<PAGE>

                     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 December 31, 1997

                                       OR

     Transition report under Section 13 or 15(d) of the 
---  
     Securities and Exchange Act of 1934

                          Commission File No.: 0-23499

                      DELAWARE FIRST FINANCIAL CORPORATION
                 ----------------------------------------------
                 (Name of Small Business Issuer in Its Charter)


       Delaware                                     52-2063973
-------------------------------               ---------------------------
(State of Other Jurisdiction of                 (I.R.S. Employer
Incorporation or Organization)                  Identification Number)


 400 Delaware Avenue, Wilmington, Delaware               19801
------------------------------------------    ----------------------------
         (Address of Principal                         (Zip Code)
          Executive Offices)

         Issuer's Telephone Number, Including Area Code: (302) 421-9090

      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: $8.0 million.

As of March 31, 1998, the aggregate value of the 1,048,622 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
108,378 shares held by all directors and executives officers of the Registrant
and the Registrant's Employee Stock Ownership Plan ("ESOP") as a group, was
approximately $14.7 million. This figure is based on the closing sales price of
$14.00 per share of the Registrant's Common Stock on March 31, 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 March 31, 1998: 1,157,000 
Transitional Small Business Disclosure Format: Yes     No  X
                                                  ---    ---


<PAGE>


                                     PART I

Item 1. Business

General

        Delaware First Financial Corporation (the "Company") is a
Delaware-chartered savings and loan holding company and the sole stockholder of
Delaware First Bank, FSB (the "Savings Bank"). The only significant assets of
the Company are the capital stock of the Savings Bank, the Company's loan to the
Employee Stock Ownership Plan ("ESOP") and the portion of the proceeds retained
by the Company in connection with the Savings Bank's conversion to stock form,
discussed below. The business of the Company currently consists of the business
of the Savings Bank. At December 31, 1997, the Company had total assets of
$113.3 million, total deposits of $76.9 million, and total stockholders' equity
of $16.1 million or 14.2% of total assets.

        The Savings Bank was founded in 1922 as Ninth Ward Building & Loan
Association, a Delaware chartered institution. In 1954, the Savings Bank changed
its name to Ninth Ward Savings & Loan Association. In 1992, the Savings Bank
adopted a federal savings association charter, and changed its name to Ninth
Ward Savings Bank, FSB. The Savings Bank converted from a federally-chartered
mutual savings bank to a federally-chartered capital stock savings bank and
became a wholly-owned subsidiary of the Company in December 1997 (the
"Conversion"). Subsequent to the Conversion, in January 1998, the Savings Bank
changed its name to Delaware First Bank, FSB. The Savings Bank's business has
been conducted from a single location since its inception. The Savings Bank
intends to operate as an independent community-oriented savings association.

        The principal sources of funds for the Savings Bank's activities are
deposits, repayments of loans and mortgage-backed securities, maturities of
investments and interest-bearing deposits, funds provided from operations and
advances from the Federal Home Loan Bank ("FHLB") of Pittsburgh. The Savings
Bank's funds are used principally for the origination of loans secured by first
mortgages on one- to four-family residences which are located in its market
area. Such loans totaled $79.2 million, or 89.1%, of the Savings Bank's total
loan portfolio at December 31, 1997. The Savings Bank's principal source of
revenue is the interest received on loans, and its principal expense is the
interest paid on deposits and FHLB of Pittsburgh advances.

        The Savings Bank has operated from a single banking location in the
central business district of Wilmington since 1922. Branch offices are a way to
bring convenient banking services to customers in a bank's market area. Because
of the Savings Bank's single location in downtown Wilmington, it has used other
methods such as personal service and competitively priced deposits to attract
and retain customers. Recently, the mix of business in central Wilmington has
shifted from industrial corporations to financial services companies, including
large banks and credit card lenders. That change has affected the Savings Bank's
ability to attract new customers because the employees of these financial
service companies have banking relationships with their employers. 

                                       1
<PAGE>


The need to develop strategies to preserve the Savings Bank's customer base
while operating from a single location has increased as its customer base has
changed and the financial services in its market have become increasingly
competitive.

        The Savings Bank's single office structure has also affected the type of
deposits used to attract loans. For a number of years, the Savings Bank's
deposit structure has been comprised of fixed rate, fixed term certificates of
deposit. The Savings Bank has also used FHLB advances as an alternate source of
funds. The Savings Bank believes that as long as it operates solely from a
single office location it will be necessary to continue to rely on certificates
of deposit as its primary source of funds. At December 31, 1997, 84.3% of the
Savings Bank's deposits were in certificate form. Moreover, of this amount,
21.2% were in certificates of deposit of $100,000 or more. The Savings Bank
believes that its depositors are particularly sensitive to rate changes and that
the Savings Bank could undergo significant decay in these deposits if it
attempted to reduce the rates paid on certificates of deposit. As a result of
the Savings Bank's dependence on higher yielding certificates of deposit and
borrowings from the FHLB of Pittsburgh, the Savings Bank's cost of funds has
been and is likely to remain higher than that of comparable thrift institutions
with more convenient banking facilities, and those which operate in less
competitive banking markets, until it is able to attract more core deposits in
the form of shorter term deposits and transaction accounts.

        Depending on general market conditions and the presence of a suitable
location, the Savings Bank anticipates opening branch facilities within the next
two years to provide more convenient banking services to the Savings Bank's
existing customers and to attract new customers. Upon the opening of a branch,
should such occur, it is likely that the initial expenses associated therewith
could cause a decline in earnings. At present, 78.5% of the Savings Bank's
assets are in loans but the establishment of a new branch facility is likely to
reduce that ratio and have an adverse impact on earnings.

        The Savings Bank's origination of loans has primarily consisted of
long-term fixed rate loans. These originations increase as a result of
refinancings during low rate environments. The Savings Bank believes the
attractiveness of fixed rate loans and the reluctance of customers to accept
adjustable rate mortgage ("ARM") loans is in large part due to the relative
stability and low level of long term interest rates in the Savings Bank's market
and in the nation as a whole. The Savings Bank, like most banks, has found that
when long term rates are relatively low, the Savings Bank's borrowers prefer the
certainty of a fixed rate loan structure. As a result, over 77.6% of the Savings
Bank's first mortgage loans are fixed rate loans while approximately only 11.4%
are ARM loans. While some of the Savings Bank's fixed rate loans have been sold
in the secondary market, it has held the majority of these loans in its
portfolio. This concentration of long term, fixed rate loans, coupled with the
Savings Bank's reliance on shorter maturity certificates of deposit, has exposed
it to substantial interest rate risk. See "Item 6. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset/Liability
Management."



                                       2
<PAGE>


        The Savings Bank intends to expand its product line by offering small
business/commercial loans as well as place more emphasis on home equity lending.
These forms of lending are shorter term, higher yielding and higher risk than
residential lending. The addition of shorter term business loans to the Savings
Bank's loan portfolio may enable it to reduce its dependence on fixed rate, long
term mortgage loans and enable it to work toward reduction of interest rate
risk.

        The Savings Bank is subject to examination and comprehensive regulation
by the Office of Thrift Supervision ("OTS"), which is the Savings Bank's
chartering authority and primary federal regulator. The Savings Bank is also
regulated by the Federal Deposit Insurance Corporation ("FDIC"), the
administrator of the Savings Association Insurance Fund ("SAIF"). The Savings
Bank is also subject to certain reserve requirements established by the Board of
Governors of the Federal Reserve System ("FRB") and is a member of the FHLB of
Pittsburgh, which is one of the 12 regional banks comprising the FHLB System.

        The Company's and the Savings Bank's executive office is located at 400
Delaware Avenue, Wilmington, Delaware 19801, and their telephone number is (302)
421-9090.

        This Form 10-KSB contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of management
as well as assumptions made by the information currently available to
management. In addition, in those and other portions of this document, the words
"anticipate," "believe," "estimate," "expect," "intend," "should," and similar
expressions, or the negative thereof, as they related to the Company or the
Company's management, are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
looking events and are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. The Company does not intend to update these forward-looking
statements.

Market Area

        The Savings Bank's primary market area consists of New Castle County,
Delaware. New Castle County, which contains the city of Wilmington, is the site
of incorporation of many of the nation's largest corporations. The largest
industries are service, nondurable goods manufacturing and finance, insurance
and real estate. Agriculture also plays a prominent part in the state's economy.
The Savings Bank is located approximately 15 miles from Newark, Delaware, site
of the University of Delaware. Delaware has two other state supported
institutions and four private schools awarding post-secondary degrees. Owing to
its preferred location as the state of incorporation for many of the nation's
largest corporations, the city has many law, accounting and consulting firms.
The state of Delaware has the fourth lowest population in the nation but has
both high employment and higher than average income levels.


                                       3
<PAGE>


        The state of Delaware has adopted numerous favorable tax laws to attract
and retain businesses. Delaware has no sales tax and a relatively low real
property tax. Additionally, the state has a regressive bank franchise tax which
is favorable for large financial institutions. Several large banking companies
have established headquarters and other facilities here for credit card
operations. Delaware has also sought to augment the service-based sector of its
economy, having recently adopted a new trust law to facilitate the location of
trusts in Delaware.

        Economic growth in the Savings Bank's market area remains dependent upon
the local economy. In addition, the Savings Bank's deposit and loan activity is
significantly affected by economic conditions in the Savings Bank's market area.
Based on the economic demographic history of the Savings Bank's primary market
area, the Savings Bank expects its market area to be relatively stable in the
future. Significant banking competition, however, will likely cause the cost of
funds to remain relatively high.

Supervisory Agreement

        Since May 21, 1997, the Savings Bank has been operating under a
Supervisory Agreement with the OTS. Under the Supervisory Agreement, the Savings
Bank has agreed to take actions to improve its compliance with certain OTS
regulations in the area of interest rate risk, develop a three year business
plan, implement and periodically follow up on the Savings Bank's interest rate
risk policy, establish procedures providing for detailed minutes of Board of
Directors and committee meetings, establish procedures to insure Board members
are presented with sufficient information in order to make informed judgments
and improve regulatory compliance. With regard to interest rate risk management,
the Savings Bank has adopted and submitted to the OTS a revised interest rate
risk policy and undertaken certain actions including the sale of fixed rate
mortgage loans to the Federal Home Loan Mortgage Corporation ("FHLMC") and
lengthening the maturities of certain FHLB advances. The Supervisory Agreement
also required that the Savings Bank submit a three year written Business Plan to
the OTS which addresses goals and strategies for improving and sustaining
earnings. The Business Plan is required to identify major areas for improving
operating performance and achieving and maintaining adequate levels of capital
while addressing operating expenses (including management compensation), the
Savings Bank's cost of funds and asset growth. The Business Plan is required to
be updated annually and reviewed by the Savings Bank's Board of Directors at
least quarterly. Pursuant to the requirements of the Supervisory Agreement, the
Business Plan was submitted to the OTS regional office on August 28, 1997. The
Supervisory Agreement also requires the OTS be notified 30 days before a new
director or executive officer is appointed. Further, the Savings Bank must
provide notice to the OTS prior to extending, renewing, reviewing or entering
into any compensation or benefit-related contract with a senior executive
officer or director of the Savings Bank. The Supervisory Agreement remains in
effect until terminated by the OTS, although it states that the OTS Regional
Director will consider requests for termination after the first Report of
Examination following the May 21, 1997 effective date of the Supervisory
Agreement. The OTS completed its examination of the Savings Bank in March, 1998.
Presently, the Savings Bank is awaiting the 


                                       4
<PAGE>


receipt of the Report of Examination at which time it anticipates requesting
termination of the Supervisory Agreement.

Lending Activities

        The following table sets forth information concerning the types of loans
held by the Company:


<TABLE>
<CAPTION>

                                                   Composition of Loan Portfolio
                                  ----------------------------------------------------------------
                                                            December 31,
                                  ----------------------------------------------------------------
                                              1997                               1996
                                  ------------------------------    ------------------------------
                                                    Percent of                          Percent of
                                    Amount            Total            Amount             Total
                                  -------------    -------------    -------------    -------------
<S>                                <C>                 <C>            <C>            <C>
Real estate loans:
  Residential mortgage             $79,244,982         89.11%        $87,918,256           89.67%
                                  -------------    -------------    -------------    -------------
    Total real estate loans         79,244,982         89.11          87,918,256           89.67

Other loans:
  Deposit account                      749,969          0.84             528,198            0.54
  Home equity loans                  7,413,485          8.34           8,082,865            8.24
  Equity lines of credit             2,946,938          3.31           2,823,273            2.88
                                  -------------    -------------    -------------    -------------
    Total other loans               11,110,392         12.49          11,434,336           11.66

Less:
  Unamortized loan fees                959,350          1.08           1,063,474            1.08
  Allowance for loan losses            462,815          0.52             247,000            0.25
                                  -------------    -------------    -------------    -------------

Total loans, net                   $88,933,209        100.00%         $98,042,118         100.00%
                                  -------------    -------------    -------------    -------------
                                  -------------    -------------    -------------    -------------

Mortgage-backed securities           1,900,986                            203,147
                                  -------------                     -------------

         Total                     $90,834,195                        $98,245,265
                                  -------------                     -------------
                                  -------------                     -------------

</TABLE>


         The Company is currently servicing loans for the benefit of others.
Such loans totaled $56.7 million, $54.3 million and $56.7 million at December
31, 1997, 1996 and 1995, respectively. Servicing loans for others generally
consists of collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors and foreclosure processing. Loan servicing fees
generated by these activities were $105,000, $190,000 and $52,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. Additionally, at December
31, 1997, the Company had outstanding loan origination commitments of $794,000,
for fixed and adjustable rate loans with rates ranging from 7.125% to 11.75%.
These commitments are expected to be funded within one year. Commitments are
issued in accordance with the same loan policies and underwriting standards as
settled loans.


                                       5
<PAGE>



         The following table sets forth the estimated maturity of the Company's
loan portfolio at December 31, 1997. Scheduled contractual principal repayments
of loans do not reflect the actual life of such assets. The actual life of the
loan is substantially less than its contractual terms because of prepayments. In
addition, due on sale clauses on loans generally give the Company the right to
declare loans immediately due and payable in the event, among other things, that
the borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tend to increase, however, when the
current mortgage loan market rates are substantially higher than rates on
existing mortgage loans and, conversely, decrease when rates on existing
mortgage loans are substantially higher than current mortgage loan market rates.
All mortgage loans are shown as maturing based on the date of the last payment
required by the loan agreement except as noted.


<TABLE>
<CAPTION>

                                 Contractual Maturity of Loans and Mortgage-Backed Securities
                    -----------------------------------------------------------------------------------
                                                 More than       More than
                     Within 6       6 to 12      one year to     three years       Over 5
                      months        months       three years    to five years       years        Total
                    ----------     ---------    -------------  ---------------   ---------     --------
                                                       (In Thousands)
<S>                  <C>            <C>             <C>             <C>           <C>           <C>    
Residential
  Mortgage           $   93         $    2          $  650          $2,919        $75,580       $79,245
Deposit account
  loans                 750              0               0               0              0           750
Home equity
 loans                    6            121           1,166           1,930          4,190         7,413
Equity lines of
  credit(2)           2,947              0               0               0              0         2,947
                    -------         ------         -------         -------        -------      --------
  Total loans         3,796            123           1,817           4,849         79,770        90,355

Mortgage-backed
  securities              0              0             170               0          1,731         1,901
                    -------         ------         -------         -------        -------      --------

  TOTAL              $3,796           $123          $1,987          $4,849        $81,501       $92,256
                    -------         ------         -------         -------        -------      --------
                    -------         ------         -------         -------        -------      --------
</TABLE>

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

(1)       Equity lines of credit are open-ended and have no stated maturity date
          and are shown as being due when interest rates are next subject to
          change.



                                       6
<PAGE>


          The following table sets forth the amount of fixed rate and adjustable
rate loans at December 31, 1997 which are due after December 31, 1998:

<TABLE>
<CAPTION>


                                          Loans at 12/31/97 due after 12/31/98
                                    ------------------------------------------------
                                     Fixed            Adjustable            Total
                                    ---------        ------------          ---------
                                                (Dollars in thousands)
<S>                                  <C>                 <C>                 <C>    
  Residential mortgage               $69,050             $10,100             $79,150
  Deposit account loans                    0                   0                   0
  Home equity loans                    7,286                   0               7,286
  Equity lines of credit                   0                   0                   0
                                    ---------        ------------          ---------

       Total                         $76,336             $10,100             $86,436
                                    ---------        ------------          ---------
                                    ---------        ------------          ---------

           Percent of total loans     84.48%              11.18%              95.66%


</TABLE>


                                       7
<PAGE>

          The following table sets forth certain information with respect to the
Company's loan origination, purchase and sales activity for the periods
indicated:


         Loan Activity

<TABLE>
<CAPTION>

                                                              Year Ended December 31,
                                                 ------------------------------------------------
                                                    1997              1996              1995
                                                 -----------       -----------        -----------
<S>                                              <C>               <C>                <C>        
Net loans receivable at beginning of period      $98,042,118       $78,835,306        $72,134,479

Loans originated:
  Real estate loans:
    First mortgage loans                           6,220,820        31,673,585         41,250,431
    Home equity loans                              2,267,896         3,139,302          2,701,850
    Equity lines of credit                         2,103,992         2,691,392          2,263,227
  Deposit account loans                              783,065           713,357          1,046,369
                                                 -----------       -----------        -----------
         Total loans originated                 $ 11,375,773       $38,217,636        $47,261,877

Loans purchased:
  Participations                                      57,371            18,400             34,181
                                                 -----------       -----------        -----------
         Total loans purchased                 $      57,371      $     18,400      $      34,181

Loans sold:
  Whole loans                                    (6,812,130)       (2,599,494)       (26,010,908)
  Participations                                           0       (2,008,782)        (3,859,071)
                                                 -----------       -----------        -----------
         Total loans sold                      $ (6,812,130)     $ (4,608,276)      $(29,869,979)
                                                 -----------       -----------        -----------

Principal repayments                           $(13,618,232)     $(15,414,110)      $ (9,726,497)

Allowance for losses (increase)                    (215,815)          (47,000)            (5,000)

Reclassifications-Held for Sale                            0         1,020,000        (1,020,000)

Other activity, net                                  104,124            20,162             26,245

Net loan increase (decrease)                     (9,108,909)        19,206,812          6,700,827
                                                 -----------       -----------        -----------

Net loans receivable at end of period            $88,933,209       $98,042,118        $78,835,306
                                                 -----------       -----------        -----------
                                                 -----------       -----------        -----------
</TABLE>

          Most of the Company's loans are first or second mortgage and equity
loans which are secured by one- to four-family residences. The Company also
makes loans on deposit accounts. The Company intends to emphasize small
business/commercial lending, which will require the Company to increase its
staff and add another executive officer experienced in such lending. However,
this is a new area of lending for the Company and one that is highly competitive
in its market area. Accordingly, the Company's ability to originate small
business/commercial loans in a manner which is both profitable and in which
risks are maintained at acceptable levels is not assured. Further, small
business/commercial lending entails significantly greater risk than traditional
real estate lending. The repayment of these loans typically is dependent on the


                                       8
<PAGE>


successful operation and income stream of the borrower. Such risks can be
significantly affected by economic conditions. When economic conditions or
segments of the economy slow down, business sales and profits may also decline.
Loans made to businesses experiencing a decline may require a restructuring
which could include a reduction or deferral of interest paid on the loan, or in
some cases, a portion or all of the principal may be uncollectible and a loss
would be incurred.

          At December 31, 1997, total loans amounted to $88.9 million of which
$79.2 million or 89.1% were first mortgage loans secured by one- to four-family
residences. The majority of the Company's loans have interest rates which are
fixed for the term of the loan ("fixed rate"). To a much lesser extent, when
market conditions are favorable, the Company originates loans with rates of
interest which may adjust from period to period during the term of the loan
("adjustable rate"). The Company's reliance on interest income from fixed rate
loans has made it more susceptible to changes in interest rates and, as a
result, both its capital and its interest income could be adversely affected in
a rising interest rate environment.

          The Company intends to begin originating small business/commercial
loans. Commercial loans are business loans which may be secured by real estate
or other collateral or may be unsecured. In connection with this program, the
Company may offer loans secured by property such as small apartment buildings
and small office buildings, shopping centers, and commercial and industrial
buildings. Such loans will typically be originated on an adjustable rate basis.
Small business/commercial lending has an inherently greater risk than
residential one- to four-family lending.

          The Company obtains mortgage loans from a variety of sources. The most
frequently utilized method of obtaining mortgage loans is through employee
originators who handle telephone calls, walk-in customers and referrals from
real estate brokers. In previous years, the Company has obtained mortgage loans
from a third party originator.

          An appraisal on each property which secures a first mortgage loan made
by the Company is obtained from an independent appraisal firm. These appraisers
are approved by the Savings Bank's Appraisal Committee, and certain appraisals
are reviewed randomly by the Committee throughout the year. Each appraiser must
annually submit updated licenses and evidence of insurance coverage to maintain
their status as an approved appraiser. The appraised value of a property is
determined by a physical inspection of the property and comparison of the
property to at least three comparable properties in the immediate area. The
appraised value is used as a basis for determining loan to value ratios unless
the sale price of the property is less than the appraisal value. In that case,
the sale price is used.

          Certain officers of the Savings Bank each individually have lending
authority as defined and approved by the Board of Directors. Limits of this
lending authority are set for the loan amount, loan-to-value ratio, credit
ratios and credit quality. Residential mortgage and home equity loans that fit
within these authority limits are approved by an individual officer or officers.


                                       9
<PAGE>


All other loans are reviewed by a Loan Committee consisting of (1) either the
President or the Executive Vice President; (2) the Vice President of Residential
Lending; and (3) the Vice President of Retail Banking Services. In the case of
loans that are reviewed by the Loan Committee, a majority of the Committee is
required for the approval of a loan. The Vice President of Residential Lending
is responsible for maintaining records of all Loan Committee meetings. A summary
report of all loans approved is submitted to the Board of Directors each month
for their ratification.

          Participation interests in loans are reviewed and approved by either
the Board of Directors or the Executive Committee. The amount of the loan
participation must be approved by the Board of Directors.

          Promptly after the Company approves a loan it provides a commitment
letter to the borrower which specifies the terms and conditions of the proposed
loan including the amount of the loan, the interest rate, the amortization term,
a brief description of the required collateral and required insurance coverage,
including fire and casualty insurance, and flood insurance as required. The
Company also requires each loan to have title insurance. At December 31, 1997,
the Company had commitments to originate $794,000 in mortgage and home equity
loans.

          The Company does not purchase whole loans. However, it does
occasionally purchase participation interests in loans. For the year ended
December 31, 1997, the Company purchased $57,000 of loan participations
originated by Delaware Community Investment Corporation ("DCIC").

          The Company requires private mortgage insurance on all first mortgage
loans when the loan-to-value ratio exceeds 80%. The Company retains servicing on
all loans originated. From time to time, the Company also sells certain of the
loans or participation interests in loans it originates. The only loans the
Company sells are fixed-rate residential mortgage loans. For the year ended
December 31, 1997, the Company sold $6.8 million of such loans. Such loans are
sold to either the FHLMC, Federal National Mortgage Association ("FNMA"), or
another financial institution.

          All loans collateralized by deposits held by the Savings Bank must be
approved by the Customer Service Supervisor, Branch Manager, or their designee.
Loans of this type in excess of $25,000 must be approved by either the Vice
President - Branch Sales Manager, Vice President - Retail Banking Services or
the Chief Operations Officer.

          Originations, Purchases and Sales of Loans. As a federal association,
the Savings Bank is permitted to make and/or purchase loans nationwide. The
Company originates and purchases participations in loans secured by real estate
located only in its market area. Recently, the Company's purchasing activities
have been limited to purchasing participations from DCIC. The Company makes home
mortgage loans secured by owner and nonowner occupied dwellings as well as
second mortgage loans secured by real estate. The Company occasionally makes


                                       10
<PAGE>


construction loans secured by residential real estate and loans secured by
savings accounts. To a lesser extent, from time to time, the Company
participates in permanent or construction loans originated by other
federally-insured financial institutions. The Company also participates in
permanent mortgage loans originated by DCIC secured by multi-family dwelling
units. DCIC is a community investment corporation formed to provide financing
for low and moderate income families through a loan pool formed by the
commitment of over 30 banks. The Savings Bank purchases participations in loans
based upon its pro-rata share of the total loan pool.

          The Company's ability to originate loans is based on several factors.
These include the level of interest rates, the needs of its customers, its asset
and liability funding needs and the success of its marketing efforts. In 1995,
the Company began to increase its mortgage lending and hold loans in portfolio,
rather than selling them into the secondary market. The growth was largely due
to the Company's desire to increase income through additional mortgage lending
and a high refinancing demand of consumers. Nearly all of these loans were fixed
rate loans with terms of 15 to 30 years. Holding these long-term loans with
fixed rates, while assisting in the Company's income growth, caused its interest
rate risk to increase and made it more susceptible to declines in its interest
income if interest rates increased. Accordingly, in the last quarter of 1996 the
Company reduced its lending activities so that it could better manage its
interest rate risk. This reduction also was the result of less refinancing
activity. The Company's mortgage loan originations for the year ended December
31, 1997 were $6.2 million compared to $31.7 million for the year ended December
31, 1996.

          One-to-Four Family Residential Loans. The Company's primary lending
activity consists of the origination of one-to-four-family residential mortgage
loans secured by property located in its primary market area. The Company
generally originates conforming one-to-four family owner occupied residential
mortgage loans in amounts up to 95% loan-to-value ratio -- 97% in the case of
some first time home buyer programs -- with private mortgage insurance required
on loans with a loan-to-value ratio in excess of 80%. The maximum loan-to-value
ratio on mortgage loans secured by nonowner occupied properties generally is
limited to 75%. The Company primarily originates fixed-rate loans having terms
from five to 30 years, with principal and interest payments calculated using up
to a 30-year amortization period. At December 31, 1997, approximately 12.7% of
the Company's one- to four-family residential loans had adjustable rates of
interest.

               Home Equity. The Company's loan portfolio also contains
fixed-rate home equity loans and variable rate equity lines of credit. These
loans and lines of credit totaled $10.4 million and comprised 11.6% of our total
loan portfolio at December 31, 1997.

          The Company originates fixed rate home equity loans for a minimum of
three years and a maximum of 15 years in amounts of $5,000 to $150,000. The
maximum loan-to-value ratio is 100%. However, the Company only lends up to 90%
of loan-to-value ratio on loans with first mortgages that have been outstanding
for one year or less. During the year ended December 31, 

                                       11
<PAGE>


1997, the Company originated $2.3 million in home equity loans. At December 31,
1997, all of the Company's home equity loans were secured by first or second
mortgages.

          The Company also originates variable rate home equity lines of credit.
These lines of credit range in amounts from $10,000 to $100,000 and also require
a perfected second lien on owner occupied real property. For variable rate
equity lines of credit, the maximum loan-to-value ratio is 90%. For the year
ended December 31, 1997, the Company advanced $2.1 million on home equity lines
of credit.

          Loans to One Borrower. Federal law requires that, in general, the
maximum amount of loans which the Savings Bank may make to any one borrower may
not exceed the greater of $500,000 or 15% of its unimpaired capital and
unimpaired surplus. Higher limits apply to loans to develop domestic housing
units. The Savings Bank may lend an additional 10% of its unimpaired capital and
unimpaired surplus if the loan is fully secured by readily marketable
collateral. Under federal law, the Savings Bank's maximum loan-to-one borrower
limit was approximately $2.5 million at December 31, 1997. However, the Savings
Bank has established an internal limit on loans to one borrower of $900,000. At
December 31, 1997, the aggregate loans outstanding to the Company's three
largest borrowers and related entities were $395,000, $391,000 and $314,000,
respectively. Each of these loans was secured and performing as of December 31,
1997.

Nonperforming and Problem Assets

          Loan Delinquencies. The Company classifies a loan as delinquent when
payment is 16 days past due. When a mortgage loan becomes 16 days past due, a
computer generated notice of nonpayment is sent to the borrower. On the 21st
day, a personal call is made to verify receipt of the first notice and to
request payment. A second delinquency notice is then mailed on the 30th day. If,
after 60 days, payment is still delinquent, the borrower will be advised in
writing of the Company's intent to commence foreclosure. If the loan continues
in a delinquent status for 90 days and no repayment plan is in effect, the
delinquent account is referred to an attorney for foreclosure. At December 31,
1997, the Company's total delinquent loans, consisting of all loans 30 or more
days past due, amounted to $2.8 million, or 3.16% of its total loan portfolio.


                                       12
<PAGE>


          The following table shows the Company's total delinquent loans at the
dates indicated:

<TABLE>
<CAPTION>

                                                      December 31,
                   ---------------------------------------------------------------------------------------
                                 1997                                           1996
                   ---------------------------------------     -------------------------------------------
Loans Delinquent                              Percentage                                     Percentage
     For            Number       Amount       of Portfolio      Number         Amount        of Portfolio
----------------   --------    ----------     ------------     --------    -------------    --------------
                
<S>                   <C>      <C>                 <C>            <C>      <C>               <C>  
30-59 days            38       $1,886,884          2.09%           35       $1,438,199        1.45%
60-89 days             7          188,790          0.21             8          130,490        0.13
90 days and
  over                14          774,202          0.86             9          375,509        0.38
                   --------    ----------     ------------     --------    -------------    --------------
Total delinquent
  loans               59       $2,849,876          3.16%            52      $1,944,198        1.96%
                   --------    ----------     ------------     --------    -------------    --------------
                   --------    ----------     ------------     --------    -------------    --------------
</TABLE>


          The following table shows the Company's delinquent loans by loan type:

<TABLE>
<CAPTION>

                                                        December 31,

                                              1997                           1996

                                                   Percentage of                   Percentage of
                                                     Delinquent                      Delinquent
       Loan Type                    Amount              Loans         Amount            Loans
---------------------------       ----------       --------------    ----------    -------------
                           
<S>                               <C>                   <C>          <C>               <C>   
  Residential mortgage            $2,445,396            85.81%       $1,740,229        89.51%
  Deposit account loans               60,975              2.14           56,417         2.90
  Home equity loans                  207,512              7.28          108,147         5.56
  Equity lines of credit             135,993              4.77           39,405         2.03
                                  ----------       --------------    ----------    -------------
      Total                       $2,849,876           100.00%       $1,944,198       100.00%
                                  ----------       --------------    ----------    -------------
                                  ----------       --------------    ----------    -------------
</TABLE>


          Loans are reviewed on a quarterly basis and are placed on a
non-accrual status when the loan becomes more than 90 days delinquent or when,
in the Company's opinion, the collection of additional interest is doubtful.
Interest accrued and unpaid at the time a loan is placed on nonaccrual status is
charged against interest income. Subsequent interest payments, if any, are
either applied to the outstanding principal balance or recorded as interest
income, depending on the assessment of the ultimate collectibility of the loan.

          Nonperforming Assets. The following table sets forth information
regarding nonaccrual loans and real estate owned. As of the dates indicated, the
Company had no loans categorized as troubled debt restructurings within the
meaning of SFAS 15. Interest income that would have been recorded on loans
accounted for on a nonaccrual basis under the original terms of such loans was
approximately $18,000 and $4,000 for the years ended December 31, 1997 and
December 31, 1996, respectively.

                      Nonperforming and Restructured Assets



                                       13
<PAGE>

<TABLE>
<CAPTION>

                                               December 31,
                                       ----------------------------
                                          1997              1996
                                       ----------        ----------
                                         (Dollars in Thousands)
     <S>                                 <C>               <C>    
     Non-accrual loans                   $774(1)           $376(2)
     Accruing loans delinquent
        90 days or more                        0                 0
     Real estate owned                         0                 0
                                       ----------        ----------
     Total non-performing loans           $  774            $  376
                                       ----------        ----------
                                       ----------        ----------

     Percentage of total loan              0.86%             0.38%
       portfolio
     Percentage of total assets            0.68%             0.33%

</TABLE>

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

(1)  Consists of $623,000 in residential mortgage loans, $51,000 in home equity
     loans and $100,000 in equity lines of credit loans.

(2)  Consists of $229,000 in residential mortgage loans, $108,000 in home equity
     loans and $39,000 in equity line of credit loans.

          Classification of Assets. OTS regulations provide for a classification
system for loans and other assets of savings associations. Under this
classification system, problem assets of savings associations are classified as
"substandard," "doubtful," or "loss." An asset is considered substandard if it
is inadequately protected by the current net worth and paying capacity of the
borrower or of the collateral pledged, if any. Substandard assets include those
characterized by the "distinct possibility" that the savings association will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
doubtful have all of the weaknesses inherent in those classified substandard,
with the added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions, and
values, "highly questionable and improbable." Assets classified as loss are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is not warranted.
Assets may be designated "special mention" because of potential weakness that do
not currently warrant classification in one of the aforementioned categories.

          When a savings association classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings association classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that 

                                       14
<PAGE>


portion of the asset so classified or to charge off such amount. A savings 
association's determination as to the classification of its assets and the 
amount of its valuation allowances is subject to review by the OTS, which may 
order the establishment of additional general or specific loss allowances. A 
portion of general loss allowances established to cover possible losses 
related to assets classified as substandard or doubtful may be included in 
determining a savings association's regulatory capital. Specific valuation 
allowances for loan losses generally do not qualify as regulatory capital.

          The following table presents the Company's classified assets at the
dates indicated:

                                Classified Assets

<TABLE>
<CAPTION>

                                                December 31,
                                          -------------------------
                                          1997                 1996
                                          ---------       ---------
  Classification                            (Dollars in thousands)
  --------------                                          
<S>                                       <C>             <C>    
     Substandard                            $735(1)         $303(2)
     Doubtful                                     0               0
     Loss                                         0               0
                                                  -               -

           Total Classified Assets             $735            $303
                                                ===             ===
</TABLE>

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

(1)       Consists of $625,000 in residential mortgage loans classified as
          substandard, $45,000 in home equity loans classified as substandard
          and $65,000 in equity line of credit loans classified as substandard.

(2)       Consists of $168,000 in residential mortgage loans classified as
          substandard, $88,000 in home equity loans classified as substandard,
          and $47,000 in equity line of credit loans classified as substandard.

          Allowances for Loan Losses. The Company's policy is to provide for
losses based on management's estimate of the losses that may be incurred with
respect to its loan portfolio. When the Company increases the allowances for
loan losses it does so by establishing a charge against income. The estimate,
including a review of all loans on which full collectibility of interest and
principal may not be reasonably assured, considers: (i) the Company's past loan
loss experience, (ii) known and inherent risks in the Company's portfolio, (iii)
adverse situations that may affect the borrower's ability to repay, (iv) the
estimated value of any underlying collateral, and (v) current economic
conditions.


                                       15
<PAGE>


          The Company monitors its allowance for loan losses and makes additions
to the allowance as economic conditions dictate. Although the Company maintains
its allowance for loan losses at a level that it considers to be adequate for
the inherent risk of loss in its loan portfolio, future losses could exceed
estimated amounts and additional provisions for loan losses could be required.
In addition, the Company's determination as to the amount of allowance for loan
losses is subject to review by the OTS, as part of its examination process.
After a review of the information available, the OTS might require the
establishment of an additional provision. As of the latest examination by the
OTS, which concluded in March 1998, no additional provision was required.

          The following table sets forth an analysis of the Company's allowance
for loan losses at the dates indicated:

                            Allowance for Loan Losses
<TABLE>
<CAPTION>


                                                         Year Ended December 31,
                                                --------------------------------------
                                                 1997            1996             1995
                                                ---------      ---------      --------
                                                       (Dollars in thousands)
<S>                                             <C>             <C>           <C>    
 Gross Loan Principal Balance Outstanding       $90,355         $99,353        $79,918
 Average Loans Outstanding                       95,371          91,061         78,025
 Allowance Balance at beginning of period           247             200            195
 Loans charged off                                    0               0              0
 Recoveries                                           0               0              0

 Net loans charged-off                                0               0              0
 Provision for possible loan losses                 216              47              5
                                                    ---              --              -
 Allowance Balance at end of period                $463            $247           $200
                                                    ===             ===            ===

 Allowance for loan losses to total loans         0.51%           0.25%           0.25%

 Ratio of Allowance for loan losses to total
   non-performing loans                          59.82%          65.69%           81.97%

</TABLE>


                                       16
<PAGE>


          Allocation of Allowance for Loan Losses. The following table 
presents an allocation of the entire allowance for loan losses among various 
loan classifications and sets forth the percentage of loan type to total 
loans. The allowance shown in the table should not be interpreted as an 
indication that charge-offs in future periods will occur in these amounts or 
proportions or that the analysis indicates future charge-off trends.

<TABLE>
<CAPTION>


                                                               December 31,
                                        -----------------------------------------------------------
                                                1997                             1996
                                        ----------------------------    ---------------------------
                                                      Percentage of                   Percentage of
                                        Amount         Total Loans        Amount       Total Loans
                                        ------        --------------    --------      -------------
                                                          (Dollars in thousands)

<S>                                      <C>                 <C>          <C>              <C>
   First mortgage loans                  $236                89%          $169              90%
   Home equity loans                      140                 8             10               8
   Equity lines of credit                  86                 3             67               2
   Deposit account loans                    1                 0              1               0
                                            -                 -              -               -

            Total                        $463               100%          $247             100%
                                          ===               ===            ===             ===

</TABLE>

Investment Activities

          General. The Savings Bank is permitted under federal law to make 
certain investments, including investments in securities issued by various 
federal agencies, state and municipal governments, deposits at the FHLB of 
Pittsburgh, certificates of deposit in federally insured institutions, 
certain bankers' acceptances and federal funds. The Savings Bank may also 
invest, subject to certain limitations, in commercial paper rated in one of 
the two highest investment rating categories of a nationally recognized 
credit rating agency, and certain other types of corporate debt securities 
and mutual funds. Federal regulations require the Savings Bank to maintain an 
investment in FHLB stock and a minimum amount of liquid assets which may be 
invested in cash and specified securities. From time to time, the OTS adjusts 
the percentage of liquid assets which savings banks are required to maintain.

          The goals of the Company's investment policy are to (i) maintain 
profitability; (ii) invest in relatively high quality securities; (iii) 
maintain adequate liquidity levels for meeting cash demands; (iv) maintain 
compliance with regulations; and (v) provide a short-term source of funds for 
the funding of loans designated for sale.

          Investment decisions will include these objectives as well as a 
review of risk-based capital established for each type of security.

                                       17
<PAGE>


          During periods when mortgage loan demand is moderate, the Company 
has invested its funds in certain investment and mortgage-backed securities 
rather than originating whole loans.

          The investment securities purchased by the Company consist 
primarily of securities issued or guaranteed by the U.S. government or 
agencies thereof and mortgage-backed securities. At December 31, 1997, 9.0% 
of the Company's mortgage-backed securities were FHLMC pass-throughs. 
Investment and aggregate investment limitations and credit quality parameters 
of each class of investment are prescribed in the Company's investment 
policy. The Company performs analyses on mortgage-related securities prior to 
purchase and on an ongoing basis to determine the impact on earnings and 
market value under various interest rate and prepayment conditions. Under the 
Company's current investment policy, the President and his designee(s) have 
been delegated the authority by the Board of Directors to execute agreements, 
transactions and any other appropriate material in order to effectuate 
investment transactions authorized by the investment policy. The Board of 
Directors reviews all securities transactions on a monthly basis.

          The Company has adopted SFAS No. 115. This statement requires that 
the Company classify its investment securities as either "trading," 
"available for sale" or "held to maturity." The Company has no securities 
designated as "trading." Securities designated as held to maturity are those 
assets which the Savings Bank has the ability and intent to hold to maturity. 
A held to maturity investment portfolio is carried at amortized cost. In 
contrast, those securities designated as available for sale are those assets 
which are not classified as trading securities or held to maturity. 
Securities designated as "available for sale" are carried at market value 
with unrealized gains or losses, net of tax effect, recognized in retained 
earnings.

          Mortgage-backed Securities. To supplement its lending activities, 
the Company has invested in residential mortgage-backed securities. 
Mortgage-backed securities can serve as collateral for borrowings and, 
through repayments, as a source of liquidity. Mortgage-backed securities 
represent a participation interest in a pool of single-family or other type 
of mortgages. Principal and interest payments are passed from the mortgage 
originators, through intermediaries (generally quasi-governmental agencies) 
that pool and repackage the participation interests in the form of 
securities, to investors such as the Company. The quasi-governmental 
agencies, FHLMC, Government National Mortgage Association ("GNMA"), and FNMA, 
guarantee the payment of principal and interest to investors

          Mortgage-backed securities are typically issued with stated 
principal amounts. The securities are backed by pools of mortgages that have 
loans with interest rates that are within a set range and have varying 
maturities. The underlying pool of mortgages can be composed of either 
fixed-rate or adjustable rate mortgage loans. Mortgage-backed securities are 
generally referred to as mortgage participation certificates or pass-through 
certificates. The interest rate risk characteristics of the underlying pool 
of mortgages (i.e., fixed-rate or adjustable-rate) and the prepayment risk, 
are passed on to the certificate holder. The life of a mortgage-backed 
pass-through security is equal to the life of the underlying mortgages.

                                       18
<PAGE>


          Collateralized Mortgage Obligations. The Company has purchased 
collateralized mortgage obligations ("CMOs") as an alternative investment in 
order to address its interest rate risk position. CMOs are securities, which 
have been collateralized by mortgage-backed securities. The CMO will be 
divided into various tranches each with a separate priority for receipt of 
principal payments. The maturity of a particular tranche of a CMO is 
dependent upon the amount of repayments and prepayments from the 
mortgage-backed securities. Generally as mortgage rates exceed the rates on 
the mortgage-backed securities, prepayments will decrease and the maturity of 
the CMO will increase. Conversely, when mortgage rates are below the rates on 
the loans securitizing the mortgage-backed security, prepayments will 
increase and the maturity of the CMO will also shorten. The CMOs purchased by 
the Savings Bank have floating rates tied to various market indicies that 
change monthly. As of December 31, 1997, the balance of CMOs outstanding was 
$1.7 million.

                                       19
<PAGE>


          The following table sets forth the carrying value of the Company's
investment securities and mortgage-backed securities, at the dates indicated.

                                           Investment Portfolio

<TABLE>
<CAPTION>

                                                               December 31,
                                         ---------------------------------------------------------
                                                 1997(1)                         1996(1)
                                         ---------------------------  ----------------------------
                                                         Estimated                     Estimated
                                         Carrying         Market        Carrying         Market
                                           Value           Value          Value          Value
                                         --------        ---------      --------       ---------
  <S>                                    <C>            <C>             <C>             <C>
  Federal Home Loan Mortgage
  Corporation                            $1,498,750     $1,498,750      $ 499,500       $ 499,500
  Federal National Mortgage
    Association                             499,390        499,390        495,805         495,805
  Student Loan Marketing
    Association                                   0              0        992,510         992,510
  U.S. Treasury Notes                       501,720        501,720      2,003,520       2,003,520
                                            -------        -------      ---------       ---------
      Total Investment securities        $2,499,860     $2,499,860     $6,475,800      $6,475,800
                                          =========      =========      =========       =========

  Mortgage-backed securities             $1,900,986     $1,900,986     $  203,147      $  203,147

  Federal Home Loan Bank
    capital stock, at cost                  975,000        975,000      1,500,000       1,500,000
                                            -------        -------      ---------       ---------

  Total                                  $5,375,846     $5,375,846     $8,178,947      $8,178,947
                                          =========      =========      =========       =========
</TABLE>

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

(1)       All of the Company's investment portfolio was classified as "Available
          for Sale" at December 31, 1997 and December 31, 1996 pursuant to SFAS
          No. 115.


                                       20
<PAGE>

          The following table sets forth information regarding the scheduled
maturities, carrying values, approximate fair market values, and weighted
average yields for the Company's investment securities portfolio at December 31,
1997. The following table does not take into consideration the effects of
scheduled repayments or the effects of possible prepayments.

                          Investment Portfolio Maturity
                              At December 31, 1997

<TABLE>
<CAPTION>


                           One Year or Less        One to Five Years       More than Five Years    Total Investment Securities
                           ----------------        -----------------       --------------------    ---------------------------
                                         Annualized             Annualized             Annualized                        Annualized
                                          Weighted              Weighted                Weighted              Approximate Weighted
                             Carrying      Average    Carrying   Average    Carrying     Average    Carrying     Fair      Average
                              Value         Yield       Value     Yield       Value       Yield       Value      Value      Yield
                           ----------   -----------   --------  ---------  ---------   ----------   --------  ----------  ---------

<S>                        <C>           <C>         <C>       <C>         <C>         <C>       <C>           <C>          <C>  
Obligations of U.S.        $2,499,860      5.40%    $      0        N/A    $       0        N/A     $2,499,860  $2,499,860    5.40%
Government agencies
Mortgage-backed securities
                                    0       N/A      170,444       7.01%    1,730,542      6.14%     1,900,986   1,900,986    6.22
 
FHLB stock(1)                 975,000      6.38            0        N/A            0        N/A        975,000     975,000    6.38
                              -------                    -                      -                      -------     -------

 Total investment
   securities portfolio    $3,474,860      5.67%    $170,444       7.01%   $1,730,542      6.14%    $5,375,846  $5,375,846    5.87%
                           ==========                =======                =========                =========   =========

</TABLE>


(1)   FHLB stock has no stated maturity, but has been classified based upon its 
      next stated dividend payment date. As a member of the FHLB of Pittsburgh,
      the Savings Bank is required to maintain an investment in stock of the 
      FHLB of Pittsburgh 

                                       21
<PAGE>

      equal to the greater of 1.0% of the Savings Bank's outstanding home 
      mortgage related assets or 5.0% of its outstanding advances from the FHLB
      of Pittsburgh.




                                       22
<PAGE>

Sources of Funds

               Deposits are the major external source of funds for lending and
other investment purposes. Funds are also derived from the receipt of payments
on loans, prepayment of loans advances from the FHLB and, to a much lesser
extent, maturities of investment securities and mortgage-backed securities, and
operations. Scheduled loan principal repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments may be
significantly influenced by general interest rates and market conditions.

               Deposits. Consumer deposits are attracted principally from within
the Company's primary market area through the offering of deposit accounts
including regular savings accounts, checking accounts, money market accounts,
term certificate accounts and IRA accounts. Deposit account terms vary according
to the minimum balance required, the time period the funds must remain on
deposit, and the interest rate.

               The Company competes for deposits with other institutions in its
market area by offering competitively priced accounts which are tailored to the
needs of its customers. Additionally, the Company seeks to meet its customers'
needs by providing personalized customer service to the community. To provide
additional convenience, the Company participates in the MAC(R) and Plus(R)
automatic teller machine network at locations throughout Delaware and the United
States, through which customers can gain access to their accounts at any time.
The Company does not actively solicit certificate accounts in excess of $100,000
nor do they use brokers to obtain deposits or solicit deposits outside its
market area.

               The interest rates paid by the Company on deposits are set as
needed at the direction of the Company's senior management. Rates on deposits
are determined based on the Company's liquidity requirements, interest rates
paid by its competitors, the general levels of interest rates, the Company's
growth goals and applicable regulatory restrictions and requirements.

               The Company's deposit base is characterized by a relatively small
amount of passbook depositors and a significantly higher amount of certificates
of deposit. Passbook savings, money market and transaction accounts totalled
$12.1 million, or 15.7%, of the Company's deposit portfolio at December 31,
1997. As of December 31, 1997, certificates of deposit were $64.8 million or
84.3% of the Company's deposit portfolio. In addition, $13.8 million or 17.9% of
the deposit portfolio were certificates of deposit with balances of $100,000 or
more.

               The Company believes that a portion of its depositors are
sensitive to changes in interest rates. Accordingly, some of the funds placed in
certificates of deposit with the Company are susceptible to withdrawal if
alternative investments pay a higher return or the Company's rates do not adjust
as rapidly as the competition. These deposits cannot, therefore, be viewed as
core deposits, which is also generally the case for deposits at or in excess of
$100,000. However, the Company's certificates are not derived from brokered
deposits, and the majority of those in excess of $100,000 are deposits of
long-standing customers of the Company. 


                                       23
<PAGE>


               The following table sets forth the Company's distribution of
deposit accounts at the dates indicated and the weighted average interest rate
on each category of deposits represented.


                                                 Account Distribution Balances
<TABLE>
<CAPTION>
                              ----------------------------------------------------------------
                                     December 31, 1997               December 31, 1996
                              ----------------------------------------------------------------
                                                     Weighted                         Weighted
                                       Percent of     Average              Percent of  Average
                              Amount      Total        Rate      Amount       Total     Rate
                              ------   ----------    --------    ------    ---------- --------
                                                          (Dollars in thousands)

<S>                           <C>          <C>         <C>        <C>         <C>       <C>  
   Passbook Savings           $2,494       3.24%       4.14%      $2,536      3.23%     4.14%
   Money Market Accounts       8,532       11.10       3.40        8,246     10.52      3.35
   IRA Accounts               11,880       15.45       6.51       12,073     15.40      6.47
   Certificates of deposit
     with an original term
     to maturity of:
       Less than 1 year        7,843       10.20       5.41        9,962     12.71      5.46
       1 to 3 years           33,891       44.09       5.93       33,194     42.33      5.83
       More than 3 years      11,179       14.54       6.47       11,517     14.69      6.46
   Demand deposit accounts     1,064        1.38       2.05          881      1.12      2.05
                               -----        ----                     ---      ----
   Total Deposits            $76,883      100.00%      5.65%     $78,409    100.00%     5.62%
                              ======      ======                  ======    ======

</TABLE>


                                       24
<PAGE>

          The following table sets forth the Company's monthly average balance
and interest rates of deposit accounts for the periods shown.




                         

<TABLE>
<CAPTION>
                                        For the Year Ended December 31,
                          ---------------------------------------------------------------
                                 1997                               1996
                          ---------------------------------------------------------------
                                      Monthly Weighted               Monthly Weighted
                          Amount    Average Interest Rate   Amount  Average Interest Rate
                          ------    ---------------------   ------  ---------------------

<S>                       <C>              <C>              <C>          <C>  
Passbook Savings          $2,503           4.14%            $2,682        4.14%
Money Market Accounts      8,727           3.38              8,662        3.23
IRA Accounts              11,910           6.50             12,297        6.62
Certificates of
    deposits:
    Less than 1 year       8,798           5.47             10,485        5.31
    1 to 3 years          34,028           5.90             33,363        5.96
    More than 3 years     11,379           6.46             12,073        6.55
Demand Deposit Accounts    1,024           2.05                765        2.05
                           -----                               ---
Total Deposits           $78,369           5.64%           $80,327        5.67%
                          ======                            ======

</TABLE>

          The following table sets forth the amounts and maturities of the
Company's time deposits at the dates indicated.

<TABLE>
<CAPTION>


                                                           Time Deposit Maturities
                               ------------------------------------------------------------------------------------
                                                                December 31,
                               ------------------------------------------------------------------------------------
                                1998             1999              2000               2001              Total
                               -----------      -----------     -------------      -------------      -------------

<S>                            <C>              <C>             <C>                <C>                <C>          
2.00 to 4.00%                  $     5,485      $         0     $            0     $            0     $       5,485
4.01 to 6.00%                   43,210,745        5,387,356          1,148,240          3,352,237        53,098,578
6.01 to 8.00%                    1,763,539        3,375,028          6,263,364            286,976        11,688,907
8.01 to 10.00%                           0                0                  0                  0                 0
10.01 to 12.00%                          0                0                  0                  0                 0
                                         -                -                  -                  -                 -

Total                          $44,979,769       $8,762,384         $7,411,604      $   3,639,213       $64,792,970
                                ==========        =========          =========          =========        ==========

</TABLE>








                                       25
<PAGE>



          The following table indicates the amount of our certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1997.

                   Certificates of Deposit of $100,000 or More

<TABLE>
<CAPTION>

                Primary Maturity Period                 Amount
                -----------------------             --------------
                                                    (In Thousands)

        <S>                                                  <C>     
        3 months or less                                     $  4,834
        Over 3 months to 6 months                               2,490
        Over 6 months to 12 months                              3,010
        Over 12 months                                          3,433
                                                                -----

        Total                                                 $13,767
                                                              =======
</TABLE>


          The following table sets forth net changes in the Company's deposit
accounts for the periods shown.


                                          Net Changes in Deposit Activity



<TABLE>
<CAPTION>

 
                                                          Year Ended December 31,
                                                     --------------------------------
                                                            1997              1996
                                                     -------------      -------------
<S>                                                  <C>                <C>         
   Net (decrease) before
     interest credited                                ($5,308,060)       ($7,074,384)
   Interest credited                                    3,782,468          3,960,928
                                                        ---------          ---------

   Net deposit account (decrease)                     ($1,525,592)        ($3,113,456)
                                                        =========           =========

   Weighted average cost of deposits during the
   period                                                   5.60%              5.61%

   Weighted average cost of deposits at end of
   period                                                   5.65%              5.62%

</TABLE>

          Borrowings. The Company may obtain advances (borrowings) from the FHLB
of Pittsburgh to supplement the Company's supply of lendable funds. Advances
from the FHLB of Pittsburgh are typically secured by a pledge of the Company's
stock in the FHLB of Pittsburgh,


                                       26
<PAGE>


a portion of the Company's first mortgage loans and other assets. Each FHLB
credit program has its own interest rate, which may be fixed or adjustable, and
range of maturities. If the need arises, the Company may also access the Federal
Reserve Bank discount window to supplement the Company's supply of lendable
funds and to meet deposit withdrawal requirements. At December 31, 1997,
borrowings from the FHLB of Pittsburgh totaled $17.4 million.

          The following table sets forth information concerning the Company's
borrowings from the FHLB of Pittsburgh.


                                   Borrowings

<TABLE>
<CAPTION>

                                      At or For the Year Ended December 31,
                                      -------------------------------------
                                              1997             1996
                                            ------------     -----------
    <S>                                     <C>             <C>
     FHLB Advances:
      Average balance(1)                    $23,162,560      20,868,039
      Maximum balance at any month-          25,700,000      33,700,000
       end
      Balance at period end                  17,400,000      25,900,000
      Weighted average interest rate
       during the period                           6.32%           6.00%
      Weighted average interest rate
       at period end                               6.53%           6.33%

</TABLE>

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

     (1) The average balance was computed using an average of daily
         balances during the year.

Competition

          Competition for deposits and loans comes from commercial banks, thrift
institutions, credit unions, finance companies, credits card banks, mortgage
bankers and multi-state regional banks in the Company's market area, many of
whom have greater resources. Competition for deposits also includes a number of
insurance products sold by local agents and investment products such as mutual
funds and other securities sold by local and regional brokers.

          The Company operates from a single office and until recent years
relied extensively on the presence of employees of several corporations located
near its single office for deposit growth. The Company's convenience enabled it
to attract and maintain funds that were reasonably priced. The relocation of
corporate offices and the transfer of employees to suburban locations has 


                                       27
<PAGE>

manifested itself in a decline in the number of downtown Wilmington customer
relationships and has required the Company to seek deposits from other parts of
New Castle County. The Company has been able to maintain its position in
mortgage loan originations throughout its market areas by virtue of the
Company's long-standing presence in the community, competitive pricing, and
referrals from existing customers.

Employees

          At December 31, 1997, the Company had 18 full-time employees, one
full-time seasonal employee and one part-time employee. None of the Company's
employees are represented by a collective bargaining group. The Company believes
that its relationship with its employees is good.

Subsidiaries

          At December 31, 1997, the Company had one wholly owned subsidiary,
Delaware First Bank.

                                   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, do not purport to be complete and are qualified in its
entirety by reference to applicable laws and regulations.

Savings and Loan Holding Company Regulation

          General. The Company has registered as a savings and loan holding
company with the OTS and is subject to regulation and examination by the OTS. In
addition, the OTS has enforcement authority over the Company and any non-savings
institution subsidiaries. This allows the OTS to restrict or prohibit activities
that it determines to be a serious risk to the Company. This regulation is
intended primarily for the protection of the Company's depositors and not for
the benefit of stockholders of the Company.

          QTL Test. Since the Company owns one savings institution, it is able
to diversify its operations into activities not related to banking, but only so
long as it satisfies the qualified thrift lender ("QTL") test. If the Company
controls more than one savings institution, it would lose the ability to
diversify its operations into non-banking related activities, unless such other
savings institutions each also qualify as a QTL or were acquired in a supervised
acquisition. See "- Qualified Thrift Lender Test."



                                       28
<PAGE>


          Restrictions on Acquisitions. The Company must obtain approval from
the OTS before acquiring control of any other SAIF-insured savings institution.
No person may acquire control of a federally insured savings institution without
providing at least 60 days written notice to the OTS and giving the OTS an
opportunity to disapprove the proposed acquisition.

Savings Bank Regulation

          General. As a federally chartered, SAIF-insured savings bank, the
Savings Bank is subject to extensive regulation by the OTS and the FDIC. The
Savings Bank's lending activities and other investments must comply with various
federal and state statutory and regulatory requirements. The Savings Bank is
also subject to certain reserve requirements promulgated by the FRB.

          The OTS, in conjunction with the FDIC, regularly examines the Savings
Bank and prepares reports for the consideration of the Savings Bank's Board of
Directors on any deficiencies that the OTS finds in the Savings Bank's
operations. The Savings Bank's relationship with its depositors and borrowers is
also regulated to a great extent by federal and state law, especially in such
matters as the ownership of savings accounts and the form and content of its
mortgage documents.

          The Savings Bank must file reports with the OTS and the FDIC
concerning the Savings Bank's activities and financial condition, in addition to
obtaining regulatory approvals prior to entering into certain transactions such
as mergers with or acquisitions of other financial institutions. 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 SAIF
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 regulations, whether by the OTS, the FDIC
or any other government agency, could have a material adverse impact on our
operations.

          Insurance of Deposit Accounts. The FDIC is authorized to establish
separate annual assessment rates for deposit insurance for members of the Bank
Insurance Fund ("BIF") and the SAIF. The FDIC may increase assessment rates for
either fund if necessary to restore the fund's ratio of reserves to insured
deposits to its target level within a reasonable time and may decrease such
assessment rates if such target level is met. The FDIC has established a
risk-based assessment system for both SAIF and BIF members. Under this system,
assessments are set within a range, based on the risk the institution poses to
its deposit insurance fund. This risk level is determined based on the
institution's capital level and the FDIC's level of supervisory concern about
the institution.

          Because a significant portion of the assessments paid into the SAIF by
savings institutions were used to pay the cost of prior savings institution
failures, the reserves of the SAIF were below 


                                       29
<PAGE>

the level required by law at the end of 1995. The BIF had, however, met its
required reserve level during the third calendar quarter of 1995. As a result,
deposit insurance premiums for deposits insured by the BIF were substantially
less than premiums for deposits such as ours which are insured by the SAIF.
Legislation to recapitalize the SAIF and to eliminate the significant premium
disparity between the BIF and the SAIF became effective September 30, 1996. The
recapitalization plan provided for a special assessment equal to $.657 per $100
of SAIF deposits held at March 31, 1995, in order to increase SAIF reserves to
the level required by law. Certain BIF institutions holding SAIF-insured
deposits were required to pay a lower special assessment. Based on its deposits
at March 31, 1995, on November 27, 1996, the Savings Bank paid a pre-tax special
assessment of approximately $492,000.

          The recapitalization plan also provides that the cost of prior
failures, which were funded through the issuance of the Financing Corporation
Bonds, will be shared by members of both the SAIF and the BIF. This will
increase BIF assessments for healthy banks to approximately $.013 per $100 of
deposits in 1997. SAIF assessments for healthy savings institutions in 1997 were
approximately $.064 per $100 in deposits and may be reduced, but not below the
level set for healthy BIF institutions.

          Pursuant to the recapitalization plan, the FDIC has lowered the rates
on assessments paid to the SAIF and widened the spread of those rates. The
FDIC's action established a base assessment schedule for the SAIF with rates
ranging from 4 to 31 basis points, and an adjusted assessment schedule that
reduces these rates by 4 basis points. As a result, the effective SAIF rates
range from 0 to 27 basis points as of October 1, 1996. Finally, the FDIC's
action established a procedure for making limited adjustments to the base
assessment rates by rulemaking without notice and comment, for both the SAIF and
the BIF.

          The recapitalization plan also provides for the merger of the SAIF and
BIF effective January 1, 1999, assuming there are no savings institutions
chartered under federal law. Under separate proposed legislation, Congress is
considering the elimination of the federal thrift charter and the separate
federal regulation of thrifts. As a result, the Savings Bank might have to
convert to a different financial institution charter and be regulated under
federal law as a bank, including being subject to the more restrictive activity
limitations imposed on national banks. The impact of the Savings Bank's
conversion to, or regulation as, a bank cannot be determined until the
legislation requiring such change is enacted.

          Under regulations of the FDIC relating to premiums paid for deposit
insurance, the Savings Bank is also required to pay more for federal deposit
insurance than it previously has because of the Savings Bank's Supervisory
Agreement. That additional cost will continue as long as the Supervisory
Agreement remains in effect and will prevent the Savings Bank from achieving the
full benefit of the recapitalization plan. The lowest premium is available only
to those institutions that are well-capitalized and meet other requirements set
by the FDIC. The Savings Bank does not qualify for the lowest premium because of
the Supervisory Agreement.


                                       30
<PAGE>


          Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) core capital equal to at least 3% of total
adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted
assets.

          Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits of mutual savings associations and
qualifying supervisory goodwill, less nonqualifying intangible assets, certain
mortgage servicing rights and certain investments.

          The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans, and other assets.

          The risk-based capital standards of the OTS generally require savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. An institution's interest rate risk will be measured
in terms of the sensitivity of its "net portfolio value" to changes in interest
rates. Net portfolio value is defined, generally, as the present value of
expected cash inflows from existing assets and off-balance sheet contracts less
the present value of expected cash outflows from existing liabilities. A savings
institution will be considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. An institution with a greater than normal interest rate
risk will be required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets. In August 1995, the OTS indefinitely delayed
implementation of this regulation.

          Dividend and Other Capital Distribution Limitations. OTS regulations
require the Savings Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company. The OTS has the authority under its
supervisory powers to prohibit the payment 


                                       31
<PAGE>


of dividends by the Savings Bank to the Company. In addition, the Savings Bank
may not declare or pay a cash dividend on its capital stock if the effect would
be to reduce its regulatory capital below the amount required for the
liquidation account established at the time of the Conversion.

          OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger, and other distributions charged against capital. The rule
establishes three tiers of institutions based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory notice. Based on
the Savings Bank's capital level at December 31, 1997, the Savings Bank
qualified as a Tier 1 institution.

          In the event the Savings Bank's capital falls below its fully
phased-in requirement or the OTS notifies the Savings Bank that it is in need of
more than normal supervision, the Savings Bank would become a Tier 2 or Tier 3
institution and as a result, its ability to make capital distributions could be
restricted. Tier 2 institutions, which are institutions that before and after
the proposed distribution meet their current minimum capital requirements, may
only make capital distributions of up to 75% of net income over the most recent
four quarter period. Tier 3 institutions, which are institutions that do not
meet current minimum capital requirements and propose to make any capital
distribution, and Tier 2 institutions that propose to make a capital
distribution in excess of the noted safe harbor level, must obtain OTS approval
prior to making such distribution. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. The OTS has proposed rules relaxing
certain approval and notice requirements for well-capitalized institutions.

          A savings institution is prohibited from making a capital distribution
if, after making the distribution, the savings institution would be
undercapitalized (i.e., the savings institution does not meet any one of its
minimum regulatory capital requirements). Further, a savings institution cannot
distribute regulatory capital that is needed for its liquidation account.

          Qualified Thrift Lender Test. In general, savings associations are
required to maintain at least 65% of their portfolio assets in certain qualified
thrift investments (which consist primarily of loans and other investments
related to residential real estate and certain other assets). A savings
association that fails the qualified thrift lender test is subject to
substantial restrictions on activities and to other significant penalties.



                                       32
<PAGE>


          Recent legislation permits a savings association to qualify as a
qualified thrift lender not only by maintaining 65% of portfolio assets in
qualified thrift investments but also, in the alternative, by qualifying under
the Code as a "domestic building and loan association." The Savings Bank is a
domestic building and loan association as defined in the Code.

          Recent legislation also expands the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios. In
particular, credit card and educational loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may be made in an amount up to 10 percent of total assets, plus an
additional 10 percent for small business loans. Loans for personal, family and
household purposes (other than credit card small business and educational loans)
are now included without limit with other assets that, in the aggregate, may
account for up to 20% of the total assets. At December 31, 1997, under the
expanded QTL test, approximately 95.6% of the Savings Bank's portfolio assets
were qualified thrift investments.

          Transactions With Affiliates. Generally, restrictions on transactions
with affiliates require that transactions between a savings institution or its
subsidiaries and its affiliates be on terms as favorable to the savings
institution as comparable transactions with non-affiliates. In addition, certain
of these transactions are restricted to an aggregate percentage of the savings
institution's capital or are prohibited altogether. Collateral in specified
amounts must usually be provided by affiliates in order to receive loans from
the savings institution. The Savings Bank's affiliates include the Company and
any company which would be under common control with the Savings Bank. In
addition, a savings institution may not extend credit to any affiliate engaged
in activities not permissible for a bank holding company or acquire the
securities of any affiliate that is not a subsidiary. The OTS has the discretion
to treat subsidiaries of savings institution as affiliates on a case-by-case
basis.

          Liquidity Requirements. All savings institutions are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At December 31, 1997, the Savings Bank's
required liquid asset ratio was 4.0% and its actual ratio was 19.8%. Monetary
penalties may be imposed upon associations for violations of liquidity
requirements.

          Federal Home Loan Bank System. The Savings Bank is a member of the
FHLB of Pittsburgh, which is one of 12 regional FHLBs. Each FHLB serves as a
reserve or central bank for its members within its assigned region. It is funded
primarily from funds deposited by savings institutions and proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the Board of Directors of the FHLB.



                                       33
<PAGE>


          As a member, the Savings Bank is required to purchase and maintain
stock in the FHLB of Pittsburgh in an amount equal to at least 1% of the Savings
Bank's aggregate unpaid residential mortgage loans, home purchase contracts or
similar obligations at the beginning of each year. At December 31, 1997, the
Savings Bank held $975,000 in FHLB stock, at cost, which was in compliance with
this requirement. The FHLB imposes various limitations on advances such as
limiting the amount of certain types of real estate related collateral to 30% of
a member's capital and limiting total advances to a member.

          The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future.

          Federal Reserve System. The Federal Reserve System requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve System may be used
to satisfy the liquidity requirements that are imposed by the OTS. At December
31, 1997, the Savings Bank's reserve met the minimum level required by the
Federal Reserve System.

          Savings institutions have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings institutions to exhaust all other sources before borrowing from the
Federal Reserve System. The Savings Bank had no borrowings from the Federal
Reserve System at December 31, 1997.


                                       34
<PAGE>


                                    TAXATION

Federal Taxation

          The Company and the Savings Bank are subject to the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), in the same general
manner as other corporations. Prior to August 1996, however, savings
institutions such as the Savings Bank, which met certain definitional tests and
other conditions prescribed by the Code, could benefit from certain favorable
provisions regarding deductions from taxable income for annual additions to bad
debt reserve. The amount of the bad debt deduction that a qualifying savings
institution could claim with respect to additions to its reserve for bad debts
was subject to certain limitations. The Savings Bank reviewed the most favorable
way to calculate the deduction attributable to an addition to its bad debt
reserve on an annual basis.

          In August 1996, the Code was revised to equalize the taxation of
thrifts and banks. Thrifts no longer have a choice between the percentage of
taxable income method and the experience method in determining additions to bad
debt reserves. Thrifts with $500 million of assets or less may still use the
experience method, which is generally available to small banks currently. Larger
thrifts must use the specific charge off method regarding bad debts. Any reserve
amounts added after 1987 will be taxed over a six year period beginning in 1996;
however, bad debt reserves set aside through 1987 are generally not taxed. A
savings institution may delay recapturing into income its post-1987 bad debt
reserves for an additional two years if it meets a residential-lending test.
This law is not expected to have a material impact on the Savings Bank. At
December 31, 1997, the Savings Bank had approximately $330,000 of post 1987
bad-debt reserves.

          Under the percentage of taxable income method, the bad debt deduction
attributable to "qualifying real property loans" could not exceed the greater of
(i) the amount deductible under the experience method, or (ii) the amount which,
when added to the bad debt deduction for non-qualifying loans, equaled the
amount by which 12% of the sum of the total deposits and the advance payments by
borrowers for taxes and insurance at the end of the taxable year exceeded the
sum of the surplus, undivided profits and reserves at the beginning of the
taxable year. The amount of the bad debt deduction attributable to qualifying
real property loans computed using the percentage of taxable income method was
permitted only to the extent that the institution's reserve for losses on
qualifying real property loans at the close of the taxable year did not exceed
6% of such loans outstanding at such time.

          Under the experience method, the bad debt deduction may be based on
(i) a six-year moving average of actual losses on qualifying and non-qualifying
loans, or (ii) a fill-up to the institution's base year reserve amount, which is
the tax bad debt reserve determined as of December 31, 1987.


                                       35
<PAGE>



          The percentage of specially computed taxable income that was used to
compute a savings institution's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8% at the
time the Code was revised. The percentage of taxable income bad debt deduction
thus computed was reduced by the amount permitted as a deduction for
non-qualifying loans under the experience method. The availability of the
percentage of taxable income method permitted qualifying savings institutions to
be taxed at a lower effective federal income tax rate than that applicable to
corporations generally (approximately 31.3% assuming the maximum percentage bad
debt deduction).

          If a savings institution's qualifying assets (generally, loans secured
by residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
institution may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a specified period, which is
immediately accruable for financial reporting purposes. As of December 31, 1997,
at least 60% of the Savings Bank's assets were qualifying assets as defined in
the Code. No assurance can be given that the Savings Bank will meet the 60% test
for subsequent taxable years.

          Earnings appropriated to the Savings Bank's pre-1988 bad debt reserve
and claimed as a tax deduction as well as its supplemental reserves for losses
will not be available for the payment of cash dividends or for distribution to
the Savings Bank's stockholders (including distributions made on dissolution or
liquidation), unless the Savings Bank includes the amount in income, along with
the amount deemed necessary to pay the resulting federal income tax. As of
December 31, 1997, the Savings Bank had $1.3 million of accumulated earnings,
representing its base year tax reserve, for which federal income taxes have not
been provided. If such amount is used for any purpose other than bad debt
losses, including a dividend distribution or a distribution in liquidation, it
will be subject to federal income tax at the then current rate.

          The Code imposes a tax ("AMT") on alternative minimum taxable income
("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net operating loss
carryovers of which the Company and the Savings Bank currently has none. AMTI is
also adjusted by determining the tax treatment of certain items in a manner that
negates the deferral of income resulting from the regular tax treatment of those
items. Thus, the Savings Bank's or the Company's AMTI is increased by an amount
equal to 75% of the amount by which its adjusted current earnings exceeds its
AMTI (determined without regard to this adjustment and prior to reduction for
net operating losses).

          The Company may exclude from its income 100% of dividends received
from the Savings Bank as a member of the same affiliated group of corporations.
A 70% dividends received deduction generally applies with respect to dividends
received from corporations that are not members of such affiliated group, except
that an 80% dividends received deduction applies if the Company owns more than
20% of the stock of a corporation paying a dividend. The above exclusion
amounts, with the exception of the affiliated group figure, were reduced in
years in 


                                       36
<PAGE>


which the Savings Bank availed itself of the percentage of taxable income bad
debt deduction method.

          The Savings Bank's federal income tax returns have not been audited by
the IRS for at least the last five years.

Delaware State Taxation

          The State of Delaware imposes a franchise tax on financial
institutions of 8.7% of taxable income. Taxable income, for this purpose, is 56%
of net operating income after adjustments. These taxes have not been a material
expense for the Savings Bank.

           As a Delaware holding company earning income in Delaware, the Company
is required to file an annual report with and pay an annual franchise tax to the
State of Delaware. Minimum tax is generally equal to $5,000 for each 100,000
shares of authorized capital stock regardless of whether such stock has been
issued.

Item 2. Properties

          The following table sets forth our location and related information at
June 30, 1997.

<TABLE>
<CAPTION>

                                                                                  Net Book Value at
        Location                       Leased or Owned         Year Acquired      December 31, 1997 (1)
        --------                       ------ -- -----         ---- --------      ------------ ---- ---
   <S>                                     <C>                    <C>                  <C>       
   MAIN OFFICE:
   400 Delaware Avenue
   Wilmington, Delaware  19801              Owned                  1953                 $1,806,632

</TABLE>

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

    (1)  Net book value is calculated by totaling the estimated value of land 
         and buildings, $2,278,764, and then subtracting accumulated 
         depreciation of $472,132.

Item 3. Legal Proceedings

               The Company is, from time to time, a party to legal proceedings
arising in the ordinary course of its business, including legal proceedings to
enforce its rights against borrowers. The Company is not currently a party to
any legal proceedings which are expected to have a material adverse effect on
its financial condition or results of operations.


                                       37
<PAGE>


Item 4. Submission of Matters to a Vote of Security Holders

          Not applicable


                                     PART II


Item 5. Market for Common Equity and Related Stockholder Matters

          Shares of the Company's common stock are traded on the
over-the-counter market under the symbol "DFFN," with quotations available
through the OTC Bulletin Board operated by the NASDAQ. At March 31, 1998, the
Company had 273 shareholders of record. Such holdings do not reflect the number
of beneficial owners of common stock. The Company issued its common stock at
$10.00 per share in its initial public offering on December 31, 1997.

          The Company's Board of Directors has the authority to declare
dividends on the shares, subject to statutory and regulatory requirements. The
Company has not declared or paid any cash dividends on its common stock.
Generally, declarations of dividends by the Board of Directors depends upon a
number of factors, including, but not limited to: (i) the amount of the net
proceeds retained by the Company in the Conversion, (ii) investment
opportunities available, (iii) capital requirements, (iv) regulatory
limitations, (v) results of operations and financial condition, (vi) tax
considerations, and (vii) general economic conditions. Upon review of such
considerations, the board may authorize dividends in the future if it deems such
payment appropriate and in compliance with applicable law and regulation. For a
period of one year following the completion of the Conversion, the Company will
not pay dividends that would be treated for tax purposes as a return of capital,
nor take any actions to pursue or propose such dividends.

          The Company is not subject to OTS regulatory restrictions on the
payment of dividends to its stockholders, although the source of such dividends
will be dependent in part upon the receipt of dividends from the Savings Bank.
The Savings Bank, like all financial institutions regulated by the OTS, is
subject to certain restrictions on the payment of dividends based on its net
income, its capital in excess of regulatory capital requirements and the amount
of capital required for the liquidation account required to be established in
connection with the Conversion. The Company is subject, however, to the
requirements of Delaware law, which generally limit the payment of dividends to
amounts that will not affect the ability of the Company, after the dividend has
been distributed, to pay its debts in the ordinary course of business.


                                       38
<PAGE>


Item 6. Management's Discussion and Analysis of Financial Condition and Results
        of Operation

          Management's discussion and analysis of financial condition and
results of operations is intended to assist in understanding the consolidated
financial condition and results of operations of the Company. The following
discussion and analysis of financial condition and results of operations of the
Company should be read in conjunction with the Company's consolidated financial
statements and the notes thereto found in "Item 7. Financial Statements" below.

General
          The Company's results of operations depend primarily on net interest
income, which is determined by (i) the difference between rates of interest
earned on interest-earning assets and the rates paid on interest-bearing
liabilities ("interest rate spread"), and (ii) the relative amounts of
interest-earning assets and interest-bearing liabilities. The Company's results
of operations also are affected by (i) non-interest income, which includes
income from customer deposit account service charges, loan servicing fee income,
gains and losses from the sale of loans, investments and mortgage-backed
securities and (ii) non-interest expense, which includes compensation and
employee benefits, federal deposit insurance premiums, office occupancy costs,
advertising costs and data processing costs. The Company's results of operations
also are affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities, all of which are beyond the Company's control.

          The Savings Bank currently is operating under a Supervisory Agreement
with the OTS which requires the Savings Bank to take certain actions, including,
but not limited to, addressing the Savings Bank's interest rate risk profile.
The Supervisory Agreement will remain in place until terminated by the OTS,
although it provides that the OTS Regional Director will consider requests for
termination after the first Report of Examination of the Bank is concluded
following May 21, 1997, which was the effective date of the Supervisory
Agreement.

Asset/Liability Management

          The Company's assets and liabilities may be analyzed by examining the
extent to which its assets and liabilities are interest rate sensitive and by
evaluating the expected effects of interest rate changes on its net portfolio
value. The ability to maintain consistent net interest income is largely
dependent upon the achievement of a positive interest rate spread that can be
sustained during fluctuations in prevailing interest rates. Interest rate
sensitivity is a measure of the difference between amounts of interest-earning
assets and interest-bearing liabilities that either reprice or mature within a
given period of time.

          Thus, an asset or liability is interest rate sensitive within a
specific time period if it will mature or reprice within that time period. If
the Company's assets mature or reprice more quickly 


                                       39
<PAGE>

or to a greater extent than its liabilities, the Company's net portfolio value
and net interest income would tend to increase during periods of rising interest
rates but decrease during periods of falling interest rates. Conversely, if the
Company's assets mature or reprice more slowly or to a lesser extent than its
liabilities, the Company's net portfolio value and net interest income would
tend to decrease during periods of rising interest rates but increase during
periods of falling interest rates. The difference or interest rate repricing
"Gap" provides an indication of the extent to which an institution's interest
rate spread will be affected by changes in interest rates. A Gap is considered
positive when the amount of interest rate sensitive assets maturing or repricing
within a given period exceeds the amount of interest rate sensitive liabilities
maturing or repricing within such period. A Gap is considered negative when the
amount of interest-bearing liabilities repricing or maturing within a given
period exceeds the amount of interest rate sensitive assets repricing or
maturing within such period.

          The Company's lending activities historically have emphasized
long-term fixed rate mortgage loans secured by one-to-four family residences. At
December 31, 1997, 77.6% of all of the Company's loans were of this type.
Conversely, the Company's deposit accounts mature or are subject to repricing
within a relatively short period of time. These factors historically have caused
the income earned by the Company on its loan portfolio to adjust more slowly to
changes in interest rates than the interest the Company pays on its deposits.

          In recent years the Company has sought to manage its interest rate
risk by selling portions of its fixed rate loans to the FHLMC or another
financial institution (while retaining the servicing of those loans). The
Company has also sought to manage interest rate risk by lengthening the
maturities of its certificates of deposit and through longer term borrowings
from the FHLB of Pittsburgh. The imbalance, however, between the Company's
assets and liabilities has caused its interest rate risk to remain high.

          The Savings Bank's Supervisory Agreement with the OTS identifies the
Savings Bank's interest rate risk level as unacceptably high and requires the
Savings Bank to develop and pursue strategies to reduce interest-rate risk. The
strategies considered include adjustment of FHLB advances by replacing
short-term variable advances with the proceeds of longer termed fixed rate
advances. The Savings Bank has also sold or is considering the sale of new fixed
rate loans to the FHLMC in order to help manage its interest-rate risk. The
proceeds of these sales will be used to either acquire short term variable rate
assets or to repay short term or variable rate borrowings.

          On June 26, 1997, the Savings Bank adopted a revised interest rate
risk policy and also took certain actions to implement this policy, including
loan sales and lengthening the maturities of some FHLB borrowings. The Savings
Bank anticipates taking additional actions of this nature in order to reduce its
interest rate sensitivity. In implementing these strategies, the Savings Bank
will attempt to balance the need to improve its interest rate risk against the
impact such restructuring will have on profitability. As a result of the
Conversion, the Savings Bank has experienced an increase in investable assets
approximately equal to the net proceeds from the sale 


                                       40
<PAGE>


of Common Stock in the Conversion less the amount of the ESOP loan. As these
proceeds are invested, it is expected that any positive Gap will be increased
and any negative Gap will be reduced because such investment will add short-term
interest sensitive assets while there will be no immediate corresponding
increase in short-term interest sensitive liabilities.

          The following table, often referred to as a "Gap Table," sets forth
asset and liability balances at December 31, 1997 which are expected to reprice
and mature in each of the future periods indicated. Loans with adjustable rates
are shown as being due in the next adjustment period. Passbook accounts, money
market deposit accounts and NOW accounts are not assumed to be subject to
immediate repricing and are placed in repricing periods based upon assumptions
prepared by management.



                                       41
<PAGE>

<TABLE>
<CAPTION>



                                                                More than 1        More than 2         More than 3    
                                              Less than 1     Month through 2    Months through 3    Months through 6 
                                                 Month            Months             Months              Months       
                                              ------------    ---------------    ----------------    ---------------- 
                                                                    (Dollars in thousands)                            
                                                                                                                      
<S>                                           <C>             <C>                <C>                 <C>              
Interest-Earning Assets                                                                                               
  Cash and Interest Earning Deposits              $ 15,200          $      0            $      0           $      0  
  Investments                                          500             1,498                   0                502  
  FHLB Stock                                             0                 0                 975                  0  
  Equity Loans/Lines                                 2,947                 3                   0                  3  
  Collateral Loans                                     750                 0                   0                  0  
  Mortgage-Backed Securities                         1,731                 0                   0                  0  
  Adjustable Rate Mortgages                            876               308                 896              1,795  
  Balloon Mortgages(1)                                  43                43                  43                128  
  Fixed Rate Mortgages(2)                              485               485                 486              1,547  
                                                  --------          --------            --------           --------  
         Total Interest-Earning Assets            $ 22,532          $  2,337            $  2,400           $  3,975  
                                                  ========          ========            ========           ========  
Interest-bearing liabilities                                                                                         
  Passbook Accounts(3)                                  31                31                  31                 94  
  Checking Accounts(4)                                   0                 0                   0                  0  
  Money Market Deposit Accounts(5)                     654               654                 654                380  
  Fixed Rate Fixed Term Deposits                     4,602             4,889               7,253             12,520  
  FHLB Advances - Fixed Rate and Term                1,500               500                   0              1,300  
  Escrow Deposits                                       40                40                  40                120  
                                                  --------          --------            --------           --------  
         Total Interest-Bearing Liabilities       $  6,827          $  6,114            $  7,978           $ 15,414  
                                                  ========          ========            ========           ========  
Excess (Deficiency) of Interest-Earning Assets                                                                       
  over Interest-Bearing Liabilities               $ 15,705          ($ 3,777)           ($ 5,578)          ($11,439) 
                                                  ========          ========            ========           ========  
Cumulative Excess (Deficiency) of Interest-                                                                          
  Earning Assets Over Interest-Bearing                                                                               
  Liabilities at December 31, 1997                $ 15,705          $ 11,928            $  6,350           ($ 5,089) 
                                                  ========          ========            ========           ========  
Cumulative Excess (Deficiency) of Interest-                                                                           
  Earning Assets Over Interest-Bearing                                                                                
  Liabilities as a Percent of Total Assets at                                                                         
  December 31, 1997                                  13.86%            10.52%               5.60%             (4.49%)
                                                  ========          ========            ========           ========  
Cumulative Excess (Deficiency) of                                                                                     
Interest-Earning                                                                                                      
  Assets over Interest-Bearing Liabilities as a                                                                      
  percent of Total Interest-Earning Assets           14.16%           10.75%                5.72%             (4.59%)
                                                  ========         ========             ========           ========  
                                                                                                                     
Cumulative Excess (Deficiency) of Interest-                                                                          
  Earning Assets over Interest-Bearing                                                                               
  Liabilities as a percent of Cumulative                                                                             
  Interest-Bearing Liabilities                      230.04%           92.17%               30.36%            (14.01%)
                                                  ========         ========             ========           ========  


<CAPTION>

                                                            More than 6       More than 1              
                                                          Months through    Year through 3   More than 
                                                              1 year              Years       3 Years  
                                                          ---------------   --------------   --------- 


<S>                                                          <C>              <C>             <C>      
Interest-Earning Assets                                                                                
  Cash and Interest Earning Deposits                          $      0         $      0       $      0 
  Investments                                                        0                0              0 
  FHLB Stock                                                         0                0              0 
  Equity Loans/Lines                                               121            1,165          6,121 
  Collateral Loans                                                   0                0              0 
  Mortgage-Backed Securities                                         0              170              0 
  Adjustable Rate Mortgages                                      2,207            4,018              0 
  Balloon Mortgages(1)                                             256            1,451          2,401 
  Fixed Rate Mortgages(2)                                        2,913           11,644         47,220 
                                                              --------         --------       -------- 
         Total Interest-Earning Assets                        $  5,497         $ 18,448       $ 55,742 
                                                              ========         ========       ======== 
Interest-bearing liabilities                                                                           
  Passbook Accounts(3)                                             188              376          3,011 
  Checking Accounts(4)                                               0                0          1,064 
  Money Market Deposit Accounts(5)                                 436            1,743          1,743 
  Fixed Rate Fixed Term Deposits                                15,716           16,174          3,639 
  FHLB Advances - Fixed Rate and Term                            3,300            7,300          3,500 
  Escrow Deposits                                                  596                0              0 
                                                              --------         --------       -------- 
         Total Interest-Bearing Liabilities                   $ 20,236         $ 25,593       $ 12,957 
                                                              ========         ========       ======== 
Excess (Deficiency) of Interest-Earning Assets                                                         
  over Interest-Bearing Liabilities                           ($14,739)        ($ 7,145)      $ 42,785 
                                                              ========         ========       ======== 
Cumulative Excess (Deficiency) of Interest-                                                            
  Earning Assets Over Interest-Bearing                                                                 
  Liabilities at December 31, 1997                            ($19,828)        ($26,973)      $ 15,812 
                                                              ========         ========       ======== 
Cumulative Excess (Deficiency) of Interest-                                                            
  Earning Assets Over Interest-Bearing                                                                 
  Liabilities as a Percent of Total Assets at                                                          
  December 31, 1997                                             (17.50%)         (23.80%)        13.95%
                                                              ========         ========       ======== 
Cumulative Excess (Deficiency) of                                                                      
Interest-Earning                                                                                       
  Assets over Interest-Bearing Liabilities as a                                                        
  percent of Total Interest-Earning Assets                      (17.87%)         (24.32%)        14.25%
                                                              ========         ========       ======== 
                                                                                                       
Cumulative Excess (Deficiency) of Interest-                                                            
  Earning Assets over Interest-Bearing                                                                 
  Liabilities as a percent of Cumulative                                                               
  Interest-Bearing Liabilities                                  (35.05%)         (32.83%)        16.62%
                                                              ========         ========       ======== 
</TABLE>




                                       42
<PAGE>

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


(1)      12% annual prepayment rate is based on assumptions provided by the OTS.

(2)      9% annual prepayment rate for 30 year loans and 8% annual prepayment
         rate for 15 year loans is based on assumptions provided by the OTS.

(3)      Repricing rate is estimated at 10% for year 1, 10% for 1-3 yrs., and
         80% for 3+ years.

(4)      Repricing rate is estimated 100% for 3 plus years.

(5)      Repricing is based on the assumption that approximately 40% of accounts
         with balances greater than $10,000 to reprice evenly over 6 months. The
         remainder of accounts, assumed to be core deposits, reprice evenly over
         all time periods.


Interest Rate Sensitivity Analysis

          The Company has measured its interest rate sensitivity by computing
the "Gap" between the assets and liabilities which were expected to mature or
reprice within certain time periods, based on assumptions regarding loan
prepayment and deposit repricing provided by the OTS and management. In order to
encourage savings associations such as the Savings Bank to reduce interest rate
risk, however, the OTS added an interest rate risk component to its risk-based
capital rules. The OTS requires the computation of the net present value of an
institution's cash flow from assets, liabilities and off balance sheet items
(the institution's net portfolio value or "NPV") and measures the change in NPV
in the event of a range of assumed changes in market interest rates.

          Qualitative Risk Analysis. The OTS measures an institution's interest
rate risk by the change in its NPV as a result of a hypothetical 200 basis point
("bp") change in market rates. A resulting change in NPV of more than 2% of the
estimated present value of total assets ("PV") will require the Savings Bank to
add to its capital 50% of that excess change. The rules provide that the OTS
will calculate the IRR component quarterly for each institution such as the
Savings Bank. The OTS has indefinitely delayed implementation of this regulation
regarding interest rate risk. Nevertheless, the following table estimates the
effect on the Savings Bank's NPV from instantaneous and permanent 1% to 4% (100
to 400 basis points) increases and decreases in market interest rates. The
following table presents the Savings Bank's NPV at December 31, 1997, which is
based upon quarterly information that the Savings Bank provides to the OTS and
which is calculated for the Savings Bank by the OTS.


                                       43
<PAGE>

<TABLE>
<CAPTION>


                     Net Portfolio Value at December 31, 1997                 NPV as % of PV of Assets
                     ----------------------------------------                 ------------------------

       Change in    
         Rates        $ Amount           $ Change            % Change           NPV Ratio           Change
         -----        --------           --------            --------           ---------           ------
                                                (Dollars in thousands)


       <S>            <C>                <C>                 <C>                <C>                 <C>  
         +400 bp        $6,307           $(9,135)               (59)%              6.21%            (7.34)%
         +300 bp         8,593            (6,848)               (44)               8.21             (5.33)
         +200 bp        10,974            (4,468)               (29)              10.18             (3.37)
         +100 bp        13,337            (2,104)               (14)              12.01             (1.53)
            0 bp        15,441                 0                  0               13.55                 0
         -100 bp        16,818             1,377                  9               14.47               .92
         -200 bp        16,992             1,551                 10               14.48               .93
         -300 bp        16,792             1,351                  9               14.22               .67
         -400 bp        17,040             1,599                 10               14.28               .73
</TABLE>


         The above calculations indicate that the Savings Bank would be deemed
to have an excessive level of interest rate risk under applicable regulatory
requirements in a rising rate environment. In the event of a 200 bp change in
interest rates, the Savings Bank would experience a 10% increase in NPV in a
declining rate environment and a 29% decrease in NPV in a rising rate
environment. If the interest rate risk component of the capital regulations had
been in effect, at December 31, 1997, the Savings Bank would have been required
to deduct $1.1 million pursuant to such regulations in calculating total
risk-based capital.

         Qualitative Risk Analysis. While the Company cannot predict future
interest rates or their effects on its "Gap," NPV or net interest income, the
Company does not expect current interest rates to have a material adverse effect
on its NPV or net interest income in the near future. Computations of
prospective effects of hypothetical interest rate changes are based on numerous
assumptions, including relative levels of market interest rates, prepayments and
deposit run-offs and should not be relied upon as indicative of actual results.
Certain shortcomings are inherent in such computations. Although certain assets
and liabilities may have similar maturity or periods of repricing, they may
react at different times and in different degrees to changes in the market
interest rates. The interest rates on certain types of assets and liabilities
may fluctuate in advance of changes in market interest rates, while rates on
other types of assets and liabilities may lag behind changes in market interest
rates. Certain assets, such as adjustable rate mortgages, generally have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. In the event of a change in interest rates, prepayments
and early withdrawal levels could deviate significantly from those assumed in
making calculations set forth above. 


                                       44


<PAGE>


Additionally, an increased credit risk may result as the ability of many 
borrowers to service their debt may decrease in the event of an interest rate 
increase.

         INTEREST RISK ANALYSIS AND MONITORING. The Savings Bank has 
established an Asset/Liability Committee which is currently comprised of 
non-employee directors Thomas L. Cloud, Chairman, Alan B. Levin and Dr. 
Robert L. Schweitzer as well as the Savings Bank's Chief Executive Officer, 
Ronald P. Crouch. This committee meets periodically and reviews the maturity 
of the Savings Bank's assets and liabilities and discusses and recommends 
policies and strategies designed to regulate its flow of funds and to 
coordinate the sources, uses and pricing of such funds. The first priority in 
structuring and pricing of the Savings Bank's assets and liabilities is to 
maintain an acceptable interest rate spread while reducing the net effects of 
changes in interest rates.

         The Board of Directors also reviews the Savings Bank's asset and
liability policies. The Board of Directors meets monthly to review interest rate
risk and interest rate trends, as well as liquidity and capital ratios and
requirements. Management administers the policy and determinations of the Board
of Directors with respect to the Savings Bank's asset and liability goals and
strategies. The Savings Bank expects that its asset and liability policy and
strategies will continue as described so long as competitive and regulatory
conditions in the financial institution industry and market interest rates
continue as they have in recent years.

ANALYSIS OF NET INTEREST INCOME

         The Company's earnings historically have depended upon its net interest
income, which is the difference between interest income earned on loans and
investments (the "interest-earning assets") and interest paid on deposits and
any borrowed funds (the "interest-bearing liabilities"). It is the single
largest component of the Company's operating income. Net interest income is
affected by (i) the difference between rates of interest earned on the Company's
interest-earning assets and rates paid on its interest-earning liabilities (the
"interest rate spread") and (ii) the relative amounts of the Company's
interest-earning assets and interest-bearing liabilities.

         The following tables present an analysis of certain aspects of the
Company's operations during the periods indicated. The first table presents the
average balances of and the interest and dividends earned or paid on each major
class of the Company's interest earning assets and interest-bearing liabilities.
Average balances are daily average balances. The yields and costs include fees
which are considered adjustments to yields.


                                       45

<PAGE>

<TABLE>
<CAPTION>

                                                              For the Year ended December 31,
                             ------------------------------------------------------------------------------------------------------
                                              1997                                  1996                      At December 31, 1997
                             -------------------------------------  -------------------------------------- ------------------------
                             Average Daily  Interest &              Average Daily  Interest &
                                Balance     Dividends   Yield/Rate     Balance      Dividends  Yield/Rate     Balance    Yield/Rate
                             -------------  ----------  ----------  -------------  ----------  ----------  ------------  ----------
<S>                           <C>           <C>         <C>         <C>             <C>        <C>         <C>            <C>
Assets:                                                                                         
Interest-earning assets                                                                                     
    Loans receivable, net (1) $95,370,924   $7,352,557      7.71%     $91,061,307     7,092,065    7.79%    $88,933,209      7.62%
    Investment securities(2)    7,336,699      427,656      5.83       12,644,840       709,493    5.61       5,375,846      5.72
    Interest-bearing deposits   4,523,787      198,227      4.38        2,412,209       120,551    5.00      12,987,050      5.72
                             -------------  ----------                -----------     ---------             -----------        
      Total interest-earning
        assets                107,231,410    7,978,440      7.44      106,118,356     7,922,109    7.47     107,296,105      7.29
Non-interest-earning assets     3,777,951                               3,621,634                             6,036,320
                             -------------                           ------------                           -----------
Total assets                 $111,009,361                            $109,739,990                          $113,332,425
                             -------------                           ------------                           -----------
                             -------------                           ------------                           -----------
                                                                                                                   
Liabilities and                                                                                                    
 Stockholders' Equity:                                                                                             
   Interest-bearing                                                                                                
     liabilities                                                                                                   
   Deposits                   $78,891,620   $4,416,447      5.60      $80,199,233    $4,497,657    5.61     $76,883,201      5.65
   Advances from FHLB          23,162,560    1,464,357      6.32       20,868,039     1,252,482    6.00      17,400,000      6.53
                             -------------  ----------               ------------    ----------             -----------
     Total interest-bearing                                                                                           
        liabilities           102,054,180    5,880,804      5.76      101,067,272     5,750,139    5.69      94,283,201      5.81
                                                                                                                       
Non-interest-bearing                                                                                                         
  liabilities                   2,598,910                               2,386,544                             2,951,413
                             -------------                           ------------                           -----------
                                                                                                                          
Total liabilities            $104,653,090                            $103,453,816                           $97,234,614
Stockholder's Equity            6,356,271                               6,286,174                            16,097,811
                             -------------                           ------------                           -----------
                                                                                                                         
Total liabilities and                                                                                                      
stockholders' equity         $111,009,361                            $109,739,990                          $113,332,425
                             -------------                           ------------                           -----------
                             -------------                           ------------                           -----------
                                                                                                            
Net interest income/Interest                                                                                           
  rate spread(3)                            $2,097,636      1.68%                    $2,171,970    1.78%                     1.48%
                                            ----------   --------                   -----------  -------                
                                            ----------   --------                   -----------  -------                
                                                                                                              
Net interest-earning                                                                                                  
  assets/net interest                                                                                                  
  margin(4)                    $5,177,230                   1.96%       5,051,084                  2.05%
                             ------------                --------                                -------                
                             ------------                --------                                -------                

Interest-earning assets to
  interest-bearing liabilities                            105.07%                                105.00%                   113.80%
                                                         --------                                -------                   -------
                                                         --------                                -------                   -------

</TABLE>



                                       46
<PAGE>

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

     (1)      The inclusion of nonaccrual loans in average daily balance and 
              loan fees in interest and dividends has been deemed to have an 
              immaterial impact on this analysis.

     (2)      Includes mortgage-backed securities

     (3)      Interest rate spread represents the difference between the 
              average yield on interest-earning assets and the average rate 
              on interest-bearing liabilities.

     (4)      Net interest margin represents net interest income before the 
              provision for loan losses divided by average interest-earning 
              assets.

Rate/Volume Analysis

         The following table sets forth certain information regarding changes 
in the Company's interest income and interest expense for the periods 
indicated. For each category of interest-earning assets and interest-bearing 
liabilities, information is provided on changes attributable to: (i) changes 
in volume (changes in volume multiplied by the old rate); (ii) changes in 
rate (changes in rate multiplied by old volume); and (iii) total change in 
rate and volume. The combined effects of changes in both rate and volume has 
been allocated proportionately to the change due to rate and the change due 
to volume.

                                       47

<PAGE>


<TABLE>
<CAPTION>


                                                              Year Ended December 31,
                                                                Increase (Decrease)
                                    --------------------------------------------------------------------------
                                                 1997 vs. 1996                         1996 vs. 1995
                                    -------------------------------------   ----------------------------------
                                      Volume         Rate         Net        Volume        Rate         Net
                                    ----------    ----------    ---------   ----------  ----------   ---------
  <S>                                 <C>          <C>           <C>        <C>          <C>           <C>     
  Interest Income:                                                                                           

    Loans                             $332,995     $(72,503)     $260,492   $1,025,048  $(341,549)    $683,499

    Investment securities            (308,423)        26,586    (281,837)     (45,053)     (9,218)    (54,271)

    Interest-bearing                                                                                                 
      deposits                          94,141      (16,465)       77,676       40,481    (40,347)         134
                                    ----------    ----------    ---------   ----------  ----------   ---------
           Total interest income       118,713      (62,382)       56,331    1,020,476   (391,114)     629,362
                                    ----------    ----------    ---------   ----------  ----------   ---------
                                                                                                 
  Interest Expense                                                                                                 

     Deposits                        $(73,173)      $(8,037)    $(81,210)     $138,888      $7,761    $146,649

     Advances from FHLB                152,044        59,831      211,875      598,343    (49,994)     548,349
                                    ----------    ----------    ---------   ----------  ----------   ---------
           Total interest                                                                                            
                expense                 78,871        51,794      130,665      737,231    (42,233)     694,998
                                    ----------    ----------    ---------   ----------  ----------   ---------
     Net interest income               $39,842    $(114,176)    $(74,334)     $283,245  $(348,881)   $(65,636)
                                    ----------    ----------    ---------   ----------  ----------   ---------
                                    ----------    ----------    ---------   ----------  ----------   ---------

</TABLE>


                                       48

<PAGE>


FINANCIAL CONDITION

         Total assets amounted to $113.3 million at December 31, 1997 compared
to $112.7 million at December 31, 1996. The increase of $649,000 or 0.6% was
primarily due to an increase of $12.6 million in cash and cash equivalents and a
$1.7 million increase in mortgage-backed securities available for sale which
were substantially offset by a $9.1 million or 9.3% decrease in loans
receivable, net and a $4.0 million decrease in investment securities available
for sale. The increase in cash and cash equivalents was primarily due to net
proceeds from the Conversion of $11.0 million while the decrease in net loans
was primarily due to sales of long-term fixed rate loans in the secondary market
as well as loan principal repayments. The increase in mortgage-backed securities
was due to purchases during 1997 of $1.7 million. The decrease in investment
securities was due to maturities during 1997 of $4.0 million. Total liabilities
decreased $9.5 million or 8.9% to $97.2 million at December 31, 1997 compared to
$106.7 million at December 31, 1996 due primarily to a decrease in FHLB
advances. Stockholders' equity increased from $6.0 million at December 31, 1996
to $16.1 million at December 31, 1997 due to net Conversion proceeds of $11.0
million.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997.

         NET INCOME. The Company had a net loss of $14,000 for the year ended
December 31, 1997 compared to a net loss of $95,000 for the year ended December
31, 1996. The loss during 1997 was primarily due to an increase in the provision
for loan losses and decreases in net interest income and other income,
substantially offset by a decrease in other expenses.

         NET INTEREST INCOME. Net interest income for the year ended December
31, 1997 was $2.1 million compared to $2.2 million for the year ended December
31, 1996. The interest rate spread and net interest margin decreased to 1.68%
and 1.96%, respectively, for 1997 compared to 1.78% and 2.05%, respectively, for
1996. The ratio of interest-earning assets to interest-bearing liabilities
remained stable at 105.07% for 1997 compared to 105.00% for 1996.

         INTEREST INCOME. Total interest and dividend income was $7,978,000 for
the year ended December 31, 1997 compared to $7,922,000 for the year ended
December 31, 1996, representing an increase of $56,000 or 0.7%. The increase in
fiscal 1997 was due primarily to an increase in interest on loans from $7.1
million for the year ended December 31, 1996 to $7.4 million for the year ended
December 31, 1997, which was the result of an increase in the average balance of
the Company's loan portfolio. This increase was slightly offset by a decrease in
interest and dividends on investments from $791,000 for the year ended December
31, 1996 to $582,000 for the year ended December 31, 1997 due to a decrease in
the average balance of such assets.

         INTEREST EXPENSE. Total interest expense, which consists primarily of
interest on savings deposits, increased from $5,750,000 for the year ended
December 31, 1996 to $5,881,000 for the year ended December 31, 1997, an
increase of $131,000 or 2.3%. This increase primarily was the result of an
increase in interest paid on FHLB advances due to an increase in the average


                                       49

<PAGE>

balance of and rate paid on such liabilities. This increase in advances was due
to increased funding needs and a decrease in deposits.

         PROVISION FOR LOAN LOSSES. Provisions for loan losses are charged to
earnings to maintain the total allowance for loan losses at a level considered
adequate by the Company to provide for probable loan losses based on prior loss
experience, volume and type of lending conducted by the Company, available peer
group information, and past due loans in the Company's loan portfolio. The
Company's policies require the review of assets on a quarterly basis. While the
Company believes it uses the best information available to make a determination
with respect to the allowance for loan losses, the Company recognizes that
future adjustments may be necessary. The Company provided $47,000 for loan
losses for the year ended December 31, 1996 while providing $216,000 for loan
losses for the year ended December 31, 1997. The Company continues to increase
the provision for loan losses due to the growth in the loan portfolio during the
year and due to the increase in non-performing loans. As the loan portfolio
continues to grow, the Company increases the provision for loan losses due to
risk inherent in the loan portfolio. In establishing such provisions, the
Company also considered the levels of its non-performing loans which were
$376,000 and $774,000 at December 31, 1996 and 1997, respectively.

         NON-INTEREST INCOME. Total non-interest income decreased from $305,000
for the year ended December 31, 1996 to $256,000 for the year ended December 31,
1997. This decrease in non-interest income was attributable to a decrease in
service fees of $85,000 partially offset by an increase in gains from the sales
of loans of $19,000 and an increase in miscellaneous other income of $17,000.
The decrease in service fees was caused by a decrease in application fees
collected due to fewer loan originations, and by a write-down int he value of
mortgage servicing rights.

         NON-INTEREST EXPENSE. Total other expenses decreased from $2,593,000
for the year ended December 31, 1996 to $2,162,000 for the year ended December
31, 1997, a decrease of $431,000 or 16.6%. Such decrease was due to the one-time
SAIF special assessment of $492,000 in 1996. Correspondingly, federal insurance
premiums decreased $134,000 to $53,000 in 1997 compared to $187,000 in 1996 due
to a reduction in premiums upon the recapitalization of the SAIF. Such decreases
were partially offset by an increase in salaries and employee benefits of
$163,000 to $1.1 million for 1997 compared to $917,000 for 1996. Salaries and
employee benefits increased due to expense incurred for the ESOP at the end of
the year of $93,000. The remainder of the increase was caused by lower fee
income provided by loan originations, due to a lower volume of originations
during the year. Fee income from originations offsets salary expense. In
addition, other general and administrative expenses increased $61,000 to
$414,000 for 1997 due to an increase in legal and consulting expenses.

         INCOME TAXES. The Company experienced a benefit for income taxes of
$10,000 for 1997 and $69,000 for 1996. Such benefits were due to losses from
operations during such periods.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDING DECEMBER 31, 1995 AND 1996


                                       50

<PAGE>


         NET INCOME. The Company had a net loss of $95,000 for the year ended
December 31, 1996 compared to net income of $420,000 for the year ended December
31, 1995. The loss was primarily due to the recognition of a one-time SAIF
special assessment in the amount of $492,000. This decrease was the result of an
increase in total interest expense from $5.1 million for the year ended December
31, 1995 to $5.8 million for the year ended December 31, 1996 an increase in the
provision for loan losses from $5,000 for the year ended December 31, 1995 to
$47,000 for the year ended December 31, 1996 and a decrease in total other
income from $520,000 for the year ended December 31, 1995 to $305,000 for the
year ended December 31, 1996. These fluctuations were offset by an increase in
total interest income from $7.3 million for the year ended December 31, 1995 to
$7.9 million for the year ended December 31, 1996.

         NET INTEREST INCOME. Net interest income was approximately $2.2 million
for each of the years ended December 31, 1996 and 1995. The ratio of average
interest-earning assets to average interest-earning liabilities remained fairly
constant. However, the interest rate spread and net interest margin decreased
from 2.13% and 2.40%, respectively, in 1995 to 1.78% and 2.05%, respectively, in
1996.

         INTEREST INCOME. Total interest income was $7.9 million for the year
ended December 31, 1996 compared to $7.3 million for the year ended December 31,
1995, representing an increase of $600,000 or 8.2%. Such increase was primarily
due to an increase in interest on loans, and was partially offset by a decrease
on interest and dividends from investments. Interest on loans increased from
$6.4 million for the year ended December 31, 1995 to $7.1 million for the year
ended December 31, 1996. This increase of $700,000 or 10.9% was due primarily to
an increase in the average balance of loans as a result of an increase in
originations of loans secured by single-family residential real estate. The
increase in average balances of loans receivable was partially offset by a 42
basis point decrease in the average yield on loans receivable. Interest and
dividends on investments decreased from $844,000 at December 31, 1995 to
$791,000 at December 31, 1996.

         INTEREST EXPENSE. Total interest expense increased from $5.1 million
for the year ended December 31, 1995 to $5.8 million for the year ended December
31, 1996, an increase of $700,000 or 13.7%. During the year ended December 31,
1996, the Company borrowed funds from the FHLB to increase the Company's
mortgage and home equity loan portfolios. The Company determined that FHLB
advances were less costly, on a marginal basis, than increasing rates on savings
accounts and certificates of deposit to attract more funds. As a result,
interest on borrowings increased by $500,000 or 71.4% from $700,000 for the year
ended December 31, 1995 to $1.2 million for the year ended December 31, 1996.
Interest on savings deposits increased $100,000 or 2.3% from $4.4 million for
the year ended December 31, 1995 to $4.5 million for the year ended December 31,
1996. Such increase was primarily due to an increase in the average balance of
deposits.

         PROVISION FOR LOAN LOSSES. The Company provided $5,000 and $47,000 for
loan losses for the years ended December 31, 1995 and 1996, respectively. In
establishing such provisions, 


                                       51

<PAGE>


management considered (i) the levels of non-performing loans which were $244,000
and $376,000 at December 31, 1995 and 1996, respectively, and (ii) the increase
in the Company's loan portfolio. The size of the Company's loan portfolio is a
component in the model the Company uses to determine the amount of the
provision.

         NON-INTEREST INCOME. Total non-interest income decreased from $520,000
for the year ended December 31, 1995 to $305,000 for the year ended December 31,
1996. This change was the result of the reduction of gains on sales of loans
from $439,000 for the year ended December 31, 1995 to $69,000 for the year ended
December 31, 1996. The Company sold fewer loans in 1996 based on the Company's
determination to hold a greater percentage of loans originated in its portfolio
as opposed to selling such loans in the secondary market. This reduction was
offset by an increase in service fees from $52,000 for the year ended December
31, 1995 to $190,000 for the year ended December 31, 1996 and an increase in
other income from $18,000 to $47,000. The increase in fees for the year ended
December 31, 1996 was due to an increase in loan originations.

         NON-INTEREST EXPENSE. Other non-interest expense increased by $500,000
or 23.8% from $2.1 million for the year ended December 31, 1995 to $2.6 million
for the year ended December 31, 1996. The increase was attributable to a
one-time special SAIF assessment of $492,000. Pursuant to the Economic Growth
and Paperwork Reduction Act of 1996 (the "Act"), the FDIC imposed a special
assessment on SAIF members to recapitalize the SAIF at the designated reserve
level of 1.25% as of October 1, 1996. Based on the Savings Bank's deposits as of
March 31, 1995, the date for measuring the amount of the special assessment
pursuant to the Act, the Savings Bank's special assessment was $492,000. The
recapitalization of the SAIF has had the effect of lowering premiums for deposit
insurance for the entire thrift industry that holds deposits insured by the
SAIF. The SAIF insurance assessment rate paid by the Savings Bank before the
recapitalization of the SAIF was 23 basis points per $100 of deposit and has
decreased to 6.4 basis points per $100 of deposits after the recapitalization of
the SAIF. Pursuant to the Act, the Savings Bank will pay in addition to its
normal insurance premium as a member of the SAIF an annual amount equal to
approximately 6.4 basis points of outstanding SAIF deposits towards the
retirement of the Financing Corporation bonds issued in the 1980's to assist in
the recovery of the savings and loan industry. Beginning no later than January
1, 2000, the rate paid to retire these bonds will be equal for members of the
BIF and the SAIF. Members of the BIF, by contrast, will pay in addition to their
normal deposit insurance premium approximately 1.3 basis points. Because of the
Supervisory Agreement of May 21, 1997, the Savings Bank incurs higher premiums
than some other institutions. See "Item 1 - Business - Regulation." The Act also
provides for the merging of the BIF and the SAIF by January 1, 1999 provided
there are no financial institutions still chartered as federal savings
associations at that time.

         Advertising costs increased from $169,000 for the year ended December
31, 1995 to $203,000 for the year ended December 31, 1996, or a $34,000
increase. Salaries and employee benefits decreased from $941,000 for the year
ended December 31, 1995 to $917,000 for the year ended December 31, 1996. This
decrease was due to an increase in loan volume, which resulted 


                                       52

<PAGE>


in allocation of salaries and employee benefits to loan origination costs.
Occupancy expenses also decreased from $237,000 for the year ended December 31,
1995 to $215,000 for the year ended December 31, 1996 because the Company used
an accelerated method of depreciation.

         INCOME TAX EXPENSE. The Company's income tax expense was a benefit of
$69,000 for the year ended December 31, 1996 compared to $265,000 owed for the
year ended December 31, 1995. This decrease in taxes was the result of the
Company's net loss of $164,000, before taxes, for the year ended December 31,
1996.

LIQUIDITY AND CAPITAL RESOURCES

         The Savings Bank is required to maintain minimum levels of liquid
assets as defined by OTS regulations. This requirement, which varies from time
to time depending upon economic conditions and deposit flows, is based upon a
percentage of the Savings Bank's deposits and short-term borrowings. The
required ratio currently is 4.0%. The Savings Bank's liquidity ratio average was
14.8%, 11.2% and 13.9% at December 31, 1995, December 31, 1996, and December 31,
1997, respectively. The decrease in the Savings Bank's average liquidity rate at
December 31, 1996 was the result of its sale of investments and increase in
short term borrowings. The increase in the Savings Bank's average liquidity rate
at December 31, 1997 primarily was due to the proceeds from the Conversion.

         The Company's primary sources of funds are deposits, repayment and
sales of loans and mortgage-backed securities, maturities of investments and
interest-bearing deposits, funds provided from operations and advances from the
FHLB of Pittsburgh. While scheduled repayments of loans and mortgage-backed
securities and maturities of investment securities are predictable, other
sources of funds, such as deposit flows and loan prepayments, can be greatly
influenced by the general level of interest rates, economic conditions and
competition. The Company uses its liquidity resources principally to fund
existing and future loan commitments, to fund maturing certificates of deposit
and demand deposit withdrawals, to invest in other interest-earning assets, to
maintain liquidity, and to meet operating expenses.

         Liquidity may be adversely affected by unexpected deposit outflows,
higher interest rates paid by competitors, and similar matters. Further, the
disparity in Financing Company ("FICO") bond interest payments as previously
described could result in the loss of deposits to BIF members that have this
lower cost and therefore are able to pay higher rates of interest on deposits.
Management monitors projected liquidity needs and determines the level
desirable, based in part on the Company's commitments to make loans and
management's assessment of the Company's ability to generate funds.

         The Company and the Savings Bank are subject to federal regulations
that impose certain minimum capital requirements. For a discussion on such
capital levels, see "Item 1. Description of Business-Regulation." 


                                       53

<PAGE>


IMPACT OF INFLATION AND CHANGING PRICES

         The Company's financial statements and the accompanying notes presented
elsewhere herein, have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time and due to inflation. The
impact of inflation is reflected in the increased cost of the Company's
operations. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.

THE YEAR 2000 ISSUE

         The Company is aware of the issues associated with the programming code
in existing computer systems as the Year 2000 approaches. The Year 2000 Issue is
the result of computer programs being written using two digits rather than four
digits to define the applicable year. Computer programs that have time-sensitive
coding may recognize a date using "00" as the year 1900 rather than the year
2000. Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail.

         The Savings Bank has conducted a review of its computer systems to
identify the systems that could be affected by the Year 2000 issue and has
developed an implementation plan to resolve the issue. The majority of the
Savings Bank's data processing is provided by a third party service bureau. The
service bureau is actively involved in resolving Year 2000 issues and has
provided the Savings Bank with frequent updates regarding their progress. The
service bureau has advised the Savings Bank that it expects to have the majority
of the Year 2000 issues resolved before the end of 1998 to allow the Savings
Bank to test their system for Year 2000 compliance during the third quarter of
1998. The Savings Bank presently believes that, based on the progress of the
Savings Bank's service bureau, the Year 2000 problem will not pose significant
operational problems for the Savings Bank's computer system. Costs are
anticipated to be immaterial at this time.


                                       54

<PAGE>


Recent Accounting Pronouncements

         In November 1993, the American Institute of Certified Public
Accountants ("AICPA") issued SOP 93-6 Employers' Accounting for Employee Stock
Ownership Plan. SOP 93-6 addresses accounting for shares of stock issued to
employees by an employee stock ownership plan. SOP 93-6 requires that the
employer record compensation expense in an amount equal to the fair value of
shares committed to be released from the ESOP to employees. SOP 93-6 is
effective for fiscal years beginning after December 15, 1993 and relates to
shares purchased by an ESOP after December 31, 1992. If the Common Stock
appreciates over time, SOP 93-6 will increase compensation expense relative to
the ESOP, as compared with prior guidance that required recognition of
compensation expense based on the cost of the shares acquired by the ESOP. The
amount of any such increase, however, cannot be determined at this time because
the expense will be based on the fair value of the shares committed to be
released to employees, which amount is not determinable.


Item 7. Financial Statements


[Deloitte & Touche LLP Logo]


Delaware First Financial
Corporation

Financial Statements as of December 31, 1997 and 1996 and for Each of the Three
Years in the Period Ended December 31, 1997, and Independent Auditors' Report

                                      55

<PAGE>


[Deloitte & Touche LLP Letterhead]




INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
   Delaware First Financial Corporation:

We have audited the accompanying consolidated statements of financial condition
of Delaware First Financial Corporation and Subsidiary (the "Company") as of
December 31, 1997, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the year then ended. We have
also audited the related statements of financial condition of Ninth Ward Savings
Bank, FSB (the "Predecessor Bank") as of December 31, 1996 and the related
statements of operations, changes in retained earnings and cash flows for the
years ended December 31, 1996 and 1995. These financial statements are the
responsibility of the Company's and the Predecessor Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Delaware First Financial
Corporation and Subsidiary at December 31, 1997 and the results of their
operations and their cash flows for the year then ended, and the financial
position of Ninth Ward Savings Bank, FSB at December 31, 1996 and the results of
its operations and its cash flows for the years ended December 1996 and 1995, in
conformity with generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, on December 31,
1997, the Predecessor Bank converted from a federally chartered mutual savings
bank into a federally chartered capital stock savings bank with the concurrent
formation of the Company.

/s/ Deloitte & Touche LLP
--------------------------
Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 6, 1998

                                      56
<PAGE>



DELAWARE FIRST FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                   ------------------------------
ASSETS                                                                                  1997            1996
                                                                                   -------------    -------------
<S>                                                                                <C>              <C>          
Cash and cash equivalents ......................................................   $  15,199,726    $   2,643,452
Investment securities available for sale (amortized cost - 1997,
  $2,499,753; 1996, $6,494,860) ................................................       2,499,860        6,475,800
Mortgage-backed securities available for sale (amortized cost - 1997,
  $1,903,007; 1996, $200,666) ..................................................       1,900,986          203,147
Loans receivable - net .........................................................      88,933,209       98,042,118
Federal Home Loan Bank stock - at cost .........................................         975,000        1,500,000
Accrued interest receivable:
  Loans ........................................................................         823,266          975,244
  Investments ..................................................................          81,353           93,526
  Mortgage-backed securities ...................................................           6,902            1,171
Office property and equipment, net .............................................       1,956,404        2,020,957
Prepaid expenses and other assets ..............................................         291,613           66,012
Prepaid income taxes ...........................................................         115,316          166,850
Mortgage servicing rights ......................................................         371,361          317,435
Deferred income taxes ..........................................................         177,429          177,506
                                                                                   -------------    -------------
TOTAL ASSETS ...................................................................   $ 113,332,425    $ 112,683,218
                                                                                   -------------    -------------
                                                                                   -------------    -------------
LIABILITIES AND RETAINED EARNINGS

Liabilities:
  Deposits .....................................................................   $  76,883,201    $  78,408,793
  Advances from Federal Home Loan Bank .........................................      17,400,000       25,900,000
  Advances by borrowers for taxes and insurance ................................         835,417          812,569
  Accrued interest payable .....................................................         358,171          265,764
  Accounts payable and accrued expenses ........................................       1,757,825        1,338,503
                                                                                   -------------    -------------
      Total liabilities ........................................................      97,234,614      106,725,629

Stockholders' Equity:
  Preferred stock, $.01 par value, 500,000 shares authorized, none issued 
  Common stock, $.01 par value, 3,000,000 authorized; issued and outstanding,
     December 31, 1997, 1,157,000 shares .......................................          11,570
  Additional paid in capital ...................................................      10,966,430
  Common stock acquired by the ESOP ............................................        (833,040)
  Unrealized losses on available for sale securities, net of tax ...............          (1,263)         (10,776)
  Retained earnings - substantially restricted .................................       5,954,114        5,968,365
                                                                                   -------------    -------------
      Total stockholders' equity ...............................................      16,097,811        5,957,589
                                                                                   -------------    -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .....................................   $ 113,332,425    $ 112,683,218
                                                                                   -------------    -------------
                                                                                   -------------    -------------
</TABLE>

See notes to consolidated financial statements.

                                      57
<PAGE>


DELAWARE FIRST FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                          Year Ended December 31,
                                                -----------------------------------------
                                                    1997          1996           1995
                                                -----------    -----------    -----------
<S>                                             <C>            <C>            <C>        
INTEREST INCOME:
Interest on loans ...........................   $ 7,352,557    $ 7,092,065    $ 6,408,566
Interest on mortgage-backed securities ......        44,057         38,982         40,336
Interest and dividends on investments .......       581,826        791,062        843,845
                                                -----------    -----------    -----------
         Total interest income ..............     7,978,440      7,922,109      7,292,747
                                                -----------    -----------    -----------
INTEREST EXPENSE:

Deposits ....................................     4,416,447      4,497,657      4,351,008
Federal Home Loan Bank advances .............     1,464,357      1,252,482        704,133
                                                -----------    -----------    -----------
         Total interest expense .............     5,880,804      5,750,139      5,055,141
                                                -----------    -----------    -----------
NET INTEREST INCOME .........................     2,097,636      2,171,970      2,237,606

PROVISION FOR LOAN LOSSES ...................       215,815         47,000          5,000
                                                -----------    -----------    -----------
NET INTEREST INCOME AFTER PROVISION
  FOR LOAN LOSSES ...........................     1,881,821      2,124,970      2,232,606
                                                -----------    -----------    -----------
OTHER INCOME:
    Service fees ............................       104,507        189,604         51,700
    Gain on sale of loans ...................        88,125         68,629        438,970
    Realized market adjustment on loans .....                                      11,060
    Other ...................................        63,389         46,543         18,469
                                                -----------    -----------    -----------
         Total other income .................       256,021        304,776        520,199
                                                -----------    -----------    -----------
OTHER EXPENSES:
    Salaries and employee benefits ..........     1,079,437        916,635        941,086
    Advertising .............................       162,382        202,825        169,170
    Federal insurance premiums ..............        52,795        187,057        171,097
    SAIF Special Assessment .................                      491,992
    Occupancy expense .......................       208,727        214,968        236,687
    Data processing expense .................       142,887        121,121        103,178
    Directors fees ..........................       102,447        105,817         99,036
    Other general and administrative expenses       413,718        352,872        347,957
                                                -----------    -----------    -----------
         Total other expenses ...............     2,162,393      2,593,287      2,068,211
                                                -----------    -----------    -----------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
    FOR INCOME TAXES ........................       (24,551)      (163,541)       684,594

PROVISION (BENEFIT) FOR INCOME TAXES ........       (10,300)       (69,000)       264,670
                                                -----------    -----------    -----------
NET INCOME (LOSS) ...........................   $   (14,251)   $   (94,541)   $   419,924
                                                -----------    -----------    -----------
                                                -----------    -----------    -----------
</TABLE>

See notes to consolidated financial statements.

                                       58
<PAGE>


DELAWARE FIRST FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                        Common
                                                                         Stock    Unrealized
                                                                        Acquired   Losses on
                                                            Additional   by Stock   Available                    Total
                                                 Common     Paid-In     Benefit    for Sale      Retained     Stockholders'
                                                   Stock     Capital      Plans    Securities    Earnings        Equity
                                                  -------  -----------  ---------  ----------  ------------   ------------
<S>                                               <C>      <C>          <C>        <C>         <C>            <C>         
BALANCE,  JANUARY 1, 1995 ......................                                               $  5,642,982   $  5,642,982

     Net income ................................                                                    419,924        419,924
                                                  -------  -----------  ---------  ----------  ------------   ------------
BALANCE, DECEMBER 31, 1995 .....................                                                  6,062,906      6,062,906

    Net loss ...................................                                                    (94,541)       (94,541)

    Unrealized losses on available for
     sale securities, net of tax ...............                                   $(10,776)                       (10,776)
                                                  -------  -----------  ---------- ----------- ------------   ------------
BALANCE, DECEMBER 31, 1996 .....................                                   $(10,776)      5,968,365      5,957,589

    Common stock issued ........................  $11,570  $10,966,430                                          10,978,000

    Common stock acquired by stock benefit plans                        $(925,600)                                (925,600)

    ESOP stock committed to be released ........                           92,560                                   92,560

    Change in unrealized losses on available
     for sale securities, net of tax ...........                                      9,513                          9,513

    Net loss ...................................                                                   (14,251)        (14,251)
                                                   -------  ----------- ---------- ---------- ------------     ------------
BALANCE, DECEMBER 31, 1997 .....................  $11,570   $10,966,430 $(833,040) $ (1,263)  $  5,954,114     $ 16,097,811
                                                   -------  ----------- ---------  ---------- ------------     ------------
                                                   -------  ----------- ---------  ---------- ------------     ------------
</TABLE>

See notes to consolidated financial statements.

                                       59
<PAGE>



DELAWARE FIRST FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                                 --------------------------------------------
                                                                     1997           1996            1995
                                                                 ------------    ------------    ------------
<S>                                                              <C>             <C>             <C>         
OPERATING ACTIVITIES:
  Net income (loss) ..........................................   $    (14,251)   $    (94,541)   $    419,924
  Adjustments to reconcile net income (loss) to net cash
    (used in) provided by operating activities:
    Depreciation .............................................        126,656         121,751         164,780
    Provision for loan losses ................................        215,815          47,000           5,000
    Gain on sale of investment and
      mortgage-backed securities .............................                         (6,925)
    Gain on sale of loans ....................................        (88,125)        (68,629)       (438,970)
    Realized market adjustment on loans ......................                                        (11,060)
    Amortization of:
      Deferred loan fees .....................................       (100,622)       (130,226)       (126,475)
      Discount on investment and
        mortgage-backed securities ...........................         (4,193)         (8,827)         (6,782)
    Changes in assets and liabilities which
      provided (used) cash:
      Accrued interest receivable ............................        158,420        (221,562)       (170,295)
      Mortgage servicing rights ..............................        (53,926)        (19,466)       (297,969)
      Prepaid expenses and other assets ......................       (225,601)          9,153          (7,296)
      Accrued interest payable ...............................         92,407          45,211         (24,932)
      Accounts payable and accrued expenses ..................        419,322         505,430          28,720
      Income taxes ...........................................         51,534        (252,740)        452,205
      Deferral of loan fees ..................................         84,623         379,572         564,350
                                                                 ------------    ------------    ------------
           Net cash provided by operating activities .........        662,059         305,201         551,200
                                                                 ------------    ------------    ------------
INVESTING ACTIVITIES:
  Proceeds from sale of investments held to maturity .........                      2,996,406
  Proceeds from maturity of investments ......................      4,000,000       6,998,205       7,500,000
  Principal collected on long-term loans
    and mortgage-backed securities ...........................     13,649,576      15,576,441       9,865,735
  Long-term loans originated .................................    (11,433,144)    (38,236,036)    (47,296,058)
  Proceeds from sale of loans ................................      6,812,130       4,407,397      29,869,979
  Proceeds from sale of mortgage-backed securities
    held to maturity .........................................                        346,427
  Redemption of Federal Home Loan Bank stock .................        634,800         263,200          25,700
  Purchase of Federal Home Loan Bank stock ...................       (109,800)     (1,035,700)       (104,400)
  Purchase of investments ....................................     (1,739,460)     (4,996,281)     (6,997,017)
  Proceeds from sale of real estate owned ....................                                         63,000
  Purchases of premises and equipment ........................        (62,103)        (39,244)        (62,167)
                                                                 ------------    ------------    ------------
           Net cash provided by (used in) investing activities     11,751,999     (13,719,185)     (7,135,228)
                                                                 ------------    ------------    ------------
FINANCING ACTIVITIES:
  Net (decrease) increase in deposits ........................     (1,525,592)     (3,113,456)     11,025,699
  Increase in advances by borrowers for taxes
    and insurance ............................................         22,848         160,036         123,382
  Proceeds from Federal Home Loan Bank advances ..............     49,345,726      79,119,823      26,950,000
  Repayments of Federal Home Loan Bank advances ..............    (57,845,726)    (61,169,823)    (31,900,000)
  Proceeds from the sale of stock, net of conversion costs ...     10,978,000
  Common stock acquired by ESOP ..............................       (833,040)
                                                                 ------------    ------------    ------------
           Net cash provided by financing activities .........        142,216      14,996,580       6,199,081
                                                                 ------------    ------------    ------------
NET INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS .......................................     12,556,274       1,582,596        (384,947)

CASH AND CASH EQUIVALENTS,
  BEGINNING OF PERIOD ........................................      2,643,452       1,060,856       1,445,803
                                                                 ------------    ------------    ------------
CASH AND CASH EQUIVALENTS,
  END OF PERIOD ..............................................   $ 15,199,726    $  2,643,452    $  1,060,856
                                                                 ------------    ------------    ------------
                                                                 ------------    ------------    ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the period for:
    Interest .................................................   $  5,788,397    $  5,704,928    $  5,080,072
                                                                 ------------    ------------    ------------
                                                                 ------------    ------------    ------------
    Income taxes .............................................   $     25,956    $    310,140    $     31,018
                                                                 ------------    ------------    ------------
                                                                 ------------    ------------    ------------
</TABLE>

See notes to consolidated financial statements.

                                      60
<PAGE>


DELAWARE FIRST FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

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


1.    NATURE OF OPERATIONS

      On June 30, 1997, the Board of Directors of Ninth Ward Savings Bank, FSB
      (the "Bank") adopted a plan of conversion to convert from a federally
      chartered mutual savings bank to a federally chartered capital stock
      savings bank with the concurrent formation of a holding company (the
      "Conversion").

      The Conversion was completed on December 31, 1997, with the issuance by
      the holding company Delaware First Financial Corporation (the "Company"),
      of 1,157,000 shares of its common stock in a public offering to the Bank's
      eligible depositors and borrowers, members of the general public and the
      Bank's Employee Stock Ownership Plan (the "ESOP"). In exchange for the net
      conversion proceeds of $10,978,000, less $2,144,960 retained by the
      Company, the Company acquired 100% of the issued and outstanding capital
      stock of the Bank.

      In connection with the Conversion, the Company established the ESOP for
      the benefit of eligible employees. The Company purchased 92,560 shares of
      common stock on behalf of the ESOP in the Conversion.

      The Bank's primary market is concentrated in New Castle County, Delaware,
      to which it offers mainly conventional residential real estate loans on
      new and existing properties and mortgage refinancing. Since 1994, the Bank
      has been active in offering equity lines of credit. Effective January 5,
      1998, Ninth Ward Savings Bank, FSB changed its name to Delaware First
      Bank, FSB.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Basis of Presentation - The consolidated financial statements include the
      accounts of Delaware First Financial Corporation as of December 31, 1997,
      the date of Conversion. Amounts prior to that date include the accounts of
      the Company's wholly-owned subsidiary, Ninth Ward Savings Bank, FSB.

      Principles of Consolidation - The accompanying consolidated financial
      statements include the accounts of the Company and its wholly-owned
      subsidiaries. Intercompany accounts and transactions have been eliminated
      in consolidation. Assets of the Company consist primarily of interest
      bearing deposits and activities are insignificant.

      Use of Estimates in the Preparation of Financial Statements - The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the
      financial statements and the reported amounts of income and expenses
      during the reporting period. Actual results could differ from those
      estimates.

      Interest on Loans - The Company recognizes interest on loans when earned.
      The Company does not recognize interest on loans deemed to be
      uncollectible, generally when a loan is three months or more delinquent.
      Such interest ultimately collected is credited to income in the period of
      recovery.

                                      61
<PAGE>

      Investment and Mortgage-Backed Securities - The Company accounts for debt
      and equity securities as follows:

            Held to Maturity - Debt securities that management has the positive
            intent and ability to hold until maturity are classified as held to
            maturity and are carried at their remaining unpaid principal
            balance, net of unamortized premiums or unaccreted discounts.
            Premiums are amortized and discounts are accreted using the interest
            method over the period remaining until maturity.

            Available for Sale - Debt and equity securities that will be held
            for indefinite periods of time, including securities that may be
            sold in response to changes in market interest or prepayment rates,
            needs for liquidity, and changes in the availability of and the
            yield of alternative investments, are classified as available for
            sale. These assets are carried at fair value. Fair value is
            determined using published quotes as of the close of business.
            Unrealized gains and losses are excluded from earnings and are
            reported net of tax as a separate component of retained earnings
            until realized.

      Office Property and Equipment - Office property and equipment is recorded
      at cost. Depreciation is computed using either the straight-line method or
      an accelerated method over the expected useful lives of the assets,
      ranging from three to fifty years. The costs of maintenance and repairs
      are expensed as they are incurred, and renewals and betterments are
      capitalized.

      Loan Fees - The Company defers all loan fees, net of certain costs, and
      accretes them into income over the contractual life of the loan using the
      interest method.

      Allowance for Loan Losses - The allowance for loan losses is increased by
      charges to income and decreased by charge-offs (net of recoveries).
      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 any underlying collateral, and current
      economic conditions.

      The Company has adopted Statement of Financial Accounting Standards
      ("SFAS") Nos. 114 and 118, Accounting by Creditors for Impairment of a
      Loan and Accounting by Creditors for Impairment of a Loan - Income
      Recognition and Disclosures, respectively. SFAS No. 114 requires that
      certain impaired loans be measured based either on the present value of
      expected future cash flows discounted at the loan's effective interest
      rate, or the loan's observable market price, or the fair value of the
      collateral if the loan is collateral dependent.

      Federal Home Loan Bank Advances - Periodically, the Company borrows from
      the Federal Home Loan Bank of Pittsburgh. These borrowings are
      collateralized by Federal Home Loan Bank stock and qualified investments
      and mortgage loans.

      Income Taxes - Deferred income taxes are recognized for the tax
      consequences of "temporary differences" by applying enacted statutory tax
      rates applicable to future years to differences between the financial
      statement carrying amounts and the tax bases of existing assets and
      liabilities. The effect on deferred taxes of a change in tax rates is
      recognized in income in the period that includes the enactment date.

      Cash and Cash Equivalents - For purposes of reporting cash flows, cash and
      cash equivalents include cash and interest-bearing accounts.

                                      62
<PAGE>

      Interest Rate Risk - The Company is principally engaged in the business of
      attracting deposits from the general public and using these deposits,
      together with borrowings and other funds, to make loans secured by real
      estate and, to a lesser extent, consumer loans.

      At December 31, 1997, the Company had interest-earning assets of
      approximately $110,931,000 having a weighted average effective yield of
      7.44% which have a weighted average term to maturity greater than the
      interest-bearing liabilities of approximately $94,283,000 having a
      weighted average effective interest rate of 5.76%. At December 31, 1996,
      the Company had interest-earning assets of approximately $108,885,000
      having a weighted average effective yield of 7.47% which have a weighted
      average term to maturity greater than the interest-bearing liabilities of
      approximately $104,309,000 having a weighted average effective interest
      rate of 5.69%. The shorter duration of the interest-sensitive liabilities
      indicates that the Company is exposed to interest rate risk because, in a
      rising rate environment, liabilities will reprice faster than assets,
      thereby reducing the market value of long-term assets and net interest
      income. For this reason, management regularly monitors the maturity
      structure of the Company's assets and liabilities in order to measure this
      risk and enact measures to manage volatility of future interest rate
      movements.

      Mortgage Loans Held for Sale - The Company originates mortgage loans for
      sale in the secondary market to provide additional funds for lending.
      These loans are carried at the lower of cost or market value, determined
      on a net aggregate basis.

      Real Estate Owned - Real estate properties acquired through, or in lieu
      of, loan foreclosure are to be sold and are initially recorded at fair
      value at the date of foreclosure establishing a new cost basis. After
      foreclosure, valuations are periodically performed by management and the
      real estate is carried at the lower of carrying amount or fair value less
      cost to sell. Revenue and expenses from operations of foreclosed real
      estate and changes in the valuation allowance are included in loss on
      foreclosed real estate.

      Mortgage Servicing Rights - The Company adopted SFAS No. 122, Accounting
      for Mortgage Servicing Rights during 1995. The statement requires the
      Company, which services mortgage loans for others in return for servicing
      fees, to recognize these servicing rights as assets, regardless if such
      assets were acquired or originated. In June 1996, the Financial Accounting
      Standards Board ("FASB") issued SFAS No. 125, Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of Liabilities. The
      statement, which is effective for transactions occurring after December
      31, 1996, requires an entity to recognize, prospectively, the financial
      and servicing assets it controls and the liabilities it has incurred,
      derecognize financial assets when control has been surrendered, and
      derecognize liabilities when extinguished. It requires that servicing
      assets and other retained interests in transferred assets be measured by
      allocating the previous carrying amounts between the asset sold, if any,
      and retained interest, if any, based on their relative fair values at the
      date of transfer. It also provides implementation guidance for servicing
      of financial assets, securitizations, loan syndications and participations
      and transfers of receivables with recourse. The statement supersedes SFAS
      No. 122, Accounting for Mortgage Servicing Rights. In December 1996, the
      FASB issued SFAS No. 127, Deferral of the Effective Date of Certain
      Provisions of FASB Statement No. 125. SFAS No. 127 defers for one year the
      effective date of SFAS No. 125 as it relates to transactions involving
      secured borrowings and collateral, and transfers and servicing of
      financial assets. This statement also provides additional guidance on
      these types of transactions. Additionally, the Company is required to
      assess the fair value of these assets at each reporting date to determine
      any potential impairment.

      Earnings Per Share - The Company's conversion was completed on December
      31, 1997 and, therefore, earnings per share amounts are not applicable.

                                      63
<PAGE>

      Accounting Principles Issued and Not Adopted -In June 1997, the FASB
      issued SFAS No. 130, Reporting Comprehensive Income, which requires an
      entity to present, as a component of comprehensive income, the amounts
      from transactions and other events which currently are excluded from the
      statement of income and are recorded directly to stockholders' equity.
      Also in June 1997, the FASB issued SFAS No. 131, Disclosures About
      Segments of an Enterprise and Related Information. This statement requires
      an entity to disclose financial information in a manner consistent to
      internally used information and requires more detailed disclosures of
      operating and reporting segments than are currently in practice. In
      February 1998, the FASB issued SFAS No. 132, Employer's Disclosure About
      Pensions and Other Postretirement Benefits. This statement revises
      employers' disclosures about pension and other postretirement benefit
      plans. It does not change the measurement or recognition of those plans.
      The statements are applicable for years beginning after December 15, 1997.
      The adoption of these statements, which concern disclosure standards only,
      is not required until 1998. The adoption will not have any impact on the
      Company's consolidated financial condition or results of operations.

      Reclassifications - Certain items in the 1995 and 1996 financial
      statements have been reclassified to conform with the presentation in the
      1997 financial statements.

3.    INVESTMENT SECURITIES

      Investment securities are summarized as follows:

<TABLE>
<CAPTION>
                                                     December 31, 1997
                                       --------------------------------------------
                                                     Gross     Gross
                                       Amortized  Unrealized Unrealized Approximate
                                          Cost       Gain      Loss     Fair Value
                                       ----------   ------   --------   -----------
<S>                                    <C>          <C>      <C>        <C>       
Available for sale:
  Debt securities:
 Obligations of U.S. Government
   agencies--Due in one year or less   $2,499,753   $1,967   $(1,860)   $2,499,860
                                       ----------   ------   --------   ----------
Total ..............................   $2,499,753   $1,967   $(1,860)   $2,499,860
                                       ----------   ------   --------   ----------
                                       ----------   ------   --------   ----------
</TABLE>

<TABLE>
<CAPTION>
                                                     December 31, 1996
                                       --------------------------------------------
                                                     Gross    Gross
                                       Amortized  Unrealized Unrealized Approximate
                                          Cost       Gain      Loss     Fair Value
                                       ----------   ------   --------   -----------
<S>                                    <C>          <C>      <C>        <C>       
Available for sale:
  Debt securities:
 Obligations of U.S. Government
   agencies:
   Due in one year or less .........   $2,499,285   $4,520   $(10,870)  $2,492,935
   Due after one year through
     five years ....................    3,995,575    2,899    (15,609)   3,982,865
                                       ----------   ------   --------   ----------
Total ..............................   $6,494,860   $7,419   $(26,479)  $6,475,800
                                       ----------   ------   --------   ----------
                                       ----------   ------   --------   ----------
</TABLE>



      Included in investment securities at December 31, 1996 are step-up and
      floating rate bonds with various U.S. Government agencies. At December 31,
      1996, the par value of these bonds was $1,500,000. At December 31, 1997,
      no such amounts were outstanding.

                                       64

<PAGE>

      On November 29, 1996, the Company sold investment securities with a book
      value of $2,998,205 from the held to maturity portfolio resulting in a net
      loss of $1,798. Included in these securities were investments with a book
      value of $998,205 that had a maturity of April 17, 1997, which exceeded
      the three-month example as discussed in SFAS No. 115, Accounting for
      Certain Investments in Debt and Equity Securities. The securities were
      sold in order to achieve "well capitalized" regulatory capital levels as
      defined by the Office of Thrift Supervision. As a result of the sale, the
      Company transferred all securities previously classified as held to
      maturity to available for sale and has subsequently classified all
      securities purchased as available for sale.

4.    MORTGAGE-BACKED SECURITIES

      Mortgage-backed securities are summarized as follows:

<TABLE>
<CAPTION>
                                                           December 31, 1997
                                           -----------------------------------------------------
                                                           Gross         Gross       Approximate
                                           Amortized     Unrealized    Unrealized       Fair
                                              Cost          Gain          Loss          Value
                                           ----------    ----------    ----------     ----------
<S>                                        <C>           <C>           <C>           <C>       
Available for sale:
  FHLMC pass-through certificates ...      $  168,757      $1,687                      $  170,444
  Collateralized mortgage obligations       1,734,250         640      $  (4,348)       1,730,542
                                           ----------      ------      ---------       ----------
Total ...............................      $1,903,007      $2,327      $  (4,348)      $1,900,986
                                           ----------      ------      ---------       ----------
                                           ----------      ------      ---------       ----------
</TABLE>

<TABLE>
<CAPTION>
                                                     December 31, 1996
                                          ---------------------------------------
                                                           Gross      Approximate
                                           Amortized     Unrealized      Fair
                                             Cost           Gain         Value
                                           ----------    ----------   -----------
<S>                                        <C>           <C>          <C>
Available for sale:
  FHLMC pass-through certificates ...         $200,666      $2,481      $203,147
                                              --------      ------     ---------
                                              --------      ------     ---------
</TABLE>



      In connection with the sale discussed in Note 3, the Company sold
      mortgage-backed securities with a book value of $335,918 from the held to
      maturity portfolio resulting in a net gain of $8,723. Included in these
      securities was a mortgage-backed security with a book value of $173,227
      that had a maturity of March 1, 1997 which exceeded the three-month
      example. As a result of the sale, the Company transferred all
      mortgage-backed securities previously classified as held to maturity to
      available for sale and has subsequently classified all securities
      purchased as available for sale.


                                       65
<PAGE>

5.    LOANS RECEIVABLE

      Loans receivable consist of the following:

<TABLE>
<CAPTION>
                                                     December 31,
                                            -------------------------------
                                                1997               1996
                                            ------------       ------------
<S>                                         <C>                <C>         
First mortgage loans (primarily one-
  to four-family residential) ........      $ 79,244,982       $ 87,918,256
Loans on savings accounts ............           749,969            528,198
Home equity loans - fixed rate .......         7,413,485          8,082,865
Equity lines or credit - variable rate         2,946,938          2,823,273
                                            ------------       ------------
           Total .....................        90,355,374         99,352,592

Less:
  Allowance for loan losses ..........          (462,815)          (247,000)
  Deferred loan fees .................          (959,350)        (1,063,474)
                                            ------------       ------------
           Total .....................      $ 88,933,209       $ 98,042,118
                                            ------------       ------------
                                            ------------       ------------
</TABLE>


      The Company is servicing loans for the benefit of others totaling
      approximately $56,730,000, and $54,321,000 at December 31, 1997 and 1996,
      respectively. Servicing loans for others generally consists of collecting
      mortgage payments, maintaining escrow accounts, disbursing payments to
      investors and foreclosure processing. Loan servicing income is recorded on
      the cash basis and includes servicing fees from investors and certain
      charges collected from borrowers, such as late payment fees. In connection
      with these loans serviced for others, the Company held borrowers' escrow
      balances of $353,742 and $301,325 at December 31, 1997 and 1996,
      respectively.

      At December 31, 1997 and 1996, the Company had outstanding loan
      origination commitments of $793,800 and $2,270,200, respectively, for
      fixed and adjustable rate loans, with rates ranging from 7.125% to 11.75%
      and 6.75% to 8.50%, respectively. These commitments are expected to be
      funded within one year. Commitments are issued in accordance with the same
      loan policies and underwriting standards as settled loans. Additionally,
      in November 1994, the Company entered into an agreement with a community
      investment company to purchase $250,000 of loans for low and moderate
      income housing over the next three years. At December 31, 1997 and 1996,
      the Company had purchased $122,000 and $64,000 of these loans,
      respectively.

                                       66
<PAGE>

      Certain directors and officers of the Company have loans with the Company.
      Such loans were made in the ordinary course of business at the Company's
      normal credit terms, including interest rate and collateralization, and do
      not represent more than a normal risk of collection. The following is a
      summary of loans to these officers and directors:

<TABLE>
<CAPTION>
                                                  December 31,
                                           -------------------------
                                             1997             1996
                                           ---------       ---------
<S>                                        <C>             <C>      
           Balance, beginning of year      $ 367,780       $ 394,195
           Additions ................        195,090          34,000
           Repayments ...............        (51,414)        (60,415)
                                           ---------       ---------
           Balance, end of year .....      $ 511,456       $ 367,780
                                           ---------       ---------
                                           ---------       ---------
</TABLE>



      The following is a summary of changes in the allowance for loan losses:

<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                        ------------------------------------
                                          1997          1996         1995
                                        --------      --------      --------
<S>                                     <C>           <C>           <C>     
   Balance, beginning of year ....      $247,000      $200,000      $195,000
   Provision charged to operations       215,815        47,000         5,000
                                        --------      --------      --------
   Balance, end of year ..........      $462,815      $247,000      $200,000
                                        --------      --------      --------
                                        --------      --------      --------
</TABLE>


      Loans delinquent more than 90 days are placed on nonaccrual status.
      Interest reserved from these loans amounted to $18,459, $3,123 and $4,351
      at December 31, 1997, 1996 and 1995, respectively.

      The provision for loan losses charged to expense is based upon past loan
      and loss experiences and an evaluation of estimated losses in the current
      loan portfolio, including the evaluation of impaired loans under SFAS No.
      114. A loan is considered to be impaired when, based upon current
      information and events, it is probable that the Company will be unable to
      collect all amounts due according to the contractual terms of the loan. An
      insignificant delay or insignificant shortfall in amount of payments does
      not require application of SFAS No. 114. For this purpose, delays less
      than 90 days are considered to be insignificant. As of December 31, 1997
      and 1996, 100% of the impaired loan balance was measured for impairment
      based on the fair value of the loan's collateral. Impairment losses are
      included in the provision for loan losses. SFAS No. 114 does not apply to
      large groups of smaller balance homogeneous loans that are collectively
      evaluated for impairment, except for those loans restructured under a
      troubled debt restructuring. At December 31, 1997 and 1996, the Company's
      impaired loans consisted of smaller balance residential mortgage loans.

      Interest income on impaired loans other than nonaccrual loans is
      recognized on an accrual basis. Interest income on nonaccrual loans is
      recognized only as collected.



                                       67

<PAGE>

6.    OFFICE PROPERTY AND EQUIPMENT

      Office property and equipment is summarized by major classification as
follows:
 
<TABLE>
<CAPTION>
                                                 December 31,
                                        -----------------------------
                                           1997              1996
                                        -----------       -----------
<S>                                     <C>               <C>        
          Land and buildings .....      $ 2,278,764       $ 2,278,764
          Furniture and equipment         1,017,822           955,720
                                        -----------       -----------
              Total ..............        3,296,586         3,234,484
          Accumulated depreciation       (1,340,182)       (1,213,527)
                                        -----------       -----------
          Net ....................      $ 1,956,404       $ 2,020,957
                                        -----------       -----------
                                        -----------       -----------
</TABLE>

      Depreciation expense totaled $126,656, $121,751, and $164,780 for the
      years ended December 31, 1997, 1996 and 1995, respectively.

7.    MORTGAGE SERVICING RIGHTS

      The Company adopted SFAS No. 122 effective January 1, 1995. The effect of
      adopting this new statement was an increase of approximately $300,000 to
      gain on sale of loans on the 1995 statement of operations, and to mortgage
      servicing rights on the 1995 statement of financial condition. For
      potential impairment evaluation purposes, the market value of the
      servicing portfolio was determined through independent valuation of the
      aggregate portfolio.

      The Company's servicing portfolio for which mortgage servicing rights have
      been capitalized at December 31, 1997 consists of fixed rate,
      predominately conforming mortgage loans, as follows:

            Whole Loans Sold - $30,612,052 - interest rates range from 6.50% to
            8.875%; original terms range from 180 to 360 months with a weighted
            average coupon of 7.488%, weighted average remaining maturity of 317
            months, and an average servicing fee of 0.25%.

            Participations Sold - $5,076,062 - interest rates range from 6.75%
            to 8.00%; original terms range from 120 months to 240 months with a
            weighted average coupon of 7.316%, weighted average pass-through
            rate of 7.10%, and a weighted average remaining term of 157 months.

      Evaluation of potential impairment of the carrying value of mortgage
      servicing rights is determined based upon market valuation of loans within
      specified interest rate ranges. At December 31, 1997, 1996 and 1995, the
      fair value of mortgage servicing rights approximates its carrying value.
      Mortgage servicing rights are amortized in proportion to projected net
      servicing revenue.

                                       68
<PAGE>

8.    DEPOSITS

      Deposits by stated type are summarized as follows:

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                               -------------------------------------------------------------
                                                                            1997                            1996
                                                               ----------------------------     ----------------------------
                                                                  Amount            Percent        Amount           Percent
                                                               -------------        -------     -------------       ------- 
<S>                                                            <C>                  <C>         <C>                 <C>
Demand deposit accounts:
  1997 - 2.05%...................................                 $1,063,720           1.4%
  1996 - 2.05%...................................                                                   $881,302           1.1%
Passbook accounts:
  1997 - 4.14%...................................                  2,494,272           3.2
  1996 - 4.14%...................................                                                  2,536,443           3.2
Money market deposit accounts:
  1997 - 3.40%...................................                  8,532,239          11.1
  1996 - 3.35%...................................                                                  8,246,455          10.5
91-day to five-year certificates
  of deposits
  1997 - 4.94% - 7.04%...........................                 64,792,970          84.3
  1996 - 4.82 - 8.33%............................                                                 66,744,593          85.2
                                                               -------------         -----      -------------        ----- 
Total                                                          $  76,883,201         100.0%     $  78,408,793        100.0%
                                                               -------------         -----      -------------        ----- 
                                                               -------------         -----      -------------        ----- 
</TABLE>




      The weighted average cost of funds was 5.65% and 5.62% at December 31,
      1997 and 1996, respectively.

      A summary of certificates by maturity is as follows:

<TABLE>
<CAPTION>
                                                        December 31,
                                              ----------------------------------
                                                 1997                    1996
                                              -----------            -----------
<S>                                           <C>                    <C>        
Less than 1 year .................            $44,979,769            $41,736,900
1 to 3 years .....................             16,173,988             16,073,655
3 years or more ..................              3,639,213              8,934,038
                                              -----------            -----------
Total ............................            $64,792,970            $66,744,593
                                              -----------            -----------
                                              -----------            -----------
</TABLE>









      A summary of interest expense on savings accounts is as follows:

<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                      ------------------------------------------
                                         1997            1996            1995
                                      ----------      ----------      ----------
<S>                                   <C>             <C>             <C>       
Passbooks ......................      $  136,140      $  109,303      $  132,819
Demand deposit accounts ........          19,088          14,634          11,262
Money market deposit accounts ..         292,641         281,797         329,419
Certificates ...................       3,968,578       4,092,023       3,877,508
                                      ----------      ----------      ----------
Total ..........................      $4,416,447      $4,497,657      $4,351,008
                                      ----------      ----------      ----------
                                      ----------      ----------      ----------
</TABLE>

                                       69
<PAGE>





      At December 31, 1997, the Company had $13,133,000 of deposits in
      denominations of $100,000 or more. Generally, deposits in excess of
      $100,000 are not federally insured. The Company does not accept brokered
      deposits.

9.    ADVANCES FROM FEDERAL HOME LOAN BANK

      Advances from the Federal Home Loan Bank consist of the following:

<TABLE>
<CAPTION>
                                                                 December 31,
                                            -------------------------------------------------------
                                                       1997                         1996
                                            -------------------------      ------------------------
                                                             Weignted                      Weighted
                                                             Interest                      Interest
Maturing Period                                Amount          Rate           Amount         Rate
                                            -----------     ---------      ------------   ----------
<S>                                         <C>             <C>            <C>            <C>  
Line of credit....................                                          $   400,000       7.23%
12 months or less.................          $ 6,600,000        6.27%         13,600,000       6.05
13 to 24 months...................            6,000,000        6.51           5,100,000       6.42
25 to 36 months...................            1,300,000        6.72           4,000,000       6.55
37 to 48 months...................            3,400,000        6.96             300,000       7.11
49 to 60 months...................              100,000        7.35           2,400,000       7.09
Thereafter........................                                              100,000       7.35
                                            -----------                     -----------
Total                                       $17,400,000                     $25,900,000
                                            -----------                     -----------
                                            -----------                     -----------

</TABLE>


      The weighted average interest rate for these advances at December 31,
      1997, and 1996 was 6.53% and 6.33%, respectively.

      As of December 31, 1997 and 1996, the Company had an unused line of credit
      of $8,592,000 and $7,363,000, respectively, with the Federal Home Loan
      Bank of Pittsburgh.

10.   REGULATORY CAPITAL REQUIREMENTS

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

      Quantitative measures established by regulation to ensure capital adequacy
      require the Company and the Bank to maintain minimum amounts and ratios
      (set forth in the table below) of tangible and core capital (as defined in
      the regulations) to total adjusted assets (as defined), and of risk-based
      capital (as defined) to risk-weighted assets (as defined). Management
      believes, as of December 31, 1997, that the Company and the Bank meet all
      capital adequacy requirements to which it is subject.

      The most recent notification to the Office of Thrift Supervision (OTS)
      categorized the Bank as well-capitalized under the regulatory framework
      for prompt corrective action. To be categorized as well-

                                       70
<PAGE>

      capitalized, the Bank must maintain minimum tangible, core and risk-based
      ratios as set forth in the table. There are no conditions or events since
      that notification that management believes have changed the institutions
      category.

      The Company's and the Bank's actual capital amounts (in thousands) and
      ratios are presented in the table below:

<TABLE>
<CAPTION>
                                                                   To be Considered
                                                                   Well Capitalized
                                                 Required for        Under Prompt
                                 Actual        Capital Adequacy       Provisions
                           -----------------   ----------------   ------------------
                           Amount      Ratio    Amount    Ratio    Amount    Ratio
<S>                        <C>         <C>     <C>        <C>     <C>        <C>
At December 31, 1997:
  Tangible
    Consolidated ....      $16,062      14.18%  $1,699     1.50%     N/A       N/A
    Bank ............       13,085      11.77    1,667     1.50      N/A       N/A
  Core (Leverage)
    Consolidated ....       16,062      14.18    3,399     3.00      5,665     5.00
    Bank ............       13,085      11.77    3,335     3.00      5,558     5.00
  Tier 1 risk-based
    Consolidated ....       16,062      26.58      N/A     N/A       3,626     6.00
    Bank ............       13,085      21.81      N/A     N/A       3,600     6.00
  Total risk-based
    Consolidated ....       16,444      27.21    4,835     8.00      6,044    10.00
    Bank ............       13,467      22.44    4,800     8.00      6,000    10.00

At December 31, 1996:
  Tangible ..........      $ 5,926       5.26%  $1,690     1.5%       N/A      N/A
  Core (Leverage) ...        5,926       5.26    3,380     3.0      $5,633     5.0%
  Tier 1 risk-based .        5,926       9.63      N/A     N/A       3,693     6.0
  Total risk-based ..        6,173      10.03    4,924     8.0       6,155    10.0
</TABLE>



      Retained earnings for financial statement purposes differs from actual
      (leverage) capital amounts by $37,000, and $42,000 at December 31, 1997
      and 1996, respectively. This difference represents the unallowed portion
      of mortgage servicing rights. Retained earnings for financial statement
      purposes differs from total risk-based capital amounts by the unallowed
      portion of mortgage servicing rights and the exclusion of the allowance
      for loan losses from the calculation.

      On May 21, 1997, the Bank entered into a supervisory agreement with the
      OTS which requires the Bank to develop, adopt and in some cases modify,
      certain policies and procedures relating to interest rate risk management,
      improvement of operating performance and capital adequacy.

      It is management's opinion, based on the Bank's compliance with all
      regulatory capital requirements and compliance with various agreements and
      directives, that no further regulatory action will be taken and that no
      adjustments to the financial statements will be required.

      At the date of the Conversion, the Bank established a liquidation account
      in an amount equal to its retained earnings. The liquidation account will
      be maintained for the benefit of eligible account holders who continue to
      maintain their accounts at the Bank after the Conversion. The liquidation
      account will be reduced annually to the extent that eligible account
      holders have reduced their qualifying deposits as of each anniversary
      date. Subsequent increases will not restore an eligible account holder's
      interest in the liquidation account. In the event of a complete
      liquidation of the Bank, each eligible account holder will be entitled to
      receive a distribution from the liquidation account in an amount
      proportionate to the current adjusted qualifying balances for accounts
      then held.

                                       71

<PAGE>

11.   INCOME TAXES

      In August 1996, the Small Business Job Protection Act (the "Act") was
      signed into law. The Act repealed the percentage of taxable income method
      of accounting for bad debts for thrift institutions effective for years
      beginning after December 31, 1995. The Act required the Company, as of
      January 1, 1996 to change its method of computing reserves for bad debts
      to the experience method. The bad debt deduction allowable under this
      method is available to small banks with assets less than $500 million.
      Generally, this method allows the Company to deduct an annual addition to
      the reserve for bad debts equal to the increase in the balance of the
      Company's reserve for bad debts at the end of the year to an amount equal
      to the percentage of total loans at the end of the year, computed using
      the ratio of the previous six years' net charge-offs divided by the sum of
      the previous six years' total outstanding loans at year end.

      A thrift institution required to change its method of computing reserves
      for bad debts treats such change as a change in a method of accounting
      determined solely with respect to the "applicable excess reserves" of the
      institution. The amount of the applicable excess reserves is taken into
      account ratably over a six-taxable year period, beginning with the first
      taxable year beginning after December 31, 1995. For financial reporting
      purposes, the Company will not incur any additional tax expense due to
      previously provided deferred taxes. At December 31, 1997 under SFAS No.
      109, deferred taxes were provided on the difference between the book
      reserve at December 31, 1997 and the applicable excess reserve in the
      amount equal to the Company's increase in the tax reserve from December
      31, 1987 to December 31, 1997. Retained earnings at December 31, 1997 and
      1996 includes approximately $1,300,000 representing bad debt deductions
      for which no deferred income taxes have been provided.

                                       72

<PAGE>


Income tax expense (benefit) consists of the following components:

<TABLE>
<CAPTION>

                                                                      Year Ended December 31,
                              ------------------------------------------------------------------------------------------------------
                                              1997                              1996                               1995
                              ---------------------------------- ----------------------------------  -------------------------------
                                 Federal      State      Total     Federal      State       Total      Federal     State     Total

<S>                           <C>         <C>         <C>        <C>         <C>         <C>         <C>        <C>        <C>      
Current tax provision.......  $  (8,400)  $  (1,900)  $  10,300) $ (96,200)  $ (22,800)  $(119,000)  $ 172,670  $  42,000  $ 214,670

Deferred tax provision......                                        50,000                  50,000      50,000                50,000
                              ---------   ---------   ---------  ---------   ---------   ---------   ---------  ---------  ---------

Total.......................  $  (8,400)  $  (1,900)  $  10,300) $ (46,200)  $ (22,800)  $ (69,000)  $ 222,670  $  42,000  $ 264,670
                              ---------   ---------   ---------  ---------   ---------   ---------   ---------  ---------  ---------
                              ---------   ---------   ---------  ---------   ---------   ---------   ---------  ---------  ---------

</TABLE>


      The Company's provision (benefit) for income taxes differs from the
amounts determined by applying the statutory federal income tax rate to income
before income taxes for the following reasons:

<TABLE>
<CAPTION>

                                                                                       December 31,
                                                    -------------------------------------------------------------------------------
                                                            1997                          1996                       1995
                                                    -----------------------        ----------------------     ---------------------
                                                    Amount       Percentage        Amount      Percentage     Amount     Percentage

<S>                                             <C>                <C>          <C>             <C>         <C>            <C>   
Tax at federal tax rate........................ $  (8,593)         (35.0)%      $ (57,239)      (35.0)%     $ 239,607      35.0 %
Increase (decrease) resulting from:
  Benefit of surtax exemption..................       246            1.0            1,635         1.0          (6,845)     (1.0)
  State income taxes, net of federal
    income tax benefit.........................    (1,254)          (5.1)         (15,048)       (9.2)         27,720       4.1
  Other........................................      (699)          (2.8)           1,652         1.0           4,188       0.6
                                                ---------          -----        ---------        ----       ---------      ----  

Total.......................................... $ (10,300)         (41.9)%      $ (69,000)       42.2 %     $ 264,670      38.7 %
                                                ---------          -----        ---------        ----       ---------      ----  
</TABLE>

                                        73

<PAGE>






      Items that give rise to significant portions of the deferred tax accounts
at December 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                             December 31,
                                                     ---------------------------
                                                      1997               1996

<S>                                                   <C>             <C>      
Deferred tax assets:
  Deferred loan fees................................  $ 233,526       $ 260,120
  Reserve for bad debts.............................     63,840
  Other.............................................     14,730          73,455
                                                       --------        -------- 


           Total deferred tax assets................    312,096         333,575
                                                       --------        -------- 


Deferred tax liabilities:

  Reserve for bad debts.............................                    (28,240)
  Property..........................................     (8,404)         (3,417)
  Mortgage servicing rights.........................   (126,263)       (124,412)
                                                       --------        -------- 


           Total deferred tax liabilities...........   (134,677)       (156,069)
                                                       --------        -------- 
                                                       

Net deferred tax assets.............................  $ 177,429       $ 177,506
                                                      ---------       ---------
                                                      ---------       --------- 
</TABLE>








12.                        EMPLOYEE BENEFITS

      Pension Plan

      The Company has a noncontributory defined benefit pension plan which
covers all eligible employees.

      Net pension expense included the following components:

<TABLE>
<CAPTION>

                                                                December 31,
                                                  -------------------------------------
                                                     1997          1996          1995

<S>                                               <C>           <C>           <C>      
Service cost - benefits earned during the year..  $  62,681     $  69,168     $  65,980
Interest cost on projected benefit obligation...     60,266        59,198        55,891
Actual return on assets.........................    (55,469)      (29,910)     (116,479)
Net amortization of transition costs............    (14,376)      (47,717)       49,776
                                                  ---------     ---------     ---------

Net pension expense.............................  $  53,102     $  50,739     $  55,168
                                                  ---------     ---------     ---------

</TABLE>

                                      74

<PAGE>



      The following table sets forth the aggregate funded status of the pension
plan for the years ended:

<TABLE>
<CAPTION>

                                                              December 31,
                                                       -------------------------
                                                            1997         1996

<S>                                                     <C>           <C>      
Actuarial present value of benefit obligation:

  Vested..............................................  $ 653,317     $ 545,453
  Nonvested...........................................     15,998        22,727
                                                        ---------     ---------

Total accumulated benefit obligation..................  $ 669,315     $ 568,180
                                                        ---------     --------- 
                                                        ---------     ---------

Plan assets at fair value.............................    970,808       950,845
Projected benefit obligation..........................   (966,140)      928,292
                                                        ---------     --------- 

Projected benefit obligation less than plan assets....      4,668        22,553
Unrecognized:
  Net gain from past experience.......................   (132,423)      (95,462)
  Net transition asset................................    (20,923)      (22,667)
                                                        ---------     --------- 

Accrued pension liability.............................  $(148,678)    $ (95,576)
                                                        ---------     --------- 
                                                        ---------     ---------
</TABLE>



      The projected benefit obligation was determined using a weighted average
      assumed discount rate of 7% and a rate of compensation increase of 4.25%.
      The expected weighted average long-term rate of return of plan assets is
      7%. Assumed average remaining service lives of employees is approximately
      22 years.

      The type of assets held by the plan are general trust investments
      including cash equivalents, fixed income assets, group annuities and stock
      mutual funds.

      The Company terminated the pension plan on December 17, 1997, ceasing
      benefit accruals as of January 15, 1998. The Company plans to distribute
      excess funds pro rata to the participants.

      Deferred compensation agreements are in effect with certain members of the
      Board of Directors. Payment of Director fees is being deferred until
      retirement. For the years ended December 31, 1997, 1996 and 1995, $11,718,
      $11,590 and $15,348, respectively, of fees were deferred under these
      agreements.

      401(k) Plan

      The Company instituted a 401(k) plan beginning in 1997. The plan covers
      all full-time employees of the Company and provides for pre-tax
      contributions by the employees with matching contributions of 25% of the
      first 2% of each employee's contribution. The Company incurred $4,611 in
      401(k) expense for the year-ended December 31, 1997.

      Common Stock Acquired by the Employee Stock Ownership Plan

      In connection with the Conversion, the Company established an ESOP for the
      benefit of eligible employees. The Company purchased 92,560 shares of
      common stock on behalf of the ESOP in the Conversion. At December 31,
      1997, 9,256 shares of the total ESOP were committed to be released with
      none allocated to participants. The Company accounts for its ESOP in
      accordance with AICPA Statement of Position 93-6 "Employers Accounting for
      Employee Stock Ownership Plans," which requires the Company to recognize
      compensation expense equal to the fair value of the ESOP shares during the
      periods in which they become committed to be released. To the extent that
      the fair value of the ESOP shares differs from the cost of such shares,
      this differential will be charged or credited to equity as additional paid
      in capital. Management expects the recorded amount of expense to fluctuate
      as continuing

                                      75


<PAGE>

      adjustments are made to reflect changes in the fair value of the ESOP
      shares. The Company recorded compensation and employee benefit expense
      related to the ESOP of $92,560 for the year ended December 31, 1997.

13.   CONCENTRATION OF CREDIT RISK

      Most of the Company's lending activity is with customers located within
      the state of Delaware. Generally, the loans are secured by real estate
      consisting of single-family residential properties. The ultimate repayment
      of these loans is dependent to a certain degree on the local economy.

14.   FAIR VALUE OF FINANCIAL INSTRUMENTS

      The following disclosure of the estimated fair value of financial
      instruments is made in accordance with the requirements of SFAS No. 107,
      Disclosures About Fair Value of Financial Instruments. The estimated fair
      value amounts have been determined by the Company using available market
      information and appropriate valuation methodologies. However, considerable
      judgment is necessarily required to interpret market data to develop the
      estimates of fair value. Accordingly, the estimates presented herein are
      not necessarily indicative of the amounts the Company could realize in a
      current market exchange. The use of different market assumptions and/or
      estimation methodologies may have a material effect on the estimated fair
      value amounts.

<TABLE>
<CAPTION>

                                                             December 31,
                                             ---------------------------------------------
                                                     1997                   1996
                                             ---------------------  ----------------------
                                             Carrying   Estimated   Carrying   Estimated
                                              Amount    Fair Value   Amount    Fair Value
                                                (in thousands)         (in thousands)

<S>                                           <C>        <C>        <C>        <C>    
Assets:
  Cash and cash equivalents.................  $15,200    $15,200    $ 2,643    $ 2,643
  Investment securities available for sale..    2,500      2,500      6,476      6,476
  Mortgage-backed securities available
    for sale................................    1,901      1,901        203        203
  Loans, net................................   88,933     89,949     98,042     99,570

Liabilities:

  Demand deposits and passbook accounts.....    3,558      3,558      3,418      3,418
  Money market accounts.....................    8,532      8,532      8,246      8,246
  Savings certificates......................   64,793     65,187     66,745     67,391
  Advances from Federal Home Loan Bank......   17,400     17,523     25,900     26,024

</TABLE>

      Cash and Cash Equivalents - For cash and cash equivalents, the carrying
      amount is a reasonable estimate of fair value.

      Investments and Mortgage-backed Securities - The fair value of investment
      securities and mortgage-backed securities (including collateralized
      mortgage obligations) is based on quoted market prices or dealer quotes.

      Loans Receivable - The fair value of loans is estimated based on present
      value using approximate current entry-value interest rates applicable to
      each category of such financial instruments.

      Loans Held for Sale - The fair value of loans held for sale is based upon
      commitment prices from the Federal Home Loan Mortgage Corporation.


                                      76

<PAGE>

      Demand Deposits, Passbook Accounts, Money Market Accounts, and Savings
      Certificates - The fair value of demand deposits, passbook accounts and
      money market accounts is the amount reported in the financial statements.
      The fair value of savings certificates is based on a present value
      estimate using rates currently offered for deposits of similar remaining
      maturity.

      Advances from Federal Home Loan Bank - The fair value of advances is based
      on a present value estimate using rates currently offered for Federal Home
      Loan Bank borrowings of similar remaining maturity.

      Commitments to Extend Credit - The majority of the Company's commitments
      to extend credit carry current market interest rates if converted to
      loans. Because commitments to extend credit are generally unassignable by
      either the Company or the borrower, they only have value to the Company
      and the borrower. The estimated fair value approximates the recorded
      deferred fee amounts, which are insignificant.

      The fair value estimates presented herein are based on pertinent
      information available to management as of the date indicated. Although
      management is not aware of any factors that would significantly affect the
      estimated fair value amounts, such amounts have not been comprehensively
      revalued for purposes of these financial statements since the dates
      indicated and, therefore, current estimates of fair value may differ
      significantly from the amounts presented herein.

15.   SAVINGS ASSOCIATION INSURANCE FUND

      On September 30, 1996, an omnibus appropriations bill for fiscal year
      1996, which included recapitalization of the Savings Association Insurance
      Fund (SAIF) became law. Accordingly, all SAIF insured depository
      institutions were charged a one-time special assessment based on their
      SAIF-assessable deposits as of March 31, 1995 at the rate of 65.7 basis
      points. Accordingly, the Company incurred a pre-tax expense of $491,992
      during the third quarter of 1996.


                                      77

<PAGE>


16. PARENT COMPANY FINANCIAL INFORMATION

Financial statements of Delaware First Financial Corporation are as follows:

                        Statement of Financial Condition
                               December 31, 1997
                                    ($000's)
<TABLE>
<CAPTION>



<S>                                                         <C>     
Assets:

Interest-bearing deposits.................................. $  2,145
Investment in subsidiary bank..............................   13,954
Other assets...............................................        1
                                                            --------

Total assets............................................... $ 16,100
                                                            --------
                                                            --------

Liabilities and Stockholders' Equity:

Other liabilities.......................................... $      2
Stockholders' equity:
  Preferred stock
  Common stock.............................................       12
  Additional paid in capital...............................   10,966
  Common stock acquired by the ESOP........................     (833)
  Unrealized loss on available for sale securities.........       (1)
  Retained earnings........................................    5,954
                                                            --------

Total stockholders' equity.................................   16,098
                                                            --------

Total liabilities and stockholders' equity................. $ 16,100
                                                            --------
                                                            --------
</TABLE>




                             Statement of Operations
   Period September 23, 1997 (date of incorporation) through December 31, 1997
                                    ($000's)
<TABLE>
<CAPTION>

<S>                                                         <C>  
Operating expenses........................................      $  1
                                                            --------
Net loss..................................................      $ (1)
                                                            --------
                                                            --------
</TABLE>

                                      78


<PAGE>

                            Statement of Cash Flows
  Period September 23, 1997 (date of incorporation) through December 31, 1997
                                    ($000's)


<TABLE>
<CAPTION>

<S>                                                           <C>      
OPERATING ACTIVITIES:

  Net loss

  Adjustments to reconcile net loss to net cash.............. $     (1)
    (used in) provided by operating activities:
    Increase in other assets.................................       (1)
    Increase in other liabilities............................        2
    Amortization of common stock acquired by ESOP............       93
                                                              --------

           Net cash provided by operating activities......... $     93
                                                              --------
                                                              --------

INVESTING ACTIVITIES:

  Purchase of common stock of subsidiary..................... $ (8,000)
                                                              --------

           Net cash used in investing activities............. $ (8,000)
                                                              --------
                                                              --------

FINANCING ACTIVITIES:

  Net proceeds from issuance of common stock................. $ 10,978
  Common stock acquired by stock benefit plans...............     (926)
                                                              --------

           Net cash provided by financing activities......... $ 10,052
                                                              --------
                                                              --------

NET INCREASE IN CASH......................................... $  2,145

CASH, BEGINNING OF PERIOD....................................     --
                                                              --------
CASH, END OF PERIOD.......................................... $  2,145
                                                              --------
                                                              --------
</TABLE>









                                     ******
                                       79

<PAGE>

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

                  Not Applicable.


                                    PART III


ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; 
        COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

MANAGEMENT OF THE COMPANY

                  The Board of Directors of the Company ("Board") consists of
the same individuals who serve as directors of the Company's subsidiary,
Delaware First Bank. The Company's Certificate of Incorporation and Bylaws
require that directors be divided into three classes, as nearly equal in number
as possible. Each class of directors serves for a three-year period, with
approximately one-third of the directors elected each year. Officers will be
elected annually by the Board and serve at the Board's discretion.

MANAGEMENT OF DELAWARE FIRST BANK

         DIRECTORS AND EXECUTIVE OFFICERS. The Savings Bank's Board of Directors
("Savings Bank Board") is composed of eight members each of whom serves for a
term of three years. The Savings Bank's Federal Stock Charter and Bylaws require
that directors be divided into three classes, as nearly equal in number as
possible. Each class of directors serves for a three-year 


                                       80

<PAGE>


period, with approximately one-third of the directors elected each year.
Executive officers are elected annually by the Savings Bank Board and serve at
the Savings Bank Board's discretion.

         The following table sets forth information with respect to the Savings
Bank's directors and executive officers.

<TABLE>
<CAPTION>


                                Age at                                               Current 
                               March 31,                               Director       Term
               Name              1998         Position                   Since       Expires
               ----              ----         --------                   -----       -------

<S>                               <C>        <C>                          <C>        <C> 
Dr. William R. Baldt              62         Director                     1988       1998
J. Bayard Cloud                   85         Chairman                     1945       1999
Thomas B. Cloud                   49         Director                     1972       2000
Ronald P. Crouch                  49         President, Chief Executive   1983       1998
                                             Officer and Director
Larry D. Gehrke                   52         Director                     1988       2000
Alan B. Levin                     43         Director                     1993       1999
Ernest J. Peoples                 65         Vice Chairman                1964       1998
Dr. Robert L. Schweitzer          48         Director                     1997       2000

</TABLE>


OTHER EXECUTIVE OFFICERS

<TABLE>
<CAPTION>


                          Age at
                         March 31, 
      Name                 1998                  Position

<S>                          <C>    <C>
Jerome P. Arrison            46     Executive Vice President, Chief Operating
                                    Officer and Treasurer

Genevieve B. Marino          32     Vice President, Retail Banking Services

Lori N. Richards             35     Vice President, Finance and Administration

</TABLE>

         The principal occupation and business experience of each of the
directors is set forth below. Unless otherwise noted, the information applies
for the past five years. There are no arrangements or understandings between the
Savings Bank and any person pursuant to which such person has been elected as a
director.


                                       81

<PAGE>


         DR. WILLIAM R. BALDT is currently President Emeritus of Goldey-Beacom
College in Wilmington, Delaware. Until August 30, 1996, he was the President of
the college.

         J. BAYARD CLOUD has been Chairman of the Board since January 1, 1983.
He previously served as President of the Savings Bank from 1961 to 1982. He is
the father of Thomas B. Cloud.

         THOMAS B. CLOUD, since December 1, 1995, has been President and 
Chief Executive Officer of United Electric Supply Company, Inc. where he has 
been employed since 1973 in various capacities including Controller, Vice 
President of Finance and Chief Financial Officer and Executive Vice 
President. The firm employs over 190 individuals and distributes electric 
products to industrial, institutional and electrical construction customers 
in a five state area. Mr. Cloud is the son of J. Bayard Cloud.

         RONALD P. CROUCH currently serves as President and Chief Executive
Officer of the Savings Bank, a position he has held since 1983. Mr. Crouch is a
Certified Public Accountant and served as a director of the Federal Home Loan
Bank of Pittsburgh from 1989 to 1996. He is a trustee of Goldey-Beacom College.

         LARRY D. GEHRKE is a director and Vice President of Bellevue Holding
Company of Wilmington, Delaware, a real estate development concern. He has been
employed there since 1972. He holds real estate brokerage licenses from the
State of Delaware and the Commonwealth of Pennsylvania.

         ALAN B. LEVIN is Chairman, President and Chief Executive Officer of
Happy Harry's, Inc., a privately held pharmacy chain in Delaware with
approximately 1,100 employees. He is a member of the Delaware Bar and a former
chairman of the Delaware Workforce Development Council and Delaware Private
Industry Council. He was formerly a member of the State Attorney General's
Office in Delaware.

         ERNEST J. PEOPLES is the Vice Chairman of the board. He was a Vice
President of the Savings Bank. He is retired and was formerly an owner of a
building and construction firm.

         DR. ROBERT W. SCHWEITZER is Professor of Finance at the University of
Delaware, located in Newark, Delaware. He also serves as a faculty member of the
Stonier School of Banking and the National School of Banking at Fairfield
University.


                                       82

<PAGE>


EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS

         The following executive officers do not serve on the Savings Bank
Board. There are no arrangements or understandings between the Savings Bank and
any person pursuant to which such person serves as an executive officer. Except
as otherwise noted, they have been employed by the Savings Bank for the last
five years.

         JEROME P. ARRISON has been employed by the Savings Bank since August
1989. He is currently the Chief Operating Officer, Executive Vice President and
Treasurer.

         GENEVIEVE B. MARINO joined the Savings Bank in November 1995 as the
Director of Marketing and Communications. She assumed her current position, Vice
President of Retail Banking Services, in July 1997. From November 1993 to
November 1995 she was the Advertising and Communications Manager of Wilmington
Savings Fund Society, FSB. Prior to that, she served in other capacities in the
Wilmington Savings Fund Society marketing department.

         LORI N. RICHARDS assumed her current position as Vice President of
Finance and Administration in July 1997. From June 1996 to July 1997 she was the
Controller of the Savings Bank. From September 1994 to June 1996 she was an
accounting supervisor at Lanxide Corporation located in Newark, Delaware. From
May 1991 to September 1994 she served as a senior financial accountant at TA
Instruments, Inc. in New Castle, Delaware. She is a Certified Public Accountant.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         Section 16(a) of the Exchange Act requires the officers and directors,
and persons who own more than 10% of the Company's common stock to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc. Officers,
directors and greater than 10% stockholders are required by regulation to
furnish the Company with copies of all Section 16(a) forms they file. The
Company knows of no person who owns 10% or more of the Company's Common Stock.

         Based solely on review of the copies of such forms furnished to the
Company, or written representations from its officers and directors, the Company
believes that during, and with respect to, 1997, the Company's officers and
directors complied in all respects with the reporting requirements promulgated
under Section 16(a) of the Exchange Act.

BOARD MEETINGS AND COMMITTEES

         The Board of Directors conducts its business through meetings and
activities of its committees. During the year ended December 31, 1997, the Board
of Directors held 12 regular meetings. No director attended fewer than 75% of
the total meetings of the Board of Directors and committees on which such
director served during the year ended December 31, 1997, except 


                                       83

<PAGE>


for Mr. Levin who attended 52% of such meetings. The standing committees of the
Board include the following:

         EXECUTIVE COMMITTEE. The Executive Committee meets as needed. It makes
recommendations to the full Board and acts on policies adopted by the full Board
in the absence of the meeting of the entire full Board. The committee did not
meet during the year ended December 31, 1997. The committee is composed of
Messrs. Peoples (Chairman), J. Bayard Cloud, Thomas Cloud and Crouch.

         APPRAISAL COMMITTEE. The Appraisal Committee consists of Messrs.
Peoples (Chairman), J. Bayard Cloud and Gehrke. The members of the committee
review the appraisals of the real estate collateral for certain loans. The
Appraisal Committee met four times in 1997.

         PERSONNEL COMMITTEE. The Personnel Committee reviews and prepares
recommendations for annual salary adjustment and bonuses. The committee also
administers the Savings Bank's various benefit plans. It consists of Messrs.
Gehrke (Chairman), Levin and Dr. Schweitzer. The committee met four times during
1997.

         BUDGET COMMITTEE. The Budget Committee is responsible for determining
the capital needs of the Savings Bank and making recommendations regarding how
those needs may be satisfied. The Budget Committee met once during 1997. It
consists of Dr. Baldt (Chairman) and Messrs. Gehrke and Crouch.

         AUDIT COMMITTEE. The Audit Committee meets with the Company's
independent certified public accountants annually to review the results of the
annual audit and other related matters. This committee consists of Dr. Baldt
(Chairman) and Messrs. Peoples and Levin. It met twice during 1997.

         ASSET/LIABILITY COMMITTEE. The Asset/Liability Committee was
established in 1997 and currently meets monthly. It consists of Messrs. Thomas
Cloud (Chairman), Levin, Crouch and Dr. Schweitzer. It is principally
responsible for management of the Company's interest rate risk.


                                       84

<PAGE>


Item 10. Executive Compensation

         Summary Compensation Table. The Company has not yet paid separate
compensation to its directors and officers. The following table sets forth a
summary of certain information concerning the compensation paid by the Savings
Bank for services rendered in all capacities during the year ended December 31,
1997, 1996 and 1995 to the President and Chief Executive Officer and the
Executive Vice President and Chief Operating Officer. No other executive
officers of the Company or the Savings Bank had total annual compensation in
excess of $100,000 during fiscal 1997.

<TABLE>
<CAPTION>


                                             Annual Compensation                       Long-Term
                                                                                      Compensation
                                         -------------------------------------   --------------------
                                                                    Other         Restricted             
          Name and                                                  Annual            Stock                    All Other
      Principal Position      Year       Salary       Bonus     Compensation(1)      Awards     Options    Compensation(2)
--------------------------    ----       --------    -------    --------------    -----------   -------    ---------------
 <S>                          <C>        <C>          <C>            <C>               <C>        <C>       <C>    
  Ronald P. Crouch            1997       $120,000     $     0        $     0           $0          0            $11,341
  President and Chief         1996        116,595      11,132         12,873            0          0                  0
   Executive Officer          1995        110,682       5,853         11,349            0          0                  0
--------------------------    ----       --------     -------    --------------    -----------  -------    ---------------

  Jerome P. Arrison           1997       $101,000      $    0        $     0           $0          0             $11,341
  Executive Vice              1996         96,606       8,921         12,840            0          0                   0
  President and Chief         1995         88,581       4,695         10,199            0          0                   0
  Operating Officer
--------------------------    ----        --------     -------   --------------    -----------  -------    ---------------

</TABLE>
---------------
(1)    Amounts reflect the Savings Bank's contribution to its defined
       contributory pension plan on behalf of the employee during 1996. Annual
       compensation does not include amounts attributable to other miscellaneous
       benefits received by the executive officers. The costs to the Savings 
       Bank of providing such other miscellaneous benefits during fiscal 1997
       did not exceed the lesser of $50,000 or 10% of the total salary and bonus
       paid to or accrued for the benefit of such individual executive officer.

(2)    Consists of amounts allocated during the year ended December 31, 1997 on
       behalf of each individual pursuant to the ESOP.

         Bonus Compensation. The Savings Bank has a bonus compensation plan
pursuant to which officers can receive bonus compensation up to 20% of their
salaries if certain performance goals are met at the discretion of the Board of
Directors. During 1997, Mr. Crouch and Mr. Arrison did not receive bonuses.

         401(k) Plan. In 1997, the Savings Bank established a contributory
savings plan for employees which meets the requirements of Section 401(k) of the
Code. All employees who are at least 21 years old and who have completed at
least one year of service may elect to contribute a percentage of their
compensation to the plan each year subject to certain maximums imposed by


                                       60
<PAGE>


federal law. The Savings Bank matches 25% of each employee's contribution, on
the first 2% of that employee's contribution.

Participants are fully vested in the amounts they contribute to the 401(k).
Participants are fully vested in amounts contributed to the plan on their behalf
by the Savings Bank as employer matching contributions after seven years of
service. Benefits under the 401(k) plan are payable in the event of a
participant's retirement, death, disability, or termination of employment.
Normal retirement age under the 401(k) plan is 65 years of age.

         Pension Plan. The Savings Bank terminated its noncontributory
tax-qualified defined pension benefit plan effective December 17, 1997. The
excess funds will be distributed pro rata to the participants.

         Employee Stock Ownership Plan. The Savings Bank has established an
employee stock ownership plan (the "ESOP") to allow participating employees to
share in its growth and profits. Participating employees are all employees who
have completed one year of service with the Savings Bank and have attained the
age of 21.

         The ESOP is funded by tax-deductible contributions made by the Savings
Bank in cash or common stock. All contributions to the ESOP will be held in the
trust which is part of the ESOP and will be invested primarily in Savings Bank
stock.

         To receive an allocation, a participant must be credited with at least
1,000 hours of service during the year and be employed by the Savings Bank on
the last day of the year, or have terminated employment during the year as a
result of death, disability (as defined in the ESOP) or retirement at or after
attaining age 65. A participant becomes vested in his account balance as
follows: after 1 year of service - 20%, 2 years - 40%, 3 years - 60%, 4 years -
80%, 5 years or more - 100%. Full vesting is accelerated upon retirement at or
after age 65, death, disability, or termination of the ESOP, provided such
acceleration is not prohibited by applicable law.

         The Board of Directors has appointed the Personnel Committee to
administer the ESOP and to serve as the ESOP Committee. Wilmington Trust Company
has been engaged as the ESOP Trustee. The Personnel Committee is responsible for
administering the ESOP and for instructing the ESOP Trustee regarding the
investment of any ESOP funds which cannot be invested in Savings Bank stock.

Director Compensation

         Each of the non-employee directors is paid an annual retainer of
$2,000. Additionally, each non-employee director receives $300 for each board
meeting attended and $300 for each committee meeting attended. The maximum fee
for meetings attended for any director is $300 per day so that if both a board
and committee meeting are held on the same day the 


                                       61
<PAGE>


maximum payment for attendance is $300. Mr. Crouch receives no fees for his
services on the board.

         J. Bayard Cloud, the Chairman of the Board, receives a special retainer
of $28,800 per year and Ernest J. Peoples, the Vice Chairman, receives a special
retainer of $27,000 per year. These retainers are paid based on their service as
Chair and Vice Chair of the Board and for their review of appraisals.
Additionally, a supplemental pension benefit is paid to J. Bayard Cloud. For
1997 the amount of that benefit was $15,468. Wilmington wage tax is also paid
for all non-employee directors. This tax is currently 1.25% of gross earnings.
Wilmington wage withholding for 1997 was $1,183. Total aggregate fees paid to
the current directors for the year ended December 31, 1997 were $117,915.

Deferred Non-employee Director Compensation Program

         The Savings Bank has a deferred non-employee director compensation
program, whereby directors may defer their fees. Currently, Dr. Baldt and Mr.
Gehrke participate in this program. Pursuant to this program, directors defer
their fees until their retirement or resignation from the Board of Directors.
For the year ended December 31, 1997, $8,101 of fees were deferred pursuant to
this program. Fees deferred pursuant to this program are subject to the general
rights of the Bank's creditors.

Item 11. Security Ownership of Certain Beneficial Owners and Management

         The following table sets forth, as of March 31, 1998, certain
information as to the common stock of the Company beneficially owned by (i) each
person or entity, including any "group" as that term is used in Section 13(d)(3)
of the Exchange Act, who or which was known to the Company to be the beneficial
owner of more than 5% of the issued and outstanding Common Stock, (ii) the
directors of the Company, (iii) those executive officers of the Company whose
salary and bonus exceeded $100,000 in fiscal 1997, and (iv) all directors and
executive officers of the Company and the Savings Bank as a group.


                                       62
<PAGE>

<TABLE>
<CAPTION>

                                          Amount and Nature
      Name of Beneficial                   of Beneficial          Percent of
     Owner or Number of                    Ownership as of          Common 
      Persons in Group                     March 31, 1998(1)         Stock
     -------------------                   ----------------       ----------
<S>                                         <C>                     <C> 
Delaware First Financial Corporation        83,304(2)               7.2%
  Employee Stock Ownership Plan
   and Trust
  400 Delaware Avenue
  Wilmington, Delaware 19801

Jeffrey L. Gendell, et al.                 114,500(5)               9.9
  200 Park Avenue
  Suite 3900
  New York, New York 10166

Directors:
                                                                   *

Dr. William R. Baldt                         1,000                 *
J. Bayard Cloud                              1,000                 *
Thomas B. Cloud                              6,154                 *
Ronald P. Crouch                             3,284(3)              *
Larry D. Gehrke                              5,000                 *
Alan B. Levin                                1,500                 *
Ernest J. Peoples                            1,000                 *

Executive Officer:

Jerome P. Arrison                            1,234(4)              *


All directors and executive officers of the 
 Company and the Savings Bank as a group
 (11 persons)                               25,074               2.2

</TABLE>

                                                  (Footnotes on following page)

                                       63
<PAGE>
-----------------
* Represents less than 1% of the outstanding Common Stock.

    (1)    Based upon filings made pursuant to the Exchange Act and information
           furnished by the respective individuals. Under regulations
           promulgated pursuant to the Exchange Act, shares of the Company's
           common stock are deemed to be beneficially owned by a person if he or
           she directly or indirectly has or shares (i) voting power, which
           includes the power to vote or to direct the voting of the shares, or
           (ii) investment power, which includes the power to dispose or to
           direct the disposition of the shares. Unless otherwise indicated, 
           the named beneficial owner has sole voting and dispositive power with
           respect to the shares.

   (2)     The Delaware First Financial Corporation Employee Stock Ownership
           Plan Trust ("Trust") was established pursuant to the Delaware First
           Financial Corporation. Employee Stock Ownership Plan ("ESOP") by an
           agreement between the Company and Wilimington Trust Company who acts
           as trustee of the plan ("Trustee"). As of March 31, 1998, 9,256
           shares held in the Trust have been allocated to the accounts of
           participating employees. The 83,304 unallocated shares held in the
           Trust as of March 31, 1998 will be voted by the Trustee in accordance
           with its fiduciary duty as Trustee. The amount of Common Stock
           beneficially owned by all directors and executive officers as a group
           does not include the shares held by the Trust.

   (3)     Includes 1,134 shares of the Company's common stock allocated to Mr.
           Crouch under the ESOP which the Trustees will vote in accordance with
           Mr. Crouch's instructions.

   (4)     Includes 1,134 shares of the Company's common stock allocated to Mr.
           Arrison under the ESOP which the Trustees will vote in accordance
           with Mr. Arrison's instructions.

   (5)     Mr. Gendell is the managing member of Tontine Management, L.L.C., a
           limited liability company organized under the laws of the State of
           Delaware ("TM") and Tontine Overseas Associates, L.L.C., a limited
           liability company organized under the laws of the State of Delaware
           ("TOA"). TM is the general partner of Tontine Financial Partners,
           L.P., a Delaware limited partnership ("TFP"). TOA serves as the
           investment manager to TFP Overseas Funds, Ltd., a company organized
           under the laws of the Cayman Islands ("TFPO"). TFP and TFPO directly
           own 93,750 and 20,750 shares of the Company's common stock,
           respectively. The business address of Mr. Gendell and TM, TOA, TFP
           and TFPO is 200 Park Avenue, Suite 3900, New York, New York 10166.


                                       64
<PAGE>


Item 12. Certain Relationships and Related Transactions

           The Company offers loans to its directors and officers. These loans
are currently made in the ordinary course of business with the same collateral,
interest rates and underwriting criteria as those of comparable transactions
prevailing at the time and do not involve more than the normal risk of
collectibility or present other favorable features. Under current law, the
Company's loans to directors and executive officers are required to be made on
substantially the same terms, including interest rates, as those prevailing for
comparable transactions and must not involve more than the normal risk of
repayment or present other favorable features. Additionally, all loans to such
persons must be approved in advanced by a disinterested majority of the Board of
Directors. At December 31, 1997, the Company's loans to directors and executive
officers totalled approximately $511,000, or 3.2% of the Company's retained
earnings at that date.

Item 13. Exhibits, List and Reports on Form 8-K

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


No.               Exhibits
---               ---------
3.1               Certificate of Incorporation of the Company.*
3.2               Bylaws of the Company.*
4.0               Stock Certificate of the Company.*
21.0              List of Subsidiaries.*
27.0              Financial Data Schedule.
----------------
*Incorporated herein by reference from the Company's Registration Statement on
Form SB-2 filed with the SEC on September 26, 1997.

(b) Reports filed on Form 8-K.

    None.


                                       65
<PAGE>



                                   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.


                                       DELAWARE FIRST FINANCIAL CORPORATION



                                       By: /s/ Ronald P. Crouch
                                          ------------------------------------
                                           Ronald P. Crouch
                                           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/ Ronald P. Crouch                            April 14, 1998
  ------------------------------
   Ronald P. Crouch
   President, Chief Executive
    Officer and Director


     /s/ J. Bayard Cloud                             April 14, 1998
  ------------------------------
   J. Bayard Cloud
   Chairman of the Board



                                       66
<PAGE>



  /s/ Ernest J. Peoples                                April 14, 1998
  ------------------------------
   Ernest J. Peoples
   Vice Chairman of the Board


  /s/ William R. Baldt
  ------------------------------                       April 14, 1998
   Dr. William R. Baldt
   Director


  /s/ Thomas B. Cloud
  ------------------------------                       April 14, 1998
   Thomas B. Cloud
   Director


  /s/ Larry D. Gehrke
  -----------------------------                        April 14, 1998
   Larry D. Gehrke
   Director


  -----------------------------                        April   , 1998
   Alan B. Levin                                  
   Director                                       
                                                  

   /s/ Dr. Robert L. Schweitzer   
   ----------------------------                        April 14, 1998
   Dr. Robert L. Schweitzer                       
   Director                                       
                                                  
 
   /s/ Jerome P. Arrison
   ----------------------------                        April 14, 1998
   Jerome P. Arrison                           
   Executive Vice President, Chief Operating Officer
   and Treasurer
   (principal financial officer)


   /s/ Lori N. Richards
   ----------------------------                        April 14, 1998
   Lori N. Richards
   Vice President, Finance and Administration
   (principal accounting officer)




                                       67