UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-KSB

[ X ]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended December 31, 1997

                                       OR

[    ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________ to _________________

Commission file number 33-71712
                       --------

                            FIRST LEHIGH CORPORATION
              ----------------------------------------------------
              (Exact name of small business issuer in its charter)

           Pennsylvania                                           23-2218479
-------------------------------                              -------------------
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

1620 Pond Road, Allentown, Pennsylvania                            18104
----------------------------------------                         ----------
(Address of principal executive offices)                         (Zip code)

Issuer's telephone number: (610) 398-6660
                           --------------

Securities registered under Section 12(b) of the Act:  None.
Securities registered under Section 12(g) of the Act:  None.

    Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 will not 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. [N/A]

    Issuer's revenues for its most recent fiscal year:  $7,806,000.
                                                        ----------

    The aggregate market value of the common stock of the Registrant held by
non-affiliates of the Registrant as of March 20, 1997 is $5,477,700 based upon a
per share average bid and actual prices of $7.50 on such date.

    State the number of shares outstanding of each of the Registrant's classes
of common stock as of the latest practicable date: 2,050,000 shares of Common
Stock, par value $.01 per share, as of March 20, 1998.

Documents incorporated by reference:  None.

Transitional Small Business Disclosure Format (check one):  Yes |_|  No |X|


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                                     Part I

Item 1.  Description of Business.

         (a) Business Development.

         First Lehigh Corporation (the "Company") was incorporated under
Pennsylvania law in 1982 and is registered as a bank holding company under the
Bank Holding Company Act of 1956 (the "Holding Company Act"). The Company
provides financial and managerial resources and services to, and coordinates and
evaluates the activities of, First Lehigh Bank (the "Bank") and the Bank's
subsidiaries. Through the Bank, the Company provides a wide range of financial
services, principally to consumers and small- to medium-size businesses in the
Lehigh Valley area of Pennsylvania.

         As of December 31, 1997, the Company had total assets of $108.7 million
and total deposits of $92.1 million.

         In recent years, the financial condition, results of operations and
business of the Company and the Bank have been adversely affected by the adverse
markets for real estate and economic conditions in its market areas during the
early 1990's. The Company and the Bank have also consented to certain regulatory
agreements that have established certain requirements, including an increased
regulatory capital requirement for the Bank, generally intended to enhance the
financial condition and operations of the Company and the Bank.

         The Bank experienced financial difficulties in the early 1990's that
resulted from problems in loan administration and controls and inadequacies in
the Bank's internal loan review functions. In order to take steps to correct
such problems, the Bank has initiated numerous actions.

         The Bank has improved its loan files by updating old loan files with
current cash flow analyses and by obtaining new appraisals on older credits.
Management of the Bank reviews all loans having a principal balance in excess of
$100,000 on an annual basis to determine whether the allowance for loan losses
is adequate. The Bank has also allocated additional staff to conduct such loan
reviews. The Bank strengthened underwriting policies by reducing collateral
emphasis by setting new minimums for cash flow coverage of debt service and by
increasing loan to value ratios. The Bank has significantly reduced the Bank's
exposure to certain types of lending, primarily loans to builder/developers, by
curtailing lending to new customers in the real estate development business and
by reducing exposure to existing customers in the real estate business.

         It is the Bank's policy for appraisals of properties held as Foreclosed
Assets to be periodically updated. The Bank has improved the appraisal process
by pre-qualifying all appraisers from prepared lists of those appraisers who are
acceptable to the Bank, with respect to which the Bank has been assisted by new
certification requirements for appraisers under state law.


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         The Bank has improved its record keeping functions by adding better
controls, formalizing written policies and internal loan grading by grading all
loans over $100,000, assigning a risk rating to each loan and adjusting loan
loss reserves to match the internal loan grading.

         (b) Business of the Company.

         First Lehigh Bank

         The Bank, which was established in 1923, engages in a full-service
commercial banking business, including accepting time and demand deposits,
making secured and unsecured commercial and consumer loans, financing
commercial transactions, and making construction and mortgage loans. Its
deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC")
to the extent provided by law. The Bank is a Pennsylvania banking institution
under the supervision of the Pennsylvania Department of Banking (the
"Department") and the FDIC.

         The Bank maintains its principal executive offices in Allentown, Lehigh
County, Pennsylvania, with five banking offices located in Pennsylvania. The
Bank's five branches are located in Walnutport and Cherryville, Northampton
County, Allentown and Bethlehem, Lehigh County. In January 1997, the Bank
received permission from the Department to open a branch in Allentown, Lehigh
County. In October 1997, the Bank sold $6.82 million of deposits of the Bank's
Quakertown Branch to Quakertown National Bank and closed its Quakertown Branch.

         Lending Activity of the Bank

         The Bank offers consumer and commercial loans to customers and
prospective customers. Commercial loans are for working capital lines of credit,
term loans to purchase equipment, fixtures or furniture, commercial mortgages to
finance investment properties, and commercial mortgages to acquire
business-owner occupied properties. The Bank writes loans at variable interest
rates or at fixed interest rates with balloon maturities. Commercial lines of
credit are usually reviewed on an annual basis while term loans and mortgages
usually mature within a five-to-seven-year period. The Bank makes commercial
loans to a wide variety of service, retail, distribution and manufacturing
companies. In the past the Bank has had a concentration of loans to real estate
developers/speculators; however, the Bank continues to significantly reduce this
concentration.

         In general, the Bank requires collateral on all commercial loans in the
form of real estate, either residential or commercial, cash, marketable
securities, accounts receivable, inventory, equipment or other fixed assets. The
Bank generally does not make loans based primarily on the accounts receivable or
inventory of a business. In general, the Bank maintains a loan-to-value ratio of
not greater than 75% (except higher amounts would be available for the most
credit worthy customers) on real estate taken as collateral. The Bank will
accept a second or third lien position on real estate assuming that the overall
loan-to-value ratio is not greater than 75% and that prior liens are not
excessive in relation to the Bank's loan.


                                       -2-

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         Commercial mortgages that have an adjustable rate feature are based
upon the base interest rate of the Bank and, in general, do not have interest
rate caps or floors. The Bank does not offer negative amortization loans. As
structured, adjustable rate commercial mortgages of the Bank are not anticipated
to present increased prepayment risks, increased default risks or, in periods of
rising interest rates, increased risks that loan rates may lag behind the Bank's
funding costs to a material extent.

         In addition to commercial loans, the Bank makes personal loans to
consumers and individuals. These loans include "bridge loans" to acquire a
residential property when the existing home remains unsold and installment loans
for the purchase of automobiles, debt consolidation or other personal purposes.
The Bank makes residential first mortgage loans for the acquisition of homes and
refinancings of mortgages in the Bank's primary market area. The Bank offers
adjustable rate residential mortgages. In general, the Bank will lend up to 80%
of the value of a borrower's home, less any prior liens. The borrower must
demonstrate the financial ability to service the loan and must have an
acceptable credit repayment history. Management of the Bank believes that these
types of loans present no undue risks or lending concentrations.

         Secured loans up to $50,000 may be approved by the individual loan
officer. Loans in excess of $150,000 must be approved by the full Board of
Directors of the Bank. Loans between $50,000 and $150,000 are approved by the
officers' loan committee and reported to the full Board of Directors of the
Bank. All loans approved by the officers' loan committee are reported to the
full Board of Directors of the Bank on a monthly basis.

         Non-Banking Subsidiaries

         The Company has a 90% ownership interest in a corporation which is a
general partner of a limited partnership. This partnership owns real estate that
is leased to the Bank. Also, the Company has six other indirect subsidiaries
that are wholly owned by the Bank. These subsidiaries primarily own real estate
that is leased to the Bank.

         Competition

         The Bank competes actively with other Lehigh Valley area commercial
banks, many of which have assets substantially greater than those of the Bank,
as well as with major banking and financial institutions headquartered
elsewhere. The Bank is generally competitive with other financial institutions
in the service area with respect to interest rates paid on time and savings
deposits, service charges on deposit accounts and interest rates charged on
loans.

         Supervision and Regulation

         Bank holding companies and banks are extensively regulated under both
federal and state law. The following discussion encompasses the material
statutory and regulatory provisions that affect the Company and the Bank. To the
extent that the following information describes

                                       -3-

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statutory and regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions.

         Bank Holding Companies. The Company is registered as a "bank holding
company" under the Holding Company Act. As a bank holding company, the Company
is subject to regulation by the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board") and is required to file with the Federal Reserve
Board an annual report and such additional information as the Federal Reserve
Board may require pursuant to the Holding Company Act. The Federal Reserve Board
will also make examinations of the Company and its subsidiaries. The Federal
Reserve Board has the authority to issue cease-and-desist orders against a bank
holding company and its non-bank subsidiaries if the Board determines that their
actions constitute a serious risk to the financial safety, soundness or
stability of the bank holding company's subsidiary bank or a violation of law.
The order may require the bank holding company and its non-bank subsidiaries to
cease the activity or may require the bank holding company to divest itself of
the non-bank subsidiary or subsidiaries.

         A bank holding company is prohibited under the Holding Company Act
from, among other things, engaging in or acquiring direct or indirect control of
more than 5% of the voting shares of any company engaged in non-banking
activities unless the Federal Reserve Board, by order or regulation, has found
such activities to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. In making determinations, the Federal
Reserve Board considers whether the performance of these activities by a bank
holding company would offer benefits to the public that outweigh possible
adverse effects. Activities found permissible as activities properly incident to
banking include, among others: operating a mortgage, finance, credit card or
factoring company; performing certain data processing operations; providing
investment and financial advice; acting as insurance agent or underwriter for
certain types of credit-related insurance; leasing personal property on a
full-payout, nonoperating basis; and, subject to certain limitations, providing
certain discount brokerage services for customers.

         Federal Reserve Board approval may be required before the Company or
its non-bank subsidiaries, if any, may begin to engage in any such activities
and before any such businesses may be acquired. The Federal Reserve Board is
empowered to differentiate between activities that are initiated by a bank
holding company or a subsidiary and activities commenced by acquisition of a
going concern. Further, under the Holding Company Act and the Federal Reserve
Board's regulations, a bank holding company and its subsidiaries are prohibited
from engaging in certain tie-in arrangements in connection with any extension of
credit or provision of credit or provision of any property or services. The
so-called anti-tie-in provisions state generally that a bank may not extend
credit, lease or sell property or furnish any service to a customer on the
condition that the customer obtain or provide additional credit or service from
or to the bank, its bank holding company or any other subsidiary of its bank
holding company, or on the condition that the customer not obtain other credit
or service from a competitor of the bank, its bank holding company or any
subsidiary of its bank holding company.


                                       -4-

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         The Holding Company Act requires the prior approval of the Federal
Reserve Board in any case where a bank holding company proposes to acquire
direct or indirect ownership or control of more than 5% of any class of voting
securities of any bank (unless it owns a majority of such bank's voting shares)
or to merge or consolidate with any other bank holding company. The Holding
Company Act further provides that the Federal Reserve Board shall not approve
any such acquisition, merger or consolidation that would have anticompetitive
effects. The Holding Company Act prohibits a bank holding company from acquiring
a bank located in another state unless such acquisition is specifically
authorized by the statutory laws of the state in which such bank is located. The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act") provides that, among other things, substantially all
state barriers to the acquisition of out-of-state bank holding companies will be
eliminated.

         Source of Strength Policy. Under the Federal Reserve Board's "source of
strength" policy, the Company is expected to act as a source of financial
strength to the Bank and to commit resources to support the Bank in
circumstances in which it might not do so absent such policy. The legality and
scope of this policy of the Federal Reserve Board is unclear in light of recent
judicial precedent. Nevertheless, the Company has sought to act as a source of
strength to the Bank in recent periods and will continue to seek to act as a
source of strength to the Bank.

         Banks. The Bank is a Pennsylvania-chartered bank subject to the
supervision of, and is regularly examined by, the FDIC and the Department.

         As a state-chartered commercial bank, the Bank is subject to the
applicable provisions of the Pennsylvania Banking Code of 1965, as amended (the
"Banking Code"), and the regulations of the Department adopted thereunder. The
Bank derives its lending and investment powers from these laws, and is subject
to examination from time to time by the Department.

         The Banking Code provides for extensive regulation of the Bank's
business, including limitations on the amount of interest it may charge on
various loans, limitations on the amount of credit it may extend to any one
customer and limitations on its ownership of shares of stock in certain
entities, including banks and trust companies. The Banking Code prohibits any
person from acquiring more than 10% of any class of outstanding stock of any
bank (5% of any such class if the bank had net operating loss carryforwards, as
defined in the Internal Revenue Code of 1986, in excess of 20% of the bank's
total stockholders' equity), without the prior approval by the Department.
Exempted from prior approval by the Department are acquisitions of shares of
stock of a bank by such bank or a person who controls the bank and acquisitions
of shares of stock of a bank through a merger or consolidation approved by the
Department or the U.S. Comptroller of the Currency. Approval of the Department
is required for amendments to the Articles of Incorporation of the Bank. The
Banking Code regulates the establishment of branch offices and sets minimum
capital stock and surplus requirements. Under the Banking Code, banks are
permitted to operate branch offices statewide.

         The Bank is subject to certain restrictions under Pennsylvania law
relating to the declaration and payment of dividends. Dividends may be declared
and paid only out of accumulated net earnings (undivided profits). Where surplus
is less than 50% of the amount of the Bank's

                                       -5-

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capital (defined as par value multiplied by the number of shares outstanding),
no dividend may be paid or declared without the prior approval of the Department
until surplus is equal to 50% of the total amount of capital. Where surplus is
equal to or greater than 50% but less than 100% of capital, until such time as
surplus equals capital, the Bank must transfer at least 10% of its net earnings
to surplus prior to the declaration of a dividend. The Department has the power
to issue orders prohibiting the payment of dividends where such payment is
deemed to be an unsafe or unsound banking practice.

         The Bank is a member of the FDIC and, therefore, is subject to
additional regulation by that agency. The FDIC must approve the establishment of
new branch offices. Any insured bank that does not operate in accordance with,
or conform to, FDIC regulations, policies and directives may be sanctioned for
noncompliance. Dividend payments by a bank are generally prohibited where the
bank is in default of its FDIC assessments. Moreover, the FDIC has the power to
issue orders prohibiting the payment of dividends where such payment is deemed
to be an unsafe or unsound banking practice. The Bank is subject to examinations
from time to time by the FDIC. The Bank is not a member of the Federal Reserve
System.

         The Federal Reserve Board has adopted a regulation pursuant to the
Change in Bank Control Act of 1978, which, subject to certain exceptions,
requires persons who intend to acquire control of a bank or bank holding company
to give at least 60 days' prior written notice to the Federal Reserve Board.
Control for the purpose of this regulation exists when the acquiring party
obtains voting control of at least 25% of any class of a bank's voting
securities. Subject to rebuttal, control is presumed to exist when the acquiring
party obtains voting control of at least 10% of any class of a bank's voting
securities if (i) securities issued by the bank are registered pursuant to
Section 12 of the Exchange Act, or (ii) following the acquisition, there would
be no holder of that class of the bank's voting securities with holdings larger
than that of the acquiring party. The Change in Bank Control Act of 1978 and the
regulations promulgated thereunder authorize the Federal Reserve Board to
disapprove any such acquisition on certain specified grounds.

         Although the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 ("FIRREA") pertains primarily to thrift depository institutions
(such as savings and loan associations), certain of FIRREA's provisions may now
or in the future affect the Bank. In particular, were the Bank in the future to
seek to acquire and own a single thrift institution (although the Bank does not
currently plan to do so), FIRREA would permit such acquisition free from
interstate banking laws. In addition, FIRREA imposes certain "cross-guarantee"
provisions which are applicable to the Bank. Under FIRREA, all commonly
controlled insured depository institutions are liable to the FDIC for any loss
the FDIC incurs in connection with defaults of or assistance granted to their
affiliated depository institutions. Under such "cross-guarantee" arrangements,
each depository institution subsidiary could be subject to claims for amounts
the FDIC actually loses in connection with the operation of or assistance
granted to an affiliated depository institution in the event it were ultimately
to be taken over by the FDIC.

         Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), financial institutions are subject to increased regulatory scrutiny
and must comply with certain

                                       -6-

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operational, managerial and compensation standards. Under FDICIA, institutions
must be classified in one of five defined categories (well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized). In the event an institution's capital deteriorates
to the "undercapitalized" category or below, FDICIA prescribes an increasing
amount of regulatory intervention, including the institution by a bank of a
capital restoration plan, a performance guarantee of the plan by a parent
institution and the placement of a hold on increases in assets, number of
branches or lines of business. If capital has reached the significantly or
critically undercapitalized levels, further material restrictions can be
imposed, including restrictions on interest payable on accounts, dismissal of
management and (in critically undercapitalized situations) appointment of a
receiver. Critically undercapitalized institutions may not, beginning 60 days
after becoming critically undercapitalized, make any payment of principal or
interest on their subordinated debt. A well capitalized institution may be
reclassified as adequately capitalized, and an adequately capitalized
institution or an undercapitalized institution may be forced to comply with
certain supervisory actions as if it were in the next lower capital category
(except that a significantly undercapitalized institution may not be
reclassified as critically undercapitalized where the institution is deemed to
be engaging in unsafe or unsound practices or has received and not corrected a
less than satisfactory examination report rating for asset quality, management,
earnings or liquidity). All but well capitalized institutions are prohibited
from accepting brokered deposits without prior regulatory approval.

         FDICIA also requires the regulators to prescribe certain non-capital
standards for safety and soundness relating generally to operations and
management, asset quality and executive compensation and permits regulatory
action against a financial institution that does not satisfy such standards.

         Furthermore, FDICIA and its implementing regulations require all
insured depository institutions, except those with total assets of less than
$500 million, to conduct periodic audits and to establish audit committees of
their boards of directors. FDICIA also requires all depository institutions to
undergo an annual regulatory examination.

         Restrictions on Transactions with Affiliates and Insiders. The Bank, as
an FDIC-insured, state-chartered, nonmember bank, is also subject to the
restrictions of Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act
and Regulation O adopted by the Federal Reserve Board. Section 23A requires that
loans or extensions of credit to an affiliate, purchases of securities issued by
an affiliate, purchases of assets from an affiliate (except as may be exempted
by order or regulation), the acceptance of securities issued by an affiliate as
collateral and the issuance of a guarantee, acceptance or letter of credit on
behalf of an affiliate (collectively, "covered transactions") be on terms and
conditions consistent with safe and sound banking practices, and imposes
quantitative restrictions on the amount of and collateralization requirements on
such transactions. Section 23B requires that all covered transactions and
certain other transactions, including the sale of securities or other assets to
an affiliate and the payment of money or the furnishing of services to an
affiliate, be on terms comparable to those prevailing for similar transactions
with nonaffiliates.


                                       -7-

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         Sections 22(g) and 22(h) of the Federal Reserve Act impose similar
limitations on loans and extensions of credit from the Bank to its and the
Company's executive officers, directors and principal shareholders and any of
their related interests. The limitations restrict the terms and aggregate amount
of such transactions. Regulation O implements the provisions of Sections 22(g)
and 22(h) and requires maintenance of records of such transactions by the Bank
and regular reporting of such transactions by insiders. The FDIC also requires
the Bank, upon request, to disclose publicly loans and extensions of credit to
insiders in excess of certain amounts.

         Limitation on Activities of FDIC-Insured, State-Chartered Banks. The
Federal Deposit Insurance Act (the "FDIA"), as amended by FDICIA, generally
limits the activities and equity investments of an FDIC-insured, state-chartered
bank, such as the Bank, to those that are permissible for national banks, unless
the FDIC has determined that an activity would not pose a significant risk to
the deposit insurance fund and the bank is, and continues to be, in compliance
with applicable capital standards.

         FDIC Insurance. The Deposit Insurance Funds Act of 1996 (the "Deposit
Act") was enacted on September 29, 1996. The Deposit Act changes payment terms
for the Bank's payments into the Bank Insurance Fund ("BIF") of the FDIC.

         The law provides that BIF assessments must be set at a rate equal to
one-fifth of the Savings Institution Insurance Fund ("SAIF") rates for
1997, 1998 and 1999. After 1999, all FDIC-insured institutions will pay the same
risk-adjusted rates.

         The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution or its Board of Directors has engaged or is engaging in unsafe or
unsound practices, is in an unsafe or unsound condition to continue operations,
or has violated any applicable law, regulation or order of or any condition
imposed by the FDIC. It also may suspend deposit insurance temporarily during
the hearing process for the permanent termination of insurance if the
institution has no tangible capital under applicable regulations or capital
guidelines.

         Governmental Monetary Policy. Bank profitability is principally
dependent upon interest rate differentials. In general, the difference between
the interest paid by a bank on its deposits and other borrowings and the
interest received by a bank on loans and securities held in its investment
portfolio comprise the major portion of a bank's earnings. Thus, the earnings
and growth of the Bank will be subject to the influence of general economic
conditions and the monetary and fiscal policies of the United States Government
and its agencies, including the Comptroller of the Currency, the Federal Reserve
Board and the FDIC. An important function of the Federal Reserve Board is to
regulate the money supply, credit conditions and interest rates in order to
mitigate recessionary and inflationary pressures. Among the instruments of
monetary policy used to implement these objectives are open market transactions
in United States Government securities and changes in reserve requirements
against bank deposits. These instruments are used in varying combinations to
influence overall growth and distribution of credit, bank

                                       -8-

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loans, investment and deposits. Their use may also affect interest rates charged
on loans or paid on deposits.

         The Federal Reserve Board requires all depository institutions, such as
the Bank, to maintain reserves against their net transaction accounts (primarily
NOW, Super NOW and checking accounts) and non-personal time deposits. As of
January 1997, reserves of 3% must be maintained against net transaction accounts
of $44.9 million or less, except that no reserves are required against the first
$4.4 million of net transaction accounts, and reserves of 10% must be maintained
against net transaction accounts in excess of $44.9 million. No reserves are
currently required against non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy applicable liquidity requirements. Because required reserves
must be maintained in the form of vault cash or a noninterest-bearing account at
a Federal Reserve Bank, however, the effect of the reserve requirements is to
reduce an institution's interest-earning assets.

         The monetary policies and regulations of the United States Government
and its agencies have had a significant effect on the operations of commercial
banks in the past and are expected to continue to do so in the future. The
effects of such policies upon the future business, earnings and growth of the
Bank cannot be predicted.

         Interstate Banking Legislation. The Interstate Banking Act allows
federal regulators to approve mergers between adequately capitalized banks from
different states regardless of whether the transaction is prohibited under any
state law, unless one of the banks' home states has enacted a law expressly
prohibiting out-of-state mergers before June 1997. This act also allows a state
to permit out-of-state banks to establish and operate new branches in this
state. The Commonwealth of Pennsylvania has "opted in" to this interstate
merger provision. Therefore, the prior requirement that interstate acquisitions
would only be permitted when another state had "reciprocal" legislation that
allowed acquisitions by Pennsylvania-based bank holding companies has been
eliminated. The new Pennsylvania legislation, however, retained the requirement
that an acquisition of a Pennsylvania institution by a Pennsylvania or a
non-Pennsylvania-based holding company must be approved by the Department.

         Employees

         As of December 31, 1997, the Company and its subsidiaries had 60
employees, including 50 full-time employees. The Company provides a variety of
employment benefits and considers its relationships with its employees to be
satisfactory.

Item 2.  Properties.

         The principal executive offices of the Company and the Bank consist of
7,190 square feet of space in an office building located in Allentown,
Pennsylvania. The Bank leases this office building from a non-banking subsidiary
of the Company under a lease expiring in October 2010 providing for an average
monthly rental payment of $22,920 and $23,339 for 1997 and 1998, respectively.
The rent for the remaining years of the lease may be adjusted based on increases

                                       -9-

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in the Consumer Price Index or changes in the cost of debt service to the Bank
as master lessee. The Bank subleases a portion of the building to a third party
under a lease expiring in December 2000 providing for monthly rental payments of
$8,633. The sublessee has the right to extend the lease for a five-year period
at monthly rental payment of $10,359. The Bank has subleased another portion of
the building to two parties and has achieved substantial occupancy, which
reduces its carrying costs. The property is encumbered by a mortgage with an
outstanding balance of $2,103,000. The Bank is a participant in this mortgage to
the extent of $1,051,000.

         The Bank leases the Walnutport branch building from a subsidiary
pursuant to an open-ended oral lease, which provide for monthly rental payment
of $2,000. The Cherryville branch building is owned directly by the Bank. There
are no mortgages or other encumbrances on these properties. The Bank leases the
Allentown and Bethlehem branch buildings from third parties. The Bethlehem lease
will expire in August 1999 and provides for monthly rental payments of $2,479.
The Allentown lease will expire in April 2000 and provides for monthly rental
payments of $3,440. The branches range in size from approximately 2,500 to 4,000
square feet with the average size being approximately 3,300 square feet. The
Quakertown property owned by a subsidiary of the Bank is listed for sale with a
real estate agent.

         The Company considers its and the Bank's offices, branches and
equipment to be modern, well-maintained and adequate for their operations.

Item 3.  Legal Proceedings.

         (a)  Summary of Regulatory Enforcement Actions to Which the Company
              and the Bank are Subject

         The Company and the Bank are subject to and have consented to the
following regulatory orders and agreements: (i) effective February 28, 1996, the
Company and the Bank entered into an Administrative Order (the "Pennsylvania
Order") with the Department, which replaced an earlier order entered into in
1993; (ii) on April 29, 1996, the Bank entered into a Memorandum of
Understanding (the "Memorandum of Understanding") with the FDIC, which has
replaced two cease and desist orders dating from October 1987 and June 1992; and
(iii) in January 1991, the Company consented to a written agreement (the
"Federal Reserve Agreement") with the Federal Reserve Bank of Philadelphia (the
"Federal Reserve Bank") and the Department.

         The following is a discussion of the material terms and provisions of
the Pennsylvania Order, the Memorandum of Understanding and the Federal Reserve
Agreement.

         The Pennsylvania Order

         Capital Requirements and Dividend Restrictions

         Under the terms of the Pennsylvania Order, the Bank is required to
maintain, at all times, a minimum Tier I capital equal to or greater than 6.5%
of the Bank's adjusted total assets, plus a fully-funded loan loss reserve. The
Bank must provide the Department, with a quarterly report

                                      -10-

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detailing the maintenance of a 6.5% Tier I capital ratio and a fully-funded loan
loss reserve. As of December 31, 1997, the Bank's Tier I capital ratio was
12.58%. The Bank is required to maintain a formal program to review the adequacy
of the Bank's allowance for loan and lease losses. The Bank may not declare or
pay any cash dividend without the prior written approval of the Department and
the Regional Director of the FDIC.

         Credit Limitations and Restrictions

         The following credit limitations and restrictions were imposed under
the Pennsylvania Order: (i) the Bank may not grant, extend, renew, alter or
restructure any loan or other extension of credit without first obtaining and
analyzing all relevant credit information, as well as taking all necessary steps
to properly value and perfect its interests in collateral, where applicable;
(ii) the Bank may not extend, directly or indirectly, any new or additional
credit (which for the purposes of the Pennsylvania Order, includes the granting
of renewals or extensions, or the capitalizing of accrued interest) to, or for
the benefit of, any borrower who is obligated in any manner to the Bank on any
extension of credit, or portion thereof, which has been charged off the books of
the Bank, in whole or in part, or to any affiliate or related interest of, or
other person or entity associated with, any such borrower, as long as any
portion of such extension of credit, whether or not the portion was charged off,
remains uncollected. The provisions of clause (ii) above do not apply to the
advancement of funds by the Bank for the sole purpose of maintaining or
protecting the Bank's real estate collateral if the failure to extend such
credit would otherwise be substantially detrimental to the best interests of the
Bank; (iii) the Bank may not extend, directly or indirectly, any new or
additional credit to, or for the benefit of, any borrower who is obligated in
any manner to the Bank on any loan or other extension of credit that has been
adversely classified, in whole or in part, by the Department in the report of
examination dated as of June 30, 1995, or as a result of any subsequent
examination of the Bank by the Department or the FDIC, or to any affiliate or
related interest of, or other person or entity associated with any such borrower
("classified borrower"), as long as such loan or other extension of credit
remains classified or uncollected. This clause (iii) does not prohibit the Bank
from renewing all or any part of an extension of credit to a classified borrower
who is not subject to the prohibitions of clause (ii), after collection in cash
of interest due on the entire extension of credit. The prohibitions of clause
(iii) do not apply to any extension of credit to a classified borrower who is
not subject to the prohibitions of clause (ii) above, if the Bank's failure to
extend further credit to a classified borrower would be substantially
detrimental to the best interests of the Bank, which determination must be
evidenced in writing in the applicable loan files; and (iv) the Bank must comply
fully and at all times with the provisions of section 1415 of the Banking Code
of 1965, as amended, relating to loans to executive officers and directors.

         Performance Objectives

         The following performance objectives were also stated in the
Pennsylvania Order: (i) the Bank was required to reduce the level of nonaccrual
loans to total gross loans noted in the Report of Examination as of June 30,
1995, to no more than 7% by August 26, 1996, and further reduce such ratio to no
more than 4% by November 24, 1996 and 2% by February 22, 1997; and (ii) the Bank
was required to reduce the level of classified assets as of June 30, 1995, to no
more

                                      -11-

<PAGE>


than 100% of Tier I capital and reserve for loan and lease losses by August 26,
1996, and further reduce such ratio to 75% by November 24, 1996 and 50% by
February 22, 1997.

         Reporting and Other Requirements

         Other affirmative measures required to be taken by the Bank under the
Pennsylvania Order are as follows: (i) the Bank is required to submit quarterly
progress reports, no later than 30 days following the last day of each calendar
quarter; (ii) the Bank must comply with all state and federal laws that relate
to the operation of the Bank; (iii) the Bank must have and retain qualified
management, must notify the Secretary of Banking in writing of any resignations
and/or terminations of any members of its Board of Directors and/or any of its
senior executive officers and must obtain prior written approval from the
Department for any new Directors or senior executive officers; (iv) and the Bank
must maintain a written investment policy in a form and manner acceptable to the
Secretary of Banking, as determined at subsequent examinations or visitations.

         Status of Compliance with the Pennsylvania Order

         The Company believes that it and the Bank are substantially in
compliance with the Pennsylvania Order. The Pennsylvania Order requires the Bank
to reduce the level of nonaccrual loans to total gross loans noted in the report
of examination as of June 30, 1995, to no more than 2% by February 22, 1997. As
of December 31, 1997, this ratio was 2.12%, and as of February 28, 1998, this
ratio was 2.07%. Additionally, the Order requires the Bank to reduce the level
of classified assets as of June 30, 1995, to no more than 50% of Tier I capital
and the reserve for loan and lease losses by February 22, 1997, with further
reductions thereafter. As of December 31, 1997, this ratio was 23.68%, and as of
February 28, 1998, this ratio was 21.21%. The Pennsylvania Order also contains a
provision requiring the Bank to maintain, at all times, a minimum Tier I capital
equal to or greater than 6.5% of the Bank's adjusted total assets, plus a
fully-funded loan loss reserve. As of December 31, 1997 this ratio was 12.58%
and the Bank's loan loss reserve was fully funded.

         The Memorandum of Understanding

         Capital Requirements and Dividend Restrictions

         The Memorandum of Understanding requires the Bank to maintain its Tier
I capital at an amount equal to or greater than 6.0% of the Bank's adjusted
total assets. During the term of the Memorandum of Understanding, the Bank may
not declare or pay dividends without the prior written approval of the FDIC,
which declarations and payments must be made in accordance with applicable laws
and regulations, and may be made only if after such payments the ratio of Tier I
capital to adjusted total assets will be not less than 6.0%.


                                      -12-

<PAGE>

         Credit Limitations and Restrictions

         Under the terms of the Memorandum of Understanding, the Bank is
prohibited from extending credit, either directly or indirectly, to or for the
benefit of any borrower who is obligated in any manner to the Bank on any
extension of credit, or portion thereof, which has been charged off the books of
the Bank. The Bank is also prohibited from extending credit to, or for the
benefit of, any borrower who is obligated in any manner to the Bank on any
extension of credit that has been classified, in whole or in part, as a result
of the examination of the Bank as of June 30, 1995. These prohibitions will not
apply if the Bank determines that failure to extend further credit would be
substantially detrimental to the institution.

         Reporting and Other Requirements

         The Bank was required to charge-off assets classified as "Loss" or
"Doubtful" as of June 30, 1995 by May 9, 1996, and, within 30 days of receipt of
future FDIC Reports of Examination, charge-off assets classified "Loss" or
"Doubtful." The Bank was required to submit a Classified Asset Reduction Plan to
the FDIC by May 29, 1996. Also, the Bank was required (i) to adopt a method of
computing the balance of its allowance for loan and lease losses that gives
consider ation to the volume and composition of the loan portfolio; (ii) to
adopt and implement a written earnings plan and (iii) to revise, adopt and
implement written lending and investment policies in a form and manner
acceptable to the FDIC as determined at subsequent examinations. The Bank is
required to review the adequacy of the loan loss allowance quarterly and submit
progress reports to the Regional Director of the FDIC detailing the form,
content and manner of any actions taken to secure compliance with the Memorandum
of Understanding on a quarterly basis. The Bank is in compliance with these
requirements of the Memorandum of Understanding.

         Status of Compliance with the Memorandum of Understanding

         The Bank is currently in compliance with the requirements of the
Memorandum of Understanding. As of December 31, 1997 the Bank's Tier I capital
ratio was 12.58%, which is greater than the 6.0% ratio required by the
Memorandum of Understanding. The Bank has made necessary charge-offs and revised
and adopted its credit and investment policies. The earnings improvement plan
required has been prepared and submitted.

         The Federal Reserve Agreement

         Requirements and Dividend Restrictions

         Under the Federal Reserve Agreement, the Company is subject to the
following requirements: (i) the Board of Directors of the Company was required
to establish a compliance committee consisting of three directors who were not
officers or principal shareholders of the Company, which would be responsible
for monitoring and coordinating the Company's adherence to the Federal Reserve
Agreement and submit quarterly progress reports to the Company's Board of
Directors; (ii) the Company is not permitted to declare or pay any dividends
without the prior written approval of the Federal Reserve Bank and the
Department; (iii) the Board of Directors

                                      -13-

<PAGE>


of the Company was required to conduct a review of the functions and performance
of the officers of the Company and the Bank and forward its written findings and
conclusions along with a written description of proposed management or
operational changes; (iv) the Company was required to submit a capital plan; (v)
the Company is not permitted to redeem or repurchase its outstanding preferred
and common stock without 30 days prior written notice to the Federal Reserve
Bank and the Department; (vi) the Company may not incur any additional debt
without the written approval of the Federal Reserve Bank and the Department;
(vii) the Company was required to develop written procedures to strengthen and
maintain in a satisfactory manner its records and audit functions; and (viii)
the Company and the Bank are required to submit quarterly reports to the Federal
Reserve Bank and the Department.

         Status of Compliance with the Federal Reserve Agreement

         According to information received from the Federal Reserve Bank, the
Company believes that it is currently in substantial compliance with the Federal
Reserve Agreement.

Consequences of Failure to Comply with the Regulatory Orders

         Failure to comply with the Pennsylvania Order, the Memorandum of
Understanding, the Federal Reserve Agreement or any other regulatory agreement
or order, as well as future regulatory determinations, could result in
additional enforcement actions, restrictions on the operations of the Company
and the Bank and civil monetary penalties, among other things. For example, if
the Company or the Bank does not comply with any of the terms of any order or
agreement, the respective regulatory authority may petition the appropriate
court for an order to enforce the terms thereof. If willful noncompliance were
to continue, the Department could seek to take possession of the business and
property of the Bank, subject to providing notice and the holding of a hearing
with the concurrence of the Pennsylvania Attorney General, or the FDIC could
seek to terminate the deposit insurance of the Bank.

         (b) Other Legal Proceedings

         In December 1997, a settlement was reached involving ongoing litigation
centered on a partnership, in which the Company was a limited partner. This
litigation was commenced in March 1992 in the court of Common Pleas of Lehigh
County, Pennsylvania. The partnership owned the Pond Road building which housed
the administrative offices of the Bank as well as a branch office. As part of
this litigation settlement, the Company received $184,000 representing a
$47,000 general partnership interest and a cash settlement of $137,000. The
entire $184,000 has been included in other income. The general partnership
interest received as part of the settlement, combined with the Company's
interest already owned, aggregated more than a 50% ownership interest as a
general partner. Since the Company has a majority of the general partnership
interest, it is required under generally accepted accounting principles to
include in its 1997 financial statements all of the accounts of this previously
unconsolidated subsidiary.


                                      -14-

<PAGE>

         On June 23, 1995, the FDIC issued a Notice of Intention to Prohibit
from Further Participation and a Notice of Assessment of Civil Money Penalties,
Findings of Fact and Conclusions of Law, Order to Pay and Notice of Hearing
(collectively, the "Notice") against James L. Leuthe, Chairman of the Board and
Chief Executive Officer of the Company, and against Harold R. Marvin, Jr.,
formerly the President of the Company and of the Bank. Mr. Marvin resigned as
President and as director of both the Company and the Bank in 1993. The FDIC and
Mr. Marvin have reached and consummated a settlement in this matter. The
settlement does not assess any monetary damages or penalties against Mr. Marvin
and prohibits Mr. Marvin from participating in any manner in the conduct of the
affairs of any financial institution or organization without the approval of the
FDIC and the appropriate federal financial institution regulatory agency.

         The Notice initiated administrative proceedings in which the FDIC, as a
result of transactions occurring prior to 1993, is seeking to prohibit Mr.
Leuthe from further participation in the conduct of the affairs of any bank
insured by the FDIC or any other federally insured depository institution,
without the prior approval of the FDIC and the appropriate federal financial
institution regulatory agency. The allegations of the FDIC are substantially the
same as those which formed the basis of the Stipulation of Settlement with and
Administrative Order of the Pennsylvania Department of Banking, which the
Company and the Bank entered into in March 1993. The FDIC also sought to impose
civil monetary penalties of $500,000 against Mr. Leuthe. Mr. Leuthe has denied
wrongdoing and is defending these actions.

         Neither the Company nor the Bank is a party to these proceedings.

         On February 13, 1998, the administrative law judge of the FDIC issued a
decision recommending the prohibition of Mr. Leuthe from future participation in
the affairs of any federally insured financial institution and the assessment of
a civil monetary penalty in the sum of $250,000 against Mr. Leuthe. On March 13,
1998, Mr. Leuthe filed exceptions to the recommended decision with a supporting
Memorandum of Law and Request for Oral Argument. Those exceptions will be heard
by the full FDIC Board of Directors. The Company believes that the FDIC Board of
Directors will likely not render a decision for at least 45 to 60 days following
any such appeal. Also, either party will have the right to appeal any decision
of the FDIC Board of Directors to the United States District of Columbia Circuit
Court of Appeals or the United States Court of Appeals for the Third Circuit
within 30 days after the date of the decision.

         Under both the Company's and the Bank's Bylaws, the Company and the
Bank are required to indemnify Mr. Leuthe in connection with the administrative
proceedings brought against him by reason of the fact that he is or was an
officer and director of the Bank. However, Mr. Leuthe is required to reimburse
the Company and/or the Bank for all expenses incurred or advanced by the Company
or the Bank in connection with such events if a court ultimately determines that
the alleged actions or omissions of Mr. Leuthe constituted willful misconduct or
recklessness. While it is difficult to determine the amount of indemnification
in this case, the Company believes at this time that the amount will not
materially and adversely affect the Company's financial condition.


                                      -15-

<PAGE>


         The Company carries Director's and Officer's Liability Insurance
coverage, and it initially submitted a claim for reimbursement of its expenses
in connection with these proceedings. The Company's insurance carrier responded
by disputing coverage, raising, among other things, the position that the
insurance carrier did not receive timely notice of the proceedings. The Company
disputes the insurance carrier's position, and has recently instituted a suit
against the carrier in the Court of Common Pleas for Lehigh County to litigate
this coverage issue.

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

         None.

                                     Part II

Item 5.  Market for Common Equity and Related Stockholder Matters.

         The Company's Common Stock, $.01 par value, is the only class of common
stock of the Company that is authorized, issued and outstanding. As of February
28, 1998, there were 2,050,000 shares issued and outstanding, held by
approximately 137 stockholders of record. The market makers in the Company's
Common Stock are Security First Group, F.J. Morrisey & Co., Ryan Beck & Co. and
Legg Mason Wood Walker Incorporated. The Company's Common Stock is quoted on the
OTC electronic bulletin board. According to information received by the Company
from F.J. Morrissey & Co., certain information regarding bid quotations for the
Company's Common Stock is as follows: for 1996, (i) at March 31, 1996, bid price
$4.75; (ii) at June 30, 1996, bid price $4.50; (iii) at September 30, 1996, bid
price $4.50; and (iv) at December 31, 1996, bid price $4.50; and for 1997, (i)
at March 31, 1997, bid price $5.00; (ii) at June 30, 1997, bid price $4.875;
(iii) at September 30, 1997, bid price $5.00; and (iv) at December 31, 1997, bid
price $7.00. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.

         The Company has not paid any dividends on the Common Stock since June
1991. Due to its financial condition, its recent results of operations and
regulatory restrictions on the payment of dividends by the Bank and the Company,
management of the Company currently does not anticipate the resumption of
dividend payments on the Common Stock. Also, the Company has accrued and unpaid
dividends on its Series A Preferred Stock of $943,464 as of December 31, 1997.
Dividends accrue on the Series A Preferred Stock at the rate of $.3255 per share
per year. Dividends on the Senior Preferred Stock accrue at the rate of $.25 per
share per year. When, as and if declared by the Board of Directors of the
Company out of funds legally available for that purpose, dividends are payable
to the holders of the Senior Preferred Stock quarterly. Dividends must be
declared and paid, or declared and a sum sufficient for payment thereof set
aside, on the Senior Preferred Stock before any dividend may be declared or paid
on any other capital stock of the Company. Dividends must be declared and paid,
or declared and a sum sufficient for payment thereof set aside, on the Series A
Preferred Stock before any dividend may be declared or paid on any other capital
stock of the Company other than the Senior Preferred Stock. Under the Company's
Articles of Incorporation, the aggregate amount of dividends paid in any
calendar year on the Senior Preferred Stock and the Series A Preferred

                                      -16-

<PAGE>


Stock may not exceed the amount of the Company's net income for the preceding
calendar year as shown on the Company's audited statement of income for such
preceding calendar year.

         Under Pennsylvania law, the Company's Board of Directors may not
authorize, and the Company may not make, distributions (including dividends) if
either (i) the Company would be unable to pay its debts as they become due in
the usual course of its business, or (ii) as determined by the Board of
Directors, the total assets of the Company would be less than the sum total of
its liabilities plus the amount that would be needed, if the Company were to be
dissolved at the time as of which the distribution is measured, to satisfy the
preferential rights upon dissolution of the holders of the Company's outstanding
Series A Preferred Stock, Senior Preferred Stock and any other shares that may
have preferential rights upon dissolution superior to those receiving the
distribution.

         Under the Pennsylvania Order, the Bank may not declare or pay any cash
dividends without prior written approval of the Department and the Regional
Director of the FDIC. Certain other provisions under the Pennsylvania Banking
Code restrict the ability of the Bank to transfer funds to the Company in the
form of cash dividends, loans and advances. Under the Federal Reserve Agreement,
the Company may not declare or pay any cash dividends without the prior written
approval of the Federal Reserve Bank and the Department.

Item 6.  Management's Discussion and Analysis or Plan of Operation.

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

         The consolidated financial review of the Company is intended to compare
the performance of the Company for the years ended December 31, 1997 and 1996.
The review of the information presented should be read in conjunction with the
consolidated financial statements and the notes thereto included in Item 7 of
this report.

         OVERVIEW

         The Company's total assets were $108.72 million at December 31, 1997, a
decrease of $1.56 million from December 31, 1996. The decrease in assets
resulted from the liquidation of a portion of available-for-sale securities to
fund the sale of $6.82 million of deposits of the Quakertown branch to the
Quakertown National Bank on October 30, 1997, an overall decline in nonconsumer
loan originations along with several large commercial loan repayments during the
fourth quarter of 1997.

         The Company reported net income of $3.003 million, or $0.86 per share,
diluted, for 1997 as compared to $2.145 million, or $0.63 per share, diluted,
for 1996. The majority of the net income was attributable to trading securities
gains in 1997, while the litigation Settlement was the primary source in 1996.
Without the income from security gains and litigation settlements, the Company
would have incurred a loss from operations of $894,000 in 1997, as compared to a
loss of $833,000 for 1996.


                                      -17-

<PAGE>


         During 1997, the Bank continued its program to dispose of foreclosed
assets by aggressively marketing its foreclosed asset portfolio and reinvesting
the proceeds from these sales into performing assets. The foreclosed assets held
for sale decreased $3.253 million from $4.850 million in 1996 to $1.597 million
in 1997.

         In January 1996, the Bank instituted a new consumer loan program,
pursuant to which it signed agreements with several auto dealers to originate
their dealer paper. The Bank incurred unanticipated losses during the second
half of 1997, when the Bank, based on its internal investigation, charged off
$484,000 of installment loans. The Bank provided an additional provision of
$440,000 to its allowance for loan loss reserve to facilitate this charge off.
Furthermore, the Bank's management concluded after conducting a detailed
analysis of the indirect paper portfolio that its net yield before these losses
was comparable to other consumer loan portfolios with lesser degree of risk.
Therefore, effective August 1997, the Bank discontinued this auto dealer
program. The Bank has added two additional employees within its credit and
collection department to continually monitor and work this segment of this loan
portfolio to provide against future losses.

         In December 1997, a settlement was reached involving ongoing litigation
centered on a partnership, in which the Company was a limited partner. The
partnership owned the Pond Road building which housed the administrative offices
of the Bank as well as a branch office. As part of this litigation settlement,
the Company received $184,000 representing a $47,000 general partnership
interest and a cash settlement of $137,000. The entire $184,000 has been
included in other income. The general partnership interest received as part of
the settlement, combined with the Company's interest already owned, aggregated
more than a 50% ownership interest as a general partner. Since the Company has a
majority of the general partnership interest, it is required under generally
accepted accounting principles to include in its 1997 financial statements all
of the accounts of this previously unconsolidated subsidiary.

         COMPARISON BETWEEN 1997 AND 1996 NET INCOME

         NET INCOME

         In 1997, the Company recorded net income of $3,003,000 as compared to
$2,145,000 in 1996, an increase of $858,000, or 40%. Net interest income
increased $65,000 in 1997 mostly due to an increase in the average balance of
the loan portfolio mitigated by an increase in interest paid on long-term debt.
The 1997 provision for loan losses amounted to $1,003,000 as compared to a
$367,000 credit recorded for 1996, primarily the result of a large recovery
recorded during the second quarter of 1996. Other income increased $1,737,000
during 1997 as compared to 1996 due to several significant items: gains
recognized on investment securities increased $2.274 million consistent with the
performance of the stock market; a gain of $478,000 was recognized on the sale
of deposits of its Quakertown branch on October 30, 1997; an increase in rental
income of $190,000 due to inclusion of a previously unconsolidated subsidiary
and the above mitigated by a decrease in settlements from litigations of
$1,355,000 as compared to 1996, when the Company recorded $1,539,000 as other
income resulting from a litigation settlement (the "Settlement") with respect to
a large impaired loan. Other expenses declined $426,000, or 7.34%

                                      -18-

<PAGE>


in 1997 as compared to 1996, mostly as the result of decreased legal expenses
pertaining to FDIC litigation involving the Company's Chairman and CEO and the
Bank's former president.

         The profit performance for financial institutions is measured by the
Return on Average Assets ("ROA") and the Return on Average Equity ("ROE"). On an
annualized basis the Company's ROA was 2.70% in 1997 as compared to 1.99% in
1996. The ROE was 22.32% in 1997 compared to 18.89% in 1996.

         NET INTEREST INCOME

         Net interest income is the difference between interest income and fees
on earning assets and interest expense on deposits and borrowed funds. The
principal components of earning assets are loans and investment securities,
while the primary sources used to fund these assets were deposits, borrowed
funds and capital.

         During 1997, interest and fee income on loans increased $151,000, or
2.66%, compared to 1996, mostly due to increased average loan balance of $3.54
million, or 5.91%. The average loan balance has continually grown since the
first quarter of 1996 when the Bank instituted a consumer loan program
initiative which was directed to the local auto dealers and their creditworthy
customers. Also, the yield on the loan portfolio decreased 29 basis points to
9.23% during 1997 as compared to 9.52% in 1996. The decrease in the interest
yield was partly attributable to the reversal of $135,000 as compared to $76,000
being recovered in 1996, of accrued interest income on problem loans. The
Company's policy is to discontinue accruing interest when it appears that the
borrower may be unable to meet payments as they become due.

         Interest expense on deposits remained static at approximately $3.57
million for 1997 and 1996. The average balance of deposits decreased $809,000 in
1997 as compared to 1996. The average balance of time deposits increased $1.40
million in 1997 while the average cost fluctuated slightly downward from 5.29%
to 5.26%, while the average balance of savings deposits decreased $593,000 with
a 1997 average cost down 9 basis points from 2.77% to 2.68%. The overall
decrease in deposits were the result of the sale of the deposits of the
Quakertown Branch on October 30, 1997 offset by several deposit promotions
throughout the year aimed at increasing the Bank's market share, in particular
its time deposits.

         Interest expense on long-term debt increased $78,000 in 1997 as
compared to 1996, directly attributable to inclusion in the 1997 consolidated
financial statements of a mortgage and related interest expense of a previously
unconsolidated subsidiary.

         For 1997, the average yield on interest-earning assets decreased 15
basis points, while the cost of interest-bearing liabilities increased 1 basis
point, resulting in a net decrease in the interest rate spread of 16 basis
points. The net yield on interest-earning assets also decreased 8 basis points.


                                      -19-

<PAGE>


         Distribution of Interest-Earning Assets and Interest-Bearing
Liabilities:

         Interest Rates and Interest Differential

         The following tables set forth, for the periods indicated, information
regarding: (a) the average balances of asset and liability categories; (b) the
total dollar amount of interest income from interest-earning assets (including
mortgage loan origination fees representing yield adjustments) and the
resulting average yields; (c) the total dollar amount of interest expense on
interest-bearing liabilities and resulting average costs; (d) net interest
income; (e) interest rate spread; (f) net interest margin on interest-earning
assets; and (g) the ratio of average interest-earning assets to average
interest-bearing liabilities. Average balances are based on daily balances.


<TABLE>
<CAPTION>
                                                                  For the Year ended December 31,
                                                                           (in thousands)
                                                             1997                                    1996
                                              --------------------------------------   ------------------------------------
                                               Average                      Average     Average                     Average
                                               Balance     Interest       Yield/Rate    Balance     Interest      Yield/Rate
                                              --------     --------       ----------    -------     --------      ----------
<S>                                           <C>          <C>              <C>           <C>         <C>            <C>

INTEREST-EARNING ASSETS:
Loans(1)                                     $63,109        $5,824           9.23%      $59,585       $5,673          9.52%
Investment securities                         29,867           168           6.07%       31,162        1,901          6.10%
Overnight funds                                3,044         1,814           5.52%        1,969          105          5.33%
                                             -------        ------         ------       -------       ------       -------
Total interest-earning assets                $96,020        $7,806           8.13%      $92,716       $7,679          8.28%
                                             =======        ======         ======       =======       ======       -------
INTEREST-BEARING
  LIABILITIES:
Saving deposits                               35,495        $  950           2.68%      $36,088       $1,001          2.77%
Time deposits                                 49,944         2,629           5.26%       48,542        2,570          5.29%
Other borrowed funds                             404            26           6.44%          849           50          5.89%
Long-term debt                                 1,291           108           8.37%          327           30          9.17%
                                             -------        ------         ------       -------       ------       -------
Total interest-bearing liabilities           $87,134        $3,713           4.26%      $85,806       $3,651          4.25%
                                             =======        ======         ======       =======       ======       =======
NET INTEREST INCOME                                         $4,093                                    $4,028
                                                            ======                                    ======
INTEREST RATE SPREAD                                                         3.87%                                    4.03%
                                                                           ======                                   ======
NET INTEREST MARGIN ON
  INTEREST-EARNING ASSETS(2)                                                 4.26%                                    4.34%
                                                                           ======                                   ======
RATIO OF AVERAGE
  INTEREST-EARNING ASSETS
  TO AVERAGE INTEREST-
  BEARING LIABILITIES                                                      110.20%                                  108.05%
                                                                           ======                                   ======
</TABLE>

----------------
(1)  For the purpose of these computations, nonaccrual loans are not included
     in the daily average loan amounts outstanding.

(2)  Net interest income divided by average interest-earning assets.

                                      -20-

<PAGE>
<TABLE>
<CAPTION>
                                                                   For the Year Ended December 31,
                                                                            (in thousands)
                                                             1996                                      1995
                                              --------------------------------------    --------------------------------------
                                               Average                     Average      Average                      Average
                                               Balance     Interest       Yield/Rate    Balance      Interest       Yield/Rate
                                              ---------    --------       ----------    --------     --------       ----------
<S>                                           <C>          <C>            <C>           <C>          <C>            <C>
INTEREST-EARNING ASSETS:
Loans(1)                                       $59,585      $5,673           9.52%      $53,276        $5,131           9.63%
Investment securities                           31,162       1,901           6.10%       29,880         1,746           5.84%
Overnight funds                                  1,969         105           5.33%        2,741           161           5.87%
                                               -------      ------         ------       -------        ------         ------
Total interest-earning assets                  $92,716      $7,679           8.28%      $85,897        $7,038           8.19%
                                               =======      ------         ------       =======        ------         ------
INTEREST-BEARING
  LIABILITIES:
Saving deposits                                $36,088      $1,001           2.77%      $35,781        $1,068           2.98%
Time deposits                                   48,542       2,570           5.29%       46,652         2,402           5.15%
Other borrowed funds                               849          50           5.89%          629            42           6.68%
Long-term debt                                     327          30           9.17%          436            42           9.63%
                                               -------      ------         ------       -------        ------         ------
Total interest-bearing liabilities             $85,806      $3,651           4.25%      $83,498        $3,554           4.26%
                                               =======      ------         ------       =======        ------         ------
NET INTEREST INCOME                                         $4,028                                     $3,484
                                                            ======                                     ======
INTEREST RATE SPREAD                                                         4.03%                                      3.93%
                                                                           ======                                     ======
NET INTEREST MARGIN ON
  INTEREST-EARNING ASSETS(2)                                                 4.34%                                      4.06%
                                                                           ======                                     ======

RATIO OF AVERAGE
INTEREST-EARNING ASSETS
  TO AVERAGE  INTEREST-
  BEARING LIABILITIES                                                      108.05%                                    102.87%
                                                                           ======                                     ======
</TABLE>
----------------
(1)  For the purpose of these computations, nonaccrual loans are not included in
     the daily average loan amounts outstanding.

(2)  Net interest income divided by average interest-earning assets.


                                      -21-

<PAGE>


         Analysis of the Effect of Volume and Rate Changes in Interest Income
         and Interest Expense:

         The following table presents the extent to which net interest income
changed due to changes in interest rates and changes in volume of
interest-earning assets and interest-bearing liabilities during the periods
indicated. Information provided in each category with respect to changes
attributable to changes in volume (changes in volume multiplied by prior rate),
changes attributable to changes in rates (changes in rate multiplied by prior
volume) and the net change. The change in interest income and interest expense
attributable to the combined impact of both volume and rate has been allocated
proportionately to the changes due to volume and the changes due to rate.


<TABLE>
<CAPTION>

                                                  For the Year Ended                    For the Year Ended
                                               December 31, 1997 vs. 1996            December 31, 1996 vs. 1995
                                               Increase (Decrease) Due to             Increase (Decrease) Due to
                                             ------------------------------         -------------------------------
                                             Volume       Rate        Total         Volume      Rate          Total
                                             ------       -----       -----         ------      ----          -----
INTEREST-EARNING ASSETS:                                              (in thousands)
<S>                                          <C>         <C>          <C>            <C>        <C>           <C>
Loans                                         $337        $(186)       $151          $598       $(56)          $542
Investment securities                          (69)         (18)        (87)           77         78            155
Overnight funds                                 59            4          63           (42)       (14)           (56)
                                              ----        -----        ----          ----       ----           ----
Total interest-earning assets                 $327        $(200)       $127          $633       $  8           $641
                                              ----        -----        ----          ----       ----           ----
INTEREST-BEARING LIABILITIES:
Savings deposits                              $(22)         (29)       $(51)            5       $(72)          $(67)
Time deposits                                   71          (12)         59            65        103            168
Other borrowed funds                           (28)           4         (24)           13         (5)             8
Long-term debt                                  81           (3)         78           (11)        (1)           (12)
                                              ----        -----        ----          ----       ----           ----
Total interest-bearing liabilities            $102        $ (40)       $ 62          $ 72       $ 25           $ 97
                                              ----        -----        ----          ----       ----           ----
CHANGE IN NET INTEREST INCOME                 $225        $(160)       $ 65          $561       $(17)          $544
                                              ====        =====        ====          ====       ====           ====
</TABLE>

         OTHER INCOME

         Total other income increased $1.737 million, or 48.89%, during 1997 as
compared to 1996. There were several major factors which contributed to changes
in the composition of other income between 1997 and 1996. First, the most
significant part of other income were gains recognized by the Company on its
security portfolio represented $3.713 million and $1.439 million in 1997 and
1996, respectively. Of the $2.274 million increase in investment securities
gains, $1.483 million represented realized gains on equity securities.
Throughout 1997, manage ment has evaluated its trading securities portfolio and
has sold those securities which represented significant appreciation. The
Company's trading securities are carried at fair value and consist principally
of common stock of bank holding companies. Management continues to closely

                                      -22-

<PAGE>


monitor its investment portfolio to position the portfolio against future
fluctuations in the stock market. A downturn in the overall market could result
in future trading securities losses.

         In 1997, the Company recorded a gain of $478,000 representing the
premium on the deposits of its Quakertown Branch which were sold on October 30,
1997 to Quakertown National Bank. Also, on December 19, 1997, the Company
acquired, through a litigation settlement, the controlling interest of a real
estate partnership. Prior to this settlement, the Company was allowed to record
the yearly activity under the equity method. However once the controlling
interest was acquired late in 1997, the Company was required to include all of
the activity of the partnership in its consolidated financial statements. As
such the $190,000 increase in rental income was the result of inclusion of this
previously unconsolidated partnership as required for 1997. In 1997, the Company
also sold certain parcels of real estate it previously acquired at a gain of
$183,000, an increase, as compared to 1996, of $130,000. Mitigating all of the
above increases was a decrease in litigation settlements of $1.355 million. In
1996, the company received $1.539 million from the settlement of an impaired
loan which had been in protracted litigation while in 1997 it received $184,000
attributable to settlement of litigation pertaining to a real estate investment
partnership as mentioned above.

         OTHER EXPENSES

         Overall, other expenses declined $426,000, or 7.34%, during 1997 as
compared to 1996. The most significant change was attributable to a $506,000, or
21.83%, decrease in expenses classified as other. Within this category, legal
and professional fees, mostly attributable to litigation by the FDIC against the
Company's Chairman and Chief Executive Officer and the Bank's former president,
decreased $612,000. Since a significant portion of the casework and expenses for
this litigation was performed in 1996, minimal expenses were incurred in 1997.
As explained in the legal proceedings section, the administrative law judge
assigned to this case has recommended a decision against the Company's Chairman.
The Company is now awaiting a final ruling from the FDIC's board pertaining to
this matter. Other decreases included a rate reduction of $50,000, or 32.05%, of
the FDIC insurance premium due to an improvement in the Bank's risk
classification from a 1C to a 1B and the decrease in amortization expense of
$64,000 due to certain assets which were previously acquired in a branch
purchase were fully amortized in 1996. The above decreases were mitigated by
increases in 1997 of $148,000, or 9.97%, in salaries and employees benefits due
to additional employees being hired for the new Pond Road branch and two
employees added to the credit and collection department, computer service fee of
$80,000 due to outsourcing the Bank's check processing and data entry operations
and increased advertising and promotional expenses of $63,000 incurred for an
advertising campaign aimed at promoting the Bank within the local community.

         PROVISION FOR LOAN LOSSES

         The allowance for loan losses was $1.586 million at December 31, 1997,
compared to $1.624 million at December 31, 1996. The allowance equaled 2.51% of
loans at December 31, 1997, as compared to 2.46% at December 31, 1996.

                                      -23-

<PAGE>


         The adequacy of the allowance for loan losses is measured monthly by an
adequacy test. The adequacy test includes an evaluation of all loans which have
been classified (other loans especially mentioned, substandard, doubtful, loss)
by internal loan review, regulatory examination, monitoring of delinquency and
other pertinent factors. Allocations are determined by an in-depth review of
each individual credit based on its potential future loss. The value of tangible
collateral and/or guarantees is determined as well as the borrower's ability and
willingness to repay. This value, as measured against the loan balance, is used
in determining the allowance allocation for collateral-dependent loans.
Additionally, the Bank considers the suggested guidelines of its regulatory
agencies when completing the analysis of the institution's allowance for loan
losses. The guidelines suggest the utilization of minimum percentages of 15%,
50%, and 100% for use in determining general allowances for loans classified as
substandard, doubtful and loss, respectively. These requirements are a
measurement only and do not constitute a specific allowance placed against any
specifically identified loan. Total loans outstanding, net of substandard,
doubtful, and loss are given an estimated allowance requirement to absorb future
losses. These loans are performing loans, well secured, or loans secured by
cash, cash equivalents or marketable securities. Although it would appear that
little or no allowance allocations would apply to these loans, allowances need
to be made for the historical charge-offs and the human error element in the
perfection of the Bank's interest and other issues unforeseen to management.
Additionally, the Bank conducts an annual review of all credits in excess of
$100,000 or more, which demonstrates any recent delinquency characteristics or
other weaknesses, to assure the adequacy of the allowance and provision for
loan losses.

         At monthly meetings, the Credit Administration Committee is presented
with the adequacy test of the allowance for loan losses that contains
information relative to both specific credits and the total portfolio in
general. The information is used to determine the adjustment needed for the
allowance to be properly stated. In establishing the adjustment required,
management considers a variety of factors, including, but not limited to,
general economic factors and potential losses from significant borrowers. The
Bank continues to strengthen its underwriting process and internal loan review
process by implementing stringent analytical standards in the loan approval and
review procedures.

         At December 31, 1997, the amount charged to operating expense for the
provision for loan losses was $1,003,000 as compared to a credit provision for
loan losses of $367,000 in 1996. The increase in the 1997 provision was based on
management's evaluation of the loan portfolio as outlined above and also above
average losses incurred within the auto segment of the installment loan
portfolio. In August 1997, management discontinued the loan program to local
auto dealers to reduce the Bank's exposure for additional losses. The credit
provision in 1996 was mostly due to a significant recovery as part of litigation
settlement on an impaired loan which occurred in the second quarter of 1996.

         The following table sets forth a reconciliation of the allowance for
loan losses and illustrates the charge-offs and recoveries by major loan
category for the period ended December 31, 1997 (in thousands):

                                      -24-

<PAGE>


      Beginning Balance, January 1, 1997.......................       $1,624
                                                                      ------
      Charge-offs:
         Commercial, financial and agricultural................          105
         Real estate - construction............................           37
         Real estate - mortgage................................          327
         Installment loans to individuals......................          703
         Lease financing.......................................           --
                                                                      ------
      Total charge-offs........................................        1,172
                                                                      ------
      Recoveries:
         Commercial, financial and agricultural................           24
         Real estate - construction............................           --
         Real estate - mortgage................................           31
         Installment loans to individuals......................           43
         Lease financing.......................................           33
                                                                      ------
      Total recoveries.........................................          131
                                                                      ------
      Net charge-offs..........................................        1,041
                                                                      ------
      Provision for loan losses................................        1,003
                                                                      ------
      Ending Balance, December 31, 1997........................       $1,586
                                                                      ======

      Ratio of net charge-offs to
         average loans outstanding.............................         1.55%


         FINANCIAL CONDITION

         At December 31, 1997, the Company's total assets were $108.72 million,
a decrease of $1.56 million from December 31, 1996. This decrease is mostly
attributable to $6.82 million sale of deposits of the Quakertown branch to The
Quakertown National Bank on October 30, 1997. The above decrease was mitigated
by several promotions the bank had aimed at increasing its market share of time
deposits and also the opening of its new Pond Road Branch office which accounted
for $1.934 million of deposits as of December 31, 1997.

         Loans

         Net loans decreased $1.554 million, from $64.374 million at December
31, 1996 to $62.82 million at December 31, 1997. A portion of the decrease was
partly attributable to a $1.051 million loan which was eliminated in
consolidation and represented the Bank's portion of a loan to a partnership
which was previously not required to be included in the consolidated financial
statements.

         All categories of loans, as outlined below, declined at December 31,
1997 as compared to December 31, 1996 with the exception of consumer loans which
increased 15.35%. The

                                      -25-

<PAGE>


nonconsumer loan portfolio experienced flat originations throughout 1997. Also,
in the fourth quarter of 1997, the Bank experienced an increase in principal
paydowns of $2.864 million as compared to the same period in 1996. Management
believes that the decrease in originations and an increase in commercial
principal paydowns is a regional trend and is evaluating ways to increase
consumer interest. The average balance of the consumer loan portfolio increased
$5.856 million from $11.645 million in 1996 to $17.501 million in 1997. As
mentioned previously, the Bank began an affiliation with several local auto
dealers in January 1996 aimed at increasing its installment loan portfolio. In
August 1997, management evaluated the performance of this segment of the
installment loan portfolio and decided that the overall rate of return on this
segment can be achieved in other areas with less risk and therefore terminated
this arrangement effective August 1997. The change in the composition of loans
at December 31, 1997 as compared to December 31, 1996 is as follows: Real estate
construction loans declined $300,000, or 6.10%; Residential real estate loans
decreased $1.498 million, or 5.80%; Commercial real estate loans decreased
$1.357 million, or 6.84%; Commercial loans declined $243,000, or 6.64%; and
Consumer loans increased $1.806 million, or 15.35%.

         The following table sets forth the maturity and repricing schedule of
the loan portfolio at December 31, 1997 (in thousands):

<TABLE>
<CAPTION>
                                                             After one        After
                                             Within         but within        five
                                            One year        five years        years          Total
                                            --------        ----------       -------        -------
  <S>                                       <C>              <C>           <C>             <C>
   Maturity Schedule:

         Commercial.....................    $ 1,570           $ 1,110      $     614        $ 3,294
         Real estate-construction........     3,223               669            183          4,075
         Real estate-mortgage............     8,658            20,322         11,211         40,191
         Consumer, net...................     1,092            11,269          1,121         13,482
         Nonaccrual loans................        --                --             --          3,364
                                            -------           -------        -------        -------
   Total.................................   $14,543           $33,370        $13,129        $64,406
                                            =======           ======         =======        =======

   Repricing Schedule (1):

         Fixed rate loans................   $14,446           $28,834        $ 3,724        $47,004
         Floating rate loans.............    12,972               695            371         14,038
         Nonaccrual loans................        --                --             --          3,364
                                            -------           -------        -------        -------
   Total.................................   $27,418           $29,529        $ 4,095        $64,406
                                            =======           =======        =======        =======
</TABLE>

--------------
(1) Data for repricing schedule by loan categories is not available.


                                      -26-

<PAGE>



         Investment Securities

         The primary objectives of the Company's investment strategy are to
provide and maintain a level of liquidity, to generate a favorable return on
investments without incurring undue interest rate and credit risk and to promote
the Company's lending activities.

         The largest sector of the investment portfolio remains securities of
U.S. Government agencies and corporations which total $19.14 million (amortized
cost) at December 31, 1997, or 71.07% of total investment securities. Included
in the above are $2.331 million mortgage-backed products, mostly consisting of
collateralized mortgage obligations ("CMO") and real estate mortgage investment
conduits ("REMIC"). Twice a year, stress tests are conducted on these CMOs and
REMICs, all of which were passed recently.

         The available-for-sale securities decreased $4.014 million, or 18.31%,
from $21.922 million in 1996 to $17.908 million in 1997. Approximately $2.0
million of this decrease was the result of securities sold to fund the sale of
the Quakertown Deposits. Also, in 1997 the Company had other sales and
maturities of $2.0 million of debt equities which it currently has maintained in
a cash position as it evaluates future loan and investment opportunities.

         At the present time, the Company does not engage in the use of
derivatives investment products as a means to hedge the risks in its investment,
loan or deposit portfolios.

         Deposits and Other Borrowed Funds

         The Company continues to offer a variety of deposit accounts with a
range of interest rates and term options. The deposits consist primarily of
checking, savings, super now, money market and certificates of deposit.
Fluctuations within its deposit base are influenced by competition, economic
conditions and changes in current rates. Total deposits at December 31, 1997
declined $3.793 million from $95.939 million at December 31, 1996 to $92.146
million at December 31, 1997, attributable mostly to $6.82 million sale of
deposits of the Quakertown branch to the Quakertown National Bank on October 30,
1997. Throughout 1997, the Company offered several promotions aimed at
increasing its deposits. In addition to the Pond Road Branch increase, the Bank
had significant increases in its time deposits at both its Walnutport and
Bethlehem branches of $1.131 million and $541,000, respectively. The Bank opened
its new Pond Road branch on May 23, 1997, and through several promotions had
approximately $1.93 million of deposits at December 31, 1997. Overall, the
change in the composition of the deposits was an increase in noninterest-bearing
deposits of $1.172 million, while interest-bearing deposits declined $4.965
million consisting of savings, club accounts and interest-bearing demand
deposits declining $1.779 and time deposits declining $3.186 million. As a
percentage of total deposits, savings, club accounts and interest-bearing demand
deposits represented 36.43% at December 31, 1997 as compared to 36.85% at
December 31, 1996. There were no brokered deposits within the Company's deposit
base at December 31, 1997.


                                      -27-

<PAGE>


         Other borrowed funds, at December 31, 1996 consisted of a $1.20 million
repurchase agreement with a brokerage company which was utilized to fund the
Company's asset growth, in particular, its installment loan portfolio. During
1997, the outstanding amount was repaid in its entirety.

         The following table sets forth maturities of time deposits of $100,000
or more at December 31, 1997 and 1996.

<TABLE>
<CAPTION>
                                                                      December 31,
                                                              --------------------------
                                                               1997                1996
                                                              ------              ------
                                                                    (in thousands)
         <S>                                                  <C>                <C>

         Three months or less.......................          $2,124              $2,800
         Over three months through twelve months....           2,641               3,312
         Over one year through five years...........           2,528               1,640
         Over five years............................               0                   0
                                                              ------              ------
                TOTAL...............................          $7,293              $7,752
                                                              ======              ======
</TABLE>


         NONPERFORMING ASSETS

         Nonperforming assets include nonperforming loans and foreclosed assets
held for sale. Nonperforming loans consist of impaired and other loans where the
principal, interest, or both, is 90 or more days past due and loans that have
been placed on nonaccrual. When loans are placed on nonaccrual status, income
from the current period is reversed from current earnings and interest from
prior periods is charged to the allowance for loan losses. Similarly, consumer
loans are considered nonaccrual if the collateral is insufficient to recover the
principal or are charged-off if deemed to be uncollectible. Foreclosed assets
consist of assets acquired through foreclosure or real estate acquired by
acceptance of a deed in lieu of foreclosure.

         The following table represents nonperforming assets of the Company at
December 31, 1997 and 1996.

                                                            December 31,
                                                    ---------------------------
                                                      1997                1996
                                                    -------             -------
                                                           (in thousands)
Impaired loans..................................    $ 3,364             $ 2,052
Other loans past due 90 days or more............        421                 609
                                                    -------             -------
    Total nonperforming loans...................      3,785               2,661

Foreclosed assets held for sale.................      1,597               4,850
                                                    -------             -------
    Total nonperforming assets..................    $ 5,382             $ 7,511
                                                    =======             =======


                                      -28-

<PAGE>



Nonperforming loans as a percentage
    of loans (net of unearned interest).........     5.88%               4.03%

Nonperforming assets as a percentage of assets..     4.95%               6.81%

         Impaired loans increased $1.312 million at December 31, 1997 as
compared to December 31, 1996. Throughout the year, as problems are identified
within the loan portfolio, those credits which are considered beyond the point
of restructure are immediately transferred to the impaired loan category for
further evaluation. The loans within this category are normally involved in
litigation and/or foreclosure. Once a credit is considered impaired, management
will try as quickly as possible to remove it from the impaired classification
through liquidation, by transferring it to foreclosed assets. During 1997,
$2.832 million of loans were transferred to impaired loans as part of
managements internal evaluation. Of that amount, $539,000 was transferred to
foreclosed assets, $239,000 was charged off to the allowance for loan losses,
$181,000 was paid off and $559,000 was returned to accrual status, while the
balance of $1.312 million represented the overall increase. Real estate loans
represent $3.152 million of impaired loans and loans to consumer and commercial
borrowers represent $90,000 and $122,000, respectively.

         Loans past due 90 days or more decreased $188,000 from $609,000 at
December 31, 1996 to $421,000 at December 31, 1997. All delinquent loans are
reviewed by management on a weekly basis with regard to legal proceedings and
collection efforts. Of the delinquent loans, 80.29% are secured by real estate,
11.40% are loans to consumers and 8.31% are to commercial borrowers.

         Foreclosed assets held for sale declined $3.253 million, or 67.07%, at
December 31, 1997 compared to December 31, 1996. In 1996, as part of its
operating plan, and in order to comply with the Administrative Order of the
Department, the Written Agreement of the Federal Reserve Bank and several
previous orders which have been replaced by the Memorandum of Understanding,
the Company set aggressive goals to begin to liquidate its nonperforming assets.
As part of this plan, management set a goal to dispose of $4.50 million of
classified assets. At December 31, 1997, the gross reduction in classified
assets was $4.622 million, however, after inclusion of the activity for 1997,
the overall net reduction was $2.998 million. Although management did not meet
its overall goal for 1997, the Company remains in substantial compliance with
the regulatory requirements as they pertain to classified assets as discussed in
the "Legal Proceedings" in Part I of this report.

         The following table sets forth the total of commercial and investment
properties at December 31, 1997, all of which are currently in litigation and/or
foreclosure.

         Commercial/Investment Properties:
         Impaired and over 90 days........................   $   1,857,967
         Foreclosed assets held for sale..................         301,908
                                                             -------------
         Total............................................   $   2,159,875
                                                             =============


                                      -29-

<PAGE>



         The following table sets forth the total of residential properties to
be foreclosed upon and liquidated at December 31, 1997, including properties
currently owned that are listed for sale. All litigation and foreclosure
proceedings in the nonaccrual and over 90-day category are being actively
pursued.

         Residential:
         Impaired and over 90 days.........................   $     683,270
         Foreclosed assets held for sale...................         345,779
                                                              -------------
         Total.............................................   $   1,029,049
                                                              =============

         The following table sets forth the total of land developments and
building lots to be foreclosed upon and liquidated at December 31, 1997,
including land developments and building lots currently owned and listed for
sale. All litigation and foreclosure proceedings in the nonaccrual and over
90-day category are being actively pursued.

         Land Development/Building Lots:
         Impaired and over 90 days.......................    $     416,661
         Foreclosed assets held for sale.................          491,573
                                                             -------------
         Total...........................................    $     908,234
                                                             =============

         The following table sets forth the total of loans in litigation that
are not secured by real estate at December 31, 1997.

         Secured by Other Than Real Estate:
         Impaired and over 90 days.......................   $    547,728
                                                            ============

         The following table sets forth the total of assets that are listed as
nonperforming, but which are under agreements that provide a yield at or in
excess of current market rates at December 31, 1997.

         Performing/Nonperforming Assets:
         Impaired and over 90 days.......................   $     279,085
                                                            =============

         The following table sets forth the total of assets that are under
agreement or are being paid off with the settlement dates to take place in the
first quarter of 1998.

         Assets Under Agreement:
         Foreclosed assets held for sale.................    $    457,686
                                                             ============

         At December 31, 1997, there were no loans, other than those classified
as nonperforming loans, where known information about borrowers' possible credit
problems causes management to have serious doubts as to their ability to comply
with the current loan repayment terms.



                                      -30-

<PAGE>

         LIQUIDITY AND FUNDS MANAGEMENT

         Liquidity management is intended to ensure that adequate funds will be
available to meet anticipated and unanticipated deposit withdrawals, debt
servicing payments, investment commitments, commercial and consumer loan demand
and ongoing operating expenses. Funding sources include principal repayments on
loans and investments, sales of assets, growth in core deposits, short and
long-term borrowings and repurchase agreements. While regular loan payments are
a predictable source of funds, the sale of loans and investment securities,
deposit flows, and loan prepayments are significantly influenced by general
economic conditions and level of interest rates and competition. The Company
manages its balance sheet to prove adequate liquidity based on various economic,
interest rate and competitive assumptions and in light of profitability
measures.

         At December 31, 1997, the Company maintained $7.47 million in cash and
cash equivalents in the form of cash and due from banks (after reserve
requirements). In addition, the Company had $17.908 million in securities
available-for-sale representing 16.47% of total assets at December 31, 1997.

         The Company considers its primary source of liquidity to be its core
deposit base and continues to promote the acquisition of deposits through its
branch offices. At December 31, 1997, approximately 78.14% of the Company's
assets were funded by core deposits acquired within its market area. An
additional 13.29% of the assets were funded by the Company's equity. These two
components provide a substantial and stable source of funds.

         The Company paid the following cash dividends to its Preferred
stockholders during 1997. There were no dividends paid to its common
stockholders in 1997.

<TABLE>
<CAPTION>
      Class of Stock               Date  Paid            Current         Arrears          Total
      --------------               ----------            -------         -------          -----
      <S>                       <C>                      <C>            <C>            <C>
      Senior Preferred          May 12, 1997             $56,273        $237,542        $293,815
                                August 12, 1997           56,272             ---          56,272
                                November 1997             56,272             ---          56,272

      Series A Preferred        August 12, 1997          $55,498        $110,995        $166,493
                                November 1997             55,498         110,995         166,493
</TABLE>


         In addition, on December 17, 1997, the Company's Board of Directors
declared a dividend on both the Senior and Series A Preferred to stockholders of
record as of December 17, 1997. This declaration included $56,272 due to its
Senior Preferred stockholders for the fourth quarter of 1997 and $166,493 due to
the Series A Preferred stockholders, which represented the fourth quarter 1997
of $55,498 and $110,995 dividend in arrears. After payment of the $166,493,
$943,464 remains in arrears on the Series A Preferred stock through December 31,
1997.


                                      -31-

<PAGE>


         The Bank is subject to certain restrictions under Pennsylvania law
relating to the declaration and payment of dividends. Dividends may be declared
and paid only out of accumulated net earnings (undivided profits). Where surplus
is less than 50% of the amount of the Bank's capital (defined as par value
multiplied by the number of shares outstanding), no dividend may be paid or
declared without the prior approval of the Department until surplus is equal to
50% of the total amount of capital. Where surplus is equal to or greater than
50% but less than 100% of capital, until such time as surplus equals capital,
the Bank must transfer at least 10% of its net earnings to surplus prior to the
declaration of a dividend. The Department has the power to issue orders
prohibiting the payment of dividends where such payment is deemed to be an
unsafe or unsound banking practice. The Company's ability to pay dividends is
also impacted by regulatory orders and agreements.

      At December 31, 1997, cash and cash equivalents increased $3.461 million
from $4.62 million in 1996 to $8.081 million. Contributing to this increase was
$3.810 million provided by operating activities as compared to $2.124 million in
1996 and cash utilized in investing and financing activities of $349,000 in 1997
as compared to $2.547 million in 1996. The significant changes in investing cash
activity were net proceeds of securities transactions in 1997 of $4.277 million
as compared to net purchases of $450,000 in 1996. The Company sold $1.93 million
of securities to fund the sale of its Quakertown deposits on October 30, 1997
and also had debt equities of $500,000 prematurely called in December 1997. The
Company has decided to maintain a higher than average cash position as it
evaluates several loan and other options. Loans decreased $7.418 million,
primarily as the result of the discontinuing of the auto segment of the
installment loan portfolio in August 1997 and several commercial prepayments in
December 1997. Also, as mentioned earlier, the Company continues to
aggressively market its foreclosed assets portfolio, increasing proceeds $1.804
million in 1997 as compared to 1996.

         Deposits decreased $7.42 million mostly attributable to the sale of the
Quakertown deposits of $6.82 million on October 30, 1997 and related runoff.
Other borrowed funds decreased $1.200 million, as the Company repaid its
outstanding repurchase agreement at December 31, 1996 which was used in 1996 to
fund the Company's installment loan growth. Long-term debt increased $1.051
million, the result of inclusion of a previously unconsolidated subsidiary.
Also, in 1997, the Company resumed paying dividends and during the year made
dividend payments of $740,000 to its stockholders, consisting of $280,000 of the
1997 amount currently due as well as $460,000 of amounts previously in arrears.

         INTEREST RATE SENSITIVITY

         Interest rate sensitivity management involves the matching of maturity
and repricing dates of interest-earning assets and interest-bearing liabilities
to help insure the Company's earnings against extreme fluctuations in interest
rates.

         The effect of interest rate changes on the Company's assets and
liabilities may be analyzed by monitoring the Company's interest rate
sensitivity gap ("GAP"). An asset or liability is said to be interest-rate
sensitive within a specific time period if it will mature or reprice within

                                      -32-

<PAGE>


a given time period. The interest rate sensitivity GAP is defined as the
difference between interest-earning assets and interest-bearing liabilities
maturing or repricing within a given time period. A positive GAP (asset
sensitive) indicates that more assets reprice during a given period compared to
liabilities, while a negative GAP (liability sensitive) has the opposite effect.

         The Company's principal financial objective is to achieve long-term
profitability while managing its exposure to fluctuations in interest rates.
This is accomplished through the measurement of the relationship between
interest rate sensitive assets and interest rate sensitive liabilities. The goal
of maintaining a reasonable balance between interest rate sensitive assets and
interest rate sensitive liabilities is accomplished through the Company's
asset/liability management program.

         At December 31, 1997 the Company has a positive interest sensitive GAP
of $1.36 million, or 1.42% of total interest-earning assets which have been
adjusted for the depreciation on securities available-for-sale. Under a general
assumption, that the general market interest rate changes affect the repricing
of assets and liabilities equally, this gap indicates that the effect of an
increase in overall market interest rates would result in an increase in the net
interest margin, while falling interest rates would cause a decrease in the
margin.


                                      -33-

<PAGE>


         The following table sets forth the Company's interest sensitivity GAP
position at December 31, 1997:

<TABLE>
<CAPTION>
                                                                     December 31, 1997
                                    ---------------------------------------------------------------------------------
                                    6 Months        6 Months        1 to 2       2 to 5         Over 5
                                     or less        to 1 Year        Years        Years          Years         Total
                                    --------        ---------       -------      -------        -------       -------
<S>                                 <C>             <C>             <C>         <C>            <C>            <C>
Interest-earning assets:                                               (in thousands)
 Investment securities (1)           $13,756         $  533         $ 1,218      $ 3,756        $15,606       $34,869
 Loans (2)                            20,774          6,644           9,844       19,685          4,095        61,042
                                      ------         ------         -------      -------        -------       -------
  TOTAL                              $34,530         $7,177         $11,062      $23,441        $19,701       $95,911
                                     -------         ------         -------      -------        -------       -------
Interest-bearing
    liabilities:
 Demand-interest bearing             $14,120         $   --         $    --      $    --        $    --       $14,120
 Savings and clubs (3)                   675            839           1,350        4,050         12,537        19,451
 Time                                 18,158          6,344          17,115        5,700             --        47,317
 Long-term debt (4)                      186             24              51          953             --         1,214
                                     -------         ------         -------      -------        -------       -------
  TOTAL                              $33,139         $7,207         $18,516      $10,703        $12,537       $82,102
                                     -------         ------         -------      -------        -------       -------
GAP                                  $ 1,391          ($30)         $(7,454)     $12,738        $ 7,164       $13,809
                                     -------          -----         -------      -------        -------       -------
Cumulative GAP                       $ 1,391         $1,361         $(6,093)     $ 6,645        $13,809       $13,809
                                     =======         ======         =======      =======        =======       =======
</TABLE>

------------
(1)   Includes average pay downs based on the stress test for collateralized
      mortgage obligation securities, equity securities categorized as trading
      securities and $5.306 million investment in overnight funds.
(2)   Includes estimated scheduled maturities of the fixed rate loans ignoring
      any potential rollover at maturity. Excludes nonaccrual loans of $3.364
      million.
(3)   Assumes that 7% of the savings deposits are repriceable each year based on
      the previous five years' historical activity.
(4)   Includes estimated scheduled payments for mortgage note.

         MARKET RISK DISCLOSURE

         The Company has evaluated the impact of changes in interest rates on
the net interest margin. The assumptions used in the evaluation include all
aspects of interest earning assets and interest bearing liabilities. The overall
impact in future interest rates changes on these assumptions may vary since a
shift in interest rates may provide consumers with an option, for example, a
switch from variable to fixed rate products.

         Sensitivity analysis was used to apply +200 and -200 basis point
interest rate shocks to the Bank's balance sheet and income statement at
December 31, 1997. Market Risks for interest

                                      -34-

<PAGE>


rate declines were measured in terms of percent and dollars of forecast net
income at risk, while the Market Risk for initial rate increases are measured in
terms of percent and dollars of equity value at risk. Equity value at risk
determined by comparing the before and after shock market value of portfolio
equity. Market value of portfolio equity is the present value of total assets,
less the present value of total liabilities.

         Total net income at risk for the period January 1, 1998 to December 31,
1998, given a negative 200 basis point decline in interest rates was 9.51%, or a
projected $225,000 decrease in net income. The majority of the decrease was the
trading portfolio earnings at risk estimated to be $133,000, while all other
earnings as risk were $92,000.

         Equity value risk as of December 31, 1997 was 5.46%, or a $961,000
decrease in the present value of equity, given a 200 basis point increase in
interest rates. The present value of the trading portfolio would decrease
$19,000, while the combined present value of all other assets and liabilities
would decline $942,000.

         CAPITAL

         The adequacy of the Company's capital is reviewed on an ongoing basis
with reference to size, composition and quality of the Company's resources. An
adequate capital base is important for continued growth and expansion in
addition to providing an added protection against unexpected losses.

         As required by the federal banking regulatory authorities, new
guidelines have been adopted to measure capital adequacy. Under the guidelines,
certain minimum ratios are required for core capital and total capital as a
percentage of risk-weighted assets and other off balance sheet instruments. For
the Company, Tier I capital consists of shareholders' equity less intangible
assets, and Tier II capital includes the allowable portion of the allowance for
loan losses, currently limited to 1.25% of risk-weighted assets.

         The following table sets forth the capital ratios of the Bank as of
December 31, 1997 and 1996.

<TABLE>
<CAPTION>
                                                                        December 31,
                                              Regulatory           ---------------------
                                             Requirements           1997           1996
                                             ------------          ------          -----
<S>                                          <C>                   <C>             <C>
Leverage ratio:
 Tier I (core capital) ratio..............       4.0%*             12.58%          10.70%
Risk-based capital ratios:
 Tier I capital/risk-weighted.............       4.0%              18.02%          15.19%
 Tier I and Tier II capital/
          Risk-weighted assets............       8.0%              19.28%          16.45%
</TABLE>

------------
*  The Pennsylvania Department of banking requires the Bank to maintain a
   minimum Tier I leverage capital ratio of at least 6.5% under the terms
   of the Administrative Order.


                                      -35-

<PAGE>



         DEPOSIT INSURANCE FUNDS ACT OF 1996

         The Deposit Insurance Funds Act of 1996 (the "Act") was enacted on
September 29, 1996. The Act changes payment terms for the Bank's payments into
the Bank Insurance Fund ("BIF") of the FDIC.

         Beginning in 1997, BIF assessments will be used for the first time to
help pay off the $780 million annual interest payments on $8 billion in "FICO"
bonds issued in the 1980s as part of the federal government's savings and loan
bailout. The law provides that BIF assessments must be set at a rate equal to
one-fifth of the Savings Institution Insurance Fund ("SAIF") rates for 1997,
1998 and 1999. After 1999, all FDIC-insured institutions will pay the same risk-
adjusted rates.

         During 1997, the Bank incurred $12,100 expense for the Bank Insurance
Fund of the FDIC.

         "YEAR 2000" ISSUES

         During 1997, the Bank formed a Technology Task Team who will be
responsible for year 2000 compliance for the Bank. The team members contacted
all vendors which they believe would be affected by the millennium change. The
Bank's computer application servicer has been dealing with the year 2000 issue
since May 1997 and is expecting to complete the host phase by September 1998.
During the period of October 1998 to March 1999, the servicer will coordinate an
end-to-end test which will allow the Bank to simulate daily processing on
sensitive century dates such as Day 1, first Month-end, first Leap Day, etc. At
a minimum, testing will involve bank/branch input to host, production cycles and
feedback to the general ledger system, and other key interfaces to facilitate
completion of the end-to-end test. Most of other computer related vendors are
anticipating to be year 2000 compliance during 1998. The Bank's Technology Task
Team has inventoried all operating systems, hardware and software and concluded
that the majority of personal computers are year 2000 compatible. The Bank will
replace those computers which are not compliant as necessary. An estimated cost
of $50,000 to $75,000 will be incurred by the Bank for the year 2000 issue.



                                      -36-

<PAGE>



Item 7.  Financial Statements.

         The following consolidated audited financial statements are included in
this Item:

         Index to Financial Statements

<TABLE>
<CAPTION>
                                                                                                  Page Nos.
                                                                                                  --------
            <S>                                                                                   <C>
             Independent Auditors' Report........................................................   F-1

             Consolidated Balance Sheets as of December 31, 1997 and 1996........................   F-2

             Consolidated Statements of Income for the Years Ended
                    December 31, 1997 and 1996 ..................................................   F-3 to F-4

             Consolidated Statements of Changes in Shareholders' Investment
                    for the Years Ended December 31, 1997 and 1996 ..............................   F-5

             Consolidated Statements of Cash Flows for the Years Ended
                    December 31, 1997 and 1996 ..................................................   F-6 to F-7

             Notes to the Consolidated Financial Statements......................................   F-8 to F-34
</TABLE>


<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Shareholders and
    Board of Directors of
    First Lehigh Corporation:

         We have audited the accompanying consolidated balance sheets of First
Lehigh Corporation and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in shareholders' investment
and cash flows for the years then ended. These financial statements are the
responsibility of the Corporation'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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First Lehigh
Corporation and subsidiary at December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.

         As discussed in Note 12 to the consolidated financial statements, in
1997 the Corporation changed its method of computing earnings per share by
adopting Statement of Financial Accounting Standards No. 128, "Earnings Per
Share."

/s/ Parente, Randolph, Orlando, Carey & Associates

Allentown, Pennsylvania
February 3, 1998



                                      F-1
<PAGE>

                     FIRST LEHIGH CORPORATION AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEET
                           DECEMBER 31, 1997 AND 1996
                                 (In thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------

                                                                  1997         1996
-------------------------------------------------------------------------------------
<S>                                                             <C>         <C>

                                     ASSETS

CASH AND DUE FROM BANKS                                         $  7,470     $  2,861

FEDERAL FUNDS SOLD                                                   611        1,759

TRADING SECURITIES                                                 7,571        6,309

SECURITIES AVAILABLE-FOR-SALE                                     17,908       21,922

SECURITIES HELD-TO-MATURITY (Fair value of $3,990
      and $3,899)                                                  4,085        4,091

LOANS (Net of $1,586 and $1,624 allowance for loan losses)        62,820       64,374

PREMISES AND EQUIPMENT                                             4,365        2,022

FORECLOSED ASSETS HELD FOR SALE, Net                               1,597        4,850

OTHER ASSETS                                                       2,292        2,092
                                                                --------     --------

                                 TOTAL ASSETS                   $108,719     $110,280
                                                                ========     ========

                    LIABILITIES AND SHAREHOLDERS' INVESTMENT

DEPOSITS:
      Noninterest-bearing                                       $ 11,258     $ 10,086
      Interest-bearing                                            80,888       85,853
                                                                --------     --------

                   Total deposits                                 92,146       95,939

OTHER BORROWED FUNDS                                                --          1,200

LONG-TERM DEBT                                                     1,214          272

OTHER LIABILITIES                                                    909          859
                                                                --------      --------

                Total liabilities                                 94,269       98,270

SHAREHOLDERS' INVESTMENT                                          14,450       12,010
                                                                --------     --------

               TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT   $108,719     $110,280
                                                                ========     ========

-----------------------------------------------------------------------------------
</TABLE>

                 See Notes to Consolidated Financial Statements


                                      F-2
<PAGE>

                     FIRST LEHIGH CORPORATION AND SUBSIDIARY

                        CONSOLIDATED STATEMENT OF INCOME
                    FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
          (In thousands, except per share data and shares outstanding)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------

                                                                    1997         1996
---------------------------------------------------------------------------------------
<S>                                                               <C>           <C>
INTEREST INCOME:
      Interest and fees on loans                                  $ 5,824       $ 5,673
      Interest and dividends on investment securities:
          Taxable interest income                                   1,660         1,637
          Dividends                                                   154           264
      Interest on overnight funds                                     168           105
                                                                  -------       -------

                   Total interest income                            7,806         7,679
                                                                  -------       -------

INTEREST EXPENSE:
      Interest on deposits                                          3,579         3,571
      Interest on other borrowed funds                                 26            50
      Interest on long-term debt                                      108            30
                                                                  -------       -------

                   Total interest expense                           3,713         3,651
                                                                  -------       -------

NET INTEREST INCOME                                                 4,093         4,028
PROVISION (CREDIT) FOR LOAN LOSSES                                  1,003          (367)
                                                                  -------       -------

NET INTEREST INCOME AFTER PROVISION (CREDIT)
      FOR LOAN LOSSES                                               3,090         4,395
                                                                  -------       -------

OTHER INCOME:
      Service charges, fees and other income                          492           459
      Gain on sale of foreclosed assets, net                           49            62
      Gain on sale of real estate                                     183            53
      Rental income                                                   191             1
      Gain on sale of deposits                                        478
      Unrealized holding gains on trading securities                1,163           372
      Realized gains (losses) on:
          Trading securities                                        2,528         1,006
          Securities available-for-sale                                22            79
          Securities held-to-maturity                                               (18)
      Litigation settlement                                           184         1,539
                                                                  -------       -------

                   Total other income                               5,290         3,553
                                                                  -------       -------
</TABLE>


                                      F-3
<PAGE>

                    FIRST LEHIGH CORPORATION AND SUBSIDIARY

                        CONSOLIDATED STATEMENT OF INCOME
                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
          (In thousands, except per share data and shares outstanding)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
                                                                     1997        1996
---------------------------------------------------------------------------------------
<S>                                                               <C>           <C>
OTHER EXPENSES:
      Salaries and employee benefits                              $ 1,633       $ 1,485
      Net occupancy expense                                           442           462
      Equipment expense                                               209           207
      FDIC insurance                                                  106           156
      Foreclosed asset expenses                                     1,175         1,175
      Other                                                         1,812         2,318
                                                                  -------       -------

                   Total other expenses                             5,377         5,803
                                                                  -------       -------

NET INCOME                                                        $ 3,003       $ 2,145
                                                                  =======       =======

EARNINGS PER SHARE - BASIC                                        $  1.28       $  0.86
                                                                  =======       =======

EARNINGS PER SHARE - DILUTED                                      $  0.86       $  0.63
                                                                  =======       =======


---------------------------------------------------------------------------------------
</TABLE>

                 See Notes to Consolidated Financial Statements



                                      F-4
<PAGE>

                     FIRST LEHIGH CORPORATION AND SUBSIDIARY

          CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' INVESTMENT
                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
                  (In thousands, except for share information)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                   SENIOR                 SERIES A
                                                 PREFERRED               PREFERRED                               CONTRIBUTED
                                                   STOCK                   STOCK            COMMON STOCK         CAPITAL IN
                                           ---------------------     -----------------   ------------------     EXCESS OF PAR
                                           SHARES         AMOUNT     SHARES     AMOUNT    SHARES      AMOUNT        VALUE
------------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>             <C>      <C>          <C>      <C>          <C>       <C>
BALANCE AT DECEMBER 31, 1995              848,902           $8      682,000       $7     2,000,000      $20         $8,764

ISSUANCE OF SENIOR PREFERRED
      STOCK IN LIEU OF CASH DIVIDEND       51,461            1                                                         257

NET INCOME

NET CHANGE IN UNREALIZED
      APPRECIATION (DEPRECIATION)
                                          -------           --      -------       --     ---------      ---         ------
BALANCE AT DECEMBER 31, 1996              900,363            9      682,000        7     2,000,000       20          9,021

ISSUANCE OF COMMON STOCK
      UNDER STOCK BONUS PLAN                                                                50,000                     150

DIVIDENDS DECLARED ON
      SENIOR PREFERRED AND
      SERIES A PREFERRED STOCK

NET INCOME

NET CHANGE IN UNREALIZED
      APPRECIATION (DEPRECIATION)
                                          -------           --      -------       --     ---------      ---         ------
BALANCE AT DECEMBER 31, 1997              900,363           $9      682,000       $7     2,050,000      $20         $9,171
                                          =======           ==      =======       ==     =========      ===         ======

</TABLE>

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
                                                            NET
                                                         UNREALIZED
                                                        APPRECIATION
                                                       (DEPRECIATION)
                                                        ON SECURITIES        TOTAL
                                             RETAINED     AVAILABLE      SHAREHOLDERS'
                                             EARNINGS     FOR SALE        INVESTMENT
-------------------------------------------------------------------------------------
<S>                                          <C>        <C>            <C>
BALANCE AT DECEMBER 31, 1995                 $ 1,340        $ 94           $ 10,233

ISSUANCE OF SENIOR PREFERRED
      STOCK IN LIEU OF CASH DIVIDEND            (258)

NET INCOME                                     2,145                          2,145

NET CHANGE IN UNREALIZED
      APPRECIATION (DEPRECIATION)                           (368)              (368)
                                             -------       -----           --------
BALANCE AT DECEMBER 31, 1996                   3,227        (274)            12,010

ISSUANCE OF COMMON STOCK
      UNDER STOCK BONUS PLAN                                                    150

DIVIDENDS DECLARED ON
      SENIOR PREFERRED AND
      SERIES A PREFERRED STOCK                  (962)                          (962)

NET INCOME                                     3,003                          3,003

NET CHANGE IN UNREALIZED
      APPRECIATION (DEPRECIATION)                            249                249
                                             -------       -----           --------
BALANCE AT DECEMBER 31, 1997                 $ 5,268       $ (25)          $ 14,450
                                             =======       =====           ========

</TABLE>


--------------------------------------------------------------------------------
                 See Notes to Consolidated Financial Statements



                                      F-5
<PAGE>

                     FIRST LEHIGH CORPORATION AND SUBSIDIARY

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
                                 (In thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------

                                                                         1997         1996
--------------------------------------------------------------------------------------------
<S>                                                                    <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net income                                                       $ 3,003       $ 2,145
      Adjustments to reconcile net income to net cash provided
          by operating activities:
               Realized gains on securities available-for-sale             (22)          (79)
               Gain on sale of foreclosed assets, net                      (49)          (62)
               Gain on sale of deposits                                    478
               Provision (credit) for loan losses                        1,003          (367)
               Provision for foreclosed assets losses                      655           602
               Depreciation of premises and equipment                      182           161
               Amortization                                                 14            73
               Gain on sale/disposal of equipment                           27            (7)
               Realized losses on securities held-to-maturity                             18
               Net increase in trading securities                       (1,262)         (271)
               Gains on other assets                                      (183)         (397)
               Change in:
                   Other assets                                            184           (79)
                   Other liabilities                                      (220)          387
                                                                       -------       -------

                        Net cash provided by operating activities        3,810         2,124
                                                                       -------       -------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Proceeds from the sale of securities available-for-sale            1,952         4,038
      Proceeds from the maturity of securities available-for-sale        2,325         3,789
      Purchases of securities available-for-sale                                      (8,604)
      Proceeds from sale of securities held-to-maturity                                  327
      Net increase in loans                                             (1,526)       (8,944)
      Proceeds from sales of premises and equipment                                       54
      Capital expenditures for premises and equipment                     (450)          (56)
      Capital expenditures for foreclosed assets                          (101)          (43)
      Proceeds from sales of foreclosed assets                           3,287         1,483
      Proceeds from sales of other assets                                  484           691
                                                                       -------       -------

                        Net cash provided by (used in)
                             investing activities                        5,971        (7,265)
                                                                       -------       -------
</TABLE>



                                      F-6
<PAGE>


                     FIRST LEHIGH CORPORATION AND SUBSIDIARY
                      CONSOLIDATED STATEMENT OF CASH FLOWS

                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
                                 (In Thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
                                                                         1997         1996
--------------------------------------------------------------------------------------------
<S>                                                                    <C>           <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
      Sale of deposit accounts                                         $(6,820)
      Net (decrease) increase in other borrowed funds                   (1,200)      $ 1,200
      Dividend payments                                                   (740)
      Payments on long-term debt                                          (109)         (109)
      Net increase in deposits                                           2,549         3,627
                                                                       -------       -------

                        Net cash (used in) provided by
                             financing activities                       (6,320)        4,718
                                                                       -------       -------

NET INCREASE (DECREASE) IN
      CASH AND CASH EQUIVALENTS                                          3,461          (423)

CASH AND CASH EQUIVALENTS, BEGINNING                                     4,620         5,043
                                                                       -------       -------

CASH AND CASH EQUIVALENTS, ENDING                                      $ 8,081       $ 4,620
                                                                       =======       =======

SUPPLEMENTARY DISCLOSURE:
      Cash paid for interest                                           $ 3,712       $ 3,657
                                                                       =======       =======

      Cash paid for income taxes                                       $    47       $    22
                                                                       =======       =======
</TABLE>



--------------------------------------------------------------------------------
                 See Notes to Consolidated Financial Statements


                                      F-7
<PAGE>

                     FIRST LEHIGH CORPORATION AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

 1.   ADMINISTRATIVE ORDER AND OTHER REGULATORY AGREEMENTS

      First Lehigh Corporation (the "Company") and First Lehigh Bank (the
      "Bank") are subject to and have consented to the following regulatory
      orders and agreements: (i) effective February 28, 1996, the Company and
      the Bank entered into an Administrative Order (the "Pennsylvania Order")
      with the Pennsylvania Department of Banking (the "Department"), which
      replaced an earlier order entered into in 1993; (ii) on April 29, 1996,
      the Bank entered into a Memorandum of Understanding (the "Memorandum of
      Understanding") with the Federal Deposit Insurance Corporation ("FDIC"),
      which has replaced two cease and desist orders dating from October 1987
      and June 1992; and (iii) in January 1991, the Company consented to a
      written agreement (the "Federal Reserve Agreement") with the Federal
      Reserve Bank and the Department.

      Under the terms of the Pennsylvania Order, the Bank, among other things:

      o  Must not declare or pay any cash dividend, without the prior written
         approval of the Department and the Regional Director of the FDIC;

      o  Must maintain, at all times, a minimum Tier 1 capital equal to or
         greater than 6.5% of the Bank's adjusted total assets and a "fully
         funded loan loss reserve";

      o  May not grant, extend, renew, alter or restructure any loan or other
         extension of credit without first obtaining and analyzing all relevant
         credit information, as well as taking all necessary steps to properly
         value and perfect its interests in collateral, where applicable;

      o  May not extend directly or indirectly, any new or additional credit to,
         or for the benefit of, any borrower who is associated with a previously
         charged-off loan or a credit that has been adversely classified in the
         June 30, 1995 Report of Examination or as a result of any subsequent
         regulatory examination.

      The following performance objectives were also stated in the Pennsylvania
      Order: (i) the Bank must reduce the level of nonaccrual loans to total
      gross loans noted in the Report of Examination as of June 30, 1995, to no
      more than 7% by August 26, 1996, and further reduce such ratio to no more
      than 4% by November 24, 1996 and 2% by February 22, 1997; and (ii) the
      Bank must reduce the level of classified assets as of June 30, 1995, to no
      more than 100% of Tier I capital and the allowance for loan losses by
      August 26, 1996, and further reduce such ratio to 75% by November 24, 1996
      and 50% by February 22, 1997.

                                      F-8
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


      The Company believes that it and the Bank are substantially in compliance
      with the Pennsylvania Order as of December 31, 1997. The Pennsylvania
      Order requires the Bank to reduce the level of nonaccrual loans to total
      gross loans noted in the Report of Examination as of June 30, 1995, to no
      more than 4% by November 24, 1996 and to 2% by February 22, 1997. As of
      December 31, 1997, this ratio was 2.1% which was higher than the 2%
      required by the Pennsylvania Order. Additionally, the Pennsylvania Order
      requires the Bank to reduce the level of classified assets as of June 30,
      1995, to no more than 75% of Tier I capital and the allowance for loan
      losses by November 24, 1996 and to 50% by February 22, 1997. As of
      December 31, 1997, this ratio was 23.68%. The Pennsylvania Order also
      contains a provision requiring the Bank to maintain, at all times, a
      minimum Tier I capital equal to or greater than 6.5% of the Bank's
      adjusted total assets, plus a "fully-funded loan loss reserve." As of
      December 31, 1997, this ratio was 12.58% and the Bank's loan loss reserve
      was fully funded.

      The Federal Reserve Agreement requires the Company to obtain the approval
      of the Federal Reserve Bank and the Department in order to declare or pay
      any dividends to its shareholders.

      The Memorandum of Understanding and Federal Reserve Agreement also place
      certain requirements related to capital, adversely classified assets and
      management policies. Such requirements are no more restrictive than those
      included in the Pennsylvania Order issued by the Department. Management
      believes the Corporation is in compliance with the Memorandum of
      Understanding and the Federal Reserve Agreement as of December 31, 1997.

      The Company's and the Bank's continued existence is dependent upon its
      ability to achieve compliance with the terms of the administrative order
      and other regulatory agreements. The Corporation's management believes
      that compliance will be achieved allowing the Corporation to continue as a
      going concern in its present form.


 2.   NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

      NATURE OF OPERATIONS

         First Lehigh Corporation and its subsidiaries, Pond Associates (a
         partnership) and First Lehigh Bank, and First Lehigh Bank's
         subsidiaries (Allentown Properties, Inc., Quakertown Properties, Inc.,
         Walnutport Properties, Inc., Walnutport Properties II, Inc., Winchester
         Property Management Corporation and Pond Road Properties, Inc.)
         (collectively the "Corporation") provide commercial banking services.

         The First Lehigh Corporations' primary regulator is the Federal Reserve
         Bank while the primary regulator of its subsidiary, First Lehigh Bank
         is the Pennsylvania Department of Banking. First Lehigh Bank is also
         regulated and insured by the Federal Deposit Insurance Corporation.



                                      F-9
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         First Lehigh Bank is a commercial bank which provides a variety of
         financial services to individuals and small business customers through
         its five branch offices in Walnutport, Cherryville, Bethlehem and
         Allentown, Pennsylvania. Its primary deposit products are passbook and
         statement savings accounts, certificates of deposit, NOW accounts,
         money market accounts, checking accounts and club accounts. Its primary
         lending products are secured small business loans and lines of credit,
         residential loans, installment loans and secured consumer loans.

      PRINCIPLES OF CONSOLIDATION

         The consolidated financial statements include the accounts of the First
         Lehigh Corporation and its direct and indirect subsidiaries. All
         significant intercompany balances and transactions have been eliminated
         in consolidation.

      USE OF ESTIMATES

         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 revenues
         and expenses during the reporting period. Actual results could differ
         from those estimates.

         Estimates that are particularly susceptible to significant change
         relate to the determination of the allowances for loan losses and the
         valuation of assets acquired in connection with foreclosures or in
         satisfaction of loans. In connection with the determination of
         allowances for loan losses and for writedowns of foreclosed assets,
         management obtains independent appraisals for significant properties.

         A majority of the Corporation's loan portfolio consist of commercial
         and residential real estate loans to borrowers within the Lehigh
         Valley, which constitutes the primary marketing area of the
         institution.

         While management uses available information to recognize losses on
         loans and foreclosed assets, future additions to the allowances may be
         necessary based on changes in local economic conditions. In addition,
         regulatory agencies, as an integral part of their examination process,
         periodically review the allowances for loan losses and for writedowns
         of foreclosed assets. Such agencies may require the Corporation to
         recognize additions to the allowances based on their judgments about
         information available to them at the time of their examination. Because
         of these factors, it is reasonably possible that the allowances for
         loan losses and for writedowns of foreclosed assets may change
         materially in the near term.



                                      F-10
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

      INVESTMENT SECURITIES

         Securities held-to-maturity are debt securities for which the Bank has
         the positive intent and ability to hold to maturity and are reported at
         amortized cost.

         Trading securities are marketable equity securities held principally
         for resale in the near term and recorded at their fair values.
         Unrealized appreciation and depreciation on trading securities are
         included immediately in other income.

         Securities available-for-sale consist of securities not classified as
         trading securities or securities held-to-maturity. Unrealized
         appreciation and depreciation, net of tax, on securities
         available-for-sale are reported as a net amount in a separate component
         of shareholders' investment until realized.

         Gains and losses on the sale of securities are determined using the
         specific identification method.

         Declines in the fair value of individual securities held-to-maturity
         and available-for-sale below their cost that are other than temporary
         result in write-downs of the individual securities to their fair value.
         Any related write-downs are included in earnings as realized losses.

         Premiums and discounts are amortized over the period to maturity using
         an interest method.

      LOANS

         Loans receivable that management has the intent and ability to hold for
         the foreseeable future or until maturity or pay-off are reported at
         their outstanding principal adjusted for any charge-offs, the allowance
         for loan losses, and any deferred fees or costs on originated loans and
         unamortized premiums or discounts on purchased loans.

         The accrual of interest on impaired loans is discontinued when, in
         management's opinion, the borrower may be unable to meet payments as
         they become due generally, when the loan is ninety days past due. When
         interest accrual is discontinued, all unpaid accrued interest is
         reversed. Interest income is subsequently recognized only to the extent
         cash payments are received. Impaired loans are charged off when
         collection is considered remote.



                                      F-11
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

      MORTGAGE LOANS HELD FOR SALE

         Mortgage loans held for sale are carried at the lower of aggregate cost
         or market. Net unrealized losses are recognized through a valuation
         allowance by charges to income.

      LOAN FEES

         Fees collected upon loan origination and certain direct costs of
         originating loans are deferred and recognized as adjustments to income
         over the contractual lives of the related loans as yield adjustments.
         Upon prepayment or other dispositions of the underlying loans before
         their contractual maturities, any associated unamortized fees or costs
         are recognized. Prior to 1988, such fees and costs were included in
         income when collected or paid.

      ALLOWANCE FOR LOAN LOSSES

         The allowance for loan losses is maintained at a level believed
         adequate by management to absorb potential losses in the loan
         portfolio. Management's determination of the adequacy of the allowance
         is based on an evaluation of the portfolio, past loan loss experience,
         current economic conditions, volume, growth and composition of the loan
         portfolio, and other relevant factors.

      PREMISES AND EQUIPMENT

         Premises and equipment are stated at cost, less accumulated
         depreciation and amortization. The provision for depreciation and
         amortization is computed generally using the straight-line method.

      FORECLOSED ASSETS HELD FOR SALE

         Foreclosed assets held for sale are carried at the lower of fair value
         minus costs to sell or cost. The provision for foreclosed asset losses
         and the costs of holding and maintaining the property are included in
         the statement of operations caption "Foreclosed asset expenses."

      INCOME TAXES

         Deferred tax assets and liabilities are reflected at currently enacted
         income tax rates applicable to the period in which the deferred tax
         assets or liabilities are expected to be realized or settled. As
         changes in tax laws or rates are enacted, deferred tax assets and
         liabilities are adjusted through the provision for income taxes.



                                      F-12
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

      STATEMENT OF CASH FLOWS

         The Corporation considers all cash and amounts due from depository
         institutions, interest-bearing deposits in other banks, and federal
         funds sold to be cash equivalents for purposes of the statement of cash
         flows.

         The Corporation transferred approximately $539,000 and $2,015,000 from
         loans to foreclosed assets held for sale during the years ended
         December 31, 1997 and 1996, respectively.

      FAIR VALUES OF FINANCIAL INSTRUMENTS

         Statement of Financial Accounting Standards ("SFAS") No. 107,
         "Disclosures about Fair Value of Financial Instruments," requires
         disclosure of fair value information about financial instruments,
         whether or not recognized in the statement of financial condition. In
         cases where quoted market prices are not available, fair values are
         based on estimates using present value or other valuation techniques.
         Those techniques are significantly affected by the assumptions used,
         including the discount rate and estimates of future cash flows. In that
         regard, the derived fair value estimates cannot be substantiated by
         comparison to independent markets and, in many cases, could not be
         utilized in immediate settlement of the instruments. Statement No. 107
         excludes certain financial instruments and all nonfinancial instruments
         from its disclosure requirements. Accordingly, the aggregate fair value
         amounts presented do not represent the underlying value of the
         Corporation.

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

             Cash and cash equivalents: The carrying amounts reported in the
             statement of financial condition for cash and cash equivalents
             approximate those assets' fair values.

             Investment securities: Fair values for investment securities are
             based on quoted market prices, where available. If quoted market
             prices are not available, fair values are based on quoted market
             prices of comparable instruments.

             Loans: For variable-rate loans that reprice frequently and with no
             significant change in credit risk, fair values are based on
             carrying amounts. The fair values for other loans (for example,
             fixed rate commercial real estate and rental property mortgage
             loans and commercial and industrial loans) are estimated using
             discounted cash flow analysis, based on interest rates currently
             being offered for loans with similar terms to borrowers of similar
             credit quality. Loan fair value estimates include judgments
             regarding future expected loss experience and risk characteristics.
             The carrying amount of accrued interest receivable approximates its
             fair value.



                                      F-13
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

             Deposits: The fair values disclosed for demand deposits (for
             example, interest-bearing checking accounts and passbook accounts)
             are, by definition, equal to the amount payable on demand at the
             reporting date (that is, their carrying amounts). The fair values
             for certificates of deposit are estimated using a discounted cash
             flow calculation that applies interest rates currently being
             offered on certificates to a schedule of aggregated contractual
             maturities on such time deposits. The carrying amount of accrued
             interest payable approximates fair value.

             Other borrowed funds and long-term debt: The carrying amounts of
             other borrowed funds and long-term debt approximate their fair
             values.

             Other liabilities: Commitments to extend credit were evaluated and
             fair value was estimated using the fees currently charged to enter
             into similar agreements, taking into account the remaining terms of
             the agreements and the present creditworthiness of the
             counterparts. For fixed-rate loan commitments, fair value also
             considers the difference between current levels of interest rates
             and the committed rates.

      DERIVATIVE FINANCIAL STATEMENTS

         The Company has no derivative financial instruments requiring
         disclosure under SFAS No. 119.


 3.   CASH AND DUE FROM BANKS

      Deposits with one financial institution are insured up to $100,000. The
      Bank maintains cash balances with certain other financial institutions in
      excess of the insured amount.


                                      F-14
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

 4.   INVESTMENT SECURITIES

      Trading securities are comprised of marketable equity securities with a
      cost basis of $4,908,000 and $4,810,000 at December 31, 1997 and 1996,
      respectively. Unrealized net holding gains on trading securities of
      $1,163,000 and $372,000 were included in earnings in 1997 and 1996,
      respectively.

      The amortized cost of other securities and their fair value at December
      31, 1997 and 1996 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                        1997
                                                          --------------------------------------------------------------
                                                                               GROSS                GROSS
                                                          AMORTIZED          UNREALIZED          UNREALIZED       FAIR
                                                            COST               GAINS               LOSSES         VALUE
                                                          ---------          ----------          ----------      --------
<S>                                                       <C>                <C>                 <C>             <C>
      SECURITIES AVAILABLE-
         FOR-SALE
             Obligations of the U.S.
                Treasury and other U.S.
                government agencies and
                corporations                              $15,109              $  84               $  (92)        $15,101
             Other, primarily corporate
                debt securities                             2,774                 19                  (36)          2,757
             Equity securities                                 50                  -                    -              50
                                                          -------              -----               ------         -------

                    Total securities
                       available-for-sale                 $17,933              $ 103               $ (128)        $17,908
                                                         ========              =====              =======         =======

      SECURITIES HELD-TO-
         MATURITY
             Obligations of the U.S.
                Treasury and other U.S.
                government agencies and
                corporations                             $  4,035              $   -              $   (95)        $ 3,940
             Foreign securities                                50                                                      50
                                                          -------              -----               ------         -------

                    Total securities
                       held-to-maturity                  $  4,085              $   -              $   (95)        $ 3,990
                                                         ========              =====              =======         =======
</TABLE>


                                      F-15
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                        1996
                                                        -----------------------------------------------------------------
                                                                              GROSS                GROSS
                                                         AMORTIZED          UNREALIZED          UNREALIZED         FAIR
                                                           COST               GAINS               LOSSES           VALUE
                                                         --------            ---------          ----------        -------
<S>                                                      <C>                 <C>                <C>               <C>
      SECURITIES AVAILABLE-
         FOR-SALE
             Obligations of the U.S.
                Treasury and other U.S.
                government agencies and
                corporations                              $19,279              $  83                $(287)        $19,075
             Other, primarily corporate
                debt securities                             2,867                  3                  (73)          2,797
             Equity securities                                 50                  -                    -              50
                                                          -------              -----                -----         -------

                    Total securities
                       available-for-sale                 $22,196              $  86                $(360)        $21,922
                                                          =======              =====                =====         =======

      SECURITIES HELD-TO-
         MATURITY
             Obligations of the U.S.
                Treasury and other U.S.
                government agencies and
                corporations                              $ 4,041              $   -                $(192)        $ 3,849
             Foreign securities                                50                                                      50
                                                          -------              -----                -----         -------

                    Total securities
                       held-to-maturity                   $ 4,091              $   -                $(192)        $ 3,899
                                                          =======              =====                =====         =======
</TABLE>


                                      F-16
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

      The amortized cost and fair value of debt securities held-to-maturity and
      securities available-for-sale at December 31, 1997 by contractual
      maturity, are shown below (in thousands). Expected maturities will differ
      from contractual maturities because borrowers may have the right to call
      or prepay obligations with or without call or prepayment penalties.


<TABLE>
<CAPTION>
                                                       SECURITIES                  SECURITIES
                                                  AVAILABLE-FOR-SALE            HELD-TO-MATURITY
                                               -----------------------         ------------------
                                               AMORTIZED         FAIR          AMORTIZED     FAIR
                                                  COST          VALUE            COST       VALUE
                                               ---------       -------         ---------   -------
         <S>                                   <C>            <C>              <C>        <C>
         Due within one year                    $     -        $     -          $   -       $    -
         Due after one year
             through five years                     661            657             50           50
         Due after five years
             through ten years                   13,402         13,421          4,035        3,940
         Due after ten years                        756            769              -            -
                                                -------        -------          -----       ------

         Total debt securities                   14,819         14,847          4,085        3,990

         Mortgage-backed securities               3,064          3,011              -            -
                                                -------        -------          -----       ------

                Total                           $17,883        $17,858         $4,085       $3,990
                                                =======        =======         ======       ======
</TABLE>

      The proceeds, gross gains and gross losses from the sale of
      available-for-sale securities during the year ended December 31, 1997 and
      1996 were as follows (in thousands):

<TABLE>
<CAPTION>

                                                                                1997        1996
                                                                               ------      ------
         <S>                                                                   <C>        <C>
         Proceeds                                                              $1,952      $4,038
         Gross gains                                                               31         131
         Gross losses                                                               9          52
</TABLE>


      On October 22, 1996, the Company sold debt securities classified as
      held-to-maturity with an amortized cost of $345,000 for $327,000 resulting
      in a realized loss of $18,000. The Bank's regulators classified this
      security due to a negative change in the issuer's credit worthiness
      resulting in management's decision to liquidate the security.

      Investment securities with a carrying value of approximately $10,457,000
      and $8,459,000 at December 31, 1997 and 1996, respectively were pledged to
      secure certain deposits, repurchase agreements and for other purposes as
      required by law.


                                      F-17
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

      At December 31, 1997, there is no concentration of investments that exceed
      10% of shareholders' equity for any individual issuer excluding those
      guaranteed by the U.S. government.

      In management's opinion, no permanent impairment of the value of any
      held-to-maturity or available-for-sale securities has occurred at December
      31, 1997.


 5.   LOANS

      The components of loans in the consolidated statements of financial
      condition were as follows at December 31, 1997 and 1996, (in thousands):

                                                         1997          1996
                                                       --------      --------
         Commercial                                    $  3,416      $  3,659
         Real estate construction                         4,620         4,920
         Commercial real estate                          18,485        19,842
         Residential real estate                         24,381        25,941
         Consumer                                         6,467         4,453
         Automobile loans                                 7,267         7,619
                                                       --------      --------

                       Subtotal                          64,636        66,434

         Unearned income                                    230           436
         Allowance for loan losses                        1,586         1,624
                                                       --------      --------

                              Net loans                 $62,820      $ 64,374
                                                        =======      ========


                                      F-18
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

      An analysis of the changes in the allowance for loan losses follows:

                                                            1997         1996
                                                          -------       ------

         Balance at January 1                             $ 1,624       $1,624
                                                           ------       ------

         Loans charged off                                 (1,172)        (849)
         Recoveries                                           131        1,216
                                                          -------       ------

                  Net (charge offs) recoveries             (1,041)         367
                                                          -------       ------

         Provision (credit) for loan losses                 1,003         (367)
                                                          -------       ------

         Balance at December 31                           $ 1,586       $1,624
                                                          =======       ======

      Impairment of loans having recorded investments of $3,364,000 at December
      31, 1997, and $2,052,000 at December 31, 1996, has been recognized in
      conformity with FASB Statement No. 114 as amended by FASB Statement No.
      118. The average recorded investment in impaired loans during 1997 and
      1996 was $1,969,000 and $3,718,000, respectively. The total allowance for
      loan losses related to these loans was $655,000 and $258,000 at December
      31, 1997 and 1996, respectively. Payments received on impaired loans and
      applied to principal were $314,000 and $1,180,000 in 1997 and 1996,
      respectively. The Bank is not committed to lend additional funds to
      debtors whose loans are impaired.

      Smaller balance homogeneous loans excluded from the impaired loan
      classification include residential real estate and consumer loans. Loans
      to the real estate development industry were approximately $1,157,000 and
      $3,400,000 at December 31, 1997 and 1996, respectively.

      The Corporation makes loans to its officers and directors and to their
      associates. Related party loans are made on substantially the same terms,
      including interest rates and collateral, as those prevailing at the time
      for comparable transactions with unrelated persons and do not involve more
      than normal risk of collectibility. The following table summarizes loan
      activity with officers, directors and their associates during the years
      ended December 31, 1997 and 1996 (in thousands):

                                                            1997          1996
                                                           ------        ------
         Balance, beginning                                $2,395        $2,538
         Advances                                              40         1,275
         Payments and other reductions                       (245)       (1,418)
                                                           ------        ------
         Balance, ending                                   $2,190        $2,395
                                                           ======        ======


                                      F-19
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


 6.   FORECLOSED ASSETS HELD FOR SALE

      The following table summarizes the activity in foreclosed assets held for
      sale during the years ended December 31, 1997 and 1996 (in thousands):

<TABLE>
<CAPTION>
                                                                           1997          1996
                                                                          ------        ------
        <S>                                                              <C>           <C>
         Balance, beginning                                               $5,200        $4,875
         Transfers from loans                                                539         2,015
         Additional capitalized costs                                         97            56
         Disposals                                                        (3,234)       (1,433)
         Charge-offs                                                        (705)         (313)
                                                                          ------        ------

                  Total                                                    1,897         5,200

         Less allowance for write-downs of foreclosed assets                 300           350
                                                                          ------        ------
         Balance, ending                                                  $1,597        $4,850
                                                                          ======        ======
</TABLE>

      The following table summarizes the activity in the allowance for
      write-downs of foreclosed assets during the years ended December 31, 1997
      and 1996 (in thousands):


<TABLE>
<CAPTION>
                                                                           1997          1996
                                                                         --------       ------
         <S>                                                             <C>            <C>
         Balance, beginning                                              $   350        $   61
         Provision for foreclosed asset losses                               655           602
         Charge-offs                                                        (705)         (313)
                                                                         -------        ------
         Balance, ending                                                 $   300        $  350
                                                                         =======        ======
</TABLE>

      Income of $1,539,000 from a litigation settlement related to foreclosed
      assets held for sale was recognized in 1996.



                                      F-20
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

 7.   PREMISES AND EQUIPMENT

      The following is a summary of premises and equipment at December 31, 1997
      and 1996 (in thousands):

<TABLE>
<CAPTION>
                                                                     1997        1996
                                                                   -------     -------
         <S>                                                       <C>        <C>
         Land and improvements                                     $   893     $   243
         Buildings and leasehold improvements                        4,323       2,003
         Equipment and fixtures                                      2,018       1,936
                                                                   -------     -------

                  Total                                              7,234       4,182

         Less accumulated depreciation and amortization              2,869       2,160
                                                                    ------     -------

                             Total                                  $4,365     $ 2,022
                                                                    ======     =======
</TABLE>


 8.   TIME DEPOSITS

      The aggregate amount of time certificates of deposit in denominations of
      $100,000 or more was $7,293,000 and $7,752,000 at December 31, 1997 and
      1996, respectively. Interest related to time certificates of deposit in
      denominations of $100,000 or more was approximately $399,000 and $388,000
      for the years ended December 31, 1997 and 1996, respectively.

      At December 31, 1997, the scheduled maturities of certificates of deposit
      under $100,000 are as follows:

         1998                                           $19,902
         1999                                            15,330
         2000                                             3,086
         2001                                             1,433
         2002 and thereafter                                437
                                                        -------
                                                        $40,188
                                                        =======



                                      F-21
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


 9.   OTHER BORROWED FUNDS

      Information concerning securities sold under agreements to repurchase and
      other borrowings is summarized as follows (dollars in thousands):


<TABLE>
<CAPTION>
                                                                  1997           1996
                                                                -------         ------
         <S>                                                    <C>             <C>
         Year end balance                                        $    -         $1,200
         Average interest rate during the year                     6.28%          5.94%
         Average balance during the year                         $  404         $  849
         Maximum month-end balance during the year               $3,000         $2,400

         Securities underlying the agreements (actual
             ownership  not transferred) at year end:
                Amortized cost                                   $6,637         $4,643
                Fair value                                       $6,581         $4,431
</TABLE>


10.   LONG-TERM DEBT

      The Corporation has a secured promissory note with principal payments of
      $9,100, plus interest, due monthly, maturing in 1999. Interest is
      calculated by using the lender's commercial rate plus .6%. At December 31,
      1997 $163,000 was outstanding on this debt. The note is secured by less
      than 10% of the shares of Bank stock owned by the Corporation.

      The Corporation has a mortgage payable with Firstrust Bank of $1,051,000
      at December 31, 1997. The mortgage is due in monthly payments, including
      interest at 8.25%, of $11,013 through February 2001 with the outstanding
      balance due in a balloon payment of approximately $890,000. The mortgage
      is secured by real estate with a carrying value of approximately
      $3,002,000.

      Maturities of long-term debt at December 31, 1997 are as follows:

         YEARS ENDING DECEMBER 31
         ------------------------
            1998                                                    $  156,000
            1999                                                       105,000
            2000                                                        55,000
            2001                                                       898,000
                                                                    ----------
                                                                    $1,214,000
                                                                    ==========


                                      F-22
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

11.   SHAREHOLDERS' INVESTMENT

      Shareholders' investment at December 31, 1997 and 1996 consists of the
      following (in  thousands,  except share information):

<TABLE>
<CAPTION>

                                                                                         1997        1996
                                                                                       ------      -------
         <S>                                                                           <C>         <C>
         Senior preferred stock, par value $.01 per share, 1,500,000
            shares authorized, 900,363 shares issued and outstanding                   $    9       $    9

         Series A preferred stock, par value $.01 per share, 1,000,000 shares
            authorized; 682,000 shares issued and outstanding (liquidation
            preference of $2,114)                                                           7            7

         Common stock, par value $.01 per share, 10,000,000 shares
            authorized; 2,050,000 and 2,000,000 shares issued and outstanding
            in 1997 and 1996, respectively                                                 20           20

         Contributed capital in excess of par value                                     9,171        9,021

         Retained earnings, including partners' equity from partnership
             included in consolidation                                                  5,268        3,227

         Net unrealized depreciation on securities available-for-sale                     (25)        (274)
                                                                                      -------      -------

                       Total shareholders' investment                                 $14,450      $12,010
                                                                                      =======      =======
</TABLE>


      Each share of the Corporation's senior preferred stock is convertible at
      the option of the shareholder, prior to October 31, 1998, to common stock
      at the rate of one share of common stock for each share of senior
      preferred stock. The conversion rate will be adjusted on November 1, 1998
      if the greater of book value or market value of the Corporation's common
      stock is not equal to $5.00 or more per share at the close of business on
      the last trading day of the New York Stock Exchange in October 1998. No
      adjustment will be made if the greater of the market value or book value
      is equal to or greater than $5.00 per share at such time. Conversion rates
      are adjusted for common stock dividends and splits. The senior preferred
      stock dividend is at an annual rate of $.25 per share. The liquidation
      price of the senior preferred stock is $5.00 plus any accrued dividends.
      During 1996, 51,461 shares of senior preferred stock and $465 in cash were
      issued in payment of $257,770 dividends in arrears. During 1997, dividends
      of $406,359, including $237,542 dividends in arrears, were paid to senior
      preferred stockholders.




                                      F-23
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

      Each share of the Series A preferred stock with a par value of $.01 is
      convertible at the option of the holder to common stock at the rate of .8
      of a share of common stock for each share of Series A preferred stock
      until March 31, 1999. Conversion rates are adjusted for common stock
      dividends and splits. The Series A preferred stock dividend is at an
      annual rate of $.3255 per share. During 1997, $332,986 dividends,
      including $221,990 dividends in arrears, were paid to Series A preferred
      stockholders. Cumulative dividends in arrears are $943,464 and $1,220,951
      as of December 31, 1997 and 1996, respectively.

      In addition, the Board of Directors declared a fourth quarter 1997
      dividend, payable to recordholders of December 17, 1997, to its senior
      preferred stockholders of $56,272 and $166,493 to its Series A preferred
      stockholders.


12.   EARNINGS PER SHARE

      In 1997, the Corporation adopted SFAS No. 128, "Earnings Per Share," which
      changed the computation of earnings per share ("EPS") and requires
      presentation of two new amounts, basic and diluted EPS, and additional
      informational disclosures. The adoption of SFAS No. 128 is required for
      all reporting periods after December 15, 1997 and requires restatement for
      all prior periods. The adoption of SFAS No. 128 resulted in the
      restatement of the Corporation's 1996 EPS, as follows:

         Previously reported:
             Basic EPS                                            $.60
             Diluted EPS                                          $.50

         Restated amounts:
             Basic EPS                                            $.86
             Diluted EPS                                          $.63




                                      F-24
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

      The following data show the amounts used in computing earnings per share
      and the effects of income and the weighted average number of shares of
      dilutive potential common stock for the years ended December 31, 1997 and
      1996:

<TABLE>
<CAPTION>

                                                                          INCOME          COMMON SHARES
                                                                         NUMERATOR         DENOMINATOR          EPS
                                                                         ---------        -------------        -----
         <S>                                                            <C>               <C>                  <C>
         1997
             Net income                                                $3,002,876
             Less preferred stock dividends:
                Series A                                                 (221,991)
                Senior                                                   (225,091)
                                                                        ---------
             Basic EPS
                Net income available to common
                    shareholders                                        2,555,794           2,002,877          $1.28
                                                                                                               =====
             Dilutive effect of potential common stock
                Stock options:
                    Exercise of options outstanding                                            60,000
                    Hypothetical share repurchase
                       at $7.75                                                               (27,097)

                Preferred stock:
                    Common shares issued upon
                       assumed conversion:
                           Series A                                                           545,600
                           Senior                                                             900,363
                Preferred dividend that would not
                    apply upon conversion                                 447,082
                                                                       ----------           ---------

             Diluted EPS                                               $3,002,876           3,481,743          $ .86
                                                                       ==========           =========          =====
</TABLE>


                                      F-25
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                         INCOME           COMMON SHARES
                                                                        NUMERATOR          DENOMINATOR          EPS
                                                                        ---------         -------------        -----
         <S>                                                            <C>               <C>                  <C>
         1996
             Net income                                                $2,145,312
             Less preferred stock dividends:
                Series A                                                 (221,991)
                Senior                                                   (212,542)
                                                                        ---------

             Basic EPS
                Net income available to common
                    shareholders                                        1,710,779           2,000,000           $.86
                                                                                                                ====

             Dilutive effect of potential common stock
               Stock options:
                    Exercise of options outstanding                                            60,000
                    Hypothetical share repurchase
                       at $5.25                                                               (40,000)

                Preferred stock:
                    Common shares issued upon
                       assumed conversion:
                           Series A                                                           545,600
                           Senior                                                             850,167
                Preferred dividend that would not
                    apply upon conversion                                 434,533
                                                                       ----------           ---------

             Diluted EPS                                               $2,145,312           3,415,767           $.63
                                                                       ==========           =========           ====
</TABLE>



                                      F-26
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

13.   NONCASH INVESTING AND FINANCING ACTIVITIES

      CONSOLIDATION OF PARTNERSHIP INTEREST

         In December 1997, a settlement was reached involving ongoing litigation
         centered on a partnership, in which the Company was a limited partner,
         which owned the building which houses a branch and administrative
         offices of the Bank. As part of this litigation settlement, the Company
         received $184,000 representing a $47,000 general partnership interest
         and a cash settlement of $137,000. The entire $184,000 has been
         included in other income. After receipt of this settlement, the
         Company's ownership interest as a general partner exceeded 50%, and
         therefore, the Company has been required under generally accepted
         accounting principles to include in its 1997 financial statements all
         of the accounts of this previously unconsolidated subsidiary. The pro
         forma balances of this partnership after elimination of intercompany
         balances are as follows:

         ASSETS
             Premises and equipment                                $1,051,000
             Other assets                                             252,000
                                                                   ----------

                              Total assets                         $1,303,000
                                                                   ==========

         LIABILITIES AND EQUITY
             Mortgage payable                                      $1,051,000
             Other liabilities                                          7,000
             Minority interest                                        191,000
                                                                   ----------

                       Total liabilities                            1,249,000

             Equity                                                    54,000
                                                                   ----------

                         Total liabilities and equity              $1,303,000
                                                                   ==========

         INCOME STATEMENT
             Noninterest income                                    $  188,000
             Mortgage interest                                        (88,000)
             Occupancy expenses                                      (141,000)
                                                                   ----------

                              Net loss                             $  (41,000)
                                                                   ==========

      DIVIDEND PAYMENTS

         At December 31, 1997, the Company has accrued $222,000 of dividends
         payable to its stockholders in the first quarter of 1998.

      ISSUANCE OF COMMON STOCK

         The Company, under the terms of its nonqualified stock bonus plan,
         issued 50,000 shares of its common stock in 1997 at the option price of
         $150,000.


                                      F-27
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

14.   INCOME TAXES

      The reasons for the difference between the provision for income taxes and
      the amount computed by applying the statutory federal income tax rate of
      34% to income before provision for income taxes are as follows (in
      thousands):

<TABLE>
<CAPTION>
                                                                                    1997         1996
                                                                                   ------        -----
         <S>                                                                       <C>           <C>
         Expected provision                                                        $1,021        $ 729
         Effect of tax-exempt income                                                   (9)          (9)
         Effect of dividends received deduction                                       (37)         (63)
         Other                                                                          3            1
         Net operating loss carryforward                                             (978)        (658)
                                                                                   ------        -----
                           Provision for income taxes                              $    -        $   -
                                                                                   ======        =====
</TABLE>

      At December 31, 1997, the Corporation has a net operating loss
      carryforward of approximately $1,594,000 available to offset future
      taxable income, which begins to expire in 2007 if not utilized.

      The  deferred income  tax asset and liability components are as follows
      at December 31, 1997 and 1996 (in thousands):

<TABLE>
<CAPTION>

                                                                                   1997          1996
                                                                                  -------       ------
        <S>                                                                      <C>           <C>
         Deferred tax assets:
             Net operating loss                                                   $   543       $1,139
             Write-down of foreclosed assets held for sale                            492          498
             Accrued expenses                                                          17           51
             Net unrealized losses on securities available-for-sale                     8           93
                                                                                  -------       ------
                       Total                                                        1,060        1,781
                                                                                  -------       ------

         Deferred tax liabilities:
             Loan losses                                                              (52)         (35)
             Deferred loan costs, net                                                 (11)         (32)
             Depreciation                                                             (86)        (107)
             Accretion                                                                 (6)          (5)
             Trading securities gains                                                (905)        (528)
                                                                                   ------       ------
                       Total                                                       (1,060)        (707)
                                                                                   ------       ------
         Valuation allowance                                                            -       (1,074)
                                                                                   ------       ------
         Net deferred tax asset                                                    $    -      $     -
                                                                                   ======      =======
</TABLE>



                                      F-28
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


15.   REGULATORY MATTERS AND RESTRICTIONS

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

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

      To be categorized as well capitalized, a bank must maintain minimum total
      risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
      the table. The Bank's actual capital amounts and ratios are also presented
      in the table. The Company's consolidated capital ratios are not
      significantly different from those of the Bank. No amounts were deducted
      from capital for interest-rate risk in either 1997 or 1996.

<TABLE>
<CAPTION>
                                                                                                     TO BE WELL
                                                                                                  CAPITALIZED UNDER
                                                                          FOR CAPITAL                  PROMPT
                                                                            ADEQUACY             CORRECTIVE ACTION
                                                  ACTUAL                    PURPOSES                  PROVISIONS
         (Dollars in thousands)            -------------------        ------------------        -------------------
                                            AMOUNT       RATIO        AMOUNT       RATIO        AMOUNT        RATIO
                                           -------      ------        ------       -----        ------        -----
      <S>                                  <C>          <C>           <C>         <C>           <C>           <C>
      As of December 31, 1997:
         Total capital (to risk
             weighted assets)              $14,714       19.28%        $6,104       8.00%        $7,631        10.00%
         Tier I capital (to risk
             weighted assets)              $13,752       18.02%        $3,052       4.00%        $4,578         6.00%
         Tier I capital (to
             average assets) *             $13,752       12.58%        $4,372       4.00%        $5,464         5.00%
      As of December 31, 1996:
         Total capital (to risk
             weighted assets)              $12,775       16.45%        $6,212       8.00%        $7,765        10.00%
         Tier I capital (to risk
             weighted assets)              $11,796       15.19%        $3,106       4.00%        $4,659         6.00%
         Tier I capital (to
             average assets) *             $11,796       10.70%        $4,410       4.00%        $5,513         5.00%
</TABLE>

      *  The Department requires a minimum of 6.5% under the terms of the
         Administrative Order.



                                      F-29
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

      Certain restrictions exist regarding the ability of the Bank to transfer
      funds to First Lehigh Corporation in the form of cash dividends, loans and
      advances. As of December 31, 1997, no retained earnings of the Bank
      (included in consolidated retained earnings) were available for
      distribution to First Lehigh Corporation as dividends, without prior
      regulatory approval. In addition, First Lehigh Corporation is unable to
      pay dividends at December 31, 1997, without the prior approval of the
      Federal Reserve Bank.

      Additionally, the Bank is limited to the amount it may loan or advance to
      its affiliates unless such loans or advances are collateralized by
      specified obligations. At December 31, 1997, the maximum amount available
      for unsecured loans from the Bank to First Lehigh Corporation approximates
      $1,750,000.


16.   PROFIT-SHARING PLAN

      The Corporation has a noncontributory profit-sharing plan covering
      eligible employees. Costs of the profit-sharing plan are funded as
      accrued. Contributions to the plan are discretionary and are determined
      annually by the Bank's board of directors. Profit sharing expense of
      $25,000 was recorded for both 1997 and 1996.


17.   STOCK OPTIONS

      1997 NONQUALIFIED STOCK OPTION PLAN

         On November 12, 1997, the Corporation instituted a nonqualified stock
         option plan for the purpose of securing and retaining key employees.
         Under this plan, 75,000 shares of common stock have been reserved for
         future issuance. The option period may vary by agreement, but in no
         case shall be exercisable after ten years from the date of grant. On
         December 11, 1997, the Corporation issued options to purchase 50,000
         shares of the Corporation's common stock at an option price of $3.00
         per share. The options were all exercised prior to December 31, 1997.

      1989 EQUITY INCENTIVE

         In 1989, the Corporation formed the "First Lehigh Corporation 1989
         Equity Incentive Plan" for which stock options may be granted to
         employees for the purchase of up to 84,000 shares of the Corporation's
         common stock. On December 7, 1995, 60,000 options were issued at $3.50
         per share. These options expire December 2005.



                                      F-30
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

      INCENTIVE STOCK OPTION PLAN

         Previously, the Corporation had reserved 66,500 shares of common stock
         for issuance under a key employee Incentive Stock Option Plan. At
         January 1, 1996, there were 20,000 remaining options under this plan
         which expired during 1996. At December 31, 1997, this plan was
         terminated.

      The Corporation applies Accounting Principles Board Opinion No. 25 and
      related interpretations in accounting for its stock option plans. The
      compensation expense attributable to the participants of the 1997
      Nonqualified Stock Option Plan was $100,000. If the Company utilized SFAS
      No. 123 based on the fair value at the grant date for awards, there would
      have been no effect on income or earnings per share.

      For purposes of the SFAS No. 123 calculations, the fair value of each
      option grant is estimated using the Black-Scholes option - pricing model
      with the following weighted-average assumptions for grants issued in 1997:

             Dividend yield                                             .00%
             Expected volatility                                        .00%
             Risk-free interest rate                                   5.55%
             Expected life                                              None


18.   FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

      The Corporation is a party to financial instruments with off-balance sheet
      risk in the normal course of business to meet the financing needs of its
      customers. These financial instruments include commitments to extend
      credit and standby letters of credit. Those instruments involve to varying
      degrees elements of credit, interest rate or liquidity risk in excess of
      the amount recognized in the consolidated balance sheet.

      The Corporation's exposure to credit loss from nonperformance by the other
      party to the financial instruments for commitments to extend credit and
      standby letters of credit is represented by the contractual amount of
      those instruments. The Corporation uses the same credit policies in making
      commitments and conditional obligations as it does for on-balance sheet
      instruments.

      The Corporation generally does not require collateral or other security to
      support financial instruments with off-balance sheet credit risk.

      Financial instruments whose contract amounts represent credit risk are as
follows at December 31, 1997:

         Commitments to extend credit                              $3,176,632
         Standby letters of credit                                  1,293,265



                                      F-31
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

      Commitments to extend credit are legally binding agreements to lend to
      customers. Commitments generally have fixed expiration dates or other
      termination clauses and may require payment of fees. Since many of the
      commitments are expected to expire without being drawn upon, the total
      commitment amounts do not necessarily represent future liquidity
      requirements. The Corporation evaluates each customer's credit-worthiness
      on a case-by-case basis. The amount of collateral obtained if deemed
      necessary by the Corporation on extension of credit is based on
      management's credit assessment of the counterparty.

      Standby letters of credit are conditional commitments issued by the
      Corporation guaranteeing performance by a customer to a third party. The
      credit risk involved in issuing letters of credit is essentially the same
      as that involved in extending loan facilities to customers.


19.   FAIR VALUES OF FINANCIAL INSTRUMENTS

      The estimated fair values of the Corporations' financial instruments at
      December 31, 1997 and 1996, are as follows (in thousands):

<TABLE>
<CAPTION>
                                                              1997                          1996
                                                    -------------------------      ----------------------
                                                    CARRYING           FAIR        CARRYING        FAIR
                                                     AMOUNT           VALUE         AMOUNT         VALUE
                                                    --------         --------       --------     --------
         <S>                                        <C>              <C>            <C>         <C>
         Financial assets:
             Cash and cash equivalents              $  8,081         $  8,081       $  4,620     $  4,620
             Trading account securities                7,571            7,571          6,309        6,309
             Securities available-for-sale            17,908           17,908         21,922       21,922
             Securities held-to-maturity               4,085            3,990          4,091        3,899
             Loans, net of allowance                  62,769           64,276         64,374       63,658
             Accrued interest receivable                 758              758            855          855

         Financial liabilities:
             Deposits                                 92,904           92,598         95,939       95,772
             Other borrowed funds                          -                -          1,200        1,200
             Long-term debt                            1,214            1,214            272          272
             Accrued interest payable                    211              211            211          211
</TABLE>



                                      F-32
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

19.      FIRST LEHIGH CORPORATION (Parent company only)
           CONDENSED FINANCIAL STATEMENTS (In thousands):


<TABLE>
<CAPTION>
                             CONDENSED BALANCE SHEET
                                                                               1997          1996
                                                                              -------      --------
         <S>                                                                 <C>          <C>
         Assets:
             Deposits with bank subsidiary                                    $   754      $    630
             Accounts receivable                                                   52             5
             Investment in subsidiary                                          13,727        11,522
             Premises and equipment                                             2,346             -
             Other assets                                                         313           356
                                                                              -------       -------
                           Total assets                                       $17,192       $12,513
                                                                              =======       =======

         Liabilities and shareholders' investment:
             Demand notes payable                                             $   163       $   272
             Other liabilities                                                    476           231
             Long-term debt                                                     2,103             -
                                                                              -------       -------
                    Total liabilities                                           2,742           503

             Shareholders' investment                                          14,450        12,010
                                                                              -------       -------
                           Total liabilities and shareholders' investment     $17,192       $12,513
                                                                              =======       =======


                        CONDENSED STATEMENT OF OPERATIONS
                                                                                1997          1996
                                                                              -------        ------
             Investment income                                                $    18        $   24
             Other income                                                         449            42
             Other expenses                                                      (312)         (919)
             Interest expense                                                    (197)          (30)
                                                                              -------        ------
             Loss before equity in income of subsidiary                           (42)         (883)
             Equity in net income of subsidiary                                 3,045         3,028
                                                                              -------        ------
             Net income                                                       $ 3,003       $ 2,145
                                                                              =======       =======
</TABLE>


                                      F-33
<PAGE>

FIRST LEHIGH CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                        CONDENSED STATEMENT OF CASH FLOWS

                                                                                1997          1996
                                                                               ------        ------
         <S>                                                                    <C>          <C>
         Cash flows from operating activities:
             Net income                                                        $3,003        $2,145
             Adjustments to reconcile net income to
                net cash used in operating activities:
                    Equity in net income of subsidiary                         (3,045)       (3,028)
                    Increase or decrease in:
                       Accounts receivable                                        (47)            1
                       Loans                                                                     94
                       Other assets                                               (72)          484
                       Other liabilities                                          172           230
                                                                               ------       -------
                           Net cash used in operating activities                   11           (74)
                                                                               ------       -------
         Cash flows provided by investing activities,
             Dividends received from subsidiary                                   962            --
                                                                               ------       -------
         Cash flows from financing activities,
             Distributions to shareholders                                       (740)
             Payments on note payable                                            (109)         (109)
                                                                               ------       -------
                           Net cash used in investing activities                 (849)         (109)
                                                                               ------       -------
         Net decrease in deposits with bank subsidiary                            124          (183)

         Deposits with bank subsidiary at beginning of year                       630           813
                                                                               ------       -------
         Deposits with bank subsidiary at end of year                          $  754       $   630
                                                                               ======       =======
</TABLE>




                                      F-34
<PAGE>


Item 8.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure.

         None.

                                    Part III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act.

         (a)  Directors and Executive Officers.

         The following table sets forth certain information regarding the
executive officers and directors of the Company and the Bank.

<TABLE>
<CAPTION>

        Name                   Age                        Position
       -----                   ---                        --------
<S>                           <C>          <C>
James L. Leuthe                 56         Chairman of the Board, Acting President, Chief
                                           Executive Officer and Director of the Company

Wilbur R. Roat                  50         President, Chief Executive Officer and Director
                                           of the Bank and Director of the Company

George M. Baltozer              63         Executive Vice President and Chief Operating
                                           Officer of the Bank

Kashmira K. Lodaya              49         Treasurer of the Company and Vice President
                                           and Controller of the Bank

Stephen M. Alinikoff            53         Director of the Company and the Bank

Peter Barter                    82         Director of the Company and the Bank

Robert B. Colfer                55         Director of the Company and the Bank

Vincent Dieter                  63         Director of the Company and the Bank

Charles D. Flack, Jr.           43         Director of the Company and the Bank

Harry J. Lentz                  88         Director of the Company and the Bank

John H. McKeever                72         Secretary and Director of the Company and
                                           Chairman of the Board, Secretary and Director
                                           of the Bank
</TABLE>

         James L. Leuthe has served as Chairman and a director of the Company
since its formation in 1982 and is currently serving as the Company's Acting
President. Mr. Leuthe has also served from time to time as the Company's
President, most recently from October 1992 to October 1993, and as Chairman and
a director of the Bank from 1971 to May 1993. Mr. Leuthe

                                      -37-

<PAGE>


is also the President of Midland Farms, Inc., a real estate holding and
development company and active farm operation, and a director of The Bethlehem
Corporation, an industrial equipment and machinery manufacturer. Mr. Leuthe was
subject to a 1993 order of the Department and two former orders of the FDIC of
1987 and 1992, under which he resigned as an officer of the Bank. See also
"Legal Proceedings" in Part I above for a description of the current FDIC
administrative proceedings against Mr. Leuthe.

         Wilbur R. Roat has served as President, Chief Executive Officer and a
director of the Bank and as director of the Company since September 1994. Prior
to joining the Bank, Mr. Roat served as President and Chief Executive Officer of
St. Edmond's Savings and Loan Association ("St. Edmond's") in Philadelphia,
Pennsylvania from March 1992 to August 1994. During his tenure at St. Edmond's,
St. Edmond's was a $70 million thrift institution for which Mr. Roat was
responsible for recruiting and developing the management team and the
development of the institution's initial five-year business plan. Prior thereto,
Mr. Roat served in various positions with PSFS/Meritor Financial Group, the most
recent of which were as Senior Vice President of Retail Banking for the
Philadelphia Savings Fund Society from March 1990 to March 1992 and as Senior
Vice President and Chief Administrative Officer of Meritor Financial Group from
November 1986 to February 1990.

         George M. Baltozer has served as Executive Vice President and Chief
Operating Officer of the Bank since January 1991. Mr. Baltozer previously served
as President of Dauphin National Bank from October 1985 to December 1990. Mr.
Baltozer served as the Acting President of the Bank from March 1994 until
September 1994.

         Kashmira K. Lodaya has served as Treasurer of the Company since January
1993 and as Vice President and Controller of the Bank since February 1996. Ms.
Lodaya previously served as Controller of the Bank from 1992 to February 1996.

         Stephen M. Alinikoff has served as a director of the Company and the
Bank since June 1993. During the past five years, Mr. Alinikoff has served as
the President and Chief Executive Officer of Security First Group, an
independent financial services organization, and as managing principal of First
Security Investments, Inc., a registered broker-dealer.

         Peter Barter was elected as director of the Company and the Bank on
October 24, 1994. Mr. Barter has been the owner of Fernbrook & Co., a sportswear
business, for more than 30 years.

         Robert B. Colfer has served as a director of the Company and the Bank
since 1985. Mr. Colfer has been the President of Keypunch, Inc., a data entry
service provider, since 1973.

         Vincent Dieter has served as a director of the Company and the Bank
since 1972. Mr. Dieter has been the owner of Kern's Machine Shop, Inc., a
manufacturer of small machine parts, for over 10 years.


                                      -38-

<PAGE>


         Charles D. Flack, Jr. was elected as a director of the Company and the
Bank in August 1993. During the past five years, he has served as Chief
Executive Officer of Diamond Manufacturing Co., a perforated metal
manufacturer.

         Harry J. Lentz has served as a director of the Company and the Bank
since 1975. Mr. Lentz is retired and formerly served as the assistant cashier of
the Bank for over 20 years. He also is retired from service as the Deputy
Recorder of Deeds for the Northampton County, Pennsylvania courthouse.

         John H. McKeever has served as a director of the Company and the Bank
since 1972 and as Secretary of the Company and the Bank for more than five
years. He has served as Chairman of the Board of the Bank since May 1993. Mr.
McKeever is an attorney at law in private practice.

         (b) Compliance with Section 16(a) of the Exchange Act.

         The Company does not have a class of securities registered under the
Securities Exchange Act of 1934, and, therefore, its officers, directors and
holders of more than 10% of the outstanding shares of the Company are not
subject to the provisions of Section 16(a).

Item 10.  Executive Compensation.

         (a)  Executive Compensation.

         The following tables contain compensation data with respect to the
Company's Chief Executive Officer, each executive officer whose total salary and
bonus for 1997 exceeded $100,000.


                                      -39-

<PAGE>


                           Summary Compensation Table

                               Annual Compensation

<TABLE>
<CAPTION>
                                                                                               Long-Term
                                                                                              Compensation
                                                                                              ------------
                                                                              Other            Securities            All
   Name and                                                                   Annual           Underlying           Other
Principal Position            Year       Salary($)       Bonus($)        Compensation($)       Options(#)      Compensation($)
------------------            ----       ---------       --------        ---------------       ----------      ---------------
<S>                           <C>       <C>             <C>               <C>                  <C>             <C>
James L. Leuthe               1997       $90,000(1)      $100,000           $27,706(2)            --                --
Chairman of the               1996       190,000(1)            --            15,921(2)            --                --
Board, Acting President,      1995        30,000(1)            --            15,203(2)            --                --
Chief Executive Officer
and director of the
Company

Wilbur Roat                   1997         $111,635      $  5,000            $7,053(3)             --                --
President, Chief              1996          107,500            --             6,257(3)             --                --
Executive Officer             1995          107,500        12,500             3,675(3)         60,000           $35,503(4)
and Director of the
Bank and director
of the Company
</TABLE>

----------------
(1)   Inasmuch as Mr. Leuthe was not deemed an employee of the Company, these
      amounts were paid to Mr. Leuthe as consulting and management fees.
      Since October 1992, Mr. Leuthe has committed a majority of his time to
      the restructuring and raising of capital necessary to assure compliance
      with the regulatory orders and agreements.

(2)   Represents the depreciation expense of $9,422 in 1997, $9,423 in 1996 and
      $9,423 in 1995 with respect to the use by Mr. Leuthe of a vehicle owned by
      the Bank and $607, $664 and $890 paid in insurance premiums with respect
      to such vehicle in 1997, 1996 and 1995, respectively. The total also
      includes the depreciation expense of $4,061 in 1997, $4,061 in 1996 and
      $4,061 in 1995 and insurance premiums of $1,437 in 1997, $707 in 1996 and
      $829 in 1995 with respect to the use by Mr. Leuthe of a vehicle owned by
      the Company. For 1997 and 1996, the totals include $2,134 and $1,096,
      respectively, of a non-cash taxable fringe benefit. The total in 1997
      includes an auto lease paid by the Company of $10,045.

(3)   Represents the depreciation expense of $3,341 in 1997, $2,824 in 1996
      and $2,824 in 1995 and insurance premiums of $706 in 1997, $676 in 1996
      and $851 in 1995 with respect to the use by Mr. Roat of a vehicle owned
      by the Bank. For 1997 and 1996 the total includes $3,006 and $2,757,
      respectively, of a non-cash taxable fringe benefit.

(4)   Represents relocation expense paid to Mr. Roat in 1995.

                                      -40-

<PAGE>


         The Company did not grant stock options to any executive officers in
1997.

                Fiscal Year-End (December 31, 1997) Option Values

                                                                Value of
                                                               Unexercised
                                     Number of                 In-the-Money
                                Unexercised Options             Options at
                                   at FY-End (#)                FY-End ($)
                                -------------------            ------------

Name                                Exercisable                Exercisable
----                                -----------                ------------
James L. Leuthe                         --                         $ --
Wilbur R. Roat                       60,000(1)                 $ 210,000(2)
---------------
(1)  Options to purchase 60,000 shares are exercisable at an exercise price of
     $3.50 per share.
(2)  Value based upon the per share bid price of $7.00 at December 31, 1997.

         The Bank has entered into a Severance Compensation Agreement with Mr.
Roat that commenced September 1, 1995 and is effective through August 31, 2000.
Under this agreement, in the event of a discharge within two years of a change
of control of the Bank or the Company, the Bank will be obligated (i) to pay to
Mr. Roat an amount equal to two times his salary plus bonus for the immediately
preceding calendar year prior to such change of control, (ii) to provide life,
disability and health insurance coverage for 24 months and (iii) to pay to Mr.
Roat an additional amount based upon his benefits under the Bank's employee
profit sharing plan. Also, at Mr. Roat's request made within six months of such
discharge, the Bank is obligated to purchase Mr. Roat's principal residence in
the Lehigh Valley at its original purchase price.

         Director Compensation

         The non-employee directors of the Bank received fees of $350 for each
meeting they at tended through May 28, 1997. As of June 1, 1997, all
non-employee directors of the Bank received fees of $450 for each meeting
attended. All directors of the Company received a fee of $450 for 1997. During
1997, John H. McKeever, a director of the Company and the Bank, was paid $15,750
for legal services performed for the Company and the Bank. Harry J. Lentz was
paid $100 per month for services as an assistant secretary of the Company and
the Bank in 1997.

Item 11.  Security Ownership of Certain Beneficial Owners and Management.

         The following table sets forth, as of February 28, 1998, the name and
address of each person who is known by the Company to be the beneficial owner of
more than 5% of the Company's outstanding Common Stock or of more than 5% of
the Company's outstanding Series A Preferred Stock, the number of shares of each
class beneficially owned and the percentages of the Company's outstanding Common
Stock and Series A Preferred Stock so owned. No person

                                      -41-

<PAGE>


holds more than 5% of the Company's outstanding Senior Preferred Stock. The
Series A Preferred Stock is convertible at the option of each holder into Common
Stock at any time on the following basis: (i) on or before March 31, 1996, each
share of Series A Preferred Stock is convertible at the rate of .8 of a share of
Common Stock for each share of Series A Preferred Stock and (ii) after March 31,
1996, each share of Series A Preferred Stock is convertible at the rate of .72
of a share of Common Stock for each share of Series A Preferred Stock. However,
the Board of Directors of the Company has approved an amendment to the Company's
Articles of Incorporation that would retain the .8 conversion rate until March
1999 subject to shareholder approval, and the share amounts and percentages
included in the following tables are based upon the .8 per share conversion
rate. The Senior Preferred Stock is currently convertible at the option of each
holder into Common Stock at any time at the rate of one share of Common Stock
for each share of Senior Preferred Stock.

<TABLE>
<CAPTION>
                                                                                                     Percent of
                                                              Percent of       Series A              Outstanding
                                                              Outstanding      Preferred              Series A
                                    Common Stock             Common Stock        Stock             Preferred Stock
                                     Beneficially            Beneficially     Beneficially           Beneficially
Name and Address                       Owned(1)                Owned(1)          Owned                  Owned
----------------                    -------------            ------------     ------------         ---------------
<S>                                 <C>                      <C>              <C>                  <C>
James L. Leuthe(3)                   1,278,780(2)               54.7%           420,000(3)                61.6%
1620 Pond Road
Allentown, PA 18104

Frank Henry                            125,000                   6.3                 --                    --
P.O. Box 1007
Wilkes-Barre, PA 18773

John H. McKeever                       132,800(4)                6.5             50,000                    7.3
1112 Walnut Drive
Danielsville, PA 18038

Robert B. Colfer                       100,000                   4.9             50,000                    7.3
845 W. Wyoming Street
Allentown, PA 18015

A. John May                             42,560                   2.1             51,500(5)                 7.6
4200 One Liberty Place
Philadelphia, PA 19103

Financial East, L.P.                    40,000                   2.0             50,000                    7.3
4200 One Liberty Place
Philadelphia, PA 19103
</TABLE>

                                      -42-
<PAGE>

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

(1)   Includes the number of shares of Common Stock that such persons have
      the right to acquire upon conversion of the Series A Preferred Stock
      and the Senior Preferred Stock. The number of shares of Common Stock
      that Mr. Leuthe, Mr. McKeever, Mr. Colfer, Mr. May and Financial East,
      L.P. have the right to acquire upon conversion of the Series A
      Preferred Stock is 336,000 shares, 40,000 shares, 40,000 shares, 41,200
      shares and 40,000 shares, respectively.

(2)   Includes 221,640 shares owned by Mr. Leuthe's children and 18,000
      shares owned by corporations of which Mr. Leuthe is the controlling
      shareholder. Mr. Leuthe disclaims beneficial ownership of 12,400 shares
      of Common Stock held in certain trusts for the benefit of his children
      that are included in this total.

(3)   Includes 20,000 shares owned by Mr. Leuthe's children.

(4)   Of these shares, 600 shares are owned by Mr. McKeever's wife.

(5)   These shares consist of 50,000 shares owned by Financial East, L.P., a
      limited partnership of which Mr. May is the general partner, and 1,500
      shares owned by Mash & Co., a general partnership of which Mr. May is a
      general partner. Mr. May disclaims beneficial ownership of 36,471
      shares owned by Financial East, L.P. and 900 shares owned by Mash & Co.

         The following table sets forth, as of February 28, 1998, the amount and
percentage of the Company's outstanding Common Stock and Series A Preferred
Stock beneficially owned by each director of the Company and by all directors
and executive officers of the Company as a group.

<TABLE>
<CAPTION>
                                                                                                   Percent of
                                                        Percent of           Series A             Outstanding
                                                        Outstanding          Preferred              Series A
  Name and Address                Common Stock         Common Stock            Stock             Preferred Stock
   of Individual                  Beneficially         Beneficially         Beneficially          Beneficially
or Identity of Group              Owned(1)(2)             Owned(2)            Owned(1)               Owned
--------------------              ------------         ------------         ------------         ---------------
<S>                               <C>                 <C>                  <C>                   <C>
James L. Leuthe(3)                  1,278,780               54.7%              420,000               61.6%
Stephen M. Alinikoff(4)                45,846                2.5                    --                 --
Peter Barter                           50,000                2.5                    --                 --
Robert B. Colfer(3)                   100,000                4.9                50,000                7.3
Vincent Dieter(5)                      13,960                 --                    --                 --
Charles D. Flack, Jr.(6)               86,756                4.1                    --                 --
Harry J. Lentz                          9,100                 --                    --                 --
John H. McKeever(3)                   132,800                6.5                50,000                7.3
Wilbur R. Roat(7)                      62,000                3.0                    --                 --
All directors and
executive officers as a
group (11 persons)                  1,789,242               71.2%              520,000               76.2%
</TABLE>

                                      -43-
<PAGE>

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

(1)   Information furnished by the directors.

(2)   Assumes the number of shares of Common Stock that such persons have the
      right to acquire upon the conversion of the Series A Preferred Stock.
      Reference is made to "Principal Beneficial Owners" above.

(3)   Reference is made to "Principal Beneficial Owners" above.

(4)   This total includes 4,250 shares of Common Stock that Mr. Alinikoff's
      sister has the right to acquire upon the conversion of 4,250 shares of
      Senior Preferred Stock; 1,591 shares of Common Stock that Mr.
      Alinikoff's daughter has the right to acquire upon the conversion of
      1,591 shares of Senior Preferred Stock; and 1,005 shares of Common
      Stock that Mr. Alinikoff has the right to acquire upon the conversion
      of 1,005 shares of Senior Preferred Stock.

(5)    These shares are owned jointly with Mr. Dieter's wife.

(6)   Of these shares, 50,000 shares are held by Diamond Manufacturing Co., a
      company of which Mr. Flack is a director, the President and a
      controlling shareholder, 700 shares are owned by Mr. Flack's wife and
      9,300 shares are owned by Mr. Flack's three children. This total also
      includes an aggregate 26,756 shares of Common Stock that two pension
      funds of Diamond Manufacturing Co. have the right to acquire upon
      conversion of 26,756 shares of Senior Preferred Stock.

(7)   These shares include 2,000 shares owned jointly with Mr. Roat's wife
      and 60,000 shares that Mr. Roat has the right to acquire under
      currently exercisable stock options.

Item 12.  Certain Relationships and Related Transactions.

         The Bank has had and expects to continue to have banking and financial
transactions in the ordinary course of business with directors and executive
officers of the Company and its subsidiaries, and members of such persons'
immediate families and companies in which they have an ownership interest of 10%
or more, on comparable terms, including interest rates, collateral and repayment
terms on extensions of credit, as those prevailing from time to time for other
customers. In the opinion of management, such loans and commitments to loan did
not involve more than a normal risk of collectibility or present other
unfavorable features. As of December 31, 1997, the directors and officers of the
Company and their respective affiliates have loans outstanding in the following
principal amounts: Mr. Leuthe, $1,349,204; Mr. Alinikoff, $386,405; and Mr.
Barter, $76,245.

                                      -44-

<PAGE>


         The Company has provided advancement of legal expenses on behalf of Mr.
Leuthe in connection with the FDIC proceedings described under "Legal
Proceedings" in part I of this report.

         The Bank leases certain office space from a partnership in which the
Bank owns 49% of the limited partnership interests. The Bank in turn subleases a
portion of this space. Net rent expense related to this lease was $112,442 and
$195,486 for the years ended December 31, 1996 and 1995, respectively. During
1997, this limited partnership was included in the consolidation.
Therefore, this expense was eliminated in consolidation.

         Mr. McKeever provided legal services to the Bank during 1997. A. John
May is a principal beneficial owner of the Company's Series A Preferred Stock.
Mr. May is a member of Duane, Morris & Heckscher, which provided legal services
for the Company and the Bank in 1996 and 1997.


                                      -45-

<PAGE>



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

         (a)  Exhibits.

<TABLE>
<CAPTION>
Exhibit No.    Description
<S>            <C>

    3.1        Articles of Incorporation of the Company, as amended (incorporated by
               reference to Exhibit 3.1 to the Company's Form SB-2 Registration State
               ment No. 33-71712).
    3.2        Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
               Company's Form SB-2 Registration Statement No. 33-71712).
    4.1        Specimen Certificate of Senior Preferred Stock of the Company (incorporated
               by reference to Exhibit 4.1 to the Company's Form SB-2 Registration
               Statement No. 33-71712).
   10.1        Severance Compensation Agreement between the Bank and Wilbur R. Roat
               dated December 7, 1995 (incorporated by reference to Exhibit 10.1 to the
               Company's Form 10-KSB Annual Report for the year ended December 31,
               1995).*
   10.2        Government Securities Clearing Agreement dated as of July 12, 1993
               between the Bank and Custodial Trust Company (incorporated by
               reference to Exhibit 10.2 to the Company's Form SB-2 Registration
               Statement No. 33-71712).
   10.3        Promissory Note from the Company to Meridian Bank in the principal amount
               of $545,183.92 dated June 24, 1994. (Incorporated by reference to
               Exhibit 10.3 of the Company's Form 10-KSB report, as amended, for
               fiscal year ended December 31, 1994).
   10.4        Office Lease dated June 3, 1994 between the Bank and Neely, Scharadin
               & Silbert, Inc.  (Incorporated by reference to Exhibit 10.4 of the
               Company's Form 10-KSB report, as amended, for fiscal year ended December
               31, 1994).
   10.5        Data Processing Services Agreement between the Bank and Bisys, Inc.
               dated as of January 1, 1997 and Addendum to Services Agreement dated
               as of October 2, 1997.
   10.6        Office Lease between Pond Associates and First Lehigh Bank dated November 1,
               1990 (incorporated by reference to Exhibit 10.6 to the Company's Form
               SB-2 Registration Statement No. 33-71712).
   10.7        Lease Agreement between 740 Hamilton Street, Inc. and the Germantown
               Savings Bank dated as of February 1, 1971; Lease Assignment and
               Assumption between the Bank and Savings Fund Society of
               Germantown, d/b/a Germantown Savings Bank dated September 19,
               1986; and letter dated August 4, 1993 acknowledging exercise of
               option term and confirmed by 740 Hamilton Street, Inc. and the
               Bank (each incorporated by reference to Exhibit 10.7 to the
               Company's Form SB-2 Registration Statement No. 33-71712).

</TABLE>

                                          -46-

<PAGE>

<TABLE>
<S>           <C>

   10.8        Lease Agreement between Janice H. Levin and the Estate of Philip J.
               Levin and The Savings Fund Society of Germantown and its Vicinity dated
               July 31, 1974, First Amendment dated January 20, 1975, Second
               Amendment dated June 22, 1984, Assignment and Assumption between
               the Bank and the Savings Fund Society of Germantown and its
               Vicinity dated as of September 30, 1986, including Consent to
               Assignment of Net Realty Holding Trust, Third Amendment dated
               July 11, 1989, Fourth Amendment dated August 6, 1991, Fifth
               Amendment dated August 26, 1991 and Sixth Amendment dated August
               16, 1993 (each incorporated by reference to Exhibit 10.8 to the
               Company's Form SB-2 Registration Statement No. 33-71712).
   10.9        The Company's 1984 Incentive Stock Option Plan (incorporated by
               reference to Exhibit 10.9 to the Company's Form SB-2 Registration
               Statement No. 33-71712).*
   10.10       The Company's 1989 Equity Incentive Plan (incorporated by reference to
               Exhibit 10.10 to the Company's Form SB-2 Registration Statement No. 33-71712).*
   10.11       Agreement of Limited Partnership of Pond Associates dated March 2, 1990
               among Pond Eight, Inc. and the limited partners set forth
               therein; and First Amendment of Limited Partnership Agreement of
               Pond Associates dated January 15, 1991 (each incorporated by
               reference to Exhibit 10.12 to the Company's Form SB-2 Registration
               Statement No. 33-71712).
   10.12       Office Lease dated April 30, 1996 between the Bank and Kevin T.
               Fogerty. (Incorporated by reference to the Company's Form 10-KSB annual
               report for the year ended December 31, 1996).
   10.13       Office Lease dated September 1, 1996 between the Bank and ERA Partners
               Group, Inc. (Incorporated by reference to the Company's Form 10-KSB
               annual report for the year ended December 31, 1996).
   10.14       Letter amending Lease dated April 28, 1997 between 740 Hamilton
               Street Inc. and the Bank.
   10.15       Seventh Amendment of Lease dated September 15, 1995 between Net
               Realty Holding Trust and the Bank.
   10.16       Eighth Amendment of Lease dated September 3, 1997 between Net
               Realty Holding Trust and the Bank.
   10.17       First Lehigh Corporation Nonqualified Stock Option Plan.*
   21.1        Subsidiaries of the Company. (Incorporated by reference to Exhibit
               21.1 of the Company's Form 10-KSB report for the fiscal year ended
               December 31, 1995).
   23.1        Consent of Parente, Randolph, Orlando, Carey & Associates
   27.1        Financial Data Schedule
</TABLE>

-------------------
*  This exhibit is a management contract or compensatory plan or arrangement.

         (b)  Reports on Form 8-K.
         None.

                                      -47-

<PAGE>

                                   SIGNATURES

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

                                     FIRST LEHIGH CORPORATION



Date:    March 30, 1998              By: /s/ James L. Leuthe
                                         ---------------------------------------
                                         James L. Leuthe, Chairman of the Board,
                                         Acting President and Chief Executive
                                         Officer

         In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
              Signature                               Title                            Date
              ---------                               -----                            -----
<S>                                       <C>                                     <C>

/s/ James L. Leuthe                       Chief Executive Officer and              March 30, 1998
-----------------------------------       Director (principal executive officer)
James L. Leuthe


/s/ Kashmira K. Lodaya                    Treasurer (principal financial           March 30, 1998
----------------------------------        and accounting officer)
Kashmira K. Lodaya


/s/ Stephen M. Alinikoff                  Director                                 March 30, 1998
-----------------------------------
Stephen M. Alinikoff


/s/ Peter Barter                          Director                                 March 30, 1998
-----------------------------------
Peter Barter


/s/ Robert B. Colfer                      Director                                 March 30, 1998
-----------------------------------
Robert B. Colfer


/s/ Vincent Dieter                        Director                                 March 30, 1998
-----------------------------------
Vincent Dieter

</TABLE>


<PAGE>


<TABLE>
<CAPTION>
              Signature                               Title                            Date
              ---------                               -----                            -----
<S>                                       <C>                                     <C>


/s/ Charles D. Flack, Jr.                 Director                                 March 30, 1998
-----------------------------------
Charles D. Flack, Jr.


/s/ Harry J. Lentz                        Director                                 March 30, 1998
-----------------------------------
Harry J. Lentz


/s/ John H. McKeever                      Director                                 March 30, 1998
-----------------------------------
John H. McKeever


/s/ Wilbur R. Roat                        Director                                 March 30, 1998
-----------------------------------
Wilbur R. Roat

</TABLE>


<PAGE>


Supplemental Information to Be Furnished with Reports Filed Pursuant to Section
15(d) of the Exchange Act by Non-Reporting Issuers.

         No annual report to security holders covering the fiscal year ended
December 31, 1997 has been sent to the Company's security holders. In accordance
with the instructions included under this caption of Form 10-KSB, the Company
intends to furnish copies of any such material to the Commission at such time
that it is sent to security holders.

         The Company did not hold an annual meeting in 1997, and will forward
copies of its proxy statement for its 1998 annual meeting to the Commission at
the time of their distributions to shareholders.


<PAGE>

                                  Exhibit Index


  Exhibit No.                           Description

     3.1               Articles of Incorporation of the Company, as amended
                       (incorporated by reference to Exhibit 3.1 to the
                       Company's Form SB-2 Registration Statement No. 33-71712).
     3.2               Bylaws of the Company (incorporated by reference to
                       Exhibit 3.2 to the Company's Form SB-2 Registration
                       Statement No. 33-71712).
     4.1               Specimen Certificate of Senior Preferred Stock of the
                       Company (incorporated by reference to Exhibit 4.1 to
                       the Company's Form SB-2 Registration Statement
                       No. 33-71712).
    10.1               Severance Compensation Agreement between the Bank
                       and Wilbur R. Roat dated December 7, 1995.
                       (incorporated by reference to Exhibit 10.1 to the
                       Company's Form 10-KSB Annual Report for the year ended
                       December 31, 1995).*
    10.2               Government Securities Clearing Agreement dated as of
                       July 12, 1993 between the Bank and Custodial Trust
                       Company (incorporated by reference to Exhibit 10.2 to
                       the Company's Form SB-2 Registration Statement
                       No. 33-71712).
    10.3               Promissory Note from the Company to Meridian Bank in
                       the principal amount of $545,183.92 dated June 24, 1994.
                       (Incorporated by reference to Exhibit 10.3 of the
                       Company's Form 10-KSB report, as amended, for fiscal year
                       ended December 31, 1994).
    10.4               Office Lease dated June 3, 1994 between the Bank and
                       Neely, Scharadin & Silbert, Inc. (incorporated by
                       reference to Exhibit 10.4 of the Company's Form 10-KSB
                       report, as amended, for fiscal year ended December 31,
                       1994).
    10.5               Data Processing Services Agreement between the Bank
                       and Bisys, Inc. dated as of January 1, 1997 and Addendum
                       to Services Agreement dated as of October 2, 1997.
    10.6               Office Lease between Pond Associates and First Lehigh
                       Bank dated November 1, 1990 (incorporated by reference
                       to Exhibit 10.6 to the Company's Form SB-2 Registration
                       Statement No. 33-71712).
    10.7               Lease Agreement between 740 Hamilton Street, Inc. and
                       the Germantown Savings Bank dated as of February 1,
                       1971; Lease Assignment and Assumption between the
                       Bank and Savings Fund Society of Germantown, d/b/a

<PAGE>


                       Germantown Savings Bank dated September 19, 1986; and
                       letter dated August 4, 1993 acknowledging exercise of
                       option term and confirmed by 740 Hamilton Street,
                       Inc. and the Bank (each incorporated by reference to
                       Exhibit 10.7 to the Company's Form SB-2 Registration
                       Statement No. 33-71712).
    10.8               Lease Agreement between Janice H. Levin and the Estate
                       of Philip J. Levin and The Savings Fund Society of
                       Germantown and its Vicinity dated July 31, 1974, First
                       Amendment dated January 20, 1975, Second Amendment
                       dated June 22, 1984, Assignment and Assumption be
                       tween the Bank and the Savings Fund Society of
                       Germantown and its Vicinity dated as of September 30,
                       1986, including Consent to Assignment of Net Realty
                       Holding Trust, Third Amendment dated July 11, 1989,
                       Fourth Amendment dated August 6, 1991, Fifth Amendment
                       dated August 26, 1991 and Sixth Amendment dated
                       August 16, 1993 (each incorporated by reference to
                       Exhibit 10.8 to the Company's Form SB-2 Registration
                       Statement No. 33-71712).
    10.9               The Company's 1984 Incentive Stock Option Plan
                       (incorporated by reference to Exhibit 10.9 to the
                       Company's Form SB-2 Registration Statement
                       No. 33-71712).*
    10.10              The Company's 1989 Equity Incentive Plan (incorporated
                       by reference to Exhibit 10.10 to the Company's
                       Form SB-2 Registration Statement No. 33-71712).*
    10.11              Agreement of Limited Partnership of Pond Associates
                       dated March 2, 1990 among Pond Eight, Inc. and the
                       limited partners set forth therein; and First Amendment
                       of Limited Partnership Agreement of Pond Associates dated
                       January 15, 1991 (each incorporated by reference to
                       Exhibit 10.12 to the Company's Form SB-2 Registration
                       Statement No. 33-71712).
    10.12              Office Lease dated April 30, 1996 between the Bank and
                       Kevin T. Fogerty. (Incorporated by reference to the
                       Company's Form 10-KSB annual report for the year ended
                       December 31, 1996).
    10.13              Office Lease dated September 1, 1996 between the Bank
                       and ERA Partners Group, Inc. (Incorporated by reference
                       to the Company's Form 10-KSB annual report for the
                       year ended December 31, 1996).
    10.14              Letter amending Lease dated April 28, 1997 between 740
                       Hamilton Street Inc. and the Bank.
    10.15              Seventh Amendment of Lease dated September 15, 1995
                       between Net Realty Holding Trust and the Bank.

<PAGE>


    10.16              Eighth Amendment of Lease dated September 3, 1997
                       between Net Realty Holding Trust and the Bank.
    10.17              First Lehigh Corporation Nonqualified Stock Option
                       Plan.*
    21.1               Subsidiaries of the Company.  (incorporated by reference
                       to Exhibit 21.1 of the Company's Form 10-KSB report
                       for the fiscal year ended December 31, 1995).
    23.1               Consent of Parente, Randolph, Orlando, Carey & Associates
    27.1               Financial Data Schedule

------------------
*  This exhibit is a management contract or compensatory plan or arrangement.