FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


(Mark One)

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

For the quarterly period ended June 30, 1997, OR
                               -------------
( )      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
         SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________.

Commission File No. 0-12870.


                         FIRST WEST CHESTER CORPORATION
             (Exact name of Registrant as specified in its charter)


        Pennsylvania                                         23-2288763
        ------------                                         ----------
(State or other jurisdiction of                             (IRS Employer
 incorporation or organization)                              Identification No.)


9 North High Street, West Chester, Pennsylvania                          19380
-----------------------------------------------                          -----
    (Address of principal executive office)                           (Zip code)


                                 (610) 692-1423
                                 --------------
              (Registrant's telephone number, including area code)

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
                                      ---
The number of shares outstanding of Common Stock of the Registrant as of July 1,
1997 was 2,291,833.


<PAGE>




                 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES

                                      INDEX
                                      -----


                                                                            PAGE
                                                                            ----

Part I.        FINANCIAL INFORMATION


               Consolidated Statements of Condition
               June 30, 1997 and December 31, 1996                           3


               Consolidated Statements of Income
               Three Months and Six Months Ended
               June 30, 1997 and 1996                                        4


               Consolidated Statements of Stockholders' Equity               5


               Consolidated Statements of Cash Flows
               Six Months Ended June 30, 1997 and 1996                       6


               Notes to Consolidated Financial Statements                    7


               Management's Discussion and Analysis of
               Financial Condition and Results of Operations                8-20



Part II.       OTHER INFORMATION

               Item 1 - Legal Proceedings
               Item 2 - Changes in Securities
               Item 3 - Defaults upon Senior Securities
               Item 4 - Submission of Matters to Vote of Security Holders
               Item 5 - Other Information
               Item 6 - Exhibits and Reports on Form 8-K                   21-22


               Signatures                                                   23


<PAGE>



                 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
(Dollars in thousands)                                                                          Unaudited
                                                                                                 June 30,           December 31,
                                                                                                   1997                 1996
                                                                                               ------------         ------------
ASSETS
<S>                                                                                           <C>                   <C> 
    Cash and due from banks                                                                    $   21,227            $   21,956
    Federal funds sold                                                                              8,600                 3,800

           Total cash and cash equivalents                                                         29,827                25,756
                                                                                                 --------              --------

    Interest bearing deposits with banks                                                               -                  1,000

    Investment securities  held-to-maturity (market value of $12,809 and $15,749
        at June 30, 1997 and December 31,
        1996, respectively)                                                                        12,779                15,667

    Investment securities available-for-sale, at fair value                                        61,489                82,008

    Loans                                                                                         306,375               264,582
    Less allowance for possible loan losses                                                        (5,653)               (5,218)
                                                                                                 --------              --------

           Net loans                                                                              300,722               259,364

    Premises and equipment, net                                                                     6,652                 6,752
    Other assets                                                                                    6,546                 7,137
                                                                                                 --------              --------

           TOTAL ASSETS                                                                         $ 418,015             $ 397,684
                                                                                                 ========              ========

LIABILITIES
    Deposits
        Non-interest bearing                                                                    $  60,505             $  63,591
        Interest bearing                                                                          302,204               287,675
                                                                                                 --------              --------

           Total deposits                                                                         362,709               351,266

    Securities sold under repurchase agreements                                                     8,385                 7,943
    Federal Home Loan Bank Advances                                                                 6,433                     -
    Other liabilities                                                                               5,962                 5,300
                                                                                                 --------              --------

           Total liabilities                                                                      383,489               364,509
                                                                                                 --------              --------

STOCKHOLDERS' EQUITY
    Common stock, par value $1-authorized,  5,000,000 shares, Issued,  2,399,833
        and 1,799,941 at June 30, 1997 and
        December 31, 1996 respectively;                                                             2,400                 1,800
    Additional paid-in capital                                                                      2,714                 3,305
    Retained earnings                                                                              31,495                30,133
    Net unrealized loss on securities available-for-sale                                             (327)                 (242)
    Treasury stock, at cost: 108,000 shares and 84,000 shares at
        June 30, 1997 and December 31, 1996, respectively;                                         (1,756)               (1,821)
                                                                                                 --------              --------

           Total stockholders' equity                                                              34,526                33,175
                                                                                                 --------              --------

           TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                           $ 418,015             $ 397,684
                                                                                                 ========              ========

    Book Value Per Share                                                                           $15.06                $14.50
                                                                                                    =====                 =====

The accompanying notes are an integral part of these statements.
</TABLE>

                                        3

<PAGE>



                 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME

                                   (UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands - except per share data)                            Three Months Ended                   Six  Months Ended
                                                                                     June 30,                         June 30,
                                                                         -------------------------------    ------------------
                                                                         1997             1996                1997         1996
                                                                         ----             ----                ----         ----
INTEREST INCOME
<S>                                                                  <C>                <C>               <C>           <C> 
    Loans, including fees                                                 $6,680           $5,652           $12,833       $11,208
    Investment securities                                                  1,331            1,487             2,806         2,924
    Federal funds sold                                                        61              202                85           422
    Deposits in banks                                                         --               15                12            18
                                                                           -----            -----            ------        ------

                Total interest income                                      8,072            7,356            15,736        14,572
                                                                           -----            -----            ------        ------

INTEREST EXPENSE
    Deposits                                                               3,163            2,957             6,141         5,916
    Securities sold under repurchase agreements                               68               78               132           160
    Other borrowings                                                         111               --               175            --
                                                                           -----            -----            ------        ------

                Total interest expense                                     3,342            3,035             6,448         6,076
                                                                           -----            -----            ------        ------

                Net interest income                                        4,730            4,321             9,288         8,496

    Provision for loan losses                                                446              276               656           552
                                                                           -----            -----            ------        ------

                Net interest income after provision
                   for possible loan losses                                4,284            4,045             8,632         7,944
                                                                           -----            -----            ------        ------

NON-INTEREST INCOME
    Financial Management Services                                            500              453             1,000           905
    Service charges on deposit accounts                                      249              219               480           420
    Other                                                                    157              255               326           434
                                                                           -----            -----            ------        ------

                Total non-interest income                                    906              927             1,806         1,759
                                                                           -----            -----            ------        ------

NON-INTEREST EXPENSE
    Salaries and employee benefits                                         2,018            1,950             4,054         3,852
    Net occupancy and  equipment                                             702              653             1,473         1,222
    FDIC deposit insurance                                                    11                1                21             1
    Bank shares tax                                                           85               77               170           154
    Other                                                                    851              663             1,572         1,372
                                                                           -----            -----            ------        ------

                Total non-interest expense                                 3,667            3,344             7,290         6,601
                                                                           -----            -----            ------        ------

                Income before income taxes                                 1,523            1,628             3,148         3,102

INCOME TAXES                                                                 394              532               919         1,006
                                                                           -----            -----            ------        ------

    NET INCOME                                                            $1,129           $1,096           $ 2,229       $ 2,096
                                                                           =====            =====            ======        ======

PER SHARE DATA
    Net income                                                             $0.49            $0.48           $0.97           $0.92
                                                                           ====              ====            ====            ====
    Dividends declared                                                     $0.19            $0.17           $0.38           $0.34
                                                                           ====              ====            ====            ====

Weighted average shares outstanding                                    2,307,432        2,290,430       2,304,231       2,287,652
                                                                       =========        =========       =========       =========

The accompanying notes are an integral part of these statements.
</TABLE>

                                        4

<PAGE>



                 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
(Dollars in thousands)                                                                                  1997             1996
                                                                                                      --------         --------
<S>                                                                                                   <C>             <C> 
Balance at January 1,                                                                                  $33,175          $30,692

    Net  income to date                                                                                  2,229            2,096
    Cash dividends declared                                                                               (867)            (788)
    Net unrealized gain (loss) on securities available-for-sale                                            (85)            (648)
    Treasury stock transactions                                                                             65               --
    Paid in capital from treasury stock transactions                                                         9               --
                                                                                                        ------           ------

Balance at June 30,                                                                                    $34,526          $31,352
                                                                                                        ======           ======

































The accompanying notes are an integral part of these statements.
</TABLE>

                                        5

<PAGE>



                 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                                  Six Months Ended
                                                                                                            June 30,
(Dollars in thousands)                                                                              1997               1996
                                                                                                ------------       --------
<S>     <C>    <C>    <C>    <C>    <C>    <C>
OPERATING ACTIVITIES
    Net Income                                                                                 $   2,229           $    2,096
    Adjustments to reconcile net income to net cash
           provided by operating activities:
        Depreciation                                                                                 498                  345
        Provision for loan losses                                                                    656                  552
        Amortization of investment security premiums
           and accretion of discounts                                                                 22                  113
        Amortization of deferred fees on loans                                                        84                   17
        Investment securities (gains) losses, net                                                     14                   --
        (Decrease) increase in other assets                                                          635                 (349)
        Increase in other liabilities                                                                662                  675
                                                                                                --------             --------

           Net cash provided by operating activities                                               4,800                3,449
                                                                                                --------             --------

INVESTING ACTIVITIES
    (Increase) decrease in interest bearing deposits in banks                                      1,000               (1,000)
    Increase in loans                                                                            (42,099)              (6,029)
    Proceeds from sales of investment securities available-for-sale                               24,606                   --
    Proceeds from sales of investment securities held-to-maturity                                     --                   --
    Proceeds from maturities of investment securities available-for-sale                           6,521                9,103
    Proceeds from maturities of investment securities held-to-maturity                             2,909                8,083
    Purchases of investment securities available-for-sale                                        (10,793)             (21,704)
    Purchases of investment securities held-to-maturity                                               --                 (999)
    Purchase of premises and equipment, net                                                         (398)              (1,019)
                                                                                                --------             --------

        Net cash used in investing activities                                                    (18,254)             (13,565)
                                                                                                --------             --------

FINANCING ACTIVITIES
    Increase in Federal Home Loan Bank advances                                                    6,433                   --
    Increase (decrease) in deposits                                                               11,443               (2,156)
    Increase in securities sold under repurchase agreements                                          442                   83
    Cash dividends                                                                                  (867)                (839)
       Treasury stock transactions                                                                    74                   --
                                                                                                --------             --------

           Net cash provided (used in) by financing activities                                    17,525               (2,912)
                                                                                                --------             --------

              NET (DECREASE) INCREASE IN CASH AND CASH
                EQUIVALENTS                                                                        4,071              (13,028)

Cash and cash equivalents at beginning of period                                                  25,756               44,644
                                                                                                --------             --------

Cash and cash equivalents at end of period                                                     $  29,827            $  31,616
                                                                                                ========             ========




The accompanying notes are an integral part of these statements.
</TABLE>
                                                                 6

<PAGE>



                 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

1.         The unaudited  financial  statements have been prepared in accordance
           with generally accepted  accounting  principles for interim financial
           information.   In  the  opinion  of   management,   all   adjustments
           (consisting  only of normal  recurring  adjustments)  necessary for a
           fair  presentation  of the  financial  position  and the  results  of
           operations for the interim period  presented have been included.  For
           further information,  refer to the consolidated  financial statements
           and footnotes thereto included in First West Chester  Corporation and
           Subsidiaries' (the "Corporation")  Annual Report on Form 10-K for the
           year ended December 31, 1996.

2.         The results of operations for the three-month  and six-month  periods
           ended June 30, 1997 and 1996 are not  necessarily  indicative  of the
           results to be expected for the full year.

3.         Per share data is based on the weighted  average  number of shares of
           common  stock  outstanding  during the period.  All per share data in
           this report has been  restated to reflect the stock split in the form
           of a  331/3%  stock  dividend,  declared  on  February  20,  1997  to
           shareholders of record on March 21, 1997 and paid on April 21, 1997.

4.         The Financial Accounting Standards Board issued a new standard,  SFAS
           128,   "Earnings  per  Share",   which  is  effective  for  financial
           statements  issued after December 15, 1997. Early adoption of the new
           standard is not permitted.  The new standard  eliminates  primary and
           fully diluted  earnings per share and requires  presentation of basic
           and diluted  earnings per share  together with  disclosure of how the
           per share amounts were  computed.  Basic  earnings per share excludes
           dilution  and is  computed  by dividing  income  available  to common
           shareholders by the  weighted-average  common shares  outstanding for
           the  period.  Diluted  earnings  per  share  reflects  the  potential
           dilution that could occur if  securities or other  contracts to issue
           common  stock were  exercised  and  converted  into  common  stock or
           resulted  in the  issuance  of common  stock that then  shared in the
           earnings of the  entity.  The  adoption  of this new  standard is not
           expected to have a material  impact on the disclosure of earnings per
           share in the financial statements.


                                        7

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

                              RESULTS OF OPERATIONS
                              ---------------------

                         EARNINGS SUMMARY AND HIGHLIGHTS

         Net income for the  three-month  period  ended June 30,  1997 was $1.13
million,  an  increase  of $33  thousand  or  3.0%  from  $1.10  million  in the
three-month  period ended June 30,  1996.  Net income for the  six-month  period
ended June 30, 1997 was $2.23 million, an increase of $133 thousand or 6.3% from
$2.10  million in the  six-month  period ended June 30,  1996.  Increases in net
income  are  primarily  the result of  increases  in net  interest  income and a
reduction  in the  effective  tax rate,  partially  offset  by higher  loan loss
provisions  and increases in operating  expenses.  The lower  effective tax rate
results from expected tax credits relating to a community  development  project.
For further  information  see the section  titled "Income  Taxes."  Earnings per
share for the three- and  six-month  periods  ended June 30, 1997 were $0.49 and
$0.97 per share,  respectively,  increases of $0.01 and $0.05 per share compared
to the same periods in 1996, respectively.

         Cash dividends  declared during the second quarter of 1997 increased to
$0.19 per share,  an 11.8%  increase  compared  to $0.17 per share in the second
quarter of 1996. On a year-to-date  basis, cash dividends increased to $0.38 per
share, an 11.8% increase compared to $0.34 per share in the same period of 1996.
Over the past ten years, the  Corporation's  practice has been to pay a dividend
of at least 35.0% of net income.

The "Consolidated Average Balance Sheet" on pages 9 and 10 may assist the reader
in following this discussion.
<TABLE>
<CAPTION>
                                                                       Three Months Ended               Six Months Ended
                                                                             June 30,                       June 30,
                                                                     -----------------------         ----------------------
                                                                       1997           1996              1997           1996
                                                                       ----           ----              ----           ----
         <S>                                                       <C>           <C>                <C>            <C>    
           SELECTED RATIOS
           Return on Average Assets                                    1.10%          1.14%              1.10%         1.09%
           Return on Average Equity                                   13.31%         14.08%             13.24%        13.53%
           Earnings Retained                                          61.20%         64.05%             61.10%        62.40%
           Dividend Payout Ratio                                      38.80%         35.95%             38.90%        37.60%
           Book Value Per Share                                      $15.06         $13.73             $15.06        $13.73
</TABLE>
                               NET INTEREST INCOME

         Net  interest  income  is the  difference  between  interest  income on
earning  assets  and  interest  expense  on  interest-bearing  liabilities.  Net
interest  income for the three- and six-month  periods ended June 30, 1997, on a
tax equivalent  basis,  was $4.80 million and $9.41  million,  compared to $4.38
million and $8.61 million for the same periods in 1996, respectively. Net yields
on interest earning assets,  on a tax equivalent  basis, were 4.97% for both the
three- and six-month periods ended June 30, 1997 compared to 4.86% and 4.80% for
the  same  periods  in  1996,  respectively.  Average  interest  earning  assets
increased  approximately  $25.6  million  to $386.0  million  during  the second
quarter of 1997 from $360.5  million in the same period last year.  The increase
in average  earning  assets  was a direct  result of strong  loan  demand in all
areas,  particularly  our third party  automobile loan and lease  programs.  The
increase in earning  asset  yields was a result of changes in the earning  asset
mix. Although the net yield on earning assets has increased during the six month
period  ended  June 30,  1997  over the same  period  in 1996,  the  Corporation
anticipates continued pressure on the net interest margin as competition for new
loan business  remains very strong and  incremental  deposit growth becomes more
expensive.


                                        8

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

                       CONSOLIDATED AVERAGE BALANCE SHEET
             AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES FOR THE
                           THREE MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>

(Dollars in thousands)                                               1997                                    1996
                                                     ----------------------------------      ---------------------------------
                                                        Daily                                   Daily
                                                       Average                                  Average
                                                       Balance     Interest      Rate           Balance     Interest     Rate
                                                       -------     --------      ----           -------     --------     ----
<S>                                               <C>            <C>          <C>           <C>           <C>          <C>
ASSETS
Federal funds sold                                  $    4,389     $     61      5.56%        $  14,954     $    200     5.35%
Interest bearing deposits in banks                          --           --        --             1,000           15     6.00%
Investment securities
    Taxable                                             79,753        1,301      6.53%           94,023        1,455     6.19%
    Tax-exempt (1)                                       2,375           41      6.91%            2,471           43     6.96%
                                                       -------        -----                     -------        -----
        Total investment securities                     82,128        1,342      6.54%           96,494        1,498     6.21%
                                                       -------        -----                     -------        -----
Loans (2)
    Taxable                                            289,905        6,528      9.01%          241,388        5,531     9.17%
    Tax-exempt (1)                                       9,649          209      8.66%            6,666          166     9.96%
                                                       -------        -----                     -------        -----
        Total loans                                    299,554        6,737      9.00%          248,054        5,697     9.19%
                                                       -------        -----                     -------        -----
        Total interest earning assets                  386,071        8,140      8.43%          360,502        7,410     8.22%
Non-interest earning assets
    Allowance for possible loan losses                  (5,436)                                  (4,745)
    Cash and due from banks                             18,453                                   16,688
    Other assets                                        13,241                                   12,957
                                                       -------                                  -------
        Total assets                                  $412,329                                 $385,402
                                                       =======                                  =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits                 $174,556      $ 1,362      3.12%         $168,013      $ 1,292     3.08%
Certificates of deposits and other time                125,283        1,801      5.75%          117,232        1,664     5.68%
                                                       -------       ------                     -------       ------
   Total interest bearing deposits                     299,839        3,163      4.22%          285,245        2,956     4.15%
Securities sold under repurchase agreements              8,313           68      3.27%            9,507           77     3.24%
Federal Home Loan Bank Advances                          6,775          105      6.20%               --           --         --
Other borrowings                                           402            6      5.97%               --           --         --
                                                       -------       ------                     -------       ------
   Total interest bearing liabilities                  315,329        3,342      4.24%          294,752        3,033     4.12%
                                                       -------       ------                     -------       ------
Non-interest bearing liabilities
    Non-interest bearing demand deposits                57,180                                   54,247
    Other liabilities                                    5,892                                    5,267
                                                      --------                                 --------
        Total liabilities                              378,401                                  354,266
Stockholders' equity                                    33,928                                   31,136
                                                      --------                                 --------
        Total liabilities and stockholders' equity   $ 412,329                                $ 385,402
                                                      ========                                 ========
Net interest income                                                 $ 4,798                                  $ 4,377
                                                                     ======                                   ======
Net yield on interest earning assets                                             4.97%                                   4.86%
                                                                                 ====                                    ====











<FN>

(1) The indicated  income and annual rate are presented on a taxable  equivalent
    basis using the Federal  marginal  rate of 34% adjusted for the 20% interest
    expense disallowance for 1997 and 1996.
(2) Non-accruing loans are included in the average balance.
</FN>
</TABLE>

                                        9

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

                       CONSOLIDATED AVERAGE BALANCE SHEET
             AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES FOR THE
                            SIX MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>

(Dollars in thousands)                                                       1997                                      1996
                                                     ----------------------------------------------------------------------
                                                        Daily                                   Daily
                                                       Average                                  Average
                                                       Balance     Interest      Rate           Balance     Interest       Rate
<S>                                            <C>    <C>    <C>    <C>    <C>    <C>
ASSETS
Federal funds sold                                    $  3,124      $    85      5.44%         $ 15,613      $   421     5.39%
Interest bearing deposits in banks                         398           12      6.03%              593           18     6.07%
Investment securities
Taxable                                                 84,410        2,745      6.50%           93,294        2,860     6.13%
    Tax-exempt (1)                                       2,437           84      6.89%            2,554           88     6.89%
                                                       -------       ------                     -------       ------
        Total investment securities                     86,847        2,829      6.51%           95,848        2,948     6.15%
Loans (2)
    Taxable                                            279,279       12,554      8.99%          239,699       10,964     9.15%
    Tax-exempt (1)                                       8,933          383      8.57%            6,697          335    10.00%
                                                       -------       ------                     -------       ------
        Total loans                                    288,212       12,937      8.98%          246,396       11,299     9.17%
                                                       -------       ------                     -------       ------
Total Interest Earning Assets                          378,581       15,863      8.38%          358,450       14,686     8.19%
Non-interest earning assets
    Allowance for possible loan losses                  (5,356)                                  (4,676)
    Cash and due from banks                             18,035                                   16,421
    Other assets                                        13,474                                   12,673
                                                       -------                                  -------
        Total assets                                  $404,734                                 $382,868
                                                       =======                                  =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits                 $173,079     $  2,687      3.10%         $165,862     $  2,570     3.10%
Certificates of deposits and other time                121,802        3,454      5.67%          117,381        3,346     5.70%
                                                       -------      -------                     -------      -------
Total interest bearing deposits                        294,881        6,141      4.17%          283,243        5,916     4.18%
Securities sold under repurchase agreements              8,113          132      3.25%            9,782          160     3.27%
Federal Home Loan Bank Advances                          5,432          165      6.08%               --           --       --
Other borrowings                                           390           11      5.64%               --           --       --
                                                       -------      -------                     -------      -------
   Total interest bearing liabilities                  308,816        6,449      4.18%          293,025        6,076     4.15%
                                                       -------      -------                     -------      -------
Non-interest bearing liabilities
    Non-interest bearing demand deposits                56,336                                   53,683
    Other liabilities                                    5,905                                    5,172
                                                       -------                                  -------
        Total liabilities                              371,057                                  351,880
Stockholders' equity                                    33,677                                   30,988
                                                       -------                                  -------
        Total liabilities and stockholders' equity    $404,734                                 $382,868
                                                       =======                                  =======
Net interest income                                                 $ 9,414                                 $  8,610
                                                                     ======                                  =======
Net yield on interest earning assets                                             4.97%                                   4.80%
                                                                                 =====                                   =====












<FN>
(1) The indicated  income and annual rate are presented on a taxable  equivalent
    basis using the Federal  marginal  rate of 34% adjusted for the 20% interest
    expense disallowance for 1997 and 1996.
(2) Non-accruing loans are included in the average balance.
</FN>
</TABLE>


                                       10

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

               AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS)
<TABLE>
<CAPTION>
                                                                  Three-Months                       Six-Months
         Yield On:                                               Ended June 30,                     Ended June 30,
         ---------                                            -------------------                -------------------
                                                              1997          1996                  1997         1996
                                                              ----          ----                  ----         ----
<S>                                                         <C>           <C>                   <C>          <C>    
Interest Earning Assets                                       8.43%         8.22%                 8.38%        8.19%
Interest Bearing Liabilities                                  4.24%         4.12%                 4.18%        4.15%
                                                              ----          ----                  ----         ----
Net Interest Spread                                           4.19%         4.10%                 4.20%        4.04%
Contribution of Interest Free Funds                           0.78%         0.76%                 0.77%        0.76%
                                                              ----          ----                  ----         ----
Net Yield on Interest Earning Assets                          4.97%         4.86%                 4.97%        4.80%
                                                              ====          ====                  ====         ====
</TABLE>

                      INTEREST INCOME ON FEDERAL FUNDS SOLD

         Interest  income on federal  funds  sold for the  three- and  six-month
periods  ended June 30, 1997,  decreased  $139 thousand and $336 thousand to $61
thousand and $85  thousand,  respectively,  when compared to the same periods in
1996.  The  decrease in federal  funds  interest  income for the three- and six-
month periods ended June 30, 1997 is primarily the result of a $10.6 million and
$12.5 million decrease in average balances, partially offset by a 21 and 5 basis
point (a basis point  equals one  hundredth  of one  percent)  increase in rates
compared  to the same  periods in 1996,  respectively.  The  decrease in average
balances is  attributable  to the continued  strength in loan demand through the
six month period ended June 30, 1997.

                    INTEREST INCOME ON INVESTMENT SECURITIES

         On a tax equivalent  basis,  interest  income on investment  securities
decreased  $156 thousand and $119 thousand for the three- and six-month  periods
ended June 30,  1997 to $1.34  million  and $2.83  million,  respectively,  when
compared to the same periods in 1996.  The decrease for the three- and six-month
period is primarily due to a decrease in average  balances of $14.37 million and
$9.00 million,  partially offset by 33 and 36 basis point increases in the yield
earned on  securities  compared  to the same  periods  last year,  respectively.
Proceeds from net investment  securities  sales and maturities have been used to
fund loan growth over the last two quarters.

                            INTEREST INCOME ON LOANS

         Loan  interest  income,  on a tax  equivalent  basis,  generated by the
Corporation's loan portfolio  increased $1.04 million and $1.64 million to $6.74
million and $12.94  million for the three- and six-month  periods ended June 30,
1997,  compared  to the same  periods in 1996,  respectively.  The  increase  in
interest income on loans for the three- and six-month  period ended June 30,1997
is attributable to a $51.50 million and $41.82 million increase in average loans
outstanding respectively, partially offset by a 19 basis point decrease in rates
earned for both time  periods.  The  decrease in the loan  portfolio  yield is a
direct result of increased  competition for new and existing loan  relationships
and volume  increases in lower  yielding  automobile  related  loans and leases.
There has been a  noticeable  increase in pricing and fee  competition  on large
(over  $500,000)  loans (new and  renewals)  during  the past 18  months.  It is
anticipated  that this pricing  pressure  will  continue to reduce  overall loan
yields and net interest margins.




                                       11

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

                      INTEREST EXPENSE ON DEPOSIT ACCOUNTS

         Interest expense on deposit  accounts  increased $207 thousand and $225
thousand  for the  three- and  six-month  periods  ended June 30,  1997 to $3.16
million and $6.14  million,  compared to the same periods in 1996.  The increase
for the three month  period  ended June 30, 1997 is the result of  increases  in
average  interest-bearing  deposits  of  $14.59  million,  and a 7  basis  point
increase in the rates paid on  interest-bearing  deposits.  The increase for the
six month  period  ended June 30,  1997 is the result of an  increase in average
interest-bearing deposits of $11.6 million,  partially offset by a 1 basis point
decrease in rates paid on interest-bearing deposits.

         The Corporation's effective rate on interest-bearing deposits increased
from  4.15% in the second  quarter  1996 to 4.22% in the  second  quarter  1997.
Competition for deposits from credit unions and non-banking institutions such as
mutual fund  companies  continues  to grow.  The slow growth  rates for interest
bearing and  non-interest  bearing  deposits are expected to continue for future
time periods.  The Bank is considering  opening new branches in order to attract
new deposits.

         INTEREST EXPENSE ON SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

         Interest  expense  on  securities  sold  under  repurchase   agreements
decreased $9 thousand and $28 thousand to $68 thousand and $132 thousand for the
three- and six-month periods ended June 30, 1997, respectively,  compared to the
same periods in 1996. The decreases are primarily  attributable to $1.19 million
and  $1.67  million  decreases  in  average  securities  sold  under  repurchase
agreements  outstanding  compared to the three- and six-month periods ended June
30, 1996, respectively.

                         INTEREST EXPENSE ON BORROWINGS

         Interest  expense on borrowings was $111 thousand and $176 thousand for
the three- and six-month periods ended June 30, 1997,  respectively.  There were
no  borrowings  during  the  first and  second  quarters  of 1996.  The need for
borrowings is the result of strong loan demand out pacing increases in deposits.
Borrowings  consist of overnight Fed Funds  purchased,  FHLB FlexLine,  and FHLB
term advances.

                       PROVISION FOR POSSIBLE LOAN LOSSES

         During the three-  and  six-month  periods  ended  June 30,  1997,  the
Corporation  recorded a $446 thousand and a $656 thousand provision for possible
loan losses  compared to $276 thousand and $552 thousand for the same periods in
1996.  The increased  provisions  in 1997 are a direct result of increased  loan
activity and are not indicative of loan quality. The allowance for possible loan
losses as a percentage  of total loans was 1.85% as of June 30, 1997 compared to
1.97% and 1.95% as of December 31, 1996 and June 30, 1996, respectively. See the
section titled "Allowance For Possible Loan Losses" for additional discussion.

                               NON-INTEREST INCOME

         Total  non-interest  income  decreased  $21 thousand and  increased $47
thousand to $906 thousand and $1.81 million for the three- and six-month periods
ended June 30, 1997,  respectively,  compared to the same  periods in 1996.  The
primary  component  of  non-interest  income is  Financial  Management  Services
revenue,  which  increased  $47 thousand  and $95 thousand to $500  thousand and
$1.00  million  for the  three-  and  six-month  periods  ended  June 30,  1997,
respectively,  compared  to the  same  periods  in  1996.  The  market  value of
Financial Management Services' assets increased $46.3 million to $307.6 million

                                       12

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

at June 30, 1997 from $261.3  million at June 30, 1996.  The growth in Financial
Management  Services'  assets under  management  and  revenues is primarily  the
result of market appreciation and new account relationships.

         Service  charges on deposit  accounts  increased  $30  thousand and $60
thousand to $249 thousand and $480 thousand for the three- and six-month  period
ended June 30, 1997,  respectively,  compared to the same  periods in 1996.  The
increases relate to more effective enforcement of service charge policies.

         Other  non-interest  income decreased $98 thousand and $108 thousand to
$157 thousand and $326 thousand for the three- and six-month  periods ended June
30, 1997 compared to the same periods in 1996.  Second quarter and  Year-to-date
1996 other non-interest income figures include a $135 thousand net gain from the
sale of  property  owned by the  Corporation's  subsidiary,  323 East Gay Street
Corp.

                              NON-INTEREST EXPENSE

         Total  non-interest  expense for the three- and six-month periods ended
June 30, 1997 was $3.67  million and $7.29  million,  increases of $323 thousand
and $689  thousand  from $3.34 million and $6.60 million for the same periods in
1996.  The various  components  of  non-interest  expense  changes are discussed
below.

         Salaries and employee benefits increased $68 thousand and $202 thousand
for the three- and  six-month  periods  ended June 30, 1997 to $2.02 million and
$4.05  million  compared  to the  same  periods  in 1996,  respectively.  Annual
employee  raises and a staff  increase  from 182 full-time  equivalents  (FTE's)
employees  in the second  quarter of 1996 to 190 FTE's in the second  quarter of
1997  are  responsible  for  the  increase.  These  staffing  increases  reflect
additions  to  the  Corporation's  sales,   marketing  and  related  staff.  The
Corporation also experienced proportionate increases in employee benefits.

         Net occupancy, equipment, and data processing expense was $702 thousand
and $1.47  million for the three- and  six-month  periods  ended June 30,  1997,
representing  increases of $49 thousand and $251  thousand over the same periods
last year,  respectively.  The  increases in the first half of 1997 are a direct
result of  increased  costs  associated  with the  opening  of our new  mortgage
center,  renovations  to the  Financial  Management  Services  building  and the
depreciation on the new teller on-line system and document imaging system.

         The FDIC's Bank Insurance Fund ("BIF") insurance  assessment was $0 for
the three- and six-month  periods  ended June 30, 1997,  compared to $1 thousand
for each of the same periods last year. Effective January 1, 1997, in accordance
with the Deposit Insurance Act of 1996 an additional assessment by the Financing
Corporation  ("FICO")  became  applicable  to  all  insured  institutions.  This
assessment is not tied to the FDIC risk classification.  The BIF FICO assessment
will be 1.296  basis  points per $100 in deposits  for 1997.  For the three- and
six-month  periods ended June 30, 1997, the Bank's  assessments for the BIF FICO
were $11 thousand and $21 thousand, respectively.

         Bank shares tax was $85 thousand  and $170  thousand for the three- and
six-month period ended June 30, 1997,  increases of $8 thousand and $16 thousand
over the same periods last year, respectively.  The Pennsylvania Bank Shares Tax
is calculated on quarter-end Bank stockholders' equity and paid annually.

         Other  non-interest  expense  increased $188 thousand and $200 thousand
for the three- and  six-month  periods  ended June 30, 1997 to $851 thousand and
$1.57 million, compared to the same periods in 1996, respectively.

                                       13

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

These  increases are  primarily the result of a $100 thousand  accrual to comply
with a  conciliation  agreement  with the United  States  Department  of Labor's
Office of Federal  Contract  Compliance  Program.  Additionally,  increases  are
attributed to additional  operating expenses associated with increased staff and
premises.

                                  INCOME TAXES

         Income tax expense for the three- and six-month  periods ended June 30,
1997 was $394 thousand and $919  thousand,  compared to $532 thousand and $1,006
thousand in the same periods last year. This  represents  effective tax rates of
25.9% and 29.2% for the  three-  and  six-month  periods  ended  June 30,  1997,
compared  with  32.7%  and  32.4% for the same  periods  in 1996,  respectively.
Effective  tax rates were  reduced  to account  for an  expected  1997  historic
rehabilitation tax credit of approximately $198 thousand.  The tax credit is the
result of an investment the Bank made in a local community  development project.
This tax  credit  was not used in the first  quarter's  tax  calculation  due to
uncertainties  relating to the completion date of the project.  If the effective
tax rate of 29.0% was applied for the  three-month  period  ended June 30, 1997,
income  tax  expenses  would have been $442  thousand  or $48  thousand  higher.
Additionally  there  has  been  an  increase  in  tax-exempt  instruments  as  a
percentage of total assets.  Average  tax-exempt assets as a percentage of total
average assets were 2.81% and 2.42% at June 30, 1997 and 1996, respectively.

               LIQUIDITY MANAGEMENT AND INTEREST RATE SENSITIVITY

         The objective of liquidity  management is to ensure the availability of
sufficient  cash flows to meet all  financial  commitments  and to capitalize on
opportunities  for  business  expansion.   Liquidity  management  addresses  the
Corporation's  ability  to meet  deposit  withdrawals  either  on  demand  or at
contractual  maturity,  to repay borrowings as they mature and to make new loans
and investments as  opportunities  arise.  Liquidity is managed on a daily basis
enabling  Senior  Management to effectively  monitor changes in liquidity and to
react  accordingly to fluctuations in market  conditions.  The primary source of
liquidity  for the  Corporation  is its  available-for-sale  portfolio of liquid
investment grade securities. Funding sources include NOW, money-market, savings,
and smaller  denomination  certificates  of deposit  accounts.  The  Corporation
considers funds from such sources to comprise its "core" deposit base because of
the historical  stability of such sources of funds.  Additional  liquidity comes
from the  Corporation's  non-interest  bearing  demand deposit  accounts.  Other
deposit  sources  include a three-tiered  savings  product and  certificates  of
deposit in excess of $100,000.  Details of core deposits,  non-interest  bearing
demand  deposit  accounts  and other  deposit  sources  are  highlighted  in the
following table:


                                       14

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

                                DEPOSIT ANALYSIS
<TABLE>
<CAPTION>

(Dollars in thousands)                           June 30, 1997                  December 31, 1996                Average Balance
                                           ------------------------         -------------------------       ------------------------
                                            Average       Effective          Average        Effective        Dollar       Percentage
DEPOSIT TYPE                                Balance         Yield            Balance          Yield         Variance       Variance
------------                                -------       ---------         ---------       ---------       --------      ----------
<S>                                      <C>              <C>              <C>              <C>            <C>        <C>
NOW Accounts                               $ 51,630         2.18%            $ 47,984         2.20%          $ 3,646         7.60%
Money Market                                 28,685         3.12               28,974         3.09              (289)       (1.00)
Statement Savings                            49,861         3.28               48,834         3.24             1,027         2.10
Other Savings                                 3,199         2.69                4,222         2.75            (1,023)      (24.23)
CD's Less than $100,000                     106,408         5.73              102,566         5.76             3,842         3.75
                                            -------                           -------                         ------
Total Core Deposits                         239,783         4.10              232,580         4.11             7,203         3.10
Non-Interest Bearing
  Demand Deposit Accounts                    56,336         --                 55,018         --               1,318         2.40
                                            -------                           -------                         ------
Total Core and Non-Interest
  Bearing Deposits                          296,119         --                287,598         --                8,521        2.96
Tiered Savings                               39,704         4.10               38,514         4.11             1,190         3.09
CD's Greater than $100,000                   15,392         5.31               12,677         5.36             2,715        21.42
                                            -------                           -------                         ------

Total Deposits                             $351,215         --               $338,789         --             $12,426         3.67
                                            =======                           =======                         ======
</TABLE>

         The Bank, as a member of the Federal Home Loan Bank ("FHLB"), maintains
an $8.0 million line of credit secured by the Bank's mortgage related assets. As
of June 30,  1997,  the  amount  outstanding  on this line of credit  was $0. In
addition to the line of credit,  the Bank has additional  borrowing  capacity at
the FHLB of  approximately  $90  million.  FHLB  advances  as of June  30,  1997
consisted of $6.4 million in term  advances,  which  represent a combination  of
maturities ranging from 9 months to 10 years.



                                       15

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

         The  goal  of  interest  rate   sensitivity   management  is  to  avoid
fluctuating  net  interest  margins,  and to  enhance  consistent  growth of net
interest income through periods of changing  interest rates. Such sensitivity is
measured  as the  difference  in the  volume of assets  and  liabilities  in the
existing  portfolio  that are subject to repricing in a future time period.  The
Corporation's  net interest rate  sensitivity  gap within one year is a negative
$121  million or 29% of total assets at June 30, 1997,  compared  with  negative
$76.3  million  and  negative  19.7%  at  June  30,  1996,   respectively.   The
Corporation's gap position is one factor used to evaluate interest rate risk and
the  stability  of  net  interest   margins.   Other  factors  include  computer
simulations of what might happen to net interest  income under various  interest
rate  forecasts  and  scenarios.  Management  monitors  interest  rate risk as a
regular part of bank  operations  with the intention of maintaining a stable net
interest margin.

                          INTEREST SENSITIVITY ANALYSIS
                               AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
(Dollars in thousands)
                                                                          One              Over
                                                      Within            through            five          Non-rate
                                                     one year         five years           years        sensitive           Total
                                                     --------         ----------           -----        ---------           -----
<S>                                              <C>               <C>             <C>             <C>              <C> 
ASSETS
    Federal funds sold                             $     8,600       $        --      $        --    $         --       $     8,600
    Investment securities                               12,136            37,077           25,055              --            74,268
    Interest bearing deposits in banks                      --                --               --              --                --
    Loans and leases                                   131,303           157,725           17,347          (5,653)          300,722
    Cash and cash equivalents                               --                --               --          21,227            21,227
    Premises & equipment                                    --                --               --           6,652             6,652
    Other assets                                            --                --               --           6,546             6,546
                                                            --                --               --     -----------        ----------
       Total assets                                $   152,039       $   194,802      $    42,402    $     28,772       $   418,015
                                                    ==========        ==========       ==========     ===========        ==========

LIABILITIES AND CAPITAL
    Non-interest bearing deposit                   $        --       $        --      $        --    $     60,505       $    60,505
    Interest bearing deposits                          260,793            41,221              190              --           302,204
    FHLB Term Advance                                    3,950                --            2,483              --             6,433
    Borrowed funds                                       8,385                --               --              --             8,385
    Other liabilities                                       --                --               --           5,962             5,962
    Capital                                                 --                --               --          34,526            34,526
                                                            --        ----------       ----------     -----------        ----------
       Total liabilities & capital                 $   273,128       $    41,221      $     2,673    $    100,993       $   418,015
                                                    ==========        ==========       ==========     ===========        ==========
    Net interest rate
      sensitivity gap                              $  (121,089)      $   153,581      $    39,729    $    (72,221)      $        -- 
                                                    ==========        ==========       ==========     ===========        ==========
    Cumulative interest rate
      sensitivity gap                              $  (121,089)      $    32,492      $    72,221    $         --       $        --
                                                    ==========        ==========       ==========     ===========        ==========
    Cumulative interest rate
      sensitivity gap divided
      by total assets                                   (29.0%)             7.8%            17.3%
                                                    ==========        ==========       ==========
</TABLE>



                                       16

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

                       ALLOWANCE FOR POSSIBLE LOAN LOSSES

         The  allowance  for possible  loan losses is an amount that  management
believes will be adequate to absorb  possible loan losses on existing loans that
may become  uncollectible  based on evaluations of the  collectibility of loans.
The evaluations  take into  consideration  such factors as changes in the nature
and  volume  of the loan  portfolio,  overall  portfolio  quality,  adequacy  of
collateral,  review of specific problem loans,  and current economic  conditions
that may affect the borrower's ability to pay.

          ANALYSIS OF CHANGES IN THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
                       AND COMPARISON OF LOANS OUTSTANDING
<TABLE>
<CAPTION>
                                                                          Three Months                        Six Months
                                                                             Ended                              Ended
                                                                            June 30,                           June 30,
                                                                    ------------------------           ----------------------    
(Dollars in thousands)                                                1997           1996                 1997          1996
                                                                      ----           ----                 ----          ----
<S>                                                               <C>             <C>                <C>            <C>   

Balance at beginning of period                                      $  5,387        $  4,667           $  5,218       $ 4,506
                                                                     -------         -------            -------        ------
Provision charged to operating expense                                   446             276                656           552
                                                                     -------         -------            -------        ------
    Recoveries of loans previously charged-off                            42               5                69            38
    Loans charged-off                                                   (222)           (117)             (290)         (265)
                                                                     -------         -------            -------        ------
Net loans charged-off                                                   (180)           (112)             (221)         (227)
                                                                     -------         -------            -------        ------
Balance at end of period                                            $  5,653        $  4,831           $ 5,653       $ 4,831
                                                                     =======         =======            =======        ======
Period-end loans outstanding                                         306,375        $248,372           $306,375      $248,372

Average loans outstanding                                            299,554        $248,054           $288,212      $246,396

Ratio of net charge-offs to average loans
  outstanding                                                          0.06%           0.05%              0.08%         0.05%
</TABLE>
         Non-performing loans include loans on non-accrual status and loans past
due 90 days or more and still  accruing.  The Bank's policy is to write down all
non-performing  loans  to net  realizable  value  based on  updated  appraisals.
Non-performing loans are generally  collateralized by real estate and are in the
process of  collection.  Management  is not aware of any loans  other than those
included in the following table that would be considered potential problem loans
and cause management to have doubts as to the borrower's  ability to comply with
loan  repayment  terms.  The reduction in the current  levels of  non-performing
assets from year end 1996 levels can  primarily be  attributed  to two items:  A
loan for $1.2 million was assumed by another borrower and brought current; and a
$600 thousand  asset,  classified as OREO, was sold. At June 30, 1997 there were
no  concentration  of loans exceeding 10% of total loans which are not otherwise
disclosed.



                                       17

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

                         NON-PERFORMING LOANS AND ASSETS
<TABLE>
<CAPTION>

                                                                        June 30,                    December 31,
                                                               ------------------------             ------------
(Dollars in thousands)                                            1997            1996                  1996
                                                                  ----            ----                  ----
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Past due over 90 days and still accruing                       $   740          $   621               $ 2,772
Non-accrual loans                                                1,089              681                   713
                                                                ------           ------                ------
Total non-performing loans                                       1,829            1,302                 3,485
Other real estate owned                                            851            1,447                 1,274
                                                                ------           ------                ------
Total non-performing assets                                    $ 2,680          $ 2,749               $ 4,759
                                                                ======           ======                ======
Non-performing loans as a percentage
     of total loans                                              0.60%            0.52%                 1.32%
Allowance for possible loan losses as a
   percentage of non-performing loans                          309.08%          371.04%                149.7%
Allowance for possible loan losses as a
  percentage of non-performing assets                           210.9%           175.7%                109.6%
Allowance for possible loan losses as a
  percentage of period-end loans outstanding                     1.85%            1.96%                 1.97%
</TABLE>

         The   allowance   for  possible   loan  losses  as  a   percentage   of
non-performing loans ratio indicates that the allowance for possible loan losses
is  sufficient to cover the  principal of all  non-performing  loans at June 30,
1997.  Other Real Estate Owned ("OREO")  represents  residential  and commercial
real estate that has been  written  down to  realizable  value (net of estimated
disposal  costs)  based  on  professional  appraisals.   Management  intends  to
liquidate OREO in the most  expedient and  cost-effective  manner.  This process
could  take  up  to  twenty-four   months,   although  swifter   disposition  is
anticipated.

                                 LOAN IMPAIRMENT

         In  accordance  with FAS  114,  the Bank  identifies  certain  loans as
impaired when it is probable  that interest and principal  will not be collected
according  to the  contractual  terms  of the loan  agreement.  The  accrual  of
interest is  discontinued  in such loans and no income is  recognized  until all
recorded  amounts of interest and principal  are recovered in full.  These loans
are included in the non-accrual loans total in the above analysis.

         Loan  impairment  is measured by  estimating  the expected  future cash
flows and  discounting  them at the  respective  effective  interest  rate or by
valuing the underlying  collateral.  The recorded  investment in these loans and
the valuation for credit losses related to loan impairment are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)                           June 30, 1997            June 30, 1996             December 31, 1996
                                                 -------------            -------------             -----------------
<S>                                                <C>                      <C>                         <C>
Principal amount of impaired loans                   $ 706                    $ 422                       $ 443
Less valuation allowance                               318                      406                         419
                                                      ----                     ----                        ----
                                                     $ 388                    $  16                       $  24
                                                      ====                     ====                        ====
</TABLE>




                                       18

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

The activity in the valuation  allowance  for the three- and  six-month  periods
ended June 30, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
                                                                        June 30,1997                     June 30, 1996
                                                                     ------------------              -------------------
                                                                     Three        Six                 Three        Six
                                                                     Months      Months               Months      Months
                                                                     Ended       Ended                Ended       Ended
                                                                     ------      ------              -------      ------
<S>                                                             <C>           <C>                  <C>         <C> 
Valuation allowance at beginning of period                          $  454      $  419               $  380      $  433
Provision for loan impairment                                           25          75                  100         100
Direct charge-offs                                                    (161)       (176)                 (75)       (159)
Recoveries                                                              --          --                    1          32
                                                                     -----       -----                -----       -----
Valuation allowance at end of period                                $  318      $  318               $  406      $ 406
                                                                     =====       =====                =====       =====
</TABLE>
         Total cash  collected on impaired loans during the three- and six-month
periods ended June 30, 1997 was $6 thousand and $212 thousand,  respectively, of
which $6  thousand  and $176  thousand  was  credited to the  principal  balance
outstanding  on such loans.  Interest  that would have been  accrued on impaired
loans  during the  three-  and  six-month  periods  ended June 30,  1997 was $15
thousand and $25  thousand.  Interest  income  recognized  during the three- and
six-month periods ended June 30, 1997 was $0 and $36 thousand, respectively.

         Total cash collected on impaired loans during the three- and six- month
periods ended June 30, 1996 was $3 thousand and $9 thousand,  respectively,  all
of which was  credited  to the  principal  balance  outstanding  on such  loans.
Interest  that would have been  accrued on impaired  loans during the three- and
six-  month  periods  ended June 30,  1996 was $12  thousand  and $22  thousand,
respectively. Interest income recognized during the three- and six-month periods
ended June 30, 1996 was $0.

                  BUILDING IMPROVEMENTS AND TECHNOLOGY PROJECTS

         Renovations  to  the  former  Commonwealth  Bank  building,  which  was
purchased  in  1995,  are  now  complete.  Improvements  to  the  property  cost
approximately $580 thousand. The building was occupied during the fourth quarter
of 1996 and houses our new Mortgage  Center.  Renovations  and  expansion of the
Miller building which house the Financial  Management  Services  Department were
completed  during the second  quarter  of 1996 at a cost of  approximately  $408
thousand.

         The Branch teller automation project is still in process.  Depreciation
on the  project  started in 1996 at  approximately  $6 thousand  per month.  The
customer check imaging project has been  completed.  Depreciation on the project
started  during the second  quarter of 1996 at  approximately  $10  thousand per
month.

         Management is in the process of reviewing the adequacy of its mainframe
computer and software for possible replacement of some or all of its components.
The cost  associated  with such a project could be  significant.  An estimate of
costs has not yet been  determined.  A vendor will be selected during the fourth
quarter of this year and conversion is expected to occur in 1998.

         Management is aware of and is taking the  appropriate  steps to address
the year 2000 date  change  issue.  Management  will ensure that all systems and
controls are in place to comply with applicable regulations.


                                       19

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

                                CAPITAL ADEQUACY

         The Corporation is subject to Risk-Based  Capital Guidelines adopted by
the Federal Reserve Board ("FRB") for bank holding  companies.  The Bank is also
subject to similar capital requirements adopted by the Office of the Comptroller
of the Currency.  Under these  requirements,  the  regulatory  agencies have set
minimum  thresholds for Tier I Capital,  Total Capital,  and Leverage ratios. At
June 30,  1997,  both the  Corporation's  and the Bank's  capital  exceeded  all
minimum  regulatory  requirements,  and were  considered  "well  capitalized" as
defined in the regulations  issued pursuant to the FDIC Improvement Act of 1991.
The Corporation's  Risk-Based Capital Ratios, shown below, have been computed in
accordance with regulatory accounting policies.
<TABLE>
<CAPTION>
RISK-BASED                                         June 30,                    December 31,             
CAPITAL RATIOS                            ------------------------           -------------          "Well Capitalized"
--------------                             1997               1996               1996                  Requirements
                                           ----               ----               ----               ------------------
<S>                                     <C>                 <C>               <C>                      <C>    
Leverage Ratio                             8.44%              8.26%              8.58%                    5.00%
Tier I Capital Ratio                      11.24%             11.95%             12.05%                    6.00%
Total Risk-Based Capital Ratio            12.49%             13.21%             13.31%                   10.00%
</TABLE>

         The Bank is not under any agreement with the regulatory authorities nor
is it aware of any current  recommendations by the regulatory  authorities that,
if they were to be  implemented,  would  have a  material  affect on  liquidity,
capital resources or operations of the Corporation.  The internal capital growth
rate for the  Corporation  was 8.14% and 4.30% for the six months ended June 30,
1997 and 1996, respectively.



                                       20

<PAGE>




                           PART II - OTHER INFORMATION

Item 1.           Legal Proceedings
                  -----------------
                  Various actions and proceedings are presently pending to which
                  the  Corporation  is a party.  These  actions and  proceedings
                  arise out of routine operations and, in management's  opinion,
                  will not,  either  individually  or in the  aggregate,  have a
                  material adverse effect on the consolidated financial position
                  of the Corporation and its subsidiaries.

Item 2.           Changes in Securities
                  ---------------------
                  None

Item 3.           Defaults upon Senior Securities
                  -------------------------------
                  None

Item 4.           Submission of Matters to Vote of Security Holders
                  -------------------------------------------------
                  None

Item 5.           Other Information
                  -----------------
                  None

Item 6.           Exhibits and Reports on Form 8-K
                  --------------------------------
                  (a)       Exhibits
                            --------
                            The following is a list of exhibits  incorporated by
                            reference into this report:

                            (3)(a)  Articles of Incorporation.
                                    -------------------------
                                     (i.) Copy of the Corporation's  Articles of
                                     Incorporation,  filed on  March 9,  1984 is
                                     incorporated  by  reference  to  Exhibit  3
                                     (a)(iii) to the Corporation's Annual Report
                                     on Form  10-K for the year  ended  December
                                     31, 1988.

                                     (ii.) Copy of the Corporation's Certificate
                                     of    Amendment    to   the   Articles   of
                                     Incorporation  filed with the  Secretary of
                                     the  Commonwealth  of Pennsylvania on April
                                     2, 1986 is  incorporated  by  reference  to
                                     Exhibit  3  (a)(I)  to  the   Corporation's
                                     Annual  Report  on Form  10-K  for the year
                                     ended December 31, 1988.

                                     (iii.)    Copy    of   the    Corporation's
                                     Certificate of Amendment to the Articles of
                                     Incorporation  filed with  Secretary of the
                                     Commonwealth  of  Pennsylvania on March 23,
                                     1984  is   incorporated   by  reference  to
                                     Exhibit   3(a)(II)  to  the   Corporation's
                                     Annual  Report  on Form  10-K  for the year
                                     ended December 31, 1988.


                                       21

<PAGE>



                           PART II - OTHER INFORMATION

                                   (CONTINUED)

                            (3)(b) Bylaws of the Corporation,  as amended.  Copy
                                   --------------------------------------
                            of  the  Corporation's   Bylaws,   as  amended,   is
                            incorporated  by  reference  to Exhibit 3 (b) to the
                            Corporation's  Annual  Report  on Form  10-K for the
                            year ended December 31, 1988.

                            (27)     Financial Data Schedule

         (b)      Reports on Form 8-K
                  -------------------
                  A Form 8-K was  filed on  February  24,  1997 with the sec via
                  EDGAR pertaining to a press release on the stock split.

                  A Form 8-K was  filed on June 24,  1997 with the SEC via EDGAR
                  pertaining to a press release on a conciliation agreement with
                  the Department of Labor.


                                       22

<PAGE>


                                   SIGNATURES


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the  Registrant  has duly  caused  this report to be signed on its behalf by the
undersigned thereunto duly authorized.




                                     FIRST WEST CHESTER CORPORATION



                                     Charles E. Swope



                                     /s/ Charles E. Swope
                                     --------------------
                                     President


DATE:  August 13, 1997


                                     J. Duncan Smith



                                     /s/ J. Duncan Smith
                                     -------------------
                                     Treasurer
                                     (Principal Accounting
                                      and Financial Officer)


                                       23