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 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 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 $1.8 billion at June 30, 2008, Parkvale was the ninth largest financial institution headquartered in the Pittsburgh metropolitan area and eleventh 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's average interest-earning assets decreased $4.6 million for the year ended June 30, 2008 over fiscal year 2007. The overall reduction in average total assets is primarily related to the repayment of higher cost debt during fiscal 2008 and in the latter part of fiscal 2007. Debt repayments included trust preferred securities of $7.2 million on December 26, 2007, $25 million on March 26, 2007 and $10 million each of FHLB advances in February and June 2008. Average loan balances decreased $19.6 million, while average deposit balances rose $16.1 million in fiscal year 2008.

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. Total assets define the gap ratio 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 shifted from 1.67% at June 30, 2007 to 2.07% as of June 30, 2008, the three-year gap ratio went from 7.53% at June 30, 2007 to -0.92% at June 30, 2008 and the five-year gap ratio was 14.28% at June 30, 2007 versus 8.54% at June 30, 2008. The improvement in the one-year GAP ratio is due to an increase in 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, nonmaturity deposit assumptions and management's capital requirements. The estimated impact on projected net interest income in fiscal 2009 assuming an immediate shift in current interest rates, would result in the following percentage changes over fiscal 2008 net interest income: +100 basis points ("bp"), +13.1%; +200 bp, +7.4%; -100 bp, +13.8%; -200 bp, +5.1%. This compares to projected net interest income for fiscal 2008 made at June 30, 2007 of: +100 bp, +1.7%; +200 bp, -10.3%; -100 bp, +9.7%; -200 bp, -4.0%. The fluctuation in projected net interest income between fiscal 2008 and 2007 is reflective of wider net interest margins.

Interest-Sensitivity Analysis. The following table reflects the maturity and repricing characteristics of Parkvale's assets and liabilities at June 30, 2008 (Dollars in thousands):

Interest sensitive assets                 <3 Months        4-12 Months        1-5 Years       5+ Years           Total

ARM and other variable rate loans         $  190,231      $     272,907       $  260,952      $  17,034       $   741,124
Other fixed rate loans, net(1)                12,762             39,463          181,542        241,219           474,986
Variable rate mortgage-backed
securities                                     4,831             24,711          122,610         41,021           193,173
Fixed rate mortgage-backed
securities(1)                                    192                415            2,167          2,459             5,233
Investments and Federal funds sold           243,942                791           53,504         28,329           326,566
Equities, primarily FHLB                       4,160              4,733           15,847          6,607            31,347

Total interest-sensitive assets           $  456,118      $     343,020       $  636,622      $ 336,669       $ 1,772,429

Ratio of interest-sensitive assets to
total assets                                    24.6 %             18.5 %           34.4 %         18.2 %            95.7 %

Interest-sensitive liabilities
Passbook deposits and club accounts(2)    $    7,706      $      26,694       $   30,827      $ 127,443       $   192,670
Checking accounts(3)                          21,910             17,000           34,002        197,230           270,142
Money market deposit accounts                 51,324             44,000           44,000              -           139,324
Certificates of deposit                      140,771            424,538          272,346         41,301           878,956
FHLB advances and other borrowings            26,893                  -          135,679         50,823           213,395

Total interest-sensitive liabilities      $  248,604      $     512,232       $  516,854      $ 416,797       $ 1,694,487

Ratio of interest-sensitive liabilities
to total liabilities and equity                 13.4 %             27.7 %           27.9 %         22.5 %            91.5 %

Ratio of interest-sensitive assets to
interest-sensitive liabilities                 183.5 %             67.0 %          123.0 %         80.9 %           104.6 %

Periodic Gap to total assets                   11.21 %            (9.14 )%          6.47 %        (4.33 )%           4.21 %

Cumulative Gap to total assets                 11.21 %             2.07 %           8.54 %         4.21 %

(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 16.3% per annum, compared with 16.0% for fiscal 2007.

(3) Include 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 19.9% for the quarter ended June 30, 2008. During fiscal 2008, in addition to maintaining high liquidity, Parkvale's investment strategy was to purchase investment grade securities rated BBB or higher and single-family adjustable rate mortgage ("ARM") loans 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 2008, 2007 and 2006, 66.4%, 72.3% and 78.2%, respectively, of mortgage loans originated or purchased were adjustable-rate loans. Parkvale has continually emphasized the origination and

purchase of ARM loans. ARMs totaled $657.5 million or 67.9% of total mortgage loans at June 30, 2008 versus $712.2 million or 69.8% of total mortgage loans at June 30, 2007. To supplement local mortgage originations, Parkvale purchased loans aggregating $87.7 million, $142.9 million and $139.5 million in fiscal 2008, 2007 and 2006, 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, 2007 and 2006 purchases were residential ARMs that were generally originated at competitive rates that may be considered teaser rates as the rates are projected to increase when the rates contractually reset in future periods. 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 that are calculated at fully indexed rates. The practice of purchasing loans or ARM securities in the secondary market is expected to continue in fiscal 2009 when liquidity exceeds targeted levels. At June 30, 2008, Parkvale had commitments to originate mortgage loans totaling $5.2 million and commercial loans of $8.8 million. Commitments to fund construction loans in process at June 30, 2008 were $10.0 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 120% 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, 2008 and 2007, consumer loans were $176.9 million and $173.5 million which represented a 2.0% increase and a 4.9% decrease over the balances at June 30, 2007 and 2006, respectively, with fixed-rate second mortgage loans totaling $100.8 million, $98.7 million and $90.6 million of outstanding balances at June 30, 2008, 2007 and 2006, respectively.

Investments in mortgage-backed securities and other securities, such as U.S. Government and agency obligations and corporate debt, are purchased to enhance Parkvale's overall net interest margin and to diversify asset concentration. During fiscal 2008, Parkvale purchased an aggregate of $361.7 million of investment securities classified as held to maturity, compared to $134.8 million of such purchases in fiscal 2007 and $53.0 million in fiscal 2006. Of the amount purchased in fiscal 2008, $283.0 million had adjustable interest rates. Of the adjustable rate securities purchased, 52% are tied to one-year treasury or Libor indices, 16% are tied to six month Libor, 27% are tied to three month Libor and 5% are tied to one month Libor. These adjustable securities were purchased at an average yield of 6.25%. Yields fell as the index rates decreased in the second half of the fiscal year. At June 30, 2008, the combined weighted average yield on adjustable corporate securities and collateralized mortgage obligations was 5.32%. If the interest rate indices were to fall further, net interest income may decrease if the net yield, after discount amortization, on these securities, as well as other liquid assets and ARM loans were to fall faster than liabilities would reprice. Substantially 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 21.2% at June 30, 2008 and 24.8% at June 30, 2007. 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 2008, checking accounts increased by 10.0% compared to a 1.0% increase during fiscal 2007. 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, 2008 is summarized as follows. Contractual obligations for deposit accounts do not include accrued interest. Payments for deposits other than time, which consist of noninterest 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         $        168,634      $   91,828      $   17,001      $ 324,673      $   602,136
Time deposits                             565,309         204,260          68,086         41,301          878,956
Advances from FHLB                          5,000          35,000          40,180        111,250          191,430
Operating leases                            1,054           1,576             769          2,401            5,800

Total                            $        739,997      $  332,664      $  126,036      $ 479,625      $ 1,678,322

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 purchased and originated, Parkvale has taken steps to reduce exposure to credit risk by emphasizing lower risk single-family mortgage loans, which comprise 68.1% of the gross loan portfolio as of June 30, 2008. The next largest component of the loan portfolio is consumer loans at 15.1%, 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:


                                                 2008         2007         2006         2005         2004
                                                                  (Dollars in thousands)

Nonaccrual Loans:
Mortgage                                       $  6,004      $ 2,746      $ 1,700      $ 3,535      $ 2,610
Consumer                                            582          416          567          776          420
Commercial                                        5,943        1,177        1,321        2,850        1,925

Total nonaccrual loans                         $ 12,529      $ 4,339      $ 3,588      $ 7,161      $ 4,955
Total nonaccrual loans as a % of total loans       1.02 %       0.35 %       0.29 %       0.59 %       0.48 %
Total foreclosed real estate, net                 3,279        1,857          976        1,654        2,998
Total amount of nonaccrual loans and
foreclosed real estate                         $ 15,808      $ 6,196      $ 4,564      $ 8,815      $ 7,953
Total nonaccrual loans and foreclosed real
estate as a percent of total assets                0.85 %       0.34 %       0.25 %       0.47 %       0.49 %

A weakening of the national and to a lesser extent local housing sector and credit markets has contributed towards an increased level of nonaccrual (delinquent 90 days or more) assets. Nonaccrual single-family mortgage loans at June 30, 2008 consisted of 39 owner occupied homes. As of June 30, 2008, $3.3 million or 55.5% of the $6.0 million of nonaccrual mortgage loans were purchased from others. Management believes the loans are well collateralized as single-family loans are generally originated at a maximum of 80% loan to value or the borrower is otherwise required to purchase private mortgage insurance.

Commercial loans delinquent 90 days or more of $5.9 million at June 30, 2008 includes real estate loans of $3.1 million to a residential developer that has experienced very slow sales of spec units, and these loans are in the foreclosure process that was completed on September 2, 2008. An extended unit absorption rate on this multi-phase residential development caused the developer to have financial difficulties that prevented his ability to continue development of this plan. A commercial real estate loan of $756,000 is considered impaired as the primary business operating from this location has closed and foreclosure is in process. The allowance for loan losses was increased during fiscal 2008 to provide for losses on these facilities. 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.

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 $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 $4.3 million were classified as special mention and $806,000 were classified as substandard for regulatory purposes at June 30, 2008. The special mention loans consist of $1.1 million of commercial loans and $3.1 million of commercial real estate loans. These 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 are 30 to 89 days past due at June 30, 2008 aggregated $11.5 million, including $9.8 million of single-family loans, compared to $8.1 million at June 30, 2007 and $10.8 million at June 30, 2006.

In addition, Parkvale has invested in trust preferred securities issued by other companies. At June 30, 2008, trust preferred securities with an aggregate carrying value of $13.0 million had deferred interest payments aggregating $300,000. For a further discussion of the trust preferred securities held by Parkvale, see Note B of Notes to Consolidated Financial Statements included in Item 8 of this document.

Allowance for Loan Losses

The allowance for loan loss was $15.2 million at June 30, 2008 and $14.2 million at June 30, 2007 or 1.25% and 1.14% of gross loans at June 30, 2008 and June 30, 2007, respectively. The allowance increased during fiscal 2008 commensurate with the increase of troubled loans. The adequacy of the allowance for loan loss is determined by management through an 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:

                                             2008                       2007                       2006                       2005                       2004
                                                                                          (Dollars in thousands)

General Allowances
Residential 1-4 mortgages            $  3,788        24.8 %     $  2,716        19.1 %     $  2,855        19.2 %     $  2,732        18.0 %     $  2,669        19.3 %
Commercial & multi-family mortgage      4,739        31.1 %        3,964        27.9 %        3,802        25.5 %        3,952        26.0 %        4,029        29.2 %
Consumer Loans                          3,510        23.0 %        4,154        29.3 %        4,568        30.6 %        4,794        31.6 %        3,542        25.6 %
Commercial Loans                        2,741        18.0 %        2,848        20.1 %        3,368        22.6 %        3,386        22.3 %        2,895        21.0 %

Total General                          14,778        96.9 %       13,682        96.4 %       14,593        97.9 %       14,864        97.9 %       13,135        95.1 %
Specific Allowances
Residential 1-4 mortgage                  105         0.7 %           31         0.2 %           32         0.2 %           93         0.6 %          112         0.8 %
Consumer                                  288         1.9 %          426         3.0 %          256         1.7 %          213         1.4 %          269         1.9 %
Commercial                                 78         0.5 %           50         0.4 %           26         0.2 %           18         0.1 %          292         2.1 %

Total Specific                            471         3.1 %          507         3.6 %          314         2.1 %          324         2.1 %          673         4.8 %
Total Allowances for loan losses     $ 15,249       100.0 %     $ 14,189       100.0 %     $ 14,907       100.0 %     $ 15,188       100.0 %     $ 13,808       100.0 %

The allowance on residential 1-4 family loans is $3.8 million or 0.5% of the residential 1-4 family loan portfolio at June 30, 2008, on commercial and multi-family loans the allowance is $4.7 million or 3.3% of the commercial and multi-family loan portfolio, on consumer loans the allowance is $3.5 million or 1.9% of the consumer loan portfolio and on the commercial loan portfolio the allowance is $2.7 million or 6.3% of the commercial loan portfolio.

Parkvale Financial Corporation reported net income for the fiscal year ended June 30, 2008 of $12.8 million or $2.31 per diluted share, compared to net income of $13.4 million or $2.34 per diluted share for the fiscal year ended June 30, 2007. The $622,000 decrease in fiscal 2008 net income reflects . . .