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