SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-KSB

[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934
      For Fiscal Period Ended:  June 30, 1997

                        Or

[   ] Transition Report Pursuant to Section 13 or 15(d) of the
      Securities Exchange Act of 1934
      For the transition period from ________ to _________

                           Commission File No: 0-18833

                           Chester Valley Bancorp Inc.
                           ---------------------------
             (Exact name of registrant as specified in its charter)

               Pennsylvania                                      23-2598554
               ------------                                      ----------
      (State or other jurisdiction of                          (IRS Employer
      incorporation or organization)                        Identification No.)

   100 E. Lancaster Ave., Downingtown PA                           19335
   -------------------------------------                           -----
 (Address of principal executive offices)                        (Zip Code)

       Registrant's telephone number, including area code: (610) 269-9700

           Securities registered pursuant to Section 12(b) of the Act:
                                 Not Applicable

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

                     Common Stock, $1.00 Par Value Per Share
                     ---------------------------------------
                                (Title of Class)
<PAGE>

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 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-B is not contained  herein,  and will not be contained,  to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference in Part III of this Form 10-KSB or any  amendments to
this Form 10-KSB.   [ X ]

State issuer's revenues for its most recent fiscal year.      $23,892,931

As of September 1, 1997, the aggregate  value of the 1,757,559  shares of Common
Stock  of the  registrant  which  were  issued  and  outstanding  on such  date,
excluding 301,821 shares held by all directors and officers of the registrant as
a group, was approximately  $42.18 million.  This figure is based on the closing
sales price of $24.00 per share of the registrant's Common Stock on September 1,
1997.

Number of shares of Common Stock outstanding as of September 1, 1997: 2,059,380

Transitional Small Business Disclosure Format. YES [   ]    NO [ X ]


                       DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated by reference:

(1)      Portions of the Annual Report to  shareholders  for the year ended June
         30,  1997,  are  incorporated  into  Part II,  Items 5 - 7 of this Form
         10-KSB.

(2)      Portions of the Definitive  Proxy Statement for the 1997 annual meeting
         of shareholders  are  incorporated  into Part III, Items 9 - 12 of this
         Form 10-KSB.

<PAGE>

PART I.

ITEM 1.  BUSINESS

General

         Chester Valley Bancorp Inc. (the "Company"),  established in 1989, is a
Pennsylvania-chartered   unitary  thrift  holding   company,   headquartered  in
Downingtown, Pennsylvania. The business of the Company primarily consists of the
ownership  of 100% of the  outstanding  capital  stock of First  Financial  Bank
("First  Financial"  or the  "Bank"),  a  Pennsylvania-chartered  stock  savings
association   founded  in  1922,   which  conducts   operations   through  seven
full-service offices located in Downingtown, Exton, Frazer, Thorndale, Westtown,
Airport Village in Coatesville,  and Brandywine  Square between  Downingtown and
Exton,  Pennsylvania.   The  Bank  has  always  emphasized  a  strong  community
orientation and personalized customer service.

         The Bank is primarily  engaged in attracting  deposits from the general
public and using such  deposits,  together with  borrowings and other sources of
funds,  to originate and purchase first  mortgage loans as well as  construction
loans secured by residential  and commercial real estate,  consumer  loans,  and
other non-mortgage loans.

         Excluding the one-time  Savings  Institutions  Insurance  Fund ("SAIF")
special assessment, the Company had net income of $2.76 million for fiscal 1997,
as  compared to $2.44  million in fiscal  1996.  The pre-tax  amount of the SAIF
assessment  was $1.39 million,  resulting in an after-tax  charge to earnings of
approximately $832,000. After recognition of this assessment, the Company earned
net income of $1.93 million for fiscal 1997. The Company's operating results are
derived almost entirely from the Bank's results of operations.

         The Company's  earnings depend primarily on the difference  between the
yield earned on its loan and  investment  securities  portfolios and its cost of
funds,  consisting  primarily of the interest  paid on deposits and, to a lesser
extent,  on borrowings  ("interest  rate  spread").  During fiscal year 1997 the
Company's  interest rate spread  averaged  3.38%  compared to 3.21% and 3.19% in
fiscal years 1996 and 1995,  respectively.  Net interest income,  on a fully tax
equivalent  basis,  increased  13.9%, or $1.39 million to $11.36 million in 1997
from $9.97 million in 1996, compared to a 6.6% increase of $613,000 from 1995 to
1996. Net interest  margin,  on a fully tax equivalent  basis, was 4.03% for the
year ended 1997, compared to 3.86% in 1996 and 3.73% in 1995.

         Total other income increased $201,000 or 17.9% to $1.32 million for the
year ended June 30, 1997,  from fiscal  1996.  An increase of $44,000 in service
charges  and fees in fiscal  1997 as the result of an  increase  in  commissions
earned  on the  sale  of  disability  and  life  insurance  to the  Bank's  loan
customers,  an increase in the number of safe  deposit  boxes  rented,  and fees
earned on the Bank's debit card contributed to the increase in other income. The
Bank  recognized a gain of $2,400 on the sale of real estate owned during fiscal
1997  compared to a loss of $52,000  during the prior fiscal year.  In addition,
during fiscal 1997 the Bank purchased  properties adjacent to its main office in
order to expand its facilities to accommodate its growth. The rental income from
these  properties also contributed to the increase in other income during fiscal
1997.

         Total other income  increased  $78,000 or 7.5% to $1.12 million for the
year ended June 30,  1996,  as compared to fiscal 1995.  During  fiscal 1996 the
Company  recognized  gains  on the  sale of  securities  available  for  sale of
$148,000  compared to no such gains in fiscal 1995.  However,  this increase was
partially offset in fiscal 1996 by the recognition of a $52,000 loss on the sale
of two real estate owned  properties.  An increase of $86,000 in service charges
and fees in  fiscal  1996 as the  result  of  increased  fees and the  number of
deposit accounts also contributed to the increase in other income.  Other income
in  fiscal  1995  included  a  $100,000  gain  on the  sale  of  land  held  for
development.

         Excluding  the  $1.39  million  one-time  SAIF  assessment,   operating
expenses  totaled $7.80 million for fiscal year 1997, an increase of $800,000 or
11.4% over fiscal 1996. The one-time  assessment was part of legislation adopted
to recapitalize  the SAIF and required the Bank to pay 65.7 cents for every $100
of deposits. As a result of the special assessment, the Bank's federal insurance
premiums decreased from $0.23 per $100 of deposits to $0.06 per $100 of deposits
in the third fiscal  quarter of 1997. The Bank  anticipates  paying this reduced
premium for the foreseeable future. This reduction in federal insurance premiums
will  favorably  impact  expense for fiscal  1998.  The  increase  in  operating
expenses  over the prior  fiscal year was  primarily  due to a $489,000 or 15.0%
increase in salaries and employee  benefits  related to general salary increases
as well as the hiring of additional  staff for the Bank's newest branch  office,
Brandywine  Square,  and  for  the  Bank's  commercial  loan  department.   Also
contributing to the increase in other operating expenses was a $196,000 or 15.1%
increase in occupancy  and furniture and  equipment  costs  associated  with the
opening of the Brandywine Square branch in the first quarter of fiscal 1997.

         Operating  expenses  totaled $7.00 million for the fiscal year 1996, an
increase of $383,000 or 5.8% over the prior fiscal year.  The increase  over the
prior fiscal year was  primarily  due to a $197,000 or 6.4% increase in salaries
and employee  benefits related to general salary  increases,  increased  benefit
costs,  and a full year of expenses  related to the  staffing  required  for the
Company's   Airport  Village  branch  which  opened  during  fiscal  1995.  Also
contributing to the increase in other operating expenses was a $118,000 or 10.0%
increase  in  occupancy  and  furniture  and  equipment  costs  associated  with
increased costs of maintenance  contracts on computer equipment,  the renovation
of one of the Bank's  branches,  and the  purchase  of  software  and  equipment
related to the upgrade of the computer network for the operations  department of
the Bank.

         The  Company's  assets  totaled  $323.67  million at June 30, 1997,  as
compared with $272.93 million as of June 30, 1996. This 18.6% increase in assets
was primarily  funded by an increase in deposits of $32.54 million or 14.3% from
$228.21  million at June 30, 1996, to $260.75  million at June 30, 1997,  and an
increase in Federal  Home Loan Bank  ("FHLB")  advances of $16.23  million  from
$13.97  million to $30.20 million at June 30, 1996 and 1997,  respectively.  The
increase in deposits  and  advances  was used in part to fund loan  originations
during the period,  which contributed to an increase in net loans receivable and
loans held for sale from $223.96 million at June 30, 1996, to $257.15 million at
June 30, 1997. In addition, the Company's investment securities held to maturity
and available for sale along with its interest-bearing deposits increased in the
aggregate  from  $39.54  million to $53.88  million  at June 30,  1996 and 1997,
respectively.

         In September  1996 and 1995 the Company paid 5% common stock  dividends
in the amounts of 77,731 and 74,110 shares,  respectively,  from  authorized but
unissued common stock, with fractional shares paid in the form of cash. In March
1997 the Company  paid a  five-for-four  stock  split  effected in the form of a
dividend in the amount of 414,188  shares,  with  fractional  shares paid in the
form of cash.

         The Bank's primary market area includes  Chester County and sections of
the four contiguous  counties  (Delaware,  Montgomery,  Berks, and Lancaster) in
Pennsylvania.  Chester  County,  in which all of the Bank's offices are located,
continues to grow in terms of economic  development  and population  growth.  In
1990 the  population  of Chester  County  was  approximately  376,400,  an 18.9%
increase  from  1980,  while  by the  end of 1996 it had  further  increased  to
419,070.

         Customer  deposits  with First  Financial  are  insured to the  maximum
extent provided by law by the Federal  Deposit  Insurance  Corporation  ("FDIC")
through  the  SAIF.  The  Bank  is  subject  to  examination  and  comprehensive
regulation  by the  FDIC,  the  Office of Thrift  Supervision  ("OTS"),  and the
Pennsylvania Department of Banking ("Department"). It is a member of the FHLB of
Pittsburgh ("FHLBP"),  which is one of the 12 regional banks comprising the FHLB
System.  The Bank is further subject to regulations of the Board of Governors of
the Federal Reserve System ("Federal Reserve Board") governing reserves required
to be maintained against deposits and certain other matters.

Lending Activities

         Loan  Portfolio  Composition.  The Company's net loan portfolio (net of
undisbursed  proceeds,  deferred  fees and  allowance  for possible loan losses)
totaled $257.15 million at June 30, 1997,  representing  approximately  79.4% of
the Company's total assets of $323.67 million at that date.

<PAGE>
The following table presents information  regarding the Company's loan portfolio
by type of loan indicated.

(Dollars in Thousands)
<TABLE>
<CAPTION>
                                                                             At June 30,
                                      ----------------------------------------------------------------------------------------------
                                             1997                     1996                    1995                      1994        
                                      ------------------       -----------------       -----------------         ------------------ 
                                                   % of                    % of                    % of                       % of  
                                                   Total                   Total                   Total                      Total 
                                       Amount      Loans       Amount      Loans       Amount      Loans         Amount       Loans 
                                      -------      -----       -------     -----       -------     -----         -------      ----- 
<S>                                  <C>          <C>         <C>         <C>         <C>         <C>           <C>          <C>    
Real estate loans:
   Residential:
        Single-family                $158,537       58.4%     $147,274      62.6%     $150,639      66.0%       $130,808       63.8%
        Multi-family                      893        0.3         1,256       0.5         1,359       0.6           1,562        0.8 
   Commercial                          33,981       12.5        22,552       9.6        22,433       9.8          16,853        8.2 
   Construction and land
      acquisition(1)                   22,907        8.5        17,028       7.2        13,120       5.7          17,631        8.6 
                                     -------------------      ------------------      ------------------        ------------------- 
           Total real estate loans    216,318       79.7       188,110      79.9       187,551      82.1         166,854       81.4 
Commercial business loans(2)            7,863        2.9         5,701       2.4         4,039       1.8           3,581        1.8 
Consumer loans(3)                      47,343       17.4        41,486      17.7        36,634      16.1          34,512       16.8 
                                     -------------------      ------------------      ------------------        ------------------- 
            Total loans receivable    271,524      100.0%      235,297     100.0%      228,224     100.0%        204,947      100.0%
                                                   =====                   =====                   =====                      ===== 
 
Less:
  Loans in process                    (10,092)                  (7,134)                 (3,385)                   (6,941)           
  Allowance for possible
          loan losses                  (2,855)                  (2,667)                 (2,449)                   (2,199)           
   Deferred fee income                 (1,537)                  (1,533)                 (1,574)                   (1,514)           
                                     ---------                --------                --------                  --------            
              Net loans receivable    257,040                  223,963                 220,816                   194,293            

Loans held for sale, single-family
   residential mortgages                  106                       --                     142                        --            
                                     ---------                --------                --------                  --------            

   Net loans receivable and
     loans held for sale             $257,146                 $223,963                $220,958                  $194,293            
                                     ========                 ========                ========                  ========            
</TABLE>
----------------
(1)      Includes  construction  loans for both  residential and commercial real
         estate properties.

(2)      Consists primarily of secured equipment loans.

(3)      Consists  primarily  of home  equity  loans and lines of  credit,  home
         improvement, automobile and other personal loans.
<PAGE>
<TABLE>
<CAPTION>
                                                      At June 30,       
                                                 -------------------    
                                                         1993           
                                                  ------------------    
                                                               % of     
                                                               Total    
                                                  Amount       Loans    
                                                  -------      -----    
<S>                                              <C>          <C>       
Real estate loans:                                                      
   Residential:                                                         
        Single-family                            $113,860       60.7%   
        Multi-family                                1,886        1.0    
   Commercial                                      14,679        7.8    
   Construction and land                                                
      acquisition(1)                               17,390        9.3    
                                                 -------------------    
           Total real estate loans                147,815       78.8    
Commercial business loans(2)                        4,008        2.1    
Consumer loans(3)                                  35,892       19.1    
                                                 -------------------    
            Total loans receivable                187,715      100.0%   
                                                               =====    
                                                                        
Less:                                                                   
  Loans in process                                 (8,668)              
  Allowance for possible                                                
          loan losses                              (1,770)              
   Deferred fee income                             (1,236)              
                                                 --------               
              Net loans receivable                176,041               
                                                                        
Loans held for sale, single-family                                      
   residential mortgages                               --               
                                                 --------               
                                                                        
   Net loans receivable and                                             
     loans held for sale                         $176,041               
                                                 ========               
</TABLE>
                                                 
----------------
(1)      Includes  construction  loans for both  residential and commercial real
         estate properties.

(2)      Consists primarily of secured equipment loans.

(3)      Consists  primarily  of home  equity  loans and lines of  credit,  home
         improvement, automobile and other personal loans.
<PAGE>
         Contractual Maturities.  The following table sets forth the contractual
principal repayments of the total loan portfolio, including loans in process, of
the Company as of June 30, 1997, by categories of loans.  Adjustable,  floating,
and fixed-rate loans are included in the period in which they mature.
<TABLE>
<CAPTION>
                                                                                        Principal Repayments
                                                                            Contractually Due in Year(s) Ended June 30,
                                                                                           (In Thousands)
                                                                    Total                                                        
                                                                 Outstanding                                                     
                                                                      at                                                     2003   
                                                                   June 30,                                                   and   
                                                                     1997               1998             1999-2002        Thereafter
                                                                   --------           --------           ---------        ----------
<S>                                                                <C>                <C>                <C>                <C>     
Real estate loans:
  Residential(1) .......................................           $159,430           $    940           $  5,943           $152,547
  Commercial ...........................................             33,981                196              4,178             29,607
  Construction and land acquisition(2) .................             22,907              8,978              6,232              7,697
Commercial business loans(3) ...........................              7,863              2,949              3,251              1,663
Consumer loans(4) ......................................             47,343              5,495             20,369             21,479
                                                                   ========           ========           ========           ========

        Total loans ....................................           $271,524           $ 18,558           $ 39,973           $212,993
                                                                   ========           ========           ========           ========

</TABLE>

(1)      Includes  mortgages on both  single-family and multi-family  (more than
         four units) residential properties.

(2)      Includes  construction  loans for both  residential and commercial real
         estate properties.

(3)      Consists primarily of secured equipment loans.

(4)      Consists  primarily  of home  equity  loans and lines of  credit,  home
         improvement, automobile and other personal loans.
<PAGE>
The following  table sets forth,  as of June 30, 1997,  the dollar amount of all
loans contractually due after June 30, 1998, which have fixed interest rates and
floating or adjustable rates.
<TABLE>
<CAPTION>
                                                                 Contractual Obligations
                                                                 Due After June 30, 1998
                                                     -------------------------------------------------
                                                                                       Floating/
                                                              Fixed                    Adjustable
                                                              Rates                      Rates
                                                     -------------------------    ---------------------
                                                                          (In Thousands)
<S>                                                   <C>                            <C>              
Real estate loans:
        Residential                                   $                68,214        $          90,276
        Commercial                                                      3,548                   30,237
        Construction and land acquisition                               3,144                   10,785
Commercial business loans                                               3,201                    1,713
Consumer loans                                                         36,422                    5,426
                                                     =========================    =====================
         Total loans                                   $              114,529         $        138,437
                                                     =========================    =====================
</TABLE>

         Contractual  principal  repayments of loans do not necessarily  reflect
the actual term of the Company's  loan  portfolio.  The average life of mortgage
loans is  substantially  less  than  their  contractual  terms  because  of loan
prepayments  and because of enforcement of due-on-sale  clauses,  which give the
Company  the right to declare a loan  immediately  due and payable in the event,
among other things,  that the borrower  sells the real  property  subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends to
increase,  however,  when current mortgage loan rates substantially exceed rates
on existing  mortgage  loans and,  conversely,  decrease  when rates on existing
mortgage loans substantially exceed current mortgage loan rates.

         Origination,  Purchase and Sale of Loans.  As a  Pennsylvania-chartered
savings  institution,  First  Financial  has general  authority  pursuant to the
Savings  Association  Code of 1967, as amended ("State Code"),  to originate and
purchase loans secured by real estate located  throughout the United States. Due
to  the  Company's  strong  community  orientation,  substantially  all  of  the
Company's total mortgage loan portfolio is secured by real estate located in its
primary market area.

         Residential and commercial real estate loans are originated directly by
the Company through salaried loan officers.  In addition,  from time to time the
Company utilizes third-party  originators who use the same credit guidelines and
standards  as the  Company  to  originate  residential  loans.  Residential  and
commercial real estate loan originations are normally  attributable to referrals
from real estate brokers and builders and other financial institutions, mortgage
brokers,  depositors  and walk-in  customers.  Consumer  loan  originations  are
primarily  attributable  to existing  customers and referrals,  as well as third
party auto loans originated through dealers.
<PAGE>

         The Company  periodically  identifies certain loans as held for sale at
the  time  of  origination.   These  loans  consist   primarily  of  fixed-rate,
single-family   residential   mortgage   loans   which  meet  the   underwriting
characteristics of certain government-sponsored  enterprises (conforming loans).
The  majority of  conforming  loans sold to date have  consisted of sales to the
Federal Home Loan Mortgage Corporation ("FHLMC") of fixed-rate mortgage loans in
furtherance  of the  Company's  goal  of  better  matching  the  maturities  and
interest-rate  sensitivity of its assets and liabilities.  In selling conforming
loans,  the Company has retained the servicing  thereon in order to increase its
non-interest  income.  At June 30, 1997, the Company  serviced $24.89 million of
mortgage loans for others.  Sales of loans produce future  servicing  income and
provide  funds for  additional  lending  and other  purposes.  The  Company is a
qualified servicer for FHLMC,  Federal National Mortgage  Association  ("FNMA"),
and  Government  National  Mortgage  Association  ("GNMA").  In fiscal  1995 the
Company entered into an agreement with a third party to originate and sell jumbo
fixed-rate  mortgage  loans with servicing  released upon sale of the loans.  In
fiscal 1997 the Company had no jumbo  fixed-rate  loan  originations  or related
sales of such loans.
<PAGE>

The  following  table  shows  total  loans and loans  held for sale  originated,
purchased, sold and repaid during the periods indicated.
<TABLE>
<CAPTION>
                                                                Year Ended June 30,
                                                        ----------------------------------
                                                          1997         1996          1995
                                                        --------     --------     --------
                                                                  (In Thousands)
<S>                                                     <C>          <C>          <C>     
Total loans receivable and loans held for sale at
    beginning of period ...........................     $235,297     $228,366     $204,947

        Real estate loan originations:
               Residential ........................       31,031       23,340       28,019
               Commercial .........................       10,018        3,674        8,144
               Construction and land acquisition(1)       21,740       13,305        6,958
                                                        --------     --------     --------
                   Total real estate
                        loan originations .........       62,789       40,319       43,121
          Consumer loans(2) .......................       19,163       19,044       12,004
          Commercial business loans ...............        5,150        4,977        1,601
                                                        --------     --------     --------
                   Total loan
                         originations .............       87,102       64,340       56,726
                                                        --------     --------     --------

Principal loan repayments .........................       45,846       54,611       32,234
Sales of loans ....................................        4,923        2,798        1,073
                                                        --------     --------     --------
                      Total principal
                          repayments
                          and sales ...............       50,769       57,409       33,307
                                                        --------     --------     --------
                       Net increase in
                          loans and loans
                          held for sale ...........       36,333        6,931       23,419
                                                        --------     --------     --------

Total loans receivable and loans
    held for sale at end of period ................     $271,630     $235,297     $228,366
                                                        ========     ========     ========
</TABLE>

(1)      Includes  construction  loans for both  residential and commercial real
         estate properties.

(2)      Includes  primarily  home  equity  loans  and  lines  of  credit,  home
         improvement, automobile and other personal loans.
<PAGE>
         Loans on Existing Residential Properties.  The Company currently offers
adjustable-rate  mortgages  ("ARMs") which have up to 30-year terms and interest
rates which  adjust  either  annually or every three  years,  or which are fixed
initially for the first three years, five years,  seven years, or ten years, and
adjust annually  thereafter,  based upon changes in an index based on the weekly
average  yield on United  States  Treasury  securities  adjusted  to a  constant
maturity of one year or three  years,  respectively,  as made  available  by the
Federal Reserve Board plus a margin.  In recent years,  consumers have expressed
interest in ARMs which adjust on a three-year  basis. The amount of any increase
or decrease in the interest rate for ARMs is limited to 2% or 3% per year and 6%
over the life of the loan. Although the Company has originated a small amount of
ARMs which include a conversion to a fixed-rate  feature,  substantially  all of
the ARMs originated  cannot be converted to fixed-rate  loans.  The Company does
not currently offer ARMs with negative amortization.  The interest rates of ARMs
may not adjust as rapidly as changes in the Company's cost of funds.

         Fixed-rate  residential  mortgage loans currently  originated generally
have 30-year terms,  although some have 15-year terms with commensurately  lower
interest  rates.  Substantially  all  of  the  Company's  long-term,  fixed-rate
residential  mortgage loans and ARMs include "due on sale" clauses.  The Company
also offers a  bi-weekly  mortgage  which is a  fixed-rate  loan with  bi-weekly
payments.  Based on current  interest  rates, it is repaid in  approximately  22
years.

         The Company also makes second mortgage loans and home equity loans. See
"Lending Activities - Consumer Loans."

         Loans on Existing  Commercial and Multi-Family  Properties.  During the
past  several  years,  the Company has  originated  permanent  loans  secured by
multi-family and  income-producing  properties such as  condominiums,  apartment
buildings,  office  buildings and to a lesser extent,  hotels and small shopping
centers.  The Company  intends to increase  its emphasis on the  origination  of
commercial real estate loans and, as such, has increased its commercial  lending
staff. The Company's  Commercial Loan Department  consists of four loan officers
with a combined total of 70 years of experience. The origination of multi-family
residential  and  commercial  real  estate  loans has been used to  shorten  the
average  maturity and increase the interest  rate  sensitivity  of the Company's
loan portfolio as well as to generate increased fee income. All of the Company's
multi-family residential and commercial real estate loan portfolio is secured by
properties  located in the Company's  primary  market area. As of June 30, 1997,
commercial and multi-family real estate loans,  excluding construction loans for
such  properties,  amounted  to  $34.87  million,  or  12.8% of the  total  loan
portfolio.

         Commercial  real estate loans have interest rates which adjust annually
after an initial  three- or five-year  term by a margin over the prime  interest
rate as  published  in the money rates  table of The Wall Street  Journal on the
last  business  day of the month  ("Prime  Rate").  These loans  typically  have
amortization  periods of up to 20 years, but occasionally provide that the loans
can be called prior to the end of the amortization  period,  generally at three,
five, seven or ten years after origination.

         Commercial and  multi-family  residential  real estate lending  entails
significant additional risks as compared with single-family residential property
lending.  Commercial and  multi-family  residential  real estate loans typically
involve large loan balances to single borrowers or groups of related  borrowers.
The payment  experience on such loans is typically  dependent on the  successful
operation of the business or real estate  project.  The success of such projects
is  sensitive  to  changes in supply  and  demand  conditions  in the market for
commercial  and  multi-family  residential  real  estate  as  well  as  economic
conditions generally.

         The Company seeks to ensure that the property securing these loans will
generate  sufficient cash flow to adequately  cover operating  expenses and debt
service payments. To this end, permanent commercial and multi-family residential
real estate loans generally are made at a loan-to-value ratio of 75% or less. In
underwriting   commercial  and  multi-family   residential  real  estate  loans,
consideration  is given to the property's  operating  history,  future operating
projections, current and projected occupancy, position in the local and regional
market, location and physical condition. The underwriting analysis also includes
credit  checks and a review of the  financial  condition  of the  borrower.  The
Company usually  obtains full or partial loan  guarantees from the  principal(s)
involved.

         Construction  Loans.  The  Company  also  offers  both  fixed-rate  and
adjustable-rate  residential  and  commercial  construction  loans.  Residential
construction  loans  are  offered  to  individuals  building  their  primary  or
secondary residence as well as to selected local developers to construct one- to
four-family  dwellings.  Generally,  loans for both  residential  and commercial
construction  are made with terms that reflect the  underlying  cash flow of the
loan. However, extensions may be granted upon Board of Directors' approval after
additional underwriting  procedures have been performed.  Advances are made on a
percentage of completion  basis,  usually  consisting of six draws.  Residential
construction  loans  convert to permanent  loans at the end of 12 months or upon
completion,  whichever  occurs  first.  The Company will only make  construction
loans to a developer if 25% of the ground cost has been paid.  At June 30, 1997,
$16.14  million or 5.9% of the  Company's  total  loan  portfolio  consisted  of
construction loans including loans in process.  Loans in process related to such
loans totaled $8.93 million at June 30, 1997.

         The Company has been active in construction  lending for many years and
intends to continue its involvement in such lending in the future.  Construction
lending is generally  considered to involve a higher degree of risk of loss than
long-term  financing  on  improved,  occupied  real  estate.  Risk  of  loss  on
construction  loans is  dependent  largely  upon  the  accuracy  of the  initial
appraisal of the property's  projected  value at completion of  construction  as
well as the estimated cost,  including  interest,  of  construction.  During the
construction  phase,  a number  of  factors  could  result  in  delays  and cost
overruns.  If either estimate proves to be inaccurate and the borrower is unable
to provide  additional funds, the lender may be required to advance funds beyond
the amount  originally  committed to permit  completion of the project and/or be
confronted at the maturity of the  construction  loan with a project whose value
is insufficient to assure full repayment.

         Land  Acquisition and Development  Loans.  The Company also offers land
acquisition and development  loans.  These types of loans are generally provided
only to local  developers  with  strong  financial  positions  and with whom the
Company is familiar.  These loans typically have terms of one to three years and
carry a floating  interest rate normally  indexed to the Prime Rate. The Company
will lend up to 75% of the  appraised  value of the  project.  At June 30, 1997,
$6.76 million,  or 2.5% of the Company's total loan portfolio  consisted of land
acquisition and development loans,  including loans in process. Loans in process
on such loans totaled $1.16 million at June 30, 1997. Like construction lending,
these loans  generally are considered to involve a higher degree of risk of loss
than  long-term  financing  on approved  occupied  real  estate.  The Company is
actively  pursuing  developers who can demonstrate the ability to meet cash flow
projections in order to repay the loan through a very strong financial  position
and a reputation for successfully completing such projects in similar situations
with the Company.

         Consumer  Loans.  The Company offers a wide variety of consumer  loans,
including home equity loans,  home  improvement  loans,  equity lines of credit,
secured and  unsecured  personal  loans and  automobile  loans.  The Company has
aggressively  marketed  consumer  loans  in  order to  provide  a wide  range of
financial  services to its  customers  and  because of the shorter  terms of and
normally  higher  interest  rates on such loans.  As of June 30, 1997,  consumer
loans amounted to $47.34 million or 17.4% of the total loan portfolio.

         The Company's home equity lines of credit  currently  provide for terms
of up to 10 years.  The interest rate on the "Prime Line" adjusts monthly to the
Prime Rate. The loan has initial costs paid by the borrower.  The regular equity
line of credit adjusts  monthly at 1.50% above the Prime Rate. The limit of such
loan is the  borrower's  equity in his  residence,  subject  to  certain  income
qualifications.  The Company also makes fixed-rate, fixed-term home equity loans
on which it takes a first- or second-mortgage  lien on the borrower's  property.
These loans have terms of up to 15 years.  The balance of the  mortgages  on the
properties  cannot exceed 80% of the  appraised  value of the  properties.  Home
equity  lines of credit and  fixed-rate  home  equity  loans  amounted  to $5.77
million  and $35.49  million,  respectively,  as of June 30,  1997.  The Company
originates fixed-rate bridge loans with loan-to-value ratios no greater than 80%
of the value of the secured real estate and at a maximum term of twelve  months.
At June 30, 1997, the balance on these loans totaled $93,000. Unsecured personal
loans amounted to $671,500 at June 30, 1997,  and consisted of fixed-rate  loans
with  maximum loan  balances of $5,000 and terms no greater than 48 months.  The
Company also originates fixed-rate loans on new and used automobiles.  The terms
of such  loans do not  exceed 60 months on new cars and 48 months on used  cars.
Automobile  loans  amounted to $4.61  million at June 30,  1997.  The  Company's
current line of credit provides for unsecured loans of up to $1,000 for terms of
up to 36 months with an interest  rate set at 6.0% over the Prime Rate  adjusted
monthly.  Such loans  have a floor of 10.0% and a ceiling  of 18.0% and  totaled
$341,000 at June 30, 1997. The Company  originates  Visa and  MasterCard  credit
card loans with up to $5,000 lines of credit and at an interest rate set at 6.0%
over the Prime Rate.  At June 30, 1997,  the Company had $356,000 in credit card
loans outstanding.

         Consumer loans  generally have shorter terms and higher  interest rates
than mortgage  loans but generally  involve more credit risk than mortgage loans
because of the type and nature of the  collateral  and,  in certain  cases,  the
absence of collateral.  In addition,  consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
adversely effected by job loss,  divorce,  illness and personal  bankruptcy.  In
most cases,  any repossessed  collateral for a defaulted  consumer loan will not
provide an adequate source of repayment of the outstanding  loan balance because
of improper  repair and  maintenance  of the  underlying  security.  The Company
believes that the generally  higher yields earned on consumer  loans  compensate
for the increased credit risk associated with such loans and that consumer loans
are  important  to its efforts to increase  the interest  rate  sensitivity  and
shorten the average maturity of its loan portfolio.

         Commercial  Business Loans.  The Company has placed greater emphasis on
commercial  business lending in an effort to better serve our community's needs,
obtain vital core  non-interest  bearing  deposits,  and increase the  Company's
interest rate spread. A substantial majority of such loans are adjustable, being
tied to the Prime  Rate.  The  Company  will extend  equipment  loans,  lines of
credit,  letters of credit,  and loans to purchase or start a business  and will
normally obtain either full or partial personal guarantees from the principal(s)
involved.  Such  loans  amounted  to $7.86  million  or 2.9% of the  total  loan
portfolio at June 30, 1997.

         Regulatory  Requirements and Underwriting  Policies.  At June 30, 1997,
pursuant to such provisions,  the Bank was permitted to extend credit to any one
borrower   totaling   $4.44  million.   Special  rules   applicable  to  savings
associations'  provide authority to loan up to $500,000 to a single borrower for
any purpose and to develop domestic  residential  housing units up to the lesser
of 30% of the savings association's unimpaired capital and unimpaired surplus or
$30.0  million,  if: (a) the  purchase  price of a  single-family  unit does not
exceed  $500,000;  (b) the savings  association is in compliance  with the fully
phased-in  capital  standards;  (c) the OTS director,  by order,  authorizes the
higher limit; (d) the loans made to all borrowers in the aggregate do not exceed
150% of the savings association's unimpaired capital and unimpaired surplus; and
(e) all loans comply with applicable loan-to-value requirements.

         Those loans to one borrower  which were made prior to the  enactment of
FIRREA  and the  OTS's  final  rule on loans to one  borrower  were  limited  by
previous  regulations of the OTS to the lesser of 10% of the Bank's withdrawable
deposits  or 100% of its  regulatory  capital.  However,  to the extent any such
loans exceed the limits imposed by FIRREA,  the Bank cannot extend new funds and
must use its best  efforts to reduce its  interest  in such  loans.  At June 30,
1997,  the  Bank's  largest  loan or group of loans to one  borrower,  including
related  entities,  aggregated  $3.43  million,  and is in  conformity  with the
current loans to one borrower regulations described above.

         The Company is currently  permitted to lend up to 100% of the appraised
value  of the  real  property  securing  a loan;  however,  if the  amount  of a
residential  loan originated or refinanced  exceeds 90% of the appraised  value,
the Company is required by federal  regulations,  the State Code and  Department
regulations to obtain private mortgage insurance on the portion of the principal
amount of the loan  that  exceeds  80% of the  appraised  value of the  security
property. Pursuant to underwriting guidelines adopted by the Board of Directors,
private  mortgage  insurance  must be  obtained on all  residential  loans whose
loan-to-value  ratios exceed 80%. The Company will  generally  lend up to 97% of
the appraised value of one-to four-family  owner-occupied  residential dwellings
when the required private mortgage insurance is obtained.  The Company generally
originates loans of up to 75% of the appraised value of the properties  securing
its  commercial  real  estate  and  commercial  business  loans  and  75% of the
appraised  value  upon  completion  or  sale  price,  whichever  is  lower,  for
construction  loans.  With  respect  to  construction  loans for  owner-occupied
properties made in connection with the providing of the permanent financing, the
Company will lend up to 90% of the  appraised  value when the  required  private
mortgage insurance is obtained.

         In the loan approval process,  the Company assesses both the borrower's
ability  to  repay  the loan  and the  adequacy  of the  proposed  security.  In
connection therewith, the Bank obtains an appraisal of the security property and
information  concerning the income,  financial condition,  employment and credit
history of the applicant.  Loans must be approved at various  management levels,
including  the  Board  of  Directors,  depending  on the  amount  of  the  loan.
Residential  mortgage  loans in  excess of  $500,000,  commercial  business  and
commercial real estate loans in excess of $450,000, and consumer loans in excess
of $250,000 require approval by the Board of Directors.

         For mortgage loans the Company  requires title  insurance  insuring the
priority of its lien, as well as fire and extended coverage casualty  insurance,
in order to protect the  properties  securing its real estate  loans.  Borrowers
must also obtain flood insurance policies where the property is in a flood plain
as  designated  by the Federal  Emergency  Management  Agency.  Borrowers may be
required  to advance  funds on a monthly  basis  together  with each  payment of
principal  and interest to a mortgage  loan account from which the Company makes
disbursements for items such as real estate taxes, hazard insurance premiums and
private mortgage insurance premiums as they fall due.

         Loan Fee and Servicing Income. In addition to interest earned on loans,
the Company  receives  income through  servicing of loans and fees in connection
with  loan  originations,   loan  modifications,   late  payments,  prepayments,
repayments  and changes of property  ownership  and for  miscellaneous  services
related to its loans.  Income from these activities varies from period to period
with the volume and type of loans made.

         Statement of Financial  Accounting  Standards  ("SFAS") No. 91 requires
that loan origination fees and certain related direct loan origination  costs be
offset and that the resulting net amount be deferred and amortized over the life
of the  related  loans as an  adjustment  to the  yield of such  related  loans.
However,  in the event the related loan is sold, any deferred loan fees or costs
remaining  with respect to such loan should be taken into  income.  In following
the guidelines of the statement,  all loan  origination and commitment fees have
been deferred and direct costs of originating loans have been capitalized.

         The  Company   currently   charges  loan  origination  fees  which  are
calculated  as a  percentage  of the amount of the loan.  The fees  received  in
connection  with the  origination of commercial real estate loans have generally
amounted to two points (one point being equivalent to 1% of the principal amount
of the loan). In addition, the Company typically receives fees from two to three
points  in  connection  with  the  origination  of  new,  conventional,   one-to
four-family  mortgages  and 3.5 points in  connection  with the  origination  of
construction loans.

         At June 30, 1997, the Company was servicing $24.89 million of loans for
others,  substantially  all of which were whole loans sold by the Company to the
FHLMC. The Company receives a servicing fee of approximately 1/4 or 3/8 of 1% on
such loans.

         In June 1996 the Financial  Accounting  Standards Board ("FASB") issued
SFAS No. 125,  "Accounting  for Transfers and Servicing of Financial  Assets and
Extinguishments  of  Liabilities."   This  statement  provides   accounting  and
reporting  standards  for  transfers  and  servicing  of  financial  assets  and
extinguishments   of   liabilities   based  on  consistent   application   of  a
financial-components   approach  that  focuses  on  control.   It  distinguishes
transfers of  financial  assets that are sales from  transfers  that are secured
borrowings.  Under  the  financial-components  approach,  after  a  transfer  of
financial  assets,  an entity  recognizes all financial and servicing  assets it
controls and liabilities it has incurred and  de-recognizes  financial assets it
no longer controls and  liabilities  that have been  extinguished.  The approach
focuses on the assets  and  liabilities  that  exist  after the  transfer.  If a
transfer does not meet the criteria for a sale, the transfer is accounted for as
a secured  borrowing  with pledge of  collateral.  The Company  adopted SFAS 125
prospectively  on January  1, 1997,  and the  impact on  earnings,  equity,  and
financial condition was not material.

         Non-Performing  Loans and Real Estate  Owned  ("REO").  When a borrower
fails to make a required loan payment, the Company attempts to cause the default
to be cured by contacting  the borrower.  In general,  contacts are made after a
payment is more than 15 days past due, at which time a late charge is  assessed.
Defaults are cured promptly in most cases. If the delinquency on a mortgage loan
exceeds  90 days  and is not  cured  through  the  Company's  normal  collection
procedures,  or an acceptable  arrangement  is not worked out with the borrower,
the Company will institute measures to remedy the default,  including commencing
a foreclosure action or, in special circumstances,  accepting from the mortgagor
a voluntary deed of the secured  property in lieu of  foreclosure.  The remedies
available to the Bank in the event of a default or  delinquency  with respect to
certain  residential  mortgage loans,  and the procedures by which such remedies
may be  exercised,  are  subject  to  Pennsylvania  law and  regulations.  Under
Pennsylvania  law, a lender is prohibited  from  accelerating  the maturity of a
residential  mortgage loan,  commencing any legal action (including  foreclosure
proceedings)  to  collect  on  such  loan,  or  taking  possession  of any  loan
collateral  until the lender has first provided the delinquent  borrower with at
least 30 days prior written notice  specifying the nature of the delinquency and
the  borrower's  right to correct such  delinquency.  In addition,  the lender's
ability to exercise  any  remedies it may have with respect to loans for one- or
two-family  principal  residences  located in Pennsylvania is further restricted
(including the lender's  right to foreclose on such  property)  until the lender
has  provided  the  delinquent   borrower  with  written  notice  detailing  the
borrower's  rights  to seek  consumer  credit  counseling  and  state  financial
assistance and until the borrower has exhausted or failed to pursue such rights.
These  provisions of  Pennsylvania  law may delay for several  months the Bank's
ability to foreclose  upon  residential  loans secured by real estate located in
the Commonwealth of Pennsylvania.  In addition,  the uniform  FNMA/FHLMC lending
documents  used  by the  Bank,  as well as most  other  residential  lenders  in
Pennsylvania, requires notice and a right to cure similar to that provided under
Pennsylvania law.

         Non-accrual  loans are loans on which the  accrual of  interest  ceases
when the  collection  of  principal  or interest  payments is  determined  to be
doubtful  by  management.  It is the policy of the  Company to  discontinue  the
accrual of interest when  principal or interest  payments are delinquent 90 days
or more (unless the loan  principal and interest are determined by management to
be fully secured and in the process of collection), or earlier, if the financial
condition of the borrower raises significant  concern with regard to the ability
of the  borrower to service the debt in  accordance  with the current loan term.
Interest income is not accrued until the financial  condition and payment record
of the borrower once again  demonstrate  the ability to service the debt. When a
loan is placed on non-accrual status,  previously accrued but unpaid interest is
deducted from interest income. Non-real estate consumer loans more than 120 days
delinquent   are  required  to  be  written  off  in  accordance   with  federal
regulations.

         If foreclosure is effected, the property is sold at a public auction in
which the Company may participate as a bidder.  If the Company is the successful
bidder,  the acquired  real estate  property is then  included in the  Company's
"real estate owned" account until it is sold.  When property is acquired,  it is
recorded at the lower of carrying or fair value at the date of  acquisition  and
any write-down resulting therefrom is charged to the allowance for possible loan
losses.  Interest  accrual  ceases  on the  date of  acquisition  and all  costs
incurred in maintaining the property from that date forward are expensed.  Costs
incurred for the  improvement or development of such property are capitalized to
the extent they do not exceed the  property's  fair value.  No loss reserves are
maintained  on REO,  and future  write-downs  for cost beyond the fair value are
expensed.  The Company is permitted  under  Department  and OTS  regulations  to
finance sales of REO by "loans to facilitate,"  which may involve more favorable
interest  rates and terms  than  generally  would be  granted  under the  Bank's
underwriting guidelines. However, at June 30, 1997, the Company did not have any
loans to facilitate.

         For purposes of applying the  measurement  criteria for impaired loans,
the  Company  excludes  large  groups  of  smaller-balance   homogeneous  loans,
primarily consisting of residential real estate loans and consumer loans as well
as commercial loans with balances of less than $100,000.  For applicable  loans,
the Company  evaluates the need for impairment  recognition  when a loan becomes
non-accrual  or earlier if,  based on  management's  assessment  of the relevant
facts and circumstances,  it is probable that the Bank will be unable to collect
all proceeds due according to the contractual  terms of the loan  agreement.  At
and during the twelve-month  period ended June 30, 1997, the recorded investment
in impaired loans was not material.  The Company's policy for the recognition of
interest income on impaired loans is the same as for non-accrual loans discussed
above.  Impaired  loans  are  charged  off  when  the  Company  determines  that
foreclosure  is probable and the fair value of the  collateral  is less than the
recorded investment of the impaired loan.
<PAGE>
The following table sets forth information  regarding  non-accrual  loans, loans
which  are 90 days or more  delinquent  but on which  the  Company  is  accruing
interest and REO held by the Company at the dates indicated. The Company did not
have any loans which were classified as restructured troubled debt at any of the
dates presented.
<TABLE>
<CAPTION>
                                                                  Year Ended June 30,
                                      ----------------------------------------------------------------------------
                                         1997            1996             1995            1994             1993
                                      ------------    ------------     ------------    ------------     -----------
                                                                (Dollars In Thousands)
<S>                                       <C>              <C>             <C>             <C>              <C>   
Residential real estate loans:
  Non-accrual loans                       $   417          $1,166          $2,029          $1,552           $2,103
  Accruing loans 90 days overdue               --              --              --              --               --
                                      ------------    ------------    ------------    ------------     ------------
       Total                                  417           1,166           2,029           1,552            2,103
                                      ------------    ------------    ------------    ------------     ------------
Commercial real estate loans:
  Non-accrual loans                            --              --              28             295              885
  Accruing loans 90 days overdue               --              --              --              --               --
                                      ------------    ------------    ------------    ------------     ------------
       Total                                   --              --              28             295              885
                                      ------------    ------------    ------------    ------------     ------------
Construction and land loans
  Non-accrual loans                            --             737             294             354              534
  Accruing loans 90 days overdue               --              --              --              --               --
                                      ------------    ------------    ------------    ------------     ------------
       Total                                   --             737             294             354              534
                                      ------------    ------------    ------------    ------------     ------------
Commercial business loans:
  Non-accrual loans                            --              18              10              63              249
  Accruing loans 90 days overdue               --              --              --              --              113
                                      ------------    ------------    ------------    ------------     ------------
       Total                                   --              18              10              63              362
                                      ------------    ------------    ------------    ------------     ------------
Consumer loans:
  Non-accrual loans                           331             297             549             358              455
  Accruing loans 90 days overdue               --              --              --              --               57
                                      ------------    ------------    ------------    ------------     ------------
       Total                                  331             297             549             358              512
                                      ------------    ------------    ------------    ------------     ------------
Total non-performing loans:
  Non-accrual loans                           748           2,218           2,910           2,622            4,226
  Accruing loans 90 days overdue               --              --              --              --              170
                                      ------------    ------------    ------------    ------------     ------------
       Total                              $   748          $2,218          $2,910          $2,622           $4,396
                                      ============    ============    ============    ============     ============
Total non-performing loans to
  total assets                               .23%            .81%           1.11%           1.07%            1.98%

Total REO                                      --            $121          $  157          $  885           $1,197

Total non-performing loans and
  REO to total assets                        .23%            .86%           1.17%           1.44%            2.52%
</TABLE>
<PAGE>
         At  June  30,  1997,   non-accrual  real  estate  loans  included  five
residential  mortgage loans aggregating  $417,000,  all secured by single-family
residential properties.

         At June 30, 1997,  non-performing loans amounted to $748,000.  If these
non-performing  loans had been current in accordance  with their  original terms
and had been  outstanding  throughout the period,  the gross interest income for
fiscal 1997 that would have been  recorded for these loans was  $71,400.  Fiscal
1997  interest  income  recognized  on these  non-performing  loans  amounted to
$35,200.

          Allowances for Losses on Loans and Classified Assets. An allowance for
loan  losses is  maintained  at a level that  management  considers  adequate to
provide for  potential  losses  based upon an  evaluation  of known and inherent
risks in the loan portfolio.  Management's  evaluation is based upon an analysis
of the portfolio,  past loss experience,  current economic  conditions and other
relevant factors.  While management uses the best information  available to make
such evaluations, such evaluations are highly subjective, and future adjustments
to the allowance may be necessary if conditions  differ  substantially  from the
assumptions  used in making the  evaluations.  In addition,  various  regulatory
agencies, as an integral part of their examination process,  periodically review
the  Company's  allowance  for losses on loans.  Such  agencies  may require the
Company to recognize  additions to the allowance  based on their judgments about
information available to them at the time of their examination. The allowance is
increased by the provision for loan losses which is charged to operations.  Loan
losses are charged  directly  against the allowance and recoveries on previously
charged-off  loans are generally  added to the allowance.  At June 30, 1997, the
Bank's  allowance  for loan  losses was $2.86  million or 1.10% of net loans and
381.7% of total  non-performing  loans compared to $2.67 million or 1.18% of net
loans and 120.4% of total non-performing loans at June 30, 1996.

         The  Company  monitors  the  quality of its assets on a regular  basis.
Under  regulations of the OTS, all of the Company's  assets are subject to being
classified  under  a  classification  system  that  has  three  categories:  (i)
substandard,  (ii) doubtful,  and (iii) loss. An asset may fall within more than
one category and a portion of the asset may remain unclassified.  The Company is
required  to review  the  classification  of its assets on a regular  basis.  In
addition, in connection with the examinations of First Financial by the OTS, the
FDIC, and the Department,  the examiners have the authority to identify  problem
assets and, if  appropriate,  classify them and/or  require  adjustments  to the
carrying value of such assets.

         Assets classified substandard are considered  inadequately protected by
the  current net worth and paying  capacity of the obligor or of the  collateral
pledged,  if any.  Assets so  classified  must have a  well-defined  weakness or
weaknesses.  They are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.

         Assets  classified  doubtful are  considered to have all the weaknesses
inherent in those classified  substandard with the added characteristic that the
weaknesses  make  collection or  liquidation  in full, on the basis of currently
existing facts, conditions, and values, highly questionable and improbable.


         Assets classified loss are considered  uncollectable and of such little
value that  their  continuance  as assets  without  establishment  of a specific
reserve is not warranted.  This  classification  does not mean that an asset has
absolutely no recovery or salvage value, but rather, that it is not practical or
desirable to defer writing off a basically  worthless  asset even though partial
recovery may be affected in the future.

         At June 30,  1997 and 1996,  the  Company's  classified  assets,  which
consisted of assets classified as substandard,  doubtful, loss, and REO, totaled
$1.40 million and $2.97 million, respectively. Included in the assets classified
substandard at June 30, 1997 and 1996, were all loans 90 days past due and loans
which are less than 90 days delinquent but inadequately protected by the current
paying  capacity of the  borrower  or of the  collateral  pledged,  as well as a
well-defined  weakness that may  jeopardize  the  liquidation  of the debt.  The
majority of loans which are classified but otherwise  performing are residential
mortgage loans.

         Other loans  designated as special  mention by the Company  amounted to
$88,000 and  $100,000 at June 30, 1997 and 1996,  respectively.  Although  these
loans are not considered or classified as substandard, doubtful or loss, they do
have a potential weakness which may, if not corrected,  result in increased risk
at some future date.
<PAGE>
         The following table summarizes  activity in the Company's allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
                                                                        As of June 30,
                                       ----------------------------------------------------------------------------------
                                           1997             1996              1995              1994            1993
                                       -------------    --------------    --------------    -------------   -------------
                                                                        (In Thousands)
<S>                                          <C>               <C>               <C>             <C>              <C>   
Allowance at beginning of period             $2,667            $2,449            $2,199          $1,770           $1,186

Loans charged off against the allowance:
    Residential real estate                   (117)             (101)              (54)              --             (43)
    Construction and land                     (177)                --               (5)              --             (12)
    Commercial business                         (1)               (2)             (201)           (160)              (6)
    Consumer                                   (82)              (43)              (69)            (85)             (95)
                                       -------------    --------------    --------------    ------------    -------------
                                              (377)             (146)             (329)           (245)            (156)

Recoveries:
    Residential real estate                      37                --                --              --                4
    Construction and land                         4                16                --              --               --
    Commercial business                          --                --                93              --               --
    Consumer                                      1                 8                31              47               28
                                       -------------    --------------    --------------    ------------    -------------
                                                 42                24               124              47               32

Net charge-offs                               (335)             (122)             (205)           (198)            (124)

Provision for loan losses
  charged to operating expenses                 523               340               455             627              708
                                       -------------    --------------    --------------    ------------    -------------

Allowance at year end                        $2,855            $2,667            $2,449          $2,199           $1,770
                                       =============    ==============    ==============    ============    =============

Ratio of net charge-offs to
  average loans outstanding                    .13%              .05%              .10%            .11%             .07%
                                       =============    ==============    ==============    ============    =============

Ratio of allowance to period-end
  net loans                                   1.10%             1.18%             1.10%           1.12%            1.01%
                                       =============    ==============    ==============    ============    =============
</TABLE>
<PAGE>
         The following table presents information  regarding the Company's total
allowance  for losses on loans as well as the  allocation of such amounts to the
various categories of the loan portfolio. (Dollars in Thousands)

<TABLE>
<CAPTION>
                                                                                At June 30,
                                            ------------------------------------------------------------------------------------
                                                      1997                         1996                         1995            
                                            --------------------------    ------------------------    --------------------------
                                                                 % of                        % of                          % of 
                                                                Loans                       Loans                         Loans 
                                                             to Total                    to Total                      to Total 
                                                  Amount        Loans          Amount       Loans          Amount         Loans 
                                                  ------        -----          ------       -----          ------         ----- 
<S>                                             <C>             <C>          <C>            <C>         <C>               <C>   
Residential real estate loans                   $    778        58.7%        $    898       63.1%       $   1,077          66.6%
Commercial real estate loans                         871         12.5             585         9.6             428           9.8 
Construction and land loans                          139          8.5             280         7.2             309           5.7 
Commercial business loans                            278          2.9             207         2.4             105           1.8 
Consumer loans                                       789         17.4             697        17.7             530          16.1 
                                                ---------------------        --------------------       ----------------------- 

   Total allowance for loan losses              $  2,855        100.0%       $  2,667       100.0%      $   2,449         100.0%
                                                =====================        ====================       ======================= 

Total allowance for loan losses
  to total non-performing loans                    381.7%                       120.2%                       84.2%              
                                                   =====                        =====                        ====               


Total non-performing loans                      $    748                       $2,218                      $2,910               
                                                ========                       ======                      ======               

<PAGE>
<CAPTION>
                                                                    At June 30,
                                            --------------------------------------------------------
                                                       1994                          1993
                                            ---------------------------    -------------------------
                                                                  % of                         % of
                                                                 Loans                        Loans
                                                              to Total                     to Total
                                                 Amount          Loans          Amount        Loans
                                                 ------          -----          ------        -----
<S>                                            <C>               <C>          <C>             <C>   
Residential real estate loans                  $    791           64.6%       $    706         61.7%
Commercial real estate loans                        507            8.2             335          7.8
Construction and land loans                         340            8.6             257          9.3
Commercial business loans                           112            1.8             158          2.1
Consumer loans                                      449           16.8             314         19.1
                                               -----------------------        --------------------- 

   Total allowance for loan losses             $   2,199         100.0%       $   1,770       100.0%
                                               =======================        ===================== 

Total allowance for loan losses
  to total non-performing loans                    83.9%                          40.3%
                                                   ====                           ==== 


Total non-performing loans                     $  2,622                       $  4,396
                                               ========                       ========

</TABLE>
<PAGE>
Investment Activities

         Historically,  interest and dividends on investments  have provided the
Company with a significant  source of revenue.  At June 30, 1997,  the Company's
investment   securities,   investment   securities   available  for  sale,   and
interest-bearing  deposits  amounted  to  $53.88  million  or 16.6% of its total
assets. First Financial's investments are used to meet certain federal liquidity
ratios.  The liquidity  ratios are met in part by investing in  securities  that
qualify as liquid assets under OTS regulations. (See "Regulation - Regulation of
the Bank Liquidity Requirements"). Such securities include obligations issued or
fully  guaranteed  by the  United  States  Government,  certain  federal  agency
obligations, certain time deposits and negotiable certificates of deposit issued
by commercial banks and other specified investments,  including commercial paper
and  other  securities.  Investment  decisions  are made by  members  of  senior
management within guidelines approved by the Company's Board of Directors.

         The Company divides its securities  portfolio into three segments:  (a)
held to maturity;  (b)  available for sale;  and (c) trading.  Securities in the
held  to  maturity  category  are  accounted  for  at  amortized  cost.  Trading
securities,  if any, are  accounted  for at quoted market prices with changes in
market values being recorded as gain or loss in the income statement.  All other
securities are included in the available for sale category and are accounted for
at fair value with  unrealized  gains or losses,  net of tax, being reflected as
adjustments to equity.  At June 30, 1997, the Company had a net unrealized  gain
on securities available for sale, net of taxes, of $2,714.
<PAGE>
         The following table sets forth the Company's  investment  portfolio and
other interest-earning assets at carrying value at the dates indicated.

<TABLE>
<CAPTION>
                                                             At June 30,
                                                     ---------------------------
                                                       1997      1996     1995
                                                     -------   -------   -------
                                                            (In Thousands)
<S>                                                  <C>       <C>       <C>    
Interest-bearing deposits ........................   $ 6,844   $ 8,784   $ 5,808
Investment securities held to maturity:
  U.S. Government and agency obligations .........     5,500     5,500     5,189
  Municipal notes and bonds ......................    10,986    15,950    17,520
  Mortgage-backed securities .....................     1,473     1,729     2,092
  Other ..........................................     1,510     1,414     1,484
                                                     -------   -------   -------
  Total investment securities held to maturity ...    19,469    24,593    26,285
                                                     -------   -------   -------
Investment securities available for sale:
  U.S. Government and agency obligations .........    18,217     6,049      --
  Municipal notes and bonds ......................     4,128        81      --
  Mortgage-backed securities .....................     5,054      --        --
  Equity securities ..............................       167        29      --
                                                     -------   -------   -------
  Total investment securities available for sale .    27,566     6,159      --
                                                     =======   =======   =======
      Total investments ..........................   $53,879   $39,536   $32,093
                                                     =======   =======   =======

</TABLE>

         The contractual maturity or repricing  characteristics of the Company's
investment  portfolio is considerably  more interest rate sensitive than that of
its  loan  portfolio.   Consequently,   the  investment   portfolio  provides  a
significant  source of liquidity and protection  against interest rate risk. The
weighted  average  term to maturity or  repricing  of the  Company's  investment
securities  held to maturity  was 5.6 years at June 30,  1997,  and 5.9 years at
June 30, 1996.  The Company has the intent and ability to hold these  securities
to maturity.
<PAGE>
The amortized cost and estimated  market value of investment  securities at June
30, 1997 by contractual maturity, are shown below (Dollars in Thousands).

<TABLE>
<CAPTION>
                                                                                Weighted
                                               Amortized       Estimated         Average
                                                 Cost        Market Value        Yield
                                              ----------     ------------       --------
<S>                                             <C>            <C>               <C>  
Held to Maturity
  Due in one year or less ..............        $ 4,442        $ 4,450           6.15%
  Due after one year through five years           7,025          7,059           6.39
  Due after five years through ten years          2,100          2,047           6.61
  Due after ten years ..................          4,392          4,326           7.08
  No stated maturity ...................          1,510          1,511           6.38
                                                -------        -------             

  Total held to maturity ...............        $19,469        $19,393           6.51%
                                                =======        =======           ====
Available for Sale
  Due in one year or less ..............        $    45             45           6.87%
  Due after one year through five years           9,631          9,633           7.43
  Due after five years through ten years          6,813          6,773           7.29
  Due after ten years ..................         10,937         10,948           7.87
  No stated maturity ...................            136            167           3.31
                                                -------        -------             
Total available for sale ...............        $27,562        $27,566           7.55%
                                                =======        =======           ====
</TABLE>

         The weighted average yield,  based on amortized cost, is presented on a
taxable equivalent basis.

         As of June 30, 1997 investments in the debt and/or equity securities of
any one issuer  (excluding U.S.  Government and federal agencies) did not exceed
10% of the Company's stockholders' equity.
<PAGE>
Sources of Funds

         General.  Deposits  obtained through branch offices have  traditionally
been the  principal  source of the  Company's  funds for use in lending  and for
other  general   business   purposes.   The  Company  also  derives  funds  from
amortization and prepayments of outstanding  loans and sales of loans. From time
to time,  the Company  also may borrow  funds from the FHLBP and other  sources.
Borrowings  generally  may be used  on a  short-term  basis  to  compensate  for
seasonal or other reductions in deposits or other inflows at less than projected
levels,  as well as on a longer  term  basis to  support  expanded  lending  and
investment activities.

         Deposits.  The Company  obtains  deposits  primarily  from residents of
Chester County, and to a lesser extent Berks, Delaware, Lancaster and Montgomery
Counties, Pennsylvania. Currently, the principal methods used by First Financial
to attract  deposit  accounts  include the  offering of services  and  accounts,
competitive  interest rates, and convenient  office locations and service hours.
Other than during times of inverse or flat yield curves,  the Bank has adopted a
pricing program for its certificate  accounts which provides for higher rates of
interest on its longer term  certificates  in order to encourage  depositors  to
invest in certificates with longer  maturities,  thus reducing the interest rate
sensitivity of the Company's  deposit  portfolio.  First Financial also offers a
tiered money market account that pays higher  interest on higher  balances so as
to  maintain a  relatively  stable core of  deposits  even when its  certificate
accounts mature.

         In recent years, First Financial has been required by market conditions
to rely  increasingly  on  short-term  certificate  accounts  and other  deposit
alternatives  that are more  responsive to market  interest  rates than passbook
accounts  and   regulated   fixed-rate,   fixed-term   certificates   that  were
historically  the  Company's  primary  sources of  deposits.  First  Financial's
current    deposit    products    include     non-interest-bearing     accounts,
passbook/statement savings accounts, NOW checking accounts, money market deposit
accounts,  certificates  of deposit  ranging in terms from 30 days to five years
and  certificates  of deposit  in  denominations  of  $100,000  or more  ("jumbo
certificates").  Included among these deposit products are individual retirement
account certificates ("IRA certificates") and Keogh accounts.
<PAGE>
The following table shows the balances of the Company's deposits as of the dates
indicated:

(Dollars in Thousands)
<TABLE>
<CAPTION>
                                                                            At June 30,
                                     ------------------------------------------------------------------------------------------
                                                1997                           1996                            1995
                                     ---------------------------    ----------------------------    ---------------------------
                                                           % of                            % of                           % of
                                            Amount     Deposits             Amount     Deposits            Amount     Deposits
                                            ------     --------             ------     --------            ------     --------
<S>                                       <C>            <C>             <C>             <C>           <C>              <C>   
Non-interest-bearing accounts            $  21,493         8.2%          $  18,653         8.2%         $  14,394         6.6%
NOW checking accounts                       27,625         10.6             22,332          9.8            20,770          9.5
Savings accounts                            26,474         10.2             25,070         10.9            26,343         12.1
Money market accounts                       29,887         11.5             23,856         10.5            26,464         12.2
Certificates of deposit less than
  $100,000                                 124,636         47.8            116,158         50.9           106,649         48.9
Certificates of deposit with
  $100,000 minimum balance                  30,635         11.7             22,137          9.7            23,361         10.7
                                     ---------------------------    ----------------------------    ---------------------------

      Total deposits                      $260,750       100.0%           $228,206       100.0%        $  217,981       100.0%
                                     ===========================    ============================    ===========================
</TABLE>

         The  following  table shows the weighted  average  interest rate of the
Company's deposits by type of account at June 30, 1997:

(Dollars in Thousands)
<TABLE>
<CAPTION>
                                                                            Weighted
                                                           Amount           Avg. Rate
                                                          --------          ---------                
<S>                                                       <C>                 <C>  
Non-interest-bearing accounts ...................         $ 21,493            0.00%
NOW checking accounts ...........................           27,625            1.98
Savings accounts ................................           26,474            2.90
Money market accounts ...........................           29,887            3.78
Certificates of deposit less than
  $100,000                                                 124,636            5.58
Certificates of deposit with
  $100,000 minimum balance ......................           30,635            5.73
                                                          --------

      Total deposits ............................         $260,750            4.28%
                                                          ========            ==== 

</TABLE>
<PAGE>

The  following  table sets forth the net  deposit  flows of the  Company for the
periods indicated:

(In Thousands)
<TABLE>
<CAPTION>
                                                      Year Ended June 30,
                                               ---------------------------------
                                                 1997         1996         1995
                                               -------      -------      -------
<S>                                            <C>          <C>          <C>    
Increase before interest credited .......      $23,848      $ 1,754      $ 5,990
Interest credited .......................        8,696        8,471        7,189
                                               -------      -------      -------

      Net deposit increase ..............      $32,544      $10,225      $13,179
                                               =======      =======      =======
</TABLE>

The following  table shows the balances of certificates of deposit with balances
of $100,000 or greater which mature during the periods indicated and the balance
at June 30, 1997.

(In Thousands)

<TABLE>
<CAPTION>
                                                                  Balances at June 30, 1997, Maturing
                                            ========================================================================
                                                 At            Within          Three        Six to         After
                                              June 30,          Three         to Six        Twelve         Twelve
                                                1997           Months         Months        Months         Months
                                            =============    ============    ==========    ==========    ===========

<S>                                         <C>              <C>             <C>          <C>            <C>      
Certificates of deposit with $100,000
      minimum balance                        $    30,635      $   13,065      $  8,031     $   2,614      $   6,925
                                            =============    ============    ==========    ==========    ===========
</TABLE>

At June 30, 1997, there were no other time deposits with balances of $100,000 or
greater other than certificates of deposit
<PAGE>
The  following  table  presents  the average  balance by type of deposit and the
average rate paid by type of deposit for the periods indicated.

(Dollars in Thousands)
<TABLE>
<CAPTION>
                                                                     Year Ended June 30,
                                     ------------------------------------------------------------------------------------
                                               1997                         1996                          1995
                                     -------------------------    --------------------------    -------------------------
                                                     Average                       Average                      Average
                                        Average       Rate           Average        Rate           Average       Rate
                                        Balance       Paid           Balance        Paid           Balance       Paid
                                        -------       ----           -------        ----           -------       ----
<S>                                   <C>             <C>          <C>              <C>           <C>            <C>  
NOW checking accounts                 $ 23,986        1.92%        $ 20,464         2.20%         $ 20,744       2.24%
Savings accounts                        25,067        2.87           25,080         2.89            28,303       2.93
Money market accounts                   26,084        3.42           24,638         3.35            36,235       3.29
Certificates of deposit                                                                                   
  less than $100,000                   119,679        5.81          112,745         5.86            91,927       5.24
Certificates of deposit with                                                                              
  $100,000 minimum balance              26,990        4.91           25,325         5.33            23,019       5.75
</TABLE>

         The greater variety of deposit  accounts offered by First Financial has
increased  its  ability  to  retain  deposits  and  has  allowed  it to be  more
competitive  in obtaining  new funds,  although the threat of  disintermediation
(the  flow of funds  away  from  savings  institutions  into  direct  investment
vehicles such as government and corporate securities) still exists. However, the
new types of accounts  have been more costly than  traditional  accounts  during
periods of high interest  rates.  In addition,  First  Financial has become much
more susceptible to short-term  fluctuations in deposit flows, as customers have
become  more rate  conscious  and  willing to move  funds  into  higher-yielding
accounts.  Thus, the ability of First Financial to attract and maintain deposits
and First Financial's cost of funds have been, and will continue to be, affected
significantly by economic market conditions.
<PAGE>

         In an effort to  attract  increasing  amounts  of  non-interest-bearing
deposits,  First Financial offers a basic checking account which features no-fee
checking with a minimum  balance of $50. First  Financial also offers a business
checking  account  which grants  credits  against  service  charges based on the
average daily balance. It is management's belief that such accounts represent an
excellent source of deposits that are not affected by interest rates.

         First Financial attempts to control the flow of deposits by pricing its
accounts to remain generally  competitive  with other financial  institutions in
its primary  market  area,  but does not  necessarily  seek to match the highest
rates paid by competing institutions.

         First Financial's  deposits are obtained primarily from persons who are
residents of  Pennsylvania.  First  Financial  does not  advertise  for deposits
outside of  Pennsylvania or accept brokered  deposits,  and management  believes
that  an  insignificant  amount  of  First  Financial's  deposits  were  held by
non-residents of Pennsylvania at June 30, 1997.

         Borrowings. First Financial may obtain advances from the FHLBP upon the
security of the common stock it owns in that bank and certain of its residential
mortgage loans,  provided certain  standards  related to credit  worthiness have
been met.  See  "Regulation  -  Regulation  of the Bank - Federal Home Loan Bank
System." Such advances are made pursuant to several  different  credit programs,
each of which has its own interest rate and range of maturities.  FHLBP advances
are  generally  available  to meet  seasonal  and other  withdrawals  of deposit
accounts and to expand lending and investment activities,  as well as to aid the
efforts  of  members  of the  FHLBP to  establish  better  asset  and  liability
management through the extension of maturities of liabilities. At June 30, 1997,
the Company had $30.20  million in FHLBP advances  outstanding.  The Company has
available  to it an annually  renewable  line of credit not to exceed 10% of the
Company's maximum borrowing  capacity.  The line of credit was $13.80 million at
the time the commitment was executed.  The Company,  from time to time, has used
the line of credit  to meet  liquidity  needs.  At June 30,  1997,  there was no
balance outstanding on the line of credit.
<PAGE>
         The following tables present certain information  regarding  short-term
borrowings, all of which consisted of borrowings from the FHLBP (borrowings with
a maturity of one year or less), for the periods indicated:

<TABLE>
<CAPTION>
                                                     Year Ended June 30,
                                              ---------------------------------
                                                1997         1996         1995
                                              -------      -------      -------
                                                   (Dollars in Thousands)
<S>                                           <C>          <C>          <C>    
Short-term borrowings:
      Balance outstanding at end
               of period ................     $18,325      $ 1,416      $ 3,300
      Weighted average interest rate
               at end of period .........        5.91%        5.87%        5.47%
      Average balance outstanding .......     $ 6,152      $ 3,562      $10,261
      Maximum amount outstanding at
              any month-end during the
              period ....................     $19,046      $ 5,716      $19,300
      Weighted average interest rate
              during the period .........        5.97%        5.28%        5.54%
</TABLE>

The Bank did not use any other  short-term  borrowings  from fiscal 1995 through
fiscal 1997, such as reverse repurchase agreements.

Yields Earned and Rates Paid

         The largest  components of the Company's total income and total expense
are interest income and interest expense.  As a result,  the Company's  earnings
are dependent  primarily  upon net interest  income,  which is determined by the
Company's  net interest  rate spread (i.e.,  the  difference  between the yields
earned  on  interest-earning  assets  and the  rates  paid  on  interest-bearing
liabilities)   and  the  relative   amounts  of   interest-earning   assets  and
interest-bearing liabilities.
<PAGE>
Interest Income and Interest Spread Analysis

         The following table sets forth, for the periods indicated,  information
regarding  (i) the total  dollar  amount of interest  income of the Company from
interest-earning  assets and the resultant average yields; (ii) the total dollar
amount of interest  expense on  interest-bearing  liabilities  and the resultant
average cost;  (iii) net interest  income;  (iv)  interest rate spread;  (v) net
interest-earning  assets and their net yield;  and (vi) weighted  average yields
and rates at June 30, 1997.  Average  balances are determined on a monthly basis
which are representative of operations.

<TABLE>
<CAPTION>
                                            At June                               Year Ended June 30,
                                              30,     ------------------------------------------------------------------------------
                                            1997(3)                  1997                                      1996                 
                                            -------   ------------------------------------     -------------------------------------
                                                                                                      (Dollars in Thousands)
                                            Yield/      Average                    Yield/         Average                     Yield/
                                             Rate       Balance     Interest(1)   Rate(1)         Balance     Interest(1)    Rate(1)
                                             ----       -------     --------      ----            -------     -------        ----   
<S>                                          <C>       <C>          <C>           <C>            <C>          <C>            <C>    
Assets:
  Loans and loans held for sale(2)           8.08%     $240,858     $20,452       8.49%          $218,702     $18,368        8.40%  
  Investment securities and other
    investments                              7.08%       41,261       2,408       5.84%            39,434       2,478        6.28%  
                                                       --------     -------                      --------     -------               
     Total interest-earning assets           7.93%      282,119     $22,860       8.10%           258,136     $20,846        8.08%  
                                             ----                                 ----                                       ----   
  Non-interest-earning assets                            11,110                                    10,552                           
                                                         ------                                    ------                           
     Total assets                                      $293,229                                  $268,688                           
                                                       ========                                  ========                           
Liabilities and Stockholders' Equity:
  Deposits and repurchase agreements         4.31%     $223,048     $10,338       4.63%           207,978      $9,919        4.77%  
  FHLB advances and other borrowings         5.67%       20,651       1,165       5.64%            15,316         956        6.24%  
                                                       --------     -------                      --------     -------               
     Total interest-bearing liabilities      4.42%      243,699     $11,503       4.72%           223,294     $10,875        4.87%  
                                             ----                                 ----                                       ----   
  Non-interest-bearing liabilities                       23,535                                    20,651                           
  Stockholders' equity                                   25,995                                    24,743                           
                                                         ------                                    ------                           
     Total liabilities and  
       stockholders' equity                            $293,229                                  $268,688                           
                                                       ========                                  ========                           
Net interest income/interest rate spread    3.51%                   $11,357       3.38%                       $ 9,971        3.21%  
                                            ====                    =======       ====                        =======        ====   
Net interest-earning assets/net yield on
  interest-earning assets                             $  38,420                   4.03%          $ 34,842                    3.86%  
                                                      =========                   ====           ========                    ====   
Ratio of average interest-earning
  assets to interest-bearing liabilities                                           116%                                       116%  
                                                                                   ===                                        ===   
<PAGE>
<CAPTION>
                                            
                                            ---------------------------------------
                                                             1995
                                            ---------------------------------------
                                            
                                                Average                      Yield/
                                                Balance     Interest(1)     Rate(1)
                                               --------     --------        ----   
<S>                                            <C>          <C>             <C>  
Assets:
  Loans and loans held for sale(2)             $213,172     $17,010         7.98%
  Investment securities and other
    investments                                  37,927       2,178         5.74%
                                               --------     -------              
     Total interest-earning assets              251,099     $19,188         7.64%
                                                                            ---- 
  Non-interest-earning assets                     9,999
                                                  -----
     Total assets                              $261,098
                                               ========
Liabilities and Stockholders' Equity:
  Deposits and repurchase agreements           $200,163     $ 8,613        4.30%
  FHLB advances and other borrowings             20,633       1,217        5.90%
                                               --------     -------              
     Total interest-bearing liabilities         220,796      $9,830        4.45%
                                                                            ---- 
  Non-interest-bearing liabilities               17,468
  Stockholders' equity                           22,834
                                                 ------
     Total liabilities and  
       stockholders' equity                    $261,098
                                               ========
Net interest income/interest rate spread                     $9,358        3.19%
                                                             ======        ==== 
Net interest-earning assets/net yield on
  interest-earning assets                      $ 30,303                    3.73%
                                               ========                    ==== 
Ratio of average interest-earning
  assets to interest-bearing liabilities                                    114%
                                                                            === 
</TABLE>

(1)      The  indicated  interest and annual  yield and rate are  presented on a
         taxable  equivalent basis using the Federal income tax marginal rate of
         34%  adjusted  for the 20% interest  expense  disallowance  (27.2%) for
         1997, 1996, and 1995.

(2)      Non-accruing loans are included in the average balance.

(3)      Yields at June 30, 1997, do not reflect interest yield adjustments such
         as  amortization  of  deferred  fees  and  interest  penalty  fees  for
         premature withdrawals.
<PAGE>
Rate/Volume Analysis

         The following table presents certain  information  regarding changes in
interest income and interest  expense of the Company for the periods  indicated.
Interest income and the annual rate are calculated on a taxable equivalent basis
using the Federal  income tax marginal rate of 34% adjusted for the 20% interest
expense disallowance (27.2%).

         For each  category  of  interest-earning  assets  and  interest-bearing
liabilities, information is provided with respect to changes attributable to (1)
changes in volume (change in volume multiplied by old rate), (2) changes in rate
(change in rate multiplied by old volume) and (3) changes in rate/volume (change
in rate multiplied by change in volume).
<TABLE>
<CAPTION>
                                                         1997 Compared to 1996                        
                                                      Increase (Decrease) Due to                      
                                            ------------------------------------------------------    
                                                        (Dollars in Thousands)                        
                                                                           Rate/                      
                                            Volume          Rate           Volume           Total     
                                            -------        -------         -------         -------    
<S>                                         <C>            <C>             <C>             <C>        
Interest income on interest-earning
  assets:
    Loans and loans held for sale ..        $ 1,861        $   203         $    21         $ 2,085    
    Investment securities and
      other investments ............            115           (177)             (8)            (70)   
                                            -------        -------         -------         -------    
        Total interest income ......        $ 1,976        $    26         $    13         $ 2,015    
                                            -------        -------         -------         -------    

Interest expense on interest-bearing
  liabilities:
     Deposits and repurchase
       agreements ..................        $   719        ($  279)        ($   20)        $   420    
     FHLB advances and other
       borrowed money ..............            333            (92)            (32)            209    
                                            -------        -------         -------         -------    
         Total interest expense ....        $ 1,052        ($  371)        ($   52)        $   629    
                                            -------        -------         -------         -------    

Net change in net interest
income .............................        $   924        $   397         $    65         $ 1,386    
                                            =======        =======         =======         =======    

<PAGE>
<CAPTION>
                                                          1996 Compared to 1995
                                                       Increase (Decrease) Due to
                                            ------------------------------------------------------
                                                          (Dollars in Thousands)
                                                                           Rate/
                                            Volume           Rate          Volume           Total
                                            -------         -------        -------         -------
<S>                                         <C>             <C>            <C>             <C>    
Interest income on interest-earning
  assets:
    Loans and loans held for sale ..        $   441         $   894        $    23         $ 1,358
    Investment securities and
      other investments ............             87             205              8             300
                                            -------         -------        -------         -------
        Total interest income ......        $   528         $ 1,099        $    31         $ 1,658
                                            -------         -------        -------         -------

Interest expense on interest-bearing
  liabilities:
     Deposits and repurchase
       agreements ..................        $   336         $   933        $    36         $ 1,305
     FHLB advances and other
       borrowed money ..............           (314)             71            (18)           (261)
                                            -------         -------        -------         -------
         Total interest expense ....        $    22         $ 1,004        $    18         $ 1,044
                                            -------         -------        -------         -------

Net change in net interest
income .............................        $   506         $    95        $    13         $   614
                                            =======         =======        =======         =======
</TABLE>
<PAGE>
Ratios

         The following table shows certain income and financial condition ratios
for the periods indicated. All averages are based on month-end balances.
<TABLE>
<CAPTION>
                                                         Year Ended June 30,
                                                  --------------------------------
                                                  1997          1996          1995
                                                 -----         -----         ----- 
<S>                                              <C>           <C>           <C>   
Return on average assets (income
  excluding the special SAIF
  assessment of $832,000 net
  of taxes divided by average
  total assets) ......................             .94%          .91%          .82%
Return on average assets (income
  divided by average total assets) ...             .66%          .91%          .82%
Return on average equity (income
  excluding the special SAIF
  assessment of $832,000 net
  of taxes divided by average equity)            10.61%         9.86%         9.43%
Return on average equity (income
  divided by average equity) .........            7.41%         9.86%         9.43%

Equity-to-assets ratio
  (average equity divided by
   average assets) ...................            8.87%         9.21%         8.75%

Dividend pay-out ratio ...............           39.39%        23.50%        21.89%
</TABLE>

Subsidiaries of First Financial

         The  Bank  operates  (as  a  wholly  owned  subsidiary)  D & S  Service
Corporation  ("D & S Service"),  which has  participated  in the development for
sale of residential properties, in particular condominium conversions,  and also
the  development  of  commercial  properties in order for the Bank to expand its
facilities  to  accommodate  its growth.  All of such  projects have either been
located in or within close  proximity to the Bank's  primary  market area. D & S
Service  operates  two wholly  owned  subsidiaries:  Wildman  Projects and D & F
Projects, Inc.

         At June 30, 1997, the Bank was permitted by regulations to invest up to
2% of assets in the  capital  stock of,  and  secured  and  unsecured  loans to,
subsidiary  corporations or service corporations and under certain circumstances
may make  conforming  loans to service  corporations  in greater  amounts.  As a
Pennsylvania-chartered  savings  institution,  the Bank may  diversify  into any
business  activity  approved in advance by the  Department.  In addition,  First
Financial  could  invest up to 30% of its assets in finance  subsidiaries.  Such
subsidiaries must be limited purpose subsidiaries whose sole purpose is to issue
debt or equity  securities  that the parent  association  is authorized to issue
directly and to remit the proceeds of such issuance to the parent association.

         Effective  with  the  enactment  of  FIRREA,   state-chartered  savings
institutions  may  not  acquire  any  equity   investment  not  permissible  for
federally-chartered  savings  institutions.  Divestiture was required by July 1,
1994.  Under  limited  conditions,   state-chartered  savings  institutions  may
continue  to  have  equity  investments  in  service   corporations  engaged  in
activities the FDIC  determines  pose no significant  risk to its fund. The Bank
was not required to divest any of its equity  investments  due to this change in
regulations.

         At June 30, 1997, the Bank was authorized to have a maximum  investment
of $6.47 million in its one first-tier wholly-owned  subsidiary,  D & S Service.
As of such date, the Bank had invested $736,000 in this subsidiary.

Competition

         First Financial encounters strong competition both in the attraction of
deposits  and in the making of real  estate  and other  loans.  Its most  direct
competition  for deposits has  historically  come from commercial  banks,  other
savings  and loan  associations,  savings  banks and  credit  unions  conducting
business in its primary market area. The Bank also  encounters  competition  for
deposits  from  money  market  funds,   as  well  as  corporate  and  government
securities.  The principal  methods used by the Bank to attract deposit accounts
include  offering  a variety  of  services  and  interest  rates  and  providing
convenient  office locations and expanded banking hours. The Bank's  competition
for  real  estate  and  other  loans  comes   principally   from  other  savings
institutions,  credit unions,  commercial  banks,  mortgage  banking  companies,
insurance companies,  and other institutional  lenders. First Financial competes
for loans through interest rates, loan maturities,  loan fees and the quality of
service extended to borrowers and real estate brokers.

Employees

         The Company had 96 full-time employees and 27 part-time employees as of
June  30,  1997.  None  of  these  employees  are  represented  by a  collective
bargaining  agent,  and the Company  believes that it enjoys good relations with
its personnel.

                                   REGULATION

         Set forth below is a brief  description of certain laws and regulations
which  relate to the  regulation  of the Company and the Bank as in effect as of
the date of this Annual Report on form 10-KSB. The description of these laws and
regulations, as well as descriptions of laws and regulations contained elsewhere
herein,  does not purport to be complete  and is  qualified  in its  entirety by
reference to applicable laws and regulations.

         In recent periods there have been various legislative  proposals in the
U.S.  Congress to eliminate the thrift charter and the OTS. Although the Company
currently is unable to predict  whether the existence of the thrift  charter and
the OTS may be the  subject of future  legislation  and,  if so,  what the final
contents of such legislation  will be and their effects,  if any, on the Company
and the Bank, such legislation could result in, among other things,  the Company
becoming  subject  to  the  same  regulatory  capital  requirements,  activities
limitations  and  other  requirements  which  are  applicable  to  bank  holding
companies  under the Bank Holding  Company Act of 1956 ("BHCA").  Unlike savings
and loan holding  companies,  bank holding  companies  are subject to regulatory
capital  requirements,  which generally are comparable to the regulatory capital
requirements  which are applicable to the Bank,  and unlike unitary  savings and
loan holding  companies such as the Company,  which generally are not subject to
activities  limitations,  bank holding  companies  generally are prohibited from
engaging in activities or acquiring or controlling,  directly or indirectly, the
voting  securities or assets of any company  engaged in any activity  other than
banking, managing or controlling banks and bank subsidiaries or other activities
that the Federal Reserve Board has determined, by regulation or otherwise, to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto.

Regulation of the Company

         Federal  Regulation-General.  The Company is a  registered  savings and
loan holding  company  within the meaning of the Home Owners' Loan Act. As such,
the  Company  is  subject  to OTS  regulations,  examinations,  supervision  and
reporting  requirements.  As a subsidiary of a savings and loan holding company,
the Bank is subject to certain restrictions in its dealings with the Company and
affiliates thereof.

         Federal Activities Restrictions. There are generally no restrictions on
the  activities  of a savings  and loan  holding  company  which  holds only one
subsidiary savings  association.  However, if the Director of the OTS determines
that there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity  constitutes a serious risk to the financial
safety,  soundness or  stability  of its  subsidiary  savings  association,  the
Director may impose such  restrictions as deemed necessary to address such risk,
including  limiting (i) payment of dividends  by the savings  association;  (ii)
transactions  between the savings association and its affiliates;  and (iii) any
activities of the savings  association that might create a serious risk that the
liabilities  of the  holding  company and its  affiliates  may be imposed on the
savings association.  Notwithstanding the above rules as to permissible business
activities  of  unitary  savings  and loan  holding  companies,  if the  savings
association  subsidiary  of such a holding  company  fails to meet the Qualified
Thrift  Lender  ("QTL")  test,  then such unitary  holding  company shall become
subject to the activities  restrictions  applicable to multiple savings and loan
holding  companies and,  unless the savings  association  re-qualifies  as a QTL
within  one year  thereafter,  shall  register  as,  and  become  subject to the
restrictions  applicable  to, a bank holding  company.  See "- Regulation of the
Bank - Qualified Thrift Lender Test."

         If the Company were to acquire control of another savings  association,
other than  through  merger or other  business  combination  with the Bank,  the
Company  would  thereupon  become a multiple  savings and loan holding  company.
Except where such acquisition is pursuant to the authority to approve  emergency
thrift  acquisitions and where each subsidiary savings association meets the QTL
test, the activities of the Company and any of its subsidiaries  (other than the
Bank or other subsidiary  savings  associations)  would thereafter be subject to
further  restrictions.  Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings  association shall commence
or continue for a limited period of time after  becoming a multiple  savings and
loan holding  company or subsidiary  thereof any business  activity,  upon prior
notice to, and no objection by the OTS, other than: (i) furnishing or performing
management  services for a subsidiary  savings  association;  (ii) conducting an
insurance  agency or escrow  business;  (iii)  holding,  managing or liquidating
assets owned by or acquired from a subsidiary savings association;  (iv) holding
or managing properties used or occupied by a subsidiary savings association; (v)
acting as trustee  under deeds of trust;  (vi) those  activities  authorized  by
regulation  as of March 5, 1987 to be engaged in by  multiple  savings  and loan
holding  companies;  or  (vii)  unless  the  Director  of the OTS by  regulation
prohibits  or limits such  activities  for savings and loan  holding  companies,
those activities authorized by the Federal Reserve Board as permissible for bank
holding  companies.  Those  activities  described  in (vii)  above  also must be
approved  by the  Director  of the OTS prior to being  engaged  in by a multiple
savings and loan holding company.

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

         In addition,  Sections 22(g) and (h) of the Federal  Reserve Act places
restrictions on loans by savings  associations to executive officers,  directors
and principal  stockholders  of the Company and the Bank.  Under Section  22(h),
loans to a director,  an executive officer and to a greater than 10% stockholder
of a savings  association or the company that controls the savings  association,
and certain affiliated  interests of such insiders (i) may not exceed,  together
with all other  outstanding loans to such person and affiliated  interests,  the
association's  loans  to  one  borrower  limit  (generally  equal  to 15% of the
institution's   unimpaired   capital  and   surplus)   (ii)  be  made  on  terms
substantially  the same as offered in comparable  transactions to other persons,
provided the Bank is not prohibited from extending  credit pursuant to a benefit
or  compensation  program  widely  available  to  employees  of the Bank and the
Company and that does not give preference to any officer,  director or principal
stockholder over other employees thereof,  and (iii), in certain cases,  require
prior board approval. In addition,  the aggregate amount of extensions of credit
by a  savings  association  to all  insiders  cannot  exceed  the  association's
unimpaired  capital and  surplus.  Furthermore,  Section  22(g)  places  certain
additional  restrictions on loans to executive  officers.  At June 30, 1997, the
Bank was in compliance with the above restrictions.

         Restrictions  on  Acquisitions.  Except  under  limited  circumstances,
savings and loan holding companies are prohibited from acquiring,  without prior
approval  of  the  Director  of the  OTS,  (i)  control  of  any  other  savings
association or savings and loan holding company or substantially  all the assets
thereof or (ii) more than 5% of the voting  shares of a savings  association  or
holding  company  thereof  which is not a  subsidiary.  Except  with  the  prior
approval  of the  Director  of the OTS,  no director or officer of a savings and
loan holding  company or person owning or controlling by proxy or otherwise more
than  25%  of  such  company's   stock,  may  acquire  control  of  any  savings
association,  other  than a  subsidiary  savings  association,  or of any  other
savings and loan holding company.

         The Director of the OTS may only approve acquisitions  resulting in the
formation of a multiple  savings and loan holding company which controls savings
associations in more than one state if (i) the multiple savings and loan holding
company involved controls a savings  association which operated a home or branch
office  located in the state of the  association  to be  acquired as of March 5,
1987,  (ii) the  acquiror  is  authorized  to  acquire  control  of the  savings
association  pursuant to the  emergency  acquisition  provisions  of the Federal
Deposit Insurance Act ("FDIA)",  or (iii) the statutes of the state in which the
association to be acquired is located  specifically  permit  institutions  to be
acquired  by the  state-chartered  associations  or  savings  and  loan  holding
companies  located in the state where the  acquiring  entity is located (or by a
holding company that controls such state-chartered savings associations).

Regulation of the Bank

         General. The OTS has extensive authority over the operations of savings
associations.  As part of this authority,  savings  associations are required to
file periodic  reports with the OTS and are subject to periodic  examinations by
the  OTS  and  the  FDIC.  The  investment  and  lending  authority  of  savings
associations  are  prescribed  by  federal  laws  and  regulations  and they are
prohibited  from  engaging  in any  activities  not  permitted  by such laws and
regulations.  Those  laws  and  regulations  generally  are  applicable  to  all
federally  chartered savings  associations and may also apply to state-chartered
savings associations.  Such regulation and supervision is primarily intended for
the protection of depositors.

         The OTS's enforcement authority over all savings associations and their
holding  companies  includes,  among other  things,  the ability to assess civil
money  penalties,  to issue  cease and desist or removal  orders and to initiate
injunctive actions.  In general,  these enforcement actions may be initiated for
violations  of laws and  regulations  and  unsafe or  unsound  practices.  Other
actions or inactions  may provide the basis for  enforcement  action,  including
misleading or untimely reports filed with the OTS.

         Insurance  of  Accounts.  The  deposits  of the Bank are  insured up to
$100,000 per depositor (as defined by law and regulation) by the SAIF,  which is
administered  by the FDIC,  and are  backed by the full  faith and credit of the
United  States  Government.  As  insurer,  the  FDIC is  authorized  to  conduct
examinations of, and to require reporting by, FDIC-insured institutions, such as
the Bank. It also may prohibit any FDIC-insured institution from engaging in any
activity the FDIC  determines by regulation or order to pose a serious threat to
the FDIC. The FDIC also has the authority to initiate  enforcement actions where
the OTS has failed or declined to take such action after  receiving a request to
do so from the FDIC.

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

         On September 30, 1996, President Clinton signed into law legislation to
eliminate  the  premium  differential  between  SAIF-insured   institutions  and
BIF-insured  institutions by recapitalizing  the SAIF's reserves to the required
ratio of 1.25% of insured deposits. The legislation provided that the holders of
SAIF-assessable  deposits pay a one-time special  assessment to recapitalize the
SAIF.

         Effective  October  8,  1996,  the  FDIC  imposed  a  one-time  special
assessment  equal to 65.7 basis  points for all  SAIF-assessable  deposits as of
March 31, 1995,  which was collected on November 27, 1996.  The Bank's  one-time
special assessment amounted to $1.39 million.  Net of related tax benefits,  the
one-time  special  assessment  amounted to $832,000.  The payment of the special
assessment reduced the Bank's capital by the amount of the assessment.

         Following the imposition of the one-time special  assessment,  the FDIC
lowered  assessment  rates for SAIF  members  to  reduce  the  disparity  in the
assessment  rates  paid by BIF and SAIF  members.  Beginning  October  1,  1996,
effective  SAIF rates range from zero basis  points to 27 basis  points which is
the same range of premiums as paid by insured  institutions  insured by the Bank
Insurance Fund  administered by the FDIC.  From 1997 through 1999,  FDIC-insured
institutions will pay 6.4 basis points of their SAIF-assessable deposits to fund
the Financing  Corporation.  Based upon the $259.39  million of  SAIF-assessable
deposits at June 30,  1997,  the Bank would  expect to pay $41,000 in  insurance
premiums per quarter during fiscal 1998.

         Regulatory  Capital  Requirements - General.  Federally insured savings
associations  are required to maintain  minimum  levels of  regulatory  capital.
These   standards   generally  must  be  no  less  stringent  than  the  capital
requirements  applicable to national banks. The OTS also is authorized to impose
capital requirements in excess of these standards on individual  associations on
a case-by-case basis.

         Federally-insured  savings  associations  are subject to three  capital
requirements:  a  tangible  capital  requirement,  a core  or  leverage  capital
requirement  and a  risk-based  capital  requirement.  All savings  associations
currently are required to maintain tangible capital of at least 1.5% of adjusted
total  assets  (as  defined in the  regulations),  core  capital  equal to 3% of
adjusted total assets and total capital (a combination of core and supplementary
capital) equal to 8% of  risk-weighted  assets.  For purposes of the regulation,
tangible  capital is core capital  less all  intangibles  other than  qualifying
mortgage servicing rights,  and any investment in non-permissible  subsidiaries,
which are  subsidiaries  which are not engaged in permissible  activities.  Core
capital includes common stockholders' equity, non-cumulative perpetual preferred
stock and related  surplus,  minority  interest in the equity  accounts of fully
consolidated  subsidiaries  and certain  non-withdrawable  accounts  and pledged
deposits.  Core  capital  generally  is  reduced  by  the  amount  of a  savings
association's intangible assets other than qualifying mortgage servicing rights.

         A savings  association  is  allowed to include  both core  capital  and
supplementary  capital in the  calculation  of its total capital for purposes of
the risk-based capital  requirements,  provided that the amount of supplementary
capital  included  does not  exceed  the  savings  association's  core  capital.
Supplementary  capital  consists  of  certain  capital  instruments  that do not
qualify as core  capital,  including  subordinated  debt which  meets  specified
requirements  and  general  valuation  loan and lease  loss  allowances  up to a
maximum of 1.25% of risk-weighted  assets. In determining the required amount of
risk-based capital, total assets, including certain off-balance sheet items, are
multiplied  by a  risk-weight  based on the risk inherent in the type of assets.
The  risk  weights  assigned  by the  OTS for  principal  categories  of  assets
currently range from 0% to 100%, depending on the type of asset.

         OTS  policy  imposes a  limitation  on the amount of net  deferred  tax
assets  under SFAS No. 109 that may be  included  in  regulatory  capital.  (Net
deferred  tax assets  represent  deferred  tax assets,  reduced by an  valuation
allowances,  in excess of deferred tax  liabilities.)  Application  of the limit
depends on the possible sources of taxable income available to an institution to
realize  deferred tax assets.  Deferred tax assets that can be realized from the
following  generally are not limited:  taxes paid in prior  carryback  years and
future reversals of existing taxable temporary  differences.  To the extent that
the  realization  of  deferred  tax assets  depends on an  institution's  future
taxable income (exclusive of reversing temporary differences and carryforwards),
or its  tax-planning  strategies,  such  deferred  tax  assets are  limited  for
regulatory  capital  purposes  to the lesser of the amount  that can be realized
within  one year of the  quarter-end  report  date or 10% of core  capital.  The
foregoing considerations did not affect the calculation of the Bank's regulatory
capital at June 30, 1997.

         In August 1993 the OTS adopted a final rule  incorporating  an interest
rate risk component into the risk-based capital  regulation.  Under the rule, an
institution  with a greater than  "normal"  level of interest  rate risk will be
subject to a deduction of its interest  rate risk  component  from total capital
for purposes of calculating  the risk-based  capital  requirement.  As a result,
such an institution will be required to maintain  additional capital in order to
comply with the  risk-based  capital  requirement.  Although  the final rule was
originally  scheduled to be effective as of January 1994, in August 1995 the OTS
indefinitely  delayed  implementation of its interest rate risk component of its
risk-based capital requirement. Management of the Bank does not believe that the
OTS's  adoption of an interest  rate risk  component to the  risk-based  capital
requirement  will  adversely  affect  the Bank if it  becomes  effective  in its
current form.

         In April  1991 the OTS  proposed  to modify  the 3% of  adjusted  total
assets  core  capital  requirement  in  the  same  manner  as  was  done  by the
Comptroller  of the Currency for national  banks.  Under the OTS proposal,  only
savings  associations  rated  composite 1 under the CAMEL rating  system will be
permitted to operate the  regulatory  minimum core capital  ratio of 3%. For all
other  savings  associations,  the minimum core capital ratio will be 3% plus at
least an additional  100 to 200 basis points,  which thus will increase the core
capital  ratio  requirement  to 4% to 5% of adjusted  total  assets or more.  In
determining  the amount of  additional  capital,  the OTS will  assess  both the
quality  of risk  management  systems  and the  level  of  overall  risk in each
individual savings association through the supervisory process on a case-by-case
basis.
<PAGE>
         The  following  table sets forth a  reconciliation  between  the Bank's
stockholder's  equity  and each of its three  capital  requirements  at June 30,
1997.
<TABLE>
<CAPTION>
                                       Tangible             Core            Risk-Based
                                       Capital            Capital           Capital(1,2)
                                      ----------         ----------         -------
                                                   (Dollars in Thousands)
<S>                                   <C>                <C>                <C>    
Total regulatory capital .....        $   26,750         $   26,750         $29,057
Minimum required regulatory
  capital ....................             4,855              9,710          15,689
                                      ----------         ----------         -------
Excess regulatory capital ....        $   21,895         $   17,040         $13,368
                                      ==========         ==========         =======

Regulatory capital as a
  percentage of assets(2) ....              8.26%              8.26%          14,82%

Minimum capital required
  as a percentage of assets(2)              1.50               3.00            8.00
                                      ----------         ----------         -------

Excess regulatory capital as
  a percentage of assets .....              6.76%              5.26%           6.82%
                                      ==========         ==========         =======
</TABLE>

(1)      Does not reflect amendments to the risk-based capital requirement which
         have been adopted but not implemented by the OTS, as discussed above.

(2)      Tangible  and core  capital are  computed as a  percentage  of adjusted
         total assets of $323.67  million.  Risk-based  capital is computed as a
         percentage of adjusted total risk-weighted assets of $196.11 million.

        Any savings  association  that fails any of the capital  requirements is
subject to possible  enforcement  actions by the OTS or the FDIC.  Such  actions
could  include a  capital  directive,  a cease and  desist  order,  civil  money
penalties,  the establishment of restrictions on an association's operations and
the  appointment  of a  conservator  or receiver.  The OTS'  capital  regulation
provides that such actions, through enforcement proceedings or otherwise,  could
require one or more of a variety of corrective actions. See "- Prompt Corrective
Regulatory Action."

        Liquidity  Requirements.   All  savings  associations  are  required  to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity  requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings  associations.  At the present  time,  the required  liquid
asset ratio is 5%. At June 30, 1997, the Bank's  liquidity  ratio was 12.68% and
its short-term liquidity ratio was 12.60%.

        Real Estate Lending  Standards.  Effective March 19, 1993, all financial
institutions  are  required to adopt and  maintain  comprehensive  written  real
estate  lending  policies  that  are  consistent  with  safe and  sound  banking
practices.  These lending policies must reflect consideration of the Interagency
Guidelines  for Real Estate  Lending  Policies  adopted by the  federal  banking
agencies, including the OTS, in December 1992 ("Guidelines"). The Guidelines set
forth,  pursuant  to the  mandates  of  Federal  Deposit  Insurance  Corporation
Improvement Act ("FDICIA"),  uniform regulations  prescribing standards for real
estate  lending  which is defined  as  extension  of credit  secured by liens on
interests in real estate or made for the purpose of financing  the  construction
of a building or other improvements to real estate, regardless of whether a lien
has been taken on the property.

        The policies must address  certain lending  considerations  set forth in
the Guidelines,  including  loan-to-value  ("LTV") limits,  loan  administration
procedures,  underwriting standards,  portfolio  diversification  standards, and
documentation,  approval and reporting requirements. These policies must also be
appropriate  to the size of the  institution  and the  nature  and  scope of its
operations,  and must be reviewed  and  approved by the  institution's  board of
directors at least annually. The Guidelines,  among other things,  establish the
following  supervisory  LTV limits:  raw land  (65%);  land  development  (75%);
construction  (commercial,  multi-family  and  nonresidential)  (80%);  improved
property (85%) and one-to-four  family  residential (owner occupied) (no maximum
ratio,  although  any LTV  ratio in  excess of 90%  should  require  appropriate
insurance or readily marketable collateral).

        Certain institutions can make real estate loans that do not conform with
the established LTV ratio limits up to 100% of the institution's  total capital.
Within  this  aggregate  limit,  total loans for all  commercial,  agricultural,
multi-family and other non-one-to-four  family residential properties should not
exceed  30%  of  total  capital.   An  institution  will  come  under  increased
supervisory scrutiny as the total of such loans approaches these levels. Certain
loans are exempt from the LTV ratios  (e.g.  those  guaranteed  by a  government
agency,  loans to  facilitate  the sale of real  estate  owned,  loans  renewed,
refinanced or  restructured  by the original  lender(s) to the same  borrower(s)
where there is no advancement of new funds, etc.).

        Accounting   Requirements.   Applicable  OTS  accounting  and  reporting
requirements  incorporates the following standards:  (i) regulatory reports will
incorporate  generally accepted accounting principles ("GAAP") when GAAP is used
by federal banking agencies;  (ii) savings association  transactions,  financial
condition  and  regulatory  capital must be reported and disclosed in accordance
with OTS regulatory reporting requirements that will be at least as stringent as
for national banks;  and (iii) the director of the OTS may prescribe  regulatory
reporting requirements more stringent than GAAP whenever the director determines
that such  requirements are necessary to ensure the safe and sound reporting and
operation of savings associations.

        In  October  1995  the  FASB  issued  SFAS  No.  123,   "Accounting  for
Stock-based  Compensation." This statement encourages the adoption of fair value
accounting for stock-based  compensation  issued to employees.  Further,  in the
event that fair value  accounting  is not adopted,  the  statement  requires pro
forma  disclosure  of net  income  and  earnings  per  share  as if  fair  value
accounting  had been  adopted.  The  Company  has not  adopted  the  fair  value
accounting  provisions  of SFAS 123 but has instead  provided  the  required pro
forma disclosures, as permitted, in the current fiscal year.

        In June 1996 the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing  of  Financial  Assets  and  Extinguishments  of  Liabilities".   This
statement  provides   accounting  and  reporting  standards  for  transfers  and
servicing  of  financial  assets and  extinguishments  of  liabilities  based on
consistent  application  of a  financial-components  approach  that  focuses  on
control.  It  distinguishes  transfers of  financial  assets that are sales from
transfers that are secured borrowings. Under the financial-components  approach,
after a transfer of financial  assets,  an entity  recognizes  all financial and
servicing  assets it controls and liabilities it has incurred and  de-recognizes
financial   assets  it  no  longer  controls  and  liabilities  that  have  been
extinguished.  The  approach  focuses on the assets and  liabilities  that exist
after the  transfer.  If a transfer  does not meet the criteria for a sale,  the
transfer is accounted for as a secured borrowing with pledge of collateral.  The
Company  adopted SFAS 125  prospectively  on January 1, 1997,  and the impact on
earnings, equity, and financial condition was not material.

        In February  1997 the FASB issued  SFAS No. 128,  "Earnings  Per Share."
This statement  establishes  standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or potential
common stock.  This statements  simplifies the standards for computing  earnings
per share  previously found in APB Opinion No. 15, Earnings per Share, and makes
them comparable to international EPS standards.  It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income  statement  for all  entities
with complex capital  structures and requires a reconciliation  of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the  diluted  EPS  computation.   This  statement  is  effective  for  financial
statements issued for periods ending after December 15, 1997,  including interim
periods;   earlier  application  is  not  permitted.   This  statement  requires
restatement of all prior period EPS data presented. Had the Company adopted SFAS
No. 128 as of June 30, 1997,  the basic  earnings per share on a pro forma basis
would have been $.94, $1.19, and $1.05 for the fiscal years ended 1997, 1996 and
1995, respectively,  rather than $.93, $1.18, and $1.04, respectively. Pro forma
disclosure of diluted earnings per share would have been $.93,  $1.18, and $1.04
for the fiscal  years  ended 1997,  1996,  and 1995,  respectively,  the same as
disclosed under the current accounting requirements.

        In June 1997 the FASB  issued  SFAS No.  130,  "Reporting  Comprehensive
Income." This statement  establishes  standards for the reporting and display of
comprehensive  income  and  its  components  in a full  set  of  general-purpose
financial statements.  SFAS No. 130 requires that all items that are required to
be recognized as components of  comprehensive  income be reported in a financial
statement  that is  displayed  with  the  same  prominence  as  other  financial
statements.  The statement does not require a specific format for that financial
statement but requires that an enterprise  display an amount  representing total
comprehensive income for the period in that financial statement. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Management has not
yet determined the impact, if any, of this statement on the Company.

        In June 1997 the FASB issued SFAS No. 131,  "Disclosures  About Segments
of an Enterprise and Related  Information."  SFAS No. 131 establishes  standards
for the way that public business  enterprises report information about operating
segments in annual  financial  statements  and requires  that those  enterprises
report  selected  information  about  operating  segments  in interim  financial
reports  issued to  shareholders.  It also  establishes  standards  for  related
disclosures about products and services,  geographic areas, and major customers.
SFAS No. 131 is effective for financial  statements for periods  beginning after
December 15, 1997. Management has not yet determined the impact, if any, of this
statement on the Company.

        Prompt Corrective  Regulatory  Action.  Under Section 38 of the FDIA, as
added by the FDICIA,  each  appropriate  agency and the FDIC is required to take
prompt  corrective  action  to  resolve  the  problems  of  insured   depository
institutions  that do not meet  minimum  capital  ratios.  Such  action  must be
accomplished  at the least possible  long-term cost to the  appropriate  deposit
insurance fund.

        The federal banking agencies,  including the OTS, adopted  substantially
similar  regulations  in  order  to  implement  Section  38 of the  FDIA,  which
regulations  became  effective  in  December  1992.  Under the  regulations,  an
institution  shall be deemed to be (i) "well  capitalized" if it has total risk-
based capital of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or
more, has a Tier I leverage  capital ratio of 5.0% or more and is not subject to
any order or final  capital  directive to meet and  maintain a specific  capital
level for any capital measure;  (ii) "adequately  capitalized" if it has a total
risk-based  capital ratio of 8.0% or more, a Tier I risk-based  capital ratio of
4.0% or more and a Tier I leverage  capital  ratio of 4.0% or more  (3.0%  under
certain  circumstances) and does not meet the definition of "well  capitalized,"
(iii) "undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier I risk-based  capital ratio that is less than 4.0% or a Tier I
leverage   capital   ratio   that  is  less  than  4.0%  (3.0%   under   certain
circumstances),   (iv)  "significantly  undercapitalized"  if  it  has  a  total
risk-based  capital  ratio that is less than 6.0%, a Tier I  risk-based  capital
ratio  that is less than 3.0% or a Tier I  leverage  capital  ratio that is less
than 3.0%, and (v) "critically  undercapitalized"  if it has a ratio of tangible
equity to total  assets  that is equal to or less than  2.0%.  Section 38 of the
FDIA and the regulations promulgated thereunder also specify circumstances under
which a federal banking agency may reclassify a well capitalized  institution as
adequately capitalized and may require an adequately capitalized  institution or
an undercapitalized institution to comply with supervisory actions as if it were
in the  next  lower  category  (except  that  the  FDIC  may  not  reclassify  a
significantly undercapitalized institution as critically undercapitalized).

        The  Bank  complies  with  the  requirements  to be  classified  as well
capitalized.

        Safety and  Soundness.  On November 18, 1993, a joint notice of proposed
rule making was issued by the OTS, the FDIC,  the Office of the  Comptroller  of
the Currency,  and the Federal  Reserve  Board  (collectively,  the  "agencies")
concerning  standards  for safety and  soundness  required to be  prescribed  by
regulation  pursuant  to the  FDIA.  In  general,  the  standards  relate to (1)
operational  and  managerial  matters;  (2) asset quality and earnings;  and (3)
compensation.  Legislation  enacted in 1994:  (1)  authorizes  the  agencies  to
establish  safety and  soundness  standards by  regulation  or guideline for all
insured depository  institutions;  (2) gives the agencies greater flexibility in
prescribing asset quality and earnings  standards by eliminating the requirement
that  agencies  establish  quantitative   standards;   and  (3)  eliminates  the
requirement that the standards referenced above apply to depository  institution
holding  companies.  The agencies  have  published a final rule and  interagency
guidelines  ("Guidelines")  as  well  as  proposed  asset  quality  and  earning
standards which will be added to the Guidelines  when finalized.  The final rule
and Guidelines became effective in August 1995.

        Under the  Guidelines  and final rule of the OTS, if an insured  savings
institution fails to meet any of the standards  promulgated by Guidelines,  then
the OTS may require  such  institution  to submit a plan within 30 days (or such
different  period  specified  by the OTS)  specifying  the steps it will take to
correct  the  deficiency.  In the event that an  institution  fails to submit or
fails in any material  respect to  implement a  compliance  plan within the time
allowed by the OTS, the OTS must order the institution to correct the deficiency
and may (1) restrict asset growth;  (2) require the  institution to increase its
ratio of tangible equity to assets;  (3) restrict the rates of interest that the
institution  may pay; or (4) take any other  action that would  better carry out
the  purpose  of  prompt  corrective  action.  The Bank  believes  that it is in
compliance with each of the standards as adopted.

        Qualified  Thrift Lender Test. All savings  associations,  including the
Bank,  are required to meet a QTL test to avoid  certain  restrictions  on their
operations. Under FDICIA, a depository institution must have at least 65% of its
portfolio  assets (which  consist of total assets less  intangibles,  properties
used to  conduct  the  savings  association's  business  and  liquid  assets not
exceeding  20% of total  assets) in qualified  thrift  investments  on a monthly
average basis in nine of every 12 months.  Loans and mortgage-backed  securities
secured by domestic  residential  housing,  certain  obligations of the FDIC and
certain other related entities, small business loans, credit card loans, student
loans, and loans for personal, family and household purposes, may be included in
qualifying thrift investments without limit.  Certain other  housing-related and
non-residential  real estate loans and  investments,  including loans to develop
churches,   nursing  homes,  hospitals  and  schools,  and  consumer  loans  and
investments in subsidiaries  engaged in  housing-related  activities may also be
included.  Qualifying  assets for the QTL test  include  investments  related to
domestic  residential  real estate or  manufactured  housing,  the book value of
property  used by an  association  or its  subsidiaries  for the  conduct of its
business,  an amount of residential  mortgage loans that the  association or its
subsidiaries  sold within 90 days of origination,  shares of stock issued by any
FHLB and  shares  of stock  issued  by the  FHLMC or the  FNMA.  The Bank was in
compliance  with the QTL  test as of June 30,  1997,  with  85.9% of its  assets
invested in qualified thrift investments.

        Restrictions on Capital Distributions.  The OTS has adopted a regulation
governing  capital  distributions  by savings  associations,  which include cash
dividends, stock redemptions or repurchases, cash-out mergers, interest payments
on  certain  convertible  debt and other  transactions  charged  to the  capital
account of a savings association to make capital distributions.  Generally,  the
regulation  creates a safe harbor for specified levels of capital  distributions
from associations meeting at least their minimum capital  requirements,  so long
as such associations notify the OTS and receive no objection to the distribution
from the OTS. Savings associations and distributions that do not qualify for the
safe harbor are required to obtain prior OTS approval  before making any capital
distributions.  The Bank  currently is a Tier 1 institution  for purposes of the
regulator dealing with capital distributions.

        Generally,  Tier 1  associations,  which are savings  associations  that
before and after the proposed  distribution meet or exceed their fully phased-in
capital  requirements,  may make capital  distributions during any calendar year
equal to the greater of 100% of net income for the  calendar  year-to-date  plus
50% of its "surplus  capital ratio" at the beginning of the calendar year or 75%
of net income over the most recent four quarter  period.  The  "surplus  capital
ratio" is defined to mean the  percentage  by which the  association's  ratio of
total  capital  to  assets  exceeds  the ratio of its  fully  phased-in  capital
requirement to assets,  and "fully phased-in capital  requirement" is defined to
mean an  association's  capital  requirement  under the statutory and regulatory
standards to be  applicable  on December  31,  1994,  as modified to reflect any
applicable individual minimum capital requirements imposed upon an association.

        In December  1994 the OTS  published a notice of proposed rule making to
amend its capital  distribution  regulation.  Under the  proposal,  institutions
would be permitted to only make capital  distributions  that would not result in
their  capital  being  reduced  below the level  required to remain  "adequately
capitalized,"  as defined above under "Prompt  Corrective  Action."  Because the
Bank is a subsidiary of a holding  company,  the proposal would require the Bank
to provide notice to the OTS of its intent to make a capital  distribution.  The
Bank does not believe that the  proposal  will  adversely  affect its ability to
make capital distributions if it is adopted substantially as proposed.

        Federal Home Loan Bank System.  The Bank is a member of the FHLBP, which
is one of 12 regional FHLBs that  administers the home financing credit function
of savings  associations and commercial  banks.  Each FHLB serves as a source of
liquidity for its members  within its assigned  region.  It is funded  primarily
from  proceeds  derived from the sale of  consolidated  obligations  of the FHLB
System.  It makes loans to members (i.e.,  advances) in accordance with policies
and procedures  established by its Board of Directors.  As of June 30, 1997, the
Bank's advances from the FHLBP amounted to $30.20 million.

        As a member,  the Bank is required to purchase and maintain stock in the
FHLBP  in  an  amount  equal  to  the  greater  of 1% of  its  aggregate  unpaid
residential  mortgage loans, home purchase  contracts or similar  obligations at
the beginning of each year or 5% of total  advances.  At June 30, 1997, the Bank
had $1.51 million in FHLB stock, which was in compliance with this requirement.

        As a result of FIRREA,  the FHLBs are required to provide  funds for the
resolution  of troubled  savings  associations  and to  contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community  investment and low- and moderate-income  housing projects.  These
contributions have adversely affected the level of FHLB dividends paid and could
continue to do so in the future.  These contributions also could have an adverse
effect on the value of FHLB  stock in the  future.  For the year  ended June 30,
1997, dividends paid by the FHLBP to the Bank totaled approximately $91,000.

        Federal  Reserve   System.   The  Federal  Reserve  Board  requires  all
depository  institutions to maintain reserves against their transaction accounts
(primarily NOW and super NOW checking  accounts) and non-personal time deposits.
At June 30, 1997, the Bank was in compliance with such requirements.

        The balances maintained to meet the reserve  requirements imposed by the
Federal Reserve Board may be used to satisfy applicable liquidity  requirements.
Because  required  reserves  must be  maintained  in the form of vault cash or a
non-interest  bearing  account  at a Federal  Reserve  Bank,  the effect of this
reserve requirement is to reduce an association's  earning assets. The amount of
funds necessary to satisfy this requirement has not had a material affect on the
Bank's operations.

Interstate Acquisitions

        The Commonwealth of Pennsylvania  enacted  legislation in 1986 regarding
the acquisition of commercial banks, bank holding  companies,  savings banks and
savings and loan  associations  located in Pennsylvania by institutions  located
outside of  Pennsylvania.  The  legislation  dealing with  savings  institutions
authorizes (i) a saving bank,  savings and loan  association or holding  company
thereof located in Delaware, the District of Columbia,  Kentucky,  Maryland, New
Jersey, Ohio, Virginia and West Virginia (collectively "regional  institutions")
to acquire the voting stock of, merge or  consolidate  with, or purchase  assets
and assume  liabilities of, a  Pennsylvania-chartered  savings bank, savings and
loan  association  or  holding  company  thereof   (collectively,   Pennsylvania
institutions")  and  (ii) the  establishment  of  branches  in  Pennsylvania  by
regional  institutions,  in each case  subject to certain  conditions  including
reciprocal  legislation in the state in which the regional  institution  seeking
entry into Pennsylvania is located  permitting  comparable entry by Pennsylvania
institutions  and  approval  by the  Pennsylvania  Department  of  Banking.  The
legislation  also provides for  nationwide  branching by  Pennsylvania-chartered
savings banks and savings and loan associations,  subject to Department approval
and certain other conditions.
<PAGE>
                                    TAXATION

Federal and State Taxation

General. The Company and the Bank are subject to the corporate tax provisions of
the Internal  Revenue Code of 1986 (the "Code"),  as well as certain  additional
provisions  of the Code  which  apply to  thrift  and other  types of  financial
institutions.  The  following  discussion  of tax matters is intended  only as a
summary and does not purport to be a comprehensive  description of the tax rules
applicable to the Company and the Bank. Beginning with July 1, 1993, the Company
and its subsidiaries elected to file its federal and state income tax returns on
a fiscal year basis.

Bad Debt Reserves.  Legislation  enacted under the Small Business Job Protection
Act of 1996 (the "Act")  provided for the Bank to recapture into income,  over a
six-year  period,  only the portion of its tax bad debt  reserves as of June 30,
1996, that exceed its base year reserves (i.e., tax reserves for years beginning
before 1988). Under the Act, the amount of the excess base year reserves subject
to recapture  would be suspended for each of two successive tax years  beginning
July 1,  1996,  in  which  the Bank  originates  a  minimum  amount  of  certain
residential  loans based upon the average of the principal amounts of such loans
the Bank made during its six preceding tax years.  The Bank's total tax bad debt
reserves at June 30,  1997,  are  approximately  $3.14  million,  of which $2.64
million  represents  the base year amount and $504,000 is subject to  recapture.
The Company has previously recorded a deferred tax liability for the excess base
year reserves to be  recaptured;  therefore,  this recapture will not impact the
statement of  operations.  The base year tax  reserves,  which may be subject to
recapture  if the Bank  ceases  to  qualify  as a bank for  federal  income  tax
purposes, are restricted to certain  distributions.  Under the provisions of the
Act, the Bank is  considered a "small bank" (i.e.,  a bank that has total assets
under  $500  million)  and may claim its tax bad debt  deductions  for tax years
beginning  after  December  31,  1995,  using a  six-year  average  of its  loan
charge-offs to total loans.

Minimum Tax. The Code imposes an  alternative  minimum tax at a rate of 20% on a
base of regular  taxable  income  plus  certain  tax  preferences  ("alternative
minimum  taxable income" or "AMTI").  The alternative  minimum tax is payable to
the extent such AMTI is in excess of an exemption amount. The Code provides that
an item of tax  preference is the excess of bad debt  deduction  allowable for a
taxable year over the amount  allowable under the experience  method.  The other
items of tax preference that constitute AMTI include (a) tax-exempt  interest on
a newly issued (generally, issued on or after August 8, 1986) privately activity
bonds other than certain  qualified  bonds and (b) for taxable  years  beginning
after  1989,  75% of the excess (if any) of (i)  adjusted  current  earnings  as
defined  in the  Code,  over  (ii)  AMTI  (determined  without  regard  to  this
preference and prior to reduction by net operating losses). Net operating losses
can offset no more than 90% of AMTI. Certain payments of alternative minimum tax
may be used as credits  against  regular tax  liabilities  in future  years.  In
addition, for taxable years after 1986 and beginning before January 1, 1996, the
Company is also subject to an environmental  tax equal to 0.12% of the excess of
AMTI for the taxable year over $2.0 million.

Audit by IRS. The Company's  consolidated federal income tax returns for taxable
years through June 30, 1993,  have been closed for the purpose of examination by
the IRS.

State Taxation.  The Company and its non-thrift  Pennsylvania  subsidiaries  are
subject to the  Pennsylvania  Corporate  Net Income  Tax and  Capital  Stock and
Franchise  Tax.  The  Corporate  Net  Income  Tax rate for 1997 is 9.99%  and is
imposed on the Company's and its non-thrift subsidiaries' unconsolidated taxable
income for federal purposes with certain  adjustments.  In general,  the Capital
Stock Tax is a property  tax  imposed  at the rate of 1.275% of a  corporation's
capital stock value, which is determined in accordance with a fixed formula.

The Bank is taxed under the Pennsylvania Mutual Thrift Institutions Tax Act (the
"MTIT"),  as  amended to  include  thrift  institutions  having  capital  stock.
Pursuant to the MTIT,  the  Company's  tax rate is 11.5%.  The MTIT  exempts the
Company from all other taxes imposed by the  Commonwealth  of  Pennsylvania  for
state  income tax  purposes  and from all local  taxation  imposed by  political
subdivisions, except taxes on real estate and real estate transfers. The MTIT is
a tax upon net  earnings,  determined  in  accordance  with  generally  accepted
accounting principals ("GAAP") with certain adjustments.  The MTIT, in computing
GAAP income,  allows for the deduction of interest  earned on  Pennsylvania  and
federal  securities,  while  disallowing  a  percentage  of a thrift's  interest
expense  deduction in the proportion of interest  income on those  securities to
the overall  interest  income of the  Company.  Net  operating  losses,  if any,
thereafter can be carried forward three years for MTIT purposes.
<PAGE>
ITEM 2.  PROPERTIES

Offices and Other Material Properties

        At June 30,  1997,  the Company  conducted  its  business  from its main
office in Downingtown, Pennsylvania and six full-service branch offices.

        The following table sets forth certain  information  with respect to the
offices of the Company as of June 30, 1997:
<TABLE>
<CAPTION>
                                                                           Net Book Value
                                                                           of Property and
                                                         Lease             Leasehold
                                   Owned or              Expiration        Improvements at
                                   Leased                Date              June 30, 1997            Deposits
                                   --------              ----------        ----------------         --------
                                                                                          (In Thousands)
<S>                                <C>                   <C>                 <C>                  <C>   
Main Office:

100 E. Lancaster Avenue
Downingtown PA 19335               Own                      --                  $  995               $74,794 
                                                                                                             
Branch Offices:                                                                                              
                                                                                                             
Exton-Lionville                                                                                              
601 N. Pottstown Pike                                                                                        
Exton PA  19341                    Own                       --                    436                54,153 
                                                                                                             
Frazer-Malvern                                                                                               
200 W. Lancaster Avenue                                                                                      
Frazer PA 19355                    Own                       --                  1,339                33,596 
                                                                                                             
Thorndale                                                                                                    
3909 Lincoln Highway                                                                                         
Downingtown PA 19335               Lease                 9/30/2000                  45                39,903 
                                                                                                             
Westtown                                                                                                     
1197 Wilmington Pike                                                                                         
West Chester PA 19382              Lease                 10/31/99                  116                40,642 
                                                                                                             
Airport Village                                                                                              
102 Airport Road                   Own Building                                                              
Coatesville PA 19320               Lease Land            11/30/2004                356                 9,308 
                                                                                                             
Brandywine Square                  Lease                 8/14/2011                 100                 8,354 
82 Quarry Road                                                                                               
Downingtown PA 19335                                                                                         
                                                                                ------              --------  
                                                                                                             
          Total                                                                 $3,387              $260,750 
                                                                                ======              ========  
                                                                               
</TABLE>
<PAGE>
        In  addition,  the  Company  currently  owns  two  developed  properties
adjacent to its main office. These properties are being held for possible use as
future office facilities and expansion of the main office. One of the properties
is currently being leased to other users.  The net book value of each of the two
parcels at June 30, 1997, was approximately $11,400 and $96,400.

        In September  1989 the Bank entered into a 10-year  operating  lease for
the Bank's Westtown office. The lease contains two five-year options to renew.

        In October  1990 the Bank  entered  into a 10-year  lease  agreement  in
connection with the relocation of its existing branch in Thorndale to a new site
in the Thorndale  area. The lease  includes two five-year  options to extend the
lease.

        In May 1994 the Bank entered into a 10-year lease  agreement for land in
connection  with the  construction  of the  Airport  Village  branch.  The lease
includes three five-year options to extend the lease.

        In April 1995 the Bank entered into a 15-year  lease  agreement  for the
Bank's Brandywine Square office, which opened in August 1996.

         First  Financial  operates and  participates in the MAC(R) Money Access
Service shared  Automated  Teller Machine ("ATM")  network system.  In addition,
First Financial operates six office ATMs under the MAC(R) system.

ITEM 3.  LEGAL PROCEEDINGS

        The Company is not involved in any pending legal  proceedings other than
routine,  non-material  legal  proceedings  occurring in the ordinary  course of
business which  management  believes 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 SECURITY HOLDERS

        Not applicable.

PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        The  information  required  herein is  incorporated  by  reference  from
"Market  Information"  on pages 17 and 18 of the Company's 1997 Annual Report to
Stockholders included herein as Exhibit 13 hereto ("Annual Report").



ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

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

ITEM 7.  FINANCIAL STATEMENTS

        The financial  statements  and  supplementary  data required  herein are
incorporated by reference from pages 20 to 37 of the Annual Report.

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

        Not applicable.

PART III

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

        The information  required herein is incorporated by reference from pages
2 to 7 of the Company's  Definitive Proxy Statement which will be filed with the
SEC within 120 days of the end of the Company's fiscal year  ("Definitive  Proxy
Statement").

ITEM 10.  EXECUTIVE COMPENSATION

         The information required herein is incorporated by reference from pages
9 to 10 of the Company's Definitive Proxy Statement.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required herein is incorporated by reference from pages
1 to 7 of the Company's Definitive Proxy Statement.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The  information  required herein is incorporated by reference from page
13 of the Company's Definitive Proxy Statement.

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

(a)     The following documents are filed as part of this report:

        (1)    The following financial  statements are incorporated by reference
               into  Item 8 hereof  from  pages 20 to 36 of the  Annual  Report,
               Exhibit 13 hereto:

               Consolidated  Statements of Financial  Condition at June 30, 1997
               and 1996

               Consolidated  Statements of  Operations  for the Years Ended June
               30, 1997, 1996, and 1995

               Consolidated  Statements  of  Stockholders'  Equity for the Years
               Ended June 30, 1997, 1996, and 1995

               Consolidated  Statements  of Cash Flows for the Years  Ended June
               30, 1997, 1996, and 1995.

               Notes to Consolidated Financial Statements.

        (2)    Financial  statement schedules for which provision is made in the
               applicable accounting  regulations of the SEC are omitted because
               of the absence of the conditions under which they are required or
               because the required information is set forth in the Consolidated
               Financial Statements or Notes thereto.

(b)     Reports on Form 8-K

        None

<PAGE>
                                Index to Exhibits


<TABLE>
<CAPTION>

Number          Description of Documents
------          ------------------------
<S>             <C>
3a              Restated Articles of Incorporation **
3b              Bylaws, as amended ***
4               Specimen Stock Certificate *
10a             Key Employee Stock Compensation Program, as amended **
10b             Employee Stock Ownership Plan **
10c             Employment Agreement By and Between the Company and Ellen Ann Roberts **
10d             Employment Agreement By and Between the Company and Edward H. Plank **
10e             Employment Agreement By and Between the Company and Colin N. Maropis *
10f             Employment Agreement By and Between the Company and Anthony J. Biondi **
10h             Amendment No. 1 to the Employment Agreement By and Between the Company and Ellen Ann Roberts ****
10i             Amendment No. 1 to the Employment Agreement By and Between the Company and Edward H. Plank ****
10j             Amendment No. 1 to the Employment Agreement By and Between the Company and Colin N. Maropis ****
10k             Amendment No. 1 to the Employment Agreement By and Between the Company and Anthony J. Biondi ****
10l             1997 Stock Option Plan
11              Computation of Earnings Per Share
13              Annual Report to Stockholders
21              Subsidiaries  of the Registrant - Reference is made to Item, 1, Business -  Subsidiaries,"  for the
                required information
23              Consent of Independent Auditors

(*)             Incorporated herein by reference from the Company's Registration
                Statement on Form S-4 (33-30433) dated August 10, 1989.

(**)            Incorporated  herein by reference from the Company's  Annual Report on Form 10-K for the year ended
                June 30, 1990.

(***)           Incorporated  herein by reference from the Company's  Annual Report on Form 10-K for the year ended
                June 30, 1991.

(****)          Incorporated  herein by reference from the Company's  Annual Report on Form 10-K for the year ended
                June 30,  1992.
</TABLE>
<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.

                                       CHESTER VALLEY BANCORP INC.


September 26, 1997                     By: /s/ Ellen Ann Roberts
                                           ---------------------
                                           Ellen Ann Roberts
                                           Director, Chairman of the Board, and
                                           Chief Executive Officer

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


/s/ Ellen Ann Roberts                         September 26, 1997
---------------------------------------
Ellen Ann Roberts
Director, Chairman of the Board, and
Chief Executive Officer


/s/ Anthony J. Biondi                         September 26, 1997
----------------------------------------
Anthony J. Biondi
President and
Chief Operating Officer


/s/ Robert J. Bradbury                        September 26, 1997
-----------------------------------------
Robert J. Bradbury
Director


/s/ Gerard F. Griesser                        September 26, 1997
----------------------------------------
Gerard F. Griesser
Director
<PAGE>
/s/ James E. McErlane                         September 26, 1997
-----------------------------------------
James E. McErlane
Director and Secretary


/s/ Richard L. Radcliff                        September 26, 1997
-----------------------------------------
Richard L. Radcliff
Director


/s/ Emory S. Todd                             September 26, 1997
-----------------------------------------
Emory S. Todd
Director

/s/ Edward L. Towson                          September 26, 1997
-----------------------------------------
Edward L. Towson
Director


/s/ William M. Wright                         September 26, 1997
-----------------------------------------
William M. Wright
Director