<PAGE>   1
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

   
                                    FORM 10-K/A
    

|X|     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                     FOR THE FISCAL YEAR ENDED JUNE 30, 1998

                                       OR
                                        
[ ]          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

          For the transition period from __________ to _______________

                          Commission File No.:    0-23101
                                              ---------------

                           LAUREL CAPITAL GROUP, INC.
             -------------------------------------------------------
             (Exact name of registrant as specified in its charter)

               PENNSYLVANIA                             25-1717451
     ---------------------------------            ----------------------
       (State or other jurisdiction                  (I.R.S. Employer
     of incorporation or organization)            Identification Number)

            2724 HARTS RUN ROAD
          ALLISON PARK, PENNSYLVANIA                       15101
          --------------------------              -----------------------
                 (Address)                               (Zip Code)

       Registrant's telephone number, including area code: (412) 487-7400

           Securities registered pursuant to Section 12(b) of the Act:
                                 NOT APPLICABLE

           Securities registered pursuant to Section 12(g) of the Act

                     COMMON STOCK (PAR VALUE $.01 PER SHARE)
                     ---------------------------------------
                                (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes  X   No
                     -----   -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

As of September 24, 1998, the aggregate value of the 2,052,041 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
154,069 shares held by all directors and officers of the Registrant as a
group, was approximately $38.7 million. This figure is based on the mean of the
bid and asked prices of $18.875 per share of the Registrant's Common Stock on
September 24, 1998.


Number of shares of Common Stock outstanding as of September 24, 1998:2,206,110

                       DOCUMENTS INCORPORATED BY REFERENCE

         List hereunder the following documents incorporated by reference and
the Part of the Form 10-K into which the document is incorporated.

(1) Portions of the Annual Report to Stockholders for the year ended June 30,
1998 are incorporated into Part II, Items 5 through 8 of this Form 10-K.

(2) Portions of the definitive proxy statement for the 1998 Annual Meeting of
Stockholders to be filed within 120 days of June 30, 1998 are incorporated into
Part III, Items 10 through 13 of this Form 10-K.



<PAGE>   2




PART I


ITEM 1.  BUSINESS

GENERAL

         Laurel Capital Group, Inc. (the "Company") is a bank holding company
whose primary asset is the common stock of its wholly owned subsidiary Laurel
Savings Bank ("Laurel Savings" or the "Bank"). The Bank's business is conducted
through its corporate headquarters located in Allison Park, Pennsylvania as well
as four branch offices located in Allegheny County and one branch office located
in Butler County, Pennsylvania. At June 30, 1998, the Company had total assets
of $221.0 million and stockholders' equity of $23.5 million or 10.6% of total
assets. In addition, at such date, the Bank's core capital of $22.8 million and
tier I and tier II risk-based capital of $22.8 million and $24.3 million,
respectively, exceeded the required amounts by $14.1 million, $18.2 million and
$15.0 million, respectively. The Bank's corporate headquarters is located at
2724 Harts Run Road, Allison Park, Pennsylvania, and its telephone number is
(412) 487-7400.

         Laurel Savings is primarily engaged in attracting deposits from the
general public and using these funds to originate permanent first mortgage loans
on single-family residential properties, and, to a lesser extent, multi-family
residential loans, construction loans, commercial real estate loans and consumer
loans. Laurel Savings' revenue is primarily derived from interest income on its
loan portfolio. The Bank's principal expenses are interest expense on deposits
and other operating expenses. The principal sources of funds for Laurel Savings'
lending activities are its deposits and amortization and prepayments of
outstanding loans.

         Deposits with Laurel Savings are insured to the maximum extent provided
by law through the Savings Association Insurance Fund ("SAIF") administered by
the Federal Deposit Insurance Corporation ("FDIC"). Laurel Savings is subject to
examination and comprehensive regulation by the Pennsylvania Department of
Banking ("Department") and the FDIC. The Bank is also a member of the Federal
Home Loan Bank of Pittsburgh ("FHLB of Pittsburgh" or "FHLB"), which is one of
the 12 regional banks comprising the Federal Home Loan Bank System ("FHLB
System"). The Bank is also subject to regulations of the Board of Governors of
the Federal Reserve System ("Federal Reserve Board") governing reserves required
to be maintained against deposits and certain other matters.

MARKET AREA

         The Bank's principal market area consists of Allegheny and Butler
counties, Pennsylvania, which includes the City of Pittsburgh, the region's
major metropolitan center and the hub of the Pittsburgh Metropolitan Statistical
Area ("MSA"), one of the nation's largest. The Bank's business is conducted
through its corporate office located in Allison Park, a suburb of Pittsburgh,
and five branch offices. Substantially all of the Bank's deposits are received
from residents of its principal market area and most of its loans are secured by
properties in Allegheny and Butler counties. Although the Bank has no branches
in downtown Pittsburgh, the Bank participates in the MAC(TM) and Cirrus(TM)
automatic teller machine ("ATM") networks which provide customers with access to
their deposits at thousands of locations throughout metropolitan Pittsburgh and
Pennsylvania as well as other states.


                                       1

<PAGE>   3



         The population of the Bank's principal market is approximately 1.5
million. The area's economy has been undergoing a rapid transition from heavy
industry to one of service, health care, advanced technology, light
manufacturing and education industries. As a result of this transition, the
unemployment in Allegheny County, the Bank's largest market area, is 4.1%
compared to 4.5% for the state of Pennsylvania and 4.6% for the United States.
The region also is one of the nation's largest corporate and financial centers
which contributes to a fairly stable real estate market. Housing costs are below
the national average resulting in over 67% of the area's residents owning their
own home. The area's median housing cost is approximately $88,000 while the
average sales price is approximately $116,000. While the area will likely
experience job losses to corporate mergers and downsizing in the future, the
Company believes the diversity of the area's industry will continue to provide a
stable economy.

LENDING ACTIVITIES

         GENERAL. Laurel Savings has traditionally concentrated its lending
activities on conventional first mortgage loans secured by residential property.
Conventional loans are neither insured by the Federal Housing Administration
("FHA") nor partially guaranteed by the Department of Veterans' Affairs ("VA").
At June 30, 1998, Laurel Savings' total loan portfolio amounted to $155.6
million ("total loan portfolio"), representing approximately 70.4% of the Bank's
total assets at that date. Permanent loans secured by single-family (one-to-four
units) residential properties amounted to $115.0 million or 73.9% of the total
loan portfolio at June 30, 1998. At June 30, 1998, multi-family (over four
units) residential loans amounted to $2.5 million or 1.6% of the total loan
portfolio while construction loans (all of which were for the construction of
single-family residential properties) totaled $4.3 million or 2.8% of the total
loan portfolio and commercial real estate loans totaled $6.4 million or 4.1% of
the total loan portfolio. The Bank's consumer loans, the second largest
component of the Bank's total loan portfolio, amounted to $27.4 million or 17.6%
of such portfolio at June 30, 1998.






                                       2

<PAGE>   4



         The following table sets forth the composition of the Bank's loan
portfolio by type of loan at the dates indicated.

<TABLE>
<CAPTION>
                                                                As of June 30,
                                  ------------------------------------------------------------------------------
                                          1998                         1997                        1996
                                  ---------------------       ----------------------      ----------------------
                                     Amount          %         Amount            %         Amount            %   
                                  -----------      ----       --------         -----      ---------        -----
                                                              (Dollars in Thousands)
<S>                                 <C>           <C>        <C>              <C>        <C>               <C>  
Real estate loans:

  Single-family                      $114,972      73.9%      $114,062         76.5%      $113,160          76.1%

  Multi-family                          2,474       1.6          2,740          1.8          2,811           1.9
                                                                                                  

  Construction(1)                       4,341       2.8          3,079          2.1          4,281           2.9
                                                                                                      

  Commercial                            6,391       4.1          5,676          3.8          5,788           3.9
                                     --------     -----       --------        -----       --------         ----- 
                                                                                                       
    Total real estate loans           128,178      82.4        125,557         84.2        126,040          84.8
                                                                                                        

Consumer loans(2)                      27,373      17.6         23,584         15.8         22,630          15.2
                                     --------     -----       --------        -----       --------         ----- 
                                                                                                        

    Total loans                      $155,551     100.0%      $149,141        100.0%      $148,670         100.0%
                                     --------     =====       --------        =====       --------         ===== 

Less:

  Loans in process                     (1,953)                  (1,634)                     (2,148)
 
  Allowance for possible loan          (1,852)                  (1,943)                     (1,899)
    losses


  Unamortized discounts and
    fees                                 (622)                    (894)                     (1,091)
                                     --------                 --------                    --------

  Net loans receivable               $151,124                 $144,670                    $143,532
                                     ========                 ========                    ========


  Loans held for sale (3)              $1,633                   $1,827                      $1,627
                                     ========                 ========                    ========
</TABLE>

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



(1)      The $4.3 million construction loan portfolio outstanding at June 30,
         1998 consisted of fixed-rate construction loans totaling $2.3 million
         and adjustable-rate construction loans totaling $2.0 million.

(2)      Consumer loans consist primarily of installment loans, auto loans, home
         equity loans, home improvement loans, commercial loans and loans on
         savings accounts. For additional information regarding these loans, see
         Note 4 to the Notes to Consolidated Financial Statements in the
         Company's 1998 Annual Report to Stockholders ("Annual Report") set
         forth as Exhibit 13 hereto.

(3)      Loans held for sale consist of guaranteed student loans.




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<PAGE>   5



         CONTRACTUAL MATURITIES OF LOANS. The following table sets forth the
contractual principal repayments of the total loan portfolio of the Bank as of
June 30, 1998 by categories of loans. Loans with adjustable interest rates are
shown in the year that they are contractually due. The amounts shown for each
period do not take into account either loan prepayments or scheduled
amortization of the Bank's loan portfolio.


<TABLE>
<CAPTION>
                                                    Contractual Maturities in Year Ended June 30,
                       ----------------------------------------------------------------------------------------------
                             Total
                         Outstanding
                         At June 30,                      2000-         2002-        2004-        2009-     2020 and
                             1998           1999          2001          2003         2008         2019     Thereafter
                             ----           ----          ----          ----         ----         ----     ----------


                                                                   (In Thousands)

<S>                        <C>            <C>           <C>           <C>          <C>           <C>        <C>        
Fixed-rate mortgage
  Loans                    $ 82,137       $ 4,197       $ 7,886       $ 8,626      $21,708       $22,871    $16,849    
Adjustable-rate                                                                                                        
  mortgage loans             41,700         1,940         2,092         2,396        6,672        14,870     13,730    
Construction                  4,341         4,341            --            --           --            --         --    
Consumer and other                                                                                                     
  Loans                      27,373         8,472         7,079         4,230        5,231         2,361         --    
                           --------       -------       -------       -------      -------       -------    -------    
                                                                                                                       
          Total            $155,551       $18,950       $17,057(1)    $15,252(1)   $33,611(1)    $40,102(1) $30,579(1) 
                           ========       =======       =======       =======      =======       =======    =======
</TABLE>


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

(1)      Of the $136.6 million of principal repayments contractually due after
         June 30, 1999, $96.8 million have fixed-rates of interest and $39.8
         million have adjustable or floating rates of interest.

         Contractual maturities of loans do not reflect the actual term of the
Bank's loan portfolio. The average life of mortgage loans is substantially less
than their contractual terms because of loan prepayments and because of
enforcement of due-on-sale clauses which give the Bank the right to declare a
loan immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. Scheduled principal amortization also reduces the average maturity of
the loan portfolio. The average life of mortgage loans tends to increase,
however, when current mortgage rates substantially exceed rates on existing
mortgages and conversely, decrease when rates on existing mortgages
substantially exceed current mortgage loan rates.

         ORIGINATION, PURCHASE AND SALE OF LOANS. All of the Bank's mortgage
lending is subject to its written, nondiscriminatory underwriting standards and
to loan origination procedures prescribed by its Board of Trustees. Decisions on
loan applications are made on the basis of detailed applications and property
valuations by independent appraisers approved by the Board of Trustees. The loan
applications are designed to determine the borrower's ability to repay, and the
more significant items on the applications are verified through the use of
credit reports, financial statements and confirmations.




                                       4
<PAGE>   6




         Mortgage loans have been originated by the Bank primarily through
referrals from real estate brokers, builders and walk-in customers, as well as
through refinancing for existing customers. The Bank's consumer loans have been
originated primarily through walk-in customers and dealer-referred customers,
and its construction loans have been originated primarily through local
contractors and some walk-in customers.

         It is the Bank's policy to obtain title insurance policies insuring
that the Bank has a valid lien on mortgaged real estate. Borrowers must obtain
fire and casualty insurance policies prior to closing and, when the property is
in a flood plain as designated by the Department of Housing and Urban
Development, flood insurance policies. Borrowers may be required to advance
funds on a monthly basis together with each payment of principal and interest to
a mortgage escrow account from which the Bank makes disbursements for items such
as real estate taxes, hazard insurance premiums and private mortgage insurance
premiums as they are due.

         Under policies adopted by the Bank's Board of Trustees, the Bank limits
the loan-to-value ratio to 95% on residential mortgage loans and requires that
private mortgage insurance be obtained that reduces the Bank's loan-to-value
ratio to 80%. The loan-to-value ratio on second mortgages may not exceed 80%
including the amount of the first mortgage on the property. Construction and
commercial real estate loans generally are made for 80% and 75% or less,
respectively, of the appraised value of the property. With respect to
construction loans, such value reflects the projected value of the property upon
completion.

         Historically, the Bank has not been an active purchaser or seller of
loans. The sales activity conducted by the Bank during fiscal 1998, 1997 and
1996 primarily focused on the sale of student loans.





                                       5
<PAGE>   7



         The following table shows total loan origination, purchase and
repayment activities of the Bank during the periods indicated.


<TABLE>
<CAPTION>
                                                               Year Ended June 30,
                                            ----------------------------------------------------------
                                               1998                   1997                      1996
                                               ----                   ----                      ----
                                                                 (In Thousands)
<S>                                         <C>                      <C>                       <C>    
Real estate originations:
  Residential:
    Single-family                           $ 19,654                 $ 9,798                   $14,002
    Multi-family                                  --                     550                        --
  Commercial                                     360                     835                        --
  Construction (1)                             6,020                   3,829                     3,455
                                            --------                 -------                   -------
    Total real estate loan
      originations                            26,034                  15,012                    17,457
Consumer and other loan
  originations (2)                            17,465                  15,390                    13,154
                                            --------                 -------                   -------
      Total loan originations                 43,499                  30,402                    30,611
Loan participation interests
 purchased                                    $1,000                      29                        --
                                            --------                 -------                   -------
Total loan originations
  and loan participation
  interests purchased                         44,499                  30,431                    30,611
                                            --------                 -------                   -------

Students loans sold                            1,107                     719                       550
Loan participation interests
  sold                                            --                      --                        68
Principal loan repayments                     36,890                  28,330                    28,897
Other, net (3)                                   242                      44                       233
                                            --------                 -------                   -------
  Total principal loan
    repayments and other                      38,239                  29,093                    29,748
                                            --------                 -------                   -------
Net increase in loans
  receivable, net and loans                 $  6,260                 $ 1,338                   $   863
  held for sale                             ========                 =======                   =======
</TABLE>


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


(1)      Construction loans are classified as either a residential or commercial
         real estate loan at the time of origination depending on the nature of
         the property securing the loan. Construction loan originations totaled
         $6.0 million during fiscal 1998, of which $3.0 million were fixed-rate,
         single-family residential loans and $3.0 million were adjustable-rate,
         single-family residential loans.

(2)      Includes student loans held for sale

(3)      Includes transfers to real estate owned and all activity in the 
         allowance for possible loan losses.


LENDING PROGRAMS AND POLICIES

         RESIDENTIAL LENDING. Historically, Laurel Savings concentrated its
lending activity on the origination of long-term, fixed-rate residential
mortgage loans secured by one-to-four family residential properties. As a
result, at June 30, 1998, $79.1 million or 50.9% of the Bank's total loan



                                       6
<PAGE>   8



portfolio consisted of long-term loans with fixed-rates of interest which were
secured by first mortgages on one-to-four family residential properties. During
fiscal 1998, 1997 and 1996, the Bank originated $14.3 million, $4.3 million and
$9.7 million, respectively, of fixed-rate mortgage loans. Due to the interest
rate environment during fiscal 1998, the Bank found the largest portion of its
single-family loan demand to be for fixed-rate loans.

         The Bank's fixed-rate loans generally have maturities ranging from 15
to 30 years and are fully amortizing with monthly payments sufficient to repay
the total amount of the loan with interest by the end of the loan term. Such
loans are originated under terms, conditions and documentation which permit them
to be sold to U.S. Government sponsored agencies. The Bank's fixed-rate loans
customarily include "due on sale" clauses, which give the Bank the right to
declare a loan immediately due and payable in the event the borrower sells or
otherwise disposes of the real property subject to the mortgage or the loan is
not repaid.

         In addition, Laurel Savings originates ARMs with up to a 30-year
amortization schedule. On all ARMs currently offered by the Bank, payments are
adjusted with each interest rate adjustment so that the term of the ARM is not
affected. The Bank currently offers one, three, and five year adjustable rate
loans. Interest rate adjustments occur every one, three or five years and are
based on the weekly average yield on U.S. Treasury Securities adjusted to a
constant maturity that matches the loan type. All three loan types limit
interest rate increases to 6% over the life of the loan and limit decreases to
2% below the initial rate. The one year ARM has a 2% maximum increase per
adjustment while the three and five year loans have a maximum increase of 3% per
adjustment. All of these loans may be converted to fixed rate loans. The Bank
does not offer ARMs with below market introductory or "teaser" rates. Although
Laurel Savings intends to continue to emphasize the origination of ARMs in order
to reduce the impact on its operations of rapid increases in market rates of
interest, such loans generally do not adjust as rapidly as changes in the Bank's
cost of funds. At June 30, 1998, $35.8 million or 23.0% of the Bank's total loan
portfolio consisted of ARMs on one-to-four family residential real estate.

         COMMERCIAL AND MULTI-FAMILY REAL ESTATE LENDING. Laurel Savings
originated $360,000 of commercial real estate loans and purchased a $1.0 million
commercial real estate participation loan in fiscal 1998. The Bank originated no
multi-family residential real estate loans in fiscal 1998. At June 30, 1998, the
Bank's multi-family residential real estate loans and commercial real estate
loans amounted to $2.5 million and $6.4 million, respectively, or 1.6% and 4.1%
of the total loan portfolio, respectively. Such loans generally earn rates of
interest which exceed the rates on residential real estate loans and are usually
for shorter terms. Such loans have been generally offered with interest rates
that adjust annually at 1% to 2% over the Bank Prime Lending Rate as published
in the Wall Street Journal. These loans have up to 30-year amortization
schedules. The Bank's multi-family real estate loans are secured primarily by
apartment buildings and its commercial real estate loans are secured primarily
by other income-producing properties located in the Pittsburgh MSA, including
office buildings and warehouses. Of the $8.9 million of commercial and
multi-family loans at June 30, 1998, $3.1 million have fixed rates of interest
and $5.8 million have adjustable rates of interest.



                                       7
<PAGE>   9


         Multi-family and commercial real estate lending entails significant
additional risks as compared with single-family residential property lending.
Multi-family and commercial real estate loans typically involve large loan
balances to single borrowers or groups of related borrowers. The payment
experience on such loans is typically dependent on the successful operation of
the real estate project. The success of such projects is sensitive to changes in
supply and demand conditions in the market for multi-family and commercial real
estate as well as economic conditions generally. Due to certain difficulties the
Bank has experienced with its commercial real estate lending in the past, it has
limited its involvement in this type of lending in recent years.

         The Bank evaluates all aspects of commercial and multi-family real
estate loan transactions in order to mitigate the risk to the Bank to the
greatest extent possible. The Bank seeks to ensure that the property securing
the loan will generate sufficient cash flow to adequately cover operating
expenses and debt service payments. To this end, permanent commercial and
multi-family real estate loans are generally made at a loan-to-value ratio of
75% or less and with a minimum debt service coverage generally of one to one and
one-half times net rental income. In underwriting commercial and multi-family
real estate loans, consideration is given to the property's operating history,
future operating projections, current and projected occupancy, position in the
local and regional market, location and physical condition. The underwriting
analysis also includes credit checks and a review of the financial condition of
the borrower. A narrative appraisal report prepared by an outside appraiser
qualified by an independent member of the American Institute of Appraisers
("MAI") or a similar organization is commissioned by the Bank to substantiate
property values for commercial and multi-family real estate loan transactions,
which appraisal, in final form, the Bank obtains prior to closing the loan. The
Bank also obtains in virtually all cases full personal loan guarantees from the
borrower, or in the case of a corporate borrower, the loan guarantees from the
persons controlling the borrower.

         CONSTRUCTION LENDING. The Bank's construction loans accounted for 23.1%
of the real estate loans originated in fiscal 1998, 25.6% in fiscal 1997 and
19.8% in fiscal 1996. Such loans are generally used to fund the construction of
residential properties for owner-occupancy although the Bank has originated
commercial construction and land acquisition and development loans to a limited
degree. Most of the Bank's residential construction loans are originated in
connection with providing permanent financing on the construction project. The
interest rate on the permanent loan is set at the time of the origination of the
construction loan. Construction loans are classified as either residential or
commercial real estate loans at the time of origination, depending on the nature
of the property securing the loan. At June 30, 1998, construction loans amounted
to $4.3 million, all of which were originated for the construction of
residential properties.

         A significant portion of the Bank's loans are made to builders on both
pre-sold and unsold properties. Speculative construction loans on unsold
properties carry more risk than pre-sold or individual construction loans
originated by the Bank because the payoff for the loan is dependent on the
builder's ability to sell the property prior to the time that the construction
loan is due. The Bank attempts to mitigate these risks by, among other things,
working with builders with whom it has established relationships and by
generally limiting the number of unsold homes under construction.

         The Bank has been active in residential construction lending for many
years and intends to continue its involvement in such lending in the future.
Although the Bank has not experienced any significant difficulties, construction
lending is generally considered to involve a higher degree of risk of loss than
long-term financing on improved, occupied real estate. Risk of loss on
construction loans 


                                       8
<PAGE>   10



is dependent largely upon the accuracy of the initial appraisal of the
property's projected value at completion of construction as well as the
estimated costs of construction, including interest. During the construction
phase, a number of factors could result in delays and cost overruns. If either
estimate proves to be inaccurate and the borrower is unable to provide
additional funds, the lender may be required to advance funds beyond the amount
originally committed to permit completion of the project and/or be confronted at
the maturity of the construction loan with a project whose value is insufficient
to assure full repayment. In addition, if the borrower is unable to obtain
permanent financing prior to the expiration of the term of the construction loan
and has not sold his or her existing residence due to market conditions, the
Bank could experience a risk of loss in the event of the borrower's existing
residence is not sold for an extended period of time. In such instance, the Bank
generally requires the borrower to sell the construction property, rent the
property or execute a deed-in-lieu of foreclosure.

         CONSUMER LENDING. The Bank has continued to emphasize the origination
of consumer loans, installment loans and home equity loans, and such loans have
increased as a percentage of the total loan portfolio from 13.8% of the total
loan portfolio at June 30, 1995 to 17.6% of the total loan portfolio at June 30,
1998, primarily as a result of the Bank's increased origination of fixed-rate
home equity loans. The Bank originated $16.5 million, $15.4 million and $13.2
million of consumer loans in fiscal 1998, 1997 and 1996 out of total loan
originations and purchases of $44.5.4 million, $30.4 million and $30.6 million,
respectively. Although consumer loans may involve a greater risk of loss than
residential real estate loans due to the nature of the collateral involved (or
the absence of collateral), the Bank carefully reviews the creditworthiness of
the borrower and, where applicable, the value of the collateral for such loans.
However, since the amount outstanding on each individual loan is smaller, the
risk of financial loss per loan is lower when compared to mortgage and
commercial lending.

         Installment loans, consisting primarily of home equity loans, and
commercial loans accounted for $26.9 million or 98.4% of all consumer loans at
June 30, 1998. Installment loans generally have terms of less than five years
with fixed rates of interest. Home equity loans typically have fixed interest
rates and terms up to 20 years, although a majority of such loans have terms of
ten years or less. The Bank does not require that it hold the first mortgage on
the secured property. The Bank also offers a home equity line of credit with an
adjustable rate of interest.

         Loans on savings accounts are also offered with the interest rate set
at the higher of the underlying collateral rate plus 3% or the current Federal
Reserve Board discount rate plus 5%, the interest rate being adjusted if the
rate on the account or the Federal Reserve Board discount rate changes. Such
loans are generally made for up to 90% of the amount in the savings account and
accounted for $335,000 or 1.2% of the consumer loan portfolio at June 30, 1998.

         REGULATORY REQUIREMENTS. Under the provisions of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), the
aggregate amount of loans that the Bank may make to any one borrower is limited
to the loans to one borrower limitations applicable to national banks (i.e., 15%
of unimpaired capital and unimpaired surplus plus an additional 10% of
unimpaired capital and unimpaired surplus when the loan is fully secured by
readily marketable securities). At June 30, 1998, the Bank's loans to one
borrower limit was approximately $3.4 million and the largest aggregate amount
of loans by the Bank to any one borrower, including related entities, was a
$984,000 participation loan secured by office buildings. This loan was current
as of June 30, 1998.



                                       9
<PAGE>   11



         Federal and Department regulations as well as the Pennsylvania Banking
Act of 1965, as amended (the "Act") also limit the amount of a real estate loan
made by a Pennsylvania-chartered state savings bank to a specified percentage of
the value of the property securing the loan (referred to as the "loan-to-value
ratio"). Such regulations provide that at the time of origination, a real estate
loan may not exceed 100% of the appraised value of the secured property. Maximum
loan-to-value ratios for each type of real estate loan made by an institution
are to be established by the institution's board of trustees. If the amount of a
home loan originated or refinanced is in excess of 80% of the appraised value,
the institution is required to obtain private mortgage insurance on the portion
of the principal amount of the loan that exceeds 80% of the appraised value of
the secured property.

LOAN SERVICING AND LOAN FEES

         Interest rates charged by Laurel Savings on mortgage loans are
primarily determined by competitive loan rates offered in its market area.
Mortgage loan rates reflect factors such as general interest rate levels, the
supply of money available to the savings industry and the demand for such loans.
These factors are, in turn, affected by general economic conditions, the
monetary policies of the federal government, including the Federal Reserve
Board, the general supply of money in the economy, tax policies and governmental
budget matters.

         In addition to interest earned on loans and income from servicing of
loans, the Bank receives fees in connection with loan modifications, late
payments, changes of property ownership and for miscellaneous services related
to its loans. Funds from these activities varies from period to period with the
volume and type of loans originated, sold and purchased, which in turn is
dependent on prevailing mortgage interest rates and their effect on the demand
for loans in the markets served by the Bank. The fees received by the Bank in
connection with the origination of mortgage loans on existing properties
generally amount from zero to three points, with a point being equivalent to 1%
of the principal amount of the loan.

         In accordance with Statement of Financial Accounting Standards No. 91,
loan origination fees and certain related direct loan origination costs are
offset and the resulting net amount is deferred and amortized over the life of
the related loans as an adjustment to the yield of such related loans. In
addition, commitment fees are offset against related direct costs and the
resulting net amount is generally recognized over the life of the related loans
as an adjustment of yield, if the commitment is exercised, or if the commitment
expires unexercised, recognized upon expiration of the commitment.

NONPERFORMING LOANS AND OTHER REAL ESTATE OWNED

         When a borrower fails to make a required payment on a loan, Laurel
Savings attempts to cause the deficiency to be cured by contacting the borrower
and seeking payment. A late charge is generally assessed after 20 days. Contacts
are generally made after a payment is more than 30 days past due. In most cases,
the deficiencies are cured promptly. If the delinquency exceeds 90 days and is
not cured through the Bank's normal collection procedures, the Bank will
generally institute measures to remedy the default, including in the case of
mortgage loans, commencing a foreclosure action or accepting from the mortgagor
a voluntary deed of the secured property in lieu of foreclosure or, obtaining
from the borrower the collateral which secures a non-mortgage obligation.




                                       10
<PAGE>   12


         Loans are placed on nonaccrual status when, in the judgment of
management, the probability of collection is deemed to be insufficient to
warrant further accrual. Loans which are delinquent 90 days or more are placed
on nonaccrual status. When a loan is placed on nonaccrual status, previously
accrued but unpaid interest is deducted from interest income. Consumer loans
more than 120 days or 180 days delinquent (depending on the nature of the loan)
are generally required to be written off.

         If a foreclosure action is instituted and the loan is not reinstated,
paid in full or refinanced, the property is sold at a public auction at which
the Bank may participate as a bidder at the sale. If the Bank is the successful
bidder, the acquired property is then included in the Bank's "real estate owned"
account until it is sold. The Bank is permitted to finance the sales of these
properties by "loans to facilitate," which involve a lower down payment or a
longer term than would be generally allowed by the Bank's underwriting
standards. At June 30, 1998, the Bank had one loan to facilitate amounting to
$31,000.

         The remedies available to the Bank in the event of a default or
delinquency with respect to certain residential mortgage loans, and the
procedures by which such remedies may be exercised, are subject to Pennsylvania
law and regulations. Under Pennsylvania law, a lender is prohibited from
accelerating the maturity of a residential mortgage loan, commencing any legal
action (including foreclosure proceedings) to collect on such loan, or taking
possession of any loan collateral until the lender has first provided the
delinquent borrower with at least 30 days' prior written notice specifying the
nature of the delinquency and the borrower's right to correct such delinquency.
In addition, the lender's ability to exercise any remedies it may have with
respect to loans for one- or two-family principal residences located in
Pennsylvania is further restricted (including the lender's right to foreclose on
such property) until the lender has provided the delinquent borrower with
written notice detailing the borrower's rights to seek consumer credit
counseling and state financial assistance and until the borrower has exhausted
or failed to pursue such rights. These provisions of Pennsylvania law may delay
for several months the Bank's ability to foreclose upon residential loans
secured by real estate located in the Commonwealth of Pennsylvania. In addition,
the uniform Federal National Mortgage Association ("FNMA")/ Federal Home Loan
Mortgage Corporation ("FHLMC") lending documents used by the Bank, as well as
most other residential lenders in Pennsylvania, require notice and a right to
cure similar to that provided under Pennsylvania law.

         Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until it is sold.
When property is acquired, it is recorded at the lower of cost or fair value at
the date of acquisition and any write-down resulting therefrom is charged to the
allowance for losses. All costs incurred in maintaining the Bank's interest in
the property are capitalized between the date the loan becomes delinquent and
the date of acquisition. After the date of acquisition, all costs incurred in
maintaining the property are expensed and costs incurred for the improvement or
development of such property are capitalized.




                                       11
<PAGE>   13





         The following table sets forth information regarding the Bank's
nonaccrual loans and real estate owned at the dates indicated. The Bank did not
have any troubled debt restructurings at June 30, 1998.


<TABLE>
<CAPTION>
                                                           June 30,
                                                   ------------------------  
                                                   1998      1997      1996
                                                   ----      ----      ----

                                                    (Dollars in Thousands)

<S>                                                <C>       <C>       <C> 
Nonaccruing loans:
  Single-family residential real estate            $355      $600      $364
  Commercial real estate                            119       158       198

Multi-family residential                             23        28        39
  Consumer and other loans                           64       129        11
                                                   ----      ----      ----
     Total nonaccruing loans                       $561      $915      $612
                                                   ====      ====      ====
Total nonperforming loans as a
  percentage of net loans receivable                .37%      .63%      .43%
                                                   ====      ====      ====
Total real estate owned, net of related
  reserves                                         $143      $ --      $219
                                                   ====      ====      ====
Total nonperforming loans and real
  estate owned as a percentage of total assets      .32%      .43%      .42%
                                                   ====      ====      ====
</TABLE>


         Under current federal regulations, an institution's problem assets are
subject to classification according to one of three categories: "substandard,"
"doubtful" and "loss." For assets classified "substandard" and "doubtful," the
institution is required to establish prudent general loan loss reserves in
accordance with GAAP. Assets classified "loss" must be either completely written
off or supported by a 100% specific reserve. A classification category
designated "special mention" also must be established and maintained for assets
not currently requiring classification but having potential weaknesses or risk
characteristics that could result in future problems. An institution is required
to develop an in-house program to classify its assets, including investments in
subsidiaries, on a regular basis and to set aside appropriate loss reserves on
the basis of such classification. At June 30, 1998, the Bank's classified assets
totaled $794,000, of which $612,000 were assets classified as substandard and
$182,000 were assets classified as loss. Assets classified as substandard
consisted of the Bank's nonperforming residential, multi-family and commercial
real estate loans, consumer loans and real estate owned, certain loans which
were delinquent between 15 and 90 days and other current loans which have in the
past displayed characteristics which reflect potential weaknesses.

         ALLOWANCES FOR ESTIMATED LOAN LOSSES. Provisions for possible losses on
first mortgage and other loans are charged to earnings in amounts that result in
allowances sufficient, in management's judgment, to cover anticipated losses. In
determining the appropriate level of provisions for possible loan losses,
consideration is given to general economic conditions, diversification of loan
portfolios, historical loss experience, identified credit problems, delinquency
levels and adequacy of collateral. The Bank's allowances for loan losses totaled
$1.8 million at June 30, 1998 or 330.1% of total nonperforming loans at such
date. The Bank's management believes that its present allowances for losses are
adequate. However, while management uses the best information available to make
such determinations, future adjustments to the loan loss allowance may be
necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination 



                                       12
<PAGE>   14


process, periodically review the Bank's allowance for possible loan losses. Such
agencies may require the Bank to recognize additions to such allowance based on
their judgements about information available to them at the time of their
examination.

         The Bank's asset classification committee, consisting of the Assistant
Vice President - Credit and Collections, Chief Executive Officer and Senior Vice
President-Finance, meets on at least a quarterly basis. The committee reviews
all non-performing assets to determine the adequacy of resources. Adjustments
are made as needed and the committee's findings are summarized in a detailed
report submitted to the Board of Trustees.




                                       13
<PAGE>   15



         The following table sets forth information concerning the allocation of
the Bank's allowance for loan losses by loan category at the dates indicated.


<TABLE>
<CAPTION>
                                             Year Ended June 30,
                                     -----------------------------------
                                      1998           1997         1996
                                      ----           ----         ----


                                           (Dollars in Thousands)

<S>                                  <C>           <C>           <C>    
Balance at beginning of
   Period                            $ 1,943       $ 1,899       $ 1,893
                                     -------       -------       -------

Charge-offs:
   Residential real estate               (71)          (15)          (20)
   Commercial real estate                (20)           --           (10)
   Consumer                              (61)          (39)          (51)
                                     -------       -------       -------
     Total charge-offs                  (152)          (54)          (81)
                                     -------       -------       -------
 Recoveries:
   Residential real estate                --            --             1
   Consumer                               43            68            56
                                     -------       -------       -------
     Total recoveries                     43            68            57
                                     -------       -------       -------
Net (charge-offs) recoveries            (109)           14           (24)
                                     -------       -------       -------

Provision for losses on loans             18            30            30
                                     -------       -------       -------

Balance at end of period             $ 1,852       $ 1,943       $ 1,899
                                     =======       =======       =======

Allowance for loan losses as a
  percent of total net loans
  outstanding                           1.23%         1.34%         1.32%
                                     =======       =======       =======

Allowance for loan losses as a
  percent of nonperforming loans      330.12%       212.35%       310.29%
                                     =======       =======       =======

Ratio of net charge-offs to
  average loans outstanding             (.07)%          --%        (0.02)%
                                     =======       =======       =======
</TABLE>




                                       14
<PAGE>   16






         The following table sets forth information concerning the allocation of
the Bank's allowance for loan losses by loan category at the dates indicated.


<TABLE>
<CAPTION>
                                                                    June 30,
                             ---------------------------------------------------------------------------------
                                         1998                        1997                    1996
                             ---------------------------------------------------------------------------------
                                            Percent of                  Percent of                Percent of
                                             Loans in                    Loans in                  Loans in
                                               Each                        Each                      Each
                                           Category to                 Category to               Category to
                                           Total Loans      Amount     Total Loans      Amount   Total Loans
                             ---------------------------------------------------------------------------------
                                                        (Dollars in Thousands)
<S>                             <C>          <C>          <C>            <C>          <C>           <C>       
    Residential real estate(1)   $ 603        76.7%        $ 600          78.6%        $ 598         79.0%     
    Multi-family real estate        26         1.6            29           1.8            30          1.9 
    Commercial real estate         203         4.1           237           3.8           231          3.9
    Consumer                       282        17.6           250          15.8           234         15.2
    Unallocated                    738          --           827            --           806           --
                                ------       -----        ------         -----        ------        ----- 
         Total                  $1,852       100.0%       $1,943         100.0%       $1,893        100.0%
                                ======       =====        ======         =====        ======        ===== 
</TABLE>

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

(1) Includes construction loans.

    INVESTMENT ACTIVITIES

         MORTGAGE-BACKED SECURITIES. Mortgage-backed securities (which also are
known as mortgage participation certificates or pass-through certificates)
typically represent a participation interest in a pool of single-family or
multi-family mortgages, the principal and interest payments on which are passed
from the mortgage originators, through intermediaries (generally U.S. Government
agencies and government sponsored enterprises) that pool and repackage the
participation interests in the form of securities, to investors such as the
Association. Such U.S. Government agencies and government sponsored enterprises,
which guarantee the payment of principal and interest to investors, primarily
include the FHLMC, the FNMA and the Government National Mortgage Association
("GNMA").

         The FHLMC is a public corporation chartered by the U.S. government and
guarantees the timely payment of interest and the ultimate return of principal
within one year. The FHLMC mortgage-backed securities are not backed by the full
faith and credit of the United States, but because the FHLMC is a U.S.
government sponsored enterprise, these securities are considered high quality
investments with minimal credit risks. The GNMA is a government agency within
the Department of Housing and Urban Development which is intended to help
finance government assisted housing programs. The GNMA guarantees the timely
payment of principal and interest, and GNMA securities are backed by the full
faith and credit of the U.S. Government. The FNMA guarantees the timely payment
of principal and interest, and FNMA securities are indirect obligations of the
U.S. Government.

      Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed rate or adjustable rate, as 



                                       15
<PAGE>   17


well as the prepayment risk, are passed on to the certificate holder.
Accordingly, the life of a mortgage-backed pass-through security approximates
the life of the underlying mortgages.

      The following table sets forth the composition and amortized cost of the
Bank's mortgage-backed securities at the dates indicated.

<TABLE>
<CAPTION>
                                                                     June 30,
                                                        -----------------------------------
                                                            1998       1997          1996
                                                            ----       ----          ----

                                                                  (In Thousands)
<S>                                                      <C>          <C>          <C>    
Mortgage-backed securities:
  GNMA                                                  $    --      $    --      $     --
  FNMA                                                       --           --            --
  FHLMC                                                      --           --            --
  FNMA Remic                                                151          200           254
  FHLMC Remic                                               900          900         1,130
  Other                                                     --           120           162
                                                        -------      -------      --------
     Total                                              $ 1,051      $ 1,220      $  1,546
                                                        =======      =======      ========

Mortgage-backed securities available for sale:
  GNMA                                                   $3,973       $4,900      $  5,885
  FNMA                                                    3,424        4,050         4,397
  FHLMC                                                     183          307           437
  FNMA Remic                                                228          284           284
  FHLMC Remic                                             3,454        3,526         2,926
                                                        -------      -------      --------
     Total                                              $11,262      $13,067      $ 13,929
                                                        =======      =======      ========
</TABLE>



                                       16
<PAGE>   18


      Information regarding the contractual maturities and weighted average
yield of the Bank's mortgage-backed securities portfolio at June 30, 1998 is
presented below.

<TABLE>
<CAPTION>
                                                      Amounts at June 30, 1998 Which Mature In
                                     -------------------------------------------------------------------------
                                     One Year        After One to     After Five To      Over 10
                                      or Less         Five Years         10 Years         Years         Total
                                      -------         ----------         --------         -----         -----
                                                                  (Dollars in Thousands)

<S>                                    <C>                <C>               <C>          <C>           <C>    
Mortgage-backed securities:
  GNMA                                 $--                $ --              $--          $    --       $    --
  FNMA                                  --                  --               --               --            --
  FHLMC                                 --                  --               --               --            --
  FNMA Remic                            --                  --               --              151           151
  FHLMC Remic                           --                  --               --              900           900
                                       ---                ----              ---          -------       -------
      Total                            $--                $ --              $--          $ 1,051       $ 1,051
                                       ===                ====              ===          =======       =======
Weighted average yield                  --%                 --%              --%             6.8%          6.8%
                                       ===                ====              ===          =======       =======

Mortgage-backed securities 
available for sale:
  GNMA                                 $--                $ --              $--          $ 3,973       $ 3,973
  FNMA                                  --                 397               --            3,027         3,424
  FHLMC                                 --                  --               --              183           183
  FNMA Remic                            --                  --               --              228           228
  FHLMC Remic                           --                  --               --            3,454         3,454
                                       ---                ----              ---          -------       -------
      Total                            $--                $397              $--          $10,865       $11,262
                                       ===                ====              ===          =======       =======
Weighted average yield                  --%                6.8%              --%             7.3%          7.3%
                                       ===                ====              ===          =======       =======
</TABLE>


      Mortgage-backed securities generally increase the quality of the Bank's
assets by virtue of the insurance or guarantees that back them, are more liquid
than individual mortgage loans and may be used to collateralize borrowings or
other obligations of the Bank. At June 30, 1998, none of the Bank's
mortgage-backed securities were pledged to secure obligations of the Bank.

      The actual maturity of a mortgage-backed security may be less than its
stated maturity due to prepayments of the underlying mortgages. Prepayments that
are faster than anticipated may shorten the life of the security and adversely
affect its yield to maturity. The yield is based upon the interest income and
the amortization of any premium or discount related to the mortgage-backed
security. In accordance with generally accepted accounting principles, premiums
and discounts are amortized over the estimated lives of the loans, which
decrease and increase interest income, respectively. The prepayment assumptions
used to determine the amortization period for premiums and discounts can
significantly affect the yield of the mortgage-backed security, and these
assumptions are reviewed periodically to reflect actual prepayments. Although
prepayments of underlying mortgages depend on many factors, including the type
of mortgages, the coupon rate, the age of mortgages, the geographical location
of the underlying real estate collateralizing the mortgages and general levels
of market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
falling mortgage interest rates, if the coupon rate of the underlying mortgages
exceeds the prevailing market interest rates offered for mortgage loans,
refinancing generally increases and accelerates the prepayment of the underlying
mortgages and the related security. Under such circumstances, the Bank may be
subject to reinvestment risk because to the 


                                       17


<PAGE>   19


extent that the Bank's mortgage-backed securities amortize or prepay faster than
anticipated, the Bank may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate.

      For additional information relating to the Bank's mortgage-backed
securities, see Notes 1 and 2 of the Notes to the Consolidated Financial
Statements.

      INVESTMENT SECURITIES. Under federal regulations, the Bank is permitted to
make certain securities investments. Investment decisions are made by authorized
officers of Laurel Savings within policies established by Laurel Savings' Board
of Trustees.

      The Bank is authorized to invest in obligations issued or fully guaranteed
by the United States, certain federal agency obligations, certain time deposits,
negotiable certificates of deposit issued by commercial banks and other insured
financial institutions, investment grade corporate debt securities and other
specified investments.

      The following table sets forth the composition and maturities of the
Bank's investment securities portfolio at June 30, 1998.

<TABLE>
<CAPTION>
                                                            Amounts at June 30, 1998 Which Mature In
                                           -------------------------------------------------------------------------
                                           One Year          1 to 5             5 to 10        Over 10
                                           or Less            Years              Years          Years          Total
                                           -------            -----              -----          -----          -----
                                                                   (Dollars in Thousands)
<S>                                           <C>              <C>              <C>              <C>           <C>    
Investment securities:
   Corporate notes and
    commercial paper                          $    --          $1,500           $ 6,498          $6,005        $14,003
                                              =======          ======           =======         =======        =======
   Weighted average
    yield                                          --%            6.5%              6.8%            7.6%           7.1%
                                              =======          ======           =======         =======        =======

Investment securities available for sale:
   Municipal obligations                      $    --          $   --           $    --         $ 8,914        $ 8,914
   Shay Financial
     Services Arms Fund (1)                    14,444              --                --              --         14,444
   FNMA preferred stock (1)                       250                                                              250
   FHLMC preferred stock (1)                      250                                                              250
   FNMA stock (1)                                 610              --                --              --            610
   FHLMC stock  (1)                               925              --                --              --            925
                                              -------          ------           -------         -------        -------

               Total                          $16,479          $   --           $    --         $ 8,914        $25,393
                                              =======          ======           =======         =======        =======
      Weighted average
       yield                                      5.4%             --%               --%            5.4%           5.4%
                                              =======          ======           =======         =======        =======
</TABLE>


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

(1) Such investment securities have no stated contractual maturity.



                                       18

<PAGE>   20




      The following table sets forth the composition and amortized cost of the
Bank's investment securities at each of the dates indicated.


<TABLE>
<CAPTION>
                                                         June 30,
                                              -------------------------------
                                               1998        1997        1996
                                               ----        ----        ----

                                                      (In Thousands)

<S>                                           <C>         <C>         <C>    
Investment securities:
   Corporate notes and
    commercial paper                          $14,003     $15,494     $ 9,948
                                              =======     =======     =======

Investment securities available for sale:
Corporate notes and
   commercial paper                           $    --     $ 1,500     $ 1,000
  Municipal obligations                         8,914       4,541       2,315
  Financial Institutions
    Insurance Group, Inc. stock                    --          --          25
 Shay Financial Services:
      ARMs Fund                                14,444       8,832       8,317
FNMA preferred stock                              250         250          --
FHLMC preferred stock                             250          --          --
FNMA stock                                        610          --          --
FHLMC stock                                       925         250          --
                                              -------     -------     -------
                                              $25,393     $15,373     $11,657
                                              =======     =======     =======
</TABLE>



SOURCES OF FUNDS

      GENERAL. Savings accounts and other types of deposits have traditionally
been the principal source of the Bank's funds for use in lending and for other
general business purposes. In addition to deposits, the Bank derives funds from
loan repayments. Borrowings may be used on a short-term basis to compensate for
seasonal or other reductions in deposits or inflows at less than projected
levels, as well as on a longer term basis to support expanded lending activities
or asset/liability management. During fiscal 1998, the Bank borrowed $12.0
million in FHLB advances for asset/liability management purposes.

      DEPOSITS. In recent years, the Bank has been required by market conditions
to rely increasingly on newly authorized types of short-term certificate
accounts and other deposit alternatives which have no fixed term and that pay
interest at rates that are more responsive to market interest rates than the
passbook accounts and regulated fixed-rate, fixed-term certificates that were
historically the Bank's primary sources of deposits. The types of deposits
currently offered by the Bank include passbook savings accounts, negotiable
order of withdrawal ("NOW") accounts, money market deposit accounts ("MMDAs"),
and certificates of deposit ranging in terms from 91 days to ten years. Included
among these savings programs are individual retirement accounts ("IRA") and
Keogh accounts.



                                       19
<PAGE>   21




      The following table sets forth the distribution of the Bank's deposits by
type of deposit at the dates indicated.


<TABLE>
<CAPTION>
                                                                     As of June 30,
                                  --------------------------------------------------------------------------------------


                                              1998                        1997                        1996
                                  --------------------------------------------------------------------------------------
                                                       % of                         % of                           % of 
                                    Amount           Deposits     Amount           Deposits      Amount          Deposits
                                    ------           --------     ------           --------      ------          --------
                                                                  (Dollars in Thousands)

<S>                                <C>                <C>        <C>                <C>        <C>                <C>  
Passbook and club accounts         $ 29,531           16.9%      $ 27,690           15.8%      $ 28,704           17.4%
NOW Accounts                         24,916           14.2         23,819           13.6         20,115           12.2
MMDAs                                16,444            9.4         18,047           10.3         18,477           11.2
Fixed-rate certificates              73,961           42.2         72,871           41.7         66,940           40.7
Jumbo certificates                    2,000            1.1          3,650            2.1          2,233            1.4
IRA and Keogh accounts               28,538           16.2         28,946           16.5         28,214           17.1
                                   --------          -----       --------          -----       --------          ----- 
  Total                            $175,390          100.0%      $175,019          100.0%      $164,683          100.0%
                                   ========          =====       ========          =====       ========          ===== 
</TABLE>


      The large variety of savings accounts offered by the Bank has increased
the Bank's ability to retain deposits and allowed it to be more competitive in
obtaining new funds, but has not eliminated the threat of disintermediation (the
flow of funds away from savings institutions into direct investment vehicles
such as government and corporate securities). However, these accounts have been
more costly than traditional accounts in periods of rising interest rates. In
addition, the Bank has become increasingly sensitive to short-term fluctuations
in deposit flows, as customers have become more rate conscious. As customers
have become more rate conscious and willing to move funds into higher yielding
accounts, the ability of the Bank to attract and maintain deposits and the
Bank's cost of funds have been, and will continue to be, significantly affected
by money market conditions.






                                       20
<PAGE>   22








      The following table sets forth information relating to the Bank's deposit
flows during the periods indicated.

                                           Year Ended June 30,
                                  ----------------------------------------
                                    1998            1997           1996
                                    ----            ----           ----
                                              (In Thousands)
(Decrease) increase before
  interest credited               $ (6,078)        $ 4,066        $(4,730)
Interest credited                    6,449           6,270          6,105
                                  --------         -------        -------
                                  $    371         $10,336        $ 1,375
                                  ========         =======        =======


      The principal methods used by Laurel Savings to attract deposits include
the offering of a wide variety of services and accounts, competitive interest
rates, and convenient office locations and service hours. The Bank uses
traditional marketing methods to attract new customers and deposits, including
mass media advertising and direct mailings. The development of new deposit
accounts and services within the past several years has enhanced the Bank's
deposit gathering function. The Bank has also adopted a tiered pricing program
for its certificate accounts, providing higher rates of interest on its
long-term certificates in order to encourage depositors to invest in
certificates with longer maturities, thus reducing the interest-rate sensitivity
of the Bank's deposit portfolio.

      The Bank's deposits are obtained primarily from persons who are residents
of Pennsylvania, particularly Allegheny and Butler counties. The Bank does not
advertise for deposits outside of Pennsylvania and management believes that an
insignificant amount of the Bank's deposits were held by nonresidents of
Pennsylvania at June 30, 1998. The Bank has not used brokers to obtain funds to
date and management of the Bank does not intend to utilize brokers to obtain
such deposits in the future.

      The following table presents, by various interest rate categories, the
amounts of certificates of deposit at the dates indicated and the amounts at
June 30, 1998 which mature during the periods indicated.


<TABLE>
<CAPTION>
                                                           Amounts at June 30, 1998 Maturing
                                As of June 30,                   in the Year Ended June,
                            ---------------------     -----------------------------------------------
                               1997       1998          1999        2000          2001     Thereafter
                               ----       ----          ----        ----          ----     ----------
                                                         (In Thousands)
<S>                        <C>          <C>          <C>         <C>          <C>           <C>    
Certificate Accounts:
   4.00% to   5.99%         $ 62,012     $79,427      $ 44,800    $17,901      $ 10,903      $ 5,823
   6.00% to   7.99%           38,683      22,791         7,120      7,700         2,381        5,590
   8.00% to   9.99%            4,772       2,281         1,810        441            30           --
  10.00% to  11.99%            2,520          --            --         --            --           --
                            --------    --------      --------    -------      --------      -------

Total                       $105,467    $104,499      $ 53,730     $26,042    $ 13,314       $11,413
                            ========    ========      ========     =======    ========       =======
</TABLE>


      The Bank has attempted to encourage such certificate holders to invest the
proceeds of their maturing certificates in longer term certificates of deposit
by offering commensurately higher interest rates in order to reduce the
vulnerability of the Bank to interest rate risk. To insure a continuity of this
trend, as well as to maintain adequate deposit levels, the Bank expects to offer
competitive rates 



                                       21
<PAGE>   23


relative to its marketplace. The Bank is confident that by competitively pricing
these certificates, balance levels deemed appropriate by management can be
achieved on a continuing basis. If necessary, the Bank also has the capacity to
borrow from the FHLB of Pittsburgh and from other sources to maintain adequate
liquidity.

      As of June 30, 1998, certificates of deposit in amounts of $100,000 or
more in the Bank amounted to $2.0 million. The following table sets forth as of
June 30, 1998 the distribution of certificates of deposit of $100,000 or more by
time remaining to maturity.

                                            ---------------
                                                 Amount
                                            ---------------
                                             (In Thousands)
       Three months or less                     $1,000
       Over three through six months               200
       Over six though 12 months                   200
       Over 12 months                              600
                                                ------
           Total                                $2,000
                                                ======



                                       22
<PAGE>   24

      The following table presents information concerning deposit accounts at
June 30, 1998, including the weighted average rate and the scheduled maturity of
certificates of deposit.


                                                        % of Total      Average
                                           Amounts        Deposits        Rate
                                           -------        --------        ----
                                       (In Thousands)

Passbook and club accounts               $ 29,531           16.8%         2.48%
Now accounts                               24,916           14.2          1.01
MMDA's                                     16,444            9.4          2.23
                                         --------          -----          ---- 
  Total                                    70,891           40.4          1.91
                                         --------          -----          ---- 
Certificates maturing by quarter:
  September 30, 1998                       19,517           11.1          5.39
  December 31, 1998                        11,500            6.6          5.39
  March 31, 1999                           12,425            7.1          5.56
  June 30, 1999                            10,288            5.9          5.53
  September 30, 1999                        8,547            4.9          5.73
  December 31, 1999                         5,621            3.2          5.84
  March 31, 2000                            5,053            2.9          5.87
  June 30, 2000                             6,821            3.9          5.88
  September 30, 2000                        3,927            2.2          5.76
  December 31, 2000                         3,101            1.8          5.78
  March 31, 2001                            4,117            2.3          5.64
  June 30, 2001                             2,169            1.2          6.23
  Thereafter                               11,413            6.5          5.99
                                         --------          -----          ---- 
Total certificate accounts                104,499           59.6          5.65
                                         --------          -----          ---- 
    Total deposits                       $175,390          100.0%         4.14%
                                         ========          =====          ==== 


         BORROWINGS. Laurel Savings may obtain advances from the FHLB of
Pittsburgh upon the security of the capital stock of the FHLB which it owns,
deposits with the FHLB of Pittsburgh and certain of its home mortgages, provided
certain standards related to creditworthiness are met. Such advances are made
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. FHLB advances are generally available to
meet seasonal and other withdrawals of savings accounts and to expand lending,
as well as to aid the efforts of members to establish better asset/liability
management by extending the maturities of liabilities. At June 30, 1998, 1997
and 1996, the Bank had $17.0 million, $11.0 million and $6.3 million,
respectively, of FHLB advances outstanding.


                                       23



<PAGE>   25


         The following table presents certain information regarding short-term
FHLB advances for the periods indicated:


                                              Year Ended June 30,
                                    --------------------------------------
                                      1998            1997           1996
                                      ----            ----           ----

                                            (Dollars in thousands)

FHLB advances:
Average balance outstanding         $12,998         $ 9,353         $5,122
Maximum amount outstanding 
 at any month-end during 
 the period                         $17,035         $11,046         $6,328
Weighted average interest
 rate during the period                5.54%           5.66%          5.87%
Amount outstanding at the
 end of the period                  $17,033         $11,044         $6,327
Weighted average rate at the
 end of the period                     5.49%           5.75%          5.52%



         Many financial institutions obtain funds from sales of securities to
institutional investors under agreements to repurchase ("institutional
repurchase agreements"), which are considered borrowings. The Bank has not
utilized and has no present intention to utilize institutional repurchase
agreements as a source of funds.

SUBSIDIARIES

         The Bank has one wholly owned subsidiary, Laurel Financial Services
Corporation ("LFSC"), which is the result of combining its former wholly owned
subsidiaries of All-Par Service Corporation and Pesa Service Corporation. LFSC
is currently inactive. At June 30, 1998, LFSC had no assets or liabilities.

EMPLOYEES

         The Bank had 40 full-time employees and 10 part-time employees as of
June 30, 1998. None of the employees are represented by a collective bargaining
agent, and the Bank believes it enjoys good relations with its personnel.



                                    24



<PAGE>   26




COMPETITION

         The Bank's primary market area consists of Allegheny and Butler
counties, Pennsylvania, in the north suburban Pittsburgh area. Substantially all
of the Bank's savings deposits are received from residents of its primary market
area, and most of its loans are secured by properties in this area.

         Laurel Savings faces substantial competition both in attracting
deposits and in making mortgage and other loans in its primary market area.
Competition for the origination of real estate loans principally comes from
other savings institutions, commercial banks and mortgage-banking companies
located in the Pittsburgh MSA. The Bank's most direct competition for deposits
has historically also come from other savings institutions, commercial banks and
credit unions located in the Pittsburgh MSA. In times of high interest rates,
Laurel Savings also encounters significant competition for investors' funds from
short-term money market securities and other corporate and government
securities.

         Laurel Savings competes for loans principally through the use of
competitive interest rates and loan fees it charges on its loan programs.
Further, Laurel Savings believes it offers a high degree of professionalism and
quality in the services it provides borrowers and their real estate brokers. It
competes for deposits by offering a variety of deposit accounts at competitive
rates, convenient business hours, and convenient branch locations with
interbranch deposit and withdrawal privileges at each.



                                       25



<PAGE>   27


                                   REGULATION


         Set forth below is a brief description of certain laws and regulations
which together with the descriptions of laws and regulations contained elsewhere
herein, are deemed material to an investor's understanding of the extent to
which the Company and the Savings Bank are regulated. The description of these
laws and regulations, as well as descriptions of laws and regulations contained
elsewhere herein, does not purport to be complete and is qualified in its
entirety by reference to applicable laws and regulations.

THE COMPANY

         GENERAL. The Company is a registered bank holding company pursuant to
the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company is
subject to regulation and supervision by the Federal Reserve Board and the
Department. The Company is required to file annually a report of its operations
with, and will be subject to examination by, the Federal Reserve Board and the
Department.

         BHCA ACTIVITIES AND OTHER LIMITATIONS. The BHCA prohibits a bank
holding company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any bank, or increasing such ownership or
control of any bank, without prior approval of the Federal Reserve Board. The
BHCA also generally prohibits a bank holding company from acquiring any bank
located outside of the state in which the existing bank subsidiaries of the bank
holding company are located unless specifically authorized by applicable state
law. Pennsylvania banking law permits the interstate acquisition of banking
institutions by bank holding companies on a regional and reciprocal basis. See
"Interstate Acquisitions." No approval under the BHCA is required, however, for
a bank holding company already owning or controlling 50% of the voting shares of
a bank to acquire additional shares of such bank.

         The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal Reserve Board is
required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.

         The Federal Reserve Board has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA. These
activities include operating a mortgage company, finance company, credit card
company, factoring company, trust company or savings association; performing
certain data processing operations; providing limited securities brokerage
services; acting as an investment or financial advisor; acting as an insurance
agent for certain types of credit-related insurance; leasing personal property
on a full-payout, non-operating basis; providing tax planning and preparation
services; operating a collection agency; and providing certain courier 







                                       26
<PAGE>   28

services. The Federal Reserve Board also has determined that certain other
activities, including real estate brokerage and syndication, land development,
property management and underwriting of life insurance not related to credit
transactions, are not closely related to banking and a proper incident thereto.

         CAPITAL REQUIREMENTS. The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the BHCA. The Federal Reserve Board capital adequacy guidelines
generally require bank holding companies to maintain total capital equal to 8%
of total risk-adjusted assets, with at least one-half of that amount consisting
of Tier I or core capital and up to one-half of that amount consisting of Tier
II or supplementary capital. Tier I capital for bank holding companies generally
consists of the sum of common stockholders' equity and perpetual preferred stock
(subject in the case of the latter to limitations on the kind and amount of such
stocks which may be included as Tier I capital), less goodwill. Tier II capital
generally consists of hybrid capital instruments; perpetual preferred stock
which is not eligible to be included as Tier I capital; term subordinated debt
and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring no additional capital) for assets such as cash to 100% for
the bulk of assets which are typically held by a bank holding company, including
multi-family residential and commercial real estate loans, commercial business
loans and consumer loans. Single-family residential first mortgage loans which
are not (90 days or more) past-due or non-performing and which have been made in
accordance with prudent underwriting standards are assigned a 50% level in the
risk-weighing system, as are certain privately-issued mortgage-backed securities
representing indirect ownership of such loans. Off-balance sheet items also are
adjusted to take into account certain risk characteristics.

         In addition to the risk-based capital requirements, the Federal Reserve
Board requires bank holding companies to maintain a minimum leverage capital
ratio of Tier I capital to total assets of 3.0%. Total assets for this purpose
does not include goodwill and any other intangible assets and investments that
the Federal Reserve Board determines should be deducted from Tier I capital. The
Federal Reserve Board has announced that the 3.0% Tier I leverage capital ratio
requirement is the minimum for the top-rated bank holding companies without any
supervisory, financial or operational weaknesses or deficiencies or those which
are not experiencing or anticipating significant growth. Other bank holding
companies will be expected to maintain Tier I leverage capital ratios of at
least 4.0% to 5.0% or more, depending on their overall condition.

         The Company is in compliance with the above-described Federal Reserve
Board regulatory capital requirements.

         COMMITMENTS TO AFFILIATED INSTITUTIONS. Under Federal Reserve Board
policy, the Company is expected to act as a source of financial strength to the
Bank and to commit resources to support the Bank in circumstances when it might
not do so absent such policy. The legality and precise scope of this policy is
unclear, however, in light of recent judicial precedent.




                                       27
<PAGE>   29



THE BANK

         GENERAL. The Bank is incorporated under the Pennsylvania Banking Code
of 1965, as amended (the "Banking Code") and is subject to extensive regulation
and examination by the Department and by the FDIC, which insures its deposits to
the maximum extent permitted by law, and is subject to certain requirements
established by the Federal Reserve Board. The federal and state laws and
regulations which are applicable to banks regulate, among other things, the
scope of their business, their investments, their reserves against deposits, the
timing of the availability of deposited funds and the nature and amount of and
collateral for certain loans. There are periodic examinations by the Department
and the FDIC to test the Bank's compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulation, whether by the Department, the FDIC or the Congress could have a
material adverse impact on the Company, the Bank and their operations.

         FDIC INSURANCE PREMIUMS. The deposits of the Bank are insured to the
maximum extent permitted by the SAIF, which is administered by the FDIC, and are
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
is authorized to conduct examination of, and to require reporting by,
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious threat to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the OTS an
opportunity to take such action.

         The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe of unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.

         CAPITAL REQUIREMENTS. The FDIC has promulgated regulations and adopted
a statement of policy regarding the capital adequacy of state-chartered banks
which, like the Bank, will not be members of the Federal Reserve System. These
requirements are substantially similar to those adopted by the Federal Reserve
Board regarding bank holding companies, as described above.

         The FDIC's capital regulations establish a minimum 3.0% Tier I leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier I leverage ratio for such other banks to 4.0% to 5.0% or more. Under the
FDIC's regulation, highest-rated banks are those that the FDIC determines are
not anticipating or experiencing 




                                       28
<PAGE>   30



significant growth and have well diversified risk, including no undue interest
rate risk exposure, excellent asset quality, high liquidity, good earnings and,
in general, which are considered a strong banking organization and are rated
composite 1 under the Uniform Financial Institutions Rating System. Leverage or
core capital is defined as the sum of common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
and minority interests in consolidated subsidiaries, minus all intangible assets
other than certain qualifying supervisory goodwill, and certain purchased
mortgage servicing rights and purchased credit and relationships.

         The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital (which is defined as Tier I capital and
supplementary (Tier 2 capital) to risk weighted assets of 8%. In determining the
amount of risk-weighted assets, all assets, plus certain off balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item.

         The components of Tier I capital are equivalent to those discussed
above under the 3% leverage standard. The components of supplementary (Tier 2)
capital include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
general allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. At June 30, 1998, the
Bank met each of its capital requirements.




                                       29
<PAGE>   31




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

<TABLE>
<CAPTION>
                                                     -------           -------           -------
                                                                        Tier 1            Tier 1
                                                      Tier 1             Risk-             Risk- 
                                                        Core             Based             Based
                                                     Capital           Capital           Capital
                                                     -------           -------           -------
<S>                                                 <C>               <C>               <C>     
Equity Capital (1)                                  $ 23,131          $ 23,131          $ 23,131
Less unrealized securities gains                        (290)             (290)             (290)
Plus general valuation allowances (2)                     --                --             1,445
                                                    --------          --------          --------
        Total regulatory capital                      22,841            22,841            24,286
Minimum required capital                               8,753             4,623             9,245
                                                    --------          --------          --------
        Excess regulatory capital                   $ 14,088          $ 18,218          $ 15,041
                                                    ========          ========          ========
Regulatory capital as a percentage (3)                 10.44%            19.83%            21.09%
Minimum required capital percentage                     4.00              4.00              8.00
                                                    --------          --------          --------
        Excess regulatory capital percentage            6.44%            15.83%            13.09%
                                                    ========          ========          ========
</TABLE>


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

(1)      Represents equity capital of the Bank as reported to the FDIC and the
         Department for the quarter ended June 30, 1998.

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

(3)      Tier 1 capital is calculated as a percentage of adjusted total assets
         of $218,837. Tier I and Tier II risk-based capital are calculated as a
         percentage of adjusted risk-weighed assets of $115,158.


         The Bank is also subject to more stringent Department capital
guidelines. Although not adopted in regulation form, the Department utilizes
capital standards requiring a minimum of 6% leverage capital and 10% risk-based
capital. The components of leverage and risk-based capital are substantially the
same as those defined by the FDIC.

         ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. The
activities and equity investments of FDIC-insured, state-chartered banks are
generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a 



                                       30
<PAGE>   32





company that solely provides or reinsures directors', trustees' and officers'
liability insurance coverage or bankers' blanket bond group insurance coverage
for insured depository institutions, and (iv) acquiring or retaining the voting
shares of a depository institution if certain requirements are met. In addition,
an insured state-chartered bank may not, directly, or indirectly through a
subsidiary, engage as "principal" in any activity that is not permissible for a
national bank unless the FDIC has determined that such activities would pose no
risk to the insurance fund of which it is a member and the bank is in compliance
with applicable regulatory capital requirements.

         PENNSYLVANIA SAVINGS BANK LAW. The Banking Code contains detailed
provisions governing the organization, location of offices, rights and
responsibilities of directors, officers, employees and members, as well as
corporate powers, savings and investment operations and other aspects of the
Savings Bank and its affairs. The Banking Code delegates extensive rulemaking
power and administrative discretion to the Department so that the supervision
and regulation of state-chartered savings banks may be flexible and readily
responsive to changes in economic conditions and in savings and lending
practices.

         One of the purposes of the Banking Code is to provide savings banks
with the opportunity to be competitive with each other and with other financial
institutions existing under other Pennsylvania laws and other state, federal and
foreign laws. A Pennsylvania savings bank may locate or change the location of
its principal place of business and establish an office anywhere in the
Commonwealth, with the prior approval of the Department.

         The Department generally examines each savings bank not less frequently
than once every two years. Although the Department may accept the examinations
and reports of the FDIC in lieu of the Department's examination, the present
practice is for the Department to conduct individual examinations. The
Department may order any savings bank to discontinue any violation of law or
unsafe or unsound business practice and may direct any trustee, officer,
attorney or employee of a savings bank engaged in an objectionable activity,
after the Department has ordered the activity to be terminated, to show cause at
a hearing before the Department why such person should not be removed.

         INTERSTATE ACQUISITIONS. The Commonwealth of Pennsylvania has enacted
legislation regarding the acquisition of commercial banks, bank holding
companies, savings banks and savings and loan associations located in
Pennsylvania by institutions located outside of Pennsylvania. The statute
dealing with savings institutions authorizes (i) a savings bank, savings and
loan association or holding company thereof located in Delaware, the District of
Columbia, Indiana, Kentucky, Maryland, New Jersey, Ohio, Virginia and West
Virginia (collectively, "regional institutions") to acquire the voting stock of,
merge or consolidate with, or purchase assets and assume liabilities of, a
Pennsylvania-chartered savings bank, (collectively, "Pennsylvania institutions")
and (ii) the establishment of branches in Pennsylvania by regional institutions,
in each case subject to certain conditions including reciprocal legislation in
the state in which the regional institution seeking entry into Pennsylvania is
located permitting comparable entry by Pennsylvania institutions and approval by
the Pennsylvania Department of Banking. The statute also provides for nationwide
branching by Pennsylvania-chartered savings banks and savings and loan
associations, subject to Pennsylvania Department of Banking approval and certain
other conditions. Of the states within the region, Delaware, Maryland, New
Jersey, Ohio and West Virginia currently have laws that permit Pennsylvania
institutions to branch into such states and/or acquire savings institutions
located in such states.




                                       31
<PAGE>   33
         MISCELLANEOUS. The Bank is subject to certain restrictions on loans to
the Company, on investments in the stock or securities thereof, on the taking of
such stock or securities as collateral for loans to any borrower, and on the
issuance of a guarantee or letter of credit on behalf of the Company. The Bank
is also subject to certain restrictions on most types of transactions with the
Company, requiring that the terms of such transactions be substantially
equivalent to terms of similar transactions with non-affiliated firms. In
addition, there are various limitations on the distribution of dividends to the
Company by the Bank.


                                       32
<PAGE>   34


                                    TAXATION

FEDERAL AND STATE TAXATION

         The Company and Bank are subject to federal income tax under the
Internal Revenue Code of 1986, as amended (the "Code"), in the same general
manner as other corporations. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters and is
not a comprehensive description of the tax rules applicable to the Company and
the Bank.

         FISCAL YEAR. The Company and the Bank file consolidated federal income
tax returns on the basis of a fiscal year ending on June 30.

         ACCRUAL METHOD OF ACCOUNTING. For federal income tax purposes, the
Company and the Bank currently reports its income and expenses on the accrual
basis method of accounting, for filing federal income tax returns.

         BAD DEBT RESERVES. Savings institutions such as the Bank, which meet
certain definitional tests primarily relating to their assets and the nature of
their businesses, are permitted to establish a reserve for bad debts and to make
annual additions to the reserve. These additions may, within specified formula
limits, be deducted in arriving at the Bank's taxable income. For purposes of
computing the deductible addition to its bad debt reserve, the Bank's loans are
separated into "qualifying real property loans" (i.e., generally those loans
secured by interests in real property) and all other loans ("non-qualifying
loans"). The deduction with respect to nonqualifying loans must be computed
under the experience method, which essentially allows a deduction for the Bank's
actual charge-offs while a deduction with respect to qualifying loans may be
computed using a percentage based on actual loss experience or a percentage of
taxable income. Reasonable additions to the reserve for losses on nonqualifying
loans must be based upon actual loss experience and would reduce the current
years addition to the reserve for losses on qualifying real property loans,
unless that addition is also determined under the experienced method. The sum of
the additions to each reserve for each year is the Bank's annual bad debt
deduction.

         Under the experience method, the deductible annual addition is the
amount necessary to increase the balance of the reserve at the close of the
taxable year to the greater of (i) the amount which bears the same ratio to
loans outstanding at the close of the taxable year as the total net bad debts
sustained during the current and five preceding taxable years bear to the sum of
the loans outstanding at the close of those six years or (ii) the balance in the
reserve account at the close of the last taxable year prior to the most recent
adoption of the experience method or on December 31, 1969, whichever is later
(assuming that the loans outstanding have not declined since then) (the "base
year"). For taxable years beginning after 1987, the base year shall be the last
taxable year beginning before 1988.

         Under the percentage of taxable income method, the bad debt deduction
equals 8% of taxable income determined without regard to that deduction and with
certain adjustments. The availability of the percentage of taxable income method
has permitted a qualifying savings institution to be taxed at a significantly
lower maximum effective marginal federal income tax rate rather than that
applicable to corporations in general. This resulted generally in a maximum
effective marginal federal income tax rate payable by a qualifying savings
institution fully able to use the maximum deduction permitted 


                                       33
<PAGE>   35


under the percentage of taxable income method, in the absence of other factors
affecting taxable income, of 31.3%. As of June 30, 1998, at least 60% of the
Bank's assets were "qualifying assets" described in Section 7701(a)(19)(C) of
the Code, and the Bank anticipates that at least 60% of its assets will continue
to be qualifying assets in the immediate future. If this ceases to be the case,
the Bank may be required to restore some portion of its bad debt reserve to
taxable income in the future.

         Under the percentage of taxable income method, the bad debt deduction
for an addition to the reserve for qualifying real property loans cannot exceed
the amount necessary to increase the balance in this reserve to an amount equal
to 6% of such loans outstanding at the end of the taxable year. Based on
experience, it is not expected that this restriction will be a limiting factor
in the immediate future. The bad debt deduction is also limited to the amount
which when added to the addition to the reserve for losses on nonqualifying
loans, equals the amount by which 12% of deposits at the close of the year
exceeds the sum of surplus, undivided profits and reserves at the beginning of
the year. It is not expected that these restrictions will be a limiting factor
for the Bank in the foreseeable future. In addition, the deduction for
qualifying real property loans is reduced by an amount equal to all or part of
the deduction for nonqualifying loans.

         Recently enacted legislation (i) repeals the provision of the Code
which authorizes use of the percentage of taxable income method by qualifying
savings institutions to determine deductions for bad debts, effective for
taxable years beginning after 1995, and (ii) requires that a savings institution
recapture for tax purposes (i.e. take into income) over a six-year period it
applicable excess reserves, which for a thrift institution such as the Bank
which becomes a "small bank," as defined in the Code, generally is the excess of
the balance of its bad debt reserves as of the close of its last taxable year
beginning before January 1, 1996 over the balance of such reserves as of the
close of its last taxable year beginning before January 1, 1988, which recapture
would be suspended for any tax year that begins after December 31, 1995 and
before January 1, 1998 (thus a maximum of two years) in which a savings
institution originates an amount of residential loans which is not less than the
average of the principal amount of such loans made by a savings institution
during its six most recent taxable years beginning before January 1, 1996. As an
institution with less than $500.0 million in assets, the Bank can elect to
either use the experience method available to commercial banks of this size or
it can adopt the specific charge-off method applicable to "large banks" (banks
with total assets in excess of $500.0 million). The Company does not believe
that these provisions will have a material adverse affect on the Company's
financial condition or results of operations.

         The above-reference legislation also repeals certain provisions of the
Code that only apply to thrift institutions to which Section 593 applies: (I)
the denial of a portion of certain tax credits to a thrift institution; (ii) the
special rules with respect to the foreclosure of property securing loans of a
thrift institution; (iii) the reduction in the dividends received deduction of a
thrift institution; and (iv) the ability of a thrift institution to use a net
operation loss to offset its income from a residual interest in a real estate
mortgage investment conduit. It is not anticipated that the repeal of these
provisions will have a material adverse effect on the Company's financial
condition or results of operations.

         DISTRIBUTIONS. If the Bank makes a distribution to stockholders, and
the distribution is treated as being from its accumulated bad debt reserves, the
distribution will cause the Bank to have additional taxable income. A
distribution to stockholders is deemed to have been made from accumulated bad
debt reserves to the extent that (a) the reserves exceed the amount that would
have been accumulated on the basis of actual loss experience, and (b) the
distribution is a "nondividend distribution." A 


                                       34
<PAGE>   36

distribution in respect of stock is a non-dividend distribution to the extent
that, for federal income tax purposes, (i) it is in redemption of shares, (ii)
it is pursuant to a liquidation of the institution, or (iii) in the case of a
current distribution, together with all other such distributions during the
taxable year, exceeds the Bank's current and post-1951 accumulated earnings and
profits. The amount of additional taxable income created by a nondividend
distribution is an amount that when reduced by the tax attributable to it is
equal to the amount of the distribution.

         MINIMUM TAX. The Code imposes the corporate minimum tax from an add-on
tax to an alternative minimum tax at a rate of 20%. The alternative minimum tax
generally will apply to a base of regular taxable income plus certain tax
preferences ("alternative minimum taxable income" or "AMTI") and will be payable
to the extent such AMTI is in excess of an exemption amount. The Code provides
that an item of tax preference is the excess of the bad debt deduction over the
amount allowable under the experience method. The other items of tax preference
that constitute AMTI include (a) tax-exempt interest on newly-issued (generally,
issued on or after August 8, 1986) private activity bonds other than certain
qualified bonds and (b) 75% of the excess (if any) of (i) 75% of adjusted
current earnings as defined in the Code, over (ii) AMTI (determined without
regard to this preference and prior to reduction by net operating losses).

         NET OPERATING LOSS CARRYOVERS. The Bank may carry back net operating
losses ("NOLS") to the preceding three taxable years and forward to the
succeeding 15 taxable years. Losses incurred by savings institutions in years
beginning after 1981 and before 1986 may be carried back ten years and forward
eight years. Losses attributable to years before 1982 may be carried back ten
years and forward five years.

         CAPITAL GAINS AND CORPORATE DIVIDENDS-RECEIVED DEDUCTION. Corporate net
capital gains are taxed at a maximum rate of 34%. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated tax
return, however, if a corporation owns less than 20% of the stock of a
corporation distributing a dividend, it may deduct only 70% of dividends
received or accrued on its behalf. A corporation may deduct 100% of dividends
from a member of the same affiliated group of corporations.

         Laurel Savings' federal income tax returns for its tax years beginning
after June 30, 1992 and subsequent periods are open under the statute of
limitations and are subject to review by the Internal Revenue Service.

         Recent Legislation. On August 10, 1993, the President signed the
Revenue Reconciliation Act of 1993 into law. This legislation contains wide
ranging revisions to the existing tax law, including increasing the effective
tax rate to 35% for corporations with taxable income in excess of $10 million,
and reducing the deductibility of meal and entertainment expenses to 50%. While
this revision of the tax law is not expected to have an immediate effect on the
Bank, two items with potential future impact are the ability to amortize
intangible business assets such as core deposit intangibles, and the possibility
of implementing mark-to market rules for certain securities held or acquired by
a broker/dealer, as defined by the Internal Revenue Code. At August 10, 1993,
the Bank had no intangible business assets recorded, nor are any such assets
contemplated in the near term. In addition, regulations have not been issued
detailing the determination and implementation procedures for mark-to-market
accounting, for tax purposes, for certain investment securities. As such, and
pending the issuance of final regulations, the impact of this legislation is not
expected to have a material impact on the Bank's or operations.



                                       35
<PAGE>   37

STATE TAXATION

         The Company is subject to the Pennsylvania Corporate Net Income Tax and
Capital Stock and Franchise Tax. The Corporate Net Income Tax rate is currently
12.25% and is imposed on the Company's unconsolidated taxable income for federal
purposes with certain adjustments. In general, the Capital Stock Tax is a
property tax imposed at a rate of 1.3% of a corporation's capital stock value,
which is determined in accordance with a fixed formula based an average net
income and net worth.

         The Bank is subject to tax under the Pennsylvania Mutual Thrift
Institutions Tax Act ("MITA"), which previously imposed a tax at the rate of
11.5% on the Bank's net earnings, determined in accordance with GAAP, as shown
on its books. For fiscal years beginning in 1983, and thereafter, net operating
losses may be carried forward and allowed as a deduction for three succeeding
years. MITA exempts the Bank from all other corporate taxes imposed by
Pennsylvania for state tax purposes, and from all local taxes imposed by
political subdivisions thereof, except taxes on real estate and real estate
transfers.

         In calculating its income for purposes of the MITA, the Bank previously
included interest earned on obligations of the United States and the
Commonwealth of Pennsylvania. However, the Pennsylvania Supreme Court ruled in
1987 that such interest income did not need to be included in calculating income
for purposes of the MITA. The MITA tax rate is currently 11.5%.


                                       36
<PAGE>   38


ITEM 2.  PROPERTIES.

         The following table sets forth certain information as of June 30, 1998
with respect to the offices of the Company and Laurel Savings.

<TABLE>
<CAPTION>
                                        Owned                                    Net Book Value of Property or 
                                         or                  Lease                Leasehold Improvements as of  
          Location                     Leased            Expiration Date                 June 30, 1998
------------------------------      -------------      ------------------      ----------------------------------
<S>                                    <C>                <C>                             <C>
Allegheny County:

  363 Butler Street,
  Etna                                 Owned                                                $ 152

  1416 Mt. Royal Blvd.
  Glenshaw                             Owned                                                  172

  1801 Jancey Street
  Morningside, Pittsburgh              Leased                2001(1)                           --

  2724 Harts Run Road
  Allison Park                         Owned                                                  490

  744 Little Deer Creek Road
  Russellton                           Owned                                                   97

Butler County:
  125 West Main Street
  Saxonburg                            Owned                                                  199

</TABLE>

---------------------
(1) There is presently a five year option to extend this lease.

         The Bank also has ATMs in its branch offices located at 363 Butler
Street, 744 Little Deer Creek Road, Russellton, 2724 Harts Run Road and 125 West
Main Street. The Bank participates in the MAC(TM) and Cirrus(TM) shared ATM
network systems which provides customers with access to their deposits at
thousands of locations throughout Pennsylvania, the United States and many
foreign countries.

ITEM 3.  LEGAL PROCEEDINGS.
         The Company and the Bank are not involved in any pending legal
proceedings other than routine, non-material legal proceedings occurring in the
ordinary course of business.


                                       37
<PAGE>   39


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         Not applicable.

PART II.

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         The information required herein is incorporated by reference from pages
1 and 3 of the Company's Annual Report to Stockholders attached hereto as
Exhibit 13 (the "1998 Annual Report").

ITEM 6.  SELECTED FINANCIAL DATA.

         The information required herein is incorporated by reference from page
29 of the Company's 1998 Annual Report.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

         The information required herein is incorporated by reference from pages
30 to 42 of the Company's 1998 Annual Report.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         The information required herein is incorporated by reference from pages
30 to 32 of the Company's 1998 Annual Report.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The information required herein is incorporated by reference from pages
7 to 28 of the Company's 1998 Annual Report.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
         FINANCIAL DISCLOSURE.

         Not applicable.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The information required herein is incorporated by reference from
"Information With Respect to Nominees for Director, Directors Whose Terms
Continue and Executive Officers" in the Bank's Proxy Statement for the Annual
Meeting of Stockholders for fiscal 1998 ("Proxy Statement").


                                       38
<PAGE>   40

ITEM 11. EXECUTIVE COMPENSATION.

         The information required herein is incorporated by reference from
"Executive Compensation" in the Proxy Statement.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The information required herein is incorporated by reference from
"Principal Holders of Common Stock" and "Information With Respect to Nominees
For Director, Directors Whose Term Continues and Executive Officers" in the
Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         None.

PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

         (a)      DOCUMENTS FILED AS PART OF THIS REPORT

         (1) The following financial statements are incorporated by reference
from Item 8 hereof (see Exhibit 13 hereto):

         Independent Auditors' Report

         Consolidated Statements of Financial Condition at June 30, 1998 
         and 1997

         Consolidated Statements of Operations for the Years Ended June 30, 
         1998, 1997 and 1996

         Consolidated Statements of Stockholders' Equity for the Years Ended 
         June 30, 1998, 1997 and 1996

         Consolidated Statements of Cash Flows for the Years Ended June 30, 
         1998, 1997 and 1996

         Notes to Consolidated Financial Statements

         (2) All other schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because of the absence of
conditions under which they are required or because the required information is
included in the consolidated financial statements and related notes thereto.

                                       39
<PAGE>   41




         (3) The following exhibits are filed as part of this Form 10-K and this
list includes the Exhibit Index.

<TABLE>
<CAPTION>

         No.                     Exhibits                                                      Page
         ---                     --------                                                      ----
       <S>                      <C>                                                            <C>    
        3.1                      Articles of Incorporation                                       *
        3.2                      Bylaws                                                          *
        4                        Common Stock Certificate                                        *
       10.1                      1987 Stock Compensation Program                                 *
       10.2                      1993 Key Employee Stock Compensation Program                   **
       10.3                      1993 Directors' Stock Option Plan                              **
       10.4                      1996 Stock Option Plan                                        ***
       10.5                      Employment agreement between Laurel Savings Bank and
                                    Edwin R. Maus                                              ***
       11                        Earnings Per Share Computation
       13                        1998 Annual Report to Stockholders
       21                        See "Business - Subsidiaries"
                                    for the required information.
       23                        Consent of KPMG Peat Marwick LLP
       27                        Financial Data Schedule
</TABLE>

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

         * Incorporated by reference to the Company's Registration Statement on
Form S-4.

         ** Incorporated by reference to the Company's Form 10-K for the year
ended June 30, 1994.

         *** Incorporated by reference to the Company's Form 10-K for the year 
ended June 30, 1997.

         (b)  Reports on Form 8-K

         The Registrant did not file any reports on Form 8-K during the quarter
ended June 30, 1998.

         (c) See (a)(3) above for all exhibits and the Exhibit Index.

         (d) There are no other financial statements and Financial Statement
Schedules which were excluded from the 1998 Annual Report to Stockholders which
are required to be included herein.

                                       40
<PAGE>   42



                                   SIGNATURES



         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                               LAUREL CAPITAL GROUP, INC.



                                                By: /S/ EDWIN R. MAUS
                                                   -----------------------------
Date: September 28, 1998                            Edwin R. Maus, President and
                                                       Chief Executive Officer


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.



 /S/ ARTHUR G. BORLAND                                 Date: September 28, 1998
-------------------------------------------------
Arthur G. Borland, Director



 /S/ RICHARD  J. CESSAR                                Date: September 28, 1998
-------------------------------------------------
Richard J. Cessar, Chairman of the Board



 /S/ ANNETTE D. GANASSI                                Date: September 28, 1998
-------------------------------------------------
Annette D. Ganassi, Director



 /S/ RICHARD S. HAMILTON                               Date: September 28, 1998
-------------------------------------------------
Richard S. Hamilton, Director



 /S/ HARVEY J. HAUGHTON                                Date: September 28, 1998
-------------------------------------------------
Harvey J. Haughton, Director



                                       41
<PAGE>   43


 /S/ EDWIN R. MAUS                                     Date: September 28, 1998
-------------------------------------------------
Edwin R. Maus, Director, President
 and Chief Executive Officer



 /S/ J. HAROLD NORRIS                                  Date: September 28, 1998
-------------------------------------------------
J. Harold Norris, Director



 /S/ JOHN A. HOWARD, JR.                               Date: September 28, 1998
-------------------------------------------------
John A. Howard, Jr., Senior Vice President,
 Chief Financial Officer and Corporate Secretary/
  Treasurer


                                       42