<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, 1999

                                       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)

<TABLE>
<S>                                                                       <C>
          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)
</TABLE>

         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.
                 ---

Issuer's revenues for its most recent fiscal year: $4.1 million.

As of September 21, 1999, the aggregate value of the 367,432 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
189,707 shares held by all directors and executive officers of the Registrant
and the Registrant's Employee Stock Ownership Plan ("ESOP") as a group, was
approximately $3.3 million. This figure is based on the closing sales price of
$8.875 per share of the Registrant's Common Stock on September 21, 1999.
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 21, 1999: 557,139
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, 1999, the
Company had consolidated total assets of $51.7 million, total consolidated
deposits of $35.5 million, and total consolidated stockholders' equity of $6.6
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.

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




<PAGE>   3



LENDING ACTIVITIES

            GENERAL. At June 30, 1999, the Company's net loan portfolio amounted
to $42.7 million, or 82.6% 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, 1999, $29.8 million or 64.8% of the
Company's total loan portfolio consisted of single-family residential loans and
$9.5 million or 20.7% of the Company's total loan portfolio consisted of
consumer loans. To a lesser extent, the Company also originates multi-family
residential, commercial real estate and residential construction loans. At June
30, 1999, such loan categories amounted to $501,000, $903,000 and $5.3 million,
respectively, or 1.1%, 2.0% and 11.4% 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.

            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,
                                           ------------------------------------------------------------------------------
                                                           1999                                    1998
                                           --------------------------------       --------------------------------

                                                Amount             Percent              Amount             Percent
                                           --------------     --------------      --------------      ---------------
                                                                                         (Dollars in Thousands)

<S>                                           <C>                   <C>               <C>                   <C>
Single-family residential................     $29,851                64.8%            $22,006                60.7%
Multi-family residential.................         501                 1.1                 453                 1.2
Commercial real estate...................         903                 2.0               1,107                 3.1
Construction.............................       5,300                11.4               3,631                10.0
                                             --------              ------             -------              ------
    Total real estate loans..............      36,555                79.3              27,197                75.0
Consumer loans:
  Home improvement/equity................       8,741                19.0               8,217                22.7
  Other(1)...............................         761                 1.7                 840                 2.3
                                             --------             -------            --------             -------
    Total consumer loans.................       9,502                20.7               9,057                25.0
Commercial business loans................          --                  --                  --                  --
                                             --------            --------         -----------           ---------
      Total loans........................      46,057               100.0%             36,254               100.0%
                                              =======               =====              ======               =====
Less:
  Loans in process.......................       2,770                                   1,852
  Deferred loan origination
    fees.................................         233                                     310
  Unearned discounts.....................          30                                      73
  Allowance for loan losses..............         309                                     394
                                             --------                                --------
    Net loans............................     $42,715                                 $33,625
                                               ======                                  ======
</TABLE>

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

                                                Amount            Percent
                                           -------------     ------------------


<S>                                          <C>                   <C>
Single-family residential................    $14,857                50.2%
Multi-family residential.................        478                 1.6
Commercial real estate...................      1,524                 5.1
Construction.............................      3,748                12.7
                                             -------              ------
    Total real estate loans..............     20,607                69.6
Consumer loans:
  Home improvement/equity................      8,110                27.4
  Other(1)...............................        906                 3.0
                                            --------             -------
    Total consumer loans.................      9,016                30.4
Commercial business loans................         --                  --
                                            --------           ---------
      Total loans........................     29,623              100.0%
                                              ------              =====
Less:
  Loans in process.......................      1,924
  Deferred loan origination
    fees.................................        265
  Unearned discounts.....................        172
  Allowance for loan losses..............        282
                                            --------
    Net loans............................    $26,980
                                              ======
</TABLE>
-----------------
(1) Consists primarily of unsecured personal loans and lines of credit and
automobile loans.


                                        2

<PAGE>   4



            CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following
table sets forth certain information at June 30, 1999 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
                                                  Due One              Five Years               More
                                                  Year or                After              Years After
                                                   Less                 6/30/99               6/30/99                 Total
                                           -----------------      -----------------     -----------------     -----------------
                                                                         (In Thousands)
<S>                                              <C>                   <C>                  <C>                    <C>
Single-family residential................          $4,070                $3,428               $22,353                $29,851
Multi-family residential.................              --                    79                   422                    501
Commercial real estate...................              --                   246                   657                    903
Construction.............................               4                    32                 5,264                  5,300
Consumer.................................           1,063                 2,183                 6,256                  9,502
                                                    -----                 -----                ------                 ------
     Total...............................          $5,137                $5,968               $34,952                $46,057
                                                    =====                 =====                ======                 ======
</TABLE>


            The following table sets forth the dollar amount of all loans,
before net items, due after June 30, 2000 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.......................            $20,674                           $5,107               $25,781
Multi-family residential........................                 --                              501                   501
Commercial real estate..........................                 --                              903                   903
Construction....................................              5,296                               --                 5,296
Consumer........................................              8,439                               --                 8,439
                                                             ------                            -----                ------
            Total...............................            $34,409                           $6,511               $40,920
                                                             ======                            =====                ======
</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, 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.

                                        3

<PAGE>   5



            Loan applications originated by the Company are generally processed
at the Company's main office in Pittsburgh. For consumer loans, the Loan
Supervisor can approve such loan amounts up to $8,000, with the Company's
President approving any higher amount. For residential mortgage loans, the loan
request is presented by the underwriter to the Company's Vice President of
Lending and the President. Together, their approval authority is up to $227,150.
For mortgage requests exceeding $227,150, up to an in-house aggregate loan limit
of $300,000 to one borrower, approval requires the majority vote of the Board of
Directors. On an "Exception to Policy" basis, as indicated to the Board of
Directors, loan approval can up to an ultimate maximum of $400,000 in the
aggregate to one borrower. All commercial loans, regardless of amount, must be
approved by the Board of Directors.

            Property appraisals on real estate and improvements securing the
Company's residential and commercial loans are made by independent appraisal
companies, as approved by the Board of Directors. Appraisals are performed by
licensed appraisers in accordance with federal regulations and industry accepted
standards. The Company requires title insurance policies on all first mortgage
loans. Borrowers must obtain a hazard insurance policy prior to the closing. If
the secured property is situated in a designated flood zone, the Borrowers must
obtain a flood insurance policy prior to the closing. In addition to the loan
principal and interest, the Company requires an escrow account to be established
for all residential and commercial mortgage loans. Disbursements from the
Borrower's escrow account are made for such items as real estate taxes, and if
applicable, private mortgage insurance and flood 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 1998, the Company purchased two single-family loans totaling
$144,000 from FHLMC that the Company had been servicing. 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. At June 30,
1999, loans purchased and serviced by others totalled $578,000, of which none
were classified as non-performing.


                                        4

<PAGE>   6



The following table shows total loans originated, purchased, sold and repaid
during the periods indicated.


<TABLE>
<CAPTION>
                                                                                Year Ended June 30,
                                                    -------------------------------------------------------------------------
                                                              1999                      1998                      1997
                                                    ---------------------     -------------------       ---------------------
                                                                                   (In Thousands)
Loan originations:
<S>                                                          <C>                       <C>                        <C>
  Single-family residential.......................           $  8,162                  $  5,742                   $ 6,014
  Multi-family residential........................                333                        --                        --
  Commercial real estate..........................                 --                        --                       180
  Construction....................................              6,019                     4,920                     3,966
  Consumer........................................              4,419                     3,461                     4,197
  Commercial business.............................                 --                        --                        --
                                                              -------                     -----                    ------
    Total loans originated........................             18,933                    14,123                    14,357
Purchases(1)......................................                 --                       144                        96
                                                              -------                     -----                    ------
    Total loans originated
      and purchased...............................             18,933                    14,267                    14,453
Sales and loan principal
  reductions:
  Loans sold......................................                 --                        --                        --
  Loan principal reductions.......................              9,130                     7,609                     9,014
                                                              -------                     -----                    ------
    Total loans sold and
       principal reductions.......................              9,130                     7,609                     9,014
Increase (decrease) due to
  other items, net(2).............................               (713)                      (13)                      373
                                                              -------                     -----                    ------

Net increase (decrease) in
  loan portfolio..................................           $  9,090                  $  6,645                   $ 5,812
                                                              =======                     =====                    ======
</TABLE>

--------------------------
(1)         In fiscal 1998, consists of two FHLMC loans that the Company had
            been servicing.

(2)         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, 1999, 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, 1999, the Company's five largest
loans or groups of loans-to-one borrower, including persons or entities related
to the borrower, amounted to $1.7 million in the aggregate, ranged from an
aggregate of $268,000 to $453,000 and were secured primarily by single-family
residential and commercial real estate. At June 30, 1999, $218,000 of the loans
which comprise the Company's largest loans-to-one borrower were classified as
non-performing.

            The Company's largest loans-to-one borrower consists of five loans
which are secured by multi-family residential rental properties. The five loans
had an aggregate principal balance of

                                        5

<PAGE>   7



$453,000 as of June 30, 1999, and three of the loans were over 90 days
delinquent (with an aggregate principal balance of $218,000), and two of the
loans were 30 days delinquent (with a principal balance of $235,000), as of such
date. Four of the five 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, 1999, $29.9 million or 64.8% 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 adjustable rate
single-family residential loans originated by the Company can, upon payment of a
fee, be converted into fixed-rate loans during certain periods. Approximately
19.1% of the permanent single-family residential loans in the Company's loan
portfolio at June 30, 1999 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.

            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.


                                        6

<PAGE>   8



            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, 1999, approximately $26.6 million or 88.9% 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 secured
property. Pursuant to underwriting guidelines adopted by the Board of Directors,
the Company will 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 currently does not 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, 1999, $1.4 million or 3.0% 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, 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 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

                                        7

<PAGE>   9



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.

            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, 1999, construction loans amounted to
$5.3 million or 11.4% of the Company's total loan portfolio.

            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.

                                        8

<PAGE>   10



            The Company also provides construction and permanent financing to
Owner-Builder borrowers, who act in the capacity of general contractor. These
borrowers sub-contract portions of the overall construction project, and realize
a price reduction for performing the balance of the work themselves.
Owner-Builder loans present a higher degree of risk due to the inexperience of
the borrowers in estimating construction costs and in scheduling work to ensure
project completion within the contractual time period.

            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, 1999, consumer loans
amounted to $9.5 million or 20.7% 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
field. 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 plus
a margin. 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. A combination
home improvement project, plus bill consolidation loan, can result in a home
equity loan over $100,000. Such loans can have terms up to 240 months and
usually require a first lien position if over $50,000. Under this amount, the
loan may be a second mortgage if the overall loan-to-value ratio meets the
bank's underwriting standards. Any loan over $100,000 shall be reported in the
Loan Committee minutes. At June 30, 1999, home equity lines of credit and home
improvement loans totaled $8.7 million or 19.0% 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, unsecured fixed rate loans up to $5,000 for borrowers
with excellent credit support 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, 1999, $761,000 or 1.7% 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

                                        9

<PAGE>   11



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 contractual 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. At June 30, 1999, $396,000 of the
Company's consumer loans were non-performing, which constituted 100.0% of total
non-performing loans and 4.2% of total consumer loans at such date.

            COMMERCIAL BUSINESS LOANS. In years prior to the fiscal year ended
1997, 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 in
"Multi-Family Residential and Commercial Real Estate Loans." 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.

            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 $205,000, $140,000 and $43,000 of
deferred loan fees during the years ended June 30, 1999, 1998 and 1997,
respectively, in connection with loan refinancing, payoffs and ongoing
amortization of outstanding loans.


                                       10

<PAGE>   12



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.
During fiscal 1999, the Company hired a full time collector to improve loan
recovery efforts.

            The following table sets forth information concerning delinquent
loans at June 30, 1999, 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, 1999
                           -------------------------------------------------------------------------------------------------------
                                         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..    $193                    0.45%        $ --                      --%         $ --                  --%
Multi-family residential
  and commercial real
  estate...................     235                    0.55          100                    0.23            --                  --
Consumer...................      71                    0.17           41                    0.10           396                0.93
                               ----                    ----         ----                    ----           ---                ----
  Total delinquent loans...    $499                    1.17%        $141                    0.33%         $396                0.93%
                                ===                    ====          ===                    ====           ===                ====
</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

                                       11

<PAGE>   13



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.

            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,
                                                       -------------------------------------------------------------------------
                                                                 1999                      1998                      1997
                                                       ---------------------     ---------------------     ---------------------
                                                                                  (Dollars in Thousands)
Non-accruing loans:
<S>                                                         <C>                           <C>                      <C>
  Single-family residential..........................         $  --                      $ 51                      $ 96
  Multi-family residential and
    commercial real estate...........................            --                        --                        60
  Construction.......................................            --                        --                        --
  Consumer...........................................           228                       272                       117
  Commercial business................................            --                        --                        --
                                                               ----                      ----                      ----
    Total non-accruing loans.........................           228                       323                       273
Accruing loans greater than
  90 days delinquent:
  Single-family residential..........................            --                        --                        --
  Multi-family residential and
    commercial real estate...........................            --                        --                        --
  Consumer...........................................           168                       331                       181
                                                               ----                       ---                      ----
    Total accruing loans greater than
     90 days delinquent..............................           168                       331                       181
                                                               ----                       ---                      ----
    Total non-performing loans.......................           396                       654                       454
Real estate owned....................................            86                        11                        37
                                                               ----                      ----                      ----
  Total non-performing assets........................         $ 482                      $665                      $491
                                                               ====                       ---                       ===
  Total non-performing loans
    as a percentage of total loans...................          0.93%                     1.94%                     1.68%
                                                               ====                      ====                      ====
  Total non-performing assets
    as a percentage of total assets..................          0.93%                     1.44%                     0.98%
                                                               ====                      ====                      ====
</TABLE>


            For the years ended June 30, 1999, 1998 and 1997, approximately
$24,000, $42,000 and $26,000, 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, 1999, 1998 and 1997, $1,000, $12,000 and $10,000,
respectively, were included in interest income for these same loans.


                                       12

<PAGE>   14



            The $396,000 of non-performing loans at June 30, 1999 included $0 of
single-family residential loans, $396,000 of consumer loans (consisting of 24
loans, all of which are secured by single-family residential real estate), and
no commercial business loan. The $86,000 of real estate owned at June 30, 1999
consisted of five single family residential properties.

            The decrease in non-performing assets during the year ended June 30,
1999 was primarily due to a $207,000 decrease in non-performing consumer loans
and a $51,000 decrease in non-performing single-family residential loans which
was offset by a $75,000 increase in real estate owned. The decrease in
non-performing consumer loans and single-family residential loans reflected the
Company's ongoing collection efforts as well as an improvement in credit
quality. The increase in real estate owned also reflected collection efforts to
address credit deterioration.

            ALLOWANCE FOR LOAN LOSSES. It is management's policy to maintain an
allowance for estimated losses based on the risk of loss in the loan portfolio.
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 1999 Annual Report to Stockholders, filed as Exhibit
13 hereto (the "1999 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.


                                       13

<PAGE>   15



            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,
                                              -----------------------------------------
                                                1999              1998            1997
                                              --------         --------        --------
                                                       (Dollars in Thousands)
<S>                                           <C>              <C>             <C>
Total loans outstanding (net)..............   $ 42,715         $ 33,625        $ 26,980
                                              ========         ========        ========
Average loans outstanding, net.............     40,454         $ 30,152        $ 22,377
                                              ========         ========        ========
Balance at beginning of period.............   $    394         $    282        $    337
Charge-offs:
  Single-family residential................         --                6              --
  Multi-family residential and
    commercial real estate.................         --               60              --
  Consumer.................................        181              146              95
                                              --------         --------        --------
    Total charge-offs......................        181              212              95
Recoveries:
  Consumer.................................         26               12              11
                                              --------         --------        --------
    Total recoveries.......................         26               12              11
                                              --------         --------        --------
Net charge-offs............................       (155)            (200)            (84)
Provision for loan losses..................         70              312              29
                                              --------         --------        --------
Balance at end of period...................        309         $    394        $    282
                                              ========         ========        ========
Allowance for loan losses as a
  percent of total loans  outstanding......       0.72%            1.17%           1.05%
                                              ========         ========        ========
Allowance for loan losses as a
  percent of total non-performing loans....      78.03%           60.24%          62.11%
                                              ========         ========        ========
Ratio of net charge-offs to
  average loans outstanding................       0.38%            0.66%           0.38%
                                              ========         ========        ========
</TABLE>

            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,
                                    -------------------------------------------------------------------------------

                                            1999                    1998                             1997
                                    -----------------------  ----------------------      --------------------------
                                                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) .....................       $ 99          76.2%     $ 78          70.7%          $ 76          62.9%
Multi-family residential and
  commercial real estate loans         59           3.1        66           4.3            130           6.7
Consumer loans ...............        151          20.7       250          25.0             76          30.4
                                     ----         -----      ----         -----           ----         -----
     Total ...................       $309         100.0%     $394         100.0%          $282         100.0%
                                     ====         =====      ====         =====           ====         =====
</TABLE>
----------------

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


                                       14

<PAGE>   16



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 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, 1999, $3.5 million of the Company's $3.7 million of
investment securities were classified as available for sale and the remaining
$207,000 were classified as held to maturity.

            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,
                                          ------------------------------------------------------------------------------
                                                   1999                       1998                        1997
                                          ----------------------     -----------------------      ----------------------
                                          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 ....................       $    --       $    --       $    --      $     --       $    --       $    --
  Corporate obligations ............            --            --            --            --           497           500
  Municipal obligations ............           200           203           200           205           200           205
  Mortgage-backed securities .......             7             7            10            10            15            15
  Other ............................            --            --            --            --            --            --
                                           -------       -------       -------       -------       -------       -------
    Total investment securities held
      to maturity ..................       $   207       $   210       $   210       $   215       $   712       $   720
                                           =======       =======       =======       =======       =======       =======
Investment securities available for
  sale:
  U.S. Government and agency
    obligations ....................       $ 1,997       $ 1,974       $ 5,696       $ 5,735       $15,741       $15,729
  Corporate obligations ............            --            --            --            --           400           401
  Mortgage-backed securities .......         1,131         1,144         1,644         1,693         1,836         1,835
  Other(1) .........................           385           397           313           324           250           259
                                           -------       -------       -------       -------       -------       -------
    Total investment securities
      available for sale ...........       $ 3,513       $ 3,515       $ 7,653       $ 7,752       $18,227       $18,224
                                           =======       =======       =======       =======       =======       =======
</TABLE>
------------------
(1)         Consists of FNMA Preferred and Common Stock.


                                       15

<PAGE>   17



            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, 1999.


<TABLE>
<CAPTION>
                                                                           Contractually Maturing
                                   ------------------------------------------------------------------------------------------------

                                                        Weighted                           Weighted                      Weighted
                                                        Average                            Average         Over 5         Average
                                    Under 1 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..........             --            --             --                  --               --              --
  Municipal obligations..........             --            --             --                  --              200            5.75
  Mortgage-backed securities.....             --            --             --                  --                7            7.50
                                       ---------                    ---------                             --------
  Total investment securities
    held to maturity.............     $       --            --%     $      --                  --%          $  207            5.83%
                                       =========    ==========      =========          ==========           ======            ====
Available for sale(1):
  U.S. Government and
    agency obligations...........     $       --            --%     $      --                  --%          $1,974            7.56%
  Corporate obligations..........             --            --             --                  --               --              --
  Other..........................             --            --             --                  --              397            6.45
  Mortgage-backed securities.....             --            --             --                  --            1,144            7.24
                                       ---------                    ---------                                -----
    Total investment securities
      available for sale.........     $       --            --%     $      --                  --%          $3,515            7.33%
                                       =========    ==========      =========          ==========            =====            ====
</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, 3 and 9 of the
Notes to Consolidated Financial Statements in the 1999 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.

            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

                                       16

<PAGE>   18



variety of accounts, competitive interest rates, and convenient office locations
and service hours. 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, 1999.

       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,
                                       ------------------------------------------------------------------------------------
                                                   1999                        1998                         1997
                                       --------------------------    -------------------------    -------------------------
                                                       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 ....................       $ 8,423           23.71%    $ 8,669           24.24%    $ 9,168           25.60%
  NOW accounts ..................         3,568           10.04       3,322            9.29       3,221            8.99
  Money market accounts .........           359            1.01         528            1.48         724            2.02
                                        -------           -----     -------           -----     -------           -----
    Total transaction accounts ..        12,350           34.76      12,519           35.01      13,113           36.61
                                        -------           -----     -------           -----     -------           -----

Certificates of deposit:
  Within 1 year .................        12,659           35.63      11,983           33.52      12,075           33.71
  1-2 years .....................         4,137           11.64       4,462           12.48       4,171           11.64
  2-3 years .....................         3,164            8.91       2,722            7.61       2,360            6.59
  3-4 years .....................         2,114            5.95       2,089            5.84       1,955            5.46
  4-5 years .....................         1,105            3.11       1,979            5.54       2,145            5.99
  Over 5 years ..................            --              --          --              --          --              --
                                        -------           -----     -------           -----     -------           -----
    Total certificates of deposit        23,179           65.24      23,235           64.99      22,706           63.39
                                        -------           -----     -------           -----     -------           -----
    Total deposits ..............       $35,529          100.00%    $35,754          100.00%    $35,819          100.00%
                                        =======          ======     =======          ======     =======          ======
</TABLE>

            The following table sets forth the savings activities of the Company
during the periods indicated.



<TABLE>
<CAPTION>
                                           Year Ended June 30,
                                 ----------------------------------------
                                   1999           1998            1997
                                 --------       --------        ---------
                                              (In Thousands)
<S>                             <C>             <C>             <C>
Deposits ................       $ 47,074        $ 34,734        $ 30,947
Withdrawals .............         48,977          35,776          33,404
                                --------        --------        --------
  Net decrease before
    interest credited ...         (1,903)         (1,042)         (2,457)
Interest credited .......          1,678             977             943
                                --------        --------        --------
  Net increase (decrease)
    in deposits .........       $   (225)       $    (65)       $ (1,514)
                                ========        ========        ========
</TABLE>



                                       17

<PAGE>   19



            The following table shows the interest rate and maturity information
for the Company's certificates of deposit at June 30, 1999.


<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%            $    --        $    33             $    --           $      --             $    33
4.01 - 5.99%             10,209          2,968               1,116               1,650              15,943
6.00 - 8.00%              2,450          1,136               2,048               1,569               7,203
                        -------        -------             -------             -------             -------
  Total ....            $12,659        $ 4,137             $ 3,164             $ 3,219             $23,179
                        =======        =======             =======             =======             =======
</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,
1999.


<TABLE>
<CAPTION>
  Certificates of deposit maturing
        in quarter ending:                                Amount
  ------------------------------------              -------------------
                                                      (In Thousands)
<S>                                                        <C>
September 30, 1999 .................                       $  408
December 31, 1999 ..................                          318
March 31, 2000 .....................                          563
After March 31, 2000 ...............                          709
                                                           ------
  Total certificates of deposit with
   balances of $100,000 or more ....                       $1,998
                                                           ======
</TABLE>

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.



                                       18

<PAGE>   20



EMPLOYEES

            The Company had 14 full-time employees and 8 part-time employees as
of June 30, 1999. 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, 1999, the Company had two wholly-owned subsidiaries, the
Savings Bank and 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.

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

                                       19

<PAGE>   21



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.

            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

                                       20

<PAGE>   22



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 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, 1999, 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.

                                       21

<PAGE>   23



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 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.


                                       22

<PAGE>   24



            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 1998 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
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

                                       23

<PAGE>   25



exceed 100% of core capital. At June 30, 1999, 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 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.


                                       24

<PAGE>   26



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

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


                                       25

<PAGE>   27



            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 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.

            At June 30, 1998 (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
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.


                                       26

<PAGE>   28



            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 liability over a period of at least six years, beginning in the
fiscal year ending June 30, 1998. 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.

            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, 1999, 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

                                       27

<PAGE>   29



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, 1999, the Savings Bank had no net operating
losses.

ITEM 2. PROPERTIES

            At June 30, 1999. 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,
1999.


<TABLE>
<CAPTION>
                                                                               Net Book Value of                  Amount of
                    Description/Address                Leased/Owned                 Property                       Deposits
------------------------------------------------  -------------------     ----------------------------      ----------------------

                                                                                                 (In Thousands)
<S>                                                <C>                        <C>                             <C>
Main Office
683 Lincoln Avenue
Pittsburgh, Pennsylvania 15202..................          Owned                       $   596                    $14,608

Branch Offices:
125 Market Street
Kittanning, Pennsylvania 16201..................          Owned                       $   701                    $13,432

4 Hilltop Plaza
Kittanning, Pennsylvania 16201..................        Leased(1)                     $    43                    $ 7,489
                                                                                      -------                    -------

            Total...............................                                       $1,340                    $35,529
                                                                                       ======                    =======
</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 61 of the Company's 1999 Annual Report to Stockholders filed as Exhibit 13
hereto ("1999 Annual Report").

                                       28

<PAGE>   30



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 1999 Annual Report.

ITEM 7. FINANCIAL STATEMENTS

            The information required herein is incorporated by reference from
pages 19 to 58 of the 1999 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
the Registrant's Proxy Statement to be filed within 120 days after the end of
the fiscal year covered by this Form 10-KSB ("Proxy Statement").

ITEM 10. EXECUTIVE COMPENSATION

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

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

            The information required herein is incorporated by reference from
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 1999 Annual Report:

                        Independent Auditors' Report.


                                       29

<PAGE>   31



                        Consolidated Statements of Financial Condition as of
                        June 30, 1999 and 1998.

                        Consolidated Statements of Income for the Years Ended
                        June 30, 1999, 1998 and 1997.

                        Consolidated Statements of Changes in Shareholders'
                        Equity for the Years Ended June 30, 1999, 1998 and 1997.

                        Consolidated Statements of Cash Flows for the Years
                        Ended June 30, 1999, 1998 and 1997.

                        Notes to Consolidated Financial Statements.

            The following exhibits are filed as part of the Form 10-KSB, 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.*
10.1                      Pennwood Bancorp, Inc. 1997 Stock Option Plan.**
10.2                      Pennwood Bancorp, Inc. 1997 Recognition Plan and Trust Agreement.**
13                        Annual Report to Stockholders for
                          the Year Ended June 30, 1999
21                        List of Subsidiaries
                          (See "Item I. Business - Subsidiaries" in
                          this Form 10-KSB)
27                        Financial Data Schedule
</TABLE>

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

            * Incorporated herein by reference from the Company's Registration
Statement on Form 8-B filed with the SEC on January 9, 1998.

            ** Incorporated herein by reference to the Company's Proxy Statement
on Schedule 14A filed with the SEC on February 21, 1997.

            (b) Reports filed on Form 8-K.

            The Company did not file any Current Reports on Form 8-K during the
fourth quarter of the fiscal year ended June 30, 1999.



                                       30

<PAGE>   32



                                   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 28, 1999
-------------------------------------
Paul S. Pieffer
President, Chief Executive
  Officer and Director
(principal executive officer)

/s/ MARY M. FRANK
-------------------------------------
Mary M. Frank                                            September 28, 1999
Vice Chairman of the Board,
Director and Treasurer

/s/ JOHN B. MALLON
-------------------------------------
John B. Mallon
Director                                                 September 28, 1999

/s/ C. JOSEPH TOUHILL
-------------------------------------
C. Joseph Touhill                                        September 28, 1999
Chairman of the Board



<PAGE>   33





/s/ ROBERT W. HANNAN
-------------------------------------
Robert W. Hannan                                         September 28, 1999
Director

/s/ MICHAEL KOTYK                                        September 28, 1999
-------------------------------------
Michael Kotyk
Director

                                                         September 28, 1999
-------------------------------------
H.J. Zoffer
Director

/s/ JAMES W. KIHM                                        September 28, 1999
-------------------------------------
James W. Kihm
Vice President and Secretary
(principal financial and accounting officer)