statements include the information concerning possible or assumed future results of operations of the Corporation and its subsidiaries. When we use words such as believe, expect, anticipate, or similar expressions, we are making forward-looking statements.
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.
Valuation allowance on deferred tax assets - during fiscal 2009, a valuation allowance of $3.0 million was recorded against equity writedowns that could be considered capital losses that may not be realizable due to the difficulty in projecting sufficient capital gains in the future to offset such losses.

Balance Sheet Data:

                                                                   March 31,
  (Dollar amounts in thousands, except per share data)       2009            2008
  Total assets                                           $ 1,906,436     $ 1,856,807
  Loans, net                                               1,143,015       1,181,982
  Interest-earning deposits and federal funds sold           103,448         144,326
  Total investments                                          543,667         420,566
  Deposits                                                 1,511,773       1,490,174
  FHLB advances                                              186,259         201,487
  Shareholders' equity                                       149,752         130,292
  Book value per common share                            $     21.74     $     23.77


Statistical Profile:

                                                     Three Months Ended                  Nine Months Ended
                                                       March 31, (1)                       March 31, (1)
                                                   2009              2008              2009             2008
Average yield earned on all
interest-earning assets                              5.09 %           5.68 %            5.32 %           5.75 %
Average rate paid on all interest-bearing
liabilities                                          2.83             3.42              2.97             3.51
Average interest rate spread                         2.26             2.26              2.35             2.24
Net yield on average interest-earning
assets                                               2.30             2.32              2.43             2.30
Other expenses to average assets                     1.52             1.55              1.54             1.57
Taxes to pre-tax income                            -18.70            30.89            -14.98            28.34
Dividend payout ratio                               -8.30            34.38            -31.73            34.20
Return on average assets                            -2.96             0.77             -0.78             0.78
Return on average equity                           -34.51            10.64             -9.83            10.97
Average equity to average total assets               8.56             7.22              7.93             7.12
Dividends per share                             $    0.22          $  0.22          $   0.66          $  0.66



                                                                          At March 31,
                                                                     2009             2008
One year gap to total assets                                          9.78 %           5.95 %
Intangibles to total equity                                          19.80            23.45
Capital to assets ratio                                               7.86             7.02
Ratio of nonperforming loans and foreclosed real estate to
total assets                                                          1.65             0.78
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)                 3/31/09      12/31/08      6/30/08      3/31/08
  Delinquent single-family mortgage loans   $ 18,162     $  11,041     $  5,911     $  5,089
  Delinquent other loans                       6,078         2,334        5,472        5,777

  Total nonperforming loans                   24,240        13,375       11,383       10,866
  Total impaired loans                           776           508        1,146          989
  Real estate owned, net                       6,475         6,897        3,279        2,648

  Total                                     $ 31,491     $  20,780     $ 15,808     $ 14,503

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 1.65%, 1.10%, 0.85% and 0.78% of total assets at the respective balance sheet dates shown above. Such non-performing assets at March 31, 2009 have increased to $31.5 million from $20.8 million at December 31, 2008, which includes $25.0 million of non-accrual loans.
As of March 31, 2009, single-family mortgage loans delinquent 90 days or more include loans aggregating $14.4 million purchased from others and serviced by national service providers with a cost basis ranging from $97,000 to $1.0 million. Management believes that all of these delinquent single-family mortgage loans are adequately collateralized with the exception of 13 loans, which have the necessary related allowances for losses provided.
Other loans 90 days or more delinquent of $6.1 million at March 31, 2009 include $3.8 million of commercial real estate, $1.6 million of commercial loans and $700,000 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 a commercial real estate loan of $247,000 which is in process of foreclosure and as to which the necessary related allowances for losses have been provided.
In addition to the loans shown in the above table, special mention loans include $1.0 million of commercial loans and $1.4 million of commercial real estate loans at March 31, 2009, compared to an aggregate of $3.1 million at June 30, 2008 and $4.4 million at March 31, 2008. 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 $6.5 million at March 31, 2009 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 March 31, 2009. Marketing efforts are underway to sell the homes individually with an allowance for completion. At March 31, 2009, foreclosed real estate also includes four commercial real estate properties with an aggregate value of $574,000. 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 fair 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 $582,000 at March 31, 2009 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 it is probable that all contractual amounts due will not be collected. 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 $776,000 and $1.1 million of loans classified as impaired at March 31, 2009 and at June 30, 2008. Impaired loans are reported net of allowances of $0 at both March 31, 2009 and June 30, 2008. The average recorded balance of impaired loans was $786,000 during the nine months ended March 31, 2009. Interest income of $69,000 on impaired loans was not recognized for the nine months ended March 31, 2009 compared to $81,600 for the nine months ended March 31, 2008. Allowance for Loan Losses:
The allowance for loan losses was $17.3 million at March 31, 2009, $15.2 million at June 30, 2008 and $15.0 million at March 31, 2008 or 1.49%, 1.25% and 1.26% 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 $765.5 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 $236.6 million of interest only mortgage loans as of March 31, 2009. 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 affect the assumptions used in evaluating the adequacy of the allowance for loan losses.
Liquidity and Capital Resources:
Federal funds sold decreased $12.7 million or 14.8% from June 30, 2008 to March 31, 2009. Investment securities held to maturity increased $107.7 million or 26.1%, interest-earning deposits in other institutions increased $22.9 million or 316.0%, loans decreased $58.7 million or 4.9% from June 30, 2008 to March 31, 2009, and prepaid expenses and other assets increased $4.6 million or 11.1%. Deposits increased $18.1 million or 1.2% from June 30, 2008 to March 31, 2009, and advances from the Federal Home Loan Bank decreased $5.2 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 $741.3 million at March 31, 2009. 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, during the December 2008 quarter, Parkvale borrowed $25.0 million and issued $31.8 million 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 pays 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 at a price of $1,000 per share plus accrued and unpaid dividends, subject to the concurrence of the Treasury and its federal banking regulators. Prior to December 23, 2011, unless the Corporation 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 Corporation 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, 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 scheduled to be $15,625,000, due and payable on December 31, 2013 (the "Maturity Date"). The outstanding balance due under the credit facility may be repaid, at any time, 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. If the Corporation has an event of default, the interest rate of the loan may increase by 2% during the period of default. As of March 31, 2009, the Corporation received a waiver concerning compliance with one of the financial covenants contained in the Loan Agreement, which could have triggered an event 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 after the affects of the add-on of 325 basis points to Libor, $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%.
In January 2009, the Corporation entered into interest rate swap contracts to modify the interest rate characteristics of designated debt instruments from variable to fixed in order to reduce the impact of changes in future cash flows due to interest rate changes. The Corporation hedged its exposure to the variability of future cash flows for all forecasted transactions for a maximum of three to five years for hedges converting an aggregate of $20.0 million in floating-rate debt to fixed. The fair value of these derivatives, totaling a $178,000 loss at March 31, 2009, is reported in other liabilities and offset in accumulated other comprehensive income (loss) for the effective portion of the derivatives. Ineffectiveness of these swaps, if any, is recognized immediately in earnings. The ineffective portion of the change in value of these derivatives resulted in no adjustment to current earnings for fiscal 2009.
Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counter party or customer owes the Corporation, and results in credit risk to the Corporation. When the fair value of a derivative instrument contract is negative, the Corporation owes the customer or counterparty and therefore, has no credit risk. Shareholders' equity was $149.8 million or 7.9% of total assets at March 31, 2009. A stock repurchase program, approved in June 2008, permitted the purchase of 5.0% of outstanding stock or 274,000 shares during fiscal 2009 at prevailing prices in open-market transactions. Through December 22, 2008, 55,000 shares had been acquired under this program at an average cost of $13.05, representing 19.6% of the repurchase program. As noted above, the Corporation is restricted from repurchasing additional shares of its Common Stock prior to December 23, 2011 unless it either redeems the Series A Preferred Stock or receives the written consent of the Treasury. 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 March 31, 2009, Parkvale Bank was in compliance with all applicable regulatory requirements, with Tier 1 Core, Tier 1 Risk-Based and Total

Risk-Based ratios of 7.52%, 9.48% and 10.54%, respectively.
The regulatory capital ratios for Parkvale Bank at March 31, 2009 are calculated as follows:

                                                Tier 1          Tier 1           Total
                                                 Core         Risk-Based      Risk-Based
 (Dollars in 000's)                             Capital         Capital         Capital

 Equity capital (1)                          $   170,984     $   170,984     $   170,984
 Less non-allowable intangible assets            (29,647 )       (29,647 )       (29,647 )
 Plus permitted valuation allowances (2)               -               -          15,810

 Total regulatory capital                        141,337         141,337         157,147
 Minimum required capital                         75,209          59,611         119,222

 Excess regulatory capital                   $    66,128     $    81,726     $    37,925

 Adjusted total assets (1)                   $ 1,880,226     $ 1,490,280     $ 1,490,280
 Regulatory capital as a percentage                 7.52 %          9.48 %         10.54 %
 Minimum capital required as a percentage           4.00 %          4.00 %          8.00 %

 Excess regulatory capital as a percentage          3.52 %          5.48 %          2.54 %

 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 March 31, 2009.

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

The above total risk-based capital ratio includes a higher risk weighted component for many of the investment securities rated more than one level below investment grade, which has caused the ratio to decrease from the 15.25% reported at December 31, 2008.
In light of the significant loss incurred during the quarter ended March 31, 2009, the Board of Directors intends to review Parkvale's dividend policy to determine whether a reduction in the current rate of $0.22 per share per quarter is appropriate. The Board of Directors will consider various factors, including whether the level of non-performing loans continues to increase, the possibility . . .