##### Table of Contents



Securities and Exchange Commission
 WASHINGTON, D. C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended: December 31, 2005
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Transition period from to
 Commission File Number: 0-23010
 LAUREL CAPITAL GROUP, INC.
  Pennsylvania
    
    25-1717451(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)2724 Harts Run RoadAllison Park, Pennsylvania
    
    15101(Address of principal executive office)
    
    (Zip Code)
  þ o
  o o þ
 o þ




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##### 



LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
 Index
 PAGEPart I  Financial InformationItem 1. Financial Statements (Unaudited)Consolidated Statements of Financial Condition as of December 31, 2005 and June 30, 2005
    
    
    1Consolidated Statements of Operations for the Three and Six Months ended December 31, 2005 and 2004
    
    
    2Consolidated Statement of Stockholders Equity for the Six Months ended December 31, 2005
    
    
    3Consolidated Statements of Cash Flows for the Six Months ended December 31, 2005 and 2004
    
    
    4Notes to Unaudited Consolidated Financial Statements
    
    
    5-12Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13-21Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22Part II  Other InformationItem 1. Legal Proceedings
    
    
    23Item 1A. Risk Factors
    
    
    23Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3. Defaults Upon Senior Securities
    
    
    23Item 4. Submission of Matters to a Vote of Security Holders
    
    
    23Item 5. Other Information
    
    
    23Item 6. Exhibits
    
    
    23Signatures
    
    
    24EX-31.1EX-31.2EX-32.1EX-32.2




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##### Table of Contents



Financial Statements
 LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
 
 
 December 31,
    
    June 30,2005
    
    2005ASSETSCash
    
    $
    1,701
    
    
    $
    2,146Interest-earning deposits with other institutions
    
    
    12,441
    
    
    
    10,825Total Cash and Cash Equivalents
    
    
    14,142
    
    
    
    12,971Investment securities available for sale
    
    
    43,427
    
    
    
    45,539Investment securities held to maturity (market value of $10,239 and
$10,845)
    
    
    10,418
    
    
    
    10,918Mortgage-backed securities available for sale
    
    
    10,644
    
    
    
    13,002Loans receivable, held for sale
    
    
    507
    
    
    
    947Loans receivable
    
    
    215,629
    
    
    
    211,738Allowance for loan losses
    
    
    (1,998
    )
    
    
    (1,989
    )Loans receivable, net
    
    
    213,631
    
    
    
    209,749Federal Home Loan Bank stock
    
    
    1,909
    
    
    
    1,878Real estate owned
    
    
    0
    
    
    
    37Accrued interest receivable:Loans
    
    
    729
    
    
    
    733Interest-earning deposits and investments
    
    
    312
    
    
    
    287Mortgage-backed securities
    
    
    43
    
    
    
    66Office properties and equipment, net of accumulated depreciation
    
    
    2,165
    
    
    
    2,277Goodwill
    
    
    2,158
    
    
    
    2,158Other intangible assets
    
    
    1,019
    
    
    
    1,170Prepaid expenses and sundry assets
    
    
    8,402
    
    
    
    8,069Total Assets
    
    $
    309,506
    
    
    $
    309,801LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Savings deposits
    
    $
    254,972
    
    
    $
    254,891Federal Home Loan Bank advances
    
    
    21,599
    
    
    
    21,602Advance deposits by borrowers for taxes and
insurance
    
    
    2,097
    
    
    
    2,713Accrued interest payable
    
    
    945
    
    
    
    765Accrued income taxes
    
    
    48
    
    
    
    90Other accrued expenses and sundry liabilities
    
    
    1,921
    
    
    
    1,936Total Liabilities
    
    
    281,582
    
    
    
    281,997Stockholders Equity:Common stock, $.01 par value; 5,000,000
shares authorized; 2,515,847 and 2,467,670
shares
issued, respectively
    
    
    25
    
    
    
    25Additional paid-in capital
    
    
    6,949
    
    
    
    6,465Treasury stock, at cost (524,670 shares)
    
    
    (8,238
    )
    
    
    (8,238
    )Retained earnings
    
    
    30,036
    
    
    
    29,878Accumulated other comprehensive (loss) income,
net of tax
    
    
    (325
    )
    
    
    176Stock held in deferred compensation trust
(32,402 and 31,452 shares)
    
    
    (523
    )
    
    
    (502
    )Total Stockholders
Equity
    
    
    27,924
    
    
    
    27,804Total Liabilities
and Stockholders
Equity
    
    $
    309,506
    
    
    $
    309,801
 See accompanying notes to unaudited consolidated financial statements
 1




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##### Table of Contents



LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
 
 
 
 Three months ended
    
    
    Six months endedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Interest income:Loans
    
    $
    2,841
    
    
    $
    2,648
    
    
    $
    5,667
    
    
    $
    5,185Mortgage-backed securities
    
    
    112
    
    
    
    174
    
    
    
    220
    
    
    
    360Investments
    
    
    605
    
    
    
    513
    
    
    
    1,167
    
    
    
    1,010Interest-earning deposits
    
    
    56
    
    
    
    89
    
    
    
    125
    
    
    
    193Total interest income
    
    
    3,614
    
    
    
    3,424
    
    
    
    7,179
    
    
    
    6,748Interest expense:Savings deposits
    
    
    1,459
    
    
    
    1,242
    
    
    
    2,849
    
    
    
    2,437Borrowings
    
    
    321
    
    
    
    321
    
    
    
    642
    
    
    
    642Total interest expense
    
    
    1,780
    
    
    
    1,563
    
    
    
    3,491
    
    
    
    3,079Net interest income before provision
for loan losses
    
    
    1,834
    
    
    
    1,861
    
    
    
    3,688
    
    
    
    3,669Provision for loan losses
    
    
    0
    
    
    
    3
    
    
    
    0
    
    
    
    6Net interest income after provision
for loan losses
    
    
    1,834
    
    
    
    1,858
    
    
    
    3,688
    
    
    
    3,663Other income:Service charges
    
    
    238
    
    
    
    276
    
    
    
    492
    
    
    
    562Gain on the sale of loans held for sale
    
    
    2
    
    
    
    
    
    
    
    8
    
    
    
    6Income from bank owned life insurance
    
    
    68
    
    
    
    63
    
    
    
    135
    
    
    
    127Other operating income
    
    
    13
    
    
    
    20
    
    
    
    29
    
    
    
    33Total other income
    
    
    321
    
    
    
    359
    
    
    
    664
    
    
    
    728Operating expenses:Compensation, payroll taxes and
fringe benefits
    
    
    749
    
    
    
    723
    
    
    
    1,529
    
    
    
    1,440Premises and occupancy costs
    
    
    209
    
    
    
    210
    
    
    
    430
    
    
    
    417Federal insurance premiums
    
    
    9
    
    
    
    9
    
    
    
    17
    
    
    
    18Data processing expense
    
    
    110
    
    
    
    102
    
    
    
    220
    
    
    
    203Professional fees
    
    
    55
    
    
    
    93
    
    
    
    115
    
    
    
    156Amortization of core deposit intangible
    
    
    75
    
    
    
    88
    
    
    
    151
    
    
    
    177Other operating expenses
    
    
    300
    
    
    
    324
    
    
    
    552
    
    
    
    610Total operating expenses
    
    
    1,507
    
    
    
    1,549
    
    
    
    3,014
    
    
    
    3,021Income before income taxes
    
    
    648
    
    
    
    668
    
    
    
    1,338
    
    
    
    1,370Provision for income taxes:Federal
    
    
    146
    
    
    
    173
    
    
    
    305
    
    
    
    353State
    
    
    40
    
    
    
    34
    
    
    
    81
    
    
    
    68Total income taxes
    
    
    186
    
    
    
    207
    
    
    
    386
    
    
    
    421Net income
    
    $
    462
    
    
    $
    461
    
    
    $
    952
    
    
    $
    949Earnings per shareBasic
    
    $
    0.23
    
    
    $
    0.24
    
    
    $
    0.48
    
    
    $
    0.49Diluted
    
    $
    0.23
    
    
    $
    0.23
    
    
    $
    0.48
    
    
    $
    0.48Dividends per share
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.40
    
    
    $
    0.40
 See accompanying notes to unaudited consolidated financial statements
 2




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##### Table of Contents



LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
 
 
 
 AccumulatedOther
    
    
    Stock Held inAdditional
    
    
    
    
    
    
    
    
    
    
    Comprehensive
    
    
    Deferred
    
    
    TotalCommon
    
    
    Paid-in
    
    
    Treasury
    
    
    Retained
    
    
    Loss,
    
    
    Compensation
    
    
    StockholdersStock
    
    
    Capital
    
    
    Stock
    
    
    Earnings
    
    
    Net of Tax
    
    
    Trust
    
    
    EquityBalance, June 30, 2005
    
    $
    25
    
    
    $
    6,465
    
    
    
    ($8,238
    )
    
    $
    29,878
    
    
    $
    176
    
    
    
    ($502
    )
    
    $
    27,804Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    952
    
    
    
    
    
    
    
    
    
    
    
    952Other comprehensive loss,
net of tax $(258)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (501
    )
    
    
    
    
    
    
    (501
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    952
    
    
    
    (501
    )
    
    
    
    
    
    
    451Stock options exercised
(41,628 shares)
    
    
    
    
    
    
    484
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    484Dividends on common stock
at $0.20 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (794
    )
    
    
    
    
    
    
    
    
    
    
    (794
    )Stock purchased by deferred
compensation trust
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    (21
    )Balance, December 31, 2005
    
    $
    25
    
    
    $
    6,949
    
    
    
    ($8,238
    )
    
    $
    30,036
    
    
    
    ($325
    )
    
    
    ($523
    )
    
    $
    27,924
 See accompanying notes to unaudited consolidated financial statements
 3




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##### Table of Contents



LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
 
 
 
 2005
    
    2004Net income:
    
    $
    952
    
    
    $
    949Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation
    
    
    135
    
    
    
    137Provision for loan losses
    
    
    
    
    
    
    6Gain on the sale of loans held for sale
    
    
    (8
    )
    
    
    (6
    )Loss on the sale of REO
    
    
    3
    
    
    
    1Net amortization of deferred loan costs
    
    
    133
    
    
    
    121Net decrease (increase) in loans held for sale
    
    
    36
    
    
    
    (242
    )Proceeds from sale of loans held for sale
    
    
    412
    
    
    
    425Decrease in accrued interest receivable
    
    
    2
    
    
    
    66Increase in accrued interest payable
    
    
    180
    
    
    
    178Amortization of the core deposit intangible
    
    
    151
    
    
    
    177Increase in cash surrender value
    
    
    (108
    )
    
    
    (104
    )(Decrease) increase in taxes payable
    
    
    (42
    )
    
    
    320Other  net
    
    
    (22
    )
    
    
    (148
    )Net cash provided by operating activities
    
    
    1,824
    
    
    
    1,880Investing activities:Purchase of investment securities held to maturity
    
    
    (4,394
    )
    
    
    (8,300
    )Purchase of investment securities available for sale
    
    
    (450
    )
    
    
    (1,293
    )Principal repayments and maturities of investment securities available for sale
    
    
    1,950
    
    
    
    4,325Principal repayments and maturities of investment securities held to maturity
    
    
    4,894
    
    
    
    7,315Principal repayments and maturities of mortgage-backed securities available for sale
    
    
    2,230
    
    
    
    3,966Increase in loans receivable
    
    
    (4,015
    )
    
    
    (25,164
    )Purchase of FHLB stock
    
    
    (159
    )
    
    
    (192
    )Sale of FHLB stock
    
    
    128
    
    
    
    Proceeds from the sale of REO
    
    
    34
    
    
    
    39Additions to office properties and equipment
    
    
    (23
    )
    
    
    (62
    )Net cash provided (used) by investing activities
    
    
    195
    
    
    
    (19,366
    )Financing activities:Net decrease in demand and club accounts
    
    
    (1,799
    )
    
    
    (32
    )Net increase in time deposit accounts
    
    
    1,880
    
    
    
    8,505Repayment of FHLB advances
    
    
    (3
    )
    
    
    (4
    )Decrease in advance deposits by borrowers for taxes and insurance
    
    
    (616
    )
    
    
    (260
    )Stock options exercised
    
    
    484
    
    
    
    76Dividends paid
    
    
    (794
    )
    
    
    (774
    )Net cash (used) provided by financing activities
    
    
    (848
    )
    
    
    7,511Net change in cash and cash equivalents
    
    
    1,171
    
    
    
    (9,975
    )Cash and cash equivalents at beginning of period
    
    
    12,971
    
    
    
    27,675Cash and cash equivalents at end of period
    
    $
    14,142
    
    
    $
    17,700SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid during the period for:Interest on savings deposits
    
    $
    2,669
    
    
    $
    2,259Interest on FHLB advances
    
    
    642
    
    
    
    642Income taxes
    
    
    440
    
    
    
    175Transfer of loans to other real estate owned
    
    
    
    
    
    
    401
   See accompanying notes to unaudited consolidated financial statements
 4




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##### Table of Contents



LAUREL CAPITAL GROUP, INC. AND SUBSIDIARY
 
 Notes to Unaudited Consolidated Financial Statements
 December 31, 2005 and June 30, 2005
 (Dollar amounts in thousands, except per share data)
 (1) Summary of Significant Accounting Policies
 Basis of Presentation
  Earnings Per Share
  Three Months Ended
    
    
    Six Months EndedDecember 31,
    
    
    December 31,2005
    2004
    
    
    2005
    2004Basic earnings per share:Net income
    
    $
    462
    
    
    $
    461
    
    
    $
    952
    
    
    $
    949Weighted average shares outstanding
    
    
    1,989,540
    
    
    
    1,936,811
    
    
    
    1,975,500
    
    
    
    1,933,293Earnings per share
    
    $
    0.23
    
    
    $
    0.24
    
    
    $
    0.48
    
    
    $
    0.49Diluted earnings per share:Net income
    
    $
    462
    
    
    $
    461
    
    
    $
    952
    
    
    $
    949Weighted average shares outstanding
    
    
    1,989,540
    
    
    
    1,936,811
    
    
    
    1,975,500
    
    
    
    1,933,293Dilutive effect of employee
stock options
    
    
    21,205
    
    
    
    63,748
    
    
    
    28,008
    
    
    
    61,059Diluted weighted shares outstanding
    
    
    2,010,745
    
    
    
    2,000,559
    
    
    
    2,003,508
    
    
    
    1,994,352Earnings per share
    
    $
    0.23
    
    
    $
    0.23
    
    
    $
    0.48
    
    
    $
    0.48
  5




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Securities
  Comprehensive Income
  Loans Receivable
  6




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##### Table of Contents



Cash and Cash Equivalents
  Recent Accounting Developments
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
 7




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##### Table of Contents



Share-Based Payment
 Exchanges of Nonmonetary Assets  An Amendment of APB
Opinion No. 29 Accounting for Nonmonetary Transactions
 Accounting Changes and Errors Corrections, a replacement
of APB Opinion No. 20 and FAS No. 3
 8




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##### Table of Contents



(2) Contingent Liabilities
  9




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##### Table of Contents



(3) INVESTMENT AND MORTGAGE-BACKED SECURITIES
  Amortized
    
    
    Gross Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueAt December 31, 2005:Municipal obligations
    
    $
    7,660
    
    
    $
    400
    
    
    $
    2
    
    
    $
    8,058Freddie Mac preferred stock
    
    
    750
    
    
    
    
    
    
    
    17
    
    
    
    733Fannie Mae common stock
    
    
    583
    
    
    
    
    
    
    
    95
    
    
    
    488Freddie Mac common stock
    
    
    684
    
    
    
    231
    
    
    
    
    
    
    
    915Agency Notes
    
    
    8,000
    
    
    
    
    
    
    
    134
    
    
    
    7,866Corporate notes
    
    
    509
    
    
    
    
    
    
    
    74
    
    
    
    435Shay Financial Services ARM Fund
    
    
    24,380
    
    
    
    
    
    
    
    625
    
    
    
    23,755CRA Qualified Investment Fund
    
    
    1,000
    
    
    
    
    
    
    
    35
    
    
    
    965Other
    
    
    220
    
    
    
    
    
    
    
    8
    
    
    
    21243,786
    
    
    
    631
    
    
    
    990
    
    
    
    43,427Mortgage-backed securities available for sale
    
    
    10,777
    
    
    
    30
    
    
    
    163
    
    
    
    10,644Total
    
    $
    54,563
    
    
    $
    661
    
    
    $
    1,153
    
    
    $
    54,071
  Amortized
    
    
    FairCost
    ValueDue after one year through five years
    
    $
    5,025
    
    
    $
    4,940Due after five years through ten years
    
    
    2,708
    
    
    
    2,822Due after ten years
    
    
    19,103
    
    
    
    19,131Total
    
    $
    26,836
    
    
    $
    26,893
  Note:
    
    There were no sales of investment or mortgage-backed securities during the six months
ended December 31, 2005 or 2004.
  Amortized
    
    
    Gross Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueAt December 31, 2005Corporate and Agency bonds
    
    $
    10,418
    
    
    $
    
    
    
    $
    179
    
    
    $
    10,239Total
    
    $
    10,418
    
    
    $
    
    
    
    $
    179
    
    
    $
    10,239
  Amortized
    
    
    FairCost
    ValueDue in one year or less
    
    $
    
    
    
    $
    Due after one year through five years
    
    
    9,420
    
    
    
    9,257Due after five years through ten years
    
    
    
    
    
    
    Due after ten years
    
    
    998
    
    
    
    982Total
    
    $
    10,418
    
    
    $
    10,239
 10




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##### Table of Contents



(4) Loans Receivable
  December 31,
    
    
    June 30,2005
    
    
    2005First mortgage loans:1 to 4 family dwellings
    
    $
    169,451
    
    
    $
    165,844Multi-family dwellings
    
    
    718
    
    
    
    1,462Commercial
    
    
    3,400
    
    
    
    4,437Construction and development loans
    
    
    4,425
    
    
    
    5,095177,994
    
    
    
    176,838Commercial and other loans
    
    
    706
    
    
    
    665Consumer loans:Loans secured by savings accounts
    
    
    111
    
    
    
    155Installment loans
    
    
    37,969
    
    
    
    36,48338,786
    
    
    
    37,303Loans receivable, net of unearned discounts
    
    
    216,780
    
    
    
    214,141Less: Allowance for loan losses
    
    
    (1,998
    )
    
    
    (1,989
    )Loans in process
    
    
    (2,102
    )
    
    
    (3,290
    )Net deferred loan origination costs
    
    
    951
    
    
    
    887Loans receivable, net
    
    $
    213,631
    
    
    $
    209,749
  December 31,
    
    
    December 31,2005
    
    
    2004Balance at beginning of the fiscal year
    
    $
    1,989
    
    
    $
    2,032Provision for losses
    
    
    
    
    
    
    6Charge-offs
    
    
    (3
    )
    
    
    (53
    )Recoveries
    
    
    12
    
    
    
    3Allowance for loan losses
    
    $
    1,998
    
    
    $
    1,988
  December 31,2005

    2004Non-accrual loans
    
    $
    668
    
    
    $
    1,205Non-accrual loans as a percent of total loans, net
    
    
    0.31
    %
    
    
    0.61
    %
 
 All loans 90 days or more past due are reported as non-accrual. 11




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(5) Guarantees
  (6) Goodwill and Other Intangible Assets
   For the six months endedDecember 31,2005
    
    
    2004Amortized intangible assets:Core deposit
intangible  gross
    
    $
    1,170
    
    
    $
    1,511Less: accumulated amortization
    
    
    (151
    )
    
    
    (177
    )Core deposit
intangible  net
    
    $
    1,019
    
    
    $
    1,334
  For the six months ended 12/31/05
    
    $
    151For the fiscal year ending 6/30/06
    
    
    290For the fiscal year ending 6/30/07
    
    
    243For the fiscal year ending 6/30/08
    
    
    199For the fiscal year ending 6/30/09
    
    
    158For the fiscal year ending 6/30/10
    
    
    120
 (8) Post-retirement Benefits
  12




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At December 31,2005
    
    2004(In thousands except per share data)(Unaudited)Total assets
    
    $
    309,506
    
    
    $
    308,499Interest-earning deposits with other institutions
    
    
    12,441
    
    
    
    15,326Investment securities available for sale
    
    
    43,427
    
    
    
    45,131Investment securities held to maturity
    
    
    10,418
    
    
    
    13,201Mortgage-backed securities available for sale
    
    
    10,644
    
    
    
    17,068Loans receivable, held for sale
    
    
    507
    
    
    
    953Loans receivable, net
    
    
    213,631
    
    
    
    197,927Savings deposits
    
    
    254,972
    
    
    
    254,652FHLB advances
    
    
    21,599
    
    
    
    21,605Retained earnings
    
    
    30,036
    
    
    
    29,555Stockholders equity
    
    
    27,924
    
    
    
    27,702Stockholders equity per share
    
    $
    14.02
    
    
    $
    14.28
 STATISTICAL PROFILE
 Three months ended
    
    Six months endedDecember 31,
    
    December 31,2005
    
    2004
    
    2005
    
    2004Average yield earned on all interest-earning assets
    
    
    4.94
    %
    
    
    4.71
    %
    
    
    4.88
    %
    
    
    4.65
    %Average rate paid on all interest-bearing liabilities
    
    
    2.76
    
    
    
    2.41
    
    
    
    2.69
    
    
    
    2.38Average interest rate spread
    
    
    2.18
    
    
    
    2.30
    
    
    
    2.19
    
    
    
    2.27Net yield on average interest-earning assets
    
    
    2.51
    
    
    
    2.56
    
    
    
    2.51
    
    
    
    2.53Average interest-earning assets as a percentage of
average interest-bearing liabilities
    
    
    114.45
    
    
    
    113.18
    
    
    
    114.40
    
    
    
    113.10Return on average assets (1)
    
    
    0.60
    
    
    
    0.60
    
    
    
    0.62
    
    
    
    0.62Return on average equity (1)
    
    
    6.63
    
    
    
    6.68
    
    
    
    6.84
    
    
    
    6.91Average equity to average assets
    
    
    9.06
    
    
    
    9.01
    
    
    
    9.02
    
    
    
    8.99
 
 (1)
    
    Amounts are annualized. 13




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COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004
 GENERAL.
 NET INTEREST INCOME.
   14




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PROVISION FOR LOAN LOSSES.
  15




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OTHER INCOME.
 OPERATING EXPENSES.
 INCOME TAX EXPENSE.
 16




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COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 2005 AND 2004
 GENERAL.
 NET INTEREST INCOME.
    17




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PROVISION FOR LOAN LOSSES.
 OTHER INCOME.
 OPERATING EXPENSES.
 18




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INCOME TAX EXPENSE.
 FINANCIAL CONDITION AND CAPITAL RESOURCES
    Tier I
    
    
    Tier I
    
    
    Tier IICore
    
    
    Risk-Based
    
    
    Risk-BasedCapital
    
    
    Capital
    
    
    Capital(Dollar amounts in thousands)Equity capital (1)
    
    $
    24,034
    
    
    $
    24,034
    
    
    $
    24,034Plus general valuation allowances (2)
    
    
    
    
    
    
    
    
    
    
    1,998Total regulatory capital
    
    
    24,034
    
    
    
    24,034
    
    
    
    26,032Minimum required capital
    
    
    12,184
    
    
    
    6,424
    
    
    
    12,848Excess regulatory capital
    
    $
    11,850
    
    
    $
    17,610
    
    
    $
    13,184Minimum required capital to be well
capitalized under Prompt Corrective
Action Provisions
    
    $
    15,230
    
    
    $
    9,636
    
    
    $
    16,060Regulatory capital as a percentage (3)
    
    
    7.89
    %
    
    
    14.97
    %
    
    
    16.21
    %Minimum required capital percentage
    
    
    4.00
    
    
    
    4.00
    
    
    
    8.00Excess regulatory capital percentage
    
    
    3.89
    %
    
    
    10.97
    %
    
    
    8.21
    %Minimum required capital percentage
to be well capitalized under Prompt
Corrective Action Provisions
    
    
    5.00
    %
    
    
    6.00
    %
    
    
    10.00
    %
 19




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(1)
    
    Represents equity capital of the Bank as reported to the FDIC and the Pennsylvania
Department of Banking on Form 041 for the three months ended December 31, 2005.(2)
    
    Limited to 1.25% of risk adjusted assets.(3)
    
    Tier I capital is calculated as a percentage of adjusted total assets of $304,604. Tier I
and Tier II risk-based capital are calculated as percentage of adjusted risk-weighted assets
of $160,600. IMPACT OF INFLATION AND CHANGING PRICES
  CRITICAL ACCOUNTING POLICIES
   Allowance for Loan Losses.
  20




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Other Than Temporary Decline.
 Deferred Income Taxes. Accounting for Income
Taxes
 21




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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 Item 4. CONTROLS AND PROCEDURES
   FORWARD LOOKING STATEMENTS
  22




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Legal Proceedings
  
 Risk Factors
  
 Unregistered Sales of Equity Securities and Use of Proceeds
  
 Defaults Upon Senior Securities
  
 Submission of Matters to a Vote of Security Holders
  
 Other Information
  
 Exhibits
 31.1
    
    Certification of Chief Executive Officer Pursuant to Rules 13a-14
and 15d-14 of the Securities Exchange Act of 1934 and Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to Rules 13a-14
and 15d-14 of the Securities Exchange Act of 1934 and Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to section 906
of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to section 906
of the Sarbanes-Oxley Act of 2002
 23




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SIGNATURES
   /s/ Edwin R. MausEdwin R. MausPresident and Chief Executive Officer
 /s/ John A. Howard, Jr.John A. Howard, Jr.Senior Vice President andChief Financial Officer
  24