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 June 30, 1997 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 --------- --------- 9,419,274 common shares, no par value per share, outstanding at July 31, 1997. Page 1 of 54 Exhibit Index At Page 20
2 PARK NATIONAL CORPORATION CONTENTS -------- <TABLE> <CAPTION> Page ---- <S> <C> PART I. FINANCIAL INFORMATION 3-8 Item 1. Financial Statements 3-8 Consolidated Balance Sheet as of June 30, 1997 and December 31, 1996 (unaudited) 3 Consolidated Condensed Statement of Income for the Three Months Ended and for the Six Months Ended June 30, 1997 and 1996 (unaudited) 4-5 Consolidated Statement of Cash Flows for the Six Months ended June 30, 1997 and 1996 (unaudited) 6-7 Notes to Consolidated Financial Statements 8-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-17 PART II. OTHER INFORMATION 18 Item 1. Legal Proceedings 18 Item 2. Changes in Securities 18 Item 3. Defaults Upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 19 EXHIBITS 20-54 </TABLE> -2-
3 PARK NATIONAL CORPORATION Consolidated Balance Sheet (Unaudited) (Dollars in thousands, except per share data) <TABLE> <CAPTION> June 30, December 31, 1997 1996 ----------- ------------ <S> <C> <C> Assets: Cash and due from banks $ 80,924 $ 81,765 Federal funds sold 600 0 Securities available-for-sale, at fair value (amortized cost of $576,076 and $556,436 at June 30, 1997 and December 31, 1996) 582,423 563,613 Securities held-to-maturity, at amortized cost (fair value approximates $9,462 and $11,217 at June 30, 1997 and December 31, 1996) 9,243 10,780 Loans (net of unearned interest) 1,534,410 1,472,024 Allowance for possible loan losses 34,325 32,347 Net loans 1,500,085 1,439,677 Bank premises and equipment, net 27,321 27,548 Other assets 65,857 61,587 ----------- ----------- Total assets $ 2,266,453 $ 2,184,970 Liabilities and Stockholders' Equity Deposits: Noninterest-bearing $ 242,812 $ 225,424 Interest-bearing 1,534,985 1,537,994 Total deposits 1,777,797 1,763,418 Short-term borrowings 218,356 135,111 Long term debt 41,346 62,375 Other liabilities 18,381 25,105 Total liabilities 2,055,880 1,986,009 Stockholders' Equity: Common stock (No par value; 20,000,000 shares authorized; 9,547,610 shares in 1997 and 9,443,864 shares issued in 1996) 68,063 64,612 Unrealized holding gain on available-for-sale securities, net 4,146 4,687 Retained earnings 143,665 132,647 Treasury stock (129,897 shares in 1997 and 89,426 shares in 1996) (5,301) (2,985) Total stockholders' equity 210,573 198,961 ----------- ----------- Total liabilities and stockholders' equity $ 2,266,453 $ 2,184,970 </TABLE> SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3
4 PARK NATIONAL CORPORATION Consolidated Condensed Statement of Income (Unaudited) (Dollars in thousands, except per share data) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 ------- ------- ------- ------- <S> <C> <C> <C> <C> Interest Income: Interest & fees on loans $35,515 $31,676 $69,645 $63,426 Interest on: Obligations of U.S. Govt. its agencies & other securities 8,811 6,695 17,184 13,216 Obligations of states & political subdivisions 938 882 1,808 1,724 Other interest income 142 554 426 1,101 Total interest income 45,406 39,807 89,063 79,467 Interest expense: Interest on deposits: Demand & savings deposits 4,269 3,929 8,362 7,900 Time deposits 12,300 10,996 24,537 21,962 Non-deposit interest 2,897 1,705 5,344 3,701 Total interest expense 19,466 16,630 38,243 33,563 Net interest income 25,940 23,177 50,820 45,904 Provision for loan losses 1,454 1,256 2,648 2,342 Net interest income after provision 24,486 21,921 48,172 43,562 </TABLE> 4
5 PARK NATIONAL CORPORATION Consolidated Condensed Statement of Income (Unaudited) - (Continued) (Dollars in thousands, except per share data) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Other income $ 4,829 $ 4,238 $ 9,771 $ 8,656 Loss on sale of securities 0 (401) 0 (700) Other expense: Salaries & employee benefits 7,734 6,769 15,387 14,054 Occupancy 821 757 1,652 1,565 Furniture & equipment 890 909 1,789 1,801 Other expenses 6,021 5,149 12,250 10,994 Total other expense 15,466 13,584 31,078 28,414 Income before federal income taxes 13,849 12,174 26,865 23,104 Federal income taxes 4,297 3,751 8,324 7,092 Net income $ 9,552 $ 8,423 $ 18,541 $ 16,012 =========== =========== =========== =========== Per Share: Net income per share: Primary $ 1.01 $ 0.90 $ 1.97 $ 1.71 Fully diluted $ 1.01 $ 0.90 $ 1.97 $ 1.71 Weighted average common shares outstanding: Primary 9,419,553 9,385,147 9,402,216 9,381,644 Fully Diluted 9,430,958 9,385,933 9,408,196 9,382,760 Cash dividends declared $ 0.40 $ 0.35 $ 0.80 $ 0.70 </TABLE> SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5
6 PARK NATIONAL CORPORATION Consolidated Statement of Cash Flows (Unaudited) (Dollars in thousands) <TABLE> <CAPTION> Six Months Ended June 30, 1997 1996 --------- --------- <S> <C> <C> Operating activities: Net income $ 18,541 $ 16,012 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization & accretion 217 591 Provision for loan losses 2,648 2,342 Amortization of the excess of cost over net assets of banks purchased 978 257 Realized investment security losses 0 700 Changes in assets & liabilities: Increase in other assets (4,959) (2,450) Decrease in other liabilities (2,969) (2,146) Net cash provided from operating activities 14,456 15,306 Investing activities: Proceeds from sales of: Available-for-sale securities 24,925 37,636 Proceeds fro maturities of: Available-for-sale securities 85,873 64,062 Held-to-maturity securities 1,888 826 Purchases of: Available-for-sale securities (129,974) (112,835) Held-to-maturity securities 0 (1,575) Net increase in loans (62,502) (16,760) Purchases of premises & equipment, net (1,358) (1,007) Net cash used by investing activities (81,148) (29,653) </TABLE> 6
7 PARK NATIONAL CORPORATION Consolidated Statement of Cash Flows (Unaudited) - (Continued) (Dollars in thousands) <TABLE> <CAPTION> Six Months Ended June 30, 1997 1996 --------- --------- <S> <C> <C> Financing activities: Net increase in deposits $ 14,379 $ 19,370 Net increase/(decrease) in short-term borrowings 83,245 (12,623) Exercise of stock options 3,451 85 (Purchase)/reissue of treasury stock (2,317) 389 Repayment of long term debt (21,029) (507) Cash dividends paid (11,278) (8,533) Net cash provided from/(used by) financing activities 66,451 (1,819) Decrease in cash & cash equivalents (241) (16,166) Cash & cash equivalents at beginning of year 81,765 113,164 Cash & cash equivalents at end of period $ 81,524 $ 96,998 ========= ========= Supplemental disclosures of cash flow information: Cash paid for: Interest $ 39,729 $ 34,015 Income taxes 7,455 8,350 </TABLE> SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS 7
8 PARK NATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Three and Six Month Periods Ended June 30, 1997 and 1996. Note 1 - Basis of Presentation --------------------- The consolidated financial statements included in this report have been prepared by Park National Corporation (the "Registrant", "Corporation", or "Park") without audit. In the opinion of management, all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation of results of operations for the interim periods included herein have been made. The results of operations for the periods ended June 30, 1997 are not necessarily indicative of the operating results to be anticipated for the fiscal year ended December 31, 1997. 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 sheet, condensed statement of income and statement 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 for the year ended December 31, 1996. Certain amounts in prior periods have been reclassified to conform to the financial statement presentation used for current periods. Primary earnings per share is computed based on the weighted average shares outstanding during the periods presented plus common equivalent shares arising from dilutive stock options, using the treasury stock method. Fully diluted earnings per share reflects additional dilution related to stock options due to the use of market price at the end of the period when higher than the average price for the period. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. At that time, the Corporation will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements, primary earnings per share will be replaced by a more simply calculated basic earnings per share which will not include the impact of any potentially dilutive securities. Diluted earnings per share will continue to be disclosed and will be calculated using a methodology not significantly different from that presently used to calculate fully diluted earnings per share. The new calculation methods will not have a material impact on the earnings per share results as the Corporation has not had significant dilution from stock options. Park does not have any off-balance sheet derivative financial instruments such as interest-rate swap agreements. 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 Park have been restated to show Park and First-Knox on a combined basis. -8-
9 Separate results of operations for Park and First-Knox follow: <TABLE> <CAPTION> Three Months Six Months Ended June 30, 1996 Ended June 30, 1996 ------------------- -------------- ---- <S> <C> <C> Net Interest Income Park $17,829 $35,413 First-Knox 5,348 10,491 ------- ------- Combined $23,177 $45,904 Net Income Park $ 6,804 $12,899 First-Knox 1,619 3,113 ------- ------- Combined $ 8,423 $16,012 Net Income Per Common Share Park $ .96 $ 1.81 First-Knox .43 .82 Combined $ .90 $ 1.71 </TABLE> Certain amounts in prior periods in 1996 have been reclassified to conform to the financial statement presentation used for current periods. 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) 1997 1996 -------- -------- <S> <C> <C> Balance January 1 $ 32,347 $ 29,239 Provision for loan losses 2,648 2,342 Losses charged to the reserve (2,102) (2,037) Recoveries 1,432 1,314 -------- -------- Balance June 30, 1997 $ 34,325 $ 30,858 ======== ======== </TABLE> -9-
10 Note 4 - Long-Term Debt -------------- <TABLE> <CAPTION> Description (In Thousands) --------------- June 30, December 31, 1997 1996 -------- -------- <S> <C> <C> Fixed rate Federal Home Loan Bank advances with monthly principal and interest payments: 5.60% Advance due August 1, 2003 $ 2,043 $ 2,180 6.35% Advance due August 1, 2013 $ 2,676 $ 2,723 5.95% Advance due March 1, 2004 $ 553 $ 586 5.70% Advance due May 1, 2004 $ 4,499 $ 4,760 5.85% Advance due January 1, 2016 $ 4,325 $ 4,876 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 $ 10,000 6.60% Advance due July 21, 1999 $ -0- $ 10,000 6.90% Advance due July 21, 2001 $ -0- $ 10,000 -------- -------- $ 41,346 $ 62,375 ======== ======== </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. -10-
11 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Comparison of Results of Operations for the Three and Six Month Periods Ended June 30, 1997 and 1996 Net Interest Income - ------------------- The Corporation's principal source of earnings is net interest income, the difference between total interest income and total interest expense. Net interest income increased by $2.8 million or 11.9% to $25.94 million for the three months ended June 30, 1997 compared to $23.18 million for the second quarter of 1996. The following table compares the average balance and tax equivalent yield/cost for interest-earning assets and interest-bearing liabilities for the second quarter of 1997 with the same quarter in 1996. <TABLE> <CAPTION> Three Months Ended June 30th (In Thousands) 1997 1996 Tax Tax Average Equivalent Average Equivalent Balance % Balance % --------------------------- --------------------------- <S> <C> <C> <C> <C> Loans $1,511,498 9.46% $1,350,470 9.47% Taxable Investments $ 503,649 7.02% $ 399,510 6.74% Tax-Exempt Investments $ 67,197 8.46% $ 62,639 8.56% Federal Funds Sold $ 10,878 5.24% $ 41,789 5.33% ---------- ---- ---------- ---- Interest-Earning Assets $2,093,222 8.83% $1,854,408 8.77% ---------- ---- ---------- ---- Interest-Bearing Deposits $1,554,898 4.27% $1,413,519 4.25% Short-Term Borrowings $ 158,801 4.90% $ 111,614 4.42% Long-Term Borrowings $ 63,264 6.06% $ 35,009 5.49% ---------- ---- ---------- ---- Interest-Bearing Liabilities $1,776,963 4.39% $1,560,142 4.29% ---------- ---- ---------- ---- Excess Interest-Earning Assets $ 316,259 4.44% $ 294,266 4.48% Net Interest Margin 5.09% 5.16% </TABLE> -11-
12 Average interest-earning assets increased by $239 million or 12.9% to $2,093 million for the quarter ended June 30, 1997 compared to the same quarter in 1996. Average loans outstanding increased by $161 million or 11.9% to $1,511 million for the second quarter of 1997 compared to the same quarter in 1996. Approximately $31 million of this increase was due to loans acquired as part of the purchase of branches in Richland County in December, 1996. Loan demand continues to be relatively strong. Average investment securities including federal funds sold increased by $78 million or 15.4% to $582 million in 1997 compared to the same quarter in 1996. The yield on taxable investments increased to 7.02% for the second quarter of 1997 compared to 6.74% for the same quarter in 1996. The increase in yield on taxable investments resulted primarily from the purchase of longer-term mortgage-backed securities and callable U.S. Agency securities acquired during the third quarter of 1996. Average interest-bearing liabilities increased by $217 million or 13.9% to $1,777 million for the quarter ended June 30, 1997 compared to the same quarter in 1996. Average interest-bearing deposits increased by $141 million or 10.0% to $1,555 million for the second quarter of 1997 compared to the same quarter in 1996. Approximately $98 million of this increase was due to deposits acquired as part of the purchase of branches in Richland County in December, 1996. Average total borrowings increased by $75 million or 52% to $222 million for the second quarter of 1997 compared to the same quarter in 1996. The increase in average borrowings was primarily used to fund the purchase of longer-term investment securities. The increase in net interest income of $2.8 million or 11.9% to $25.94 million for the three months ended June 30, 1997 was primarily due to the 12.9% increase in average interest-earning assets. The tax equivalent net interest margin (defined as net interest income divided by average earning assets) decreased to 5.09% for the second quarter of 1997 compared to 5.16% for the same quarter in 1996. For the three months ended June 30, 1997, the net interest spread (the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities) decreased by .04% to 4.44% compared to 4.48% for the same period in 1996. The yield on interest-earning assets increased by .06% to 8.83% for the second quarter of 1997 compared to 8.77% for the same quarter in 1996 and the cost of interest-bearing liabilities increased by .10% to 4.39% for the second quarter of 1997 compared to 4.29% for the same period in 1996. Net interest income increased by $4.9 million or 10.7% to $50.8 million for the six months ended June 30, 1997 compared to $45.9 million for the same period in 1996. The following table compares the average balance and tax equivalent yield/cost for interest-earning assets and interest-bearing liabilities for the first six months of 1997 with the same period in 1996. <TABLE> <CAPTION> Six Months Ended June 30th (In Thousands) 1997 1996 ---------------------- ---------------------- Tax Tax Average Equivalent Average Equivalent Balance % Balance % -------------------- ---------------------- <S> <C> <C> <C> <C> Loans $1,495,690 9.43% $1,347,995 9.50% Taxable $ 498,382 6.95% $ 398,087 6.68% Investments Tax-Exempt Investments $ 63,806 8.63% $ 61,140 8.57% </TABLE> -12-
13 <TABLE> <S> <C> <C> <C> <C> Federal Funds $ 16,102 5.33% $ 41,434 5.34% Sold ---------- ---- ---------- ---- Interest-Earning $2,073,980 8.79% $1,848,656 8.80% Assets ---------- ---- ---------- ---- Interest-Bearing $1,551,010 4.28% $1,399,173 4.29% Deposits Short-Term $ 147,517 4.68% $ 119,749 4.60% Borrowings Long-Term $ 61,494 6.29% $ 35,132 5.51% Borrowings ---------- ---- ---------- ---- Interest-Bearing $1,760,021 4.38% $1,554,054 4.34% Liabilities ---------- ---- ---------- ---- Excess Interest- $ 313,959 4.41% $ 294,602 4.46% Earning Assets Net Interest Margin 5.07% 5.14% </TABLE> Average interest-earning assets increased by $225 million or 12.2% to $2,074 million for the six months ended June 30, 1997 compared to the same period in 1996. Average loans outstanding increased by $148 million or 11.0% to $1,496 million for the first half of 1997 compared to the same period in 1996. Approximately $31 million of this increase was due to loans acquired as part of the purchase of branches in Richland County in December, 1996. Loan demand continues to be relatively strong, particularly for consumer loans secured by automobiles. Average investment securities including federal funds sold increased by $78 million or 15.5% to $578 million for the first six months of 1997 compared to the same period in 1996. The yield on taxable investments increased to 6.95% for the first half of 1997 compared to 6.68% for the same period in 1996. The increase in yield on taxable investments resulted primarily from the purchase of longer-term mortgage-backed securities and callable U.S. Agency securities acquired during the third quarter of 1996. Average interest-bearing liabilities increased by $206 million or 13.3% to $1,760 million for the first six months of 1997 compared to the same period in 1996. Average interest-bearing deposits increased by $152 million or 10.9% to $1,551 million for the first half of 1997 compared to the same period in 1996. Approximately $98 million of this increase was due to deposits acquired as part of the purchase of branches in Richland County in December, 1996. Average total borrowings increased by $54 million or 34.9% to $209 million for the first half of 1997 compared to the same period in 1996. The increase in average borrowings was primarily used to fund the purchase of longer-term investment securities. The increase in net interest income of $4.9 million or 10.7% to $50.8 million for the first six months of 1997 was primarily due to the 12.2% increase in average interest-earning assets. The tax equivalent net interest margin (defined as net interest income divided by average earning assets) decreased to 5.07% for the first half of 1997 compared to 5.14% for the same period in 1996. For the six months ended June 30, 1997, the net interest spread (the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities) decreased by .05% to 4.41% compared to 4.46% for the same period in 1996. The yield on interest-earning assets decreased by .01% to 8.79% in 1997 compared to 8.80% for 1996 and the cost of interest-bearing liabilities increased by .04% to 4.38% in 1997 compared to 4.34% in 1996. -13-
14 Provision for Loan Losses - ------------------------- The provision for loan losses increased by $198,000 to $1.45 million for the three months ended June 30, 1997 and increased by $306,000 to $2.65 million for the six months ended June 30, 1997 compared to the same periods in 1996. Net charge-offs were $716,000 and $670,000, respectively, for the three and six month periods ended June 30, 1997 compared to net charge-offs of $421,000 and $723,000, respectively, for the same periods in 1996. Non-performing loans, defined as loans that are 90 days past due, renegotiated loans and non-accrual loans were $7.1 million or .46% of loans at June 30, 1997 compared to $7.8 million or .53% of loans at December 31, 1996 and $6.9 million or .50% of loans at June 30, 1996. The reserve for loan losses as a percentage of outstanding loans was 2.24% at June 30, 1997 compared to 2.20% at December 31, 1996 and 2.25% at June 30, 1996. See Footnote 3 for a discussion of the factors considered by management in determining the provision for loan losses. Non-Interest Income - ------------------- Non-interest income increased by $591,000 or 13.9% to $4.8 million for the three months ended June 30, 1997 and increased by $1.1 million or 12.9% to $9.8 million for the six months ended June 30, 1997 compared to the same periods in 1996. The increase in non-interest income for both periods in 1997 compared to 1996 was primarily due to increases in fees from fiduciary activities and service charges on deposit accounts. Security Losses - --------------- Investment security losses were $401,000 for the three month period ended June 30, 1996 and $700,000 for the first half of 1996 compared to no gain or loss for the same periods in 1997. In 1996, taxable investment securities were sold and the proceeds reinvested into taxable investment securities with slightly longer maturities. At June 30, 1997, the unrealized net holding gain on available-for-sale securities was $4.1 million compared to an unrealized net hold gain of $4.7 million at December 31, 1996. If longer-term interest rates would increase during the second half of 1997, the Corporation could realize some investment security losses in the last two quarters of 1997. Other Expense - ------------- Total other expense increased by $1.9 million or 13.9% to $15.5 million for the three months ended June 30, 1997 and increased by $2.7 million or 9.4% to $31.1 million for the six months ended June 30, 1997 compared to the same periods in 1996. Salaries and employee benefits expense increased by $965,000 or 14.3% to $7.7 million for the three months ended June 30, 1997 and increased by $1.3 million or 9.5% to $15.4 million for the six months ended June 30, 1997 compared to the same periods in 1996. Included in salaries and employee benefits expense were expenses pertaining to the payment of stock appreciation rights and the related payroll taxes, and payroll taxes pertaining to the exercise of nonqualifying employee stock options. The stock appreciation rights and the stock options were exercised by the First-Knox employees during May, 1997 after the merger with Park was completed. See Footnote 2 for information about the merger. The additional expense due to the exercise of the stock appreciation rights and the stock options was $339,000 for the three months ended June 30, 1997 and $437,000 for the six months ended June 30, 1997 compared to the same periods in 1996. Full time equivalent employees were 980 at June 30, 1997 compared to 956 at June 30, 1996. -14-
15 The subcategory other expense which includes data processing expense, fees and service charges, marketing, telephone, postage, deposit insurance premiums, amortization of intangibles, and expenses pertaining to other real estate owned, increased by $872,000 or 16.9% to $6.0 million for the three months ended June 30, 1997 and increased by $1.3 million or 11.4% to $12.3 million for the six months ended June 30, 1997. The increase in the subcategory other expense for both periods was primarily due to increases in the amortization of intangibles and to a lesser extent increases in marketing expense and fees and service charges. The increase in the amortization of intangibles was $360,000 for the second quarter of 1997 and $721,000 for the first six months of 1997 compared to the same periods in 1996. Federal Income Taxes - -------------------- Federal income tax expense increased by $546,000 to $4.3 million and by $1.2 million to $8.3 million for the three and six month periods ended June 30, 1997, respectively, compared to the same periods in 1996. The ratio of federal income tax expense to income before taxes was approximately 31% for both periods in 1997 and 1996. Net Income - ---------- Net income increased by $1.1 million or 13.4% to $9.55 million for the three months ended June 30, 1997 compared to $8.42 million for the same period in 1996. For the six months ended June 30, 1997, net income increased by $2.5 million or 15.8% to $18.5 million compared to $16.0 million for the same period in 1996. The annualized, net income to average asset ratio (ROA) was 1.73% and 1.70%, respectively, for the three and six month periods ended June 30, 1997 compared to 1.72% and 1.64%, respectively, for the same periods in 1996. The annualized, net income to average equity ratios (ROE) was 19.25% and 18.81%, respectively, for the three and six month periods ended June 30, 1997 compared to 18.49% and 17.54%, respectively, for the same periods in 1996. -15-
16 COMPARISON OF FINANCIAL CONDITION FOR JUNE 30, 1997 AND DECEMBER 31, 1996 Changes in Financial Condition and Liquidity - -------------------------------------------- Total assets increased by $81 million or 3.7% to $2,266 million at June 30, 1997 compared to $2,185 million at December 31, 1996. Loan balances increased by $62 million to $1,534 million and federal funds sold and investment securities increased by $18 million to $592 million. Total liabilities increased by $70 million or 3.5% to $2,056 million at June 30, 1997 compared to $1,986 million at December 31. 1996. This increase was due to increases in short-term borrowings and non-interest-bearing deposits. Total borrowing increased by $62 million to $260 million at June 30, 1997. Short-term borrowings, which primarily consist of overnight repurchase agreements with customers, increased by $83 million to $218 million while long-term debt, which consists of Federal Home Loan Bank advances, decreased by $21 million to $41 million at June 30, 1997. Proceeds from short-term borrowings were used to prepay higher rate long-term debt at the end of the second quarter of 1997. Total deposits increased by $14 million to $1,778 million at June 30, 1997 as noninterest-bearing deposits increased by $17 million and interest-bearing deposits decreased by $3 million. 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 67.7% at June 30, 1997 compared to 67.4% at December 31, 1996 and 69.4% at June 30, 1997. Cash and cash equivalents were unchanged during the six months ended June 30, 1997 and remained at $82 million. The present funding sources provide more than adequate liquidity for the Corporation to meet its cash flow needs. Capital Resources - ----------------- Stockholders' equity at June 30, 1997 was $210.6 million or 9.29% of total assets compared to $199.0 million or 9.11% of total assets at December 31, 1996 and $185.4 million or 9.39% of total assets at June 30, 1996. 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 not included in computing regulatory capital. The minimum leverage capital ratio (defined as stockholders' equity less intangible assets) is 4% and the well capitalized ratio is greater than or equal to 5%. Park's leverage ratio was 8.83% at June 30, 1997 and 8.73% at December 31, 1996. 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 June 30, 1997 and 13.16% at December 31, 1996. 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 14.89% at June 30, 1997 and 14.42% at December 31, 1996. The financial institution subsidiaries of Park each met the well capitalized capital ratio guidelines at June 30, 1997. The following table indicates the capital ratios for each subsidiary and Park at June 30, 1997: -16-
17 <TABLE> <CAPTION> Tier I Total Leverage Risk-Based Risk-Based -------- ---------- ---------- <S> <C> <C> <C> Park National Bank 7.73% 10.60% 11.87% Richland Trust Company 6.56% 11.69% 12.96% Century National Bank 8.24% 14.18% 15.44% First-Knox National Bank 7.40% 12.53% 13.78% Farmers and Savings Bank 8.19% 12.27% 13.52% Park National Corporation 8.83% 13.63% 14.89% Minimum Capital Ratio 4.00% 4.00% 8.00% Well Capitalized Ratio 5.00% 6.00% 10.00% </TABLE> Mutual Federal Savings Bank converted from a thrift charter to a national commercial bank charter effective April 7, 1997 and accordingly changed its name to Century National Bank. At the July 21, 1997 Park National Corporation Board of Directors' Meeting, a cash dividend of $.40 per share was declared payable on September 10, 1997 to stockholders of record on August 22, 1997. -17-
18 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 --------------------- Not applicable Item 3. Defaults Upon Senior Securities ------------------------------- Not applicable Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- Not applicable Item 5. Other Information ----------------- Not Applicable Item 6. Exhibits and Reports on Form 8-K -------------------------------- a. Exhibits -------- See Exhibit Index at Page 20 b. Reports on Form 8-K ------------------- A Form 8-K was filed by Park on May 19, 1997 announcing the acquisition of First-Knox. Included in the filing were a condensed pro forma combined balance sheet of Park and First-Knox as of March 31, 1997 and condensed pro forma combined statements of income for the quarters ended March 31, 1997 and 1996. -18-
19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PARK NATIONAL CORPORATION DATE: August 12, 1997 BY: /s/ C. Daniel DeLawder ------------------------- ------------------------------------ C. Daniel DeLawder President DATE: August 12, 1997 BY: /s/ David C. Bowers ------------------------- ------------------------------------ David C. Bowers Chief Financial Officer/Secretary -19-
20 PARK NATIONAL CORPORATION EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION -------------- ----------- 3(a)1 Certificate of Amendment by Shareholders to the Articles of Incorporation of Park National Corporation as filed with the Ohio Secretary of State on April 22, 1997. 3(a)2 Articles of Incorporation of Park National Corporation (reflecting amendments through April 22, 1997) (for SEC reporting compliance purposes only; not filed with Ohio Secretary of State) 3(b)1 Certified Resolution regarding adoption of amendment to Subsection 2.02(A) of the Regulations of Park National Corporation by shareholders on April 21, 1997. 3(b)2 Regulations of Park National Corporation (reflecting amendments through April 21, 1997) (For SEC reporting compliance purposes only) 27 Financial Data Schedule -20-