UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2008

OR

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

For the transition period from                      to                     

Commission File Number: 1-13006

Park National Corporation

(Exact name of registrant as specified in its charter)

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

50 North Third Street, Newark, Ohio 43055

(Address of principal executive offices) (Zip Code)

(740) 349-8451

(Registrant’s telephone number, including area code)

N/A

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

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

Yes       þ       No      o

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

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller Reporting Company o

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

Yes       o       No þ

13,964,560 Common shares, no par value per share, outstanding at April 30, 2008.

Page 1 of 46

PARK NATIONAL CORPORATION

 

 

CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements		3-22
Consolidated Condensed Balance Sheets as of March 31, 2008 and December 31, 2007 (unaudited)		3
Consolidated Condensed Statements of Income for the Three Months Ended March 31, 2008 and 2007 (unaudited)		4-5
Consolidated Condensed Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2008 and 2007 (unaudited)		6
Consolidated Condensed Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007 (unaudited)		7-8
Notes to Consolidated Condensed Financial Statements		9-22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23-37
Item 3. Quantitative and Qualitative Disclosures About Market Risk		38
Item 4. Controls and Procedures		39
PART II. OTHER INFORMATION		40-45
Item 1. Legal Proceedings		40
Item 1A. Risk Factors		40-41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		41-42
Item 3. Defaults Upon Senior Securities		42
Item 4. Submission of Matters to a Vote of Security Holders		42-43
Item 5. Other Information		43
Item 6. Exhibits		44
SIGNATURES		46
EX-3.2(D)
EX-3.2(E)
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PARK NATIONAL CORPORATION

Consolidated Condensed Balance Sheets (Unaudited)
(dollars in thousands)

		March 31,				December 31,
		2008				2007
Assets:
Cash and due from banks		$	176,350			$	183,165
Money market instruments			8,546				10,232
Cash and cash equivalents			184,896				193,397
Interest bearing deposits			1				1
Securities available-for-sale, at fair value (amortized cost of $1,661,576 and $1,473,052 at March 31, 2008 and December 31, 2007)			1,684,276				1,474,517
Securities held-to-maturity, at amortized cost (fair value approximates $205,805 and $161,414 at March 31, 2008 and December 31, 2007)			207,139				165,421
Other investment securities			64,620				63,165
Loans			4,253,363				4,224,134
Allowance for loan losses			85,848				87,102
Net loans			4,167,515				4,137,032
Bank premises and equipment, net			68,816				66,634
Bank owned life insurance			128,726				119,472
Goodwill and other intangible assets			143,550				144,556
Other assets			131,826				136,907
Total assets		$	6,781,365			$	6,501,102
Liabilities and Stockholders’ Equity:
Deposits:
Noninterest bearing		$	711,151			$	695,466
Interest bearing			3,808,605				3,743,773
Total deposits			4,519,756				4,439,239
Short-term borrowings			753,953				759,318
Long-term debt			787,512				590,409
Subordinated Debentures			40,000				40,000
Other liabilities			88,965				92,124
Total liabilities			6,190,186				5,921,090
COMMITMENTS AND CONTINGENCIES
Stockholders’ Equity:
Common stock (No par value; 20,000,000 shares authorized; 16,151,188 shares issued at 2008 and 16,151,200 shares issued at 2007)			301,213				301,213
Retained earnings			487,443				489,511
Treasury stock (2,186,624 shares at 2008 and 2,186,624 shares at 2007)			(208,104	)			(208,104	)
Accumulated other comprehensive income (loss), net of taxes			10,627				(2,608	)
Total stockholders’ equity			591,179				580,012
Total liabilities and stockholders’ equity		$	6,781,365			$	6,501,102

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Continued

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Continued

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PARK NATIONAL CORPORATION

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

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

Goodwill is evaluated on an annual basis for impairment and otherwise when circumstances warrant. During the fourth quarter of 2007, Park’s management determined that the goodwill from the Vision Bank acquisition on March 9, 2007 could possibly be impaired due to the significant deterioration in the credit condition of Vision Bank. Nonperforming loans at Vision Bank increased from $26.3 million at September 30, 2007 to $63.5 million at December 31, 2007 or 9.9% of year-end loan balances. Net loan charge-offs were $6.4 million for the fourth quarter or an annualized 3.99% of average loan balances. Management determined that due to these severe credit conditions, a valuation of the fair value of Vision Bank be computed to determine if the goodwill of $109.0 million was impaired. Management determined that an impairment charge of $54.0 million was appropriate; therefore, the current carrying value of goodwill resulting from the Vision acquisition is $55.0 million at March 31, 2008.

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

Note 3 — Allowance for Loan Losses

The allowance for loan losses is that amount believed adequate to absorb probable incurred credit losses in the loan portfolio based on management’s evaluation of various factors including overall growth in the loan portfolio, an analysis of individual loans, prior and current loss experience, and current economic conditions. A provision for loan losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors.

Commercial loans are individually risk graded. Where appropriate, reserves are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral and other sources of cash flow. Homogenous loans, such as consumer installment loans and residential mortgage loans are not individually risk graded. Reserves are established for each pool of loans based on historical loan loss experience, current economic conditions, loan delinquency and other environmental factors.

The following table shows the activity in the allowance for loan losses for the three months ended March 31, 2008 and 2007.

For the three months ended March 31, 2008, options to purchase 601,919 shares of common stock were outstanding but not included in the computation of diluted earnings per share because the respective option exercise prices exceeded the market value of the underlying common shares such that their inclusion would have had an anti-dilutive effect. The amount of 601,919 represented all outstanding options at March 31, 2008. For the three months ended March 31, 2007, options to purchase 652,224 shares of common stock were outstanding but not included in the computation of diluted net income per share due to their having the same anti-dilutive effect as those disclosed for the three months ended March 31, 2008.

Note 5 — Segment Information

The Corporation is a multi-bank holding company headquartered in Newark, Ohio. The operating segments for the Corporation are its financial institution subsidiaries. The Corporation’s financial institution subsidiaries are The Park National Bank (PNB), The Richland Trust Company (RTC), Century National Bank (CNB), The First-Knox National Bank of Mount Vernon (FKNB), United Bank, N.A. (UB), Second National Bank (SNB), The Security National Bank and Trust Co. (SEC), The Citizens National Bank of Urbana (CIT) and Vision Bank (VIS).

The operating results of the Parent Company and Guardian Financial Services Company (GFC) in the “all other” row are used to reconcile the segment totals to the consolidated condensed statements of income for the periods ended March 31, 2008 and 2007. The reconciling amounts for consolidated total assets for both of the periods ended March 31, 2008 and 2007 consist of the elimination of intersegment borrowings, and the assets of the Parent Company and GFC which are not eliminated. The results for Vision Bank for March 31, 2007 are from the acquisition date of March 9, 2007 through March 31, 2007.

Note 7 — Stock Option Plans

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

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

All of the stock options outstanding at March 31, 2008 were exercisable. The aggregate intrinsic value of the outstanding stock options at March 31, 2008 was $0.

No options were exercised during the first quarter of 2008. The intrinsic value of the stock options exercised during the first quarter of 2007 was $47,000. The weighted average contractual remaining term was 1.8 years for the stock options outstanding at March 31, 2008.

All of the common shares delivered upon exercise of incentive stock options granted under the Park National Corporation 2005 Incentive Stock Option Plan (the “2005 Plan”) and the Park National Corporation 1995 Incentive Stock Option Plan (the “1995 Plan”) are to be treasury shares. At March 31, 2008, incentive stock options (granted under both the 2005 Plan and 1995 Plan) covering 590,254 common shares were outstanding. The remaining outstanding stock options at March 31, 2008 covering 11,665 common shares were granted under a stock option plan (the “Security Plan”) assumed by Park in the acquisition of Security Banc Corporation in 2001. At March 31, 2008, Park held 1,008,681 treasury shares that are allocated for the stock option plans (including the Security Plan).

Note 9 — Investment Securities

The amortized cost and fair values of investment securities are shown in the following table. Management evaluates investment securities on a quarterly basis for other-than-temporary impairment. No impairment charges have been deemed necessary in 2008 or 2007. The unrealized losses on debt securities are primarily the result of changes in interest rates and will not prohibit Park from receiving its contractual principal and interest payments.

For the first quarter ended March 31, 2008, the tax equivalent yield on the total investment portfolio was 5.07% and the average maturity was 3.4 years. U.S. Government Sponsored Entities’ asset-backed securities comprised approximately 86% of the total investment portfolio at the end of the first quarter of 2008. This segment of the investment portfolio consists of fifteen-year mortgage-backed securities and fifteen-year collateralized mortgage obligations.

The average maturity of the investment portfolio would lengthen if long-term interest rates would increase as the principal repayments from mortgage-backed securities and collateralized mortgage obligations would be reduced. Management estimates that the average maturity of the investment portfolio would lengthen to 4.5 years with a 100 basis point increase in long-term interest rates and to 5.0 years with a 200 basis point increase in long-term interest rates. Conversely, management estimates that repayments would increase and that the average maturity of the investment portfolio would decrease to 2.2 years and 1.4 years respectively, with a 100 basis point and 200 basis point decrease in long-term rates.

Note 10 — Other Investment Securities

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

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

Note 12 — Recent Accounting Pronouncements

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

At March 31, 2008, Park and its subsidiary banks owned $128.7 million of bank owned life insurance policies. These life insurance policies are generally subject to endorsement split-dollar life insurance arrangements. These arrangements were designed to provide a pre-and postretirement benefit for senior officers and directors of Park and its subsidiary banks. Park’s management has completed its evaluation of the impact of the adoption of EITF Issue No. 06-4 on Park’s consolidated financial statements. On January 1, 2008, Park charged approximately $11.6 million to retained earnings and recorded a corresponding liability for the same amount.

In Note 1 to Park’s 2007 Annual Report, Park reported that the EITF 06-04 charge to retained earnings would be approximately $7.5 million, net of deferred tax and that a corresponding liability of $11.6 million would be recorded. During the first quarter of 2008, management came to the conclusion that the book liability of $11.6 million would be a permanent tax item and the company would not receive a tax deduction. As such, no deferred tax asset was recognized.

Fair Value Measurements

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

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

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

Accounting for Written Loan Commitments Recorded at Fair Value

On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value through Earnings” (“SAB 109”). Previously, SAB 105, “Application of Accounting Principles to Loan Commitments”, stated that in measuring the fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the loan. SAB 109 supercedes SAB 105 and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in measuring fair value for all written loan commitments that are accounted for at fair value through earnings. SAB 105 also indicated that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment, and SAB 109 retains that view. SAB 109 is effective for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The impact of adoption of this standard was not material.

Accounting for Business Combinations

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

Note 13 — Derivative Instruments

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

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

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

As of March 31, 2008, no derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, the Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges.

At March 31, 2008, the derivative’s fair value of ($874,000) was included in other liabilities. No hedge ineffectiveness on the cash flow hedge was recognized during the quarter. At March 31, 2008, the variable rate on the $25 million subordinated note was 4.67% (LIBOR plus 200 basis points) and Park was paying 6.01% (4.01% fixed rate on the interest rate swap plus 200 basis points).

For the quarter ended March 31, 2008, the change in the fair value of the derivative designated as a cash flow hedge reported other comprehensive income was $568,000 (net of taxes of $306,000). Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.

Note 14 — Guarantees

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

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

Note 15 — Fair Value

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

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

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

Assets and Liabilities Measured on a Recurring Basis :

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

Fair Value Measurements at Reporting Date Using
(In Thousands)

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

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

Assets and Liabilities Measured on a Nonrecurring Basis :

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

Fair Value Measurements at Reporting Date Using
(In Thousands)

Impaired loans, which are measured for impairment using the fair value of the collateral, had a carrying amount of $92.4 million, with a valuation allowance of $4.8 million, resulting in an additional provision for loan losses of $1.4 million for the period.

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

Management’s discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance. The forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risk and uncertainties that could cause actual results to differ materially include, without limitation: deterioration in the asset value of Vision Bank’s loan portfolio may be worse than expected; Park’s ability to execute its business plan successfully and within the expected timeframe; Park’s ability to successfully integrate acquisitions into Park’s operations; Park’s ability to achieve the anticipated cost savings and revenue synergies from acquisitions; general economic and financial market conditions, either national or in the state in which Park and its subsidiaries do business, are less favorable than expected; Park’s ability to convert its Ohio-based community banking subsidiaries and divisions to one operating system and combine their charters; deterioration in credit conditions in the markets in which Park’s subsidiary banks operate; changes in the interest rate environment reduce net interest margins; competitive pressures among financial institutions increase significantly; changes in banking regulations or other regulatory or legislative requirements affecting the respective businesses of Park and its subsidiaries; changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies; the effect of critical accounting policies and judgments; demand for loans in the respective market areas served by Park and its subsidiaries, and other risk factors relating to the banking industry as detailed from time to time in Park’s reports filed with the Securities and Exchange Commission including those described in “Item 1A. Risk Factors” of Part I of Park’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and in “Item 1A. Risk Factors” of Part II of this Quarterly Report on Form 10-Q. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date hereof. Park does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions that may be made to update any forward-looking statement to reflect the events or circumstances after the date on which the forward-looking statement is made, or reflect the occurrence of unanticipated events, except to the extent required by law.

Critical Accounting Policies

Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2007 Annual Report to Shareholders lists significant accounting policies used in the development and presentation of Park’s consolidated financial statements. The accounting and reporting policies of Park conform with U.S. generally accepted accounting principles and general practices within the financial services industry. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.

Park considers that the determination of the allowance for loan losses involves a higher degree of judgement and complexity than its other significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb probable incurred credit losses in the loan portfolio. Management’s determination of the adequacy of the allowance for loan losses is based on periodic evaluations of the loan portfolio and of current economic conditions. However, this evaluation is inherently subjective as it requires material estimates, including expected default probabilities, loss given default, the amounts and timing of expected future cash flows on impaired loans and estimated losses on consumer loans and residential mortgage loans based on historical loss experience and the current economic conditions. All of those factors may be susceptible to significant change. To the extent that actual results differ from management estimates, additional loan loss provisions may be required that would adversely impact earnings for future periods.

Management’s assessment of the adequacy of the allowance for loan losses considers individual impaired loans, pools of homogeneous loans with similar risk characteristics and other environmental risk factors. This assessment is updated on a quarterly basis. The allowance established for individual impaired loans reflects expected losses resulting from analyses developed through specific credit allocations for individual loans. The specific credit allocations are based on regular analyses of commercial, commercial real estate and construction loans where the internal credit rating is at or below a predetermined classification. These analyses involve a high degree of judgement in estimating the amount of loss associated with specific impaired loans.

Pools of homogeneous loans with similar risk characteristics are also assessed for probable losses. A loss migration analysis is performed on certain commercial, commercial real estate and construction loans. These are loans above a fixed dollar amount that are assigned an internal credit rating. Generally, residential real estate loans and consumer loans are not individually graded. The amount of loan loss reserve assigned to these loans is dependent on their net charge-off history.

Management also evaluates the impact of environmental factors which pose additional risks. Such environmental factors include: national and local economic trends and conditions; experience, ability, and depth of lending management and staff; effects of any changes in lending policies and procedures; levels of, and trends in, consumer bankruptcies, delinquencies, impaired loans and charge-offs and recoveries. The determination of this component of the allowance for loan losses requires considerable management judgement.

Park’s recent adoption of SFAS No. 157 (See Note 15 to this Form 10-Q) on January 1, 2008 required management to establish a fair value hierarchy, which has the objective of maximizing the use of observable market inputs. This statement also requires enhanced disclosures regarding the inputs used to calculate fair value. These are classified as Level 1, 2, and 3. Level 3 inputs are those with significant unobservable inputs that reflect a company’s own assumptions about the market for a particular instrument. Some of this could be based on internal models and cash flow analysis. At March 31, 2008, the Level 3 inputs for Park had an aggregate fair value of approximately $91 million. This was 5.11% of the total amount of assets measured at fair value as of the end of the first quarter. The fair value of impaired loans was approximately $88 million (or 97%) of the total amount of Level 3 inputs. The large majority of Park’s Level 2 inputs consist of available for sale (“AFS”) securities. The fair value of these AFS securities is obtained largely by the use of matrix pricing, which is a mathematical technique widely used in the financial services industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.

Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgement than most other significant accounting policies Statement of Financial Accounting Standards (“SFAS”) No. 142, “Accounting for Goodwill and Other Intangible Assets” establishes standards for the amortization of acquired intangible assets and the impairment assessment of goodwill. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Park’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Park’s banking subsidiaries to provide quality, cost-effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base, the inability to deliver cost effective services over sustained periods or significant credit problems can lead to impairment of goodwill that could adversely impact earnings in future periods. SFAS No. 142 requires an annual evaluation of goodwill for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The fair value of the goodwill, which resides on the books of Park’s subsidiary banks, is estimated by reviewing the past and projected operating results for the Park subsidiary banks and banking industry comparable information.

During the fourth quarter of 2007, Park’s management determined that Vision Bank had significant credit problems and concluded that an impairment analysis needed to be done on the goodwill balance at Vision Bank. As a result of this impairment analysis, Vision Bank recorded a goodwill impairment charge of $54.0 million during the fourth quarter of 2007. This impairment charge reduced the goodwill balance carried on the books of Vision Bank to $55.0 from $109.0 million.

At March 31, 2008, on a consolidated basis, Park had core deposit intangibles of $16.2 million subject to amortization and $127.3 million of goodwill, which was not subject to periodic amortization. The core deposit intangibles recorded on the balance sheets of Park’s Ohio-based banks totaled $5.8 million and the core deposit intangibles at Vision Bank were $10.4 million. The goodwill assets carried on the balance sheets of Park’s Ohio-based banks totaled $72.3 million and the goodwill balance at Vision Bank was $55.0 million. During the first quarter of 2008, Park’s management evaluated the goodwill for Park’s Ohio-based banks for impairment and concluded that the fair value of the goodwill for Park’s Ohio-based banks exceeded the carrying value and accordingly was not impaired. An impairment analysis was not performed on the goodwill at Vision Bank during the first quarter of 2008 because the impairment analysis was completed for Vision Bank at year-end 2007. Park’s management will review the goodwill at Vision Bank for impairment during the fourth quarter of 2008.

Comparison of Results of Operations
For the Three Months Ended March 31, 2008 and 2007

Summary Discussion of Results

Net income for the first quarter of 2008 increased by $1.9 million or 9.1% to $23.0 million compared to $21.1 million for the first three months of 2007. Diluted earnings per share increased by $.16 or 10.7% to $1.65 for the first quarter of 2008 compared to $1.49 for the same period in 2007.

The annualized net income to average asset ratio (ROA) was 1.42% for the first quarter of 2008 and was 1.51% for the same period in 2007. The annualized net income to average equity ratio (ROE) was 16.02% for the first three months of 2008 and was 14.58% for the first quarter of 2007.

Park’s management uses certain non-GAAP (generally accepted accounting principles) financial measures to evaluate Park’s performance. Specifically, management reviews return on average tangible realized equity (ROTRE) and has included in this Quarterly Report on Form 10-Q information relating to ROTRE for the three-month periods ended March 31, 2008 and 2007. For purposes of calculating the non-GAAP financial measure of ROTRE, annualized net income for each period is divided by average tangible realized equity during the period. Average tangible realized equity equals average stockholders’ equity during the applicable period less (i) average goodwill and other intangible assets during the period and (ii) average accumulated other comprehensive income (loss), net of taxes, during the period. Management believes that ROTRE presents a meaningful view of Park’s operating performance and ensures comparability of operating performance from period to period while eliminating certain non-operational effects of acquisitions and unrealized gains and losses arising from mark-to-market accounting for the fair market value of investment securities.

Reconciliation of average stockholders’ equity to average tangible realized equity:

The reconciliation is provided for the purpose of complying with SEC Regulations G and not as an indication that return on average tangible realized equity is a substitute for return on average equity as determined in accordance with GAAP.

The ROTRE was 21.72% for the first quarter of 2008 and was 17.09% for the first quarter of 2007.

The following tables compare the components of net income for the first quarter of 2008 and the first quarter of 2007. The summary income statements are for Park, Vision Bank and Park Excluding Vision Bank.

Park-Summary Income Statement
For the Three Months Ended March 31, 2008 and March 31, 2007

Park acquired Vision Bancshares Inc. on March 9, 2007 and accordingly the operating results for Vision Bank for the first quarter of 2007 only include the revenue and expense from the date of acquisition through the end of March. As a result, the percentage increases in the various components of the income statement are larger than normal.

Vision Bank continued to have significant credit problems during the first quarter of 2008, as net loan charge-offs were $5.5 million or an annualized 3.37% of average loans. The large loan loss provision of $4.8 million generated a $1.8 million loss for the first three months of 2008.

Park Excluding Vision Bank-Summary Income Statement
For the Three Months Ended March 31, 2008 and March 31, 2007

Income before taxes increased by $6.5 million or 22.8% to $35.2 million for the first quarter of 2008 compared to the same period in 2007 for Park excluding Vision Bank. Approximately $3.1 million or 48% of the increase in income before taxes was due to the successful completion of the Visa initial public offering.

Park’s Ohio-based banks recognized $3.1 million of other income during the first quarter of 2008 as a result of the Visa initial public offering. The Ohio-based banks received $2.2 million in cash from Visa and also recognized $.9 million in income due to the elimination of the contingent liability reserve for Visa litigation claims, which was established during the fourth quarter of 2007.

Net Interest Income Comparison for the First Quarter of 2008 and 2007

Net interest income (the difference between total interest income and total interest expense) is Park’s principal source of earnings, making up approximately 74.2% of total revenue for the first quarter of 2008 and 77.2% of total revenue for the first quarter of 2007. Net interest income increased by $6.6 million or 12.0% to $61.5 million for the first three months of 2008 compared to $54.9 million for the same period in 2007. The large increase in net interest income for 2008 compared to 2007 was due to the acquisition of Vision Bank. Park acquired Vision Bank on March 9, 2007 and as a result only 23 days of net interest income was included in the first quarter of 2007. Vision Bank generated net interest income of $6.85 million during the first quarter of 2008, compared to $2.1 million for the partial first quarter of 2007. Excluding Vision Bank, net interest income increased by $1.8 million or 3.4% to $54.6 million for the first quarter of 2008 compared to $52.8 million for the first quarter of 2007.

The tax equivalent net interest margin (annualized tax equivalent net interest income divided by average interest earning assets) was 4.19% for the first quarter of 2008 and 4.31% for the first quarter of 2007. The tax equivalent net interest margin for Vision Bank was 3.60% for the first quarter of 2008 compared to 5.11% for the first quarter of 2007. Excluding Vision Bank, the tax equivalent net interest margin was 4.28% for both the first quarter of 2008 and the first quarter of 2007.

The large decline in the net interest margin of Vision Bank for the first quarter of 2008 compared to the first quarter of 2007 was primarily due to the large increase in nonaccrual loans. For loans which are placed on nonaccrual status, it is Park’s policy to reverse interest previously accrued on the loan against interest income. Interest on such loans is thereafter recorded on a cash basis and is included in earnings only when actually received in cash and when full payment of principal is no longer doubtful. At March 31, 2008, Vision Bank’s nonaccrual loans were $59.0 million or 8.87% of total loans, compared to $6.9 million or 1.16% of total loans at March 31, 2007. Excluding Vision Bank, nonaccrual loans were $46.6 million or 1.30% of total loans at March 31, 2008, compared to $27.4 million or .78% of total loans at March 31, 2007.

The following table compares the average balance sheet and tax equivalent yield on interest earning assets and the cost of interest bearing liabilities for the first quarter of 2008 with the same quarter in 2007.

Average interest earning assets for the first quarter of 2008 increased by $726 million or 13.9% to $5,942 million compared to $5,216 million for the same period in 2007. Vision Bank accounted for most of the increase in average interest earning assets. Vision Bank had $768 million of average interest earning assets in the first quarter of 2008 compared to $165 million for the first quarter of 2007. The average yield on interest earning assets decreased by 27 basis points to 6.83% for the first three months of 2008 compared to 7.10% for the same period in 2007.

Average interest bearing liabilities for the first quarter of 2008 increased by $771 million or 17.8% to $5,111 million compared to $4,340 million for the first three months of 2007. Vision Bank had $680 million of average interest bearing liabilities for the first quarter of 2008 compared to $138 million for the first quarter of 2007. The average cost of interest bearing liabilities decreased by 29 basis points to 3.07% for the first three months of 2008 compared to 3.36% for the same period in 2007.

Interest Rates

The Federal Open Market Committee of the Federal Reserve aggressively lowered the targeted federal funds rate during the first quarter of 2008 by 200 basis points from 4.25% to 2.25%. The average federal funds rate was 3.18% for the first three months of 2008 compared to 5.25% for the first quarter of 2007.

The average prime lending rate was 6.21% for the first three months of 2008 compared to 8.25% for the first quarter of 2007.

The average interest rate on a five year U.S. Treasury note was 2.75% for the first quarter of 2008 compared to 4.65% for the first quarter of 2007.

Discussion of Loans, Investments, Deposits and Borrowings

Total loans outstanding at March 31, 2008 were $4,253 million compared to $4,089 million at March 31, 2007, an increase of approximately $164 million or 4.0%. Vision Bank produced an increase in loans of $67 million or 11.3% and Park’s Ohio-based banks increased loans by $97 million or 2.8% for the twelve months ended March 31, 2008.

Loan balances increased by approximately $29 million during the first quarter of 2008, with $26 million of the increase coming at Vision Bank. On an annualized basis, loans grew by 2.8% during the first quarter of 2008. In Park’s 2007 Annual Report, management projected that loans would grow by 2% to 3% during 2008. Park’s management continues to project that loans will increase by 2% to 3% in 2008.

The yield on loans decreased by 44 basis points to 7.53% for the first quarter of 2008 compared to 7.97% for the first quarter of 2007. Management expects that the yield on loans will continue to decrease in 2008 due to the 200 basis point decrease in the prime lending rate during the first quarter of 2008.

Park’s management purchased approximately $360 million of taxable investment securities during the first quarter of 2008. These investment securities were all U.S. Government Agencies* and were purchased at a yield of approximately 4.90% with an expected average life of about 3.6 years. Most of the securities were seasoned 15 year mortgage-backed securities with a weighted average maturity of about 12 years. On an amortized cost basis, the total investment portfolio increased by approximately $232 million during the first quarter of 2008 to $1,933 million at March 31, 2008. The tax equivalent yield on Park’s investment portfolio was 5.07% at March 31, 2008.

^*     Management uses U.S. Government Agencies interchangeably with U.S. Government Sponsored Entities’ Asset-Backed Securities and      Other Asset-Backed Securities.

The yield on taxable investment securities was 5.06% for the first quarter of 2008 compared to 5.04% for the same period in 2007. The tax equivalent yield on tax exempt investment securities was 6.74% for the first three months of 2008 compared to 6.78% for the same period in 2007. On a combined basis, the tax equivalent yield on total investment securities was 5.12% for both the first quarter of 2008 and the first quarter of 2007.

Management expects that the average balance of the total investment portfolio will increase to approximately $1,860 million during the second quarter of 2008 compared to the average balance for the first quarter of 2008 of $1,701 million. Management expects that the tax equivalent yield on the total investment portfolio will decrease to approximately 4.95% for the second quarter of 2008 compared to 5.12% for the first quarter of 2008.

Interest bearing deposit account balances decreased by $25 million or .7% to $3,809 million at March 31, 2008 compared to $3,834 million at March 31, 2007. The average rate paid on interest bearing deposits decreased by 25 basis points to 2.83% for the first quarter of 2008 compared to 3.08% for the first quarter of 2007. Management expects the average rate paid on deposits will continue to decrease in 2008 due to the large decrease in market interest rates in the first quarter of 2008.

Interest bearing deposit account balances increased by $65 million during the first quarter of 2008 to $3,809 million at March 31, 2008 compared to $3,744 million at December 31, 2007. Noninterest bearing deposit account balances increased by $16 million during the first quarter of 2008 to $711 million at March 31, 2008 compared to $695 million at December 31, 2007. In Park’s 2007 Annual Report, management projected that total deposit balances would increase by 1% to 2% during 2008. Park’s management continues to expect modest deposit growth of 1% to 2% during 2008.

Total borrowings increased by $570 million or 56.4% to $1,581 million at March 31, 2008 compared to $1,011 million at March 31, 2007. The average rate paid on total borrowings decreased by 60 basis points to 3.72% for the first quarter of 2008 compared to 4.32% for the first quarter of 2007. Management expects that the average interest rate paid on total borrowings will continue to decrease in 2008 as a result of the 200 basis point reduction in the federal funds rate during the first quarter of 2008.

Total borrowings increased by $191.7 million or 13.8% during the first quarter of 2008 to $1,581 million at March 31, 2008 compared to $1,390 million at December 31, 2007. This increase was primarily needed to fund the increase in the investment portfolio.

Guidance on Net Interest Income for 2008

Management provided guidance in Park’s 2007 Annual Report that net interest income for 2008 would be approximately $240 to $242 million, the tax equivalent net interest margin would be approximately 4.10% and that average interest earning assets for the year would be approximately $5,900 million.

The actual results for the first quarter of 2008 were better than management’s guidance. Net interest income was $61.5 million, which annualized would be about $246 to $247 million for 2008. The tax equivalent net interest margin was 4.19% and average interest earning assets were $5,942 million for the first quarter of 2008. Management did not anticipate having the opportunity to purchase U.S. Government Agency securities at an average yield of 4.90% during the first quarter of 2008 and funding the purchases with a borrowing rate of below 3.00%. The most recent projection by management indicates that net interest income for 2008 will be between $247 to $250 million. The tax equivalent net interest margin is forecast to be approximately 4.15% for 2008 and average interest earning assets are projected to be approximately $6,020 million for 2008.

Provision for Loan Losses

The provision for loan losses increased by $5.2 million or 235.3% to $7.4 million for the first three months of 2008 compared to $2.2 million for the first quarter of 2007. Net loan charge-offs were $8.6 million for the first quarter of 2008 compared to $2.2 million for the first quarter of 2007. On an annualized basis, net loan charge-offs were .82% of average loans for the first three months of 2008 and .25% of average loans for the first quarter of 2007.

The provision for loan losses was $2.6 million for Park’s Ohio-based banks and $4.8 million for Vision Bank for the first quarter of 2008. Net loan charge-offs were $3.1 million for Park’s Ohio-based banks and $5.5 million for Vision Bank for the first three months of 2008. On an annualized basis, net loan charge-offs were .35% of average loans for Park’s Ohio-based banks and 3.37% of average loans for Vision Bank for the first quarter of 2008.

Park’s annualized net loan charge-off ratio for the past five years has been .55% for 2007, .12% for 2006, .18% for 2005, .28% for 2004 and .43% for 2003. For 2007, Park’s Ohio-based banks had an annualized net loan charge-off ratio of .39% and Vision Bank had an annualized net loan charge-off ratio of 1.71% for 2007.

Nonperforming loans, defined as loans that are 90 days past due, nonaccrual and renegotiated loans were $111.3 million or 2.62% of loans at March 31, 2008, $108.5 million or 2.57% of loans at December 31, 2007 and $40.6 million or .99% of loans at March 31, 2007. The nonperforming loan totals for Park’s Ohio-based banks were $51.8 million or 1.44% of loans at March 31, 2008, $45.0 million or 1.26% of loans at December 31, 2007 and $33.7 million or .97% of loans at March 31, 2007. The nonperforming loan totals for Vision Bank were $59.5 million or 8.94% of loans at March 31, 2008, $63.5 million or 9.86% of loans at December 31, 2007 and $6.9 million or 1.16% of loans at March 31, 2007. The non-performing loan totals have been written down on a timely basis by management. Partial charge-offs of $3.8 million and $9.0 million have been taken on these loans for the Ohio-based banks and Vision Bank, respectively, as of March 31, 2008.

Other real estate owned was $20.1 million at March 31, 2008, compared to $13.4 million at December 31, 2007 and $4.6 million at March 31, 2007. Vision Bank had other real estate owned of $13.7 million at March 31, 2008 compared to $0 at March 31, 2007. Management expects that other real estate owned will increase in the second and third quarters of 2008 as Vision Bank management works through their non-performing loans.

The reserve for loan losses as a percentage of outstanding loans was 2.02% at March 31, 2008, 2.06% at December 31, 2007 and 1.95% at March 31, 2007.

Management provided guidance in Park’s 2007 Annual Report that the loan loss provision for 2008 would be $20 to $25 million and that the annualized net loan charge-off ratio would be approximately .45% to .55%. The actual results for the first three months of 2008 were higher than anticipated as the loan loss provision was $7.4 million and the annualized net loan charge-off ratio was .82%. In addition, nonperforming loans increased slightly during the first quarter of 2008 to 2.62% of loans at March 31, 2008 compared to 2.57% of loans at December 31, 2007. The most current projection by Park’s management indicates that the loan loss provision for 2008 will be $25 to $30 million and that the annualized net loan charge-off percentage for 2008 will be .55% to .70%. Management expects a reduction in the annualized net loan charge-off percentage for Vision Bank for the last three quarters of 2008. The annualized net loan charge-off percentage for Park’s Ohio-based banks is expected to remain about the same for the next three quarters.

The following table compares nonperforming assets at March 31, 2008, December 31, 2007 and March 31, 2007.

Total Other Income

Total other income for the first quarter of 2008 was $21.0 million, an increase of $4.865 million or 30.1% from total other income of $16.2 million for the first quarter of 2007. The primary reason for the increase in total other income was due to $3.1 million of other income that was recognized by Park’s Ohio-based banks resulting from the successful completion of the initial public offering by Visa during March 2008. Total other income also increased as Vision Bank’s total other income in the first quarter of 2007 was only included from the date of acquisition on March 9, 2007. Total other income for Vision Bank increased by $816,000 to $1.1 million for the first quarter of 2008 compared to $.3 million for the first quarter of 2007.

The following table is a summary of the changes in the components of total other income.