
- ----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM BORROWINGS $151,624 $135,111
- ----------------------------------------------------------------------------------------------------------------------
56
54
The outstanding balances for all short-term borrowings as of December 31, 1997,
1996 and 1995 (in thousands) and the weighted-average interest rates as of and
paid during each of the years then ended are as follows:
- ----------------------------------------------------------------------------------------------------------------------
REPURCHASE DEMAND
AGREEMENTS FEDERAL NOTES
AND FEDERAL HOME LOAN DUE U.S.
FUNDS BANK TREASURY
(DOLLARS IN THOUSANDS) PURCHASED ADVANCES AND OTHER
- ----------------------------------------------------------------------------------------------------------------------
1997:
Ending balance $127,587 $18,900 $5,137
- ----------------------------------------------------------------------------------------------------------------------
Highest month-end balance 161,172 86,000 5,137
- ----------------------------------------------------------------------------------------------------------------------
Average daily balance 132,976 26,741 2,909
- ----------------------------------------------------------------------------------------------------------------------
Weighted-average interest rate:
As of year-end 4.61% 6.25% 5.75%
- ----------------------------------------------------------------------------------------------------------------------
Paid during the year 4.60% 5.49% 5.25%
- ----------------------------------------------------------------------------------------------------------------------
1996:
Ending balance $119,959 $10,000 $5,152
- ----------------------------------------------------------------------------------------------------------------------
Highest month-end balance 137,843 10,000 5,895
- ----------------------------------------------------------------------------------------------------------------------
Average daily balance 118,592 4,420 3,709
- ----------------------------------------------------------------------------------------------------------------------
Weighted-average interest rate:
As of year-end 4.53% 5.85% 5.32%
- ----------------------------------------------------------------------------------------------------------------------
Paid during the year 4.40% 6.06% 5.75%
- ----------------------------------------------------------------------------------------------------------------------
1995:
Ending balance $110,105 $10,000 $1,874
- ----------------------------------------------------------------------------------------------------------------------
Highest month-end balance 153,683 11,040 6,113
- ----------------------------------------------------------------------------------------------------------------------
Average daily balance 125,591 10,361 3,083
- ----------------------------------------------------------------------------------------------------------------------
Weighted-average interest rate:
As of year-end 4.63% 5.94% 5.28%
- ----------------------------------------------------------------------------------------------------------------------
Paid during the year 5.07% 6.21% 5.29%
- ----------------------------------------------------------------------------------------------------------------------
57
55
10. LONG-TERM DEBT
Long-term debt is listed below:
- -----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, (IN THOUSANDS) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
FIXED RATE FEDERAL HOME LOAN BANK ADVANCES WITH MONTHLY PRINCIPAL AND
INTEREST PAYMENTS:
5.60% Advance due August 1, 2003 $ 1,902 $ 2,180
- -----------------------------------------------------------------------------------------------------------------------
6.35% Advance due August 1, 2013 2,628 2,723
- -----------------------------------------------------------------------------------------------------------------------
5.95% Advance due March 1, 2004 519 586
- -----------------------------------------------------------------------------------------------------------------------
5.70% Advance due May 1, 2004 4,230 4,760
- -----------------------------------------------------------------------------------------------------------------------
5.85% Advance due January 1, 2016 4,259 4,876
- -----------------------------------------------------------------------------------------------------------------------
2.00% Advance due November 1, 2027 40 --
- -----------------------------------------------------------------------------------------------------------------------
2.00% Advance due January 1, 2028 40 --
- -----------------------------------------------------------------------------------------------------------------------
FIXED RATE FEDERAL HOME LOAN BANK ADVANCES WITH MONTHLY INTEREST PAYMENTS:
5.35% Advance due February 1, 1999 5,000 5,000
- -----------------------------------------------------------------------------------------------------------------------
5.60% Advance due April 1, 1999 5,000 5,000
- -----------------------------------------------------------------------------------------------------------------------
5.70% Advance due June 1, 1999 7,000 7,000
- -----------------------------------------------------------------------------------------------------------------------
6.35% Advance due March 1, 2004 250 250
- -----------------------------------------------------------------------------------------------------------------------
6.15% Advance due July 21, 1997 -- 10,000
- -----------------------------------------------------------------------------------------------------------------------
6.60% Advance due July 21, 1999 -- 10,000
- -----------------------------------------------------------------------------------------------------------------------
6.90% Advance due July 21, 2001 -- 10,000
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $30,868 $62,375
- -----------------------------------------------------------------------------------------------------------------------
At December 31, 1997, Federal Home Loan Bank (FHLB) advances were collaterized
by the FHLB stock owned by the Corporation's affiliate banks and by residential
mortgage loans pledged under a blanket agreement by the Corporation's affiliate
banks.
11. STOCK OPTION PLAN
The Park National Corporation 1995 Incentive Stock Option Plan ("the Park Plan")
was adopted April 17, 1995. The Park Plan is intended as an incentive to
encourage stock ownership by the key employees of the Corporation. The maximum
number of common shares with respect to which incentive stock options may be
granted under the Park Plan is 200,000. At December 31, 1997, 45,142 options
were available for future grants under this plan. Incentive stock options may be
granted at a price not less than the fair market value at the date of the grant,
and for an option term of up to five years. No incentive stock options may be
granted under the Park Plan after January 16, 2005.
In conjunction with the First-Knox Merger in 1997, the Corporation assumed the
1995 First-Knox Director's Stock Option and Stock Appreciation Rights Plan and
the 1990 First-Knox Stock Option and Stock Appreciation Rights Plan.
Additionally, in conjunction with the merger in 1997, all former First-Knox
Plans were terminated with respect to the granting of any additional options and
stock appreciation rights.
58
56
The Corporation's stock option activity and related information is summarized as
follows:
- -----------------------------------------------------------------------------------------------------------------
STOCK OPTIONS STOCK APPRECIATION RIGHTS
- -----------------------------------------------------------------------------------------------------------------
OUTSTANDING OUTSTANDING
------------------------ ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
AVAILABLE PRICE PER AVAILABLE PRICE PER
FOR GRANT NUMBER SHARE FOR GRANT NUMBER SHARE
- -----------------------------------------------------------------------------------------------------------------
January 1, 1995 101 105,362 $20.49 22,967 25,906 $22.95
- -----------------------------------------------------------------------------------------------------------------
Authorized 311,774 -- -- 37,258 -- --
- -----------------------------------------------------------------------------------------------------------------
Granted (53,486) 53,486 45.26 -- -- --
- -----------------------------------------------------------------------------------------------------------------
Exercised -- (9,688) 28.74 -- (1,223) 17.75
- -----------------------------------------------------------------------------------------------------------------
Forfeited/Expired (101) (805) 19.12 (22,967) (161) 19.12
- -----------------------------------------------------------------------------------------------------------------
December 31, 1995 258,288 148,355 28.89 37,258 24,522 23.23
- -----------------------------------------------------------------------------------------------------------------
Granted (49,605) 49,605 43.62 (2,602) 2,602 37.01
- -----------------------------------------------------------------------------------------------------------------
Exercised -- (15,766) 39.56 -- (656) 18.45
- -----------------------------------------------------------------------------------------------------------------
Forfeited/Expired 400 (400) 47.28 -- -- --
- -----------------------------------------------------------------------------------------------------------------
December 31, 1996 209,083 181,794 31.95 34,656 26,468 24.70
- -----------------------------------------------------------------------------------------------------------------
Granted (87,405) 87,405 62.16 -- -- --
- -----------------------------------------------------------------------------------------------------------------
Exercised -- (137,049) 28.06 -- (26,445) 24.70
- -----------------------------------------------------------------------------------------------------------------
Forfeited/Expired (76,536) (4,317) 59.07 (34,656) (23) 24.04
- -----------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 45,142 127,833 55.88 -- -- --
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Range of exercise prices: $34.70 - $98.00
- -----------------------------------------------------------------------------------------------------------------
Weighted-average remaining contractual life: 4.2 years
- -----------------------------------------------------------------------------------------------------------------
Exerciseable at year-end: 117,807
- -----------------------------------------------------------------------------------------------------------------
Weighted-average exercise price of exerciseable options: $53.37
- -----------------------------------------------------------------------------------------------------------------
Compensation expense related to stock appreciation rights was $339,000, $212,000
and $150,000 in 1997, 1996 and 1995, respectively.
The Corporation has elected to follow Accounting Principles Board Opinion No.25
"Accounting for Stock issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123, "Accounting
for Stock Based Compensation," requires the use of option valuation models that
were not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Corporation's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
The fair value of these options was estimated at the date of grant using a
Black-Scholes options pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of
6.25%, 6.48% and 6.41%; a dividend yield of 2.50%, 2.61% and 2.49%; a volatility
factor of the expected market price of the Corporation's common stock of .219,
.206 and .200 and a weighted-average expected option life of 4.0, 4.2 and 4.3
years. The weighted-average fair value of options granted were $13.94, $8.30 and
$9.90 for 1997, 1996 and 1995, respectively.
59
57
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, options valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Corporation's employee stock options have characteristics significantly
different from those traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The Corporation's proforma information follows:
- ---------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
Net income as reported $37,693 $31,700 $27,829
- ---------------------------------------------------------------------------------------------------------------------
Proforma net income 36,620 31,360 27,353
- ---------------------------------------------------------------------------------------------------------------------
Basic earnings per share as reported $4.02 $3.39 $2.96
- ---------------------------------------------------------------------------------------------------------------------
Proforma basic earnings per share 3.90 3.36 2.92
- ---------------------------------------------------------------------------------------------------------------------
Diluted earnings per share as reported 4.00 3.38 2.95
- ---------------------------------------------------------------------------------------------------------------------
Proforma diluted earnings per share 3.89 3.34 2.91
- ---------------------------------------------------------------------------------------------------------------------
12. BENEFIT PLANS
The Corporation has a noncontributory defined benefit pension plan covering
substantially all of its employees. The plan provides benefits based on an
employee's years of service and compensation. The Corporation's funding policy
is to contribute annually an amount that can be deducted for federal income tax
purposes using a different actuarial cost method and different assumptions from
those used for financial reporting purposes.
Net pension cost for 1997, 1996 and 1995 included the following components:
- ---------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
Service cost - benefits earned during the year $ 942 $ 911 $ 823
- ---------------------------------------------------------------------------------------------------------------------
Interest cost on projected benefit obligation 1,098 1,025 917
- ---------------------------------------------------------------------------------------------------------------------
Actual return on plan assets (3,934) (2,253) (2,303)
- ---------------------------------------------------------------------------------------------------------------------
Net amortization and deferral 2,493 915 1,158
- ---------------------------------------------------------------------------------------------------------------------
PENSION COST, NET $ 599 $ 598 $ 595
- ---------------------------------------------------------------------------------------------------------------------
60
58
The funded status of the plan and the prepaid pension cost at December 31, 1997,
1996, and 1995 were as follows:
- ---------------------------------------------------------------------------------------------------------------------
December 31, (In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefits $12,128 $10,318 $ 9,810
- ---------------------------------------------------------------------------------------------------------------------
Nonvested benefits 176 312 235
- ---------------------------------------------------------------------------------------------------------------------
ACCUMULATED BENEFIT OBLIGATION 12,304 10,630 10,045
- ---------------------------------------------------------------------------------------------------------------------
Impact of projected future salary increases 4,194 3,629 3,730
- ---------------------------------------------------------------------------------------------------------------------
PROJECTED BENEFIT OBLIGATION 16,498 14,259 13,775
- ---------------------------------------------------------------------------------------------------------------------
Plan assets at fair value 19,578 16,376 15,169
- ---------------------------------------------------------------------------------------------------------------------
PLAN ASSETS IN EXCESS OF
PROJECTED BENEFIT OBLIGATION 3,080 2,117 1,394
- ---------------------------------------------------------------------------------------------------------------------
Items not yet recognized in income:
Unrecognized net gain from past
experience different from that assumed
and effects of changes in assumptions (2,731) (1,537) (169)
- ---------------------------------------------------------------------------------------------------------------------
Unrecognized prior service cost (3) (10) (118)
- ---------------------------------------------------------------------------------------------------------------------
Initial transition asset which is being amortized
over 15.8 years (221) (285) (349)
- ---------------------------------------------------------------------------------------------------------------------
PREPAID PENSION COST INCLUDED IN
CONSOLIDATED BALANCE SHEET $ 125 $ 285 $ 758
- ---------------------------------------------------------------------------------------------------------------------
The assumptions used as of December 31, 1997, 1996, and 1995 in determining
pension expense and funded status information shown above were as follows:
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
Weighted-average discount rate 7.71% 7.50 - 8.00% 7.50%
- ---------------------------------------------------------------------------------------------------------------------
Rate of future salary increases 5.00% 4.75 - 5.00% 4.75 - 5.00%
- ---------------------------------------------------------------------------------------------------------------------
Long-term rate of return on assets 8.00% 8.00 - 9.00% 8.00 - 9.00%
- ---------------------------------------------------------------------------------------------------------------------
The Corporation contributed approximately $438,000, $125,000, and $1,276,000 to
the plan in 1997, 1996 and 1995, respectively.
The Corporation has a voluntary salary deferral plan covering substantially all
of its employees. Eligible employees may contribute a portion of their
compensation subject to a maximum statutory limitation. The Corporation provides
a matching contribution established annually by the Corporation. Contribution
expense for the Corporation was $586,000, $475,000 and $458,000 for 1997, 1996
and 1995, respectively.
61
59
13. FEDERAL INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Corporation's deferred tax assets and liabilities are as follows:
- -----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, (IN THOUSANDS) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Allowance for loan losses $ 12,491 $10,937
- -----------------------------------------------------------------------------------------------------------------------
Deferred loan fees 457 328
- -----------------------------------------------------------------------------------------------------------------------
Deferred compensation 529 559
- -----------------------------------------------------------------------------------------------------------------------
Other 2,776 2,451
- -----------------------------------------------------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS $ 16,253 $14,275
- -----------------------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Lease revenue reporting $ 4,472 $ 3,126
- -----------------------------------------------------------------------------------------------------------------------
Unrealized holding gain on securities 3,760 2,492
- -----------------------------------------------------------------------------------------------------------------------
Fixed assets, principally due to depreciation 870 953
- -----------------------------------------------------------------------------------------------------------------------
Other 5,017 4,680
- -----------------------------------------------------------------------------------------------------------------------
TOTAL DEFERRED TAX LIABILITIES $ 14,119 $11,251
- -----------------------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS, NET $ 2,134 $ 3,024
- -----------------------------------------------------------------------------------------------------------------------
The components of the provision for federal income taxes are shown below:
- ----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, (IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Currently payable $17,235 $14,805 $13,182
- ----------------------------------------------------------------------------------------------------------------------
Deferred (378) (213) (770)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL $16,857 $14,592 $12,412
- ----------------------------------------------------------------------------------------------------------------------
The following is a reconcilement of federal income tax expense to the amount
computed at the statutory rate of 35% for the year ended December 31, 1997 and
the weighted-average statutory rate of 34.8% for the years ended December 31,
1996 and 1995.
- ----------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Statutory corporate tax rate 35.0% 34.8% 34.8%
- ----------------------------------------------------------------------------------------------------------------------
Changes in rate resulting from:
Tax-exempt interest income -2.9% -1.5% -1.7%
- ----------------------------------------------------------------------------------------------------------------------
Other -1.2% -1.8% -2.3%
- ----------------------------------------------------------------------------------------------------------------------
EFFECTIVE TAX RATE 30.9% 31.5% 30.8%
- ----------------------------------------------------------------------------------------------------------------------
62
60
14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the years ended December 31, 1997, 1996 and 1995:
- ----------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
NUMERATOR:
Net income $ 37,693 $ 31,700 $ 27,829
- ----------------------------------------------------------------------------------------------------------------------
DENOMINATOR:
Denominator for basic earnings per share -
weighted-average shares 9,385,827 9,351,902 9,395,341
- ----------------------------------------------------------------------------------------------------------------------
Effect of dilutive securities - stock options 37,944 34,317 29,003
- ----------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions 9,423,771 9,386,219 9,424,344
- ----------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Basic earnings per share $4.02 $3.39 $2.96
- ----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $4.00 $3.38 $2.95
- ----------------------------------------------------------------------------------------------------------------------
15. DIVIDEND RESTRICTIONS
Bank regulators limit the amount of dividends a subsidiary bank can declare in
any calendar year without obtaining prior approval. At December 31, 1997,
approximately $7,385,000 of the total stockholders' equity of the bank
subsidiaries is available for the payment of dividends to the Corporation,
without approval by the applicable regulatory authorities.
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND
FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
The Corporation is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include loan commitments and standby letters of
credit. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the financial
statements.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and standby letters
of credit is represented by the contractual amount of those instruments. The
Corporation uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. Since many of the loan
commitments may expire without being drawn upon, the total commitment amount
does not necessarily represent future cash requirements. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan commitments to customers.
The total amounts of off-balance sheet financial instruments with credit risk
are as follows:
- -----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, (IN THOUSANDS) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Loan commitments $215,638 $231,023
- -----------------------------------------------------------------------------------------------------------------------
Unused credit card limits 92,993 93,282
- -----------------------------------------------------------------------------------------------------------------------
Standby letters of credit 6,362 6,259
- -----------------------------------------------------------------------------------------------------------------------
The loan commitments are generally for variable rates of interest.
63
61
customers primarily located in Central Ohio. The Corporation evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Corporation upon extension of credit, is
based on management's credit evaluation of the customer. Collateral held varies
but may include accounts receivable, inventory, property, plant and equipment,
and income-producing commercial properties.
Although the Corporation has a diversified loan portfolio, a substantial portion
of the debtors' ability to honor their contracts is dependent upon the economic
conditions in each loan's respective location.
17. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance sheet
for cash and short-term instruments approximate those assets' fair values.
INVESTMENT SECURITIES: Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
LOANS RECEIVABLE: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values. The
fair values for certain mortgage loans, one-to-four family residential, are
based on quoted market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan characteristics.
The fair values for other loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
OFF-BALANCE SHEET INSTRUMENTS: Fair values for the Corporation's loan
commitments and standby letters of credit are based on the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counter parties' credit standing.
DEPOSIT LIABILITIES: The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date. The
carrying amounts for variable-rate, fixed-term certificates of deposit
approximate their fair values at the reporting date. Fair values for fixed rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
SHORT-TERM BORROWINGS: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings
approximate their fair values.
LONG-TERM DEBT: The fair value for long-term debt is estimated using a
discounted cash flow evaluation using current market interest rates available to
replace the various maturities.
54
62
The fair value of financial instruments at December 31, 1997 and 1996 is as
follows:
- -----------------------------------------------------------------------------------------------------------------------
1997 1996
---------------------------------------------------------------
DECEMBER 31, (IN THOUSANDS) Carrying Fair Carrying Fair
Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and federal funds sold $ 93,585 $ 93,585 $ 81,765 $ 81,765
- -----------------------------------------------------------------------------------------------------------------------
Investment securities 540,370 541,078 574,393 574,830
- -----------------------------------------------------------------------------------------------------------------------
Loans:
Commercial, financial and agricultural 212,970 212,970 224,912 224,912
- -----------------------------------------------------------------------------------------------------------------------
Real estate - construction 65,548 65,548 70,359 70,359
- -----------------------------------------------------------------------------------------------------------------------
Real estate - residential 708,768 722,794 617,018 630,457
- -----------------------------------------------------------------------------------------------------------------------
Real estate - commercial 256,074 256,183 215,372 215,629
- -----------------------------------------------------------------------------------------------------------------------
Consumer, net 313,517 314,757 320,831 322,520
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LOANS 1,556,877 1,572,252 1,448,492 1,463,877
- -----------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (35,595) -- (32,347) --
- -----------------------------------------------------------------------------------------------------------------------
LOANS RECEIVABLE, NET $1,521,282 $1,572,252 $1,416,145 $1,463,877
- -----------------------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Noninterest bearing checking $ 257,867 $ 257,867 $ 225,424 $ 225,424
- -----------------------------------------------------------------------------------------------------------------------
Interest bearing checking 124,087 124,087 201,698 201,698
- -----------------------------------------------------------------------------------------------------------------------
Savings accounts 274,025 274,025 276,442 276,442
- -----------------------------------------------------------------------------------------------------------------------
Money market accounts 242,854 242,854 168,740 168,740
- -----------------------------------------------------------------------------------------------------------------------
Time deposits 954,564 959,077 889,345 892,935
- -----------------------------------------------------------------------------------------------------------------------
Other 1,567 1,567 1,769 1,769
- -----------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $1,854,964 $1,859,477 $1,763,418 $1,767,008
- -----------------------------------------------------------------------------------------------------------------------
Short-term borrowings 151,624 151,624 135,111 135,111
- -----------------------------------------------------------------------------------------------------------------------
Long-term debt 30,868 30,344 62,375 62,036
- -----------------------------------------------------------------------------------------------------------------------
UNRECOGNIZED FINANCIAL INSTRUMENTS:
Loan commitments -- $ (216) -- $ (231)
- -----------------------------------------------------------------------------------------------------------------------
Standby letters of credit -- (32) -- (31)
- -----------------------------------------------------------------------------------------------------------------------
18. CAPITAL RATIOS
The following table reflects various measures of capital at December 31, 1997
and December 31, 1996:
- -----------------------------------------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, (DOLLARS IN THOUSANDS) AMOUNT RATIO Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------
Total equity (1) $222,117 9.71% $198,961 9.11%
- -----------------------------------------------------------------------------------------------------------------------
Tier 1 capital (2) 198,949 13.46% 182,041 13.16%
- -----------------------------------------------------------------------------------------------------------------------
Total risk-based capital (3) 217,636 14.72% 199,517 14.42%
- -----------------------------------------------------------------------------------------------------------------------
Leverage (4) 198,949 8.91% 182,041 8.73%
- -----------------------------------------------------------------------------------------------------------------------
65
63
(1) Computed in accordance with generally accepted accounting principles,
including unrealized market value adjustment of securities
available-for-sale.
(2) Stockholders' equity less certain intangibles and the unrealized market
value adjustment of securities available-for-sale; computed as a ratio to
risk-adjusted assets as defined.
(3) Tier 1 capital plus qualifying loan loss allowance; computed as a ratio to
risk-adjusted assets, as defined.
(4) Tier 1 capital computed as a ratio to average total assets less certain
intangibles.
The Corporation's Tier 1, total risk-based capital and leverage ratios are well
above both the required minimum levels of 4.00%, 8.00% and 4.00%, respectively,
and the well-capitalized levels of 6.00%, 10.00% and 5.00%, respectively.
At December 31, 1997, all of the Corporation's subsidiary financial institutions
met the well-capitalized levels under the capital definitions prescribed in the
FDIC Improvement Act of 1991.
19. PARENT COMPANY STATEMENTS
The Parent Company statements should be read in conjunction with the
consolidated financial statements and the information set forth below.
Investments in subsidiaries are accounted for using the equity method of
accounting.
The effective tax rate for the Parent Company is substantially less than the
statutory rate due principally to tax-exempt dividends from subsidiaries.
Cash represents noninterest bearing deposits with a bank subsidiary.
Net cash provided by operating activities reflects cash payments for income
taxes of $1,040,000, $663,000 and $876,000 in 1997, 1996 and 1995,
respectively.
At December 31, 1997 and 1996, stockholders' equity reflected in the Parent
Company balance sheet includes $80.6 million and $73.9 million, respectively, of
undistributed earnings of the Corporation's subsidiaries which are restricted
from transfer as dividends to the Corporation.
66
64
19. PARENT COMPANY STATEMENTS (continued)
Balance Sheets
at December 31, 1997 and 1996
- ------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash $ 15,714 $ 22,498
- ------------------------------------------------------------------------------------------------------------------------
Investment in subsidiaries 161,591 165,193
- ------------------------------------------------------------------------------------------------------------------------
Debentures receivable from subsidiary banks 12,000 2,000
- ------------------------------------------------------------------------------------------------------------------------
Other investments 84 84
- ------------------------------------------------------------------------------------------------------------------------
Excess of cost over net assets of banks purchased, net 1,218 1,522
- ------------------------------------------------------------------------------------------------------------------------
Dividends receivable from subsidiaries 31,700 8,700
- ------------------------------------------------------------------------------------------------------------------------
Other assets 5,214 3,869
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $227,521 $203,866
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Dividends payable $ 4,512 $ 3,754
- ------------------------------------------------------------------------------------------------------------------------
Other liabilities 892 1,151
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 5,404 4,905
- ------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
TOTAL STOCKHOLDERS' EQUITY 222,117 198,961
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $227,521 $203,866
- ------------------------------------------------------------------------------------------------------------------------
Statements of Income
for the years ended December 31, 1997, 1996 and 1995
- ----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
INCOME:
Dividends from subsidiaries $45,097 $26,965 $24,901
- ----------------------------------------------------------------------------------------------------------------------
Interest and dividends 790 629 193
- ----------------------------------------------------------------------------------------------------------------------
Gain of sale of securities -- 181 --
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INCOME 45,887 27,775 25,094
- ----------------------------------------------------------------------------------------------------------------------
EXPENSE:
Amortization of intangibles 304 259 259
- ----------------------------------------------------------------------------------------------------------------------
Other, net 465 2,179 837
- ----------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 769 2,438 1,096
- ----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE FEDERAL TAXES AND EQUITY IN
UNDISTRIBUTED EARNINGS OF SUBSIDIARIES 45,118 25,337 23,998
- ----------------------------------------------------------------------------------------------------------------------
Federal income tax (expense) benefit (113) 449 516
- ----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES 45,005 25,786 24,514
- ----------------------------------------------------------------------------------------------------------------------
Equity in undistributed earnings
of subsidiaries (7,312) 5,914 3,315
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $37,693 $31,700 $27,829
- ----------------------------------------------------------------------------------------------------------------------
67
65
19. PARENT COMPANY STATEMENTS (continued)
Statements of Cash Flows
for the years ended December 31, 1997, 1996 and 1995
- ----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 37,693 $ 31,700 $ 27,829
- ----------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Amortization 304 259 259
- ----------------------------------------------------------------------------------------------------------------------
Undistributed earnings of subsidiaries 7,312 (5,914) (3,315)
- ----------------------------------------------------------------------------------------------------------------------
Gain on sale of securities available-for-sale -- (181) --
- ----------------------------------------------------------------------------------------------------------------------
Increase in dividends receivable
from subsidiaries (23,000) (1,200) (990)
- ----------------------------------------------------------------------------------------------------------------------
(Increase) decrease in other assets (1,345) (3,236) 110
- ----------------------------------------------------------------------------------------------------------------------
(Decrease) increase in other liabilities (259) 705 411
- ----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 20,705 22,133 24,304
- ----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of debenture from subsidiary bank (10,000) -- --
- ----------------------------------------------------------------------------------------------------------------------
Purchase of investment securities -- (54) (30)
- ----------------------------------------------------------------------------------------------------------------------
Proceeds from sale of securities available-for-sale -- 431 --
- ----------------------------------------------------------------------------------------------------------------------
Capital contribution to subsidiary -- (8,000) --
- ----------------------------------------------------------------------------------------------------------------------
Other, net (1,379) -- --
- ----------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (11,379) (7,623) (30)
- ----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Cash dividends paid (15,047) (12,166) (10,282)
- ----------------------------------------------------------------------------------------------------------------------
Proceeds from issuance of common stock 3,664 337 247
- ----------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock, net (4,727) (118) (4,471)
- ----------------------------------------------------------------------------------------------------------------------
NET CASH USED FINANCING ACTIVITIES (16,110) (11,947) (14,506)
- ----------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH (6,784) 2,563 9,768
- ----------------------------------------------------------------------------------------------------------------------
Cash at beginning of year 22,498 19,935 10,167
- ----------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 15,714 $ 22,498 $ 19,935
- ----------------------------------------------------------------------------------------------------------------------
68
66
PARK NATIONAL CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1997
INDEX TO EXHIBITS
Exhibit No. Description Page No.
- ----------- ----------- --------
2(a)(1) Agreement and Plan of Merger, dated as of Incorporated herein by reference to
October 28, 1996, between Park National Registrant's Registration Statement on
Corporation ("Registrant") and First-Knox Banc Form S-4, filed January 24, 1997
Corp. (Registration No. 333-20417)
("Registrant's Form S-4") [Exhibit 2(a)]
2(a)(2) Amendment to Agreement and Plan of Merger, Incorporated herein by reference to
dated as of January 10, 1997, between Registrant's Form S-4 [Exhibit 2(b)]
Registrant and First-Knox Banc Corp.
2(b)(1) Branch Purchase and Assumption Agreement *
between KeyBank National Association and
The Park National Bank, dated as of May 23, 1997
2(b)(2) Amendment No. 1 to Branch Purchase and *
Assumption Agreement between KeyBank National
Association and The Park National Bank, dated
as of September 24, 1997
3(a)(1) Articles of Incorporation of Park National Incorporated herein by reference to
Corporation as filed with the Ohio Registrant's Form 8-B, filed May 20,
Secretary of State on March 24, 1992 1992 (File No. 0-18772) ("Registrant's
Form 8-B") [Exhibit 3(a)]
67
Exhibit No. Description Page No.
- ----------- ----------- --------
3(a)(2) Certificate of Amendment to the Articles of Incorporated herein by reference to
Incorporation of Park National Registrant's Annual Report on Form 10-K
Corporation as filed with the Ohio Secretary for the fiscal year ended
of State on May 6, 1993 December 31, 1993 (File No. 0-18772)
[Exhibit 3(b)]
3(a)(3) Certificate of Amendment to the Articles of Incorporated herein by reference to
Incorporation of Park National Corporation as Registrant's Quarterly Report on
filed with the Ohio Secretary of State on Form 10-Q for the fiscal quarter ended
April 16, 1996 March 31, 1996 (File No. 1-13006)
("Registrant's March 1996 Form 10-Q")
[Exhibit 3(a)]
3(a)(4) Certificate of Amendment by Shareholders to Incorporated herein by reference to
the Articles of Incorporation of Park Registrant's Quarterly Report on Form
National Corporation as filed with the 10-Q for the fiscal quarter ended
Ohio Secretary of State on April 22, 1997 June 30, 1997 (File No. 1-13006)
("Registrant's June 1997 Form 10-Q")
[Exhibit 3(a)(1)]
3(a)(5) Articles of Incorporation of Park National Incorporated herein by reference to
Corporation (reflecting amendments through Registrant's June 1997 Form 10-Q
April 22, 1997) (For SEC reporting compliance [Exhibit 3(a)(2)]
purposes only -- not filed with Ohio Secretary
of State)
3(b)(1) Regulations of Registrant Incorporated herein by reference to
Registrant's Form 8-B [Exhibit 3(b)]
3(b)(2) Certified Resolution regarding adoption of Incorporated herein by reference to
amendment to Subsection 2.02(A) of the Registrant's June 1997 Form 10-Q
Regulations of Park National Corporation [Exhibit 3(b)(1)]
by Shareholders on April 21, 1997
3(b)(3) Regulations of Park National Corporation Incorporated herein by reference to
(reflecting amendments through April 21, Registrant's June 1997 Form 10-Q
1997) (For SEC reporting [Exhibit 3(b)(2)]
compliance purposes only)
68
Exhibit No. Description Page No.
- ----------- ----------- --------
10(a) Certified Copy of Resolutions Adopted by Board Incorporated herein by reference to
of Directors of Park National Corporation on Registrant's Annual Report on Form 10-K
July 17, 1995 Affecting Park National for the fiscal year ended December 31,
Corporation Defined Benefit Pension Plan and 1995 (File No. 1-13006) ("Registrant's
Trust 1995 Form 10-K") [Exhibit 10(a)]
10(b) Park National Corporation Defined Benefit Incorporated herein by reference to
Pension Plan Registrant's 1995 Form 10-K
[Exhibit 10(b)]
10(c) Park National Corporation Employees Voluntary Incorporated herein by reference to
Salary Deferral Plan and Trust Registrant's Annual Report on Form 10-K
for the fiscal year ended December
31, 1993 (File No. 0-18772)
[Exhibit 10(d)]
10(d) Summary of Incentive Bonus Plan of Park Incorporated herein by reference to
National Corporation Registrant's Form S-4 [Exhibit 10(d)]
10(e) Split-Dollar Agreement, dated May 17, 1993, Incorporated herein by reference to:
between William T. McConnell and The Park (a) Registrant's Annual Report on
National Bank; and Schedule A to Exhibit 10(f) Form 10-K for the fiscal year ended
identifying other identical Split-Dollar December 31, 1993 (File No. 0-18772)
Agreements between The Park National Bank and [Exhibit 10(f)]; and (b) Registrant's
executive officers of Registrant Annual Report on Form 10-K for the
fiscal year ended December 31, 1994
(File No. 1-13006) [Exhibit 10(g)]
10(f) Split-Dollar Agreement, dated September 29, Incorporated herein by reference to: (a)
1993, between Dominic C. Fanello and The Registrant's Annual Report on Form 10-K
Richland Trust Company; and Schedule A to for the fiscal year ended December 31,
Exhibit 10(f) identifying other identical 1993 (File No. 0-18772) [Exhibit 10(g)];
Split-Dollar Agreements between directors of Schedule A to Exhibit 10(f) is being
Registrant and The Park National Bank, The filed herewith
Richland Trust Company or Century National
Bank, as identified in such Schedule A
69
Exhibit No. Description Page No.
- ----------- ----------- --------
10(g) Park National Corporation 1995 Incentive Stock Incorporated herein by reference to
Option Plan Registrant's Registration Statement on
Form S-8 filed May 9, 1995 (Registration
No. 33-92060) [Exhibit 4(d)]
10(h) Form of Stock Option Agreement executed in Incorporated herein by reference to
connection with the grant of options under the Registrant's 1995 Form 10-K
Park National Corporation 1995 Incentive Stock [Exhibit 10(i)]
Option Plan
10(i) Description of Park National Corporation Incorporated herein by reference to
Supplemental Executive Retirement Plan Registrant's Form S-4 [Exhibit 10(i)]
13 Annual Report to Stockholders of Registrant Incorporated herein by reference to the
for the fiscal year ended December 31, 1997 financial statements portion of this
(Not deemed filed except for portions thereof Annual Report on Form 10-K beginning at
which are specifically incorporated by page 18
reference into this Annual Report on Form 10-K)
21 Subsidiaries of Registrant *
23(a) Consent of Ernst & Young LLP *
23(b) Consent of Crowe, Chizek and Company LLP *
24 Powers of Attorney *
27 Financial Data Schedule *
99 Report of Crowe, Chizek and Company LLP *
- ---------------
*Filed herewith