<PAGE>   1

                                                                      Exhibit 13



                       LOGO    LAUREL CAPITAL GROUP, INC.

INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------

THE BOARD OF DIRECTORS AND STOCKHOLDERS
LAUREL CAPITAL GROUP, INC.:

We have audited the accompanying consolidated statements of financial condition
of Laurel Capital Group, Inc. and subsidiary as of June 30, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended June 30, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Laurel Capital
Group, Inc. and subsidiary at June 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1999, in conformity with generally accepted accounting
principles.

                                                  /s/ KPMG LLP

Pittsburgh, Pennsylvania
August 12, 1999

                                        6
<PAGE>   2

                       LOGO    LAUREL CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
--------------------------------------------------------------------------------
At June 30, 1999 and 1998

<TABLE>
<CAPTION>
(in thousands, except per share data)                           1999        1998
----------------------------------------------------------------------------------
<S>                                                           <C>         <C>
ASSETS
Cash                                                          $    690    $    753
Money market investments                                         3,711       3,532
Interest-earning deposits with other institutions                7,710       7,092
Investment securities available for sale (note 2)               35,549      25,539
Investment securities held to maturity (market value of
  $12,224 and $14,097)(note 2)                                  12,439      14,003
Mortgage-backed securities available for sale (note 3)          11,868      11,554
Mortgage-backed securities held to maturity (market value of
  $1,074 and $1,068) (note 3)                                    1,072       1,051
Loans receivable, held for sale (note 4)                         1,562       1,633
Loans receivable, net of unearned discounts of $2 and $7       153,256     152,976
Allowance for loan losses                                       (1,866)     (1,852)
----------------------------------------------------------------------------------
  Loans receivable, net (notes 4 and 5)                        151,390     151,124
Federal Home Loan Bank stock (note 6)                            1,277       1,277
Real estate owned                                                  377         143
Accrued interest receivable:
  Loans                                                            846         854
  Interest-earning deposits and investments                        492         406
  Mortgage-backed securities                                        71          73
Office properties and equipment, net of accumulated
  depreciation (note 7)                                          1,458       1,322
Prepaid expenses and sundry assets                                 962         630
----------------------------------------------------------------------------------
     Total Assets                                             $231,474    $220,986
----------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Savings deposits (note 8)                                   $182,118    $175,390
  FHLB advances (note 9)                                        20,029      17,033
  Advance deposits by borrowers for taxes and insurance          3,020       3,143
  Accrued interest payable on savings deposits                     500         523
  Accrued income taxes (note 10)                                   294         169
  Other accrued expenses and sundry liabilities                    983       1,222
----------------------------------------------------------------------------------
     Total Liabilities                                         206,944     197,480
----------------------------------------------------------------------------------
Stockholders' Equity (note 11)
  Common stock, $.01 par value; 5,000,000 shares authorized;
     2,324,298 and 2,305,055 shares issued, respectively            23          23
  Additional paid-in capital                                     5,197       4,823
  Treasury stock, at cost (152,120 and 113,670 shares,
     respectively)                                              (2,270)     (1,626)
  Retained earnings                                             22,070      20,200
  Accumulated other comprehensive income (loss), net of tax
     $(98) and $149, respectively                                 (190)        290
  Stock held in deferred compensation trust                       (300)       (204)
----------------------------------------------------------------------------------
     Total Stockholders' Equity                                 24,530      23,506
----------------------------------------------------------------------------------
     Total Liabilities and Stockholders' Equity               $231,474    $220,986
----------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.

                                        7
<PAGE>   3

                       LOGO    LAUREL CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
For the years ended June 30, 1999, 1998, and 1997

<TABLE>
<CAPTION>
(in thousands, except per share data)                    1999          1998          1997
--------------------------------------------------------------------------------------------
<S>                                                   <C>           <C>           <C>
Interest income:
  Loans receivable                                    $   11,854    $   11,819    $   11,835
  Mortgage-backed securities                                 791           970         1,036
  Investment securities:
    Taxable                                                1,423         1,649         1,771
    Tax-exempt                                             1,131         1,011           540
  Interest-earning deposits                                  453           316           160
--------------------------------------------------------------------------------------------
    Total interest income                                 15,652        15,765        15,342
Interest expense:
  Savings deposits (note 8)                                7,059         7,349         7,182
  FHLB advances (note 9)                                   1,008           720           533
--------------------------------------------------------------------------------------------
    Total interest expense                                 8,067         8,069         7,715
--------------------------------------------------------------------------------------------
Net interest income before provision for loan losses       7,585         7,696         7,627
Provision for loan losses                                     18            18            30
--------------------------------------------------------------------------------------------
Net interest income after provision for loan losses        7,567         7,678         7,597
--------------------------------------------------------------------------------------------
Other income:
  Service charges                                            542           595           476
  Net gain on sales of investment securities
    available for sale                                       296           186           113
  Gain on the sale of loans held for sale                     17            32            12
  Other operating income                                     165           169           116
--------------------------------------------------------------------------------------------
    Total other income                                     1,020           982           717
--------------------------------------------------------------------------------------------
Operating expenses:
  Compensation and employee benefits (note 12)             1,805         1,734         1,750
  Premises and occupancy costs                               515           498           491
  Federal insurance premiums                                 105           109           149
  Special SAIF assessment                                     --            --         1,059
  Net loss (income) on real estate owned                      26            (5)          (31)
  Data processing expense                                    208           255           252
  Professional fees                                          224           487           178
  Other operating expenses                                   860           819           803
--------------------------------------------------------------------------------------------
    Total operating expenses                               3,743         3,897         4,651
--------------------------------------------------------------------------------------------
Income before income taxes                                 4,844         4,763         3,663
--------------------------------------------------------------------------------------------
Provision for income taxes (note 10)
  Federal                                                  1,329         1,383         1,091
  State                                                      332           329           253
--------------------------------------------------------------------------------------------
    Total income taxes                                     1,661         1,712         1,344
--------------------------------------------------------------------------------------------
  Net income                                          $    3,183    $    3,051    $    2,319
--------------------------------------------------------------------------------------------
Earnings per share (note 1)
  Basic
    Net income                                        $     1.45    $     1.40    $     1.03
    Average number of shares outstanding               2,188,014     2,176,893     2,247,021
--------------------------------------------------------------------------------------------
  Diluted
    Net income                                        $     1.39    $     1.32    $     1.00
    Average number of shares outstanding               2,294,324     2,312,389     2,325,658
--------------------------------------------------------------------------------------------
Dividends paid per share                              $      .60    $      .44    $      .29
--------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.

                                        8
<PAGE>   4

                       LOGO    LAUREL CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
For the years ended June 30, 1999, 1998, and 1997

<TABLE>
<CAPTION>
                                                                    Accumulated
                                                                       Other
                                                                   Comprehensive    Stock Held
                               Additional                             Income       in Deferred        Total
                       Common   Paid-in     Treasury    Retained      (Loss)       Compensation   Stockholders'
   (in thousands)      Stock    Capital       Stock     Earnings    Net of Tax        Trust           Equity
<S>                    <C>     <C>          <C>         <C>        <C>             <C>            <C>
----------------------------------------------------------------------------------------------------------------
Balance, June 30,
  1996                    $15      $4,646          --    $16,436            $ 49          $ (60)         $21,086
Comprehensive income:
  Net income               --          --          --      2,319              --             --            2,319
  Other comprehensive
    income                 --          --          --         --             157             --              157
----------------------------------------------------------------------------------------------------------------
Total comprehensive
  income                   --          --          --      2,319             157             --            2,476
Stock options
  exercised (8,913
  shares)                  --          44          --         --              --             --               44
Dividends paid             --          --          --       (660)             --             --             (660)
Treasury stock
  purchased (113,670
  shares)                  --          --     $(1,626)        --              --             --           (1,626)
Stock purchased by
  deferred
  compensation trust       --          --          --         --              --            (58)             (58)
----------------------------------------------------------------------------------------------------------------
Balance, June 30,
  1997                    $15      $4,690     $(1,626)   $18,095            $206          $(118)         $21,262
Comprehensive income:
  Net income               --          --          --      3,051              --             --            3,051
  Other comprehensive
    income                 --          --          --         --              84             --               84
----------------------------------------------------------------------------------------------------------------
Total comprehensive
  income                   --          --          --      3,051              84             --            3,135
Stock options
  exercised (27,227
  shares)                  --         141          --         --              --             --              141
Retroactive effect of
  stock issued as a
  result of stock
  split declared on
  December 18, 1997         8          (8)         --         --              --             --               --
Dividends paid             --          --          --       (946)             --             --             (946)
Stock purchased by
  deferred
  compensation trust       --          --          --         --              --            (86)             (86)
----------------------------------------------------------------------------------------------------------------
Balance June 30, 1998     $23      $4,823     $(1,626)   $20,200            $290          $(204)         $23,506
Comprehensive income:
  Net income               --          --          --      3,183              --             --            3,183
  Other comprehensive
    loss, net of tax
    $(121)                 --          --          --         --            (235)            --             (235)
  Reclassification
    adjustment, net
    of tax, $(126)         --          --          --         --            (245)            --             (245)
----------------------------------------------------------------------------------------------------------------
Total comprehensive
  (loss) income            --          --          --      3,183            (480)            --            2,703
Stock options
  exercised (19,243
  shares)                  --         155          --         --              --             --              155
Dividends paid             --          --          --     (1,313)             --             --           (1,313)
Treasury stock
  purchased (38,450
  shares)                  --          --        (644)        --              --             --             (644)
Deferred compensation
  payable in common
  stock                    --         219          --         --              --             --              219
Stock purchased by
  deferred
  compensation trust       --          --          --         --              --            (96)             (96)
----------------------------------------------------------------------------------------------------------------
Balance, June 30,
  1999                    $23      $5,197     $(2,270)   $22,070           $(190)         $(300)         $24,530
----------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.

                                        9
<PAGE>   5

                       LOGO    LAUREL CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
For the years ended June 30, 1999, 1998, and 1997

<TABLE>
<CAPTION>
(in thousands)                                                    1999        1998        1997
<S>                                                           <C>         <C>         <C>
----------------------------------------------------------------------------------------------
Net income:                                                   $  3,183    $  3,051    $  2,319
  Adjustments to reconcile net income to net cash
   provided by operating activities:
    Depreciation                                                   147         149         139
    Provision for loan losses                                       18          18          30
    Net loss (gain) on the sale of real estate owned                15         (16)        (42)
    Net gain on the sale of investment securities
      available for sale                                          (296)       (186)       (113)
    Gain on the sale of loans held for sale                        (17)        (32)        (12)
    Amortization of deferred loan fees                            (169)       (214)       (166)
    Origination of loans held for sale                            (864)       (881)       (907)
    Proceeds from the sale of loans held for sale                  952       1,107         719
    (Increase) decrease in accrued interest receivable             (76)        152        (266)
    Decrease in accrued interest payable                           (23)        (10)        (41)
    Other--net                                                       3         304         278
----------------------------------------------------------------------------------------------
      Net cash provided by operating activities                  2,873       3,442       1,938
----------------------------------------------------------------------------------------------
Investing activities:
  Purchase of investment securities held to maturity           (14,387)    (19,160)    (12,994)
  Purchase of investment securities available for sale         (13,912)    (14,567)     (5,156)
  Purchase of mortgage-backed securities held to maturity       (1,011)         --          --
  Purchase of mortgage-backed securities available for sale     (3,970)         --        (600)
  Purchase of FHLB stock                                            --          --          (2)
  Proceeds from maturities of investment securities held to
    maturity                                                    16,000      20,655       7,450
  Proceeds from maturities of investment securities
    available for sale                                               3       1,500         500
  Proceeds from maturities of mortgage-backed securities
    available for sale                                              28         192          --
  Proceeds from the sale of investment securities available
    for sale                                                     3,581       3,240       1,053
  Principal repayments of mortgage-backed securities
    available for sale                                           3,388       1,616       1,459
  Principal repayments of mortgage-backed securities held to
    maturity                                                       990         169         326
  Increase in loans                                               (450)     (6,591)     (1,002)
  Proceeds from the sale of real estate owned                       85         206         261
  Net additions to office properties and equipment                (283)       (204)       (160)
----------------------------------------------------------------------------------------------
      Net cash used by investing activities                     (9,938)    (12,944)     (8,865)
----------------------------------------------------------------------------------------------
Financing activities:
  Net increase (decrease) in demand and club accounts            1,840       1,341       2,256
  Net increase (decrease) in time deposit accounts               4,888        (970)      8,080
  Net increase in FHLB advances                                  2,996       5,989       4,717
  Decrease in advance deposits by borrowers for taxes and
    insurance                                                     (123)        (11)       (167)
  Stock options exercised                                          155         141          44
  Acquisition of treasury stock                                   (644)         --      (1,626)
  Dividends paid                                                (1,313)       (946)       (660)
----------------------------------------------------------------------------------------------
      Net cash provided by financing activities                  7,799       5,544      12,644
----------------------------------------------------------------------------------------------
Net change in cash and cash equivalents                            734      (3,958)      5,717
Cash and cash equivalents at beginning of period                11,377      15,335       9,618
----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                    $ 12,111    $ 11,377    $ 15,335
----------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
----------------------------------------------------------------------------------------------
Cash paid during the period for:
  Interest on savings deposits                                $  7,082    $  7,359    $  7,223
  Interest on FHLB advances                                      1,005         611         503
  Income taxes                                                   1,535       1,839       1,216
Transfer of loans to real estate owned                             335         333          --
Cash paid during the period for interest includes interest credited on deposits of $6,178,
$6,449 and $6,270 for the years ended June 30, 1999, 1998 and 1997, respectively.
----------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.

                                       10
<PAGE>   6

                       LOGO    LAUREL CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATION AND USE OF ESTIMATES
     Laurel Capital is a registered bank holding company pursuant to the Bank
     Holding Company Act of 1956, as amended. The only significant asset is the
     stock of its wholly-owned subsidiary, Laurel Savings Bank, a
     Pennsylvania-chartered state savings bank. The Bank conducts business
     through its six offices located in Allegheny and Butler counties.

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of certain assets and
     liabilities and disclosure of contingent assets and liabilities at the date
     of the financial statements and the reported amounts of related revenue and
     expense during the reporting period. Actual results could differ from those
     estimates.

CONSOLIDATION
     The consolidated financial statements include the accounts of the Laurel
     Capital Group, Inc. and its wholly-owned subsidiary, Laurel Savings Bank,
     after elimination of intercompany accounts and transactions.

INVESTMENT AND MORTGAGE-BACKED SECURITIES
     Statement of Financial Accounting Standards (SFAS) No. 115 requires that
     investments be classified as either: (1) Securities Held to Maturity--debt
     securities that the Company has the positive intent and ability to hold to
     maturity and reported at amortized cost; (2) Trading Securities--debt and
     equity securities bought and held principally for the purpose of selling
     them in the near term and reported at fair value, with unrealized gains and
     losses included in the current period earnings; or (3) Securities Available
     for Sale-- debt and equity securities not classified as either Securities
     Held to Maturity or Trading Securities and reported at fair value, with
     unrealized gains and losses included in accumulated other comprehensive
     income. The cost of securities sold is determined on a specific
     identification basis.

REAL ESTATE OWNED
     Real estate owned consists of properties acquired through foreclosure and
     are recorded at the lower of cost (principal balance of the former mortgage
     loan plus costs of obtaining title and possession) or fair value at the
     date of acquisition. Costs relating to development and improvement of the
     property are capitalized, whereas costs of holding such real estate are
     expensed as incurred. Additional write-downs are charged to income, and the
     carrying value of the property reduced, when the fair value of the
     property, less costs to sell, is less than the carrying value.

PROVISIONS FOR LOAN LOSSES
     Provisions for loan losses are charged to operations in amounts that result
     in an allowance appropriate, in management's judgment, to cover probable
     losses inherent in the loan portfolio based on past and expected loss
     experience and economic conditions.

OFFICE PROPERTIES AND EQUIPMENT
     Depreciation is computed on the straight-line method over the estimated
     useful lives of the related assets.

                                       11
<PAGE>   7

                       LOGO    LAUREL CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)

INTEREST ON SAVINGS
     Interest on savings deposits is accrued and charged to expense monthly and
     is paid or credited in accordance with the terms of the respective
     accounts.

CASH AND CASH EQUIVALENTS
     For purposes of reporting cash flows, the Company has defined cash and cash
     equivalents as cash, interest-earning deposits with other institutions and
     money market investments.

LOANS
     Loans receivable are stated at unpaid principal balances net of the
     allowance for loan losses and net of deferred loan fees and discounts. In
     accordance with SFAS Nos. 114 and 118, the Bank considers all one-to-four
     family residential mortgage loans and all consumer loans (as presented in
     Note 4) to be smaller homogeneous loans. As such, these loans are
     collectively evaluated for impairment. Loans within the scope of these
     statements are considered impaired when, based on current information and
     events, it is probable that all principal and interest will not be
     collected in accordance with the contractual terms of the loans. Management
     determines the impairment of loans based on knowledge of the borrower's
     ability to repay the loan according to the contractual agreement, the
     borrower's repayment history and the fair value of collateral for certain
     collateral dependent loans. Pursuant to SFAS 114, management does not
     consider an insignificant delay or insignificant shortfall to impair a
     loan. Management has determined that a delay less than 90 days will be
     considered an insignificant delay and that an amount less than $5,000 will
     be considered an insignificant shortfall. The Bank does not apply SFAS 114
     using major risk calculations but on a loan by loan basis. All loans are
     charged off when management determines that principal and interest are not
     collectible.

     Any excess of the Bank's recorded investment in the loans over the measured
     value of the loans in accordance with SFAS 114 is provided for in the
     allowance for loan losses. The Bank reviews its loans for impairment on a
     quarterly basis.

     The accrual of interest on all loans is discontinued when, in management's
     opinion, the borrower may be unable to meet payments as they become due or
     when the loan becomes 90 days past due, whichever occurs first. When
     interest accrual is discontinued, all unpaid accrued interest is reserved.
     Such interest ultimately collected is credited to income in the period of
     recovery or applied to reduce principal if there is sufficient doubt about
     the collectibility of principal. Consumer loans more than 120 days or 180
     days delinquent (depending on the nature of the loan) are generally
     required to be written off.

     The Company is a party to financial instruments with off-balance sheet risk
     (commitments to extend credit) in the normal course of business to meet the
     financing needs of its customers. Commitments to extend credit are
     agreements to lend to a customer as long as there is no violation of any
     condition established in the commitment. Commitments generally have fixed
     expiration dates or other termination clauses and may require payment of a
     fee. Since some of the commitments are expected to expire without being
     drawn upon, the total commitment amount does not necessarily represent
     future cash requirements. The Company evaluates each customer's credit
     worthiness on a case-by-case basis using the same credit policies in making
     commitments and conditional obligations as it does for on-balance sheet
     instruments. The amount of collateral obtained, if deemed necessary by the
     Company upon extension of credit, is based on management's credit
     evaluation of the counter-party.

     Loans receivable classified as held for sale are recorded in the financial
     statements at the lower of cost or market.

                                       12
<PAGE>   8

                       LOGO    LAUREL CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)

INCOME TAXES
     The Company utilizes the asset and liability method of accounting for
     income taxes. Under the asset and liability method, deferred tax assets and
     liabilities are recognized for the future tax consequences attributable to
     differences between the financial statement carrying amounts of existing
     assets and liabilities and their respective tax bases and operating loss
     and tax credit carry forwards. Deferred tax assets and liabilities are
     measured using enacted tax rates expected to apply to taxable income in the
     years in which those temporary differences are expected to be recovered or
     settled. The effect on deferred tax assets and liabilities of a change in
     tax rates is recognized in income in the period that includes the enactment
     date.

EARNINGS PER SHARE
     In February 1997, the FASB released SFAS No. 128, "Earnings Per Share."
     SFAS No. 128 establishes standards for computing and presenting earnings
     per share ("EPS") and applies to entities with publicly held common stock
     or potential common stock. SFAS No. 128 simplifies the standards for
     computing earnings per share previously found in APB Opinion No. 15,
     "Earnings Per Share," and makes them comparable to international EPS
     standards. It replaces the presentation of primary EPS with a presentation
     of basic EPS. It also requires dual presentation of basic and diluted EPS
     on the face of the income statement. Basic EPS excludes dilution and is
     computed by dividing income available to common stockholders by the
     weighted average number of common shares outstanding for the period.
     Diluted EPS reflects the potential dilution that could occur if securities
     or other contracts to issue common stock were exercised or converted into
     common stock or resulted in the issuance of common stock that then shared
     in the earnings of the entity. Diluted EPS is computed similarly to fully
     diluted EPS pursuant to APB Opinion No. 15. The Company adopted SFAS No.
     128 as of December 31, 1997 and all prior period per share amounts have
     been restated. In addition, all weighted average share and per share
     amounts reflect the three-for-two stock split paid on January 16, 1998.

The following table sets forth the computation of basic and diluted earnings per
share:

<TABLE>
<CAPTION>
                                                                   June 30,
                                                  1999               1998               1997
-----------------------------------------------------------------------------------------------
<S>                                            <C>                <C>                <C>
Basic earnings per share:
  Net income                                   $    3,183         $    3,051         $    2,319
  Weighted average shares outstanding           2,188,014          2,176,893          2,247,021
  Earnings per share                           $     1.45         $     1.40         $     1.03
Diluted earnings per share:
  Net income                                   $    3,183         $    3,051         $    2,319
  Weighted average shares outstanding           2,188,014          2,176,893          2,247,021
  Dilutive effect of employee stock options       106,310            135,496             78,637
-----------------------------------------------------------------------------------------------
Diluted weighted average shares outstanding     2,294,324          2,312,389          2,325,658
  Earnings per share                           $     1.39         $     1.32         $     1.00
-----------------------------------------------------------------------------------------------
</TABLE>

                                       13
<PAGE>   9

                       LOGO    LAUREL CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)

COMPREHENSIVE INCOME
     In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
     Income." SFAS No. 130 establishes standards for reporting and display of
     comprehensive income and its components (revenues, expenses, gains and
     losses) in a full set of general purpose financial statements. SFAS No. 130
     requires that all items that are required to be recognized under accounting
     standards as components of comprehensive income be reported in a financial
     statement that is displayed with the same prominence as other financial
     statements. SFAS No. 130 requires that an enterprise (a) classify items of
     other comprehensive income by their nature in a financial statement and (b)
     display the accumulated balance of other comprehensive income separately
     from retained earnings and additional paid-in capital in the equity section
     of a statement of financial position. For the fiscal years ended June 30,
     1999, 1998 and 1997, the Company's total comprehensive income was $2,703,
     $3,135 and $2,476, respectively. Total comprehensive income is comprised of
     net income of $3,183, $3,051 and $2,319, respectively, and other
     comprehensive income (loss) of ($480), $84 and $157, net of tax,
     respectively. Other comprehensive income consists of unrealized gains and
     losses on investment securities and mortgage-backed securities available
     for sale.

RECLASSIFICATION
     Certain items previously reported have been reclassified to conform with
     the current year's reporting format.

(2) INVESTMENT SECURITIES

Investment securities held to maturity are comprised of the following:

<TABLE>
<CAPTION>
                                                           Gross              Gross
                                        Amortized        Unrealized         Unrealized         Market
                          Face/Par         Cost         Appreciation       Depreciation        Value
--------------------------------------------------------------------------------------------------------
<S>                     <C>            <C>            <C>                <C>                <C>
AT JUNE 30, 1999:
  Corporate notes and
     commercial paper        $12,445        $12,439                 --               $215        $12,224
--------------------------------------------------------------------------------------------------------
AT JUNE 30, 1998:
 Corporate notes and
   commercial paper     $     14,000   $     14,003   $             94   $             --   $     14,097
--------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                       Amortized   Market
                                                            Face/Par     Cost       Value
<S>                                                         <C>        <C>         <C>
------------------------------------------------------------------------------------------
At June 30, 1999, the contractual maturities of the debt securities held to
 maturity are:
  Due after one year through five years                       $1,000      $1,000   $   982
  Due after five years through ten years                       3,500       3,499     3,458
  Due after ten years                                          7,945       7,940     7,784
------------------------------------------------------------------------------------------
                                                             $12,445     $12,439   $12,224
------------------------------------------------------------------------------------------
</TABLE>

Note continued

                                       14
<PAGE>   10

                       LOGO    LAUREL CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)

Investment securities available for sale are comprised of the following:

<TABLE>
<CAPTION>
                                                               Gross              Gross
                                            Amortized        Unrealized         Unrealized         Market
                              Face/Par         Cost         Appreciation       Depreciation        Value
<S>                         <C>            <C>            <C>                <C>                <C>
------------------------------------------------------------------------------------------------------------
AT JUNE 30, 1999:
  Municipal obligations          $18,420        $18,301               $186               $646        $17,841
  Federal National
    Mortgage Association
    preferred stock                  250            250                 11                 --            261
  Federal Home Loan Mort-
    gage Corporation
    preferred stock                  250            250                 10                 --            260
  Federal National
    Mortgage Association
    stock                            582            582                101                 --            683
  Federal Home Loan Mort-
    gage Corporation stock           480            480                 99                 --            579
  SLM Student Loan Trust             804            783                 19                 --            802
  Standard Insurance
    Company stock                      4              4                  1                 --              5
  Shay Financial Services
    ARMs Fund                     15,240         15,240                 --                122         15,118
------------------------------------------------------------------------------------------------------------
                                 $36,030        $35,890               $427               $768        $35,549
------------------------------------------------------------------------------------------------------------
AT JUNE 30, 1998:
  Municipal obligations          $ 8,990        $ 8,914               $190               $ 37        $ 9,067
  Federal National
    Mortgage Association
    preferred stock                  250            250                 13                 --            263
  Federal Home Loan Mort-
    gage Corporation
    preferred stock                  250            250                 15                 --            265
Federal National Mortgage
  Association stock                  610            610                 10                 13            607
Federal Home Loan Mortgage
  Corporation stock                  925            925                 31                 15            941
Shay Financial Services
  ARMs Fund                       14,444         14,444                 --                 48         14,396
------------------------------------------------------------------------------------------------------------
                                 $25,469        $25,393               $259               $113        $25,539
------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                        Amortized          Market
                                                          Face/Par         Cost            Value
<S>                                                     <C>            <C>            <C>
------------------------------------------------------------------------------------------------------
At June 30, 1999, the contractual maturities of the debt securities available for
 sale are:
  Due after five years through ten years                       $ 804          $ 783              $ 802
  Due after ten years                                         18,420         18,301             17,841
------------------------------------------------------------------------------------------------------
                                                             $19,224        $19,084            $18,643
------------------------------------------------------------------------------------------------------
</TABLE>

The Federal National Mortgage Association preferred and common stock, Federal
Home Loan Mortgage Corporation preferred and common stock, Standard Insurance
Company stock and Shay Financial Services ARMs Fund have no stated maturity.

Proceeds from the sale of investment securities available for sale during 1999,
1998 and 1997 were $3,581, $3,240 and $1,053, respectively.

Gross gains of $296, $186 and $113 were realized on these sales in 1999, 1998
and 1997, respectively.

There were no realized losses in 1999, 1998 and 1997.

                                       15
<PAGE>   11

                       LOGO    LAUREL CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)

(3) MORTGAGE-BACKED SECURITIES

Mortgage-backed securities held to maturity were comprised of the following:

<TABLE>
<CAPTION>
                                                   Gross                  Gross
                             Amortized          Unrealized             Unrealized           Market
     At June 30, 1999           Cost           Appreciation           Depreciation           Value
-----------------------------------------------------------------------------------------------------
<S>                         <C>             <C>                    <C>                    <C>
Federal National Mortgage
  Association REMIC                $ 100                    $ 3                    $--          $ 103
Federal Home Loan Mortgage
  Corporation REMIC                  972                     --                      1            971
-----------------------------------------------------------------------------------------------------
                                  $1,072                    $ 3                    $ 1         $1,074
-----------------------------------------------------------------------------------------------------
At June 30, 1998
-----------------------------------------------------------------------------------------------------
Federal National Mortgage
 Association REMIC                 $ 151                    $ 4                    $--          $ 155
Federal Home Loan Mortgage
  Corporation REMIC                  900                     13                     --            913
-----------------------------------------------------------------------------------------------------
                                  $1,051                    $17                    $--         $1,068
-----------------------------------------------------------------------------------------------------
</TABLE>

Mortgage-backed securities available for sale were comprised of the following:

<TABLE>
<CAPTION>
                                                   Gross                  Gross
                             Amortized          Unrealized             Unrealized           Market
     At June 30, 1999           Cost           Appreciation           Depreciation           Value
-----------------------------------------------------------------------------------------------------
<S>                         <C>             <C>                    <C>                    <C>
Government National
  Mortgage Association           $ 4,721                   $ 79                    $28        $ 4,772
Federal National Mortgage
  Association                      4,042                      8                     47          4,003
Federal Home Loan Mortgage
  Corporation                         58                     --                     --             58
Federal Home Loan Mortgage
  Corporation REMIC                2,994                     41                     --          3,035
-----------------------------------------------------------------------------------------------------
                                 $11,815                   $128                    $75        $11,868
-----------------------------------------------------------------------------------------------------
At June 30, 1998
-----------------------------------------------------------------------------------------------------
Government National
 Mortgage Association            $ 3,973                   $154                    $--        $ 4,127
Federal National Mortgage
  Association                      3,424                     71                     --          3,495
Federal Home Loan Mortgage
  Corporation                        183                      6                     --            189
Federal National Mortgage
  Association REMIC                  228                     --                      1            227
Federal Home Loan Mortgage
  Corporation REMIC                3,454                     62                     --          3,516
-----------------------------------------------------------------------------------------------------
                                 $11,262                   $293                    $ 1        $11,554
-----------------------------------------------------------------------------------------------------
</TABLE>

Prepayments may shorten the lives of these mortgage-backed securities.

There were no sales of mortgage-backed securities available for sale during
1999, 1998 and 1997.

                                       16
<PAGE>   12

                       LOGO    LAUREL CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)

(4) LOANS RECEIVABLE

Loans receivable are comprised of the following:

<TABLE>
<CAPTION>
                                                                        June 30,
                                                                  1999             1998
<S>                                                           <C>              <C>
---------------------------------------------------------------------------------------
First mortgage loans:
  Conventional:
     1 to 4 family dwellings                                  $112,295         $114,905
     Multi-family dwellings                                      1,612            2,474
     Commercial                                                  5,375            6,391
---------------------------------------------------------------------------------------
                                                               119,282          123,770
  Guaranteed or insured                                             39               67
---------------------------------------------------------------------------------------
Total long term with monthly amortization                      119,321          123,837
  Construction and development loans                             2,268            4,341
---------------------------------------------------------------------------------------
                                                               121,589          128,178
Less: Loans in process                                            (987)          (1,953)
    Deferred loan fees                                            (386)            (615)
---------------------------------------------------------------------------------------
                                                               120,216          125,610
---------------------------------------------------------------------------------------
Consumer loans:
  Home improvement loans (net of unearned discounts of $2
     and $7)                                                        21               92
  Loans secured by savings accounts                                276              335
  Installment loans                                             31,802           26,289
  Commercial loans                                                 941              650
---------------------------------------------------------------------------------------
                                                                33,040           27,366
---------------------------------------------------------------------------------------
                                                               153,256          152,976
Less: Allowance for loan losses                                 (1,866)          (1,852)
---------------------------------------------------------------------------------------
                                                              $151,390         $151,124
---------------------------------------------------------------------------------------
</TABLE>


At June 30, 1999 and 1998, the Company had a commitment to sell its guaranteed
student loan portfolio totaling $1,562 and $1,633, respectively.

Outstanding commitments to originate loans:

<TABLE>
<CAPTION>
                                                                        June 30,
                                                                  1999             1998
---------------------------------------------------------------------------------------
<S>                                                           <C>              <C>
First mortgage loans:
  Fixed rates (6.50% to 9.75% and 6.50% to 7.75%)               $1,624           $1,626
  Variable rates                                                   589              407
---------------------------------------------------------------------------------------
                                                                 2,213            2,033
Other loans--fixed rates                                           460              617
Unused lines of credit                                           4,319            5,050
---------------------------------------------------------------------------------------
                                                                $6,992           $7,700
---------------------------------------------------------------------------------------
</TABLE>

The Company's customers have unused lines of credit as follows: secured (home
equity), builder lines of credit and all other lines of credit. The amount
available at June 30, 1999 for each type was $3,120, $397 and $802,
respectively. The amount available at June 30, 1998 for each type was $3,221,
$933 and $896, respectively. The interest rate for each loan is based on the
prevailing market conditions at the time of funding.

The Company serviced loans for others of $762, $1,118 and $1,229 at June 30,
1999, 1998 and 1997, respectively. These loans serviced for others are not
assets of the Company and are appropriately excluded from the Company's
financial statements. Fidelity bond and errors and omission insurance coverage
is maintained with respect to these loans.
Note continued

                                       17
<PAGE>   13

                       LOGO    LAUREL CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)

At June 30, 1999, over 99.7% of the Company's net mortgage loan portfolio was
secured by properties located in Pennsylvania. The Company does not believe it
has significant concentrations of credit risk to any one group of borrowers
given its underwriting and collateral requirements.

(5) Allowance for Losses on Loans

Changes in the allowance for losses on loans are as follows:

<TABLE>
<S>                                                           <C>
--------------------------------------------------------------------
Balance at June 30, 1996                                      $1,899
Provision for losses                                              30
Charge-offs                                                      (54)
Recoveries                                                        68
--------------------------------------------------------------------
Balance at June 30, 1997                                      $1,943
Provision for losses                                              18
Charge-offs                                                     (152)
Recoveries                                                        43
--------------------------------------------------------------------
Balance at June 30, 1998                                      $1,852
Provision for losses                                              18
Charge-offs                                                      (61)
Recoveries                                                        57
--------------------------------------------------------------------
Balance at June 30, 1999                                      $1,866
--------------------------------------------------------------------
</TABLE>

Management believes that the allowance for losses on loans was appropriate at
June 30, 1999. While management uses available information to recognize losses
on loans, future additions to the allowance may be necessary based on changes in
economic conditions and other factors. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the
Company's allowance for losses on loans. Such agencies may require the Company
to recognize additions to the allowance based on their judgements about
information available to them at the time of their examination.

At June 30, 1999 and 1998, the recorded investment in loans that are considered
to be impaired under SFAS 114 were $281 and $285, respectively. Included in the
amount at June 30, 1999 is $88 of impaired loans for which the related allowance
for loan losses is $3 and $193 of impaired loans that as a result of write-downs
do not have an allowance for loan losses. Included in the amount at June 30,
1998 is $103 of impaired loans for which the related allowance for loan losses
is $4 and $182 of impaired loans that as a result of write-downs do not have an
allowance for loan losses. The average recorded investment in impaired loans
during the fiscal years ended June 30, 1999, 1998 and 1997 was approximately
$291, $358 and $437, respectively. For the fiscal years ended June 30, 1999,
1998 and 1997, the Company recognized interest income on those impaired loans of
$6, $5 and $2, respectively, which was recognized using the cash basis of income
recognition.

Non-accrual loans at June 30, 1999, 1998 and 1997 were approximately $476, $561
and $915, respectively. The foregone interest on these loans for the fiscal
years ended June 30, 1999, 1998 and 1997 was approximately $48, $37 and $65,
respectively. The amount of interest income on such loans actually included in
income in fiscal 1999, 1998 and 1997 was $15, $28 and $27, respectively. There
were no commitments to lend additional funds to borrowers whose loans were in
non-accrual status.

(6) FEDERAL HOME LOAN BANK STOCK

The Company is a member of the Federal Home Loan Bank ("FHLB") System. As a
member, the Company maintains an investment in the capital stock of the FHLB of
Pittsburgh, at cost, in an amount not less than the greater of 1% of its
qualifying assets, as defined by the FHLB of Pittsburgh, or 5% of its
outstanding advances, if any, from the FHLB of Pittsburgh as calculated at
December 31 of each year.

                                       18
<PAGE>   14

                       LOGO    LAUREL CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)

(7) OFFICE PROPERTIES AND EQUIPMENT

Office properties and equipment are summarized by major classifications as
follows:

<TABLE>
<CAPTION>
                                                                     June 30,
                                                               1999            1998
<S>                                                           <C>             <C>
-------------------------------------------------------------------------------------
Land and land improvements                                    $   333         $   333
Office buildings and improvements                               2,123           2,123
Furniture, fixtures and equipment                                 862             579
-------------------------------------------------------------------------------------
  Total, at cost                                                3,318           3,035
Less accumulated depreciation                                  (1,860)         (1,713)
-------------------------------------------------------------------------------------
                                                              $ 1,458         $ 1,322
-------------------------------------------------------------------------------------
</TABLE>

Depreciation expense for the periods ended June 30, 1999, 1998 and 1997 was
$147, $149 and $139, respectively.

(8)SAVINGS DEPOSITS

Savings deposit balances and interest rates are summarized as follows:

<TABLE>
<CAPTION>
                                                         Weighted Average
                               Interest Rate              Interest Rate
                                     at                    at June 30,                    June 30,
                               June 30, 1999               1999           1998         1999       1998
<S>                        <C>                      <C>                   <C>        <C>        <C>
--------------------------------------------------------------------------------------------------------
Demand and club accounts        1.00 to 2.50%              2.14%          2.48%      $ 30,426   $ 29,531
Money market deposit
  accounts                      2.09 to 2.33               2.23           2.23         15,750     16,444
NOW deposits                       0 to 1.50               1.05           1.01         26,555     24,916
--------------------------------------------------------------------------------------------------------
                                                                                       72,731     70,891
--------------------------------------------------------------------------------------------------------
Time deposits:                  3.01 to 4.00%                                           1,369         --
                                4.01 to 5.00                                           35,641     19,698
                                5.01 to 6.00                                           57,931     61,640
                                6.01 to 7.00                                           12,959     19,777
                                7.01 to 8.00                                            1,049      1,112
                                8.01 to 9.00                                              438      2,272
--------------------------------------------------------------------------------------------------------
                                                           5.31           5.65       $109,387   $104,499
--------------------------------------------------------------------------------------------------------
                                                           3.89%          4.14%      $182,118   $175,390
--------------------------------------------------------------------------------------------------------
</TABLE>

At June 30, 1999 and 1998, time deposits with balances in excess of $100,000
amounted to $1.5 million and $2.0 million, respectively.

The contractual maturity of time deposits is as follows:

<TABLE>
<CAPTION>
                                                                      June 30,
                                                                1999             1998
<S>                                                           <C>              <C>
---------------------------------------------------------------------------------------
Under 12 months                                               $ 63,316         $ 53,730
12 months to 24 months                                          26,420           26,041
24 months to 36 months                                           7,434           13,314
36 months to 48 months                                           3,972            2,254
48 months to 60 months                                           1,623            4,036
Over 60 months                                                   6,622            5,124
---------------------------------------------------------------------------------------
                                                              $109,387         $104,499
---------------------------------------------------------------------------------------
</TABLE>

Note continued

                                       19
<PAGE>   15

                       LOGO    LAUREL CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)

Interest expense by deposit category is as follows:

<TABLE>
<CAPTION>
                                                                Years ended June 30,
                                                       1999             1998             1997
<S>                                                   <C>              <C>              <C>
----------------------------------------------------------------------------------------------
Passbook and club accounts                            $  635           $  690           $  696
Money market deposit accounts                            354              416              437
NOW accounts                                             267              251              242
Time deposits                                          5,803            5,992            5,807
----------------------------------------------------------------------------------------------
                                                      $7,059           $7,349           $7,182
----------------------------------------------------------------------------------------------
</TABLE>

(9) FEDERAL HOME LOAN BANK ADVANCES

FHLB advances are summarized as follows:

<TABLE>
<CAPTION>
                                                     Interest              June 30,
                     Due Date                          Rate           1999         1998
-----------------------------------------------------------------------------------------
<S>                                                  <C>             <C>          <C>
September 16, 1998                                        5.61%      $    --      $   900
August 9, 1999                                            6.11         2,000        2,000
September 14, 1999                                        5.00           900           --
November 24, 2000                                         5.80           793          793
February 14, 2002                                         5.48         2,000        2,000
December 31, 2002                                         5.38         6,200        6,200
January 23, 2008                                          4.94         2,000        2,000
February 20, 2008                                         5.48         3,000        3,000
December 18, 2008                                         5.15         3,000           --
November 13, 2015                                         6.51           136          140
-----------------------------------------------------------------------------------------
                                                                     $20,029      $17,033
-----------------------------------------------------------------------------------------
</TABLE>

Under a blanket collateral pledge agreement, the Bank has pledged as collateral
for advances from the FHLB of Pittsburgh certain qualifying collateral, such as
mortgage-backed securities and loans, with weighted collateral values determined
by the FHLB of Pittsburgh equal to at least the unpaid amount of outstanding
advances.

The Bank has an available line of credit with the FHLB of Pittsburgh equal to
its maximum borrowing capacity less any outstanding advances. As of June 30,
1999 this was approximately $99.1 million. There are no commitment fees
associated with this line of credit. When used, interest is charged at the
FHLB's posted rates, which change daily, and the loan can be repaid at any time.
The Bank has yet to use this credit line and has no plans to do so in the
immediate future.

(10)  INCOME TAXES

Total income tax expense for the years ended June 30, 1999, 1998 and 1997
consisted of:

<TABLE>
<CAPTION>
                                                           1999        1998        1997
<S>                                                       <C>         <C>         <C>
----------------------------------------------------------------------------------------
Current:
  Federal                                                 $1,392      $1,322      $1,156
  State                                                      332         329         253
----------------------------------------------------------------------------------------
                                                           1,724       1,651       1,409
----------------------------------------------------------------------------------------
Deferred:
  Federal                                                    (63)         61         (65)
----------------------------------------------------------------------------------------
                                                          $1,661      $1,712      $1,344
----------------------------------------------------------------------------------------
</TABLE>

Note continued

                                       20
<PAGE>   16

                       LOGO    LAUREL CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)

Total income tax provision for the years ended June 30, 1999, 1998 and 1997 was
allocated as follows:

<TABLE>
<CAPTION>
                                                           1999        1998        1997
----------------------------------------------------------------------------------------
<S>                                                       <C>         <C>         <C>
Income                                                    $1,661      $1,712      $1,344
Stockholders' equity:
  Accumulated other comprehensive income (loss)             (247)         43          81
----------------------------------------------------------------------------------------
                                                          $1,414      $1,755      $1,425
----------------------------------------------------------------------------------------
</TABLE>

A reconciliation from the expected statutory income tax rate to the actual
effective tax rate expressed as a percentage of pre-tax income for the years
ended June 30, 1999, 1998 and 1997 is as follows:

<TABLE>
<CAPTION>
                                                              1999      1998      1997
--------------------------------------------------------------------------------------
<S>                                                           <C>       <C>       <C>
Expected federal tax rate                                     34.0%     34.0%     34.0%
State taxes, net of federal tax benefit                       4.5       4.6        4.6
Other, net                                                     .1       (.8)        --
Tax exempt income, net                                        (4.3)     (1.9)     (1.9)
--------------------------------------------------------------------------------------
                                                              34.3%     35.9%     36.7%
--------------------------------------------------------------------------------------
</TABLE>

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities and the related
valuation allowances as of June 30, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                                  1999          1998
--------------------------------------------------------------------------------------
<S>                                                             <C>           <C>
DEFERRED TAX ASSETS:
  Deferred loan fees                                               $ 129         $ 168
  Tax vs. book loan loss reserve                                     434           362
  Investment securities                                               98            --
  Other                                                              123            91
--------------------------------------------------------------------------------------
  Gross deferred tax assets                                          784           621
  Valuation allowance                                                 --            --
--------------------------------------------------------------------------------------
  Net deferred tax asset                                             784           621
DEFERRED TAX LIABILITIES:
  Investment securities                                               --          (149)
  Property, plant and equipment                                      (89)          (92)
  Prepaid expense                                                    (25)          (20)
--------------------------------------------------------------------------------------
Gross deferred tax liability                                        (114)         (261)
--------------------------------------------------------------------------------------
Net deferred tax asset                                             $ 670         $ 360
--------------------------------------------------------------------------------------
</TABLE>

The Bank has determined that no valuation reserve is necessary for any deferred
tax asset since it is more likely than not that the deferred tax assets will be
realized through carryback to taxable income in prior years, future reversals of
existing differences and to a lesser extent, through future taxable income.

SFAS 109 treats tax basis bad debt reserves established after 1987 as temporary
differences on which deferred income taxes have been provided. Deferred taxes
are not required to be provided on tax bad debt reserves recorded in 1987 and
prior years (base year bad debt reserves). Approximately $2,217 of the balances
in retained earnings at June 30, 1999, represent base year bad debt deductions
for tax purposes only. No provision for federal income tax has been made for
such amount. Should amounts previously claimed as bad debt deduction be used for
any purpose other than to absorb bad debts (which is not anticipated), tax
liabilities will be incurred at the rate then in effect.

                                       21
<PAGE>   17

                       LOGO    LAUREL CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)

(11) STOCKHOLDERS' EQUITY

The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary--actions by
regulators, that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weighting, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain amounts and ratios (set forth in the table below)
of total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier 1 capital (as defined) to average assets (as
defined). Management believes, as of June 30, 1999, that the Bank meets all
capital adequacy requirements to which it is subject.

As of June 30, 1999, the most recent notification from the FDIC categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the Bank must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the institution's category.

The following table sets forth certain information concerning the Bank's
regulatory capital at June 30, 1999 and 1998.

<TABLE>
<CAPTION>
                                             JUNE 30, 1999                   JUNE 30, 1998
                                                Tier I    Tier II               Tier I    Tier II
                                      Tier I     Risk-     Risk-      Tier I     Risk-     Risk-
                                       Core      Based     Based       Core      Based     Based
                                      Capital   Capital   Capital     Capital   Capital   Capital
<S>                                   <C>       <C>       <C>         <C>       <C>       <C>
--------------------------------------------------------------------------------------------------
Equity Capital (1)                    $24,022   $24,022   $24,022     $23,131   $23,131   $23,131
Less unrealized securities gains           --        --        --        (290)     (290)     (290)
Plus general valuation allowances
  (2)                                                       1,530                           1,445
--------------------------------------------------------------------------------------------------
    Total regulatory capital           24,022    24,022    25,552      22,841    22,841    24,286
Minimum required capital                9,183     4,897     9,795       8,753     4,623     9,245
--------------------------------------------------------------------------------------------------
    Excess regulatory capital         $14,839   $19,125   $15,757     $14,088   $18,218   $15,041
--------------------------------------------------------------------------------------------------
Minimum required capital to be well
  capitalized under Prompt
  Corrective Action Provisions        $11,479   $ 7,326   $12,210     $10,942   $ 6,909   $11,516
--------------------------------------------------------------------------------------------------
Regulatory capital as a percentage
  (3)                                   10.46%    19.67%    20.93%      10.44%    19.83%    21.09%
Minimum required capital percentage      4.00      4.00      8.00        4.00      4.00      8.00
--------------------------------------------------------------------------------------------------
    Excess regulatory capital
       percentage                        6.46%    15.67%    12.93%       6.44%    15.83%    13.09%
--------------------------------------------------------------------------------------------------
Minimum required capital percentage
  to be well capitalized under
  Prompt Corrective Action
  Provisions                             5.00%     6.00%    10.00%       5.00%     6.00%    10.00%
--------------------------------------------------------------------------------------------------
</TABLE>

(1) Represents equity capital of the Bank as reported to the FDIC and the
    Department of Banking on Form 033 for the quarters ended June 30, 1999 and
    1998.

(2) Limited to 1.25% of risk weighted assets.

(3) Tier I capital is calculated as a percentage of adjusted total average
    assets of $229,587 and $218,837 at June 30, 1999 and 1998, respectively.
    Tier I and Tier II risk-based capital are calculated as a percentage of
    adjusted risk-weighted assets of $122,098 and $115,158 at June 30, 1999 and
    1998, respectively.

                                       22
<PAGE>   18

                       LOGO    LAUREL CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)

(12) EMPLOYEE BENEFIT PLANS

The Company sponsors a defined contribution plan in which substantially all
employees participate. The plan requires employer contributions of five percent
of total compensation of each participant. Employees are also permitted to make
contributions. Total plan expense was $67, $70 and $69 during fiscal 1999, 1998,
and 1997, respectively.

The Bank sponsors a nonqualified deferred compensation plan for key officers of
the Bank. This plan is structured as a "rabbi trust." The amount of compensation
to be deferred under the plan is determined each year by the officers.

(13) STOCK COMPENSATION PROGRAMS

In fiscal 1988, the Company adopted an Employee Stock Compensation Program under
which shares of common stock could be issued. Under the 1988 Program, each
eligible participant may be granted options to purchase common stock at an
amount equal to or less than the fair market value of the shares at the time of
the grant of the option. At June 30, 1999, there were no remaining shares
available to be granted.

In fiscal 1994, the Company adopted the 1993 Key Employee Stock Compensation
Program ("1993 Employee Program") and the 1993 Directors' Stock Option Plan
("1993 Directors' Plan"). Under the 1993 Employee Program, each eligible
participant may be granted options to purchase common stock at an amount equal
to or less than the fair market value of the shares at the time of the grant of
the options. At June 30, 1999, there were 10,405 remaining shares available to
be granted as determined by the Program Administrators. Under the 1993
Directors' Plan, each person who served as a non-employee Director of the
Company immediately following the adjournment of such annual meeting was granted
as of such date an option to purchase 1,405 shares of common stock exercisable
at a price equal to the fair market value on the date of the grant. At June 30,
1999 there were 4,237 remaining shares available to be granted under the terms
of the 1993 Directors' Plan.

In fiscal 1997, the Company adopted the 1996 Key Employee Stock Compensation
Program ("1996 Employee Program") and the 1996 Directors' Stock Option Plan
("1996 Directors' Plan"). Under the 1996 Employee Program, each eligible
participant may be granted options to purchase common stock at an amount equal
to or less than the fair market value of the shares at the time of the grant of
the options. During fiscal 1999, options to purchase 52,500 shares of common
stock were granted to key employees at a price equal to the fair market value on
the date of the grant. Such stock options will be vested and exercisable over
four years at the rate of 25% per year. At June 30, 1999, there were 32,511
remaining shares available to be granted as determined by the Program
Administrators. Under the 1996 Directors' Plan, each person who served as a
non-employee director of the Company immediately following the adjournment of
the 1996 annual meeting was granted as of such date an option to purchase 4,722
shares of common stock exercisable at a price equal to the fair market value on
the date of the grant. All of the 28,332 options granted under the 1996
Directors' Plan have vested and are exercisable. At June 30, 1999 there were no
remaining shares available to be granted under the terms of the 1996 Directors'
Plan.

Note continued

                                       23
<PAGE>   19

                       LOGO    LAUREL CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)

Each option granted under all five stock option plans will expire no later than
10 years from the date on which the option was or is granted. For the periods
presented, options granted for all plans were granted at the fair market value
at the date of the grant.
<TABLE>
<CAPTION>
                                      Average       1993       Average       1993       Average    1996     Average    1996
                           1988       Exercise    Employee     Exercise    Director     Exercise Employee   Exercise Director
                         Program       Price      Program       Price        Plan        Price   Program     Price     Plan
-----------------------------------------------------------------------------------------------------------------------------
<S>                    <C>            <C>       <C>            <C>       <C>            <C>      <C>        <C>      <C>
June 30, 1996                95,657   $5.87          110,988   $9.51           28,101   $ 8.72       --     $  --        --
Granted                          --      --               --      --            8,430   10.59        --        --    28,332
Exercised                    (7,020)   4.25             (487)   8.45           (1,405)   7.38        --        --        --
Forfeited                      (937)   7.62               --      --           (4,216)   8.65        --        --        --
-----------------------------------------------------------------------------------------------------------------------------
June 30, 1997                87,700   $5.98          110,501   $9.51           30,910   $ 9.30       --        --    28,332
Granted                          --      --               --      --            8,430   18.00        --        --        --
Exercised                   (22,953)   4.41           (1,464)   8.78           (2,810)   9.29        --        --        --
Forfeited                        --      --               --      --               --      --        --        --        --
-----------------------------------------------------------------------------------------------------------------------------
June 30, 1998                64,747   $6.54          109,037   $9.52           36,530   $11.31       --        --    28,332
Granted                          --      --               --      --            8,430   19.50    52,500     15.75        --
Exercised                    (8,068)   6.49          (10,070)   9.40           (1,105)   7.91        --        --        --
Forfeited                        --      --               --      --               --      --        --        --        --
-----------------------------------------------------------------------------------------------------------------------------
June 30, 1999                56,679   $6.54           98,967   $9.53           43,855   $12.97   52,500     $15.75   28,332
-----------------------------------------------------------------------------------------------------------------------------
Actual contractual
 life remaining in
 years                          3.8                      5.4                      7.2               9.9                 7.4
Option price per
 share                 $2.73-$11.00             $8.44-$10.92             $7.38-$18.00            $15.75              $10.59
Options available to
 be granted at June
 30, 1999                        --                   10,405                    4,237            32,511                  --
-----------------------------------------------------------------------------------------------------------------------------

<CAPTION>
                       Average
                       Exercise
                        Price
<S>                    <C>
June 30, 1996          $  --
Granted                10.59
Exercised                 --
Forfeited                 --
---------------------------------
June 30, 1997          $10.59
Granted                   --
Exercised                 --
Forfeited                 --
---------------------------------
June 30, 1998          $10.59
Granted                   --
Exercised                 --
Forfeited                 --
---------------------------------
June 30, 1999          $10.59
---------------------------------
Actual contractual
 life remaining in
 years
Option price per
 share
Options available to
 be granted at June
 30, 1999
---------------------------------
</TABLE>

Using a Black-Scholes option valuation model, the weighted-average fair value of
options granted during fiscal 1999 under the 1993 Director Plan and the 1996
Employee Program was $4.04 and $3.27, respectively. The fair value of options
granted during fiscal 1998 under the 1993 Director Plan was $4.18. The fair
value of options granted during fiscal 1997 under the 1993 and 1996 Directors'
Plans was $4.15.

At June 30, 1999, 1998 and 1997, 238,508, 223,723 and 223,944 shares were
immediately exercisable at average prices of $9.86, $9.00 and $8.05,
respectively.

In October 1995, the FASB issued Statement of Financial Accounting Standard No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
establishes a fair value based method of accounting for stock-based compensation
plans. Effective for fiscal years beginning after December 15, 1995, SFAS 123
allows companies to expense an estimated fair value of stock options or to
continue to measure compensation expense for stock option plans using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25
("APB No. 25"). Entities that elect to continue to measure compensation expense
based on APB No. 25 must provide pro forma disclosures of net income and
earnings per share as if the fair value method of accounting had been applied.
The Company has elected to continue to measure compensation cost using the
intrinsic value method prescribed by APB No. 25. Had the Company used the fair
value method, net income and earnings per share would have been as follows (In
thousands, except per share data):

<TABLE>
<CAPTION>
                                                                       June 30
                                                               1999      1998      1997
----------------------------------------------------------------------------------------
<S>                                                           <C>       <C>       <C>
Net income
  As reported                                                 $3,183    $3,051    $2,319
  Pro forma                                                   $3,140    $3,010    $2,293
----------------------------------------------------------------------------------------
Basic earnings per share
  As reported                                                  $1.45     $1.40     $1.03
  Pro forma                                                    $1.43     $1.38     $1.02
----------------------------------------------------------------------------------------
Diluted earnings per share
  As reported                                                  $1.39     $1.32     $1.00
  Pro forma                                                    $1.37     $1.30     $0.99
----------------------------------------------------------------------------------------
</TABLE>

Note continued

                                       24
<PAGE>   20

                       LOGO    LAUREL CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)

The fair value for these options was estimated at the date of grant using a
Black-Scholes Option Valuation Model with the following weighted-average
assumptions for 1999, 1998 and 1997, respectively: risk-free interest rates of
6.01%, 5.63% and 6.51%; dividend yields of 3.84%, 2.6% and 2.3%; volatility
factors of the expected market price of the Company's common stock of 20.9%,
18.6% and 17.2%; and a weighted-average expected life of the options of 7 years.
The pro forma net income and earnings per share amounts in the table above
reflect only options granted in fiscal 1999, 1998 and 1997. Therefore, the full
impact of calculating the cost for stock options under the fair value method of
SFAS 123 is not reflected in the pro forma net income and earnings per share
amounts presented above because compensation cost is reflected over the options'
vesting periods and compensation cost for options granted prior to July 1, 1996
is not considered.

The Black-Scholes Option Valuation Model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjectivity
of input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

(14) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                  Three Month Periods Ended
1998/1999:                           September 30    December 31    March 31    June 30
<S>                                  <C>             <C>            <C>         <C>
----------------------------------------------------------------------------------------
  Interest income                           $3,973         $3,884      $3,900     $3,895
  Interest expense                           2,042          2,022       1,995      2,008
----------------------------------------------------------------------------------------
  Net interest income before
    provision for possible loan
    losses                                   1,931          1,862       1,905      1,887
  Provision for possible loan
    losses                                       4              5           5          4
  Other income                                 269            353         162        236
  Operating expenses                           954            944         906        939
----------------------------------------------------------------------------------------
  Income before income taxes                 1,242          1,266       1,156      1,180
  Provision for income taxes                   437            441         385        398
----------------------------------------------------------------------------------------
  Net income                                 $ 805          $ 825       $ 771      $ 782
----------------------------------------------------------------------------------------
  Earnings per share:
    Basic                                   $ 0.37         $ 0.38      $ 0.35     $ 0.36
    Diluted                                 $ 0.35         $ 0.36      $ 0.34     $ 0.34
----------------------------------------------------------------------------------------
  Dividends per share                       $ 0.15         $ 0.15      $ 0.15     $ 0.15
----------------------------------------------------------------------------------------
1997/1998:
----------------------------------------------------------------------------------------
Interest income                             $3,918         $3,904      $3,970     $3,973
Interest expense                             2,021          2,034       2,011      2,003
----------------------------------------------------------------------------------------
Net interest income before
  provision for possible loan
  losses                                     1,897          1,870       1,959      1,970
Provision for possible loan losses               8              2           4          4
Other income                                   225            224         324        209
Operating expenses                             883          1,033         956      1,025
----------------------------------------------------------------------------------------
Income before income taxes                   1,231          1,059       1,323      1,150
Provision for income taxes                     454            387         489        382
----------------------------------------------------------------------------------------
Net income                                   $ 777          $ 672       $ 834      $ 768
----------------------------------------------------------------------------------------
Earnings per share:
  Basic                                     $ 0.36         $ 0.31      $ 0.38     $ 0.35
  Diluted                                   $ 0.34         $ 0.29      $ 0.36     $ 0.33
----------------------------------------------------------------------------------------
Dividends per share                         $ 0.09         $ 0.09      $ 0.13     $ 0.13
----------------------------------------------------------------------------------------
</TABLE>

As a result of rounding, the sum of quarterly amounts may not equal the annual
amounts.
                                       25
<PAGE>   21

                       LOGO    LAUREL CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)

(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments," ("SFAS 107") requires disclosure of fair value
information about financial instruments, whether or not recognized in the
Consolidated Statement of Financial Condition. SFAS 107 excludes certain
financial instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company. The carrying amounts reported in
the Consolidated Statement of Financial Condition approximate fair value for the
following financial instruments; cash, money market investments, interest-
earning deposits with other institutions, investment securities and
mortgage-backed securities available for sale, FHLB stock and all deposits
except time deposits.

The net carrying value of investment securities held to maturity exceeded the
estimated fair value by approximately $215 at June 30, 1999. The fair market
value of investment securities held to maturity exceeded the carrying value by
approximately $94 at June 30, 1998. At both June 30, 1999 and 1998 the fair
market value of mortgage-backed securities held to maturity exceeded the net
carrying value by approximately $2 and $17, respectively. Estimated fair values
are based on quoted market prices, dealer quotes, and prices obtained from
independent pricing services. Refer to Notes 2 and 3 herein for the detail on
breakdowns by type of investment and mortgage-backed securities.

The fair value of loans and loans held for sale exceeded the carrying value by
approximately $687 and $4,713 at June 30, 1999 and 1998, respectively. Loans
with comparable characteristics including collateral and repricing structures
were segregated for valuation purposes. Each loan pool was separately valued
utilizing a discounted cash flow analysis. Projected monthly cash flows were
discounted to present value using a market rate for comparable loans.
Characteristics of comparable loans included remaining term, coupon interest and
estimated prepayment speeds.

The carrying amounts and estimated fair values of deposits at June 30, 1999 and
1998 were as follows:

<TABLE>
<CAPTION>
                                            June 30, 1999                       June 30, 1998
                                      Carrying       Estimated            Carrying       Estimated
                                       Amount        Fair Value            Amount        Fair Value
<S>                                 <C>            <C>                  <C>            <C>
-----------------------------------------------------------------------------------------------------
Non-interest-bearing:
  Demand accounts                       $  7,339         $  7,339           $  8,002         $  8,002
Interest-bearing:
  Now and MMDA accounts                   34,966           34,966             33,358           33,358
  Passbook accounts                       30,426           30,426             29,531           29,531
  Time deposits                          109,387          108,006            104,499          104,244
-----------------------------------------------------------------------------------------------------
Total Deposits                          $182,118         $180,737           $175,390         $175,135
-----------------------------------------------------------------------------------------------------
</TABLE>

The fair value estimates above do not include the benefit that results from the
low-cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market. Fair values for time deposits are estimated using
a discounted cash flow calculation that applies contractual cost currently being
paid in the existing portfolio to current market rates being offered locally for
deposits of similar remaining maturities. The mark-to-market valuation
adjustment for the time deposit portfolio consists of the present value of the
difference of these two cash flows, discounted at the assumed market rate of the
corresponding maturity.

The carrying amounts and estimated fair values of borrowed funds at June 30,
1999 and 1998 were as follows:

<TABLE>
<CAPTION>
                                            June 30, 1999                       June 30, 1998
                                      Carrying       Estimated            Carrying       Estimated
                                       Amount        Fair Value            Amount        Fair Value
<S>                                 <C>            <C>                  <C>            <C>
-----------------------------------------------------------------------------------------------------
Borrowed funds:
  FHLB advances                         $ 20,029         $ 19,895           $ 17,033         $ 17,090
-----------------------------------------------------------------------------------------------------
</TABLE>

Note continued
                                       26
<PAGE>   22

                       LOGO    LAUREL CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)

The fair value of borrowed funds is based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently offered for
advances of similar remaining maturities.

There is no material difference between the carrying value and the estimated
fair value of the Company's off-balance sheet items which totaled $7.0 million
and $7.7 million at June 30, 1999 and 1998, respectively, and are primarily
comprised of unfunded loan commitments which are generally priced at market at
the time of funding.

Fair value estimates are made at a specific point in time, based on relevant
market information about the financial instrument. Because no market exists for
a significant portion of the Company's financial instruments, fair value
estimates are based on judgements regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgement and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.

(16) LAUREL CAPITAL GROUP, INC.
       (PARENT COMPANY ONLY) FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                              June 30,     June 30,
STATEMENT OF FINANCIAL CONDITION                                1999         1998
<S>                                                           <C>          <C>
------------------------------------------------------------------------------------
ASSETS
Cash                                                           $   503      $   338
Other assets                                                       340          284
Investment in Laurel Savings Bank                               24,022       23,131
------------------------------------------------------------------------------------
  Total assets                                                 $24,865      $23,753
------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Other accrued expenses                                         $   335      $   247
------------------------------------------------------------------------------------
                                                                   335          247
------------------------------------------------------------------------------------
Stockholders' equity                                            24,530       23,506
------------------------------------------------------------------------------------
     Total liabilities and stockholders' equity                $24,865      $23,753
------------------------------------------------------------------------------------
</TABLE>

Note continued

<TABLE>
<CAPTION>
                                                             June        June        June
                                                             30,         30,         30,
STATEMENT OF OPERATIONS                                      1999        1998        1997
<S>                                                        <C>         <C>         <C>
-------------------------------------------------------------------------------------------
Dividends from subsidiary                                    $1,967       $ 930      $2,301
Other income                                                     57         102          95
Equity in undistributed income of Laurel Savings Bank         1,248       2,104          13
-------------------------------------------------------------------------------------------
                                                              3,272       3,136       2,409
-------------------------------------------------------------------------------------------
Operating expenses                                               94          71          86
-------------------------------------------------------------------------------------------
Income before income taxes                                    3,178       3,065       2,323
Provision (credit) for income taxes                              (5)         14           4
-------------------------------------------------------------------------------------------
Net income                                                   $3,183      $3,051      $2,319
-------------------------------------------------------------------------------------------
</TABLE>

Note continued

                                       27
<PAGE>   23

                       LOGO    LAUREL CAPITAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                             June        June        June
                                                             30,         30,         30,
STATEMENT OF CASH FLOWS                                      1999        1998        1997
<S>                                                        <C>         <C>         <C>
-------------------------------------------------------------------------------------------
Net income                                                  $ 3,183     $ 3,051     $ 2,319
Undistributed income of Laurel Savings Bank                  (1,248)     (2,104)        (13)
  Adjustments to reconcile net income to net cash
     provided by operating activities:
       Other--net                                                32         (17)         (5)
-------------------------------------------------------------------------------------------
       Net cash provided by operating activities              1,967         930       2,301
-------------------------------------------------------------------------------------------
Financing activities:
  Acquisition of treasury stock                                (644)         --      (1,626)
  Stock options exercised                                       155         141          44
  Dividends paid                                             (1,313)       (946)       (660)
-------------------------------------------------------------------------------------------
  Net cash used by financing activities                      (1,802)       (805)     (2,242)
-------------------------------------------------------------------------------------------
Net change in cash and cash equivalents                         165         125          59
-------------------------------------------------------------------------------------------
Cash and cash equivalents at the beginning of the period    $   338     $   213     $   154
Net change during the period                                    165         125          59
-------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period          $   503     $   338     $   213
-------------------------------------------------------------------------------------------
</TABLE>

(17) STOCK SPLIT

On December 18, 1997, the Company's Board of Directors declared a three-for-two
stock split payable on January 16, 1998 to stockholders of record on January 2,
1998. An amount equal to the par value of the shares issued has been transferred
from additional paid-in capital to common stock. The number of shares and per
share amounts have been restated to reflect this distribution.

(18) CONTINGENT LIABILITIES

The Company is subject to a number of asserted and unasserted potential claims
in the normal course of business. In the opinion of management, after
consultation with legal counsel, the resolution of these claims will not have a
material adverse effect on the Company's financial position, liquidity or
results of operation.

                                       28
<PAGE>   24

                       LOGO    LAUREL CAPITAL GROUP, INC.

SELECTED FIVE YEAR FINANCIAL DATA
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)

FINANCIAL CONDITION DATA:

<TABLE>
<CAPTION>
                                                         June 30,
                                   1999        1998        1997        1996        1995
-----------------------------------------------------------------------------------------
<S>                              <C>         <C>         <C>         <C>         <C>
Total assets                     $231,474    $220,986    $211,987    $196,947    $188,916
Loans, net                        151,390     151,124     144,670     143,532     143,091
Loans held for sale                 1,562       1,633       1,827       1,627       1,205
Mortgage-backed securities held
  to maturity                       1,072       1,051       1,220       1,546       8,222
Mortgage-backed securities
  available for sale               11,868      11,554      13,259      14,021       4,892
Investment securities held to
  maturity                         12,439      14,003      15,494       9,948       9,655
Investment securities available
  for sale                         35,549      25,539      15,494      11,639       2,057
Money market investments            3,711       3,532       9,086       6,291      12,085
Deposits                          182,118     175,390     175,019     164,683     163,308
FHLB advances                      20,029      17,033      11,044       6,327       2,000
Stockholders' equity               24,530      23,506      21,262      21,086      18,918
</TABLE>

OPERATING DATA:

<TABLE>
<CAPTION>
                                                         June 30,
                                   1999        1998        1997        1996        1995
-----------------------------------------------------------------------------------------
<S>                               <C>         <C>         <C>         <C>         <C>
Interest income                   $15,652     $15,765     $15,342     $14,785     $13,834
Interest expense                    8,067       8,069       7,715       7,319       6,347
-----------------------------------------------------------------------------------------
Net interest income before
  provision for loan losses         7,585       7,696       7,627       7,466       7,487
Provision for loan losses              18          18          30          30         100
-----------------------------------------------------------------------------------------
Net interest income after
  provision for loan losses         7,567       7,678       7,597       7,436       7,387
Net gain (loss) on
  investments, loans and
  mortgage-backed securities
  available for sale                  313         218         125          92         (31)
Other income                          707         764         592         535         513
Operating expenses                  3,743       3,897       4,651       3,777       3,752
-----------------------------------------------------------------------------------------
Income before income taxes          4,844       4,763       3,663       4,286       4,117
Income tax expense                  1,661       1,712       1,344       1,621       1,604
-----------------------------------------------------------------------------------------
Net income before cumulative
  effect of change in
  accounting principle              3,183       3,051       2,319       2,665       2,513
Cumulative effect of change in
  accounting principle                 --          --          --          --          30
-----------------------------------------------------------------------------------------
Net income                        $ 3,183     $ 3,051     $ 2,319     $ 2,665     $ 2,543
-----------------------------------------------------------------------------------------
Diluted earnings per share
  before cumulative effect of
  change in accounting
  principle                       $  1.39     $  1.32     $  1.00     $  1.15     $  1.10
Cumulative effect of change in
  accounting principle                 --          --          --          --         .01
-----------------------------------------------------------------------------------------
Diluted earnings per share        $  1.39     $  1.32     $  1.00     $  1.15     $  1.11
-----------------------------------------------------------------------------------------
</TABLE>

STATISTICAL PROFILE:

<TABLE>
<CAPTION>
                                                          June 30,
                                    1999        1998        1997        1996        1995
-----------------------------------------------------------------------------------------
<S>                                 <C>         <C>         <C>         <C>         <C>
Return on average assets             1.41%       1.43%       1.13%       1.39%       1.41%
Return on average equity            13.04%      13.58%      10.82%      13.29%      14.33%
Average equity to average assets
  ratio                             10.84%      10.49%      10.47%      10.43%       9.85%
Dividend payout ratio               43.17%      33.33%      29.33%      16.81%      12.61%
-----------------------------------------------------------------------------------------
</TABLE>

                                       29
<PAGE>   25

                       LOGO    LAUREL CAPITAL GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
OVERVIEW

For fiscal 1999, the Company continued achieving record earnings with a recorded
net income of $3.2 million or $1.39 per share on a diluted basis compared to
$3.1 million or $1.32 per share for fiscal 1998 and $2.3 million or $1.00 per
share for fiscal 1997. The net income for fiscal 1997 includes a special
one-time after tax charge of $636,000 or $0.27 per share to recapitalize the
SAIF.

The Company continued to report strong returns on average assets (ROA) and
average equity (ROE). The ROA for fiscal 1999, 1998 and 1997 was 1.41%, 1.43%
and 1.13%, respectively. The ROE for fiscal 1999, 1998 and 1997 was 13.04%,
13.58% and 10.82%, respectively. Excluding the special one-time SAIF charge, the
ROA and ROE for fiscal 1997 would have been 1.44% and 13.79%, respectively. Also
during fiscal 1999, the Company experienced continued growth in assets and
equity.

The Company's ongoing emphasis on controlling its non-interest expenses has
resulted in a low ratio of such expenses to total average assets and a low
efficiency ratio. These ratios for the Company continue to exceed such ratios
for national thrift industry averages of similarily sized institutions.

Total loan origination during fiscal 1999 was $41.5 million or a 6.8% decrease
compared to fiscal 1998. Mortgage lending activity decreased during fiscal 1999
as compared to the prior year and was concentrated more on the origination of
fixed rate mortgages due to current conditions in the Company's market area. In
addition, consumer lending activity increased by 14.8% during the same time
period due to the Company's continued emphasis on consumer lending.

The Company continues its efforts to further diversify its assets by emphasizing
loans and investments having relatively shorter terms and/or adjustable rates
such as secured home equity line-of-credit loans and consumer installment loans.

All known trends, events, uncertainties and current recommendations by the
regulatory authorities that would have a material effect on the Company's
liquidity, capital resources and results of operations have been considered in
the following discussion and analysis.

ASSET AND LIABILITY MANAGEMENT

The Company's vulnerability to interest rate risk exists to the extent that its
interest-bearing liabilities, consisting of customer deposits and borrowings,
mature or reprice more rapidly or on a different basis than its interest-earning
assets, which consist primarily of intermediate or long-term real estate loans
and investment and mortgage-backed securities.

The principal determinant of the exposure of the Company's earnings to interest
rate risk is the timing difference between the repricing or maturity of the
Company's interest-earning assets and the repricing or maturity of its
interest-bearing liabilities. If the maturities of such assets and liabilities
were perfectly matched, and if the interest rates borne by its assets and
liabilities were equally flexible and moved concurrently, neither of which is
the case, the impact on net interest income of rapid increases or decreases in
interest rates would be minimized.

The objective of interest rate risk management is to control the effects that
interest rate fluctuations have on net interest income and on the net present
value of the Company's interest-earning assets and interest-bearing liabilities.
Management and the Board are responsible for managing interest rate risk and
employing risk management policies that monitor and limit exposure to interest
rate risk. Interest rate risk is measured using net interest margin simulation
and asset/liability net present value sensitivity analyses. These analyses
provide a range of potential impacts on net interest income and portfolio equity
caused by interest rate movements.

The Company uses financial modeling to measure the impact of changes in interest
rates on the net interest margin. Assumptions used by the Office of Thrift
Supervision are made regarding loan prepayments and amortization rates of
passbook and NOW account withdrawal rates. In addition, certain financial
instruments may provide customers with a degree of "optionality," whereby a
shift in interest rates may result in customers changing to an alternative
financial instrument, such as from a variable to

                                       30
<PAGE>   26

                       LOGO    LAUREL CAPITAL GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------

fixed rate loan product. Thus, the effects of changes in future interest rates
on these assumptions may cause actual results to differ from simulated results.

The Company has established the following guidelines for assuming interest rate
risk:

Net interest margin simulation - Given a +/-200 basis point parallel shift in
interest rates, the estimated net interest margin may not change by more than
10% for a one-year period. Portfolio equity simulation - Portfolio equity is the
net present value of the Company's existing assets and liabilities. Given a +200
basis point change in interest rates, portfolio equity may not decrease by more
than 50% of total shareholders' equity. Given a -200 basis point change in
interest rates, portfolio equity may not decrease by more than 20% of total
shareholders' equity.

The following table illustrates the simulated impact of a 100 basis point ("bp")
or 200 basis point upward or downward movement in interest rates on net interest
income, return on average equity and earnings per share. This analysis was done
assuming that interest-earning asset levels at June 30, 1999 remained constant.
The impact of the rate movements was developed by simulating the effect of rates
changing over a twelve-month period from the June 30, 1999 levels.

Interest Rate Simulation Sensitivity Analysis
--------------------------------------------------------------------------------
                            Movements in interest rates from June 30, 1999 rates

<TABLE>
                                              Increase              Decrease
Simulated impact in the next 12 months   -------------------   -------------------
      Compared with June 30, 1999:       +100 bp    +200 bp    -100 bp    -200 bp
                                         --------   --------   --------   --------
<S>                                      <C>        <C>        <C>        <C>
  Net interest revenue
     increase/(decrease)                   1.1%       (2.8)%     (3.3)%     (8.3)%
  Return on average equity
     increase/(decrease)                    36bp       (92)bp    (108)bp    (272)bp
  Earnings per share
     increase/(decrease)                  $.04       $(.10)     $(.12)     $(.29)
                                           ---        ----      -----      -----
</TABLE>

The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds interest rate sensitive liabilities. A gap is considered negative when
the amount of interest rate sensitive liabilities exceeds interest rate
sensitive assets. During a period of rising interest rates, a negative gap would
tend to adversely affect net interest income, while a positive gap would tend to
result in an increase in net interest income. During a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to adversely affect net
interest income. The following table presents a summary of the Company's gap
position at June 30, 1999. In preparing the table below, adjustable-rate loans
are included in the period in which the interest rates are next scheduled to
adjust rather than in the period in which the loans mature. In addition, the
assumptions used by the Office of Thrift Supervision for regulatory purposes
have been made with respect to loan prepayments and contractual amortization
rates and passbook and NOW account withdrawal rates. The above assumptions may
not be indicative of the actual prepayments and withdrawals which may be
experienced by the Company.

                                       31
<PAGE>   27

                       LOGO    LAUREL CAPITAL GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                  3 Months      4-12        1-5       Over 5
  Interest Sensitivity Period      or Less     Months      Years       Years      Total
<S>                               <C>          <C>        <C>         <C>        <C>
-----------------------------------------------------------------------------------------
Rate sensitive assets:
  Loans and mortgage-backed
     securities                     $26,028    $38,344     $61,901    $41,485    $167,758
  Investment securities              12,238     15,117       1,521     29,265      58,141
-----------------------------------------------------------------------------------------
Total rate sensitive assets         $38,266    $53,461     $63,422    $70,750    $225,899
-----------------------------------------------------------------------------------------
Rate sensitive liabilities:
Deposits:
  Certificates of deposit           $19,641    $43,675     $39,449     $6,622    $109,387
  NOW and money funds                 7,185     12,374      10,814      4,593      34,966
  Passbooks                           1,390      3,796      12,977     12,263      30,426
-----------------------------------------------------------------------------------------
     Total deposits                 $28,216    $59,845     $63,240    $23,478    $174,779
Borrowings                           13,100         --       3,793      3,136      20,029
-----------------------------------------------------------------------------------------
Total rate sensitive liabilities    $41,316    $59,845     $67,033    $26,614    $194,808
-----------------------------------------------------------------------------------------
Interest sensitivity GAP:
  Interval                           (3,050)    (6,384)     (3,611)    44,136          --
  Cumulative                        $(3,050)   $(9,434)   $(13,045)   $31,091     $31,091
-----------------------------------------------------------------------------------------
Ratio of cumulative GAP to total
  assets                              (1.32)%    (4.08)%     (5.64)%   13.43%
-----------------------------------------------------------------------------------------
</TABLE>

The Company targets its one year gap to be in the range of +10.0% to -10.0%. At
June 30, 1999 and 1998, the Company's one year gap was (4.08)% and 6.90%,
respectively. As part of its effort to minimize the impact changes in interest
rates have on operating results, the Company continues to emphasize the
origination of interest-earning assets with adjustable rates and shorter
maturities and to extend the terms of its interest-bearing liabilities. The
Company also maintains a high level of liquid assets, which includes assets
available for sale, that could be reinvested at higher yields if interest rates
were to rise. Management believes its asset and liability strategies reduce the
Company's vulnerability to fluctuations in interest rates.

FINANCIAL CONDITION

The Company's consolidated assets totaled approximately $231.5 million at June
30, 1999, an increase of $10.5 million or 4.8% from June 30, 1998. The growth in
assets was primarily the result of increases in investment securities available
for sale. The growth was funded primarily from increases in savings deposits,
FHLB advances and income generated from current earnings.

                                       32
<PAGE>   28

                       LOGO    LAUREL CAPITAL GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------

The following table presents an analysis of the Company's average balance sheet,
net interest income and average yields earned on its interest-bearing assets and
average rates paid on its interest-bearing liabilities for the periods and as of
the date indicated. Information is based on average daily balances during the
periods presented which management believes is representative of the operations
of the Company.

<TABLE>
<CAPTION>
                           At                                            Year Ended June 30
                        June 30,                1999                            1998                            1997
                          1999      ---------------------------------------------------------------------------------------------
                         Average                          Average                         Average                         Average
                         Yield/     Average                Yield    Average                Yield    Average                Yield
                          Rate      Balance    Interest    Rate     Balance    Interest    Rate     Balance    Interest    Rate
<S>                     <C>         <C>        <C>        <C>       <C>        <C>        <C>       <C>        <C>        <C>
---------------------------------------------------------------------------------------------------------------------------------
Interest-earning
 assets:
 Mortgage loans 1            7.32%  $122,194   $ 9,326       7.63%  $121,266     $9,666      7.97%  $122,406   $ 9,760       7.97%
 Consumer and other
   loans 1                   8.02     31,669     2,528       7.98     25,637      2,153      8.40     24,401     2,075       8.50
---------------------------------------------------------------------------------------------------------------------------------
Total loans                  7.48    153,863    11,854       7.70    146,903     11,819      8.05    146,807    11,835       8.06
 Mortgage-backed
   securities                7.25     11,824       791       6.69     13,567        970      7.15     14,658     1,036       7.07
 Investment
   securities                5.62     45,626     2,554       5.60     42,688      2,660      6.23     35,513     2,311       6.51
 Interest-bearing
   deposits                  5.36      9,379       453       4.83      5,853        316      5.40      3,029       160       5.28
---------------------------------------------------------------------------------------------------------------------------------
Total
 interest-earning
 assets                      6.97%   220,692   $15,652       7.09%   209,011    $15,765      7.54%   200,007   $15,342       7.67%
Non-interest-earning
 assets                                4,584                           5,083                           4,724
---------------------------------------------------------------------------------------------------------------------------------
   Total Assets                     $225,276                        $214,094                        $204,731
---------------------------------------------------------------------------------------------------------------------------------
Interest-bearing
 liabilities:
 Savings deposits            4.12   $169,209   $ 7,059       4.17%  $166,498     $7,349      4.41   $163,562   $ 7,182       4.39
 Borrowings                  5.41     18,555     1,008       5.43     12,998        720      5.54      9,353       533       5.66
---------------------------------------------------------------------------------------------------------------------------------
Total
 interest-bearing
 liabilities                 4.25%   187,764   $ 8,067       4.30%   179,496     $8,069      4.50%   172,915   $ 7,715       4.46%
Non-interest-bearing
 liabilities                          13,096                          12,135                          10,382
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities                    200,860                         191,631                         183,297
Stockholders' equity                  24,416                          22,463                          21,434
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
 stockholders' equity               $225,276                        $214,094                        $204,731
---------------------------------------------------------------------------------------------------------------------------------
Net earning assets                  $ 32,928                        $ 29,515
Net interest
 income/average
 interest rate spread        2.72%             $ 7,585       2.79%               $7,696      3.04%             $ 7,627       3.21%
Net yield on
 interest-earning
 assets                                                      3.44%                           3.68%                           3.82%
Average
 interest-earning
 assets as a percent
 of average interest-
 bearing liabilities                   117.4%                          116.4%                          115.7%
---------------------------------------------------------------------------------------------------------------------------------

</TABLE>

1Includes loans on which the Company has discontinued accruing interest.

The Company continually seeks to increase its level of profitability while
maintaining its asset quality. This emphasis on earnings and asset quality has
resulted in an increase in net income from $2.5 million, before cumulative
effect of change in accounting principal, for fiscal 1995 to $3.2 million for
fiscal 1999 and a .32% ratio of non-performing assets to total assets at June
30, 1999. The Company has continued to focus its efforts on more evenly matching
the maturities and/or repricing characteristics of its interest-earning assets
and interest-bearing liabilities in order to minimize fluctuations that may
occur due to changes in market interest rates.

                                       33
<PAGE>   29

                       LOGO    LAUREL CAPITAL GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------

INVESTMENT SECURITIES HELD TO MATURITY AND INVESTMENT SECURITIES AVAILABLE FOR
SALE

The Company's investment securities held to maturity totaled $12.4 million at
June 30, 1999 which was a decrease of $1.6 million or 11.2% compared to the
level at June 30, 1998. The decrease was primarily due to the maturity of $16.0
million of such securities during fiscal 1999 partially offset by purchases of
$14.4 million of securities during the same period. The Company primarily
invests in government and corporate notes and bonds. Investment securities
available for sale totaled $35.5 million at June 30, 1999 or an increase of
$10.0 million compared to June 30, 1998. The increase was primarily due to the
purchases of approximately $9.4 million of municipal bonds. The increase in
purchases of investment securities available for sale was primarily due to the
investment of the funds generated from the increases in savings deposits and
FHLB advances.

MORTGAGE-BACKED SECURITIES HELD TO MATURITY AND MORTGAGE-BACKED SECURITIES
AVAILABLE FOR SALE

The total of all mortgage-backed securities was $12.9 million at June 30, 1999,
an increase of $335,000 or 2.7% compared to the level at June 30, 1998. This
increase was primarily due an increase in the volume of purchases of these
securities in fiscal 1999 as compared to fiscal 1998. During fiscal 1999, the
Company purchased $5.0 million of these securities compared to none in the prior
fiscal year. These purchases were offset by an increase in the principal
repayments on all mortgage-backed securities during fiscal 1999.

LOAN PORTFOLIO

Loans receivable increased $266,000 or .2% to $151.4 million during the fiscal
year ended June 30, 1999 as compared to an increase of $6.5 million or 4.5% for
the fiscal year ended June 30, 1998. Mortgage loan originations in fiscal years
1999 and 1998 amounted to $21.4 million and $27.0 million, respectively. The
Company originated primarily fixed rate loans in fiscal 1999 due to current
market conditions in the Bank's market area. Of the total amount of mortgage and
construction loans originated in fiscal 1999, $19.4 million or 90.5% were
fixed-rate mortgages as compared to $16.3 million or 60.3% in fiscal 1998.
Adjustable-rate mortgage and construction loan originations totaled $2.0 million
or 9.5% of total mortgage and construction loans originated in fiscal 1999 as
compared to $10.7 million or 39.7% of total mortgage and construction loans
originated in fiscal 1998.

Consumer loan originations, including home equity and other installment loans,
totaled $20.1 million in fiscal 1999, $17.5 million in fiscal 1998 and $15.4
million in fiscal 1997. The Company has placed a greater emphasis on other
installment lending including home equity loans, personal loans, auto loans and
other secured lines of credit due to the shorter term and higher yield
associated with such loans.

DEPOSIT PORTFOLIO

Savings deposits increased $6.7 million to $182.1 million during fiscal 1999.
This increase was due to the combined result of $500,000 of net deposit growth
and interest credited of approximately $6.2 million. Deposit increases occurred
in certificate of deposit accounts, NOW/checking accounts and passbook accounts
partially offset by decreases in money market accounts.

For the years ended June 30, 1999, 1998 and 1997, the Company had certificates
of deposit with remaining terms to maturity of three (3) to ten (10) years
aggregating $12.2 million, $11.4 million and $10.9 million, respectively. As
part of its asset and liability planning, the Company attempts to attract longer
term deposits, thereby reducing the interest rate sensitivity of its
interest-bearing liabilities.

                                       34
<PAGE>   30

                       LOGO    LAUREL CAPITAL GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------

BORROWINGS

Borrowings, consisting of FHLB advances, increased from $17.0 million at June
30, 1998 to $20.0 million at June 30, 1999. The Company used the additional
funds as part of its asset and liability management strategy.

STOCKHOLDERS' EQUITY

Stockholders' equity increased $1.0 million or 4.4% to $24.5 million at June 30,
1999 compared to $23.5 million at June 30, 1998. This increase primarily
resulted from comprehensive income of $2.7 million and $155,000 of stock options
exercised. These increases were reduced by the payment of cash dividends of $1.3
million on the Company's common stock, the repurchase of $644,000 of the
Company's common stock and the purchase of $96,000 of the Company's stock held
in a deferred compensation trust. Under regulations adopted by the Federal
Deposit Insurance Corporation ("FDIC"), the Company is required to maintain Tier
I (Core) capital equal to at least 4% of the Company's adjusted total assets and
Tier II (Supplementary) risk-based capital equal to at least 8% of the
risk-weighted assets. At June 30, 1999, the Company exceeded all of its
regulatory capital requirements. See "Liquidity and Capital Resources."

RESULTS OF OPERATIONS

The results of operations of the Company depend substantially on its net
interest income, which is determined by the interest rate spread between the
Company's interest-earning assets and interest-bearing liabilities and the
relative amounts of such assets and liabilities.

                                       35
<PAGE>   31

                       LOGO    LAUREL CAPITAL GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------

RATE/VOLUME ANALYSIS

The following table presents certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided with respect to changes attributable to (1) changes in
rate (change in rate multiplied by old volume), (2) changes in volume (changes
in volume multiplied by old rate), and (3) changes in rate-volume (change in
rate multiplied by the change in volume). Changes in net interest income due to
both volume and rate were combined with the changes of each based on their
proportionate amounts.

<TABLE>
<CAPTION>
                                                                     Fiscal 1999
                                                               Compared to Fiscal 1998
                                                             Increase (Decrease) Due to
---------------------------------------------------------------------------------------------
                                                                          Rate/
                                               Rate      Volume          Volume         Total
---------------------------------------------------------------------------------------------
<S>                                            <C>      <C>             <C>             <C>
Interest income on interest-earning assets:
  Mortgage loans                               $(411)       $  74            $ (3)      $(340)
  Consumer loans                                (107)         507             (25)        375
  Mortgage-backed securities                     (62)        (125)              8        (179)
  Investment securities                         (270)         183             (19)       (106)
  Interest-earning deposits                      (33)         190             (20)        137
---------------------------------------------------------------------------------------------
     Total                                      (883)         829             (59)       (113)
---------------------------------------------------------------------------------------------
Interest expense on interest-bearing
  liabilities:
  Deposits                                      (403)         120              (7)       (290)
  Borrowings                                     (14)         308              (6)        288
---------------------------------------------------------------------------------------------
     Total                                      (417)         428             (13)         (2)
---------------------------------------------------------------------------------------------
Net change in net interest income              $(466)       $ 401            $(46)      $(111)
---------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                      Fiscal 1998
                                                                Compared to Fiscal 1997
                                                              Increase (Decrease) Due to
----------------------------------------------------------------------------------------------
                                                                           Rate/
                                                Rate      Volume          Volume         Total
----------------------------------------------------------------------------------------------
<S>                                             <C>      <C>             <C>             <C>
Interest income on interest-earning assets:
  Mortgage loans                                $  (3)        $(91)           $ --       $(94)
  Consumer loans                                  (26)         105              (1)        78
  Mortgage-backed securities                       12          (77)             (1)       (66)
  Investment securities                           (98)         467             (20)       349
  Interest-earning deposits                         4          149               3        156
----------------------------------------------------------------------------------------------
     Total                                       (111)         553             (19)       423
----------------------------------------------------------------------------------------------
Interest expense on interest-bearing
  liabilities:
  Deposits                                         37          129               1        167
  Borrowings                                      (11)         202              (4)       187
----------------------------------------------------------------------------------------------
     Total                                         26          331              (3)       354
----------------------------------------------------------------------------------------------
Net change in net interest income               $(137)        $222            $(16)      $ 69
----------------------------------------------------------------------------------------------
</TABLE>

                                       36
<PAGE>   32

                       LOGO    LAUREL CAPITAL GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------

INTEREST INCOME ON LOANS AND LOANS HELD FOR SALE

Interest on loans and loans held for sale increased by $35,000 or .3% in fiscal
1999 primarily due to a $7.0 million increase in the average balance of the
portfolio and, in particular, the consumer loan portfolio. This increase was
partially offset by a decrease in the average yield earned on the portfolio from
8.05% during fiscal 1998 to 7.70% during fiscal 1999. The average balance of the
consumer loan portfolio increased by $6.0 million or 23.5% and the average
balance of the mortgage loan portfolio increased by $928,000 or .8% during
fiscal 1999. Interest on loans and loans held for sale decreased by $16,000 or
 .1% in fiscal 1998 primarily due to a decrease in the average yield earned on
the portfolio from 8.06% during fiscal 1997 to 8.05% during fiscal 1998. The
average balance of the mortgage loan portfolio decreased by $1.1 million or .9%
and the average balance of the consumer loan portfolio increased by $1.2 million
or 5.1% during fiscal 1998. The decrease in the average yield during fiscal 1999
and 1998 was primarily due to increased originations of home equity loans that
have lower rates of interest due to the competitive interest rates in the
Company's market area.

INTEREST INCOME ON MORTGAGE-BACKED SECURITIES HELD TO MATURITY AND
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE

Interest income on all mortgage-backed securities decreased by $179,000 or 18.5%
during fiscal 1999 primarily due to a $1.7 million or 12.9% decrease in the
average outstanding balance. Also contributing to this decrease was a decrease
in the average yield from 7.15% in fiscal 1998 to 6.69% in fiscal 1999. Interest
income on mortgage-backed securities decreased $66,000 or 6.4% during fiscal
1998 primarily due to a $1.1 million decrease in the average outstanding
balance. This decrease was partially offset by an increase in the average yield
from 7.07% in fiscal 1997 to 7.15% in fiscal 1998. The decrease in the average
outstanding balance was primarily due to repayments of the loans underlying the
mortgage-backed securities.

INTEREST INCOME ON INVESTMENTS HELD TO MATURITY AND INVESTMENTS AVAILABLE FOR
SALE

Interest on investments held to maturity and investments available for sale
decreased by $106,000 or 4.0% during fiscal 1999 primarily due to a decrease in
the average yield on these investments from 6.23% in fiscal 1998 to 5.60% in
fiscal 1999. This decrease was partially offset by a $2.9 million or 6.9%
increase in the average balance of these securities during fiscal 1999. Interest
on investments held to maturity and investments available for sale increased by
$349,000 or 15.1% during fiscal 1998 primarily due to an $7.2 million increase
in the average balance of these securities. This increase was partially offset
by a decrease in the average yield on these investments from 6.51% in fiscal
1997 to 6.23% in fiscal 1998. The increase in the average outstanding balance
during both fiscal 1999 and 1998 was primarily due to the increased purchases of
these securities with the funds generated from the increases in savings deposits
and FHLB advances.

                                       37
<PAGE>   33

                       LOGO    LAUREL CAPITAL GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------

INTEREST INCOME ON INTEREST-EARNING DEPOSITS

Interest on deposits, consisting of interest-bearing deposits maintained with
the FHLB of Pittsburgh, increased $137,000 or 43.4% during fiscal 1999 compared
to fiscal 1998 and increased by $156,000 or 97.5% during fiscal 1998 compared to
fiscal 1997. The increase in fiscal 1999 was primarily due to a $3.5 million
increase in the average outstanding balance of these deposits. This increase was
partially offset by a decrease in the average yield from 5.40% in fiscal 1998 to
4.83% in fiscal 1999. The increase in fiscal 1998 was primarily due to a $2.8
million increase in the average outstanding balance of these deposits. In
addition, the average yield increased from 5.28% in fiscal 1997 to 5.40% in
fiscal 1998.

INTEREST EXPENSE ON SAVINGS DEPOSITS

Interest expense on savings deposits decreased by $290,000 or 3.9% in fiscal
1999 primarily due to a decrease in the average rate paid on deposits from 4.41%
in fiscal 1998 to 4.17% in fiscal 1999. This decrease was partially offset by a
$2.7 million increase in the average outstanding balance of savings deposits.
Interest expense on savings deposits increased by $167,000 or 2.3% in fiscal
1998 primarily due to a $2.9 million increase in the average outstanding balance
of savings deposits. The average rate paid on deposits rose slightly from 4.39%
in fiscal 1997 to 4.41% in fiscal 1998. The increase in the average balance of
deposits during both fiscal 1999 and 1998 was primarily due to increased
marketing of the Company's certificate of deposit and checking products.

INTEREST EXPENSE ON BORROWINGS

Interest on borrowings increased $288,000 or 40.0% in fiscal 1999 primarily due
to a $5.6 million or 42.8% increase in the average outstanding balance. This
increase was partially offset by a decrease in the average rate paid on
borrowings from 5.54% in fiscal 1998 to 5.43% in fiscal 1999. Interest on
borrowings increased $187,000 or 35.1% in fiscal 1998 primarily due to a $3.6
million increase in the average outstanding balance. In addition, the average
rate paid on borrowings decreased from 5.66% in fiscal 1997 to 5.54% in fiscal
1998. The Company used the funds borrowed during fiscal 1999 and 1998 as part of
its asset and liability strategy.

NET INTEREST INCOME

Net interest income decreased by $111,000 or 1.4% in fiscal 1999 as compared to
fiscal 1998 and increased by $69,000 or .9% in fiscal 1998 over the prior fiscal
year. The decrease in fiscal 1999 was primarily due to decreases in the average
yields on the loan and the investment portfolios and an increase in the average
outstanding balance of borrowings partially offset by a decrease in the average
rate paid on deposits. The increase in fiscal 1998 was primarily due to
increases in the average outstanding balances of investments available for sale,
loans receivable and interest-earning deposits with other institutions partially
offset by increases in the average outstanding balances of deposit accounts and
borrowings.

Interest-earning assets as a percent of interest-bearing liabilities amounted to
117.4%, 116.4% and 115.7% at June 30, 1999, 1998 and 1997, respectively, and the
average interest rate spread was 2.79%, 3.04% and 3.21% for fiscal 1999, 1998
and 1997, respectively. The Company's average interest rate spread has decreased
from 3.21% in fiscal 1997 to 2.79% in fiscal 1999 primarily due to decreases in
the average rates earned on the Company's loan and investment portfolios. The
Company's net interest income continued to exceed its total other expenses in
fiscal 1999 and 1998, and the Company intends to continue to manage its assets
and liabilities in order to maintain its net interest income at levels in excess
of total other expenses.

                                       38
<PAGE>   34

                       LOGO    LAUREL CAPITAL GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------

PROVISION FOR LOAN LOSSES

Financial institutions are subject to the risk of loan losses as one of the
costs of lending. While the Company recognizes as losses all loans which are
determined to be uncollectible, experience dictates that at any point in time,
losses may exist in the portfolio which cannot be specifically identified. As a
result, a provision for such unidentifiable losses is established and charged
against current earnings to represent management's best estimate of such
probable losses. The provision for loan losses for fiscal 1999, 1998 and 1997
amounted to $18,000, $18,000 and $30,000, respectively. Such provisions were the
result of an analysis of the allowance for loan losses performed in connection
with a review of the Company's loan portfolio.

At each of June 30, 1999, 1998 and 1997, the allowance for loan losses was
approximately $1.9 million. This amount represented 1.2%, 1.2% and 1.3%,
respectively, of the total loan portfolio at such dates.

A review is conducted at least quarterly by management to determine that the
allowance for loan losses is appropriate to absorb estimated loan losses. In
determining the appropriate level of the allowance for loan losses,
consideration is given to general economic conditions, diversification of loan
portfolios, historic loss experience, identified credit problems, delinquency
levels and adequacy of collateral. In consideration of the above, management has
assessed the risks in the loan portfolio and has determined that no significant
changes have occurred during the fiscal year ended June 30, 1999. Thus, the
level of the allowance for loan losses is substantially unchanged from June 30,
1998. Although management believes that the current allowance for loan losses is
appropriate, future additions to the reserve may be necessary due to changes in
economic conditions and other factors. In addition, as an integral part of their
periodic examination, certain regulatory agencies review the adequacy of the
Bank's allowance for loan losses and may direct the Bank to make additions to
the allowance based on their judgement. No such additions were required to be
made during the Company's most recent examination.

During fiscal 1996, the Company adopted SFAS No. 114 "Accounting by Creditors
for Impairment of a Loan." SFAS 114 defines the term "impaired loan" and gives
the creditor ways to measure the impairment. The measurement of impairment may
be based on (1) the present value of the expected future cash flows of the
impaired loan discounted at the loan's original effective interest rate, (2) the
observable market price of the impaired loan or (3) the fair value of the
collateral of a collateral dependent loan. The adoption of SFAS 114 has not been
material to the Company's operations.

OTHER INCOME

Fees and service charges decreased by $53,000 or 8.9% to $542,000 in fiscal 1999
and increased by $119,000 or 25.0% in fiscal 1998. The decrease in fiscal 1999
was primarily due to decreases in the amount of fees and service charges earned
on the Bank's NOW accounts. The increase in fiscal 1998 was primarily due to
increases in the fees and service charges earned on the Bank's NOW accounts.

During fiscal 1999, the Company realized net gains of $313,000 on investments,
mortgage-backed securities and loans in its available for sale portfolio. Gains
of $296,000 and $17,000 were recorded on the sale of investment securities and
loans, respectively. During fiscal 1998, the Company realized net gains of
$218,000 on investments, mortgage-backed securities and loans in its available
for sale portfolio. Gains of $186,000 and $32,000 were recorded on the sale of
investment securities and loans, respectively.

Other operating income, which primarily consists of miscellaneous fees, rents,
and other income, was $165,000, $169,000 and $116,000 in fiscal 1999, 1998 and
1997, respectively. The increase in fiscal 1998 was primarily due to an increase
in ATM fees.

Total other income increased $38,000 or 3.9% in fiscal 1999 and by $265,000 or
37.0% in fiscal 1998. The increase in fiscal 1999 was primarily due to increases
in gains on the sale of investment securities and loans available for sale. The
increase in fiscal 1998 was primarily due to the increases in fees and service
charges and gains on the sale of investment securities and loans available for
sale.

                                       39
<PAGE>   35

                       LOGO    LAUREL CAPITAL GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------

OPERATING EXPENSES

Compensation and employee benefits, which is the largest component of total
operating expenses, increased by $71,000 or 4.1% in fiscal 1999 and decreased by
$16,000 or .9% in fiscal 1998. The increase in fiscal 1999 was primarily due to
normal salary and benefit increases. The decrease in fiscal 1998 was primarily
due to an increase in the deferral of compensation costs associated with the
origination of loans as a result of the increased loan originations during
fiscal 1998. These deferred costs will be written off over future periods based
on the lives of the loans. The decrease in fiscal 1998 was partially offset by
normal salary and benefit increases.

Premises and occupancy expense increased by $17,000 or 3.4% in fiscal 1999 and
by $7,000 or 1.4% in fiscal 1998. The increase in fiscal 1999 was primarily due
to increases in furniture, fixtures and equipment expenses partially offset by
decreases in repairs and maintenance. The increase in fiscal 1998 was primarily
due to increases in repairs and maintenance and furniture, fixture and equipment
depreciation which were partially offset by decreases in insurance and
furniture, fixture and equipment expenses.

Federal insurance premiums decreased by $4,000 or 3.7% in fiscal 1999 and
decreased by $40,000 or 26.9% in fiscal 1998. The decrease in fiscal 1998 was
due to the FDIC's one-time special assessment to recapitalize the SAIF in fiscal
1997. The Company incurred a $1.1 million pre-tax charge as a result of this
assessment however, the premium rate for federal deposit insurance decreased to
approximately 6.5 basis points in January of 1997 from 23 basis points as a
result of the recapitalization of the SAIF. The amount of the premium is based
upon the average amount of deposits outstanding.

In fiscal 1999 the Company had a net loss of $26,000 from its real estate owned
("REO"). In fiscal 1998 and 1997, the Company had net gains of $5,000 and
$31,000, respectively.

Data processing expenses decreased by $47,000 or 18.4% in fiscal 1999 and
increased by $3,000 or 1.2% in fiscal 1998. The decrease in fiscal 1999 was the
result of decreased pricing. The increase in fiscal 1998 was primarily
attributable to increases in certain service bureau charges.

Professional fees decreased by $263,000 in fiscal 1999 and increased by $309,000
in fiscal 1998. The decrease in fiscal 1999 and the increase in fiscal 1998 were
both primarily due to legal fees incurred in litigation brought by the Company
against another financial institution.

INCOME TAXES

Income taxes decreased $51,000 or 3.0% in fiscal 1999 and increased $368,000 or
27.4% in fiscal 1998 over the comparable prior years. The decrease in fiscal
1999 was due to a decrease in the Company's effective tax rate due to increased
purchases of non-taxable municipal obligations during the past year. The
increase in fiscal 1998 was primarily due to higher pre-tax income partially
offset by a decrease in the Company's effective tax rate.

NET INCOME

Net income increased $132,000 or 4.3% in fiscal 1999 and increased $732,000 or
31.6% in fiscal 1998 primarily due to the $1.1 million pre-tax special one-time
SAIF assessment in fiscal 1997. Excluding that assessment, net income increased
$96,000 or 3.3%in fiscal 1998.

LIQUIDITY AND CAPITAL RESOURCES

The Company's assets increased from $212.0 million at June 30, 1997 to $221.0
million at June 30, 1998, and to $231.5 million at June 30, 1999. Stockholders'
equity increased from $21.3 million at June 30, 1997 to $23.5 million at June
30, 1998 and $24.5 million at June 30, 1999. At June 30, 1999, stockholders'
equity amounted to 10.6% of the Company's total assets under generally accepted
accounting principles ("GAAP").

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<PAGE>   36

                       LOGO    LAUREL CAPITAL GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------

The Company is currently required to maintain Tier I (Core) capital equal to at
least 4.0% of its adjusted total assets and Tier II (Supplementary) risk-based
capital equal to at least 8.0% of its risk-weighted assets. At June 30, 1999,
the Company substantially exceeded all of these requirements with Tier I and
Tier II ratios of 10.46% and 20.93%, respectively.

During the fiscal years ended June 30, 1999, 1998 and 1997, the Company had
positive cash flows from operating activities. Cash and cash equivalents
increased by $734,000, decreased by $4.0 million and increased by $5.7 million
for the fiscal years ended June 30, 1999, 1998 and 1997, respectively. See
Consolidated Statements of Cash Flows.

Cash flows from operating activities for the periods covered by the Consolidated
Statements of Cash Flows have been primarily related to net income and
operations. Operating activities provided $2.9 million of cash in fiscal 1999,
$3.4 million in fiscal 1998 and $1.9 million in fiscal 1997.

Investing activities used cash on a net basis of $9.9 million in fiscal 1999,
$12.9 million in fiscal 1998 and $8.9 million in fiscal 1997. This was primarily
due to the amount of loans originated and the purchase of investment securities
and mortgage-backed securities which were greater than cash provided by the
sales, maturities and periodic principal payments received on investments and
loans.

Cash flows from financing activities for the periods covered by the Consolidated
Statements of Cash Flows have been primarily related to changes in deposits and
borrowings. Financing activities generated $7.8 million of cash in fiscal 1999
due to a net increase of $6.7 million in deposits, $3.0 million in FHLB advances
and $155,000 from stock options exercised. These increases were partially offset
by $1.3 million of cash dividends paid, $644,000 of treasury stock acquired and
a decrease of $123,000 in advance deposits by borrowers for taxes and insurance.
Financing activities generated $5.5 million of cash in fiscal 1998 due to a net
increase of $6.0 million in FHLB advances, $371,000 in deposits and $141,000
from stock options exercised. These increases were partially offset by $946,000
of cash dividends paid and a decrease of $11,000 in advance deposits by
borrowers for taxes and insurance.

The Company's primary source of funds consists of deposits bearing market rates
of interest, loan repayments and current earnings. Also, advances from the FHLB
of Pittsburgh may be used on short term basis to compensate for savings outflows
or on a long term basis to support lending and investment activities.

The Company uses its capital resources principally to meet its on-going
commitments to fund maturing certificates of deposit and deposit withdrawals,
fund existing and continuing loan commitments, maintain its liquidity and meet
operating expenses. At June 30, 1999, the Company had commitments to originate
loans totalling $7.0 million. Scheduled maturities of certificates of deposit
during fiscal 2000 totaled $63.3 million at June 30, 1998. Management believes
that by evaluating competitive instruments and pricing in its market area, the
Company can generally retain a substantial portion of its maturing certificates
of deposit.

IMPACT OF INFLATION AND CHANGING PRICES

The financial statements and related data presented herein have been prepared in
accordance with GAAP, which requires the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation. Unlike most
industrial companies, substantially all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effect of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services, since
such prices are affected by inflation to a larger extent than interest rates.

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<PAGE>   37

                       LOGO    LAUREL CAPITAL GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------

YEAR 2000

The Company outsources its primary data processing functions. A challenging
problem exists as the millennium ("year 2000") or ("Y2K") approaches as many
computer systems worldwide do not have the capability of recognizing the year
2000 or years thereafter.

The Company has established a management committee to identify all of its
functions potentially affected by the year 2000 with emphasis placed on "mission
critical" functions. Due to the critical issues of the Y2K problem, quarterly
reports are made to Company's Board of Directors detailing the progress made in
preparing for the year 2000. The Committee developed a Year 2000 Plan to ensure
the re-programming or replacement of the affected systems. The plan was
developed using recommended guidance provided by the Company's primary regulator
and encompasses five phases: awareness, assessment, renovation, validation and
implementation. These phases have enabled the Company to identify problem areas,
develop appropriate plans for action and ensure adequate testing of the affected
systems to validate the Company's readiness for the year 2000.

As part of its Year 2000 Plan, the Company has developed a Business Resumption
Contingency Plan to address actions to be taken in the event a mission critical
system fails to perform in a normal manner due to a system or supplier failure.
In addition to regulatory reviews, the Company's Year 2000 plan has been
reviewed by an independent third party and found to be appropriate.

The Company has also contacted its largest borrowers to determine the extent
they may be materially affected by potential year 2000 problems. To date, the
Company has received confirmations from its mission critical vendors that
corrections have been made and testing has been completed to address the issues
associated with the year 2000 problem.

During the fourth quarter of fiscal 1999, the Company completed the replacement
of various hardware and software components at a cost of approximately $300,000
that will be depreciated over future periods. In addition, the Company has begun
to address the potential liquidity risks posed by the year 2000 and believes it
has adequate alternative funding sources available to adequately serve the needs
of its customers.

The Company does not anticipate that the year 2000 issue will pose any
significant operational problems or will have any material impact on its results
of operations. However, the failure of external power or telecommunication
suppliers may have a material impact on the operations of the Company.

RECENT ACCOUNTING DEVELOPMENTS

Effective July 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement requires that all items recognized under
accounting standards as components of comprehensive earnings be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This statement also requires that an entity classify items
of other comprehensive earnings by their nature in a financial statement. For
example, other comprehensive earnings may include foreign currency transaction
adjustments, minimum pension liability adjustments, and unrealized gains and
losses on marketable securities classified as available for sale. Adoption had
no impact on reported results.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for fiscal years beginning after December
31, 1997. The adoption of this standard did not have a material impact on the
Company's reporting.

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<PAGE>   38

                       LOGO    LAUREL CAPITAL GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------

In June 1998, FASB issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. The provisions of this statement require that derivative
instruments be carried at fair value on the balance sheet. The statement
continues to allow derivative instruments to be used to hedge various risks and
sets forth specific criteria to be used to determine when hedge accounting can
be used. The statement also provides for offsetting changes in fair value or
cash flows of both the derivative and the hedged asset of liability to be
recognized in earnings in the same period; however, any changes in fair value or
cash flow that represent the ineffective portion of the hedge are required to be
recognized in earnings and cannot be deferred. For derivative instruments not
accounted for as hedges, changes in fair value are required to be recognized in
earnings.

The provisions of this statement become effective beginning with the fiscal year
2001 interim reporting. Although the statement allows for early adoption on any
quarterly period after June 1998, the Company has no plans to adopt the
provisions of SFAS No 133 prior to the effective date. The impact of adopting
provisions of this statement on the Company's financial position, results of
operations and cash flow subsequent to the effective date is not currently
estimable and will depend on the financial position of the Company and the
future and purpose of the derivative instruments in use by management at that
time. No such instruments were used by the Company during fiscal 1999.

On January 1, 1999, the Company adopted the provisions of the American Institute
of Certified Public Accountants Statement of Position ("SOP") No 98-5 on
reporting on the costs of start-up activities. This SOP requires that costs of
start-up activities be expensed as incurred. Initial application of this SOP is
to be reported as a cumulative effect of a change in accounting principle. The
adoption of SOP 98-5 had no impact on the Company's financial position and
results of operations.

On January 1, 1999, the Company adopted the provisions of SOP No. 98-1 on
accounting for the costs of computer software developed or obtained for internal
use. This SOP requires the capitalization of certain costs incurred in
connection with developing or obtaining software for internal use. The adoption
of SOP No. 98-1 was immaterial to the Company's financial position and results
of operations.

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