<PAGE>   1
                     U.S. SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB


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

                     FOR THE FISCAL YEAR ENDED JUNE 30, 1998

                                       OR

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

                          Commission File No.: 0-21939

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

        Pennsylvania                                           25-1783648
--------------------------------------------              ----------------------
(State of Other Jurisdiction of                             (I.R.S. Employer
Incorporation or Organization)                            Identification Number)

683 Lincoln Avenue, Pittsburgh, Pennsylvania                      15202
--------------------------------------------              ----------------------
    (Address of Principal                                       (Zip Code)
      Executive Offices)

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

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

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

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

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

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

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

Issuer's revenues for its most recent fiscal year: $3.9 million.

As of September 25, 1998, the aggregate value of the 517,074 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
145,450 shares held by all directors and executive officers of the Registrant
and the Registrant's Employee Stock Ownership Plan ("ESOP") as a group, was
approximately $5.7 million. This figure is based on the closing sales price of
$11.00 per share of the Registrant's Common Stock on September 25, 1998.
Although directors and executive officers and the ESOP were assumed to be
"affiliates" of the Registrant for purposes of this calculation, the
classification is not to be interpreted as an admission of such status.

Number of shares of Common Stock outstanding as of September 25, 1998: 662,524
Transitional Small Business Disclosure Format:  Yes        No    X
                                                    ------    ------
<PAGE>   2
                                     PART I

ITEM 1. BUSINESS

GENERAL

       Pennwood Bancorp, Inc. (the "Company)" is a Pennsylvania-incorporated
bank holding company and the sole stockholder of Pennwood Savings Bank (the
"Savings Bank"). The only significant assets of the Company is the capital stock
of the Savings Bank. The business of the Company currently consists of the
business of the Savings Bank. At June 30, 1998, the Company had consolidated
total assets of $46.0 million, total consolidated deposits of $35.7 million, and
total consolidated stockholders' equity of $7.9 million.

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

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

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

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


                                        1
<PAGE>   3
LENDING ACTIVITIES

       GENERAL. At June 30, 1998, the Company's net loan portfolio amounted to
$33.6 million, or 73.0% of total assets at that date. The Company has
traditionally concentrated its lending activities on conventional first mortgage
loans secured by single-family residential properties and consumer loans
(consisting primarily of home equity and improvement loans). Consistent with its
lending orientation, as of June 30, 1998, $22.0 million or 60.7% of the
Company's total loan portfolio consisted of single-family residential loans and
$9.1 million or 25.1% of the Company's total loan portfolio consisted of
consumer and other loans. To a lesser extent, the Company also originates
multi-family residential, commercial real estate and residential construction
loans. At June 30, 1998, such loan categories amounted to $453,000, $1.1 million
and $3.6 million, respectively, or 1.2%, 3.1% and 10.0% of the total loan
portfolio, respectively. Substantially all of the Company's total loan portfolio
consists of conventional loans, which are loans that are neither insured by the
Federal Housing Administration nor partially guaranteed by the Department of
Veteran Affairs. Historically, the Company's lending activities have been
concentrated in its primary market area of Allegheny County and Armstrong
County, Pennsylvania and portions of the surrounding counties. The Company
estimates that a substantial portion of its mortgage loans are secured by
properties located in its primary market area, and that substantially all of its
non-mortgage loan portfolio consists of loans made to residents and businesses
located in such primary market area.

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


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

                                                       1998                       1997                         1996
                                              ----------------------      ---------------------       ----------------------

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

<S>                                           <C>              <C>        <C>             <C>          <C>           <C>
Single-family residential                     $22,006           60.7%     $14,857          50.2%        $9,572         40.8%
Multi-family residential                          453            1.2          478           1.6             85          0.3
Commercial real estate                          1,107            3.1        1,524           5.1          2,582         11.0
Construction                                    3,631           10.0        3,748          12.7          2,393         10.2
                                               ------          -----       ------         -----         ------        -----
    Total real estate loans                    27,197           75.0       20,607          69.6         14,632         62.3
Consumer loans:
  Home improvement/equity                       8,217           22.7        8,110          27.4          7,843         33.4
  Other(1)                                        840            2.3          906           3.0            998          4.3
                                               ------          -----       ------          ----         ------        -----
    Total consumer loans                        9,057           25.0        9,016          30.4          8,841         37.7
Commercial business loans                           -             --           --            --             --           --
                                               ------          -----       ------         -----         ------        -----
      Total loans                              36,254          100.0%      29,623         100.0%        23,473        100.0%
                                               ======          =====       ------         =====         ------        =====
Less:
  Loans in process                              1,852                       1,924                        1,487
  Deferred loan origination
    fees                                          310                         265                          129
  Unearned discounts                               73                         172                          352
  Allowance for loan losses                       394                         282                          337
                                                -----                      ------                       ------
    Net loans                                 $33,625                     $26,980                      $21,168
                                               ======                      ======                       ======
</TABLE>

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

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


                                        2
<PAGE>   4
       CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table
sets forth certain information at June 30, 1998 regarding the dollar amount of
loans maturing in the Company's total loan portfolio, based on the contractual
terms to maturity, before giving effect to net items. Loans having no stated
schedule of repayments and no stated maturity are reported as due in one year or
less.


<TABLE>
<CAPTION>
                                                      Due One to          Due Five or
                                     Due One          Five Years             More
                                     Year or            After             Years After
                                      Less             6/30/98              6/30/98             Total
                                   -----------      --------------       -------------     -------------
                                                              (In thousands)
<S>                                   <C>               <C>                 <C>                <C>
Single-family residential             $ 283             $4,739              $16,984            $22,006
Multi-family residential                 --                 81                  372                453
Commercial real estate                   --                687                  420              1,107
Construction                          1,852                397                1,382              3,631
Consumer                                644              2,254                6,159              9,057
Commercial business                      --                 --                   --                 --
                                      -----              -----               ------             ------
     Total                           $2,779             $8,158              $25,317            $36,254
                                      =====              =====               ======             ======
</TABLE>


       The following table sets forth the dollar amount of all loans, before net
items, due after June 30, 1999 which have fixed interest rates or which have
floating or adjustable interest rates.



<TABLE>
<CAPTION>
                                                       Floating or Adjustable-
                                         Fixed-Rates           Rates                 Total
                                         -----------  ------------------------   --------------
                                                           (In Thousands)
<S>                                          <C>               <C>                   <C>
Single-family residential                    $15,560           $6,163                $21,723
Multi-family residential                          --              453                    453
Commercial real estate                            --            1,107                  1,107
Construction                                   1,567              212                  1,779
Consumer                                       7,573              840                  8,413
Commercial business                               --               --                     --
                                             -------           ------                -------
    Total                                    $24,700           $8,775                $33,475
                                             =======           ======                =======
</TABLE>

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


                                        3
<PAGE>   5
       ORIGINATION, PURCHASE AND SALE OF LOANS. The lending activities of the
Company are subject to the written, non-discriminatory, underwriting standards
and loan origination procedures established by the Company's Board of Directors
and management. Loan originations are obtained from a variety of sources,
including existing customers, builders, realtors, walk-in customers, loan
officers and advertising.

       Loan applications originated by the Company are generally processed at
the Company's main office in Pittsburgh. The loan applications are initially
processed by loan processors and, once completed, are submitted first to the
Vice President of Lending for initial approval and then to the Company's
President and Chief Executive Officer who may approve loans up to $150,000.
Loans of up to $227,150 also may be approved by such officers if originated by
NVR Mortgage. Loans between $150,000 to $250,000 are submitted for approval to
the Board of Director's Loan Committee, while loans in excess of $250,000 must
be approved by the Company's Board of Directors. All commercial loans,
regardless of amount, must be approved by the Board of Directors.

       Property appraisals on the real estate and improvements securing the
Company's single-family residential loans are made by independent appraisers.
Appraisals are performed in accordance with federal regulations and policies.
The Company obtains title insurance policies on first mortgage real estate loans
originated by it. Borrowers also must obtain hazard insurance prior to closing
and, when required, flood insurance. Borrowers may be required to advance funds,
with each monthly payment of principal and interest, to a loan escrow account
from which the Company makes disbursements for items such as real estate taxes
and mortgage insurance premiums as they become due.

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

       Historically, the Company has not been an active purchaser of loans.
However, in fiscal 1998, the Company purchased two single-family loans totaling
$144,000 from FHLMC that the Company had been servicing. In fiscal 1997, the
Company purchased seven commercial participation loans totaling $96,000, in May
1996, the Company purchased a $7,000 participation in a commercial loan, and
prior to 1994 purchased participation interests in loans secured by commercial
real estate and equipment-secured commercial leases. Such loans were generally
purchased from an investment consulting and loan servicing firm located in
Monroeville, Pennsylvania. The Company ceased purchasing such loans and
participation interests as a result of an increase in delinquencies. At June 30,
1998, loans purchased and serviced by others totalled $888,000, of which none
were classified as non-performing.


                                        4
<PAGE>   6
The following table shows total loans originated, purchased, sold and repaid
during the periods indicated.



<TABLE>
<CAPTION>
                                                      Year Ended June 30,
                                        -------------------------------------------------
                                           1998               1997                1996
                                        ----------      ---------------        ----------
                                                         (In Thousands)
<S>                                       <C>                   <C>              <C>
Loan originations:
  Single-family residential               $  5,742              $ 6,014          $   557
  Multi-family residential                      --                   --               --
  Commercial real estate                        --                  180              160
  Construction                               4,920                3,966            2,644
  Consumer                                   3,461                4,197            2,927
  Commercial business                           --                   --               --
                                           -------               ------           ------
    Total loans originated                  14,123               14,357            6,288
Purchases(1)                                   144                   96                7
                                           -------               ------           ------
    Total loans originated
      and purchased                         14,267               14,453            6,295
Sales and loan principal
  reductions:
  Loans sold                                    --                   --               --
  Loan principal reductions                  7,609                9,014            8,532
                                             -----               ------            -----
    Total loans sold and
       principal reductions                  7,609                9,014            8,532
Increase (decrease) due to
  other items, net(2)                         (13)                  373            (440)
                                           -------               ------           ------

Net increase (decrease) in
  loan portfolio                          $  6,645              $ 5,812         $(2,677)
                                             =====               ======          =======
</TABLE>
--------------------------
(1)    In fiscal 1998, consists of two FHLMC loans that the Company had been
       servicing.

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

       A savings institution generally may not make loans to one borrower and
related entities in an amount which exceeds 15% of its unimpaired capital and
surplus, although loans in an amount equal to an additional 10% of unimpaired
capital and surplus may be made to a borrower if the loans are fully secured by
readily marketable securities. At June 30, 1998, the Company's limit on
loans-to-one borrower was approximately $1.3 million. Nevertheless, except in
certain limited circumstances, the Company's loan policy currently limits its
loans to one borrower to $300,000. At June 30, 1998, the Company's five largest
loans or groups of loans-to-one borrower, including persons or entities related
to the borrower, amounted to $1.5 million in the aggregate, ranged from an
aggregate of $250,000 to $459,000 and were secured primarily by single-family
residential and commercial real estate. At June 30, 1998, $220,000 of the loans
which comprise the Company's largest loans-to-one borrower were classified as
non-performing.


                                        5
<PAGE>   7
       The Company's largest loans-to-one borrower consists of five loans which
are secured by single-family residential rental properties. The five loans had
an aggregate principal balance of $459,000 as of June 30, 1998, and three of the
loans were over 90 days delinquent (with an aggregate principal balance of
$220,000), one of the loans was 60 days delinquent (with a principal balance of
$110,000) and one loan was 30 days delinquent (with a principal balance of
$129,000), as of such date. Four of the five loans are secured by properties
located within the Company's primary market area. The principal borrower (which
consists of a partnership which is affiliated with the investment consulting and
loan servicing firm with respect to which the Company has purchased commercial
real estate and commercial business loans in the past) is currently negotiating
with the Company in order to bring all of the loans current and, accordingly,
the Company does not presently anticipate any loss of principal at this time.

       SINGLE-FAMILY RESIDENTIAL REAL ESTATE LOANS. The Company has historically
concentrated its lending activities on the origination of loans secured by first
mortgage liens on existing single-family residences located in its market area.
At June 30, 1998, $22.0 million or 60.7% of the Company's total loan portfolio
consisted of permanent single-family residential real estate loans.

       The Company had been emphasizing for its portfolio single-family
residential mortgage loans which provide for periodic adjustments to the
interest rate. The loans emphasized by the Company have up to 30-year terms and
an interest rate which adjusts every year in accordance with a designated index
(the weekly average yield on U.S. Treasury securities adjusted to a constant
comparable maturity of one year, as made available by the Board of Governors of
the Federal Reserve System ("Federal Reserve Board")). Such loans currently have
a 2% cap on the amount of any increase or decrease in the interest rate per
year, and a 6% limit on the amount by which the interest rate can increase or
decrease over the life of the loan. The Company has not engaged in the practice
of using a cap on the payments that could allow the loan balance to increase
rather than decrease, resulting in negative amortization. Most adjustable rate
single-family residential loans originated by the Company can, upon payment of a
fee, be converted into fixed-rate loans during certain periods. Approximately
28.7% of the permanent single-family residential loans in the Company's loan
portfolio at June 30, 1998 had adjustable interest rates. Recently, the Company
has emphasized for its portfolio fixed-rate single-family residential mortgage
loans.

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

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


                                       6
<PAGE>   8
date, generally are less than the risks associated with holding fixed-rate loans
in an increasing interest rate environment.

       The Company continues to originate long-term, fixed-rate loans in order
to provide a full range of products to its customers, but generally only under
terms, conditions and documentation which permit the sale thereof in the
secondary market. At June 30, 1998, approximately $15.7 million or 71.3% of the
permanent single-family residential loans in the Company's portfolio consisted
of loans which provide for fixed rates of interest. Although these loans provide
for repayments of principal over a fixed period of up to 30 years, it is the
Company's experience that such loans remain outstanding for a substantially
shorter period of time.

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

       MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LOANS. The Company
originates mortgage loans for the acquisition and refinancing of multi-family
residential properties and properties secured by commercial real estate. The
Company currently does not actively solicit such loans, which do not constitute
an active part of its business, and generally offers such loans to accommodate
its present customers and members of the local community. At June 30, 1998, $1.6
million or 4.4% of the Company's total loan portfolio consisted of loans secured
by multi-family residential and commercial real estate. The majority of the
Company's multi-family residential and commercial real estate loans are secured
by office buildings, restaurants, and other special purpose properties located
within the Company's primary market area. Management does not expect to
emphasize multi-family residential and commercial real estate lending in the
near future.

       A substantial portion of the Company's multi-family residential and
commercial real estate loans within the Company's portfolio consist of whole
loans and loan participations which were purchased by the Company through an
investment consulting and loan servicing firm headquartered in Monroeville,
Pennsylvania. The Company has experienced a high level of delinquencies with
respect to such purchased loans and, consequently, no longer engages in the
purchase of commercial real estate loans.

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


                                       7
<PAGE>   9
       Although terms vary, multi-family residential and commercial real estate
loans generally are amortized over a period of up to 25 years and mature in 15
years or less. The Company originates these loans with interest rates which
adjust in accordance with a designated index, which generally is negotiated at
the time of origination. Loan-to-value ratios on the Company's multi-family
residential and commercial real estate loans are currently limited to 80% or
lower. As part of the criteria for underwriting multi-family residential and
commercial real estate loans, the Company generally imposes a specified debt
coverage ratio (the ratio of net cash from operations before payment of debt
service to debt service). It is also the Company's general policy to obtain
personal guarantees on its multi-family residential and commercial real estate
loans from the principals of the borrower and, when this cannot be obtained, to
impose more stringent loan-to-value, debt service and other underwriting
requirements.

       Multi-family residential and commercial real estate lending entails
different and significant risks when compared to single-family residential
lending because such loans typically involve large loan balances to single
borrowers and because the payment experience on such loans is typically
dependent on the successful operation of the project or the borrower's business.
These risks can also be significantly affected by supply and demand conditions
in the local market for apartments, offices, warehouses or other commercial
space. The Company attempts to minimize its risk exposure by limiting the extent
of the nonresidential lending generally. In addition, the Company imposes
loan-to-value ratios, requires conservative debt coverage ratios, and
continually monitors the operation and physical condition of the collateral. At
June 30, 1998, $220,000 of the Company's multi-family residential and commercial
real estate loans were non-performing, which constituted 33.6% of total
non-performing loans at such date.

       CONSTRUCTION LOANS. The Company also originates residential construction
loans to individuals who have a contract with a builder for the construction of
their residence and, to a much lesser extent, to local real estate builders,
generally with whom it has an established relationship. The Company's
construction loans are secured by property located primarily in the Company's
primary market area. At June 30, 1998, construction loans amounted to $3.6
million or 10.0% of the Company's total loan portfolio.

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

       Construction lending is generally considered to involve a higher level of
risk as compared to permanent single-family residential lending, due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on developers and builders. Moreover, a
construction loan can involve additional risks because of the inherent
difficulty in estimating both a property's value at completion of the project
and the estimated cost (including interest) of the project. The nature of these
loans is such that they are generally more difficult to evaluate and monitor. In
addition, construction loans to a builder may not always be pre-


                                       8
<PAGE>   10
sold and thus could pose a greater potential risk to the Company than
construction loans to individuals on their personal residences. Nevertheless,
the Company has attempted to minimize the foregoing risks by, among other
things, limiting the extent of its construction lending as a proportion of the
total loan portfolio and by limiting its construction lending solely to
residential properties.

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

       CONSUMER LOANS. The Company has been originating consumer loans in recent
years in order to provide a full range of financial services to its customers
and because such loans generally have shorter terms and higher interest rates
than mortgage loans. The consumer loans offered by the Company include home
equity lines of credit, home improvement loans, unsecured personal loans and
lines of credit and automobile loans. At June 30, 1998, consumer loans amounted
to $9.1 million or 25.1% of the Company's total loan portfolio.

       Home equity lines of credit are originated by the Company for up to 80%
of the appraised value, less the amount of any existing prior liens on the
property. The Company also offers home improvement loans in amounts up to 90% of
the appraised value, less the amount of any existing prior liens. In 1987, the
Company entered into a contractual arrangement with an individual who assisted
the Company in originating and servicing home improvement loans through a
network of dealers. Although the contractual arrangement was terminated in
January 1994 (which resulted in the Company's recognition of $110,000 of expense
during fiscal 1994), the Company continues to originate home improvement loans
through a network of dealers which directly engage in the home improvement
field. Generally, home equity lines of credit have a maximum term of ten years
and interest rates which adjust in accordance with a designated prime rate plus
a margin. Home improvement loans have a maximum term of ten years and generally
carry fixed interest rates. In either case, the Company will secure the loan
with a mortgage on the property (generally a second mortgage) and will originate
the loan even if another institution holds the first mortgage. A combination
home improvement project, plus bill consolidation loan, can result in a home
equity loan over $100,000. Such loans can have terms up to 240 months and
usually require a first lien position if over $50,000. Under this amount, the
loan may be a second mortgage if the overall loan-to-value ratio meets the
bank's underwriting standards. Any loan over $100,000 shall be reported in the
Loan Committee minutes. At June 30, 1998, home equity lines of credit and home
improvement loans totaled $8.2 million or 22.6% of the Company's total loan
portfolio.

       The Company also offers unsecured lines of credit up to $3,000 with terms
up to 24 months, unsecured fixed rate loans up to $5,000 for borrowers with
excellent credit support as well as automobile loans up to $25,000 with terms up
to 60 months. The Company generally offers these loans to existing customers. At
June 30, 1998, $840,000 or 9.3% of the Company's total consumer loan portfolio
consisted of unsecured personal loans and lines of credit and automobile loans.


                                        9
<PAGE>   11
       The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's credit history and an assessment of
the borrower's ability to meet existing obligations and payments on the proposed
loan. The stability of the applicant's monthly income may be determined by
verification of gross monthly income from primary employment, and additionally
from any verifiable secondary income. Creditworthiness of the applicant is of
primary consideration; however, the underwriting process also includes a
comparison of the value of any security in relation to the proposed loan amount.
Upon termination of the Company's consulting arrangement discussed above, the
Company revised its loan underwriting and collection policies in order to
enhance its consumer loan underwriting standards and improve its collection
efforts.

       Consumer loans generally have shorter terms and higher interest rates
than mortgage loans but often involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. In addition, consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
adversely effected by job loss, divorce, illness and personal bankruptcy. In
most cases, any repossessed collateral for a defaulted consumer loan will not
provide an adequate source of repayment of the outstanding loan balance because
of improper repair and maintenance of the underlying security. The remaining
deficiency often does not warrant further substantial collection efforts against
the borrower. The Company believes that the generally higher yields earned on
consumer loans compensate for the increased credit risk associated with such
loans and that consumer loans are important to its efforts to increase rate
sensitivity, shorten the average maturity of its loan portfolio and provide a
full range of services to its customers. Nevertheless, at June 30, 1998,
$603,000 of the Company's consumer loans were non-performing, which constituted
92.2% of total non-performing loans and 6.7% of total consumer loans at such
date.

       COMMERCIAL BUSINESS LOANS. In years prior to the fiscal year ended 1997,
the Company became involved in purchasing office equipment and other commercial
leases, primarily through the investment consulting and loan servicing firm
located in Monroeville, Pennsylvania which was discussed above. The consulting
firm underwrote the leases pursuant to the Company's underwriting standards and
procedures. The Company then generally reviewed the documents and made a
determination whether to purchase such lease. The Company no longer has any
outstanding lease loans with this firm and does not plan to purchase any
additional loans from them in the future.

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

       The Company charges loan origination fees which are calculated as a
percentage of the amount borrowed. Loan origination and commitment fees in
excess of loan origination costs are deferred and recognized over the
contractual remaining lives of the related loans on a level yield basis.
Discounts and premiums on loans purchased are credited and amortized in the same
manner. In accordance with Financial Accounting Standards Board ("FASB")
Statement No. 91, the Company recognized $140,000, $43,000 and $67,000 of
deferred loan fees during the years ended


                                      10
<PAGE>   12
June 30, 1998, 1997, and 1996, respectively, in connection with loan
refinancing, payoffs and ongoing amortization of outstanding loans.

ASSET QUALITY

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

       The following table sets forth information concerning delinquent loans at
June 30, 1998, in dollar amounts and as a percentage of the Company's total loan
portfolio. The amounts presented represent the total outstanding principal
balances of the related loans, rather than the actual payment amounts which are
past due.


<TABLE>
<CAPTION>
                                                                           June 30, 1998
                             ---------------------------------------------------------------------------------------------------
                                        30-59                                                            90 or More Days
                                     Days Overdue                     60-89 Days Overdue                     Overdue
                             ----------------------------       -------------------------------    -----------------------------
                                               Percent                               Percent                         Percent
                                               of Total                              of Total                        of Total
                               Amount           Loans              Amount             Loans          Amount           Loans
                             ----------     -------------       -----------        ------------    ---------      --------------
                                                                       (Dollars in Thousands)
<S>                             <C>             <C>                 <C>                <C>             <C>             <C>
Single-family residential       $116             0.34%              $205               0.61%           $51              0.15%
Multi-family residential
  and commercial real
  estate                         129             0.38                227               0.68              -                --

Construction                      --               --                 --                 --             --                --
Consumer                         205             0.61                141               0.42            603              1.79
Commercial business               --               --                 --                 --              -                --
                                 ---             ----                ---               ----            ---              ----
  Total delinquent loans        $450             1.33%              $573               1.71%          $654              1.94%
                                 ===             ====                ===               ====           ====              ====
</TABLE>


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


                                       11
<PAGE>   13
       Real estate acquired by the Company as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until sold.
Pursuant to a statement of position ("SOP 92-3") issued by the American
Institute of Certified Public Accountants in April 1992, which provides guidance
on determining the balance sheet treatment of foreclosed assets in annual
financial statements for periods ending on or after December 15, 1992, there is
a rebuttable presumption that foreclosed assets are held for sale and such
assets are recommended to be carried at the lower of fair value minus estimated
costs to sell the property, or cost (generally the balance of the loan on the
property at the date of acquisition). After the date of acquisition, all costs
incurred in maintaining the property are expensed and costs incurred for the
improvement or development of such property are capitalized up to the extent of
their net realizable value. The Company's accounting for its real estate
acquired by foreclosure complies with the guidance set forth in SOP 92-3.

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


<TABLE>
<CAPTION>
                                                                         June 30,
                                                         ---------------------------------------
                                                           1998           1997            1996
                                                         --------      ---------       ---------
                                                                  (Dollars in Thousands)
<S>                                                        <C>           <C>             <C>
Non-accruing loans:
  Single-family residential                                 $51           $ 96            $111
  Multi-family residential and
    commercial real estate                                   --             60              60
  Construction                                               --             --              --
  Consumer                                                  272            117             137
  Commercial business                                        --             --              --
                                                            ---            ---             ---
    Total non-accruing loans                                323            273             308
Accruing loans greater than
  90 days delinquent:
  Single-family residential                                  --             --               2
  Multi-family residential and
    commercial real estate                                   --             --              --
  Consumer                                                  331            181             196
                                                            ---            ---             ---
    Total accruing loans greater than
     90 days delinquent                                     331            181             198
                                                            ---            ---             ---
    Total non-performing loans                              654            454             506
Real estate owned                                            11             37             166
                                                            ---            ---             ---
  Total non-performing assets                              $665           $491            $672
                                                            ---            ===             ===
  Total non-performing loans
    as a percentage of total loans                         1.94%          1.68%           2.39%
                                                           ====           ====            ====
  Total non-performing assets
    as a percentage of total assets                        1.44%          0.98%           1.43%
                                                           ====           ====            ====
</TABLE>


       For the years ended June 30, 1998, 1997 and 1996, approximately $42,000,
$26,000 and $29,000, respectively, in gross interest income would have been
recorded on loans accounted for on


                                       12
<PAGE>   14
a non-accrual basis if such loans had been current in accordance with their
original terms and had been outstanding throughout the year or since origination
if held for part of the year. For the years ended June 30, 1998, 1997 and 1996,
$12,000, $10,000 and $6,000, respectively, were included in interest income for
these same loans.

       The $654,000 of non-performing loans at June 30, 1998 included $51,000 of
single-family residential loans, $603,000 of consumer loans (consisting of 56
loans, 40 of which are secured by single-family residential real estate), and no
commercial business loan. The $11,000 of real estate owned at June 30, 1998
consisted of one single family residential property.

       The increase in non-performing assets during the year ended June 30, 1998
was primarily due to a $305,000 increase in non-performing consumer loans offset
by a $45,000 decrease in non-performing single-family residential loans, a
$60,000 decrease in non-performing multi-family residential and commercial real
estate loans and a $26,000 decrease in real estate owned. The increase in
non-performing consumer loans reflected a deterioration in credit quality. The
decrease in non-performing single-family residential loans and multi-family
residential and commercial real estate loans reflected the Company's ongoing
collection efforts. The decline in real estate owned resulted from the sale of
property.

       ALLOWANCE FOR LOAN LOSSES. It is management's policy to maintain an
allowance for estimated losses based on the perceived risk of loss in the loan
portfolio and the adequacy of the allowance. Management's periodic evaluation of
the adequacy of the allowance is based on the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of the
underlying collateral and current economic conditions. The allowance is
increased by provisions for loan losses which are charged against income. See
Notes 1 and 4 of the Notes to the Consolidated Financial Statements in the 1998
Annual Report to Stockholders, filed as Exhibit 13 hereto (the "1998 Annual
Report").

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

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






                                       13
<PAGE>   15
<TABLE>
<CAPTION>
                                                        Year Ended June 30,
                                         ---------------------------------------------------
                                             1998               1997               1996
                                         -----------       --------------       ------------
                                                       (Dollars in Thousands)

<S>                                        <C>                 <C>                <C>
Total loans outstanding (net)              $33,625             $26,980            $21,168
                                            ======              ======             ======
Average loans outstanding, net             $30,152             $22,377            $22,708
                                            ======              ======             ======
Balance at beginning of period             $   282             $   337            $   531
Charge-offs:
  Single-family residential                      6                  --                 --
  Multi-family residential and
    commercial real estate                      60                  --                116
  Consumer                                     146                  95                194
  Commercial business                           --                  --                  2
                                             -----               -----             ------
    Total charge-offs                          212                  95                312
Recoveries:
  Consumer                                      12                  11                 13
                                             -----               -----             ------
    Total recoveries                            12                  11                 13
                                             -----               -----             ------
Net charge-offs                               (200)                (84)              (299)
Provision for loan losses                      312                  29                105
                                             -----               -----             ------
Balance at end of period                      $394             $   282            $   337
                                               ===              ======             ======
Allowance for loan losses as a
  percent of total loans  outstanding         1.17%               1.05%              1.59%
                                             =====               =====              =====
Allowance for loan losses as a
  percent of total non-performing loans      60.24%              62.11%             66.60%
                                             =====               =====              =====
Ratio of net charge-offs to
  average loans outstanding                   0.66%               0.38%              1.32%
                                             =====               =====              =====
</TABLE>

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


<TABLE>
<CAPTION>
                                                                               June 30,
                                  -------------------------------------------------------------------------------------------------
                                            1998                                1997                               1996
                                  ----------------------------    ---------------------------------    ----------------------------
                                               Percent of                            Percent of                      Percent of
                                              Loans in Each                        Loans in Each                    Loans in Each
                                               Category to                          Category to                      Category to
                                   Amount      Total Loans           Amount         Total Loans         Amount       Total Loans
                                  -------    -----------------    -----------   -------------------    ---------  -----------------
                                                                        (Dollars in Thousands)


<S>                                   <C>           <C>               <C>               <C>            <C>              <C>
Single-family residential             $78           70.7%             $ 76              62.9%          $    22          51.0%
  loans(1)
Multi-family residential and
  commercial real estate loans         66            4.3               130               6.7               170          11.3
Consumer loans                        250           25.0                76              30.4               145          37.7
Commercial business loans              --              -                --                 -                 -            --
                                      ---            ---               ---             -----            ------         -----

     TOTAL                           $394            100%             $282             100.0%          $   337         100.0%
                                      ===            ===               ===             =====            ======         =====
</TABLE>

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


                                       14
<PAGE>   16
INVESTMENT ACTIVITIES

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

       Securities that management has the intent and positive ability to hold to
maturity are classified as held to maturity and are reported at amortized cost.
Securities that management has the clear intent of selling in advance of
maturity, or which management is uncertain it will hold until maturity are
classified as available for sale and are reported at their fair value. At June
30, 1998, $7.7 million of the Company's $7.9 million of investment securities
were classified as available for sale and the remaining $210,000 were classified
as held to maturity.

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


<TABLE>
<CAPTION>
                                                                                     June 30,
                                               -------------------------------------------------------------------------------
                                                           1998                         1997                      1996
                                               ----------------------------    ----------------------    ---------------------
                                                Amortized         Market        Amortized    Market       Amortized    Market
                                                   Cost           Value           Cost       Value          Cost       Value
                                               -------------  -------------    -----------  ---------     ----------  --------
                                                                                   (In Thousands)
<S>                                                 <C>          <C>             <C>         <C>           <C>         <C>
Investment securities held to
  maturity:
  U.S. Government and agency
    obligations                                     $   --       $   --          $    --     $    --       $ 2,000     $ 2,004
  Corporate obligations                                 --           --              497         500           764         775
  Municipal obligations                                200          205              200         205           200         202
  Mortgage-backed securities                            10           10               15          15            20          20
  Other                                                 --           --               --          --            --          --
                                                      ----         ----             ----        ----          ----        ----
    Total investment securities held
      to maturity                                   $  210       $  215          $   712     $   720       $ 2,984     $ 3,001
                                                       ===          ===           ======      ======        ======      ======
Investment securities available for
  sale:
  U.S. Government and agency
    obligations                                     $5,696       $5,735          $15,741     $15,729       $ 8,002     $ 7,919
  Corporate obligations                                 --           --              400         401           398         403
  Mortgage-backed securities                         1,644        1,693            1,836       1,835         1,980       1,944
  Other(1)                                             313          324              250         259            --          --
                                                       ---          ---           ------      ------        ------      ------
    Total investment securities
      available for sale                            $7,653       $7,752          $18,227     $18,224       $10,380     $10,266
                                                     =====        =====           ======      ======        ======      ======
</TABLE>

-----------------
(1)    Consists of FNMA Preferred Stock.


                                       15
<PAGE>   17
       The following table sets forth the amount of the Company's investment
securities which mature during each of the periods indicated and the weighted
average yields for each range of maturities at June 30, 1998.


<TABLE>
<CAPTION>
                                                                         Contractually Maturing
                                         --------------------------------------------------------------------------------------
                                                          Weighted                       Weighted                     Weighted
                                                          Average                        Average          Over 5      Average
                                         Under 1 Year      Yield           1-5 Years      Yield            Years       Yield
                                         ------------    ----------       -----------   ----------       --------     ---------
                                                                         (Dollars in Thousands)
<S>                                        <C>              <C>            <C>            <C>               <C>           <C>
Investment securities held to
  maturity:
  U.S. Government and
    agency obligations                     $    -              -%           $    -             -%              $--           --%
  Corporate obligations                        --             --                --            --                --            -
  Municipal obligations                        --             --                --            --               200         5.75
  Mortgage-backed securities                   --             --                --            --                10         7.50
                                            -----                            -----                           -----
  Total investment securities
    held to maturity                       $    -             --%           $   --            --%           $  210         5.83%
                                            =====          =====             =====         =====               ===         ====
Available for sale(1):
  U.S. Government and
    agency obligations                     $   --             --%           $1,257          6.97%           $4,802         7.27%
  Corporate obligations                        --             --                --            --                --           --
  Mortgage-backed securities                   --             --                --            --             1,693         7.26
                                            -----                            -----                           -----
    Total investment securities
      available for sale                   $   --             --%           $1,257          6.97%           $6,495         7.27%
                                            =====          =====             =====          ====             =====         ====
</TABLE>
-------------------------------
(1)    Reflected at fair value.

       The actual maturity of the Company's investment securities may differ
from contractual maturity since certain of the Company's investment securities
are subject to call provisions which allow the issuer to accelerate the maturity
date of the security. In addition, due to repayments of the underlying loans,
the actual maturities of mortgage-backed securities are substantially less than
the scheduled maturities. See Notes 2 and 3 of the Notes to Consolidated
Financial Statements in the 1998 Annual Report, filed as Exhibit 13 hereto.

SOURCES OF FUNDS

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

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

       The Company's deposits are obtained primarily from residents of Allegheny
County and Armstrong County, Pennsylvania. The Company attracts deposit accounts
by offering a wide


                                       16
<PAGE>   18
variety of accounts, competitive interest rates, and convenient office locations
and service hours. The Company utilizes traditional marketing methods to attract
new customers and savings deposits, including print media advertising and direct
mailings. The Company does not advertise for deposits outside of its local
market area or utilize the services of deposit brokers, and management believes
that an insignificant number of deposit accounts were held by non-residents of
Pennsylvania at June 30, 1998.

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



<TABLE>
<CAPTION>
                                                                                   June 30,
                                         --------------------------------------------------------------------------------------
                                                     1998                            1997                        1996
                                         --------------------------        -----------------------     ------------------------
                                                        Percent of                      Percent of                  Percent of
                                           Amount        Deposits            Amount     Deposits         Amount      Deposits
                                         ----------     -----------        ----------  -----------     ----------  ------------
                                                                            (Dollars in Thousands)
<S>                                         <C>              <C>            <C>                           <C>            <C>
Transaction accounts:
  Passbook savings and club                                                                 
    accounts                                $8,669           24.24%         $ 9,168         25.60%        $10,577        28.28%
  NOW accounts                               3,322            9.29            3,221          8.99           3,028         8.11
  Money market accounts                        528            1.48              724          2.02           1,008         2.70
                                            ------          ------           ------        ------          ------       ------
    Total transaction accounts              12,519           35.01           13,113         36.61          14,593        39.09
                                            ------          ------           ------        ------          ------       ------

Certificates of deposit:
  Within 1 year                             11,983           33.52           12,075         33.71          12,199        32.68
  1-2 years                                  4,462           12.48            4,171         11.64           3,628         9.72
  2-3 years                                  2,722            7.61            2,360          6.59           2,978         7.98
  3-4 years                                  2,089            5.84            1,955          5.46           2,040         5.46
  4-5 years                                  1,979            5.54            2,145          5.99           1,895         5.08
  Over 5 years                                   -               -               --            --              --           --
                                            ------          ------           ------        ------          ------       ------
    Total certificates of deposit           23,235           64.99           22,706         63.39          22,740        60.91
                                            ------           -----           ------        ------          ------       ------
    Total deposits                         $35,754          100.00%         $35,819        100.00%        $37,333       100.00%
                                            ======          ======           ======        ======          ======       ======
</TABLE>

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



<TABLE>
<CAPTION>
                                             Year Ended June 30,
                                --------------------------------------------
                                    1998            1997           1996
                                ------------   -------------   -------------
                                               (In Thousands)
<S>                                 <C>            <C>           <C>
Deposits                            $34,734        $30,947       $29,221
Withdrawals                          35,776         33,404        30,889
                                     ------        -------        ------
  Net decrease before
    interest credited                (1,042)        (2,457)       (1,668)
Interest credited                       977            943         1,182
                                     ------         ------        ------
  Net increase (decrease)
    in deposits                     $  (65)        $(1,514)      $  (486)
                                     ======         =======       =======
</TABLE>


                                       17

<PAGE>   19
       The following table shows the interest rate and maturity information for
the Company's certificates of deposit at June 30, 1998.


<TABLE>
<CAPTION>
                                                             Maturity Date
                      -------------------------------------------------------------------------------------------
   Interest Rate      One Year or Less    Over 1-2 Years       Over 2-3 Years       Over 3 Years        Total
-------------------   ----------------    --------------      ----------------     --------------    ------------
                                                             (In Thousands)
<C>                     <C>                                       <C>                   <C>             <C>
2.00 - 4.00%            $                    $   33               $   --                $   --          $    33
4.01 - 6.00%             11,104               2,888                  909                 1,202           16,103
6.01 - 8.00%                879               1,541                1,813                 2,866            7,099
                        -------               -----                -----                 -----           ------
  Total                 $11,983              $4,462               $2,722                $4,068          $23,235
                         ======               =====                =====                 =====           ======
</TABLE>


       The following table sets forth the maturities of the Company's
certificates of deposit having principal amounts of $100,000 or more at June 30,
1998.


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

<S>                                                       <C>
     September 30, 1998                                   $  105
     December 31, 1998                                       202
     March 31, 1999                                          422
     After March 31, 1999                                  1,576
                                                           -----
      Total certificates of deposit with
      balances of $100,000 or more                        $2,305
                                                           =====
</TABLE>

COMPETITION

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

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


                                       18
<PAGE>   20
EMPLOYEES

       The Company had 11 full-time employees and 9 part-time employees as of
June 30, 1998. None of these employees is represented by a collective bargaining
agent. The Company believes that it enjoys good relations with its personnel.

SUBSIDIARIES

       At June 30, 1998, the Company had two wholly-owned subsidiaries, the
Savings Bank and Pennwood Service Corporation, which held no significant assets
and was inactive as of such date.

                                   REGULATION

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

THE COMPANY

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

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

       The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring more than 5% of the voting shares of any company that is not a
bank and from engaging in any business other than banking or managing or
controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident


                                       19
<PAGE>   21
thereto. In making such determinations, the Federal Reserve Board is required to
weigh the expected benefit to the public, such as greater convenience, increased
competition or gains in efficiency, against the possible adverse effects, such
as undue concentration of resources, decreased or unfair competition, conflicts
of interest or unsound banking practices.

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

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

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


                                       20
<PAGE>   22
approval for certain loans. In addition, the aggregate amount of extensions of
credit by a savings institution to all insiders cannot exceed the institution's
unimpaired capital and surplus. Furthermore, Section 22(g) places additional
restrictions on loans to executive officers.

       CAPITAL REQUIREMENTS. The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the BHCA. The Federal Reserve Board capital adequacy guidelines
generally require bank holding companies to maintain total capital equal to 8%
of total risk-adjusted assets, with at least one-half of that amount consisting
of Tier I or core capital and up to one-half of that amount consisting of Tier
II or supplementary capital. Tier I capital for bank holding companies generally
consists of the sum of common stockholders' equity and perpetual preferred stock
(subject in the case of the latter to limitations on the kind and amount of such
stocks which may be included as Tier I capital), less goodwill and, with certain
exceptions, intangibles. Tier II capital generally consists of hybrid capital
instruments; perpetual preferred stock which is not eligible to be included as
Tier I capital; term subordinated debt and intermediate-term preferred stock;
and, subject to limitations, general allowances for loan losses. Assets are
adjusted under the risk-based guidelines to take into account different risk
characteristics, with the categories ranging from 0% (requiring no additional
capital) for assets such as cash to 100% for the bulk of assets which are
typically held by a bank holding company, including multi-family residential and
commercial real estate loans, commercial business loans and consumer loans.
Single-family residential first mortgage loans which are not past-due (90 days
or more) or non-performing and which have been made in accordance with prudent
underwriting standards are assigned a 50% level in the risk-weighing system, as
are certain privately-issued mortgage-backed securities representing indirect
ownership of such loans. Off-balance sheet items also are adjusted to take into
account certain risk characteristics.

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

       At June 30, 1998, the Company was in compliance with the above-described
Federal Reserve Board regulatory capital requirements.

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


                                       21
<PAGE>   23
THE SAVINGS BANK

       The Savings Bank is incorporated under Pennsylvania law under the Banking
Code of 1965, as amended (the "Banking Code") and is subject to extensive
regulation and examination by the Department and by the FDIC, and, is subject to
certain requirements established by the Federal Reserve Board. The federal and
state laws and regulations which are applicable to banks regulate, among other
things, the scope of their business, their investments, their reserves against
deposits, the timing of the availability of deposited funds and the nature and
amount of and collateral for certain loans. There are periodic examinations by
the Department and the FDIC to test the Savings Bank's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the Department, the FDIC or the U.S.
Congress could have a material adverse impact on the Company, the Savings Bank
and their operations.

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

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

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


                                       22
<PAGE>   24
       On October 16, 1996, the FDIC proposed to lower assessment rates for SAIF
members to reduce the disparity in the assessment rates paid by BIF and SAIF
members. Beginning October 1, 1996, effective SAIF rates range from zero basis
points to 27 basis points. From 1998 through 1999, SAIF members will pay 6.4
basis points to fund the Financing Corporation while BIF member institutions
will pay approximately 1.3 basis points.

       The FDIC may terminate the deposit insurance of any insured depository
institution, including the Savings Bank, if it determines after a hearing that
the institution has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Savings Bank's deposit insurance.

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

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


                                       23
<PAGE>   25
exceed 100% of core capital. At June 30, 1998, the Savings Bank met each of its
capital requirements.

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

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

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


                                      24
<PAGE>   26
       PENNSYLVANIA SAVINGS BANK LAW. The Banking Code contains detailed
provisions governing the organization, location of offices, rights and
responsibilities of directors, officers, employees and members, as well as
corporate powers, savings and investment operations and other aspects of the
Savings Bank and its affairs. The Banking Code delegates extensive rulemaking
power and administrative discretion to the Department so that the supervision
and regulation of state-chartered savings banks may be flexible and readily
responsive to changes in economic conditions and in savings and lending
practices.

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

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

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


                           FEDERAL AND STATE TAXATION

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

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


                                       25
<PAGE>   27
       METHOD OF ACCOUNTING. The Savings Bank maintains its books and records
for federal income tax purposes using the accrual method of accounting. The
accrual method of accounting generally requires that items of income be
recognized when all events have occurred that establish the right to receive the
income and the amount of income can be determined with reasonable accuracy, and
that items of expense be deducted at the later of (i) the time when all events
have occurred that establish the liability to pay the expense and the amount of
such liability can be determined with reasonable accuracy or (ii) the time when
economic performance with respect to the item of expense has occurred.

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

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

       Under the percentage of taxable income method, the bad debt deduction
equals 8% of taxable income determined without regard to that deduction and with
certain adjustments. The availability of the percentage of taxable income method
permits a qualifying savings institution to be taxed at a lower effective
federal income tax rate than that applicable to corporations in general. This
resulted generally in an effective federal income tax rate payable by a
qualifying savings institution fully able to use the maximum deduction permitted
under the percentage of taxable income method, in the absence of other factors
affecting taxable income, of 31.3%


                                       26
<PAGE>   28
exclusive of any minimum tax or environmental tax (as compared to 34% for
corporations generally). For tax years beginning on or after January 1, 1993,
the maximum corporate tax rate was increased to 35%, which increased the maximum
effective federal income tax rate payable by a qualifying savings institution
fully able to use the maximum deduction to 32.2%.

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

       At June 30, 1997 (the most recent date for which a tax return has been
filed), the federal income tax bad debt reserves of the Savings Bank included
$979,000 for which no federal income tax has been provided. Because of these
federal income tax bad debt reserves and the liquidation account established for
the benefit of certain depositors of the Savings Bank in connection with the
conversion of the Savings Bank to stock form, the retained earnings of the
Saving Bank are substantially restricted.

       On August 20, 1996, President Clinton signed into law the "Small Business
Job Protection Act" which included legislation, effective for tax years
beginning after December 31, 1995, whereby a small thrift institution (one with
an adjusted basis of assets of less than $500 million), such as the Savings
Bank, would no longer be permitted to make additions to its tax bad debt reserve
under the percentage of taxable income method. Such institutions will be
permitted to use the experience method in lieu of deducting bad debts only as
they occur. The legislation will require the Savings Bank to realize increased
current tax liability over a period of at least six years, beginning in the
fiscal year ending June 30, 1998. Specifically, the legislation requires a small
thrift institution to recapture (i.e., take into income) over a multi-year
period the balance of its bad debt reserves in excess of the lesser of (i) the
balance of such reserves as of the end of its last taxable year beginning before
1988 or (ii) an amount that would have been the balance of such reserves had the
institution always computed its additions to its reserves using the experience
method. However, such recapture requirements may be suspended for each of two
successive taxable years beginning on or after January 1, 1996, in which the
Savings Bank originates a minimum amount of certain residential loans based upon
the average of the principal amounts of such loans made by the Savings Bank
during its six taxable years preceding 1996. It is anticipated that any
recapture of the Savings Bank's bad debt reserves accumulated the first tax year
ending after 1987 would not have a material adverse effect on the Savings Bank's
financial condition and results of operations.

       MINIMUM TAX. The Code imposes an alternative minimum tax at a rate of
20%. The alternative minimum tax generally applies to a base of regular taxable
income plus certain tax preferences ("alternative minimum taxable income" or
"AMTI") and is payable to the extent such


                                       27
<PAGE>   29
AMTI is in excess of an exemption amount. The Code provides that an item of tax
preference is the excess of the bad debt deduction allowable for a taxable year
pursuant to the percentage of taxable income method over the amount allowable
under the experience method. Other items of tax preference that constitute AMTI
include (a) tax-exempt interest on newly issued (generally, issued on or after
August 8, 1986) private activity bonds other than certain qualified bonds and
(b) 75% of the excess (if any) of (i) adjusted current earnings as defined in
the Code, over (ii) AMTI (determined without regard to this preference and prior
to reduction by net operating losses).

       NET OPERATING LOSS CARRYOVERS. A financial institution may carry back net
operating losses ("NOLs") to the preceding three taxable years and forward to
the succeeding 15 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. At June 30, 1998, the Savings Bank had no
NOL carryforwards for federal income tax purposes.

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

       STATE TAXATION. The Savings Bank is subject to tax under the Pennsylvania
Mutual Thrift Institutions Tax Act, which imposes a tax at the rate of 11.5% on
the Savings Bank's net earnings, determined in accordance with generally
accepted accounting principles, as shown on its books. For fiscal years
beginning in 1983, and thereafter, NOLs may be carried forward and allowed as a
deduction for three succeeding years. This Act exempts the Savings Bank from all
other corporate taxes imposed by Pennsylvania for state tax purposes, and from
all local taxes imposed by political subdivisions thereof, except taxes on real
estate and real estate transfers. At June 30, 1998, the Savings Bank had no net
operating losses.


                                       28
<PAGE>   30
ITEM 2. PROPERTIES

       At June 30, 1998, the Company conducted its business from its main office
in Pittsburgh, Pennsylvania and two branch offices in Kittanning, Pennsylvania.
The following tables set forth the net book value (including leasehold
improvement, furnishings and equipment) and certain other information with
respect to the offices and other properties of the Company at June 30, 1998.



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

<S>                                                <C>                    <C>                  <C>
Main Office                                          Owned                 $  273               $15,214
683 Lincoln Avenue
Pittsburgh, Pennsylvania 15202

Branch Offices:
125 Market Street                                    Owned                 $  712               $12,894
Kittanning, Pennsylvania 16201

4 Hilltop Plaza                                     Leased(1)              $   59               $ 7,646
                                                                            -----                ------
Kittanning, Pennsylvania 16201

               Total                                                       $1,044               $35,754
                                                                            =====                ======
-------------------
</TABLE>

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

ITEM 3. LEGAL PROCEEDINGS

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

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

       Not applicable


                                       29
<PAGE>   31
                                     PART II


ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

       The information required herein is incorporated by reference from page
60 of the Company's 1998 Annual Report to Stockholders filed as Exhibit 13
hereto ("1998 Annual Report").
       
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION

       The information required herein is incorporated by reference from pages 4
to 18 of the 1998 Annual Report.

ITEM 7. FINANCIAL STATEMENTS

       The information required herein is incorporated by reference from pages
19 to 57 of the 1998 Annual Report.

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

       Not applicable


                                      II-1
<PAGE>   32
                                    PART III


ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

ITEM 10. EXECUTIVE COMPENSATION

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

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

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

       (a) The following documents are filed as part of this report and are
incorporated herein by reference from the Registrant's 1998 Annual Report:

              Independent Auditors' Report.

              Consolidated Statements of Financial Condition as of June 30, 1998
              and 1997.

              Consolidated Statements of Income for the Years Ended June 30,
              1998, 1997 and 1996.

              Consolidated Statements of Changes in Shareholders' Equity for the
              Years Ended June 30, 1998, 1997 and 1996.

              Consolidated Statements of Cash Flows for the Years Ended June 30,
              1998, 1997 and 1996.

              Notes to Consolidated Financial Statements.


                                     III-1
<PAGE>   33
       The following exhibits are filed as part of the Form 10-KSB, and this
       list includes the Exhibit Index:

<TABLE>
<CAPTION>
No.         Exhibits
---         --------
<S>         <C>
3.1         Articles of Incorporation of Pennwood Bancorp, Inc.*
3.2         Bylaws of Pennwood Bancorp, Inc.*
4           Stock Certificate of Pennwood Bancorp, Inc.*
10.1        Pennwood Bancorp, Inc. 1997 Stock Option Plan.**
10.2        Pennwood Bancorp, Inc. 1997 Recognition Plan and Trust Agreement.**
13          Annual Report to Stockholders for
            the Year Ended June 30, 1998
21          List of Subsidiaries
            (See "Item I. Business - Subsidiaries" in
            this Form 10-KSB)
27          Financial Data Schedule
</TABLE>

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

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

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

     (b) Reports filed on Form 8-K.

     The Company did not file any Current Reports on Form 8-K during the fourth
quarter of the fiscal year ended June 30, 1998.


                                      III-2
<PAGE>   34
                                   SIGNATURES

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



                                       PENNWOOD BANCORP, INC.



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


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




/s/ PAUL S. PIEFFER                                 September 28, 1998
-------------------------------------
Paul S. Pieffer
President, Chief Executive
 Officer and Director

/s/ CHARLES R. FRANK
-------------------------------------               September 28, 1998
Charles R. Frank
Chairman of the Board and
 Director

/s/ MARY M. FRANK
-------------------------------------               September 28, 1998
Mary M. Frank
Vice Chairman of the Board,
Director and Treasurer

/s/ JOHN B. MALLON
-------------------------------------               September 28, 1998
John B. Mallon
Director


                                      III-3
<PAGE>   35
/s/ C. JOSEPH TOUHILL
-------------------------------------               September 16, 1998
C. Joseph Touhill                                                        
Director

/s/ ROBERT W. HANNAN
-------------------------------------               September 28, 1998
Robert W. Hannan                                                      
Director

/s/ MICHAEL KOTYK                                                     
-------------------------------------               September 28, 1998
Michael Kotyk
Director

/s/ H.J. ZOFFER                                                       
-------------------------------------               September 28, 1998
H.J. Zoffer
Director

/s/ JAMES W. KIHM
-------------------------------------               September 28, 1998
James W. Kihm
Vice President and Secretary
(also principal accounting officer)


                                      III-4