UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2006

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

For the transition period from                      to                     

Park National Corporation

 

(Exact name of registrant as specified in its charter)

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

50 North Third Street, Newark, Ohio 43055(Address of principal executive offices) (Zip Code)

(740) 349-8451(Registrant’s telephone number, including area code)

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

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

Yes þ No o

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

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

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

Yes o No þ

13,882,363 Common shares, no par value per share, outstanding at July 31, 2006.

 

 

PARK NATIONAL CORPORATION

CONTENTS

						Page
PART I. FINANCIAL INFORMATION
		Item 1.		Financial Statements		3-18
				Consolidated Condensed Balance Sheets as of June 30, 2006 and December 31, 2005 (unaudited)		3
				Consolidated Condensed Statements of Income for the Three and Six Months Ended June 30, 2006 and 2005 (unaudited)		4-5
				Consolidated Condensed Statements of Changes in Stockholders' Equity for the Six Months Ended June 30, 2006 and 2005 (unaudited)		6
				Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005 (unaudited)		7-8
				Notes to Consolidated Financial Statements		9-18
		Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations		19-30
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk		31
		Item 4.		Controls and Procedures		31
PART II. OTHER INFORMATION						32-34
		Item 1.		Legal Proceedings		32
		Item 1A.		Risk Factors		32
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		32-33
		Item 3.		Defaults Upon Senior Securities		33
		Item 4.		Submission of Matters to a Vote of Security Holders		33
		Item 5.		Other Information		33
		Item 6.		Exhibits		34
SIGNATURES						35
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PARK NATIONAL CORPORATION
Consolidated Condensed Balance Sheets (Unaudited)
(dollars in thousands)

		June 30,				December 31,
		2006				2005
Assets:
Cash and due from banks		$	170,603			$	169,690
Money market instruments			25,091				4,283
Interest bearing deposits			1				300
Securities available-for-sale, at fair value (amortized cost of $1,364,513 and $1,424,955 at June 30, 2006 and December 31, 2005)			1,312,131				1,409,351
Securities held-to-maturity, at amortized cost (fair value approximates $172,984 and $190,425 at June 30, 2006 and December 31, 2005)			186,278				195,953
Other investment securities			59,535				58,038
Loans (net of unearned interest)			3,368,095				3,328,112
Allowance for loan losses			69,698				69,694
Net loans			3,298,397				3,258,418
Bank premises and equipment, net			47,080				47,172
Bank owned life insurance			111,413				109,600
Goodwill and other intangible assets			67,914				69,188
Other assets			134,004				114,055
Total assets		$	5,412,447			$	5,436,048
Liabilities and Stockholders’ Equity:
Deposits:
Noninterest bearing		$	685,545			$	667,328
Interest bearing			3,163,531				3,090,429
Total deposits			3,849,076				3,757,757
Short-term borrowings			434,550				314,074
Long-term debt			517,715				714,784
Other liabilities			71,627				91,003
Total liabilities			4,872,968				4,877,618
COMMITMENTS AND CONTINGENCIES
Stockholders’ Equity:
Common stock (No par value; 20,000,000 shares authorized; 15,272,258 shares issued in 2006 and 15,271,574 shares issued in 2005)			208,404				208,365
Retained earnings			498,834				476,889
Treasury stock (1,339,709 shares in 2006 and 1,178,948 shares in 2005)			(133,711	)			(116,681	)
Accumulated other comprehensive income (loss), net of taxes			(34,048	)			(10,143	)
Total stockholders’ equity			539,479				558,430
Total liabilities and stockholders’ equity		$	5,412,447			$	5,436,048

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PARK NATIONAL CORPORATION
Consolidated Condensed Statements of Income (Unaudited)
(dollars in thousands, except per share data)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Interest and dividends income:
Interest and fees on loans		$	63,215			$	54,531			$	123,148			$	106,771
Interest and dividends on:
Obligations of U.S. Government, its agencies and other securities			19,038				23,105				38,602				44,549
Obligations of states and political subdivisions			945				1,180				1,922				2,354
Other interest income			100				112				222				213
Total interest and dividends income			83,298				78,928				163,894				153,887
Interest expense:
Interest on deposits:
Demand and savings deposits			6,244				3,522				11,248				6,490
Time deposits			13,398				10,118				25,714				19,455
Interest on borrowings:
Short-term borrowings			4,104				1,835				7,229				3,226
Long-term debt			5,730				8,041				12,462				14,859
Total interest expense			29,476				23,516				56,653				44,030
Net interest income			53,822				55,412				107,241				109,857
Provision for loan losses			1,467				1,325				1,467				2,407
Net interest income after provision for loan losses			52,355				54,087				105,774				107,450
Other income:
Income from fiduciary activities		$	3,432			$	3,040			$	6,708			$	5,967
Service charges on deposit accounts			4,984				4,384				9,447				8,457
Other service income			2,800				2,763				5,527				5,106
Other			5,112				5,267				10,039				10,036
Total other income			16,328				15,454				31,721				29,566
Gain (loss) on sale of securities			—				96				—				96

Continued

PARK NATIONAL CORPORATION
Consolidated Condensed Statements of Income (Unaudited)
(Continued)
(dollars in thousands, except per share data)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Other expense:
Salaries and employee benefits		$	19,520			$	19,551			$	39,566			$	39,552
Occupancy expense			2,182				2,151				4,444				4,431
Furniture and equipment expense			1,355				1,381				2,691				2,749
Other expense			11,799				11,251				23,167				22,006
Total other expense			34,856				34,334				69,868				68,738
Income before federal income taxes			33,827				35,303				67,627				68,374
Federal income taxes			9,941				10,533				19,934				20,262
Net income		$	23,886			$	24,770			$	47,693			$	48,112
Per Share:
Net income:
Basic		$	1.71			$	1.73			$	3.41			$	3.36
Diluted		$	1.70			$	1.72			$	3.39			$	3.33
Weighted average
Basic			13,977,432				14,312,032				14,005,896				14,321,647
Diluted			14,010,407				14,379,463				14,053,151				14,427,549
Cash dividends declared		$	0.92			$	0.90			$	1.84			$	1.80

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

														Accumulated
										Treasury				Other
		Common				Retained				Stock				Comprehensive				Comprehensive
Six Months ended June 30, 2006 and 2005		Stock				Earnings				at Cost				Income (loss)				Income
BALANCE AT DECEMBER 31, 2004		$	208,251			$	433,260				($91,392	)		$	12,442
Net Income							48,112											$	48,112
Accumulated other comprehensive income (loss), net of tax:
Unrealized net holding loss on securities available-for-sale, net of taxes ($2,024)															(3,758	)			(3,758	)
Total comprehensive income																		$	44,354
Cash dividends on common stock at $1.80 per share							(25,783	)
Shares issued for stock options - 1,917			61
Tax benefit from exercise of stock options			57
Treasury stock purchased - 82,684 shares											(8,794	)
Treasury stock reissued for stock options - 41,048 shares											3,618
BALANCE AT JUNE 30, 2005		$	208,369			$	455,589				($96,568	)		$	8,684
BALANCE AT DECEMBER 31, 2005		$	208,365			$	476,889				($116,681	)			($10,143	)
Net Income							47,693											$	47,693
Accumulated other comprehensive income (loss), net of tax:
Unrealized net holding loss on securities available-for-sale, net of taxes ($12,872)															(23,905	)			(23,905	)
Total comprehensive income																		$	23,788
Cash dividends on common stock at $1.84 per share							(25,748	)
Cash payment for fractional shares in dividend reinvestment plan			(3	)
Shares issued for stock options - 684			24
Tax benefit from exercise of stock options			18
Treasury stock purchased - 195,761 shares											(19,890	)
Treasury stock reissued for stock options - 35,000 shares											2,860
BALANCE AT JUNE 30, 2006		$	208,404			$	498,834				($133,711	)			($34,048	)

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

		Six Months Ended
		June 30,
		2006				2005
Operating activities:
Net income		$	47,693			$	48,112
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, (accretion) and amortization, net			(72	)			1
Stock dividends on Federal Home Loan Bank stock			(1,497	)			(1,156	)
Provision for loan losses			1,467				2,407
Amortization of core deposit intangibles			1,274				1,274
Realized investment securities gains			—				(96	)
Changes in assets and liabilities:
Increase in other assets			(8,889	)			(16,394	)
Decrease in other liabilities			(6,376	)			(6,666	)
Net cash provided from operating activities			33,600				27,482
Investing activities:
Proceeds from sales of:
Available-for-sale securities			—				131,794
Proceeds from maturity of:
Available-for-sale securities			187,937				177,295
Held-to-maturity securities			9,675				17,588
Purchases of:
Available-for-sale securities			(126,527	)			(113,112	)
Held-to-maturity securities			—				(187,420	)
Net increase in other investments			—				(1,829	)
Net decrease in interest bearing deposits with other banks			299				997
Net increase in loans			(39,503	)			(4,320	)
Loans sold with branch office			—				5,273
Cash paid for acquisition, net			—				(39,227	)
Purchases of premises and equipment, net			(2,747	)			(5,356	)
Net cash provided from (used by) investing activities			29,134				(18,317	)

Continued

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

		Six Months Ended
		June 30,
		2006				2005
Financing activities:
Net increase in deposits		$	91,319			$	48,080
Deposits sold with branch office			—				($12,419	)
Net increase in short-term borrowings			120,476				42,366
Proceeds from exercise of stock options			2,902				3,736
Purchase of treasury stock			(19,890	)			(8,794	)
Cash payment for fractional shares in dividend reinvestment plan			(3	)			—
Long-term debt issued			—				100,939
Repayment of long-term debt			(197,069	)			(113,431	)
Cash dividends paid			(38,748	)			(38,671	)
Net cash (used by) provided from financing activities			(41,013	)			21,806
Increase in cash and cash equivalents			21,721				30,971
Cash and cash equivalents at beginning of year			173,973				161,829
Cash and cash equivalents at end of period		$	195,694			$	192,800
Supplemental disclosures of cash flow information:
Cash paid for:
Interest		$	56,560			$	42,630
Income taxes		$	12,633			$	12,900
Summary of business acquisition:
Fair value of assets acquired						$	185,372
Cash paid for purchase of First Clermont Bank							(52,500	)
Fair value of liabilities assumed							161,241
Goodwill recognized						$	28,369

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PARK NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Six Months Ended June 30, 2006 and 2005.

Note 1 — Basis of Presentation

The consolidated financial statements included in this report have been prepared by Park National Corporation (the “Registrant”, “Corporation”, “Company”, or “Park”) without audit. In the opinion of management, all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation of results of operations for the interim periods included herein have been made. The results of operations for the periods ended June 30, 2006 are not necessarily indicative of the operating results to be anticipated for the fiscal year ending December 31, 2006.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q, and therefore, do not include all information and footnotes necessary for a fair presentation of the condensed balance sheets, condensed statements of income, condensed statements of changes in stockholders’ equity and condensed statements of cash flows in conformity with U.S. generally accepted accounting principles. These financial statements should be read in conjunction with the financial statements incorporated by reference in the Annual Report on Form 10-K of Park for the fiscal year ended December 31, 2005 from Park’s 2005 Annual Report to Shareholders.

Park’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2005 Annual Report to Shareholders. For interim reporting purposes, Park follows the same basic accounting policies and considers each interim period as an integral part of an annual period.

Effective January 1, 2006, Park adopted Financial Accounting Standards Board Statement No. 123R (revised 2004), “Share-Based Payment” (“SFAS 123R”) which amends SFAS 123, “Accounting for Stock-Based Compensation”, and supercedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. SFAS 123R permits public companies to adopt its requirements using one of two methods. The “modified prospective” method recognizes compensation for all stock options granted after the date of adoption and for all previously granted stock options that become vested after the date of adoption. The “modified retrospective” method includes the requirements of the “modified prospective” method described above, but also permits entities to restate prior period results based on the amounts previously recognized under SFAS 123 for purposes of pro-forma disclosures. Park has elected to adopt SFAS 123R using the “modified prospective” method and accordingly will not restate prior period results. See Note 6 for a more detailed description of Park’s adoption of SFAS 123R.

Park does not have any off-balance sheet derivative financial instruments such as interest-rate swap agreements.

Note 2 — Acquisition, Branch Sale and Intangible Assets

On January 3, 2005, Park acquired all of the stock of First Clermont Bank (“First Clermont”) of Milford, Ohio for $52,500,000 in an all cash transaction accounted for as a purchase. Immediately following Park’s stock acquisition, First Clermont merged with Park’s subsidiary, The Park National Bank. First Clermont is being operated as a separate division of The Park National Bank and is now operating under the name of The Park National Bank of Southwest Ohio & Northern Kentucky. The goodwill recognized as a result of this acquisition was $28,369,000. The fair value of the acquired assets of First Clermont was $185,372,000 and the fair value of the liabilities assumed was $161,241,000 at January 3, 2005.

On February 11, 2005, Park’s subsidiary, Century National Bank, sold its Roseville, Ohio branch office. The Roseville branch office was acquired in connection with the acquisition of First Federal Bancorp, Inc. (“First Federal”) on December 31, 2004. The Federal Reserve Board required that the Roseville branch office be sold as a condition of their approval of the merger transactions involving Park and First Federal. The deposits sold with the Roseville branch office totaled $12,419,000 and the loans sold with the branch office totaled $5,273,000. Century National Bank received a premium of $1,184,000 from the sale of the deposits.

The following table shows the activity in goodwill and core deposit intangibles during the first six months of 2006.

						Core Deposit
(In Thousands)		Goodwill				Intangibles				Total
December 31, 2005		$	61,696			$	7,492			$	69,188
Amortization			—				<1,274>				<1,274>
June 30, 2006		$	61,696			$	6,218			$	67,914

Goodwill is evaluated on an annual basis for impairment and otherwise when circumstances warrant. Goodwill was evaluated for impairment during the first quarter of 2006, and no impairment charge was necessary.

Core deposit intangibles are being amortized to expense using the straight-line method over periods ranging from six to twelve years. Core deposit intangibles amortization expense was $637,000 for both the second quarter of 2006 and the second quarter of 2005 and was $1,274,000 for both the first six months of 2006 and the first six months of 2005.

Note 3 — Allowance for Loan Losses

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

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

The following table shows the activity in the allowance for loan losses for the three and six months ended June 30, 2006 and 2005.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In Thousands)		2006				2005				2006				2005
Average Loans (Net of Unearned Interest)		$	3,337,351			$	3,259,676			$	3,324,535			$	3,256,545
Allowance for Loan Losses:
Beginning Balance		$	69,695			$	70,322			$	69,694			$	68,328
Charge-Offs:
Commercial, Financial and Agricultural			318				655				620				1,033
Real Estate — Construction			200				36				500				46
Real Estate — Residential			371				115				784				220
Real Estate — Commercial			252				271				399				928
Consumer			1,437				1,815				2,855				3,143
Lease Financing			21				52				37				165
Total Charge-Offs			2,599				2,944				5,195				5,535
Recoveries:
Commercial, Financial and Agricultural			169				209				530				682
Real Estate — Construction			—				92				—				173
Real Estate — Residential			132				169				355				290
Real Estate — Commercial			18				295				1,083				313
Consumer			764				820				1,675				1,749
Lease Financing			52				64				89				96
Total Recoveries			1,135				1,649				3,732				3,303
Net Charge-Offs			1,464				1,295				1,463				2,232
Provision Charged to Earnings			1,467				1,325				1,467				2,407
Allowance for Loan Losses of Acquired Bank			—				—				—				1,849
Ending Balance		$	69,698			$	70,352			$	69,698			$	70,352
Ratio of Net Charge-Offs to Average Loans			.18	%			.16	%			.09	%			.14	%
Ratio of Allowance for Loan Losses to End of Period Loans, Net of Unearned Interest			2.07	%			2.14	%			2.07	%			2.14	%

Note 4 — Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2006 and 2005.

(Dollars in Thousands, Except Per Share Data)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Numerator:
Net Income		$	23,886			$	24,770			$	47,693			$	48,112
Denominator:
Denominator for Basic Earnings Per Share (Weighted Average Shares Outstanding)			13,977,432				14,312,032				14,005,896				14,321,647
Effect of Dilutive Securities			32,975				67,431				47,255				105,902
Denominator for Diluted Earnings Per Share (Weighted Average Shares Outstanding Adjusted for the Dilutive Securities)			14,010,407				14,379,463				14,053,151				14,427,549
Earnings per Share:
Basic Earnings Per Share		$	1.71			$	1.73			$	3.41			$	3.36
Diluted Earnings Per Share		$	1.70			$	1.72			$	3.39			$	3.33

Note 5 — Segment Information

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

Operating Results for the Three Months Ended June 30, 2006 (In Thousands)

		PNB				RTC				CNB				FKNB				UB				SNB				SEC				CIT				All Other				TOTAL
Net Interest Income		$	17,989			$	4,621			$	6,435			$	7,692			$	1,939			$	2,957			$	7,669			$	1,373			$	3,147			$	53,822
Provision for Loan Losses			701				70				70				150				20				80				150				40				186				1,467
Other Income			6,982				1,217				2,171				1,896				571				602				2,357				392				140				16,328
Other Expense			11,695				2,845				3,954				4,237				1,593				1,879				4,938				1,091				2,624				34,856
Net Income		$	8,546			$	1,935			$	3,035			$	3,443			$	616			$	1,127			$	3,322			$	433			$	1,429			$	23,886
Balances at June 30, 2006
Assets		$	2,043,457			$	492,595			$	723,694			$	766,713			$	219,304			$	387,075			$	915,180			$	160,785			$	<296,356>			$	5,412,447

Operating Results for the Three Months Ended June 30, 2005 (In Thousands)

																																		All
		PNB				RTC				CNB				FKNB				UB				SNB				SEC				CIT				Other				TOTAL
Net Interest Income		$	17,519			$	5,113			$	6,970			$	7,776			$	2,153			$	3,519			$	7,960			$	1,582			$	2,820			$	55,412
Provision for Loan Losses			200				140				220				282				60				60				170				50				143				1,325
Other Income			6,604				1,161				1,851				1,757				521				555				2,482				382				237				15,550
Other Expense			11,572				2,670				3,851				4,082				1,553				1,898				4,949				1,108				2,651				34,334
Net Income		$	8,368			$	2,300			$	3,150			$	3,439			$	721			$	1,471			$	3,579			$	557			$	1,185			$	24,770
Balances at June 30, 2005
Assets		$	1,920,785			$	506,913			$	745,381			$	774,384			$	241,486			$	397,946			$	944,064			$	185,490			$	<83,130>			$	5,633,319

Operating Results for the Six Months Ended June 30, 2006 (In Thousands)

																																		All
		PNB				RTC				CNB				FKNB				UB				SNB				SEC				CIT				Other				TOTAL
Net Interest Income		$	35,780			$	9,342			$	12,914			$	15,153			$	3,890			$	6,038			$	15,204			$	2,759			$	6,161			$	107,241
Provision for Loan Losses			613				170				40				155				<180>				55				200				40				374				1,467
Other Income			13,626				2,314				4,100				3,963				1,072				1,160				4,393				810				283				31,721
Other Expense			23,103				5,554				8,188				8,582				3,184				3,816				10,076				2,160				5,205				69,868
Net Income		$	17,381			$	3,926			$	5,825			$	6,871			$	1,333			$	2,338			$	6,285			$	932			$	2,802			$	47,693

Operating Results for the Six Months Ended June 30, 2005 (In Thousands)

																																		All
		PNB				RTC				CNB				FKNB				UB				SNB				SEC				CIT				Other				TOTAL
Net Interest Income		$	34,554			$	10,326			$	14,007			$	15,314			$	4,387			$	6,970			$	15,521			$	3,210			$	5,568			$	109,857
Provision for Loan Losses			840				170				90				612				70				70				165				100				290				2,407
Other Income			12,637				2,208				3,571				3,541				983				1,061				4,539				740				382				29,662
Other Expense			23,097				5,364				7,806				8,261				3,079				3,916				9,769				2,264				5,182				68,738
Net Income		$	15,783			$	4,633			$	6,417			$	6,649			$	1,508			$	2,818			$	6,817			$	1,087			$	2,400			$	48,112

The operating results of the Parent Company and Guardian Finance Company (GFC) in the All Other column are used to reconcile the segment totals to the consolidated income statements for the periods ended June 30, 2006 and 2005. The reconciling amounts for consolidated total assets for both of the periods ended June 30, 2006 and 2005 consist of the elimination of intersegment borrowings, and the assets of the Parent Company and GFC which are not eliminated.

Note 6 — Stock Option Plans

Effective January 1, 2006, Park adopted SFAS 123R using the “modified prospective” method and accordingly will not restate prior period results. SFAS 123R requires that compensation expense be recognized for all stock options granted after the date of adoption and for all previously granted stock options that become vested after the date of adoption. Prior to January 1, 2006, Park accounted for its stock option plans under the recognition and measurement principles of APB 25 and related interpretations. Under APB 25, no stock-based employee compensation cost was reflected in net income as all stock options granted under the Park stock option plans had an exercise price equal to the market value of the underlying common stock on the grant date.

Park did not grant any stock options during the first six months of 2006. Additionally, no stock options became vested during the first six months of 2006. The adoption of SFAS 123R on January 1, 2006 had no impact on Park’s net income for the first six months of 2006.

The following table summarizes stock option activity during the first half of 2006.

						Weighted				Weighted
						Average Exercise				Average Fair
		Stock Options				Price Per Share				Value Per Share
Outstanding at December 31, 2005			818,182			$	99.78			$	13.50
Granted			—				—				—
Exercised			<35,684>				80.81				15.02
Forfeited/Expired			<78,419>				89.83				15.07
Outstanding at June 30, 2006			704,079			$	101.85			$	13.25

All of the stock options outstanding at June 30, 2006 were exercisable. The aggregate intrinsic value of the outstanding stock options at June 30, 2006 was $3,444,087.

The intrinsic value of the stock options exercised during the second quarter of 2006 was $275,000 and $675,000 for the first half of 2006 compared to $293,000 for the second quarter of 2005 and $864,000 for the first half of 2005. The weighted average contractual remaining term was 2.6 years for the stock options outstanding at June 30, 2006.

Park granted 227,000 incentive stock options during the second quarter of 2005. The following table illustrates the effect on net income and earnings per share had Park applied fair value recognition to stock-based employee compensation in 2005.

		Three Months Ended				Six Months Ended
		June 30,				June 30,
(Dollars in Thousands, Except Per Share Data)		2005				2005
Net income as reported		$	24,770			$	48,112
Deduct:
Total stock-based employee compensation expense determined under fair value method, net of related tax effects			(3,664	)			(3,664	)
Pro forma net income		$	21,106			$	44,448
Basic earnings per share as reported		$	1.73			$	3.36
Pro forma basic earnings per share		$	1.47			$	3.10
Diluted earnings per share as reported		$	1.72			$	3.33
Pro forma diluted earnings per share		$	1.47			$	3.08

The fair value was computed at the date of grant (in the second quarter of 2005) using a Black-Scholes option pricing model with the assumptions listed below.

Assumptions		2005
Risk-Free Interest Rate			3.77	%
Dividend Yield			3.00	%
Volatility Factor of the Market Price			.198
Weighted Average Expected Life of Options		4 years

Note 6 — Stock Option Plans — (Continued)

All of the common shares delivered upon exercise of incentive stock options granted under the Park National Corporation 2005 and 1995 Incentive Stock Option Plans are to be treasury shares. At June 30, 2006, incentive stock options (granted under both the 2005 Plan and 1995 Plan) covering 690,093 common shares were outstanding. The remaining outstanding stock options at June 30, 2006 covering 13,986 common shares pertain to a stock option plan assumed by Park in the acquisition of Security Banc Corporation in 2001. At June 30, 2006, Park held 925,372 treasury shares that are allocated for the stock option plans (including the Security Plan). Management anticipates that very few, if any, additional shares of Park common stock will be repurchased within the next twelve months for the stock option plans.

Note 7 — Loans

The composition of the loan portfolio is as follows:

		June 30,				December 31,
(In Thousands)		2006				2005
Commercial, Financial and Agricultural		$	524,617			$	512,636
Real Estate:
Construction			197,071				193,185
Residential			1,293,374				1,287,438
Commercial			828,894				823,354
Consumer			511,261				494,975
Leases			12,878				16,524
Total Loans		$	3,368,095			$	3,328,112

Note 8 — Investment Securities

The amortized cost and fair values of investment securities are shown in the following table. Management evaluates investment securities on a quarterly basis for other-than-temporary impairment. No impairment charges have been deemed necessary in 2006 and 2005. The unrealized losses are primarily the result of changes in interest rates and will not prohibit Park from receiving its contractual principal and interest payments.

(In Thousands)

						Gross
June 30, 2006						Unrealized				Gross Unrealized				Estimated
Securities Available-for-Sale		Amortized Cost				Holding Gains				Holding Losses				Fair Value
Obligations of U.S. Treasury and Other U.S. Government Sponsored Entities		$	50,985			$	—			$	<1,169>			$	49,816
Obligation of States and Political Subdivisions			61,623				981				<20>				62,584
U.S. Government Sponsored Entities’ Asset-Backed Securities and Other Asset-Backed Securities			1,250,301				476				<53,331>				1,197,446
Equity Securities			1,604				737				<56>				2,285
Total		$	1,364,513			$	2,194			$	<54,576>			$	1,312,131

						Gross
June 30, 2006						Unrecognized				Gross Unrecognized				Estimated
Securities Held-to-Maturity		Amortized Cost				Holding Gains				Holding Losses				Fair Value
Obligations of States and Political Subdivisions		$	16,658			$	156			$	—			$	16,814
U.S. Government Sponsored Entities’ Asset-Backed Securities and Other Asset-Backed Securities			169,620				1				<13,451>				156,170
Total		$	186,278			$	157			$	<13,451>			$	172,984

(In Thousands)

						Gross
December 31, 2005						Unrealized				Gross Unrealized				Estimated
Securities Available-for-Sale		Amortized Cost				Holding Gains				Holding Losses				Fair Value
Obligations of U.S. Treasury and Other U.S. Government Sponsored Entities		$	998			$	—			$	<2>			$	996
Obligation of States and Political Subdivisions			66,181				1,740				<15>				67,906
U.S. Government Sponsored Entities’ Asset-Backed Securities and Other Asset-Backed Securities			1,356,233				1,823				<19,629>				1,338,427
Equity Securities			1,543				527				<48>				2,022
Total		$	1,424,955			$	4,090			$	<19,694>			$	1,409,351

						Gross
December 31, 2005						Unrecognized				Gross Unrecognized				Estimated
Securities Held-to-Maturity		Amortized Cost				Holding Gains				Holding Losses				Fair Value
Obligations of States and Political Subdivisions		$	17,430			$	308			$	—			$	17,738
U.S. Government Sponsored Entities’ Asset-Backed Securities and Other Asset-Backed Securities			178,523				2				<5,838>				172,687
Total		$	195,953			$	310			$	<5,838>			$	190,425

Note 9 — Other Investment Securities

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

		June 30,				December 31,
(In Thousands)		2006				2005
Federal Home Loan Bank Stock		$	53,656			$	52,159
Federal Reserve Bank Stock			5,879				5,879
Total		$	59,535			$	58,038

Note 10 — Benefit Plans

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

Park’s funding policy is to contribute annually an amount that can be deducted for federal income tax purposes using a different actuarial cost method and different assumptions from those used for financial reporting purposes. A pension plan contribution of $9,117,417 was paid during the first quarter of 2006 and a pension plan contribution of $9,688,096 was paid during the first quarter of 2005.

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

		(In Thousands)
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Service Cost		$	795			$	671			$	1,590			$	1,342
Interest Cost			722				689				1,443				1,378
Expected Return on Plan Assets			<994>				<834>				<1,988>				<1,668>
Amortization of Prior Service Cost			3				3				7				6
Recognized Net Actuarial Loss			139				136				277				272
Benefit Expense		$	665			$	665			$	1,329			$	1,330

Note 11 — Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises’ financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. Management does not expect that the adoption of this standard will have a material impact on Park’s financial statements.

In July 2006, the Emerging Issues Task Force (“EITF”) of FASB issued a draft abstract for EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”. This draft abstract from EITF reached a consensus that for an endorsement split-dollar life insurance arrangement within the scope of this Issue, an employer should recognize a liability for future benefits in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” The Task Force believed that a liability for the benefit obligation under SFAS No. 106 has not been settled through the purchase of an endorsement type life insurance policy. At June 30, 2006, Park and its subsidiary banks owned $111 million of bank owned life insurance. These life insurance policies are generally subject to endorsement split-dollar life insurance arrangements. These arrangements were designed to provide a pre-and postretirement benefit for senior officers and directors of Park and its subsidiary banks. The comment period for this draft abstract ends on August 4, 2006. The draft abstract of EITF Issue No. 06-4 could be effective for fiscal years beginning after December 15, 2006. The management of Park believes that if EITF Issue No. 06-4 is adopted in its present form, it may have a material impact on Park’s financial statements. Park’s management will closely monitor the status of EITF Issue No. 06-4. If EITF Issue No. 06-4 is adopted as proposed, Park may amend its split-dollar life insurance arrangements to eliminate some of the postretirement benefits.

In March 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 156, “Accounting for Servicing of Financial Assets-an amendment of SFAS No. 140,” which changes the accounting for all loan servicing rights which are recorded as the result of selling a loan where the seller undertakes an obligation to service the loan, usually in exchange for compensation. SFAS No. 156 amends current accounting guidance by permitting the servicing right to be recorded initially at fair value and also permits the subsequent reporting of these assets at fair value. SFAS No. 156 is effective beginning January 1, 2007. Management does not expect that the adoption of this standard will have a material impact on Park’s financial statements.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”, an amendment of SFAS Nos. 133 and 140. This Statement changes the accounting for various derivatives and securitized financial assets. This Statement will be effective for all financial instruments acquired, issued, or subject to a remeasurement (new basis) event occurring after January 1, 2007. Management does not expect that the adoption of this standard will have a material impact on Park’s financial statements.

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

Management’s discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance. The forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation, Park’s ability to execute its business plan, changes in general economic and financial market conditions, changes in the competitive environment, changes in banking regulations or other regulatory or legislative requirements affecting bank holding companies and changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or regulatory agencies. Additional detailed information concerning a number of important factors which could cause actual results to differ materially from the forward-looking statements contained in management’s discussion and analysis is available in Park’s filings with the Securities and Exchange Commission, under the Securities Exchange Act of 1934, including the disclosure under the heading “Item 1A. Risk Factors” of Part I of Park’s 2005 Form 10-K. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date hereof. Park does not undertake any obligation to publicly update any forward-looking statement except to the extent required by law.

Critical Accounting Policies

Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2005 Annual Report to Shareholders lists significant accounting policies used in the development and presentation of its financial statements. The accounting and reporting policies of Park conform with U.S. generally accepted accounting principles and general practices within the financial services industry. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.

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

Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgement than most other significant accounting policies. Statement of Financial Accounting Standards (“SFAS”) No. 142, “Accounting for Goodwill and Other Intangible Assets” establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill. At June 30, 2006, Park had core deposit intangibles of $6.2 million subject to amortization and $61.7 million of goodwill, which was not subject to periodic amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Park’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Park’s banking subsidiaries to provide quality, cost effective banking services in a competitive marketplace. The goodwill value of $61.7 million 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 or the inability to deliver cost-effective services over sustained periods can lead to impairment of goodwill that could adversely impact earnings in future periods. SFAS No. 142 requires an annual evaluation of goodwill for impairment. This evaluation was performed during the first quarter of 2006 and no impairment charge was necessary.

Comparison of Results of Operations
For the Three and Six Month Periods Ended
June 30, 2006 and 2005

Summary Discussion of Results

Net income decreased by $884,000 or 3.6% to $23.9 million for the three months ended June 30, 2006 compared to $24.8 million for the same period in 2005. For the first half of 2006, net income decreased by $419,000 or .9% to $47.7 million compared to $48.1 million for the same period in 2005. The annualized, net income to average asset ratio (ROA) was 1.78% for both the three and six month periods ended June 30, 2006 compared to 1.75% for the second quarter of 2005 and 1.72% for the first six months of 2005. The annualized, net income to average equity ratio (ROE) was 17.89% for the second quarter of 2006 and 17.77% for the first half of 2006 compared to 17.81% for the second quarter of 2005 and 17.37% for the first half of 2005.

Diluted earnings per share decreased by 1.2% to $1.70 for the second quarter of 2006 compared to $1.72 for the second quarter of 2005. Diluted earnings per share increased by 1.8% to $3.39 for the first half of 2006 compared to $3.33 for the first half of 2005.

The following table explains the change in net income for the three and six month periods ended June 30, 2006 compared to the same periods in 2005.

		June 30, 2006 compared to June 30, 2005
		Three Months				Six Months
Decrease in Net Interest Income		$	<1,590>			$	<2,616>
(Increase) Decrease in Provision for Loan Losses			<142>				940
Increase in Other Income			874				2,155
Decrease in Gain on Sale of Securities			<96>				<96>
Increase in Operating Expenses			<522>				<1,130>
Decrease in Income Before Taxes			<1,476>				<747>
Decrease in Federal Income Taxes			592				328
Decrease in Net Income		$	<884>			$	<419>

Over the next several pages, management will explain in detail the changes in net income for the three and six month periods ended June 30, 2006 compared to the same periods in 2005.

Net Interest Income Comparison for the Second Quarter of 2006 and 2005

Park’s principal source of earnings is net interest income, the difference between total interest income and total interest expense. Net interest income decreased by $1.6 million or 2.9% to $53.8 million for the second quarter of 2006 compared to $55.4 million for the second quarter of 2005. The following table compares the average balance and the annualized tax equivalent yield/cost for interest earning assets and interest bearing liabilities for the second quarter of 2006 with the same quarter of 2005.

Three Months Ended June 30,
(In Thousands)

		2006								2005
						Tax								Tax
		Average				Equivalent				Average				Equivalent
		Balance				%				Balance				%
Loans		$	3,337,351				7.61	%		$	3,259,676				6.73	%
Taxable Investments			1,554,684				4.91	%			1,908,841				4.85	%
Tax Exempt Investments			79,814				7.06	%			96,379				7.25	%
Money Market Instruments			7,457				5.39	%			14,353				3.13	%
Interest Earning Assets		$	4,979,306				6.76	%		$	5,279,249				6.05	%
Interest Bearing Deposits		$	3,160,283				2.49	%		$	3,206,866				1.71	%
Short-Term Borrowings			392,760				4.21	%			306,910				2.40	%
Long-Term Debt			540,835				4.25	%			908,312				3.55	%
Interest Bearing Liabilities		$	4,093,878				2.89	%		$	4,422,088				2.13	%
Excess Interest Earning Assets		$	885,428				—			$	857,161				—
Net Interest Spread							3.87	%							3.92	%
Net Interest Margin							4.38	%							4.26	%