PARK NATIONAL CORP /OH/ - Quarter Report: 2008 September (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Park National Corporation

 

(Exact name of registrant as specified in its charter)

Ohio		31-1179518
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

50 North Third Street, Newark, Ohio 43055

(Address of principal executive offices) (Zip Code)

(740) 349-8451

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

13,964,533 Common shares, no par value per share, outstanding at October 31, 2008.

 

 

PARK NATIONAL CORPORATION

CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3-23
Consolidated Condensed Balance Sheets as of September 30, 2008 and December 31, 2007 (unaudited)			3
Consolidated Condensed Statements of Income for the Three and Nine Months Ended September 30, 2008 and 2007 (unaudited)			4-5
Consolidated Condensed Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2008 and 2007 (unaudited)			6
Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 (unaudited)			7-8
Notes to Consolidated Condensed Financial Statements			9-23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24-41
Item 3. Quantitative and Qualitative Disclosures About Market Risk			42
Item 4. Controls and Procedures			43
PART II. OTHER INFORMATION			44-49
Item 1. Legal Proceedings			44
Item 1A. Risk Factors			44-45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			45-46
Item 3. Defaults Upon Senior Securities			46
Item 4. Submission of Matters to a Vote of Security Holders			46
Item 5. Other Information			46
Item 6. Exhibits			46-48
SIGNATURES			49
EX-2.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

(dollars in thousands)

		September 30,				December 31,
		2008				2007
Assets:
Cash and due from banks		$	161,591			$	183,165
Money market instruments			22,378				10,232
Cash and cash equivalents			183,969				193,397
Interest bearing deposits			1				1
Securities available-for-sale, at fair value (amortized cost of $1,503,575 and $1,473,052 at September 30, 2008 and December 31, 2007)			1,502,362				1,474,517
Securities held-to-maturity, at amortized cost (fair value approximates $232,410 and $161,414 at September 30, 2008 and December 31, 2007)			236,298				165,421
Other investment securities			68,804				63,165
Loans			4,466,671				4,224,134
Allowance for loan losses			89,195				87,102
Net loans			4,377,476				4,137,032
Bank premises and equipment, net			69,562				66,634
Bank owned life insurance			131,248				119,472
Goodwill and other intangible assets			86,551				144,556
Other assets			143,462				136,907
Total assets		$	6,799,733			$	6,501,102
Liabilities and Stockholders’ Equity:
Deposits:
Noninterest bearing		$	725,859			$	695,466
Interest bearing			4,048,650				3,743,773
Total deposits			4,774,509				4,439,239
Short-term borrowings			580,306				759,318
Long-term debt			784,440				590,409
Subordinated debentures			40,000				40,000
Other liabilities			90,793				92,124
Total liabilities			6,270,048				5,921,090
COMMITMENTS AND CONTINGENCIES
Stockholders’ Equity:
Common stock (No par value; 20,000,000 shares authorized; 16,151,162 shares issued at 2008 and 16,151,200 shares issued at 2007)			301,211				301,213
Retained earnings			440,968				489,511
Treasury stock (2,186,624 shares at 2008 and 2,186,624 shares at 2007)			(208,104	)			(208,104	)
Accumulated other comprehensive (loss), net of taxes			(4,390	)			(2,608	)
Total stockholders’ equity			529,685				580,012
Total liabilities and stockholders’ equity		$	6,799,733			$	6,501,102

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Interest and dividend income:
Interest and fees on loans		$	75,167			$	83,964			$	229,109			$	238,625
Interest and dividends on:
Obligations of U.S. Government, its agencies and other securities			22,204				18,826				65,538				55,651
Obligations of states and political subdivisions			488				754				1,707				2,349
Other interest income			88				222				262				802
Total interest and dividend income			97,947				103,766				296,616				297,427
Interest expense:
Interest on deposits:
Demand and savings deposits			5,573				11,309				18,266				29,936
Time deposits			15,527				21,440				51,344				60,249
Interest on borrowings:
Short-term borrowings			3,265				6,479				12,097				14,651
Long-term debt			8,354				5,122				23,871				17,867
Total interest expense			32,719				44,350				105,578				122,703
Net interest income			65,228				59,416				191,038				174,724
Provision for loan losses			15,906				5,793				37,869				10,879
Net interest income after provision for loan losses			49,322				53,623				153,169				163,845
Other income:
Income from fiduciary activities		$	3,356			$	3,614			$	10,639			$	10,689
Service charges on deposit accounts			6,434				6,544				18,285				17,338
Other service income			2,361				3,231				8,299				8,665
Other			4,937				5,671				19,447				17,004
Total other income			17,088				19,060				56,670				53,696
Gain on sale of securities			—				—				896				—

Continued

PARK NATIONAL CORPORATION
Consolidated Condensed Statements of Income (Unaudited)
(Continued)

(dollars in thousands, except per share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Other expense:
Salaries and employee benefits		$	25,105			$	24,980			$	74,262			$	72,776
Occupancy expense			2,850				2,700				8,758				8,054
Furniture and equipment expense			2,412				2,407				7,305				6,964
Goodwill impairment charge			54,986				0				54,986				0
Other expense			14,126				12,730				41,878				36,812
Total other expense			99,479				42,817				187,189				124,606
Income (loss) before income taxes			(33,069	)			29,866				23,546				92,935
Income taxes			5,343				8,562				20,789				27,058
Net income (loss)			($38,412	)		$	21,304			$	2,757			$	65,877

Per Share:

Net income (loss):
Basic			($2.75	)		$	1.50			$	0.20			$	4.62
Diluted			($2.75	)		$	1.50			$	0.20			$	4.61
Weighted average shares
Basic			13,964,549				14,193,019				13,964,561				14,273,759
Diluted			13,964,549				14,193,019				13,964,561				14,279,810
Cash dividends declared		$	0.94			$	0.93			$	2.82			$	2.79

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PARK NATIONAL CORPORATION

Consolidated Condensed Statements of Changes in Stockholders’ Equity (Unaudited)
(dollars in thousands, except share data)

														Accumulated
										Treasury				Other
		Common				Retained				Stock				Comprehensive				Comprehensive
Nine Months ended September 30, 2008 and 2007		Stock				Earnings				at Cost				Income (loss)				Income
BALANCE AT DECEMBER 31, 2006		$	217,067			$	519,563				($143,371	)			($22,820	)
Net Income							65,877											$	65,877
Other comprehensive income (loss), net of tax:
Unrealized net holding gain on securities available-for-sale, net of taxes $1,548															2,875				2,875
Total comprehensive income																		$	68,752
Cash dividends on common stock at $2.79 per share							(39,586	)
Cash payment for fractional shares in dividend reinvestment plan			(4	)
Treasury stock purchased — 620,531 shares											(54,817	)
Treasury stock reissued for stock options — 3,561 shares											296
Shares issued for Vision Bancshares purchase — 792,937 shares			83,258
BALANCE AT SEPTEMBER 30, 2007		$	300,321			$	545,854				($197,892	)			($19,945	)
BALANCE AT DECEMBER 31, 2007		$	301,213			$	489,511				($208,104	)			($2,608	)
Net Income							2,757											$	2,757
Other comprehensive income (loss), net of tax:
Unrealized net holding loss on on cash flow hedge, net of taxes ($23)															(42	)			(42	)
Unrealized net holding (loss) on securities available-for-sale, net of taxes ($937)															(1,740	)			(1,740	)
Total comprehensive income																		$	975
Cash dividends on common stock at $2.82 per share							(39,335	)
Cash payment for fractional shares in dividend reinvestment plan			(2	)
Postretirement benefit pertaining to endorsement split-dollar life insurance							(11,634	)
FAS 158 measurement date adjustment, net of taxes ($178)							(331	)
BALANCE AT SEPTEMBER 30, 2008		$	301,211			$	440,968				($208,104	)			($4,390	)

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PARK NATIONAL CORPORATION
Consolidated Condensed Statements of Cash Flows (Unaudited)

(dollars in thousands)

		Nine Months Ended
		September 30,
		2008				2007
Operating activities:
Net income		$	2,757			$	65,877
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, (accretion) and amortization, net			263				(2,154	)
Provision for loan losses			37,869				10,879
Other than temporary impairment on investment securities			774				—
Stock dividends on Federal Home Loan Bank stock			(2,269	)			—
Goodwill impairment charge			54,986				—
Amortization of core deposit intangibles			3,019				2,759
Realized investment security gains			(896	)			—
Changes in assets and liabilities:
Increase in other assets			(9,617	)			(7,639	)
Increase (decrease) in other liabilities			166				(13,138	)
Net cash provided by operating activities			87,052				56,584
Investing activities:
Proceeds from sales of:
Available-for-sale securities			80,894				—
Proceeds from maturity of:
Available-for-sale securities			245,560				646,918
Held-to-maturity securities			5,829				9,852
Purchases of:
Available-for-sale securities			(355,612	)			(841,746	)
Held-to-maturity securities			(76,705	)			—
Net increase in other investments			(3,370	)			—
Net increase in loans			(274,177	)			(66,742	)
Loans acquired — Ohio Legacy Bank, N.A. Branch			—				(38,348	)
Cash paid for branch acquisition, Ohio Legacy Bank, N.A.			—				(2,693	)
Cash paid for bank acquisition, Vision Bancshares, Inc.			—				(44,993	)
Purchases of bank owned life insurance, net			(8,107	)			—
Purchases of premises and equipment, net			(8,571	)			(14,461	)
Premises and equipment acquired — Ohio Legacy Bank, N.A. Branch			—				(1,150	)
Net cash used in investing activities			(394,259	)			(353,363	)

Continued

PARK NATIONAL CORPORATION
Consolidated Condensed Statements of Cash Flows (Unaudited)
(Continued)

(dollars in thousands)

		Nine Months Ended
		September 30,
		2008				2007
Financing activities:
Net increase in deposits		$	335,270			$	109,131
Deposits acquired, Ohio Legacy Bank, N.A. Branch			—				23,466
Net (decrease) increase in short-term borrowings			(179,012	)			311,018
Proceeds from exercise of stock options			—				296
Purchase of treasury stock			—				(54,817	)
Cash payment for fractional shares in dividend reinvestment plan			(2	)			(4	)
Long-term debt issued			390,100				225,100
Repayment of long-term debt			(196,069	)			(284,671	)
Cash dividends paid			(52,508	)			(52,533	)
Net cash provided by financing activities			297,779				276,986
Decrease in cash and cash equivalents			(9,428	)			(19,793	)
Cash and cash equivalents at beginning of year			193,397				186,256
Cash and cash equivalents at end of period		$	183,969			$	166,463
Supplemental disclosures of cash flow information:
Cash paid for:
Interest		$	108,315			$	122,739
Income taxes		$	25,220			$	29,655
Summary of business acquisitions:
Fair value of assets acquired — Vision Bancshares, Inc.			—			$	686,512
Cash paid for purchase — Vision Bancshares, Inc.			—				(87,843	)
Stock issued for purchase — Vision Bancshares, Inc.			—				(83,258	)
Fair value of liabilities assumed — Vision Bancshares, Inc.			—				(624,432	)
Goodwill recognized			—				($109,021	)

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PARK NATIONAL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2008 and 2007.

Note 1 — Basis of Presentation

The consolidated financial statements included in this report have been prepared by Park National Corporation (the “Registrant”, “Corporation”, “Company”, or “Park”) without audit. In the opinion of management, all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation of results of operations for the interim periods included herein have been made. The results of operations for the three months and nine months ended September 30, 2008 are not necessarily indicative of the operating results to be anticipated for the fiscal year ending December 31, 2008.

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of the condensed balance sheets, condensed statements of income, condensed statements of changes in stockholders’ equity and condensed statements of cash flows in conformity with U.S. generally accepted accounting principles. These financial statements should be read in conjunction with the consolidated financial statements incorporated by reference in the Annual Report on Form 10-K of Park for the fiscal year ended December 31, 2007 from Park’s 2007 Annual Report to Shareholders.

Park’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2007 Annual Report to Shareholders. For interim reporting purposes, Park follows the same basic accounting policies and considers each interim period as an integral part of an annual period.

Note 2 — Acquisitions and Intangible Assets

Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets (as amended)” requires goodwill to be tested for impairment on an annual basis, or more frequently if circumstances indicate that an asset might be impaired, by comparing the fair value of such goodwill to its recorded or carrying amount. If the carrying amount of the goodwill exceeds the fair value, an impairment charge must be recorded in an amount equal to the excess. Based primarily on the increased level of net loan charge-offs at Vision Bank during the second quarter of 2008, management determined that it would be prudent to test for goodwill impairment during the third quarter of 2008. Park continued to experience credit deterioration in Vision Bank’s market place during the third quarter of 2008.

The fair value of Vision was estimated by using the average of three measurement methods. These included application of various metrics from bank sale transactions for institutions comparable to Vision Bank, including application of a market-derived multiple of tangible value and estimations of the present value of future cash flows. Park’s management reviewed the valuation of the fair value of Vision Bank with Park’s Board of Directors and concluded that Vision Bank should recognize an impairment charge and write down the remaining value of the goodwill previously recorded as a result of the merger of Vision Bancshares, Inc. (“Vision”) into Park ($55.0 million), resulting in goodwill with a balance of zero in respect of Vision Bank.

During the fourth quarter of 2007, Park’s management had determined that the goodwill from the Vision acquisition on March 9, 2007 could possibly be impaired due to the significant deterioration in the credit condition of Vision Bank. Nonperforming loans at Vision Bank increased from $26.3 million at September 30, 2007 to $63.5 million at December 31, 2007 or 9.9% of year-end loan balances. Net loan charge-offs were $6.4 million for the fourth quarter of 2007 or an annualized 3.99% of average loan balances. Management determined that due to these severe credit conditions, a valuation of the fair value of Vision Bank was required to be computed to determine if the then recorded goodwill of $109.0 million was impaired. Management determined that an impairment charge of $54.0 million was appropriate as of December 31, 2007.

Additional information pertaining to Park’s acquisitions made during 2007 is disclosed in Note 2 of the Notes to Consolidated Financial Statements included in Park’s 2007 Annual Report to Shareholders.

The following table shows the activity in goodwill and core deposit intangibles during the first nine months of 2008.

						Core Deposit
(In Thousands)		Goodwill				Intangibles				Total
December 31, 2007		$	127,320			$	17,236			$	144,556
Amortization			—				<3,019>				<3,019>
Impairment Charge			<54,986>				—				<54,986>
September 30, 2008		$	72,334			$	14,217			$	86,551

For the first nine months of 2008, Vision Bank experienced $25.2 million in net loan charge-offs, or an annualized 5.01% of average loans. For the third quarter of 2008, the net loan charge-offs for Vision Bank were $8.9 million, or an annualized 5.18% of average loans. The loan loss provision for Vision Bank was $11.5 million and $27.7 million for the three month and nine month periods ended September 30, 2008, respectively. See the disclosure under “Provision for Loan Losses” within “Item 2 —Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more details of the loan loss experience for Vision Bank and Park.

The core deposit intangibles are being amortized to expense principally on the straight-line method, over periods ranging from six to ten years. The amortization period for the Vision acquisition and the Millersburg branch purchase core deposit intangibles is six years. Management expects that the core deposit intangibles amortization expense will be $1.0 million for the fourth quarter of 2008.

Core deposit intangibles amortization expense is projected to be as follows for each of the following years:

		Annual
(In Thousands)		Amortization
2008		$	4,025
2009		$	3,746
2010		$	3,422
2011		$	2,677
2012		$	2,677
Total		$	16,547

Goodwill for the Ohio-based divisions was evaluated during the first quarter of 2008, and no impairment charge was necessary.

Note 3 — Allowance for Loan Losses

The allowance for loan losses is that amount believed adequate to absorb probable incurred 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.

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 and residential mortgage loans, are not individually risk graded. Reserves are established for each pool of loans based on historical loan loss experience, current economic conditions, loan delinquency and other environmental factors.

The following table shows the activity in the allowance for loan losses for the three and nine months ended September 30, 2008 and 2007.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In Thousands)		2008				2007				2008				2007
Average Loans		$	4,409,188			$	4,115,617			$	4,317,204			$	3,948,942
Allowance for Loan Losses:
Beginning Balance		$	86,045			$	79,905			$	87,102			$	70,500
Charge-Offs:
Commercial, Financial and Agricultural			825				1,152				2,050				3,267
Real Estate — Construction			7,630				2,267				19,924				2,516
Real Estate — Residential			2,326				1,093				7,991				3,104
Real Estate — Commercial			630				768				2,811				1,139
Consumer			2,516				1,770				7,196				5,280
Lease Financing			—				—				4				—
Total Charge-Offs			13,927				7,050				39,976				15,306
Recoveries:
Commercial, Financial and Agricultural			203				167				612				863
Real Estate — Construction			12				—				62				8
Real Estate — Residential			268				314				548				578
Real Estate — Commercial			48				220				350				485
Consumer			639				470				2,611				2,441
Lease Financing			1				27				17				64
Total Recoveries			1,171				1,198				4,200				4,439
Net Charge-Offs			12,756				5,852				35,776				10,867
Provision for Loan Losses			15,906				5,793				37,869				10,879
Allowance for Loan Losses of Acquired Banks			—				—				—				9,334
Ending Balance		$	89,195			$	79,846			$	89,195			$	79,846
Annualized Ratio of Net Charge-Offs to Average Loans			1.15	%			.56	%			1.11	%			.37	%
Ratio of Allowance for Loan Losses to End of Period Loans			2.00	%			1.91	%			2.00	%			1.91	%

Note 4 — Earnings (Loss) Per Share

The following table sets forth the computation of basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2008 and 2007.

(Dollars in Thousands, Except Per Share Data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Numerator:
Net Income (Loss)			<$38,412>			$	21,304			$	2,757			$	65,877
Denominator:
Denominator for Basic Earnings (Loss) Per Share (Weighted Average Shares Outstanding)			13,964,549				14,193,019				13,964,561				14,273,759
Effect of Dilutive Securities			—				—				—				6,051
Denominator for Diluted Earnings (Loss)Per Share (Weighted Average Shares Outstanding Adjusted for the Dilutive Securities)			13,964,549				14,193,019				13,964,561				14,279,810
Earnings (Loss) Per Share:
Basic Earnings (Loss) Per Share			<$2.75>			$	1.50			$	0.20			$	4.62
Diluted Earnings (Loss) Per Share			<$2.75>			$	1.50			$	0.20			$	4.61

For the three month and nine month periods ended September 30, 2008, options to purchase a weighted average 474,608 and 519,082 common shares, respectively, were outstanding but not included in the computation of diluted earnings (loss) per share because the respective option exercise prices exceeded the market value of the underlying common shares such that their inclusion would have had an anti-dilutive effect. For the three month and nine month periods ended September 30, 2007, options to purchase 538,015 and 482,780 common shares, respectively, were outstanding but not included in the computation of diluted net income per share due to their having the same anti-dilutive effect as those disclosed for the three and nine months ended September 30, 2008.

Note 5 — Segment Information

The Corporation is a multi-bank holding company headquartered in Newark, Ohio. The operating segments for the Corporation are its two chartered bank subsidiaries, The Park National Bank (headquartered in Newark, Ohio) and Vision Bank (headquartered in Panama City, Florida) (“VIS”). During the third quarter of 2008, Park combined the eight separately chartered Ohio-based bank subsidiaries into one national bank charter, that of The Park National Bank (“PNB”). Prior to the charter mergers that were consummated in the third quarter of 2008, Park considered each of its nine chartered bank subsidiaries as a separate segment for financial reporting purposes. SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information (as amended)” requires management to disclose information about the different types of business activities in which a company engages and also information on the different economic environments in which a company operates, so that the users of the financial statements can better understand a company’s performance, better understand the potential for future cash flows, and make more informed judgments about the company as a whole. The change to two operating segments is in line with SFAS No. 131 as there are: (i) two separate and distinct geographic markets in which Park operates, (ii) the key operational functions of the two segments are primarily kept separate and distinct and (iii) the segments are aligned with the internal reporting to Park’s senior management. The financial information for the three and nine months ended September 30, 2007 has been reclassified to be consistent with the presentation of the financial information for the three and nine months ended September 30, 2008.

Operating Results for the Three Months Ended September 30, 2008
(In Thousands)

		PNB				VIS				All Other				Total
Net Interest Income		$	56,096			$	6,928			$	2,204			$	65,228
Provision for Loan Losses			3,988				11,474				444				15,906
Other Income			16,940				48				100				17,088
Goodwill Impairment			—				54,986				—				54,986
Other Expense			34,575				6,383				3,535				44,493
Net Income (Loss)			23,099				<61,682>				171				<38,412>
Balances at September 30, 2008
Assets		$	5,966,890			$	870,148				<$37,305>			$	6,799,733

Operating Results for the Three Months Ended September 30, 2007
(In Thousands)

		PNB				VIS				All Other				Total
Net Interest Income		$	49,550			$	7,743			$	2,123			$	59,416
Provision for Loan Losses			2,873				2,420				500				5,793
Other Income			17,740				1,121				199				19,060
Other Expense			33,545				6,189				3,083				42,817
Net Income			20,779				176				349				21,304
Balances at September 30, 2007
Assets		$	5,593,416			$	890,566			$	27,154			$	6,511,136

Operating Results for the Nine Months Ended September 30, 2008
(In Thousands)

		PNB				VIS				All Other				Total
Net Interest Income		$	163,672			$	20,609			$	6,757			$	191,038
Provision for Loan Losses			8,752				27,729				1,388				37,869
Other Income and Gain on Sale of Securities			54,983				2,172				411				57,566
Goodwill Impairment			—				54,986				—				54,986
Other Expense			101,810				19,821				10,572				132,203
Net Income (Loss)		$	72,276				<$70,216>			$	697			$	2,757

Operating Results for the Nine Months Ended September 30, 2007
(In Thousands)

		PNB				VIS				All Other				Total
Net Interest Income		$	149,500			$	18,078			$	7,146			$	174,724
Provision for Loan Losses			7,289				2,505				1,085				10,879
Other Income			50 825				2,377				494				53,696
Other Expense			101,565				13,301				9,740				124,606
Net Income		$	61,503			$	2,917			$	1,457			$	65,877

The operating results of the Parent Company and Guardian Financial Services Company (GFC) in the “All Other” column are used to reconcile the segment totals to the consolidated condensed statements of income for the periods ended September 30, 2008 and 2007. The reconciling amounts for consolidated total assets for both of the periods ended September 30, 2008 and 2007 consist of the elimination of intersegment borrowings, and the assets of the Parent Company and GFC which are not eliminated. The results for Vision Bank for the nine months ended September 30, 2007 are from the acquisition date of March 9, 2007 through September 30, 2007.

Note 6 — Stock Option Plans

Park did not grant any stock options during the first nine months of 2008 or the first nine months of 2007. Additionally, no stock options became vested during the first nine months of 2008 or 2007.

The following table summarizes stock option activity during the first nine months of 2008.

						Weighted
						Average Exercise
		Stock Options				Price Per Share
Outstanding at December 31, 2007			615,191			$	100.63
Granted			—				—
Exercised			—				—
Forfeited/Expired			142,565			$	93.15
Outstanding at September 30, 2008			472,626			$	102.88

All of the stock options outstanding at September 30, 2008 were exercisable. The aggregate intrinsic value of the outstanding stock options at September 30, 2008 was $0.

No stock options were exercised during the first nine months of 2008. The intrinsic value of the stock options exercised during the first nine months of 2007 was $47,000. The weighted average contractual remaining term was 1.7 years for the stock options outstanding at September 30, 2008.

All of the common shares delivered upon exercise of incentive stock options granted under the Park National Corporation 2005 Incentive Stock Option Plan (the “2005 Plan”) and the Park National Corporation 1995 Incentive Stock Option Plan (the “1995 Plan”) are to be treasury shares. At September 30, 2008, incentive stock options (granted under both the 2005 Plan and 1995 Plan) covering 460,961 common shares were outstanding. The remaining outstanding stock options at September 30, 2008 covering 11,665 common shares were granted under a stock option plan (the “Security Plan”) assumed by Park in the acquisition of Security Banc Corporation in 2001. At September 30, 2008, Park held 1,008,681 treasury shares that are allocated for the stock option plans (including the Security Plan).

Note 7 — Loans

The composition of the loan portfolio was as follows at the dates shown:

		September 30,				December 31,
(In Thousands)		2008				2007
Commercial, Financial and Agricultural		$	697,637			$	613,282
Real Estate:
Construction			544,823				536,389
Residential			1,536,229				1,481,174
Commercial			1,032,512				993,101
Consumer			651,384				593,388
Leases			4,086				6,800
Total Loans		$	4,466,671			$	4,224,134

Note 8 — Investment Securities

The amortized cost and fair values of investment securities are shown in the following table. Management evaluates investment securities on a quarterly basis for other-than-temporary impairment. No impairment charges were deemed necessary in 2007.

Management follows the principles of Staff Accounting Bulletin No. 59 (“SAB No. 59”) when performing the quarterly evaluation of investment securities for any other-than-temporary impairment. During the second quarter of 2008, Management determined that Park’s unrealized loss in the stock of National City Corporation (NYSE:NCC) was other-than-temporary due to the duration and severity of the loss. Therefore, Park recognized an impairment loss of $439,000 during the second quarter of 2008. During the third quarter 2008, as a result of Management’s quarterly evaluation of investment securities for any other-than-temporary impairment, Management determined that impairment charges of $335,000 were necessary and were recorded in the results for the third quarter 2008. These charges were made up of an additional $62,000 for the stock held in National City Corporation, $98,000 for the stock held in Huntington Bancshares Incorporated (NASDAQ:HBAN), and $175,000 for Fifth Third Bancorp (NASDAQ:FITB). For the nine month period ended September 30, 2008, Park has recorded a total of $774,000, which is recorded in “other expenses” within the Consolidated Condensed Statements of Income. These impairment losses represent the difference between the investment’s cost and fair value on September 30, 2008.

The unrealized losses on debt securities are primarily the result of interest rate changes, credit spread widening on agency-issued mortgage related securities, general financial market uncertainty and unprecedented market volatility. These conditions will not prohibit Park from receiving its contractual principal and interest payments on its debt securities.

(In Thousands)
						Gross				Gross
September 30, 2008						Unrealized				Unrealized				Estimated
Securities Available-for-Sale		Amortized Cost				Holding Gains				Holding Losses				Fair Value
Obligations of U.S. Treasury and Other U.S. Government Sponsored Entities		$	127,732			$	628				<$336	>		$	128,024
Obligation of States and Political Subdivisions			30,470				373				<64	>			30,779
U.S. Government Sponsored Entities’ Asset-Backed Securities and Other Asset-Backed Securities			1,343,707				5,648				<7,726	>			1,341,629
Equity Securities			1,666				442				<178	>			1,930
Total		$	1,503,575			$	7,091				<$8,304	>		$	1,502,362
						Gross				Gross
September 30, 2008						Unrecognized				Unrecognized				Estimated
Securities Held-to-Maturity		Amortized Cost				Holding Gains				Holding Losses				Fair Value
Obligations of States and Political Subdivisions		$	11,572			$	72			$	—			$	11,644
U.S. Government Sponsored Entities’ Asset-Backed Securities and Other Asset-Backed Securities			224,726				1				<3,961	>			220,766
Total		$	236,298			$	73				<$3,961	>		$	232,410

(In Thousands)
						Gross				Gross
December 31, 2007						Unrealized				Unrealized				Estimated
Securities Available-for-Sale		Amortized Cost				Holding Gains				Holding Losses				Fair Value
Obligations of U.S. Treasury and Other U.S. Government Sponsored Entities		$	200,996			$	2,562			$	—			$	203,558
Obligation of States and Political Subdivisions			44,805				716				<20	>			45,501
U.S. Government Sponsored Entities’ Asset-Backed Securities and Other Asset-Backed Securities			1,224,958				6,292				<8,115	>			1,223,135
Equity Securities			2,293				420				<390	>			2,323
Total		$	1,473,052			$	9,990				<$8,525	>		$	1,474,517
						Gross				Gross
December 31, 2007						Unrecognized				Unrecognized				Estimated
Securities Held-to-Maturity		Amortized Cost				Holding Gains				Holding Losses				Fair Value
Obligations of States and Political Subdivisions		$	13,551			$	127			$	—			$	13,678
U.S. Government Sponsored Entities’ Asset-Backed Securities and Other Asset-Backed Securities			151,870				2				<4,136	>			147,736
Total		$	165,421			$	129				<$4,136	>		$	161,414

Note 9 — Other Investment Securities

Other investment securities consist of stock investments in the Federal Home Loan Bank and the Federal Reserve Bank. These restricted stock investments are carried at their amortized costs.

		September 30,				December 31,
(In Thousands)		2008				2007
Federal Home Loan Bank Stock		$	61,928			$	56,754
Federal Reserve Bank Stock			6,876				6,411
Total		$	68,804			$	63,165

Note 10 — Benefit Plans

Park has a noncontributory defined benefit pension plan covering substantially all of its employees. The plan provides benefits based on an employee’s years of service and compensation.

Park’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. Management does not expect to make a pension plan contribution in 2008.

The following table shows the components of net periodic benefit expense:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In Thousands)		2008				2007				2008				2007
Service Cost		$	863			$	810			$	2,589			$	2,430
Interest Cost			789				776				2,367				2,328
Expected Return on Plan Assets			<1,152	>			<1,066	>			<3,456	>			<3,198	>
Amortization of Prior Service Cost			8				8				24				24
Recognized Net Actuarial Loss			—				138				—				414
Benefit Expense		$	508			$	666			$	1,524			$	1,998

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132R.” This statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multi-employer plan) as an asset or liability in its balance sheet, beginning with fiscal year-end December 31, 2006, and to recognize changes in the funded status in the year in which the changes occur through comprehensive income beginning in 2007. Additionally, defined benefit plan assets and obligations are to be measured as of the date of the employer’s fiscal year-end, starting in 2008. Park had a pension asset and liability valuation performed as of September 30, 2007, and as a result of the SFAS No. 158 measurement date provisions, Park was required to adjust retained earnings for three-fifteenths (20%) of the estimated expense for 2008. Therefore, Park charged approximately $0.3 million to retained earnings on January 1, 2008 (net of taxes) to reflect the expense pertaining to three months of pension plan expense.

Note 11 — Recent Accounting Pronouncements

In July 2006, the Emerging Issues Task Force (“EITF”) of the FASB issued a draft abstract for EITF Issue No. 06-04, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF Issue No. 06-04”). The EITF reached a consensus that for an endorsement split-dollar life insurance arrangement within the scope of this Issue, an employer should recognize a liability for future benefits in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”. The EITF concluded that a liability for the benefit obligation under SFAS No. 106 has not been settled through the purchase of an endorsement type life insurance policy. In September 2006, FASB agreed to ratify the consensus reached in EITF Issue No. 06-04. This new accounting standard was effective for Park beginning January 1, 2008.

At September 30, 2008, Park and its subsidiary banks owned $131.2 million of bank owned life insurance policies. These life insurance policies are generally subject to endorsement split-dollar life insurance arrangements. These arrangements were designed to provide a pre-and postretirement benefit for senior officers and directors of Park and its subsidiary banks. Park’s management has completed its evaluation of the impact of the adoption of EITF Issue No. 06-4 on Park’s consolidated financial statements. On January 1, 2008, Park charged approximately $11.6 million to retained earnings and recorded a corresponding liability for the same amount.

Fair Value Measurements

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 159 gives entities the option to measure eligible financial assets and financial liabilities at fair value on an instrument by instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The fair value option permits companies to choose to measure eligible items at fair value at specified election dates. Subsequent changes in fair value must be reported in earnings. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008 or during the first nine months of 2008.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Management believes that the impact of adoption resulted in enhanced footnote disclosures; however, the adoption did not materially impact the Consolidated Balance Sheets, the Consolidated Statements of Income, the Consolidated Statements of Changes in Stockholders’ Equity, or the Consolidated Statements of Cash Flows. (See Note 14 — Fair Value of the Notes to Consolidated Condensed Financial Statements).

At the February 12, 2008 FASB meeting, the FSAB decided to defer the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). SFAS No. 157 is effective for these nonfinancial assets and liabilities for fiscal years beginning after November 15, 2008. Non-financial assets and liabilities may include (but are not limited to): (i) nonfinancial assets and liabilities initially measured at fair value in a business combination, but not measured at fair value in subsequent periods, (ii) reporting units measured at fair value in the first step of a goodwill impairment test as described in SFAS No. 142, and (iii) nonfinancial assets and liabilities measured at fair value in the second step of a goodwill impairment test as described in SFAS No. 142.

On October 10, 2008, the FASB issued FASB Staff Position (“FSP”) 157-3, “Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active”. This FSP does not change existing GAAP, but seeks to clarify how to consider various inputs in determining fair value under current market conditions consistent with the principles of SFAS 157. The FSP provides an example on how to calculate fair value when there is not an active market for that financial asset. Key concepts addressed include distressed sales, the use of 3^rd party pricing information, use of internal assumptions, and others. FSP 157-3 was effective upon issuance and therefore it applies to Park’s consolidated financial statement for the three month and nine month periods ended September 30, 2008. The adoption of FSP 157-3 had no material impact on these financial statements.

Accounting for Business Combinations

On December 4, 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”), with the objective to improve the comparability of information that a company provides in its financial statements related to a business combination and its effects. SFAS No. 141(R) establishes principles and requirements for how the acquirer (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) does not apply to combinations between entities under common control. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

Note 12 — Derivative Instruments

SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS No. 133, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified into earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction.

During the first quarter of 2008, the Company executed an interest rate swap to hedge a $25 million floating-rate subordinated note that was entered into by Park during the fourth quarter of 2007. The Company’s objective in using this derivative is to add stability to interest expense and to manage its exposure to interest rate risk. Our interest rate swap involves the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreement without exchange of the underlying principal amount, and has been designated as a cash flow hedge.

As of September 30, 2008, no derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, the Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges.

At September 30, 2008, the derivative’s fair value of <$65,000> was included in other liabilities. No hedge ineffectiveness on the cash flow hedge was recognized during the quarter. At September 30, 2008, the variable rate on the $25 million subordinated note was 6.05% (LIBOR plus 200 basis points) and Park was paying 6.01% (4.01% fixed rate on the interest rate swap plus 200 basis points).

For the nine months ended September 30, 2008, the change in the fair value of the derivative designated as a cash flow hedge reported in other comprehensive income was <$42,000> (net of taxes of <$23,000>). Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.

Note 13 — Guarantees

Pursuant to the requirements of FASB Interpretation 45 (“FIN 45”), Park recorded a contingent legal liability of $.9 million during the fourth quarter of 2007. This was a result of an announcement Visa made in the fourth quarter of 2007 that it was establishing litigation reserves for the settlement of a lawsuit and for additional potential settlements with other parties. Park recorded the contingent legal liability based on Visa’s announcements and Park’s membership interest in Visa. Visa had a successful initial public offering (“IPO”) during the first quarter of 2008. Visa used a portion of the IPO proceeds to fund an escrow account that will be used to pay contingent legal settlements. As a result of the IPO, Park was able to reverse the entire contingent legal liability and recognize as income $.9 million during the first quarter of 2008. This was reflected in other income within the unaudited consolidated condensed statement of income for the nine months ended September 30, 2008.

At the time of the IPO, Park held 132,876 Class B Common Shares of Visa. During the first quarter of 2008, Visa redeemed 51,373 of these shares and paid Park $2.2 million, which was recognized in other income within the unaudited consolidated condensed statement of income for the nine months ended September 30, 2008. The unredeemed shares are recorded at their original cost basis of zero.

Note 14 — Fair Value

SFAS No. 157 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. SFAS No. 157 describes three levels of inputs that Park uses to measure fair value:

	•		Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
	•		Level 2: Level 1 inputs for assets or liabilities that are not actively traded. Also consists of an observable market price for a similar asset or liability. This includes the use of “matrix pricing” used to value debt securities absent the exclusive use of quoted prices.
	•		Level 3: Consists of unobservable inputs that are used to measure fair value when observable market inputs are not available. This could include the use of internally developed models, financial forecasting, etc.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability between market participants at the balance sheet date. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to observable market data for similar assets and liabilities. However, certain assets and liabilities are not traded in observable markets and Park must use other valuation methods to develop a fair value. The fair value of impaired loans is based on the fair value of the underlying collateral, which is estimated through third party appraisals or internal estimates of collateral values.

Assets and Liabilities Measured on a Recurring Basis:

The following table presents financial assets and liabilities measured on a recurring basis:

Fair Value Measurements at Reporting Date Using
(In Thousands)

Quoted Prices in

Active Markets For

Significant Other

Significant

Identical Assets

Observable Inputs

Unobservable Inputs

Description

09/30/08

(Level 1)

(Level 2)

(Level 3)

Available-for-Sale Securities

$

1,502,362

$

1,930

$

1,497,608

$

2,824

The table below is a reconciliation of the beginning and ending balances of the Level 3 inputs:

Fair Value Measurements at Reporting Date Using
Significant Unobservable Inputs (Level 3)

(In Thousands)		AFS Securities
Beginning Balance, at January 1, 2008		$	2,969
Total Unrealized (Losses)/Gains Included in Other Comprehensive Income			<145>
Ending Balance		$	2,824

Assets and Liabilities Measured on a Nonrecurring Basis:

The following table presents financial assets and liabilities measured on a nonrecurring basis:

Fair Value Measurements at Reporting Date Using
(In Thousands)

Quoted Prices in

Active Markets For

Significant Other

Significant

Identical Assets

Observable Inputs

Unobservable Inputs

Description

09/30/08

(Level 1)

(Level 2)

(Level 3)

SFAS No. 114 Impaired Loans

$

55,328

—

—

$

55,328

Impaired loans, which are usually measured for impairment using the fair value of the collateral, had a carrying amount of $106.0 million. Of these, $55.3 million were carried at fair value, as a result of partial charge-offs of $21.8 million and a specific valuation allowance of $4.5 million. The specific valuation allowance for those loans has increased from $3.2 million at June 30, 2008 to $4.5 million at September 30, 2008.

Note 15 — Subsequent Events

On October 10, 2008, Park’s Ohio-based banking subsidiary, The Park National Bank (“PNB”), executed agreements to sell its unsecured credit card portfolio (with the exception of certain specified ineligible accounts) and its merchant card processing business to U.S. Bank National Association ND, d/b/a Elan Financial Services (“Elan”) and Elavon Inc. (“Elavon”), respectively. Both Elan and Elavon are wholly-owned subsidiaries of U.S. Bancorp. As of September 30, 2008, the unsecured credit card portfolio had a balance of approximately $30 million, the transaction had a total sale price of $39.3 million and Park expects to recognize approximately $8 million in other income (as a pre-tax gain resulting from the sale of the credit card portfolio) during the fourth quarter of 2008. Park expects to recognize income of approximately $4.2 million in the fourth quarter of 2008 from the sale of the merchant card processing business.

Note 16 — Evaluation of Participation in the U.S. Treasury Capital Purchase Program

On October 3, 2008, Congress passed the Emergency Economic Stabilization Act of 2008 (EESA), which creates the Troubled Asset Relief Program (“TARP”) and provides the U.S. Secretary of the Treasury with broad authority to implement certain actions to help restore stability and liquidity to U.S. markets. The Capital Purchase Program (the “CPP”) was announced by the U.S. Treasury on October 14, 2008 as part of TARP. Pursuant to the CPP, the U.S. Treasury will purchase up to $250 billion of senior preferred shares on standardized terms from qualifying financial institutions. The purpose of the CPP is to encourage U.S. financial institutions to build capital to increase the flow of financing to U.S. businesses and consumers and to support the U.S. economy.

The CPP is voluntary and requires a participating institution to comply with a number of restrictions and provisions, including standards for executive compensation and corporate governance and limitations on share repurchases and the declaration and payment of dividends on common shares. In order to participate in the CPP an application must be submitted before 5:00 p.m. (EST) on November 14, 2008. If a financial institution submits an application by the deadline and receives a preliminary approval to participate in the CPP, the financial institution would then have 30 days from the date of the preliminary approval to satisfy all requirements for participation and to complete the issuance of the senior preferred shares to the U.S. Treasury.

Eligible financial institutions can generally apply to issue senior preferred shares to the U.S. Treasury in aggregate amounts between 1% to 3% of the institution’s risk-weighted assets. In the case of Park, this would permit Park to apply for an investment by the U.S. Treasury of between approximately $47 million and $141 million.

If Park participates in the CPP, the U.S. Treasury would purchase from Park cumulative perpetual preferred shares, with a liquidation preference of at least $1,000 per share (the “Senior Preferred Shares”). The Senior Preferred Shares would constitute Tier 1 capital and rank senior to Park’s common shares. The Senior Preferred Shares would pay cumulative dividends at a rate of 5% per annum for the first five years and will reset to a rate of 9% per annum after five years.

Financial institutions participating in the CPP must also issue warrants to the U.S. Treasury to purchase a number of common shares having a market price equal to 15% of the aggregate amount of the Senior Preferred Shares purchased by the U.S. Treasury. The initial exercise price for the warrants and the market price for determining the number of common shares subject to the warrants will be determined by reference to the market price of the common shares on the date of the investment by the U.S. Treasury in the Senior Preferred Shares (calculated on a 20-day trailing average). The warrants will have a term of 10 years. The Company is evaluating whether to apply for participation in the CPP.

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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: governmental intervention in the U.S. financial system; changes in consumer spending, borrowing and savings habits; deterioration in the asset value of Vision Bank’s loan portfolio may be worse than expected; Park’s ability to execute its business plan successfully and within the expected timeframe; Park’s ability to successfully integrate acquisitions into Park’s operations; Park’s ability to achieve the anticipated cost savings and revenue synergies from acquisitions; general economic and financial market conditions, specifically the real estate market, either national or in the states in which Park and its subsidiaries do business, are less favorable than expected; Park’s ability to convert its Ohio-based divisions to one operating system; deterioration in credit conditions in the markets in which Park’s subsidiary banks operate; changes in the interest rate environment reduce net interest margins; competitive pressures among financial institutions increase significantly; changes in banking regulations or other regulatory or legislative requirements affecting the respective businesses of Park and its subsidiaries; changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies; the effect of critical accounting policies and judgments; demand for loans in the respective market areas served by Park and its subsidiaries, and other risk factors relating to the banking industry as detailed from time to time in Park’s reports filed with the Securities and Exchange Commission including those described in “Item 1A. Risk Factors” of Part I of Park’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and in “Item 1A. Risk Factors” of Part II of this Quarterly Report on Form 10-Q. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Park does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions that may be made to update any forward-looking statement to reflect the events or circumstances after the date on which the forward-looking statement is made, or reflect the occurrence of unanticipated events, except to the extent required by law.

Critical Accounting Policies

Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2007 Annual Report to Shareholders lists significant accounting policies used in the development and presentation of Park’s 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 incurred credit losses in the loan portfolio. Management’s determination of the adequacy of the allowance for loan losses is based on periodic evaluations of the loan portfolio and of current economic conditions. However, this evaluation is inherently subjective as it requires material estimates, including expected default probabilities, loss given default, 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 judgment 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 certain commercial, commercial real estate and construction loans. These are loans above a fixed dollar amount that 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.

Park’s recent adoption of SFAS No. 157 (See Note 14 — Fair Value of the Notes to Consolidated Condensed Financial Statements in this Form Quarterly Report 10-Q) on January 1, 2008 required management to establish a fair value hierarchy, which has the objective of maximizing the use of observable market inputs. SFAS No. 157 also requires enhanced disclosures regarding the inputs used to calculate fair value. These are classified as Level 1, 2, and 3. Level 3 inputs are those with significant unobservable inputs that reflect a company’s own assumptions about the market for a particular instrument. Some of the inputs could be based on internal models and cash flow analysis. At September 30, 2008, the Level 3 inputs for Park had an aggregate fair value of approximately $58.2 million. This was 3.7% of the total amount of assets measured at fair value as of the end of the third quarter. The fair value of impaired loans was approximately $55.3 million (or 95%) of the total amount of Level 3 inputs. The large majority of Park’s Level 2 inputs consist of available for sale (“AFS”) securities. The fair value of these AFS securities is obtained largely by the use of matrix pricing, which is a mathematical technique widely used in the financial services industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.

Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. SFAS No. 142, “Accounting for Goodwill and Other Intangible Assets (as amended)” establishes standards for the amortization of acquired intangible assets and the impairment assessment of goodwill. 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 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, the inability to deliver cost-effective services over sustained periods or significant credit problems 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, or more frequently if events or changes in circumstances indicate that the asset might be impaired. 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 and the banking industry comparable information.

During the three months ended September 30, 2008, Park’s management determined that the credit conditions at Vision Bank had further deteriorated and that an impairment analysis of the goodwill balance at Vision Bank was required. As a result of this impairment analysis, Vision Bank recorded a goodwill impairment charge of $55.0 million during the third quarter of 2008, which eliminated the goodwill asset at Vision Bank. Previously, Vision Bank recorded a goodwill impairment charge of $54.0 million during the fourth quarter of 2007 which had reduced the goodwill balance carried on the books of Vision Bank to $55.0 million from the original goodwill asset of $109.0 million.

At September 30, 2008, on a consolidated basis Park had core deposit intangibles of $14.2 million subject to amortization and $72.3 million of goodwill, which was not subject to periodic amortization. During the third quarter of 2008, the banking charters for seven of Park’s Ohio-based subsidiary banks were merged into one remaining Ohio-based subsidiary bank, The Park National Bank, which is headquartered in Newark, Ohio. At September 30, 2008, the core deposit intangible asset recorded on the balance sheet of The Park National Bank was $4.86 million and the core deposit intangible asset at Vision Bank was $9.36 million. The goodwill asset recorded at The Park National Bank was $72.3 million at September 30, 2008. During the first quarter of 2008, Park’s management evaluated the goodwill for Park’s Ohio-based banks for impairment and concluded that the fair value of the goodwill for Park’s Ohio-based banks exceeded the carrying value of $72.3 million and accordingly was not impaired. Please see Note 2 — Acquisitions and Intangible Assets of the Notes to Consolidated Condensed Financial Statements in this Quarterly Report on Form 10-Q for additional information on intangible assets.

Comparison of Results of Operations
For the Three and Nine Months Ended September 30, 2008 and 2007

Summary Discussion of Results

Net income for the nine months ended September 30, 2008 decreased by $63.1 million or 95.8% to $2.8 million compared to net income of $65.9 million for the first three quarters of 2007. The primary reason for the large decrease in net income was the net loss of $70.2 million at Vision Bank for the first nine months of 2008 compared to net income of $2.9 million for the same period in 2007. As previously discussed, Vision Bank recognized a goodwill impairment charge of $55.0 million during the third quarter of 2008. Diluted earnings per share decreased by 95.7% to $.20 for the first three quarters of 2008 compared to $4.61 for the same period in 2007.

Excluding the $55.0 million goodwill impairment charge, net income for the first three quarters of 2008 was $57.8 million compared to $65.9 million for the first nine months of 2007, a decrease of $8.1 million or 12.3%. The provision for loan losses was $37.9 million for the nine months ended September 30, 2008 compared to $10.9 million for the same period in 2007. Net loan charge-offs were $35.8 million for the first nine months of 2008 compared to $10.9 million for the same period in 2007. The increase in the loan loss provision and the related net loan charge-offs in 2008 was primarily due to worsening credit conditions at Vision Bank.

As a result of the $55.0 million goodwill impairment charge, Park had a net loss of $38.4 million and a diluted net loss per share of $2.75 for the three months ended September 30, 2008 compared to net income of $21.3 million and diluted earnings per share of $1.50 for the third quarter of 2007. Vision Bank had a net loss of $61.7 million for the three months ended September 30, 2008 compared to net income of $176,000 for the third quarter of 2007.

Excluding the $55.0 million goodwill impairment charge, net income for the three months ended September 30, 2008 was $16.6 million compared to $21.3 million for the same period in 2007, a decrease of $4.7 million or 22.2%. The primary reason for the decrease in net income was an increase in the loan loss provision to $15.9 million for the third quarter of 2008 compared to $5.8 million for the third quarter of 2007. Net loan charge-offs were $12.8 million for the three months ended September 30, 2008 and $5.9 million for the same period in 2007. This deterioration in credit quality was largely focused at Vision Bank.

The following tables compare the components of net income for the three and nine month periods ended September 30, 2008 with the components of net income for the three and nine month periods ended September 30, 2007. The summary income statements are for Park, Vision Bank and Park Excluding Vision Bank (“Ohio-based divisions).

Park — Summary Income Statement

		Three Months Ended												Nine Months Ended
		September 30,												September 30,
(In Thousands)		2008				2007				Percent Change				2008				2007				Percent Change
Net Interest Income		$	65,228			$	59,416				9.8	%		$	191,038			$	174,724				9.3	%
Provision for Loan Losses			15,906				5,793				174.6	%			37,869				10,879				248.1	%
Other Income			17,088				19,060				<10.3%>				56,670				53,696				5.5	%
Gain on Sale of Securities			—				—				—				896				—				—
Goodwill Impairment Charge			54,986				—				—				54,986				—				—
Other Expense			44,493				42,817				3.9	%			132,203				124,606				6.1	%
Income (Loss) Before Taxes			<$33,069			$	29,866				<210.7%>			$	23,546			$	92,935				<74.7%>
Income Taxes			5,343				8,562				<37.6%>				20,789				27,058				<23.2%>
Net Income (Loss)			<$38,412>			$	21,304				<280.3%>			$	2,757			$	65,877				<95.8%>