<PAGE>   1

                    U.S. SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                  FORM 10-KSB

  X    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
-----  OF 1934

                    FOR THE FISCAL YEAR ENDED JUNE 30, 1997

                                      OR

       TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
-----  EXCHANGE ACT OF 1934

                        Commission File No.: 0-21939

                            PENNWOOD BANCORP, INC.
--------------------------------------------------------------------------------
               (Name of Small Business Issuer in Its Charter)


                Pennsylvania                                  25-1783648
---------------------------------------------        ---------------------------
      (State of Other Jurisdiction of                      (I.R.S. Employer
       Incorporation or Organization)                   Identification Number)
                                                     
                                                     
683 Lincoln Avenue, Pittsburgh, Pennsylvania                     15202
---------------------------------------------        ---------------------------
           (Address of Principal                               (Zip Code)
             Executive Offices)

         Issuer's Telephone Number, Including Area Code: (412) 761-1234

         Securities registered under Section 12(b) of the Exchange Act:
                                 NOT APPLICABLE

         Securities registered under Section 12(g) of the Exchange Act:

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

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

Yes   X    No
    -----     -----

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.   X
                  -----

Issuer's revenues for its most recent fiscal year: $3.8 million.

As of September 24, 1997, the aggregate value of the 434,970 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
134,652 shares held by all directors and executives officers of the Registrant
and the Registrant's Employee Stock Ownership Plan ("ESOP") as a group, was
approximately $7.5 million.  This figure is based on the closing sales price of
$17.25 per share of the Registrant's Common Stock on September 24, 1997.
Although directors and executive officers and the ESOP were assumed to be
"affiliates" of the Registrant for purposes of this calculation, the
classification is not to be interpreted as an admission of such status.

Number of shares of Common Stock outstanding as of September 24, 1997: 569,622
Transitional Small Business Disclosure Format:  Yes        No   X  
                                                    -----     -----
<PAGE>   2
                                     PART I

ITEM 1. BUSINESS

GENERAL

         Pennwood Bancorp, Inc. (the "Company)" is a Pennsylvania-incorporated
bank holding company and the sole stockholder of Pennwood Savings Bank (the
"Savings Bank").  The only significant assets of the Company is the capital
stock of the Savings Bank.  The business of the Company currently consists of
the business of the Savings Bank.  At June 30, 1997, the Company had
consolidated total assets of $49.9 million, total consolidated deposits of
$35.8 million, and total consolidated stockholders' equity of $8.7 million.

         The Savings Bank is a Pennsylvania-chartered stock savings bank which
was originally founded in 1910 as a Pennsylvania-chartered mutual savings
association.  The Savings Bank converted from a Pennsylvania-chartered mutual
savings association to a Pennsylvania-chartered mutual savings bank in July
1993.  In July 1996, the Savings Bank converted from a Pennsylvania-chartered
mutual savings bank to a Pennsylvania-chartered stock savings bank.  In January
1997, the Savings Bank organized to the holding company form of ownership and
was acquired by the Company.  The Savings Bank conducts business from its main
office in Pittsburgh, Pennsylvania and two branch offices located in
Kittanning, Pennsylvania.  The Savings Bank's deposits are insured by the
Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC") to the maximum extent permitted by law.

         The Savings Bank is primarily engaged in attracting deposits from the
general public through its offices and using those and other available sources
of funds to originate loans secured by single-family residences as well as
consumer loans (consisting primarily of home equity and improvement loans).  To
a lesser extent, the Savings Bank originates loans secured by existing
multi-family residential and commercial real estate, as well as construction
loans.  The Savings Bank also invests its funds in U.S. Government and agency
obligations, as well as corporate and municipal debt securities,
mortgage-backed securities and various short-term investments.

         The Savings Bank is a community-oriented financial institution which
emphasizes customer services and convenience.  As part of this strategy, the
Savings Bank has sought to develop a wide variety of products and services
which meet the needs of its retail customers.  The Savings Bank generally has
sought to achieve long-term financial strength and stability by increasing the
amount and stability of its net interest income.  In pursuit of these goals,
the Savings Bank has adopted a number of complementary business strategies
which emphasize retail lending and deposit products and services traditionally
offered by savings institutions.





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<PAGE>   3
         The main office of the Savings Bank is located at 683 Lincoln Avenue,
Pittsburgh, Pennsylvania 15202, and its telephone number is (412) 761-1234.


LENDING ACTIVITIES

         GENERAL.  At June 30, 1997, the Company's total loan portfolio
amounted to $26.9 million, or 53.9% of total assets at that date.  The Company
has traditionally concentrated its lending activities on conventional first
mortgage loans secured by single-family residential properties and consumer
loans (consisting primarily of home equity and improvement loans).  Consistent
with its lending orientation, as of June 30, 1997, $14.9 million or 50.2% of
the Company's total loan portfolio consisted of single-family residential loans
and $9.0 million or 30.5% of the Company's total loan portfolio consisted of
consumer and other loans.  To a lesser extent, the Company also originates
multi-family residential, commercial real estate and residential construction
loans.  At June 30, 1997, such loan categories amounted to $478,000, $1.5
million and $3.7 million, respectively, or 1.6%, 5.1% and 12.7% of the total
loan portfolio, respectively.  Substantially all of the Company's total loan
portfolio consists of conventional loans, which are loans that are neither
insured by the Federal Housing Administration nor partially guaranteed by the
Department of Veteran Affairs.  Historically, the Company's lending activities
have been concentrated in its primary market area of Allegheny County and
Armstrong County, Pennsylvania and portions of the surrounding counties.  The
Company estimates that a substantial portion of its mortgage loans are secured
by properties located in its primary market area, and that substantially all of
its non-mortgage loan portfolio consists of loans made to residents and
businesses located in such primary market area.





                                       2
<PAGE>   4
         LOAN PORTFOLIO COMPOSITION.  The following table sets forth the
composition of the Company's loan portfolio by type of loan at the dates
indicated.

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

 <S>                               <C>         <C>         <C>         <C>          <C>         <C>
 Single-family residential         $14,857      50.2%      $ 9,572      40.8%       $10,637      40.0%
 Multi-family residential              478       1.6            85       0.3            123       0.5
 Commercial real estate              1,524       5.1         2,582      11.0          3,324      12.5
 Construction                        3,748      12.7         2,393      10.2          2,120       8.0
                                   -------     -----       -------     -----        -------     -----
     Total real estate loans        20,607      69.5        14,632      62.3         16,204      61.0
 Consumer loans:
   Home improvement/equity           8,110      27.4         7,843      33.4          9,285      34.8
   Other(1)                            906       3.1           998       4.3          1,061       4.0
                                   -------     -----       -------     -----        -------     -----
     Total consumer loans            9,016      30.5         8,841      37.7         10,346      38.8
 Commercial business loans(2)           --        --            --        --             40       0.2
                                   -------     -----       -------     -----        -------     -----
       Total loans                  29,623     100.0%       23,473     100.0%        26,590     100.0%
                                   -------     =====       -------     =====        -------     ===== 
 Less:
   Loans in process                  1,924                   1,487                    1,400
   Deferred loan origination
     fees                              265                     129                      158
   Unearned discounts                  172                     352                      656
   Allowance for loan losses           282                     337                      531
                                   -------                 -------                  -------
     Net loans                     $26,980                 $21,168                  $23,845
                                   =======                 =======                  =======
</TABLE>

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

(1)      Consists primarily of unsecured personal loans and lines of credit and
         automobile loans.

(2)      Consists of lease receivables.

         CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES.  The following
table sets forth certain information at June 30, 1997 regarding the dollar
amount of loans maturing in the Company's total loan portfolio, based on the
contractual terms to maturity, before giving effect to net items.  Loans having
no stated schedule of repayments and no stated maturity are reported as due in
one year or less.

<TABLE>
<CAPTION>
                                                    Due One to    Due Five or
                                                    Five Years       More
                                     Due One          After       Years After
                                   Year or Less      6/30/97        6/30/97        Total
                                   ------------     ----------    -----------      -----
                                                    
                                                         (In thousands)

 <S>                                   <C>            <C>          <C>            <C>
 Single-family residential             $  172         $  610       $14,075        $14,857
 Multi-family residential                  --             84           394            478
 Commercial real estate                    61            899           564          1,524
                                       ------                                            
 Construction                           1,118            514         2,116          3,748
 Consumer                               2,797          4,783         1,436          9,016
 Commercial business                       --             --            --             --
                                       ------         ------       -------        -------
      Total                            $4,148         $6,890       $18,585        $29,623
                                       ======         ======       =======        =======
</TABLE>





                                       3
<PAGE>   5
         The following table sets forth the dollar amount of all loans, before
net items, due after June 30, 1998 which have fixed interest rates or which
have floating or adjustable interest rates.

<TABLE>
<CAPTION>
                                                                   Floating or
                                               Fixed-Rates      Adjustable-Rates               Total
                                               -----------      ----------------               -----

                                                                 (In Thousands)

 <S>                                              <C>                   <C>                   <C>
 Single-family residential                        $ 8,192               $ 6,493               $14,685
 Multi-family residential                              --                   478                   478
 Commercial real estate                               215                 1,248                 1,463
 Construction                                          --                 2,630                 2,630
 Consumer                                           5,661                   558                 6,219
 Commercial business                                   --                    --                    --
                                                  -------               -------               -------
     Total                                        $14,068               $11,407               $25,475
                                                  =======               =======               =======
</TABLE>


         Scheduled contractual principal repayments do not reflect the actual
maturities of loans.  The average maturity of loans is substantially less than
their average contractual terms because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses, which generally give the
Company the right to declare a loan immediately due and payable in the event,
among other things, that the borrower sells the real property subject to the
mortgage and the loan is not repaid.  The average life of mortgage loans tends
to increase when current mortgage loan rates are substantially higher than
rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgages are substantially lower than current mortgage loan rates
(due to refinancings of adjustable-rate and fixed-rate loans at lower rates).

         ORIGINATION, PURCHASE AND SALE OF LOANS.  The lending activities of
the Company are subject to the written, non-discriminatory, underwriting
standards and loan origination procedures established by the Company's Board of
Directors and management.  Loan originations are obtained from a variety of
sources, including existing customers, builders, realtors, walk-in customers,
loan officers and advertising.

         Loan applications originated by the Company are generally processed at
the Company's main office in Pittsburgh.  The loan applications are initially
processed by loan processors and, once completed, are submitted to the
Company's President and Chief Executive Officer or Vice President of Lending,
which officers may approve loans up to $150,000.  Loans of up to $175,000 also
may be approved by such officers if originated by NVR Mortgage.  Loans between
$150,000 to $250,000 are submitted for approval to the Board of Director's Loan
Committee, while loans in excess of $250,000 must be approved by the Company's
Board of Directors.  All commercial loans, regardless of amount, must be
approved by the Board of Directors.

         Property appraisals on the real estate and improvements securing the
Company's single-family residential loans are made by independent appraisers.
Appraisals are performed in accordance with federal regulations and policies.
The Company obtains title





                                       4
<PAGE>   6
insurance policies on first mortgage real estate loans originated by it.
Borrowers also must obtain hazard insurance prior to closing and, when
required, flood insurance.  Borrowers may be required to advance funds, with
each monthly payment of principal and interest, to a loan escrow account from
which the Company makes disbursements for items such as real estate taxes and
mortgage insurance premiums as they become due.

         Historically, the Company has originated substantially all of the
loans in its portfolio and has held them until maturity.  Nevertheless, the
Company's residential loans are generally made on terms, conditions and
documentation which permit the sale to the Federal Home Loan Mortgage
Corporation ("FHLMC"), the Federal National Mortgage Association ("FNMA") and
other institutional investors in the secondary market.  However, the Company
has not sold any loans in the secondary market since July 1993 when it sold
$123,000 of single-family residential loans to the FHLMC.  Sales of loans to
date generally have been under terms which do not provide any recourse to the
Company by the purchaser in the event of default on the loan by the borrower.
Although the Company is not currently selling loans in the secondary market, it
may in the future consider resuming the sale of loans to the FHLMC and other
institutional investors as market conditions permit.

         Historically, the Company has not been an active purchaser of loans.
However, in fiscal 1997, the Company purchased seven commercial participation
loans totaling $96,000, in May 1996, the Company purchased a $7,000
participation in a commercial loan, and prior to 1994 purchased participation
interests in loans secured by commercial real estate and equipment-secured
commercial leases.  Such loans were generally purchased from an investment
consulting and loan servicing firm located in Monroeville, Pennsylvania.  The
Company ceased purchasing such loans and participation interests as a result of
an increase in delinquencies and because some of the loans and leases it had
acquired began to sustain some losses.  At June 30, 1997, loans purchased and
serviced by others totalled $1.0 million, of which $60,000 was classified as
non-performing.





                                       5
<PAGE>   7
         The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.

<TABLE>
<CAPTION>
                                                             Year Ended June 30,
                                                 --------------------------------------------
                                                   1997              1996              1995
                                                 -------           --------           -------
                                                                (In Thousands)
 <S>                                             <C>               <C>                <C>
 Loan originations:
   Single-family residential                     $ 6,014           $    557           $ 1,110
   Multi-family residential                           --                 --                --
   Commercial real estate                            180                160                --
   Construction                                    3,966              2,644             2,793
   Consumer                                        4,197              2,927             6,183
   Commercial business                                --                 --                --
                                                 -------           --------           -------
     Total loans originated                       14,357              6,288            10,086
 Purchases(1)                                         96                  7                34
                                                 -------           --------           -------
     Total loans originated
       and purchased                              14,453              6,295            10,120

 Sales and loan principal
   reductions:
   Loans sold(2)                                      --                 --                --
   Loan principal reductions                       9,014              8,532            10,544
                                                 -------           --------           -------
     Total loans sold and
        principal reductions                       9,014              8,532            10,544

 Increase (decrease) due to
   other items, net(3)                               373               (440)              605
                                                 -------           --------           -------
 Net increase (decrease) in
   loan portfolio                                $ 5,812           $ (2,677)          $   181
                                                 =======           ========           =======
</TABLE>

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

(1)      Consists of a commercial real estate loan during the year ended June
         30, 1996 and 1995, respectively.

(2)      Loans sold consist of single-family residential loans which were sold
         to the FHLMC.

(3)      Other items consist of loans in process, deferred fees and discounts
         and allowance for loan losses.

         A savings institution generally may not make loans to one borrower and
related entities in an amount which exceeds 15% of its unimpaired capital and
surplus, although loans in an amount equal to an additional 10% of unimpaired
capital and surplus may be made to a borrower if the loans are fully secured by
readily marketable securities.  At June 30, 1997, the Company's limit on
loans-to-one borrower was approximately $1.3 million.  Nevertheless, except in
certain limited circumstances, the Company's loan policy currently limits its
loans to one borrower to $300,000.  At June 30, 1997, the Company's five
largest loans or groups of loans-to-one borrower, including persons or entities
related to the borrower, amounted to $1.5 million in the aggregate, ranged from
an aggregate of $225,000 to $459,000 and were secured primarily by
single-family residential and commercial real estate.  At June 30, 1997, two of
the loans which comprise the Company's largest loans-to-one borrower were
classified as non-performing.





                                       6
<PAGE>   8
         The Company's largest loans-to-one borrower consists of five loans
which are secured by single-family residential rental properties.  The five
loans had an aggregate principal balance of $459,000 as of June 30, 1997, and
two of the loans were over 90 days delinquent (with an aggregate principal
balance of $100,000), one of the loans was 60 days delinquent (with a principal
balance of $117,000) and one loan was 30 days delinquent (with a principal
balance of $131,000), as of such date.  All five of the loans are secured by
properties located within the Company's primary market area.  The principal
borrower (which consists of a partnership which is affiliated with the
investment consulting and loan servicing firm with respect to which the
Company has purchased commercial real estate and commercial business loans in
the past) is currently negotiating with the Company in order to bring all of
the loans current and, accordingly, the Company does not presently anticipate
any loss of principal at this time.

         SINGLE-FAMILY RESIDENTIAL REAL ESTATE LOANS.  The Company has
historically concentrated its lending activities on the origination of loans
secured by first mortgage liens on existing single-family residences located in
its market area.  At June 30, 1997, $14.9 million or 50.2% of the Company's
total loan portfolio consisted of permanent single- family residential real
estate loans.

         The Company had been emphasizing for its portfolio single-family
residential mortgage loans which provide for periodic adjustments to the
interest rate.  The loans emphasized by the Company have up to 30-year terms
and an interest rate which adjusts every year in accordance with a designated
index (the weekly average yield on U.S. Treasury securities adjusted to a
constant comparable maturity of one year, as made available by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board")).  Such loans
currently have a 2% cap on the amount of any increase or decrease in the
interest rate per year, and a 6% limit on the amount by which the interest rate
can increase or decrease over the life of the loan.  The Company has not
engaged in the practice of using a cap on the payments that could allow the
loan balance to increase rather than decrease, resulting in negative
amortization.  Most single-family residential loans originated by the Company
can, upon payment of a fee, be converted into fixed-rate loans during certain
periods.  Approximately 45.0% of the permanent single-family residential loans
in the Company's loan portfolio at June 30, 1997 had adjustable interest rates.
Recently, the Company has emphasized for its portfolio fixed-rate single-family
residential mortgage loans.                       

         The demand for adjustable-rate loans in the Company's primary market
area has been a function of several factors, including the level of interest
rates, the expectations of changes in the level of interest rates and the
difference between the interest rates and loan fees offered for fixed-rate
loans and adjustable-rate loans.  The relative amount of fixed-rate and
adjustable-rate residential loans that can be originated at any time is largely
determined by the demand for each in a competitive environment.





                                       7
<PAGE>   9
         Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the terms of
the loan, thereby increasing the potential for default.  At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates.  The Company believes that these risks, which have not had a
material adverse effect on the Company to date, generally are less than the
risks associated with holding fixed-rate loans in an increasing interest rate
environment.

         The Company continues to originate long-term, fixed-rate loans in
order to provide a full range of products to its customers, but generally only
under terms, conditions and documentation which permit the sale thereof in the
secondary market.  At June 30, 1997, approximately $8.2 million or 55.0% of the
permanent single-family residential loans in the Company's portfolio consisted
of loans which provide for fixed rates of interest.  Although these loans
provide for repayments of principal over a fixed period of up to 30 years, it
is the Company's experience that such loans remain outstanding for a
substantially shorter period of time.

         The Company is permitted to lend up to 100% of the appraised value of
the real property securing a residential loan (referred to as the loan-to-value
ratio); however, if the amount of a residential loan originated or refinanced
exceeds 90% of the appraised value, the Company is required by federal
regulations to obtain private mortgage insurance on the portion of the
principal amount that exceeds 80% of the appraised value of the security
property.  Pursuant to underwriting guidelines adopted by the Board of
Directors, the Company will occasionally lend up to 95% of the appraised value
of the property securing a single-family residential loan.  However, the
Company generally requires private mortgage insurance on the portion of the
principal amount that exceeds 80% of the appraised value of the secured
property.

         MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LOANS.  The
Company originates mortgage loans for the acquisition and refinancing of
multi-family residential properties and properties secured by commercial real
estate.  The Company does not currently actively solicit such loans, which do
not constitute an active part of its business, and generally offers such loans
to accommodate its present customers and members of the local community.  At
June 30, 1997, $2.0 million or 6.7% of the Company's total loan portfolio
consisted of loans secured by multi-family residential and commercial real
estate.  The majority of the Company's multi-family residential and commercial
real estate loans are secured by office buildings, restaurants, a fraternity
house and other special purpose properties located within the Company's primary
market area.  Management does not expect to emphasize multi-family residential
and commercial real estate lending in the near future.

         A substantial portion of the Company's multi-family residential and
commercial real estate loans within the Company's portfolio consist of whole
loans and loan participations which were purchased by the Company through an
investment consulting and loan servicing firm headquartered in Monroeville,
Pennsylvania.  The Company has experienced a high





                                       8
<PAGE>   10
level of delinquencies with respect to such purchased loans and, consequently,
no longer engages in the purchase of commercial real estate loans.

         The Company requires appraisals of all properties securing
multi-family residential and commercial real estate loans.  Appraisals are
performed by an independent appraiser designated by the Company, all of which
are reviewed by management.  The Company considers the quality and location of
the real estate, the credit of the borrower, the cash flow of the project and
the quality of management involved with the property.

         Although terms vary, multi-family residential and commercial real
estate loans generally are amortized over a period of up to 25 years and mature
in 15 years or less.  The Company originates these loans with interest rates
which adjust in accordance with a designated index, which generally is
negotiated at the time of origination.  Loan-to-value ratios on the Company's
multi-family residential and commercial real estate loans are currently limited
to 80% or lower.  As part of the criteria for underwriting multi-family
residential and commercial real estate loans, the Company generally imposes a
specified debt coverage ratio (the ratio of net cash from operations before
payment of debt service to debt service).  It is also the Company's general
policy to obtain personal guarantees on its multi-family residential and
commercial real estate loans from the principals of the borrower and, when this
cannot be obtained, to impose more stringent loan-to-value, debt service and
other underwriting requirements.

         Multi-family residential and commercial real estate lending entails
different and significant risks when compared to single-family residential
lending because such loans typically involve large loan balances to single
borrowers and because the payment experience on such loans is typically
dependent on the successful operation of the project or the borrower's
business.  These risks can also be significantly affected by supply and demand
conditions in the local market for apartments, offices, warehouses or other
commercial space.  The Company attempts to minimize its risk exposure by
limiting the extent of the nonresidential lending generally.  In addition, the
Company imposes loan-to-value ratios, requires conservative debt coverage
ratios, and continually monitors the operation and physical condition of the
collateral.  At June 30, 1997, $60,000 of the Company's multi-family
residential and commercial real estate loans were non-performing, which
constituted 13.2% of total non-performing loans at such date.

         CONSTRUCTION LOANS.  The Company also originates residential
construction loans to individuals who have a contract with a builder for the
construction of their residence and, to a much lesser extent, to local real
estate builders, generally with whom it has an established relationship.  The
Company's construction loans are secured by property located primarily in the
Company's primary market area.  At June 30, 1997, construction loans amounted
to $3.7 million or 12.7% of the Company's total loan portfolio.





                                       9
<PAGE>   11
         The Company's construction loans to individuals generally have
variable interest rates during the construction period with payments being made
monthly on an interest-only basis.

         Prior to making a commitment to fund a construction loan, the Company
requires an appraisal of the property by an independent state-licensed and
qualified appraiser.  The appraiser typically reviews and inspects each project
at the commencement of construction and throughout the term of the construction
loan.  Loan proceeds are disbursed after inspections of the project by the
appraiser based on the percentage of completion.

         Construction lending is generally considered to involve a higher level
of risk as compared to permanent single-family residential lending, due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on developers and builders.  Moreover, a
construction loan can involve additional risks because of the inherent
difficulty in estimating both a property's value at completion of the project
and the estimated cost (including interest) of the project.  The nature of
these loans is such that they are generally more difficult to evaluate and
monitor.  In addition, construction loans to a builder may not always be
pre-sold and thus could pose a greater potential risk to the Company than
construction loans to individuals on their personal residences.  Nevertheless,
the Company has attempted to minimize the foregoing risks by, among other
things, limiting the extent of its construction lending as a proportion of the
total loan portfolio and by limiting its construction lending solely to
residential properties.

         CONSUMER LOANS.  The Company has been originating consumer loans in
recent years in order to provide a full range of financial services to its
customers and because such loans generally have shorter terms and higher
interest rates than mortgage loans.  The consumer loans offered by the Company
include home equity lines of credit, home improvement loans, unsecured personal
loans and lines of credit and automobile loans.  At June 30, 1997, consumer
loans amounted to $9.0 million or 30.5% of the Company's total loan portfolio.

         Home equity lines of credit are originated by the Company for up to
80% of the appraised value, less the amount of any existing prior liens on the
property.  The Company also offers home improvement loans in amounts up to 90%
of the appraised value, less the amount of any existing prior liens.  In 1987,
the Company entered into a contractual arrangement with an individual who
assisted the Company in originating and servicing home improvement loans
through a network of dealers.  Although the contractual arrangement was
terminated in January 1994 (which resulted in the Company's recognition of
$110,000 of expense during fiscal 1994), the Company continues to originate
home improvement loans through a network of dealers which directly engage in
the home improvement project.  Generally, home equity lines of credit have a
maximum term of ten years and interest rates which adjust in accordance with a
designated prime rate.  Home improvement loans have a maximum term of ten years
and generally carry fixed interest rates.  In either case, the Company will
secure the loan with a mortgage on the property (generally a second mortgage)
and will originate the loan even if another institution holds the first
mortgage.





                                       10
<PAGE>   12
At June 30, 1997, home equity lines of credit and home improvement loans
totalled $8.1 million or 27.4% of the Company's total loan portfolio.

         The Company also offers unsecured lines of credit up to $3,000 with
terms up to 24 months as well as automobile loans up to $25,000 with terms up
to 60 months.  The Company generally offers these loans to existing customers.
At June 30, 1997, $906,000 or 3.1% of the Company's total consumer loan
portfolio consisted of unsecured personal loans and lines of credit and
automobile loans.

         The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's credit history and an assessment of
the borrower's ability to meet existing obligations and payments on the
proposed loan.  The stability of the applicant's monthly income may be
determined by verification of gross monthly income from primary employment, and
additionally from any verifiable secondary income.  Creditworthiness of the
applicant is of primary consideration; however, the underwriting process also
includes a comparison of the value of any security in relation to the proposed
loan amount.  Upon termination of the Company's consulting arrangement
discussed above, the Company revised its loan underwriting and collection
policies in order to enhance its consumer loan underwriting standards and
improve its collection efforts.

         Consumer loans generally have shorter terms and higher interest rates
than mortgage loans but often involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. In addition, consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to
be adversely effected by job loss, divorce, illness and personal bankruptcy.
In most cases, any repossessed collateral for a defaulted consumer loan will
not provide an adequate source of repayment of the outstanding loan balance
because of improper repair and maintenance of the underlying security.  The
remaining deficiency often does not warrant further substantial collection
efforts against the borrower.  The Company believes that the generally higher
yields earned on consumer loans compensate for the increased credit risk
associated with such loans and that consumer loans are important to its efforts
to increase rate sensitivity, shorten the average maturity of its loan
portfolio and provide a full range of services to its customers.  Nevertheless,
at June 30, 1997, $298,000 of the Company's consumer loans were non-performing,
which constituted 65.6% of total non-performing loans and 3.3% of total
consumer loans at such date.

         COMMERCIAL BUSINESS LOANS.  In years prior to the most recent fiscal
year, the Company became involved in purchasing office equipment and other
commercial leases, primarily through the investment consulting and loan
servicing firm located in Monroeville, Pennsylvania which was discussed above.
The consulting firm underwrote the leases pursuant to the Company's
underwriting standards and procedures.  The Company then generally reviewed the
documents and made a determination whether to purchase such lease.  The Company
no longer has any outstanding lease loans with this firm and does not plan to
purchase any additional loans from them in the future.





                                       11
<PAGE>   13
         LOAN FEE INCOME.  In addition to interest earned on loans, the Company
receives income from fees in connection with loan originations, loan
modifications, late payments and for miscellaneous services related to its
loans.  Income from these activities varies from period to period depending
upon the volume and type of loans made and competitive conditions.

         The Company charges loan origination fees which are calculated as a
percentage of the amount borrowed.  Loan origination and commitment fees in
excess of loan origination costs are deferred and recognized over the
contractual remaining lives of the related loans on a level yield basis.
Discounts and premiums on loans purchased are credited and amortized in the
same manner.  In accordance with Financial Accounting Standards Board ("FASB")
Statement No. 91, the Company recognized $43,000, $67,000 and $49,000 of
deferred loan fees during the years ended June 30, 1997, 1996 and 1995,
respectively, in connection with loan refinancing, payoffs and ongoing
amortization of outstanding loans.

ASSET QUALITY

         DELINQUENT LOANS.  When a borrower fails to make a required payment on
a loan, the Company attempts to cure the deficiency by contacting the borrower
and seeking the payment.  Contacts are generally made at least 15 days after a
payment is due.  In most cases, deficiencies are cured promptly.  If a
delinquency continues, the loan and payment history are reviewed and efforts
are made to collect the loan.  While the Company generally prefers to work with
borrowers to resolve such problems, the Company will institute foreclosure or
other proceedings, as necessary, to minimize any potential loss.  The Company
generally initiates such proceedings when a loan becomes 90 days delinquent.





                                       12
<PAGE>   14
         The following table sets forth information concerning delinquent loans
at June 30, 1997, in dollar amounts and as a percentage of the Company's total
loan portfolio.  The amounts presented represent the total outstanding
principal balances of the related loans, rather than the actual payment amounts
which are past due.

<TABLE>
<CAPTION>
                                                               June 30, 1997
                               ----------------------------------------------------------------------------
                                       30-59                                              90 or More Days
                                    Days Overdue            60-89 Days Overdue               Overdue
                               ---------------------      ----------------------      ---------------------
                                            Percent                     Percent                    Percent
                                            of Total                    of Total                   of Total
                               Amount        Loans        Amount         Loans        Amount         Loans
                               ------       --------      ------        --------      ------       --------
                                                           (Dollars in Thousands)

 <S>                            <C>          <C>            <C>         <C>             <C>          <C>
 Single-family residential      $397         1.47%          $ 17        0.06%           $ 96         0.36%
 Multi-family residential
   and commercial real
   estate                        131         0.49             --          --              60         0.22
 Construction                     --           --             --          --              --           --
 Consumer                        312         1.16            212        0.79             298         1.10
 Commercial business              --           --             --          --              --           --
                                ----         ----           ----        ----            ----         ----
   Total delinquent loans       $840         3.11%          $229        0.85%           $454         1.68%
                                ====         ====           ====        ====            ====         ==== 
</TABLE>


         NON-PERFORMING ASSETS.  Loans are placed on non-accrual status when,
in the judgment of management, the probability of collection of interest is
deemed to be insufficient to warrant further accrual.  When a loan is placed on
non-accrual status, previously accrued but unpaid interest is deducted from
interest income.  As a matter of policy, the Company does not accrue interest
on loans past due 90 days or more except when the estimated value of the
collateral and collection efforts are deemed sufficient to ensure full
recovery.

         Real estate acquired by the Company as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until sold.
Pursuant to a statement of position ("SOP 92-3") issued by the American
Institute of Certified Public Accountants in April 1992, which provides
guidance on determining the balance sheet treatment of foreclosed assets in
annual financial statements for periods ending on or after December 15, 1992,
there is a rebuttable presumption that foreclosed assets are held for sale and
such assets are recommended to be carried at the lower of fair value minus
estimated costs to sell the property, or cost (generally the balance of the
loan on the property at the date of acquisition).  After the date of
acquisition, all costs incurred in maintaining the property are expensed and
costs incurred for the improvement or development of such property are
capitalized up to the extent of their net realizable value.  The Company's
accounting for its real estate acquired by foreclosure complies with the
guidance set forth in SOP 92-3.





                                       13
<PAGE>   15
         The following table sets forth the amounts and categories of the
Company's non-performing assets at the dates indicated.  The Company did not
have any troubled debt restructurings at any of the dates presented.

<TABLE>
<CAPTION>
                                                                  June 30,
                                                   --------------------------------------
                                                   1997             1996             1995
                                                   ----             ----             ----
                                                         (Dollars in Thousands)
 <S>                                               <C>              <C>            <C>
 Non-accruing loans:
   Single-family residential                       $ 96             $111           $  269
   Multi-family residential and
     commercial real estate                          60               60              492
   Construction                                      --               --               --
   Consumer                                         117              137              283
   Commercial business                               --               --               38
                                                   ----             ----           ------
     Total non-accruing loans                       273              308            1,082

 Accruing loans greater than
   90 days delinquent:
   Single-family residential                         --                2               22
   Multi-family residential and
     commercial real estate                          --               --               --
   Consumer                                         181              196              161
                                                   ----             ----           ------
     Total accruing loans greater than
      90 days delinquent                            181              198              183
                                                   ----             ----           ------
     Total non-performing loans                     454              506            1,265
 Real estate owned                                   37              166              228
                                                   ----             ----           ------
   Total non-performing assets                     $491             $672           $1,493
                                                   ====             ====           ====== 
   Total non-performing loans
     as a percentage of total loans                1.68%            2.39%            5.31%
                                                   ====             ====           ====== 
   Total non-performing assets
     as a percentage of total assets               0.98%            1.43%            3.50%
                                                   ====             ====           ====== 
</TABLE>


         For the years ended June 30, 1997, 1996 and 1995, approximately
$26,000, $29,000 and $97,000, respectively, in gross interest income would have
been recorded on loans accounted for on a non-accrual basis if such loans had
been current in accordance with their original terms and had been outstanding
throughout the year or since origination if held for part of the year.  For the
years ended June 30, 1997, 1996 and 1995, $10,000, $6,000 and $32,000,
respectively, were included in interest income for these same loans.

         The $454,000 of non-performing loans at June 30, 1997 included $96,000
of single-family residential loans, $60,000 of multi-family residential and
commercial real estate loans (consisting of one loan), $298,000 of consumer
loans (consisting of 26 loans), 19 of which are secured by single-family
residential real estate, and no commercial business loans.  The $37,000 of real
estate owned at June 30, 1997 consisted of one commercial real estate property
and one single family residential property.





                                       14
<PAGE>   16
         The decline in non-performing assets during the year ended June 30,
1997 was primarily due to a $17,000 decrease in non-performing single-family
residential loans, a $35,000 decrease in non-performing consumer loans and a
$129,000 decrease in real estate owned.  The decrease in non-performing loans
reflected the Company's more aggressive and enhanced collection efforts with
respect to its non-performing assets.  The decline in non-performing assets
during fiscal 1996 was primarily due to a $178,000 decrease in non-performing
single-family residential loans, a $432,000 decrease in non-performing
multi-family residential and commercial real estate loans, a $111,000 decrease
in non-performing consumer loans, a $38,000 decrease in non-performing
commercial business loans and a $62,000 decrease in real estate owned.  The
decline in real estate owned resulted from the restructuring of a $60,000
commercial property and a $45,000 increase in the real estate owned loss
reserve.

         ALLOWANCE FOR LOAN LOSSES.  It is management's policy to maintain an
allowance for estimated losses based on the perceived risk of loss in the loan
portfolio and the adequacy of the allowance.  Management's periodic evaluation
of the adequacy of the allowance is based on the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of the
underlying collateral and current economic conditions.  The allowance is
increased by provisions for loan losses which are charged against income.  See
Notes 1 and 4 of the Notes to the Consolidated Financial Statements in the 1997
Annual Report to Stockholders, filed as Exhibit 13 hereto (the "1997 Annual
Report").

         Although management uses the best information available to make
determinations with respect to the provisions for loan losses, additional
provisions for loan losses may be required to be established in the future
should economic or other conditions change substantially.  In addition, the
Pennsylvania Department of Banking (the "Department") and the FDIC, as an
integral part of their examination process, periodically review the Company's
allowance for possible loan losses.  Such agencies may require the Company to
recognize additions to such allowance based on their judgments about
information available to them at the time of their examination.





                                       15
<PAGE>   17
         The following table sets forth an analysis of the Company's allowance
for loan losses during the periods indicated.


<TABLE>
<CAPTION>
                                                           Year Ended June 30,
                                                 --------------------------------------
                                                  1997            1996            1995
                                                 -------        -------         -------
                                                         (Dollars in Thousands)

 <S>                                             <C>            <C>             <C>
 Total loans outstanding (net)                   $26,980        $21,168         $23,845
                                                 =======        =======         =======
 Average loans outstanding, net                  $22,377        $22,708         $24,546
                                                 =======        =======         =======
 Balance at beginning of period                  $   337        $   531         $   327
 Charge-offs:
   Single-family residential                          --             --              20
   Multi-family residential and
     commercial real estate                           --            116              --
   Consumer                                           95            194             164
   Commercial business                                --              2               2
                                                 -------        -------         -------
     Total charge-offs                                95            312             186
 Recoveries:
   Consumer                                           11             13               5
                                                 -------        -------         -------
     Total recoveries                                 11             13               5
                                                 -------        -------         -------
 Net charge-offs                                     (84)          (299)           (181)
 Provision for loan losses                            29            105             385
                                                 -------        -------         -------
 Balance at end of period                        $   282        $   337         $   531
                                                 =======        =======         =======
 Allowance for loan losses as a
   percent of total loans
   outstanding                                      1.05%          1.59%           2.23%
                                                 =======        =======         =======
 Allowance for loan losses as a
   percent of total non-performing loans           62.11%         66.60%          41.98%
                                                 =======        =======         =======
 Ratio of net charge-offs to
   average loans outstanding                        0.38%          1.32%           0.74%
                                                 =======        =======         =======
</TABLE>





                                       16
<PAGE>   18
         The following table sets forth information concerning the allocation
of the Company's allowance for loan losses by loan categories at the dates
indicated.

<TABLE>
<CAPTION>
                                                                             June 30,
                                        -----------------------------------------------------------------------------------
                                                  1997                         1996                         1995
                                        -------------------------    -------------------------    -------------------------
                                                      Percent of                   Percent of                   Percent of
                                                    Loans in Each                Loans in Each                Loans in Each
                                                     Category to                  Category to                  Category to
                                        Amount       Total Loans     Amount       Total Loans     Amount       Total Loans
                                        ------      -------------    ------      -------------    ------      -------------
                                                                       (Dollars in Thousands)

 <S>                                     <C>           <C>            <C>           <C>            <C>            <C>
 Single-family residential loans(1)      $ 76           62.7%         $ 22           51.0%         $ 59            48.0%
 Multi-family residential and
   commercial real estate loans           130            6.7           170           11.3           309            13.0
 Consumer loans                            76           30.6           145           37.7           157            38.8
 Commercial business loans                 --             --            --             --             6             0.2
                                         ----          -----          ----          -----          ----           -----
      TOTAL                              $282          100.0%         $337          100.0%         $531           100.0%
                                         ====          =====          ====          =====          ====           ===== 
</TABLE>


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

(1)      Includes both permanent and construction loans secured by
         single-family residential real estate.

INVESTMENT ACTIVITIES

         The Company invests in various types of securities, including U.S.
Government and agency obligations, corporate and municipal debt securities and
mortgage-backed securities guaranteed by the FHLMC.  The investment policy of
the Company, as established by the Board of Directors, is designed primarily to
provide and maintain liquidity and to generate a favorable return on
investments without incurring undue interest rate risk, credit risk, and
investment portfolio asset concentrations.  The Company's investment policy is
currently implemented by the Company's President and Chief Executive Officer
and is overseen by the Board of Directors.

         Securities that management has the intent and positive ability to hold
to maturity are classified as held to maturity and are reported at amortized
cost.  Securities that management has the clear intent of selling in advance of
maturity, or which management is uncertain it will hold until maturity are
classified as available for sale and are reported at their fair value.  At June
30, 1997, $18.2 million of the Company's $18.9 million of investment securities
were classified as available for sale and the remaining $0.7 million were
classified as held to maturity.





                                       17
<PAGE>   19
         The following table sets forth information relating to the amortized
cost and market value of the Company's investment securities (including
investment securities held to maturity and available for sale).

<TABLE>
<CAPTION>
                                                                           June 30,
                                          ------------------------------------------------------------------------
                                                    1997                     1996                      1995
                                          ---------------------    ----------------------    ---------------------
                                          Amortized     Market     Amortized      Market     Amortized     Market
                                            Cost        Value         Cost        Value        Cost         Value
                                          ---------     -------    ---------      -------    ---------     -------
                                                                       (In Thousands)

 <S>                                      <C>           <C>         <C>           <C>         <C>           <C>
 Investment securities held to
   maturity:
   U.S. Government and agency
     obligations                          $    --       $    --     $ 2,000       $ 2,004     $2,750        $2,758
   Corporate obligations                      497           500         764           775      1,657         1,679
   Municipal obligations                      200           205         200           202        200           202
   Mortgage-backed securities                  15            15          20            20         27            27
   Other                                       --            --          --            --         --            --
                                          -------       -------     -------       -------     ------        ------
     Total investment securities held
       to maturity                        $   712       $   720     $ 2,984       $ 3,001     $4,634        $4,666
                                          =======       =======     =======       =======     ======        ======
 Investment securities available for
   sale:
   U.S. Government and agency             $15,741       $15,729     $ 8,002       $ 7,919     $  900        $  907
     obligations
   Corporate obligations                      400           401         398           403        398           406
   Mortgage-backed securities               1,836         1,835       1,980         1,944         --            --
   Other(1)                                   250           259          --            --         --            --
                                          -------       -------     -------       -------     ------        ------
     Total investment securities
       available for sale                 $18,227       $18,224     $10,380       $10,266     $1,298        $1,313
                                          =======       =======     =======       =======     ======        ======
</TABLE>

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

(1)      Consists of FNMA Preferred Stock.





                                       18
<PAGE>   20
         The following table sets forth the amount of the Company's investment
securities which mature during each of the periods indicated and the weighted
average yields for each range of maturities at June 30, 1997.

<TABLE>
<CAPTION>
                                                               Contractually Maturing
                                       -----------------------------------------------------------------------
                                                   Weighted                  Weighted                 Weighted
                                       Under 1      Average                  Average      Over 5       Average
                                        Year         Yield     1-5 Years      Yield        Years        Yield
                                       -------     --------    ---------     --------     ------      --------
                                                               (Dollars in Thousands)

 <S>                                    <C>          <C>        <C>           <C>       <C>             <C>
 Investment securities held to
   maturity:
   U.S. Government and
     agency obligations                 $ --           --%      $   --          --%     $    --           --%
   Corporate obligations                 497         6.32           --          --           --           --
   Municipal obligations                  --           --           --          --          200         5.75
   Mortgage-backed securities             --           --           --          --           15         7.50
                                        ----                    ------                  -------             
   Total investment securities
     held to maturity                   $497         6.32%      $   --          --%     $   215         5.87%
                                        ====         ====       ======        ====      =======         ==== 
 Available for sale(1):
   U.S. Government and
     agency obligations                 $ --           --%      $3,147        6.97%     $12,841         7.43%
   Corporate obligations                 201         6.50          200        8.80           --           --
   Mortgage-backed securities             --           --           --          --        1,835         7.27
                                        ----                    ------                  -------             
     Total investment securities
       available for sale               $201         6.50%      $3,347        7.08%     $14,676         7.41%
                                        ====         ====       ======        ====      =======         ==== 
</TABLE>

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

(1)      Reflected at fair value.

         The actual maturity of the Company's investment securities may differ
from contractual maturity since certain of the Company's investment securities
are subject to call provisions which allow the issuer to accelerate the
maturity date of the security.  In addition, due to repayments of the
underlying loans, the actual maturities of mortgage-backed securities are
substantially less than the scheduled maturities.  See Notes 2 and 3 of the
Notes to Consolidated Financial Statements in the 1997 Annual Report, filed as
Exhibit 13 hereto.

SOURCES OF FUNDS

         GENERAL.  Deposits are the primary source of the Company's funds for
lending and other investment purposes.  In addition to deposits, the Company
derives funds from loan principal repayments and prepayments, the maturity and
sales of investment securities and operations.  Loan repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest rates and market
conditions.





                                       19
<PAGE>   21
         DEPOSITS.  The Company's deposit products include a broad selection of
deposit instruments, including passbook savings and club accounts, NOW
accounts, money market accounts and certificates of deposit.  Deposit account
terms vary, with the principal differences being the minimum balance required,
the time periods the funds must remain on deposit and the interest rate.

         The Company's deposits are obtained primarily from residents of
Allegheny County and Armstrong County, Pennsylvania.  The Company attracts
deposit accounts by offering a wide variety of accounts, competitive interest
rates, and convenient office locations and service hours.  In addition, the
Company had installed an automated teller machine in a retail department store
located in Kittanning, Pennsylvania.  The Company utilizes traditional
marketing methods to attract new customers and savings deposits, including
print media advertising and direct mailings.  The Company does not advertise
for deposits outside of its local market area or utilize the services of
deposit brokers, and management believes that an insignificant number of
deposit accounts were held by non-residents of Pennsylvania at June 30, 1997.

         The following table shows the distribution of and certain other
information relating to the Company's deposits by type as of the dates
indicated.


<TABLE>
<CAPTION>
                                                                       June 30,
                                      --------------------------------------------------------------------------
                                               1997                      1996                     1995
                                      ----------------------    ----------------------    ----------------------
                                                  Percent of                Percent of                Percent of
                                      Amount       Deposits     Amount       Deposits     Amount       Deposits
                                      -------     ----------    -------     ----------    -------     ----------
                                                                 (Dollars in Thousands)

 <S>                                  <C>           <C>         <C>           <C>         <C>           <C>
 Transaction accounts:
   Passbook savings and club
     accounts                         $ 9,168        25.60%     $10,577        28.28%     $10,389        27.47%
   NOW accounts                         3,221         8.99        3,028         8.11        3,018         7.98
   Money market accounts                  724         2.02        1,008         2.70          989         2.62
                                      -------       ------      -------       ------      -------       ------
     Total transaction accounts        13,113        36.61       14,593        39.09       14,396        38.07
                                      -------       ------      -------       ------      -------       ------
 Certificates of deposit:
   Within 1 year                       12,075        33.71       12,199        32.68       15,302        40.46
   1-2 years                            4,171        11.64        3,628         9.72        2,078         5.49
   2-3 years                            2,360         6.59        2,978         7.98        2,968         7.85
   3-4 years                            1,955         5.46        2,040         5.46        1,206         3.19
   4-5 years                            2,145         5.99        1,895         5.08        1,869         4.94
   Over 5 years                            --           --           --           --           --           --
                                      -------       ------      -------       ------      -------       ------
     Total certificates of deposit     22,706        63.39       22,740        60.91       23,423        61.93
                                      -------       ------      -------       ------      -------       ------
     Total deposits                   $35,819       100.00%     $37,333       100.00%     $37,819       100.00%
                                      =======       ======      =======       ======      =======       ====== 
</TABLE>





                                       20
<PAGE>   22
         The following table sets forth the savings activities of the Company
during the periods indicated.


<TABLE>
<CAPTION>
                                                   Year Ended June 30,
                                        ----------------------------------------
                                          1997            1996             1995
                                        -------         -------          -------
                                                    (In Thousands)

 <S>                                    <C>             <C>              <C>
 Deposits                               $30,947         $29,221          $25,330
 Withdrawals                             33,404          30,889           26,061
                                        -------         -------          -------
   Net decrease before interest
     credited                            (2,457)         (1,668)            (731)
 Interest credited                          943           1,182            1,134
                                        -------         -------          -------
   Net increase (decrease)
     in deposits                        $(1,514)        $  (486)         $   403
                                        =======         =======          =======
</TABLE>


         The following table shows the interest rate and maturity information
for the Company's certificates of deposit at June 30, 1997.

<TABLE>
<CAPTION>
                                                         Maturity Date
                      -------------------------------------------------------------------------------------
 Interest Rate        One Year or Less    Over 1-2 Years      Over 2-3 Years      Over 3 Years       Total
 -------------        ----------------    --------------      --------------      ------------      -------
                                                        (In Thousands)
 <S>                       <C>                <C>                 <C>                <C>            <C>
 2.00 - 4.00%              $    36            $   --              $   --             $   --         $    36
 4.01 - 6.00%               11,153             3,180                 515              1,094          15,942
 6.01 - 8.00%                  885               991               1,845              3,006           6,727
                           -------            ------              ------             ------         -------
   Total                   $12,074            $4,171              $2,360             $4,100         $22,705
                           =======            ======              ======             ======         =======
</TABLE>


         The following table sets forth the maturities of the Company's
certificates of deposit having principal amounts of $100,000 or more at June
30, 1997.

<TABLE>
<CAPTION>
           Certificates of deposit maturing
                  in quarter ending:                                 Amount
 -------------------------------------------------------         --------------
                                                                 (In Thousands)

 <S>                                                                 <C>
 September 30, 1997                                                  $   --
 December 31, 1997                                                      100
 March 31, 1998                                                         615
 After March 31, 1998                                                 1,156
                                                                     ------
   Total certificates of deposit with
    balances of $100,000 or more                                     $1,871
                                                                     ======
</TABLE>





                                       21
<PAGE>   23
COMPETITION

         The Company faces significant competition for real estate loans,
principally from mortgage banking companies, other savings institutions,
commercial banks and credit unions. Factors which affect competition generally
include the general and local economic conditions, current interest rate levels
and volatility in the mortgage markets.  The Company also faces significant
competition in attracting deposits.  Its most direct competition for deposits
has historically come from commercial banks and other savings institutions
located in its market area.  The Company faces additional significant
competition for investors' funds from other financial intermediaries.  The
Company competes for deposits principally by offering depositors a variety of
deposit programs, convenient branch locations, hours and other services.  The
Company does not rely upon any individual group or entity for a material
portion of its deposits.

         Federal legislation in recent years has eliminated many of the
distinctions between commercial banks and savings institutions and holding
companies and allowed bank holding companies to acquire savings institutions.
Such legislation has generally resulted in an increase in the competition
encountered by savings institutions and has resulted in a decrease in both the
number of savings institutions and the aggregate size of the savings industry.

EMPLOYEES

         The Company had 11 full-time employees and 8 part-time employees as of
June 30, 1997.  None of these employees is represented by a collective
bargaining agent.  The Company believes that it enjoys good relations with its
personnel.

SUBSIDIARIES

         At June 30, 1997, the Company had one wholly owned subsidiary,
Pennwood Service Corporation, which held no significant assets and was inactive
as of such date.

                                   REGULATION

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





                                       22
<PAGE>   24
THE COMPANY

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

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

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

         The Federal Reserve Board has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA.
These activities include operating a mortgage company, finance company, credit
card company, factoring company, trust company or savings association;
performing certain data processing functions; providing limited securities
brokerage services; acting as an investment or financial advisor; acting as an
insurance agent for certain types of credit related insurance; leasing personal
property on a full-payout, non-operating basis; providing tax planning and
preparation services; operating a collection agency; and providing certain
courier services.  The Federal Reserve Board also has determined that certain
other activities, including real estate brokerage and syndication, land
development, property management and underwriting of life insurance not related
to credit transactions, are not closely related to banking and a proper
incident thereto.





                                       23
<PAGE>   25
         LIMITATIONS ON TRANSACTIONS WITH AFFILIATES.  Transactions between
savings institutions and any affiliate are governed by Section 23A and 23B of
the Federal Reserve Act.  An affiliate of a savings institution is any company
or entity which controls, is controlled by or is under common control with the
savings institution.  In a holding company context, the parent holding company
of a savings institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution.  Generally, Section 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate.  The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar transactions.  In
addition to the restrictions imposed by Sections 23A and 23B, no savings
institution may (i) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings institutions.

         In addition, Sections 22(h) and (g) of the Federal Reserve Act places
restrictions on loans to executive officers, directors and principal
stockholders.  Under Section 22(h), loans to a director, an executive officer
and to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interest, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus).  Section 22(h) also requires
that loans to directors, executive officers and principal stockholders be made
on terms substantially the same as offered in comparable transactions to other
persons and also requires prior board approval for certain loans.  In addition,
the aggregate amount of extensions of credit by a savings institution to all
insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers.

         CAPITAL REQUIREMENTS.  The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the BHCA.  The Federal Reserve Board capital adequacy guidelines
generally require bank holding companies to maintain total capital equal to 8%
of total risk-adjusted assets, with at least one-half of that amount consisting
of Tier I or core capital and up to one-half of that amount consisting of Tier
II or supplementary capital.  Tier I capital for bank holding companies
generally consists of the sum of common stockholders' equity and perpetual
preferred stock (subject in the case of the latter to limitations on the kind
and amount of such stocks which may be included as Tier I capital), less
goodwill and, with certain exceptions, intangibles.  Tier II capital generally
consists of hybrid capital instruments; perpetual preferred stock which is





                                       24
<PAGE>   26
not eligible to be included as Tier I capital; term subordinated debt and
intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses.  Assets are adjusted under the risk-based
guidelines to take into account different risk characteristics, with the
categories ranging from 0% (requiring no additional capital) for assets such as
cash to 100% for the bulk of assets which are typically held by a bank holding
company, including multi-family residential and commercial real estate loans,
commercial business loans and consumer loans.  Single-family residential first
mortgage loans which are not past-due (90 days or more) or non-performing and
which have been made in accordance with prudent underwriting standards are
assigned a 50% level in the risk-weighing system, as are certain
privately-issued mortgage-backed securities representing indirect ownership of
such loans.  Off-balance sheet items also are adjusted to take into account
certain risk characteristics.

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

         At June 30, 1997, the Company was in compliance with the
above-described Federal Reserve Board regulatory capital requirements.

         FINANCIAL SUPPORT OF AFFILIATED INSTITUTIONS.  Under Federal Reserve
Board policy, the Company will be expected to act as a source of financial
strength to the Savings Bank and to commit resources to support the Savings
Bank in circumstances when it might not do so absent such policy.

THE SAVINGS BANK

         The Savings Bank is incorporated under Pennsylvania law under the
Banking Code of 1965, as amended (the "Banking Code") and is subject to
extensive regulation and examination by the Department and by the FDIC, and, is
subject to certain requirements established by the Federal Reserve Board.  The
federal and state laws and regulations which are applicable to banks regulate,
among other things, the scope of their business, their investments, their
reserves against deposits, the timing of the availability of deposited funds
and the nature and amount of and collateral for certain loans.  There are
periodic examinations by the Department and the FDIC to test the Savings Bank's
compliance with various regulatory requirements.  This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors.  The regulatory structure





                                       25
<PAGE>   27
also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and examination policies,
including policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes.  Any
change in such regulation, whether by the Department, the FDIC or the U.S.
Congress could have a material adverse impact on the Company, the Savings Bank
and their operations.

         FDIC INSURANCE PREMIUMS.  The deposits of the Savings Bank are
currently insured by the SAIF.  Both the SAIF and the Bank Insurance Fund
("BIF"), the federal deposit insurance fund that covers commercial bank
deposits, are required by law to attain and thereafter maintain a reserve ratio
of 1.25% of insured deposits.  The BIF fund met its target reserve level in
September 1995, but the SAIF was not expected to meet its target reserve level
until at least 2002.  Consequently, in late 1995, the FDIC approved a final
rule regarding deposit insurance premiums which, effective with respect to the
semiannual premium assessment beginning January 1, 1996, reduced deposit
insurance premiums for BIF member institutions to zero basis points (subject to
an annual minimum of $2000) for institutions in the lowest risk category.
Deposit insurance premiums for SAIF members were maintained at their existing
levels (23 basis points for institutions in the lowest risk category).

         On September 30, 1996 President Clinton signed into law legislation
which eliminated the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio.  The legislation provided that all SAIF member institutions pay a
one-time special assessment to recapitalize the SAIF, which was sufficient to
bring the reserve ratio in the SAIF to 1.25% of insured deposits.  The
legislation also provides for the merger of the BIF and the SAIF, with such
merger being conditioned upon the prior elimination of the thrift charter.

         Effective October 8, 1996, FDIC regulations imposed a one-time special
assessment of 65.7 basis points on SAIF-assessable deposits as of March 31,
1995.  The Savings Bank's one-time special assessment amounted to $247,000
pre-tax.

         On October 16, 1996, the FDIC proposed to lower 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.  From 1997 through 1999, SAIF members will pay
6.4 basis points to fund the Financing Corporation while BIF member
institutions will pay approximately 1.3 basis points.

         The FDIC may terminate the deposit insurance of any insured depository
institution, including the Savings Bank, if it determines after a hearing that
the institution has engaged or is engaging in unsafe or unsound practices, is
in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC.  It also may suspend deposit insurance temporarily





                                       26
<PAGE>   28
during the hearing process for the permanent termination of insurance, if the
institution has no tangible capital.  If insurance of accounts is terminated,
the accounts at the institution at the time of the termination, less subsequent
withdrawals, shall continue to be insured for a period of six months to two
years, as determined by the FDIC.  Management is aware of no existing
circumstances which would result in termination of the Savings Bank's deposit
insurance.

         CAPITAL REQUIREMENTS.  The FDIC has promulgated regulations and
adopted a statement of policy regarding the capital adequacy of state-chartered
banks which, like the Savings Bank, will not be members of the Federal Reserve
System.  The FDIC's capital regulations establish a minimum 3.0% Tier I
leverage capital requirement for the most highly-rated state-chartered,
non-member banks, with an additional cushion of at least 100 to 200 basis
points for all other state-chartered, non-member banks, which effectively will
increase the minimum Tier I leverage ratio for such other banks to 4.0% to 5.0%
or more.  Under the FDIC's regulation, the highest-rated banks are those that
the FDIC determines are not anticipating or experiencing significant growth and
have well diversified risk, including no undue interest rate risk exposure,
excellent asset quality, high liquidity, good earnings and, in general, which
are considered a strong banking organization and are rated composite 1 under
the Uniform Financial Institutions Rating System.  Leverage or core capital is
defined as the sum of common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, and
minority interests in consolidated subsidiaries, minus all intangible assets
other than certain qualifying supervisory goodwill and certain purchased
mortgage servicing rights.

         The FDIC also requires that savings banks meet a risk-based capital
standard.  The risk-based capital standard for savings banks requires the
maintenance of total capital (which is defined as Tier I capital and
supplementary (Tier 2) capital) to risk weighted assets of 8%.  In determining
the amount of risk-weighted assets, all assets, plus certain off balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item.  The components of
Tier I capital are equivalent to those discussed above under the 3% leverage
capital standard.  The components of supplementary capital include certain
perpetual preferred stock, certain mandatory convertible securities, certain
subordinated debt and intermediate preferred stock and general allowances for
loan and lease losses.  Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets.
Overall, the amount of capital counted toward supplementary capital cannot
exceed 100% of core capital.  At June 30, 1997, the Savings Bank met each of
its capital requirements.

         In August 1995, the FDIC and other federal banking agencies published
a final rule modifying their existing risk-based capital standards to provide
for consideration of interest rate risk when assessing capital adequacy of a
bank.  Under the final rule, the FDIC must explicitly include a bank's exposure
to declines in the economic value of its capital due to changes in interest
rates as a factor in evaluating a bank's capital adequacy.  In addition, in





                                       27
<PAGE>   29
August 1995, the FDIC and the other federal banking agencies published a joint
policy statement for public comment that describes the process the banking
agencies will use to measure and assess the exposure of a bank's net economic
value to changes in interest rates.  Under the policy statement, the FDIC will
consider results of supervisory and internal interest rate risk models as one
factor in evaluating capital adequacy.  In June 1996, the FDIC and other
federal banking agencies adopted a joint policy statement on interest rate risk
policy.  Because market conditions, bank structure, and bank activities vary,
the agencies concluded that each bank needs to develop its own interest rate
risk management program tailored to its needs and circumstances.  The policy
statement describes prudent principles and practices that are fundamental to
sound interest rate risk management, including appropriate board and senior
management oversight and a comprehensive risk management process that
effectively identifies, measure, monitors and controls risks.

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

         ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS.  The
activities and equity investments of FDIC-insured, state-chartered banks are
generally limited to those that are permissible for national banks.  Under
regulations dealing with equity investments, an insured state bank generally
may not directly or indirectly acquire or retain any equity investment of a
type, or in an amount, that is not permissible for a national bank.  An insured
state bank is not prohibited from, among other things, (i) acquiring or
retaining a majority interest in a subsidiary, (ii) investing as a limited
partner in a partnership the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation or new construction of a
qualified housing project, provided that such limited partnership investments
may not exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the
voting stock of a company that solely provides or reinsures directors',
trustees' and officers' liability insurance coverage or bankers' blanket bond
group insurance coverage for insured depository institutions, and (iv)
acquiring or retaining the voting shares of a depository institution if certain
requirements are met.  In addition, an insured state-chartered bank may not,
directly, or indirectly through a subsidiary, engage as "principal" in any
activity that is not permissible for a national bank unless the FDIC has
determined that such activities would pose no risk to the insurance fund of
which it is a member and the bank is in compliance with applicable regulatory
capital requirements.  Any insured state-chartered bank directly or indirectly
engaged in any activity that is not permitted for a national bank must cease
the impermissible activity.

         PENNSYLVANIA SAVINGS BANK LAW.  The Banking Code contains detailed
provisions governing the organization, location of offices, rights and
responsibilities of directors, officers, employees and members, as well as
corporate powers, savings and investment operations and other aspects of the
Savings Bank and its affairs.  The Banking Code delegates extensive rulemaking
power and administrative discretion to the Department so





                                       28
<PAGE>   30
that the supervision and regulation of state-chartered savings banks may be
flexible and readily  responsive to changes in economic conditions and in
savings and lending practices.

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

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

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

                           FEDERAL AND STATE TAXATION

         GENERAL.  The Company and the Savings Bank are subject to the
corporate tax provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), as well as certain additional provisions of the Code which apply to
thrift and other types of financial institutions.  The following discussion of
tax matters is intended only as a summary and does not purport to be a
comprehensive description of the tax rules applicable to the Savings Bank.

         FISCAL YEAR.  The Company and its subsidiaries file a consolidated
federal income tax return on a June 30 year end basis.

         METHOD OF ACCOUNTING.  The Savings Bank maintains its books and
records for federal income tax purposes using the accrual method of accounting.
The accrual method of accounting generally requires that items of income be
recognized when all events have occurred that establish the right to receive
the income and the amount of income can be





                                       29
<PAGE>   31
determined with reasonable accuracy, and that items of expense be deducted at
the later of (i) the time when all events have occurred that establish the
liability to pay the expense and the amount of such liability can be determined
with reasonable accuracy or (ii) the time when economic performance with
respect to the item of expense has occurred.

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

         Under the experience method, the deductible annual addition to the
institution's bad debt reserves is the amount necessary to increase the balance
of the reserve at the close of the taxable year to the greater of (a) the
amount which bears the same ratio to loans outstanding at the close of the
taxable year as the total net bad debts sustained during the current and five
preceding taxable years bear to the sum of the loans outstanding at the close
of the six years, or (b) the lower of (i) the balance of the reserve account at
the close of the Savings Bank's "base year," which was its tax year ended June
30, 1988, or (ii) if the amount of loans outstanding at the close of the
taxable year is less than the amount of loans outstanding at the close of the
base year, the amount which bears the same ratio to loans outstanding at the
close of the taxable year as the balance of the reserve at the close of the
base year bears to the amount of loans outstanding at the close of the base
year.

         Under the percentage of taxable income method, the bad debt deduction
equals 8% of taxable income determined without regard to that deduction and
with certain adjustments.  The availability of the percentage of taxable income
method permits a qualifying savings institution to be taxed at a lower
effective federal income tax rate than that applicable to corporations in
general.  This resulted generally in an effective federal income tax rate
payable by a qualifying savings institution fully able to use the maximum
deduction permitted under the percentage of taxable income method, in the
absence of other factors affecting taxable income, of 31.3% exclusive of any
minimum tax or environmental tax (as compared to 34% for corporations
generally).  For tax years beginning on or after January 1, 1993, the maximum
corporate tax rate was increased to 35%, which increased the maximum effective
federal income tax rate payable by a qualifying savings institution fully able
to use





                                       30
<PAGE>   32
the maximum deduction to 32.2%.  

         Under the percentage of taxable income method, the bad debt deduction
for an addition to the reserve for qualifying real property loans cannot exceed
the amount necessary to increase the balance in this reserve to an amount equal
to 6% of such loans outstanding at the end of the taxable year.  The bad debt
deduction is also limited to the amount which, when added to the addition to
the reserve for losses on non-qualifying loans, equals the amount by which 12%
of deposits at the close of the year exceeds the sum of surplus, undivided
profits and reserves at the beginning of the year.  In addition, the deduction
for qualifying real property loans is reduced by an amount equal to all or part
of the deduction for non-qualifying loans.

         At June 30, 1996 (the most recent date for which a tax return has been
filed), the federal income tax bad debt reserves of the Savings Bank included
$979,000 for which no federal income tax has been provided.  Because of these
federal income tax bad debt reserves and the liquidation account to be
established for the benefit of certain depositors of the Savings Bank in
connection with the conversion of the Savings Bank to stock form, the retained
earnings of the Saving Bank are substantially restricted.

         On August 20, 1996, President Clinton signed into law the "Small
Business Job Protection Act" which included legislation, effective for tax
years beginning after December 31, 1995, whereby a small thrift institution
(one with an adjusted basis of assets of less than $500 million), such as the
Savings Bank, would no longer be permitted to make additions to its tax bad
debt reserve under the percentage of taxable income method.  Such institutions
will be permitted to use the experience method in lieu of deducting bad debts
only as they occur.  The legislation will require the Savings Bank to realize
increased current tax lability over a period of at least six years, beginning
in the fiscal year ending June 30, 1997.  Specifically, the legislation
requires a small thrift institution to recapture (i.e., take into income) over
a multi-year period the balance of its bad debt reserves in excess of the
lesser of (i) the balance of such reserves as of the end of its last taxable
year beginning before 1988 or (ii) an amount that would have been the balance
of such reserves had the institution always computed its additions to its
reserves using the experience method.  However, such recapture requirements may
be suspended for each of two successive taxable years beginning on or after
January 1, 1996, in which the Savings Bank originates a minimum amount of
certain residential loans based upon the average of the principal amounts of
such loans made by the Savings Bank during its six taxable years preceding
1996.  It is anticipated that any recapture of the Savings Bank's bad debt
reserves accumulated the first tax year ending after 1987 would not have a
material adverse effect on the Savings Bank's financial condition and results
of operations.





                                       31
<PAGE>   33
         MINIMUM TAX.  The Code imposes an alternative minimum tax at a rate of
20%.  The alternative minimum tax generally applies to a base of regular
taxable income plus certain tax preferences ("alternative minimum taxable
income" or "AMTI") and is payable to the extent such AMTI is in excess of an
exemption amount.  The Code provides that an item of tax preference is the
excess of the bad debt deduction allowable for a taxable year pursuant to the
percentage of taxable income method over the amount allowable under the
experience method.  Other items of tax preference that constitute AMTI include
(a) tax-exempt interest on newly issued (generally, issued on or after August
8, 1986) private activity bonds other than certain qualified bonds and (b) 75%
of the excess (if any) of (i) adjusted current earnings as defined in the Code,
over (ii) AMTI (determined without regard to this preference and prior to
reduction by net operating losses).

         NET OPERATING LOSS CARRYOVERS.  A financial institution may carry back
net operating losses ("NOLs") to the preceding three taxable years and forward
to the succeeding 15 taxable years.  This provision applies to losses incurred
in taxable years beginning after 1986.  At June 30, 1997, the Savings Bank had
no NOL carryforwards for federal income tax purposes.

         AUDIT BY IRS.  The Savings Bank's federal income tax returns for
taxable years through June 30, 1993 have been closed for the purpose of
examination by the Internal Revenue System.

         STATE TAXATION.  The Savings Bank is subject to tax under the
Pennsylvania Mutual Thrift Institutions Tax Act, which imposes a tax at the
rate of 11.5% on the Savings Bank's net earnings, determined in accordance with
generally accepted accounting principles, as shown on its books.  For fiscal
years beginning in 1983, and thereafter, NOLs may be carried forward and
allowed as a deduction for three succeeding years.  This Act exempts the
Savings Bank from all other corporate taxes imposed by Pennsylvania for state
tax purposes, and from all local taxes imposed by political subdivisions
thereof, except taxes on real estate and real estate transfers.  At June 30,
1997, the Savings Bank had no net operating losses.

ITEM 2. PROPERTIES

         At June 30, 1997, the Company conducted its business from its main
office in Pittsburgh, Pennsylvania and two branch offices in Kittanning,
Pennsylvania.  The following tables set forth the net book value (including
leasehold improvement, furnishings and equipment) and certain other information
with respect to the offices and other properties of the Company at June 30,
1997.





                                       32
<PAGE>   34
<TABLE>
<CAPTION>
                                                                          Net Book Value of       Amount of
       Description/Address                     Leased/Owned                    Property            Deposits
 --------------------------------------        ------------               -----------------       ---------
                                                                                      (In Thousands)

 <S>                                             <C>                            <C>                <C>
 Main Office                                       Owned                        $  294             $16,973
 683 Lincoln Avenue
 Pittsburgh, Pennsylvania 15202

 Branch Offices:
 125 Market Street                                 Owned                        $  710             $11,808
 Kittanning, Pennsylvania 16201

 4 Hilltop Plaza                                 Leased(1)                      $   85             $ 7,038
 Kittanning, Pennsylvania 16201                                                 ------             -------

         Total                                                                  $1,089             $35,819
                                                                                ======             =======
</TABLE>
-------------------------

(1)      This property is subject to a lease which expires on July 2002.

ITEM 3. LEGAL PROCEEDINGS

         The Company is not involved in any pending legal proceedings other
than nonmaterial legal proceedings occurring in the ordinary course of
business.

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

         NOT APPLICABLE



                                    PART II


ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The information required herein is incorporated by reference from page
52 of the Company's 1997 Annual Report to Stockholders filed as Exhibit 13
hereto ("1997 Annual Report").

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION

         The information required herein is incorporated by reference from
pages 4 to 17 of the 1997 Annual Report.





                                       33
<PAGE>   35
ITEM 7. FINANCIAL STATEMENTS

         The information required herein is incorporated by reference from
pages 18 to 49 of the 1997 Annual Report.

ITEM 8. CHANGES IN AND DISAGREEMENTS ON WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

         NOT APPLICABLE

                                    PART III


ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information required herein is incorporated by reference from
pages 2 to 5 of the Registrant's Proxy Statement dated October 2, 1997 ("Proxy
Statement").

ITEM 10. EXECUTIVE COMPENSATION

         The information required herein is incorporated by reference from
pages 10 to 12 of the Proxy Statement.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required herein is incorporated by reference from
pages 8 and 9 of the Proxy Statement.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required herein is incorporated by reference from page
13 of the Proxy Statement.

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

         (a)  The following documents are filed as part of this report and are
incorporated herein by reference from the Registrant's 1997 Annual Report:

               Independent Auditors' Report.
               
               Consolidated Statements of Financial Condition as of June 30,
               1997 and 1996.
               
               Consolidated Statements of Income for the Years Ended June 30, 
               1997, 1996 and 1995.





                                       34
<PAGE>   36
               Consolidated Statements of Changes in Shareholders' Equity for
               the Years Ended June 30, 1997, 1996 and 1995.
               
               Consolidated Statements of Cash Flows for the Years Ended June
               30, 1997, 1996 and 1995.
               
               Notes to Consolidated Financial Statements.

         The following exhibits are filed as part of the Form 10-K, and this
         list includes the Exhibit Index:

<TABLE>
<CAPTION>
No.            Exhibits
---            --------
<S>            <C>
3.1            Articles of Incorporation of Pennwood Bancorp, Inc.*
3.2            Bylaws of Pennwood Bancorp, Inc.*
4              Stock Certificate of Pennwood Bancorp, Inc.*
13             Annual Report to Stockholders for the Year Ended June 30, 1997
21             List of Subsidiaries 
               (See "Business - Subsidiaries" in this Form 10-K)
</TABLE>
-------------------------

         *Incorporated herein by reference from the Savings Bank's Registration
Statement on Form 8-B filed with the SEC on January 9, 1997.

         (b)  Reports filed on Form 8-K.

         During the fourth quarter of the fiscal year ended June 30, 1997, the
Company filed reports on Form 8-K on April 2, 1997, May 1, 1997 and July 30,
1997.  Each of the three Form 8-K's were filed in respect of Items 5 and 7.
None of the Form 8-K's contained financial statements.





                                       35
<PAGE>   37
                                   SIGNATURES


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



                                       PENNWOOD BANCORP, INC.


                                       By:   /s/ PAUL S. PIEFFER
                                             ----------------------------------
                                             Paul S. Pieffer
                                             President, Chief Executive Officer
                                               and Director


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




  /s/ PAUL S. PIEFFER                                      September 29, 1997
  -----------------------------------
  Paul S. Pieffer
  President, Chief Executive
  Officer and Director


  /s/ CHARLES R. FRANK                                     September 29, 1997
  -----------------------------------
  Charles R. Frank
  Chairman of the Board and
  Director


  /s/ MARY M. FRANK                                        September 29, 1997
  -----------------------------------
  Mary M. Frank
  Vice Chairman of the Board,
  Director and Treasurer





                                       36
<PAGE>   38


  /s/ JOHN B. MALLON                                       September 29, 1997
  -----------------------------------
  John B. Mallon
  Director


  /s/ JOSEPH TOUHILL                                       September 29, 1997
  -----------------------------------
  Joseph Touhill
  Director


  /s/ ROBERT W. HANNAN                                     September 29, 1997
  -----------------------------------
  Robert W. Hannan
  Director


  /s/ MICHAEL KOTYK                                        September 29, 1997
  -----------------------------------
  Michael Kotyk
  Director


  /s/ H.J. ZOFFER                                          September 29, 1997
  ----------------------------------- 
  H.J. Zoffer
  Director


  /s/ JAMES W. KIHM                                        September 29, 1997
  -----------------------------------
  James W. Kihm
  Vice President and Secretary
  (also principal accounting officer)





                                       37