EX-13 8 l18755aexv13.txt EX-13 EXHIBIT 13 FINANCIAL REVIEW This financial review presents management's discussion and analysis of the 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 notes 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. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance. The forward-looking statements are based on management's expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation, Park's ability to execute its business plan, changes in general economic and financial market conditions, changes in interest rates, changes in the competitive environment, changes in banking regulations or other regulatory or legislative requirements affecting bank holding companies and changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date hereof. Park does not undertake any obligation to publicly update any forward-looking statement except to the extent required by law. Park's Board of Directors approved a 5% stock dividend in November 2004. The additional common shares resulting from the dividend were distributed on December 15, 2004, to stockholders of record as of December 1, 2004. The consolidated financial statements, notes and other references to share and per share data have been retroactively restated for the stock dividend. OVERVIEW Net income for 2005 increased by $3.7 million to $95.2 million, a 4.1% increase over net income of $91.5 million for 2004. Diluted earnings per share increased by 5.1% to $6.64 for 2005 compared to $6.32 for 2004. For 2005 compared to 2004, income before federal income taxes benefited from an $8.3 million increase in net interest income, a $3.2 million decrease in the provision for loan losses and a $7.9 million increase in total other income. Total operating expenses increased by $13.1 million and federal income tax expense increased by $2.4 million in 2005 compared to 2004. The primary reason for the increases in net interest income, total other income and operating expense was the acquisitions of First Federal Bancorp, Inc. ("First Federal") on December 31, 2004 and First Clermont Bank ("First Clermont") on January 3, 2005. First Federal had $253 million of assets at the time of its acquisition and First Clermont had $185 million of assets on January 3, 2005. Both acquisitions were accounted for as purchases and did not have any impact on the 2004 operating results for Park. Net income for 2004 increased by $4.6 million to $91.5 million, a 5.3% increase over net income of $86.9 million for 2003. Diluted earnings per share increased by 5.9% to $6.32 for 2004 compared to $5.97 for 2003. For 2004 compared to 2003, income before federal income taxes benefited from a $9.7 million increase in net interest income and a $4.0 million reduction in the provision for loan losses. Total other income decreased by $3.7 million, total operating expenses increased by $3.9 million and federal income tax expense increased by $1.4 million in 2004 compared to 2003. The primary reason for the increase in net income in 2004 was the $9.7 million or 4.8% increase in net interest income. Average loan balances were $2,813 million in 2004 compared to $2,696 million in 2003. The reduction in the provision for loan losses contributed to the increases in net income for both 2005 and 2004. The provision for loan losses was $5.4 million in 2005, $8.6 million in 2004 and $12.6 million in 2003. The reduction in the provision for loan losses was primarily due to a reduction in net loan charge-offs, which were $5.9 million in 2005, $7.9 million in 2004 and $11.5 million in 2003. The annualized net income to average assets ratio (ROA) was 1.71% for 2005 and 1.81% for both 2004 and 2003. The annualized net income to average equity ratio (ROE) was 17.03% for 2005, 17.00% for 2004 and 16.69% for 2003. Effective the fourth quarter of 2005, the quarterly cash dividend on common stock was increased to $.92 per share. The new annualized cash dividend of $3.68 per share is 2.2% greater than the sum of the cash dividends declared for the four previous quarters. Park has paid quarterly cash dividends since becoming a holding company in early 1987. The annual compound growth rate for Park's dividend declared per share for the last five years is 7.4%. The dividend pay out ratio was 54.19% for 2005, 53.54% for 2004 and 53.42% for 2003. ACQUISITIONS AND BRANCH SALE On January 3, 2005, Park acquired First Clermont Bank of Milford, Ohio for $52.5 million in an all cash transaction. First Clermont Bank merged with The Park National Bank (a Park subsidiary bank) and has been operating as a separate division of The Park National Bank (under the First Clermont name). The fair value of the acquired assets of First Clermont was $185.4 million and the fair value of the liabilities assumed was $161.3 million at January 3, 2005. The goodwill recognized as a result of this acquisition was $28.4 million. Park announced during the fourth quarter of 2005 that The Park National Bank's three offices in southwest Ohio will be combined with the First Clermont Division during the first six months of 2006. On December 31, 2004, Park acquired First Federal Bancorp, Inc. for $46.6 million in an all cash transaction accounted for as a purchase. The savings and loan subsidiary of First Federal, First Federal Savings Bank of Eastern Ohio, merged with Park's subsidiary bank, Century National Bank. The goodwill recognized as a result of this acquisition was $26.7 million. The fair value of the acquired assets of First Federal was $252.6 million and the fair value of the liabilities assumed was $232.7 million at December 31, 2004. On February 11, 2005, Century National Bank sold its Roseville, Ohio branch office. The Roseville branch office was acquired in connection with the acquisition of First Federal on December 31, 2004. The Federal Reserve Board required that the Roseville branch office be sold as a condition of its approval of the merger transactions involving Park and First Federal. The deposits sold with the Roseville branch office totaled $12.4 million and the loans sold with the branch office totaled $5.3 million. Century National Bank received a premium of $1.2 million from the sale of deposits which reduced goodwill by $860,000 and core deposit intangibles by $324,000. The two acquisitions were funded through the working capital of Park and its subsidiary banks. A year ago, management projected that the two acquisitions would add approximately $3 to $4 million to net income in 2005. Management estimates that the acquisitions added approximately $4.5 million to net income in 2005, net of the implied interest cost on the combined purchase prices of $99.1 million. CRITICAL ACCOUNTING POLICIES The significant accounting policies used in the development and presentation of Park's financial statements are listed in Note 1 of the Notes to Consolidated Financial Statements. The accounting and reporting policies of Park conform with U.S. generally accepted accounting principles and general practices within the financial services industry. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. Park considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb probable credit losses in the loan portfolio. Management's determination of the adequacy of the allowance for loan losses is based on periodic evaluations 26 FINANCIAL REVIEW of the loan portfolio and of current economic conditions. However, this evaluation is inherently subjective as it requires material estimates, including expected default probabilities, loss given default, the amounts and timing of expected future cash flows on impaired loans, and estimated losses on consumer loans and residential mortgage loans based on historical loss experience and the current economic conditions. All of those factors may be susceptible to significant change. To the extent that actual results differ from management estimates, additional loan loss provisions may be required that would adversely impact earnings for future periods. Management's assessment of the adequacy of the allowance for loan losses considers individual impaired loans, pools of homogeneous loans with similar risk characteristics and other environmental risk factors. This assessment is updated on a quarterly basis. The allowance established for individual impaired loans reflects expected losses resulting from analyses developed through specific credit allocations for individual loans. The specific credit allocations are based on regular analyses of commercial, commercial real estate and construction loans where the internal credit rating is at or below a predetermined classification. These analyses involve a high degree of judgement in estimating the amount of loss associated with specific impaired loans. Pools of homogeneous loans with similar risk characteristics are also assessed for probable losses. A loss migration analysis is performed on commercial, commercial real estate loans and construction loans. These loans over a fixed dollar amount are assigned an internal credit rating. Generally, residential real estate loans and consumer loans are not individually graded. The amount of loan loss reserve assigned to these loans is dependent on their net charge-off history. Management also evaluates the impact of environmental factors which pose additional risks. Such environmental factors include: national and local economic trends and conditions; experience, ability, and depth of lending management and staff; effects of any changes in lending policies and procedures; levels of, and trends in, consumer bankruptcies, delinquencies, impaired loans and charge-offs and recoveries. The determination of this component of the allowance for loan losses requires considerable management judgement. Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgement than most other significant accounting policies. Statement of Financial Accounting Standard (SFAS) No. 142, "Accounting for Goodwill and Other Intangible Assets," establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill. At December 31, 2005, Park had core deposit intangibles of $7.5 million subject to amortization and $61.7 million of goodwill, which was not subject to periodic amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Park's goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Park's banking subsidiaries to provide quality, cost effective banking services in a competitive marketplace. The goodwill value of $61.7 million is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely impact earnings in future periods. SFAS No. 142 requires an annual evaluation of goodwill for impairment. The fair value of the goodwill, which resides on the books of Park's subsidiary banks, is estimated by reviewing the past and projected operating results for the Park subsidiary banks, deposit and loan totals for the Park subsidiary banks and banking industry comparable information. Park has concluded in each of the past three years that the recorded value of goodwill was not impaired. 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, Park attempts to meet the needs of its customers for commercial, real estate and consumer loans, consumer and commercial leases, and investment, fiduciary and deposit services. Familiarity with its local markets has allowed Park to achieve solid financial results even in periods when there have been weak economic conditions. A subsidiary bank of Park, The Park National Bank, has concentrated on further expanding its operations in three metropolitan areas in Ohio during the past year. The metropolitan areas are Columbus, Cincinnati and Dayton. The Park National Bank opened an office in Worthington (near Columbus), opened an office in West Chester (near Cincinnati) and relocated its downtown Dayton office to the Dayton suburb of Centerville during 2005. Additional lenders were added to further increase loans in these markets. The small to medium population Ohio communities, where most of Park's subsidiary banks are headquartered, have experienced slow economic growth in the past few years. Management expects to continue to concentrate on adding banking offices in higher growth markets in the next two years. Management anticipates that some of this expansion will be to metropolitan areas outside the state of Ohio. The Corporation's subsidiaries compete for deposits and loans with other banks, savings associations, credit unions and other types of financial institutions. At December 31, 2005, Park and its subsidiaries operated one hundred twenty-six full service offices and a network of one hundred thirty-seven automatic teller machines in twenty-nine Ohio counties. The acquisition of First Clermont Bank added seven additional full service offices. Park 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 strong results are contingent upon economic conditions in Ohio and competitive factors, among other things. A table of financial data of Park's subsidiaries for 2005, 2004 and 2003 is shown below. See Note 20 of the Notes to Consolidated Financial Statements for additional financial information on the Corporation's subsidiaries. TABLE 1 - PARK NATIONAL CORPORATION AFFILIATE FINANCIAL DATA
2005 2004 2003 -------------------- -------------------- -------------------- AVERAGE NET Average Net Average Net ASSETS INCOME Assets Income Assets Income ---------- ------- ---------- ------- ---------- ------- (IN THOUSANDS) Park National Bank: Park National Division $1,413,872 $23,026 $1,380,568 $21,569 $1,330,713 $22,460 Fairfield National Division 362,192 6,856 335,006 7,309 333,095 5,965 First Clermont Division 229,726 3,049 -- -- -- -- Richland Trust Company 515,749 8,842 546,710 9,753 509,609 9,748 Century National Bank 743,276 12,464 503,239 8,065 458,440 7,629 First-Knox National Bank: First-Knox National Division 639,000 10,805 665,116 11,049 649,851 11,242 Farmers & Savings Division 126,939 2,544 79,442 2,799 82,019 2,386 United Bank, N.A. 241,277 3,026 240,988 3,523 226,741 3,467 Second National Bank 404,656 6,029 390,906 6,859 372,152 6,201 Security National Bank: Security National Division 782,467 11,393 773,710 12,290 719,043 11,091 Unity National Division 184,234 1,404 170,829 1,159 164,535 1,275 Citizens National Bank 189,965 1,928 201,916 2,332 188,446 2,261 Parent Company, including consolidating entries (275,265) 3,872 (239,349) 4,800 (231,381) 3,153 ---------- ------- ---------- ------- ---------- ------- CONSOLIDATED TOTALS $5,558,088 $95,238 $5,049,081 $91,507 $4,803,263 $86,878 ========== ======= ========== ======= ========== =======
27 FINANCIAL REVIEW RETURN ON EQUITY Park's primary financial goal is to achieve a superior long-term return on stockholders' equity. The Corporation measures performance in its attempt to achieve this goal against its peers, defined as all U.S. bank holding companies between $3 billion and $10 billion in assets. At year-end 2005, there were approximately 89 bank holding companies in this peer group. The Corporation's net income to average equity ratio (ROE) was 17.03%, 17.00% and 16.69% in 2005, 2004 and 2003, respectively. The return on equity ratio has averaged 17.12% over the past five years compared to 13.55% for the peer group. HISTORICAL COMPARISON OF RETURN ON AVERAGE EQUITY
2001 2002 2003 2004 2005 ----- ----- ----- ----- ----- Park 17.33% 17.56% 16.69% 17.00% 17.03% Peer Mean 13.39% 14.46% 13.54% 13.16% 13.18%*
* as of 09/30/2005 BALANCE SHEET COMPOSITION Park functions as a commercial bank holding company. The following section discusses the balance sheet for the Corporation. SOURCE OF FUNDS DEPOSITS: Park'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. These larger balance certificates of deposit were less than 13% of total deposits for each of the last three years. In 2005, year-end total deposits decreased by $55 million or 1.5% exclusive of the $136 million of deposits that were acquired in the First Clermont acquisition and the $12 million of deposits that were included in the sale of the Roseville branch office. In 2004, year-end total deposits increased by $103 million or 3.0% exclusive of the $172 million of deposits that were acquired in the First Federal acquisition. Average total deposits were $3,830 million in 2005 compared to $3,521 million in 2004 and $3,424 million in 2003. Average noninterest bearing deposits were $643 million in 2005 compared to $575 million in 2004 and $522 million in 2003. Management expects that average total deposits will increase by a modest amount (1% to 2%) in 2006. Emphasis will continue to be placed on increasing noninterest bearing deposits. A year ago, management projected that average total deposits would increase by approximately 2.5% in 2005. The growth in average total deposits in 2005 was $13 million or only .4% exclusive of the acquisitions of First Federal and First Clermont and the sale of the Roseville branch office. The slower than expected growth was primarily due to increased competition for interest bearing balances. Management concentrated on controlling the cost of interest bearing deposit accounts in 2005. The average interest rate paid on interest bearing deposit accounts was 1.79% in 2005 compared to 1.36% in 2004 and 1.67% in 2003. By comparison, the average federal funds rate was 3.21% in 2005, 1.36% in 2004 and 1.13% in 2003. Maturity of time certificates of deposit and other time deposits of $100,000 and over as of December 31, 2005 were: TABLE 2 - $100,000 AND OVER MATURITY SCHEDULE
TIME CERTIFICATES DECEMBER 31, 2005 OF DEPOSIT ----------------- ----------------- (IN THOUSANDS) 3 months or less $114,078 Over 3 months through 6 months 77,892 Over 6 months through 12 months 115,396 Over 12 months 110,487 -------- TOTAL $417,853 --------
SHORT-TERM BORROWINGS: Short-term borrowings consist of securities sold under agreements to repurchase, Federal Home Loan Bank advances, federal funds purchased and other borrowings. These funds are used to manage the Corporation's liquidity needs and interest rate sensitivity risk. The average rate paid on short-term borrowings generally moves closely with changes in market interest rates for short-term investments. The average rate paid on short-term borrowings was 2.57% in 2005 compared to 1.33% in 2004 and .53% in 2003. The Federal Reserve Board has increased the federal funds rate by 25 basis points at each Federal Open Market Committee meeting since June 2004. The federal funds rate increased from 1.00% to 2.25% at year-end 2004 and further increased to 4.25% by year-end 2005. The average federal funds rate was 1.13% in 2003, 1.36% in 2004 and 3.21% in 2005. The average rate paid on short-term borrowings was .53% in 2003 compared to the average federal funds rate of 1.13% for the year. The primary reason for the unusually low borrowing rate in 2003 was due to dollar-roll repo borrowings, which averaged $264 million for the year at an average borrowing rate of a negative .03%. The dollar-roll repo borrowings were secured by U.S. Government Agency fifteen-year mortgage-backed securities. This very attractive borrowing rate was due to a shortage of 5.00% fifteen-year mortgage-backed securities during the first half of 2003. This attractive borrowing rate was not available in 2004 and 2005. The proceeds from the dollar-roll repo borrowings were used to purchase short-term U.S. Government Agency securities which on average yielded 1.15%. This arbitrage generated $3.1 million in net interest income for 2003. The average borrowing rate for short-term borrowings, excluding the dollar-roll repos, was 1.12% for 2003. LONG-TERM DEBT: Long-term debt primarily consists of borrowings from the Federal Home Loan Bank and repurchase agreements with investment banking firms. The average rate paid on long-term debt was 3.69% for 2005 compared to 2.57% for 2004 and 3.78% for 2003. In 2005, average long-term debt was $800 million compared to $520 million in 2004 and $282 million in 2003. Average total debt (long-term and short-term) was $1,092 million in 2005 compared to $921 million in 2004 and $797 million in 2003. Average long-term debt was 73% of average total debt in 2005 compared to 56% in 2004 and 35% in 2003. Management increased the amount of long-term debt over the past two years due to the increase in short-term interest rates. STOCKHOLDERS' EQUITY: Average stockholders' equity to average total assets was 10.06% in 2005, 10.66% in 2004 and 10.83% in 2003. The decrease in the average stockholders' equity to average total assets ratio in 2005 was primarily due to the acquisitions of First Federal and First Clermont which added assets totaling $438 million but no equity since both acquisitions were all cash transactions. In accordance with SFAS No. 115, Park reflects any unrealized holding gain or loss on available-for-sale securities, net of federal taxes, as accumulated other comprehensive income which is part of Park's equity. While the effects of this accounting are not recognized for calculation of regulatory capital adequacy ratios, it does impact Park's equity as reported in the audited financial statements. The unrealized holding loss on available-for-sale securities, net of federal taxes, was $10.1 million at year-end 2005. The 28 FINANCIAL REVIEW unrealized holding gain on available-for-sale securities, net of federal taxes, was $12.4 million at year-end 2004 and $19.0 million at year-end 2003. Long-term interest rates increased during 2005 which caused the market value of Park's investment securities to decline and produced the unrealized holding loss on available-for-sale securities. INVESTMENT OF FUNDS LOANS: Average loans, net of unearned income, were $3,278 million in 2005 compared to $2,813 million in 2004 and $2,696 million in 2003. The average yield on loans was 6.84% in 2005 compared to 6.38% in 2004 and 6.85% in 2003. The average prime lending rate in 2005 was 6.19% compared to 4.35% in 2004 and 4.12% in 2003. Approximately 64% of loan balances mature or reprice within one year (see Table 11). This results in the interest rate yield on the loan portfolio adjusting with changes in interest rates, but on a delayed basis. Management expects that the yield on the loan portfolio will increase in 2006 as variable rate loans reprice at higher interest rates. Year-end loan balances, net of unearned income, increased by $52 million or 1.7% in 2005 exclusive of $161 million of loans that were acquired in the First Clermont acquisition and $5 million of loans that were included in the sale of the Roseville branch office. In 2004, loans increased by $167 million or 6.1% exclusive of $223 million of loans that were acquired in the First Federal acquisition. Year-end loan balances increased by $39 million or 1.4% in 2003. In summary, year-end loan balances (exclusive of acquisitions) have increased by 1.7%, 6.1% and 1.4% for the years 2005, 2004 and 2003, respectively. The growth in loans in 2005 was negatively impacted by the decrease in the loan portfolios of First Federal and First Clermont. Their combined loan portfolios decreased by approximately $47 million in 2005. Management believes that the runoff in these two loan portfolios has stopped and that these loan portfolios will stabilize and grow slowly in 2006. Park added commercial lenders to its metropolitan area offices (Columbus, Cincinnati and Dayton) in 2004 and 2005 and has experienced faster loan growth in these markets. However, some of our subsidiary banks experienced decreases in loans during 2005 due to weak loan demand in their respective markets. Management believes that year-end loan balances will grow between 3% to 5% during 2006. A year ago, management projected that growth in year-end loan balances would be a little stronger than the 6.1% growth in 2004. This forecast was not correct due to runoff in the loan portfolios of First Federal and First Clermont and to weak loan demand in some of the markets where Park's subsidiary banks operate. Year-end residential real estate loans were $1,287 million, $1,190 million and $984 million in 2005, 2004 and 2003, respectively. Residential real estate loans increased by $9 million at year-end 2005 exclusive of $88 million of loans from the First Clermont acquisition. Residential real estate loans increased by $78 million or 7.9% at year-end 2004 exclusive of $129 million of loans from the First Federal acquisition. Residential real estate loans decreased by $15 million or 1.5% at year-end 2003. Management expects continued slow growth in residential real estate loans in 2006. The long-term fixed rate mortgage loans that Park originates are sold in the secondary market and Park retains the servicing on these loans. This activity, the origination and sale of fixed rate mortgage loans, produced a significant increase in fee income (Other service income) during 2003, but did not increase loan balances since the loans were sold. The sold fixed rate mortgage loans were $1,403 million (which includes $137 million of sold loans from First Clermont) at year-end 2005 compared to $1,266 million (which includes $78 million of sold loans from First Federal) at year-end 2004 compared to $1,166 million at year-end 2003. Management expects that the balance of sold fixed rate mortgage loans would remain relatively stable during 2006. Year-end consumer loans were $495 million, $505 million and $450 million in 2005, 2004 and 2003, respectively. Consumer loans decreased by $30 million or 5.9% at year-end 2005 exclusive of $20 million of loans from the First Clermont acquisition. Consumer loans increased by $3 million or .6% at year-end 2004 exclusive of $52 million of loans from the acquisition of First Federal. Consumer loans increased by $8 million or 1.9% in 2003. Management expects that the balance of consumer loans will decrease slightly in 2006 as the runoff from the consumer loan portfolios of First Federal and First Clermont has generally stopped. The demand for construction loans, commercial loans and commercial real estate loans continued to be relatively strong in 2005. On a combined basis, these loans totaled $1,529 million, $1,377 million and $1,232 million at year-end 2005, 2004 and 2003, respectively. These combined loan totals increased by $96 million or 7.0% at year-end 2005 exclusive of $56 million of loans from the First Clermont acquisition. At year-end 2004, these combined loan totals increased by $105 million or 8.5% exclusive of $40 million of loans from the acquisition of First Federal. These combined loan totals increased by $76 million or 6.6% in 2003. Management expects that the growth in the commercial loan and commercial real estate portfolios will continue to be relatively strong in 2006. The emphasis will continue to be placed on further developing Park's commercial lending in the metropolitan markets where Park operates. Year-end lease balances were $17 million, $48 million and $65 million in 2005, 2004 and 2003, respectively. Management continues to de-emphasize automobile leasing and to a lesser extent commercial leasing. The year-end lease balances are expected to decrease by approximately $10 million in 2006. Table 3 reports year-end loan balances by type of loan for the past five years. TABLE 3 - LOANS BY TYPE
DECEMBER 31, 2005 2004 2003 2002 2001 ------------ ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Commercial, financial and agricultural $ 512,636 $ 469,382 $ 441,165 $ 440,030 $ 440,336 Real estate - construction 193,185 155,326 121,160 99,102 89,235 Real estate - residential 1,287,438 1,190,275 983,702 998,202 1,073,801 Real estate - commercial 823,354 752,428 670,082 617,270 595,567 Consumer, net of unearned income 494,975 505,151 450,145 441,747 477,579 Leases, net of unearned income 16,524 48,046 64,549 95,836 119,290 ---------- ---------- ---------- ---------- ---------- TOTAL LOANS $3,328,112 $3,120,608 $2,730,803 $2,692,187 $2,795,808 ========== ========== ========== ========== ==========
TABLE 4 - SELECTED LOAN MATURITY DISTRIBUTION
Over One Over One Year Through Five DECEMBER 31, 2005 or Less Five Years Years TOTAL ----------------- -------- ---------- -------- -------- (IN THOUSANDS) Commercial, financial and agricultural $260,097 $155,657 $ 96,882 $512,636 Real estate - construction 97,351 46,950 48,884 193,185 -------- -------- -------- -------- TOTAL $357,448 $202,607 $145,766 $705,821 ======== ======== ======== ======== Total of these selected loans due after one year with: Fixed interest rate $144,287 Floating interest rate $204,086
INVESTMENT SECURITIES: Park's investment securities portfolio is structured to provide liquidity and contribute to earnings. Park's investment strategy is dynamic. As conditions change over time, Park's overall interest rate risk, liquidity needs and potential return on the investment portfolio will change. Management regularly reevaluates the securities in the investment portfolio based on circumstances as they evolve. Circumstances that may precipitate a sale of a security would be to better manage interest rate risk, to meet liquidity needs, or to improve the overall yield on the investment portfolio. Park classifies most of its securities as available-for-sale (see Note 4 of the Notes to Consolidated Financial Statements). These securities are carried on the books at their estimated fair value with the unrealized holding gain or loss, net of federal taxes, accounted for as accumulated other comprehensive income which is part of the Corporation's equity. 29 FINANCIAL REVIEW Management classified approximately 88% of the securities portfolio as available-for-sale at December 31, 2005. These securities are available to be sold in future periods in carrying out Park's investment strategies. The remaining securities are classified as held-to-maturity and are accounted for at amortized cost. Park realized net security gains of $96,000 in 2005 and net security losses of $793,000 in 2004 and $6.1 million in 2003. During the third quarter and fourth quarter of 2003, long-term interest rates increased. The increase in interest rates provided Park an opportunity to restructure the investment portfolio to improve earnings. The proceeds from the sale of investment securities were reinvested in higher yielding U.S. Government Agency mortgage-backed securities. Management expects that the net losses from the sale of investment securities during 2003 will be earned back in approximately three years from the higher reinvestment rate on the mortgage-backed securities. Average taxable investment securities were $1,758 million in 2005 compared to $1,795 million in 2004 and $1,633 million in 2003. The average yield on taxable securities was 4.87% in 2005 compared to 4.84% in 2004 and 4.54% in 2003. Average tax-exempt investment securities were $94 million in 2005 compared to $107 million in 2004 and $127 million in 2003. The average tax-equivalent yield on tax-exempt investment securities was 7.01% in 2005 compared to 7.17% in 2004 and 7.23% in 2003. On a combined basis, the total of the average balance of taxable and tax-exempt securities was 33.3% of average total assets in 2005 compared to 37.7% in 2004 and 36.6% in 2003. Average investment securities as a percentage of average total assets decreased in 2005. At year-end 2005, total investment securities (at amortized cost) were 30.9% of total assets. Management did not purchase investment securities during the second half of 2005 and used the cash flow from maturities and repayments of investment securities (approximately $212 million) to repay borrowings and provide funding for the increase in loan balances. The amount of investment securities purchased in 2006 will be dependent upon an increase in long-term interest rates. Without such an improvement in investment opportunities, management plans on using the cash flow from the maturities and repayments of investment securities (approximately $270 million) to repay borrowings in 2006 and provide funding for loans. At year-end 2005 and 2004, the average tax-equivalent yield on the total investment portfolio was 4.93% and 4.97%, respectively. The weighted average remaining maturity was 4.6 years at December 31, 2005 and 4.1 years at December 31, 2004. U.S. Government Agency asset-backed securities were approximately 91% of the total investment portfolio at year-end 2005 and at year-end 2004. This segment of the investment portfolio consists of fifteen-year mortgage-backed securities and collateralized mortgage obligations. The average maturity of the investment portfolio would lengthen if long-term interest rates would increase as the principal repayments from mortgage-backed securities and collateralized mortgage obligations would be reduced. At year-end 2005, management estimates that the average maturity of the investment portfolio would lengthen to 4.9 years with a 100 basis point increase in long-term interest rates and to 5.1 years with a 200 basis point increase in long-term interest rates. The following table sets forth the book value of investment securities at year-end: TABLE 5 - INVESTMENT SECURITIES
DECEMBER 31, 2005 2004 2003 ------------ ---------- ---------- ---------- (IN THOUSANDS) Obligations of U.S. Treasury and other U.S. Government agencies $ 996 $ 15,206 $ 25,354 Obligations of states and political subdivisions 85,336 103,739 121,008 U.S. Government asset-backed securities and other asset-backed securities 1,516,950 1,754,852 1,800,352 Other securities 60,060 52,985 44,512 ---------- ---------- ---------- TOTAL $1,663,342 $1,926,782 $1,991,226 ---------- ---------- ----------
Included in Other securities in Table 5, are the investments in Federal Home Loan Bank stock and Federal Reserve stock. Park owned $52.1 million of Federal Home Loan Bank stock and $5.9 million of Federal Reserve Bank stock at December 31, 2005. At December 31, 2004, Park owned $47.1 million of Federal Home Loan Bank stock and $4.4 million of Federal Reserve Bank stock. Park owned $39.7 million of Federal Home Loan Bank stock and $3.0 million of Federal Reserve stock at December 31, 2003. The fair values of these investments are the same as their amortized costs. EARNING RESULTS Park'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. (See Table 6 for three years of history on the average balances of the balance sheet and the average rates earned on interest earning assets and the average rates paid on interest bearing liabilities.) Net interest income increased by $8.3 million or 3.9% to $220.6 million for 2005 compared to an increase of $9.7 million or 4.8% to $212.3 million for 2004. The net yield on interest earning assets was 4.34% for 2005 compared to 4.56% for 2004 and 4.60% for 2003. The net interest rate spread--the difference between rates received for interest earning assets and the rates paid for interest bearing liabilities--was 3.98% for 2005 compared to 4.28% for 2004 and 4.30% for 2003. The increases in net interest income in both 2005 and 2004 was primarily due to increases in average interest earning assets for both years. In 2005, average interest earning assets increased by $418 million or 8.9%. In 2004, average interest earning assets increased by $232 million or 5.2%. The average yield on interest earning assets was 6.17% in 2005 compared to 5.80% in 2004 and 5.98% in 2003. The Federal Reserve Board increased the federal funds rate from 1.00% at June 30, 2004 to 2.25% at year-end 2004 and to 4.25% at year-end 2005. Management expects that the Federal Reserve Board will increase the federal funds rate to 4.75% during the first six months of 2006. The average yield on interest earning assets on a quarterly basis in 2005 was 5.97% for the first quarter, 6.05% for the second quarter, 6.23% for the third quarter and 6.41% for the fourth quarter. The average yield on loans on a quarterly basis in 2005 was 6.53% for the first quarter, 6.73% for the second quarter, 6.94% for the third quarter and 7.17% for the fourth quarter. Management expects that the average yield on interest earning assets and loans will continue to increase in 2006 as loans reprice at higher interest rates or mature and are replaced with higher yielding loans. The average rate paid on interest bearing liabilities was 2.19% in 2005 compared to 1.52% in 2004 and 1.68% in 2003. The average rate paid on interest bearing deposits was 1.79% in 2005 compared to 1.36% in 2004 and 1.67% in 2003. The average rate paid on interest bearing liabilities on a quarterly basis in 2005 was 1.93% for the first quarter, 2.13% for the second quarter, 2.26% for the third quarter and 2.46% for the fourth quarter. The average rate paid on interest bearing deposits on a quarterly basis in 2005 was 1.55% for the first quarter, 1.71% for the second quarter, 1.86% for the third quarter and 2.02% for the fourth quarter. Management expects that the average cost of interest bearing liabilities and the average rate paid on interest bearing deposits will continue to increase in 2006. Management expects that net interest income will increase modestly (2% to 3%) in 2006. Management expects modest growth in average interest earning assets and a slight improvement in the net yield on interest earning assets. A year ago, management projected that the net yield on interest earning assets would be approximately 4.35% in 2005. The actual results for 2005 were 4.34%. For 2006, management projects that the net yield on interest earning assets will be between 4.35% and 4.40%. 30 FINANCIAL REVIEW TABLE 6 - DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
2005 2004 ------------------------------- ------------------------------- DAILY AVERAGE Daily Average DECEMBER 31, AVERAGE INTEREST RATE Average Interest Rate ------------ ---------- -------- ------- ---------- -------- ------- (DOLLARS IN THOUSANDS) ASSETS INTEREST EARNING ASSETS: Loans (1) (2) $3,278,092 $224,346 6.84% $2,813,069 $179,458 6.38% Taxable investment securities 1,757,853 85,664 4.87% 1,794,544 86,806 4.84% Tax-exempt investment securities (3) 93,745 6,571 7.01% 106,585 7,637 7.17% Money market instruments 12,258 441 3.60% 9,366 219 2.34% ---------- -------- ---- ---------- -------- ---- TOTAL INTEREST EARNING ASSETS 5,141,948 317,022 6.17% 4,723,564 274,120 5.80% ---------- -------- ---- ---------- -------- ---- NONINTEREST EARNING ASSETS: Allowance for possible loan losses (71,052) (64,676) Cash and due from banks 148,303 142,102 Premises and equipment, net 46,418 36,540 Other assets 292,471 211,551 ---------- ---------- TOTAL $5,558,088 $5,049,081 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY INTEREST BEARING LIABILITIES: Transaction accounts $1,007,576 $ 11,763 1.17% $ 871,264 $ 4,458 0.51% Savings deposits 633,545 3,328 0.53% 598,181 2,437 0.41% Time deposits 1,545,912 41,808 2.70% 1,476,915 33,103 2.24% ---------- -------- ---- ---------- -------- ---- TOTAL INTEREST BEARING DEPOSITS 3,187,033 56,899 1.79% 2,946,360 39,998 1.36% ---------- -------- ---- ---------- -------- ---- Short-term borrowings 291,842 7,508 2.57% 401,299 5,319 1.33% Long-term debt 799,888 29,488 3.69% 519,979 13,385 2.57% ---------- -------- ---- ---------- -------- ---- TOTAL INTEREST BEARING LIABILITIES 4,278,763 93,895 2.19% 3,867,638 58,702 1.52% ---------- -------- ---- ---------- -------- ---- NONINTEREST BEARING LIABILITIES: Demand deposits 643,032 574,560 Other 77,082 68,608 ---------- ---------- Total noninterest bearing liabilities 720,114 643,168 ---------- ---------- Stockholders' equity 559,211 538,275 ---------- ---------- TOTAL $5,558,088 $5,049,081 ---------- ---------- Net interest earnings $223,127 $215,418 Net interest spread 3.98% 4.28% Net yield on interest earning assets 4.34% 4.56% 2003 ------------------------------- Daily Average DECEMBER 31, Average Interest Rate ------------ ---------- -------- ------- (DOLLARS IN THOUSANDS) ASSETS INTEREST EARNING ASSETS: Loans (1) (2) $2,695,830 $184,676 6.85% Taxable investment securities 1,632,565 74,089 4.54% Tax-exempt investment securities (3) 127,251 9,199 7.23% Money market instruments 35,768 443 1.24% ---------- -------- ---- TOTAL INTEREST EARNING ASSETS 4,491,414 268,407 5.98% ---------- -------- ---- NONINTEREST EARNING ASSETS: Allowance for possible loan losses (64,735) Cash and due from banks 133,157 Premises and equipment, net 38,077 Other assets 205,350 ---------- TOTAL $4,803,263 ---------- LIABILITIES AND STOCKHOLDERS' EQUITY INTEREST BEARING LIABILITIES: Transaction accounts $ 797,421 $ 4,437 0.56% Savings deposits 571,448 3,589 0.63% Time deposits 1,532,966 40,574 2.65% ---------- -------- ---- TOTAL INTEREST BEARING DEPOSITS 2,901,835 48,600 1.67% ---------- -------- ---- Short-term borrowings 515,328 2,738 0.53% Long-term debt 281,599 10,654 3.78% ---------- -------- ---- TOTAL INTEREST BEARING LIABILITIES 3,698,762 61,992 1.68% ---------- -------- ---- NONINTEREST BEARING LIABILITIES: Demand deposits 522,456 Other 61,654 ---------- Total noninterest bearing liabilities 584,110 ---------- Stockholders' equity 520,391 ---------- TOTAL $4,803,263 ---------- Net interest earnings $206,415 Net interest spread 4.30% Net yield on interest earning assets 4.60%
(1) Loan income includes loan related fee income of $3,809 in 2005, $3,336 in 2004 and $4,882 in 2003. Loan income also includes the effects of taxable equivalent adjustments using a 35% tax rate in 2005, 2004 and 2003. The taxable equivalent adjustment was $478 in 2005, $605 in 2004 and $747 in 2003. (2) For the purpose of the computation, non-accrual loans are included in the daily average loans outstanding. (3) Interest income on tax-exempt investment securities includes the effects of taxable equivalent adjustments using a 35% tax rate in 2005, 2004 and 2003. The taxable equivalent adjustments were $2,085 in 2005, $2,522 in 2004 and $3,031 in 2003. 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 2004 TO 2005 Change From 2003 to 2004 ---------------------------- ---------------------------- VOLUME RATE TOTAL Volume Rate Total (IN THOUSANDS) Increase (decrease) in: Interest income: TOTAL LOANS $31,256 $ 13,632 $44,888 $ 7,806 $(13,024) $(5,218) ------- -------- ------- ------- -------- ------- Taxable investments (1,703) 561 (1,142) 7,633 5,084 12,717 Tax-exempt investments (899) (167) (1,066) (1,486) (76) (1,562) Money market instruments 81 141 222 (459) 235 (224) ------- -------- ------- ------- -------- ------- TOTAL INTEREST INCOME 28,735 14,167 42,902 13,494 (7,781) 5,713 ------- -------- ------- ------- -------- ------- Interest expense: Transaction accounts $ 788 $ 6,517 $ 7,305 $ 417 $ (396) $ 21 Savings accounts 150 741 891 161 (1,313) (1,152) Time deposits 1,613 7,092 8,705 (1,428) (6,043) (7,471) Short-term borrowings (1,757) 3,946 2,189 (724) 3,305 2,581 Long-term debt 8,899 7,204 16,103 6,926 (4,195) 2,731 ------- -------- ------- ------- -------- ------- TOTAL INTEREST EXPENSE 9,693 25,500 35,193 5,352 (8,642) (3,290) ------- -------- ------- ------- -------- ------- NET VARIANCE $19,042 $(11,333) $ 7,709 $ 8,142 $ 861 $ 9,003 ======= ======== ======= ======= ======== =======
OTHER INCOME: Total other income, exclusive of security gains or losses, increased by $7.0 million or 13.2% to $59.6 million in 2005 compared to a decrease of $8.9 million or 14.5% to $52.6 million in 2004. Income from fiduciary activities increased by $897,000 or 8.1% to $12.0 million in 2005 and increased by $892,000 or 8.7% in 2004. These increases are primarily due to growth in the number of customers being served. Management expects a similar increase (8% to 9%) in fee income from fiduciary activities in 2006. First Federal and First Clermont did not have any fee income from fiduciary activities. Service charges on deposit accounts increased by $2.3 million or 14.7% to $17.9 million in 2005 and increased by $1.3 million or 9.2% to $15.6 million in 2004. The primary reason for the large increase in service charges on deposit accounts in 2005 was due to the additional deposit customers from the First Federal and First Clermont acquisitions. Management expects that service charges on deposit accounts will increase by approximately 7% in 2006. Fee income earned from the origination and sale into the secondary market of fixed rate mortgage loans is included with other non-yield related loan fees in the subcategory "other service income". Other service income increased by $428,000 or 4.1% to $10.8 million in 2005 and decreased by $11.3 million or 52.3% in 2004. Other service income was $10.3 million in 2004 and $21.6 31 FINANCIAL REVIEW million in 2003. During 2003, long-term interest rates decreased and ignited a mortgage loan refinancing boom, which produced record mortgage loan volume. Management expects that other service income for 2006 will be about the same as the 2005 fee income of $10.8 million. The subcategory of "other income" increased by $3.4 million or 21.6% to $19.0 million in 2005 and increased by $173,000 or 1.1% to $15.6 million in 2004. The large increase in other income in 2005 was primarily due to the additional customers from the First Federal and First Clermont acquisitions. This subcategory includes fees earned from check card and ATM services, fee income from bank owned life insurance, fee income earned from the sale of investment and insurance products, rental fee income from safety deposit boxes and fees earned from the sale of official and printed checks. For 2006, management expects that other income will be about the same as the 2005 fee income of $19.0 million. A year ago, management projected that total other income, exclusive of security gains or losses, would be approximately $59.5 million in 2005 and actual results for 2005 were $59.6 million. Management expects that total other income, exclusive of security gains or losses, will be approximately $61.5 million in 2006. OTHER EXPENSE: Total other expense increased by $13.1 million or 10.3% to $139.4 million in 2005 and increased by $3.9 million or 3.2% to $126.3 million in 2004. The large increase in total other expense in 2005 of 10.3% was primarily due to the acquisitions of First Federal and First Clermont. Salaries and employee benefits increased by $7.0 million or 9.8% to $78.5 million in 2005 and increased by $3.4 million or 5.0% in 2004. Full-time equivalent employees at year-end 2005 were 1,824 (which includes 67 at First Clermont) compared to 1,749 at year-end 2004 (which includes 56 at First Federal). Full-time equivalent employees at year-end 2003 were 1,645. None of the employees of First Federal and First Clermont were included in salary and benefit expense in 2004, but were included for the entire year of 2005. This accounts for the large increase in salaries and employee benefits expense in 2005 of 9.8% compared to 5.0% in 2004. A year ago, management projected that salaries and employee benefit expense would be approximately $81 million for 2005 compared to the actual expense of $78.5 million in 2005. This positive variance was due to the addition of less employees in 2005 than anticipated and to no increase in the officer incentive compensation pool. Management expects that salaries and employee benefits expense will increase by approximately 5% in 2006. The expense for amortization of intangibles was $2.5 million in 2005, $1.5 million in 2004 and $3.1 million in 2003. The increase in this expense in 2005 was due to the acquisitions of First Federal and First Clermont. The reduction in the amortization of intangibles in 2004 was due to the completion of the amortization of core deposit intangibles at the Fairfield National Division in 2003. Intangibles amortization expense is expected to be $2.5 million in 2006. Data processing expense increased by $1.7 million or 19.5% to $10.6 million in 2005 and increased by $1.1 million or 13.8% in 2004. The large increase in data processing expense in 2005 was primarily due to the acquisitions of First Federal and First Clermont. Data processing expense is expected to increase by approximately 11% in 2006. A year ago, management projected that total other expense would be approximately $143 million in 2005 compared to actual results of $139.4 million. Most of the positive variance was due to salary and employee benefit expense being $2.5 million below the projected amount. For 2006, management expects that total other expense will increase by about 4% to approximately $145 million. See Note 1 of the Notes to Consolidated Financial Statements for a discussion of the accounting for Park's incentive stock option plan. Park is adopting SFAS No. 123R "Accounting for Stock-Based Compensation" using the "modified prospective" method on January 1, 2006. This method recognizes compensation expense beginning with the effective date (January 1, 2006) for all stock options that are granted or become vested after December 31, 2005. The "modified retrospective" method includes the requirements of the "modified prospective" method described above, but also permits entities to restate prior period results based on the amounts previously recognized under SFAS No. 123 for purposes of pro-forma disclosures. Management has decided that prior period results will not be restated. Park granted 228,150 incentive stock options in 2005, 232,178 in 2004 and 179,125 in 2003. The pro-forma impact on earnings for 2005, 2004 and 2003 would have decreased earnings by $3.7 million, $3.2 million and $1.9 million, respectively. Management expects that a significantly reduced number of incentive stock options will be granted in 2006 and that the related expense will be approximately $1 million. FEDERAL INCOME TAXES: Federal income tax expense as a percentage of income before taxes was 29.7% in 2005, 29.2% in 2004 and 29.5% in 2003. A lower effective tax percentage rate than the statutory rate of thirty-five percent is primarily due to tax-exempt interest income from state and municipal investments and loans and low income housing tax credits. Park and its subsidiary banks do not pay state income tax to the state of Ohio, but pay a franchise tax based on their year-end equity. The franchise tax expense is included in "state taxes" on Park's Consolidated Statements of Income. State tax expense was $2.9 million in 2005 and $2.5 million in both 2004 and 2003. CREDIT EXPERIENCE PROVISION FOR LOAN LOSSES: The provision for loan losses is the amount added to the allowance for loan losses to absorb future loan charge-offs. The amount of the loan loss provision is determined by management after reviewing the risk characteristics of the loan portfolio, historic and current loan loss experience and current economic conditions. The provision for loan losses was $5.4 million in 2005, $8.6 million in 2004 and $12.6 million in 2003. Net loan charge-offs were $5.9 million in 2005, $7.9 million in 2004 and $11.5 million in 2003. The ratio of net loan charge-offs to average loans was .18% in 2005, .28% in 2004 and .43% in 2003. At year-end 2005, the allowance for loan losses was $69.7 million or 2.09% of total loans outstanding, compared to $68.3 million or 2.19% of total loans outstanding at year-end 2004 and $63.1 million or 2.31% of total loans outstanding at year-end 2003. First Clermont's allowance for loan losses of $1.8 million was added to Park's allowance for loan losses in 2005 and First Federal's allowance for loan losses of $4.45 million was added to Park's allowance for loan losses at year-end 2004. Management believes that the allowance for loan losses at year-end 2005 is adequate to absorb probable credit losses in the loan portfolio. See Note 1 of the Notes to Consolidated Financial Statements for additional information on management's evaluation of the adequacy of the allowance for loan losses. 32 FINANCIAL REVIEW The following table summarizes the activity in the allowance for loan losses for the past five years. The charge-offs and recoveries are listed by type of loan for each year. TABLE 8 - SUMMARY OF LOAN LOSS EXPERIENCE
2005 2004 2003 2002 2001 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) AVERAGE LOANS (NET OF UNEARNED INTEREST) $3,278,092 $2,813,069 $2,695,830 $2,719,805 $2,881,551 ALLOWANCE FOR LOAN LOSSES: Beginning balance $ 68,328 $ 63,142 $ 62,028 $ 59,959 $ 57,473 CHARGE-OFFS: Commercial, financial and agricultural 3,154 2,557 4,698 7,210 3,770 Real estate - construction 46 613 -- 317 180 Real estate - residential 1,006 1,476 1,173 1,208 1,262 Real estate - commercial 1,612 1,951 1,947 884 1,181 Consumer 7,255 8,111 9,233 8,606 9,908 Lease financing 316 465 985 1,602 1,519 ---------- ---------- ---------- ---------- ---------- TOTAL CHARGE-OFFS 13,389 15,173 18,036 19,827 17,820 ---------- ---------- ---------- ---------- ---------- RECOVERIES: Commercial, financial and agricultural $ 2,707 $ 2,138 $ 1,543 $ 1,812 $ 2,453 Real estate - construction 173 67 175 -- -- Real estate - residential 659 650 549 969 433 Real estate - commercial 517 292 407 565 223 Consumer 3,214 3,633 3,236 2,891 3,426 Lease financing 229 529 645 616 712 ---------- ---------- ---------- ---------- ---------- TOTAL RECOVERIES 7,499 7,309 6,555 6,853 7,247 ---------- ---------- ---------- ---------- ---------- NET CHARGE-OFFS 5,890 7,864 11,481 12,974 10,573 ---------- ---------- ---------- ---------- ---------- Provision charged to earnings 5,407 8,600 12,595 15,043 13,059 ---------- ---------- ---------- ---------- ---------- Allowance for loan losses of acquired bank 1,849 4,450 -- -- -- ---------- ---------- ---------- ---------- ---------- ENDING BALANCE $ 69,694 $ 68,328 $ 63,142 $ 62,028 $ 59,959 ---------- ---------- ---------- ---------- ---------- RATIO OF NET CHARGE-OFFS TO AVERAGE LOANS 0.18% 0.28% 0.43% 0.48% 0.37% RATIO OF ALLOWANCE FOR LOAN LOSSES TO END OF YEAR LOANS, NET OF UNEARNED INTEREST 2.09% 2.19% 2.31% 2.30% 2.14% ---------- ---------- ---------- ---------- ----------
The following table summarizes the allocation of the allowance for loan losses for the past five years: TABLE 9 - ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
2005 2004 2003 2002 2001 -------------------- -------------------- -------------------- -------------------- -------------------- PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF LOANS PER LOANS PER LOANS PER LOANS PER LOANS PER DECEMBER 31, ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY ------------ --------- ---------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- (DOLLARS IN THOUSANDS) Commercial, financial and agricultural $17,942 15.40% $17,837 15.04% $17,117 16.16% $17,049 16.34% $15,853 15.75% Real estate - construction 3,864 5.80% 3,107 4.98% 2,423 4.44% 1,982 3.68% 1,562 3.19% Real estate - residential 10,329 38.68% 8,926 38.14% 7,378 36.02% 7,504 37.17% 8,053 38.41% Real estate - commercial 16,823 24.74% 16,930 24.11% 15,412 24.54% 13,889 22.93% 12,080 21.30% Consumer 19,799 14.87% 20,206 16.19% 18,681 16.48% 18,322 16.40% 19,131 17.08% Leases 937 0.51% 1,322 1.54% 2,131 2.36% 3,282 3.48% 3,280 4.27% ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ TOTAL $69,694 100.00% $68,328 100.00% $63,142 100.00% $62,028 100.00% $59,959 100.00% ======= ====== ======= ====== ======= ====== ======= ====== ======= ======
As of December 31, 2005, Park had no significant concentrations of loans to borrowers engaged in the same or similar industries nor did Park have any loans to foreign governments. NONPERFORMING ASSETS: Nonperforming loans include: 1) 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, 2005 2004 2003 2002 2001 ------------ ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Nonaccrual loans $14,922 $17,873 $15,921 $17,579 $17,303 Renegotiated loans 7,441 5,461 5,452 2,599 2,254 Loans past due 90 days or more 7,661 5,439 4,367 6,290 7,550 ------- ------- ------- ------- ------- TOTAL NONPERFORMING LOANS 30,024 28,773 25,740 26,468 27,107 ------- ------- ------- ------- ------- Other real estate owned 2,368 2,680 2,319 3,206 3,425 ------- ------- ------- ------- ------- TOTAL NONPERFORMING ASSETS $32,392 $31,453 $28,059 $29,674 $30,532 ------- ------- ------- ------- ------- PERCENTAGE OF NONPERFORMING LOANS TO LOANS,NET OF UNEARNED INTEREST 0.90% 0.92% 0.94% 0.98% 0.97% PERCENTAGE OF NONPERFORMING ASSETS TO LOANS,NET OF UNEARNED INTEREST 0.97% 1.01% 1.03% 1.10% 1.09% PERCENTAGE OF NONPERFORMING ASSETS TO TOTAL ASSETS 0.60% 0.58% 0.56% 0.67% 0.67% ------- ------- ------- ------- -------
Tax equivalent interest income from loans of $224.3 million for 2005 would have increased by $1.7 million if all loans had been current in accordance with their original terms. Interest income for the year ended December 31, 2005 in the approximate amount of $787,000 is included in interest income for those loans in accordance with their original terms. The Corporation had $130.8 million of loans included on the Corporation's watch list of potential problem loans at December 31, 2005 compared to $131.8 million at year-end 2004 and $177.7 million at year-end 2003. The existing conditions of these loans do not warrant classification as nonaccrual. Management performs additional analyses regarding a borrower's ability to comply with payment terms for watch list loans. As a percentage of year-end loans, the Corporation's watch list of potential problem loans was 3.9% in 2005, 4.2% in 2004 and 6.5% in 2003. Management expects that the Corporation's watch list of potential problem loans at year-end 2006 will be similar to year-end 2005 as economic conditions are relatively stable. A year-ago, management projected that watch list loans at year-end 2005 would be similar to year-end 2004, which was accurate. 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. 33 FINANCIAL REVIEW Cash and cash equivalents increased by $12.1 million during 2005 to $174.0 million at year end. Cash provided by operating activities was $81.0 million in 2005, $86.7 million in 2004 and $99.2 million in 2003. Net income was the primary source of cash for operating activities during each year. Cash provided by investing activities was $142.5 million in 2005. Cash used in investing activities was $147.8 million in 2004 and $665.0 million in 2003. Security transactions are the major use or source 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 $236.5 million of cash in 2005 and $64.6 million of cash in 2004. Net security transactions used $615.9 million of cash in 2003. The other major use or source of cash in investing activities is the net increase or decrease in the loan portfolio. Cash used by the net increase in the loan portfolio was $53.6 million in 2005, $171.8 million in 2004 and $45.2 million in 2003. Cash used by financing activities was $211.4 million in 2005. Cash provided by financing activities was $53.2 million in 2004 and $496.7 million in 2003. A major source of cash for financing activities is the net change in deposits. Cash used by the net decrease in deposits was $55.5 million in 2005 and $80.9 million in 2003. Cash provided by the net increase in deposits was $103.3 million in 2004. Changes in short-term borrowings or long-term debt is another major source or use of cash for financing activities. The net increase in short-term borrowings provided cash of $35.8 million in 2005 and $327.9 million in 2003. The net decrease in short-term borrowings used cash of $256.8 million in 2004. Cash was used by the net decrease in long-term debt of $102.6 million in 2005. Cash was provided by the net increase in long-term debt of $271.4 million in 2004 and $298.8 million in 2003. 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. The increase or decrease in the investment portfolio and short-term borrowings and long-term debt is greatly dependent upon the growth in loans and deposits. The primary objective of management is to grow loan and deposit totals. To the extent that management is unable to grow loan totals at a desired growth rate, additional investment securities may be added to the balance sheet. Likewise, short-term borrowings and long-term debt are utilized to fund the growth in earning assets if the growth in deposits and the cash flow from operations are not sufficient to do so. Liquidity is enhanced by assets maturing or repricing within one year. Assets maturing or repricing within one year were $2,446 million or 49.0% of interest earning assets at year-end 2005. 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 rate-sensitive 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 rate sensitivity data for five different time intervals as of December 31, 2005: TABLE 11 - INTEREST RATE SENSITIVITY
Over 5 0-3 Months 3-12 Months 1-3 Years 3-5 Years Years TOTAL ---------- ----------- ---------- --------- -------- ---------- (DOLLARS IN THOUSANDS) INTEREST RATE SENSITIVE ASSETS: Investment securities (1) $ 121,306 $ 199,987 $ 439,846 $304,960 $597,543 $1,663,642 Money market instruments 4,283 -- -- -- -- 4,283 Loans (1) 1,158,193 962,116 1,051,735 143,262 12,806 3,328,112 ---------- ---------- ---------- -------- -------- ---------- TOTAL INTEREST EARNING ASSETS 1,283,782 1,162,103 1,491,581 448,222 610,349 4,996,037 ---------- ---------- ---------- -------- -------- ---------- INTEREST BEARING LIABILITIES: Interest bearing transaction accounts 530,699 -- 457,255 -- -- 987,954 Savings accounts (2) 297,353 -- 297,353 -- -- 594,706 Time deposits 299,734 667,992 437,058 97,731 3,388 1,505,903 Other 1,866 -- -- -- -- 1,866 ---------- ---------- ---------- -------- -------- ---------- TOTAL DEPOSITS 1,129,652 667,992 1,191,666 97,731 3,388 3,090,429 ---------- ---------- ---------- -------- -------- ---------- Short-term borrowings 314,074 -- -- -- -- 314,074 Long-term debt 291,000 107,475 187,936 48,621 79,752 714,784 ---------- ---------- ---------- -------- -------- ---------- TOTAL INTEREST BEARING LIABILITIES 1,734,726 775,467 1,379,602 146,352 83,140 4,119,287 ---------- ---------- ---------- -------- -------- ---------- INTEREST RATE SENSITIVITY GAP (450,944) 386,636 111,979 301,870 527,209 876,750 CUMULATIVE RATE SENSITIVITY GAP (450,944) (64,308) 47,671 349,541 876,750 -- CUMULATIVE GAP AS A PERCENTAGE OF TOTAL INTEREST EARNING ASSETS -9.03% -1.29% 0.95% 7.00% 17.55% -- ---------- ---------- ---------- -------- -------- ----------
(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 and therefore, not as rate sensitive as other deposit accounts and borrowed money. Accordingly, only 54% of interest bearing transaction 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 negative 1.29% to a negative 16.39%. The interest rate sensitivity gap analysis provides a good overall picture of the Corporation's static interest rate risk position. The Corporation's policy is that the twelve month cumulative gap position should not exceed fifteen percent of interest earning assets for three consecutive quarters. At December 31, 2005, the cumulative interest earning assets maturing or repricing within twelve months were $2,446 million compared to the cumulative interest bearing liabilities maturing or repricing within twelve months of $2,510 million. For the twelve-month cumulative gap position, rate sensitive liabilities exceed rate sensitive assets by $64 million or 1.3% of interest earning assets. A negative twelve month cumulative rate sensitivity gap (liabilities exceeding assets) would suggest that the Corporation's net interest margin would decrease if interest rates were to rise. However, 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 may not prove to be correct. 34 FINANCIAL REVIEW The cumulative twelve month interest rate sensitivity gap position at December 31, 2004 was a positive $453 million or a positive 9.0% of interest earning assets compared to a negative $64 million or a negative 1.3% of interest earning assets at December 31, 2005. This change in the cumulative twelve month interest rate sensitivity gap of a negative $517 million was primarily due to a decrease in the amount of loans repricing or maturing in one year to $2,120 million at year-end 2005 compared to $2,467 million at year-end 2004. The loans repricing or maturing within one to three years totaled $1,052 million at year-end 2005 compared to $450 million at year-end 2004. 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 cannot 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 basis point change in market interest rates per quarter for a total of 200 basis points per year in evaluating the impact of changing interest rates on net interest income and net income over a twelve month horizon. At December 31, 2005, the earnings simulation model projected that net income would decrease by .2% using a rising interest rate scenario and increase by .9% using a declining interest rate scenario over the next year. At December 31, 2004, the earnings simulation model projected that net income would increase by .9% using a rising interest rate scenario and decrease by .9% using a declining interest rate scenario over the next year and at December 31, 2003, the earnings simulation model projected that net income would increase by .1% using a rising interest rate scenario and decrease by 1.3% using a declining interest rate scenario over the next year. Consistently, over the past several years the earnings simulation model has projected that changes in interest rates would have only a small impact on net income and the net interest margin. The net interest margin has been relatively stable over the past five years at 4.34% in 2005, 4.56% in 2004, 4.60% in 2003, 5.06% in 2002 and 4.92% in 2001. A major goal of the asset/liability committee is to have a relatively stable net interest margin regardless of the level of interest rates. Management expects that the net interest margin will be 4.35% to 4.40% in 2006. The decrease in the net interest margin for 2005 was largely due to the cash acquisitions of First Federal and First Clermont. CONTRACTUAL OBLIGATIONS In the ordinary course of operations, Park enters into certain contractual obligations. Such obligations include the funding of operations through debt issuances as well as leases for premises. The following table summarizes Park's significant and determinable obligations by payment date at December 31, 2005. Further discussion of the nature of each obligation is included in the referenced Note to the Consolidated Financial Statements. TABLE 12 - CONTRACTUAL OBLIGATIONS
PAYMENTS DUE IN ----------------------------------------------------------------------- Table/ DECEMBER 31,2005 Notes 0-1 Year 1-3 Years 3-5 Years Over 5 Years TOTAL ---------------- ------ ---------- --------- --------- ------------ ---------- (DOLLARS IN THOUSANDS) Deposits without stated maturity $2,251,854 $ -- $ -- $ -- $2,251,854 Certificates of deposit 11 967,726 437,058 97,731 3,388 1,505,903 Short-term borrowings 11 314,074 -- -- -- 314,074 Long-term debt 10 113,268 188,353 183,519 229,644 714,784 Operating leases 8 1,758 3,084 1,861 833 7,536 Purchase obligations 39 -- -- -- 39 ---------- -------- -------- -------- ---------- TOTAL CONTRACTUAL OBLIGATIONS $3,648,719 $628,495 $283,111 $233,865 $4,794,190 ========== ======== ======== ======== ==========
The Corporation's operating lease obligations represent short-term and long-term lease and rental payments for facilities and equipment. Purchase obligations represent obligations under agreements to purchase goods or services that are enforceable and legally binding on the Corporation. COMMITMENTS, CONTINGENT LIABILITIES, AND OFF-BALANCE SHEET ARRANGEMENTS: In order to meet the financing needs of its customers, the Corporation issues loan commitments and standby letters of credit. At December 31, 2005, the Corporation had $667 million of loan commitments for commercial, commercial real estate, and residential real estate loans and had $133 million of commitments for revolving home equity and credit card lines. Standby letters of credit totaled $21 million at December 31, 2005. Commitments to extend credit under loan commitments and standby letters of credit do not necessarily represent future cash requirements. These commitments often expire without being drawn upon. However, all of the loan commitments and standby letters of credit are permitted to be drawn upon in 2006. See Note 17 of the Notes to Consolidated Financial Statements for additional information on loan commitments and standby letters of credit. The Corporation did not have any significant contingent liabilities at December 31, 2005, and did not have any off-balance sheet arrangements at year-end 2005. CAPITAL: Park's primary means of maintaining capital adequacy is through net retained earnings. At December 31, 2005, the Corporation's equity capital was $558.4 million, compared to $562.6 million at December 31, 2004. Stockholders' equity at December 31, 2005 was 10.27% of total assets compared to 10.39% of total assets at December 31, 2004. The decrease in stockholders' equity at year-end 2005 compared to year-end 2004 was primarily due to the net increase in treasury stock of $25.3 million and the decrease in accumulated other comprehensive income of $22.6 million. Park purchased 281,360 treasury shares for general corporate purposes and for the incentive stock option plans. Long-term interest rates increased during 2005 and the market value of Park's investment securities decreased causing the decrease in other comprehensive income. Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank holding companies. 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 was 8.00% at December 31, 2005. At year-end 2005, the Corporation had a risk-based capital ratio of 15.43% or capital above the minimum required by $261 million. The capital standard of tier l capital to risk-based assets was 4.00% at December 31, 2005. Tier l capital includes stockholders' equity net of goodwill and other intangible assets. At year-end 2005, the Corporation had a tier l capital to risk-based assets ratio of 14.17% or capital above the minimum required by $358 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 2005, the Corporation had a leverage capital ratio of 9.27% or capital above the minimum required by $283 million. Regulatory guidelines also establish capital ratio requirements for "well capitalized" bank holding companies. The capital ratios are 10% for 35 FINANCIAL REVIEW 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." The financial institution subsidiaries of the Corporation each met the well capitalized ratio guidelines at December 31, 2005. See note 19 of the Notes to Consolidated Financial Statements for the capital ratios for the Corporation and its financial institution subsidiaries. EFFECTS OF INFLATION: Balance sheets of financial institutions typically contain assets and liabilities that are monetary in nature and, therefore, differ greatly from those of 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. The following table summarizes five-year financial information. All per share data have been retroactively restated for the 5% stock dividend paid on December 15, 2004. TABLE 13 - CONSOLIDATED FIVE-YEAR SELECTED FINANCIAL DATA
DECEMBER 31, 2005 2004 2003 2002 2001 ------------ ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) RESULTS OF OPERATIONS: Interest income $ 314,459 $ 270,993 $ 264,629 $ 287,920 $ 320,348 Interest expense 93,895 58,702 61,992 82,588 127,404 Net interest income 220,564 212,291 202,637 205,332 192,944 Provision for loan losses 5,407 8,600 12,595 15,043 13,059 Net interest income after provision for loan losses 215,157 203,691 190,042 190,289 179,885 Gain/(loss) on sale of securities 96 (793) (6,060) (182) 140 Noninterest income 59,609 52,641 61,583 51,032 45,098 Noninterest expense 139,438 126,290 122,376 119,964 114,207 Net income 95,238 91,507 86,878 85,579 78,362 PER SHARE: Net income - basic 6.68 6.38 6.01 5.87 5.32 Net income - diluted 6.64 6.32 5.97 5.86 5.31 Cash dividends declared 3.620 3.414 3.209 2.962 2.752 AVERAGE BALANCES: Loans $3,278,092 $2,813,069 $2,695,830 $2,719,805 $2,881,551 Investment securities 1,851,598 1,901,129 1,759,816 1,384,750 1,105,707 Money market instruments and other 12,258 9,366 35,768 36,679 21,021 ---------- ---------- ---------- ---------- ---------- TOTAL EARNING ASSETS 5,141,948 4,723,564 4,491,414 4,141,234 4,008,279 ---------- ---------- ---------- ---------- ---------- Noninterest bearing deposits 643,032 574,560 522,456 502,400 460,219 Interest bearing deposits 3,187,033 2,946,360 2,901,835 2,901,456 2,735,046 ---------- ---------- ---------- ---------- ---------- TOTAL DEPOSITS 3,830,065 3,520,920 3,424,291 3,403,856 3,195,265 ---------- ---------- ---------- ---------- ---------- Short-term borrowings 291,842 401,299 515,328 226,238 279,244 Long-term debt 799,888 519,979 281,599 252,834 295,669 Stockholders' equity 559,211 538,275 520,391 487,316 452,287 Total assets 5,558,088 5,049,081 4,803,263 4,435,162 4,270,004 RATIOS: Return on average assets 1.71% 1.81% 1.81% 1.93% 1.84% Return on average equity 17.03% 17.00% 16.69% 17.56% 17.33% Net interest margin (1) 4.34% 4.56% 4.60% 5.06% 4.92% Noninterest expense to net revenue (1) 49.32% 47.11% 45.66% 46.02% 47.11% Dividend payout ratio 54.19% 53.54% 53.42% 50.42% 51.64% Average stockholders' equity to average total assets 10.06% 10.66% 10.83% 10.99% 10.59% Leverage capital 9.27% 10.10% 10.79% 10.72% 9.97% Tier 1 capital 14.17% 15.16% 16.51% 16.51% 14.84% Risk-based capital 15.43% 16.43% 17.78% 17.78% 16.09%
(1) Computed on a fully taxable equivalent basis The following table is a summary of selected quarterly results of operations for the years ended December 31, 2005 and 2004. Certain quarterly amounts have been reclassified to conform to the year-end financial statement presentation. TABLE 14 - QUARTERLY FINANCIAL DATA
THREE MONTHS ENDED ----------------------------------------------------- MARCH 31 JUNE 30 SEPT.30 DEC.31 ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2005: Interest income $ 74,959 $ 78,928 $ 79,768 $ 80,804 Interest expense 20,514 23,516 24,217 25,648 Net interest income 54,445 55,412 55,551 55,156 Provision for loan losses 1,082 1,325 1,600 1,400 Gain (loss) on sale of securities -- 96 -- -- Income before income taxes 33,071 35,303 34,763 32,287 Net income 23,342 24,770 24,295 22,831 Per share data: Net income - basic 1.63 1.73 1.70 1.62 Net income - diluted 1.61 1.72 1.69 1.61 Weighted-average common stock outstanding - basic 14,331,261 14,312,032 14,256,723 14,134,058 Weighted-average common stock equivalent - diluted 14,475,634 14,379,463 14,338,418 14,199,455 2004: Interest income $ 66,787 $ 66,372 $ 68,604 $ 69,230 Interest expense 14,171 13,850 14,794 15,887 Net interest income 52,616 52,522 53,810 53,343 Provision for loan losses 1,465 1,905 2,745 2,485 Gain (loss) on sale of securities 106 -- -- (899) Income before income taxes 32,604 34,368 32,982 29,295 Net income 22,978 24,085 23,547 20,897 Per share data: Net income - basic 1.59 1.68 1.65 1.46 Net income - diluted 1.58 1.67 1.63 1.44 Weighted-average common stock outstanding - basic 14,443,898 14,341,123 14,289,060 14,305,004 Weighted-average common stock equivalent - diluted 14,553,019 14,464,537 14,427,971 14,499,782
The Corporation's common stock (symbol: PRK) is traded on the American Stock Exchange (AMEX). At December 31, 2005, the Corporation had 4,982 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, 2005 and 2004, as reported by AMEX. TABLE 15 - MARKET AND DIVIDEND INFORMATION
CASH DIVIDEND LAST DECLARED HIGH LOW PRICE PER SHARE ------- ------- ------- --------- 2005: FIRST QUARTER $133.30 $108.40 $112.50 $0.900 SECOND QUARTER 113.01 99.04 110.50 0.900 THIRD QUARTER 118.20 104.55 108.27 0.900 FOURTH QUARTER 112.91 101.00 102.64 0.920 2004: First Quarter $110.24 $105.33 $107.90 $0.838 Second Quarter 124.76 107.52 121.63 0.838 Third Quarter 125.08 108.48 121.17 0.838 Fourth Quarter 141.25 119.29 135.50 0.900
36 MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING To the Board of Directors and Stockholders Park National Corporation The management of Park National Corporation (the "Corporation") is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Corporation's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in conformity with U.S. generally accepted accounting principles. The Corporation's internal control over financial reporting includes those policies and procedures that: a.) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation and its consolidated subsidiaries; b.) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in conformity with U.S. generally accepted accounting principles, and that receipts and expenditures of the Corporation and its consolidated subsidiaries are being made only in accordance with authorizations of management and directors of the Corporation; and c.) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the assets of the Corporation and its consolidated subsidiaries that could have a material effect on the financial statements. The Corporation's internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even an effective system of internal control over financial reporting will provide only reasonable assurance with respect to financial statement preparation. With the supervision and participation of our Chairman and Chief Executive Officer, our President and our Chief Financial Officer, management assessed the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2005. In making this assessment, management used the criteria set forth for effective internal control over financial reporting by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment and those criteria, management concluded that the Corporation maintained effective internal control over financial reporting as of December 31, 2005. Park's independent registered public accounting firm (Ernst & Young LLP) has issued an attestation report on management's assessment of the Corporation's internal control over financial reporting which follows this report. /s/ C. Daniel DeLawder /s/ David L. Trautman /s/ John W. Kozak -------------------------- ------------------------- ----------------------- C. Daniel DeLawder David L. Trautman John W. Kozak Chairman and President Chief Financial Officer Chief Executive Officer February 21, 2006 37 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders Park National Corporation We have audited management's assessment, included in the accompanying Report of Management on Internal Control over Financial Reporting, that Park National Corporation and Subsidiaries maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The management of Park National Corporation and its subsidiaries are responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Park National Corporation and Subsidiaries maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Park National Corporation and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Park National Corporation and Subsidiaries as of December 31, 2005 and 2004, 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, 2005 and our report dated February 21, 2006 expressed an unqualified opinion thereon. (ERNST & YOUNG LLP) Columbus, Ohio February 21, 2006 38 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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, 2005 and 2004, 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, 2005. These consolidated 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. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Park National Corporation and Subsidiaries at December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Park National Corporation and Subsidiaries internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2006 expressed an unqualified opinion thereon. (ERNST & YOUNG LLP) Columbus, Ohio February 21, 2006 39 CONSOLIDATED BALANCE SHEETS PARK NATIONAL CORPORATION AND SUBSIDIARIES at December 31, 2005 and 2004 (Dollars in thousands)
2005 2004 ---------- ---------- ASSETS Cash and due from banks $ 169,690 $ 155,529 Money market instruments 4,283 6,300 Interest bearing deposits with other banks 300 2,096 INVESTMENT SECURITIES: Securities available-for-sale, at fair value (amortized cost of $1,424,955 and $1,783,724 at December 31, 2005 and 2004, respectively) 1,409,351 1,802,865 Securities held-to-maturity, at amortized cost (fair value of $190,425 and $73,613 at December 31, 2005 and 2004, respectively) 195,953 72,447 Other investment securities 58,038 51,470 ---------- ---------- TOTAL INVESTMENT SECURITIES 1,663,342 1,926,782 ---------- ---------- Loans 3,333,713 3,125,829 Unearned loan interest (5,601) (5,221) ---------- ---------- TOTAL LOANS 3,328,112 3,120,608 ---------- ---------- Allowance for loan losses (69,694) (68,328) ---------- ---------- NET LOANS 3,258,418 3,052,280 ---------- ---------- OTHER ASSETS: Bank owned life insurance 109,600 94,909 Goodwill and other intangible assets 69,188 40,887 Premises and equipment, net 47,172 43,179 Accrued interest receivable 23,306 20,548 Other 90,749 70,074 ---------- ---------- TOTAL OTHER ASSETS 340,015 269,597 ---------- ---------- TOTAL ASSETS $5,436,048 $5,412,584 ========== ==========
The accompanying notes are an integral part of the financial statements. 40 CONSOLIDATED BALANCE SHEETS (CONTINUED) PARK NATIONAL CORPORATION AND SUBSIDIARIES at December 31, 2005 and 2004 (Dollars in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY
2005 2004 ---------- ---------- DEPOSITS: Noninterest bearing $ 667,328 $ 630,882 Interest bearing 3,090,429 3,058,979 ---------- ---------- TOTAL DEPOSITS 3,757,757 3,689,861 ---------- ---------- Short-term borrowings 314,074 278,231 Long-term debt 714,784 795,793 OTHER LIABILITIES: Accrued interest payable 8,943 6,411 Other 82,060 79,727 ---------- ---------- TOTAL OTHER LIABILITIES 91,003 86,138 ---------- ---------- TOTAL LIABILITIES 4,877,618 4,850,023 ---------- ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, no par value (20,000,000 shares authorized; 15,271,574 shares issued in 2005 and 15,269,707 issued in 2004) 208,365 208,251 Accumulated other comprehensive income, net (10,143) 12,442 Retained earnings 476,889 433,260 Less: Treasury stock (1,178,948 shares in 2005 and 949,480 shares in 2004) (116,681) (91,392) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 558,430 562,561 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,436,048 $5,412,584 ========== ==========
The accompanying notes are an integral part of the financial statements. 41 CONSOLIDATED STATEMENTS OF INCOME PARK NATIONAL CORPORATION AND SUBSIDIARIES for the years ended December 31, 2005, 2004 and 2003 (Dollars in thousands, except per share data)
2005 2004 2003 -------- -------- -------- INTEREST INCOME: Interest and fees on loans $223,868 $178,853 $183,929 Interest and dividends on: Obligations of U.S. Government, its agencies and other securities 85,664 86,806 73,753 Obligations of states and political subdivisions 4,486 5,115 6,168 Other interest income 441 219 779 -------- -------- -------- TOTAL INTEREST INCOME 314,459 270,993 264,629 -------- -------- -------- INTEREST EXPENSE: Interest on deposits: Demand and savings deposits 15,091 6,895 8,026 Time deposits 41,808 33,103 40,574 Interest on short-term borrowings 7,508 5,319 2,738 Interest on long-term debt 29,488 13,385 10,654 -------- -------- -------- TOTAL INTEREST EXPENSE 93,895 58,702 61,992 -------- -------- -------- NET INTEREST INCOME 220,564 212,291 202,637 -------- -------- -------- Provision for loan losses 5,407 8,600 12,595 -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 215,157 203,691 190,042 -------- -------- -------- OTHER INCOME: Income from fiduciary activities 12,034 11,137 10,245 Service charges on deposit accounts 17,853 15,585 14,269 Gain/(loss) on sales of securities 96 (793) (6,060) Other service income 10,753 10,325 21,648 Other 18,969 15,594 15,421 -------- -------- -------- TOTAL OTHER INCOME $ 59,705 $ 51,848 $ 55,523 -------- -------- --------
The accompanying notes are an integral part of the financial statements. 42 CONSOLIDATED STATEMENTS OF INCOME (CONTINUED) PARK NATIONAL CORPORATION AND SUBSIDIARIES for the years ended December 31, 2005, 2004 and 2003 (Dollars in thousands, except per share data)
2005 2004 2003 -------- -------- -------- OTHER EXPENSE: Salaries and employee benefits $ 78,498 $ 71,464 $ 68,093 Data processing fees 10,636 8,900 7,819 Fees and service charges 8,723 8,784 7,830 Net occupancy expense of bank premises 8,641 7,024 6,917 Amortization of intangibles 2,548 1,479 3,110 Furniture and equipment expense 5,278 5,749 6,434 Insurance 1,243 1,030 1,090 Marketing 4,197 3,972 3,585 Postage and telephone 4,827 4,482 4,691 State taxes 2,893 2,468 2,518 Other 11,954 10,938 10,289 -------- -------- -------- TOTAL OTHER EXPENSE 139,438 126,290 122,376 -------- -------- -------- INCOME BEFORE FEDERAL INCOME TAXES 135,424 129,249 123,189 Federal income taxes 40,186 37,742 36,311 -------- -------- -------- NET INCOME $ 95,238 $ 91,507 $ 86,878 -------- -------- -------- EARNINGS PER SHARE: BASIC $ 6.68 $ 6.38 $ 6.01 DILUTED $ 6.64 $ 6.32 $ 5.97 -------- -------- --------
The accompanying notes are an integral part of the financial statements. 43 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY PARK NATIONAL CORPORATION AND SUBSIDIARIES for the years ended December 31, 2005, 2004 and 2003 (Dollars in thousands, except per share data)
COMMON STOCK ACCUMULATED ---------------------- OTHER SHARES RETAINED COMPREHENSIVE TREASURY OUTSTANDING AMOUNT EARNINGS INCOME STOCK TOTAL ----------- -------- -------- ------------- ---------- -------- BALANCE,JANUARY 1, 2003 14,481,564 $105,768 $446,300 $ 22,418 $ (65,194) $509,292 ---------- -------- -------- -------- --------- -------- Treasury stock purchased (92,913) -- -- -- (8,907) (8,907) Treasury stock reissued primarily for stock options exercised 64,396 -- -- -- 5,524 5,524 Cash payment for fractional shares in dividend reinvestment plan (40) (3) -- -- -- (3) Shares issued for stock options 2,020 130 130 Net income -- -- 86,878 -- -- 86,878 Other comprehensive income, net of tax: Unrealized net holding loss on securities available-for-sale, net of income taxes of $(2,725) (5,062) (5,062) Reverse additional minimum liability for pension plan, net of income taxes of $860 1,598 -- 1,598 -------- -------- Total other comprehensive income (3,464) -------- Comprehensive income 83,414 Cash dividends: Corporation at $3.209 per share -- -- (46,409) -- -- (46,409) ---------- -------- -------- -------- --------- -------- BALANCE,DECEMBER 31, 2003 14,455,027 $105,895 $486,769 $ 18,954 $ (68,577) $543,041 ---------- -------- -------- -------- --------- -------- Treasury stock purchased (214,681) -- -- -- (23,699) (23,699) Treasury stock reissued primarily for stock options exercised 79,626 -- -- -- 7,323 7,323 Cash payment for fractional shares in dividend reinvestment plan (25) (3) -- -- -- (3) Shares issued for stock options 2,052 144 -- -- -- 144 Stock dividend at 5% 102,464 (96,025) (6,439) -- Cash payment for fractional shares for 5% stock dividend (1,772) (249) (249) Net income -- -- 91,507 -- 91,507 Other comprehensive income, net of tax: Unrealized net holding loss on securities available-for-sale, net of income taxes of $(3,506) (6,512) (6,512) -------- -------- Total other comprehensive income (6,512) -------- Comprehensive income 84,995 Cash dividends: Corporation at $3.414 per share -- -- (48,991) -- -- (48,991) ---------- -------- -------- -------- --------- -------- BALANCE, DECEMBER 31, 2004 14,320,227 $208,251 $433,260 $ 12,442 $ (91,392) $562,561 ---------- -------- -------- -------- --------- -------- TREASURY STOCK PURCHASED (281,360) -- -- -- (29,978) (29,978) TREASURY STOCK REISSUED PRIMARILY FOR STOCK OPTIONS EXERCISED 51,892 -- -- -- 4,689 4,689 CASH PAYMENT FOR FRACTIONAL SHARES IN DIVIDEND REINVESTMENT PLAN (50) (3) -- -- -- (3) SHARES ISSUED FOR STOCK OPTIONS 1,917 117 117 NET INCOME -- -- 95,238 -- -- 95,238 OTHER COMPREHENSIVE INCOME, NET OF TAX: UNREALIZED NET HOLDING LOSS ON SECURITIES AVAILABLE-FOR-SALE, NET OF INCOME TAXES OF $(12,161) (22,585) (22,585) -------- -------- TOTAL OTHER COMPREHENSIVE INCOME (22,585) -------- COMPREHENSIVE INCOME 72,653 CASH DIVIDENDS: CORPORATION AT $3.62 PER SHARE -- -- (51,609) -- -- (51,609) ---------- -------- -------- -------- --------- -------- BALANCE,DECEMBER 31, 2005 14,092,626 $208,365 $476,889 $(10,143) $(116,681) $558,430 ---------- -------- -------- -------- --------- --------
The accompanying notes are an integral part of the financial statements. 44 CONSOLIDATED STATEMENTS OF CASH FLOWS PARK NATIONAL CORPORATION AND SUBSIDIARIES for the years ended December 31, 2005, 2004 and 2003 (Dollars in thousands)
2005 2004 2003 --------- --------- ----------- OPERATING ACTIVITIES: Net income $ 95,238 $ 91,507 $ 86,878 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 5,407 8,600 12,595 Amortization of loan fees and costs, net (3,809) (3,336) (4,882) Provision for depreciation of premises and equipment 5,641 5,436 5,866 Amortization of intangible assets 2,548 1,479 3,110 Accretion of investment securities (2,444) (1,756) (6,063) Deferred income tax expense (benefit) 1,990 (2,542) (3,661) Realized investment security (gains) losses (96) 793 6,060 Changes in assets and liabilities: Increase in other assets (24,431) (20,219) (10,463) Increase in other liabilities 958 6,750 9,767 --------- --------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 81,002 86,712 99,207 --------- --------- ----------- INVESTING ACTIVITIES: Proceeds from sales of available-for-sale securities 131,794 58,438 754,474 Proceeds from maturities of securities: Held-to-maturity 63,914 52,741 632,005 Available-for-sale 345,660 384,087 3,013,785 Purchase of securities: Held-to-maturity (187,420) (62,659) (341,656) Available-for-sale (113,198) (364,215) (4,672,909) Net increase in other investments (4,268) (3,759) (1,567) Net decrease in interest bearing deposits with other banks 1,796 50 -- Net increase in loans (53,600) (171,784) (45,215) Proceeds from loans sold with branch office 5,273 -- -- Cash paid for acquisition, net (39,227) (34,693) -- Purchases of premises and equipment, net (8,193) (6,047) (3,878) --------- --------- ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 142,531 (147,841) (664,961) --------- --------- ----------- FINANCING ACTIVITIES: Net (decrease) increase in deposits (55,491) 103,273 (80,886) Deposits sold with branch office (12,419) -- -- Net increase (decrease) in short-term borrowings 35,843 (256,756) 327,881 Cash payment for fractional shares of common stock (3) (252) (3) Exercise of stock options 117 144 130 Purchase of treasury stock, net (25,289) (16,376) (3,383) Proceeds from long-term debt 326,040 477,915 475,000 Repayment of long-term debt (428,689) (206,541) (176,249) Cash dividends paid (51,498) (48,231) (45,742) --------- --------- ----------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (211,389) 53,176 496,748 --------- --------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,144 (7,953) (69,006) Cash and cash equivalents at beginning of year 161,829 169,782 238,788 --------- --------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 173,973 $ 161,829 $ 169,782 --------- --------- ----------- SUPPLEMENTAL DISCLOSURE Summary of business acquisition: Fair value of assets acquired $ 185,372 $ 252,687 Cash paid for the purchase of financial institutions (52,500) (46,638) Fair value of liabilities assumed (161,241) (232,707) --------- --------- Goodwill recognized $ (28,369) $ (26,658) --------- ---------
The accompanying notes are an integral part of the financial statements. 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 ("Park" or the "Corporation") and all of its subsidiaries. Material intercompany accounts and transactions have been eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the 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 are included in other comprehensive income, net of applicable taxes. At December 31, 2005 and 2004, the Corporation did not hold any trading securities. Available-for-sale and held-to-maturity securities are evaluated quarterly for potential other-than-temporary impairment. Management considers the facts of each security including the nature of the security, the amount and duration of the loss, credit quality of the issuer, the expectations for that security's performance and Park's intent and ability to hold the security until recovery. A decline in value that is considered to be other-than-temporary is recorded as a charge to earnings in the Consolidated Statements of Income. Other investment securities (as shown on the balance sheet) consist of stock investments in the Federal Home Loan Bank and the Federal Reserve Bank. The fair values of these investments are the same as their amortized costs. Gains and losses realized on the sale of investment securities have been accounted for on the trade date in the year of sale on a specific identification basis. MORTGAGE LOANS HELD-FOR-SALE Mortgage loans held-for-sale are carried at the lower of cost or fair value, determined using an aggregate basis. Write-downs to fair value are recognized as a charge to earnings at the time the decline in value occurs. Mortgage loans held-for-sale were $5.8 million at December 31, 2005, and $2.9 million at December 31, 2004. These amounts are included in loans on the balance sheet. The Corporation enters into forward commitments to sell mortgage loans to reduce market risk on mortgage loans in the process of origination and mortgage loans held-for-sale. Gains and losses resulting from sales of mortgage loans are recognized when the respective loans are sold to investors. Gains and losses are determined by the difference between the selling price and the carrying amount of the loans sold, net of discounts collected or paid and considering a normal servicing rate. Fees received from borrowers to guarantee the funding of mortgage loans held-for-sale and fees paid to investors to ensure the ultimate sale of such mortgage loans are recognized as income or expense when the loans are sold or when it becomes evident that the commitment will not be used. LOANS Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff, are reported at their outstanding principal balances adjusted for any charge-offs, any deferred fees or costs on originated loans, and any unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Generally, loans are placed on nonaccrual status at 90 days past due and interest is considered a loss, unless the loan is well-secured and in the process of collection. Consumer loans are generally not placed on nonaccrual status, but are charged-off when they are 120 days past due. For loans which are on nonaccrual status, it is Park's policy to reverse interest previously accrued on the loan against interest income. Interest on such loans is thereafter recorded on a cash basis and is included in earnings only when actually received in cash and when full payment of principal is no longer doubtful. The delinquency status of a loan is based on contractual terms and not on how recently payments have been received. Loans are removed from nonaccrual status when loan payments have been received to cure the delinquency status and the loan is deemed to be well-secured by management. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is that amount believed adequate to absorb probable credit losses in the loan portfolio based on management's evaluation of various factors including overall growth in the loan portfolio, an analysis of individual loans, prior and current loss experience and current economic conditions. A provision for loan losses is charged to operations based on management's periodic evaluation of these and other pertinent factors. 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" requires 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. Commercial loans are individually risk graded. Where appropriate, reserves are allocated to individual loans based on management's estimate of the borrower's ability to repay the loan given the availability of collateral and other sources of cash flow. Homogenous loans, such as consumer installment loans, residential mortgage loans and automobile leases are not individually risk graded. Reserves are established for each pool of loans based on historical loan loss experience, current economic conditions and loan delinquency. INCOME RECOGNITION Income earned by the Corporation and its subsidiaries is recognized on the accrual basis of accounting, except for late charges on loans which are recognized as income when they are collected. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation and amortization. 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. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The range of depreciable lives that premises and equipment are being depreciated over are: Buildings 5 to 50 Years Equipment, furniture and fixtures 3 to 20 Years Leasehold improvements 1 to 10 Years
Buildings that are currently placed in service are depreciated over 20 to 30 years. Equipment, furniture and fixtures that are currently placed in service are depreciated over 3 to 10 years. Leasehold improvements are depreciated over the life of the leases which range from 1 to 10 years. 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, 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. MORTGAGE SERVICING RIGHTS When Park sells mortgage loans with servicing rights retained, the total cost of the mortgage loan is allocated to the servicing rights and the loans based on their relative fair values. The servicing rights capitalized are amortized in proportion to and over the period of estimated servicing income. Capitalized mortgage servicing rights are included in other assets and totaled $10.7 million at December 31, 2005 and $9.5 million at December 31, 2004. The estimated fair values of capitalized mortgage servicing rights are $12.2 million and $9.5 million at December 31, 2005 and 2004, respectively. The fair value of mortgage servicing rights is determined by discounting estimated future cash flows from the servicing assets, using market discount rates, and using expected future prepayment rates. In 2005, 2004 and 2003, Park capitalized $2.0 million, $1.97 million and $7.88 million in mortgage servicing rights, respectively. In 2005, 2004 and 2003, Park's amortization of mortgage servicing rights was $2.1 million, $1.95 million and $4.24 million, respectively. Generally, mortgage servicing rights are capitalized and amortized on an individual sold loan basis. When a sold mortgage loan is paid off, the related mortgage servicing rights are fully amortized. Mortgage servicing rights increased by $1,298,000 in 2005 as a result of the acquisition of First Clermont Bank on January 3, 2005 and also increased by $315,000 in 2004 as a result of the acquisition of First Federal Bancorp, Inc. on December 31, 2004. Mortgage servicing rights are assessed for impairment periodically, based on fair value, with any impairment recognized through a valuation allowance. Fees received for servicing mortgage loans owned by investors are based on a percentage of the outstanding monthly principal balance of such loans and are included in income as loan payments are received. The cost of servicing loans is charged to expense as incurred. Park serviced sold mortgage loans of $1,403 million at December 31, 2005, $1,266 million at December 31, 2004 and $1,166 million at December 31, 2003. At December 31, 2005, $87 million of the serviced mortgage loans were sold with recourse compared to $102 million at December 31, 2004. Management closely monitors the delinquency rates on the mortgage loans sold with recourse. At December 31, 2005, management determined that no liability was deemed necessary for these loans. 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. The estimated residual values of leases are established at inception by determining the estimated residual value for the equipment, automobiles, or aircraft from the particular industry leasing guide. Management re-evaluates the estimated residual values of leases on a quarterly basis from review of the leasing guides and charges operating expense for any write-down of the estimated residual values of leases. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents the excess of the purchase price over net identifiable tangible and intangible assets acquired in a purchase business combination. Other intangible assets represent purchased assets that have no physical property but represent some future economic benefit to their owner and are capable of being sold or exchanged on their own or in combination with a related asset or liability. Goodwill and indefinite-lived intangible assets are not amortized to expense, but are subject to annual impairment tests. Intangible assets with definitive useful lives (such as core deposit intangibles) are amortized to expense over their estimated useful life. Management considers several factors when performing the annual impairment tests on goodwill. The factors considered include the operating results for the particular Park subsidiary bank for the past year and the operating results budgeted for the current year, the purchase prices being paid for financial institutions in the Midwest, the deposit and loan totals of the Park subsidiary bank and the economic conditions in the markets served by the Park subsidiary bank. The following table reflects the activity in goodwill and other intangible assets for the years 2005 and 2004. (See Note 2 of the Notes to Consolidated Financial Statements for details on the acquisitions of First Federal Bancorp, Inc. ("First Federal") and First Clermont Bank ("First Clermont") and the sale of the Roseville branch office.)
CORE DEPOSIT GOODWILL INTANGIBLES TOTAL -------- ------------ ------- (IN THOUSANDS) December 31, 2003 $ 7,529 $ 5,429 $12,958 ------- ------- ------- Amortization -- (1,479) (1,479) First Federal acquisition 26,658 2,750 29,408 ------- ------- ------- DECEMBER 31, 2004 $34,187 $ 6,700 $40,887 ------- ------- ------- FIRST CLERMONT ACQUISITION 28,369 3,664 32,033 SALE OF BRANCH OFFICE (860) (324) (1,184) AMORTIZATION -- (2,548) (2,548) ------- ------- ------- DECEMBER 31,2005 $61,696 $ 7,492 $69,188 ------- ------- -------
Park evaluates goodwill for impairment during the first quarter of each year. A determination has been made each year that goodwill was not impaired. The balance of goodwill was $61.7 million at December 31, 2005. This goodwill balance is located at three subsidiary banks of Park. The subsidiary banks are The Park National Bank ($28.4 million), Century National Bank ($25.8 million) and The Security National Bank and Trust Co. ($7.5 million). Goodwill and other intangible assets (as shown on the balance sheet) totaled $69,188,000 at December 31, 2005 and $40,887,000 at December 31, 2004. The core deposit intangibles are being amortized to expense principally on the straight-line method, over periods ranging from six to twelve years. The amortization period for the First Federal and First Clermont acquisitions is six years. Core deposit intangible amortization expense was $2,548,000 in 2005, $1,479,000 in 2004 and $3,110,000 in 2003. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The accumulated amortization of core deposit intangibles was $11.1 million at December 31, 2005 and $8.6 million at December 31, 2004. The expected core deposit intangible amortization expense for each of the next five years is as follows: (IN THOUSANDS) 2006 $2,469 2007 1,860 2008 1,349 2009 1,069 2010 745 ------ TOTAL $7,492 ======
CONSOLIDATED STATEMENT OF CASH FLOWS Cash and cash equivalents include cash and cash items, amounts due from banks and money market instruments. Generally money market instruments are purchased and sold for one day periods. Net cash provided by operating activities reflects cash payments as follows:
DECEMBER 31, 2005 2004 2003 ------------ ------- ------- ------- (DOLLARS IN THOUSANDS) Interest paid on deposits and other borrowings $91,408 $58,986 $63,608 Income taxes paid $37,146 $41,884 $36,400
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 bases 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. STOCK DIVIDEND Park's Board of Directors approved a 5% stock dividend in November 2004. The additional shares resulting from the dividend were distributed on December 15, 2004 to stockholders of record as of December 1, 2004. The consolidated financial statements, notes and other references to share and per share data have been retroactively restated for the stock dividend. TREASURY STOCK The purchase of Park's common stock is recorded at cost. At the date of retirement or subsequent reissuance, the treasury stock account is reduced by the cost of such stock. STOCK OPTIONS At December 31, 2005, Park has one incentive stock option plan under which grants of options can be made. This plan is described more fully in Note 11 of the Notes to Consolidated Financial Statements. Park accounts for this plan under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB 25) and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share as if Park had applied the fair value provisions of SFAS No. 123, "Accounting for Stock Based Compensation," to stock-based employee compensation.
DECEMBER 31, 2005 2004 2003 ------------ ------- ------- ------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net income as reported $95,238 $91,507 $86,878 Pro-forma net income 91,574 88,284 84,989 ------- ------- ------- Basic earnings per share as reported $ 6.68 $ 6.38 $ 6.01 Pro-forma basic earnings per share 6.42 6.15 5.88 ------- ------- ------- Diluted earnings per share as reported 6.64 6.32 5.97 Pro-forma diluted earnings per share 6.38 6.09 5.84
On April 14, 2005, the Securities and Exchange Commission announced the adoption of a new rule that delayed the date for compliance with SFAS No. 123 (revised 2004), "Accounting for Stock-Based Compensation" (SFAS No. 123R). SFAS No. 123R was previously scheduled to become mandatory for public entities, such as Park, that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The SEC's new rule allowed these public entities to implement SFAS No. 123R at the beginning of the next fiscal year that begins after June 15, 2005. SFAS No. 123R prohibits companies from using APB 25 for the accounting of stock options and requires that grants of stock options be charged to expense. Companies were permitted to adopt SFAS No. 123R earlier than the beginning of their next fiscal year, but the management of Park elected to adopt SFAS 123R on January 1, 2006. SFAS No. 123R permits public companies to adopt its requirements using one of two methods. The "modified prospective" method recognizes compensation expense beginning with the effective date for all stock options granted after the effective date and for all stock options that become vested after the effective date. The "modified retrospective" method includes the requirements of the "modified prospective" method described above, but also permits entities to restate prior period results based on the amounts previously recognized under SFAS No. 123 for purposes of pro-forma disclosures. Park has elected to adopt SFAS No. 123R using the "modified prospective" method and accordingly will not restate prior period results. The management of Park does not expect that the adoption of SFAS No. 123R will have a material impact on its results of operations, financial condition or liquidity. DERIVATIVE INSTRUMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The provisions of this statement require that derivative instruments be carried at fair value on the balance sheet. The statement continues to allow derivative instruments to be used to hedge various risks and sets forth specific criteria to be used to determine when hedge accounting can be used. The statement also provided for offsetting changes in fair value or cash flows of both the derivative and the hedged asset or liability to be recognized in earnings in the same period; however, any changes in fair value or cash flow that represent the ineffective portion of a hedge are required to be recognized in earnings and cannot be deferred. For derivative instruments not accounted for as hedges, changes in fair value are required to be recognized in earnings. The provisions of this statement became effective for quarterly and annual reporting beginning January 1, 2001. The Corporation did not use any derivative instruments in 2005, 2004 and 2003 and as a result the adoption of this statement has had no impact on the Corporation's financial position, results of operations and cash flows. RECENT ACCOUNTING PRONOUNCEMENTS MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT: In November 2005, FASB issued FASB Staff Position (FSP) 115-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." The FSP provides additional guidance on when an investment in a debt or equity security should be considered impaired and when that impairment should be considered other-than-temporary and recognized as a loss in earnings. Specifically, the guidance clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell has not been made. The FSP also requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP must be applied to reporting periods beginning after December 15, 2005. The management of Park does not expect that the adoption of this FSP will have a material impact on its results of operations, financial condition or liquidity. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ACCOUNTING CHANGES AND ERROR CORRECTIONS: In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections," which changes the accounting for and reporting of a change in accounting principle. This statement applies to all voluntary changes in accounting principle and changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This statement requires retrospective application to prior period financial statements of changes in accounting principle, unless it is impractical to determine either the specific period (or the cumulative effect) of the change. SFAS No. 154 is effective for accounting changes made in reporting periods beginning after December 15, 2005. The management of Park does not expect that the adoption of SFAS No. 154 will have a material impact on its results of operations, financial condition or liquidity. 2. ORGANIZATION AND ACQUISITIONS Park National Corporation is a multi-bank holding company headquartered in Newark, Ohio. Through its banking subsidiaries, The Park National Bank (PNB), The Richland Trust Company (RTC), Century National Bank (CNB), The First-Knox National Bank of Mount Vernon (FKNB), United Bank, N.A. (UB), Second National Bank (SNB), The Security National Bank and Trust Co. (SEC), and The Citizens National Bank of Urbana (CIT), Park is engaged in a general commercial banking and trust business, primarily in Ohio. A wholly owned subsidiary of Park, Guardian Finance Company (GFC) began operating in May 1999. GFC is a consumer finance company located in Central Ohio. PNB operates through three banking divisions with the Park National Division headquartered in Newark, Ohio, the Fairfield National Division headquartered in Lancaster, Ohio and the First Clermont Division headquartered in Milford, Ohio. FKNB 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. SEC also operates through two banking divisions with the Security National Division headquartered in Springfield, Ohio and The Unity National Division (formerly The Third Savings and Loan Company) headquartered in Piqua, 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. See Note 20 for financial information on the Corporation's banking subsidiaries. On January 3, 2005, Park acquired all of the stock of First Clermont Bank of Milford, Ohio for $52,500,000 in an all cash transaction accounted for as a purchase. Immediately following Park's acquisition, First Clermont merged with Park's subsidiary, The Park National Bank. The goodwill recognized as a result of this acquisition was $28,369,000. The fair value of the acquired assets of First Clermont was $185,372,000 and the fair value of the liabilities assumed was $161,241,000 at January 3, 2005. On December 31, 2004, Park acquired First Federal Bancorp, Inc., a savings and loan holding company headquartered in Zanesville, Ohio, in an all cash transaction accounted for as a purchase. The stockholders of First Federal received $13.25 in cash for each outstanding common share of First Federal common stock. Park paid a total of $46,638,000 to the stockholders of First Federal. The savings and loan subsidiary of First Federal, First Federal Savings Bank of Eastern Ohio, merged with Century National Bank. The goodwill recognized as a result of this acquisition was $26,658,000. The fair value of the acquired assets of First Federal was $252,687,000 and the fair value of the liabilities assumed was $232,707,000 at December 31, 2004. On February 11, 2005, Park's subsidiary Century National Bank, sold its Roseville, Ohio, branch office. The Roseville branch office was acquired in connection with the acquisition of First Federal on December 31, 2004. The Federal Reserve Board required that the Roseville branch office be sold as a condition of their approval of the merger transactions involving Park and First Federal. The deposits sold with the Roseville branch office totaled $12,419,000 and the loans sold with the branch office totaled $5,273,000. Century National Bank received a premium of $1,184,000 from the sale of the deposits. 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 $37,674,000 and $30,827,000 at December 31, 2005 and 2004, respectively. No other compensating balance arrangements were in existence at year end. 4. INVESTMENT SECURITIES The amortized cost and fair value of investment securities are shown below. Management evaluates the investment securities on a quarterly basis for permanent impairment. No impairment charges have been deemed necessary in 2005 and 2004.
GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING ESTIMATED COST GAINS LOSSES FAIR VALUE ---------- ---------- ---------- ---------- (IN THOUSANDS) 2005: SECURITIES AVAILABLE-FOR-SALE Obligations of U.S. Treasury and other U.S. Government agencies $ 998 $ -- $ 2 $ 996 Obligations of states and political subdivisions 66,181 1,740 15 67,906 U.S. Government agencies' asset-backed securities and other asset-backed securities 1,356,233 1,823 19,629 1,338,427 Other equity securities 1,543 527 48 2,022 ---------- ------ ------- ---------- TOTAL $1,424,955 $4,090 $19,694 $1,409,351 ========== ====== ======= ========== 2005: SECURITIES HELD-TO-MATURITY Obligations of states and political subdivisions $ 17,430 $ 308 $ -- $ 17,738 U.S. Government agencies' asset-backed securities and other asset-backed securities 178,523 2 5,838 172,687 ---------- ------ ------- ---------- TOTAL $ 195,953 $ 310 $ 5,838 $ 190,425 ========== ====== ======= ==========
Other investment securities (as shown on the balance sheet) consist of stock investments in the Federal Home Loan Bank and the Federal Reserve Bank. Park owned $52.1 million of Federal Home Loan Bank stock and $5.9 million of Federal Reserve Bank stock at December 31, 2005. Park owned $47.1 million of Federal Home Loan Bank stock and $4.4 million of Federal Reserve Bank stock at December 31, 2004. The fair values of these investments are the same as their amortized costs. Management does not believe any individual unrealized loss as of December 31, 2005 and December 31, 2004, represents an other-than-temporary impairment. The unrealized losses relate primarily to the impact of increases in market interest rates on U.S. Government agencies' asset-backed securities. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Securities with unrealized losses at December 31, 2005, were as follows:
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL ----------------------- ------------------- ----------------------- FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED VALUE LOSSES VALUE LOSSES VALUE LOSSES ---------- ---------- ------ ---------- ---------- ---------- (IN THOUSANDS) 2005: SECURITIES AVAILABLE-FOR-SALE Obligations of U.S. Treasury and other U.S. Government agencies $ 996 $ 2 $ -- $ -- $ 996 $ 2 Obligations of states and political subdivisions 346 4 474 11 820 15 U.S.Government agencies' asset- backed securities and other asset- backed securities 1,244,306 19,272 4,338 357 1,248,644 19,629 Other equity securities -- -- 152 48 152 48 ---------- ------- ------ ---- ---------- ------- TOTAL $1,245,648 $19,278 $4,964 $416 $1,250,612 $19,694 ========== ======= ====== ==== ========== ======= 2005: SECURITIES HELD-TO-MATURITY U.S.Government agencies' asset- backed securities and other asset- backed securities $ 172,591 $ 5,838 $ -- $ -- $ 172,591 $ 5,838 ---------- ------- ------ ---- ---------- -------
Investment securities at December 31, 2004, were as follows:
GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING ESTIMATED COST GAINS LOSSES FAIR VALUE ---------- ---------- ---------- ---------- (IN THOUSANDS) 2004: SECURITIES AVAILABLE-FOR-SALE Obligations of U.S.Treasury and other U.S.Government agencies $ 15,201 $ 8 $ 3 $ 15,206 Obligations of states and political subdivisions 81,738 3,851 23 85,566 U.S.Government agencies' asset-backed securities and other asset-backed securities 1,685,760 16,043 1,225 1,700,578 Other equity securities 1,025 501 11 1,515 ---------- ------- ------ ---------- TOTAL $1,783,724 $20,403 $1,262 $1,802,865 ========== ======= ====== ========== 2004: SECURITIES HELD-TO-MATURITY Obligations of states and political subdivisions $ 18,173 $ 703 $ -- $ 18,876 U.S.Government agencies' asset-backed securities and other asset-backed securities 54,274 470 7 54,737 ---------- ------- ------ ---------- TOTAL $ 72,447 $ 1,173 $ 7 $ 73,613 ========== ======= ====== ==========
Securities with unrealized losses at December 31, 2004, were as follows:
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL --------------------- -------------------- --------------------- FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED VALUE LOSSES VALUE LOSSES VALUE LOSSES -------- ---------- ------- ---------- -------- ---------- (IN THOUSANDS) 2004: SECURITIES AVAILABLE-FOR-SALE Obligations of U.S. Treasury and other U.S. Government agencies $ 5,198 $ 3 $ -- $ -- $ 5,198 $ 3 Obligations of states and political subdivisions 1,019 23 -- -- 1,019 23 U.S.Government agencies' asset- backed securities and other asset- backed securities 208,643 363 24,136 862 232,779 1,225 Other equity securities 189 11 -- -- 189 11 -------- ---- ------- ---- -------- ------ TOTAL $215,049 $400 $24,136 $862 $239,185 $1,262 ======== ==== ======= ==== ======== ====== 2004: SECURITIES HELD-TO-MATURITY U.S.Government agencies' asset- backed securities and other asset- backed securities $ 4,715 $ 7 $ -- $ -- $ 4,715 $ 7 -------- ---- ------- ---- -------- ------
The amortized cost and estimated fair value of investments in debt securities at December 31, 2005, are shown below by contractual maturity or the expected call date, except for asset-backed securities which are shown based on expected principal repayments. The average yield is computed on a tax equivalent basis using a thirty-five percent tax rate and is based on the amortized cost of the securities.
WEIGHTED AMORTIZED ESTIMATED AVERAGE AVERAGE COST FAIR VALUE MATURITY YIELD ---------- ---------- ----------- ------- (DOLLARS IN THOUSANDS) SECURITIES AVAILABLE-FOR-SALE U.S.Treasury and agencies' notes: Due within one year $ 998 $ 996 0.20 YEARS 3.36% ---------- ---------- ----------- ---- Obligations of states and political subdivisions: Due within one year 17,879 18,072 0.51 YEARS 7.07% Due one through five years 44,355 45,754 2.21 YEARS 7.09% Due five through ten years 2,827 2,972 5.78 YEARS 7.07% Due over ten years 1,120 1,108 17.04 YEARS 8.23% ---------- ---------- ----------- ---- TOTAL $ 66,181 $ 67,906 2.15 YEARS 7.10% ========== ========== =========== ==== U.S.Government agencies' asset-backed securities and other asset-backed securities: Due within one year $ 208,985 $ 206,247 0.53 YEARS 4.86% Due one through five years 613,271 605,237 2.88 YEARS 4.85% Due five through ten years 421,192 415,674 7.23 YEARS 4.78% Due over ten years 112,785 111,269 11.08 YEARS 4.71% ---------- ---------- ----------- ---- TOTAL $1,356,233 $1,338,427 4.55 YEARS 4.82% ========== ========== =========== ==== SECURITIES HELD-TO-MATURITY Obligations of states and political subdivisions: Due within one year $ 6,278 $ 6,318 0.52 YEARS 6.42% Due one through five years 11,152 11,420 2.40 YEARS 6.58% ---------- ---------- ----------- ---- TOTAL $ 17,430 $ 17,738 1.72 YEARS 6.52% ========== ========== =========== ==== U.S.Government agencies' asset-backed securities and other asset-backed securities: Due within one year $ 27,534 $ 26,634 0.51 YEARS 4.77% Due one through five years 35,235 34,083 2.41 YEARS 4.73% Due five through ten years 81,882 79,204 7.82 YEARS 4.76% Due over ten years 33,872 32,766 11.01 YEARS 4.77% ---------- ---------- ----------- ---- TOTAL $ 178,523 $ 172,687 6.23 YEARS 4.76% ========== ========== =========== ====
Investment securities having a book value of $1,503 million and $1,367 million at December 31, 2005 and 2004, respectively, were pledged to collateralize government and trust department deposits in accordance with federal and state requirements and to secure repurchase agreements sold, and as collateral for Federal Home Loan Bank (FHLB) advance borrowings. At December 31, 2005, $699 million was pledged for government and trust department deposits, $659 million was pledged to secure repurchase agreements and $145 million was pledged as collateral for FHLB advance borrowings. At December 31, 2004, $530 million was pledged for government and trust department deposits, $441 million was pledged to secure repurchase agreements and $396 million was pledged as collateral for FHLB advance borrowings. 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In 2005, 2004 and 2003, gross gains of $97,000, $140,000 and $1,507,000, and gross losses of $1,000, $933,000 and $7,567,000 were realized, respectively. The tax expense related to the net securities gains was $34,000 in 2005 and the tax benefits related to net securities losses were $278,000 in 2004 and $2,121,000 in 2003. 5. LOANS The composition of the loan portfolio is as follows:
DECEMBER 31 2005 2004 ----------- ---------- ---------- (DOLLARS IN THOUSANDS) Commercial, financial and agricultural $ 512,636 $ 469,382 Real estate: Construction 193,185 155,326 Residential 1,287,438 1,190,275 Commercial 823,354 752,428 Consumer, net 494,975 505,151 Leases, net 16,524 48,046 ---------- ---------- TOTAL LOANS $3,328,112 $3,120,608 ========== ==========
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 2005 2004 ----------- ------- ------- (DOLLARS IN THOUSANDS) Impaired loans: Nonaccrual $ 9,308 $12,441 Restructured 7,441 5,461 Total impaired loans 16,749 17,902 Other nonaccrual loans 5,614 5,432 ------- ------- TOTAL NONACCRUAL AND RESTRUCTURED LOANS $22,363 $23,334 ======= =======
The allowance for credit losses related to impaired loans at December 31, 2005 and 2004, was $1,988,000 and $3,580,000, respectively. All impaired loans for both periods were subject to a related allowance for credit losses. The average balance of impaired loans was $19,557,000, $21,003,000 and $21,397,000 for 2005, 2004 and 2003, respectively. 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, 2005, 2004 and 2003, the Corporation recognized $490,000, $721,000 and $845,000, respectively, of interest income on impaired loans. The Corporation received cash payments for interest related to these loans of $553,000 in 2005, $752,000 in 2004 and $546,000 in 2003. Certain of the Corporation's executive officers, directors and their affiliates are loan customers of the Corporation's banking subsidiaries. As of December 31, 2005 and 2004, loans aggregating approximately $130,116,000 and $120,917,000, respectively, were outstanding to such parties. During 2005, $37,792,000 of new loans were made and repayments totaled $28,593,000. These loans were made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other persons and involve no unusual risk of collectibility. 6. ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses is summarized as follows:
2005 2004 2003 -------- -------- -------- (DOLLARS IN THOUSANDS) Balance, January 1 $ 68,328 $ 63,142 $ 62,028 Allowance for loan losses of acquired bank 1,849 4,450 -- Provision for loan losses 5,407 8,600 12,595 Losses charged to the reserve (13,389) (15,173) (18,036) Recoveries 7,499 7,309 6,555 -------- -------- -------- BALANCE, DECEMBER 31 $ 69,694 $ 68,328 $ 63,142 ======== ======== ========
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 2005 2004 ----------- ------- ------- (DOLLARS IN THOUSANDS) Total minimum payments to be received $12,987 $38,606 Estimated unguaranteed residual value of leased property 4,562 11,953 Less unearned income (1,368) (2,513) ------- ------- TOTAL $16,181 $48,046 ======= =======
Minimum lease payments, in thousands, to be received as of December 31, 2005 are:
(IN THOUSANDS) 2006 $ 3,752 2007 2,776 2008 2,401 2009 2,392 2010 1,079 Thereafter 587 ------- TOTAL $12,987 =======
8. PREMISES AND EQUIPMENT The major categories of premises and equipment and accumulated depreciation are summarized as follows:
DECEMBER 31 2005 2004 ----------- -------- -------- (DOLLARS IN THOUSANDS) Land $ 14,292 $ 13,258 Buildings 59,347 54,256 Equipment, furniture and fixtures 53,630 52,284 Leasehold improvements 3,624 3,248 -------- -------- TOTAL 130,893 123,046 -------- -------- Less accumulated depreciation and amortization (83,721) (79,867) -------- -------- PREMISES AND EQUIPMENT, NET $ 47,172 $ 43,179 ======== ========
Depreciation and amortization expense amounted to $5,641,000, $5,436,000 and $5,866,000 for the three years ended December 31, 2005, 2004 and 2003, 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) 2006 $1,758 2007 1,620 2008 1,464 2009 1,158 2010 703 Thereafter 833 ------ TOTAL $7,536 ======
Rent expense amounted to $1,915,000, $1,362,000 and $1,307,000, for the three years ended December 31, 2005, 2004 and 2003, respectively. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. SHORT-TERM BORROWINGS Short-term borrowings are as follows:
DECEMBER 31 2005 2004 ----------- -------- -------- (DOLLARS IN THOUSANDS) Securities sold under agreements to repurchase and federal funds purchased $246,502 $192,483 Federal Home Loan Bank advances 60,000 78,228 Other short-term borrowings 7,572 7,520 -------- -------- TOTAL SHORT-TERM BORROWINGS $314,074 $278,231 ======== ========
The outstanding balances for all short-term borrowings as of December 31, 2005, 2004 and 2003 (in thousands) and the weighted-average interest rates as of year-end 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 PURCHASED ADVANCES AND OTHER ----------- --------- --------- (DOLLARS IN THOUSANDS) 2005: ENDING BALANCE $246,502 $ 60,000 $7,572 HIGHEST MONTH-END BALANCE 246,502 170,000 8,583 AVERAGE DAILY BALANCE 194,157 94,264 3,421 WEIGHTED-AVERAGE INTEREST RATE: AS OF YEAR-END 2.94% 4.20% 4.16% PAID DURING THE YEAR 2.14% 3.46% 2.93% -------- -------- ------ 2004: Ending balance $192,483 $ 78,228 $7,520 Highest month-end balance 354,195 160,050 7,520 Average daily balance 323,978 74,043 3,278 Weighted-average interest rate: As of year-end 1.29% 2.31% 2.25% Paid during the year 1.17% 2.01% 1.13% -------- -------- ------ 2003: Ending balance $367,082 $145,050 $4,627 Highest month-end balance 777,707 145,050 9,914 Average daily balance 495,704 16,011 3,613 Weighted-average interest rate: As of year-end 1.09% 1.01% 1.00% Paid during the year 0.50% 1.24% 1.12% -------- -------- ------
At December 31, 2005 and 2004, Federal Home Loan Bank (FHLB) advances were collateralized by investment securities owned by the Corporation's subsidiary banks and by residential mortgage loans pledged under a blanket agreement by the Corporation's subsidiary banks. See Note 4 of the Notes to Consolidated Financial Statements for the amount of investment securities that are pledged. At December 31, 2005, $867 million of residential mortgage loans were pledged under a blanket agreement to the FHLB by Park's subsidiary banks. At December 31, 2004, $797 million of residential mortgage loans were pledged to the FHLB. 10. LONG-TERM DEBT Long-term debt is listed below:
2005 2004 --------------------- --------------------- OUTSTANDING AVERAGE Outstanding Average DECEMBER 31 BALANCE RATE Balance Rate ----------- ----------- ------- ----------- ------- (DOLLARS IN THOUSANDS) TOTAL FEDERAL HOME LOAN BANK ADVANCES BY YEAR OF MATURITY: 2005 $ -- -- $ 22,300 5.73% 2006 113,268 4.17% 187,581 2.65% 2007 41,243 4.02% 188,189 2.83% 2008 122,110 4.20% 117,379 4.03% 2009 6,115 3.93% 73,510 4.98% 2010 17,404 5.72% 15,951 5.86% Thereafter 79,644 4.54% 5,883 4.58% -------- ---- -------- ---- TOTAL $379,784 4.31% $610,793 3.47% ======== ==== ======== ==== TOTAL BROKER REPURCHASE AGREEMENTS BY YEAR OF MATURITY: 2007 $ 25,000 3.84% $100,000 3.62% 2009 85,000 3.94% 85,000 2.56% 2010 75,000 3.83% -- -- Thereafter 150,000 3.87% -- -- -------- ---- -------- ---- TOTAL $335,000 3.88% $185,000 3.13% ======== ==== ======== ==== TOTAL COMBINED LONG-TERM DEBT BY YEAR OF MATURITY: 2005 $ -- -- $ 22,300 5.73% 2006 113,268 4.17% 187,581 2.65% 2007 66,243 3.95% 288,189 3.10% 2008 122,110 4.20% 117,379 4.03% 2009 91,115 3.94% 158,510 3.68% 2010 92,404 4.19% 15,951 5.86% Thereafter 229,644 4.10% 5,883 4.48% -------- ---- -------- ---- TOTAL $714,784 4.11% $795,793 3.39% ======== ==== ======== ====
At December 31, 2005 and 2004, Federal Home Loan Bank (FHLB) advances were collateralized by investment securities owned by the Corporation's subsidiary banks and by residential mortgage loans pledged under a blanket agreement by the Corporation's subsidiary banks. See Note 4 of the Notes to Consolidated Financial Statements for the amount of investment securities that are pledged. See Note 9 of the Notes to Consolidated Financial Statements for the amount of residential mortgage loans that are pledged to the FHLB. 11. STOCK OPTION PLANS The Park National Corporation 2005 Incentive Stock Option Plan (the "2005 Plan") was adopted by the Board of Directors of Park on January 18, 2005, and was approved by the shareholders at the Annual Meeting of Shareholders on April 18, 2005. Under the 2005 Plan, 1,500,000 common shares are authorized for delivery upon the exercise of incentive stock options. All of the common shares delivered upon the exercise of incentive stock options granted under the 2005 Plan are to be treasury shares. At December 31, 2005, 1,289,162 options were available for future grants under the 2005 Plan. Under the terms of the 2005 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 additional incentive stock options may be granted under the 2005 Plan after January 17, 2015. The Park National Corporation 1995 Incentive Stock Option Plan (the "1995 Plan") was adopted April 17, 1995, and amended, April 20, 1998 and April 16, 2001. Pursuant to the terms of the 1995 Plan, all of the common shares delivered upon exercise of incentive stock options are to be treasury shares. No incentive stock options may be granted under the 1995 Plan after January 16, 2005. The activity in Park's stock option plans is listed in the following table for the past three years:
STOCK OPTIONS ------------------- WEIGHTED AVERAGE EXERCISE PRICE PER NUMBER SHARE ------- --------- January 1, 2003 579,816 $ 87.27 Granted 179,125 92.10 Exercised (60,431) 81.41 Forfeited/Expired (78,414) 88.82 ------- ------- December 31, 2003 620,096 89.04 Granted 232,178 109.48 Exercised (75,653) 87.46 Forfeited/Expired (56,513) 91.48 ------- ------- December 31, 2004 720,108 95.60 Granted 228,150 108.40 Exercised (47,509) 85.83 Forfeited/Expired (82,567) 95.23 ------- ------- DECEMBER 31, 2005 818,182 $ 99.78 ======= =======
Range of exercise prices: $35.58 - $154.20 Weighted-average remaining contractual life: 2.8 Years Exercisable at year end: 801,360 Weighted-average exercise price of exercisable options: $99.59
52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------- ------------------------------------ WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE RANGE OF AS OF CONTRACTUAL EXERCISE AS OF EXERCISE EXERCISE PRICES 12/31/05 LIFE PRICE 12/31/05 PRICE ----------------- ----------- ----------- --------- ----------- --------- $30.00 - $80.00 11,107 0.4 $ 67.87 11,107 $ 67.87 $80.01 - $90.00 202,237 1.1 86.44 202,237 86.44 $90.01 - $100.00 151,885 2.2 91.72 151,885 91.72 $100.01 - $110.00 417,261 3.9 108.11 400,439 108.09 $110.01 - $120.00 12,830 3.5 113.95 12,830 113.95 $120.01 - $160.00 22,862 3.2 126.78 22,862 126.72 ------- --- ------- ------- ------- 818,182 2.8 $ 99.78 801,360 $ 99.59 ======= === ======= ======= =======
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. The alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock Based Compensation," requires the use of option valuation models to value 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 2005, 2004 and 2003, respectively: risk-free interest rates of 3.77%, 3.36% and 2.74%; a dividend yield of 3.00% for all three years, a volatility factor of the expected market price of the Corporation's common stock of .198%, .175% and .170% and a weighted-average expected option life of 4.0 years for all three years. The weighted-average fair value of options granted were $16.14, $13.88 and $10.55 for 2005, 2004 and 2003, respectively. 12. BENEFIT PLANS The Corporation has a noncontributory defined benefit pension plan covering substantially all of the employees of the Corporation and its subsidiaries. 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. Using an accrual measurement date of September 30, plan assets for the pension plan are listed below:
2005 2004 ------- ------- (DOLLARS IN THOUSANDS) CHANGE IN FAIR VALUE OF PLAN ASSETS: Fair value at beginning of measurement period $37,341 $36,355 Actual return on plan assets 4,303 3,830 Company contributions 9,688 -- Benefits paid (5,001) (2,844) ------- ------- FAIR VALUE AT END OF MEASUREMENT PERIOD $46,331 $37,341 ======= =======
The asset allocation for the defined benefit pension plan as of the measurement date, by asset category, is as follows:
PERCENTAGE OF PLAN ASSETS ------------- ASSET CATEGORY TARGET ALLOCATION 2005 2004 -------------- ----------------- ---- ---- Equity securities 50% - 100% 82% 84% Fixed income and cash equivalents remaining balance 18% 16% Other -- -- -- --- --- --- TOTAL -- 100% 100% === === ===
The investment policy, as established by the Retirement Plan Committee, is to invest assets per the target allocation stated above. Assets will be reallocated periodically based on the investment strategy of the Retirement Plan Committee. The investment policy is reviewed periodically. The expected long-term rate of return on plan assets is 7.75% in 2005 and 2004. This return is based on the expected return of each of the asset categories, weighted based on the median of the target allocation for each class. Using an actuarial measurement date of September 30, benefit obligation activity is listed as follows:
2005 2004 ------- ------- (DOLLARS IN THOUSANDS) CHANGE IN BENEFIT OBLIGATION: Projected benefit obligation at beginning of measurement period $45,169 $39,948 Service cost 2,682 2,502 Interest cost 2,756 2,577 Actuarial loss or (gain) 1,035 2,986 Benefits paid (5,001) (2,844) ------- ------- PROJECTED BENEFIT OBLIGATION AT THE END OF MEASUREMENT PERIOD $46,641 $45,169 ======= =======
The accumulated benefit obligation for the defined benefit pension plan was $38,301,000 at September 30, 2005 and $37,167,000 at September 30, 2004. The weighted average assumptions used to determine benefit obligations at September 30, were as follows:
2005 2004 ---- ---- Discount rate 5.96% 6.00% Rate of compensation increase 3.50% 3.75%
The estimated future pension benefit payments reflecting expected future service for the next ten years are shown below in thousands: 2006 $ 1,164 2007 1,375 2008 1,554 2009 1,737 2010 1,962 2011 - 2015 17,051 ------- TOTAL $24,843 =======
The following table displays the funded status of the defined benefit pension plan which is computed by taking the difference between the fair value of the plan assets and the projected benefit obligation at the measurement date of September 30. The following table also provides information on the prepaid or accrued benefit cost at September 30:
2005 2004 ------ ------- (DOLLARS IN THOUSANDS) Funded status $ (310) $(7,828) Unrecognized prior service cost 238 250 Unrecognized net actuarial loss 9,956 10,435 ------ ------- PREPAID BENEFIT COST $9,884 $ 2,857 ====== =======
Using an actuarial measurement date of September 30, components of net periodic benefit cost are as follows:
2005 2004 2003 ------- ------- ------- (DOLLARS IN THOUSANDS) COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost $ 2,682 $ 2,502 $ 2,095 Interest cost 2,756 2,577 2,347 Expected return on plan assets (3,334) (2,789) (2,138) Amortization of prior service cost 12 12 12 Recognized net actuarial loss/(gain) 545 497 339 ------- ------- ------- BENEFIT COST $ 2,661 $ 2,799 $ 2,655 ======= ======= =======
53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31, are listed below:
2005 2004 ---- ---- Discount rate 6.00% 6.25% Rate of compensation increase 3.75% 4.00% Expected long-term return on plan assets 7.75% 7.75%
The Corporation has a voluntary salary deferral plan covering substantially all of the employees of the Corporation and its subsidiaries. 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 $1,763,000, $1,452,000 and $1,393,000 for 2005, 2004 and 2003, respectively. The Corporation has a Supplemental Executive Retirement Plan (SERP) covering certain key officers of the Corporation and its subsidiaries with defined pension benefits in excess of limits imposed by federal tax law. At December 31, 2005 and 2004, the accrued benefit cost for this plan totaled $5,620,000 and $4,776,000, respectively. The expense for the Corporation was $744,000, $636,000, and $1,236,000 for 2005, 2004 and 2003, respectively. 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 2005 2004 ----------- ------- ------- (DOLLARS IN THOUSANDS) DEFERRED TAX ASSETS: Allowance for loan losses $24,393 $23,915 Accumulated other comprehensive loss 5,461 -- Intangible assets 3,465 2,743 Deferred compensation 3,545 3,638 Other 3,628 3,270 ------- ------- TOTAL DEFERRED TAX ASSETS $40,492 $33,566 ------- ------- DEFERRED TAX LIABILITIES: Lease revenue reporting $ 3,830 $ 6,293 Accumulated other comprehensive income -- 6,700 Deferred investment income 12,170 9,998 Pension Plan 3,400 -- Mortgage servicing rights 3,733 3,333 Other 1,804 830 ------- ------- TOTAL DEFERRED TAX LIABILITIES $24,937 $27,154 ------- ------- NET DEFERRED TAX ASSETS $15,555 $ 6,412 ======= =======
The components of the provision for federal income taxes are shown below:
2005 2004 2003 ------- ------- ------- (DOLLARS IN THOUSANDS) Currently payable $38,196 $40,284 $39,972 Deferred 1,990 (2,542) (3,661) ------- ------- ------- TOTAL $40,186 $37,742 $36,311 ======= ======= =======
The following is a reconcilement of federal income tax expense to the amount computed at the statutory rate of 35% for the years ended December 31, 2005, 2004 and 2003:
DECEMBER 31 2005 2004 2003 ----------- ---- ---- ---- Statutory corporate tax rate 35.0% 35.0% 35.0% Changes in rates resulting from: Tax-exempt interest income (1.3%) (1.7%) (2.1%) Tax credits (low income housing) (2.5%) (2.2%) (2.1%) Other (1.5%) (1.9%) (1.3%) ---- ---- ---- EFFECTIVE TAX RATE 29.7% 29.2% 29.5% ==== ==== ====
Park and its subsidiary banks do not pay state income tax to the State of Ohio, but pay a franchise tax based on their year-end equity. The franchise tax expense is included in state tax expense and was $2.9 million in 2005, $2.5 million in 2004 and $2.5 million in 2003. 14. OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income components and related taxes are shown in the following table for the years ended December 31, 2005, 2004 and 2003:
BEFORE-TAX TAX NET-OF-TAX YEAR ENDED DECEMBER 31 AMOUNT EXPENSE AMOUNT ---------------------- ---------- -------- ---------- (DOLLARS IN THOUSANDS) 2005: Unrealized losses on available-for-sale securities $(34,650) $(12,127) $(22,523) Reclassification adjustment for gains realized in net income (96) (34) (62) -------- -------- -------- OTHER COMPREHENSIVE LOSS $(34,746) $(12,161) $(22,585) -------- -------- -------- 2004: Unrealized losses on available-for-sale securities $(10,811) $ (3,784) $ (7,027) Reclassification adjustment for losses realized in net income 793 278 515 -------- -------- -------- OTHER COMPREHENSIVE LOSS $(10,018) $ (3,506) $ (6,512) -------- -------- -------- 2003: Reverse additional minimum liability for pension plan $ 2,458 $ 860 $ 1,598 Unrealized losses on available-for-sale securities (13,847) (4,846) (9,001) Reclassification adjustment for losses realized in net income 6,060 2,121 3,939 -------- -------- -------- OTHER COMPREHENSIVE LOSS $ (5,329) $ (1,865) $ (3,464) -------- -------- --------
15. EARNINGS PER SHARE SFAS No. 128, "Earnings Per Share" requires the reporting of basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. The following table sets forth the computation of basic and diluted earnings per share:
YEAR ENDED DECEMBER 31 2005 2004 2003 ---------------------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NUMERATOR: Net income $ 95,238 $ 91,507 $ 86,878 DENOMINATOR: Basic earnings per share: Weighted-average shares 14,258,519 14,344,771 14,458,899 Effect of dilutive securities - stock options 89,724 141,556 92,523 Diluted earnings per share: Adjusted weighted-average shares and assumed conversions 14,348,243 14,486,327 14,551,422 EARNINGS PER SHARE: Basic earnings per share $ 6.68 $ 6.38 $ 6.01 Diluted earnings per share $ 6.64 $ 6.32 $ 5.97
16. 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, 2005, approximately $10,701,000 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. 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. 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 2005 2004 ----------- -------- -------- (DOLLARS IN THOUSANDS) Loan commitments $667,074 $630,041 Unused credit card limits 132,591 139,056 Standby letters of credit 20,872 15,179 -------- --------
The loan commitments are generally for variable rates of interest. The Corporation grants retail, commercial and commercial real estate loans to customers primarily located in 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 borrowers' ability to honor their contracts is dependent upon the economic conditions in each borrower's geographic location. 18. 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. INTEREST BEARING DEPOSITS WITH OTHER BANKS: The carrying amounts reported in the balance sheet for interest bearing deposits with other banks 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. BANK OWNED LIFE INSURANCE: The carrying amounts reported in the balance sheet for bank owned life insurance approximate those assets' fair values. 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 (e.g., 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 (e.g., interest and non-interest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). 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 of 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: Fair values for long-term debt are estimated using a discounted cash flow calculation that applies interest rates currently being offered on long-term debt to a schedule of monthly maturities. The fair value of financial instruments at December 31, 2005 and 2004, is as follows:
2005 2004 ----------------------- ----------------------- CARRYING FAIR Carrying Fair DECEMBER 31, AMOUNT VALUE Amount Value ------------ ---------- ---------- ---------- ---------- (IN THOUSANDS) FINANCIAL ASSETS: Cash and money market instruments $ 173,973 $ 173,973 $ 161,829 $ 161,829 Interest bearing deposits with other banks 300 300 2,096 2,096 Investment securities 1,663,342 1,657,814 1,926,782 1,927,948 Bank owned life insurance 109,600 109,600 94,909 94,909 Loans: Commercial, financial and agricultural 512,636 512,636 469,382 469,382 Real estate: Construction 193,185 193,185 155,326 155,326 Residential 1,287,438 1,281,657 1,190,275 1,188,930 Commercial 823,354 815,022 752,428 747,289 Consumer, net 494,975 494,064 505,151 499,933 ---------- ---------- ---------- ---------- TOTAL LOANS 3,311,588 3,296,564 3,072,562 3,060,860 ---------- ---------- ---------- ---------- Allowance for loan losses (69,694) -- (68,328) -- ---------- ---------- ---------- ---------- LOANS RECEIVABLE,NET $3,241,894 $3,296,564 $3,004,234 $3,060,860 ---------- ---------- ---------- ---------- FINANCIAL LIABILITIES: Noninterest bearing checking $ 667,328 $ 667,328 $ 630,882 $ 630,882 Interest bearing transaction accounts 987,954 987,954 898,575 898,575 Savings 594,706 594,706 632,942 632,942 Time deposits 1,505,903 1,486,989 1,525,613 1,520,609 Other 1,866 1,866 1,849 1,849 ---------- ---------- ---------- ---------- TOTAL DEPOSITS $3,757,757 $3,738,843 $3,689,861 $3,684,857 ---------- ---------- ---------- ---------- Short-term borrowings 314,074 314,074 278,231 278,231 Long-term debt 714,784 718,384 795,793 801,315 UNRECOGNIZED FINANCIAL INSTRUMENTS: Loan commitments -- (667) -- (630) Standby letters of credit -- (104) -- (76) ---------- ---------- ---------- ----------
55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. CAPITAL RATIOS The following table reflects various measures of capital at December 31, 2005 and December 31, 2004: 2005 2004 ---------------- ---------------- DECEMBER 31, AMOUNT RATIO Amount Ratio ------------ -------- ----- -------- ----- (DOLLARS IN THOUSANDS) Total equity (1) $558,430 10.27% $562,561 10.39% Tier 1 capital (2) 498,502 14.17% 508,279 15.16% Total risk-based capital (3) 543,000 15.43% 550,675 16.43% Leverage (4) 498,502 9.27% 508,279 10.10%
(1) Stockholders' equity including accumulated other comprehensive income; computed as a ratio to total assets. (2) Stockholders' equity less certain intangibles and accumulated other comprehensive income; 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. At December 31, 2005 and 2004, the Corporation's tier 1 capital, total risk-based capital and leverage ratios were 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, 2005 and 2004, 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. The following table indicates the capital ratios for each subsidiary at December 31, 2005 and December 31, 2004:
2005 2004 ------------------------- ------------------------- TIER 1 TOTAL Tier 1 Total RISK- RISK- Risk- Risk- DECEMBER 31 BASED BASED LEVERAGE Based Based Leverage ----------- ------ ----- -------- ------ ----- -------- Park National Bank 7.65% 10.41% 5.44% 7.71% 11.04% 5.24% Richland Trust Company 9.76% 11.02% 5.76% 10.23% 11.49% 5.64% Century National Bank 8.91% 11.36% 5.65% 8.40% 10.29% 8.02% First-Knox National Bank 8.87% 12.23% 5.80% 8.44% 12.26% 5.37% United Bank, N.A. 10.82% 12.07% 5.64% 10.88% 12.14% 5.70% Second National Bank 9.27% 12.64% 5.63% 8.84% 12.17% 5.48% Security National Bank 9.42% 13.78% 5.35% 9.43% 13.84% 5.10% Citizens National Bank 11.86% 17.29% 5.60% 11.76% 16.67% 5.68%
20. SEGMENT INFORMATION The Corporation's segments are its banking subsidiaries. The operating results of the banking subsidiaries are monitored closely by senior management and each president of the subsidiary and division are held accountable for their results. Information about reportable segments follows. See Note 2 for a detailed description of individual banking subsidiaries.
ALL PNB RTC CNB FKNB UB SNB SEC CIT OTHERS TOTAL ---------- -------- -------- -------- -------- -------- -------- -------- --------- ---------- OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 2005 (IN THOUSANDS) Net interest income $ 71,227 $ 20,273 $ 27,599 $ 30,855 $ 8,606 $ 13,592 $ 30,811 $ 6,140 $ 11,461 $ 220,564 Provision for loan losses 2,611 700 150 1,127 (160) (510) 1,005 (100) 584 5,407 Other income 25,566 4,442 7,439 7,191 1,968 2,154 8,880 1,518 547 59,705 Depreciation and amortization 1,705 394 913 675 233 315 993 200 213 5,641 Other expense 43,622 10,226 15,155 16,156 6,026 7,238 18,665 4,701 12,008 133,797 ---------- -------- -------- -------- -------- -------- -------- -------- --------- ---------- Income before taxes 48,855 13,395 18,820 20,088 4,475 8,703 19,028 2,857 (797) 135,424 ---------- -------- -------- -------- -------- -------- -------- -------- --------- ---------- Federal income taxes 15,924 4,553 6,356 6,739 1,449 2,674 6,231 929 (4,669) 40,186 ---------- -------- -------- -------- -------- -------- -------- -------- --------- ---------- NET INCOME $ 32,931 $ 8,842 $ 12,464 $ 13,349 $ 3,026 $ 6,029 $ 12,797 $ 1,928 $ 3,872 $ 95,238 ---------- -------- -------- -------- -------- -------- -------- -------- --------- ---------- BALANCES AT DECEMBER 31, 2005: Assets $1,999,102 $506,198 $711,804 $753,288 $228,716 $392,257 $924,484 $173,190 $(252,991) $5,436,048 Loans 1,247,105 266,293 503,278 507,148 96,232 203,638 439,698 58,611 6,109 3,328,112 Deposits 1,343,180 373,398 469,333 476,257 180,274 250,553 578,404 123,555 (37,197) 3,757,757 ---------- -------- -------- -------- -------- -------- -------- -------- --------- ---------- Operating Results for the year ended December 31, 2004 (In thousands) Net interest income $ 63,050 $ 21,992 $ 19,725 $ 32,329 $ 10,074 $ 15,477 $ 31,939 $ 7,252 $ 10,453 $ 212,291 Provision for loan losses 3,230 735 965 1,695 320 (15) 430 580 660 8,600 Other income 21,401 4,339 5,210 6,766 1,722 2,079 8,257 1,253 821 51,848 Depreciation and amortization 1,708 388 520 693 197 334 1,183 197 216 5,436 Other expense 36,827 10,549 11,413 15,995 6,071 7,282 18,649 4,284 9,784 120,854 ---------- -------- -------- -------- -------- -------- -------- -------- --------- ---------- Income before taxes 42,686 14,659 12,037 20,712 5,208 9,955 19,934 3,444 614 129,249 ---------- -------- -------- -------- -------- -------- -------- -------- --------- ---------- Federal income taxes 13,808 4,906 3,972 6,864 1,685 3,096 6,485 1,112 (4,186) 37,742 ---------- -------- -------- -------- -------- -------- -------- -------- --------- ---------- Net income $ 28,878 $ 9,753 $ 8,065 $ 13,848 $ 3,523 $ 6,859 $ 13,449 $ 2,332 $ 4,800 $ 91,507 ---------- -------- -------- -------- -------- -------- -------- -------- --------- ---------- Balances at December 31, 2004: Assets $1,662,200 $511,681 $782,393 $756,454 $236,658 $445,158 $917,084 $200,795 $ (99,839) $5,412,584 Loans 1,011,912 277,812 540,607 479,348 101,628 196,577 436,718 69,830 6,176 3,120,608 Deposits 1,182,804 386,652 530,082 488,748 182,578 262,271 571,580 131,873 (46,727) 3,689,861 ---------- -------- -------- -------- -------- -------- -------- -------- --------- ----------
56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Operating Results for the year ended December 31, 2003 (In thousands)
ALL PNB RTC CNB FKNB UB SNB SEC CIT OTHERS TOTAL ---------- -------- -------- -------- -------- -------- -------- -------- --------- ---------- Net interest income $ 61,254 $ 21,081 $ 19,180 $ 31,459 $ 8,615 $ 13,962 $ 31,631 $ 6,493 $ 8,962 $ 202,637 Provision for loan losses 5,385 845 2,025 1,997 110 360 1,471 (35) 437 12,595 Other income 22,980 4,713 5,584 6,801 2,492 2,541 8,437 1,272 703 55,523 Depreciation and amortization 1,988 406 506 685 245 435 1,164 238 199 5,866 Other expense 35,575 9,759 10,850 15,547 5,705 6,853 19,175 4,236 8,810 116,510 ---------- -------- -------- -------- -------- -------- -------- -------- --------- ---------- Income before taxes 41,286 14,784 11,383 20,031 5,047 8,855 18,258 3,326 219 123,189 ---------- -------- -------- -------- -------- -------- -------- -------- --------- ---------- Federal income taxes 12,861 5,036 3,754 6,403 1,580 2,654 5,892 1,065 (2,934) 36,311 ---------- -------- -------- -------- -------- -------- -------- -------- --------- ---------- Net income $ 28,425 $ 9,748 $ 7,629 $ 13,628 $ 3,467 $ 6,201 $ 12,366 $ 2,261 $ 3,153 $ 86,878 ========== ======== ======== ======== ======== ======== ======== ======== ========= ========== Balances at December 31, 2003: Assets $1,636,753 $576,461 $495,594 $727,543 $245,175 $400,233 $922,334 $204,691 $(173,828) $5,034,956 Loans 927,663 260,726 293,242 462,758 93,669 182,980 436,873 69,652 3,240 2,730,803 Deposits 1,084,537 386,507 340,657 478,207 181,259 276,267 572,031 131,853 (37,069) 3,414,249 ---------- -------- -------- -------- -------- -------- -------- -------- --------- ----------
Reconciliation of financial information for the reportable segments to the Corporation's consolidated totals is listed below:
NET INTEREST DEPRECIATION OTHER INCOME INCOME EXPENSE EXPENSE TAXES ASSETS DEPOSITS -------- ------------ -------- ------- ---------- ---------- (IN THOUSANDS) 2005: Totals for reportable segments $209,103 $5,428 $121,789 $44,855 $5,689,039 $3,794,954 Elimination of intersegment items -- -- -- -- (337,393) (37,197) Parent Co. and GFC totals - not eliminated 11,461 62 12,008 (4,669) 84,402 -- Other items -- 151 -- -- -- -- -------- ------ -------- ------- ---------- ---------- TOTALS $220,564 $5,641 $133,797 $40,186 $5,436,048 $3,757,757 ======== ====== ======== ======= ========== ========== 2004: Totals for reportable segments $201,838 $5,220 $111,070 $41,928 $5,512,423 $3,736,588 Elimination of intersegment items -- -- -- -- (173,856) (46,727) Parent Co. and GFC totals - not eliminated 10,453 65 9,784 (4,186) 74,017 -- Other items -- 151 -- -- -- -- -------- ------ -------- ------- ---------- ---------- Totals $212,291 $5,436 $120,854 $37,742 $5,412,584 $3,689,861 ======== ====== ======== ======= ========== ========== 2003: Totals for reportable segments $193,675 $5,667 $107,702 $39,245 $5,208,784 $3,451,318 Elimination of intersegment items -- -- -- -- (237,240) (37,069) Parent Co. and GFC totals - not eliminated 8,962 48 8,808 (2,934) 63,412 -- Other items -- 151 -- -- -- -- -------- ------ -------- ------- ---------- ---------- Totals $202,637 $5,866 $116,510 $36,311 $5,034,956 $3,414,249 ======== ====== ======== ======= ========== ==========
21. 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 $5,492,000, $4,386,000 and $3,339,000 in 2005, 2004 and 2003, respectively. At December 31, 2005 and 2004, stockholders' equity reflected in the Parent Company balance sheet includes $120.1 million and $130.5 million, respectively, of undistributed earnings of the Corporation's subsidiaries which are restricted from transfer as dividends to the Corporation. BALANCE SHEETS at December 31, 2005 and 2004
2005 2004 -------- -------- (IN THOUSANDS) ASSETS: Cash $ 45,043 $123,418 Investment in subsidiaries 375,454 353,966 Debentures receivable from subsidiary banks 56,000 56,000 Other investments 1,738 1,308 Dividends receivable from subsidiaries 75,075 26,400 Other assets 52,195 47,027 -------- -------- TOTAL ASSETS $605,505 $608,119 ======== ======== LIABILITIES: Dividends payable $ 13,000 $ 12,891 Other liabilities 34,075 32,667 -------- -------- TOTAL LIABILITIES 47,075 45,558 TOTAL STOCKHOLDERS' EQUITY 558,430 562,561 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $605,505 $608,119 ======== ========
STATEMENTS OF INCOME for the years ended December 31, 2005, 2004 and 2003
2005 2004 2003 -------- ------- ------- (IN THOUSANDS) INCOME: Dividends from subsidiaries $109,250 $83,000 $69,200 Interest and dividends 6,553 6,461 6,448 Other 514 774 684 -------- ------- ------- TOTAL INCOME 116,317 90,235 76,332 -------- ------- ------- EXPENSE: Other, net 10,096 8,199 7,668 -------- ------- ------- TOTAL EXPENSE 10,096 8,199 7,668 -------- ------- ------- INCOME BEFORE FEDERAL TAXES AND EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES 106,221 82,036 68,664 Federal income tax benefit 5,503 4,791 3,253 -------- ------- ------- INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNING OF SUBSIDIARIES 111,724 86,827 71,917 Equity in undistributed (losses) earnings of subsidiaries (16,486) 4,680 14,961 -------- ------- ------- NET INCOME $ 95,238 $91,507 $86,878 -------- ------- -------
57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STATEMENTS OF CASH FLOWS for the years ended December 31, 2005, 2004 and 2003
2005 2004 2003 -------- -------- -------- (IN THOUSANDS) OPERATING ACTIVITIES: Net income $ 95,238 $ 91,507 $ 86,878 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed losses (earnings) of subsidiaries 16,486 (4,680) (14,961) (Increase) decrease in dividends receivable from subsidiaries (48,675) 25,500 24,875 Increase in other assets (5,138) (3,833) (5,385) Increase in other liabilities 1,408 3,689 5,147 -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 59,319 112,183 96,554 -------- -------- -------- INVESTING ACTIVITIES: Cash paid for acquisition, net (52,500) (43,645) -- (Purchases) sales of investment securities (521) 277 447 Capital contribution to subsidiary (8,000) -- -- -------- -------- -------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (61,021) (43,368) 447 -------- -------- -------- FINANCING ACTIVITIES: Cash dividends paid (51,498) (48,231) (45,742) Proceeds from issuance of common stock 117 144 130 Cash payment for fractional shares (3) (252) (3) Purchase of treasury stock, net (25,289) (16,376) (3,383) -------- -------- -------- NET CASH USED IN FINANCING ACTIVITIES (76,673) (64,715) (48,998) -------- -------- -------- (Decrease) increase in cash (78,375) 4,100 48,003 Cash at beginning of year 123,418 119,318 71,315 -------- -------- -------- CASH AT END OF YEAR $ 45,043 $123,418 $119,318 ======== ======== ========
58