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 September 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
November 1, 1998 was 2,310,013.

The  number  of  shares  outstanding  of Common  Stock of the  Registrant  as of
November 1, 1998 adjusted for 2-for-1  stock split payable  November 24, 1998 to
shareholders of record on October 23, 1998 was 4,620,026.


<PAGE>


                 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES

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

Part I.  FINANCIAL INFORMATION

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


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


                             Consolidated Statements of Stockholder's Equity                                              5


                             Consolidated Statements of Cash Flows
                             Nine-Months Ended September 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                                             9-25

                  Item 3 -   Quantitative and Qualitative Disclosures About Market Risk                                  26



Part II. OTHER INFORMATION

                  Item 1 -   Legal Proceedings                                                                           27
                  Item 2 -   Changes in Securities                                                                       27
                  Item 3 -   Defaults upon Senior Securities                                                             27
                  Item 4 -   Submission of Matters to a Vote of Security Holders                                         27
                  Item 5 -   Other Information                                                                           27
                  Item 6 -   Exhibits and Reports on Form 8-K                                                            27

                  Signatures                                                                                             28
</TABLE>

<PAGE>



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

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

ASSETS
    Cash and due from banks                                                                    $   20,084            $   22,248
    Federal funds sold                                                                              8,950                 4,200

           Total cash and cash equivalents                                                         29,034                26,448
                                                                                                ---------             ---------

    Investment securities  held-to-maturity  (market value of $8,673 and $12,237
        at September 30, 1998 and December 31,
        1997, respectively)                                                                         8,398                12,082

    Investment securities available-for-sale at market value                                       82,816                65,516

    Loans                                                                                         317,568               318,899
    Less allowance for possible loan losses                                                        (5,788)               (5,900)
                                                                                                ---------             ---------

           Net loans                                                                              311,780               312,999

    Premises and equipment, net                                                                     9,380                 6,659
    Other assets                                                                                    5,911                 7,664
                                                                                                ---------             ---------

           TOTAL ASSETS                                                                        $  447,319            $  431,368
                                                                                                =========             =========

LIABILITIES
    Deposits
        Non-interest bearing                                                                   $   66,243            $   63,287
        Interest bearing                                                                          323,268               310,962
                                                                                                ---------             ---------

           Total deposits                                                                         389,511               374,249

    Securities sold under repurchase agreements                                                     4,854                 7,625
    Federal Home Loan Bank advances and other borrowings                                            5,066                 7,380
    Other liabilities                                                                               8,095                 5,901
                                                                                                ---------             ---------

           Total liabilities                                                                      407,526               395,155
                                                                                                ---------             ---------

STOCKHOLDERS' EQUITY
    Common stock, par value $1.00;  authorized,  5,000,000 shares;  Outstanding,
        4,620,026(*) shares at September 30, 1998 and
        4,799,666(*) shares December 31, 1997.                                                      4,800                 2,400
    Additional paid-in capital                                                                        422                 2,729
    Retained earnings                                                                              35,013                32,803
    Net unrealized gain (loss) on securities available-for-sale                                     1,018                   (33)
    Treasury stock, at cost:  89,820 shares at September 30, 1998 and
        103,700 shares at December 31, 1997.                                                       (1,460)               (1,686)
                                                                                                ---------             ---------

           Total stockholders' equity                                                              39,793                36,213
                                                                                                ---------             ---------

           TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                          $  447,319            $  431,368
                                                                                                =========             =========

    Book Value Per Share(*)                                                                        $8.61                 $7.54
                                                                                                    ====                  ====
<FN>

    (*)  Adjusted  for  2-for-1  stock  split  payable on  November  24, 1998 to
         shareholders of record on October 23, 1998.
</FN>
</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                   Nine  Months Ended
                                                                              September 30,                       September 30, 
                                                                         ------------------                   ------------------  
                                                                          1998              1997              1998         1997
                                                                         -----              ----              ----         ----
<S>                                                                     <C>               <C>              <C>           <C>    
INTEREST INCOME
    Loans, including fees                                                $ 7,041           $6,897           $21,136       $19,730
    Investment securities                                                  1,265            1,220             3,573         4,026
    Federal funds sold                                                       166              110               319           195
    Deposits in banks                                                         --               --                --            12
                                                                          ------            -----            ------        ------

                Total interest income                                      8,472            8,227            25,028        23,963
                                                                          ------            -----            ------        ------

INTEREST EXPENSE
    Deposits                                                               3,477            3,260            10,151         9,401
    Securities sold under repurchase agreements                               25               82                86           214
    Federal Home Loan Bank advances and other borrowings                      86              109               258           284
                                                                          ------            -----            ------        ------

                Total interest expense                                     3,588            3,451            10,495         9,899
                                                                          ------            -----            ------        ------

                Net interest income                                        4,884            4,776            14,533        14,064

    Provision for loan losses                                                201              290               613           946
                                                                          ------            -----            ------        ------

                Net interest income after provision
                   for possible loan losses                                4,683            4,486            13,920        13,118
                                                                          ------            -----            ------        ------

NON-INTEREST INCOME
    Financial Management Services                                            573              500             1,693         1,500
    Service charges on deposit accounts                                      270              242               788           722
    Other                                                                    334              176               946           502
                                                                          ------            -----            ------        ------

                Total non-interest income                                  1,177              918             3,427         2,724
                                                                          ------            -----            ------        ------

NON-INTEREST EXPENSE
    Salaries and employee benefits                                         2,250            2,119             6,731         6,173
    Net occupancy and equipment                                              838              748             2,448         2,221
    FDIC deposit insurance                                                    31               11                34            32
    Bank shares tax                                                           (3)              85               172           255
    Other                                                                  1,017              707             2,702         2,280
                                                                          ------            -----            ------        ------

                Total non-interest expense                                 4,133            3,670            12,087        10,961
                                                                          ------            -----            ------        ------

                Income before income taxes                                 1,727            1,734             5,260         4,881

INCOME TAXES                                                                 475              520             1,552         1,438
                                                                          ------            -----            ------        ------

                NET INCOME                                               $ 1,252           $1,214           $ 3,708       $ 3,443
                                                                          ======            =====            ======        ======

PER SHARE DATA
    Basic Net income per common share (*)                                $  0.27          $  0.27             $0.80         $0.75
                                                                          ======           ======              ====          ====
    Diluted net income per common share (*)                              $  0.26          $  0.27             $0.79         $0.74
                                                                          ======           ======              ====          ====
    Dividends declared (*)                                               $  0.12          $  0.11             $0.33         $0.29
                                                                          ======           ======              ====          ====

Weighted average shares outstanding (*)                                4,619,450        4,583,894         4,609,134     4,579,564
                                                                       =========        =========         =========     =========
<FN>

(*)  Adjusted  for  2-for-1   stock  split  payable  on  November  24,  1998  to
     shareholders of record on October 23, 1998.
</FN>
</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>

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

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

    Net income to date                                                                                   3,708            3,443
    Cash dividends declared                                                                             (1,498)          (1,348)
    Net unrealized gain on securities available-for-sale                                                 1,051              148
    Treasury stock transactions                                                                            225               70
    Paid in capital from treasury stock transactions                                                        94                9
                                                                                                        ------           ------

Balance at September 30,                                                                               $39,793          $35,497
                                                                                                        ======           ======
</TABLE>
































The accompanying notes are an integral part of these statements.

                                       5
<PAGE>


                 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                                                      Nine Months Ended
                                                                                                          September 30,        
                                                                                                ------------------------------
(Dollars in thousands)                                                                              1998               1997   
                                                                                                ------------       -----------
<S>                                                                                           <C>                  <C>

OPERATING ACTIVITIES
    Net Income                                                                                 $   3,708            $   3,443
    Adjustments to reconcile net income to net cash
        provided by operating activities:
    Depreciation                                                                                     889                  750
    Provision for loan losses                                                                        613                  946
    Amortization of investment security premiums
        and accretion of discounts                                                                   150                   10
    Amortization of deferred fees on loans                                                            47                   14
    Investment securities (gains) losses, net                                                         (2)                  15
    Decrease in other assets                                                                       1,210                  501
    Increase (decrease) in other liabilities                                                       2,194                1,992
                                                                                                --------             --------
           Net cash provided by operating activities                                               8,809                7,671
                                                                                                --------             --------

INVESTING ACTIVITIES
    Decrease in interest bearing deposits in banks                                                    --                1,000
    (Increase) decrease in loans                                                                     560              (47,934)
    Proceeds from sales of investment securities available-for-sale                               12,640               27,564
    Proceeds from maturities of investment securities available-for-sale                          19,794                9,585
    Proceeds from maturities of investment securities held-to-maturity                             3,859                3,075
    Purchases of investment securities available-for-sale                                        (48,465)             (16,624)
    Purchase of premises and equipment, net                                                       (3,609)                (508)
                                                                                                --------             --------

           Net cash used in investing activities                                                 (15,221)             (23,842)
                                                                                                --------             --------

FINANCING ACTIVITIES
    Decrease in securities sold under repurchase agreements                                       (2,525)                 775
    Increase in deposits                                                                          15,262                5,738
    Increase in Federal Home Loan Bank advances and other borrowings                              (2,559)               9,915
    Cash dividends                                                                                (1,498)              (1,348)
    Treasury stock transactions                                                                      318                   80
                                                                                                --------             --------

           Net cash provided by financing activities                                               8,998               15,160
                                                                                                --------             --------

              NET INCREASE (DECREASE) IN CASH AND CASH
     EQUIVALENTS                                                                                   2,586               (1,011)

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

Cash and cash equivalents at end of period                                                     $  29,034            $  24,745
                                                                                                ========             ========
</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 nine-month  period ended  September
           30, 1998 are not necessarily indicative of the results to be expected
           for the full year.

3.         On  September  22, 1998 the Board of  Directors  authorized a 2-for-1
           stock  split in the form a of 100% stock  dividend.  The  dividend is
           payable  November 24, 1998 to  shareholders  of record on October 23,
           1998.  The 1998 and 1997  common  stock and per share  data have been
           adjusted to reflect the effects of the stock dividend.

           Per share data is based on the weighted  average  number of shares of
           common stock  outstanding (on a post-split  basis) during the period.
           Diluted net income per share  includes the effect of options  granted
           (on a post-split  basis).  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.  Comprehensive
           income/(loss)  net of taxes for the  three-  and  nine-month  periods
           ended  September  30,  1998 was $874  thousand  and $1,051  thousand,
           compared to $233  thousand and $148  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
           post-retirement  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 Position ("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

                                       7
<PAGE>

                 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                   (UNAUDITED)

           beginning  after December 15, 1998. This statement is not expected to
           have a material impact on the Corporation's financial statements.

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 SUMMARY AND HIGHLIGHTS

         Net income for the  three-month  period  ended  September  30, 1998 was
$1.25  million,  an increase  of 3.1% from $1.21  million for the same period in
1997.  Net income for the nine-month  period ended  September 30, 1998 was $3.71
million,  an  increase  of 7.7% from $3.40  million for the same period in 1997.
Increases  in net income are  primarily  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 decrease in income tax expense for
the three-month period ended September 30, 1998. This decrease can be attributed
to tax  credits  which  resulted  from  an  investment  in a  community  project
accounted for in the third quarter of 1998.  In addition,  net income  benefited
from a reduction in the provision for loan loss expense  through the  nine-month
period.  Cash dividends  declared  during the third quarter of 1998 increased to
$0.12 per share (on a post-split  basis), a 9.5% increase  compared to the third
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.

         On  September  22,  1998,  The Board of Directors of First West Chester
Corporation  authorized  a "2 for 1" stock  split  in the  form of a 100%  stock
dividend. The dividend is payable on November 24, 1998 to shareholders of record
on October  23,  1998.  The 1998 and 1997  common  stock per share data has been
adjusted to reflect the effects of the stock dividend. In addition, the Board of
Directors  authorized  the  repurchase  of up to 50,000  shares (on a  pre-split
basis) of common  stock  through  open market  transactions.  The shares will be
purchased from time to time depending upon market conditions.

The  "Consolidated  Average  Balance  Sheet" on pages 14 and 15 may  assist  the
reader in the following discussion.
<TABLE>
<CAPTION>
                                                                       Three Months Ended              Nine Months Ended
                                                                          September 30,                   September 30,     
                                                                       -------------------             --------------------
                                                                       1998           1997              1998           1997
                                                                       ----           ----              ----           ----
          <S>                                                        <C>            <C>                <C>           <C> 
           PERFORMANCE RATIOS
           Return on Average Assets                                    1.13%          1.16%              1.14%         1.12%
           Return on Average Equity                                   13.06%         13.87%             13.07%        13.45%
           Earnings Retained                                          57.59%         60.38%             59.60%        60.85%
           Dividend Payout Ratio                                      42.41%         39.62%             40.40%        39.15%
</TABLE>

                               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 nine-month  periods ended  September 30,
1998, on a tax equivalent basis, was $4.9 million and $14.7 million, an increase
of 1.9% and 3.0% compared to the same periods in 1997, respectively. Average net
yields on  interest-earning  assets,  on a tax equivalent  basis, were 4.77% and
4.82% for the three- and nine-month periods ended September 30, 1998 compared to
4.95% and 4.98% for the same  periods in 1997,  respectively.  Increases  in net
interest  income can be  attributed  to an increase in average  interest-earning
assets of 5.6% or $22.1  million  and 6.3% or $24.0  million  for the three- and
nine-month  periods  ended  September 30, 1998 compared to the same periods last
year. The increases in average  interest-earning assets are primarily the result
of increases in loan activity and investment  security  acquisitions.  While the
total amount of loans has increased, the loan growth rate has decreased compared
to the same period last year.  The decrease in growth rate can be  attributed to

                                       9
<PAGE>

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

the Corporation's  decision to exit the third party automobile  lending business
due to less than expected results. The decision took effect on July 3, 1998. The
Corporation  will  continue to service the  existing  portfolio  totaling  $24.3
million,  but  has  ceased  adding  any  additional  volume.  Decreases  in  the
Corporation's net yield on interest-earning assets are primarily the result of a
decrease in the yields  earned on its interest  earning  assets and increases in
the  cost or  yield  paid  on  interest  bearing  liabilities.  The  Corporation
anticipates  continued  pressure  on net  yields on  interest-earning  assets as
competition  for  new  loan  business  remains  very  strong  and the  costs  of
incremental deposit growth and other funding sources become more expensive.

               AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS)
<TABLE>
<CAPTION>
                                                                  Three Months                        Nine Months
         Yield On:                                            Ended September 30,                 Ended September 30,
         ---------                                            -------------------                 -------------------
                                                              1998          1997                   1998         1997
                                                              ----          ----                   ----         ----
<S>                                                          <C>           <C>                   <C>          <C>   
Interest Earning Assets                                       8.24%         8.47%                 8.27%        8.43%
Interest Bearing Liabilities                                  4.33%         4.32%                 4.29%        4.22%
                                                              ----          ----                  ----         ----
Net Interest Spread                                           3.91%         4.15%                 3.98%        4.21%
Contribution of Interest Free Funds                           0.86%         0.80%                 0.84%        0.77%
                                                              ----          ----                  ----         ----
Net Yield on Interest Earning Assets                          4.77%         4.95%                 4.82%        4.98%
                                                              ====          ====                  ====         ====
</TABLE>

                        INTEREST INCOME ON FEDERAL FUNDS

         Interest  income on federal  funds  sold for the three- and  nine-month
periods ended  September 30, 1998 increased 51.8% and 62.8% to $167 thousand and
$319  thousand,  respectively,  when  compared to the same periods in 1997.  The
increase in interest  income on federal funds sold for the three- and nine-month
periods  ended  September 30, 1998 is primarily the result of a $4.0 million and
$3.4 million increase in average balances, respectively, partially offset in the
nine-month period by lower rates paid.

                    INTEREST INCOME ON INVESTMENT SECURITIES

         On a tax equivalent  basis,  interest  income on investment  securities
increased 3.4% and decreased  11.4% for the three- and nine-month  periods ended
September  30,  1998 to $1.27  million  and $3.60  million,  respectively,  when
compared to the same period in 1997. The increase for the three-month  period is
due to an increase in the average  balance of $8.6 million  offset by a 48 basis
point decrease in the yield earned on investment securities when compared to the
same  period  last year.  The  decrease  for the  nine-month  period is due to a
decrease in average balance of $4.7 million and a 40 basis point decrease in the
yield earned on securities when compared to the same period last year.  Proceeds
from the sale of investment  securities  and  maturities  have been used to fund
continued loan growth over the last three quarters.

                            INTEREST INCOME ON LOANS

         On a tax equivalent  basis,  interest  income on loans generated by the
Corporation's  loan portfolio  increased 1.9% and 6.9% to $7.1 million and $21.3
million for the three- and nine-month periods ended September 30, 1998, compared
to the same periods in 1997,  respectively.  The increase in interest  income on
loans  for the  three-  and  nine-month  periods  ended  September  30,  1998 is
attributable  to a $9.4  million and $25.6  million  increase  in average  loans
outstanding,  respectively,  partially offset by 11 and 15 basis point decreases
in average  interest  rates  earned  compared to the same time  periods in 1997,
respectively.  The  decreases in the average  rates earned on the  Corporation's

                                       10

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

loan portfolio are a direct result of increased competition for new and existing
loan relationships and volume increases in lower yielding third party automobile
related  loans  (occurring  during  the first and second  quarters  of 1998) and
leases. As noted earlier, the third party automobile lending portfolio failed to
meet  expected  results  prompting  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 put pressure on net interest margins.  A reduction in fees will also
result in a direct decrease in non-interest income.

                      INTEREST EXPENSE ON DEPOSIT ACCOUNTS

         Interest  expense on deposit  accounts  increased 6.7% and 8.0% for the
three- and nine-month periods ended September 30, 1998 to $3.5 million and $10.2
million,  compared to the same periods in 1997. The increase for the three-month
period  ended  September  30,  1998  is  the  result  of  increases  in  average
interest-bearing deposits of $21.2 million,  partially offset by a 2 basis point
decrease in the average rates paid on  interest-bearing  deposits.  The increase
for the nine-month period ended September 30, 1998 is the result of increases in
average interest-bearing  deposits of $20.2 million and a 5 basis point increase
in average rates paid on interest-bearing deposits.

         The Corporation's effective rate on interest-bearing deposits increased
from  4.21% to 4.26%  for the  nine-month  ended  September  30,  1997 and 1998,
respectively. Rates being paid on interest bearing liabilities has increased due
to competition. Competition for deposits from non-banking institutions, such as,
credit  unions and mutual fund  companies  continues to  increase.  Despite this
competition,  the  Corporation's  deposit  base is growing  and is  expected  to
increase  for future time  periods.  The  Corporation's  new Frazer  branch site
opened for business on August 3, 1998.  This and other new branches are expected
to expand the Corporation's deposit base.

         INTEREST EXPENSE ON SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

         Interest  expense  on  securities  sold  under  repurchase   agreements
decreased  68.3% and 59.8% to $26  thousand  and $86 thousand for the three- and
nine-month periods ended September 30, 1998 compared to the same time periods in
1997. The decreases are primarily  attributable to $7.6 million and $5.7 million
decreases in average  securities sold under repurchase  agreements  outstanding,
partially  offset by 117 and 47 basis  point  decreases  on  average  rates paid
compared  to the  three-  and  nine-month  periods  ended  September  30,  1997,
respectively.

    INTEREST EXPENSE ON FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS

         Interest expense on borrowings  decreased 21.1% and 9.2% for the three-
and  nine-month  periods ended  September 30, 1998,  respectively.  The need for
borrowings has decreased as a result of increased  deposit growth and a decrease
in loan  growth  rate.  Borrowings  at any  time  consist  of one or more of the
following:  Overnight Fed Funds purchased,  Federal Home Loan Bank ("FHLB") Term
Advances, FHLB Open Repo and Repo Plus Advances.

                                       11

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

                       PROVISION FOR POSSIBLE LOAN LOSSES


         During the three- and nine-month  periods ended September 30, 1998, the
Corporation  recorded a $201 thousand and a $613 thousand provision for possible
loan losses, compared to $290 thousand and $946 thousand for the same periods in
1997.  The decrease in the  provision  expense can be  attributed to a decreased
rate in loan growth for the three- and  nine-month  periods ended  September 30,
1998,  compared to the same periods in 1997.  The  allowance  for possible  loan
losses as a percentage of total loans was 1.82% at September 30, 1998, and 1.85%
at December 31,  1997.  See the section  titled  "Allowance  For  Possible  Loan
Losses" for additional discussion.

                               NON-INTEREST INCOME

         Total non-interest income increased 28.2% and 25.8% to $1.2 million and
$3.4 million for the three- and  nine-month  periods  ended  September 30, 1998,
compared to the same  periods in 1997.  The primary  component  of  non-interest
income is Financial Management Services revenue, which increased 14.6% and 12.9%
to $573  thousand and $1.7 million for the three- and  nine-month  periods ended
September  30, 1998,  respectively,  compared to the same  periods in 1997.  The
market value of Financial Management Services' assets increased $46.0 million to
$370.0  million at September 30, 1998 from $324.0 million at September 30, 1997.
The increase in Financial  Management Services= assets and revenues is primarily
the result of market appreciation and new account relationships acquired through
stronger marketing efforts.

         Service  charges on deposit  accounts  increased 11.6% and 9.2% to $270
thousand and $788 thousand for the three- and nine-month  period ended September
30,  1998,  respectively,  compared to the same periods in 1997.  The  increases
relate  to  increases  in the  volume of  deposit  accounts  and more  effective
enforcement of service charge policies.

         Other  non-interest  income  increased 89.4% and 88.5% to $334 thousand
and $946 thousand for the three- and nine-month periods ended September 30, 1998
compared to the same periods in 1997.  The  increases  are  attributed to income
from service charges for non-customer ATM  transactions,  which commenced during
the second quarter of 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 in other non-interest income.

                              NON-INTEREST EXPENSE

         Total non-interest  expense for the three- and nine-month periods ended
September 30, 1998  increased  12.6% and 10.3% to $4.1 million and $12.1 million
compared to the same periods in 1997.  The various  components  of  non-interest
expense changes are discussed below.

         Salaries and employee  benefits  increased 6.2% and 9.0% for the three-
and nine-month periods ended September 30, 1998 to $2.3 million and $6.7 million
compared to the same periods in 1997, respectively.  Employee raises, promotions
and a proportional  increase in employee benefits are primarily  responsible for
the increases. The hiring of additional staff also contributed to the increases.
Average  full time  equivalent  staff  increased  from 189 for the period  ended
September 30, 1997 to 203 for the period ended September 30, 1998.

         Net occupancy,  equipment,  and data processing expense increased 12.0%
and 10.2% for the three- and nine-month  period ended September 30, 1998 to $838

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

thousand  and $2.4 million  compared to the same periods in 1997,  respectively.
The increases are a direct result in the increased number of personal  computers
and related equipment costs, which are a necessary part of the Corporations core
system  conversion.  The  conversion  is  scheduled  to occur  during the fourth
quarter 1998. See section titled "Building Improvements and Technology Projects"
for additional information.

         Other  non-interest  expense  increased 43.8% and 18.5% to $1.0 million
and $2.7 million for the three- and nine-month  periods ended September 30, 1998
compared  to the same  periods  in 1997.  This  increase  can be  attributed  to
increases in the Corporation's marketing and loan related legal expenses as well
as  additional  operating  expenses  associated  with the increases in staff and
premises which occurred through the third quarter 1998.

       Construction  on the  Corporation's  new  Frazer  area  branch  has  been
completed.  The branch opened for business on August 3, 1998.  Preliminary plans
for additional  branches continue to be pursued.  The Corporation  believes that
the costs  associated with opening 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 SEPTEMBER 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                                    $ 11,908      $   167      5.61%         $  7,862      $   110     5.60%
Investment securities
    Taxable                                             82,500        1,245      6.04%           73,371        1,193     6.50%
    Tax-exempt (1)                                       1,502           29      7.60%            2,011           39     7.69%
                                                       -------       ------                     -------       ------
        Total investment securities                     84,002        1,274      6.06%           75,382        1,232     6.54%
                                                       -------       ------                     -------       ------
Loans (2)
    Taxable                                            311,710        6,932      8.90%          299,708        6,753     9.01%
    Tax-exempt (1)                                       6,423          158      9.86%            8,985          208     9.27%
                                                       -------       ------                     -------       ------
        Total loans                                    318,133        7,090      8.91%          308,693        6,961     9.02%
                                                       -------       ------                     -------       ------
        Total interest earning assets                  414,043        8,531      8.24%          391,937        8,303     8.47%
Non-interest earning assets
    Allowance for possible loan losses                  (5,881)                                  (5,732)
    Cash and due from banks                             21,056                                   19,853
    Other assets                                        13,907                                   12,842
                                                       -------                                  -------
        Total assets                                  $443,125                                 $418,900
                                                       =======                                  =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits                 $186,108      $ 1,642      3.53%         $173,691      $ 1,362     3.14%
Certificates of deposits and other time                138,027        1,835      5.32%          129,206        1,898     5.88%
                                                       -------       ------                     -------       ------
   Total interest bearing deposits                     324,135        3,477      4.29%          302,897        3,260     4.31%
Securities sold under repurchase agreements              2,334           26      4.46%            9,957           82     3.29%
Federal Home Loan Bank advances and
   Other Borrowings                                      5,093           86      6.75%            6,953          109     6.27%
                                                       -------       ------                     -------       ------
   Total interest bearing liabilities                  331,562        3,589      4.33%          319,807        3,451     4.32%
                                                       -------       ------                     -------       ------
Non-interest bearing liabilities
    Non-interest bearing demand deposits                65,047                                   57,538
    Other liabilities                                    8,168                                    6,543
                                                       -------                                  -------
        Total liabilities                              404,777                                  383,888
Stockholders' equity                                    38,348                                   35,012
                                                       -------                                  -------
        Total liabilities and stockholders' equity    $443,125                                 $418,900
                                                       =======                                  =======
Net interest income                                                 $ 4,942                                  $ 4,852
                                                                     ======                                   ======
Net yield on interest earning assets                                             4.77%                                   4.95%
                                                                                 ====                                    ====










<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
                         NINE MONTHS ENDED SEPTEMBER 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                                    $  7,680      $   319      5.54%         $  4,271      $   196     6.12%
Interest bearing deposits in banks                          --           --        --               264           12     6.06%
Investment securities
    Taxable                                             76,805        3,513      6.10%           80,652        3,937     6.51%
    Tax-exempt (1)                                       1,490           86      7.69%            2,294          127     7.40%
                                                       -------       ------                     -------       ------
        Total investment securities                     78,295        3,599      6.13%           82,946        4,064     6.53%
                                                       -------       ------                     -------       ------
Loans (2)
    Taxable                                            314,084       20,790      8.83%          286,511       19,307     8.98%
    Tax-exempt (1)                                       6,619          502     10.12%            8,603          613     9.50%
                                                       -------       ------                     -------       ------
        Total loans                                    320,703       21,292      8.85%          295,114       19,920     9.00%
                                                       -------       ------                     -------       ------
Total Interest Earning Assets                          406,678       25,210      8.27%          382,595       24,192     8.43%
Non-interest earning assets
    Allowance for possible loan losses                  (5,924)                                  (5,483)
    Cash and due from banks                             20,113                                   18,647
    Other assets                                        13,747                                   13,711
                                                       -------                                  -------
        Total assets                                  $434,614                                 $409,508
                                                       =======                                  =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits                 $182,773      $ 4,306      3.14%         $173,286      $ 4,048     3.11%
Certificates of deposits and other time                134,989        5,845      5.77%          124,296        5,353     5.74%
                                                       -------       ------                     -------       ------
   Total interest bearing deposits                     317,762       10,151      4.26%          297,582        9,401     4.21%
Securities sold under repurchase agreements              3,069           86      3.74%            8,734          214     3.27%
Federal Home Loan Bank advances and
   Other borrowings                                      5,343          258      6.44%            6,202          284     6.11%
                                                       -------       ------                     -------       ------
   Total interest bearing liabilities                  326,174       10,495      4.29%          312,518        9,899     4.22%
                                                       -------       ------                     -------       ------
Non-interest bearing liabilities
    Non-interest bearing demand deposits                63,502                                   56,741
    Other liabilities                                    7,124                                    6,117
                                                       -------                                  -------
        Total liabilities                              396,800                                  375,376
Stockholders' equity                                    37,814                                   34,132
                                                       -------                                  -------
        Total liabilities and stockholders' equity    $434,614                                 $409,508
                                                       =======                                  =======
Net interest income                                                 $14,715                                  $14,293
                                                                     ======                                   ======
Net yield on interest earning assets                                             4.82%                                   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  nine-month  periods  ended
September 30, 1998 was $475 thousand and $1.6 million, respectively, compared to
$520 thousand and $1.4 million for the same periods last year.  This  represents
effective  tax rates of 27.5% and 29.5% for the  three- and  nine-month  periods
ended September 30, 1998,  compared with 29.9% and 29.5% for the same periods in
1997,  respectively.  Tax-exempt  instruments  as a percentage  of total average
assets  were 1.9% and 2.8% at  September  30, 1998 and 1997,  respectfully.  Tax
rates were  effected by tax  credits  which  resulted  from an  investment  in a
community  development  project that were accounted for in the second quarter of
1997 and third quarter of 1998.

               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 also include NOW,  money-market,
savings,  and  smaller  denomination   certificates  of  deposit  accounts.  The
Corporation  considers  funds from such sources to comprise  its "core"  deposit
base because of the  historical  stability of such sources of funds.  Additional
liquidity  comes from the  Corporation's  non-interest  bearing  demand  deposit
accounts.  Other deposit  sources  include a  three-tiered  savings  product and
certificates  of  deposit  in  excess of  $100,000.  Details  of core  deposits,
non-interest  bearing  demand  deposit  accounts and other  deposit  sources are
highlighted in the following table:

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

                                DEPOSIT ANALYSIS
<TABLE>
<CAPTION>

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

NOW Accounts                                    $ 55,430       2.13%          $ 52,758       2.19%          $ 2,672         5.06%
Money Market                                      28,046       3.14             28,433       3.15              (387)       (1.36)
Statement Savings                                 46,723       3.30             48,381       3.31            (1,658)       (3.43)
Other Savings                                      2,520       2.75              2,996       2.74              (476)      (15.89)
CD's Less than $100,000                          112,860       5.80            108,022       5.80             4,838         4.48
                                                 -------                       -------                       ------

Total Core Deposits                              245,579       4.16            240,590       4.16             4,989         2.07

Demand Deposit Accounts                           63,502         --             57,659         --             5,843        10.13
                                                 -------                       -------                       ------

Total Core and Demand
  Deposits Accounts                              309,081         --            298,249       3.35            10,832         3.63
                                                 -------                       -------                       ------

Tiered Savings                                    50,054       4.14            41,184        4.14             8,870        21.54
CD's Greater than $100,000                        22,129       5.65            17,415        5.54             4,714        27.07
                                                 -------                       -------                       ------

Total Deposits                                  $381,264         --          $356,848        3.55           $24,416         6.84
                                                 =======                      =======                        ======
</TABLE>

         The Corporation,  as a member of FHLB,  maintains a $10 million line of
credit secured by the Corporation's mortgage related assets. As of September 30,
1998,  the amount  outstanding on this line of credit was $0. In addition to the
line of credit,  the  Corporation has additional  borrowing  capacity at FHLB of
approximately  $94  million.  During  the third  quarter of 1998,  average  FHLB
advances  were  approximately  $5.1  million  and  consisted  of terms  advances
representing  a combination of  maturities.  The average  interest rate on these
advances was approximately  6.75%. FHLB advances are  collateralized by a pledge
on the  Corporation's  entire portfolio of unencumbered  investment  securities,
certain mortgage loans and a lien on the Corporation'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
$109.2  million or 24.4% of total assets at September  30, 1998,  compared  with
negative  $118  million  or 28.2%  at  September  30,  1997,  respectively.  The
Corporation=s gap position is one factor used to evaluate interest rate risk and
the  stability  of  net  interest   margins.   Other  factors  include  computer
simulations of what might happen to net interest  income under various  interest
rate  forecasts  and  scenarios.  Management  monitors  interest  rate risk as a
regular part of bank  operations  with the intention of maintaining a stable net
interest margin.

                                       17
<PAGE>
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

                          INTEREST SENSITIVITY ANALYSIS
                            AS OF SEPTEMBER 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                         $      8,950     $        --       $        --      $        --    $     8,950
    Investment securities                            34,769          35,501            20,944               --         91,214
    Loans and leases                                119,008         179,519            19,041           (5,788)       311,780
    Cash and cash equivalents                            --              --                --           20,084         20,084
    Premises & equipment                                 --              --                --            9,380          9,380
    Other assets                                      2,029              --                --            3,882          5,911
                                                -----------      ----------        ----------       ----------     ----------
       Total assets                            $    164,756     $   215,020       $    39,985      $    27,558    $   447,319
                                                ===========      ==========        ==========       ==========     ==========

LIABILITIES AND CAPITAL
    Non-interest bearing deposit               $         --     $        --       $        --      $    66,243    $    66,243
    Interest bearing deposits                       267,188          54,787             1,293               --        323,268
    FHLB Term Advance                                 1,941           3,103                22               --          5,066
    Borrowed funds                                    4,854              --                --               --          4,854
    Other liabilities                                    --              --                --            8,095          8,095
    Capital                                             --               --                --           39,793         39,793
                                                -----------      ----------        ----------       ----------     ----------
       Total liabilities & capital             $    273,983     $    57,890       $     1,315      $   114,131    $   447,319
                                                ===========      ==========        ==========       ==========     ==========
    Net interest rate
      sensitivity gap                          $  (109,227)     $   157,130       $    38,670      $  (86,573)    $        --
                                                ==========       ==========        ==========       =========      ==========
    Cumulative interest rate
      sensitivity gap                          $  (109,227)     $    47,903       $    86,573      $        --    $        --
                                                ==========       ==========        ==========       ==========     ==========
    Cumulative interest rate
      sensitivity gap divided
      by total assets                                (24.4%)          10.7%             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                          Nine Months
                                                                            Ended                                 Ended
                                                                         September 30,                         September 30,     
                                                                         -------------                         -------------     
(Dollars in thousands)                                                1998            1997                1998             1997
                                                                      ----            ----                ----             ----
<S>                                                               <C>             <C>                <C>               <C>   

Balance at beginning of period                                       $ 5,912        $  5,653            $ 5,900          $ 5,218
                                                                     -------         -------             ------
Provision charged to operating expense                                   201             290                613              946
                                                                     -------         -------             ------           ------
    Recoveries of loans previously charged-off                             9              12                 26               80
    Loans charged-off                                                   (334)            (55)              (751)            (344)
                                                                     -------         -------             ------           ------
Net loans charged-off                                                   (325)            (43)              (725)            (264)
                                                                     -------         -------             ------           ------
Balance at end of period                                             $ 5,788         $ 5,900            $ 5,788          $ 5,900
                                                                      ======          ======             ======           ======

Period-end loans outstanding                                        $317,568        $312,237           $317,568         $312,237

Average loans outstanding                                           $318,133        $308,693           $320,703         $295,114

Allowance for possible loan losses as a
    percentage of period-end loans outstanding                         1.82%           1.89%              1.82%            1.89%

Ratio of net charge-offs to average loans
    outstanding (annualized)                                           0.40%           0.04%              0.31%            0.12%
</TABLE>

                         NON-PERFORMING LOANS AND ASSETS

         Non-performing loans include loans on non-accrual status and loans past
due 90 days or more and still  accruing.  The  Corporation'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
<TABLE>
<CAPTION>

                                                                   September 30,                     December 31, 
                                                                   -------------                     ------------ 
(Dollars in thousands)                                         1998              1997                    1997
                                                              -----              ----                    ----
<S>                                                        <C>                <C>                    <C>    

Past due over 90 days and still accruing                     $  614             $  619                 $  466
Non-accrual loans                                             2,183              1,258                  1,443
                                                              -----              -----                  -----
Total non-performing loans                                    2,797              1,877                  1,909
Other real estate owned                                         192                851                  1,651
                                                              -----              -----                  -----
Total non-performing assets                                  $2,989             $2,728                 $3,560
                                                              =====              =====                  =====
Non-performing loans as a percentage
     of total loans                                           0.88%              0.60%                  0.60%
Allowance for possible loan losses as a
   percentage of non-performing loans                       206.94%            314.33%                309.10%
Non-performing assets 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                       193.64%            216.28%                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 September
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
resulting in a $15 thousand loss.


         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  Corporation  increased
third party  automobile  loans $23 million to $24 million.  During  1998,  these
loans had grown  approximately  $3 million to $27 million.  As of September  30,
1998 these loans totaled  approximately $24 million.  These loans are unseasoned
and have  increased  non-performing  loan  numbers.  As of  September  30,  1998
approximately  7.41% of this portfolio was past due. In addition,  approximately
$130  thousand  in  repossessed  vehicles  is  included  in  other  assets.  The
Corporation  decided to withdraw from third party automobile lending due to less
than expected  results.  The  Corporation  will continue to service the existing
portfolio  but has not  added any  additional  volume  since  July 3,  1998.  At
September 30, 1998 there were no  concentrations of loans exceeding 10% of total
loans which are not otherwise disclosed.

                                 LOAN IMPAIRMENT

         In accordance with FAS 114, the Corporation 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

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

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)                             September 30, 1998             September 30, 1997            December 31,1997
                                                   ------------------             ------------------            ----------------
<S>                                                     <C>                            <C>                            <C>    

Principal amount of impaired loans                       $1,690                         $1,093                         $1,121
Less valuation allowance                                   (338)                          (331)                          (306)
                                                          -----                          ------                         -----
                                                         $1,352                         $  762                         $  815
                                                          =====                          =====                          =====
</TABLE>

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

                                                                     September 30, 1998                September 30, 1997   
                                                                  -----------------------           ------------------------
                                                                   Three            Nine                Three           Nine
                                                                  Months           Months              Months          Months
                                                                   Ended            Ended               Ended          Ended 
                                                                   -----            -----               -----          ----- 
<S>                                                                <C>             <C>                <C>              <C>    

Valuation allowance at beginning of period                          $  297          $  306             $  318           $ 419
Provision for loan impairment                                           50             125                 50             125
Direct charge-offs                                                      (9)            (93)               (37)           (213)
Recoveries                                                              --              --                 --              --
                                                                     -----                              -----            -----
Valuation allowance at end of period                                $  338          $  338             $  331           $  331
                                                                     =====           =====              =====            =====
</TABLE>

         Total cash collected on impaired loans during the three- and nine-month
periods  ended  September  30, 1998 was $102 thousand and $123 thousand of which
$81  thousand  and  $102  thousand  were  credited  to  the  principal  balances
outstanding.  During the three- and nine-month periods ended September 30, 1998,
$20  thousand was credited to interest  income for both  periods,  respectively.
Interest  that would have been  accrued on impaired  loans during the three- and
nine-month  periods ended  September 30, 1998 was $38 thousand and $97 thousand,
respectively.  Interest  income  recognized  during the  three-  and  nine-month
periods ended September 30, 1998 was $20 thousand.

         Total cash collected on impaired loans during the three- and nine-month
periods  ended   September  30,  1997  was  $64  thousand  and  $276   thousand,
respectively,  of which $63  thousand  and $245  thousand  was  credited  to the
principal balance outstanding. During the three-month period ended September 30,
1997,  $1 thousand  was  credited  to  interest.  Interest  that would have been
accrued on  impaired  loans  during the three-  and nine-  month  periods  ended
September  30, 1997 was $13 thousand and $38  thousand,  respectively.  Interest
income recognized  during the three- and nine-month  periods ended September 30,
1997 was $0 and $36 thousand, respectively.

                  BUILDING IMPROVEMENTS AND TECHNOLOGY PROJECTS

         During 1998, the Corporation  completed  construction of a 2,750 square
foot branch office in the Frazer area.  The Branch opened for business on August
3, 1998.

         In December 1997, the Corporation entered into an agreement to purchase
a 25,000  square foot office  building  adjacent to the  Corporation's  existing
Operation Center in West Chester,  Pennsylvania for approximately  $1.7 million.
The Corporation took possession of the property in September 1998 and expects to
occupy the building sometime during 1999.
  
                                     21
<PAGE>
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

         In  September  1998,  the  Corporation  entered  into an  agreement  to
purchase  approximately  five acres of land in Chester County,  Pennsylvania for
approximately  $1.4 million.  The Corporation is scheduled to take possession of
the land in September 1999.

         During 1997, the  Corporation  completed an in depth review of its core
processing system and concluded that a new core processing system was needed for
competitive  reasons.  After extensive research,  the Corporation  selected Jack
Henry and Associates Inc. ("JHA") to provide the new core processing system. JHA
is a major provider of community bank core processing systems. Specifically, the
Corporation  contracted  with JHA to purchase  its  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 is
expected to be completed in the fourth quarter of this year.

                                YEAR 2000 ISSUES

State of Readiness
------------------

         The  Corporation  has adopted a Year 2000 ("Y2K") policy to address the
inability of certain  information  systems and  automated  equipment to properly
recognize and process dates containing the Y2K and beyond, (the "Y2K Issue"). If
not  corrected,   these  systems  and  equipment  could  produce  inaccurate  or
unpredictable results commencing on January 1, 2000. The Corporation, similar to
most financial services providers,  is particularly  vulnerable to the potential
impact of the Y2K Issue due to the nature of  financial  information.  Potential
impacts to the Corporation may arise from software, computer hardware, and other
equipment  failure both within the  Corporation's  direct control and outside of
the  Corporation's  ownership yet with which the Corporation  electronically  or
operationally  interfaces.  The Corporation has no internally generated software
coding to correct. Substantially all of the software utilized by the Corporation
is purchased or licensed from external providers.

         In order to address the Y2K Issue,  the  Corporation  has developed and
implemented a five phase  compliance  plan. The compliance  plan is divided into
the following major components:  (1) Awareness; (2) Assessment;  (3) Renovation;
(4)  Validation  and  Testing;  and  (5)  Implementation.  The  Corporation  has
completed  the first  three  phases of the plan for all of its  mission-critical
systems  and is  currently  working  on the final two  phases.  The  Corporation
anticipates  that  the  validation,   testing  and   implementation   phases  of
mission-critical systems will be substantially completed by March 31, 1999.

         JHA has tested the unmodified  version of its Silverlake system and the
Federal Financial  Institutions  Examination  Council ("FFIEC") has reviewed JHA
test procedures and has provided the Corporation with a copy of the results. The
Corporation  will  conduct  an  independent  test on the  Silverlake  system and
related  hardware  during the week of March 7, 1999.  Testing will consist of an
integrated test for critical dates and a baseline test.

         The Corporation's  Financial Management Services Department  outsources
its core processing to Sunguard Trust System Inc.'s ("STS") Charlotte.  STS is a
provider of data processing services to the financial services industry. STS has
informed the Corporation  that, based upon tests,  which it has conducted and is
currently conducting, it believes its systems are Y2K compliant. The Corporation
will  rely on  testing  conducted  by STS and  will  also  rely on  Proxy  Tests
conducted by certain STS customers.  The Corporation  anticipates  testing to be
completed by December 31, 1998.

The Costs to Address the Corporation's Year 2000 Issues
-------------------------------------------------------

         The Corporation has incurred direct Y2K project cost of $19 thousand as
of September 30, 1998. The  Corporation  anticipates  that its total Y2K project
cost  will not  exceed  $150,000.  This  estimated  project  cost is based  upon
currently available information and includes expenses for the review and testing
by third  parties,  including  government  entities.  However,  there  can be no
guarantee that the hardware, software, and systems of such third parties will be
free of  unfavorable  Y2K issues and  therefore  not present a material  adverse
impact upon the Corporation.  The  aforementioned Y2K project cost estimate also
may  change  as the  Corporation  progresses  in its  Y2K  program  and  obtains
additional information associated with, and conducts further testing concerning,
third  parties.  At this time,  no  significant  projects have been delayed as a
result of the Corporation's Y2K effort.

Risk Assessment
---------------

         In  assessing  the   Corporation's  Y2K  exposure  the  Corporation  is
identifying  those  suppliers and customers whose possible lack of the Y2K Issue
preparedness  might expose the  Corporation  to financial  loss.  Financial loss
includes but is not limited to the  following:  (1) monies paid to suppliers for
which no  performance  is  rendered;  (2)  inability  of  suppliers  to  furnish
necessary items may result in costly business  interruptions;  and (3) inability
of loan customers to repay amounts due.

                                       22
<PAGE>

         The  Corporation   has  initiated   formal   communications   with  its
significant  vendors and large loan customers  (over  $250,000) to determine its
vulnerability  as a result of the  failure of those third  parties to  remediate
their own Y2K Issues. For significant vendors, the Corporation will review their
Y2K  capabilities  by  December  31, 1998 or make plans to switch to new vendors
with systems that are Y2K compliant.  For large loan customers,  the Corporation
will  take  appropriate  action  based  upon  each  customer's  response  to the
Corporation's Y2K communication.

The Corporation's Contingency Plan
----------------------------------

         The Corporation has developed labor intensive  contingency plans, which
are  designed  to render the  Corporation  operational  for a period of seven to
fourteen days should a Y2K problem surface.  These  contingency plans consist of
various  manual tasks,  which include but are not limited to the  following:
  
1.       Maintenance  of new loan input and loan  payments  collected  are to be
         maintained on Microsoft Excel spreadsheets;

2.       Maintenance of core  deposit  account  information  as  well as account
         closings are to  maintained  on Microsoft  Excel  spreadsheets;  

3.       Manual sorting of deposit tickets and checks by account number;  and 

4.       Manual preparation of billing notices

         At this time the  Corporation  cannot  estimate the cost,  if any, that
might be required to implement such contingency plans.

Other
-----
         Financial  institution  regulators  have  intensively  focused upon Y2K
exposures, issuing guidance concerning the responsibilities of senior management

                                       23
<PAGE>
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

and  directors in addressing  the Y2K Issue.  Y2K testing and  certification  is
being  addressed  as a key  safety  and  soundness  issue  in  conjunction  with
regulatory exams. In May 1997, the FFIEC issued an interagency  statement to the
chief  executive  officers of all federally  supervised  financial  institutions
regarding Y2K project management awareness. The FFIEC has highly prioritized Y2K
compliance in order to avoid major  disruptions  to the  operations of financial
institutions  and the country's  financial  systems when the new century begins.
The FFIEC statement  provides guidance to financial  institutions,  providers of
data  services,  and all  examining  personnel of the federal  banking  agencies
regarding the Y2K Issue.

         The federal banking  agencies,  including the Office of the Comptroller
and the Currency ("OCC") have been conducting Y2K compliance  examinations.  The
failure to implement an adequate Y2K program can be  identified as an unsafe and
unsound banking practice. The Corporation and the Bank are subject to regulation
and  supervision by the OCC which regularly  conducts  reviews of the safety and
soundness of the Corporation's operations,  including the Corporation's progress
in becoming Y2K compliant.  The OCC has  established  an  examination  procedure
which contains three categories of ratings: "Satisfactory", "Needs Improvement",
and  "Unsatisfactory".  Institutions that receive a Y2K rating of Unsatisfactory
may be subject to formal enforcement action,  supervisory agreements,  cease and
desist orders,  civil money penalties,  or the appointment of a conservator.  In
addition,  federal  banking  agencies will be taking into account Y2K compliance
programs when reviewing  applications  and may deny an application  based on Y2K
related issues.  Failure by the Corporation to adequately prepare for Y2K issues
could negatively  impact the  Corporation's  banking  operations,  including the
imposition of restrictions upon its operations by the OCC.

         Despite the Corporation's activities in regards to the Y2K Issue, there
can be no assurance  that partial or total  systems  interruptions  or the costs
necessary  to update  hardware and  software  would not have a material  adverse
effect  upon  the  Corporation's  business,   financial  condition,  results  of
operations, and business prospects.

                                CAPITAL ADEQUACY

         The Corporation is subject to Risk-Based  Capital Guidelines adopted by
the Federal Reserve Board ("FRB") for bank holding companies. The Corporation is
also subject to similar  capital  requirements  adopted by the OCC.  Under these
requirements,  the  regulatory  agencies have set minimum  thresholds for Tier I
Capital,  Total Capital,  and Leverage  ratios.  At September 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.
<TABLE>
<CAPTION>

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

Corporation
-----------
Leverage Ratio                             8.75%              8.48%              8.57%                         5.00%
Tier I Capital Ratio                      11.71%             11.30%             11.22%                         6.00%
Total Risk-Based Capital Ratio            12.96%             12.56%             12.48%                        10.00%

Bank
----
Leverage Ratio                             8.56%              8.57%              8.30%                         5.00%
Tier I Capital Ratio                      11.46%             11.22%             10.89%                         6.00%
Total Risk-Based Capital Ratio            12.71%             12.48%             12.14%                        10.00%
</TABLE>
                                       24
<PAGE>
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

         The  Corporation  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 13.18% and 9.33% for the nine months
ended September 30, 1998 and 1997, respectively.  The growth rate is computed by
annualizing the change in equity during the last period and doubling it by total
stockholders equity at September 30, 1998 and 1997, respectively.

                           FORWARD-LOOKING STATEMENTS

       This  report  contains  statements  relating  to  future  results  of the
Corporation that are considered "forward-looking  statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements relate
to among other things, planned investments in new technology,  branch locations,
anticipated pressures on net yields, and the Y2K Issue.

       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; (e) changes in the regulatory environment, securities markets, general
business conditions and inflation may be adverse; (f) unforeseen difficulties in
implementing  the Y2K compliance plan or contingency  plans;  and (g) failure of
suppliers and customers to be Y2K compliant.  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 and similar
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.

                                       25
<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 this assessment.


                                       26
<PAGE>



                           PART II - OTHER INFORMATION

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

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

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

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

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

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

         3(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
                            -------------------
                  A Form 8-K was filed on  September  22,  1998 with the SEC via
                  EDGAR  pertaining  to a press  release  on the stock  dividend
                  described herein on pages 7 and 9 and the  Corporation's  plan
                  to  repurchase  50,000 shares on a pre-split  basis  described
                  herein on page 9.

                                       27
<PAGE>


                                   SIGNATURES


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



                         FIRST WEST CHESTER CORPORATION


                                Charles E. Swope

                              
                              /s/ Charles E. Swope
                              ____________________
                                    President


                             DATE: November 16, 1998


                                 J. Duncan Smith


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

                                       28