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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K

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

                    FOR THE FISCAL YEAR ENDED JUNE 30, 1997

                                       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 25, 1997, the aggregate value of the 1,349,063 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
96,894 shares held by all directors and officers of the Registrant as a group,
was approximately $33.8 million. This figure is based on the mean of the bid and
asked prices of $25.06 per share of the Registrant's Common Stock on September
25, 1997.

Number of shares of Common Stock outstanding as of September 25, 1997:
1,445,957

                      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,
1997 are incorporated into Part II, Items 5 through 8 of this Form 10-K.

(2) Portions of the definitive proxy statement for the 1997 Annual Meeting of
Stockholders to be filed within 120 days of June 30, 1997 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, 1997, the Company had total
assets of $212.0 million and stockholders' equity of $21.3 million or 10.0% of
total assets. In addition, at such date, the Bank's core capital of $20.8
million and tier I and tier II risk-based capital of $20.8 million and $22.2
million, respectively, exceeded the required amounts by $12.4 million, $16.5
million and $13.5 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



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well as other states.

         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 4.7%
compared to 5.3% for the state of Pennsylvania and 4.8% 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 $82,000 while
the average sales price is approximately $105,000. 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, 1997, Laurel Savings' total loan portfolio
amounted to $149.1 million ("total loan portfolio"), representing approximately
70.3% of the Bank's total assets at that date. Permanent loans secured by
single-family (one-to-four units) residential properties amounted to $114.0
million or 76.5% of the total loan portfolio at June 30, 1997. At June 30,
1997, multi-family (over four units) residential loans amounted to $2.7 million
or 1.8% of the total loan portfolio while construction loans (all of which were
for the construction of single-family residential properties) totalled $3.1
million or 2.1% of the total loan portfolio and commercial real estate loans
totalled $5.7 million or 3.8% of the total loan portfolio. The Bank's consumer
loans, the second largest component of the Bank's total loan portfolio,
amounted to $23.6 million or 15.8% of such portfolio at June 30, 1997.


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         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,
                                  ----------------------------------------------------------------------------
                                         1997                          1996                         1995
                                  -------------------          -----------------           -------------------
                                  Amount            %          Amount          %           Amount            %
                                  -------------------          -----------------           -------------------

                                                              (Dollars in Thousands)
<S>                                  <C>          <C>         <C>             <C>         <C>              <C>
Real estate loans:

  Single-family                      $114,062      76.5%      $113,160         76.1%      $113,243          76.1%

  Multi-family                          2,740       1.8          2,811          1.9          3,281           2.2

  Construction(1)                       3,079       2.1          4,281          2.9          4,754           3.2

  Commercial                            5,676       3.8          5,788          3.9          7,002           4.7
                                     --------     -----       --------        -----       --------        ------

    Total real estate loans           125,557      84.2        126,040         84.8        128,280          86.2

Consumer loans(2)                      23,584      15.8         22,630         15.2         20,444          13.8
                                     --------     -----       --------        -----       --------        ------

    Total loans                      $149,141     100.0%      $148,670        100.0%      $148,724         100.0%
                                     --------     =====       --------        =====       --------         =====
                                            
Less:

  Loans in process                     (1,634)                  (2,148)                     (2,377)

  Allowance for possible loan
  losses                               (1,943)                  (1,899)                     (1,893)

  Unamortized discounts and
    Fees                                 (894)                  (1,091)                     (1,363)
                                      -------                  -------                     -------

  Net loans receivable               $144,670                 $143,532                    $143,091
                                      =======                  =======                     =======
</TABLE>

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(1)      The $3.1 million construction loan portfolio outstanding at June 30,
         1997 consisted of adjustable-rate construction loans totalling $3.0
         million and fixed-rate construction loans totalling $100,000.

(2)      Consumer loans consist primarily of installment loans, auto loans,
         home equity loans, home improvement loans, commercial loans, mobile
         home 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 1997 Annual Report to
         Stockholders ("Annual Report") set forth as Exhibit 13 hereto.


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         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, 1997 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,                     1999-         2001-        2003-       2008-       2019 and
                            1997            1998         2000          2002         2007        2018       Thereafter
                         -----------      --------     ---------      --------     -------     -------    ------------

                                                                 (In Thousands)
<S>                        <C>            <C>           <C>           <C>          <C>         <C>          <C>
Fixed-rate mortgage
  Loans                    $ 80,846       $ 4,130       $ 7,529       $ 8,082      $21,861     $22,103      $17,141
Adjustable-rate
  mortgage loans             41,632         2,133         2,021         2,295        6,715      14,656       13,812
Construction                  3,079         3,079            --            --           --          --           --
Consumer and other
  Loans                      23,584         8,423         6,395         3,317        3,811       1,638           --
                           --------       -------       -------       -------      -------     -------      -------
          Total            $149,141       $17,765       $15,945(1)    $13,694(1)   $32,387(1)  $38,397(1)   $30,953(1)
                           ========       =======       =======       =======      =======     =======      =======
</TABLE>
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(1)      Of the $131.4 million of principal repayments contractually due after
         June 30, 1998, $91.9 million have fixed-rates of interest and $39.5
         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.

         Mortgage loans have been originated by the Bank primarily through
referrals from real



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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 1997, 1996 and
1995 primarily focused on the sale of student loans.



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<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,
                                        ----------------------------------------------------------------
                                             1997                    1996                       1995
                                        --------------          --------------             -------------

                                                                (In Thousands)
<S>                                          <C>                     <C>                       <C>
Real estate originations:
  Residential:
    Single-family                            $ 9,798                 $14,002                   $20,218
    Multi-family                                 550                      --                        --
  Commercial                                     835                      --                        --
  Construction(1)                              3,829                   3,455                     3,488
                                             -------                 -------                   -------
    Total real estate loan
      Originations                            15,012                  17,457                    23,706
Consumer and other loan
  Originations                                15,390                  13,154                    12,553
                                             -------                 -------                   -------
      Total loan originations                 30,402                  30,611                    36,259
Loan participation interests
 Purchased                                        29                      --                       450
                                             -------                 -------                   -------
 Total loan originations
  and loan participation
  interests purchased                         30,431                  30,611                    36,709
                                             -------                 -------                   -------

Students loans sold                              719                     550                       362
Loan participation interests
  Sold                                            --                      68                       225
Principal loan repayments                     28,530                  29,319                    22,934
Other, net(2)                                     44                     233                       280
                                             -------                 -------                   -------
  Total principal loan
    repayments and other                      29,293                  30,170                    23,831
                                             -------                 -------                   -------
Net increase in loans
  receivable, net                            $ 1,138                 $   441                   $12,878
                                             =======                 =======                   =======
</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 totalled $3.8 million during fiscal 1997, of which
         $800,000 were fixed-rate, single-family residential loans and $3.0
         million were adjustable-rate, single-family residential loans.

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


LENDING PROGRAMS AND POLICY

         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, 1997, $69.4 million or 46.5% of the Bank's total loan



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<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 1997, 1996 and 1995, the Bank originated $4.3 million, $9.7 million and
$8.0 million, respectively, of fixed-rate mortgage loans. However, due to the
interest rate environment during fiscal 1997, the Bank found the largest
portion of its single-family loan demand to be for adjustable-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, 1997, $44.7 million or 29.9%
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 $835,000 of commercial real estate loans and $550,000 of
multi-family residential real estate loans in fiscal 1997. At June 30, 1997,
the Bank's multi-family residential real estate loans and commercial real
estate loans amounted to $2.7 million and $5.7 million, respectively, or 1.8%
and 3.8% 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 $8.4 million
of commercial and multi-family loans at June 30, 1997, $2.9 million have fixed
rates of interest and $5.5 million have adjustable rates of interest.



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<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. As of June 30, 1997, the Bank's five largest outstanding commercial real
estate loans consisted of two loans to two separate borrowers secured by three
commercial office buildings having balances of $751,000 and $425,000,
respectively; one loan on a combination commercial/multi-family building having
a balance of $591,000, one loan on a church for $440,000 and one loan on a
restaurant for $323,000. At June 30, 1997, all of such loans were current in
accordance with their original terms.

         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
25.6% of the real estate loans originated in fiscal 1997, 19.8% in fiscal 1996
and 14.7% in fiscal 1995. 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, 1997, construction loans amounted to $3.1 million, all of which are for the
construction of residential properties.

         A significant portion of the Bank's loans are made to builders on both
presold and unsold properties. Speculative construction loans on unsold
properties carry more risk than presold 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



                                       8
<PAGE>   10

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 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. While the Bank has continued to emphasize the
origination of consumer loans, installment loans and home equity loans, such
loans have decreased as a percentage of the total loan portfolio from 19.4% of
the total loan portfolio at June 30, 1992 to 15.8% of the total loan portfolio
at June 30, 1997, primarily as a result of the Bank's reduced involvement in
third party dealer originated home improvement loans during the past five
fiscal years. The Bank originated $15.4 million, $13.2 million and $12.6
million of consumer loans in fiscal 1997, 1996 and 1995 out of total loan
originations and purchases of $30.4 million, $30.6 million and $36.7 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. In order to provide for potential losses in the portfolio,
the Bank has established an allowance for losses on consumer and other
non-first mortgage loans which totalled $585,000 at June 30, 1997.

         Installment loans, consisting primarily of home equity loans, and
commercial loans accounted for $22.2 million or 94.1% of all consumer loans at
June 30, 1997. Installment loans can be for any purpose and 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



                                       9
<PAGE>   11

accounted for $288,000 or 1.2% of the consumer loan portfolio at June 30, 1997.

         The Bank has also purchased packages of insured mobile home loans.
Such loans bear favorable rates of interest and are fully insured. If any of
such loans is delinquent more than 90 days, the loan is paid off by the
insurer. At June 30, 1997, such loans accounted for $747,000 or 3.2% of the
consumer loan portfolio.

         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, 1997, the Bank's loans to one
borrower limit was approximately $3.2 million and the largest aggregate amount
of loans by the Bank to any one borrower, including related entities, was
$826,000, $798,000 of which was secured by office buildings and $28,000 was
extended for the construction of single-family homes. These loans were current
as of June 30, 1997.

         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



                                       10
<PAGE>   12

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.

         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, 1997, the Bank had one loan to facilitate amounting to
$33,200.

         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



                                       11
<PAGE>   13

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. Similar treatment is accorded to the
collateral of loans which have been deemed to constitute in-substance
foreclosures. 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.




                                       12
<PAGE>   14

         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, 1997.

<TABLE>
<CAPTION>
                                                                        June 30,
                                                        ----------------------------------------
                                                         1997             1996             1995
                                                        ------           ------           ------

                                                                 (Dollars in Thousands)
<S>                                                     <C>               <C>             <C>
Nonaccruing loans:
  Single-family residential real estate                 $ 600             $ 364             $ 289
  Commercial real estate                                  158               198               149
Multi-family residential                                   28                39                49
  Consumer and other loans                                129                11                34
                                                        -----             -----             -----
     Total nonaccruing loans                            $ 915             $ 612             $ 521
                                                        =====             =====             =====
Total nonperforming loans as a
  percentage of net loans receivable                      .63%              .43%              .36%
                                                          ===               ===               ===
Total real estate owned, net of related
  reserves                                               $ --             $ 219             $ 157
                                                         ====             =====             =====
Total nonperforming loans and real
  estate owned as a percentage of total assets            .43%              .42%              .36%
                                                          ===               ===               ===
</TABLE>



         Management does not currently expect to incur any material losses on
any of such loans and properties, net of any specific reserves.

         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, 1997, the Bank's
classified assets totalled $2.2 million, of which $1.8 million were assets
classified as substandard and $377,000 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,



                                       13
<PAGE>   15

diversification of loan portfolios, historical loss experience, identified
credit problems, delinquency levels and adequacy of collateral. The Bank's
allowances for loan losses totalled $1.9 million at June 30, 1997 or 212.4% 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 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.


                                       14
<PAGE>   16



         The following table sets forth an analysis of the Bank's allowance for
loan losses during the periods indicated.

<TABLE>
<CAPTION>
                                                    Year Ended June 30,
                                --------------------------------------------------------
                                  1997                    1996                    1995
                                --------                --------                --------

                                                   (Dollars in Thousands)
<S>                               <C>                    <C>                      <C>
Balance at beginning of
   period                         $1,899                 $1,893                   $1,819
                                  ------                 ------                   ------
Charge-offs:
   Residential real estate           (15)                   (20)                      (4)
   Commercial real estate             --                    (10)                     (22)
   Consumer                          (39)                   (51)                     (85)
                                  ------                 ------                   ------
     Total charge-offs               (54)                   (81)                    (111)
                                  ------                 ------                   ------
 Recoveries:
   Residential real estate            --                      1                        6
   Consumer                           68                     56                       79
                                  ------                 ------                   ------
     Total recoveries                 68                     57                       85
                                  ------                 ------                   ------
Net recoveries (charge-offs)          14                    (24)                     (26)
                                  ------                 ------                   ------

Provision for losses on loans         30                     30                      100
                                  ------                 ------                   ------

Balance at end of period          $1,943                 $1,899                   $1,893
                                  ======                 ======                   ======

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

Allowance for loan losses as a
  percent of nonperforming loans  212.35%                310.29%                  363.34%
                                  ======                 ======                   ======

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



                                       15
<PAGE>   17

         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,
                             -----------------------------------------------------------------------------------
                                               1997                       1996                        1995
                             -----------------------------------------------------------------------------------
                                            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)           $ 600           78.6%       $ 598          79.0%        $ 605         79.3%
Multi-family real estate                29            1.8           30           1.9            35          2.2
Commercial real estate                 237            3.8          231           3.9           241          4.7
Consumer                               250           15.8          234          15.2           213         13.8
Unallocated                            827             --          806            --           799           --
                                    ------          -----       ------         -----        ------        -----
     Total                          $1,943          100.0%      $1,893         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


                                       16
<PAGE>   18

adjustable rate, as 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,
                                       -----------------------------------------------------
                                           1997                1996                  1995
                                       ------------        ------------          -----------
                                                           (In Thousands)
<S>                                        <C>                <C>                 <C>
Mortgage-backed securities:
  GNMA                                     $    --                $ --            $  5,286
  FNMA                                          --                  --               1,399
  FHLMC                                         --                  --                 481
  FNMA Remic                                   200                 254                 327
  FHLMC Remic                                  900               1,130                 493

  Other                                        120                 162                 236
                                            ------             -------             -------
     Total                                  $1,220             $ 1,546             $ 8,222
                                            ======             =======             =======

Mortgage-backed securities available 
for sale:
  GNMA                                      $4,900             $ 5,885             $ 2,536
  FNMA                                       4,050               4,397               1,612
  FHLMC                                        307                 437                 558
  FNMA Remic                                   284                 284                  --
  FHLMC Remic                                3,526               2,926                  --
                                           -------             -------             -------
     Total                                 $13,067             $13,929             $ 4,706
                                           =======             =======             =======
</TABLE>


                                       17
<PAGE>   19



      Information regarding the contractual maturities and weighted average
yield of the Bank's mortgage-backed securities portfolio at June 30, 1997 is
presented below.

<TABLE>
<CAPTION>
                                                      Amounts at June 30, 1997 Which Mature In
                                    -------------------------------------------------------------------------
                                                                        After Five
                                     One Year       After One to            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                            --                 --                --             200           200
  FHLMC Remic                           --                 --                --             900           900
  Other                                 --                 --                --             120           120

      Total                            $--               $ --              $ --          $1,220        $1,220
                                      ====                ===               ===           =====         =====
Weighted average yield                  --%                --%              --%             7.0%          7.0%
                                      ====                ===               ===           =====         =====

Mortgage-backed securities available 
for sale:
  GNMA                                $ --               $ --              $ --          $4,900        $4,900
  FNMA                                 115                340                96           3,498         4,049
  FHLMC                                 90                 --                --             217           307
  FNMA Remic                            --                 --                --             284           284
  FHLMC Remic                           --                 --                --           3,527         3,527
                                     -----               ----               ---          ------        ------
                                  
      Total                         $  205              $ 340              $ 96         $12,426       $13,067
                                     =====               ====               ===          ======        ======
Weighted average yield                 8.4%               6.3%              9.4%            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, 1997, 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


                                       18
<PAGE>   20

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 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.

      In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Statement 115 requires that investments be
classified as either: (1) Securities Held to Maturity - debt securities that
the Company has the positive intent and ability to hold to maturity and
reported at amortized cost; (2) Trading Securities - debt and equity securities
bought and held principally for the purpose of selling them in the near term
and reported at fair value, with unrealized gains and losses included in the
current period earnings; or (3) Securities Available for Sale - debt and equity
securities not classified as either Securities Held to Maturity or Trading
Securities and reported at fair value, with unrealized gains and losses
included as a separate component of stockholders' equity.

      Effective July 1, 1994, the Company adopted Statement 115 and has
reported the cumulative effect of this change in the method of accounting for
investment securities in the June 30, 1995, statement of operations.

      In the year ended June 30, 1994, and prior years, securities were
classified as either investment or available for sale securities when
purchased.  The Company classified securities as investment securities when it
had the positive intent and ability to hold the securities to maturity. The
Company classified securities as available for sale securities when the intent
was to hold securities for indefinite periods of time as part of the Company's
asset/liability management strategy.



                                       19
<PAGE>   21

      The following table sets forth the composition and maturities of the
Bank's investment securities portfolio at June 30, 1997.

<TABLE>
<CAPTION>

                                                      Amounts at June 30, 1997 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                     $   --          $4,000              $5,498        $5,996      $15,494
                                         ======          ======              ======        ======      =======
   Weighted average
    yield                                    --%            7.1%                7.4%          8.0%         7.6%
                                         ======          ======              ======        ======      =======
Investment securities available 
for sale:
   Corporate notes and
     commercial paper                    $   --          $   --              $1,500        $   --      $ 1,500
   Municipal obligations                     --              --                  --         4,541        4,541
   Shay Financial
     Services Arms Fund (1)               8,832              --                  --            --        8,832
   FMNA preferred stock (1)                 250              --                  --            --          250
   FHLMC stock  (1)                         250              --                  --            --          250
                                         ------          ------              ------        ------      -------
               Total                     $9,332          $   --               1,500        $4,541      $15,373
                                         ======          ======              ======        ======      =======
       Weighted average      
       yield                                6.1%             --%                7.6%          5.7%         6.1%
                                         ======          ======              ======        ======      =======
</TABLE>
---------------

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


                                       20
<PAGE>   22



      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,
                                       ------------------------------------------------
                                          1997              1996                 1995
                                       ---------          --------            ---------
                                                       (In Thousands)
<S>                                      <C>              <C>                  <C>
Investment securities:
   Corporate notes and
    Commercial paper                     $15,494           $9,948              $9,655
                                          ======            =====               =====

Investment securities
 Available for sale:
   U.S. Treasury notes                   $    --          $    --              $1,996
Corporate Notes and
   Commercial paper                        1,500            1,000                  --
Municipal obligations                      4,541            2,315                  --
Financial Institutions
    Insurance Group, Inc. stock               --               25                  25
 Shay Financial Services:
      ARMs Fund                            8,832            8,317                  --
FMNA preferred stock                         250               --                  --
FHLMC stock                                  250               --                  --
                                          ------           ------               -----
                                         $15,373          $11,657              $2,021
                                          ======           ======               =====
</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 1997, the Bank borrowed
$22.0 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


                                       21
<PAGE>   23

accounts.

      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,
                                  ----------------------------------------------------------------------------------
                                              1997                        1996                          1995
                                  ----------------------------------------------------------------------------------
                                                    % of                         % of                       % of
                                      Amount      Deposits       Amount        Deposits        Amount     Deposits
                                  ------------- -----------   -----------    ------------   ------------ ----------
                                                                  (Dollars in Thousands)
<S>                                 <C>            <C>          <C>               <C>          <C>         <C>
Passbook and club accounts          $ 27,690        15.8%       $ 28,890           17.4%       $ 28,890     17.7%
NOW Accounts                          23,819        13.6          18,633           12.2          18,633     11.4
MMDAs                                 18,047        10.3          20,859           11.2          20,859     12.8
Fixed-rate certificates               72,871        41.7          63,306           40.7          63,306     38.7
Jumbo certificates                     3,650         2.1           2,761            1.4           2,761      1.7
IRA and Keogh accounts                28,946        16.5          28,859           17.1          28,859     17.7
                                    --------       -----        --------          -----        --------    -----
  Total                             $175,019       100.0%       $163,308          100.0%       $163,308    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.



                                       22
<PAGE>   24

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

<TABLE>
<CAPTION>
                                                            Year Ended June 30,
                                                ----------------------------------------------
                                                    1997            1996               1995
                                                ------------    ------------       -----------
                                                               (In Thousands)
<S>                                             <C>              <C>                <C>
Increase (decrease) before
  interest credited                              $ 4,066         $ (4,730)            $ 639
Interest credited                                  6,270            6,105             5,490
                                                --------          -------           -------
                                                $ 10,336          $ 1,375           $ 6,129
                                                ========          =======           =======
</TABLE>


      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, 1997. 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, 1997 which mature during the periods indicated.

<TABLE>
<CAPTION>

                                                           Amounts at June 30, 1997 Maturing
                            As of June 30,                     in the Year Ended June,
                        ------------------------   ----------------------------------------------
                          1996           1997        1998       1999       2000      Thereafter
                        --------       --------    --------   --------   --------  --------------
                                                      (In Thousands)
<S>                     <C>         <C>           <C>          <C>        <C>        <C>
Certificate Accounts:
2.00% to  3.99%          $   847     $     --      $    --     $    --     $   --     $    --
4.00% to  5.99%           64,275       62,012       44,514      10,107      2,265       5,126
6.00% to  7.99%           26,810       38,683       20,738       7,502      5,110       5,783
8.00% to  9.99%            5,225        4,772        2,520       1,800        425          27
10.00% to 11.99%             230        2,520           --          --         --          --
                         -------     --------      -------     -------     ------     -------
Total                    $97,387     $105,467      $67,772     $18,959     $7,800     $10,936
                         =======     ========      =======     =======     ======     =======

</TABLE>


                                       23
<PAGE>   25

      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 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, 1997, certificates of deposit in amounts of $100,000 or
more in the Bank amounted to $3.6 million. The following table sets forth as of
June 30, 1997 the distribution of certificates of deposit of $100,000 or more
by time remaining to maturity.

<TABLE>
<CAPTION>
                                          ----------------------
                                                  Amount
                                          ----------------------
                                              (In Thousands)
   <S>                                            <C>
   Three months or less                            $1,034
   Over three through six months                    1,296
   Over six though 12 months                          620
   Over 12 months                                     700
                                                   ------
       Total                                       $3,650
                                                   ======
</TABLE>



                                       24
<PAGE>   26



      The following table presents information concerning deposit accounts at
June 30, 1997, including the weighted average rate and the scheduled maturity
of certificates of deposit.

<TABLE>
<CAPTION>
                                                           % of Total        Average
                                             Amounts        Deposits           Rate
                                          ------------    ------------      ---------
                                         (In Thousands)
<S>                                         <C>               <C>              <C>
Passbook and club accounts                   $ 27,690          15.8%           2.48%
Now accounts                                   23,819          13.6            1.11
MMDA's                                         18,043          10.3            2.38
                                             --------         -----           -----
  Total                                        69,552          39.7            1.98
                                             --------         -----           -----
Certificates maturing by quarter:
  September 30, 1997                           17,106           9.8            5.13
  December 31, 1997                            16,887           9.6            5.80
  March 31, 199                                21,598          12.3            6.28
  June 30, 1998                                12,182           7.0            5.71
  September 30, 1998                            7,150           4.1            5.84
  December 31, 1998                             4,163           2.4            6.15
  March 31, 1999                                4,668           2.7            6.13
  June 30, 1999                                 2,979           1.7            6.00
  September 30, 1999                            2,370           1.4            6.19
  December 31, 1999                             1,053            .6            5.88
  March 31, 2000                                1,829           1.0            6.13
  June 30, 2000                                 2,548           1.5            6.09
  Thereafter                                   10,934           6.2            6.00
                                             --------         -----           -----
Total certificate accounts                    105,467          60.3            5.86
                                             --------         -----           -----
    Total deposits                           $175,019         100.0%           4.32%
                                             ========         =====           =====
</TABLE>


         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, 1997, 1996 and 1995, the Bank had $11.0 million, $6.3 million and $2.0
million, respectively, of FHLB advances outstanding.



                                       25
<PAGE>   27



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

<TABLE>
<CAPTION>
                                                       Year Ended June 30,
                                         -----------------------------------------------
                                             1997             1996              1995
                                         -----------       ----------        -----------

                                                       (Dollars in thousands)
<S>                                          <C>                <C>             <C>
FHLB advances:

Average balance outstanding                   $ 9,353           $ 5,122            $ 655

Maximum amount
 outstanding at any month-
 end during the period                       $ 11,046           $ 6,328         $  2,000

Weighted average interest
 rate during the period                          5.66%             5.87%            7.07%

Amount outstanding at the
 end of the period                           $ 11,044           $ 6,327         $  2,000

Weighted average rate at the
 end of the period                               5.75%             5.52%            7.07%
</TABLE>



         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, 1997, LFSC had no assets or liabilities.



                                       26
<PAGE>   28

EMPLOYEES

         The Bank had 42 full-time employees and 9 part-time employees as of
June 30, 1997. None of the employees are represented by a collective bargaining
agent, and the Bank believes it enjoys good relations with its personnel.

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.



                                       27
<PAGE>   29



                                   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




                                       28
<PAGE>   30

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
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.




                                       29
<PAGE>   31

         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.

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 BIF fund met its target reserve level in September 1995, but the
SAIF was not expected to meet its target reserve level until at least 2002.
Consequently, in late 1995, the FDIC approved a final rule regarding deposit
insurance premiums which, effective with respect to the semiannual premium
assessment beginning January 1, 1996, reduced deposit insurance premiums for
BIF member institutions in the lowest risk category. Deposit insurance premiums
from SAIF members were maintained at their existing levels (23 basis points for
institutions in the lowest risk category).

         On September 30, 1996, President Clinton signed into law legislation
to eliminate the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio of 1.25% of insured deposits. The legislation provided that the holders
of SAIF-assessable deposits pay a one-time special



                                       30
<PAGE>   32

assessment to recapitalize the SAIF. The legislation also provided for the
merger of the BIF and the SAIF, with such merger being conditioned upon the
prior elimination of the thrift charter. Effective October 8, 1996, FDIC
regulations imposed a one-time special assessment equal to 65.7 basis points
for all SAIF-assessable deposits as of March 31, 1995, which was collected on
November 27, 1996.

         Following the imposition of the one-time special assessment, the FDIC
lowered assessment rates for SAIF members to reduce the disparity in the
assessment rates paid by BIF and SAIF members. Beginning October 1, 1996,
effective BIF and SAIF rates both range from zero basis points to 27 basis
points. From 1997 through 1999, FDIC-insured institutions will pay
approximately 1.3 basis points of their BIF-assessable deposits and 6.4 basis
points of their SAIF-assessable deposits to fund the Financing Corporation.

         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 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-



                                       31
<PAGE>   33

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, 1997, the
Bank met each of its capital requirements.



                                       32
<PAGE>   34



         The following table sets forth certain information concerning the
Bank's regulatory capital at June 30, 1997.

<TABLE>
<CAPTION>
                                                          ------------       -----------     -----------
                                                                                Tier 1          Tier 1
                                                             Tier 1              Risk-           Risk-
                                                              Core               Based          Based
                                                             Capital            Capital        Capital
                                                          ------------       -----------     -----------
<S>                                                         <C>                <C>              <C>

Equity Capital (1)                                          $ 21,028           $ 21,028         $ 21,028
Less unrealized securities gains                                (206)              (206)            (206)
Plus general valuation allowances (2)                             --                 --            1,352
                                                             -------            -------          -------
        Total regulatory capital                              20,822             20,822           22,174
Minimum required capital                                       8,403              4,327            8,655
                                                             -------            -------          -------

        Excess regulatory capital                           $ 12,419           $ 16,495         $ 13,519
                                                             =======            =======          =======
Regulatory capital as a percentage (3)                          9.91%             19.35%           20.61%
Minimum required capital percentage                             4.00               4.00             8.00
                                                              ------             ------           ------
        Excess regulatory capital percentage                    6.70%             15.35%           12.61%
                                                              ======             ======           ======
</TABLE>

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

(1)      Represents equity capital of the Bank as reported to the FDIC and the
         Pennsylvania Department of Banking on Form 033 for the quarter ended
         June 30, 1997.

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

(3)      Tier 1 capital is calculated as a percentage of adjusted total assets
         of $210,082. Tier I and Tier II risk-based capital are calculated as a
         percentage of adjusted risk-weighed assets of $107,596.

         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


                                       33
<PAGE>   35

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 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



                                       34
<PAGE>   36

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.

         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 will be various limitations on the distribution of dividends to
the Company by the Bank.

                  REGULATORY ENFORCEMENT AUTHORITY. Applicable banking laws
include substantial enforcement powers available to federal banking regulators.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities.



                                       35
<PAGE>   37



                                    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



                                       36
<PAGE>   38

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 under the percentage of
taxable income method, in the absence of other factors affecting taxable
income, of 31.3%. As of June 30, 1997, 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


                                       37
<PAGE>   39

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 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.



                                       38
<PAGE>   40

         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.

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%.


                                       39
<PAGE>   41




ITEM 2.  PROPERTIES.

         The following table sets forth certain information as of June 30, 1997
with respect to the offices of the Company and Laurel Savings.

<TABLE>
<CAPTION>
                                                                             Net Book Value of Property or
                                       Owned or          Lease               Leasehold Improvements as of
         Location                       Leased       Expiration Date                June 30, 1997
------------------------------        -----------  ------------------      ---------------------------------
<S>                                    <C>               <C>                          <C>
Allegheny County:

  363 Butler Street,
  Etna                                 Owned                                          $ 167
  1416 Mt. Royal Blvd.
  Glenshaw                             Owned                                            188
  1801 Jancey Street
  Morningside, Pittsburgh              Leased            2001(1)                         --
  2724 Harts Run Road
  Allison Park                         Owned                                            412
  744 Little Deer Creek Road
  Russellton                           Owned                                            101
Butler County:
  125 West Main Street
  Saxonburg                            Owned                                            216
</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.



                                       40
<PAGE>   42

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 "1997 Annual Report").

ITEM 6.  SELECTED FINANCIAL DATA.

         The information required herein is incorporated by reference from page
29 of the Company's 1997 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 1997 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 1997 Annual Report.

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

         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 1997 ("Proxy Statement").


                                       41
<PAGE>   43

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, 1997 and
         1996

         Consolidated Statements of Operations for the Years Ended June 30,
         1997, 1996 and 1995

         Consolidated Statements of Stockholders' Equity for the Years Ended
         June 30, 1997, 1996 and 1995

         Consolidated Statements of Cash Flows for the Years Ended June 30,
         1997, 1996 and 1995

         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.



                                       42
<PAGE>   44

         (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            1997 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.

         (b)  Reports on Form 8-K

         The Registrant did not file any reports on Form 8-K during the quarter
ended June 30, 1997.

         (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 1997 Annual Report to Stockholders which
are required to be included herein.


                                       43
<PAGE>   45

                                   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 29, 1997                    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 29, 1997
----------------------------------
Arthur G. Borland, Director

/s/ Richard  J. Cessar                              Date: September 29, 1997
----------------------------------
Richard J. Cessar, Chairman of the Board

/s/ Annette D. Ganassi                              Date: September 29, 1997
----------------------------------
Annette D. Ganassi, Director

/s/ Richard S. Hamilton                             Date: September 29, 1997
----------------------------------
Richard S. Hamilton, Director

/s/ Harvey J. Haughton                              Date: September 29, 1997
----------------------------------
Harvey J. Haughton, Director



                                       44
<PAGE>   46

/s/ Edwin R. Maus                                   Date: September 29, 1997
----------------------------------
Edwin R. Maus, Director, President
 and Chief Executive Officer

/s/ J. Harold Norris                                Date: September 29, 1997
----------------------------------
J. Harold Norris, Director

/s/ John A. Howard, Jr.                             Date: September 29, 1997
----------------------------------
John A. Howard, Jr., Senior Vice President,
 Chief Financial Officer and Corporate Secretary/
  Treasurer

                                       45