The purpose of this discussion is to summarize the financial condition and results of operations of Parkvale Financial Corporation ("PFC") and provide other information which is not readily apparent from the consolidated financial statements included in this report. Reference should be made to those statements, the notes thereto and the selected financial data presented elsewhere in this report for a complete understanding of the following discussion and analysis.

PFC is a unitary savings and loan holding company incorporated under the laws of the Commonwealth of Pennsylvania. Its main operating subsidiary is Parkvale Savings Bank (the "Bank"), which is a Pennsylvania chartered permanent reserve fund stock savings bank headquartered in Monroeville, Pennsylvania. PFC and its subsidiaries are collectively referred to herein as "Parkvale". Parkvale is also involved in lending in the Columbus, Ohio area through its wholly owned subsidiary, Parkvale Mortgage Corporation ("PMC").

General

The Bank conducts business in the greater Tri-State area through 48 full-service offices using the trade name Parkvale Bank with 41 offices in Allegheny, Beaver, Butler, Fayette, Washington and Westmoreland Counties of Pennsylvania, two branches in West Virginia and five branches in Ohio. With total assets of $1.9 billion at June 30, 2009, Parkvale was the tenth largest financial institution headquartered in the Pittsburgh metropolitan area and twelfth largest financial institution with a significant presence in Western Pennsylvania.

The primary business of Parkvale consists of attracting deposits from the general public in the communities that it serves and investing such deposits, together with other funds, in residential real estate loans, consumer loans, commercial loans, and investment securities. Parkvale focuses on providing a wide range of consumer and commercial services to individuals, partnerships and corporations in the greater Pittsburgh metropolitan area, which comprises its primary market area. In addition to the loans described above, these services include various types of deposit and checking accounts, including commercial checking accounts and automated teller machines ("ATMs") as part of the STAR network.

Parkvale derives its income primarily from interest charged on loans, interest on investments, and, to a lesser extent, service charges and fees. Parkvale's principal expenses are interest on deposits and borrowings and operating expenses. Lending activities are funded principally by deposits, loan repayments, and operating earnings.

Lower housing demand in Parkvale's primary lending areas, relative to its deposit growth, has spurred the Bank to purchase residential mortgage loans from other financial institutions in the secondary market. This purchase strategy also achieves geographic asset diversification. Parkvale purchases adjustable rate residential mortgage loans subject to its normal underwriting standards. Parkvale did not purchase loans during fiscal 2009 as a result of uncertainties related to the secondary mortgage market.

Parkvale's average interest-earning assets increased $34.0 million or 2% for the year ended June 30, 2009 over fiscal year 2008. The overall increase in average total assets is primarily related to the proceeds received from $25.0 million of term debt and to $31.8 million of proceeds from the sale of preferred stock pursuant to the Capital Purchase Program, offset somewhat by repayment of $5 million of FHLB advances. Average balances decreased by $41.0 million in loans and by $22.1 of federal funds sold, while average investments increased by $97.1 million. Average liabilities rose $8.4 million in fiscal year 2009.

Parkvale functions as a financial intermediary, and as such, its financial condition should be examined in terms of its ability to manage interest rate risk ("IRR") and diversify credit risk.

Parkvale's asset and liability management ("ALM") is driven by the ability to manage the exposure of current and future earnings and capital to fluctuating interest rates. This exposure occurs because the present value of future cash flows, and in many cases the cash flows themselves, change when interest rates change. One of Parkvale's ALM goals is to minimize this exposure.

IRR is measured and analyzed using static interest rate sensitivity gap indicators, net interest income simulations and net present value sensitivity measures. These combined methods enable Parkvale's management to regularly monitor both the direction and magnitude of potential changes in the pricing relationship between interest-earning assets and interest-bearing liabilities.

Interest rate sensitivity gap analysis provides one indicator of potential interest rate risk by comparing interest-earning assets and interest-bearing liabilities maturing or repricing at similar intervals. The gap ratio is defined as rate-sensitive assets minus rate-sensitive liabilities for a given time period divided by total assets. Parkvale continually monitors gap ratios, and within the IRR framework and in conjunction with net interest income simulations, implements actions to reduce exposure to fluctuating interest rates. Such actions have included maintaining high liquidity, increasing the repricing frequency of the loan portfolio, purchasing adjustable-rate investment securities and lengthening the overall maturities of interest-bearing liabilities. Management believes these ongoing actions minimize Parkvale's vulnerability to fluctuations in interest rates. The one-year gap ratio increased from 2.07% at June 30, 2008 to 9.46% as of June 30, 2009, the three-year gap ratio went from -0.92% at June 30, 2008 to 1.49% at June 30, 2009 and the five-year gap ratio was 8.54% at June 30, 2008 versus 9.14% at June 30, 2009. The increase in the asset sensitivity in the one-year GAP ratio is due to an increase in federal funds sold, investments and ARM loans scheduled to reprice or mature within one-year.

Gap indicators of IRR are not necessarily consistent with IRR simulation estimates. Parkvale utilizes net interest income simulation estimates under various assumed interest rate environments to more fully capture the details of IRR. Assumptions included in the simulation process include measurement over a probable range of potential interest rate changes, prepayment speeds on amortizing financial instruments, other imbedded options, loan and deposit volumes and rates, non-maturity deposit assumptions and management's capital requirements. The estimated impact on projected net interest income in fiscal 2010 assuming an immediate parallel and instantaneous shift in current interest rates, would result in the following percentage changes over fiscal 2009 net interest income: +100 basis points ("bp"), +0.9%; +200 bp, +0.1%; -100 bp,
+0.9%; -200 bp, -8.0%. This compares to projected net interest income for fiscal 2009 made at June 30, 2008 of: +100 bp, +13.1%; +200 bp, +7.4%; -100 bp, +13.8%; -200 bp, +5.1%. The fluctuation in projected net interest income between fiscal 2010 and 2009 is reflective of lower yields on shorter-term liquid assets as federal funds are at 0.25% and the higher level of non-earning assets.

Interest-Sensitivity Analysis. The following table reflects the maturity and repricing characteristics of Parkvale's assets and liabilities at June 30, 2009 (Dollars in thousands):

Interest Sensitive Assets                  <3 Months        4-12 Months        1-5 Years         5+Years           Total

ARM and other variable rate loans          $  205,036      $     261,426       $  188,372       $  14,061       $   668,895
Other fixed rate loans, net(1)                 12,123             36,486          177,150         231,232           456,991
Variable rate mortgage-backed securities
and CMO's                                      32,214             79,453          111,377           5,949           228,993
Fixed rate mortgage-backed securities
and CMO's(1)                                      183              1,069              801          10,012            12,065
Investments and Federal funds sold            283,844             41,442           80,543          26,932           432,761
Equities, primarily FHLB                           72              4,792           13,875           4,766            23,505

Total interest-sensitive assets            $  533,472      $     424,668       $  572,118       $ 292,952       $ 1,823,210

Ratio of interest-sensitive assets to
total assets                                     28.0 %             22.3 %           30.0 %          15.4 %            95.6 %

Interest-sensitive liabilities
Passbook deposits and club accounts(2)     $    9,075      $      30,925       $   36,313       $ 127,443       $   203,756
Checking accounts(3)                           25,024             18,379           36,760         201,347           281,510
Money market deposit accounts                  48,701             44,000           44,000               -           136,701
Certificates of deposit                       183,921            391,486          263,567          39,459           878,433
FHLB advances and other borrowings             26,196                  -          197,582          40,447           264,225

Total interest-sensitive liabilities       $  292,917      $     484,790       $  578,222       $ 408,696       $ 1,764,625

Ratio of interest-sensitive liabilities
to total liabilities and equity                  15.4 %             25.4 %           30.3 %          21.4 %            92.5 %

Ratio of interest-sensitive assets to
interest-sensitive liabilities                  182.1 %             87.6 %           98.9 %          71.7 %           103.3 %

Periodic Gap to total assets                     12.6 %             (3.2 %)          (0.3 %)         (6.1 %)            3.1 %

Cumulative Gap to total assets                   12.6 %              9.5 %            9.1 %           3.1 %

(1) Includes total repayments and prepayments at an assumed rate of 15% per annum for fixed-rate mortgage loans and mortgage-backed securities, with the amounts for other loans based on the estimated remaining loan maturity by loan type.

(2) Based on historical data, assumes passbook deposits are rate sensitive at the rate of 18.1% per annum, compared with 16.3% for fiscal 2008.

(3) Includes investment checking accounts, which are assumed to be immediately rate sensitive, with remaining interest-bearing checking accounts assumed to be rate sensitive at 10% in the first year and 5% per annum thereafter. Noninterest checking accounts are considered core deposits and are included in the 5+ years category.

Asset Management. A primary goal of Parkvale's asset management is to maintain a high level of liquid assets. Parkvale defines the following as liquid assets:
cash, federal funds sold, certain corporate debt maturing in less than one year, U.S. Government and agency obligations maturing in less than one year and short-term bank deposits. The average daily liquidity was 28.9% for the quarter ended June 30, 2009. During fiscal 2009, in addition to maintaining high liquidity, Parkvale's investment strategy was to purchase primarily lower risk investment grade securities rated AA or higher to enhance yields and reduce the risk associated with rate volatility.

Parkvale's lending strategy has been designed to shorten the average maturity of its assets and increase the rate sensitivity of the loan portfolio. In fiscal 2009, 2008 and 2007, 48.3%, 66.4% and 72.3%, respectively, of mortgage loans originated or purchased were adjustable-rate loans. Parkvale has continually emphasized the origination and

purchase of ARM loans. ARMs totaled $577.0 million or 65.2% of total mortgage loans at June 30, 2009 versus $657.5 million or 67.9% of total mortgage loans at June 30, 2008. In prior years, to supplement local mortgage originations, Parkvale purchased loans aggregating $87.7 million and $142.9 million in fiscal 2008 and 2007, respectively, from mortgage bankers and other financial institutions. The loan packages purchased were predominately 3/1 and 5/1 residential ARMs. All of the fiscal 2008 and 2007 purchases were residential ARMs. The loans purchased from others are reviewed for underwriting standards that include appraisals, creditworthiness and acceptable ratios of loan to value and debt to income calculated at fully indexed rates. The practice of purchasing loans or ARM securities in the secondary market was temporarily discontinued in fiscal 2009 due to the lack of acceptable product availability. At June 30, 2009, Parkvale had commitments to originate mortgage loans totaling $2.6 million and commercial loans of $3.2 million. Commitments to fund construction loans in process at June 30, 2009 were $10.4 million, which were funded from current liquidity.

Parkvale continues to focus on its consumer loan portfolio through new originations. Home equity lines of credit are granted up to 90% of collateral value at competitive rates. In general, these loans have shorter maturities and greater interest rate sensitivity and margins than residential real estate loans. At June 30, 2009 and 2008, consumer loans were $185.8 million and $176.9 million which represented a 5.0% increase and a 2.0% increase over the balances at June 30, 2008 and 2007, respectively, with fixed-rate second mortgage loans totaling $89.7 million, $100.8 million and $98.7 million of the total outstanding balances at June 30, 2009, 2008 and 2007, respectively.

Investments in mortgage-backed securities and other securities, such as U.S. Government and agency obligations and corporate debt, are primarily purchased to enhance Parkvale's liquidity position and to diversify asset concentration. During fiscal 2009, Parkvale purchased an aggregate of $277.8 million of investment securities classified as held to maturity, compared to $361.7 million of such purchases in fiscal 2008 and $134.8 million in fiscal 2007. The fiscal 2009 purchases consist of $198.8 million of government agency securities, $29.8 million of CMOs with AAA ratings, $32.7 million of short-term corporate notes and $16.6 million of municipal securities. All of the 2009 purchases were either adjustable or expected to be shorter term due to step up features. Of the amount purchased in fiscal 2008, $283.0 million had adjustable interest rates. At June 30, 2009, the combined weighted average yield on adjustable corporate securities, agency and collateralized mortgage obligations was 4.01%. If the interest rate indices were to fall further, net interest income may decrease if the yield, after discount amortization, on these securities, as well as other liquid assets and ARM loans were to fall faster than liabilities would reprice. All debt securities are classified as held to maturity and are not available for sale or held for trading.

Liability Management. Deposits are priced according to management's asset/liability objectives; alternate funding sources and competitive factors. Certificates of deposits maturing after one year as a percent of total deposits were 20.1% at June 30, 2009 and 21.2% at June 30, 2008. The reduced percentage of longer-term certificates is reflective of consumer preference for shorter-terms. Over the past 5 years, Parkvale has made a concentrated effort to increase low cost deposits by attracting new checking customers to our community branch offices. During fiscal 2009, checking accounts increased by 2.1% compared to a 10.0% increase during fiscal 2008. Parkvale's primary sources of funds are deposits received through its branch network, and advances from the Federal Home Loan Bank ("FHLB"). FHLB advances can be used on a short-term basis for liquidity purposes or on a long-term basis to support lending activities.

Contractual Obligations

Information concerning our future contractual obligations by payment due dates at June 30, 2009 is summarized as follows. Contractual obligations for deposit accounts do not include accrued interest. Payments for deposits other than time, which consist of non-interest bearing deposits and money market, NOW and savings accounts, are based on our historical experience, judgment and statistical analysis, as applicable, concerning their most likely withdrawal behaviors.

                                    Due < One Year       1-3 Years       3-5 Years       5+ Years          Total
                                                                (Dollars in thousands)

Deposits other than time           $        176,104      $   98,693      $   18,380      $ 328,790      $   621,967
Time deposits                               575,408         197,045          66,521         39,459          878,433
Advances from FHLB                                -          65,386          20,242        100,574          186,202
Term Debt                                     1,250           5,000          18.750              -           25,000
Operating leases                              1,137           1,617           1,082          2,594            6,430

Total                              $        753,899      $  367,741      $  156,737      $ 471,417      $ 1,749,764

Concentration of Credit Risk

Financial institutions, such as Parkvale, generate income primarily through lending and investing activities. The risk of loss from lending and investing activities includes the possibility that losses may occur from the failure of another party to perform according to the terms of the loan or investment agreement. This possibility of loss is known as credit risk.

Credit risk is increased when lending and investing activities concentrate a financial institution's earning assets in a way that exposes the institution to a material loss from any single occurrence or group of related occurrences. Diversifying loans and investments to prevent concentrations of risks is one manner a financial institution can reduce potential losses due to credit risk. Examples of asset concentrations would include, but not be limited to, geographic concentrations, loans or investments of a single type, multiple loans to a single borrower, loans made to a single type of industry and loans of an imprudent size relative to the total capitalization of the institution. For loans originated, Parkvale has taken steps to reduce exposure to credit risk by emphasizing lower risk single-family mortgage loans, which comprise 64.6% of the gross loan portfolio as of June 30, 2009. The next largest component of the loan portfolio is consumer loans at 16.5%, which generally consists of lower balance second mortgages and home equity loans originated in the greater Pittsburgh area and Ohio Valley region and an auto loan portfolio.

Nonperforming Loans and Foreclosed Real Estate

Nonperforming loans and foreclosed real estate ("REO") consisted of the
following at June 30:


                                                  2009          2008         2007         2006         2005
                                                                   (Dollars in thousands)

Nonaccrual Loans:
Mortgage                                        $ 21,046      $  6,004      $ 2,746      $ 1,700      $ 3,535
Consumer                                             623           582          416          567          776
Commercial                                         6,266         5,943        1,177        1,321        2,850

Total nonaccrual loans                            27,935        12,529        4,339        3,588        7,161
Total foreclosed real estate, net                  5,706         3,279        1,857          976        1,654

Total amount of nonaccrual loans and
foreclosed real estate                          $ 33,641      $ 15,808      $ 6,196      $ 4,564      $ 8,815

Total nonaccrual loans as a % of total loans        2.48 %        1.02 %       0.35 %       0.29 %       0.59 %
Total nonaccrual loans and foreclosed real
estate as a percent of total assets                 1.76 %        0.85 %       0.34 %       0.25 %       0.47 %

A weak national economy 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 1.76%, 0.85% and 0.34% of total assets at June 30, 2009, 2008 and 2007 respectively. Such non-performing assets at June 30, 2009 have increased to $33.6 million from $15.8 million at June 30, 2008, which includes $27.9 million of non-accrual loans.

As of June 30, 2009, single-family mortgage loans delinquent 90 days or more include 54 loans aggregating $18.0 million purchased from others and serviced by national service providers with a cost basis ranging from $29,000 to $1.0 million and 43 loans aggregating $3.1 million in Parkvale's retail market area. Management believes that these delinquent single-family mortgage loans are adequately collateralized with the exception of 30 loans with a remaining net book value of $19.1 million, which have the necessary related allowances for losses provided. Loans 180 days or more delinquent are individually evaluated for collateral values in accordance with banking regulations with specific reserves recorded as appropriate.

Commercial loans delinquent 90 days or more of $6.3 million at June 30, 2009 include two unrelated relationships with loans to automobile dealers aggregating $3.7 million secured by real estate and vehicles that are in the process of collection. Both of these dealers sold automobiles and failed to remit the proceeds on a timely basis as slow sales in late 2008 contributed to their financial difficulties. A Beaver County, Pennsylvania home developer has aggregate debt of $1.2 million on multiple single-family units; town homes, developed lots and raw land on multiple sites that are in an orderly liquidation process with a consent for deeds in lieu of foreclosure in the event sale efforts fail. Six units in a condominium complex valued at $833,000 were acquired at sheriff sale on August 10, 2009 with unrelated second lien holders divested at sale. Parkvale believes it is well collateralized and/or reserved on the loans and properties securing this relationship. A multi-family apartment building loan with a balance of $684,000 is more than 90 days past due and 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 $247,000, which is in process of refinancing outside of Parkvale to which the necessary related allowance for losses have been provided.

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 has not been recognized in interest income was $825,000 for fiscal 2009, $426,000 for fiscal 2008 and $193,000 for fiscal 2007. Parkvale provides an allowance for the loss of accrued but uncollected interest on mortgage, consumer and commercial business loans, which are 90 days or more contractually past due.

In addition, loans totaling $1.1 million were classified as special mention and $3.5 million were classified as substandard for regulatory purposes at June 30, 2009. The special mention loans consist of $1.0 million of commercial loans and $58,000 of commercial real estate loans. The substandard loans include loans that recently have been modified or refinanced and are being monitored to assess if new payment terms are followed by the borrowers. These loans, while current or less than 90 days past due, have previously 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.

Loans that are 30 to 89 days past due at June 30, 2009 aggregated $21.8 million, including $18.3 million of single-family loans, compared to $9.8 million at June 30, 2008 and $8.1 million at June 30, 2007.

Foreclosed real estate was $5.7 million at June 30, 2009 compared to $3.3 million at June 30, 2008. The 2009 real estate owned includes $5.1 million in 31 single-family dwellings, with the highest single property valued at $714,000 that is not able to be sold due to the inability to evict the former owner to permit marketing efforts. Another 10 units are in a golf course community with slow sales to date with an average property value of $213,000. The properties are valued at the lower of cost or market less estimated selling and holding costs with reserves established when deemed necessary.

Allowance for Loan Losses

The allowance for loan loss was $18.0 million at June 30, 2009 and $15.2 million at June 30, 2008 or 1.60% and 1.25% of gross loans at June 30, 2009 and June 30, 2008, respectively. The allowance increased during fiscal 2009 commensurate with the increase of non-performing loans. Management determines the adequacy of the allowance for loan

loss after a thorough evaluation of 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.

The loan portfolio is monitored by management on a regular basis for potential risks to detect potential credit deterioration in the early stages. Management then establishes reserves in the allowance for loan loss based upon evaluation of the inherent risks in the loan portfolio. Management believes the allowance for loan loss is adequate to absorb probable loan losses.

The following table sets forth the allowance for loan loss allocation at June 30:

                                                       2009                       2008                       2007                       2006                       2005
                                                                                                    (Dollars in thousands)

General Allowances Residential 1-4 mortgages   $  4,769         26.6 %    $  3,788         24.8 %    $  2,716         19.1 %    $  2,855         19.2 %    $  2,732         18.0 %
Commercial & multi-family mortgage                4,393         24.5 %       4,739         31.1 %       3,964         27.9 %       3,802         25.5 %       3,952         26.0 %
. . .