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, 1996, 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 October
1, 1996 was 1,714,441.


<PAGE>




                 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES


                                      INDEX
                                      -----


                                                                           PAGE
                                                                           ----

Part I.           FINANCIAL INFORMATION


                  Consolidated Statements of Condition
                  September 30, 1996 and December 31, 1995                    3


                  Consolidated Statements of Income
                  Three Months and Nine Months Ended
                  September 30, 1996 and 1995                                 4


                  Consolidated Statements of Stockholders' Equity             5


                  Consolidated Statements of Cash Flows
                  Nine Months Ended September 30, 1996 and 1995               6


                  Notes to Consolidated Financial Statements                7-8


                  Management's Discussion and Analysis of
                  Financial Condition and Results of Operations             9-20



Part II.          OTHER INFORMATION

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


                  Signatures                                                  23


<PAGE>
                 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
 
(Dollars in thousands)
                                                                                               Unaudited
                                                                                              September 30,         December 31,
                                                                                                   1996                 1995
                                                                                              -------------         ------------
<S>                                                                                          <C>                   <C>   
ASSETS
    Cash and due from banks                                                                    $   17,578            $   19,944
    Federal funds sold                                                                              7,800                24,700
                                                                                                ---------             ---------

           Total cash and cash equivalents                                                         25,378                44,644
                                                                                                ---------             ---------

    Interest bearing deposits with banks                                                            1,000                    --
                                                                                                ---------             ---------

    Investment securities  held-to-maturity (market value of $16,816 
        and $23,213 at September 30, 1996 and December 31,
        1995, respectively)                                                                        15,800                23,048
                                                                                                ---------             ---------

    Investment securities available-for-sale at market value                                       83,930                70,463
                                                                                                ---------             ---------

    Loans                                                                                         251,192               242,587
    Less allowance for possible loan losses                                                        (5,025)               (4,506)
                                                                                                ---------             ---------

           Net loans                                                                              246,167               238,081

    Premises and equipment                                                                          6,499                 5,521
    Other assets                                                                                    6,944                 6,743
                                                                                                ---------             ---------

           TOTAL ASSETS                                                                        $  385,718            $  388,500
                                                                                                =========             =========

LIABILITIES
    Deposits
        Non-interest bearing                                                                   $   57,500            $   63,393
        Interest bearing                                                                          280,532               280,533
                                                                                                ---------             ---------
           Total deposits                                                                         338,032               343,926

    Securities sold under repurchase agreements                                                     9,394                 8,858
    Other liabilities                                                                               6,077                 5,024
                                                                                                ---------             ---------

           Total liabilities                                                                      353,503               357,808
                                                                                                ---------             ---------

STOCKHOLDERS' EQUITY
    Common  stock,  par  value  $1-authorized,   5,000,000  shares;  
        outstanding 1,714,441  at  September  30, 1996 and  1,712,941  
        at December 31, 1995; excluding shares in treasury 85,500
        at September 30, 1996 and 87,000 at December 31, 1995                                       1,800                 1,800
    Additional paid-in capital                                                                      3,303                 3,301
    Retained earnings                                                                              29,479                27,542
    Net unrealized loss on securities available-for-sale                                             (514)                  (65)
    Treasury stock, at cost                                                                        (1,853)               (1,886)
                                                                                                ---------             ---------

           Total stockholders' equity                                                              32,215                30,692
                                                                                                ---------             ---------

           TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                          $  385,718            $  388,500
                                                                                                =========             =========
The accompanying notes are an integral part of these statements.
</TABLE>
                                        3

<PAGE>
                 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME

                                   (UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands - except per share data)                              Three Months Ended                Nine  Months Ended
                                                                               September 30,                      September 30,
                                                                           ---------------------              ------------------
                                                                           1996             1995              1996         1995
                                                                           ----             ----              ----         ----
<S>                                                                   <C>               <C>              <C>            <C>   
INTEREST INCOME
    Loans, including fees                                                 $5,704           $5,638           $16,912       $17,059
    Investment securities                                                  1,523            1,367             4,447         3,732
    Federal funds sold                                                       202              206               623           388
    Deposits in banks                                                         15               --                32            --
                                                                           -----            -----            ------        ------

                Total interest income                                      7,444            7,211            22,014        21,179
                                                                           -----            -----            ------        ------

INTEREST EXPENSE
    Deposits                                                               2,940            2,917             8,855         8,120
    Securities sold under repurchase agreements                               89              119               248           313
    Other borrowings                                                          --               --                --            59
                                                                           -----            -----            ------        ------

                Total interest expense                                     3,029            3,036             9,103         8,492
                                                                           -----            -----            ------        ------

                Net interest income                                        4,415            4,175            12,911        12,687

    Provision for loan losses                                                249              400               801         1,184
                                                                           -----            -----            ------        ------

                Net interest income after provision
                   for possible loan losses                                4,166            3,775            12,110        11,503
                                                                           -----            -----            ------        ------

NON-INTEREST INCOME
    Financial Management Services                                            453              459             1,358         1,377
    Service charges on deposit accounts                                      207              225               627           678
    Other                                                                    229              150               663           427
                                                                           -----            -----            ------         -----

                Total non-interest income                                    889              834             2,648         2,482
                                                                           -----            -----            ------         -----

NON-INTEREST EXPENSE
    Salaries and employee benefits                                         1,942            1,781             5,793         5,306
    Net occupancy and  equipment                                             714              585             1,936         1,741
    FDIC deposit insurance                                                     1              (19)                2           318
    Bank shares tax                                                           77               75               231           222
    Other                                                                    766              604             2,139         1,911
                                                                           -----            -----            ------         -----

                Total non-interest expense                                 3,500            3,026            10,101         9,498
                                                                           -----            -----            ------         -----

                Income before income taxes                                 1,555            1,583             4,657         4,487

INCOME TAXES                                                                 498              498             1,504         1,399
                                                                           -----            -----            ------         -----

                NET INCOME                                                $1,057           $1,085           $ 3,153        $3,088
                                                                           =====            =====            ======         =====

PER SHARE DATA
    Net income                                                            $0.61             $0.63             $1.84         $1.75
                                                                           ====              ====              ====         =====
    Dividends declared                                                    $0.25             $0.23             $0.71         $0.63
                                                                           ====              ====              ====         =====

Weighted average shares outstanding                                    1,718,952        1,716,130         1,716,819     1,765,522
                                                                       =========        =========         =========     =========
The accompanying notes are an integral part of these statements.
</TABLE>
                                        4
<PAGE>



                 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

(Dollars in thousands)                                                                                  1996             1995
                                                                                                      --------          -------
<S>                                                                                                  <C>              <C>

Balance at January 1,                                                                                  $30,692          $28,299

    Net  income to date                                                                                  3,153            3,088
    Cash dividends declared                                                                             (1,216)          (1,108)
    Net unrealized gain (loss) on securities available-for-sale                                           (449)           1,461
    Treasury stock transactions                                                                             35           (1,886)
                                                                                                        ------           ------

Balance at September 30,                                                                               $32,215          $29,854
                                                                                                        ======           ======





























The accompanying notes are an integral part of these statements.

</TABLE>

                                        5

<PAGE>



                 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                     Nine Months Ended
                                                                                                        September 30,
                                                                                                ------------------------------
(Dollars in thousands)                                                                             1996                1995
                                                                                                -----------        -----------
<S>                                                                                        <C>                  <C>    
OPERATING ACTIVITIES
    Net Income                                                                                $    3,153           $    3,088
    Adjustments to reconcile net income to net cash
           provided by operating activities:
        Depreciation                                                                                 560                  455
        Provision for loan losses                                                                    801                1,184
        Amortization of investment security premiums
           and accretion of discounts                                                                132                  165
        Amortization of deferred fees on loans                                                        18                  103
        Decrease (increase) in other assets                                                           30                 (404)
        Increase in other liabilities                                                              1,070                1,296
        Investment securities losses, net                                                              3                   --
                                                                                               ---------            ---------

           Net cash provided by operating activities                                               5,767                5,887
                                                                                               ---------            ---------

INVESTING ACTIVITIES
        Purchase of interest bearing deposit in bank                                              (1,000)                  --
        Increase in loans                                                                         (8,905)              (1,988)
        Proceeds from maturities of investment securities available-for-sale                      12,825                7,428
        Proceeds from maturities of investment securities held-to-maturity                         9,216                5,262
        Proceeds from sales of investment securities available-for-sale                              100                   --
        Purchases of investment securities available-for-sale                                    (27,176)             (21,037)
        Purchases of investment securities held-to-maturity                                       (1,999)                (999)
        Purchase of premises and equipment, net                                                   (1,538)                (974)
                                                                                               ---------            ---------

           Net cash used in investing activities                                                 (18,477)             (12,308)
                                                                                               ---------            ---------

FINANCING ACTIVITIES
        Decrease (increase) in deposits                                                           (5,894)              15,791
        Increase in securities sold under repurchase agreements                                      536                  452
       Cash dividends                                                                             (1,233)              (1,104)
       Treasury stock transactions, net                                                               35               (1,886)
                                                                                               ---------            ---------

           Net cash (used in) provided by financing activities                                    (6,556)              13,253
                                                                                               ----------           ---------

              NET (DECREASE) INCREASE IN CASH AND CASH
                EQUIVALENTS                                                                      (19,266)               6,832

Cash and cash equivalents at beginning of period                                                  44,644               21,981
                                                                                               ---------            ---------

Cash and cash equivalents at end of period                                                    $   25,378           $   28,813
                                                                                               =========            =========






The accompanying notes are an integral part of these statements.

</TABLE>

                                        6

<PAGE>



                 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

1.         The unaudited  financial  statements have been prepared in accordance
           with generally accepted  accounting  principles for interim financial
           information.   In  the  opinion  of   management,   all   adjustments
           (consisting  only of normal  recurring  adjustments)  necessary for a
           fair  presentation  of the  financial  position  and the  results  of
           operations for the interim period  presented have been included.  For
           further information,  refer to the consolidated  financial statements
           and footnotes thereto included in First West Chester  Corporation and
           Subsidiaries' (the "Corporation")  Annual Report on Form 10-K for the
           year ended December 31, 1995.

2.         The results of operations for the three-month and nine-month  periods
           ended September 30, 1996 and 1995 are not  necessarily  indicative of
           the results to be expected for the full year.

3.         Per share data is based on the weighted  average  number of shares of
           common stock outstanding during the period.

4.         On January 1, 1995, the  Corporation  adopted  Statement of Financial
           Accounting  Standards ("SFAS") No. 114, "Accounting for Creditors for
           Impairment  of a Loan," as amended by SFAS No.  118,  "Accounting  by
           Creditors  for  Impairment  of  a  Loan  -  Income   Recognition  and
           Disclosures."  SFAS No. 114 requires  loan  impairment to be measured
           based on the present value of expected  future cash flows  discounted
           at  the  loan's  effective  interest  rate,  except  as  a  practical
           expedient,  a  creditor  may  measure  impairment  based  on a loan's
           desirable  market price,  or the fair value of the  collateral if the
           loan is collateral dependent. Regardless of the measurement method, a
           creditor  must  measure  impairment  based on the  fair  value of the
           collateral when the creditor determines that foreclosure is probable.
           SFAS No. 118 allows creditors to use existing methods for recognizing
           interest income on impaired loans.

           The Bank  identifies  a loan 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  on such  loans and no income  is  recognized  until all
           recorded amounts of interest and principal are recovered in full.

           Loan  impairment is measured by estimating  the expected  future cash
           flows and discounting them at the respective  effective interest rate
           or by valuing the underlying  collateral.  The recorded investment in
           these  loans and the  valuation  for  credit  losses  related to loan
           impairment are as follows:

                                                             1996
                                                 -------------------------------
           (Dollars in thousands)                 January 1         September 30
                                                 ----------         ------------
           Principal amount of impaired loans    $     590            $     422
           Less valuation allowance                   (433)                (406)
                                                   -------              -------
                                                 $     157            $      16
                                                  ========             ========

           On January 1, 1996, a valuation for credit losses related to impaired
           loans was established. The activity in this allowance account for the
           three- and nine-month periods ended September 30, 1996 and 1995 is as
           follows:



                                        7

<PAGE>



                 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)

                                   (UNAUDITED)
<TABLE>
<CAPTION>

4.         (Continued)                                                     September 30, 1996                September 30, 1995
                                                                         ----------------------           -----------------------
                                                                            Three          Nine            Three           Nine
                                                                           Months         Months           Months          Months
                                                                            Ended         Ended            Ended           Ended
<S>                                                                    <C>            <C>               <C>          <C>    

           Valuation allowance at beginning of period                     $    406      $    433          $    303      $    380
           Provision for loan impairment                                        10           110                50           280
           Direct charge-offs                                                   --          (159)              (20)         (369)
           Recoveries                                                            2            34                --            42
                                                                           -------       -------           -------       -------
           Valuation allowance at end of period                           $    418      $    418          $    333      $    333
                                                                           =======       =======           =======       =======
</TABLE>
           Total  cash  collected  on  impaired  loans  during  the  three-  and
           nine-month  periods ended September 30, 1996 was $32 thousand and $41
           thousand,  respectively,  of which $31  thousand and $40 thousand was
           credited to the principal  balance  outstanding  on such loans and $1
           thousand  and  $1  thousand  was   recognized  as  interest   income,
           respectively. Interest that would have been accrued on impaired loans
           during the three- and nine-month periods ended September 30, 1996 was
           $10  thousand  and  $32  thousand,   respectively.   Interest  income
           recognized  during the three- and nine-month  periods ended September
           30, 1996 was $0 thousand and $1 thousand, respectively.

           Total  cash  collected  on  impaired  loans  during  the  three-  and
           nine-month  periods  ended  September  30, 1995 was $17  thousand and
           $1,432  thousand,  of which $17  thousand  and  $1,260  thousand  was
           credited to the principal  balance  outstanding  on such loans and $0
           and $172 thousand was  recognized as interest  income,  respectively.
           Interest  that would have been  accrued on impaired  loans during the
           three-  and  nine-month  periods  ended  September  30,  1995 was $18
           thousand and $76 thousand,  respectively.  Interest income recognized
           during the three- and nine-month periods ended September 30, 1995 was
           $0 and $172 thousand, respectively.

           During the nine months ended  September 30, 1995,  two impaired loans
           totaling $699 thousand  were  transferred  to Other Real Estate Owned
           and one  impaired  loan  for $500  thousand  was  transferred  to the
           Corporation's  real  estate  subsidiary,  323  East Gay  Street  Corp
           ("EGSC"),  as an equity  investment.  The $500 thousand impaired loan
           that was  transferred to EGSC in 1995 was liquidated in May 1996. The
           proceeds  from  the  liquidation  were in  excess  of  $600  thousand
           resulting in a gain of $135 thousand  included in other  non-interest
           income.

5.         The Financial Accounting Standards Board issued a new standard,  SFAS
           No. 123, "Accounting for Stock- Based Compensation," which contains a
           fair-value  based method for valuing  stock-based  compensation  that
           entities may use, which measures  compensation cost at the grant date
           based on the fair value of the award. Compensation is then recognized
           over  the  service  period,  which is  usually  the  vesting  period.
           Alternatively,  the standard permits entities to continue  accounting
           for employees  stock  options and similar  equity  instruments  under
           Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock
           Issued to  Employees."  Entities  that  continue to account for stock
           options  using  APB  Opinion  25  are  required  to  make  pro  forma
           disclosures  of net income  and  earnings  per share,  as if the fair
           value-based  method of  accounting  defined  in SFAS No. 123 had been
           applied.  The  Corporation  will continue to use APB Opinion 25 while
           complying with the disclosure requirements of SFAS No. 123.

                                        8

<PAGE>


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

                              RESULTS OF OPERATIONS
                              ---------------------
                         EARNINGS SUMMARY AND HIGHLIGHTS

         Net income for the three  month  period  ended  September  30, 1996 was
$1,057 thousand,  a decrease of $28 thousand or 2.6% from $1,085 thousand in the
three month  period ended  September  30,  1995.  Net income for the  nine-month
period ended September 30, 1996 was $3,153 thousand, an increase of $65 thousand
or 2.1% from $3,088 thousand in the nine-month  period ended September 30, 1995.
Changes in net income are primarily the result of an industry wide  reduction in
Federal Deposit Insurance Corporation ("FDIC') insurance premiums, gain from the
sale of  property  owned by the  Corporation's  subsidiary,  323 East Gay Street
Corp,  and a lower  provision for loan losses,  partially  offset by tighter net
interest margins and increased  operating  expenses.  Earnings per share for the
three month period ended  September 30, 1996 was $0.61 per share,  a decrease of
$0.02 per share compared to the same period in 1995.  Earnings per share for the
nine month period ended  September 30, 1996 was $1.84 per share,  an increase of
$0.09 per share compared to the same period in 1995.

         Performance   ratios  for  the  three-  and  nine-month  periods  ended
September  30,  1996  declined  slightly  compared to the same period in 1995 as
shown below. Cash dividends  declared during the third quarter of 1996 increased
to $0.25 per share,  an 8.7%  increase  compared to $0.23 per share in the third
quarter of 1995. On a year-to-date  basis, cash dividends increased to $0.71 per
share, a 12.7% increase  compared to $0.63 per share in the same period of 1995.
Over the past ten years, the  Corporation's  practice has been to pay a dividend
of at least 35.0% of net income.
<TABLE>
<CAPTION>

                                                                        Three Months Ended               Nine Months Ended
                                                                           September 30,                   September 30,
                                                                      ---------------------            ---------------------
                                                                       1996           1995              1996           1995
                                                                       ----           ----              ----           ----
<S>                                                                <C>            <C>                 <C>          <C> 
           PERFORMANCE RATIOS
           ------------------
           Return on Average Assets                                    1.09%          1.17%              1.09%         1.14%
           Return on Average Equity                                   13.30%         14.67%             13.43%        14.06%
           Earnings Retained                                          59.51%         64.24%             61.43%        64.12%
           Dividend Payout Ratio                                      40.49%         35.78%             38.57%        35.88%
           Book Value Per Share                                      $18.79         $17.43             $18.79        $17.43
</TABLE>

                               NET INTEREST INCOME

         Net  interest  income  is the  difference  between  interest  income on
earning  assets  and  interest  expense  on  interest-bearing  liabilities.  Net
interest income for the three- and nine-month  periods ended September 30, 1996,
on a tax equivalent basis, was $4,471 thousand and $13,082 thousand, compared to
$4,233 thousand and $12,869 thousand for the same periods in 1995, respectively.
Net yields on interest earning assets, on a tax equivalent basis, were 4.95% and
4.85% for the three- and nine-month periods ended September 30, 1996 compared to
4.89% and 5.11% for the same  periods in 1995,  respectively.  Average  interest
earning assets  increased  approximately  $23.6 million to $359.5 million during
the first nine months of 1996 compared to $335.9 million in the same period last
year.  The  increase in average  earnings  assets is a direct  result of overall
deposit  growth over the past 24 months.  This inflow of funds was directed into
investments  and federal  funds sold rather than  higher  yielding  loans.  As a
result,  the  overall  net  yield  on  interest  earning  assets  declined.  The
Corporation  anticipates  continued  pressure on net yield on  interest  earning
assets as competition for new loan business  remains very strong and incremental
deposit growth becomes more rate sensitive.

                                        9

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


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

(Dollars in thousands)                                              1996                                    1995
                                                     ---------------------------------      ---------------------------------
                                                        Daily                                   Daily
                                                       Average                                  Average
                                                       Balance     Interest      Rate           Balance     Interest     Rate
                                                       -------     --------      ----           -------     --------     ----
<S>                                                <C>           <C>           <C>          <C>           <C>          <C>
ASSETS
Federal funds sold                                   $  15,065     $    202      5.36%        $  13,925      $   206     5.92%
Interest bearing deposits in banks                       1,000           15      6.00%               --           --        --
Investment securities
    Taxable                                             93,852        1,492      6.36%           85,395        1,323     6.20%
    Tax-exempt (1)                                       2,480           43      6.94%            3,484           59     6.77%
                                                       -------       ------                     -------        -----
        Total investment securities                     96,332        1,535      6.37%           88,879        1,382     6.22%
                                                       -------       ------                     -------        -----
Loans (2)
    Taxable                                            243,219        5,585      9.19%          236,770        5,523     9.33%
    Tax-exempt (1)                                       6,016          163     10.84%            6,531          158     9.68%
                                                       -------       ------                     -------        -----
        Total loans                                    249,235        5,748      9.23%          243,301        5,681     9.34%
                                                       -------       ------                     -------        -----
Total interest earning assets                          361,632        7,500      8.30%          346,105        7,269     8.40%
Non-interest earning assets
    Allowance for possible loan losses                  (4,917)                                  (3,857)
    Cash and due from banks                             18,486                                   16,697
    Other assets                                        13,387                                   11,998
                                                       -------                                  -------
        Total assets                                  $388,588                                 $370,943
                                                       =======                                  =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits                 $171,950      $ 1,325      3.08%         $162,774       $1,364     3.35%
Certificates of deposits and other time                113,040        1,615      5.71%          107,879        1,553     5.76%
                                                       -------       ------                     -------        -----
   Total interest bearing deposits                     284,990        2,940      4.13%          270,653        2,917     4.31%
Securities sold under repurchase agreements             10,706           89      3.33%           14,435          119     3.30%
                                                       -------       ------                     -------        -----
   Total interest bearing liabilities                  295,696        3,029      4.10%          285,088        3,036     4.26%
                                                                     ------                                    -----
Non-interest bearing liabilities
    Non-interest bearing demand deposits                55,433                                   51,106
    Other liabilities                                    6,164                                    5,467
                                                       -------                                  -------
        Total liabilities                              357,293                                  341,661
Stockholders' equity                                    31,295                                   29,282
                                                       -------                                  -------
        Total liabilities and stockholders' equity    $388,588                                 $370,943
                                                       =======                                  =======
Net interest income                                                 $ 4,471                                  $ 4,233
                                                                    =======                                  =======
Net yield on interest earning assets                                             4.95%                                   4.89%
                                                                                 ====                                    ====







<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 1996 and 1995.
(2) Non-accruing loans are included in the average balance.

</FN>
</TABLE>
                                       10

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

                       CONSOLIDATED AVERAGE BALANCE SHEET
             AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES FOR THE
                         NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
(Dollars in thousands)                                              1996                                      1995
                                                     ----------------------------------     -----------------------------------
                                                        Daily                                   Daily
                                                       Average                                  Average
                                                       Balance     Interest      Rate           Balance     Interest       Rate
                                                       -------     --------      ----           -------     --------       ----
<S>                                               <C>           <C>            <C>         <C>          <C>            <C>
ASSETS
Federal funds sold                                   $  15,429    $     623      5.38%       $    8,725    $     388     5.93%
Interest bearing deposits in banks                         730           32      5.84%               --           --         --
Investment securities
Taxable                                                 93,481        4,352      6.21%           78,622        3,592     6.09%
    Tax-exempt (1)                                       2,529          130      6.85%            3,690          192     6.94%
                                                       -------       ------                     -------       ------
        Total investment securities                     96,010        4,482      6.22%           82,312        3,784     6.13%
Loans (2)
    Taxable                                            240,696       16,549      9.17%          238,137       16,711     9.36%
    Tax-exempt (1)                                       6,653          499     10.00%            6,676          478     9.55%
                                                       -------       ------                     -------       ------
        Total loans                                    247,349       17,048      9.19%          244,813       17,189     9.36%
                                                       -------       ------                     -------       ------
Total Interest Earning Assets                          359,518       22,185      8.23%          335,850       21,361     8.48%
Non-interest earning assets
    Allowance for possible loan losses                  (4,757)                                  (3,654)
    Cash and due from banks                             17,115                                   16,122
    Other assets                                        12,912                                   12,026
                                                       -------                                  -------
        Total assets                                  $384,788                                 $360,344
                                                       =======                                  =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits                 $167,905     $  3,894      3.09%         $162,669      $ 4,073     3.34%
Certificates of deposits and other time                115,924        4,961      5.71%           97,920        4,047     5.51%
                                                       -------       ------                     -------       ------
   Total interest bearing deposits                     283,829        8,855      4.16%          260,589        8,120     4.15%
Securities sold under repurchase agreements             10,092          248      3.28%           12,846          313     3.25%
Other borrowings                                            --           --        --             1,269           59     6.20%
                                                       -------       ------                     -------       ------
   Total interest bearing liabilities                  293,921        9,103      4.13%          274,704        8,492     4.12%
                                                                     ------                                   ------
Non-interest bearing liabilities
    Non-interest bearing demand deposits                54,270                                   51,349
    Other liabilities                                    5,302                                    5,009
                                                       -------                                  -------
        Total liabilities                              353,493                                  331,062
Stockholders' equity                                    31,295                                   29,282
                                                       -------                                  -------
        Total liabilities and stockholders' equity    $384,788                                 $360,344
                                                       =======                                  =======
Net interest income                                                 $13,082                                 $ 12,869
                                                                     ======                                  =======
Net yield on interest earning assets                                             4.85%                                   5.11%
                                                                                 =====                                   ====








<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 1996 and 1995.
(2) Non-accruing loans are included in the average balance.
</FN>
</TABLE>
                                       11

<PAGE>


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

               AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS)
<TABLE>
<CAPTION>
                                                                Three-Months                          Nine-Months
         Yield On:                                           Ended September 30,                  Ended September 30,
         ---------                                           -------------------                  -------------------
                                                              1996          1995                  1996         1995
                                                              ----          ----                  ----         ----
<S>                                                         <C>           <C>                   <C>          <C>    

Interest Earning Assets                                       8.30%         8.40%                 8.23%        8.48%
Interest Bearing Liabilities                                  4.10%         4.26%                 4.13%        4.12%
                                                              ----          ----                  ----         ----
Net Interest Spread                                           4.20%         4.14%                 4.10%        4.36%
Contribution of Interest Free Funds                           0.75%         0.75%                 0.75%        0.75%
                                                              ----          ----                  ----         ----
Net Yield on Interest Earning Assets                          4.95%         4.89%                 4.85%        5.11%
                                                              ====          ====                  ====         ====
</TABLE>

                        INTEREST INCOME ON FEDERAL FUNDS

         Interest  income on federal funds sold for the three month period ended
September  30, 1996  decreased $4 thousand  when  compared to the same period in
1995.  The decrease in federal  funds sold  interest  income for the three month
period ended  September  30, 1996 is due to a 56 basis point  decrease in rates,
partially offset by a $1.1 million increase in average balances  compared to the
same period in 1995.

         Interest  income on federal  funds sold for the nine month period ended
September 30, 1996  increased  $235 thousand when compared to the same period in
1995.  The  increase in federal  funds sold  interest  income for the nine month
period ended  September  30, 1996 is due to a $6.7  million  increase in average
balances, partially offset by a 55 basis point decrease in rates compared to the
same period in 1995.

                      INTEREST INCOME ON DEPOSITS IN BANKS

         Interest  income on  deposits  in banks for the  three-  and-nine-month
periods   ended   September   30,  1996  was  $15  thousand  and  $32  thousand,
respectively,  when compared to the same periods in 1995. There were no deposits
in banks in the three- and nine-month  periods ended September 30, 1995 compared
to $1.0 million and $0.7 million in average deposits in banks outstanding during
the three- and nine-month period ended September 30, 1996.

                    INTEREST INCOME ON INVESTMENT SECURITIES

         On a tax equivalent  basis,  interest  income on investment  securities
increased $153 thousand and $698 thousand for the three- and nine-month  periods
ended September 30, 1996 to $1,535 thousand and $4,482  thousand,  respectively,
when  compared  to the same  periods in 1995.  The  increase  for the three- and
nine-month  period is due to an increase in average balances of $7.5 million and
$13.7 million and 15 basis point and 9 basis point increases in the yield earned
on  securities  when compared to the same periods last year,  respectively.  The
increases in average  balances in  investment  securities is a result of overall
deposit growth in conjunction with reduced loan demand.

                            INTEREST INCOME ON LOANS

         Loan  interest  income,  on a tax  equivalent  basis,  generated by the
Corporation's  loan portfolio  increased $67 thousand to $5,748 thousand for the
three-month  period ended  September  30,  1996,  compared to the same period in
1995. The increase in interest income on loans for the three-month  period ended
September 30, 1996 is

                                       12

<PAGE>


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

attributable to $5.9 million increase in average balances,  partially off set by
an 11-basis point decrease in rates.

         Loan  interest  income,  on a tax  equivalent  basis,  generated by the
Corporation's loan portfolio decreased $141 thousand to $17,048 thousand for the
nine-month period ended September 30, 1996, compared to the same period in 1995.
The  decrease  in  interest  income on loans  for the  nine-month  period  ended
September  30,  1996 is  attributable  to a 17-basis  point  decrease  in rates,
partially offset by a $2.5 million increase in average balances.

         The  decrease in the loan  portfolio  yield is a result of decreases in
lending rates due to the increased  competition on existing loans and new loans.
The Bank has seen a noticeable  increase in pricing and fee competition on large
(more than $500,000) loans (new and renewal) during the past twelve months.  The
Bank  expects that pricing  pressure  will  continue and reduce the overall loan
yields and net interest yield on interest earning assets.

                      INTEREST EXPENSE ON DEPOSIT ACCOUNTS

         Interest  expense on deposit  accounts  increased $23 thousand and $735
thousand  for the three- and  nine-month  periods  ended  September  30, 1996 to
$2,940 thousand and $8,855  thousand,  compared to the same periods in 1995. The
increase for the three month period  ended  September  30, 1996 is the result of
increases  in average  interest-bearing  deposits  of $14.3  million,  partially
offset  by a 18 basis  point  decrease  in the  rates  paid on  interest-bearing
deposits. The increase for the nine month period ended September 30, 1996 is the
result of a 1 basis point  increase in rates paid on  interest-bearing  deposits
and increases in average interest-bearing deposits of $23.2 million.

         The Corporation's effective rate on interest-bearing deposits decreased
from 4.31% in the third quarter 1995 to 4.13% in the third  quarter 1996.  Steps
are being taken to continue to control  interest expense without causing deposit
run-off.  Competition for deposits from non-banking  institutions such as credit
unions and mutual fund companies continues to grow.

         INTEREST EXPENSE ON SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

         Interest  expense  on  securities  sold  under  repurchase   agreements
decreased  $30 thousand  and $65 thousand to $89 thousand and $248  thousand for
the three- and  nine-month  periods  ended  September  30, 1996 compared to $119
thousand and $313 thousand for the three- and nine-month periods ended September
30, 1995, respectively. The decreases are primarily attributable to $3.7 million
and  $2.8  million  decreases  in  average   securities  sold  under  repurchase
agreements  outstanding  compared  to the three- and  nine-month  periods  ended
September 30, 1995,  respectively.  Average balances decreased due to a new cash
sweep product  recently  introduced by the Bank. The Bank sweeps excess customer
demand deposit  account  balances  overnight  outside the Bank through a program
with Federated  Investors.  Cash sweep balances  amounted to approximately  $4.9
million as of September 30, 1996. This product provides  fee-based income to the
Bank while  earning  our  customers a higher  yield than our current  repurchase
agreement product.

                      INTEREST EXPENSE ON OTHER BORROWINGS

         There were no other  borrowings in the nine months ended  September 30,
1996 compared to $1.3 million average other  borrowings  outstanding  during the
nine month period ended September 30, 1995.  Short term funding  requirements in
1996 have been met through deposits  increases,  management of federal funds and
investment maturities.

                                       13

<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, 1996, the
Corporation  recorded a $249 thousand and a $801 thousand provision for possible
loan losses  compared to $400 thousand and $1,184  thousand for the same periods
in 1995.  The  allowance for possible loan losses as a percentage of total loans
was 2.00% as of September 30, 1996 compared to 1.86% as of December 31, 1995 and
1.69%  as of  September  30,  1995.  The  Corporation  continues  to  deal  with
non-performing  loans by building up the  allowance for possible loan losses and
aggressively  charging-off  loans deemed  uncollectible.  See the section titled
"Allowance For Possible Loan Losses" for additional discussion.

                               NON-INTEREST INCOME

         Total  non-interest  income increased $55 thousand and $166 thousand to
$889 thousand and $2,648  thousand for the three- and  nine-month  periods ended
September 30, 1996,  compared to $834 thousand and $2,482  thousand for the same
periods in 1995.  The primary  component  of  non-interest  income is  Financial
Management  Services  revenue,  which  decreased $6 thousand and $19 thousand to
$453 thousand and $1,358  thousand for the three- and  nine-month  periods ended
September  30, 1996 from $459  thousand  and $1,377  thousand for the three- and
nine-month   periods  ended  September  30,  1995.  Market  value  of  Financial
Management  Services'  assets  declined  $13.9  million  to  $262.0  million  at
September  30, 1996 from $275.9  million at September  30, 1995.  The decline in
Financial  Management  Services'  assets and revenues is primarily the result of
the loss of three account relationships partially offset by business development
efforts.

         Service  charges on deposit  accounts  decreased  $18  thousand and $51
thousand to $207 thousand and $627 thousand for the three- and nine-month period
ended  September  30, 1996 from $225  thousand  and $678  thousand  for the same
periods in 1995.  The  decreases  relate to increases  in the  earnings  credits
offered  to  business  customers,  partially  offset  by an  internal  review of
unprofitable accounts and changes in service charges.

         Other  non-interest  income increased $79 thousand and $236 thousand to
$229  thousand and $663  thousand for the three- and  nine-month  periods  ended
September  30, 1996  compared to $150  thousand  and $427  thousand for the same
periods in 1995.  These  increases  relate to a $135  thousand net gain from the
sale of  property  owned by the  Corporation's  subsidiary,  323 East Gay Street
Corp,  increases in revenue from the sale of  residential  mortgage  loans,  and
rental income received from other real estate owned property,  partially  offset
by decreases in credit card income.

                              NON-INTEREST EXPENSE

         Total non-interest  expense for the three- and nine-month periods ended
September 30, 1996 was $3,500 thousand and $10,101  thousand,  increases of $474
thousand and $603 thousand from $3,026 thousand and $9,498 thousand for the same
periods in 1995.  The various  components of  non-interest  expense  changes are
discussed below.

         Salaries  and  employee  benefits  increased  $161  thousand  and  $487
thousand  for the three- and  nine-month  periods  ended  September  30, 1996 to
$1,942  thousand and $5,793  compared to $1,781 thousand and $5,306 thousand for
the same periods in 1995.  Annual  employee raises and a staff increase from 176
full-time  equivalents  (FTE's)  employees in the second  quarter of 1995 to 187
FTE's in the second quarter of 1996 are responsible for the

                                       14

<PAGE>


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

increase. These staffing increases reflect the Corporation's need for additional
sales and marketing  personnel.  The Corporation also experienced  proportionate
increases in employee benefits.

         Net occupancy, equipment, and data processing expense was $714 thousand
and $1,936  thousand for the three- and nine-month  periods ended  September 30,
1996,  increases of $129  thousand and $195  thousand over the same periods last
year.  The  increase in the first nine  months of 1996 is  primarily a result of
increased  costs  associated  with  building  improvements  and  new  technology
projects,  such as the teller on-line system and the check imaging  system.  See
the  section  titled  "Building   Improvements  and  Technology   Projects"  for
additional discussion.

         Effective  January 1, 1996, the Federal Deposit  Insurance  Corporation
("FDIC") reduced the Bank Insurance Fund ("BIF") deposit  insurance  premiums to
the  statutory  minimum  of $500 per  quarter  for the best  rated  banks.  FDIC
insurance for the best rated banks, was calculated based on quarter-end deposits
at a rate of $0.23 per year per $1,000 in deposits  from  January 1, 1995 to May
31, 1995 and $0.04 per year per $1,000 in  deposits  from  September  1, 1995 to
December 31, 1995. It is anticipated that the premium for 1997 will be above the
statutory minimum.

         Bank shares tax was $77 thousand  and $231  thousand for the three- and
nine-month  period ended  September  30,  1996,  increases of $2 thousand and $9
thousand over the same periods last year.  The  Pennsylvania  Bank Shares Tax is
calculated on quarter-end Bank stockholders' equity and paid annually.

         Other non-interest  expense increased $162 thousand,  or 26.8%, to $766
thousand for the three- month period ended  September  30, 1996 compared to $604
thousand for the same period in 1995.  This  increase is primarily the result of
increases in marketing costs,  supplies,  and fraud losses,  partially offset by
recoveries of loan related legal fees.

         Other non-interest expense increased $228 thousand, or 11.9%, to $2,139
thousand for the nine-month  period ended  September 30, 1996 compared to $1,911
thousand for the same period in 1995. The increase in  non-interest  expenses is
due to increases in supplies,  fraud losses and  additional  writedowns on other
real  estate  owned,  partially  offset by a  Pennsylvania  sales tax refund and
recoveries of loan related legal fees. The increase is also partially  offset by
the  adoption  of SFAS No.  116,  "Accounting  for  Contributions  Received  and
Contributions  Made" on January 1, 1995.  The  adoption of SFAS No. 116 required
the  Corporation  to  recognize  conditional  promises  to  contribute  when the
promises  became  unconditional.  This had an impact of $117  thousand  on other
non-interest expenses during the first nine months of 1995.

                                  INCOME TAXES

         Income  tax  expense  for  the  three-  and  nine-month  periods  ended
September  30,  1996 was $498  thousand  and $1,504  thousand,  compared to $498
thousand  and $1,399  thousand in the same periods  last year.  This  represents
effective tax rates of 32.03% and 32.30% for the three- and  nine-month  periods
ended  September 30, 1996,  compared with 31.46% and 31.18% for the same periods
in 1995,  respectively.  The primary  reason for the  increases in effective tax
rates is decreases in  tax-exempt  instruments  as a percentage of total assets.
Average tax-exempt assets as a percentage of total average assets were 2.39% and
2.88% at September 30, 1996 and 1995, respectively.



                                       15

<PAGE>


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

               LIQUIDITY MANAGEMENT AND INTEREST RATE SENSITIVITY

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

                                DEPOSIT ANALYSIS
<TABLE>
<CAPTION>

(Dollars in thousands)                        September 30, 1996            December 31, 1995            Average Balance
                                            ----------------------        ---------------------     ------------------------
                                             Average     Effective        Average     Effective      Dollar       Percentage
Deposit Type                                 Balance        Yield         Balance       Yield       Variance       Variance
------------                                 -------     ---------        -------     ---------     --------       ---------
<S>                                      <C>             <C>           <C>            <C>          <C>              <C>

NOW Accounts                                $ 47,236        2.20%        $ 42,974       2.32%        $ 4,262          9.92%
Money Market                                  28,775        3.07           29,610       3.23            (835)        (2.82)
Statement Savings                             48,995        3.21           46,347       3.64           2,648          5.71
Other Savings                                  4,407        2.75            4,657       2.73            (250)        (5.37)
CD's Less than $100,000                      103,356        5.75           89,866       5.67          13,490         15.01
                                             -------                      -------                     ------
Total Core Deposits                          232,769        4.11          213,454       4.15          19,315          9.05
Non-Interest Bearing
  Demand Deposit Accounts                     54,270       --              52,177      --              2,093          4.01
                                             -------                      -------                     ------
Total Core and Non-Interest
  Bearing Deposits                           287,039       --             265,631      --             21,408          8.06
Tiered Savings                                38,492        4.09           38,744       4.29            (252)        (0.65)
CD's Greater than $100,000                    12,568        5.36           11,331       5.11           1,237         10.92
                                             -------                      -------                     ------
Total Deposits                              $338,099       --            $315,706      --            $22,393          7.09
                                             =======                      =======                     ======
</TABLE>

         The Bank, as a member of the Federal Home Loan Bank ("FHLB"), maintains
a line of credit secured by the Bank's mortgage related assets.  As of September
30, 1996, this line of credit was  approximately $8 million.  The line of credit
at the FHLB at December 31, 1995 was approximately $34 million. The reduction in
the line of credit available is the result of a system wide policy change by the
FHLB.  However,  the  Bank's  overall  borrowing  capacity  at the FHLB  remains
unchanged at  approximately  $84 million.  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 $90.0 million or 23.3% of total assets at September 30,

                                       16

<PAGE>


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

1996,  compared with negative  $60.9 million and negative 16.6% at September 30,
1995,  respectively.  Management  is aware of this  negative gap position and is
taking steps to maintain net interest margins at acceptable levels.

                          INTEREST SENSITIVITY ANALYSIS
                            AS OF SEPTEMBER 30, 1996
<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                           $       7,800    $           --    $          --    $           --    $       7,800
    Investment securities                               31,187            45,841           22,702                --           99,730
    Interest bearing deposits in banks                   1,000                --               --                --            1,000
    Loans and leases                                   121,928           114,765           14,499            (5,025)         246,167
    Cash and cash equivalents                               --                --               --            17,578           17,578
    Other assets                                            --                --               --            13,443           13,443
                                                            --                --               --            ------           ------
       Total assets                              $     161,915    $      160,606    $      37,201    $       25,996    $     385,718
                                                       =======           =======           ======            ======          =======

LIABILITIES AND CAPITAL
    Non-interest bearing deposit                 $          --    $           --    $          --    $       57,500    $      57,500
    Interest bearing deposits                          242,552            37,980               --                --          280,532
    Borrowed funds                                       9,394                --               --                --            9,394
    Other liabilities                                       --                --               --             6,077            6,077
    Capital                                                 --                --               --            32,215           32,215
                                                            --        ----------      -----------      ------------      -----------
       Total liabilities & capital               $     251,946    $       37,980    $          --    $       95,792    $     385,718
                                                  ============     =============     ============     =============     ============
    Net interest rate
      sensitivity rate                           $     (90,031)   $      122,626    $      37,201    $      (69,796)   $          --
                                                  ============     =============     ============     =============     ============
    Cumulative interest rate
      sensitivity gap                            $     (90,031)   $       32,595    $      69,796    $            --   $          --
                                                  ============     =============     ============     ==============    ============
    Cumulative interest rate
      sensitivity gap divided                           (23.3%)             8.5%            18.1%
                                                   ===========      ============      ===========
      by total assets
</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.

                                       17

<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)                                                 1996            1995                1996             1995
                                                                       ----            ----                ----             ----
<S>                                                              <C>             <C>                  <C>              <C>   

Balance at beginning of period                                      $  4,831         $ 3,712            $ 4,506          $ 3,303
                                                                     -------          ------             ------           ------
Provision charged to operating expense                                   249             400                801            1,184
                                                                     -------          ------             ------           ------
    Recoveries of loans previously charged-off                             3              21                 41               74
    Loans charged-off                                                    (58)            (78)              (323)            (506)
                                                                     -------          ------             ------           ------
Net loans charged-off                                                    (55)            (57)              (282)            (432)
                                                                     -------          ------             ------           ------
Balance at end of period                                            $  5,025         $ 4,055            $ 5,025          $ 4,055
                                                                     =======          ======             ======           ======

Period-end loans outstanding                                        $251,192        $240,579           $251,192         $240,579

Average loans outstanding                                           $249,235        $243,301           $247,349         $244,813

Allowance for possible loan losses as a
    percentage of period-end loans outstanding                         2.00%           1.69%              2.00%            1.69%

Ratio of net charge-offs to average loans
    outstanding (annualized)                                           0.09%           0.09%              0.15%            0.24%
</TABLE>

         Non-performing loans include loans on non-accrual status and loans past
due 90 days or more and still  accruing.  The Bank's policy is to write down all
non-performing  loans  to net  realizable  value  based on  updated  appraisals.
Non-performing loans are generally  collateralized by real estate and are in the
process of  collection.  Management  is not aware of any loans  other than those
included in the following table that would be considered potential problem loans
and cause management to have doubts as to the borrower's  ability to comply with
loan repayment terms.



                                                                 18

<PAGE>


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

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

                                                                     September 30,                  December 31,
                                                               ----------------------               ------------
(Dollars in thousands)                                          1996             1995                    1995
                                                               -----             ----                    ----
<S>                                                         <C>              <C>                   <C>                 

Past due over 90 days and still accruing                        $  705           $  200                $  419
Non-accrual loans                                                  688              925                   726
                                                                 -----            -----                 -----
Total non-performing loans                                       1,393            1,125                 1,145
Other real estate owned                                          1,368            1,278                 1,447
                                                                 -----            -----                 -----
Total non-performing assets                                     $2,761           $2,403                $2,592
                                                                 =====            =====                 =====
Non-performing loans as a percentage
     of total loans                                              0.55%            0.47%                 0.47%
Allowance for possible loan losses as a
   percentage of non-performing loans                          360.73%          360.44%               393.54%
Non-performing assets as a percentage of
   total loans and other real estate owned                       1.09%            0.99%                 1.06%
Allowance for possible loan losses as a
  percentage of non-performing assets                          182.00%          168.75%               173.84%
</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.  Other Real
Estate Owned ("OREO") represents residential and commercial real estate that has
been written down to realizable value (net of estimated disposal costs) based on
professional  appraisals.  Management  intends  to  liquidate  OREO in the  most
expedient and cost-effective  manner.  This process could take up to twenty-four
months, although swifter disposition is anticipated.

                         CHANGES IN EXECUTIVE MANAGEMENT

The following  changes/promotions in executive management have occurred over the
past twelve months:

         o        Effective January 16, 1996, William E. Hughes,  Sr., Executive
                  Vice President, assumed all the duties and responsibilities of
                  Richard C. Cloud,  Executive  Vice  President,  who retired on
                  June 30, 1996.

         o        Effective  March  29,  1996,  Peter J.  D'Angelo  assumed  Mr.
                  Cloud's  duties as  Cashier  of the Bank and the  Corporation.
                  Effective  September  20, 1996,  Mr.  D'Angelo was promoted to
                  Senior Vice President.

         o        Effective  December 15, 1995,  J. Duncan Smith was promoted to
                  Senior Vice  President and  Comptroller of the Bank. Mr. Smith
                  also serves as Treasurer of the Corporation.

         o        Effective September 20, 1996, David W. Glarner was promoted to
                  Senior  Vice  President.  Mr.  Glarner  is head of the  Bank's
                  Mortgage Department.




                                       19

<PAGE>


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

                  BUILDING IMPROVEMENTS AND TECHNOLOGY PROJECTS

         During the second quarter 1996, the Corporation  completed  renovations
to the  first  floor of the  Miller  building  at a cost of  approximately  $408
thousand.  This building  includes a new customer  service  contact area for the
Financial Management Services Department and a complete renovation of the Market
Street Office.  Renovations to the former Commonwealth Bank building,  which was
purchased in 1995, are continuing with occupancy expected in the fourth quarter.
Improvements to the property will cost an estimated $525 thousand.

         The Corporation has two technology  projects in process:  Branch teller
automation ("BTA") and customer check imaging ("CCI"). The BTA project,  with an
approximate  cost of $450  thousand,  which was scheduled for  completion in the
first half of 1996, has been delayed and is not expected to be fully operational
until the first  quarter  of 1997.  The CCI  project,  with an  initial  cost of
approximately  $550  thousand,  was  fully  operational  at the end of the third
quarter.

                                CAPITAL ADEQUACY

         The Corporation is subject to Risk-Based  Capital Guidelines adopted by
the Federal Reserve Board ("FRB") for bank holding  companies.  The Bank is also
subject to similar capital requirements adopted by the Office of the Comptroller
of the Currency.  Under these  requirements,  the  regulatory  agencies have set
minimum  thresholds for Tier I Capital,  Total Capital,  and Leverage ratios. At
September 30, 1996, 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"
                                          ------------------------         ------------                     Requirements
CAPITAL RATIOS                             1996               1995              1995                    ------------------   
--------------                             ----               ----              ----                    
<S>                                    <C>                <C>                <C>                           <C>    
Leverage Ratio                             8.39%              8.31%              8.47%                         5.00%
Tier I Capital Ratio                      12.20%             11.46%             11.51%                         6.00%
Total Risk-Based Capital Ratio            13.46%             12.71%             12.77%                        10.00%
</TABLE>

         The Bank is not under any agreement with the regulatory authorities nor
is it aware of any current  recommendations by the regulatory  authorities that,
if they were to be  implemented,  would  have a  material  affect on  liquidity,
capital resources or operations of the Corporation.  The internal capital growth
rate for the Corporation was 6.62% for the nine months ended September 30, 1996.



                                       20

<PAGE>




                           PART II - OTHER INFORMATION

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

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

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

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

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

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

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

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

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


                                       21

<PAGE>



                           PART II - OTHER INFORMATION

                                   (CONTINUED)


Item 6.           Exhibits and Reports on Form 8-K (Continued)
                  --------------------------------------------
                            (3)(b) Bylaws of the Corporation,  as amended.  Copy
                            of  the  Corporation's   Bylaws,   as  amended,   is
                            incorporated  by  reference  to Exhibit 3 (b) to the
                            Corporation's  Annual  Report  on Form  10-K for the
                            year ended December 31, 1988.

         (b)      Reports on Form 8-K
                  -------------------
                  No report was filed during the nine months ended September 30,
                  1996.

                                       22

<PAGE>


                                   SIGNATURES


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




                         FIRST WEST CHESTER CORPORATION



                              Charles E. Swope



                              /s/ Charles E. Swope
                              President


DATE: November 14, 1996


                              J. Duncan Smith



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


                                       23