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, 1997, OR

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

     For the transition period from ____________ to ____________.

     Commission File No. 0-12870.


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


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


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


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

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

The number of shares outstanding of Common Stock of the Registrant as of October
1, 1997 was 2,399,833.


<PAGE>


                 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES


                                      INDEX
                                      -----


                                                                           PAGE

Part I.                    FINANCIAL INFORMATION


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


Consolidated Statements of Income
Three Months and Nine Months Ended
September 30, 1997 and 1996                                                  4


Consolidated Statements of Stockholders' Equity                              5


Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996                                6


Notes to Consolidated Financial Statements                                   7


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



Part II.          OTHER INFORMATION

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


Signatures                                                                  23

<PAGE>


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

(Dollars in thousands)
                                                                                                Unaudited
                                                                                               September 30,         December 31,
                                                                                                   1997                  1996
                                                                                              ------------          -----------
<S>                                                                                          <C>                   <C> 
ASSETS
    Cash and due from banks                                                                    $   21,845            $   21,956
    Federal funds sold                                                                              2,900                 3,800

           Total cash and cash equivalents                                                         24,745                25,756
                                                                                                ---------             ---------

    Interest bearing deposits with banks                                                               --                 1,000

    Investment securities held-to-maturity (market value of $12,759
        and $15,749 at September 30, 1997 and December 31, 1996, respectively)                     12,626                15,667

    Investment securities available-for-sale at market value                                       61,649                82,008

    Loans                                                                                         312,237               264,582
    Less allowance for possible loan losses                                                        (5,900)               (5,218)
                                                                                                ---------             ---------

           Net loans                                                                              306,337               259,364

    Premises and equipment, net                                                                     6,511                 6,752
    Other assets                                                                                    6,558                 7,137
                                                                                                ---------             ---------

           TOTAL ASSETS                                                                        $  418,426            $  397,684
                                                                                                =========             =========

LIABILITIES
    Deposits
        Non-interest bearing                                                                   $   58,755            $   63,591
        Interest bearing                                                                          298,249               287,675
                                                                                                ---------             ---------

           Total deposits                                                                         357,004               351,266

    Securities sold under repurchase agreements                                                     8,718                 7,943
    Federal Home Loan Bank Advances                                                                 9,915                    --
    Other liabilities                                                                               7,292                 5,300
                                                                                                ---------             ---------

           Total liabilities                                                                      382,929               364,509
                                                                                                ---------             ---------

STOCKHOLDERS' EQUITY
    Common  stock,  par  value  $1-authorized,   5,000,000  shares;  outstanding
        2,399,833 at September 30, 1997 and 1,799,941
        at December 31, 1996.                                                                       2,400                 1,800
    Additional paid-in capital                                                                      2,715                 3,305
    Retained earnings                                                                              32,227                30,133
    Net unrealized loss on securities available-for-sale                                              (94)                 (242)
    Treasury stock, at cost:  107,700 shares and 84,000 shares at
       September 30, 1997 and December 31, 1996, respectively.                                     (1,751)               (1,821)
                                                                                                ---------             ---------

           Total stockholders' equity                                                              35,497                33,175
                                                                                                ---------             ---------

           TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                          $  418,426            $  397,684
                                                                                                =========             =========

    Book Value Per Share                                                                           $15.49                $14.50

                                                                                                   =====                 =====

The accompanying notes are an integral part of these statements.
</TABLE>
                                       3
<PAGE>


                 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME

                                   (UNAUDITED)
<TABLE>
<CAPTION>

(Dollars in thousands - except per share data)                              Three Months Ended                Nine  Months Ended
                                                                              September 30,                       September 30,
                                                                           1997             1996              1997          1996
                                                                           ----             ----              ----          ----
<S>                                                                     <C>              <C>              <C>           <C>
INTEREST INCOME
    Loans, including fees                                                 $6,897           $5,704           $19,729       $16,912
    Investment securities                                                  1,220            1,523             4,026         4,447
    Federal funds sold                                                       110              202               196           623
    Deposits in banks                                                         --               15                12            32

                Total interest income                                      8,227            7,444            23,963        22,014
                                                                           -----            -----            ------        ------

INTEREST EXPENSE
    Deposits                                                               3,260            2,940             9,401         8,855
    Securities sold under repurchase agreements                               82               89               214           248
    Other borrowings                                                         109               --               284            --
                                                                           -----            -----            ------        ------
                Total interest expense                                     3,451            3,029             9,899         9,103
                                                                           -----            -----            ------        ------

                Net interest income                                        4,776            4,415            14,064        12,911

    Provision for loan losses                                                290              249               946           801
                                                                           -----            -----            ------        ------

                Net interest income after provision
                   for possible loan losses                                4,486            4,166            13,118        12,110
                                                                           -----            -----            ------        ------

NON-INTEREST INCOME
    Financial Management Services                                            500              453             1,500         1,358
    Service charges on deposit accounts                                      242              207               722           627
    Other                                                                    176              229               502           663
                                                                           -----            -----            ------        ------

                Total non-interest income                                    918              889             2,724         2,648
                                                                           -----            -----            ------        ------

NON-INTEREST EXPENSE
    Salaries and employee benefits                                         2,119            1,942             6,173         5,793
    Net occupancy and  equipment                                             748              714             2,221         1,936
    FDIC deposit insurance                                                    11                1                32             2
    Bank shares tax                                                           85               77               255           231
    Other                                                                    707              766             2,280         2,139
                                                                           -----            -----            ------        ------

                Total non-interest expense                                 3,670            3,500            10,961        10,101
                                                                           -----            -----            ------        ------

                Income before income taxes                                 1,734            1,555             4,881         4,657

INCOME TAXES                                                                 520              498             1,438         1,504

                NET INCOME                                                $1,214           $1,057           $ 3,443       $ 3,153
                                                                           =====            =====            ======        ======

PER SHARE DATA
    Net income                                                             $0.53            $0.46             $1.49         $1.38
                                                                            ====             ====              ====          ====
    Dividends declared                                                     $0.21            $0.19             $0.59         $0.53
                                                                            ====             ====              ====          ====

Weighted average shares outstanding                                    2,309,408        2,291,936         2,305,976     2,289,092
                                                                       =========        =========         =========     =========

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

                                       4
<PAGE>



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

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

    Net  income to date                                                                                  3,443            3,153
    Cash dividends declared                                                                             (1,348)          (1,216)
    Net unrealized gain (loss) on securities available-for-sale                                            148             (449)
    Treasury stock transactions                                                                             70               35
    Paid in capital from treasury stock transactions                                                         9               --
                                                                                                    ----------       ----------

Balance at September 30,                                                                               $35,497          $32,215
                                                                                                        ======           ======


































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)                                                                             1997               1996
                                                                                                 --------           --------
<S>                                                                                         <C>                  <C>    
OPERATING ACTIVITIES
    Net Income                                                                                $    3,443           $    3,153
    Adjustments to reconcile net income to net cash
           provided by operating activities:
        Depreciation                                                                                 750                  560
        Provision for loan losses                                                                    946                  801
        Amortization of investment security premiums
           and accretion of discounts                                                                 10                  132
        Amortization of deferred fees on loans                                                        14                   18
        Investment securities (gains) losses, net                                                     15                    3
        Decrease in other assets                                                                     501                   30
        Increase (decrease) in other liabilities                                                   1,992                1,070
                                                                                               ---------            ---------

           Net cash provided by operating activities                                               7,671                5,767
                                                                                               ---------            ---------

INVESTING ACTIVITIES
        (Increase) decrease in interest bearing deposits in banks                                  1,000               (1,000)
        Increase in loans                                                                        (47,934)              (8,905)
        Proceeds from sales of investment securities available-for-sale                           27,564                  100
        Proceeds from sales of investment securities held-to-maturity                                 --                   --
        Proceeds from maturities of investment securities available-for-sale                       9,585               12,825
        Proceeds from maturities of investment securities held-to-maturity                         3,075                9,216
        Purchases of investment securities available-for-sale                                    (16,624)             (27,176)
        Purchases of investment securities held-to-maturity                                           --               (1,999)
        Purchase of premises and equipment, net                                                     (508)              (1,538)
                                                                                              ----------            ---------

           Net cash used in investing activities                                                 (23,842)             (18,477)
                                                                                                --------             --------

FINANCING ACTIVITIES
        Increase in Federal Home Loan Bank advances                                                9,915                   --
        Increase (decrease) in deposits                                                            5,738               (5,894)
        Increase in securities sold under repurchase agreements                                      775                  536
       Cash dividends paid                                                                        (1,348)              (1,233)
       Treasury stock transactions                                                                    80                   35
                                                                                             -----------          -----------

           Net cash provided by (used in) financing activities                                    15,160               (6,556)
                                                                                                --------            ---------

              NET (DECREASE) INCREASE IN CASH AND CASH
     EQUIVALENTS                                                                                  (1,011)             (19,266)

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

Cash and cash equivalents at end of period                                                      $ 24,745             $ 25,378
                                                                                                 =======              =======






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

                                       6
<PAGE>


                 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

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

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

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


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

5.         In June,  1997, the Financial  Accounting  Standards Board (FASB) has
           issued SFAS 130, "Reporting Comprehensive Income," which is effective
           for years  beginning  after  December  15,  1997.  This new  standard
           requires entities  presenting a complete set of financial  statements
           to include  details of  comprehensive  income.  Comprehensive  income
           consists  of net income or loss for the  current  period and  income,
           expenses,  gains and losses that bypass the income  statement and are
           reported directly in a separate  component of equity.  Management has
           chosen not to adopt this standard early.  Adoption is not expected to
           have a material impact on the disclosure of the Corporation's income.

                                       7
<PAGE>


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


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

                         EARNINGS SUMMARY AND HIGHLIGHTS

         Net income for the three month period ended September 30, 1997 was $1.2
million,  an increase of $157  thousand or 14.9% from $1.1  million in the three
month period ended  September  30, 1996.  Net income for the  nine-month  period
ended September 30, 1997 was $3.4 million, an increase of 9.2% from $3.2 million
in the nine-month  period ended September 30, 1996.  Increases in net income are
primarily the result of increases in net interest  income and a reduction in the
effective  tax  rate,  partially  offset  by higher  loan  loss  provisions  and
increases  in  operating  expenses.  The lower  effective  tax rate results from
expected tax credits relating to a community  development  project.  For further
information see section titled "Income Taxes". Earnings per share for the three-
and nine-month  periods ended September 30, 1997 were $0.53 and $1.49 per share,
respectively.

         Cash dividends  declared  during the third quarter of 1997 increased to
$0.21 per share,  a 10.5%  increase  compared to the third quarter of 1996. On a
year-to-date  basis,  cash  dividends  increased  to $0.59 per  share,  an 11.3%
increase  compared  to the same  period of 1996.  Over the past ten  years,  the
Corporation's  practice  has been to pay a  dividend  of at  least  35.0% of net
income.

The "Consolidated  Average Balance Sheet" on page 9 and 10 may assist the reader
in the following discussion.

<TABLE>
<CAPTION>
                                                                        Three Months Ended              Nine Months Ended
                                                                           September 30,                   September 30,
                                                                       -------------------              -------------------
                                                                       1997           1996               1997          1996
                                                                       ----           ----               ----          ----
<S>                                                                 <C>            <C>               <C>            <C> 

           PERFORMANCE RATIOS
           Return on Average Assets                                    1.16%          1.09%              1.12%         1.09%
           Return on Average Equity                                   13.87%         13.30%             13.45%        13.43%
           Earnings Retained                                          60.38%         59.51%             60.85%        61.43%
           Dividend Payout Ratio                                      39.62%         40.49%             39.15%        38.57%
</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, 1997,
on a tax equivalent  basis,  was $4.9 million and $14.3 million,  an increase of
8.3% and 9.0% compared to the same periods in 1996, respectively.  Net yields on
interest earning assets, on a tax equivalent basis, were 4.95% and 4.98% for the
three- and  nine-month  periods  ended  September 30, 1997 compared to 4.96% and
4.86% for the same  periods  in 1996,  respectively.  Average  interest  earning
assets increased  approximately $30.3 million to $391.9 million during the third
quarter of 1997  compared to $361.6  million in the same  period last year.  The
increase in average  earnings assets is a direct result of strong loan growth in
our third party automobile loan and lease programs.  These programs have shifted
assets from lower yielding investments into higher yielding loans,  resulting in
increases in the earning asset yields.  Although the net yield on earning assets
increased  during the nine month period  ended  September  30, 1997  compared to
1996, the Corporation  anticipates continued pressure on the net interest margin
as competition  for new commercial and retail loan business  remains very strong
and incremental deposit growth becomes more expensive.

                                       8
<PAGE>

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS
                                      
                       CONSOLIDATED AVERAGE BALANCE SHEET
             AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES FOR THE
                        THREE MONTHS ENDED SEPTEMBER 30,

<TABLE>
<CAPTION>

(Dollars in thousands)                                             1997                                       1996
                                                    ---------------------------------         ---------------------------------
                                                        Daily                                   Daily
                                                       Average                                  Average
                                                       Balance     Interest      Rate           Balance     Interest       Rate
                                                       -------     --------      ----           -------     --------       ----
<S>                                                <C>           <C>            <C>         <C>           <C>          <C>
ASSETS
Federal funds sold                                   $   7,862     $    110      5.60%        $  15,065     $    202     5.36%
Interest bearing deposits in banks                          --           --        --             1,000           15     6.00%
Investment securities
    Taxable                                             73,371        1,193      6.50%           93,852        1,492     6.36%
    Tax-exempt (1)                                       2,011           39      7.69%            2,480           44     7.15%
                                                      --------      -------                    --------      -------
        Total investment securities                     75,382        1,232      6.54%           96,332        1,536     6.38%
                                                      --------      -------                    --------      -------
Loans (2)
    Taxable                                            299,708        6,753      9.01%          242,670        5,585     9.21%
    Tax-exempt (1)                                       8,985          208      9.27%            6,565          173    10.56%
                                                      --------      -------                    --------      -------
        Total loans                                    308,693        6,961      9.02%          249,235        5,758     9.24%
                                                      --------      -------                    --------      -------
Total interest earning assets                          391,937        8,303      8.47%          361,632        7,511     8.31%
Non-interest earning assets
    Allowance for possible loan losses                  (5,732)                                  (4,917)
    Cash and due from banks                             19,853                                   18,486
    Other assets                                        12,842                                   13,387
                                                      --------                                 --------
        Total assets                                 $ 418,900                                $ 388,588
                                                      ========                                 ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits                $ 173,691     $  1,362      3.14%        $ 171,950     $  1,325     3.08%
Certificates of deposits and other time                129,206        1,898      5.88%          113,040        1,615     5.71%
                                                      --------      -------                    --------      -------
   Total interest bearing deposits                     302,897        3,260      4.31%          284,990        2,940     4.13%
Securities sold under repurchase agreements              9,957           82      3.29%           10,706           89     3.33%
Other Borrowings                                         6,953          109      6.27%               --           --        --
                                                      --------      -------                    --------      -------
   Total interest bearing liabilities                  319,807        3,451      4.32%          295,696        3,029     4.10%
                                                                    -------                                  -------
Non-interest bearing liabilities
    Non-interest bearing demand deposits                57,538                                   55,433
    Other liabilities                                    6,543                                    6,164
                                                      --------                                 --------
        Total liabilities                              383,888                                  357,293
Stockholders' equity                                    35,012                                   31,295
                                                      --------                                 --------
        Total liabilities and stockholders' equity   $ 418,900                                $ 388,588
                                                      ========                                 ========
Net interest income                                                 $ 4,852                                  $ 4,482
                                                                     ======                                   ======
Net yield on interest earning assets                                             4.95%                                   4.96%
                                                                                 ====                                    ====





<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 TEFRA penalty for 1997 and 1996.
(2) Non-accruing loans are included in the average balance.
</FN>
</TABLE>
                                       9
<PAGE>
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

                       CONSOLIDATED AVERAGE BALANCE SHEET
             AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES FOR THE
                         NINE MONTHS ENDED SEPTEMBER 30,

<TABLE>
<CAPTION>

(Dollars in thousands)                                              1997                                    1996
----------------------                                -------------------------------        --------------------------------
                                                        Daily                                    Daily
                                                       Average                                  Average
                                                       Balance     Interest      Rate           Balance     Interest     Rate
                                                       -------     --------      ----           -------     --------     ----
<S>                                                <C>           <C>           <C>          <C>          <C>            <C>
ASSETS
Federal funds sold                                   $   4,271    $     196      6.12%        $  15,429    $     623     5.38%
Interest bearing deposits in banks                         264           12      6.06%              730           32     5.84%
Investment securities
    Taxable                                             80,652        3,937      6.51%           93,481        4,352     6.21%
    Tax-exempt (1)                                       2,294          127      7.40%            2,529          136     7.16%
                                                       -------      -------                     -------      -------
        Total investment securities                     82,946        4,064      6.53%           96,010        4,488     6.23%
Loans (2)
    Taxable                                            286,511       19,307      8.98%          240,696       16,549     9.17%
    Tax-exempt (1)                                       8,603          613      9.50%            6,653          529    10.60%
                                                       -------      -------                     -------      -------
        Total loans                                    295,114       19,920      9.00%          247,349       17,078     9.21%
                                                       -------      -------                     -------      -------
Total Interest Earning Assets                          382,595       24,192      8.43%          359,518       22,221     8.24%
Non-interest earning assets
    Allowance for possible loan losses                  (5,483)                                  (4,757)
    Cash and due from banks                             18,647                                   17,115
    Other assets                                        13,711                                   12,912
                                                       -------                                  -------
        Total assets                                  $409,508                                 $384,788
                                                       =======                                  =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits                 $173,286     $  4,048      3.11%         $167,905     $  3,894     3.09%
Certificates of deposits and other time                124,296        5,353      5.74%          115,924        4,961     5.71%
                                                       -------      -------                     -------      -------
   Total interest bearing deposits                     297,582        9,401      4.21%          283,829        8,855     4.16%
Securities sold under repurchase agreements              8,734          214      3.27%           10,092          248     3.28%
Other borrowings                                         6,202          284      6.11%               --           --        --
                                                       -------      -------                     -------      -------
   Total interest bearing liabilities                  312,518        9,899      4.22%          293,921        9,103     4.13%
                                                                    -------                                  -------
Non-interest bearing liabilities
    Non-interest bearing demand deposits                56,741                                   54,270
    Other liabilities                                    6,117                                    5,302
                                                      --------                                 --------
        Total liabilities                              375,376                                  353,493
Stockholders' equity                                    34,132                                   31,295
                                                      --------                                 --------
        Total liabilities and stockholders' equity   $ 409,508                                $ 384,788
                                                      ========                                 ========
Net interest income                                                 $14,293                                  $13,118
                                                                     ======                                   ======
Net yield on interest earning assets                                             4.98%                                   4.86%
                                                                                 ====                                    ====







<FN>
(1) The  indicated  income and annual rate are  presented  on a taxable  equivalent  basis using the  Federal  marginal  rate of 34%
    adjusted for the TEFRA penalty for 1997 and 1996.
(2) Non-accruing loans are included in the average balance.
</FN>
</TABLE>
                                       10
<PAGE>
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

               AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS)

<TABLE>
<CAPTION>

                                                                 Three-Months                        Nine-Months
         Yield On:                                           Ended September 30,                 Ended September 30,
         ---------                                           -------------------                 -------------------
                                                              1997          1996                  1997         1996
                                                              ----          ----                  ----         ----
<S>                                                         <C>           <C>                   <C>          <C>   

Interest Earning Assets                                       8.47%         8.31%                 8.43%        8.24%
Interest Bearing Liabilities                                  4.32%         4.10%                 4.22%        4.13%
                                                              ----          ----                  ----         ----
Net Interest Spread                                           4.15%         4.21%                 4.21%        4.11%
Contribution of Interest Free Funds                           0.80%         0.75%                 0.77%        0.75%
                                                              ----          ----                  ----         ----
Net Yield on Interest Earning Assets                          4.95%         4.96%                 4.98%        4.86%
                                                              ====          ====                  ====         ====
</TABLE>

                        INTEREST INCOME ON FEDERAL FUNDS

         Interest  income on federal  funds  sold for the three- and  nine-month
periods ended  September 30, 1997 decreased 45.3% and 68.5% to $110 thousand and
$196  thousand,  respectively,  when  compared to the same periods in 1996.  The
decrease in federal  funds sold  interest  income for the three- and  nine-month
periods  ended  September 30, 1997 is primarily the result of a $7.2 million and
$11.2  million  decrease in average  balances,  partially  offset by a 24 and 74
basis point (a basis point  equals one  hundredth  of one  percent)  increase in
rates compared to the same periods in 1996, respectively.

                    INTEREST INCOME ON INVESTMENT SECURITIES

         On a tax equivalent  basis,  interest  income on investment  securities
decreased  19.9% and 9.4% for the three- and nine-month  periods ended September
30, 1997 to $1.2 million and $4.1  million,  respectively,  when compared to the
same  periods in 1996.  The  decrease  for the three- and  nine-month  period is
primarily  due to a decrease  in average  balances  of $21.0  million  and $13.1
million  partially offset by 16 and 30 basis point increases in the yield earned
on  securities  when  compared  to the same  periods  last  year,  respectively.
Proceeds from net investment  securities  sales and maturities have been used to
fund continued loan growth over the nine month period.

                            INTEREST INCOME ON LOANS

         On a tax equivalent  basis,  interest  income on loans generated by the
Corporation's loan portfolio increased 20.9% and 16.6% to $7.0 million and $19.9
million for the three- and nine-month periods ended September 30, 1997, compared
to the same periods in 1996,  respectively.  The increase in interest  income on
loans  for  the  three-  and  nine-month   period  ended  September  30,1997  is
attributable  to a $59.5  million and $47.8  million  increase in average  loans
outstanding,  a majority of which are third party  automobile  loans and leases,
partially offset by a 22 and 21 basis point decrease in rates earned compared to
the same time periods in 1996, respectively.  The decrease in the loan portfolio
yield is a direct  result of increased  competition  for new and  existing  loan
relationships  and volume increases in lower yielding  automobile  related loans
and leases.  There has been a noticeable increase in pricing and fee competition
on large (over $500,000) loans (new and renewals) during the past 24 months.  It
is anticipated  that this pricing  pressure will continue to reduce overall loan
yields and net interest margins.

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

                      INTEREST EXPENSE ON DEPOSIT ACCOUNTS

         Interest expense on deposit  accounts  increased 10.9% and 6.2% for the
three- and nine-month  periods ended September 30, 1997 to $3.3 million and $9.4
million,  compared to the same periods in 1996. The increase for the three month
period  ended  September  30,  1997  is  the  result  of  increases  in  average
interest-bearing  deposits of $17.9  million,  and an 18 basis point increase in
the rates paid on  interest-bearing  deposits.  The  increase for the nine month
period  ended  September  30, 1997 is the result of a 5 basis point  increase in
rates   paid   on   interest-bearing   deposits   and   increases   in   average
interest-bearing deposits of $13.8 million.

         The Corporation's effective rate on interest-bearing deposits increased
from 4.13% in the third  quarter of 1996 to 4.31% in the third  quarter of 1997.
Competition for deposits from non-banking institutions such as credit unions and
mutual fund  companies  continues  to grow.  The slow growth  rates for interest
bearing and  non-interest  bearing  deposits are expected to continue for future
time  periods.  The Bank is going  forward  with its plans to expand its deposit
base by adding additional Branch sites, one of which is scheduled to open during
1998.

         INTEREST EXPENSE ON SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

         Interest  expense  on  securities  sold  under  repurchase   agreements
decreased  7.9% and 13.7% to $82 thousand  and $214  thousand for the three- and
nine-month periods ended September 30, 1997 compared to the same time periods in
1996. The decreases are primarily attributable to $749 thousand and $1.4 million
decreases in average  securities sold under  repurchase  agreements  outstanding
compared  to the  three-  and  nine-month  periods  ended  September  30,  1996,
respectively.

                      INTEREST EXPENSE ON OTHER BORROWINGS

         Interest  expense  on other  borrowings  were  $109  thousand  and $284
thousand  for the  three- and  nine-month  periods  ended  September  30,  1997,
respectively.  There were no other borrowings  outstanding during the nine month
period ended  September 30, 1996. The need for borrowings  continues as a result
of loan demand out pacing deposit growth. Other borrowings consists of overnight
Fed Funds purchased, FHLB (Federal Home Loan Bank) Flexline, FHLB Term Advances,
FHLB Open Repo and Repo Plus Advances.

                       PROVISION FOR POSSIBLE LOAN LOSSES

         During the three- and nine-month  periods ended September 30, 1997, the
Corporation  recorded a $290 thousand and a $946 thousand provision for possible
loan losses,  increases  of 16.5% and 18.1% over the same  periods in 1996.  The
increased provisions in 1997 are a direct result of increased loan activity. The
allowance  for possible  loan losses as a percentage of total loans was 1.89% as
of September 30, 1997 compared to 1.97% as of December 31, 1996. See the section
titled "Allowance For Possible Loan Losses" for additional discussion.

                               NON-INTEREST INCOME

         Total non-interest  income increased 3.3% and 2.9% to $918 thousand and
$2,724 thousand for the three- and nine-month  periods ended September 30, 1997,
compared to the same  periods in 1996.  The primary  component  of  non-interest

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

income is Financial Management Services revenue, which increased 10.4% and 10.5%
to $500  thousand and $1.5 million for the three- and  nine-month  periods ended
September  30, 1997  compared to the same  periods in 1996.  The market value of
Financial  Management Services' assets increased $62.0 million to $324.0 million
at September 30, 1997 from $262.0 million at September 30, 1996. The increase in
Financial  Management  Services=  assets and revenues is primarily the result of
market  appreciation  and new account  relationships  acquired  through stronger
marketing efforts.

         Service charges on deposit  accounts  increased 16.8% and 15.1% to $242
thousand and $722 thousand for the three- and nine-month  period ended September
30, 1997  compared to the same  periods in 1996.  The  increases  relate to more
effective  enforcement of service  charge  policies and an increase in fee based
products and services offered and sold.

         Other  non-interest  income  decreased 23.0% and 24.3% to $176 thousand
and $502 thousand for the three- and nine-month periods ended September 30, 1997
compared to the same periods in 1996. Third quarter and year-to-date  1996 other
non-interest  income  figures  include a $135 thousand net gain from the sale of
property owned by the Corporation's subsidiary, 323 East Gay Street Corp.

                              NON-INTEREST EXPENSE

         Total non-interest  expense for the three- and nine-month periods ended
September 30, 1997 was $3.7 million and $11.0 million, representing increases of
4.9% and 8.5%  compared to the same periods in 1996.  The various  components of
non-interest expense changes are discussed below.

         Salaries and employee  benefits  increased 9.1% and 6.6% for the three-
and nine-month periods ended September 30, 1997 to $2.1 million and $6.2 million
compared to the same  periods in 1996.  Increases  are  primarily  the result of
annual  employee  raises  and  increases  in  employee  benefits.  The hiring of
additional staff also contributed to the increases.

          Net  occupancy,  equipment,  and  data  processing  expense  was  $748
thousand and $2.2 million for the three- and nine-month  periods ended September
30,  1997,  representing  increases of 4.8% and 14.7% over the same periods last
year.  The  increase in the first nine  months of 1997 is  primarily a result of
increased  costs  associated  with  the  opening  of our  new  mortgage  center,
renovations of the Financial  Management  Services building and the depreciation
associated with new technology systems.

         The FDIC's Bank Insurance Fund ("BIF") insurance  assessment was $0 for
the three- and  nine-month  periods  ended  September  30, 1997,  compared to $1
thousand for each of the same periods last year.  Effective  January 1, 1997, in
accordance  with the Deposit  Insurance Act of 1996 an additional  assessment by
the   Financing   Corporation   ("FICO")   became   applicable  to  all  insured
institutions.  This assessment is not tied to the FDIC risk classification.  The
BIF FICO assessment is 1.296 basis points per $100 in deposits for 1997. For the
three- and nine-month  periods ended September 30, 1997, the Bank's  assessments
for the BIF FICO were $11 thousand and $32 thousand, respectively.

         Bank shares tax was $85 thousand  and $255  thousand for the three- and
nine-month  period ended  September  30, 1997,  increases of 10.5% over the same
periods last year. The Pennsylvania Bank Shares Tax is calculated on quarter-end
Bank stockholders' equity and paid annually.
  
                                     13
<PAGE>
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

         Other  non-interest  expense  decreased  7.7% to $707  thousand for the
three month period ended  September 30, 1997 and  increased  6.6% to 2.3 million
for the nine  month  period  ended  September  30,  1997.  The  increase  in the
year-to-date  expense  is  primarily  the result of a $100  thousand  expense to
comply  with a  conciliation  agreement  with the United  States  Department  of
Labor's  Office  of  Federal  Contract  Compliance  Program.  Additionally,  the
increase  is  attributed  to  additional   operating  expenses  associated  with
increased premises and staff.

         The Bank  intends to open one branch  during the Spring of 1998 and has
preliminary  plans for a second  early in 1999.  The costs  associated  with the
opening  of new  branch  sites will have a direct  impact on all  components  of
non-interest  expense.  It is  anticipated  that this  increase in costs will be
offset over time by an increase in net interest and fee income  generated by new
business development.

                                  INCOME TAXES

         Income  tax  expense  for  the  three-  and  nine-month  periods  ended
September 30, 1997 was $520 thousand and $1.4 million, respectively, compared to
$498  thousand and $1.5 million in the same periods last year.  This  represents
effective  tax rates of 29.9% and 29.5% for the  three- and  nine-month  periods
ended September 30, 1997,  compared with 32.0% and 32.3% for the same periods in
1996, respectively.  In 1997, effective tax rates were reduced to account for an
expected 1997 historic rehabilitation tax credit of approximately $200 thousand.
The tax credit is the result of an investment the Bank made in a local community
development  project.  This tax credit was not used in the first  quarter=s  tax
calculation due to uncertainties relating to the completion date of the project.
Although not guaranteed, the Company anticipates the credits will be realized in
1997 and should be part of the effective tax rate calculation. In the event that
the credits are deferred  until 1998,  the 1997 fourth  quarter tax rate will be
adjusted upward to  approximately  37.0% to yield an effective rate of 31.5% for
the year ended  December  31, 1997.  Additionally  there has been an increase in
tax-exempt  instruments  as a percentage  of total  assets.  Average  tax-exempt
assets as a percentage of total average assets were 2.79% and 2.39% at September
30, 1997 and 1996, respectively.

               LIQUIDITY MANAGEMENT AND INTEREST RATE SENSITIVITY

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

                                       14
<PAGE>
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

                                DEPOSIT ANALYSIS

<TABLE>
<CAPTION>

(Dollars in thousands)                           September 30, 1997            December 31, 1996              Average Balance
                                             -------------------------     ------------------------      ------------------------
                                               Average        Effective     Average       Effective        Dollar      Percentage
                                               Balance          Yield       Balance         Yield         Variance      Variance
                                               -------        ---------    --------       ---------       --------     ----------
<S>                                        <C>                <C>        <C>              <C>          <C>            <C>
NOW Accounts                                 $ 52,461           2.19%      $ 47,984         2.20%        $ 4,477          9.33%
Money Market                                   28,590           3.14         28,974         3.09            (384)        (1.33)
Statement Savings                              48,924           3.30         48,834         3.24              90          0.18
Other Savings                                   3,220           2.77          4,222         2.75          (1,002)       (23.73)
CD's Less than $100,000                       107,713           5.79        102,566         5.76           5,147          5.02
                                              -------                       -------                       ------
Total Core Deposits                           240,908           4.15        232,580         4.11           8,328          3.58
Demand Deposits                                56,741             --         55,018           --           1,723          3.13
                                              -------                       -------                        -----
Total Core and Demand Deposits                297,649             --        287,598           --          10,051          3.49
Tiered Savings                                 40,091           4.12         38,514         4.11           1,577          4.09
CD's Greater than $100,000                     16,582           5.43         12,677         5.36           3,905         30.80
                                              -------                       -------                       ------
Total Deposits                               $354,322             --       $338,789           --         $15,533          4.58%
                                              =======                       =======                       ======
</TABLE>


         The Bank, as a member of the Federal Home Loan Bank ("FHLB"), maintains
a $10 million line of credit secured by the Bank=s mortgage  related assets.  As
of September 30, 1997, the amount  outstanding on this line of credit was $0. In
addition to the line of credit,  the Bank has additional  borrowing  capacity at
the FHLB of  approximately  $95 million.  FHLB advances as of September 30, 1997
consisted of $7.4 million in term  advances,  which  represent a combination  of
maturities  ranging  from 6 months to 10 years  and a $2.5  million  short  term
advance with a maturity of 5 days.

                                       15
<PAGE>
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

         The  goal  of  interest  rate   sensitivity   management  is  to  avoid
fluctuating  net  interest  margins,  and to  enhance  consistent  growth of net
interest income through periods of changing  interest rates. Such sensitivity is
measured  as the  difference  in the  volume of assets  and  liabilities  in the
existing  portfolio  that are subject to repricing in a future time period.  The
Corporation's  net interest rate  sensitivity  gap within one year is a negative
$118  million or 28.2% of total  assets at September  30,  1997,  compared  with
negative $90 million and negative 23.3% at September 30, 1996, respectively. The
Corporation=s gap position is one factor used to evaluate interest rate risk and
the  stability  of  net  interest   margins.   Other  factors  include  computer
simulations of what might happen to net interest  income under various  interest
rate  forecasts  and  scenarios.  Management  monitors  interest  rate risk as a
regular part of bank  operations  with the intention of maintaining a stable net
interest margin.

                          INTEREST SENSITIVITY ANALYSIS
                            AS OF SEPTEMBER 30, 1997

<TABLE>
<CAPTION>

(Dollars in thousands)
                                                                        One              Over
                                                      Within          through            five            Non-rate
                                                    one year         five years          years          sensitive           Total
                                                    --------         ----------          -----          ---------           -----
<S>                                            <C>              <C>               <C>              <C>               <C>    
ASSETS
    Federal funds sold                           $       2,900    $           --    $          --    $           --    $       2,900
    Investment securities                               15,438            32,617           26,220                --           74,275
    Loans and leases                                   127,728           168,102           16,407            (5,900)         306,337
    Cash and due from banks                                 --                --               --            21,845           21,845
    Premises & equipment                                    --                --               --             6,511            6,511
    Other assets                                            --                --               --             6,558            6,558
                                                   -----------      ------------      -----------      ------------      -----------
       Total assets                              $     146,066    $      200,719    $      42,627    $       29,014    $     418,426
                                                  ============     =============     ============     =============     ============

LIABILITIES AND CAPITAL
    Non-interest bearing deposit                 $          --    $           --    $          --    $       58,755    $      58,755
    Interest bearing deposits                          248,769            48,865              615                --          298,249
    FHLB Term Advance                                    6,642               784            2,489                --            9,915
    Borrowed funds                                       8,718                --               --                --            8,718
    Other liabilities                                       --                --               --             7,292            7,292
    Capital                                                 --                --               --            35,497           35,497
                                                   -----------      ------------      -----------      ------------      -----------
       Total liabilities & capital               $     264,129    $       49,649    $       3,104    $      101,544    $     418,426
                                                  ============     =============     ============     =============     ============
    Net interest rate
      sensitivity gap                            $    (118,063)   $      151,070    $      39,523    $      (72,530)   $          --
                                                  ============     =============     ============     =============     ============
    Cumulative interest rate
      sensitivity gap                            $    (118,063)   $       33,007    $      72,530    $            --   $          --
                                                  ============     =============     ============     ==============    ============
    Cumulative interest rate
      sensitivity gap divided
      by total assets                            $      (28.2)%   $         7.9%    $       17.3%
                                                  =============    ============      ===========
</TABLE>


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

                       ALLOWANCE FOR POSSIBLE LOAN LOSSES

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

          ANALYSIS OF CHANGES IN THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
                       AND COMPARISON OF LOANS OUTSTANDING

<TABLE>
<CAPTION>

                                                                         Three Months                         Nine Months
                                                                             Ended                               Ended
                                                                         September 30,                        September 30,
                                                                    -----------------------             -----------------------
(Dollars in thousands)                                                1997           1996                1997             1996
                                                                      ----           ----                ----             ----
<S>                                                               <C>             <C>                 <C>            <C>   
Balance at beginning of period                                      $  5,653        $  4,831           $  5,218        $  4,506
                                                                     -------         -------            -------         -------
Provision charged to operating expense                                   290             249                946             801
                                                                     -------         -------            -------         -------
    Recoveries of loans previously charged-off                            12               3                 80              41
    Loans charged-off                                                    (55)            (58)              (344)           (323)
                                                                     -------         -------            -------         -------
Net loans charged-off                                                    (43)            (55)              (264)           (282)
                                                                     -------         -------            -------         -------
Balance at end of period                                            $  5,900        $  5,025           $  5,900        $  5,025
                                                                     =======         =======            =======         =======

Period-end loans outstanding                                        $312,237        $251,192           $312,237        $251,192

Average loans outstanding                                           $308,693        $249,235           $295,114        $247,349

Allowance for possible loan losses as a
    percentage of period-end loans outstanding                         1.89%           2.00%              1.89%           1.69%

Ratio of net charge-offs to average loans
    outstanding (annualized)                                           0.01%           0.09%              0.09%           0.15%
</TABLE>

                         NON-PERFORMING LOANS AND ASSETS

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

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

                                                    September 30,             December 31,
                                              -----------------------         ------------
(Dollars in thousands)                          1997             1996             1996
                                                ----             ----             ----                  
<S>                                         <C>              <C>               <C> 
Past due over 90 days and still accruing      $   619          $   705           $2,772
Non-accrual loans                               1,258              688              713
                                               ------           ------            -----
Total non-performing loans                      1,877            1,393            3,485
Other real estate owned                           851            1,368            1,274
                                               ------           ------            -----
Total non-performing assets                    $2,728          $ 2,761           $4,759
                                                =====           ======            =====                
Non-performing loans as a percentage
     of total loans                             0.60%            0.55%            1.32%
Allowance for possible loan losses as a
   percentage of non-performing loans         314.33%          360.73%           149.7%
Non-performing assets as a percentage of
   total loans and other real estate owned      0.87%            1.09%            1.79%
Allowance for possible loan losses as a
  percentage of non-performing assets         216.28%          182.00%           109.6%

</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 existing 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.

                                 LOAN IMPAIRMENT

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

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

<TABLE>
<CAPTION>

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

Principal amount of impaired loans                   $ 1,093                        $   422                          $ 443
Less valuation allowance                                (331)                          (406)                           419
                                                       -----                         ------                          ----
                                                     $   762                        $    16                         $   24
                                                      ======                         ======                          =====
</TABLE>

The activity in the valuation  allowance for the three- and  nine-month  periods
ended September 30, 1997 and 1996 is as follows:

                                       18

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

<TABLE>
<CAPTION>

                                                                       September 30,1997                 September 30, 1996
                                                                       -----------------                 ------------------
                                                                     Three           Nine               Three           Nine
                                                                     Months          Months             Months          Months
                                                                     Ended           Ended              Ended           Ended
                                                                     -----           -----              -----           -----
<S>     <C>    <C>    <C>    <C>    <C>    <C>
Valuation allowance at beginning of period                          $  318          $  419             $  303          $  380
Provision for loan impairment                                           50             125                 50             280
Direct charge-offs                                                     (37)           (213)               (20)           (369)
Recoveries                                                              --              --                 --              42
                                                                     -----           -----              -----           -----
Valuation allowance at end of period                                $  331          $  331             $  406          $  406
                                                                     =====           =====              =====           =====
</TABLE>
         Total cash collected on impaired loans during the three- and nine-month
periods  ended   September  30,  1997  was  $64  thousand  and  $276   thousand,
respectively,  of which $63  thousand  and $245  thousand  was  credited  to the
principal balance outstanding on such loans. During the three-month period ended
September  30, 1997,  $1 thousand was credited to interest.  Interest that would
have been  accrued on impaired  loans during the three- and  nine-month  periods
ended  September  30, 1997 was $13 thousand and $38  thousand.  Interest  income
recognized during the three- and nine-month periods ended September 30, 1997 was
$0 and $36 thousand, respectively.

         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 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 and $1 thousand,
respectively.

                  BUILDING IMPROVEMENTS AND TECHNOLOGY PROJECTS

         During the third quarter,  the Bank leased a shopping center pad in the
Frazer area for the purpose of  constructing a new branch.  Construction  on the
new branch is  expected  to begin  during  the fourth  quarter of this year with
completion estimated for the Spring of 1998.

         Management has  determined  that  additional  office space is needed to
house  banking  operations.  Several  solutions  are being  explored such as the
purchase or lease of needed space.

         Management is in the process of reviewing the adequacy of its mainframe
computer and software for possible replacement of some or all of its components.
Cost estimates for the project range from $.5 million to $2.5 million.  A vendor
will be  selected  during the  fourth  quarter  of this year and  conversion  is
expected to occur in 1998.

         Management is aware of and is taking the  appropriate  steps to address
the year 2000 date change issue.  Management is in the process of formulating an
action plan for the testing and implementation of system solutions to assure all
regulatory requirements are met.

                                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

                                       19
<PAGE>
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

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, 1997, both the  Corporation's  and the Bank's capital exceeded all
minimum  regulatory  requirements,  and were  considered  "well  capitalized" as
defined in the regulations  issued pursuant to the FDIC Improvement Act of 1991.
The Corporation's  Risk-Based Capital Ratios, shown below, have been computed in
accordance with regulatory accounting policies.

<TABLE>
<CAPTION>

                                                September 30,              December 31,                 "Well Capitalized"
RISK-BASED                                ------------------------        ------------                 ------------------
CAPITAL RATIOS                             1997               1996              1996                       Requirements
--------------                             ----               ----              ----                    ---------------
<S>                                     <C>                <C>                <C>    
Leverage Ratio                             8.48%              8.39%              8.58%                         5.00%
Tier I Capital Ratio                      11.30%             12.20%             12.05%                         6.00%
Total Risk-Based Capital Ratio            12.56%             13.46%             13.31%                        10.00%
</TABLE>

         The Bank is not under any agreement with the regulatory authorities nor
is it aware of any current  recommendations by the regulatory  authorities that,
if they were to be  implemented,  would  have a  material  affect on  liquidity,
capital resources or operations of the Corporation.  The internal capital growth
rate for the Corporation was 9.33% for the nine months ended September 30, 1997.

                                       20
<PAGE>

                           PART II - OTHER INFORMATION

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

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

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

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

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

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

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

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

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


                                       21

<PAGE>



                           PART II - OTHER INFORMATION

                                   (CONTINUED)

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

  
         (b)      Reports on Form 8-K
                  -------------------
                  None

                                       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, 1997


                                 J. Duncan Smith


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