<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   Form 10-K

(Mark One)
  |X|          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

                  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 (NO FEE REQUIRED)

        For the transition period from ______________ to _____________

                          Commission File No. 0-22850

                                JEFFBANKS, INC.
            (Exact name of registrant as specified in its charter)

                   Pennsylvania                         23-2189480
        (State or other jurisdiction of              (I.R.S. Employer
          incorporation or organization)            Identification No.)

                            1845 Walnut Street
                             Philadelphia, PA                  19103
       (Address of registrant's principal executive offices) (Zip Code)

      Registrant's telephone number, including area code: (215) 861-7000
                         -----------------------------
          Securities registered pursuant to Section 12(b) of the Act:


  Title of each class                  Name of each exchange on which registered

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

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


          Securities registered pursuant to Section 12(g) of the Act:

                                 Common Stock
                               (Title of Class)

     Indicate by check mark whether the registrant (1) has filed all reports
to be filed by Section 13 or Section 15 (d) of the Securities Exchange Act of
1934 during the preceding 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____



    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
II of this Form 10-K or any amendment to this Form 10-K. [ ]

    Aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon closing sale price as quoted on NASDAQ Stock Market on
March 16, 1998: $182,913,648.

                  (APPLICABLE ONLY TO CORPORATE REGISTRANTS)

   Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 5,050,725 shares
as of March 18, 1998.
<PAGE>

                      DOCUMENTS INCORPORATED BY REFERENCE


Portions of the Proxy Statement (the "Proxy Statement") for registrant's 1998
Annual Meeting of Shareholders to be held on May 21, 1998 are incorporated by
reference in Part III of this Form 10-K.





<PAGE>



                                    Part I

ITEM 1. BUSINESS

General

    Jeffbanks, Inc. (the "Company") is a Pennsylvania chartered, registered
bank holding company headquartered in Philadelphia with two wholly-owned
subsidiaries, Jefferson Bank ("Jefferson PA") and Jefferson Bank of New Jersey
("Jefferson NJ"). The Company operates principally through its subsidiary
banks, which are engaged in the commercial banking business in Philadelphia,
Pennsylvania and its immediately adjacent Pennsylvania and New Jersey suburbs.
The Company currently operates an executive office, thirty retail branch
offices and a mortgage loan production office.

    During the past three years, the Company has experienced substantial
growth, reflecting internal growth and the acquisition of United Valley Bank
in 1997 and Constitution Bank in 1995. For the three-year period ended
December 31, 1997, the Company's total assets grew from $863.2 million to $1.3
billion, its deposits and interest bearing liabilities grew from $779.6
million to $1.2 billion and its shareholders' equity grew from $75.2 million
to $102.9 million. The Company also enjoyed increased profitability during the
period. The Company's income increased from $7.3 million for 1994 to $12.4
million for 1997. Return on average assets increased from .96% for 1994 to
1.04% for 1997.

    The Company's primary strategy for further growth is to continue expansion
of its market presence as the "small and middle-market business bank". The
Company has sought to implement its strategy by targeting the banking needs of
high net worth or high income individuals within its market area and the
businesses which they own or control. To attract this market, the Company
provides specialized commercial lending, cash management, lease financing and
personal credit services. In its commercial lending, the Company seeks to
respond to its targeted market by customizing the terms of its loans to the
specific or special needs of individual customers or their businesses. Such
services are also intended to aid in generating loans and deposits from the
Company's targeted market. The Company believes that satisfactory attention to
this selected market requires a combination of the services of the type
described above (which the Company believes are frequently unavailable at
small banks), and the personal attention of senior management (which the
Company believes is often unavailable to such customers at major financial
institutions). The customers in this market generally require relatively small
amounts of credit (generally not in excess of $5 million, and often less than
$1 million), but often seek customized solutions to their financial
requirements.

    The Company provides a wide range of banking services for individuals and
businesses in addition to the more specialized services referred to
previously. For individuals, the Company provides services which include
demand, interest checking, money market, certificates of deposit and other
saving accounts. The Company also offers home banking by computers, telephone
banking services, automatic teller services through the MAC inter-bank
automated teller system, night depository services, safe-deposit facilities,
consumer loan programs (including installment loans for home repairs and for
the purchase of consumer goods such as automobiles and boats), home equity
loans, credit card plans with Visa and Mastercard, revolving lines of credit,
automobile leases, residential construction loans and permanent mortgages for
single family and multi-family homes. For businesses, the Company additionally
offers short-term loans for seasonal and working capital purposes, term loans
secured by real estate and other assets, loans for construction and expansion
needs, including residential construction, equipment and automobile leasing,
revolving credit plans and other commercial loans, cash management services
and merchant credit card depository programs. The Company also makes indirect
automobile loans to consumers through automobile dealerships. Potential
customers for trust services are referred to several institutions which offer
trust services.

     Deposits obtained through the Company's branch system have been the
principal source of funds for use in the Company's lending activities. At
December 31, 1997, the Company had total deposits of $933.6 million. Of that
total, 44% represented time deposits, 41% represented interest checking and
savings and money market deposits and 15% represented demand (non-interest
bearing) deposits.
<PAGE>

    At December 31, 1997, the Company had a net loan portfolio (excluding
mortgage loans held for sale) of $894.0 million, representing 67% of total
assets at that date. The loan portfolio of the Company is categorized into
commercial, commercial mortgage, construction, direct lease financing,
consumer (including indirect and direct automobile loans and home equity),
credit card and residential mortgage. At December 31, 1997, commercial
mortgages and other commercial loans, including construction and direct
financing leases, were $566.5 million or approximately 63% of the Company's
net loan portfolio. Although in making its loans the Company relies upon its
evaluation of the creditworthiness and debt-servicing capability of a
borrower, its loans often are secured by residential or commercial real
property, automobiles, equipment, fixtures and other collateral. However,
exceptions may be made to this general operating philosophy. The Company does
not generally engage in non-recourse lending (i.e., lending as to which the
lender only looks to the asset securing the loan for repayment) and generally
will require the principals of any commercial borrower to personally guarantee
the loan. The Company does not generally engage in out-of-area lending,
although it may accept significant amounts of out-of-area collateral security
(such as a second home or other collateral) from borrowers in the Philadelphia
area.


<PAGE>

     The Company has been active in originating residential mortgage loans for
the purposes of resale to the Federal National Mortgage Association, the
Federal Home Loan Mortgage Corporation and other entities. For the year ended
December 31, 1997, the Company originated $46.2 million of mortgage loans. The
Company originates these loans primarily through its branches and existing
network of customers and generally retains the servicing on loans sold.
Originations are sold without recourse to the Company. The Company generally
obtains commitments to sell its mortgage originations as they are made, to
minimize the interest rate risk of holding such originations. At December 31,
1997, the Company had approximately $3.0 million of mortgage loans held for
sale.

    Additionally, the Company periodically purchases the right to service
other portfolios located in its geographic markets. Amounts so purchased are
subject to, and limited by, management's assessment of the prepayment risk of
the underlying portfolio. Under its mortgage servicing arrangements, the
Company collects and remits loan payments, maintains related account records,
makes or monitors insurance and tax payments, makes any required physical
inspections of property, pursues collection efforts with delinquent mortgagors
and supervises foreclosures and property dispositions. At December 31, 1997,
the Company was servicing real estate loans for other investors in an
aggregate principal amount of approximately $243.3 million.

Competition

    In its Philadelphia metropolitan service area, the Company is subject to
intense competition for customers from numerous commercial banks, savings and
loan associations and other financial institutions. The Company actively
competes with these institutions for deposits and local retail and commercial
accounts. Many of its competitors have significantly greater financial
resources than the Company. In consumer transactions, which typically involve
loans in amounts far less than the lending limit of either of the subsidiary
banks, the Company believes it is able to compete on a substantially equal
basis with larger financial institutions. In commercial loan transactions,
Jefferson PA's lending limit to a single customer (approximately $18.0 million
as of December 31, 1997) enables the Company to compete effectively for the
credit needs of the moderate-sized and small businesses which constitute its
target market, while the lending limit of Jefferson NJ (approximately $1.6
million at December 31, 1997) enables it to effectively compete for the credit
needs of small businesses. These lending limits are, however, considerably
below those of various competing institutions, which makes it difficult, and
in some cases impossible, for the Company to compete effectively when the
amount of the loan or financing required is in excess of the lending limits of
its subsidiary banks. In competing with other banks, as well as savings and
loans associations and other financial institutions, the Company seeks to
provide personalized services through officers' and directors' knowledge of
the Company's primary service area and customers. The size of such customers,
in management's opinion, often inhibits close attention to their needs by
larger institutions.

     In addition to competition from other commercial banks and savings and
loan associations, commercial banks are experiencing competition from
non-traditional sources. Industrial, retail, securities and insurance
companies through their financial services units, through various new products
and services, are providing significant competition in traditional banking
activities. These competitors are not regulated on the same basis as banks.


Acquisition Activity

    The Company has been active in acquiring banks within its geographic
market areas, including Bank of Chester County (1994), Security First Bank
(1994) and Constitution Bank (1995).

    On January 21, 1997, the Company, through Jefferson PA, completed a merger
with United Valley Bank ("UVB") pursuant to which it acquired that
institution. Under the terms of the merger, each share of UVB common stock was
converted into .339 of a share of the Company's common stock, resulting in the
issuance of 749,278 shares of the Company's common stock. In addition,
outstanding warrants to purchase the acquired institution's common stock were
converted into warrants to purchase 255,381 shares of the Company's common
stock, with an exercise price of $11.80 per share. UVB was a Pennsylvania
chartered banking institution engaged in commercial and retail banking with
one principal office in Philadelphia. UVB had total assets of $121.1 million
at the time of acquisition. The acquisition was accounted for under the
pooling of interests method of accounting. All prior acquisitions had been
accounted for under the purchase method.

    Regent National Bank. On March 18, 1998, the Company announced that,
through Jefferson PA, it had entered into a merger agreement with Regent
National Bank ("Regent"), pursuant to which it would acquire that institution.
Consummation of the merger is conditional upon required regulatory and
shareholder approvals. Under the terms of the pending merger, each share of
Regent common stock would be converted into .303 of a share of the Company's
common stock, resulting in the issuance of 1,032,989 shares of the Company's
common stock. In addition, outstanding options to purchase Regent's common
stock would be converted into options to purchase 111,201 shares of the
Company's common stock at an average exercise price of $26.26. Regent is a
nationally chartered banking institution engaged in commercial and retail
banking with one office in Philadelphia. Regent had total assets of $225.6
million at December 31, 1997. The acquisition would be accounted for under the
pooling of interests method of accounting.
<PAGE>

Services to Subsidiary Banks

     The Company provides a number of services to Jefferson PA and Jefferson
NJ, including arranging for and maintaining computer services, insurance
coverage, marketing and advertising, internal audit services and loan review
services (primarily review of loan quality, loan documentation, supervision of
the loan watch list and workouts on problem loans). The Company received fees
from its subsidiary banks for such services aggregating $2.8 million in 1997,
$3.1 million in 1996 and $2.9 million in 1995. On a consolidated basis, for
financial reporting purposes, these fees are eliminated, except to the extent
they have reduced income applicable to minority interests in 1993 and prior
years.


SUPERVISION AND REGULATION

     The Company and its banking subsidiaries are extensively regulated under
both federal and state law. The regulation and supervision of the Company and
its bank subsidiaries is designed primarily for the protection of depositors
and not the respective institutions or their shareholders. To the extent that
the following information describes statutory and regulatory provisions, it is
qualified in its entirety by reference to the particular statutory and
regulatory provisions. A change in applicable law or regulation may have a
material effect on the business of the Company or its bank subsidiaries.


General

    The Company is a registered bank holding company under the Bank Holding
Company Act of 1956 (the "Holding Company Act"). As such, it is required to
file an annual report with the Federal Reserve Board ("FRB") and provide such
additional information as the FRB may require pursuant to the Holding Company
Act, and is also subjected to regular examination by the FRB. The Holding
Company Act limits the activities which may be engaged in by the Company and
its subsidiaries to those of banking and the management of banking
organizations, and to certain non-banking activities, including those
activities which the FRB has found, by order or regulation, to be so closely
related to banking or managing or controlling banks as to be proper incidents
thereto. Such activities include, among other things, and, subject to certain
limitations, operating a mortgage company, finance company, credit card
company or factoring company; performing certain data processing operations;
providing certain investment and financial advice; acting as an insurance
agent for certain types of credit related insurance and providing certain
securities brokerage services for customers. The Company has no present plans to
engage in any of these activities other than through its subsidiary banks. The
FRB has adopted certain capital adequacy guidelines pertaining to bank holding
companies. The Company currently exceeds all such guidelines. For a discussion
of these guidelines, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Results of Operations: Liquidity and
Capital Resources."

    Under FRB regulations, a bank holding company is required to serve as a
source of financial and managerial strength to its subsidiary banks and may
not conduct its operations in an unsafe or unsound manner. It is the FRB
policy that, in serving as a source of strength to its subsidiary banks, a
bank holding company should stand ready to use available resources to provide
adequate capital funds to its subsidiary banks during periods of financial
stress or adversity and should maintain the financial flexibility and
capital-raising capacity to obtain additional resources for assisting its
subsidiary banks. A bank holding company's failure to meet its obligations to
serve as a source of strength to its subsidiary banks will generally be
considered by the FRB to be an unsafe and unsound banking practice, and/or a
violation of FRB regulations.

    The FRB has also issued policy statements which provide that bank holding
companies generally should pay dividends only out of current operating
earnings.

     The Company is subject to additional regulation by the Pennsylvania
Department of Banking (the "PA Department"). Pennsylvania law currently
permits Pennsylvania bank holding companies to own an unlimited number of
banking subsidiaries.


Limitations on Dividends from Subsidiary Banks

    There are various legal limitations on the extent to which Jefferson PA
and Jefferson NJ may pay dividends to the Company. With respect to Jefferson
PA, the Pennsylvania Banking Code of 1965, as amended (the "1965 Code"),
provides that dividends may be declared and paid only out of accumulated net
earnings (undivided profits). Where surplus is less than 50% of the amount of
Jefferson PA'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 PA Department until surplus is equal to 50% of the total
amount of capital. Where surplus is less than 100% of Capital, until such time
as surplus equals capital, at least 10% of net earnings must be transferred to
surplus prior to the declaration of a dividend. The PA Department has the
power to issue orders prohibiting the payment of dividends when such payment
is deemed to be an unsafe or unsound banking practice.
<PAGE>

    With respect to Jefferson NJ, the New Jersey Banking Act of 1948, as
amended (the "1948 Act"), provides that a bank may declare and pay dividends
on its capital stock if stated capital will not be reduced following the
payment of any such dividend. A bank also may not pay a dividend if, after
payment thereof, it will have a surplus of less than 50% of stated capital
unless such dividend would not reduce surplus.

     As of December 31, 1997, Jefferson PA had $34.5 million of undivided
profits legally available for the payment of dividends. Jefferson NJ had $1.7
million available for the payment of dividends as of that date.


Pennsylvania Regulation of Jefferson PA

    As a Pennsylvania state-chartered commercial bank, Jefferson PA is subject
to the applicable provisions of the 1965 Code, and the regulations of the PA
Department adopted thereunder. Jefferson PA derives its lending and investment
powers from these laws and is subject to examination from time to time by the
PA Department. The most recently concluded examination of Jefferson PA by the
PA Department was conducted as of December 31, 1997. The 1965 Code provides
for extensive regulation of the business of Jefferson PA, 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 other entities, including
banks and trust companies. Any merger of Jefferson PA and another institution
must receive the prior approval of the PA Department. In addition, the 1965
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 carry forwards, as defined in the Internal Revenue Code, in
excess of 20% of the bank's total shareholders' equity) without the prior
approval of the PA Department. Exempted from prior approval of the PA
Department are stock acquisitions by the issuing bank or a person who controls
the bank and acquisitions through a merger or consolidation approved by the
U.S. Comptroller of the Currency. The 1965 Code regulates the establishment of
branch offices and sets minimum capital stock and surplus requirements (with
which Jefferson PA complies). Under the 1965 Code, banks are permitted to
operate branch offices statewide. Approval of the PA Department is required
for amendments to the Articles of Incorporation of Jefferson PA.

    Pennsylvania has adopted a reciprocal interstate banking law which
currently permits, subject to certain conditions, out-of-state bank holding
companies located in all fifty states to acquire banks and bank holding
companies in Pennsylvania, provided Pennsylvania bank holding companies are
accorded reciprocal rights. Subject to the reciprocity requirement and to the
prior approval of the PA Department, Pennsylvania permits out-of-state bank
holding companies to enter the state either by acquisition of an existing
Pennsylvania bank or bank holding company or establishment of a new bank in
Pennsylvania. Approval of the PA Department is also required if a Pennsylvania
bank holding company acquires an out-of-state bank or bank holding company.
Currently, the interstate banking laws determined by the PA Department to be
fully reciprocal with Pennsylvania law include the laws of the states of New
Jersey, New York and Ohio. However, the Riegle-Neal Act, summarized below, has
superseded Pennsylvania law, subject to certain conditions.


New Jersey Regulation of Jefferson NJ

    As a state-charted commercial bank, Jefferson NJ is subject to the
applicable provisions of the 1948 Act and the regulations of the New Jersey
Department of Banking (the "NJ Department") adopted thereunder. Jefferson NJ
derives its lending and investment powers from these laws, and is subject to
examination from time to time by the NJ Department. The most recent
examination of Jefferson NJ by the NJ Department was as of September 5, 1995.
Jefferson NJ is required to comply with various provisions of New Jersey law
regarding its deposits and lending 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, restrictions on the amount of
capital which may be used for fixed assets and limitations on the amount and
nature of its investment in certain entities. In addition, New Jersey law sets
minimum capital stock and surplus requirements (with which Jefferson NJ
presently complies) and regulates the establishment of branch offices.
Approval of the NJ Department is also required for amendments to the
Certificate of Incorporation of Jefferson NJ.

     Under the 1948 Act, banks are generally permitted to operate branch
offices statewide, except that a bank generally may not establish a branch
office in a municipality, other than the municipality in which it maintains
its principal office, which has a population of less than 10,000 persons and
in which another banking institution maintains its principal office. Certain
stock and surplus requirements (with which Jefferson NJ presently complies)
also must be satisfied in order to establish additional branch offices.

     New Jersey has a reciprocal interstate banking law which permits, subject
to certain conditions, out-of-state holding companies to acquire New Jersey
banks or bank holding companies or to establish banks in New Jersey, provided
the laws of the jurisdiction in which the operations of the out-of-state bank
holding company's banking subsidiaries are principally conducted afford
reciprocity to New Jersey-based banking institutions. Currently, the
interstate banking laws determined by the NJ Department to be fully reciprocal
with the New Jersey law include the laws of the states of Pennsylvania, New
York and Delaware. However, the Riegle-Neal Act, summarized below, has
superseded New Jersey law, subject to certain conditions.
<PAGE>

FDIC Regulation

    Jefferson PA and Jefferson NJ are members of the Federal Deposit Insurance
Corporation ("FDIC") and therefore are subject to additional regulation by
that agency. The FDIC must approve the establishment of new branch offices.
Dividend payments by a bank are generally prohibited when the bank is in
default on its FDIC assessments. Moreover, the FDIC has the power to issue
orders prohibiting the payment of dividends when such payment is deemed to be
an unsafe or unsound banking practice. The subsidiary banks are subject to
examinations from time to time by the FDIC. The most recently concluded
examination of Jefferson PA by the FDIC was conducted as of September 30,
1996. The most recent examination of Jefferson NJ was conducted as of
September 30, 1996. As members of the FDIC, Jefferson PA and Jefferson NJ are
assessed annual premiums based on the amount of their deposits and in part on
ratings given them by the FDIC. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Results of Operations:
Non-Interest Expense ". Neither subsidiary bank is a member of the Federal
Reserve System.

Regulations Concerning Liquidity and Capital

     Each regulatory agency referred to above evaluates the adequacy of
liquidity of the Company and/or its subsidiary banks at the time of their
respective examinations. None of these agencies has required specific
liquidity amounts or percentages. Instead, to assess adequacy the agencies
consider a variety of factors including historical deposit stability, success
in generating new deposits, loan demand and other factors. Based upon current
liquidity levels and policies, each agency has, as a result of its most
recently concluded examination, determined liquidity and related policies to
be adequate. For a discussion of capital adequacy guidelines promulgated by
regulators, and the compliance of the Company and its subsidiary banks with
such guidelines, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Results of Operations: Liquidity and
Capital Resources."


Federal Change in Control and Acquisition Regulation

    Under the Change in Bank Control Act of 1978 and regulations thereunder,
persons who intend to acquire control of a bank or bank holding company are
required to give at least 60 days prior written notice to the FRB (in the case
of a bank holding company) or the FDIC (in the case of a state-chartered
non-member bank such as Jefferson PA or Jefferson NJ). Control for the purpose
of this regulation exists when the acquiring party obtains voting control of
at least 25% of any class of the bank's or holding company'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 the
bank's or holding company's voting securities if (i) securities issued by the
bank or holding company 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 or holding company's voting securities with a holding larger
than the acquiring party. Under the Holding Company Act, a company cannot
acquire control of a bank or a bank holding company without the prior approval
of the FRB. Control has substantially the same definition for these purposes
as under the Change in Bank Control Act of 1978. The Change in Bank Control
Act of 1978 and the regulations promulgated thereunder authorize the FRB or
FDIC, as the case may be, to disapprove any such acquisition on certain
specified grounds. With respect to the acquisition of banking organizations,
the Company is required to obtain the prior approval of the FRB before it may
merge or consolidate with another bank holding company, acquire all or
substantially all of the assets of any bank, or acquire ownership or control
of any voting shares of any bank, if, after such share acquisition, it will
own or control more than 5% of the voting shares of such bank. The Holding
Company Act generally prohibits the FRB from approving the acquisitions by the
Company, or any voting shares of, or interest in, or all or substantially all
of the assets of, any bank located outside Pennsylvania, unless specifically
authorized by the laws of the state in which the target bank is located.
<PAGE>

    In addition, under the Bank Merger Act of 1956, as amended, the approval
of the appropriate federal bank regulatory agency (the FRB, the Comptroller of
the Currency or the FDIC, depending on the resulting institution) is required
before either subsidiary bank may merge or consolidate with, or acquire all or
substantially all of the assets of, another bank.


FIRREA

     Although the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") pertains to thrift depository institutions (such as savings
and loan associations), certain of FIRREA's provisions may affect the
Company's subsidiary banks. In particular, FIRREA imposes certain
"cross-guarantee" provisions which are applicable to the subsidiary banks, as
more fully described below.

    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. Accordingly, one
of the Company's subsidiary banks could be subject to "cross-guarantee" claims
by the FDIC for losses sustained by the FDIC in the event such agency is
required to operate or assist the other subsidiary bank, or any insured
depository institution which may be formed or acquired by the Company in the
future.

                                      5
<PAGE>


The Improvement Act

    Under the Federal Deposit Insurance Corporation Improvement Act of 1991
(the "Improvement Act") financial institutions are subject to increased
regulatory scrutiny and must comply with certain operational, managerial and
compensation standards developed by FDIC regulations. Under the Improvement
Act, 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,
the Improvement Act prescribes an increasing amount of regulatory
intervention, including the adoption by a bank of a capital restoration plan,
a guarantee of the plan by its parent holding company and the placement of a
hold on increases in assets, number of branches and 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 or conservator.
Critically undercapitalized institutions generally may not, beginning 60 days
after becoming critically undercapitalized, make any payment of principal or
interest on their subordinated debt. For well capitalized institutions, the
Improvement Act provides authority for regulatory intervention when the
institution is deemed to be engaging in unsafe or unsound practices or
receives 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.
For information concerning capital requirements applicable to the Company's
subsidiary banks and their capital levels at December 31, 1997, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations: Liquidity and Capital Resources." As set
forth therein, under currently existing standards, the Company and both of its
subsidiary banks are deemed to be "well capitalized".

     The Improvement Act also requires federal banking regulators to issue new
rules establishing certain minimum standards to which an institution must
adhere, including standards requiring a maximum ratio of classified assets to
capital, minimum earnings sufficient to absorb losses and, to the extent
feasible, a minimum ratio of market value to book value. Additional
regulations are required to be developed relating to internal controls, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, fees and benefits. The Improvement Act also requires all
institutions in general to undergo an annual regulatory examination and
requires an institution with total assets of at least $500 million to have
annual audits, establish an independent audit committee of its board of
directors and undergo an annual regulatory examination.


The Riegle-Neal Act

    The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Riegle-Neal Act") has eliminated substantially all state law barriers to the
acquisition of banks by out-of-state bank holding companies as of September
29, 1995. The law permitted interstate branching by banks effective as of June
1, 1997, subject to the ability of states to opt-out completely or to set an
earlier effective date. Both Pennsylvania and New Jersey have adopted
legislation permitting out-of-state bank holding companies unrestricted access
to acquire Pennsylvania banks. The Pennsylvania legislation permits
out-of-state banks to set up branches in Pennsylvania so long as their home
state reciprocates by allowing Pennsylvania banks to open branches there. New
Jersey has not yet adopted legislation to set an earlier effective date for
the Riegle-Neal Act, although such legislation is currently pending. The
Company anticipates that the effect of these new laws will be to increase
competition within the markets in which the Company now operates, although the
Company cannot predict the extent to which competition will increase in such
markets or the timing of such increase.


                                      6
<PAGE>

ITEM 2. PROPERTY

     The Company and its subsidiary banks currently operate thirty retail
branch offices, one loan production office and an operations center. In 1998,
the Company occupied a new 13,000 square foot executive office. Twenty-seven
of these offices occupy approximately 155,000 square feet and are leased under
leases expiring between 1998 and 2011. During 1997, the Company paid aggregate
rentals of $2.0 million under these leases. Six offices are owned and occupy
approximately 27,000 square feet.


ITEM 3. LEGAL PROCEEDINGS

     The Company is not involved in any material legal proceeding. However,
its subsidiary banks are involved in routine litigation in the normal course
of their business. In the opinion of the Company, final disposition of this
litigation will not have a material adverse effect on the financial condition
or operations of the Company.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

    None.





                                      7
<PAGE>

                                   PART II.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's common stock is traded on The Nasdaq Stock Market under the
symbol "JEFF." The following table sets forth, on a quarterly basis, the high
and low bid prices for the Company's common stock for the Company's two most
recent fiscal years as reported by Nasdaq, together with quarterly dividend
payment information for such period:


                                                                 Cash Dividends
    1996                            High            Low            Per Share
    ----                          -----------     -----------   ----------------
First Quarter                      $22.09          $20.19             $.12
Second Quarter                      21.85           21.14              .12
Third Quarter                       26.96           21.61              .12
Fourth Quarter                      27.08           25.41              .12

                                                                 Cash Dividends
    1997                            High            Low            Per Share
                                 -----------     -----------   ----------------
First Quarter                      $29.50          $26.50             .14
Second Quarter                      28.50           26.75             .17
Third Quarter                       38.38           28.25             .17
Fourth Quarter                      48.00           34.00             .19


As of March 16, 1998, there were approximately 3,000 holders of the Company's
Common Stock.




                                      8
<PAGE>
ITEM 6.      SELECTED CONSOLIDATED FINANCIAL DATA

    The following selected consolidated financial and operating information of
the Company should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements of the Company, including the notes thereto,
included elsewhere herein.
<TABLE>
<CAPTION>
                                                                                  As of or for the Year Ended December 31,
                                                                        -----------------------------------------------------------
                                                                        1997          1996          1995        1994        1993
                                                                        ----          ----          ----        ----        ----
                                                                                   (dollars in thousands, except per share amounts)
<S>                                                                  <C>          <C>           <C>          <C>          <C>
Income Statement Data:
    Interest income ..............................................   $   94,136   $    85,204   $    74,276  $   54,462   $  46,832
    Interest expense .............................................       45,140        39,079        33,049      20,583      19,252
                                                                     ----------   -----------   -----------  ----------   ---------
    Net interest income ..........................................       48,996        46,125        41,227      33,879      27,580
    Provision for credit losses ..................................        3,600         5,023         3,986       1,857       2,519
                                                                     ----------   -----------   -----------  ----------   ---------
    Net interest income after provision for credit losses ........       45,396        41,102        37,241      32,022      25,061
    Non-interest income(1)(2) ....................................        9,649         7,305         6,969       5,814       5,879
    Non-interest expense .........................................       36,607        35,817        31,160      26,978      23,365
                                                                     ----------   -----------   -----------  ----------   ---------
    Income before income taxes, dividends on preferred stock,
        minority interest and cumulative effect of
            accounting change ....................................       18,438        12,590        13,050      10,858       7,575
    Income taxes(3) ..............................................        6,001         4,640         4,571       3,593       2,307
                                                                     ----------   -----------   -----------  ----------   ---------
    Income before dividends on preferred stock, minority interest
        and cumulative effect of accounting change ...............       12,437         7,950         8,479       7,265       5,268
    Dividends on preferred stock of subsidiary ...................         --            --            --          --           789
    Minority interest in net income of subsidiaries ..............         --            --            --          --         1,191
                                                                     ----------   -----------   -----------  ----------   ---------
    Income before cumulative effect of accounting change .........       12,437         7,950         8,479       7,265       3,288
    Cumulative effect of change in accounting for income taxes (3)                                                              485
              Net Income .........................................   $   12,437   $     7,950   $     8,479  $    7,265   $   3,773
                                                                     ==========   ===========   ===========  ==========   =========
Per Common Share Data:(4)
    Net income - basic ...........................................   $     2.50    $     1.63   $      1.87  $     1.72   $    1.50
    Net income - diluted .........................................         2.33          1.54          1.63        1.57        1.33
    Book value ...................................................        20.57         18.43         17.42       16.49       15.81
    Book value - diluted(5) ......................................        18.77         17.41         16.54       15.28       14.57
Balance Sheet Data:
    Total assets .................................................   $1,328,624    $1,127,174   $ 1,069,692  $  863,230   $ 740,706
    Total loans(6) ...............................................      909,725       829,587       774,491     634,472     533,987
    Allowance for credit losses ..................................      (12,769)      (13,734)      (14,991)     (8,986)     (6,867)
    Investment securities(7) .....................................      244,169       175,238       163,572      97,108     110,415
    Goodwill, net ................................................        4,435         8,776         8,978         809         135
    Deposits .....................................................      933,630       787,139       840,516     710,669     631,091
    Securities sold under repurchase agreements ..................       70,911        73,764        46,549      16,229      16,211
    FHLB advances ................................................      150,000       127,750        77,000      43,745      10,774
    Subordinated notes and debentures ............................       32,000        32,000         9,000       9,000       9,000
    Trust preferred securities ...................................       25,300          --            --          --          --
    Minority interest ............................................         --            --            --          --           437
    Convertible preferred stock and related surplus ..............         --            --            --        12,835      12,845
    Common shareholders' equity ..................................      102,855        91,281        85,038      62,330      53,054
Selected Operating Ratios:
    Return on average assets .....................................         1.04%          .74%          .92%        .96%        .87%
    Return on average common equity ..............................        12.89%         8.95%        10.74%      10.73%      10.76%
    Net interest margin ..........................................         4.51%         4.59%         4.82%       4.83%       4.45%
    Ratio of earnings to fixed charges ...........................          140%          132%          132%        138%        126%
    Dividend payout ratio ........................................        26.71%        30.15%        22.05%      16.63%       --
Selected Capital and Asset Quality Ratios:
    Equity/assets ................................................         7.74%         8.10%          7.95%       8.71%      8.90%
    Non-performing loans/total loans(8) ..........................         1.03%         1.36%          1.69%       1.83%      1.56%
    Non-performing assets/total loans and non-performing assets(9)         1.27%         1.78%          2.23%       2.76%      2.64%
    Allowance for credit losses/total loans ......................         1.40%         1.66%          1.93%       1.42%      1.29%
    Allowance for credit losses/non-performing assets(9) .........       110.12%        92.76%         86.22%      50.77%     48.15%
    Net charge-offs/average loans ................................          .53%          .79%           .58%        .50%       .42%
</TABLE>
-----------
(1)  Includes gain on sale of securities of $515,000 in 1997, $245,000 in
     1996, $333,000 in 1995, $128,000 in 1994 and $376,000 in 1993.

(2)  Effective October 1, 1995, the Company adopted SFAS No. 122, "Accounting
     for Mortgage Servicing Rights." Income resulting from the capitalization
     of mortgage servicing rights required by that pronouncement amounted to
     $554,000 in 1997, $279,000 in 1996 and $72,000 in 1995.

(3)  Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting
     for Income Taxes." As a result of adopting SFAS No. 109, in 1993 the
     Company recognized a cumulative benefit of $485,000, or $.22 and $.15
     respectively in basic and diluted earnings per share.



                                      9
<PAGE>

(4)  The Company adopted the provisions of SFAS No. 128, "Earnings Per Share,"
     which eliminates primary and fully diluted earnings per share and
     requires presentation of basic and diluted earnings per share in
     conjunction with the disclosure of the methodology used in computing such
     earnings per share. Basic earnings per share excludes dilution and is
     computed by dividing income available to common shareholders by the
     weighted average common shares outstanding during the period. Diluted
     earnings per share takes into account the potential dilution that could
     occur if securities or other contracts to issue common stock were
     exercised and converted into common stock. Prior periods earnings per
     share calculations have been restated to reflect the adoption of SFAS No.
     128. Basic net income per share is based upon the respective weighted
     average number of common shares outstanding, as follows: 4,967,000
     (1997); 4,882,000 (1996); 3,936,000 (1995); 3,460,000 (1994) and
     2,166,000 (1993). Diluted net income per share in all years presented
     gives effect to the dilution resulting from stock options granted by the
     Company or acquired companies. Diluted net income per share in 1995, 1994
     and 1993 gives effect to the increase in average shares that would have
     been outstanding, and the increase in net income applicable to common
     stock that would have resulted from, the assumed conversion of the
     Company's dilutive preferred stock. Per share amounts in all years have
     been adjusted to retroactively reflect prior stock dividends.

(5)  Diluted book values in all years presented give effect to the dilution
     which results from stock options granted by the Company or acquired
     companies. Diluted book values in 1994 through 1993 give effect to the
     increase in average shares that would be outstanding, and the increase in
     common equity that would result from, the assumed conversion of the
     Company's dilutive convertible preferred stock.

(6)  Includes mortgage loans held for sale of $2,959,000 (1997), $725,000
     (1996), $484,000 (1995), $380,000 (1994) and $19.0 million (1993).

(7)  Effective January 1, 1994, the Company adopted SFAS No. 115 "Accounting
     for Certain Investments in Debt and Equity Securities." The adoption had
     no effect on the Company's financial position or results of operations.

(8)  Non-performing loans consist of non-accrual loans and renegotiated loans
     and exclude loans past due 90 days or more still accruing interest.
     Effective January 1, 1995, the Company adopted SFAS No. 114 "Accounting
     for Impairment of a Loan, as amended by SFAS No. 118 "Accounting by
     Creditors for Impairment of a Loan - Income Recognition and Disclosures."
     The effect of adoption was not significant to the Company's financial
     position or results of operations.

(9)  Non-performing assets consist of non-accrual loans, renegotiated loans
     and other real estate owned and exclude loans past due 90 days or more
     still accruing interest.

(10) All acquisitions through December 31, 1996, have been accounted for under
     the purchase method of accounting and accordingly, the results of these
     entities' operations are included from their respective dates of
     acquisition. As a result of the 1997 acquisition of United Valley Bank,
     the financial statements have been restated to reflect the impact of
     United Valley Bank. Restatement was required as the transaction was
     accounted for under the pooling of interests method of accounting.




                                      10
<PAGE>






ITEM 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
             RESULTS OF OPERATIONS

    All statements contained in this Form 10-K Annual Report that are not
historical facts are based on current expectations. Such statements are
forward-looking (as defined in the Private Securities Litigation Reform Act of
1995) in nature and involve a number of risks and uncertainties. Actual
results may vary materially. The factors that could cause actual results to
vary materially include: the ability of the Company to maintain profitable
operations, the adequacy of the Company's allowance for credit losses, general
business and economic conditions in the Company's primary lending and
deposit-taking areas, future interest rate fluctuations, competition from
various financial and non-financial businesses, the ability of the Company to
remain in compliance with current regulatory provisions and any future changes
in such provisions, the ability of the Company to continue to generate loans
and to improve its net interest margin and other risks that may be described
from time to time in the reports the Company is required to file with the
Securities and Exchange Commission (the "Commission"). Undue reliance should
not be placed on any such forward-looking statements.

    The following discussion and analysis of financial condition and results
of operations should be read in conjunction with the consolidated financial
statements of the Company and related notes included elsewhere herein.

Overview

    Net income of the Company increased to $12.4 million in 1997, from $8.0
million in 1996 and $8.5 million in 1995. The increases in net income
reflected increases in net interest margin and other income. In addition, in
1997, the Company acquired United Valley Bank in a transaction accounted for
as a pooling of interests, requiring the Company to restate its financial
statements to include United Valley Bank income and expense and other
financial information in all periods. As a consequence, the increase in net
income in 1997 reflected savings resulting from the consolidation of United
Valley Bank into the Company in 1997, and a reduced provision for credit
losses for United Valley Bank loans. Net income in 1996 reflected the impact
of a $1.5 million additional provision for credit losses for United Valley
Bank. The $1.5 million increase in the provision reflected amounts provided to
bring the United Valley Bank reserve to levels more consistent with
industry-wide methodologies. Non-accrual loans were $9.4 million at December
31, 1997, compared to $11.3 million a year earlier. Non-performing assets
amounted to $11.6 million at December 31, 1997 and $14.8 million at December
31, 1996(1). Non-performing assets reflected a decrease in other real estate
owned to $2.2 million at December 31, 1997 from $3.5 million at December
31,1996(1) .

    As set forth in "Results of Operations - General", below, the Company's
results of operations depend primarily on its net interest income. Reflecting
increased loan balances resulting from internal growth and the acquisitions,
the Company's net interest income increased in 1997 and 1996. Net interest
income in 1997 increased approximately 6% over 1996 which increased 12% over
1995. The net interest margin, expressed as net interest income divided by
average interest earning assets, decreased to 4.51% in 1997 from 4.59% in 1996
and 4.82% in 1995. While the prime rate and the Company's loan and investment
yields generally rose in 1997 compared to 1996, the yield on interest bearing
liabilities increased more, and resulted in the reductions in net interest
margin. Increases in the proportion of lower yielding consumer loans
(primarily indirect automobile), partially offset the impact of higher market
interest rates. The increase in the yield on interest bearing liabilities
reflected the issuance of $25.3 million of 9.25% trust preferred securities
and increases in rates paid on certain promotional savings and money market
accounts. The 1996 reduction in the net interest margin reflected the impact
of a lower prime rate which contributed to lower loan yields. While yields on
many categories of interest bearing liabilities were also lower, yields in
other categories were increased due to competitive pressure, reducing the
overall decrease in yield in savings and money market accounts. Further, the
proportion of higher cost non-deposit funding increased, contributing to other
increases in the cost of funds. In 1995, the Company maintained net interest
margins at approximately the prior year's level by continuing to maintain
interest rates on many core deposits at lower levels more consistent with
industry averages, and as a result of growth in demand deposit balances. Total
loans at December 31, 1997 increased 10% or $80.1 million over the prior year
reflecting internal growth. Total loans at December 31, 1996 increased 7%, or
$55.1 million over the prior year amount. Total loans at December 31, 1995
increased 22% or $140.0 million over the prior year amount. Of that increase,
approximately $72.0 million resulted from the acquisition of Constitution
Bank. As of December 31, 1997, the capital ratios of the Company's subsidiary
banks significantly exceeded the "well-capitalized" standard established by
regulatory authorities. See "Liquidity and Capital Resources", below.

-----------------------
(1) Non-accrual loans and non-performing assets exclude loans past due 90 days
    or more still accruing interest.




<PAGE>

    In the first quarter of 1997, the Company issued $25.3 million of 9.25%
junior subordinated deferrable interest debentures due March 31, 2027 to JBI
Capital Trust I (the Trust), a Delaware Business Trust, in which the Company
owns all of the common equity. The debentures are the sole asset of the Trust.
The Trust issued $25 million of trust preferred securities to investors.
Although the junior subordinated debentures will be treated as debt of the
Company, they currently qualify for tier 1 capital treatment, subject to
certain limitations. The Trust preferred securities are callable by the
Company on or after March 31, 2002, or earlier if the deduction of related
interest for federal income taxes is prohibited, treatment as tier 1 capital
is no longer permitted or certain other contingencies arise. The Trust
preferred securities must be redeemed upon maturity of the debentures in 2027.
The debentures are the sole asset of the Trust. See "Liquidity and Capital
Resources," below.

                                      11
<PAGE>

Results of Operations

     General. The Company's results of operations depend primarily on net
interest income, which is the difference between interest income on interest
earning assets and interest expense on interest bearing liabilities. Interest
earning assets consist principally of loans and investment securities, while
interest bearing liabilities consist primarily of deposits. The Company's net
income is also affected by the provision for credit losses and the level of
non-interest income as well as by non-interest expenses, including salary and
employee benefits, occupancy costs, data processing expense, charges relating
to non-performing and other classified assets and other expenses.

    Net Income. Net income was $12.4 million in 1997 compared to $8.0 million
in 1996 and $8.5 million in 1995. The increases in net income in 1997 and 1996
reflect increases in net interest income which increased 6% and 12%,
respectively, over prior year periods. These increases reflected the impact of
increased loan balances, while net interest margins expressed as net interest
income divided by average interest earning assets, decreased in 1997 and 1996
compared to respective prior years. While the prime rate and the Company's
loan and investment yields generally rose in 1997 compared to 1996, the yield
on interest bearing liabilities increased more, and resulted in the reductions
in net interest margin. Increases in the proportion of lower yielding consumer
loans (primarily indirect automobile), partially offset the impact of higher
market interest rates. The increase in the yield on interest bearing
liabilities reflected the issuance of $25.3 million of 9.25% trust preferred
securities, and increases in rates paid on certain promotional savings and
money market accounts. The 1996 reduction in the net interest margin reflected
the impact of a lower prime rate which contributed to lower loan yields. While
yields on many categories of interest bearing liabilities were also lower,
yields in other categories were increased due to competitive pressure,
reducing the overall decrease in yield in savings and money market accounts.
Further the proportion of higher cost non-deposit funding increased,
contributing to other increases in the cost of funds. Net interest margins
were comparable in 1995 and 1994. In 1995, the Company maintained net interest
margins at approximately the prior year's level by continuing to maintain
interest rates on many core deposits at lower levels more consistent with
industry averages, and as a result of growth in demand deposit balances. See
"Net Interest Income and Average Balances", below. Repricing opportunities for
loans and the shift in deposit base to lower cost demand, interest checking,
savings and money market deposits served to increase net interest margins in
1994. In 1994, the Company had reduced its cost of funds to levels more
consistent with industry averages by maintaining interest rates on many core
deposits at or below their lowered prior year levels when rates had generally
declined. The provision for credit losses amounted to $3.6 million in 1997,
$5.0 million in 1996 and $4.0 million in 1995. The provision for credit losses
in 1996 reflected the impact of a $1.5 million additional provision for credit
losses for United Valley Bank. That increase was reflected in the restatement
of the financial statements resulting from the pooling of interests method of
accounting utilized for that acquisition. The $1.5 million increase in the
provision reflected amounts provided to bring the United Valley Bank reserve
to levels more consistent with industry-wide methodologies. See "Financial
Condition - Provision for Credit Losses", below. In 1997 the gain on sales of
residential mortgages totaled $1.1 million, compared to $419,000 in 1996, and
reflected increases in the volume of residential mortgage loans generated.
Increases in merchant credit card deposit fees during these periods were
significantly offset by increases in related expense, reflected under
non-interest expense as merchant credit card deposit expense. Other income was
$1.5 million in 1997, compared to $903,000 in 1996 and $1.4 million in 1995.
The $642,000 increase in 1997 compared to 1996 reflected $300,000 resulting
from service charges instituted in 1997 on cash withdrawals from proprietary
ATMs by non customers. The $503,000 decrease in other income in 1996 compared
to 1995 reflected a $264,000 reduction in gains on the sale of other real
estate owned. See "Results of Operations - Net Interest Income and Average
Balances" and Non-Interest Income," below.
<PAGE>

    Net Interest Income and Average Balances. Net interest income was $49.0
million in 1997, compared to $46.1 million in 1996 and $41.2 million in 1995.
Yields on interest earning assets increased to 8.55% in 1997 from 8.44% in
1996, a difference of .11%. The increase in yields reflected a higher prime
and other market interest rates, the effects of which were partially offset by
an increased proportion of lower yielding indirect automobile loans (as
compared to commercial loans). The cost of interest bearing liabilities also
reflected increases in market interest rates and increased to 4.78% in 1997
from 4.59% in 1998, a difference of .19%. The increase in the yield on
interest bearing liabilities reflected the issuance of $25.3 million of 9.25%
trust preferred securities and increases in rates paid on certain promotional
savings and money market accounts. Yields on interest earning assets decreased
to 8.44% in 1996 from 8.67% in 1995, a difference of .23%, and reflected the
impact of a lower prime and other market interest rates. While yields on
certain categories of interest bearing liabilities were also lower, yields in
other categories were increased due to competitive pressure, reducing the
overall decrease in yield in savings and money market accounts. Further, the
proportion of higher cost non-deposit funding increased, contributing to other
increases in the cost of funds. Accordingly, the cost of interest bearing
liabilities was 4.59% in 1996, compared to 4.66% in 1995. The ratio of higher
cost non-deposit funding (consisting of securities sold under repurchase
agreements, trust preferred securities, subordinated debentures and FHLB
advances to deposits), also increased in 1997 and 1996 compared to 1995,
generally increasing the Company's cost of funds. Expressed as a percentage of
deposits, that ratio was 26% in 1997, 21% in 1996 and 12% in 1995. In 1995 the
Company was able to maintain interest rates on certain core deposits at lower
levels (relative to market rates) which were more consistent with industry
averages, as it had done in 1994. Also in 1995, increases in demand deposits
served to partially offset the impact of increases in the cost of interest
bearing liabilities. Net interest margins of 4.82% in 1995 and 4.83% in 1994
were comparable. Repricing opportunities for loans and the shift in deposit
base to lower cost demand, interest checking, savings and money market
deposits served to increase net interest margins in 1994. In 1994 the Company
had reduced its cost of funds to levels more consistent with industry averages
by maintaining interest rates on many core deposits at or below their lowered
prior year levels when rates had generally declined. However, the Company's
cost of funds, which was high relative to the industry before 1994, may
increase in the future. In addition to matching its local competitors' rates,
which may fluctuate significantly, the Company has in the past and may in the
future have a higher relative proportion of certificates of deposit or other
higher rate funding sources, to fund loan growth or increase liquidity, which
might serve to increase the cost of funds.

                                      12
<PAGE>

    The following tables present the average daily balances of assets,
liabilities and shareholders' equity and the respective interest earned or
paid on interest earning assets and interest bearing liabilities, as well as
average rates for the periods indicated:

<TABLE>
<CAPTION>

                                                                                     Year Ended December 31,
                                                    -------------------------------------------------------------------------------
                                                    1997                                      1996
                                                    --------------------------------------    -------------------------------------
                                                      Average                    Average       Average                     Average
                                                      Balance       Interest      Rate         Balance      Interest         Rate
                                                    -----------      ---------   -------      ---------     ---------      --------

                                                                               (dollars in thousands)
<S>                                                    <C>              <C>        <C>            <C>            <C>         <C>
Assets:
Interest earning assets:
    Mortgages held for sale.....................       $ 4,079          $ 299      7.33%          $ 658          $ 47       7.14%
    Loans net of unearned discount(1)...........       858,136         79,118      9.22%(2)     792,219        72,638       9.17%(2)
    Allowance for credit losses.................       (13,452)                                 (14,275)
                                                    -----------      ---------                 ---------     ---------

    Loans, net.................................        848,763         79,417      9.36%        778,602        72,685       9.34%
    Investment Securities:
    Held to maturity:
        Taxable investment securities                                                               544            34       6.25%
        Non-taxable investment securities......            682             54      7.92%(2)         687            53       7.71%(2)
    Available for sale:
        Taxable investment securities...........       143,928          8,886      6.17%        168,851         9,828       5.82%
        Non-taxable investment securities.......        39,271          3,372      8.59%(2)       7,970           660       8.28%(2)
    Federal funds sold..........................        69,833          3,731      5.34%         42,821         2,324       5.43%
                                                    -----------      ---------                 ---------     ---------

Net interest earning assets.....................     1,102,477         95,460                   999,475        85,584
Cash and due from banks.........................        38,374                                   34,165
Accrued interest receivable.....................         7,436                                    6,759
Bank premises and equipment.....................        16,340                                   13,596
Other real estate owned.........................         3,073                                    4,158
Other assets....................................        23,192                                   21,304

Liabilities and Shareholders' Equity:
Deposits:
    Demand (non-interest bearing)...............     $ 132,512                                $ 125,435
    Interest checking...........................        80,673        $ 1,003      1.24%         73,063       $ 1,414       1.94%
    Savings and money market....................       256,538          8,895      3.47%        233,837         7,701       3.29%
    Time........................................       384,983         21,724      5.64%        376,472        20,875       5.54%
                                                    -----------      ---------                 ---------     ---------

        Total deposits..........................       854,706         31,622                   808,807        29,990
FHLB advances...................................        96,107          5,455      5.68%         69,271         3,854       5.56%
Subordinated notes and debentures...............        32,000          2,868      8.96%         26,565         2,401       9.04%
Trust preferred securities......................        22,868          2,119      9.27%
Securities sold under repurchase agreements             70,710          3,076      4.35%         71,805         2,834       3.95%
Accrued interest payable........................         9,810                                    8,771
Other liabilities...............................         8,176                                    5,387
Shareholders' equity:
    Common stock................................       $ 4,975                                  $ 4,877
    Preferred stock and related surplus.........             -                                        -
    Additional paid-in capital..................        67,565                                   61,327
    Retained earnings...........................        23,975                                   22,647
                                                    -----------      ---------                 ---------     ---------

        Total shareholders' equity..............      $.96,515                                 $ 88,851
                                                    -----------      ---------                 ---------     ---------

    Average total interest earning assets.......    $1,115,929        $95,460      8.55%    $ 1,013,750         85,584      8.44%
    Average total interest bearing liabilities..    $  943,879        $45,140      4.78%      $ 851,013         39,079      4.59%
                                                    -----------      ---------                 ---------     ---------

    Net yield on average interest earning
        assets (net interest margin)...........     $1,115,929        $50,320      4.51%    $ 1,013,750         46,505      4.59%
                                                    -----------      ---------              -----------      ---------
</TABLE>




<PAGE>
<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                        ---------------------------------------------
                                                        1995
                                                        ---------------------------------------------
                                                          Average                        Average
                                                          Balance        Interest        Rate
                                                        ----------       --------
                                                                  (dollars in thousands)

<S>                                                        <C>             <C>            <C>
Assets:
Interest earning assets:
    Mortgages held for sale.....................           $ 867           $ 69           7.96%
    Loans net of unearned discount(1)...........         703,334         65,715           9.34%(2)
    Allowance for credit losses.................         (11,100)
                                                       ----------       --------

    Loans, net.................................          693,101         65,784           9.49%
    Investment Securities:
    Held to maturity:
        Taxable investment securities                      4,199            233           5.55%
        Non-taxable investment securities......              632             49           7.75%(2)
    Available for sale:
        Taxable investment securities...........         100,654          5,433           5.40%
        Non-taxable investment securities.......           4,862            321           6.60%(2)
    Federal funds sold..........................          45,485          2,721           5.98%
                                                       ----------       --------

Net interest earning assets.....................         848,933         74,541
Cash and due from banks.........................          31,242
Accrued interest receivable.....................           5,566
Bank premises and equipment.....................          12,589
Other real estate owned.........................           6,080
Other assets....................................          14,159

Liabilities and Shareholders' Equity:
Deposits:
    Demand (non-interest bearing)...............       $ 119,034
    Interest checking...........................          63,906        $ 1,357           2.12%
    Savings and money market....................         203,110          6,719           3.31%
    Time........................................         355,719         20,211           5.68%
                                                       ----------       --------

        Total deposits..........................         741,769         28,287
FHLB advances...................................          49,646          2,927           5.90%
Subordinated notes and debentures...............           9,000            855           9.50%
Trust preferred securities......................
Securities sold under repurchase agreements               27,962            980           3.50%
Accrued interest payable........................           7,703
Other liabilities...............................           3,524
Shareholders' equity:
    Common stock................................         $ 4,534
    Preferred stock and related surplus.........          11,235
    Additional paid-in capital..................          44,492
    Retained earnings...........................          18,704
                                                       ----------       --------

        Total shareholders' equity..............        $ 78,965
                                                       ----------       --------

    Average total interest earning assets.......       $ 860,033         74,541           8.67%
    Average total interest bearing liabilities..       $ 709,343         33,049           4.66%
                                                       ----------       --------

    Net yield on average interest earning
        assets (net interest margin)...........        $ 860,033         41,492           4.82%
                                                       ----------       --------
</TABLE>

(1)  Non-accrual loans have been included in the appropriate average loan
     balance category, but interest on non-accrual loans has not been included
     for purpose of determining interest income.

(2)  The interest earned on non-taxable loans and investment securities is
     shown on a tax equivalent basis assuming a marginal federal tax rate of
     35% for all periods.

--------
(1)  Non-accrual loans and non-performing assets exclude loans past due 90
     days or more still accruing interest.

                                      13




<PAGE>





The following table presents a summary of the principal components of and
changes in interest income and interest expense of the Company for the periods
indicated:

<TABLE>
<CAPTION>

                                                                                                     Change from Prior Year
                                                                                      ---------------------------------------------
                                                        Year Ended December 31,                1997                     1996
                                                  -------------------------------     ----------------------     ------------------
                                                    1997       1996        1995        Amount        Percent     Amount     Percent
                                                  --------   --------    --------     --------       -------    --------    -------
                                                                                    (dollars in thousands)
<S>                                               <C>        <C>         <C>          <C>               <C>     <C>           <C>

Interest Income:
Mortgages held for sale .......................   $    299   $     47    $     69     $    252          536%    $    (22)     (32%)
Interest and fees on loans ....................     78,993     72,500      65,583        6,493            9%       6,917       11%
Interest on investments securities:
     Held to maturity:
        U.S. Treasury securities ..............                               102                                   (102)    (100%)
        Federal agency obligations ............                    34         131          (34)        (100%)        (97)     (74%)
        State and municipal obligations .......         35         35          32                                      3        9%
     Available for sale:
        U.S. Treasury securities ..............      3,066      3,565       2,280         (499)         (14%)      1,285       56%
        Federal agency obligations ............      4,975      5,282       2,538         (307)          (6%)      2,744      108%
        State and municipal obligations .......      2,192        436         205        1,756          403%         231      113%
        Other .................................        845        981         615         (136)         (14%)        366       60%
Interest on federal funds sold ................      3,731      2,324       2,721        1,407           61%        (397)     (15%)
                                                  --------   --------    --------     --------                  --------

Total interest income .........................     94,136     85,204      74,276        8,932           10%      10,928       15%
                                                  --------   --------    --------     --------                  --------
Interest Expense:
     Deposits .................................     31,622     29,990      28,287        1,632            5%       1,703        6%
     FHLB advances ............................      5,455      3,854       2,927        1,601           42%         927       32%
     Subordinated notes and debentures ........      2,868      2,401         855          467           19%       1,546      181%
     Trust preferred securities ...............      2,119                               2,119          100%
     Securities sold under repurchase
        agreements ............................      3,076      2,834         980          242            9%       1,854      189%
                                                  --------   --------    --------     --------                  --------
Total interest expense ........................     45,140     39,079      33,049        6,061           16%       6,030       18%
                                                  --------   --------    --------     --------                  --------
Net interest income ...........................   $ 48,996   $ 46,125    $ 41,227     $  2,871            6%    $  4,898       12%
                                                  --------   --------    --------     --------                  --------
</TABLE>


                                       14


<PAGE>

    The following table sets forth changes in net interest income attributable
either to changes in volume (average balances) or to changes in average rate
for interest earning assets and interest bearing liabilities:
<TABLE>
<CAPTION>
                                                                   1997 Versus 1996                        1996 Versus 1995
                                                      -------------------------------------    -------------------------------------
                                                          Net                Due to                Net                Due to
                                                        Increase           Changes in           Increase            Changes in
                                                       (Decrease)       Volume         Rate    (Decrease)      Volume         Rate
                                                       ----------       ------         ----    ----------      ------       ----
                                                                             (in thousands)
<S>                                                      <C>          <C>           <C>        <C>           <C>          <C>
Interest Income:
     Mortgages held for sale. . . . . . . . . . .. .       $ 252        $ 251           $ 1        $ (22)        $ (15)       $ (7)
     Loans. . . . . . . . . . . . . . . . . . . .. .       6,493        6,065           428        6,917         8,108      (1,191)
     Investments securities:
        Held to maturity:
            Taxable investment securities. . . .  . .        (34)         (34)                      (199)         (233)         34
            Non-taxable investment securities. .  . .                                                  3             3
        Available for sale:
            Taxable investment securities. . . .  . .       (942)      (1,430)          488        4,395         3,848         547
            Non-taxable investment securities. .  . .      1,756        1,747             9          231           158          73
     Federal funds sold                                    1,407        1,319            88         (397)         (154)       (243)
                                                      -----------   ----------   -----------   ----------  ------------  ----------

     Total increase (decrease) in interest income . .      8,932        7,918         1,014       10,928        11,715        (787)
                                                      -----------   ----------   -----------   ----------  ------------  ----------

Interest Expense:
     Interest checking. . . . . . . . . . . . . .. .        (411)         169          (580)          57           149         (92)
     Savings and money market. . . . . . . . . .  .        1,194          773           421          982         1,012         (30)
     Time deposits. . . . . . . . . . . . . . . .. .         849          477           372          664         1,131        (467)
     FHLB advances. . . . . . . . . . . . . . . .. .       1,601        1,522            79          927         1,081        (154)
     Subordinated notes and debentures. . . . . .. .         467          487           (20)       1,546         1,585         (39)
     Trust preferred securities. . . . . . . . .  .        2,119        2,119
     Securities sold under repurchase agreements.. .         242          (42)          284        1,854         1,716         138
                                                      -----------   ----------   -----------   ----------  ------------  ----------

Total increase (decrease) in interest expense. .  .        6,061        5,505           556        6,030         6,674        (644)
                                                      -----------   ----------   -----------   ----------  ------------  ----------

Changes in net interest income. . . . . . . . . ..       $ 2,871       $2,413         $ 458      $ 4,898       $ 5,041      $ (143)
                                                      ============  ==========   ===========   ==========  ============  ==========

</TABLE>


    During 1997, average total interest earning assets totaled $1.1 billion,
an increase of $102.2 million or 10% over 1996, as compared to an increase of
$153.7 million or 18% in 1996 over 1995. The $102.2 million increase in 1997
reflected a $65.9 million increase in average loan balances, primarily in the
consumer category, the majority of which is comprised of indirect automobile
loans. Of the $153.7 million increase in 1996, $88.9 million resulted from
increased average loan balances, and primarily reflected the full year impact
in 1996 from the Constitution acquisition on August 4, 1995. The average rate
on interest earning assets was 8.55% in 1997, 8.44% in 1996 and 8.67% in 1995.
During 1997, average interest bearing liabilities totaled $943.9 million an
increase of $92.9 million or 11% over 1996 compared to an increase of $141.7
million or 20% in 1996 from 1995. Of the $92.9 million increase in 1997, $30.3
million resulted from increases in interest checking, savings and money market
accounts. Of the $141.7 million increase in 1996, $39.9 million resulted from
increases in interest checking, savings and money market accounts. The average
rate on interest bearing liabilities increased to 4.78% in 1997 after
decreasing to 4.59% in 1996 from 4.66% in 1995.

                                      15

<PAGE>

    Non-Interest Income. The following table provides a summary of
non-interest income:
<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                                        ---------------------------------------------
                                                          1997               1996               1995
                                                          ----               ----               ----
                                                                            (in thousands)
<S>                                                  <C>                  <C>             <C>
Service fees on deposit accounts. . . . . . . .        $ 3,378            $ 3,181            $ 2,768
Gain on sales of residential mortgages. . . . .          1,067                419                261
Gain on sales of investment securities. . . . .            515                245                333
Mortgage servicing fees . . . . . . . . . . . .            744                819                885
Merchant credit card deposit fees . . . . . . .          1,968              1,593              1,247
Credit card fee income  . . . . . . . . . . . .            432                145                 69
Other . . . . . . . . . . . . . . . . . . . . .          1,545                903              1,406
                                                    ----------         ----------         ----------
Total . . . . . . . . . . . . . . . . . . . . .        $ 9,649            $ 7,305            $ 6,969
                                                     ==========         ==========         ==========
 </TABLE>

     Total non-interest income for 1997 was $9.6 million, an increase of $2.3
million or 32% from 1996, which in turn had shown an increase of $336,000 or
5% from the prior year. Service fees on deposit accounts increased by 6% and
15% respectively in 1997 and 1996, as compared to the prior year periods and
totaled $3.4 million in 1997. The increase in 1996 reflected the full year
impact of the Constitution acquisition, and internal growth. Throughout the
three year period ended 1997, there were no significant increases in service
charge amounts. Thus, most of the increases resulted from increases in both
volume of accounts and number of charges.

    Gains on the sales of residential mortgages for 1997 amounted to $1.1
million, an increase of $648,000 or 155% from 1996, which in turn had shown an
increase of $158,000 or 61% from the prior year. The increase in 1997 over the
prior year primarily reflected increases in the volume of residential mortgage
loans generated. The increase in 1996 reflected the implementation of SFAS No.
122 "Accounting for Mortgage Servicing Rights" which mandated the recognition
of income resulting from originated mortgage servicing rights and was
effective with the fourth quarter of 1995. Resulting income for 1997, 1996 and
1995 was, respectively, $554,000, $279,000 and $72,000. The Company generally
sells all the residential mortgage loans it originates under fixed price
commitments from the Federal National Mortgage Association, the Federal Home
Loan Mortgage Corporation and other entities. Gain on sales of residential
mortgage loans is recognized at the time of the sale and substantially all
such gains resulted from originated mortgage servicing rights and fees
collected from borrowers.

     Sales of securities resulted in net gains of $515,000 in 1997, as
compared to $245,000 in 1996 and $333,000 in 1995. In structuring the
Company's investment portfolio, management attempts to lock in yields in the
most advantageous rate environments. In 1997, 1996 and in the latter half of
1995, investment securities available for sale were sold and replaced with
securities offering higher yields.

    Mortgage servicing fees were $744,000 in 1997, compared to $819,000 in
1996 and $885,000 in 1995. The decreases in 1997 and 1996 compared to
respective prior years reflected the impact of lower average balances in the
servicing portfolio with period end balances amounting to $243.3 million at
December 31, 1997, $245.3 million at December 31, 1996 and $254.2 million at
December 31, 1995. The reductions reflected paydowns and insignificant
portfolio purchases in 1997 and 1996. At December 31, 1997 and 1996, the
remaining unamortized purchase price amounts for mortgage servicing rights
were $631,000 and $799,000, respectively, and are being amortized over the
estimated lives of the portfolios. Originated mortgage servicing rights
capitalized and recognized as income were $554,000, $279,000 and $72,000
respectively in 1997, 1996 and 1995. At December 31, 1997 and 1996, the
remaining unamortized balance of capitalized mortgage servicing rights was
$761,000 and $222,000, respectively.

     Credit card fee income, which includes interchange fees earned when cards
are utilized for purchases and cash advances, totaled $432,000 in 1997,
$145,000 in 1996 and $69,000 in 1995. Such fee increases were offset by
increases in related expense, reflected under non-interest expense as credit
card processing expense.

     Merchant credit card fees increased in 1997 as compared to 1996 which had
increased significantly over 1995. Most of the increases, which resulted
primarily from increases in volume, were offset by increases in related
expense, reflected under non-interest expense as merchant credit card deposit
expense.

     Other income was $1.5 million in 1997, compared to $903,000 in 1996 and
$1.4 million in 1995. The $642,000 increase in 1997 compared to 1996 reflected
$300,000 resulting from service charges instituted in 1997 on cash withdrawals
from proprietary ATMs by non-customers. The $503,000 decrease in other income
in 1996 compared to 1995 reflected a $264,000 reduction in gains on the sale
of other real estate owned.


                                      16
<PAGE>





    Non-Interest Expense.   The following table provides a summary of
non-interest expense, by category of expense.
<TABLE>
<CAPTION>

                                                                                         Year Ended December 31,
                                                                       ---------------------------------------------------------
                                                                          1997                     1996                  1995
                                                                          ----                     ----                  ----
                                                                                              (in thousands)
Non-interest expense:
<S>                                                                     <C>                      <C>                   <C>
     Salaries and employee benefits. . . . . . . . . . . . . .          $ 16,653                 $ 16,382              $ 13,954
     Occupancy expense . . . . . . . . . . . . . . . . . . . .             3,709                    3,847                 3,528
     Depreciation. . . . . . . . . . . . . . . . . . . . . . .             1,746                    1,692                 1,565
     FDIC insurance. . . . . . . . . . . . . . . . . . . . . .                98                       29                   826
     Data processing expense . . . . . . . . . . . . . . . . .               802                    1,235                 1,309
     Legal . . . . . . . . . . . . . . . . . . . . . . . . . .               792                      924                   702
     Stationary, printing, and supplies. . . . . . . . . . . .               849                      888                   675
     Shares tax. . . . . . . . . . . . . . . . . . . . . . . .               791                      751                   592
     Advertising . . . . . . . . . . . . . . . . . . . . . . .             1,008                    1,223                   700
     Other real estate owned maintenance expense . . . . . . .               201                      230                   362
     Loss on sale and write-downs of other real estate owned .               454                      500                   298
     Amortization of intangibles . . . . . . . . . . . . . . .             1,310                    1,262                   816
     Credit card origination expense . . . . . . . . . . . . .               490                      235                    85
     Credit card processing expense. . . . . . . . . . . . . .               577                      318                    96
     Merchant credit card deposit expense. . . . . . . . . . .             1,597                    1,218                   984
     Other . . . . . . . . . . . . . . . . . . . . . . . . . .             5,530                    5,083                 4,668
                                                                   =============            =============         =============
            Total. . . . . . . . . . . . . . . . . . . . . . .          $ 36,607                 $ 35,817              $ 31,160
                                                                   =============            =============         =============

</TABLE>

    Total non-interest expense in 1997 was $36.6 million, an increase of
$790,000 million or 2% over the $35.8 million in 1996, which had increased
$4.7 million or 15% over 1995. Various categories of non-interest expense in
1997 were reduced as compared to prior years, which include United Valley
Bank's expenses as a result of the restatement of financial statements
required by the pooling of interests method of accounting. In 1997, certain
such duplicative expenses were eliminated as noted below. These savings are
reflected in the lower 2% increase in non-interest expense in 1997, as
compared to the 15% increase in 1996, over respective prior years. Such
savings in salaries and employee benefits, the largest component of
non-interest expense, more than offset increases in the consumer loan
department, branches and other areas in 1997, and that category of expense
increased only $271,000 or 2% over the 1996 amount which had increased $2.4
million or 17% over 1995. The increase in salaries and employee benefits in
1996 over 1995 reflected the expansion of the commercial and consumer loan
departments and the addition of new branches. Salaries and employee benefits
in 1995 also reflected decreases in mortgage department staffing levels
resulting primarily from reduced mortgage refinancing originations in that
year.

    Reflected in 1997 salaries and employee benefits were a $290,000 increase
attributable to the expansion of the consumer loan department and a $254,000
increase resulting from new branches. As noted, these and other increases were
more than offset by savings from the consolidation of United Valley Bank. Of
the 1996 increase in salaries and benefits of $2.4 million, $222,000 resulted
from commercial loan department expansion, $124,000 resulted from consumer
loan department expansion and $430,000 resulted from additional branches.
Additionally, salaries and benefits attributable to United Valley Bank prior
to acquisition by the Company increased approximately $1.0 million in 1996
compared to 1995. Significant amounts of that increase and other salaries and
employee benefits were reduced in 1997 as previously noted. The increases in
1997 and 1996 also reflected annual merit increases which averaged 3% to 4.5%.

     Occupancy expense totaled $3.7 million in 1997 compared to $3.8 million
in 1996 and $3.5 million in 1995. The $138,000 reduction in 1997 over the
prior year reflected the termination of an office lease and the closure of two
branches, resulting from the acquisition of United Valley Bank. The $319,000
increase in 1996 reflected the expense of a branch from the Constitution
acquisition and four additional new branches. Depreciation expense was $1.7
million in 1997 and 1996 and $1.6 million in 1995. Increases reflected the
impact of new branches.

     The FDIC insurance assessment for 1997 amounted to $98,000 compared to
$29,000 in 1996 and $826,000 in 1995. The $797,000 reduction in 1996 resulted
primarily from reductions in assessment rates. However, larger assessments may
be re-instituted at any time, and may be subject to periodic increases or
decreases.

                                      17
<PAGE>
     Data processing expense amounted to $802,000 in 1997, $1.2 million in
1996 and $1.3 million in 1995. The $433,000 reduction in 1997 over the prior
year reflected an $84,000 data processing contractual termination penalty as
well as approximately $268,000 of other data processing expense incurred by
United Valley Bank in 1996, the majority of which was eliminated in 1997. The
decrease also reflected reductions in data processing fees resulting from a
new outsourcing contract.

     Legal expense amounted to $792,000 in 1997, $924,000 in 1996 and $702,000
in 1995. The $132,000 reduction in 1997 from the prior year reflects
approximately $125,000 of legal expense incurred by United Valley Bank in
1996, the majority of which was eliminated in 1997. The $222,000 increase in
1996 over 1995 reflected legal fees on several unrelated matters.

     Stationery printing and supplies amounted to $849,000 in 1997, $888,000
in 1996 and $675,000 in 1995. The $213,000 increase in 1996 over the prior
year reflected the impact of acquisitions and additional branch locations.

     The shares tax is a tax assessed in Pennsylvania in lieu of a state
income tax. The tax is assessed at the rate of 1.25% against a six year moving
average of shareholders' equity. Accordingly, increases in expense of $40,000
in 1997 and $159,000 in 1996 over the respective prior years reflected the
impact of increases in shareholders' equity resulting from capital offerings,
acquisitions and retained earnings.

     Advertising expense amounted to $1.0 million in 1997, $1.2 million in
1996 and $700,000 in 1995. The $215,000 reduction in 1997 over the prior year
reflects reductions in various types of advertising programs. Of the $523,000
increase in 1996 over 1995, approximately $125,000 resulted from promotional
expense in connection with credit card programs. Approximately $125,000 of the
increase resulted from a one time advertising campaign promoting personal
transaction accounts, and $65,000 of that increase resulted from introductory
advertising of new telephone and computer banking services.

     Amortization of intangibles amounted to $1.3 million in 1997 and 1996 and
$816,000 in 1995. Substantially all of the $446,000 increase in 1996 over 1995
resulted from the full year impact of the Constitution acquisition. Of that
$446,000, a total of $208,000 resulted from increased related goodwill
amortization, and $231,000 resulted from related core deposit intangibles
amortization. Goodwill from acquisitions is being amortized over a fifteen
year period.

     Credit card origination expense totaled $490,000 in 1997, $235,000 in
1996 and $85,000 in 1995. Increases in expense during these periods resulted
primarily from amortization of increased direct account origination
expenditures. Credit card processing expense totaled $577,000 in 1997,
$318,000 in 1996 and $96,000 in 1995. Increases in expense during these
periods resulted primarily from increases in the number of accounts and
related volume.

     Merchant credit card deposit expense increased in 1997 as compared to
1996 which had increased significantly over 1995. Most of the increases, which
resulted primarily from increases in volume, are offset by increases in
related income, reflected under non-interest income as merchant credit card
deposit fees.

     The Company's income tax provision was $6.0 million in 1997 compared to
$4.6 million in 1996 and 1995. The effective income tax rate was 33% in 1997,
37% in 1996 and 35% in 1995. The decrease in the effective rate in 1997
compared to 1996 reflected increases in tax-exempt income. The increase in the
effective income tax rate in 1996 compared to 1995 reflected increases in
non-deductible amortization.

     Premises and equipment at December 31, 1997, reflected the purchase of
approximately $1.6 million of hardware and software for a branch automation
and sales tracking system, which had been implemented by the end of that year.
A full year of related expenses will be realized beginning in 1998. Potential
offsets to the related expense include salary savings, forms savings and the
benefits of increased cross sales which are monitored by the system. Also
reflected in premises and equipment was a $1.3 million expenditure for check
imaging equipment and software which was paid for, but will not be implemented
until 1998. Potential offsets to related expenses include salary and postage
savings and additional service charge income.

    In 1998, the Company occupied a new main office, initially consisting of
13,000 square feet with an initial annual rental of $200,000.

Liquidity and Capital Resources

     Liquidity defines the ability of the Company to generate funds to support
asset growth, meet deposit withdrawals, satisfy borrowing needs, maintain
reserve requirements and otherwise operate on an ongoing basis. During the
past three years, the liquidity needs of the Company have been primarily met
by cash on hand, deposits in other banks, federal funds sold and the sale of
investment securities. The Company invests its funds not needed for operations
("excess liquidity") primarily in daily federal funds and securities.
Investment securities available for sale may be sold for liquidity purposes.
Investment securities held to maturity are, after maturity, an additional
source of liquidity.

                                      18
<PAGE>

     In addition to demand, interest checking and savings and money market
deposit growth, the Company utilizes certificates of deposit to fund its
loans. Amounts of such certificates have historically been generated by
matching upper market Philadelphia-area certificate of deposit rates. Federal
Home Loan Bank ("FHLB") overnight advances may also be utilized, as they may
be less costly than other sources, and may be repaid or increased on a daily
basis.

        The major source of funds for the Company's investing activities are
cash inflows resulting from net increases in deposits. Advances from the FHLB
are also periodically utilized. Net deposits increased $146.5 million in 1997
after decreasing $53.4 million in 1996 and increasing $29.6 million in 1995.
The increase in 1997 reflected increases in savings, money market and time
deposits resulting from the promotional rates offered for these instruments.
The decrease in 1996 reflected seasonal fluctuations. Net increases in FHLB
advances amounted to $22.3 million in 1997 as compared to $50.8 million in
1996 and $33.3 million in 1995. Funding was directed primarily at cash
outflows required by net increases in loans of $83.1 million, $64.0 million
and $65.7 million, respectively, in 1997, 1996 and 1995. Purchases of
investment securities increased to $171.1 million in 1997, from $102.2 million
in 1996 and $131.8 million in 1995. While substantially all securities are
available for sale and therefore may be sold for liquidity purposes, $156.6
million of $244.2 million in total securities owned at December 31, 1997,
consisted of either mortgage backed securities or state and municipal
obligations. The majority of those securities were purchased in 1997 and have
longer maturities and higher yields than the majority of securities purchased
in prior years. Mortgage backed securities totaled $103.5 million at December
31, 1997 and generally had average lives of 5 years or more. State and
municipal obligations at that date totaled $53.8 million and generally had
maturities of 15 years or more. Cash flows in 1997 were increased through an
offering of $25.3 million of 9.25% trust preferred securities. Cash flows in
1996 were increased through an offering of $23 million of 8.75% subordinated
notes.

     Operating activities include cash outflows for residential mortgages
originated for sale, which amounted to $46.2 million, $26.6 million and $20.5
million, respectively, in 1997, 1996 and 1995. Outflows for mortgages
originated for sale are generally offset within 90 days by the receipt of
related sales proceeds.

     The cash flow effects of the Constitution Bank acquisition in 1995 were
excluded from the consolidated statements of cash flows and from the preceding
discussion since they arose when that bank was independent of the Company.

     The Company knows of no adverse conditions which would impact the
continued short or long term use of its cash inflows as heretofore described.
To enhance liquidity, Jefferson PA maintains membership in the FHLB. Thus, it
may obtain overnight funding in excess of 10% of its total assets at rates
approximately .25% over daily federal funds rates by pledging first mortgage
residential and other collateral against such advances. Longer term funding at
rates approximately .40% over U.S. Treasury rates is also available although
it is rarely utilized. As of December 31, 1997, the Company had outstanding
$150.0 million of overnight advances, substantially all of which matured in
January, 1998.

    Both the Company and its subsidiary banks are required to comply with
certain "risk-based" capital adequacy guidelines issued by the FRB (for the
Company ) and FDIC (for the subsidiary banks). The risk-based capital
guidelines assign varying risk weights to the individual assets held by a
bank. The guidelines also assign weights to the "credit-equivalent" amounts of
certain off-balance sheet items, such as letters of credit and interest rate
and currency swap contracts. Under these guidelines, institutions are expected
to meet minimum ratios for "qualifying total capital" and tier 1 capital to
risk-weighted assets of 8% and 4% respectively and a minimum leverage ratio
(the ratio of Tier 1 capital to total average assets) of 3% plus an additional
cushion of between 1% and 2%. As used in the guidelines, "Tier 1 capital"
includes common shareholders' equity, certain qualifying perpetual preferred
stock and qualifying trust preferred securities and minority interest in the
equity accounts of consolidated subsidiaries, less goodwill. "Tier 2 capital"
components (limited in the aggregate to one-half of total qualifying capital)
include allowances for credit losses (within limits), certain excess levels of
perpetual preferred stock and certain types of "hybrid" capital instruments,
subordinated debt and other preferred stock. The subordinated debt component
of Tier 2 capital is reduced by 20% per year over the last five years of the
term of the subordinated debt. The following table sets forth the regulatory
capital ratios of the Company, Jefferson PA and Jefferson NJ as of December
31, 1997 and 1996, together with the minimum ratios required under the
regulation for an institution to be deemed "well-capitalized":


                                      19
<PAGE>


<TABLE>
<CAPTION>

                                                         Tier 1 Capital            Tier 1 Capital                  Total Capital
                                                        to Total Average          to Risk-Weighted               to Risk-Weighted
                                                          Assets Ratio              Assets Ratio                   Assets Ratio
                                                          December 31,              December 31,                   December 31,
                                                          ------------              ------------                   ------------
                                                    1997          1996           1997          1996            1997          1996
                                                    ----          ----           ----          ----            ----          ----
<S>                                                 <C>           <C>          <C>             <C>            <C>           <C>

Entity:
The Company . . . . . . . . . . . . . . . . .       9.31%         7.26%        12.27%          9.87%          16.93%        15.08%
Jefferson PA. . . . . . . . . . . . . . . . .       7.14%         7.14%         9.61%          9.57%          14.33%        14.65%
Jefferson NJ. . . . . . . . . . . . . . . . .       7.04%         8.10%         9.23%         11.16%          13.57%        16.88%
"Well capitalized"  institution (under FDIC
      Regulations). . . . . . . . . . . . . .       5.00%         5.00%         6.00%          6.00%          10.00%        10.00%
---------------
</TABLE>

    At December 31, 1997, both the Company's subsidiary banks were
"well-capitalized" under FDIC regulations.




                                      20
<PAGE>

Asset and Liability Management

     The management of rate sensitive assets and liabilities is essential to
controlling interest rate risk and optimizing interest margins. An interest
rate sensitive asset or liability is one that, within a defined time period,
either matures or experiences an interest rate change in line with general
market rates. Interest rate sensitivity measures the relative volatility of a
bank's interest margin resulting from changes in market interest rates.

    The following table summarizes estimated repricing intervals for interest
earning assets and interest bearing liabilities as of December 31,1997, and
the difference or "gap" between them on an actual and cumulative basis for the
periods indicated. A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds interest rate sensitive assets. During a period
of falling interest rates, a positive gap would tend to adversely affect net
interest income, while a negative gap would tend to result in an increase in
net interest income. During a period of rising interest rates, a positive gap
would tend to result in an increase in net interest income while a negative
gap would tend to affect net interest income adversely. To the extent loans
presented in this table are on a demand basis, they are categorized as to
maturity based upon their estimated amortization.
<TABLE>
<CAPTION>
                                                         Within           Four to         One to        Three to          Over
                                                         Three             Twelve          Two            Five            Five
                                                         Months            Months         Years          Years            Years
                                                     ---------------   -------------   -----------    ------------    -------------
                                                                                    (dollars in thousands)
<S>                                                  <C>                <C>           <C>             <C>              <C>
Interest earning assets:
     Federal funds sold                                    $ 92,200
     Investment securities:
         Available for sale:
            Taxable investment securities                     6,500        $ 34,436      $ 17,256        $ 13,753        $ 118,389
            Non-taxable investment securities                   375           1,219           251             295           51,013
         Held to maturity:
            Non-taxable investment securities                                                 262             195              225
     Mortgages held for sale                                  2,959
     Loans net of unearned discount                         382,484         139,440       120,866         189,643           74,333
                                                     ---------------   -------------   -----------    ------------    -------------
Total interest earning assets                               484,518         175,095       138,635         203,886          243,960
                                                     ---------------   -------------   -----------    ------------    -------------


Interest bearing liabilities:
     Savings, money market and interest checking             21,297          51,091        62,440         246,154
     Time deposits                                          206,565         161,295        24,296          15,526              656
     Securities sold under repurchase
          agreements                                         70,911
     FHLB advances                                          150,000
     Subordinated notes and debentures                            -                                                         32,000
     Preferred securities                                         -                                                         25,300
                                                     ---------------   -------------   -----------    ------------    -------------
Total interest bearing liabilities                          448,773         212,386        86,736         261,680           57,956
                                                     ---------------   -------------   -----------    ------------    -------------
Gap                                                        $ 35,745       $ (37,291)     $ 51,899       $ (57,794)       $ 186,004
                                                     ===============   =============   ===========    ============    =============
Cumulative gap                                             $ 35,745       $ ( 1,546)     $ 50,353        $ (7,441)       $ 178,563
                                                     ===============   =============   ===========    ============    =============
Gap to assets ratio                                               3%             (3%)           4%             (4%)             14%
Cumulative gap to assets ratio                                    3%              -             4%             (1%)             13%

</TABLE>

--------------------------------------------------------
* Less than 1%.

    The method used to analyze interest rate sensitivity in the table above
has a number of limitations. Certain assets and liabilities may react
differently to changes in interest rates even though they reprice or mature in
the same or similar time periods. The interest rates on certain assets and
liabilities may change at different times than changes in market interest
rates, with some changing in advance of changes in market rates and some
lagging behind changes in market rates. Also, certain assets, e.g., adjustable
rate loans, often have provisions which may limit changes in interest rates
each time the interest rate changes and on a cumulative basis over the life of
the loan. Additionally, the actual prepayments and withdrawals experienced by
the Company in the event of a change in interest rates may deviate
significantly from those assumed in calculating the data shown in the table.
Finally, the ability of borrowers to service their debt may decrease in the
event of an interest rate increase.



                                      21
<PAGE>

    The following table summarizes interest earning assets and interest
bearing liabilities at December 31, 1997 by contractual maturity, except for
savings, money market and interest checking. As in the above table which
summarizes repricing intervals, contractual maturities of one day for those
instruments have been modified as a result of the Company's and industry's
experience with such accounts. The Company's historical experience with it's
savings, money market and interest checking, has demonstrated core deposit
retention notwithstanding that such instruments were not repriced during
periods when market interest rates increased. In 1997, the Company reviewed
such retention with an outside consulting firm which affirmed these
characteristics based upon their studies. Accordingly, the company classifies
significant portions of its savings, money market and interest checking as
maturing and/or repriceable in periods as shown in the following table.
<TABLE>
<CAPTION>

                           Within     Four to     One to    Two to      Three to    Four to      Over
                           Three      Twelve      Two       Three       Four        Five         Five                  Fair
                           Months     Months      Years     Years       Years       Years        Years      Total      Value
                           ------     -------     -----     -----       -----       -----        -----      -----      -----
                                                       (dollars in thousands)
<S>                       <C>          <C>        <C>       <C>          <C>        <C>          <C>      <C>       <C>
Interest earning assets:

  Federal funds sold.     $ 92,200                                                                       $ 92,200   $ 92,200
                 (Rate)      5.50%                                                                           5.50%

Investment securities
Available for sale:
    Taxable investment
         securities..        6,500    $ 34,436   $ 17,256   $ 7,778      $ 3,914     $2,061    $118,389    190,334    190,334
                 (Rate)      6.24%       5.88%      6.20%     6.09%        5.87%      6.60%       6.80%      6.51%

  Non-taxable investment
        securities...          375       1,219        251       115                     180      51,013     53,153     53,153
                 (Rate)      6.59%       6.45%      6.08%     5.61%                   6.97%       8.08%      8.01%

Held to maturity:

   Non-taxable investment
        securities...                                 262                               195         225        682        699
                 (Rate)                             7.05%                             7.62%       7.62%      7.40%

Loans net of unearned
       discount            126,387     240,003    133,246   100,875       80,565     53,723     174,926    909,725    913,673
                 (Rate)      9.32%       8.89%       8.75%    8.70%        8.48%      8.86%       8.52%      8.82%
                         ---------   ---------   -------- ---------    ---------  ---------   ---------  ---------  ---------
  Total interest earning
      assets               225,462     275,658    151,015   108,768       84,479     56,159     344,553  1,246,094  1,250,059
                         ---------   ---------   -------- ---------    ---------  ---------   ---------  ---------  ---------

Interest bearing liabilities:

Savings. money market
    and interest
    checking                21,297      51,376     62,451    95,544       52,062     98,252                380,982    380,982
                 (Rate)      5.41%       3.25%      3.04%     3.28%        2.21%      1.93%                  2.86%

Time deposits........      206,565     161,295     15,872     8,424       11,569      3,051       1,562    408,338    408,338
                 (Rate)      5.61%       5.49%      5.55%     6.26%        7.17%      6.63%       6.53%      6.53%

 Securities sold under
    repurchase
    agreement               70,911                                                                          70,911     70,911
                 (Rate)      4.50%                                                                           4.50%

   FHLB advances.....      150,000                                                                         150,000    150,000
                 (Rate)      5.65%                                                                           5.65%

  Subordinated notes
    and debentures.                                                                              32,000     32,000     30,875
                 (Rate)                                                                           8.98%      8.98%
  Preferred Securities                                                                           25,300     25,300     23,782
                 (Rate)                                                                           9.25%      9.25%
                         ---------   ---------   -------- ---------    ---------  ---------   ---------  ---------  ---------
Total interest bearing
    liabilities            448,773     212,671     78,323   103,968       63,631    101,303      58,862  1,067,531  1,064,888
                         ---------   ---------   -------- ---------    ---------  ---------   ---------  ---------  ---------
 Gap..................   $(223,311)  $  62,987   $ 72,692 $   4,800    $  20,848  $ (45,144)  $ 285,691  $ 178,563  $ 185,171
                         =========   =========   ======== =========    =========  =========   =========  =========  =========
Cumulative gap.......    $(223,311)  $(160,324) $ (87,632)$ (82,832)   $ (61,984) $(107,128)  $ 178,563
                         =========   =========   ======== =========    =========  =========   =========  =========  =========
Gap to assets ratio..         (17%)         5%         5%         *           2%     (3%)           22%
Cumulative gap to assets
   ratio                      (17%)       (12%)       (7%)      (6%)         (5%)     (8%)          13%

Less than 1%.
</TABLE>
                                      22
<PAGE>

Financial Condition

    General. Total average assets of the Company amounted to $1.2 billion in
1997, $1.1 billion in 1996, and $918.6 million in 1995, as restated to reflect
the United Valley Bank acquisition. This amounted to a $111.4 million or 10%
increase in 1997 over 1996, as compared with an increase of $160.9 million or
18% in 1996 over 1995. In 1997, increases reflected internal growth including
increases in consumer loans which are comprised primarily of indirect
automobile loans. In 1996, increases in average assets reflected the full year
effect of the Constitution Bank acquisition. Total average assets increased
during 1995 primarily as a result of the 1995 Constitution Bank acquisition
and the full year effect of the 1994 Security First Bank and Bank of Chester
County acquisitions. Regulatory capital in 1997 was increased by an offering
of $25.3 million of 9.25% trust preferred securities. Regulatory capital was
increased in 1996 by the $23.0 million offering of the Company's 8.75%
subordinated notes. See "Liquidity and Capital Resources", above.

     Investment Portfolio. The following tables present the amortized cost and
approximate market values for each major category of the Company's investment
securities for securities, both held to maturity as well as securities
available for sale.
<TABLE>
<CAPTION>
                                                                                 December 31,
                                      ----------------------------------------------------------------------------------------------
                                           1997                           1996                            1995
                                         Amortized                      Amortized                       Amortized
                                           Cost           Market          Cost          Market            Cost            Market
                                                                                (in thousands)
<S>                                   <C>              <C>            <C>            <C>              <C>              <C>
Securities Held to Maturity:
U.S. Treasury securities . . . . . ..                                                                       $ 2,000         $ 1,999
Federal agency obligations   . . . ..                                                                         1,197           1,198
State and municipal obligations. . ..            $682           $699           $687           $701              692             711
                                      ---------------- --------------  ------------- --------------   --------------   ------------

Total investment securities
     held to maturity. . . . . . . ..            $682           $699           $687           $701          $ 3,889         $ 3,908
                                      ================ ==============  ============= ==============   ==============   ============


                                                                     December 31,
                                      ----------------------------------------------------------------------------------------------
                                            1997                           1996                            1995
                                         Amortized                      Amortized                       Amortized
                                           Cost           Market          Cost          Market            Cost            Market

Securities Available for Sale:
U.S. Treasury securities  . . . . . .       $ 42,489       $ 42,612       $ 68,580       $ 68,549         $ 61,528         $ 61,559
Federal agency obligations. . . . . .         21,060         21,148         37,127         37,201           50,598           51,123
Mortgage-backed securities . . . . ..        103,246        103,495         35,433         35,424           28,132           28,247
State and municipal obligations. . ..         51,215         53,153         15,334         15,580            4,523            4,555
Other securities. . . . . . . . . . .         23,012         23,079         17,794         17,797           14,188           14,199
                                      ---------------- --------------  ------------- --------------   --------------   -------------
Total investment securities
    available for sale. . . . . . . .      $ 241,022      $ 243,48       $ 174,268      $ 174,551        $ 158,969        $ 159,683
                                      ================ ==============  ============= ==============   ==============   =============
</TABLE>

---------------
    Except for U.S. Treasury and Federal agency securities, investments in the
securities of any one issuer do not exceed 10% of the total amount of
investment securities held.

     To enhance liquidity and diversification of its interest earning assets,
the Company has increased its portfolio of investment securities, primarily in
U.S. Treasury and Federal agency securities. The Company has been increasing
the average maturity of its investment portfolio by purchasing Federal agency
mortgage-backed securities with average lives of five years or more, and
municipal securities with maturities of fifteen years or longer.

    Investment securities with a carrying value of $93.3 million and $89.4
million at December 31, 1997 and 1996, respectively, were pledged to secure
deposits of state and local governments, federal government agencies, and
securities sold under repurchase agreements as required or permitted by law.


                                      23
<PAGE>

    The following table shows the contractual maturity distribution of the
investment securities portfolio and the weighted average yield of such
securities as of December 31, 1997:
<TABLE>
<CAPTION>
                                                                After                After
                                                                One to              Five to               Over
                                          One Year  Average     Five     Average      Ten     Average      Ten    Average
                                          or less  Yield (1)    Years   Yield (1)    Years   Yield (1)    Years  Yield (1) Total
                                          -------  ---------    -----   ---------   -------  ---------    -----  -------  -------
                                                                           (dollars in thousands)
<S>                                       <C>      <C>          <C>     <C>         <C>       <C>         <C>    <C>     <C>
Held to Maturity:
U.S. Treasury securities . . . . .
Federal agency obligations . . . .
State and municipal obligations. .                              $ 457      7.29%   $ 225        7.62%                      $ 682
                                                                -----              -----                                   -----
     Total held to maturity. . . .                              $ 457              $ 225                                   $ 682
                                                               ======              =====                                  ======
       Weighted average yield (1)                                          7.29%                7.62%
                                                                           ----                 ====
Available for Sale:
U.S. Treasury securities. . . . .      $ 35,138       5.90%   $ 6,613      6.16%   $ 861        6.47%                    $42,612
Federal agency obligations. . . .         4,000       6.31%    17,148      6.17%                                          21,148
Mortgage backed securities. . . .           790       5.76%     6,520      6.13%   2,600        6.98%  $ 93,585    6.90% 103,495
State and municipal obligations .         1,594       6.48%       546      6.28%                         51,013    8.08%  53,153
Other securities. . . . . . . . .         1,008       5.79%       728      6.10%     220        8.58%    21,123    6.33%  23,079
                                   -------------              -------              -----               --------          -------
     Total available for sale . .      $ 42,530              $ 31,555            $ 3,681              $ 165,721         $243,487
                                   =============            =========            =======              =========         ========
      Weighted average yield (1)                     5.96%                6.16%                6.96%              7.19%
                                                     ====                 ====                 ====               ====
</TABLE>

---------------
(1)  Yields on tax-exempt obligations have been computed on a tax equivalent
     basis assuming a marginal federal tax rate of 35%.

    Loan Portfolio. In addition to continuing its historical emphasis on
commercial loans the Company has increasingly emphasized consumer loans,
especially indirect automobile loans. Accordingly, consumer loans, the
majority of which are comprised of indirect automobile loans, grew to $247.9
million at December 31, 1997, or 52% more than the $162.7 million at December
31, 1996, which had increased 34% over the prior year end. Commercial based
lending includes commercial loans, commercial mortgages, construction loans
and direct financing leases. Total commercial based loans decreased to $566.5
million at December 31, 1997, or 4% less than the $591.5 million at December
31, 1996, which had increased 1% over the prior year end..

     The following table summarizes the loan portfolio of the Company by loan
category and amount at December 31 for the past five years. The loan
categories correspond to the Company's internal classifications. Net loans are
stated at the amount of unpaid principal, and are net of unearned discount and
unearned loan fees. Loans with a principal amount in excess of 2% of the
Company's capital are generally considered to be "large" loans. By these
standards, large loans were those exceeding $2.1 million, $1.8 million and
$1.7 million at December 31, 1997, 1996 and 1995, respectively. Large loans as
a percentage of total loans at December 31, 1997, 1996 and 1995 were 8%, 11%
and 11%, respectively.

<TABLE>
<CAPTION>
                                                                               December 31,
                                                   -------------------------------------------------------------------
                                                     1997          1996           1995           1994           1993
                                                   --------      --------       --------       --------       --------
<S>                                                <C>           <C>            <C>            <C>            <C>
Mortgages held for sale ........................   $  2,959      $    725       $    484       $    380       $ 19,009
                                                   --------      --------       --------       --------       --------

Commercial loans(1) ............................    259,027       283,107        270,700        236,630        196,528
Commercial mortgages ...........................    214,297       228,246        241,074        173,100        158,287
Construction loans .............................     74,496        66,182         62,405         50,182         38,427
Direct financing leases ........................     18,649        13,963         13,642         13,556          9,837
Consumer loans .................................    247,858       162,726        121,395         99,861         62,299
Credit cards ...................................     21,669         6,079          2,115            624            --
Residential mortgages ..........................     67,029        67,252         61,580         59,227         49,092
Overdrafts .....................................      3,741         1,307          1,096            912            508
                                                   --------      --------       --------       --------       --------
Net loans (before allowance for credit lossses)     906,766       828,862        774,007        634,092        514,978
                                                   --------      --------       --------       --------       --------
     Total net loans and mortgages held for sale   $909,725      $829,587       $774,491       $634,472       $533,987
                                                   ========      ========       ========       ========       ========
</TABLE>
(1)  Commercial loans secured by real property approximated $149.7 million,
     $165.5 million, $164.0 million, $150.2 million and $108.3 million
     respectively at December 31, 1997, 1996, 1995, 1994 and 1993.

                                      24
<PAGE>



    The following table summarizes the loan portfolio of the Company by loan
category and amount at December 31, 1997 and corresponds to appropriate
regulatory definitions.
<TABLE>
<CAPTION>


                                                                                      Book Value
                                                                                    (in thousands)
<S>                                                                                 <C>
Loans secured by real estate:
       Construction and land development ...........................................   $ 74,806
       Secured by 1-4 family residential properties ................................    205,433
       Secured by multifamily (5 or more) residential properties ...................     30,912
       Secured by non-family, non- residential properties ..........................    245,078
Commercial and industrial loans:
       To U.S. addresses (domicile)  ...............................................    109,357
Loans to individuals for household, family and other personal expenditures:
       Credit cards and related plans ..............................................     21,669
       Other .......................................................................    194,685
       Tax-exempt industrial development obligations ...............................      5,001
       All other loans .............................................................      4,136
       Lease financing receivables, net of unearned income .........................     18,648
                                                                                       ========
           Total ...................................................................   $909,725
                                                                                       ========

</TABLE>


     The following table presents selected loan categories at December 31,
1997 by maturity. Loans having no stated schedule of repayments and no stated
maturity are reported as due in one year or less. Loans at variable rates
include loans immediately repriceable, or repriceable at specified intervals
(usually three years or less) in response to changes in specified indices.
<TABLE>
<CAPTION>

                                                                  Period to Maturity
                                              Within           One to Five    After Five
                                              One Year          Years            Years          Total
                                              --------          -----            -----          -----
                                                                    (in thousands)
<S>                                         <C>              <C>             <C>             <C>
Commercial and commercial mortgages . .. .  $    174,552     $    193,084     $   105,688    $    473,324
Construction. . . . . . . . . . . . . .. .        59,192           15,304                          74,496
                                            =============    =============    ============   =============
               Total. . . . . . . . . .. .  $    233,744     $    208,388     $   105,688    $    547,820
                                            =============    =============    ============   =============

Amounts of loans:
       Loans at fixed rates. . . . . . . .                   $    111,801     $    38,518
       Loans at variable rates. . . . .. .                         96,587          67,170
                                                             =============    ============
               Total. . . . . . . . . .. .                   $    208,388     $   105,688
                                                             =============    ============

</TABLE>

    The following table presents loans, including mortgages held for sale, as
of December 31,1997 by maturity:
<TABLE>
<CAPTION>

                                                         Period to Maturity
                                           Within          One to Five            After
                                          One Year            Years             Five Years        Total
                                        --------------    ---------------     -------------   -------------
                                                           (in thousands)
<S>                                     <C>               <C>                 <C>             <C>
Mortgages held for sale  . . . . . . .  $       2,959                                         $      2,959
Loans at fixed rates . . . . . . . . .        148,186     $      271,726      $      82,691        502,603
Loans at variable rates. . . . . . . .        215,245             96,683             92,235        404,163
                                        ==============    ===============     =============   =============
               Total . . . . . . . . .  $     366,390     $      368,409      $     174,926   $    909,725
                                        ==============    ===============     =============   =============
</TABLE>


                                      25
<PAGE>
    Non-Performing Loans. Loans are considered to be non-performing if they
are on a non-accrual basis or terms have been renegotiated to provide a
reduction or deferral of interest or principal because of a weakening in the
financial positions of the borrowers. A loan which is past due 90 days or more
and still accruing interest remains on accrual status only when it is both
adequately secured as to principal and accruing interest and is in the process
of collection. Non-accrual loans were $9.4 million, $11.3 million, $13.1
million, $10.2 million and $6.8 million, respectively, at December 31, 1997,
1996, 1995, 1994 and 1993 (1). Non-performing assets including other real
estate owned amounted to $11.6 million, $14.8 million, $17.4 million, $17.7
million and $14.3 million, respectively, at December 31, 1997, 1996, 1995,
1994 and 1993 (1). Of the $9.4 million in non-accrual loans (1) at December
31, 1997, $3.3 million resulted from the Constitution acquisition. Of the
$11.3 million in non-accrual loans (1) at December 31, 1996, $2.6 million
resulted from the Constitution acquisition. Of the $13.1 million in
non-accrual loans at December 31, 1995, $3.0 million resulted from the
Constitution acquisition, and $895,000 remained from other acquisitions.
Activity in non-accrual loans in 1997 reflected $5.2 million of additions,
$3.3 million of payments, $3.4 million of charge-offs, $357,000 of transfers
to other real estate owned and $91,000 of loans returned to accrual status.
Activity in 1996 reflected $5.0 million of additions, $619,000 of transfers to
other real estate owned, $656,000 of returns to accrual status, $4.4 million
of charge-offs and $1.2 million of payments. Loans past due 90 days or more
still accruing amounted to $5.5 million in 1997, $4.5 million in 1996 and $6.9
million in 1995. The decreases in 1997 and 1996 as compared to 1995 reflect
the elimination of substantially all amounts originally resulting from the
Constitution acquisition. Although significant increases in non-accrual loans
resulted from acquisitions, management believes that such loans are adequately
reserved in the allowance for credit losses. See "Summary of Credit Loss
Experience" below.

    Other real estate owned at December 31, 1997 totaled $2.2 million,
compared to $3.5 million at December 31, 1996. The December 31, 1997 total
included approximately $275,000 from the Constitution acquisition and no
remaining amounts from other acquisitions. Activity in 1997 reflected
additions of $2.1 million, sales and other receipts of $2.7 million and
charge-offs and other write downs of $671,000. The December 31, 1996 total
included approximately $625,000 from the Constitution acquisition. Activity in
1996 reflected additions of $4.1 million with sales and other receipts of $3.6
million and charge offs of $1.2 million. Other real estate owned at December
31, 1995 totaled $4.3 million, a decrease of $1.8 million from December 31,
1994. The balance at December 31, 1995 included $2.2 million of other real
estate owned from the Constitution acquisition and insignificant amounts from
other acquisitions.

    The following table presents the principal amounts of non-accrual and
renegotiated loans (excluding loans past due 90 days or more and still
accruing interest) at December 31 for the years 1997 through 1993 in addition
to a schedule presenting loans contractually past due 90 days or more as to
interest or principal still accruing interest. Totals for other real estate
owned are also presented.
<TABLE>
<CAPTION>
                                                                                   December 31,
                                                              ---------------------------------------------------
                                                               1997        1996      1995       1994       1993
                                                              -------    -------    -------    -------    -------
                                                                              (dollars in thousands)
<S>                                                           <C>        <C>        <C>        <C>        <C>
Loans accounted for on a non-accrual basis(1)  .....          $ 9,361    $11,269    $13,127    $10,240    $ 6,832
Loans renegotiated to provide a reduction or
    deferral of interest or principal ..............                                   --        1,367      1,493
                                                              -------    -------    -------    -------    -------
Total non-performing loans (1) .....................            9,361     11,269     13,127     11,607      8,325
                                                              -------    -------    -------    -------    -------
Other real estate owned ............................            2,235      3,537      4,260      6,093      5,937
                                                              =======    =======    =======    =======    =======
Total non-performing assets (1)  ...................          $11,596    $14,806    $17,387    $17,700    $14,262
                                                              =======    =======    =======    =======    =======
Non-performing loans/total loans(1)  ...............             1.03%      1.36%      1.69%      1.83%      1.56%
Non-performing assets/total loans and non-
    performing assets(1) ...........................             1.27%      1.78%      2.23%      2.76%      2.64%
Loans past due 90 days or more as to interest or
    principal payments still accruing interest and
    not included in non-accrual loans ..............          $ 5,452    $ 4,478    $ 6,898    $ 6,190    $ 4,564
                                                              =======    =======    =======    =======    =======
</TABLE>
    Interest Accrual Policies. Interest income is accrued as it is earned on a
simple interest basis. Accrual of interest is discontinued on a loan when
management believes, after considering economic and business conditions which
may affect the borrower's repayment ability and collection efforts, that the
borrower's financial condition is such that collection of interest is
doubtful. Loans on which the accrual of interest had been discontinued or
reduced amounted to $9.4 million, $11.3 million and $13.1 million at December
31, 1997, 1996 and 1995, respectively. If interest on non-accrual loans (1)
had been accrued, such income would have been approximately $931,000, $1.1
million and $774,000 for the years ended December 31, 1997, 1996 and 1995,
respectively (1). At December 31, 1997 and 1996, there were no commitments to
lend additional funds to borrowers whose loans were classified as non-accrual.
---------------
(1) Excluding loans past due 90 days or more and still accruing interest.

                                      26
<PAGE>


    The balance of impaired loans was $9.4 million and $11.3 million
respectively at December 31, 1997 and 1996. The Company identifies a loan as
impaired when it is probable that interest and principal will not be collected
according to the contractual terms of the loan agreements. The allowance for
credit loss associated with impaired loans was $2.3 million and $3.7 million
respectively at December 31, 1997 and 1996. The average recorded investment in
impaired loans was $10.3 million in 1997 and the income recognized on impaired
loans during 1997 was $-0-. The average recorded investment in impaired loans
was $12.2 million in 1996 and the income recognized on impaired loans during
1996 was $-0-. Total cash collected on impaired loans during 1997 and 1996 was
$3.3 million and $1.2 million respectively which was credited to the principal
balance outstanding on such loans. Respective interest which would have been
accrued on impaired loans during 1997 and 1996 was $931,000 and $1.1 million.
The Company recognizes income on non-accrual loans under the cash basis when
the loans are both current and the collateral on the loans is sufficient to
cover the outstanding obligation to the Company. If these factors do not
exist, the Company will not recognize income.

    Provision for Credit Losses. The provision for credit losses is an amount
charged against earnings to fund the reserve for possible future losses on
existing loans. In order to determine the amount of the provision for credit
losses, the Company conducts a quarterly review of the loan portfolio to
evaluate overall credit quality. This evaluation consists of an analysis of
individual loans and overall risk characteristics, the size of the different
loan portfolios, current economic and market conditions, changes in
non-performing loans, the capability of specific borrowers to repay specific
loan obligations and current loan collateral values. The Company also
considers past estimates of possible loan losses as compared with actual
losses, potential problems relating to sizable loans and large loan
concentrations (if any). As adjustments become identified, they are reported
in earnings for the period in which they become known.

    The provision for credit losses was $3.6 million in 1997, as compared to
$5.0 million in 1996 and $4.0 million in 1995. The ratio of the allowance for
credit losses to total loans was 1.40%, 1.66% and 1.93% respectively at
December 31, 1997, 1996 and 1995. The ratio of the allowance for credit losses
to non-performing assets was 110%, 93% and 86% at December 31, 1997, 1996 and
1995. The ratio of the allowance for credit losses to non-accrual loans,
including loans 90 days past due still accruing interest, was 86%, 87% and 75%
at December 31, 1997, 1996 and 1995, respectively. The decrease in the
allowance for credit losses to $12.8 million at December 31, 1997 from $13.7
million at December 31, 1996 reflected , among other factors, the 4% decrease
in the commercial loan portfolio. The decrease in the December 31, 1996
allowance for credit losses to $13.7 million from $15.0 at December 31, 1995
reflects the charge off in the third quarter of 1996 of $3.9 million which had
previously been recorded in the allowance for credit losses. The increase in
the allowance in 1995 to $15.0 million reflects the $6.1 million allowance for
credit losses resulting from Constitution Bank. The provision for credit
losses of $3.6 million in 1997 compared with $5.0 million in 1996, $4.0
million in 1995, $1.9 million in 1994 and $2.5 million in 1993. The $1.0
million increase in 1996 compared to 1995 reflected a $1.5 million additional
provision to bring the United Valley Bank allowance for credit losses to
levels more consistent with industry wide methodologies. The increase was
reflected in the restatement of the financial statements resulting from the
pooling of interests method of accounting utilized for that acquisition. The
$2.1 million increase in 1995 over the prior year in the provision for credit
losses was required by the ongoing quarterly analyses of adequacy of the
allowance for credit losses. The Company's charge offs, excluding the effect of
all its acquisitions, amounted to $2.8 million in 1997, $5.6 million in 1996,
$3.3 million in 1995 and $2.4 million in 1994. The $2.3 million increase in
1996 charge offs over 1995 reflected the charge off of amounts
already reflected in the allowance for credit losses. The determination to
charge off most of these amounts was a judgment that the collection process
was more extended than anticipated. The majority of recoveries of $1.3 million
in 1997, $1.1 million in 1996, $672,0000 in 1995, and $513,000 in 1994,
resulted from loans originating in the portfolios of acquired banks.

    In 1993 and 1994, quarterly provisions for credit losses approximated
budgeted amounts of $500,000 to $600,000. Quarterly provisions in 1995,
excluding United Valley Bank, in chronological order, were $540,000, $615,000,
$1,215,000 and $765,000. As noted above, the increases in these quarters were
required by the ongoing quarterly analyses of adequacy of the allowance for
credit losses. The $1,215,000 included a special provision of $500,000
resulting from a management decision to eliminate a problem credit by
disposing of the underlying real estate collateral at the then current loss
instead of pursuing a lengthy work out, as was previously intended.
Chronological quarterly provision for 1996, excluding United Valley Bank, were
$624,000, $703,000, $786,000 and $867,000 and reflected budgeted amounts,
supported by ongoing quarterly analyses of adequacy of the allowance for
credit losses. Provisions for United Valley Bank amounted to $2.0 million and
included $1.5 million to bring levels in the allowance to levels more
consistent with industry wide methodologies. Chronological quarterly
provisions for 1997 were $825,000, $870,000, $945,000 and $960,000 and were
consistent with budgeted amounts.

                                      27
<PAGE>





Summary of Credit Loss Experience. The following table summarizes the credit
loss experience of the Company for each of the past five years:
<TABLE>
<CAPTION>
                                                                            December 31,
                                                         ----------------------------------------------------
                                                           1997       1996       1995       1994       1993
                                                          =======    =======    =======    =======    =======
                                                                        (dollars in thousands)
<S>                                                       <C>         <C>       <C>        <C>       <C>
Balance in allowance for credit losses
    at beginning  of year .............................   $13,734    $14,991    $ 8,986    $ 6,867    $ 6,468
                                                          =======    =======    =======    =======    =======

Loans charged-off:
     Commercial .......................................       957      1,914      2,816      1,198        736
     Construction .....................................      --          473       --          167       --
     Real estate mortgage .............................     3,140      4,272      1,588      1,768      1,274
     Credit card ......................................       835        160         16       --         --
     Installment and direct financing leases ..........       900        522        435        236        243
                                                          =======    =======    =======    =======    =======
        Total .........................................     5,832      7,341      4,855      3,369      2,253
                                                          =======    =======    =======    =======    =======

Recoveries:
     Commercial .......................................       216        109        265        309         73
     Construction .....................................      --         --         --         --            1
     Real estate mortgage .............................       956        901        437        196         31
     Credit card ......................................         9       --         --         --         --
     Installment and direct financing leases ..........        86         51         51         28         28
                                                          =======    =======    =======    =======    =======
        Total .........................................     1,267      1,061        753        533        133
                                                          =======    =======    =======    =======    =======

Net charge-offs .......................................     4,565      6,280      4,102      2,836      2,120
Purchase of Chester County ............................                                      2,434
Purchase of Security First ............................                                        664
Purchase of Constitution ..............................                           6,121
Provision charged to operations .......................     3,600      5,023      3,986      1,857      2,519
                                                          =======    =======    =======    =======    =======
Balance in allowance for credit losses at end of
     period ...........................................   $12,769    $13,734    $14,991    $ 8,986    $ 6,867
                                                          =======    =======    =======    =======    =======
Net charge-offs/average loans, net ....................      0.53%      0.79%      0.58%      0.50%      0.42%
</TABLE>
     Management of the Company has not attempted to allocate specific portions
of the allowance for credit losses to specific loan categories. However, the
Company regularly monitors the credit-worthiness and financial condition of
its significant borrowers, in all loan categories.

    The Company determines the level of its allowance for possible credit
losses based on a number of factors. An analysis of individual commercial
loans, commercial real estate, construction and other loans as well as
internally classified loans is conducted and specific reserves are allocated
for those credits which are determined to have weaknesses requiring such
allocations. In addition, an analysis based upon historical loss experience is
conducted. In this analysis, the Company applies its loss experience over the
preceding eight fiscal quarters in each loan portfolio segment to the balance
outstanding in such segment at the end of the period as to which the
determination of allowance adequacy is being made, and uses this analysis as a
predictor of future loss. In conjunction with the above analyses, the Company
considers both internal and external factors which may affect the adequacy of
the allowance for possible credit losses. Such factors may include, but are
not limited to present and prospective industry trends and regional and
national economic conditions, past estimates of possible loan losses as
compared to actual losses, potential problems with sizable loans and large
loan concentrations. The Board of Directors reviews management's assessments
at least on a quarterly basis.

     Historically, the Company has not generally been an unsecured lender
either to businesses or individuals, and most of its loans are secured by some
form of collateral. However, exceptions may be made to this general operating
philosophy from time to time. For most loans, which are collateralized, the
primary risk element, other than fraud, relates to the market acceptability
and value adequacy of the collateral securing the loans.

     Commitments. In the normal course of its business, the Company makes
commitments to extend credit and issues standby letters of credit. Generally,
such commitments are provided by the Company as a service to customers with
which the Company has other relationships. Commitments to extend credit
amounted to $340.8 million and $218.6 million at December 31, 1997 and 1996,
respectively. Outstanding letters of credit amounted to $11.5 million and $8.8
million at December 31, 1997 and 1996, respectively.
<PAGE>

    Deposits. One of the primary components of sound growth and profitability
is core deposit accumulation and retention. Core deposits consist of all
deposits except public funds and certificates of deposit in excess of
$100,000. Since core deposits exclude certificates of deposit issued in excess
of $100,000, it is the Company's general policy to issue such certificates
only to customers with which the Company has other relationships. At December
31, 1997, total deposits were approximately $933.6 million, an increase of
approximately $146.5 million or 19% from December 31, 1996. The increase
reflected inflows resulting from promotional rates on various deposit
instruments. At December 31, 1996, total deposits were approximately $787.1
million, a decrease of approximately $53.4 million or 6% over 1995. The
decrease between 1996 and 1995 year-end amounts reflected seasonal
fluctuations. Year end core deposits as a percentage of total deposits were
approximately 89% for 1997 and 1996 while the percentage of certificates of
deposit in excess of $100,000 was 11% in those years.

                                      28
<PAGE>

    The following tables present the average balances and rates paid on
deposits for each of the years 1997, 1996 and 1995:
<TABLE>
<CAPTION>


                                                                           Year Ended December 31,
                                       ---------------------------------------------------------------------------------------------
                                                   1997                          1996                             1995
                                       -----------------------------  -----------------------------   ------------------------------
                                         Average          Average        Average          Average        Average          Average
                                         Balance            Rate         Balance           Rate          Balance            Rate
                                       ------------      -----------  --------------    -----------   ---------------    -----------
                                                                       (dollars in thousands)
<S>                                       <C>                           <C>                             <C>
Demand (non-interest bearing). . .. .     $ 132,512                  $   125,435                        $ 119,034
Interest checking. . . . . . . . .. .        80,673          1.24%        73,063            1.94%          63,906            2.12%
Savings and money market . . . . .. .       256,538          3.47%       233,837            3.29%         203,110            3.31%
Time . . . . . . . . . . . . . . .. .       384,983          5.64%       376,472            5.54%         355,719            5.68%
                                       ============                  ===========                       ==========
        Total Deposits . . . . . .. .     $ 854,706                  $   808,807                        $ 741,769
                                       ============                  ===========                      ===========

</TABLE>

     As of December 31, 1997, the Company had total time deposits of
approximately $408.3 million. The following table summarizes the composition
of these deposits.

<TABLE>
<CAPTION>

                                                                                  Percentage of
                                                                                   Total Time
                                                              Amount                Deposits
                                                            ------------            --------
                                                                (dollars in thousands)
<S>                                                         <C>                    <C>
Certificates of deposits in excess of $100,000. . . . . .   $    98,626               24%
Individual retirement accounts. . . . . . . . . . . . . .        36,560                9%
Other time deposits. . . . . . . . . . . . . . . . . . .        273,152               67%
                                                            -----------            ------
         Total. . . . . . . . . . . . . . . . . . . . . .   $   408,338              100%
                                                            ===========            ======

</TABLE>

    The remaining maturity of certificates of deposit of $100,000 or more as
of December 31, 1997 is presented:


                                                           Amount
                                                        ------------
                                                       (in thousands)
Maturity:
Three months or less. . . . . . . . . . . .               $ 60,244
Three to six months. . . . . . . . . . . .                  14,831
Six to 12 months. . . . . . . . . . . . . .                 17,520
Over 12 months. . . . . . . . . . . . . . .                  6,031
                                                       ===========
         Total. . . . . . . . . . . . . . .               $ 98,626
                                                       ===========


    Impact of Inflation. The financial statements and related financial data
presented in this report have been prepared in accordance with generally
accepted accounting principles which require the measurement of financial
position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. The primary impact of inflation on the operation of the Company is
reflected in increased operating costs. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates have a more significant impact
on a financial institution's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the price of goods and services. The Company believes
that continuation of its efforts to manage the rates, liquidity and interest
sensitivity of the Company's assets and liabilities is necessary to generate
an acceptable return on assets.



                                      29
<PAGE>

     Year 2000. As a control over the potential disruption which might result
from year 2000 computer malfunctions or failure of computer chips utilized in
equipment, management is in process of rectifying non-compliant software and
hardware systems throughout the institution. The bank's loan and deposit
applications are serviced by Fiserv, a publicly held corporation which
specializes in providing data processing services to financial institutions.
Management is monitoring that company's execution of its plan to bring
remaining applications into compliance. Fiserv's compliance is further under
review by a third party firm and is scheduled for additional examinations
through 1999. Management does not expect the costs of bringing the Company's
system into year 2000 compliance to have a material adverse effect on the
Company's financial condition, results of operation or liquidity.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    See Item 7 Managements Discussion and Analysis of Financial Condition and
Results of Operations

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The Financial Statements and Financial Statement Schedules are set forth
at pages 31 to 65 of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

    None.




                                      30
<PAGE>

              Report of Independent Certified Public Accountants


Board of Directors and Stockholders
JeffBanks, Inc.


         We have audited the accompanying consolidated balance sheets of
JeffBanks, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company'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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
JeffBanks, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.





/s/ GRANT THORNTON LLP
-----------------------------

Philadelphia, Pennsylvania
January 15, 1998 (except for note 2, as
        to which the date is March 19, 1998)



                                      31
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                                 --------------------------
                ASSETS                                                              1997            1996
                                                                                 ----------      ----------
                                                                                       (in thousands)
<S>                                                                              <C>             <C>
Cash and cash equivalents
   Cash and due from banks                                                       $   49,623      $   45,343
   Federal funds sold                                                                92,200          41,950
                                                                                 ----------      ----------
                                                                                    141,823          87,293
Investment securities available for sale                                            243,487         174,551
Investment securities held to maturity                                                  682             687
Mortgages held for sale                                                               2,959             725
Loans, net                                                                          893,997         815,128
Premises and equipment, net                                                          18,420          14,989
Accrued interest receivable                                                           7,518           7,299
Other real estate owned                                                               2,235           3,537
Goodwill, net                                                                         4,435           8,776
Other assets                                                                         13,068          14,189
                                                                                 ----------      ----------
            Total assets                                                         $1,328,624      $1,127,174
                                                                                 ==========      ==========
            LIABILITIES
Deposits
   Demand (non-interest bearing)                                                 $  144,310      $  137,361
   Savings, money market and interest checking                                      380,982         315,939
   Time deposits                                                                    309,712         249,787
   Time deposits, $100,000 and over                                                  98,626          84,052
                                                                                 ----------      ----------
                                                                                    933,630         787,139
Securities sold under repurchase agreements                                          70,911          73,764
FHLB advances                                                                       150,000         127,750
Subordinated notes and debentures                                                    32,000          32,000
Guaranteed preferred beneficial interest in the Company's subordinated debt          25,300            --
Accrued interest payable                                                             11,352           8,082
Other liabilities                                                                     2,576           7,158
                                                                                 ----------      ----------
            Total liabilities                                                     1,225,769       1,035,893
                                                                                 ----------      ----------
            SHAREHOLDERS' EQUITY
Common stock - authorized, 10,000,000 shares of $1.00 par value; issued and
   outstanding, 5,001,430 and 4,716,228 shares, respectively                          5,001           4,716
Additional paid-in capital                                                           71,101          64,030
Retained earnings                                                                    25,127          22,355
Net unrealized gain on securities available for sale                                  1,626             180
                                                                                 ----------      ----------
            Total shareholders' equity                                              102,855          91,281
                                                                                 ----------      ----------
            Total liabilities and shareholders' equity                           $1,328,624      $1,127,174
                                                                                 ==========      ==========
</TABLE>


The accompanying notes are an integral part of these statements.



                                      32
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

                       CONSOLIDATED STATEMENTS OF INCOME


<TABLE>
<CAPTION>
                                                                          Year ended December 31,
                                                                     ---------------------------------
                                                                       1997         1996         1995
                                                                     -------      -------      -------
                                                                   (in thousands, except per share data)
<S>                                                                  <C>          <C>          <C>
Interest income
    Loans, including fees                                            $79,292      $72,547      $65,652
    Investment securities                                             11,113       10,333        5,903
    Federal funds sold                                                 3,731        2,324        2,721
                                                                     -------      -------      -------
                                                                      94,136       85,204       74,276
                                                                     -------      -------      -------
Interest expense
    Time deposits, $100,000 and over                                   5,254        5,002        4,478
    Other deposits                                                    26,368       24,988       23,809
    FHLB advances                                                      5,455        3,854        2,927
    Subordinated notes and debentures                                  2,868        2,401          855
    Trust preferred securities                                         2,119         --           --
    Securities sold under repurchase agreements                        3,076        2,834          980
                                                                     -------      -------      -------
                                                                      45,140       39,079       33,049
                                                                     -------      -------      -------
          Net interest income                                         48,996       46,125       41,227
Provision for credit losses                                            3,600        5,023        3,986
                                                                     -------      -------      -------
          Net interest income after provision for credit losses       45,396       41,102       37,241
                                                                     -------      -------      -------
Non-interest income
    Service fees on deposit accounts                                   3,378        3,181        2,768
    Gain on sales of residential mortgages                             1,067          419          261
    Gain on sales of investment securities                               515          245          333
    Mortgage servicing fees                                              744          819          885
    Merchant credit card deposit fees                                  1,968        1,593        1,247
    Credit card fee income                                               432          145           69
    Other                                                              1,545          903        1,406
                                                                     -------      -------      -------
                                                                       9,649        7,305        6,969
                                                                     -------      -------      -------
Non-interest expense
    Salaries and employee benefits                                    16,653       16,382       13,954
    Occupancy expense                                                  3,709        3,847        3,528
    Depreciation                                                       1,746        1,692        1,565
    FDIC expense                                                          98           29          826
    Data processing expense                                              802        1,235        1,309
    Legal                                                                792          924          702
    Stationery, printing and supplies                                    849          888          675
    Shares tax                                                           791          751          592
    Advertising                                                        1,008        1,223          700
    Other real estate owned maintenance expense                          201          230          362
    Loss on sale and write-downs of other real estate owned              454          500          298
    Amortization of intangibles                                        1,310        1,262          816
    Credit card origination expense                                      490          235           85
    Credit card processing expense                                       577          318           96
    Merchant credit card deposit expense                               1,597        1,218          984
    Other                                                              5,530        5,083        4,668
                                                                     -------      -------      -------
                                                                      36,607       35,817       31,160
                                                                     -------      -------      -------
          Income before income taxes                                  18,438       12,590       13,050
Income taxes                                                           6,001        4,640        4,571
                                                                     -------      -------      -------
          Net income                                                 $12,437      $ 7,950      $ 8,479
                                                                     =======      =======      =======
          Net income applicable to common stock                      $12,437      $ 7,950      $ 7,354
                                                                     =======      =======      =======
Per share data
    Net income per common share - basic                              $  2.50      $  1.63      $  1.87
    Net income per common share - diluted                            $  2.33      $  1.54      $  1.63
</TABLE>





The accompanying notes are an integral part of these statements.



                                      33
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

           CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY



<TABLE>
<CAPTION>
                                                                                               Net unrealized
                                                                      Additional                  gain (loss)
                                                                       paid-in       Retained    on securities
                                     Common stock   Preferred stock    capital       earnings  available for sale   Total
                                     ------------   ---------------    -------       --------  ------------------   -----
                                                                          (in thousands)

<S>                                    <C>             <C>            <C>            <C>            <C>            <C>
Balance at January 1, 1995             $  3,428        $    186       $ 57,252       $ 15,558       $ (1,259)      $ 75,165

Net income                                 --              --             --            8,479           --            8,479

Purchase of Constitution Bank               107            --            2,075           --             --            2,182

Conversion of preferred stock               907            (186)          (822)          --             --             (101)

Issuance of common stock
    for 401(k) plan                          11            --              219           --             --              230

Cost to acquire minority interest
    in Jefferson Bank of
    New Jersey                             --              --              (15)          --             --              (15)

Cash dividends on preferred
     stock                                 --              --             --           (1,127)          --           (1,127)

Cash dividends on common
    stock                                  --              --             --           (1,621)          --           (1,621)

Warrants exercised                            8            --               94           --             --              102

5% stock dividend                           188            --            4,299         (4,487)          --             --

Net unrealized gain
    on securities available
    for sale                               --              --             --             --            1,744          1,744
                                       --------        --------       --------       --------       --------       --------

Balance at December 31, 1995              4,649            --           63,102         16,802            485         85,038

Net income                                 --              --             --            7,950           --            7,950

Issuance of common stock
    for 401(k) plan                          10            --              255           --             --              265

Cost to establish a dividend
    reinvestment plan                      --              --              (26)          --             --              (26)

Issuance of common stock
    for dividend reinvestment
    plan                                      7            --              166           --             --              173

Warrants exercised                           50            --              533           --             --              583

Cash dividends on common
    stock                                  --              --             --           (2,397)          --           (2,397)

Net unrealized loss
    on securities available
    for sale                               --              --             --             --             (305)          (305)
                                       --------        --------       --------       --------       --------       --------

Balance at December 31, 1996              4,716            --           64,030         22,355            180         91,281
</TABLE>

                                                    (Continued)


                                      34
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

     CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - CONTINUED



<TABLE>
<CAPTION>
                                                                                               Net unrealized
                                                                      Additional                  gain (loss)
                                                                       paid-in       Retained    on securities
                                     Common stock   Preferred stock    capital       earnings  available for sale   Total
                                     ------------   ---------------    -------       --------  ------------------   -----
                                                                          (in thousands)

<S>                                  <C>             <C>            <C>            <C>            <C>            <C>

Net income                           $    --         $    --        $    --         $  12,437       $    --         $  12,437

Issuance of common stock
    for 401(k) plan                         19            --              493            --              --               512

Issuance of common stock
    for dividend reinvestment
    plan                                     7            --              221            --              --               228

Warrants exercised                          22            --              251            --              --               273

Cash dividends on common
    stock                                 --              --             --            (3,322)           --            (3,322)

5% stock dividend                          237            --            6,106          (6,343)           --              --

Net unrealized gain
    on securities available
    for sale                              --              --             --              --             1,446           1,446
                                     ---------       ---------      ---------       ---------       ---------       ---------

Balance at December 31, 1997         $   5,001       $    --        $  71,101       $  25,127       $   1,626       $ 102,855
                                     =========       =========      =========       =========       =========       =========
</TABLE>




The accompanying notes are an integral part of this statement.


                                      35
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

                     CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                Year ended December 31,
                                                                     -----------------------------------------
                                                                          1997             1996          1995
                                                                     ---------       ---------       ---------
                                                                                   (in thousands)
<S>                                                                  <C>             <C>             <C>
Operating activities
    Net income                                                       $  12,437       $   7,950       $   8,479
    Adjustments to reconcile net income to net cash provided
          by operating activities
       Depreciation and amortization                                     4,099           3,947           3,123
       Provision for credit losses                                       3,600           5,023           3,986
       Gain on sales of investment securities                             (515)           (245)           (333)
       Mortgage loans originated for sale                              (46,200)        (26,602)        (20,497)
       Mortgage loan sales                                              43,966          26,361          20,394
       Increase in interest receivable                                    (219)           (275)           (940)
       Increase in interest payable                                      3,270             543             215
       Increase in other assets                                         (3,277)         (3,074)         (1,434)
       Increase in other liabilities                                     1,511           3,108             976
                                                                     ---------       ---------       ---------
              Net cash provided by operating activities                 18,672          16,736          13,969
                                                                     ---------       ---------       ---------
Investing activities
    Proceeds from sales of investment securities available
       for sale                                                         43,187          11,827          31,147
    Proceeds from maturities of investment securities available
       for sale                                                         60,795          74,205          37,431
    Proceeds from maturities of investment securities held to
       maturity                                                           --             3,196           4,018
    Purchases of investment securities available for sale             (171,104)       (102,226)       (131,817)
    Proceeds from sales of other real estate owned                       2,390           3,147           6,421
    Net increase in loans                                              (83,112)        (64,003)        (65,659)
    Cash of entities acquired                                             --              --             8,698
    Purchases of premises and equipment                                 (5,177)         (3,516)         (2,094)
                                                                     ---------       ---------       ---------
              Net cash used in investing activities                   (153,021)        (77,370)       (111,855)
                                                                     ---------       ---------       ---------
Financing activities
    Net increase (decrease) in deposits                                146,491         (53,377)         29,587
    Net (decrease) increase in repurchase agreements                    (2,853)         27,215          30,320
    Net proceeds from issuance of common stock                           1,013             995             215
    Proceeds from FHLB advances                                         22,250          50,750          33,255
    Proceeds from issuance of subordinated notes                          --            23,000            --
    Proceeds from issuance of preferred securities                      25,300            --              --
    Dividends paid on preferred stock                                     --              --            (1,127)
    Dividends paid on common stock                                      (3,322)         (2,397)         (1,621)
                                                                     ---------       ---------       ---------
              Net cash provided by financing activities                188,879          46,186          90,629
                                                                     ---------       ---------       ---------
Net increase (decrease) in cash and cash equivalents                    54,530         (14,448)         (7,257)
Cash and cash equivalents at beginning of year                          87,293         101,741         108,998
                                                                     ---------       ---------       ---------
Cash and cash equivalents at end of year                             $ 141,823       $  87,293       $ 101,741
                                                                     =========       =========       =========
</TABLE>





The accompanying notes are an integral part of these statements.


                                      36
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE 1 - SUMMARY OF ACCOUNTING POLICIES

    The accounting policies followed by JeffBanks, Inc. (the Company) and its
    wholly-owned subsidiaries, Jefferson Bank (JBPA) and Jefferson Bank of New
    Jersey (JBNJ) (collectively referred to as the Banks), conform to
    generally accepted accounting principles and predominant practices within
    the banking industry. The Company is registered under the Bank Holding
    Company Act of 1956. The Banks are state-chartered banks regulated by the
    Pennsylvania Department of Banking and the New Jersey Department of
    Banking, respectively, and the Federal Deposit Insurance Corporation.

    The Banks operate as commercial banks offering a wide variety of
    commercial loans and, to a lesser degree, consumer credits, primarily
    indirect automobile loans. Their primary future strategic aim is to
    establish a reputation and market presence as the "small and middle market
    business bank" in their principal markets. The Company funds its loans
    primarily by offering time, savings and money market, and demand deposit
    accounts to both commercial enterprises and individuals. Additionally, the
    Company originates and, in limited amounts, purchases residential mortgage
    loans, and services such loans which are owned by other investors. Also,
    the Company serves as a processor of merchant credit card deposits.
    However, these activities are peripheral to the Company's core business of
    commercial and consumer lending, and represent less significant aspects of
    its operations, as determined by their net contributions to net income.
    Principal markets consist of Philadelphia and contiguous Pennsylvania and
    southern New Jersey counties.

    The Company and the Banks are subject to regulations of certain state and
    federal agencies and, accordingly, they are periodically examined by those
    regulatory authorities. As a consequence of the extensive regulation of
    commercial banking activities, the Banks' business is particularly
    susceptible to being affected by state and federal legislation and
    regulations.

    Basis of financial statement presentation

    The accounting and reporting policies of the Company and the Banks conform
    with generally accepted accounting principles and predominant practices
    within the banking industry. All intercompany balances and transactions
    have been eliminated. As a result of the merger with United Valley Bank as
    more fully described in note 2 below, the financial statements have been
    restated to reflect the impact of United Valley Bank. Restatement was
    required as the transaction was accounted for under the pooling of
    interests method of accounting.

    The preparation of financial statements 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. These estimates and assumptions also
    affect reported amounts of revenues and expenses during the reporting
    period. Actual results could differ from those estimates. Significant
    estimates implicit in these financial statements are as follows.






                                  (Continued)


                                      37
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE 1 - SUMMARY OF ACCOUNTING POLICIES - Continued

    The principal estimates that are particularly susceptible to significant
    change in the near term relate to the allowance for credit losses; certain
    intangible assets, such as goodwill, core deposits and mortgage servicing
    rights; and other real estate owned. In connection with management's
    evaluation of the acquisition, it was determined that the deferred tax
    asset was more realizable than not. Accordingly, the deferred tax
    valuation account and goodwill were reduced by $3,668,000.

    The evaluation of the adequacy of the allowance for credit losses
    includes, among other factors, an analysis of historical loss rates, by
    category, applied to current loan totals. However, actual losses may be
    higher or lower than historical trends, which vary. Actual losses on
    specified problem loans, which also are provided for in the evaluation,
    may vary from estimated loss percentages, which are established based upon
    a limited number of potential loss classifications.

    Substantially all outstanding goodwill resulted from the acquisition of
    Constitution Bank, a central Philadelphia institution which had developed
    a compelling, if not predominant, market position of being the small
    business bank in Philadelphia. As the result of Constitution Bank's market
    penetration, JBPA had formulated its own strategy to create such a market
    role. Accordingly, implicit in the purchase of the Constitution Bank
    franchise was the acquisition of that role. However, if such benefits,
    including new business, are not derived or JBPA changes its business plan,
    estimated amortization may increase and/or a charge for impairment may be
    recognized.

    Core deposit intangibles are amortized over estimated lives of deposit
    accounts. However, decreases in deposit lives may result in increased
    amortization and/or a charge for impairment may be recognized.

    Purchased and originated mortgage servicing rights are amortized
    consistent with prepayment estimates. However, if prepayments differ from
    those estimates, or if market values decline in excess of amortization,
    future amortization may increase and/or a charge for impairment may be
    recognized.

    Other real estate owned is written down to market based both upon
    estimates derived through appraisals and other resources. However,
    realization of sales proceeds may ultimately be higher or lower than those
    estimates.

    Direct origination costs for credit cards are capitalized and amortized
    over card terms to match related expense with future growth in balances
    and resulting income. However, if such growth in balances and income does
    not occur, estimated amortization may increase and/or a charge for
    impairment may be recognized.

    The Financial Accounting Standards Board (FASB) issued Statement of
    Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
    Income," which is effective for years beginning after December 15, 1997.
    This new standard requires entities presenting a complete set of financial
    statements to include details of comprehensive income. Comprehensive
    income consists of net income or loss for the current period and income,
    expenses, gains, and losses that bypass the income statement and are
    reported directly in a separate component of equity. The adoption of SFAS
    No. 130 will not have a material effect on the presentation of the
    Company's financial position or results of operations.



                                 (Continued)


                                      38
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 1 - SUMMARY OF ACCOUNTING POLICIES - Continued

    The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise
    and Related Information," which is effective for all periods beginning
    after December 15, 1997. SFAS No. 131 requires that public business
    enterprises report certain information about operating segments in
    complete sets of financial statements of the enterprise and in condensed
    financial statements of interim periods issued to shareholders. It also
    requires that public business enterprises report certain information about
    their products and services, the geographic areas in which they operate,
    and their major customers. The adoption of SFAS No. 131 will not have a
    material effect on the presentation of the Company's financial position or
    results of operations.

    Financial instruments

    The FASB issued SFAS No. 107, "Disclosures about Fair Value of Financial
    Instruments," which requires all entities to disclose the estimated fair
    value of their assets and liabilities considered to be financial
    instruments. Financial instruments requiring disclosure consist primarily
    of investment securities, loans and deposits.

    Investment securities

    The Company accounts for its investment securities in accordance with SFAS
    No. 115, "Accounting for Certain Investments in Debt and Equity
    Securities." This standard requires investments in securities to be
    classified in one of three categories: held to maturity, trading or
    available for sale. Investments in debt securities, for which management
    has both the ability and intent to hold to maturity, are carried at cost,
    adjusted for the amortization of premiums and accretion of discounts
    computed by the interest method. Investments in debt securities, which
    management believes may be sold prior to maturity due to changes in
    interest rates, prepayment risk and equity, liquidity requirements or
    other factors, are classified as available for sale. Net unrealized gains
    and losses for such securities, net of tax effect, are required to be
    recognized as a separate component of shareholders' equity and excluded
    from the determination of net income. The Company does not engage in
    security trading. Security transactions are accounted for on a trade date
    basis. Gains or losses on disposition of investment securities are based
    on the net proceeds and the adjusted carrying amount of the securities
    sold using the specific identification method.

    Loans and allowance for credit losses

    Loans that management has the intent and ability to hold for the
    foreseeable future or until maturity or payoff are stated at the amount of
    unpaid principal and are net of unearned discount, unearned loan fees and
    an allowance for credit losses. The allowance for credit losses is
    established through a provision for credit losses charged to expense. Loan
    principal considered to be uncollectible by management is charged against
    the allowance for credit losses. The allowance is an amount that
    management believes will be adequate to absorb possible losses on existing
    loans that may become uncollectible based upon an evaluation of known and
    inherent risks in the loan portfolio. The evaluation takes into
    consideration such factors as changes in the nature and size of the loan
    portfolio, overall portfolio quality, specific problem loans, and current
    and future economic conditions which may affect the borrowers' ability to
    pay. The evaluation details historical losses by loan category, the
    resulting loss rates for which are projected at current loan total
    amounts. Loss estimates for specified problem loans are also detailed.

                                  (Continued)


                                      39
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 1 - SUMMARY OF ACCOUNTING POLICIES - Continued

    Interest income is accrued as earned on a simple interest basis. Accrual
    of interest is discontinued on a loan when management believes, after
    considering economic and business conditions and collection efforts, that
    the borrower's financial condition is such that collection of interest is
    doubtful. When a loan is placed on such non-accrual status, all
    accumulated accrued interest receivable applicable to periods prior to the
    current year is charged off to the allowance for credit losses. Interest
    which had accrued in the current year is reversed out of current period
    income. Payments received subsequent to the non-accrual classification are
    applied as a reduction of principal in accordance with both regulatory
    guidelines and generally accepted accounting principles. Loans 90 days or
    more past due and still accruing interest must have both principal and
    accruing interest adequately secured and must be in the process of
    collection.

    The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment
    of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for
    Impairment of a Loan - Income Recognition and Disclosures," on January 1,
    1995. This standard requires that a creditor measure impairment based on
    the present value of expected future cash flows discounted at the loan's
    effective interest rate, except that as a practical expedient, a creditor
    may measure impairment based on a loan's observable market price, or the
    fair value of the collateral if the loan is collateral-dependent.
    Regardless of the measurement method, a creditor must measure impairment
    based on the fair value of the collateral when the creditor determines
    that foreclosure is probable. Because the Company already recognized such
    reductions of value through its provision for credit losses, the adoption
    of SFAS No. 114, as amended by SFAS No. 118, did not have a material
    impact on the Company's financial condition or results of operations.

    Bank premises and equipment

    Bank premises and equipment, including leasehold improvements, are stated
    at cost less accumulated depreciation. Depreciation expense is computed on
    the straight-line method over the estimated useful lives of the assets.
    Leasehold improvements are depreciated over the shorter of the estimated
    useful lives of the improvements or the terms of the related leases.

    Other real estate owned

    Other real estate owned, representing property acquired through
    foreclosure, is carried at the lower of the principal balance of the
    secured loan or fair value less estimated disposal costs of the acquired
    property. Costs relating to holding the assets are charged to expense.
    Loans in the amount of $511,000 and $934,000 in 1997 and 1996,
    respectively, were made on competitive terms and in conformity with normal
    underwriting standards to facilitate the sale of other real estate owned.








                                  (Continued)


                                      40
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 1 - SUMMARY OF ACCOUNTING POLICIES - Continued

    Goodwill and core deposit intangibles

    Substantially all outstanding goodwill resulted from the acquisition of
    Constitution Bank and is being amortized on a straight-line basis over
    approximately 15 years. The unamortized balance at December 31, 1997 and
    1996 was $3,958,000 and $8,243,000, respectively. In connection with
    management's evaluation of the realizability of its deferred tax assets
    associated with recent acquisitions, it was determined that the deferred
    tax asset was more realizable than not. Accordingly, the deferred tax
    valuation account and goodwill were reduced by $3,668,000.

    Additionally, as a result of the Constitution Bank acquisition in 1995,
    the Company recognized approximately $2,300,000 of core deposit
    intangibles which is being amortized on a straight-line basis over
    approximately seven years. The unamortized balance at December 31, 1997
    and 1996 was $1,560,000 and $1,889,000, respectively.

    Other assets

    Deferred financing fees of $1,153,000, related to the issuance of trust
    preferred securities, were incurred in 1997 and are being amortized over
    the remainder of the 30-year term of the underlying obligations. The
    unamortized balance at December 31, 1997 was $1,121,000.

    Deferred financing fees of $1,368,000, related to the issuance of
    subordinated notes and debentures, are being amortized over the remainder
    of the original 10-year term of the instruments and are included in other
    assets. The unamortized balances at December 31, 1997 and 1996 were
    $1,061,000 and $1,206,000, respectively.

    Certain direct origination costs for credit cards are capitalized and are
    being amortized over a two-year or four-year period depending on the term
    of the credit card. At December 31, 1997 and 1996, the unamortized balance
    was $2,276,000 and $582,000, respectively.

    Mortgage servicing

    JBPA performs various servicing functions on loans owned by others. A fee,
    usually based on a percentage of the outstanding principal balance of the
    loan, is received for these services. At December 31, 1997 and 1996, JBPA
    was servicing approximately $243,294,000 and $245,329,000, respectively,
    of loans for others.

    During 1997, 1996 and 1995, the Banks purchased $-0-, $15,000 and
    $258,000, respectively, of mortgage servicing rights. Amortization is
    based upon the ratio of servicing fees earned during the period to total
    servicing fees expected over the estimated lives of the portfolios.
    Additional amortization is recognized when prepayments exceed expected
    amounts. Unamortized purchased mortgage servicing rights are included in
    other assets and amounted to $631,000 and $799,000 at December 31, 1997
    and 1996, respectively. Amortization expense amounted to $168,000,
    $198,000 and $190,000 in 1997, 1996 and 1995, respectively. At December
    31, 1997 and 1996, JBPA maintained $466,000 and $460,000, respectively, of
    escrow balances associated with the servicing portfolio.

                                  (Continued)


                                      41
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 1 - SUMMARY OF ACCOUNTING POLICIES - Continued

    The FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of
    Financial Assets and Extinguishments of Liabilities," as amended by SFAS
    No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No.
    125," which provides accounting guidance on transfers of financial assets,
    servicing of financial assets and extinguishments of liabilities. This
    statement is effective for transfers of financial assets, servicing of
    financial assets and extinguishments of liabilities occurring after
    December 31, 1996. The Company originates mortgages under a definitive
    plan to sell or securitize those loans and allocates the cost of the loans
    to originated mortgage servicing rights and the loans based on relative
    fair values at the date of origination. Originated mortgage servicing
    rights of $554,000 and $279,000 for 1997 and 1996, respectively, resulted
    from the respective origination of $46,200,000 and $22,317,000 of
    mortgages in those years. Amortization on originated mortgage servicing
    rights is recognized in accordance with policies for purchased mortgages,
    as previously discussed. The unamortized balance of originated mortgage
    servicing rights at December 31, 1997 and 1996 was $761,000 and $222,000,
    respectively.

    Long-lived assets

    The Banks adopted SFAS No. 121, "Accounting for the Impairment of
    Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," for the
    year ended December 31, 1996, which provides guidance on when to recognize
    and how to measure impairment losses of long-lived assets and certain
    identifiable intangibles and how to value long-lived assets to be disposed
    of. The adoption of this new statement did not have a material impact on
    the Banks' financial position or results of operations.

    Mortgages held for sale

    Mortgages held for sale are recorded at cost, which approximates market.
    These mortgages are typically sold within three months of origination
    without recourse to the Banks. Gain on the sales of residential mortgages
    is recognized at the time of sale, and substantially all such gains result
    from the recognition of previously deferred fees collected upon the
    origination of such loans.

    Restrictions on cash and due from banks

    The Banks are required to maintain reserves against customer demand
    deposits by keeping cash on hand or balances with the Federal Reserve Bank
    in a non-interest bearing account. The amounts of those reserves and cash
    balances at December 31, 1997 and 1996 were approximately $9,273,000 and
    $7,569,000, respectively.










                                  (Continued)


                                      42
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE 1 - SUMMARY OF ACCOUNTING POLICIES - Continued

    Earnings per common share

    The Company adopted the provisions of SFAS No. 128, "Earnings Per Share,"
    which eliminates primary and fully diluted earnings per share and requires
    presentation of basic and diluted earnings per share in conjunction with
    the disclosure of the methodology used in computing such earnings per
    share. Basic earnings per share excludes dilution and is computed by
    dividing income available to common shareholders by the weighted average
    common shares outstanding during the period. Diluted earnings per share
    takes into account the potential dilution that could occur if securities
    or other contracts to issue common stock were exercised and converted into
    common stock. Prior periods' earnings per share calculations have been
    restated to reflect the adoption of SFAS No. 128.

    Advertising costs

    The Company expenses advertising costs as incurred.

    Employee benefit plans

    The Banks have certain employee benefit plans covering substantially all
    employees. The Banks accrue such costs as incurred.

    The Company adopted SFAS No. 123, "Accounting for Stock-Based
    Compensation," on January 1, 1996, which contains a fair value-based
    method for valuing stock-based compensation that entities may use, which
    measures compensation cost at the grant date based on the fair value of
    the award. Compensation is then recognized over the service period, which
    is usually the vesting period. Alternatively, the standard permits
    entities to continue accounting for employee stock options and similar
    equity instruments under Accounting Principles Board (APB) Opinion No. 25,
    "Accounting for Stock Issued to Employees." Entities that continue to
    account for stock options using APB Opinion No. 25 are required to make
    pro forma disclosures of net income and earnings per share, as if the fair
    value-based method of accounting defined in SFAS No. 123 had been applied.
    The Company's stock option plans are accounted for under APB Opinion No.
    25.

    Statement of cash flows

    Cash and cash equivalents are defined as cash on hand, cash items in the
    process of collection, amounts due from banks and federal funds sold with
    an original maturity of three months or less. Cash paid for income taxes
    was $3,172,000, $3,275,000 and $2,170,000 in 1997, 1996 and 1995,
    respectively. Cash paid for interest was $41,870,000, $38,799,000 and
    $33,334,000 in 1997, 1996 and 1995, respectively. Loans transferred to
    other real estate owned were $2,095,000, $4,188,000 and $6,097,000 in
    1997, 1996 and 1995, respectively.

    The consolidated statement of cash flows for the year ended December 31,
    1995 excludes the effect of Constitution Bank, as that business
    combination did not involve related cash flows.

    Reclassifications

    Certain reclassifications have been made to the 1996 financial statements
    to conform to the 1997 presentation.



                                      43
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 2 - ACQUISITIONS AND MERGERS

    On March 19, 1998, the Company announced that, through JBPA, it had
    entered into a merger agreement with Regent National Bank (Regent),
    pursuant to which it would acquire that institution. Consummation of the
    merger is conditional upon required regulatory and shareholder approvals.
    Under the terms of the pending merger, each share of Regent common stock
    would be converted into .303 of a share of the Company's common stock,
    resulting in the issuance of 1,032,989 shares of the Company's common
    stock.

    In January 1997, the Company, through JBPA, completed a merger with United
    Valley Bank. Under the terms of the merger, each share of United Valley
    Bank common stock was converted into .339 of a share of the Company's
    common stock, resulting in the issuance of 749,278 shares of the Company's
    common stock. In addition, outstanding warrants to purchase the acquired
    institution's common stock were converted into warrants to purchase
    255,381 shares of the Company's common stock, with an exercise price of
    $11.80 per share. This transaction was accounted for under the pooling of
    interests method of accounting.

    In August 1995, the Company, through JBPA, completed a merger with
    Constitution Bank. Under the terms of the merger, each share of
    Constitution Bank common stock was converted into .05909 of a share of the
    Company's common stock, resulting in the issuance of 106,456 shares of the
    Company's common stock. This transaction was accounted for under the
    purchase method of accounting. A total of $9,091,000 of goodwill and
    $2,300,000 of core deposit intangibles were recorded and are being
    amortized over 15 and 7 years, respectively.

NOTE 3 - INVESTMENT SECURITIES

    The amortized cost, gross unrealized gains and losses, and the estimated
    fair value of the Company's available for sale and held to maturity
    securities are as follows:


<TABLE>
<CAPTION>
                                                                  1997
                                            --------------------------------------------------
                                                           Gross         Gross      Estimated
                                           Amortized    unrealized    unrealized      fair
                                              cost         gains        losses        value
                                            --------      --------      --------      --------
                                                              (in thousands)
<S>                                         <C>           <C>           <C>           <C>
    Available for sale
       U.S. Treasury securities             $ 42,489      $    125      $      2      $ 42,612
       Federal agency obligations             21,060            88          --          21,148
       Mortgage-backed securities            103,246           307            58       103,495
       State and municipal obligations        51,215         1,939             1        53,153
       Other securities                       23,012            68             1        23,079
                                            --------      --------      --------      --------
                                            $241,022      $  2,527      $     62      $243,487
                                            ========      ========      ========      ========
     Held to maturity
       State and municipal obligations      $    682      $     17      $   --        $    699
                                            ========      ========      ========      ========
</TABLE>




                                  (Continued)


                                      44
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 3 - INVESTMENT SECURITIES - Continued


<TABLE>
<CAPTION>
                                                                  1996
                                            --------------------------------------------------
                                                           Gross         Gross      Estimated
                                           Amortized    unrealized    unrealized      fair
                                              cost         gains        losses        value
                                            --------      --------      --------      --------
                                                              (in thousands)
<S>                                         <C>           <C>           <C>           <C>
    Available for sale
      U.S. Treasury securities             $ 68,580      $     57      $     88      $ 68,549
      Federal agency obligations             37,127            91            17        37,201
      Mortgage-backed securities             35,433           141           150        35,424
      State and municipal obligations        15,334           265            19        15,580
      Other securities                       17,794             3          --          17,797
                                           --------      --------      --------      --------
                                           $174,268      $    557      $    274      $174,551
                                           ========      ========      ========      ========
    Held to maturity
      State and municipal obligations      $    687      $     14      $   --        $    701
                                           ========      ========      ========      ========
</TABLE>

    The following table lists maturities of debt and equity securities at
    December 31, 1997 classified as available for sale and held to maturity:

<TABLE>
<CAPTION>
                                                     Available for sale           Held to maturity
                                                   -----------------------      ---------------------
                                                                 Estimated                  Estimated
                                                   Amortized        fair        Amortized      fair
                                                      cost          value          cost        value
                                                    --------      --------      --------      --------
                                                                      (in thousands)

<S>                                                 <C>           <C>           <C>           <C>
    Due in one year or less                         $ 41,686      $ 41,740      $   --        $   --
    Due after one year through five years             24,892        25,035           457           467
    Due after five years through ten years             1,051         1,081           225           232
    Due after ten years                               49,877        51,866          --            --
                                                    --------      --------      --------      --------
                                                     117,506       119,722           682           699
    Mortgage-backed securities                       103,246       103,495          --            --
    Federal Home Loan Bank of Pittsburgh stock        20,270        20,270          --            --
                                                    --------      --------      --------      --------
                                                    $241,022      $243,487      $    682      $    699
                                                    ========      ========      ========      ========
</TABLE>

    Proceeds on sales of securities classified as available for sale were
    $43,187,000, $11,827,000 and $31,147,000 in 1997, 1996 and 1995,
    respectively. Realized gains and losses on sales of investment securities
    were $515,000 and $-0-; $245,000 and $-0-; and $334,000 and $1,000 in
    1997, 1996 and 1995, respectively.

    Tax-exempt interest income on state and municipal obligations classified
    as either investment securities or loans was $2,459,000, $727,000 and
    $495,000 in 1997, 1996 and 1995, respectively.



                                  (Continued)


                                      45
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 3 - INVESTMENT SECURITIES - Continued

    Investment securities with an aggregate carrying value of approximately
    $93,285,000 and $89,442,000 at December 31, 1997 and 1996, respectively,
    were pledged to secure public deposits and for other purposes required or
    permitted by law.

NOTE 4 - LOANS

    Major classifications of loans are as follows:

                                             1997            1996
                                          ---------       ---------
                                                (in thousands)

        Commercial                        $ 259,027       $ 283,107
        Commercial mortgage                 214,297         228,246
        Construction                         74,496          66,182
        Direct financing leases, net         18,649          13,963
        Consumer loans                      247,858         162,726
        Credit card                          21,669           6,079
        Residential mortgage                 67,029          67,252
        Overdrafts                            3,741           1,307
                                          ---------       ---------
                                            906,766         828,862
        Allowance for credit losses         (12,769)        (13,734)
                                          ---------       ---------

                                          $ 893,997       $ 815,128
                                          =========       =========
    Changes in the allowance for credit losses are as follows:

<TABLE>
<CAPTION>
                                               1997           1996           1995
                                             --------       --------       --------
                                                         (in thousands)

<S>                                          <C>            <C>            <C>
        Balance at beginning of year         $ 13,734       $ 14,991       $  8,986
        Provision charged to operations         3,600          5,023          3,986
        Loans charged off                      (5,832)        (7,341)        (4,855)
        Recoveries                              1,267          1,061            753
        Purchase of Constitution Bank            --             --            6,121
                                             --------       --------       --------

        Balance at end of year               $ 12,769       $ 13,734       $ 14,991
                                             ========       ========       ========
</TABLE>







                                  (Continued)


                                      46
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 4 - LOANS - Continued

    The balance of impaired loans was $9,361,000 and $11,269,000 at December
    31, 1997 and 1996, respectively. The Banks have identified a loan as
    impaired when it is probable that interest and principal will not be
    collected according to the contractual terms of the loan agreements. The
    allowance for credit loss associated with impaired loans was $2,250,000
    and $3,733,000 at December 31, 1997 and 1996, respectively. The average
    recorded investment on impaired loans was $10,259,000 and $12,229,000
    during 1997 and 1996, respectively, and the income recognized on impaired
    loans during 1997 and 1996 was $-0-. Total cash collected on impaired
    loans during 1997 and 1996 was $3,217,000 and $1,196,000, respectively,
    all of which was credited to the principal balance outstanding on such
    loans. Interest which would have been accrued on impaired loans during
    1997, 1996 and 1995 was $931,000, $1,107,000 and $774,000, respectively.
    The Banks' policy for interest income recognition on impaired loans is to
    recognize income on restructured loans under the accrual method. The Banks
    recognize income on non-accrual loans under the cash basis when the loans
    are both current and the collateral on the loan is sufficient to cover the
    outstanding obligation to the Banks; if these factors do not exist, the
    Banks will not recognize income.

    Loans past due 90 days or more as to interest or principal payments still
    accruing interest at December 31, 1997 and 1996 were $5,452,000 and
    $4,478,000, respectively. At December 31, 1997 and 1996, there were no
    commitments to lend additional funds to borrowers whose loans are
    classified as non-accrual.

    Loans totalling $188,000,000 and $159,000,000 at December 31, 1997 and
    1996, respectively, were pledged as collateral to secure advances from the
    Federal Home Loan Bank (FHLB).

NOTE 5 - PREMISES AND EQUIPMENT

    Premises and equipment are as follows:

<TABLE>
<CAPTION>
                                                                                          1997             1996
                                                                       Estimated        --------          --------
                                                                      useful lives           (in thousands)
                                                                      ------------

<S>                                                                 <C>                <C>               <C>
       Land                                                               --           $   2,670         $   2,670
       Building                                                     10 to 40 years         3,990             3,913
       Furniture, fixtures and equipment                            5  to 12 years        18,124            14,227
       Leasehold improvements                                       5  to 20 years         8,056             7,823
                                                                                        --------          --------
                                                                                          32,840            28,633
       Accumulated depreciation                                                          (14,420)          (13,644)
                                                                                        --------          --------

                                                                                       $  18,420         $  14,989
                                                                                        ========          ========
</TABLE>





                                      47

<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 6 - DEPOSITS

    The aggregate amount of jumbo certificates of deposit, each with a minimum
    denomination of $100,000, was $98,626,000 and $84,052,000 in 1997 and
    1996, respectively.

    At December 31, 1997, the scheduled maturities of certificates of deposit
    are as follows:

       1998                                              $368,136
       1999                                                24,296
       2000                                                11,569
       2001                                                 3,051
       2002 and thereafter                                  1,286
                                                        ---------
                                                         $408,338
NOTE 7 - DEBT                                            ========

    FHLB advances

    At December 31, 1997, JBPA had $150,000,000 in advances outstanding from
    the FHLB. Of that total, $148,000,000 was overnight advances with an
    interest rate of 5.65%. A total of $2,000,000 at 6.35% is repayable in
    March 1998. The maximum amount outstanding at any time was $150,000,000.
    For 1997, the average amount outstanding was $95,147,000, with a weighted
    average interest rate of 5.73%. At December 31, 1997, JBPA had
    approximately $27,006,000 in unused advances from the FHLB.

    At December 31, 1996, JBPA had $127,750,000 in advances outstanding from
    the FHLB. Of that total, $125,750,000 was overnight advances with an
    interest rate of 6.75%. A total of $2,000,000 at 6.35% is repayable in
    March 1998. The maximum amount outstanding at any month-end was
    $129,750,000. Maturing advances are generally renewed for periods ranging
    from one day to three months. For 1996, the average amount outstanding was
    $69,271,000, with a weighted average interest rate of 5.56%. At December
    31, 1996, JBPA had approximately $23,000,000 in unused advances from the
    FHLB.

    Subordinated notes and debentures

    In March 1996, the Company issued $23,000,000 of 8.75% subordinated notes
    due April 1, 2006. The notes are redeemable at the option of the Company,
    in whole or in part, at any time on or after April 1, 2001, at their
    stated principal amount plus accrued interest, if any. Interest is payable
    semi-annually on April 1 and October 1.









                                  (Continued)


                                      48
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 7 - DEBT - Continued

    JBPA issued $9,000,000 of 9.5% subordinated debentures due February 15,
    2003. The debentures are redeemable at the option of JBPA, in whole or in
    part, at any time on or after February 15, 2000, at their stated principal
    amount plus accrued interest, if any. Interest is payable semi-annually on
    February 15 and August 15. The note agreement restricts the payment of
    cash dividends and any other distributions to (i) 50% of the cumulative
    net income of JBPA since JBPA's inception plus (ii) $500,000 without the
    consent of a majority of the holders of the subordinated debentures. JBPA
    shall also not redeem or repurchase any of its preferred or common stock
    subject to the above limitation.

    Guaranteed preferred beneficial interest in the Company's subordinated debt

    On February 5, 1997, the Company issued $25,300,000 principal amount of
    9.25% junior subordinated deferrable interest debentures due March 31,
    2027 (the debentures) to JBI Capital Trust I (the Trust), a Delaware
    business trust, in which the Company owns all the common equity. The
    debentures are the sole asset of the Trust. The Trust issued $25,000,000
    of Trust preferred securities to investors. The Company's obligations
    under the debentures and related documents, taken together, constitute a
    full and unconditional guarantee by the Company of the Trust's obligations
    under the Trust preferred securities. Although the subordinated debentures
    will be treated as debt of the Company, they currently qualify for Tier 1
    capital treatment, subject to certain limitations. The Trust preferred
    securities are callable by the Company on or after March 31, 2002, or
    earlier in the event the deduction of related interest for federal income
    taxes is prohibited, treatment as Tier 1 capital is no longer permitted or
    certain other contingencies arise. The Trust preferred securities must be
    redeemed upon maturity of the debentures in 2027.

NOTE 8 - SHAREHOLDERS' EQUITY

    On April 1, 1997, the Company declared a 5% common stock dividend, payable
    May 13, 1997. On January 17, 1996, the Company declared a 5% common stock
    dividend, payable March 15, 1996, in addition to its regular quarterly
    cash dividend. Quarterly cash dividends per common share totalled $.67 in
    1997, $.48 in 1996 and $.39 in 1995.

    The Company's preferred stock was all converted into shares of the
    Company's common stock in October 1995. The number of shares of common
    stock which were issued on conversion was determined by dividing the
    original issue price of such preferred stock by the conversion price, as
    adjusted for the conversion of JBPA common stock into the Company's common
    stock and to reflect certain increases and decreases in the amount of
    common stock outstanding. Each share of Series B, 12%, $5,000 face value,
    and Series C, 11%, $5,000 face value, preferred stock was converted into
    common stock at a price of $17.10 per share. Each share of Series D, 9.5%,
    $1,000 face value, preferred stock was converted into common stock at a
    price of $11.00 per share. Each share of Series E, 8%, $20.00 face value,
    preferred stock was converted into common stock at a price of $16.00 per
    share. Additionally, each share of 9.5%, $1,000 face value, preferred
    stock was converted into common stock at a price of $13.50 per share. As a
    result of the above conversions, 906,930 shares of the Company's common
    stock were issued.




                                      49

<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 9 - EARNINGS PER SHARE

    The Company's calculation of earnings per share in accordance with SFAS
    No. 128 is as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                      Year ended December 31, 1997
                                                             ----------------------------------------------
                                                               Income             Shares          Per share
                                                             (numerator)       (denominator)       amount
                                                             -----------       -------------      ---------
<S>                                                            <C>                  <C>           <C>
        Basic earnings per share
           Net income available to common stockholders         $12,437              4,967         $   2.50

        Effect of dilutive securities
           Options                                                --                  366             (.17)
                                                               -------            -------         --------

        Diluted earnings per share
           Net income available to common stockholders
               plus assumed conversions                        $12,437              5,333         $   2.33
                                                               =======            =======         ========
</TABLE>

    Options to purchase 46,000 shares of common stock at $38.375 per share
    were outstanding during the year. They were not included in the
    computation of diluted earnings per share because the option exercise
    price was greater than the average market price.


<TABLE>
<CAPTION>
                                                                      Year ended December 31, 1996
                                                             ----------------------------------------------
                                                               Income             Shares          Per share
                                                             (numerator)       (denominator)       amount
                                                             -----------       -------------      ---------
<S>                                                           <C>                <C>             <C>
        Basic earnings per share
            Net income available to common stockholders         $7,950            4,882           $   1.63

         Effect of dilutive securities
            Options                                               --                280               (.09)
                                                                ------           ------           --------

         Diluted earnings per share
            Net income available to common stockholders
                plus assumed conversions                        $7,950            5,162           $   1.54
                                                                ======           ======           ========
</TABLE>










                                  (Continued)


                                      50
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 9 - EARNINGS PER SHARE - Continued

<TABLE>
<CAPTION>
                                                                      Year ended December 31, 1995
                                                           ----------------------------------------------
                                                              Income           Shares          Per share
                                                           (numerator)      (denominator)       amount
                                                           -----------      -------------     ---------
<S>                                                           <C>                <C>             <C>
        Basic earnings per share
           Net income available to common stockholders       $7,354            3,936           $   1.87

        Effect of dilutive securities
           Preferred dividends                                1,125            1,002               (.19)
           Options                                             --                260               (.05)
                                                             ------           ------           --------

        Diluted earnings per share
           Net income available to common stockholders
               plus assumed conversions                      $8,479            5,198           $   1.63
                                                             ======           ======           ========
</TABLE>

NOTE 10 - INCOME TAXES

    An analysis of current and deferred income taxes is as follows:

                               1997             1996             1995
                              ------           ------           ------
                                           (in thousands)

        Current               $5,428           $3,136           $3,663
        Deferred                 573            1,504              908
                              ------           ------           ------
              Total           $6,001           $4,640           $4,571
                              ======           ======           ======

    The income tax provision reconciled to the tax computed at the statutory
federal rate was as follows:

<TABLE>
<CAPTION>
                                                                1997               1996               1995
                                                              -------            -------            -------
                                                                            (in thousands)

<S>                                                           <C>                <C>                <C>
        Tax at statutory rate                                 $ 6,269            $ 4,281            $ 4,437
        Increase (decrease) in taxes resulting from
           Tax-exempt loan and investment income                 (791)              (210)              (153)
           Non-deductible amortization                            389                397                151
           Other, net                                             134                172                136
                                                              -------            -------            -------

              Applicable income tax                           $ 6,001            $ 4,640            $ 4,571
                                                              =======            =======            =======
</TABLE>






                                  (Continued)


                                      51
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 10 - INCOME TAXES - Continued

    The net deferred tax liability consisted of the following:
<TABLE>
<CAPTION>
                                                                         1997               1996
                                                                         ----               ----
                                                                             (in thousands)

<S>                                                                    <C>                <C>
        Allowance for credit losses                                    $ 3,389            $ 3,208
        Deferred loan fees                                                  80                116
        Allowance for real estate owned                                    655              1,055
        Purchased net operating loss carryforwards                       3,888              3,909
                                                                       -------            -------
                Total deferred tax assets                                8,012              8,288
        Deferred asset valuation allowance                              (2,748)            (6,348)
                                                                       -------            -------
                Net deferred tax asset                                   5,264              1,940
                                                                       -------            -------
        Accumulated depreciation                                        (2,183)            (1,988)
        Net unrealized gain on securities available for sale              (819)              (101)
        Other                                                              (52)               (28)
                                                                       -------            -------
                Total deferred tax liabilities                          (3,054)            (2,117)
                                                                       -------            -------
        Net deferred tax liability                                     $ 2,210            $  (177)
                                                                       =======            =======
</TABLE>

    During 1997, management revised its estimate of the realizable deferred
    tax assets acquired as a result of the merger of Constitution Bank. The
    valuation allowance was reduced, resulting in an increase in the deferred
    tax assets at December 31, 1997 and a corresponding reduction in goodwill
    acquired in the merger. Similarly, based upon the Company's current and
    expected future taxable income levels, management revalued the deferred
    tax asset to reflect a 35% expected tax rate. This change increased the
    deferred tax asset and reduced deferred tax expense for 1997 by
    approximately $87,000.

NOTE 11 - EMPLOYEE BENEFIT PLANS

    The Company maintains an Employee Stock Ownership Plan for employees of
    the Banks. Contributions to this plan are made by the Company in amounts
    determined by the Board of Directors. Contributions by the Company
    amounted to $225,000, $215,000 and $201,000 in 1997, 1996 and 1995,
    respectively. Contributions are distributed to the Banks in proportion to
    their respective employee salaries.

    The Company maintains a 401(k) plan covering substantially all employees.
    The Company matches $.25 for each dollar contributed by participants up to
    an annual maximum of $2,000 per participant. The Company's matching
    contributions were $111,000, $95,000 and $78,000 in 1997, 1996 and 1995,
    respectively.







                                      52

<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 12 - STOCK OPTIONS

    The Company maintains a Key Employee Stock Option Plan (the Plan). Under
    the Plan, options to purchase a maximum of 600,000 shares of the Company's
    common stock may be issued to executive officers and other key employees
    of the Company who occupy responsible managerial or professional positions
    and who have the capability of making a substantial contribution to the
    success of the Company, as selected by the Plan committee. Directors and
    independent contractors who, in the judgment of the Plan committee, have
    contributed to the success of the Company are also eligible to participate
    subject to certain limitations. Options granted under the Plan may be
    either qualified or non-qualified. Option prices must be 100% of fair
    market value of the shares on the date of grant and the exercise period
    may not exceed 10 years, except that, in the case of qualified options
    granted to persons holding 10% or more of the combined voting power of the
    Company, the option exercise price may not be less than 110% of the fair
    market value of the shares on the date of grant and the exercise period
    for any option may not exceed five years. Vesting of options granted under
    the Plan is determined by the Plan committee. The Plan committee has the
    right, in its discretion, to permit an optionee to be paid the difference
    between the option exercise price and the fair market value of the option
    shares on the date of option exercise. At December 31, 1997, options to
    purchase 137,750 shares under the Plan were authorized to be issued, but
    had not been granted.

    As a result of the United Valley Bank merger, there are 241,120 options
    outstanding which are reflected in the tables in this footnote.

    Under former plans of the Company and JBPA, there were exercisable options
    outstanding to purchase 66,150 shares of the Company's common stock at
    $13.61 per share and 32,242 shares at $13.19 per share at December 31,
    1997, 1996 and 1995. No options were granted, exercised or expired during
    1997, 1996 and 1995 under these former plans.

    Had compensation cost for the plans been determined based on the fair
    value of the options at the grant dates consistent with SFAS No. 123, the
    Company's net income and earnings per share would have been reduced to the
    pro forma amounts indicated below.
<TABLE>
<CAPTION>
                                                                         1997           1996           1995
                                                                       -------         ------         ------

                                                                       (in thousands, except per share data)

<S>                                                <C>                 <C>             <C>            <C>
       Net income                                  As reported         $12,437         $7,950         $7,354
                                                   Pro forma            11,412          7,865          6,796

       Net income per common share - basic         As reported            2.50           1.63           1.87
                                                   Pro forma              2.29           1.61           1.69

       Net income per common share - diluted       As reported            2.33           1.54           1.63
                                                   Pro forma              2.14           1.52           1.45
</TABLE>

    These pro forma amounts may not be representative of future disclosures
    because they do not take into effect pro forma compensation expense
    related to grants before 1995.


                                  (Continued)


                                      53
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 12 - STOCK OPTIONS - Continued

    The fair value of each option grant is estimated on the date of grant
    using the Black-Scholes options-pricing model with the following weighted
    average assumptions used for grants in 1997, 1996 and 1995, respectively:
    dividend yield of 2.0% in 1997 and 2.5% for both 1996 and 1995; expected
    volatility of 15% in 1997 and 10% for both 1996 and 1995; risk-free
    interest rates of 6.42%, 6.19% and 6.28% in 1997, 1996 and 1995,
    respectively; and expected lives of 10 years for all three years.

    A summary of the status of the Company's option plans as of December 31,
    1997, 1996 and 1995 and the changes during the years ending on those dates
    is represented below:

<TABLE>
<CAPTION>
                                                  1997                      1996                    1995
                                            -----------------        -----------------        -----------------
                                                     Weighted                 Weighted                 Weighted
                                                      average                  average                  average
                                                     exercise                 exercise                 exercise
                                             Shares    price          Shares    price           Shares   price
                                            -------   ------         -------   ------         -------   ------

<S>                                         <C>      <C>             <C>      <C>             <C>      <C>
       Outstanding, beginning of year       662,591  $ 14.58         695,697  $ 14.21         594,148  $ 13.02
       Granted                              163,525    30.87          16,275    22.03         110,250    20.41
       Exercised                            (23,409)   11.24         (49,381)   11.24          (8,701)   11.24
                                            -------   ------         -------   ------         -------   ------
       Outstanding, end of year             802,707  $ 18.00         662,591  $ 14.58         695,697  $ 14.21
                                            -------   ======         -------   ======         -------   ======
       Options exercisable at year-end      802,707                  662,591                  695,697
                                            =======                  =======                  =======
       Weighted average fair value of
           options granted during the
           year                                      $  9.84                  $  5.61                  $  5.59
                                                      ======                  =======                  =======
</TABLE>

    The following table summarizes information about options outstanding at
December 31, 1997:

<TABLE>
<CAPTION>
                            Options outstanding                                     Options exercisable
------------------------------------------------------------------------     -------------------------------
                                          Weighted
                        Number             average          Weighted             Number            Weighted
                    outstanding at        remaining          average         outstanding at         average
     Range of        December 31,        contractual        exercise           December 31,         exercise
exercise prices          1997            life (years)         price                1997               price
------------------- ------------------- ----------------- --------------     -------------------  ----------

<S>      <C>            <C>                  <C>             <C>                  <C>              <C>
$11.24 - $16.55         512,657              3.71            $ 13.35              512,657          $ 13.35
 20.41 -  30.25         240,950              8.47              23.99              240,950            23.99
          38.38          49,100              9.92              38.38               49,100            38.38
                        -------                                                   -------

                        802,707                                                   802,707
                        =======                                                   =======
</TABLE>


                                      54
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



NOTE 13 - RELATED PARTY TRANSACTIONS

    At December 31, 1997 and 1996, loans outstanding to certain officers and
    directors of the Company and their subsidiaries and companies in which
    they have material ownership amounted to $19,486,000 and $15,946,000,
    respectively. An analysis of activity in loans to related parties at
    December 31, 1997 and 1996 resulted in new loans of $11,510,000 and
    $10,394,000, respectively; reductions of $7,970,000 and $4,747,000,
    respectively, representing payments; and respective reductions of $-0- and
    $170,000, respectively, representing changes in the composition of related
    parties. Deposits of these individuals and their affiliated companies at
    December 31, 1997 and 1996 were $45,154,000 and $6,942,000, respectively.
    The majority of the related party deposits at December 31, 1997 were
    short-term in nature.

    The Banks lease premises from several limited partnerships whose partners
    are persons related to the Company. Rental expense under these leases was
    $355,000, $355,000 and $340,000 in 1997, 1996 and 1995, respectively.

    The Company incurred $589,000, $606,000 and $392,000 in 1997, 1996 and
    1995, respectively, in legal fees to Ledgewood Law Firm for legal services
    related to regulatory compliance, the lending function, leases, contract
    review, the acquisition of the minority interest in the Banks, capital
    offerings, the acquisitions of United Valley Bank, Constitution Bank, and
    Security First, and other matters. A member of the Board of the Company
    was also a principal of Ledgewood Law Firm; however, in 1996, the
    relationship was terminated.

    The Banks are parties to a management agreement with the Company under
    which the Company provides services in the areas of management,
    accounting, internal audit, loan review, marketing and advertising. Total
    charges for such services amounted to $2,752,000, $3,061,000 and
    $2,945,000 for the years ended December 31, 1997, 1996 and 1995,
    respectively. These fees were eliminated in consolidation.

NOTE 14 - COMMITMENTS AND CONTINGENCIES

    Operating leases

    The Company leases certain of its operating facilities under
    non-cancellable operating leases expiring in 1996 through 2011. The leases
    require payment by the Company of the real estate taxes and insurance on
    the leased properties. Approximate future minimum annual rental payments
    are as follows (in thousands):

       Year ending December 31

                 1998                          $    2,362
                 1999                               2,062
                 2000                               1,965
                 2001                               1,891
                 2002                               1,796
                 Thereafter                         5,177
                                                ---------

                                                $  15,253
                                                =========


                                  (Continued)


                                      55
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 14 - COMMITMENTS AND CONTINGENCIES - Continued

    Rental expense amounted to $2,054,000, $1,753,000 and $1,680,000 in 1997,
    1996 and 1995, respectively.

    Other

    In the normal course of business, the Banks have been named as defendants
    in several lawsuits. Although the ultimate outcome of these suits cannot
    be ascertained at this time, it is the opinion of management that the
    resolution of such suits will not have a material adverse effect on the
    financial position or results of operations of the Company.

NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS

    SFAS No. 107 requires disclosure of the estimated fair value of an
    entity's assets and liabilities considered to be financial instruments.
    For the Company, as for most financial institutions, the majority of its
    assets and liabilities are considered financial instruments as defined in
    SFAS No. 107. However, many such instruments lack an available trading
    market, as characterized by a willing buyer and seller engaging in an
    exchange transaction. Also, it is the Company's general practice and
    intent to hold its financial instruments to maturity and not to engage in
    trading or sales activities, except for certain loans. Therefore, the
    Company had to use significant estimations and present value calculations
    to prepare this disclosure.

    Changes in the assumptions or methodologies used to estimate fair values
    may materially affect the estimated amounts. Also, management is concerned
    that there may not be reasonable comparability between institutions due to
    the wide range of permitted assumptions and methodologies in the absence
    of active markets. This lack of uniformity gives rise to a high degree of
    subjectivity in estimating financial instrument fair values.

    Estimated fair values have been determined by the Company using the best
    available data and an estimation methodology suitable for each category of
    financial instruments. The estimation methodologies used, the estimated
    fair values, and recorded book balances at December 31, 1997 and 1996 are
    outlined below.

    For cash and due from banks, the recorded book values of $141,823,000 and
    $87,293,000 at December 31, 1997 and 1996, respectively, approximate fair
    values. The estimated fair values of investment securities are based on
    quoted market prices, if available. Estimated fair values are based on
    quoted market prices of comparable instruments if quoted market prices are
    not available.











                                  (Continued)


                                      56
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

    The net loan portfolio at December 31, 1997 and 1996 has been valued using
    a present value discounted cash flow where market prices were not
    available. The discount rate used in these calculations is the estimated
    current market rate adjusted for credit risk. The carrying value of
    accrued interest approximates fair value.

<TABLE>
<CAPTION>
                                                                  1997                           1996
                                                         -------------------------      -------------------------
                                                         Carrying        Estimated      Carrying      Estimated
                                                          amount        fair value       amount        fair value
                                                         --------       ----------      --------      -----------
                                                                                (in thousands)

<S>                                                       <C>            <C>            <C>            <C>
       Investment securities                              $244,169       $244,186       $175,238       $175,252
       Loans, including mortgages held for sale            896,956        913,673        815,853        815,084
</TABLE>

    The estimated fair values of demand deposits (i.e. interest (checking) and
    non-interest bearing demand accounts, savings and certain types of money
    market accounts) are, by definition, equal to the amount payable on demand
    at the reporting date (i.e. their carrying amounts). The carrying amounts
    of variable rate accounts and certificates of deposit approximate their
    fair values at the reporting date. The carrying amount of accrued interest
    payable approximates its fair value.

    The majority of all time deposits with stated maturities totalling
    $408,338,000 and $333,839,000 mature or reprice within one year of
    December 31, 1997 and 1996, respectively; therefore, the recorded book
    value of such deposits approximates its fair value.

    The recorded book balance of subordinated debentures of $32,000,000 at
    December 31, 1997 and 1996 had an approximate fair value of $30,875,000
    and $32,500,000, respectively.

    The recorded book balance of the guaranteed beneficial interest in the
    Company's Trust preferred debt of $25,300,000 at December 31, 1997 had an
    approximate fair value of $23,782,000.

    The fair values of the FHLB advances totalling $150,000,000 and
    $127,750,000 are estimated to approximate their recorded book balances at
    December 31, 1997 and 1996, respectively.

    There was no material difference between the notional amount and the
    estimated fair value of off-balance-sheet items which totalled
    approximately $352,294,000 and $227,427,000 at December 31, 1997 and 1996,
    respectively, and primarily comprise unfunded loan commitments which are
    generally priced at market at the time of funding.







                                      57
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 16 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
          OF  CREDIT RISK

    The Banks are parties to financial instruments with off-balance-sheet risk
    in the normal course of business to meet the financing needs of their
    customers. These financial instruments include commitments to extend
    credit and standby letters of credit. Such financial instruments are
    recorded in the financial statements when they become payable. Those
    instruments involve, to varying degrees, elements of credit and interest
    rate risk in excess of the amount recognized in the consolidated balance
    sheets. The contract or notional amounts of those instruments reflect the
    extent of involvement the Banks have in particular classes of financial
    instruments.

    The Banks' exposure to credit loss in the event of non-performance by the
    other party to the financial instrument for commitments to extend credit
    and standby letters of credit is represented by the contractual or
    notional amount of those instruments. The Banks use the same credit
    policies in making commitments and conditional obligations as they do for
    on-balance-sheet instruments.

    Unless noted otherwise, the Banks do not require collateral or other
    security to support financial instruments with credit risk. The
    approximate contract amounts are as follows:

<TABLE>
<CAPTION>
                                                                                         1997             1996
                                                                                       --------           --------
                                                                                              (in thousands)

<S>                                                                                    <C>                <C>
        Financial instruments whose contract amounts represent credit risk
           Commitments to extend credit                                                $340,810           $218,578
           Standby letters of credit and financial guarantees written                    11,484              8,849
</TABLE>

    Commitments to extend credit are agreements to lend to a customer as long
    as there is no violation of any condition established in the contract.
    Commitments generally have fixed expiration dates or other termination
    clauses and may require payment of a fee. Since many of the commitments
    are expected to expire without being drawn upon, the total commitment
    amounts do not necessarily represent future cash requirements. The Banks
    evaluate each customer's creditworthiness on a case-by-case basis. The
    amount of collateral obtained, if deemed necessary by the Banks upon
    extension of credit, is based on management's credit evaluation.

    Standby letters of credit are conditional commitments issued by the Banks
    to guarantee the performance of a customer to a third party. Those
    guarantees are primarily issued to support public and private borrowing
    arrangements, including commercial paper, bond financing and similar
    transactions. The credit risk involved in issuing letters of credit is
    essentially the same as that involved in extending loan facilities to
    customers. The Banks hold residential or commercial real estate, accounts
    receivable, inventory and equipment as collateral supporting those
    commitments for which collateral is deemed necessary. The extent of
    collateral held for those commitments at December 31, 1997 and 1996 varies
    up to 100%.






                                  (Continued)

                                      58
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 16 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
          OF  CREDIT RISK - Continued

    The Banks grant loans primarily to customers in Philadelphia and its
    immediately adjacent suburban Pennsylvania counties which include Chester,
    Delaware and Montgomery and southern New Jersey which includes Camden and
    Burlington counties. Although the Banks have diversified loan portfolios,
    a large portion of their loans are secured by commercial or residential
    real property. The Banks do not generally engage in non-recourse lending
    and typically will require the principals of any commercial borrower to
    obligate themselves personally on the loan. Although the Banks have
    diversified loan portfolios, a substantial portion of their debtors'
    ability to honor their contracts is dependent upon the economic sector.
    The distribution of commitments to extend credit approximates the
    distribution of loans outstanding. Commercial and standby letters of
    credit were granted primarily to commercial borrowers.

NOTE 17 - REGULATORY MATTERS

    The Bank Holding Company Act of 1956 restricts the amount of dividends the
    Company can pay. Accordingly, dividends should generally only be paid out
    of current earnings, as defined.

    The Pennsylvania Banking Code of 1965 restricts the amount of dividends
    JBPA can pay. Accordingly, dividends may be declared and paid only out of
    net earnings, as defined. Where surplus, as defined, is less than 50% of
    the amount of JBPA's capital, no dividend may be paid or declared without
    the prior approval of the Pennsylvania Department of Banking (the
    Department) until the surplus, as defined, is equal to 50% of the total
    amount of capital. Where surplus, as defined, is less than 100% of
    capital, until such time as surplus equals capital, JBPA must transfer at
    least 10% of its net earnings to surplus, as defined, 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 New Jersey Banking Act of 1948 restricts the amount of dividends paid
    on JBNJ capital stock. Accordingly, no dividends shall be paid by JBNJ on
    its capital stock unless, following the payment of such dividends, the
    capital stock of JBNJ will be unimpaired, and (1) JBNJ will have a
    surplus, as defined, of not less than 50% of its capital, or, if not, (2)
    the payment of such dividend will not reduce the surplus, as defined, of
    JBNJ.

    The Banks are 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 Banks' consolidated financial
    statements. Under capital adequacy guidelines and the regulatory framework
    for prompt corrective action, the Company must meet specific capital
    guidelines that involve quantitative measures of the Banks' assets,
    liabilities and certain off-balance-sheet items as calculated under
    regulatory accounting practices. The Banks' capital amounts and
    classification are also subject to qualitative judgments by the regulators
    about components, risk weightings and other factors.




                                  (Continued)

                                      59
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 17 - REGULATORY MATTERS - Continued

    Quantitative measures established by regulations to ensure capital
    adequacy require the Banks to maintain minimum amounts and ratios (set
    forth in the table below) of total and core capital (as defined in the
    regulations) to risk-weighted assets, and of core capital to adjusted
    assets. Management believes, as of September 30, 1997, that the Banks meet
    all capital adequacy requirements to which they are subject.

    As of December 31, 1997, the Banks met all regulatory requirements for
    classification as well capitalized under the regulatory framework for
    prompt corrective action. To be categorized as well capitalized, the Banks
    must maintain minimum total risk-based, core risk-based and core leverage
    ratios as set forth in the table. There are no conditions or events since
    that notification that management believes have changed the institution's
    category.

    As of December 31, 1997 and 1996, the Company and the Banks had the
    following capital ratios:

<TABLE>
<CAPTION>
                                                                                                             To be well
                                                                                                          capitalized under
                                                                           For capital                    prompt corrective
                                              Actual                    adequacy purposes                 action provisions
                                      ---------------------           --------------------               ------------------
                                      Amount          Ratio           Amount         Ratio               Amount        Ratio
                                      ------          -----           ------         -----               ------        -----


<S>                                  <C>              <C>            <C>              <C>               <C>
       As of December 31, 1997
          Total capital
              (to risk-weighted
              assets)
                 Company             $158,788         16.93%         $ 75,021         8.00%             $ 93,777          N/A
                 JBPA                 120,418         14.33            67,209         8.00                84,011        10.00%
                 JBNJ                  10,754         13.57             6,338         8.00                 7,922        10.00
          Tier I capital
              (to risk-weighted
              assets)
                 Company              115,053         12.27            37,511         4.00                56,266          N/A
                 JBPA                  80,754          9.61            33,604         4.00                50,406         6.00
                 JBNJ                   7,311          9.23             3,169         4.00                 4,753         6.00
          Tier I capital
              (to average assets)
                 Company              115,053          9.31            49,417         4.00                61,772          N/A
                 JBPA                  80,754          7.14            45,266         4.00                56,582         5.00
                 JBNJ                   7,311          7.04             4,151         4.00                 5,189         5.00
</TABLE>





                                  (Continued)

                                      60
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 17 - REGULATORY MATTERS - Continued

<TABLE>
<CAPTION>
                                                                                                             To be well
                                                                                                          capitalized under
                                                                           For capital                    prompt corrective
                                              Actual                    adequacy purposes                 action provisions
                                      ---------------------           --------------------               ------------------
                                      Amount          Ratio           Amount         Ratio               Amount        Ratio
                                      ------          -----           ------         -----               ------        -----


<S>                                  <C>              <C>            <C>              <C>               <C>
       As of December 31, 1996
          Total capital
              (to risk-weighted
              assets)
                 Company             $122,181         15.08%         $ 64,832         8.00%             $ 81,040        N/A
                 JBPA                 111,308         14.65            60,802         8.00                76,003      10.00%
                 JBNJ                   9,912         16.88             4,698         8.00                 5,872       10.00
          Tier I capital
              (to risk-weighted
              assets)
                 Company               80,007          9.87            32,416         4.00                48,624         N/A
                 JBPA                  72,760          9.57            30,401         4.00                45,602        6.00
                 JBNJ                   6,554         11.16             2,349         4.00                 3,527        6.00
          Tier I capital
              (to average assets)
                 Company               80,007          7.26            44,089         4.00                55,111         N/A
                 JBPA                  72,760          7.14            40,767         4.00                50,959        5.00
                 JBNJ                   6,554          8.10             3,236         4.00                 4,046        5.00
</TABLE>


















                                      61

<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 18 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY

    The condensed financial information for JeffBanks, Inc. (parent company
    only) is as follows:

                           CONDENSED BALANCE SHEETS

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

<S>                                                           <C>                <C>
    Assets
       Cash                                                   $    920           $    713
       Equity investment in the Banks                          126,452             90,588
       Investment in the Banks' subordinated notes              23,000             23,000
       Investment in securities available for sale                 848                100
       Accrued interest receivable                                 510                503
       Premises and equipment, net                                 129                177
                                                              --------           --------
                                                              $151,859           $115,081
    Liabilities and shareholders' equity                      ========           ========
       Subordinated notes                                     $ 23,000           $ 23,000
       Minority interest in consolidated subsidiary             25,300               --
       Accrued interest payable                                    503                503
       Other liabilities                                           201                297
                                                              --------           --------
                                                                49,004             23,800
                                                              --------           --------
    Shareholders' equity
       Common stock                                              5,001              4,716
       Additional paid-in capital                               71,101             64,030
       Retained earnings                                        25,127             22,355
       Net unrealized gain on investment securities
          available for sale                                     1,626                180
                                                              --------           --------
                                                               102,855             91,281
                                                              --------           --------
                                                              $151,859           $115,081
                                                              ========           ========
</TABLE>










                                  (Continued)


                                      62
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 18 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued

                        CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                                Year ended December 31,
                                                                     -------------------------------------------
                                                                       1997              1996              1995
                                                                     -------           -------           -------
                                                                                    (in thousands)
<S>                                                                  <C>               <C>               <C>
    Income
      Dividends from the Banks                                       $ 3,330           $ 2,356           $ 2,749
      Interest income from the Banks                                   4,132             1,542              --
      Interest from investment securities                                 33              --                --
      Management service fees from the Banks                           2,752             3,061             2,945
                                                                     -------           -------           -------

          Total income                                                10,247             6,959             5,694
                                                                     -------           -------           -------

    Expenses
      Interest on subordinated notes                                   2,013             1,542              --
      Interest on preferred securities                                 2,119              --                --
      Salaries and employee benefits                                   1,053             1,189             1,046
      Occupancy expense                                                   57                55                56
      Depreciation                                                        48                49                40
      Data processing expense                                            691               930             1,073
      Advertising                                                        326               453               312
      Insurance                                                          316               345               351
      Other                                                               63                40                73
                                                                     -------           -------           -------

          Total expenses                                               6,686             4,603             2,951
                                                                     -------           -------           -------

          Income before provision for income taxes and
               equity in undistributed net income of the
               Banks                                                   3,561             2,356             2,743

    Provision for income taxes                                            79              --                --
                                                                     -------           -------           -------

          Income before equity in undistributed net income
               of the Banks                                            3,482             2,356             2,743

    Equity in undistributed net income of the Banks                    8,955             5,594             5,736
                                                                     -------           -------           -------

    Net income                                                       $12,437           $ 7,950           $ 8,479
                                                                     =======           =======           =======

    Net income applicable to common stock                            $12,437           $ 7,950           $ 7,352
                                                                     =======           =======           =======
</TABLE>



                                  (Continued)


                                      63
<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 18 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued

                      CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                   Year ended December 31,
                                                                       ------------------------------------------------
                                                                         1997                1996                1995
                                                                       --------            --------            --------
                                                                                       (in thousands)
<S>                                                                    <C>                 <C>                 <C>
    Operating activities
       Net income                                                      $ 12,437            $  7,950            $  8,479
       Adjustments to reconcile net income to net cash
              provided by operating activities
           Depreciation and amortization                                     48                  49                  40
           Equity in undistributed net income of the Banks               (8,955)             (5,594)             (5,736)
           (Decrease) increase in other liabilities                        (142)                126                  69
           Decrease in other assets                                          41                --                  --
                                                                       --------            --------            --------

                 Net cash provided by operating activities                3,429               2,531               2,852
                                                                       --------            --------            --------

    Investing activities
       Purchases of premises and equipment                                 --                  --                  (144)
       Purchases of investment securities available for sale               (694)               (100)               --
                                                                       --------            --------            --------

                 Net cash used in investing activities                     (694)               (100)               (144)
                                                                       --------            --------            --------

    Financing activities
       Dividends paid on preferred stock                                   --                  --                (1,127)
       Dividends paid on common stock                                    (3,322)             (2,397)             (1,621)
       Proceeds from issuance of common stock                               794                 438                 230
       Costs to acquire minority interest in JBNJ                          --                  --                   (15)
                                                                       --------            --------            --------

                 Net cash used in financing activities                   (2,528)             (1,959)             (2,533)
                                                                       --------            --------            --------

    Net increase in cash                                                    207                 472                 175

    Cash at beginning of year                                               713                 241                  66
                                                                       --------            --------            --------

    Cash at end of year                                                $    920            $    713            $    241
                                                                       ========            ========            ========
</TABLE>









                                      64

<PAGE>


                       JeffBanks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




NOTE 19 - QUARTERLY FINANCIAL DATA (UNAUDITED)

    The following represents summarized quarterly financial data of the
    Company which, in the opinion of management, reflects all adjustments,
    consisting only of normal recurring adjustments, necessary for a fair
    presentation of the Company's results of operations.

<TABLE>
<CAPTION>
                                                                             Three months ended
                                                       --------------------------------------------------------------
                                                       December 31     September 30         June 30          March 31
                                                       -----------     ------------         -------          --------
                                                                    (in thousands, except per share data)

<S>                                                     <C>               <C>               <C>               <C>
    1997
    ----
       Interest income                                  $24,654           $24,338           $22,943           $22,201
       Interest expense                                  12,027            11,773            10,927            10,413
       Net interest income                               12,627            12,565            12,016            11,788
       Provision for credit losses                          960               945               870               825
       Gain on sale of securities                           185               183               147              --
       Other operating income                             2,625             2,421             2,104             1,984
       Other operating expenses                           9,257             9,446             8,999             8,905
       Income before income taxes                         5,220             4,778             4,398             4,043
       Net income                                         3,503             3,249             3,001             2,684

       Per share data
           Net income per common share - basic              .70               .65               .60               .55
           Net income per common share - diluted            .65               .60               .57               .51

    1996
    ----
       Interest income                                  $21,854           $21,488           $21,098           $20,764
       Interest expense                                  10,059             9,964             9,760             9,296
       Net interest income                               11,795            11,524            11,338            11,468
       Provision for credit losses                        2,503               921               840               759
       Gain on sale of securities                            96                71                78              --
       Other operating income                             1,831             1,802             1,792             1,635
       Other operating expenses                          10,085             8,633             8,664             8,435
       Income before income taxes                         1,134             3,843             3,704             3,909
       Net income                                           574             2,480             2,376             2,520

       Per share data
           Net income per common share - basic              .12               .50               .48               .53
           Net income per common share - diluted            .11               .47               .46               .50
</TABLE>




                                      65

<PAGE>


                                   PART III


ITEM 10.          DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
                  PERSONS OF THE REGISTRANT

         The information required by this item is set forth under the caption
"Directors and Executive Officers" in the Proxy Statement, and is incorporated
herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

         The information required by this item is set forth under the caption
"Compensation of Executive Officers and Directors" in the Proxy Statement, and
is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT

         The information required by this item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement, and is incorporated herein by reference.

ITEM 3. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this item is set forth under the captions
"Security Ownership of Certain Beneficial Owners and Management" and "Certain
Relationships and Related Party Transactions" in the Proxy Statement, and is
incorporated herein by reference.


                                      66
<PAGE>



                                    PART IV

ITEM 14.          FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)      1.       Financial Statements

                  Report of Independent Certified Public Accountants
                  Report of Independent Accountants
                  Consolidated Balance Sheets
                  Consolidated Statements of Income
                  Consolidated Statement of Changes in Shareholders' Equity
                  Consolidated Statements of Cash Flows
                  Notes to Consolidated Financial Statements

         2.       Financial Statement Schedules

                  None.

         3.       Exhibits

                  Exhibits 3, 10, 12 and 21 appear in Exhibits 3, 2, 12 and
                  21, respectively, of the Company's registration statement on
                  Form S-4, as amended, Registration No. 333- 16261, each of
                  which such exhibits is hereby incorporated herein by
                  reference. Exhibits 4.1, 4.2, 4.3 and 4.4 appear in Exhibits
                  4.1, 4.2, 4.3 and 4.4 of the Company's registration
                  statement on Form S-3 as amended, Registration No. 333-
                  20111, each of which such exhibits is hereby incorporated
                  herein by reference.

                  Exhibit 23(a) Consent of Grant Thornton

                  Exhibit 27 - Items 27-1 through 27-9 -
                                 Financial Data Schedules

(b)      Reports on Form 8-K during the fourth quarter

         None.





<PAGE>

                                  SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Philadelphia, Commonwealth of Pennsylvania on March 18, 1998.


                                              JEFFBANKS, INC.



                                           By: /s/  BETSY Z. COHEN
                                              ---------------------------------

                                              Betsy Z. Cohen
                                              Chairperson of the Board
                                              (Chief Executive Officer)




<PAGE>





                                  SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>



<S>                                                                           <C>
/s/  BETSY Z. COHEN
--------------------------------                                               Date: MARCH 18, 1998
BETSY Z. COHEN, Chairperson
  of the Board, Chief Executive
  Officer and Director
  (Chief Executive Officer)

/s/ EDWARD E. COHEN
-------------------------------                                                Date: MARCH 18, 1998
EDWARD E. COHEN, Chairman
  of the Executive Committee
  and Director

/s/ ROBERT J. COLEMAN
--------------------------------                                               Date: MARCH 18, 1998
ROBERT J. COLEMAN, Director



/s/ PAUL FRENKIEL
--------------------------------                                               Date: MARCH 18, 1998
PAUL FRENKIEL, Senior Vice
  President - Finance, Chief Financial
  Officer and Controller ( Chief
  Financial and Accounting Officer)

/s/ JOHN G. HOOPES
--------------------------------                                               Date: MARCH 18, 1998
JOHN G. HOOPES, Director

/s/ HERSH KOZLOV
--------------------------------                                               Date: MARCH 18, 1998
HERSH KOZLOV, Director

/s/ WILLIAM H. LAMB
--------------------------------                                               Date: MARCH 18, 1998
WILLIAM H. LAMB, Director

/s/ ARTHUR MAKADON
--------------------------------                                               Date: MARCH 18, 1998
ARTHUR MAKADON, Director

/s/ P. SHERRILL NEFF
--------------------------------                                               Date: MARCH 18, 1998
P. SHERRILL NEFF, Director

/s/ JAMES R. SIBEL
--------------------------------                                               Date: MARCH 18, 1998
JAMES R. SIBEL, Chief Credit
  Officer and Director

</TABLE>



<PAGE>



<TABLE>
<CAPTION>



<S>                                                                           <C>


/s/ HARMON S. SPOLAN
--------------------------------                                               Date: MARCH 18, 1998
HARMON S. SPOLAN, President
  and Director

/s/ WILLIAM D. WHITE
--------------------------------                                               Date: MARCH 18, 1998
WILLIAM D. WHITE, Director



</TABLE>