Shareholders should note that many factors, some of which are discussed elsewhere in this document, could affect the future financial results of the Corporation and its subsidiaries and could cause those results to differ materially from those expressed in our forward-looking statements contained in this document. These factors include the following: operating, legal and regulatory risks; economic, political and competitive forces affecting our businesses; and the risk that our analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.
Critical Accounting Policies, Judgments and Estimates:
The accounting and reporting policies of the Corporation and its subsidiaries conform to accounting principles generally accepted in the United States of America (U.S. GAAP) and general practices within the financial services industry. All significant inter-company transactions are eliminated in consolidation and certain reclassifications are made when necessary to conform the previous year's financial statements to the current year's presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented. Therefore, actual results could differ significantly from those estimates. Accounting policies involving significant judgments and assumptions by management, which have or could have a material impact on the carrying value of certain assets or comprehensive income, are considered critical accounting policies. The Corporation recognizes the following as critical accounting policies: Allowance for Loan Loss, Carrying Value of Investment Securities, Valuation of Foreclosed Real Estate and Carrying Value of Goodwill and Other Intangible Assets.
The Corporation's critical accounting policies and judgments disclosures are contained in the Corporation's June 30, 2008 Annual Report printed in September 2008. Management believes that there have been no material changes since June 30, 2008. The Corporation has not substantively changed its application of the foregoing policies, and there have been no material changes in assumptions or estimation techniques used as compared to prior periods except fair value is measured in accordance with FAS 157 as disclosed in the Notes to the Financial Statements beginning on page 8.

Balance Sheet Data:

                                                                 September 30,
  (Dollar amounts in thousands, except per share data)       2008            2007
  Total assets                                           $ 1,828,077     $ 1,846,756
  Loans, net                                               1,181,938       1,221,914
  Interest-earning deposits and federal funds sold            97,449         124,689
  Total investments                                          433,580         381,960
  Deposits                                                 1,482,400       1,474,628
  FHLB advances                                              186,372         211,601
  Shareholders' equity                                       131,258         129,273
  Book value per share                                   $     23.94     $     23.39

Statistical Profile:

                                                               Three Months Ended
                                                               September 30, (1)
                                                                2008         2007
    Average yield earned on all interest-earning assets          5.47 %       5.77 %
    Average rate paid on all interest-bearing liabilities        3.07 %       3.54 %
    Average interest rate spread                                 2.40 %       2.23 %
    Net yield on average interest-earning assets                 2.50 %       2.30 %
    Other expenses to average assets                             1.53 %       1.58 %
    Taxes to pre-tax income                                     30.59 %      23.07 %
    Return on average assets                                     0.24 %       0.80 %
    Return on average equity                                     3.28 %      11.27 %
    Average equity to average total assets                       7.27 %       7.08 %



                                                            At September 30,
                                                            2008        2007
         One year gap to total assets                        2.28 %     11.06 %
         Intangibles to total equity                        22.93 %     23.99 %
         Ratio of nonperforming assets to total assets       0.90 %      0.47 %
         Number of full-service offices                        48          47

(1) The applicable income and expense figures have been annualized in calculating the percentages.

Nonperforming Loans and Foreclosed Real Estate:
Loans delinquent 90 days or more, impaired loans and foreclosed real estate
(REO) consisted of the following at: (Dollar amounts in 000's)

                                           9/30/08      6/30/08       12/31/07      9/30/07
 Delinquent single-family mortgage loans   $  8,264     $  5,911     $    3,683     $  3,754
 Delinquent other loans                       1,567        5,472          2,057        2,243

 Total nonperforming loans                    9,831       11,383          5,740        5,997
 Total impaired loans                         1,265        1,146          1,054        1,063
 Real estate owned, net                       5,353        3,279          2,563        1,675

 Total                                     $ 16,449     $ 15,808     $    9,357     $  8,735

A weakening of the national and to a lesser extent local housing sector and credit markets have contributed towards an increased level of non-performing assets. Nonperforming (delinquent 90 days or more) and impaired loans and real estate owned in the aggregate represented 0.90%, 0.85%, 0.51% and 0.47% of total assets at the respective balance sheet dates shown above. Non-performing assets at September 30, 2008 have increased to $16.4 million from $15.8 million at June 30, 2008, which includes $9.8 million of non-accrual loans. As of September 30, 2008, single-family mortgage loans delinquent 90 days or more include facilities aggregating $5.4 million purchased from others and serviced by national service providers with a cost basis ranging from $97,000 to $721,000. Management believes that all of these delinquent single-family mortgage loans are adequately collateralized with the exception of five loans, which have the necessary related allowances for losses provided.

Other loans delinquent 90 days or more of $1.6 million at September 30, 2008 include $713 of commercial real estate, $300 of commercial loans and $554 of consumer loans. A delinquent multi-family apartment building loan with a balance of $684,000 is more than 90 days past due as the borrower has declared bankruptcy in response to collection efforts that may result in foreclosure; management believes this facility is well collateralized. Impaired loans include a commercial real estate loan of $757,000 as the primary business operating from this location has closed and foreclosure is in process.
In addition to the loans shown in the above table, special mention loans include $1.1 million of commercial loans and $2.9 million of commercial real estate loans at September 30, 2008, compared to an aggregate of $3.1 million at June 30, 2008 and $3.8 million at December 31, 2007. The special mention loans, while current or less than 90 days past due, have exhibited characteristics which warrant special monitoring. Examples of these concerns include irregular payment histories, questionable collateral values, investment properties having cash flows insufficient to service debt, and other financial inadequacies of the borrower. These loans are regularly monitored with efforts being directed towards resolving the underlying concerns while continuing with the performing status classification of such loans.
Foreclosed real estate of $5.4 million primarily consists of single-family dwellings. The increase in real estate owned was primarily due to the September 2008 foreclosure of ten single family units in a residential development with a net book value of $2.5 million at September 30, 2008. Marketing efforts are underway to sell the homes individually upon completion. At September 30, 2008, foreclosed real estate also includes four commercial real estate properties with an aggregate value of $441,000. Foreclosed real estate properties are recorded at the lower of the carrying amount or fair value of the property less costs to sell.
Each of the above categories of loans have been evaluated for the market values of the collateral, less possible selling and holding costs, with appropriate valuation allowances and reserves provided as deemed necessary by management. Loans are placed on nonaccrual status when, in management's judgment, the probability of collection of principal and interest is deemed to be insufficient to warrant further accrual. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income. As a result, uncollected interest income is not included in earnings for nonaccrual loans. The amount of interest income on nonaccrual loans that had not been recognized in interest income was $352,000 at September 30, 2008 and $426,000 at June 30, 2008. Parkvale provides an allowance for the loss of accrued but uncollected interest on mortgage, consumer and commercial business loans that are 90 days or more contractually past due.
Nonaccrual, substandard and doubtful commercial and other real estate loans are assessed for impairment. Loans are considered impaired when the fair value of collateral is insufficient compared to the contractual amount due. Parkvale excludes single-family loans, credit card and installment consumer loans in the determination of impaired loans, consistent with the exception under paragraph 6 of SFAS 114 of loans measured for impairment. Parkvale Bank had $1.3 million and $1.1 million of loans classified as impaired at September 30, 2008 and at June 30, 2008. Impaired loans are reported net of allowances of $0 at September 30, 2008 and June 30, 2008. The average recorded balance of impaired loans was $1.2 million during the three months ended September 30, 2008. Interest income of $27,000 on impaired loans was not recognized for the three months ended September 30, 2008 compared to $44,000 for the three months ended September 30, 2007.

Allowance for Loan Losses:
The allowance for loan losses was $15.1 million at September 30, 2008, $15.2 million at June 30, 2008 and $14.8 million at September 30, 2007 or 1.26%, 1.25% and 1.20% of gross loans at September 30, 2008, June 30, 2008 and September 30, 2007. The adequacy of the allowance for loan loss is determined by management through evaluation of the loss probable on individual nonperforming, delinquent and high dollar loans, economic and business trends, growth and composition of the loan portfolio and historical loss experience, as well as other relevant factors.
Management continually monitors the loan portfolio to identify potential portfolio risks and to detect potential credit deterioration in the early stages. Management then establishes reserves based upon its evaluation of the inherent risks in the loan portfolio. Changes to the levels of reserves are made quarterly based upon perceived changes in risk. When evaluating the risk elements within the loan portfolio, Parkvale has a substantial portion of the loans secured by real estate as noted in the loan footnote on page 7. In addition to the $812.9 million of 1-4 family loans, the majority of the consumer loans represent either second mortgages in the form of term loans, home equity lines of credit or first lien positions on home loans. The Bank does not underwrite subprime loans, negative amortization loans or discounted teaser rates on ARM loans. Included in the mortgage portfolio are $256.0 million of interest only mortgage loans. All originated ARM loans are made at competitive market rates in the primary lending areas of the Bank with add-on margins ranging from 250 to 300 basis points to either the constant maturity treasury yields or Libor. Adjustable-rate mortgage loans purchased in the secondary market that are serviced by national service providers are prudently underwritten with emphasis placed on loans to value of less than 80% combined with high FICO scores. The entire purchased loan portfolio is considered well collateralized and geographically diversifies the portfolio throughout the United States. Aside from the states where Parkvale has offices, no other state exceeds 5% of the mortgage loan portfolio. While management believes the allowance is adequate to absorb estimated credit losses in its existing loan portfolio, future adjustments may be necessary in circumstances that differ substantially from the assumptions used in evaluating the adequacy of the allowance for loan losses.
Liquidity and Capital Resources:
Federal funds sold increased $3.0 million or 3.5% from June 30, 2008 to September 30, 2008. Investment securities held to maturity decreased $6.7 million or 1.6%, loans decreased $19.7 million or 1.6% from June 30, 2008 to September 30, 2008, interest-earning deposits in other institutions increased $1.2 million or 16.5% and prepaid expenses and other assets increased $513,000 or 1.25% due to prepaid taxes. Deposits decreased $11.3 million or 0.8% from June 30, 2008 to September 30, 2008, advances from the Federal Home Loan Bank decreased $5.1 million or 2.6% due to the maturity of a $5.0 million 5.58% advance. Parkvale Bank's FHLB advance available maximum borrowing capacity is $455.4 million. If Parkvale were to experience a deposit decrease in excess of the available cash resources and cash equivalents, the FHLB borrowing capacity could be utilized to fund a rapid decrease in deposits.
TARP Capital Purchase Program: On October 14, 2008, the United States Department of the Treasury announced a voluntary Capital Purchase Program under which the Treasury will purchase up to $250 billion of senior preferred shares from qualifying financial institutions. Parkvale is eligible to request the Treasury to purchase preferred shares ranging from $10.6 million to $31.7 million with a dividend rate for the first five years of 5.0% per year. Parkvale currently has until November 14, 2008 to submit its application.

Parkvale expects to request near the maximum amount in order to increase the Bank's Tier 1 risk based capital ratio from 9.4% to above 12%. The preferred stock represents a relatively cheap source of capital and may provide the Bank with growth opportunities along with solidifying our well- capitalized regulatory status. If preferred stock is issued to Parkvale, the Treasury would also receive warrants with up to a 10-year life to purchase common stock of Parkvale, with the amount of the warrants equal to 15% of the amount of preferred stock. Parkvale believes that the dilutive effect of the common stock warrants would not be material. In addition, the terms of the preferred stock would restrict Parkvale's ability to repurchase its common stock or to increase the dividends paid on its common stock while the preferred stock is outstanding, in each case unless prior regulatory approval is received.
Shareholders' equity was $131.3 million or 7.2% of total assets at September 30, 2008. A stock repurchase program, approved in June 2008, permits the purchase of 5.0% of outstanding stock or 274,000 shares during fiscal 2009 at prevailing prices in open-market transactions. Through September 30, 2008, no shares have been acquired under this program. Banks are required to maintain Tier 1 (Core) capital equal to at least 4% of the institution's adjusted total assets and Total (Supplementary) Risk-Based capital equal to at least 8% of the risk-weighted assets. At September 30, 2008, Parkvale Bank was in compliance with all applicable regulatory requirements, with Tier 1 Core, Tier 1 Risk-Based and Total Risk-Based ratios of 5.54%, 9.40% and 10.65%, respectively. The regulatory capital ratios for Parkvale Bank at September 30, 2008 are calculated as follows:

                                                Tier 1          Tier 1           Total
                                                 Core         Risk-Based      Risk-Based
 (Dollars in 000's)                             Capital         Capital         Capital
 Equity capital (1)                          $   129,612     $   129,612     $   129,612
 Less non-allowable intangible assets            (30,102 )       (30,102 )       (30,102 )
 Plus permitted valuation allowances (2)               -               -          13,246

 Total regulatory capital                         99,510          99,510         112,756
 Minimum required capital                         71,820          42,351          84,701

 Excess regulatory capital                   $    27,690     $    57,159     $    28,055


 Adjusted total assets (1)                   $ 1,823,490     $ 1,058,765     $ 1,058,765

 Regulatory capital as a percentage                 5.46 %          9.40 %         10.65 %
 Minimum capital required as a percentage           4.00 %          4.00 %          8.00 %

 Excess regulatory capital as a percentage          1.46 %          5.40 %          2.65 %

 Well capitalized requirement                       5.00 %          6.00 %         10.00 %

(1) Represents amounts for the consolidated Bank as reported to the Pennsylvania Department of Banking and FDIC on Form 041 for the quarter ended September 30, 2008.

(2) Limited to 1.25% of risk adjusted total assets.

Management is not aware of any trends, events, uncertainties or current recommendations by any regulatory authority that will have, or that are reasonably likely to have, material effects on Parkvale's liquidity, capital resources or operations.
Results of Operations - Comparison of Three Months Ended September 30, 2008 and 2007:
For the three months ended September 30, 2008, Parkvale reported net income of $1.1 million or $0.20 per diluted share compared to net income of $3.6 million or $0.65 per diluted share for the quarter ended September 30, 2007. The $2.5 million decrease in net income for the September 2008 quarter reflects a $3.9

million writedown of equity and debt securities mitigated by related tax benefits of $1.3 million. On an operating basis, excluding security writedowns, net income for the September 2008 quarter would have been $3.7 million or $0.67 per diluted share. Management believes that excluding the security writedowns offers a better basis of comparison with prior periods. Net income was favorably impacted by a $988,000 increase in net interest income, a $114,000 decrease in noninterest expense and a $607,000 decrease in income tax expense, and was negatively impacted by a $324,000 increase in the provision for loan losses. The security writedowns reduced the carrying value by $2.6 million of preferred stock investments in Freddie Mac, the largest U.S. Government sponsored mortgage company, and by $1.3 million of a debt investment in Washington Mutual, to their market values at September 30, 2008. These writedowns, less tax benefits, resulted in a net charge of $0.47 per share. These investments remain in the portfolio and it is management's intent to hold such investments until market conditions improve for these securities. Interest Income:
Parkvale had interest income of $23.8 million during the three months ended September 30, 2008 versus $24.8 million during the comparable period in 2007. The $994,000 or 4.0% decrease is the result of a 30 basis point decrease in the average yield from 5.77% in 2007 to 5.47% in 2008, mitigated by a $21.9 million or 1.3% increase in the average balance of interest-earning assets. Interest income from loans decreased $816,000 or 4.4%, resulting from a decrease in the average outstanding loan balances of $29.6 million or 2.4% and by a 13 basis point decrease in the average yield from 6.01% in 2007 to 5.88% in 2008. Investment interest income increased by $755,000 or 15.2% due to an increase of $62.3 million or 16.2% in the average balance, offset somewhat by a 5 basis point decrease in the average yield from 5.17% in 2007 to 5.12% in 2008. The higher level of investment was primarily related to purchases of AAA rated collateralized mortgage obligations in the latter part of fiscal 2008. Interest income earned on federal funds sold decreased $933,000 or 65.0% from the 2007 quarter due to a 320 basis point decrease in the average yield from 5.24% in 2007 to 2.04% in 2008, due to a substantial decline in short-term interest rates and by a decrease in the average balance of $10.8 million or 9.8%. The weighted average yield on all interest-earning assets was 5.45% at September 30, 2008 and 5.73% at September 30, 2007.
Interest Expense:
Interest expense decreased $2.0 million or 13.3% from the 2007 to the 2008 quarter. The decrease was due to a decrease in the average deposits and borrowings of $1.5 million or 0.1%, and by a 47 basis point decrease in the average rate paid on deposits and borrowings from 3.54% in 2007 to 3.07% in 2008. The overall decrease in liabilities includes the effects of the prepayment of trust-preferred securities of $7.2 million in December 2007. At September 30, 2008, the average rate payable on liabilities was 2.72% for deposits, 4.70% for borrowings, and 2.96% for combined deposits and borrowings. Net Interest Income:
Net interest income was $10.9 million for the quarter ended September 30, 2008 compared to $9.9 million for the quarter ended September 30, 2007. The $988,000 improvement is primarily attributable to an increase of $21.9 million or 1.3% increase in the average interest-earning assets, mitigated by a 30 basis point decrease in the average yield from 5.77% in 2007 to 5.47% in 2008, and by the decreased cost of liabilities of 47 basis points from 3.54% to 3.07%. The decreased yield on earning assets is primarily attributable to lower rates on loans and investments, and the decreased cost of funds primarily relates to lower deposit interest rates.

Provision for Loan Losses:
The provision for loan losses is an amount added to the allowance against which loan losses are charged. The provision for loan losses for the quarter ended September 2008 increased by $324,000 from the 2007 quarter due to a higher amount of non-performing loans. Aggregate valuation allowances were 1.26% and 1.25% of gross loans at September 30, 2008 and June 30, 2008, respectively. Nonperforming loans, impaired loans and real estate owned aggregated $16.5 million, $15.8 million and $8.7 million at September 30, 2008, June 30, 2008 and September 30, 2007, representing 0.90%, 0.85% and 0.47% of total assets at the respective balance sheet dates. Total loan loss reserves at September 30, 2008 were $15.1 million, compared to $15.2 million at June 30, 2008 and $14.8 million at September 30, 2007. Management considers loan loss reserves sufficient when compared to the value of underlying collateral. See "Nonperforming Loans and Foreclosed Real Estate" and "Allowance for Loan Losses" concerning trends experienced. Collateral is considered and evaluated when establishing the provision for loan losses and the sufficiency of the allowance for loan losses. Management believes the allowance for loan losses is adequate to cover the amount of probable loan losses. Noninterest Income:
Total noninterest income for the September 2008 quarter decreased by $3.9 million due to a writedown of securities of $3.9 million. The current quarter writedowns of $3.9 million are due to FHLMC preferred stock series M and S and to a floating rate note in Washington Mutual, offset slightly by a $25,000 gain on the sale of available for sale investment securities. Noninterest income changes included an increase of $96,000 or 33.4% of other fees and service charges, offset by decreases of $35,000 or 2.0% and $68,000 or 10.0% in service charges on deposits and other income, respectively. Annuity fee and commission income was $227,000 in the 2008 quarter compared to $321,000 in the 2007 quarter.
Noninterest Expense:
Total noninterest expense decreased by $114,000 or 1.6% for the three months ended September 30, 2008 compared to the September 30, 2007 quarter. This decrease is primarily due to a $127,000 decrease in compensation and employee benefits related to decreased profitability and incentive expense. Annualized noninterest expense as a percentage of average assets was 1.53% for the quarter ended September 2008 and 1.58% for the quarter ended September 2007. Income Tax Expense:
Income tax expense decreased by $607,000 or 55.5% for the three months ended September 30, 2008 compared to the September 2007 quarter. The decrease in income tax expense is due to a lower level of taxable income due to the writedown of securities. The overall effective tax rate was 30.6% and 23.1% for the three months ended September 30, 2008 and 2007, respectively. Impact of Inflation and Changing Prices: . . .