<PAGE>   1
                                                                    EXHIBIT 13



                             PENNWOOD BANCORP, INC.




                               1997 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...........................................                   18
      Consolidated Statesments of Financial Condition........................                   19
      Consolidated Statements of Income......................................                   21
      Consolidated Statements of Shareholders' Equity........................                   22
      Consolidated Statements of Cash Flows..................................                   23
      Notes to Consolidated Financial Statements.............................                   25
                                                                                              
Directors and Executive Officers.............................................                   55
                                                                                              
Banking Locations............................................................                   56
                                                                                              
Stockholder Information......................................................                   57

</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,
                                               --------------------------------------------------------------------
                                                   1997         1996           1995         1994           1993
                                               ---------      ---------      --------     --------       ----------


<S>                                             <C>             <C>           <C>          <C>           <C>    
SELECTED BALANCE SHEET DATA:

Total assets                                    $49,981         $46,900       $42,634      $41,902       $41,576
Cash and cash equivalents(1)                      1,804          10,106        10,624       11,815        12,853
Investment securities(2):
  Available for sale                             18,224          10,266         1,313           --            --
  Held to maturity                                  712           2,984         4,634        4,137           355
Loans receivable, net                            26,980          21,168        23,845       23,664        25,967
Deposits                                         35,819          37,333        37,819       37,416        37,142
Borrowed Funds                                    4,464              --            --           --            --
Deposit of stock subscription                        --           4,569            --           --            --
rights
Shareholders' equity                              8,726           4,076         3,862        3,737         3,543
Full service offices                                  3               3             3            3             3

<CAPTION>
                                                                           Year Ended June 30,
                                               -----------------------------------------------------------------------
                                                 1997             1996           1995           1994           1993
                                               ---------       --------       ----------     ----------      ---------


<S>                                              <C>            <C>             <C>            <C>             <C>          
SELECTED OPERATING DATA:                                                                                                    
                                                                                                                            
Total interest income                            $3,711         $3,378          $ 3,146        $ 2,820         $ 2,866      
Total interest expense                            1,680          1,717            1,570          1,474           1,573      
                                                  -----         ------           ------        -------          ------      
  Net interest income                             2,031          1,661            1,576          1,346           1,293      
Provision for loan losses                            29            105              385             58              75      
                                                 ------         ------           ------        -------                      
Net interest income after                                                                                                   
  provision for loan losses                       2,002          1,556            1,191          1,288           1,218      
Other income                                        107            104              190            124             158      
Other expenses                                    1,653          1,201            1,215          1,252             950      
                                                  -----         ------           ------         ------          ------      
Income before income taxes                                                                                                  
  and cumulative effect                                                                                                     
  of change in accounting                                                                                                   
  principle                                         456            459              166            160             426      
Provision for income taxes                          129            162               51             56             162      
                                                  -----         ------           ------         ------          ------      
Income before cumulative                                                                                                    
  effect of change in accounting                                                                                            
  principle                                         327            297              115            104             264      
Cumulative effect of change                                                                                                 
  in accounting principle(3)                         --             --               --             90              --      
                                                 ------         ------           ------         ------          ------      
Net income                                      $   327         $  297          $   115        $   194         $   264      
                                                 ======         ======           ======         ======          ======      
</TABLE>



                                      1

<PAGE>   4


<TABLE>
<CAPTION>

                                                            ----------------------------------------------------------------------
                                                                                 At or For the Year Ended June 30,
                                                            ----------------------------------------------------------------------
                                                                 1997             1996            1995         1994         1993
                                                            -----------        ----------      ---------    ----------    --------
<S>                                                             <C>              <C>            <C>            <C>         <C>     
                                                                                                                                   
SELECTED OPERATING RATIOS(4):                                                                                                      
                                                                                                                                   
PERFORMANCE RATIOS:                                                                                                                
Return on average assets                                        0.69%            0.70%          0.28%          0.47%        0.66%  
Return on average equity                                         3.54             7.34           2.99           5.28         7.68  
Equity to assets at end of period                               17.46             8.69           9.06           8.92         8.52  
Interest rate spread(5)                                          3.79             3.88           3.84           3.23         3.21  
Net interest margin(5)                                           4.56             4.17           4.06           3.45         3.43  
Average interest-earning assets to                                                                                                 
  average interest-bearing liabilities                         120.52           106.94         105.50         105.59       105.29  
Net interest income after provision                                                                                                
  for loan losses to total other                                                                                                   
  expenses                                                     121.11           129.55          98.02         102.87       128.21  
Total other expenses to average                                                                                                    
  total assets                                                   3.50             2.82           2.93           3.00         2.36  
                                                                                                                                   
ASSET QUALITY RATIOS:                                                                                                              
Non-performing loans to total                                                                                                      
  loans at end of period(6)                                      1.68             2.39           5.31           7.97         4.48  
Non-performing assets to                                                                                                           
  total assets at end of period(6)                               0.98             1.43           3.50           5.47         3.80  
Allowance for loan losses to total                                                                                                 
  loans at end of period                                         1.05             1.59           2.23           1.38         1.26  
Allowance for loan losses to total                                                                                                 
 non-performing loans at end of                                                                                                    
 period(6)                                                      62.11            66.60          41.98          17.35        28.12  
                                                                                                                                   
CAPITAL RATIOS OF THE                                                                                                              
  SAVINGS BANK(7):                                                                                                                 
Tier 1 risk-based capital ratio                                 33.30            16.76          15.78          15.37          N/A  
Total risk-based capital ratio                                  34.51            18.31          17.03          16.62          N/A  
Tier 1 leverage capital ratio                                   18.48             9.32           9.32           8.97          N/A  

</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)  Reflects the Company's adoption of Statement of Financial Accounting
     Standards ("SFAS") No. 109, "Accounting for Income Taxes," effective July
     1, 1993.

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

(5)  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.

(6)  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.

(7)  Prior to fiscal 1994, the Savings Bank operated as a mutual savings and
     loan association. As such, the Savings Bank was subject to the capital
     ratios of the Office of Thrift Supervision ("OTS") and not those of the
     FDIC and was at all times in compliance therewith.


                                      2

<PAGE>   5




                     [PENNWOOD BANCORP, INC. LETTERHEAD]




Dear Stockholders:

We are pleased to present Pennwood Bancorp, Inc.'s first Annual Report to
Stockholders for the fiscal year ended June 30, 1997.

This past year included two notable corporate accomplishments. On July 12,
1996, the Bank converted from mutual to stock form of ownership, which raised
approximately $5.7 million of additional capital. Further corporate
reorganization was completed on January 27, 1997, with the establishment of a
holding company and the acquisition of all of the stock of Pennwood Savings
Bank by Pennwood Bancorp, Inc.

Capital obtained in the conversion to a stock company was used primarily to
fund additional loan growth in our residential loan portfolio. Net loan
receivables grew to $26.9 million at fiscal year end, an increase of $5.8
million or 27.5% over the previous year. The increase in loan volume coupled
with improved yields in the securities portfolio resulted in a $370,000
increase in net interest income.

Mindful of stockholder expectations for a competitive return on their
investment, the Company declared its first dividend of $.07 per share in
December, 1996 and increased the dividend to $.08 in June, 1997. Shareholder
value was further enhanced by the repurchase in June, 1997 of 30,506 shares of
stock, or approximately 5% of shares outstanding. Shares were repurchased at
prices well below the intrinsic value of the company and represented an
effective use of the Company's capital.

The Board of Directors, management and employees of your Company remain
committed to maximizing the value of your investment in Pennwood Bancorp, Inc.
We thank you for the confidence that you have placed in the Company and look
forward to reporting continued successes in the future.


Sincerely,


/s/ PAUL S. PIEFFER

Paul S. Pieffer
President and Chief Executive Officer


                                      3

<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 Company
depend upon the operating results of the Savings Bank. The results of the
Savings Bank are primarily dependent 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, 1997, the Company's total assets increased by $3.1 million
or 6.6% from $46.9 million at June 30, 1996 to $49.9 million at June 30, 1997.
The increase in total assets was primarily due to increases in investment
securities and net loans receivable, which were partially offset by decreases in
money market investments and increases in borrowed money. The Company continued
the restructuring of its investment portfolio during the year by shifting funds
from lower yielding, short-term investments, such as cash, interest bearing
deposits (including certificates of deposits) and federal funds sold, to higher
yielding, longer-term investment securities. As a result, during the year, the
Company's investment and mortgage-backed securities (classified as available for
sale) increased by $7.9 million or 77.5% from $10.3 million at June 30, 1996, to
$18.2 million at June 30, 1997, while money market investments and federal funds
sold decreased by $8.7 million or 90.9%, from $9.5 million at June 30, 1996 to
$868,000 at June 30, 1997, and investment and mortgage backed securities
(classified as held to maturity) decreased by $2.2 million or 76.1%, from $2.9
million at June 30, 1996 to $712,000 at June 30, 1997. Net loans receivable
increased by $5.8 million or 27.5% from $21.2 million at June 30, 1996 to $26.9
million at June 30, 1997. The increase in net loans receivable during the year
was primarily due to $14.3 million of loan originations, which were partially
offset by $9.0 million in loan repayments. Real estate owned declined during the
period by 77.7% from $166,000 at June 30, 1996 to $37,000 on June 30, 1997.

        Savings deposits decreased $1.5 million, or 4.1% from $37.3 million at
June 30, 1996, to $35.8 million at June 30, 1997. This was due primarily to $1.2
million of deposits which were withdrawn from the Savings Bank and invested in
stock in the Conversion.

        Borrowings increased $4.5 million from $0 at June 30, 1996, to $4.5
million at June 30, 1997. A loan to provide the funds for the purchase of shares
for the Company's Employee Stock Ownership Plan ("ESOP") accounts for $464,000
of the borrowed funds. The ESOP loan is for a term of ten years and carries an
interest rate of prime (8.50% at June 30, 1997). The remaining $4.0 million in
borrowed money is in the form of a $1.0 million convertible advance and $3.0
million in variable rate short term advances with the FHLB of Pittsburgh. The
term of the convertible loan is five years and the interest rate is 5.78%, with
the conversion option being

                                      4

<PAGE>   7



exercisable after two years. Funds from the advance were used to purchase a
security. The security is an agency note with a yield to maturity of 7.54% and
two year call protection. The proceeds of the remaining $3.0 million advances
were used to fund loan originations.

        The shareholders' equity increased by $4.6 million or 114.1% from $4.1
million at June 30, 1996, to $8.7 million at June 30, 1997. The increase was
primarily due to the increase in paid in capital from $0 at June 30, 1996 to
$5.6 million at June 30, 1997, which resulted from the net proceeds of the sale
of common stock in the Conversion, net income of $327,000 and a $71,000
improvement in unrealized gains on investment securities, which were offset by
the purchases of $488,000 in common stock for the ESOP, $357,000 in common stock
for the Management Recognition Plan and $458,000 for the buyback of treasury
stock.

                                      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,
                                                     At June 30,  -----------------------------------
                                                        1997                   1997                  
                                                  --------------  -----------------------------------
                                                                    Average                 Yield/   
                                                     Yield/Rate     Balance    Interest       Rate   
                                                  --------------  ----------  ----------  -----------
                                                                              (Dollars in Thousands)                       

<S>                                               <C>            <C>          <C>           <C>                     
INTEREST-EARNING ASSETS:                                                                             
  Loans receivable, net(1)                         8.80%          $22,377      $ 2,166        9.68%    
  Investment securities(2)                         7.38            18,057        1,319        7.30     
  Money market investments(3)                      5.52             3,726          193        5.18     
  Federal funds sold and other                                                                         
    investments                                    6.38               422           33        7.82     
                                                                  -------      -------                 
    Total interest-earning assets                  8.15%           44,582      $ 3,711        8.32%    
                                                   ====                        -------        ====                    
Non-interest-earning assets                                         2,645                              
                                                                  -------                              
      Total assets                                                $47,227                              
                                                                  =======                              
                                                                                                       
INTEREST-BEARING LIABILITIES:                                                                          
  Deposits:                                                                                            
    Passbook savings and club                                                                          
      accounts                                                    $ 9,276      $   285        3.07%    
    NOW accounts                                                    3,090           54        1.75     
    Money market accounts                                             852           24        2.82     
    Certificates of deposit                                        22,334        1,226        5.49     
                                                                  -------      -------                 
      Total deposits                               4.59%           35,552        1,589        4.47     
                                                                                                       
Borrowed money                                     5.99             1,439           91        6.32     
                                                                   ------      -------                 
    Total interest-bearing liabilities             4.74%           36,991      $ 1,680        4.54%    
                                                   ====                        -------        ====       
Non-interest-bearing liabilities                                      992                            
                                                                   ------                            
    Total liabilities                                              37,983                            
Net worth                                                           9,244                            
                                                                   ------                            
  Total liabilities and                                                                                
    net worth                                                      47,227                            
                                                                   ======                            
Net interest income; interest                                                                          
  rate spread(4)                                   3.41%                       $ 2,031        3.78%    
                                                   ====                        =======        ====        
Net interest margin(5)                                                                        4.56%
                                                                                              ====         
Average interest-earning                                                                               
  assets to average interest-                                                                          
  bearing liabilities                                                                       120.52% 
                                                                                            ======         
<CAPTION>

                                                                                   Year Ended June 30,
                                                  ---------------------------------------------------------------------------------
                                                                    1996                                      1995
                                                  --------------------------------------    ---------------------------------------
                                                    Average                     Yield/       Average                       Yield/
                                                    Balance       Interest      Rate         Balance         Interest       Rate
                                                  ------------    ---------  -----------    ----------     -----------  -----------

<S>                                                <C>            <C>          <C>        <C>             <C>            <C>       
INTEREST-EARNING ASSETS:
  Loans receivable, net(1)                          $22,708        $2,349      10.34%      $24,546          $2,354          9.59%   
  Investment securities(2)                           10,582           697       6.59         5,018             302          6.02    
  Money market investments(3)                         4,957           228       4.60         3,500             176          5.03    
  Federal funds sold and other                                                                                                      
    investments                                       1,545           104       6.73         5,737             314          5.47    
                                                    -------         -----       ----         -----             ---          ----    
    Total interest-earning assets                    39,792        $3,378       8.49%       38,801           3,146          8.11%   
                                                    =======         -----       ====                                        ====    
Non-interest-earning assets                           2,730                                   2,644                              
                                                    -------                                   -----
      Total assets                                  $42,522                                 $41,445                              
                                                    =======                                 =======
                                                                                     
INTEREST-BEARING LIABILITIES:                                                                                                      
  Deposits:                                                                                                                       
    Passbook savings and club                                                                                                     
      accounts                                      $ 9,911       $   308        3.10%      $11,478             384          3.35%
    NOW accounts                                      2,791            64        2.29         2,989              80          2.68   
    Money market accounts                               985            21        2.13         1,100              26          2.36   
    Certificates of deposit                          23,523         1,324        5.63        21,212           1,080          5.09   
                                                     ------       -------                    ------           -----                 
      Total deposits                                 37,210         1,717        4.61        36,779           1,570          4.27%  
                                                                  -------                                                    ====   
Borrowed money                                           --            --          --            --                                 
                                                     ------       -------                    ------                                 
    Total interest-bearing liabilities               37,210       $ 1,717        4.61%       36,779                                 
                                                                   ------        ====                                               
Non-interest-bearing liabilities                      1,268                                     815                                 
                                                    -------                                  ------                                 
    Total liabilities                                38,478                                  37,594                                 
Net worth                                             4,044                                   3,851                                 
                                                    -------                                 -------                                 
  Total liabilities and                                                                                                             
    net worth                                       $42,522                                 $41,445                                 
                                                    =======                                  ======                               
Net interest income; interest                                                                                                       
  rate spread(4)                                                  $ 1,661        3.88%                       $1,576          3.84%  
                                                                  =======        ====                         =====          ====   
Net interest margin(5)                                                           4.17%                                       4.06%  
                                                                                 ====                                        ====   
Average interest-earning                                                                                                            
  assets to average interest-                                                                                                       
  bearing liabilities                                                          106.94%                                     105.50%  
                                                                               ======                                      ======
</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.


                                      7

<PAGE>   10



        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,
                                                         --------------------------------------------------------------------------
                                                                        1997 vs. 1996                        1996 vs. 1995
                                                         ------------------------------------    ----------------------------------
                                                                Increase                          Increase
                                                               (Decrease)                        (Decrease)
                                                                 Due to              Total         Due to                  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                                  $(149)      $ (34)        $(183)       $ 178       $(183)         $  (5)
  Investment and mortgage-backed securities(1)              83         539           622           31         364            395 
  Money market investments(2)                               26         (61)          (35)         (16)         68             52 
  Federal funds sold and other investments                  15         (86)          (71)          60        (270)          (210)
                                                         -----       -----         -----        -----       -----          ----- 
    Total interest-earning assets                        $ (25)      $ 358         $ 333        $ 253       $ (21)         $ 232 
                                                         -----       -----         -----        =====       =====          ===== 
                                                                                                                                 
Interest-bearing liabilities:                                                                                                    
  Passbook and club accounts                             $  (2)      $ (20)        $ (22)       $ (26)      $ (50)         $ (76)
  NOW accounts                                             (16)          6           (10)         (11)         (5)           (16)
  Money market accounts                                      6          (3)            3           (2)         (3)            (5)
  Certificates of deposit                                  (33)        (66)          (99)         120         124            244 
  Borrowed Money                                             0          91            91            0           0              0 
                                                         -----       -----         -----        -----       -----          ----- 
    Total interest-bearing liabilities                   $ (46)      $   9         $ (37)       $  81       $  66            147 
                                                         -----       -----         -----        -----       -----          ----- 
                                                                                                                                 
Increase in net interest income                          $  21       $ 349         $ 370        $ 172       $ (87)         $  85 
                                                         =====       =====         =====        =====       =====          ===== 

</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).


                                      8

<PAGE>   11



RESULTS OF OPERATIONS

        NET INCOME. The Company reported net income of $327,000, $297,000 and
$115,000 for the year ended June 30, 1997, 1996 and 1995, respectively. The
$30,000 or 10.1% increase in net income for fiscal 1997 was primarily due to a
$370,000 or 22.3% increase in net interest income, a $33,000 or 20.3% decrease
in the provision for income taxes and a $76,000 or 72.4% reduction in loan loss
provisions, which were offset by a $205,000 or 17.1% increase in non-interest
expenses and the special assessment of $247,000 to recapitalize the Savings
Association Insurance Fund ("SAIF"), which occurred on September 30, 1996. The
$182,000 or 158.3% increase in net income during fiscal 1996 as compared to
fiscal 1995 was primarily due to an increase of $85,000 or 5.4% in net interest
income, a decrease of $280,000 or 72.7% in the provision for loan losses and a
decrease of $14,000 or 1.2% in total other expenses, which were partially offset
by an increase of $111,000 in the provision for income taxes and a decrease of
$86,000 or 45.3% in total other income.

        For the year ended June 30, 1997, the Company's net interest margin
increased by 39 basis points to 4.56% from 4.17% for fiscal 1996. The average
yield earned on the Company's interest-earning assets decreased by 17 basis
points, which offset a 7 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 assets from $39.8 million at June 30, 1996 to $44.6 million at the
year ended June 30, 1997, together with a decrease in the average yield on loans
receivable from 10.34% at the year ended June 30, 1996, to 9.68% at the year
ended June 30, 1997. 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 passbook and certificates of deposit, which were offset by rates paid on
borrowed money.

        For the year ended June 30, 1996, the Company's net interest margin
increased by 11 basis points to 4.17% from 4.06% for fiscal 1995. The average
yield earned on the Company's interest-earning assets increased by 38 basis
points, which offset a 34 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
reinvestment of a portion of its money market investments and federal funds sold
into higher yielding investment and mortgage-backed securities (primarily U.S.
Government and agency obligations). The Company determined to restructure its
short-term investments in order to enhance net interest income, reduce its
excess liquidity and reduce its one-year interest rate sensitivity gap position.
The increase in the average rate paid on interest-bearing liabilities reflected
a shift in the Company's deposit accounts from lower cost passbook savings and
club accounts to higher cost certificates of deposit. At the end of fiscal 1996,
market rates of interest declined which resulted in decreases in the yields
earned on the Company's interest-earning assets and the rates paid on the
Company's interest-bearing liabilities. As a result of the Company's positive
one-year interest rate sensitivity gap, the yields on the Company's
interest-earning assets declined more rapidly than the rates paid on its
interest-bearing liabilities. Consequently, the Company's interest rate spread
increased to 3.88% at June 30, 1996.

        NET INTEREST INCOME. Net interest income increased by $370,000 or 22.3%
during the year ended June 30, 1997, as compared to the prior fiscal year, due
to a $4.8 million or 12.0% increase in the average balance of interest-earning
assets together with a 17 basis point decrease in the average yield earned
thereon, which was offset by a $219,00 decrease in the average balance of
interest-bearing liabilities and a 7 basis point decrease in the average rate
paid thereon.

        During the year ended June 30, 1997, total interest income increased by
$333,000 or 9.9%, as compared to the prior fiscal year, primarily due to a
$622,000 or 89.2% increase in interest earned on investment securities. This
increase was partially offset by a $71,000 or 68.3% decrease in interest earned
on federal funds sold, a $35,000 or 15.3% decrease in interest earned on money
market investments and a $183,000 or 7.8% decrease in interest earned on loans.
The increase in interest earned on investment securities was due primarily to a
$7.5 million or 70.1% increase in the average balance of investment securities,
together with a 71 basis point increase

                                      9

<PAGE>   12



in the average yield earned thereon. The decrease in interest earned on federal
funds sold was due to the reduction of the amount of federal funds sold. The
increase in the average balance of the Company's investment securities reflected
the Company's reinvestment of a portion of its money market investments and
federal funds into higher yielding U.S. government and agency obligations. The
decrease in interest earned on loans was due to 66 basis point decrease in the
average yield earned thereon, together with a $331,000 or 1.5% decrease in the
average balance of loans outstanding.

        During the year ended June 30, 1997, total interest expense decreased
$37,000 or 2.2% as compared to the prior fiscal year, due to the combined effect
of a decrease of $1.7 million or 4.5% in the average balance of savings deposits
and a 14 basis point decrease on the average rate paid thereon. This was
partially offset by a $1.4 million increase in the average balance of borrowed
money, which, when combined with the change in the average balance of the
savings deposits resulted in a 7 basis point decrease for the fiscal year.

        Net interest income increased by $85,000 or 5.4% during the year ended
June 30, 1996, as compared to the prior fiscal year, due to a $991,000 or 2.6%
increase in the average balance of interest-earning assets together with a 38
basis point increase in the average yield earned thereon, which more than offset
a $431,000 or 1.2% increase in the average balance of interest-bearing
liabilities and a 34 basis point increase in the average rate paid thereon.

        During the year ended June 30, 1996, total interest income increased by
$232,000 or 7.4%, as compared to the prior fiscal year, primarily due to a
$395,000 or 130.8% increase in interest earned on investment securities and a
$52,000 or 29.5% increase in interest earned on money market investments. These
increases were partially offset by a $210,000 or 66.9% decrease in interest
earned on federal funds sold and a $5,000 or 0.2% decrease in interest earned on
loans. The increase in interest earned on investment securities was due
primarily to a $5.6 million or 110.8% increase in the average balance of
investment securities together with a 57 basis point increase in average yield
earned thereon. The decrease in interest earned on federal funds sold was due
primarily to the reduction of the amount of federal funds sold. The increase in
the average balance of the Company's investment securities reflected the
Company's reinvestment of a portion of its money market investments and federal
funds sold into higher yielding U.S. Government and agency obligations. The
decrease in interest earned on loans was due to a 75 basis point increase in the
average yield earned thereon, which was offset by a $1.8 million or 7.3%
decrease in the average balance of loans outstanding.

        During the year ended June 30, 1996, total interest expense increased by
$147,000 or 9.4%, as compared to the prior fiscal year, due to the combined
effect of an increase of $2.3 million or 10.9% in the average balance of
certificates of deposit and a 54 basis point increase on the average rate paid
thereon. These increases reflected a shift in the Company's deposits from lower
yielding passbook savings and club accounts into higher yielding certificates of
deposit during the year.

        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 collectability of the Company's loan portfolio. During the years ended June
30, 1997, 1996 and 1995, the Company established provisions for loan losses of
$29,000, $105,000 and $385,000, respectively. The decrease in the provision for
loan losses during fiscal 1997 reflected the decline in the level of
non-performing loans as well as the decline in the total amount of loans held in
the Company's portfolio during the period. The amount of the provision for loan
losses during fiscal 1996 and 1995 reflected a deterioration in credit quality
with respect to several of the Company's commercial real estate and consumer
loans. This deterioration in credit quality occurred notwithstanding an overall
decline in the level of non-performing assets during these years. In addition,
in January 1994, the Company terminated its consulting arrangement with an
individual who had previously assisted the Company in originating and servicing
consumer

                                      10

<PAGE>   13



loans. In connection with the termination of such agreement, during fiscal 1995,
the Company enhanced its loan underwriting and collection efforts with respect
to its consumer loans which initially resulted in an increase in the level of
consumer loan charge-off during the year. In fiscal 1997, the total of
non-performing loans decreased $52,000 or 10.3% due to the Company's receipt of
payments on prior non-performing loans. At June 30, 1997, the Company's
allowance for loan losses amounted to $282,000 or 62.1% of total non-performing
loans and 1.0% 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 based on their judgments about information available to
them at the time of their examination.

        OTHER INCOME. Total other income increased by $3,000 or 2.9% during the
year ended June 30, 1997, as compared to the prior year. The increase was
primarily due to an increase of $10,000 or 15.4% in other miscellaneous income
(which consists primarily of rental income earned on real estate owned, late
charges, service charges and other miscellaneous fees). These were partially
offset by an $8,000 or 20.5% decrease in service charges.

        Total other income decreased by $86,000 or 45.3% during the year ended
June 30, 1996, as compared to the prior year. The decrease was primarily due to
a gain of $100,000 on the sale of available for sale securities (consisting
primarily of Federal Home Loan Mortgage Corporation ("FHLMC") preferred stock)
in fiscal 1995, with no comparable gains being recognized during fiscal 1996,
and a decrease of $7,000 or 14.3% in other miscellaneous income (which consists
primarily of rental income earned on real estate owned, late charges, service
charges and other miscellaneous fees). These were partially offset by a $21,000
or 51.2% increase in service charges.

        OTHER EXPENSES. Total other expenses increased by $452,000 or 37.6%
during the year ended June 30, 1997, as compared to the prior year. The primary
reasons for the increase were an $81,000 or 1,383.3% increase in legal expenses
pertaining to the conversion to a public company, a $102,000 or 20.4% increase
in compensation and employee benefits due to the addition of an employee ESOP
plan and a management recognition plan, a $9,000 or 4.3% increase in premises
and occupancy costs and a $193,000 or 209.8% increase in federal insurance
premiums. This increase was the result of a special assessment of $247,000 to
recapitalize the SAIF which occurred on September 30, 1996. The increase in
premises and occupancy costs was due to the assumption of a new lease with
respect to one of the Company's branch offices together with renovation costs
and an increase in depreciation expense. The increase in other miscellaneous
operating expenses (which consist primarily of advertising expenses, costs
related to postage, forms and supplies, professional fees and supervisory
assessments) reflected increases due to the completion of the Conversion and a
provision of $65,000 established for potential expenses related to a regulatory
determination that the Company will be required to reimburse certain borrowers
for violations of Regulation Z (Truth in Lending).  Management anticipates that
its other expenses will increase as a result of additional expenses relating to
the Company's operation as a public stock company as well as expenses relating
to its stock benefit plans.

        Total other expenses decreased by $14,000 or 1.2% during the year ended
June 30, 1996, as compared to the prior year. The primary reasons for the
decrease were a $28,000 or 28.0% decrease in net loss on real estate owned and a
$27,000 or 9.8% decrease in other miscellaneous operating expenses, which were
partially offset by a $25,000 or 5.3% increase in compensation and employee
benefits, a $10,000 or 5.1% increase in premises and occupancy costs and a
$7,000 or 8.2% increase in federal insurance premiums. The decrease in net loss
on real estate owned reflected the Company's recording of an additional
provision in fiscal 1995 for the decline in estimated fair value below its
carrying value of a commercial property held as real estate owned as well as the
sale of property held as real estate owned. The increase in compensation and
employee benefits reflected merit salary increases as well as the addition of
new employees, while the increase in premises and

                                      11

<PAGE>   14



occupancy costs was due to the assumption of a new lease with respect to one of
the Company's branch offices together with renovation costs and an increase in
depreciation expense. The decline in other miscellaneous operating expenses
(which consist primarily of advertising expenses, costs related to postage,
forms and supplies, professional fees and supervisory assessments) reflected
decreases in loan servicing costs and costs relating to office supplies.

        PROVISION FOR INCOME TAXES. The Company incurred income tax expense of
$129,000 for the year ended June 30, 1997, as compared to $162,000 for fiscal
1996 and $51,000 for fiscal 1995. The Company's effective tax rate amounted to
28.4%, 35.2% and 30.7% for fiscal 1997, 1996 and 1995, respectively.

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. In contrast to the typical thrift institution, the
Savings Bank's assets generally reprice more frequently than its liabilities,
which is generally beneficial to net interest income during periods of rising
interest rates, while detrimental to net interest income during periods of
declining 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 investment 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, 1997, $10.1 million or 37.4% of the Company's total loan portfolio had
adjustable interest rates. As of such date, $8.7 million or 51.4% of the
Company's portfolio of single-family residential mortgage loans consisted of
adjustable-rate loans. In addition, at June 30, 1997, $4.0 million or 8.1% of
the Company's investment securities portfolio had scheduled maturities of five
years or less and the Company maintained $1.8 million or 3.6% 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, 1997, 1996 and 1995, the
Company originated $4.1 million, $2.9 million and $6.2 million of consumer
loans, respectively. At June 30, 1997, the Company's total loan portfolio
included $9.0 million or 33.4% 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

                                      12

<PAGE>   15



upon specific occasions when market 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
(5.1)% of total assets at June 30, 1997. 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, 1997, the Company's interest-earning assets maturing or
repricing within one year totalled $15.5 million while the Company's
interest-bearing liabilities maturing or repricing within one year was $18.0
million, providing an excess of interest-earning assets over interest-bearing
liabilities of $2.5 million. At June 30, 1997, the percentage of the Company's
interest-earning assets to interest-bearing liabilities maturing or repricing
within one year was 85.8%.

                                      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, 1997, based on the information and assumptions set forth in the notes
to the table.

<TABLE>
<CAPTION>

                                                    Six to       More Than     More Than
                                      Within Six    Twelve      One Year to   Three Years   Over Five
                                        Months      Months      Three Years  to Five Years    Years       Total
                                      ----------  -----------  ------------  -------------  ---------  -----------
                                                                  (Dollars in Thousands)
<S>                                 <C>           <C>          <C>           <C>          <C>         <C>    
Interest-earning assets:
  Investment securities(1)(2)          $    698      $     0      $    851      $ 2,993      $14,394     $18,936
  Loans receivable, net(3)                7,569        6,018         3,791        3,336        6,266      26,980
  Money market investments                  868            0             0            0            0         868
  Federal funds sold and other
    investments                             345            0             0            0            0         345
                                       --------      -------      --------      -------      -------     -------

    Total interest-earning
      assets                              9,480        6,018         4,642        6,329       20,660      47,129
                                       --------      -------      --------      -------      -------     -------


Interest-bearing liabilities:
  Deposits(4)                             8,281        6,764         9,742        5,887        5,145      35,819
  Borrowed Money                          3,000            0         1,000            0          464       4,464
                                       --------      -------      --------      -------      -------     -------
    Total interest-bearing
      liabilities                        11,281        6,764        10,742        5,887        5,609      40,283
                                       --------      -------      --------      -------      -------     -------

Excess (deficiency) of
 interest-earning assets over
 interest-bearing liabilities          $ (1,801)     $  (746)     $ (6,100)     $   442      $15,051     $ 6,846
                                       ========      =======      ========      =======      =======     =======

Cumulative excess of
  interest-earning assets over
  interest-bearing liabilities         $ (1,801)     $(2,547)     $ (8,647)     $(8,205)     $ 6,846
                                       =======       ========     ========      =======      =======


Cumulative excess of
  interest-earning assets over
  interest-bearing liabilities as a
  percentage of total assets             (3.60)%      (5.10)%      (17.30)%     (16.42)%      13.70%
                                         =======     ========      ========     ========      ====== 
</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,
1997.

<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                  $ 7,446                         15.78%                (2,895)                     (28.0)%
    +300                    8,200                         16.99                 (2,140)                     (20.7) 
    +200                    8,930                         18.09                 (1,410)                     (13.6) 
    +100                    9,663                         19.16                   (677)                      (6.6) 
      --                   10,341                         20.09                      0                          0    
    -100                   11,005                         20.95                    664                        6.4  
    -200                   11,684                         21.80                  1,344                       13.0  
    -300                   12,447                         22.73                  2,106                       20.4  
    -400                   13,324                         23.77                  2,984                       28.9  
</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 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

                                      15

<PAGE>   18



commitments to pay maturing savings certificates and savings withdrawals, fund
loan commitments and maintain an investment securities portfolio. At June 30,
1997, the total commitments outstanding (excluding undisbursed portions of loans
in process) amounted to $2.3 million in mortgage loans and $658,000 in unused
lines of credit. At the same date, the unadvanced portion of loans in process
approximated $1.8 million. Certificates of deposit scheduled to mature in one
year or less at June 30, 1997, totalled $12.0 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, 1997, 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 October 1995, the FASB released SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 establishes a fair value based method for stock-based
compensation plans. SFAS 123 permits entities to expense an estimated fair value
of employee stock options or to continue to measure compensation cost for these
plans using the intrinsic value accounting method contained in APB Opinion No.
25. Entities that elect to continue to use the intrinsic value method must
provide pro forma disclosures of net income and earnings per share as if the
fair value method of accounting had been applied. For fiscal 1997, the Company
has elected to continue to use the intrinsic value method under APB Opinion No.
25 and has disclosed the pro forma effects of SFAS 123 in the footnotes to the
financial statements.

        In June 1996, the FASB released SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities and distinguishes transfers
of financial assets that are sales from transfers that are secured borrowings.
Under SFAS 125, an entity recognizes all financial and servicing assets it
controls and liabilities it has incurred and does not recognize financial assets
it no longer controls and liabilities that have been extinguished. This
financial-components approach focuses on the assets and liabilities that exist
after the transfer. SFAS 125 also extends the "available-for-sale" or "trading"
approach in SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities," to non-security financial assets that can contractually be prepaid
or otherwise settled in such a way that the holder of the asset would not
recover substantially all of its recorded investment. Thus, non-security
financial assets that are subject to prepayment risk that could prevent recovery
of substantially all of the recorded amount are to be reported at fair value
with the change in fair value accounted for depending on the asset's
classification as "available-for-sale" or "trading." SFAS 125 is generally
effective for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, with certain provisions having
been delayed until after December 31, 1997 by SFAS 127, "Deferral of Effective
Date of Certain Provisions of FASB Statement No. 125, an amendment of Statement
No. 125." Also, the extension of SFAS 115 approach to certain non-security
financial assets and the amendment to SFAS 115 is effective for financial assets
held on or acquired after January 1, 1997. The adoption of SFAS 125 did not have
a material impact on the consolidated financial statements of the Company.

        In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share."
SFAS No. 128 establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or potential
common stock. SFAS No. 128 simplifies previous standards for computing EPS. SFAS
No. 128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods; earlier application is not
permitted. SFAS No. 128 requires restatement of all prior period EPS data
presented. Management does not expect SFAS No. 128 to have a significant impact
on the Company's net income paid per share amounts disclosed.

        In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure." SFAS No. 129 summarizes previously issued
disclosure guidance contained within APB Opinions No. 10 and 15 as well as SFAS
No. 47. There will be no changes to the


                                      16

<PAGE>   19



Company's disclosures pursuant to the adoption of SFAS No. 129. This statement
is effective for financial statements issued for periods ending after December
15, 1997.

        In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
Comprehensive income is defined as "the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. It includes all changes in equity during a period except
those resulting from investment by owners and distributions to owners." The
comprehensive income and related cumulative equity impact of comprehensive
income items will be required to be disclosed prominently as part of the notes
to the financial statements. Only the impact of unrealized gains or losses on
securities available for sale is expected to be disclosed as an additional
component of the Company's income under the requirements of SFAS No. 130. This
statement is effective for fiscal years beginning after December 15, 1997.

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.

                                      17

<PAGE>   20
           PENNWOOD BANCORP, INC. AND SUBSIDIARY
           
           Consolidated Financial Statements
           
           June 30, 1997 and 1996
           
           (With Independent Auditors' Report Thereon)
<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, 1997 and
1996, 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,
1997.  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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1997, in conformity with generally accepted accounting
principles.

As discussed in note 3 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," in 1995.




Pittsburgh, Pennsylvania                            /s/ KPMG Peat Marwick LLP
August 11, 1997
<PAGE>   22
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

                 Consolidated Statements of Financial Condition

                             June 30, 1997 and 1996

                             (Amounts in thousands)



<TABLE>
<CAPTION>
                                                                                      1997            1996
                                                                                      ----            ----
    Assets
    ------
<S>                                                                                <C>                 <C>
Cash and amounts due from depository institutions                                  $     936              513
Interest-bearing deposits                                                                868            9,293
Federal funds sold                                                                         -              300
Investment and mortgage-backed securities (notes 2 and 3):
    Available-for-sale (amortized cost $18,227 and $10,380)                           18,224           10,266
    Held-to-maturity (market value $720 and $3,001)                                      712            2,984
Loans receivable, net (note 4)                                                        26,980           21,168
Real estate owned, net                                                                    37              166
Federal Home Loan Bank stock, at cost (notes 5 and 9)                                    345              181
Premises and equipment, net (note 6)                                                   1,089            1,153
Accrued interest receivable (note 7)                                                     534              341
Prepaid expenses and other assets                                                        256              535
                                                                                      ------           ------
                 Total assets                                                      $  49,981           46,900
                                                                                      ======           ======
</TABLE>

                                                                     (Continued)





                                       19
<PAGE>   23
                    PENNWOOD BANCORP, INC. AND SUBSIDIARY

          Consolidated Statements of Financial Condition, Continued
                              

                            (Amounts in thousands)



<TABLE>
<CAPTION>
                                                                                      1997          1996
                                                                                      ----          ----
                Liabilities and Shareholders' Equity
                ------------------------------------
 <S>                                                                                <C>            <C>
 Liabilities:
     Savings deposits (note 8)                                                      $  35,819      37,333
     Borrowed funds (note 9)                                                            4,464           -
     Advances from borrowers for taxes and insurance                                      320         276
     Accrued interest payable                                                             410         395
     Deposits on stock subscription rights                                                  -       4,569
     Accrued expenses and other liabilities                                               242         251
                                                                                       ------      ------
                  Total liabilities                                                    41,255      42,824

 Shareholders' Equity (notes 10 and 11):
     Preferred stock, $.01 par value, 1,000,000 shares authorized,
        none issued                                                                         -           -
     Common stock, $.01 par value, 4,000,000 shares authorized,
        610,128 shares issued at June 30, 1997                                              6           -
     Additional paid-in capital                                                         5,603           -
     Retained earnings, substantially restricted                                        4,355       4,149
     Treasury stock, at cost, 30,506 shares at June 30, 1997                             (458)          -
     Unearned Employee Stock Ownership Plan shares                                       (439)          -
     Unearned common stock - Recognition and Retention Plan                              (339)          -
     Unrealized loss on investment securities available
        for sale, net                                                                      (2)        (73)
                                                                                       ------      ------
                  Total shareholders' equity                                            8,726       4,076
                                                                                       ------      ------

                  Total liabilities and shareholders' equity                        $  49,981      46,900
                                                                                       ======      ======
</TABLE>

See accompanying notes to consolidated financial statements.





                                       20
<PAGE>   24
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

                       Consolidated Statements of Income

                    Years Ended June 30, 1997, 1996 and 1995

                             (Amounts in thousands)



<TABLE>
<CAPTION>
                                                            1997             1996             1995
                                                            ----             ----             ----
<S>                                                    <C>                 <C>           <C>
 Interest income:
     Loans                                              $  2,166            2,349            2,354
     Investment and mortgage-backed securities             1,319              697              302
     Federal funds sold and other investments                 33              104              314
     Interest-bearing deposits                               193              228              176
                                                          ------           ------           ------
               Total interest income                       3,711            3,378            3,146

 Interest expense:
     Interest on savings deposits (note 8)                 1,589            1,717            1,570
     Interest on borrowed funds                               91                -                -
                                                          ------           ------           ------
               Total interest expense                      1,680            1,717            1,570
                                                          ------           ------           ------

               Net interest income                         2,031            1,661            1,576

 Provision for loan losses                                    29              105              385
                                                          ------           ------           ------
               Net interest income after provision
                  for loan losses                          2,002            1,556            1,191

 Other income:
     Service charges                                          32               62               41
     Gain on sale of available-for-sale securities             -                -              100
     Other                                                    75               42               49
                                                          ------           ------           ------
               Total other income                            107              104              190
                                                          ------           ------           ------

 Other expenses:
     Compensation and employee benefits (note 12)            603              501              476
     Premises and occupancy costs                            216              207              197
     Federal insurance premiums                               38               92               85
     FDIC-SAIF assessment (note 14)                          247                -                -
     Data processing expense                                  78               81               82
     Net loss on real estate owned                            61               72              100
     Legal and professional                                  119               42               40
     Other operating expenses                                291              206              235
                                                          ------           ------           ------
               Total other expenses                        1,653            1,201            1,215
                                                          ------           ------           ------

               Income before income taxes                    456              459              166

 Provision for income taxes (note 10):
     Federal                                                 141              140               39
     State                                                   (12)              22               12
                                                          ------           ------           ------
               Total provision for income taxes              129              162               51
                                                          ------           ------           ------

               Net Income                              $     327              297              115
                                                          ======           ======           ======

 Primary and fully diluted earnings per share (the
     Savings Bank converted to stock form in July  
     1996)                                                $  .58              N/A              N/A
                                                             ===              ===              ===
</TABLE>

See accompanying notes to consolidated financial statements.





                                       21
<PAGE>   25
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

                Consolidated Statements of Shareholders' Equity

                    Years Ended June 30, 1997, 1996 and 1995

                             (Amounts in thousands)



<TABLE>
<CAPTION>
                                                                                                              Unrealized
                                                                                                              gain (loss)
                                                                                                             on securities
                                                      Additional                         Unearned  Unearned  available-for-
                                               Common   paid-in    Retained   Treasury     ESOP      RRP       sale, net
                                                stock   capital    earnings     stock     shares    shares      of taxes      Total
                                                -----   -------    --------     -----     ------    ------      --------      -----
<S>                                             <C>       <C>        <C>         <C>        <C>      <C>          <C>        <C>
Balance at June 30, 1994                        $   -         -      3,737          -          -        -           -        3,737
Impact of change in accounting for securities                                                                           
     at July 1, 1994, net of tax (note 2)           -         -          -          -          -        -          56           56
Net income                                          -         -        115          -          -        -           -          115
Change in unrealized gain on securities                   -----      -----        ---        ---      ---               
     available-for-sale, net of tax                 -         -          -          -          -        -         (46)         (46)
                                                   --     -----      -----        ---        ---      ---          --        -----
Balance at June 30, 1995                            -         -      3,852          -          -        -          10        3,862
                                                                                                                        
Net income                                          -         -        297          -          -        -           -          297
Change in unrealized gain on securities                   -----      -----        ---        ---      ---               
     available-for-sale, net of tax                 -         -          -          -          -        -         (83)         (83)
                                                   --     -----      -----        ---        ---      ---          --        -----
Balance at June 30, 1996                            -         -      4,149          -          -        -         (73)       4,076
                                                                                                                        
Net income                                          -         -        327          -          -        -           -          327
Proceeds from stock offering (note 17)              6     5,589          -          -          -        -           -        5,595
Shares acquired for ESOP - 48,810 shares            -         -          -          -       (488)       -           -         (488)
Principal repayment of ESOP debt                    -        14          -          -         49        -           -           63
Shares acquired for RRP - 24,405 shares             -         -          -          -          -     (357)          -         (357)
Amortization of RRP                                 -         -          -          -          -       18           -           18
Purchase of treasury stock - 30,506 shares          -         -          -       (458)         -        -           -         (458)
Cash dividends declared at $.22 per share           -         -       (121)         -          -        -           -         (121)
Change in unrealized gain on securities                   
     available-for-sale, net of tax                 -         -          -          -          -        -          71           71
                                                   --     -----      -----        ---        ---      ---         ---        -----
Balance at June 30, 1997                        $   6     5,603      4,355       (458)      (439)    (339)         (2)       8,726
                                                   ==     =====      =====        ===        ===      ===         ===        =====
</TABLE>

See accompanying notes to consolidated financial statements.





                                       22
<PAGE>   26
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

                     Consolidated Statements of Cash Flows

                    Years Ended June 30, 1997, 1996 and 1995

                             (Amounts in thousands)



<TABLE>
<CAPTION>
                                                                           1997                1996           1995
                                                                           ----                ----           ----
 <S>                                                                  <C>                   <C>             <C>
 Operating activities:
     Net income                                                       $        327              297            115
     Adjustments to reconcile net income to net
        cash provided by operating activities:
            Depreciation expense                                                54               57             60
            Gain on sale of investment securities
               available-for-sale                                                -                -           (100)
            Provision for loan losses                                           29              105            385
            Increase in accrued interest receivable                           (193)             (64)           (35)
            Increase in prepaid expenses and other assets                      279             (130)          (121)
            Increase in accrued interest payable on
               savings deposits                                                 15                5            122
            (Decrease) increase in stock subscription
               deposits                                                     (4,569)           4,569              -
            Other, net                                                          78              188            143
                                                                           -------          -------       --------
                    Total adjustments                                       (4,307)           4,730            454
                                                                           -------          -------       --------

                    Net cash (used) provided by operating
                       activities                                           (3,980)           5,027            569

 Investing activities:
     Purchases of premises and equipment                                        (9)               -            (31)
     Purchases of investment securities held-to-maturity                         -             (700)        (2,952)
     Purchases of investment and mortgage-backed
        securities available-for-sale                                      (10,941)         (11,882)        (1,297)
     Proceeds from maturities of investment
        securities held-to-maturity                                          2,272            2,350          2,410
     Proceeds from sale of investment securities
        available-for-sale                                                       -                -            106
     Proceeds from maturities and principal
        repayments of investment and mortgage-
        backed securities available-for-sale                                 2,949            2,800              -
     Proceeds from sale of real estate owned                                   101              111            309
     Net (increase) decrease in loans receivable                            (5,828)           2,476           (771)
     Increase in FHLB stock                                                   (164)               -              -
     Other                                                                      24              (59)            10
                                                                           -------          -------       --------
                    Net cash used in investing activities                  (11,596)          (4,904)        (2,216)
</TABLE>

                                                                     (Continued)





                                       23
<PAGE>   27
                    PENNWOOD BANCORP, INC. AND SUBSIDIARY

               Consolidated Statements of Cash Flows, Continued

                            (Amounts in thousands)



<TABLE>
<CAPTION>
                                                                           1997                 1996              1995
                                                                           ----                 ----              ----
 <S>                                                                   <C>                    <C>             <C>
 Financing activities:
     Net (decrease) increase in passbook, club,
        money market and NOW accounts                                    $  (1,479)              190            (3,296)
     Net (decrease) increase in certificates of
        deposit accounts                                                       (35)             (676)            3,700
     Net (decrease) increase in advances from
        borrowers for taxes and insurance                                       44              (155)               52
     Proceeds from issuance of common stock                                  5,595                 -                 -
     Stock acquired for ESOP                                                  (488)                -                 -
     Stock  acquired for RRP                                                  (357)                -                 -
     Purchase of Treasury stock                                               (458)                -                 -
     Dividends paid                                                            (75)                -                 -
     Proceeds from FHLB advances                                             4,000                 -                 -
     Proceeds from ESOP loan                                                   488                 -                 -
     Repayment of ESOP loan                                                    (24)                -                 -
     Other                                                                      63                 -                 -
                                                                           -------            ------            ------
                    Net cash provided (used) by financing
                       activities                                            7,274              (641)              456
                                                                           -------            ------            ------

 Net decrease in cash and cash equivalents                                  (8,302)             (518)           (1,191)
 Cash and cash equivalents, beginning of period                             10,106            10,624            11,815
                                                                           -------            ------            ------
 Cash and cash equivalents, end of period                               $    1,804            10,106            10,624
                                                                           -------            ------            ------

 Supplemental disclosure of cash flow information:
     Cash paid during the period for:
        Interest                                                        $    1,665             1,717             1,448
                                                                           -------            ------            ------
                                                                                                                       
        Income taxes                                                    $      106                51               139
                                                                           -------            ------            ------
                                                                                                                       
 Supplemental schedule of noncash investing activities:                                                                
     Loan transferred to real estate owned                             $        16               111               215
                                                                           -------            ------            ------
                                                                                                                       
     Dividends declared but not paid                                   $        46                 -                 -
                                                                           -------            ------            ------
</TABLE>

See accompanying notes to consolidated financial statements.





                                       24
<PAGE>   28
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          June 30, 1997, 1996 and 1995

                         (Dollar amounts in thousands)




(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:

     Principles of Consolidation

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

     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.

     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.

                                                                     (Continued)





                                       25
<PAGE>   29
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



     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 on the Company's books 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, 1997 and 1996, 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.

                                                                     (Continued)





                                       26
<PAGE>   30
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



     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.

     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.

     On July 1, 1995, the Company adopted SFAS No. 114 and SFAS No. 118, which
         provide guidelines for measuring and reporting impairment losses on
         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, excluding consumer and single family
         residential 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, 1997
         and 1996, there were $394 and $446 of nonperforming 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.  Included in impaired
         loans at June 30, 1996, was $60 that had a related impairment reserve
         of $30.  There were no impairment reserves at June 30, 1997.  Average
         impaired loans during the year ended June 30, 1997 and 1996, were $178
         and $192, respectively.  During the years ended June 30, 1997 and
         1996, the Bank recognized $10 and $5 of interest revenue on impaired
         loans, respectively, all of which was recognized using the cash basis
         method of income recognition.

                                                                     (Continued)





                                       27
<PAGE>   31
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



     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 anticipated losses based on
         management's periodic evaluation of known and inherent risks in the
         loan portfolio, past and expected future 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.

     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.

     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.

                                                                     (Continued)





                                       28
<PAGE>   32
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



     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.

     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.

     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.

     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, 1997
         and 1996.

                                                                     (Continued)





                                       29
<PAGE>   33
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



(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, 1997 and 1996, are summarized as
         follows:

<TABLE>
<CAPTION>
                                                                        June 30, 1997
                                                  ------------------------------------------------------------
                                                                    Gross            Gross          Estimated
                                                  Amortized       unrealized       unrealized         market
                                                     cost           gains            losses           value
                                                     ----           -----            ------           -----
         <S>                                      <C>                   <C>            <C>            <C>
         U.S. agency obligations                  $  15,741             27             39             15,729
         Mortgage-backed securities                   1,836             13             14              1,835
         Corporate obligations                          400              3              2                401
         FNMA preferred stock                           250              9              -                259
                                                     ------             --             --             ------
                       Total                      $  18,227             52             55             18,224
                                                     ======             ==             ==             ======
</TABLE>

<TABLE>
<CAPTION>
                                                                        June 30, 1996
                                                --------------------------------------------------------------
                                                                    Gross            Gross           Estimated
                                                  Amortized       unrealized       unrealized          market
                                                     cost           gains            losses            value
                                                     ----           -----            ------            -----
         <S>                                     <C>                    <C>            <C>            <C>
         U.S. agency obligations                  $   7,997              4              82             7,919
         Mortgage-backed securities                   1,985              -              41             1,944
         Corporate obligations                          398              6               1               403
                                                     ------             --             ---            ------
                       Total                      $  10,380             10             124            10,266
                                                     ======             ==             ===            ======
</TABLE>

                                                                     (Continued)





                                       30
<PAGE>   34
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



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

<TABLE>
<CAPTION>
                                                 June 30, 1997                    June 30, 1996
                                         ------------------------------  -------------------------------
                                                           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           $     198             201                 -               -
        Due after one year
            through five years                3,352           3,347             3,547           3,526
        Due after five years
            through ten years                12,591          12,582             4,848           4,796
                                             ------          ------           -------          ------
                                             16,141          16,130             8,395           8,322

 FNMA preferred stock                           250             259                 -               -
 Mortgage-backed securities                   1,836           1,835             1,985           1,944
                                             ------          ------           -------          ------
                                          $  18,227          18,224            10,380          10,266
                                             ======          ======           =======          ======
</TABLE>

     The Bank adopted SFAS No. 115, "Accounting for Certain Investments in Debt
         and Equity Securities," on July 1, 1994.  In conjunction with the
         adoption, the Bank reclassified $6 of securities to the
         available-for-sale classification from the former investment, now
         held-to-maturity, category.  At that date, unrealized appreciation on
         total securities available-for-sale was approximately $85, resulting
         in an increase to net worth of $56, net of taxes.

     There were no sales of securities available-for-sale during 1997 or 1996.
         Proceeds from the sale of securities available-for-sale for the year
         ended June 30 1995, were $106.  Gross gains for the same period were
         $100.

                                                                     (Continued)





                                       31
<PAGE>   35
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



(3)  Investment Securities Held-to-Maturity

     The carrying values and estimated market values of investment securities
          held-to-maturity as of June 30, 1997 and 1996, are summarized as
          follows:

<TABLE>
<CAPTION>
                                                                       June 30, 1997
                                                  ---------------------------------------------------------
                                                                    Gross            Gross        Estimated
                                                   Amortized      unrealized       unrealized       market
                                                     cost           gains            losses          value
                                                     ----           -----            ------          -----
         <S>                                      <C>                    <C>            <C>             <C>
         U.S. Treasury and U.S.
              government agencies                   $    -               -              -                 -
         Corporate obligations                         497               3              -               500
         Municipal obligations                         200               5              -               205
         Mortgage-backed securities                     15               -              -                15
                                                       ---             ---            ---              ----
                      Total investments             $  712               8              -               720
                                                       ===             ===            ===              ====
</TABLE>

<TABLE>
<CAPTION>
                                                                       June 30, 1996
                                                  ---------------------------------------------------------
                                                                    Gross            Gross         Estimated
                                                   Amortized     unrealized        unrealized        market
                                                     cost           gains            losses          value
                                                     ----           -----            ------          -----
         <S>                                       <C>                 <C>              <C>            <C>
         U.S. Treasury and
              U.S. government
              agencies                             $  2,000             6               2              2,004
         Corporate obligations                          764            11               -                775
         Municipal obligations                          200             2               -                202
         Mortgage-backed securities                      20             -               -                 20
                                                      -----            --             ---              -----
                      Total investments            $  2,984            19               2              3,001
                                                      =====            ==             ===              =====
</TABLE>

                                                                     (Continued)





                                       32
<PAGE>   36
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)


     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,
                                                         -------------------------------------------------------
                                                                      1997                        1996
                                                         --------------------------     ------------------------
                                                                         Estimated                     Estimated
                                                           Amortized      market         Amortized      market
                                                              cost         value           cost          value
                                                              ----         -----           ----          -----
         <S>                                                <C>              <C>            <C>          <C>
         Due in one year or less                            $  497           500            1,774        1,530
         Due after one year through five years                   -             -              990        1,249
         Due after five years through ten years                  -             -                -            -
         Due after ten years                                   200           205              200          202
                                                               ---          ----            -----        -----
                                                               697           705            2,964        2,981

         Mortgage-backed securities                             15            15               20           20
                                                               ---          ----            -----        -----
                                                            $  712           720            2,984        3,001
                                                               ===           ===            =====        =====
</TABLE>

(4)  Loans Receivable

     Loans receivable as of June 30, 1997 and 1996, are summarized as follows:

<TABLE>
<CAPTION>
                                                                   1997             1996
                                                                   ----             ----
 <S>                                                          <C>                 <C>
 Mortgage loans:
     Conventional, 1 - 4 family                               $  15,085            9,231
     Commercial and multifamily                                   1,524            2,667
     Construction                                                 3,748            2,393
     Insured and guaranteed                                         250              341
                                                                 ------           ------
                                                                 20,607           14,632

 Other:
     Consumer loans                                               8,110            7,843
     Lines of credit                                                906              998
                                                                 ------           ------
                                                                  9,016            8,841

 Less:
     Unearned interest on consumer loans                            172              352
     Undisbursed loan proceeds                                    1,924            1,487
     Deferred loan fees                                             265              129
     Allowance for loan losses                                      282              337
                                                                 ------           ------
                                                              $  26,980           21,168
                                                                 ======           ======
</TABLE>

                                                                     (Continued)





                                       33
<PAGE>   37
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



     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, 1997 and 1996, the Bank had
         outstanding fixed rate commitments to originate and fund first
         mortgage loans and construction loans of approximately $2,260 and
         $2,283, respectively.  Unused customer lines of credit as of June 30,
         1997 and 1996, approximated $658 and $757, respectively.

     Nonaccrual loans totaled approximately $273, $308 and $1,413 as of June
         30, 1997, 1996 and 1995, respectively.  The interest that would have
         been recorded on these loans for the years ended June 30, 1997, 1996
         and 1995, was approximately $26, $29 and $97, respectively.  The
         amount of interest income recognized for the same periods was
         approximately $10, $6 and $32.  The Company is not committed to lend
         additional funds to debtors whose loans have been placed on nonaccrual
         status.

     Allowances for Estimated Losses

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

<TABLE>
<CAPTION>
                                                                  1997            1996           1995
                                                                  ----            ----           ----
 <S>                                                          <C>                <C>             <C>
 Loans receivable
 ----------------

     Balance at beginning of period                            $  337             531             327

     Provision charged to income                                   29             105             385

     Charge-offs                                                  (95)           (312)           (186)

     Recoveries                                                    11              13               5
                                                                 ----             ---             ---

     Balance at end of period                                  $  282             337             531
                                                                  ---             ---             ---
 Real Estate Owned
 -----------------

     Balance at beginning of period                                38              81             194

     Provision charged to income                                   45              18              81

     Charge-offs                                                  (38)            (61)           (194)

     Recoveries                                                     -               -               -
                                                                 ----             ---             ---

     Balance at end of period                                 $    45              38              81
                                                                 ----            ----            ----
</TABLE>

                                                                     (Continued)





                                       34
<PAGE>   38
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



(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.

(6)  Premises and Equipment

     Premises and equipment as of June 30, 1997 and 1996, are summarized by
           major classification as follows:

<TABLE>
<CAPTION>
                                                                            1997             1996
                                                                            ----             ----
         <S>                                                           <C>                  <C>
         Land                                                          $     145              145
         Office buildings and improvements                                 1,135            1,135
         Leasehold improvements                                               68               80
         Furniture, fixtures and equipment                                   328              325
                                                                          ------            -----
                        Total, at cost                                     1,676            1,685

             Less accumulated depreciation and
                amortization                                                 587              532
                                                                          ------            -----
                        Premises and equipment, net                     $  1,089            1,153
                                                                          ------            -----
</TABLE>

     Depreciation and amortization expense for the years ended June 30, 1997,
         1996 and 1995, was $54, $57 and $60, respectively.

     The Bank maintains operating leases with respect to a branch office
         facility and an automatic teller machine which expire on July 31,
         2002, and October 31, 1997, respectively.  Lease expense approximated
         $28, $16 and $14 for the years ended June 30, 1997, 1996 and 1995,
         respectively, and is included in premises and occupancy costs.
         Minimum annual lease commitments approximate $20 through 2002.

                                                                     (Continued)





                                       35
<PAGE>   39
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



(7)  Accrued Interest Receivable

     Accrued interest receivable as of June 30, 1997 and 1996, is summarized as
           follows:

<TABLE>
<CAPTION>
                                                                    1997             1996
                                                                    ----             ----
 <S>                                                              <C>                 <C>
 Loans receivable                                                 $  160              162
 Investment and mortgage-backed securities
     and other interest-bearing deposits                             374              179
                                                                     ---              ---
                  Total                                           $  534              341
                                                                     ===              ===
</TABLE>

(8)  Savings Deposits

     Savings deposits as of June 30, 1997 and 1996, are summarized as follows:

<TABLE>
<CAPTION>
                                                                       June 30,
                                              ---------------------------------------------------
                                                         1997                          1996
                                              --------------------------  -----------------------
                                                Weighted                       Weighted
                                                average                        average
                                                 rate         Amount            rate         Amount
                                                 ----         ------            ----         ------
 <S>                                       <C>            <C>             <C>           <C>
 Passbook savings accounts                    %  2.96      $   4,775         %  2.96     $   5,656
 Premium savings and club                                                             
     accounts                                    3.19          4,392            3.19         4,901
 Money market and NOW                                                                 
     accounts                                    1.97          2,777            2.26         3,430
 Noninterest-bearing checking                                                         
     accounts                                       -          1,169               -           606
                                                              ------                         -----
                                                              13,113                        14,593
                                                                                      
 Certificates of deposit:                                                             
     3.01% to 4.00%                              3.50             36            3.50            33
     4.01% to 5.00%                              4.94          2,417            4.75         6,635
     5.01% to 6.00%                              5.38         13,526            5.44        11,404
     6.01% to 7.00%                              6.36          5,707            6.44         3,555
     7.01% to 8.00%                              7.25          1,020            7.24         1,113
     8.01% and greater                              -              -               -             -
                                                              ------                         -----
                                                              22,706                        22,740
                                                              ------                        ------
                                                                                      
                  Total                          4.60      $  35,819            4.45     $  37,333
                                                              ======                        ======
</TABLE>

                                                                     (Continued)





                                       36
<PAGE>   40
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



     Noninterest-bearing checking accounts included in money market and NOW
         accounts amounted to $1,169 and $606 at June 30, 1997 and 1996,
         respectively.

     Certificates of deposit with balances of $100,000 or more totaled
         approximately $1,871 and $1,744 as of June 30, 1997 and 1996,
         respectively.

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

<TABLE>
<CAPTION>
                                                                    1997             1996
                                                                    ----             ----
          <S>                                                    <C>                 <C>
          Within one year                                        $  12,075           12,199
          Beyond one year but within two years                       4,171            3,628
          Beyond two years but within three years                    2,360            2,978
          Beyond three years but within four years                   1,955            2,040
          Beyond four years but within five years                    2,145            1,895
                                                                    ------           ------
                           Total                                 $  22,706           22,740
                                                                    ======           ======
</TABLE>

     Interest expense on savings deposits for the years ended June 30, 1997 and
         1996, is summarized as follows:

<TABLE>
<CAPTION>
                                                                      1997              1996             1995
                                                                      ----              ----             ----
         <S>                                                       <C>                  <C>              <C>
         Passbook savings accounts                                  $    142              150              164
         Premium savings and club accounts                               143              158              220
         Money market and NOW accounts                                    78               85              106
         Certificates of deposit                                       1,226            1,324            1,080
                                                                       -----            -----            -----
                          Total                                     $  1,589            1,717            1,570
                                                                       =====            =====            =====
</TABLE>

                                                                     (Continued)





                                       37
<PAGE>   41
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



(9)  Borrowed Funds

     Borrowed funds at June 30, 1997 and 1996, are summarized as follows:

<TABLE>
<CAPTION>
                                                                                 June 30,
                                                     -----------------------------------------------------
                                                                 1997                        1996
                                                     ------------------------   --------------------------
                                                      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                 %  5.67         $  3,000       %  -       $         -
                  Due between four and five                                                
                     years                               5.78            1,000          -                 -
                                                                         -----                     --------
                           Total advances                                4,000                            -
                                                                                           
          ESOP term loan, payable through
               2006                                                        464                            -
                                                                         -----                     --------
                           Borrowed funds                             $  4,464                  $         -
                                                                         -----                     --------
</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, 1997, was
         8.5%.

     The advances payable to the FHLB of Pittsburgh are secured by the
         Company's stock in the FHLB of Pittsburgh, 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 $52, $-0- and $-0- and on the ESOP
         term loan $39, $-0- and $-0- for the years ended June 30, 1997, 1996
         and 1995, respectively.

                                                                     (Continued)





                                       38
<PAGE>   42
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



(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, 1997, 1996
           and 1995, consists of the following:

<TABLE>
<CAPTION>
                                                                    1997            1996           1995
                                                                    ----            ----           ----
 <S>                                                             <C>                <C>             <C>
 Current tax expense (benefit):
     Federal                                                     $  138              45             121
     State                                                          (12)             22              12
                                                                   ----             ---             ---
                                                                    126              67             133

 Deferred tax expense (benefit):
     Federal                                                          3              95             (82)
                                                                   ----             ---             ---
            Provision for taxes on income                           129             162              51

 Income tax expense (benefit) reported in net
     worth related to securities available-for-
     sale                                                            37             (44)              6
                                                                   ----             ---             ---
            Total income tax expense                             $  167             118              57
                                                                    ===             ===            ====
</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, 1997, 1996 and 1995, is summarized as
           follows:

<TABLE>
<CAPTION>
                                                                   1997            1996           1995
                                                                   ----            ----           ----
 <S>                                                         <C>                   <C>             <C>
 Expected federal tax rate                                      %  34.0            34.0            34.0
 State tax (net of federal benefit)                                (1.8)            3.1             4.7
 Exempt income on investment securities                            (2.0)           (2.5)           (7.4)
 Other                                                             (1.8)             .6             (.6)
                                                                   ----            ----            ----
                                                                %  28.4            35.2            30.7
                                                                   ====            ====            ====
</TABLE>

                                                                     (Continued)





                                       39
<PAGE>   43
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



      The tax effect of temporary differences which give rise to a significant
           portion of deferred tax assets (liabilities) as of June 30, 1997,
           1996 and 1995, are as follows:

<TABLE>
<CAPTION>
                                                                  1997            1996           1995
                                                                  ----            ----           ----
 <S>                                                            <C>                 <C>             <C>
 Deferred tax assets:
     Deferred loan fees                                         $    26              35              54
     Book loan loss reserve                                          96             114             195
     Unrealized loss on securities available-
        for-sale                                                      1              38               -
     Employee stock ownership plan                                   11               -               -
     Uncollected interest                                            25              27               -
     Other                                                           10               4              24
                                                                    ---             ---             ---
                Total deferred tax asset                            169             218             273

 Deferred tax liabilities:
     Fixed assets                                                   (14)            (28)            (25)
     Unrealized gain on securities available
        for sale                                                      -               -              (6)
     Tax loan loss reserve                                           (5)              -               -
                                                                    ---             ---             ---
                Total deferred tax liability                        (19)            (28)            (31)
                                                                    ---             ---             ---

                Net deferred tax asset                           $  150             190             242
                                                                    ---             ---             ---
</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.

                                                                     (Continued)





                                       40
<PAGE>   44
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



      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, 1996 (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.

      On August 20, 1996, President Clinton signed legislation which eliminated
           the percentage of taxable income bad debt deduction for thrift
           institutions for tax years beginning after December 31, 1995.  This
           new legislation also requires a thrift to generally recapture the
           excess of its current tax reserves in excess of its 1987 base year
           reserves.  As the Bank has previously provided deferred taxes on
           this amount, no financial statement tax expense should result from
           this new legislation.

(11)  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, 1997, that the Bank meets all
           capital adequacy requirements to which it is subject.

                                                                     (Continued)





                                       41
<PAGE>   45
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



      As of June 30, 1997, the most recent notification from the Federal
           Deposit Insurance Corporation categorized the Bank as "well
           capitalized" under the regulatory framework for prompt corrective
           action.  To be categorized as "well capitalized" the Bank must
           maintain minimum total risk-based, Tier 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.

    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, 1997:
     Total capital (to
        risk-weighted
        assets)                $  9,043       %  34.51   $  2,096   %  greater than           $  2,620    %  greater than 
                                                                       or equal to  8.00                     or equal to  10.00   
     Tier I Capital (to                                                                                                   
        risk-weighted                                                                                                           
        assets)                   8,726          33.30      1,048      greater than              1,572        greater than      
                                                                       or equal to  4.00                      or equal to  5.00 
     Tier I Capital (to                                                                                                         
        average assets)           8,726          18.48      1,889      greater than              2,361        greater than      
                                                                       or equal to  4.00                      or equal to  5.00 
 As of June 30, 1996:                                                                                                           
     Total capital (to                                                                                                          
        risk-weighted                                                                                                           
        assets)                   4,453          18.31      1,946      greater than              2,432        greater than       
                                                                       or equal to  8.00                      or equal to 10.00 
     Tier I Capital (to                                                                                                         
        risk-weighted                                                                                                           
        assets)                   4,076          16.76        973      greater than              1,459        greater than      
                                                                       or equal to  4.00                      or equal to  6.00 
     Tier I Capital (to                                                                                                         
        average assets)           4,076           9.32      1,748      greater than              2,185        greater than      
                                                                       or equal to  4.00                      or equal to  5.00 
</TABLE>

                                                                     (Continued)





                                       42
<PAGE>   46
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



(12)  Employee Benefit Plans

      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, 1997, 1996 and 1995.  The Bank has been
           notified by the plan administrator that the plan is fully funded for
           the plan year beginning July 1, 1995.

      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 20,745 which shares were purchased in open
           market transactions at a price ranging from $14.13 per share to
           $14.75 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 $14.62 average purchase price.

      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 61,013, of which
           18,304 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.

                                                                     (Continued)





                                       43
<PAGE>   47
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



      A summary of the Company's stock option plan as of June 30, 1997, and the
           changes for the year then ended is as follows:

<TABLE>
<CAPTION>
                                                                          Shares           Average
                                                                          subject         exercise
                   Stock option activity                                 to option          price
                   ---------------------                                 ---------          -----
               <S>                                                         <C>           <C>
               Balance at June 30, 1996                                         -                -
                   Granted                                                 51,861        $  14.125 (1)
                   Exercised                                                    -                -
                   Forfeited                                                    -                -
                                                                           ------           ------
               Balance at June 30, 1997                                    51,861        $  14.125
                                                                           ======           ======
</TABLE>

                (1)  Using a Black-Scholes Option Valuation Model, the
                     weighted-average fair value of options granted in 1997 was
                     estimated at $5.76 per share.

      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 financial
           institutions to expense an estimated fair value of stock options or
           to continue to measure compensation expense for stock option plans
           using the intrinsic value method prescribed by 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 year ended June 30, 1997, would have been as follows
           (in thousands, except for per share data):

<TABLE>
<CAPTION>
                                                                                  1997
                                                                                  ----
            <S>                                                                  <C>
            Net income:
                As reported                                                      $  327
                Pro forma                                                           312

            Primary/fully diluted earnings per share:
                As reported                                                      $  .58
                Pro forma                                                           .55
</TABLE>

                                                                     (Continued)





                                       44
<PAGE>   48
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



      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.

      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, 1997:

<TABLE>
<CAPTION>
                                                         Outstanding                          Exercisable
                                                ----------------------------         -----------------------------
                                                                   Average                                 Average
             Exercise                           Average            exercise                               exercise
               price             Shares         life (2)             price             Shares               price
               -----             ------         --------             -----             ------               -----
            <S>                  <C>              <C>              <C>                   <C>               <C>
            $  14.125            51,861           9.75             $  14.125             -                 $    -
</TABLE>

          (2)         Average contractual life remaining in years.

                                                                     (Continued)





                                       45
<PAGE>   49
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



      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 $489,000 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.

      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 $63 for the year
           ended June 30, 1997, from the 4,881 shares committed to be released.
           Unallocated ESOP shares at June 30, 1997, amounted to 48,810 with a
           total fair value of $744.  Dividends received on unallocated ESOP
           shares during the year ended June 30, 1997, amounted to $11.

(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,
           1997, 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.

                                                                     (Continued)





                                       46
<PAGE>   50
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



(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.

(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.

                                                                     (Continued)





                                       47
<PAGE>   51
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



      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 not
           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
           balance sheets 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.

           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.

                                                                     (Continued)





                                       48
<PAGE>   52
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



           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 Bank's balance sheet as of June 30, 1997
           and 1996 (in thousands):

<TABLE>
<CAPTION>
                                                       1997                             1996
                                           -----------------------------      ----------------------------
                                                               Estimated                         Estimated
                                           Carrying              fair            Carrying           fair
                                            value                value            value            value
                                            -----                -----            -----            -----
 <S>                                       <C>                 <C>              <C>              <C>


 Financial assets
 ----------------
     Loans receivable                      $  26,980           27,749           21,168           22,048

 Financial liabilities
 ---------------------
     Time deposits                            22,705           22,596           22,740           22,615
     Borrowed funds                            4,464            4,461                -                -
</TABLE>

(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
           $6,101,280 of gross proceeds to the Bank.  Costs of the common stock
           offering of $505,638 were deducted from the offering proceeds.

                                                                     (Continued)





                                       49
<PAGE>   53
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



      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.

                                                                     (Continued)





                                       50
<PAGE>   54
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



(18)  Selected Quarterly Financial Data (Unaudited)

<TABLE>
<CAPTION>
                                                                         Three Months Ended
                                                    -----------------------------------------------------------
                                                      September 30      December 31       March 31      June 30
                                                      ------------      -----------       --------      -------
                                                                 (in thousands, except per share data)
 <S>                                                   <C>                   <C>             <C>          <C>
 1997

 Interest income                                        $  904               930             914          956
 Interest expense                                          408               412             417          442
                                                          ----              ----             ---          ---
 Net interest income before provision
     for loan losses                                       496               518             497          514

 Provision for loan losses                                   8                 -              15            6
 Noninterest income                                         27                27              27           28
 Noninterest expense                                       571               367             334          376
                                                          ----              ----             ---          ---
 Income (loss) before income taxes                         (56)              178             175          160
 Provision (benefit) for income taxes                      (39)               51              54           63
                                                          ----              ----             ---          ---
                  Net (loss) income                    $   (17)              127             121           97
                                                           ===              ====             ===          ===

 Primary/fully diluted earnings share (1)                  .03               .23             .22          .17

 1996

 Interest income                                           865               871             818          826
 Interest expense                                          442               432             423          420
                                                          ----              ----             ---          ---
 Net interest income before provision
     for loan losses                                       423               439             395          406

 Provision for loan losses                                   3                25              26           51
 Noninterest income                                         21                25              25           33
 Noninterest expense                                       278               341             271          313
                                                          ----              ----             ---          ---
 Income before income taxes                                163                98             123           75
 Provision for income taxes                                 56                35              48           23
                                                          ----              ----             ---          ---
                  Net income                            $  107                63              75           52
                                                           ===              ====             ===          ===

 Primary/fully diluted earnings (loss)
     share (1)                                             N/A               N/A             N/A          N/A
</TABLE>

(1)   The Savings Bank converted to stock form in July 1996.

                                                                     (Continued)





                                       51
<PAGE>   55
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)



(19)  Pennwood Bancorp, Inc. (Parent Company Only)

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

                  Condensed Statements of Financial Condition

<TABLE>
<CAPTION>
                                                                      June 30, 1997
                                                                      -------------
                          Assets
                          ------
 <S>                                                                   <C>
 Interest-earning deposits in other institutions                        $    232
 Investment in subsidiary                                                  8,993
 Other assets                                                                  4
                                                                           -----
                  Total assets                                          $  9,229
                                                                           =====

             Liabilities and Shareholders' Equity
             ------------------------------------

 Liabilities:
     ESOP loan payable                                                       464
     Accrued expenses and other liabilities                                   39
                                                                           -----
                  Total liabilities                                          503

 Shareholders' equity:
     Preferred stock, $.01 par value; 1,000,000 shares
         authorized - none issued                                              -
     Common stock, $.01 par value; 4,000,000 shares
         authorized - 610,128 shares issued at
         June 30, 1997                                                         6
     Additional paid-in capital                                            5,603
     Retained earnings                                                     4,355
     Treasury stock at cost; 30,506 shares at
         June 30, 1997                                                      (458)
     Unearned ESOP shares                                                   (439)
     Unearned common stock held by Recognition and
         Retention Plan                                                     (339)
     Unrealized loss on investment securities
         available-for-sale, net                                              (2)
                                                                           -----
                  Total shareholders' equity                               8,726
                                                                           -----

                  Total liabilities and shareholders' equity            $  9,229
                                                                           =====
</TABLE>

                                                                     (Continued)





                                       52
<PAGE>   56
                     PENNWOOD BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

                         (Dollar amounts in thousands)




                         Condensed Statements of Income

<TABLE>
<CAPTION>
                                                                           For the five-
                                                                           month period
                                                                               ended
                                                                             June 30,
                                                                               1997
                                                                               ----
 <S>                                                                         <C>
 Income:
     Equity in earnings of subsidiary                                        $  371
                                                                                ---
                  Total income                                                  371

 Expense:
     Interest expense on ESOP loan                                               16
     Personnel costs                                                             18
     Other operating expenses                                                    10
                                                                                ---
                  Total expense                                                  44
                                                                                ---
                                                                                
                  Income before income taxes                                    327
                                                                                
 Income tax provision (benefit)                                                   -
                                                                                ---
                  Net income                                                 $  327
                                                                                ===
</TABLE>

                                                                     (Continued)





                                       53
<PAGE>   57
                    PENNWOOD BANCORP, INC. AND SUBSIDIARY

                       Notes to Consolidated Financial
                            Statements, Continued

                        (Dollar amounts in thousands)




                      Condensed Statement of Cash Flows

<TABLE>
<CAPTION>
                                                                           For the five-
                                                                           month period
                                                                               ended
                                                                             June 30,
                                                                               1997
                                                                               ----
 <S>                                                                      <C>
 Cash flows from operating activities:
     Net earnings                                                         $     327
     Equity in undistributed earnings of subsidiary                            (371)
     Other                                                                     (151)
                                                                              -----
                  Net cash used in operating activities                        (195)

 Cash flows from investing activities:
     Dividends from subsidiary                                                1,282
                                                                              -----
                  Net cash provided by investing activities                   1,282

 Cash flows from financing activities:
     Purchase of RRP shares                                                    (357)
     Purchase of treasury stock                                                (458)
     Other                                                                      (41)
                                                                              -----
                  Net cash used in financing activities                        (856)
                                                                              -----

 Net increase in cash                                                           231
 Cash at beginning of period                                                      1
                                                                              -----
 Cash at end of period                                                    $     232
                                                                              =====
</TABLE>





                                       54
<PAGE>   58



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



                                    DIRECTORS

Charles R. Frank                           Mary M. Frank
Chairman of the Board of                   Vice Chairman of the Board and
  the Company                                Treasurer of the Company
                                           
Paul S. Pieffer                            John B. Mallon
President and Chief Executive Officer      Retired; Formerly President of
  of the Company                             Suburban General Hospital
                                           
C. Joseph Touhill                          Robert W. Hannan
Principal, Touhill                         Vice Chairman of Eckerd Corporation
  Technology Management                    
                                           
Michael Kotyk                              H. J. Zoffer
Retired, formerly Technical Director       Retired; formerly Dean of
  of Materials Technology at                 Joseph M. Katz Graduate
  U.S. Steel Corporation                     School of Business at the
                                             University of Pittsburgh




                               EXECUTIVE OFFICERS


Charles R. Frank                           Mary M. Frank
Chairman of the Board                      Vice Chairman of the Board and
                                             Treasurer
                                           
Paul S. Pieffer                            Joseph W. Messner
President and Chief Executive Officer      Vice President of Lending

James W. Kihm
Vice President and Secretary




                                      55

<PAGE>   59




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


                                    DIRECTORS

Charles R. Frank                             Mary M. Frank
Chairman of the Board of                     Vice Chairman of the Board and
  the Savings Bank                             Treasurer of the Savings Bank
                                             
Paul S. Pieffer                              John B. Mallon
President and Chief Executive Officer        Retired, Formerly President of
  of the Savings Bank                          Suburban General Hospital
                                             
C. Joseph Touhill                            Robert W. Hannan
Principal, Touhill                           Vice Chairman of Eckerd Corporation
  Technology Management                      
                                             
Michael Kotyk                                H. J. Zoffer
Retired, formerly Technical Director         Retired; formerly Dean of
  of Materials Technology at                   Joseph M. Katz Graduate
  U.S. Steel Corporation                       School of Business at the
                                               University of Pittsburgh

                               EXECUTIVE OFFICERS

Charles R. Frank                             Mary M. Frank
Chairman of the Board                        Vice Chairman of the Board and
                                               Treasurer

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

James W. Kihm
Vice President and Secretary

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


                                   MAIN OFFICE

                               683 Lincoln Avenue
                         Pittsburgh, Pennsylvania 15202

                                 BRANCH OFFICES

125 Market Street                             4 Hilltop Plaza
Kittanning, Pennsylvania  16201               Kittanning, Pennsylvania  16201



                                      56

<PAGE>   60


                             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 are traded under the
symbol "PWBK" on the Nasdaq Stock Market, Small-Cap Market System. At September
25, 1997, the Company had 195 stockholders of record. The table below sets forth
the range of high and low bid information for the common stock for each quarter
as well as dividends paid since July 12, 1996, the date of the Savings Bank's
conversion from the mutual form of ownership to the stock form of ownership. On
January 27, 1997, shares of the Savings Bank's common stock were converted into
shares of common stock of the Company in the Reorganization.

<TABLE>
<CAPTION>

                               Quotations
                        -----------------------

                                                       Dividend
 Quarter Ended           High Bid      Low Bid          Amount
-----------------       ----------    -----------     ----------
<S>                                                     <C>  
September 30, 1996       $10.750       $ 8.750            -- 
December 31, 1996         12.875        10.500           $.07
March 31, 1997            14.000        12.875           $.07
June 30, 1997             14.750        13.750           $.08
</TABLE>



                                      57