<PAGE>   1

                       LOGO    LAUREL CAPITAL GROUP, INC.

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

KPMG Letterhead

<Table>
<S>                                                          <C>
One Mellon Bank Center                                       Telephone 412 391 9710
Pittsburgh, PA 15219                                         Fax 412 391 8963
</Table>

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, 2001 and 2000, 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, 2001. 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 auditing standards generally accepted
in the United States of America. 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2001, in conformity with accounting principles generally accepted
in the United States of America.

                                         /s/ KPMG LLP

Pittsburgh, Pennsylvania
August 10, 2001

Footnote graphic
KPMG LLP. KPMG LLP, a U.S. limited liability partnership, is
a member of KPMG International, a Swiss association.
                                        6
<PAGE>   2

                       LOGO    LAUREL CAPITAL GROUP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
--------------------------------------------------------------------------------
At June 30, 2001 and 2000

<Table>
<Caption>
(in thousands, except for per share data)                         2001        2000
----------------------------------------------------------------------------------
<S>                                                           <C>         <C>
ASSETS
Cash                                                          $  1,045    $    822
Interest-earning deposits with other institutions                8,669       4,096
Investment securities available for sale (note 2)               39,762      38,665
Investment securities held to maturity (market value of
  $14,129 and $21,144)(note 2)                                  13,937      21,931
Mortgage-backed securities available for sale (note 3)           9,998      10,947
Mortgage-backed securities held to maturity (market value of
  $152 and $396) (note 3)                                          150         397
Loans receivable, held for sale (note 4)                         1,701       1,514
Loans receivable                                               178,667     171,319
Allowance for loan losses                                       (1,759)     (1,798)
----------------------------------------------------------------------------------
  Loans receivable, net (notes 4 and 5)                        176,908     169,521
Federal Home Loan Bank stock (note 6)                            1,706       1,671
Real estate owned                                                  290          --
Accrued interest receivable:
  Loans                                                            960         874
  Interest-earning deposits and investments                        687         790
  Mortgage-backed securities                                        56          67
Office properties and equipment, net of accumulated
  depreciation (note 7)                                          1,271       1,413
Prepaid expenses and sundry assets                                 872       1,365
----------------------------------------------------------------------------------
     Total Assets                                             $258,012    $254,073
==================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Savings deposits (note 8)                                   $205,636    $192,663
  FHLB advances (note 9)                                        21,626      33,424
  Advance deposits by borrowers for taxes and insurance          2,850       3,092
  Accrued interest payable on savings deposits                     563         404
  Accrued income taxes (note 10)                                   130         239
  Other accrued expenses and sundry liabilities                  1,069       1,005
----------------------------------------------------------------------------------
     Total Liabilities                                         231,874     230,827
----------------------------------------------------------------------------------
Stockholders' Equity (note 11)
  Common stock, $.01 par value; 5,000,000 shares authorized;
     2,348,863 and 2,329,272 shares issued, respectively            23          23
  Additional paid-in capital                                     5,322       5,224
  Treasury stock, at cost (389,895 and 328,670 shares,
     respectively)                                              (5,553)     (4,711)
  Retained earnings                                             26,427      24,120
  Accumulated other comprehensive income (loss), net of tax
     of $171 and $(518), respectively                              331      (1,007)
  Stock held in deferred compensation trust                       (412)       (403)
----------------------------------------------------------------------------------
     Total Stockholders' Equity                                 26,138      23,246
----------------------------------------------------------------------------------
     Total Liabilities and Stockholders' Equity               $258,012    $254,073
==================================================================================
</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, 2001, 2000 and 1999

<Table>
<Caption>
(in thousands, except for earnings per share data)          2001          2000          1999
--------------------------------------------------------------------------------------------
<S>                                                   <C>           <C>           <C>
Interest income:
  Loans receivable                                    $   13,642    $   11,967    $   11,854
  Mortgage-backed securities                                 769           836           791
  Investment securities:
    Taxable                                                1,405         1,379         1,423
    Tax-exempt                                             2,415         2,342         1,131
  Interest-earning deposits                                  149            86           453
--------------------------------------------------------------------------------------------
    Total interest income                                 18,380        16,610        15,652
Interest expense:
  Savings deposits (note 8)                                8,282         7,291         7,059
  FHLB advances (note 9)                                   1,974         1,290         1,008
--------------------------------------------------------------------------------------------
    Total interest expense                                10,256         8,581         8,067
--------------------------------------------------------------------------------------------
Net interest income before provision for loan losses       8,124         8,029         7,585
Provision for loan losses                                     18            18            18
--------------------------------------------------------------------------------------------
Net interest income after provision for loan losses        8,106         8,011         7,567
--------------------------------------------------------------------------------------------
Other income:
  Service charges                                            740           765           679
  Gain on the sale of investment securities
    available for sale                                        82            --           296
  Gain on the sale of loans held for sale                     14            12            17
  Other operating income                                      70            63            68
  Other non-operating income                                 325            --            --
--------------------------------------------------------------------------------------------
    Total other income                                     1,231           840         1,060
--------------------------------------------------------------------------------------------
Operating expenses:
  Compensation and employee benefits (note 12)             2.022         1,880         1,805
  Premises and occupancy costs                               550           569           504
  Federal insurance premiums                                  38            72           105
  Net loss on real estate owned                               --            32            26
  Data processing expense                                    219           207           208
  Professional fees                                          155           214           224
  Other operating expenses                                 1,051           945           911
--------------------------------------------------------------------------------------------
    Total operating expenses                               4,035         3,919         3,783
--------------------------------------------------------------------------------------------
Income before income taxes                                 5,302         4,932         4,844
--------------------------------------------------------------------------------------------
Provision for income taxes (note 10):
  Federal                                                  1,388         1,298         1,329
  State                                                      275           226           332
--------------------------------------------------------------------------------------------
    Total income taxes                                     1,663         1,524         1,661
--------------------------------------------------------------------------------------------
  Net income                                          $    3,639    $    3,408    $    3,183
============================================================================================
Earnings per share (note 1):
  Basic
    Net income                                        $     1.85    $     1.62    $     1.45
    Average number of shares outstanding               1,963,365     2,107,711     2,188,014
--------------------------------------------------------------------------------------------
  Diluted
    Net income                                        $     1.79    $     1.56    $     1.39
    Average number of shares outstanding               2,036,609     2,180,490     2,294,324
--------------------------------------------------------------------------------------------
Dividends paid per share                              $     0.68    $     0.64    $     0.60
============================================================================================
</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, 2001, 2000 and 1999

<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, 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
  income (loss)            --          --          --      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
Comprehensive income:
  Net income               --          --          --      3,408              --             --            3,408
  Other comprehensive
    loss, net of tax
    $(420)                 --          --          --         --            (817)            --             (817)
----------------------------------------------------------------------------------------------------------------
Total comprehensive
  income (loss)            --          --          --      3,408            (817)            --            2,591
Stock options
  exercised (4,974
  shares)                  --          27          --         --              --             --               27
Dividends paid             --          --          --     (1,358)             --             --           (1,358)
Treasury stock
  purchased (176,550
  shares)                  --          --      (2,441)        --              --             --           (2,441)
Stock purchased by
  deferred
  compensation trust       --          --          --         --              --           (103)            (103)
----------------------------------------------------------------------------------------------------------------
Balance, June 30,
  2000                    $23      $5,224     $(4,711)   $24,120         $(1,007)         $(403)         $23,246
Comprehensive income:
  Net income               --          --          --      3,639              --             --            3,639
  Other comprehensive
    income, net of
    tax $690               --          --          --         --           1,338             --            1,338
----------------------------------------------------------------------------------------------------------------
Total comprehensive
  income                   --          --          --      3,639           1,338             --            4,977
Stock options
  exercised (19,591
  shares)                  --          98          --         --              --             --               98
Dividends paid             --          --          --     (1,332)             --             --           (1,332)
Treasury stock
  purchased (61,225
  shares)                  --          --        (842)        --              --             --             (842)
Stock purchased by
  deferred
  compensation trust       --          --          --         --              --             (9)              (9)
----------------------------------------------------------------------------------------------------------------
Balance, June 30,
  2001                    $23      $5,322     $(5,553)   $26,427          $  331          $(412)         $26,138
================================================================================================================
</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, 2001, 2000 and 1999

<Table>
<Caption>
(in thousands)                                                    2001        2000        1999
----------------------------------------------------------------------------------------------
<S>                                                           <C>         <C>         <C>
Net income:                                                   $  3,639    $  3,408    $  3,183
  Adjustments to reconcile net income to net cash
   provided by operating activities:
    Depreciation                                                   195         206         147
    Provision for loan losses                                       18          18          18
    Net loss on the sale of real estate owned                        1          18          15
    Net gain on the sale of investment securities
      available for sale                                           (82)         --        (296)
    Gain on the sale of loans held for sale                        (14)        (12)        (17)
    Amortization of deferred loan fees                            (113)       (104)       (169)
    Origination of loans held for sale                            (860)       (805)       (864)
    Proceeds from the sale of loans held for sale                  687         865         952
    Decrease (increase) in accrued interest receivable              28        (322)        (76)
    Increase (decrease) in accrued interest payable                159         (96)        (23)
    Other--net                                                    (191)        (23)          3
----------------------------------------------------------------------------------------------
      Net cash provided by operating activities                  3,467       3,153       2,873
----------------------------------------------------------------------------------------------
Investing activities:
  Purchase of investment securities held to maturity                --     (13,523)    (14,387)
  Purchase of investment securities available for sale          (1,691)     (4,264)    (13,912)
  Purchase of mortgage-backed securities held to maturity           --          --      (1,011)
  Purchase of mortgage-backed securities available for sale         --      (1,000)     (3,970)
  Purchase of FHLB stock                                           (35)       (394)         --
  Proceeds from maturities of investment securities held to
    maturity                                                     8,000       4,050      16,000
  Proceeds from maturities of investment securities
    available for sale                                           1,260          --           3
  Proceeds from the sale of investment securities available
    for sale                                                     1,097          --       3,581
  Principal repayments of mortgage-backed securities
    available for sale                                           1,230       1,737       3,416
  Principal repayments of mortgage-backed securities held to
    maturity                                                       247         675         990
  Increase in loans                                             (7,801)    (18,263)       (450)
  Proceeds from the sale of real estate owned                      218         557          85
  Net additions to office properties and equipment                 (53)       (161)       (283)
----------------------------------------------------------------------------------------------
      Net cash provided (used) by investing activities           2,472     (30,586)     (9,938)
----------------------------------------------------------------------------------------------
Financing activities:
  Net increase in demand and club accounts                         216       3,387       1,840
  Net increase in time deposit accounts                         12,757       7,158       4,888
  Net (decrease) increase in FHLB advances                     (11,798)     13,395       2,996
  (Decrease) increase in advance deposits by borrowers for
    taxes and insurance                                           (242)         72        (123)
  Stock options exercised                                           98          27         155
  Acquisition of treasury stock                                   (842)     (2,441)       (644)
  Dividends paid                                                (1,332)     (1,358)     (1,313)
----------------------------------------------------------------------------------------------
      Net cash (used) provided by financing activities          (1,143)     20,240       7,799
----------------------------------------------------------------------------------------------
Net change in cash and cash equivalents                          4,796      (7,193)        734
Cash and cash equivalents at beginning of period                 4,918      12,111      11,377
----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                    $  9,714    $  4,918    $ 12,111
==============================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
----------------------------------------------------------------------------------------------
Cash paid during the period for:
  Interest on savings deposits                                $  8,123    $  7,387    $  7,082
  Interest on FHLB advances                                      1,904       1,344       1,005
  Income taxes                                                   1,836       1,579       1,535
Transfer of loans to real estate owned                             493         204         335
Cash paid during the period for interest includes interest credited on deposits of $7,052,
$6,455, and $6,178 for the years ended June 30, 2001, 2000 and 1999, 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 data)

(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. Laurel Capital's 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 Laurel
     Capital Group, Inc. and its wholly-owned subsidiary, Laurel Savings Bank,
     after elimination of inter-company 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.

PROVISION 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.

Note continued

                                       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.

Note continued

                                       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 ("EPS")
     Basic EPS 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.

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

<Table>
<Caption>
                                                                    June 30,
                                                     2001               2000               1999
-----------------------------------------------------------------------------------------------
<S>                                            <C>                <C>                <C>
Basic earnings per share:
  Net income                                   $    3,639         $    3,408         $    3,183
  Weighted average shares outstanding           1,963,365          2,107,711          2,188,014
  Earnings per share                           $     1.85         $     1.62         $     1.45
Diluted earnings per share:
  Net income                                   $    3,639         $    3,408         $    3,183
  Weighted average shares outstanding           1,963,365          2,107,711          2,188,014
  Dilutive effect of employee stock options        73,244             72,779            106,310
-----------------------------------------------------------------------------------------------
Diluted weighted average shares outstanding     2,036,609          2,180,490          2,294,324
  Earnings per share                           $     1.79         $     1.56         $     1.39
===============================================================================================
</Table>

Note continued

                                       13
<PAGE>   9

                       LOGO    LAUREL CAPITAL GROUP, INC.

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

COMPREHENSIVE INCOME
     The Company reports comprehensive income in accordance with SFAS No. 130
     which 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,
     2001, 2000 and 1999, the Company's total comprehensive income was $4,977,
     $2,591 and $2,703, respectively. Total comprehensive income is comprised of
     net income of $3,639, $3,408 and $3,183, respectively, and other
     comprehensive income (loss) of $1,338, $(817) and $(480), 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, 2001:
  Corporate notes and
     commercial paper        $13,945        $13,937               $226               $ 34        $14,129
========================================================================================================
AT JUNE 30, 2000:
  Corporate notes and
     commercial paper        $21,945        $21,931               $ --               $787        $21,144
========================================================================================================
</Table>

<Table>
<Caption>
                                                                       Amortized    Market
                                                            Face/Par        Cost     Value
------------------------------------------------------------------------------------------
<S>                                                         <C>        <C>         <C>
At June 30, 2001, the contractual maturities of the debt
 securities held to maturity are:
  Due after one year through five years                      $ 1,500     $ 1,500   $ 1,526
  Due after five years through ten years                       5,000       4,999     5,065
  Due after ten years                                          7,445       7,438     7,538
------------------------------------------------------------------------------------------
                                                             $13,945     $13,937   $14,129
==========================================================================================
</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, 2001:
  Municipal obligations                $21,275        $20,335              $286            $  230      $20,391
  Federal National Mortgage
    Association preferred stock            250            250                 1                --          251
  Federal Home Loan Mortgage
    Corporation preferred stock            750            750                 6                --          756
  Federal National Mortgage
    Association Stock                      249            249               176                --          425
  Federal Home Loan Mortgage
    Corporation stock                      199            199               141                --          340
  SLM Student Loan Trust                   461            445                16                --          461
  Standard Insurance Company
    stock                                    4              4                 4                --            8
  Shay Financial Services ARM
    Fund                                17,179         17,179                --                49       17,130
--------------------------------------------------------------------------------------------------------------
                                       $40,367        $39,411              $630            $  279      $39,762
==============================================================================================================
AT JUNE 30, 2000:
  Municipal obligations                $22,535        $21,500              $112            $1,137      $20,475
  Federal National Mortgage
    Association preferred stock            250            250                --                 1          249
  Federal Home Loan Mortgage
    Corporation preferred stock            250            250                --                 1          249
  Federal National Mortgage
    Association stock                      723            723                12                83          652
  Federal Home Loan Mortgage
    Corporation stock                      590            590                 4                88          506
  SLM Student Loan Trust                   625            606                18                --          624
  Standard Insurance Company
    stock                                    4              4                 1                --            5
  Shay Financial Services ARM
    Fund                                16,137         16,137                --               232       15,905
--------------------------------------------------------------------------------------------------------------
                                       $41,114        $40,060              $147            $1,542      $38,665
==============================================================================================================
</Table>

<Table>
<Caption>
                                                                               Amortized       Market
                                                              Face/Par              Cost        Value
-----------------------------------------------------------------------------------------------------
<S>                                                           <C>              <C>            <C>
At June 30, 2001, the contractual maturities of the debt
 securities available for sale are:
  Due after five years through ten years                       $   876           $   855      $   878
  Due after ten years                                           20,860            19,925       19,974
-----------------------------------------------------------------------------------------------------
                                                               $21,736           $20,780      $20,852
=====================================================================================================
</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 2001,
2000 and 1999 were $1,097, $-- and $3,581, respectively.

Gross gains of $82, $-- and $296 were realized on these sales in 2001, 2000 and
1999, respectively.

There were no realized losses in 2001, 2000 and 1999.

                                       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, 2001                    Cost           Appreciation           Depreciation          Value
-----------------------------------------------------------------------------------------------------
<S>                            <C>             <C>                        <C>                 <C>
Federal National Mortgage
  Association REMIC                 $ 57                    $ 2                    $--           $ 59
Federal Home Loan Mortgage
  Corporation REMIC                   93                     --                     --             93
-----------------------------------------------------------------------------------------------------
                                    $150                    $ 2                    $--           $152
=====================================================================================================
At June 30, 2000
-----------------------------------------------------------------------------------------------------
Federal National Mortgage
 Association REMIC                  $ 74                    $ 2                    $--           $ 76
Federal Home Loan Mortgage
  Corporation REMIC                  323                     --                      3            320
-----------------------------------------------------------------------------------------------------
                                    $397                    $ 2                    $ 3           $396
=====================================================================================================
</Table>

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

<Table>
<Caption>
                                                          Gross                  Gross
                               Amortized             Unrealized             Unrealized         Market
At June 30, 2001                    Cost           Appreciation           Depreciation          Value
-----------------------------------------------------------------------------------------------------
<S>                            <C>                 <C>                    <C>                 <C>
Government National
  Mortgage Association           $ 3,424                   $ 92                  $  --        $ 3,516
Federal National Mortgage
  Association                      3,027                     19                      9          3,037
Federal Home Loan Mortgage
  Corporation                        818                     15                     --            833
Federal Home Loan Mortgage
  Corporation REMIC                2,578                     34                     --          2,612
-----------------------------------------------------------------------------------------------------
                                 $ 9,847                   $160                   $  9        $ 9,998
=====================================================================================================
At June 30, 2000
-----------------------------------------------------------------------------------------------------
Government National
 Mortgage Association            $ 4,197                   $ 37                   $ 54        $ 4,180
Federal National Mortgage
  Association                      3,318                      3                    126          3,195
Federal Home Loan Mortgage
  Corporation                        979                      1                     17            963
Federal Home Loan Mortgage
  Corporation REMIC                2,584                     25                     --          2,609
-----------------------------------------------------------------------------------------------------
                                 $11,078                   $ 66                   $197        $10,947
=====================================================================================================
</Table>

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

There were no sales of mortgage-backed securities available for sale during
2001, 2000 and 1999.

                                       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,
                                                                  2001             2000
---------------------------------------------------------------------------------------
<S>                                                           <C>              <C>
First mortgage loans:
  Conventional:
     1 to 4 family dwellings                                  $130,010         $125,242
     Multi-family dwellings                                      2,892            2,476
     Commercial                                                  5,051            5,391
---------------------------------------------------------------------------------------
                                                               137,953          133,109
  Guaranteed or insured                                             29               34
---------------------------------------------------------------------------------------
Total long term with monthly amortization                      137,982          133,143
  Construction and development loans                            10,763           10,167
---------------------------------------------------------------------------------------
                                                               148,745          143,310
Less: Loans in process                                          (6,160)          (7,796)
    Deferred loan fees                                             (66)            (224)
---------------------------------------------------------------------------------------
                                                               142,519          135,290
---------------------------------------------------------------------------------------
Commercial loans                                                 1,707              919
Consumer loans:
  Loans secured by savings accounts                                251              211
  Installment loans                                             34,190           34,899
---------------------------------------------------------------------------------------
                                                                36,148           36,029
---------------------------------------------------------------------------------------
                                                               178,667          171,319
Less: Allowance for loan losses                                 (1,759)          (1,798)
---------------------------------------------------------------------------------------
                                                              $176,908         $169,521
=======================================================================================
</Table>

At June 30, 2001 and 2000, the Company had a commitment to sell its guaranteed
student loan portfolio totaling $1,701 and $1,514, respectively.

Outstanding commitments to originate loans:

<Table>
<Caption>
                                                                        June 30,
                                                                  2001             2000
---------------------------------------------------------------------------------------
<S>                                                             <C>              <C>
First mortgage loans:
  Fixed rates (6.625% to 7.25% and 8.25% to 8.75%)              $2,008           $  952
  Variable rates                                                   457            2,627
---------------------------------------------------------------------------------------
                                                                 2,465            3,579
Other loans -- fixed rates                                         509              525
Unused lines of credit                                           4,353            4,983
---------------------------------------------------------------------------------------
                                                                $7,327           $9,087
=======================================================================================
</Table>

The Company's customers have unused lines of credit as follows: secured (home
equity) lines of credit, builder lines of credit and all other lines of credit.
The amount available at June 30, 2001 for each type was $3,165, $351 and $837,
respectively. The amount available at June 30, 2000 for each type was $3,120,
$578 and $1,285, 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 $456, $481 and $762 at June 30, 2001,
2000 and 1999, 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.

At June 30, 2001, 99.86% 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.

                                       17
<PAGE>   13

                       LOGO    LAUREL CAPITAL GROUP, INC.

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

(5) ALLOWANCE FOR LOSSES ON LOANS

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

<Table>
<S>                                                           <C>
--------------------------------------------------------------------
Balance at June 30, 1998                                      $1,852
Provision for losses                                              18
Charge-offs                                                      (61)
Recoveries                                                        57
--------------------------------------------------------------------
Balance at June 30, 1999                                      $1,866
Provision for losses                                              18
Charge-offs                                                      (99)
Recoveries                                                        13
--------------------------------------------------------------------
Balance at June 30, 2000                                      $1,798
Provision for losses                                              18
Charge-offs                                                      (75)
Recoveries                                                        18
--------------------------------------------------------------------
Balance at June 30, 2001                                      $1,759
====================================================================
</Table>

Management believes that the allowance for losses on loans was appropriate at
June 30, 2001. 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, 2001 and 2000, the recorded investment in loans that are considered
to be impaired under SFAS 114 was $214 and $332, respectively. At June 30, 2001
the $214 of impaired loans, as a result of write-downs, do not have an allowance
for loan losses. Included in the amount at June 30, 2000 is $79 of impaired
loans for which the related allowance for loan losses is $3 and $253 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, 2001, 2000 and 1999 was approximately $303, $304 and $291,
respectively. For the fiscal years ended June 30, 2001, 2000 and 1999, the
Company recognized interest income on those impaired loans of $1, $3 and $6,
respectively, which was recognized using the cash basis of income recognition.

Non-accrual loans at June 30, 2001, 2000 and 1999 were approximately $523, $560
and $476, respectively. The foregone interest on these loans for the fiscal
years ended June 30, 2001, 2000 and 1999 was approximately $42, $64 and $48,
respectively. The amount of interest income on such loans actually included in
income in fiscal 2001, 2000 and 1999 was $20, $11 and $15, 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,
                                                                 2001            2000
-------------------------------------------------------------------------------------
<S>                                                           <C>             <C>
Land and land improvements                                    $   412         $   412
Office buildings and improvements                               2,129           2,123
Furniture, fixtures and equipment                                 991             944
-------------------------------------------------------------------------------------
  Total, at cost                                                3,532           3,479
Less accumulated depreciation                                  (2,261)         (2,066)
-------------------------------------------------------------------------------------
                                                              $ 1,271         $ 1,413
=====================================================================================
</Table>

Depreciation expense for the periods ended June 30, 2001, 2000 and 1999 was
$195, $206 and $147, 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, 2001            2001       2000           2001       2000
-------------------------------------------------------------------------------------------------
<S>                            <C>                     <C>         <C>        <C>        <C>
Demand and club accounts        1.00 to 2.15%           2.13%      2.13%      $ 30,401   $ 31,257
Money market deposit
  accounts                         0 to 2.38            2.25       2.24         15,756     15,812
NOW deposits                       0 to 1.50            0.98       1.02         30,177     29,049
-------------------------------------------------------------------------------------------------
                                                                                76,334     76,118
-------------------------------------------------------------------------------------------------
Time deposits:                  3.01 to 4.00                                     2,211        679
                                4.01 to 5.00                                    24,967     24,904
                                5.01 to 6.00                                    38,432     44,660
                                6.01 to 7.00                                    60,481     44,331
                                7.01 to 8.00                                     3,211      1,936
                                8.01 to 9.00                                         0         35
-------------------------------------------------------------------------------------------------
                                                        5.80       5.67        129,302    116,545
-------------------------------------------------------------------------------------------------
                                                        4.28%      4.11%      $205,636   $192,663
=================================================================================================
</Table>

At June 30, 2001 and 2000, time deposits with balances in excess of $100,000
amounted to $4.1 million and $2.1 million, respectively.

The contractual maturity of time deposits is as follows:

<Table>
<Caption>
                                                                        June 30,
                                                                  2001             2000
---------------------------------------------------------------------------------------
<S>                                                           <C>              <C>
Under 12 months                                               $ 64,031         $ 61,679
12 months to 24 months                                          39,569           28,840
24 months to 36 months                                          13,766           15,883
36 months to 48 months                                           2,290            1,187
48 months to 60 months                                           2,429            2,384
Over 60 months                                                   7,217            6,572
---------------------------------------------------------------------------------------
                                                              $129,302         $116,545
=======================================================================================
Note continued
</Table>

                                       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,
                                                       2001             2000             1999
---------------------------------------------------------------------------------------------
<S>                                                  <C>              <C>              <C>
Passbook and club accounts                           $  629           $  651           $  635
Money market deposit accounts                           350              354              354
NOW accounts                                            282              276              267
Time deposits                                         7,021            6,010            5,803
---------------------------------------------------------------------------------------------
                                                     $8,282           $7,291           $7,059
=============================================================================================
</Table>

(9) FEDERAL HOME LOAN BANK ADVANCES

FHLB advances are summarized as follows:

<Table>
<Caption>
                                                      Interest              June 30,
Due date                                                  Rate          2001         2000
-----------------------------------------------------------------------------------------
<S>                                                   <C>            <C>          <C>
July 3, 2000                                              7.00       $    --      $14,500
November 24, 2000                                         5.80            --          793
February 20, 2008                                         5.48         3,000        3,000
December 18, 2008                                         5.15         3,000        3,000
October 22, 2009                                          5.52                      1,500
June 30, 2010                                             6.18        10,500       10,500
December 1, 2010                                          5.64         5,000           --
November 13, 2015                                         6.51           126          131
-----------------------------------------------------------------------------------------
                                                                     $21,626      $33,424
=========================================================================================
</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,
2001 this was approximately $121 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, 2001, 2000 and 1999
consisted of:

<Table>
<Caption>
                                                            2001        2000        1999
----------------------------------------------------------------------------------------
<S>                                                       <C>         <C>         <C>
Current:
  Federal                                                 $1,434      $1,358      $1,392
  State                                                      275         226         332
----------------------------------------------------------------------------------------
                                                           1,709       1,584       1,724
----------------------------------------------------------------------------------------
Deferred:
  Federal                                                    (46)        (60)        (63)
----------------------------------------------------------------------------------------
                                                          $1,663      $1,524      $1,661
========================================================================================
Note continued
</Table>

                                       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, 2001, 2000 and 1999 was
allocated as follows:

<Table>
<Caption>
                                                            2001        2000        1999
----------------------------------------------------------------------------------------
<S>                                                       <C>         <C>         <C>
Income                                                    $1,663      $1,524      $1,661
Stockholders' equity:
  Accumulated other comprehensive income (loss)              690        (420)       (247)
----------------------------------------------------------------------------------------
                                                          $2,353      $1,104      $1,414
========================================================================================
</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, 2001, 2000 and 1999 is as follows:

<Table>
<Caption>
                                                             2001      2000      1999
-------------------------------------------------------------------------------------
<S>                                                          <C>       <C>       <C>
Expected federal tax rate                                    34.0%     34.0%     34.0%
State taxes, net of federal tax benefit                       3.4       3.0       4.5
Other, net                                                   (0.4)     (0.2)       .1
Tax exempt income, net                                       (5.6)     (5.9)     (4.3)
-------------------------------------------------------------------------------------
                                                             31.4%     30.9%     34.3%
=====================================================================================
</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, 2001 and 2000 are as follows:

<Table>
<Caption>
                                                               2001        2000
-------------------------------------------------------------------------------
<S>                                                           <C>        <C>
DEFERRED TAX ASSETS:
  Deferred loan fees                                          $  80      $  103
  Loan loss reserve                                             531         478
  Investment securities                                          --         518
  Other                                                         186         157
-------------------------------------------------------------------------------
  Gross deferred tax assets                                     797       1,256
  Valuation allowance                                            --          --
-------------------------------------------------------------------------------
  Net deferred tax asset                                        797       1,256
DEFERRED TAX LIABILITIES:
  Property, plant and equipment                                 (97)        (85)
  Prepaid expense                                               (22)        (21)
  Investment securities                                        (172)         --
-------------------------------------------------------------------------------
Gross deferred tax liability                                   (291)       (106)
-------------------------------------------------------------------------------
Net deferred tax asset                                        $ 506      $1,150
===============================================================================
</Table>

The Company 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, 2001 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). As of June 30, 2001, the Bank meets all capital adequacy requirements
to which it is subject.

As of June 30, 2001, 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, 2001 and 2000.

<Table>
<Caption>
                                             JUNE 30, 2001                   JUNE 30, 2000
                                                 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)                    $24,626   $24,626   $24,626     $23,344   $23,344   $23,344
Plus general valuation
  allowances (2)                                            1,735                           1,774
Plus allowable unrealized gains                               126                              --
--------------------------------------------------------------------------------------------------
    Total regulatory capital           24,626    24,626    26,487      23,344    23,344    25,118
Minimum required capital               10,230     5,552    11,104       9,902     5,676    11,353
--------------------------------------------------------------------------------------------------
    Excess regulatory capital         $14,396   $19,074   $15,383     $13,442   $17,668   $13,765
--------------------------------------------------------------------------------------------------
Minimum required capital to be well
  capitalized under Prompt
  Corrective Action Provisions        $12,788   $ 8,327   $13,878     $12,378   $ 8,513   $14,188
==================================================================================================
Regulatory capital as a percentage
  (3)                                    9.63%    17.74%    19.09%       9.43%    16.45%    17.70%
Minimum required capital percentage      4.00      4.00      8.00        4.00      4.00      8.00
--------------------------------------------------------------------------------------------------
    Excess regulatory capital
       Percentage                        5.63%    13.74%    11.09%       5.43%    12.45%     9.70%
--------------------------------------------------------------------------------------------------
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 Federal Financial
    Institutions Examination Council on Form 041 for the quarters ended June 30,
    2001 and 2000.

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

(3) Tier I capital is calculated as a percentage of adjusted total average
    assets of $255,754 and $247,551 at June 30, 2001 and 2000, respectively.
    Tier I and Tier II risk-based capital are calculated as a percentage of
    adjusted risk-weighted assets of $138,782 and $141,884 at June 30, 2001 and
    2000, 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 $75, $73 and $67 during fiscal 2001, 2000,
and 1999, 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. There are no remaining shares available to be granted
under the terms of the 1998 Program.

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, 2001, 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. There are no
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, 2001, there were 33,511
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. There are no remaining shares
available to be granted under the terms of the 1996 Directors' Plan.

In fiscal 2001, the Company adopted the 2000 Stock Compensation Program ("2000
Plan"). Under the 2000 Plan, 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 2001, each
person who served as a non-employee director of the Company immediately
following the adjournment of the 2000 annual meeting was granted as of such date
an option to purchase 3,953 shares of common stock exercisable at a price equal
to the fair market value on the date of the grant. At June 30, 2001 there were
71,161 remaining shares available to be granted as determined by the Program
Administrators.

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 six 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, 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
Granted                        --        --           --         --          4,236      14.69        --         --         --
Exercised                  (4,532)     5.15         (142)      8.44           (300)      7.91        --         --         --
Forfeited                  (5,935)       --           --         --             --         --    (1,000)        --         --
-----------------------------------------------------------------------------------------------------------------------------
June 30, 2000              46,212     $6.63       98,825      $9.53         47,791     $13.15    51,500     $15.75     28,332
Granted                        --        --           --         --             --         --        --         --         --
Exercised                 (17,824)     4.60         (562)      8.44         (1,205)      9.30        --         --         --
Forfeited                    (843)       --           --         --             --         --        --         --         --
-----------------------------------------------------------------------------------------------------------------------------
June 30, 2001              27,545     $7.91       98,263      $9.54         46,586     $13.25    51,500     $15.75     28,332
------------------------------------------------------------------------------------------------------------------- ---------
Actual contractual
 life remaining in
 years                        2.6                    3.4                       5.5                  7.9                   5.4
Option price per
 share               $7.38-$11.00           $8.44-$10.92              $7.38-$19.50                          $15.75     $10.59
Options available
 to be granted at
 June 30, 2001                 --                 10,405                        --               33,511                    --
=============================================================================================================================

<Caption>
                      Average               Average
                     Exercise      2000    Exercise
                        Price      Plan       Price
---------------------------------------------------
<S>                    <C>       <C>       <C>
June 30, 1998          $10.59        --          --
Granted                    --        --          --
Exercised                  --        --          --
Forfeited                  --        --          --
---------------------------------------------------
June 30, 1999          $10.59        --          --
Granted                    --        --          --
Exercised                  --        --          --
Forfeited                  --        --          --
---------------------------------------------------
June 30, 2000          $10.59        --          --
Granted                    --    23,718      $14.00
Exercised                  --        --          --
Forfeited                  --        --          --
---------------------------------------------------
June 30, 2001          $10.59    23,718      $14.00
---------------------------------------------------
Actual contractual
 life remaining in
 years                              9.3
Option price per
 share                           $14.00
Options available to
 be granted at June
 30, 2001                        71,161
===================================================
</Table>

Using a Black-Scholes option valuation model, the weighted-average fair value of
options granted during fiscal 2001 under the 2000 Plan was $2.25. The fair value
of options granted during fiscal 2000 under the 1993 Directors' Plan was $2.71.
The 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.

At June 30, 2001, 2000 and 1999, 247,259, 242,759 and 238,508 shares were
immediately exercisable at average prices of $11.29, $10.37 and $9.86,
respectively.

In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". 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
                                                            2001        2000        1999
----------------------------------------------------------------------------------------
<S>                                                       <C>         <C>         <C>
Net income
  As reported                                             $3,639      $3,408      $3,183
  Pro forma                                               $3,589      $3,351      $3,140
----------------------------------------------------------------------------------------
Basic earnings per share
  As reported                                              $1.85       $1.62       $1.45
  Pro forma                                                $1.83       $1.59       $1.43
----------------------------------------------------------------------------------------
Diluted earnings per share
  As reported                                              $1.79       $1.56       $1.39
  Pro forma                                                $1.76       $1.53       $1.37
========================================================================================
Note continued
</Table>

                                       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 2001, 2000 and 1999, respectively: risk-free interest rates of
5.54%, 6.12% and 6.01%; dividend yields of 4.9%, 4.8% and 3.8%; volatility
factors of the expected market price of the Company's common stock of 20.8%,
22.9% and 20.9%; 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 subsequent to July 1, 1996. 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
2000/2001:                            September 30    December 31    March 31    June 30
----------------------------------------------------------------------------------------
<S>                                   <C>             <C>            <C>         <C>
Interest income                             $4,590         $4,674      $4,612     $4,504
Interest expense                             2,553          2,679       2,549      2,475
----------------------------------------------------------------------------------------
Net interest income before
  provision for loan losses                  2,037          1,995       2,063      2,029
Provision for loan losses                        5              4           4          5
Other income                                   206            599         195        231
Operating expenses                           1,023          1,023       1,021        968
----------------------------------------------------------------------------------------
Income before income taxes                   1,215          1,567       1,233      1,287
Provision for income taxes                     372            511         374        406
----------------------------------------------------------------------------------------
Net income                                  $  843         $1,056      $  859     $  881
========================================================================================
Earnings per share:
  Basic                                     $ 0.43         $ 0.54      $ 0.44     $ 0.45
  Diluted                                   $ 0.41         $ 0.52      $ 0.42     $ 0.43
========================================================================================
Dividends per share                         $ 0.17         $ 0.17      $ 0.17     $ 0.17
========================================================================================
1999/2000:
----------------------------------------------------------------------------------------
Interest income                             $4,019         $4,053      $4,154     $4,384
Interest expense                             2,039          2,082       2,158      2,302
----------------------------------------------------------------------------------------
Net interest income before
  provision for loan losses                  1,980          1,971       1,996      2,082
Provision for loan losses                        5              4           4          5
Other income                                   203            201         199        237
Operating expenses                           1,000            998         934        987
----------------------------------------------------------------------------------------
Income before income taxes                   1,178          1,170       1,257      1,327
Provision for income taxes                     363            365         388        408
----------------------------------------------------------------------------------------
Net income                                  $  815         $  805      $  869     $  919
========================================================================================
Earnings per share:
  Basic                                     $ 0.38         $ 0.38      $ 0.41     $ 0.45
  Diluted                                   $ 0.36         $ 0.36      $ 0.40     $ 0.44
========================================================================================
Dividends per share                         $ 0.16         $ 0.16      $ 0.16     $ 0.16
========================================================================================
As a result of rounding, the sum of quarterly amounts may not equal the annual amounts.
</Table>

                                       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

SFAS No. 107, "Disclosure about Fair Value of Financial Instruments," 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.

At June 30, 2001 the estimated fair value of investment securities held to
maturity exceeded the net carrying value by approximately $192. At June 30,
2000, the net carrying value of investment securities held to maturity exceeded
the estimated fair value by approximately $787. At June 30, 2001 the estimated
fair value of mortgage-backed securities held to maturity exceeded the net
carrying value by approximately $2. At June 30, 2000 the net carrying value of
mortgage-backed securities held to maturity exceeded the fair market value by
approximately $1. 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 $3,602 and $2,705 at June 30, 2001 and 2000, 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, 2001 and
2000 were as follows:

<Table>
<Caption>
                                              June 30, 2001                       June 30, 2000
                                        Carrying        Estimated           Carrying        Estimated
                                          Amount       Fair Value             Amount       Fair Value
-----------------------------------------------------------------------------------------------------
<S>                                     <C>            <C>                  <C>            <C>
Non-interest-bearing:
  Demand accounts                       $ 10,022         $ 10,022           $  8,652         $  8,652
Interest-bearing:
  Now and MMDA accounts                   35,911           35,911             36,209           36,209
  Passbook accounts                       30,401           30,401             31,257           31,257
  Time deposits                          129,302          130,490            116,545          114,530
-----------------------------------------------------------------------------------------------------
     Total Deposits                     $205,636         $206,824           $192,663         $190,648
=====================================================================================================
</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,
2001 and 2000 were as follows:

<Table>
<Caption>
                                              June 30, 2001                       June 30, 2000
                                        Carrying        Estimated           Carrying        Estimated
                                          Amount       Fair Value             Amount       Fair Value
-----------------------------------------------------------------------------------------------------
<S>                                     <C>            <C>                  <C>            <C>
Borrowed funds:
  FHLB advances                         $ 21,626         $ 22,429           $ 33,424         $ 33,046
=====================================================================================================

Note continued
</Table>

                                       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 $7.3 million
and $9.1 million at June 30, 2001 and 2000, 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                                   2001         2000
------------------------------------------------------------------------------------
<S>                                                           <C>          <C>
ASSETS
Cash                                                            $ 1,179      $   591
Other assets                                                         --           --
------------------------------------------------------------------------------------
Investment in Laurel Savings Bank                                24,957       22,724
     Total assets                                               $26,136      $23,315
====================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Other accrued expenses                                          $    (2)     $    69
------------------------------------------------------------------------------------
                                                                     (2)          69
------------------------------------------------------------------------------------
Stockholders' equity                                             26,138       23,246
------------------------------------------------------------------------------------
     Total liabilities and stockholders' equity                 $26,136      $23,315
====================================================================================
</Table>

<Table>
<Caption>
                                                         June 30,    June 30,    June 30,
STATEMENT OF OPERATIONS                                      2001        2000        1999
-----------------------------------------------------------------------------------------
<S>                                                     <C>         <C>         <C>
Dividends from subsidiary                                  $2,833      $3,860      $1,967
Other income                                                   --          --          57
Equity in undistributed income of Laurel Savings Bank         903        (377)      1,248
-----------------------------------------------------------------------------------------
                                                            3,736       3,483       3,272
-----------------------------------------------------------------------------------------
Operating expenses                                            141         113          94
-----------------------------------------------------------------------------------------
Income before income taxes                                  3,595       3,370       3,178
Provision (credit) for income taxes                           (44)        (38)         (5)
-----------------------------------------------------------------------------------------
Net income                                                 $3,639      $3,408      $3,183
=========================================================================================
Note continued
</Table>

                                       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 30,    June 30,    June 30,
STATEMENT OF CASH FLOWS                                 2001        2000        1999
------------------------------------------------------------------------------------
<S>                                                <C>         <C>         <C>
Net income                                           $ 3,639     $ 3,408     $ 3,183
Undistributed income of Laurel Savings Bank             (903)        377      (1,248)
  Adjustments to reconcile net income to net cash
     provided by operating activities:
       Other -- net                                      (72)         75          32
------------------------------------------------------------------------------------
  Net cash provided by operating activities            2,664       3,860       1,967
------------------------------------------------------------------------------------
Financing activities:
  Acquisition of treasury stock                         (842)     (2,441)       (644)
  Stock options exercised                                 98          27         155
  Dividends paid                                      (1,332)     (1,358)     (1,313)
------------------------------------------------------------------------------------
  Net cash used by financing activities               (2,076)     (3,772)     (1,802)
------------------------------------------------------------------------------------
Net change in cash and cash equivalents                  588          88         165
------------------------------------------------------------------------------------
Cash and cash equivalents at the beginning of the
  period                                             $   591     $   503     $   338
Net change during the period                             588          88         165
------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the
  period                                             $ 1,179     $   591     $   503
====================================================================================
</Table>

(17) 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,
                                     2001        2000        1999        1998        1997
-----------------------------------------------------------------------------------------
<S>                              <C>         <C>         <C>         <C>         <C>
Total assets                     $258,012    $254,073    $231,474    $220,986    $211,987
Loans, net                        176,908     169,521     151,390     151,124     144,670
Loans held for sale                 1,701       1,514       1,562       1,633       1,827
Mortgage-backed securities held
  to maturity                         150         397       1,072       1,051       1,220
Mortgage-backed securities
  available for sale                9,998      10,947      11,868      11,554      13,259
Investment securities held to
  maturity                         13,937      21,931      12,439      14,003      15,494
Investment securities available
  for sale                         39,762      38,665      35,549      25,539      15,494
Money market investments               --          --       3,711       3,532       9,086
Deposits                          205,636     192,663     182,118     175,390     175,019
FHLB advances                      21,626      33,424      20,029      17,033      11,044
Stockholders' equity               26,138      23,246      24,530      23,506      21,262
</Table>

OPERATING DATA:

<Table>
<Caption>
                                                         June 30,
                                     2001        2000        1999        1998        1997
-----------------------------------------------------------------------------------------
<S>                               <C>         <C>         <C>         <C>         <C>
Interest income                   $18,380     $16,610     $15,652     $15,765     $15,342
Interest expense                   10,256       8,581       8,067       8,069       7,715
-----------------------------------------------------------------------------------------
Net interest income before
  provision for loan losses         8,124       8,029       7,585       7,696       7,627
Provision for loan losses              18          18          18          18          30
-----------------------------------------------------------------------------------------
Net interest income after
  provision for loan losses         8,106       8,011       7,567       7,678       7,597
Net gain on investments, loans
  and mortgage-backed
  securities available for
  sale                                 96          12         313         218         125
Other income                        1,135         828         707         764         592
Operating expenses                  4,035       3,919       3,743       3,897       4,651
-----------------------------------------------------------------------------------------
Income before income taxes          5,302       4,932       4,844       4,763       3,663
Income tax expense                  1,663       1,524       1,661       1,712       1,344
-----------------------------------------------------------------------------------------
Net income                        $ 3,639     $ 3,408     $ 3,183     $ 3,051     $ 2,319
=========================================================================================
Diluted earnings per share        $  1.79     $  1.56     $  1.39     $  1.32     $  1.00
=========================================================================================
</Table>

STATISTICAL PROFILE:

<Table>
<Caption>
                                                         June 30,
                                     2001        2000        1999        1998        1997
-----------------------------------------------------------------------------------------
<S>                                 <C>         <C>         <C>         <C>         <C>
Return on average assets             1.42%       1.43%       1.41%       1.43%       1.13%
Return on average equity            14.73%      14.27%      13.04%      13.58%      10.82%
Average equity to average assets
  ratio                              9.47%      10.03%      10.84%      10.49%      10.47%
Dividend payout ratio               37.99%      41.03%      43.17%      33.33%      29.33%
=========================================================================================
</Table>

                                       29
<PAGE>   25

                       LOGO    LAUREL CAPITAL GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

--------------------------------------------------------------------------------

OVERVIEW

For fiscal 2001, the Company achieved its long-term goal of profitable
controlled growth with net income of $3.6 million or $1.79 per share on a
diluted basis compared to $3.4 million or $1.56 per share for fiscal 2000 and
$3.2 million or $1.39 per share for fiscal 1999.

The Company continued to report strong returns on average assets (ROA) and
average equity (ROE). The ROA for fiscal 2001, 2000 and 1999 was 1.42%, 1.43%
and 1.41%, respectively. The ROE for fiscal 2001, 2000 and 1999 was 14.73%,
14.27% and 13.04%, respectively. Also during fiscal 2001, the Company's total
assets increased 1.6% to $258 million.

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 similarly sized institutions.

Total loan origination during fiscal 2001 amounted to $42.0 million or a 27%
decrease compared to fiscal 2000. Mortgage lending activity decreased during
fiscal 2001 as compared to the prior year and was concentrated more on the
origination of fixed rate mortgages due to the interest rate environment in the
Company's market area. In addition, consumer lending activity decreased by 16.6%
during the same time period.

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 principal determinant of the exposure of the Company's earnings to interest
rate risk is the timing difference between the re-pricing or maturity of the
Company's interest-earning assets and the re-pricing or maturity of its
interest-bearing liabilities. 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 re-price 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 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 and portfolio equity, ROE. 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
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 various parameters regarding its net interest margin
and portfolio equity assuming a 200 basis point ("bp") parallel increase or
decrease in interest rates. Net interest margin represents net interest income
as a percentage of average interest-earning assets while portfolio equity is the
net present value of the Company's existing assets and liabilities at a certain
date. Assuming a 200 bp increase in rates, the estimated net interest margin may
not change by more than 15% for a one-year period and portfolio equity may not
decrease by more than 45% or total shareholder's equity. Conversely, if interest
rates drop 200 bp, the estimated net interest margin may not change by more than
10% for a one-year period and portfolio equity may not decrease by more than 20%
of total shareholders' equity.
                                       30
<PAGE>   26

                       LOGO    LAUREL CAPITAL GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)

--------------------------------------------------------------------------------

The following table illustrates the simulated impact of a 100 basis point 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
calculated assuming that interest-earning asset levels at June 30, 2001 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, 2001
levels.

Interest rate simulation sensitivity analysis
--------------------------------------------------------------------------------

<Table>
                                                   Increase                    Decrease
  Simulated impact in the next 12 months     ---------------------        ----------------------
        Compared with June 30, 2001:         +100 bp       +200 bp        -100 bp        -200 bp
                                             -------       -------        -------        -------
<S>                                          <C>           <C>         <C>               <C>
  Net interest revenue increase/(decrease)       1.7%         (1.0)%         (4.8)%         (9.7)%
  Return on average equity
     increase/(decrease)                          59bp         (35)bp        (168)bp        (340)bp
  Diluted earnings per share
     increase/(decrease)                        $.07         $(.04)         $(.20)         $(.41)
                                             -------       --------       -------        -------
</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 re-price within that time period. The interest rate
sensitivity gap is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or re-pricing 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, 2001. 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 (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                     $23,485     $36,902     $78,522    $51,607    $190,516
  Investment securities              12,131      17,130         499     32,608      62,368
------------------------------------------------------------------------------------------
Total rate sensitive assets         $35,616     $54,032     $79,021    $84,215    $252,884
==========================================================================================
Rate sensitive liabilities:
Deposits:
  Certificates of deposit           $23,229     $40,802     $58,054     $7,217    $129,302
  NOW and money funds                 7,283      12,610      11,198      3,641      34,732
  Passbooks                           1,389       3,793      12,967     12,252      30,401
------------------------------------------------------------------------------------------
     Total deposits                 $31,901     $57,205     $82,219    $23,110    $194,435
Borrowings                                0           0           0     21,626      21,626
------------------------------------------------------------------------------------------
Total rate sensitive liabilities    $31,901     $57,205     $82,219    $44,736    $216,061
==========================================================================================
Interest sensitivity GAP:
  Interval                            3,715      (3,173)     (3,198)    39,479      36,823
  Cumulative                        $ 3,715     $   542     $(2,656)   $36,283    $     --
==========================================================================================
Ratio of cumulative GAP to total
  assets                               1.44%        .21%      (1.03)%    14.06%
==========================================================================================
</Table>

The Company targets its one year gap to be in the range of 10.0% to (10.0)%. At
June 30, 2001 and 2000, the Company's one year gap was .21% and (11.01)%,
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.

                                       32
<PAGE>   28

                       LOGO    LAUREL CAPITAL GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)

--------------------------------------------------------------------------------

FINANCIAL CONDITION

The Company's consolidated assets totaled approximately $258.0 million at June
30, 2001, an increase of $3.9 million or 1.6% from June 30, 2000. The growth in
assets was primarily the result of increases in loans receivable and
interest-earning deposits with other institutions. The growth was funded
primarily from increases in savings deposits and income generated from current
earnings. 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 $2.3 million for fiscal 1997 to
$3.6 million for fiscal 2001 and a .32% ratio of non-performing assets to total
assets at June 30, 2001.

The following table presents an analysis of the Company's average balance sheet,
net interest income and average yields earned on its interest-earning 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,               2001                            2000                            1999
                             2001     -------------------------------------------------------------------------------------------
                          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)           7.51%  $138,503   $10,662       7.70%  $121,733     $9,169      7.53%  $122,194   $ 9,326       7.63%
 Consumer and other
   loans(1)                  8.08     36,964     2,980       8.06     35,348      2,798      7.92     31,669     2,528       7.98
---------------------------------------------------------------------------------------------------------------------------------
Total loans                  7.63    175,467    13,642       7.77    157,081     11,967      7.62    153,863    11,854       7.70
 Mortgage-backed
   securities                6.86     10,963       769       7.01     12,275        836      6.81     11,824       791       6.69
 Investment securities       5.89     60,243     3,820       6.34     60,544      3,721      6.15     45,626     2,554       5.60
 Interest-bearing
   deposits                  3.94      3,056       149       4.88      1,607         86      5.35      9,379       453       4.83
---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
 assets                      7.11%   249,729   $18,380       7.36%   231,507     16,610      7.17%   220,692   $15,652       7.09%
Non-interest-earning
 assets                                6,748                           6,610                           4,584
---------------------------------------------------------------------------------------------------------------------------------
Total Assets                        $256,477                        $238,117                        $225,276
=================================================================================================================================
Interest-bearing
 liabilities:
 Savings deposits            4.50   $184,656   $ 8,282       4.49%  $177,201     $7,291      4.11%  $169,209   $ 7,059       4.17%
 Borrowings                  5.82     31,927     1,974       6.18     22,736      1,290      5.67     18,555     1,008       5.43
---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
 liabilities                 4.63%   216,583   $10,256       4.74%   199,937     $8,581      4.29%   187,764   $ 8,067       4.30%
Non-interest-bearing
 liabilities                          15,193                          14,302                          13,096
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities                    231,776                         214,239                         200,860
Stockholders' equity                  24,701                          23,878                          24,416
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
 stockholders' equity               $256,477                        $238,117                        $225,276
---------------------------------------------------------------------------------------------------------------------------------
Net earning assets                  $ 33,146                        $ 31,570                        $ 32,928
Net interest
 income/average
 interest rate spread        2.48%             $ 8,124       2.62%               $8,029      2.88%             $ 7,585       2.79%
Net yield on interest-
 earning assets                         3.47%                3.25%                           3.47%                           3.44%
Average
 interest-earning
 assets as a percent
 of average
 interest-bearing
 liabilities                           115.3%                          115.8%                          117.4%
=================================================================================================================================
</Table>

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

                                       33
<PAGE>   29

                       LOGO    LAUREL CAPITAL GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)

--------------------------------------------------------------------------------

INVESTMENT SECURITIES HELD TO MATURITY AND INVESTMENT SECURITIES AVAILABLE FOR
SALE

The Company's investment securities held to maturity totaled $13.9 million at
June 30, 2001 which was a decrease of $8.0 million or 36.5% compared to the
level at June 30, 2000. The decrease was primarily due to $8.0 million of FHLB
bonds being called during fiscal 2001 as a result of the decline in interest
rates during the period. The Company primarily invests in government and
corporate notes and bonds. Investment securities available for sale totaled
$39.8 million at June 30, 2001 or an increase of $1.1 million compared to June
30, 2000. The increase was primarily due to the increase in the market value of
the securities held.

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

The total of all mortgage-backed securities was $10.1 million at June 30, 2001,
a decrease of $1.2 million or 10.5% compared to the level at June 30, 2000. This
decrease was primarily due to principal repayments on all mortgage-backed
securities during the year.

LOAN PORTFOLIO

Loans receivable increased $7.4 million or 4.4% to $176.9 million during the
fiscal year ended June 30, 2001 as compared to an increase of $18.1 million or
12% for the fiscal year ended June 30, 2000. Mortgage loan origination in fiscal
years 2001 and 2000 amounted to $27.9 million and $40.5 million, respectively.
The Company originated primarily fixed-rate loans in fiscal 2001 due to the
interest rate environment in the Company's market area. Of the total amount of
mortgage and construction loans originated in fiscal 2001, $16.2 million or
58.3% were fixed-rate mortgages as compared to $12.1 million or 29.9% in fiscal
2000. Adjustable-rate mortgage and construction loan origination totaled $11.6
million or 41.7% of total mortgage and construction loans originated in fiscal
2001 as compared to $28.4 million or 70.1% of total mortgage and construction
loans originated in fiscal 2000.

Consumer loan origination, including home equity and other installment loans,
totaled $13.7 million in fiscal 2001, $16.4 million in fiscal 2000 and $20.1
million in fiscal 1999. The Company has recently 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 generally
higher yield associated with such loans.

                                       34
<PAGE>   30

                       LOGO    LAUREL CAPITAL GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)

--------------------------------------------------------------------------------

DEPOSIT PORTFOLIO

Savings deposits increased $13.0 million to $205.6 million during fiscal 2001.
This increase was due to the combined result of $5.9 million of net deposit
growth and interest credited of approximately $7.1 million. Deposit increases
occurred primarily in certificate of deposit accounts and NOW/checking accounts.

For the years ended June 30, 2001, 2000 and 1999, the Company had certificates
of deposit with remaining terms to maturity of three (3) to ten (10) years
aggregating $11.9 million, $10.1 million and $12.2 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.

BORROWINGS

Borrowings, consisting of FHLB advances, decreased from $33.4 million at June
30, 2000 to $21.6 million at June 30, 2001 with a majority of the reduction
occurring during the second half of the current fiscal year. The Company was
able to reduce total borrowings from the FHLB as a result of the deposit growth
during the same period.

STOCKHOLDERS' EQUITY

Stockholders' equity increased $2.9 million or 12.4% to $26.1 million at June
30, 2001 compared to $23.2 million at June 30, 2000. This increase primarily
resulted from an increase in other comprehensive income of $1.3 million and net
income of $3.6 million. These increases were partially offset by the repurchase
of $842,000 of the Company's common stock and the payment of cash dividends of
$1.3 million. 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, 2001, 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 (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 2001
                                                           Compared to Fiscal 2000
                                                         Increase (Decrease) due to
----------------------------------------------------------------------------------------------
                                                                            Rate/
                                                Rate       Volume          Volume        Total
----------------------------------------------------------------------------------------------
<S>                                            <C>         <C>             <C>          <C>
Interest income on interest-earning assets:
  Mortgage loans                               $ 202       $1,263            $ 28       $1,493
  Consumer loans                                  52          128               2          182
  Mortgage-backed securities                      25          (89)             (3)         (67)
  Investment securities                          118          (18)             (1)          99
  Interest-earning deposits                       (8)          78              (7)          63
----------------------------------------------------------------------------------------------
     Total                                       389        1,362              19        1,770
----------------------------------------------------------------------------------------------
Interest expense on interest-bearing
  liabilities:
  Deposits                                       656          307              28          991
  Borrowings                                     116          521              47          684
----------------------------------------------------------------------------------------------
     Total                                       772          828              75        1,675
----------------------------------------------------------------------------------------------
Net change in net interest income              $(383)       $ 534            $(56)      $   95
==============================================================================================
</Table>

<Table>
<Caption>
                                                                 Fiscal 2000
                                                           Compared to Fiscal 1999
                                                         Increase (Decrease) due to
----------------------------------------------------------------------------------------------
                                                                            Rate/
                                                Rate       Volume          Volume        Total
----------------------------------------------------------------------------------------------
<S>                                            <C>         <C>             <C>          <C>
Interest income on interest-earning assets:
  Mortgage loans                               $(122)      $  (35)           $ --       $ (157)
  Consumer loans                                 (21)         293              (2)         270
  Mortgage-backed securities                      14           30               1           45
  Investment securities                          250          835              82        1,167
  Interest-earning deposits                       49         (375)            (41)        (367)
----------------------------------------------------------------------------------------------
     Total                                       170          748              40          958
----------------------------------------------------------------------------------------------
Interest expense on interest-bearing
  liabilities:
  Deposits                                       (97)         334              (5)         232
  Borrowings                                      45          227              10          282
----------------------------------------------------------------------------------------------
     Total                                       (52)         561               5          514
----------------------------------------------------------------------------------------------
Net change in net interest income              $ 222        $ 187            $ 35       $  444
==============================================================================================
</Table>

                                       36
<PAGE>   32

                       LOGO    LAUREL CAPITAL GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)

--------------------------------------------------------------------------------

INTEREST INCOME ON LOANS AND LOANS HELD FOR SALE

Interest on loans and loans held for sale increased by $1.7 million or 14.0% in
fiscal 2001 primarily due to a $18.4 million increase in the average balance of
the portfolio, particularly the mortgage loan portfolio. Additionally, the
average yield earned on the portfolio increased from 7.62% during fiscal 2000 to
7.77% during fiscal 2001. The average balance of the mortgage loan portfolio
increased by $16.8 million or 13.8% and the average balance of the consumer loan
portfolio increased by $1.6 million or 4.6% during fiscal 2001. The increase in
the average yield during fiscal 2001 was primarily due to increased origination
of fixed rate mortgage loans that had higher rates of interest due to the
interest rates in the Company's market area. Interest on loans and loans held
for sale increased by $113,000 or 1.0% in fiscal 2000 primarily due to a $3.2
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 7.70% during fiscal 1999 to 7.62%
during fiscal 2000. The average balance of the consumer loan portfolio increased
by $3.7 million or 11.6% and the average balance of the mortgage loan portfolio
decreased by $461,000 or .4% during fiscal 2000. The decrease in the average
yield during fiscal 2000 was primarily due to increased origination of
adjustable-rate mortgage loans that had 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 $67,000 or 8.0%
during fiscal 2001 primarily due to a $1.3 million or 10.7% decrease in the
average outstanding balance of the portfolio. This decrease was partially offset
by an increase in the average yield from 6.81% in fiscal 2000 to 7.01% in fiscal
2001. Interest income on all mortgage-backed securities increased by $45,000 or
5.7% during fiscal 2000 primarily due to a $451,000 or 3.8% increase in the
average outstanding balance of the portfolio. Also contributing to this increase
was an increase in the average yield from 6.69% in fiscal 1999 to 6.81% in
fiscal 2000.

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

Interest on investments held to maturity and investments available for sale
increased by $99,000 or 2.7% during fiscal 2001 primarily due to an increase in
the average yield from 6.15% in fiscal 2000 to 6.34% in fiscal 2001. This
increase was partially offset by a $301,000 or .5% decrease in the average
outstanding balance of such securities. The increase in the average yield
resulted primarily from the purchase of investments late in fiscal 2000 when
market interest rates were on the rise. Interest on investments held to maturity
and investments available for sale increased by $1.2 million or 45.7% during
fiscal 2000 primarily due to a $14.9 million or 32.7% increase in the average
outstanding balance of such securities. Also contributing to the increase was an
increase in the average yield on these investments from 5.60% in fiscal 1999 to
6.15% in fiscal 2000. The increase in the average yield in fiscal 2000 was
primarily due to increases in market interest rates.

                                       37
<PAGE>   33

                       LOGO    LAUREL CAPITAL GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)

--------------------------------------------------------------------------------

INTEREST INCOME ON INTEREST-EARNING DEPOSITS

Interest on deposits, consisting of interest-earning deposits maintained with
the FHLB of Pittsburgh, increased $63,000 or 73.3% during fiscal 2001 compared
to fiscal 2000 and decreased $367,000 or 81.0% during fiscal 2000 compared to
fiscal 1999. The increase in fiscal 2001 was primarily due to a $1.4 million or
90.2% increase in the average outstanding balance. This increase was partially
offset by a decrease in the average yield from 5.35% in fiscal year 2000 to
4.88% in fiscal year 2001. The increase in the average outstanding balance
during fiscal 2001 was primarily due to excess liquidity as a result of
increased deposits and decreased loan origination. The decrease in fiscal 2000
was primarily due to a $7.8 million or 82.9% decrease in the average outstanding
balance of these deposits as such funds were used to fund increased loan
origination and investment security purchases during the period. This decrease
was partially offset by an increase in the average yield from 4.83% in fiscal
1999 to 5.35% in fiscal 2000 reflecting a rise in market interest rates.

INTEREST EXPENSE ON SAVINGS DEPOSITS

Interest expense on savings deposits increased by $991,000 or 13.6% in fiscal
2001 primarily due to a $7.5 million or 4.2% increase in the average outstanding
balance of savings deposits. Additionally, the average rate paid on deposits
increased from 4.11% in fiscal year 2000 to 4.49% in fiscal year 2001 primarily
due to an increase in certificates of deposit which typically have a higher rate
of interest. Interest expense on savings deposits increased by $232,000 or 3.3%
in fiscal 2000 primarily due to an $8.0 million or 4.7% increase in the average
outstanding balance of savings deposits. This increase was partially offset by a
decrease in the average rate paid on deposits from 4.17% in fiscal 1999 to 4.11%
in fiscal 2000. The increase in the average balance of deposits during both
fiscal 2001 and 2000 was primarily due to increased marketing of the Company's
certificate of deposit and checking products in conjunction with the market
conditions.

INTEREST EXPENSE ON BORROWINGS

Interest on borrowings increased $684,000 or 53.0% in fiscal 2001 primarily due
to a $9.2 million or 40.4% increase in the average outstanding balance of FHLB
advances. Additionally, the average rate paid on borrowings increased from 5.67%
in fiscal 2000 to 6.18% in fiscal 2001. Interest on borrowings increased
$282,000 or 28.0% in fiscal 2000 primarily due to a $4.2 million or 22.5%
increase in the average outstanding balance of FHLB advances. In addition, the
average rate paid on borrowings increased from 5.43% in fiscal 1999 to 5.67% in
fiscal 2000. The Company used the funds borrowed during fiscal 2001 and 2000
primarily to originate loans and purchase investment securities.

NET INTEREST INCOME

Net interest income increased by $95,000 or 1.2% in fiscal 2001 as compared to
fiscal 2000 and increased by $444,000 or 5.9% in fiscal 2000 as compared to the
prior fiscal year. The increase in fiscal 2001 was primarily due to the increase
in the average outstanding balances of the loan portfolio and interest-earning
deposits with other institutions. This increase was partially offset by the
decrease in the average outstanding balances of the mortgage-backed security and
investment security portfolios and the increase in the average outstanding
balances of savings deposits and borrowings. The increase in fiscal 2000 was
primarily due to the increase in the average outstanding balances of the loan,
mortgage-backed security and investment security portfolios. This increase was
partially offset by a decrease in the average outstanding balance of
interest-earning deposits with other institutions and increases in average
outstanding balances of savings deposits and borrowings.

Interest-earning assets as a percent of interest-bearing liabilities amounted to
115.3%, 115.8% and 117.4% at June 30, 2001, 2000 and 1999, respectively, and the
average interest rate spread was 2.62%, 2.88% and 2.79% for fiscal 2001, 2000
and 1999, respectively. The Company's average interest rate spread has decreased
from 2.79% in fiscal 1999 to 2.62% in fiscal 2001 primarily due to increases in
the average rates paid on the Company's interest-bearing liabilities. The
Company's net interest income continued to exceed its total other expenses in
fiscal 2001 and 2000, 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 (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 amounted to $18,000 for each of
fiscal 2001, 2000 and 1999. 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 June 30, 2001, 2000 and 1999, the allowance for loan losses was approximately
$1.8 million, $1.8 million and $1.9 million, respectively. This amount
represented 1.0%, 1.1% and 1.2%, 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, 2001. Thus, the
level of the allowance for loan losses is substantially unchanged from June 30,
2000. 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.

OTHER INCOME

Fees and service charges decreased by $25,000 or 3.3% to $740,000 in fiscal 2001
and increased by $86,000 or 12.7% in fiscal 2000. The decrease in fiscal 2001
was primarily due to decreased loan underwriting fees as a result of decreased
loan origination during the current period and a decrease in late charge fee
income. The increase in fiscal 2000 was primarily due to higher fees realized
from various products and services offered by the Company combined with
increased loan origination during the year.

During fiscal 2001, the Company realized net gains of $96,000 on the sale of
investments, mortgage-backed securities and loans in its available for sale
portfolio. Gains of $82,000 were recorded on the sale of investment securities
available for sale and gains of $14,000 were recorded on the sale of loans held
for sale. During fiscal 2000, the Company realized net gains of $12,000 on the
sale of investments, mortgage-backed securities and loans in its available for
sale portfolio. These gains were realized solely on the sale of loans held for
sale as there were no sales of investments or mortgage-backed securities during
fiscal 2000.

Other operating income, which primarily consists of miscellaneous income and
rents, was $70,000, $63,000 and $69,000 in fiscal 2001, 2000 and 1999,
respectively. The increase in fiscal 2001 was primarily the result of an
increase in rental income during the current year partially offset by a decrease
in miscellaneous income.

Other non-operating income increased $325,000 or 100.0% in fiscal 2001. The
increase in fiscal 2001 was the result of the settlement of litigation and an
insurance claim during the year.

                                       39
<PAGE>   35

                       LOGO    LAUREL CAPITAL GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)

--------------------------------------------------------------------------------

OPERATING EXPENSES

Compensation and employee benefits, which is the largest component of total
operating expenses, increased by $142,000 or 7.6% in fiscal 2001 and increased
by $75,000 or 4.2% in fiscal 2000. The increase in both fiscal 2001 and 2000 was
primarily due to normal salary and benefit increases.

Premises and occupancy expense decreased by $19,000 or 3.3% in fiscal 2001 and
increased by $65,000 or 12.9% in fiscal 2000. The decrease in fiscal 2001 was
primarily due to a decrease in furniture, fixtures and equipment expenses,
office building repairs and maintenance and depreciation expense partially
offset by an increase in light, heat and utilities expense and office building
taxes. The increase in fiscal 2000 was primarily due to increases in furniture,
fixture and equipment depreciation and repairs and maintenance partially offset
by decreases in furniture, fixtures and equipment expenses and office building
depreciation.

Federal insurance premiums decreased by $34,000 or 47.2% in fiscal 2001 and
decreased by $33,000 or 31.4% in fiscal 2000. The decrease in both fiscal 2001
and fiscal 2000 was due to the lowering of the rate paid by SAIF insured
institutions to support the interest payments on the Financing Corporation
("FICO") Bonds. The amount of the premium is based upon the average amount of
deposits outstanding.

For fiscal 2000, the Company had net losses of $32,000 from its real estate
owned ("REO"). There were no such losses during fiscal 2001.

Data processing expenses increased by $12,000 of 5.8% in fiscal 2001 and
decreased by $1,000 or .5% in fiscal 2000. The increase in fiscal 2001 was the
result of increased pricing.

Professional fees decreased by $59,000 or 27.6% in fiscal 2001 and decreased by
$10,000 in fiscal 2000. The decrease in both fiscal 2001 and 2000 was primarily
due to reduced legal fees incurred with regard to litigation brought by the
Company against another financial institution.

INCOME TAXES

Income taxes increased $139,000 or 9.1% in fiscal 2001 and decreased $137,000 or
8.3% in fiscal 2000. The increase in fiscal 2001 was primarily due to an
increase in pre-tax income for fiscal 2001 as compared to fiscal 2000. The
decrease in fiscal 2000 was due to a decrease in the Company's effective tax
rate due to increased purchases of non-taxable municipal obligations.

NET INCOME

Net income increased $231,000 or 6.8% in fiscal 2001 and increased $225,000 or
7.1% in fiscal 2000. The increase in fiscal 2001 was due to a $95,000 increase
in net interest income and a $391,000 increase in other income partially offset
by a $116,000 increase in operating expenses and a $139,000 increase in income
tax expense. The increase in fiscal 2000 was due to a $444,000 increase in net
interest income and a $137,000 decrease in income tax expense partially offset
by a $220,000 decrease in total other income and a $136,000 increase in
operating expenses.

LIQUIDITY AND CAPITAL RESOURCES

The Company's assets increased from $231.5 million at June 30, 1999 to $254.1
million at June 30, 2000 and to $258.0 million at June 30, 2001. Stockholders'
equity decreased from $24.5 million at June 30, 1999 to $23.2 million at June
30, 2000 and increased to $26.1 million at June 30, 2001. At June 30, 2001,
stockholders' equity amounted to 10.13% of the Company's total assets under
generally accepted accounting principles ("GAAP").

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, 2001,
the Company substantially exceeded all of these requirements with Tier I and
Tier II ratios of 9.63% and 19.09%, respectively.

During the fiscal years ended June 30, 2001, 2000 and 1999, the Company had
positive cash flows from operating activities. Cash and cash equivalents
increased $4.8 million, decreased by $7.2 million and increased by $734,000 for
the fiscal years ended June 30, 2001, 2000 and 1999, respectively. See
Consolidated Statements of Cash Flows.
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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 $3.5 million of cash in fiscal 2001,
$3.2 million in fiscal 2000 and $2.9 million in fiscal 1999.

Investing activities provided cash on a net basis of $2.5 million in fiscal 2001
and used cash on a net basis of $30.6 million in fiscal 2000 and $9.9 million in
fiscal 1999. For fiscal 2001 cash was provided primarily due to $8.0 million of
investments held to maturity being called during the period which was greater
than cash used to originate loans and purchase investment securities and
mortgage-backed securities. For fiscal 2000 and 1999 cash was used 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 used $1.1 million of cash in fiscal 2001 due to
a net decrease in FHLB advances of $11.8 million, $1.3 million of cash dividends
paid and $842,000 of treasury stock acquired. These decreases were partially
offset by a $12.8 million increase in deposit accounts. Financing activities
generated $20.2 million of cash in fiscal 2000 due to a net increase of $13.4
million in FHLB advances, $10.5 million in deposits, $72,000 in advance deposits
by borrowers for taxes and insurance and $27,000 from stock options exercised.
These increases were partially offset by $2.4 million of treasury stock acquired
and $1.4 million of cash dividends paid. 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.

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, 2001, the Company had commitments to originate
loans totaling $7.3 million. Scheduled maturities of certificates of deposit
during fiscal 2002 totaled $64.0 million at June 30, 2001. 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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MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)

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RECENT ACCOUNTING DEVELOPMENTS

SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133," and
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - An Amendment of FASB Statement No. 133," requires 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 statements also provide for offsetting changes in fair value or
cash flows of both the derivative and the hedged asset or 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 a 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 as amended, were effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. There was no impact on
the Company's financial position, results of operations or cash flow subsequent
to the effective date of this statement as no such instruments are used by the
Company.

In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a replacement
of FASB Statement No. 125." This statement revises the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of Statement 125's
provisions without reconsideration. This statement was effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. This statements was effective for recognition and
reclassification of collateral and for disclosures related to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
Disclosures about securitization and collateral accepted need not be reported
for periods ending on or before December 15, 2000, for which financial
statements are presented for comparative purposes. This statement is to be
applied prospectively with certain exceptions. Other than those exceptions,
earlier or retroactive application of its accounting provisions are not
permitted. Adoption of this statement had no impact on the Company's
consolidated financial statements.

In July 2001, the FASB issued Statement No. 141, "Business Combinations," and
Statement No. 142, "Goodwill and Other Intangible Assets." Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual value, and reviewed for impairment in accordance with SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The Company does not anticipate any material impact on
the Company's financial position, results of operations and cash flow as a
result of adoption of this standard as the Company has no goodwill.

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