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, 1998, 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
31, 1998 was 2,309,913.


<PAGE>


                 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES

                                      INDEX
                                      -----


                                                                             

<TABLE>
<CAPTION>
                                                                                                                       PAGE
                                                                                                                       ----
<S>              <C>                                                                                                <C> 

Part I.  FINANCIAL INFORMATION
        

                  Item 1 -   Financial Statements
                             Consolidated Statements of Condition
                             June 30, 1998 and December 31, 1997                                                          3


                             Consolidated Statements of Income
                             Three-Months Ended June 30, 1998 and 1997                                                    4


                             Consolidated Statements of Stockholder's Equity                                              5


                             Consolidated Statements of Cash Flows
                             Three-Months Ended June 30, 1998 and 1997                                                    6


                             Notes to Consolidated Financial Statements                                                 7-8


                  Item 2 -   Management's Discussion and Analysis of
                             Financial Condition and Results of Operations                                             9-23

                  Item 3 -   Quantitative and Qualitative Disclosures About Market Risk                                  24



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 a Vote of Security Holders
                  Item 5 -   Other Information
                  Item 6 -   Exhibits and Reports on Form 8-K                                                            25

                  Signatures                                                                                             26

</TABLE>

<PAGE>



                                                                 

                 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>

(Dollars in thousands - except per share data)                                                 (Unaudited)
                                                                                                  June 30,          December 31,
                                                                                                    1998               1997
                                                                                               -------------        -----------
<S>                                                                                          <C>                    <C>    

ASSETS
    Cash and due from banks                                                                    $   21,441            $   22,248
    Federal funds sold                                                                             12,000                 4,200

           Total cash and cash equivalents                                                         33,441                26,448
                                                                                                ---------             ---------

    Investment securities  held-to-maturity (market value of $10,863 and $12,237
        at June 30, 1998 and December 31,
        1997, respectively)                                                                        10,709                12,082

    Investment securities available-for-sale at market value                                       67,501                65,516

    Loans                                                                                         320,150               318,899
    Less allowance for possible loan losses                                                        (5,912)               (5,900)
                                                                                                ---------             ---------

           Net loans                                                                              314,238               312,999

    Premises and equipment, net                                                                     7,347                 6,659
    Other assets                                                                                    6,612                 7,664
                                                                                                ---------             ---------

           TOTAL ASSETS                                                                        $  439,848            $  431,368
                                                                                                =========             =========

LIABILITIES
    Deposits
        Non-interest bearing                                                                   $   69,478           $    63,287
        Interest bearing                                                                          318,284               310,962
                                                                                                ---------             ---------

           Total deposits                                                                         387,762               374,249

    Securities sold under repurchase agreements                                                     1,728                 7,625
    Federal Home Loan Bank advances and other borrowings                                            5,104                 7,379
    Other liabilities                                                                               7,077                 5,902
                                                                                                ---------             ---------

           Total liabilities                                                                      401,671               395,155
                                                                                                ---------             ---------

STOCKHOLDERS' EQUITY
    Common stock, par value $1.00;  authorized,  5,000,000 shares;  Outstanding,
        2,308,913 shares at June 30, 1998 and 2,399,833
        shares December 31, 1997.                                                                   2,400                 2,400
    Additional paid-in capital                                                                      2,820                 2,729
    Retained earnings                                                                              34,291                32,803
    Net unrealized gain (loss) on securities available-for-sale                                       144                   (33)
    Treasury stock, at cost:  91,210 shares at June 30, 1998 and
        103,700 shares at December 31, 1997.                                                       (1,478)               (1,686)
                                                                                                ---------             ---------

           Total stockholders' equity                                                              38,177                36,213
                                                                                                ---------             ---------

           TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                          $  439,848            $  431,368
                                                                                                =========             =========

    Book Value Per Share                                                                          $16.53                $15.77
                                                                                                   =====                 =====
</TABLE>


The accompanying notes are an integral part of these statements.

                                       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,
                                                                         ------------------------          ---------------------
                                                                           1998             1997             1998           1997
                                                                           ----             ----             ----           ----
<S>                                                                      <C>              <C>              <C>          <C>

INTEREST INCOME
    Loans, including fees                                                 $7,117           $6,680           $14,118       $12,833
    Investment securities                                                  1,138            1,331             2,308         2,806
    Federal funds sold                                                        83               61               152            85
    Deposits in banks                                                         --               --                --            12
                                                                           -----            -----            ------        ------

                Total interest income                                      8,338            8,072            16,578        15,736
                                                                           -----            -----            ------        ------

INTEREST EXPENSE
    Deposits                                                               3,383            3,163             6,674         6,141
    Securities sold under repurchase agreements                               23               68                60           132
    Federal Home Loan Bank advances and other borrowings                      76              111               172           175
                                                                           -----            -----            ------        ------

                Total interest expense                                     3,482            3,342             6,906         6,448
                                                                           -----            -----            ------        ------

                Net interest income                                        4,856            4,730             9,672         9,288

    Provision for loan losses                                                188              446               412           656
                                                                           -----            -----            ------        ------

                Net interest income after provision
                   for possible loan losses                                4,668            4,284             9,260         8,632
                                                                           -----            -----            ------        ------

NON-INTEREST INCOME
    Financial management services                                            560              500             1,121         1,000
    Service charges on deposit accounts                                      265              249               519           480
    Other                                                                    327              157               588           326
                                                                           -----            -----            ------        ------

                Total non-interest income                                  1,152              906             2,228         1,806
                                                                           -----            -----            ------        ------

NON-INTEREST EXPENSE
    Salaries and employee benefits                                         2,268            2,018             4,481         4,054
    Net occupancy and  equipment                                             808              702             1,610         1,473
    FDIC deposit insurance                                                    11               11                22            21
    Bank shares tax                                                           87               85               175           170
    Other                                                                    809              851             1,667         1,572
                                                                           -----            -----            ------        ------

                Total non-interest expense                                 3,983            3,667             7,955         7,290
                                                                           -----            -----            ------        ------

                Income before income taxes                                 1,837            1,523             3,533         3,148


INCOME TAXES                                                                 561              394             1,078           919
                                                                           -----            -----            ------        ------

                NET INCOME                                                $1,276           $1,129           $ 2,455       $ 2229
                                                                           =====            =====            ======        =====

PER SHARE DATA
    Basic net income per common share                                     $0.55             $0.49            $1.07          $0.97
                                                                           ====              ====             ====           ====
    Diluted net income per common share                                   $0.54             $0.49            $1.05          $0.96
                                                                           ====              ====             ====           ====
    Dividends declared                                                    $0.21             $0.19            $0.42          $0.38
                                                                           ====              ====             ====           ====

Weighted average shares outstanding                                    2,306,928        2,289,434         2,301,946     2,288,682
                                                                       =========        =========         =========     =========
</TABLE>

The accompanying notes are an integral part of these statements.
                                       4

<PAGE>



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

                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                                          Six Months Ended
                                                                                                               June 30,
                                                                                                     --------------------------
(Dollars in thousands)                                                                                  1998             1997
                                                                                                       -------          ------
<S>                                                                                                   <C>              <C>

Balance at January 1,                                                                                  $36,213          $33,175

    Net income to date                                                                                   2,455            2,229
    Cash dividends declared                                                                               (967)            (867)
    Net unrealized gain (loss) on securities available-for-sale                                            177              (85)
    Treasury stock transactions                                                                            207               65
    Paid in capital from treasury stock transactions                                                        92                9
                                                                                                        ------           ------

Balance at June 30,                                                                                    $38,177          $34,526
                                                                                                        ======           ======
</TABLE>






























The accompanying notes are an integral part of these statements.

                                       5
<PAGE>


                 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                                           (Unaudited)
                                                                                                        Six Months Ended
                                                                                                            June 30,
                                                                                               -------------------------------
(Dollars in thousands)                                                                              1998               1997
                                                                                                ------------       -----------
<S>                                                                                          <C>                  <C>    

OPERATING ACTIVITIES
    Net Income                                                                                $    2,455           $    2,229
    Adjustments to reconcile net income to net cash
           provided by operating activities:
        Depreciation                                                                                 535                  498
Provision for loan losses                                                                            412                  656
Amortization of investment security premiums
           and accretion of discounts                                                                 81                   22
Amortization of deferred fees on loans                                                                13                   84
    Investment securities losses, net                                                                  3                   14
    Increase in other assets                                                                         961                  635
    Increase in other liabilities                                                                  1,175                  662
                                                                                               ---------            ---------

           Net cash provided by operating activities                                               5,635                4,800
                                                                                               ---------            ---------

INVESTING ACTIVITIES
    Decrease in interest bearing deposits in banks                                                    --                1,000
    Increase in loans                                                                             (1,664)             (42,099)
    Proceeds from sales of investment securities available-for-sale                                6,159               24,606
    Proceeds from maturities of investment securities available-for-sale                          12,687                6,521
    Proceeds from maturities of investment securities held-to-maturity                             1,394                2,909
    Purchases of investment securities available-for-sale                                        (20,668)             (10,793)
    Purchase of premises and equipment, net                                                       (1,223)                (398)
                                                                                               ---------            ---------

        Net cash used in investing activities                                                     (3,315)             (18,254)
                                                                                               ---------            ---------

FINANCING ACTIVITIES
    Increase (decrease) in securities sold under repurchase agreements                            (5,651)                 442
    Increase in deposits                                                                          13,513               11,443
    Increase (decrease) in Federal Home Loan Bank advances and other borrowings                   (2,521)               6,433
    Cash dividends                                                                                  (967)                (867)
    Treasury stock transactions                                                                      299                   74
                                                                                               ---------            ---------

           Net cash provided by financing activities                                               4,673               17,525
                                                                                               ---------            ---------

NET INCREASE IN CASH AND CASH
  EQUIVALENTS                                                                                      6,993                4,071

Cash and cash equivalents at beginning of period                                                  26,448               25,756
                                                                                               ---------            ---------

Cash and cash equivalents at end of period                                                    $   33,441           $   29,827
                                                                                               =========            =========
</TABLE>




The accompanying notes are an integral part of these statements.

                                       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
           fiscal year ended December 31, 1997.

2.         The   results of operations for  the six-month  period ended June 30,
           1998 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.  Diluted net income per
           share includes the effect of options  granted.  All per share data in
           this report has been restated to reflect the new standards imposed by
           the Financial  Accounting Standards Board Statement ("SFAS") No. 128,
           "Earnings Per Share" which became effective for financial  statements
           issued after December 15, 1997.

4.         The  Corporation  adopted  SFAS  No.  130,  "Reporting  Comprehensive
           Income"  which became  effective  January 1, 1998.  This new standard
           requires entities  presenting a complete set of financial  statements
           to include  details of  comprehensive  income.  Comprehensive  income
           consists  of net income or loss for the  current  period and  income,
           expenses,  gains and losses that bypass the income  statement and are
           reported   directly  in  a  separate   component  of  equity.   Other
           comprehensive income/(loss) net of taxes for the three- and six-month
           periods  ended June 30,  1998 was $100  thousand  and $177  thousand,
           compared to $431 thousand and $(85)  thousand in the same period last
           year.

5.         The Financial  Accounting  Standards  Board ("FASB")  issued SFAS No.
           132, "Employers  Disclosures About Pensions and Other  Postretirement
           Benefits"  which  amends  FASB  statements  No.  87, 88 and 106.  The
           statement  revises  employers'  disclosures  about  pension and other
           postretirement  benefit plans and does not change the  measurement of
           recognition   of  these  plans.   It   standardizes   the  disclosure
           requirements   and  requires   additional   information   on  benefit
           obligations  and the fair value of plan assets  that will  facilitate
           financial  analysis,  and eliminate  certain  disclosures that are no
           longer useful.  The statement is effective for fiscal years beginning
           after December 15, 1997. Adoption of the new standard is not expected
           to have a material impact on the Corporation's financial statements.

6.         The  American  Institute of Certified  Public  Accountants  ("AICPA")
           issued Statement of Option ("SOP") 98-1, "Accounting for the Costs of
           Computer  Software  Developed or Obtained for Internal  Use." The SOP
           was  issued to  provide  authoritative  guidance  on the  subject  of
           accounting for the costs  associated with the purchase or development
           of computer  software.  The  statement is effective  for fiscal years
           beginning  after December 15, 1998. This statement is not expected to
           have a material impact on the Corporation's financial statements.

                                       7
<PAGE>

                 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                   (UNAUDITED)

7.         FASB issued SFAS No. 133, "Accounting for Derivative  Instruments and
           Hedging Activities" which amends FASB statements No. 52, 80, 105, 119
           and  107.  The  statement   requires  that  entities   recognize  all
           derivatives  as either  assets or  liabilities  in the  statement  of
           financial  position and measure those  instruments at fair value. The
           statement is effective for fiscal  quarters of fiscal years beginning
           after June 15, 1999.  Management is considering early adoption of the
           statement,  which is not  expected  to have a material  impact on the
           Corporation's financial statements.

8.         Certain  prior year amounts have been reclassified to conform to the 
           current year presentations.
 
                                      8

<PAGE>


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

                          EARNINGS AND DIVIDEND SUMMARY

         Net income for the  three-month  period  ended June 30,  1998 was $1.28
million,  an increase  of 13.0% from $1.13  million for the same period in 1997.
Net income for the six-month  period ended June 30, 1998 was $2.46  million,  an
increase of 10.1% from $2.23  million for the same period in 1997.  Increases in
net income are the result of increases in net interest  income and  non-interest
income  partially  offset by increases in  operating  expenses.  Net income also
benefited  from a reduction in the provision  for loan loss expense  through the
six-month  period.  Cash  dividends  declared  during the second quarter of 1998
increased to $0.21 per share,  a 10.5%  increase  compared to $0.19 per share in
the second quarter of 1997. Over the past ten years, the Corporation's  practice
has been to pay a dividend of at least 35.0% of net income.
<TABLE>
<CAPTION>

                                                                     Three Months Ended               Six Months Ended
                                                                          June 30,                         June 30,
                                                                    ---------------------            --------------------
                                                                    1998             1997            1998            1997
                                                                    ----             ----            ----            ----
         <S>                                                     <C>             <C>                <C>           <C>   

           SELECTED RATIOS
           ---------------
           Return on Average Assets                                 1.18%           1.10%             1.14%         1.10%
           Return on Average Equity                                13.57%          13.31%            13.22%        13.24%
           Earning Retained                                        61.99%          61.20%            60.61%        61.10%
           Dividend Payout Ratio                                   38.01%          38.80%            39.39%        38.90%
           Book Value Per Share                                   $16.53          $15.06            $16.53        $15.06
</TABLE>

The  "Consolidated  Average  Balance  Sheet" on pages 14 and 15 may  assist  the
reader in following this discussion.

                               NET INTEREST INCOME

         Net  interest  income  is the  difference  between  interest  income on
interest-earning  assets and interest expense on  interest-bearing  liabilities.
Net interest income for the three- and six-month periods ended June 30, 1998, on
a tax equivalent  basis, was $4.92 million and $9.78 million,  compared to $4.81
million and $9.42 million for the same periods in 1997, respectively. Net yields
on interest-earning  assets, on a tax equivalent basis, were 4.84% and 4.85% for
the three- and  six-month  periods ended June 30, 1998 compared to 4.98% for the
same periods in 1997,  respectively.  Average  interest-earning assets increased
approximately  $20.1 million to $406.1 million during the second quarter of 1998
from  $386.1  million in the same  period  last year.  The  increase  in average
earning  assets was a direct result of loan demand,  particularly  in the Bank's
third  party  automobile  loan and lease  programs.  Effective  July 3, 1998 the
Corporation  exited the third party automobile lending business due to less than
expected  results.  The  Corporation  will  continue  to  service  the  existing
portfolio totaling $27.0 million but will not add any additional  volume.  While
the total  amount of loans has  increased,  the loan growth  rate has  decreased
compared to the same period last year. The yield on interest-earning  assets has
decreased,  the cost or yield of the Bank's  interest  bearing  liabilities  has
increased,  resulting in a decrease in the Bank's net yield. The increase in the
Bank's average  funding costs is the direct result of an increase in the average
rate  being  paid  on  time  deposits  and  other  borrowings.  The  Corporation
anticipates  continued  pressure  on net yields on  interest  earning  assets as
competition for new loan business  remains very strong and  incremental  deposit
growth is becoming more expensive.

                                       9
<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,
         ---------                                            ------------------                 ------------------
                                                              1998          1997                  1998         1997
                                                              ----          ----                  ----         ----
<S>                                                          <C>           <C>                   <C>          <C>    

Interest Earning Assets                                       8.27%         8.45%                 8.28%        8.38%
Interest Bearing Liabilities                                  4.30%         4.24%                 4.27%        4.18%
                                                              ----          ----                  ----         ----
Net Interest Spread                                           3.97%         4.21%                 4.01%        4.20%
Contribution of Interest Free Funds                           0.87%         0.77%                 0.84%        0.78%
                                                              ----          ----                  ----         ----
Net Yield on Interest Earning Assets                          4.84%         4.98%                 4.85%        4.98%
                                                              ====          ====                  ====         ====
</TABLE>


                      INTEREST INCOME ON FEDERAL FUNDS SOLD

         Interest  income on federal  funds  sold for the  three- and  six-month
periods ended June 30, 1998,  increased 36.1% and 78.8% to $83 thousand and $152
thousand,  respectively, when compared to the same periods in 1997. The increase
in federal funds interest income for the three- and six-month periods ended June
30, 1998 is primarily the result of a $1.6 million and $2.4 million  increase in
average balances.

                    INTEREST INCOME ON INVESTMENT SECURITIES

         On a tax equivalent  basis,  interest  income on investment  securities
decreased  14.7% and 17.9% for the three- and  six-month  periods ended June 30,
1998 to $1.2 million and $2.3 million,  respectively,  when compared to the same
periods in 1997. The decreases for the three- and six-month periods is primarily
due to a  decrease  in  average  balances  of 7.7% and 13.2% and 51 and 35 basis
point  decreases in the yield earned on securities  compared to the same periods
last year.  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 6.2% and 9.8% to $7.2 million and $14.2
million for the three- and six-month  periods  ended June 30, 1998,  compared to
the same periods in 1997,  respectively.  The  increases  in interest  income on
loans for the three- and six-month  periods ended June 30, 1998 is  attributable
to a $24.7  million  and $33.8  million  increase in average  loans  outstanding
respectively, offset by 17 and 16 basis point decreases in rates earned on loans
compared to the same period last year, respectively.  The decrease in rates is a
direct result of increased  competition for new and existing loan  relationships
and volume increases in lower yielding third party automobile  related loans and
leases. As previously  mentioned,  the third party automobile  lending portfolio
has not met established  objectives  resulting in the Corporation's  decision to
cease  adding  additional  volume  while  continuing  to  service  the  existing
portfolio  as of July 3,  1998.  Pricing  and fee  competition  on  large  (over
$500,000) loans (new and renewals)  remains strong.  It is anticipated that this
pricing  pressure will  continue to reduce  overall loan yields and net interest
margins.  A reduction in fees will result in a direct  decrease in  non-interest
income.

                                       10
<PAGE>

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

                      INTEREST EXPENSE ON DEPOSIT ACCOUNTS

         Interest  expense on deposit  accounts  increased 7.0% and 8.7% for the
three- and  six-month  periods  ended  June 30,  1998 to $3.4  million  and $6.7
million,  compared to the same periods in 1997. The increase for the three-month
period   ended   June  30,   1998  is  the  result  of   increases   in  average
interest-bearing  deposits of $16.9 million, and a 5 basis point increase in the
rates paid on interest-bearing  deposits.  The increase for the six-month period
ended June 30,  1998 is the result of an  increase  in average  interest-bearing
deposits of $19.6 million, partially offset by a 7 basis point decrease in rates
paid on interest-bearing deposits.

         The Corporation's effective rate on interest-bearing deposits increased
from  4.2% in the  second  quarter  1997 to 4.3%  in the  second  quarter  1998.
Competition for deposits from credit unions and 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's new Frazer
branch  site was  opened  for  business  on August 3,  1998.  This and other new
branches are expected to expand the Bank's deposit base.

         INTEREST EXPENSE ON SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

         Interest  expense  on  securities  sold  under  repurchase   agreements
decreased  66.2% and 54.5% to $23  thousand  and $60 thousand for the three- and
six-month  periods  ended  June 30,  1998,  respectively,  compared  to the same
periods in 1997.  The decreases are primarily  attributable  to $6.0 million and
$4.7 million  decreases in average  securities sold under repurchase  agreements
outstanding,  partially  offset by 69 and 24 basis point increase on rates paid,
compared to the three- and six-month periods ended June 30, 1997, respectively.

    INTEREST EXPENSE ON FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS

         Interest expense on borrowings  decreased 31.5% and 2.3% for the three-
and six-month periods ended June 30, 1998, respectively. The need for borrowings
has decreased as a result of increased deposit growth and a decrease in the loan
growth rate.  Borrowings consist of overnight Fed Funds purchased,  Federal Home
Loan Bank ("FHLB") FlexLine, FHLB term advances and FHLB Open Repo and Repo Plus
advances.

                       PROVISION FOR POSSIBLE LOAN LOSSES

         During the three-  and  six-month  periods  ended  June 30,  1998,  the
Corporation  recorded a $188 thousand and a $412 thousand provision for possible
loan losses  compared to $446 thousand and $656 thousand for the same periods in
1997.  The decrease in the provision  expense is a result of a decreased rate in
loan growth for the three- and six-month  periods ended June 30, 1998,  compared
to the same  periods  in 1997.  The  allowance  for  possible  loan  losses as a
percentage of total loans was 1.85% at June 30, 1998, December 31, 1997 and June
30, 1997,  respectively.  See the section  titled  "Allowance  For Possible Loan
Losses" for additional discussion.

                                       11
<PAGE>
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

                               NON-INTEREST INCOME

         Total non-interest income increased 27.2% and 23.4% to $1.2 million and
$2.2  million  for the  three-  and  six-month  periods  ended  June  30,  1998,
respectively,  compared to the same  periods in 1997.  The primary  component of
non-interest income is Financial  Management  Services revenue,  which increased
12.0%  and 12.1% to $560  thousand  and $1.1  million  for both the  three-  and
six-month  periods  ended  June 30,  1998,  respectively,  compared  to the same
periods in 1997.  Market value of  Financial  Management  Services'  assets grew
24.5% from $307.6  million at June 30, 1997 to $ 383.1 million at June 30, 1998.
The increase is a result of market appreciation and new account relationships.

         Service  charges on deposit  accounts  increased  6.4% and 8.1% to $265
thousand and $519  thousand for the three- and  six-month  period ended June 30,
1998,  respectively,  compared to the same periods in 1997. The increases relate
to more effective  enforcement of service charge  policies.  Other  non-interest
income  increased  108.3% and 80.3% to $327  thousand and $588  thousand for the
three- and six-month periods ended June 30, 1998 compared to the same periods in
1997.  The increases are  attributed to income from service  charges on Bank ATM
machines  commencing  during the second  quarter  1998.  Income from the sale of
residential  mortgages  to the  secondary  market  during  the first and  second
quarters of 1998 also contributed to the increases.

                              NON-INTEREST EXPENSE

         Total  non-interest  expense for the three- and six-month periods ended
June 30, 1998  increased  8.6% and 9.1% to $4.0 million and $8.0 million for the
same periods in 1997. The various components of non-interest expense changes are
discussed below.

         Salaries and employee benefits increased 12.4% and 10.5% for the three-
and  six-month  periods  ended June 30, 1998 to $2.3  million  and $4.5  million
compared to the same  periods in 1997,  respectively.  Annual  employee  raises,
promotions  and a  proportional  increase in  employee  benefits  are  primarily
responsible for the increases. Average full time equivalent staff also increased
from 191 for the period ended June 30, 1997 to 197 for the period ended June 30,
1998.

         Net occupancy,  equipment,  and data processing expense increased 15.1%
and 9.3% to $808 thousand and $1.61 million for the three- and six-month periods
ended June 30, 1998, compared to the same periods last year,  respectively.  The
increases  are a direct  result  of  increased  personal  computer  and  related
equipment  costs which are a  necessary  part of the  Corporation's  Core System
conversion. The conversion is scheduled to occur during the fourth quarter 1998.

        Total other non-interest expense decreased 4.9% to $809 thousand for the
three-month  period  ended June 30,  1998  compared  to the same period in 1997.
Total  other  non-interest  expense  increased  6.0% to  $1.67  million  for the
six-month  period ended June 30, 1998 compared to the same period in 1997.  This
increase can be attributed to increases in the Bank's marketing and loan related
legal  expenses as well as additional  operating  expenses  associated  with the
increases in staff and premises occurring during the first quarter 1998.

                                       12
<PAGE>
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

       Construction on the Bank's new Frazer area branch has been completed. The
branch opened for business on August third of this year.  Preliminary  plans for
another branch in early 1999 continue to be pursued.  The  Corporation  believes
that the costs  associated  with the  opening  of new  branch  sites will have a
direct impact on all the components of non-interest  expense.  It is anticipated
that the  increases  in costs  will be offset  over time by an  increase  in net
interest and fee income generated by business in the new marketing areas.



                                       13

<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)                                             1998                                     1997
                                                    ----------------------------------        ---------------------------------
                                                        Daily                                   Daily
                                                       Average                                  Average
                                                       Balance     Interest      Rate           Balance     Interest     Rate
                                                       -------     --------      ----           -------     --------     ----
<S>                                                <C>            <C>           <C>         <C>            <C>          <C>

ASSETS
Federal funds sold                                  $    6,035     $     83      5.50%       $    4,389     $     61     5.56%
Investment securities
    Taxable                                             74,353        1,119      6.02%           79,753        1,301     6.53%
    Tax-exempt (1)                                       1,490           27      7.29%            2,375           43     7.22%
                                                       -------        -----                     -------        -----
        Total investment securities                     75,843        1,146      6.04%           82,128        1,344     6.55%
                                                       -------        -----                     -------        -----
Loans (2)
    Taxable                                            317,760        7,003      8.82%          289,905        6,528     8.99%
    Tax-exempt (1)                                       6,489          166     10.20%            9,132          220     9.63%
                                                       -------        -----                     -------        -----
        Total loans                                    324,249        7,169      8.84%          299,554        6,748     9.01%
                                                       -------        -----                     -------        -----
        Total interest earning assets                  406,127        8,398      8.27%          386,071        8,153     8.45%
Non-interest earning assets
    Allowance for possible loan losses                  (5,970)                                  (5,436)
    Cash and due from banks                             20,148                                   18,453
    Other assets                                        13,652                                   13,241
                                                       -------                                 --------
        Total assets                                  $433,957                                 $412,329
                                                       =======                                  =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits                 $181,542       $1,605      3.54%         $174,556      $ 1,362     3.12%
Certificates of deposits and other time                135,239        1,778      5.26%          125,283        1,801     5.75%
                                                       -------        -----                     -------       ------
   Total interest bearing deposits                     316,781        3,383      4.27%          299,839        3,163     4.22%
Securities sold under repurchase agreements              2,323           23      3.96%            8,313           68     3.27%
Federal Home Loan Bank advances and
      other borrowings                                   4,853           76      6.26%            7,177          111     6.19%
                                                       -------        -----                     -------        -----
   Total interest bearing liabilities                  323,957        3,482      4.30%          315,329        3,342     4.24%
                                                       -------        -----                     -------        -----
Non-interest bearing liabilities
    Non-interest bearing demand deposits                65,211                                   57,180
    Other liabilities                                    7,164                                    5,892
                                                       -------                                  -------
        Total liabilities                              396,332                                  378,401
Stockholders' equity                                    37,625                                   33,928
                                                       -------                                  -------
        Total liabilities and stockholders' equity    $433,957                                 $412,329
                                                       =======                                  =======
Net interest income                                                  $4,916                                  $ 4,811
                                                                      =====                                   ======
Net yield on interest earning assets                                             4.84%                                   4.98%
                                                                                 ====                                    ====










<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 1998 and 1997.
(2) Non-accruing loans are included in the average balance.
</FN>
</TABLE>
                                       14

<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)                                            1998                                      1997
                                                    ----------------------------------       ----------------------------------
                                                        Daily                                   Daily
                                                       Average                                  Average
                                                       Balance     Interest      Rate           Balance     Interest     Rate
                                                       -------     --------      ----           -------     --------     ----
<S>                                                <C>            <C>           <C>         <C>          <C>            <C>

ASSETS
Federal funds sold                                  $    5,531     $    152      5.50%       $    3,124   $       85     5.44%
Interest bearing deposits in banks                          --           --        --               398           12     6.03%
Investment securities
Taxable                                                 73,910        2,268      6.14%           84,410        2,745     6.50%
    Tax-exempt (1)                                       1,484           57      7.73%            2,437           87     7.16%
                                                       -------       ------                     -------       ------
        Total investment securities                     75,394        2,325      6.17%           86,847        2,832     6.52%
Loans (2)
    Taxable                                            315,293       13,882      8.81%          279,279       12,554     8.97%
    Tax-exempt (1)                                       6,716          326      9.71%            8,418          383     9.10%
                                                       -------       ------                     -------       ------
        Total loans                                    322,009       14,208      8.82%          288,212       12,937     8.98%
                                                       -------       ------                     -------       ------
Total Interest Earning Assets                          402,934       16,685      8.28%          378,581       15,866     8.38%
Non-interest earning assets
    Allowance for possible loan losses                  (5,946)                                  (5,356)
    Cash and due from banks                             19,635                                   18,035
    Other assets                                        13,666                                   13,474
                                                       -------                                  -------
        Total assets                                  $430,289                                 $404,734
                                                       =======                                  =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits                 $181,077      $ 2,838      3.13%         $173,079     $  2,687     3.10%
Certificates of deposits and other time                133,455        3,836      5.75%          121,802        3,454     5.67%
                                                       -------       ------                     -------      -------
Total interest bearing deposits                        314,522        6,674      4.24%          294,881        6,141     4.17%
Securities sold under repurchase agreements              3,443           60      3.49%            8,113          132     3.25%
Federal Home Loan Bank advances and
     other borrowings                                    5,469          172      6.29%            5,822          176     6.05%
                                                       -------       ------                     -------       ------
   Total interest bearing liabilities                  323,434        6,906      4.27%          308,816        6,449     4.18%
                                                       -------       ------                     -------       ------
Non-interest bearing liabilities
    Non-interest bearing demand deposits                62,717                                   56,336
    Other liabilities                                    6,984                                    5,905
                                                       -------                                  -------
        Total liabilities                              393,235                                  371,057
Stockholders' equity                                    37,154                                   33,677
                                                       -------                                  -------
        Total liabilities and stockholders' equity    $430,289                                 $404,734
                                                       =======                                  =======
Net interest income                                                  $9,779                                  $ 9,417
                                                                      =====                                   ======
Net yield on interest earning assets                                             4.85%                                   4.98%
                                                                                 ====                                    ====










<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 1998 and 1997.
(2) Non-accruing loans are included in the average balance.
</FN>
</TABLE>
                                       15
<PAGE>
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS


                                  INCOME TAXES

         Income tax expense for the three- and six-month  periods ended June 30,
1998 was $561  thousand  and $1.1  million,  compared to $394  thousand and $919
thousand in the same periods last year. This  represents  effective tax rates of
30.5% for both the three- and six-month  periods  ended June 30, 1998,  compared
with 25.9% and 29.2% for the same  periods in 1997,  respectively.  The  primary
reason for the  increases  in effective  tax rates is  decreases  in  tax-exempt
instruments  as a percentage of total average  assets from 1.9% and 2.7% at June
30, 1998 and 1997,  respectively.  Tax credits which resulted from an investment
in a community development project were taken in the second quarter of 1997.

               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 and credit
facilities.  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:

                                       16
<PAGE>
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS


                                DEPOSIT ANALYSIS
<TABLE>
<CAPTION>

(Dollars in thousands)                        June 30, 1998               December 31, 1997
                                      ---------------------------     ---------------------------
                                      Average         Effective        Average         Effective     Dollar       Percentage
DEPOSIT TYPE                          Balance            Yield          Balance           Yield      Variance      Variance
------------                          -------         ----------       ---------       ---------     --------      --------
<S>                                 <C>                 <C>           <C>               <C>         <C>   

NOW Accounts                         $ 54,818            2.16%         $ 52,758          2.19%       $ 2,060         3.90%
Money Market                           28,474            3.13            28,433          3.15             41         0.14
Statement Savings                      46,741            3.28            48,381          3.31         (1,640)       (3.39)
Other Savings                           2,450            2.69             2,996          2.74           (546)      (18.22)
CD's Less than $100,000               112,379            5.76           108,022          5.80          4,357         4.03
                                      -------                           -------                       ------

Total Core Deposits                   244,862            4.14           240,590          4.16          4,272         1.78

  Demand Deposit Accounts              62,717             --             57,659           --           5,058         8.77
                                      -------                           -------                       ------

Total Core and Demand
  Deposit Accounts                    307,579            3.30           298,249          3.35          9,330         3.13
                                      -------                           -------                       ------

Tiered Savings                         48,594            4.12            41,184          4.14          7,410        17.99
CD's Greater than $100,000             21,066            5.70            17,415          5.54          3,651        20.96
                                      -------                           -------                       ------

Total Deposits                       $377,239            3.54          $356,848          3.55        $20,391         5.71
                                      =======                           =======                       ======
</TABLE>


         The Bank, as a member of the FHLB,  maintains a line of credit  secured
by the Bank's mortgage-related  assets. As of June 30, 1998, this line of credit
was  approximately  $10.0  million.  As of June 30, 1998 the amount  outstanding
under this line of credit was $0. In  addition  to the line of credit,  the Bank
has additional  borrowing  capacity of approximately  $96.0 million.  During the
second quarter of 1998,  average FHLB advances were  approximately  $5.1 million
and consisted of term advances  representing a combination  of  maturities.  The
average interest rate on this advance was approximately  6.3%. FHLB advances are
collateralized  by a pledge  on the  Bank's  entire  portfolio  of  unencumbered
investment  securities,  certain  mortgage  loans and a lien on the Bank's  FHLB
stock.

         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
$104.1  million  or 23.7% of total  assets  at June  30,  1998  compared  with a
negative  $121  million  or  29.0%  of  total  assets  at  June  30,  1997.  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.
                                       17

<PAGE>
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS


                          INTEREST SENSITIVITY ANALYSIS
                               AS OF JUNE 30, 1998
<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                         $     12,000     $        --       $        --      $        --    $    12,000
    Investment securities                            27,310          33,084            17,816               --         78,210
    Loans and leases                                128,958         175,864            15,328           (5,912)       314,238
    Cash and cash equivalents                            --              --                --           21,441         21,441
    Premises & equipment                                 --              --                --            7,347          7,347
    Other assets                                         --              --                --            6,612          6,612
                                                -----------      ----------        ----------       ----------     ----------
       Total assets                            $    168,268     $   208,948       $    33,144      $    29,488    $   439,848
                                                ===========      ==========        ==========       ==========     ==========

LIABILITIES AND CAPITAL
    Non-interest bearing deposit               $         --     $        --       $        --      $    69,478    $    69,478
    Interest bearing deposits                       268,655          48,380             1,249               --        318,284
    FHLB Term Advance                                 1,941           1,640             1,523               --          5,104
    Borrowed funds                                    1,728              --                --               --          1,728
    Other liabilities                                    --              --                --            7,077          7,077
    Capital                                             --               --                --           38,177         38,177
                                                 ----------      ----------        ----------       ----------     ----------
       Total liabilities & capital             $    272,324     $    50,020       $     2,772      $   114,732    $   439,848
                                                ===========      ==========        ==========       ==========     ==========
    Net interest rate
      sensitivity gap                          $  (104,056)     $   158,928       $    30,372      $  (85,244)    $        --
                                                ==========       ==========        ==========       =========      ==========
    Cumulative interest rate
      sensitivity gap                          $  (104,056)     $    54,872       $    85,244      $        --    $        --
                                                ==========       ==========        ==========       ==========     ==========
    Cumulative interest rate
      sensitivity gap divided
      by total assets                               (23.7%)          12.5%             19.4%
                                                ==========           =====         =========
</TABLE>

                       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.

                                       18
<PAGE>

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

          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,                         June30,
                                                                   -------------------------        ------------------------
(Dollars in thousands)                                                1998           1997              1998             1997
                                                                      ----           ----              -----            ----
<S>                                                                <C>             <C>              <C>             <C>    

Balance at beginning of period                                      $  5,940        $  5,387         $  5,900        $  5,218
                                                                     -------         -------          -------         -------

Provision charged to operating expense                                   188             446              412             656
                                                                     -------         -------          -------         -------
    Recoveries of loans previously charged-off                            11              42               18              69
    Loans charged-off                                                   (227)           (222)            (418)           (290)
                                                                     -------         -------          -------         -------

Net loans charged-off                                                   (216)           (180)            (400)           (221)
                                                                     -------         -------          -------         -------

Balance at end of period                                            $  5,912        $  5,653         $  5,912        $  5,653
                                                                     =======         =======          =======         =======
Period-end loans outstanding                                        $320,150        $306,375         $320,150        $306,375
Average loans outstanding                                           $324,249        $299,554         $322,009        $288,212
Ratio of net charge-offs to average loans
    outstanding                                                        0.07%           0.06%            0.12%           0.08%
</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.

                                       19

<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)                          1998              1997                1997
                                                ----              ----                ----
<S>                                         <C>                <C>                 <C>    

Past due over 90 days and still accruing     $   413            $   740             $   466

Non-accrual loans                              1,895              1,089               1,443
                                              ------             ------               -----
Total non-performing loans                     2,308              1,829               1,909

Other real estate owned                          712                851               1,651
                                              ------             ------               -----

Total non-performing assets                  $ 3,020            $ 2,680             $ 3,560
                                              ======             ======              ======

Non-performing loans as a percentage
   of total loans (gross)                      0.72%              0.60%               0.60%

Allowance for possible loan losses as a
   percentage of non-performing loans        256.15%            309.08%             309.10%

Allowance for possible loan losses as a
   percentage of total loans and other real
   estate owned                                0.94%              0.87%               1.11%

Allowance for possible loan losses as a
   percentage of non-performing assets       195.76%            210.93%             165.70%
</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,
1998.  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.  In July 1998, the Corporation
liquidated  from OREO a commercial  property for a net amount of $505  thousand.
This sale  resulted in a loss of $15  thousand  which will be  reflected  in the
third quarter.

         Management is not aware of any loans other than those included in these
tables  and  mentioned  in this  paragraph  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. During 1997, the Bank increased third party
automobile  loans $23  million to $24  million.  During  1998  these  loans grew
approximately  $3 million to $27 million.  These loans are  unseasoned  and have
increased  non-performing  loan numbers. As of June 30, 1998 approximately 7.53%
of this  portfolio  was past due. In  addition,  approximately  $65  thousand in
repossessed vehicles is included in other assets. As previously  mentioned,  the
Corporation has decided to withdraw from third party  automobile  lending due to
less than  expected  results.  The  Corporation  will  continue  to service  the
existing portfolio but will not add any additional volume as of July 3, 1998. At
June 30, 1998 there were no concentrations of loans exceeding 10% of total loans
which are not otherwise disclosed.

                                       20
<PAGE>
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

                                 LOAN IMPAIRMENT

         In  accordance  with FASB 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, 1998             June 30, 1997            December 31, 1997
                                                    -------------             -------------            -----------------
<S>                                                    <C>                      <C>                        <C>   

Principal amount of impaired loans                      $1,351                    $ 706                     $ 1,121
Less valuation allowance                                   297                      318                         306
                                                         -----                     ----                      ------
                                                        $1,054                    $ 388                     $   815
                                                         =====                     ====                      ======
</TABLE>



The activity in the valuation  allowance  for the three- and  six-month  periods
ended June 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>

                                                                       June 30, 1998                      June 30, 1997
                                                                  ----------------------              --------------------
                                                                   Three          Six                   Three        Six
                                                                   Months        Months                 Months      Months
                                                                   Ended         Ended                  Ended       Ended
                                                                   -----         -----                  -----       -----
<S>                                                                <C>           <C>                  <C>         <C>    

Valuation allowance at beginning of period                        $  274        $  306                 $  454      $  419
Provision for loan impairment                                         25            75                     25          75
Direct charge-offs                                                    (2)          (84)                  (161)       (176)
                                                                   -----        ------                  -----       -----
Valuation allowance at end of period                              $  297        $  297                 $  318      $  318
                                                                   =====         =====                  =====       =====
</TABLE>

         Total cash  collected on impaired loans during the three- and six-month
periods ended June 30, 1998 was $11 thousand and $21 thousand, respectively, all
of which was credited to the principal balance  outstanding on such loans and $0
was  recognized  as interest  income.  Interest  that would have been accrued on
impaired  loans during the three- and six-month  periods ended June 30, 1998 was
$31 thousand and $59 thousand.  There was no interest income  recognized  during
the three- and six-month periods ended June 30, 1998.

         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 $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,
respectively. Interest income recognized during the three- and six-month periods
ended June 30, 1997 was $0 and $36 thousand, respectively.
                                       21

<PAGE>
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS


         BUILDING IMPROVEMENTS, TECHNOLOGY PROJECTS AND YEAR 2000 ISSUES

         In the third quarter of 1997,  the Bank entered into a contract for the
purpose of  constructing  a 2,750 square foot branch  office in the Frazer area.
The Frazer  branch has been  completed  and was opened for business on August 3,
1998.

         In December  1997,  the Bank  entered  into an  agreement to purchase a
25,000 square foot office  building  adjacent to the Bank's  existing  Operation
Center in West Chester, Pennsylvania for approximately $1.7 million. The Bank is
expected to take possession of the property in September 1998.

         During  1997,  Management  completed  an in  depth  review  of its core
processing  system  and  concluded  that  a  new  core  system  was  needed  for
competitive,  functional and Year 2000 reasons.  After extensive  research,  the
Corporation selected Jack Henry and Associates ("Jack Henry") to provide the new
core  processing  system.  Jack Henry is a major provider of Community Bank Core
Processing  Systems.  Specifically,  the  Corporation has contracted to purchase
Jack Henry's  Silverlake  System,  related  hardware,  installation and training
services.  First year  contract  costs are  estimated  to be $1.2  million.  The
conversion  process has commenced  and the final  changeover is expected to take
place in the fourth quarter of this year.

         Management  continues  addressing  Year 2000 issues on several  levels.
Jack Henry's Silverlake software is Year 2000 compliant, which addresses a major
component of the  Corporation's  Year 2000 Compliance  Action Plan (the "Plan").
The Plan  requires a review of the  remainder of the  Corporation's  systems for
compliance  or  replacement.   The  Plan  also  calls  for  communication   with
significant customers, critical vendors and service providers.

                                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,  1998,  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.

                                       22
<PAGE>
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS


<TABLE>
<CAPTION>

                                                   June 30,                    December 31,           
RISK-BASED                               -------------------------             ------------           "Well Capitalized"
CAPITAL RATIOS                             1998               1997                  1997                  Requirements
--------------                             ----               ----                  ----               ----------------
<S>                                      <C>                <C>                   <C> 

    Corporation
    -----------
Leverage Ratio                             8.76%              8.44%                 8.57%                    5.00%
Tier I Capital Ratio                      11.48%             11.24%                11.22%                    6.00%
Total Risk-Based Capital Ratio            12.74%             12.49%                12.48%                   10.00%

       Bank
       ----
Leverage Ratio                             8.57%              8.38%                 8.30%                    5.00%
Tier I Capital Ratio                      11.23%             11.16%                10.89%                    6.00%
Total Risk-Based Capital Ratio            12.49%             12.42%                12.14%                   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 10.85% and 8.14% for the six months ended June 30,
1998 and 1997,  respectively.  The growth rate is computed  by  annualizing  the
change in equity  during the last period and dividing it by total  stockholder's
equity at June 30, 1998 and 1997, respectively.


                           FORWARD-LOOKING STATEMENTS

         The Corporation has discussed its planned investments in new technology
and branch  locations in this  report.  These,  among  others,  i.e.  anticipate
pressures on net yields, are forward-looking statements.

         Risks  and   uncertainties   could  cause  actual  future  results  and
investments to differ materially from those contemplated in such forward-looking
statements.  These risks and uncertainties  include, but are not limited to, the
following: (a) loan growth and/or loan margins may be less than expected, due to
competitive  pressures in the banking  industry  and/or  changes in the interest
rate environment;  (b) general economic  conditions in the Corporation's  market
area may be less favorable than  expected,  resulting in, among other things,  a
deterioration in credit quality; (c) costs of the Corporation's planned training
initiatives, product development, branch expansion, new technology and operating
systems may exceed expectations; (d) volatility in the Corporation's market area
due to recent  mergers  may have  unanticipated  consequences,  such as customer
turnover;  and (e) changes in the regulatory  environment,  securities  markets,
general  business  conditions  and  inflation  may be  adverse.  These risks and
uncertainties  are all  difficult  to predict and most are beyond the control of
the Corporation's Management.

         Readers  are   cautioned   not  to  place   undue   reliance  on  these
forward-looking  statements,  which speak only as the date of this  report.  The
Corporation  undertakes no obligation to publicly release any revisions to these
forward-looking  statements to reflect events or circumstances after the date of
this report.

                                       23

<PAGE>

           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


         There have been no material changes in the Corporation's  assessment of
its sensitivity to market risk since its  presentation in the 1997 Annual Report
of the  Corporation,  filed as an exhibit  to its Form 10-K for the fiscal  year
ended  December  31,  1997  with  the  SEC  via  EDGAR.   Please  refer  to  the
"Management's   Discussion   and  Analysis"   section  on  pages  22-23  of  the
Corporation's 1997 Annual Report for additional information.

                                       24
<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

                  None

                  (a) Exhibits

         3(i). Articles of Incorporation.  Copy of the Corporation's Articles of
Incorporation,  as amended,  is incorporated herein by reference to Exhibit 3(i)
to the Corporation's  Annual Report on Form 10-K for the year ended December 31,
1997.

         3(ii). Bylaws of the Corporation, as amended. Copy of the Corporation's
Bylaws, as amended,  is incorporated herein by reference to Exhibit 3(ii) to the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1997.

         27.      Financial Data Schedule.

         (b)      Reports on Form 8-K

                  None

                                       25

<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 14, 1998


                                                     J. Duncan Smith


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

                                       26