<PAGE>   1

                                                                   Exhibit 13

 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
--------------------------------------------------------------------------------
At June 30, 1997 and 1996
 
<TABLE>
<CAPTION>
(in thousands, except per share data)                                 1997         1996
-----------------------------------------------------------------------------------------
<S>                                                                 <C>          <C>
ASSETS
Cash                                                                $    406     $    520
Money market investments                                               9,086        6,291
Interest-earning deposits with other institutions                      5,843        2,807
Investment securities available for sale (note 2)                     15,494       11,639
Investment securities (market value of $15,504 and $9,944) 
  (note 2)                                                            15,494        9,948
Mortgage-backed securities available for sale (note 3)                13,259       14,021
Mortgage-backed securities (market value of $1,230 and $1,542)
  (note 3)                                                             1,220        1,546
Loans receivable, held for sale (note 4)                               1,827        1,627
Loans receivable, net of unearned discounts of $34 and $84           146,613      145,431
Allowance for possible loan losses                                    (1,943)      (1,899)
-----------------------------------------------------------------------------------------
  Loans receivable, net (notes 4 and 5)                              144,670      143,532
Federal Home Loan Bank Stock (note 6)                                  1,277        1,275
Real estate owned                                                         --          219
Accrued interest receivable:
  Loans                                                                  894          894
  Interest-earning deposits and investments                              505          233
  Mortgage-backed securities                                              86           92
Office properties and equipment, net of accumulated depreciation
  (note 7)                                                             1,267        1,246
Prepaid expenses and sundry assets                                       659        1,057
-----------------------------------------------------------------------------------------
     Total Assets                                                   $211,987     $196,947
=========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Savings deposits (note 8)                                         $175,019     $164,683
  FHLB Advances (note 9)                                              11,044        6,327
  Advance deposits by borrowers for taxes and insurance                3,154        3,321
  Accrued interest payable on savings deposits                           533          574
  Accrued income taxes (note 10)                                         289          410
  Other accrued expenses and sundry liabilities                          686          546
-----------------------------------------------------------------------------------------
     Total Liabilities                                               190,725      175,861
-----------------------------------------------------------------------------------------
Stockholders' Equity (note 11)
  Common stock, $.01 par value; 5,000,000 shares authorized;
     1,518,609 and 1,512,667 shares issued respectively                   15           15
  Additional paid-in capital                                           4,690        4,646
  Treasury stock, at cost (75,780 shares)                             (1,626)          --
  Retained earnings                                                   18,095       16,436
  Unrealized gains on securities available for sale, net of tax          206           49
  Stock held in deferred compensation trust (note 12)                   (118)         (60)
-----------------------------------------------------------------------------------------
     Total Stockholders' Equity                                       21,262       21,086
-----------------------------------------------------------------------------------------
     Total Liabilities and Stockholders' Equity                     $211,987     $196,947
=========================================================================================
</TABLE>
 
See accompanying notes to consolidated financial statements.
 
                                        7
<PAGE>   2
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
For the years ended June 30, 1997, 1996, and 1995
 
<TABLE>
<CAPTION>
(in thousands, except per share data)                     1997            1996            1995
-------------------------------------------------------------------------------------------------
<S>                                                    <C>             <C>             <C>
Interest income:
  Loans                                                $   11,835      $   11,964      $   11,615
  Mortgage-backed securities                                1,036             953           1,009
  Investments                                               2,311           1,683           1,084
  Interest-earning deposits                                   160             185             126
-------------------------------------------------------------------------------------------------
    Total interest income                                  15,342          14,785          13,834
Interest expense:
  Savings deposits (note 8)                                 7,182           7,018           6,301
  Borrowings (note 9)                                         533             301              46
-------------------------------------------------------------------------------------------------
    Total interest expense                                  7,715           7,319           6,347
-------------------------------------------------------------------------------------------------
Net interest income before provision for possible
  loan losses                                               7,627           7,466           7,487
Provision for possible loan losses (note 4)                    30              30             100
-------------------------------------------------------------------------------------------------
Net interest income after provision for possible
  loan losses                                               7,597           7,436           7,387
-------------------------------------------------------------------------------------------------
Other income:
  Service charges                                             476             405             403
  Net gain (loss) on sales of investments and
    mortgage-backed securities available for sale             113              85             (33)
  Gain on the sale of loans held for sale                      12               7               2
  Other operating income                                      116             130             110
-------------------------------------------------------------------------------------------------
    Total other income                                        717             627             482
-------------------------------------------------------------------------------------------------
Operating expenses:
  Compensation and employee benefits (note 12)              1,750           1,693           1,665
  Premises and occupancy costs                                491             466             431
  Federal insurance premiums                                  149             374             362
  Special SAIF assessment                                   1,059              --              --
  Net (income) loss on real estate owned                      (31)              5             (31)
  Data processing expense                                     252             249             239
  Professional fees                                           178             244             286
  Other operating expenses                                    803             746             800
-------------------------------------------------------------------------------------------------
    Total operating expenses                                4,651           3,777           3,752
-------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of
  change in accounting principle                            3,663           4,286           4,117
-------------------------------------------------------------------------------------------------
Provision for income taxes (note 10)
  Federal                                                   1,091           1,319           1,314
  State                                                       253             302             290
-------------------------------------------------------------------------------------------------
    Total income taxes                                      1,344           1,621           1,604
-------------------------------------------------------------------------------------------------
Income before cumulative effect of change in
  accounting principle                                      2,319           2,665           2,513
Cumulative effect of change in accounting principle            --              --              30
-------------------------------------------------------------------------------------------------
  Net income                                           $    2,319      $    2,665      $    2,543
=================================================================================================
Earnings per share(note 1)
  Primary
    Net income before cumulative effect of change in
       accounting principle                            $     1.50      $     1.72      $     1.65
    Cumulative effect of change in accounting
       principle                                               --              --            0.02
-------------------------------------------------------------------------------------------------
    Net income                                         $     1.50      $     1.72      $     1.67
    Average number of shares outstanding                1,550,439       1,548,971       1,521,406
  Fully diluted
    Net income before cumulative effect of change in
       accounting principle                            $     1.48      $     1.72      $     1.64
    Cumulative effect of change in accounting
       principle                                               --              --            0.02
-------------------------------------------------------------------------------------------------
    Net income                                         $     1.48      $     1.72      $     1.66
    Average number of shares outstanding                1,566,960       1,548,924       1,533,806
=================================================================================================
Dividends per share                                    $     0.44      $     0.29      $     0.21
=================================================================================================
</TABLE>
 
See accompanying notes to consolidated financial statements.
 
                                        8
<PAGE>   3
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
For the years ended June 30, 1997, 1996, and 1995
 
<TABLE>
<CAPTION>
                                                                        Unrealized
                                                                             Gains
                                                                       (Losses) on       Stock Held
                                 Additional                             Securities      in Deferred           Total
                        Common      Paid-in      Treasury     Retained   Available     Compensation    Stockholders'
    (in thousands)       Stock      Capital         Stock     Earnings    for Sale            Trust          Equity
---------------------------------------------------------------------------------------------------------------------
<S>                     <C>      <C>           <C>          <C>        <C>             <C>             <C>
Balance, June 30, 1994      $10     $ 4,508           --     $11,979           ($15)             --           $16,482
Stock options exercised
  (2,610 shares)             --          36           --          --             --              --                36
Retroactive effect of
  stock issued as a
  result of stock split
  declared on August
  17, 1995                    5          (5)          --          --             --              --                --
Dividends paid               --          --           --        (305)            --              --              (305)
Unrealized gains on
  securities available
  for sale                   --          --           --          --            162              --               162
Net income                   --          --           --       2,543             --              --             2,543
---------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995      $15      $4,539           --     $14,217           $147              --           $18,918
Stock options exercised
  (20,409 shares)            --         107           --          --             --              --               107
Dividends paid               --          --           --        (446)            --              --              (446)
Unrealized losses on
  securities available
  for sale                   --          --           --          --            (98)             --               (98)
Stock purchased by
  deferred compensation
  trust                      --          --           --          --             --             (60)              (60)
Net income                   --          --           --       2,665             --              --             2,665
---------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996      $15      $4,646           --     $16,436            $49            ($60)          $21,086
Stock options exercised
  (5,942 shares)             --          44           --          --             --              --                44
Dividends paid               --          --           --        (660)            --              --              (660)
Treasury stock
  purchased (75,780
  shares)                    --          --       (1,626)         --             --              --            (1,626)
Unrealized gains on
  securities available
  for sale                   --          --           --          --            157              --               157
Stock purchased by
  deferred compensation
  trust                      --          --           --          --             --             (58)              (58)
Net income                   --          --           --       2,319             --              --             2,319
---------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997      $15      $4,690      ($1,626)    $18,095           $206           ($118)          $21,262
=====================================================================================================================
</TABLE>
 
See accompanying notes to consolidated financial statements.
 
                                        9
<PAGE>   4
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
For the years ended June 30, 1997, 1996, and 1995
 
<TABLE>
<CAPTION>
(in thousands)                                                        1997         1996         1995
<S>                                                               <C>          <C>          <C>
----------------------------------------------------------------------------------------------------
Net income:                                                       $  2,319     $  2,665     $  2,543
  Adjustments to reconcile net income to net cash
   provided by operating activities:
    Depreciation                                                       139          117          114
    Provision for possible loan losses                                  30           30          100
    Net gain on sale of real estate owned                              (42)         (10)         (56)
    Net (gain) loss on the sale of investments and
      mortgage-backed securities available for sale                   (113)         (85)          33
    Gain on the sale of loans held for sale                            (12)          (7)          (2)
    Amortization of deferred loan fees                                (166)        (234)        (202)
    Origination of loans held for sale                                (907)        (966)        (961)
    Proceeds from sale of loans held for sale                          719          550          362
    Increase in accrued interest receivable                           (266)         (71)        (177)
    (Decrease) Increase in accrued interest payable                    (41)          53           40
    Other--net                                                         278           78          (88)
----------------------------------------------------------------------------------------------------
      Net cash provided by operating activities                      1,938        2,120        1,706
----------------------------------------------------------------------------------------------------
Investing activities:
  Purchase of investment securities                                (12,994)     (10,157)      (5,905)
  Purchase of investment securities available for sale              (5,156)     (10,571)         (98)
  Purchase of mortgage-backed securities                                --         (900)      (1,245)
  Purchase of mortgage-backed securities available for sale           (600)      (5,216)          --
  Purchase of FHLB stock                                                (2)         (15)        (207)
  Proceeds from investment maturities                                7,950       10,500        2,043
  Proceeds from sale of investment securities available for
    sale                                                             1,053          349        6,106
  Proceeds from sale of mortgage-backed securities available
    for sale                                                            --          703          839
  Principal repayments of investment and mortgage-backed
    securities available for sale                                    1,459        1,655          918
  Principal repayments of investment and mortgage-backed
    securities                                                         326        1,261          972
  Increase in loans                                                 (1,002)        (394)     (13,001)
  Proceeds from sale of real estate owned                              261          105          279
  Net additions to office properties and equipment                    (160)        (180)          (6)
----------------------------------------------------------------------------------------------------
      Net cash used by investing activities                         (8,865)     (12,860)      (9,305)
----------------------------------------------------------------------------------------------------
Financing activities:
  Net increase (decrease) in demand and club accounts                2,256       (1,086)      (8,619)
  Net increase in time deposit accounts                              8,080        2,461       14,748
  Net increase in FHLB advances                                      4,717        4,327        2,000
  (Decrease) increase in advance deposits by borrowers for
    taxes and insurance                                               (167)         (77)         511
  Stock options exercised                                               44          107           36
  Acquisition of treasury stock                                     (1,626)          --           --
  Dividends paid                                                      (660)        (446)        (305)
----------------------------------------------------------------------------------------------------
      Net cash used by financing activities                         12,644        5,286        8,371
----------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents                              5,717       (5,454)         772
Cash and cash equivalents at beginning of period                     9,618       15,072       14,300
----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                        $ 15,335     $  9,618     $ 15,072
====================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
----------------------------------------------------------------------------------------------------
Cash paid during the period for:
  Interest on savings deposits                                    $  7,223     $  6,997     $  6,261
  Interest on FHLB advances                                            503          295           34
  Income taxes                                                       1,216        1,581        1,907
Transfer of loans to real estate owned                                  --          227          206
Transfer of investment securities to available for sale                 --        1,402           25
Transfer of mortgage-backed securities to available for sale            --        6,461        6,422
Cash paid during the period for interest includes interest credited on deposits of $6,270, $6,105
and $5,490 for the years ended June 30, 1997, 1996 and 1995, respectively.
====================================================================================================
</TABLE>
 
See accompanying notes to consolidated financial statements.
 
                                       10
<PAGE>   5
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
NATURE OF OPERATION AND USE OF ESTIMATES
     Laurel Capital is a registered bank holding company pursuant to the Bank
     Holding Company Act of 1956, as amended. The only significant asset is the
     stock of its wholly-owned subsidiary, Laurel Savings Bank, a
     Pennsylvania-chartered state savings bank. The Bank conducts business
     through its six offices located in Allegheny and Butler counties.
 
     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of certain assets and
     liabilities and disclosure of contingent assets and liabilities at the date
     of the financial statements and the reported amounts of related revenue and
     expense during the reporting period. Actual results could differ from those
     estimates.
 
CONSOLIDATION
     The consolidated financial statements include the accounts of the Laurel
     Capital Group, Inc. and its wholly owned subsidiary, Laurel Savings Bank,
     after elimination of intercompany accounts and transactions.
 
INVESTMENT AND MORTGAGE-BACKED SECURITIES
     In May 1993, the Financial Accounting Standards Board (FASB) issued
     Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
     Certain Investments in Debt and Equity Securities." SFAS 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 SFAS 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.
 
REAL ESTATE OWNED
     Real estate owned consists of properties acquired through foreclosure and
     are recorded at the lower of cost (principal balance of the former mortgage
     loan plus costs of obtaining title and possession) or fair value at the
     date of acquisition. Costs relating to development and improvement of the
     property are capitalized, whereas costs of holding such real estate are
     expensed as incurred. Additional write downs are charged to income, and the
     carrying value of the property reduced, when the fair value of the
     property, less costs to sell, is less than the carrying value.
 
PROVISIONS FOR POSSIBLE LOAN LOSSES
     Provisions for possible loan losses are charged to operations in amounts
     that result in allowances sufficient, in management's judgment, to cover
     anticipated losses based on past and expected future loss experience and
     economic conditions.
 
OFFICE PROPERTIES AND EQUIPMENT
     Depreciation is computed on the straight-line method over the estimated
     useful lives of the related assets.
 
INTEREST ON SAVINGS
     Interest on savings deposits is accrued and charged to expense monthly and
     is paid or credited in accordance with the terms of the respective
     accounts.
 
                                       11
<PAGE>   6
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
 
CASH AND CASH EQUIVALENTS
     For purposes of reporting cash flows, the Company has defined cash and cash
     equivalents as cash, interest-earning deposits with other institutions, and
     money market investments.
 
LOANS
     Loans receivable are stated at unpaid principal balances net of the
     allowance for possible loan losses, net deferred loan fees and discounts.
     The Company adopted SFAS 114, "Accounting by Creditors for Impairment of a
     Loan" and SFAS 118, "Accounting by Creditors for Impairment of a
     Loan--Income Recognition and Disclosures", an amendment of SFAS 114,
     effective July 1, 1995. These statements address the accounting by
     creditors for impairment of certain loans. They apply to all creditors and
     to all loans, uncollateralized as well as collateralized, except for large
     groups of smaller-balance homogeneous loans that are collectively evaluated
     for impairment. The Bank considers all one-to-four family residential
     mortgage loans and all consumer loans (as presented in Note 4) to be
     smaller homogeneous loans. Loans within the scope of these statements are
     considered impaired when, based on current information and events, it is
     probable that all principal and interest will not be collected in
     accordance with the contractual terms of the loans. Management determines
     the impairment of loans based on knowledge of the borrower's ability to
     repay the loan according to the contractual agreement, the borrower's
     repayment history and the fair value of collateral for certain collateral
     dependent loans. Pursuant to SFAS 114 paragraph 8, management does not
     consider an insignificant delay or insignificant shortfall to impair a
     loan. Management has determined that a delay less than 90 days will be
     considered an insignificant delay and that an amount less than $5,000 will
     be considered an insignificant shortfall. The Bank does not apply SFAS 114
     using major risk calculations, but on a loan by loan basis. All loans are
     charged off when management determines that principal and interest are not
     collectible.
 
     The accrual of interest on all loans is discontinued when, in management's
     opinion, the borrower may be unable to meet payments as they become due or
     when the loan becomes 90 days past due, whichever occurs first. When
     interest accrual is discontinued, all unpaid accrued interest is reserved.
     Such interest ultimately collected is credited to income in the period of
     recovery or applied to reduce principal if there is sufficient doubt about
     the collectability of principal. Consumer loans more than 120 days or 180
     days delinquent (depending on the nature of the loan) are generally
     required to be written off.
 
     Any excess of the Bank's recorded investment in the loans over the measured
     value of the loans in accordance with SFAS 114 are provided for in the
     allowance for loan losses. The Bank review its loans for impairment on a
     quarterly basis.
 
     The Company is a party to financial instruments with off-balance sheet risk
     (commitments to extend credit) in the normal course of business to meet the
     financing needs of its customers. Commitments to extend credit are
     agreements to lend to a customer as long as there is no violation of any
     condition established in the commitment. Commitments generally have fixed
     expiration dates or other termination clauses and may require payment of a
     fee. Since some of the commitments are expected to expire without being
     drawn upon, the total commitment amount does not necessarily represent
     future cash requirements. The Company evaluates each customer's credit
     worthiness on a case-by-case basis using the same credit policies in making
     commitments and conditional obligations as it does for on-balance sheet
     instruments. The amount of collateral obtained, if deemed necessary by the
     Company upon extension of credit, is based on management's credit
     evaluation of the counter-party.
 
     Loans receivable classified as held for sale are recorded in the financial
     statements at the lower of cost or market.
 
                                       12
<PAGE>   7
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
 
INCOME TAXES
     In February 1992, FASB issued SFAS 109, "Accounting for Income Taxes' which
     requires use of the asset and liability method of accounting for income
     taxes. Under the asset and liability method of SFAS 109, deferred tax
     assets and liabilities are recognized for the future tax consequences
     attributable to differences between the financial carrying amounts of
     existing assets and liabilities and their respective tax bases and
     operating loss and tax credit carryforwards. Deferred tax assets and
     liabilities are measured using enacted tax rates expected to apply to
     taxable income in the years in which those temporary differences are
     expected to be recovered or settled. Under SFAS 109, the effect on deferred
     tax assets and liabilities of a change in tax rates is recognized in income
     in the period that includes the enactment date. The Company adopted SFAS
     109 effective July 1, 1993.
 
EARNINGS PER SHARE
     Earnings per share is computed using the treasury stock method to calculate
     weighted average number of shares of common stock and common stock
     equivalents outstanding during the period. The weighted average number,
     including common stock equivalents, used to calculate primary earnings per
     share for 1997, 1996 and 1995 was 1,550,439, 1,548,971 and 1,521,406,
     respectively. The weighted average number used to calculate fully diluted
     earnings per share for 1997, 1996 and 1995 was 1,566,960, 1,548,924 and
     1,533,806, respectively.
 
RECLASSIFICATION
     Certain items previously reported have been reclassified to conform with
     the current year's reporting format.
 
(2) INVESTMENT SECURITIES
 
Investment securities are comprised of the following:
 
<TABLE>
<CAPTION>
                                                         Gross           Gross
                                     Amortized      Unrealized      Unrealized       Market
                        Face/Par          Cost    Appreciation    Depreciation        Value
<S>                    <C>           <C>           <C>             <C>             <C>
---------------------------------------------------------------------------------------------
AT JUNE 30, 1997:
  Corporate notes and
     commercial paper     $15,000       $15,494             $37             $27       $15,504
=============================================================================================
AT JUNE 30, 1996:
 Corporate notes and
   commercial paper        $9,950        $9,948             $15             $19        $9,944
=============================================================================================
</TABLE>
 
<TABLE>
<CAPTION>
                                                                         Amortized    Market
                                                             Face/Par         Cost     Value
<S>                                                          <C>         <C>          <C>
---------------------------------------------------------------------------------------------
At June 30, 1997, the contractual maturities of the 
 debt securities are:
   Due after one year through five years                     $ 4,000      $ 4,000     $ 4,005
   Due after five years through ten years                      5,500        5,498       5,496
   Due after ten years                                         6,000        5,996       6,003
---------------------------------------------------------------------------------------------
                                                             $15,500      $15,494     $15,504
=============================================================================================
</TABLE>
 
Note continued
 
                                       13
<PAGE>   8
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
 
Investment securities available for sale are comprised of the following:
 
<TABLE>
<CAPTION>
                                                         Gross           Gross
                                     Amortized      Unrealized      Unrealized       Market
                        Face/Par          Cost    Appreciation    Depreciation        Value
<S>                    <C>           <C>           <C>             <C>             <C>
--------------------------------------------------------------------------------------------
AT JUNE 30, 1997:
  Corporate notes and
     commercial paper      $1,500        $1,500              $3              $2        $1,501
  Municipal
     obligations            4,600         4,541             102               5         4,638
  Federal National
     Mortgage
     Association pre-
     ferred stock             250           250               9              --           259
  Federal Home Loan
     Mortgage
     Corporation stock        250           250               4              --           254
  Shay Financial
     Services ARMs
     Fund                   8,832         8,832              10              --         8,842
---------------------------------------------------------------------------------------------
                          $15,432       $15,373            $128              $7       $15,494
=============================================================================================
AT JUNE 30, 1996:
  Corporate notes and
     commercial paper      $1,000        $1,000              --              $6          $994
  Municipal
     obligations            2,350         2,315               7              50         2,272
  Financial
     Institutions
     Insurance Group,
     Ltd stock                 50            25              73              --            98
  Shay Financial
     Services ARMs
     Fund                   8,317         8,317              --              42         8,275
---------------------------------------------------------------------------------------------
                          $11,717       $11,657             $80             $98       $11,639
=============================================================================================
</TABLE>
 
<TABLE>
<CAPTION>
                                                                          Amortized    Market
                                                              Face/Par         Cost     Value
<S>                                                           <C>         <C>          <C>
---------------------------------------------------------------------------------------------
At June 30, 1997, the contractual maturities of the debt securities available for
 sale are:
  Due after five years through ten years                       $1,500      $ 1,500     $1,502
  Due after ten years                                           4,600        4,542     4,639
---------------------------------------------------------------------------------------------
                                                               $6,100      $ 6,042     $6,141
=============================================================================================
</TABLE>
 
The Federal National Mortgage Association preferred stock, Federal Home Loan
Mortgage Corporation stock, Shay Financial Services ARMs Fund and Financial
Institutions Insurance Group, Ltd stock have no stated maturity.
 
Proceeds from the sale of investment securities available for sale during 1997,
1996 and 1995 were $1,053, $349 and $6,106, respectively.
 
Gross gains of $113 and $37 were realized on these sales in 1997 and 1996. There
were no realized gains in 1995.
 
There were no realized losses in 1997 and 1996 and $74 of realized losses in
1995.
 
During fiscal 1996, the Company transferred investment securities with a fair
market value of approximately $1.4 million to its available for sale portfolio
in accordance with the the FASB's one-time opportunity to reclassify debt and
equity securities under SFAS 115.
 
                                       14
<PAGE>   9
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
 
(3) MORTGAGE-BACKED SECURITIES
 
Mortgage-backed securities were comprised of the following:
 
<TABLE>
<CAPTION>
                                                 Gross               Gross
                             Amortized        Unrealized          Unrealized           Market
     At June 30, 1997             Cost      Appreciation        Depreciation            Value
---------------------------------------------------------------------------------------------
<S>                              <C>                <C>                  <C>            <C>
Federal National Mortgage
  Association REMIC                 200                   6                  --           206
Federal Home Loan Mortgage
  Corporation REMIC                 900                   5                  --           905
Other                               120                  --                   1           119
---------------------------------------------------------------------------------------------
                                 $1,220                 $11                 $ 1        $1,230
=============================================================================================
At June 30, 1996
---------------------------------------------------------------------------------------------
Federal National Mortgage
 Association REMIC               $  254                 $ 5                 $--        $  259
Federal Home Loan Mortgage
  Corporation REMIC               1,130                  --                   9         1,121
Other                               162                  --                  --           162
---------------------------------------------------------------------------------------------
                                 $1,546                 $ 5                 $ 9        $1,542
=============================================================================================
</TABLE>
 
Mortgage-backed securities available for sale were comprised of the following:
 
<TABLE>
<CAPTION>
                                                 Gross               Gross
                             Amortized        Unrealized          Unrealized           Market
     At June 30, 1997             Cost      Appreciation        Depreciation            Value
---------------------------------------------------------------------------------------------
<S>                             <C>                <C>                   <C>          <C>
Government National
  Mortgage Association          $ 4,900                $182                 $ 2       $ 5,080
Federal National Mortgage
  Association                     4,050                  16                  34         4,032
Federal Home Loan Mortgage
  Corporation                       307                   7                  --           314
Federal National Mortgage
  Association REMIC                 284                   3                  --           287
Federal Home Loan Mortgage
  Corporation REMIC               3,526                  20                  --         3,546
---------------------------------------------------------------------------------------------
                                $13,067                $228                 $36       $13,259
=============================================================================================
At June 30, 1996
---------------------------------------------------------------------------------------------
Government National
 Mortgage Association           $ 5,885                $172                $  5       $ 6,052
Federal National Mortgage
  Association                     4,397                  15                  88         4,324
Federal Home Loan Mortgage
  Corporation                       437                  12                  --           449
Federal National Mortgage
  Association REMIC                 284                  --                  --           284
Federal Home Loan Mortgage
  Corporation REMIC               2,926                  --                  14         2,912
---------------------------------------------------------------------------------------------
                                $13,929                $199                $107       $14,021
=============================================================================================
</TABLE>
 
Prepayments may shorten the lives of these mortgage-backed securities.
 
There were no sales of mortgage-backed securities during 1997. Proceeds from the
sale of mortgage-backed securities available for sale during 1996 and 1995 were
$703 and $839, respectively. Gross gains of $48 and $40 were realized on the
sales in 1996 and 1995, respectively.
 
                                       15
<PAGE>   10
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
 
(4) LOANS RECEIVABLE
 
Loans receivable are comprised of the following:
 
<TABLE>
<CAPTION>
                                                                                  June 30,
                                                                     1997             1996
<S>                                                              <C>              <C>
------------------------------------------------------------------------------------------
First mortgage loans:
  Conventional:
     1 to 4 family dwellings                                     $113,986         $113,050
     Multi-family dwellings                                         2,740            2,811
     Commercial                                                     5,676            5,788
------------------------------------------------------------------------------------------
                                                                  122,402          121,649
  Guaranteed or insured                                                76              110
------------------------------------------------------------------------------------------
Total long term with monthly amortization                         122,478          121,759
  Construction and development loans                                3,079            4,281
------------------------------------------------------------------------------------------
                                                                  125,557          126,040
Less: Allowance for possible losses                                (1,358)          (1,363)
      Loans in process                                             (1,634)          (2,148)
      Deferred loan fees                                             (860)          (1,007)
------------------------------------------------------------------------------------------
                                                                  121,705          121,522
------------------------------------------------------------------------------------------
Consumer loans:
  Home improvement loans (net of unearned discounts
     of $34 and $84)                                                  291              604
  Mobile home loans                                                   747            1,157
  Loans secured by savings accounts                                   288              316
  Installment loans                                                21,226           19,492
  Commercial loans                                                    998              977
------------------------------------------------------------------------------------------
                                                                   23,550           22,546
Less: Allowance for possible losses                                  (585)            (536)
------------------------------------------------------------------------------------------
                                                                   22,965           22,010
------------------------------------------------------------------------------------------
                                                                 $144,670         $143,532
==========================================================================================
</TABLE>
 
At June 30, 1997 and 1996, the Company had a commitment to sell its guaranteed
student loan portfolio totaling $1,827 and $1,627, respectively.
 
Outstanding commitments to originate loans:
 
<TABLE>
<CAPTION>
                                                                        June 30,
                                                                  1997               1996
------------------------------------------------------------------------------------------
<S>                                                            <C>                  <C>
First mortgage loans:
  Fixed rates (7.625% to 8.250% and 7.250% to 8.000%)               $ 498           $  462
  Variable rates                                                      523            2,425
------------------------------------------------------------------------------------------
                                                                    1,021            2,887
Other loans--fixed rates                                              264              289
Unused lines of credit                                              5,049            4,264
------------------------------------------------------------------------------------------
                                                                   $6,334           $7,440
==========================================================================================
</TABLE>
 
The Company's customers have unused lines of credit as follows: secured (home
equity), builder lines of credit, and all other lines of credit. The amount
available at June 30, 1997 for each type was $2,473, $1,558 and $1,018,
respectively. The amount available at June 30, 1996 for each type was $1,861,
$1,510 and $893, respectively. The interest rate for each loan is based on the
prevailing market conditions at the time of funding.
 
The Company serviced loans for others of $1,229, $1,107 and $1,699 at June 30,
1997, 1996 and 1995, respectively. These loans serviced for others are not
assets of the Company and are appropriately excluded from the Company's
financial statements. Fidelity bond and errors and omission insurance coverage
is maintained with respect to these loans.
 
                                       16
<PAGE>   11
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
 
At June 30, 1997, over 99.5% of the Company's net mortgage loan portfolio was
secured by properties located in Pennsylvania. The Company does not believe it
has significant concentrations of credit risk to any one group of borrowers
given its underwriting and collateral requirements.
 
(5) ALLOWANCE FOR POSSIBLE LOSSES ON LOANS
 
Changes in the allowances for possible losses on loans are as follows:
 
<TABLE>
<CAPTION>
                                                                                    First
                                                              Consumer           Mortgage
                                                                 Loans              Loans
-----------------------------------------------------------------------------------------
<S>                                                             <C>              <C>
  Balance at June 30, 1994                                           $455          $1,364
  Provision for losses                                                 66              34
  Charge-offs                                                         (85)            (26)
  Recoveries                                                           79               6
-----------------------------------------------------------------------------------------
  Balance at June 30, 1995                                           $515          $1,378
  Provision for losses                                                 16              14
  Charge-offs                                                         (51)            (30)
  Recoveries                                                           56               1
-----------------------------------------------------------------------------------------
  Balance at June 30, 1996                                           $536          $1,363
  Provision for losses                                                 20              10
  Charge-offs                                                         (39)            (15)
  Recoveries                                                           68              --
-----------------------------------------------------------------------------------------
  Balance at June 30, 1997                                           $585          $1,358
=========================================================================================
</TABLE>
 
Management believes that the allowance for losses on loans was adequate at June
30, 1997. While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions and other factors. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the
Company's allowance for losses on loans. Such agencies may require the Company
to recognize additions to the allowance based on their judgements about
information available to them at the time of their examination.
 
At June 30, 1997, the recorded investment in loans that are considered to be
impaired under FAS 114 was $482. Included in this amount is $104 of impaired
loans for which the related allowance for credit losses is $2 and $335 of
impaired loans that as a result of write-downs do not have an allowance for
credit losses. The average recorded investment in impaired loans during the
fiscal years ended June 30, 1997 and 1996 was approximately $437 and $449,
respectively. For the fiscal years ended June 30, 1997 and 1996, the Company
recognized interest income on those impaired loans of $2 and $6, respectively,
which was recognized using the cash basis of income recognition.
 
Non-accrual loans at June 30, 1997, 1996 and 1995 were approximately $915, $612
and $521, respectively. The foregone interest on these loans for the fiscal
years ended June 30, 1997, 1996 and 1995 was approximately $65, $40 and $43,
respectively. The amount of interest income on such loans actually included in
income in fiscal 1997, 1996 and 1995 was $27, $31 and $28, respectively. There
were no commitments to lend additional funds to borrowers whose loans were in
non-accrual status.
 
(6) FEDERAL HOME LOAN BANK STOCK
 
The Company is a member of the Federal Home Loan Bank ("FHLB") System. As a
member, the Company maintains an investment in the capital stock of the FHLB of
Pittsburgh, at cost, in an amount not less than the greater of 1% of its
qualifying assets, as defined by the FHLB of Pittsburgh, or 5% of its
outstanding advances, if any, from the FHLB of Pittsburgh as calculated at
December 31 of each year.
 
                                       17
<PAGE>   12
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
 
(7) OFFICE PROPERTIES AND EQUIPMENT
 
Office properties and equipment are summarized by major classifications as
follows:
 
<TABLE>
<CAPTION>
                                                                          June 30,
                                                                     1997          1996
<S>                                                                 <C>           <C>
-----------------------------------------------------------------------------------------
Land and improvements                                               $   226       $   226
Office buildings and improvements                                     2,118         2,071
Furniture, fixtures and equipment                                       487           375
-----------------------------------------------------------------------------------------
  Total, at cost                                                      2,831         2,672
Less accumulated depreciation                                        (1,564)       (1,426)
-----------------------------------------------------------------------------------------
                                                                    $ 1,267       $ 1,246
=========================================================================================
</TABLE>
 
Depreciation expense for the periods ended June 30, 1997, 1996 and 1995 was
$139, $117 and $114, respectively.
 
(8) SAVINGS DEPOSITS
 
Savings deposit balances and interest rates are summarized as follows:
 
<TABLE>
<CAPTION>
                                                    Weighted Average
                             Interest Range          Interest Rate
                                   at                  at June 30,                June 30,
                             June 30, 1997          1997          1996        1997        1996
<S>                          <C>                 <C>             <C>        <C>         <C>
------------------------------------------------------------------------------------------------
  Demand and club
     accounts                   2.00 to 2.50%        2.48%        2.49%     $ 27,690    $ 28,704
  Money market deposit
     accounts                   2.27 to 2.46%        2.38         2.39        18,043      18,477
  NOW accounts                     0 to 1.50%        1.11         1.15        23,819      20,115
------------------------------------------------------------------------------------------------
                                                                              69,552      67,296
------------------------------------------------------------------------------------------------
TIME DEPOSITS:                  3.01 to 4.00%                                     --       1,889
                                 4.01 to 5.00                                 26,525      27,019
                                 5.01 to 6.00                                 37,213      38,045
                                 6.01 to 7.00                                 29,327      17,022
                                 7.01 to 8.00                                  7,722       8,104
                                 8.01 to 9.00                                  3,891       4,331
                                9.01 to 10.00                                    789         977
------------------------------------------------------------------------------------------------
                                                     5.86         5.72      $105,467    $ 97,387
------------------------------------------------------------------------------------------------
                                                     4.32%        4.22%     $175,019    $164,683
================================================================================================
</TABLE>
 
At June 30, 1997 and 1996, time deposits with balances in excess of $100,000
amounted to $3.6 million and $2.2 million, respectively.
Note continued
 
                                       18
<PAGE>   13
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
 
The contractual maturity of time deposits is as follows:
 
<TABLE>
<CAPTION>
                                                                          June 30,
                                                                    1997            1996
<S>                                                               <C>              <C>
------------------------------------------------------------------------------------------
Under 12 months                                                   $ 67,772         $47,688
12 months to 24 months                                              18,960          29,484
24 months to 36 months                                               7,799           6,098
36 months to 48 months                                               3,453           4,495
48 months to 60 months                                               2,248           2,978
Over 60 months                                                       5,235           6,644
------------------------------------------------------------------------------------------
                                                                  $105,467         $97,387
==========================================================================================
</TABLE>
 
Interest expense by deposit category is as follows:
 
<TABLE>
<CAPTION>
                                                                Years ended June 30,
                                                        1997            1996            1995
<S>                                                    <C>             <C>             <C>
---------------------------------------------------------------------------------------------
Passbook and club accounts                             $  696          $  703          $  749
Money market deposit accounts                             437             463             567
NOW accounts                                              242             221             224
Time deposits                                           5,807           5,631           4,761
---------------------------------------------------------------------------------------------
                                                       $7,182          $7,018          $6,301
=============================================================================================
</TABLE>
 
(9) FEDERAL HOME LOAN BANK ADVANCES
 
FHLB advances are summarized as follows:
 
<TABLE>
<CAPTION>
                                                        Interest             June 30,
                      Due Date                              Rate         1997         1996
-------------------------------------------------------------------------------------------
<S>                                                     <C>             <C>          <C>
July 15, 1996                                               5.42%           --       $  900
July 19, 1996                                               5.48            --        3,279
September 23, 1996                                          5.57            --        2,000
July 15, 1997                                               5.66        $  900           --
July 17, 1997                                               5.67         2,000           --
August 4, 1997                                              5.94         1,000           --
August 20, 1997                                             5.72         1,000           --
August 22, 1997                                             5.67         1,000           --
January 30, 1998                                            5.67         1,000           --
August 9, 1999                                              6.11         2,000           --
February 14, 2002                                           5.48         2,000           --
November 13, 2015                                           6.54           144          148
</TABLE>
 
At June 30, 1997, the Bank had nine fixed rate advances from the FHLB of
Pittsburgh. Fixed rate advances are subject to a prepayment fee in the event the
advances are repaid prior to maturity. The prepayment fee is equal to the
present value of the difference between cash flows generated by the advance at
the advance rate from the date of prepayment until the original maturity date
and an advance of the same amount at the interest rate posted by the FHLB on the
date of prepayment for an advance of comparable maturity.
 
Under a blanket collateral pledge agreement, the Bank has pledged as collateral
for advances from the FHLB of Pittsburgh, certain qualifying collateral, such as
mortgage-backed securities and loans, with weighted collateral values determined
by the FHLB of Pittsburgh equal to at least the unpaid amount of outstanding
advances.
 
The Bank has a line of credit with the FHLB of Pittsburgh (Flexline), which is
approximately $12.0 million, and expires on March 25, 1998. There are no
commitment fees associated with this line of credit and the FHLB of Pittsburgh
may reduce or terminate the line at any time. When used, interest is charged at
the FHLB's posted rates, which change daily, and the loan can be repaid at any
time but in no event later than March 25, 1997. The Bank has yet to use this
credit line and has no plans to do so in the immediate future. However, funds
remain available up to the $12.0 million commitment at daily rates posted by the
FHLB.
 
                                       19
<PAGE>   14
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
 
(10) INCOME TAXES
 
Total income tax expense for the years ended June 30, 1997, 1996 and 1995
consisted of:
 
<TABLE>
<CAPTION>
                                                            1997         1996         1995
-------------------------------------------------------------------------------------------
<S>                                                        <C>          <C>          <C>
Current:
  Federal                                                  $1,156       $1,230       $1,116
  State                                                       253          302          290
-------------------------------------------------------------------------------------------
                                                           $1,409       $1,532       $1,406
-------------------------------------------------------------------------------------------
Deferred:
  Federal                                                  $  (65)      $   89       $  198
-------------------------------------------------------------------------------------------
                                                           $1,344       $1,621       $1,604
===========================================================================================
</TABLE>
 
Total income tax provision for the years ended June 30, 1997, 1996 and 1995 was
allocated as follows:
 
<TABLE>
<CAPTION>
                                                                1997      1996         1995
--------------------------------------------------------------------------------------------
<S>                                                            <C>       <C>          <C>
Income                                                         $1,344    $1,621       $1,604
Stockholders' equity:
  Unrealized gains (losses) on investment securities               81       (54)          86
--------------------------------------------------------------------------------------------
                                                               $1,425    $1,567       $1,690
============================================================================================
</TABLE>
 
A reconciliation from the expected statutory income tax rate to the actual
effective tax rate expressed as a percentage of pre-tax income for the years
ended June 30, 1997, 1996 and 1995 is as follows:
 
<TABLE>
<CAPTION>
                                                               1997       1996       1995
-----------------------------------------------------------------------------------------
<S>                                                            <C>        <C>        <C>
Expected federal tax rate                                      34.0%      34.0%      34.0%
State taxes, net of federal tax benefit                        4.6        4.6        4.6
Other, net                                                     (1.9)      (.8)        --
-----------------------------------------------------------------------------------------
                                                               36.7%      37.8%      38.6%
=========================================================================================
</TABLE>
 
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities and the related
valuation allowance as of June 30, 1997 and 1996 are as follows:
 
<TABLE>
<CAPTION>
                                                                           June 30,
                                                                      1997           1996
-------------------------------------------------------------------------------------------
<S>                                                                 <C>            <C>
DEFERRED TAX ASSETS:
  Deferred loan fees                                                   $ 209          $ 244
  Tax vs. book loan loss reserve                                         326            232
  Writedown of investments                                                 8              8
  Other                                                                  142            130
-------------------------------------------------------------------------------------------
  Gross deferred tax assets                                            $ 685          $ 614
  Valuation allowance                                                     --             --
-------------------------------------------------------------------------------------------
  Net deferred tax asset                                               $ 685          $ 614
DEFERRED TAX LIABILITIES:
  Investment Securities                                                $(106)         $ (25)
  Property, plant & equipment                                            (93)           (84)
  Prepaid expense                                                        (22)           (26)
-------------------------------------------------------------------------------------------
  Gross deferred tax liability                                          (221)          (135)
-------------------------------------------------------------------------------------------
  Net deferred tax asset                                               $ 464          $ 479
===========================================================================================
</TABLE>
 
Note continued
 
                                       20
<PAGE>   15
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
 
The Bank has determined that no valuation reserve is necessary for the deferred
tax asset since it is more likely than not that the deferred tax asset will be
realized through carryback to taxable income in prior years, future reversals of
existing differences and to a lesser extent, through future taxable income.
 
SFAS 109 treats tax basis bad debt reserves established after 1987 as temporary
differences on which deferred income taxes have been provided. Deferred taxes
are not required to be provided on tax bad debt reserves recorded in 1987 and
prior years (base year bad debt reserves). Approximately $2,217 of the balances
in retained income at June 30, 1997, represent base year bad debt deductions for
tax purposes only. No provision for federal income tax has been made for such
amount. Should amounts previously claimed as a bad debt deduction be used for
any purpose other than to absorb bad debts (which is not anticipated), tax
liabilities will be incurred at the rate then in effect.
 
On August 20, 1996, President Clinton signed legislation which eliminated the
percentage of taxable income bad debt deduction for thrift institutions for tax
years beginning after December 31, 1995. This new legislation also requires a
thrift to generally recapture the excess of its current tax reserves in excess
of its 1987 base year reserves. As the Bank has previously provided deferred
taxes on this amount, no financial statement tax expense should result from this
new legislation.
 
(11) STOCKHOLDERS' EQUITY
 
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary--actions by
regulators, that, if undertaken, could have a direct material effect on the
Bank's financial statement. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory account
practices. The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
 
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain amounts and ratios (set forth in the table below)
of total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier 1 capital (as defines) to average assets (as
defined). Management, believes, as of June 30, 1997, that the Bank meets all
capital adequacy requirements to which it is subject.
 
As of June 30, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
 
                                       21
<PAGE>   16
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
 
The following table sets forth certain information concerning the Company's
regulatory capital at
June 30, 1997 and 1996.
 
<TABLE>
<CAPTION>
                                         JUNE 30, 1997                            JUNE 30, 1996
                                           Tier I       Tier II                     Tier I       Tier II
                              Tier I        Risk-         Risk-         Tier I       Risk-         Risk-
                                Core        Based         Based           Core       Based         Based
                             Capital      Capital       Capital        Capital     Capital       Capital
<S>                           <C>        <C>           <C>             <C>        <C>           <C>
---------------------------------------------------------------------------------------------------------
Equity Capital (1)            $21,028     $ 21,028      $ 21,028       $20,918     $ 20,918      $ 20,918
Less unrealized securities
  gains                          (206)        (206)         (206)          (49)         (49)          (49)
Plus general valuation
  allowances (2)                   --           --         1,352            --           --         1,263
---------------------------------------------------------------------------------------------------------
    Total regulatory
       capital                 20,822       20,822        22,174        20,869       20,869        22,132
Minimum required capital        8,403        4,327         8,655         7,801        4,043         8,085
---------------------------------------------------------------------------------------------------------
    Excess regulatory
       capital                $12,419     $ 16,495      $ 13,519       $13,068     $ 16,826      $ 14,047
---------------------------------------------------------------------------------------------------------
Minimum required capital to
  be well capitalized under
  Prompt Corrective Action
  Provisions                  $10,504     $  6,456      $ 10,760       $ 9,751     $  6,026      $ 10,043
=========================================================================================================
Regulatory capital as a
  percentage (3)                 9.91%       19.35%        20.61%        10.70%       20.78%        22.04%
Minimum required capital
  percentage                     4.00         4.00          8.00          4.00         4.00          8.00
---------------------------------------------------------------------------------------------------------
    Excess regulatory
       capital percentage        5.91%       15.35%        12.61%         6.70%       16.78%        14.04%
---------------------------------------------------------------------------------------------------------
Minimum required capital
  percentage to be well
  capitalized under Prompt
  Corrective Action
  Provisions                     5.00%        6.00%        10.00%         5.00%        6.00%        10.00%
=========================================================================================================
</TABLE>
 
(1) Represents equity capital of the Bank as reported to the FDIC and the
    Department of Banking on Form 033 for the quarter ended June 30, 1997 and
    1996.
 
(2) Limited to 1.25% of risk adjusted assets.
 
(3) Tier I capital is calculated as a percentage of adjusted total average
    assets of $210,082 and $195,029 at June 30, 1997 and 1996, respectively.
    Tier I and Tier II risk-based capital are calculated as a percentage of
    adjusted risk weighted assets of $107,596 and $100,433 at June 30, 1997 and
    1996, respectively.
 
                                       22
<PAGE>   17
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
 
(12) EMPLOYEE BENEFIT PLANS
 
The Company sponsors a defined contribution plan in which substantially all
employees participate. The plan requires employer contributions of five percent
of total compensation of each participant. Employees are also permitted to make
contributions. Total plan expense was $69, $65 and $66 during fiscal 1997, 1996,
and 1995 respectively.
 
The Bank sponsors a nonqualified deferred compensation plan for key officers of
the Bank. This plan is structured as a "rabbi trust". The amount of compensation
to be deferred under the plan is determined each year by the officers.
 
(13) STOCK COMPENSATION PROGRAMS
 
In fiscal 1988, the Company adopted an Employee Stock Compensation Program under
which shares of common stock can be issued. Under the 1988 Program, each
eligible participant may be granted options to purchase common stock at an
amount equal to or less than the fair market value of the shares at the time of
the grant of the option. At June 30, 1997, there were 625 remaining shares
available to be granted as determined by the Program Administrators.
 
In fiscal 1994, the Company adopted the 1993 Key Employee Stock Compensation
Program ("Employee Program") and the 1993 Directors' Stock Option Plan
("Directors' Plan"). Under the 1993 Employee Program, each eligible participant
may be granted options to purchase common stock at an amount equal to or less
than the fair market value of the shares at the time of the grant of the
options. At June 30, 1997, there were 6,937 remaining shares available to be
granted as determined by the Program Administrators. Under the 1993 Directors'
Plan, each person who serves as a non-employee director of the Company
immediately following each annual meeting shall be granted as of such date an
option to purchase 937 shares of common stock exercisable at a price equal to
the fair market value on the date of the grant. At June 30, 1997 there were
14,067 remaining shares available to be granted under the terms of the plan.
 
In fiscal 1997, the Company adopted the 1996 Key Employee Stock Compensation
Program ("Employee Program") and the 1996 Directors' Stock Option Plan
("Directors' Plan"). Under the 1996 Employee Program, each eligible participant
may be granted options to purchase common stock at an amount equal to or less
than the fair market value of the shares at the time of the grant of the
options. At June 30, 1997, there were 56,674 remaining shares available to be
granted as determined by the Program Administrators. Under the 1996 Directors'
Plan, each person who served as a non-employee director of the Company
immediately following the last adjournment of the 1996 annual meeting was
granted as of such date an option to purchase 3,148 shares of common stock
exercisable at a price equal to the fair market value on the date of the grant.
Such stock options to directors will be vested and exercisable over three years
at the rate of 33.3% per year. At June 30, 1997, 6,296 shares of the 18,888
granted during fiscal 1997 were vested and exercisable. At June 30, 1997 there
were no remaining shares available to be granted under the terms of the plan.
 
Each option granted under all five stock option plans will expire no later than
10 years from the date on which the option was or is granted. For the periods
presented, options granted for all Plans were granted at the fair market value
at the date of the grant.



Note continued
 
                                       23
<PAGE>   18
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
 
<TABLE>
<CAPTION>
                        Average        1993        Average       1993        Average     1996      Average     1996      Average
             1988       Exercise     Employee      Exercise    Director      Exercise  Employee    Exercise  Director    Exercise
           Program       Price       Program        Price       Program       Price    Program      Price    Program      Price
---------------------------------------------------------------------------------------------------------------------------------
<S>        <C>            <C>        <C>           <C>        <C>           <C>       <C>         <C>       <C>         <C>
June 30,
 1994           55,496      $11.43      26,998      $19.00         5,000      $16.60
Granted            --          --           --          --          3,500       11.87
Exercised       (2,610)      13.80          --         --            --          --
Forfeited         (202)      11.47        (250)      12.67            --         --
Stock
 split          26,313        7.54      13,372       12.67         5,555       11.44
---------------------------------------------------------------------------------------------------------------------------------
June 30,
 1995           78,997        7.54      40,120       12.67        14,055       11.44
Granted          2,695       16.38      34,500       16.08         6,559       16.00
Exercised      (17,910)       4.36        (625)      12.67        (1,874)      11.07
Forfeited           --         --           --          --            --          --
---------------------------------------------------------------------------------------------------------------------------------
June 30,
 1996           63,782        8.80      73,995       14.26        18,740       13.08         --         --         --         --
Granted            --          --           --          --         5,622       15.88         --         --     18,888     $15.88
Exercised       (4,680)       6.37        (325)      12.67          (937)      11.07         --         --         --         --
Forfeited         (625)      11.43          --          --        (2,811)       12.98         --         --         --         --
---------------------------------------------------------------------------------------------------------------------------------
June 30,
 1997           58,477       $8.97      73,670      $14.27        20,614      $13.95         --         --     18,888      15.88
---------------------------------------------------------------------------------------------------------------------------------
Average
 con-
tractual
 life
 remaining
 in
 years             5.2                     7.8                       8.1                                         9.4
Option
 price
 per
 share   $3.24-$16.375          $12.67-$16.375             $11.07-$16.00                                      $15.88
Options
 availa-
 ble for
granting
 at June
 30,
 1997              625                   6,937                    14,067                56,674                    --
=================================================================================================================================
</TABLE>
 
Using a Black-Scholes option valuation model, the weighted-average fair value of
options granted during fiscal 1996 under the 1988 and 1993 Employee Programs was
$4.18. The fair value of the options granted under the 1993 Director Program was
$4.08. The fair value of options granted during fiscal 1997 under the 1993 and
1996 Director Program was $4.15.
 
At June 30, 1997, 1996, and 1995, 149,296, 140,428 and 130,206 shares were
immediately exercisable at average prices of $12.08, $11.41 and $9.42,
respectively.
 
In October, 1995, the FASB issued Statement of Financial Accounting Standard No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
establishes a fair value based method of accounting for stock-based compensation
plans. Effective for fiscal years beginning after December 15, 1995, SFAS 123
allows financial institutions to expense an estimated fair value of stock
options or to continue to measure compensation expense for stock option plans
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25 ("APB No. 25"). Entities that elect to continue to measure
compensation expense based on APB No. 25 must provide pro forma disclosures of
net income and earnings per share as if the fair value method of accounting had
been applied. The Company has elected to continue to measure compensation cost
using the intrinsic value method prescribed by APB No. 25. Had the Company used
the fair value method, net income and earnings per share would have been as
follows (In thousands, except per share data):
 
<TABLE>
<CAPTION>
                                                                             June 30
                                                                         1997       1996
-----------------------------------------------------------------------------------------
<S>                                                                     <C>        <C>
Net income
  As reported                                                           $2,319     $2,665
  Pro Forma                                                             $2,293     $2,495
-----------------------------------------------------------------------------------------
Primary earnings per share
  As reported                                                            $1.50      $1.72
  Pro Forma                                                              $1.48      $1.61
-----------------------------------------------------------------------------------------
Fully diluted earnings per share
  As reported                                                            $1.48      $1.72
  Pro Forma                                                              $1.46      $1.61
-----------------------------------------------------------------------------------------
</TABLE>
 
The fair value for these options was estimated at the date of grant using a
Black-Scholes Option Valuation Model with the following weighted-average
assumptions for 1997 and 1996, respectively: risk-free interest rates of
 
                                       24
<PAGE>   19
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
 
6.51% and 6.27%; dividend yields of 2.3% and 2.1%; volatility factors of the
expected market price of the Company's common stock of 17.2% and 15.7%; and a
weighted-average expected life of the options of 7 years. The pro forma net
income and earnings per share in the table above reflect only options granted in
fiscal 1997 and 1996. Therefore, the full impact of calculating the cost for
stock options under the fair value method of SFAS 123 is not reflected in the
pro forma net income and earnings per share amounts presented above because
compensation cost is reflected over the options' vesting periods and
compensation cost for options granted prior to July 1, 1996 is not considered.
 
The Black-Scholes Option Valuation Model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjectivity
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
 
(14) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                       Three Month Periods Ended
                                           September 30     December 31     March 31     June 30
1996/1997:
<S>                                       <C>              <C>             <C>          <C>
------------------------------------------------------------------------------------------------
  Interest income                                $3,773          $3,823       $3,831      $3,916
  Interest expense                                1,868           1,912        1,942       1,993
------------------------------------------------------------------------------------------------
  Net interest income before provision
    for possible loan losses                      1,905           1,911        1,889       1,923
  Provision for possible loan losses                  8               7            8           7
  Other income                                      168             234          143         172
  Operating expenses                              1,972             900          873         906
------------------------------------------------------------------------------------------------
  Income before income taxes                         93           1,238        1,151       1,182
  Provision for income taxes                         25             462          421         436
------------------------------------------------------------------------------------------------
  Net income                                      $  68           $ 776        $ 730       $ 746
================================================================================================
  Earnings per share:
    Primary                                         .04          $  .50       $  .46      $  .49
    Fully diluted                                $  .04          $  .50       $  .46      $  .49
------------------------------------------------------------------------------------------------
  Dividends per share                            $  .11          $  .11       $  .11      $  .11
================================================================================================
1995/1996:
------------------------------------------------------------------------------------------------
  Interest income                                $3,718          $3,699       $3,690      $3,678
  Interest expense                                1,867           1,848        1,828       1,776
------------------------------------------------------------------------------------------------
  Net interest income before provision
    for possible loan losses                      1,851           1,851        1,862       1,902
  Provision for possible loan losses                 10               8            7           5
  Other income                                      191             164          124         148
  Operating expenses                                925             975          894         983
------------------------------------------------------------------------------------------------
  Income before income taxes                      1,107           1,032        1,085       1,062
  Provision for income taxes                        430             390          417         384
------------------------------------------------------------------------------------------------
  Net income                                      $ 677           $ 642        $ 668       $ 678
================================================================================================
  Earnings per share:
    Primary                                      $  .44          $  .41       $  .43      $  .44
    Fully diluted                                $  .44          $  .41       $  .43      $  .44
------------------------------------------------------------------------------------------------
  Dividends per share                            $  .05          $  .08       $  .08      $  .08
================================================================================================
</TABLE>
 
As a result of rounding, the sum of quarterly amounts may not equal the annual
amounts.
 
                                       25
<PAGE>   20
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
 
(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
 
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized in the Consolidated
Statement of Financial Condition. FAS 107 excludes certain financial instruments
and all non-financial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the underlying value
of Laurel Capital Group, Inc. The carrying amounts reported in the Consolidated
Statement of Financial Condition approximate fair value for the following
financial instruments; cash, money market investments, interest-earning deposits
with other institutions, investment securities available for sale, Federal Home
Loan Bank stock and all deposits except time deposits.
 
At June 30, 1997, the fair market value of both investments and mortgage-backed
securities exceeded the net carrying value by approximately $10, respectively.
At June 30, 1996, the net carrying value of investments and mortgage-backed
securities both exceeded the fair market value by approximately $4. Estimated
fair values are based on quoted market prices, dealer quotes, and prices
obtained from independent pricing services. Refer to Notes and 3 herein for the
detail on breakdowns by type of investment products.
 
The fair value of loans and loans held for sale exceeded the carrying value by
approximately $3,293 and $1,282 at June 30, 1997 and 1996, respectively. Loans
with comparable characteristics including collateral and repricing structures
were segregated for valuation purposes. Each loan pool was separately valued
utilizing a discounted cash flow analysis. Projected monthly cash flows were
discounted to present value using a market rate for comparable loans.
Characteristics of comparable loans included remaining term, coupon interest and
estimated prepayments speeds.
 
The carrying amounts and estimated fair values of deposits at June 30, 1997 and
1996 were as follows:
 
<TABLE>
<CAPTION>
                                           June 30, 1997                  June 30, 1996
                                      Carrying      Estimated        Carrying      Estimated
                                        Amount     Fair Value          Amount     Fair Value
<S>                                  <C>           <C>              <C>           <C>
---------------------------------------------------------------------------------------------
Noninterest-bearing:
  Demand accounts                      $  6,274       $  6,274        $  4,860       $  4,860
Interest-bearing:
  NOW and MMDA accounts                  35,588         35,588          33,732         33,732
  Passbook accounts                      27,690         27,690          28,704         28,704
  Time deposits                         105,467        104,740          97,387         96,753
---------------------------------------------------------------------------------------------
Total Deposits                         $175,019       $174,292        $164,683       $164,049
=============================================================================================
</TABLE>
 
The fair value estimates above do not include the benefit that results from the
low-cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market. Fair values for time deposits are estimated using
a discounted cash flow calculation that applies contractual cost currently being
paid on the existing portfolio to current market rates being offered locally for
deposits of similar remaining maturities. The mark-to-market valuation
adjustment for the time deposit portfolio consists of the present value of the
difference of these two cash flows, discounted at the assumed market rate of the
corresponding maturity.
 
The carrying amounts and estimated fair values of borrowed funds at June 30,
1997 and 1996 were as follows:
 
<TABLE>
<CAPTION>
                                           June 30, 1997                  June 30, 1996
                                      Carrying      Estimated        Carrying      Estimated
                                        Amount     Fair Value          Amount     Fair Value
<S>                                   <C>            <C>              <C>           <C>
---------------------------------------------------------------------------------------------
Borrowed funds:
  FHLB advances                         $11,044        $11,028          $6,327         $6,314
=============================================================================================
</TABLE>
 
The fair value of borrowed funds is based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently offered for
advances of similar remaining maturities.
 
                                       26
<PAGE>   21
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
 
There is no material difference between the carrying value and the estimated
fair value of the Company's off-balance sheet items which totaled $6.3 million
and $7.4 million at June 30, 1997 and 1996, respectively, and are primarily
comprised of unfunded loan commitments which are generally priced at market at
the time of funding.
 
Fair value estimates are made at a specific point in time, based on relevant
market information about the financial instrument. Because no market exists for
a significant portion of the Company's financial instruments, fair value
estimates are based on judgements regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgement and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
 
(16) LAUREL CAPITAL GROUP, INC.
       (PARENT COMPANY ONLY) FINANCIAL INFORMATION
 
<TABLE>
<CAPTION>
                                                                  June 30,     June 30,
STATEMENT OF FINANCIAL CONDITION                                      1997         1996
---------------------------------------------------------------------------------------
<S>                                                               <C>          <C>
ASSETS
Cash                                                               $   213      $   154
Other equity investments                                               182           87
Investment in Laurel Savings Bank                                   21,029       20,918
---------------------------------------------------------------------------------------
  Total assets                                                     $21,424      $21,159
=======================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Other accrued expenses                                             $   162      $    73
---------------------------------------------------------------------------------------
                                                                       162           73
---------------------------------------------------------------------------------------
Stockholders' equity                                                21,262       21,086
---------------------------------------------------------------------------------------
  Total liabilities and stockholders' equity                       $21,424      $21,159
=======================================================================================
</TABLE>
 
<TABLE>
<CAPTION>
                                                      June 30,     June 30,     June 30,
STATEMENT OF OPERATIONS                                   1997         1996         1995
---------------------------------------------------------------------------------------
<S>                                                   <C>          <C>          <C>
Income before equity in undistributed earnings of
  subsidiary--dividends from subsidiary                $2,301        $ 120       $   --
Other equity income                                        95           87           --
Equity in undistributed income of Laurel Savings
  Bank                                                     13        2,531        2,543
---------------------------------------------------------------------------------------
                                                        2,409        2,738        2,543
---------------------------------------------------------------------------------------
Other operating expenses                                   86           63           --
---------------------------------------------------------------------------------------
Income before income taxes                              2,323        2,675        2,543
Provision for income taxes                                  4           10           --
---------------------------------------------------------------------------------------
Net income                                             $2,319       $2,665       $2,543
=======================================================================================
</TABLE>
 
Note continued
 
                                       27
<PAGE>   22
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
 
<TABLE>
<CAPTION>
                                                    June 30,     June 30,   June 30,
STATEMENT OF CASH FLOWS                                 1997         1996       1995
------------------------------------------------------------------------------------
<S>                                                  <C>         <C>         <C>
Net income                                           $ 2,319     $ 2,665     $ 2,543
Undistributed income of Laurel Savings Bank              (13)     (2,531)     (2,543)
  Adjustments to reconcile net income to net cash
     provided by operating activities:
     Other--net                                           (5)        (14)         --
------------------------------------------------------------------------------------
     Net cash provided by operating activities         2,301         120          --
------------------------------------------------------------------------------------
Financing activities:
  Acquisition of treasury stock                       (1,626)         --          --
  Stock options exercised                                 44         107          36
  Dividends paid                                        (660)       (446)       (305)
------------------------------------------------------------------------------------
  Net cash provided by financing activities           (2,242)       (339)       (269)
------------------------------------------------------------------------------------
Net change in cash and cash equivalents                   59        (219)       (269)
------------------------------------------------------------------------------------
Cash and cash equivalents at the beginning of the
  period                                             $   154     $   373     $   642
Net change during the period                              59        (219)       (269)
------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period   $   213     $   154     $   373
====================================================================================
</TABLE>
 
(17) CONTINGENT LIABILITIES
 
The Company is subject to a number of asserted and unasserted potential claims
in the normal course of business. In the opinion of management and legal
counsel, the resolution of these claims will not have a material adverse effect
on the Company's financial position, liquidity or results of operation.
 
                                       28
<PAGE>   23
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
SELECTED FIVE YEAR FINANCIAL DATA
--------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts)
 
FINANCIAL CONDITION DATA:
 
<TABLE>
<CAPTION>
                                                            June 30,
                                    1997         1996         1995         1994         1993
----------------------------------------------------------------------------------------------
<S>                               <C>          <C>          <C>          <C>          <C>
Total assets                      $211,987     $196,947     $188,916     $177,729     $175,931
Loans, net                         144,670      143,532      143,091      130,213      129,949
Loans held for sale                  1,827        1,627        1,205          604        2,613
Mortgage-backed securities           1,220        1,546        8,222       14,371       19,747
Mortgage-backed securities
  available for sale                13,259       14,021        4,892           --           --
Investment securities               15,494        9,948        9,655        5,818        4,659
Investment securities available
  for sale                          15,494       11,639        2,057        8,004           --
Money market investments             9,086        6,291       12,085        9,729       11,324
Savings deposits                   175,019      164,683      163,308      157,179      158,132
FHLB advances                       11,044        6,327        2,000           --           --
Stockholders' equity                21,262       21,086       18,918       16,482       13,845
</TABLE>
 
OPERATING DATA:
 
<TABLE>
<CAPTION>
                                                           June 30,
                                    1997         1996         1995         1994         1993
----------------------------------------------------------------------------------------------
<S>                               <C>          <C>          <C>          <C>          <C>
Interest income                   $15,342      $14,785      $13,834      $13,258      $14,400
Interest expense                    7,715        7,319        6,347        5,989        7,057
----------------------------------------------------------------------------------------------
Net interest income before
  provision for possible loan
  losses                            7,627        7,466        7,487        7,269        7,343
Provision for possible loan
  losses                               30           30          100          135          385
----------------------------------------------------------------------------------------------
Net interest income after
  provision for possible loan
  losses                            7,597        7,436        7,387        7,134        6,958
Net gain (loss) on
  investments, loans and
  mortgage-backed securities
  available for sale                  125           92          (31)        (147)          31
Other income                          592          535          513          521          562
Operating expenses                  4,651        3,777        3,752        3,602        3,625
----------------------------------------------------------------------------------------------
Income before income taxes          3,663        4,286        4,117        3,906        3,926
Income tax expense                  1,344        1,621        1,604        1,562        1,586
----------------------------------------------------------------------------------------------
Net income before cumulative
  effect of change in
  accounting principle              2,319        2,665        2,513        2,344        2,340
Cumulative effect of change in
  accounting principle                 --           --           30          500           --
----------------------------------------------------------------------------------------------
Net income                        $ 2,319      $ 2,665      $ 2,543      $ 2,844      $ 2,340
==============================================================================================
Fully diluted earnings per
  share before cumulative
  effect of change in
  accounting principle            $  1.48      $  1.72      $  1.64      $  1.55      $  1.55
Cumulative effect of change in
  accounting principle                 --           --          .02          .33           --
==============================================================================================
Fully diluted earnings per
  share                           $  1.48      $  1.72      $  1.66      $  1.88      $  1.55
==============================================================================================
</TABLE>
 
STATISTICAL PROFILE:
 
<TABLE>
<CAPTION>
                                                            June 30,
                                    1997         1996         1995         1994         1993
----------------------------------------------------------------------------------------------
<S>                                 <C>          <C>          <C>          <C>          <C>
Return on average assets             1.13%        1.39%        1.41%        1.62%        1.35%
Return on average equity            10.82%       13.29%       14.33%       18.57%       18.45%
Average equity to average assets
  ratio                             10.47%       10.43%        9.85%        8.71%        7.33%
Dividend payout ratio               29.73%       16.86%       12.70%        9.00%        9.00%
==============================================================================================
</TABLE>
 
                                       29
<PAGE>   24
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
OVERVIEW
 
In fiscal 1997, the Company reported net income of $2.3 million or $1.48 per
share on a fully diluted basis compared to $2.7 million or $1.72 per share for
fiscal 1996 and $2.5 million or $1.66 per share for fiscal 1995. The net income
for fiscal 1997 includes a special one-time after tax charge of $636,000 or
$0.41 per share to recapitalize the SAIF. Excluding that charge, net income for
fiscal 1997 would have been approximately $3.0 million or $1.89 per share and
would have achieved the Company's highest level of net earnings. Included in the
$2.5 million of net income for fiscal 1995 was a $30,000 cumulative effect of a
change in an accounting principle which relates to the adoption of Financial
Accounting Standards Board's ("FASB") Statement No. 115 relating to the
accounting for debt and equity securities.
 
Excluding the special one-time SAIF charge, the Company continued to report
strong returns on average assets (ROA) and average equity (ROE). The ROA for
fiscal 1997, 1996 and 1995 was 1.44%, 1.39% and 1.41%, respectively. The ROE for
fiscal 1997, 1996 and 1995 was 13.79%, 13.29% and 14.33%, respectively. Also
during fiscal 1997, the Company completed a 5% stock repurchase program, and
experienced continued growth in assets and equity.
 
The Company's ongoing emphasis on controlling its non-interest expenses has
resulted in a low ratio of such expenses to total average assets and the
continued outperformance by the Company relative to such ratio for national
thrift industry averages of similarily sized institutions.
 
Total loan origination during fiscal 1997 was about the same as compared to
fiscal 1996. Mortgage lending activity decreased during fiscal 1997 as compared
to the prior year and was concentrated more on the origination of adjustable
rate mortgages due to current conditions in the Company's market area. However,
consumer lending activity increased during the same time period due to the
Company's continued emphasis on consumer lending.
 
Efforts continue to further diversify the Company's assets by emphasizing loans
and investments having relatively shorter terms and/or adjustable rates such as
secured home equity line-of-credit loans, consumer installment loans and
investments in adjustable-rate mortgage-backed securities.
 
All known trends, events, uncertainties and current recommendations by the
regulatory authorities that would have a material effect on the Company's
liquidity, capital resources and results of operations have been considered in
the following discussion and analysis.
 
ASSET AND LIABILITY MANAGEMENT
 
The Company's vulnerability to interest rate risk exists to the extent that its
interest-bearing liabilities, consisting of customer deposits and borrowings,
mature or reprice more rapidly or on a different basis than its interest-earning
assets, which consist primarily of intermediate or long-term real estate loans
and investment and mortgage-backed securities.
 
The principal determinant of the exposure of the Company's earnings to interest
rate risk is the timing difference between the repricing or maturity of the
Company's interest-earning assets and the repricing or maturity of its
interest-bearing liabilities. If the maturities of such assets and liabilities
were perfectly matched, and if the interest rates borne by its assets and
liabilities were equally flexible and moved concurrently, neither of which is
the case, the impact on net interest income of rapid increases or decreases in
interest rates would be minimized.
 
The objective of interest rate risk management is to control the effects that
interest rate fluctuations have on net interest income and on the net present
value of the Company's interest-earning assets and interest-bearing liabilities.
Management and the Board are responsible for managing interest rate risk and
employing risk management policies that monitor and limit exposure to interest
rate risk. Interest rate risk is measured using net interest margin simulation
and asset/liability net present value sensitivity analyses. These analyses
provide a range of potential impacts on net interest income and portfolio equity
caused by interest rate movements.
 
The Company uses financial modeling to measure the impact of changes in interest
rates on the net interest margin. Assumptions used by the Office of Thrift
Supervision are made regarding loan prepayments and amortization rates of
passbook and NOW account withdrawal rates. In addition, certain financial
instruments
 
                                       30
<PAGE>   25
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------
 
may provide customers with a degree of "optionality,' whereby a shift in
interest rates may result in customers changing to an alternative financial
instrument, such as from a variable to fixed rate loan product. Thus, the
effects of changes in future interest rates on these assumptions may cause
actual results to differ from simulated results.
 
The Company has established the following guidelines for assuming interest rate
risk:
 
Net interest margin simulation - Given a +/-200 basis point parallel shift in
interest rates, the estimated net interest margin may not change by more than
10% for a one-year period.
 
Portfolio equity simulation - Portfolio equity is the net present value of the
Company's existing assets, liabilities. Given a +200 basis point change in
interest rates, portfolio equity may not decrease by more than 50% of total
shareholders' equity. Given a -200 basis point change in interest rates,
portfolio equity may not decrease by more than 20% of total shareholders'
equity.
 
The following table illustrates the simulated impact of a 100 basis point or 200
basis point upward or downward movement in interest rates on net interest
income, return on average equity and earnings per share. This analysis was done
assuming that interest-earning asset levels at June 30, 1997 remained constant.
The impact of the rate movements was developed by simulating the effect of rates
changing over a twelve-month period from the June 30, 1997 levels.
 
Interest Rate Simulation Sensitivity Analysis
--------------------------------------------------------------------------------
              Movements in interest rates from June 30, 1997 rates

<TABLE>
<CAPTION>
                                                    Increase                Decrease
  Simulated impact in the next 12 months      --------------------    --------------------
        Compared with June 30, 1997:          +100 bp     +200 bp     -100 bp     -200 bp
                                              --------    --------    --------    --------
<S>                                           <C>         <C>         <C>         <C>
  Net interest revenue increase/(decrease)       3.1%        1.0%        (3.4)%      (7.4)%
  Return on average equity
     increase/(decrease)                         116bp        37bp       (127)bp     (276)bp
  Earnings per share increase/(decrease)        $.16        $.05        $(.17)      $(.38)
                                              --------    --------    --------    --------
</TABLE>
 
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds interest rate sensitive liabilities. A gap is considered negative when
the amount of interest rate sensitive liabilities exceeds interest rate
sensitive assets. During a period of rising interest rates, a negative gap would
tend to adversely affect net interest income, while a positive gap would tend to
result in an increase in net interest income. During a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to adversely affect net
interest income. The following table presents a summary of the Company's gap
position at June 30, 1997. In preparing the table below, adjustable-rate loans
are included in the period in which the interest rates are next scheduled to
adjust rather than in the period in which the loans mature. In addition, the
assumptions used by the Office of Thrift Supervision for regulatory purposes
have been made with respect to loan prepayments and contractual amortization
rates and passbook and NOW account withdrawal rates. The above assumptions may
not be indicative of the actual prepayments and withdrawals which may be
experienced by the Company.
 
                                       31
<PAGE>   26
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                   3 Months        4-12         1-5       Over 5
  Interest Sensitivity Period       or Less       Months       Years       Years       Total
----------------------------------------------------------------------------------------------
<S>                                <C>           <C>          <C>         <C>         <C>
Rate sensitive assets:
  Loans and mortgage-backed
     securities                     $29,916      $ 38,477     $52,942     $42,301     $163,636
  Investment securities              21,950            --      10,353      13,614       45,917
----------------------------------------------------------------------------------------------
Total rate sensitive assets         $51,866      $ 38,477     $63,295     $55,915     $209,553
==============================================================================================
Rate sensitive liabilities:
Deposits:
  Certificates of deposit           $17,106      $ 50,666     $32,461     $ 5,235     $105,468
  NOW and money funds                 7,741        13,004      10,464       4,379       35,588
  Passbooks                           1,265         3,455      11,810      11,158       27,688
----------------------------------------------------------------------------------------------
     Total deposits                 $26,112      $ 67,125     $54,735     $20,772     $168,744
Borrowings                            5,900         3,000       2,000         144       11,044
----------------------------------------------------------------------------------------------
Total rate sensitive liabilities    $32,012      $ 70,125     $56,735     $20,916     $179,788
==============================================================================================
Interest sensitivity GAP:
  Interval                           19,854       (31,648)      6,560      34,999           --
  Cumulative                        $19,854      $(11,794)    $(5,234)    $29,765     $ 29,765
==============================================================================================
Ratio of cumulative GAP to total
  assets                               9.37%        -5.56%      -2.47%      14.04%
==============================================================================================
</TABLE>
 
The Company targets its one year gap to be in the range of +10.0% to -10.0%. At
June 30, 1997 and 1996, the Company's one year gap was -5.56% and -4.37%,
respectively. As part of its effort to minimize the impact changes in interest
rates have on operating results, the Company continues to emphasize the
origination of interest-earning assets with adjustable rates and shorter
maturities and to extend the terms of its interest-bearing liabilities. The
Company also maintains a high level of liquid assets, which includes assets
available for sale, that could be reinvested at higher yields if interest rates
were to rise. Management believes its asset and liability strategies reduce the
Company's vulnerability to fluctuations in interest rates.
 
FINANCIAL CONDITION
 
The Company's consolidated assets totalled approximately $212.0 million at June
30, 1997, an increase of $15.0 million or 7.6% from June 30, 1996. The growth in
assets was primarily the result of increases in investment securities and
investment securities available for sale, interest-bearing deposits with other
institutions and money market investment securities which were partially offset
by a decrease in both mortgage-backed securities and mortgage-backed securities
available for sale. The growth was funded primarily from increases in Federal
Home Loan Bank Advances and savings deposits and income generated from current
earnings.
 
                                       32
<PAGE>   27
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------
 
The following table presents the average daily balances of interest-earning
assets and interest-bearing liabilities for the years ended June 30, 1997, 1996
and 1995, which management believes is representative of the operations of the
Company.
 
<TABLE>
<CAPTION>
                                                                Year Ended June 30,
                    (in thousands)                         1997         1996         1995
-------------------------------------------------------------------------------------------
<S>                                                      <C>          <C>          <C>
Interest-earning assets:
  Mortgage loans1                                        $122,406     $122,487     $121,129
  Consumer and other loans1                                24,401       21,959       19,436
-------------------------------------------------------------------------------------------
Total loans                                               146,807      144,446      140,565
  Mortgage-backed securities                               14,658       13,029       13,841
  Investment securities                                    35,513       26,717       18,580
  Interest-bearing deposits                                 3,029        3,366        2,440
-------------------------------------------------------------------------------------------
Total interest-earning assets                            $200,007     $187,558     $175,426
===========================================================================================
Interest-bearing liabilities:
  Passbook and club accounts                             $ 27,830     $ 28,163     $ 29,882
  NOW and money market deposit accounts                    34,763       34,081       37,732
  Certificates of deposit                                 100,969       95,788       85,981
  Borrowings                                                9,353        5,122          655
-------------------------------------------------------------------------------------------
Total interest-bearing liabilities                       $172,915     $163,154     $154,250
-------------------------------------------------------------------------------------------
Net earning assets                                       $ 27,092     $ 24,404     $ 21,176
-------------------------------------------------------------------------------------------
Average interest-earning assets as a percent of
  average interest-bearing liabilities                      115.7%       115.0%       113.7%
===========================================================================================
</TABLE>
 
(1) Includes loans on which the Company has discontinued accruing interest.
 
The Company continually seeks to increase its level of profitability while
maintaining its asset quality. This emphasis on earnings and asset quality has
resulted in an increase in net income from $2.3 million for fiscal 1993 to $3.0
million for fiscal 1997, excluding the SAIF adjustment, and a continued decrease
in in the ratio of non-performing assets to total assets from .47% at June 30,
1993 to .43% at June 30, 1997. The Company has also focused its efforts on more
evenly matching the maturities and/or repricing characteristics of its
interest-earning assets and interest-bearing liabilities in order to minimize
fluctuations that may occur due to changes in market interest rates.
 
INVESTMENT SECURITIES AND INVESTMENT SECURITIES AVAILABLE FOR SALE
 
The Company's investment securities totaled $15.5 million at June 30, 1997, an
increase of $5.6 million or 55.8% compared to June 30, 1996. The increase was
primarily due to purchases of $13.0 million of investment securities during
fiscal 1997 which was partially offset by $7.4 million of securities which
matured or were called during the period. The Company primarily invests in
government and corporate notes and bonds. Investment securities available for
sale totaled $15.5 million at June 30, 1997, or an increase of $3.9 million
compared to June 30, 1996. The increase was primarily due to the purchase of
approximately $2.3 million of municipal bonds. The increase in purchases of
investment securities and investment securities available for sale was primarily
due to the investment of the funds generated from the increases in savings
deposits and FHLB advances.
 
MORTGAGE-BACKED SECURITIES AND MORTGAGE-BACKED SECURITIES
AVAILABLE FOR SALE
 
The total of all mortgage-backed securities was $14.5 million at June 30, 1997,
a decrease of $1.1 million or 7.0% compared to June 30, 1996. This decrease was
primarily due a reduction in the volume of purchases of these securities in
fiscal 1997 as compared to fiscal 1996. During fiscal 1997, the Company
purchased approximately $600,000 of adjustable-rate mortgage-backed securities
as compared to the purchase of $5.2 million of such securities in the prior
fiscal year.
 
                                       33
<PAGE>   28
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------
 
LOAN PORTFOLIO
 
Loans receivable increased $1.1 million or .8% to $144.7 million during the
fiscal year ended June 30, 1997, as compared to an increase of $441,000 or .3%
for the fiscal year ended June 30, 1996. Mortgage loan originations in fiscal
years 1997 and 1996 amounted to $15.0 million, and $17.5 million, respectively.
The Company originated primarily adjustable rate loans in fiscal 1997 due to
current conditions in the Bank's market area. Of the total amount of mortgage
and construction loans originated in fiscal 1997, $9.8 million or 65.4% were
adjustable-rate mortgages as compared to $6.5 million or 37.1% in fiscal 1996.
Fixed-rate mortgage and construction loan originations decreased in fiscal 1997
to $5.2 million or 34.6% as compared to $11.0 million or 37.0% in fiscal 1996.
 
Other loan originations and purchases, including home equity and other
installment loans, totalled $15.4 million in fiscal 1997, $13.2 million in
fiscal 1996, and $12.6 million in fiscal 1995. The Company has placed a greater
emphasis on other installment lending, including home equity loans, personal
loans, auto loans and other secured lines of credit.
 
DEPOSIT PORTFOLIO
 
Savings deposits increased $10.3 million to $175.0 million during fiscal 1997.
This increase was due to the combined result of $4.0 million of net deposit
growth and interest credited of approximately $6.3 million. Deposit increases
occurred in certificate of deposit accounts and NOW/checking accounts partially
offset by decreases in money market accounts and passbook accounts.
 
For the years ended June 30, 1997, 1996 and 1995, the Company had certificates
of deposit with remaining terms to maturity of three (3) to ten (10) years
aggregating $10.9 million, $14.1 million and $13.1 million, respectively. As
part of its asset and liability planning, the Company attempts to attract longer
term deposits, thereby reducing the interest rate sensitivity of its
interest-bearing liabilities.
 
BORROWINGS
 
Borrowings, consisting of Federal Home Loan Bank advances, increased from $6.3
million at June 30, 1996 to $11.0 million at June 30, 1997. The Company used the
additional funds as part of its asset and liability management strategy.
 
STOCKHOLDERS' EQUITY
 
Stockholders' equity increased $176,000 or .8% to $21.3 million at June 30, 1997
compared to $21.1 million at June 30, 1996. This increase resulted from net
income of $2.3 million, $157,000 of unrealized gains on investments available
for sale plus $44,000 of stock options exercised. These increases were reduced
by the repurchase of $1.6 million of the Company's common stock, the payment of
cash dividends of $660,000 on the Company's common stock and the purchase of
$58,000 of the Company's stock held in a deferred compensation trust. Under
regulations adopted by the Federal Deposit Insurance Corporation ("FDIC"), the
Company is required to maintain Tier I (Core) capital equal to at least 4% of
the Company's adjusted total assets, and Tier II (Supplementary) risk-based
capital equal to at least 8% of the risk-weighted assets. At June 30, 1997, the
Company exceeded all of its regulatory capital requirements. See "Liquidity and
Capital Resources."
 
                                       34
<PAGE>   29
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------
 
RESULTS OF OPERATIONS
 
The results of operations of the Company depend substantially on its net
interest income, which is determined by the interest rate spread between the
Company's interest-earning assets and interest-bearing liabilities and the
relative amounts of such assets and liabilities. The following table sets forth
the average yields earned on the Company's interest-earning assets and the
average rates paid on its interest-bearing liabilities for the periods
indicated, the weighted average yields and the rates at June 30, 1997, the
resulting average interest rate spreads, and the net yield on interest-earning
assets.
 
<TABLE>
<CAPTION>
                                         
                                           At June 30,             Year Ended June 30,
                                              1997          1997          1996          1995
<S>                                         <C>             <C>           <C>           <C>
---------------------------------------------------------------------------------------------
Average yield on1:
  Mortgage loans                               7.72%         7.97%         8.15%         8.10%
  Consumer loans                               8.63          8.50          9.01          9.26
---------------------------------------------------------------------------------------------
Total loans                                    7.87          8.06          8.28          8.26
  Mortgage-backed securities                   7.23          7.07          7.31          7.29
  Investment securities                        6.66          6.51          6.30          5.83
  Interest-earning deposits                    6.26          5.28          5.50          5.16
---------------------------------------------------------------------------------------------
Total interest-earning assets                  7.56          7.67          7.88          7.89
=============================================================================================
Average rates paid on1:
  Passbook and club accounts                   2.49          2.50          2.50          2.51
  NOW and money market accounts                1.95          1.95          2.01          2.10
  Certificates of deposit                      5.86          5.75          5.88          5.54
  Borrowings                                   5.75          5.66          5.88          7.07
---------------------------------------------------------------------------------------------
Total interest-bearing liabilities             4.56          4.46          4.49          4.11
---------------------------------------------------------------------------------------------
Average interest rate spread                   3.00%         3.21%         3.39%         3.78%
=============================================================================================
Net yield on interest-earning assets2           N/A          3.82%         3.98%         4.27%
=============================================================================================
</TABLE>
 
(1) Average yields and rates are calculated by dividing the interest income or
 expense for the period by the average daily balance which, with respect to
 loans and loans held for sale, includes loans on which the Company has
 discontinued accruing interest. The weighted averages at June 30, 1997 are
 based on the weighted average contractual rates.
 
(2) Net interest income divided by average interest-earning assets.
 
                                       35
<PAGE>   30
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------
 
 RATE/VOLUME ANALYSIS
 
 The following table presents certain information regarding changes in interest
 income and interest expense of the Company for the periods indicated. For each
 category of interest-earning assets and interest-bearing liabilities,
 information is provided with respect to changes attributable to (1) changes in
 rate (change in rate multiplied by old volume), (2) changes in volume (changes
 in volume multiplied by old rate), and (3) changes in rate-volume (change in
 rate multiplied by the change in volume). Changes in net interest income due to
 both volume and rate were combined with the changes of each based on their
 proportionate amounts.
 
<TABLE>
<CAPTION>
                                                                    Fiscal 1997
                                                              Compared to Fiscal 1996
                                                            Increase (Decrease) Due to
-------------------------------------------------------------------------------------------
                                                                        Rate/
                                              Rate      Volume         Volume         Total
-------------------------------------------------------------------------------------------
<S>                                           <C>        <C>            <C>            <C>
Interest income on interest-earning assets:
  Mortgage loans                              $(219)      $  (7)          $ --        $(226)
  Consumer loans                               (111)        220            (12)          97
  Mortgage-backed securities                    (32)        119             (4)          83
  Investment securities                          56         554             18          628
  Interest-earning deposits                      (7)        (19)             1          (25)
-------------------------------------------------------------------------------------------
     Total                                     (313)        867              3          557
-------------------------------------------------------------------------------------------
Interest expense on interest-bearing
  liabilities:
  Deposits                                      (79)        246             (3)         164
  Borrowings                                    (11)        252             (9)         232
-------------------------------------------------------------------------------------------
     Total                                      (90)        498            (12)         396
-------------------------------------------------------------------------------------------
Net change in net interest income             $(223)       $369           $ 15        $ 161
===========================================================================================
</TABLE>
 
<TABLE>
<CAPTION>
                                                                    Fiscal 1996
                                                              Compared to Fiscal 1995
                                                            Increase (Decrease) Due to
-------------------------------------------------------------------------------------------
                                                                        Rate/
                                              Rate      Volume         Volume         Total
-------------------------------------------------------------------------------------------
<S>                                           <C>       <C>            <C>            <C>
Interest income on interest-earning assets:
  Mortgage loans                              $  59        $110           $  1        $ 170
  Consumer loans                                (48)        234             (6)         180
  Mortgage-backed securities                      3         (59)            --          (56)
  Investment securities                          86         475             38          599
  Interest-earning deposits                       8          48              3           59
-------------------------------------------------------------------------------------------
     Total                                      108         808             36          952
-------------------------------------------------------------------------------------------
Interest expense on interest-bearing
  liabilities:
  Deposits                                      521         182             15          718
  Borrowings                                     (8)        314            (51)         255
-------------------------------------------------------------------------------------------
     Total                                      513         496            (36)         973
-------------------------------------------------------------------------------------------
Net change in net interest income             $(405)       $312           $ 72        $ (21)
===========================================================================================
</TABLE>
 
                                       36
<PAGE>   31
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------
 
INTEREST INCOME ON LOANS AND LOANS HELD FOR SALE
 
Interest on loans and loans held for sale decreased by $129,000 or 1.1% in
fiscal 1997 primarily due to a decrease in the average yield earned on the
portfolio from 8.28% during fiscal 1996 to 8.06% during fiscal 1997. The average
balance of the mortgage loan portfolio decreased by $81,000 or .1% and the
average balance of the consumer loan portfolio increased by $2.4 million or
11.1% during fiscal 1997. Interest on loans and loans held for sale increased
$349,000 or 3.0% in fiscal 1996 primarily due to a $3.9 million or 2.8% increase
in the average balance of the loan portfolio. The average yield earned on the
portfolio increased slightly to 8.28% during fiscal 1996 from 8.26% during
fiscal 1995. The average balance of the mortgage loan portfolio increased $1.3
million or 1.1% and the average balance of the consumer loan portfolio increased
$2.5 million or 13.0% during fiscal 1996. The increase in the average balance of
the loan portfolio during both fiscal 1997 and 1996 was primarily due to
continued originations. The decrease in the average yield during fiscal 1997 was
primarily due to increased originations of adjustable-rate mortgage loans which
generally have lower initial rates of interest compared to fixed rate loans and
the increased originations of home equity loans and auto loans that have lower
rates of interest due to the competitive interest rates in the CompanyIs market
area.
 
INTEREST INCOME ON MORTGAGE-BACKED SECURITIES AND
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
 
Interest income on mortgage-backed securities increased $83,000 or 8.7% during
fiscal 1997 primarily due to a $1.6 million increase in the average outstanding
balance. The increase in the average outstanding balance was due to the purchase
of $5.2 million of these securities during the third and fourth quarters of
fiscal 1996. The yield on mortgage-backed securities decreased from 7.31% in
fiscal 1996 to 7.07% in fiscal 1997. Interest income on mortgage-backed
securities decreased $56,000 or 5.6% during fiscal 1996 primarily due to a
$812,000 or 5.9% decrease in the average outstanding balance. The decline in the
average balance was primarily due to repayments of the loans underlying the
mortgage-backed securities and the sale of approximately $703,000 of
mortgage-backed securities available for sale. The yield on mortgage-backed
securities increased slightly from 7.29% in fiscal 1995 to 7.31% in fiscal 1996.
 
INTEREST INCOME ON INVESTMENTS AND INVESTMENTS AVAILABLE FOR SALE
 
Interest on investments and investments available for sale, consisting primarily
of U.S. Government and agency securities, high-grade corporate notes, mutual
funds, municipal bonds and FHLB stock, increased by $628,000 or 37.3% during
fiscal 1997 primarily due to an $8.8 million increase in the average balance of
these securities. In addition, the average yield on these investments increased
from 6.30% in fiscal 1996 to 6.51% in fiscal 1997. The increase in the average
outstanding balance during fiscal 1997 was primarily due to the increased
purchases of these securities with the funds generated from the increases in
savings deposits and FHLB advances. Interest on investments and investments
available for sale increased by $599,000 or 55.3% during fiscal 1996 primarily
due to a $8.1 million or 43.8% increase in the average balance of these
securities. In addition, the average yield on these investments increased from
5.83% in fiscal 1995 to 6.30% in fiscal 1996. The increase in the average
outstanding balance during fiscal 1996 was primarily due to increased purchases
of these securities due to the decline in loan originations as a result of the
general real estate market in the Company's area. The increase in yield during
fiscal 1996 primarily reflects the general rise in interest rates.
 
                                       37
<PAGE>   32
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------
 
INTEREST INCOME ON INTEREST-EARNING DEPOSITS
 
Interest on deposits, consisting of interest-bearing deposits maintained with
the FHLB of Pittsburgh, decreased by $25,000 or 13.5% during fiscal 1997
compared to fiscal 1996 and increased by $59,000 or 46.8% during fiscal 1996
compared to fiscal 1995. The decrease in fiscal 1997 was primarily due to a
$337,000 decrease in the average outstanding balance of these deposits. In
addition, the average yield decreased from 5.50% in fiscal 1996 to 5.28% in
fiscal 1997. The increase in fiscal 1996 was primarily due to a $926,000 or
38.0% increase in the average outstanding balance of these deposits. In
addition, the average yield increased from 5.16% in fiscal 1995 to 5.50% in
fiscal 1996.
 
INTEREST EXPENSE ON SAVINGS DEPOSITS
 
Interest expense on savings deposits increased by $164,000 or 2.3% in fiscal
1997 primarily due to a $5.5 million increase in the average balance of savings
deposits. This increase was partially offset by a decrease in the average rate
paid on deposits from 4.44% in fiscal 1996 to 4.39% in fiscal 1997. The increase
in the average balance of deposits during fiscal 1997 was primarily due to
increased marketing of the Company's certificate of deposit and checking
products. Interest expense on savings deposits increased $717,000 or 11.4% in
fiscal 1996 primarily due to an increase in the average rate paid on deposits
from 4.10% in fiscal 1995 to 4.44% in fiscal 1996. The average balance of
savings deposits increased by $4.4 million or 2.9% during fiscal 1996. The
increase in the average rate paid on savings deposits during fiscal 1996 was
primarily due to the migration of deposits from lower yielding passbook and
money market funds into certificates of deposit which have higher rates of
interest.
 
INTEREST EXPENSE ON BORROWINGS
 
Interest expense on borrowings increased $232,000 in fiscal 1997 primarily due
to a $4.2 million increase in the average outstanding balance which was
partially offset by a decrease in the average rate paid on borrowings from 5.88%
in fiscal 1996 to 5.66% in fiscal 1997. Interest expense on borrowings increased
$255,000 in fiscal 1996 primarily due to a $4.5 million increase in the average
outstanding balance which was partially offset by a decrease in the average rate
paid on borrowings from 7.02% in fiscal 1995 to 5.88% in fiscal 1996. The
increased borrowings during fiscal 1997 and 1996 were used by the Company as
part of its asset and liability strategy.
 
NET INTEREST INCOME
 
Net interest income increased by $161,000 or 2.2% in fiscal 1997 as compared to
fiscal 1996 and decreased by $21,000 or .3% in fiscal 1996 over the prior fiscal
year. The increase in fiscal 1997 was primarily due to the increases in the
average outstanding balance of investments and investments available for sale,
loans receivable and mortgage-backed securities and mortgage-backed securities
available for sale. These increases were partially offset by increases in the
average outstanding balance of savings deposits and borrowings. The decrease in
fiscal 1996 was primarily due to an increase in the average rate paid on
deposits and increases in the average outstanding balances of such deposits and
borrowings. These increases were partially offset by increases in the average
outstanding balances of investments and loans.
 
Interest-earning assets as a percent of interest-bearing liabilities amounted to
115.7%, 115.0% and 113.7% at June 30, 1997, 1996 and 1995, respectively, and the
average interest rate spread was 3.21%, 3.39% and 3.78% for fiscal 1997, 1996
and 1995, respectively. The Company's average interest rate spread has decreased
from 3.78% in fiscal 1995 to 3.21% in fiscal 1997, primarily due to increases in
the average rates paid on the Company's savings deposits. The Company's net
interest income continued to exceed its total other expenses in fiscal 1997 and
1996, and the Company intends to continue to manage its assets and liabilities
in order to maintain its net interest income at levels in excess of total other
expenses.
 
                                       38
<PAGE>   33
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------
 
PROVISION FOR POSSIBLE LOAN LOSSES
 
Financial institutions are subject to the risk of possible loan losses as one of
the costs of lending. While the Company recognizes as losses all loans which are
determined to be uncollectible, experience dictates that at any point in time,
losses may exist in the portfolio which cannot be specifically identified. As a
result, a provision for such unidentifiable losses is established and charged
against current earnings to represent management's best estimate of such
potential losses. The provision for possible loan losses for fiscal 1997, 1996
and 1995 amounted to $30,000, $30,000 and $100,000, respectively.
 
At June 30, 1997, 1996 and 1995, the allowance for possible loan losses was $1.9
million or 1.3% of the total loan portfolio. As a percentage of non-performing
loans (loans delinquent 90 days and over, net of specific reserves) the
allowances for possible loan losses were 212.4%, 310.3%, and 363.3% at June 30,
1997, 1996 and 1995, respectively.
 
A review is conducted at least quarterly by management to determine that the
allowance for possible loan losses is adequate to absorb estimated loan losses.
Additionally, steps have been taken to strengthen and improve the Company's
overall underwriting, collection and recovery procedures. These steps are
expected to limit or reduce the level of loan losses in the future. In
determining the level of allowances for possible loan losses required,
consideration is given to general economic conditions, diversification of loan
portfolios, historical loss experience, identified credit problems, delinquency
levels and adequacy of collateral. Although management believes that the current
allowance for possible loan losses is adequate, future additions to the reserves
may be necessary due to changes in economic conditions. In addition, as an
integral part of their periodic examination, the various regulatory agencies
review the adequacy of the Company's allowances for possible loan losses. An
agency may require the Company to make additions to the allowances based on
their judgement. No such additions were required to be made during the Company's
most recent examination.
 
During fiscal 1996, the Company adopted FASB Statement No. 114 "Accounting by
Creditors for Impairment of a Loan." FAS 114 defines the term "impaired loan"
and gives the creditor ways to measure the impairment. The measurement of
impairment may be based on (1) the present value of the expected future cash
flows of the impaired loan discounted at the loan's original effective interest
rate, (2) the observable market price of the impaired loan or (3) the fair value
of the collateral of a collateral dependent loan. The adoption of FAS 114 has
not been material to the Company's operations.
 
OTHER INCOME
 
Fees and service charges increased by $71,000 or 17.5% in fiscal 1997 and by
$2,000 or .5% in fiscal 1996. The increase in fiscal 1997 was primarily due to
increases in the fees and service charges earned on the Bank's NOW accounts.
 
During fiscal 1997, the Company realized net gains of $125,000 on investments,
mortgage-backed securities and loans in its available for sale portfolio. Gains
of $113,000 and $12,000 were recorded on the sale of investment securities and
loans, respectively. During fiscal 1996, the Company realized net gains of
$92,000 on investments, mortgage-backed securities and loans available for sale.
Gains of $48,000, $37,000 and $7,000 were recorded on the sale of
mortgage-backed securities, investment securities and loans, respectively.
 
Other operating income, which primarily consists of miscellaneous fees, rents,
and other income, was $116,000, $130,000 and $110,000 in fiscal 1997, 1996 and
1995, respectively. The decrease in fiscal 1997 was primarily due to a decrease
in other non-operating income resulting from a settlement of litigation received
by the Company in fiscal 1996.
 
Total other income increased $90,000 or 14.4% in fiscal 1997 and by $145,000 or
30.1% in fiscal 1996. The increase in fiscal 1997 was primarily due to the
increases in fees and service charges and gains on the sale of investments,
mortgage-backed securities and loans available for sale. The increase in fiscal
1996 was primarily due to increases in the gains on the sale of investments,
mortgage-backed securities and loans available for sale and in other operating
income.
 
                                       39
<PAGE>   34
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------
 
OPERATING EXPENSES
 
Compensation and employee benefits, which is the largest component of total
operating expenses, increased by $57,000 or 3.4% in fiscal 1997 and by $28,000
or 1.7% in fiscal 1996. The increase in fiscal 1997 was primarily due to normal
salary and benefit increases. The increase in fiscal 1996 was primarily due to
normal salary and benefit increases that were partially offset by certain
reductions in staff that occurred during fiscal 1995.
 
Premises and occupancy expense increased by $25,000 or 5.4% in fiscal 1997 and
by $35,000 or 8.1% in fiscal 1996. The increase in fiscal 1997 was primarily due
to increases in furniture, fixture and equipment depreciation and expenses and
office building depreciation. The increases in depreciation were due to
renovations made during fiscal 1997. The increase in fiscal 1996 was primarily
due to increases in furniture, fixtures and equipment expense and repairs and
maintenance.
 
Federal insurance premiums increased by $834,000 or 223.0% in fiscal 1997 and by
$12,000 or 3.3% in fiscal 1996. The increase in fiscal 1997 was due to the $1.1
million pre-tax charge for the FDIC's one-time special assessment to
recapitalize the SAIF. Excluding this charge, Federal insurance premiums
decreased $225,000 or 60.2% during fiscal 1997. The amount of the premium is
based upon the average amount of deposits outstanding. The premium rate for
Federal deposit insurance decreased to approximately 6.5 basis points in fiscal
1997 from 23 basis points in fiscal 1996 as a result of the recapitalization of
the SAIF.
 
In fiscal 1997, the Company had a net gain of $31,000 from its real estate owned
("REO"). In fiscal 1996 and 1995, the Company incurred a net loss of $5,000 and
a net gain of $31,000, respectively.
 
Data processing expenses increased by $3,000 or 1.2% in fiscal 1997 and by
$10,000 or 4.2% in fiscal 1996. The increase in both fiscal 1997 and 1996 was
primarily attributable to increases in certain service bureau charges.
 
Professional fees decreased by $66,000 in fiscal 1997 and by $42,000 in fiscal
1996. The decrease in both years was primarily due to decreased legal expenses.
 
INCOME TAXES
 
Income taxes decreased $277,000 or 17.1% in fiscal 1997 and increased $17,000 or
1.1% in fiscal 1996 over the comparable prior years. The decrease in fiscal 1997
was primarily due to lower pre-tax income as a result of the $1.1 million
one-time special FDIC assessment. The increase in fiscal 1996 was due to a
$169,000 or 4.1% increase in income before income taxes partially offset by a
decrease in the Company's effective tax rate.
 
NET INCOME
 
Net income decreased $346,000 or 13.0% in fiscal 1997 primarily due to the $1.1
million pre-tax special one-time SAIF assessment. Excluding that assessment, net
income increased $290,000 or 10.9%. Net income increased $122,000 or 4.8% in
fiscal 1996 primarily due to a $145,000 increase in other income and a $49,000
increase in net interest income after provision for loan losses.
 
LIQUIDITY AND CAPITAL RESOURCES
 
The Company's assets increased from $188.9 million at June 30, 1995 to $196.9
million at June 30, 1996, and to $212.0 million at June 30, 1997. Stockholders'
equity increased from $18.9 million at June 30, 1995 to $21.1 million at June
30, 1996, and $21.3 million at June 30, 1997. At June 30, 1997, stockholders'
equity amounted to 10.0% of the Company's total assets under generally accepted
accounting principles ("GAAP").
 
The Company is currently required to maintain Tier I (Core) capital equal to at
least 4.0% of its adjusted total assets and Tier II (Supplementary) risk-based
capital equal to at least 8.0% of its risk-weighted assets. At June 30, 1997,
the Company substantially exceeded all of these requirements with Tier I and
Tier II ratios of 9.91% and 20.61%, respectively.
 
During the fiscal years ended June 30, 1997, 1996 and 1995, the Company had
positive cash flows from operating activities. Cash and cash equivalents
increased by $5.7 million, decreased by $5.5 million and
 
                                       40
<PAGE>   35
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------
 
increased by $772,000 for the fiscal years ended June 30, 1997, 1996 and 1995,
respectively. See Consolidated Statements of Cash Flows.
 
Cash flows from operating activities for the periods covered by the Consolidated
Statements of Cash Flows have been primarily related to net income and
operations. Operating activities provided $1.9 million of cash in fiscal 1997,
$2.1 million in fiscal 1996 and $1.7 million in fiscal 1995.
 
Investing activities used cash on a net basis of $8.9 million in fiscal 1997,
$12.9 million in fiscal 1996, and $9.3 million in fiscal 1995. This was
primarily due to the amount of loans originated and the purchase of investment
securities and mortgage-backed securities which were greater than cash provided
by the sales, maturities and periodic principal payments received on investments
and loans.
 
Cash flows from financing activities for the periods covered by the Consolidated
Statements of Cash Flows have been primarily related to changes in deposits and
borrowings. Financing activities generated $12.6 million of cash in fiscal 1997,
due to a net increase of $5.3 million in FHLB advances, $10.3 million in
deposits and $44,000 from stock options exercised. These increases were
partially offset by $1.6 million of treasury stock acquired, $660,000 of cash
dividends paid and a decrease of $167,000 in advance deposits by borrowers for
taxes and insurance. During fiscal 1996, financing activities generated $5.3
million of cash due to a net increase of $4.3 million in FHLB advances, $1.4
million in deposits and $77,000 from stock options exercised. These increases
were partially offset by $446,000 of cash dividends paid and a decrease of
$77,000 in advance deposits by borrowers for taxes and insurance.
 
The Company's primary source of funds consists of deposits bearing market rates
of interest, loan repayments and current earnings. Also, advances from the FHLB
of Pittsburgh may be used on short term basis to compensate for savings outflows
or on a long term basis to support expanded lending and investment activities.
 
The Company uses its capital resources principally to meet its on-going
commitments to fund maturing certificates of deposit and deposit withdrawals,
fund existing and continuing loan commitments, maintain its liquidity and meet
operating expenses. At June 30, 1997, the Company had commitments to originate
loans totalling $6.3 million. Scheduled maturities of certificates of deposit
during fiscal 1998 totalled $67.8 million at June 30, 1997. Management believes
that by evaluating competitive instruments and pricing in its market area, the
Company can generally retain a substantial portion of its maturing certificates
of deposit.
 
IMPACT OF INFLATION AND CHANGING PRICES
 
The financial statements and related data presented herein have been prepared in
accordance with GAAP, which requires the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation. Unlike most
industrial companies, substantially all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effect of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services, since
such prices are affected by inflation to a larger extent than interest rates.
 
RECENT LEGISLATION
 
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 assessment to recapitalize the
SAIF.
 
Effective October 8, 1996, the FDIC 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. The Company's one-time special
assessment amounted to $1.1 million. Net of related tax benefits, the one-time
special assessment amounted to $636,000. The payment of the special assessment
reduced the Company's capital by the amount of the assessment.
 
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 SAIF
rates range from zero basis points to 27 basis points which is the same range of
premiums
 
                                       41
<PAGE>   36
 
                       LOGO    LAUREL CAPITAL GROUP, INC.
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------
 
as the BIF rates. From 1997 through 1999, FDIC-insured institutions will pay 6.4
basis points of their SAIF-assessable deposits and approximately 1.3 basis
points of their BIF-assessable deposits to fund the Financing Corporation. Based
upon the $175.6 million of SAIF-assessable deposits at June 30, 1997, the
Company would expect to pay approximately $28,000 in insurance premiums per
quarter during 1997.
 
RECENT ACCOUNTING DEVELOPMENTS
 
On July 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." SFAS
No. 121 establishes guidelines for recognition of impairment losses related to
long-lived assets and certain intangibles and related goodwill for both assets
held and used as well as assets held for disposition. This statement excludes
financial instruments, long-term customer relationships of financial
institutions, mortgage and other servicing rights and deferred tax assets.
Adoption of this statement was immaterial to the Company's financial position
and results of operations.
 
On January 1, 1997, SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," became effective. SFAS No.
125 establishes the criteria for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. SFAS No. 125
supersedes several accounting standards including SFAS No. 122, "Accounting for
Mortgage Servicing Rights." The adoption of SFAS No. 125 was immaterial to the
Company's financial position and results of operations.
 
In February 1997, the FASB released SFAS No. 128, "Earnings Per Share." SFAS No.
128 establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. SFAS No. 128 simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, Earnings Per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of Basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the numerator and denominator of the
diluted EPS computation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. The
effect of SFAS No. 128 on the Company's EPS is not expected to be significant.
 
In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information About
Capital Structure." SFAS No. 129 continues the existing requirements to disclose
the pertinent rights and privileges of all securities other than ordinary common
stock but expands the number of companies subject to portions of its
requirements. Specifically, the Statement requires all entities to provide the
capital structure disclosures previously required by APB Opinion No. 15.
Companies that were exempt from the provision of APB Opinion No. 15 will now
need to make those disclosures. This standard is not expected to impact the
Company's current presentation regarding capital structure.
 
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
 
                                       42