Park National Corp. Annual Report 2007

Plain-text annual report

Park National Corporation Board of Directors Back Row: William A. Phillips - Chairman, Century National Bank; F.W. Engleﬁeld IV - President, Engleﬁeld, Inc.; Nicholas L. Berning - Owner, Berning Financial Consulting; Rick R. Taylor - President, Jay Industries, Inc. Middle Row: David L. Trautman - President; John J. O’Neill - Chairman, Southgate Corporation; Maureen Buchwald - Owner, Glen Hill Orchards, LLC; James J. Cullers - Sole Proprietor, Mediation and Arbitration Services; C. Daniel DeLawder - Chairman Front Row: Harry O. Egger - Vice Chairman; J. Gilbert Reese - Retired, Reese, Pyle, Drake & Meyer, P.L.L.; Lee Zazworsky - President, Mid State Systems, Inc.; William T. McConnell - Chairman of the Executive Committee Executive Oﬃcers C. Daniel DeLawder Chairman David L. Trautman President/Secretary William T. McConnell Chairman of the Executive Committee John W. Kozak Chief Financial Oﬃcer Harry O. Egger Vice Chairman www.parknationalcorp.com 5 Santa RosaOkaloosaWaltonBayGulfEscambiaFloridaScope Aircraft FinanceGuardian Finance CompanyLeonConsolidated Computer Center and Park Title are headquartered in Newark, Ohio.AlabamaMobileBaldwinFultonWilliamsLucasHenryDefianceWoodOttawaSanduskySenecaHancockPutnamPauldingVan WertHardinAllenAuglaizeMercerWyandotCrawfordRichlandMarionMorrowKnoxDelawareLickingFranklinUnionLoganShelbyDarkeChampaignMiamiClarkGreeneMontgomeryPreblePickawayFayetteButlerRossPikeHighlandClintonWarrenHamiltonClermontBrownAdamsSciotoLawrenceGalliaJacksonMeigsVintonAthensHockingFairfieldPerryMuskingumMorganWashingtonMonroeBelmontGuernseyNobleCoshoctonHolmesHarrisonTuscarawasCarrollJeffersonErieHuronLorainMedinaAshlandWayneCuyahogaSummitStarkColumbianaMahoningPortageTrumbullAshtabulaGeaugaLakeCentury National BankCitizens National BankFairfield National BankFarmers BankFirst-Knox National BankPark National BankPark National Bank Southwest Ohio & Northern KentuckyRichland BankSecond National BankSecurity National BankUnited BankUnity National BankVision Bank AlabamaVision Bank Florida MadisonKentonCampbellKentuckyBooneSSGGGGGGGGCENTURY NATIONAL BANK Century National Bank Board of Directors Michael L. Bennett The Longaberger Company Ronald A. Bucci Buckeye Stoneware Ward D. Coffman, III Coffman Law Ofﬁces Robert D. Goodrich, II Wendy’s Management Group, Inc. Patrick L. Hennessey P & D Transportation, Inc. Robert D. Kessler Kessler Sign Company Henry C. Littick, II Southeastern Ohio Broadcasting Systems, Inc. Thomas M. Lyall President Timothy S. McLain, CPA McLain, Hill, Rugg and Associates, Inc. Don R. Parkhill Jacobs, Vanaman Agency, Inc. William A. Phillips Chairman James L. Shipley Miller-Lynn Insurance Service and Smith-Brogan Insurance Agency Oﬃce Locations Main Oﬃce - Zanesville 14 South Fifth Street Athens* 898 East State Street Coshocton* 100 Downtowner Plaza Coshocton - Main Street* 639 Main Street Dresden* 91 West Dave Longaberger Avenue Logan* 61 North Market Street Newcomerstown* 220 East State Street Oﬀ-Site ATM Locations New Concord* 1 West Main Street New Lexington* 206 North Main Street Zanesville - East* 1705 East Pike Thomas L. Sieber Retired Hospital Administrator Dr. Anne C. Steele Muskingum College Dr. Robert J. Thompson Neurological Associates of Southeastern Ohio, Inc. Zanesville - Kroger* 3387 Maple Avenue Zanesville - Lending Center* 505 Market Street Zanesville - North* 1201 Brandywine Boulevard Zanesville - North Military* 990 Military Road Zanesville - South* 2127 Maysville Avenue Zanesville - South Maysville* 2810 Maysville Pike *Automated Teller Machine Frazeysburg - The Longaberger Homestead 5563 West Raiders Road Zanesville - Genesis HealthCare System - Bethesda Campus 2951 Maple Avenue Zanesville - Genesis HealthCare System - Good Samaritan Campus 800 Forest Avenue www.centurynationalbank.com 7 The Citizens National Bank Board of Directors Rick Cole Colepak, Inc. Jeffrey A. Darding President William C. Fralick Security National Bank Dr. Robert Head Urbana University Robert McConnell Desmond-Stephan Mfg. Co. Scott Michael Michael Farms, Inc. Ralph Smucker Smucker Insurance Agency James R. Wilson Chairman and Retired President Oﬃce Locations Main Oﬃce - Urbana* 1 Monument Square Mechanicsburg* 2 South Main Street North Lewisburg* 8 West Maple Street Plain City 105 West Main Street Urbana - Scioto Street* 828 Scioto Street *Automated Teller Machine Oﬀ-Site ATM Locations Plain City - Shell 440 South Jeﬀerson Street Urbana - Champaign County Community Center 1512 South US Highway 68 8 www.citnatbk.com FAIRFIELD NATIONAL BANK DIVISION OF THE PARK NATIONAL BANK Advisory Board Fairﬁeld National Division Charles P. Bird, Ph.D. Ohio University Leonard F. Gorsuch Fairﬁeld Homes, Inc. Edward J. Gurile Senior Vice President Eleanor V. Hood The Lancaster Festival Jonathan W. Nusbaum, M.D. Fairﬁeld Medical Center S. Alan Risch Risch Drug Stores, Inc. Mina H. Ubbing Fairﬁeld Medical Center Paul Van Camp P.V.C. Limited Stephen G. Wells President Oﬃce Locations Main Oﬃce - Lancaster 143 West Main Street Main Oﬃce Drive-Thru* 150 West Wheeling Street Baltimore* 1301 West Market Street Lancaster - East Main Street - Kroger* 1141 East Main Street Pickerington - Central - Kroger* 1045 Hill Road North Lancaster - Meĳer* 2900 Columbus-Lancaster Road Pickerington - North - Kroger* 7833 Refugee Road NW Lancaster - Memorial Drive* 1280 North Memorial Drive Reynoldsburg - Slate Ridge* 1988 Baltimore-Reynoldsburg Road (Route 256) Canal Winchester - Kroger* 6095 Gender Road Lancaster - Memorial Drive - Kroger* 1735 North Memorial Drive *Automated Teller Machine Lancaster - East Main* 1001 East Main Street Lancaster - West Fair* 1001 West Fair Avenue Oﬀ-Site ATM Locations Lancaster - Fairﬁeld Medical Center (2) 401 North Ewing Street Lancaster - River View Surgery Center 2405 North Columbus Street www.fairﬁeldnationalbank.com 9 Farmers and Savings Division Advisory Board Patricia A. Byerly Byerly Lindsey Funeral Home Timothy R. Cowen Cowen Truck Line, Inc. James S. Lingenfelter President Roger E. Stitzlein Loudonville Farmers Equity Chris D. Tuttle Amish Oak Furniture Company, Inc. Gordon E. Yance First-Knox National Bank Oﬃce Locations Main Oﬃce - Loudonville* 120 North Water Street Ashland* 1161 East Main Street Perrysville* 112 North Bridge Street *Automated Teller Machine Oﬀ-Site ATM Locations Ashland 1161 East Main Street Loudonville - Stake’s Short Stop 3052 State Route 3 10 www.farmersandsavings.com The First-Knox National Bank Board of Directors Maureen Buchwald Glen Hill Orchards, LLC James J. Cullers Mediation and Arbitration Services Ronald J. Hawk Danville Feed and Supply, Inc. William B. Levering Levering Management, Inc. Noel C. Parrish NOE, Inc. During 2007 the Ohio banking industry lost a long-time advocate. Carlos E. Watkins exempliﬁed exceptional character and a desire to make a difference during his 20 year afﬁliation with The First-Knox National Bank as President and Director. He was a good friend and a great banker who will be missed by all. Mount Vernon - Coshocton Avenue* 810 Coshocton Avenue Operations Center 105 West Vine Street *Automated Teller Machine Mark R. Ramser Ohio Cumberland Gas Co. R. Daniel Snyder Retired Director Snyder Funeral Homes, Inc. Roger E. Stitzlein Loudonville Farmers Equity Gordy E. Yance President Oﬃce Locations Main Oﬃce - Mount Vernon One South Main Street Millersburg* 225 North Clay Street Bellville* 154 Main Street Millersburg - Wal-Mart* 1640 South Washington Street Centerburg* 35 West Main Street, Drawer F Mount Gilead 17 West High Street Danville* Public Square Mount Gilead - Edison* 504 West High Street Fredericktown* 137 North Main Street Mount Vernon - Blackjack Road* 8641 Blackjack Road Oﬀ-Site ATM Locations Fredericktown - Hot Rod’s 10103 Mount Gilead Road Gambier - Kenyon College Bookstore 106 Gaskin Avenue Howard - Apple Valley 21973 Coshocton Road Mount Gilead - ATD Enterprises Marathon 6154 State Route 95 Mount Vernon - Knox Community Hospital 1330 Coshocton Road Mount Gilead - Morrow County Hospital 651 West Marion Street Mount Vernon - Mount Vernon Nazarene University 800 Martinsburg Road Mount Vernon - Colonial City Lanes 110 Mount Vernon Avenue Mount Vernon 11 West Vine Street www.ﬁrstknox.com 11 PARK NATIONAL BANK The Park National Bank Board of Directors Donna M. Alvarado AGUILA International C. Daniel DeLawder Chairman F.W. Engleﬁeld IV Engleﬁeld, Inc. John W. Kozak Chief Financial Ofﬁcer William T. McConnell Chairman of the Executive Committee Dr. Charles Noble, Sr. Shiloh Missionary Baptist Church John J. O’Neill Southgate Corporation Robert E. O’Neill Southgate Corporation J. Gilbert Reese Retired Reese, Pyle, Drake & Meyer, P.L.L. David L. Trautman President Lee Zazworsky Mid State Systems, Inc. Oﬃce Locations Main Oﬃce - Newark* 50 North Third Street Johnstown* 60 West Coshocton Street Pataskala - Kroger** 350 East Broad Street Columbus 140 East Town Street, Suite 1010 Kirkersville 177 East Main Street Reynoldsburg - Kroger* 8460 Main Street Gahanna - Kroger* 1365 Stoneridge Drive Granville* 119 East Broadway Heath - Southgate* 567 Hebron Road Heath - 30th Street* 800 South 30th Street Hebron* 103 East Main Street Newark - Deo Drive - Kroger* 245 Deo Drive Utica* 33 South Main Street Newark - Dugway* 1495 Granville Road Newark - Eastland* 1008 East Main Street Newark - McMillen* 1633 West Main Street Newark - 21st Street* 990 North 21st Street Worthington* 7140 North High Street Operations Center 21 South First Street *Automated Teller Machine **Automated Teller Machine Drive-up and Inside Oﬀ-Site ATM Locations Granville - Denison University Slayter Hall Newark - Licking Memorial Hospital 1320 West Main Street Reynoldsburg - Kroger 6962 East Main Street Hebron - Kroger 600 East Main Street Newark - OSU-N/COTC 1179 University Drive 12 www.parknationalbank.com Park National Bank of Southwest Ohio & Northern Kentucky Division Advisory Board Nicholas L. Berning Berning Financial Consulting Thomas J. Button The Park National Bank K. Douglas Compton President Daniel L. Earley Chairman Retired President Owensville* 5100 State Route 132 West Chester* 8366 Princeton-Glendale Road *Automated Teller Machine Oﬃce Locations Main Oﬃce - Milford 400 TechneCenter Drive Amelia - Main Street* 5 West Main Street Amelia - Ohio Pike* 1187 Ohio Pike Anderson* 1075 Nimitzview Drive Dayton 7887 Washington Village Drive, Suite 310 Richard W. Holmes Retired Partner PricewaterhouseCoopers LLP Donald J. Zimmerman Retired Ohio National Financial Services Eastgate - bigg’s* 4450 Eastgate Boulevard Eastgate Mall* 4609 Eastgate Boulevard Florence 600 Meĳer Drive, Suite 303 Milford* 25 Main Street New Richmond 100 Western Avenue Oﬀ-Site ATM Locations Batavia - UC Clermont College Auditorium 4200 College Drive New Richmond - Berry Pharmacy 1041 Old US 52 www.bankwithpark.com 13 The Richland Trust Company Board of Directors Ronald L. Adams Retired DAI Emulsions, Inc. Mark Breitinger Milark Industries Michael L. Chambers J & B Acoustical Benjamin A. Goldman Retired Superior Building Services David J. Gooch President Timothy J. Lehman The Park National Bank Grant E. Milliron Milliron Industries Shirley Monica S.S.M. Inc. Linda H. Smith Ashwood LLC Rick R. Taylor Jay Industries, Inc. Oﬃce Locations Main Oﬃce - Mansﬁeld* 3 North Main Street Butler* 85 Main Street Lexington* 276 East Main Street Mansﬁeld - Ashland Road* 797 Ashland Road Mansﬁeld - Cook Road* 460 West Cook Road Mansﬁeld - Lexington Avenue - Kroger* 1500 Lexington Avenue Mansﬁeld - Madison - Kroger* 1060 Ashland Road Mansﬁeld - West Park* 1255 Park Avenue West Ontario* 325 North Lexington-Springmill Road Mansﬁeld - Marion Avenue* 50 Marion Avenue Shelby - Mansﬁeld Avenue* 155 Mansﬁeld Avenue Mansﬁeld - Springmill* 889 North Trimble Road *Automated Teller Machine Oﬀ-Site ATM Locations Mansﬁeld - Kroger 1240 Park Avenue West Mansﬁeld - McDonald’s Restaurant State Route 13 and 71 25 West Hanley Road 14 www.richlandbank.com Second National Bank Board of Directors Tyeis Baker-Baumann Rebsco, Inc. Fred C. Brumbaugh Retired Nelson Tree Service Neil J. Diller Cooper Farms, Inc. Jeff Hittle Hittle Pontiac-Cadillac- GMC Dealership Wesley M. Jetter Ft. Recovery Industries Marvin J. Stammen President Greenville - Brethren Retirement Community 750 Chestnut Street Greenville - North* 1302 Wagner Avenue Greenville - Wal-Mart Supercenter Store* 1501 Wagner Avenue Versailles* 101 West Main Street Greenville - Third and Walnut* East Third and Walnut *Automated Teller Machine Oﬃce Locations Main Oﬃce - Greenville 499 South Broadway Arcanum - Downtown 1 West George Street Arcanum - North* 603 North Main Street Ft. Recovery* 117 North Wayne Street Oﬀ-Site ATM Locations Greenville - Whirlpool Corporation 1701 Kitchenaid Way www.secondnational.com 15 Security National Bank Board of Directors R. Andrew Bell Consolidated Insurance Company Harry O. Egger Chairman and Retired President Larry D. Ewald Retired - Process Equipment Company William C. Fralick President Larry E. Kaffenbarger Kaffenbarger Truck Equipment Company Thomas P. Loftis Midland Properties, Inc. Dr. Karen E. Raﬁnski Clark State Community College Chester L. Walthall Heat-Treating, Inc. Robert A. Warren Hauck Bros., Inc. Oﬃce Locations Main Oﬃce - Springﬁeld* 40 South Limestone Street New Carlisle* 201 North Main Street Springﬁeld - Northridge* 1600 Moreﬁeld Road Enon* 3680 Marion Drive New Carlisle - Park Layne* 2035 South Dayton-Lakeview Road Springﬁeld - Western* 920 West Main Street Jamestown* 82 West Washington Street South Charleston* 102 South Chillicothe Street Xenia Downtown* 161 East Main Street Jamestown - Shawnee* 3566 Jasper Road Springﬁeld - Derr Road - Kroger* 2989 Derr Road Xenia Plaza* 82 North Allison Avenue Jeﬀersonville* 2 South Main Street Medway 130 West Main Street Springﬁeld - East Main* 2730 East Main Street Springﬁeld - North Limestone* 1756 North Limestone Street *Automated Teller Machine Oﬀ-Site ATM Locations Springﬁeld 2051 North Bechtle Avenue Springﬁeld - Mercy Medical Center 1343 North Fountain Boulevard Springﬁeld - Clark County Fairgrounds - Champions Center 4122 Layboune Road Springﬁeld - Wittenberg University - Student Center 738 Woodlawn Avenue Springﬁeld - Wittenberg University - HPER Center 250 Bill Edwards Drive Springﬁeld - Young’s Jersey Dairy 6880 Springﬁeld-Xenia Road 16 www.securitynationalbank.com United Bank, N.A. Board of Directors W. J. Blicke Retired United Bank, N.A. James J. Kennedy Ohio Mutual Insurance Group Michele McElligott Pigman, Brown, McElligott Ltd. Kenneth A. Parr, Jr. Parr Insurance Agency, Inc. Douglas M. Schilling Schilling Graphics, Inc. Donald R. Stone President Douglas Wilson Rindfuss Realty Oﬃce Locations Main Oﬃce - Bucyrus* 401 South Sandusky Avenue Galion* 8 Public Square Caledonia* 140 East Marion Street Crestline* 245 North Seltzer Street Marion 685 Delaware Avenue Prospect* 105 North Main Street Waldo 133 North Marion Street Marion - Wal-Mart Super Center* 1546 Marion-Mt. Gilead Road *Automated Teller Machine www.unitedbankna.com 17 Unity National Division Advisory Board Dr. Richard N. Adams Self-employed Consultant Tamara Baird-Ganley Baird Funeral Home Michael C. Bardo Hartzell Industries, Inc. John A. Brown President Thomas E. Dysinger Dysinger, Stewart & Stewart, LLC William C. Fralick Security National Bank Dr. Douglas D. Hulme Oakview Veterinary Hospital Timothy Johnston Self-employed Consultant W. Samuel Robinson Murray, Wells, Wendeln & Robinson CPAs, Inc. Oﬃce Locations Main Oﬃce - Piqua* 215 North Wayne Street Piqua - Wal-Mart* 1300 East Ash Street Troy - Wal-Mart* 1801 West Main Street Administrative Oﬃce - Piqua 212 North Main Street Tipp City* 1176 West Main Street *Automated Teller Machine Piqua - Sunset* 1603 Covington Avenue Troy 1314 West Main Street Oﬀ-Site ATM Locations Troy - Upper Valley Medical Center 3130 North Dixie Highway 18 https://unitynationalbk.com Vision Bank - Alabama Advisory Board Gordon Barnhill Barnhill Land & Real Estate Barney Blanchard Real Estate Developer Andrew Braswell Vision Bank C. Daniel DeLawder Park National Corporation John B. Foley, IV Cunningham, Foley & Barnes Joey W. Ginn Chairman Anthony Kaiser Realty Executives - Gulf Shores Henry N. Lyda, III Retired University of Alabama Robert S. McKean Retired Vision Bank Christopher S. McManus D.M.D. Baldwin County Endodontics, PC Katherine A. Monroe A G Edwards James R. Owen, Jr. Gulf Shores Title Co., Inc. Oﬃce Locations Main Oﬃce - Gulf Shores* 2201 West First Street Fairhope* 218 North Greeno Road Daphne* 28720 US Highway 98 Elberta* 24989 State Street Foley* 501 South McKenzie Street Orange Beach* 25051 Canal Road Rick Phillips Ono Professional Partners Daniel Scarbrough, MD Community Health Systems Point Clear* 17008 Scenic Highway 98 Robertsdale 22245-3A Highway 59 *Automated Teller Machine Oﬀ-Site ATM Locations Elberta - Wolf Bay Lodge 9050 Pinewood Avenue Elberta - Ya’ll Stop & Go 25931 County Road 32 Gulf Shores - McDonald’s 2000 Gulf Shores Parkway Point Clear - Grand Hotel 1 Grand Boulevard Orange Beach - Lester’s 24821 Canal Road Foley - McDonald’s 1010 South McKenzie Street Orange Beach - Sam’s 27123 Canal Road www.visionbank.net 19 Vision Bank - Florida Board of Directors Dr. James D. Campbell, Sr. James D. Campbell, D.D.S., M.S. William A. Cathey Cathey’s Hardware C. Daniel DeLawder Park National Corporation Joey W. Ginn Chairman Charles S. Isler, III Isler, Sombathy & Sombathy, P A, Attorneys at law Patrick Koehnemann Koehnemann Construction, Inc. Lana Jane Lewis-Brent Paul Brent Designer, Inc. Robert S. McKean Retired Vision Bank Jimmy Patronis, Jr. Captain Andrew’s Restaurant Jack B. Prescott Retired Smurﬁtt-Stone Container Ralph Rish Preble-Rish, Inc. John S. Robbins Vision Bank Oﬃce Locations Jerry F. Sowell, Jr., CPA Segers Sowell Stewart & Johnson, PA Dr. James Strohmenger Bay Radiology Associates Kim Styles-DiBacco Styles Designs Main Oﬃce - Panama City* 2200 Stanford Road Panama City Beach - Beckrich* 559 Beckrich Road Destin* 1021 Highway 98 East, Suite A Port St Joe* 529 Cecil G Costin, Sr. Boulevard Navarre 7552 Navarre Parkway, Unit 56 Port St Joe Beach* 8134 West Highway 98 Tallahassee 1414 North Piedmont Way, Suite 100 Wewahitchka* 125 North Highway 71 *Automated Teller Machine Panama City Beach* 16901 Panama City Beach Parkway Santa Rosa Beach* 1598 South County Highway 393, Suite 106 Oﬀ-Site ATM Locations Panama City - Panama City International Airport 3173 Airport Road 20 www.visionbank.net T A B L E O F C O N T E N T S To Our Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Stockholders’ Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Park National Corporation Directors & Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Regional Map . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Directors: Century National Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 The Citizens National Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Fairfield National Division Advisory Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Farmers and Savings Division Advisory Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 The First-Knox National Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 The Park National Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Park National Bank of Southwest Ohio & Northern Kentucky Division Advisory Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 The Richland Trust Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Second National Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Security National Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 United Bank, N.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Unity National Division Advisory Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Vision Bank - Alabama . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Vision Bank - Florida. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Financial Review. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Management’s Report on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Financial Statements: Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Consolidated Statements of Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Consolidated Statements of Changes in Stockholders’ Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 1 T O O U R S T O C K H O L D E R S Net income in 2007 totaled $22.7 million, a decrease of 75.9% from 2006 net income of $94.1 million. Diluted earnings per share declined from $6.74 in 2006 to $1.60 in 2007, a reduction of 76.3%. As announced in January, 2008, we wrote down the value of goodwill on our balance sheet at December 31, 2007 by $54 million. This was charged against net income and reduced the stated capital of Park by the identical amount. Excluding the goodwill impairment charge, net income would have been $76.7 million and diluted earnings per share would have been $5.40. We could describe at some length the accounting for bank acquisitions, how our regulatory net worth and the “real” net income from continuing operations or some other commonly used refrain were not affected by this charge. And we could provide a complete ex- planation about how regulators and informed investors alike exclude goodwill as a tangible asset, and how, from their perspective, the write down was a non-event in terms of valuing the worth of our company. But we will not be tempted to take such a path. The simple fact is that the record will always show that our net income in 2007 was $22.7 million. It is not a record that instills pride in either of us, our associates or our board of directors. What occurred in 2007 was unprecedented, at least for our company. We formally concluded the acquisition of Vision Bancshares, Inc. (“Vision”) in the first quarter of last year. We subsequently wrote down the value of the purchase by $54 million by the end of the fourth quarter of last year. The intent to acquire Vision was announced in September, 2006. Evaluated within the context of bank mergers and acquisitions at the time, we believed the terms of the transaction were reasonable compared to merger and acquisition transactions of a similar nature. By late 2007 general economic conditions, and especially single family real estate and the related demand for homes, had deteriorated significantly. As a result of these changes, Vision began experiencing credit problems during the third quarter. These credit problems escalated during the fourth quarter and caused us to conclude that the goodwill of $109 million recorded at the time of the acquisition of Vision was possibly impaired. A goodwill impairment analysis was completed and the conclusion was that—just 15 months following the original announcement—the goodwill associated with the purchase was overstated by the amount we subsequently recognized as an impairment charge. We study general economic conditions in the normal course of our business and attempt to employ strategies that help us succeed in various environments. For example, we understood and accepted the economic risks associated with doing business in the Vision markets. But we did not anticipate the severity and abruptness of the changes that occurred after Vision joined us. 2 In addition to the impairment charge of $54 million, Vision lost approximately $6.6 million from normal operations which included a provision for loan losses of $19.4 million. Vision’s nonperforming loans increased to $63.5 million at year-end 2007, 9.9% of outstanding loans. The ultimate loss to be realized on Vision’s loan portfolio is unknown. However, we recognized $8.6 million in net loan charge-offs during 2007 and increased the allowance for loan losses by $10.8 million during 2007 to $20.2 million, 3.15% of year-end loan balances. Our intent was to recognize all known losses at December 31, 2007 and to reserve for all probable losses in the loan portfolio. We want to be clear that these losses are not the fault of Vision associates. Changes in economic conditions were largely responsible for the losses and the extraordinary increase in nonperforming loans. The impairment charge is history. There is nothing we can do about the past but learn from the experience and marshal our resources to help minimize future losses. As we enter 2008, questions about the economy continue. We cannot control the economy. But we can control our expenses, our efforts to compete relentlessly for new customers and our determination to serve existing clients and customers better. We considered expanding this letter by describing the many initiatives we have under way. We are proud of the efforts of our associates in developing and executing on several concurrent agendas. However, we concluded it is better to be brief this year and not offer excuses, deny or run the risk of appearing to gloss over the impairment charge that resulted from our purchase of Vision. Our crystal ball is as clouded as anyone’s. We are able to predict the future no better today than we could a year ago. Yet we are very comfortable predicting that we and our associates will do all within our power to return this organization to the high levels of perform- ance that our fellow stockholders expect and deserve. We want to close by assuring you that our newest associates at Vision fit our culture as well as we first anticipated. We did not err in such a critical assessment. They are a welcome addition to the fabric of our company, and we remain optimistic about the future. As always, we appreciate your support and referral of prospective customers and clients. C. Daniel DeLawder Chairman David L. Trautman President F I N A N C I A L H I G H L I G H T S (Dollars in thousands, except per share data) 2007 2006 $ 401,824 $ 334,559 Earnings: Total interest income Total interest expense Net interest income Net income Net income before impairment charge (a) Per Share: Net income – basic Net income – diluted Net income per share before impairment charge – diluted (a) Cash dividends declared Book value (end of period) At Year-End: Total assets Deposits Loans Investment securities Total borrowings Stockholders’ equity Ratios: Return on average equity Return on average equity before impairment charge (a) Return on average assets Return on average assets before impairment charge (a) Efficiency ratio 167,147 234,677 22,707 76,742 1.60 1.60 5.40 3.73 41.54 $6,501,102 4,439,239 4,224,134 1,703,103 1,389,727 580,012 3.67% 12.40% 0.37% 1.24% 72.74% (a) Net income for the year has been adjusted for the impairment charge to goodwill. Net income before impairment charge equals net income for the year plus the impairment charge to goodwill of $54,035. Twelve Months Ended December 31 (In thousands, except per share data) Reconciliation of net income to net income before impairment charge: Net income Plus goodwill impairment charge Net income before impairment charge Reconciliation of net income per share – diluted to net income per share – diluted before impairment charge: Net income per share – diluted Plus impairment charge to goodwill per share – diluted Net income per share – diluted before impairment charge 2007 $22,707 54,035 $76,742 $1.60 3.80 $5.40 121,315 213,244 94,091 94,091 6.75 6.74 6.74 3.69 40.98 $5,470,876 3,825,534 3,480,702 1,513,498 979,913 570,439 17.26% 17.26% 1.75% 1.75% 50.35% 2006 $94,091 — $94,091 $6.74 — $6.74 Percent Change 20.11% 37.78% 10.05% –75.87% –18.44% –76.30% –76.26% –19.88% 1.08% 1.37% 18.83% 16.04% 21.36% 12.53% 41.82% 1.68% — — — — — 3 S T O C K H O L D E R S ’ I N F O R M A T I O N STOCK LISTING: AMEX Symbol – PRK CUSIP #700658107 GENERAL STOCKHOLDER INQUIRIES: Park National Corporation David L. Trautman, Secretary 50 North Third Street Post Office Box 3500 Newark, Ohio 43058-3500 740/349-3927 DIVIDEND REINVESTMENT PLAN: The Corporation offers a plan whereby participating stockholders can purchase additional shares of Park National Corporation common stock through automatic reinvestment of their regular quarterly cash dividends. All commissions and fees connected with the purchase and safekeeping of the shares are paid by the Corporation. Details of the plan and an enrollment card can be obtained by contacting the Corporation’s Stock Transfer Agent and Registrar as indicated below. DIRECT DEPOSIT OF DIVIDENDS: The Corporation’s stockholders may have their dividend payments directly deposited into their checking, savings or money market account. This direct deposit of dividends is free for all stockholders. If you have any questions or need an enrollment form, please contact the Corporation’s Stock Transfer Agent and Registrar indicated below. STOCK TRANSFER AGENT AND REGISTRAR: First-Knox National Bank Post Office Box 1270 One South Main Street Mount Vernon, Ohio 43050-1270 800/837-5266 Ext. 5208 FORM 10-K: All forms filed by the Corporation with the SEC (including our Form 10-K for 2007) are available on our website by clicking on the Documents/SEC Filings section of the Investor Relations page. These forms may also be obtained, without charge, by contacting the Secretary as indicated above. INTERNET ADDRESS: www.parknationalcorp.com E-MAIL: David L. Trautman dtrautman@parknationalbank.com 4 F I N A N C I A L R E V I E W 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 under- standing 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, Park’s ability to success- fully integrate acquisitions into Park’s operations, Park’s ability to achieve the anticipated cost savings and revenue synergies from acquisitions, Park’s ability to convert its Ohio-based community banking subsidiaries and divisions to one operating system and combine their charters, changes in general economic and financial market conditions, deterioration in credit conditions in the markets in which Park’s subsidiary banks operate, changes in interest rates, changes in the competitive environment, 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, demand for loans in the respective market areas served by Park and its sub- sidiaries, and other risk factors relating to our industry as detailed from time to time in Park’s reports filed with the Securities and Exchange Commission (“SEC”) including those described in “Item 1A. Risk Factors” of Park’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date hereof. 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. ACQUISITION OF VISION BANCSHARES, INC. On March 9, 2007, Park acquired all of the stock and outstanding stock options of Vision Bancshares, Inc. (“Vision”) for $87.8 million in cash and 792,937 shares of Park common stock valued at $83.3 million or $105.00 per share. The goodwill recognized was $109.0 million. The fair value of the acquired assets of Vision was $686.5 million and the fair value of the liabilities assumed was $624.4 million as of March 9, 2007. At the time of the acquisition, Vision operated two bank subsidiaries (both named Vision Bank) which became bank subsidiaries of Park on March 9, 2007. On July 20, 2007, the bank operations of the two Vision Banks were consolidated under a single charter through the merger of the Vision Bank headquartered in Gulf Shores, Alabama with and into the Vision Bank headquartered in Panama City, Florida. Vision Bank operates under a Florida banking charter and has 18 branch locations in Baldwin County, Alabama and in the Florida panhandle. The markets that Vision Bank operates in are expected to grow faster than many of the non-metro markets in which Park’s subsidiary banks operate in Ohio. Management expects that the acquisition of Vision will improve the future growth rate for Park’s loans and deposits. However, the acquisition of Vision had a significant negative impact on Park’s net income in 2007. Please see the next section “Overview” for a discussion of the net loss at Vision Bank in 2007. OVERVIEW Net income for 2007 decreased by $71.4 million or 75.9% to $22.7 million, compared to net income of $94.1 million for 2006. The primary reason for the large decrease in net income was the net loss of $60.7 million at Vision Bank from the date of the acquisition (March 9, 2007) through December 31, 2007. Vision Bank recognized a goodwill impairment charge of $54.0 million during the fourth quarter of 2007. Diluted earnings per share decreased by 76.3% to $1.60 for 2007 compared to $6.74 for 2006. Excluding the goodwill impair- ment charge of $54.0 million or $3.80 per diluted share, net income was $76.7 million in 2007 and diluted earnings per share were $5.40 in 2007, a decrease of 18.4% in net income and 19.9% in diluted earnings per share compared to 2006. The following tables show the components of net income for 2007 by quarter for Park, Vision Bank and Park excluding Vision Bank. Park – Summary Income Statement (For the year ended December 31, 2007) (In thousands) March 31 Net interest income $54,898 Provision for loan losses 2,205 Other income Other expense Income (loss) before taxes Income taxes 16,174 39,309 29,558 8,495 June 30 $60,410 2,881 18,462 42,480 33,511 10,001 Sept. 30 $59,416 5,793 19,060 42,817 29,866 8,562 Dec. 31 Total $ 59,953 $234,677 18,597 17,944 99,558 (40,258) 2,912 29,476 71,640 224,164 52,677 29,970 Net income (loss) $21,063 $23,510 $21,304 $(43,170) $ 22,707 Vision Bank – Summary Income Statement (For the period March 9, 2007 through December 31, 2007) (In thousands) March 31 Net interest income $2,075 Provision for loan losses Other income Other expense Income (loss) before taxes Income taxes — 266 1,405 936 356 June 30 $8,260 85 990 5,707 3,458 1,297 Sept. 30 Dec. 31 Total $7,744 $ 5,677 $ 23,756 2,420 1,121 6,189 256 80 16,920 1,088 59,279 19,425 3,465 72,580 (69,434) (64,784) (5,836) (4,103) Net income (loss) $ 580 $2,161 $ 176 $(63,598) $(60,681) Vision Bank began experiencing credit problems during the third quarter. Net loan charge-offs were $2.2 million during the third quarter and nonperforming loans increased by $19.8 million to $26.3 million. During the fourth quarter, net loan charge-offs were $6.4 million and nonperforming loans increased by $37.2 million to $63.5 million or 9.9% of year-end loan balances. From the date of acquisition (March 9, 2007) through December 31, 2007, net loan charge-offs for Vision Bank were $8.6 million or an annualized 1.71% of average loans. As a result of the credit problems at Vision Bank, Park’s manage- ment determined during the fourth quarter that the goodwill of $109.0 million recorded at the time of acquisition was possibly impaired. A goodwill impair- ment analysis was completed and the conclusion was reached that a goodwill impairment charge of $54.0 million be recorded at Vision Bank at year-end 2007 to reduce the goodwill balance to $55.0 million. Park Excluding Vision Bank – Summary Income Statement (For the year ended December 31, 2007) (In thousands) March 31 Net interest income $52,823 Provision for loan losses 2,205 Other income Other expense 15,908 37,904 Income before taxes 28,622 Income taxes Net income 8,139 June 30 $52,150 2,796 17,472 36,773 30,053 8,704 Sept. 30 $51,672 3,373 17,939 36,628 29,610 8,482 Dec. 31 Total $54,276 $210,921 1,677 16,856 40,279 29,176 8,748 10,051 68,175 151,584 117,461 34,073 $20,483 $21,349 $21,128 $20,428 $ 83,388 21 F I N A N C I A L R E V I E W The following table compares the summary income statement for Park excluding Vision Bank for 2007 with the operating results for Park for 2006. Summary Income Statement (In thousands) Net interest income Provision for loan losses Other income Other expense Income before taxes Income taxes Net income 2007 2006 Change $210,921 $213,244 $ (2,323) 10,051 68,175 151,584 117,461 34,073 3,927 64,762 141,002 133,077 38,986 6,124 3,413 10,582 (15,616) (4,913) $ 83,388 $ 94,091 $(10,703) A year ago, Park’s management projected that for 2007, net interest income excluding Vision Bank would be in a range of $217.5 million to $219.6 million. The actual result for the year was $210.9 million. However, Park paid $87.8 million in cash for Vision and assumed $15.0 million in debt. The interest expense pertaining to these items was $4.5 million in 2007. In addition, primarily throughout the last three quarters of 2007, Park purchased 760,531 shares of treasury stock during 2007 at a total cost of approximately $65.6 million. The interest expense associated with the treasury stock purchases was approximately $1.8 million. As a result, net interest income for Park excluding Vision Bank and the purchase of treasury stock would have been approximately $217.2 million for 2007, which is just below the lower end of the projected range for 2007. The provision for loan losses for Park excluding Vision Bank increased by $6.1 million in 2007 to $10.1 million. Net loan charge-offs were $13.6 million or .39% of average loans for Park excluding Vision Bank. By comparison, net loan charge-offs were $3.9 million or .12% of average loans in 2006. Park’s management projected a year ago that total other income for 2007 would be $68.3 million. The actual total other income for the year excluding Vision Bank was $68.2 million, slightly below the projection. During the fourth quarter of 2007, Park accrued $887,000 of expense pertain- ing to Visa members’ indemnification of estimated future litigation settlements. Visa has announced plans for an initial public offering and to fund litigation settlements from an escrow account to be funded by the initial public offering. When and if that occurs in 2008, management would expect to reverse the $887,000 litigation reserve. Park’s management projected a year ago that total other expense would be $150 million for 2007. The actual total other expense was $151.6 million for Park, excluding Vision Bank. However, $887,000 of the difference is explained by the Visa litigation reserve established during the fourth quarter. Net income for 2006 decreased by $1.1 million or 1.2% to $94.1 million, compared to net income of $95.2 million for 2005. Diluted earnings per share increased by 1.5% to $6.74 for 2006 compared to $6.64 for 2005. For 2006 compared to 2005, income before income taxes was negatively impacted by a $7.3 million reduction in net interest income and a $1.6 million increase in total operating expenses. Income before income taxes benefited from a decrease in the loan loss provision of $1.5 million and an increase in total other income of $5.1 million. The net impact to income before income taxes from the reduction in net interest income, the reduction in the provision for loan losses, the increase in total other income and the increase in total oper- ating expenses was a decrease of $2.3 million. Income tax expense decreased by $1.2 million, which generated the decrease in net income of $1.1 million in 2006 compared to 2005. Effective the fourth quarter of 2007, the quarterly cash dividend on common shares was increased to $.94 per share. The new annualized cash dividend of $3.76 per share is 1.1% 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 4.7%. The 22 dividend pay out ratio was 232.35% for 2007, 54.65% for 2006 and 54.19% for 2005. Excluding the goodwill impairment charge of $54.0 million, the dividend payout ratio for 2007 was 68.75%. Park’s management expects that the dividend payout ratio for 2008 will be approximately 60% to 62%. OTHER ACQUISITIONS OF FINANCIAL INSTITUTIONS On December 18, 2006, Park acquired Anderson Bank Company (“Anderson”) of Cincinnati, Ohio for $17.7 million in a cash and stock transaction. Park paid the shareholders of Anderson aggregate consideration consisting of $9.052 million and 86,137 common shares of Park valued at $8.665 million. Anderson merged with Park’s subsidiary bank, The Park National Bank (“PNB”), and Anderson’s two offices are being operated as part of the operating division of PNB known as The Park National Bank of Southwest Ohio & Northern Kentucky (“PSW”). The fair value of the acquired assets of Anderson was $69.7 million and the fair value of the liabilities assumed was $62.6 million at December 18, 2006. The goodwill recognized as a result of this acquisition was $10.6 million. On January 3, 2005, Park acquired First Clermont Bank (“First Clermont”) of Milford, Ohio for $52.5 million in an all cash transaction. First Clermont Bank merged with PNB and operated as a separate division of PNB (under the First Clermont name) until June 12, 2006, when First Clermont and three offices of PNB in southwest Ohio were combined to form PSW. 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. The two acquisitions were funded through the working capital of Park and its subsidiary banks. BRANCH PURCHASE AND BRANCH SALE On September 21, 2007, a national bank subsidiary of Park, The First-Knox National Bank of Mount Vernon (“FKNB”) acquired the Millersburg, Ohio banking office (the “Millersburg branch”) of Ohio Legacy Bank, N.A. (“Ohio Legacy”). FKNB acquired substantially all of the loans administered at the Millersburg branch of Ohio Legacy and assumed substantially all of the deposit liabilities relating to the deposit accounts assigned to the Millersburg branch. The fair value of the loans acquired was approximately $38.3 million and the fair value of the deposit liabilities assumed was approximately $23.5 million. FKNB paid a premium of approximately $1.7 million in connection with the purchase of the deposit liabilities. FKNB recognized a loan premium adjustment of $700,000 and a certificate of deposit adjustment of $300,000, resulting in the recording of a core deposit intangible of $2.7 million. No goodwill was recognized as part of this transaction. In addition, FKNB paid $900,000 for the acquisition of the branch office building that Ohio Legacy was leasing from a third party. On February 11, 2005, Century National Bank (“CNB”) sold its Roseville, Ohio branch office. The deposits sold with the Roseville branch office totaled $12.4 million and the loans sold with the branch office totaled $5.3 million. CNB 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. 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 account- ing policies. The allowance for loan losses is calculated with the objective of F I N A N C I A L R E V I E W 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 peri- odic evaluations of the loan portfolio and of current economic conditions. However, this evaluation is inherently subjective as it requires material esti- mates, 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 con- struction 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 loans 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 man- agement 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 judgment. Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. Statement of Financial Accounting Standards (SFAS) No. 142, “Accounting for Goodwill and Other Intangible Assets,” establishes stan- dards for the amortization of acquired intangible assets and the impairment assessment of goodwill. Goodwill arising from business combinations repre- sents 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, deposit and loan totals for the Park subsidiary banks and banking industry comparable information. During the fourth quarter of 2007, Vision Bank recorded a goodwill impair- ment charge of $54.0 million which reduced the goodwill balance on its books to $55.0 million from $109.0 million. Park’s management determined that Vision Bank had significant credit problems during the fourth quarter of 2007 and concluded that an impairment analysis needed to be done on the goodwill balance at Vision Bank. The goodwill impairment charge was computed by determining the fair value of Vision Bank on a controlling interest basis. The fair value of Vision Bank was considered to be the amount at which Vision Bank could be sold in a current transaction between willing parties, that is, other than a forced liquidation sale. Four different methods were used to determine the fair value of Vision Bank. The four methods used were the discounted cash flow method, the capitalized earnings method, the capitalized tangible book value method, and the core deposit premium plus tangible book value method. Each method was given a 25% weighting to determine the fair value of Vision Bank. The computed fair value of Vision Bank was found to be less than its carrying value. As a result management computed the amount of the goodwill impairment charge needed to reduce the carrying value of Vision Bank to its fair value. At December 31, 2007, on a consolidated basis, Park had core deposit intangibles of $17.2 million subject to amortization and $127.3 million of goodwill, which was not subject to periodic amortization. The core deposit intangibles recorded on the balance sheets of Park’s Ohio-based banks totaled $6.3 million and the core deposit intangibles at Vision Bank were $10.9 million. The goodwill assets carried on the balance sheets of Park’s Ohio- based banks totaled $72.3 million and the goodwill balance at Vision Bank was $55.0 million. ABOUT OUR BUSINESS Through its Ohio-based banking subsidiaries, Park is engaged in the commercial banking and trust business, generally in small to medium population Ohio communities and through Vision Bank in Baldwin County, Alabama and in the Florida panhandle. 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 generally allowed Park to achieve solid financial results. Park’s subsidiaries compete for deposits and loans with other banks, savings associations, credit unions and other types of financial institutions. At December 31, 2007, Park and its Ohio-based subsidiaries operated 136 offices and a network of 147 automatic teller machines in 28 Ohio counties and one county in northern Kentucky. Vision Bank operated 18 offices and a network of 23 automatic teller machines in Baldwin County, Alabama and in six counties in the panhandle of Florida. A table of financial data of Park’s subsidiaries for 2007, 2006 and 2005 is shown below. See Note 21 of the Notes to Consolidated Financial Statements for additional information on the Corporation’s subsidiaries. Table 1 – Park National Corporation Affiliate Financial Data 2007 2006 Average Assets Net Income (Loss) Average Assets Net Income (Loss) 2005 Net Income (Loss) Average Assets $1,492,652 $24,830 $1,503,420 $26,577 $1,413,872 $23,026 332,564 6,322 338,183 6,457 362,192 6,856 (In thousands) Park National Bank: Park National Division Fairfield National Division Park National SW & N KY Division Richland Trust Company 529,175 5,915 496,481 398,517 (69) 288,189 1,331 7,987 229,726 515,749 3,049 8,842 Century National Bank 720,781 11,913 719,864 10,149 743,276 12,464 First-Knox National Bank: First-Knox National Division Farmers & Savings Division 656,406 10,891 639,969 11,406 639,000 10,805 129,133 2,292 132,222 2,308 126,939 2,544 23 F I N A N C I A L R E V I E W Table 1 – Park National Corporation Affiliate Financial Data continued (In thousands) United Bank, N.A. Second National Bank Security National Bank: Security National Division Unity National Division Citizens National Bank Vision Bank Parent Company, including consolidating entries 2007 2006 2005 Average Assets 207,493 403,114 Net Income (Loss) 2,410 4,847 Average Assets 218,358 386,139 Net Income (Loss) 2,537 4,705 Average Assets 241,277 404,656 Net Income (Loss) 3,026 6,029 685,718 10,609 766,298 11,931 782,467 11,393 192,382 150,083 1,290 1,830 698,788 (60,681) 190,751 166,611 — 986 1,854 — 184,234 189,965 — 1,404 1,928 — (427,650) 308 (465,862) 5,863 (275,265) 3,872 Consolidated Totals $6,169,156 $22,707 $5,380,623 $94,091 $5,558,088 $95,238 BALANCE SHEET COMPOSITION Park functions as a financial holding company. The following section discusses the balance sheet for the Corporation. IMPACT OF ACQUISITION OF VISION ON PARK’S BALANCE SHEET The following table displays (for selected balance sheet items) the consolidated condensed balance sheet item, the balance sheet item for Vision Bank and the total for the balance sheet item without Vision Bank as of December 31, 2007. A comparison is made to the year-end 2006 balance sheet. (In thousands) December 31, 2007 December 31, 2006 Selected Balance Sheet Items at Park Vision Bank Park Excluding Vision Bank Cash and due from banks Total investment securities Loans Allowance for loan losses $ 183,165 $1,703,103 $4,224,134 87,102 $ $ 23,541 $111,851 $639,097 $ 20,157 $ 159,624 $1,591,252 $3,585,037 66,945 $ Net loans $4,137,032 $618,940 $3,518,092 Goodwill and other intangible assets Bank premises and equipment, net Noninterest bearing deposits Interest bearing deposits $ 144,556 $ 65,939 $ 66,634 $ 18,511 $ $ 78,617 48,123 $ 695,466 $3,743,773 $ 66,514 $590,254 $ 628,952 $3,153,519 Total deposits $4,439,239 $656,768 $3,782,471 Total borrowings $1,389,727 $ 70,594 $1,319,133 Total assets $6,501,102 $855,794 $5,645,308 Park $ 177,990 $1,513,498 $3,480,702 70,500 $ $3,410,202 $ $ 78,003 47,554 $ 664,962 $3,160,572 $3,825,534 $ 979,913 $5,470,876 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. Core deposits were 85.5% of total deposits at year-end 2007, compared to 88.2% at year-end 2006 and 88.9% at year-end 2005. In 2007, year-end total deposits increased by $13 million or .3% exclusive of the $577 million of deposits that were acquired in the Vision acquisition and exclusive of the $23 million in deposits that were acquired in the purchase of the Millersburg, Ohio branch office. During 2007, the deposits of Vision Bank increased by approximately $80 million or 13.8% from the date of acquisition (March 9, 2007) through year-end. By comparison, the deposits for Park’s Ohio-based banks decreased by $67 million or 1.7% during 2007. In 2006, year-end total deposits increased by $6 million or .2% exclusive of the $61 million of deposits that were acquired in the Anderson acquisition. Average total deposits were $4,403 million in 2007 compared to $3,825 million in 2006 and $3,830 million in 2005. Average noninterest bearing deposits were 24 $697 million in 2007 compared to $662 million in 2006 and $643 million in 2005. Management expects that average total deposits will increase by a modest amount (1% to 2%) in 2008. Emphasis will continue to be placed on increasing noninterest bearing deposits and controlling the cost of interest bearing deposits. A year ago, management projected that average total deposits (exclud- ing the Vision acquisition) would increase by 1% to 2% in 2007. Average total deposits (excluding the Vision acquisition and the Millersburg branch acquisi- tion) increased by approximately $56 million or 1.5% in 2007, which was in line with the guidance provided by management for 2007. The Federal Open Market Committee (“FOMC”) of the Federal Reserve Board decreased the targeted federal funds rate by 50 basis points at its meeting in September 2007 and further decreased the targeted federal funds rate by 50 basis points during the fourth quarter of 2007. The targeted federal funds rate decreased in total by 100 basis points in 2007 from 5.25% to 4.25%. The average federal funds rate was 5.02% in 2007, 4.97% in 2006 and 3.21% in 2005. The average interest rate paid on interest bearing deposits was 3.27% in 2007 compared to 2.60% in 2006 and 1.79% in 2005. The average cost of interest bearing deposits was 3.23% for the fourth quarter of 2007, compared to 3.39% for the third quarter, 3.34% for the second quarter and 3.08% for the first quarter. The FOMC announced on January 22, 2008 an additional reduction in the targeted federal funds rate of 75 basis points to 3.50% and further reduced the targeted federal funds rate by 50 basis points to 3.00% at their meeting on January 30, 2008. The FOMC took these actions in view of a weakening of the economic outlook and increasing downside risks to growth. Park’s management has been able to significantly reduce the interest rates being offered on certificates of deposits and to a lesser extent other interest bearing deposit accounts during the month of December. As a result of these changes, Park’s management expects a significant reduction in the average interest rate paid on interest bearing deposits in 2008. Maturities of time certificates of deposit and other time deposits of $100,000 and over as of December 31, 2007 were: Table 2 – $100,000 and Over Maturity Schedule December 31, 2007 (In thousands) 3 months or less Over 3 months through 6 months Over 6 months through 12 months Over 12 months Total Time Certificates of Deposit $242,681 143,212 156,797 99,260 $641,950 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 4.47% in 2007 compared to 4.18% in 2006 and 2.57% in 2005. The average cost of short-term borrowings was 4.26% for the fourth quarter of 2007, compared to 4.71% for the third quarter, 4.55% for the second quarter and 4.45% for the first quarter. Management expects a significant reduction in the average rate paid on short-term borrowings in 2008, as a result of the recent decreases in the targeted federal funds rate. Average short-term borrowings were $494 million in 2007 compared to $375 million in 2006 and $292 million in 2005. The increase in short-term borrow- ings in 2007 compared to 2006 was primarily due to the acquisition of Vision on March 9, 2007. Park paid $87.8 million in cash as part of the consideration for the acquisition of Vision. F I N A N C I A L R E V I E W 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 4.22% for both 2007 and 2006 and was 3.69% for 2005. The average cost of long-term debt was 4.10% for the fourth quarter of 2007, compared to 4.29% for the third quarter, 4.28% for the second quarter and 4.24% for the first quarter. (The average balance of long-term debt and the average cost of long-term debt includes the subordi- nated debentures discussed in the following section.) In 2007, average long-term debt was $569 million compared to $553 million in 2006 and $800 million in 2005. Average total debt (long-term and short-term) was $1,063 million in 2007 compared to $929 million in 2006 and $1,092 million in 2005. Average long-term debt was 54% of average total debt in 2007 compared to 60% in 2006 and 73% in 2005. Subordinated Debentures: Park assumed with the Vision acquisition $15 million of a floating rate subordinated debenture. The interest rate on this subordinated debenture adjusts every quarter at 148 basis points above the three month LIBOR interest rate. The maturity date on the debenture is December 30, 2035 and the subordinated debenture may be prepaid after December 30, 2010. This subordinated debenture qualifies as Tier 1 capital under Federal Reserve Board guidelines. Park’s Ohio-based banking subsidiary (The Park National Bank) issued $25 million of a subordinated debenture on December 28, 2007. The interest rate on this subordinated debenture adjusts every quarter at 200 basis points above the three month LIBOR interest rate. The maturity date on the subordinated debenture is December 29, 2017 and the subordinated debenture may be prepaid after December 28, 2012. On January 2, 2008, Park entered into a “pay fixed-receive floating” interest rate swap agreement for a notional amount of $25 million with a maturity date of December 28, 2012. This interest rate swap agreement was designed to hedge the cash flows pertaining to the $25 million subordinated debenture until December 28, 2012. Management converted the cash flows to a fixed interest rate of 6.01% through the use of the interest rate swap. This subordinated debenture qualifies as Tier 2 capital under the applicable regulations of the Office of the Comptroller of the Currency of the United States of America (the “OCC”). See Note 11 of the Notes to Consolidated Financial Statements for additional information on the subordinated debentures. Stockholders’ Equity: Average stockholders’ equity to average total assets was 10.03% in 2007, 10.13% in 2006 and 10.06% in 2005. Tangible stockholders’ equity (stockholders’ equity less goodwill and other intangible assets) to tangible assets (total assets less goodwill and other intangible assets) was 6.85% at December 31, 2007, compared to 9.13% at December 31, 2006 and 9.12% at December 31, 2005. The large decrease in the ratio of tangible stockholders’ equity to tangible assets was primarily due to the purchase of treasury stock during 2007 and to the acquisition of Vision. Park purchased 760,531 treasury shares in 2007 at an average price of $86.21 per share for a total cost of $65.6 million. As part of the Vision acquisition, Park issued 792,937 shares of Park common stock valued at a price of $105.00 per share for a total value of $83.3 million. Vision Bank had a net loss of $60.7 million in 2007 and ended the year with goodwill and intangible assets of $65.9 million. In accordance with SFAS No. 115, Park reflects any unrealized holding gain or loss on available-for-sale securities, net of income taxes, as accumulated other comprehensive income (loss) which is part of Park’s equity. The unrealized holding gain on available-for-sale securities, net of income taxes, was $1.0 million at year-end 2007, compared to the unrealized holding loss on available- for-sale securities, net of income taxes of ($16.0) million at year-end 2006 and ($10.1) million at year-end 2005. Long-term and short-term interest rates decreased during the fourth quarter of 2007 which caused the market value of Park’s investment securities to increase and produced the small unrealized holding gain on available-for-sale securities, net of income taxes, at year-end 2007. Park recorded a decrease in accumulated other comprehensive income (loss), net of income taxes, of ($6.8) million in 2006 related to the adoption of SFAS No. 158, which pertains to the accounting for Park’s defined benefit pension plan. In 2007, Park recognized other comprehensive income, net of taxes, of $3.3 million pertaining to the accounting for Park’s pension plan. As a result, the balance in accumulated other comprehensive income (loss) pertaining to the pension plan was a loss of ($3.6) million at year-end 2007. INVESTMENT OF FUNDS Loans: Average loans, net of unearned income, were $4,011 million in 2007 compared to $3,357 million in 2006 and $3,278 million in 2005. The average yield on loans was 8.01% in 2007 compared to 7.61% in 2006 and 6.84% in 2005. The average prime lending rate in 2007 was 8.05% compared to 7.96% in 2006 and 6.19% in 2005. Approximately 65% 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 decrease in 2008 as a result of the decrease in market interest rates during the fourth quarter of 2007 and the first quarter of 2008. Year-end loan balances, net of unearned income, increased by $110 million or 3.2% in 2007 exclusive of $596 million of loans that were acquired in the Vision acquisition and exclusive of the $38 million of loans that were acquired as part of the Millersburg, Ohio branch purchase. From the date of the Vision acquisition (March 9, 2007) through year-end 2007, Vision Bank increased loans by $43 million to $639 million at year-end 2007. Excluding the growth from Vision Bank, Park’s Ohio-based subsidiary banks grew loans by $67 million during 2007 for a growth rate of 1.9%. In 2006, year-end loan balances, net of unearned income, increased by $100 million or 3.0% in 2006 exclusive of $53 million of loans that were acquired in the Anderson acquisition. Loans 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. A year ago, management projected that year-end loan balances would grow between 3% to 4% exclusive of acquisitions. The actual loan growth for the year was 3.2%, however, if Park had not acquired Vision the loan growth for the year would have been 1.9%. Management expects that loan growth for 2008 will be approximately 2% to 3%. Management expects that loan growth at Vision Bank will be slower in 2008, due to Vision Bank’s lending management working through problem loans. Year-end residential real estate loans were $1,481 million, $1,300 million and $1,287 million in 2007, 2006 and 2005, respectively. Residential real estate loans increased by $43 million or 3.3% at year-end 2007 exclusive of the $138 million of loans from the Vision acquisition. In 2006, residential real estate loans decreased by $15 million exclusive of the $28 million of loans from the Anderson acquisition. In 2005, residential real estate loans increased by $9 million exclusive of $88 million of loans from the First Clermont acquisition. During 2007, $27 million of the $43 million of growth in residential real estate loans from the year resulted from the growth in residential real estate loans at Vision Bank from March 9, 2007 through year-end. Management expects growth of 1% to 2% in residential real estate loans in 2008. The long-term fixed rate residential mortgage loans that Park originates are sold in the secondary market and Park retains the servicing on these loans. The balance of sold fixed rate mortgage loans was $1,403 million at year-end 2007 compared to $1,405 million at year-end 2006 and $1,403 million at year-end 2005. Vision Bank did not retain servicing on residential real estate loans sold in the secondary market and as a result had no impact on Park’s sold loan port- folio. Management expects that the balance of sold fixed rate mortgage loans will increase by 2% to 3% in 2008 as a result of the decrease in long-term interest rates in the fourth quarter of 2007 and the first quarter of 2008. 25 F I N A N C I A L R E V I E W Year-end consumer loans were $593 million, $532 million and $495 million in 2007, 2006 and 2005, respectively. Consumer loans increased by $55 million or 10.3% exclusive of the $6 million of consumer loans acquired from the Vision acquisition. In 2006, consumer loans increased by $35 million or 7.1% exclusive of $2 million of loans from the Anderson acquisition. In 2005, consumer loans decreased by $30 million or 5.9% exclusive of $20 million of loans from the First Clermont acquisition. The increase in consumer loans in both 2007 and 2006 was primarily due to an increase in automobile loans originated through automobile dealers. Management expects that consumer loans will increase by 3% to 4% in 2008. Park experienced modest growth in construction loans, commercial loans and commercial real estate loans in 2007 exclusive of loans acquired as a result of the Vision acquisition and the purchase of the Millersburg branch office. On a combined basis, these loans totaled $2,143 million, $1,638 million and $1,529 million at year-end 2007, 2006 and 2005, respectively. These combined loan totals increased by $33 million or 2.0% exclusive of the $472 million of loans acquired through the Vision acquisition and the Millersburg branch purchase. In 2006, these combined loan totals increased by $86 million or 5.6% exclusive of $23 million of loans from the Anderson acquisition. In 2005, these combined loan totals increased by $96 million or 7.0% exclusive of $56 million of loans from the First Clermont acquisition. Management expects that construction loans, commercial loans and commercial real estate loans will grow by 2% to 3% in 2008. Year-end lease balances were $7 million, $10 million and $17 million in 2007, 2006 and 2005, respectively. Management continues to de-emphasize automobile leasing and to a lesser extent commercial leasing. The year-end lease balances are expected to continue to decrease in 2008. Table 3 reports year-end loan balances by type of loan for the past five years. Table 3 – Loans by Type December 31, (In thousands) Commercial, financial and agricultural Real estate – construction Real estate – residential Real estate – commercial Consumer, net of unearned income Leases, net of unearned income 2007 2006 2005 2004 2003 $ 613,282 $ 548,254 $ 512,636 $ 469,382 $ 441,165 536,389 234,988 193,185 155,326 121,160 1,481,174 1,300,294 1,287,438 1,190,275 983,702 993,101 854,869 823,354 752,428 670,082 593,388 532,092 494,975 505,151 450,145 6,800 10,205 16,524 48,046 64,549 Total Loans $4,224,134 $3,480,702 $3,328,112 $3,120,608 $2,730,803 Table 4 – Selected Loan Maturity Distribution December 31, 2007 (In thousands) Commercial, financial and agricultural Real estate – construction Real estate – commercial One Year or Less $294,780 342,232 117,515 Over One Through Five Years $200,813 135,127 189,413 Over Five Years Total $117,689 59,030 686,173 $ 613,282 536,389 993,101 Total $754,527 $525,353 $862,892 $2,142,772 Total of these selected loans due after one year with: Fixed interest rate Floating interest rate $ 406,115 $ 982,130 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 evaluates the securities in the investment portfolio as circumstances evolve. Circumstances that may precipitate a sale of a security would be to better manage interest rate risk, meet liquidity needs or to improve the overall yield on the investment portfolio. 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 (loss) which is part of the Corporation’s equity. Management classified approximately 90% of the securities portfolio as available-for-sale at December 31, 2007. 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. Average taxable investment securities were $1,531 million in 2007 compared to $1,533 million in 2006 and $1,758 million in 2005. The average yield on taxable securities was 5.03% in 2007 compared to 4.91% in 2006 and 4.87% in 2005. Average tax-exempt investment securities were $65 million in 2007 com- pared to $77 million in 2006 and $94 million in 2005. The average tax-equivalent yield on tax-exempt investment securities was 6.68% in 2007 compared to 6.84% in 2006 and 7.01% in 2005. On a combined basis, the total of the average balance of taxable and tax-exempt securities was 25.9% of average total assets in 2007 compared to 29.9% in 2006 and 33.3% in 2005. Year-end total investment securities (at amortized cost) were $1,702 million in 2007, $1,538 million in 2006 and $1,679 million in 2005. Management purchased investment securities totaling $842 million in 2007, $167 million in 2006 and $301 million in 2005. Proceeds from repayments and maturities of investment securities were $711 million in 2007, $313 million in 2006 and $410 million in 2005. Park did not sell any investment securities in 2007. Proceeds from sales of available-for-sale securities were $304,000 in 2006 and $132 million in 2005. Park realized net security gains of $97,000 in 2006 and $96,000 in 2005. Park’s management purchased $438 million of investment securities during the third quarter of 2007 and as a result total investment securities (at amortized cost) increased by $219 million to $1,755 million at September 30, 2007 from $1,536 million at June 30, 2007. The monthly average interest rate on a 5 year U.S. Treasury security was 4.50% during the third quarter of 2007. Typically, the investment securities purchased by Park (U.S. Government Agency 15 year mortgage-backed securities) yield approximately 75 basis points above a 5 year U.S. Treasury security. During the third quarter of 2007, the spreads on mort- gage-backed securities widened compared to U.S. Treasury securities and Park was able to purchase securities at a weighted average yield of 5.71%. Interest rates on 5 year U.S. Treasury securities decreased during the fourth quarter of 2007 and into the first quarter of 2008. The average interest rate on a 5 year U.S. Treasury security declined to 3.49% during the month of December and is below 3.00% at the end of January 2008. Due to the sharp decline in long-term interest rates, management anticipates that the proceeds from the repayments and maturities of investment securities in 2008 will exceed purchases and as a result the balance of investment securities will decline during 2008 until long-term interest rates increase. At year-end 2007 and 2006, the average tax-equivalent yield on the total investment portfolio was 5.13% and 5.01%, respectively. The weighted average remaining maturity was 3.7 years at December 31, 2007 and 4.4 years at December 31, 2006. U.S. Government Agency asset-backed securities were approximately 81% of the total investment portfolio at year-end 2007 and were approximately 85% of the total investment portfolio at year-end 2006. This segment of the investment portfolio consists of 15 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 2007, management estimated that the average maturity of the investment portfolio would lengthen to 4.5 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. 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 following table sets forth the carrying value of investment securities at year-end 2007, 2006 and 2005: 26 F I N A N C I A L R E V I E W Table 5 – Investment Securities December 31, (In thousands) Obligations of U.S. Treasury and other U.S. Government agencies 2007 2006 2005 $ 203,558 $ 90,709 $ 996 Obligations of states and political subdivisions 59,052 70,090 85,336 U.S. Government asset-backed securities and other asset-backed securities Other securities Total 1,375,005 1,288,969 1,516,950 65,488 63,730 60,060 $1,703,103 $1,513,498 $1,663,342 Included in “Other Securities” in Table 5, are Park’s investments in Federal Home Loan Bank stock and Federal Reserve Bank stock. Park owned $56.8 million of Federal Home Loan Bank stock and $6.4 million of Federal Reserve Bank stock at December 31, 2007. At December 31, 2006, Park owned $55.5 Table 6 – Distribution of Assets, Liabilities and Stockholders’ Equity million of Federal Home Loan Bank stock and $6.4 million of Federal Reserve Bank stock. At December 31, 2005, Park owned $52.1 million of Federal Home Loan Bank stock and $5.9 million of Federal Reserve Bank stock. The fair values of these investments are the same as their amortized costs. ANALYSIS OF EARNINGS 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 inter- est 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 categories and the average rates earned on interest earning assets and the average rates paid on interest bearing liabilities.) December 31, (Dollars in thousands) ASSETS Interest earning assets: Loans (1) (2) Taxable investment securities Tax-exempt investment securities (3) Money market instruments Total interest earning assets Noninterest earning assets: Allowance for loan losses Cash and due from banks Premises and equipment, net Other assets TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY Interest bearing liabilities: Transaction accounts Savings deposits Time deposits Total interest bearing deposits Short-term borrowings Long-term debt Total interest bearing liabilities Noninterest bearing liabilities: Demand deposits Other Total noninterest bearing liabilities Stockholders’ equity TOTAL Net interest earnings Net interest spread Net yield on interest earning assets Daily Average 2007 Interest Average Rate Daily Average 2006 Interest Average Rate Daily Average 2005 Interest Average Rate $4,011,307 $321,392 1,531,144 65,061 17,838 77,016 4,346 920 5,625,350 403,674 8.01% 5.03% 6.68% 5.16% 7.18% $3,357,278 $255,641 1,533,310 77,329 8,723 75,300 5,288 469 4,976,640 336,698 7.61% 4.91% 6.84% 5.38% 6.77% $3,278,092 $224,346 1,757,853 93,745 12,258 85,664 6,571 441 5,141,948 317,022 6.84% 4.87% 7.01% 3.60% 6.17% (78,256) 151,219 61,604 409,239 $6,169,156 (70,386) 142,794 46,894 284,681 $5,380,623 $1,318,764 $ 35,919 553,407 1,834,060 3,878 81,224 3,706,231 121,021 494,160 568,575 22,113 24,013 4,768,966 167,147 2.72% 0.70% 4.43% 3.27% 4.47% 4.22% 3.50% $1,058,323 $ 22,508 573,067 1,531,477 3,162,867 375,332 553,307 3,362 56,402 82,272 15,692 23,351 4,091,506 121,315 2.13% 0.59% 3.68% 2.60% 4.18% 4.22% 2.97% 697,247 84,185 781,432 618,758 $6,169,156 662,077 81,966 744,043 545,074 $5,380,623 (71,052) 148,303 46,418 292,471 $5,558,088 $1,007,576 $ 11,763 3,328 41,808 56,899 7,508 29,488 93,895 633,545 1,545,912 3,187,033 291,842 799,888 4,278,763 643,032 77,082 720,114 559,211 $5,558,088 $236,527 $215,383 $223,127 3.68% 4.20% 3.80% 4.33% 1.17% 0.53% 2.70% 1.79% 2.57% 3.69% 2.19% 3.98% 4.34% (1) Loan income includes loan related fee income of $5,935 in 2007, $4,340 in 2006 and $3,809 in 2005. Loan income also includes the effects of taxable equivalent adjustments using a 35% tax rate in 2007, 2006 and 2005. The taxable equivalent adjustment was $565 in 2007, $518 in 2006, and $478 in 2005. (2) For the purpose of the computation, nonaccrual 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 2007, 2006 and 2005. The taxable equivalent adjustments were $1,285 in 2007, $1,621 in 2006, and $2,085 in 2005. Net interest income increased by $21.4 million or 10.1% to $234.7 million for 2007 compared to a decrease of $7.3 million or 3.3% to $213.2 million for 2006. The tax equivalent net yield on interest earning assets was 4.20% for 2007 compared to 4.33% for 2006 and 4.34% for 2005. The net interest rate spread (the difference between rates received for interest earning assets and the rates paid for interest bearing liabilities) was 3.68% for 2007, compared to 3.80% for 2006 and 3.98% for 2005. The increase in net interest income in 2007 was primarily due to the large increase in average interest earnings assets of $649 million or 13.0% which resulted from the acquisition of Vision on March 9, 2007. The decrease in net interest income in 2006 was primarily due to a decrease in average interest earning assets of $165 million or 3.2%. The average yield on interest earning assets was 7.18% in 2007 compared to 6.77% in 2006 and 6.17% in 2005. On a quarterly basis for 2007, the average 27 F I N A N C I A L R E V I E W yield on earning assets was 7.02% for the fourth quarter, 7.26% for the third quarter, 7.33% for the second quarter and 7.10% for the first quarter. By comparison, the average federal funds rate for the fourth quarter was 4.50%, 5.07% for the third quarter and 5.25% for the second and first quarter of 2007. Management expects that the average yield on interest earning assets will decrease in 2008 due to reductions in market interest rates in the fourth quarter of 2007 and the first quarter of 2008. The average rate paid on interest bearing liabilities was 3.50% in 2007 compared to 2.97% in 2006 and 2.19% in 2005. On a quarterly basis for 2007, the average rate paid on interest bearing liabilities was 3.47% for the fourth quarter, 3.62% for the third quarter, 3.55% for the second quarter and 3.36% for the first quarter. Management expects that the average rate paid on interest bearing liabilities will decrease in 2008 due to reductions in market interest rates in the fourth quarter of 2007 and the first quarter of 2008. The following table displays (for each quarter of 2007) the average balance of interest earning assets, net interest income and the tax equivalent net yield on interest earning assets. (In thousands) First Quarter Second Quarter Third Quarter Fourth Quarter 2007 Average Interest Earning Assets $5,215,847 5,654,699 5,695,339 5,927,364 Net Interest Income $ 54,898 60,410 59,416 59,953 $5,625,350 $234,677 Tax Equivalent Net Interest Margin 4.31% 4.32% 4.17% 4.04% 4.20% Management expects that average interest earnings assets will be approximately $5,900 million for 2008 as the expected growth in loan balances from year-end will be offset by a similar decrease in investment securities. Management expects that net interest income will be $240 to $242 million in 2008 and that the tax equivalent net interest margin will be approximately 4.10% in 2008. (Please see the “Overview” section of this “Financial Review” for a comparison of 2007 results to management’s projection from a year ago.) 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 2006 to 2007 Total Rate Volume Change from 2005 to 2006 Total Rate Volume (In thousands) Increase (decrease) in: Interest income: Total loans $51,780 $13,971 $65,751 $ 5,529 $25,766 $31,295 Taxable investments Tax-exempt investments (107) (821) 1,823 1,716 (11,059) 695 (10,364) (121) (942) (1,127) (156) (1,283) Money market instruments 471 (20) 451 (153) 181 28 Total interest income 51,323 15,653 66,976 (6,810) 26,486 19,676 Interest expense: Transaction accounts $ 6,309 $ 7,102 $13,411 $ 621 $10,124 $10,745 Savings accounts (116) 632 516 Time deposits 12,218 12,604 24,822 (332) (394) 366 34 14,988 14,594 Short-term borrowings 5,267 1,154 6,421 2,566 Long-term debt 662 0 662 (9,970) 5,618 3,833 8,184 (6,137) Total interest expense 24,340 21,492 45,832 (7,509) 34,929 27,420 Net variance $26,983 $ (5,839) $21,144 $ 699 $ (8,443) $ (7,744) Other Income: Total other income, exclusive of security gains or losses, increased by $7.0 million or 10.8% to $71.6 million in 2007 compared to an increase of $5.1 million or 8.5% to $64.7 million in 2006. The large increase in 2007 was primarily due to the acquisition of Vision on March 9, 2007. Excluding Vision Bank’s total other income of $3.5 million, the increase was $3.5 million or 5.4% to $68.2 million in 2007. A year ago, management had projected that total other income for 2007 (exclusive of Vision) would be $68.3 million, very close to the actual results. 28 The following table displays total other income for Park in 2007 excluding Vision, compared to total other income for 2006. For Year Ended December 31, 2007 (In thousands) Income from fiduciary activities Service charges on deposits Net gains on sales of securities Other service income Other Park $14,403 23,813 — 11,543 21,881 Vision Bank Park Without Vision Bank $ 4 1,629 — 1,257 575 $14,399 22,184 — 10,286 21,306 2006 $13,548 19,969 97 10,920 20,228 Total other income $71,640 $3,465 $68,175 $64,762 Income from fiduciary activities increased by $855,000 or 6.3% to $14.4 million in 2007 and increased by $1.5 million or 12.6% to $13.5 million in 2006. These increases are primarily due to growth in the number of customers being serviced. Vision Bank did not offer this service prior to joining Park. Management expects an increase of 7% to 8% in fee income from fiduciary activities in 2008. Service charges on deposit accounts increased by $3.8 million or 19.2% to $23.8 million in 2007 and increased by $2.1 million or 11.9% to $20.0 million in 2006. The increase in service charges on deposits in 2007 (exclusive of Vision Bank) was $2.2 million or 11.1%. For both 2007 and 2006, Park experienced a relatively large increase in service charges on deposit accounts with an increase of 11.1% in 2007 (exclusive of Vision) and an increase of 11.9% in 2006. The primary reason for this strong growth was an increase in charges from Park’s courtesy overdraft program. Management expects a smaller increase in fee income from service charges on deposit accounts in 2008 and is projecting an increase of 7% to 8%. 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 was $11.5 million in 2007 ($10.3 million excluding Vision), $10.9 million in 2006 and $10.8 million in 2005. Management expects that the volume of mortgage loans originated and sold in the secondary market will increase in 2008 due to the recent decrease in long-term interest rates. Management expects that other service income will increase by about 10% in 2008. The subcategory of “Other Income” includes fees earned from check card and ATM services, income from bank owned life insurance, fee income earned from the sale of investment and insurance products, rental fee income from safe deposit boxes and fees earned from the sale of official checks and printed checks. The increase in other income was $1.7 million or 8.2% to $21.9 million in 2007 and $1.3 million or 6.6% to $20.2 million in 2006. Excluding Vision Bank, the increase in other income was $1.1 million or 5.3% in 2007. Management expects an increase of 4% to 5% in other income for 2008. For 2008, management expects an increase in total other income of 6% to 8% for a total of $75.9 million to $77.4 million. Other Expense: Total other expense increased by $83.2 million or 59.0% to $224.2 million in 2007. The very large increase was due to the acquisition of Vision on March 9, 2007. Vision Bank had total other expense of $72.6 million in 2007, which included $54.0 million for a goodwill impairment charge. Excluding Vision Bank, total other expenses increased by $10.6 million or 7.5% to $151.6 million in 2007. A year ago management had projected that total other expense would be $150 million for 2007. The actual results were 1.1% higher and the variance of $1.6 million is explained later in this section. Total other expense increased by only $1.6 million or 1.1% to $141.0 million in 2006. F I N A N C I A L R E V I E W The following table displays total other expense for Park in 2007 excluding Vision, compared to total other expense for 2006. For Year Ended December 31, 2007 (In thousands) Park Vision Bank Park Without Vision Bank 2006 Salaries and employee benefits $ 97,712 $ 9,234 $ 88,478 $ 82,579 Goodwill impairment charge Data processing fees Fees and service charges Net occupancy expense of bank premises Amortization of intangibles Furniture and equipment expense Insurance Marketing Postage and telephone State taxes Other 54,035 6,892 11,055 10,717 3,847 9,259 1,445 4,961 6,910 2,769 14,562 54,035 1,429 1,115 1,517 1,767 1,053 314 541 592 132 851 — 5,463 9,940 9,200 2,080 8,206 1,131 4,420 6,318 2,637 — 4,246 9,553 9,155 2,470 8,215 1,137 4,438 6,303 2,333 13,711 10,573 Total other expense $224,164 $72,580 $151,584 $141,002 Salaries and employee benefits expense increased by $15.1 million or 18.3% to $97.7 million in 2007 and increased by $2.0 million or 2.5% to $82.6 million in 2006. The increase in salaries and employee benefits expense in 2007 (exclusive of Vision Bank) was $5.9 million or 7.1%. During the fourth quarter of 2007, Park issued 90,000 incentive stock options to officers and other key employees of the subsidiary banks and accordingly compensation expense of $.9 million was recorded. A year ago, management projected that salaries and employee benefits expense would increase by approximately 8% in 2007, which was a little higher than the actual results excluding Vision Bank. Full-time equivalent employees at year-end 2007 were 2,066 compared to 1,892 at year-end 2006 and 1,824 at year-end 2005. Vision Bank had 201 full-time equivalent employees at year-end 2007. On July 30, 2007, Park announced a plan to review current processes and identify opportunities to improve efficiency by converting to one operating system. One outcome of this initiative (“Project EPS”) will be the merging of the eight banking charters of Park’s Ohio-based subsidiary banks into one national bank charter. Management anticipates that using a common operational plat- form and centralizing certain functions will result in expense reduction due to having fewer operational support positions. Management expects to begin merging Park’s Ohio-based subsidiary banks during the fourth quarter of 2008 and anticipates completing the consolidation of the Ohio-based subsidiary banks during the second quarter of 2009. Management anticipates that the cost savings generated by Project EPS in 2008 will be largely offset by severance expense pertaining to the anticipated reduction in Park’s full-time equivalent employees. Management expects that salaries and employee benefits expense will increase by approximately 6.5% in 2008, which includes an estimated $2 million of severance expense. Vision Bank recorded a goodwill impairment charge of $54.0 million during the fourth quarter of 2007. Please see Note 1 of the Notes to Consolidated Financial Statements for a discussion of the goodwill impairment charge. Data processing expense increased by $2.6 million or 62.3% to $6.9 million in 2007 and increased by $92,000 or 2.2% to $4.25 million for 2006. The increase in data processing expense in 2007 (exclusive of Vision Bank) was $1.2 million or 28.7%. The primary reason for this increase was due to a large increase in check card transactions. The subcategory “Other Expense” includes expenses for supplies, travel, charitable contributions, amortization of low income housing tax credits, sundry write-offs and other miscellaneous expenses. The subcategory other expense increased by $4.0 million or 37.7% to $14.6 million in 2007 and decreased by $1.6 million or 12.9% to $10.6 million for 2006. The increase in other expense in 2007 (exclusive of Vision Bank) was $3.1 million or 29.7%. For 2007, the increase in other expense (exclusive of Vision Bank) was primarily due to an increase in the amortization expense of low income housing tax credit investments, an accrual pertaining to a Visa litigation reserve and an increase in charitable contribution expense. The amortization expense for low income housing tax credit investment increased by $1.1 million to $4.8 million for 2007. Park accrued $887,000 pertaining to a Visa members’ indemnification of estimated future litigation settlements during the fourth quarter of 2007. Charitable contribution expense increased by $509,000 in 2007. For 2006, the decrease in other expense was due to a decrease in charitable expense of $1.7 million. Charitable contribution expense was $300,000 in 2006 compared to $2.0 million in 2005. Management expects that total other expense will be approximately $177 million for 2008. This projected amount represents an increase of $6.9 million or 4.0% in total other expense compared to $170.1 million for 2007, which is exclusive of the $54.0 million goodwill impairment charge. Income Taxes: Federal income tax expense was $30.4 million for 2007 and state income tax expense was a credit of ($453,000). Vision Bank is subject to state income tax, in the states of Alabama and Florida. State tax expense was a credit in 2007 because Vision had a loss in 2007. Park and its Ohio-based subsidiary banks do not pay state income tax to the state of Ohio, but pay a franchise tax based on year-end equity. The franchise tax expense is included in “state taxes” on Park’s Consolidated Statements of Income. Federal income tax expense as a percentage of income before taxes was 57.8% in 2007. The $54.0 million goodwill impairment charge in 2007 had no impact on income tax expense. For 2007, the percentage of federal income tax expense to income before taxes (adjusted for the goodwill impairment charge) is 28.5%. By comparison, the percentage of federal income taxes to income before taxes was 29.3% in 2006 and 29.7% in 2005. A lower federal effective tax rate than the statutory rate of 35% is primarily due to tax-exempt interest income from state and municipal investments and loans, low income housing tax credits and income from bank owned life insurance. Management expects that the federal effective income tax rate for 2008 will be approximately 29.4% 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 $29.5 million in 2007, $3.9 million in 2006 and $5.4 million in 2005. Net loan charge-offs were $22.2 million in 2007, $3.9 million in 2006 and $5.9 million in 2005. The ratio of net loan charge-offs to average loans was .55% in 2007, .12% in 2006 and .18% in 2005. Vision Bank experienced significant credit problems during the second half of 2007. The loan loss provision for Vision Bank was $19.4 million in 2007 and net loan charge-offs were $8.6 million. Vision Bank’s net loan charge-offs on an annualized basis were 1.71% of average loans. Park’s Ohio-based subsidiary banks had a loan loss provision of $10.1 million for 2007 and net loan charge offs of $13.6 million. Park’s Ohio-based sub- sidiary banks had an annualized net loan charge-off ratio of .39% in 2007. At year-end 2007, the allowance for loan losses was $87.1 million or 2.06% of total loans outstanding, compared to $70.5 million or 2.03% of total loans outstanding at year-end 2006 and $69.7 million or 2.09% of total loans out- standing at year-end 2005. In each of the last four years, the loan loss reserve for an acquired bank was added to Park’s allowance for loan losses. The Vision acquisition added $9.3 million in 2007, the Anderson acquisition added $798,000 in 2006, the First Clermont acquisition added $1.8 million in 2005 and the First Federal Bancorp. Inc. acquisition added $4.5 million in 2004. 29 F I N A N C I A L R E V I E W Management believes that the allowance for loan losses at year-end 2007 is adequate to absorb probable incurred credit losses in the loan portfolio. See Note 1 of the Notes to Consolidated Financial Statements and the discussion under the heading “Critical Accounting Policies” earlier in this Financial Review section for additional information on management’s evaluation of the adequacy of the allowance for loan losses. Management expects that the loan loss provision for 2008 will be approximately $20 to $25 million and that the annualized net loan charge-off ratio will be approximately .45% to .55%. This estimate could change significantly as cir- cumstances for individual loans and economic conditions change. Table 8 – Summary of Loan Loss Experience (In thousands) 2007 2006 2005 2004 2003 Average loans (net of unearned interest) Allowance for loan losses: Beginning balance Charge-offs: Commercial, financial and agricultural Real estate – construction Real estate – residential Real estate – commercial Consumer Lease financing $4,011,307 $3,357,278 $3,278,092 $2,813,069 $2,695,830 70,500 69,694 68,328 63,142 62,028 4,170 7,899 853 718 3,154 2,557 4,698 46 613 — 5,785 1,915 1,006 1,476 1,173 1,899 8,020 3 556 6,673 57 1,612 7,255 316 1,951 8,111 465 1,947 9,233 985 Total charge-offs 27,776 10,772 13,389 15,173 18,036 Recoveries: Commercial, financial and agricultural $ Real estate – construction Real estate – residential Real estate – commercial Consumer Lease financing Total recoveries Net charge-offs Provision charged to earnings Allowance for loan losses of acquired bank 1,011 $ 842 $ 2,707 $ 2,138 $ 1,543 180 718 560 3,035 64 5,568 22,208 — 1,017 1,646 3,198 150 6,853 3,919 173 659 517 3,214 229 7,499 5,890 67 650 292 3,633 529 7,309 7,864 175 549 407 3,236 645 6,555 11,481 29,476 3,927 5,407 8,600 12,595 9,334 798 1,849 4,450 — Ending balance $ 87,102 $ 70,500 $ 69,694 $ 68,328 $ 63,142 Ratio of net charge-offs to average loans Ratio of allowance for loan losses to end of year loans, net of unearned interest 2.06% 2.03% 2.09% 2.19% 2.31% 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 As of December 31, 2007, 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: l) loans whose interest is accounted for on a nonaccrual basis; 2) loans whose terms have been renegotiated; and 3) loans which are contractually past due 90 days or more as to principal or interest payments but whose interest continues to accrue. Other real estate owned results from taking title to property used as collateral for a defaulted loan. The percentage of nonperforming loans to total loans was 2.57% at year-end 2007, .95% at year-end 2006 and .90% at year-end 2005. The percentage of nonperforming assets to total loans was 2.89% at year-end 2007, 1.04% at year-end 2006 and .97% at year-end 2005. Vision Bank had $63.5 million of nonperforming loans or 9.9% of their total loans at year-end 2007 and had $70.5 million of nonperforming assets or 11.0% of their total loans at year-end 2007. By comparison, Park’s Ohio-based subsidiary banks had $45.0 million of nonperforming loans or 1.26% of their total loans at year-end 2007 and had $51.4 million of nonperforming assets or 1.43% of their total loans at year-end 2007. Park’s lending management has reviewed closely all of the nonperforming loans and nonperforming assets as of December 31, 2007. Partial loan charge-offs of approximately $10 million were taken on nonperforming loans in 2007. Approximately $6 million of these net loan charge-offs were recorded at Vision Bank. Economic conditions deteriorated during the second half of 2007 which caused a sharp increase in net loan charge-offs and nonperforming loans for Park and many other financial institutions throughout the country. The net loan charge-off ratios for Park on an annualized basis was .26% as of June 30, 2007 and non- performing assets as a percentage of loans was 1.20% at June 30, 2007. By comparison, the annualized net loan charge-off ratio was .56% for the third quarter of 2007 and was 1.07% for the fourth quarter of 2007. Nonperforming assets were 1.78% of total loans as of September 30, 2007. Park had $208.8 million of loans included on the watch list of potential problem loans at December 31, 2007 compared to $176.8 million at year-end 2006 and $130.8 million at year-end 2005. As a percentage of year-end total loans, Park’s watch list of potential problem loans was 4.9% in 2007, 5.1% in 2006 and 3.9% in 2005. The existing conditions of these loans do not warrant classification as nonaccrual. However, these loans have shown some weakness and management performs additional analyses regarding a borrower’s ability to comply with payment terms for watch list loans. The following is a summary of the nonaccrual, past due and renegotiated loans and other real estate owned for the last five years: December 31, (Dollars in thousands) Nonaccrual loans Renegotiated loans Loans past due 90 days or more Total nonperforming loans 2007 2006 2005 2004 2003 $101,128 2,804 $16,004 9,113 $14,922 7,441 $17,873 5,461 $15,921 5,452 4,545 7,832 7,661 5,439 4,367 108,477 32,949 30,024 28,773 25,740 0.55% 0.12% 0.18% 0.28% 0.43% Table 10 – Nonperforming Assets December 31, 2007 2006 2005 2004 2003 Other real estate owned 13,443 3,351 2,368 2,680 2,319 (Dollars in thousands) Commercial, financial and agricultural Real estate – construction Real estate – residential Real estate – commercial Consumer Leases Percent of Loans Per Allowance Category Percent of Loans Per Allowance Category Percent of Loans Per Allowance Category Percent of Loans Per Allowance Category Percent of Loans Per Allowance Category $14,557 14.52% $16,985 15.75% $17,942 15.40% $17,837 15.04% $17,117 16.16% 20,007 12.70% 4,425 6.75% 3,864 5.80% 3,107 4.98% 2,423 4.44% 15,997 35.06% 10,402 37.36% 10,329 38.68% 8,926 38.14% 7,378 36.02% 15,989 20,477 75 23.51% 14.05% 0.16% 17,097 21,285 306 24.56% 15.29% 0.29% 16,823 19,799 937 24.74% 14.87% 0.51% 16,930 20,206 1,322 24.11% 16.19% 1.54% 15,412 18,681 2,131 24.54% 16.48% 2.36% Total $87,102 100.00% $70,500 100.00% $69,694 100.00% $68,328 100.00% $63,142 100.00% 30 Total nonperforming assets Percentage of nonperforming loans to loans, net of unearned income Percentage of nonperforming assets to loans, net of unearned income Percentage of nonperforming assets to total assets $121,920 $36,300 $32,392 $31,453 $28,059 2.57% 0.95% 0.90% 0.92% 0.94% 2.89% 1.04% 0.97% 1.01% 1.03% 1.88% 0.66% 0.60% 0.58% 0.56% F I N A N C I A L R E V I E W Tax equivalent interest income from loans of $321.4 million for 2007 would have increased by $5.8 million if all loans had been current in accordance with their original terms. CAPITAL RESOURCES Liquidity and Interest Rate Sensitivity Management: Park’s objective in managing its liquidity is to maintain the ability to continuously meet the cash flow needs of customers, such as borrowings or deposit withdrawals, while at the same time seeking higher yields from longer-term lending and investing activities. Cash and cash equivalents increased by $7.1 million during 2007 to $193.4 million at year-end. Cash provided by operating activities was $83.2 million in 2007, $85.3 million in 2006 and $78.5 million in 2005. Net income was the primary source of cash for operating activities during each year. The goodwill impairment charge of $54.0 million in 2007 did not impact cash and as a result had no impact on cash provided by operating activities. Cash used in investing activities was $360.3 million in 2007. Cash provided by investing activities was $47.8 million in 2006 and $145.1 million in 2005. Investment security transactions are the major use or source of cash in invest- ing activities. Proceeds from the sale, repayment or maturity of securities provide cash and purchases of securities use cash. Net security transactions used cash of $130.8 million in 2007 and provided cash of $145.9 million in 2006 and $239.0 million in 2005. Another 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 $126.0 million in 2007, $99.3 million in 2006 and $53.6 million in 2005. In 2007, Park also used $38.3 million in cash to acquire the loans pertaining to the Millersburg, Ohio branch purchase and used $47.7 million of cash on a net basis for the acquisition of Vision. Cash provided by financing activities was $284.2 million in 2007. Cash used in financing activities was $120.7 million in 2006 and $211.4 million in 2005. Changes in short-term borrowings and long-term debt is a major source or use of cash for financing activities. The net increase in short-term borrowings provided cash of $359.2 million in 2007, $61.7 million in 2006 and $35.8 million in 2005. Cash was used by the net decrease in long-term borrowings of $19.4 million in 2007, $110.6 million in 2006 and $102.6 million in 2005. Another major source of cash for financing activities is the net change in deposits. Cash provided by the net increase in deposits was $13.2 million in 2007 and $6.3 million in 2006. Cash used by the net decrease in deposits was $55.5 million in 2005. In 2007, cash was also provided from the deposits of $23.5 million acquired as part of the Millersburg, Ohio branch purchase and from the $25 million in proceeds from the issuance of subordinated debt. 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 Park to meet its cash flow needs. The following table shows interest rate sensitivity data for five different time intervals as of December 31, 2007: Table 11 – Interest Rate Sensitivity (Dollars in thousands) 0-3 Months 3-12 Months 1-3 Years 3-5 Years Over 5 Years Total Interest earning assets: Investment securities (1) $ 176,410 $ 275,598 $ 431,416 $291,243 $528,436 $1,703,103 Money market instruments 10,232 — — — — 10,232 Loans (1) 1,683,278 1,079,639 1,257,096 183,628 20,493 4,224,134 Total interest earning assets 1,869,920 1,355,237 1,688,512 474,871 548,929 5,937,469 Table 11 – Interest Rate Sensitivity continued (Dollars in thousands) 0-3 Months 3-12 Months 1-3 Years 3-5 Years Over 5 Years Total Interest bearing liabilities: Interest bearing transaction accounts (2) Savings $ 656,910 $ — $ 681,582 $ — $ — $1,338,492 accounts (2) 53,105 — 477,944 — — 531,049 Time deposits 571,597 929,811 277,793 91,776 1,463 1,872,440 Other 1,792 — — — — 1,792 Total deposits $1,283,404 929,811 1,437,319 91,776 1,463 3,743,773 Short-term borrowings 559,319 200,000 — — — 759,319 Long-term debt 2,901 32,040 48,625 1,960 504,882 590,408 Subordinated debentures Total interest bearing liabilities Interest rate 40,000 — — — — 40,000 1,885,624 1,161,851 1,485,944 93,736 506,345 5,133,500 sensitivity gap (15,704) 193,386 202,568 381,135 42,584 803,969 Cumulative rate sensitivity gap Cumulative gap as a percentage of total interest earning assets (15,704) 177,682 380,250 761,385 803,969 — –0.26% 2.99% 6.40% 12.82% 13.54% — (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. The totals for investment securities include interest bearing deposits with other banks. (2) Management considers interest bearing transaction accounts and savings accounts to be core deposits and therefore, not as rate sensitive as other deposit accounts and borrowed money. Accordingly, only 49% of interest bearing transaction accounts and 10% of savings accounts are considered to reprice within one year. If all of the interest bearing checking accounts and savings accounts were considered to reprice within one year, the one year cumulative gap would change from a positive 2.99% to a negative 16.54%. 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, 2007, the cumulative interest earning assets maturing or repricing within twelve months were $3,225 million compared to the cumulative interest bearing liabilities maturing or repricing within twelve months of $3,047 million. For the twelve-month cumulative gap position, rate sensitive assets exceed rate sensitive liabilities by $178 million or 3.0% of interest earning assets. A positive twelve month cumulative rate sensitivity gap (assets exceed liabilities) would suggest that the Corporation’s net interest margin would decrease if inter- est rates were to decrease. 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. The cumulative twelve month interest rate sensitivity gap position at December 31, 2006, was a negative $396 million or a negative 7.9% of interest earning assets compared to a positive $178 million or a positive 3.0% of interest earning assets at December 31, 2007. This change in the cumulative twelve month interest rate sensitivity gap of a positive $574 million was due in part to an increase in the percentage of interest earning assets maturing or repricing within one year to 54.3% at year-end 2007 compared to 49.0% at year-end 2006. Additionally, the percentage of interest bearing liabilities maturing or repricing within one year decreased to 59.4% at year-end 2007 compared to 68.8% at year-end 2006. 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. Park’s manage- 31 F I N A N C I A L R E V I E W ment 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 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, 2007, the earnings simulation model projected that net income would increase by .2% using a rising interest rate scenario and decrease by .6% using a declining interest rate scenario over the next year. At December 31, 2006, the earnings simulation model projected that net income would increase by .1% using a rising interest rate scenario and decrease by .7% using a declining interest rate scenario over the next year and 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 declin- ing 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 three years at 4.20% in 2007, 4.33% in 2006 and 4.34% in 2005. 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 approximately 4.10% in 2008. The large increase in nonaccrual loans in 2007 reduced the net interest margin during the second half of 2007 and the projected large amount of nonaccrual loans in 2008 is expected to continue to negatively impact the net interest margin in 2008. 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, 2007. Further discussion of the nature of each specified obligation is included in the referenced Note to the Consolidated Financial Statements or referenced Table in this Financial Review section. Table 12 – Contractual Obligations December 31, 2007 Payments Due In Table / Note 0-1 Years 1-3 Years 3-5 Years Over 5 Years Total $2,566,799 $ — $ — $ — $2,566,799 1,501,408 277,793 91,776 1,463 1,872,440 759,319 — — — 759,319 34,894 48,688 2,053 504,774 590,409 — 2,186 1,530 — — 40,000 40,000 3,084 1,646 3,012 250 — — 9,928 1,780 $4,866,136 $329,815 $95,475 $549,249 $5,840,675 (Dollars in thousands) Deposits without stated maturity Certificates of deposit Short-term borrowings Long-term debt 11 9 10 Subordinated debentures 11 Operating leases 8 Purchase obligations Total contractual obligations 32 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, 2007, the Corporation had $996 million of loan commitments for commercial, commercial real estate, and residential real estate loans and had $132 million of commitments for revolving home equity and credit card lines. Standby letters of credit totaled $30 million at December 31, 2007. Commitments to extend credit for 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 2008. See Note 18 of the Notes to Consolidated Financial Statements for additional information on loan commitments and standby letters of credit. The Corporation did not have any unrecorded significant contingent liabilities at December 31, 2007, and did not have any off-balance sheet arrangements at year-end 2007. Capital: Park’s primary means of maintaining capital adequacy is through net retained earnings. At December 31, 2007, the Corporation’s stockholders’ equity was $580.0 million, compared to $570.4 million at December 31, 2006. Stockholders’ equity at December 31, 2007 was 8.92% of total assets compared to 10.43% of total assets at December 31, 2006. Tangible stockholders’ equity (stockholders’ equity less goodwill and other intangible assets) was $435.5 million at December 31, 2007 and was $492.4 million at December 31, 2006. At December 31, 2007, tangible stockholders’ equity was 6.85% of total tangible assets (total assets less goodwill and other intangible assets), compared to 9.13% at December 31, 2006. Net income for 2007 was $22.7 million, $94.1 million in 2006 and $95.2 million in 2005. The large decrease in net income in 2007 was primarily due to a loss of $60.7 million at Vision Bank. This loss includes a goodwill impairment charge of $54.0 million. Cash dividends declared were $52.8 million in 2007, $51.4 million in 2006 and $51.6 million in 2005. On a per share basis, the cash dividends declared were $3.73 per share in 2007, $3.69 per share in 2006 and $3.62 per share in 2005. Park purchased 760,531 shares of treasury stock totaling $65.6 million in 2007 at a weighted average cost of $86.21 per share. In 2006, Park purchased 302,786 shares of treasury stock totaling $30.5 million at a weighted average cost of $100.76 per share. In 2005, Park purchased 281,360 shares of treasury stock totaling $30.0 million at a weighted average cost of $106.55 per share. Treasury stock had a balance in stockholders’ equity of $208.1 million at December 31, 2007 compared to $143.4 million at December 31, 2006 and $116.7 million at December 31, 2005. Park issued 792,937 shares of Park common stock valued at a price of $105.00 per share for a total value of $83.3 million pursuant to the acquisition of Vision on March 9, 2007. In 2006, Park issued 86,137 shares of common stock valued at a price of $100.60 per share for a total value of $8.7 million pursuant to the acquisition of Anderson Bank. Common stock had a balance in stock- holders’ equity of $301.2 million at December 31, 2007 compared to $217.1 million at December 31, 2006 and $208.4 million at December 31, 2005. Accumulated other comprehensive income (loss) was ($2.6) million at December 31, 2007 compared to ($22.8) million at December 31, 2006 and ($10.1) million at December 31, 2005. Long-term interest rates decreased during the fourth quarter of 2007 and the market value of Park’s investment securities increased and as a result Park recognized $16.9 million of other comprehensive income on investment securities in 2007 and $3.3 million of other comprehensive income related to the change in pension plan assets and benefit obligations in 2007. F I N A N C I A L R E V I E W Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts, and bank holding companies. Park’s accumulated other comprehensive income (loss) is not included in computing regulatory capital. The minimum leverage capital ratio (defined as stockholders’ equity less intangible assets divided by tangible assets) is 4% and the well capitalized ratio is greater than or equal to 5%. Park’s leverage ratio was 7.10% at December 31, 2007 and exceeded the minimum capital required by $197 million. The minimum Tier 1 risk-based capital ratio (defined as leverage capital divided by risk-adjusted assets) is 4% and the well capitalized ratio is greater than or equal to 6%. Park’s Tier 1 risk-based capital ratio was 10.16% at December 31, 2007 and exceeded the minimum capital required $274 million. The minimum total risk-based capital ratio (defined as leverage capital plus supplemental capital divided by risk-adjusted assets) is 8% and the well capitalized ratio is greater than or equal to 10%. Park’s total risk-based capital ratio was 11.97% at December 31, 2007 and exceeded the minimum capital required by $177 million. At December 31, 2007, Park exceeded the well capitalized regulatory guidelines for bank holding companies. Park exceeded the well capitalized leverage capital ratio of 5% by $134 million and exceeded the well capitalized Tier 1 risk-based capital ratio of 6% by $185 million and exceeded the well capitalized total risk- based capital ratio of 10% by $88 million at year-end 2007. The financial institution subsidiaries of Park each met the well capitalized ratio guidelines at December 31, 2007. See Note 20 of the Notes to Consolidated Financial Statements for the capital ratios for Park 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 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, (Dollars in thousands, except per share data) Results of Operations: Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Net gains (losses) on sale of securities Noninterest income Noninterest expense Net income Net income excluding 2007 2006 2005 2004 2003 $401,824 $ 334,559 $ 314,459 $ 270,993 $ 264,629 61,992 93,895 167,147 202,637 220,564 234,677 121,315 213,244 58,702 212,291 29,476 3,927 5,407 8,600 12,595 205,201 209,317 215,157 203,691 190,042 — 71,640 224,164 22,707 97 64,665 141,002 94,091 96 59,609 139,438 95,238 (793) 52,641 126,290 91,507 (6,060) 61,583 122,376 86,878 impairment charge (a) 76,742 94,091 95,238 91,507 86,878 Per share: Net income – basic Net income – diluted Net income per share excluding impairment charge – diluted (a) Cash dividends declared 1.60 1.60 5.40 3.730 6.75 6.74 6.74 3.690 6.68 6.64 6.64 3.620 6.38 6.32 6.32 3.414 6.01 5.97 5.97 3.209 Table 13 – Consolidated Five-Year Selected Financial Data continued December 31, (Dollars in thousands, except per share data) Average Balances: Loans Investment securities Money market instruments 2007 2006 2005 2004 2003 $4,011,307 $3,357,278 $3,278,092 $2,813,069 $2,695,830 1,759,816 1,851,598 1,596,205 1,901,129 1,610,639 17,838 8,723 12,258 9,366 35,768 Total earning assets 5,625,350 4,976,640 5,141,948 4,723,564 4,491,414 Noninterest bearing deposits Interest bearing deposits 697,247 662,077 643,032 574,560 522,456 3,706,231 3,162,867 3,187,033 2,946,360 2,901,835 Total deposits 4,403,478 3,824,944 3,830,065 3,520,920 3,424,291 Short-term borrowings Long-term debt Stockholders’ equity Total assets 494,160 568,575 618,758 6,169,156 375,332 553,307 545,074 5,380,623 291,842 799,888 559,211 5,558,088 401,299 519,979 538,275 5,049,081 515,328 281,599 520,391 4,803,263 0.37% 1.75% 1.71% 1.81% 1.81% 1.24% 3.67% 1.75% 17.26% 1.71% 17.03% 1.81% 17.00% 1.81% 16.69% Ratios: Return on average assets Return on average assets excluding impairment charge (a) Return on average equity Return on average equity excluding impairment charge (a) Net interest margin (1) Noninterest expense to 12.40% 4.20% 10.03% 7.10% 10.16% 11.97% 17.26% 4.33% 50.35% 54.65% 10.13% 9.96% 14.72% 15.98% 17.03% 4.34% 49.32% 54.19% 10.06% 9.27% 14.17% 15.43% 17.00% 4.56% 47.11% 53.54% 10.66% 10.10% 15.16% 16.43% 16.69% 4.60% 45.66% 53.42% 10.83% 10.79% 16.51% 17.78% net revenue (1) Dividend payout ratio Average stockholders’ equity to average total assets 72.74% 232.35% Leverage capital Tier 1 capital Risk-based capital (1) Computed on a fully taxable equivalent basis (a) Net income for 2007 has been adjusted for the impairment charge to goodwill. Net income excluding the impairment charge equals net income for the year plus the impairment charge to goodwill of $54,035. Twelve Months Ended December 31, (In thousands, except per share data) Reconciliation of net income to net income excluding impairment charge: Net income Plus goodwill impairment charge Net income before impairment charge Reconciliation of net income per share – diluted to net income per share – diluted excluding impairment charge: Net income per share – diluted Plus impairment charge to goodwill per share – diluted Net income per share – diluted before impairment charge 2007 2006 $22,707 $94,091 54,035 — $76,742 $94,091 $1.60 3.80 $6.74 — $5.40 $6.74 Non-GAAP Financial Measures: Park’s management uses certain non-GAAP (generally accepted accounting principles) financial measures to evaluate Park’s performance. Specifically, management reviews (i) net income before impairment charge, (ii) net income per share–diluted before impairment charge, (iii) return on average assets before impairment charge, and (iv) return on average equity before impairment charge, (collectively, the “adjusted performance metrics”) and has included in this annual report information relating to the adjusted performance metrics for the three-month and twelve-month periods ended December 31, 2007 and 2006. For purposes of calculating these non-GAAP financial measures, net income (loss) for the three-month and twelve-month periods ended December 31, 2007 is increased by the non-cash goodwill impairment charge to earnings of approximately $54.0 million, to determine net income before impairment charge. Management believes the adjusted performance metrics present a more reasonable view of Park’s operating performance and ensures comparability of operating performance from period to period while eliminating the one-time non-recurring impairment charge. Park has provided a reconciliation of net income (loss) to net income before impairment charge and a reconciliation 33 F I N A N C I A L R E V I E W Three Months Ended December 31, (In thousands, except per share data) Reconciliation of net income (loss) to net income excluding impairment charge: Net income (loss) Plus goodwill impairment charge Net income before impairment charge Reconciliation of net income (loss) per share – diluted to net income per share – diluted excluding impairment charge: Net income (loss) per share – diluted Plus impairment charge to goodwill per share – diluted Net income per share – diluted before impairment charge 2007 2006 $(43,170) $22,593 54,035 — $10,865 $22,593 $(3.08) 3.85 $1.63 — $0.77 $1.63 The Corporation’s common stock (symbol: PRK) is traded on the American Stock Exchange (AMEX). At December 31, 2007, the Corporation had 4,937 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, 2007 and 2006, as reported by AMEX. Table 15 – Market and Dividend Information 2007: First Quarter Second Quarter Third Quarter Fourth Quarter 2006: First Quarter Second Quarter Third Quarter Fourth Quarter High Low Last Price $101.25 $ 88.48 $ 94.48 95.50 93.45 91.70 83.50 78.55 64.50 84.79 87.20 64.50 $117.21 $103.00 $106.50 105.42 105.00 103.95 92.36 93.72 98.14 98.81 100.09 99.00 Cash Dividend Declared Per Share $0.93 0.93 0.93 0.94 $0.92 0.92 0.92 0.93 of net income (loss) per share–diluted to net income per share–diluted before impairment charge solely for the purpose of complying with SEC Regulation G and not as an indication that the adjusted performance metrics are a substitute for net income (loss), net income (loss) per share–diluted, return on average assets or return on average equity determined by GAAP. The following table is a summary of selected quarterly results of operations for the years ended December 31, 2007 and 2006. Certain quarterly amounts have been reclassified to conform to the year-end financial statement presentation. Table 14 – Quarterly Financial Data (Dollars in thousands, except per share data) March 31 Three Months Ended Sept. 30 June 30 Dec. 31 2007: Interest income Interest expense Net interest income Provision for loan losses Gain (loss) on sale of securities Income before income taxes Net income (loss) Net income excluding impairment charge (a) Per share data: Net income (loss) – basic Net income (loss) – diluted Net income per share excluding impairment charge – diluted (a) Weighted-average common stock outstanding – basic Weighted-average common stock equivalent – diluted 2006: Interest income Interest expense Net interest income Provision for loan losses Gain (loss) on sale of securities Income before income taxes Net income Per share data: Net income – basic Net income – diluted Weighted-average common stock outstanding – basic Weighted-average common stock equivalent – diluted $90,836 $102,825 $103,766 $104,397 35,938 54,898 2,205 — 29,558 21,063 42,415 60,410 2,881 — 33,511 23,510 44,350 59,416 5,793 — 29,866 21,304 44,444 59,953 18,597 — (40,258) (43,170) 21,063 23,510 21,304 10,865 1.49 1.49 1.62 1.62 1.50 1.50 (3.08) (3.08) 1.49 1.62 1.50 0.77 14,121,331 14,506,926 14,193,019 14,029,944 14,138,517 14,507,895 14,193,019 14,030,499 $80,596 $83,298 $85,290 $85,375 27,177 53,419 — — 33,800 23,807 1.70 1.69 29,476 53,822 1,467 — 33,827 23,886 1.71 1.70 31,728 53,562 935 97 33,589 23,805 1.72 1.71 32,934 52,441 1,525 — 31,861 22,593 1.63 1.63 14,034,360 13,977,432 13,859,498 13,845,071 14,095,895 14,010,407 13,888,458 13,872,586 a) Net income for the fourth quarter 2007 has been adjusted for the impairment charge to goodwill. Net income excluding the impairment charge equals net income for the period plus the impairment charge to goodwill of $54,035. 34 F I N A N C I A L R E V I E W PERFORMANCE GRAPH Table 16 compares the total return performance for Park common shares with the AMEX Composite Index, the NASDAQ Bank Stocks Index and with the SNL Financial Bank and Thrift Index for the five year period from December 31, 2002 to December 31, 2007. The AMEX Composite Index is a market capitalization-weighted index of the stocks listed on the American Stock Exchange. The NASDAQ Bank Stocks Index is comprised of all depository institutions, holding companies and other investment companies that are traded on The NASDAQ Global Select and Global Markets. Park considers a number of bank holding companies traded on The NASDAQ National Market to be within its peer group. The SNL Financial Bank and Thrift Index is comprised of all publicly traded bank and thrift stocks researched by SNL Financial. The AMEX Financial Stocks Index includes the stocks of banks, thrifts, finance companies and securities broker-dealers. Park believes that The NASDAQ Bank Stocks Index and the SNL Financial Bank and Thrift Index are more appropriate industry indices for Park to use for the five year total return performance comparison. The total return performance for Park’s common shares has underperformed the total return performance on the three indices used in the five year comparison as indicated in Table 16. The annual compound total return on Park’s common shares for the past five years is a negative 4.0%. By comparison, the annual compound total returns for the past five years on the AMEX Composite Index, the NASDAQ Bank Stocks Index and the SNL Bank and Thrift Index were 26.7%, 3.6% and 6.6%, respectively. The total return performance for bank stocks in 2007 was generally very poor. For 2007, the total return on Park’s common shares was a negative 31.9%, compared to a total return on the NASDAQ Bank Stocks Index of a negative 22.1%% and a total return on the SNL Bank and Thrift Index of a negative 23.7%. 350 300 250 200 150 100 50 0 l e u a V x e d n I 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 Table 16 – Total Return Performance PERIOD ENDING Index 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 Park National Corporation AMEX Composite Index NASDAQ Bank Stocks Index SNL Bank and Thrift Index 100.00 100.00 100.00 100.00 118.18 146.69 129.93 135.57 152.98 184.19 144.21 151.82 119.75 232.41 137.97 154.20 119.79 278.76 153.15 180.17 81.58 326.63 119.35 137.40 35 M A N A G E M E N T ’ S R E P O R T O N O V E R F I N A N C I A L I N T E R N A L R E P O R T I N G C O N T R O L 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 accordance 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 accordance 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 participation of our Chairman of the Board and Chief Executive Officer, our President and our Chief Financial Officer, management evaluated the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2007, the end of the Corporation’s fiscal year. 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. This assessment excluded the internal control over financial reporting of Vision Bank and Vision Bancshares Financial Group, Inc. which were acquired on March 9, 2007 through the merger of Vision Bancshares, Inc., their then parent, with and into the Corporation, and whose financial statements reflect total assets constituting approximately 13% of total assets reported on the Corporation’s consolidated financial statements as of December 31, 2007. Based on our assessment under the criteria described in the proceeding paragraph, management concluded that the Corporation maintained effective internal control over financial reporting as of December 31, 2007. The Corporation’s independent registered public accounting firm, Crowe Chizek and Company LLC, has audited the Corporation’s 2007 and 2006 consolidated financial statements included in this Annual Report and the Corporation’s internal control over financial reporting as of December 31, 2007, and has issued their Report of Independent Registered Public Accounting Firm, which appears in this Annual Report. C. Daniel DeLawder Chairman and Chief Executive Officer David L. Trautman President John W. Kozak Chief Financial Officer February 23, 2008 36 R E P O R T I N D E P E N D E N T O F P U B L I C A C C O U N T I N G F I R M R E G I S T E R E D To the Board of Directors and Shareholders Park National Corporation Newark, Ohio We have audited the accompanying consolidated balance sheets of Park National Corporation as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the years then ended. We also have audited Park National Corporation’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Park National Corporation’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our re- sponsibility is to express an opinion on these financial statements and an opinion on the company’s internal control over financial reporting based on our audits. The consolidated statements of income, changes in stockholders’ equity and cash flows of Park National Corporation for the year ended December 31, 2005 were audited by other auditors whose report, dated February 21, 2006, expressed an unqualified opinion on those statements. 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 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. As permitted, the Company excluded the subsidiary acquired on March 9, 2007 (Vision Bank) from the scope of Management’s Report on Internal Control Over Financial Reporting. As such, this entity has also been excluded from the scope of our audit of internal control over financial reporting. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Park National Corporation as of December 31, 2007 and 2006, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Park National Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by the COSO. Columbus, Ohio February 23, 2008 37 C O N S O L I D A T E D B A L A N C E S H E E T S PARK NATIONAL CORPORATION AND SUBSIDIARIES at December 31, 2007 and 2006 (Dollars in thousands) ASSETS Cash and due from banks Money market instruments Cash and cash equivalents Interest bearing deposits with other banks Investment securities: Securities available-for-sale, at fair value (amortized cost of $1,473,052 and $1,299,686 at December 31, 2007 and 2006, respectively) Securities held-to-maturity, at amortized cost (fair value of $161,414 and $169,786 at December 31, 2007 and 2006, respectively) Other investment securities Total investment securities Total loans Allowance for loan losses Net loans Other assets: Bank owned life insurance Goodwill Other intangible assets Premises and equipment, net Accrued interest receivable Other real estate owned Mortgage loan servicing rights Other Total other assets Total assets The accompanying notes are an integral part of the financial statements. 2007 $ 183,165 10,232 193,397 1 1,474,517 165,421 63,165 1,703,103 4,224,134 (87,102) 4,137,032 119,472 127,320 17,236 66,634 30,646 13,443 10,204 82,614 467,569 $6,501,102 2006 $ 177,990 8,266 186,256 1 1,275,079 176,485 61,934 1,513,498 3,480,702 (70,500) 3,410,202 113,101 72,334 5,669 47,554 26,122 3,351 10,371 82,417 360,919 $5,470,876 38 C O N S O L I D A T E D B A L A N C E S H E E T S (CONTINUED) PARK NATIONAL CORPORATION AND SUBSIDIARIES at December 31, 2007 and 2006 (Dollars in thousands) LIABILITIES AND STOCKHOLDERS’ EQUITY Deposits: Noninterest bearing Interest bearing Total deposits Short-term borrowings Long-term debt Subordinated debentures Total borrowings Other liabilities: Accrued interest payable Other Total other liabilities Total liabilities COMMITMENTS AND CONTINGENCIES Stockholders’ equity: Common stock, no par value (20,000,000 shares authorized; 16,151,200 shares issued in 2007 and 15,358,323 issued in 2006) Accumulated other comprehensive income (loss), net Retained earnings Less: Treasury stock (2,186,624 shares in 2007 and 1,436,794 shares in 2006) Total stockholders’ equity Total liabilities and stockholders’ equity The accompanying notes are an integral part of the financial statements. 2007 $ 695,466 3,743,773 4,439,239 759,318 590,409 40,000 1,389,727 15,125 76,999 92,124 5,921,090 301,213 (2,608) 489,511 (208,104) 580,012 $6,501,102 2006 $ 664,962 3,160,572 3,825,534 375,773 604,140 — 979,913 13,076 81,914 94,990 4,900,437 217,067 (22,820) 519,563 (143,371) 570,439 $5,470,876 39 C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E PARK NATIONAL CORPORATION AND SUBSIDIARIES for the years ended December 31, 2007, 2006 and 2005 (Dollars in thousands, except per share data) Interest and dividend income: Interest and fees on loans Interest and dividends on: Obligations of U.S. Government, its agencies and other securities Obligations of states and political subdivisions Other interest income Total interest and dividend income Interest expense: Interest on deposits: Demand and savings deposits Time deposits Interest on short-term borrowings Interest on long-term debt Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Other income: Income from fiduciary activities Service charges on deposit accounts Net gains on sales of securities Other service income Other Total other income The accompanying notes are an integral part of the financial statements. 2007 2006 2005 $ 320,827 $255,123 $223,868 77,016 3,061 920 401,824 39,797 81,224 22,113 24,013 167,147 234,677 29,476 205,201 14,403 23,813 — 11,543 21,881 75,300 3,667 469 334,559 25,870 56,402 15,692 23,351 121,315 213,244 3,927 209,317 13,548 19,969 97 10,920 20,228 85,664 4,486 441 314,459 15,091 41,808 7,508 29,488 93,895 220,564 5,407 215,157 12,034 17,853 96 10,753 18,969 $ 71,640 $ 64,762 $ 59,705 40 C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E (CONTINUED) PARK NATIONAL CORPORATION AND SUBSIDIARIES for the years ended December 31, 2007, 2006 and 2005 (Dollars in thousands, except per share data) Other expense: Salaries and employee benefits Goodwill impairment charge Data processing fees Fees and service charges Net occupancy expense of bank premises Amortization of intangibles Furniture and equipment expense Insurance Marketing Postage and telephone State taxes Other Total other expense Income before income taxes Income taxes Net income Earnings per share: Basic Diluted The accompanying notes are an integral part of the financial statements. 2007 2006 2005 $ 97,712 $ 82,579 $ 80,579 54,035 6,892 11,055 10,717 3,847 9,259 1,445 4,961 6,910 2,769 14,562 224,164 52,677 29,970 $ 22,707 $1.60 $1.60 — 4,246 9,553 9,155 2,470 8,215 1,137 4,438 6,303 2,333 10,573 141,002 133,077 38,986 $ 94,091 $6.75 $6.74 — 4,154 9,035 8,721 2,548 7,915 1,243 4,201 5,975 2,925 12,142 139,438 135,424 40,186 $ 95,238 $6.68 $6.64 41 Comprehensive Income $95,238 (22,585) $72,653 C O N S O L I D A T E D S T A T E M E N T S O F C H A N G E S I N S T O C K H O L D E R S ’ E Q U I T Y PARK NATIONAL CORPORATION AND SUBSIDIARIES for the years ended December 31, 2007, 2006 and 2005 (Dollars in thousands, except per share data) Common Stock Shares Outstanding 14,320,227 — Amount $208,251 — Retained Earnings $433,260 95,238 Treasury Stock $ (91,392) — Accumulated Other Comprehensive Income (Loss) $ 12,442 — Total $562,561 95,238 Balance, January 1, 2005 Net income Other comprehensive income (loss), net of tax: Unrealized net holding loss on securities available-for-sale, net of income taxes of $(12,161) Cash dividends, $3.62 per share Cash payment for fractional shares in dividend reinvestment plan Shares issued for stock options Treasury stock purchased Treasury stock reissued primarily for stock options exercised — (50) 1,917 (281,360) 51,892 — (3) 117 — — (51,609) — — — — — (29,978) 4,689 (22,585) (22,585) — — — — (51,609) (3) 117 (29,978) 4,689 Balance, December 31, 2005 14,092,626 $208,365 $476,889 $(116,681) $(10,143) $558,430 Net income Other comprehensive income (loss), net of tax: Unrealized net holding loss on securities available-for-sale, net of income taxes of $(3,151) Total comprehensive income Adjustment to initially apply SFAS No. 158, net of income taxes of $(3,675) Cash dividends, $3.69 per share Cash payment for fractional shares in dividend reinvestment plan Shares issued for stock options Treasury stock purchased Treasury stock reissued primarily for stock options exercised Shares issued for Anderson Bank purchase Balance, December 31, 2006 Net income Other comprehensive income (loss), net of tax: Application of SFAS No. 158, net of income taxes of $1,759 Unrealized net holding gain on securities available-for-sale, net of income taxes of $9,125 Total comprehensive income — — 94,091 — — 94,091 94,091 (5,851) (5,851) (5,851) $88,240 — (72) 684 (302,786) 44,940 86,137 13,921,529 — — (5) 42 — — 8,665 $217,067 — (51,417) — — — — — — — — (30,508) 3,818 — (6,826) — — — — — — (6,826) (51,417) (5) 42 (30,508) 3,818 8,665 $519,563 22,707 $(143,371) — $(22,820) — $570,439 22,707 22,707 3,266 3,266 3,266 16,946 16,946 16,946 $42,919 Cash dividends, $3.73 per share Cash payment for fractional shares in dividend reinvestment plan Stock options granted Treasury stock purchased Treasury stock reissued for stock options exercised and other grants Shares issued for Vision Bancshares, Inc. purchase — (60) — (760,531) 10,701 — (5) 893 — — 792,937 83,258 (52,759) — — — — — — — — (65,568) 835 — — — — — — — (52,759) (5) 893 (65,568) 835 83,258 Balance, December 31, 2007 13,964,576 $301,213 $489,511 $(208,104) $ (2,608) $580,012 The accompanying notes are an integral part of the financial statements. 42 C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S PARK NATIONAL CORPORATION AND SUBSIDIARIES for the years ended December 31, 2007, 2006 and 2005 (Dollars in thousands) Operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses Amortization of loan fees and costs, net Provision for depreciation and amortization Goodwill impairment charge Amortization of intangible assets Accretion of investment securities Deferred income tax expense (benefit) Realized net investment security (gains) Stock based compensation expense Stock dividends on Federal Home Loan Bank stock Changes in assets and liabilities: Increase in other assets (Decrease) increase in other liabilities Net cash provided by operating activities Investing activities: Proceeds from sales of available-for-sale securities Proceeds from maturities of securities: Held-to-maturity Available-for-sale Purchase of securities: Held-to-maturity Available-for-sale Net decrease (increase) in other investments Net decrease in interest bearing deposits with other banks Net increase in loans Loans (purchased) sold with branch office Cash (paid) received for acquisition, net Purchases of premises and equipment, net Premises and equipment acquired in branch acquisitions Net cash (used in) provided by investing activities Financing activities: Net increase (decrease) in deposits Deposits purchased (sold) with branch office Net increase in short-term borrowings Cash payment for fractional shares of common stock Exercise of stock options, including tax benefits Purchase of treasury stock, net Proceeds from issuance of subordinated debt Proceeds from long-term debt Repayment of long-term debt Cash dividends paid Net cash provided by (used in) financing activities Increase in cash and cash equivalents Cash and cash equivalents at beginning of year 2007 $ 22,707 2006 $ 94,091 2005 $ 95,238 29,476 (5,935) 6,480 54,035 3,847 (3,009) (7,839) — 893 — (11,975) (5,492) 83,188 — 11,063 700,582 — (842,598) 180 — (126,005) (38,348) (47,686) (16,331) (1,150) (360,293) 13,198 23,466 359,213 (5) — (64,733) 25,000 378,100 (397,460) (52,533) 284,246 7,141 186,256 3,927 (4,340) 5,522 — 2,470 (1,630) 156 (97) — (3,101) (14,606) 2,858 85,250 304 19,471 293,207 — (166,518) (532) 299 (99,316) — 5,177 (4,311) — 47,781 6,320 — 61,699 (5) 42 (26,690) — 300,000 (410,644) (51,470) (120,748) 12,283 173,973 5,407 (3,809) 5,641 — 2,548 (2,444) 1,990 (96) — (2,525) (24,431) 958 78,477 131,794 63,914 345,660 (187,420) (113,198) (1,743) 1,796 (53,600) 5,273 (39,227) (8,193) — 145,056 (55,491) (12,419) 35,843 (3) 117 (25,289) — 326,040 (428,689) (51,498) (211,389) 12,144 161,829 Cash and cash equivalents at end of year $ 193,397 $ 186,256 $ 173,973 Supplemental disclosure Summary of business acquisition: Fair value of assets acquired Cash paid for the purchase of financial institutions Stock issued for the purchase of financial institutions Fair value of liabilities assumed Goodwill recognized The accompanying notes are an integral part of the financial statements. $ 686,512 (87,843) (83,258) (624,432) $(109,021) $ 69,717 (9,052) (8,665) (62,638) $ (10,638) $ 185,372 (52,500) — (161,241) $ (28,369) 43 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 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. The allowance for loan losses and the accounting for goodwill are particularly subject to change. 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 but included in other comprehensive income, net of applicable taxes. At December 31, 2007 and 2006, 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 perform- ance 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. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. 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. Federal Home Loan Bank (FHLB) Stock Park’s subsidiary banks are members of the FHLB system. Members are required to own a certain amount of stock based on their level of borrowings and other factors and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impair- ment based on the ultimate recovery of the par value. Both cash and stock dividends are reported as income. Bank Owned Life Insurance Park has purchased life insurance policies on certain key officers and directors. Bank owned life insurance is recorded at its cash surrender value (or the amount that can be realized). 44 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 $10.0 million at December 31, 2007 and $5.1 million at December 31, 2006. 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, commercial loans are placed on nonaccrual status at 90 days past due and residential mort- gage loans are placed on nonaccrual at 120 days past due. Interest on these loans is considered a loss, unless the loan is well-secured and in the process of collection. Consumer loans are generally charged-off when they are 120 days past due. Commercial loans placed on nonaccrual status are considered impaired under SFAS No. 114, as amended by SFAS No. 118 (See Note 5). 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 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. 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 environmental factors. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Such environmental factors include: historical loan loss experience; current economic conditions; loan delinquency; and experience, ability and depth of lending management and staff. 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. The range of depreciable lives that premises and equipment are being depreciated over are: Buildings Equipment, furniture and fixtures Leasehold improvements 5 to 50 Years 3 to 20 Years 1 to 10 Years Buildings that are currently placed in service are depreciated over 30 years. Equipment, furniture and fixtures that are currently placed in service are depreciated over 3 to 12 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 fair market value (which is the 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) and costs relating to holding the properties are charged to expense. Mortgage Loan 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. Park adopted SFAS No. 156, “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140,” on January 1, 2007, and selected the “amortization method”, whereby the servicing rights capitalized are amortized in proportion to and over the period of estimated future servicing income of the underlying loan. Capitalized mortgage servicing rights totaled $10.2 million at December 31, 2007 and $10.4 million at December 31, 2006. The estimated fair values of capitalized mortgage servicing rights are $11.6 million at both December 31, 2007 and 2006. 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. Park capitalized $1.6 million in mortgage servicing rights in both 2007 and 2006 and capitalized $2.0 million in 2005. In 2007, 2006 and 2005, Park’s amortization of mortgage servicing rights was $1.7 million, $1.9 million and $2.1 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 $1.3 million in 2005 as a result of the acquisition of First Clermont Bank on January 3, 2005. 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, 2007 compared to $1,405 million at December 31, 2006, and $1,403 million at December 31, 2005. At December 31, 2007, $70 million of the sold mortgage loans were sold with recourse compared to $77 million at December 31, 2006. Management closely monitors the delinquency rates on the mortgage loans sold with recourse. At December 31, 2007, 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 determin- ing 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 prop- erty but represent some future economic benefit to its 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, or more frequently if events or changes in circumstances indicate that the asset might be impaired. 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 (including multi-year projections), the purchase prices being paid for financial institutions in the markets served by the sub- sidiary banks, 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 2007, 2006 and 2005. (See Note 2 for details on the acquisitions of Vision Bancshares, Inc. (“Vision”), Anderson Bank Company (“Anderson”) and First Clermont Bank (“First Clermont”), the sale of the Roseville branch office, the acquisition of the Millersburg branch of Ohio Legacy Bank, N.A. and the recognition of an impairment charge to the Vision goodwill. (In thousands) January 1, 2005 First Clermont Acquisition Sale of Branch Office Amortization December 31, 2005 Amortization Anderson Acquisition December 31, 2006 Vision Acquisition Millersburg Branch Acquisition Amortization Impairment of Vision Goodwill December 31, 2007 Goodwill $ 34,187 28,369 (860) — Core Deposit Intangibles Total $ 6,700 $ 40,887 3,664 (324) (2,548) 32,033 (1,184) (2,548) $ 61,696 $ 7,492 $ 69,188 — 10,638 (2,470) 647 (2,470) 11,285 $ 72,334 $ 5,669 $ 78,003 109,021 — — (54,035) 12,720 2,694 (3,847) — 121,741 2,694 (3,847) (54,035) $127,320 $17,236 $144,556 45 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Park typically evaluates goodwill for impairment during the first quarter of each year. A determination was made during the first quarter of 2007 that goodwill was not impaired. SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), requires a company to perform an impairment test on goodwill annually, or more frequently if events or changes in circumstances indicate that the 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. During the fourth quarter of 2007, Park’s management 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 or an annualized 3.99% of average loan balances. Management determined that due to these severe credit conditions that a valuation of the fair value of Vision Bank be computed to determine if the goodwill of $109.0 million was impaired. Management calculated the estimated fair value of Vision Bank to be $123.0 million, based on four equally weighted tests; (i) on-going earnings multiplied by a price to earnings multiple (ii) tangible book multiplied by a price to tangible book ratio (iii) core deposit premium added to tangible book, and (iv) discounted future cash flows. Once it is determined that the fair value is materially less than the carrying value, FAS 142 requires a company to calculate the implied fair value of goodwill and compare it to the carrying amount of goodwill. The amount of the excess of the carrying amount of good- will over the implied amount of goodwill is the amount of the impairment loss, which was calculated as $54.0 million by Park management. After the impair- ment charge, the new carrying amount of goodwill resulting from the Vision acquisition is $55.0 million at December 31, 2007. The balance of goodwill was $127.3 million at December 31, 2007. This goodwill balance is located at four subsidiary banks of Park. The subsidiary banks are Vision Bank ($55.0 million), The Park National Bank ($39.0 million), Century National Bank ($25.8 million) and The Security National Bank and Trust Co. ($7.5 million). Goodwill and other intangible assets totaled $144.6 million at December 31, 2007 and $78.0 million at December 31, 2006. The core deposit intangibles are being amortized to expense principally on the straight-line method, over periods ranging from six to ten years. The amortiza- tion period for each of the Vision, First Clermont and Anderson acquisitions, and the Millersburg branch acquisition is six years. Core deposit intangible amortization expense was $3.8 million in 2007 and $2.5 million in both 2006 and 2005. The accumulated amortization of core deposit intangibles was $7.1 million as of December 31, 2007 and $9.0 million at December 31, 2006. In addition, Park’s subsidiary, United Bank, N.A., had core deposit intangibles of $5.7 million, which were fully amortized by the end of 2007. Park’s subsidiary banks had two branch offices in 2006 for which the core deposit intangibles were fully amortized. These intangibles totaled $4.6 million. The expected core deposit intangible amortization expense for each of the next five years is as follows: (In thousands) 2008 2009 2010 2011 2012 Total 46 $ 4,025 3,746 3,422 2,677 2,677 $16,547 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, (Dollars in thousands) 2007 2006 2005 Interest paid on deposits and other borrowings $167,154 Income taxes paid $ 39,115 $118,589 $ 34,633 $91,408 $37,146 Loss Contingencies and Guarantees Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. During the fourth quarter of 2007, Visa USA announced that it had reached an agreement to settle one of its lawsuits and that they were establishing an additional liability for a potential settlement with another party. Pursuant to the Visa USA bylaws, Park is obligated to indemnify Visa USA for certain covered losses. Park recorded a contingent liability of $0.9 million in the fourth quarter, which was based on the Visa USA announcements and Park’s membership inter- est in Visa USA. Visa has also announced its plans for an initial public offering (“IPO”). If this IPO occurs, Visa’s stated intention is to fund litigation settle- ments from an escrow account that will be funded by the IPO. When and if the IPO takes place, Park expects that it would reverse the $0.9 million liability, in addition to recognizing gains as a result of the IPO. 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. Park adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes—(“FIN 48”), on January 1, 2007. A tax position is recognized as a benefit only if it is “more-likely-than- not” that the tax position would be sustained in a tax examination being presumed to occur. The benefit recognized for a tax position that meets the more-likely-than-not criteria is measured based on the largest benefit that is more than 50 percent likely to be realized, taking into consideration the amounts and probabilities of the outcome upon settlement. For tax positions not meeting the “more-likely-than-not” test, no tax benefit is recorded. FIN 48 also provides guidance on disclosures and other issues. The adoption had no material effect on Park’s consolidated financial statements. As a result, there was no cumulative effect related to adopting FIN 48. As of December 31, 2007, Park had provided a liability of approximately $900,000 for unrecognized tax benefits related to various federal and state income tax matters. Park recognizes interest and penalties through the income tax provision. The total amount of interest and penalties on the date of adoption was $76,000. Park is no longer subject to examination by federal taxing authorities for the tax year 2003 and the years prior. 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. Comprehensive Income Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale and changes in the funded status of the Company’s defined benefit pension plan, which are also recognized as separate components of equity. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Stock Options Effective January 1, 2006, Park adopted SFAS No. 123R, “Share-Based Payment,” using the modified prospective method and accordingly did not restate prior period results. The modified prospective method recognizes compensation expense beginning with the effective date of January 1, 2006, for all stock options granted after January 1, 2006 and for all stock options that became vested after January 1, 2006. Park granted 90,000 stock options in 2007 and did not grant any stock options in 2006. Additionally, no stock options became vested in 2006. The adoption of SFAS No. 123R on January 1, 2006, had no impact on Park’s net income in 2006. Prior to January 1, 2006, Park accounted for its stock option plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (APB 25) and related interpretations. Under APB 25, no stock based employee compensation cost was reflected in net income, as all stock options granted under Park’s plans had an exercise price equal to the market value of the underlying common stock on the grant date. Park granted 228,150 incentive stock options in 2005. The following table illustrates the effect on net income and earnings per share if compensation expense was measured using the fair value recognition provisions of SFAS No. 123R for 2005. December 31, (Dollars in thousands, except per share data) Net income as reported Deduct: Stock-based compensation expense determined under fair value based method Pro-forma net income Basic earnings per share as reported Pro-forma basic earnings per share Diluted earnings per share as reported Pro-forma diluted earnings per share 2005 $95,238 (3,664) 91,574 $6.68 6.42 6.64 6.38 Derivative Instruments Park did not use any derivative instruments (such as interest rate swaps) in 2007, 2006 and 2005. However, on January 2, 2008, Park entered into an interest rate swap transaction, which was designated as a cash flow hedge against the variability of cash flows related to the Subordinated Debenture of $25 million, which was issued by one of Park’s subsidiary banks during the fourth quarter of 2007 (see Note 11 and Note 23). Accounting for Defined Benefit Pension Plan In September 2006, the 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 year-end 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. The adoption of SFAS No. 158 had the following effect on individual line items in the 2006 balance sheet: (In thousands) Before application of SFAS No. 158 Adjustments After application of SFAS No. 158 Prepaid pension benefit cost $ 16,342 $(10,501) $ 5,841 Deferred income tax asset Total assets 18,715 5,477,702 Accumulated other comprehensive income (loss), net (15,994) Total stockholders’ equity $ 577,265 3,675 (6,826) (6,826) $ (6,826) 22,390 5,470,876 (22,820) $ 570,439 As a result of the adoption of the SFAS No. 158 measurement date provisions, Park believes there will be a charge of approximately $0.3 million to retained earnings on January 1, 2008 to reflect the after-tax expense pertaining to three months of pension plan expense. Prior Year Misstatements In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which is effective for fiscal years ending on or after November 15, 2006. SAB 108 provides guidance on how the effects of prior- year uncorrected financial statement misstatements should be considered in quantifying a current year misstatement. SAB 108 requires public companies to quantify misstatements using both an income statement (rollover) and balance sheet (iron curtain) approach and evaluate whether either approach results in misstatement that when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial now are considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. Upon adoption in 2006, Park had no items that required posting an adjustment to beginning retained earnings. Adoption of New Accounting Standards Accounting for Certain Hybrid Financial Instruments: In February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment to SFAS No. 133 and 140.” This statement permits fair value re-measurement for any hybrid financial instruments, clarifies which instruments are subject to the requirements of SFAS No. 133, and establishes a requirement to evaluate interests in securitized financial assets and other items. In January 2007, the FASB issued Derivatives Implementation Group Issue B40, “Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets” (“DIG Issue B40”). DIG Issue B40 provides an exemption from the embedded derivative test of paragraph 13(b) of SFAS No. 133 for instruments that would otherwise require bifurcation if the test is met solely because of a prepayment feature included within the securitized interest and prepayment is not controlled by the security holder. SFAS No. 155 and DIG Issue B40 are effective for all financial instruments acquired, issued, or subject to a remeasurement (new basis) event occurring after January 1, 2007. The adoption of SFAS No. 155 and DIG Issue B40 did not have a material impact on Park’s consolidated financial statements. Accounting for Servicing of Financial Assets: In March 2006, FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—an amendment of SFAS No. 140.” This Statement provides the following: 1.) revised guidance on when a servicing asset and servicing liability should be recognized; 2.) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; 3.) permits an entity to elect to measure servicing assets and servicing liabilities at fair value each reporting date and report changes in fair value in earnings in the period in which the changes occur; 4.) upon initial adoption, permits a one-time reclassification of avail- able-for-sale securities to trading securities for securities which are identified as offsetting the entity’s exposure to changes in the fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value; and 5.) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial condition and additional footnote disclosures. For Park, SFAS No. 156 was effective January 1, 2007. The adoption of this Statement did not have a material impact on Park’s consolidated financial statements. 47 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Recently Issued but not yet Effective Accounting Pronouncements Accounting for Postretirement Benefits Pertaining to Life Insurance Arrangements: In July 2006, the Emerging Issues Task Force (“EITF”) of 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). This draft abstract from 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 will be effective for fiscal years beginning after December 15, 2007. At December 31, 2007, Park and its subsidiary banks owned $119.5 million of bank owned life insurance policies. These life insurance policies are generally subject to endorsement split-dollar life insurance arrangements. These arrange- ments 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. Based on the most recent analysis performed by management, Park believes there will be a charge, net of deferred tax, of approximately $7.5 million to retained earnings on January 1, 2008. A corresponding liability will be recognized of $11.6 million. 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 stan- dards. 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. 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 United States 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 will result in enhanced footnote disclosures; however, management believes that the adoption will 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. At the February 12, 2008 FASB meeting, the Board decided to defer the effective date of Statement 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 certain non-financial assets and liabilities for fiscal years beginning after November 15, 2008. Non-financial assets and liabilities may include (but are not limited to); (i) non-financial assets and liabilities initially valued 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 described in SFAS No. 142, and (iii) non-financial assets and liabilities measured at fair value in the second step of a goodwill impairment test described in SFAS No. 142. Accounting for Written Loan Commitments Recorded at Fair Value: On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value through Earnings (“SAB 109”). Previously, SAB 105, “Application of Accounting Principles to Loan Commitments,” stated that in measuring the fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the loan. SAB 109 supercedes SAB 105 and indicates that the expected net future cash flows related to the associ- ated servicing of the loan should be included in measuring fair value for all written loan commitments that are accounted for at fair value through earnings. SAB 105 also indicated that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment, and SAB 109 retains that view. SAB 109 is effective for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. Park does not expect the impact of this standard to be material. Accounting for Business Combinations: On December 4, 2007, the FASB issued Statement 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. 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. The statement does not apply to combinations between entities under common control. This Statement 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. Noncontrolling Interests in Consolidated Financial Statements: In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” which amends Accounting Research Bulletin No. 51 “Consolidated Financial Statements” (“ARB 51”). A noncontrolling interest, also known as a “minority interest,” is the portion of equity in a subsidiary not attributable to a parent. The objective of this statement is to improve upon the consistency of financial information that a company provides in its consolidated financial statements. Consistent with SFAS No. 141(R), SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. Management does not expect that the adoption of this Statement will have a material impact on Park’s consolidated financial statements. 2. ORGANIZATION, ACQUISITIONS, BRANCH SALE AND BRANCH PURCHASE 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), The Citizens National Bank of Urbana (CIT), and Vision Bank (VIS), Park is engaged in a general commercial banking and trust business, primarily in Ohio and Baldwin County, Alabama and the panhandle of Florida. 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 Park National Bank of Southwest Ohio & Northern Kentucky 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 48 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S the Security National Division headquartered in Springfield, Ohio and The Unity National Division (formerly The Third Savings and Loan Company) headquar- tered in Piqua, Ohio. Finally, VIS operates through two banking divisions with the Vision Bank headquartered in Panama City, Florida and the Vision Bank Division of Gulf Shores, Alabama. All of the Ohio-based 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, commercial and auto leasing; trust services; cash management; safe deposit operations; electronic funds transfers and a variety of additional banking-related services. Vision Bank, with their two banking divisions, provide the services mentioned above, with the exception of credit cards, commercial and auto leasing, and cash management. See Note 21 for financial information on the Corporation’s banking subsidiaries. On March 9, 2007, Park acquired all of the stock and outstanding stock options of Vision Bancshares, Inc. for $87.8 million in cash and 792,937 shares of Park common stock valued at $83.3 million or $105.00 per share. The goodwill recognized as a result of this acquisition was $109.0 million. Substantially, none of the goodwill is tax deductible. Management expects that the acquisition of Vision will improve the future growth rate for Park’s loans and deposits. The fair value of the acquired assets of Vision was $686.5 million and the fair value of the liabilities assumed was $624.4 million at March 9, 2007. During the fourth quarter of 2007, Park recognized a $54.0 million impairment charge to the Vision goodwill. At the time of the acquisition, Vision operated two bank subsidiaries (both named Vision Bank) which became bank subsidiaries of Park on March 9, 2007. On July 20, 2007, the bank operations of the two Vision Banks were consolidated under a single charter through the merger of the Vision Bank headquartered in Gulf Shores, Alabama with and into the Vision Bank headquartered in Panama City, Florida. Vision Bank operates under a Florida banking charter and has 18 branch locations in Baldwin County, Alabama and in the Florida panhandle. On September 21, 2007, a national bank subsidiary of Park, The First-Knox National Bank of Mount Vernon (“First-Knox”), acquired the Millersburg, Ohio banking office (the “Millersburg branch”) of Ohio Legacy Bank, N.A. (“Ohio Legacy”). First-Knox acquired substantially all of the loans administered at the Millersburg branch of Ohio Legacy and assumed substantially all of the deposit liabilities relating to the deposit accounts assigned to the Millersburg branch. The fair value of loans acquired was approximately $38 million and deposit liabilities acquired were approximately $23 million. First-Knox paid a premium of approximately $1.7 million in connection with the purchase of the deposit liabilities. First-Knox recognized a loan premium adjustment of $700,000 and a certificate of deposit adjustment of $300,000, resulting in a total increase to core deposit intangibles of $2.7 million. No goodwill was recognized as part of this transaction. In addition, First-Knox paid $900,000 for the acquisition of the branch office building that Ohio Legacy was leasing from a third party. On December 18, 2006, Park acquired all of the stock of Anderson Bank of Cincinnati, Ohio for $9.052 million in cash and 86,137 shares of Park common stock valued at $8.665 million or $100.60 per share. Immediately following Park’s acquisition, Anderson merged with Park’s subsidiary, The Park National Bank and is being operated as part of PNB’s operating division, The Park National Bank of Southwest Ohio & Northern Kentucky. The goodwill recognized as a result of this acquisition was $10.638 million. The fair value of the acquired assets of Anderson was $69.717 million and the fair value of the liabilities assumed was $62.638 million at December 18, 2006. On January 3, 2005, Park acquired all of the stock of First Clermont Bank of Milford, Ohio for $52.5 million in an all cash transaction accounted for as a purchase. Immediately following Park’s stock acquisition, First Clermont merged with Park’s subsidiary, The Park National Bank. The goodwill recog- nized as a result of this acquisition was $28.369 million. The fair value of the acquired assets of First Clermont was $185.372 million and the fair value of the liabilities assumed was $161.241 million at January 3, 2005. During 2006, the First Clermont Division of PNB combined with three of PNB’s branches to form the operating division known as The Park National Bank of Southwest Ohio & Northern Kentucky. On February 11, 2005, Park’s subsidiary Century National Bank, sold its Roseville, Ohio branch office. The deposits sold with the Roseville branch office totaled $12.419 million and the loans sold with the branch office totaled $5.273 million. Century National Bank received a premium of $1.184 million 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 $29.0 million at December 31, 2007 and $30.9 million at December 31, 2006. 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 in the following table. Management evaluates the investment securities on a quarterly basis for other than temporary impairment. No impairment charges have been deemed necessary in 2007 and 2006. Investment securities at December 31, 2007, were as follows: Gross Gross Unrealized Unrealized Amortized Cost Holding Gains Holding Losses Estimated Fair Value (In thousands) 2007: Securities Available-for-Sale Obligations of U.S. Treasury and other U.S. Government agencies $ 200,996 $2,562 $ — $ 203,558 Obligations of states and political subdivisions U.S. Government agencies’ asset-backed securities Other equity securities Total 2007: Securities Held-to-Maturity Obligations of states and political subdivisions U.S. Government agencies’ asset-backed securities 44,805 716 20 45,501 1,224,958 2,293 6,292 420 8,115 390 1,223,135 2,323 $1,473,052 $9,990 $8,525 $1,474,517 $ 13,551 $ 127 $ — $ 13,678 151,870 2 4,136 147,736 Total $ 165,421 $ 129 $4,136 $ 161,414 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 $56.8 million of Federal Home Loan Bank stock and $6.4 million of Federal Reserve stock at December 31, 2007. Park owned $55.5 million of Federal Home Loan Bank stock and $6.4 million of Federal Reserve Bank stock at December 31, 2006. 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, 2007 and December 31, 2006, 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. The fair value is expected to recover as payments are received on these securities and they approach maturity. 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 recog- nized in net income in the period the other-than-temporary impairment is identified. 49 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S $ — $ — $147,536 $4,136 $147,536 $4,136 Due one through five years 70,000 71,567 1.37 years 5.78% Due within one year $ 130,996 $ 131,991 0.41 years 5.98% Securities with unrealized losses at December 31, 2007, were as follows: (In thousands) 2007: Securities Available-for-Sale Obligations of U.S. Treasury and other U.S. Government agencies Obligations of states and political subdivisions U.S. Government agencies’ asset- backed securities Other equity securities Less than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $1,302 $ 18 $ 120 $ 2 $ 1,422 $ 20 — 729 — 291 770,808 8,115 770,808 101 99 830 8,115 390 Total $2,031 $309 $771,029 $8,216 $773,060 $8,525 2007: Securities Held-to-Maturity U.S. Government agencies’ asset- backed securities Investment securities at December 31, 2006 were as follows: Gross Gross Unrealized Unrealized Amortized Cost Holding Gains Holding Losses Estimated Fair Value (In thousands) 2006: Securities Available-for-Sale Obligations of U.S. Treasury and other U.S. Government agencies $ 90,988 $ 140 $ 419 $ 90,709 Obligations of states and political subdivisions U.S. Government agencies’ asset-backed securities and other asset-backed securities Other equity securities Total 2006: Securities Held-to-Maturity Obligations of states and political subdivisions U.S. Government agencies’ asset-backed securities and other asset-backed securities 53,947 1,006 3 54,950 1,153,515 1,236 932 595 26,823 1,127,624 35 1,796 $1,299,686 $2,673 $27,280 $1,275,079 $ 15,140 $ 169 $ — $ 15,309 161,345 1 6,869 154,477 Total $ 176,485 $ 170 $ 6,869 $ 169,786 Securities with unrealized losses at December 31, 2006, were as follows: Less than 12 Months 12 Months or Longer Total (In thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses 2006: Securities Available-for-Sale Obligations of U.S. Treasury and other U.S. Government agencies Obligations of states and political subdivisions U.S. Government agencies’ asset- backed securities and other asset- backed securities $60,577 $419 $ — $ — $ 60,577 $ 419 131 1 120 2 251 3 Other equity securities — 17,266 116 — 1,064,607 26,707 1,081,873 26,823 165 35 165 35 Total $77,974 $536 $1,064,892 $26,744 $1,142,866 $27,280 50 (In thousands) 2006: Securities Held-to-Maturity U.S. Government agencies’ asset- backed securities and other asset- backed securities Less than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ — $ — $ 154,286 $ 6,869 $ 154,286 $ 6,869 The amortized cost and estimated fair value of investments in debt securities at December 31, 2007, are shown in the following table 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. (Dollars in thousands) Securities Available-for-Sale U.S. Treasury and agencies’ notes: Amortized Cost Estimated Fair Value Weighted Average Maturity Average Yield Total $ 200,996 $ 203,558 0.75 years 5.91% Obligations of states and political subdivisions: Due within one year Due one through five years Due five through ten years Due over ten years $ 33,470 $ 33,759 0.48 years 6.90% 9,030 1,715 590 9,398 1,745 2.46 years 7.30% 6.39 years 5.75% 599 15.26 years 6.39% Total $ 44,805 $ 45,501 1.30 years 6.93% U.S. Government agencies’ asset-backed securities: Due within one year Due one through five years Due five through ten years Due over ten years $ 212,120 $ 211,802 0.53 years 4.98% 604,175 387,551 21,112 603,283 2.85 years 4.97% 386,970 7.21 years 4.91% 21,080 10.84 years 4.90% Total $1,224,958 $1,223,135 3.97 years 4.95% Securities Held-to-Maturity Obligations of states and political subdivisions: Due within one year $ 11,659 $ 11,739 0.58 years 6.46% Due one through five years Due five through ten years 1,392 500 1,431 1.97 years 6.75% 508 6.50 years 6.53% Total $ 13,551 $ 13,678 0.94 years 6.49% U.S. Government agencies’ asset-backed securities: Due within one year Due one through five years Due five through ten years Due over ten years $ 6,042 $ 5,878 0.57 years 4.70% 37,018 104,519 4,291 36,011 3.70 years 4.67% 101,676 7.51 years 4.71% 4,171 10.17 years 4.70% Total $ 151,870 $ 147,736 6.38 years 4.70% Investment securities having a book value of $1,631 million and $1,448 million at December 31, 2007 and 2006, 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, 2007, $912 million was pledged for government and trust department deposits, $667 million was pledged to secure repurchase agree- ments and $52 million was pledged as collateral for FHLB advance borrowings. At December 31, 2006, $781 million was pledged for government and trust department deposits, $661 million was pledged to secure repurchase agree- ments and $6 million was pledged as collateral for FHLB advance borrowings. At year-end, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S There were no sales of securities in 2007. Gross gains from the sales of investment securities of $106,000 and $97,000 were realized in 2006 and 2005, respectively. Gross losses from the sales of investment securities of $9,000 and $1,000 were realized in 2006 and 2005, respectively. The tax expense related to the net securities gains was $34,000 in both 2006 and 2005. 5. LOANS The composition of the loan portfolio is as follows: December 31 (Dollars in thousands) Commercial, financial and agricultural Real estate: Construction Residential Commercial Consumer, net Leases, net Total loans 2007 $ 613,282 536,389 1,481,174 993,101 593,388 6,800 $4,224,134 2006 $ 548,254 234,988 1,300,294 854,869 532,092 10,205 $3,480,702 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 (Dollars in thousands) 2007 Impaired loans: Nonaccrual Restructured Total impaired loans Other nonaccrual loans $ 87,277 2,804 90,081 13,851 Total nonaccrual and restructured loans $103,932 2006 $10,367 9,113 19,480 5,637 $25,117 Management’s general practice is to charge down impaired loans to the fair value of the underlying collateral of the loan, so no specific loss allocations are generally necessary for these loans. The allowance for loan losses, specifically related to impaired loans at December 31, 2007 and 2006, was $3,424,000 and $2,002,000, respectively, related to loans with principal balances of $27,218,000 and $4,335,000. The average balance of impaired loans was $51,118,000, $21,976,000 and $19,557,000 for 2007, 2006 and 2005, 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, 2007, 2006 and 2005, the Corporation recognized $392,000, $450,000 and $490,000, respectively, of interest income on impaired loans. The Corporation received cash payments for interest related to these loans of $1,641,000 in 2007, $471,000 in 2006 and $553,000 in 2005. Certain of the Corporation’s executive officers, directors and their affiliates are loan customers of the Corporation’s banking subsidiaries. As of December 31, 2007 and 2006, loans aggregating approximately $118,506,000 and $112,486,000 respectively, were outstanding to such parties. During 2007, $35,992,000 of new loans (originated and through acquisitions) were made and repayments totaled $29,792,000. New loans and repayments for 2006 were $17,870,000 and $35,500,000, respectively. 6. ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses is summarized as follows: (Dollars in thousands) Balance, January 1 Allowance for loan losses of acquired banks Provision for loan losses Losses charged to the reserve Recoveries Balance, December 31 2007 $ 70,500 9,334 29,476 (27,776) 5,568 $ 87,102 2006 $ 69,694 798 3,927 (10,772) 6,853 $ 70,500 2005 $ 68,328 1,849 5,407 (13,389) 7,499 $ 69,694 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 (Dollars in thousands) Total minimum payments to be received Estimated unguaranteed residual value of leased property Less unearned income Total 2007 $7,503 405 (1,108) $6,800 2006 $ 9,458 1,702 (955) $10,205 Minimum lease payments to be received as of December 31, 2007 are: (In thousands) 2008 2009 2010 2011 2012 Thereafter Total $1,772 1,804 791 601 2,015 520 $7,503 8. PREMISES AND EQUIPMENT The major categories of premises and equipment and accumulated depreciation are summarized as follows: December 31 (Dollars in thousands) Land Buildings Equipment, furniture and fixtures Leasehold improvements Total Less accumulated depreciation and amortization 2007 2006 $ 21,789 $ 16,220 71,000 41,428 5,474 139,691 (73,057) 59,917 55,377 3,951 135,465 (87,911) Premises and Equipment, Net $ 66,634 $ 47,554 Depreciation and amortization expense amounted to $6,480,000, $5,522,000 and $5,641,000 for the three years ended December 31, 2007, 2006 and 2005, 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) 2008 2009 2010 2011 2012 Thereafter Total $2,186 1,844 1,240 833 813 3,012 $9,928 Rent expense was $2,701,000, $2,107,000 and $1,915,000, for the three years ended December 31, 2007, 2006 and 2005, respectively. 9. SHORT-TERM BORROWINGS Short-term borrowings are as follows: December 31 (Dollars in thousands) 2007 2006 Securities sold under agreements to repurchase and federal funds purchased Federal Home Loan Bank advances Other short-term borrowings Total short-term borrowings $253,289 502,000 4,029 $225,356 142,000 8,417 $759,318 $375,773 51 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S The outstanding balances for all short-term borrowings as of December 31, 2007, 2006 and 2005 (in thousands) and the weighted-average interest rates as of and paid during each of the years then ended are as follows: (Dollars in thousands) 2007: Ending balance Highest month-end balance Average daily balance Weighted-average interest rate: As of year-end Paid during the year 2006: Ending balance Highest month-end balance Average daily balance Weighted-average interest rate: As of year-end Paid during the year 2005: Ending balance Highest month-end balance Average daily balance Weighted-average interest rate: As of year-end Paid during the year Repurchase Agreements and Federal Funds Purchased Federal Home Loan Bank Advances Demand Notes Due U.S. Treasury and Other $253,289 259,065 230,651 3.27% 3.67% $225,356 240,924 224,662 3.73% 3.54% $246,502 246,502 194,157 2.94% 2.14% $502,000 502,000 260,140 4.42% 5.19% $142,000 246,000 147,145 5.24% 5.15% $ 60,000 170,000 94,264 4.20% 3.46% $4,029 8,058 3,369 3.59% 4.78% $8,417 11,290 3,525 5.06% 4.62% $ 7,572 8,583 3,421 4.16% 2.93% At December 31, 2007 and 2006, Federal Home Loan Bank (FHLB) advances were collateralized by investment securities owned by the Corporation’s subsidiary banks and by various loans pledged under a blanket agreement by the Corporation’s subsidiary banks. See Note 4 for the amount of investment securities that are pledged. At December 31, 2007, $1,865 million of commercial real estate and residential mortgage loans were pledged under a blanket agreement to the FHLB by Park’s subsidiary banks. At December 31, 2006, $1,770 million of commercial real estate and residential mortgage loans were pledged under a blanket agreement to the FHLB by Park’s subsidiary banks. 10. LONG-TERM DEBT Long-term debt is listed below: December 31 (Dollars in thousands) 2007 2006 Outstanding Balance Average Rate Outstanding Balance Average Rate Total Federal Home Loan Bank advances by year of maturity: 2007 2008 2009 2010 2011 2012 Thereafter Total $ — 34,844 6,146 17,429 1,436 485 203,475 $263,815 Total broker repurchase agreements by year of maturity: 2007 2008 2009 2010 Thereafter Total $ — — 25,000 — 300,000 $325,000 — 4.02% 3.86% 5.72% 4.01% 3.87% 3.83% 3.98% — — 3.79% — 4.04% 4.02% $41,289 84,726 6,082 17,416 1,429 481 102,717 $254,140 $ 25,000 — 25,000 — 300,000 $350,000 4.01% 4.83% 3.92% 5.72% 4.01% 3.87% 4.15% 4.46% 3.84% — 3.79% — 4.00% 3.97% 52 December 31 (Dollars in thousands) 2007 2006 Outstanding Balance Average Rate Outstanding Balance Average Rate Other borrowings by year of maturity: 2008 2009 2010 2011 2012 Thereafter Total Total combined long-term debt by year of maturity: 2007 2008 2009 2010 2011 2012 Thereafter Total $ 50 54 59 63 69 1,299 $ 1,594 $ — 34,894 31,200 17,488 1,499 554 504,774 $590,409 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00% — 4.03% 3.81% 5.74% 4.35% 4.88% 3.98% 4.02% $ $ — — — — — — — $ 66,289 84,726 31,082 17,416 1,429 481 402,717 $604,140 — — — — — — — 3.95% 4.83% 3.81% 5.72% 4.01% 3.87% 4.04% 4.18% Other borrowings consist of a capital lease obligation of $1.6 million, pertaining to an arrangement that was part of the acquisition of Vision on March 9, 2007 and its associated minimum lease payments. Park had approximately $505 million of long-term debt at December 31, 2007 with a contractual maturity longer than five years. However, approximately $403 million of this debt is callable by the issuer in 2008 and $100 million is callable by the issuer in 2009. At December 31, 2007 and 2006, Federal Home Loan Bank (FHLB) advances were collateralized by investment securities owned by the Corporation’s sub- sidiary banks and by various loans pledged under a blanket agreement by the Corporation’s subsidiary banks. See Note 4 for the amount of investment securities that are pledged. See Note 9 for the amount of residential mortgage loans that are pledged to the FHLB. 11. SUBORDINATED DEBENTURES As part of the acquisition of Vision on March 9, 2007, Park became the successor to Vision under (i) the Amended and Restated Trust Agreement of Vision Bancshares Trust I (the “Trust”), dated as of December 5, 2005, (ii) the Junior Subordinated Indenture, dated as of December 5, 2005, and (iii) the Guarantee Agreement, also dated as of December 5, 2005. On December 1, 2005, Vision formed a wholly-owned Delaware statutory business trust, Vision Bancshares Trust I (“Trust I”), which issued $15.0 million of the Trust’s floating rate Preferred Securities (the “Trust Preferred Securities”) to institutional investors. These Trust Preferred Securities qualify as Tier I capital under Federal Reserve Board guidelines. All of the common securities of Trust I are owned by Park. The proceeds from the issuance of the common securities and the Trust Preferred Securities were used by Trust I to purchase $15.5 million of junior subordinated debentures, which carry a float- ing rate based on a three-month LIBOR plus 148 basis points. The debentures represent the sole asset of Trust I. The Trust Preferred Securities accrue and pay distributions at a floating rate of three-month LIBOR plus 148 basis points per annum. The Trust Preferred Securities are mandatorily redeemable upon maturity of the debentures in December 2035, or upon earlier redemption as provided in the debenture. Park has the right to redeem the debentures purchased by Trust I in whole or in part, on or after December 30, 2010. As specified in the indenture, if the debentures are redeemed prior to maturity, the redemption price will be the principal amount, plus any unpaid accrued interest. In accordance with FASB Interpretation 46R, Trust I is not consolidated with Park’s financial statements, but rather the subordinated debentures are reflected as a liability. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S On December 28, 2007, one of Park’s wholly-owned subsidiary banks, The Park National Bank (“PNB”), entered into a Subordinated Debenture Purchase Agreement with USB Capital Funding Corp. Under the terms of the Purchase Agreement, USB Capital Funding Corp. purchased from PNB a Subordinated Debenture dated December 28, 2007, in the principal amount of $25.0 million, which matures on December 29, 2017. The Subordinated Debt is intended to qualify as Tier 2 capital under the applicable regulations of the Office of the Comptroller of the Currency of the United States of America (the “OCC”). The Subordinated Debentures accrue and pay interest at a floating rate of three- month LIBOR plus 200 basis points. The Subordinated Debenture may not be prepaid in any amount prior to December 28, 2012, however, subsequent to this date, PNB may prepay, without penalty, all or a portion of the principal amount outstanding in a minimum amount of $5.0 million or any larger multiple of $5.0 million. The three-month LIBOR rate was 4.70% at December 31, 2007. On January 2, 2008, Park entered into an interest rate swap transaction, which was designated as a cash flow hedge against the variability of cash flows related to the Subordinated Debenture of $25.0 million (see Note 23). 12. 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, 2007, 1,207,984 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 fair value of each incentive stock option granted is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of Park’s common stock. The Corporation uses historical data to estimate option exercise behavior. The expected term of incentive stock options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the incentive stock options is based on the U.S. Treasury yield curve in effect at the time of the grant. The fair value of incentive stock options granted was determined using the following weighted-average assumptions as of the grant date. Park did not grant any options in 2006. Risk-free interest rate Expected term (years) Expected stock price volatility Dividend yield 2007 3.99% 5.0 19.5% 4.00% 2006 — — — — 2005 3.77% 4.0 19.8% 3.00% The activity in Park’s stock option plan is listed in the following table for 2007: January 1, 2007 Granted Exercised Forfeited/Expired December 31, 2007 Number 686,024 90,000 (3,561) (157,272) 615,191 Exercisable at year end: Weighted-average remaining contractual life: Aggregate intrinsic value: Weighted Average Exercise Price per Share $101.89 74.96 83.02 91.86 $100.63 615,191 2.0 years $0 Information related to Park’s stock option plans for the past three years is listed in the following table for 2007: (Dollars in thousands) Intrinsic value of options exercised Cash received from option exercises Tax benefit realized from option exercises Weighted-average fair value of options granted per share 2007 $ 47 296 — 2006 $ 692 3,227 18 2005 $1,213 4,077 57 $9.92 $ — $16.14 Total compensation cost that has been charged against income pertaining to the above plans was $893,000 for 2007. No expense was recognized for 2006 and 2005. The 90,000 options granted in 2007 vested immediately upon grant. 13. 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. Management did not make a contribution to the defined benefit pension plan in 2007 and does not expect to make a contribution in 2008 due to the funded status of the plan. Using an accrual measurement date of September 30, plan assets and benefit obligation activity for the pension plan are listed below: (Dollars in thousands) Change in fair value of plan assets Fair value at beginning of measurement period Actual return on plan assets Company contributions Benefits paid Fair value at end of measurement period Change in benefit obligation Projected benefit obligation at beginning of measurement period Service cost Interest cost Actuarial (gain) or loss Benefits paid Projected benefit obligation at the end of measurement period Funded status at end of year (assets less benefit obligation) 2007 2006 $55,541 7,827 0 (3,252) $60,116 $46,331 4,336 9,117 (4,243) $55,541 $49,700 $46,641 3,238 3,104 (876) (3,252) 3,179 2,886 1,237 (4,243) $51,914 $49,700 $ 8,202 $5,841 53 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 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 Equity securities Fixed income and cash equivalents Other Total Target Allocation 50% – 100% remaining balance — — 2007 81% 19% — 100% 2006 81% 19% — 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 2007 and 2006. 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. The accumulated benefit obligation for the defined benefit pension plan was $43.9 million at September 30, 2007 and $40.5 million at September 30, 2006. The weighted average assumptions used to determine benefit obligations at September 30, were as follows: Discount rate Rate of compensation increase 2007 6.25% 3.00% 2006 6.08% 3.50% The estimated future pension benefit payments reflecting expected future service for the next ten years are shown below in thousands: 2008 2009 2010 2011 2012 2013 – 2017 Total $ 1,225 1,315 1.510 1,853 2,430 19,222 $27,555 In 2006, Park recorded the unrecognized prior service cost and the unrecognized net actuarial loss as a reduction to prepaid benefit cost and an adjustment to accumulated other comprehensive income (loss). The following table shows ending balances of accumulated other comprehensive income (loss) at December 31, 2007 and 2006. (Dollars in thousands) Prior service cost Net actuarial loss Reduction to prepaid benefit cost Deferred taxes 2007 $ (191) (5,286) (5,477) 1,917 2006 $ (224) (10,277) (10,501) 3,675 Accumulated other comprehensive income (loss) $(3,560) $ (6,826) Using an actuarial measurement date of September 30, components of net peri- odic benefit cost and other amounts recognized in other comprehensive income are as follows: (Dollars in thousands) 2007 2006 2005 Components of net periodic benefit cost and other amounts recognized in Other Comprehensive Income Service cost Interest cost Expected return on plan assets Amortization of prior service cost Recognized net actuarial loss/(gain) Net periodic benefit cost Change to net actuarial (gain)/loss for the period Amortization of prior service cost Amortization of net gain/(loss) Total recognized in other comprehensive income Total recognized in net benefit cost and other comprehensive (income) 54 $ 3,238 3,104 (4,263) 34 551 $ 2,664 (4,440) (34) (551) (5,025) $(2,361) $ 3,179 2,886 (3,975) 14 555 $ 2,659 N/A N/A N/A N/A N/A $ 2,682 2,756 (3,334) 12 545 $ 2,661 N/A N/A N/A N/A N/A The estimated prior service costs for the defined benefit pension plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $34,000. The weighted average assumptions used to determine net periodic benefit cost for the years ended December 31, 2007 and 2006, are listed below: Discount rate Rate of compensation increase Expected long-term return on plan assets 2007 6.08% 3.50% 7.75% 2006 5.96% 3.50% 7.75% The Corporation has a voluntary salary deferral plan covering substantially all of its employees. Eligible employees may contribute a portion of their compen- sation subject to a maximum statutory limitation. The Corporation provides a matching contribution established annually by the Corporation. Contribution expense for the Corporation was $1,734,000, $1,672,000 and $1,763,000 for 2007, 2006 and 2005, 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, 2007 and 2006, the accrued benefit cost for this plan totaled $7,701,000 and $5,946,000, respectively. The expense for the Corporation was $684,000, $647,000 and $771,000 for 2007, 2006, and 2005, respectively. 14. 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 compo- nents of the Corporation’s deferred tax assets and liabilities are as follows: December 31 (Dollars in thousands) 2007 2006 Deferred tax assets: Allowance for loan losses Accumulated other comprehensive loss – SFAS 115 Accumulated other comprehensive loss – SFAS 158 Intangible assets Deferred compensation Other $31,133 $24,675 — 1,917 2,895 4,504 5,153 8,612 3,675 3,209 3,678 3,973 Total deferred tax assets $45,602 $47,822 Deferred tax liabilities: Lease revenue reporting Accumulated other comprehensive income – SFAS 115 Deferred investment income Pension plan Mortgage servicing rights Purchase accounting adjustments Other Total deferred tax liabilities Net deferred tax asset $1,216 $2,096 513 11,346 4,713 3,571 5,264 708 $27,331 $18,271 — 12,319 5,625 3,630 1,416 346 $25,432 $22,390 The components of the provision for federal and state income taxes are shown below: December 31 (Dollars in thousands) 2007 2006 2005 Currently payable Federal State Deferred Federal State Total $37,692 117 $38,830 — $38,196 — (7,269) (570) 156 — 1,990 — $29,970 $38,986 $40,186 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S The following is a reconcilement of income tax expense to the amount computed at the statutory federal rate of 35% for the years ended December 31, 2007, 2006 and 2005. December 31 Statutory federal corporate tax rate Changes in rates resulting from: Tax-exempt interest income, net of disallowed interest Bank owned life insurance Tax credits (low income housing) Goodwill impairment State income tax expense, net of federal benefit Other Effective tax rate 2007 35.0% (2.6%) (2.8%) (7.5%) 35.9% (.6%) (.5%) 56.9% 2006 35.0% 2005 35.0% (1.2%) (1.0%) (2.9%) — — (.6%) (1.3%) (.9%) (2.5%) — — (.6%) 29.3% 29.7% 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 is shown in “state taxes” on Park’s Consolidated Statements of Income. Vision Bank is subject to state income tax, in the states of Alabama and Florida. State income tax expense for Vision Bank is included in “income taxes” on Park’s Consolidated Statements of Income. Vision Bank’s 2007 state income tax benefit was $(453,000). Unrecognized Tax Benefits The beginning and ending amount of unrecognized tax benefits is as follows: (Dollars in thousands) January 1, 2007 Balance Additions based on tax positions related to the current year Additions for tax positions of prior years Reductions for tax positions of prior years Reductions due to the statute of limitations Settlements December 31, 2007 Balance $713 250 17 (24) (128) — $828 Of this total, $578,000 represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. Park does not expect the total amount of unrecognized tax benefits to significantly increase or decrease during the next year. The total amount of interest and penalties recorded in the income statement for the year ended December 31, 2007 was $(3,000), and the amount accrued for interest and penalties at December 31, 2007 was $73,000. Park and its subsidiaries are subject to U.S. federal income tax. Some of Park’s subsidiaries are subject to state income tax in the following states: Alabama, Florida, California, Kentucky, Michigan, New Jersey, Pennsylvania and West Virginia. Park is no longer subject to examination by federal or state taxing authorities for the tax year 2003 and the years prior. 15. OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss) components and related taxes are shown in the following table for the years ended December 31, 2007, 2006 and 2005. Year ended December 31 (Dollars in thousands) Before-Tax Amount Tax Expense Net-of-Tax Amount 2007: Unrealized gains on available-for-sale securities Changes in pension plan assets and benefit obligations recognized in Other Comprehensive Income $ 26,071 $ 9,125 $ 16,946 5,025 1,759 3,266 Other comprehensive income $ 31,096 $ 10,884 $ 20,212 Year ended December 31 (Dollars in thousands) Before-Tax Amount Tax Expense Net-of-Tax Amount 2005: Unrealized losses on available-for-sale securities Reclassification adjustment for gains realized in net income $(34,650) $(12,127) $(22,523) (96) (34) (62) Other comprehensive loss $(34,746) $(12,161) $(22,585) 16. 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. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. The following table sets forth the computation of basic and diluted earnings per share: Year ended December 31 (Dollars in thousands, except per share data) 2007 2006 2005 Numerator: Net income Denominator: $22,707 $94,091 $95,238 Basic earnings per share: Weighted-average shares Effect of dilutive securities – stock options Diluted earnings per share: Adjusted weighted-average shares and assumed conversions Earnings per share: Basic earnings per share Diluted earnings per share 14,212,805 4,678 13,929,090 37,746 14,258,519 89,724 14,217,483 13,966,836 14,348,243 $1.60 $1.60 $6.75 $6.74 $6.68 $6.64 Stock options for 507,459 and 434,136 shares of common stock were not considered in computing diluted earnings per share for 2007 and 2006, respectively, because they were anti-dilutive. 17. 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, 2007, approximately $13.9 million 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. 18. 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 inter- est 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: 2006: Unrealized losses on available-for-sale securities Reclassification adjustment for gains realized in net income $ (8,905) $ (3,117) $ (5,788) December 31 (Dollars in thousands) Other comprehensive loss $ (9,002) $ (3,151) $ (5,851) (97) (34) (63) Loan commitments Unused credit card limits Standby letters of credit 2007 $995,775 132,242 30,009 2006 $824,412 140,100 19,687 55 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S The fair value of financial instruments at December 31, 2007 and 2006, is as follows: December 31, (In thousands) Financial assets: Cash and money market 2007 2006 Carrying Amount Fair Value Carrying Amount Fair Value instruments $ 193,397 $ 193,397 $ 186,256 $ 186,256 Interest bearing deposits with other banks Investment securities Bank owned life insurance 1 1,703,103 119,472 1 1,699,096 119,472 1 1,513,498 113,101 1 1,506,799 113,101 Loans receivable, net Financial liabilities: Noninterest bearing checking Interest bearing transaction accounts Savings Time deposits Other $4,130,232 $4,217,169 $3,399,997 $3,447,778 $ 695,466 $ 695,466 $ 664,962 $ 664,962 1,338,492 531,049 1,872,440 1,792 1,338,492 531,049 1,873,114 1,792 1,033,870 543,724 1,581,120 1,858 1,033,870 543,724 1,575,713 1,858 Total deposits $4,439,239 $4,439,913 $3,825,534 $3,820,127 Short-term borrowings Long-term debt Subordinated debentures 759,318 590,409 40,000 759,318 605,866 40,000 375,773 604,140 — 375,773 603,516 — Unrecognized financial instruments: Loan commitments Standby letters of credit — — (996) (150) — — (824) (98) 20. CAPITAL RATIOS The following table reflects various measures of capital at December 31, 2007 and December 31, 2006: December 31, (Dollars in thousands) Total equity (1) Tier 1 capital (2) Total risk-based capital (3) Leverage (4) Amount $580,012 452,073 533,041 452,073 2007 2006 Ratio 8.92% 10.16% 11.97% 7.10% Amount $570,439 528,019 573,216 528,019 Ratio 10.43% 14.72% 15.98% 9.96% (1) Stockholders’ equity including accumulated other comprehensive income (loss); computed as a ratio to total assets. (2) Stockholders’ equity less certain intangibles and accumulated other comprehensive income (loss) plus qualifying trust preferred securities; computed as a ratio to risk-adjusted assets, as defined. (3) Tier 1 capital plus qualifying loan loss allowance and subordinated debt; 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, 2007 and 2006, the Corporation’s Tier 1, 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, 2007 and 2006, all of the Corporations subsidiary financial institutions met the well-capitalized levels under the capital definitions pre- scribed in the FDIC Improvement Act of 1991. The following table indicates the capital ratios for each subsidiary at December 31, 2007 and December 31, 2006. 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, Alabama and the panhandle of Florida. 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 evalua- tion 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. 19. 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 avail- able, 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 dis- counted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities of time deposits. Maturities of time deposits in denominations of $100,000 and over at December 31, 2007, maturing in 12 months or less, were $542.7 million and those maturing after 12 months were $99.3 million. 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. Subordinated debt: The carrying amounts reported in the balance sheet approximate fair value. The interest rates on these instruments reprice every 90 days based on the three-month LIBOR. 56 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S December 31 2007 Total Risk- Based Tier 1 Risk- Based Tier 1 Risk- Based Leverage 2006 Total Risk- Based Park National Bank 7.92% 10.78% 5.66% 8.11% 10.76% Richland Trust Company 11.36% 12.62% 5.68% 9.44% 10.70% Century National Bank 9.32% 10.95% 6.14% 8.69% 10.44% First-Knox National Bank 8.81% 11.09% 5.84% 8.01% 10.61% United Bank, N.A. 11.38% 12.63% 6.06% 10.89% 12.15% Second National Bank 8.49% 10.49% 5.27% 8.39% 10.64% Security National Bank 9.22% 10.79% 5.97% 9.18% 10.76% Citizens National Bank 13.27% 14.52% 6.61% 14.58% 15.83% Vision Bank 9.01% 10.28% 7.08% — — Leverage 5.84% 5.47% 5.57% 5.27% 5.37% 5.39% 5.45% 7.24% — 21. 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. Operating Results for the year ended December 31, 2007 (In thousands) PNB RTC CNB FKNB UB SNB SEC CIT VB All Others Total Net interest income Provision for loan losses Other income Depreciation and amortization Goodwill impairment charge Other expense Income (loss) before income taxes Income taxes $ 73,123 $ 17,142 $ 25,795 $ 30,900 $ 7,558 $ 12,631 $ 29,295 $ 5,111 $ 23,756 $9,366 $ 234,677 2,991 28,016 1,986 — 49,938 46,224 15,141 2,200 5,255 378 — 545 9,451 813 — 880 8,267 737 — 10,872 15,848 17,644 8,947 3,032 18,040 6,127 19,906 6,723 — 2,441 242 — 6,221 3,536 1,126 450 2,736 261 — 7,728 6,928 2,081 900 9,596 769 — 19,725 17,497 5,598 — 1,720 206 — 3,931 2,694 864 19,425 3,465 1,024 54,035 17,521 2,085 693 64 — 29,476 71,640 6,480 54,035 14,221 163,649 (64,784) (4,103) (6,311) (6,619) 52,677 29,970 Net income (loss) $ 31,083 $ 5,915 $ 11,913 $ 13,183 $ 2,410 $ 4,847 $ 11,899 $ 1,830 $ (60,681) $308 $ 22,707 Balances at December 31, 2007: Assets Loans Deposits $2,140,160 $519,036 $725,661 $816,674 $196,254 $434,862 $813,671 $145,547 $855,794 $(146,557) $6,501,102 1,426,178 1,352,990 220,013 401,377 529,557 483,259 550,009 489,302 95,681 170,048 249,858 246,782 450,509 561,889 53,089 119,915 639,097 656,768 10,143 (43,091) 4,224,134 4,439,239 Operating Results for the year ended December 31, 2006 (In thousands) Net interest income $ 72,526 $ 18,493 $ 23,361 $ 30,755 $ 7,727 $ 12,034 $ 30,479 $ 5,383 $ Provision for loan losses Other income Depreciation and amortization Other expense Income before taxes Income taxes Net income 1,713 27,858 1,790 46,030 50,851 16,486 220 4,672 433 10,402 12,110 4,123 180 8,498 866 15,519 15,294 5,145 630 7,772 689 16,484 20,724 7,010 (130) 2,218 245 6,103 3,727 1,190 155 2,333 299 7,181 6,732 2,027 235 9,051 779 19,308 19,208 6,291 125 1,709 221 4,053 2,693 839 $ 34,365 $ 7,987 $ 10,149 $ 13,714 $ 2,537 $ 4,705 $ 12,917 $ 1,854 Balances at December 31, 2006: Assets $1,970,072 $534,142 $745,168 $778,864 $220,701 $397,602 $860,995 $162,498 Loans Deposits 1,368,125 1,367,942 245,694 377,356 511,684 493,218 521,111 499,199 92,843 194,834 227,337 248,985 446,110 572,269 58,254 122,358 $ $ 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 $ Provision for loan losses Other income Depreciation and amortization Other expense Income before taxes Income taxes Net income 2,611 25,566 1,705 43,622 48,855 15,924 700 4,442 394 10,226 13,395 4,553 150 7,439 913 15,155 18,820 6,356 1,127 7,191 675 16,156 20,088 6,739 (160) 1,968 233 6,026 4,475 1,449 (510) 2,154 315 7,238 8,703 2,674 1,005 8,880 993 18,665 19,028 6,231 (100) 1,518 200 4,701 2,857 929 $ 32,931 $ 8,842 $ 12,464 $ 13,349 $ 3,026 $ 6,029 $ 12,797 $ 1,928 Balances at December 31, 2005: Assets Loans Deposits $1,999,102 $506,198 $711,804 $753,288 $228,716 $392,257 $924,484 $173,190 1,247,105 1,343,180 266,293 373,398 503,278 469,333 507,148 476,257 96,232 180,274 203,638 250,553 439,698 578,404 58,611 123,555 $ $ — — — — — — — — — — — — — — — — — — — — — — $ 12,486 $ 213,244 799 651 200 10,400 1,738 (4,125) 3,927 64,762 5,522 135,480 133,077 38,986 $ 5,863 $ 94,091 $(199,166) $5,470,876 9,544 (50,627) 3,480,702 3,825,534 $ 11,461 $ 220,564 584 547 213 5,407 59,705 5,641 12,008 133,797 (797) 135,424 (4,669) 40,186 $ 3,872 $ 95,238 $(252,991) $5,436,048 6,109 (37,197) 3,328,112 3,757,757 57 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Reconciliation of financial information for the reportable segments to the Corporation’s consolidated totals. Balance Sheets at December 31, 2007 and 2006 49 151 10,400 (4,125) 90,997 — — — — — Statements of Income for the years ended December 31, 2007, 2006 and 2005 — (In thousands) Assets: Cash Investment in subsidiaries Debentures receivable from subsidiary banks Other investments Other assets Total assets Liabilities: Dividends payable Subordinated debentures Other liabilities Total liabilities Total stockholders’ equity 2007 $ 22,541 547,171 7,500 1,395 62,675 $641,282 $ 13,173 15,000 33,097 61,270 580,012 Total liabilities and stockholders’ equity $641,282 2006 $150,954 382,620 27,500 1,504 56,259 $618,837 $ 12,947 — 35,451 48,398 570,439 $618,837 (In thousands) Income: Dividends from subsidiaries Interest and dividends Other Total income Expense: Other, net Total expense Income before federal taxes and equity in undistributed earnings of subsidiaries Federal income tax benefit Income before equity in undistributed earnings of subsidiaries Equity in undistributed (losses) earnings of subsidiaries Net income 2007 2006 2005 $ 65,564 3,828 673 70,065 12,032 12,032 58,033 7,055 $89,500 7,107 632 97,239 8,307 8,307 $109,250 6,553 514 116,317 10,096 10,096 88,932 4,985 106,221 5,503 65,088 93,917 111,724 (42,381) $ 22,707 174 (16,486) $94,091 $ 95,238 (In thousands) 2007: Totals for reportable segments Elimination of Net Interest Depreciation Income Expense Other Expense Income Taxes Assets Deposits $225,310 $6,416 $203,463 $36,588 $6,647,659 $4,482,330 intersegment items — Parent Co. and GFC totals – not eliminated 9,367 — — 39 25 — — (245,445) (43,091) 14,221 (6,618) 98,888 — — — — — $234,677 $6,480 $217,684 $29,970 $6,501,102 $4,439,239 $200,758 $5,322 $125,080 $43,111 $5,670,042 $3,876,161 intersegment items — — — — (290,163) (50,627) Parent Co. and GFC totals – not eliminated 12,486 $213,244 $5,522 $135,480 $38,986 $5,470,876 $3,825,534 $209,103 $5,428 $121,789 $44,855 $5,689,039 $3,794,954 Other items Totals 2006: Totals for reportable segments Elimination of Other items Totals 2005: Totals for reportable segments Elimination of intersegment items — — — — (337,393) (37,197) Parent Co. and GFC totals – not eliminated 11,461 Other items Totals 62 151 12,008 (4,669) 84,402 — — — — — — $220,564 $5,641 $133,797 $40,186 $5,436,048 $3,757,757 22. 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 (received from subsidiaries) for income taxes of $6.670 million, $5.345 million and $5.492 million in 2007, 2006 and 2005, respectively. At December 31, 2007 and 2006, stockholders’ equity reflected in the Parent Company balance sheet includes $127.3 million and $127.1 million, respectively, of undistributed earnings of the Corporation’s subsidiaries which are restricted from transfer as dividends to the Corporation. 58 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 23. SUBSEQUENT EVENTS On January 2, 2008, Park entered into an interest rate swap transaction, with the notional amount of $25,000,000, which matures on December 28, 2012. The counter-party to the “pay fixed-receive floating” interest rate swap agree- ment is U.S. Bank. Park will pay a fixed rate of 4.01% and receive three-month LIBOR for the term of the swap. Park has designated all cash-flows pertaining to the $25,000,000 in principal Subordinated Debenture as hedged until the maturity of the interest rate swap. The repricing dates of the interest rate swap match those of the Subordinated Debenture, through the maturity date of the interest rate swap on December 28, 2012. Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005 (In thousands) Operating activities: Net income 2007 2006 2005 $ 22,707 $ 94,091 $ 95,238 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed losses (earnings) of subsidiaries Realized net investment security (gains) (Gain) on sale of assets (Increase) decrease in dividends receivable from subsidiaries Stock based compensation expense Increase in other assets Increase in other liabilities Net cash provided by operating activities Investing activities: Cash paid for acquisition, net Sales (purchases) of investment securities Capital contribution to subsidiary Cash received for sale of premises Repayment of debentures receivable from subsidiaries Net cash (used in) provided by investing activities Financing activities: Cash dividends paid Proceeds from issuance of common stock Cash payment for fractional shares Purchase of treasury stock, net Net cash used in financing activities Decrease (increase) in cash Cash at beginning of year 42,381 — (18) — 893 (6,227) 1,774 (174) (97) — 75,075 — (4,090) 1,378 16,486 — — (48,675) — (5,138) 1,408 61,510 166,183 59,319 (85,600) (400) (6,700) 48 (9,052) 403 (2,000) — 20,000 28,500 (52,500) (521) (8,000) — — (72,652) 17,851 (61,021) (52,533) (51,470) (51,498) — (5) (64,733) (117,271) (128,413) 150,954 42 (5) (26,690) (78,123) 105,911 45,043 117 (3) (25,289) (76,673) (78,375) 123,418 Cash at end of year $ 22,541 $150,954 $ 45,043 59 N O T E S 60

Continue reading text version or see original annual report in PDF format above