INDEX

Corporate Profile                    2

Five-Year Financial Highlights       3

Letter to Stockholders             4-5

Helping Business
   is Our Business                6-11

Management's
   Discussion
   and Analysis                  12-19

Consolidated Statements
   of Financial Condition           20

Consolidated Statements
   of Operations                    21

Consolidated Statements
   of Changes in
   Stockholders' Equity             22

Consolidated Statements
   of Cash Flows                    23

Notes to Consolidated
   Financial Statements          24-36

Independent Auditors'
   Report                           37

<PAGE>
CORPORATE PROFILE

Chester Valley Bancorp Inc. (the "Holding  Company") was  incorporated in August
1989 in the  Commonwealth of  Pennsylvania as a unitary thrift holding  company.
The Holding  Company's  principal  subsidiary  is First  Financial  Bank ("First
Financial" or the "Bank").  As used in this Report, the term "Company" refers to
the Holding Company and its subsidiaries.

First Financial's  headquarters,  along with its six branch offices, are located
in scenic Chester  County,  Pennsylvania,  an area which has seen  extraordinary
growth  over the last  ten  years.  The Bank  began  its  operations  in 1922 as
Downingtown Building and Loan, a Pennsylvania-chartered  mutual savings and loan
association,  and eventually converted to a stock form of ownership in 1987. All
of our branches, including our headquarters, are full-service facilities and are
conveniently located in Downingtown, Exton, Frazer, Thorndale, Westtown, Airport
Village, and Brandywine Square.

Chester  Valley's common stock is traded over the counter and is included in the
NASDAQ National Market System under the symbol "CVAL".


[GRAPHIC-PHOTOGRAPH]
FIRST FINANCIAL CELEBRATES ITS 75TH YEAR

First  Financial Bank celebrated its 75th  anniversary  last year, a distinction
few companies can claim and a source of great pride to the more than 125 members
of our staff and  management  whose  hard work  produced  the  highest  year-end
operating  earnings in our history.  We are very pleased to have been recognized
for this  accomplishment  in the form of a  citation  from the  Commonwealth  of
Pennsylvania, which was presented to us by Senator Robert J. Thompson. On behalf
of everyone at First Financial and Chester Valley,  we extend our sincere thanks
to all those responsible for our continuing success.

 

[GRAPHIC-PHOTOGRAPH]
CHRISSY DULLINGER,
CHESTER VALLEY'S NEW CFO

Chrissy is the newest member of our Senior Management Team and has been a valued
member of our staff since she joined us in 1993.  She was elected  Treasurer  in
1994 and Chief  Financial  Officer in October 1996. A graduate of the University
of Richmond with a B.S. in Accounting, Chrissy is a Certified Public Accountant.
She  previously  served  as a  Manager  of  Accounting  and  Auditing  Services,
specializing in financial  institutions,  at KPMG Peat Marwick,  one of the "big
six" public accounting firms.
<PAGE>
<TABLE>
<CAPTION>
                              FINANCIAL HIGHLIGHTS
                  (Dollars in thousands except per share data)

Selected Financial Condition Data
                                                                             At June 30,
                                                  ----------------------------------------------------------------
                                                    1997          1996          1995          1994          1993
                                                  ----------------------------------------------------------------
<S>                                               <C>           <C>           <C>           <C>           <C>
Total assets ................................     $323,673      $272,932      $262,360      $244,071      $222,227
Net loans receivable ........................      257,040       223,963       220,816       194,293       176,041
Deposits ....................................      260,750       228,206       217,981       204,802       191,484
Stockholders' equity ........................       27,065        25,564        23,784        21,870        19,158
Book value per common share(1) ..............        13.15         12.42         11.57         10.71          9.70

<CAPTION>
Selected Operations Data
                                                                           Year Ended June 30,
                                                  ----------------------------------------------------------------
                                                      1997          1996          1995          1994          1993
                                                  ----------------------------------------------------------------
<S>                                               <C>           <C>           <C>           <C>           <C>
Interest income .............................     $ 22,569      $ 20,566      $ 18,882      $ 16,514      $ 16,015
Interest expense ............................       11,503        10,875         9,830         8,275         8,265
                                                  --------      --------      --------      --------      --------
Net interest income .........................       11,066         9,691         9,052         8,239         7,750
Income before cumulative effect of a
  change in accounting for income taxes(2) ..        1,926         2,439         2,153         1,921         1,814
Cumulative effect of a change in
  accounting for income taxes ...............         --            --            --             540          --
                                                  --------      --------      --------      --------      --------
Net income(2) ...............................        1,926         2,439         2,153         2,461         1,814
Fully diluted earnings per share
  before cumulative effect of a change in
  accounting for income taxes (1) ...........          .93          1.18          1.04           .94           .90
Dividend per share (1) ......................          .37           .28           .23           .21           .17
                                                  --------      --------      --------      --------      --------

Other Selected Data
(based on monthly balances)

Average interest rate spread ................         3.38%         3.21%         3.19%         3.27%         3.45%
Net yield on average interest-earning assets          4.03%         3.86%         3.73%         3.75%         3.94%
Ratio of non-performing loans and real estate
  owned to total assets at end of period ....          .23%          .86%         1.17%         1.44%         2.52%
Number of full-service
  offices at end of period ..................            7             6             6             5             5
</TABLE>

(1)  Adjusted to reflect 5% stock dividends paid in September  1996,  1995, 1994
     and 1993 and the December  1993 and March 1997  five-for-four  stock splits
     effected in the form of dividends.

(2)  Fiscal 1997 includes the one-time FDIC insurance assessment of $832,000 net
     of taxes.

(3)  Net operating  income  excludes the one-time FDIC  insurance  assessment of
     $832,000 net of taxes.

[GRAPHIC-GRAPH NET OPERATING INCOME]
[GRAPHIC-TOTAL ASSETS]
[GRAPHIC-COMMERCIAL LOAN PORTFOLIO]
<PAGE>
TO OUR STOCKHOLDERS


[GRAPHIC-PHOTOGRAPH]
Anthony J. Biondi, Ellen Ann Roberts

         It's hard to believe  another  year has gone by so quickly - and what a
year it's been for Chester  Valley and its  subsidiary,  First  Financial  Bank.
Unprecedented growth in assets,  deposits,  loans, and profits has made this the
most  successful year in our history and is reflected in the 46% increase in the
price  of our  stock  during  the  past  fiscal  year - from  $13.90  per  share
(adjusted) to $20.25 per share.




         The end of our  fiscal  year,  June 30,  1997,  saw  assets at  $323.67
million,  up 18.6% from $272.93  million as of June 30, 1996;  deposits  grew to
$260.75 million, a 14.3% increase from $228.21 million at the same date in 1996.
Net loans  topped off at $257.04  million,  14.8%  higher  than  1996's  $223.96
million,  and profits rose to $2.76  million  (excluding  the  one-time  Savings
Institutions  Insurance  Fund  ["SAIF"]  special  assessment)  - 13.1% over last
year's $2.44 million.  Thanks to the diligence of our commercial loan staff, our
commercial  portfolio  has  increased  to $44.62  million  - up 50% from  $29.74
million in 1996.

         Our desire to become a  full-service  community  bank in every sense of
the word was exemplified when we changed our name to First Financial Bank, which
will better reflect the type of financial institution we are - one that provides
every banking need for current and potential customers.

         In September 1996 we opened our seventh branch in Brandywine  Square, a
multi-million  dollar  shopping  center a few miles  east of our main  office in
Downingtown.  While most of the "big banks" are closing  branches,  we have been
fortunate  in having  two very  important  factors  in our  favor.  First is the
reputation  we have  earned,  and which we  continue  to build  upon,  as a true
community bank.  Being  available for our neighbors and business  associates has
given us the  opportunity  to expand our branch  network and offer an  extensive
array of products and


<PAGE>
services.  Second is the loyalty we have  received  from our  community for over
three-quarters of a century. We've gotten to know our customers and shareholders
personally,  we've watched families grow and, in many cases,  we've been part of
that growth.

         Providing  convenience  for our customers has always been a priority at
First  Financial and led to the opening of our "First Call Center," with a staff
to open accounts and accept loan applications over the phone. Additionally,  our
Lending  Department   underwent  a  complete   reorganization  to  expedite  the
commitment  of mortgage  loans to less than 48 hours instead of the usual two to
four weeks.

         Our First Choice Check Debit Card has become a popular  alternative  to
carrying  cash or checks,  and First Pay by Phone will allow  banking  from home
when it is introduced in the Fall of 1997.  Commercial customers are reaping the
benefits of our Cash  Management  Sweep  Account,  and  Imaging  has  produced a
hassle-free method of balancing checkbooks.

      This Fall we will open our Investment  Services and Trust Division.  Under
the skillful  management  of David  Summers,  our new Vice  President and Senior
Trust  Officer who has over twenty years of local  banking  experience,  we will
offer personal money  management  and  investment  services,  and retirement and
estate planning to our individual and corporate customers.

         First   Financial  Bank  has  pledged  to  keep  its   headquarters  in
Downingtown,  where it  originated  over 75 years ago.  Through the purchase and
revitalization  of  properties  surrounding  our main office,  we are working in
conjunction  with the borough's  Main Street Project to recapture the atmosphere
of America's small towns. This will also enable us to accommodate our growth, as
evidenced by our newly renovated Operations Center which houses our Checking and
Electronic Funds Departments, and our new imaging equipment.

      We were put to the test many times during the past twelve  months,  and we
met our  challenges  head on with  one  objective  in  mind:  keeping  you,  our
shareholders  and  customers,  satisfied  with  your  Company.  As we bring  one
successful  year to a close and anticipate the one which lies ahead,  we realize
that the good  will of those we serve is the  foundation  of our  success.  Once
again we take this  opportunity  to say a heartfelt  "thank you" to all who have
made it possible.

         Sincerely,

         /s/Ellen Ann Roberts
         --------------------
         Ellen Ann Roberts
         Chairman and Chief Executive Officer


         /s/Anthony J. Biondi
         --------------------
         Anthony J. Biondi
         President and Chief Operating Officer



<PAGE>
      The inception of First Financial's Preferred Realtor Program, coupled with
our creative and flexible lending plans, has encouraged Chester County builders,
developers  and  realtors  to come to us for all  their  financing  needs.  As a
result,  we have been able to assist  with the  construction  of new  houses and
office complexes  throughout our community;  we have helped families realize the
dream of owning  their own homes;  and we have been  instrumental  in aiding the
expansion of existing  companies and the start-up of new ones.  Much of this new
business  has  come  to us as a  result  of  referrals  from  people  like  Matt
DiDomenico,  whose talents include those of builder,  developer,  and realtor. A
highly  respected  customer and member of our Frazer Advisory Board,  Matt knows
it's critical to closely monitor the County's real estate market,  and he gladly
shares  his  ideas  and  opinions  with us.  This is a  perfect  example  of the
relationships we value and will continue to encourage.


[GRAPHIC-PHOTOGRAPH]
LENDING  OFFICERS  BILL EADS ,  PHILLIS  WEIDENHAMMER,  AND COLIN  MAROPIS  HAVE
DEVELOPED  A  SOLID  WORKING  RELATIONSHIP  WITH  DEVELOPER/REALTOR  MATTHEW  J.
DIDOMENICO, SR.


[GRAPHIC-PHOTOGRAPH]
FIRST  FINANCIAL  IS  FORTUNATE  TO HAVE ITS VERY OWN  HIGH-TECH  EXPERTS  --PAM
COLLINS,  KELLY  LAURENTO,  KAREN  BROWN,  AND  KAY  FALKOW  -- TO  KEEP UP WITH
UNFOLDING TECHNOLOGICAL ADVANCES.

      Tracking loans from beginning to end requires infinite attention to detail
- as does every  other  aspect of today's  banking - through the use of the most
advanced  technology.  Keeping up with  ever-changing  and  constantly  evolving
technological  innovations will be a never-ending  process.  At First Financial,
countless  hours are spent  learning what types of products  consumers  want and
need,  then  researching the most effective ways in which we can provide them at
the lowest cost. During fiscal 1997 we introduced  several new features designed
to enhance  day-to-day cash management and streamline our customers' banking and
record keeping.

      Our First Choice Check Debit Card,  valid wherever Visa is accepted,  is a
safe  alternative to carrying a checkbook or large amounts of cash.  Bill Pay by
Phone, 


<PAGE>
which  will be in  place  this  Fall,  allows  all  banking  transactions  to be
performed by using a touch-tone phone. In the very near future we will introduce
PC Banking for those who prefer using their  computers at home or at the office.
A Cash  Management  Sweep  Account  seemed the perfect  solution for many of our
commercial checking customers, automatically "sweeping" any excess funds into an
interest-earning investment alternative account.

      Check  Imaging is one answer to the  nightmare  of  balancing a checkbook.
Imaging  not  only  makes  checkbook  maintenance  easier  and much  faster,  it
drastically reduces the amount of paper to be stored. Copies of canceled checks,
listed in numerical  order with  multiple  copies to a page,  are provided  with
monthly  statements.  Everything is three-hole punched for convenient storage in
an attractive binder, which is supplied by the Bank.

      First  Financial has made great strides in the area of technology,  but we
have much more to learn and even more to offer in the months  ahead.  One of the
keys to our success has been  providing the kind of banking our  customers  have
come to expect from the "premier bank of Chester County."

      The key to any  organization's  success,  however,  is good management:  a
thorough  knowledge  of the  business  and the 





[GRAPHIC-PHOTOGRAPH]
Carl K. Croft, President
Croft, Drozd, Barr & Company, P.C.


         It wasn't easy  finding a bank that took time to  understand  how a CPA
firm works,  but that's just what First  Financial did - they listened and asked
questions  about our operations,  with no  pre-conceived  notions.  The Bank has
always met or exceeded our  expectations,  as well as those of the clients we've
referred to them. First Financial is easily accessible, they always respond in a
timely manner,  and they never say "no" - they're always willing to try.  That's
what being a hometown bank is all about.


<PAGE>
[GRAPHIC-PHOTOGRAPH]
Ed Herd, President
Payroll On-Line


         We started our business in 1988 and quickly found that we needed a bank
that could handle electronic funds transfers. We had already gotten our mortgage
from First Financial,  so we came to them for our EFT. They were able to develop
the  process,  which was  costly in time and money for both of us at first,  but
everything  soon became  automated  and much easier to  process.  We  eventually
brought  all of our  accounts  to First  Financial,  and the  relationship  that
developed has made us stay. We've been working together ever since.


























ability to work well with staff members and  customers.  In this respect,  First
Financial Bank has a branch system that is second to none among its peers.

      Administering  the  day-to-day  operations  of a busy branch office is not
easy, so it takes a special type of manager, a true professional with experience
and skill,  to furnish  the  guidance  that  makes the office run  smoothly  and
efficiently. Handling the expected and anticipating the unexpected are only part
of what makes a good branch manager;  knowing the Bank's products and getting to
know its customers is the other. Each of our seven branches is fortunate to have
such an individual at its helm.

      Our managers have been employees of the Bank for many years;  most of them
are  lifelong  residents  of Chester  County,  giving them even more of a vested
interest  in  our  community.   They  are  very  much  involved  in  such  civic
organizations as Chambers of Commerce,  YMCAs, the March


<PAGE>
of Dimes and the United Way, and they have been  recognized  for their work with
these groups.

      These branch  managers have become key to the  development  of many of the
small business accounts on which we have been concentrating for the last several
years.  They can answer  questions  and furnish  counseling on  investments;  as
highly  trained loan  officers  they are able to create  financing  packages for
nearly all types of loan and mortgage requirements.  Having skilled managers who
are able to  handle  such an  assortment  of  business  and  personal  financial
arrangements  is unique to First Financial - it is, quite  literally,  "one-stop
shopping."

      First  Financial  demands a great deal from its managers,  but we know our
confidence is not misplaced,  and we are very proud of the  outstanding job they
are doing.



[GRAPHIC-PHOTOGRAPH]
Steve  Cunningham and Branch  Managers Ronnie Gilken,  Carol Reichard,  Michelle
Guerrero, Anne Johnson,  Celeste Moore, Vicki Banghart, and Paige Willover offer
our customers "banking - the way they want it."










[GRAPHIC-PHOTOGRAPH]
W. David Hager
Executive Director, Handi-Crafters, Inc.


         We've come a long way since our  organization  was founded in 1961, but
there's still much more to be done. It took a long time to sort out just what we
wanted  and  needed  from a  lender,  and  when we were  finally  ready to begin
interviewing  banks,  First Financial turned out to be the best of the lot. They
were not only  the  most  competitive,  they  were  also  the  kindest  and most
supportive  of our  organization.  There's  no  doubt  that  the Bank has a real
commitment to our program.















<PAGE>
[GRAPHIC-PHOTOGRAPH]
Michael J. O'Neill, President
Brian O'Neill, V.P., Fabritech Inc.


         When we decided to refinance our mortgage we tried working with another
local bank, but we felt they weren't  interested  because we're a small company.
Our accountant recommended that we call First Financial,  and we're glad we did.
Everyone was so helpful and easy to work with, and they  willingly  accommodated
our financial needs. The transaction went smoothly,  and we accomplished what we
wanted to do. Their Westtown  Branch Manager even stops by  occasionally  to see
how we're doing and make sure we're not having any  problems.  It's nice to know
that First Financial really cares.























      First   Financial's   "First  Call  Center"  is  our  latest  step  toward
hassle-free  banking.  Officially  in operation  since August 4th, the Center is
staffed  with  skilled  representatives  who can quickly  research  accounts and
respond to  inquiries  - not only from  customers,  but from our  branch  office
personnel as well. They also have the capability of opening  accounts and taking
loan  applications  over the telephone,  so several banking  transactions can be
combined  and  concluded  with just one phone call.  The Center has extended its
hours from 8 AM to 8 PM --a real  benefit  for those who can't call or come into
our offices during the normal working day. Banking  shouldn't be thought of as a
time-consuming  chore -- seeing that it isn't,  is what the First Call Center is
all about.

      "Helping  business is our  business"  is not just the theme of this year's
Annual  Report -- it has become our  practice as we have  channeled  our efforts
toward  working  more closely with the  business  community  throughout  Chester
County. One such customer is the Coatesville Area School District.  We were able
to  present  them  with  alternatives  to  some  of  their  existing   financial
arrangements  and,  thanks to our new Cash Management  Sweep Account,  eliminate
trips and telephone calls to the Bank in order to transfer funds.


<PAGE>
      We have also been  instrumental  in the development of many new businesses
because of our ability to tailor financing  packages to individual needs.  We've
also helped long-established firms with their renovation or expansion plans.

      Such has  been the case of ECS  Underwriting,  Inc.,  a  company  that has
virtually led the way in specialized  insurance  programs since its inception in
1979.  ECS is also the  owner  of four  other  businesses  -- a copy  center,  a
security company,  a warehouse,  and a limousine service -- and was in need of a
facility to house them.  They also had hopes of  constructing  a day care center
exclusively  for use by their  employees'  families.  Knowing  this would take a
great deal of careful planning and customized 




[GRAPHIC-PHOTOGRAPH]
YOU CAN JUST HEAR THE  SMILES IN THE VOICES OF FIRST CALL  CENTER  STAFF  JOANNE
BRESLIN,  JACKIE PALMER,  ROSEMARY BRADY, AND SUSAN ROSATO.  THEY'RE PART OF THE
TEAM THAT MAKES BANKING AT FIRST FINANCIAL SUCH A PLEASANT EXPERIENCE.



[GRAPHIC-PHOTOGRAPH]
ED LAWRENCE AND WARD BRACELAND JOINED FORCES WITH ECS'S DAVID M. ROSENBERG, BILL
KRONENBERG,  NAMED CEO OF THE YEAR BY THE CHESTER COUNTY CHAMBER OF BUSINESS AND
INDUSTRY, AND FRANK L. PILIERO.



financing,  CEO  William  Kronenberg  III  and  his  partners  turned  to  First
Financial.  A respected,  well-established  company  dedicated to preserving our
environment  and a  community  bank with 36  consecutive  five-star  safety  and
soundness ratings seemed the perfect combination to undertake such a project.

      Turning  dreams  into  reality is what  First  Financial  does  best.  Our
commercial  lending team will put forth their best  efforts to develop  products
that are  best-suited  to our  customers'  needs.  Their  experience  and skill,
combined with the  willingness to take time to listen and consider every option,
assure that our business will always have the same goal: helping your business.


<PAGE>
Management's Discussion
and Analysis of Financial Condition
and Results of Operations

General

     The Company's income on a consolidated basis is derived  substantially from
its  investment  in its  subsidiary,  the Bank.  The largest  components  of the
Company's  total income and total  expenses are  interest.  Although the Company
continues to emphasize the development of non-interest  income,  such as service
charges and loan servicing  fees,  its earnings  still remain largely  dependent
upon its net interest income,  which is determined  principally by the Company's
interest   rate  spread   (the   difference   between   the  yields   earned  on
interest-earning assets,  primarily loans and securities,  and the rates paid on
interest-bearing  liabilities,  primarily  deposits  and  borrowings),  and  the
relative  amounts of such assets and  liabilities.  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.  In fiscal  1997,  the net yield on
interest-earning  assets  averaged  4.03% compared to 3.86% in 1996 and 3.73% in
1995. Fee income has also played an important  part in the Company's  profitable
operation. In fiscal 1997 service charges and fee income amounted to $977,100 as
compared to $933,000 in 1996 and $847,400 in 1995.

     The Company offers  residential and commercial real estate loans as well as
consumer  and  commercial  business  loans.  The  majority of these loans are to
customers within Chester County, Pennsylvania.  The ability of such customers to
honor  these  obligations  is  dependent,  to varying  degrees,  on the  overall
economic  performance  of this  diversified  region.  The Company  considers its
current allowance for loan losses to be adequate.

     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 1996 and $2.15 million in 1995.  The pre-tax effect
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.

Asset and Liability Management

     The  principal  objective of the Company's  asset and liability  management
function is to maximize the Company's net interest  margin while  maintaining an
appropriate  level  of  risk  given  the  Company's  business  focus,  operating
environment,  capital and liquidity  requirements  and  performance  objectives.
Through such  management,  the Company seeks to reduce the  vulnerability of its
operations  to changes  in  interest  rates and to manage the ratio of  interest
rate-sensitive  assets to interest  rate-sensitive  liabilities within specified
maturities or repricing  dates.  The Company's  actions in this regard are taken
under the guidance of the Asset-Liability  Management  Committee.  Interest rate
risk  is  derived  from  timing  differences  in the  repricing  of  assets  and
liabilities,  loan prepayments,  deposit withdrawals, and differences in lending
and funding rates. One measure of interest rate risk is the gap ratio,  which is
defined as the difference between the dollar volume of  interest-earning  assets
and interest-bearing liabilities maturing or repricing within a specified period
of time as a percentage of total assets.
<PAGE>
     The  Company's  asset and  liability  management  strategy  currently is to
emphasize the  origination of  adjustable-rate  mortgages,  short-term  consumer
loans, and  floating-rate  construction  loans and commercial real estate loans.
This  strategy has greatly  reduced the  Company's  vulnerability  to changes in
interest rates. As of June 30, 1997, $129.86 million,  or 41.2% of the Company's
interest-sensitive  assets are scheduled to reprice within a one-year period and
the Company's cumulative one-year interest rate gap was negative 9.6%. The table
on the following  page  summarizes  the  appropriate  contractual  maturities or
replacement   periods   of   the   Company's    interest-earning    assets   and
interest-bearing  liabilities as of June 30, 1997. Adjustable- and floating-rate
assets are included in the period in which  interest rates are next scheduled to
adjust,  rather than in the period for which they are due, and fixed-rate  loans
are  included in the  periods in which they are  anticipated  to be repaid.  The
analysis  on the  following  page  takes  into  consideration  the timing of the
repricing but does not take into consideration any restrictions on the magnitude
of the repricing interest-sensitive assets.

     Rates  of  interest  paid  on  deposits  are  priced  to  be   sufficiently
competitive in the Company's primary market area to meet its asset and liability
management  objectives and requirements.  In the past, the Company has generally
maintained a pricing program for its  certificate  accounts which entails paying
higher rates of interest on longer-term  certificates to encourage  customers to
invest in certificates of deposits for longer maturities. This strategy assisted
the Company in controlling its cost of funds and supported its goal of extending
the maturity of its liabilities. 


                                      12
<PAGE>
Operating Results

Interest Income (Taxable-Equivalent Basis)

     Interest income is analyzed on a tax-equivalent  basis, i.e., an adjustment
is made for analysis purposes only, to increase interest income by the amount of
savings of Federal  income  taxes,  which the Company  realizes by  investing in
certain tax-free municipal  securities and by making loans to certain tax-exempt
organizations.  In this way,  the  ultimate  economic  impact of  earnings  from
various assets can be more readily compared.

     Total  interest  income  increased to $22.86  million during fiscal 1997, a
$2.01 million or 9.6% increase over the comparable  prior period.  This increase
was primarily due to a $22.16 million  increase in the average  balance of loans
coupled  with a 9  basis-point  increase in the yield  earned on the loans.  The
increase in the yield is the result of the Company's  continual  effort to focus
its originations on higher-yielding loan products.  The increase in yield on the
loans was offset in part by a 44  basis-point  decrease to 5.84% in the yield on
investment securities and other investments during fiscal 1997.

     Total  interest  income  increased to $20.84  million during fiscal 1996, a
$1.65 million or 8.6% increase over the comparable  prior period.  This increase
was primarily due to a 42  basis-point  increase in the yield earned on the loan
portfolio to 8.40% and a corresponding  increase of $5.53 million in the average
balance  at June 30,  1996.  The  increase  in the  yield is the  result  of the
Company's  efforts  to focus  its  originations  on  higher-yielding  commercial
mortgages,  commercial  business  loans  and  consumer  loans  rather  than  the
lower-yielding  residential  mortgages.  To a lesser extent,  due to the smaller
balance,  the  increase in  interest  income  during  fiscal 1996 was due to the
increase  in  the  yield  on  the  Company's  investment  securities  and  other
investments by 54 basis points to 6.28% at June 30, 1996.
<PAGE>
<TABLE>
<CAPTION>
                                      Interest Rate Sensitivity Analysis at June 30, 1997
                                                    (Dollars in thousands)


                                                                 More Than       More Than       More Than          More Than
                                                              Three Months      Six Months       One Year         Three Years
                                              Three Months      Through           Through         Through           Through      
                                                or Less        Six Months         One Year       Three Years       Five Years
                                               ---------        ---------        ---------        ---------        ---------
<S>                                            <C>              <C>              <C>              <C>              <C>   
Interest-Earning Assets
  Loans (1)
    Adjustable and floating-rate
      mortgages (2) .....................      $  26,853        $  23,190        $  23,950        $  20,447        $   9,720      
    Balloons and fixed-rate mortgages (2)          4,436            2,509            4,908           23,282           23,972      
    Consumer (2)(3) .....................          7,554            1,099            2,268           10,051            8,230      
    Commercial ..........................          4,631              131              262            1,014              970      
  Securities and interest-bearing
     deposits (4) .......................         20,883            3,942            3,240            9,439            3,065      
                                               ---------        ---------        ---------        ---------        ---------
  Total interest-earning assets .........      $  64,357        $  30,871        $  34,628        $  64,233        $  45,957      
                                               ---------        ---------        ---------        ---------        ---------

Interest-Bearing Liabilities
  Savings accounts (5) ..................      $     999        $     999        $   2,002        $    --          $    --        
  NOW accounts (5) ......................            900              900            1,800             --               --        
  Money market accounts .................         29,887             --               --               --               --        
  Certificate accounts ..................         52,408           25,090           27,274           32,936           13,659      
  Securities sold under agreements
     to repurchase ......................             12             --               --               --               --        
  Borrowings ............................         17,546               46              920            4,358            5,864      
                                               ---------        ---------        ---------        ---------        ---------
  Total interest-bearing liabilities ....      $ 101,752        $  27,035        $  31,996        $  37,294        $  19,523      
                                               ---------        ---------        ---------        ---------        ---------
Cumulative excess of interest-
  earning assets to
  interest-bearing liabilities ..........      $ (37,395)       $ (33,559)       $ (30,927)       $  (3,988)       $  22,446      
                                               =========        =========        =========        =========        =========      
Cumulative ratio of interest
  rate-sensitive assets to
  interest rate-sensitive liabilities ...             63%              74%              81%              98%             110%     
                                               =========        =========        =========        =========        =========      
Cumulative difference as a
  percentage of total assets ............          (11.6%)          (10.4%)           (9.6%)           (1.2%)            6.9%     
                                               =========        =========        =========        =========        =========      

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                               More Than               
                                              Five Years        Total  
                                              ----------        -----  
<S>                                           <C>             <C>                              
Interest-Earning Assets                    
  Loans (1)                                
    Adjustable and floating-rate           
      mortgages (2) .....................     $    --         $ 104,160  
    Balloons and fixed-rate mortgages (2)        42,959         102,066  
    Consumer (2)(3) .....................        18,141          47,343  
    Commercial ..........................           855           7,863  
  Securities and interest-bearing                                        
     deposits (4) .......................        13,310          53,879  
                                              ---------       ---------  
                                                                         
  Total interest-earning assets .........     $  75,265       $ 315,311  
                                              ---------       ---------  
                                                                         
Interest-Bearing Liabilities                                             
  Savings accounts (5) ..................     $  22,474       $  26,474  
  NOW accounts (5) ......................        24,025          27,625  
  Money market accounts .................          --            29,887  
  Certificate accounts ..................         3,904         155,271  
  Securities sold under agreements                                       
     to repurchase ......................          --                12  
  Borrowings ............................         2,047          30,781  
                                              ---------       ---------  
  Total interest-bearing liabilities ....     $  52,450       $ 270,050  
                                              ---------       ---------  
Cumulative excess of interest-
  earning assets to                                                      
  interest-bearing liabilities ..........     $  45,261       $  45,261  
                                              =========       =========  
Cumulative ratio of interest
  rate-sensitive assets to                                               
  interest rate-sensitive liabilities ...           117%            117% 
                                              =========       =========  
Cumulative difference as a
  percentage of total assets ............          14.0%           14.0% 
                                              =========       =========  
                                             


  (1)Net of undisbursed loan proceeds.
  (2)Assumes market prepayment rates.
  (3)Includes home improvement, home equity, automobile and
     other consumer loans.
  (4)Includes investment securities, mortgage-backed securities and other
     interest-bearing deposits.
  (5)Balances distributed among the various repricing time intervals based on
     historical and anticipated repricing patterns.
</TABLE>

                                       13
<PAGE>
Interest Expense

     Total  interest  expense  increased to $11.50 million during fiscal 1997, a
$620,000 or 5.7% increase  over the  comparable  prior  period.  The increase in
interest  expense is  principally  attributable  to a $15.07  million  and $5.33
million  increase in the average balances of deposits and Federal Home Loan Bank
("FHLB") advances to $223.05 million and $20.65 million,  respectively,  at June
30, 1997.  Partially  offsetting the effect of increases in the average balances
of interest-bearing  liabilities were decreases in the average rate paid on such
liabilities to 4.72% from 4.87% for the fiscal year 1997 and 1996, respectively.
Such  declines  were due, in part,  to the Bank  lowering  the rates paid on its
interest-bearing  retail checking  accounts  combined with the Bank's successful
efforts in obtaining  low-costing or no-cost  deposits in the form of commercial
business  accounts.  In  addition,  during  fiscal 1997 the Bank  shortened  the
average maturity of its FHLB advance  portfolio which  consequently  reduced the
average rate paid.

     Total  interest  expense  increased to $10.88 million during fiscal 1996, a
$1.05 million or 10.7% increase over the comparable  prior period.  The increase
in interest expense is principally  attributable to a 46 basis-point increase in
the average rate paid on the  portfolio to 4.76%,  and, to a lesser  extent,  an
$8.27 million  increase in the average balance of deposits to $208.43 million at
June 30,  1996.  The increase in the rate paid on deposits was the result of the
upward  trend in market  interest  rates in the latter  half of fiscal  1995 and
early part of fiscal 1996 which  prompted  depositors  to lock into  longer-term
time deposits. In addition,  there was a continual shift in the deposit mix from
lower-costing money market and savings accounts to higher-costing time deposits.
Partially  offsetting the increase in interest expense was the decrease of $5.31
million at June 30, 1996,  over the comparable  period in the average balance of
FHLB advances and other borrowings. The rate paid on the borrowings increased 34
basis points to 6.24% at June 30, 1996.

Net Interest Income

     Net  interest  income  is  the  difference   between   interest  income  on
interest-earning  assets and interest expense on  interest-bearing  liabilities.
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.  The  increase  in net  interest  margin  from  1996 to 1997
reflects a greater increase in the yield earned on loans and securities than the
rates paid on deposits and borrowings.

Provision for Possible Loan Losses

     The Company's  provision  for possible loan losses was $523,413,  $339,800,
and  $454,700  during  the  respective  periods  of  1997  through  1995.  These
provisions  have been added to the Company's  allowance for possible loan losses
due to general economic conditions,  loan growth, and management's assessment of
the inherent risk of loss existing in the loan portfolio.  At June 30, 1997, the
allowance  for  possible  loan  losses  was $2.86  million or 1.10% of net loans
compared to $2.67 million or 1.18% of net loans at June 30, 1996.


<PAGE>
     The Company  establishes  provisions  for possible  loan losses,  which are
charged to  operations,  in order to maintain the allowance for loan losses at a
level  which is  deemed  to be  appropriate  based  upon,  among  other  things,
delinquency trends, the volume of non-performing loans, prior loss experience of
the portfolio, current economic conditions, and other relevant factors. Although
management  believes it has used the best information  available to it in making
such determinations,  and that the present allowance for possible loan losses is
adequate,  future adjustments to the allowance may be necessary,  and net income
may be adversely  affected if the circumstances  differ  substantially  from the
assumptions  used in  determining  the level of the  allowance for possible loan
losses. In addition,  various regulatory agencies,  as an integral part of their
examination  process,  periodically  review the Company's allowance for possible
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.

Other Operating Income

     Total other  income  increased  $201,000 or 17.9% to $1.32  million for the
year ended June 30,  1997,  from the  comparable  prior  period.  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  surrounding its main office in
order to expand its facilities to accommodate its growth. The rental income from


                                       14
<PAGE>
these  properties has  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,  from the comparable  prior period.  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 accounts 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.

Other Operating Expenses

     Excluding the $1.39 million  one-time SAIF assessment,  operating  expenses
totaled $7.80 million for the fiscal year 1997, an increase of $800,000 or 11.4%
over  the  prior  comparable  period.  The  one-time   assessment  was  part  of
legislation adopted to recapitalize the Savings  Association  Insurance Fund 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,  additional staff for
the Bank's newest branch office, Brandywine Square, and additional staff 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 comparable period. 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.

Income Taxes

     The Company  incurred  income tax expense of $757,400 during the year ended
June 30, 1997,  compared to $1.03 million during fiscal 1996. The primary reason
for the $274,700 decrease was due to reduced pre-tax earnings for fiscal 1997 as
the result of the one-time SAIF special assessment.
<PAGE>
     The Company incurred income tax expense of $1.03
million during the year ended June 30, 1996,  compared to $869,000 during fiscal
1995. The primary  reasons for the increase in income tax expense was due to the
increase in income  before  taxes in fiscal 1996 and due to the  recognition  in
fiscal  1995 of an  $82,000  Pennsylvania  tax credit  related to the  Company's
investment in its Airport Village  branch.  The branch is located in the Greater
Coatesville Area Industrial  Corridor and Enterprise Zone, which is an area that
has been designated as part of a state program in which investment, promotion of
jobs, and economic revitalization are encouraged.

Capital Resources

     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  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 from $223.96
million at June 30, 1996, to $257.04 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  from  $39.54  million to $53.88
million at June 30, 1996 and 1997, respectively.

     Stockholders'  equity  increased to $27.06  million at June 30, 1997,  from
$25.56  million  at June 30,  1996,  as a result of net  income  earned of $1.93
million  during  fiscal  1997,  the  reduction in the  principal  balance of the
Employee  Stock  


                                       15
<PAGE>
Ownership  Plan  ("ESOP")  debt by  $177,250  (See  Note 13 of the  Notes to the
Consolidated Financial Statements), proceeds from stock options exercised during
the 1997 period of $337,000,  proceeds  totaling $85,400 from the sale of common
stock in  connection  with the Company's  Dividend  Reinvestment  Plan,  and the
recognition  of a net unrealized  gain on securities  available for sale, net of
taxes, of $99,900.  The increase in  stockholders'  equity was offset in part by
the payment of cash  dividends  of $760,500  and the  repurchase  of $348,700 of
common stock, as well as the payment of $15,900 in lieu of fractional  shares in
connection with the 5% stock dividend and five-for-four  stock split paid during
fiscal 1997.

Asset Quality

     Non-performing  assets are  comprised of  non-performing  loans and REO and
totaled $748,000 at June 30, 1997, compared to $2.34 million at June 30, 1996.

     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.
Non-performing  assets to total assets and non-performing  loans to total assets
were  .23% at June  30,  1997,  compared  to .86%  and  .81% at June  30,  1996.
Management's  commitment to improving asset quality through increased collection
efforts has contributed to the decrease in non-performing loans.  Non-performing
loans of $748,000 at June 30, 1997, consisted of five residential mortgage loans
in the amount of $417,000 and $331,000 in consumer loans.

     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,  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.




[GRAPHIC-GRAPH NON-PERFORMING ASSETS AS A PERCENT OF TOTAL ASSETS]



Liquidity and Committed Resources

     The  Company's   primary   sources  of  funds  are  deposits,   borrowings,
repayments,  prepayments and maturities of outstanding loans and mortgage-backed
securities,  sales of  assets  available  for  sale,  maturities  of  investment
securities and other short-term investments, and funds provided from operations.
While  scheduled  loan and  mortgage-backed  securities  repayments and maturing
investment  securities and  short-term  investments  are relatively  predictable
sources of funds,  deposit flows and loan prepayments are greatly  influenced by
the movement of interest rates in general,  economic conditions and competition.
The Company  manages the pricing of its  deposits to maintain a deposit  balance
deemed appropriate and desirable.  Although the Company's deposits represent the
majority of its total liabilities, the Company has also utilized other borrowing
sources,  namely FHLB  advances.  In addition to its ability to obtain  advances
from  the  FHLB  under  several  different  credit  programs,  the  Company  has
established  a line of credit  with the FHLB,  in an amount not to exceed 10% of
the Company's maximum borrowing  capacity,  which was $13.80 million at the time
the commitment was executed,  and subject to certain  conditions,  including the
holding of a  pre-determined  amount of FHLB stock as  collateral.  This line of
credit is used from time to time for  liquidity  purposes.  At June 30, 1997 and
1996, there were no balances outstanding on the line of credit.
<PAGE>
     Liquidity  management  is  both a  daily  and  long-term  function.  Excess
liquidity is generally invested in short-term investments such as FHLB overnight
deposits.  On a longer-term basis, the Company maintains a strategy of investing
in various  lending and investment  securities  products.  During the year ended
June 30,  1997,  the Company  used its sources 


                                       16
<PAGE>
of funds to primarily fund loan commitments and maintain a substantial portfolio
of investment  securities,  and to meet its ongoing  commitments to pay maturing
savings certificates and savings  withdrawals.  As of June 30, 1997, the Company
had $5.81  million in  commitments  to fund loan  originations.  The majority of
these  commitments  are  anticipated  to be  funded by  December  31,  1997.  In
addition,  as of June 30, 1997, the Company had undisbursed loans in process for
construction  loans of $10.09 million and $14.23 million in undisbursed lines of
credit.  In addition,  the Company has issued  $71,000 in commercial  letters of
credit fully secured by deposit  accounts or real estate.  The management of the
Company believes that the Company has adequate  resources,  including  principal
prepayments  and  repayments of loans and  investment  securities  and borrowing
capacity, to fund all of its commitments to the extent required.

     For  regulatory  purposes,  liquidity  is  defined  as a ratio  of cash and
certain  marketable  securities that can be readily converted into cash to total
deposits and short-term borrowings.  At June 30, 1997, liquidity for the Bank as
defined under these guidelines was 12.68%, which exceeded the regulatory minimum
requirement of 5.0%.

Impact of Inflation and Changing Prices

     The Consolidated Financial Statements and Related Notes presented elsewhere
herein have been  prepared in  accordance  with  generally  accepted  accounting
principles  ("GAAP")  which require the  measurement  of financial  position and
operating results in terms of historical dollars without  considering changes in
the relative  purchasing power of money over time due to inflation.  Unlike many
industrial  companies,  substantially  all of the assets and  liabilities of the
Company on a consolidated  basis are monetary in nature.  As a result,  interest
rates  have a more  significant  impact on the  Company's  performance  than the
general level of inflation.  Over a short period of time, interest rates may not
necessarily move in the same direction or with the same magnitude of inflation.

Other Information

Description of Stock

     The holders of the Common Stock of the Holding  Company  possess  exclusive
voting  rights in the  corporation.  Each  holder  of shares of Common  Stock is
entitled to one vote for each share  held,  in  accordance  with the charter and
bylaws,  including  voting on the election of  directors.  Of the 15.63  million
shares of Common Stock authorized by the Holding  Company,  13.55 million shares
remain unissued. In addition, none of the 5.00 million shares of Preferred Stock
authorized has been issued.

Dividend Policy

     The Board of Directors of Chester Valley  Bancorp Inc.  intends to continue
the policy of paying  dividends when the directors deem it prudent to do so. The
Board of Directors  will  consider  payment of  dividends on a quarterly  basis,
after giving  consideration to the level of the profit for the prior quarter and
other  relevant  aspects.  On August 20,  1997,  the Board of  Directors  of the
Holding Company declared an $.11 per share cash dividend and a 5% stock dividend
based on the  financial  results of the quarter  ended June 30,  1997.  The cash
dividend  will be  calculated  on shares held  before the  issuance of the stock
dividend.  During  fiscal  1997  and 1996 the  Holding  Company  paid a total of
$760,465 and $573,030,  respectively,  in cash dividends and a 5% stock dividend
in each year,  along with a five-for-four  stock split effected in the form of a
<PAGE>
dividend in fiscal 1997.  Cash dividends from the Holding  Company are dependent
upon dividends  paid to it by First  Financial,  which,  in turn, are subject to
certain  restrictions  established by federal  regulators and Pennsylvania  law.
(See Note 10 to Notes to Consolidated Financial Statements.)

Market Information

     As of  August 1,  1997,  the  Holding  Company's  Common  Stock was held by
approximately  1,600  shareholders,  including  shares held in nominee name. Any
broker or any NASDAQ  member can be contacted  for the latest  quotations of the
Holding Company's Common Stock. Upon the  reorganization  into a holding company
structure  in May 1990,  the  stock of the  Holding  Company  was  approved  for
inclusion in NASDAQ's  National  Market  System.  The Holding  Company's  NASDAQ
symbol is "CVAL".  The transfer  agent for the stock is American  Stock Transfer
and Trust Company,  New York, New York.  During fiscal 1997 and 1996 the Holding
Company paid  dividends of $.37 and $.28 per share,  respectively,  adjusted for
stock dividends and stock splits during those periods.

     The following  table (on the next page) sets forth the high and low closing
prices for the periods described. For comparability purposes, the closing prices
shown below have been adjusted to reflect the 5% stock  dividends paid in fiscal
1997 and 1996 and the five-for-four stock split paid in fiscal 1997.


                                       17
<PAGE>
Fiscal 1997                       Low                  High
--------------------------------------------------------------------------------

     First Quarter         $     13.71            $     16.00
     Second Quarter              14.60                  16.00
     Third Quarter               16.50                  17.40
     Fourth Quarter              16.50                  21.75

Fiscal 1996                       Low                  High
--------------------------------------------------------------------------------

     First Quarter         $     14.48           $     15.60
     Second Quarter              13.90                 15.24
     Third Quarter               13.90                 15.24
     Fourth Quarter              13.90                 14.48




[GRAPHIC-GRAPH CVAL 5 YEAR PRICE HISTORY]




Recent Accounting Pronouncements

     In October 1995 the Financial  Accounting  Standards  Board ("FASB") issued
Statement of Financial  Accounting  Standard  ("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.
<PAGE>
     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 statement 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.  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.



                                       18
<PAGE>
     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.


Summarized  Quarterly  Financial  Data For  Fiscal  1997  and  1996  (Unaudited)
(Dollars in thousands except per share data)

<TABLE>
<CAPTION>
                                                        1997                                            1996
                                   ---------------------------------------------    -------------------------------------------
                                    First        Second       Third       Fourth     First       Second      Third       Fourth
                                   Quarter       Quarter     Quarter     Quarter    Quarter      Quarter    Quarter     Quarter
                                   -------       -------     -------     -------    -------      -------    -------     -------
<S>                                <C>          <C>         <C>         <C>         <C>         <C>         <C>         <C>      
Interest income ..............     $ 5,379      $ 5,606     $ 5,570     $ 6,014     $ 5,043     $ 5,155     $ 5,188     $ 5,180
Interest expense .............       2,745        2,852       2,864       3,042       2,701       2,736       2,756       2,682
                                   -------      -------     -------     -------     -------     -------     -------     -------
Net interest income ..........       2,634        2,754       2,706       2,972       2,342       2,419       2,432       2,498
Provision for possible loan
     losses ..................          96          164          97         166          92          93          62          93
                                   -------      -------     -------     -------     -------     -------     -------     -------
Net interest income after
     provision for possible
     loan losses .............       2,538        2,590       2,609       2,806       2,250       2,326       2,370       2,405
Other income .................         369          307         296         352         333         288         233         269
Operating expenses (1) .......       3,335        1,963       1,901       1,985       1,723       1,746       1,723       1,811
                                   -------      -------     -------     -------     -------     -------     -------     -------
Income before income taxes ...        (428)         934       1,004       1,173         860         868         880         863
Income tax expense ...........        (227)         276         275         433         264         267         239         262
                                   -------      -------     -------     -------     -------     -------     -------     -------

Net income ...................     $  (201)     $   658     $   729     $   740     $   596     $   601     $   641     $   601
                                   =======      =======     =======     =======     =======     =======     =======     =======
Earnings per common share (2):
   Primary ...................     $ (0.10)     $  0.32     $  0.35     $  0.36     $  0.29     $  0.29     $  0.31     $  0.29
                                   =======      =======     =======     =======     =======     =======     =======     =======
Fully diluted ................     $ (0.10)     $  0.32     $  0.35     $  0.36     $  0.29     $  0.29     $  0.31     $  0.29
                                   =======      =======     =======     =======     =======     =======     =======     =======
<PAGE>

(1) The first  quarter of fiscal  1997  includes  the  one-time  FDIC  insurance
assessment  of $1.39  million. 
(2) Earnings per share have been restated to reflect the effects of the 5% stock
dividend  paid in September  1996 and the March 1997  five-for-four  stock split
effected in the form of a dividend.
</TABLE>
                                       19
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements Of Financial Condition
                                                                                             At June 30,
                                                                                --------------------------------
                                                                                      1997               1996
                                                                                -------------      -------------
<S>                                                                             <C>                <C>
Assets
  Cash in banks ...........................................................     $   2,609,904      $   1,527,934
  Interest-bearing deposits ...............................................         6,843,952          8,784,471
  Investment securities available for sale ................................        27,566,134          6,159,310
  Investment securities (market value June 30, 1997, $19,392,778
     June 30, 1996, $24,246,313) ..........................................        19,468,945         24,593,285
  Loans receivable, less allowance for possible loan
     losses of $2,855,003 and $2,667,104 at June 30,
     1997 and 1996,respectively ...........................................       257,040,006        223,963,171
  Loans held for sale .....................................................           105,888              ---
  Accrued interest receivable .............................................         2,107,567          1,615,579
  Real estate owned .......................................................              --              121,000
  Property and equipment - net ............................................         4,723,882          4,322,657
  Other assets ............................................................         3,206,534          1,844,522
                                                                                -------------      -------------
     Total Assets .........................................................     $ 323,672,812      $ 272,931,929
                                                                                =============      =============


Liabilities and Stockholders' Equity 

Liabilities:
  Deposits ................................................................     $ 260,750,311      $ 228,205,557
  Securities sold under agreements to repurchase ..........................            12,086              ---
  Advance payments by borrowers for
     taxes and insurance ..................................................         2,998,681          3,015,094
  Employee Stock Ownership Plan
     ("ESOP") debt ........................................................           333,490            510,740
  Federal Home Loan Bank advances .........................................        30,198,247         13,972,277
  Other borrowings ........................................................           249,165              ---
  Accrued interest payable ................................................           788,259            653,358
  Other liabilities .......................................................         1,277,962          1,010,508
                                                                                -------------      -------------
     Total Liabilities ....................................................       296,608,201        247,367,534

  Commitments and contingencies (Note 8)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                             <C>                <C>
  Stockholders' Equity:
  Preferred stock - $1.00 par value; 5,000,000 shares
     authorized; none issued
  Common stock - $1.00 par value; 15,625,000 shares
     authorized; 2,072,083 and 1,994,352 shares issued at
     June 30, 1997 and June 30, 1996, respectively ........................         2,072,083          1,994,352
  Additional paid-in capital ..............................................        12,772,488         11,261,628
  Common stock acquired by ESOP ...........................................          (333,490)          (510,740)
  Retained earnings - partially restricted ................................        12,749,503         13,109,850
  Net unrealized gain (loss) on securities available for sale, net of taxes             2,714            (97,222)
                                                                                -------------      -------------
                                                                                   27,263,298         25,757,868

Treasury  stock,  at cost  (13,213 and 14,555  shares at
  June 30, 1997 and June 30, 1996, respectively) ..........................          (198,687)          (193,473)
                                                                                -------------      -------------
     Total Stockholders' Equity ...........................................        27,064,611         25,564,395
                                                                                -------------      -------------
     Total Liabilities and Stockholders' Equity ...........................     $ 323,672,812      $ 272,931,929
                                                                                =============      =============
</TABLE>

                   Chester Valley Bancorp Inc. and Subsidiary
           See accompanying notes to consolidated financial statements

                                       20
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements Of Operations

                                                                       Year Ended June 30,
                                                            1997             1996              1995
                                                        -----------      -----------       -----------
<S>                                                     <C>              <C>               <C>
Interest Income:
  Loans ..........................................      $20,388,526      $18,317,741       $16,979,158
  Mortgage-backed securities .....................          227,293          142,163           145,681
  Interest-bearing deposits ......................          238,251          340,944           155,121
  Investment securities
     Taxable .....................................        1,104,410        1,151,633           865,539
     Non-taxable .................................          610,382          613,661           736,507
                                                        -----------      -----------       -----------
     Total interest income .......................       22,568,862       20,566,142        18,882,006
                                                        -----------      -----------       -----------

Interest Expense:
  Deposits .......................................       10,285,725        9,918,713         8,613,137
  Securities sold under agreements to repurchase .           51,801             --                --
  Short-term borrowings ..........................          382,962          199,252           598,477
  Long-term borrowings ...........................          782,218          757,481           618,088
                                                        -----------      -----------       -----------

     Total interest expense ......................       11,502,706       10,875,446         9,829,702
                                                        -----------      -----------       -----------

Net interest income ..............................       11,066,156        9,690,696         9,052,304
Provision for possible loan losses ...............          523,413          339,800           454,700
                                                        -----------      -----------       -----------
Net interest income after
  provision for possible loan losses .............       10,542,743        9,350,896         8,597,604
                                                        -----------      -----------       -----------

Other Income:
  Service charges and fees .......................          977,145          932,986           847,427
  Gain (loss) on sale of loans ...................            2,445           21,541            (1,147)
  Gain on sale of securities available for sale ..          156,451          147,978               -- 
  Gain (loss) on sale of real estate owned .......            2,407          (51,554)           12,809
  Other ..........................................          185,621           72,234           185,737
                                                        -----------      -----------       -----------

     Total other income ..........................        1,324,069        1,123,185         1,044,826
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                     <C>              <C>               <C>
Operating Expenses:
  Salaries and employee benefits .................        3,740,854        3,252,029         3,054,973
  Occupancy ......................................          877,793          737,670           684,264
  Furniture and equipment ........................          616,645          560,362           495,450
  Data processing ................................          605,149          532,136           544,939
  SAIF special assessment ........................        1,386,516             --                --
  Deposd insurance premiums ......................          309,689          501,231           473,269
  Other ..........................................        1,647,072        1,419,703         1,367,431
                                                        -----------      -----------       -----------

     Total operating expenses ....................        9,183,718        7,003,131         6,620,326
                                                        -----------      -----------       -----------
  Income before income taxes .....................        2,683,094        3,470,950         3,022,104
  Income tax expense .............................          757,434        1,032,104           869,158
                                                        -----------      -----------       -----------

     Net Income ..................................      $ 1,925,660      $ 2,438,846       $ 2,152,946
                                                        ===========      ===========       ===========

Earnings per common share (1):
  Primary ........................................      $      0.93      $      1.18      $       1.04
  Fully diluted ..................................      $      0.93      $      1.18      $       1.04

Weighted average number of shares outstanding (1):
  Primary ........................................        2,061,557        2,073,044         2,074,477
  Fully diluted ..................................        2,064,711        2,074,141         2,074,915

</TABLE>
(1)  Earnings  per share  and  weighted  average  shares  outstanding  have been
restated to reflect the effects of the 5% stock dividends paid in September 1996
and 1995, and the March 1997 five-for-four stock split effected in the form of a
dividend.

                   Chester Valley Bancorp Inc. and Subsidiary
          See accompanying notes to consolidated financial statements.

                                     21
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>

                                                                                        Net Unrealized
                                                               Common                     Gain (Loss)
                                             Additional        Stock                     on Securities                  Total       
                               Common         Paid-in         Acquired       Retained      Available     Treasury    Stockholders'  
                               Stock          Capital         by ESOP        Earnings      for Sale       Stock         Equity      
                               -----          -------         -------        --------      --------       -----         ------  
<S>                         <C>           <C>               <C>           <C>                 <C>       <C>           <C>
Balance at
  June 30, 1994 .........   $1,851,980    $  8,587,046      $ (859,812)   $ 12,477,409        $ --      $(186,595)    $ 21,870,028
Net income ..............                                                    2,152,946                                   2,152,946
Cash dividends paid .....                                                     (471,346)                                   (471,346)
Pnncipal payments
  on ESOP debt ..........                                      167,901                                                     167,901
Issuance of stock
  dividend ..............       51,527       1,301,493                      (1,476,489)                   123,469             --
Cash payment for
  fractional shares .....                                                      (10,027)                                    (10,027)
Stock options
  exercised .............        4,489         (20,733)                                                   133,351          117,107
Sale of common stock
  under the dividend
  reinvestment plan .....        5,450         129,815                                                     64,678          199,943
Stock repurchased as
  treasury stock ........                                                                                (242,140)        (242,140)
                            ----------    ------------      ----------    ------------       --------   ---------      ----------- 
Balance at
  June 30, 1995 .........    1,913,446       9,997,621        (691,911)     12,672,493          --       (107,237)      23,784,412
Net income ..............                                                    2,438,846                                   2,438,846
Cash dividends paid .....                                                     (573,030)                                   (573,030)
Pnncipal payments
  on ESOP debt ..........                                      181,171                                                     181,171
Issuance of stock
  dividend ..............       74,110       1,343,244                      (1,417,354)                                       --
Cash payment for
  fractional shares .....                                                      (11,105)                                    (11,105)
Stock options
  exercised .............        4,342        (110,681)                                                   201,675           95,336
Sale of common stock
  under the dividend
  reinvestment plan .....        2,454          31,444                                                    213,l15          247,013
Stock repurchased as
  treasury stock ........                                                                                (501,026)        (501,026)
Change in unrealized gain
  (loss) on securities
  available for sale ....                                                                     (97,222)                     (97,222)
                            ----------    ------------      ----------    ------------       --------   ---------      -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                         <C>           <C>               <C>           <C>                 <C>       <C>           <C>
Balance at
  June 30, 1996 .........    1,994,352      11,261,628        (510,740)     13,109,850        (97,222)   (193,473)      25,564,395
Net income ..............                                                    1,925,660                                   1,925,660
Cash dividends paid .....                                                     (760,465)                                   (760,465)
Principal payments
  on ESOP debt ..........                                      177,250                                                     177,250
Issuance of stock
  dividend ..............       77,731       1,438,024                      (1,515,755)                                       --
Cash payment for
  fractional shares .....                       (6,140)                         (9,787)                                    (15,927)
Stock options
   exercised ............                       78,958                                                    258,083          337,041
Sale of common stock
  under the dividend
  reinvestment plan .....                           18                                                     85,382           85,400
Stock repurchased as
  treasury stock ........                                                                                (348,679)        (348,679)
Change in unrealized gain
  (loss) on securities
  available for sale ....                                                                      99,936                       99,936
                            ----------    ------------      ----------    ------------       --------   ---------      ----------- 
Balance at
  June 30, 1997 .........   $2,072,083    $ 12,772,488      $ (333,490)   $ 12,749,503       $  2,714   $(198,687)     $ 27,064,611
                            ==========    ============      ==========    ============       ========   =========      ============


                   Chester Valley Bancorp Inc. and Subsidiary
          See accompanying notes to consolidated financial statements.
</TABLE>
                                     22
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements Of Cash Flows

                                                                                                     Year Ended June 30,
                                                                                    -----------------------------------------------
                                                                                         1997              1996             1995
                                                                                    ------------     ------------     ------------
<S>                                                                                 <C>             <C>              <C>
Cash flows from operating activties:
Net income .....................................................................    $ 1 ,925,660    $   2,438,846    $   2,152,946
Add (deduct) items not affecting cash flows from operating activities
 Depreciation ..................................................................         567,589          548,367          504,372
 Provision for possible loan losses ............................................         523,413          339,800          454,700
 Increase in deferred income taxes .............................................        (140,485)         (84,385)         (35,373)
 Gain on sale of securities available for sale .................................        (156,451)        (147,978)            --
 Loss(gain)on sale of loans ....................................................          (2,445)         (21,541)           1,147
 Loss (gain) on sale of real estate owned ......................................          (2,407)          51,554          (12,809)
 Gain on sale of land held for development .....................................            --               --           (100,000)
 Gain on disposal of property and equipment ....................................            --               --            (10,786)
 Amortization of net deferred loan fees ........................................        (537,548)        (530,570)        (629,686)
 Amortization of discounts and premiums ........................................           6,742            3,474           21,441
 Increase in accrued interest receivable .......................................        (491,988)        (143,137)        (211,162)
 Increase in other assets ......................................................      (1,221,527)        (178,794)         (94,811)
 Increase in other liabilities .................................................         267,454           71,010          203,769
 Increase (decrease) in accrued interest payable ...............................         134,901          (38,852)         147,403
                                                                                    ------------     ------------     ------------ 
Net cash flows from operating activities .......................................         872,908        2,307,794        2,391,151
                                                                                    ------------     ------------     ------------ 

Cash flows from investment activities:
 Capital expenditures ..........................................................        (968,814)        (408,052)        (631,903)
 Proceeds from sale of property and equipment ..................................            --               --            145,736
 Net increase in loans .........................................................     (34,923,710)      (5,937,167)     (27,959,616)
 Proceeds from sale of loans ...................................................       1,257,348        2,866,072        1,072,988
 Principal receipts on mortgage-backed securities ..............................         269,641          362,721          273,942
 Proceeds from real estate owned ...............................................         571,834          312,121        1,150,793
 Disbursements for real estate owned ...........................................            --               --            (14,089)
 Increase in investment-land held for development ..............................            --               --            (18,831)
 Purchase of investment securities .............................................        (115,645)      (7,013,176)     (19,718,522)
 Proceeds from maturities and calls of investment securities ...................       4,968,273        5,144,040       25,213,205
 Purchase of securities available for sale .....................................    (124,134,642)     (84,940,233)            --
 Proceeds from sale of securities available for sale ...........................     103,031,326       81,976,223             --
 Decrease in securities purchased under agreements to resell, net ..............            --               --             12,216
                                                                                    ------------     ------------     ------------ 
Net cash flows in investment activities ........................................     (50,044,389)      (7,637,451)     (20,474,081)
                                                                                    ------------     ------------     ------------ 
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                                 <C>             <C>              <C>
Cash flows from financing activities:
 Net increase in deposits before interest credited .............................      23,847,975        1,753,642        5,989,372
 Interest credited to deposits .................................................       8,696,779        8,471,186        7,189,084
 Proceeds from securities sold under agreements to repurchase ..................          12,086             --               --
 Proceeds from FHLB advances ...................................................      29,914,500        2,247,800        7,753,364
 Repayments of FHLB advances ...................................................     (13,688,530)      (3,372,897)      (5,022,195)
 Proceeds from other borrowings ................................................         249,165             --               --
 Net increase (decrease) in advance payments by borrowers for
   taxes and insurance .........................................................         (16,413)        (159,026)         401,177
 Cash dividends on common stock ................................................        (760,465)        (573,030)        (471,346)
 Repayments of principal on ESOP debt ..........................................        (177,250)        (181,171)        (167,901)
 Stock repurchased as treasury stock ...........................................        (348,679)        (501,026)        (242,140)
 Payment for fractional shares .................................................         (15,927)         (11,105)         (10,027)
 Stock options exercised .......................................................         337,041           95,336          117,107
 Reduction of common stock acquired by ESOP ....................................         177,250          181,171          167,901
 Sale of common stock under the dividend reinvestment plan .....................          85,400          247,013          199,943
                                                                                    ------------     ------------     ------------ 
Net cash flows from financing activities .......................................      48,312,932        8,197,893       15,904,339
                                                                                    ------------     ------------     ------------ 

Net increase (decrease) in cash                                                         (858,549)       2,868,236       (2,178,591)

 Cash and cash equivalents:                                                        
                                                                                    
 Beginning of period ...........................................................      10,312,405        7,444,169        9,622,760
                                                                                    ------------     ------------     ------------
 End of period .................................................................   $   9,453,856    $  10,312,405    $   7,444,169
                                                                                   =============    =============    =============
Supplemental disclosures:                                                          
 Cash payments during the year for
                                                                                   
  Taxes ........................................................................   $     757,000    $   1,196,000    $     640,000
                                                                                   =============    =============    =============
  Interest .....................................................................   $  11,367,805    $  10,919,771    $   9,682,299
                                                                                   =============    =============    =============
Non cash items:                                                                    
                                                                                   
Acquistion of real estate in settlement of loans ...............................   $     448,427    $     328,000    $     396,000
                                                                                   =============    =============    =============
Stock dividend issued ..........................................................   $   1,515,755    $   1,417,354    $   1,476,489
                                                                                   =============    =============    =============
Transfer of investment securities to investment securities available for sale ..   $        --      $   3,191,864    $        --  
                                                                                   =============    =============    =============
Net unrealized gain (loss) on investment securities available for sale .........   $     151,721    $    (147,307)   $        --  
                                                                                   =============    =============    =============
Tax effect on unrealized gain (loss) on investment securities available for sale   $      51,791    $     (50,085)   $        --  
                                                                                   =============    =============    =============
</TABLE>
                   Chester Valley Bancorp Inc. and Subsidiary                   
          See accompanying notes to consolidated financial statements.

                                       23

<PAGE>
Notes To Consolidated Financial Statements


1 - Summary of Significant Accounting Policies

Business

      Chester  Valley  Bancorp Inc. (the "Holding  Company") is a unitary thrift
holding  company,  incorporated  in the  Commonwealth  of Pennsylvania in August
1989.  The  business of Chester  Valley  Bancorp Inc.  and its  subsidiary  (the
"Company") consists of the operations of First Financial Bank ("First Financial"
or the "Bank"),  a  Pennsylvania-chartered  stock  savings and loan  association
founded  in  1922.  The  Bank  provides  a wide  range of  banking  services  to
individual and corporate  customers  through its branch banks in Chester County,
Pennsylvania.  All of the  branches are full  service and offer  commercial  and
retail  products.  These products include checking  accounts  (non-interest  and
interest-bearing),  savings  accounts,  certificates of deposit,  commercial and
installment  loans, real estate mortgages,  and home equity loans. The Bank also
offers ancillary services that complement these products. The Bank is subject to
competition  from other financial  institutions and other companies that provide
financial services. The Company is subject to the regulations of certain federal
and state  agencies and  undergoes  periodic  examinations  by those  regulatory
authorities.

Principles of Consolidation and Presentation

      The accompanying consolidated financial statements include the accounts of
Chester Valley Bancorp Inc., its wholly-owned  subsidiary,  First Financial Bank
and its wholly-owned subsidiary,  D&S Service Corp., which owns D&F Projects and
Wildman  Projects,  Inc.,  both of  which  are  wholly-owned  subsidiaries.  All
material  inter-company  balances  and  transactions  have  been  eliminated  in
consolidation.  Prior period amounts are reclassified  when necessary to conform
with the current year's presentation.

      The Company follows  accounting  principles and reporting  practices which
are in accordance with generally accepted  accounting  principles.  In preparing
the consolidated financial statements,  management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the  statement of financial  condition and revenues and expenses for
the period.  Actual  results could differ  significantly  from those  estimates.
Material  estimates that are particularly  susceptible to significant  change in
the near-term  relate to the  determination of the allowance for loan losses and
the valuation of real estate owned.  Management  believes that the allowance for
loan  losses  and the  valuation  of real  estate  owned are  adequate.  Various
regulatory  agencies,   as  an  integral  part  of  their  examination  process,
periodically  review the Company's  allowance for loan losses and  valuations of
real estate owned. Such agencies may require the Bank to recognize  additions to
the allowance or adjustments to the valuations  based on their  judgments  about
information available to them at the time of their examination.

Cash and Cash Equivalents

      For the purpose of the  consolidated  statements  of cash flows,  cash and
cash  equivalents  include cash and  interest-bearing  deposits with an original
maturity of generally three months or less.
<PAGE>
Investment Securities

      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 taxes, being reflected as adjustments to
equity.

      Investment  securities  held for investment are carried at cost,  adjusted
for  amortization  of premiums and  accretion of discounts  using a method which
approximates  a level yield,  based on the Company's  intent and ability to hold
the  securities  until  maturity.  At the time of purchase,  the Company makes a
determination on whether or not it will hold the investments to maturity,  based
upon an  evaluation  of the  probability  of the  occurrence  of future  events.
Investment  securities  which the Company  believes  may be involved in interest
rate risk, liquidity, or other asset/liability  management decisions which might
reasonably  result  in such  securities  not  being  held  until  maturity,  are
classified as available for sale. If investment securities are sold, any gain or
loss is  determined  by specific  identification  and reflected in the operating
results for the period.

Allowance for Possible Loan Losses

      The  allowance  for  possible  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
possible  loan losses  which is charged to  operations.  Loan losses are charged
directly  against the allowance and recoveries on previously  charged-off  loans
are added to the allowance.


                                       24
<PAGE>
      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  periods ended June 30, 1997 and 1996, 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  below.  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.

Loans, Loan Origination Fees and Uncollected Interest

      Loans  (other  than  loans  held for  sale)  are  recorded  at cost net of
unearned  discounts,  deferred  fees and  allowances.  Discounts and premiums on
purchased  loans are  amortized  using the  interest  method over the  remaining
contractual  life  of the  portfolio,  adjusted  for  actual  prepayments.  Loan
origination fees and certain direct origination costs are deferred and amortized
over the life of the related loans as an adjustment of the yield on the loans.

      Uncollected  interest  receivable on loans is accrued to income as earned.
Non-accrual  loans are loans on which the accrual of interest has ceased because
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 on such loans is not accrued  until the  financial  condition and payment
record of the borrower once again demonstrate the ability to service the debt.

Loans Held for Sale

      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). Loans held for sale
are carried at the lower of  aggregate  cost or fair value,  with any  resulting
unrealized  loss  included  in other  income for the period.  Realized  gains or
losses are included in other income for the period.

Real Estate Owned ("REO")

      Real estate acquired through foreclosure or by deed in lieu of foreclosure
is  classified  as REO.  REO is carried at the lower of cost (lesser of carrying
value of the loan or fair value of the property at date of  acquisition) or fair
value less selling expenses. Costs relating to the development or improvement of
the property are capitalized; holding costs are charged to expense.

Property and Equipment

      Property and equipment are stated at cost, less accumulated  depreciation.
Depreciation  is computed  using the  straight-line  method  over the  estimated
useful lives of the assets.  When assets are retired or  otherwise  disposed of,
<PAGE>
the cost and related accumulated depreciation are removed from the accounts. The
cost of  maintenance  and repairs is charged to expense as incurred and renewals
and betterments are capitalized.

Deferred Income Taxes

      The  Company  accounts  for  income  taxes  under the asset and  liability
method.  Deferred tax assets and  liabilities  are recognized for the future tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases and operating loss and tax credit  carryforwards.  Deferred tax assets and
liabilities  are measured  using enacted tax rates  expected to apply to taxable
income in the years in which  those  temporary  differences  are  expected to be
recovered  or settled.  The effect on deferred tax assets and  liabilities  of a
change in tax rates is  recognized  in income in the period  that  includes  the
enactment date.

Earnings Per Common Share and Common Equivalent Share

      Earnings  per share have been  calculated  based on the  weighted  average
number of shares of common  and common  equivalent  shares  outstanding  for the
respective  periods.  Stock options are considered  common stock equivalents and
are included in the  computation of the number of  outstanding  shares using the
treasury  stock  method.   Earnings  per  share  and  weighted   average  shares
outstanding  have been adjusted to reflect the effects of the 5% stock dividends
paid in September  1996 and 1995 and the March 1997  five-for-four  stock split,
effected in the form of a dividend.


                                       25
<PAGE>
2 - Investment Securities

Investment secunties are summarized as follows:
<TABLE>
<CAPTION>
                                                                            At June 30,
                           --------------------------------------------------------------------------------------------------------
                                                        1997                                              1996
                           ---------------------------------------------------- ---------------------------------------------------
                                        Gross          Gross         Estimated                    Gross         Gross     Estimated
                          Amortized    Unrealized   Unrealized        Market       Amortized    Unrealized    Unrealized    Market
                             Cost        Gains        Losses          Value          Cost         Gains         Losses      Value
                             ----        -----        ------          -----          ----         -----         ------      -----
<S>                     <C>             <C>         <C>          <C>            <C>              <C>       <C>          <C>
Held to Maturity
U.S. Government
  agency notes
  and bonds ..........  $  5,500,000   $  9,426     $(148,931)   $  5,360,495   $  5,500,000     $  7,500  $ (352,500)  $ 5,165,000 
                                                                                                                                   
Federal Home                                                                                                                       
  Loan Bank                                                                                                                        
  of Pittsburgh stock      1,510,000       --            --         1,510,000      1,414,100         --            --     1,414,100
                                                                                                                                   
Municipal notes                                                                                                                     
  and bonds ..........    10,986,072     66,856       (44,250)     11,008,678     15,950,020       70,816    (109,448)   15,911,388
                                                                                                                                   
Mortgage-Backed                                                                                                                    
   securities ........     1,472,841     40,240          --         1,513,081      1,729,133       26,290        --       1,755,423
                                                                                                                                   
Other ................            32        492          --               524             32          370        --             402
                        ------------   --------     ---------    ------------   -------------    --------  ----------   ----------- 
Total held to maturity  $ 19,468,945   $117,014     $(193,181)   $ 19,392,778   $ 24,593,285     $114,976  $ (461,948)  $24,246,313
                        ============   ========     =========    ============   ============     ========  ==========   ===========
                                                                                                                                   
                                                                                                                                   
Available for sale                                                                                                                 
U.S. Government agency                                                                                                              
 notes and bonds .....  $ 18,286,172   $ 17,839     $ (87,210)   $ 18,216,801   $  6,194,593     $ 39,505  $ (184,898)  $ 6,049,200
                                                                                                                                   
Municipal notes                                                                                                                    
 and bonds ...........     4,119,956     19,995       (11,988)      4,127,963         82,274         --        (1,524)       8O,750
Mortgage-Backed                                                                                                                    
 securities ..........     5,019,306     34,925          --         5,054,231           --           --          --            --  
Equity securities ....       136,280     30,859          --           167,139         29,750         --          (390)       29,360
                        ------------   --------     ---------    ------------   -------------    --------  ----------   ----------- 
Total available                                                                                                                    
  for sale ...........  $ 27,561,714   $103,618     $ (99,198)   $ 27,566,134   $  6,306,617     $ 39,505  $ (186,812)  $ 6,159,310
                        ============   ========     =========    ============   ============     ========  ==========   ===========
</TABLE>
<PAGE>
The amortized cost and estimated  market value of investment  securities at June
30, 1997, by contractual maturity, are shown below

<TABLE>
<CAPTION>
                                                              Estimated      Weighted
                                               Amortized       Market        Average
                                                 Cost           Value         Yield
                                                 ----           -----         -----
<S>                                         <C>             <C>                <C>    
Held to Maturity
 Due in one year or less ..............     $ 4,441,422     $ 4,449,782        6.15 %
 Due afte one year through five years .       7,025,180       7,059,239        6.39
 Due after five years through ten years       2,100,000       2,046,903        6.61
 Due after ten years ..................       4,392,311       4,326,330        7.08
 No stated maturity ...................       1,510,032       1,510,524        6.38
                                            -----------     -----------        ----
Total held to maturity ................     $19,468,945     $19,392,778        6.51%
                                            ===========     ===========        ==== 

Available for Sale
 Due in one year or less ..............     $    45,000     $    45,116        6.87 %
 Due after one year through five years        9,631,085       9,632,881        7.43
 Due after five years through ten years       6,812,708       6,772,735        7.29
 Due after ten years ..................      10,936,641      10,948,263        7.87
 No stated maturity ...................         136,280         167,139        3.31
                                            -----------     -----------        ----

Total available for sale ..............     $27,561,714     $27,566,134        7.55%
                                            ===========     ===========        ==== 
</TABLE>


Expected  maturities may differ from contractual  maturities  because  borrowers
generally  have  the  right to call or  prepay  obligations  without  prepayment
penalties.

      The weighted  average  yield,  based on amortized  cost, is presented on a
taxable equivalent basis using the Federal marginal rate of 34% adjusted for the
20% interest expense disallowance (27.2%).

      In December 1995 the Company transferred $3.19 million of held-to-maturity
securities  to available  for sale,  resulting  in an increase in  stockholders'
equity at such date for the  unrealized  gain on securities  available for sale,
net of  taxes,  of  $50,000.  This  transfer  was in  accordance  with a special
reassessment provision contained within a Special Report issued by the Financial
Accounting Standards Board ("FASB").

      Proceeds  from sales of  investment  securities  available for sale during
fiscal 1997 were  $103.03  million.  Gross gains of $162,284 and gross losses of
$5,833 were realized on those sales.

      Proceeds  from sales of  investment  securities  available for sale during
fiscal 1996 were $81.98  million.  Gross gains of $148,437  and gross  losses of
$459 were realized on those sales. There were no sales of investment  securities
during fiscal 1995.

      Accrued  interest  receivable  on  investments  amounted to  $719,746  and
$404,050  at June 30,  1997 and 1996,  respectively.  At June 30,  1997,  $22.43
million of  investment  securities  were held in  safekeeping  as  security in a
public funds pool and pledged as collateral for Municipal  savings deposits with
the Bank.


                                       26
<PAGE>
      3 - Loans Receivable


Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
                                                           At June 30,
                                                    1997               1996
                                               -------------      -------------  
<S>                                            <C>                <C>
First mortgage loans:
     Residential .........................     $ 159,430,494      $ 148,530,238
     Construction-residential ............         9,872,749          9,494,481
     Land acquisition and  development ...         6,763,084          5,120,837
     Commercial ..........................        33,981,099         22,552,425
     Construction-commercial .............         6,271,147          2,412,535
Commercial business.......................         7,863,000          5,700,921
Consumer .................................        47,343,185         41,486,173
                                               -------------      -------------  
Total loans ..............................       271,524,758        235,297,610


Less:
     Undisbursed loan proceeds:
       Construction-residential ..........        (6,598,504)        (6,211,241)
       Construction-commercial ...........        (3,493,774)          (922,721)
     Deferred loan fees ..................        (1,537,471)        (1,533,373)
     Allowance for possible loan losses ..        (2,855,003)        (2,667,104)
                                               -------------      -------------  
                                               $ 257,040,006      $ 223,963,171
                                               =============      =============
</TABLE>

      Accrued interest receivable on loans amounted to $1,387,821 and $1,199,865
at June 30, 1997 and 1996,  respectively.  At June 30, 1997, 1996, and 1995, the
Company serviced loans for others of $24.89 million,  $22.21 million, and $21.84
million, respectively.

      The  aggregate  amount  of  loans  by the  Company  to its  directors  and
executive  officers  was  $438,300  and  $494,800  at June 30,  1997  and  1996,
respectively.  These  loans  were made in the  ordinary  course of  business  at
substantially the same terms and conditions as those with other borrowers.

      The total amount of  non-performing  loans at June 30, 1997,  was $748,000
compared to $2.22  million at June 30, 1996. 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 and 1996 that
would have been  recorded  for these loans was $71,400  and  $210,400.  Interest
income on these non-performing loans included in income for fiscal 1997 and 1996
amounted to $35,200 and $91,900,  respectively. At June 30, 1997, and throughout
fiscal  1997,  there  were no loans  for which  impairment  was  required  to be
recognized.
<PAGE>
The activity in the allowance for possible loan losses was as follows:

<TABLE>
<CAPTION>
                                                       Year Ended June 30,
                                        ---------------------------------------------
                                            1997             1996             1995
                                        -----------      -----------      -----------
<S>                                     <C>              <C>              <C>
Balance, beginning of period ......     $ 2,667,104      $ 2,448,510      $ 2,199,004
Provision for possible loan losses          523,413          339,800          454,700
Loans charged off .................        (377,923)        (146,097)        (328,896)
Recoveries ........................          42,409           24,891          123,702
                                        -----------      -----------      -----------
Balance, end of period ............     $ 2,855,003      $ 2,667,104      $ 2,448,510
                                        ===========      ===========      ===========

</TABLE>


                                       27
<PAGE>
4 - Property And Equipment


Property and equipment by major classification are summarized as follows:
<TABLE>
<CAPTION>
                                                            At June 30,
                                                 ------------------------------
                                                      1997               1996
                                                 -----------        -----------
<S>                                              <C>                <C>
Land .....................................       $   772,826        $   772,826
Buildings and Improvements ...............         4,040,882          3,699,684
Furniture, Fixtures and Equipment ........         2,875,806          2,292,652
                                                 -----------        -----------
Total ....................................         7,689,514          6,765,162
Less Accumulated Depreciation ............        (2,965,632)        (2,442,505)
                                                 -----------        -----------
Net ......................................       $ 4,723,882        $ 4,322,657
                                                 ===========        ===========
</TABLE>

5 - Deposits


Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
                                                                            At June 30,
                                         -------------------------------------------------------------------------------
                                                            1997                                    1996
                                         ---------------------------------------  --------------------------------------
                                         Weighted                        Percent  Weighted                       Percent
                                          Average                          Of      Average                         Of
                                            Rate          Amount          Total      Rate         Amount          Total
                                            ----          ------          -----      ----         ------          -----
<S>                                         <C>       <C>               <C>          <C>      <C>                <C>
Non-interest-bearing ...............          --%     $ 21,493,230         8.2%        --%    $ 18,652,563         8.2%

Interest-bearing:
   NOW checking accounts ...........        1.98        27,624,884        10.6       1.82       22,331,663         9.8
   Money market deposit accounts ...        3.78        29,886,639        11.5       3.33       23,856,479        10.5
   Savings accounts ................        2.90        26,473,939        10.2       2.90       25,070,311        10.9
   Certificates less than $100,000 .        5.58       124,636,389        47.8       5.57      116,157,982        50.9
   Certificates $100,000 and greater        5.73        30,635,230        11.7       5.72       22,136,559         9.7
                                           -----      ------------       -----       ----     ------------       -----
   Total interest-bearing ..........        4.66       239,257,081        91.8       4.61      209,552,994        91.8
                                           -----      ------------       -----       ----     ------------       -----

Total deposits .....................        4.28%     $260,750,311       100.0%      4.24%    $228,205,557       100.0%
                                           =====      ============       =====       ====     ============       =====
</TABLE>
<PAGE>
While the certificates  frequently are renewed at maturity rather than paid out,
a  summary  of  certificates  by  contractual  maturity  at June 30,  1997 is as
follows:
<TABLE>
<CAPTION>

           Years Ending June 30,                       Amount
           ---------------------                       ------
<S>                                              <C>
                   1998                          $  104,191,001
                   1999                              17,505,120
                   2000                              15,307,646
                   2001                               6,493,981
                   2002                               7,226,634
                   2003 and thereafter                4,547,237
                                                 --------------
                                                 $  155,271,619
                                                 ==============
</TABLE>

Interest expense on deposits is comprised of the following:
<TABLE>
<CAPTION>
                                                  Year Ended June 30,
                                     -------------------------------------------
                                          1997            1996           1995
                                     -----------     -----------     -----------
<S>                                  <C>             <C>             <C>
NOW Checking Accounts ..........     $   461,510     $   449,329     $   465,476
Money Market Deposit Accounts ..         875,546         814,901       1,173,848
Savings Accounts ...............         719,751         724,771         828,844
Certificates Less than $100,000        6,639,858       6,307,763       4,821,032
Certificates $100,000 & Greater        1,589,060       1,621,949       1,323,937
                                     -----------     -----------     -----------
Total ..........................     $10,285,725     $ 9,918,713     $ 8,613,137
                                     ===========     ===========     ===========
</TABLE>

                                       28
<PAGE>
6 - Advances From Federal Home Loan Bank Of Pittsburgh ("FHLBP")


      Under  terms of its  collateral  agreement  with the  FHLBP,  the  Company
maintains  otherwise  unencumbered  qualifying  assets  (principally  1-4-family
residential  mortgage loans and U.S. Government & Agency notes and bonds) in the
amount of at least as much as its advances from the FHLBP.  The Company's  FHLBP
stock is also pledged to secure these advances.  At June 30, 1997 and 1996, such
advances mature as follows:
<TABLE>
<CAPTION>
                        Weighted
                        Average           June 30,
Due by June 30,          Rate               1997
---------------          ----               ----
<S>                      <C>           <C>
1998                     5.92%         $18,386,650

1999                     5.63            2,646,595

2000                     7.28            1,531,147

2001                     5.80            4,026,281

2002                     6.09            1,816,269

Thereafter               6.23            1,791,306
                         ----          -----------
Total FHLBP advances     5.97%         $30,198,247
                         ====          ===========
<CAPTION>

                        Weighted
                        Average           June 30,
Due by June 30,          Rate               1996
---------------          ----               ----
<S>                      <C>           <C>
1997                     6.13%         $ 2,088,530

1998                     6.07            1,886,651

1999                     5.63            2,646,594

2000                     7.28            1,531,147

2001                     5.80            4,026,281

Thereafter               6.22            1,793,074
                         ----          -----------
Total FHLBP advances     6.07%         $13,972,277
                         ====          ===========

</TABLE>

      The Company has  available  an  annually  renewable  line of credit not to
exceed 10% of the Company's maximum borrowing  capacity which 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 and 1996,
there were no balances outstanding on the line of credit.
<PAGE>
7 - Income Taxes

The provision (and benefit) for income taxes is summarized as follows:
<TABLE>
<CAPTION>
                                                                      Year Ended June 30,
                                                        ---------------------------------------------
                                                             1997              1996            1995
                                                        -----------      -----------      -----------
<S>                                                     <C>              <C>              <C>
Current:
     Federal ......................................     $   753,774      $   918,389      $   792,135
     State ........................................         144,145          198,100          112,396
Deferred - Federal ................................        (140,485)         (84,385)         (35,373)
                                                        -----------      -----------      -----------
Total .............................................     $   757,434      $ 1,032,104      $   869,158
                                                        ===========      ===========      ===========
</TABLE>


      The provision for income taxes differs from the statutory  rate due to the
following:

<TABLE>
<CAPTION>
                                                                      Year Ended June 30,
                                                        ---------------------------------------------
                                                             1997              1996            1995
                                                        -----------      -----------      -----------
<S>                                                     <C>              <C>              <C>
Federal income taxes at statutory rate ............     $   912,252      $ 1,180,123      $ 1,027,515
Tax exempt interest, net ..........................        (222,162)        (211,440)        (247,977)
State taxes net of Federal benefit ................          95,136          130,746           74,181
Other, net ........................................         (27,792)         (67,325)          15,439
                                                        -----------      -----------      -----------
Total .............................................     $   757,434      $ 1,032,104      $   869,158
                                                        ===========      ===========      ===========
</TABLE>
                                       29
<PAGE>
The deferred tax assets and liabilities at June 30, 1997 and 1996, consisted of
the following:
<TABLE>
<CAPTION>
                                                            At June 30,
                                                     ---------------------------
                                                         1997             1996
                                                     ----------       ----------
<S>                                                  <C>              <C>
Deferred tax assets:
     Allowance for possible loan losses ......       $  970,701       $  906,815
     Deferred loan fees ......................          102,487           82,968
     Net unrealized  loss on securities
        available for sale ...................             --             50,085
     Uncollected interest ....................           69,275           61,510
     Other ...................................           13,245           38,268
                                                     ----------       ----------
Gross deferred tax assets ....................        1,155,708        1,139,646

Deferred tax liabilities:
     Tax bad debt reserves ...................          171,302          218,101
     Loan discount ...........................          143,441          157,295
     Depreciation ............................           30,890           44,575
     Net unrealized gain on securities
       available for sale ....................            1,706             --  
                                                     ----------       ----------
Gross deferred tax liabilities ...............          347,339          419,971
                                                     ----------       ----------
Net deferred tax assets ......................       $  808,369       $  719,675
                                                     ==========       ==========
                                                     
                                                     
                                                     
                                                     
</TABLE>

      The  realizability  of deferred tax assets is dependent  upon a variety of
factors,  including the  generation of future taxable  income,  the existence of
taxes paid and  recoverable,  the reversal of deferred tax  liabilities  and tax
planning strategies.  Based upon these and other factors, management believes it
is more  likely  than not that the Company  will  realize the  benefits of these
deferred tax assets.

      The Small Business Job  Protection Act of 1996 ("Act"),  enacted on August
20, 1996,  provides for the repeal of the tax bad debt deduction  computed under
the percentage of taxable income method. The repeal of the use of this method is
effective for tax years beginning  after December 31, 1995.  Prior to the change
in law, the Bank had qualified under the provisions of the Internal Revenue Code
which  permitted  it to deduct from taxable  income an  allowance  for bad debts
based on 8% of taxable income.

      Upon  repeal,  the Bank is  required  to  recapture  into  income,  over a
six-year  period,  the portion of its tax bad debt reserves that exceed its base
year reserves (i.e., tax reserves for tax years beginning before 1988). 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  with respect
to certain  distributions.  The Bank's  total tax bad debt  reserves at June 30,
<PAGE>
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.

8- Commitments And Contingencies


Financial instruments with off-balance-sheet risk:

      The Company is a party to  financial  instruments  with  off-balance-sheet
risk in the  normal  course  of  business  to meet  the  financing  needs of its
customers  and to reduce its own  exposure to  fluctuations  in interest  rates.
Commitments to originate loans amounted to $5.81 million as of June 30, 1997, of
which $3.43 million was for variable-rate  loans. The balance of the commitments
represent  fixed-rate  loans with interest rates ranging from 6.825% to 10.375%.
At June 30, 1997, the Company had undisbursed  loans in process for construction
loans of $10.09 million and $14.23 million in  undisbursed  lines of credit.  In
addition,  the Company has issued $71,000 in commercial  letters of credit fully
secured by deposit accounts or real estate.

Concentration of credit risk:

      The Company is  principally a local lender and therefore has a significant
concentration  of  residential  and  commercial  real  estate  loans  as well as
consumer and  commercial  business loans to borrowers who reside in and/or which
are   collateralized  by  real  estate  located  primarily  in  Chester  County,
Pennsylvania.  The  ability of such  customers  to honor  these  obligations  is
dependent,  to varying  degrees,  on the overall  economic  performance  of this
diversified region.

Other commitments:

      The Bank has  entered  into  operating  leases  for  several of its branch
facilities.  The minimum  annual rental  payments under these leases at June 30,
1997, are as follows:

<TABLE>
<CAPTION>
            Year                 Minimum Lease Payments
            ----                 ----------------------
<S>                                   <C>
            1998                      $   341,969
            1999                          341,969
            2000                          231,613
            2001                          163,608
            2002                          153,335
            2003 and after              1,232,501
</TABLE>
        Rent  expense  under  these  leases for each of the years ended June 30,
1997, 1996, and 1995, was $383,476, $285,259, and $263,026, respectively.


                                       30
<PAGE>
9 - Affiliated Transactions

      During  fiscal  1997,  1996 and 1995 the  Company  entered  into  separate
agreements  with two directors of the Company for the improvement and renovation
of certain of the Bank's  offices,  for the  inspection  services  performed  in
connection  with  loans  and for the  review of  appraisals.  The  Company  also
contracted  with one of these  directors  during fiscal 1997,  1996 and 1995 for
performance of routine maintenance and repair at all of the Bank's offices.  The
Board of Directors  approved the agreements with both  directors,  one a general
contractor  and the other an  architect.  The total  paid was  $26,638  in 1997,
$78,695 in 1996, and $42,080 in 1995.

      A director of the  Company is a principal  in a law firm which the Company
retained during fiscal years 1997, 1996, and 1995, and which the Company intends
to retain during fiscal year 1998.  During the year ended December 31, 1996, the
amount of legal fees paid to the law firm did not exceed 5% of that firm's gross
revenues for such fiscal year.

      A director of the Company is an executive officer, director, and principal
of an  investment  banking  firm from  which the  Company  purchased  investment
securities  during fiscal years 1997,  1996,  and 1995.  The Company  intends to
continue the business relationship during fiscal 1998. During fiscal 1997, 1996,
and 1995, the purchases of investment  securities  from the  investment  banking
firm  amounted  to  $119.11  million,   $83.19  million,   and  $28.34  million,
respectively,  and were purchased at market rates and on terms no more favorable
to the investment banking firm than those obtainable on an arm's-length basis.

      A  director  of the  Company  is a director  and  president  of a mortgage
banking firm from which the Company purchased single-family residential mortgage
loans  during  fiscal years 1997,  1996,  and 1995,  and the Company  intends to
continue the business  relationship during fiscal year 1998. During fiscal 1997,
1996, and 1995,  the purchases of loans from the mortgage  banking firm amounted
to $16.32 million, $3.61 million, and $7.50 million, respectively,  with fees of
$135,061, $49,543, and $114,600,  respectively, paid to the firm. The loans were
purchased  at market rates and terms no more  favorable to the mortgage  banking
firm than those obtainable on an arm's-length basis.

      10 - Stockholders' Equity


      At the time of its conversion from a state-chartered mutual association to
a state-chartered capital stock association,  the Bank established a liquidation
account in an amount equal to $4,845,000 at September 30, 1986. The  liquidation
account is maintained for the benefit of eligible  savings  account  holders who
have  maintained  their  savings  account in the Bank after  conversion.  In the
unlikely event of a complete  liquidation,  each eligible savings account holder
will be  entitled to receive a  liquidation  distribution  from the  liquidation
account,  in the amount of the then  current  adjusted  sub-account  balance for
savings  accounts held,  before any  liquidation  distribution  may be made with
respect to capital stock.

      Except for the  repurchase  of stock and payment of dividends by the Bank,
the  existence  of  the  liquidation  account  does  not  restrict  the  use  or
application  of such  net  worth.  The  Company  may not  declare  or pay a cash
dividend on, or repurchase,  any of its common stock if the effect thereof would
cause the net worth of the Bank to be reduced  below either the amount  required
for the liquidation account or the net worth requirements  imposed by the Office
of Thrift Supervision.
<PAGE>
      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.

      In fiscal 1997 and 1996 the Company  repurchased 18,885 and 26,942 shares,
respectively,  of  its  common  stock  at  a  cost  of  $348,679  and  $501,026,
respectively, and designated the repurchased stock as treasury stock.

                                       31
<PAGE>
11 - Regulatory Capital

      The Bank is required by  regulations  of the Office of Thrift  Supervision
("OTS") to  maintain  minimum  levels of capital as  measured  by three  ratios.
Savings  institutions  are currently  required to maintain a minimum  regulatory
tangible capital equal to 1.5% of adjusted total assets, minimum core capital of
3% of  adjusted  total  assets,  and  risk-based  capital  equal  to 8% of total
risk-weighted  assets.  At June  30,  1997  and  1996,  the  Bank  exceeded  all
regulatory capital requirements.  The following sets forth the reconciliation of
the Bank's  compliance  with each of the  regualtory  capital  requirements  (in
thousands):
<TABLE>
<CAPTION>
                                                      June 30, 1997                                   June 30, 1996
                                        -------------------------------------------     -------------------------------------------
                                          Tangible         Core          Risk-based       Tangible         Core          Risk-based
                                          Capital         Capital          Capital        Capital         Capital          Capital
                                          -------         -------          -------        -------         -------          -------
<S>                                     <C>             <C>             <C>             <C>             <C>             <C>
Total Regulatory Capital ..........     $   26,750      $   26,750      $   29,057      $   25,301      $   25,301      $   27,348
Minimum Required Regulatory Capital          4,855           9,710          15,689           4,095           8,191          13,243
                                        ----------      ----------      ----------      ----------      ----------      ----------
Excess Regulatory Capital .........     $   21,895      $   17,040      $   13,368      $   21,206      $   17,110      $   14,105
                                        ==========      ==========      ==========      ==========      ==========      ==========
Regulatory Capital as a
   Percentage of Assets ...........           8.26%           8.26%          14.82%           9.27%           9.27%          16.52%
Minimum Capital Required as a
   Percentage of Assets ...........           1.50            3.00            8.00            1.50            3.00            8.00
                                        ----------      ----------      ----------      ----------      ----------      ----------
Excess Regulatory Capital as a
   Percentage of Assets ...........           6.76%           5.26%           6.82%           7.77%           6.27%           8.52%
                                        ==========      ==========      ==========      ==========      ==========      ==========
</TABLE>
 

     The Bank is not under any agreement with the regulatory  authorities nor is
it aware of any current  recommendations by the regulatory authorities which, if
they were to be implemented,  would have a material effect on liquidity, capital
resources or operations of the Company.

12- Fair Value Of Financial Instruments

      The  Company  is  required  to  disclose  estimated  fair  values  for its
financial instruments.

Limitations

      Estimates of fair value are made at a specific point in time,  based upon,
where  available,  relevant  market prices and  information  about the financial
instrument.  Such  estimates  do not include any premium or discount  that could
result from  offering for sale at one time the  Company's  entire  holdings of a
particular  financial  instrument.  For a  substantial  portion of the Company's
financial  instruments,  no quoted market exists.  Therefore,  estimates of fair
value are  necessarily  based on a number of  significant  assumptions  (many of
<PAGE>
which  involve  events  outside the  control of  management).  Such  assumptions
include assessments of current economic  conditions,  perceived risks associated
with these financial  instruments and their  counterparts,  future expected loss
experience  and  other  factors.  Given  the  uncertainties   surrounding  these
assumptions,  the reported fair values  represent  estimates only, and therefore
cannot  be  compared  to the  historical  accounting  model.  Use  of  different
assumptions or  methodologies  are likely to result in  significantly  different
fair value estimates.

      The estimated fair values presented neither include nor give effect to the
values  associated with the Company's  banking,  or other  businesses,  existing
customer relationships,  extensive branch banking network, property,  equipment,
goodwill or certain tax  implications  related to the  realization of unrealized
gains or losses.  Also, the fair value of non-interest  bearing demand deposits,
savings  and NOW  accounts  and money  market  deposit  accounts is equal to the
carrying amount because these deposits have no stated maturity.  Obviously, this
approach to estimating fair value excludes the significant  benefit that results
from the low-cost funding provided by such deposit  liabilities,  as compared to
alternative sources of funding.  As a consequence,  the fair value of individual
assets  and  liabilities  may not be  reflective  of the fair value of a banking
organization that is a going concern.

      The following methods and assumptions were used to estimate the fair value
of each major classification of financial instruments at June 30, 1997 and 1996:

Cash and cash equivalents:

      Current carrying amounts approximate estimated fair value.

Investment securities and securities available for sale:

      Current quoted market prices were used to determine fair value.


                                       32
<PAGE>
12- Fair Value Of Financial Instruments (continued)
Loans:

      Fair values were estimated for portfolios of loans with similar  financial
characteristics.  Loans were  segregated  by type,  and each loan  category  was
further  segmented by fixed- and  adjustable-rate  interest terms. The estimated
fair value of the segregated portfolios was calculated by discounting cash flows
through the  estimated  maturity and  prepayment  speeds  while using  estimated
market  discount rates that  reflected  credit and interest risk inherent in the
loans.  The estimate of the maturities  and  prepayment  speeds was based on the
Company's historical  experience.  Cash flows were discounted using market rates
adjusted for portfolio differences.

Investment in Federal Home Loan Bank:

      Current carrying amounts approximate estimated fair value.

Interest receivable:

      Current carrying amounts approximate estimated fair value.

Deposits with no stated  maturity  which consist of NOW, money market and saving
accounts:

      Current carrying amounts approximate estimated fair value.

Certificates:

      Fair value was estimated by discounting the  contractual  cash flows using
current  market rates  offered in the  Company's  market area for deposits  with
comparable terms and maturities.

Borrowed Funds:

      The fair value of borrowings was estimated using rates currently available
to the Company for debt with similar terms and remaining maturities.

Interest payable:
      Current carrying amounts approximate estimated fair value.

Commitments to extend credit:

      The majority of the Company's  commitments  to extend credit carry current
market  interest  rates if converted  to loans.  Because  commitments  to extend
credit are generally  unassignable  by either the Company or the borrower,  they
only have  value to the  Company  and the  borrower.  The  estimated  fair value
approximates the recorded deferred fee amounts.
<PAGE>
      The carrying amounts and estimated fair values of the Company's  financial
instruments were as follows (in thousands):
<TABLE>
<CAPTION>
                                                                 At June 30,
                                             -------------------------------------------------
                                                     1997                       1996
                                             ----------------------     ----------------------
                                             Carrying    Estimated      Carrying    Estimated
                                              Amount     Fair Value      Amount     Fair Value
                                             -------     ----------     -------     ----------
<S>                                          <C>          <C>          <C>          <C>
Financial Assets: ......................  
Cash and cash equivalents ..............       $  9,454     $  9,454     $ 10,312     $ 10,312   
Investment securities available for sale         27,566       27,566        6,159        6,159   
Investment securities ..................         17,959       17,883       23,179       22,832   
Loans receivable, net ..................        257,146      257,708      223,963      224,867   
Investment in Federal Home Loan Bank ...          1,510        1,510        1,414        1,414   
Interest receivable.....................          2,108        2,108        1,616        1,616   
                                               --------     --------     --------     --------  
     Total financial assets                    $315,743     $316,229     $266,643     $267,200   
                                               ========     ========     ========     ========   
                                                                                                 
Financial Liabilities:                                                                           
Deposits with no stated maturity                                                                 
   which consist of Non-interest                                                          
   Checking, NOW, Money Market and         
   Savings Accounts ....................       $105,479     $105,479     $ 89,911     $ 89,911  
Certificates ...........................        155,271      156,215      138,295      138,816         
Borrowed funds..........................         30,793       30,693       14,483       14,178                           
Interest payable .......................            788          788          653          653 
                                               --------     --------     --------     --------                     
     Total financial liabilities........       $292,331     $293,175     $243,342     $243,558   
                                               ========     ========     ========     ========   
</TABLE>
                                       33
<PAGE>                                 
13 - Employee Benefits

Stock Compensation Program

      In October 1993 a previous stock compensation  program (the "Program") was
discontinued  and was  replaced  by the  Company's  1993 Stock  Option Plan (the
"Plan").  No further options,  stock  appreciation  rights or performance  share
awards may be granted under the Program; however, outstanding options previously
granted  under the  Program  have not been  affected.  An  aggregate  of 108,527
authorized but unissued shares of common stock of the Company,  adjusted for the
5% stock  dividends  in  September  1996,  1995 and  1994,  and the  March  1997
five-for-four stock split, were reserved for issuance under the Plan. Under both
the  Program  and the Plan,  the option  price per share for  incentive  options
granted  may not be less than the fair market  value of the common  stock on the
date of grant.  All options that had been granted  under the Program have either
been exercised or have lapsed.  Options may be granted under the Plan during the
ten year period ending 2003 and options  granted under the Plan are  exercisable
up to ten years from the date of grant.  Rights to  exercise  options  under the
Plan may be limited by imposition  of vesting  schedules at the time the options
are granted.

      The  following  table is a summary of option  transactions  since June 30,
1994.  These options and option prices for the years 1995,  1996,  and 1997 have
been adjusted to reflect the stock dividends in fiscal 1995,  1996, and 1997 and
the stock split in fiscal 1997:
<TABLE>
<CAPTION>
                                                                              Year Ended June 30,
                                            ----------------------------------------------------------------------------------------
                                                     1997                            1996                             1995
                                            -------------------------      ---------------------------     -------------------------
                                                          Weighted                        Weighted                       Weighted
                                                          Average                         Average                         Average
                                            Shares     Exercise Price      Shares       Exercise Price     Shares     Exercise Price
                                            ------     --------------      ------       --------------     ------     --------------
<S>                                        <C>             <C>             <C>              <C>           <C>             <C>
Outstanding at beginning of year            83,854         $12.40           95,892          $10.64         58,971         $ 5.23
Granted                                     12,538          14.07           10,749           14.70         62,229          14.13
Exercised                                  (17,709)          5.61          (19,809)           4.81        (21,691)          5.40
Forfeited                                   (7,821)         14.29           (2,978)          14.38         (3,617)         14.17
                                           -------                         -------                        ------- 
Outstanding at end of year                  70,862          14.19           83,854           12.40         95,892          10.64
Exercisable at end of year                  32,042                          27,938                         32,401
Weighted-average fair value
of options granted during fiscal 1997        $4.69
</TABLE>

      The  Black-Scholes   option-pricing   model  was  used  to  determine  the
grant-date fair-value of options in fiscal 1997. Significant assumptions used in
the  model  included  a  weighted  average  risk  free  rate of return of 6.49%;
expected option life of 6 years;  expected stock price  volatility of 28.86% and
expected dividends of 2.10%.

     In October 1995, the FASB issued SFAS No. 123,  "Accounting for Stock-based
Compensation".  This statement encourages, but does not require, the adoption of
fair-value accounting for stock-based compensation to employees. The Company, as
permitted, has elected not to adopt the fair value accounting provisions of SFAS
123,   and  has  instead   continued   to  apply  APB  Opinion  25  and  related
Interpretations  in  accounting  for plans and  provide  the  required  proforma
disclosures  of SFAS 123. Had the grant-date  fair-value  provisions of SFAS 123
<PAGE>

been adopted,  the Company would have recognized $22,400 in compensation expense
related to its Option Plan in fiscal 1997.  As a result,  proforma net income of
the Company  would have been  $1,903,260  and proforma  earnings per share would
have been $.92 for the year ended June 30, 1997.

     The  effects on  proforma  net income and EPS of  applying  the  disclosure
requirement of SFAS 123 in fiscal 1997 may not be  representative  of the future
proforma  effects  on net income and EPS due to the  vesting  provisions  of the
options and future awards that are available to be granted.

Employee Stock Ownership Plan

      The Bank  established  an ESOP for all employees of the Bank with at least
one year of credited  service.  Benefits  become 20% vested after three years of
service, increasing to 100% after seven years. Forfeitures are reallocated among
remaining  participating  employees.  Vested benefits are generally payable upon
retirement,  disability or separation  from service.  The ESOP is subject to the
requirements of the Employee Retirement Income Security Act of 1974, as amended,
and the regulations of the Internal Revenue Service and the Department of Labor.
The ESOP is funded by the Bank's  contributions,  and all  contributions to date
have been used to pay  principal,  interest and other fees  associated  with the
ESOP's loan  referred to below.  Benefits to  participants  are normally paid in
whole shares of common stock.

      The ESOP  borrowed  funds to acquire the initial  78,125  shares of common
stock at $5.76 per share,  adjusted for the subsequent  stock splits effected in
the form of dividends.  The ESOP  purchased an additional  101,544 shares of the
common stock at a weighted  average price of $8.69 per share,  also adjusted for
the subsequent  stock splits effected in the form of dividends.  Funds necessary
to purchase such shares were borrowed from an  independent  third-party  lender.
The Company has not guaranteed the debt but anticipates  contributing sufficient
funds to the ESOP

                                       34
<PAGE>
to enable it to meet its debt service requirements. The outstanding loan balance
has been reflected as a liability and a reduction of stockholders' equity in the
consolidated statements of financial condition.  Shares purchased with such loan
proceeds are held in a suspense account for allocation among members as the loan
is repaid.  Contributions  to the ESOP and  shares  released  from the  suspense
account are allocated  among members on the basis of  compensation  and years of
service.  A total of 17,732,  19,974, and 17,884 shares were allocated in fiscal
1997, 1996, and 1995, respectively.

      Contributions  by the  Bank to the  ESOP in  fiscal  1997,  1996  and 1995
amounted to $181,240, $194,039 and $195,543,  respectively,  and are included in
the accompanying  consolidated statements of operations in salaries and employee
benefits.  Interest  expense paid during 1997, 1996 and 1995 by the ESOP for the
loan amounted to $34,298, $46,693, and $58,056, respectively.

      The interest  rate on the ESOP loan is fixed at 7.50% until  maturity with
interest  expense being computed on the unpaid principal  balance.  As principal
payments  are made by the ESOP,  the  corresponding  liability  is  reduced  and
stockholders' equity is increased. Principal payments and cash dividends paid on
the common  stock held by the ESOP in fiscal  1997  amounted  to  $177,250,  and
remaining principal payments are scheduled as follows:


        Fiscal Year                       Amount
        -----------                       ------

           1998                          $186,872
           1999                           146,618
                                         --------
          Total                          $333,490


      At June 30,  1997,  the ESOP had  pledged  94,117  shares  of  unallocated
Company stock held by it as collateral for the debt.

Incentive Compensation Program

      The Company currently maintains an incentive  compensation program for its
officers  and key  employees.  The  incentive  program  provides  cash awards to
members of the  management  group  based upon an  individual's  base  salary and
success in reaching specified pre-established objectives during the fiscal year,
provided the Company reaches a certain base amount in net income.  During fiscal
1997, 1996 and 1995, $79,380, $29,175 and $6,000 were expensed for this purpose.

Pension Plan

      The Company has a  noncontributory  defined  benefit pension plan which is
fully  funded  through a  multi-employer  investment  trust  covering  qualified
salaried employees. Costs recognized for the years ended June 30, 1997, 1996 and
1995, totaled $4,953, $34,124, and $67,249,  respectively.  Information relative
to the financial  status of the  Company's  portion of the Plan is not currently
available.
<PAGE>
14 - Recent Accounting Pronouncements


      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 statement 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.  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.

      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.


                                       35
<PAGE>
15 -  Parent Company Financial Information

Financial information of Chester Valley Bancorp Inc. (parent company only) as
 follows:
<TABLE>
<CAPTION>
Statements of Financial Condition
                                                                    At June 30,
                                                         ------------------------------
                                                              1997              1996
                                                         ------------      ------------
<S>                                                      <C>               <C>               
Assets
     On deposit with subsidiary ....................     $    309,154      $    354,777
     Investment in subsidiary ......................       27,085,593        25,717,004
     Other assets ..................................            3,354             3,354
                                                         ------------      ------------
          Total Assets .............................     $ 27,398,101      $ 26,075,135
                                                         ============      ============
Liabilities
     ESOP debt .....................................     $    333,490      $    510,740
                                                         ------------      ------------
          Total Liabilities ........................          333,490           510,740

Stockholders' Equity ...............................       27,064,611        25,564,395
                                                         ------------      ------------
          Total Liabilities and Stockholders' Equity     $ 27,398,101      $ 26,075,135
                                                         ============      ============
<CAPTION>

Statements of Operations                                                  Year Ended June 30,
                                                         ------------------------------------------------
                                                               1997              1996             1995
                                                         ------------      ------------      ------------
<S>                                                      <C>               <C>               <C>
Income
     Distributed income from subsidiary ............     $    750,000      $    900,000      $       --
     Interest income ...............................           16,598            10,500            16,922
     Equity in undistributed income of subsidiaries         1,176,407         1,534,100         2,144,978
                                                         ------------      ------------      ------------
Expense
     Other Expense .................................           17,345             5,754             8,954
                                                         ------------      ------------      ------------
         Net Income ................................     $  1,925,660      $  2,438,846      $  2,152,946
                                                         ============      ============      ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of Cash Flows                                                  Year Ended June 30,            
                                                         ------------------------------------------------
                                                              1997              1996             1995   
Operating activities:                                    ------------      ------------      ------------
<S>                                                      <C>               <C>               <C>
  Net income .......................................     $  1,925,660      $  2,438,846      $  2,152,946
  Add (deduct) items not affecting cash flows
     from operating activities:
     Equity in undistributed income of subsidiary ..       (1,176,407)       (1,534,100)       (2,144,978)
     Decrease in other liabilities .................             --                 (10)             --
     Reduction of common stock acquired by ESOP ....          177,250           181,171           167,901
                                                         ------------      ------------      ------------
  Net cash flows from operating activities .........          926,503         1,085,907           175,869
                                                         ------------      ------------      ------------
Financing activities:
     Income tax benefit on exercise of stock options          (92,246)             --                --
     Cash dividends on common stock ................         (760,465)         (573,030)         (471,346)
     Payment for fractional shares .................          (15,927)          (11,105)          (10,027)
     Stock repurchased as treasury stock ...........         (348,679)         (501,026)         (242,140)
     Repayments of principal on ESOP debt ..........         (177,250)         (181,171)         (167,901)
     Proceeds from exercise of stock options .......          337,041            95,336           117,107
     Proceeds from sale of common stock under
         the dividend reinvestment plan ............           85,400           247,013           199,943
                                                         ------------      ------------      ------------
     Net cash flows used in financing activities ...         (972,126)         (923,983)         (574,364)
                                                         ------------      ------------      ------------
Net increase (decrease) in cash ....................          (45,623)          161,924          (398,495)
Cash and cash equivalents:
     Beginning of period ...........................          354,777           192,853           591,348
                                                         ------------      ------------      ------------
     End of period .................................     $    309,154      $    354,777      $    192,853
                                                         ============      ============      ============
Non-cash items:
     Net unrealized gain (loss) on investment
         securities available for sale,
         net of taxes ..............................     $     99,936      $    (97,222)     $       --
                                                         ============      ============      ============
</TABLE>
                                       36
<PAGE>
Independent Auditors' Report

{GRAPHIC-LOGO] Peat Marwick LLP


      To the Board of Directors and Stockholders of
      Chester Valley Bancorp Inc:


      We have  audited the  accompanying  consolidated  statements  of financial
condition of Chester  Valley Bancorp Inc. and subsidiary as of June 30, 1997 and
1996,  and  the  related  consolidated  statements  of  operations,  changes  in
stockholders'  equity,  and cash  flows for each of the years in the  three-year
period ended June 30, 1997.  These  consolidated  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

      In our opinion,  the consolidated  financial  statements referred to above
present  fairly,  in all material  respects,  the financial  position of Chester
Valley Bancorp Inc. and subsidiary as of June 30, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended June 30, 1997, in conformity  with  generally  accepted  accounting
principles.



/s/KPMG Peat Marwick LLP
------------------------
KPMG Peat Marwick LLP

Philadelphia, Pennsylvania
July 25, 1997


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