Park National Corp.
Annual Report 2012

Plain-text annual report

PARKNATIO NAL C O R P O R A T I O N 2012 ANNUAL REPORT Lucas Fulton Ottawa Williams Defiance Henry Wood Sandusky Erie Lorain Cuyahoga Lake Geauga P A s h t a b ula Trumbull Paulding Putnam Hancock Seneca Huron V a n W ert Allen W y a n d o t C r a w f o r d Mercer Auglaize Hardin Marion d n a l h s A d n a l h c i R G w o r r o M Holmes Medina t i m m u S o r t a g e Mahoning Wayne Stark Columbiana Delaware Knox Coshocton Darke Logan Shelby Miami Champaign Union n o s i d a M G Franklin Licking S G G Clark G Guernsey Belmont M u s k i n g u m Noble Monroe Mont gomery G Preble Butler W a r r e n Clinton P ic k a w a y Ross Greene Fayette Fairfield Perry Morgan Hocking Washington Vinton Athens s Carroll a w a r a c s u T Harrison n o s r e f f e J t n o m r e l C Hamilton e n o o B n o t n e K l l e b p m a C Highland Pike J a c Meigs Brown Adams Scioto k s o n Gallia La wrence Kentucky Century National Bank Fairfield National Bank Farmers Bank First-Knox National Bank The Park National Bank Park National Bank Southwest Ohio & Northern Kentucky Richland Bank Second National Bank Security National Bank United Bank Unity National Bank S G Scope Aircraft Finance Guardian Finance Company T A B L E O F C O N T E N T S To Our Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Shareholders’ Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Park National Corporation Directors & Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Directors: Century National Bank Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Fairfield National Bank Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Farmers and Savings Bank Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 First-Knox National Bank Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 The Park National Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Park National Bank of Southwest Ohio & Northern Kentucky Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Richland Bank Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Second National Bank Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Security National Bank Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 United Bank Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Unity National Bank Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Officers of Corporation & Affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Management’s Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Management’s Report on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Financial Statements: Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Consolidated Statements of Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Consolidated Statements of Changes in Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 1 T O O U R S H A R E H O L D E R S We began 2012 with high hopes (cautious optimism would be a safer description of our outlook one year ago) and an internal, page-long summary of what we intended to accomplish during the year. In retrospect, there were only a couple of “lay ups” or “slam dunks.” It would be easier to write a glowing letter to shareholders if we set easier objectives to accomplish. But neither you nor we wish to take the easy path...it’s typically crowded anyway. Among our objectives, we did NOT earn our targeted net income for the year. Net Income and Park’s relative performance... We targeted $83 million in net income for 2012, excluding the gain on the sale of the Vision Bank business. We did not achieve the target. Net income was $78.6 million, or $4.88 per diluted common share. For the 2011 year, Park National Corporation (Park) reported net income of $82.1 million, or $4.95 per diluted common share, so 2012 net income per diluted common share decreased 1.4% from 2011. We did, however, earn net income sufficient to sustain our common stock dividend to our shareholders. We completed the sale of the Vision Bank business on substantially the terms announced on November 16, 2011. We also repurchased the preferred shares and common share warrant issued to the U.S. Treasury under the Troubled Asset Relief Program (TARP) and exited the Capital Purchase Program without raising additional common equity during 2012. All of these are notable accomplishments. We periodically reflect on Park’s total return for our shareholders. Ownership of bank common stock has been out of favor over the past five years, perhaps the most challenging as any five year period since the Great Depression of the 1930s. 150 125 100 75 50 25 0 l e u a V x e d n I 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 12/31/12 PERIOD ENDING Index 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 12/31/12 Park National Corporation NYSE MKT Composite NASDAQ Bank SNL Bank and Thrift Index 100.00 100.00 100.00 100.00 117.71 102.87 59.55 78.46 57.51 80.74 65.67 56.74 134.82 101.40 74.97 63.34 128.58 107.78 67.10 49.25 135.08 114.90 79.64 66.14 2 In spite of the challenges we have reported to you during this timeframe, the previous performance graph and corresponding table reveal that Park National Corporation, in terms of total return, has outperformed three other comparable bank indices over the period. You will find the identical graph and table in “Management’s Discussion and Analysis” in this Annual Report, accompanied with far more detail on our performance in 2012. Other topics addressed during 2012 are described below. The sale of the Vision Bank business... Plenty has been said and written about the challenges we experienced as a result of the purchase of Vision Bank in early 2007. You may tire of reading about our Vision Bank challenges and we think we can safely say, the end seems to be in sight. Please stay with us as we offer additional information we think you may find helpful. The initial thrill of buying Vision Bank was matched by the relief from the sale of the business on February 16, 2012. We remember the day as a giant step forward to accelerate the resolution of the problems resulting from the 2007 purchase. The sale helped position us to repay the TARP funds in April, 2012. As a result, beginning in 2013 we save $5.0 million per year in preferred share dividend payments and eliminated another layer of regulatory oversight. Both are worthy reasons justifying the repayment. The TARP funds provided meaningful capital that supported our ability to continue lending money in our communities and to rest more easily as we struggled to satisfactorily conclude the challenges associated with Vision Bank. We were delighted to repurchase the preferred shares and the related warrant as repaying the TARP funds signaled an answer to the seemingly open-ended question about our need for capital to support our ongoing operations. We were very pleased to exit the program, but grateful for the flexibility and security the TARP funds provided. We met some fine people associated with Vision Bank. We thank them for their efforts to help us minimize the losses we experienced. And we extend our gratitude to a number of key professionals outside the Park family for their assistance over the past few years. We especially want to thank a long list of Park associates for their leadership, focus and determination that allowed us to limit the challenges at Vision Bank from overshadowing the successes within the Park organization otherwise. We engaged associates from our accounting area, internal audit, technology and information services, human resources, trust, internal loan review, loan administration and operations for assistance as we worked through the sale and continue to reduce our exposure to troubled assets. It’s been a team effort. At the top of our list of Park associates to thank is Tom Button, our chief credit officer. Tom led the asset quality improvement charge and continues to navigate choppy waters as we resolve troubled assets, while simultaneously providing the strong and insightful leadership we need in lending. T O O U R S H A R E H O L D E R S Our agenda for 2013 includes a continued focus on liquidating the pile of troubled assets we retained following the sale of the Vision Bank business. We are happy to report the pile has been reduced dramatically. Nonperforming assets associated with the former Vision Bank, at October 31, 2011 (the month end immediately prior to the announcement of the agreement to sell the Vision Bank business) were $156.9 million and have been reduced to just under $90.4 million at year end 2012. We’ve made great progress. More work clearly remains to be done. We assure you it will be done. The Vision Bank story is in its final chapter and we are moving forward. The Park National Bank (PNB) story... Our favorite story continues with several more chapters of success. Below is a comparison of Park and PNB over the previous three years. It is instructive to pay particular attention to “Security Gains” in previous years compared to 2012, and the “Gain on sale of the Vision Bank business” in 2012: (In thousands) 2012 2011 2010 The Park National Bank (PNB) $ 87,106 $106,851 $102,948 Guardian Financial Services Company Vision Bank/SEPH Parent Company/Other 3,550 (12,221) 195 2,721 (25,837) (1,595) 2,006 (45,414) (1,439) Park National Corporation (Park) $ 78,630 $ 82,140 $ 58,101 Security gains – PNB PNB, excluding security gains Security gains – Vision Bank Gain on sale of the Vision Bank business Park net income, excluding gains — 87,106 — 22,167 64,221 23,634 91,489 5,195 — 63,401 11,864 95,236 — — 50,389 Excluding the gain on sale of the Vision Bank business in 2012 and the security gains in the two previous years, 2012 net income for Park compares favorably with 2011 and 2010. PNB’s net income has declined in each of the three years ended December 31, 2012. While no excuse, persistently low interest rates have compressed all banks’ net interest margins...and we are no exception. By the important measure of Return on Average Assets, PNB continues to outperform its peers as the following table discloses: 2012 PNB Peers % 2011 PNB Peers % 2010 PNB Peers % Return on average assets 1.33 1.02 78% 1.66 0.87 87% 1.66 0.49 92% “Peers” is defined as all FDIC-insured banks in the United States with assets greater than $3 billion. “%” refers to the percentile ranking of PNB compared to these peers. Our returns in 2011 and 2010 were favorably influenced by gains from the sale of securities; our performance for 2012 relative to peers excludes gains from the sale of securities. PNB Return on Average Assets for 2012 was in the upper quartile compared to our peers, slightly less than the upper quintile, our personal annual objective. Gathering deposits... Our Ohio-based community bank divisions continued a fine record of increasing deposits last year. Deposits at year end 2012 increased by just over $200 million, or 4.4% compared to year end 2011. Our strategy continues to be “the bank of choice” in the primary markets served by our community bank divisions. It seems to be working. Total deposits and repurchase agreements increased by $206 million last year over December 31, 2011. We remain convinced that Service Excellence, the program we announced last year, continues to play a meaningful role in our success in gaining and keeping customers and clients. Lending in our markets... From year end 2011 to year end 2012 our Ohio-based bank divisions increased outstanding loan balances by 4.7%. Our target for 2012 was to increase loans by 1.0% to 3.0%. Loans increased by $197 million at year end 2012 compared to year end 2011, nearly keeping pace with the increase in deposits and repurchase agreements identified above. As we have stated time and again, we have plenty of funds to lend. By far the strongest growth category was in loans to individuals to finance 1–4 family residences. We completed our second full year of originating and retaining on our bank divisions’ balance sheets a majority of loans with terms with final maturities of 15 years or less. We originated more refinance home loans and home purchase mortgages in 2012 than any year but one in our history. We are delighted to make home loans...they are the cornerstone of our consumer banking relationships and the credit quality of home loans is generally superior to other types of loans. Our bank divisions do marvelous work helping customers and prospects with the right combination of loan alternatives and a myriad of other banking services. Making a home loan may seem easy on the surface, but we assure you the reams of paper required to comply with federal regulations (increasing every year, by the way), the application process, the deliberation and dialogue between our lenders and customers, the underwriting process, the loan approval, processing and closing, followed by the post-closing loan administration, takes a small army of professionals doing their work correctly. Every day. Every loan. It is difficult to exaggerate the individual and collective efforts required to successfully manage the tedious and laborious process of making a home loan. We are exceptionally proud of all of our associates and never more proud than after witnessing the results of 2012. We take nothing for granted and equally value the work of our loan processing/servicing centers within our community bank divisions. We were pleased to be able to recruit Julie Leonard from our First-Knox National Bank Division in Mt. Vernon to oversee the critical real estate lending operations functions in the latter part of 2012. 3 T O O U R S H A R E H O L D E R S As the modest economic recovery continued in 2012, we enjoyed a 5.8% increase in consumer loan balances. This category of lending mirrored the increased level of auto sales in the markets we serve. Some banks tend to be cyclical in their automobile finance programs but consistency has been a hallmark of PNB for decades. While some competitors exit this type of lending periodically, we continue offering loans on automobiles, pick-up trucks, boats and recreational vehicles (and even motorcycles on occasion!). Consistency and predictability are rewarded as evidenced by the continued growth in loan balances within our bank divisions. Finally, our commercial real estate, other commercial, financial and agricultural loan balances increased year to year by 3.4%. As a community bank, we believe it is critical, and we very much desire, to lend money to all segments of our communities. We were pleased to take advantage of opportunities to increase our commercial lending last year. We are further encouraged that in the early part of 2013, it appears business and commercial loan demand has increased. Commercial lending leads to other services we offer, including corporate treasury, cash management, electronic deposit gathering and employee benefit plan administration. Said another way, we have a competitive and comprehensive suite of business and commercial services for the markets served by our banks, whether the focus is on deposits, lending or otherwise. This robust selection of services is delivered by bankers who we believe are unparalleled in their fields. Investing excess deposits... We identified challenges with low interest rates earlier. With interest rates throughout 2012 at or near record lows, it continues to be a great time to borrow money! As attractive as borrowing has been because of low costs, low interest rates put significant pressure on Park’s investment portfolio revenue. Designed to first and fully meet liquidity needs of our customers and our bank divisions, we also expect to earn a reasonable rate of return on our investments. It is ironic that when loan demand is slack, we tend to have surplus funds to invest. Such periods also typically coincide with periods when interest rates are low, as we’ve experienced in the past few years. During these times it is tempting to chase yield, assume unacceptable credit risk and irrationally extend maturities of our investments. Doing any of the above entails risk we try to minimize. We are fortunate to have Paul Turner managing our bank investment portfolio. Paul is a senior vice president of PNB and is ably assisted by PNB vice president April Dusthimer. Paul and April are constantly evaluating investment alternatives that will serve our two-fold purpose: managing liquidity and generating income. We are fortunate to have their talent. Our Trust and Investment Departments... We are proud of the trust departments of our bank divisions. Total assets under management or in safekeeping were, in the aggregate, more than $3.5 billion at year end 2012, an all time high. Helping clients manage wealth, settling and administering estates, managing employee benefit and retirement plans for companies and individuals 4 and offering professional consultation and investment advice has distinguished our bank divisions in each of the markets we serve. Our trust officers provide a level of distinction for our bank divisions that is uncommon. Continued asset growth is the best example we can provide that the strategy is effective. Park Technology... We currently have just under $7 million in various technology related projects underway. These projects follow several others initiated since 2010 that, in aggregate, represent a total investment of over $20 million. Projects to date have been completed under budget and generally within the time frames expected. We have updated all of our ATMs, installed our own Disaster Recovery site, and upgraded our main frame hardware, our operating systems and our work stations, among many other projects. As 2013 progresses, we anxiously await the successful conclusion of the replacement (read that as modernization) of our voice and data communications systems as well as significantly enhancing our Mobile Banking Solution by mid-year. We are excited about having contemporary and highly competitive technology we can offer through each of our affiliates. This work is being led by Tim Lehman. Late last year we asked Tim to assume additional responsibilities and were pleased that he embraced the challenge. Specifically, Tim has been named chief operating officer in addition to being a senior vice president of PNB. He is a superb community banker and is providing additional leadership we need. Internal Audit and PNB Administration... Jeff Wilson has headed up our internal audit team for nearly nine years. Last year we identified the need to add leadership talent to the administrative area of our organization, and we tapped Jeff for the job. We told him he could not advance until he and the audit committee of the board identified a successor for his current position! We are pleased that Adrienne Brokaw has joined Park as our next chief internal auditor. Adrienne brings a wealth of talent and experience to the position, most recently serving as a partner for one of the big four public accounting firms in Columbus, Ohio. She will join a fine department of audit professionals within Park; we are eager for her to apply her skills here. Her arrival will unleash Jeff to help our leadership team with important administrative responsibilities. Jeff’s formal title in the new position is chief administrative officer in addition to being a senior vice president of PNB. Our Accounting Function... In December we announced that our former chief financial officer, John Kozak, decided to accelerate his retirement by a few months. We wished John well and thanked him for more than three decades of service. Brady Burt has been our chief accounting officer since he joined PNB in April, 2007. Brady was previously identified as John’s successor. We activated the plan and Brady quickly and professionally assumed his new responsibilities as chief financial officer. T O O U R S H A R E H O L D E R S We also announced the elevation of Matt Miller to chief accounting officer, Brady’s former position. This too had been planned in connection with John’s retirement, and we appreciate even more today, in hindsight, the need for succession planning. Brady and Matt brought considerable experience and talent to the Park organization, and we enjoy working with them. They work hard, have fun, and are effective leaders. They are fully engaged and along with their entire team, we have no reservations about their ability to see that Park continues with its fine record of timely, accurate accounting and critically, providing the very best advice and counsel to management and our board. Both Brady and Matt fit within the Park culture as if they have been with us their entire careers. Three new directors being proposed... Corporate governance is an important responsibility for all boards of directors. During 2012 our Nominating and Corporate Governance committee of our board of directors met on multiple occasions to review, discuss and deliberate on the structure of our board that would serve the interests of Park and our shareholders. They concluded, and management quickly concurred, to ask three current directors of The Park National Bank, Ms. Donna M. Alvarado, Rev. Dr. Charles W. Noble, Sr. and Mr. Robert E. O’Neill to join the Park board, subject to shareholder approval at the annual meeting in April 2013. You will find biographical information on each individual in the proxy statement for our annual meeting. We urge you to support these recommendations. In closing... To bring this long letter to conclusion, we’ve previously identified how pleased we are with Guardian Financial Services Company (GFSC), our consumer finance subsidiary. GFSC finished 2012 in record style, reaching new highs in loan balances and net income. We want to especially salute Earl Osborne, who founded our GFSC subsidiary from scratch in 1999. Earl completed his 14th full year of service with Park last year, and recommended that his president, Matt Marsh, assume the role as the chief executive officer of GFSC, allowing Earl to reduce his workload and responsibilities. We thank Earl for his dedication and superior leadership, and we congratulate Matt on his new responsibility! We remain grateful as ever for the support of our shareholders. As we began this letter, the banking industry has been out of favor these past several years, and we look forward to when our collection of community bank divisions and GFSC are better recognized for our consistent, superior performance over long periods of time. Cycles come and go, and we’re ready for the recent one to end. We remain highly optimistic. As Bill McConnell taught us years ago, with talented associates, strong capital and generating superior net income, future possibilities are endless! You can help us realize our potential by referring prospects to us. We won’t let you down. C. Daniel DeLawder Chairman David L. Trautman President 5 F I N A N C I A L H I G H L I G H T S (In thousands, except per share data) 2012 2011 Earnings: Total interest income Total interest expense Net interest income Net income available to common shareholders (x) Per Share: Net income per common share – basic (x) Net income per common share – diluted (x) Cash dividends declared Common book value (end of period) At Year-End: Total assets Deposits Loans Investment securities Total borrowings Total shareholders’ equity Ratios: Return on average common equity (x) Return on average assets (x) Efficiency ratio $ 285,735 $ 331,880 50,420 235,315 75,205 4.88 4.88 3.76 42.20 $6,642,803 4,716,032 4,450,322 1,581,751 1,206,076 650,366 11.41% 1.11% 57.07% 58,646 273,234 76,284 4.95 4.95 3.76 41.82 $6,972,245 4,465,114 4,317,099 1,708,473 1,162,026 742,364 11.81% 1.06% 55.18% (x) Reported measure uses net income available to common shareholders. Net income available to common shareholders is calculated as net income less preferred share dividends and accretion, associated with the preferred shares issued to the U.S. Treasury under the Capital Purchase Program. Percent Change –13.90% –14.03% –13.88% –1.41% –1.41% –1.41% — 0.91% –4.73% 5.62% 3.09% –7.42% 3.79% –12.39% — — — 6 S H A R E H O L D E R S ’ I N F O R M A T I O N STOCK LISTING: NYSE MKT Symbol – PRK CUSIP #700658107 GENERAL SHAREHOLDER 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 shareholders can purchase additional Park National Corporation common shares 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 shareholders may have their dividend payments directly deposited into their checking, savings or money market account. This direct deposit of dividends is free for all share holders. If you have any questions or need an enrollment form, please contact the Corporation’s Stock Transfer Agent and Registrar as indicated below. STOCK TRANSFER AGENT AND REGISTRAR: The Park National Bank Shareholder Services located at First-Knox National Bank, Division of The Park National Bank Post Office Box 1270 One South Main Street Mount Vernon, Ohio 43050-1270 740/399-5208, 800/837-5266 Ext. 5208 shareholderservices@firstknox.com FORM 10-K: All forms filed by the Corporation with the SEC (including our Form 10-K for 2012) 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 7 PARKNATIONAL C O R P O R A T I O N Total Financial Service Centers: 130 Total ATMs: 144 Asset Size: $6.6 Billion Headquarters: Newark, Ohio NYSE MKT: PRK Website: ParkNationalCorp.com Maureen H. Buchwald Owner, Glen Hill Orchards, LLC Brady T. Burt Chief Financial Officer C. Daniel DeLawder Chairman Harry O. Egger Vice Chairman F.W. Englefield, IV President, Englefield, Inc. Stephen J. Kambeitz President and CFO, RC Olmstead William T. McConnell Chairman of the Executive Committee Timothy S. McLain Vice President, McLain, Hill, Rugg & Associates, Inc. John J. O’Neill Chairman, Southgate Corporation Rick R. Taylor President, Jay Industries, Inc. David L. Trautman President Sarah R. Wallace Chairman of the Board, First Federal Savings and Loan Association of Newark Lee Zazworsky President, Mid State Systems, Inc. 8 Offices: 16 ATMs: 14 Website: CenturyNationalBank.com Phone: 740.454.2521 or 800.321.7061 Facebook: /CenturyNationalBank Chairman: Thomas M. Lyall President: Patrick L. Nash Counties Served: Athens, Coshocton, Hocking, Muskingum, Perry, Tuscarawas Zanesville - North* 1201 Brandywine Boulevard Zanesville, Ohio 43701-1086 Zanesville - North Military* 990 Military Road Zanesville, Ohio 43701-1387 Zanesville - South* 2127 Maysville Avenue Zanesville, Ohio 43701-5748 Zanesville - South Maysville* 2810 Maysville Pike Zanesville, Ohio 43701-8577 *Includes Automated Teller Machine Main Office - Zanesville 14 South Fifth Street Post Office Box 1515 Zanesville, Ohio 43702-1515 Athens* 898 East State Street Athens, Ohio 45701-2115 Coshocton* 100 Downtowner Plaza Coshocton, Ohio 43812-1921 New Lexington* 206 North Main Street New Lexington, Ohio 43764-1263 Newcomerstown* 220 East State Street Newcomerstown, Ohio 43832-1451 Zanesville - Consumer Lending and Collections Center 33 South Fifth Street Zanesville, Ohio 43701-3510 Dresden* 91 West Dave Longaberger Avenue Dresden, Ohio 43821-9726 Zanesville - East* 1705 East Pike Zanesville, Ohio 43701-6601 Logan* 61 North Market Street Logan, Ohio 43138-1272 Zanesville - Kroger* 3387 Maple Avenue Zanesville, Ohio 43701-1338 New Concord* 1 West Main Street New Concord, Ohio 43762-1218 Zanesville - Lending Center* 505 Market Street Zanesville, Ohio 43701-3610 Top Row: Michael L. Bennett - The Longaberger Company; Ronald A. Bucci - Stoneware Properties and General Graphics Promotional Products, LLC; Clint W. Cameron - Cameron Drilling; Ward D. Coffman, III - Coffman Law Offices; Robert D. Goodrich, II - Retired, 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. Middle Row: Thomas M. Lyall - Chairman and CEO ; Timothy S. McLain, CPA - McLain, Hill, Rugg and Associates, Inc.; Patrick L. Nash - President; Don R. Parkhill - Jacobs, Vanaman Agency, Inc.; William A. Phillips - Chairman of the Executive Committee; James L. Shipley - Miller-Lynn Insurance Service and Smith-Brogan Insurance Agency; Thomas L. Sieber - Retired, Hospital Administrator; Dr. Anne C. Steele - Muskingum University; Bottom Row: Dr. Robert J. Thompson - Neurological Associates of Southeastern Ohio, Inc. 9 Offices: 11 ATMs: 15 Website: FairfieldNationalBank.com Phone: 740.653.7242 Facebook: /FairfieldNationalBank President: Stephen G. Wells Counties Served: Fairfield, Franklin Off-Site ATM Locations Lancaster - Fairfield Medical Center (2) 401 North Ewing Street Lancaster - Ohio University - Lancaster 1570 Granville Pike FAIRFIELD NATIONAL BANK DIVISION OF THE PARK NATIONAL BANK Main Office - Lancaster 143 West Main Street Post Office Box 607 Lancaster, Ohio 43130-0607 Main Office Drive-Thru* 150 West Wheeling Street Lancaster, Ohio 43130-3707 Baltimore* 1301 West Market Street Baltimore, Ohio 43105-1044 Lancaster - Meijer* 2900 Columbus-Lancaster Road Post Office Box 607 Lancaster, Ohio 43130-0607 Lancaster - Memorial Drive* 1280 North Memorial Drive Lancaster, Ohio 43130 Lancaster - West Fair* 1001 West Fair Avenue Lancaster, Ohio 43130 Canal Winchester - Kroger* 6095 Gender Road Canal Winchester, Ohio 43110 Pickerington - Central - Kroger* 1045 Hill Road North Pickerington, Ohio 43147 Lancaster - East Main* 1001 East Main Street Lancaster, Ohio 43130 Pickerington - North - Kroger** 7833 Refugee Road NW Pickerington, Ohio 43147 Lancaster - East Main Street - Kroger* 1141 East Main Street Post Office Box 607 Lancaster, Ohio 43130-0607 Reynoldsburg - Slate Ridge* 1988 Baltimore-Reynoldsburg Road (Route 256) Reynoldsburg, Ohio 43068 *Includes Automated Teller Machine **Includes Automated Teller Machine Drive-up and Inside Top Row: Charles P. Bird, Ph.D. - Retired, Ohio University; Dean DeRolph - Kumler Collision and Automotive; Jennifer Johns Friel - Midwest Fabricating Company; Leonard F. Gorsuch - Fairfield Homes, Inc.; Eleanor V. Hood - The Lancaster Festival Bottom Row: James McLain, II - McLain, Hill, Rugg and Associates, Inc.; Jonathan W. Nusbaum, M.D. - Retired, Surgeon; S. Alan Risch - Risch Drug Stores, Inc.; Mina H. Ubbing - Fairfield Medical Center; Paul Van Camp - P.V.C. Limited; Stephen G. Wells - President 10 Offices: 3 ATMs: 4 Website: FarmersandSavings.com Phone: 419.994.4115 Facebook: /FarmersBank President: Kenneth G. Gosche County Served: Ashland Main Office - Loudonville* 120 North Water Street Post Office Box 179 Loudonville, Ohio 44842-0179 Ashland* 1161 East Main Street Ashland, Ohio 44805-2831 Perrysville* 112 North Bridge Street Post Office Box 156 Perrysville, Ohio 44864-0156 Off-Site ATM Location Loudonville - Stake’s Short Stop 3052 State Route 3 *Includes Automated Teller Machine Patricia A. Byerly - Retired, Byerly-Lindsey Funeral Home; Timothy R. Cowen - Cowen Truck Line, Inc.; Kenneth G. Gosche - President; Roger E. Stitzlein - Loudonville Farmers Equity; Chris D. Tuttle - Amish Oak Furniture Company, Inc.; Gordon E. Yance - Chairman of the Board, First-Knox National Bank 11 Offices: 10 ATMs: 17 Website: FirstKnox.com Phone: 740.399.5500 Facebook: /FirstKnoxNationalBank President: Vickie A. Sant Counties Served: Holmes, Knox, Morrow, Southern Richland Main Office - Mount Vernon One South Main Street Post Office Box 1270 Mount Vernon, Ohio 43050-1270 Bellville* 154 Main Street Bellville, Ohio 44813-1237 Centerburg* 35 West Main Street Post Office Box F Centerburg, Ohio 43011-0870 Danville* 4 South Market Street Post Office Box 29 Danville, Ohio 43014-0029 Fredericktown* 137 North Main Street Fredericktown, Ohio 43019-1109 Millersburg* 225 North Clay Street Millersburg, Ohio 44654-1101 Mount Gilead 17 West High Street Mount Gilead, Ohio 43338-1212 Mount Gilead - Edison* 504 West High Street Mount Gilead, Ohio 43338-1296 Mount Vernon - Blackjack Road* 8641 Blackjack Road Mount Vernon, Ohio 43050-9485 Mount Vernon - Coshocton Avenue* 810 Coshocton Avenue Mount Vernon, Ohio 43050-1922 Mount Vernon - Operations Center 105 West Vine Street Post Office Box 1270 Mount Vernon, Ohio 43050-1270 Off-Site ATM Locations Fredericktown - Fast Freddies 89 South Main Street Howard - Apple Valley 21973 Coshocton Road Millersburg - BAGS 88 East Jackson Street Mount Gilead - Morrow County Hospital 651 West Marion Road Mount Vernon - Colonial City Lanes 110 Mount Vernon Avenue Mount Vernon - COTC - Ariel Hall 236 South Main Street Mount Vernon - Knox Community Hospital 1330 Coshocton Road Mount Vernon 11 West Vine Street Gambier - Kenyon College Bookstore 106 Gaskin Avenue *Includes Automated Teller Machine Top Row: Maureen H. 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.; Daniel L. Mathie - Critchfield, Critchfield & Johnston, Ltd. Bottom Row: Noel C. Parrish - NOE, Inc.; Mark R. Ramser - Ohio Cumberland Gas Co.; Vickie A. Sant - President; R. Daniel Snyder - Retired Director, Snyder Funeral Homes, Inc.; Roger E. Stitzlein - Loudonville Farmers Equity; Gordon E. Yance - Chairman, Retired President 12 PARK NATIONAL BANK Main Office - Newark* 50 North Third Street Post Office Box 3500 Newark, Ohio 43058-3500 Columbus 140 East Town Street, Suite 1400 Columbus, Ohio 43215 Gahanna - Kroger* 1365 Stoneridge Drive Gahanna, Ohio 43230 Granville* 119 East Broadway Granville, Ohio 43023 Heath - Southgate* 567 Hebron Road Heath, Ohio 43056 Heath - 30th Street* 800 South 30th Street Heath, Ohio 43056 Hebron* 103 East Main Street Post Office Box 268 Hebron, Ohio 43025-0268 Johnstown* 60 West Coshocton Street Post Office Box 446 Johnstown, Ohio 43031-0446 Offices: 18 ATMs: 23 Website: ParkNationalBank.com Phone: 740.349.8451 or 888.545.4PNB Facebook: /ParkNationalBank Chairman: C. Daniel DeLawder President: David L. Trautman Counties Served: Franklin, Licking Utica* 33 South Main Street Post Office Box 486 Utica, Ohio 43080-0486 Worthington* 7140 North High Street Worthington, Ohio 43085 Operations Centers 21 South First Street and 22 South First Street Newark, Ohio 43055 Off-Site ATM Locations Granville - Denison University Slayter Hall Granville - Kendal at Granville 2158 Columbus Road Hebron - Kroger 600 East Main Street Newark - Licking Memorial Hospital 1320 West Main Street Newark - OSU-N/COTC 1179 University Drive Reynoldsburg - Kroger 6962 East Main Street Kirkersville 177 East Main Street Post Office Box 38 Kirkersville, Ohio 43033-0038 Newark - Deo Drive - Kroger* 245 Deo Drive, Suite A Post Office Box 3500 Newark, Ohio 43058-3500 Newark - Dugway* 1495 Granville Road Newark, Ohio 43055 Newark - Eastland* 1008 East Main Street Newark, Ohio 43055 Newark - McMillen* 1633 West Main Street Newark, Ohio 43055 Newark - 21st Street* 990 North 21st Street Newark, Ohio 43055 Pataskala - Kroger** 350 East Broad Street Pataskala, Ohio 43062 Reynoldsburg - Kroger* 8460 Main Street Reynoldsburg, Ohio 43068 *Includes Automated Teller Machine **Includes Automated Teller Machine Drive-up and Inside Top Row: Donna M. Alvarado - AGUILA International; C. Daniel DeLawder - Chairman; F.W. Englefield, IV - Englefield, Inc.; Stephen J. Kambietz - RC Olmstead; William T. McConnell - Chairman of the Executive Committee Bottom Row: Dr. Charles Noble, Sr. - Retired, Shiloh Missionary Baptist Church; John J. O’Neill - Southgate Corporation; Robert E. O’Neill - Southgate Corporation; J. Gilbert Reese - Director Emeritus; David L. Trautman - President; Sarah R. Wallace - First Federal Savings and Loan Association of Newark; Lee Zazworsky - Mid State Systems, Inc. 13 Offices: 9 ATMs: 8 Website: BankWithPark.com Phone: 513.576.0600 or 888.474.PARK Facebook: /BankWithPark President: David J. Gooch Counties Served: Butler, Clermont, Hamilton, Boone (KY) Florence 600 Meijer Drive, Suite 303 Florence, Kentucky 41042 West Chester* 8366 Princeton-Glendale Road West Chester, Ohio 45069 Milford* 25 Main Street Milford, Ohio 45150 New Richmond* 100 Western Avenue New Richmond, Ohio 45157 Owensville* 5100 State Route 132 Owensville, Ohio 45160 *Includes Automated Teller Machine Main Office - Eastgate* 4550 Eastgate Boulevard Cincinnati, Ohio 45245 Amelia - Main Street* 5 West Main Street Amelia, Ohio 45102 Amelia - Ohio Pike* 1187 Ohio Pike Amelia, Ohio 45102 Anderson* 1075 Nimitzview Drive Cincinnati, Ohio 45230 Top Row: Nicholas L. Berning - Retired, Berning Financial Consulting; Thomas J. Button - The Park National Bank; Daniel L. Earley - Retired President, Chairman; David J. Gooch. - President; Bottom Row: Martin J. Grunder, Jr. - Grunder Landscaping Co.; Richard W. Holmes - Retired, PricewaterhouseCoopers LLP; Larry H. Maxey - Synchronic Business Solutions; Chris S. Smith - Clermont County Convention & Visitors Bureau 14 *Includes Automated Teller Machine **Includes Automated Teller Machine Drive-up and Inside Offices: 12 ATMs: 13 Website: RichlandBank.com Phone: 419.525.8700 Facebook: /RichlandBank President: John A. Brown County Served: Richland Main Office - Mansfield* 3 North Main Street Post Office Box 355 Mansfield, Ohio 44901-0355 Butler* 85 Main Street Butler, Ohio 44822-9618 Lexington* 276 East Main Street Lexington, Ohio 44904-1300 Mansfield - Ashland Road* 797 Ashland Road Mansfield, Ohio 44905-2075 Mansfield - Cook Road* 460 West Cook Road Mansfield, Ohio 44907-2395 Mansfield - Lexington Avenue - Kroger* 1500 Lexington Avenue Mansfield, Ohio 44907-2632 Ontario* 325 North Lexington-Springmill Road Ontario, Ohio 44906-1218 Mansfield - Madison - Kroger* 1060 Ashland Road Mansfield, Ohio 44905-8797 Shelby - Mansfield Avenue* 155 Mansfield Avenue Shelby, Ohio 44875-1832 Mansfield - Marion Avenue* 50 Marion Avenue Mansfield, Ohio 44903-2302 Mansfield - Springmill* 889 North Trimble Road Mansfield, Ohio 44906-2009 Mansfield - West Park* 1255 Park Avenue West Mansfield, Ohio 44906-2810 Off-Site ATM Locations Mansfield - Ashland University School of Nursing 1020 South Trimble Road *Includes Automated Teller Machine Top Row: Ronald L. Adams - Retired, DAI Emulsions, Inc.; Mark Breitinger - Milark Industries; John A. Brown - President; Michael L. Chambers - J&B Acoustical Bottom Row: Benjamin A. Goldman - Retired, Superior Building Services; Timothy J. Lehman - Chairman of the Board; Grant E. Milliron - Milliron Industries; Shirley Monica - S.S.M. Inc.; Linda H. Smith - Ashwood LLC; Rick R. Taylor - Jay Industries, Inc. 15 Offices: 9 ATMs: 7 Website: SecondNational.com Phone: 937.548.2122 Facebook: /SecondNationalBank President: John E. Swallow Counties Served: Darke, Mercer Main Office - Greenville 499 South Broadway Post Office Box 130 Greenville, Ohio 45331-0130 Arcanum* 603 North Main Street Arcanum, Ohio 45304 Celina* 800 North Main Street Celina, Ohio 45822 Ft. Recovery* 117 North Wayne Street Ft. Recovery, Ohio 45846 Greenville - North* 1302 Wagner Avenue Greenville, Ohio 45331 Greenville - South Located inside the Brethren Retirement Community 750 Chestnut Street Greenville, Ohio 45331 Greenville - Third and Walnut* 175 East Third Street Greenville, Ohio 45331 Greenville - Walmart* 1501 Wagner Avenue Greenville, Ohio 45331 Versailles* 101 West Main Street Versailles, Ohio 45 *Includes Automated Teller Machine Tyeis Baker-Baumann - Rebsco, Inc.; Wayne G. Deschambeau - Wayne HealthCare; Neil J. Diller - Cooper Farms, Inc.; Jeffrey E. Hittle - Hittle Buick GMC, Inc.; Wesley M. Jetter - Ft. Recovery Industries; Marvin J. Stammen - Retired President, Second National Bank; John E. Swallow - President 16 Main Office - Springfield* 40 South Limestone Street Springfield, Ohio 45502 Beavercreek - Lending Center 1427 Research Park Drive Beavercreek, Ohio 45432 Enon* 3680 Marion Drive Enon, Ohio 45323 Jamestown* 82 West Washington Street Jamestown, Ohio 45335 Jeffersonville* 2 South Main Street Jeffersonville, Ohio 43128 Mechanicsburg* 2 South Main Street Mechanicsburg, Ohio 43044 Medway* 130 West Main Street Medway, Ohio 45341 New Carlisle* 201 North Main Street New Carlisle, Ohio 45344 New Carlisle - Park Layne* 2035 South Dayton-Lakeview Road New Carlisle, Ohio 45344 North Lewisburg* 8 West Maple Street North Lewisburg, Ohio 43060 Plain City 105 West Main Street Plain City, Ohio 43064 South Charleston* 102 South Chillicothe Street South Charleston, Ohio 45368 Springboro* 720 Gardner Road Springboro, Ohio 45066 Springfield - Derr Road - Kroger* 2989 Derr Road Springfield, Ohio 45503 Springfield - East Main* 2730 East Main Street Springfield, Ohio 45503 Springfield - North Limestone* 1756 North Limestone Street Springfield, Ohio 45503 Springfield - Northridge* 1600 Moorefield Road Springfield, Ohio 45503 Springfield - Western* 920 West Main Street Springfield, Ohio 45504 Urbana* 1 Monument Square Urbana, Ohio 43078 Urbana - Scioto Street* 828 Scioto Street Urbana, Ohio 43078 Offices: 22 ATMs: 28 Website: SecurityNationalBank.com Phone: 937.324.6800 Facebook: /SECNationalBank President: William C. Fralick Counties Served: Champaign, Clark, Fayette, Greene, Madison, Warren Xenia Downtown* 161 East Main Street Xenia, Ohio 45385 Xenia Plaza* 82 North Allison Avenue Xenia, Ohio 45385 Off-Site ATM Locations Plain City - Shell 440 South Jefferson Avenue Springfield 2051 North Bechtle Avenue Springfield - Clark State Community College 570 East Leffel Lane Springfield - Regional Medical Center 222 West North Street Springfield - Wittenberg University - Student Center 738 Woodlawn Avenue Springfield - Wittenberg University - HPER Center 250 Bill Edwards Drive Urbana - Champaign County Community Center 1512 South US Highway 68 Yellow Springs - Young’s Jersey Dairy 6880 Springfield-Xenia Road *Includes Automated Teller Machine Top Row: R. Andrew Bell - Brower Insurance Agency, LLC; Rick D. Cole - Colepak, Inc.; Harry O. Egger - Chairman, Retired President; William C. Fralick - President; Alicia Hupp - Sweet Manufacturing Company Bottom Row: Larry E. Kaffenbarger - Kaffenbarger Truck Equipment Company; Thomas P. Loftis - Midland Properties, Inc.; Scott D. Michael - Michael Farms, Inc.; Dr. Karen E. Rafinski - Clark State Community College; Chester L. Walthall - Heat-Treating, Inc.; Robert A. Warren - Hauck Bros., Inc. 17 Offices: 7 ATMs: 8 Website: UnitedBankOhio.com Phone: 419.562.3040 Facebook: /UnitedBankOhio President: Donald R. Stone Counties Served: Crawford, Marion Prospect* 105 North Main Street Prospect, Ohio 43342 Off-Site ATM Location Bucyrus - East Pointe Shopping Center 211 Stetzer Road South *Includes Automated Teller Machine Main Office - Bucyrus* 401 South Sandusky Avenue Post Office Box 568 Bucyrus, Ohio 44820 Caledonia* 140 East Marion Street Caledonia, Ohio 43314 Crestline* 245 North Seltzer Street Post Office Box 186 Crestline, Ohio 44827-0186 Galion* 8 Public Square Galion, Ohio 44833 Marion - Barks Road* 129 Barks Road East Marion, Ohio 43302 Marion - Walmart Super Center* 1546 Marion-Mt. Gilead Road Marion, Ohio 43302 Lois J. Fisher - Lois J. Fisher & Assoc.; Michele McElligott - CPA - Avita Health System; Kenneth A. Parr, Jr. - Parr Insurance Agency, Inc.; Douglas M. Schilling - Schilling Graphics, Inc.; Donald R. Stone - President; Douglas Wilson - Owner, Doug’s Toggery and Realtor, Craig A. Miley Realty & Auction, Ltd. 18 Offices: 6 ATMs: 7 Website: UnityNationalBk.com Phone: 937.615.1042 Facebook: /UnityNationalBank President: Brett A. Baumeister County Served: Miami Troy - Walmart* 1801 West Main Street Troy, Ohio 45373 Off-Site ATM Location Troy - Upper Valley Medical Center 3130 North Dixie Highway *Includes Automated Teller Machine Main Office - Piqua* 215 North Wayne Street Piqua, Ohio 45356 Administrative Office - Piqua 212 North Main Street Post Office Box 913 Piqua, Ohio 45356 Piqua - Sunset* 1603 Covington Avenue Piqua, Ohio 45356 Piqua - Walmart* 1300 East Ash Street Piqua, Ohio 45356 Tipp City* 1176 West Main Street Tipp City, Ohio 45371 Troy* 1314 West Main Street Troy, Ohio 45373 Dr. Richard N. Adams - Representative of Ohio General Assembly; Tamara Baird-Ganley - Baird Funeral Home; Michael C. Bardo - Hartzell Industries, Inc.; Brett A. Baumeister - President; Thomas E. Dysinger - Dysinger & Associates, LLC; Dr. Douglas D. Hulme - Oakview Veterinary Hospital; Timothy Johnston - Self-employed Consultant; W. Samuel Robinson - Murray, Wells, Wendeln & Robinson CPAs, Inc. 19 Officer Listing William T. McConnell Chairman of the Executive Committee Harry O. Egger Vice Chairman Brady T. Burt Chief Financial Officer C. Daniel DeLawder Chairman David L. Trautman President Park National Corporation William A. Phillips Chairman of the Executive Committee Thomas M. Lyall Chairman and CEO Patrick L. Nash President James C. Blythe Senior Vice President Barbara A. Gibbs Senior Vice President Michael F. Whiteman Senior Vice President Joseph P. Allen Vice President Derek A. Boothe Vice President Theresa M. Gilligan Vice President Brian E. Hall Vice President Janice A. Hutchison Vice President Stephen G. Wells President Timothy D. Hall Senior Vice President Richard E. Baker, II Vice President Daniel R. Bates Vice President Linda M. Harris Vice President 20 Jeffrey C. Jordan Vice President Brian G. Kaufman Vice President Susan A. Lasure Assistant Vice President Century National Bank Amber M. Gibson Administrative Officer Karen D. Lowe Assistant Vice President Noelle K. Jarrett Administrative Officer Bruce D. Kolopajlo Vice President Jodi C. Pagath Assistant Vice President Sandra D. Jones Administrative Officer Mark A. Longstreth Vice President Rebecca A. Palmerton Assistant Vice President Paula L. Meadows Administrative Officer James R. Merry Vice President Rebecca R. Porteus Vice President Jody D. Spencer Vice President and Trust Officer Thomas N. Sulens Vice President Katherine M. Barclay Assistant Vice President and Trust Officer Ann M. Gildow Assistant Vice President Terri L. Sidwell Assistant Vice President Saundra W. Pritchard Administrative Officer Cynthia J. Snider Assistant Vice President Emila S. Smith Administrative Officer Stephen A. Haren Banking Officer Diana F. McCloy Banking Officer Amy M. Pinson Banking Officer Beth A. Stillwell Administrative Officer Susan L. Summers Administrative Officer Deloris A. Tom Administrative Officer Molly J. Allen Administrative Officer Elaine L. White Administrative Officer Alaina J. Ankrum Administrative Officer Fairfield National Bank Laura F. Tussing Vice President and Trust Officer Molly S. Bates Assistant Vice President Trudy M. Reeb Assistant Vice President Scott A. Reed Assistant Vice President Jamey L. Binkley Banking Officer Grace R. Cline Banking Officer Melissa J. McMullen Banking Officer Janet K. Cochenour Banking Officer Michael D. Mitchell Banking Officer Andrew J. Connell Banking Officer Tara L. Craaybeek Banking Officer Daniel J. Fawcett Banking Officer Cynthia A. Moore Banking Officer Jason A. Saul Banking Officer Kim I. Sheldon Banking Officer Officer Listing Fairfield National Bank (continued) Allison G. Spangler Banking Officer Heather N. Wiley Banking Officer EJ Gurile, III Administrative Officer Tiffany J. Ruckman Administrative Officer Tina L. Taley Banking Officer Vincent E. Carpico Administrative Officer Sean P. Murnane Administrative Officer Jessica L. Seipel Administrative Officer Farmers and Savings Bank Kenneth G. Gosche President George T. Keffalas Vice President Brian R. Hinkle Assistant Vice President Todd A. Geren Banking Officer Sharon E. Blubaugh Vice President Gregory A. Henley Assistant Vice President Barbara J. Young Assistant Vice President Michael C. Bandy Administrative Officer and Trust Officer First-Knox National Bank Gordon E. Yance Chairman Vickie A. Sant President Cheri L. Butcher Senior Vice President and Trust Officer Julie A. Leonard Senior Vice President Mark P. Leonard Senior Vice President W. Douglas Leonard Senior Vice President Jesse L. Marlow Senior Vice President Robert E. Boss Vice President Cynthia L. Higgs Vice President Jerry D. Simon Vice President Joan M. Stout Vice President Todd P. Vermilya Vice President Nicholas R. Blanchard Banking Officer Monica L. Hiller Administrative Officer Barbara A. Barry Assistant Vice President Heather A. Brayshaw Banking Officer Kassandra L. Hoeflich Administrative Officer Mark D. Blanchard Assistant Vice President Lance E. Dill Banking Officer Phyllis D. Colopy Assistant Vice President Rachelle E. Dallas Assistant Vice President Deborah S. Dove Assistant Vice President James W. Hobson Assistant Vice President Debra E. Holiday Assistant Vice President R. Edward Kline Assistant Vice President James S. Meyer Assistant Vice President Dusty C. Au Banking Officer Wendi M. Fowler Banking Officer and Trust Officer David E. Humphrey Banking Officer Sherry L. Snyder Banking Officer Nicole S. Au Administrative Officer Robert T. Brooke Administrative Officer Deborah J. Daniels Administrative Officer Krystal E. Drye Administrative Officer Todd M. Hawkins Administrative Officer Cynthia K. Hogle Administrative Officer Erin C. Kelty Administrative Officer Jeffrey A. Kinney Administrative Officer Darrell E. Lee Administrative Officer Mary A. Loyd Administrative Officer Nicole L. Mack Administrative Officer Paulina S. McQuigg Administrative Officer Tiffany D. Stefano Administrative Officer 21 Officer Listing Earl W. Osborne Chairman Tracy L. Morgan Banking Officer Valerie J. Morgan Administrative Officer April D. Storie Administrative Officer Matthew R. Marsh President Charles L. Harris Administrative Officer Mary E. Parsell Administrative Officer Guardian Finance Company The Park National Bank William T. McConnell Chairman of the Executive Committee C. Daniel DeLawder Chairman David L. Trautman President Brady T. Burt Senior Vice President and Chief Financial Officer Thomas J. Button Senior Vice President Thomas M. Cummiskey Senior Vice President and Trust Officer Lynn B. Fawcett Senior Vice President Timothy J. Lehman Senior Vice President Laura B. Lewis Senior Vice President Matthew R. Miller Senior Vice President Cheryl L. Snyder Senior Vice President Paul E. Turner Senior Vice President Jeffrey A. Wilson Senior Vice President William R. Wilson Senior Vice President Linda K. Ampadu Vice President Alice M. Browning Vice President 22 James M. Buskirk Vice President and Trust Officer Bryan M. Campolo Vice President Peter G. Cassanos Vice President Cynthia H. Crane Vice President Kelly M. Maloney Vice President Carl H. Mayer Vice President Lydia E. Miller Vice President Terry C. Myers Vice President and Trust Officer Kathleen O. Crowley Vice President Jason L. Painley Vice President April R. Dusthimer Vice President Gregory M. Rhoads Vice President Kelly A. Edds Vice President Joan L. Franks Vice President John S. Gard Vice President and Trust Officer Jeffrey C. Gluntz Vice President Scott C. Green Vice President Damon P. Howarth Vice President and Trust Officer Daniel L. Hunt Vice President Steven J. Klein Vice President William P. Kleven Vice President Teresa M. Kroll Vice President and Trust Officer Karen K. Rice Vice President Scott R. Robertson Vice President David J. Rohde Vice President David F. Romes Vice President Ralph H. Root III Vice President Alan C. Rothweiler Vice President Christine S. Schneider Vice President Michael R. Shannon Vice President Robert G. Springer Vice President Robin L. Stein Vice President Julie L. Strohacker Vice President and Trust Officer Sandra S. Travis Vice President Erin E. Tschanen Vice President Berkley C. Tuggle, Jr. Vice President Daniel H. Turben Vice President Stanley A. Uchida Vice President John B. Uible Vice President and Trust Officer Brian S. Urquhart Vice President Monte J. VanDeusen Vice President Bradden E. Waltz Vice President Barbara A. Wilson Vice President Christa D. Wright Vice President Eric M. Baker Assistant Vice President Renee L. Baker Assistant Vice President Brent A. Barnes Assistant Vice President Gail A. Blizzard Assistant Vice President Officer Listing The Park National Bank (continued) Sharon L. Bolen Assistant Vice President Jennifer L. Morehead Assistant Vice President Andrew J. Fackler Banking Officer Larry M. Bailey Administrative Officer Rebecca A. Brownfield Assistant Vice President Cynthia A. Neely Assistant Vice President Kathryn S. Firestone Banking Officer Stephen E. Buchanan Administrative Officer Beverly A. Clark Assistant Vice President and Trust Officer Amber L. Cummins Assistant Vice President and Trust Officer Lori L. Drake Assistant Vice President Amanda K. Evans Assistant Vice President Catherine J. Evans Assistant Vice President Jill S. Evans Assistant Vice President Brenda M. Frakes Assistant Vice President David W. Hardy Assistant Vice President and Trust Officer Louise A. Harvey Assistant Vice President Chris R. Hiner Assistant Vice President Vernon W. Kennedy Assistant Vice President Craig M. Larson Assistant Vice President Candy J. Lehman Assistant Vice President and Trust Officer Bethany B. Lewis Assistant Vice President Julia E. McCormack Assistant Vice President Ronald C. McLeish Assistant Vice President Mareion A. Royster Assistant Vice President Megan C. Gadke Trust Officer Brian E. Smith Assistant Vice President Jerrod F. Gambs Banking Officer Melinda S. Smith Assistant Vice President Lisa E. Stranger Assistant Vice President Angie D. Treadway Assistant Vice President Tammy L. Gast Banking Officer Kristie L. Green Trust Officer Scott A. VanHorn Assistant Vice President Cynthia R. Hollis Banking Officer Jenny L. Ward Assistant Vice President Dixie C. Hoskinson Banking Officer Alice M. Keefe Banking Officer Patricia S. Carr Administrative Officer Brad G. Chance Administrative Officer Erica L. Chance Administrative Officer Johanna M. Clay Administrative Officer Nathan T. Cook Administrative Officer Jennifer G. Corbitt Administrative Officer Shawna L. Corder Administrative Officer Teresa A. Hennessy Banking Officer Beth A. Cook Administrative Officer Carol S. Whetstone Assistant Vice President and Trust Officer D. Bradley Wilkins Assistant Vice President Rose M. Wilson Assistant Vice President J. Bradley Zellar Assistant Vice President and Trust Officer Kathy L. Allen Banking Officer Michelle L. Arnold Banking Officer Thomas E. Ballard Banking Officer Danielle A.M. Burns Banking Officer Jacqueline L. Davis Banking Officer Brian J. Elder Banking Officer Kimberly G. McDonough Banking Officer Scott D. Dorn Administrative Officer Diane M. Oberfield Banking Officer Sherri L. Pembrook Banking Officer Leda J. Rutledge Banking Officer Charles F. Schultz Banking Officer Michael D. Dudgeon Administrative Officer Aaron T. Dunifon Administrative Officer Teresa K. Faris Administrative Officer Jennifer S. Favand Administrative Officer Jennifer L. Shanaberg Banking Officer Bradley B. Feightner, Jr. Administrative Officer Lori B. Tabler Banking Officer Corey S. Alton Administrative Officer Lindsay M. Alton Administrative Officer David B. Armstrong Administrative Officer Bradley D. Gard Administrative Officer Tracy A. Grimm Administrative Officer Ellen P. Hempleman Administrative Officer Candy L. Holbrook Administrative Officer 23 Officer Listing Asher D. Hunter Administrative Officer Aaron B. Mueller Administrative Officer The Park National Bank (continued) Mark D. Ridenbaugh Administrative Officer Ginger R. Varner Administrative Officer Amber L. Keirns Administrative Officer Angela J. Muncie Administrative Officer Rhonda L. Rodgers Administrative Officer Ronda M. Welsh Administrative Officer Lisa A. Keller Administrative Officer Kathy K. Myers Administrative Officer Ruth Y. Sawyer Administrative Officer Barry H. Winters Administrative Officer Cynthia L. Kissel Administrative Officer Andrew H. Knoesel Administrative Officer Natasha D. McKee Administrative Officer Rodger D. Orr Administrative Officer Alice M. Schlaegel Administrative Officer Jeffrey A. Pillow Administrative Officer Lacie M. Priest Administrative Officer Jessica L. Schorger Administrative Officer Michelle M. Tipton Administrative Officer Park National Bank of Southwest Ohio & Northern Kentucky David J. Gooch President John R. Nienaber Vice President Sam J. DeBonis Assistant Vice President James P. Beck Administrative Officer Edward L. Brady Senior Vice President Ginger L. Vining Vice President James E. Hyson Assistant Vice President Steven M. Ernst Administrative Officer Jennifer K. Fischer Senior Vice President Joseph A. Wagner Vice President Louis J. Prabell Assistant Vice President Michael W. Miller Administrative Officer Adam T. Stypula Senior Vice President Jay F. Berliner Vice President Jason D. Hughes Vice President Timothy A. Kemper Vice President John F. Winkler II Vice President and Trust Officer David C. Brooks Assistant Vice President Kim J. Cunningham Assistant Vice President Christopher M. Young Assistant Vice President April Prather Administrative Officer Matthew D. Colwell Banking Officer Michelle M. Sandlin Administrative Officer Cyndy H. Wright Banking Officer Jason O. Verhoff Administrative Officer Jana M. Beal Administrative Officer Richland Bank John A. Brown President Rebecca J. Toomey Vice President Susan A. Fanello Assistant Vice President Linda M. Whited Assistant Vice President Frank W. Wagner II Executive Vice President Edward F. Adams Assistant Vice President Barbara A. Miller Assistant Vice President John Q. Cleland Banking Officer Donald R. Harris Jr. Senior Vice President Edward A. Brauchler Assistant Vice President Jeffrey A. Parton Assistant Vice President Beth K. Malaska Banking Officer Charla A. Irvin Vice President and Trust Officer Michael A. Jefferson Vice President 24 Jimmy D. Burton Assistant Vice President Alexander M. Rocks Assistant Vice President Elizabeth A. Myers Trust Officer Edward E. Duffey Assistant Vice President Sheryl L. Smith Assistant Vice President Barbara L. Schopp-Miller Banking Officer Officer Listing Richland Bank (continued) Carol L. Davis Administrative Officer Clayton J. Herold Administrative Officer Kristie L. Massa Administrative Officer Kathleen A. Spidel Administrative Officer Jessica L. Gribbon Administrative Officer Janis L. Hoover Administrative Officer Jennifer A. Schneeg Administrative Officer Deborah A. Sweet Administrative Officer Scope Aircraft Finance Robert N. Kent Jr. President Charles W. Sauter Vice President Linda M. Staubach Banking Officer Second National Bank John E. Swallow President Eric J. McKee Vice President Debby J. Folkerth Assistant Vice President Harvey B. Hole, III Banking Officer Steven C. Badgett Executive Vice President Daniel G. Schmitz Vice President Joy D. Greer Assistant Vice President Zachary L. Newbauer Banking Officer C. Russell Badgett Vice President Brian A. Wagner Vice President Vicki L. Neff Assistant Vice President Stephen C. Schulte Banking Officer Marie A. Boas Vice President D. Todd Durham Vice President and Trust Officer Thomas J. Lawson Vice President Kimberly A. Baker Assistant Vice President Cynthia J. Riffle Assistant Vice President Gregory P. Schwartz Banking Officer Gerald O. Beatty Assistant Vice President Shane D. Stonebraker Assistant Vice President Antonia T. Baker Administrative Officer Alexa J. Clark Assistant Vice President Michael R. Henry Banking Officer Melanie A. Smith Administrative Officer Security National Bank William C. Fralick President Jeffrey A. Darding Executive Vice President Thomas A. Goodfellow Senior Vice President Andrew J. Irick Senior Vice President Timothy L. Bunnell Vice President Connie P. Craig Vice President Margaret L. Foley Vice President and Trust Officer Mary L. Goddard Vice President and Trust Officer James A. Kreckman Vice President and Trust Officer James E. Leathley Vice President Thomas C. Ruetenik Vice President David A. Snyder Vice President Michael B. Warnecke Vice President Jill A. Brewer Assistant Vice President Thomas B. Keehner Assistant Vice President Rachel M. Brewer Assistant Vice President and Trust Officer Margaret A. Chapman Assistant Vice President Mary M. Demaree Assistant Vice President Steven B. Duelley Assistant Vice President Catherine L. Hill Assistant Vice President and Trust Officer Andrew S. Peyton Assistant Vice President Patrick K. Rastatter Assistant Vice President Mark B. Robertson Assistant Vice President Gary J. Seitz Assistant Vice President Darlene S. Williams Assistant Vice President Terri L. Wyatt Assistant Vice President and Trust Officer 25 Sharon K. Boysel Assistant Vice President R. Kathy Johnson Assistant Vice President Officer Listing Security National Bank (continued) Teresa L. Belliveau Banking Officer Joanna S. Jaques Administrative Officer Mark D. Klingler Administrative Officer Rita A. Riley Administrative Officer Margaret A. Horstman Administrative Officer Benjamin L. Kitchen Administrative Officer Sarah E. Lemon Administrative Officer Jeffrey S. Williams Administrative Officer Donald R. Stone President Matthew E. Bickert Assistant Vice President Jennifer J. Kuns Banking Officer Kriste A. Slagle Banking Officer Anne S. Cole Senior Vice President James W. Chapman Assistant Vice President David J. Lauthers Banking Officer James A. DeSimone Administrative Officer Scott E. Bennett Vice President Floyd J. Farmer Assistant Vice President J. Stephen McDonald Banking Officer and Trust Officer United Bank Brett A. Baumeister President Dean F. Brewer Assistant Vice President Mary E. Clevenger Banking Officer Lisa L. Feeser Assistant Vice President Douglas R. Eakin Banking Officer Unity National Bank Melinda M. Curtis Administrative Officer Brock A. Heath Administrative Officer Carol L. Van Culin Assistant Vice President Kenneth S. Magoteaux Banking Officer M. David Holbrook Administrative Officer Vicki L. Burke Trust Officer Kyle M. Cooper Administrative Officer G. Dwayne Cooper Vice President Nathan E. Counts Vice President John E. Frigge Vice President 26 M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S Management’s discussion and analysis presents the financial condition and results of operations for Park National Corporation and its subsidiaries (“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 successfully and within the expected timeframe; general economic and financial market conditions, and weakening in the economy, specifically the real estate market and the credit market, either nationally or in the states in which Park and its subsidiaries do business, may be worse than expected which could decrease the demand for loan, deposit and other financial services and increase loan delinquencies and defaults; changes in interest rates and prices may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our consolidated balance sheet; changes in consumer spending, borrowing and saving habits; changes in unemployment; asset/liability repricing risks and liquidity risks; our liquidity requirements could be adversely affected by changes to regulations governing bank capital and liquidity standards as well as by changes in our assets and liabilities; competitive factors among financial services organizations increase significantly, including product and pricing pressures and our ability to attract, develop and retain qualified bank professionals; the nature, timing and effect of changes in banking regulations or other regulatory or legislative requirements affecting the respective businesses of Park and its subsidiaries, including changes in laws and regulations concerning taxes, accounting, banking, securities and other aspects of the financial services industry, specifically the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), as well as future regulations which will be adopted by the relevant regulatory agencies, including the Consumer Financial Protection Bureau, to implement the Dodd-Frank Act’s provisions, the Budget Control Act of 2012 and the American Taxpayer Relief Act of 2012; the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board, the SEC, the Public Company Accounting Oversight Board and other regulatory agencies, and the accuracy of our assumptions and estimates used to prepare our financial statements; the effect of fiscal and governmental policies of the United States federal government; adequacy of our risk management program; a failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors and other service providers, including as a result of cyber attacks; demand for loans in the respective market areas served by Park and its subsidiaries; and other risk factors relating to the banking industry as detailed from time to time in Park’s reports filed with the Securities and Exchange Commission including those described in “Item 1A. Risk Factors” of Part I of Park’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012. 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 state- ment was made, or reflect the occurrence of unanticipated events, except to the extent required by law. SALE OF VISION BANK BUSINESS On February 16, 2012, Park completed the purchase and assumption trans - action between Park, Home BancShares, Inc. (“Home”) and their respective subsidiary banks. Home subsidiary, Centennial Bank (“Centennial”), purchased certain assets and liabilities of Vision Bank (“Vision”) for a purchase price of $27.9 million. Centennial purchased performing loans with an unpaid principal balance of $355.8 million, assumed ownership or operation of all 17 Vision office locations, and assumed deposit liabilities of $522.9 million. Certain other miscellaneous assets and liabilities were also purchased by Centennial. The remaining assets and liabilities were retained by Vision. As a result of the transaction, Park recorded a pre-tax gain of $22.2 million (after actual expenses directly related to the transaction) and agreed to allow Centennial to “put back” up to $7.5 million aggregate principal amount of loans, which were originally included within the loans sold in the transaction. Refer to the “Other expense” section for additional discussion of the loan put. OVERVIEW Net income for 2012 was $78.6 million, compared to $82.1 million in 2011 and $58.1 million in 2010. Diluted earnings per common share were $4.88, $4.95 and $3.45 for 2012, 2011 and 2010, respectively. Net income for 2012 included the gain from the sale of the Vision business of $22.2 million ($14.4 million after-tax). Results for 2011 and 2010 included gains of $28.8 million ($18.7 million after-tax) and $11.9 million ($7.7 million after-tax), respectively, from the sale of investment securities. Excluding the gain from the sale of the Vision business and gains from the sale of securities, net income for 2012, 2011 and 2010, respectively, would have been $64.2 million, $63.4 million, and $50.4 million. The table below reflects the net income (loss) by segment for each of the fiscal years ended December 31, 2012, 2011 and 2010. Park’s segments include The Park National Bank (“PNB”), Guardian Financial Services Company (“GFSC”), SE Property Holdings, LLC (“SEPH”) and “All Other” which primarily consists of Park as the “Parent Company.” For 2011 and 2010, the table includes the net loss at Vision, also considered an operating segment until the sale of the Vision business. Table 1 – Net Income (Loss) by Segment (In thousands) PNB GFSC Park Parent Company Ohio-based operations Vision Bank SEPH Total Park 2012 $87,106 3,550 195 $90,851 — (12,221) $78,630 2011 2010 $106,851 2,721 (1,595) $107,977 (22,526) (3,311) $ 82,140 $102,948 2,006 (1,439) $103,515 (45,414) — $ 58,101 The “Park Parent Company” above excludes the results for SEPH, an entity which is winding down commensurate with its primary objective of problem asset disposition. Management considers the “Ohio-based operations” results to reflect the business of Park and its subsidiaries going forward. The discus- sion below provides additional information regarding Park’s operating segments. 27 M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S The table below provides financial results for SEPH for the years ended December 31, 2012 and 2011. The results for fiscal year 2012 include the results for Vision through February 16, 2012, the date that Vision was merged with and into SEPH. Also included below are the financial results for Vision for the years ended December 31, 2011 and 2010. Table 4 – SEPH/Vision – Summary Income Statement For the years ended December 31, (In thousands) Net interest income Provision for loan losses Fee income Security gains Gain on sale of Vision business Total other expense Loss before income tax benefit Income tax benefit Net loss Net loss excluding security gains Balances at December 31, (In thousands) Assets Assets held for sale (1) Loans Deposits Liabilities held for sale (2) $ SEPH 2012 (341) 17,882 (736) — 22,167 22,032 $ (18,824) (6,603) $ (12,221) $ SEPH 2011 (974) — (3,039) — — 1,082 $ (5,095) (1,784) $ (3,311) Vision 2011 $ 27,078 31,052 1,422 5,195 — 31,379 $ (28,736) (6,210) $ (22,526) Vision 2010 $ 27,867 61,407 (6,024) — — 31,623 $ (71,187) (25,773) $ (45,414) $ (12,221) $ (3,311) $ (25,903) $ (45,414) SEPH 2012 $104,428 — 59,178 — — SEPH 2011 $34,989 — — — — Vision 2011 $650,935 382,462 123,883 32 536,186 Vision 2010 $791,945 — 640,580 633,432 — (1) The assets held for sale represent the loans and other assets at Vision that were sold in the first quarter of 2012. (2) The liabilities held for sale represent the deposits and other liabilities at Vision that were sold in the first quarter of 2012. SEPH’s assets primarily include performing and nonperforming loans, as well as OREO assets, that were not sold to Centennial as part of the sale of the Vision business on February 16, 2012. Net loss for SEPH was $12.2 million for the year ended December 31, 2012, compared to a net loss for the combined SEPH/Vision of $29.2 million, excluding the after-tax impact of security gains, for fiscal year 2011. The primary drivers of income/loss for SEPH are (1) charge-offs on loans retained following the sale of the Vision business which result in a dollar for dollar provision for loan loss, (2) recoveries on loans previously charged off, (3) gain/loss on the sale of OREO properties, (4) OREO devaluation adjustments based on appraisals received annually and (5) the expense of working down the portfolio of loans and OREO, including legal and third-party workout specialist costs. The table below reflects the results for Park’s Parent Company for the fiscal years ended December 31, 2012, 2011 and 2010. Table 5 – Park Parent Company – Summary Income Statement For the years ended December 31, (In thousands) Net interest income Provision for loan losses Fee income Total other expense Loss before income tax benefit Federal income tax benefit Net income (loss) 2012 $ 4,742 — 233 6,585 $(1,610) (1,805) $ 195 2011 $ 2,155 — 350 7,115 $(4,610) (3,015) $(1,595) 2010 $ 1,285 — 390 9,107 $(7,432) (5,993) $(1,439) Tables 2 through 6 show the components of net income for 2012, 2011 and 2010 for Park National Corporation and its wholly owned subsidiaries. The subsidiaries that will be reviewed in the tables are PNB, SEPH (including Vision through February 16, 2012), GFSC and Parent Company for Park (excludes SEPH results). We have also included some summary information on the balance sheet. Table 2 – PNB – Summary Income Statement For the years ended December 31, (In thousands) Net interest income Provision for loan losses Fee income Security gains Operating expenses Income before taxes Federal income taxes Net income Net income excluding security gains Balances at December 31, (In thousands) Assets Loans Deposits 2012 2011 2010 $ 221,758 16,678 70,739 — 156,516 $ 119,303 32,197 $ $ 87,106 87,106 $ 236,282 30,220 67,348 23,634 146,235 $ 150,809 43,958 $ 237,281 23,474 68,648 11,864 144,051 $ 150,268 47,320 $ 106,851 $ 102,948 $ 91,489 $ 95,236 2012 2011 2010 $6,502,579 4,369,173 4,814,107 $6,281,747 4,172,424 4,611,646 $6,495,558 4,074,775 4,622,693 Excluding the after-tax impact of security gains in 2011 and 2010, PNB’s net income was $91.5 million and $95.2 million, respectively, compared to $87.1 million in 2012. The $4.4 million decrease in net income in 2012, compared to net income excluding the after-tax impact of security gains in 2011, was due to a $14.5 million decline in net interest income and an increase in operating expenses of $10.3 million, offset by a $13.5 million decline in the provision for loan losses and an increase to fee income of $3.4 million. The decrease in net income excluding the after-tax impact of security gains in 2011, compared to 2010, was primarily due to an increase in the provision for loan losses of $6.7 million or 28.7%. This increase was largely due to an increase in the provision for loan losses pertaining to participation loans that PNB had purchased from Vision in 2007 and 2008. The loan loss provision for those participation loans was $3.4 million, $11.1 million and $7.1 million in 2012, 2011 and 2010, respectively. Table 3 – GFSC – Summary Income Statement For the years ended December 31, (In thousands) Net interest income Provision for loan losses Fee income Operating expenses Income before taxes Federal income taxes Net income Balances at December 31, (In thousands) Assets Loans Deposits 2012 $ 9,156 859 — 2,835 $ 5,462 1,912 $ 3,550 2012 $49,926 50,082 8,358 2011 $ 8,693 2,000 — 2,506 $ 4,187 1,466 $ 2,721 2011 $46,682 47,111 8,013 2010 $ 7,611 2,199 2 2,326 $ 3,088 1,082 $ 2,006 2010 $43,209 43,714 7,062 Net income for GFSC was $3.5 million for the year ended December 31, 2012, an increase of $829,000 or 30.5% from $2.7 million for fiscal year 2011. This improvement was the result of increased net interest income due to the 6.31% increase in loans in 2012, as well as a lower provision for loan losses based on improving trends, including declines in net-charge-offs, in the GFSC loan portfolio. 28 M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S For the year ended December 31, 2012, Park’s Parent Company had net income of $195,000, compared to a net loss of $1.6 million in 2011. Net interest income for Park’s Parent Company included interest income on loans by Park to SEPH and on subordinated debt investments by Park with PNB, which were eliminated in the consolidated Park National Corporation totals. Additionally, net interest income included interest expense related to the $35.25 million and $30 million of subordinated notes issued by Park in December 2009 and April 2012, respectively. Table 6 – Park – Summary Income Statement For the years ended December 31, (In thousands) Net interest income Provision for loan losses Fee income Gain on sale of Vision business Security gains Operating expenses Income before taxes State income taxes Federal income taxes Net income Balances at December 31, (In thousands) Assets Assets held for sale (1) Loans Deposits Liabilities held for sale (2) 2012 2011 2010 $ 235,315 35,419 70,236 22,167 — 187,968 $ 104,331 — 25,701 78,630 $ $ 273,234 63,272 66,081 — 28,829 188,317 $ 116,555 6,088 28,327 82,140 $ $ 274,044 87,080 63,016 — 11,864 187,107 $ $ 74,737 (1,161) 17,797 58,101 2012 2011 2010 $6,642,803 — 4,450,322 4,716,032 — $6,972,245 382,462 4,317,099 4,465,114 536,186 $7,282,261 — 4,732,685 5,095,420 — (1) The assets held for sale represent the loans and other assets at Vision that were sold in the first quarter of 2012. (2) The liabilities held for sale represent the deposits and other liabilities at Vision that were sold in the first quarter of 2012. PROJECTION OF FISCAL 2013 RESULTS BY OPERATING SEGMENT The information in the table below provides Park’s current projection of pre-tax, pre-provision income (loss) by operating segment for the 2013 fiscal year. Pre-tax, pre-provision income (loss) is calculated using net interest income, plus other income, less other expense. For comparison purposes, management has also included the pre-tax, pre-provision results for the fiscal year ended December 31, 2012. Table 7 – Projected Pre-tax, Pre-provision Income (Loss) (In thousands) PNB GFSC Parent excluding SEPH Total Ohio-based operations SEPH* Park National Corporation 2012 $135,981 6,321 (1,610) $140,692 (942) $139,750 Projected Range for 2013 $129,000 5,000 (5,000) $139,000 6,000 (4,000) $129,000 $141,000 (16,000) (10,000) $113,000 $131,000 *Includes Vision’s results through February 16, 2012, including the $22.2 million pre-tax gain on the sale of the Vision business on February 16, 2012. Management expects the low interest rate environment to remain throughout 2013. Credit loss experience is expected to continue to improve. Similar to management’s guidance one year ago, loan growth is expected to grow modestly, between 1% and 3%. The information below begins with Park’s projected consolidated pre-tax, pre-provision income and incorporates a projected range for provision for loan losses, income before income tax, income taxes and net income for Park on a consolidated basis in 2013. Table 8 – Projected Net Income (In thousands) 2012 Actual Projected Range for 2013 Pre-tax, pre-provision income Provision for loan losses Income before income tax Income taxes Net income $139,750 35,419 $104,331 25,701 $ 78,630 $113,000 20,000 $ 93,000 23,250 $ 69,750 $131,000 15,000 $116,000 30,160 $ 85,840 SUMMARY DISCUSSION OF OPERATING RESULTS FOR PARK A year ago, Park’s management projected that net interest income would be $240 million to $250 million in 2012. The actual results in 2012 were $235.3 million, $4.7 million below the bottom of the projected range. Park’s manage- ment projected that the average interest earning assets for 2012 would be approximately $6,200 million. The actual average interest earning assets for the year were $6,190 million, $10 million or 0.2% lower than the projected balance. Park’s forecast for the net interest margin in 2012 was a range of 3.88% to 3.98%. The actual results for the year were 3.83%, slightly below the bottom of the estimated range. Park’s management also projected a year ago that the provision for loan losses would be $20 million to $27 million in 2012. The actual provision for loan losses in 2012 was $35.4 million, which exceeded the top of the estimated range by $8.4 million. Fee income for 2012 was $70.2 million, excluding the $22.2 million pre-tax gain on the sale of the Vision business. A year ago, Park’s management pro- jected that fee income would be in a range of $62 million to $66 million. The actual results were $4.2 million above the top of the range. A year ago, Park’s management projected that operating expenses would be approximately $170 million to $175 million. Operating expenses for 2012 were $188.0 million, $13.0 million above the top of the estimated range. ISSUANCE OF PREFERRED SHARES AND EMERGENCY ECONOMIC STABILIZATION ACT On October 3, 2008, Congress passed the Emergency Economic Stabilization Act of 2008 (“EESA”), which created the Troubled Asset Relief Program (“TARP”) and provided the Secretary of the Treasury with broad authority to implement certain actions to help restore stability and liquidity to U.S. markets. The Capital Purchase Program (the “CPP”) was announced by the U.S. Department of the Treasury (the “U.S. Treasury”) on October 14, 2008 as part of TARP. The CPP is voluntary and requires a participating institution to comply with a number of restrictions and provisions, including standards for executive compensation and corporate governance and limitations on share repurchases and the declaration and payment of dividends on common shares. Park elected to apply for $100 million of funds through the CPP. On December 23, 2008, Park completed the sale to the U.S. Treasury of $100 million of newly-issued Park non-voting preferred shares as part of the CPP. Park entered into a Securities Purchase Agreement and a Letter Agreement with the U.S. Treasury on December 23, 2008. Pursuant to these agreements, Park issued and sold to the U.S. Treasury (i) 100,000 of Park’s Fixed Rate Cumulative Perpetual Preferred Shares, Series A, each without par value and having a liquidation preference of $1,000 per share (the “Series A Preferred Shares”), and (ii) a warrant (the “Warrant”) to purchase 227,376 Park common shares at an exercise price of $65.97 per share, for an aggregate purchase price of $100 million. The Warrant had a ten-year term. All of the proceeds from the sale of the Series A Preferred Shares and the Warrant by Park to the U.S. Treasury under the CPP qualified as Tier 1 capital for regulatory purposes. U.S. Generally Accepted Accounting Principles (GAAP) required management to allocate the proceeds from the issuance of the Series A Preferred Shares between the Series A Preferred Shares and related Warrant. The terms of the Series A Preferred Shares required that Park pay a cumulative dividend at the rate of 5 percent per annum until February 14, 2014, and 9 percent thereafter. Management determined that the 5 percent dividend rate was below market value; therefore, the fair value of the Series A Preferred Shares was less than the $100 million in proceeds. Management determined that a reasonable market discount rate was 12 percent for the fair value of the Series A Preferred Shares and used the Black-Scholes model to calculate the fair value of the Warrant (and related common shares). The allocation between the Series A Preferred Shares and the Warrant at December 23, 2008, the date of issuance, was $95.7 million and $4.3 million, respectively. The discount on the Series A Preferred Shares of $4.3 million was accreted through retained earnings using the level yield method over a 60-month period. GAAP requires Park to measure earnings 29 M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S per share with earnings available to common shareholders. Therefore, the Consolidated Statements of Income reflect a line item for “Preferred stock dividends and accretion” and a line item for “Income available to common shareholders”. The dividends and accretion on the Series A Preferred Shares totaled $3,425,000 for 2012, $5,856,000 for 2011 and $5,807,000 for 2010. The accretion of the discount was $1,854,000 in 2012, $856,000 in 2011 and $807,000 in 2010. On April 25, 2012, Park entered into a Letter Agreement with the U.S. Treasury pursuant to which Park repurchased the 100,000 Series A Preferred Shares for a purchase price of $100 million plus pro rata accrued and unpaid dividends. Total consideration of $101.0 million included accrued and unpaid dividends of $1.0 million. In addition to the accrued and unpaid dividends of $1.0 million, the charge to retained earnings, resulting from the repurchase of the Series A Preferred Shares, was $1.6 million on April 25, 2012. On May 2, 2012, Park entered into a Letter Agreement pursuant to which Park repurchased from the U.S. Treasury the Warrant to purchase 227,376 Park common shares for consideration of $2.8 million, or $12.50 per Park common share. Income available to common shareholders is net income minus the preferred share dividends and accretion. Income available to common shareholders was $75.2 million for 2012, $76.3 million for 2011, and $52.3 million for 2010. See Note 1 and Note 25 of the Notes to Consolidated Financial Statements for additional information on the Series A Preferred Shares. DIVIDENDS ON COMMON SHARES Cash dividends declared on common shares were $3.76 in 2012, 2011 and 2010 and the quarterly cash dividend on common shares was $0.94 per share for each quarter of 2012, 2011 and 2010. CRITICAL ACCOUNTING POLICIES The significant accounting policies used in the development and presentation of Park’s consolidated financial statements are listed in Note 1 of the Notes to Consolidated Financial Statements. The accounting and reporting policies of Park conform with GAAP and general practices within the financial services industry. The preparation of financial statements in conformity with GAAP 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 management believes the determination of the allowance for loan and lease losses (“ALLL”) involves a higher degree of judgment and complexity than its other significant accounting policies. The ALLL is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb probable incurred credit losses in the loan portfolio. Management’s determination of the adequacy of the ALLL is based on periodic evaluations of the loan portfolio and of current economic conditions. However, this evaluation is inherently subjective as it requires material estimates, including expected default probabilities, the 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 current economic conditions. All of these 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. Refer to the “CREDIT EXPERIENCE –Provision for Loan Losses” section for additional discussion. Other real estate owned (“OREO”), property acquired through foreclosure, is recorded at estimated fair value less anticipated selling costs (net realizable value). If the net realizable value is below the carrying value of the loan on the date of transfer, the difference is charged off against the ALLL. Subsequent declines in value (OREO devaluations) are reported as adjustments to the carrying amount of OREO and are expensed within other income. Gains or losses not previously recognized, resulting from the sale of OREO, are 30 recognized in other income on the date of sale. At December 31, 2012, OREO totaled $35.7 million, a decrease of 15.6%, compared to $42.3 million at December 31, 2011. In accordance with GAAP, management utilizes the fair value hierarchy, which has the objective of maximizing the use of observable market inputs. The accounting guidance also requires disclosures regarding the inputs used to calculate fair value. These inputs are classified as Level 1, 2, and 3. Level 3 inputs are those with significant unobservable inputs that reflect a company’s own assumptions about the market for a particular instrument. Some of the inputs could be based on internal models and cash flow analysis. At December 31, 2012, financial assets valued using Level 3 inputs for Park had an aggregate fair value of approximately $74.6 million. This was 6.1% of the total amount of assets measured at fair value as of the end of the year. The fair value of impaired loans was approximately $53.9 million (or 72.3%) of the total amount of Level 3 inputs. Additionally, there were $78.2 million of loans that were impaired and carried at cost, as fair value exceeded book value for each individual credit. The large majority of Park’s financial assets valued using Level 2 inputs consist of available-for-sale (“AFS”) securities. The fair value of these AFS securities is obtained largely by the use of matrix pricing, which is a mathematical technique widely used in the financial services industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. GAAP establishes standards for the amortization of acquired intangible assets and the impairment assessment of goodwill. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Park’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Park’s banking subsidiary 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. GAAP requires an annual evaluation of goodwill for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired by assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If after assessing these events or circumstances, it is con- cluded that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the second step of the impair- ment test is required. If the carrying amount of the goodwill exceeds the fair value, an impairment charge must be recorded in an amount equal to the excess. The fair value of the goodwill, which resides on the books of PNB, Park’s subsidiary bank, is estimated by reviewing the past and projected operating results for PNB, deposit and loan totals for PNB and banking industry comparable information. At December 31, 2012, on a consolidated basis, Park had core deposit intangibles of $337,000 subject to amortization and $72.3 million of goodwill, which was not subject to periodic amortization. ABOUT OUR BUSINESS Through its Ohio-based banking divisions, Park is engaged in the commercial banking and trust business, generally in small to medium population Ohio communities. Management believes there are 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 or investment banking, 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. M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S Park’s subsidiaries compete for deposits and loans with other banks, savings associations, credit unions and other types of financial institutions. At December 31, 2012, Park operated 130 financial service offices and a network of 144 automated teller machines in 28 Ohio counties and one county in northern Kentucky. A summary of financial data, average loans and average deposits, for Park’s banking subsidiaries and their divisions for 2012, 2011 and 2010 is shown in Table 9. See Note 23 of the Notes to Consolidated Financial Statements for additional financial information for the Corporation’s operating segments. Please note that the financial statements for various divisions of PNB are not reported on a separate basis and, therefore, net income is not included in the summary financial data below. Table 9 – Park National Corporation Affiliate Financial Data (In thousands) Park National Bank: Park National Bank Division Security National Bank Division First-Knox National Bank Division Century National Bank Division Richland Trust Bank Division Fairfield National Bank Division Second National Bank Division 2012 2011 2010 Average Loans Average Deposits Average Loans Average Deposits Average Loans Average Deposits $1,286,751 $1,354,196 $1,206,520 $1,387,223 $1,141,941 $1,315,047 412,388 767,560 394,605 685,428 377,503 647,417 513,976 507,237 493,158 482,537 470,832 475,419 604,382 480,536 573,056 460,825 547,014 477,248 248,421 439,420 244,687 422,261 226,094 437,974 245,064 394,239 236,467 383,358 219,310 376,985 302,185 290,870 281,749 281,347 273,531 282,654 Park National SW & N KY Bank Division 291,297 United Bank Division 92,258 218,407 196,841 329,690 95,528 240,213 193,685 349,700 96,752 258,593 202,550 Unity National Bank Division Farmers & Savings Bank Division Scope Aircraft Finance SEPH/Vision Bank Guardian Finance Parent Company, including consolidating entries 147,956 149,537 146,965 145,051 147,239 134,125 95,661 75,684 97,228 71,386 99,839 68,924 175,019 133,306 48,987 9 67,737 8,524 156,681 582,221 45,957 9 575,784 8,093 146,424 666,652 40,792 10 666,868 6,219 (186,990) (115,400) (171,001) (144,711) (161,145) (168,018) Consolidated Totals $4,410,661 $4,835,397 $4,713,511 $5,192,489 $4,642,478 $5,182,015 SOURCE OF FUNDS Deposits: Park’s major source of funds is deposits from individuals, busi- nesses and local government entities. These deposits consist of non-interest bearing and interest bearing deposits. Average total deposits were $4,835 million in 2012, compared to $5,192 million in 2011 and $5,182 million in 2010. Total deposits were $4,716 million at December 31, 2012, compared to $4,465 million at December 31, 2011. This represents an increase in total deposits of $251 million or 5.6% in 2012. The increase in total deposits in 2012 was predominately in Park’s non-interest bearing checking accounts and interest bearing savings accounts. Table 10 – Year-End Deposits December 31, (In thousands) Non-interest bearing checking Interest bearing transaction accounts Savings All other time deposits Other 2012 2011 $1,137,290 $ 995,733 1,088,617 1,038,356 1,450,424 1,345 1,037,385 931,527 1,499,105 1,364 Change $141,557 51,232 106,829 (48,681) (19) Total $4,716,032 $4,465,114 $250,918 A year ago, management projected that Park’s total deposits would increase by 1% to 2% in 2012. The Federal Open Market Committee (“FOMC”) of the Federal Reserve Board decreased the federal funds rate from 4.25% at December 31, 2007 to a range of 0% to 0.25% at year-end 2008. The FOMC aggressively lowered the federal funds rate during 2008 as the severity of the economic recession increased. The FOMC has maintained the targeted federal funds rate in the 0% to 0.25% range for all of 2009, 2010, 2011 and 2012, as the U.S. economy has gradually recovered from the severe recession. The average federal funds rate was 0.15% for 2012, 0.10% for 2011 and 0.18% for 2010. The average interest rate paid on interest bearing deposits was 0.49% in 2012, compared to 0.66% in 2011 and 0.98% in 2010. The average cost of interest bearing deposits for each quarter of 2012 was 0.42% for the fourth quarter, 0.46% for the third quarter, 0.53% for the second quarter and 0.56% for the first quarter. 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 0.26% in 2012, compared to 0.28% in 2011 and 0.39% in 2010. The year-end balance for short-term borrowings was $344 million at December 31, 2012, compared to $264 million at December 31, 2011 and $664 million at December 31, 2010. The increase from 2011 to 2012 and the large decrease from 2010 to 2011 were due to investment security purchases at year-end 2012 and year-end 2010 that were temporarily funded through the use of short-term borrowings. 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 balance of long-term debt and the average cost of long-term debt includes the subordinated debentures and subordinated notes discussed in the following section.) In 2012, average long-term debt was $908 million, compared to $882 million in 2011 and $725 million in 2010. Average total debt (long-term and short-term) was $1,166 million in 2012, compared to $1,179 million in 2011 and $1,026 million in 2010. Average total debt decreased by $13 million or 1.1% in 2012 compared to 2011 and increased by $153 million or 14.9% in 2011 compared to 2010. The increase in average total debt in 2011 compared to 2010 was primarily due to the increase in average loans combined with an increase in average taxable investments. Management increased the amount of long-term debt during 2011 to partially offset the interest rate risk from maintaining 15-year, fixed-rate residential mortgage loans on Park’s balance sheet. Average long-term debt was 78% of average total debt in 2012 compared to 75% in 2011 and 71% in 2010. On November 30, 2012, Park’s banking subsidiary, PNB, restructured $300 million of fixed rate repurchase agreement borrowings with a third-party investment banking firm. The restructuring reduced the weighted average interest rate paid on the debt from 4.04% to 1.75% and extended the weighted average maturity term from 4.4 years to 5.0 years. A $25 million prepayment penalty was paid by PNB to the third-party investment banking firm as part of the restructuring which will be amortized over the five-year remaining term of the restructured borrowing. The effective rate on the restructured borrowing is 3.40%, including the impact of the prepayment penalty amortization. The average interest rate paid on long-term debt was 3.45% for 2012, compared to 3.42% for 2011 and 3.91% for 2010. 31 M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S Subordinated Debenture/Notes: Park assumed, with the 2007 Vision acquisition, $15 million of floating rate junior subordinated notes. The interest rate on these junior subordinated notes adjusted every quarter at 148 basis points above the three-month LIBOR interest rate. The maturity date for the junior subordinated notes is December 30, 2035 and the junior subordinated notes may be prepaid after December 30, 2010. These junior subordinated notes qualify as Tier 1 capital under current Federal Reserve Board guidelines. Park’s banking subsidiary, PNB, issued a $25 million subordinated debenture on December 28, 2007. The interest rate on this subordinated debenture adjusted every quarter at 200 basis points above the three-month LIBOR interest rate. The maturity date for the subordinated debenture was December 29, 2017 and the subordinated debenture was eligible to 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 matu- rity 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 related to this subordinated debenture to a fixed interest rate of 6.01% through the use of the interest rate swap. This subordinated debenture qualified 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”) and the Federal Reserve Board. This subordinated debenture was paid off in full on December 31, 2012. On December 23, 2009, Park issued $35.25 million of subordinated notes to 38 purchasers. These subordinated notes have a fixed annual interest rate of 10% with quarterly interest payments. The maturity date of these subordinated notes is December 23, 2019. These subordinated notes may be prepaid by Park any time after December 23, 2014. The subordinated notes qualify as Tier 2 capital under applicable rules and regulations of the Federal Reserve Board. Each subordinated note was purchased at a purchase price of 100% of the principal amount by an accredited investor. On April 20, 2012, Park issued $30.0 million of subordinated notes to 56 purchasers. These subordinated notes have a fixed annual interest rate of 7% with quarterly interest payments. The maturity date of these subordinated notes is April 20, 2022. The subordinated notes may be prepaid by Park any time after April 20, 2017. The subordinated notes qualify as Tier 2 Capital under applicable rules and regulations of the Federal Reserve Board. Each subordinated note was purchased at a purchase price of 100% of the principal amount by an accredited investor. See Note 11 of the Notes to Consolidated Financial Statements for additional information on the subordinated debenture and subordinated notes. Sale of Common Shares: Park sold an aggregate of 509,184 common shares, out of treasury shares, during 2010. Of the 509,184 common shares sold in 2010, 437,200 common shares were issued upon the exercise of warrants associated with the capital raise that closed on October 30, 2009. As part of the capital raise that closed on December 10, 2010, Park sold 71,984 common shares and issued warrants for the purchase of 71,984 common shares. In total for 2010, Park sold 509,184 common shares and issued warrants covering 71,984 common shares at a weighted average price per share of $67.99 for gross proceeds of $34.6 million. Net of selling expenses and professional fees, Park raised $33.5 million of common equity from capital raising activities in 2010. There were no sales of common shares during the years ended December 31, 2012 or 2011. Shareholders’ Equity: Tangible shareholders’ equity (shareholders’ equity less goodwill and other intangible assets) to tangible assets (total assets less goodwill and other intangible assets) was 8.79% at December 31, 2012, compared to 9.68% at December 31, 2011 and 9.04% at December 31, 2010. The ratio of tangible shareholders’ equity to tangible assets for each of the fiscal years ended December 31, 2011 and 2010 included the issuance of $100 million of Park Series A Preferred Shares to the U.S. Treasury on December 23, 2008. As previously discussed, Park repurchased the $100 million of Park 32 Series A Preferred Shares from the U.S. Treasury on April 25, 2012. Excluding the balance of Series A Preferred Shares, the ratio of tangible common share- holders’ equity to tangible assets was 8.25% at December 31, 2011 and 7.69% at December 31, 2010. As noted above, the ratio of tangible common share- holders’ equity to tangible assets was 8.79% at December 31, 2012. In accordance with GAAP, Park reflects any unrealized holding gain or loss on AFS securities, net of income taxes, as accumulated other comprehensive income (loss) which is part of Park’s shareholders’ equity. The unrealized holding gain on AFS securities, net of income taxes, was $9.6 million at year-end 2012, compared to an unrealized holding gains of $12.7 million at year-end 2011 and $15.1 million at year-end 2010. The decrease in the amount of unrealized holding gains on AFS securities, net of income taxes, at year-end 2011 was primarily due to the sale of AFS securities in 2011 for gains. Park sold AFS securities with an amortized cost value of $557 million in 2011 for a gain of $27.7 million. The large gain from the sale of securities in 2011 was possible due to the sharp decline in long-term interest rates during the year. In accordance with GAAP, Park adjusts accumulated other comprehensive income (loss) to recognize the net actuarial gain or loss reflected in the accounting for Park’s Pension Plan. See Note 13 of the Notes to Consolidated Financial Statements for information on the accounting for Park’s Pension Plan. Pertaining to the Pension Plan, Park recognized a net comprehensive loss of $6.2 million, $5.0 million and $2.4 million in 2012, 2011 and 2010, respectively. The comprehensive loss in each of 2012, 2011 and 2010 was due to changes in actuarial assumptions, primarily decreases in the discount rate. This actuarial loss more than offset the positive investment returns to the Pension Plan in 2010, 2011 and 2012. At year-end 2012, the balance in accumulated other comprehensive income/(loss) pertaining to the Pension Plan was $(27.1) million, compared to $(20.9) million at December 31, 2011, and $(15.9) million at December 31, 2010. Park also recognized net comprehensive income/(loss) of $0.6 million, $0.5 million and $(0.1) million for the years ended December 31, 2012, 2011 and 2010, respectively, due to the mark-to-market of the $25 million (notional amount) cash flow hedge that expired on December 28, 2012. See Note 19 of the Notes to Consolidated Financial Statements for information on the accounting for Park’s derivative instruments. INVESTMENT OF FUNDS Loans: Average loans were $4,411 million in 2012, compared to $4,714 million in 2011 and $4,642 million in 2010. The average yield on loans was 5.35% in 2012, compared to 5.61% in 2011 and 5.80% in 2010. The average prime lending rate was 3.25% in 2012, 2011 and 2010. Approximately 52% of Park’s loan balances mature or reprice within one year (see Table 30). The yield on average loan balances for each quarter of 2012 was 5.23% for the fourth quarter, compared to 5.31% for the third quarter, 5.36% for the second quarter and 5.52% for the first quarter. At December 31, 2012, loan balances were $4,450 million, compared to $4,317 million at year-end 2011, an increase of $133 million or 3.1%. The loan growth of $133 million in 2012 was due to increases in loans of $197 million at PNB and $3 million at GFSC, offset by a decline in legacy Vision loans held by SEPH of $67 million. The increase in loans experienced at PNB in 2012 was primarily related to continued demand for 1-4 family mortgages, which increased by $123.5 million. Of the $123.5 million increase in the mortgage loan portfolio, approximately $91.1 million of the increase was associated with our decision to continue to retain a portion of the 15-year, fixed-rate mortgages originated by PNB rather than selling these loans in the secondary market. The balance of the increase in loans of $73.2 million was across all loan portfolio categories, with the exception of the real estate construction portfolio, which declined during the 2012 year. In 2011, year-end loan balances were $4,317 million, a decrease of $416 million or 8.8% from the balance of $4,733 million at year-end 2010. The large decrease in loan balances was primarily due to $369 million of loans at Vision being shown on Park’s balance sheet as assets held for sale at December 31, 2011. M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S A year ago, management projected that year-end loan balances would increase by 1% to 3% in 2012. The actual change in year-end loan balances was an increase of 3.1%. Year-end residential real estate loans were $1,713 million, $1,629 million and $1,692 million in 2012, 2011 and 2010, respectively. Residential real estate loans increased by $84 million or 5.2% in 2012, primarily due to manage- ment’s decision to continue to retain certain of the 15-year, fixed-rate mortgage loans originated during the year. Residential real estate loans decreased by $63.6 million or 3.8% in 2011, due to the pending sale of the Vision business. The balance of loans for 15-year, fixed rate mortgage was $315 million at December 31, 2011, with a weighted average interest rate of 3.79%. This 15-year, fixed-rate product increased by $91 million to $406 million at December 31, 2012, and has a weighted average interest rate of 3.57%. The long-term, fixed-rate residential mortgage loans that Park originates are generally sold in the secondary market and Park typically retains servicing on these loans. As mentioned above, during 2010, Park began to retain on its balance sheet certain of the 15-year, fixed-rate residential mortgage loans that it originated. The balance of sold fixed-rate residential mortgage loans was $1,313 million at year-end 2012, compared to $1,347 million at year-end 2011 and $1,471 million at year-end 2010. The decrease in Park’s sold residential mortgage loan portfolio of $158 million in the last two years was due to the retention of the 15-year, fixed-rate residential mortgage loan product. The retained 15-year fixed-rate residential mortgage loan product totaled $406 million at December 31, 2012, an increase of $231 million from the $175 million in this portfolio at December 31, 2010. This increase of $231 million was $73 million more than the decrease in the long-term, fixed-rate residential mortgage sold servicing portfolio. Management is pleased with this performance, as the 15-year, fixed-rate mortgage loans retained on the balance sheet would have been sold prior to 2010 and included in the servicing portfolio. Year-end consumer loans were $652 million, $617 million and $667 million in 2012, 2011 and 2010, respectively. Consumer loans increased by $35 million or 5.7% in 2012 and decreased by $50 million or 7.5% in 2011. The increase in consumer loans in 2012 was primarily due to an increase in automobile lending in Ohio. The decrease in consumer loans in 2011 was primarily due to a decline in automobile loans originated in Ohio, as competition for automobile loans increased in 2011. On a combined basis, year-end commercial, financial and agricultural loans, real estate construction loans and commercial real estate loans totaled $2,082 million, $2,070 million and $2,371 million at year-end 2012, 2011 and 2010, respectively. These combined loan totals increased by $12 million or 0.6% in 2012 and decreased by $301 million or 12.7% in 2011. The increase in 2012 was primarily due to an increase in commercial, financial and agricultural loans of $80.1 million, offset by a decline in real estate construction loans of $52.0 million. The decrease in 2011 was primarily due to the pending sale of the Vision business as $211 million of these combined loan totals were classified as assets held for sale on Park’s balance sheet at December 31, 2011. Table 11 reports year-end loan balances by type of loan for the past five years. Table 11 – Loans by Type December 31, (In thousands) Commercial, financial and agricultural Real estate – construction Real estate – residential Real estate – commercial Consumer Leases 2012 2011 2010 2009 2008 $ 823,927 $ 743,797 $ 737,902 $ 751,277 $ 714,296 165,528 217,546 406,480 495,518 533,788 1,713,645 1,628,618 1,692,209 1,555,390 1,560,198 1,092,164 651,930 3,128 1,108,574 616,505 2,059 1,226,616 666,871 2,607 1,130,672 704,430 3,145 1,035,725 643,507 3,823 Total loans $4,450,322 $4,317,099 $4,732,685 $4,640,432 $4,491,337 Table 12 – Selected Loan Maturity Distribution December 31, 2012 (In thousands) Commercial, financial and agricultural Real estate – construction Real estate – commercial One Year or Less (1) $324,415 80,379 143,952 Over One Through Five Years Over Five Years Total $328,565 34,458 150,253 $ 170,947 50,691 797,959 $ 823,927 165,528 1,092,164 Total $548,746 $513,276 $1,019,597 $2,081,619 Total of these selected loans due after one year with: Fixed interest rate Floating interest rate 346,454 166,822 119,696 899,901 $ 466,150 $1,066,723 (1) Nonaccrual loans of $88.4 million are included within the one year or less classification above. Investment Securities: Park’s investment securities portfolio is structured to minimize credit risk, provide liquidity and contribute to earnings. 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 could result in the sale of a security include: to better manage interest rate risk; to meet liquidity needs; or to improve the overall yield in the investment portfolio. Park classifies the majority of its securities as AFS (see Note 4 of the Notes to Consolidated Financial Statements). These securities are carried on the books at their estimated fair value with the unrealized holding gain or loss, net of federal taxes, accounted for as accumulated other comprehensive income (loss). The securities that are classified as AFS are free to be sold in future periods in carrying out Park’s investment strategies. Generally, Park classifies most of the U.S. Government sponsored entity collateralized mortgage obligations (“CMOs”) that it purchases as held-to- maturity. A classification of held-to-maturity means that Park has the positive intent and the ability to hold these securities until maturity. Park classifies most of its CMOs as held-to-maturity because these securities are generally not as liquid as the other U.S. Government sponsored entity asset-backed securities that Park classifies as AFS. At year-end 2012, Park’s held-to-maturity securities portfolio was $401 million, compared to $820 million at year-end 2011 and $674 million at year-end 2010. Park purchased $388 million of CMOs in 2012, $628 million of CMOs in 2011 and $314 million of CMOs in 2010. All of the CMOs, mortgage-backed securities, and callable notes in Park’s investment portfolio were issued by a U.S. Government sponsored entity. Average taxable investment securities were $1,610 million in 2012, compared to $1,841 million in 2011 and $1,730 million in 2010. The average yield on taxable securities was 3.14% in 2012, compared to 3.74% in 2011 and 4.44% in 2010. Average tax-exempt investment securities were $3.1 million in 2012, compared to $8 million in 2011 and $17 million in 2010. The average tax- equivalent yield on tax-exempt investment securities was 7.03% in 2012, compared to 7.17% in 2011 and 7.24% in 2010. Year-end total investment securities (at amortized cost) were $1,567 million in 2012, compared to $1,689 million in 2011 and $2,017 million in 2010. Management purchased investment securities totaling $1,227 million in 2012, $1,268 million in 2011 and $3,033 million in 2010. The decrease in investment purchases during 2011 was primarily due to the reduced interest rate environ- ment during the year and partially due to management’s decision to retain 15-year, fixed-rate residential mortgage loans on Park’s balance sheet. The purchases during 2010 included the purchase of $1,319 million of 28-day U.S. Government sponsored entity discount notes and $823 million of U.S. Government sponsored entity callable notes. Proceeds from repayments and maturities of investment securities were $1,348 million in 2012, $1,013 million in 2011 and $2,385 million in 2010. The increase in proceeds from repayments and maturities in 2012 was primarily due to accelerated prepayments of U.S. Government sponsored entity mortgage-backed securities and U.S. Government sponsored entity CMOs and also from U.S. Government sponsored entity callable notes being called. The decrease in proceeds from repayments and maturities in 2011 was primarily due to relative fewer holdings of 28-day U.S. Government sponsored entity discount notes during the year. The proceeds 33 M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S from repayments and maturities in 2010 included the 28-day U.S. Government sponsored entity discount notes and U.S. Government sponsored entity callable notes, which had repayments or maturities of $1,319 million and $710 million, respectively, during 2010. Proceeds from sales of investment securities were $610 million in 2011 and $460 million in 2010. Park realized net security gains on a pre-tax basis of $28.8 million in 2011, and $11.9 million in 2010. There were no sales of investment securities in 2012. At year-end 2012, 2011 and 2010, the average tax-equivalent yield on the total investment portfolio was 2.76%, 3.31% and 4.01%, respectively. The weighted average remaining maturity of the total investment portfolio was 2.1 years at December 31, 2012, 1.7 years at December 31, 2011 and 3.6 years at December 31, 2010. Obligations of the U.S. Treasury and other U.S. Government sponsored entities, and U.S. Government sponsored entity asset- backed securities were approximately 95.7% of the total investment portfolio at year-end 2012, approximately 95.7% of the total investment portfolio at year-end 2011 and approximately 95.9% of the total investment portfolio at year-end 2010. 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 CMOs would be reduced and callable U.S. Government sponsored entity notes would extend to their maturity dates. At year-end 2012, management estimated that the average maturity of the investment portfolio would lengthen to 5.4 years with a 100 basis point increase in long-term inter- est rates and to 6.5 years with a 200 basis point increase in long-term interest rates. Likewise, the average maturity of the investment portfolio would shorten if long-term interest rates would decrease as the principal repayments from Table 14 – Distribution of Assets, Liabilities and Shareholders’ Equity mortgage-backed securities and CMOs would increase as borrowers would refinance their mortgage loans and the callable U.S. Government sponsored entity notes would shorten to their call dates. At year-end 2012, management estimated that the average maturity of the investment portfolio would decrease to 1.1 years with a 100 basis point decrease in long-term interest rates and to 0.9 years with a 200 basis point decrease in long-term interest rates. Table 13 sets forth the carrying value of investment securities, as well as the percentage held within each category at year-end 2012, 2011 and 2010: Table 13 – Investment Securities December 31, (In thousands) Obligations of U.S. Treasury and other U.S. Government sponsored entities Obligations of states and political subdivisions U.S. Government asset-backed securities Federal Home Loan Bank stock Federal Reserve Bank stock Equities Total Investments by category as a percentage of total investment securities Obligations of U.S. Treasury and other U.S. Government sponsored entities Obligations of states and political subdivisions U.S. Government asset-backed securities Federal Home Loan Bank stock Federal Reserve Bank stock Equities 2012 2011 2010 $ 695,727 1,573 816,322 59,031 6,876 2,222 $ 371,657 4,652 1,262,527 60,728 6,876 2,033 $ 273,313 14,211 1,681,815 61,823 6,876 1,753 $1,581,751 $1,708,473 $2,039,791 44.0% 0.1% 51.7% 3.7% 0.4% 0.1% 21.8% 0.3% 73.9% 3.5% 0.4% 0.1% 13.4% 0.7% 82.5% 3.0% 0.3% 0.1% Total 100.0% 100.0% 100.0% December 31, (In thousands) ASSETS Interest earning assets: Loans (1) (2) Taxable investment securities Tax-exempt investment securities (3) Money market instruments Total interest earning assets Non-interest earning assets: Allowance for loan losses Cash and due from banks Premises and equipment, net Other assets TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY Interest bearing liabilities: Transaction accounts Savings deposits Time deposits Total interest bearing deposits Short-term borrowings Long-term debt (4) Total interest bearing liabilities Non-interest bearing liabilities: Demand deposits Other Total non-interest bearing liabilities Shareholders’ equity TOTAL Daily Average 2012 Interest Average Rate Daily Average 2011 Interest Average Rate Daily Average 2010 Interest Average Rate $264,192 68,873 575 178 333,818 5.60% 3.74% 7.15% 0.23% 5.03% $ 2,686 1,126 23,842 27,654 823 30,169 58,646 0.19% 0.12% 1.31% 0.66% 0.28% 3.42% 1.09% $236,184 50,549 217 408 287,358 5.35% 3.14% 7.03% 0.25% 4.64% $ 1,411 1,072 15,921 18,404 678 31,338 50,420 0.11% 0.11% 1.03% 0.49% 0.26% 3.45% 1.02% $4,410,661 1,610,044 3,087 166,319 6,190,111 (61,995) 119,410 54,917 464,363 $6,766,806 $1,239,417 1,006,321 1,540,863 3,786,601 258,661 907,704 4,952,966 1,048,796 75,312 1,124,108 689,732 $6,766,806 $4,713,511 1,840,842 8,038 78,593 6,640,984 (128,512) 124,649 69,507 499,543 $7,206,171 $1,430,492 946,406 1,816,506 4,193,404 297,537 881,921 5,372,862 999,085 90,351 1,089,436 743,873 $7,206,171 $269,306 76,839 1,220 200 347,565 5.80% 4.44% 7.24% 0.22% 5.36% $ 4,450 1,303 36,212 41,965 1,181 28,327 71,473 0.33% 0.15% 1.78% 0.98% 0.39% 3.91% 1.35% $4,642,478 1,729,511 16,845 93,009 6,481,843 (119,700) 116,961 69,839 493,762 $7,042,705 $1,354,392 891,021 2,029,088 4,274,501 300,939 725,356 5,300,796 907,514 87,885 995,399 746,510 $7,042,705 Net interest earnings Net interest spread Net yield on interest earning assets (net interest margin) $236,938 $275,172 $276,092 3.62% 3.83% 3.94% 4.14% 4.01% 4.26% (1) Loan income includes loan related fee income of $3,096 in 2012, $2,381 in 2011 and $238 in 2010. Loan income also includes the effects of taxable equivalent adjustments using a 35% tax rate in 2012, 2011 and 2010. The taxable equivalent adjustment was $1,547 in 2012, $1,734 in 2011 and $1,614 in 2010. (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 2012, 2011 and 2010. The taxable equivalent adjustments were $77 in 2012, $204 in 2011 and $434 in 2010. Includes subordinated debenture and subordinated notes. (4) 34 M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S 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 interest bearing liabilities in conjunction with the average rates earned and paid on them. (See Table 14 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.) Net interest income decreased by $37.9 million or 13.9% to $235.3 million for 2012 compared to a decrease of $810,000 or 0.3% to $273.2 million for 2011. The tax equivalent net yield on interest earning assets (net interest margin) was 3.83% for 2012, compared to 4.14% for 2011 and 4.26% for 2010. The net interest rate spread (the difference between rates received for interest earning assets and the rates paid for interest bearing liabilities) was 3.62% for 2012, compared to 3.94% for 2011 and 4.01% for 2010. The decrease in net interest income in 2012 was due to the decrease in the net interest spread to 3.62% from 3.94% and due to the sale of the Vision business on February 16, 2012. The average balance of interest earning assets decreased by $451 million, or 6.8%, to $6,190 million in 2012 largely as a result of the sale of the Vision business. The average yield on interest earning assets was 4.64% in 2012, compared to 5.03% in 2011 and 5.36% in 2010. The average federal funds rate for 2012 was 0.15%, compared to an average rate of 0.10% in 2011 and 0.18% in 2010. On a quarterly basis for 2012, the average yield on interest earning assets was 4.49% for the fourth quarter, 4.56% for the third quarter, 4.71% for the second quarter and 4.81% for the first quarter. The average rate paid on interest bearing liabilities was 1.02% in 2012, compared to 1.09% in 2011 and 1.35% in 2010. On a quarterly basis for 2012, the average rate paid on interest bearing liabilities was 0.97% for the fourth quarter, 1.00% for the third quarter, and 1.05% for both the second and first quarters. The following table displays (for each quarter of 2012) the average balance of interest earning assets, net interest income and the tax equivalent net interest margin. Table 15 – Quarterly Net Interest Margin (In thousands) First Quarter Second Quarter Third Quarter Fourth Quarter 2012 Average Interest Earning Assets Net Interest Income Tax Equivalent Net Interest Margin $6,297,772 6,134,797 6,200,288 6,128,159 $6,190,111 $ 61,728 58,680 58,016 56,891 $235,315 3.97% 3.87% 3.75% 3.72% 3.83% The change in tax equivalent 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 16 – Volume/Rate Variance Analysis Change from 2011 to 2012 Total Rate Volume Change from 2010 to 2011 Total Rate Volume (In thousands) Increase (decrease) in: Interest income: Total loans $(16,271) $(11,737) $(28,008) $ 3,988 $ (9,102) $ (5,114) Taxable investments Tax-exempt investments Money market instruments Total interest income (8,038) (348) (10,286) (10) (18,324) (358) 4,711 (631) (12,676) (14) (7,965) (645) 213 17 230 (31) 9 (22) (24,444) (22,016) (46,460) 8,037 (21,783) (13,746) Table 16 – Volume/Rate Variance Analysis (continued) (In thousands) Interest expense: Change from 2011 to 2012 Total Rate Volume Change from 2010 to 2011 Total Rate Volume Transaction accounts Savings accounts Time deposits Short-term borrowings Long-term debt $ (307) $ 58 (3,289) (94) 898 (968) $ (1,275) (54) (112) (7,921) (4,632) (145) (51) 1,169 271 $ 237 $ (2,001) $ (1,764) (177) (12,370) (358) 1,842 (262) (8,856) (344) (3,821) 85 (3,514) (14) 5,663 Total interest expense (2,734) (5,492) (8,226) 2,457 (15,284) (12,827) Net variance $(21,710) $(16,524) $(38,234) $ 5,580 $ (6,499) $ (919) Other Income: Total other income was $92.4 million in 2012, compared to $94.9 million in 2011 and $74.9 million in 2010. The decrease of $2.5 million in 2012 compared to 2011 was primarily due to the fact that the increase of $22.2 million from the gain recognized on the sale of the Vision business, the increase of $3.0 million in other service income and the increase of approxi- mately $1.0 million in income from fiduciary activities, were more than offset by there being no gains from the sale of investment securities in 2012, in contrast to $28.8 million of gains in 2011. The large increase in total other income of $20.0 million in 2011 compared to 2010, was primarily due to the large increase in net gains from the sale of investment securities. The net gain from the sale of investment securities was $28.8 million in 2011, compared to a net gain of $11.9 million in 2010. The following table displays total other income for Park in 2012, 2011 and 2010. Table 17 – Other Income Year Ended December 31, (In thousands) Income from fiduciary activities Service charges on deposits Gain on sale of Vision business Net gains on sales of securities Other service income Checkcard fee income Bank owned life insurance income ATM fees Gain/loss on the sale of OREO, net OREO devaluations Other Total other income 2012 $15,947 16,704 22,167 — 13,631 12,541 4,754 2,359 4,414 (6,872) 6,758 $92,403 2011 $14,965 18,307 — 28,829 10,606 12,496 5,089 2,703 1,312 (8,219) 8,822 $94,910 2010 $13,874 19,717 — 11,864 13,816 11,177 4,978 2,951 1,466 (13,206) 8,243 $74,880 The following table breaks out the change in total other income for the year ended December 31, 2012 compared to December 31, 2011 and for the year ended December 31, 2011 compared to December 31, 2010 between Park’s Ohio-based operations and SEPH/Vision. Table 18 – Other Income Breakout (In thousands) Income from fiduciary activities Service charges on deposits Gain on sale of Vision business Net gains on sale of securities Other service income Checkcard fee income Bank owned life insurance income ATM fees Gain/loss on the sale of OREO, net OREO devaluations Other Change from 2011 to 2012 Ohio-based SEPH/ Operations VB Total Change from 2010 to 2011 SEPH/ VB Ohio-based Operations Total $ 1,106 $ (124) $ 982 $ 1,081 $ 10 $ 1,091 (615) (988) (1,603) (1,211) (199) (1,410) — 22,167 22,167 — — — (23,634) 4,499 802 (5,195) (1,474) (757) (28,829) 3,025 45 11,770 (3,295) 852 (240) (282) 176 (289) (1,883) (95) (62) (335) (344) 2,926 1,636 (181) 3,102 1,347 (2,064) 111 37 (277) 832 528 5,195 85 467 — (285) 123 4,155 51 16,965 (3,210) 1,319 111 (248) (154) 4,987 579 Total other income $(20,360) $17,853 $(2,507) $10,428 $9,602 $20,030 35 M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S Income from fiduciary activities increased by $1.0 million or 6.6% to $15.9 million in 2012 and increased by $1.1 million or 7.9% to $15.0 million in 2011. The increases in fiduciary fee income in 2012 and 2011 were primarily due to improvements in the equity markets and also due to an increase in the total accounts served by Park’s Trust department. Park charges fiduciary fees largely based on the market value of the assets being managed. The Dow Jones Industrial Average stock index annual average was 10,669 for calendar year 2010, 11,958 for calendar year 2011 and 12,960 for calendar year 2012. The market value of the assets that Park manages was $3.55 billion at December 31, 2012, compared to $3.3 billion at December 31, 2011 and December 31, 2010. Service charges on deposit accounts decreased by $1.6 million or 8.8% to $16.7 million in 2012 and decreased by $1.4 million or 7.2% to $18.3 million in 2011. The decrease in 2012 was primarily due to the sale of the Vision business on February 16, 2012, which resulted in a $1.0 million decrease in services charges on deposits in 2012 compared to 2011. The balance of the decline in 2012 of approximately $615,000 was related to declines in service charges on deposits within Park’s Ohio-based operations, largely as a result of a decrease in fee income from overdraft charges and other non-sufficient funds (NSF) charges. Park’s customers did not use our courtesy overdraft program as frequently in 2012. As previously discussed, on February 16, 2012, Park completed the sale of the Vision business for a purchase price of $27.9 million. As a result of the trans - action, Park recorded a pre-tax gain of $22.2 million (after actual expenses directly related to the transaction). This gain on sale was recognized at Vision prior to the merger of the remaining Vision subsidiary with and into SEPH. Park recognized net gains from the sale of investment securities of $28.8 million in 2011 and $11.9 million in 2010. There were no sales of investments securities in 2012. The majority of the investment securities sold in 2011, with an amortized cost of $579.2 million, were U.S. Government sponsored entity mortgage-backed securities. The remaining investment securities sold in 2011 were municipal securities. Fee income earned from origination and sale into the secondary market of long-term fixed-rate mortgage loans is included within other non-yield related fees in the subcategory “Other service income.” Other service income increased by $3.0 million, or 28.5%, to $13.6 million in 2012, compared to $10.6 million in 2011. The increase in other service income was primarily due to an increase in the amount of fixed-rate mortgage loans originated and sold in 2012 within Park’s Ohio-based operations. Other service income for Park’s Ohio-based operations increased $4.5 million in 2012. This increase was offset by a $1.5 million decline in other service income for the combined SEPH/VB as a result of the sale of the Vision business. The amount of fixed-rate mortgage loans orig- inated and sold in 2012 was $409 million, compared to $190 million in 2011. As previously discussed, Park began to originate and retain 15-year, fixed-rate residential mortgages in August 2010, which results in fewer loans being sold in the secondary market. The balance of 15-year, fixed-rate resi dential mort- gage loans retained was $406 million at December 31, 2012, an increase of $91 million compared to $315 million at December 31, 2011. In 2011, other service income decreased by $3.2 million, or 23.2%, to $10.6 million, compared to $13.8 million in 2010. The decrease in other service income in 2011 was primarily due to a decline in the amount of fixed-rate mortgage loans originated and sold. Checkcard fee income, which is generated from debit card transactions increased $45,000 or 0.4 % to $12.5 million in 2012. During 2011, checkcard fee income increased $1.3 million or 11.8% to $12.5 million. The increases in both 2012 and 2011 were attributable to continued increases in the volume of debit card transactions. In 2012, increases in checkcard fee income of $802,000 for Park’s Ohio-based operations were offset by a decline of $757,000 for SEPH/VB following the sale of the Vision business. Gain/(loss) on the sale of OREO, net, totaled $4.4 million in 2012, an increase of $3.1 million compared to $1.3 million in 2011. The gain/(loss) on sale of 36 OREO was primarily related to other real estate owned at SEPH. Of the $4.4 million net gain, $3.9 million was at SEPH. OREO devaluations, which result from declines in the fair value (less anticipated selling costs) of property acquired through foreclosure, totaled $6.9 million in 2012, a decrease of $1.3 million or 16.4% compared to $8.2 million in 2011. The OREO devaluations in 2012 related primarily to other real estate owned at SEPH. Of the $6.9 million in OREO devaluations in 2012, $5.6 million were related to devaluations recognized at SEPH. Of the $5.6 million at SEPH, $1.7 million was recorded as a valuation allowance to mark to market approximately $6.7 million of OREO ($5 million net of allowance) to a bulk sale value for potential sale of a group of properties. A year ago, Park’s management forecast that total other income, excluding the gain from the sale of the Vision business, would be approximately $62 million to $66 million for 2012. The actual performance for 2012 was higher than management’s original estimate, at $70.2 million. Other Expense: Total other expense was $188.0 million in 2012, compared to $188.3 million in 2011 and $187.1 million in 2010. Total other expense decreased by $349,000, or 0.2%, in 2012. Total other expense increased by $1.2 million or 0.6% in 2011. The following table displays total other expense for Park in 2012, 2011 and 2010. Table 19 – Other Expense Year Ended December 31, (In thousands) Salaries and employee benefits Data processing fees Professional fees and services Net occupancy expense of bank premises Furniture and equipment expense Insurance Marketing Postage and telephone Intangible amortization expense State taxes Loan put provision OREO expense Other Total other expense Full time equivalent employees 2012 $ 95,977 3,916 24,267 9,444 10,788 5,780 3,474 5,983 2,172 3,786 3,299 4,011 15,071 $187,968 1,826 2011 $102,068 4,965 21,119 11,295 10,773 6,821 2,967 6,060 3,534 1,544 — 3,266 13,905 $188,317 1,920 2010 $ 98,315 5,728 19,972 11,510 10,435 8,983 3,656 6,648 3,422 3,171 — 3,358 11,909 $187,107 1,969 The following table breaks out the change in total other expense for the year ended December 31, 2012 compared to December 31, 2011 and for the year ended December 31, 2011 compared to December 31, 2010 in each of Park’s Ohio-based operations and SEPH/Vision. Table 20 – Other Expense Breakout (In thousands) Salaries and employee benefits Data processing fees Professional fees and services Net occupancy expense of bank premises Furniture and equipment expense Insurance Marketing Postage and telephone Intangible amortization expense State taxes Loan put provision OREO expense Other Total other expense Change from 2011 to 2012 Ohio-based SEPH/ Operations VB Total Change from 2010 to 2011 SEPH/ VB Ohio-based Operations Total $ 2,911 $ (9,002) (1,466) 417 $(6,091) (1,049) $4,286 (279) $(533) (484) $3,753 (763) 1,589 1,559 3,148 (137) 1,284 1,147 (85) (1,766) (1,851) (239) 24 (215) 850 (197) 720 203 (835) (844) (213) (280) — (1,362) — 3,299 (5) 488 2,242 — 750 678 15 (1,041) 507 (77) (1,362) 2,242 3,299 745 1,166 466 (1,696) (667) (578) (746) (1,627) — (65) 1,655 (128) (466) (22) (10) 338 (2,162) (689) (588) 112 858 — (1,627) — — (92) (27) 1,996 341 $10,078 $(10,427) $ (349) $ 373 $ 837 $1,210 M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S Salaries and employee benefits expense decreased by $6.1 million or 6.0% to $96.0 million in 2012 and increased by $3.8 million or 3.8% to $102.1 million in 2011. The decrease in 2012 was primarily related to a decrease of $9.0 million at SEPH/VB due to the sale of the Vision business on February 16, 2012, offset by a $2.9 million increase in salaries and employee benefits for Park’s Ohio-based operations. Park had 1,826 full-time equivalent employees at year- end 2012, compared to 1,920 at year-end 2011 and 1,969 at year-end 2010. Professional fees and services increased by $3.1 million or 14.9% to $24.3 million in 2012 and increased by $1.1 million or 5.7% to $21.1 million in 2011. This subcategory of total other expense includes legal fees, management consulting fees, director fees, audit fees, regulatory examination fees and memberships in industry associations. The increase in fees and service charges expense in both 2011 and 2012 was primarily due to an increase in legal and consulting fees at both PNB and SEPH. This additional expense was primarily related to an increase in costs associated with the workout of problem loans at Park’s SEPH subsidiary. Net occupancy expense decreased by $1.9 million or 16.4% to $9.4 million in 2012 and decreased by $215,000 or 1.9% to $11.3 million in 2011. The reduction in 2012 was due largely to the sale of the Vision business. Insurance expense decreased by $1.0 million or 15.3% to $5.8 million in 2012 and decreased by $2.2 million or 24.1% to $6.8 million in 2011. The decline in 2012 was primarily the result of lower insurance expense at SEPH/VB following the sale of the Vision business, which eliminated the FDIC insurance expense for the Vision subsidiary. The remaining decline in 2012 was the result of the full year impact of the new FDIC assessment methodology utilizing total assets less tangible equity, which went into effect in the third quarter of 2011. As previously discussed, as part of the transaction between Vision and Centennial, Park agreed to allow Centennial to “put back” up to $7.5 million aggregate principal amount of loans, which were originally included within the loans sold in the transaction. The loan put option expired on August 16, 2012, 180 days after the closing of the transaction. In total, Centennial put back forty- four loans, totaling approximately $7.5 million. Upon repurchase, Park was required to charge each of the repurchased loans down to its then current fair value. Park recognized $3.3 million of loan put provision expense in 2012 to establish a liability account that was utilized to cover write downs on the forty- four loans repurchased from Centennial. The subcategory “other” expense includes expenses for supplies, travel, charitable contributions, amortization of low income housing tax investments and other miscellaneous expense. The subcategory other expense increased by $1.2 million or 8.4% in 2012 and increased by $2.0 million or 16.8% in 2011. The $1.2 million increase in 2012 was largely due to the establishment of a $1.5 million liability for potential credit loss exposure related to certain off-balance sheet arrangements in the Ohio-based operations. A year ago, Park’s management projected that total other expense would be approximately $170 million to $175 million in 2012. The actual expense for the year of $188.0 million was $13.0 million higher than the upper end of management’s estimate. Income Taxes: Federal income tax expense was $25.7 million in 2012, compared to $28.3 million in 2011 and $17.8 million in 2010. Federal income tax expense as a percentage of income before taxes, adjusted for the state income tax expense or benefit, was 24.6% in 2012, compared to 25.6% in 2011 and to 23.4% in 2010. The difference between the statutory federal income tax rate of 35% and Park’s effective tax rate is the permanent tax differences, primarily consisting of tax-exempt interest income from municipal investments and loans, low income housing tax credits, bank owned life insur- ance income, and dividends paid on shares held within Park’s salary deferral plan. Park’s permanent tax differences for 2012 were approximately $11.4 million. State income tax expense (benefit) was zero in 2012, $6.1 million in 2011 and $(1.2) million in 2010. All of the state income tax expense or benefit pertains to Vision, as Park and its Ohio-based subsidiaries do not pay state income tax to the state of Ohio, but pay franchise tax based on year-end equity. The franchise tax expense is included in “state taxes” as part of total other expense on Park’s Consolidated Statements of Income. Park recognized $6.1 million in state tax expense during 2011, which was the charge necessary to write off the previously reported state operating loss carry-forward asset and other state deferred tax assets at Vision. State income tax benefit was $1.2 million in 2010 as a result of losses at Vision. Park performed an analysis in 2010 to determine if a valuation allowance against deferred tax assets was required in accordance with GAAP. Vision was subject to state income tax in Alabama and Florida. In 2010, a state tax benefit of $1.16 million was recorded by Vision, consisting of a gross benefit of $3.46 million and a valuation allowance of $2.30 million ($1.5 million net of the federal income tax benefit). CREDIT EXPERIENCE Provision for Loan Losses: The provision for loan losses is the amount added to the allowance for loan losses to ensure the allowance is sufficient to absorb probable, incurred credit losses. 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 for Park was $35.4 million in 2012, $63.3 million in 2011 and $87.1 million in 2010. Net loan charge-offs were $48.3 million in 2012, $125.1 million in 2011 and $60.2 million in 2010. Net loan charge-offs for the year ended December 31, 2012 included the charge-off of $12.1 million related to the retained Vision loans to bring the retained Vision loan portfolio to fair value prior to the merger of Vision with and into SEPH on February 16, 2012. The ratio of net loan charge-offs to average loans was 1.10% in 2012, 2.65% in 2011 and 1.30% in 2010. Park’s Ohio-based subsidiaries had a combined loan loss provision of $17.5 million in 2012, $32.2 million in 2011 and $25.7 million in 2010. Absent the loan loss provision of $3.4 million, $11.1 million, and $7.1 million for 2012, 2011 and 2010, respectively, related to participation in Vision loans that PNB purchased, the provision for loan losses for Ohio-based subsidiaries would have been $14.1 million, $21.1 million, and $18.6 million, respectively. Net loan charge-offs for Park’s Ohio-based subsidiaries were $19.7 million in 2012, $49.2 million in 2011 and $23.6 million in 2010. The net loan charge-off ratio for Park’s Ohio-based subsidiaries was 0.46% for 2012, 1.19% for 2011 and 0.60% for 2010. Of the $19.7 million and $49.2 million in net loan charge-offs for Park’s Ohio-based subsidiaries in 2012 and 2011, respectively, $3.5 million and $18.1 million were related to participations in Vision loans that PNB had purchased. Absent the charge-offs on these Vision loan participations, net charge-offs for Park’s Ohio-based operations were $16.2 million and $31.1 million and the net loan charge-off ratio was 0.38% and 0.76% for 2012 and 2011. The provision for loan losses for SEPH, including those provisions recorded at Vision prior to the February 16, 2012 merger of Vision with and into SEPH, was $17.9 million in 2012. The provision for loan losses for Vision was $31.1 million in 2011 and $61.4 million in 2010. Net loan charge-offs for SEPH, including net charge-offs of $12.1 million recorded at Vision prior to the merger of Vision with and into SEPH, were $28.6 million in 2012. Net charge- offs for Vision were $75.9 million in 2011 and $36.6 million in 2010. SEPH’s ratio of net loan charge-offs to average loans was 21.5% in 2012 and Vision’s ratio of net loan charge-offs to average loans was 13.04% in 2011 and 5.48% in 2010. 37 M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S The following table shows the improving credit trends in Park’s Ohio-based operations’ commercial loan portfolio: Table 23 – Park Ohio – Commercial Credit Trends Year Ended December 31, (In thousands) 2012 2011 2010 Commercial loans* Pass rated Special mention Substandard Impaired Total $2,225,702 49,275 16,843 89,365 $2,131,007 66,254 29,604 95,109 $2,046,016 85,287 78,529 90,694 $2,381,185 $2,321,974 $2,300,526 *Commercial loans include: (1) Commercial, financial and agricultural loans; (2) Commercial real estate loans; (3) Commercial related loans in the construction real estate portfolio; and (4) Commercial related loans in the residential real estate portfolio. The commercial loan table above demonstrates the improvement experienced over the last 24 months in Park’s Ohio-based operations’ commercial portfolio. Pass rated commercial loans have grown $179.7 million, or 8.8% since December 31, 2010. Over this period, special mention loans have declined by $36.0 million, or 42.2% and substandard loans have declined by $61.7 million, or 78.5%. These improved credit metrics in the special mention and substan- dard categories of the commercial loan portfolio have a significant impact on the general reserves that are established to cover incurred losses on performing commercial loans. As these metrics have improved over the past 24 months, general reserves have declined. Delinquent and accruing loan trends for Park’s Ohio-based operations have also improved over the past 24 months. Delinquent and accruing loans were $39.6 million or 0.90% of total loans at December 31, 2012, compared to $40.1 million (0.96%) at December 31, 2011 and $45.8 million (1.12%) at December 31, 2010. Impaired commercial loans for Park’s Ohio-based operations were $89.4 million as of December 31, 2012, down slightly from the balances of impaired loans of $95.1 million and $90.7 million at December 31, 2011 and 2010, respectively. The $89.4 million of impaired commercial loans at December 31, 2012 included $16.7 million of loans modified in a troubled debt restructuring which are currently on accrual status and performing in accordance with the restructured terms. Impaired commercial loans are individually evaluated for impairment and specific reserves are established to cover incurred losses. Management believes that the allowance for loan losses at year-end 2012 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 Management’s Discussion and Analysis for additional information on management’s evaluation of the adequacy of the allowance for loan losses. A year ago, management projected the provision for loan losses would be $20 million to $27 million in 2012. The actual performance was above the high end of our expectation by $8.4 million, at $35.4 million for the 2012 year. The provision for loan losses was greater than management’s projection due to $16.1 million in loan loss provision related to one loan relationship retained from the Vision loan portfolio, most of which was recognized in the third quarter of 2012. On February 16, 2012, when Vision merged with and into SEPH, the loans which had been retained by Vision were transferred by operation of law at their fair market value and no allowance for loan loss has been or will be carried at SEPH. The loans included in both the performing and nonperforming portfolios of SEPH continue to be carried at their fair value. The table below provides additional information regarding charge-offs as a percentage of unpaid principal balance, as of December 31, 2012: Table 21 – SEPH – Retained Vision Loan Portfolio Charge-offs as a percentage of unpaid principal balance December 31, 2012 (In thousands) Unpaid Principal Balance Charge- offs Net Book Balance Charge-off Percentage Nonperforming loans – retained by SEPH Performing loans – retained by SEPH $126,801 $71,509 $55,292 4,236 350 3,886 Total SEPH loan exposure $131,037 $71,859 $59,178 56% 8% 55% Park management obtains updated appraisal information for all nonperforming loans at least annually. As new appraisal information is received, management performs an evaluation of the appraisal and applies a discount for anticipated disposition costs to determine the net realizable value of the collateral, which is compared against the outstanding principal balance to determine if additional write-downs are necessary. At year-end 2012, the allowance for loan losses was $55.5 million or 1.25% of total loans outstanding, compared to $68.4 million or 1.59% of total loans outstanding at year-end 2011 and $143.6 million or 3.03% of total loans out- standing at year-end 2010. The table below provides additional information related to specific reserves on impaired commercial loans and general reserves for all other loans in Park’s portfolio at December 31, 2012, 2011 and 2010. Table 22 – General Reserve Trends – Park National Corporation Year Ended December 31, (In thousands) 2012 2011 2010 Allowance for loan losses, end of period $ 55,537 Specific reserves General reserves Total loans Impaired commercial loans Non-impaired loans Allowance for loan losses as a percentage of period end loans General reserves as a percentage of non-impaired loans 8,276 $ 47,261 $ $ 68,444 $ 143,575 15,935 66,904 52,509 $ 76,671 $4,450,322 $4,317,099 $4,732,685 137,238 187,074 250,933 $4,313,084 $4,130,025 $4,481,752 1.25% 1.59% 3.03% 1.10% 1.27% 1.71% The decline in general reserves as a percentage of non-impaired loans from 1.27% at December 31, 2011 to 1.10% at December 31, 2012 was primarily due to the elimination of general reserves held against the retained Vision performing loans that are held at SEPH and improving credit trends in the commercial loan portfolio for Park’s Ohio-based operations (PNB and GFSC). At December 31, 2011, Vision had general reserves of approximately $1.85 million, which were established to cover incurred losses on the retained performing loans following the sale of the Vision business to Centennial. Upon completion of the sale of the Vision business and prior to the merger of Vision with and into SEPH on February 16, 2012, all retained loans (performing and nonperforming) were charged down to their fair value, resulting in a $1.85 million decline in Park’s general reserves. 38 M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S The table below provides a summary of the loan loss experience over the past five years: Table 24 – Summary of Loan Loss Experience (In thousands) 2012 2011 2010 2009 2008 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 Leases $4,410,661 $4,713,511 $4,642,478 $4,594,436 $4,354,520 68,444 143,575 116,717 100,088 87,102 26,847 18,350 8,484 10,047 2,953 9,985 64,166 23,308 21,956 34,052 8,607 20,691 18,401 11,765 12,600 10,454 5,375 — 23,063 7,612 — 7,748 8,373 — 5,662 9,583 9 4,126 9,181 4 Total charge-offs $ 61,268 $ 133,882 $ 66,314 $ 59,022 $ 62,916 Recoveries: Commercial, financial and agricultural $ Real estate – construction Real estate – residential Real estate – commercial Consumer Leases 1,066 $ 1,402 $ 1,237 $ 1,010 $ 2,979 1,463 813 1,322 861 137 5,559 1,719 1,429 1,723 1,128 783 2,555 — 1,825 2,385 4 850 1,763 — 771 2,001 3 451 2,807 31 5,415 Total recoveries $ 12,942 $ 8,798 $ 6,092 $ 6,830 $ Net charge-offs $ 48,326 $ 125,084 $ 60,222 $ 52,192 $ 57,501 Provision charged to earnings Transfer of loans at fair value Allowance for loan losses acquired (transferred) related to Vision 35,419 63,272 87,080 68,821 70,487 — (219) — (13,100) — — — — — — Ending balance $ 55,537 $ 68,444 $ 143,575 $ 116,717 $ 100,088 Ratio of net charge-offs to average loans Ratio of allowance for loan losses to end of year loans 1.10% 2.65% 1.30% 1.14% 1.32% 1.25% 1.59% 3.03% 2.52% 2.23% The following table summarizes the allocation of the allowance for loan losses for the past five years: Table 25 – Allocation of Allowance for Loan Losses December 31, 2012 2011 2010 2009 2008 Percent of Loans Per (In thousands) Allowance Category Allowance Category Allowance Category Allowance Category Percent of Loans Per Percent of Loans Per Percent of Loans Per Percent of Loans Per Allowance Category Commercial, financial and agricultural Real estate – construction Real estate – residential Real estate – commercial Consumer Leases 6,841 3.72% 14,433 5.04% 70,462 8.59% 47,521 10.68% 24,794 11.88% 14,759 38.51% 15,692 37.72% 30,259 35.75% 19,753 33.51% 22,077 34.74% 11,736 6,566 24.54% 14.65% — 0.07% 15,539 5,830 25.68% 14.28% — 0.05% 24,369 6,925 5 25.92% 14.09% 0.06% 23,970 10,713 35 24.37% 15.18% 0.07% 15,498 23,391 42 23.06% 14.33% 0.09% Total $55,537 100.00% $68,444 100.00% $143,575 100.00% $116,717 100.00% $100,088 100.00% As of December 31, 2012, Park had no significant concentrations of loans to borrowers engaged in the same or similar industries nor did Park have any loans to foreign governments. Nonperforming Assets: Nonperforming loans include: 1) loans whose interest is accounted for on a nonaccrual basis; 2) renegotiated loans on accrual status; and 3) loans which are contractually past due 90 days or more as to principal or interest payments but whose interest continues to accrue. Prior to Park’s adoption of ASU 2011-02, Park classified all troubled debt restructurings (TDRs) as nonaccrual loans. With the adoption of ASU 2011-02, management determined it was appropriate to return certain TDRs to accrual status. Specifically, if the restructured note has been current for a period of at least six months, and management expects the borrower will remain current throughout the renegotiated contract, the loan may be returned to accrual status. Other real estate owned results from taking possession of property used as collateral for a defaulted loan. The following is a summary of Park National Corporation’s nonaccrual loans, accruing TDRs, loans past due 90 days or more and still accruing and other real estate owned for the last five years: Table 26 – Park – Nonperforming Assets December 31, (In thousands) Nonaccrual loans Accruing TDRs Loans past due 90 days or more Total nonperforming loans Other real estate owned – PNB Other real estate owned – Vision Other real estate owned – SEPH Total nonperforming assets Percentage of nonperforming loans to total loans Percentage of nonperforming assets to total loans Percentage of nonperforming assets to total assets 2012 2011 2010 2009 2008 $155,536 29,800 $195,106 28,607 $289,268 — $233,544 142 $159,512 2,845 2,970 3,489 3,590 14,773 5,421 $188,306 $227,202 $292,858 $248,459 $167,778 14,715 13,240 8,385 6,037 6,149 — — 33,324 35,203 19,699 21,003 29,032 — — — $224,024 $269,474 $334,567 $289,699 $193,626 4.23% 5.26% 6.19% 5.35% 3.74% 5.03% 6.24% 7.07% 6.24% 4.31% 3.37% 3.86% 4.59% 4.11% 2.74% Tax equivalent interest income from loans for 2012 was $236.2 million. Park has forgone interest income of approximately $7.2 million from nonaccrual loans as of December 31, 2012 that would have been earned during the year if all loans had performed in accordance with their original terms. SEPH and Vision nonperforming assets for the last five years were as follows: Table 27 – SEPH/Vision – Nonperforming Assets December 31, (In thousands) 2012 2011 2010 2009 2008 Nonaccrual loans Accruing TDRs Loans past due 90 days or more $55,292 — — $ 98,993 2,265 122 $171,453 — 364 $148,347 — 11,277 $ 91,206 2,845 644 94,695 — 19,699 Other real estate owned – SEPH Other real estate owned – Vision 21,003 — 29,032 — — 33,324 — 35,203 Total nonperforming assets $76,295 $130,412 $205,141 $194,827 $114,394 Percentage of nonperforming loans to total loans Percentage of nonperforming assets to total loans Percentage of nonperforming assets to total assets N.M. N.M. 26.82% 23.58% 13.71% N.M. N.M. 32.02% 28.78% 16.57% N.M. N.M. 25.90% 21.70% 12.47% 39 $15,635 18.51% $16,950 17.23% $ 11,555 15.59% $ 14,725 16.19% $ 14,286 15.90% Total nonperforming loans $55,292 101,380 171,817 159,624 M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S Nonperforming assets for Park, excluding SEPH/Vision, for the last five years were as follows: Table 28 – Park Excluding SEPH/Vision – Nonperforming Assets December 31, (In thousands) Nonaccrual loans Accruing TDRs Loans past due 90 days or more Total nonperforming loans Other real estate owned – PNB Total nonperforming assets Percentage of nonperforming loans to total loans Percentage of nonperforming assets to total loans Percentage of nonperforming assets to total assets 2012 2011 2010 2009 2008 $100,244 29,800 $ 96,113 26,342 $117,815 — $85,197 142 $68,306 — 2,970 3,367 3,226 3,496 4,777 $133,014 $125,822 $121,041 $88,835 $73,083 14,715 13,240 8,385 6,037 6,149 $147,729 $139,062 $129,426 $94,872 $79,232 3.03% 3.00% 2.96% 2.24% 1.92% 3.36% 3.32% 3.16% 2.39% 2.08% 2.26% 2.21% 1.99% 1.54% 1.29% Economic conditions began deteriorating during the second half of 2007 and continued throughout 2008 and 2009. While conditions across the U.S. improved slightly in 2010, 2011 and 2012, the economic recovery continues to be a slow process. Park and many other financial institutions throughout the country experienced a sharp increase in net loan charge-offs and nonperform- ing loans over the past five years. Financial institutions operating in Florida and Alabama (including Vision) have been particularly hard hit by the severe reces- sion as the demand for real estate and the price of real estate have sharply decreased. Park had $68.3 million of commercial loans included on the watch list of potential problem commercial loans at December 31, 2012 compared to $134.5 million at year-end 2011 and $238.7 million at year-end 2010. Commercial loans include: (1) commercial, financial and agricultural loans; (2) commercial real estate loans; (3) certain real estate construction loans; and (4) certain residential real estate loans. Park’s watch list includes all criticized and classified commercial loans, defined by Park as loans rated special mention or worse, less those commercial loans currently considered to be impaired. As a percentage of year-end total loans, Park’s watch list of potential problem loans was 1.5% in 2012, 3.1% in 2011 and 5.0% in 2010. The existing conditions of these loans do not warrant classification as non - accrual. 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. Park’s allowance for loan losses includes an allocation for loans specifically identified as impaired under GAAP. At December 31, 2012, loans considered to be impaired consisted substantially of commercial loans graded as “doubtful” and placed on non-accrual status. These specific reserves are typically based on management’s best estimate of the fair value of collateral securing these loans. The amount ultimately charged off for these loans may be different from the specific reserve as the ultimate liquidation of the collateral may be for amounts different from management’s estimates. When determining the quarterly and annual loan loss provision, Park reviews the grades of commercial loans. These loans are graded from 1 to 8. A grade of 1 indicates little or no credit risk and a grade of 8 is considered a loss. Commercial loans with grades of 1 to 4.5 (pass-rated) are considered to be of acceptable credit risk. Commercial loans graded a 5 (special mention) are considered to be watch list credits and a higher loan loss reserve percentage is allocated to these loans. Commercial loans graded 6 (substandard), also considered watch list credits, are considered to represent higher credit risk 40 and, as a result, a higher loan loss reserve percentage is allocated to these loans. Generally, commercial loans that are graded a 6 are considered for partial charge-off. Commercial loans that are graded a 7 (doubtful) are shown as nonperforming and Park generally charges these loans down to their fair value by taking a partial charge-off or recording a specific reserve. Any com- mercial loan graded an 8 (loss) is completely charged off. As of December 31, 2012, management had taken partial charge-offs of approximately $105.1 million related to the $137.2 million of commercial loans considered to be impaired, compared to charge-offs of approximately $103.8 million related to the $191.5 million of impaired commercial loans at December 31, 2011. The table below provides additional information related to the Park impaired commercial loans at December 31, 2012, including those impaired commercial loans at PNB, impaired PNB participations in Vision loans and those impaired Vision commercial loans (commercial land and develop- ment (“CL & D”) and other commercial) retained at SEPH. Table 29 – Park National Corporation Impaired Commercial Loans December 31, 2012 (In thousands) PNB PNB participations in VB loans SEPH – CL&D loans SEPH – other loans Unpaid Principal Balance (UPB) Prior Charge- offs Total Impaired Loans Specific Reserve Carrying Balance Carrying Balance as a % of UPB $ 85,020 $ 9,764 $ 75,256 $7,979 $ 67,277 79.13% 43,409 57,346 56,570 29,300 44,088 21,955 14,109 13,258 34,615 297 — — 13,812 13,258 34,615 31.82% 23.12% 61.19% Total Park $242,345 $105,107 $137,238 $8,276 $128,962 53.21% A significant portion of Park’s allowance for loan losses is allocated to commercial loans classified as “special mention” or “substandard.” “Special mention” loans are loans that have potential weaknesses that may result in loss exposure to Park. “Substandard” loans are those that exhibit a well defined weakness, jeopardizing repayment of the loan, resulting in a higher probability that Park will suffer a loss on the loan unless the weakness is corrected. Park’s annualized 48-month loss experience, defined as charge-offs plus changes in specific reserves, within the commercial loan portfolio has been 0.66% of the principal balance of these loans. This annualized 48-month loss experience includes only the performance of the PNB loan portfolio. The allowance for loan losses related to performing commercial loans was $32.1 million or 1.40% of the outstanding principal balance of other accruing commercial loans at December 31, 2012. The overall reserve of 1.40% for other accruing commercial loans breaks down as follows: pass-rated commercial loans are reserved at 1.25%; special mention commercial loans are reserved at 4.75%; and substandard commercial loans are reserved at 11.12%. The reserve levels for pass-rated, special mention and substandard commercial loans in excess of the annualized 48-month loss experience of 0.66% are due to the following factors which management reviews on a quarterly or annual basis: (cid:0) Loss Emergence Period Factor: Annually during the fourth quarter, management calculates the loss emergence period for each commercial loan segment. This loss emergence period is calculated based upon the average period of time it takes a credit to move from pass-rated to non - accrual. If the loss emergence period for any commercial loan segment is greater than one year, management applies additional general reserves to all performing loans within that segment of the commercial loan portfolio. (cid:0) Loss Migration Factor: Park’s commercial loans are individually risk graded. If loan downgrades occur, the probability of default increases, and accordingly, management allocates a higher percentage reserve to those accruing commercial loans graded special mention and substan- dard. Annually, management calculates a loss migration factor for each commercial loan segment for special mention and substandard credits based on a review of losses over the past three-year period, considering how each individual credit was rated at the beginning of the three-year period. M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S (cid:0) Environmental Loss Factor: Management has identified certain macroeconomic factors that trend in accordance with losses in Park’s commercial loan portfolio. These macroeconomic factors are reviewed quarterly and the adjustments made to the environmental loss factor impacting each segment in the performing commercial loan portfolio correlate to changes in the macroeconomic environment. Generally, consumer loans are not individually graded. Consumer loans include: (1) mortgage and installment loans included in the construction real estate segment of the loan portfolio; (2) mortgage, home equity lines of credit (HELOC), and installment loans included in the residential real estate segment of the loan portfolio; and (3) all loans included in the consumer segment of the loan portfolio. The amount of loan loss reserve assigned to these loans is based on historical loss experience over the past 48 months. Management generally considers a one-year coverage period (the “Historical Loss Factor”) appro - priate because the probable loss on any given loan in the consumer loan pool should ordinarily become apparent in that time frame. However, management may incorporate adjustments to the Historical Loss Factor as circumstances warrant additional reserves (e.g., increased loan delinquencies, improving or deteriorating economic conditions, changes in lending management and underwriting standards, etc.). At December 31, 2012, the coverage level within the consumer portfolio was approximately 1.52 years. The judgmental increases discussed above incorporate management’s evaluation of the impact of environmental qualitative factors which pose additional risks and assign a component of the allowance for loan losses in consideration of these factors. Such environmental factors include: national and local economic trends and conditions; experience, ability and depth of lending management and staff; effects of any changes in lending policies and procedures; levels of, and trends in, consumer bankruptcies, delinquencies, impaired loans and charge-offs and recoveries. The determination of this component of the allowance for loan losses requires considerable management judgment. As always, management is working to address weaknesses in those loans that may result in future loss. Actual loss experience may be more or less than the amount allocated. 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 $43.8 million during 2012 to $201.3 million at year-end. Cash provided by operating activities was $105.2 million in 2012, $123.5 million in 2011 and $127.3 million in 2010. Net income was the primary source of cash for operating activities during each year. Cash used in investing activities was $194.7 million in 2012. Cash provided by investing activities was $274.4 million in 2011 and cash used in investing activities was $353.3 million in 2010. Investment security transactions are the major use or source of cash in investing activities. Proceeds from the sale, repayment or maturity of securities provide cash and purchases of securities use cash. Net security transactions provided cash of $120.6 million in 2012, provided cash of $354.8 million in 2011 and used cash of $187.7 million in 2010. 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 $163.1 million in 2012, $71.9 million in 2011 and $153.7 million in 2010. Cash provided by financing activities was $133.4 million for 2012. Cash used in financing activities was $374.2 million in 2011. Cash provided by financing activities was $200.6 million in 2010. A major source of cash for financing activities is the net change in deposits. Deposits increased and provided $250.9 million of cash in 2012, and decreased and used $97.7 million of cash in 2011, and also decreased in 2010 and used cash of $92.6 million. Another major source of cash for financing activities is short-term borrowings and long-term debt. In 2012, net short-term borrowings increased and provided $80.6 million in cash, and net long-term borrowings decreased and used $65.1 million in cash. In 2011, net short-term borrowings declined, using $400.1 million in cash and net long-term borrowings increased, providing $186.4 million in cash. In 2010, net short-term borrowings increased, providing $339.5 million in cash and net long-term borrowings declined, using $17.6 million in cash. Park’s management generated cash in 2010 from the sale of common shares previously held as treasury shares. The sale of common shares provided cash of $33.5 million in 2010. Additionally, in 2012, cash declined by $100.0 million from the repurchase of the Series A Preferred Shares and $2.8 million from the repurchase of the common share warrant, both from the U.S. Treasury. Finally, cash declined by $60.2 million in 2012, $62.9 million in 2011, and $62.1 million in 2010, from cash dividends paid. Funds are available from a number of sources, including the investment securities portfolio, the core deposit base, Federal Home Loan Bank borrow- ings and the capability to securitize or package loans for sale. In the opinion of Park’s management 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, 2012: Table 30 – Interest Rate Sensitivity 0-3 Months 3-12 Months 1-3 Years 3-5 Years Over 5 Years Total $ 668,163 $ 284,553 $ 210,553 $209,014 $209,468 $1,581,751 37,185 1,149,759 — 1,174,745 — 1,274,918 — 439,775 — 411,125 37,185 4,450,322 1,855,107 1,459,298 1,485,471 648,789 620,593 6,069,258 $ 571,265 $ — $ 517,352 $ — $ — $1,088,617 (In thousands) Interest earning assets: Investment securities (1) Money market instruments Loans (1) Total interest earning assets Interest bearing liabilities: Interest bearing transaction accounts (2) Savings accounts (2) Time deposits Other 233,766 366,292 — Total deposits 1,171,323 — 804,590 355,722 — 1,677,664 563,555 1,345 564,900 — 163,849 — 163,849 — 1,038,356 1,450,424 1,345 3,578,742 1,006 — 1,006 Short-term borrowings Long-term debt Subordinated debentures/ notes Total interest bearing liabilities Interest rate $ 344,168 $ — $ — $ — $ — 75,500 126,500 327,399 — $ 344,168 781,658 252,259 15,000 — 35,250 30,000 — 80,250 1,530,491 640,400 1,839,414 521,248 253,265 4,784,818 sensitivity gap 324,616 818,898 (353,943) 127,541 367,328 1,284,440 Cumulative rate sensitivity gap Cumulative gap as a percentage of total interest earning assets 324,616 1,143,514 789,571 917,112 1,284,440 5.35% 18.84% 13.01% 15.11% 21.16% (1) Investment securities and loans that are subject to prepayment are shown in the table by the earlier of their re-pricing date or their expected repayment date and not by their contractual maturity date. Nonaccrual loans of $185.3 million are included within the three to twelve month maturity category. (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 52% of interest bearing transaction accounts and 23% of savings accounts are considered to re-price within one year. If all of the interest bearing checking accounts and savings accounts were considered to re-price within one year, the one year cumulative gap would change from a positive 18.84% to a negative 2.94%. 41 M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S The interest rate sensitivity gap analysis provides a good overall picture of Park’s static interest rate risk position. At December 31, 2012, the cumulative interest earning assets maturing or repricing within twelve months were $3,314 million compared to the cumulative interest bearing liabilities maturing or repricing within twelve months of $2,171 million. For the twelve-month cumulative gap position, rate sensitive assets exceeded rate sensitive liabilities by $1,144 million or 18.84% of interest earning assets. A positive twelve-month cumulative rate sensitivity gap (assets exceed liabilities) would suggest that Park’s net interest margin would increase if interest rates were to increase. Conversely, a negative twelve-month cumulative rate sensitivity gap would suggest that Park’s net interest margin would decrease if interest rates were to decrease. However, the usefulness of the interest rate sensitivity gap analysis as a forecasting tool in projecting net interest income is limited. The gap analysis does not consider the magnitude, timing or frequency 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 year-end 2011 was a positive $1,376 million or 21.5% of total interest earning assets. The percentage of interest earning assets maturing or repricing within one year was 54.6% at year-end 2012, compared to 61.3% at year-end 2011. The percentage of interest bearing liabilities maturing or repricing within one year was 45.4% at year-end 2012, compared to 50.3% at year-end 2011. 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 management 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 non-interest 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, 2012, the earnings simulation model projected that net income would increase by 1.1% using a rising interest rate scenario and decrease by 6.6% using a declining interest rate scenario over the next year. At December 31, 2011, the earnings simulation model projected that net income would increase by 2.1% using a rising interest rate scenario and decrease by 3.5% using a declining interest rate scenario over the next year. At December 31, 2010, the earnings simulation model projected that net income would increase by 2.4% using a rising interest rate scenario and decrease by 1.4% using a declining interest rate scenario over the next year. Consistently, over the past several years, Park’s earnings simulation model has projected that changes in interest rates would have only a small impact on net income and the net interest margin. Park’s net interest margin was 3.83% in 2012, 4.14% in 2011, and 4.26% in 2010. A major goal of Park’s asset/liability committee is to maintain a relatively stable net interest margin regardless of the level of interest rates. 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, 2012. Further discussion of the nature of each specified obligation is included in the referenced Note to the Consolidated Financial Statements. Table 31 – Contractual Obligations December 31, 2012 Payments Due In (In thousands) Note Deposits without stated maturity Certificates of deposit Short-term borrowings Long-term debt Subordinated debentures/ notes Operating leases Purchase obligations Total contractual obligations 8 8 9 10 11 7 0–1 Years 1–3 Years 3–5 Years Over 5 Years Total $3,265,459 $ — $ — $ — $3,265,459 927,505 358,051 163,862 1,006 1,450,424 344,168 — — — 75,500 126,500 327,399 252,259 344,168 781,658 — 1,394 2,435 — 1,924 — — 80,250 80,250 926 — 678 — 4,922 2,435 $4,616,461 $486,475 $492,187 $334,193 $5,929,316 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, 2012, the Corporation had $815.6 million of loan commit- ments for commercial, commercial real estate, and residential real estate loans and had $23.0 million of standby letters of credit. At December 31, 2011, the Corporation had $809.1 million of loan commitments for commercial, commercial real estate and residential real estate loans and had $18.8 million of standby letters of credit. Commitments to extend credit under loan commitments and standby letters of credit do not necessarily represent future cash requirements. These com - mitments often expire without being drawn upon. However, all of the loan commitments and standby letters of credit are permitted to be drawn upon in 2013. At December 31, 2012, Park had established a $1.7 million liability for potential credit loss exposure related to these off-balance sheet arrangements. 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, 2012. Capital: Park’s primary means of maintaining capital adequacy is through net retained earnings. At December 31, 2012, the Corporation’s shareholders’ equity was $650.4 million, compared to $742.4 million at December 31, 2011. Shareholders’ equity at December 31, 2012 was 9.79% of total assets, compared to 10.65% of total assets at December 31, 2011. The decline in shareholders’ equity of $92.0 million was primarily due to Park’s April 25, 2012 repurchase of the $100 million in Series A Preferred Shares issued to the U.S. Treasury as part of the CPP and the repurchase of the warrant to purchase 227,376 Park common shares for $2.8 million during 2012. Tangible shareholders’ equity (shareholders’ equity less goodwill and other intangible assets) was $577.7 million at December 31, 2012 and was $667.5 million at December 31, 2011. At December 31, 2012, tangible shareholders’ equity was 8.79% of total tangible assets (total assets less goodwill and other intangible assets), compared to 9.68% at December 31, 2011. 42 M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S Tangible common equity (tangible shareholders’ equity less the balance, if any, of the Series A Preferred Shares) was $577.7 million at December 31, 2012, compared to $569.4 million at December 31, 2011. At December 31, 2012, tangible common equity was 8.79% of tangible assets, compared to 8.25% at December 31, 2011. Net income for 2012 was $78.6 million, $82.1 million in 2011 and $58.1 million in 2010. Preferred share dividends paid as a result of Park’s participation in the CPP were $1.6 million in 2012 and $5.0 million in 2011, and 2010. Accretion of the discount on the Series A Preferred Shares was $1,854,000 in 2012, $856,000 in 2011, and $807,000 in 2010. As mentioned previously, Park repurchased the Series A Preferred Shares on April 25, 2012. Income available to common shareholders is net income less the preferred share dividends and accretion. Income available to common shareholders was $75.2 million for 2012, $76.3 million in 2011, and $52.3 million in 2010. Cash dividends declared for common shares were $57.9 million in 2012 and 2011, and $57.1 million in 2010. On a per share basis, the cash dividends declared were $3.76 per share in each of 2012, 2011 and 2010. Park did not purchase any treasury shares during 2012, 2011 or 2010. Treasury shares had a balance of $76.4 million at December 31, 2012, $77.0 million at December 31, 2011, and $77.7 million at December 31, 2010. During 2012, the value of treasury shares was reduced by $632,000 as a result of the issuance of an aggregate of 6,120 common shares to directors of Park and to the directors of Park’s bank subsidiary, PNB (and its divisions). During 2011, the value of treasury shares was reduced by $726,000 as a result of the issuance of an aggregate of 7,020 common shares to directors of Park and to the directors of Park’s bank subsidiaries PNB and Vision (and their divisions). During 2010, Park issued 437,200 common shares as a result of the exercise of warrants that were originally issued in 2009. Also during 2010, Park issued 71,984 common shares resulting in a total of 509,184 common shares issued in 2010, which reduced the amount of treasury shares available. The issuance of these shares out of treasury shares reduced the value of treasury shares by the weighted average cost of $47.0 million in 2010. Additionally in 2010, the value of treasury shares was reduced by $634,000 as a result of the issuance of an aggregate of 7,020 common shares to the Board of Directors of Park and Park’s bank subsidiaries PNB and Vision (and their divisions). Park did not issue any new common shares (that were not already held in treasury shares, as discussed above) in either 2012 or 2011. However, in 2010, Park recorded $0.2 million for the warrants that were issued as part of the issuance of the 71,984 common shares discussed above and also recorded a reduction of $1.1 million as warrants were either exercised or canceled during 2010. Common shares had a balance of $302.7 million for the year ended December 31, 2012, and $301.2 million at each of the years ended December 31, 2011, and 2010. Accumulated other comprehensive loss was $17.5 million at December 31, 2012, compared to $8.8 million at December 31, 2011 and $1.9 million at December 31, 2010. During the 2011 year, the change in net unrealized gains, net of tax, was a gain of $16.3 million and Park realized after-tax gains of $18.7 million, resulting in an unrealized gain of $12.7 million at December 31, 2011. During the 2012 year, the change in net unrealized gains, net of tax, was a loss of $3.1 million and Park did not realize any after-tax gains, resulting in an unrealized gain of $9.6 million at December 31, 2012. In addition, Park recognized other comprehensive loss of $6.2 million related to the change in Pension Plan assets and benefit obligations in 2012 compared to a loss of $5.0 million in 2011. Finally, Park has recognized other comprehensive gain of $0.6 million in 2012 due to the mark-to-market of a cash flow hedge at December 31, 2012 compared to a $0.5 million gain in comprehensive income for the year ended December 31, 2011. 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 shareholders’ equity less intangible assets divided by tangible assets) is 4%. Park’s leverage ratio was 9.17% at December 31, 2012 and exceeded the minimum capital required by $344 million. The minimum Tier 1 risk-based capital ratio (defined as leverage capital divided by risk-adjusted assets) is 4%. Park’s Tier 1 risk-based capital ratio was 13.12% at December 31, 2012 and exceeded the minimum capital required by $424 million. The minimum total risk-based capital ratio (defined as leverage capital plus supplemental capital divided by risk-adjusted assets) is 8%. Park’s total risk-based capital ratio was 15.77% at December 31, 2012 and exceeded the minimum capital required by $361 million. The Park National Bank, the only financial institution subsidiary of Park, met the well capitalized ratio guidelines at December 31, 2012. See Note 22 of the Notes to Consolidated Financial Statements for the capital ratios for Park and its financial institution subsidiary. 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. SELECTED FINANCIAL DATA Table 32 summarizes five-year financial information. Table 32 – 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 Gain on sale of Vision business (1) Net gains on sale of securities Non-interest income Non-interest expense Net income Net income available to common shareholders Per common share: Net income per common share – basic Net income per common share – diluted Cash dividends declared 2012 2011 2010 2009 2008 $ 285,735 $ 331,880 $ 345,517 $ 367,690 $ 391,339 135,466 255,873 71,473 274,044 94,199 273,491 58,646 273,234 50,420 235,315 35,419 63,272 87,080 68,821 70,487 199,896 209,962 186,964 204,670 185,386 22,167 — — — — — 70,236 187,968 78,630 28,829 66,081 188,317 82,140 11,864 63,016 187,107 58,101 7,340 73,850 188,725 74,192 1,115 83,719 234,501 13,708 75,205 76,284 52,294 68,430 13,566 4.88 4.88 3.76 4.95 4.95 3.76 3.45 3.45 3.76 4.82 4.82 3.76 0.97 0.97 3.77 43 M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S Table 32 – Consolidated Five-Year Selected Financial Data (continued) Table 33 – Quarterly Financial Data (continued) (Dollars in thousands, except share data) March 31 Three Months Ended Sept. 30 June 30 Dec. 31 2011: Interest income Interest expense Net interest income Provision for loan losses Gain on sale of securities Income before income taxes Net income Net income available to common shareholders Per common share data: Net income per common share – basic (x) Net income per common share – diluted (x) Weighted-average common shares outstanding – basic Weighted-average common shares equivalent – diluted $84,662 $84,922 $82,065 $80,231 15,349 69,313 14,100 6,635 30,532 22,196 14,900 70,022 12,516 15,362 41,000 28,954 14,445 67,620 16,438 3,465 27,075 20,381 13,952 66,279 20,218 3,367 17,948 10,609 20,732 27,490 18,917 9,145 1.35 1.35 1.79 1.79 1.23 1.23 0.59 0.59 15,398,930 15,398,919 15,398,909 15,403,861 15,403,420 15,399,593 15,398,909 15,403,861 (1) The Vision business was sold on February 16, 2012 for a gain on sale of $22.2 million. (x) Reported measure uses net income available to common shareholders. Non-GAAP Financial Measures: Park’s management uses certain non-GAAP (U.S. generally accepted accounting principles) financial measures to evaluate Park’s performance. Specifically, management reviews (i) net income available to common shareholders excluding impairment charge, (ii) net income avail- able to common shareholders excluding impairment charge per common share-diluted, (iii) return on average assets excluding impairment charge, (iv) return on average common equity excluding impairment charge, and (v) the ratio of non-interest expense excluding impairment charge to net revenue (collectively, the “adjusted performance metrics”) and has included in this annual report information relating to the adjusted performance metrics for the twelve-month period ended December 31, 2008. 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 charges. Park has provided reconciliations of the U.S. GAAP measures to the adjusted performance metrics solely for the purpose of complying with SEC Regulation G and not as an indication that the adjusted performance metrics are a substitute for other measures determined by U.S. GAAP. The following table displays net income available to common shareholders and related performance metrics after excluding the 2008 goodwill impairment charges related to the Vision acquisition. December 31, (Dollars in thousands, except per share data) Average balances: Loans Investment securities Money market 2012 2011 2010 2009 2008 $4,410,661 $4,713,511 $4,642,478 $4,594,436 $4,354,520 1,801,299 1,746,356 1,613,131 1,877,303 1,848,880 instruments and other 166,319 78,593 93,009 52,658 15,502 Total earning assets 6,190,111 6,640,984 6,481,843 6,524,397 6,171,321 Non-interest bearing deposits Interest bearing deposits 1,048,796 999,085 907,514 818,243 739,993 3,786,601 4,193,404 4,274,501 4,232,391 3,862,780 Total deposits 4,835,397 5,192,489 5,182,015 5,050,634 4,602,773 Short-term borrowings $ 258,661 $ 297,537 $ 300,939 $ 419,733 $ 609,219 835,522 881,921 Long-term debt Shareholders’ equity 567,965 743,873 Common shareholders’ 780,435 675,314 907,704 689,732 725,356 746,510 equity Total assets Ratios: Return on average assets (x) Return on average common equity (x) Net interest margin (2) Dividend payout ratio Average shareholders’ equity to average total assets Leverage capital Tier 1 capital Risk-based capital 658,855 6,766,806 646,169 7,206,171 649,637 7,042,705 579,224 7,035,531 565,612 6,708,086 1.11% 1.06% 0.74% 0.97% 0.20% 11.41% 3.83% 73.68% 10.19% 9.17% 13.12% 15.77% 11.81% 4.14% 70.50% 10.32% 9.81% 14.15% 16.65% 8.05% 4.26% 98.24% 10.60% 9.54% 13.24% 15.71% 11.81% 4.22% 78.27% 2.40% 4.16% 387.79% 9.60% 9.04% 12.45% 14.89% 8.47% 8.36% 11.69% 13.47% (1) The Vision business was sold on February 16, 2012 for a gain on sale of $22.2 million. (2) Computed on a fully taxable equivalent basis. (x) Reported measure uses net income available to common shareholders. The following table is a summary of selected quarterly results of operations for the years ended December 31, 2012 and 2011. Table 33 – Quarterly Financial Data (Dollars in thousands, except share data) March 31 Three Months Ended Sept. 30 June 30 Dec. 31 2012: Interest income Interest expense Net interest income Provision for loan losses Gain on sale of Vision business (1) Income before income taxes Net income Net income available to common shareholders Per common share data: Net income per common share – basic (x) Net income per common share – diluted (x) Weighted-average common shares outstanding – basic Weighted-average common shares equivalent – diluted $74,838 $71,486 $70,618 $68,793 13,110 61,728 8,338 22,167 44,540 31,475 12,806 58,680 5,238 12,602 58,016 16,655 11,902 56,891 5,188 — — — 25,146 18,886 13,757 11,982 20,888 16,287 29,998 16,938 11,982 16,287 1.95 1.95 1.10 1.10 0.78 0.78 1.06 1.06 15,405,910 15,405,902 15,405,894 15,410,606 15,417,745 15,405,902 15,405,894 15,410,606 44 M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S Table 34 – Net Income Available to Common Shareholders and Related Performance Metrics December 31, (Dollars in thousands, except per share data) Results of operations: Net income available to common shareholders excluding impairment charge (a) Per common share: Net income per common share excluding impairment charge – diluted (a) Ratios: Return on average assets excluding impairment charge (a)(b) Return on average common equity excluding impairment charge (a)(x) Non-interest expense excluding impairment charge to net revenue (1) 2012 2011 2010 2009 2008 $75,205 $76,284 $52,294 $68,430 $68,552 4.88 4.95 3.45 4.82 4.91 1.11% 1.06% 0.74% 0.97% 1.02% 11.41% 11.81% 8.05% 11.81% 12.12% 57.07% 55.18% 55.18% 54.01% 52.59% (1) Computed on a fully tax equivalent basis. (x) Reported measure uses net income available to common shareholders. (a) Net income for 2008 has been adjusted for the impairment charge to goodwill. Net income excluding impairment charge equals net income for the year plus the impairment charge to goodwill of $54,986 for 2008. (b) Net income for the year available to common shareholders. The Corporation’s common shares (symbol: PRK) are traded on the NYSE MKT LLC. At December 31, 2012, the Corporation had 4,206 shareholders of record. The following table sets forth the high, low and closing sale prices of, and divi- dends declared on the common shares for each quarterly period for the years ended December 31, 2012 and 2011, as reported by NYSE MKT LLC. Table 35 – Market and Dividend Information 2012: First Quarter Second Quarter Third Quarter Fourth Quarter 2011: First Quarter Second Quarter Third Quarter Fourth Quarter High Low Last Price $ 72.75 $ 65.06 $ 69.17 69.93 72.18 71.25 61.94 65.30 61.44 69.75 70.02 64.63 $ 73.64 $ 62.99 $ 66.82 69.59 66.21 65.70 62.14 49.00 49.80 65.86 52.88 65.06 Cash Dividend Declared Per Share $0.94 0.94 0.94 0.94 $0.94 0.94 0.94 0.94 PERFORMANCE GRAPH Table 36 compares the total return performance for Park common shares with the NYSE MKT Composite Index, the NASDAQ Bank Stocks Index and the SNL Financial Bank and Thrift Index for the five-year period from December 31, 2007 to December 31, 2012. The NYSE MKT Composite Index is a market capitalization-weighted index of the stocks listed on NYSE MKT. The NASDAQ Bank Stocks Index is comprised of all depository institutions, holding com - panies 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 Global Select 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 NYSE MKT 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. 150 125 100 75 50 25 0 l e u a V x e d n I 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 12/31/12 Table 36 – Total Return Performance PERIOD ENDING Index 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 12/31/12 Park National Corporation NYSE MKT Composite NASDAQ Bank SNL Bank and Thrift Index 100.00 100.00 100.00 100.00 117.71 102.87 59.55 78.46 57.51 80.74 65.67 56.74 134.82 101.40 74.97 63.34 128.58 107.78 67.10 49.25 135.08 114.90 79.64 66.14 The total return for Park’s common shares has outperformed the total return of the NYSE MKT Composite Index, the NASDAQ Bank Stocks Index and the SNL Bank and Thrift Index for the five-year period indicated in Table 36. The annual compound total return on Park’s common shares for the past five years was a positive 6.2%. By comparison, the annual compound total returns for the past five years on the NYSE MKT Composite Index, the NASDAQ Bank Stocks Index and the SNL Bank and Thrift Index were a positive 2.8%, a negative 4.5% and a negative 7.9%, respectively. 45 M A N A G E M E N T ’ S R E P O R T O N I N T E R N A L C O N T R O L O V E R F I N A N C I A L R E P O R T I N G To the Board of Directors and Shareholders 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, 2012, 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. Based on our assessment under the criteria described in the preceding paragraph, management concluded that the Corporation maintained effective internal control over financial reporting as of December 31, 2012. The Corporation’s independent registered public accounting firm, Crowe Horwath LLP, has audited the Corporation’s 2012 and 2011 consolidated financial statements included in this Annual Report and the Corporation’s internal control over financial reporting as of December 31, 2012, 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 Brady T. Burt Chief Financial Officer February 26, 2013 46 R E P O R T O F I N D E P E N D E N T R E G I S T E R E D P U B L I C A C C O U N T I N G F I R M 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, 2012 and 2011 and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2012. We also have audited Park National Corporation’s internal control over financial reporting as of December 31, 2012, 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 responsibility 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. 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 disposi- tions 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 expendi- tures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Park National Corporation as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, 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, 2012, based on criteria established in Internal Control – Integrated Framework issued by the COSO. Crowe Horwath LLP Columbus, Ohio February 26, 2013 47 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, 2012 and 2011 (In thousands, except share and per share data) ASSETS Cash and due from banks Money market instruments Cash and cash equivalents Investment securities: Securities available-for-sale, at fair value (amortized cost of $1,099,658 and $801,147 at December 31, 2012 and 2011, respectively) Securities held-to-maturity, at amortized cost (fair value of $410,705 and $834,574 at December 31, 2012 and 2011, respectively) Other investment securities Total investment securities Total loans Allowance for loan losses Net loans Other assets: Bank owned life insurance Goodwill Other intangibles Premises and equipment, net Accrued interest receivable Other real estate owned Mortgage loan servicing rights Other Assets held for sale Total other assets Total assets The accompanying notes are an integral part of the consolidated financial statements. 2012 $ 164,120 37,185 201,305 1,114,454 401,390 65,907 1,581,751 4,450,322 (55,537) 4,394,785 161,069 72,334 337 53,751 19,710 35,718 7,763 114,280 — 464,962 $6,642,803 2011 $ 137,770 19,716 157,486 820,645 820,224 67,604 1,708,473 4,317,099 (68,444) 4,248,655 154,567 72,334 2,509 53,741 19,697 42,272 9,301 120,748 382,462 857,631 $6,972,245 48 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, 2012 and 2011 (In thousands, except share and per share data) LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits: Non-interest bearing Interest bearing Total deposits Short-term borrowings Long-term debt Subordinated debentures/notes Total borrowings Other liabilities: Accrued interest payable Other Liabilities held for sale Total other liabilities Total liabilities COMMITMENTS AND CONTINGENCIES Shareholders’ equity: Preferred shares (200,000 shares authorized; No shares issued at December 31, 2012 and 100,000 shares issued at December 31, 2011 with $1,000 per share liquidation preference) Common shares, no par value (20,000,000 shares authorized; 16,150,987 and 16,151,021 shares issued at December 31, 2012 and 2011, respectively) Common share warrants Accumulated other comprehensive income (loss), net Retained earnings Less: Treasury shares (738,989 and 745,109 shares at December 31, 2012 and 2011, respectively) Total shareholders’ equity 2012 $1,137,290 3,578,742 4,716,032 344,168 781,658 80,250 1,206,076 3,459 66,870 — 70,329 5,992,437 — 302,654 — (17,518) 441,605 (76,375) 650,366 2011 $ 995,733 3,469,381 4,465,114 263,594 823,182 75,250 1,162,026 4,916 61,639 536,186 602,741 6,229,881 98,146 301,202 4,297 (8,831) 424,557 (77,007) 742,364 Total liabilities and shareholders’ equity $6,642,803 $6,972,245 The accompanying notes are an integral part of the consolidated financial statements. 49 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, 2012, 2011 and 2010 (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 Checkcard fee income Bank owned life insurance income ATM fees Net gain on sale of OREO OREO devaluations Gain on sale of Vision business Other Total other income 2012 2011 2010 $234,638 $262,458 $267,692 50,549 140 408 285,735 2,483 15,921 678 31,338 50,420 235,315 35,419 199,896 15,947 16,704 — 13,631 12,541 4,754 2,359 4,414 (6,872) 22,167 6,758 68,873 371 178 331,880 3,812 23,842 823 30,169 58,646 273,234 63,272 209,962 14,965 18,307 28,829 10,606 12,496 5,089 2,703 1,312 (8,219) — 8,822 $ 92,403 $ 94,910 76,839 786 200 345,517 5,753 36,212 1,181 28,327 71,473 274,044 87,080 186,964 13,874 19,717 11,864 13,816 11,177 4,978 2,951 1,466 (13,206) — 8,243 $ 74,880 The accompanying notes are an integral part of the consolidated financial statements. 50 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, 2012, 2011 and 2010 (In thousands, except per share data) Other expense: Salaries and employee benefits Data processing fees Professional fees and services Net occupancy expense of bank premises Amortization of intangibles Furniture and equipment expense Insurance Marketing Postage and telephone State taxes Loan put provision OREO expense Other Total other expense Income before income taxes State income taxes (benefit) Federal income taxes Net income Preferred share dividends and accretion Income available to common shareholders Earnings per common share: Basic Diluted 2012 2011 2010 $ 95,977 $102,068 $ 98,315 3,916 24,267 9,444 2,172 10,788 5,780 3,474 5,983 3,786 3,299 4,011 15,071 187,968 104,331 — 25,701 $ 78,630 3,425 $ 75,205 $4.88 $4.88 4,965 21,119 11,295 3,534 10,773 6,821 2,967 6,060 1,544 — 3,266 13,905 188,317 116,555 6,088 28,327 $ 82,140 5,856 $ 76,284 $4.95 $4.95 5,728 19,972 11,510 3,422 10,435 8,983 3,656 6,648 3,171 — 3,358 11,909 187,107 74,737 (1,161) 17,797 $ 58,101 5,807 $ 52,294 $3.45 $3.45 The accompanying notes are an integral part of the consolidated financial statements. 51 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 O M P R E H E N S I V E I N C O M E PARK NATIONAL CORPORATION AND SUBSIDIARIES for the years ended December 31, 2012, 2011 and 2010 (In thousands) Net income Other comprehensive income (loss), net of tax: Change in funded status of pension plan, net of income taxes of $(3,328), $(2,707) and $(1,307) for years ended December 31, 2012, 2011, and 2010, respectively Unrealized net holding gain (loss) on cash flow hedge, net of income taxes of $296, $276 and $(53) for years ended December 31, 2012, 2011 and 2010, respectively Unrealized net holding gain (loss) on securities available-for-sale, net of income taxes of $(1,645), $(1,318) and $(8,078) for years ended December 31, 2012, 2011 and 2010, respectively Other comprehensive income (loss) Comprehensive income 2012 $78,630 2011 $82,140 2010 $ 58,101 (6,180) (5,027) (2,427) 550 512 (98) (3,057) $ (8,687) $69,943 (2,448) $ (6,963) $75,177 (15,004) $(17,529) $ 40,572 The accompanying notes are an integral part of the consolidated financial statements. 52 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 H A R E H O L D E R S ’ E Q U I T Y PARK NATIONAL CORPORATION AND SUBSIDIARIES for the years ended December 31, 2012, 2011 and 2010 (In thousands, except share and per share data) Balance, January 1, 2010 Net income Other comprehensive income (loss), net of tax: Change in funded status of pension plan, net of income taxes of $(1,307) Unrealized net holding loss on cash flow hedge, net of income taxes of $(53) Unrealized net holding loss on securities available-for-sale, net of income taxes of $(8,078) Cash dividends, $3.76 per share Cash payment for fractional shares in dividend reinvestment plan Reissuance of common shares from treasury shares held Accretion of discount on preferred shares Common share warrants issued Common share warrants expired Preferred share dividends Treasury shares reissued for director grants Preferred Shares Common Shares Shares Outstanding 100,000 Amount $ 96,483 Shares Outstanding 14,882,780 — Amount $306,569 — Retained Earnings $423,872 58,101 Accumulated Other Comprehensive Income (Loss) Treasury Shares Total $(125,321) $ 15,661 $717,264 — — 58,101 807 — (50) 509,184 — 7,020 — (4) (898) 176 (166) (57,076) — (12,729) (807) 166 (5,000) (185) — — 46,954 634 (2,427) (2,427) (98) (98) (15,004) — (15,004) (57,076) — (4) 33,327 — 176 — (5,000) 449 Balance, December 31, 2010 100,000 $ 97,290 15,398,934 $305,677 $406,342 $ (77,733) $ (1,868) $729,708 Net income Other comprehensive income (loss), net of tax: Change in funded status of pension plan, net of income taxes of $(2,707) Unrealized net holding gain on cash flow hedge, net of income taxes of $276 Unrealized net holding loss on securities available-for-sale, net of income taxes of $(1,318) Cash dividends, $3.76 per share Cash payment for fractional shares in dividend reinvestment plan Accretion of discount on preferred shares Common share warrants expired Preferred share dividends Treasury shares reissued for director grants — — 82,140 — — 82,140 856 — (42) 7,020 — (2) (176) (57,907) — (856) 176 (5,000) (338) — — 726 (5,027) (5,027) 512 512 (2,448) — — (2,448) (57,907) (2) — — (5,000) 388 Balance, December 31, 2011 100,000 $ 98,146 15,405,912 $305,499 $424,557 $ (77,007) $ (8,831) $742,364 Net income Other comprehensive income (loss), net of tax: Change in funded status of pension plan, net of income taxes of $(3,328) Unrealized net holding gain on cash flow hedge, net of income taxes of $296 Unrealized net holding loss on securities available-for-sale, net of income taxes of $(1,645) Cash dividends, $3.76 per share Cash payment for fractional shares in dividend reinvestment plan Common share warrants redeemed Preferred shares redeemed Accretion of discount on preferred shares Preferred share dividends Treasury shares reissued for director grants — — 78,630 — — 78,630 (100,000) (100,000) 1,854 — (34) 6,120 — (57,932) (2) (2,843) — (1,854) (1,571) (225) — — 632 (6,180) (6,180) 550 550 (3,057) — — (3,057) (57,932) (2) (2,843) (100,000) — (1,571) 407 Balance, December 31, 2012 — $ — 15,411,998 $302,654 $441,605 $ (76,375) $ (17,518) $650,366 The accompanying notes are an integral part of the consolidated financial statements. 53 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, 2012, 2011 and 2010 (In thousands) Operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses Loan put provision Amortization of loan fees and costs, net Provision for depreciation Other than temporary impairment on investment securities Amortization of intangible assets (Accretion)/amortization of investment securities Deferred income tax (benefit) Realized net investment security gains Compensation expense for issuance of treasury shares to directors Loan originations to be sold in secondary market Proceeds from sale of loans in secondary market Gain on sale of loans in secondary market OREO devaluations Bank owned life insurance income Changes in assets and liabilities: (Increase) in other assets Increase (decrease) in other liabilities Cash included in assets held for sale Net cash provided by operating activities Investing activities: Proceeds from sales of available-for-sale securities Proceeds from sales of held-to-maturity securities Proceeds from calls and maturities of securities: Held-to-maturity Available-for-sale Purchase of securities: Held-to-maturity Available-for-sale Net decrease in other investments Net loan originations, portfolio loans Sales of assets/liabilities related to Vision Bank Purchases of bank owned life insurance, net Purchases of premises and equipment, net Net cash (used in) provided by investing activities Financing activities: Net increase (decrease) in deposits Net increase (decrease) in short-term borrowings Issuance of treasury shares, net Proceeds from issuance of subordinated notes Proceeds from long-term debt Repayment of sub-debt Repayment of long-term debt Cash payment for repurchase of common share warrant from U.S. Treasury Repurchase of preferred shares from U.S. Treasury Cash dividends paid Net cash provided by (used in) financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 2012 2011 2010 $ 78,630 $ 82,140 $ 58,101 35,419 3,299 2,119 6,954 54 2,172 (239) 12,717 — 407 (442,890) 422,875 5,807 6,872 (4,754) (15,231) (9,010) — 105,201 — — 681,513 666,431 (262,679) (964,704) 1,697 (163,106) (144,436) (2,500) (6,964) (194,748) 250,918 80,574 — 30,000 300,000 (25,000) (340,129) (2,843) (100,000) (60,154) 133,366 63,272 — 2,871 7,583 — 3,534 490 28,466 (28,829) 388 (269,922) 263,170 3,557 8,219 (5,089) (18,722) (10,826) (6,766) 123,536 584,573 25,410 454,937 557,552 (625,925) (641,751) 1,095 (71,862) — (3,000) (6,618) 274,411 (97,708) (400,075) — — 203,000 — (16,551) — — (62,907) (374,241) 43,819 157,486 $ 201,305 23,706 133,780 $ 157,486 87,080 — 4,179 7,126 23 3,422 (2,413) (9,603) (11,864) 449 (443,369) 443,360 1,220 13,206 (4,978) (18,774) 180 — 127,345 460,192 — 146,986 2,238,059 (313,642) (2,719,265) 220 (153,677) — (4,562) (7,602) (353,291) (92,632) 339,450 33,541 — — — (17,648) — — (62,076) 200,635 (25,311) 159,091 $ 133,780 The accompanying notes are an integral part of the consolidated financial statements. 54 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 and its subsidiaries (“Park”, the “Company” or the “Corporation”). Material intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) 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. Management has identified the allowance for loan losses, accounting for Other Real Estate Owned (“OREO”), fair value accounting and accounting for goodwill as significant estimates. Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. Reclassifications had no effect on prior year net income or shareholders’ equity. Restrictions on Cash and Due from Banks The Corporation’s bank subsidiary is required to maintain average reserve balances with the Federal Reserve Bank. The average required reserve balance was approximately $41.0 million at December 31, 2012 and $38.1 million at December 31, 2011. No other compensating balance arrangements were in existence at December 31, 2012. Investment Securities Investment securities are classified upon acquisition into one of three categories: held-to-maturity, available-for-sale, or trading (see Note 4 of these Notes to Consolidated Financial Statements). 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 other reasons. 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. The Corporation did not hold any trading securities during any period presented. Available-for-sale and held-to-maturity securities are evaluated quarterly for potential other-than-temporary impairment. Management considers the facts related to each security including the nature of the security, the amount and duration of the loss, the credit quality of the issuer, the expectations for that security’s performance and whether Park intends to sell, or it is more likely than not to be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. Declines in equity securities that are considered to be other-than-temporary are recorded as a charge to earnings in the Consolidated Statements of Income. Declines in debt securities that are considered to be other-than-temporary are separated into (1) the amount of the total impairment related to credit loss and (2) the amount of the total impair- ment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total impairment related to all other factors is recognized in other comprehensive income. 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 are recorded on the trade date and determined using the specific identification basis. Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) Stock Park’s subsidiary bank, The Park National Bank (PNB) is a member of the FHLB. Additionally, PNB is a member of the FRB. 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 and FRB stock are classified as restricted securities and are carried at their redemption value within other investment securities on the balance sheet. Both cash and stock dividends are reported as income. Bank Owned Life Insurance Park has purchased life insurance policies on directors and certain key officers. Bank owned life insurance is recorded at its cash surrender value (or the amount that can be realized). Mortgage Loans Held for Sale Mortgage loans held for sale are carried at their fair value. Mortgage loans held for sale were $25.7 million and $11.5 million at December 31, 2012 and 2011, respectively. These amounts are included in loans on the Consolidated Balance Sheets and in the residential real estate loan segments in Notes 5 and 6. The contractual balance was $25.2 million and $11.4 million at December 31, 2012 and 2011, respectively. The gain expected upon sale was $568,000 and $182,000 at December 31, 2012 and 2011, respectively. None of these loans are 90 days or more past due or on nonaccrual status as of December 31, 2012 or 2011. Mortgage Banking Derivatives Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked. The Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into, in order to hedge the change in interest rates result- ing from its commitments to fund the loans. Changes in the fair values of these derivatives are included in net gains on sales of loans. 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 origination fees and costs over the loan term. Commercial loans include: (1) commercial, financial and agricultural loans; (2) commer- cial real estate loans; (3) those commercial loans in the real estate construction loan segment; and (4) those commercial loans in the residential real estate loan segment. Consumer loans include: (1) mortgage and installment loans included in the real estate construction segment; (2) mortgage, home equity lines of credit (HELOC), and installment loans included in the residential real estate segment; and (3) all loans included in the consumer segment. Generally, commercial loans are placed on nonaccrual status at 90 days past due and consumer and residential mortgage loans are placed on nonaccrual status at 120 days past due. Accrued interest on these loans is considered a loss, unless the loan is well-secured and in the process of collection. Commercial loans placed on nonaccrual status are considered impaired (see Note 5 of these Notes to Consolidated Financial Statements). For loans which are on nonaccrual status, it is Park’s policy to reverse interest previously accrued on the loans against interest income. Interest on such loans may be recorded on a cash basis and be included in earnings only when cash is actually received. Park’s charge-off policy for commercial loans requires management to establish a specific reserve or record a charge-off as soon as it is apparent 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 that the borrower is troubled and there is, or likely will be, a collateral shortfall related to the estimated value of the collateral securing the loan. The Company’s charge-off policy for consumer loans is dependent on the class of the loan. Residential mortgage loans and HELOC are typically charged down to the value of the collateral, less estimated selling costs at 180 days past due. The charge- off policy for other consumer loans, primarily installment loans, requires a monthly review of delinquent loans and a complete charge-off for any account that reaches 120 days past due. 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, the borrower has demonstrated the ability to pay and the loan is deemed to be well-secured by management. A description of each segment of the loan portfolio, along with the risk characteristics of each segment, is included below: Commercial, financial and agricultural: Commercial, financial and agricultural loans are made for a wide variety of general corporate purposes, including financing for commercial and industrial businesses, financing for equipment, inventories and accounts receivable, acquisition financing and commercial leasing. The term of each commercial loan varies by its purpose. Repayment terms are structured such that commercial loans will be repaid within the economic useful life of the underlying asset. The commercial loan portfolio includes loans to a wide variety of corporations and businesses across many industrial classifications in the 28 Ohio counties and one Kentucky county where PNB operates. The primary industries represented by these customers include manufacturing, retail trade, health care and other services. Commercial real estate: Commercial real estate (“CRE”) loans include mortgage loans to developers and owners of commercial real estate. The lending policy for CRE loans is designed to address the unique risk attributes of CRE lending. The collateral for these CRE loans is the underlying commercial real estate. PNB and its divisions generally require that the CRE loan amount be no more than 85% of the purchase price or the appraised value of the commer- cial real estate securing the CRE loan, whichever is less. CRE loans made for each subsidiary bank’s portfolio generally have a variable interest rate. A CRE loan may be made with a fixed interest rate for a term generally not exceeding five years. Construction real estate: The Company defines construction loans as both commercial construction loans and residential construction loans where the loan proceeds are used exclusively for the improvement of real estate as to which the Company holds a mortgage. Construction loans may be in the form of a permanent loan or short-term construction loan, depending on the needs of the individual borrower. Generally, the permanent construction loans have a variable interest rate although a permanent construction loan may be made with a fixed interest rate for a term generally not exceeding five years. Short-term construction loans are made with variable interest rates. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost (including interest) of construction. If the estimate of construction cost proves to be inaccurate, the PNB banking division making the loan may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value proves inaccurate, the subsidiary bank may be confronted, at or prior to the maturity of the loan, with a project having a value insufficient to assure full repayment, should the borrower default. In the event a default on a construction loan occurs and foreclosure follows, the subsidiary bank must take control of the project and attempt either to arrange for completion of con- struction or to dispose of the unfinished project. Additional risk exists with respect to loans made to developers who do not have a buyer for the property, as the developer may lack funds to pay the loan if the property is not sold upon completion. Park’s subsidiary banks attempt to reduce such risks on loans to 56 developers by requiring personal guarantees and reviewing current personal financial statements and tax returns as well as other projects undertaken by the developer. Residential real estate: The Company defines residential real estate loans as first mortgages on individuals’ primary residence or second mortgages of individuals’ primary residence in the form of HELOCs or installment loans. Credit approval for residential real estate loans requires demonstration of sufficient income to repay the principal and interest and the real estate taxes and insurance, stability of employment, an established credit record and an appropriately appraised value of the real estate securing the loan. Each banking division generally requires that the residential real estate loan amount be no more than 80% of the purchase price or the appraised value of the real estate securing the loan, whichever is less, unless private mortgage insurance is obtained by the borrower. Loans made for each banking division’s portfolio in this lending category are adjustable rate, fully amortized mortgages or 15-year, fixed rate mortgages. The rates used are generally fully-indexed rates. Park generally does not price residential loans using low introductory “teaser” rates. Home equity lines of credit are generally made as second mortgages by Park’s banking divisions. The maximum amount of a home equity line of credit is generally limited to 85% of the appraised value of the property less the balance of the first mortgage. Consumer: The Company originates direct and indirect consumer loans, primarily automobile loans and home equity based credit cards to customers in its primary market areas. Credit approval for consumer loans requires income sufficient to repay principal and interest due, stability of employment, an established credit record and sufficient collateral for secured loans. Consumer loans typically have shorter terms and lower balances with higher yields as compared to real estate mortgage loans, but generally carry higher risks of default. Consumer loan collections are dependent on the borrower’s financial stability, and thus are more likely to be affected by adverse personal circumstances. 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. The determination of the allowance requires significant estimates, including the timing and amounts of expected cash flows on impaired loans, consideration of current economic conditions, and historical loss experience pertaining to pools of homogeneous loans, all of which may be susceptible to change. The allowance is increased through a provision for loan losses that is charged to earnings based on management’s quarterly evaluation of the factors previously mentioned and is reduced by charge-offs, net of recoveries. The allowance for loan losses includes both (1) an estimate of loss based on historical loss experience within both commercial and consumer loan categories with similar characteristics (“statistical allocation”) and (2) an estimate of loss based on an impairment analysis of each commercial loan that is considered to be impaired (“specific allocation”). In calculating the allowance for loan losses, management believes it is appropriate to utilize historical loss rates that are comparable to the current period being analyzed, giving consideration to losses experienced over a full cycle. For the historical loss factor at December 31, 2012, the Company utilized an annual loss rate (“historical loss experience”), calculated based on an average of the net charge-offs and the annual change in specific reserves for impaired commercial loans, experienced during 2009, 2010, 2011 and 2012 within the individual segments of the commercial and consumer loan categories. Management believes the 48-month historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed. The loss factor applied to Park’s consumer portfolio as of December 31, 2012 is based on the historical loss experience over the past 48 months, plus an additional judgmental reserve, increasing the total allowance for loan loss 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 coverage in the consumer portfolio to approximately 1.52 years of historical loss. The loss coverage ratio was 1.38 years at December 31, 2011. The loss factor applied to Park’s commercial portfolio as of December 31, 2012 is based on the historical loss experience over the past 48 months, plus additional reserves for consideration of (1) a loss emergence period factor, (2) a loss migration factor and (3) a judgmental or environ mental loss factor. These additional reserves increased the total allowance for loan loss coverage in the commercial portfolio to approximately 2.59 years of historical loss. The loss coverage ratio was 2.80 years at December 31, 2011. Park’s commercial loans are individually risk graded. If loan downgrades occur, the probability of default increases, and accordingly management allocates a higher percentage reserve to those accruing com mercial loans graded special mention and substandard. The judgmental increases discussed above incorporate management’s evaluation of the impact of environmental qualitative factors which pose additional risks and assign a component of the allowance for loan losses in consideration of these factors. Such environmental factors include: national and local economic trends and conditions; experience, ability and depth of lending management and staff; effects of any changes in lending policies and procedures; and levels of, and trends in, consumer bankruptcies, delinquen- cies, impaired loans and charge-offs and recoveries. U.S. GAAP require a specific allocation 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 loans will not be collected, and the recorded investment in the loans exceeds their measure of impairment. Management considers the following related to commercial loans when determining if a loan should be considered impaired: (1) current debt service coverage levels of the borrowing entity; (2) payment history over the most recent 12-month period; (3) other signs of deterioration in the borrower’s financial situation, such as changes in beacon scores; and (4) consideration of the current collateral supporting the loan. The recorded investment is the carrying balance of the loan, plus accrued interest receivable, both as of the end of the year. Impairment 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 a loan is considered to be collateral dependent, the fair value of collateral, less estimated selling costs, is used to measure impairment. Troubled Debt Restructuring (TDRs) Management classifies loans as TDRs when a borrower is experiencing financial difficulties and Park has granted a concession. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy. Management’s policy is to modify loans by extending the term or by granting a temporary or permanent con - tractual interest rate below the market rate, not by forgiving debt. TDRs are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. Income Recognition Income earned by the Corporation and its subsidiaries is recognized on the accrual basis of accounting, except for nonaccrual loans as previously discussed, and 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 shorter of the remaining lease period or the estimated useful lives of the improvements. Upon the sale or other disposal of an asset, 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 that extend the useful life of an asset are capitalized. Premises and equipment are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of a particular asset may not be recoverable. The range of depreciable lives over which premises and equipment are being depreciated 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 lives of the related leases which range from 1 to 10 years. Other Real Estate Owned (OREO) OREO is recorded at fair value less anticipated selling costs (net realizable value) and consists of property acquired through foreclosure and real estate held for sale. If the net realizable value is below the carrying value of the loan at the date of transfer, the difference is charged to the allowance for loan losses. Subsequent declines in the value of real estate are classified as OREO devalua- tions, are reported as adjustments to the carrying amount of OREO and are expensed within “other income.” In certain circumstances where management believes the devaluation may not be permanent in nature, Park utilizes a valua- tion allowance to record OREO devaluations, which is also expensed through “other income”. 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 other expense. Mortgage Loan Servicing Rights When Park sells mortgage loans with servicing rights retained, servicing rights are recorded at an amount not to exceed fair value with the income statement effect recorded in gains on sale of loans. Capitalized servicing rights are amor- tized in proportion to and over the period of estimated future servicing income of the underlying loan and is included within “other service income.” Mortgage servicing rights are assessed for impairment periodically, based on fair value, with any impairment recognized through a valuation allowance. The fair value of mortgage servicing rights is determined by discounting estimated future cash flows from the servicing assets, using market discount rates and expected future prepayment rates. In order to calculate fair value, the sold loan portfolio is stratified into homogeneous pools of like categories. (See Note 20 of these Notes to Consolidated Financial Statements.) 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. Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price over net identifiable tangible and intangible assets acquired in a purchase business combination. Other intangible assets represent purchased assets that have no physical property but represent some future economic benefit to their owner and are capable of being sold or exchanged on their own or in combination with a related asset or liability. Goodwill and indefinite-lived intangible assets are not amortized to expense, but are subject to impairment tests annually, 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 amor- tized to expense over their estimated useful lives. 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 Management considers several factors when performing the annual impairment tests on goodwill. The factors considered include the operating results for the particular Park segment for the past year and the operating results budgeted for the current year (including multi-year projections), the deposit and loan totals of the Park segment and the economic conditions in the markets served by the Park segment. The following table reflects the activity in goodwill and other intangible assets for the years 2012, 2011 and 2010. (In thousands) December 31, 2009 Amortization December 31, 2010 Amortization December 31, 2011 Amortization December 31, 2012 Goodwill $ 72,334 Core Deposit Intangibles Total $ 9,465 $ 81,799 — (3,422) (3,422) $ 72,334 $ 6,043 $ 78,377 — $ 72,334 — $ 72,334 (3,534) $ 2,509 (2,172) $ 337 (3,534) $ 74,843 (2,172) $ 72,671 U.S. GAAP 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 assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carry- ing amount. If after assessing these events or circumstances, it is concluded that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. If the carrying amount of the goodwill exceeds the fair value, an impairment charge must be recorded in an amount equal to the excess. Park evaluates goodwill for impairment on April 1 of each year, with financial data as of March 31. Based on the analysis performed as of April 1, 2012, the Company determined that goodwill for Park’s subsidiary bank, PNB, was not impaired. Goodwill and other intangible assets (as shown on the Consolidated Balance Sheets) totaled $72.7 million at December 31, 2012, $74.8 million at December 31, 2011 and $78.4 million at December 31, 2010. The core deposit intangibles are being amortized to expense principally on the straight-line method, over a period of six years. The amortization period for the core deposit intangibles related to Vision Bank was accelerated in the 4th quarter of 2011 and 1st quarter of 2012 due to the pending sale of the Vision Bank business to Centennial Bank. (See Note 3 of these Notes to Consolidated Financial Statements for details on the sale of the Vision Bank business.) Core deposit intangible amortization expense was $2.2 million in 2012, $3.5 million in 2011 and $3.4 million in 2010. The accumulated amortization of core deposit intangibles was $21.8 million as of December 31, 2012 and $19.6 million at December 31, 2011. The expected core deposit intangible amortization expense for each of the next five years is as follows: (In thousands) 2013 2014 2015 2016 2017 Total $337 — — — — $337 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, (In thousands) Interest paid on deposits and other borrowings Income taxes paid 2012 $51,877 7,000 2011 $59,552 17,700 2010 $74,680 24,600 Non-cash Items Non-cash items included in cash provided by operating activities: December 31, (In thousands) Transfers to OREO 2012 2011 2010 $23,634 $36,209 $35,507 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. 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. To the extent that Park does not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is recorded. All positive and negative evidence is reviewed when determining how much of a valuation allowance is recognized on a quar- terly basis. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. An uncertain 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. Park recognizes any interest and penalties related to income tax matters in income tax expense. Treasury Shares The purchase of Park’s common shares is recorded at cost. At the date of retirement or subsequent reissuance, the treasury shares account is reduced by the weighted average cost of the common shares retired or reissued. Comprehensive Income Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale, changes in the funded status of the Company’s Defined Benefit Pension Plan, and the unrealized net holding gains and losses on the cash flow hedge, which are also recognized as separate components of equity. Stock Based Compensation Compensation cost is recognized for stock options and stock awards issued to employees and directors, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of Park’s common shares at the date of grant is used for stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. Park did not grant any stock options during 2012, 2011 or 2010. No stock options vested in 2012, 2011 or 2010. Park granted 6,120 common shares to its directors in 2012 and 7,020 in 2011 and 2010. 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 Loan Commitments and Related Financial Instruments Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Derivative Instruments At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company’s intentions and belief as to likely effectiveness as a hedge. These three types are: (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”); (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”); or (3) an instrument with no hedging designation (“stand-alone derivative”). For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. For both types of hedges, changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as non-interest income. The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the Consolidated Balance Sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended. When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods in which the hedged transactions will affect earnings. Fair Value Measurement Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 21 of these Notes to Consolidated Financial Statements. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Transfers of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Retirement Plans Pension expense is the net of service and interest cost, return on plan assets and amortization of gains and losses not immediately recognized. Employee 401(k) plan expense is the amount of matching contributions. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service. Earnings Per Common Share Basic earnings per common share is net income available to common share- holders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options, warrants and convertible securities. Earnings and dividends per common share are restated for any stock splits and stock dividends through the date of issuance of the consolidated financial statements. Operating Segments Prior to February 16, 2012, the operating segments for the Corporation were its two chartered bank subsidiaries, PNB (headquartered in Newark, Ohio) and Vision Bank (“Vision” or “VB”) (headquartered in Panama City, Florida). On February 16, 2012, Vision sold certain assets and liabilities to Centennial Bank (see Note 3 of these Notes to Consolidated Financial Statements). Promptly following the closing of the transaction, Vision surrendered its Florida banking charter to the Florida Office of Financial Regulation and became a non-bank Florida corporation (the “Florida Corporation”). The Florida Corporation merged with and into a wholly-owned non-bank subsidiary of Park, SE Property Holdings, LLC (“SEPH”), with SEPH being the surviving entity. The closing of this transaction prompted Park to add SEPH as a reportable segment. Additionally, due to the increased significance of the entity, Guardian Financial Services Company (“GFSC”) was added as a reportable segment in the first quarter of 2012. Adoption of New Accounting Pronouncements No. 2011-04 – Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirement in U.S. GAAP and IFRSs: In May 2011, FASB issued Accounting Standards Update 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirement in U.S. GAAP and IFRSs (ASU 2011-04). The new guidance in this ASU results in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Certain amendments clarify FASB’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. These amendments also enhance disclosure requirements surrounding fair value measurement. Most significantly, an entity is required to disclose additional information regarding Level 3 fair value measurements including quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements. The new guidance became effective for interim and annual periods beginning on or after December 15, 2011. The adoption of the new guidance on January 1, 2012 impacted the fair value disclosures in Note 21. No. 2011-05 – Presentation of Comprehensive Income: In June 2011, FASB issued Accounting Standards Update 2011-05, Presentation of Comprehensive Income (ASU 2011-05). The ASU eliminates the option to report other comprehensive income and its components in the statement of changes in equity. An entity can elect to present the components of net income and the components of other comprehensive income either in a single continu- ous statement of comprehensive income or in two separate but consecutive statements. The ASU does not change the items that must be reported in other 59 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 comprehensive income, when an item of other comprehensive income must be reclassified to net income, or how earnings per share is calculated or presented. The new guidance became effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and must be applied retrospectively. The adoption of the new guidance impacted the presentation of the consolidated financial statements. No. 2011-08 – Intangibles – Goodwill and Other: In September 2011, FASB issued Accounting Standards Update 2011-08, Intangibles – Goodwill and Other (ASU 2011-08). The ASU allows an entity to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The new guidance became effective for annual and interim goodwill impairment tests performed for fiscal years begin- ning after December 15, 2011. The adoption of this guidance did not have an impact on the consolidated financial statements. No. 2011-12 Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05: In December 2011, FASB issued Accounting Standards Update 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12). This ASU defers only those changes in ASU 2011-05 that relate to the pre - sentation of reclassification adjustments. Entities are to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. The other requirements in ASU 2011-05 were not affected by this ASU. Further guidance surrounding the reclassification of items out of accumulated other compre - hensive income was provided by FASB in ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. No. 2012-02 Testing Indefinite-Lived Intangible Assets for Impairment: In July 2012, FASB issued Accounting Standards Update 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (ASU 2012-02). The ASU allows an entity to first assess qualitative factors to determine whether the existence of events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. The new guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this guidance is not expected to have an impact on the consolidated financial statements. No. 2013-02 Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income: In February 2013, FASB issued Accounting Standards Update 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02). The ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about these amounts. The new guidance is effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this guidance is expected to impact financial statement disclosures. 2. ORGANIZATION Park National Corporation is a bank holding company headquartered in Newark, Ohio. Through its banking subsidiary, PNB, Park is engaged in a general commercial banking and trust business, primarily in Ohio. PNB operates through eleven banking divisions with the Park National Division headquartered in Newark, Ohio, the Fairfield National Division headquartered in Lancaster, Ohio, The Park National Bank of Southwest Ohio & Northern Kentucky Division headquartered in Cincinnati, Ohio, the First-Knox National Division headquartered in Mount Vernon, Ohio, the Farmers and Savings Division headquartered in Loudonville, Ohio, the Security National Division headquartered in Springfield, Ohio, the Unity National Division headquartered in Piqua, Ohio, the Richland Bank Division headquartered in Mansfield, Ohio, the Century National Division headquartered in Zanesville, Ohio, the United Bank Division headquartered in Bucyrus, Ohio and the Second National Division headquartered in Greenville, Ohio. A wholly-owned subsidiary of Park, Guardian Financial Services Company (“GFSC”) began operating in May 1999. GFSC is a consumer finance company located in Central Ohio. Through February 16, 2012, Park operated a second banking subsidiary, Vision Bank, which was engaged in a general commercial banking business, primarily in Baldwin County, Alabama and the panhandle of Florida. VB operated through two banking divisions with the Vision Bank Florida Division headquartered in Panama City, Florida and the Vision Bank Alabama Division headquartered in Gulf Shores, Alabama. Promptly following the sale of the Vision business to Centennial, Vision surrendered its Florida banking charter to the Florida Office of Financial Regulation and became a non-bank Florida corporation. The Florida Corporation merged with and into a wholly-owned, non-bank subsidiary of Park, SEPH, with SEPH being the surviving entity. SEPH holds the remaining assets and liabilities retained by Vision subsequent to the sale. SEPH also holds other real estate owned (“OREO”) that had previously been transferred to SEPH from Vision. SEPH’s assets consist primarily of performing and nonperforming loans and other real estate owned (“OREO”). This segment represents a run off portfolio of the legacy Vision assets. All of the Ohio-based banking 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 leasing; trust services; cash management; safe deposit operations; electronic funds transfers and a variety of additional banking-related services. VB, with its two banking divisions, through February 16, 2012, provided the services mentioned above, with the exception of commercial leasing. See Note 23 of these Notes to Consolidated Financial Statements for financial information on the Corporation’s operating segments. 3. SALE OF VISION BANK BUSINESS On February 16, 2012, Park and its wholly-owned subsidiary, Vision Bank, a Florida state-chartered bank, completed their sale of substantially all of the performing loans, operating assets and liabilities associated with Vision to Centennial Bank (“Centennial”), an Arkansas state-chartered bank which is a wholly-owned subsidiary of Home BancShares, Inc. (“Home”), an Arkansas corporation, as contemplated by the previously announced Purchase and Assumption Agreement by and between Park, Vision, Home and Centennial, dated as of November 16, 2011, as amended by the First Amendment to Purchase and Assumption Agreement, dated as of January 25, 2012, and the Second Amendment to Purchase and Assumption Agreement, dated as of April 30, 2012 (the “Agreement”) for a purchase price of $27.9 million. 60 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 assets purchased and liabilities assumed by Centennial as of February 16, 2012, included the following: (In thousands) Assets sold Cash and due from banks Loans Allowance for loan losses Net loans Fixed assets Other assets Total assets sold Liabilities sold Deposits Other liabilities Total liabilities sold February 16, 2012 $ 20,711 355,750 (13,100) 342,650 12,496 4,612 $380,469 $522,856 2,049 $524,905 Subsequent to the transactions contemplated by the Agreement, Vision was left with approximately $22 million of performing loans (including mortgage loans held for sale) and non-performing loans with a fair value of $88 million. Park recorded a pre-tax gain, net of expenses directly related to the sale, of approximately $22.2 million, resulting from the transactions contemplated by the Agreement. The pre-tax gain, net of expense is summarized in the table below: (In thousands) Premium paid One-time gains Loss on sale of fixed assets Employment and severance agreements Other one-time charges, including estimates Pre-tax gain $27,913 298 (2,434) (1,610) (2,000) $22,167 Promptly following the closing of the transactions contemplated by the Agreement, Vision surrendered its Florida banking charter to the Florida Office of Financial Regulation and became a non-bank Florida corporation (the “Florida Corporation”). The Florida Corporation merged with and into a wholly-owned, non-bank subsidiary of Park, SE Property Holdings, LLC (“SEPH”), with SEPH being the surviving entity. As part of the transaction between Vision and Centennial, Park agreed to allow Centennial to “put back” up to $7.5 million aggregate principal amount of loans, which were originally included within the loans sold in the transaction. The loan put option expired on August 16, 2012, 180 days after the closing of the transaction, which was February 16, 2012. Prior to August 16, 2012, Centennial notified Park of its intent to put back approximately $7.5 million. Through December 31, 2012, Centennial had put back forty-four loans, totaling approximately $7.5 million. These forty-four loans were recorded on the books at a fair value of $4.2 million. The difference of $3.3 million was written off against the loan put liability that had previously been established in the first half of 2012. The balance sheet of SEPH as of December 31, 2012 and March 31, 2012 was as follows: (In thousands) Assets: Cash Performing loans Nonperforming loans OREO Other assets Total assets Liabilities and equity: Intercompany borrowings Other liabilities Equity Total liabilities and equity December 31, 2012 $ 7,444 3,886 55,292 21,003 16,803 $104,428 $ 93,000 838 10,590 $104,428 March 31, 2012 (unaudited) $ 16,049 16,123 82,326 28,578 18,417 $161,493 $140,000 4,623 16,870 $161,493 4. INVESTMENT SECURITIES The amortized cost and fair value of investment securities are shown in the following table. Management performs a quarterly evaluation of investment securities for any other-than-temporary impairment. During 2012, there were $54,000 in investment securities deemed to be other-than-temporarily impaired, related to an equity investment in a financial institution. During 2011, there were no investment securities deemed to be other-than-temporarily impaired. During 2010, Park recognized an other- than-temporary impairment charge of $23,000, related to an equity investment in a financial institution. Investment securities at December 31, 2012 were as follows: Gross Gross Unrealized Unrealized Amortized Cost Holding Gains Holding Losses Estimated Fair Value $ 695,655 $ 1,352 $1,280 $ 695,727 (In thousands) 2012: Securities Available-for-Sale Obligations of U.S. Treasury and other U.S. Government sponsored entities Obligations of states and political subdivisions U.S. Government sponsored entities’ asset-backed securities Other equity securities 401,882 1,137 14,067 1,085 984 19 — 447 — 1,003 415,502 2,222 Total 2012: Securities Held-to-Maturity Obligations of states and political subdivisions U.S. Government sponsored $1,099,658 $16,523 $1,727 $1,114,454 $ 570 $ 2 $ — $ 572 entities’ asset-backed securities 400,820 9,351 Total $ 401,390 $ 9,353 $ 38 38 410,133 $ 410,705 Park’s U.S. Government sponsored entity asset-backed securities consisted of 15-year mortgage-backed securities and collateralized mortgage obligations (CMOs). At December 31, 2012, the amortized cost of Park’s available-for- sale and held-to-maturity mortgage-backed securities was $277.8 million and $0.1 million, respectively. At December 31, 2012, the amortized cost of Park’s available-for-sale and held-to-maturity CMOs was $124.1 million and $400.7 million, respectively. Other investment securities (as shown on the Consolidated Balance Sheets) consist of stock investments in the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank (“FRB”). These restricted stock investments are carried at their redemption value. Park owned $59.0 million of FHLB stock and $6.9 million of FRB stock at December 31, 2012. Park owned $60.7 million of FHLB stock and $6.9 million of FRB stock at December 31, 2011. Management does not believe any individual unrealized loss as of December 31, 2012 or December 31, 2011, represents other-than-temporary impairment. The unrealized losses on debt securities are primarily the result of interest rate changes. These conditions will not prohibit Park from receiving its contractual principal and interest payments on these debt securities. The fair value of these debt securities 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 recognized in net income in the period the other-than-temporary impairment is identified. 61 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 amortized cost and estimated fair value of investments in debt securities at December 31, 2012, are shown in the following table by contractual maturity or the expected call date, except for asset-backed securities, which are shown as a single total, due to the unpredictability of the timing in principal repayments. (In thousands) Securities Available-for-Sale U.S. Treasury and other U.S. Government sponsored entities’ notes: Due within one year Due one through five years Due five through ten years Total Obligations of states and political subdivisions: Due within one year Total U.S. Government sponsored entities’ asset-backed securities: Total Securities Held-to-Maturity Obligations of states and political subdivisions: Due within one year Total U.S. Government sponsored entities’ asset-backed securities: Amortized Cost Estimated Fair Value $516,905 123,750 55,000 $695,655 $ $ 984 984 $518,257 122,912 54,558 $695,727 $ 1,003 $ 1,003 $401,882 $415,502 $ $ 570 570 $ $ 572 572 Total $400,820 $410,133 Approximately $695.7 million of Park’s securities shown in the above table as U.S. Treasury and other U.S. Government sponsored entities’ notes are callable notes. These callable securities have a final maturity of 9 to 15 years, but are shown in the table at their expected call date. Investment securities having a book value of $1,364 million and $1,548 million at December 31, 2012 and 2011, respectively, were pledged to collateralize government and trust department deposits in accordance with federal and state requirements, to secure repurchase agreements sold and as collateral for Federal Home Loan Bank (FHLB) advance borrowings. At December 31, 2012, $655 million was pledged for government and trust department deposits, $667 million was pledged to secure repurchase agreements and $41 million was pledged as collateral for FHLB advance borrowings. At December 31, 2011, $813 million was pledged for government and trust department deposits, $669 million was pledged to secure repurchase agreements and $66 million was pledged as collateral for FHLB advance borrowings. At December 31, 2012, 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. During 2012, Park had no sales of investment securities. During 2011, Park received proceeds from the sale of investment securities of $610.0 million, realizing a pre-tax gain of $28.8 million ($18.7 million after-tax). Certain of the investment securities sold in 2011 included all investment securities (AFS and HTM) held by Vision, which were sold in preparation of the sale of the business to Centennial. There were no HTM securities sold by PNB in 2011. During 2010, Park sold $460.2 million of U.S. Government sponsored entity mortgage- backed securities, realizing a pre-tax gain of $11.9 million ($7.7 million after-tax). No gross losses were realized in 2012, 2011 or 2010. The following table provides detail on investment securities with unrealized losses aggregated by investment category and length of time the individual securities had been in a continuous loss position at December 31, 2012: (In thousands) 2012: Securities Available-for-Sale Obligations of U.S. Treasury and other U.S. Government sponsored entities U.S. Government sponsored entities’ asset-backed securities Less than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $177,470 $1,280 $ — $ — $177,470 $1,280 123,631 447 — — 123,631 447 Total $301,101 $1,727 $ — $ — $301,101 $1,727 2012: Securities Held-to-Maturity U.S. Government sponsored entities’ asset-backed securities $10,120 $ 38 $ — $ — $ 10,120 $ 38 Investment securities at December 31, 2011 were as follows: Gross Gross Unrealized Unrealized Amortized Cost Holding Gains Holding Losses Estimated Fair Value $ 370,043 $ 1,614 $ — $371,657 2,616 44 — — 32 2,660 444,295 2,033 $ 801,147 $19,530 $ 32 $820,645 (In thousands) 2011: Securities Available-for-Sale Obligations of U.S. Treasury and other U.S. Government sponsored entities Obligations of states and political subdivisions U.S. Government sponsored Total 2011: Securities Held-to-Maturity Obligations of states and political subdivisions U.S. Government sponsored entities’ asset-backed securities Other equity securities 427,300 1,188 16,995 877 $ 1,992 $ 5 entities’ asset-backed securities 818,232 14,377 Total $ 820,224 $14,382 $ — 32 $ 32 $ 1,997 832,577 $834,574 The following table provides detail on investment securities with unrealized losses aggregated by investment category and length of time the individual secu- rities had been in a continuous loss position at December 31, 2011: Less than 12 Months 12 Months or Longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (In thousands) 2011: Securities Available-for-Sale Other equity securities $ — $ — $ 80 $32 $ 80 $32 2011: Securities Held-to-Maturity U.S. Government sponsored entities’ asset-backed securities $ — $ — $38,775 $32 $38,775 $32 62 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 5. LOANS The composition of the loan portfolio, by class of loan, as of December 31, 2012 and December 31, 2011 was as follows: (In thousands) 2012: Commercial, financial and agricultural* Commercial real estate* Construction real estate: SEPH commercial land and development* Remaining commercial Mortgage Installment Residential real estate: Commercial Mortgage HELOC Installment Consumer Leases Total loans 2011: Commercial, financial and agricultural* Commercial real estate* Construction real estate: Vision commercial land and development* Remaining commercial Mortgage Installment Residential real estate: Commercial Mortgage HELOC Installment Consumer Leases Total loans Loan Balance Accrued Interest Receivable $ 823,927 1,092,164 $ 2,976 3,839 15,105 115,473 26,373 8,577 392,203 1,064,787 212,905 43,750 651,930 3,128 37 331 81 33 959 1,399 892 176 2,835 29 Recorded Investment $ 826,903 1,096,003 15,142 115,804 26,454 8,610 393,162 1,066,186 213,797 43,926 654,765 3,157 $4,450,322 $13,587 $4,463,909 $ 743,797 1,108,574 $ 3,121 4,235 $ 746,918 1,112,809 31,603 156,053 20,039 9,851 395,824 953,758 227,682 51,354 616,505 2,059 31 394 64 61 1,105 1,522 942 236 2,930 43 31,634 156,447 20,103 9,912 396,929 955,280 228,624 51,590 619,435 2,102 $4,317,099 $14,684 $4,331,783 *Included within commercial, financial and agricultural loans, commercial real estate loans, and SEPH/Vision commercial land and development loans are an immaterial amount of consumer loans that are not broken out by class. Loans are shown net of deferred origination fees, costs and unearned income of $6.7 million at December 31, 2012 and $6.8 million at December 31, 2011, which is a net deferred income position in both years. Overdrawn deposit accounts of $3.0 million and $3.6 million have been reclassified to loans at December 31, 2012 and 2011, respectively. Credit Quality The following table presents the recorded investment in nonaccrual, accruing restructured, and loans past due 90 days or more and still accruing by class of loan as of December 31, 2012 and December 31, 2011: (In thousands) 2012: Commercial, financial and agricultural Commercial real estate Construction real estate: SEPH commercial land and development Remaining commercial Mortgage Installment Residential real estate: Commercial Mortgage HELOC Installment Consumer Total loans 2011: Commercial, financial and agricultural Commercial real estate Construction real estate: Vision commercial land and development Remaining commercial Mortgage Installment Residential real estate: Commercial Mortgage HELOC Installment Consumer Total loans Accruing Restructured Loans Loans Past Due 90 Days or More and Accruing Total Nonperforming Loans Nonaccrual Loans $ 17,324 40,983 $ 5,277 3,295 $ 37 1,007 $ 22,638 45,285 13,939 14,977 158 149 33,961 28,260 1,689 1,670 2,426 — 6,597 100 175 1,661 9,425 736 780 1,900 — — — — 94 950 — 54 888 13,939 21,574 258 324 35,716 38,635 2,425 2,504 5,214 $155,536 $29,946 $3,030 $188,512 $ 37,797 43,704 $ 2,848 8,274 $ — — $ 40,645 51,978 25,761 14,021 66 30 43,461 25,201 1,412 1,777 1,876 — 11,891 — — 815 4,757 — 98 — — — — — — 2,610 — 58 893 25,761 25,912 66 30 44,276 32,568 1,412 1,933 2,769 $195,106 $28,683 $3,561 $227,350 The following table provides additional information regarding those nonaccrual and accruing restructured loans that are individually evaluated for impairment and those collectively evaluated for impairment as of December 31, 2012 and December 31, 2011. (In thousands) 2012: Commercial, financial and agricultural Commercial real estate Construction real estate: SEPH commercial land and development Remaining commercial Mortgage Installment Residential real estate: Commercial Mortgage HELOC Installment Consumer Total loans Nonaccrual and Accruing Restructured Loans Loans Individually Evaluated for Impairment Loans Collectively Evaluated for Impairment $ 22,601 44,278 $ 22,587 44,278 $ 14 — 13,939 21,574 258 324 35,622 37,685 2,425 2,450 4,326 13,260 21,574 — — 35,622 — — — 18 679 — 258 324 — 37,685 2,425 2,450 4,308 $185,482 $137,339 $48,143 63 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 Management’s general practice is to proactively charge down loans individually evaluated for impairment to the fair value of the underlying collateral. At December 31, 2012 and December 31, 2011, there were $96.9 million and $83.7 million, respectively, in partial charge-offs on loans individually evaluated for impairment with no related allowance recorded and $8.2 million and $20.1 million, respectively, of partial charge-offs on loans individually evaluated for impairment that also had a specific reserve allocated. The allowance for loan losses included specific reserves related to loans individually evaluated for impairment at December 31, 2012 and 2011, of $8.3 million and $15.9 million, respectively. These loans had a recorded investment as of December 31, 2012 and 2011 of $28.8 million and $52.7 million, respectively. The average balance of loans individually evaluated for impairment was $164.2 million, $214.0 million, and $210.4 million for 2012, 2011, and 2010, respectively. Interest income on loans individually evaluated for impairment is recognized on a cash basis. The following tables present the average recorded investment and interest income recognized on loans individually evaluated for impairment for the years ended December 31, 2012 and 2011. (In thousands) Recorded Investment as of December 31, 2012 Commercial, financial and agricultural Commercial real estate Construction real estate: SEPH commercial land and development Remaining commercial Residential real estate: Commercial Consumer Total Commercial, financial and agricultural Commercial real estate Construction real estate: Vision commercial land and development Remaining commercial Residential real estate: Commercial Consumer Total $ 22,587 44,278 13,260 21,574 35,622 18 $ 40,621 51,978 24,328 25,912 44,276 20 (In thousands) Recorded Investment as of December 31, 2011 Year ended December 31, 2012 Average Recorded Investment $ 35,305 44,541 Interest Income Recognized $ 529 968 17,277 27,774 39,248 19 — 818 497 1 Year ended December 31, 2011 Average Recorded Investment $ 23,518 49,927 Interest Income Recognized $ 209 829 58,792 29,152 52,640 16 — 339 214 1 $137,339 $164,164 $2,813 $187,135 $214,045 $1,592 For the year ended December 31, 2010, the Corporation recognized a net reversal to interest income for $1.3 million, consisting of $948,000 in interest recognized at PNB and $2.2 million in interest reversed at Vision, on loans that were individually evaluated for impairment as of the end of the year. (In thousands) 2011: Commercial, financial and agricultural Commercial real estate Construction real estate: Vision commercial land and development Remaining commercial Mortgage Installment Residential real estate: Commercial Mortgage HELOC Installment Consumer Total loans Nonaccrual and Accruing Restructured Loans Loans Individually Evaluated for Impairment Loans Collectively Evaluated for Impairment $ 40,645 51,978 $ 40,621 51,978 $ 24 — 25,761 25,912 66 30 44,276 29,958 1,412 1,875 1,876 24,328 25,912 — — 44,276 — — — 20 1,433 — 66 30 — 29,958 1,412 1,875 1,856 $223,789 $187,135 $36,654 All of the loans individually evaluated for impairment were evaluated using the fair value of the collateral or present value of expected future cash flows as the measurement method. The following table presents loans individually evaluated for impairment by class of loan as of December 31, 2012 and December 31, 2011. (In thousands) 2012: With no related allowance recorded Commercial, financial and agricultural Commercial real estate Construction real estate: SEPH commercial land and development Remaining commercial Residential real estate: Commercial Consumer With an allowance recorded Commercial, financial and agricultural Commercial real estate Construction real estate: SEPH commercial land and development Remaining commercial Residential real estate: Commercial Consumer Total 2011: With no related allowance recorded Commercial, financial and agricultural Commercial real estate Construction real estate: Vision commercial land and development Remaining commercial Residential real estate: Commercial Consumer With an allowance recorded Commercial, financial and agricultural Commercial real estate Construction real estate: Vision commercial land and development Remaining commercial Residential real estate: Commercial Consumer Total Unpaid Principal Balance Recorded Investment Allowance for Loan Losses Allocated $ 23,782 56,258 $ 14,683 35,097 $ — — 56,075 29,328 39,918 18 12,268 11,412 1,271 8,071 12,740 14,093 31,957 18 7,904 9,181 520 7,481 3,944 — $242,345 3,665 — $137,339 — — — — 3,180 1,540 — 2,277 1,279 — $ 8,276 $ 23,164 58,242 $ 18,098 41,506 $ — — 54,032 33,319 49,341 — 23,719 12,183 20,775 9,711 17,786 18,372 38,686 — 22,523 10,472 6,542 7,540 6,402 20 $290,908 5,590 20 $187,135 — — — — 5,819 4,431 1,540 1,874 2,271 — $15,935 64 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 table presents the aging of the recorded investment in past due loans as of December 31, 2012 and December 31, 2011 by class of loan. Past Due Nonaccrual Loans and Loans Past Due 90 Days or More and Accruing* Accruing Loans Past Due 30–89 Days Total Past Due Total Current Total Recorded Investment $ 6,251 2,212 $11,811 26,355 $ 18,062 $ 808,841 $ 826,903 1,096,003 1,067,436 28,567 686 3,652 171 135 1,163 11,948 620 563 12,924 — 11,314 5,838 85 40 5,917 17,370 309 787 2,688 — 12,000 9,490 256 175 7,080 29,318 929 1,350 15,612 — 3,142 106,314 26,198 8,435 386,082 1,036,868 212,868 42,576 639,153 3,157 15,142 115,804 26,454 8,610 393,162 1,066,186 213,797 43,926 654,765 3,157 (In thousands) December 31, 2012: Commercial, financial and agricultural Commercial real estate Construction real estate: SEPH commercial land and development Remaining commercial Mortgage Installment Residential real estate: Commercial Mortgage HELOC Installment Consumer Leases Total loans $40,325 $82,514 $122,839 $4,341,070 $4,463,909 *Includes $3.0 million of loans past due 90 days or more and accruing. The remaining are past due, nonaccrual loans. Past Due Nonaccrual Loans and Loans Past Due 90 Days or More and Accruing* Accruing Loans Past Due 30–89 Days Total Past Due Total Current Total Recorded Investment $ 3,106 2,632 $11,308 21,798 $ 14,414 $ 732,504 $ 746,918 1,112,809 1,088,379 24,430 — 99 76 421 1,545 15,879 1,015 1,549 11,195 — 19,235 7,839 — 8 10,097 20,614 436 1,136 2,192 — 19,235 7,938 76 429 11,642 36,493 1,451 2,685 13,387 — 12,399 148,509 20,027 9,483 385,287 918,787 227,173 48,905 606,048 2,102 31,634 156,447 20,103 9,912 396,929 955,280 228,624 51,590 619,435 2,102 (In thousands) December 31, 2011: Commercial, financial and agricultural Commercial real estate Construction real estate: Vision commercial land and development Remaining commercial Mortgage Installment Residential real estate: Commercial Mortgage HELOC Installment Consumer Leases Total loans $37,517 $94,663 $132,180 $4,199,603 $4,331,783 *Includes $3.6 million of loans past due 90 days or more and accruing. The remaining are past due, nonaccrual loans. Credit Quality Indicators Management utilizes past due information as a credit quality indicator across the loan portfolio. Past due information as of December 31, 2012 and December 31, 2011 is included in the tables above. The past due information is the primary credit quality indicator within the following classes of loans: (1) mortgage loans and installment loans in the construction real estate segment; (2) mortgage loans, HELOC and installment loans in the residential real estate segment; and (3) consumer loans. The primary credit indicator for commercial loans is based on an internal grading system that grades all commercial loans from 1 to 8. Credit grades are continuously monitored by the respective loan officer and adjustments are made when appropriate. A grade of 1 indicates little or no credit risk and a grade of 8 is considered a loss. Commercial loans with grades of 1 to 4 (pass-rated) are considered to be of acceptable credit risk. Commercial loans graded a 5 (special mention) are considered to be watch list credits and a higher loan loss reserve per - centage is allocated to these loans. Loans classified as special mention have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Commercial loans graded 6 (substandard), also considered watch list credits, are considered to represent higher credit risk and, as a result, a higher loan loss reserve percentage is allocated to these loans. Loans classified as substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Commercial loans that are graded a 7 (doubtful) are shown as nonaccrual and Park generally charges these loans down to their fair value by taking a partial charge-off or recording a specific reserve. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly question- able and improbable. Certain 6-rated loans and all 7-rated loans are included within the impaired category. A loan is deemed impaired when management determines the borrower’s ability to perform in accordance with the contractual loan agreement is in doubt. Any commercial loan graded an 8 (loss) is completely charged off. The tables below present the recorded investment by loan grade at December 31, 2012 and December 31, 2011 for all commercial loans: (In thousands) 5 Rated 6 Rated Impaired Pass Rated Recorded Investment December 31, 2012: Commercial, financial and agricultural Commercial real estate Construction real estate: SEPH commercial land and development Remaining commercial Residential real estate: Commercial Leases Total commercial loans December 31, 2011: Commercial, financial and agricultural Commercial real estate Construction real estate: Vision commercial land and development Remaining commercial Residential real estate: Commercial Leases Total commercial loans $ 9,537 25,616 $10,874 3,960 $ 22,601 44,278 $ 783,891 1,022,149 $ 826,903 1,096,003 411 6,734 8,994 — — — 2,053 — 13,939 21,574 35,622 — 792 87,496 346,493 3,157 15,142 115,804 393,162 3,157 $51,292 $16,887 $138,014 $2,243,978 $2,450,171 $11,785 37,445 $ 7,628 10,460 $ 40,645 51,978 $ 686,860 1,012,926 $ 746,918 1,112,809 3,102 6,982 17,120 — — 8,311 3,785 — 25,761 25,912 44,276 — 2,771 115,242 331,748 2,102 31,634 156,447 396,929 2,102 $76,434 $30,184 $188,572 $2,151,649 $2,446,839 Troubled Debt Restructuring (TDRs) Management classifies loans as TDRs when a borrower is experiencing financial difficulties and Park has granted a concession. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of the borrower’s debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy. Management’s policy is to modify loans by extending the term or by granting a temporary or permanent contractual interest rate below the market rate, not by forgiving debt. Certain loans which were modified during the period ended December 31, 2012 did not meet the definition of a TDR as the modification was a delay in a payment that was considered to be insignificant. Management considers a forbearance period of up to three months or a delay in payment of up to 30 days to be insignificant. TDRs may be classified as accruing if the bor- rower has been current for a period of at least six months with respect to loan payments and management expects that the borrower will be able to continue 65 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 to make payments in accordance with the terms of the restructured note. Management reviews all accruing TDRs quarterly to ensure payments continue to be made in accordance with the modified terms. At December 31, 2012 and December 31, 2011, there were $84.7 million and $100.4 million, respectively, of TDRs included in nonaccrual loan totals. At December 31, 2012 and December 31, 2011, $52.6 million and $79.9 million of these nonaccrual TDRs were performing in accordance with the terms of the restructured note. As of December 31, 2012 and December 31, 2011, there were $29.9 million and $28.7 million, respectively, of TDRs included in accruing loan totals. Management will continue to review the restructured loans and may determine it appropriate to move certain non - accrual TDRs to accrual status in the future. At December 31, 2012 and December 31, 2011, Park had commitments to lend $5.0 million and $4.0 million, respectively, of additional funds to borrowers whose terms had been modified in a TDR. The specific reserve related to TDRs at December 31, 2012 and December 31, 2011 was $5.6 million and $9.1 million respectively. Modifications made in 2011 and 2012 were largely the result of renewals, extending the maturity date of the loan, at terms consistent with the original note. These modifications were deemed to be TDRs primarily due to Park’s conclusion that the borrower would likely not have qualified for similar terms through another lender. Many of the modifications deemed to be TDRs were previously identified as impaired loans, and thus were also previously evaluated for impairment under ASC 310. Additional specific reserves of $2.3 million were recorded during the twelve month period ending December 31, 2012, as a result of TDRs identified in the 2012 year. The terms of certain other loans were modified during the year ended December 31, 2012 that did not meet the definition of a TDR. Modified substandard commercial loans which did not meet the definition of a TDR had a total recorded investment as of December 31, 2012 of $800,000. The modification of these loans: (1) involved a modification of the terms of a loan to a borrower who was not experiencing financial difficulties, (2) resulted in a delay in a payment that was considered to be insignificant, or (3) resulted in Park obtaining additional collateral or guarantees that improved the likelihood of the ultimate collection of the loan such that the modification was deemed to be at market terms. Modified consumer loans which did not meet the definition of a TDR had a total recorded investment as of December 31, 2012 of $26.5 million. Many of these loans were to borrowers who were not experiencing financial difficulties but who were looking to reduce their cost of funds. The following tables detail the number of contracts modified as TDRs during the period ended December 31, 2012 and December 31, 2011 as well as the recorded investment of these contracts at December 31, 2012 and December 31, 2011. The recorded investment pre- and post-modification is generally the same. (In thousands) December 31, 2012: Commercial, financial and agricultural Commercial real estate Construction real estate: SEPH commercial land and development Remaining commercial Mortgage Installment Residential real estate: Commercial Mortgage HELOC Installment Consumer Total loans Number of Contracts Accruing Nonaccrual Recorded Investment 44 25 12 15 2 6 18 129 46 57 600 954 $ 2,843 2,648 $ 1,499 3,611 $ 4,342 6,259 — 531 99 175 1,139 4,279 736 761 1,899 1,301 6,579 85 78 1,842 5,776 58 508 670 1,301 7,110 184 253 2,981 10,055 794 1,269 2,569 $15,110 $22,007 $37,117 66 During 2012, as a result of general guidance issued by the Office of the Comptroller of the Currency (“OCC”), $12.5 million of consumer loans (includes mortgage, HELOC and installment loans in the residential real estate segment and those loans in the consumer loan segment) were identified as troubled debt restructurings (“TDR”) whereby the borrower’s obligation to PNB has been discharged in bankruptcy and the borrower has not reaffirmed the debt. These newly identified TDRs are included in the current year modified loan totals above, within the residential real estate and consumer segments, although certain of these modifications occurred prior to January 1, 2012. (In thousands) December 31, 2011: Commercial, financial and agricultural Commercial real estate Construction real estate: Vision commercial land and development Remaining commercial Mortgage Installment Residential real estate: Commercial Mortgage HELOC Installment Consumer Total loans Number of Contracts Accruing Nonaccrual Recorded Investment 56 23 12 24 1 — 30 37 2 7 1 $ 2,842 3,332 $21,258 3,831 $24,100 7,163 — 11,890 — — 500 3,234 — 95 — 4,268 6,712 66 — 29,095 2,691 56 126 18 4,268 18,602 66 — 29,595 5,925 56 221 18 193 $21,893 $68,121 $90,014 Of those loans listed in the tables above which were modified during the twelve month period ended December 31, 2012, $6.5 million were on nonaccrual status as of December 31, 2011 but were not classified as TDRs. Of those loans which were modified during the twelve month period ended December 31, 2011, $29.9 million were on nonaccrual status as of December 31, 2010 but were not classified as TDRs. The following table presents the recorded investment in financing receivables which were modified as troubled debt restructurings within the previous 12 months and for which there was a payment default during the 12 month period ended December 31, 2012 and December 31, 2011. For this table, a loan is considered to be in default when it becomes 30 days contractually past due under modified terms. The additional allowance for loan loss resulting from the defaults on TDR loans was immaterial. (In thousands) Commercial, financial and agricultural Commercial real estate Construction real estate: SEPH/Vision commercial land and development Remaining commercial Mortgage Installment Residential real estate: Commercial Mortgage HELOC Installment Consumer Leases Total loans 12 months ended December 31, 2012 12 months ended December 31, 2011 Number of Contracts Recorded Investment Number of Contracts Recorded Investment 8 10 7 4 1 1 1 39 5 9 123 — 208 $ 244 2,113 970 1,476 85 27 16 2,863 70 272 743 — $8,879 19 5 5 4 1 — 10 7 1 2 — — 54 $ 3,878 2,353 3,406 1,277 66 — 20,195 1,193 50 44 — — $32,462 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 Of the $8.9 million in modified TDRs which defaulted during the twelve months ended December 31, 2012, $606,000 were accruing loans and $8.3 million were nonaccrual loans. Of the $32.5 million in modified TDRs which defaulted during the twelve months ended December 31, 2011, $3.5 million were accruing loans and $29.0 million were nonaccrual loans. $4.4 million was related to Vision Bank’s executive officers, directors and related entities and is not included in the December 31, 2012 total. During 2012, $4.4 million of new loans were made to these executive officers and directors and repayments totaled $13.6 million. New loans and repayments for 2011 were $4.9 million and $5.5 million, respectively. Management transfers a loan to other real estate owned at the time that Park takes constructive ownership of the asset. At December 31, 2012 and 2011, Park had $35.7 million and $42.3 million, respectively, of other real estate owned. Certain of the Corporation’s executive officers, directors and related entities of directors are loan customers of PNB or were loan customers of Vision Bank in 2011. As of December 31, 2012 and 2011, loans and lines of credit aggregating approximately $39.4 million and $53.0 million, respectively, were outstanding to such parties. Of the amount outstanding at December 31, 2011, 6. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is that amount management believes is adequate to absorb probable incurred credit losses in the loan portfolio based on man- agement’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 opera- tions based on management’s periodic evaluation of these and other pertinent factors as discussed within Note 1 of these Notes to Consolidated Financial Statements. The activity in the allowance for loan losses for the years ended December 31, 2012, December 31, 2011, and December 31, 2010 is summarized in the following tables. (In thousands) December 31, 2012 Allowance for credit losses: Beginning balance Charge-offs Recoveries Net charge-offs Provision Ending balance December 31, 2011 Allowance for credit losses: Beginning balance Transfer of loans at fair value Transfer of allowance to held for sale (1) Charge-offs Recoveries Net charge-offs Provision Ending balance Commercial, Financial and Agricultural Commercial Real Estate Construction Real Estate Residential Real Estate Consumer Leases Total $16,950 26,847 1,066 $25,781 24,466 $15,635 $11,555 2 1,184 18,350 1,402 $16,948 23,529 $16,950 $15,539 10,454 783 $ 9,671 5,868 $11,736 $24,369 150 4,327 23,063 1,825 $21,238 16,885 $15,539 $14,433 9,985 2,979 $ 7,006 (586) $ 6,841 $70,462 63 1,998 64,166 1,463 $62,703 8,735 $14,433 $15,692 8,607 5,559 $ 3,048 2,115 $14,759 $30,259 4 5,450 20,691 1,719 $18,972 9,859 $15,692 $5,830 5,375 2,555 $2,820 3,556 $6,566 $6,925 — 141 7,612 2,385 $5,227 4,273 $5,830 $ — — — $ — — $ — $ 5 — — — 4 $ (4) (9) $ — $ 68,444 61,268 12,942 $ 48,326 35,419 $ 55,537 $143,575 219 13,100 133,882 8,798 $125,084 63,272 $ 68,444 (1) Transfer of allowance to held for sale was allocated on a pro-rata basis based on the outstanding balance of the loans held for sale. Loans collectively evaluated for impairment in the following tables include all performing loans at December 31, 2012 and December 31, 2011, as well as nonperforming loans internally classified as consumer loans. Nonperforming consumer loans are not typically individually evaluated for impairment, but receive a portion of the statistical allocation of the allowance for loan losses. Loans individually evaluated for impairment include all impaired loans inter- nally classified as commercial loans at December 31, 2012 and 2011, which are evaluated for impairment in accordance with U.S. GAAP (see Note 1 of these Notes to Consolidated Financial Statements). (In thousands) Allowance for loan losses: Beginning balance Charge-offs: Commercial, financial and agricultural Commercial real estate Construction real estate Residential real estate Consumer Lease financing Total charge-offs Recoveries: Commercial, financial and agricultural Commercial real estate Construction real estate Residential real estate Consumer Lease financing Total recoveries Net charge-offs Provision for loan losses Ending balance 2010 $ 116,717 8,484 7,748 23,308 18,401 8,373 — 66,314 1,237 850 813 1,429 1,763 — 6,092 60,222 87,080 $ 143,575 67 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 composition of the allowance for loan losses at December 31, 2012 and 2011 was as follows: (In thousands) December 31, 2012 Allowance for loan losses: Ending allowance balance attributed to loans Individually evaluated for impairment Collectively evaluated for impairment Total ending allowance balance Loan balance: Loans individually evaluated for impairment Loans collectively evaluated for impairment Total ending loan balance Allowance for loan losses as a percentage of loan balance: Loans individually evaluated for impairment Loans collectively evaluated for impairment Total ending loan balance Recorded investment: Loans individually evaluated for impairment Loans collectively evaluated for impairment Total ending loan balance December 31, 2011 Allowance for loan losses: Ending allowance balance attributed to loans Individually evaluated for impairment Collectively evaluated for impairment Total ending allowance balance Loan balance: Loans individually evaluated for impairment Loans collectively evaluated for impairment Total ending loan balance Allowance for loan losses as a percentage of loan balance: Loans individually evaluated for impairment Loans collectively evaluated for impairment Total ending loan balance Recorded investment: Loans individually evaluated for impairment Loans collectively evaluated for impairment Total ending loan balance Commercial, Financial and Agricultural Commercial Real Estate Construction Real Estate Residential Real Estate Consumer Leases Total $ 3,180 12,455 $ 15,635 $ 22,523 801,404 $823,927 14.12% 1.55% 1.90% $ 22,587 804,316 $826,903 $ 5,819 11,131 $ 16,950 $ 40,621 703,176 $743,797 14.33% 1.58% 2.28% $ 40,621 706,297 $746,918 $ $ 1,540 10,196 11,736 $ 44,267 1,047,897 $1,092,164 3.48% 0.97% 1.07% $ 44,278 1,051,725 $1,096,003 $ 4,431 11,108 $ 15,539 $ 51,978 1,056,596 $1,108,574 8.52% 1.05% 1.40% $ 51,978 1,060,831 $1,112,809 $ 2,277 4,564 $ 6,841 $ 34,814 130,714 $165,528 6.54% 3.49% 4.13% $ 34,834 131,176 $166,010 $ 3,414 11,019 $ 14,433 $ 50,240 167,306 $217,546 6.80% 6.59% 6.63% $ 50,240 167,856 $218,096 $ $ 1,279 13,480 14,759 $ 35,616 1,678,029 $1,713,645 3.59% 0.80% 0.86% $ 35,622 1,681,449 $1,717,071 $ 2,271 13,421 $ 15,692 $ 44,276 1,584,342 $1,628,618 5.13% 0.85% 0.96% $ 44,276 1,588,147 $1,632,423 $ — 6,566 $ 6,566 $ 18 651,912 $651,930 — 1.01% 1.01% $ 18 654,747 $654,765 $ — 5,830 $ 5,830 $ 20 616,485 $616,505 — 0.95% 0.95% $ 20 619,415 $619,435 $ — — $ — $ — 3,128 $3,128 — — — $ — 3,157 $3,157 $ — — $ — $ — 2,059 $2,059 — — — $ — 2,102 $2,102 $ $ 8,276 47,261 55,537 $ 137,238 4,313,084 $4,450,322 6.03% 1.10% 1.25% $ 137,339 4,326,570 $4,463,909 $ 15,935 52,509 $ 68,444 $ 187,135 4,129,964 $4,317,099 8.52% 1.27% 1.59% $ 187,135 4,144,648 $4,331,783 7. PREMISES AND EQUIPMENT The major categories of premises and equipment and accumulated depreciation are summarized as follows: December 31 (In thousands) Land Buildings Equipment, furniture and fixtures Leasehold improvements Total Less accumulated depreciation Premises and equipment, net 2012 $ 17,354 69,091 61,679 4,009 $152,133 (98,382) $53,751 2011 $ 18,151 69,690 59,037 4,283 $151,161 (97,420) $ 53,741 Depreciation expense amounted to $7.0 million, $7.6 million and $7.1 million for the years ended December 31, 2012, 2011 and 2010, respectively. The Corporation leases certain premises and equipment accounted for as oper- ating 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) 2013 2014 2015 2016 2017 Thereafter Total 68 $1,394 1,079 845 536 390 678 $4,922 Rent expense for Park was $1.9 million, $2.4 million and $2.6 million, for the years ended December 31, 2012, 2011 and 2010, respectively. 8. DEPOSITS At December 31, 2012 and 2011, non-interest bearing and interest bearing deposits were as follows: December 31 (In thousands) Non-interest bearing Interest bearing Total 2012 $1,137,290 3,578,742 $4,716,032 2011 $ 995,733 3,469,381 $4,465,114 At December 31, 2012, the maturities of time deposits were as follows: (In thousands) 2013 2014 2015 2016 2017 After 5 years Total $ 927,505 265,643 92,408 88,655 75,207 1,006 $1,450,424 At December 31, 2012, Park had approximately $16.8 million of deposits received from executive officers, directors, and their related interests. 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 Maturities of time deposits over $100,000 as of December 31, 2012 were: December 31 (In thousands) 3 months or less Over 3 months through 6 months Over 6 months through 12 months Over 12 months Total 9. SHORT-TERM BORROWINGS Short-term borrowings were as follows: $212,188 113,169 141,244 190,664 $657,265 December 31 (In thousands) 2012 2011 Securities sold under agreements to repurchase and federal funds purchased Federal Home Loan Bank advances Total short-term borrowings $244,168 100,000 $344,168 $240,594 23,000 $263,594 The outstanding balances for all short-term borrowings as of December 31, 2012 and 2011 and the weighted-average interest rates as of and paid during each of the years then ended were as follows: (In thousands) 2012: Ending balance Highest month-end balance Average daily balance Weighted-average interest rate: As of year-end Paid during the year 2011: 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 $244,168 302,946 257,341 0.23% 0.26% $240,594 265,412 246,145 0.29% 0.30% $100,000 100,000 1,320 0.38% 0.28% $ 23,000 232,000 51,392 0.04% 0.18% $ — — — — — $ — — — — — At December 31, 2012 and 2011, FHLB advances were collateralized by invest- ment 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 of these Notes to Consolidated Financial Statements for the amount of investment securities that are pledged. At December 31, 2012 and 2011, $2,053 million and $2,231 million, respectively, of commercial real estate and residential mortgage loans were pledged under a blanket agreement to the FHLB by Park’s subsidiary banks. Note 4 states that $667 million and $669 million of securities were pledged to secure repurchase agreements as of December 31, 2012 and 2011, respectively. Park’s repurchase agreements in short-term borrowings consist of customer accounts and securities which are pledged on an individual secu- rity basis. Park’s repurchase agreements with a third-party financial institution are classified in long-term debt. See Note 10 of these Notes to Consolidated Financial Statements. 10. LONG-TERM DEBT Long-term debt is listed below: December 31 (In thousands) 2012 2011 Outstanding Balance Average Rate Outstanding Balance Average Rate Total Federal Home Loan Bank advances by year of maturity: 2012 2013 2014 2015 2016 2017 Thereafter Total $ — 75,500 75,500 51,000 1,000 51,000 252,259 $506,259 Total broker repurchase agreements by year of maturity: 2016 2017 Total $ — 300,000 $300,000 Other borrowings by year of maturity: 2012 2013 2014 2015 2016 2017 Thereafter Total Total combined long-term debt by year of maturity: 2012 2013 2014 2015 2016 2017 Thereafter Total $ $ — — — — — — — — $ — 75,500 75,500 51,000 1,000 351,000 252,259 $806,259 Prepayment penalty (24,601) — 1.11% 1.61% 2.00% 2.05% 3.37% 2.94% 2.42% — 1.75% 1.75% — — — — — — — — — 1.11% 1.61% 2.00% 2.05% 1.99% 2.94% 2.17% — $ 15,500 75,500 75,500 51,000 1,000 51,000 252,314 $521,814 $ 75,000 225,000 $300,000 $ 69 74 81 87 94 102 861 $ 1,368 $ 15,569 75,574 75,581 51,087 76,094 276,102 253,175 $823,182 — 2.09% 1.11% 1.61% 2.00% 2.05% 3.37% 2.94% 2.41% 4.05% 4.03% 4.04% 7.97% 7.97% 7.97% 7.97% 7.97% 7.97% 7.97% 7.97% 2.12% 1.11% 1.62% 2.01% 4.03% 3.91% 2.96% 3.01% — Total long-term debt $781,658 2.87% $823,182 3.01% On November 30, 2012, Park restructured $300 million in repurchase agreements at a rate of 1.75%. As part of this restructure, Park paid a prepay- ment penalty of $25 million. The penalty is being amortized as an adjustment to interest expense over the remaining term of the repurchase agreements using the effective interest method, resulting in an effective interest rate of 3.4%. Of the $25 million prepayment penalty, $24.6 million remained to be amortized as of December 31, 2012. The remaining amortization will be $4.8 million in 2013, $4.9 million in 2014, $5.0 million in 2015, $5.1 million in 2016 and $4.8 million in 2017. Other borrowings as of December 31, 2011 consisted of a capital lease obligation of $1.4 million pertaining to an arrangement that was part of the acquisition of Vision on March 9, 2007 and its associated minimum lease payments. This capital lease was assumed by Centennial Bank in connection with their acquisition of Vision’s branches on February 16, 2012. Park had approximately $252.3 million of long-term debt at December 31, 2012 with a contractual maturity longer than five years. However, approximately $250 million of this debt is callable by the issuer in 2013. At December 31, 2012 and 2011, FHLB advances were collateralized by investment securities owned by the Corporation’s banking divisions and by various loans pledged under a blanket agreement by the Corporation’s banking divisions. See Note 4 of these Notes to Consolidated Financial Statements for the amount of investment securities that are pledged. See Note 9 of these Notes to Consolidated Financial Statements for the amount of commercial real estate and residential mortgage loans that are pledged to the FHLB. 69 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 11. SUBORDINATED DEBENTURES/NOTES 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 notes, which carry a floating 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 notes in December 2035, or upon earlier redemption as provided in the notes. Park has the right to redeem the notes purchased by Trust I in whole or in part, on or after December 30, 2010. As specified in the indenture, if the notes are redeemed prior to maturity, the redemption price will be the principal amount, plus any unpaid accrued interest. In accordance with GAAP, the Trust is not consolidated with Park’s financial statements, but rather the subordinated notes are reflected as a liability. On December 28, 2007, 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 million, which matures on December 29, 2017. The Subordinated Debenture 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 Debenture accrues and pays 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 that date, PNB may prepay, without penalty, all or a portion of the principal amount outstanding in a minimum amount of $5 million or any larger multiple of $5 million. The three-month LIBOR rate was 0.31% at December 31, 2012. 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 (see Note 19 of these Notes to Consolidated Financial Statements). This Subordinated Debenture was prepaid in full on December 31, 2012. On December 23, 2009, Park entered into a Note Purchase Agreement, dated December 23, 2009, with 38 purchasers (the “2009 Purchasers”). Under the terms of the Note Purchase Agreement, the 2009 Purchasers purchased from Park an aggregate principal amount of $35.25 million of 10% Subordinated Notes due December 23, 2019 (the “2009 Notes”). The 2009 Notes are intended to qualify as Tier 2 capital under applicable rules and regulations of the Federal Reserve Board. The 2009 Notes may not be prepaid in any amount prior to December 23, 2014; however, subsequent to that date, Park may prepay, without penalty, all or a portion of the principal amount outstand- ing. Of the $35.25 million in 2009 Notes, $14.05 million were purchased by related parties. On April 20, 2012, Park entered into a Note Purchase Agreement, dated April 20, 2012 (the “2012 Purchase Agreement”), with 56 purchasers (the “2012 Purchasers”). Under the terms of the 2012 Purchase Agreement, the 2012 Purchasers purchased from Park an aggregate principal amount of $30 million of 7% Subordinated Notes Due April 20, 2022 (the “2012 Notes”). The 2012 Notes are intended to qualify as Tier 2 Capital under applicable rules and regulations of the Federal Reserve Board. Each 2012 Note was purchased at 70 a purchase price of 100% of the principal amount thereof. The 2012 Notes may not be prepaid by Park prior to April 20, 2017. From and after April 20, 2017, Park may prepay all, or from time to time, any part of the 2012 Notes at 100% of the principal amount (plus accrued interest) without penalty, subject to any requirement under Federal Reserve Board regulations to obtain prior approval from the Federal Reserve Board before making any prepayment. 12. STOCK OPTION PLAN 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, 2012, 1,500,000 common shares 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 fair value of each incentive stock option granted is estimated on the date of grant using a closed form option valuation (Black-Scholes) model. 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 activity in the 2005 Plan is listed in the following table for 2012: January 1, 2012 Granted Exercised Forfeited/Expired December 31, 2012 Number 74,020 — — 74,020 — Exercisable at year end Weighted-average remaining contractual life Aggregate intrinsic value Weighted Average Exercise Price per Share $ 74.96 — — 74.96 $ — — N/A N/A There were no options granted or exercised in 2012, 2011 or 2010. Additionally, no expense was recognized for 2012, 2011 or 2010. 13. BENEFIT PLANS The Corporation has a noncontributory Defined Benefit Pension Plan (the “Pension Plan”) covering substantially all of the employees of the Corporation and its subsidiaries. The Pension 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. In January 2011, management contributed $14 million, of which $12.4 million was deductible on the 2010 tax return and $1.6 million on the 2011 tax return. In January 2012, management contributed $15.9 million, of which $14.3 million was deductible on the 2011 tax return and $1.6 million will be deductible on the 2012 tax return. In January 2013, management con- tributed $12.6 million, of which $11.0 million will be deductible on the 2012 tax return and $1.6 million will be deductible on the 2013 tax return. The entire $11.0 million deductible on the 2012 tax return is reflected as part of the deferred taxes at December 31, 2012. See Note 14 of these Notes to Consolidated Financial Statements. Park does not expect to make any additional contributions to the Pension Plan in 2013. 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 Using an accrual measurement date of December 31, 2012 and 2011, plan assets and benefit obligation activity for the Pension Plan are listed below: The following table shows ending balances of accumulated other compre - hensive loss at December 31, 2012 and 2011. (In thousands) 2012 2011 (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 loss Benefits paid Projected benefit obligation at the end of measurement period Funded status at end of year $ 96,581 11,256 15,900 (5,969) $117,768 $ 81,507 4,271 4,048 13,796 (5,969) $85,464 1,813 14,000 (4,696) $96,581 $74,164 4,557 3,967 3,515 (4,696) $ 97,653 $81,507 (fair value of plan assets less benefit obligation) $ 20,115 $15,074 The asset allocation for the Pension Plan as of each measurement date, by asset category, was as follows: Asset Category Equity securities Fixed income and cash equivalents Total Target Allocation 50% – 100% remaining balance — 2012 83% 17% 100% 2011 80% 20% 100% Percentage of Plan Assets The investment policy, as established by the Retirement Plan Committee, is to invest assets according to 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 was 7.5% in 2012 and 7.75% in 2011. This return was 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 Pension Plan was $85.1 million and $71.4 million at December 31, 2012 and 2011, respectively. On November 17, 2009, the Park Pension Plan completed the purchase of 115,800 common shares of Park for $7.0 million or $60.45 per share. At December 31, 2012 and 2011, the fair value of the 115,800 common shares held by the Pension Plan was $7.5 million, or $64.63 per share and $7.5 million, or $65.06 per share, respectively. The weighted average assumptions used to determine benefit obligations at December 31, 2012, 2011 and 2010 were as follows: Discount rate Rate of compensation increase 2012 4.47% 3.00% 2011 5.18% 3.00% 2010 5.50% 3.00% The estimated future pension benefit payments reflecting expected future service for the next ten years are shown below (in thousands): 2013 2014 2015 2016 2017 2018 – 2022 Total $ 6,431 6,163 6,623 6,619 7,233 41,653 $74,722 Prior service cost Net actuarial loss Total Deferred taxes 2012 $ (54) (41,691) (41,745) 14,611 2011 $ (74) (32,163) (32,237) 11,283 Accumulated other comprehensive loss $(27,134) $(20,954) Using an actuarial measurement date of December 31 for 2012, 2011 and 2010, components of net periodic benefit cost and other amounts recognized in other comprehensive loss were as follows: (In thousands) 2012 2011 2010 Components of net periodic benefit cost and other amounts recognized in other comprehensive loss Service cost Interest cost Expected return on plan assets Amortization of prior service cost Recognized net actuarial loss Net periodic benefit cost Change to net actuarial (loss)/gain for the period Amortization of prior service cost Amortization of net loss Total recognized in other comprehensive (loss)/income Total recognized in net benefit cost $ (4,271) (4,048) 8,742 (20) (1,708) $ (1,305) $(11,236) 20 1,708 $ (4,557) (3,967) 7,543 (19) (1,411) $ (2,411) $ (9,164) 19 1,411 $(3,671) (3,583) 5,867 (22) (1,079) $(2,488) $(4,835) 22 1,079 (9,508) (7,734) (3,734) and other comprehensive (loss)/income $(10,813) $(10,145) $(6,222) The estimated prior service costs for the Pension Plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year is $20,000. The estimated net actuarial (loss) expected to be recognized in the next fiscal year is $(2.7) million. The weighted average assumptions used to determine net periodic benefit cost for the years ended December 31, 2012, 2011 and 2010 are listed below: Discount rate Rate of compensation increase Expected long-term return on plan assets 2012 5.18% 3.00% 7.75% 2011 5.50% 3.00% 7.75% 2010 6.00% 3.00% 7.75% Management believes the 7.75% expected long-term rate of return is an appropriate assumption given the performance of the S&P 500 Index over the most recent 10 years, which management believes is a good indicator of future performance of Pension Plan assets. The Pension Plan maintains cash in a Park National Bank savings account. The Pension Plan cash balance was $1.3 million at December 31, 2012. GAAP defines fair value as the price that would be received by Park for an asset or paid by Park to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date, using the most advan - tageous market for the asset or liability. The fair values of equity securities, consisting of mutual fund investments and common stock (U.S. large cap) held by the Pension Plan and the fixed income and cash equivalents, are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs). The market value of Pension Plan assets at December 31, 2012 was $117.8 million. At December 31, 2012, $98.8 million of equity investments and cash in the Pension Plan were categorized as Level 1 inputs; $18.9 million of plan investments in corporate (U.S. large cap) and U.S. Government sponsored entity bonds were categorized as Level 2 inputs, as fair value is based on quoted market prices of comparable instru- ments; and no investments were categorized as Level 3 inputs. The market value of Pension Plan assets was $96.6 million at December 31, 2011. At December 31, 2011, $83.2 million of investments in the Pension Plan were categorized as Level 1 inputs; $13.4 million were categorized as Level 2; and no investments were categorized as Level 3. 71 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 Corporation has a voluntary salary deferral plan covering substantially all of the employees of the Corporation and its subsidiaries. Eligible employees may contribute a portion of their compensation subject to a maximum statutory limitation. The Corporation provides a matching contribution established annually by the Corporation. Contribution expense for the Corporation was $1.0 million, $1.1 million, and $1.0 million for 2012, 2011 and 2010, 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. The accrued benefit cost for the SERP totaled $7.4 million and $7.2 million for 2012 and 2011, respectively. The expense for the Corporation was $0.3 million for 2012, $0.6 million for 2011 and $0.5 million for 2010. 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 (in thousands) Deferred tax assets: Allowance for loan losses Accumulated other comprehensive loss – interest rate swap Accumulated other comprehensive loss – pension plan Intangible assets Deferred compensation OREO devaluations Partnership adjustments Other Loans held for sale fair value adjustment Tax credit carry-forwards 2012 2011 $19,438 $23,956 — 296 14,611 697 3,750 4,855 3,329 2,973 — — 11,283 1,523 3,733 6,364 2,016 2,515 4,585 1,269 Total deferred tax assets $49,653 $57,540 Deferred tax liabilities: Accumulated other comprehensive income – unrealized gains on securities Deferred investment income Pension plan Mortgage servicing rights Other Total deferred tax liabilities Net deferred tax assets $ 5,178 10,199 25,517 2,717 646 $44,257 $ 5,396 $ 6,824 10,199 21,567 3,255 2,260 $44,105 $13,435 Park performs an analysis to determine if a valuation allowance against deferred tax assets is required in accordance with GAAP. Prior to the sale of substantially all of its assets in February 2012, Vision was subject to income tax in Alabama and Florida. During 2011, Park recognized $6.1 million in state tax expense which was the charge necessary to write off the previously reported state operating loss carry-forward asset and other state deferred tax assets at Vision. Prior to the execution of the Purchase Agreement with Centennial, man- agement of Park believed that a merger of Vision Bank into The Park National Bank (the national bank subsidiary of Park) would enable Park to fully utilize the state net operating loss carry-forward asset recorded at Vision. The struc- ture of the transactions contemplated by the Purchase Agreement did not allow either the buyer or the seller to benefit from the previously recorded net operat- ing loss carry-forward asset at Vision to offset future taxable income; therefore, this asset was written off by Vision at December 31, 2011. Management has determined that it is not required to establish a valuation allowance against remaining deferred tax assets in accordance with GAAP since it is more likely than not that the deferred tax assets will be fully utilized in future periods. The components of the provision for federal and state income taxes are shown below: December 31 (in thousands) 2012 2011 2010 Currently payable Federal State Deferred Federal State Valuation allowance Federal State Total $12,984 — 12,717 — — — $ 5,949 — $26,130 109 22,378 8,382 — (2,294) (8,333) (3,564) — 2,294 $25,701 $34,415 $16,636 The following is a reconciliation of income tax expense to the amount computed at the statutory rate of 35% for the years ended December 31, 2012, 2011 and 2010. 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) State income tax expense, net of federal benefit Valuation allowance, net of federal benefit Other Effective tax rate 2012 35.0% (0.9)% (1.6)% (6.1)% 2011 35.0% (1.0)% (1.5)% (5.2)% 2010 35.0% (1.7)% (2.3)% (6.7)% — 4.7% (3.0)% — (1.8)% 24.6% (1.3)% (1.2)% 29.5% 2.0% (1.0)% 22.3% Park and its Ohio-based subsidiaries 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 the state tax expense and is shown in “state taxes” on Park’s Consolidated Statements of Income. Vision did not record state income tax expense (benefit) in 2012. Unrecognized Tax Benefits The following is a reconciliation of the beginning and ending amount of unrecognized tax benefits. (In thousands) January 1 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 statute of limitations December 31 Balance 2012 $485 74 25 — (67) $517 2011 $477 70 1 (3) (60) $485 2010 $595 69 7 (131) (63) $477 The amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in the future periods at December 31, 2012, 2011 and 2010 was $404,000, $378,000 and $370,000, respectively. Park does not expect the total amount of unrecognized tax benefits to significantly increase or decrease during the next year. The (income)/expense related to interest and penalties recorded in the Consolidated Statements of Income for the years ended December 31, 2012, 2011 and 2010 was $4,500, $2,500 and $(10,500), respectively. The amount accrued for interest and penalties at December 31, 2012, 2011 and 2010 was $67,500, $63,000 and $60,500, respectively. 72 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 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 and Kentucky. Park is no longer subject to examination by federal or state taxing authorities for the tax year 2008 and the years prior. The 2007 and 2008 federal income tax returns of Park National Corporation were recently under examination by the Internal Revenue Service. Additionally, the 2009 state of Ohio franchise tax return was recently under examination. The IRS examination closed in the first quarter of 2012 with no adjustments. The Ohio examination closed in 2011 with no material adjustments. 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, 2012, 2011 and 2010. Year ended December 31 (In thousands) Before-Tax Amount Tax Effect Net-of-Tax Amount 2012: Unrealized losses on available-for-sale securities Unrealized net holding gain on cash flow hedge Changes in pension plan assets and benefit obligations recognized in other comprehensive income $ (4,702) $ (1,645) $ (3,057) 846 296 550 (9,508) (3,328) (6,180) Other comprehensive loss $(13,364) $ (4,677) $ (8,687) 2011: Unrealized gains on available-for-sale securities Reclassification adjustment for gains realized in net income Unrealized net holding gain on cash flow hedge Changes in pension plan assets and benefit obligations recognized in other comprehensive income $ 25,063 $ 8,772 $ 16,291 (28,829) (10,090) (18,739) 788 276 512 (7,734) (2,707) (5,027) Other comprehensive loss $(10,712) $ (3,749) $ (6,963) 2010: Unrealized losses on available-for-sale securities Reclassification adjustment for gains realized in net income Unrealized net holding loss on cash flow hedge Changes in pension plan assets and benefit obligations recognized in other comprehensive income $(11,218) $ (3,926) $ (7,292) (11,864) (4,152) (7,712) (151) (53) (98) (3,734) (1,307) (2,427) Other comprehensive loss $(26,967) $ (9,438) $ (17,529) The ending balance of each component of accumulated other comprehensive income (loss) was as follows as of December 31: (In thousands) Pension benefit adjustments Unrealized net holding loss on cash flow hedge Unrealized net holding gains on AFS securities Total accumulated other comprehensive loss 2012 $(27,134) — 9,616 2011 $(20,954) (550) 12,673 $(17,518) $ (8,831) 16. EARNINGS PER COMMON SHARE GAAP requires the reporting of basic and diluted earnings per common share. Basic earnings per common share excludes any dilutive effects of options, warrants and convertible securities. The following table sets forth the computation of basic and diluted earnings per common share: Year ended December 31 (in thousands, except per share data) 2012 2011 2010 Numerator: Net income available to common shareholders Denominator: Basic earnings per common share: Weighted-average shares Effect of dilutive securities – stock options and warrants Diluted earnings per common share: Adjusted weighted-average shares and assumed conversions Earnings per common share: Basic earnings per common share Diluted earnings per common share $75,205 $76,284 $52,294 15,407,078 15,400,155 15,152,692 1,063 1,291 3,043 15,408,141 15,401,446 15,155,735 $4.88 $4.88 $4.95 $4.95 $3.45 $3.45 As of December 31, 2011, options to purchase 74,020 common shares were outstanding under Park’s 2005 Plan. All options had expired as of December 31, 2012. A warrant to purchase 227,376 common shares was outstanding at December 31, 2011 as a result of Park’s participation in the U.S. Treasury Capital Purchase Program (“CPP”). Park repurchased the CPP warrant on May 2, 2012. In addition, warrants to purchase an aggregate of 71,984 common shares were outstanding at December 31, 2010 as a result of the issuance of common shares and warrants to purchase common shares on December 10, 2010 (the “December 2010 Warrants”). The December 2010 Warrants expired in 2011, with no warrants being exercised, but have been considered in the 2011 diluted earnings per share calculation. The common shares represented by the options and the December 2010 Warrants for the twelve months ended December 31, 2012 and 2011, totaling a weighted average of 63,308 and 126,292, respectively, were not included in the computation of diluted earnings per common share because the respective exercise prices exceeded the market value of the underlying common shares such that their inclusion would have had an anti-dilutive effect. The warrant to purchase 227,376 common shares issued under the CPP was included in the computation of diluted earnings per common share for the year ended December 31, 2012 and 2011, as the dilutive effect of this warrant was 1,063 and 1,291 common shares for the twelve month periods ended December 31, 2012 and December 31, 2011, respectively. The exercise price of the CPP warrant to purchase 227,376 common shares was $65.97. 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, 2012, approximately $27.9 million of the total shareholders’ equity of PNB was avail- able 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 interest rate risk in excess of the amount recognized in the consolidated 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. 73 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 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 were as follows: December 31 (In thousands) Loan commitments Standby letters of credit 2012 $815,585 22,961 2011 $809,140 18,772 The loan commitments are generally for variable rates of interest. The Corporation grants retail, commercial and commercial real estate loans to customers primarily located in Ohio. The Corporation evaluates each cus- tomer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Although the Corporation has a diversified loan portfolio, a substantial portion of the borrowers’ ability to honor their contracts is dependent upon the economic conditions in each borrower’s geographic location and industry. 19. DERIVATIVE INSTRUMENTS FASB ASC 815, Derivatives and Hedging, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by GAAP, the Company records all derivatives on the Consolidated Balance Sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivatives and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are con- sidered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivatives is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified into earnings when the hedged transaction affects earnings, with any ineffective portion of changes in the fair value of the derivative recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction. During the first quarter of 2008, the Company executed an interest rate swap to hedge a $25 million floating-rate subordinated note that was entered into by PNB during the fourth quarter of 2007. The Company’s objective in using this derivative was to add stability to interest expense and to manage its exposure to interest rate risk. Our interest rate swap involved the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreement without exchange of the underlying principal amount, and was designated as a cash flow hedge. This interest rate swap matured on December 28, 2012. At December 31, 2012 and 2011, the interest rate swap’s fair value of $0 million and $(0.8) million, respectively, was included in other liabilities. No hedge ineffectiveness on the cash flow hedge was recognized during the twelve months ended December 31, 2012, 2011 or 2010. For the twelve months ended December 31, 2012 and 2011, the change in the fair value of the interest rate swap reported in other comprehensive income was a gain of $550,000 (net of taxes of $296,000) and a gain of $512,000 (net of taxes of $276,000), respectively. There was a zero balance related to the interest rate swap in accumulated other comprehensive income as of December 31, 2012. 74 As of December 31, 2012 and 2011, no derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, the Company does not use derivatives for trading or speculative purposes. As of December 31, 2012 and December 31, 2011, Park had mortgage loan interest rate lock commitments (IRLCs) outstanding of approximately $28.9 million and $17.2 million, respectively. Park has specific contracts to sell each of these loans to a third-party investor. These loan commitments represent derivative instruments, which are required to be carried at fair value. The derivative instruments used are not designed as hedges under GAAP. The fair value of the derivative instruments was approximately $372,000 at December 31, 2012 and $251,000 at December 31, 2011. The fair value of the derivative instruments is included within loans held for sale and the corresponding income is included within non-yield loan fee income. Gains and losses resulting from expected sales of mortgage loans are recognized when the respective loan contract is entered into between the borrower, Park, and the third-party investor. The fair value of Park’s mortgage IRLCs is based on current secondary market pricing. In connection with the sale of Park’s Class B Visa shares during the 2009 year, Park entered into a swap agreement with the purchaser of the shares. The swap agreement adjusts for dilution in the conversion ratio of Class B Visa shares resulting from certain Visa litigation. At December 31, 2012 and December 31, 2011, the fair value of the swap liability of $135,000 and $700,000, respec- tively, is an estimate of the exposure based upon probability-weighted potential Visa litigation losses. 20. LOAN SERVICING Park serviced sold mortgage loans of $1,313 million at December 31, 2012 compared to $1,349 million at December 31, 2011, and $1,471 million at December 31, 2010. At December 31, 2012, $16 million of the sold mortgage loans were sold with recourse compared to $25 million at December 31, 2011. Management closely monitors the delinquency rates on the mortgage loans sold with recourse. As of December 31, 2012, management had established a $550,000 reserve to account for future loan repurchases. The amortization of mortgage loan servicing rights is included within “Other service income”. Generally, mortgage servicing rights are capitalized and amor- tized on an individual sold loan basis. When a sold mortgage loan is paid off, the related mortgage servicing rights are fully amortized. Activity for mortgage servicing rights and the related valuation allowance follows: December 31 (In thousands) 2012 2011 2010 Mortgage servicing rights: Carrying amount, net, beginning of year Additions Amortization Change in valuation allowance Carrying amount, net, end of year Valuation allowance: Beginning of year Additions expensed End of year $ 9,301 3,399 (3,634) (1,303) $ 7,763 $ 1,021 1,303 $ 2,324 $10,488 1,659 (2,573) (273) $ 9,301 $ 748 273 $ 1,021 $10,780 3,062 (3,180) (174) $10,488 $ $ 574 174 748 The fair value of mortgage servicing rights at December 31, 2012 was established using a discount rate of 10.0% and constant prepayment speeds ranging from 6% to 25%. Servicing fees included in other service income were $3.6 million, $3.9 million and $4.2 million for the twelve months ended December 31, 2012, 2011 and 2010, respectively. 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 21. FAIR VALUES The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that Park uses to measure fair value are as follows: (cid:0) Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that Park has the ability to access as of the measurement date. (cid:0) Level 2: Level 1 inputs for assets or liabilities that are not actively traded. Also consists of an observable market price for a similar asset or liability. This includes the use of “matrix pricing” used to value debt securities absent the exclusive use of quoted prices. (cid:0) Level 3: Consists of unobservable inputs that are used to measure fair value when observable market inputs are not available. This could include the use of internally developed models, financial forecasting and similar inputs. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability between market participants at the balance sheet date. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to observable market data for similar assets and liabilities. However, certain assets and liabilities are not traded in observable markets and Park must use other valuation methods to develop a fair value. The fair value of impaired loans is based on the fair value of the underlying collateral, which is estimated through third-party appraisals or internal estimates of collateral values. Assets and Liabilities Measured on a Recurring Basis The following table presents financial assets and liabilities measured on a recurring basis: Fair Value Measurements at December 31, 2012 Using: (In thousands) Level 1 Level 2 Level 3 Balance at 12/31/12 ASSETS Investment Securities Obligations of U.S. Treasury and other U.S. Government sponsored entities Obligations of states and political subdivisions U.S. Government sponsored entities’ asset-backed securities Equity securities Mortgage loans held for sale Mortgage IRLCs LIABILITIES $ — $695,727 $ — $695,727 — 1,003 — 1,003 — 1,442 — — 415,502 — 25,743 372 — $780 — — $ — 135 415,502 2,222 25,743 372 $ — 135 Interest rate swap Fair value swap $ — — $ — — Fair Value Measurements at December 31, 2011 Using: (In thousands) Level 1 Level 2 Level 3 Balance at 12/31/11 ASSETS Investment Securities Obligations of U.S. Treasury and other U.S. Government sponsored entities Obligations of states and political subdivisions U.S. Government sponsored entities’ asset-backed securities Equity securities Mortgage loans held for sale Mortgage IRLCs LIABILITIES $ — $371,657 $ — $371,657 — 2,660 — 2,660 — 1,270 — — 444,295 — 11,535 251 — $763 — — $ — 700 444,295 2,033 11,535 251 $ 846 700 Interest rate swap Fair value swap $ — — $ 846 — There were no transfers between Level 1 and Level 2 during 2012 or 2011. Management’s policy is to transfer assets or liabilities from one level to another when the methodology to obtain the fair value changes such that there are more or fewer unobservable inputs as of the end of the reporting period. The following methods and assumptions were used by the Corporation in determining fair value of the financial assets and liabilities discussed above: 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. The Fair Value Measurements tables exclude Park’s Federal Home Loan Bank stock and Federal Reserve Bank stock. These assets are carried at their respec- tive redemption values, as it is not practicable to calculate their fair values. For securities where quoted prices or market prices of similar securities are not available, which include municipal securities, fair values are calculated using discounted cash flows. Interest rate swap: The fair value of the interest rate swap represents the estimated amount Park would pay or receive to terminate the agreement, considering current interest rates and the current creditworthiness of the counterparty. Fair value swap: The fair value of the swap agreement entered into with the purchaser of the Visa Class B shares represents an internally developed estimate of the exposure based upon probability-weighted potential Visa litigation losses. Interest Rate Lock Commitments (IRLCs): IRLCs are based on current secondary market pricing and are classified as Level 2. Mortgage loans held for sale: Mortgage loans held for sale are carried at their fair value. Mortgage loans held for sale are estimated using security prices for similar product types and, therefore, are classified in Level 2. 75 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 table below is a reconciliation of the beginning and ending balances of the Level 3 inputs for the years ended December 31, 2012 and 2011, for financial instruments measured on a recurring basis and classified as Level 3: Level 3 Fair Value Measurements (in thousands) Obligations of States and Political Subdivisions Equity Securities Fair Value Swap Balance at January 1, 2012 $ — $763 $(700) Total gains/(losses) Included in earnings – realized Included in earnings – unrealized Included in other comprehensive income Purchases, sales, issuances and settlements, other, net Re-evaluation of fair value swap Balance at December 31, 2012 Balance at January 1, 2011 Total gains/(losses) Included in earnings – realized Included in earnings – unrealized Included in other comprehensive income Purchases, sales, issuances and settlements, other, net Re-evaluation of fair value swap Balance at December 31, 2011 — — — — — $ — $2,598 — (128) — (2,470) — $ — (54) — 71 — — $780 $745 — — 18 — — $763 — — — — 565 $(135) $ (60) — — — — (640) $(700) Assets and Liabilities Measured on a Nonrecurring Basis The following methods and assumptions were used by the Company in determining the fair value of assets and liabilities measured at fair value on a nonrecurring basis described below: Impaired loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value have been partially charged off or receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is generally based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the inde- pendent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments result in a Level 3 classification of the inputs for determining fair value. Collateral is then adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. Additionally, updated valuations are obtained annually for all impaired loans in accordance with Company policy. Other Real Estate Owned (OREO): Assets acquired through or in lieu of loan foreclosure are initially recorded at fair value less costs to sell when acquired. The carrying value of OREO is not re-measured to fair value on a recurring basis, but is subject to fair value adjustments when the carrying value exceeds the fair value, less estimated selling costs. Fair value is based on recent real estate appraisals and is updated at least annually. These appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales approach and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments result in a Level 3 classification of the inputs for determining fair value. Appraisals for both collateral dependent impaired loans and other real estate owned are performed by licensed appraisers. Appraisals are generally obtained to support the fair value of collateral. In general, there are two types of appraisals, real estate appraisals and lot development loan appraisals, received by the Company. These are discussed below: 76 (cid:0) Real estate appraisals typically incorporate measures such as recent sales prices for comparable properties. Appraisers may make adjustments to the sales prices of the comparable properties as deemed appropriate based on the age, condition or general characteristics of the subject property. Management generally applies a 15% discount to real estate appraised values which management expects will cover all disposition costs (including selling costs). This 15% discount is based on historical discounts to appraised values on sold OREO properties. (cid:0) Lot development loan appraisals are typically performed using a discounted cash flow analysis. Appraisers determine an anticipated absorption period and a discount rate that takes into account an investor’s required rate of return based on recent comparable sales. Management generally applies a 6% discount to lot development appraised values, which is an additional discount above the net present value calculation included in the appraisal, to account for selling costs. MSRs: MSRs are carried at the lower of cost or fair value. MSRs do not trade in active, open markets with readily observable prices. For example, sales of MSRs do occur, but precise terms and conditions typically are not readily available. As such, management, with the assistance of a third-party specialist, determines fair value based on the discounted value of the future cash flows estimated to be received. Significant inputs include the discount rate and assumed prepayment speeds utilized. The calculated fair value is then compared to market values where possible to ascertain the reasonableness of the valuation in relation to current market expectations for similar products. Accordingly, MSRs are classified as Level 2. The following table presents assets and liabilities measured at fair value on a nonrecurring basis: Fair Value Measurements at December 31, 2012 Using: (In thousands) Level 1 Level 2 Level 3 Balance at 12/31/12 Impaired loans: $ — $ — $25,997 $25,997 Commercial real estate Construction real estate: SEPH commercial land and development — Remaining commercial — — Residential real estate — — — 12,832 8,113 6,990 12,832 8,113 6,990 Total impaired loans $ — $ — $53,932 $53,932 Mortgage servicing rights Other real estate owned: $ — $ 6,642 $ — $ 6,642 Construction real estate — — Residential real estate — Commercial real estate Total other — — — 12,134 4,307 3,485 12,134 4,307 3,485 real estate owned $ — $ — $19,926 $19,926 Fair Value Measurements at December 31, 2011 Using: (In thousands) Level 1 Level 2 Level 3 Balance at 12/31/11 Impaired loans: $ — $ — $24,859 $24,859 Commercial real estate Construction real estate: Vision commercial land and development — Remaining commercial — — Residential real estate — — — 21,228 8,860 12,935 21,228 8,860 12,935 Total impaired loans $ — $ — $67,882 $67,882 Mortgage servicing rights Other real estate owned: $ — $ 5,815 $ — $ 5,815 Construction real estate — — Residential real estate — Commercial real estate Total other — — — 10,834 6,826 6,062 10,834 6,826 6,062 real estate owned $ — $ — $23,722 $23,722 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 Impaired loans had a book value of $137.2 million at December 31, 2012 after partial charge-offs of $105.1 million. Additionally, these impaired loans had a specific valuation allowance of $8.3 million. Of the $137.2 million impaired loan portfolio, loans with a book value of $59.0 million were carried at their fair value of $53.9 million, as a result of charge-offs of $91.6 million and a specific valuation allowance of $5.1 million. The remaining $78.2 million of impaired loans were carried at cost, as the fair value of the underlying col - lateral or present value of expected future cash flows on each of these loans exceeded the book value for each individual credit. At December 31, 2011, impaired loans had a book value of $187.1 million, after partial charge-offs of $103.8 million. Additionally, these impaired loans had a specific valuation allowance of $15.9 million. Of these, loans with a book value of $78.0 million were carried at their fair value of $67.9 million as a result of partial charge-offs of $97.6 million and a specific valuation allowance for those loans carried at fair value of $10.1 million. The remaining $109.1 million of impaired loans at December 31, 2011 were carried at cost. The financial impact of credit adjust- ments related to impaired loans carried at fair value during the twelve months ended December 31, 2012, 2011 and 2010 was $16.0 million, $37.4 million and $59.2 million, respectively. MSRs, which are carried at the lower of cost or fair value, were recorded at $7.8 million at December 31, 2012. Of the $7.8 million MSR carrying balance at December 31, 2012, $6.6 million was recorded at fair value and included a valuation allowance of $2.3 million. The remaining $1.2 million was recorded at cost, as the fair value exceeded cost at December 31, 2012. At December 31, 2011, MSRs were recorded at $9.3 million, including a valuation allowance of $1.0 million. Expense related to MSRs carried at fair value for the years ended December 31, 2012, 2011 and 2010 was $1.3 million, $273,000 and $174,000, respectively. At December 31, 2012 and December 31, 2011, the estimated fair value of OREO, less estimated selling costs, amounted to $19.9 million and $23.7 million, respectively. The financial impact of OREO fair value adjustments for the years ended December 31, 2012, 2011 and 2010 was $6.9 million, $8.2 million and $13.2 million, respectively. The following table presents qualitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non- recurring basis at December 31, 2012: Fair Value Valuation Technique Unobservable Input(s) Range (Weighted Average) (In thousands) Impaired loans: Commercial real estate $25,997 Construction real estate: SEPH commercial land and development 12,832 Remaining commercial Residential real estate Other real estate owned: Commercial real estate Construction real estate Residential real estate 8,113 6,990 3,485 12,134 4,307 Sales comparison approach Income approach Cost approach Sales comparison approach Bulk sale approach Sales comparison approach Bulk sale approach Adj to comparables Capitalization rate Accumulated depreciation 0.0% – 116.0% (22.3%) 7.5% – 20.9% (10.1%) 23.0% – 63.0% (50.4%) Adj to comparables Discount rate Adj to comparables Discount rate 0.0% – 218.0% (31.9%) 11.0% – 55.0% (23.4%) 0.0% – 75.0% (26.2%) 10.0% – 55.0% (18.3%) Sales comparison approach Adj to comparables 0.0% – 178.0% (17.9%) Sales comparison approach Income approach Bulk sale approach Cost approach Sales comparison approach Income approach Bulk sale approach Sales comparison approach Income approach Cost approach Adj to comparables Capitalization rate Discount rate Accumulated depreciation Adj to comparables Capitalization rate Discount rate Adj to comparables Capitalization rate Accumulated depreciation 0.0% – 67.0% (25.8%) 11.0% (11.0%) 13.0% (13.0%) 40.9% – 90.0% (65.0%) 0.0% – 273.0% (34.0%) 8.5% (8.5%) 10.0% – 12.0% (10.8%) 1.0% – 61.0% (18.0%) 7.9% – 9.3% (8.7%) 6.0% (6.0%) The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for assets and liabilities not discussed above: Cash and cash equivalents: The carrying amounts reported in the Consolidated Balance Sheets for cash and short-term instruments 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 counterparties’ credit standing. The carrying amount and fair value are not material. Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed- term certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities of time deposits. Short-term borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements and other short-term borrowings approximate their fair values. Long-term debt: Fair values for long-term debt are estimated using a discounted cash flow calculation that applies interest rates currently being offered on long-term debt to a schedule of monthly maturities. Subordinated debentures and notes: Fair values for subordinated debentures and notes are estimated using a discounted cash flow calculation that applies interest rate spreads currently being offered on similar debt structures to a schedule of monthly maturities. 77 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, 2012 and December 31, 2011, was as follows: Fair Value Measurements at December 31, 2012: (In thousands) Financial assets: Cash and money market instruments Investment securities Accrued interest receivable – securities Accrued interest receivable – loans Mortgage loans held for sale Impaired loans carried at fair value Mortgage IRLCs Other loans Loans receivable, net Financial liabilities: Non-interest bearing checking accounts Interest bearing transaction accounts Savings accounts Time deposits Other Total deposits Short-term borrowings Long-term debt Subordinated debentures/notes Accrued interest payable – deposits Accrued interest payable – debt /borrowings Derivative financial instruments: Interest rate swap Fair value swap December 31, (In thousands) Financial assets: Cash and money market instruments Investment securities Accrued interest receivable Mortgage loans held for sale Impaired loans carried at fair value Mortgage IRLCs Other loans Loans receivable, net Assets held for sale Financial liabilities: Non-interest bearing checking Interest bearing transaction accounts Savings Time deposits Other Total deposits Short-term borrowings Long-term debt Subordinated debentures/notes Accrued interest payable Liabilities held for sale Derivative financial instruments: Interest rate swap Fair value swap Carrying Value $ 201,305 1,515,844 6,122 13,588 25,743 53,932 372 4,314,738 $4,394,785 $1,137,290 1,088,617 1,038,356 1,450,424 1,345 $4,716,032 $ 344,168 781,658 80,250 1,960 1,499 $ — 135 2011 Fair Value $ 157,486 1,655,219 19,697 11,535 87,813 251 4,166,973 $4,266,572 382,462 $ 995,733 1,037,385 931,526 1,506,075 1,365 $4,472,084 $ 263,594 915,274 68,601 4,916 536,991 $ 846 700 Carrying Value $ 157,486 1,640,869 19,697 11,535 87,813 251 4,149,056 $4,248,655 382,462 $ 995,733 1,037,385 931,526 1,499,105 1,365 $4,465,114 $ 263,594 823,182 75,250 4,916 536,186 $ 846 700 Level 1 Level 2 Level 3 $ 201,305 1,442 — — — — — — $ — $1,137,290 1,088,617 1,038,356 — 1,345 $3,265,608 $ $ — — — 21 8 — — $ — 1,522,937 6,122 2 25,743 — 372 — $ 26,115 $ — — — 1,458,793 — $1,458,793 $ 344,168 861,466 79,503 1,939 1,491 $ — — $ — 780 — 13,586 — 53,932 — 4,348,705 $4,402,637 $ $ $ $ — — — — — — — — — — — — 135 Total Fair Value $ 201,305 1,525,159 6,122 13,588 25,743 53,932 372 4,348,705 $4,428,752 $1,137,290 1,088,617 1,038,356 1,458,793 1,345 $4,724,401 $ 344,168 861,466 79,503 1,960 1,499 $ — 135 22. CAPITAL RATIOS Prior to February 16, 2012, the Corporation operated two chartered bank subsidiaries, PNB and Vision. On February 16, 2012, Vision sold certain assets and liabilities to Centennial Bank. Following the sale, Vision surrendered its Florida banking charter to the Florida Office of Financial Regulation (See Note 3 of these Notes to Consolidated Financial Statements). At December 31, 2012 and 2011, the Corporation and each of its then separately chartered banks had Tier 1, total risk-based capital and leverage ratios which 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. The following table indicates the capital ratios for Park and each subsidiary at December 31, 2012 and December 31, 2011. 2012 Total Risk- Based Tier 1 Risk- Based Tier 1 Risk- Based Leverage 2011 Total Risk- Based Leverage Park National Bank 9.28% 11.17% 6.43% 9.52% 11.46% 6.58% Vision Bank Park N/A N/A N/A 23.42% 24.72% 15.89% 13.12% 15.77% 9.17% 14.15% 16.65% 9.81% Failure to meet the minimum requirements above could cause the Federal Reserve Board to take action. Each of Park’s bank subsidiaries is also subject to the capital requirements of their primary regulators. As of December 31, 2012 and 2011, Park and its then banking subsidiaries were well-capitalized and met all capital requirements to which each was then subject. There are no conditions or events since PNB’s most recent regulatory report filings that management believes have changed the risk categories for PNB. 78 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 table reflects various measures of capital for Park and each of PNB and VB (during the period it was a Park banking subsidiary): (In thousands) Actual Amount Ratio To Be Adequately Capitalized Ratio Amount To Be Well Capitalized Amount Ratio At December 31, 2012: Total risk-based capital (to risk-weighted assets) PNB Park Tier 1 risk-based capital (to risk-weighted assets) PNB Park Leverage ratio (to average total assets) PNB Park At December 31, 2011: Total risk-based capital (to risk-weighted assets) PNB VB (1) Park Tier 1 risk-based capital (to risk-weighted assets) PNB VB Park Leverage ratio (to average total assets) PNB VB (1) Park $502,680 732,413 $417,690 609,411 $417,690 609,411 $498,367 115,637 812,286 $413,870 109,566 690,419 $413,870 109,566 690,419 11.17% 15.77% 9.28% 13.12% 6.43% 9.17% 11.46% 24.72% 16.65% 9.52% 23.42% 14.15% 6.58% 15.89% 9.81% $359,971 371,477 $179,986 185,739 $259,769 265,719 $347,972 37,427 390,270 $173,986 18,714 195,135 $251,691 27,588 281,506 8.00% 8.00% 4.00% 4.00% 4.00% 4.00% 8.00% 8.00% 8.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% $449,964 N/A $269,978 N/A $324,711 N/A $434,965 46,784 N/A $260,979 28,071 N/A $314,614 34,485 N/A 10.00% N/A 6.00% N/A 5.00% N/A 10.00% 10.00% N/A 6.00% 6.00% N/A 5.00% 5.00% N/A (1) Park management had agreed to maintain Vision Bank’s total risk-based capital at 16.00% and the leverage ratio at 12.00%. 23. SEGMENT INFORMATION The Corporation is a bank holding company headquartered in Newark, Ohio. Prior to February 16, 2012, the operating segments for the Corporation were its two chartered bank subsidiaries, PNB (headquartered in Newark, Ohio) and Vision (headquartered in Panama City, Florida). On February 16, 2012, Vision sold certain assets and liabilities to Centennial Bank (See Note 3 of these Notes to Consolidated Financial Statements). Promptly following the closing of the transaction, Vision surrendered its Florida banking charter to the Florida Office of Financial Regulation and became a non-bank Florida corpora- tion. The Florida Corporation merged with and into a wholly-owned non-bank subsidiary of Park, SEPH, with SEPH being the surviving entity. The closing of this transaction prompted Park to add SEPH as a reportable segment. Additionally, due to the increased significance of the entity, GFSC was added as a reportable segment in the first quarter of 2012. GAAP requires management to disclose information about the different types of business activities in which a company engages and also information on the different economic environments in which a company operates, so that the users of the financial statements can better understand a company’s perform- ance, better understand the potential for future cash flows, and make more informed judgments about the company as a whole. Park’s current operating segments are in line with GAAP as there are: (i) three separate and distinct geographic markets in which Park operates; (ii) discrete financial information is available for each operating segment; and (iii) the segments are aligned with internal reporting to Park’s Chief Executive Officer, who is the chief operating decision maker. 79 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 Operating results for the year ended December 31, 2012 (In thousands) Net interest income Provision for loan losses Other income Other expense Income (loss) before taxes Income taxes (benefit) Net income (loss) Balances at December 31, 2012: Assets Loans Deposits PNB $ 221,758 16,678 70,739 156,516 119,303 32,197 $ 87,106 $6,502,579 4,369,173 4,814,107 Operating results for the year ended December 31, 2011 (In thousands) Net interest income Provision for loan losses Other income (loss) Other expense Income (loss) before taxes Income taxes (benefit) Net income (loss) Balances at December 31, 2011: Assets Assets held for sale (1) Loans Deposits Liabilities held for sale (2) PNB $ 236,282 30,220 90,982 146,235 150,809 43,958 $ 106,851 $6,281,747 — 4,172,424 4,611,646 — Operating results for the year ended December 31, 2010 (In thousands) Net interest income Provision for loan losses Other income (loss) Other expense Income (loss) before taxes Income taxes (benefit) Net income (loss) Balances at December 31, 2010: Assets Loans Deposits PNB $ 237,281 23,474 80,512 144,051 150,268 47,320 $ 102,948 $6,495,558 4,074,775 4,622,693 $ $ $ VB — — — — — — — — — — VB $ 27,078 31,052 6,617 31,379 (28,736) (6,210) $ (22,526) $650,935 382,462 123,883 32 536,186 VB $ 27,867 61,407 (6,024) 31,623 (71,187) (25,773) $ (45,414) $791,945 640,580 633,432 GFSC $ 9,156 859 — 2,835 5,462 1,912 $ 3,550 $ 49,926 50,082 8,358 GFSC $ 8,693 2,000 — 2,506 4,187 1,466 $2,721 $ 46,682 — 47,111 8,013 — GFSC $ 7,611 2,199 2 2,326 3,088 1,082 $ 2,006 $ 43,209 43,714 7,062 $ SEPH (341) 17,882 21,431 22,032 (18,824) (6,603) $ (12,221) $104,428 59,178 — $ SEPH (974) — (3,039) 1,082 (5,095) (1,784) $ (3,311) $ 34,989 — — — — SEPH $ $ $ — — — — — — — — — — All Other $ 4,742 — 233 6,585 (1,610) (1,805) $ 195 $(14,130) (28,111) (106,433) All Other $ 2,155 — 350 7,115 (4,610) (3,015) $ (1,595) $(42,108) — (26,319) (154,577) — All Other $ 1,285 — 390 9,107 (7,432) (5,993) $ (1,439) $(48,451) (26,384) (167,767) Total $ 235,315 35,419 92,403 187,968 104,331 25,701 $ 78,630 $6,642,803 4,450,322 4,716,032 Total $ 273,234 63,272 94,910 188,317 116,555 34,415 $ 82,140 $6,972,245 382,462 4,317,099 4,465,114 536,186 Total $ 274,044 87,080 74,880 187,107 74,737 16,636 $ 58,101 $7,282,261 4,732,685 5,095,420 (1) The assets held for sale represent the loans and other assets at Vision Bank that were sold in the first quarter of 2012. (2) The liabilities held for sale represent the deposits and other liabilities at Vision Bank that were sold in the first quarter of 2012. 80 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 reconciliation of financial information for the reportable segments to the Corporation’s consolidated totals: Statements of Income for the years ended December 31, 2012, 2011 and 2010 Net Interest Depreciation Income Expense Other Expense Income Taxes Assets Deposits (In thousands) Income: 2012 2011 2010 Dividends from subsidiaries $ 197,000 $105,000 $ 80,000 (In thousands) 2012: Totals for reportable segments Elimination of $230,573 $6,954 $174,429 $27,506 $6,656,933 $4,822,465 intersegment items (4,948) Parent Co. totals – not eliminated 9,690 — — — — (35,639) (106,433) 6,585 (1,805) 21,509 — Totals 2011: Totals for reportable segments Elimination of $235,315 $6,954 $181,014 $25,701 $6,642,803 $4,716,032 $271,079 $7,583 $173,619 $37,430 $7,014,353 $4,619,691 intersegment items (974) Parent Co. totals – not eliminated 3,129 — — — — (63,243) (154,577) 7,115 (3,015) 21,135 — Totals 2010: Totals for reportable segments Elimination of $273,234 $7,583 $180,734 $34,415 $6,972,245 $4,465,114 $272,759 $7,126 $170,874 $22,629 $7,330,712 $5,263,187 intersegment items — Parent Co. totals – not eliminated 1,285 — — — — (77,876) (167,767) 9,107 (5,993) 29,425 — Totals $274,044 $7,126 $179,981 $16,636 $7,282,261 $5,095,420 24. 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 non-interest bearing deposits with a bank subsidiary. Net cash provided by operating activities reflects cash payments (received from subsidiaries) for income taxes of $4.54 million, $4.21 million and $5.97 million in 2012, 2011 and 2010, respectively. At December 31, 2012 and 2011, shareholders’ equity reflected in the Parent Company balance sheet includes $173.1 million and $146.6 million, respectively, of undistributed earnings of the Corporation’s subsidiaries which are restricted from transfer as dividends to the Corporation. Balance Sheets December 31, 2012 and 2011 (In thousands) Assets: Cash Investment in subsidiaries Debentures receivable from PNB Other investments Other assets Total assets Liabilities: Dividends payable Subordinated notes Other liabilities Total liabilities Total shareholders’ equity 2012 $ 98,726 589,523 30,000 2,133 19,639 $740,021 $ — 80,250 9,405 89,655 650,366 Total liabilities and shareholders’ equity $740,021 2011 $134,650 643,959 — 2,280 19,406 $800,295 $ — 50,250 7,681 57,931 742,364 $800,295 Interest and dividends Other Total income Expense: Other, net Total expense Income before federal taxes and equity in undistributed losses of subsidiaries Federal income tax benefit Income before equity in undistributed losses of subsidiaries Equity in undistributed losses of subsidiaries Net income 10,027 232 207,259 11,869 11,869 5,643 385 111,028 10,639 10,639 195,390 1,806 100,389 3,016 4,789 411 85,200 12,632 12,632 72,568 5,993 197,196 103,405 78,561 (118,566) (21,265) $ 78,630 $ 82,140 (20,460) $ 58,101 Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010 (In thousands) Operating activities: Net income 2012 2011 2010 $ 78,630 $ 82,140 $ 58,101 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed losses of subsidiaries Decrease in other assets Increase (decrease) in other liabilities Net cash provided by operating activities Investing activities: Purchase of investment securities Capital contribution to subsidiary Purchase of debentures receivable from subsidiaries Repayment of debentures receivable from subsidiaries Net cash provided by (used in) investing activities Financing activities: Cash dividends paid Proceeds from issuance of common shares and warrants Payment to repurchase warrants Payment to repurchase preferred shares Proceeds from issuance of subordinated notes Cash payment for fractional shares Net cash used in financing activities (Decrease) increase in cash Cash at beginning of year 118,566 5,748 1,724 21,265 8,268 (7,875) 20,460 7,344 (3,763) 204,668 103,798 82,142 — (45,000) (250) (36,000) — (52,000) (115,000) (30,000) — 52,000 — 2,500 (108,000) (66,250) (49,500) (60,154) (62,907) (62,076) 407 (2,843) (100,000) 30,000 (2) (132,592) (35,924) 134,650 — — — — (2) 33,541 — — — (4) (62,909) (25,361) 160,011 (28,539) 4,103 155,908 Cash at end of year $ 98,726 $134,650 $160,011 81 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 25. PARTICIPATION IN THE U.S. TREASURY CAPITAL PURCHASE PROGRAM On December 23, 2008, Park issued $100 million of Fixed-Rate Cumulative Perpetual Preferred Shares, Series A, with a liquidation preference of $1,000 per share (the “Series A Preferred Shares”). The Series A Preferred Shares constituted Tier 1 capital and ranked senior to Park’s common shares. The Series A Preferred Shares were to pay cumulative dividends at a rate of 5% per annum through February 14, 2014 and reset to a rate of 9% per annum thereafter. For the period ended December 31, 2012, Park recognized a charge to retained earnings of $3.4 million representing the preferred share dividend and accretion of the discount on the preferred shares, associated with Park’s participation in the CPP. As part of its participation in the CPP, Park also issued a warrant to the U.S. Treasury to purchase 227,376 common shares (the “Warrant”), which was equal to 15% of the aggregate amount of the Series A Preferred Shares purchased by the U.S. Treasury, having an exercise price of $65.97. The initial exercise price for the Warrant and the market price for determining the number of common shares subject to the Warrant were determined by reference to the market price of the common shares on the date the Company’s application for participation in the CPP was approved by the U.S. Department of the Treasury (calculated on a 20-day trailing average). The Warrant had a term of 10 years. As a participant in the CPP, the Company was required to adopt certain standards for compensation and corporate governance, established under the American Recovery and Reinvestment Act of 2009 (the “ARRA”), which amended and replaced the executive compensation provisions of the Emergency Economic Stabilization Act of 2008 (“EESA”) in their entirety, and the Interim Final Rule promulgated by the Secretary of the U.S. Treasury under 31 C.F.R. Part 30. In addition, Park’s ability to declare or pay dividends on or repurchase its common shares was partially restricted until December 23, 2011 as a result of its participation in the CPP. On April 25, 2012, Park entered into a Letter Agreement with the U.S. Treasury pursuant to which Park repurchased the 100,000 Series A Preferred Shares for a purchase price of $100 million plus a pro rata accrued and unpaid dividend. Total consideration of $101.0 million included accrued and unpaid dividends of $1.0 million. In addition to the accrued and unpaid dividends of $1.0 million, the charge to retained earnings, resulting from the repurchase of the Series A Preferred Shares, was $1.6 million on April 25, 2012. On May 2, 2012, Park entered into a Letter Agreement pursuant to which Park repurchased from the U.S. Treasury the Warrant to purchase 227,376 Park common shares in full for consideration of $2.8 million, or $12.50 per Park common share. 82 N O T E S N O T E S PARK NATIONAL CORPORATION Post Office Box 3500 Newark, Ohio 43058-3500 740.349.8451 ParkNationalCorp.com 2012 ANNUAL REPORT 

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