EX-13 10 prk-ex13x20121231.htm EXHIBIT
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 understanding of anticipated future financial performance. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance. The forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation: Park's ability to execute its business plan 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 2011 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 statement 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 transaction 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.
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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) | 2012 | 2011 | 2010
PNB | $ | 87,106 |  | $ | 106,851 |  | $ | 102,948 |
GFSC | 3,550 |  | 2,721 |  | 2,006 |
Park Parent Company | 195 |  | (1,595 | ) | (1,439 | )
Ohio-based operations | $ | 90,851 |  | $ | 107,977 |  | $ | 103,515 |
Vision Bank | — |  | (22,526 | ) | (45,414 | )
SEPH | (12,221 | ) | (3,311 | ) | — |
Total Park | $ | 78,630 |  | $ | 82,140 |  | $ | 58,101 |

The “Park Parent Company” above excludes the results for SEPH, an entity which is winding down commensurate with it's 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 discussion below provides additional information regarding Park's operating segments.
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) |  | 2012 |  | 2011 |  | 2010
Net interest income |  | $ | 221,758 |  |  | $ | 236,282 |  |  | $ | 237,281 |
Provision for loan losses |  | 16,678 |  |  | 30,220 |  |  | 23,474 |
Fee income |  | 70,739 |  |  | 67,348 |  |  | 68,648 |
Security gains |  | — |  |  | 23,634 |  |  | 11,864 |
Operating expenses |  | 156,516 |  |  | 146,235 |  |  | 144,051 |
Income before taxes |  | $ | 119,303 |  |  | $ | 150,809 |  |  | $ | 150,268 |
Federal income taxes |  | 32,197 |  |  | 43,958 |  |  | 47,320 |
Net income |  | $ | 87,106 |  |  | $ | 106,851 |  |  | $ | 102,948 |
Net income excluding security gains |  | $ | 87,106 |  |  | $ | 91,489 |  |  | $ | 95,236 |

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Balances at December 31,
(In thousands) |  | 2012 |  | 2011 |  | 2010
Assets |  | $ | 6,502,579 |  |  | $ | 6,281,747 |  |  | $ | 6,495,558 |
Loans |  | 4,369,173 |  |  | 4,172,424 |  |  | 4,074,775 |
Deposits |  | 4,814,107 |  |  | 4,611,646 |  |  | 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) |  | 2012 |  | 2011 |  | 2010
Net interest income |  | $ | 9,156 |  |  | $ | 8,693 |  |  | $ | 7,611 |
Provision for loan losses |  | 859 |  |  | 2,000 |  |  | 2,199 |
Fee income |  | — |  |  | — |  |  | 2 |
Operating expenses |  | 2,835 |  |  | 2,506 |  |  | 2,326 |
Income before taxes |  | $ | 5,462 |  |  | $ | 4,187 |  |  | $ | 3,088 |
Federal income taxes |  | 1,912 |  |  | 1,466 |  |  | 1,082 |
Net income |  | $ | 3,550 |  |  | $ | 2,721 |  |  | $ | 2,006 |

Balances at December 31,
(In thousands) |  | 2012 |  | 2011 |  | 2010
Assets |  | $ | 49,926 |  |  | $ | 46,682 |  |  | $ | 43,209 |
Loans |  | 50,082 |  |  | 47,111 |  |  | 43,714 |
Deposits |  | 8,358 |  |  | 8,013 |  |  | 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.
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.
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Table 4 - SEPH/Vision - Summary Income Statement |  |  |  |  |  |  |
For the years ended December 31, |  |  |  |  |  |  |
(In thousands) | SEPH 2012 |  | SEPH 2011 |  | Vision 2011 |  | Vision 2010
Net interest income | $ | (341 | ) |  | $ | (974 | ) |  | $ | 27,078 |  |  | $ | 27,867 |
Provision for loan losses | 17,882 |  |  | — |  |  | 31,052 |  |  | 61,407 |
Fee income | (736 | ) |  | (3,039 | ) |  | 1,422 |  |  | (6,024 | )
Security gains | — |  |  | — |  |  | 5,195 |  |  | — |
Gain on sale of Vision business | 22,167 |  |  | — |  |  | — |  |  | — |
Total other expense | 22,032 |  |  | 1,082 |  |  | 31,379 |  |  | 31,623 |
Loss before income tax benefit | $ | (18,824 | ) |  | $ | (5,095 | ) |  | $ | (28,736 | ) |  | $ | (71,187 | )
Income tax benefit | (6,603 | ) |  | (1,784 | ) |  | (6,210 | ) |  | (25,773 | )
Net loss | $ | (12,221 | ) |  | $ | (3,311 | ) |  | $ | (22,526 | ) |  | $ | (45,414 | )
Net loss excluding security gains | $ | (12,221 | ) |  | $ | (3,311 | ) |  | $ | (25,903 | ) |  | $ | (45,414 | )

Balances at December 31,
(In thousands) |  | SEPH 2012 |  | SEPH 2011 |  | Vision 2011 |  | Vision 2010
Assets |  | $ | 104,428 |  |  | $ | 34,989 |  |  | $ | 650,935 |  |  | $ | 791,945 |
Assets held for sale (1) |  | — |  |  | — |  |  | 382,462 |  |  | — |
Loans |  | 59,178 |  |  | — |  |  | 123,883 |  |  | 640,580 |
Deposits |  | — |  |  | — |  |  | 32 |  |  | 633,432 |
Liabilities held for sale (2) |  | — |  |  | — |  |  | 536,186 |  |  | — |

(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) | 2012 | 2011 | 2010
Net interest income | $ | 4,742 |  | $ | 2,155 |  | $ | 1,285 |
Provision for loan losses | — |  | — |  | — |
Fee income | 233 |  | 350 |  | 390 |
Total other expense | 6,585 |  | 7,115 |  | 9,107 |
Loss before income tax benefit | $ | (1,610 | ) | $ | (4,610 | ) | $ | (7,432 | )
Federal income tax benefit | (1,805 | ) | (3,015 | ) | (5,993 | )
Net income (loss) | $ | 195 |  | $ | (1,595 | ) | $ | (1,439 | )

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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) |  | 2012 |  | 2011 |  | 2010
Net interest income |  | $ | 235,315 |  |  | $ | 273,234 |  |  | $ | 274,044 |
Provision for loan losses |  | 35,419 |  |  | 63,272 |  |  | 87,080 |
Fee income |  | 70,236 |  |  | 66,081 |  |  | 63,016 |
Gain on sale of Vision business |  | 22,167 |  |  | — |  |  | — |
Security gains |  | — |  |  | 28,829 |  |  | 11,864 |
Operating expenses |  | 187,968 |  |  | 188,317 |  |  | 187,107 |
Income before taxes |  | $ | 104,331 |  |  | $ | 116,555 |  |  | $ | 74,737 |
State income taxes |  | — |  |  | 6,088 |  |  | (1,161 | )
Federal income taxes |  | 25,701 |  |  | 28,327 |  |  | 17,797 |
Net income |  | $ | 78,630 |  |  | $ | 82,140 |  |  | $ | 58,101 |

Balances at December 31,
(In thousands) |  | 2012 |  | 2011 |  | 2010
Assets |  | $ | 6,642,803 |  |  | $ | 6,972,245 |  |  | $ | 7,282,261 |
Assets held for sale (1) |  | — |  |  | 382,462 |  |  | — |
Loans |  | 4,450,322 |  |  | 4,317,099 |  |  | 4,732,685 |
Deposits |  | 4,716,032 |  |  | 4,465,114 |  |  | 5,095,420 |
Liabilities held for sale (2) |  | — |  |  | 536,186 |  |  | — |

(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) | 2012 |  | Projected range for 2013
PNB | $ | 135,981 |  |  | $ | 129,000 |  | $ | 139,000 |
GFSC | 6,321 |  |  | 5,000 |  | 6,000 |
Parent excluding SEPH | (1,610 | ) |  | (5,000 | ) | (4,000 | )
Total Ohio-based operations | $ | 140,692 |  |  | $ | 129,000 |  | $ | 141,000 |
SEPH * | (942 | ) |  | (16,000 | ) | (10,000 | )
Park National Corporation | $ | 139,750 |  |  | $ | 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.
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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 | $ | 139,750 |  |  | $ | 113,000 |  | $ | 131,000 |
Provision for loan losses | 35,419 |  |  | 20,000 |  | 15,000 |
Income before income tax | $ | 104,331 |  |  | $ | 93,000 |  | $ | 116,000 |
Income taxes | 25,701 |  |  | 23,250 |  | 30,160 |
Net income | $ | 78,630 |  |  | $ | 69,750 |  | $ | 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 management 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 projected 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.
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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 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.
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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 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 concluded 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 impairment 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.
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 (including GFSC) 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.
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Table 9 - Park National Corporation Affiliate Financial Data
|  | 2012 |  | 2011 |  | 2010
(In thousands) |  | Average Loans |  | Average Deposits |  | Average Loans |  | Average Deposits |  | Average Loans |  | Average Deposits
Park National Bank: |  |  |  |  |  |  |  |  |  |  |  |
Park National Bank Division |  | $ | 1,286,751 |  |  | $ | 1,354,196 |  |  | $ | 1,206,520 |  |  | $ | 1,387,223 |  |  | $ | 1,141,941 |  |  | $ | 1,315,047 |
Security National Bank Division |  | 412,388 |  |  | 767,560 |  |  | 394,605 |  |  | 685,428 |  |  | 377,503 |  |  | 647,417 |
First-Knox National Bank Division |  | 513,976 |  |  | 507,237 |  |  | 493,158 |  |  | 482,537 |  |  | 470,832 |  |  | 475,419 |
Century National Bank Division |  | 604,382 |  |  | 480,536 |  |  | 573,056 |  |  | 460,825 |  |  | 547,014 |  |  | 477,248 |
Richland Trust Bank Division |  | 248,421 |  |  | 439,420 |  |  | 244,687 |  |  | 422,261 |  |  | 226,094 |  |  | 437,974 |
Fairfield National Bank Division |  | 245,064 |  |  | 394,239 |  |  | 236,467 |  |  | 383,358 |  |  | 219,310 |  |  | 376,985 |
Second National Bank Division |  | 302,185 |  |  | 290,870 |  |  | 281,749 |  |  | 281,347 |  |  | 273,531 |  |  | 282,654 |
Park National SW & N KY Bank Division |  | 291,297 |  |  | 218,407 |  |  | 329,690 |  |  | 240,213 |  |  | 349,700 |  |  | 258,593 |
United Bank Division |  | 92,258 |  |  | 196,841 |  |  | 95,528 |  |  | 193,685 |  |  | 96,752 |  |  | 202,550 |
Unity National Bank Division |  | 147,956 |  |  | 149,537 |  |  | 146,965 |  |  | 145,051 |  |  | 147,239 |  |  | 134,125 |
Farmers & Savings Bank Division |  | 95,661 |  |  | 75,684 |  |  | 97,228 |  |  | 71,386 |  |  | 99,839 |  |  | 68,924 |
Scope Aircraft Finance |  | 175,019 |  |  | 9 |  |  | 156,681 |  |  | 9 |  |  | 146,424 |  |  | 10 |
SEPH/Vision Bank |  | 133,306 |  |  | 67,737 |  |  | 582,221 |  |  | 575,784 |  |  | 666,652 |  |  | 666,868 |
Guardian Finance |  | 48,987 |  |  | 8,524 |  |  | 45,957 |  |  | 8,093 |  |  | 40,792 |  |  | 6,219 |
Parent Company, including consolidating entries |  | (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, businesses 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) |  | 2012 |  | 2011 |  | Change
Non-interest bearing checking |  | $ | 1,137,290 |  |  | $ | 995,733 |  |  | $ | 141,557 |
Interest bearing transaction accounts |  | 1,088,617 |  |  | 1,037,385 |  |  | 51,232 |
Savings |  | 1,038,356 |  |  | 931,527 |  |  | 106,829 |
All other time deposits |  | 1,450,424 |  |  | 1,499,105 |  |  | (48,681 | )
Other |  | 1,345 |  |  | 1,364 |  |  | (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.
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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.
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 adjusts 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 maturity date of December 28, 2012. This interest rate swap agreement was designed to hedge the cash flows pertaining to the $25 million subordinated debenture until December 28, 2012. Management converted the cash flows 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.
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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 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 shareholders’ 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 shareholders’ 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.
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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.
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 a 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 management'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.
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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) |  | 2012 |  | 2011 |  | 2010 |  | 2009 |  | 2008
Commercial, financial and agricultural |  | $ | 823,927 |  |  | $ | 743,797 |  |  | $ | 737,902 |  |  | $ | 751,277 |  |  | $ | 714,296 |
Real estate - construction |  | 165,528 |  |  | 217,546 |  |  | 406,480 |  |  | 495,518 |  |  | 533,788 |
Real estate - residential |  | 1,713,645 |  |  | 1,628,618 |  |  | 1,692,209 |  |  | 1,555,390 |  |  | 1,560,198 |
Real estate - commercial |  | 1,092,164 |  |  | 1,108,574 |  |  | 1,226,616 |  |  | 1,130,672 |  |  | 1,035,725 |
Consumer |  | 651,930 |  |  | 616,505 |  |  | 666,871 |  |  | 704,430 |  |  | 643,507 |
Leases |  | 3,128 |  |  | 2,059 |  |  | 2,607 |  |  | 3,145 |  |  | 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 |  |  |  |  |  |
|  | One Year or Less (1) |  | Over One Through Five Years |  | Over Five Years |  | Total
December 31, 2012 |  |  |  |
(In thousands) |  |  |  |
Commercial, financial and agricultural |  | $ | 324,415 |  |  | $ | 328,565 |  |  | $ | 170,947 |  |  | $ | 823,927 |
Real estate - construction |  | 80,379 |  |  | 34,458 |  |  | 50,691 |  |  | 165,528 |
Real estate - commercial |  | 143,952 |  |  | 150,253 |  |  | 797,959 |  |  | 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 |  |  |  | 346,454 |  |  | 119,696 |  |  | $ | 466,150 |
Floating interest rate |  |  |  | 166,822 |  |  | 899,901 |  |  | $ | 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.
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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 environment 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 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 interest 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 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.
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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) |  | 2012 |  | 2011 |  | 2010
Obligations of U.S. Treasury and other U.S. Government sponsored entities |  | $ | 695,727 |  |  | $ | 371,657 |  |  | $ | 273,313 |
Obligations of states and political subdivisions |  | 1,573 |  |  | 4,652 |  |  | 14,211 |
U.S. Government asset-backed securities |  | 816,322 |  |  | 1,262,527 |  |  | 1,681,815 |
Federal Home Loan Bank stock |  | 59,031 |  |  | 60,728 |  |  | 61,823 |
Federal Reserve Bank stock |  | 6,876 |  |  | 6,876 |  |  | 6,876 |
Equities |  | 2,222 |  |  | 2,033 |  |  | 1,753 |
Total |  | $ | 1,581,751 |  |  | $ | 1,708,473 |  |  | $ | 2,039,791 |
Investments by category as a percentage of total investment securities |  |  |  |  |  |
Obligations of U.S. Treasury and other U.S. Government sponsored entities |  | 44.0 | % |  | 21.8 | % |  | 13.4 | %
Obligations of states and political subdivisions |  | 0.1 | % |  | 0.3 | % |  | 0.7 | %
U.S. Government asset-backed securities |  | 51.7 | % |  | 73.9 | % |  | 82.5 | %
Federal Home Loan Bank stock |  | 3.7 | % |  | 3.5 | % |  | 3.0 | %
Federal Reserve Bank stock |  | 0.4 | % |  | 0.4 | % |  | 0.3 | %
Equities |  | 0.1 | % |  | 0.1 | % |  | 0.1 | %
Total |  | 100.0 | % |  | 100.0 | % |  | 100.0 | %

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.
15

Table 14 - Distribution of Assets, Liabilities and Shareholders' Equity
December 31, | 2012 | 2011 | 2010
(In thousands) | Daily Average | Interest | Average Rate | Daily Average | Interest | Average Rate | Daily Average | Interest | Average Rate
ASSETS |  |  |  |  |  |  |  |  |
Interest earning assets: |  |  |  |  |  |  |  |  |
Loans (1) (2) | $ | 4,410,661 |  | $ | 236,184 |  | 5.35 | % | $ | 4,713,511 |  | $ | 264,192 |  | 5.60 | % | $ | 4,642,478 |  | $ | 269,306 |  | 5.80 | %
Taxable investment securities | 1,610,044 |  | 50,549 |  | 3.14 | % | 1,840,842 |  | 68,873 |  | 3.74 | % | 1,729,511 |  | 76,839 |  | 4.44 | %
Tax-exempt investment securities (3) | 3,087 |  | 217 |  | 7.03 | % | 8,038 |  | 575 |  | 7.15 | % | 16,845 |  | 1,220 |  | 7.24 | %
Money market instruments | 166,319 |  | 408 |  | 0.25 | % | 78,593 |  | 178 |  | 0.23 | % | 93,009 |  | 200 |  | 0.22 | %
Total interest earning assets | 6,190,111 |  | 287,358 |  | 4.64 | % | 6,640,984 |  | 333,818 |  | 5.03 | % | 6,481,843 |  | 347,565 |  | 5.36 | %
Non-interest earning assets: |  |  |  |  |  |  |  |  |
Allowance for loan losses | (61,995 | ) |  |  | (128,512 | ) |  |  | (119,700 | ) |  |
Cash and due from banks | 119,410 |  |  |  | 124,649 |  |  |  | 116,961 |  |  |
Premises and equipment, net | 54,917 |  |  |  | 69,507 |  |  |  | 69,839 |  |  |
Other assets | 464,363 |  |  |  | 499,543 |  |  |  | 493,762 |  |  |
TOTAL | $ | 6,766,806 |  |  |  | $ | 7,206,171 |  |  |  | $ | 7,042,705 |  |  |
LIABILITIES AND SHAREHOLDERS' EQUITY |  |  |  |  |  |
Interest bearing liabilities: |  |  |  |  |  |  |  |  |
Transaction accounts | $ | 1,239,417 |  | $ | 1,411 |  | 0.11 | % | $ | 1,430,492 |  | $ | 2,686 |  | 0.19 | % | $ | 1,354,392 |  | $ | 4,450 |  | 0.33 | %
Savings deposits | 1,006,321 |  | 1,072 |  | 0.11 | % | 946,406 |  | 1,126 |  | 0.12 | % | 891,021 |  | 1,303 |  | 0.15 | %
Time deposits | 1,540,863 |  | 15,921 |  | 1.03 | % | 1,816,506 |  | 23,842 |  | 1.31 | % | 2,029,088 |  | 36,212 |  | 1.78 | %
Total interest bearing deposits | 3,786,601 |  | 18,404 |  | 0.49 | % | 4,193,404 |  | 27,654 |  | 0.66 | % | 4,274,501 |  | 41,965 |  | 0.98 | %
Short-term borrowings | 258,661 |  | 678 |  | 0.26 | % | 297,537 |  | 823 |  | 0.28 | % | 300,939 |  | 1,181 |  | 0.39 | %
Long-term debt (4) | 907,704 |  | 31,338 |  | 3.45 | % | 881,921 |  | 30,169 |  | 3.42 | % | 725,356 |  | 28,327 |  | 3.91 | %
Total interest bearing liabilities | 4,952,966 |  | 50,420 |  | 1.02 | % | 5,372,862 |  | 58,646 |  | 1.09 | % | 5,300,796 |  | 71,473 |  | 1.35 | %

16

Table 14 - Continued
Non-interest bearing liabilities: |  |  |  |  |  |  |  |  |
Demand deposits | 1,048,796 |  |  |  | 999,085 |  |  |  | 907,514 |  |  |
Other | 75,312 |  |  |  | 90,351 |  |  |  | 87,885 |  |  |
Total non-interest bearing liabilities | 1,124,108 |  |  |  | 1,089,436 |  |  |  | 995,399 |  |  |
Shareholders' equity | 689,732 |  |  |  | 743,873 |  |  |  | 746,510 |  |  |
TOTAL | $ | 6,766,806 |  |  |  | $ | 7,206,171 |  |  |  | $ | 7,042,705 |  |  |
Net interest earnings |  | $ | 236,938 |  |  |  | $ | 275,172 |  |  |  | $ | 276,092 |  |
Net interest spread |  |  | 3.62 | % |  |  | 3.94 | % |  |  | 4.01 | %
Net yield on interest earning assets (net interest margin) |  |  | 3.83 | % |  |  | 4.14 | % |  |  | 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.

(4) | Includes subordinated debenture and subordinated notes.

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) |  | Average Interest Earning Assets |  | Net Interest Income |  | Tax Equivalent Net Interest Margin
First Quarter |  | $ | 6,297,772 |  |  | $ | 61,728 |  |  | 3.97 | %
Second Quarter |  | 6,134,797 |  |  | 58,680 |  |  | 3.87 | %
Third Quarter |  | 6,200,288 |  |  | 58,016 |  |  | 3.75 | %
Fourth Quarter |  | 6,128,159 |  |  | 56,891 |  |  | 3.72 | %
2012 |  | $ | 6,190,111 |  |  | $ | 235,315 |  |  | 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.
17

Table 16 - Volume/Rate Variance Analysis |  |
|  | Change from 2011 to 2012 |  | Change from 2010 to 2011
(In thousands) |  | Volume |  | Rate |  | Total |  | Volume |  | Rate |  | Total
Increase (decrease) in: |  |  |  |  |  |  |  |  |  |  |  |
Interest income: |  |  |  |  |  |  |  |  |  |  |  |
Total loans |  | $ | (16,271 | ) |  | $ | (11,737 | ) |  | $ | (28,008 | ) |  | $ | 3,988 |  |  | $ | (9,102 | ) |  | $ | (5,114 | )
Taxable investments |  | (8,038 | ) |  | (10,286 | ) |  | (18,324 | ) |  | 4,711 |  |  | (12,676 | ) |  | (7,965 | )
Tax-exempt investments |  | (348 | ) |  | (10 | ) |  | (358 | ) |  | (631 | ) |  | (14 | ) |  | (645 | )
Money market instruments |  | 213 |  |  | 17 |  |  | 230 |  |  | (31 | ) |  | 9 |  |  | (22 | )
Total interest income |  | (24,444 | ) |  | (22,016 | ) |  | (46,460 | ) |  | 8,037 |  |  | (21,783 | ) |  | (13,746 | )
Interest expense: |  |  |  |  |  |  |  |  |  |  |  |
Transaction accounts |  | $ | (307 | ) |  | $ | (968 | ) |  | $ | (1,275 | ) |  | $ | 237 |  |  | $ | (2,001 | ) |  | $ | (1,764 | )
Savings accounts |  | 58 |  |  | (112 | ) |  | (54 | ) |  | 85 |  |  | (262 | ) |  | (177 | )
Time deposits |  | (3,289 | ) |  | (4,632 | ) |  | (7,921 | ) |  | (3,514 | ) |  | (8,856 | ) |  | (12,370 | )
Short-term borrowings |  | (94 | ) |  | (51 | ) |  | (145 | ) |  | (14 | ) |  | (344 | ) |  | (358 | )
Long-term debt |  | 898 |  |  | 271 |  |  | 1,169 |  |  | 5,663 |  |  | (3,821 | ) |  | 1,842 |
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 approximately $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) |  | 2012 |  | 2011 |  | 2010
Income from fiduciary activities |  | $ | 15,947 |  |  | $ | 14,965 |  |  | $ | 13,874 |
Service charges on deposits |  | 16,704 |  |  | 18,307 |  |  | 19,717 |
Gain on sale of Vision business |  | 22,167 |  |  | — |  |  | — |
Net gains on sales of securities |  | — |  |  | 28,829 |  |  | 11,864 |
Other service income |  | 13,631 |  |  | 10,606 |  |  | 13,816 |
Checkcard fee income |  | 12,541 |  |  | 12,496 |  |  | 11,177 |
Bank owned life insurance income |  | 4,754 |  |  | 5,089 |  |  | 4,978 |
ATM fees |  | 2,359 |  |  | 2,703 |  |  | 2,951 |
Gain/loss on the sale of OREO, net |  | 4,414 |  |  | 1,312 |  |  | 1,466 |
OREO devaluations |  | (6,872 | ) |  | (8,219 | ) |  | (13,206 | )
Other |  | 6,758 |  |  | 8,822 |  |  | 8,243 |
Total other income |  | $ | 92,403 |  |  | $ | 94,910 |  |  | $ | 74,880 |

18

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
|  | Change 2011 to 2012 |  | Change 2010 to 2011
(In thousands) |  | Ohio-based operations |  | SEPH/VB |  | Total |  | Ohio-based operations |  | SEPH/VB |  | Total
Income from fiduciary activities |  | $ | 1,106 |  |  | $ | (124 | ) |  | $ | 982 |  |  | $ | 1,081 |  |  | $ | 10 |  |  | $ | 1,091 |
Service charges on deposits |  | (615 | ) |  | (988 | ) |  | (1,603 | ) |  | (1,211 | ) |  | (199 | ) |  | (1,410 | )
Gain on sale of Vision business |  | — |  |  | 22,167 |  |  | 22,167 |  |  | — |  |  | — |  |  | — |
Net gains on sales of securities |  | (23,634 | ) |  | (5,195 | ) |  | (28,829 | ) |  | 11,770 |  |  | 5,195 |  |  | 16,965 |
Other service income |  | 4,499 |  |  | (1,474 | ) |  | 3,025 |  |  | (3,295 | ) |  | 85 |  |  | (3,210 | )
Checkcard fee income |  | 802 |  |  | (757 | ) |  | 45 |  |  | 852 |  |  | 467 |  |  | 1,319 |
Bank owned life insurance income |  | (240 | ) |  | (95 | ) |  | (335 | ) |  | 111 |  |  | — |  |  | 111 |
ATM fees |  | (282 | ) |  | (62 | ) |  | (344 | ) |  | 37 |  |  | (285 | ) |  | (248 | )
Gain/loss on the sale of OREO, net |  | 176 |  |  | 2,926 |  |  | 3,102 |  |  | (277 | ) |  | 123 |  |  | (154 | )
OREO devaluations |  | (289 | ) |  | 1,636 |  |  | 1,347 |  |  | 832 |  |  | 4,155 |  |  | 4,987 |
Other |  | (1,883 | ) |  | (181 | ) |  | (2,064 | ) |  | 528 |  |  | 51 |  |  | 579 |
Total other income |  | $ | (20,360 | ) |  | $ | 17,853 |  |  | $ | (2,507 | ) |  | $ | 10,428 |  |  | $ | 9,602 |  |  | $ | 20,030 |

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 transaction, 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 originated and sold in 2012 was $409 million, compared to $190 million in 2011. As previously
19

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 residential mortgage 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 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 Vision Bank, 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) | 2012 |  | 2011 |  | 2010
Salaries and employee benefits | $ | 95,977 |  |  | $ | 102,068 |  |  | $ | 98,315 |
Data processing fees | 3,916 |  |  | 4,965 |  |  | 5,728 |
Professional fees and services | 24,267 |  |  | 21,119 |  |  | 19,972 |
Net occupancy expense of bank premises | 9,444 |  |  | 11,295 |  |  | 11,510 |
Furniture and equipment expense | 10,788 |  |  | 10,773 |  |  | 10,435 |
Insurance | 5,780 |  |  | 6,821 |  |  | 8,983 |
Marketing | 3,474 |  |  | 2,967 |  |  | 3,656 |
Postage and telephone | 5,983 |  |  | 6,060 |  |  | 6,648 |
Intangible amortization expense | 2,172 |  |  | 3,534 |  |  | 3,422 |
State taxes | 3,786 |  |  | 1,544 |  |  | 3,171 |
Loan put provision | 3,299 |  |  | — |  |  | — |
OREO expense | 4,011 |  |  | 3,266 |  |  | 3,358 |
Other | 15,071 |  |  | 13,905 |  |  | 11,909 |
Total other expense | $ | 187,968 |  |  | $ | 188,317 |  |  | $ | 187,107 |
Full time equivalent employees | 1,826 |  |  | 1,920 |  |  | 1,969 |

20

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
|  | Change 2011 to 2012 |  | Change 2010 to 2011
(In thousands) |  | Ohio-based operations |  | SEPH/VB |  | Total |  | Ohio-based operations |  | SEPH/VB |  | Total
Salaries and employee benefits |  | $ | 2,911 |  |  | $ | (9,002 | ) |  | $ | (6,091 | ) |  | $ | 4,286 |  |  | $ | (533 | ) |  | $ | 3,753 |
Data processing fees |  | 417 |  |  | (1,466 | ) |  | (1,049 | ) |  | (279 | ) |  | (484 | ) |  | (763 | )
Professional fees and services |  | 1,589 |  |  | 1,559 |  |  | 3,148 |  |  | (137 | ) |  | 1,284 |  |  | 1,147 |
Net occupancy expense of bank premises |  | (85 | ) |  | (1,766 | ) |  | (1,851 | ) |  | (239 | ) |  | 24 |  |  | (215 | )
Furniture and equipment expense |  | 850 |  |  | (835 | ) |  | 15 |  |  | 466 |  |  | (128 | ) |  | 338 |
Insurance |  | (197 | ) |  | (844 | ) |  | (1,041 | ) |  | (1,696 | ) |  | (466 | ) |  | (2,162 | )
Marketing |  | 720 |  |  | (213 | ) |  | 507 |  |  | (667 | ) |  | (22 | ) |  | (689 | )
Postage and telephone |  | 203 |  |  | (280 | ) |  | (77 | ) |  | (578 | ) |  | (10 | ) |  | (588 | )
Intangible amortization expense |  | — |  |  | (1,362 | ) |  | (1,362 | ) |  | (746 | ) |  | 858 |  |  | 112 |
State taxes |  | 2,242 |  |  | — |  |  | 2,242 |  |  | (1,627 | ) |  | — |  |  | (1,627 | )
Loan put provision |  | — |  |  | 3,299 |  |  | 3,299 |  |  | — |  |  | — |  |  | — |
OREO expense |  | 750 |  |  | (5 | ) |  | 745 |  |  | (65 | ) |  | (27 | ) |  | (92 | )
Other |  | 678 |  |  | 488 |  |  | 1,166 |  |  | 1,655 |  |  | 341 |  |  | 1,996 |
Total other expense |  | $ | 10,078 |  |  | $ | (10,427 | ) |  | $ | (349 | ) |  | $ | 373 |  |  | $ | 837 |  |  | $ | 1,210 |

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.
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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 insurance 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 Park's 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.
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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 | $ | 126,801 |  | $ | 71,509 |  | $ | 55,292 |  | 56 | %
Performing loans - retained by SEPH | 4,236 |  | 350 |  | 3,886 |  | 8 | %
Total SEPH loan exposure | $ | 131,037 |  | $ | 71,859 |  | $ | 59,178 |  | 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 outstanding 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 |  |  | $ | 68,444 |  |  | $ | 143,575 |
Specific reserves |  | 8,276 |  |  | 15,935 |  |  | 66,904 |
General reserves |  | $ | 47,261 |  |  | $ | 52,509 |  |  | $ | 76,671 |
Total loans |  | $ | 4,450,322 |  |  | $ | 4,317,099 |  |  | $ | 4,732,685 |
Impaired commercial loans |  | 137,238 |  |  | 187,074 |  |  | 250,933 |
Non-impaired loans |  | $ | 4,313,084 |  |  | $ | 4,130,025 |  |  | $ | 4,481,752 |
Allowance for loan losses as a percentage of period end loans |  | 1.25 | % |  | 1.59 | % |  | 3.03 | %
General reserves as a percentage of non-impaired loans |  | 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.
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The following table shows the improving credit trends in Park's Ohio-based operations' commercial loan portfolio:

Table 23 - Park Ohio - Commercial Credit Trends |  |  |
Commercial loans * (In thousands) | December 31, 2012 | December 31, 2011 | December 31, 2010
Pass rated | $ | 2,225,702 |  | $ | 2,131,007 |  | $ | 2,046,016 |
Special Mention | 49,275 |  | 66,254 |  | 85,287 |
Substandard | 16,843 |  | 29,604 |  | 78,529 |
Impaired | 89,365 |  | 95,109 |  | 90,694 |
Total | $ | 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 substandard 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.
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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) |  | $ | 4,410,661 |  |  | $ | 4,713,511 |  |  | $ | 4,642,478 |  |  | $ | 4,594,436 |  |  | $ | 4,354,520 |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |
Beginning balance |  | 68,444 |  |  | 143,575 |  |  | 116,717 |  |  | 100,088 |  |  | 87,102 |
Charge-offs: |  |  |  |  |  |  |  |  |  |
Commercial, financial |  |  |  |  |  |  |  |  |  |
and agricultural |  | 26,847 |  |  | 18,350 |  |  | 8,484 |  |  | 10,047 |  |  | 2,953 |
Real estate - construction |  | 9,985 |  |  | 64,166 |  |  | 23,308 |  |  | 21,956 |  |  | 34,052 |
Real estate - residential |  | 8,607 |  |  | 20,691 |  |  | 18,401 |  |  | 11,765 |  |  | 12,600 |
Real estate - commercial |  | 10,454 |  |  | 23,063 |  |  | 7,748 |  |  | 5,662 |  |  | 4,126 |
Consumer |  | 5,375 |  |  | 7,612 |  |  | 8,373 |  |  | 9,583 |  |  | 9,181 |
Leases |  | — |  |  | — |  |  | — |  |  | 9 |  |  | 4 |
Total charge-offs |  | $ | 61,268 |  |  | $ | 133,882 |  |  | $ | 66,314 |  |  | $ | 59,022 |  |  | $ | 62,916 |
Recoveries: |  |  |  |  |  |  |  |  |  |
Commercial, financial |  |  |  |  |  |  |  |  |  |
and agricultural |  | $ | 1,066 |  |  | $ | 1,402 |  |  | $ | 1,237 |  |  | $ | 1,010 |  |  | $ | 861 |
Real estate - construction |  | 2,979 |  |  | 1,463 |  |  | 813 |  |  | 1,322 |  |  | 137 |
Real estate - residential |  | 5,559 |  |  | 1,719 |  |  | 1,429 |  |  | 1,723 |  |  | 1,128 |
Real estate - commercial |  | 783 |  |  | 1,825 |  |  | 850 |  |  | 771 |  |  | 451 |
Consumer |  | 2,555 |  |  | 2,385 |  |  | 1,763 |  |  | 2,001 |  |  | 2,807 |
Leases |  | — |  |  | 4 |  |  | — |  |  | 3 |  |  | 31 |
Total recoveries |  | $ | 12,942 |  |  | $ | 8,798 |  |  | $ | 6,092 |  |  | $ | 6,830 |  |  | $ | 5,415 |
Net charge-offs |  | $ | 48,326 |  |  | $ | 125,084 |  |  | $ | 60,222 |  |  | $ | 52,192 |  |  | $ | 57,501 |
Provision charged to earnings |  | 35,419 |  |  | 63,272 |  |  | 87,080 |  |  | 68,821 |  |  | 70,487 |
Transfer of loans at fair value |  | — |  |  | (219 | ) |  | — |  |  | — |  |  | — |
Allowance for loan losses acquired (transferred) related to Vision |  | — |  |  | (13,100 | ) |  | — |  |  | — |  |  | — |
Ending balance |  | $ | 55,537 |  |  | $ | 68,444 |  |  | $ | 143,575 |  |  | $ | 116,717 |  |  | $ | 100,088 |
Ratio of net charge-offs to average loans |  | 1.10 | % |  | 2.65 | % |  | 1.30 | % |  | 1.14 | % |  | 1.32 | %
Ratio of allowance for loan losses |  |  |  |  |  |  |  |  |  |
to end of year loans |  | 1.25 | % |  | 1.59 | % |  | 3.03 | % |  | 2.52 | % |  | 2.23 | %

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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
(In thousands) | Allowance | Percent of Loans Per Category | Allowance | Percent of Loans Per Category | Allowance | Percent of Loans Per Category | Allowance | Percent of Loans Per Category | Allowance | Percent of Loans Per Category
Commercial, financial, and agricultural | $ | 15,635 |  | 18.51 | % | $ | 16,950 |  | 17.23 | % | $ | 11,555 |  | 15.59 | % | $ | 14,725 |  | 16.19 | % | $ | 14,286 |  | 15.90 | %
Real estate - construction | 6,841 |  | 3.72 | % | 14,433 |  | 5.04 | % | 70,462 |  | 8.59 | % | 47,521 |  | 10.68 | % | 24,794 |  | 11.88 | %
Real estate - residential | 14,759 |  | 38.51 | % | 15,692 |  | 37.72 | % | 30,259 |  | 35.75 | % | 19,753 |  | 33.51 | % | 22,077 |  | 34.74 | %
Real estate - commercial | 11,736 |  | 24.54 | % | 15,539 |  | 25.68 | % | 24,369 |  | 25.92 | % | 23,970 |  | 24.37 | % | 15,498 |  | 23.06 | %
Consumer | 6,566 |  | 14.65 | % | 5,830 |  | 14.28 | % | 6,925 |  | 14.09 | % | 10,713 |  | 15.18 | % | 23,391 |  | 14.33 | %
Leases | — |  | 0.07 | % | — |  | 0.05 | % | 5 |  | 0.06 | % | 35 |  | 0.07 | % | 42 |  | 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) |  | 2012 |  | 2011 |  | 2010 |  | 2009 |  | 2008
Nonaccrual loans |  | $ | 155,536 |  |  | $ | 195,106 |  |  | $ | 289,268 |  |  | $ | 233,544 |  |  | $ | 159,512 |
Accruing TDRs |  | 29,800 |  |  | 28,607 |  |  | - |  |  | 142 |  |  | 2,845 |
Loans past due 90 days or more |  | 2,970 |  |  | 3,489 |  |  | 3,590 |  |  | 14,773 |  |  | 5,421 |
Total nonperforming loans |  | $ | 188,306 |  |  | $ | 227,202 |  |  | $ | 292,858 |  |  | $ | 248,459 |  |  | $ | 167,778 |
Other real estate owned – PNB |  | 14,715 |  |  | 13,240 |  |  | 8,385 |  |  | 6,037 |  |  | 6,149 |
Other real estate owned – Vision |  | — |  |  | - |  |  | 33,324 |  |  | 35,203 |  |  | 19,699 |
Other real estate owned – SEPH |  | 21,003 |  |  | 29,032 |  |  | - |  |  | - |  |  | - |
Total nonperforming assets |  | $ | 224,024 |  |  | $ | 269,474 |  |  | $ | 334,567 |  |  | $ | 289,699 |  |  | $ | 193,626 |
Percentage of nonperforming loans to total loans |  | 4.23 | % |  | 5.26 | % |  | 6.19 | % |  | 5.35 | % |  | 3.74 | %
Percentage of nonperforming assets to total loans |  | 5.03 | % |  | 6.24 | % |  | 7.07 | % |  | 6.24 | % |  | 4.31 | %
Percentage of nonperforming assets to total assets |  | 3.37 | % |  | 3.86 | % |  | 4.59 | % |  | 4.11 | % |  | 2.74 | %

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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 |  | $ | 55,292 |  |  | $ | 98,993 |  |  | $ | 171,453 |  |  | $ | 148,347 |  |  | $ | 91,206 |
Accruing TDRs |  | — |  |  | 2,265 |  |  | — |  |  | — |  |  | 2,845 |
Loans past due 90 days or more |  | — |  |  | 122 |  |  | 364 |  |  | 11,277 |  |  | 644 |
Total nonperforming loans |  | $ | 55,292 |  |  | $ | 101,380 |  |  | $ | 171,817 |  |  | $ | 159,624 |  |  | $ | 94,695 |
Other real estate owned - SEPH |  | 21,003 |  |  | 29,032 |  |  | — |  |  | — |  |  | — |
Other real estate owned - Vision |  | — |  |  | — |  |  | 33,324 |  |  | 35,203 |  |  | 19,699 |
Total nonperforming assets |  | $ | 76,295 |  |  | $ | 130,412 |  |  | $ | 205,141 |  |  | $ | 194,827 |  |  | $ | 114,394 |
Percentage of nonperforming loans to total loans |  | N.M. |  |  | N.M. |  |  | 26.82 | % |  | 23.58 | % |  | 13.71 | %
Percentage of nonperforming assets to total loans |  | N.M. |  |  | N.M. |  |  | 32.02 | % |  | 28.78 | % |  | 16.57 | %
Percentage of nonperforming assets to total assets |  | N.M. |  |  | N.M. |  |  | 25.90 | % |  | 21.70 | % |  | 12.47 | %

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) |  | 2012 |  | 2011 |  | 2010 |  | 2009 |  | 2008
Nonaccrual loans |  | $ | 100,244 |  |  | $ | 96,113 |  |  | $ | 117,815 |  |  | $ | 85,197 |  |  | $ | 68,306 |
Accruing TDRs |  | 29,800 |  |  | 26,342 |  |  | - |  |  | 142 |  |  | - |
Loans past due 90 days or more |  | 2,970 |  |  | 3,367 |  |  | 3,226 |  |  | 3,496 |  |  | 4,777 |
Total nonperforming loans |  | $ | 133,014 |  |  | $ | 125,822 |  |  | $ | 121,041 |  |  | $ | 88,835 |  |  | $ | 73,083 |
Other real estate owned – PNB |  | 14,715 |  |  | 13,240 |  |  | 8,385 |  |  | 6,037 |  |  | 6,149 |
Total nonperforming assets |  | $ | 147,729 |  |  | $ | 139,062 |  |  | $ | 129,426 |  |  | $ | 94,872 |  |  | $ | 79,232 |
Percentage of nonperforming loans to total loans |  | 3.03 | % |  | 3.00 | % |  | 2.96 | % |  | 2.24 | % |  | 1.92 | %
Percentage of nonperforming assets to total loans |  | 3.36 | % |  | 3.32 | % |  | 3.16 | % |  | 2.39 | % |  | 2.08 | %
Percentage of nonperforming assets to total assets |  | 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 nonperforming loans over the past five years. Financial institutions operating in Florida and Alabama (including Vision) have been particularly hard hit by the severe recession 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
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conditions of these loans do not warrant classification as nonaccrual. However, these loans have shown some weakness and management performs additional analyses regarding a borrower’s ability to comply with payment terms for watch list loans.
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 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 commercial 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 development ("CL&D") and other commercial) retained at SEPH.

Table 29 - Park National Corporation Impaired Commercial Loans |  |
December 31, 2012 |  |  |  |  |  |  |  |  |  |  |  |
(In thousands) |  | Unpaid principal balance (UPB) |  | Prior charge- offs |  | Total impaired loans |  | Specific reserve |  | Carrying balance |  | Carrying balance as a % of UPB
PNB |  | $ | 85,020 |  |  | $ | 9,764 |  |  | $ | 75,256 |  |  | $ | 7,979 |  |  | $ | 67,277 |  |  | 79.13 | %
PNB participations in VB loans |  | 43,409 |  |  | 29,300 |  |  | 14,109 |  |  | 297 |  |  | 13,812 |  |  | 31.82 | %
SEPH - CL&D loans |  | 57,346 |  |  | 44,088 |  |  | 13,258 |  |  | — |  |  | 13,258 |  |  | 23.12 | %
SEPH - Other loans |  | 56,570 |  |  | 21,955 |  |  | 34,615 |  |  | — |  |  | 34,615 |  |  | 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:

• | 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 nonaccrual. 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.

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• | 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 substandard. 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.

• | 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”) appropriate 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
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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 borrowings 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 |  | 3-12 |  | 1-3 |  | 3-5 |  | Over 5 |  |
(In thousands) |  | Months |  | Months |  | Years |  | Years |  | Years |  | Total
Interest earning assets: |  |  |  |  |  |  |  |  |  |  |  |
Investment securities (1) |  | $ | 668,163 |  |  | $ | 284,553 |  |  | $ | 210,553 |  |  | $ | 209,014 |  |  | $ | 209,468 |  |  | $ | 1,581,751 |
Money market instruments |  | 37,185 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 37,185 |
Loans (1) |  | 1,149,759 |  |  | 1,174,745 |  |  | 1,274,918 |  |  | 439,775 |  |  | 411,125 |  |  | 4,450,322 |
Total interest earning assets |  | 1,855,107 |  |  | 1,459,298 |  |  | 1,485,471 |  |  | 648,789 |  |  | 620,593 |  |  | 6,069,258 |
Interest bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Interest bearing transaction accounts (2) |  | $ | 571,265 |  |  | $ | — |  |  | $ | 517,352 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,088,617 |
Savings accounts (2) |  | 233,766 |  |  | — |  |  | 804,590 |  |  | — |  |  | — |  |  | 1,038,356 |
Time deposits |  | 366,292 |  |  | 563,555 |  |  | 355,722 |  |  | 163,849 |  |  | 1,006 |  |  | 1,450,424 |
Other |  | — |  |  | 1,345 |  |  | — |  |  | — |  |  | — |  |  | 1,345 |
Total deposits |  | 1,171,323 |  |  | 564,900 |  |  | 1,677,664 |  |  | 163,849 |  |  | 1,006 |  |  | 3,578,742 |
Short-term borrowings |  | 344,168 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 344,168 |
Long-term debt |  | — |  |  | 75,500 |  |  | 126,500 |  |  | 327,399 |  |  | 252,259 |  |  | 781,658 |
Subordinated debentures/notes |  | 15,000 |  |  | — |  |  | 35,250 |  |  | 30,000 |  |  | — |  |  | 80,250 |
Total interest bearing liabilities |  | 1,530,491 |  |  | 640,400 |  |  | 1,839,414 |  |  | 521,248 |  |  | 253,265 |  |  | 4,784,818 |
Interest rate sensitivity gap |  | 324,616 |  |  | 818,898 |  |  | (353,943 | ) |  | 127,541 |  |  | 367,328 |  |  | 1,284,440 |
Cumulative rate sensitivity gap |  | 324,616 |  |  | 1,143,514 |  |  | 789,571 |  |  | 917,112 |  |  | 1,284,440 |  |  |
Cumulative gap as a |  |  |  |  |  |  |  |  |  |  |  |
percentage of total |  |  |  |  |  |  |  |  |  |  |  |
interest earning assets |  | 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%.

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
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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
|  |  |  | 0-1 |  | 1-3 |  | 3-5 |  | Over 5 |  |
(In thousands) |  | Note |  | Years |  | Years |  | Years |  | Years |  | Total
Deposits without stated maturity |  | 8 |  | $ | 3,265,459 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 3,265,459 |
Certificates of deposit |  | 8 |  | 927,505 |  |  | 358,051 |  |  | 163,862 |  |  | 1,006 |  |  | 1,450,424 |
Short-term borrowings |  | 9 |  | 344,168 |  |  | — |  |  | — |  |  | — |  |  | 344,168 |
Long-term debt |  | 10 |  | 75,500 |  |  | 126,500 |  |  | 327,399 |  |  | 252,259 |  |  | 781,658 |
Subordinated debentures/notes |  | 11 |  | — |  |  | — |  |  | — |  |  | 80,250 |  |  | 80,250 |
Operating leases |  | 7 |  | 1,394 |  |  | 1,924 |  |  | 926 |  |  | 678 |  |  | 4,922 |
Purchase obligations |  |  |  | 2,435 |  |  | — |  |  | — |  |  | — |  |  | 2,435 |
Total contractual obligations |  |  |  | $ | 4,616,461 |  |  | $ | 486,475 |  |  | $ | 492,187 |  |  | $ | 334,193 |  |  | $ | 5,929,316 |

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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 commitments 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 commitments often expire without being drawn upon. However, all of the loan commitments and standby letters of credit are permitted to be drawn upon in 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.
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 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).
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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.
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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) |  | 2012 |  | 2011 |  | 2010 |  | 2009 |  | 2008
Results of Operations: |  |  |  |  |  |  |  |  |  |
Interest income |  | $ | 285,735 |  |  | $ | 331,880 |  |  | $ | 345,517 |  |  | $ | 367,690 |  |  | $ | 391,339 |
Interest expense |  | 50,420 |  |  | 58,646 |  |  | 71,473 |  |  | 94,199 |  |  | 135,466 |
Net interest income |  | 235,315 |  |  | 273,234 |  |  | 274,044 |  |  | 273,491 |  |  | 255,873 |
Provision for loan losses |  | 35,419 |  |  | 63,272 |  |  | 87,080 |  |  | 68,821 |  |  | 70,487 |
Net interest income after provision for loan losses |  | 199,896 |  |  | 209,962 |  |  | 186,964 |  |  | 204,670 |  |  | 185,386 |
Gain on sale of the Vision business (1) |  | 22,167 |  |  | — |  |  | — |  |  | — |  |  | — |
Net gains on sale of securities |  | — |  |  | 28,829 |  |  | 11,864 |  |  | 7,340 |  |  | 1,115 |
Non-interest income |  | 70,236 |  |  | 66,081 |  |  | 63,016 |  |  | 73,850 |  |  | 83,719 |
Non-interest expense |  | 187,968 |  |  | 188,317 |  |  | 187,107 |  |  | 188,725 |  |  | 234,501 |
Net income |  | 78,630 |  |  | 82,140 |  |  | 58,101 |  |  | 74,192 |  |  | 13,708 |
Net income available to common shareholders |  | 75,205 |  |  | 76,284 |  |  | 52,294 |  |  | 68,430 |  |  | 13,566 |
Per common share: |  |  |  |  |  |  |  |  |  |
Net income per common share - basic |  | $ | 4.88 |  |  | $ | 4.95 |  |  | $ | 3.45 |  |  | $ | 4.82 |  |  | $ | 0.97 |
Net income per common share - diluted |  | 4.88 |  |  | 4.95 |  |  | 3.45 |  |  | 4.82 |  |  | 0.97 |
Cash dividends declared |  | 3.76 |  |  | 3.76 |  |  | 3.76 |  |  | 3.76 |  |  | 3.77 |
Average Balances: |  |  |  |  |  |  |  |  |  |
Loans |  | $ | 4,410,661 |  |  | $ | 4,713,511 |  |  | $ | 4,642,478 |  |  | $ | 4,594,436 |  |  | $ | 4,354,520 |
Investment securities |  | 1,613,131 |  |  | 1,848,880 |  |  | 1,746,356 |  |  | 1,877,303 |  |  | 1,801,299 |
Money market 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 |  | 1,048,796 |  |  | 999,085 |  |  | 907,514 |  |  | 818,243 |  |  | 739,993 |
Interest bearing deposits |  | 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 |
Long-term debt |  | 907,704 |  |  | 881,921 |  |  | 725,356 |  |  | 780,435 |  |  | 835,522 |
Shareholders' equity |  | 689,732 |  |  | 743,873 |  |  | 746,510 |  |  | 675,314 |  |  | 567,965 |
Common shareholders' equity |  | 658,855 |  |  | 646,169 |  |  | 649,637 |  |  | 579,224 |  |  | 565,612 |
Total assets |  | 6,766,806 |  |  | 7,206,171 |  |  | 7,042,705 |  |  | 7,035,531 |  |  | 6,708,086 |

Ratios: |  |  |  |  |  |  |  |  |  |
Return on average assets (x) |  | 1.11 | % |  | 1.06 | % |  | 0.74 | % |  | 0.97 | % |  | 0.20 | %
Return on average common equity (x) |  | 11.41 | % |  | 11.81 | % |  | 8.05 | % |  | 11.81 | % |  | 2.40 | %
Net interest margin (2) |  | 3.83 | % |  | 4.14 | % |  | 4.26 | % |  | 4.22 | % |  | 4.16 | %
Dividend payout ratio |  | 73.68 | % |  | 70.50 | % |  | 98.24 | % |  | 78.27 | % |  | 387.79 | %
Average shareholders' equity to |  |  |  |  |  |  |  |  |  |
average total assets |  | 10.19 | % |  | 10.32 | % |  | 10.60 | % |  | 9.60 | % |  | 8.47 | %
Leverage capital |  | 9.17 | % |  | 9.81 | % |  | 9.54 | % |  | 9.04 | % |  | 8.36 | %
Tier 1 capital |  | 13.12 | % |  | 14.15 | % |  | 13.24 | % |  | 12.45 | % |  | 11.69 | %
Risk-based capital |  | 15.77 | % |  | 16.65 | % |  | 15.71 | % |  | 14.89 | % |  | 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.

34

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 |  |  |  |  |  |  |  |
|  | Three Months Ended
(Dollars in thousands, except share data) |  | March 31 |  | June 30 |  | Sept. 30 |  | Dec. 31
2012: |  |  |  |  |  |  |  |
Interest income |  | $ | 74,838 |  |  | $ | 71,486 |  |  | $ | 70,618 |  |  | $ | 68,793 |
Interest expense |  | 13,110 |  |  | 12,806 |  |  | 12,602 |  |  | 11,902 |
Net interest income |  | 61,728 |  |  | 58,680 |  |  | 58,016 |  |  | 56,891 |
Provision for loan losses |  | 8,338 |  |  | 5,238 |  |  | 16,655 |  |  | 5,188 |
Gain on sale of Vision business (1) |  | 22,167 |  |  | — |  |  | — |  |  | — |
Income before income taxes |  | 44,540 |  |  | 25,146 |  |  | 13,757 |  |  | 20,888 |
Net income |  | 31,475 |  |  | 18,886 |  |  | 11,982 |  |  | 16,287 |
Net income available to common shareholders |  | 29,998 |  |  | 16,938 |  |  | 11,982 |  |  | 16,287 |
Per common share data: |  |  |  |  |  |  |  |
Net income per common share - basic (x) |  | 1.95 |  |  | 1.10 |  |  | 0.78 |  |  | 1.06 |
Net income per common share - diluted (x) |  | 1.95 |  |  | 1.10 |  |  | 0.78 |  |  | 1.06 |
Weighted-average common shares outstanding - basic |  | 15,405,910 |  |  | 15,405,902 |  |  | 15,405,894 |  |  | 15,410,606 |
Weighted-average common shares equivalent - diluted |  | 15,417,745 |  |  | 15,405,902 |  |  | 15,405,894 |  |  | 15,410,606 |
2011: |  |  |  |  |  |  |  |
Interest income |  | $ | 84,662 |  |  | $ | 84,922 |  |  | $ | 82,065 |  |  | $ | 80,231 |
Interest expense |  | 15,349 |  |  | 14,900 |  |  | 14,445 |  |  | 13,952 |
Net interest income |  | 69,313 |  |  | 70,022 |  |  | 67,620 |  |  | 66,279 |
Provision for loan losses |  | 14,100 |  |  | 12,516 |  |  | 16,438 |  |  | 20,218 |
Gain on sale of securities |  | 6,635 |  |  | 15,362 |  |  | 3,465 |  |  | 3,367 |
Income before income taxes |  | 30,532 |  |  | 41,000 |  |  | 27,075 |  |  | 17,948 |
Net income |  | 22,196 |  |  | 28,954 |  |  | 20,381 |  |  | 10,609 |
Net income available to common shareholders |  | 20,732 |  |  | 27,490 |  |  | 18,917 |  |  | 9,145 |
Per common share data: |  |  |  |  |  |  |  |
Net income per common share - basic (x) |  | 1.35 |  |  | 1.79 |  |  | 1.23 |  |  | 0.59 |
Net income per common share - diluted (x) |  | 1.35 |  |  | 1.79 |  |  | 1.23 |  |  | 0.59 |
Weighted-average common shares outstanding - basic |  | 15,398,930 |  |  | 15,398,919 |  |  | 15,398,909 |  |  | 15,403,861 |
Weighted-average common shares equivalent - diluted |  | 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 available 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.
35

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.

Table 34 – Net Income Available to Common Shareholders and Related Performance Metrics
December 31, |  |
(Dollars in thousands, except per share data) |  | 2012 |  | 2011 |  | 2010 |  | 2009 |  | 2008
Results of Operations: |  |  |  |  |  |  |  |  |  |
Net income available to common shareholders excluding impairment charge (a) |  | $ | 75,205 |  |  | $ | 76,284 |  |  | $ | 52,294 |  |  | $ | 68,430 |  |  | $ | 68,552 |
Per common share: |  |  |  |  |  |  |  |  |  |
Net income per common share excluding impairment charge – diluted (a) |  | 4.88 |  |  | 4.95 |  |  | 3.45 |  |  | 4.82 |  |  | 4.91 |
Ratios: |  |  |  |  |  |  |  |  |  |
Return on average assets excluding impairment charge (a)(b) |  | 1.11 | % |  | 1.06 | % |  | 0.74 | % |  | 0.97 | % |  | 1.02 | %
Return on average common equity excluding impairment charge (a)(x) |  | 11.41 | % |  | 11.81 | % |  | 8.05 | % |  | 11.81 | % |  | 12.12 | %
Non-interest expense excluding impairment charge to net revenue (1) |  | 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 dividends 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 |  |  |  |  |  |  |  |
|  | High |  | Low |  | Last Price |  | Cash Dividend Declared Per Share
2012: |  |  |  |  |  |  |  |
First Quarter |  | $ | 72.75 |  |  | $ | 65.06 |  |  | $ | 69.17 |  |  | $ | 0.94 |
Second Quarter |  | 69.93 |  |  | 61.94 |  |  | 69.75 |  |  | 0.94 |
Third Quarter |  | 72.18 |  |  | 65.30 |  |  | 70.02 |  |  | 0.94 |
Fourth Quarter |  | 71.25 |  |  | 61.44 |  |  | 64.63 |  |  | 0.94 |
2011: |  |  |  |  |  |  |  |
First Quarter |  | $ | 73.64 |  |  | $ | 62.99 |  |  | $ | 66.82 |  |  | $ | 0.94 |
Second Quarter |  | 69.59 |  |  | 62.14 |  |  | 65.86 |  |  | 0.94 |
Third Quarter |  | 66.21 |  |  | 49.00 |  |  | 52.88 |  |  | 0.94 |
Fourth Quarter |  | 65.70 |  |  | 49.80 |  |  | 65.06 |  |  | 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 companies and other investment companies that are traded on The NASDAQ Global Select and Global Markets. Park considers a number of bank holding
36

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.

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 |  | 100.00 |  |  | 117.71 |  |  | 102.87 |  |  | 134.82 |  |  | 128.58 |  |  | 135.08 |
NYSE MKT Composite |  | 100.00 |  |  | 59.55 |  |  | 80.74 |  |  | 101.40 |  |  | 107.78 |  |  | 114.90 |
NASDAQ Bank |  | 100.00 |  |  | 78.46 |  |  | 65.67 |  |  | 74.97 |  |  | 67.10 |  |  | 79.64 |
SNL Bank and Thrift Index |  | 100.00 |  |  | 57.51 |  |  | 56.74 |  |  | 63.34 |  |  | 49.25 |  |  | 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.
37

Management’s Report on Internal Control Over Financial Reporting
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.

/s/ C. Daniel DeLawder | /s/ David L. Trautman | /s/ Brady T. Burt
C. Daniel DeLawder | David L. Trautman | Brady T. Burt
Chairman and Chief Executive Officer | President | Chief Financial Officer
February 26, 2013 |  |

38

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, 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.
/s/ Crowe Horwath LLP
Crowe Horwath LLP
Columbus, Ohio
February 26, 2013
39

Park National Corporation and Subsidiaries
Consolidated Balance Sheets
at December 31, 2012 and 2011

(In thousands, except share and per share data) |  | 2012 |  | 2011
Assets |  |  |  |
Cash and due from banks |  | $ | 164,120 |  |  | $ | 137,770 |
Money market instruments |  | 37,185 |  |  | 19,716 |
Cash and cash equivalents |  | 201,305 |  |  | 157,486 |
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) |  | 1,114,454 |  |  | 820,645 |
Securities held-to-maturity, at amortized cost (fair value of $410,705 and $834,574 at December 31, 2012 and 2011, respectively) |  | 401,390 |  |  | 820,224 |
Other investment securities |  | 65,907 |  |  | 67,604 |
Total investment securities |  | 1,581,751 |  |  | 1,708,473 |
Total loans |  | 4,450,322 |  |  | 4,317,099 |
Allowance for loan losses |  | (55,537 | ) |  | (68,444 | )
Net loans |  | 4,394,785 |  |  | 4,248,655 |
Other assets: |  |  |  |
Bank owned life insurance |  | 161,069 |  |  | 154,567 |
Goodwill |  | 72,334 |  |  | 72,334 |
Other intangibles |  | 337 |  |  | 2,509 |
Premises and equipment, net |  | 53,751 |  |  | 53,741 |
Accrued interest receivable |  | 19,710 |  |  | 19,697 |
Other real estate owned |  | 35,718 |  |  | 42,272 |
Mortgage loan servicing rights |  | 7,763 |  |  | 9,301 |
Other |  | 114,280 |  |  | 120,748 |
Assets held for sale |  | — |  |  | 382,462 |
Total other assets |  | 464,962 |  |  | 857,631 |
Total assets |  | $ | 6,642,803 |  |  | $ | 6,972,245 |

The accompanying notes are an integral part of the consolidated financial statements.
F-1

Park National Corporation and Subsidiaries
Consolidated Balance Sheets
at December 31, 2012 and 2011

(In thousands, except share and per share data) |  | 2012 |  | 2011
Liabilities and shareholders’ equity |  |  |  |
Deposits: |  |  |  |
Non-interest bearing |  | 1,137,290 |  |  | 995,733 |
Interest bearing |  | 3,578,742 |  |  | 3,469,381 |
Total deposits |  | 4,716,032 |  |  | 4,465,114 |
Short-term borrowings |  | 344,168 |  |  | 263,594 |
Long-term debt |  | 781,658 |  |  | 823,182 |
Subordinated debentures/notes |  | 80,250 |  |  | 75,250 |
Total borrowings |  | 1,206,076 |  |  | 1,162,026 |
Other liabilities: |  |  |  |
Accrued interest payable |  | 3,459 |  |  | 4,916 |
Other |  | 66,870 |  |  | 61,639 |
Liabilities held for sale |  | — |  |  | 536,186 |
Total other liabilities |  | 70,329 |  |  | 602,741 |
Total liabilities |  | 5,992,437 |  |  | 6,229,881 |
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) |  | — |  |  | 98,146 |
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) |  | 302,654 |  |  | 301,202 |
Common share warrants |  | — |  |  | 4,297 |
Accumulated other comprehensive income (loss), net |  | (17,518 | ) |  | (8,831 | )
Retained earnings |  | 441,605 |  |  | 424,557 |
Less: Treasury shares (738,989 and 745,109 shares at December 31, 2012 and 2011, respectively) |  | (76,375 | ) |  | (77,007 | )
Total shareholders’ equity |  | 650,366 |  |  | 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.
F-2

Park National Corporation and Subsidiaries
Consolidated Statements of Income
for years ended December 31, 2012, 2011 and 2010

(In thousands, except per share data) |  | 2012 |  | 2011 |  | 2010
Interest and dividend income: |  |  |  |  |  |
Interest and fees on loans |  | $ | 234,638 |  |  | $ | 262,458 |  |  | $ | 267,692 |
Interest and dividends on: |  |  |  |  |  |
Obligations of U.S. Government, its agencies and other securities |  | 50,549 |  |  | 68,873 |  |  | 76,839 |
Obligations of states and political subdivisions |  | 140 |  |  | 371 |  |  | 786 |
Other interest income |  | 408 |  |  | 178 |  |  | 200 |
Total interest and dividend income |  | 285,735 |  |  | 331,880 |  |  | 345,517 |
Interest expense: |  |  |  |  |  |
Interest on deposits: |  |  |  |  |  |
Demand and savings deposits |  | 2,483 |  |  | 3,812 |  |  | 5,753 |
Time deposits |  | 15,921 |  |  | 23,842 |  |  | 36,212 |
Interest on short-term borrowings |  | 678 |  |  | 823 |  |  | 1,181 |
Interest on long-term debt |  | 31,338 |  |  | 30,169 |  |  | 28,327 |
Total interest expense |  | 50,420 |  |  | 58,646 |  |  | 71,473 |
Net interest income |  | 235,315 |  |  | 273,234 |  |  | 274,044 |
Provision for loan losses |  | 35,419 |  |  | 63,272 |  |  | 87,080 |
Net interest income after provision for loan losses |  | 199,896 |  |  | 209,962 |  |  | 186,964 |
Other income: |  |  |  |  |  |
Income from fiduciary activities |  | 15,947 |  |  | 14,965 |  |  | 13,874 |
Service charges on deposit accounts |  | 16,704 |  |  | 18,307 |  |  | 19,717 |
Net gains on sales of securities |  | — |  |  | 28,829 |  |  | 11,864 |
Other service income |  | 13,631 |  |  | 10,606 |  |  | 13,816 |
Checkcard fee income |  | 12,541 |  |  | 12,496 |  |  | 11,177 |
Bank owned life insurance income |  | 4,754 |  |  | 5,089 |  |  | 4,978 |
ATM fees |  | 2,359 |  |  | 2,703 |  |  | 2,951 |
Net gain on sale of OREO |  | 4,414 |  |  | 1,312 |  |  | 1,466 |
OREO devaluations |  | (6,872 | ) |  | (8,219 | ) |  | (13,206 | )
Gain on sale of Vision business |  | 22,167 |  |  | — |  |  | — |
Other |  | 6,758 |  |  | 8,822 |  |  | 8,243 |
Total other income |  | $ | 92,403 |  |  | $ | 94,910 |  |  | $ | 74,880 |

The accompanying notes are an integral part of the consolidated financial statements.
F-3

Park National Corporation and Subsidiaries
Consolidated Statements of Income
for years ended December 31, 2012, 2011 and 2010

(In thousands, except per share data) |  | 2012 |  | 2011 |  | 2010
Other expense: |  |  |  |  |  |
Salaries and employee benefits |  | $ | 95,977 |  |  | $ | 102,068 |  |  | $ | 98,315 |
Data processing fees |  | 3,916 |  |  | 4,965 |  |  | 5,728 |
Professional fees and services |  | 24,267 |  |  | 21,119 |  |  | 19,972 |
Net occupancy expense of bank premises |  | 9,444 |  |  | 11,295 |  |  | 11,510 |
Amortization of intangibles |  | 2,172 |  |  | 3,534 |  |  | 3,422 |
Furniture and equipment expense |  | 10,788 |  |  | 10,773 |  |  | 10,435 |
Insurance |  | 5,780 |  |  | 6,821 |  |  | 8,983 |
Marketing |  | 3,474 |  |  | 2,967 |  |  | 3,656 |
Postage and telephone |  | 5,983 |  |  | 6,060 |  |  | 6,648 |
State taxes |  | 3,786 |  |  | 1,544 |  |  | 3,171 |
Loan put provision |  | 3,299 |  |  | — |  |  | — |
OREO expense |  | 4,011 |  |  | 3,266 |  |  | 3,358 |
Other |  | 15,071 |  |  | 13,905 |  |  | 11,909 |
Total other expense |  | 187,968 |  |  | 188,317 |  |  | 187,107 |
Income before income taxes |  | 104,331 |  |  | 116,555 |  |  | 74,737 |
State income taxes (benefit) |  | — |  |  | 6,088 |  |  | (1,161 | )
Federal income taxes |  | 25,701 |  |  | 28,327 |  |  | 17,797 |
Net income |  | $ | 78,630 |  |  | $ | 82,140 |  |  | $ | 58,101 |
Preferred share dividends and accretion |  | 3,425 |  |  | 5,856 |  |  | 5,807 |
Income available to common shareholders |  | $ | 75,205 |  |  | $ | 76,284 |  |  | $ | 52,294 |
Earnings per common share: |  |  |  |  |  |
Basic |  | $ | 4.88 |  |  | $ | 4.95 |  |  | $ | 3.45 |
Diluted |  | $ | 4.88 |  |  | $ | 4.95 |  |  | $ | 3.45 |

The accompanying notes are an integral part of the consolidated financial statements.
F-4

PARK NATIONAL CORPORATION
Consolidated Statements of Comprehensive Income
for years ended December 31, 2012, 2011 and 2010

(In thousands) | 2012 |  | 2011 |  | 2010
Net income | $ | 78,630 |  |  | $ | 82,140 |  |  | $ | 58,101 |
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 | (6,180 | ) |  | (5,027 | ) |  | (2,427 | )
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 | 550 |  |  | 512 |  |  | (98 | )
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 | (3,057 | ) |  | (2,448 | ) |  | (15,004 | )
Other comprehensive income (loss) | $ | (8,687 | ) |  | $ | (6,963 | ) |  | $ | (17,529 | )
Comprehensive income | $ | 69,943 |  |  | $ | 75,177 |  |  | $ | 40,572 |

The accompanying notes are an integral part of the consolidated financial statements.
F-5

Park National Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
for the years ended December 31, 2012, 2011 and 2010

|  | Preferred Shares |  | Common Shares |  | Retained Earnings |  | Treasury Shares |  | Accumulated Other Comprehensive Income (Loss) |  | Total
(In thousands, except share and per share data) |  | Shares Outstanding |  | Amount |  | Shares Outstanding |  | Amount |  |  |  |
Balance, January 1, 2010 |  | 100,000 |  |  | $ | 96,483 |  |  | 14,882,780 |  |  | $ | 306,569 |  |  | $ | 423,872 |  |  | $ | (125,321 | ) |  | $ | 15,661 |  |  | $ | 717,264 |
Net income |  |  |  |  |  |  |  |  |  | 58,101 |  |  |  |  |  |  |  | 58,101 |
Other comprehensive income (loss), net of tax: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Change in funded status of pension plan, net of income taxes of $(1,307) |  |  |  |  |  |  |  |  |  |  |  |  |  | (2,427 | ) |  | (2,427 | )
Unrealized net holding loss on cash flow hedge, net of income taxes of $(53) |  |  |  |  |  |  |  |  |  |  |  |  |  | (98 | ) |  | (98 | )
Unrealized net holding loss on securities available-for-sale, net of income taxes of $(8,078) |  |  |  |  |  |  |  |  |  |  |  |  |  | (15,004 | ) |  | (15,004 | )
Cash dividends, $3.76 per share |  |  |  |  |  |  |  |  |  | (57,076 | ) |  |  |  |  |  | (57,076 | )
Cash payment for fractional shares in dividend reinvestment plan |  |  |  |  |  | (50 | ) |  | (4 | ) |  |  |  |  |  |  |  | (4 | )
Reissuance of common shares from treasury shares held |  |  |  |  |  | 509,184 |  |  | (898 | ) |  | (12,729 | ) |  | 46,954 |  |  |  |  | 33,327 |
Accretion of discount on preferred shares |  |  |  | 807 |  |  |  |  |  |  | (807 | ) |  |  |  |  |  | — |
Common share warrants issued |  |  |  |  |  |  |  | 176 |  |  |  |  |  |  |  |  | 176 |
Common share warrants expired |  |  |  |  |  |  |  | (166 | ) |  | 166 |  |  |  |  |  |  | — |
Preferred share dividends |  |  |  |  |  |  |  |  |  | (5,000 | ) |  |  |  |  |  | (5,000 | )
Treasury shares reissued for director grants |  |  |  |  |  | 7,020 |  |  |  |  | (185 | ) |  | 634 |  |  |  |  | 449 |
Balance, December 31, 2010 |  | 100,000 |  |  | $ | 97,290 |  |  | 15,398,934 |  |  | $ | 305,677 |  |  | $ | 406,342 |  |  | $ | (77,733 | ) |  | $ | (1,868 | ) |  | $ | 729,708 |
Net income |  |  |  |  |  |  |  |  |  | 82,140 |  |  |  |  |  |  | 82,140 |
Other comprehensive income (loss), net of tax: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Change in funded status of pension plan, net of income taxes of $(2,707) |  |  |  |  |  |  |  |  |  |  |  |  |  | (5,027 | ) |  | (5,027 | )
Unrealized net holding gain on cash flow hedge, net of income taxes of $276 |  |  |  |  |  |  |  |  |  |  |  |  |  | 512 |  |  | 512 |
Unrealized net holding loss on securities available-for-sale, net of income taxes of $(1,318) |  |  |  |  |  |  |  |  |  |  |  |  |  | (2,448 | ) |  | (2,448 | )
Cash dividends, $3.76 per share |  |  |  |  |  |  |  |  |  | (57,907 | ) |  |  |  |  |  | (57,907 | )
Cash payment for fractional shares in dividend reinvestment plan |  |  |  |  |  | (42 | ) |  | (2 | ) |  |  |  |  |  |  |  | (2 | )
Accretion of discount on preferred shares |  |  |  | 856 |  |  |  |  |  |  | (856 | ) |  |  |  |  |  | — |
Common share warrants expired |  |  |  |  |  |  |  | (176 | ) |  | 176 |  |  |  |  |  |  | — |

F-6

Preferred share dividends |  |  |  |  |  |  |  |  |  | (5,000 | ) |  |  |  |  |  | (5,000 | )
Treasury shares reissued for director grants |  |  |  |  |  | 7,020 |  |  |  |  | (338 | ) |  | 726 |  |  |  |  | 388 |
Balance, December 31, 2011 |  | 100,000 |  |  | $ | 98,146 |  |  | 15,405,912 |  |  | $ | 305,499 |  |  | $ | 424,557 |  |  | $ | (77,007 | ) |  | $ | (8,831 | ) |  | $ | 742,364 |
Net income |  |  |  |  |  |  |  |  |  | 78,630 |  |  |  |  |  |  | 78,630 |
Other comprehensive income (loss), net of tax: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Change in funded status of pension plan, net of income taxes of $(3,328) |  |  |  |  |  |  |  |  |  |  |  |  |  | (6,180 | ) |  | (6,180 | )
Unrealized net holding gain on cash flow hedge, net of income taxes of $296 |  |  |  |  |  |  |  |  |  |  |  |  |  | 550 |  |  | 550 |
Unrealized net holding loss on securities available-for-sale, net of income taxes of $(1,645) |  |  |  |  |  |  |  |  |  |  |  |  |  | (3,057 | ) |  | (3,057 | )
Cash dividends, $3.76 per share |  |  |  |  |  |  |  |  |  | (57,932 | ) |  |  |  |  |  | (57,932 | )
Cash payment for fractional shares in dividend reinvestment plan |  |  |  |  |  | (34 | ) |  | (2 | ) |  |  |  |  |  |  |  | (2 | )
Common share warrants redeemed |  |  |  |  |  |  |  | (2,843 | ) |  |  |  |  |  |  |  | (2,843 | )
Preferred shares redeemed |  | (100,000 | ) |  | (100,000 | ) |  |  |  |  |  |  |  |  |  |  |  | (100,000 | )
Accretion of discount on preferred shares |  |  |  | 1,854 |  |  |  |  |  |  | (1,854 | ) |  |  |  |  |  | — |
Preferred share dividends |  |  |  |  |  |  |  |  |  | (1,571 | ) |  |  |  |  |  | (1,571 | )
Treasury shares reissued for director grants |  |  |  |  |  | 6,120 |  |  |  |  | (225 | ) |  | 632 |  |  |  |  | 407 |
Balance, December 31, 2012 |  | — |  |  | $ | — |  |  | 15,411,998 |  |  | $ | 302,654 |  |  | $ | 441,605 |  |  | $ | (76,375 | ) |  | $ | (17,518 | ) |  | $ | 650,366 |

F-7

Park National Corporation and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 2012, 2011 and 2010

(In thousands) |  | 2012 |  | 2011 |  | 2010
Operating activities: |  |  |  |  |  |
Net income |  | 78,630 |  |  | 82,140 |  |  | 58,101 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |  |
Provision for loan losses |  | 35,419 |  |  | 63,272 |  |  | 87,080 |
Loan put provision |  | 3,299 |  |  | — |  |  | — |
Amortization of loan fees and costs, net |  | 2,119 |  |  | 2,871 |  |  | 4,179 |
Provision for depreciation |  | 6,954 |  |  | 7,583 |  |  | 7,126 |
Other than temporary impairment on investment securities |  | 54 |  |  | — |  |  | 23 |
Amortization of intangible assets |  | 2,172 |  |  | 3,534 |  |  | 3,422 |
(Accretion)/amortization of investment securities |  | (239 | ) |  | 490 |  |  | (2,413 | )
Deferred income tax (benefit) |  | 12,717 |  |  | 28,466 |  |  | (9,603 | )
Realized net investment security gains |  | — |  |  | (28,829 | ) |  | (11,864 | )
Compensation expense for issuance of treasury shares to directors |  | 407 |  |  | 388 |  |  | 449 |
Loan originations to be sold in secondary market |  | (442,890 | ) |  | (269,922 | ) |  | (443,369 | )
Proceeds from sale of loans in secondary market |  | 422,875 |  |  | 263,170 |  |  | 443,360 |
Gain on sale of loans in secondary market |  | 5,807 |  |  | 3,557 |  |  | 1,220 |
OREO devaluations |  | 6,872 |  |  | 8,219 |  |  | 13,206 |
Bank owned life insurance income |  | (4,754 | ) |  | (5,089 | ) |  | (4,978 | )
Changes in assets and liabilities: |  |  |  |  |  |
(Increase) in other assets |  | (15,231 | ) |  | (18,722 | ) |  | (18,774 | )
Increase (decrease) in other liabilities |  | (9,010 | ) |  | (10,826 | ) |  | 180 |
Cash included in assets held for sale |  | — |  |  | (6,766 | ) |  | — |
Net cash provided by operating activities |  | 105,201 |  |  | 123,536 |  |  | 127,345 |
Investing activities: |  |  |  |  |  |
Proceeds from sales of available-for-sale securities |  | — |  |  | 584,573 |  |  | 460,192 |
Proceeds from sales of held-to-maturity securities |  | — |  |  | 25,410 |  |  | — |
Proceeds from calls and maturities of securities: |  |  |  |  |  |
Held-to-maturity |  | 681,513 |  |  | 454,937 |  |  | 146,986 |
Available-for-sale |  | 666,431 |  |  | 557,552 |  |  | 2,238,059 |
Purchase of securities: |  |  |  |  |  |
Held-to-maturity |  | (262,679 | ) |  | (625,925 | ) |  | (313,642 | )
Available-for-sale |  | (964,704 | ) |  | (641,751 | ) |  | (2,719,265 | )
Net decrease in other investments |  | 1,697 |  |  | 1,095 |  |  | 220 |
Net loan originations, portfolio loans |  | (163,106 | ) |  | (71,862 | ) |  | (153,677 | )
Sales of assets/liabilities related to Vision Bank |  | (144,436 | ) |  | — |  |  | — |
Purchases of bank owned life insurance, net |  | (2,500 | ) |  | (3,000 | ) |  | (4,562 | )
Purchases of premises and equipment, net |  | (6,964 | ) |  | (6,618 | ) |  | (7,602 | )
Net cash (used in) provided by investing activities |  | (194,748 | ) |  | 274,411 |  |  | (353,291 | )
Financing activities |  |  |  |  |  |

F-8

Net increase (decrease) in deposits |  | 250,918 |  |  | (97,708 | ) |  | (92,632 | )
Net increase (decrease) in short-term borrowings |  | 80,574 |  |  | (400,075 | ) |  | 339,450 |
Issuance of treasury shares, net |  | — |  |  | — |  |  | 33,541 |
Proceeds from issuance of subordinated notes |  | 30,000 |  |  | — |  |  | — |
Proceeds from long-term debt |  | 300,000 |  |  | 203,000 |  |  | — |
Repayment of sub-debt |  | (25,000 | ) |  | — |  |  | — |
Repayment of long-term debt |  | (340,129 | ) |  | (16,551 | ) |  | (17,648 | )
Cash payment for repurchase of common share warrant from U.S. Treasury |  | (2,843 | ) |  | — |  |  | — |
Repurchase of preferred shares from U.S. Treasury |  | (100,000 | ) |  | — |  |  | — |
Cash dividends paid |  | (60,154 | ) |  | (62,907 | ) |  | (62,076 | )
Net cash provided by (used in) financing activities |  | 133,366 |  |  | (374,241 | ) |  | 200,635 |
Increase (decrease) in cash and cash equivalents |  | 43,819 |  |  | 23,706 |  |  | (25,311 | )
Cash and cash equivalents at beginning of year |  | 157,486 |  |  | 133,780 |  |  | 159,091 |
Cash and cash equivalents at end of year |  | $ | 201,305 |  |  | $ | 157,486 |  |  | $ | 133,780 |

The accompanying notes are an integral part of the consolidated financial statements.
F-9

Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed in the preparation of the consolidated financial statements:
Principles of Consolidation
The consolidated financial statements include the accounts of Park National Corporation 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 impairment 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.
F-10

Notes to Consolidated Financial Statements
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 resulting 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) commercial 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 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.
F-11

Notes to Consolidated Financial Statements
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 divisons generally require that the CRE loan amount be no more than 85% of the purchase price or the appraised value of the commercial 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 construction 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 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”).
F-12

Notes to Consolidated Financial Statements
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 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 environmental 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 commercial 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, delinquencies, impaired loans and charge-offs and recoveries.
U.S. GAAP requires 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 contractual 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.
F-13

Notes to Consolidated Financial Statements
The range of depreciable lives over which premises and equipment are being depreciated are:

Buildings | 5 to 50 Years
Equipment, furniture and fixtures | 3 to 20 Years
Leasehold improvements | 1 to 10 Years

Buildings that are currently placed in service are depreciated over 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 devaluations, 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 valuation 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 amortized 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 amortized to expense over their estimated useful lives.
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.
F-14

Notes to Consolidated Financial Statements
The following table reflects the activity in goodwill and other intangible assets for the years 2012, 2011 and 2010.

(In thousands) |  | Goodwill |  | Core Deposit Intangibles |  | Total
December 31, 2009 |  | $ | 72,334 |  |  | $ | 9,465 |  |  | $ | 81,799 |
Amortization |  | — |  |  | (3,422 | ) |  | (3,422 | )
December 31, 2010 |  | $ | 72,334 |  |  | $ | 6,043 |  |  | $ | 78,377 |
Amortization |  | — |  |  | (3,534 | ) |  | (3,534 | )
December 31, 2011 |  | $ | 72,334 |  |  | $ | 2,509 |  |  | $ | 74,843 |
Amortization |  | — |  |  | (2,172 | ) |  | (2,172 | )
December 31, 2012 |  | $ | 72,334 |  |  | $ | 337 |  |  | $ | 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 carrying 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 |  | $ | 337 |
2014 |  | — |
2015 |  | — |
2016 |  | — |
2017 |  | — |
Total |  | $ | 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) |  | 2012 |  | 2011 |  | 2010
Interest paid on deposits and other borrowings |  | $ | 51,877 |  |  | $ | 59,552 |  |  | $ | 74,680 |
Income taxes paid |  | 7,000 |  |  | 17,700 |  |  | 24,600 |

F-15

Notes to Consolidated Financial Statements
Non-cash Items
Non-cash items included in cash provided by operating activities:

December 31, |  |  |  |  |  |
(In thousands) |  | 2012 |  | 2011 |  | 2010
Transfers to OREO |  | $ | 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 quarterly 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.
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
F-16

Notes to Consolidated Financial Statements
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 shareholders 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.
F-17

Notes to Consolidated Financial Statements
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 continuous statement of comprehensive income or in two separate but consecutive statements. The ASU does not change the items that must be reported in other 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 beginning 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 presentation 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 comprehensive 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
F-18

Notes to Consolidated Financial Statements
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.
F-19

Notes to Consolidated Financial Statements
The assets purchased and liabilities assumed by Centennial as of February 16, 2012, included the following:

(In thousands) |  | February 16, 2012
Assets sold |  |  |
Cash and due from banks |  | $ | 20,711 |
Loans |  | 355,750 |
Allowance for loan losses |  | (13,100 | )
Net loans |  | 342,650 |
Fixed assets |  | 12,496 |
Other assets |  | 4,612 |
Total assets sold |  | $ | 380,469 |
Liabilities sold |  |  |
Deposits |  | $ | 522,856 |
Other liabilities |  | 2,049 |
Total liabilities sold |  | $ | 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 | $ | 27,913 |
One-time gains | 298 |
Loss on sale of fixed assets | (2,434 | )
Employment and severance agreements | (1,610 | )
Other one-time charges, including estimates | (2,000 | )
Pre-tax gain | $ | 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.
F-20

Notes to Consolidated Financial Statements
The balance sheet of SEPH as of December 31, 2012 and March 31, 2012 was as follows:

(In thousands) | December 31, 2012 |  | March 31, 2012 (unaudited)
Assets |  |  |  |
Cash | $ | 7,444 |  |  | $ | 16,049 |
Performing loans | 3,886 |  |  | 16,123 |
Nonperforming loans | 55,292 |  |  | 82,326 |
OREO | 21,003 |  |  | 28,578 |
Other assets | 16,803 |  |  | 18,417 |
Total assets | $ | 104,428 |  |  | $ | 161,493 |
Liabilities and equity |  |  |  |
Intercompany borrowings | $ | 93,000 |  |  | $ | 140,000 |
Other liabilities | 838 |  |  | 4,623 |
Equity | 10,590 |  |  | 16,870 |
Total liabilities and equity | $ | 104,428 |  |  | $ | 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:

(In thousands) |  | Amortized Cost |  | Gross Unrealized Holding Gains |  | Gross Unrealized Holding Losses |  | Estimated Fair Value
2012: |  |  |  |  |  |  |  |  |  |  |  |
Securities Available-for-Sale |  |  |  |  |  |  |  |  |  |  |  |
Obligations of U.S. Treasury and other U.S. Government sponsored entities |  | $ | 695,655 |  |  | $ | 1,352 |  |  | $ | 1,280 |  |  | $ | 695,727 |
Obligations of states and political subdivisions |  | 984 |  |  | 19 |  |  | — |  |  | 1,003 |
U.S. Government sponsored entities’ asset-backed securities |  | 401,882 |  |  | 14,067 |  |  | 447 |  |  | 415,502 |
Other equity securities |  | 1,137 |  |  | 1,085 |  |  | — |  |  | 2,222 |
Total |  | $ | 1,099,658 |  |  | $ | 16,523 |  |  | $ | 1,727 |  |  | $ | 1,114,454 |
2012: |  |  |  |  |  |  |  |  |  |  |  |
Securities Held-to-Maturity |  |  |  |  |  |  |  |  |  |  |  |
Obligations of states and political subdivisions |  | $ | 570 |  |  | $ | 2 |  |  | $ | — |  |  | $ | 572 |
U.S. Government sponsored entities’ asset-backed securities |  | 400,820 |  |  | 9,351 |  |  | 38 |  |  | 410,133 |
Total |  | $ | 401,390 |  |  | $ | 9,353 |  |  | $ | 38 |  |  | $ | 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.
F-21

Notes to Consolidated Financial Statements
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.
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:

|  | Less than 12 Months |  | 12 Months or Longer |  | Total
(In thousands) |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
2012: |  |  |  |  |  |  |  |  |  |  |  |
Securities Available-for-Sale |  |  |  |  |  |  |  |  |  |  |  |
Obligations of U.S. Treasury and other U.S. Government sponsored entities |  | $ | 177,470 |  |  | $ | 1,280 |  |  | $ | — |  |  | $ | — |  |  | $ | 177,470 |  |  | $ | 1,280 |
U.S. Government sponsored entities' asset-backed securities |  | 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:

(In thousands) |  | Amortized Cost |  | Gross Unrealized Holding Gains |  | Gross Unrealized Holding Losses |  | Estimated Fair Value
2011: |  |  |  |  |  |  |  |
Securities Available-for-Sale |  |  |  |  |  |  |  |
Obligations of U.S. Treasury and other U.S. Government sponsored entities |  | $ | 370,043 |  |  | $ | 1,614 |  |  | $ | — |  |  | $ | 371,657 |
Obligations of states and political subdivisions |  | 2,616 |  |  | 44 |  |  | — |  |  | 2,660 |
U.S. Government sponsored entities’ asset-backed securities |  | 427,300 |  |  | 16,995 |  |  | — |  |  | 444,295 |
Other equity securities |  | 1,188 |  |  | 877 |  |  | 32 |  |  | 2,033 |
Total |  | $ | 801,147 |  |  | $ | 19,530 |  |  | $ | 32 |  |  | $ | 820,645 |
2011: |  |  |  |  |  |  |  |
Securities Held-to-Maturity |  |  |  |  |  |  |  |
Obligations of states and political subdivisions |  | $ | 1,992 |  |  | $ | 5 |  |  | $ | — |  |  | $ | 1,997 |
U.S. Government sponsored entities’ asset-backed securities |  | 818,232 |  |  | 14,377 |  |  | 32 |  |  | 832,577 |
Total |  | $ | 820,224 |  |  | $ | 14,382 |  |  | $ | 32 |  |  | $ | 834,574 |

F-22

Notes to Consolidated Financial Statements
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, 2011:

|  | Less than 12 Months |  | 12 Months or Longer |  | Total
(In thousands) |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
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 |

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) |  | Amortized Cost |  | Estimated Fair Value
Securities Available-for-Sale |  |  |  |
U.S. Treasury and other U.S. Government sponsored entities’ notes: |  |  |  |
Due within one year |  | $ | 516,905 |  |  | $ | 518,257 |
Due one through five years |  | 123,750 |  |  | 122,912 |
Due five through ten years |  | 55,000 |  |  | 54,558 |
Total |  | $ | 695,655 |  |  | $ | 695,727 |
Obligations of states and political subdivisions: |  |  |  |
Due within one year |  | $ | 984 |  |  | $ | 1,003 |
Total |  | $ | 984 |  |  | $ | 1,003 |
U.S. Government sponsored entities’ asset-backed securities: |  |  |  |
Total |  | $ | 401,882 |  |  | $ | 415,502 |
Securities Held-to-Maturity |  |  |  |
Obligations of states and political subdivisions: |  |  |  |
Due within one year |  | $ | 570 |  |  | $ | 572 |
Total |  | $ | 570 |  |  | $ | 572 |
U.S. Government sponsored entities’ asset-backed securities: |  |  |  |
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.
F-23

Notes to Consolidated Financial Statements
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.
F-24

Notes to Consolidated Financial Statements
5. Loans
The composition of the loan portfolio, by class of loan, as of December 31, 2012 and December 31, 2011 was as follows:

|  | December 31, 2012 |  |  | December 31, 2011
(In thousands) |  | Loan Balance |  | Accrued Interest Receivable |  | Recorded Investment |  |  | Loan Balance |  | Accrued Interest Receivable |  | Recorded Investment
Commercial, financial and agricultural * |  | $ | 823,927 |  |  | $ | 2,976 |  |  | $ | 826,903 |  |  |  | $ | 743,797 |  |  | $ | 3,121 |  |  | $ | 746,918 |
Commercial real estate * |  | 1,092,164 |  |  | 3,839 |  |  | 1,096,003 |  |  |  | 1,108,574 |  |  | 4,235 |  |  | 1,112,809 |
Construction real estate: |  |  |  |  |  |  |  |  |  |  |  |  |
SEPH/Vision commercial land and development * |  | 15,105 |  |  | 37 |  |  | 15,142 |  |  |  | 31,603 |  |  | 31 |  |  | 31,634 |
Remaining commercial |  | 115,473 |  |  | 331 |  |  | 115,804 |  |  |  | 156,053 |  |  | 394 |  |  | 156,447 |
Mortgage |  | 26,373 |  |  | 81 |  |  | 26,454 |  |  |  | 20,039 |  |  | 64 |  |  | 20,103 |
Installment |  | 8,577 |  |  | 33 |  |  | 8,610 |  |  |  | 9,851 |  |  | 61 |  |  | 9,912 |
Residential real estate: |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  | 392,203 |  |  | 959 |  |  | 393,162 |  |  |  | 395,824 |  |  | 1,105 |  |  | 396,929 |
Mortgage |  | 1,064,787 |  |  | 1,399 |  |  | 1,066,186 |  |  |  | 953,758 |  |  | 1,522 |  |  | 955,280 |
HELOC |  | 212,905 |  |  | 892 |  |  | 213,797 |  |  |  | 227,682 |  |  | 942 |  |  | 228,624 |
Installment |  | 43,750 |  |  | 176 |  |  | 43,926 |  |  |  | 51,354 |  |  | 236 |  |  | 51,590 |
Consumer |  | 651,930 |  |  | 2,835 |  |  | 654,765 |  |  |  | 616,505 |  |  | 2,930 |  |  | 619,435 |
Leases |  | 3,128 |  |  | 29 |  |  | 3,157 |  |  |  | 2,059 |  |  | 43 |  |  | 2,102 |
Total loans |  | $ | 4,450,322 |  |  | $ | 13,587 |  |  | $ | 4,463,909 |  |  |  | $ | 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.
F-25

Notes to Consolidated Financial Statements
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:

|  | December 31, 2012
(In thousands) |  | Nonaccrual Loans |  | Accruing Restructured Loans |  | Loans Past Due 90 Days or More and Accruing |  | Total Nonperforming Loans
Commercial, financial and agricultural |  | $ | 17,324 |  |  | $ | 5,277 |  |  | $ | 37 |  |  | $ | 22,638 |
Commercial real estate |  | 40,983 |  |  | 3,295 |  |  | 1,007 |  |  | 45,285 |
Construction real estate: |  |  |  |  |  |  |  |  |  |  |  |
SEPH commercial land and development |  | 13,939 |  |  | — |  |  | — |  |  | 13,939 |
Remaining commercial |  | 14,977 |  |  | 6,597 |  |  | — |  |  | 21,574 |
Mortgage |  | 158 |  |  | 100 |  |  | — |  |  | 258 |
Installment |  | 149 |  |  | 175 |  |  | — |  |  | 324 |
Residential real estate: |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  | 33,961 |  |  | 1,661 |  |  | 94 |  |  | 35,716 |
Mortgage |  | 28,260 |  |  | 9,425 |  |  | 950 |  |  | 38,635 |
HELOC |  | 1,689 |  |  | 736 |  |  | — |  |  | 2,425 |
Installment |  | 1,670 |  |  | 780 |  |  | 54 |  |  | 2,504 |
Consumer |  | 2,426 |  |  | 1,900 |  |  | 888 |  |  | 5,214 |
Total loans |  | $ | 155,536 |  |  | $ | 29,946 |  |  | $ | 3,030 |  |  | $ | 188,512 |

|  | December 31, 2011
(In thousands) |  | Nonaccrual Loans |  | Accruing Restructured Loans |  | Loans Past Due 90 Days or More and Accruing |  | Total Nonperforming Loans
Commercial, financial and agricultural |  | $ | 37,797 |  |  | $ | 2,848 |  |  | $ | — |  |  | $ | 40,645 |
Commercial real estate |  | 43,704 |  |  | 8,274 |  |  | — |  |  | 51,978 |
Construction real estate: |  |  |  |  |  |  |  |
Vision commercial land and development |  | 25,761 |  |  | — |  |  | — |  |  | 25,761 |
Remaining commercial |  | 14,021 |  |  | 11,891 |  |  | — |  |  | 25,912 |
Mortgage |  | 66 |  |  | — |  |  | — |  |  | 66 |
Installment |  | 30 |  |  | — |  |  | — |  |  | 30 |
Residential real estate: |  |  |  |  |  |  |  |
Commercial |  | 43,461 |  |  | 815 |  |  | — |  |  | 44,276 |
Mortgage |  | 25,201 |  |  | 4,757 |  |  | 2,610 |  |  | 32,568 |
HELOC |  | 1,412 |  |  | — |  |  | — |  |  | 1,412 |
Installment |  | 1,777 |  |  | 98 |  |  | 58 |  |  | 1,933 |
Consumer |  | 1,876 |  |  | — |  |  | 893 |  |  | 2,769 |
Total loans |  | $ | 195,106 |  |  | $ | 28,683 |  |  | $ | 3,561 |  |  | $ | 227,350 |

F-26

Notes to Consolidated Financial Statements
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.

|  | December 31, 2012 |  |  | December 31, 2011
(In thousands) |  | Nonaccrual and accruing restructured loans |  | Loans individually evaluated for impairment |  | Loans collectively evaluated for impairment |  |  | Nonaccrual and accruing restructured loans |  | Loans individually evaluated for impairment |  | Loans collectively evaluated for impairment
Commercial, financial and agricultural |  | $ | 22,601 |  |  | $ | 22,587 |  |  | $ | 14 |  |  |  | $ | 40,645 |  |  | $ | 40,621 |  |  | $ | 24 |
Commercial real estate |  | 44,278 |  |  | 44,278 |  |  | — |  |  |  | 51,978 |  |  | 51,978 |  |  | — |
Construction real estate: |  |  |  |  |  |  |  |  |  |  |  |  |
SEPH/Vision commercial land and development |  | 13,939 |  |  | 13,260 |  |  | 679 |  |  |  | 25,761 |  |  | 24,328 |  |  | 1,433 |
Remaining commercial |  | 21,574 |  |  | 21,574 |  |  | — |  |  |  | 25,912 |  |  | 25,912 |  |  | — |
Mortgage |  | 258 |  |  | — |  |  | 258 |  |  |  | 66 |  |  | — |  |  | 66 |
Installment |  | 324 |  |  | — |  |  | 324 |  |  |  | 30 |  |  | — |  |  | 30 |
Residential real estate: |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  | 35,622 |  |  | 35,622 |  |  | — |  |  |  | 44,276 |  |  | 44,276 |  |  | — |
Mortgage |  | 37,685 |  |  | — |  |  | 37,685 |  |  |  | 29,958 |  |  | — |  |  | 29,958 |
HELOC |  | 2,425 |  |  | — |  |  | 2,425 |  |  |  | 1,412 |  |  | — |  |  | 1,412 |
Installment |  | 2,450 |  |  | — |  |  | 2,450 |  |  |  | 1,875 |  |  | — |  |  | 1,875 |
Consumer |  | 4,326 |  |  | 18 |  |  | 4,308 |  |  |  | 1,876 |  |  | 20 |  |  | 1,856 |
Total loans |  | $ | 185,482 |  |  | $ | 137,339 |  |  | $ | 48,143 |  |  |  | $ | 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.
F-27

Notes to Consolidated Financial Statements
The following table presents loans individually evaluated for impairment by class of loan as of December 31, 2012 and December 31, 2011.

|  | December 31, 2012 |  |  | December 31, 2011
(In thousands) |  | Unpaid principal balance |  | Recorded investment |  | Allowance for loan losses allocated |  |  | Unpaid principal balance |  | Recorded investment |  | Allowance for loan losses allocated
With no related allowance recorded |  |  |  |  |  |  |  |  |  |  |
Commercial, financial and agricultural |  | $ | 23,782 |  |  | $ | 14,683 |  |  | $ | — |  |  |  | $ | 23,164 |  |  | $ | 18,098 |  |  | $ | — |
Commercial real estate |  | 56,258 |  |  | 35,097 |  |  | — |  |  |  | 58,242 |  |  | 41,506 |  |  | — |
Construction real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
SEPH/Vision commercial land and development |  | 56,075 |  |  | 12,740 |  |  | — |  |  |  | 54,032 |  |  | 17,786 |  |  | — |
Remaining commercial |  | 29,328 |  |  | 14,093 |  |  | — |  |  |  | 33,319 |  |  | 18,372 |  |  | — |
Residential real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  | 39,918 |  |  | 31,957 |  |  | — |  |  |  | 49,341 |  |  | 38,686 |  |  | — |
Consumer |  | 18 |  |  | 18 |  |  | — |  |  |  | — |  |  | — |  |  | — |
With an allowance recorded |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial, financial and agricultural |  | 12,268 |  |  | 7,904 |  |  | 3,180 |  |  |  | 23,719 |  |  | 22,523 |  |  | 5,819 |
Commercial real estate |  | 11,412 |  |  | 9,181 |  |  | 1,540 |  |  |  | 12,183 |  |  | 10,472 |  |  | 4,431 |
Construction real estate: |  |  |  |  |  |  |  |  |  |  |  |  |
SEPH/Vision commercial land and development |  | 1,271 |  |  | 520 |  |  | — |  |  |  | 20,775 |  |  | 6,542 |  |  | 1,540 |
Remaining commercial |  | 8,071 |  |  | 7,481 |  |  | 2,277 |  |  |  | 9,711 |  |  | 7,540 |  |  | 1,874 |
Residential real estate: |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  | 3,944 |  |  | 3,665 |  |  | 1,279 |  |  |  | 6,402 |  |  | 5,590 |  |  | 2,271 |
Consumer |  | — |  |  | — |  |  | — |  |  |  | 20 |  |  | 20 |  |  | — |
Total |  | $ | 242,345 |  |  | $ | 137,339 |  |  | $ | 8,276 |  |  |  | $ | 290,908 |  |  | $ | 187,135 |  |  | $ | 15,935 |

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.
F-28

Notes to Consolidated Financial Statements
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.

|  |  |  | Year ended December 31, 2012
(In thousands) |  | Recorded Investment as of December 31, 2012 |  | Average recorded investment |  | Interest income recognized
Commercial, financial and agricultural |  | $ | 22,587 |  |  | $ | 35,305 |  |  | $ | 529 |
Commercial real estate |  | 44,278 |  |  | 44,541 |  |  | 968 |
Construction real estate: |  |  |  |  |  |
SEPH commercial land and development |  | 13,260 |  |  | 17,277 |  |  | — |
Remaining commercial |  | 21,574 |  |  | 27,774 |  |  | 818 |
Residential real estate: |  |  |  |  |  |
Commercial |  | 35,622 |  |  | 39,248 |  |  | 497 |
Consumer |  | 18 |  |  | 19 |  |  | 1 |
Total |  | $ | 137,339 |  |  | $ | 164,164 |  |  | $ | 2,813 |

|  |  |  | Year ended December 31, 2011
(In thousands) |  | Recorded Investment as of December 31, 2011 |  | Average recorded investment |  | Interest income recognized
Commercial, financial and agricultural |  | $ | 40,621 |  |  | $ | 23,518 |  |  | $ | 209 |
Commercial real estate |  | 51,978 |  |  | 49,927 |  |  | 829 |
Construction real estate: |  |  |  |  |  |
Vision commercial land and development |  | 24,328 |  |  | 58,792 |  |  | — |
Remaining commercial |  | 25,912 |  |  | 29,152 |  |  | 339 |
Residential real estate: |  |  |  |  |  |
Commercial |  | 44,276 |  |  | 52,640 |  |  | 214 |
Consumer |  | 20 |  |  | 16 |  |  | 1 |
Total |  | $ | 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.
F-29

Notes to Consolidated Financial Statements
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.

|  | December 31, 2012
(In thousands) |  | Accruing loans past due 30-89 days |  | Past due nonaccrual loans and loans past due 90 days or more and accruing * |  | Total past due |  | Total current |  | Total recorded investment
Commercial, financial and agricultural |  | $ | 6,251 |  |  | $ | 11,811 |  |  | $ | 18,062 |  |  | $ | 808,841 |  |  | $ | 826,903 |
Commercial real estate |  | 2,212 |  |  | 26,355 |  |  | 28,567 |  |  | 1,067,436 |  |  | 1,096,003 |
Construction real estate: |  |  |  |  |  |  |  |  |  |
SEPH commercial land and development |  | 686 |  |  | 11,314 |  |  | 12,000 |  |  | 3,142 |  |  | 15,142 |
Remaining commercial |  | 3,652 |  |  | 5,838 |  |  | 9,490 |  |  | 106,314 |  |  | 115,804 |
Mortgage |  | 171 |  |  | 85 |  |  | 256 |  |  | 26,198 |  |  | 26,454 |
Installment |  | 135 |  |  | 40 |  |  | 175 |  |  | 8,435 |  |  | 8,610 |
Residential real estate: |  |  |  |  |  |  |  |  |  |
Commercial |  | 1,163 |  |  | 5,917 |  |  | 7,080 |  |  | 386,082 |  |  | 393,162 |
Mortgage |  | 11,948 |  |  | 17,370 |  |  | 29,318 |  |  | 1,036,868 |  |  | 1,066,186 |
HELOC |  | 620 |  |  | 309 |  |  | 929 |  |  | 212,868 |  |  | 213,797 |
Installment |  | 563 |  |  | 787 |  |  | 1,350 |  |  | 42,576 |  |  | 43,926 |
Consumer |  | 12,924 |  |  | 2,688 |  |  | 15,612 |  |  | 639,153 |  |  | 654,765 |
Leases |  | — |  |  | — |  |  | — |  |  | 3,157 |  |  | 3,157 |
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.
F-30

Notes to Consolidated Financial Statements

|  | December 31, 2011
(In thousands) |  | Accruing loans past due 30-89 days |  | Past due nonaccrual loans and loans past due 90 days or more and accruing * |  | Total past due |  | Total current |  | Total recorded investment
Commercial, financial and agricultural |  | $ | 3,106 |  |  | $ | 11,308 |  |  | $ | 14,414 |  |  | $ | 732,504 |  |  | $ | 746,918 |
Commercial real estate |  | 2,632 |  |  | 21,798 |  |  | 24,430 |  |  | 1,088,379 |  |  | 1,112,809 |
Construction real estate: |  |  |  |  |  |  |  |  |  |
Vision commercial land and development |  | — |  |  | 19,235 |  |  | 19,235 |  |  | 12,399 |  |  | 31,634 |
Remaining commercial |  | 99 |  |  | 7,839 |  |  | 7,938 |  |  | 148,509 |  |  | 156,447 |
Mortgage |  | 76 |  |  | — |  |  | 76 |  |  | 20,027 |  |  | 20,103 |
Installment |  | 421 |  |  | 8 |  |  | 429 |  |  | 9,483 |  |  | 9,912 |
Residential real estate: |  |  |  |  |  |  |  |  |  |
Commercial |  | 1,545 |  |  | 10,097 |  |  | 11,642 |  |  | 385,287 |  |  | 396,929 |
Mortgage |  | 15,879 |  |  | 20,614 |  |  | 36,493 |  |  | 918,787 |  |  | 955,280 |
HELOC |  | 1,015 |  |  | 436 |  |  | 1,451 |  |  | 227,173 |  |  | 228,624 |
Installment |  | 1,549 |  |  | 1,136 |  |  | 2,685 |  |  | 48,905 |  |  | 51,590 |
Consumer |  | 11,195 |  |  | 2,192 |  |  | 13,387 |  |  | 606,048 |  |  | 619,435 |
Leases |  | — |  |  | — |  |  | — |  |  | 2,102 |  |  | 2,102 |
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 percentage 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 questionable 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.
F-31

Notes to Consolidated Financial Statements
The tables below present the recorded investment by loan grade at December 31, 2012 and December 31, 2011 for all commercial loans:

|  | December 31, 2012
(In thousands) |  | 5 Rated |  | 6 Rated |  | Impaired |  | Pass Rated |  | Recorded Investment
Commercial, financial and agricultural |  | $ | 9,537 |  |  | $ | 10,874 |  |  | $ | 22,601 |  |  | $ | 783,891 |  |  | $ | 826,903 |
Commercial real estate |  | 25,616 |  |  | 3,960 |  |  | 44,278 |  |  | 1,022,149 |  |  | 1,096,003 |
Construction real estate: |  |  |  |  |  |  |  |  |  |
SEPH commercial land and development |  | 411 |  |  | — |  |  | 13,939 |  |  | 792 |  |  | 15,142 |
Remaining commercial |  | 6,734 |  |  | — |  |  | 21,574 |  |  | 87,496 |  |  | 115,804 |
Residential real estate: |  |  |  |  |  |  |  |  |  |
Commercial |  | 8,994 |  |  | 2,053 |  |  | 35,622 |  |  | 346,493 |  |  | 393,162 |
Leases |  | — |  |  | — |  |  | — |  |  | 3,157 |  |  | 3,157 |
Total Commercial Loans |  | $ | 51,292 |  |  | $ | 16,887 |  |  | $ | 138,014 |  |  | $ | 2,243,978 |  |  | $ | 2,450,171 |

|  | December 31, 2011
(In thousands) |  | 5 Rated |  | 6 Rated |  | Impaired |  | Pass Rated |  | Recorded Investment
Commercial, financial and agricultural |  | $ | 11,785 |  |  | $ | 7,628 |  |  | $ | 40,645 |  |  | $ | 686,860 |  |  | $ | 746,918 |
Commercial real estate |  | 37,445 |  |  | 10,460 |  |  | 51,978 |  |  | 1,012,926 |  |  | 1,112,809 |
Construction real estate: |  |  |  |  |  |  |  |  |  |
Vision commercial land and development |  | 3,102 |  |  | — |  |  | 25,761 |  |  | 2,771 |  |  | 31,634 |
Remaining commercial |  | 6,982 |  |  | 8,311 |  |  | 25,912 |  |  | 115,242 |  |  | 156,447 |
Residential real estate: |  |  |  |  |  |  |  |  |  |
Commercial |  | 17,120 |  |  | 3,785 |  |  | 44,276 |  |  | 331,748 |  |  | 396,929 |
Leases |  | — |  |  | — |  |  | — |  |  | 2,102 |  |  | 2,102 |
Total Commercial Loans |  | $ | 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 borrower 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 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 nonaccrual 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.
F-32

Notes to Consolidated Financial Statements
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.

|  | 12 months ended December 31, 2012
(In thousands) |  | Number of Contracts |  | Accruing |  | Nonaccrual |  | Recorded Investment
Commercial, financial and agricultural |  | 44 |  |  | $ | 2,843 |  |  | $ | 1,499 |  |  | $ | 4,342 |
Commercial real estate |  | 25 |  |  | 2,648 |  |  | 3,611 |  |  | 6,259 |
Construction real estate: |  |  |  |  |  |  |  |
SEPH commercial land and development |  | 12 |  |  | — |  |  | 1,301 |  |  | 1,301 |
Remaining commercial |  | 15 |  |  | 531 |  |  | 6,579 |  |  | 7,110 |
Mortgage |  | 2 |  |  | 99 |  |  | 85 |  |  | 184 |
Installment |  | 6 |  |  | 175 |  |  | 78 |  |  | 253 |
Residential real estate: |  |  |  |  |  |  |  |
Commercial |  | 18 |  |  | 1,139 |  |  | 1,842 |  |  | 2,981 |
Mortgage |  | 129 |  |  | 4,279 |  |  | 5,776 |  |  | 10,055 |
HELOC |  | 46 |  |  | 736 |  |  | 58 |  |  | 794 |
Installment |  | 57 |  |  | 761 |  |  | 508 |  |  | 1,269 |
Consumer |  | 600 |  |  | 1,899 |  |  | 670 |  |  | 2,569 |
Total loans |  | 954 |  |  | $ | 15,110 |  |  | $ | 22,007 |  |  | $ | 37,117 |

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.
F-33

Notes to Consolidated Financial Statements

|  | 12 months ended December 31, 2011
(In thousands) |  | Number of Contracts |  | Accruing |  | Nonaccrual |  | Recorded Investment
Commercial, financial and agricultural |  | 56 |  |  | $ | 2,842 |  |  | $ | 21,258 |  |  | $ | 24,100 |
Commercial real estate |  | 23 |  |  | 3,332 |  |  | 3,831 |  |  | 7,163 |
Construction real estate: |  |  |  |  |  |  |  |
Vision commercial land and development |  | 12 |  |  | — |  |  | 4,268 |  |  | 4,268 |
Remaining commercial |  | 24 |  |  | 11,890 |  |  | 6,712 |  |  | 18,602 |
Mortgage |  | 1 |  |  | — |  |  | 66 |  |  | 66 |
Installment |  | — |  |  | — |  |  | — |  |  | — |
Residential real estate: |  |  |  |  |  |  |  |
Commercial |  | 30 |  |  | 500 |  |  | 29,095 |  |  | 29,595 |
Mortgage |  | 37 |  |  | 3,234 |  |  | 2,691 |  |  | 5,925 |
HELOC |  | 2 |  |  |  |  |  | 56 |  |  | 56 |
Installment |  | 7 |  |  | 95 |  |  | 126 |  |  | 221 |
Consumer |  | 1 |  |  | — |  |  | 18 |  |  | 18 |
Total loans |  | 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.
F-34

Notes to Consolidated Financial Statements
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.

|  | 12 months ended December 31, 2012 |  | 12 months ended December 31, 2011
(In thousands) |  | Number of Contracts |  | Recorded Investment |  | Number of Contracts |  | Recorded Investment
Commercial, financial and agricultural |  | 8 |  |  | $ | 244 |  |  | 19 |  |  | $ | 3,878 |
Commercial real estate |  | 10 |  |  | 2,113 |  |  | 5 |  |  | 2,353 |
Construction real estate: |  |  |  |  |  |  |  |
SEPH/Vision commercial land and development |  | 7 |  |  | 970 |  |  | 5 |  |  | 3,406 |
Remaining commercial |  | 4 |  |  | 1,476 |  |  | 4 |  |  | 1,277 |
Mortgage |  | 1 |  |  | 85 |  |  | 1 |  |  | 66 |
Installment |  | 1 |  |  | 27 |  |  | — |  |  | — |
Residential real estate: |  |  |  |  |  |  |  |
Commercial |  | 1 |  |  | 16 |  |  | 10 |  |  | 20,195 |
Mortgage |  | 39 |  |  | 2,863 |  |  | 7 |  |  | 1,193 |
HELOC |  | 5 |  |  | 70 |  |  | 1 |  |  | 50 |
Installment |  | 9 |  |  | 272 |  |  | 2 |  |  | 44 |
Consumer |  | 123 |  |  | 743 |  |  | — |  |  | — |
Leases |  | — |  |  | — |  |  | — |  |  | — |
Total loans |  | 208 |  |  | $ | 8,879 |  |  | $ | 54 |  |  | $ | 32,462 |

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.
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, $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.
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 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 as discussed within Note 1 of these Notes to Consolidated Financial Statements.
F-35

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.

|  | Year ended December 31, 2012
(In thousands) |  | Commercial, financial and agricultural |  | Commercial real estate |  | Construction real estate |  | Residential real estate |  | Consumer |  | Leases |  | Total
Allowance for credit losses: |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 16,950 |  |  | $ | 15,539 |  |  | $ | 14,433 |  |  | $ | 15,692 |  |  | $ | 5,830 |  |  | $ | — |  |  | $ | 68,444 |
Charge-offs |  | 26,847 |  |  | 10,454 |  |  | 9,985 |  |  | 8,607 |  |  | 5,375 |  |  | — |  |  | 61,268 |
Recoveries |  | 1,066 |  |  | 783 |  |  | 2,979 |  |  | 5,559 |  |  | 2,555 |  |  | — |  |  | 12,942 |
Net Charge-offs |  | 25,781 |  |  | 9,671 |  |  | 7,006 |  |  | 3,048 |  |  | 2,820 |  |  | — |  |  | 48,326 |
Provision |  | 24,466 |  |  | 5,868 |  |  | (586 | ) |  | 2,115 |  |  | 3,556 |  |  | — |  |  | 35,419 |
Ending balance |  | $ | 15,635 |  |  | $ | 11,736 |  |  | $ | 6,841 |  |  | $ | 14,759 |  |  | $ | 6,566 |  |  | — |  |  | $ | 55,537 |

|  | Year ended December 31, 2011
(In thousands) |  | Commercial, financial and agricultural |  | Commercial real estate |  | Construction real estate |  | Residential real estate |  | Consumer |  | Leases |  | Total
Allowance for credit losses: |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 11,555 |  |  | $ | 24,369 |  |  | $ | 70,462 |  |  | $ | 30,259 |  |  | $ | 6,925 |  |  | $ | 5 |  |  | $ | 143,575 |
Transfer of loans at fair value |  | 2 |  |  | 150 |  |  | 63 |  |  | 4 |  |  | — |  |  | — |  |  | 219 |
Transfer of allowance to held for sale (1) |  | 1,184 |  |  | 4,327 |  |  | 1,998 |  |  | 5,450 |  |  | 141 |  |  | — |  |  | 13,100 |
Charge-offs |  | 18,350 |  |  | 23,063 |  |  | 64,166 |  |  | 20,691 |  |  | 7,612 |  |  | — |  |  | 133,882 |
Recoveries |  | 1,402 |  |  | 1,825 |  |  | 1,463 |  |  | 1,719 |  |  | 2,385 |  |  | 4 |  |  | 8,798 |
Net Charge-offs |  | 16,948 |  |  | 21,238 |  |  | 62,703 |  |  | 18,972 |  |  | 5,227 |  |  | (4 | ) |  | 125,084 |
Provision |  | 23,529 |  |  | 16,885 |  |  | 8,735 |  |  | 9,859 |  |  | 4,273 |  |  | (9 | ) |  | 63,272 |
Ending balance |  | $ | 16,950 |  |  | $ | 15,539 |  |  | $ | 14,433 |  |  | $ | 15,692 |  |  | $ | 5,830 |  |  | — |  |  | $ | 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.

F-36

Notes to Consolidated Financial Statements

(In thousands) |  | 2010
Allowance for loan losses: |  |
Beginning balance |  | $ | 116,717 |
Charge-offs: |  |
Commercial, financial and agricultural |  | 8,484 |
Commercial real estate |  | 7,748 |
Construction real estate |  | 23,308 |
Residential real estate |  | 18,401 |
Consumer |  | 8,373 |
Lease financing |  | — |
Total charge-offs |  | 66,314 |
Recoveries: |  |
Commercial, financial and agricultural |  | 1,237 |
Commercial real estate |  | 850 |
Construction real estate |  | 813 |
Residential real estate |  | 1,429 |
Consumer |  | 1,763 |
Lease financing |  | — |
Total recoveries |  | 6,092 |
Net charge-offs |  | 60,222 |
Provision for loan losses |  | 87,080 |
Ending balance |  | $ | 143,575 |

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 internally 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).
F-37

Notes to Consolidated Financial Statements
The composition of the allowance for loan losses at December 31, 2012 and 2011 was as follows:

|  | December 31, 2012
(In thousands) |  | Commercial, financial, and agricultural |  | Commercial real estate |  | Construction real estate |  | Residential real estate |  | Consumer |  | Leases |  | Total
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |
Ending allowance balance attributed to loans |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 3,180 |  |  | $ | 1,540 |  |  | $ | 2,277 |  |  | $ | 1,279 |  |  | $ | — |  |  | $ | — |  |  | $ | 8,276 |
Collectively evaluated for impairment |  | 12,455 |  |  | 10,196 |  |  | 4,564 |  |  | 13,480 |  |  | 6,566 |  |  | — |  |  | 47,261 |
Total ending allowance balance |  | $ | 15,635 |  |  | $ | 11,736 |  |  | $ | 6,841 |  |  | $ | 14,759 |  |  | $ | 6,566 |  |  | $ | — |  |  | $ | 55,537 |
Loan Balance: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans individually evaluated for impairment |  | $ | 22,523 |  |  | $ | 44,267 |  |  | $ | 34,814 |  |  | $ | 35,616 |  |  | $ | 18 |  |  | $ | — |  |  | $ | 137,238 |
Loans collectively evaluated for impairment |  | 801,404 |  |  | 1,047,897 |  |  | 130,714 |  |  | 1,678,029 |  |  | 651,912 |  |  | 3,128 |  |  | 4,313,084 |
Total ending loan balance |  | $ | 823,927 |  |  | $ | 1,092,164 |  |  | $ | 165,528 |  |  | $ | 1,713,645 |  |  | $ | 651,930 |  |  | $ | 3,128 |  |  | $ | 4,450,322 |
Allowance for loan losses as a percentage of loan balance: |  |  |  |  |  |  |  |
Loans individually evaluated for impairment |  | 14.12 | % |  | 3.48 | % |  | 6.54 | % |  | 3.59 | % |  | — | % |  | — | % |  | 6.03 | %
Loans collectively evaluated for impairment |  | 1.55 | % |  | 0.97 | % |  | 3.49 | % |  | 0.80 | % |  | 1.01 | % |  | — | % |  | 1.10 | %
Total ending loan balance |  | 1.90 | % |  | 1.07 | % |  | 4.13 | % |  | 0.86 | % |  | 1.01 | % |  | — | % |  | 1.25 | %
Recorded Investment: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans individually evaluated for impairment |  | $ | 22,587 |  |  | $ | 44,278 |  |  | $ | 34,834 |  |  | $ | 35,622 |  |  | $ | 18 |  |  | $ | — |  |  | $ | 137,339 |
Loans collectively evaluated for impairment |  | 804,316 |  |  | 1,051,725 |  |  | 131,176 |  |  | 1,681,449 |  |  | 654,747 |  |  | 3,157 |  |  | 4,326,570 |
Total ending loan balance |  | $ | 826,903 |  |  | $ | 1,096,003 |  |  | $ | 166,010 |  |  | $ | 1,717,071 |  |  | $ | 654,765 |  |  | $ | 3,157 |  |  | $ | 4,463,909 |

F-38

Notes to Consolidated Financial Statements

|  | December 31, 2011
(In thousands) |  | Commercial, financial, and agricultural |  | Commercial real estate |  | Construction real estate |  | Residential real estate |  | Consumer |  | Leases |  | Total
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |
Ending allowance balance attributed to loans |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 5,819 |  |  | $ | 4,431 |  |  | $ | 3,414 |  |  | $ | 2,271 |  |  | $ | — |  |  | $ | — |  |  | $ | 15,935 |
Collectively evaluated for impairment |  | 11,131 |  |  | 11,108 |  |  | 11,019 |  |  | 13,421 |  |  | 5,830 |  |  | — |  |  | 52,509 |
Total ending allowance balance |  | $ | 16,950 |  |  | $ | 15,539 |  |  | $ | 14,433 |  |  | $ | 15,692 |  |  | $ | 5,830 |  |  | $ | — |  |  | $ | 68,444 |
Loan Balance: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans individually evaluated for impairment |  | $ | 40,621 |  |  | $ | 51,978 |  |  | $ | 50,240 |  |  | $ | 44,276 |  |  | $ | 20 |  |  | $ | — |  |  | $ | 187,135 |
Loans collectively evaluated for impairment |  | 703,176 |  |  | 1,056,596 |  |  | 167,306 |  |  | 1,584,342 |  |  | 616,485 |  |  | 2,059 |  |  | 4,129,964 |
Total ending loan balance |  | $ | 743,797 |  |  | $ | 1,108,574 |  |  | $ | 217,546 |  |  | $ | 1,628,618 |  |  | $ | 616,505 |  |  | $ | 2,059 |  |  | $ | 4,317,099 |
Allowance for loan losses as a percentage of loan balance: |  |  |  |  |  |  |  |
Loans individually evaluated for impairment |  | 14.33 | % |  | 8.52 | % |  | 6.80 | % |  | 5.13 | % |  | — | % |  | — | % |  | 8.52 | %
Loans collectively evaluated for impairment |  | 1.58 | % |  | 1.05 | % |  | 6.59 | % |  | 0.85 | % |  | 0.95 | % |  | — | % |  | 1.27 | %
Total ending loan balance |  | 2.28 | % |  | 1.40 | % |  | 6.63 | % |  | 0.96 | % |  | 0.95 | % |  | — | % |  | 1.59 | %
Recorded Investment: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans individually evaluated for impairment |  | $ | 40,621 |  |  | $ | 51,978 |  |  | $ | 50,240 |  |  | $ | 44,276 |  |  | $ | 20 |  |  | $ | — |  |  | $ | 187,135 |
Loans collectively evaluated for impairment |  | 706,297 |  |  | 1,060,831 |  |  | 167,856 |  |  | 1,588,147 |  |  | 619,415 |  |  | 2,102 |  |  | 4,144,648 |
Total ending loan balance |  | $ | 746,918 |  |  | $ | 1,112,809 |  |  | $ | 218,096 |  |  | $ | 1,632,423 |  |  | $ | 619,435 |  |  | $ | 2,102 |  |  | $ | 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) |  | 2012 |  | 2011
Land |  | $ | 17,354 |  |  | $ | 18,151 |
Buildings |  | 69,091 |  |  | 69,690 |
Equipment, furniture and fixtures |  | 61,679 |  |  | 59,037 |
Leasehold improvements |  | 4,009 |  |  | 4,283 |
Total |  | $ | 152,133 |  |  | $ | 151,161 |
Less accumulated depreciation |  | (98,382 | ) |  | (97,420 | )
Premises and Equipment, Net |  | $ | 53,751 |  |  | $ | 53,741 |

F-39

Notes to Consolidated Financial Statements
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 operating leases. The following is a schedule of the future minimum rental payments required for the next five years under such leases with initial terms in excess of one year:

(In thousands) |  |
2013 |  | $ | 1,394 |
2014 |  | 1,079 |
2015 |  | 845 |
2016 |  | 536 |
2017 |  | 390 |
Thereafter |  | 678 |
Total |  | $ | 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) |  | 2012 |  | 2011
Non-interest bearing |  | $ | 1,137,290 |  |  | $ | 995,733 |
Interest bearing |  | 3,578,742 |  |  | 3,469,381 |
Total |  | $ | 4,716,032 |  |  | $ | 4,465,114 |

At December 31, 2012, the maturities of time deposits were as follows:

(In thousands) |  |
2013 |  | $ | 927,505 |
2014 |  | 265,643 |
2015 |  | 92,408 |
2016 |  | 88,655 |
2017 |  | 75,207 |
After 5 years |  | 1,006 |
Total |  | $ | 1,450,424 |

At December 31, 2012, Park had approximately $16.8 million of deposits received from executive officers, directors, and their related interests.
F-40

Notes to Consolidated Financial Statements
Maturities of time deposits over $100,000 as of December 31, 2012 were:

December 31 (In thousands) |  |
3 months or less |  | $ | 212,188 |
Over 3 months through 6 months |  | 113,169 |
Over 6 months through 12 months |  | 141,244 |
Over 12 months |  | 190,664 |
Total |  | $ | 657,265 |

9. Short-Term Borrowings
Short-term borrowings were as follows:

December 31 (In thousands) |  | 2012 |  | 2011
Securities sold under agreements to repurchase and federal funds purchased |  | $ | 244,168 |  |  | $ | 240,594 |
Federal Home Loan Bank advances |  | 100,000 |  |  | 23,000 |
Total short-term borrowings |  | $ | 344,168 |  |  | $ | 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) |  | Repurchase agreements and Federal Funds Purchased |  | Federal Home Loan Bank Advances |  | Demand Notes Due U.S. Treasury and Other
2012 |  |  |  |  |  |
Ending balance |  | $ | 244,168 |  |  | $ | 100,000 |  |  | — |
Highest month-end balance |  | 302,946 |  |  | 100,000 |  |  | — |
Average daily balance |  | 257,341 |  |  | 1,320 |  |  | — |
Weighted-average interest rate: |  |  |  |  |  |
As of year-end |  | 0.23 | % |  | 0.38 | % |  | — |
Paid during the year |  | 0.26 | % |  | 0.28 | % |  | — |
2011 |  |  |  |  |  |
Ending balance |  | $ | 240,594 |  |  | $ | 23,000 |  |  | — |
Highest month-end balance |  | 265,412 |  |  | 232,000 |  |  | — |
Average daily balance |  | 246,145 |  |  | 51,392 |  |  | — |
Weighted-average interest rate: |  |  |  |  |  |
As of year-end |  | 0.29 | % |  | 0.04 | % |  | — |
Paid during the year |  | 0.30 | % |  | 0.18 | % |  | — |

At December 31, 2012 and 2011, FHLB advances were collateralized by investment securities owned by the Corporation’s subsidiary banks and by various loans pledged under a blanket agreement by the Corporation’s subsidiary banks.
See Note 4 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 security 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.
F-41

Notes to Consolidated Financial Statements
10. Long-Term Debt
Long-term debt is listed below:

December 31, |  | 2012 |  | 2011
(In thousands) |  | Outstanding Balance |  | Average Rate |  | Outstanding Balance |  | Average Rate
Total Federal Home Loan Bank advances by year of maturity: |  |  |  |  |  |  |  |
2012 |  | $ | — |  |  | — | % |  | $ | 15,500 |  |  | 2.09 | %
2013 |  | 75,500 |  |  | 1.11 | % |  | 75,500 |  |  | 1.11 | %
2014 |  | 75,500 |  |  | 1.61 | % |  | 75,500 |  |  | 1.61 | %
2015 |  | 51,000 |  |  | 2.00 | % |  | 51,000 |  |  | 2.00 | %
2016 |  | 1,000 |  |  | 2.05 | % |  | 1,000 |  |  | 2.05 | %
2017 |  | 51,000 |  |  | 3.37 | % |  | 51,000 |  |  | 3.37 | %
Thereafter |  | 252,259 |  |  | 2.94 | % |  | 252,314 |  |  | 2.94 | %
Total |  | $ | 506,259 |  |  | 2.42 | % |  | 521,814 |  |  | 2.41 | %
Total broker repurchase agreements by year of maturity: |  |  |  |  |  |  |  |
2016 |  | $ | — |  |  | — | % |  | $ | 75,000 |  |  | 4.05 | %
2017 |  | 300,000 |  |  | 1.75 | % |  | 225,000 |  |  | 4.03 | %
Total |  | $ | 300,000 |  |  | 1.75 | % |  | $ | 300,000 |  |  | 4.04 | %
Other borrowings by year of maturity: |  |  |  |  |  |  |  |
2012 |  | $ | — |  |  | — | % |  | $ | 69 |  |  | 7.97 | %
2013 |  | — |  |  | — | % |  | 74 |  |  | 7.97 | %
2014 |  | — |  |  | — | % |  | 81 |  |  | 7.97 | %
2015 |  | — |  |  | — | % |  | 87 |  |  | 7.97 | %
2016 |  | — |  |  | — | % |  | 94 |  |  | 7.97 | %
2017 |  | — |  |  | — | % |  | 102 |  |  | 7.97 | %
Thereafter |  | — |  |  | — | % |  | 861 |  |  | 7.97 | %
Total |  | $ | — |  |  | — | % |  | $ | 1,368 |  |  | 7.97 | %
Total combined long-term debt by year of maturity: |  |  |  |  |  |  |  |
2012 |  | $ | — |  |  | — | % |  | $ | 15,569 |  |  | 2.12 | %
2013 |  | 75,500 |  |  | 1.11 | % |  | 75,574 |  |  | 1.11 | %
2014 |  | 75,500 |  |  | 1.61 | % |  | 75,581 |  |  | 1.62 | %
2015 |  | 51,000 |  |  | 2.00 | % |  | 51,087 |  |  | 2.01 | %
2016 |  | 1,000 |  |  | 2.05 | % |  | 76,094 |  |  | 4.03 | %
2017 |  | 351,000 |  |  | 1.99 | % |  | 276,102 |  |  | 3.91 | %
Thereafter |  | 252,259 |  |  | 2.94 | % |  | 253,175 |  |  | 2.96 | %
Total |  | $ | 806,259 |  |  | 2.17 | % |  | $ | 823,182 |  |  | 3.01 | %
Prepayment penalty |  | (24,601 | ) |  |  |  | $ | — |  |  |
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 prepayment 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.
F-42

Notes to Consolidated Financial Statements
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.
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 outstanding. 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
F-43

Notes to Consolidated Financial Statements
Note was purchased at 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:

|  | Number |  | Weighted Average Exercise Price per Share
January 1, 2012 |  | 74,020 |  |  | $ | 74.96 |
Granted |  | — |  |  | — |
Exercised |  | — |  |  | — |
Forfeited/Expired |  | 74,020 |  |  | 74.96 |
December 31, 2012 |  | — |  |  | $ | — |
Exercisable at year end |  |  |  | — |
Weighted-average remaining contractual life |  |  |  | N/A |
Aggregate intrinsic value |  |  |  | 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 contributed $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.
F-44

Notes to Consolidated Financial Statements
Using an accrual measurement date of December 31, 2012 and 2011, plan assets and benefit obligation activity for the Pension Plan are listed below:

(In thousands) |  | 2012 |  | 2011
Change in fair value of plan assets |  |  |  |
Fair value at beginning of measurement period |  | $ | 96,581 |  |  | $ | 85,464 |
Actual return on plan assets |  | 11,256 |  |  | 1,813 |
Company contributions |  | 15,900 |  |  | 14,000 |
Benefits paid |  | (5,969 | ) |  | (4,696 | )
Fair value at end of measurement period |  | $ | 117,768 |  |  | $ | 96,581 |
Change in benefit obligation |  |  |  |
Projected benefit obligation at beginning of measurement period |  | $ | 81,507 |  |  | $ | 74,164 |
Service cost |  | 4,271 |  |  | 4,557 |
Interest cost |  | 4,048 |  |  | 3,967 |
Actuarial loss |  | 13,796 |  |  | 3,515 |
Benefits paid |  | (5,969 | ) |  | (4,696 | )
Projected benefit obligation at the end of measurement period |  | $ | 97,653 |  |  | $ | 81,507 |
Funded status at end of year (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:

|  |  |  | Percentage of Plan Assets
Asset category |  | Target Allocation |  | 2012 |  | 2011
Equity securities |  | 50% - 100% |  | 83 | % |  | 80 | %
Fixed income and cash equivalents |  | remaining balance |  | 17 | % |  | 20 | %
Total |  |  |  | 100 | % |  | 100 | %

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:

|  | 2012 |  | 2011 |  | 2010
Discount rate |  | 4.47 | % |  | 5.18 | % |  | 5.50 | %
Rate of compensation increase |  | 3.00 | % |  | 3.00 | % |  | 3.00 | %

F-45

Notes to Consolidated Financial Statements
The estimated future pension benefit payments reflecting expected future service for the next ten years are shown below (in thousands):

2013 | $ | 6,431 |
2014 | 6,163 |
2015 | 6,623 |
2016 | 6,619 |
2017 | 7,233 |
2018-2022 | 41,653 |
Total | $ | 74,722 |

The following table shows ending balances of accumulated other comprehensive loss at December 31, 2012 and 2011.

(In thousands) |  | 2012 |  | 2011
Prior service cost |  | $ | (54 | ) |  | $ | (74 | )
Net actuarial loss |  | (41,691 | ) |  | (32,163 | )
Total |  | (41,745 | ) |  | (32,237 | )
Deferred taxes |  | 14,611 |  |  | 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 |  | $ | (4,271 | ) |  | $ | (4,557 | ) |  | $ | (3,671 | )
Interest cost |  | (4,048 | ) |  | (3,967 | ) |  | (3,583 | )
Expected return on plan assets |  | 8,742 |  |  | 7,543 |  |  | 5,867 |
Amortization of prior service cost |  | (20 | ) |  | (19 | ) |  | (22 | )
Recognized net actuarial loss |  | (1,708 | ) |  | (1,411 | ) |  | (1,079 | )
Net periodic benefit cost |  | $ | (1,305 | ) |  | $ | (2,411 | ) |  | $ | (2,488 | )
Change to net actuarial (loss)/gain for the period |  | $ | (11,236 | ) |  | $ | (9,164 | ) |  | $ | (4,835 | )
Amortization of prior service cost |  | 20 |  |  | 19 |  |  | 22 |
Amortization of net loss |  | 1,708 |  |  | 1,411 |  |  | 1,079 |
Total recognized in other comprehensive (loss)/income |  | (9,508 | ) |  | (7,734 | ) |  | (3,734 | )
Total recognized in net benefit cost 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.
F-46

Notes to Consolidated Financial Statements
The weighted average assumptions used to determine net periodic benefit cost for the years ended December 31, 2012, 2011 and 2010 are listed below:

|  | 2012 |  | 2011 |  | 2010
Discount Rate |  | 5.18 | % |  | 5.50 | % |  | 6.00 | %
Rate of compensation increase |  | 3.00 | % |  | 3.00 | % |  | 3.00 | %
Expected long-term return on plan assets |  | 7.75 | % |  | 7.75 | % |  | 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 advantageous 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 instruments; 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.
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.
F-47

Notes to Consolidated Financial Statements
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 components of the Corporation’s deferred tax assets and liabilities are as follows:

December 31 (In thousands) |  | 2012 |  | 2011
Deferred tax assets: |  |
Allowance for loan losses |  | $ | 19,438 |  |  | $ | 23,956 |
Accumulated other comprehensive loss – Interest rate swap |  | — |  |  | 296 |
Accumulated other comprehensive loss – pension plan |  | 14,611 |  |  | 11,283 |
Intangible assets |  | 697 |  |  | 1,523 |
Deferred compensation |  | 3,750 |  |  | 3,733 |
OREO devaluations |  | 4,855 |  |  | 6,364 |
Partnership adjustments |  | 3,329 |  |  | 2,016 |
Other |  | 2,973 |  |  | 2,515 |
Loans held for sale fair value adjustment |  | — |  |  | 4,585 |
Tax credit carry-forwards |  | — |  |  | 1,269 |
Total deferred tax assets |  | $ | 49,653 |  |  | $ | 57,540 |
Deferred tax liabilities: |  |  |  |
Accumulated other comprehensive income – Unrealized gains on securities |  | 5,178 |  |  | 6,824 |
Deferred investment income |  | 10,199 |  |  | 10,199 |
Pension plan |  | 25,517 |  |  | 21,567 |
Mortgage servicing rights |  | 2,717 |  |  | 3,255 |
Other |  | 646 |  |  | 2,260 |
Total deferred tax liabilities |  | $ | 44,257 |  |  | $ | 44,105 |
Net deferred tax assets |  | $ | 5,396 |  |  | $ | 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 Bank 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, management 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 structure of the transactions contemplated by the Purchase Agreement will not allow either the buyer or the seller to benefit from the previously recorded net operating loss carry-forward asset at Vision Bank 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.
F-48

Notes to Consolidated Financial Statements
The components of the provision for federal and state income taxes are shown below:

December 31, (In thousands) |  | 2012 |  | 2011 |  | 2010
Currently payable |  |  |  |  |  |
Federal |  | $ | 12,984 |  |  | $ | 5,949 |  |  | $ | 26,130 |
State |  | — |  |  | — |  |  | 109 |
Deferred |  |  |  |  |  |
Federal |  | 12,717 |  |  | 22,378 |  |  | (8,333 | )
State |  | — |  |  | 8,382 |  |  | (3,564 | )
Valuation allowance |  |  |  |  |  |
Federal |  | — |  |  | — |  |  | — |
State |  | — |  |  | (2,294 | ) |  | 2,294 |
Total |  | $ | 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 |  | 2012 |  | 2011 | 2,011 |  | 2010
Statutory federal corporate tax rate |  | 35.0 | % |  | 35.0 | % |  | 35.0 | %
Changes in rates resulting from: |  |  |  |  |  |
Tax exempt interest income, net of disallowed interest |  | (0.9 | )% |  | (1.0 | )% |  | (1.7 | )%
Bank owned life insurance |  | (1.6 | )% |  | (1.5 | )% |  | (2.3 | )%
Tax credits (low income housing) |  | (6.1 | )% |  | (5.2 | )% |  | (6.7 | )%
State income tax expense, net of federal benefit |  | — | % |  | 4.7 | % |  | (3.0 | )%
Valuation allowance, net of federal benefit |  | — | % |  | (1.3 | )% |  | 2.0 | %
Other |  | (1.8 | )% |  | (1.2 | )% |  | (1.0 | )%
Effective tax rate |  | 24.6 | % |  | 29.5 | % |  | 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 Bank 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) |  | 2012 |  | 2011 |  | 2010
January 1 Balance |  | $ | 485 |  |  | $ | 477 |  |  | $ | 595 |
Additions based on tax positions related to the current year |  | 74 |  |  | 70 |  |  | 69 |
Additions for tax positions of prior years |  | 25 |  |  | 1 |  |  | 7 |
Reductions for tax positions of prior years |  | — |  |  | (3 | ) |  | (131 | )
Reductions due to statute of limitations |  | (67 | ) |  | (60 | ) |  | (63 | )
December 31 Balance |  | $ | 517 |  |  | $ | 485 |  |  | $ | 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.
F-49

Notes to Consolidated Financial Statements
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.
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 |  | $ | (4,702 | ) |  | $ | (1,645 | ) |  | $ | (3,057 | )
Unrealized net holding gain on cash flow hedge |  | 846 |  |  | 296 |  |  | 550 |
Changes in pension plan assets and benefit obligations recognized in other comprehensive income |  | (9,508 | ) |  | (3,328 | ) |  | (6,180 | )
Other comprehensive loss |  | $ | (13,364 | ) |  | $ | (4,677 | ) |  | $ | (8,687 | )
2011: |  |  |  |  |  |
Unrealized gains on available-for-sale securities |  | $ | 25,063 |  |  | $ | 8,772 |  |  | $ | 16,291 |
Reclassification adjustment for gains realized in net income |  | (28,829 | ) |  | (10,090 | ) |  | (18,739 | )
Unrealized net holding gain on cash flow hedge |  | 788 |  |  | 276 |  |  | 512 |
Changes in pension plan assets and benefit obligations recognized in other comprehensive income |  | (7,734 | ) |  | (2,707 | ) |  | (5,027 | )
Other comprehensive loss |  | $ | (10,712 | ) |  | $ | (3,749 | ) |  | $ | (6,963 | )
2010: |  |  |  |  |  |
Unrealized losses on available-for-sale securities |  | $ | (11,218 | ) |  | $ | (3,926 | ) |  | $ | (7,292 | )
Reclassification adjustment for gains realized in net income |  | (11,864 | ) |  | (4,152 | ) |  | (7,712 | )
Unrealized net holding loss on cash flow hedge |  | (151 | ) |  | (53 | ) |  | (98 | )
Changes in pension plan assets and benefit obligations recognized in other comprehensive income |  | (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) |  | 2012 |  | 2011
Pension benefit adjustments |  | $ | (27,134 | ) |  | $ | (20,954 | )
Unrealized net holding loss on cash flow hedge |  | — |  |  | (550 | )
Unrealized net holding gains on AFS securities |  | 9,616 |  |  | 12,673 |
Total accumulated other comprehensive loss |  | $ | (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.
F-50

Notes to Consolidated Financial Statements
The following table sets forth the computation of basic and diluted earnings per common share:

Year ended December 31 (In thousands, except share data) |  | 2012 |  | 2011 |  | 2010
Numerator: |  |  |  |  |  |
Net income available to common shareholders |  | $ | 75,205 |  |  | $ | 76,284 |  |  | $ | 52,294 |
Denominator: |  |  |  |  |  |
Basic earnings per common share: |  |  |  |  |  |
Weighted-average shares |  | 15,407,078 |  |  | 15,400,155 |  |  | 15,152,692 |
Effect of dilutive securities – stock options and warrants |  | 1,063 |  |  | 1,291 |  |  | 3,043 |
Diluted earnings per common share: |  |  |  |  |  |
Adjusted weighted-average shares and assumed conversions |  | 15,408,141 |  |  | 15,401,446 |  |  | 15,155,735 |
Earnings per common share: |  |  |  |  |  |
Basic earnings per common share |  | $ | 4.88 |  |  | $ | 4.95 |  |  | $ | 3.45 |
Diluted earnings per common share |  | $ | 4.88 |  |  | $ | 4.95 |  |  | $ | 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 available for the payment of dividends to the Corporation, without approval by the applicable regulatory authorities.
18. Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk
The Corporation is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments and standby letters of credit. The instruments involve, to varying degrees, elements of credit and 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. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.
F-51

Notes to Consolidated Financial Statements
The total amounts of off-balance sheet financial instruments with credit risk were as follows:

December 31 (In thousands) |  | 2012 |  | 2011
Loan commitments |  | $ | 815,585 |  |  | $ | 809,140 |
Standby letters of credit |  | 22,961 |  |  | 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 customer’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 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 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.
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
F-52

Notes to Consolidated Financial Statements
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, respectively, 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 amortized 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 |  | $ | 9,301 |  |  | $ | 10,488 |  |  | $ | 10,780 |
Additions |  | 3,399 |  |  | 1,659 |  |  | 3,062 |
Amortization |  | (3,634 | ) |  | (2,573 | ) |  | (3,180 | )
Change in valuation allowance |  | (1,303 | ) |  | (273 | ) |  | (174 | )
Carrying amount, net, end of year |  | $ | 7,763 |  |  | $ | 9,301 |  |  | $ | 10,488 |
Valuation allowance: |  |  |  |  |  |
Beginning of year |  | $ | 1,021 |  |  | $ | 748 |  |  | $ | 574 |
Additions expensed |  | 1,303 |  |  | 273 |  |  | 174 |
End of year |  | $ | 2,324 |  |  | $ | 1,021 |  |  | $ | 748 |

The fair value of mortgage servicing rights at December 31, 2012 was established using a discount rate of 10% 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.
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:

• | 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.

• | 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 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
F-53

Notes to Consolidated Financial Statements
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, December 31, 2012
Assets |  |  |  |  |  |  |  |
Investment Securities |  |  |  |  |  |  |  |
Obligations of U.S. Treasury and Other U.S. Government Sponsored Entities |  | $ | — |  |  | $ | 695,727 |  |  | $ | — |  |  | $ | 695,727 |
Obligations of States and Political Subdivisions |  | — |  |  | 1,003 |  |  | — |  |  | 1,003 |
U.S. Government Sponsored Entities’ Asset-Backed Securities |  | — |  |  | 415,502 |  |  | — |  |  | 415,502 |
Equity Securities |  | 1,442 |  |  | — |  |  | 780 |  |  | 2,222 |
Mortgage Loans Held for Sale |  | — |  |  | 25,743 |  |  | — |  |  | 25,743 |
Mortgage IRLCs |  | — |  |  | 372 |  |  | — |  |  | 372 |
Liabilities |  |  |  |  |  |  |  |
Interest Rate Swap |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Fair value swap |  | — |  |  | — |  |  | 135 |  |  | 135 |

Fair Value Measurements at December 31, 2011 Using:
(In thousands) |  | Level 1 |  | Level 2 |  | Level 3 |  | Balance, December 31, 2011
Assets |  |  |  |  |  |  |  |
Investment Securities |  |  |  |  |  |  |  |
Obligations of U.S. Treasury and Other U.S. Government Sponsored Entities |  | $ | — |  |  | $ | 371,657 |  |  | $ | — |  |  | $ | 371,657 |
Obligations of States and Political Subdivisions |  | — |  |  | 2,660 |  |  | — |  |  | 2,660 |
U.S. Government Sponsored Entities’ Asset-Backed Securities |  | — |  |  | 444,295 |  |  | — |  |  | 444,295 |
Equity Securities |  | 1,270 |  |  | — |  |  | 763 |  |  | 2,033 |
Mortgage Loans Held for Sale |  | — |  |  | 11,535 |  |  | — |  |  | 11,535 |
Mortgage IRLCs |  | — |  |  | 251 |  |  | — |  |  | 251 |
Liabilities |  |  |  |  |  |  |  |
Interest rate swap |  | $ | — |  |  | $ | 846 |  |  | $ | — |  |  | $ | 846 |
Fair value swap |  | — |  |  | — |  |  | 700 |  |  | 700 |

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.
F-54

Notes to Consolidated Financial Statements
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 available, 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 respective 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.
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 |  | — |  |  | (54 | ) |  | — |
Included in earnings - unrealized |  | — |  |  | — |  |  | — |
Included in other comprehensive income |  | — |  |  | 71 |  |  | — |
Purchases, sales, issuances and settlements, other, net |  | — |  |  | — |  |  | — |
Re-evaluation of fair value swap |  | — |  |  | — |  |  | 565 |
Balance, December 31, 2012 |  | $ | — |  |  | $ | 780 |  |  | $ | (135 | )
Balance, at January 1, 2011 |  | $ | 2,598 |  |  | $ | 745 |  |  | $ | (60 | )
Total Gains/(Losses) |  |  |  |  |  |
Included in earnings - realized |  | $ | — |  |  | $ | — |  |  | $ | — |
Included in earnings - unrealized |  | (128 | ) |  | — |  |  | — |
Included in other comprehensive income |  | — |  |  | 18 |  |  | — |
Purchases, sales, issuances and settlements, other, net |  | (2,470 | ) |  | — |  |  | — |
Re-evaluation of fair value swap |  | — |  |  | — |  |  | (640 | )
Balance, December 31, 2011 |  | $ | — |  |  | $ | 763 |  |  | $ | (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:
F-55

Notes to Consolidated Financial Statements
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 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. 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:

• | 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.

• | 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.
F-56

Notes to Consolidated Financial Statements
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, December 31, 2012
Impaired Loans: |  |  |  |  |  |  |  |
Commercial real estate |  | $ | — |  |  | $ | — |  |  | $ | 25,997 |  |  | $ | 25,997 |
Construction real estate: |  |  |  |  |  |  |  |
SEPH commercial land and development |  | — |  |  | — |  |  | 12,832 |  |  | 12,832 |
Remaining commercial |  | — |  |  | — |  |  | 8,113 |  |  | 8,113 |
Residential real estate |  | — |  |  | — |  |  | 6,990 |  |  | 6,990 |
Total impaired loans |  | $ | — |  |  | $ | — |  |  | $ | 53,932 |  |  | $ | 53,932 |
Mortgage Servicing Rights |  | — |  |  | 6,642 |  |  | — |  |  | 6,642 |
Other Real Estate Owned: |  |  |  |  |  |  |  |
Construction real estate |  | $ | — |  |  | $ | — |  |  | $ | 12,134 |  |  | $ | 12,134 |
Residential real estate |  | — |  |  | — |  |  | 4,307 |  |  | 4,307 |
Commercial real estate |  | — |  |  | — |  |  | 3,485 |  |  | 3,485 |
Total Other Real Estate Owned |  | $ | — |  |  | $ | — |  |  | $ | 19,926 |  |  | $ | 19,926 |

Fair Value Measurements at December 31, 2011 Using:
(In thousands) |  | Level 1 |  | Level 2 |  | Level 3 |  | Balance, December 31, 2011
Impaired Loans: |  |  |  |  |  |  |  |
Commercial real estate |  | $ | — |  |  | $ | — |  |  | $ | 24,859 |  |  | $ | 24,859 |
Construction real estate: |  |  |  |  |  |  |  |
Vision commercial land and development |  | — |  |  | — |  |  | 21,228 |  |  | 21,228 |
Remaining commercial |  | — |  |  | — |  |  | 8,860 |  |  | 8,860 |
Residential real estate |  | — |  |  | — |  |  | 12,935 |  |  | 12,935 |
Total impaired loans |  | $ | — |  |  | $ | — |  |  | $ | 67,882 |  |  | $ | 67,882 |
Mortgage Servicing Rights |  | — |  |  | 5,815 |  |  | — |  |  | 5,815 |
Other Real Estate Owned: |  |  |  |  |  |  |  |
Construction real estate |  | $ | — |  |  | $ | — |  |  | $ | 10,834 |  |  | $ | 10,834 |
Residential real estate |  | — |  |  | — |  |  | 6,826 |  |  | 6,826 |
Commercial real estate |  | — |  |  | — |  |  | 6,062 |  |  | 6,062 |
Total Other Real Estate Owned |  | $ | — |  |  | $ | — |  |  | $ | 23,722 |  |  | $ | 23,722 |

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 collateral 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 adjustments 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.
F-57

Notes to Consolidated Financial Statements
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:

(In thousands) |  | Fair Value |  | Valuation Technique |  | Unobservable Input(s) |  | Range (Weighted Average)
Impaired loans: |  |  |  |  |  |  |  |  |
Commercial real estate |  | $ | 25,997 |  |  | Sales comparison approach |  | Adj to comparables |  | 0.0% - 116.0% (22.3%)
|  |  |  | Income approach |  | Capitalization rate |  | 7.5% - 20.9% (10.1%)
|  |  |  | Cost approach |  | Accumulated depreciation |  | 23.0% - 63.0% (50.4%)
Construction real estate: |  |  |  |  |  |  |  |  |
SEPH commercial land and development |  | $ | 12,832 |  |  | Sales comparison approach |  | Adj to comparables |  | 0.0% - 218.0% (31.9%)
|  |  |  | Bulk sale approach |  | Discount rate |  | 11.0% - 55.0% (23.4%)
Remaining commercial |  | $ | 8,113 |  |  | Sales comparison approach |  | Adj to comparables |  | 0.0% - 75.0% (26.2%)
|  |  |  | Bulk sale approach |  | Discount rate |  | 10.0% - 55.0% (18.3%)
Residential real estate |  | $ | 6,990 |  |  | Sales comparison approach |  | Adj to comparables |  | 0.0% - 178.0% (17.9%)
Other real estate owned: |  |  |  |  |  |  |  |
Commercial real estate |  | $ | 3,485 |  |  | Sales comparison approach |  | Adj to comparables |  | 0.0% - 67.0% (25.8%)
|  |  |  | Income approach |  | Capitalization rate |  | 11.0% (11.0%)
|  |  |  | Bulk sale approach |  | Discount rate |  | 13.0% (13.0%)
|  |  |  | Cost approach |  | Accumulated depreciation |  | 40.9% - 90.0% (65.0%)
Construction real estate |  | $ | 12,134 |  |  | Sales comparison approach |  | Adj to comparables |  | 0.0% - 273.0% (34.0%)
|  |  |  | Income approach |  | Capitalization rate |  | 8.5% (8.5%)
|  |  |  | Bulk sale approach |  | Discount rate |  | 10.0% - 12.0% (10.8%)
Residential Real Estate |  | $ | 4,307 |  |  | Sales comparison approach |  | Adj to comparables |  | 1.0% - 61.0% (18.0%)
|  |  |  | Income approach |  | Capitalization rate |  | 7.9% - 9.3% (8.7%)
|  |  |  | Cost approach |  | Accumulated Depreciation |  | 6.0% (6.0%)

F-58

Notes to Consolidated Financial Statements
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 S heets 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.
The fair value of financial instruments at December 31, 2012 and December 31, 2011, was as follows:
F-59

Notes to Consolidated Financial Statements

|  | December 31, 2012
|  |  |  | Fair Value Measurements
(In thousands) |  | Carrying value |  | Level 1 |  | Level 2 |  | Level 3 |  | Total fair value
Financial assets: |  |  |  |  |  |  |  |  |  |
Cash and money market instruments |  | $ | 201,305 |  |  | $ | 201,305 |  |  | $ | — |  |  | $ | — |  |  | $ | 201,305 |
Investment securities |  | 1,515,844 |  |  | 1,442 |  |  | 1,522,937 |  |  | 780 |  |  | 1,525,159 |
Accrued interest receivable - securities |  | 6,122 |  |  | — |  |  | 6,122 |  |  | — |  |  | 6,122 |
Accrued interest receivable - loans |  | 13,588 |  |  | — |  |  | 2 |  |  | 13,586 |  |  | 13,588 |
Mortgage loans held for sale |  | 25,743 |  |  | — |  |  | 25,743 |  |  | — |  |  | 25,743 |
Impaired loans carried at fair value |  | 53,932 |  |  | — |  |  | — |  |  | 53,932 |  |  | 53,932 |
Mortgage IRLCs |  | 372 |  |  | — |  |  | 372 |  |  | — |  |  | 372 |
Other loans |  | 4,314,738 |  |  | — |  |  | — |  |  | 4,348,705 |  |  | 4,348,705 |
Loans receivable, net |  | $ | 4,394,785 |  |  | $ | — |  |  | $ | 26,115 |  |  | $ | 4,402,637 |  |  | $ | 4,428,752 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-interest bearing checking accounts |  | $ | 1,137,290 |  |  | $ | 1,137,290 |  |  | $ | — |  |  | — |  |  | $ | 1,137,290 |
Interest bearing transactions accounts |  | 1,088,617 |  |  | 1,088,617 |  |  | — |  |  | — |  |  | 1,088,617 |
Savings accounts |  | 1,038,356 |  |  | 1,038,356 |  |  | — |  |  | — |  |  | 1,038,356 |
Time deposits |  | 1,450,424 |  |  | — |  |  | 1,458,793 |  |  | — |  |  | 1,458,793 |
Other |  | 1,345 |  |  | 1,345 |  |  | — |  |  | — |  |  | 1,345 |
Total deposits |  | $ | 4,716,032 |  |  | $ | 3,265,608 |  |  | $ | 1,458,793 |  |  | $ | — |  |  | $ | 4,724,401 |
Short-term borrowings |  | $ | 344,168 |  |  | $ | — |  |  | $ | 344,168 |  |  | $ | — |  |  | $ | 344,168 |
Long-term debt |  | 781,658 |  |  |  |  |  | 861,466 |  |  |  |  |  | 861,466 |
Subordinated debentures/notes |  | 80,250 |  |  | — |  |  | 79,503 |  |  | — |  |  | 79,503 |
Accrued interest payable – deposits |  | 1,960 |  |  | 21 |  |  | 1,939 |  |  | — |  |  | 1,960 |
Accrued interest payable – debt/borrowings |  | 1,499 |  |  | 8 |  |  | 1,491 |  |  | — |  |  | 1,499 |
Derivative financial instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Fair value swap |  | 135 |  |  | — |  |  | — |  |  | 135 |  |  | 135 |

F-60

Notes to Consolidated Financial Statements

|  | December 31, 2011
(In thousands) |  | Carrying Value |  | Fair Value
Financial assets: |  |  |  |
Cash and money market instruments |  | $ | 157,486 |  |  | $ | 157,486 |
Investment securities |  | 1,640,869 |  |  | 1,655,219 |
Accrued interest receivable |  | 19,697 |  |  | 19,697 |
Mortgage loans held for sale |  | 11,535 |  |  | 11,535 |
Impaired loans carried at fair value |  | 87,813 |  |  | 87,813 |
Mortgage IRLCs |  | 251 |  |  | 251 |
Other loans |  | 4,149,056 |  |  | 4,166,973 |
Loans receivable, net |  | $ | 4,248,655 |  |  | $ | 4,266,572 |
Assets held for sale |  | $ | 382,462 |  |  | $ | 382,462 |
Financial liabilities: |  |  |  |
Non-interest bearing checking |  | $ | 995,733 |  |  | $ | 995,733 |
Interest bearing transactions accounts |  | 1,037,385 |  |  | 1,037,385 |
Savings |  | 931,526 |  |  | 931,526 |
Time deposits |  | 1,499,105 |  |  | 1,506,075 |
Other |  | 1,365 |  |  | 1,365 |
Total deposits |  | $ | 4,465,114 |  |  | $ | 4,472,084 |
Short-term borrowings |  | $ | 263,594 |  |  | $ | 263,594 |
Long-term debt |  | 823,182 |  |  | 915,274 |
Subordinated debentures/notes |  | 75,250 |  |  | 68,601 |
Accrued interest payable |  | 4,916 |  |  | 4,916 |
Liabilities held for sale |  | 536,186 |  |  | 536,991 |
Derivative financial instruments: |  |  |  |
Interest rate swap |  | $ | 846 |  |  | $ | 846 |
Fair value swap |  | 700 |  |  | 700 |

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 |  | 2011
|  | Tier 1 Risk-Based |  | Total Risk-Based |  | Leverage |  | Tier 1 Risk-Based |  | Total Risk-Based |  | Leverage
Park National Bank |  | 9.28 | % |  | 11.17 | % |  | 6.43 | % |  | 9.52 | % |  | 11.46 | % |  | 6.58 | %
Vision Bank |  | N/A |  |  | N/A |  |  | N/A |  |  | 23.42 | % |  | 24.72 | % |  | 15.89 | %
Park |  | 13.12 | % |  | 15.77 | % |  | 9.17 | % |  | 14.15 | % |  | 16.65 | % |  | 9.81 | %

F-61

Notes to Consolidated Financial Statements
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.
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):

|  |  |  |  |  | To Be Adequately Capitalized |  | To Be Well Capitalized
(In thousands) |  | Actual Amount |  | Ratio |  | Amount |  | Ratio |  | Amount |  | Ratio
At December 31, 2012 |  |  |  |  |  |  |  |  |  |  |  |
Total Risk-Based Capital (to risk-weighted assets) |  |  |  |  |  |  |  |  |  |  |  |
PNB |  | $ | 502,680 |  |  | 11.17 | % |  | $ | 359,971 |  |  | 8.00 | % |  | $ | 449,964 |  |  | 10.00 | %
Park |  | 732,413 |  |  | 15.77 | % |  | 371,477 |  |  | 8.00 | % |  | N/A |  |  | N/A |
Tier 1 Risk-Based Capital (to risk-weighted assets) |  |  |  |  |  |  |  |  |  |  |  |
PNB |  | $ | 417,690 |  |  | 9.28 | % |  | $ | 179,986 |  |  | 4.00 | % |  | $ | 269,978 |  |  | 6.00 | %
Park |  | 609,411 |  |  | 13.12 | % |  | 185,739 |  |  | 4.00 | % |  | N/A |  |  | N/A |
Leverage Ratio (to average total assets) |  |  |  |  |  |  |  |  |  |  |  |
PNB |  | $ | 417,690 |  |  | 6.43 | % |  | $ | 259,769 |  |  | 4.00 | % |  | $ | 324,711 |  |  | 5.00 | %
Park |  | 609,411 |  |  | 9.17 | % |  | 265,719 |  |  | 4.00 | % |  | N/A |  |  | N/A |
At December 31, 2011 |  |  |  |  |  |  |  |  |  |  |  |
Total Risk-Based Capital (to risk-weighted assets) |  |  |  |  |  |  |  |  |  |  |  |
PNB |  | $ | 498,367 |  |  | 11.46 | % |  | $ | 347,972 |  |  | 8.00 | % |  | $ | 434,965 |  |  | 10.00 | %
VB (1) |  | 115,637 |  |  | 24.72 | % |  | 37,427 |  |  | 8.00 | % |  | 46,784 |  |  | 10.00 | %
Park |  | 812,286 |  |  | 16.65 | % |  | 390,270 |  |  | 8.00 | % |  | N/A |  |  | N/A |
Tier 1 Risk-Based Capital (to risk-weighted assets) |  |  |  |  |  |  |  |  |  |  |  |
PNB |  | $ | 413,870 |  |  | 9.52 | % |  | $ | 173,986 |  |  | 4.00 | % |  | $ | 260,979 |  |  | 6.00 | %
VB |  | 109,566 |  |  | 23.42 | % |  | 18,714 |  |  | 4.00 | % |  | 28,071 |  |  | 6.00 | %
Park |  | 690,419 |  |  | 14.15 | % |  | 195,135 |  |  | 4.00 | % |  | N/A |  |  | N/A |
Leverage Ratio (to average total assets) |  |  |  |  |  |  |  |  |  |  |  |
PNB |  | $ | 413,870 |  |  | 6.58 | % |  | $ | 251,691 |  |  | 4.00 | % |  | $ | 314,614 |  |  | 5.00 | %
VB (1) |  | 109,566 |  |  | 15.89 | % |  | 27,588 |  |  | 4.00 | % |  | 34,485 |  |  | 5.00 | %
Park |  | 690,419 |  |  | 9.81 | % |  | 281,506 |  |  | 4.00 | % |  | N/A |  |  | 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
F-62

Notes to Consolidated Financial Statements
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. 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 performance, 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.

Operating results for the year ended December 31, 2012 (In thousands)
|  | PNB |  | VB |  | GFSC |  | SEPH |  | All Other |  | Total
Net interest income |  | $ | 221,758 |  |  | $ | — |  |  | $ | 9,156 |  |  | $ | (341 | ) |  | $ | 4,742 |  |  | $ | 235,315 |
Provision for loan losses |  | 16,678 |  |  | — |  |  | 859 |  |  | 17,882 |  |  | — |  |  | 35,419 |
Other income |  | 70,739 |  |  | — |  |  | — |  |  | 21,431 |  |  | 233 |  |  | 92,403 |
Other expense |  | 156,516 |  |  | — |  |  | 2,835 |  |  | 22,032 |  |  | 6,585 |  |  | 187,968 |
Income (loss) before taxes |  | 119,303 |  |  | — |  |  | 5,462 |  |  | (18,824 | ) |  | (1,610 | ) |  | 104,331 |
Income taxes (benefit) |  | 32,197 |  |  | — |  |  | 1,912 |  |  | (6,603 | ) |  | (1,805 | ) |  | 25,701 |
Net income (loss) |  | $ | 87,106 |  |  | $ | — |  |  | $ | 3,550 |  |  | $ | (12,221 | ) |  | $ | 195 |  |  | $ | 78,630 |
Balances at December 31, 2012
Assets |  | $ | 6,502,579 |  |  | $ | — |  |  | $ | 49,926 |  |  | $ | 104,428 |  |  | $ | (14,130 | ) |  | $ | 6,642,803 |
Loans |  | 4,369,173 |  |  | — |  |  | 50,082 |  |  | 59,178 |  |  | (28,111 | ) |  | 4,450,322 |
Deposits |  | 4,814,107 |  |  | — |  |  | 8,358 |  |  | — |  |  | (106,433 | ) |  | 4,716,032 |

Operating results for the year ended December 31, 2011 (In thousands)
|  | PNB |  | VB |  | GFSC |  | SEPH |  | All Other |  | Total
Net interest income |  | $ | 236,282 |  |  | $ | 27,078 |  |  | $ | 8,693 |  |  | $ | (974 | ) |  | $ | 2,155 |  |  | $ | 273,234 |
Provision for loan losses |  | 30,220 |  |  | 31,052 |  |  | 2,000 |  |  | — |  |  | — |  |  | 63,272 |
Other income (loss) |  | 90,982 |  |  | 6,617 |  |  | — |  |  | (3,039 | ) |  | 350 |  |  | 94,910 |
Other expense |  | 146,235 |  |  | 31,379 |  |  | 2,506 |  |  | 1,082 |  |  | 7,115 |  |  | 188,317 |
Income (loss) before taxes |  | 150,809 |  |  | (28,736 | ) |  | 4,187 |  |  | (5,095 | ) |  | (4,610 | ) |  | 116,555 |
Income taxes (benefit) |  | 43,958 |  |  | (6,210 | ) |  | 1,466 |  |  | (1,784 | ) |  | (3,015 | ) |  | 34,415 |
Net income (loss) |  | $ | 106,851 |  |  | $ | (22,526 | ) |  | $ | 2,721 |  |  | $ | (3,311 | ) |  | $ | (1,595 | ) |  | $ | 82,140 |
Balances at December 31, 2011
Assets |  | $ | 6,281,747 |  |  | $ | 650,935 |  |  | $ | 46,682 |  |  | $ | 34,989 |  |  | $ | (42,108 | ) |  | $ | 6,972,245 |
Assets held for sale (1) |  | — |  |  | 382,462 |  |  | — |  |  | — |  |  | — |  |  | 382,462 |
Loans |  | 4,172,424 |  |  | 123,883 |  |  | 47,111 |  |  | — |  |  | (26,319 | ) |  | 4,317,099 |
Deposits |  | 4,611,646 |  |  | 32 |  |  | 8,013 |  |  | — |  |  | (154,577 | ) |  | 4,465,114 |
Liabilities held for sale (2) |  | — |  |  | 536,186 |  |  | — |  |  | — |  |  | — |  |  | 536,186 |

F-63

Notes to Consolidated Financial Statements

Operating results for the year ended December 31, 2010 (In thousands)
|  | PNB |  | VB |  | GFSC |  | SEPH |  | All Other |  | Total
Net interest income |  | $ | 237,281 |  |  | $ | 27,867 |  |  | $ | 7,611 |  |  | $ | — |  |  | $ | 1,285 |  |  | $ | 274,044 |
Provision for loan losses |  | 23,474 |  |  | 61,407 |  |  | 2,199 |  |  | — |  |  | — |  |  | 87,080 |
Other income (loss) |  | 80,512 |  |  | (6,024 | ) |  | 2 |  |  | — |  |  | 390 |  |  | 74,880 |
Other expense |  | 144,051 |  |  | 31,623 |  |  | 2,326 |  |  | — |  |  | 9,107 |  |  | 187,107 |
Income (loss) before taxes |  | 150,268 |  |  | (71,187 | ) |  | 3,088 |  |  | — |  |  | (7,432 | ) |  | 74,737 |
Income taxes (benefit) |  | 47,320 |  |  | (25,773 | ) |  | 1,082 |  |  | — |  |  | (5,993 | ) |  | 16,636 |
Net income (loss) |  | $ | 102,948 |  |  | $ | (45,414 | ) |  | $ | 2,006 |  |  | $ | — |  |  | $ | (1,439 | ) |  | $ | 58,101 |
Balances at December 31, 2010 |  |  |  |  |  |  |  |  |  |  |  |
Assets |  | $ | 6,495,558 |  |  | $ | 791,945 |  |  | $ | 43,209 |  |  | $ | — |  |  | $ | (48,451 | ) |  | $ | 7,282,261 |
Loans |  | 4,074,775 |  |  | 640,580 |  |  | 43,714 |  |  | — |  |  | (26,384 | ) |  | 4,732,685 |
Deposits |  | 4,622,693 |  |  | 633,432 |  |  | 7,062 |  |  | — |  |  | (167,767 | ) |  | 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.

The following is a reconciliation of financial information for the reportable segments to the Corporation’s consolidated totals:

|  | 2012
(In thousands) |  | Net Interest Income |  | Depreciation Expense |  | Other Expense |  | Income Taxes |  | Assets |  | Deposits
Totals for reportable segments |  | $ | 230,573 |  |  | $ | 6,954 |  |  | $ | 174,429 |  |  | $ | 27,506 |  |  | $ | 6,656,933 |  |  | $ | 4,822,465 |
Elimination of intersegment items |  | (4,948 | ) |  | — |  |  | — |  |  | — |  |  | (35,639 | ) |  | (106,433 | )
Parent Co. totals - not eliminated |  | 9,690 |  |  | — |  |  | 6,585 |  |  | (1,805 | ) |  | 21,509 |  |  | — |
Totals |  | $ | 235,315 |  |  | $ | 6,954 |  |  | $ | 181,014 |  |  | $ | 25,701 |  |  | $ | 6,642,803 |  |  | $ | 4,716,032 |

|  | 2011
(In thousands) |  | Net Interest Income |  | Depreciation Expense |  | Other Expense |  | Income Taxes |  | Assets |  | Deposits
Totals for reportable segments |  | $ | 271,079 |  |  | $ | 7,583 |  |  | $ | 173,619 |  |  | $ | 37,430 |  |  | $ | 7,014,353 |  |  | $ | 4,619,691 |
Elimination of intersegment items |  | (974 | ) |  | — |  |  | — |  |  | — |  |  | (63,243 | ) |  | (154,577 | )
Parent Co. totals - not eliminated |  | 3,129 |  |  | — |  |  | 7,115 |  |  | (3,015 | ) |  | 21,135 |  |  | — |
Totals |  | $ | 273,234 |  |  | $ | 7,583 |  |  | $ | 180,734 |  |  | $ | 34,415 |  |  | $ | 6,972,245 |  |  | $ | 4,465,114 |

|  | 2010
(In thousands) |  | Net Interest Income |  | Depreciation Expense |  | Other Expense |  | Income Taxes |  | Assets |  | Deposits
Totals for reportable segments |  | $ | 272,759 |  |  | $ | 7,126 |  |  | $ | 170,874 |  |  | $ | 22,629 |  |  | $ | 7,330,712 |  |  | $ | 5,263,187 |
Elimination of intersegment items |  | — |  |  | — |  |  | — |  |  | — |  |  | (77,876 | ) |  | (167,767 | )
Parent Co. totals - not eliminated |  | 1,285 |  |  | — |  |  | 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.
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Notes to Consolidated Financial Statements
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) |  | 2012 |  | 2011
Assets: |  |  |  |
Cash |  | $ | 98,726 |  |  | $ | 134,650 |
Investment in subsidiaries |  | 589,523 |  |  | 643,959 |
Debentures receivable from PNB |  | 30,000 |  |  | — |
Other investments |  | 2,133 |  |  | 2,280 |
Other assets |  | 19,639 |  |  | 19,406 |
Total assets |  | $ | 740,021 |  |  | $ | 800,295 |
Liabilities: |  |  |  |
Dividends payable |  | $ | — |  |  | $ | — |
Subordinated notes |  | 80,250 |  |  | 50,250 |
Other liabilities |  | 9,405 |  |  | 7,681 |
Total liabilities |  | 89,655 |  |  | 57,931 |
Total shareholders’ equity |  | 650,366 |  |  | 742,364 |
Total liabilities and shareholders’ equity |  | $ | 740,021 |  |  | $ | 800,295 |

Statements of Income
for the years ended December 31, 2012, 2011 and 2010
(In thousands) |  | 2012 |  | 2011 |  | 2010
Income: |  |  |  |  |  |
Dividends from subsidiaries |  | $ | 197,000 |  |  | $ | 105,000 |  |  | $ | 80,000 |
Interest and dividends |  | 10,027 |  |  | 5,643 |  |  | 4,789 |
Other |  | 232 |  |  | 385 |  |  | 411 |
Total income |  | 207,259 |  |  | 111,028 |  |  | 85,200 |
Expense: |  |  |  |  |  |
Other, net |  | 11,869 |  |  | 10,639 |  |  | 12,632 |
Total expense |  | 11,869 |  |  | 10,639 |  |  | 12,632 |
Income before federal taxes and equity in undistributed losses of subsidiaries |  | 195,390 |  |  | 100,389 |  |  | 72,568 |
Federal income tax benefit |  | 1,806 |  |  | 3,016 |  |  | 5,993 |
Income before equity in undistributed losses of subsidiaries |  | 197,196 |  |  | 103,405 |  |  | 78,561 |
Equity in undistributed losses of subsidiaries |  | (118,566 | ) |  | (21,265 | ) |  | (20,460 | )
Net income |  | $ | 78,630 |  |  | $ | 82,140 |  |  | $ | 58,101 |

F-65

Notes to Consolidated Financial Statements

Statements of Cash Flows
for the years ended December 31, 2012, 2011 and 2010
(In thousands) |  | 2012 |  | 2011 |  | 2010
Operating activities: |  |  |  |  |  |
Net income |  | $ | 78,630 |  |  | $ | 82,140 |  |  | $ | 58,101 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |  |
Undistributed losses of subsidiaries |  | 118,566 |  |  | 21,265 |  |  | 20,460 |
Decrease in other assets |  | 5,748 |  |  | 8,268 |  |  | 7,344 |
Increase (decrease) in other liabilities |  | 1,724 |  |  | (7,875 | ) |  | (3,763 | )
Net cash provided by operating activities |  | 204,668 |  |  | 103,798 |  |  | 82,142 |
Investing activities: |  |  |  |  |  |
Purchase of investment securities |  | — |  |  | (250 | ) |  | — |
Capital contribution to subsidiary |  | (45,000 | ) |  | (36,000 | ) |  | (52,000 | )
Purchase of debentures receivable from subsidiaries |  | (115,000 | ) |  | (30,000 | ) |  | — |
Repayment of debentures receivable from subsidiaries |  | 52,000 |  |  | — |  |  | 2,500 |
Net cash provided by (used in) investing activities |  | (108,000 | ) |  | (66,250 | ) |  | (49,500 | )
Financing activities: |  |  |  |  |  |
Cash dividends paid |  | (60,154 | ) |  | (62,907 | ) |  | (62,076 | )
Proceeds from issuance of common shares and warrants |  | 407 |  |  | — |  |  | 33,541 |
Payment to repurchase warrants |  | (2,843 | ) |  | — |  |  | — |
Payment to repurchase preferred shares |  | (100,000 | ) |  | — |  |  | — |
Proceeds from issuance of subordinated notes |  | 30,000 |  |  | — |  |  | — |
Cash payment for fractional shares |  | (2 | ) |  | (2 | ) |  | (4 | )
Net cash used in financing activities |  | (132,592 | ) |  | (62,909 | ) |  | (28,539 | )
(Decrease) increase in cash |  | (35,924 | ) |  | (25,361 | ) |  | 4,103 |
Cash at beginning of year |  | 134,650 |  |  | 160,011 |  |  | 155,908 |
Cash at end of year |  | $ | 98,726 |  |  | $ | 134,650 |  |  | $ | 160,011 |

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.
F-66

Notes to Consolidated Financial Statements
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.
F-67