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, 2009 Annual Report filed on September 10, 2009. Management believes that there have been no material changes since June 30, 2009. 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. 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. The valuation allowance balance at September 30, 2009 was $1,340,000 as assets subject to the initial write-down in March 2009 were sold with recoveries of $677,000 and $491,000 in the June and September 2009 quarters. No additions to the valuation allowance were considered necessary in the current fiscal period as additional OTTI charges against equities were recorded in this period.

Balance Sheet Data:                                     September 30,
(Dollar amounts in thousands, except per share data)         2009             2008
Total assets                                            $   1,903,314     $ 1,828,077
Loans, net                                                  1,071,611       1,181,938
Interest-earning deposits and federal funds sold              167,408          97,449
Total investments                                             546,955         433,580
Deposits                                                    1,518,661       1,482,400
FHLB advances                                                 186,144         186,372
Shareholders' equity                                          151,110         131,258
Book value per share                                    $       21.99     $     23.94

                                                             Three Months Ended
                                                              September 30, (1)
   Statistical Profile:                                      2009           2008
   Average yield earned on all interest-earning assets          4.45 %        5.47 %
   Average rate paid on all interest-bearing liabilities        2.44 %        3.07 %
   Average interest rate spread                                 2.01 %        2.40 %
   Net yield on average interest-earning assets                 2.07 %        2.50 %
   Other expenses to average assets                             1.59 %        1.53 %
   Taxes to pre-tax income                                     74.28 %       30.59 %
   Dividend payout ratio                                       59.25 %      109.22 %
   Return on average assets                                     0.18 %        0.24 %
   Return on average equity                                     2.26 %        3.28 %
   Average equity to average total assets                       7.91 %        7.27 %



                                                            At September 30,
                                                            2009        2008
         One year gap to total assets                        9.68 %      2.28 %
         Intangibles to total equity                        19.32 %     22.93 %
         Ratio of nonperforming assets to total assets       2.15 %      0.90 %
         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)          9/30/09      6/30/09      12/31/08      9/30/08
  Delinquent single-family mortgage loans   $ 26,247     $ 21,046     $  11,041     $  8,264
  Delinquent other loans                       4,973        3,321         2,334        1,567

  Total nonperforming loans                   31,220       24,367        13,375        9,831
  Total impaired loans                         3,495        3,568           508        1,265
  Real estate owned, net                       6,139        5,706         6,897        5,353

  Total                                     $ 40,854     $ 33,641     $  20,780     $ 16,449

A weakening of the national and to a lesser extent local housing sector and credit markets 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 2.15%, 1.76%, 1.10% and 0.90% of total assets at the respective balance sheet dates shown above. Such non-performing assets at September 30, 2009 have increased to $40.9 million from $33.6 million at June 30, 2009, which includes $34.7 million of non-accrual loans. As of September 30, 2009, single-family mortgage loans delinquent 90 days or more include loans aggregating $22.9 million purchased from others and serviced by national service providers with a total of 73 loans and a cost basis ranging from $29,000 to $1.0 million. Of these loans, 17 have a cost basis of $500,000 or greater. The net increase in delinquent single-family loans from June 30 to September 30, 2009 of $5.2 million was primarily due to loans purchased and serviced by others. Management believes that all of these delinquent single-family mortgage loans are adequately collateralized with the exception of 40 loans, which have the necessary related allowances for losses provided.

Other loans 90 days or more delinquent of $5.0 million at September 30, 2009 include $2.5 million of commercial real estate, $1.3 million of commercial loans and $740,000 of consumer loans. The increase in delinquent other loans from June 30 to September 30, 2009 includes a $1.3 million relationship with a now closed medical facility, development loans and an office warehouse. 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, which management believes this loan 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 $33,000 of commercial loans and $56,000 of commercial real estate loans at September 30, 2009, compared to an aggregate of $1.1 million at June 30, 2009 and $4.0 million at September 30, 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.
Loans that were 30 to 89 days past due at September 30, 2009 aggregated $14.0 million, including $11.5 million of single-family first lien loans, compared to $21.8 million at June 30, 2009.
Foreclosed real estate of $6.1 million at September 30, 2009 primarily consists of single-family dwellings. Real estate owned includes two unrelated foreclosures of ten and six single family units in residential developments with a net book value of $2.8 million at September 30, 2009. Marketing efforts are underway to sell the units individually with an allowance for completion. Two of the units are under agreement for sales to occur in the December 2009 quarter. At September 30, 2009, foreclosed real estate also includes three commercial real estate properties with an aggregate value of $512,000. 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 $1.1 million at September 30, 2009 and $825,000 at June 30, 2009. 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 as permitted under U.S. GAAP. Parkvale Bank had $3.5 million and $3.6 million of loans classified as impaired at September 30, 2009 and at June 30, 2009. Impaired loans

are reported net of allowances of $384,000 at September 30, 2009 and $394,000 at June 30, 2009. The average recorded balance of impaired loans was $3.5 million during the three months ended September 30, 2009. Interest income of $251,000 on impaired loans was not recognized for the three months ended September 30, 2009 compared to $27,000 for the three months ended September 30, 2008. Allowance for Loan Losses:
The allowance for loan losses was $19.5 million at September 30, 2009, $18.0 million at June 30, 2009 and $15.1 million at September 30, 2008 or 1.79%, 1.60% and 1.26% of gross loans at September 30, 2009, June 30, 2009 and September 30, 2008. 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 $692.4 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 $209.3 million of interest only mortgage loans as of September 30, 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 increased $16.4 million or 10.9% from June 30, 2009 to September 30, 2009. Investment securities held to maturity increased $20.4 million or 4.1%, interest-earning deposits in other institutions decreased $3.4 million or 86.1% and loans decreased $37.3 million or 3.4% from June 30, 2009 to September 30, 2009. Deposits increased $7.4 million or 0.5% from June 30, 2009 to September 30, 2009, other debt, primarily overnight commercial borrowings, decreased $7.0 million or 32.7%, escrow for taxes and insurance decreased $3.2 million or 44.2% and other liabilities decreased $1.3 million or 24.4%. Parkvale Bank's FHLB advance available maximum borrowing capacity is $448.2 million at September 30, 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 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 September 30, 2009, the Corporation did not meet the terms of the financial covenants contained in the Loan Agreement, which is considered an event of default. This is expected to increase the interest rate on the $25.0 million by 2%, which would have the impact of increasing interest expense by $125,000 per quarter. 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 effects of the add-on of 325 basis points to Libor, $5.0 million matures on December 31, 2011 at a rate of 4.92% to 6.92% and an additional $15.0 million matures on December 31, 2013 at a rate of 5.41% to 7.41%.
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 $45,000 at September 30, 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 during the second half of fiscal 2009 or the quarter ended September 30, 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 counterparty 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 $151.1 million or 7.9% of total assets at September 30, 2009. 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 September 30, 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 7.67%, 10.67% and 11.83%, respectively.

The regulatory capital ratios for Parkvale Bank at September 30, 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)                            $   173,720     $   173,720     $   173,720
Less non-allowable intangible assets              (29,193 )       (29,193 )       (29,193 )
Plus permitted valuation allowances (2)                 -               -          15,208
Plus allowable unrealized holding gains (3)             -               -             478

Total regulatory capital                          144,527         144,527         160,213
Minimum required capital                           75,369          54,417         108,833

Excess regulatory capital                     $    69,158     $    90,111     $    50,902

Adjusted total assets (1)                     $ 1,884,231     $ 1,354,469     $ 1,354,469
Regulatory capital as a percentage                   7.67 %         10.67 %         11.83 %
Minimum capital required as a percentage             4.00 %          4.00 %          8.00 %

Excess regulatory capital as a percentage            3.67 %          6.67 %          3.83 %

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, 2009.

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

(3) Limited to 45% pf pretax net unrealized holding gains.

Of the $56.8 million of gross proceeds from the sale of the Series A preferred Stock and the Loan from PNC, the Corporation contributed $50 million to the Bank as additional Tier 1 capital at the Bank. As noted above, the PNC Loan will be repaid quarterly, with a final principal payment of $15.6 million due on December 31, 2013, and the dividend rate on the Series A Preferred Stock will increase from 5% to 9% per annum after the five-year anniversary date of the . . .