SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                   FORM 10-QSB


[X]     QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
        ACT OF 1934

For the quarterly period ended September 30, 1998


[ ]     TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
        ACT OF 1934

For the transition period from ___________________ to ___________________


                         Commission file number 0-21285


                     MID-ATLANTIC COMMUNITY BANKGROUP, INC.
        (Exact Name of Small Business Issuer as Specified in its Charter)


              VIRGINIA                                  54-1809409
------------------------------------        ------------------------------------
   (State or Other Jurisdiction             (I.R.S. Employer Identification No.)
 of Incorporation or Organization) 


                     7171 George Washington Memorial Highway
                           Gloucester, Virginia 23061
                      -------------------------------------
                    (Address of Principal Executive Offices)


                                 (804) 693-0628
       ------------------------------------------------------------------
                (Issuer's Telephone Number, Including Area Code)

--------------------------------------------------------------------------------
              (Former Name, Former Address and Former Fiscal Year,
                         If Changed Since Last Report)



Check whether the issuer:  (1) filed all reports required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 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 ___.

State the number of shares outstanding of each of the issuer's classes of common
equity, as of September 30, 1998.


                      Common stock, $5 par value--2,198,900
                      -------------------------------------

<PAGE>


                                      INDEX
<TABLE>
<CAPTION>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.                                               Page No.
<S>                                                                                     <C>
Part I.   Financial Information

          Item 1.  Financial Statements
                   Consolidated Balance Sheets--
                     September 30, 1998 and December 31, 1997                            3

                   Consolidated Statements of Income--                                   4
                     Nine months ended September 30, 1998 and 1997
                     Three months ended September 30, 1998 and 1997

                   Consolidated Statements of Stockholders' Equity--                     5
                     Nine months ended September 30, 1998 and 1997

                   Consolidated Statements of Cash Flows--                               6
                     Nine months ended September 30, 1998 and 1997

                   Notes to Consolidated Financial Statements                            7

          Item 2.  Management's Discussion and Analysis of Financial
                     Condition and Results of Operations                                11

Part II.  Other Information:

          Item 1.  Legal Proceedings                                                    18
          Item 2.  Changes in Securities                                                18
          Item 3.  Defaults Upon Senior Securities                                      18
          Item 4.  Submission of Matters to a Vote of Security Holders                  18
          Item 5.  Other Information                                                    18
          Item 6.  Exhibits and Reports on Form 8-K                                     18
</TABLE>



                                       2
<PAGE>

                         PART I. FINANCIAL INFORMATION

Item 1.    FINANCIAL STATEMENTS

                     MID-ATLANTIC COMMUNITY BANKGROUP, INC.
                           CONSOLIDATED BALANCE SHEETS
                            (In Thousands of Dollars)
<TABLE>
<CAPTION>
                                                         September 30,          December 31,
                                                             1998                   1997   
                                                         -------------          ------------
<S>                                                          <C>                   <C>      
ASSETS:
    Cash and due from banks                                  $   5,760             $   6,960
    Securities available for sale (at market value)             30,755                24,104
    Securities held to maturity (market value
     $8,845 in 1998 and $7,381 in 1997)                          8,694                 7,290
    Federal funds sold                                          10,111                 8,414
    Loans, net                                                 118,156               104,240
    Premises and equipment                                       8,410                 5,928
    Other real estate owned                                        374                   208
    Other assets                                                 3,420                 2,161
                                                         -------------          ------------
          TOTAL ASSETS                                       $ 185,680             $ 159,305
                                                         =============          ============

LIABILITIES:
Deposits
    Demand                                                   $  25,864            $   18,791
    Interest-bearing demand                                     26,022                25,673
    Savings                                                     18,358                15,758
    Certificates of deposit, $100,000 or more                   19,168                13,528
    Other Time                                                  73,809                64,673
                                                         -------------         -------------
       TOTAL DEPOSITS                                          163,221               138,423
    Short-term debt                                                286                   292
    Long-term debt                                                  49                    31
    Other liabilities                                            1,033                 1,282
                                                         -------------         -------------
          TOTAL LIABILITIES                                    164,589               140,028
                                                         -------------         -------------

STOCKHOLDERS' EQUITY:
    Common stock, par value $5 per share,
     10,000,000 shares authorized, 2,198,900
     shares issued in 1998 and 1,093,833 in 1997                10,995                 5,477
    Surplus                                                      4,026                 9,294
    Undivided profits                                            5,857                 4,453
    Accumulated other comprehensive income, net                    213                    53
                                                         -------------         -------------
          TOTAL STOCKHOLDERS' EQUITY                            21,091                19,277
                                                         -------------         -------------
          TOTAL LIABILITIES AND
            STOCKHOLDERS' EQUITY                            $  185,680            $  159,305
                                                         =============         =============
</TABLE>

Notes to financial statements are an integral part of these statements.



                                       3
<PAGE>

                     MID-ATLANTIC COMMUNITY BANKGROUP, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                            (In Thousands of Dollars)
<TABLE>
<CAPTION>
                                                        Three Months Ended         Nine Months Ended
                                                           September 30,             September 30,
                                                          1998       1997           1998       1997
                                                          ----       ----           ----       ----
<S>                                                     <C>        <C>            <C>        <C>
INTEREST INCOME:
Loans and Fees                                          $  3089    $  2631        $  8861    $  7592
Federal Funds Sold                                          172        181            426        281
Investment Securities                                       607        506           1802       1527
                                                        -------    -------        -------    -------
   Total Interest Income                                   3868       3318          11089       9400

INTEREST EXPENSE:
Demand Deposits                                             219        202            679        587
Savings Deposits                                            133        115            366        329
Certificates of Deposit, $100,000 or more                   252        180            668        471
Other Time Deposits                                        1042        892           2961       2497
Short-term Debt                                               2          2              7          7
Long-term Debt                                                1          1              1          2
                                                       --------    -------        -------    -------
   Total Interest Expense                                  1649       1392           4682       3893
                                                       --------    -------        -------    -------
   Net Interest Income                                     2219       1926           6407       5507

PROVISION FOR
LOAN AND LEASE LOSSES                                        80        117            313        327
                                                       --------    -------        -------    -------
   Net Interest Income After
   Provision for Loan and Lease Losses                     2139       1809           6094       5180

OTHER INCOME:
Service Charges on Deposit Accounts                         182        152            567        443
Other Service Charges & Fees                                 90         56            233        156
Securities Gains (Losses)                                     0          0              1          2
                                                       --------   --------        -------    -------
   Total Other Income                                       272        208            801        601

OTHER EXPENSES:
Salaries & Employee Benefits                                883        731           2464       2094
Occupancy Expenses                                          181        133            441        356
Furniture & Equipment Expenses                              238        168            644        537
Other Operating Expenses                                    528        385           1284       1112
                                                       --------   --------        -------    -------
   Total Other Expenses                                    1830       1417           4833       4099
                                                       --------   --------        -------    -------
Income Before Income Taxes                                  581        600           2062       1682
Applicable Income Taxes                                     183        184            658        502
                                                       --------   --------        -------    -------
   Net Income                                          $    398   $    416        $  1404    $  1180
                                                       ========   ========        =======    =======

   NET INCOME PER SHARE                                     .17        .19            .61        .58
                                                       ========   ========        =======    =======
</TABLE>

Notes to financial statements are an integral part of these statements.


                                       4
<PAGE>

                     MID-ATLANTIC COMMUNITY BANKGROUP, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                            (In Thousands of Dollars)
<TABLE>
<CAPTION>
                                                                                 Accumulated
                                                                                    Other
                                                 Comprehensive    Retained      Comprehensive     Common    Capital
                                       Total         Income       Earnings          Income        Stock     Surplus

<S>                                  <C>            <C>           <C>             <C>            <C>        <C>    
Balances - January 1, 1997           $14,431                      $  3,170         ($162)        $ 4,722    $ 6,701
Comprehensive income:                                                                           
   Net income                          1,180        $ 1,180          1,180                      
   Other comprehensive income,                                                                  
   net of tax:                                                                                  
    Unrealized gain on                                                                          
    securities available for sale                                                               
    Unrealized holding gain                                                                     
    arising during the period            179            179                                     
    Less: reclassification                                                                      
    adjustment                             2              2                                     
                                    --------        -------                                     
   Other comprehensive income,                                                                  
   net of tax                            177            177                           177       
                                    --------        -------                       -------       
   Total comprehensive income          1,357        $ 1,357                         ($15)                          
                                    --------        =======        -------        =======        -------    -------
   Issuance of common stock            3,348                                                         755      2,593
Balances - September 30, 1997       $ 19,136                       $ 4,350                       $ 5,477    $ 9,294
                                    ========                       =======                       =======    =======
                                                                                                
Balances - January 1, 1998          $ 19,277                       $ 4,453        $    53        $ 5,477    $ 9,294
Comprehensive income:                                                                           
   Net income                          1,404        $ 1,404          1,404                      
   Other comprehensive income,                                                                  
   net of tax:                                                                                  
    Unrealized gain on securities                                                               
    for sale                                                                                    
    Unrealized holding gain arising                                                             
    during the period                    161            161                                     
    Less:  reclassification                                                                     
    adjustment                             1              1                                     
                                    --------        -------                                     
   Other comprehensive income,                                                                  
   net of tax                            160            160                           160       
                                    --------        -------                       -------       
   Total comprehensive income       $  1,564        $ 1,564                                     
                                    --------        =======                                     
   Issuance of common stock -                                                                   
   stock split effected in the form                                                             
   of 100% stock dividend                                                                          5,490    (5,490)
   Issuance of common stock -                                                                   
   Johnson Mortgage Co.                  250                                                          28        222
                                    --------                       -------        --------       -------    -------
Balances - September 30, 1998       $ 21,091                       $ 5,857        $   213        $10,995    $ 4,026
                                    ========                       =======        ========       =======    =======
                                                                                             
</TABLE>


Notes to financial statements are an integral part of these statements.



                                       5
<PAGE>

                     MID-ATLANTIC COMMUNITY BANKGROUP, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (In Thousands of Dollars)
<TABLE>
<CAPTION>
                                                                               Nine Months Ended
                                                                                  September 30,        
                                                                              1998           1997   
                                                                           ----------     ---------
<S>                                                                        <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net Income                                                              $    1,404     $   1,180
   Adjustments to reconcile net income to net cash
     provided by operating activities:
     Depreciation                                                                 364           227
     Provision for loan losses                                                    313           327
     Amortization of premiums on investments (net)                                 42            --
     (Profits) on sale of securities available for sale                           (1)           (2)
     Changes in operating assets and liabilities:
       (Increase) in other assets                                             (1,183)         (617)
       (Decrease) in other liabilities                                          (249)         (235)
                                                                           ----------     ---------

          Net Cash Provided by Operating Activities                        $      690     $     880
                                                                           ----------     ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Net (increase) in loans                                                  ($14,229)      ($9,650)
   Purchase of securities available for sale                                 (12,338)       (1,894)
   Proceeds from sales of securities available for sale                           200         1,593
   Purchase of investment securities                                          (5,301)       (1,853)
   Net (increase) in federal funds sold                                       (1,697)       (5,620)
   Purchase of premises and equipment                                         (2,846)         (850)
                                                                           ----------     ---------
   Proceeds from maturities of securities available for sale                    5,613            --
   Proceeds from maturities of securities held to maturity                      3,898            --

          Net Cash (Used in) Investing Activities                           ($26,700)     ($18,274)
                                                                           ==========     =========

CASH FLOWS FROM FINANCING ACTIVITIES:
   Increase in deposits - net                                              $   24,798     $  13,532
   Proceeds from issuance of stock - net                                           --         3,348
   Curtailment of other borrowed funds                                            (6)          (82)
   Advances from borrowed funds                                                    18            --
                                                                           ----------     ---------

          Net Cash Provided by Financing Activities                        $   24,810     $  16,798
                                                                           ----------     ---------

            Net (Decrease) In Cash and Due From Banks                         (1,200)         (596)

CASH AND DUE FROM BANKS - BEGINNING OF PERIOD                                   6,960         6,015
                                                                           ----------     ---------

CASH AND DUE FROM BANKS - END OF PERIOD                                    $    5,760     $   5,419
                                                                           ==========     =========
</TABLE>



Notes to financial statements are an integral part of these statements.


                                       6
<PAGE>

                     MID-ATLANTIC COMMUNITY BANKGROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    General

      The consolidated statements include the accounts of Mid-Atlantic Community
      BankGroup,  Inc. and its subsidiaries,  Peninsula Trust Bank, Incorporated
      and Johnson Mortgage Company,  LLC. All significant  intercompany balances
      and transactions have been eliminated.  In the opinion of management,  the
      accompanying  unaudited  consolidated  financial  statements  contain  all
      adjustments  (consisting of only normal recurring  accruals)  necessary to
      present  fairly the  financial  positions  as of  September  30,  1998 and
      December 31, 1997,  and the results of  operations  and cash flows for the
      nine months ended September 30, 1998 and 1997.

      The results of operations for the nine months ended September 30, 1998 and
      1997 are not necessarily  indicative of the results to be expected for the
      full year.

2.    Investment Securities

      Amortized cost and carrying  amount  (estimated  fair value) of securities
      available for sale are summarized as follows:
<TABLE>
<CAPTION>
                                                                       September 30, 1998                 
                                                                    Gross          Gross   Estimated
                                                  Amortized    Unrealized     Unrealized      Market
                                                       Cost         Gains         Losses       Value
                                                                (In Thousands of Dollars)
<S>                                              <C>            <C>             <C>         <C>
US Treasury Securities                                  622             6             --         628
US Government Agencies & Corporations                13,601            97             24      13,674
Obligations of States & Political Subdivisions        6,495           152             11       6,636
Mortgage-backed Securities                            8,827            92             --       8,919
Federal Reserve Bank Stock                              343            --             --         343
Other Equity Securities                                 545            10             --         555
                                                 ----------      --------       --------   ---------
                                                 $   30,408      $    357       $     35   $  30,755
                                                 ==========      ========       ========   =========
</TABLE>

      Amortized cost and carrying  amount  (estimated  fair value) of securities
      held to maturity are summarized as follows:
<TABLE>
<CAPTION>

                                                                       September 30, 1998                 
                                                                    Gross          Gross   Estimated
                                                  Amortized    Unrealized     Unrealized      Market
                                                       Cost         Gains         Losses       Value
                                                                (In Thousands of Dollars)
<S>                                              <C>             <C>             <C>       <C>
US Government Agencies & Corporations                 4,364            57             --       4,421
Obligations of States & Political Subdivisions        1,910            77             11       1,976
Mortgage-backed Securities                            2,420            28             --       2,448
                                                 ----------      --------       --------   ---------
                                                 $    8,694      $    162       $     11   $   8,845
                                                 ==========      ========       ========   =========
</TABLE>



                                       7
<PAGE>

                     MID-ATLANTIC COMMUNITY BANKGROUP, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


      Securities  available  for  sale  at  December  31,  1997  consist  of the
      following:
<TABLE>
<CAPTION>

                                                                    Gross          Gross   Estimated
                                                  Amortized    Unrealized     Unrealized      Market
                                                       Cost         Gains         Losses       Value
                                                                (In Thousands of Dollars)
<S>                                               <C>           <C>             <C>          <C>
US Treasury Securities                                  632            --              3         629
US Government Agencies & Corporations                10,301            84              4      10,381
Obligations of States & Political Subdivisions        4,946            90             80       4,956
Mortgage-backed Securities                            7,743            40             46       7,737
Federal Reserve Bank Stock                              343            --             --         343
Other Equity Securities                                  57            --             --          57
                                                  ---------     ---------       --------    --------
                                                  $  24,024     $     215       $    135    $ 24,104
                                                  =========     =========       ========    ========
</TABLE>

      Securities held to maturity at December 31, 1997 consist of the following:
<TABLE>
<CAPTION>

                                                                    Gross          Gross   Estimated
                                                  Amortized    Unrealized     Unrealized      Market
                                                       Cost         Gains         Losses       Value
                                                                (In Thousands of Dollars)
<S>                                               <C>           <C>             <C>         <C>   
US Government Agencies & Corporations                 3,035            23             --       3,058
Obligations of States & Political Subdivisions        1,682            52             --       1,734
Mortgage-backed Securities                            2,573            16             --       2,589
                                                  ---------     ---------       --------    --------
                                                  $   7,290     $      91       $     --    $  7,381
                                                  =========     =========       ========    ========
</TABLE>

                                                           Nine Months Ended
                                                           September 30, 1998   
                                                          1998           1997   
                                                       (In Thousands of Dollars)

Gross proceeds from sales of securities                       200         1,962
                                                       ==========     =========
Gross Gains on Sale of Securities                               1             2
Gross Losses on Sale of Securities                             --            --
                                                       ----------     ---------
  Net Securities Gains                                          1             2
                                                       ==========     =========



                                       8
<PAGE>

                     MID-ATLANTIC COMMUNITY BANKGROUP, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

3.    Loans

      The following is a summary of loans  outstanding at the end of the periods
      indicated:

                                                     September 30,  December 31,
                                                         1998            1997   
                                                     ------------   ------------
                                                      (In Thousands of Dollars)

Commercial Mortgage                                  $    24,331    $    23,135
Residential Mortgage                                      31,578         28,987
Home Equity                                               12,719         10,905
Construction                                               8,911          6,059
Commercial                                                14,920         12,477
Installment                                               27,067         23,926
All Other                                                    661            617
                                                     -----------    -----------
                                                         120,187        106,106
Less Unearned Income                                         537            542
                                                     -----------    -----------
                                                         119,650        105,564
Less Allowance for Loan and Lease Losses                   1,494          1,324
                                                     -----------    -----------
                                                     $   118,156    $   104,240
                                                     ===========    ===========


      The following  schedule  summarizes  the changes in the allowance for loan
      and lease losses:
<TABLE>
<CAPTION>
                                                   Nine Months       Nine Months
                                                     Ended              Ended
                                                 September 30,      September 30,    December 31,
                                                     1998                1997            1997    
                                                 -------------      -------------    ------------
                                                                (In Thousands of Dollars)
<S>                                                <C>                <C>             <C>      
Balance, Beginning                                    1,324              1,112           1,112
Provision Charged Against Income                        313                327             347
Recoveries                                               42                 46              55
Loans Charged Off                                     (185)              (146)           (190)
                                                 -------------      -------------    ------------
Balance, Ending                                    $  1,494           $  1,339        $  1,324
                                                 =============      =============    ============
</TABLE>

      Nonperforming assets consist of the following:

                                             September 30,    December 31,
                                                 1998             1997    
                                             -------------    ------------
                                                (In Thousands of Dollars)

Nonaccrual Loans                               $    583         $    302
Restructured Loans                                   --               --
                                             -------------    ------------
Nonperforming Loans                                 583              302
Foreclosed Properties                               374              208
                                             -------------    ------------
Nonperforming Assets                           $    957         $    510
                                             =============    ============


      Total  loans  past due 90 days or more and  still  accruing  were  $338 on
      September 30, 1998 and $77 on December 31, 1997.



                                       9
<PAGE>

                     MID-ATLANTIC COMMUNITY BANKGROUP, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

4.    Earnings Per Share

      The  following  shows  the  weighted  average  number  of  shares  used in
      computing  earnings per share and the effect on weighted average number of
      shares of  diluted  potential  common  stock  income  available  to common
      shareholders.
<TABLE>
<CAPTION>
                                                     September 30, 1998                  September 30, 1997
                                                     ------------------                  ------------------
                                                                  Per Share                          Per Share
                                                   Shares           Amount             Shares          Amount
                                                   ------           ------             ------          ------
<S>                                              <C>               <C>                <C>             <C>    
Basic Earnings Per Share                         2,195,238         $   .64            1,954,524       $   .60

Effect of dilutive securities:
  Nonemployee directors' stock options              45,166                               36,118
  Employee incentive stock options                  52,719                               32,327
                                                 ---------                            ---------

Diluted Earnings Per Share                       2,293,123         $   .61            2,022,969       $   .58
                                                 =========         =======            =========       =======
</TABLE>

5.    Capital Requirements

      A comparison  of the  Company's  capital as of September 30, 1998 with the
      minimum requirements is presented below:

                                                                      Minimum
                                                 Actual            Requirements
                                                 ------            ------------
Tier I Risk-based Capital                        15.77 %              4.00  %
Total Risk-based Capital                         16.92 %              8.00  %
Leverage Ratio                                   11.29 %              4.00  %




                                       10
<PAGE>


Item 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS

The following presents management's  discussion and analysis of the consolidated
financial  condition  and  results  of  operations  of  Mid-Atlantic   Community
BankGroup,  Inc. (the "Company") as of the dates and for the periods  indicated.
This discussion  should be read in conjunction  with the Company's  Consolidated
Financial  Statements  and the Notes thereto and other  financial data appearing
elsewhere in this report.  The  consolidated  financial  statements  include the
accounts of the Company and its subsidiaries, Peninsula Trust Bank, Incorporated
(the "Bank") and Johnson Mortgage Company, LLC ("JMC").

Results of Operations

The  Company  experienced  moderate  balance  sheet  expansion  during the third
quarter of 1998, with total assets  increasing  $4.3 million,  or 2.4% over June
30, 1998, and $26.4 million,  or 16.6% over December 31, 1997. Growth was funded
from new deposits,  which reflected $3.7 million and $24.8 million increases for
the three months and nine months ended September 30, 1998, respectively.  As the
interest rate environment began to soften,  with a mood toward falling rates and
predictions of the Federal  Reserve  targeting lower  short-term  rates over the
near term,  management became less aggressive on pricing consumer CDs during the
third  quarter of 1998.  The Company  considered  its  liquidity  position to be
adequate to allow renewing CDs to be redeemed rather than meet  competition from
non-financial sources.

Loan demand  somewhat  mirrored the moderate growth in deposits during the third
quarter, evidenced by net loans increasing $4.5 million (3.9%) and $13.4 million
(13.3%), respectively, over June 30, 1998 and December 31, 1997.

Asset  quality  continues  to be  strong.  Total  loans past due 30 days or more
equaled $4.0 million (3.31% of total outstandings). Included in the 30 day total
are  $338,000  in loans  that are 90 days or more  past due and  still  accruing
interest.  Non-accrual  loans  totaled  $583,000 at September  30,  1998,  which
represented 0.49% of total outstanding loans and 39.0% of the loan loss reserve.
Foreclosed  properties totaled $374,000 at September 30, 1998. The provision for
loan losses was $80,000 in the third  quarter of 1998 and  $313,000 in the first
nine months of 1998. Gross charge-offs for the quarter were $70,000, while total
recoveries were $21,000.

The Company  maintained its practice during the third quarter of selling Federal
funds,  having sold  continuously  on a daily basis in amounts  averaging  $12.4
million,  6.87% of average total assets.  These figures  compare to $8.8 million
and 5.13%, respectively, for the second quarter of 1998. The quarter-end balance
of $10.1 million  represented a $.5 million  increase from the second quarter of
1998 and a $1.7 million increase from December 31, 1997.

The level of the  investment  account  increased  $2.9 million  during the third
quarter of 1998,  ending the period at $39.4  million or 21.2% of total  assets.
The portfolio is comprised of 2% US Treasuries,  74% US Government Agencies, 22%
State,  County and Municipal  governments,  and 2% other equity  securities  and
Federal Reserve Bank Stock.

Financial  Accounting Standards Board (FASB) Statement 115 stipulated the way in
which banks must classify and account for their securities portfolio,  beginning
with the  first  quarter  of  1994.  Securities  are  classified  as  Investment
Securities  when  management  has both the intent and the ability at the time of
purchase  to hold the  securities  until  maturity.  Investment  Securities  are
carried  at  cost  adjusted  for  amortization  of  premiums  and  accretion  of
discounts.  Securities  that  are  held  for an  indefinite  period  of time are
classified  as  Securities  Available  for Sale and are marked to market at each
financial  reporting date, or at each month-end.  Securities  Available for Sale
include  securities  that may be sold in response to changes in interest  rates,
changes in the security's  prepayment  risk,  increases in loan demand,  general
liquidity needs and other similar factors.




                                       11
<PAGE>

The Company  elected,  as of year-end 1995, to classify the entire  portfolio as
"available  for  sale".  In an  effort  to manage  the  fluctuation  in the "net
unrealized gains/losses",  the Company elected to reclassify $5.1 million of the
portfolio as "held to  maturity"  as of July 31,  1997,  resulting in a one-time
capital  adjustment  for the gain.  These  reclassified  bonds have longer final
maturities  but,  due their  respective  call  structures,  exhibit  more  price
volatility  with subtle changes in overall  interest  rates.  Also, the need for
such bonds to be used for liquidity  purposes is considered  remote. The Company
purchased an  additional  $9.0 million and $6.1  million,  during the first nine
months of 1998, that were classified as available for sale and held to maturity,
respectively.

Management  currently  uses various tools for the  measurement of three critical
elements in portfolio management: interest rate risk, call and/or extension risk
and  maturity  distribution.  With better tools to monitor  duration,  long-term
earnings  performance  of the  portfolio  is  expected to  demonstrate  improved
stability over varying  interest rate cycles.  These parameters will also draw a
tighter   relationship  between  effective  modified  duration  (EMD)  and  bond
convexity.   Convexity   measures  the  percentage  amount  of  portfolio  price
appreciation  if  interest  rates fall 1% relative  to the  percentage  of price
depreciation  if interest rates rise 1%. The more that a bond declines  relative
to its  depreciation,  the higher the negative  convexity,  and consequently the
more potential call and extension risk that that bond is likely to have.

The Company  has  attempted  to narrow the bands of  extremes in the  investment
portfolio's  performance  acknowledging that some earnings opportunities must be
allowed to pass in the interest of minimizing  extreme  losses  during  volatile
interest environments. The current falling rate environment has caused increased
prepayment  speeds  in the  Company's  mortgage-backed  securities  as  well  as
accelerating  call  activity in the callable US Government  Agency  bonds.  As a
result in a shift in buying  philosophy  combined  with the calls and  increased
prepayments,  management has been able to somewhat restructure the portfolio and
accomplish its targeted  convexity level mentioned above. The negative convexity
as of September  30, 1998 was .73,  approaching  management's  target of .70 and
down significantly from the negative 1.40 level one year ago. The composition of
the  portfolio  has  shifted  from a mix of more  than 50% of the  portfolio  in
callable  agencies  during the first half of 1997 to its current level of 35% as
of  September  30,  1998.  Management  considers  this shift in keeping with its
desire to stabilize both interest earnings and market value performance.

The Company actively monitors principal cash flow analysis within the investment
portfolio relative to both current interest rate levels and the projected impact
of 1% increases  and decreases in overall  interest  rate levels.  This analysis
takes into  account the impact of interest  rates on the  probability  that call
features  will be  exercised  and that  prepayment  speeds  of  mortgage  backed
securities  will  either  speed up or slow down.  This  analysis  better  equips
management  to project  the  expected  maturity  of a bond  versus the  contract
maturity.  It also  allows  management  to more  effectively  plan  reinvestment
opportunities of principal cash flows.

Deposits  represent  99.2%  of  total  liabilities  of  the  Company,  including
non-interest bearing checking accounts, which represent 15.8% of total deposits.

Earnings

Net income for the third quarter of 1998 totaled $398,000,  compared to $502,000
for the second  quarter of 1998 and $416,000 for the third quarter of 1997.  The
third quarter reflected  substantial  expenses  associated with branch expansion
and activities relating to the proposed merger with United Community Bankshares,
Inc.  ("UCB").  Year to date income for the nine months ended September 30, 1998
was  $1,404,000,  or a 19% increase over the same period in 1997. On a per share
basis,  earnings  for the  quarter  were $ .17  compared  to $ .19 for the  same
quarter in 1997.  Exclusive of after tax merger-related  expenses  approximating
$70,000,  earnings  for the third  quarter of 1998 were $ .20 per share,  a 5.3%
increase over the same period in 1997.  Year to date per share income  equaled $
 .61 versus $ .58 for the same period in 



                                       12
<PAGE>

1997. Excluding year to date after tax merger-related expenses, earnings for the
nine months ended September 30, 1998 were $ .65 per share, a 12.1% increase over
the first nine months of 1997.  It is important to note that  earnings per share
were impacted not only by the increased  expenses  noted above,  but also by the
issuance of 299,000 additional shares in the Company's public offering of common
stock during the third quarter of 1997. This issuance  caused  weighted  average
shares  outstanding  to  reflect  a  6.6%  increase  for  quarter  over  quarter
comparison and a 13.4% increase for the respective nine-month periods.

Net interest  income for the third  quarter of 1998 totaled  $2,219,000 (a 15.2%
increase over the similar period in 1997).  The net interest margin  experienced
modest contraction as the average yield on interest earning assets declined by 7
basis points during a time when the average rate on interest bearing liabilities
increased by 6 basis points. As a result,  the 16.6% increase in interest income
for the third  quarter of 1998 compared to third quarter of 1997 was offset by a
18.5% increase in interest expense for the same period.

Non-interest  expense for the third quarter  totaled $1.8  million,  compared to
$1.6  million  in the  second  quarter  of 1998 and $1.4  million  for the third
quarter of 1997.  The  increase  in  non-interest  expense  resulted  from costs
incurred in  connection  with the  acquisition  and  conversion of the Company's
sixth banking office,  the  implementation  of an image processing system in the
Bank,  the computer  conversion of the Bank of Sussex and Surry, a subsidiary of
UCB, to the Company's Data  Processing  Center in association  with the proposed
merger with UCB and various other  merger-related  activities such as regulatory
application and proxy statement preparation.  The Company also hired and trained
staff in preparation of the October 22, 1998 opening of a seventh banking office
in the Kingsmill area of  Williamsburg.  Substantial  planning has also occurred
for a  fourth  quarter  computer  conversion  of the  Bank of  Franklin,  also a
subsidiary of UCB, as a part of the merger-related activities.

Capital and Liquidity

Equity capital at September 30, 1998 totaled $21.1 million,  representing  11.4%
of total assets. This level of capital will position the Company for growth well
into the future and could support asset growth to more than $265 million.

Liquidity is provided by both excess funds in the form of Federal funds sold and
access to the Federal  funds market  through the purchase of Federal  funds from
correspondent  banks.  The Bank  maintains  lines of credit to purchase  Federal
funds totaling $5.4 million.  Federal funds sold of $10.1 million  equaled 19.5%
of total demand  deposits at September  30, 1998.  This  percentage  compares to
27.0% at September  30, 1997.  While  Federal funds sold declined as a source of
liquidity  relative to demand deposits,  management  closely monitors  principal
cash flows within the investment  portfolio as discussed above.  Within the next
90 days,  the  investment  portfolio  will produce $1.8 million  through  called
securities  with an  additional  estimate  of $3 million in  principal  paydowns
and/or  maturities.  Total  projected cash flows from the  investment  portfolio
during the next six months will  approximate $10 million.  This is considered an
adequate level of liquidity to meet anticipated deposit withdrawals and expected
loan demand.

As mentioned  above,  future  purchases in the  investment  portfolio  will more
clearly   delineate  those  bonds  purchased  for  liquidity   purposes.   These
instruments  will be purchased  with greater  attention to minimizing  potential
price and market value volatility.

Future Plans

Completion of the third floor of the Newport News office,  located at the corner
of Thimble Shoals  Boulevard and J. Clyde Morris  Boulevard near the entrance to
the Oyster Point Industrial Park, is expected to begin during the fourth quarter
of  1998.  The  Company's   headquarters   will  be  



                                       13
<PAGE>

housed in this  location.  Construction  costs for the  completion  of the third
floor of the building are expected to approximate $50,000.

The Company plans to establish a branch office in Gloucester Point,  Virginia to
complement  its Main Office and Newport  News office.  In December  1997 and May
1998,  the Bank  purchased  for $252,000 two parcels of property,  including two
houses,  on Route 17 in Gloucester  Point. The Bank  anticipates  relocating the
houses prior to beginning construction of the banking office in 1999.

Year 2000 Issue

The Bank utilizes and is dependent upon data processing  systems and software to
conduct its business.  The data  processing  systems  include  various  software
packages  licensed to the Bank by outside  vendors  and a  mainframe  processing
system,  which are run on in-house computer  networks.  All of these systems are
vulnerable to the Year 2000 (Y2K) issue.  The  Company's  Board of Directors has
addressed the Y2K issue and  identified the  seriousness  of the challenge.  The
Directors  receive routine reports from management of the Company to enable them
to monitor the Company's  progress in its  preparation  for Y2K  readiness.  The
Board  has  passed  a  resolution  authorizing  management  to  commit  the full
financial  and human  resources  of the  Company  to  achieve  satisfactory  Y2K
readiness with a minimum of disruption to ordinary operations. The Company's Y2K
coordinator, who was hired in 1997, commits approximately 75% of her schedule to
the Y2K project. In addition,  a Y2K project team was formed and meets regularly
to review and ensure consistent progress in moving toward Y2K readiness.

In 1997, the Bank initiated a review and assessment of all hardware and software
to  confirm  that it will  function  properly  in the  year  2000.  The  Company
inventoried  more  than 70  applications  on which  it  relies  for its  routine
operations.  The degree of reliance was evaluated,  with each application  being
identified as either mission critical,  mission necessary or mission  desirable.
An  application  was deemed  mission  critical if it is vital to the  successful
continuation of a core business  activity.  The Federal  Financial  Institutions
Examination Council (FFIEC) has issued several inter-agency statements providing
guidance  and/or  requirements of all financial  institutions.  Included in this
guidance was an emphasis that mission  critical  applications  be identified and
related priorities be set by the end of the third quarter of 1998. Based on this
regulatory  guidance,  the Company's inventory process identified twelve mission
critical  applications,  all of which are associated with information technology
(IT). There were no non-IT systems identified as mission critical.  Such systems
might include elevators or other equipment with embedded  microcontrollers  that
may be century date  sensitive.  The Company  currently  has only two  elevators
throughout  its  branching  network.  In each of these  locations,  all business
activities  can be  conducted  in the  event  that the  elevators  are  rendered
inoperable.   Other  non-IT  systems  include  electricity  and  telephone  line
communications.  Both of  these  are  necessary  for  daily  operations  but are
considered to be beyond the Company's  control to facilitate Y2K readiness.  The
Company is  communicating  with the providers of these services to monitor their
progress  toward Y2K  readiness.  The Company  possesses and  routinely  tests a
gasoline-powered  generator  for  temporary  electrical  power  for its  primary
computer room  operations.  This form of backup power provides  limited business
continuation  features  to  the  Company  in the  area  of  processing  customer
information in its core data processing package. Therefore, the Company believes
that the integrity of critical customer information will be protected.

Based on the  assessment  described  above,  the Bank's  mainframe  hardware and
banking software are currently Y2K compliant.  However, testing is scheduled for
the  fourth  quarter  of 1998 and early 1999 to  confirm  this  compliance.  The
Company's core data processing  package is currently  installed in more than 200
banks  across the  country.  The vendor of this  software  has  completed  their
testing of the software and distributed the software  release to provide for Y2K
compliance.  However,  the vendor is also facilitating a process for independent
user group  testing in order for the user banks to test their live customer data
files in a  non-production  test  environment.  The Company was one of the users
selected  for the user group  testing.  This test 



                                       14
<PAGE>

will be  conducted  in  December  1998.  Total  estimated  cost  to the  Company
including the vendor's certification,  third party certification of the vendor's
testing,  user group testing and third party  certification of the latter's test
is less than $10,000. For certain other systems, the Company has determined that
it will have to replace or modify certain pieces of hardware  and/or software so
that the  systems  will  properly  function  in the year 2000.  The third  party
vendors  of these  systems  have  been  contacted  and have  indicated  that the
hardware   and/or   software  will  be  Y2K  compliant.   Modifications   and/or
replacements depend on the individual vendor and their respective products.

The Company  utilizes an extensive  network of personal  computers  (PCs) in its
daily operations. With the rapid changes in technology in the past 10 years, the
Company adopted a philosophy more than five years ago that acknowledged that the
average  useful life of PCs was in the  three-to  four-year  time range.  Having
embraced this  philosophy  previously,  replacement  of PCs is a part of routine
hardware planning. Currently,  approximately 30% of the Company's PCs are viewed
as nearing  the end of their  useful  life even  absent any Y2K  considerations.
Management has identified  approximately 20% of its PCs in addition to the above
stated 30% as requiring upgrades or replacement to make them Y2K capable.  At an
average cost of $2,200 per work  station,  this  renovation/replacement  process
could result in a capital outlay  approaching  $50,000.  This would result, on a
standard  depreciation  basis, in an increase of approximately  $17,000 per year
over and above ordinary hardware replacement expense.  Management considers that
its total requirement in hardware expenditure associated with Y2K readiness will
not  have  a  significant   negative  effect  on  the  Company's  total  earning
performance.

The Company has implemented a process by which all significant  loan and deposit
customers  will be  contacted  to  determine  the extent to which the Company is
vulnerable to those third parties'  failure to remedy their own Y2K issue.  Loan
officers have  received  training to include a Y2K  understanding  in the credit
decision making process. Existing borrowers have been evaluated to determine the
risk that Y2K poses to their  respective  cash flow  capacities or other related
factors that may impact their ability to repay their loans.  The Company is also
working with  borrowers who have current line of credit  commitments to properly
plan for the liquidity  requirements  of the Company to fund greater than normal
line of credit draw  requests.  In this same vein,  deposit  customers are being
evaluated to produce some basis for projecting  possible  interruption  to daily
deposit inflows. While the Company does not intend to abandon meeting the credit
needs of its  community,  it has  adopted a more  conservative  position  in its
lending  associated with overall liquidity planning as well as credit evaluation
of borrowing  requests.  Also in the interest of liquidity,  the Company will be
more  aggressive in its pricing of  certificates of deposit with maturities that
extend beyond the Year 2000.  This position  should  reduce the  possibility  of
deposit  runoff during the fourth  quarter of 1999 and first quarter of the year
2000.

The  Company  plans to  complete  the  majority of the Y2K project by the second
quarter of 1999.  Expenditures  are not expected to have a large material effect
on the Company's consolidated financial statements. The following tables present
the Company's overall progress of its mission critical applications.



                                       15
<PAGE>
 Year 2000 Plan - Planned Number of Mission Critical Applications In Each Phase
<TABLE>
<CAPTION>

                                 Year 2000 Plan
--------------------------------------------------------------------------------------------------------------
<S>                  <C>       <C>       <C>       <C>       <C>       <C>       <C>      <C>       <C>      
Phase                12/31/97  3/31/98   6/30/98   9/30/98   12/31/98  3/31/99   6/30/99  9/30/99   12/31/99
--------------------------------------------------------------------------------------------------------------
Awareness               -         -         -         -         -         -         -        -         -
--------------------------------------------------------------------------------------------------------------
Assessment              9         6         2         1         -         -         -        -         -
--------------------------------------------------------------------------------------------------------------
Renovation              3         6         7         8         5         -         -        -         -
--------------------------------------------------------------------------------------------------------------
Validation              -         -         3         3         7         9         3        -         -
--------------------------------------------------------------------------------------------------------------
Implementation          -         -         -         -         -         3         9        12        12
--------------------------------------------------------------------------------------------------------------
TOTAL                   12        12       12        12         12        12       12        12        12
--------------------------------------------------------------------------------------------------------------
</TABLE>

           Year 2000 Plan - Planned Percentage of Completion by Phase
<TABLE>
<CAPTION>
                                 Year 2000 Plan
--------------------------------------------------------------------------------------------------------------
<S>                  <C>       <C>       <C>       <C>       <C>       <C>       <C>      <C>       <C>      
Phase                12/31/97  3/31/98   6/30/98   9/30/98   12/31/98  3/31/99   6/30/99  9/30/99   12/31/99
--------------------------------------------------------------------------------------------------------------
Awareness               -         -         -         -         -         -         -        -         -
--------------------------------------------------------------------------------------------------------------
Assessment              75        50       17         8         -         -         -        -         -
--------------------------------------------------------------------------------------------------------------
Renovation              25        50       58        67         42        75        -        -         -
--------------------------------------------------------------------------------------------------------------
Validation              -         -        25        25         58        25       25        -         -
--------------------------------------------------------------------------------------------------------------
Implementation          -         -         -         -         -         -        75       100       100
--------------------------------------------------------------------------------------------------------------
TOTAL                  100       100       100       100       100       100       100      100       100
--------------------------------------------------------------------------------------------------------------
</TABLE>

The Company  has  established  a series of trigger  dates  associated  with core
application  products  that govern  primarily the customer loan and deposit data
bases. These applications address production of new and renewal loan and deposit
accounts as well as maintenance of ongoing customer  relationships.  The trigger
dates start  November 30, 1998 and  conclude on February  28, 1999.  Through the
various  testing  methods that management has selected to validate the readiness
of these applications,  management will determine on these trigger dates whether
to begin  negotiations  with alternate  vendors of the applications that are not
Y2K ready of to explore alternative solutions with existing vendors.

The  expected  costs of the project  and the date on which the Company  plans to
complete the Y2K modifications  are based on management's best estimates,  which
were derived  utilizing  numerous  assumptions  of future  events  including the
continued availability of certain resources,  third party modification plans and
other factors.  However,  there can be no guarantee that these estimates will be
achieved and actual results could differ  materially from those plans.  Specific
factors that might cause such material  differences include, but are not limited
to, the  availability  of personnel  trained in this area,  the ability of third
party vendors to correct their software and hardware, the ability of significant
customers to remedy their Y2K issues, and similar uncertainties. Management does
not anticipate that the total cost directly associated with the Y2K project will
exceed $100,000 (approximately 5% of projected 1999 net income).

New Accounting Pronouncements

In February 1998, the Financial Accounting Standards Board issued a Statement of
Financial Accounting Standards No. 132, "Employers Disclosure about Pensions and
Other Post Retirement  Benefits".  This Statement revises employers'  disclosure
about pension and other  postretirement  benefit  plans.  It does not change the
measurement  or  recognition of those plans.  This  Statement  standardizes  the
disclosure  requirements for pensions and other  postretirement  


                                      -16-
<PAGE>

benefits to the extent practicable,  requires additional  information on changes
in the benefit  obligations  and fair values of plan assets that will facilitate
financial  analysis,   and  eliminates  certain   disclosures.   Restatement  of
disclosures for earlier periods is required. This Statement is effective for the
Company's financial statements for the year ended December 31, 1998.

In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging Activities". This Statement requires companies to record derivatives
on the balance sheet as assets and liabilities, measured at fair value. Gains or
losses  resulting  from  changes  in the  values of those  derivatives  would be
accounted  for depending on the use of the  derivative  and whether it qualifies
for hedge  accounting.  This Statement is not expected to have a material impact
on the Company's  financial  statements.  This Statement is effective for fiscal
years  beginning  after June 15, 1999,  with earlier  adoption  encouraged.  The
Company will adopt this accounting standard as required by January 1, 2000.

In March 1998,  the  American  Institute of Certified  Public  Accountants  (the
"AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer  Software  Development or Obtained for Internal Use". This SOP provides
guidance on accounting for the costs of computer software  developed or obtained
for  internal  use.  This  SOP  requires   that  entities   capitalize   certain
internal-use  software  costs once  certain  criteria  are met.  This SOP is not
expected to have a material impact on the Company's financial statements.

In April 1998,  the AICPA issued SOP 98-5,  "Reporting  on the Costs of Start-Up
Activities",  which requires the costs of start-up  activities and  organization
costs to be expensed as incurred. This SOP is effective for the fiscal year 1999
financial statements.  This SOP is not expected to have a material impact on the
Company's financial statements.

Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting  Comprehensive Income". This Statement establishes
standards for reporting and display of  comprehensive  income and its components
(revenues,  expenses,  gains and losses) in a full of general purpose  financial
statements.  Financial  statements  for  prior  periods  have been  restated  as
required.

Forward-Looking Statements

Certain  information  contained in this discussion may include  "forward-looking
statements"  within the meaning of Section 27A of the Securities Act of 1933, as
amended,  and Section 21E of the  Securities  Exchange Act of 1934,  as amended.
These  forward-looking  statements  are generally  identified by phrases such as
"the Company expects," "the Company  believes" or words of similar import.  Such
forward-looking  statements  involve known and unknown risks including,  but not
limited to, changes in general economic and business  conditions,  interest rate
fluctuations,  competition  within and from  outside the banking  industry,  new
products and  services in the banking  industry,  risk  inherent in making loans
such as  repayment  risks  and  fluctuating  collateral  values,  problems  with
technology  utilized by the Company,  changing  trends in customer  profiles and
changes in laws and regulations applicable to the Company.  Although the Company
believes that its expectations  with respect to the  forward-looking  statements
are based upon  reliable  assumptions  within the bounds of its knowledge of its
business  and  operations,  there  can  be no  assurance  that  actual  results,
performance or achievements  of the Company will not differ  materially from any
future  results,  performance  or  achievements  expressed  or  implied  by such
forward-looking statements.


                                       17
<PAGE>

                           PART II. OTHER INFORMATION


Item 1.    Legal Proceedings - None

Item 2.    Changes in Securities  - None

Item 3.    Defaults Upon Senior Securities - None

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

Item 5.    Other Information - None

Item 6.    Exhibits and Reports on Form 8-K

           a)    Exhibits

                 27    Financial Data Schedule (filed electronically only)

           b)    Reports on Form 8-K - None




                                       18
<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.


                                       MID-ATLANTIC COMMUNITY BANKGROUP, INC.


Date:  November 13, 1998               BY         /s/ W. J. Farinholt           
                                         ---------------------------------------
                                         W. J. Farinholt, President & CEO



Date:  November 13, 1998               BY         /s/ Kenneth E. Smith          
                                         ---------------------------------------
                                         Kenneth E. Smith, Exec. Vice President
                                         & Chief Financial Officer


Date:  November 13, 1998               BY         /s/ Kathleen C. Healy         
                                         ---------------------------------------
                                         Kathleen C. Healy, Vice President &
                                         Chief  Accounting Officer




                                       19