<PAGE>   1
                                                                     EXHIBIT 13


                             PENNWOOD BANCORP, INC.



                               1999 ANNUAL REPORT

                                 TO STOCKHOLDERS


<PAGE>   2


                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                Page
                                                                                                                ----
<S>                                                                                                             <C>
Financial Highlights...............................................................................................1

President's Letter to Stockholders.................................................................................3

Management's Discussion and Analysis of Financial Condition
  and Results of Operations........................................................................................4

Consolidated Financial Statements:
                Independent Auditors' Report......................................................................19
                Consolidated Statements of Financial Condition....................................................20
                Consolidated Statements of Income.................................................................21
                Consolidated Statements of Shareholders' Equity...................................................22
                Consolidated Statements of Cash Flows.............................................................24
                Notes to Consolidated Financial Statements........................................................26

Directors and Executive Officers..................................................................................59

Banking Locations.................................................................................................60

Stockholder Information...........................................................................................61
</TABLE>

<PAGE>   3


                              FINANCIAL HIGHLIGHTS

     The following selected consolidated financial and other data of the Company
does not purport to be complete and is qualified in its entirety by reference to
the more detailed financial information, including the Consolidated Financial
Statements and Related Notes, appearing elsewhere herein.

<TABLE>
<CAPTION>

                                                                                     JUNE 30,
                                                         ---------------------------------------------------------------
                                                           1999          1998          1997          1996          1995
                                                         -------       -------       -------       -------       -------
<S>                                                      <C>           <C>           <C>           <C>           <C>
SELECTED BALANCE SHEET DATA:
Total assets ..........................................  $51,696       $46,080       $49,981       $46,900       $42,634
Cash and cash equivalents(1) ..........................    2,721         2,553         1,804        10,106        10,624
Investment securities(2):
  Available for sale ..................................    3,515         7,752        18,224        10,266         1,313
  Held to maturity ....................................      207           210           712         2,984         4,634
Loans receivable, net .................................   42,715        33,625        26,980        21,168        23,845
Deposits ..............................................   35,529        35,754        35,819        37,333        37,819
Borrowed funds ........................................    8,394         1,432         4,464            --            --
Deposit of stock subscription rights ..................       --            --            --         4,569            --
Shareholders' equity ..................................    6,607         7,961         8,726         4,076         3,862
Full service offices ..................................        3             3             3             3             3
</TABLE>




<TABLE>
<CAPTION>



                                                               YEAR ENDED JUNE 30,
                                           -------------------------------------------------------------
                                             1999        1998           1997         1996         1995
                                           --------    ---------     ----------   ----------    --------
<S>                                           <C>          <C>          <C>          <C>          <C>
SELECTED OPERATING DATA:
Total interest income .................       $3,930       $3,745       $3,711       $3,378       $3,146
Total interest expense ................        1,899        1,774        1,680        1,717        1,570
                                              ------       ------       ------       ------       ------
  Net interest income .................        2,031        1,971        2,031        1,661        1,576
Provision for loan losses .............           70          312           29          105          385
                                              ------       ------       ------       ------       ------
Net interest income after
  provision for loan losses ...........        1,961        1,659        2,002        1,556        1,191
Other income ..........................          176          204          107          104          190
Other expenses ........................        1,657        1,416        1,653        1,201        1,215
                                              ------       ------       ------       ------       ------
Income before income taxes ............          480          447          456          459          166
Provision for income taxes ............          207          168          129          162           51
                                              ------       ------       ------       ------       ------
Net income ............................       $  273       $  279       $  327       $  297       $  115
                                              ======       ======       ======       ======       ======
Basic Earnings Per Share ..............       $  .48       $  .42       $  .45          N/A          N/A
Diluted Earnings Per Share ............       $  .48       $  .41       $  .45          N/A          N/A
</TABLE>

Note:  The Savings Bank converted to stock form in July 1996.


<PAGE>   4




<TABLE>
<CAPTION>



                                                              AT OR FOR THE YEAR ENDED JUNE 30,
                                              ---------------------------------------------------------------------
                                                  1999          1998         1997           1996           1995
                                              ------------   -----------  -----------  ---------------  -----------
<S>                                          <C>             <C>          <C>          <C>             <C>
SELECTED OPERATING RATIOS(3):

PERFORMANCE RATIOS:
Return on average assets ...............           0.55%         0.59%         0.69%         0.70%         0.28%
Return on average equity ...............           3.73          3.26          3.54          7.34          2.99
Equity to assets at end of period ......          12.78         17.28         17.46          8.69          9.06
Interest rate spread(4) ................           3.77          3.68          3.79          3.88          3.84
Net interest margin(4) .................           4.30          4.42          4.56          4.17          4.06
Average interest-earning assets to
  average interest-bearing liabilities..         113.08        118.44        120.52        106.94        105.50
Net interest income after provision
  for loan losses to total other
  expenses .............................         118.35        117.16        121.11        129.55         98.02
Total other expenses to average
  total assets .........................           3.31          3.00          3.50          2.82          2.93

ASSET QUALITY RATIOS:
Non-performing loans to total
  loans at end of period(5) ............           0.93          1.94          1.68          2.39          5.31
Non-performing assets to
  total assets at end of period(5) .....           0.93          1.44          0.98          1.43          3.50
Allowance for loan losses to total
  loans at end of period ...............           0.72          1.17          1.05          1.59          2.23
Allowance for loan losses to total
 non-performing loans at end of
 period(5) .............................          78.03         60.24         62.11         66.60         41.98

CAPITAL RATIOS OF THE
  SAVINGS BANK:
Tier 1 risk-based capital ratio ........          19.83         30.89         34.59         16.76         15.78
Total risk-based capital ratio .........          20.77         32.15         35.72         18.31         17.03
Tier 1 leverage capital ratio ..........          12.69         17.89         19.19          9.32          9.32
</TABLE>

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

(1)  Consists of cash, interest-bearing deposits (including certificates of
     deposit), money market investments and federal funds sold.

(2)  Investment securities consist of U.S. Government and agency obligations,
     corporate obligations, municipal obligations and mortgage-backed
     securities.

(3)  With the exception of end of period ratios, all ratios are based on average
     monthly balances during the periods.

(4)  Interest rate spread represents the difference between the weighted average
     yield on interest-earning assets and the weighted average rate on
     interest-bearing liabilities. Net interest margin represents net interest
     income as a percentage of average interest-earning assets.

(5)  Non-performing loans consist of non-accrual loans, accruing loans that are
     contractually past due 90 days or more, and non-performing assets consist
     of non-performing loans and real estate acquired by foreclosure or
     deed-in-lieu thereof.





                                       2
<PAGE>   5






                                    PENNWOOD
                                  BANCORP, INC.
                               683 Lincoln Avenue
                         Bellevue, Pittsburgh, PA 15202
                         (412) 761-1234 - 1-800-242-2500
                               FAX (412) 761-7828

Dear Stockholders,

We are pleased to present Pennwood Bancorp, Inc.'s Annual Report to Stockholders
for the fiscal year ended June 30, 1999.

This past year demonstrated our continued efforts to improve the balance sheet.
The loan to deposit ratio increased to 120.22% from 94.04% in the prior year.
During this same period total non-performing loans decreased by $258,000 or
39.4%. Treasury stock was repurchased in the amount of $1.5 million. Prices paid
for the stock were below the book value of the Company and, therefore, we
believe represented an effective use of capital and a good long term investment.

We enjoyed another year of vigorous loan growth. The increase in net loan
receivables of $9.1 million or 27% was instrumental in minimizing the erosion of
our net interest margin in a difficult interest rate environment.

Our commitment to enhancing shareholder value has not changed. Efforts are
underway to explore strategic initiatives designed to improve earnings
performance in the months ahead.

The Board of Directors, management and employees thank you for continued
confidence in and support of our Company.

Sincerely,

Paul S. Peiffer
President and Chief Executive Officer


<PAGE>   6

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

     Pennwood Bancorp, Inc. (the "Company") is the holding company for the
Pennwood Savings Bank (the "Savings Bank"). The operating results of the Savings
Bank depend primarily upon its net interest income, which is determined by the
difference between interest income on interest-earning assets, which consist
principally of loans, investment securities and other investments, and interest
expense on interest-bearing liabilities, which consist principally of deposits
and borrowed money. The Savings Bank's net income also is affected by its
provision for loan losses, as well as the level of its other income, including
loan fees and service charges and miscellaneous items, and its other expenses,
including compensation and other employee benefits, premises and occupancy
costs, federal deposit insurance premiums, data processing expense, net loss on
real estate owned and other miscellaneous expenses, and income taxes.

     On July 12, 1996, the Savings Bank completed its conversion from the mutual
to the stock form (the "Conversion"). In the Conversion, the Savings Bank issued
610,128 shares of common stock, which resulted in net proceeds to the Savings
Bank of approximately $5.7 million. On January 27, 1997, the Savings Bank
completed its Reorganization into the holding company form of ownership (the
"Reorganization"), whereby each outstanding share of common stock of the Savings
Bank was converted into common stock of the Company and the Company acquired all
the capital stock of the Savings Bank.

CHANGES IN FINANCIAL CONDITION

     At June 30, 1999, the Company's total assets increased by $5.7 million or
12.2% from $46.0 million at June 30, 1998 to $51.7 million at June 30, 1999. The
increase in total assets was primarily due to an increase in net loans
receivable, which was partially offset by decreases in investment securities and
money market investments. Due to declining rates in the investment marketplace,
the Company restructured its investment portfolio during the year by shifting
funds from cash, interest bearing deposits (including certificates of deposit),
federal funds sold and investment securities to loans. As a result, during the
year, the Company's investment and mortgage-backed securities (classified as
available for sale) decreased by $4.2 million or 45.3% from $7.7 million at June
30, 1998, to $3.5 million at June 30, 1999, investment and mortgage backed
securities (classified as held to maturity) decreased by $3,000 or 1.4%, from
$210,000 at June 30, 1998 to $207,000 at June 30, 1999, and money market
investments decreased by $359,000 or 17.7% from $2.0 million at June 30, 1998 to
$1.7 million at June 30, 1999. Net loans receivable increased by $9.1 million or
27.0% from $33.6 million at June 30, 1998 to $42.7 million at June 30, 1999. The
increase in net loans receivable during the year was primarily due to $18.9
million of loan originations, which were partially offset by $9.0 million in
loan repayments. Real estate owned increased during the period by 681.8% from
$11,000 at June 30, 1998 to



                                       4
<PAGE>   7

$86,000 on June 30, 1999. Premises and equipment increased during the period by
28.3% from $1.0 million to $1.3 million due to expansion of the main office.

     Savings deposits decreased $225,000, or 0.63% from $35.7 million at June
30, 1998, to $35.5 million at June 30, 1999. The decrease in savings deposits
during the fiscal year 1999 was primarily due to a $169,000 or 32.0% decrease in
money market accounts and a $246,000 or 2.8% decrease in passbook accounts and a
$56,000 or 0.2% decrease in certificates of deposits which were partially offset
by a $246,000 or 7.4% increase in NOW accounts.

     Borrowings increased by $7.0 million or 500.0% from $1.4 million at June
30, 1998, to $8.4 million at June 30, 1999. This was due to the addition of $7.0
million in FHLB of Pittsburgh variable rate short term and fixed rate long term
advances. A loan to provide the funds for the purchase of shares for the
Company's Employee Stock Ownership Plan ("ESOP") accounts for $394,000 of the
borrowed funds. The ESOP loan is for a term of ten years and carries an interest
rate of prime (7.75% at June 30, 1999). The remaining $8.0 million in borrowed
money is in the form of advances with the FHLB of Pittsburgh. Of the $8.0
million, $4.0 million has a remaining maturity of one year or less, $3.0 million
has a remaining maturity of more than one year through three years and $1.0
million with a remaining maturity of more than three years. The proceeds from
these advances were used to purchase $2.0 million in investment securities and
fund $6.0 million in loans.

     Shareholders' equity decreased by $1.3 million or 17.0% from $7.9 million
at June 30, 1998, to $6.6 million at June 30, 1999. The decrease was primarily
due to the purchase of treasury stock of $1.5 million and the market value
adjustment of investments classified as available for sale of $65,000 which was
offset by net income of $273,000, less dividends paid of $184,000 and $119,000
in employee benefit shares earned.




                                       5
<PAGE>   8


     AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID. The
following table presents for the periods indicated the total dollar amount of
interest income from average interest-earning assets and the resultant yields,
as well as the total dollar amount of interest expense on average
interest-bearing liabilities and the resultant rates, and the net interest
margin. The table does not reflect any effect of income taxes. All average
balances are based on average monthly balances during the periods.

<TABLE>
<CAPTION>
                                                                              YEAR ENDED JUNE 30,
                                       --------------------------------------------------------------------------------------------
                                                      1999                           1998                            1997
                                       --------------------------------  ------------------------------    -------------------------
                                         AVERAGE                YIELD/   AVERAGE                YIELD/     AVERAGE            YIELD/
                                         BALANCE    INTEREST     RATE    BALANCE    INTEREST     RATE      BALANCE  INTEREST   RATE
                                       ----------   --------  ---------  --------   --------    -------    -------  ----------------
                                                                  (Dollars in Thousands)

<S>                                      <C>         <C>          <C>      <C>      <C>         <C>        <C>     <C>        <C>
INTEREST-EARNING ASSETS:
  Loans receivable, net(1) ............  $40,454     $ 3,484      8.61%    $30,152   $2,727      9.04%    $22,377  $2,166      9.68%
  Investment securities(2) ............    4,328         332      7.67      10,392      795      7.65      18,057   1,319      7.30
  Money market investments(3) .........    2,158          93      4.31       3,460      185      5.35       3,726     193      5.18
  Federal funds sold and other
    investments .......................      320          21      6.56         607       38      6.26         422      33      7.82
                                          ------     -------               -------   ------               -------  ------
    Total interest-earning assets .....   47,260     $ 3,930      8.32%     44,611   $3,745      8.39%     44,582  $3,711      8.32%
                                                     -------    ======               ------      ====               -----      ====
  Non-interest-earning assets .........    2,801                             2,563                          2,645
                                           -----                           -------                         ------
      Total assets ....................  $50,061                           $47,714                        $47,227
                                          ======                           =======                         ======

INTEREST-BEARING LIABILITIES:
  Deposits:
    Passbook savings and club
      accounts ........................  $ 8,447     $   248      2.94%    $ 8,589   $  260      3.03%    $ 9,276  $  285      3.07%
    NOW accounts ......................    3,515          49      1.39       3,216       51      1.59       3,090      54      1.75
    Money market accounts .............      441          13      2.95         662       20      3.02         852      24      2.82
    Certificates of deposit ...........   23,481       1,290      5.49      23,544    1,334      5.67      22,334   1,226      5.49
                                          ------     -------               -------   ------               -------  ------
      Total deposits ..................   35,884       1,600      4.46      36,011    1,665      4.62      35,552   1,589      4.47
Borrowed money ........................    5,911         299      5.06       1,655      109      6.59       1,439      91      6.32
                                         -------     -------               -------   ------               -------  ------
    Total interest-bearing liabilities    41,795     $ 1,899      4.54%     37,666   $1,774      4.71%     36,991  $1,680      4.54%
                                                     -------      =====              ------      =====             ------      ====
Non-interest-bearing liabilities ......      947                               951                            992
                                          ------                           -------                        -------
    Total liabilities .................   42,742                            38,617                         37,983
Net worth .............................    7,319                             8,557                          9,244
                                          ------                            ------                         ------
  Total liabilities and
    net worth .........................  $50,061                           $47,174                        $47,227
                                         =======                           =======                         ======
Net interest income; interest
  rate spread(4) ......................              $ 2,031      3.77%              $1,971      3.68%              $2,031     3.78%
                                                     =======      ====               ======      ====                =====     ====
Net interest margin(5) ................                           4.30%                          4.42%                         4.56%
                                                                  ====                           ====                          ====
Average interest-earning
  assets to average interest-
  bearing liabilities .................                         113.08%                        118.44%                       120.52%
                                                                ======                         ======                        ======

</TABLE>

                                                   (Footnotes on following page)

                                       6
<PAGE>   9

-------------------------
(1)  Non-accrual loans have been included in the average balance of loans, but
     unpaid interest on non-accrual loans has not been included for purposes of
     determining interest income.
(2)  Includes investment and mortgage-backed securities classified as available
     for sale.
(3)  Money market investments consist of interest-bearing deposits in other
     financial institutions (including certificates of deposit).
(4)  Interest rate spread represents the difference between the weighted average
     yield on interest-earning assets and the weighted average rate on
     interest-bearing liabilities.
(5)  Net interest margin is net interest income divided by average
     interest-earning assets.


     RATE/VOLUME ANALYSIS. The following table describes the extent to which
changes in interest rates and changes in volume of interest-related assets and
liabilities have affected the Savings Bank's interest income and interest
expense during the periods indicated. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (change in volume multiplied by prior year
rate), (ii) changes in rate (change in rate multiplied by prior year volume),
and (iii) total change in rate and volume. The combined effect of changes in
both rate and volume has been allocated proportionately to the change due to
rate and the change due to volume.

<TABLE>
<CAPTION>

                                                                           Year Ended June 30,
                                                    ---------------------------------------------------------------
                                                             1999 vs. 1998                    1998 vs. 1997
                                                    -------------------------------    ----------------------------
                                                               Increase                         Increase
                                                              (Decrease)                       (Decrease)
                                                                Due to                           Due to
                                                    --------------------               -------------------
                                                                            Total                            Total
                                                                           Increase                         Increase
                                                     Rate      Volume     (Decrease)   Rate     Volume     (Decrease)
                                                    -------   --------    ---------    -----  ---------   -----------
                                                           (In Thousands)                   (In Thousands)
<S>                                                  <C>        <C>        <C>        <C>       <C>        <C>
Interest-earning assets:
  Loans receivable, net ...........................  $(136)     $ 893      $ 757      $(150)     $ 711      $ 561
  Investment and mortgage-backed securities(1) ....      2       (465)      (463)        60       (584)      (524)
  Money market investments(2) .....................    (31)       (61)       (92)         6        (14)        (8)
  Federal funds sold and other investments ........      2        (19)       (17)         7         12          5
                                                     -----      -----      -----      -----      -----      -----
    Total interest-earning assets .................   (163)       348        185         91        125         34
                                                     -----      -----      -----      -----      -----      -----

Interest-bearing liabilities:

  Passbook and club accounts ......................  $  (8)     $  (4)     $ (12)     $  (4)     $ (21)     $ (25)
  NOW accounts ....................................     (6)         4         (2)        (5)         2         (3)
  Money market accounts ...........................     --         (7)        (7)         2         (6)        (4)
  Certificates of deposit .........................    (40)        (4)       (44)        39         69        108
  Borrowed Money ..................................    (31)       221        190          4         14         18
                                                     -----      -----      -----      -----      -----      ------
    Total interest-bearing liabilities ............    (85)       210        125         36         58         94
                                                     -----      -----      -----      -----      -----      -----

Increase (decrease) in net interest income ........  $ (78)     $ 138      $  60      $(127)     $  67      $ (60)
                                                     =====      =====      =====      =====      =====      =====
</TABLE>


-----------

(1)  Includes investment securities classified as available for sale.

(2)  Money market investments consist of interest-bearing deposits in other
     financial institutions (including certificates of deposit).




                                       7
<PAGE>   10



RESULTS OF OPERATIONS

     NET INCOME. The Company reported net income of $273,000, $279,000 and
$327,000 for the years ended June 30, 1999, 1998 and 1997 respectively. The
$6,000 or 2.1% decrease in net income for fiscal 1999 was primarily due to a
$241,000 or 17.0% increase in non-interest expenses, a $28,000 or 13.7% decrease
in non-interest income and a $39,000 or 23.2% increase in income taxes, which
were partially offset by a $60,000 or 3.0% increase in net interest income and a
$242,000 or 77.6% decrease in the provision for loan losses. The $48,000 or
14.7% decrease in net income for fiscal 1998 was primarily due to a $60,000 or
2.9% decrease in net interest income, a $39,000 or 30.2% increase in the
provision for income taxes and a $283,000 or 975.8% increase in loan loss
provisions, which were offset by a $237,000 or 14.3% decrease in non interest
expenses (due to a special assessment of $247,000 to recapitalize the Savings
Association Insurance Fund, which occurred on September 30, 1996) and a $97,000
or 90.7% increase in non interest income.

     For the year ended June 30, 1999, the Company's net interest margin
decreased by 12 basis points to 4.30% from 4.42% for fiscal 1998. The average
yield earned on the Company's interest-earning assets decreased by 7 basis
points, which was offset by a 17 basis point decrease in the average rate paid
on the Company's interest-bearing liabilities. The decrease in the average yield
earned on interest-earning assets was primarily attributable to the Company's
increase in average loans receivable from $30.1 million with an average rate of
9.04% at the year ended June 30, 1998, to $40.4 million with an average rate of
8.61% at the year ended June 30, 1999. The decrease in the average rate paid on
interest-bearing liabilities reflected a shift in the Company's deposit accounts
to lower rates paid on savings deposits and by a decrease in the average rate
paid on borrowed money.

     For the year ended June 30, 1998, the Company's net interest margin
decreased by 14 basis points to 4.42% from 4.56% for fiscal 1997. The average
yield earned on the Company's interest-earning assets increased by 7 basis
points, which was offset by a 17 basis point increase in the average rate paid
on the Company's interest-bearing liabilities. The increase in the average yield
earned on interest-earning assets was primarily attributable to the Company's
increase in average loans receivable from $22.4 million at the year ended June
30, 1997, to $30.1 million at the year ended June 30, 1998. The increase in the
average rate paid on interest-bearing liabilities reflected a shift in the
Company's deposit accounts from lower rates paid on passbook accounts to higher
rates paid on certificates of deposit, and by an increase in the average rate
paid on borrowed money.

     NET INTEREST INCOME. Net interest income increased by $60,000 or 3.0%
during the year ended June 30, 1999, as compared to the prior fiscal year, due
to a $10.3 million or 34.2% increase in the average balance of loans receivable
and a 17 basis point decrease in the average rate paid on interest-bearing
liabilities, which were offset by a $6.1 million or 58.3% decrease in the
average balance of investment securities together with a $1.3 million or 37.6%
decrease in the



                                       8
<PAGE>   11

average balance of money market investments and a $287,000 or 47.3% decrease in
the average balance of federal funds and other investments.

     During the year ended June 30, 1999, total interest income increased by
$185,000 or 4.9%, as compared to the prior fiscal year, primarily due to a
$757,000 or 27.8% increase in interest earned on loans receivable and a $7,000
or 18.4% increase in interest earned on federal funds sold. This increase was
partially offset by a $488,000 or 61.4% decrease in interest earned on
investment securities and a $91,000 or 49.2% decrease in interest earned on
money market investments. The increase in interest earned on loans receivable
was due primarily to a $10.3 million or 34.2% increase in the average balance of
loans receivable. The decrease in interest earned on investment securities was
due to the reduction of the average balance of investment securities from $10.4
million during 1998 to $4.3 million during 1999. The decrease in the average
balance of the Company's investment securities reflected the Company's
reinvestment of a portion of its maturing U.S. government and agency obligations
into loans receivable.

     During the year ended June 30, 1999, total interest expense increased
$125,000 or 7.0% as compared to the prior fiscal year, due to a $4.3 million of
257.2% increase in the average balance of borrowed money which was offset by a
$127,000 or 0.3% decrease in the average balance of savings deposits and a 16
basis point decrease on the average rate paid thereon. The average cost of
interest bearing liabilities decreased by 17 basis points from 4.71% at June 30,
1998 to 4.54% as of June 30, 1999.

     Net interest income decreased by $60,000 or 3.0% during the year ended June
30, 1998, as compared to the prior fiscal year, due to a $7.7 million or 42.5%
decrease in the average balance of investment securities together with a
$675,000 or 1.8% increase in the average balance of interest-bearing liabilities
and a 17 basis point increase in the average rate paid thereon, which were
offset by a $7.7 million or 34.4% increase in the average balance of loans
receivable.

     During the year ended June 30, 1998, total interest income increased by
$34,000 or 0.9%, as compared to the prior fiscal year, primarily due to a
$561,000 or 25.9% increase in interest earned on loans receivable and a $5,000
or 15.5% increase in interest earned on federal funds sold. This increase was
partially offset by a $524,000 or 39.7% decrease in interest earned on
investment securities and an $8,000 or 4.3% decrease in interest earned on money
market investments. The increase in interest earned on loans receivable was due
primarily to a $7.7 million or 34.4% increase in the average balance of loans
receivable. The decrease in interest earned on investment securities was due the
reduction of the average balance of investment securities from $18.1 million
during 1997 to $10.4 million during 1998. The decrease in the average balance of
the Company's investment securities reflected the Company's reinvestment of a
portion of its U.S. government and agency obligations into loans receivable.

     During the year ended June 30, 1998, total interest expense increased
$94,000 or 5.6% as compared to the prior fiscal year, due to the combined effect
of an increase of $459,000 or 1.3% in the average balance of savings deposits
and a 15 basis point increase on the average rate paid



                                       9
<PAGE>   12

thereon. Also contributing to the increase in interest expense was a $216,000 or
15.0% increase in the average balance of borrowed money and a 27 basis point
increase on the average rate paid thereon. The average cost on interest bearing
liabilities increased by 17 basis points from 4.54% for the year ending June 30,
1997 to 4.71% for the year ending June 30, 1998.

     PROVISION FOR LOAN LOSSES. The Company establishes provisions for losses on
loans, which are charged to operations, in order to maintain the allowance for
loan losses at a level which is deemed to be appropriate based upon an
assessment of prior loss experience, the volume and type of lending presently
being conducted by the Company, industry standards, past due loans, economic
conditions in the Company's market area generally and other factors related to
the collectibility of the Company's loan portfolio.

     During the years ended June 30, 1999 and 1998, the Company established
provisions for loan losses of $70,000 and $312,000, respectively. The decrease
in the provision for loan losses during fiscal 1999 reflected a decrease in the
level of non-performing loans. The amount of the provision for loan losses
during fiscal 1999 reflected an improvement in the credit quality with respect
to several of the Company's commercial real estate and consumer loans. For
fiscal 1999, the Company had further enhanced its collection efforts by hiring
expertise to serve in this capacity. In fiscal 1999, total non-performing loans
decreased $258,000 or 39.4% due to the Company's receipt of payments on prior
non-performing loans. At June 30, 1999, the Company's allowance for loan losses
amounted to $309,000 or 78.0% of total non-performing loans and 0.7% of total
loans outstanding.

     In fiscal 1998, total non-performing loans increased $200,000 or 44.1%. In
addition, during fiscal 1998 the Company experienced loan charge offs of
$212,000, an increase of 123.0% over the previous year. The deterioration in
credit quality primarily related to consumer loans. At June 30, 1998, the
Company's allowance for loan losses amounted to $394,000 or 60.2% of
non-performing loans and 1.2% of total loans outstanding.

     Although management utilized its best judgment in providing for possible
loan losses, there can be no assurance that the Company will not have to
increase its provisions for losses on loans in the future as a result of future
increases in non-performing loans or for other reasons, which could adversely
affect the Company's results of operations. In addition, various regulatory
agencies, as an integral part of their examinations process, periodically review
the Company's provision for loan losses and the carrying value of its other
non-performing assets. Such agencies can request the Company to adjust the
allowance based on their judgements about information available to them at the
time of their examination.

     OTHER INCOME. Total other income decreased by $28,000 or 13.7% during the
year ended June 30, 1999, as compared to the prior year. The decrease was
primarily due to a decrease of $73,000 or 42.4% in other miscellaneous income
(which consists primarily of rental income earned on real estate owned, late
charges, service charges, an adjustment to real estate tax



                                       10
<PAGE>   13

assessment and other miscellaneous fees). This decrease was partially offset by
a $43,000 net securities gain.

     During the year ended June 30, 1998, total other income increased by
$97,000 or 90.6% as compared to the prior year. The increase was primarily due
to an increase in other miscellaneous income which consists primarily of rental
income earned on real estate owned, late charges, service charges, an adjustment
to real estate tax assessment and other miscellaneous fees.

     OTHER EXPENSES. Total other expenses increased by $241,000 or 17.0% during
the year ended June 30, 1999, as compared to the prior year. The primary reasons
for the increase were a $104,000 or 14.1% increase in compensation and employee
benefits, a $16,000 or 13.6% increase in legal expenses, a $52,000 or 25.5%
increase in premises and occupancy costs, a $22,000 or 26.2% increase in data
processing expense, a $6,000 increase in net loss on real estate owned and a
$43,000 or 17.8% increase in miscellaneous operating expenses which were offset
by a $2,000 decrease in federal insurance premiums. Data operating expenses
increased as a result of additional expenses relating to the Company's
preparation for Year 2000 by upgrading its data processing system and expenses
relating to premises and occupancy have increased as the Company has purchased
property and began expansion of its main office.

     Total other expenses decreased by $237,000 or 14.3% during the year ended
June 30, 1998, as compared to the prior year. The primary reasons for the
decrease were a $54,000 or 45.4% decrease in expenses pertaining to the
formation of the holding company and the establishment of employee benefit
plans, a $12,000 or 5.6% decrease in premises and occupancy costs, a $53,000 or
86.9% decrease in loss on real estate owned and a $262,000 or 91.9% decrease in
federal insurance premiums. This decrease was the result of a special assessment
of $247,000 to recapitalize the Savings Association Insurance Fund ("SAIF")
which occurred on September 30, 1996. These decreases were offset by a $133,000
or 22.1% increase in compensation and employee benefits, a $6,000 or 7.7%
increase in data processing expense and a $5,000 or 1.7% increase in
miscellaneous operating expenses. The decrease in premises and occupancy costs
was due to a real estate tax expense reduction due to a change in the assessed
value of one of the Company's branch offices. The decrease in loss on real
estate owned expense related to the decrease of real estate owned from $37,000
to $11,000.

     PROVISION FOR INCOME TAXES. The Company incurred income tax expense of
$207,000 for the year ended June 30, 1999, as compared to $168,000 for fiscal
1998. The Company's effective tax rate amounted to 43.1% and 37.6% for fiscal
1999 and 1998, respectively.

                                       11
<PAGE>   14



ASSET AND LIABILITY MANAGEMENT

     In general, financial institutions are vulnerable to an increase in
interest rates to the extent that interest-bearing liabilities mature or reprice
more rapidly than interest-earning assets. The lending activities of most
savings institutions have historically emphasized the origination of long-term,
fixed-rate loans secured by single-family residences, and the primary source of
funds of such institutions has been deposits, which largely mature or are
subject to repricing within a short period of time. These factors have
historically caused the income earned by such institutions on their loan
portfolios to adjust more slowly to changes in interest rates than their cost of
funds. While having liabilities that reprice more frequently than assets is
generally beneficial to net interest income in times of declining interest
rates, such an asset/liability mismatch is generally detrimental during periods
of rising interest rates.

     The Company has (in recent periods) implemented asset and liability
management strategies and policies designed to better match the maturities and
repricing terms of the Company's interest-earning assets and interest-bearing
liabilities in order to minimize the adverse effects on the Company's results of
operations of material and prolonged increases in interest rates. The Company
has undertaken a variety of strategies to reduce its exposure to interest rate
fluctuations, including (i) emphasizing investment in adjustable-rate
single-family residential loans; (ii) continuing to emphasize the origination of
consumer loans, which generally have shorter terms and higher interest rates
than traditional mortgage loans; (iii) maintaining the weighted average maturity
of the Company's portfolio at five years or less; (iv) maintaining a significant
percentage of the Company's total assets in short-term investments and cash
equivalents; and (v) attempting to attract, to the extent possible, longer-term,
fixed-rate deposit accounts.

     As a result of implementing these asset and liability initiatives, at June
30, 1999, $6.6 million or 14.3% of the Company's total loan portfolio had
adjustable interest rates. As of such date, $5.1 million or 17.1% of the
Company's portfolio of single-family residential mortgage loans consisted of
adjustable-rate loans. In addition, at June 30, 1999, $3.5 million or 100% of
the Company's investment securities portfolio had scheduled maturities of more
than five years and the Company maintained $2.7 million or 5.3% of its assets in
cash and cash equivalents (consisting of cash and amounts due from depository
institutions, money market investments and federal funds sold) as of such date.

     Moreover, during the years ended June 30, 1999 and 1998, the Company
originated $4.4 million and $3.5 million of consumer loans, respectively. At
June 30, 1999, the Company's total loan portfolio included $9.5 million or 20.6%
of consumer loans.

     Finally, the Company has also elected to offer competitive rates and
experience some attrition in deposits in order to manage interest rate expense
more effectively. The Company has generally not engaged in sporadic increases or
decreases in interest rates paid or offered the highest rates available in its
deposit market except upon specific occasions when market



                                       12
<PAGE>   15

conditions have created opportunities to attract longer-term deposits. This
policy has assisted the Company in controlling its cost of funds.

     The effect of interest rate changes on a financial institution's assets and
liabilities may be analyzed by examining the extent to which such assets and
liabilities are "interest rate sensitive" and by monitoring an institution's
interest rate sensitivity "gap." An asset or liability is said to be interest
rate sensitive within a specific time period if it will mature or reprice within
that time period. The interest rate sensitivity "gap" is defined as the
difference between interest-earning assets and interest-bearing liabilities
maturing or repricing within a given time period. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities. A gap is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. During a period of falling interest rates, a positive gap
would tend to adversely affect net interest income, while a negative gap would
tend to result in an increase in net interest income. During a period of rising
interest rates, a positive gap would tend to result in an increase in net
interest income while a negative gap would tend to affect net interest income
adversely.

     As a result of the implementation of the foregoing asset and liability
strategies, the Company's one-year interest rate sensitivity gap amounted to
(8.23)% of total assets at June 30, 1999. The one-year interest rate sensitivity
gap is defined as the difference between the Company's interest-earning assets
which are scheduled to mature or reprice within one year and its
interest-bearing liabilities which are scheduled to mature or reprice within one
year. At June 30, 1999, the Company's interest-earning assets maturing or
repricing within one year totaled $15.8 million while the Company's
interest-bearing liabilities maturing or repricing within one year was $20.1
million, providing a deficiency of interest-earning assets over interest-bearing
liabilities of $4.3 million. At June 30, 1999, the percentage of the Company's
interest-earning assets to interest-bearing liabilities maturing or repricing
within one year was 78.9%.

                                       13
<PAGE>   16



     The following table summarizes the anticipated maturities or repricing of
the Company's interest-earning assets and interest-bearing liabilities as of
June 30, 1999, based on the information and assumptions set forth in the notes
to the table.

<TABLE>
<CAPTION>

                                                Within       Six to       More Than       More Than      Over
                                                 Six         Twelve     One Year to     Three Years to   Five
                                                Months       Months     Three Years      Five Years      Years        Total
                                              --------       -------    -----------     --------------  -------      -------
                                                                           (Dollars in Thousands)
<S>                                          <C>            <C>          <C>           <C>             <C>          <C>
Interest-earning assets:
  Investment securities(1)(2) .............   $    500       $ 1,474     $       --    $       --       $ 1,748      $ 3,722
  Loans receivable, net(3) ................      5,987         5,852         10,473         6,143        14,260       42,715
  Money market investments ................      1,668            --             --            --            --        1,668
  Federal funds sold and other
    investments ...........................        400            --             --            --            --          400
                                              --------       -------       --------       -------       -------      -------
    Total interest-earning
      assets ..............................      8,555         7,326         10,473         6,143        16,008       48,505
                                              --------       -------       --------       -------       -------      -------

Interest-bearing liabilities:
  Deposits(4) .............................      8,959         6,178         10,178         4,844         5,370       35,529
  Borrowed Money ..........................      5,000            --             --         3,000           394        8,394
                                              --------       -------       --------       -------       -------      -------
    Total interest-bearing
      liabilities .........................     13,959         6,178         10,178         7,844         5,764       43,923
                                              --------       -------       --------       -------        ------       ------
Excess (deficiency) of
 interest-earning assets over
 interest-bearing liabilities .............   $ (5,404)      $ 1,148       $    295       $(1,701)      $10,244      $ 4,582
                                               =======        ======       ========        ======        ======        =====

Cumulative excess of
  interest-earning assets over
  interest-bearing liabilities ............   $ (5,404)      $(4,256)      $ (3,961)      $(5,662)      $ 4,582
                                                ======         =====          =====         ======        =====

Cumulative excess of
  interest-earning assets over
  interest-bearing liabilities as a
  percentage of total assets ..............     (10.45)%       (8.23)%       (7.66)%      (10.95)%         8.86%
                                                 =====         =====         ======       ======         ======
</TABLE>

-----------------------
(1)  Reflects repricing, contractual maturity or anticipated call date.

(2)  Includes investment and mortgage-backed securities classified as available
     for sale.

(3)  Fixed-rate loans are included in the periods in which they are scheduled to
     be repaid, based on scheduled amortization, adjusted to take into account
     estimated prepayments. Adjustable-rate loans are included in the periods in
     which interest rates are next scheduled to reset, adjusted to take into
     account estimated prepayments.

(4)  Adjusted to reflect various decay rate assumptions.


                                       14
<PAGE>   17


     Although interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As a
result, management also regularly reviews interest rate risk by forecasting the
impact of alternative interest rate environments on net interest income and net
portfolio value ("NPV"), which is defined as the net present value of a savings
bank's existing assets, liabilities and off-balance sheet instruments, and
evaluating such impacts against the maximum potential changes in net interest
income and NPV. The following table presents the Company's NPV as of June 30,
1999.


<TABLE>
<CAPTION>
                                        Net Portfolio Value
            ----------------------------------------------------------------------
                                             Estimated
               Change in                     NPV as a                  Change as a
             Interest Rates    Estimated    Percentage      Amount      Percentage
             (basis points)      NPV        of Assets      of Change    of Assets
            ---------------  -----------  ------------  -------------  -----------
                                     (Dollars in Thousands)
                <S>            <C>           <C>          <C>            <C>
                  +400          $2,469         5.37%        (4,710)      (65.6)%
                  +300           3,773         7.93         (3,406)      (47.4)
                  +200           4,989        10.15         (2,190)      (30.5)
                  +100           6,108        12.07         (1,070)      (14.9)
                    --           7,179        13.79              0         0
                  -100           7,824        14.75            646         9.0
                  -200           7,954        14.84            775        10.8
                  -300           7,918        14.66            740        10.3
                  -400           8,047        14.75            869        12.1
 </TABLE>



     Management of the Company believes that the assumptions used by it to
evaluate the vulnerability of the Company's operations to changes in interest
rates approximate actual experience and considers them reasonable; however, the
interest rate sensitivity of the Company's assets and liabilities and the
estimated effects of changes in interest rates on the Company's net interest
income and NPV indicated in the above tables could vary substantially if
different assumptions were used or actual experience differs from the historical
experience on which they are based.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's primary sources of funds are deposits, repayments,
prepayments and maturities of outstanding loans, maturities of investment
securities and other short-term investments, and funds provided from operations.
While scheduled loan repayments and maturing investment securities and
short-term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by the movement of interest
rates in general, economic conditions and competition. The Company manages the
pricing of its deposits to maintain a deposit balance deemed appropriate and
desirable. In addition, the Company invests in short-term investment securities
and other interest-earning assets which provide liquidity to



                                       15
<PAGE>   18

meet lending requirements. Although the Company has been able to generate enough
cash through the retail deposit market, its traditional funding source, the
Company has, to the extent deemed necessary, utilized other borrowing sources,
consisting primarily of advances from the FHLB of Pittsburgh.

     Liquidity management is both a daily and long-term function. Excess
liquidity is generally invested in short-term investments such as cash and cash
equivalents, including money market investments and federal funds sold, and U.S.
Government and agency obligations. On a longer-term basis, the Company invests
in various lending products and investment securities. The Company uses its
sources of funds primarily to meet its ongoing commitments to pay maturing
savings certificates and savings withdrawals, fund loan commitments and maintain
an investment securities portfolio. At June 30, 1999, the total commitments
outstanding (excluding undisbursed portions of loans in process) amounted to
$3.5 million in mortgage loans and $614,000 in unused lines of credit. At the
same date, the unadvanced portion of loans in process approximated $2.9 million.
Certificates of deposit scheduled to mature in one year or less at June 30,
1999, totaled $12.7 million. Management of the Company believes that the Company
has adequate resources, including principal prepayments and repayments of loans
and maturing investments, to fund all of its commitments to the extent required.
Based upon its historical run-off experience, management believes that a
significant portion of maturing deposits will remain with the Company. See Note
8 of the Notes to Consolidated Financial Statements.

     As of June 30, 1999, the Company had regulatory capital which was in excess
of applicable limits. See Note 11 of the Notes to Consolidated Financial
Statements.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement requires that all
derivatives be recognized as either assets or liabilities in the balance sheet
and that those instruments be measured at fair value. The accounting for changes
in the fair value of a derivative (that is, gains and losses) depends on the
intended use of the derivative and resulting designation. This statement is
effective for fiscal years beginning after June 15, 1999, although earlier
adoption is permitted. In June 1999, the FASB issued SFAS No. 137 "Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FASB Statement No. 133--and Amendment of FASB Statement No. 133," which
delays the adoption of SFAS No. 133 until June 30, 2000.

     In October 1998, the FASB issued SFAS No. 134 "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage-Banking Enterprise," which amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities." This statement conforms
the subsequent accounting for securities retained after the securitization of
mortgage loans by a mortgage banking enterprise with the accounting for such
securities by a nonmortgage banking enterprise. This statement is effective for
the first quarter



                                       16
<PAGE>   19

beginning January 1, 1999, and will not have any impact on the Company's
financial position or results of operation as the Company does not currently
securitize mortgage loans.

IMPACT OF INFLATION AND CHANGING PRICES

     The Consolidated Financial Statements of the Company and related notes
presented herein have been prepared in accordance with generally accepted
accounting principles ("GAAP") which require the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation.

     Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to a
larger extent than interest rates. In the current interest rate environment,
liquidity and the maturity structure of the Company's assets and liabilities are
critical to the maintenance of acceptable performance levels.

YEAR 2000 COMPLIANCE

     Many computer programs were developed recognizing only the last two digits
of a year (e.g. "99" for "1999"). A question exists as to whether certain
computer programs will recognize the year 2000 accurately. It is possible that
since may programs will key on the "00" in the date, the year 2000 will be
recognized as 1900. This issue has been popularly named the "Y2K" problem.

     The Company is aware of the issues relating to Y2K. They are pervasive and
complex. The failure of computer systems to properly recognize the year 2000
could result in the generation of erroneous data or be the cause of a system
failure.

     The Securities and Exchange Commission, the Federal Financial Institution's
Examination Council ("FFIEC") and the other federal banking regulators have
issued guidelines to assure that insured depository institutions appropriately
address Y2K issues. Of primary concern is the ability of computer hardware and
software to recognize the year 2000. The FFIEC determined that the Y2K
management process should consist of five phases (Awareness, Assessment,
Renovation, Validation and Implementation) and established a timeline for the
completion of each phase.

     The Company outsources substantially all of its critical data processing
needs. As a result, the company is largely dependent on vendor cooperation for
systems used in its day-to-day business. The Company is working closely with its
vendors to ensure that Y2K issues will not adversely affect its operational and
financial systems.


                                       17
<PAGE>   20



     The Company has developed a Year 2000 Action Plan that addresses all
systems, hardware, software and data processing applications provided by
third-party vendors and any proprietary programs. The Awareness and Assessment
phases of the plan are complete. These phases focused on understanding the Y2K
problem and identifying all hardware, software, networks, processing platforms,
vendor interdependencies and budget requirements affected by the Y2K date
change. The Renovation phase entailed assessing the need for hardware and
software upgrades, system replacements, and related changes. The Company has
completed the Renovation phase.

     The Validation and Implementation phases involve determining the Y2K status
of the Company's mission critical systems and vendors through testing and
certification. Testing has been completed on mission critical hardware and
software systems and vendors and the tests have indicated compliance for all
critical areas. Validation and Implementation phases were completed as of June
30, 1999.

     The Company has formulated a Contingency Plan for its major functions in
the event that system interruptions or failures due to Y2K problems occur that
are beyond the Company's control. Integral to the Contingency Plan is a
liquidity plan, which outlines the Company's efforts to insure adequate cash
reserves through the Y2K dilemma. The Contingency Plan also involves, among
other things, additional equipment and supplies, additional staff and training,
and hard copy records of critical information.

     Management has estimated that expenses related to Y2K will not exceed
$15,000, of which $10,000 has already been incurred. This amount covers testing,
upgrades and customer communication. Direct and indirect costs associated with
Year 2000 issues have not had a material impact on the Company's consolidated
financial statements to date and management does not anticipate any future costs
to be significant.

     The foregoing discussion of the implications of the Y2K problem for the
Company contains forward-looking statements based on inherently uncertain
information. The cost to address Y2K issues is based on management's best
estimates, which are derived utilizing a number of assumptions of future events
including the continued availability of internal and external resources, third
party modifications and other factors. There can be no guarantee, however, that
these statements will be achieved and actual results could differ. Moreover,
although management believes it is effectively addressing its Y2K issues, no
assurances can be given that the Company will not be affected by the Y2K
problem. In the event that the Company is affected, including disruptions in the
economy generally resulting from Y2K problems, the Company's business, financial
condition and results of operations could be materially adversely affected, the
extent to which cannot be reasonably estimated at this time.




                                       18
<PAGE>   21

                         INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Pennwood Bancorp, Inc. and Subsidiary:

We have audited the accompanying consolidated statements of financial condition
of Pennwood Bancorp, Inc. and subsidiary (the Company) as of June 30, 1999 and
1998, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the years in the three-year period ended June 30,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pennwood Bancorp,
Inc. and subsidiary as of June 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1999, in conformity with generally accepted accounting
principles.

                                            /s/  KPMG LLP


Pittsburgh, Pennsylvania
July 30, 1999


                                       19





<PAGE>   22
                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                 Consolidated Statements of Financial Condition

                             June 30, 1999 and 1998

                    (Dollars in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                    1999           1998
                                                                                ------------    ------------
                             ASSETS

<S>                                                                             <C>                    <C>
Cash and amounts due from depository institutions                               $     1,054            527
Interest-bearing deposits                                                             1,667          2,026
Investment and mortgage-backed securities (notes 2, 3 and 9):
      Available-for-sale (amortized cost $3,513 and $7,653)                           3,515          7,752
      Held-to-maturity (market value $210 and $215)                                     207            210
Loans receivable, net (notes 4 and 9)                                                42,715         33,625
Real estate owned, net                                                                   86             11
Federal Home Loan Bank stock, at cost (notes 5 and 9)                                   400            284
Premises and equipment, net (note 6)                                                  1,340          1,044
Accrued interest receivable (note 7)                                                    299            331
Prepaid expenses and other assets                                                       413            270
                                                                                -----------     ----------

                       Total assets                                             $    51,696         46,080
                                                                                ===========     ==========
                        LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
      Savings deposits (note 8)                                                      35,529         35,754
      Borrowed funds (note 9)                                                         8,394          1,432
      Advances from borrowers for taxes and insurance                                   463            392
      Accrued interest payable                                                          461            441
      Accrued expenses and other liabilities                                            242            100
                                                                                -----------     ----------

                       Total liabilities                                             45,089         38,119

Shareholders' Equity (notes 10, 11 and 12):
      Preferred stock, $.01 par value, 1,000,000 shares authorized,
            none issued                                                                  --             --
      Common stock, $.01 par value, 4,000,000 shares authorized,
            813,419 shares issued                                                         8              8
      Additional paid-in capital                                                      5,665          5,642
      Retained earnings, substantially restricted                                     4,516          4,427
      Treasury stock, at cost, 252,780 and 116,025 shares at
            June 30, 1999 and 1998, respectively                                     (3,045)        (1,526)
      Unearned Employee Stock Ownership Plan shares                                    (342)          (390)
      Unearned common stock - Recognition and Retention Plan                           (196)          (267)
      Accumulated other comprehensive income, net of tax
            of $1 in 1999 and $28 in 1998                                                 1             67
                                                                                -----------     ----------

                       Total shareholders' equity                                     6,607          7,961
                                                                                -----------     ----------

                       Total liabilities and shareholders' equity               $    51,696         46,080
                                                                                ===========     ==========
</TABLE>

See accompanying notes to consolidated financial statements.



                                       20
<PAGE>   23


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                        Consolidated Statements of Income

                    Years Ended June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)


<TABLE>
<CAPTION>
                                                                                      1999        1998        1997
                                                                                -----------  ----------  ----------
<S>                                                                             <C>            <C>        <C>
           Interest income:
                 Loans                                                          $     3,484       2,727        2,166
                 Investment and mortgage-backed securities                              307         795        1,319
                 Federal funds sold and other investments                                45          38           33
                 Interest-bearing deposits                                               94         185          193
                                                                                -----------  ----------  ----------
                                Total interest income                                 3,930       3,745        3,711
           Interest expense:
                 Interest on savings deposits (note 8)                                1,600       1,665        1,589
                 Interest on borrowed funds                                             299         109           91
                                                                                -----------  ----------  ----------
                                Total interest expense                                1,899       1,774        1,680
                                                                                -----------  ----------  ----------
                                Net interest income                                   2,031       1,971        2,031

           Provision for loan losses                                                     70         312           29

                                Net interest income after provision
                                  for loan losses                                     1,961       1,659        2,002
           Other income:
                 Service charges                                                         95          95           68
                 Net securities gain                                                     43          --           --
                 Other                                                                   38         109           39
                                                                                -----------  ----------  ----------
                                Total other income                                      176         204          107
                                                                                -----------  ----------  ----------

           Other expenses:
                 Compensation and employee benefits (note 12)                           840         736          603
                 Premises and occupancy costs                                           256         204          216
                 Federal insurance premiums                                              21          23           38
                 FDIC-SAIF assessment (note 14)                                          --          --          247
                 Data processing expense                                                106          84           78
                 Net loss on real estate owned                                           15           9           61
                 Legal and professional                                                 134         118          119
                 Other operating expenses                                               285         242          291
                                                                                -----------  ----------  ----------
                                Total other expenses                                  1,657       1,416        1,653
                                                                                -----------  ----------  ----------
                                Income before income taxes                              480         447          456

           Provision for income taxes (note 10):
                 Federal                                                                165         153          141
                 State                                                                   42          15          (12)
                                                                                -----------  ----------  ----------
                                Total provision for income taxes                        207         168          129
                                                                                -----------  ----------  ----------
                                Net income                                      $       273         279          327
                                                                                ===========  ==========  ===========
           Basic earnings per share                                             $      0.48        0.42         0.45
                                                                                ===========  ==========  ===========
           Diluted earnings per share                                           $      0.48        0.41         0.45
                                                                                ===========  ==========  ===========
</TABLE>

           See accompanying notes to consolidated financial statements

                                       21
<PAGE>   24


                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

                Consolidated Statements of Shareholders' Equity

                    Years Ended June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)

<TABLE>
<CAPTION>

                                                        ADDITIONAL                              UNEARNED      UNEARNED
                                             COMMON      PAID-IN      RETAINED     TREASURY       ESOP          RRP
                                              STOCK      CAPITAL      EARNINGS      STOCK        SHARES        SHARES
                                           ----------  ------------  ----------   ----------   ---------    -----------
<S>                                        <C>          <C>          <C>           <C>         <C>           <C>
Balance at June 30, 1996                   $    --          --        4,149            --           --            --
Comprehensive income:
      Net income                                --          --          327            --           --            --
      Net unrealized gain on securities
        available-for-sale                      --          --           --            --           --            --
                                           ----------  ------------  ----------   ----------   ---------    -----------

Total comprehensive income                      --          --          327            --           --            --

Proceeds from stock offering (note 17)           6       5,589           --            --           --            --
Shares acquired for ESOP - 48,810 shares        --          --           --            --         (488)           --
Principal repayment of ESOP debt                --          14           --            --           49            --
Shares acquired for RRP - 24,405 shares         --          --           --            --           --          (357)
Amortization of RRP                             --          --           --            --           --            18
Purchase of treasury stock - 30,506 shares      --          --           --          (458)          --            --
Cash dividends declared at $.22 per share       --          --         (121)           --           --            --
                                           ----------  ------------  ----------   ----------   ---------    -----------

Balance at June 30, 1997                         6       5,603        4,355          (458)        (439)         (339)

Comprehensive income:
Net income                                      --          --          279            --           --            --
Net unrealized gain on securities
      available-for-sale                        --          --           --            --           --            --
                                           ----------  ------------  ----------   ----------   ---------    -----------

Total comprehensive income                      --          --          279            --           --            --
</TABLE>

<TABLE>
<CAPTION>
                                                ACCUMULATED
                                                   OTHER
                                               COMPREHENSIVE
                                               INCOME (LOSS),
                                                    NET             TOTAL
                                             ------------------   ----------
<S>                                              <C>              <C>
Balance at June 30, 1996                            (73)            4,076
Comprehensive income:
      Net income                                     --               327
      Net unrealized gain on securities
        available-for-sale                           71                71
                                             ------------------   ----------

Total comprehensive income                           71               398

Proceeds from stock offering (note 17)               --             5,595
Shares acquired for ESOP - 48,810 shares             --              (488)
Principal repayment of ESOP debt                     --                63
Shares acquired for RRP - 24,405 shares              --              (357)
Amortization of RRP                                  --                18
Purchase of treasury stock - 30,506 share            --              (458)
Cash dividends declared at $.22 per share            --              (121)
                                             ------------------   ----------

Balance at June 30, 1997                             (2)            8,726

Comprehensive income:
Net income                                           --               279
Net unrealized gain on securities
      available-for-sale                             69                69
                                             ------------------   ----------

Total comprehensive income                           69               348
</TABLE>



                                       22                          (Continued)
<PAGE>   25


                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

                Consolidated Statements of Shareholders' Equity

                    Years Ended June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)


<TABLE>
<CAPTION>


                                                                       ADDITIONAL                                         UNEARNED
                                                        COMMON          PAID-IN         RETAINED         TREASURY           ESOP
                                                        STOCK           CAPITAL         EARNINGS          STOCK            SHARES
                                                      ----------      ------------    ------------    --------------    ------------
<S>                                                  <C>                <C>             <C>            <C>               <C>
Four-for-three stock split                           $       2              (2)               --               --            --
Principal repayment of ESOP debt                            --              41               (12)              --            49
Amortization of RRP                                         --              --                --               --            --
Purchase of treasury stock - 75,350 shares                  --              --                --           (1,068)           --
Cash dividends declared at $.27 per share                   --              --              (195)              --            --
                                                      ----------      ------------    ------------    --------------    ------------
Balance at June 30, 1998                                     8           5,642             4,427           (1,526)         (390)

Comprehensive income:

      Net income                                            --              --               273               --            --
      Net unrealized gain on securities
            available-for-sale                              --              --                --               --            --
                                                      ----------      ------------    ------------    --------------    ------------
Total comprehensive income                                  --              --               273               --            --

Principal repayment of ESOP debt                            --              23                --               --            48
Amortization of RRP                                         --              --                --               --            --
Purchase of treasury stock - 136,755 shares                 --              --                --           (1,519)           --
Cash dividends declared at $.295 per share                  --              --              (184)              --            --
                                                      ----------      ------------    ------------    --------------    ------------
Balance at June 30, 1999                             $       8           5,665             4,516           (3,045)         (342)
                                                      ==========      =============   ============    ==============    ============

</TABLE>


<TABLE>
<CAPTION>
                                                                      ACCUMULATED
                                                                         OTHER
                                                       UNEARNED      COMPREHENSIVE
                                                         RRP         INCOME (LOSS),
                                                        SHARES            NET             TOTAL
                                                    -------------   ---------------     ---------
<S>                                                  <C>              <C>                <C>
Four-for-three stock split                               --                --                --
Principal repayment of ESOP debt                         --                --                78
Amortization of RRP                                      72                --                72
Purchase of treasury stock - 75,350 shares               --                --            (1,068)
Cash dividends declared at $.27 per share                --                --              (195)
                                                    -------------   ---------------     ---------
Balance at June 30, 1998                               (267)               67             7,961

Comprehensive income:

      Net income                                         --                --               273
      Net unrealized gain on securities
            available-for-sale                           --               (66)              (66)
                                                    -------------   ---------------     ---------
Total comprehensive income                               --               (66)              207

Principal repayment of ESOP debt                         --                --                71
Amortization of RRP                                      71                --                71
Purchase of treasury stock - 136,755 shares              --                --            (1,519)
Cash dividends declared at $.295 per share               --                --              (184)
                                                    -------------   ---------------     ---------
Balance at June 30, 1999                               (196)                1             6,607
                                                    =============   ===============     =========
</TABLE>



See accompanying notes to consolidated financial statements


                                       23
<PAGE>   26
                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                      Consolidated Statements of Cash Flows

                    Years Ended June 30, 1999, 1998 and 1997

                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                          1999           1998          1997
                                                                                      ------------   ------------   -----------
<S>                                                                                 <C>              <C>           <C>
Operating activities:
    Net income                                                                      $         273            279           327
    Adjustments to reconcile net income to net
        cash provided by operating activities:
           Depreciation expense                                                                44             50            54
           Provision for loan losses                                                           70            312            29
           Decrease (increase) in accrued interest receivable                                  32            203          (193)
           (Increase) decrease in prepaid expenses and other assets                          (113)           (14)          279
           Net gain on the sales of securities available for sale                             (43)            --            --
           Net loss on the sale of real estate owned                                           15              9            61
           Increase in accrued interest payable                                                20             31            15
           Increase (decrease) in accrued expenses and other liabilities                      148           (142)           (9)
           Increase (decrease) in stock subscription deposits                                  --             --        (4,569)
           Noncash compensation expense related to stock
              benefit plans                                                                   142            150            81
           Other, net                                                                          --              7             6
                                                                                      ------------   ------------   -----------
                         Total adjustments                                                    315            606        (4,246)
                                                                                      ------------   ------------   -----------
                         Net cash provided (used) by operating activities                     588            885        (3,919)
                                                                                      ------------   ------------   -----------
Investing activities:
    Purchases of premises and equipment                                                      (340)            (8)           (9)
    Purchases of investment securities held-to-maturity                                      (750)          (998)           --
    Purchases of investment and mortgage-backed securities
        available-for-sale                                                                 (2,911)        (2,763)      (10,941)
    Proceeds from maturities and principal repayments of
        investment securities held-to-maturity                                                750          1,500         2,272
    Proceeds from sales of securities available-for-sale                                      409
    Proceeds from maturities and principal repayments of
        investment and mortgage-backed securities available-for-sale                        6,689         13,344         2,949
    Proceeds from sale of real estate owned                                                    15             18           101
    Net increase in loans receivable                                                       (9,265)        (6,966)       (5,889)
    Decrease (increase) in FHLB stock                                                        (116)            61          (164)
    Other                                                                                      --            (36)           24
                                                                                      ------------   ------------   -----------
                         Net cash (used) provided by investing activities                  (5,519)         4,152       (11,657)
                                                                                      ------------   ------------   -----------
</TABLE>


                                       24
<PAGE>   27

                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                      Consolidated Statements of Cash Flows

                    Years Ended June 30, 1999, 1998 and 1997

                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                          1999         1998         1997
                                                                                       -----------  -----------  -----------
<S>                                                                                   <C>           <C>          <C>
Financing activities:
    Net decrease in passbook, club, money market
        and NOW accounts                                                              $     (168)        (594)      (1,479)
    Net (decrease) increase in certificates of deposit accounts                              (57)         529          (35)
    Net increase in advances from borrowers for taxes
        and insurance                                                                         71           72           44
    Proceeds from issuance of common stock                                                    --           --        5,595
    Stock acquired for ESOP                                                                   --           --         (488)
    Stock  acquired for RRP                                                                   --           --         (357)
    Purchase of Treasury stock                                                            (1,519)      (1,068)        (458)
    Dividends paid                                                                          (190)        (192)         (75)
    (Decrease) increase in FHLB advances                                                   7,000       (3,000)       4,000
    Proceeds from ESOP loan                                                                   --           --          488
    Other                                                                                    (38)         (35)          39
                                                                                       ----------   ----------   ----------
                      Net cash provided (used) by financing
                         activities                                                        5,099       (4,288)       7,274
                                                                                       ----------   ----------   ----------
                      Net increase (decrease) in cash and cash equivalents                   168          749       (8,302)

Cash and cash equivalents, beginning of period                                             2,553        1,804       10,106
                                                                                       ----------   ----------   ----------
Cash and cash equivalents, end of period                                              $    2,721        2,553        1,804
                                                                                       ==========   ==========   ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:

        Interest                                                                      $    1,879        1,743        1,665
                                                                                       ==========   ==========   ==========
        Income taxes                                                                  $      164          162          106
                                                                                       ==========   ==========   ==========
Supplemental schedule of noncash investing activities:
    Loans transferred to real estate owned                                            $      107           --           16
                                                                                       ==========   ==========   ==========
    Dividends declared but not paid                                                   $       43           49           46
                                                                                       ==========   ==========   ==========
</TABLE>


See accompanying notes to consolidated financial statements.


                                       25
<PAGE>   28
                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)



(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Pennwood Bancorp, Inc. and subsidiary (the Company) is primarily engaged in
     the business of attracting retail deposits from the general public and
     using such funds to invest in residential and commercial mortgage and
     consumer loans. The Company is subject to competition from other financial
     institutions. The Company is also subject to the regulations of certain
     federal and state agencies and undergoes periodic examinations by those
     regulatory authorities.

     The following comprise the significant accounting policies which the
     Company follows in preparing and presenting their consolidated financial
     statements:

     (a)  PRINCIPLES OF CONSOLIDATION

          The accompanying consolidated financial statements include the
          accounts of Pennwood Bancorp, Inc. and its wholly owned subsidiary,
          Pennwood Savings Bank. All significant intercompany transactions and
          balances have been eliminated in consolidation.

     (b)  BASIS OF PRESENTATION

          The financial statements have been prepared in conformity with
          generally accepted accounting principles. In preparing the financial
          statements, management is required to make estimates and assumptions
          that affect the reported amounts of assets and liabilities as of the
          date of the balance sheet, disclosure of contingent assets and
          liabilities at the date of the financial statements and revenues and
          expenses for the period.Actual results could differ significantly from
          those estimates.

     (c)  CASH AND CASH EQUIVALENTS

          For the purposes of the statements of cash flows, cash and cash
          equivalents include cash on hand and amounts due from depository
          institutions, federal funds sold and interest-bearing deposits.

                                       26                            (Continued)
<PAGE>   29

                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)


     (d)  INVESTMENT AND MORTGAGE-BACKED SECURITIES

          The Company classifies securities at the time of their purchase as
          either "held-to-maturity," "trading" or "available-for-sale." If it is
          management's intent and the Company has the ability to hold such
          securities until their maturity, these securities are classified as
          held-to-maturity and are carried at cost, adjusted for amortization of
          premiums and accretion of discounts. Alternatively, if it is
          management's intent at the time of purchase to hold securities for the
          purpose of resale in the near future, the securities are classified as
          trading and are carried at market value with unrealized gains and
          losses reported in current period earnings. At June 30, 1999 and 1998,
          the Company had no securities classified as trading. Securities not
          classified as held-to-maturity or trading are classified as
          available-for-sale and are carried at market value with unrealized
          gains and losses excluded from earnings and reported as a separate
          component of shareholders' equity, net of tax. Investments
          available-for-sale include investment securities which may be sold in
          response to changes in interest rates, resultant prepayment risk and
          other factors related to interest rate, prepayment risk or liquidity
          needs.

          Purchases and sales of securities are accounted for on a
          settlement-date basis which is not materially different than use of
          the trade-date basis. Gains and losses on the sale of securities are
          recognized upon realization using the specific identification method.
          Amortization of premiums and accretion of discounts are calculated
          using a method which approximates the level-yield method.

          The Financial Accounting Standards Board (FASB) SFAS 119 requires
          disclosure about amounts, nature and terms of derivative financial
          instruments. The Company has no involvement with derivative financial
          instruments that meet the definition of a derivative as defined by
          SFAS 119.

     (e)  LOANS RECEIVABLE

          Loans are stated at their unpaid principal balances less allowances
          for anticipated losses. Monthly loan payments are scheduled to include
          interest. Interest on loans is credited to income as earned. Interest
          earned on loans for which no payments were received during the month
          is accrued. An allowance is established for accrued interest deemed to
          be uncollectible, generally when a loan is ninety days or more
          delinquent, except when the estimated value of the collateral and
          collection efforts are deemed sufficient to ensure full recovery. Such
          interest ultimately collected is credited to income in the period
          received. Monthly mortgage loan payments are adjusted annually to
          cover insurance and tax requirements.



                                       27                           (Continued)
<PAGE>   30


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)

          Loan origination fees and certain direct loan costs are deferred, and
          the net fee or cost is recognized in income using a method which
          approximates the level-yield method over the contractual life of the
          loans.

          A loan is considered to be impaired when it is probable that the
          Company will be unable to collect all principal and interest amounts
          due according to the contractual terms of the loan agreement. All
          nonperforming loans are considered to be impaired loans. Impaired
          loans are required to be measured based upon the present value of
          expected future cash flows, discounted at the loan's initial effective
          interest rate, or at the loan's market price or fair value of the
          collateral if the loan is collateral dependent. If the loan valuation
          is less than the recorded value of the loan, an impairment reserve
          must be established for the difference by either an allocation of the
          allowance for loan losses or by a provision for loan losses, depending
          on the adequacy of the allowance for loan losses. As of June 30, 1999
          and 1998, impaired loans consisted of $396 and $654 of non-performing
          consumer and single family residential loans, respectively, that have
          been collectively evaluated for impairment. Estimated impairment
          losses for the loans are based on various factors including past loss
          experience, recent economic conditions, portfolio delinquency rates
          and fair value of the underlying collateral. There were no impairment
          reserves at June 30, 1999 and 1998. Average impaired loans during the
          years ended June 30, 1999 and 1998, were $545 and $693, respectively.
          During the years ended June 30, 1999, 1998 and 1997, the Bank
          recognized $1, $12 and $10 of interest revenue on impaired loans,
          respectively, all of which was recognized using the cash basis method
          of income recognition.

     (f)  PROVISION FOR LOAN LOSSES

          Provisions for estimated losses on loans are charged to earnings in an
          amount that results in an allowance for loan losses sufficient, in
          management's judgment, to cover probable losses based on management's
          periodic evaluation of risks in the loan portfolio, past loss
          experience of the Bank, current economic conditions, adverse
          situations which may affect a specific borrower's ability to repay,
          the estimated value of any underlying collateral and other relevant
          factors.



                                       28                            (Continued)
<PAGE>   31

                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)



          Material estimates that are particularly susceptible to significant
          change in the near-term relate to the determination of the allowance
          for loan losses. Management believes that the allowance for loan
          losses is adequate. While management uses available information to
          recognize losses on loans, future additions to the allowance may be
          necessary based on changes in economic conditions. In addition,
          various regulatory agencies, as an integral part of their examination
          process, periodically review the Bank's allowance for loan losses.
          Such agencies can require the Bank to adjust the allowance based on
          their judgments about information available to them at the time of
          their examination.

     (g)  REAL ESTATE OWNED

          Real estate owned (properties acquired by foreclosure or voluntarily
          conveyed by delinquent borrowers in lieu of foreclosure) is recorded
          as of the acquisition date at the lower of cost or fair value less
          estimated costs to sell as established by a current appraisal. Costs
          relating to development and improvement of the property are
          capitalized, whereas costs relating to the holding of such real estate
          are expensed as incurred. Subsequent to acquisition, valuations are
          periodically performed by management; and the carrying value of the
          real estate acquired is subsequently adjusted by establishing a
          valuation allowance and recording a charge to operations if the
          carrying value of a property exceeds its estimated fair value less
          estimated costs to sell. Gains and losses from the sale of real estate
          are recognized upon sale and are based upon the net carrying value of
          the related property.

     (h)  PREMISES AND EQUIPMENT

          Premises and equipment are stated at cost less accumulated
          depreciation and amortization. Depreciation for financial reporting
          purposes is computed using the straight-line method over the estimated
          useful lives of the related assets of five to forty years. Leasehold
          improvements are amortized on a straight-line basis over the shorter
          of the related lease or the estimated useful life of the improvement.
          Accelerated methods are used for income tax purposes.

     (i)  INTEREST ON SAVINGS DEPOSITS

          Interest on savings deposits is accrued and charged to expense monthly
          and is paid or credited in accordance with the terms of the respective
          accounts.

                                       29                            (Continued)
<PAGE>   32


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)


     (j)  INCOME TAXES

          Income taxes are based on financial statement income after giving
          effect to special rules applicable to savings banks under income tax
          laws.

          Deferred taxes are provided for under the asset and liability method
          of accounting for income taxes. Under the asset and liability method,
          deferred tax assets and liabilities are recognized for the future tax
          consequences attributable to differences between the financial
          statement carrying amounts of existing assets and liabilities and
          their respective tax bases. Deferred tax assets and liabilities are
          measured using enacted tax rates expected to apply to taxable income
          in the years in which those temporary differences are expected to be
          recovered or settled. The effect on deferred tax assets and
          liabilities of a change in tax rates is recognized in income in the
          period that includes the enactment date.

     (k)  PENSION PLAN

          Current costs of the pension plan are charged to expense and funded as
          accrued. There are no unfunded vested benefits as of June 30, 1999 and
          1998.

     (l)  EARNINGS PER SHARE

          In February 1997, the FASB issued Statement of Financial Accounting
          Standards (SFAS) No. 128, "Earnings per Share." SFAS No. 128
          supersedes APB Opinion No. 15, "Earnings per Share" (Opinion No. 15)
          and requires the calculation and dual presentation of basic and
          diluted earnings per share (EPS), replacing the measures of primary
          and fully-diluted EPS as reported under Opinion No. 15. SFAS No. 128
          is effective for financial statements issued for periods ending
          December 31, 1997. Prior period EPS data is restated to conform with
          SFAS No. 128.


                                       30                            (Continued)

<PAGE>   33
                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)


           The following weighted average shares and share equivalents are used
           to calculate basic and diluted EPS for the years ended June 30, 1999
           and 1998:

 <TABLE>
 <CAPTION>

                                                                        1999           1998         1997
                                                                    ------------  ------------- -------------

<S>                                                                     <C>            <C>           <C>
             Weighted average number of shares outstanding
               used to calculate basic EPS                              570,496        662,734       720,265
             Dilutive securities                                             --         23,460            --
                                                                    ------------  ------------- -------------

             Weighted average number of shares and share
               equivalents outstanding used to calculate
               diluted EPS                                              570,496        686,194       720,265
                                                                    ============  ============= =============
</TABLE>

           Options to purchase 69,148 shares of common stock at $10.59 per share
           were outstanding during 1999 and 1997 but were not included in the
           computation of diluted EPS because to do so would have been
           anti-dilutive. Additionally, 21,481 and 27,659 Recognition and
           Retention Plan awards were outstanding during 1999 and 1997,
           respectively, but were not included in the computation of diluted EPS
           because to do so would have been anti-dilutive.

      (m)  COMPREHENSIVE RESULTS

           During 1999, the Company adopted SFAS No. 130 "Reporting
           Comprehensive Income." SFAS No. 130 established standards for the
           reporting and display of comprehensive income and its components in
           the financial statements. SFAS No. 130 defines comprehensive income
           as net income, as currently reported, as well as unrealized gains and
           losses on assets available-for-sale and certain other items not
           currently included in the income statement. In complying with the
           reporting requirements of this statement, the Company retitled the
           line item in the Consolidated Statement of Financial Condition and
           the Statement of Changes in Shareholders' Equity from "Unrealized
           gain (loss) on securities available-for-sale, net" to "Accumulated
           other comprehensive income (loss), net." Other comprehensive income
           (loss) includes unrealized gains (losses) on investment securities
           available-for-sale.

      (n)  STOCK SPLIT

           On May 15 1998, the Company completed a four-for-three stock split.
           Share amounts and prior period EPS data have been restated to reflect
           the impact of the split.




                                 31                                (Continued)
<PAGE>   34

                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)




      (o)  RECLASSIFICATION OF PRIOR YEAR STATEMENTS

           Certain items previously reported have been reclassified to conform
           with the current year's reporting format.

(2)   INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE

      The carrying values and estimated market value of securities
      available-for-sale as of June 30, 1999 and 1998, are summarized as
      follows:

<TABLE>
<CAPTION>

                                                             JUNE 30, 1999
                                     --------------------------------------------------------------
                                                         GROSS           GROSS         ESTIMATED
                                       AMORTIZED      UNREALIZED      UNREALIZED        MARKET
                                         COST            GAINS          LOSSES           VALUE
                                     --------------  --------------  --------------  --------------
<S>                               <C>                <C>            <C>              <C>
       U.S. agency obligations    $          1,997              --            (23)           1,974
       Mortgage-backed securities            1,131              16             (3)           1,144
       FNMA common stock                       135               1              --             136
       FNMA preferred stock                    250              11              --             261
                                     --------------  --------------  --------------  --------------

                     Total        $          3,513              28            (26)           3,515
                                     ==============  ==============  ==============  ==============
<CAPTION>
                                                             JUNE 30, 1998
                                    --------------------------------------------------------------
                                                         GROSS           GROSS         ESTIMATED
                                       AMORTIZED      UNREALIZED      UNREALIZED        MARKET
                                         COST            GAINS          LOSSES           VALUE
                                     --------------  --------------  --------------  --------------
<S>                               <C>                <C>            <C>              <C>
       U.S. agency obligations    $          5,696              39              --           5,735
       Mortgage-backed securities            1,644              49              --           1,693
       FNMA preferred stock                    313              13             (2)             324
                                     --------------  --------------  --------------  --------------

                     Total        $          7,653             101             (2)           7,752
                                     ==============  ==============  ==============  ==============
</TABLE>




                                 32                                (Continued)
<PAGE>   35


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)



      The carrying value and estimated market value of securities
      available-for-sale by contractual maturity are as follows:

<TABLE>
<CAPTION>

                                             JUNE 30, 1999                    JUNE 30, 1998
                                       --------------------------       ----------------------------
                                                        ESTIMATED                       ESTIMATED
                                       AMORTIZED         MARKET         AMORTIZED        MARKET
                                          COST            VALUE           COST            VALUE
                                       ----------      ----------       ----------     ----------

<S>                                       <C>           <C>              <C>           <C>
       U.S. agency and corporate
         obligations:
           Due in one year or less   $       --              --              --              --
           Due after one year
              through five years             --              --           1,249           1,257
           Due after five years
              through ten years              --              --           3,547           3,566
           Due after ten years            1,997           1,974             900             912
                                       ----------      ----------       ----------     ----------

                                          1,997           1,974           5,696           5,735
       FNMA common stock                    135             136
       FNMA preferred stock                 250             261             313             324
       Mortgage-backed securities         1,131           1,144           1,644           1,693
                                       ----------      ----------       ----------     ----------

                     Total         $      3,513           3,515           7,653           7,752
                                       ==========      ==========       ==========     ==========
</TABLE>



      Proceeds from the sales of securities available-for-sale during 1999 were
      $409. Gross realized gains on the sale of securities available-for-sale
      during 1999 were $43. There were no sales of securities available-for-sale
      during 1998 or 1997. There were no commitments to purchase investment
      securities at June 30, 1999.




                                 33                                (Continued)
<PAGE>   36


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)




(3)   INVESTMENT SECURITIES HELD-TO-MATURITY

      The carrying values and estimated market values of investment securities
      held-to-maturity as of June 30, 1999 and 1998, are summarized as follows:

<TABLE>
<CAPTION>
                                                                 JUNE 30, 1999
                                         ---------------------------------------------------------------
                                                              GROSS           GROSS         ESTIMATED
                                           AMORTIZED       UNREALIZED      UNREALIZED        MARKET
                                             COST             GAINS          LOSSES           VALUE
                                         --------------   --------------  --------------  --------------
<S>                                    <C>                 <C>            <C>               <C>
       Municipal obligations           $           200                3              --             203
       Mortgage-backed securities                    7               --              --               7
                                         --------------   --------------  --------------  --------------

                     Total investments $           207                3              --             210
                                         ==============   ==============  ==============  ==============

<CAPTION>
                                                                 JUNE 30, 1998
                                         ---------------------------------------------------------------
                                                              GROSS           GROSS         ESTIMATED
                                           AMORTIZED       UNREALIZED      UNREALIZED        MARKET
                                             COST             GAINS          LOSSES           VALUE
                                         --------------   --------------  --------------  --------------
<S>                                    <C>                 <C>            <C>               <C>
       Municipal obligations           $           200                5              --             205
       Mortgage-backed securities                   10               --              --              10
                                         --------------   --------------  --------------  --------------

                     Total investments $           210                5              --             215
                                         ==============   ==============  ==============  ==============
</TABLE>




                                 34                                (Continued)
<PAGE>   37


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)



      The amortized cost and estimated market value of securities
      held-to-maturity, by contractual maturity, are shown below. Actual
      maturities may differ from contractual maturities because issuers may have
      the right to call or prepay obligations with or without call or prepayment
      penalties.

<TABLE>
<CAPTION>

                                                                        JUNE 30,
                                              -------------------------------------------------------------
                                                           1999                           1998
                                              ------------------------------  -----------------------------
                                                                ESTIMATED                      ESTIMATED
                                                AMORTIZED        MARKET        AMORTIZED         MARKET
                                                  COST            VALUE           COST           VALUE
                                              --------------  --------------  -------------   -------------
<S>                                         <C>                 <C>            <C>               <C>
       Due in one year or less              $            --              --             --              --
       Due after one year through five
       years                                             --              --             --              --
       Due after five years through ten
       years                                             --              --             --              --
       Due after ten years                              200             203            200             205
                                              --------------  --------------  -------------   -------------

                                                        200             203            200             205

       Mortgage-backed securities                         7               7             10              10
                                              --------------  --------------  -------------   -------------

                     Total                  $           207             210            210             215
                                              ==============  ==============  =============   =============
</TABLE>




                                 35                                (Continued)
<PAGE>   38


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)





(4)   LOANS RECEIVABLE

      Loans receivable as of June 30, 1999 and 1998, are summarized as follows:

<TABLE>
<CAPTION>

                                                                   1999            1998
                                                               --------------  --------------
<S>                                                          <C>                      <C>
           Mortgage loans:
              Conventional, 1 - 4 family                     $        29,680          21,800
              Commercial and multi-family                              1,404           1,560
              Construction                                             5,300           3,631
              Insured and guaranteed                                     171             206
                                                               --------------  --------------
                                                                      36,555          27,197

           Other:
              Consumer loans                                           8,741           8,217
              Lines of credit                                            761             840
                                                               --------------  --------------
                                                                       9,502           9,057

           Less:
              Unearned interest on consumer loans                         30              73
              Undisbursed loan proceeds                                2,770           1,852
              Deferred loan fees                                         233             310
              Allowance for loan losses                                  309             394
                                                               --------------  --------------

                                                             $        42,715          33,625
                                                               ==============  ==============

</TABLE>

      Commitments to extend credit are agreements to lend to a customer as long
      as there is no violation of any condition established in the contract.
      Commitments generally have fixed expiration dates or other termination
      clauses and may require payment of a fee. The Bank evaluates each
      customer's credit worthiness on a case-by-case basis. The amount of
      collateral obtained, if deemed necessary by the Bank upon extension of
      credit, is based on management's credit evaluation of the borrower. The
      collateral consists primarily of residential real estate and personal
      property. As of June 30, 1999 and 1998, the Bank had outstanding
      commitments to originate and fund first mortgage loans and construction
      loans of approximately $6,401 and $7,615, respectively. Unused customer
      lines of credit as of June 30, 1999 and 1998, approximated $614 and $676,
      respectively.




                                 36                                (Continued)
<PAGE>   39


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)



      Nonaccrual loans totaled approximately $228, $323 and $273 as of June 30,
      1999, 1998 and 1997, respectively. The interest that would have been
      recorded on these loans for the years ended June 30, 1999, 1998 and 1997,
      was approximately $24, $42 and $26, respectively. The amount of interest
      income recognized for the same periods was approximately $1, $12 and $10.
      The Company is not committed to lend additional funds to debtors whose
      loans have been placed on nonaccrual status.

      (a)   ALLOWANCES FOR ESTIMATED LOSSES

           Activity with respect to the allowances for estimated losses is
           summarized as follows:

<TABLE>
<CAPTION>

                                                      1999            1998            1997
                                                  --------------  --------------  --------------
<S>                                             <C>                  <C>              <C>
            LOANS RECEIVABLE
              Balance at beginning of period    $           394             282             337
              Provision charged to income                    70             312              29
              Charge-offs                                  (181)           (212)            (95)
              Recoveries                                     26              12              11
                                                  --------------  --------------  --------------
              Balance at end of period                      309             394             282
                                                  ==============  ==============  ==============
            REAL ESTATE OWNED
              Balance at beginning of period                 --              45              38
              Provision charged to income                    15              --              45
              Charge-offs                                   (15)            (45)            (38)
              Recoveries                                     --              --              --
                                                  --------------  --------------  --------------
              Balance at end of period          $            --              --              45
                                                  ==============  ==============  ==============

</TABLE>

(5)   FEDERAL HOME LOAN BANK STOCK

      The Bank is a member of the Federal Home Loan Bank System and, as a
      member, maintains an investment in the capital stock of the Federal Home
      Loan Bank of Pittsburgh. The investment is based on a predetermined
      formula and is carried at cost.




                                 37                                (Continued)
<PAGE>   40


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)



(6)   PREMISES AND EQUIPMENT

      Premises and equipment as of June 30, 1999 and 1998, are summarized by
      major classification as follows:

<TABLE>
<CAPTION>

                                                                       1999            1998
                                                                   --------------  --------------
<S>                                                              <C>                   <C>
           Land                                                  $           145             145
           Office buildings and improvements                               1,162           1,157
           Construction-in-progress                                          330              --
           Leasehold improvements                                             43              56
           Furniture, fixtures and equipment                                 253             323
                                                                   --------------  --------------
                         Total, at cost                                    1,933           1,681
              Less accumulated depreciation and
                 amortization                                                593             637
                                                                   --------------  --------------
                         Premises and equipment, net             $         1,340           1,044
                                                                   ==============  ==============

</TABLE>

      Depreciation and amortization expense for the years ended June 30, 1999,
      1998 and 1997, was $44, $50 and $54, respectively.

      The Bank maintains operating leases with respect to a branch office
      facility and equipment which expire on July 31, 2002, and various dates
      through June 30, 2001, respectively. Lease expense approximated $100, $47
      and $28 for the years ended June 30, 1999, 1998 and 1997, respectively.
      Minimum annual lease commitments approximate $93, $83 and $24 for the
      years ended June 30, 2000, 2001 and 2002, respectively.

(7)   ACCRUED INTEREST RECEIVABLE

      Accrued interest receivable as of June 30, 1999 and 1998, is summarized as
      follows:

<TABLE>
<CAPTION>

                                                                    1999            1998
                                                                --------------  --------------
<S>                                                          <C>                       <C>
              Loans receivable                               $            267             216
              Investment and mortgage-backed securities
                and other interest-bearing deposits                        32             115
                                                                --------------  --------------
                       Total                                 $            299             331
                                                                ==============  ==============

</TABLE>




                                 38                                (Continued)
<PAGE>   41


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)



(8)   SAVINGS DEPOSITS

      Savings deposits as of June 30, 1999 and 1998, are summarized as follows:

<TABLE>
<CAPTION>
                                                                       JUNE 30,
                                              ------------------------------------------------------------
                                                         1999                            1998
                                              ---------------------------     ----------------------------
                                                WEIGHTED                       WEIGHTED
                                                AVERAGE                         AVERAGE
                                                  RATE          AMOUNT           RATE           AMOUNT
                                              -------------   -----------     ------------   -------------

<S>                                        <C>            <C>                   <C>      <C>
       Passbook savings accounts           %      2.71     $       4,605 %       2.71     $         4,855
       Premium savings and club
         accounts                                 2.96             3,818         2.37               3,814
       Money market and NOW accounts              2.30             2,587         2.39               2,608
       Noninterest-bearing checking accts            -             1,340            -               1,242
                                                              -----------                    -------------

                                                                  12,350                           12,519

       Certificates of deposit:
         3.01% to 3.99%                           3.50                33         3.50                  33
         4.00% to 4.99%                           4.52             8,605         4.92               2,462
         5.00% to 5.99%                           5.44             7,338         5.43              13,641
         6.00% to 6.99%                           6.22             5,996         6.28               6,029
         7.00% to 7.99%                           7.22             1,207         7.25               1,070
                                                              -----------                    -------------

                                                                  23,179                           23,235
                                                              -----------                    -------------

                          Total                   4.35     $      35,529         4.41      $       35,754
                                                              ===========                    =============
</TABLE>

      Certificates of deposit with balances of $100,000 or more totaled
      approximately $1,998 and $2,305 as of June 30, 1999 and 1998,
      respectively.




                                 39                                (Continued)
<PAGE>   42


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)



      The scheduled contractual maturities of certificates of deposit are
      summarized as follows:

<TABLE>
<CAPTION>
                                                                    1999             1998
                                                                --------------   --------------
<S>                                                          <C>                     <C>
              Within one year                                $         12,659           11,983
              Beyond one year but within two years                      4,137            4,462
              Beyond two years but within three years                   3,164            2,722
              Beyond three years but within four years                  2,114            2,089
              Beyond four years but within five years                   1,105            1,979
                                                                --------------   --------------

                       Total                                 $         23,179           23,235
                                                                ==============   ==============

</TABLE>

      Interest expense on savings deposits for the years ended June 30, 1999,
      1998 and 1997, is summarized as follows:

<TABLE>
<CAPTION>
                                                         1999            1998             1997
                                                     --------------  --------------   --------------
<S>                                               <C>                       <C>              <C>
           Passbook savings accounts              $            130             135              142
           Premium savings and club accounts                   118             125              143
           Money market and NOW accounts                        62              71               78
           Certificates of deposit                           1,290           1,334            1,226
                                                     --------------  --------------   --------------

                       Total                      $          1,600           1,665            1,589
                                                     ==============  ==============   ==============

</TABLE>




                                 40                                (Continued)
<PAGE>   43


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)



(9)   BORROWED FUNDS

      Borrowed funds at June 30, 1999 and 1998, are summarized as follows:

<TABLE>
<CAPTION>

                                                                         JUNE 30,
                                                -----------------------------------------------------------
                                                            1999                           1998
                                                ----------------------------   ----------------------------
                                                  WEIGHTED                       WEIGHTED
                                                  AVERAGE                        AVERAGE
                                                    RATE          AMOUNT           RATE          AMOUNT
                                                -------------  -------------   -------------  -------------
<S>                                          <C>            <C>                 <C>         <C>
       Advances from the Federal Home
         Loan Bank of Pittsburgh:
         Due within one year                 %      5.16     $        4,000 %         -     $           --
         Due between one and three years            5.58              3,000           -                 --
         Due between three and four
           years                                       -                 --        5.78              1,000
         Due between four and five
              years                                 5.42              1,000           -                 --
                                                               -------------                  -------------

                       Total advances               5.35              8,000        5.78              1,000

       ESOP term loan, payable through
         2006                                       7.75                394        8.50                432
                                                               -------------                  -------------
                       Borrowed funds               5.46     $        8,394        6.60     $        1,432
                                                               =============                  =============
</TABLE>

      The ESOP term loan is secured by all unallocated shares of the Company's
      securities held by the ESOP. Principal and interest are payable in forty
      equal quarterly payments. The term loan has a variable interest rate equal
      to the prime rate. The interest rate at June 30, 1999, was 7.75%.

      The advances payable to the FHLB of Pittsburgh are secured by the
      Company's stock in the FHLB, qualifying residential mortgage loans and
      other mortgage-backed securities to the extent the fair market value of
      such pledged collateral must be at least equal to the advances
      outstanding.

      Interest expense on FHLB advances was $264, $76 and $52 and on the ESOP
      term loan $35, $33 and $39 for the years ended June 30, 1999, 1998 and
      1997, respectively.




                                 41                                (Continued)
<PAGE>   44


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)



(10)  INCOME TAXES

      The Bank qualifies to be taxed under income tax rules applicable to
savings banks.

      The provision for income taxes for the years ended June 30, 1999, 1998 and
      1997, consists of the following:

<TABLE>
<CAPTION>
                                                              1999            1998             1997
                                                          --------------  --------------   --------------
<S>                                                    <C>                        <C>              <C>
           Current tax expense (benefit):
              Federal                                  $            125             190              138
              State                                                  42              15              (12)
                                                          --------------  --------------   --------------

                                                                    167             205              126

           Deferred tax expense (benefit):
              Federal                                                40             (37)               3
                                                          --------------  --------------   --------------

                       Provision for taxes on income                207             168              129

           Income tax expense (benefit) reported in
              net worth related to securities
              available-for-sale                                    (27)             29               37
                                                          --------------  --------------   --------------

                       Total income tax expense        $            180             197              166
                                                          ==============  ==============   ==============
</TABLE>

      A reconciliation from the expected federal statutory income tax rate to
      the effective rate, expressed as a percentage of pretax income, for the
      years ended June 30, 1999, 1998 and 1997, is summarized as follows:

<TABLE>
<CAPTION>
                                                               1999            1998             1997
                                                          --------------  --------------   --------------
<S>                                                    <C>                 <C>              <C>
              Expected federal tax rate                %      34.0            34.0             34.0
              State tax (net of federal benefit)               5.8             2.2             (1.8)
              Exempt income on investment securities          (0.8)           (2.0)            (2.0)
              Other                                            4.1             3.4             (1.8)
                                                          --------------  --------------   --------------

                                                       %      43.1            37.6             28.4
                                                          ==============  ==============   ==============

</TABLE>




                                 42                                (Continued)
<PAGE>   45


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)



      The tax effect of temporary differences which give rise to a significant
      portion of deferred tax assets (liabilities) as of June 30, 1999, 1998 and
      1997, are as follows:

<TABLE>
<CAPTION>

                                                           1999            1998             1997
                                                       --------------  --------------   --------------
<S>                                                 <C>                        <C>              <C>
         Deferred tax assets:
           Deferred loan fees                       $              9              28               26
           Book loan loss reserve                                105             134               96
           Tax loan loss reserve                                  --               6               --
           Unrealized loss on securities available-
              for-sale                                            --              --                1
           Employee stock ownership plan                          18              14               11
           Uncollected interest                                    3               3               25
           Fixed assets                                            2              --               --
           Other                                                  11               7               10
                                                       --------------  --------------   --------------

                     Total deferred tax asset                    148             192              169

         Deferred tax liabilities:
           Fixed assets                                           --              (6)             (14)
           Unrealized gain on securities available-
              for-sale                                            (1)            (28)              --
           Tax loan loss reserve                                  (2)             --               (5)
                                                       --------------  --------------   --------------

                     Total deferred tax liability                 (3)            (34)             (19)
                                                       --------------  --------------   --------------

                     Net deferred tax asset         $            145             158              150
                                                       ==============  ==============   ==============
</TABLE>

      The Bank has determined that it was not required to establish a valuation
      allowance for deferred tax assets since it is more likely than not that
      the deferred tax asset will be realized through carryback to taxable
      income in prior years, future reversal of existing temporary differences
      and, to a lesser extent, future taxable income. The net deferred tax asset
      is included as a component of prepaid expenses and other assets in the
      consolidated balance sheets.

      As a result of the special tax treatment accorded the Bank under income
      tax regulations, approximately $979 of balances in retained earnings at
      June 30, 1998 (the most recent date for which a tax return has been
      filed), represent allocations of income to bad debt deductions for tax
      purposes only. No provision for federal income tax has been made for such
      amount. If any portion of that amount is used other than to absorb loan
      losses (which is not anticipated), taxable income will be generated
      subject to tax at the rate then in effect.




                                 43                                (Continued)
<PAGE>   46


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)



(11)  NET WORTH

      The Bank is subject to various regulatory capital requirements
      administered by the federal banking agencies. Failure to meet minimum
      capital requirements can initiate certain mandatory - and, possibly
      additional discretionary - actions by regulators that, if undertaken,
      could have a direct material effect on the Bank's financial statements.
      Under capital adequacy guidelines and the regulatory framework for prompt
      corrective action, the Bank must meet specific capital guidelines that
      involve quantitative measures of the Bank's assets, liabilities and
      certain off-balance-sheet items as calculated under regulatory accounting
      practices. The Bank's capital amounts and classification are also subject
      to qualitative judgments by the regulators about components, risk
      weightings and other factors.

      Quantitative measures established by regulation to ensure capital adequacy
      require the Bank to maintain minimum amounts and ratios (set forth in the
      table below) of total and Tier I Capital (as defined in the regulations)
      to risk-weighted assets (as defined), and of Tier I Capital (as defined)
      to average assets (as defined). Management believes, as of June 30, 1999,
      that the Bank meets all capital adequacy requirements to which it is
      subject.

      As of June 30, 1999, the most recent notification from the Federal Deposit
      Insurance Corporation categorized the Bank as "well capitalized" under the
      regulatory framework for prompt corrective action. To be categorized as
      "well capitalized" the Bank must maintain minimum total risk-based, Tier I
      risk based, Tier I leverage ratios as set forth in the table. There are no
      conditions or events since that notification that management believes have
      changed the Bank's category.




                                 44                                (Continued)
<PAGE>   47


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)



      The Bank's actual capital amounts and ratios are also presented in the
      following table.

<TABLE>
<CAPTION>
                                                                                          TO BE WELL
                                                                                       CAPITALIZED UNDER
                                                                 FOR CAPITAL           PROMPT CORRECTIVE
                                        ACTUAL                ADEQUACY PURPOSE        ACTIONS PROVISIONS
                                ------------------------   ------------------------  ------------------------
                                  AMOUNT        RATIO       AMOUNT        RATIO        AMOUNT        RATIO
                                -----------   ----------   ----------   -----------  -----------   ----------
<S>                           <C>               <C>     <C>               <C>     <C>                <C>
      As of June 30, 1999:
        Total capital (to
          risk-weighted
          assets)             $      6,835 %    20.77   $      2,633 %     >8.00   $      3,291  %   >10.00
                                                                           -                         -
        Tier I Capital (to
          risk-weighted
          assets)                    6,526      19.83          1,316       >4.00          1,974      >6.00
                                                                           -                         -

        Tier I Capital (to
          average assets)            6,526      12.69          2,057       >4.00          2,571      >5.00
                                                                           -                         -
      As of June 30, 1998:
        Total capital (to
          risk-weighted
          assets)                    8,561      32.15          2,130       >8.00          2,663      >10.00
                                                                           -                         -
        Tier I Capital (to
          risk-weighted
          assets)                    8,227      30.89          1,065       >4.00          1,597      >6.00
                                                                           -                         -
        Tier I Capital (to
          average assets)            8,227      17.89          1,839       >4.00          2,299      >5.00
                                                                           -                         -
</TABLE>

(12)  EMPLOYEE BENEFIT PLANS

      (a)  PENSION PLAN

           The Bank participates in a retirement plan which covers substantially
           all employees through the Financial Institution Retirement Fund (the
           Fund), a qualified multi-employer defined benefit plan. The Fund does
           not compute and provide separate actuarial valuations or segregation
           of plan assets by employer. Pension expense was $-0- for the years
           ended June 30, 1999, 1998 and 1997. The Bank has been notified by the
           plan administrator that the plan is fully funded for the plan year
           beginning July 1, 1998.




                                 45                                (Continued)
<PAGE>   48


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)




      (b)  RECOGNITION AND RETENTION PLAN

           On March 26, 1997, shareholders of the Company approved the adoption
           of the 1997 Recognition and Retention Plan (RRP). The purpose of the
           RRP is to retain qualified personnel in key positions, provide
           officers, key employees and directors with a proprietary interest in
           the Company as an incentive to contribute to its success and reward
           key employees for outstanding performance. The aggregate number of
           RRP shares granted was 27,660 which shares were purchased in open
           market transactions at a price ranging from $10.60 per share to
           $11.06 per share. These shares vest 20% annually beginning one year
           from the date of grant. This expense is being amortized over the life
           of the grant using a $10.97 average purchase price and amounted to
           $71, $72 and $18 for the years ended June 30, 1999,1998 and 1997,
           respectively.

      (c)  STOCK OPTION PLAN

           The Board of Directors and shareholders of the Company have adopted
           the 1997 Stock Option Plan (1997 Plan) which authorizes the grant of
           stock options. The maximum number of shares of common stock of the
           Company which may be issued under the 1997 Plan is 81,350, of which
           24,405 shares may be granted to non-employee directors. Shares become
           vested and exercisable at the rate of 20% annually beginning on one
           year from the date of grant and have a term of ten years.




                                 46                                (Continued)
<PAGE>   49


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)



           A summary of the Company's stock option plan as of June 30, 1999, and
           the changes for the years then ended is as follows:

<TABLE>
<CAPTION>

                                                                  SHARES           AVERAGE
                                                                  SUBJECT         EXERCISE
                         STOCK OPTION ACTIVITY                   TO OPTION          PRICE
            -------------------------------------------------  --------------   ----------------
<S>                                                             <C>            <C>
            Balance at July 12, 1996                                      --   $          --
              Granted                                                 69,148          10.5938(1)
              Exercised                                                   --               --
              Forfeited                                                   --               --
                                                               --------------   ----------------
            Balance at June 30, 1997                                  69,148          10.5938
              Granted                                                     --               --
              Exercised                                                   --               --
              Forfeited                                                   --               --
                                                               --------------   ----------------
            Balance at June 30, 1998                                  69,148          10.5938
              Granted                                                     --               --
              Exercised                                                   --               --
              Forfeited                                                   --               --
                                                               --------------   ----------------
            Balance at June 30, 1999                                  69,148   $      10.5938
                                                               ==============   ================
     </TABLE>

           (1) Using a Black-Scholes Option Valuation Model, the
               weighted-average fair value of options granted in 1997 was
               estimated at $4.32 per share.




                                 47                                (Continued)
<PAGE>   50


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)



           SFAS 123 establishes a fair value based method of accounting for
           stock-based compensation plans. Effective for fiscal years beginning
           after December 15, 1995, SFAS allows entities to expense an estimated
           fair value of stock options or to continue to measure compensation
           expense for stock option plans using the intrinsic value method
           prescribed by APB No. 25. Entities that elect to continue to measure
           compensation expense based on APB No. 25 must provide pro forma
           disclosures of net income and earnings per share as if the fair value
           method of accounting had been applied. The Company has elected to
           measure compensation cost using the intrinsic value method prescribed
           by APB No. 25. Had the company used the fair value method, net income
           and earnings per share for the years ended June 30, 1999, 1998 and
           1997, would have been as follows (in thousands, except for per share
           data):

<TABLE>
<CAPTION>
                                                       1999             1998            1997
                                                  --------------   --------------  --------------
<S>                                             <C>                     <C>             <C>
                Net income:
                  As reported                   $      273              279             327
                  Pro forma                            213              219             312

                Earnings per share:
                  As reported:
                    Basic                       $      .48              .42             .45
                    Diluted                            .48              .41             .45

                  Pro forma:
                    Basic                              .37              .33             .43
                    Diluted                            .37              .32             .43
</TABLE>

           The fair value for these options was estimated at the date of grant
           using a Black-Scholes Option Valuation Model with the following
           assumptions for 1997: risk-free interest rate of 6.07%; dividend
           yield of 2.1%; volatility factor of the expected market price of the
           Company's common stock of 20%; and an expected life of the options of
           10 years.




                                 48                                (Continued)
<PAGE>   51


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)


           The Black-Scholes Option Valuation Model was developed for use in
           estimating the fair value of traded options which have no vesting
           restrictions and are fully transferable. In addition, option
           valuation models require the input of highly subjective assumptions
           including the expected stock price volatility. Because the Company's
           employee stock options have characteristics significantly different
           from those of traded options and because changes in the subjectivity
           input assumptions can materially affect the fair value estimate, in
           management's opinion, the existing models do not necessarily provide
           a reliable single measure of the fair value of its employee stock
           options.

           The following table summarizes the characteristics of stock options
           outstanding at June 30, 1999:

<TABLE>
<CAPTION>
                                                   OUTSTANDING                   EXERCISABLE
                                           ----------------------------  -----------------------------
                                                            AVERAGE                        AVERAGE
               EXERCISE                      AVERAGE        EXERCISE                       EXERCISE
                 PRICE         SHARES        LIFE (2)        PRICE          SHARES          PRICE
              ------------   -----------   -------------  -------------  -------------   -------------
<S>                              <C>           <C>      <C>                    <C>     <C>
            $   10.5938          69,148        7.75      $  10.5938            27,659   $  10.5938
</TABLE>

           (2) Average contractual life remaining in years.

      (d)  EMPLOYEE STOCK OWNERSHIP PLAN

           The Company has established an Employee Stock Ownership Plan (ESOP)
           which covers employees who have been credited with at least 1,000
           hours of service during a twelve month period and have attained the
           age of 21. The ESOP Trust borrowed $488 from an independent
           third-party lender and purchased 48,810 shares, equal to 8% of the
           total number of shares issued in the conversion. The Company makes
           scheduled discretionary contributions to the ESOP sufficient to
           service the debt. The ESOP shares are pledged as collateral for the
           debt. As the debt is repaid, shares are released from collateral and
           become eligible for allocation to participants. Shares are allocated
           to participants based on compensation. The cost of shares not
           committed to be released and unallocated (suspense shares) is
           reported as a reduction in shareholders' equity. Dividends on
           allocated and unallocated shares are used for debt service.




                                 49                                (Continued)
<PAGE>   52


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)



           The Company accounts for its ESOP in accordance with AICPA Statement
           of Position 93-6 (SOP 93-6). SOP 93-6 requires that (1) compensation
           expense be recognized based on the average fair value of the ESOP
           shares committed to be released; (2) dividends on unallocated shares
           used to pay debt service be reported as a reduction of debt or of
           accrued interest payable and that dividends on allocated shares be
           charged to retained earnings; and (3) ESOP shares which have not been
           committed to be released not be considered outstanding for the
           purpose of computing earnings per share and book value per share.

           Compensation expense related to the ESOP amounted to $71, $90 and $63
           for the years ended June 30, 1999, 1998 and 1997, respectively, from
           the 6,508 shares committed to be released each year. Unallocated ESOP
           shares at June 30, 1999, amounted to 45,556 with a total fair value
           of $413. Dividends received on unallocated ESOP shares during the
           year ended June 30, 1999, amounted to $13.

(13)  CONCENTRATION OF CREDIT RISK

      The Bank is primarily engaged in the business of attracting retail
      deposits from the general public and using such funds to invest in
      residential and commercial mortgage loans and consumer loans. The Bank
      conducts its business through three offices located in the Pittsburgh and
      Kittanning areas of Pennsylvania. As of June 30, 1999, the majority of the
      Bank's loan portfolio was secured by properties located in these
      geographical areas. The Bank utilizes established loan underwriting
      procedures which generally require the taking of collateral to secure
      loans. Given its underwriting and collateral requirements, the Bank does
      not believe it has significant concentrations of credit risk to any one
      group of borrowers.

(14)  SAIF ASSESSMENT

      On September 30, 1996, President Clinton signed into law the Deposit Funds
      Act of 1996 (the Act). Among other things, the Act imposed a one-time
      special assessment on deposits insured by the SAIF designed to fully
      capitalize the SAIF to the level required by law. The result of this
      one-time charge was $247 to the Bank. The Act also provides for the
      eventual merger of the SAIF with the Bank Insurance Fund (BIF) and
      reallocates payment of Financing Corporation bond obligations to both SAIF
      and BIF insured institutions. In addition, the Act contains prohibitions
      on insured institutions facilitating or encouraging the migration of SAIF
      deposits to the BIF until the end of 1999. As a result of the
      recapitalization of the SAIF, deposit insurance premiums were
      significantly reduced beginning in calendar year 1997 for all SAIF insured
      institutions.




                                 50                                (Continued)
<PAGE>   53


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)



(15)  CONTINGENCIES

      The Company is subject to asserted and unasserted potential claims
      encountered in the normal course of business. In the opinion of management
      and legal counsel, the resolution of these claims will not have a material
      adverse effect on the Company's financial position or results of
      operations.

(16)  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

      SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
      requires disclosure of fair value information about financial instruments,
      whether or not recognized in the balance sheet, for which it is
      practicable to estimate that value. In cases where quoted market prices
      are not available, fair values are based on estimates using present value
      or other valuation techniques. Those techniques are significantly affected
      by the assumptions used, including the discount rate and estimates of
      future cash flows. In that regard, the derived fair value estimates cannot
      be sustained by comparison of independent markets and, in many cases,
      could not be realized in immediate settlement of the instrument. SFAS No.
      107 excludes certain financial instruments and all nonfinancial
      instruments from its disclosure requirements. Accordingly, the aggregate
      fair value amounts do not represent the underlying value of the Company.

      Management has made estimates of fair value discount rates that it
      believes to be reasonable considering expected prepayment rates, rates
      offered in the geographic areas in which the Company competes, credit risk
      and liquidity risk. However, because there is no active market for many of
      these financial instruments, management has no basis to verify whether the
      resulting fair value estimates would be indicative of the value negotiated
      in an actual sale.

      The following methods and assumptions were used by the Company at
      estimating its fair value disclosures for financial instruments:

           CASH AND CASH EQUIVALENTS: The carrying amounts reported in the
           consolidated statement of financial condition for cash, federal funds
           sold and interest-bearing deposits approximate those assets' fair
           values.

           INVESTMENT AND MORTGAGE-BACKED SECURITIES: Fair values for investment
           securities are based on quoted market prices where available, dealer
           quotes or prices obtained from independent pricing services. See
           notes 2 and 3 of the consolidated financial statements for a detail
           breakdown of these securities.




                                 51                                (Continued)
<PAGE>   54


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)


           LOANS RECEIVABLE: The fair values for one- to four-family residential
           loans are estimated using discounted cash flow analyses using yields
           from similar products in the secondary markets. The carrying amount
           of construction loans approximates its fair value given their
           short-term nature. The fair values of consumer and other loans are
           estimated using discounted cash flow analyses, using interest rates
           reported in various government releases and the Company's own product
           pricing schedule for loans with terms similar to the Company's. The
           fair values of multi-family and nonresidential mortgages are
           estimated using discounted cash flow analysis, using interest rates
           based on a national survey of similar loans. The carrying amount of
           accrued interest approximate its fair value.

           BORROWED FUNDS: The fair value of borrowed funds, consisting of
           Federal Home Loan Bank (FHLB) advances and other borrowings, was
           estimated using a discounted cash flow analysis based on current
           rates for advances and borrowings with similar maturities.

           SAVINGS DEPOSITS: The fair values for demand deposits (e.g.,
           passbook, savings accounts) are, by definition, equal to the amount
           payable on demand at the repricing date (i.e., their carrying
           amounts). Fair values of time deposits (e.g., certificates of
           deposit) are estimated using a discounted cash flow calculation that
           applies a comparable Federal Home Loan Bank advance rate to the
           aggregated weighted average maturity on time deposits.

           OFF-BALANCE-SHEET INSTRUMENTS: Fair values for the Company's
           off-balance-sheet instruments (e.g., lending commitments) are based
           on their carrying value, taking into account the remaining terms and
           conditions of the agreements.

      The following table includes financial instruments as defined by SFAS No.
      107, whose estimated fair value is not represented by the carrying value
      as reported on the Company's balance sheet as of June 30, 1999 and 1998
      (in thousands):

<TABLE>
<CAPTION>
                                                     1999                            1998
                                        -------------------------------  ------------------------------
                                                           ESTIMATED                       ESTIMATED
                                          CARRYING           FAIR          CARRYING          FAIR
                                            VALUE            VALUE           VALUE           VALUE
                                        --------------   --------------  --------------  --------------
<S>                                   <C>                       <C>             <C>             <C>
       Financial assets:
         Loans receivable             $        42,715           42,666          33,625          34,735
       Financial liabilities:
         Time deposits                         23,179           23,035          23,235          23,625
         Borrowed funds                         8,394            8,336           1,432           1,448
</TABLE>




                                 52                                (Continued)
<PAGE>   55


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)



(17)  CONVERSION TO STOCK FORM OF OWNERSHIP

      On February 20, 1996, as amended on April 6, 1996, the Board of Trustees
      adopted a plan of conversion whereby the Bank would be converted from a
      Pennsylvania mutual savings bank to a Pennsylvania stock savings bank. The
      conversion was completed on July 12, 1996, and the Bank issued 610,128
      shares of its common stock resulting in $6,101 of gross proceeds to the
      Bank. Costs of the common stock offering of $506 were deducted from the
      offering proceeds.

      At the completion of the conversion to stock form, the Bank established a
      liquidation account in the amount of retained earnings set forth in the
      offering circular utilized in the conversion. The liquidation account will
      be maintained for the benefit of eligible savings account holders who
      maintain deposit accounts in the Bank after conversion. In the event of a
      complete liquidation (and only in such event), each eligible savings
      account holder will be entitled to receive a liquidation distribution from
      the liquidation account in the amount of the then current adjusted balance
      of deposit accounts held, before any liquidation distribution may be made
      with respect to the shares of the Company's common stock, par value $.01
      per share (Company Common Stock) (see reorganization discussion below).
      Except for the repurchase of stock and payment of dividends by the
      Company, the existence of the liquidation account will not restrict the
      use or further application of such retained earnings.

      The Company may not declare or pay a cash dividend on, or repurchase any
      of, its common shares if the effect thereof would cause the Company's
      shareholders' equity to be reduced below either the amount required for
      the liquidation account or the regulatory capital requirements for insured
      institutions.

      On January 27, 1997, the Company became a bank holding company in
      accordance with the terms of an Agreement and Plan of Reorganization,
      dated September 18, 1996 (the Agreement), by and among the Savings Bank,
      Pennwood Interim Savings Bank (Interim) and the Company. Pursuant to the
      Agreement: (1) the Company was organized as a wholly owned subsidiary of
      the Savings Bank; (2) Interim was organized as a wholly owned subsidiary
      of the Company; (3) Interim merged with and into the Savings Bank, with
      the Savings Bank as the surviving institution; and (4) upon such merger,
      (i) the outstanding shares of the Savings Bank Common Stock became, by
      operation of law, on a one-for-one basis, common stock par value $.01 per
      share, of the Company (Company Common Stock), (ii) the common stock of
      Interim held by the Company was converted into common stock of the Savings
      Bank and (iii) the common stock of the Company held by the Savings Bank
      was canceled. Accordingly, the Savings Bank became a wholly owned
      subsidiary of the Company and the shareholders of the Savings Bank became
      shareholders of the Company.




                                 53                                (Continued)
<PAGE>   56


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)




(18)  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED
                                         ---------------------------------------------------------------
                                         SEPTEMBER 30     DECEMBER 31       MARCH 31         JUNE 30
                                         --------------  ---------------  --------------  --------------
    1999                                             (in thousands, except per share data)

<S>                                    <C>                     <C>               <C>             <C>
   Interest income                     $           973            1,003             986             968
   Interest expense                                458              494             477             470
                                         --------------  ---------------  --------------  --------------

          Net interest income before
            provision for loan losses              515              509             509             498

   Provision for loan losses                        13                7              20              30
   Noninterest income                               35               63              35              43
   Noninterest expense                             377              416             427             437
                                         --------------  ---------------  --------------  --------------

          Income before income taxes               160              149              97              74

   Provision for income taxes                       61               53              39              54
                                         --------------  ---------------  --------------  --------------

          Net income                   $            99               96              58              20
                                         ==============  ===============  ==============  ==============

   Basic earnings per share            $             .16              .16             .10             .04
   Diluted earning per share           $             .16              .16             .10             .04
</TABLE>




                                 54                                (Continued)
<PAGE>   57


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)



<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED
                                         ---------------------------------------------------------------
                                          SEPTEMBER 30    DECEMBER 31       MARCH 31         JUNE 30
                                         ------------------------------   --------------  --------------
        1998                                         (in thousands, except per share data)

<S>                                    <C>                      <C>              <C>             <C>
        Interest income                $           967             948              910             921
        Interest expense                           465             448              431             428
                                         --------------  --------------   --------------  --------------

        Net interest income before
          provision for loan losses                502             500              479             493

        Provision for loan losses                   15              12              115             170
        Noninterest income                          37              74               48              44
        Noninterest expense                        347             376              339             356
                                         --------------  --------------   --------------  --------------

        Income before income taxes                 177             186               73              11

        Provision for income taxes                  49              74               44               1
                                         --------------  --------------   --------------  --------------

               Net income              $           128             112               29              10
                                         ==============  ==============   ==============  ==============

        Basic earnings per share       $             .18             .17              .05             .02
        Diluted earning per share      $             .18             .16              .05             .02
</TABLE>




                                 55                                (Continued)
<PAGE>   58


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)



(19)  PENNWOOD BANCORP, INC. (PARENT COMPANY ONLY)

      The following are condensed financial statements for the parent company
      which was formed on January 27, 1997:

<TABLE>
<CAPTION>
                        CONDENSED STATEMENTS OF FINANCIAL CONDITION

                                                                         JUNE 30,
                                                               ------------------------------
                                                                   1999            1998
                                                               --------------  --------------
<S>                                                          <C>                         <C>
                           ASSETS

Interest-earning deposits in other institutions              $           279             107
Investment in subsidiary                                               6,526           8,228
Other assets                                                             239             111
                                                               --------------  --------------
               Total assets                                  $         7,044           8,446
                                                               ==============  ==============

            LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
   ESOP loan payable                                         $           394             432
   Accrued expenses and other liabilities                                 43              53
                                                               --------------  --------------
               Total liabilities                                         437             485
Shareholders' equity:
   Preferred stock, $.01 par value; 1,000,000 shares
      authorized - none issued                                            --              --
   Common stock, $.01 par value; 4,000,000 shares
      authorized - 813,419 and 813,419 shares issued
      at June 30, 1999 and 1998, respectively                              8               8
   Additional paid-in capital                                          5,665           5,642
   Retained earnings                                                   4,516           4,427
   Treasury stock at cost; 252,780 and 116,025 shares
      at June 30, 1999 and 1998, respectively                         (3,045)         (1,526)
   Unearned ESOP shares                                                 (342)           (390)
   Unearned common stock held by Recognition and
      Retention Plan                                                    (196)           (267)
   Accumulated other comprehensive income, net of
      tax of $1 in 1999 and $28 in 1998                                    1              67
                                                               --------------  --------------
               Total shareholders' equity                              6,607           7,961
                                                               --------------  --------------
               Total liabilities and shareholders' equity    $         7,044           8,446
                                                               ==============  ==============
</TABLE>




                                 56                                (Continued)
<PAGE>   59


                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)



<TABLE>
<CAPTION>

                         CONDENSED STATEMENTS OF INCOME

                                                                        YEARS ENDED JUNE 30,
                                                                    ------------------------------
                                                                        1999            1998
                                                                    --------------  --------------
<S>                                                              <C>                          <C>
       Income:
         Equity in earnings of subsidiary                        $            279             338
         Management fee                                                       135             104
                                                                    --------------  --------------
                     Total income                                             414             442
       Expense:
         Interest expense on ESOP loan                                         35              33
         Personnel costs                                                       71              71
         Other operating expenses                                              35              59
                                                                    --------------  --------------

                     Total expense                                            141             163
                                                                    --------------  --------------

                     Income before income taxes                               273             279
       Income tax provision (benefit)                                          --              --
                                                                    --------------  --------------

                     Net income                                   $           273             279
                                                                    ==============  ==============
</TABLE>




                                 57                                (Continued)
<PAGE>   60



                      PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1999, 1998 and 1997

                    (Dollars in thousands except share data)

<TABLE>
<CAPTION>

                            CONDENSED STATEMENTS OF CASH FLOWS

                                                                  YEARS ENDED JUNE 30,
                                                              ------------------------------
                                                                  1999            1998
                                                              --------------  --------------
<S>                                                         <C>                   <C>
Cash flows from operating activities:
   Net earnings                                             $          273             279
   Equity in earnings of subsidiary                                   (279)           (338)
   Other                                                               (75)            (24)
                                                              --------------  --------------

               Net cash used in operating activities                   (81)            (83)
                                                              --------------  --------------

Cash flows from investing activities:

   Dividends from subsidiary                                         2,000           1,250
                                                              --------------  --------------
               Net cash provided by investing
                 activities                                          2,000           1,250
                                                              --------------  --------------
Cash flows from financing activities:
   Purchase of treasury stock                                       (1,519)         (1,068)
   Dividends paid                                                     (190)           (192)
   Other                                                               (38)            (32)
                                                              --------------  --------------

               Net cash used in financing activities                (1,747)         (1,292)
                                                              --------------  --------------

               Net increase (decrease) in cash                         172            (125)

Cash at beginning of period                                            107             232
                                                              --------------  --------------

Cash at end of period                                       $          279             107
                                                              ==============  ==============
</TABLE>





                                 58                                (Continued)

<PAGE>   61

PENNWOOD BANCORP, INC.
-------------------------------------------------------------------------------

                                   DIRECTORS

<TABLE>
<S>                                                     <C>
C. Joseph Touhill                                        Mary M. Frank
Chairman of the Board                                    Vice Chairman of the Board and
  of the Company                                           Treasurer of the Company
Discipline Lead Process and Environmental
  Engineering, Foster Wheeler Environmental
  Corporation

Paul S. Pieffer                                          John B. Mallon
President and Chief Executive Officer                    Retired, Formerly President of
  of the Company                                           Suburban General Hospital


Robert W. Hannan                                         Michael Kotyk
Interim President and Chief Executive Officer            Retired, formerly Technical Director
  National Association of Chain Drugstores                 of Materials Technology at
                                                           U.S. Steel Corporation
H. J. Zoffer
Professor of Business Administration and
  Dean Emeritus, Joseph M. Katz Graduate
  School of Business at the University of
  Pittsburgh
</TABLE>

                               EXECUTIVE OFFICERS

<TABLE>
<S>                                                     <C>
C. Joseph Touhill                                        Mary M. Frank
Chairman of the Board                                    Vice Chairman of the Board and
  of the Company                                           Treasurer
Discipline Lead Process and Environmental
  Engineering, Foster Wheeler Environmental
  Corporation

Paul S. Pieffer                                          Joseph W. Messner
President and Chief Executive Officer                    Vice President of Lending

James W. Kihm
Vice President and Secretary
</TABLE>



                                       59

<PAGE>   62

PENNWOOD SAVINGS BANK
-------------------------------------------------------------------------------

                                   DIRECTORS
<TABLE>
<S>                                                     <C>
C. Joseph Touhill                                        Mary M. Frank
Chairman of the Board                                    Vice Chairman of the Board and
  of the Savings Bank                                      Treasurer of the Savings Bank
Discipline Lead Process and Environmental
  Engineering, Foster Wheeler Environmental
  Corporation

Paul S. Pieffer                                          John B. Mallon
President and Chief Executive Officer                    Retired, Formerly President of
  of the Savings Bank                                      Suburban General Hospital

Robert W. Hannan                                         Michael Kotyk
Interim President and Chief Executive Officer            Retired, formerly Technical Director
  National Association of Chain Drugstores                 of Materials Technology at
                                                           U.S. Steel Corporation

H. J. Zoffer
Professor of Business Administration and
  Dean Emeritus, Joseph M. Katz Graduate
  School of Business at the University of
  Pittsburgh
</TABLE>

                               EXECUTIVE OFFICERS

<TABLE>
<S>                                                     <C>
C. Joseph Touhill                                        Mary M. Frank
Chairman of the Board                                    Vice Chairman of the Board and
  of the Savings Bank                                      Treasurer
Discipline Lead Process and Environmental
  Engineering, Foster Wheeler Environmental
  Corporation

Paul S. Pieffer                                          Joseph W. Messner
President and Chief Executive Officer                    Vice President of Lending

James W. Kihm
Vice President and Secretary
</TABLE>


BANKING LOCATIONS
-------------------------------------------------------------------------------

                                  MAIN OFFICE

                               683 Lincoln Avenue
                        Pittsburgh, Pennsylvania  15202

                                 BRANCH OFFICES
<TABLE>
<S>                                                     <C>
125 Market Street                                        4 Hilltop Plaza
Kittanning, Pennsylvania  16201                          Kittanning, Pennsylvania  16201
</TABLE>



                                       60

<PAGE>   63

                            STOCKHOLDER INFORMATION
-------------------------------------------------------------------------------

     Pennwood Bancorp, Inc. is a Pennsylvania-incorporated bank holding company
conducting business through its wholly-owned subsidiary, Pennwood Savings Bank
(the "Savings Bank"). The Savings Bank is a Pennsylvania-chartered,
SAIF-insured stock savings bank operating through its main office located in
Pittsburgh, Pennsylvania and two branch offices located in Kittanning,
Pennsylvania.

TRANSFER AGENT/REGISTRAR:

Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey  07016
(908) 272-8511

STOCKHOLDER REQUESTS:

     Requests for annual reports, quarterly reports and related stockholder
literature should be directed to James W. Kihm, Vice President and Secretary,
Pennwood Bancorp, Inc., 683 Lincoln Avenue, Pittsburgh, Pennsylvania 15202.

     Stockholders needing assistance with stock records, transfers or lost
certificates, please contact the Company's transfer agent, Registrar and
Transfer Company.

MARKET PRICES AND DIVIDENDS:

     Shares of Pennwood Bancorp, Inc.'s common stock trades under the symbol
"PWBK" on the OTC Bulletin Board. Prior to that time, the common stock was
traded on the Nasdaq Stock Market, Small-Cap Market System. At June 30, 1999,
the Company had 190 stockholders of record. The table below sets forth the
range of high and low bid information for the common stock for each quarter
during the two most recent fiscal periods. The Company effected a 4-for-3 split
of its common stock on May 15, 1998.

<TABLE>
<CAPTION>
                                                       Quotations
                                           ----------------------------------

                                                                                          Dividend
                                                                                           Amount
        Quarter Ended                      High Bid                 Low Bid              Per Share
      -------------------                ------------             -----------          -------------
<S>                                       <C>                     <C>                    <C>
      September 30, 1997                   $13.3125                 $13.3125               $.08
      December 31, 1997                     14.8125                  14.25                 $.09
      March 31, 1998                        16.125                   16.0625               $.09
      June 30, 1998                         13.500                   13.500                $.07
      September 30, 1998                    11.00                    11.00                 $.07
      December 31, 1998                     11.25                    10.1875               $.075
      March 31, 1999                        11.00                    11.00                 $.075
      June 30, 1999                          9.0625                   9.00                 $.075
</TABLE>



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