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


[ X ]       Annual Report Pursuant to Section 13 or 15(d) of the Securities
            Exchange Act of 1934

                     For Fiscal Period Ended: June 30, 1999
                                       Or

[   ]       Transition Report  Pursuant  to  Section  13 or  15(d)  of  the
            Securities  Exchange Act of 1934

              For the transition period from ________ to _________

                           Commission File No: 0-18833

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

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

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


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

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

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

                     Common Stock, $1.00 Par Value Per Share
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports)  and  (2)  has  been  subject  to such  filing
requirements for the past 90 days. YES [ X ] NO [ ]


Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by  reference in Part III of this Form 10-K or any  amendments  to
this Form 10-K. X
<PAGE>
As of September 1, 1999, the aggregate  value of the 3,033,917  shares of Common
Stock  of the  registrant  which  were  issued  and  outstanding  on such  date,
excluding 673,822 shares held by all directors and officers of the registrant as
a group, was approximately  $50.82 million.  This figure is based on the closing
sales price of $16.75 per share of the registrant's Common Stock on September 1,
1999.

Number of shares of Common Stock outstanding as of September 1, 1999:  3,707,739


                       DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated by reference:

(1)     Portions of the Annual  Report to  shareholders  for the year ended June
        30, 1999, are incorporated into Part II, Items 5 - 8 of this Form 10-K.

(2)     Portions of the Definitive  Proxy  Statement for the 1999 annual meeting
        of shareholders are incorporated into Part III, Items 10-13 of this Form
        10-K.


<PAGE>
PART I.

ITEM 1.  BUSINESS
-----------------

Forward Looking Statements

         In this  Report,  the Company has  included  certain  "forward  looking
statements"  concerning the future operations of the Company. It is management's
desire  to  take  advantage  of the  "safe  harbor"  provisions  of the  Private
Securities  Litigation  Reform Act of 1995.  This  statement  is for the express
purpose of  availing  the  Company of the  protections  of such safe harbor with
respect to all  "forward  looking  statements"  contained  in this  Report.  The
Company has used "forward  looking  statements" to describe the future plans and
strategies  including  management's  expectations  of the  Company's  Year  2000
readiness and future financial results.  Management's ability to predict results
or the effect of future plans and strategy is inherently uncertain. Factors that
could affect  results  include  interest rate trends,  competition,  the general
economic climate in Chester County, the mid-Atlantic region and the country as a
whole, loan delinquency  rates,  changes in federal and state  regulation,  Year
2000  uncertainties and other  uncertainties  described in the Company's filings
with the  Securities  and Exchange  Commission,  including its Form 10-K for the
year ended June 30, 1999.  These factors  should be considered in evaluating the
"forward  looking  statements",  and undue reliance should not be placed on such
statements.

General

         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 the Holding Company and its  subsidiaries  (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 and  Philadelphia  Corporation  for Investment  Services  ("PCIS"),  a full
service investment  advisory and securities  brokerage firm. The Bank provides a
wide range of banking services to individual and corporate customers through its
eight  branch  banks  in  Chester  County,   Pennsylvania.   The  Bank  provides
residential real estate, commercial real estate, commercial and consumer lending
services  and  funds  these  activities   primarily  with  retail  deposits  and
borrowings.  PCIS is a registered broker/dealer in all 50 states and Washington,
DC and it is also  registered as an investment  advisor with the  Securities and
Exchange  Commission.   PCIS  provides  many  additional   services,   including
self-directed and managed retirement  accounts,  safekeeping,  daily sweep money
market funds, portfolio and estate valuations, life insurance and annuities, and
margin accounts,  to individuals and smaller corporate  accounts.  PCIS' offices
are located in Wayne and Philadelphia, Pennsylvania.

         The Company  experienced  substantially  increased  net income of $4.21
million,  or $1.13 per diluted  share,  for the fiscal year ended June 30, 1999,
compared  to $3.63  million  or $.98 per  diluted  share for fiscal  1998.  This
represents a 16.0% increase in net income.
<PAGE>
         The Company's  earnings depend primarily on the difference  between the
yield  earned  on its  loan and  securities  portfolios  and its cost of  funds,
consisting  primarily of the interest paid on deposits and, to a lesser  extent,
on borrowings  ("interest  rate spread").  During fiscal year 1999 the Company's
interest rate spread  averaged 3.03% compared to 3.28% and 3.37% in fiscal years
1998 and 1997,  respectively.  Net interest  income,  on a fully tax  equivalent
basis,  increased  12.0% or $1.54 million to $14.33  million in fiscal 1999 from
$12.80  million in 1998,  compared  to a 12.1% or $1.39  million  increase  from
fiscal 1997 to fiscal  1998.  Net  interest  margin,  on a fully tax  equivalent
basis,  was 3.64% for the fiscal year ended June 30, 1999,  compared to 3.94% in
fiscal 1998 and 4.03% in fiscal 1997.

         Total other income increased $579,000 or 12.5% to $5.20 million for the
year ended June 30, 1999 as compared to fiscal 1998.  Investment services income
increased  $460,000 or 16.5% to $3.26  million as the result of PCIS'  increased
commission income due to the increase in the stock market activity,  an increase
in advisory  fee income due to the  strategic  plan of PCIS to focus on advisory
services  as it provides a more stable  revenue  stream for PCIS and  stabilizes
expenses for the  customer,  and an increase in money market fund fees due to an
increase in customer balances.  The growth in the Bank's Investment Services and
Trust  Division  (the "Trust  Division")  also  contributed  to the  increase in
investment  services  income for fiscal  1999.  An increase in checking  account
fees, as the result of an increased  number of accounts,  and an increase in the
fees  earned  on the  Bank's  debit  card,  due to both  increased  usage and an
increased  number of  cardholders,  contributed  to the  increase of $354,000 or
31.7% in service charges and fees in fiscal 1999. The Company  recognized  gains
on trading  account  securities  of  $171,000  during  fiscal  1999  compared to
$338,000 during fiscal 1998.

         Total other income increased $968,800 or 26.6% to $4.62 million for the
year ended June 30, 1998 as compared to fiscal 1997.  Investment services income
increased  $488,400  or 21.2% to $2.80  million  as the result of  increases  in
revenue  generated  by PCIS and the Trust  Division.  Service  charges  and fees
increased  $139,700  in fiscal  1998.  The Company  recognized  gains on trading
account  securities or $337,500  during  fiscal 1998 compared to $15,700  during
fiscal 1997.

         Total  operating  expenses  increased  $1.09  million or 9.4% to $12.73
million  for the year  ended  June 30,  1999 as  compared  to fiscal  1998.  The
increase in operating expenses over the prior fiscal year was primarily due to a
$1.04  million or 17.6%  increase in salaries and employee  benefits  related to
general  salary  increases and  increased  number of staff  associated  with the
Bank's Call Center and its Trust Division established during the Summer and Fall
of 1997,  respectively.  Also, in the winter of 1999, the Bank opened its eighth
branch office in Devon, Pennsylvania which further contributed to an increase in
operating expenses. Occupancy and equipment expenses increased $190,000 or 10.1%
to $2.08  million for the year ended June 30, 1999,  compared to the same period
in 1998 as a result  of the  opening  of the  Banks  branch  office in Devon and
capital  expenditures  associated  with  technology  upgrades and  enhancements.
During  fiscal  1998,  the Bank made a $291,000  donation in  connection  with a
project  located in Honey  Brook,  PA to  provide  low  income  housing  for the


                                       2
<PAGE>
elderly.  As an offset to the donation,  the Bank received a state tax credit in
the  amount  of  $146,000  through  the  Neighborhood  Assistance  Act which was
recorded as a reduction to income tax expense in fiscal 1998.

         Total  operating  expenses  increased  $1.78 million or 18.1% to $11.64
million  for the year  ended June 30,  1998 from the  comparable  prior  period,
excluding the $1.39 million one-time SAIF assessment  levied in fiscal 1997. The
increase in operating  expenses over the fiscal 1997 year was primarily due to a
$632,500 or 12.0% increase in salaries and employee  benefits related to general
salary  increases and increased  number of staff associated with the addition of
the Bank's new Call Center and its new Investment  Services and Trust  Division.
In addition,  occupancy and equipment  expenses  increased  $246,900 or 15.1% to
$1.89 million for the year ended June 30, 1998, from the comparable prior period
related to the refurbishment of the Bank's new Call Center and Trust Department.
Also  contributing to the increase in operating  expenses during fiscal 1998 was
the previously  mentioned  $291,000  donation to a project to provide low income
housing for the elderly.

         The  Company's  assets  totaled  $451.16  million at June 30, 1999,  as
compared with $377.01  million at June 30, 1998.  This 19.7%  increase in assets
was primarily  funded by an increase in deposits of $61.32 million or 20.6% from
$298.19  million at June 30, 1998, to $359.51  million at June 30, 1999,  and an
increase  in Federal  Home Loan Bank  ("FHLB")  advances of $9.44  million  from
$40.94  million to $50.38 million at June 30, 1998 and 1999,  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
$273.13  million at June 30,  1998,  to $291.39  million  at June 30,  1999.  In
addition,  the Company's  securities  portfolios along with its interest-bearing
deposits increased, in the aggregate,  from $86.12 million to $140.03 million at
June 30, 1998 and 1999, respectively.

         In September  1998 and 1997 the Company paid 5% common stock  dividends
in the amounts of 116,034 and 102,606 shares, respectively,  from authorized but
unissued  common  stock,  with  fractional  shares paid in the form of cash.  In
December 1998 and March 1997 the Company paid a three-for-two  and five-for-four
stock split,  effected in the form of a dividend in the amount of 1,224,980  and
414,188 shares, respectively. Fractional shares were paid in the form of cash.

         The Bank's primary market area includes  Chester County and sections of
the four contiguous  counties  (Delaware,  Montgomery,  Berks, and Lancaster) in
Pennsylvania.  Chester  County,  in which all of the Bank's offices are located,
continues to grow in terms of economic development and population growth.

         Customer  deposits  with First  Financial  are  insured to the  maximum
extent provided by law by the Federal  Deposit  Insurance  Corporation  ("FDIC")
through  the  SAIF.  The  Bank  is  subject  to  examination  and  comprehensive
regulation  by the  FDIC,  the  Office of Thrift  Supervision  ("OTS"),  and the
Pennsylvania Department of Banking ("Department"). It is a member of the FHLB of
Pittsburgh ("FHLBP"),  which is one of the 12 regional banks comprising the FHLB


                                       3
<PAGE>
System.  The Bank is further subject to regulations of the Board of Governors of
the Federal Reserve System ("Federal Reserve Board") governing reserves required
to be maintained against deposits and certain other matters.

Lending Activities

         Loan  Portfolio  Composition.  The Company's net loan portfolio (net of
undisbursed  proceeds,  deferred  fees and  allowance  for loan losses)  totaled
$291.39  million  at June  30,  1999,  representing  approximately  64.6% of the
Company's total assets of $451.16 million at that date.


                                       4
<PAGE>
The following table presents information  regarding the Company's loan portfolio
by type of loan indicated.
<TABLE>
<CAPTION>
(Dollars in Thousands)

                                                                                           At June 30,
                                       ---------------------------------------------------------------------------------------------
                                                1999                    1998                    1997                   1996
                                       --------------------     -------------------     -------------------    --------------------
                                                       % of                    % of                    % of                    % of
                                                      Total                   Total                   Total                   Total
                                        Amount        Loans     Amount        Loans     Amount        Loans     Amount        Loans
                                       --------       -----    --------       -----    --------       -----    --------       -----
<S>                                    <C>             <C>     <C>             <C>     <C>             <C>     <C>             <C>
Real estate loans:
   Residential:
        Single-family                  $156,514        50.8%   $154,755        53.3%   $158,537        58.4%   $147,274        62.6%
        Multi-family                        828          .3         873         0.3         893         0.3       1,256         0.5
   Commercial                            55,197        17.9      41,002        14.1      33,981        12.5      22,552         9.6
   Construction and land
       acquisition(1)                    29,339         9.5      30,646        10.5      22,907         8.5      17,028         7.2
                                       --------       -----    --------       -----    --------       -----    --------       -----
           Total real estate loans      241,878        78.5     227,276        78.2     216,318        79.7     188,110        79.9

Commercial business loans(2)             14,708         4.8      11,437         3.9       7,863         2.9       5,701         2.4
Consumer loans(3)                        51,416        16.7      51,829        17.9      47,343        17.4      41,486        17.7
                                       --------       -----    --------       -----    --------       -----    --------       -----
            Total loans receivable      308,002       100.0%    290,542       100.0%    271,524       100.0%    235,297       100.0%
                                                      =====                   =====                   =====                   =====

Less:
  Loans in process                      (11,393)                (12,380)                (10,092)                 (7,134)
 Allowance for loan losses               (3,651)                 (3,414)                 (2,855)                 (2,667)
 Deferred loan fees                      (1,571)                 (1,620)                 (1,537)                 (1,533)
                                       --------                --------                --------                --------
              Net loans receivable      291,388                 273,128                 257,040                 223,963


Loans held for sale, single-family
   residential mortgages                     --                   1,101                     106                      --
                                       --------                --------                --------                --------

Net loans receivable and loans held
       for sale                        $291,388                $274,229                $257,146                $223,963
                                       ========                ========                ========                ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                              --------------------
                                                       1995
                                              --------------------
                                                              % of
                                                             Total
                                               Amount        Loans
                                              --------       -----
<S>                                          <C>             <C>
Real estate loans:
   Residential:
        Single-family                        $150,639        66.0%
        Multi-family                            1,359         0.6
   Commercial                                  22,433         9.8
   Construction and land
       acquisition(1)                          13,120         5.7
                                             --------       -----
           Total real estate loans            187,551        82.1

Commercial business loans(2)                    4,039         1.8
Consumer loans(3)                              36,634        16.1
                                             --------       -----
            Total loans receivable            228,224       100.0%
                                                            =====

Less:
  Loans in process                             (3,385)
 Allowance for loan losses                     (2,449)
 Deferred loan fees                            (1,574)
                                             --------
              Net loans receivable            220,816


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

Net loans receivable and loans held
       for sale                              $220,958
                                             ========

</TABLE>

(1)     Includes  construction  loans for both  residential  and commercial real
        estate properties.
(2)     Consists primarily of secured equipment
         loans.
(3)     Consists  primarily  of home  equity  loans  and lines of  credit,  home
        improvement, automobile and other personal loans.


                                        5
<PAGE>
         Contractual Maturities.  The following table sets forth the contractual
principal repayments of the total loan portfolio, including loans in process, of
the Company as of June 30, 1999, by categories of loans.  All loans are included
in the period in which they mature. Loans held for sale are not included.
<TABLE>
<CAPTION>

                                                                   Principal Repayments
                                                          Contractually Due in Year(s) Ended
                                                                         June 30,
                                                          -----------------------------------
                                                                  (Dollars in Thousands)

                                         Total
                                       Outstanding
                                           at                                        2005
                                         June 30,                         2001-       and
                                          1999                2000        2004     Thereafter
                                         --------            -------     -------     --------
<S>                                     <C>                 <C>         <C>         <C>
Real estate loans:
  Residential(1)                        $157,342            $24,456     $27,434     $105,452
  Commercial                              55,197              5,190      37,299       12,708
  Construction and land acquisition       29,339             16,368       7,957        5,014
Commercial business loans                 14,708              9,416       4,448          844
Consumer loans                            51,416              7,300      16,018       28,098
                                        --------            -------     -------     --------

        Total loans                     $308,002            $62,730     $93,156     $152,116
                                        ========            =======     =======     ========
</TABLE>

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



                                        6
<PAGE>
The following  table sets forth,  as of June 30, 1999,  the dollar amount of all
loans contractually due after June 30, 2000, which have fixed interest rates and
floating or adjustable rates.
<TABLE>
<CAPTION>

                                                                 Contractual Obligations
                                                                 Due After June 30, 2000
                                                               ---------------------------
                                                                                Floating/
                                                                 Fixed          Adjustable
                                                                 Rates            Rates
                                                               --------         -------
                                                                  (Dollars in Thousands)
<S>                                                            <C>              <C>
Real estate loans:
        Residential                                            $100,976         $31,910
        Commercial                                               10,142          39,865
        Construction and land acquisition                         3,506           9,465
Commercial business loans                                         4,923             369
Consumer loans                                                   44,099              17
                                                                --------         -------
       Total loans                                             $163,646         $81,626
                                                               ========         =======
</TABLE>

         Contractual  principal  repayments of loans do not necessarily  reflect
the actual term of the Company's  loan  portfolio.  The average life of mortgage
loans is  substantially  less  than  their  contractual  terms  because  of loan
prepayments  and because of enforcement of due-on-sale  clauses,  which give the
Company  the right to declare a loan  immediately  due and payable in the event,
among other things,  that the borrower  sells the real  property  subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends to
increase,  however,  when current mortgage loan rates substantially exceed rates
on existing  mortgage  loans and,  conversely,  decrease  when rates on existing
mortgage loans  substantially  exceed current  mortgage loan rates.  The Company
experienced  significant  refinancings of its loan portfolio  during fiscal 1999
due to the declining interest rate environment and leveling of the yield curve.

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

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

                                        7
<PAGE>
         The Bank periodically  identifies certain loans as held for sale at the
time of origination. These loans consist primarily of fixed-rate,  single-family
residential  mortgage  loans  which  meet the  underwriting  characteristics  of
certain  government-sponsored  enterprises  (conforming  loans). The majority of
conforming  loans sold to date have  consisted of sales to Freddie Mac ("FHLMC")
of fixed-rate  mortgage  loans in  furtherance  of the Company's  goal of better
matching  the  maturities  and  interest-rate  sensitivity  of  its  assets  and
liabilities.  In selling  conforming  loans, the Bank has retained the servicing
thereon in order to increase its non-interest income. At June 30, 1999, the Bank
serviced  $26.74  million of mortgage  loans for others.  Sales of loans produce
future  servicing  income and  provide  funds for  additional  lending and other
purposes.  The Bank is a qualified servicer for FHLMC, Fannie Mae ("FNMA"),  and
Ginnie Mae ("GNMA").

The  following  table  shows  total  loans and loans  held for sale  originated,
purchased, sold and repaid during the periods indicated.
<TABLE>
<CAPTION>
                                                                 Year Ended June 30,
                                                        ----------------------------------
                                                          1999        1998          1997
                                                        --------     --------     --------
                                                                  (In Thousands)
<S>                                                     <C>          <C>          <C>
Total loans  receivable and loans held for sale
at beginning of period                                  $291,643     $271,630     $235,297

         Real estate loan originations:
               Residential(1)                             31,705       39,329       31,031
               Commercial                                 18,914        9,398       10,018
               Construction and land acquisition(2)       21,852       21,057       21,740
                                                        --------     --------     --------
                   Total real estate
                        loan originations                 72,471       69,784       62,789
         Consumer loans(2)                                24,540       24,771       19,163
         Commercial business loans                        17,312       11,896        5,150
                                                        --------     --------     --------
                   Total loan
                         originations                    114,323      106,451       87,102
                                                        --------     --------     --------

         Principal loan repayments                        96,487       77,481       45,846
         Sales of loans                                    1,477        8,957        4,923
                                                        --------     --------     --------
                      Total principal
                          repayments
                          and sales                       97,964       86,438       50,769
                                                        --------     --------     --------
                       Net increase in
                          loans and loans
                          held for sale                   16,359       20,013       36,333
                                                        --------     --------     --------
Total loans receivable and loans
    held for sale at end of period                      $308,002     $291,643     $271,630
                                                        ========     ========     ========
</TABLE>
(1) Includes both single-family and multi-family residential loans.
(2) Includes  construction loans for both residential and commercial real estate
    properties.

                                        8
<PAGE>
         Loans  on  Existing  Single-Family  Residential  Properties.  The  Bank
currently  offers  adjustable-rate  mortgages  ("ARMs") which have up to 30-year
terms and interest rates which adjust either  annually or every three years,  or
which are fixed initially for the first three years, five years, seven years, or
ten years, and adjust annually thereafter,  based upon changes in an index based
on the weekly average yield on United States Treasury  securities  adjusted to a
constant maturity of one year or three years, respectively, as made available by
the Federal Reserve Board plus a margin.  The amount of any increase or decrease
in the  interest  rate for ARMs is  limited to 1% or 2% per year and 6% over the
life of the loan.  Although the Bank has originated a small amount of ARMs which
include the ability to be converted to a fixed-rate loan,  substantially  all of
the ARMs originated  cannot be converted to fixed-rate loans. The interest rates
of ARMs may not adjust as rapidly as changes in the Company's cost of funds.  In
order to minimize  risk,  ARM borrowers are qualified at the rate which would be
in effect after the first interest rate adjustment,  if that rate is higher than
the initial  rate.  The Bank's  adjustable  rate loans  require that any payment
adjustment  resulting  from a change in the interest rate of an  adjustable-rate
loan be sufficient to result in full  amortization of the loan by the end of the
loan term and,  thus, do not permit any of the increased  payment to be added to
the principal amount of the loan, or so-called negative amortization. Due to the
declining  interest rate  environment and leveling of the yield curve,  the Bank
experienced  significant  refinancings of its adjustable rate portfolio into its
fixed rate mortgage products.

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

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

         Loans on Existing  Commercial and Multi-Family  Properties.  During the
past  several  years,  the  Bank  has  originated  permanent  loans  secured  by
multi-family and  income-producing  properties such as  condominiums,  apartment
buildings,  office buildings and, to a lesser extent,  hotels and small shopping
centers.  The Bank  intends to  increase  its  emphasis  on the  origination  of
commercial  real estate loans and,  accordingly,  has increased  its  commercial
lending staff.  The Bank's  Commercial  Loan  Department  consists of seven loan
officers,  all but one of whom joined the Bank's  staff with  substantial  prior
commercial lending experience.  The origination of multi-family  residential and
commercial  real  estate  loans has  resulted in the  shortening  of the average
maturity and an increase in the  interest  rate  sensitivity  of the Bank's loan
portfolio  as well as to  generated  increased  fee  income.  All of the  Bank's
multi-family residential and commercial real estate loan portfolio is secured by
properties  located in the Company's  primary  market area. As of June 30, 1999,
commercial and multi-family real estate loans,  excluding construction loans for
such  properties,  amounted  to  $56.03  million,  or  18.2% of the  total  loan
portfolio.


                                       9
<PAGE>
         A substantial  majority of  commercial  real estate loans have interest
rates which  adjust  annually  after an initial  three- or  five-year  term by a
margin over the  corresponding  United States Treasury yield for securities with
the same term.  These  loans  typically  have  amortization  periods of up to 20
years, but  occasionally  provide that the loans can be called by the Bank prior
to the end of the amortization  period,  generally at three,  five, seven or ten
years after origination.

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

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

         Construction   Loans.   The  Bank  also  offers  both   fixed-rate  and
adjustable-rate  residential  and  commercial  construction  loans.  Residential
construction  loans  are  offered  to  individuals  building  their  primary  or
secondary  residence as well as to selected local  developers to construct up to
four-family  dwellings.  Advances are made on a percentage of completion  basis,
usually  consisting  of six draws.  Residential  construction  loans  convert to
permanent  loans at the end of 12 months  or upon  completion  of  construction,
whichever  occurs  first.  At  June  30,  1999,  $24.26  million  or 7.9% of the
Company's total loan portfolio  consisted of construction  loans including loans
in process.  Loans in process  related to such loans totaled  $10.75  million at
June 30, 1999.

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

                                       10
<PAGE>
beyond the amount  originally  committed  to permit  completion  of the  project
and/or be  confronted  at the maturity of the  construction  loan with a project
whose value is insufficient to assure full repayment.

         Land  Acquisition  and  Development  Loans.  The Bank also  offers land
acquisition and development  loans.  These types of loans are generally provided
only to local developers with strong financial  positions and with whom the Bank
is familiar.  These loans typically have terms of one to three years and carry a
floating  interest rate normally  indexed to the Wall Street Journal Prime.  The
Bank  will lend up to 75% of the  appraised  value of the  project.  At June 30,
1999, $5.08 million,  or 1.6% of the Company's total loan portfolio consisted of
land  acquisition and development  loans,  including loans in process.  Loans in
process on such loans  totaled  $627,000  at June 30,  1999.  Like  construction
lending, these loans generally are considered to involve a higher degree of risk
of loss than long-term  financing on approved occupied real estate.  The Bank is
actively  pursuing  developers who can both demonstrate the ability to meet cash
flow  projections  in order to  repay  loans  through  a very  strong  financial
position and have a reputation  for  successfully  completing  such  projects in
similar situations with the Bank.

         Consumer  Loans.  The Bank  offers a wide  variety of  consumer  loans,
including home equity loans,  home  improvement  loans,  equity lines of credit,
secured  and  unsecured  personal  loans  and  automobile  loans.  The  Bank has
aggressively  marketed  consumer  loans  in order to  provide  a wider  range of
financial  services  to its  customers  and  because  of the  shorter  terms and
normally  higher  interest  rates on such loans.  As of June 30, 1999,  consumer
loans amounted to $51.42 million or 16.7% of the total loan portfolio.

         The Bank's home equity lines of credit  currently  provide for terms of
up to 10 years.  The interest  rate on the "Prime Line"  adjusts  monthly to the
Prime Rate. The regular equity line of credit adjusts monthly at 1.50% above the
Prime Rate.  The limit of such loan is the  borrower's  equity in his residence,
subject  to  certain  income  qualifications.  The Bank also  makes  fixed-rate,
fixed-term home equity loans on which it takes a first- or second-mortgage  lien
on the  borrower's  property.  These  loans  have  terms of up to 15 years.  The
balance of the  fixed-rate  mortgages  on the  properties  cannot  exceed in the
aggregate 80% of the  appraised  value of the  properties.  Home equity lines of
credit and  fixed-rate  home equity loans  amounted to $5.51  million and $40.05
million,  respectively, as of June 30, 1999. The Bank also originates fixed-rate
bridge  loans with  loan-to-value  ratios of no greater than 80% of the value of
the secured  real  estate and at a maximum  term of twelve  months.  At June 30,
1999, the balance on these loans totaled $455,000.

          At June 30,  1999,  the  balance was  $487,700  for  fixed-rate  loans
secured by certificates of deposit or marketable securities.  Unsecured personal
loans  amounted to $443,400 at June 30, 1999 and consisted of  fixed-rate  loans
with  maximum loan  balances of $5,000 and terms no greater than 48 months.  The
Bank also originates fixed-rate loans on new and used automobiles.  The terms of
such  loans do not  exceed 60  months  on new cars and 48  months on used  cars.
Automobile  loans amounted to $3.43 million at June 30, 1999. The Bank's current
line of credit

                                       11
<PAGE>
provides for  unsecured  loans of up to $1,000 for terms of up to 36 months with
an interest  rate set at 6.0% over the Prime Rate adjusted  monthly.  Such loans
have a floor of 10.0% and a ceiling of 18.0% and  totaled  $238,000  at June 30,
1999. In addition,  the Bank  originates  Visa and MasterCard  credit card loans
with up to $5,000  lines of credit and at an interest  rate set at 6.0% over the
Prime Rate.  At June 30,  1999,  the  Company had  $365,900 in credit card loans
outstanding.

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

         Commercial  Business Loans.  The Bank makes  commercial  business loans
directly to  businesses  located in its market area.  The Bank targets small and
medium sized businesses with the majority of the loans being less than $750,000.
Applications for commercial  business loans are obtained primarily from existing
customers,  branch referrals and direct inquiry. As of June 30, 1999, commercial
business loans totaled $14.71 million or 4.8% of the total loan portfolio.

         Commercial  business loans  originated by the Bank generally have terms
of five years or less and fixed interest rates or adjustable interest rates tied
to the Wall Street Journal Prime plus a margin. Such loans are generally secured
by real estate, receivables, equipment, or inventory and are generally backed by
the personal  guarantees of the principals of the borrower.  Commercial business
loans  generally  have shorter terms to maturity and provide  higher yields than
residential  mortgage loans.  Although  commercial  business loans generally are
considered  to involve  greater  credit risk than certain  other types of loans,
management  intends to  continue  to offer  commercial  business  loans to small
medium  sized  businesses  in an effort to better serve our  community's  needs,
obtain core non-interest  bearing deposits,  and increase the Company's interest
rate spread.

         Regulatory Requirements and Underwriting Policies.  Under the Financial
Institutions  Reform,  Recovery,  and  Enforcement  Act of 1989  ("FIRREA")  and
pursuant to the parity  provisions of the State Code,  the aggregate  loans that
the Company may make to any  borrower  and its  affiliates  is limited to 15% of
unimpaired  capital for unsecured  loans and 25% of capital for loans secured by
readily marketable  collateral.  At June 30, 1999,  pursuant to such provisions,
the Bank was  permitted  to extend  credit to any one  borrower  totaling  $4.94
million.  Special rules applicable to savings associations' provide authority to
develop  domestic  residential


                                       12
<PAGE>
housing  units up to the lesser of 30% of the savings  association's  unimpaired
capital and unimpaired surplus or $30.0 million, if: (a) the purchase price of a
single-family unit does not exceed $500,000;  (b) the savings  association is in
compliance with the fully phased-in capital standards;  (c) the OTS director, by
order,  authorizes the higher limit;  (d) the loans made to all borrowers in the
aggregate do not exceed 150% of the savings association's unimpaired capital and
unimpaired  surplus;  and (e) all loans  comply  with  applicable  loan-to-value
requirements. At June 30, 1999, the Bank's largest loan or group of loans to one
borrower,  including  related  entities,  aggregated  $4.50  million,  and is in
conformity with the current loans to one borrower regulations described above.

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

         In the loan approval  process,  the Bank  assesses both the  borrower's
ability  to  repay  the loan  and the  adequacy  of the  proposed  security.  In
connection therewith, the Bank obtains an appraisal of the security property and
information  concerning the income,  financial condition,  employment and credit
history of the applicant.  Loans must be approved at various  management levels,
including  the  Board  of  Directors,  depending  on the  amount  of  the  loan.
Residential  mortgage  loans,  commercial  business and  commercial  real estate
loans,  and consumer  loans in excess of $1.00 million  require  approval by the
Board of Directors.  In addition,  any loan in excess of $500,000 which exhibits
certain characteristics concerning the borrower or the project requires approval
by the Board of Directors.

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

                                      13
<PAGE>
         Loan Fee and Servicing Income. In addition to interest earned on loans,
the Bank receives income through  servicing of loans and fees in connection with
loan originations, loan modifications,  late payments,  prepayments,  repayments
and changes of property ownership and for miscellaneous  services related to its
loans. Income from these activities varies from period to period with the volume
and type of loans made.

         Loan origination fees and certain related direct loan origination costs
are offset and the resulting net amount is deferred and amortized  over the life
of the  related  loans as an  adjustment  to the  yield of such  related  loans.
However,  in the event the related loan is sold, any deferred loan fees or costs
remaining with respect to such loan should be taken into income.

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

         At June 30, 1999,  the Bank was servicing  $26.74  million of loans for
others,  substantially  all of which  were  whole  loans sold by the Bank to the
FHLMC.  The Bank receives a servicing fee of  approximately  1/4 or 3/8 of 1% on
such loans.

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

                                       14
<PAGE>
exhausted or failed to pursue such rights.  These provisions of Pennsylvania law
may delay for several months the Bank's  ability to foreclose  upon  residential
loans secured by real estate located in the  Commonwealth  of  Pennsylvania.  In
addition,  the uniform FNMA/FHLMC lending documents used by the Bank, as well as
most other residential  lenders in Pennsylvania,  requires notice and a right to
cure similar to that provided under Pennsylvania law.

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

         If foreclosure is effected, the property is sold at a public auction in
which the Company may participate as a bidder.  If the Company is the successful
bidder,  the acquired  real estate  property is then  included in the  Company's
"real estate owned" account until it is sold.  When property is acquired,  it is
recorded at the lower of carrying or fair value at the date of  acquisition  and
any write-down  resulting therefrom is charged to the allowance for loan losses.
Interest  accrual  ceases on the date of  acquisition  and all costs incurred in
maintaining the property from that date forward are expensed. Costs incurred for
the  improvement or  development of such property are  capitalized to the extent
they do not exceed the property's fair value. No loss reserves are maintained on
REO and future  write-downs  for cost  beyond the fair value are  expensed.  The
Company is permitted  under  Department and OTS  regulations to finance sales of
REO by "loans to  facilitate,"  which may involve more favorable  interest rates
and  terms  than  generally  would be  granted  under  the  Bank's  underwriting
guidelines.  However,  at June 30,  1999,  the Company did not have any loans to
facilitate.

         For purposes of applying the  measurement  criteria for impaired loans,
the  Company  excludes  large  groups  of  smaller-balance   homogeneous  loans,
primarily consisting of residential real estate loans and consumer loans as well
as commercial loans with balances of less than $100,000.  For applicable  loans,
the Company  evaluates the need for impairment  recognition  when a loan becomes
non-accrual  or earlier if,  based on  management's  assessment  of the relevant
facts and  circumstances,  it is  probable  that the  Company  will be unable to
collect  all  proceeds  due  according  to the  contractual  terms  of the  loan
agreement.  At and during the year ended June 30,  1999,  the  average  recorded
investment in impaired  loans was  $262,000.  If these  impaired  loans had been
current  in  accordance  with  their  original  terms  and had been  outstanding
throughout the period, the gross interest income for fiscal 1999 that would have
been  recorded for these loans was $13,000.  Interest  income on these  impaired
loans included in income for



                                       15
<PAGE>
fiscal 1999 amounted to $3,000.  The  Company's  policy for the  recognition  of
interest income on impaired loans is the same as for non-accrual loans discussed
above.  Impaired  loans  are  charged  off  when  the  Company  determines  that
foreclosure  is probable and the fair value of the  collateral  is less than the
recorded investment of the impaired loan.

The following table sets forth information  regarding  non-accrual loans and REO
held by the  Company at the dates  indicated.  The  Company did not have any (i)
loans  which  are 90 days or more  delinquent  but on  which  interest  is being
accrued or (ii) loans which were classified as restructured troubled debt at any
of the dates presented.
<TABLE>
<CAPTION>

                                                 Year Ended June 30,
                                  --------------------------------------------------
                                  1999       1998        1997       1996        1995
                                  ----      ------      ----      ------      ------
                                                (Dollars In Thousands)
Non-accrual  loans:
<S>                               <C>       <C>         <C>       <C>         <C>
Residential real estate loans     $568      $  771      $417      $1,166      $2,029

Commercial real estate loans       --         --         --         --            28

Construction and land loans        --           55       --          737         294

Commercial business loans          258        --         --           18          10

Consumer loans                     107         420       331         297         549
                                  ----      ------      ----      ------      ------
Total non-accrual loans           $933      $1,246      $748      $2,218      $2,910
                                  ====      ======      ====      ======      ======

Total non-accrual loans
  to total assets                  .21%        .33%      .23%        .81%       1.10%

Total REO                          --         --         --       $  121      $  157

Total non-accrual loans and
  REO to total assets              .21%        .33%      .23%        .85%       1.16%
</TABLE>

         At  June  30,  1999,   non-accrual   real  estate  loans  included  six
residential  mortgage loans aggregating  $568,000,  all secured by single-family
residential properties.

         The total amount of  non-performing  loans was $933,000,  $1.25 million
and  $748,000  at  June  30,  1999,  1998  and  1997,  respectively.   If  these
non-performing  loans had been current in accordance  with their  original terms
and had been  outstanding  throughout  the period,  the gross amount of interest
income for fiscal 1999,  1998,  and 1997 that would have been recorded for these
loans  was   $75,200,   $111,800,   and  $71,400.   Interest   income  on  these
non-performing loans included in income for fiscal 1999, 1998, and 1997 amounted
to $26,100, $57,560, and $35,200, respectively.

         Allowances for Losses on Loans and Classified Assets. The allowance for
loan  losses is  maintained  at a level that  management  considers  adequate to
provide for  potential  losses  based upon an  evaluation  of known and inherent
risks in the loan portfolio.  Management's evaluation


                                       16
<PAGE>
is  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 loan  losses  is  adequate,  future  adjustments  to the
allowance  may be  necessary,  and  net  income  may be  adversely  affected  if
circumstances  differ substantially from the assumptions used in determining the
level of the allowance.  Management may in the future further increase the level
of  its   allowance  for  loan  losses  as  a  percentage  of  total  loans  and
non-performing  loans in the  event the level of  multi-family  residential  and
commercial  real estate loans (which  generally are considered to have a greater
risk of loss than single-family  residential  mortgage loans) as a percentage of
its total loan portfolio continues to increase. In addition,  various regulatory
agencies, as an integral part of their examination process,  periodically review
the  Company's  allowance  for losses on loans.  Such  agencies  may require the
Company to recognize  additions to the allowance  based on their judgments about
information available to them at the time of their examination. The allowance is
increased by the provision for loan losses which is charged to operations.  Loan
losses,  other than those incurred on loans held for sale, are charged  directly
against  the  allowance  and  recoveries  on  previously  charged-off  loans are
generally  added to the allowance.  At June 30, 1999,  the Bank's  allowance for
loan losses was $3.65 million or 1.24% of total net loans  receivable and 391.3%
of total  non-performing  loans  compared to $3.41 million or 1.23% of net loans
and 274.0% of total non-performing loans at June 30, 1998.

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

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

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

         Assets classified loss are considered  uncollectable and of such little
value that  their  continuance  as assets  without  establishment  of a specific
reserve is not warranted.  This  classification  does not mean that an asset has
absolutely no recovery or salvage value, but rather,


                                       17
<PAGE>
that it is not practical or desirable to defer writing off a basically worthless
asset even though partial recovery may be affected in the future.

         At June 30,  1999 and 1998,  the  Company's  classified  assets,  which
consisted of assets classified as substandard or doubtful, totaled $1.24 million
and $1.47  million,  respectively.  The Company did not have any REO at June 30,
1999 and 1998.  Included in the assets  classified  substandard at June 30, 1999
and 1998,  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, and have a well-defined weakness that may
jeopardize  the  liquidation  of the  debt.  The  majority  of loans  which  are
classified but otherwise performing are residential mortgage loans.

         Other loans  designated as special  mention by the Company  amounted to
$4.37 million and $971,700 at June 30, 1999 and 1998, respectively.  Included in
the  special  mention  category  at June 30, 1999 was one loan with a balance of
$4.37 million to an extended term  healthcare  provider  which was performing in
accordance  with the terms and  conditions  of the loan but had  characteristics
which warranted management to classify it special mention.  Although these loans
are not considered or classified as substandard,  doubtful or loss, they do have
a potential  weakness which may, if not  corrected,  result in increased risk at
some future date.




                                       18
<PAGE>
The following  table  summarizes  activity in the  Company's  allowance for loan
losses during the periods indicated.
<TABLE>
<CAPTION>
                                                                       As of June 30,
                                             ---------------------------------------------------------------
                                              1999          1998           1997         1996          1995
                                             -------       -------       -------       -------       -------
                                                                   (Dollars in Thousands)
<S>                                          <C>           <C>           <C>           <C>           <C>
Allowance at beginning of period             $ 3,414       $ 2,855       $ 2,667       $ 2,449       $ 2,199

Loans charged off against the allowance:
    Residential real estate                      (58)          (12)         (117)         (101)          (54)
    Construction and land                       --            --            (177)         --              (5)
    Commercial business                         --            --              (1)           (2)         (201)
    Consumer                                    (119)          (69)          (82)          (43)          (69)
                                             -------       -------       -------       -------       -------
                                                (177)          (81)         (377)         (146)         (329)

Recoveries:
    Residential real estate                     --              21            37          --            --
    Construction and land                       --            --               4            16          --
    Commercial business                         --            --            --            --              93
    Consumer                                      24            13             1             8            31
                                             -------       -------       -------       -------       -------
                                                  24            34            42            24           124

Net charge-offs                                 (153)          (47)         (335)         (122)         (205)

Provision for loan losses
  charged to operating expenses                  390           606           523           340           455
                                             -------       -------       -------       -------       -------

Allowance at year end                         $3,651       $ 3,414       $ 2,855       $ 2,667       $ 2,449
                                             =======       =======       =======       =======       =======

Ratio of net charge-offs to
  average loans outstanding                      .05%          .02%          .13%          .05%          .10%
                                             =======       =======       =======       =======       =======

Ratio of allowance to period-end
  net loans                                     1.24%         1.23%         1.10%         1.18%         1.10%
                                             =======       =======       =======       =======       =======
</TABLE>

                                       19
<PAGE>
The following table presents information regarding the Company's total allowance
for losses on loans as well as the  allocation  of such  amounts to the  various
categories of the loan portfolio.
<TABLE>
<CAPTION>
(Dollars in Thousands)
                                                                               At June 30,
                                     -----------------------------------------------------------------------------------------------
                                           1999                1998                1997               1996               1995
                                     -----------------    ---------------    ----------------   ----------------  -----------------
                                                 % of               % of               % of               % of                % of
                                                Loans              Loans              Loans              Loans               Loans
                                              to Total            to Total           to Total           to Total            to Total
                                              --------            --------           --------           --------            --------
                                     Amount     Loans     Amount    Loans    Amount    Loans    Amount    Loans    Amount     Loans
                                     ------     -----     ------    -----    ------    -----    ------    -----    ------     -----
<S>                                  <C>       <C>       <C>       <C>      <C>       <C>       <C>       <C>      <C>       <C>
Residential real estate loans        $  638     51.1%    $  789     53.6%   $  778     58.7%    $  898     63.1%    $1,077    66.6%
Commercial real estate loans          1,415     17.9      1,050     14.1       871     12.5        585      9.6        428     9.8
Construction and land loans             194      9.5        201     10.5       139      8.5        280      7.2        309     5.7
Commercial business loans               726      4.8        357      3.9       278      2.9        207      2.4        105     1.8
Consumer loans                          678     16.7      1,017     17.9       789     17.4        697     17.7        530    16.1

   Total allowance for loan losses   $3,651    100.0%    $3,414    100.0%   $2,855    100.0%    $2,667    100.0%    $2,449   100.0%

Total allowance for loan losses
  to total non-performing loans                391.3%              274.0%             381.7%              120.2%              84.2%
                                               =====               =====              =====               =====               ====

Total non-performing loans           $  933              $1,246             $  748              $2,218              $2,910
                                     ======              ======             ======              ======              ======
</TABLE>


                                       20
<PAGE>
Securities Activities

         Historically,  interest and dividends on  securities  have provided the
Company with a significant  source of revenue.  At June 30, 1999,  the Company's
securities portfolio and interest-bearing deposits aggregated $140.03 million or
31.04% of its total assets.  First Financial's  securities and  interest-bearing
deposits are used to meet certain federal liquidity ratios. The liquidity ratios
are met in part by investing in  securities  that qualify as liquid assets under
OTS  regulations.  (See  "Regulation  -  Regulation  of  the  Bank  -  Liquidity
Requirements").  Such securities include  obligations issued or fully guaranteed
by the United States  Government,  certain federal agency  obligations,  certain
time deposits and negotiable  certificates of deposit issued by commercial banks
and  other  specified   investments,   including   commercial  paper  and  other
securities. Investment decisions are made by members of senior management within
guidelines approved by the Company's Board of Directors.

         The Company divides its securities  portfolio into three segments:  (a)
held to maturity;  (b)  available for sale;  and (c) trading.  Securities in the
held  to  maturity  category  are  accounted  for  at  amortized  cost.  Trading
securities  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.  At June 30, 1999, the Company had a net unrealized  loss
on securities available for sale, net of taxes, of $1.55 million.







                                       21
<PAGE>
The  following  table  sets  forth  the  Company's   securities   portfolio  and
interest-earning deposits at carrying value at the dates indicated.
<TABLE>
<CAPTION>
                                                                       At June 30,
                                                          --------------------------------
                                                             1999        1998        1997
                                                          --------     -------     -------
                                                                 (Dollars in Thousands)

<S>                                                       <C>          <C>         <C>
Interest-bearing deposits                                 $ 13,409     $11,861     $ 7,901
Trading account securities                                   9,221      20,352         252
Investment securities held to maturity:
    U.S. Government and agency obligations                    --         4,500       5,500
    Municipal notes and bonds                                3,229       7,394      10,986
    Mortgage-backed securities                                 791       1,123       1,473
    Other                                                    3,781       2,583       1,510
                                                          --------     -------     -------
       Total investment securities held to
       maturity                                              7,801      15,600      19,469
                                                          --------     -------     -------
Investment securities available for sale:
    U.S. Government and agency obligations                  47,242      12,296      18,217
    Municipal notes and bonds                               27,378      15,173       4,128
    Mortgage-backed securities                              15,817       9,431       5,054
    Equity securities                                        1,336       1,096         167
    Debt securities                                         15,430         307        --
    Other                                                    2,397        --          --
                                                          --------     -------     -------
       Total investment securities available for sale      109,600      38,303      27,566
                                                          ========     =======     =======
      Total securities and interest-bearing
         deposits                                         $140,031     $86,116     $55,188
                                                          ========     =======     =======
</TABLE>


         The contractual maturity or repricing  characteristics of the Company's
investment  portfolio is considerably  more interest rate sensitive than that of
its  loan  portfolio.   Consequently,   the  investment   portfolio  provides  a
significant  source of liquidity and protection  against interest rate risk. The
weighted  average  term to maturity or  repricing  of the  Company's  investment
securities held to maturity was 3.1 years at June 30, 1999 and 5.5 years at June
30, 1998.


                                       22
<PAGE>
The amortized cost and estimated fair value of investment securities at June 30,
1999, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
                                                             Estimated      Weighted
                                                Amortized       Fair        Average
                                                   Cost         Value        Yield
                                                 --------     --------       ------
                                                        (Dollars in Thousands)
Held to Maturity
<S>                                              <C>          <C>             <C>
  Due in one year or less                        $  1,840     $  1,848        7.22%
  Due after one year through five years             1,087        1,088        6.27
  Due after five years through ten years             --           --           --
  Due after ten years                               1,093        1,098        6.96
  No stated maturity                                3,781        3,782        6.50
                                                 --------     --------        ----
  Total held to maturity                         $  7,801     $  7,816        6.70%
                                                 ========     ========        ====

Available for Sale
  Due in one year or less                        $    340     $    341        5.52%
  Due after one year through five years            25,805       25,528        6.28
  Due after five years through ten years           27,983       27,313        6.36
  Due after ten years                              56,551       55,081        6.97
  No stated maturity                                1,450        1,337        2.46
                                                 --------     --------        ----
  Total available for sale                       $112,129     $109,600        6.60%
                                                 ========     ========        ====
</TABLE>

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

         As of June 30, 1999,  investments in the debt and/or equity  securities
of any one issuer  (excluding  U.S.  Government  and federal  agencies)  did not
exceed 10% of the Company's stockholders' equity.

Sources of Funds

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

         Deposits.  The Company  obtains  deposits  primarily  from residents of
Chester County, and to a lesser extent Berks, Delaware, Lancaster and Montgomery
Counties, Pennsylvania. Currently, the principal methods used by First Financial
to attract  deposit  accounts  include the  offering of services  and  accounts,
competitive  interest rates, and convenient  office locations and service hours.
Other than during times of inverse or flat yield curves,  the Bank has adopted a
pricing program for its certificate  accounts which provides for higher rates of
interest on its

                                       23
<PAGE>
longer  term  certificates  in  order  to  encourage  depositors  to  invest  in
certificates with longer maturities, thus reducing the interest rate sensitivity
of the Company's deposit  portfolio.  First Financial also offers a tiered money
market account that pays higher  interest on higher balances so as to maintain a
relatively stable core of deposits even when its certificate accounts mature.

          Market  conditions  have caused First  Financial to rely  primarily on
short-term  certificate  accounts and other deposit  alternatives  that are more
responsive  to market  interest  rates  than  passbook  accounts  and  regulated
fixed-rate, fixed-term certificates that were historically the Company's primary
sources  of  deposits.   First  Financial's  current  deposit  products  include
non-interest-bearing accounts, passbook/statement savings accounts, NOW checking
accounts,  money market deposit  accounts,  certificates  of deposit  ranging in
terms from 30 days to five years and certificates of deposit in denominations of
$100,000 or more ("jumbo  certificates").  Included among these deposit products
are individual  retirement account  certificates ("IRA  certificates") and Keogh
accounts.









                                       24
<PAGE>
The following table shows the balances of the Company's deposits as of the dates
indicated:
<TABLE>
<CAPTION>
                                                                          At June 30,
                                      ---------------------------------------------------------------------------------
                                              1999                         1998                           1997
                                      ---------------------        ---------------------       ------------------------
                                                                    (Dollars in Thousands)
                                                      % of                        % of                            % of
                                       Amount       Deposits        Amount      Deposits         Amount         Deposits
                                       ------       --------        ------      --------         ------         --------
<S>                                   <C>              <C>         <C>             <C>          <C>               <C>
Non-interest-bearing accounts         $ 33,007         9.2%        $ 32,361        10.9%        $ 21,493          8.2%
NOW checking accounts                   36,011        10.0           31,770        10.6           27,625         10.6
Savings accounts                        29,033         8.1           27,164         9.1           29,887         10.2
Money market accounts                   47,464        13.2           35,610        11.9           26,474         11.5
Certificates of deposit less than
  $100,000                             137,559        38.2          133,801        44.9          124,636         47.8
Certificates of deposit with
  $100,000 minimum balance              76,439        21.3           37,485        12.6           30,635         11.7
                                      --------       -----         --------       -----         --------        -----

      Total deposits                  $359,513       100.0%        $298,191       100.0%        $260,750        100.0%
                                      ========       =====         ========       =====         ========       ======
</TABLE>


The following  table shows the weighted  average  interest rate of the Company's
deposits by type of account at June 30, 1999:
<TABLE>
<CAPTION>

                                                                            Weighted
                                                          Amount            Avg. Rate
                                                         --------           ---------
                                                            (Dollars in Thousands)
<S>                                                      <C>                  <C>
Non-interest-bearing accounts                            $ 33,007             0.00%
NOW checking accounts                                      36,011             1.47
Savings accounts                                           29,033             1.87
Money market accounts                                      47,464             3.82
Certificates of deposit less than
  $100,000                                                137,559             5.36
Certificates of deposit with
  $100,000 minimum balance                                 76,439             5.07
                                                         --------             ----

      Total deposits                                     $359,513             3.93%
                                                         ========             ====
</TABLE>
<PAGE>
The  following  table sets forth the net  deposit  flows of the  Company for the
periods indicated:
<TABLE>
<CAPTION>

                                                       Year Ended June 30,
                                               ---------------------------------
                                                 1999         1998          1997
                                               -------      -------      -------
                                                     (Dollars in Thousands)
<S>                                            <C>          <C>          <C>
Increase before interest credited              $50,465      $27,568      $23,848
Interest credited
                                                10,857        9,873        8,696
                                               -------      -------      -------

     Net deposit increase                      $61,322      $37,441      $32,544
                                               =======      =======      =======

</TABLE>
                                       25
<PAGE>
The following  table shows the balances of certificates of deposit with balances
of $100,000 or greater which mature during the periods indicated and the balance
at June 30, 1999.
<TABLE>
<CAPTION>

                                                                        Balances at June 30, 1999, Maturing
                                                              ----------------------------------------------------
                                                                      (Dollars in Thousands)
                                                At             Within          Three        Six to         After
                                             June 30,          Three         to Six        Twelve         Twelve
                                               1999            Months         Months        Months         Months
                                               ----            ------         ------        ------         ------
<S>                                          <C>              <C>            <C>            <C>           <C>
Certificates of deposit with $100,000
      minimum balance                        $76,439          $17,994        $8,270         $7,184        $42,991
                                             =======          =======        ======         ======        =======
</TABLE>


The  following  table  presents  the average  balance by type of deposit and the
average rate paid by type of deposit for the periods indicated.
<TABLE>
<CAPTION>


                                                                     Year Ended June 30,
                                    -----------------------------------------------------------------------------------
                                              1999                          1998                         1997
                                    -------------------------      -----------------------      -----------------------
                                                                   (Dollars in Thousands)
                                                      Average                       Average                      Average
                                      Average           Rate         Average         Rate           Average       Rate
                                      Balance           Paid         Balance         Paid           Balance       Paid
                                      -------           ----         -------         ----           -------       ----
<S>                                 <C>                 <C>        <C>               <C>        <C>               <C>
NOW checking accounts               $  33,278           1.48%      $  29,328         1.81%      $  23,986         1.92%
Savings accounts                       31,392            1.81         25,991          2.67         25,067          2.87
Money market accounts                  43,147            3.65         29,847          3.57         26,084          3.42
Certificates of deposit
  less than $100,000                  149,713            5.55        126,286          5.90        119,679          5.81
Certificates of deposit with
  $100,000 minimum balance             52,917            5.17         35,725          4.94         26,990          4.91
</TABLE>

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

         In an effort to  attract  increasing  amounts  of  non-interest-bearing
deposits,  First Financial offers a basic checking account which features no-fee
checking with a minimum balance of $50.


                                       26
<PAGE>
         First  Financial also offers a business  checking  account which grants
credits  against  service  charges  based on the average  daily  balance.  It is
management's belief that such accounts represent an excellent source of deposits
that are not affected by interest rates.

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

         First Financial's  deposits are obtained primarily from persons who are
residents of  Pennsylvania.  First  Financial  does not  advertise  for deposits
outside of  Pennsylvania or accept brokered  deposits,  and management  believes
that  an  insignificant  amount  of  First  Financial's  deposits  were  held by
non-residents of Pennsylvania at June 30, 1999.

         Borrowings. First Financial may obtain advances from the FHLBP upon the
security of the common stock it owns in that bank and certain of its residential
mortgage loans,  provided certain  standards  related to credit  worthiness have
been met.  See  "Regulation  -  Regulation  of the Bank - Federal Home Loan Bank
System." Such advances are made pursuant to several  different  credit programs,
each of which has its own interest rate and range of maturities.  FHLBP advances
are  generally  available  to meet  seasonal  and other  withdrawals  of deposit
accounts and to expand lending and investment activities,  as well as to aid the
efforts of members to establish  better asset and liability  management  through
the extension of maturities of  liabilities.  At June 30, 1999,  the Company had
$50.38  million in FHLBP advances  outstanding.  The Company has available to it
from an unaffiliated  financial institution an annually renewable line of credit
not to exceed  10% of the  Company's  maximum  borrowing  capacity.  The line of
credit was $13.13 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, 1999, there was no balance outstanding on the line of credit.




                                       27
<PAGE>
         The following tables present certain information  regarding  short-term
borrowings  (borrowings  with a  maturity  of one year or less) for the  periods
indicated:
<TABLE>
<CAPTION>
                                                                      Year Ended June 30,
                                                       ---------------------------------------------------
                                                         1999                  1998                 1997
                                                         ----                  ----                 ----
                                                                     (Dollars in Thousands)
<S>                                                     <C>                  <C>                   <C>
Short-term borrowings:
      Balance outstanding at end
               of period                                $16,731              $17,601               $18,325
      Weighted average interest rate
               at end of period                           5.43%                5.28%                 5.91%
      Average balance outstanding                       $18,596              $16,417                $6,152
      Maximum amount outstanding
              at any month-end
              during the period                         $35,320              $25,323               $19,046
      Weighted average interest rate
              during the period                            5.51%                5.58%                 5.97%

</TABLE>


Yields Earned and Rates Paid

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


                                       28
<PAGE>
Interest Income and Interest Spread Analysis

         The following table sets forth, for the periods indicated,  information
regarding  (i) the total  dollar  amount of interest  income of the Company from
interest-earning  assets and the resultant average yields; (ii) the total dollar
amount of interest  expense on  interest-bearing  liabilities  and the resultant
average cost; (iii) net interest income;  (iv) interest rate spread; and (v) net
interest-earning assets and their net yield.

Average balances are determined on a monthly basis which are  representative  of
operations.
<TABLE>
<CAPTION>
                                                                            Year Ended June 30,
                                              --------------------------------------------------------------------------------
                                                              1999                                    1998
                                              -------------------------------------- ---------------------------------------
                                                                         (Dollars in Thousands)
                                               Average                       Yield/   Average                     Yield/
                                              Balance(2)     Interest(1)    Rate(1)  Balance(2)   Interest(1)    Rate(1)
                                              ----------     -----------    -------  ----------   -----------    -------
<S>                                             <C>             <C>           <C>      <C>          <C>            <C>
Assets:
    Loans and loans
      held for sale                             $280,544        $22,875       8.15%    $264,106     $22,298        8.44%
    Securities and
      other investments                         $113,110        $ 7,137       6.31%    $ 60,777     $ 3,906        6.43%
                                                --------        -------                --------     -------
     Total interest-
      earning assets                            $393,654        $30,012       7.62%    $324,883     $26,204         8.07%
    Non-interest earning assets                 $ 18,092                               $ 15,141

    Total assets                                $411,746                               $340,024
                                                ========                               ========

Liabilities and Stockholders' Equity:
  Deposits and repurchase agreements            $287,627        $12,711       4.42%    $247,903     $11,476         4.63%
  FHLB advances and
     other borrowings                           $ 53,595        $ 2,971       5.54%    $ 31,813     $ 1,933         6.08%
                                                --------        -------                --------     -------
  Total interest-
      bearing liabilities                       $341,222        $15,682                $279,716     $13,409         4.79%

  Non-interest-bearing liabilities              $ 36,962                      4.60%    $ 30,167

  Stockholders' equity                          $ 33,562                               $ 30,141

  Total liabilities and stockholders' equity    $411,746                               $340,024
                                                ========                               ========
Net interest income/interest rate spread                        $14,330       3.03%                 $12,795         3.28%
                                                                =======       ====                  =======         ====
Net interest-earning assets/net yield on
  interest-earning assets                       $ 52,432                      3.64%    $ 45,167                     3.94%
                                                ========                      ====     ========                     ====
Ratio of average interest-earning assets to
  interest-bearing liabilities                                                 115%                                  116%
                                                                               ===                                   ===
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                  June 30,
                                                ---------------------------------------
                                                                   1997
                                                 --------------------------------------
                                                 Average                         Yield/
                                                 Balance(2)     Interes(1)      Rate(1)
<S>                                               <C>             <C>          <C>
Assets:
    Loans and loans
      held for sale                               $240,858        $20,452        8.49%
    Securities and
      other investments                           $ 42,566        $ 2,465        5.79%
                                                  --------        -------

    Total interest-
      earning assets                              $283,424        $22,917        8.09%
    Non-interest earning assets                   $ 11,388

    Total assets                                  $294,812
                                                  ========

Liabilities and Stockholders' Equity:
  Deposits and repurchase agreements              $223,048        $10,338        4.63%
  FHLB advances and
     other borrowings                             $ 20,942        $ 1,169        5.58%
                                                  --------        -------
  Total interest-
      bearing liabilities                         $243,990        $11,507        4.72%

  Non-interest-bearing liabilities                $ 23,603

  Stockholders' equity                            $ 27,219

  Total liabilities and stockholders' equity      $294,812
                                                  ========

Net interest income/interest rate spread                          $11,410        3.37%
                                                                  =======        ====

Net interest-earning assets/net yield on
  interest-earning assets                         $ 39,434                       4.03%
                                                  ========                       ====

Ratio of average interest-earning assets to
  interest-bearing liabilities                                                    116%
                                                                             =========
</TABLE>
(1)  The indicated interest and annual yield and rate are presented on a taxable
     equivalent basis using the Federal marginal income tax rate of 34% adjusted
     for the 20% interest expense disallowance (27.2%) for 1999, 1998, and 1997.
(2)  Non-accruing loans are included in the average balance.


                                       29
<PAGE>
Rate/Volume Analysis
--------------------

         The following table presents certain  information  regarding changes in
interest income and interest  expense of the Company for the periods  indicated.
Interest income and the annual rate are calculated on a taxable equivalent basis
using the Federal  marginal income tax rate of 34% adjusted for the 20% interest
expense disallowance  (27.2%). For each category of interest-earning  assets and
interest-bearing  liabilities,  information  is provided with respect to changes
attributable to (1) changes in volume (change in volume multiplied by old rate),
(2) changes in rate (change in rate multiplied by old volume) and (3) changes in
rate/volume (change in rate multiplied by change in volume).
<TABLE>
<CAPTION>

                                              1999 Compared to 1998                   1998 Compared to 1997
                                             Increase (Decrease) Due to              Increase (Decrease) Due to
                                    --------------------------------------      ---------------------------------------
                                                                      (Dollars in Thousands)
                                                          Rate/                                        Rate/
                                    Volume     Rate      Volume      Total      Volume     Rate       Volume      Total
                                    ------     -----      -----      ------     ------     -----      -----      ------
<S>                                 <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Interest income on interest-
  earning assets:
    Loans and loans
      held for sale                 $1,387     ($765)     ($ 48)     $  574     $1,974     ($117)     ($ 11)     $1,846
    Securities and
      other investments             $3,365     ($ 73)     ($ 63)     $3,229     $1,055     $ 271      $ 115      $1,441
                                    ------     -----      -----      ------     ------     -----      -----      ------
        Total interest income       $4,752     ($838)     ($111)     $3,803     $3,029     $ 154      $ 104      $3,287
                                    ------     -----      -----      ------     ------     -----      -----      ------

Interest expense on interest-
  bearing liabilities:
     Deposits and repurchase
        agreements                  $1,839     ($521)     ($ 84)     $1,234     $1,152     ($ 13)     ($  1)     $1,138
     FHLB advances and other
       borrowings                   $1,324     ($172)     ($118)     $1,034     $  607     $ 103      $  54      $  764
                                    ------     -----      -----      ------     ------     -----      -----      ------
         Total interest expense     $3,163     ($693)     ($202)     $2,268     $1,759     $  90      $  53      $1,902
                                                                                           -----      -----      ------

Net change in net interest
income                              $1,589     ($145)     $  91      $1,535     $$1,270    $  64      $  51      $1,385
                                    ======     =====      =====      ======     =======    =====      =====      ======
</TABLE>

                                       30
<PAGE>
Market Risk

         Market risk is the risk of loss from adverse  changes in market  prices
and rates.  The Company's  market risk arises  primarily  from the interest rate
risk  inherent  in its  lending  and  deposit  taking  activities.  To that end,
management actively monitors and manages its interest rate risk exposure.

         The Company's  profitability  is affected by  fluctuations  in interest
rates. A sudden and  substantial  change in interest rates may adversely  impact
the  Company's  earnings  to the extent  that the  yields on  interest-sensitive
assets and  interest-sensitive  liabilities do not change at the same speed,  to
the same  extent,  or on the same  basis.  The  Company  monitors  the impact of
changes in interest  rates between  assets and  liabilities  as discussed in the
Company's   Interest  Rate  Sensitivity   Analysis  under  the   Asset/Liability
Management  caption in the Company's 1999 Annual Report (see Exhibit 13 hereto).
Although interest rate sensitivity gap analysis is a useful measurement tool and
contributes  towards  effective asset liability  management,  it is difficult to
predict the effect of changing  interest rates based solely on that measure.  An
alternative  methodology is to estimate the impact on net interest income and on
net portfolio value of an immediate  change in interest rates in 100 basis point
increments.  Net portfolio  value ("NPV") is defined as the net present value of
assets,  liabilities,  and off-balance  sheet contracts.  The chart below is the
estimated effect of immediate  changes in interest rates at the specified levels
at June 30, 1999, calculated in compliance with Thrift Bulletin No. 13:
<TABLE>
<CAPTION>
          Change in Interest             Estimate Net Market Value
        Rates in Basis Points               of Portfolio Equity                      NPV as % of PV of Average Assets
        ---------------------               --------------------                          ---------------------
             (Rate Shock)                   Amount      $ Change     % Change              NPV Ratio     Change
             ------------                   ------      --------     --------              ---------     ------
                                             (Dollars in Thousands)

<S>             <C>                         <C>        <C>               <C>                   <C>         <C>
                 300                        $11,975    $(27,443)         (70)%                 2.86%       (580)
                 200                         20,823     (18,595)         (47)                  4.83        (382)
                 100                         30,107      (9,331)         (24)                  6.80        (186)
                Static                       39,418                       --                   8.66          --
                                                         --
                (100)                        48,191        8,773          22                   10.31        166
                (200)                        56,700       17,282          44                   11.83        318
                (300)                        66,518       27,100          69                   13.51        485

</TABLE>

         Certain  shortcomings are inherent in the methodology used in the above
interest rate risk  measurements.  Modeling changes in NPV require the making of
certain  assumptions  which may or may not  reflect  the manner in which  actual
yields and costs respond to changes in market  interest  rates.  In this regard,
the NPV table  presented  above  assumes that the  composition  of the Company's
interest sensitive assets and liabilities  existing at the beginning of a period
remains  constant  over  the  period  being  measured  and also  assumes  that a
particular  change in interest  rates is  reflected  uniformly  across the yield
curve regardless of the duration to maturity or repricing of specific assets and
liabilities.  Accordingly,  although the NPV table provides an indication of the
Company's  interest  rate risk  exposure  at a  particular  point in


                                       31
<PAGE>
time,  such  measurements  are not  intended  to and do not  provide  a  precise
forecast of the effect of changes in market  interest rates on the Company's net
interest income and will differ from actual results.

         The Company's  primary  objective in managing  interest rate risk is to
minimize the adverse  impact of changes in interest  rates on the  Company's net
interest income and capital,  while  structuring  the Company's  asset/liability
structure to obtain the maximum yield/cost spread on that structure. The Company
relies primarily on its asset/liability structure to control interest rate risk.

         The  Company  continually   evaluates  interest  rate  risk  management
opportunities, including the use of derivative financial instruments. Management
believes that hedging  instruments  currently  available are not  cost-effective
and, therefore,  has focused its efforts on increasing the Company's  yield/cost
spread through wholesale and retail opportunities.





                                       32

<PAGE>
Ratios

         The following table shows certain income and financial condition ratios
for the periods indicated. All averages are based on month-end balances.
<TABLE>
<CAPTION>
                                                            Year Ended June 30,
                                                       ----------------------------
                                                        1999       1998       1997
                                                       -----       ----       ----
<S>                                                    <C>        <C>        <C>
   Return on average assets (income
      excluding the special SAIF
      assessment of $832,000 in fiscal
      1997 net of taxes divided by
      average total assets)                             1.02%      1.07%      1.04%
   Return on average assets
      (income divided by average
      total assets)                                     1.02%      1.07%       .76%
   Return on average equity
      (income excluding the special
      SAIF assessment of $832,000
      in fiscal 1997 net of taxes divided
      by  average equity)                              12.55%     12.03%     11.28%
   Return on average equity
      (income divided by average equity)               12.55%     12.03%      8.22%
      Equity-to-assets ratio
      (average equity divided by
       average assets)                                  8.15%      8.86%      9.23%
   Dividend pay-out ratio                              27.39%     33.90%     47.46%
</TABLE>

Subsidiaries of First Financial

         At June 30, 1999, the Bank was permitted by regulations to invest up to
2% of assets in the  capital  stock of,  and  secured  and  unsecured  loans to,
subsidiary  corporations or service corporations and under certain circumstances
may make  conforming  loans to service  corporations  in greater  amounts.  As a
Pennsylvania-chartered  savings  institution,  the Bank may  diversify  into any
business  activity  approved in advance by the  Department.  In addition,  First
Financial  could  invest up to 30% of its assets in finance  subsidiaries.  Such
subsidiaries must be limited purpose subsidiaries whose sole purpose is to issue
debt or equity  securities  that the parent  association  is authorized to issue
directly and to remit the proceeds of such issuance to the parent association.

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


                                       33
<PAGE>
         At June 30, 1999, the Bank was authorized to have a maximum  investment
of $8.93 million in its one first-tier wholly-owned  subsidiary,  D & S Service.
As of such date, the Bank had invested $1.19 million in this subsidiary.

Acquisition

         On May 29, 1998,  the Company  acquired  Philadelphia  Corporation  for
Investment Services, a full service investment advisory and securities brokerage
firm.  The  transaction  was  accounted  for as a pooling of  interests  and the
shareholders  of PCIS received  23.4239  shares of Chester  Valley  Bancorp Inc.
stock for each share of PCIS stock.  Approximately  134,000 shares of CVAL stock
were issued in the exchange.

Competition

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

Employees

         The Company had 142 full-time  employees and 30 part-time  employees as
of June 30,  1999.  None of these  employees  are  represented  by a  collective
bargaining agent and the Company believes that it enjoys good relations with its
personnel.




                                       34
<PAGE>
                                   REGULATION

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

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

Regulation of the Company

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

         Federal Activities Restrictions. There are generally no restrictions on
the  activities  of a savings  and loan  holding  company  which  holds only one
subsidiary savings  association.  However, if the Director of the OTS determines
that there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity  constitutes a serious risk to the financial
safety,  soundness or  stability  of its  subsidiary  savings  association,  the
Director may impose such  restrictions as deemed necessary to address such risk,
including  limiting (i) payment of dividends  by the savings  association;  (ii)
transactions  between the savings association and its affiliates;  and (iii) any
activities of the savings  association that might create a serious risk that the
liabilities  of the  holding  company and its  affiliates  may be imposed on the
savings association.  Notwithstanding the above rules as to permissible business
activities of unitary savings and

                                       35
<PAGE>
loan holding companies,  if the savings association subsidiary of such a holding
company  fails to meet the  Qualified  Thrift  Lender  ("QTL")  test,  then such
unitary  holding  company shall become  subject to the  activities  restrictions
applicable  to  multiple  savings and loan  holding  companies  and,  unless the
savings  association  re-qualifies  as a QTL within one year  thereafter,  shall
register  as,  and  become  subject to the  restrictions  applicable  to, a bank
holding company. See "-Regulation of the Bank - Qualified Thrift Lender Test."

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

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


                                       36
<PAGE>
         In addition,  Sections 22(g) and (h) of the Federal  Reserve Act places
restrictions on loans by savings  associations to executive officers,  directors
and principal  stockholders  of the Company and the Bank.  Under Section  22(h),
loans to a director,  an executive officer and to a greater than 10% stockholder
of a savings  association or the company that controls the savings  association,
and certain affiliated  interests of such insiders (i) may not exceed,  together
with all other  outstanding loans to such person and affiliated  interests,  the
association's  loans  to  one  borrower  limit  (generally  equal  to 15% of the
institution's  unimpaired  capital  and  surplus)  (ii)  must be  made on  terms
substantially  the same as offered in comparable  transactions to other persons,
provided the Bank is not prohibited from extending  credit pursuant to a benefit
or  compensation  program  widely  available  to  employees  of the Bank and the
Company and that does not give preference to any officer,  director or principal
stockholder  over  other  employees  thereof,  and (iii) may in  certain  cases,
require prior board approval. In addition, the aggregate amount of extensions of
credit by a savings  association to all insiders cannot exceed the association's
unimpaired  capital and  surplus.  Furthermore,  Section  22(g)  places  certain
additional  restrictions on loans to executive  officers.  At June 30, 1999, the
Bank was in compliance with the above restrictions.

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

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

Regulation of PCIS

         General.  In the United States, a number of federal regulatory agencies
are  charged  with  safeguarding  the  integrity  of the  securities  and  other
financial markets and with protecting the interest of customers participating in
those markets.  The SEC is the federal agency that is primarily  responsible for
the regulation of broker-dealers  and investment  advisers doing business in the
United States, and the Federal Reserve Board promulgates  regulations applicable
to


                                       37
<PAGE>
securities  credit  transactions  involving  broker-dealers  and  certain  other
institutions  in the Unites States.  Much of the  regulation of  broker-dealers,
however,   has  been  delegated  to  self-regulatory   organizations   ("SROs"),
principally the National  Association of Securities Dealers,  Inc. ("NASD") (and
its  subsidiaries  NASD Regulation,  Inc. and the Nasdaq Stock Market),  and the
national securities  exchanges.  These SROs and exchanges adopt rules (which are
subject to approval by the SEC) that govern the industry, monitor daily activity
and conduct periodic examinations of member broker-dealers.  While PCIS is not a
member of the New York Stock  Exchange (the "NYSE"),  PCIS' business is impacted
by the NYSE rules.

         Securities  firms are also subject to  regulation  by state  securities
commissions in the states in which they are required to be  registered.  PCIS is
registered  as a  broker-dealer  with  the SEC and in all 50  states  and in the
District of Columbia, and is a member of, and subject to regulation by, a number
of SROs, including the NASD.

         As a result of federal and state registration and SRO memberships, PCIS
is subject to overlapping  schemes of regulation  which cover all aspects of its
securities   business.   Such  regulations   cover  matters   including  capital
requirements,  uses and  safe-keeping of clients'  funds,  conduct of directors,
officers and employees,  record-keeping and reporting requirements,  supervisory
and organizational procedures intended to assure compliance with securities laws
and  to  prevent   improper   trading   on   material   nonpublic   information,
employee-related  matters,  including qualification and licensing of supervisory
and  sales  personnel,   limitations  on  extensions  of  credit  in  securities
transactions,   clearance  and  settlement  procedures,   requirements  for  the
registration,  underwriting,  sale and distribution of securities,  and rules of
the SROs  designed to promote high  standards of  commercial  honor and just and
equitable principles of trade. A particular focus of the applicable  regulations
concerns the  relationship  between  broker-dealers  and their  customers.  As a
result, the many aspects of the broker-dealer  customer relationship are subject
to regulation including, in some instances,  "suitability"  determinations as to
certain customer transactions, limitations on the amounts that may be charged to
customers,  timing of proprietary  trading in relation to customers'  trades and
disclosures to customers.

         PCIS also is  subject  to "Risk  Assessment  Rules"  imposed by the SEC
which  require,  among other things,  that certain  broker-dealers  maintain and
preserve certain  information,  describe risk management policies and procedures
and report on the financial  condition of certain affiliates whose financial and
securities  activities  are reasonably  likely to have a material  impact on the
financial and operational  condition of the  broker-dealers.  Certain  "Material
Associated   Persons"  (as  defined  in  the  Risk  Assessment   Rules)  of  the
broker-dealers and the activities  conducted by such Material Associated Persons
may also be subject to regulation by the SEC.

         PCIS is  registered  as an  investment  adviser  with  the  SEC.  As an
investment adviser registered with the SEC, it is subject to the requirements of
the Investment  Advisers Act of 1940 and the SEC's  regulations  thereunder,  as
well as certain state securities laws and regulations.  Such requirements relate
to, among other things,  limitations on the ability of an investment  adviser to
charge  performance-based or non-refundable fees to clients,  record-keeping and
reporting  requirements,  disclosure  requirements,   limitations  on  principal
transactions  between an adviser or its affiliates and advisory clients, as well
as  general  anti-fraud  prohibitions.  The


                                       38
<PAGE>
state securities law requirements  applicable to registered  investment advisers
are in certain  cases more  comprehensive  than those  imposed under the federal
securities laws.

         In  the  event  of  non-compliance   with  an  applicable   regulation,
governmental  regulators and the NASD may institute  administrative  or judicial
proceedings that may result in censure,  fine, civil penalties (including treble
damages  in  the  case  of  insider   trading   violations),   the  issuance  of
cease-and-desist  orders,  the deregistration or suspension of the non-compliant
broker-dealer or investment  adviser,  the suspension or disqualification of the
broker-dealer's  officers  or  employees  or  other  adverse  consequences.  The
imposition of any such penalties or orders on PCIS could have a material adverse
effect  on PCIS'  (and  thus the  Company's)  operating  results  and  financial
condition.

         Net Capital  Requirements.  As a broker-dealer  registered with the SEC
and as a member firm of the NASD, PCIS is subject to the capital requirements of
the SEC and the NASD.  These  capital  requirements  specify  minimum  levels of
capital,  computed in  accordance  with  regulatory  requirements,  that PCIS is
required  to maintain  and also limit the amount of  leverage  that each firm is
able to obtain in its respective business.

         "Net  capital"  is  essentially  defined  as net  worth  (assets  minus
liabilities, as determined under generally accepted accounting principles), plus
qualifying subordinated  borrowings,  less the value of all of a broker-dealer's
assets that are not readily convertible into cash (such as goodwill,  furniture,
prepaid  expenses  and  unsecured  receivable),  and further  reduced by certain
percentages   (commonly   called   "haircuts")   of  the   market   value  of  a
broker-dealer's   positions  in  securities  and  other  financial  instruments.
Compliance with regulatory net capital requirements could limit those operations
that require the  intensive  use of capital,  such as  underwriting  and trading
activities.

         The SEC's capital rules also (i) require that broker-dealers notify it,
in writing, two business days prior to making withdrawals or other distributions
of  equity  capital  or  lending  money  to  certain  related  persons  if those
withdrawals  would  exceed,  in any 30-day  period,  30% of the  broker-dealer's
excess net capital,  and that they provide such notice  within two business days
after any such withdrawal or loan that would exceed,  in any 30-day period,  20%
of the  broker-dealer's  excess net capital,  (ii) prohibit a broker-dealer from
withdrawing  or otherwise  distributing  equity  capital or making related party
loans if after such  distribution or loan, the  broker-dealer has net capital of
less than  $300,000  or if the  aggregate  indebtedness  of the  broker-dealer's
consolidated entities would exceed 1,000% of the broker-dealer's net capital and
in certain  other  circumstances,  and (iii) provide that the SEC may, by order,
prohibit  withdrawals of capital from a  broker-dealer  for a period of up to 20
business days, if the withdrawals would exceed, in any 30-day period, 30% of the
broker-dealer's  excess net capital  and if the SEC  believes  such  withdrawals
would be  detrimental  to the  financial  integrity  of the firm or would unduly
jeopardize  the  broker-dealer's  ability  to pay its  customer  claims or other
liabilities.

         As of June 30, 1999, PCIS was required to maintain minimum net capital,
in  accordance  with SEC rules,  of $250,000  and had total net capital of $1.53
million,  or $1.28  million in excess of the minimum  amount  required.  PCIS is
required to maintain a net capital ratio, in

                                       39
<PAGE>
accordance  with SEC  rules,  not to exceed 15 to 1. At June 30,  1999 PCIS' net
capital ratio was .05 to 1.

         A failure of a  broker-dealer  to  maintain  its minimum  required  net
capital  or net  capital  ratio  would  require it to cease  executing  customer
transactions until it came back into compliance,  and could cause it to lose its
NASD  membership,  its  registration  with the SEC or require  its  liquidation.
Further,  the decline in a  broker-dealer's  net capital  below  certain  "early
warning levels," even though above minimum net capital requirements, could cause
material adverse consequences to the broker-dealer.

         PCIS is a member  of the  Securities  Investor  Protection  Corporation
("SIPC") which is a non-profit corporation that was created by the United States
Congress under the Securities Protection Act of 1970. SIPC protects customers of
member  broker-dealers  against  losses caused by the  financial  failure of the
broker-dealer  but not  against a change in the market  value of  securities  in
customers'  accounts at the  broker-dealer.  In the event of the  inability of a
member  broker-dealer to satisfy the claims of its customers in the event of its
failure,  the SIPC's funds are available to satisfy the  remaining  claims up to
maximum of $500,000 per  customer,  including up to $100,000 on claims for cash.
In addition,  PCIS' clearing  broker carries  private  insurance  which provides
similar coverage up to $25 million per customer.

Regulation of the Bank

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

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

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


                                       40
<PAGE>
         The FDIC may terminate the deposit insurance of any insured  depository
institution,  including  the Bank,  if it  determines  after a hearing  that the
institution has engaged or is engaging in unsafe or unsound practices,  is in an
unsafe  or  unsound  condition  to  continue  operations,  or has  violated  any
applicable law, regulation,  order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance  temporarily  during the hearing
process for the permanent  termination of insurance,  if the  institution has no
tangible  capital.  If insurance of accounts is terminated,  the accounts at the
institution at the time of the termination,  less subsequent withdrawals,  shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which could result in
termination of the Bank's deposit insurance.

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

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

         Following the imposition of the one-time special  assessment,  the FDIC
lowered  assessment  rates for SAIF  members  to  reduce  the  disparity  in the
assessment rates paid by Bank Insurance Fund ("BIF") and SAIF members. Beginning
October 1, 1996,  effective  SAIF rates range from zero basis points to 27 basis
points  which is the same  range of  premiums  as paid by  insured  institutions
insured  by  the  BIF   administered  by  the  FDIC.  From  1997  through  1999,
SAIF-insured  institutions  will pay 6.4 basis  points of their  SAIF-assessable
deposits to fund the Financing Corporation.

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

         Federally-insured  savings  associations  are subject to three  capital
requirements:  a  tangible  capital  requirement,  a core  or  leverage  capital
requirement  and a  risk-based  capital  requirement.  All savings  associations
currently are required to maintain tangible capital of at least 1.5% of adjusted
total  assets  (as  defined in the  regulations),  core  capital  equal to 3% of
adjusted total assets and total capital (a combination of core and supplementary
capital) equal to

                                       41
<PAGE>
8% of risk-weighted assets. For purposes of the regulation,  tangible capital is
core capital  less all  intangibles  other than  qualifying  mortgage  servicing
rights,   and  any  investment  in  non-permissible   subsidiaries,   which  are
subsidiaries  which are not  engaged in  permissible  activities.  Core  capital
includes common stockholders' equity,  non-cumulative  perpetual preferred stock
and  related  surplus,  minority  interest  in  the  equity  accounts  of  fully
consolidated  subsidiaries  and certain  non-withdrawable  accounts  and pledged
deposits.  Core  capital  generally  is  reduced  by  the  amount  of a  savings
association's intangible assets other than qualifying mortgage servicing rights.

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

         OTS  policy  imposes a  limitation  on the amount of net  deferred  tax
assets  under SFAS No. 109 that may be  included  in  regulatory  capital.  (Net
deferred  tax assets  represent  deferred  tax assets,  reduced by an  valuation
allowances,  in excess of deferred tax  liabilities.)  Application  of the limit
depends on the possible sources of taxable income available to an institution to
realize  deferred tax assets.  Deferred tax assets that can be realized from the
following  generally are not limited:  taxes paid in prior  carryback  years and
future reversals of existing taxable temporary  differences.  To the extent that
the  realization  of  deferred  tax assets  depends on an  institution's  future
taxable income (exclusive of reversing temporary differences and carryforwards),
or its  tax-planning  strategies,  such  deferred  tax  assets are  limited  for
regulatory  capital  purposes  to the lesser of the amount  that can be realized
within  one year of the  quarter-end  report  date or 10% of core  capital.  The
foregoing considerations did not affect the calculation of the Bank's regulatory
capital at June 30, 1999.

         In April  1991 the OTS  proposed  to modify  the 3% of  adjusted  total
assets  core  capital  requirement  in  the  same  manner  as  was  done  by the
Comptroller  of the Currency for national  banks.  Under the OTS proposal,  only
savings  associations  rated  composite 1 under the CAMEL rating  system will be
permitted to operate the  regulatory  minimum core capital  ratio of 3%. For all
other  savings  associations,  the minimum core capital ratio will be 3% plus at
least an additional  100 to 200 basis points,  which thus will increase the core
capital  ratio  requirement  to 4% to 5% of adjusted  total  assets or more.  In
determining  the amount of  additional  capital,  the OTS will  assess  both the
quality  of risk  management  systems  and the  level  of  overall  risk in each
individual savings association through the supervisory process on a case-by-case
basis.

         In  August  1993,  the  OTS  adopted  a  final  rule  incorporating  an
inters-rate  risk component into the risk-based  capital  regulation.  Under the
rule,  an  institution  with greater that  "normal"

                                       42
<PAGE>
interest  rate risk will be subject to a  deduction  of its  interest  rate risk
component from total capital for purposes of calculating its risk-based capital.
As a result, such an institution will be required to maintain additional capital
in order to comply with the risk-based capital  requirement.  An institution has
greater  than  "normal"  interest  rate  risk if it  would  suffer a loss of net
portfolio  value  exceeding 2.0% of the estimated  market value of its assets in
the event of a 200 basis point  increase or  decrease  in  interest  rates.  The
interest  rate risk  component  will be  calculated,  on a quarterly  basis,  as
one-half of the difference between an institution's  measured interest rate risk
and 2.0% multiplied by the market value of its assets.  The rule also authorizes
the OTS to waive or defer an  institution's  interest  rate risk  component on a
case-by-case  basis.  The final rule was  originally  effective as of January 1,
1994,  subject however to a two quarter "lag" time between the reporting date of
the data used to calculate an institution's interest rate risk and the effective
date of each quarter's  interest rate risk component.  However,  in October 1994
the OTS indicated that it would waive the capital  deductions  for  institutions
with greater than "normal" risk until the OTS published an appeals  process.  On
August 21, 1995, the OTS established (1) an appeals process to handle  "requests
for  adjustments" to the interest rate risk component and (2) a process by which
"well-capitalized"  institutions  may  obtain  authorization  to use  their  own
interest rate risk model to determine  their interest rate risk  component.  The
OTS also  indicated that it would  continue to delay the  implementation  of the
capital  deduction  for  interest  rate risk  pending the testing of the appeals
process.


         The  following  table sets forth a  reconciliation  between  the Bank's
stockholder's  equity  and each of its three  capital  requirements  at June 30,
1999.
<TABLE>
<CAPTION>
                                                                                                  To Be Well
                                                                                                  Capitalized
                                                                                                  Under Prompt
                                                                        For Capital                 Corrective
                                                Actual               Adequacy Purposes           Action Provisions
                                       ---------------------        --------------------        -------------------
                                        Amount         Ratio         Amount        Ratio        Amount        Ratio
                                        ------         -----         ------        -----        ------        -----
<S>                                      <C>            <C>           <C>            <C>        <C>           <C>
As of June 30, 1999:
Total Capital
   (to Risk Weighted Assets)             $34,005        13.05%        $20,848        8.00%      $26,060       10.00%
Tier 1 Capital
   (to Risk Weighted Assets)             $30,768        11.81%        $10,424        4.00%      $15,636        6.00%
Tier 1 Capital
   (to Average Assets)                   $30,768         6.86%        $17,934        3.00%      $22,418        5.00%

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


                                       43
<PAGE>
        Liquidity  Requirements.   All  savings  associations  are  required  to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity  requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings  associations.  At the present  time,  the required  liquid
asset ratio is 4%. At June 30, 1999, the Bank's  liquidity  ratio was 18.34% and
its short-term liquidity ratio was 18.34%.

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

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

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

        Accounting   Requirements.   Applicable  OTS  accounting  and  reporting
requirements  incorporates the following standards:  (i) regulatory reports will
incorporate  generally accepted accounting principles ("GAAP") when GAAP is used
by federal banking agencies;  (ii) savings association  transactions,  financial
condition  and  regulatory  capital must be reported and disclosed in accordance
with OTS regulatory reporting requirements


                                       44
<PAGE>
that will be at least as stringent as for national banks; and (iii) the director
of the OTS may prescribe regulatory  reporting  requirements more stringent than
GAAP whenever the director  determines that such  requirements  are necessary to
ensure the safe and sound reporting and operation of savings association.

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

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

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

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


                                       45
<PAGE>
        Under the  Guidelines  and final rule of the OTS, if an insured  savings
institution fails to meet any of the standards  promulgated by Guidelines,  then
the OTS may require  such  institution  to submit a plan within 30 days (or such
different  period  specified  by the OTS)  specifying  the steps it will take to
correct  the  deficiency.  In the event that an  institution  fails to submit or
fails in any material  respect to  implement a  compliance  plan within the time
allowed by the OTS, the OTS must order the institution to correct the deficiency
and may (1) restrict asset growth;  (2) require the  institution to increase its
ratio of tangible equity to assets;  (3) restrict the rates of interest that the
institution  may pay; or (4) take any other  action that would  better carry out
the  purpose  of  prompt  corrective  action.  The Bank  believes  that it is in
compliance with each of the standards as adopted.

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

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

        Recent  legislation  also  expands  the  QTL  test  to  provide  savings
associations with greater  authority to lend and diversify their portfolios.  In
particular,  credit  card  and  educational  loans  may now be  made by  savings
associations  without regard to any  percentage-of-assets  limit, and commercial
loans  may be made in an  amount  up to 10  percent  of total  assents,  plus an
additional 10 percent for small business loans.  Loans for personal,  family and
household  purposes (other than credit card, small business and education loans)
are now included  without  limit with other assets that, in the  aggregate,  may
account for up to 20% of total assets.  At June 30, 1999, under the expanded QTL
test,  approximately  79.6% of the Bank's portfolio assets were qualified thrift
investments.

        Restrictions on Capital  Distributions.  OTS regulations  govern capital
distributions  by savings  institutions,  which  include cash  dividends,  stock
repurchases and other  transactions  charged to the capital account of a savings
institution to make capital distributions. Under new regulations effective April
1, 1999, a savings  institution must file an application for OTS approval of the
capital  distribution  if either  (1) the total  capital  distributions  for the
applicable calendar year exceed the sum of the institution's net income for that
year to date plus the  institution's  retained net income for the  preceding two
years,  (2)  the  institution  would  not  be at  least  adequately  capitalized
following the  distribution,  (3) the distribution  would violate any applicable
statute, regulation,  agreement or OTS-imposed condition, or (4) the institution
is not eligible for expedited treatment of its filings. If an application is not
required to be filed,  savings  institutions which are a subsidiary of a holding
company (as well as certain  other  institutions)


                                       46
<PAGE>
must  still  file a notice  with the OTS at least 30 days  before  the  board of
directors declares a dividend or approved a capital distribution.

        Federal Home Loan Bank System.  The Bank is a member of the FHLBP, which
is one of 12 regional FHLBs that  administers the home financing credit function
of savings  associations and commercial  banks.  Each FHLB serves as a source of
liquidity for its members  within its assigned  region.  It is funded  primarily
from  proceeds  derived from the sale of  consolidated  obligations  of the FHLB
System.  It makes loans to members (i.e.,  advances) in accordance with policies
and procedures  established by its Board of Directors.  As of June 30, 1999, the
Bank's advances from the FHLBP amounted to $50.38 million.

        As a member,  the Bank is required to purchase and maintain stock in the
FHLBP  in  an  amount  equal  to  the  greater  of 1% of  its  aggregate  unpaid
residential  mortgage loans, home purchase  contracts or similar  obligations at
the beginning of each year or 5% of total  advances.  At June 30, 1999, the Bank
had $3.78 million in FHLB stock, which was in compliance with this requirement.

        As a result of FIRREA,  the FHLBs are required to provide  funds for the
resolution  of troubled  savings  associations  and to  contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community  investment and low- and moderate-income  housing projects.  These
contributions have adversely affected the level of FHLB dividends paid and could
continue to do so in the future.  These contributions also could have an adverse
effect on the value of FHLB  stock in the  future.  For the year  ended June 30,
1999, dividends paid by the FHLBP to the Bank totaled approximately $208,200.

        Federal  Reserve   System.   The  Federal  Reserve  Board  requires  all
depository  institutions to maintain reserves against their transaction accounts
(primarily NOW and super NOW checking  accounts) and non-personal time deposits.
At June 30, 1999, the Bank was in compliance with such requirements.

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

Interstate Acquisitions

        The  Commonwealth  of  Pennsylvania  adopted  legislation on 1986 ("1986
Act")   regarding  the   acquisition  of  financial   institutions   located  in
Pennsylvania by institutions located outside of Pennsylvania.  The 1986 Act: (1)
permits  federal or state savings and loan  associations,  federal savings banks
and bank or savings and loan holding companies (collectively, "Thrift Entities")
that are "located" (as defined below) in a state that offers  reciprocal  rights
to similar Thrift Entities located in  Pennsylvania,  to acquire 5% or more of a
Pennsylvania   Thrift  Entity's  voting


                                       47
<PAGE>
stock,  merge or consolidate  with a Pennsylvania  Thrift Entity or purchase the
assets and assume the  liabilities  of the  Pennsylvania  Thrift  Entity and (2)
permits a federal or state savings and loan  association or federal savings bank
to establish  and maintain  branches in  Pennsylvania,  provided  that the state
where such foreign Thrift Entity is located offers  reciprocal rights to similar
entities  located in  Pennsylvania  and provided  that each state where any bank
holding  company or savings and loan holding company owning or controlling 5% or
more of the  foreign  Thrift  Entity's  shares is also  located  in a state that
offers reciprocal rights.  Under the Pennsylvania Act, a depository is "located"
where its  deposits  are largest and a holding  company is  generally  "located"
where the aggregate deposits of its subsidiaries are largest.  Whether a foreign
state's laws are  "reciprocal"  is  determined by the  Pennsylvania  Department,
which may impose  limitations  and  conditions on the branching and  acquisition
activities  of a Thrift  Entity  located in a foreign state in order to make the
laws of such state  reciprocal to  Pennsylvania  law with respect to the type of
transaction at issue.





                                       48
<PAGE>
                                    TAXATION

Federal  and State Taxation

        General.  The  Company  and the Bank are  subject to the  corporate  tax
provisions of the Internal Revenue Code of 1986 (the "Code"), as well as certain
additional  provisions  of the Code  which  apply to thrift  and other  types of
financial institutions. The following discussion of tax matters is intended only
as a summary and does not purport to be a  comprehensive  description of the tax
rules applicable to the Company and the Bank.

        Bad Debt  Reserves.  Legislation  enacted  under the Small  Business Job
Protection  Act of 1996 (the  "Act")  provided  for the Bank to  recapture  into
income, over a six-year period, only the portion of its tax bad debt reserves as
of June 30, 1996,  that exceed its base year  reserves  (i.e.,  tax reserves for
years beginning before 1988).  Under the Act, the amount of the excess base year
reserves  subject to recapture would be suspended for each of two successive tax
years  beginning July 1, 1996, in which the Bank  originates a minimum amount of
certain  residential  loans based upon the average of the  principal  amounts of
such loans the Bank made during its six  preceding  tax years.  The Bank's total
tax bad debt reserves at June 30, 1999,  are  approximately  $3.04  million,  of
which $2.64 million  represents  the base year amount and $407,000 is subject to
recapture.  The Company has previously recorded a deferred tax liability for the
excess base year reserves to be recaptured;  therefore,  this recapture will not
impact the statement of  operations.  The base year tax  reserves,  which may be
subject to recapture if the Bank ceases to qualify as a bank for federal  income
tax purposes, are restricted to certain  distributions.  Under the provisions of
the Act, the Bank is  considered  a "small  bank"  (i.e.,  a bank that has total
assets  under  $500  million)  and may  claim  its tax bad  debt  for tax  years
beginning  after  December  31,  1995,  using a  six-year  average  of its  loan
charge-offs to total loans.

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

        IRS Examinations.  The Company's consolidated federal income tax returns
for taxable  years  through June 30, 1995,  have been closed for the purposes of
examination by the IRS.



                                       49
<PAGE>
        State Taxation. The Company and its non-thrift Pennsylvania subsidiaries
are subject to the  Pennsylvania  Corporate Net Income Tax and Capital Stock and
Franchise  Tax.  The  Corporate  Net  Income  Tax rate for 1998 is 9.99%  and is
imposed on the Company's and its non-thrift subsidiaries' unconsolidated taxable
income for federal purposes with certain  adjustments.  In general,  the Capital
Stock Tax is a property  tax  imposed  at the rate of 1.275% of a  corporation's
capital stock value, which is determined in accordance with a fixed formula.

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





                                       50
<PAGE>
ITEM 2.  PROPERTIES
-------------------

Offices and Other Material Properties

        At June 30, 1999,  the Bank  conducted its business from its main office
in  Downingtown,  Pennsylvania  and  eight  full-service  branch  offices.  PCIS
conducts its business from two offices.

        The following table sets forth certain  information  with respect to the
offices of the Company as of June 30, 1999:
<TABLE>
<CAPTION>
                                                                                          Net Book Value of
                                                              Lease                    Property and Leasehold
                                     Owned or              Expiration                       Improvements at
                                      Leased                  Date                           June 30, 1999               Deposits
                                      ------                  ----                           -------------               --------
<S>                                     <C>                   <C>                                  <C>                   <C>
First Financial Bank:
Main Office:
  100 E. Lancaster Avenue
  Downingtown PA 19335                  Own                      --                                $   986                $112,752
Branch Offices:
Exton-Lionville
  601 N. Pottstown Pike
  Exton PA  19341                       Own                       --                                   402                  63,082
Frazer-Malvern
  200 W. Lancaster Avenue
  Frazer PA 19355                       Own                       --                                 1,303                  39,211
Thorndale
  3909 Lincoln Highway
  Downingtown PA 19335                  Lease                 9/30/2000                                 42                  44,142
Westtown
  1197 Wilmington Pike
  West Chester PA 19382                 Lease                 10/31/99                                 120                  52,080
Airport Village
  102 Airport Road                      Own Bldg.
  Coatesville PA 19320                  Lease Land            11/30/04                                 324                  17,371
Brandywine Square
  82 Quarry Road
  Downingtown PA 19335                  Lease                  8/14/11                                  90                  25,568
Devon
  414 Lancaster Avenue
  Devon  PA  19333                      Own                         --                               1,449                   5,308
                                                                                                    ------                --------
              Total                                                                                 $4,716                $359,514
                                                                                                    ======                ========
PCIS:
Philadelphia
One Liberty Place, Suite 3050
1650 Market Street,
Philadelphia  PA 19103                  Lease                 5/31/04
Wayne
485 Devon Park Dr. Suite 109
Wayne  PA 19087                         Lease                 11/30/02
</TABLE>
        In  addition,  the  Company  currently  owns  two  developed  properties
adjacent to its main office. These properties are being held for possible use as
future office facilities and expansion


                                       51
<PAGE>
of the main office.  One of the  properties  is currently  being leased to other
users.  The net book  value  of each of the two  parcels  at June  30,  1999 was
approximately $10,800 and $86,300.

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

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

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

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

        In December 1997,  PCIS entered into a 5-year lease agreement for PCIS's
Wayne office.

        In June 1999,  PCIS  entered into a 5-year  lease  agreement  for PCIS's
Philadelphia office.

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

ITEM 3.  LEGAL PROCEEDINGS
--------------------------

        The Company is not involved in any pending legal  proceedings other than
routine,  non-material  legal  proceedings  occurring in the ordinary  course of
business which  management  believes will not have a material  adverse effect on
the financial condition or operations of the Company.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------

        Not applicable.

PART II

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

        The  information  required  herein is  incorporated  by  reference  from
"Market  Information"  on  page  23 of  the  Company's  1999  Annual  Report  to
Stockholders included herein as Exhibit 13 hereto ("Annual Report").




                                       52
<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA
--------------------------------

        The information required herein is incorporated by reference from page 3
of the Annual Report.

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

        The information  required herein is incorporated by reference from pages
16 to 23 of the Annual Report.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------

        The  information  required herein can be found on pages 28 to 29 of this
10K document.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------

        The financial  statements  and  supplementary  data required  herein are
incorporated by reference from pages 24 to 40 of the Annual Report.

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

        Not applicable.

PART III
--------

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------

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

ITEM 11.  EXECUTIVE COMPENSATION
--------------------------------

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

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------

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



                                       53
<PAGE>
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
---------------------------------------------------------

        The information  required herein is incorporated by reference to page 18
of the Definitive proxy Statement.


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

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

        (1)    The following financial  statements are incorporated by reference
               into  Item 8 hereof  from  pages 24 to 40 of the  Annual  Report,
               Exhibit 13 hereto:

               Consolidated  Statements of Financial  Condition at June 30, 1999
               and 1998  Consolidated  Statements  of  Operations  for the Years
               Ended June 30, 1999,  1998, and 1997  Consolidated  Statements of
               Stockholders' Equity for the Years Ended June 30, 1999, 1998, and
               1997  Consolidated  Statements  of Cash Flows for the Years Ended
               June 30, 1999, 1998 and 1997.
               Notes to Consolidated Financial Statements.

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


(b)     Reports on Form 8-K

        None




                                       54
<PAGE>
(c) The  following  exhibits are filed as a part of this form 10-K and this list
includes the Index to Exhibits.

                                Index to Exhibits

Number         Description of Documents
------         ------------------------

3a             Restated Articles of Incorporation**
3b             Bylaws, as amended
4              Specimen Stock Certificate*
10a            Key Employee Stock Compensation Program, as amended**
10b            Employee Stock Ownership Plan**
10c            Employment Agreement By and Between the Holding Company, the Bank
               and Ellen Ann Roberts**
10e            Employment Agreement By and Between the Holding Company, the Bank
               and Colin N. Maropis**
10f            Employment Agreement By and Between the Holding Company, the Bank
               and Anthony J. Biondi**
10h            Amendment  No. 1 to the  Employment  Agreement By and Between the
               Holding Company, the Bank and Ellen Ann Roberts***
10j            Amendment  No. 1 to the  Employment  Agreement By and Between the
               Holding Company, the Bank and Colin N. Maropis ***
10k            Amendment  No. 1 to the  Employment  Agreement By and Between the
               Holding Company, the Bank and Anthony J. Biondi***
101            1997 Stock Option Plan****
10m            1993 Stock Option Plan as Amended
13             Annual Report to Stockholders
21             Subsidiaries  of the  Registrant - Reference is made to Item,  1,
               Business - Subsidiaries," for the required information
23             Consent of Independent Auditors
27             Financial Statement Schedule
(*)            Incorporated herein by reference from the Company's  Registration
               Statement on Form S-4 (33-30433) dated August 10, 1989
(**)           Incorporated herein by reference from the Company's Annual Report
               on Form 10-KSB for the year ended June 30, 1990
(***)          Incorporated herein by reference from the Company's Annual Report
               on Form 10-KSB for the year ended June 30, 1992
(****)         Incorporated herein by reference from the Company's Annual Report
               on Form 10-KSB for the year ended June 30, 1997


                                       55
<PAGE>

                                   SIGNATURES

        Pursuant to the  requirements  of Section 13 or 15(d) of the  Securities
Exchange Act of 1934,  the  Registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.

                                      CHESTER VALLEY BANCORP INC.


September 28, 1999                    By: /s/ Ellen Ann Roberts
                                          ---------------------
                                          Ellen Ann Roberts
                                          Director, Chairman of the Board
                                          and Chief Executive Officer




                                       56


<PAGE>
/s/ Anthony J. Biondi                         September 28, 1999
---------------------
Anthony J. Biondi
Director

/s/ Robert J. Bradbury                        September 28, 1999
----------------------
Robert J. Bradbury
Director

/s/ Edward T. Borer                           September 28, 1999
-------------------
Edward T. Borer
Director

/s/ John J. Cunningham, III                   September 28, 1999
---------------------------
John J. Cunningham, III
Director

/s/  Gerard F. Griesser                       September 28, 1999
-----------------------
Gerard F. Griesser
Director

/s/  James E. McErlane                        September 28, 1999
----------------------
James E. McErlane
Director and Secretary

/s/  Richard L. Radcliff                      September 28, 1999
------------------------
Richard L. Radcliff
Director

/s/  Emory S. Todd                            September 28, 1999
------------------
Emory S. Todd
Director

/s/  William M. Wright                       September 28, 1999
----------------------
William M. Wright
Director

/s/ Anthony J. Biondi                         September 28, 1999
---------------------
Anthony J. Biondi
President, COO and
Acting Chief Financial Officer


                                       57