The statements in this filing that are not historical fact are forward-looking statements. Forward-looking information should not be construed as guarantees of future performance. Actual results may differ from expectations contained in such forward-looking information as a result of various factors, including but not limited to the interest rate environment, economic policy or conditions, federal and state banking and tax regulations and competitive factors in the marketplace. Each of these factors could affect estimates, assumptions, uncertainties and risks considered in the development of forward-looking information and could cause actual results to differ materially from management's expectations regarding future performance.
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:

                                                               December 31,
                                                           2008            2007
    Total assets                                       $ 1,890,250     $ 1,828,508
    Loans, net                                           1,163,968       1,207,837
    Interest-earning deposits and federal funds sold       120,669          73,312
    Total investments                                      487,821         427,329
    Deposits                                             1,481,785       1,458,688
    FHLB advances                                          186,315         211,543
    Shareholders' equity                                   163,264         128,080
    Book value per common share                        $     24.23     $     23.48

                                                    Three Months Ended                  Six Months Ended
                                                     December 31, (1)                   December 31, (1)
Statistical Profile:                               2008             2007             2008             2007
Average yield earned on all
interest-earning assets                             5.38 %           5.79 %           5.43 %           5.77 %
Average rate paid on all interest-bearing
liabilities                                         3.00 %           3.58 %           3.04 %           3.56 %
Average interest rate spread                        2.38 %           2.21 %           2.39 %           2.21 %
Net yield on average interest-earning
assets                                              2.47 %           2.27 %           2.49 %           2.29 %
Other expenses to average assets                    1.56 %           1.59 %           1.55 %           1.58 %
Taxes to pre-tax income                            28.67 %          30.67 %          29.35 %          27.02 %
Dividend payout ratio                              59.27 %          34.18 %          76.88 %          34.03 %
Return on average assets                            0.45 %           0.78 %           0.34 %           0.79 %
Return on average equity                            5.68 %          11.01 %           4.52 %          11.14 %
Average equity to average total assets              7.94 %           7.06 %           7.61 %           7.07 %
Dividends per common share                      $   0.22          $  0.22          $  0.44          $  0.44



                                                            At December 31,
                                                           2008        2007
         One year gap to total assets                      11.73 %     10.75 %
         Intangibles to total equity                       18.30 %     24.03 %
         Capital to assets ratio                            8.64 %      7.00 %
         Ratio of nonperforming assets to total assets      1.10 %      0.51 %
         Number of full-service offices                       48          48

(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)
                                               12/31/08      6/30/08       12/31/07
     Delinquent single-family mortgage loans   $  11,041     $  5,911     $    3,683
     Delinquent other loans                        2,334        5,472          2,057

     Total nonperforming loans                    13,375       11,383          5,740
     Total impaired loans                            508        1,146          1,054
     Real estate owned, net                        6,897        3,279          2,563

     Total                                     $  20,780     $ 15,808     $    9,357

A weak national economy and to a lesser extent local housing sector and credit markets has 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 1.10%, 0.85% and 0.51% of total assets at the respective balance sheet dates shown above. Non-performing assets at December 31, 2008 have increased to $20.8 million from $15.8 million at June 30, 2008, which includes $13.4 million of non-accrual loans.

As of December 31, 2008, single-family mortgage loans delinquent 90 days or more include loans aggregating $7.9 million purchased from others and serviced by national service providers with a cost basis ranging from $97,000 to $646,000. 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 over 90 days of $2.3 million at December 31, 2008 include $1.6 million of commercial real estate, $214,000 of commercial loans and $492,000 of consumer loans. A delinquent multi-family apartment building loan with a $684,000 balance is more than 90 days past due as the borrower declared bankruptcy in response to foreclosure efforts; management believes this facility is well collateralized. Impaired loans include four unrelated commercial real estate loans aggregating $508,000 on which foreclosures are in process and which the necessary related allowances for losses have been provided.
In addition to the loans shown in the above table, special mention loans include $858,000 of commercial loans and $1.7 million of commercial real estate loans at December 31, 2008, compared to an aggregate of $3.1 million at June 30, 2008 and $4.4 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 $6.9 million at December 31, 2008 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 $2.6 million at December 31, 2008. Marketing efforts are underway to sell the homes individually upon completion. At December 31, 2008, foreclosed real estate also includes four commercial real estate properties with an aggregate value of $514,000. 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 $441,000 at December 31, 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 $508,000 and $1.1 million of loans classified as impaired at December 31, 2008 and at June 30, 2008. Impaired loans are reported net of allowances of $0 at December 31, 2008 and June 30, 2008. The average recorded balance of impaired loans was $877,000 during the six months ended December 31, 2008. Interest income of $38,000 on impaired loans was not recognized for the six months ended December 31, 2008 compared to $65,000 for the six months ended December 31, 2007.
Allowance for Loan Losses:

The allowance for loan losses was $15.9 million at December 31, 2008, $15.2 million at June 30, 2008 and $14.8 million at December 31, 2007 or 1.35%, 1.25% and 1.21% of gross loans at the respective balance sheet dates. 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. Parkvale continually monitors the loan portfolio to identify potential portfolio risks and to detect potential credit deterioration in the early stages. Reserves are then established based upon the 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 $788.9 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 $245.9 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 where economic conditions change and effect the assumptions used in evaluating the adequacy of the allowance for loan losses.
Liquidity and Capital Resources:

Federal funds sold increased $4.0 million or 4.7% from June 30, 2008 to December 31, 2008. Investment securities held to maturity increased $48.7 million or 11.8%, interest-earning deposits in other institutions increased $23.4 million or 322.9%, loans decreased $37.7 million or 3.1% from June 30, 2008 to December 31, 2008, and prepaid expenses and other assets increased $3.0 million or 7.4%. Deposits decreased $11.9 million or 0.8% from June 30, 2008 to December 31, 2008, and advances from the Federal Home Loan Bank decreased $5.1 million or 2.7% due to the maturity of a $5.0 million 5.58% advance. Parkvale Bank's FHLB advance available maximum borrowing capacity is $658.9 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. In addition, borrowings increased $25.0 million and capital increased $31.8 million due to the issuance of preferred stock. See the following discussion below.

TARP Capital Purchase Program: On October 14, 2008, the United States Department of the Treasury (the "Treasury") announced a voluntary Capital Purchase Program (the "CPP") under which the Treasury will purchase senior preferred shares from qualifying financial institutions. The plan is part of the $700 billion Emergency Economic Stabilization Act signed into law in October 2008. On December 23, 2008, pursuant to the CPP established by the Treasury, Parkvale entered into a Letter Agreement, which incorporates by reference the Securities Purchase Agreement - Standard Terms, with the Treasury (the "Agreement"), pursuant to which Parkvale issued and sold to the Treasury for an aggregate purchase price of $31,762,000 in cash (i) 31,762 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share, having a liquidation preference of $1,000 per share (the "Series A Preferred Stock"), and (ii) a ten-year warrant to purchase up to 376,327 shares of common stock, par value $1.00 per share, of Parkvale ("Common Stock"), at an initial exercise price of $12.66 per share, subject to certain anti-dilution and other adjustments (the "Warrant").
The Series A Preferred Stock will pay cumulative dividends at a rate of 5% per annum on the liquidation preference for the first five years, and thereafter at a rate of 9% per annum. The Series A Preferred Stock has no maturity date and ranks senior to the Common Stock (and pari passu with Parkvale's other authorized shares of preferred stock, of which no shares are currently outstanding) with respect to the payment of dividends and distributions and amounts payable in the unlikely event of any future liquidation or dissolution of Parkvale. Parkvale may redeem the Series A Preferred Stock after three years at a price of $1,000 per share plus accrued and unpaid dividends. The Series A Preferred Stock may not be redeemed during the first three years except with the proceeds from a "qualified equity offering" (as defined in the Agreement). Prior to December 23, 2011, unless the Company has redeemed the Series A Preferred Stock or the Treasury has transferred the Series A Preferred Stock to a third party, the consent of the Treasury will be required for the Company to increase its Common Stock dividend or repurchase its Common Stock or other equity or capital securities, other than in certain circumstances specified in the Agreement.
The Warrant is immediately exercisable. The Warrant provides for the adjustment of the exercise price and the number of shares of Common Stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of Common Stock, and upon certain issuances of Common Stock at or below a specified price relative to the then-current market price of Common Stock. The Warrant expires ten years from the issuance date. If, on or prior to December 31, 2009, the Company receives aggregate gross cash proceeds of not less than the purchase price of the Series A Preferred Stock from one or more "qualified equity offerings" announced after October 13, 2008, the number of shares of Common Stock issuable pursuant to the Treasury's exercise of the Warrant will be reduced by one-half of the original number of shares, taking into account all adjustments, underlying the Warrant. Pursuant to the Agreement, the Treasury has agreed not to exercise voting power with respect to any shares of Common Stock issued upon exercise of the Warrant.
Term Debt: On December 30, 2008, Parkvale Financial Corporation (the "Corporation") entered into a Loan Agreement with PNC Bank, National Association ("PNC") for a term loan in the amount of $25.0 million (the "Loan"). The Loan pays interest at a rate equal to LIBOR plus three hundred and twenty five basis points, payable quarterly. Principal on the Loan is due and payable in fifteen consecutive quarterly payments of $625,000, commencing on March 31, 2010, with the remaining outstanding balance, which is expected to be $15,625,000, is due and payable on December 31, 2013 (the "Maturity Date"). The outstanding balance due under the credit facility may be repaid, at anytime, in whole or in part at the

Corporation's option. In connection with the Loan, the Corporation executed a Term Note, dated December 30, 2008, to evidence the Loan and a Pledge Agreement, dated December 30, 2008, whereby the Corporation granted PNC a security interest in the outstanding capital stock of Parkvale Savings Bank, the wholly owned subsidiary of the Corporation. The Loan Agreement contains customary and standard provisions regarding representations and warranties of the Corporation, covenants and events of default. On January 7, 2009, the Corporation entered into swap arrangements with PNC to convert portions of the Libor floating interest rates to fixed interest rates for three and five years. Under the swap agreements, $5.0 million matures on December 31, 2011 at a rate of 4.92% and an additional $15.0 million matures on December 31, 2013 at a rate of 5.41%. Shareholders' equity was $163.3 million or 8.6% of total assets at December 31, 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 December 31, 2008, 55,000 shares have been acquired under this program at an average cost of $13.05 and represent 19.6% of the repurchase program. The Bank is 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 its risk-weighted assets. At December 31, 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 8.39%, 14.00% and 15.25%, respectively. The regulatory capital ratios for Parkvale Bank at December 31, 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)                          $   181,449     $   181,449     $   181,449
 Less non-allowable intangible assets            (29,874 )       (29,874 )       (29,874 )
 Plus permitted valuation allowances (2)               -               -          13,553

 Total regulatory capital                        151,575         151,575         165,128
 Minimum required capital                         72,286          43,311          86,622

 Excess regulatory capital                   $    79,289     $   108,264     $    78,506

 Adjusted total assets (1)                   $ 1,807,154     $ 1,082,776     $ 1,082,776
 Regulatory capital as a percentage                 8.39 %         14.00 %         15.25 %
 Minimum capital required as a percentage           4.00 %          4.00 %          8.00 %

 Excess regulatory capital as a percentage          4.39 %         10.00 %          7.25 %

 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 December 31, 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 December 31, 2008 and 2007:

For the three months ended December 31, 2008, net income was $2.1 million or $0.37 per diluted share compared to net income of $3.6 million or $0.64 per diluted share for the quarter ended December 31,

2007. The $1.5 million decrease in net income for the December 2008 quarter reflects a $1.1 million writedown of equity securities and a $1.8 million increase in the provision for loan losses, partially offset by a $749,000 decrease in income tax expense and an increase of $818,000 in net interest income. On an operating basis, excluding the security writedowns, net income for the December 2008 quarter would have been $2.8 million or $0.50 per share. Net interest income increased to $10.6 million from $9.8 million for the prior period. The higher loan loss provision relates to a higher level of classified assets, as the ratio of non-performing loans and real estate owned to total assets increased to 1.10% up from 0.85% at June 30, 2008. Return on average equity was 5.68% for the December 2008 quarter compared to 11.01% for the December 2007 quarter.
Interest Income:

Parkvale had interest income of $23.1 million during the three months ended December 31, 2008 versus $25.0 million during the comparable period in 2007. The $1.8 million or 7.4% decrease is the result of a 41 basis point decrease in the average yield from 5.79% in 2007 to 5.38% in 2008 and a $6.6 million or 0.4% decrease in the average balance of interest-earning assets. Interest income from loans decreased $1.1 million or 5.8%, resulting from a decrease in the average outstanding loan balances of $42.6 million or 3.5% and by a 15 basis point decrease in the average yield from 6.01% in 2007 to 5.86% in 2008. Investment interest income increased by $459,000 or 8.5% due to an increase of $87.5 million or 20.0% in the average balance, offset by a 60 basis point decrease in the average yield from 5.42% in 2007 to 4.82% 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 $1.2 million or 95.4% from the 2007 quarter due to a 427 basis point decrease in the average yield from 4.67% in 2007 to 0.40% in 2008, due to a substantial decline in short-term interest rates and a decrease in the average federal fund balance of $51.5 million or 46.4%. The weighted average yield on all interest-earning assets was 5.13% at December 31, 2008 and 5.78% at December 31, 2007. Interest Expense:

Interest expense decreased $2.7 million or 17.5% from the 2007 to the 2008 quarter. The decrease was due to a decrease in the average deposits and borrowings of $29.2 million or 1.7%, and by a 58 basis point decrease in the average rate paid on deposits and borrowings from 3.58% in 2007 to 3.00% in 2008. The overall decrease in liabilities includes the effects of a . . .