SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C., 20549

                                    FORM 10-K


[X]  Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 (fee required) For the fiscal year ended December 31, 2001.
                                                          -----------------
                                       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 Number 0-11526

                           FIRST COLONIAL GROUP, INC.
       -----------------------------------------------------------------
                (Name of Registrant as Specified in its charter)

           Pennsylvania                                  23-2228154
-------------------------------------  -----------------------------------------
 (State or other jurisdiction of            (I.R.S. Employer Identification No.)
  incorporation or organization)

 76 South Main Street, Nazareth, Pennsylvania               18064
--------------------------------------------------------------------------------
    (Address of principal executive offices)             (Zip Code)


         Registrant's telephone number, including area code 610-746-7300
                                                            ------------

      Securities registered pursuant to Section 12 (b) of the Exchange Act:

                                      None

      Securities registered pursuant to Section 12 (g) of the Exchange Act:

                          Common Stock, $5.00 Par Value
                          -----------------------------
                                (Title of Class)

     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
during the preceeding 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
                              ---              ---

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]




<PAGE>

     The aggregate market value of voting stock held by non-affiliates of the
registrant is $39,751,697. (1)

     The number of shares of the Issuer's common stock, par value $5.00 per
share, outstanding as of March 26, 2002 was 2,100,062.



                      DOCUMENTS INCORPORATED BY REFERENCE:

     Certain portions of the Company's Proxy Statement to be filed in connection
with its 2002 Annual Meeting of Shareholders are incorporated by reference in
Part III of this report.

     Other documents incorporated by reference are listed in the Exhibit Index.









     (1) The aggregate dollar amount of the voting stock set forth equals the
number of shares of the registrant's Common Stock outstanding, reduced by the
amount of Common Stock held by executive officers, directors and shareholders
owning in excess of 10% of the registrant's Common Stock, multiplied by the last
sale price for the registrant's Common Stock on March 26, 2002. Includes an
aggregate of 231,449 shares, with an aggregate market value of $5,355,730, held
by the Trust Department of Nazareth National Bank & Trust Company in Trust for
persons other than executive officers, directors and 10% shareholders of the
registrant. The information provided shall in no way be construed as an
admission that any officer, director or 10% shareholder may be deemed an
affiliate of the registrant or that such person is the beneficial owner of the
shares reported as being held by him, and any such inference is hereby
disclaimed. The information provided herein is included solely for record
keeping purposes of the Securities and Exchange Commission.



<PAGE>

                                     PART I

Item 1.   Business
-------   --------

Forward Looking Information
---------------------------

     The information contained in this Annual Report contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including, without limitation, statements as to the
allowance and provision for possible loan losses, future interest rates and
their effect on the Company's financial condition or results of operations, the
classification of the Company's investment portfolio, statements as to
litigation and the amount of reserves, and other statements which are not
historical facts or as to the Company's, the Bank's or management's intentions,
plans, beliefs, expectations or opinions. Such forward looking statement are
subject to risks and uncertainties and may be affected by various factors which
may cause actual results to differ materially from those in the forward looking
statements including, without limitation, the effect of economic conditions and
related uncertainties, the effect of interest rates on the Company and the Bank,
Federal and state government regulation, competition, and the results of
litigation. These and other risks, uncertainties and other factors are discussed
elsewhere in this Annual Report on Form 10-K.

Investment Considerations
-------------------------

     In analyzing whether to make or to continue an investment in the Company,
investors should consider, among other factors, the following:

     Economic Conditions and Related Uncertainties. Commercial banking is
affected, directly and indirectly, by local, domestic, and international
economic and political conditions, and by governmental monetary and fiscal
policies. Conditions such as inflation, recession, unemployment, volatile
interest rates, tight money supply, real estate values, international conflicts
and other factors beyond the Company's control, may adversely affect the
potential profitability of the Company. Any future rises in interest rates,
while increasing the income yield on the Company's earning assets, may adversely
affect loan demand and the cost of funds and, consequently, the profitability of
the Company. Any future decreases in interest rates may adversely affect the
Company's profitability because such decreases may reduce the amounts which the
Company may earn on its assets. Economic downturns could result in the
delinquency of outstanding loans. Management does not expect any one particular
factor to affect the Company's results of operations. However, a downtrend in
several areas, including real estate, construction and consumer spending, could
have an adverse impact on the Company's ability to remain profitable.

     Effect of Interest Rates on the Bank and the Company. The operations of
financial institutions such as the Company are dependent to a large degree on
net interest income which is the difference between interest income from loans
and investments and interest expense on deposits and borrowings. An
institution's net interest income is significantly affected by market rates of
interest which in turn are affected by prevailing economic conditions, by the
fiscal and monetary policies of the federal government and by the policies of
various regulatory agencies. At December 31, 2001, total interest earning assets
maturing or repricing within one year was less than total interest bearing
liabilities maturing or repricing during the same time period by $2,000,000,
representing a negative cumulative one year gap

<PAGE>

of 99%. If interest rates rise, the Company could experience a decrease in net
interest income. The Company also has interest rate risk if interest rates
decline. This risk is the result of the investment in U. S. Agency securities
that have call features. If interest rates decline, $47,472,000 of these
securities could be called; thus reducing net interest income. Like all
financial institutions, the Company's balance sheet is affected by fluctuations
in interest rates. Volatility in interest rates can also result in
disintermediation, which is the flow of funds away from financial institutions
into direct investments, such as U. S. Government and corporate securities and
other investment vehicles, including mutual funds, which, because of the absence
of federal insurance premiums and reserve requirements, generally pay higher
rates of return than financial institutions. See "Item 7. Management's
Discussion of Financial Condition and Results of Operations", and "Item 7.A.
Quantitative and Qualitative Disclosure About Market Risk".

     Federal and State Government Regulations. The operations of the Company and
the Bank are heavily regulated and will be affected by present and future
legislation and by the policies established from time to time by various federal
and state regulatory authorities. In particular, the monetary policies of the
Federal Reserve Board have had a significant effect on the operating results of
banks in the past, and are expected to continue to do so in the future. Among
the instruments of monetary policy used by the Federal Reserve Board to
implement its objectives are changes in the discount rate charged on bank
borrowings and changes in the reserve requirements on bank deposits. It is not
possible to predict what changes, if any, will be made to the monetary policies
of the Federal Reserve Board or to existing federal and state legislation or the
effect that such changes may have on the future business and earnings prospects
of the Company.

     During the past several years, significant legislative attention has been
focused on the regulation and deregulation of the financial services industry.
Non-bank financial institutions, such as securities brokerage firms, insurance
companies and money market funds, have been permitted to engage in activities
which compete directly with traditional bank business.

     Accounting Standards. The operations of the Company and the Bank are
affected by accounting standards issued by the Financial Accounting Standards
Board ("FASB") which the Company is required to adopt. The adoption of such
standards can have the effect of reducing the Company's earnings and capital.
Information on current FASB standards that affect the Company can be found in
the Notes to Consolidated Financial Statements contained under the caption,
"Item 8. Financial Statements and Supplementary Data".

     Competition. The Company faces strong competition from many other banks,
savings institutions and other financial institutions which have branch offices
or otherwise operate in the Company's market area, as well as many other
companies now offering a range of financial services. Most of these competitors
have substantially greater financial resources than the Company including a
larger capital base which allows them to attract customers seeking larger loans
than the Bank is able to make. In addition, many of the Bank's competitors have
higher legal lending limits than does the Bank. Particularly intense competition
exists for sources of funds including savings and retail time deposits and for
loans, deposits and other services that the Bank offers. As a result of the
recent repeal of the Glass-Steagall Act which separated commercial and
investment banking industries, all banking organizations, including the Company,
are likely to face an increase in competition. See "Supervision and Regulation"
- "Recent Legislation".

<PAGE>

     Allowance for Loan Losses. The Company has established an allowance for
loan losses which management believes to be adequate to offset probable losses
on the Company's existing loans. However, there is no precise method of
predicting loan losses. There can be no assurance that any future declines in
real estate market conditions, general economic conditions or changes in
regulatory policies will not require the Company to increase its allowance for
loan losses through a charge to earnings resulting in reduced profitability.

     Dividends. While the Board of Directors presently intends to follow a
policy of paying cash dividends, the dividend policy will be reviewed
periodically in light of future earnings, regulatory restrictions and other
considerations. No assurance can be given, therefore, that cash dividends will
be paid in the future. See the information contained under the caption in "Item
5. Market for Registrant's Common Equity and Related Stockholder Matters".

     Market for Common Stock. While the Company's common stock is listed on the
Nasdaq Stock Market, there is no assurance that an active trading market for the
Company's common stock will exist at a particular time. See the information
contained under the caption in "Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters".

     "Anti-Takeover" and "Anti-Greenmail" Provisions and Management
Implications. The Articles of the Company presently contain certain provisions
which may be deemed to be "anti-takeover" and "anti-greenmail" in nature in that
such provisions may deter, discourage or make more difficult the assumption of
control of the Company by another corporation or person through a tender offer,
merger, proxy contest or similar transaction or series of transactions. The
overall effects of the "anti-takeover" and "anti-greenmail" provisions may be to
discourage, make more costly or more difficult, or prevent a future takeover
offer, prevent shareholders from receiving a premium for their securities in a
takeover offer, and enhance the possibility that a future bidder for control of
the Company will be required to act through arms-length negotiation with the
Company's Board of Directors. Copies of the Company's Articles of the
Incorporation are on file with the SEC and Pennsylvania Department of State.

     Stock Not an Insured Deposit. Investments in the shares of the Company's
common stock are not deposits insured against loss by the FDIC or any other
entity.

     Bespeaks Caution Doctrine. Investor should be aware that the U. S. Court of
Appeals for the Third Circuit in In Re: Donald J. Trump Casino Securities
Litigation Taj Mahal, (No. 92-5350 filed October 14, 1993) adopted a legal
doctrine entitled the "Bespeaks Caution Doctrine" which may prevent them from
recovering from the Company based upon material misrepresentations or omissions
contained in the Company's disclosure documents to the extent that such
documents contained sufficient cautionary statements to apprise investors of the
risks of an investment in the Company's securities. The foregoing investment
considerations may have the effect of bringing this document, as well as other
Company disclosure documents, within the purview of the "Bespeaks Caution
Doctrine".

<PAGE>

General
-------

     First Colonial Group, Inc. (the "Company) is a Pennsylvania business
corporation which is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "Holding Company Act"). The Company was
incorporated on December 30, 1982 for the purpose of acquiring Nazareth National
Bank and Trust Company (the "Bank") and thereby enabling the Bank to operate
within a bank holding company structure. The Company became an active bank
holding company on November 25, 1983 when it acquired the Bank. The Bank is a
wholly-owned subsidiary of the Company. In July, 1986, the Company established
another wholly-owned subsidiary, First C. G. Company, Inc. This subsidiary is a
Delaware business corporation formed for the purpose of investing in various
types of securities.

     The Company's principal activities consist of owning and supervising the
Bank, which engages in a full service commercial and consumer banking and trust
business. The Company, through the Bank, derives substantially all of its income
from the furnishing of banking and banking-related services. The Bank has its
principal banking office as well as three branch offices in Nazareth,
Pennsylvania. It also presently has two branch offices in Bethlehem,
Pennsylvania, three branch offices in Easton, Pennsylvania, one branch in
Brodheadsville, Pennsylvania, two branches in Stroudsburg, Pennsylvania, one
branch in East Stroudsburg, Pennsylvania, one branch in Mount Pocono,
Pennsylvania, one branch in Allentown, Pennsylvania, one branch in Trexlertown,
Pennsylvania, and one branch in Whitehall, Pennsylvania. The Bank has
twenty-seven automated teller machines (ATMs), one at each branch office (except
the Mount Pocono branch which has two and the Main Street Nazareth branch which
has none), four free-standing drive-up machines at the Northampton Crossings
Shopping Center, Easton, Pennsylvania and free-standing machines at its
operation center, The First Colonial Building in the Bethlehem Business Park,
Hanover Township, Pennsylvania, at St. Luke's Hospital, Fountain Hill,
Pennsylvania, at C. F. Martin & Company in Nazareth, Pennsylvania, at the Best
Western Hotel in Stroudsburg, Pennsylvania, and at the Redner's mini-market on
Airport Road in Allentown, Pennsylvania.

     The Company is a legal entity separate and distinct from the Bank. The
rights of the Company, and thus the rights of the Company's creditors and
shareholders, to participate in distributions of the assets or earnings of the
Bank, are necessarily subject to the prior claims of creditors of the Bank,
except to the extent that claims of the Company itself as a creditor may be
recognized. Such claims on the Bank by creditors other than the Company include
obligations relating to federal funds purchased and certain other borrowings, as
well as deposit liabilities.

     The Company directs the policies and coordinates the financial resources of
the Bank. The Company provides and performs various technical, advisory and
auditing services for the Bank, coordinates the Bank's general policies and
activities, and participates in the Bank's major business decisions.

     As of December 31, 2001 the Company, on a consolidated basis, had total
assets of $465,144,000, total deposits of $379,886,000, and total shareholders'
equity of $35,326,000.


<PAGE>

Nazareth National Bank and Trust Company
----------------------------------------

     History and Business
     --------------------

     The Bank was incorporated under the laws of the United States of America as
a national bank in 1897 under its present name. Since that time, the Bank has
operated as a banking institution doing business at several locations in
Northampton County, Monroe County and Lehigh County, Pennsylvania. The Bank is a
member of the Federal Reserve System.

     As of December 31, 2001, the Bank had total assets of $462,051,000, total
deposits of $380,867,000 and total shareholders' equity of $30,264,000. Its
deposits are insured by the Bank Insurance Fund ("BIF") maintained by the
Federal Deposit Insurance Corporation (the "FDIC") to the maximum extent
permitted by law.

     The Bank engages in a full service commercial and consumer banking and
trust business. The Bank, with its main office at 76 South Main Street,
Nazareth, Pennsylvania, also provides services to its customers through its
branch network of seventeen full service banks, which includes drive-in
facilities at most locations, ATMs at each branch office (except the Main Street
Nazareth branch) and bank-by-mail services. Nine of the Bank's full service
offices are located in Northampton County, Pennsylvania. Five offices are
located in Monroe County, Pennsylvania. Three offices are located in Lehigh
County, Pennsylvania. The Bank also has free standing ATMs located in its
Operations Center, the First Colonial Building in the Bethlehem Business Park,
Hanover Township, Pennsylvania, in the lobby of St. Luke's Hospital in the
Borough of Fountain Hill, Pennsylvania, at the C. F. Martin & Company, Nazareth,
Pennsylvania, in the Best Western Hotel in Stroudsburg, Pennsylvania, in the
Redner's mini-market in Allentown, Pennsylvania, and four free-standing drive-up
ATM's at Northampton Crossings Shopping Center, Lower Nazareth Township, Easton,
Pennsylvania.

     The Bank's services include accepting time, demand and savings deposits,
including NOW accounts (Flex Checking), regular savings accounts, money market
accounts, super money market accounts (an account that pays a higher rate of
interest for high balances), fixed rate certificates of deposit and club
accounts, including the Vacation Club, the College Club(R) and the Christmas
Club. The Bank offers Mastercard(R) and VISA(R), as well as a Constant Cash
account (a pre-approved line of credit activated by writing checks against a
checking account) and the First Colonial Club(R) and Quality Checking(R)
(deposit package programs which provide checking accounts with other services
including credit card protection, discount travel, shopping services and other
related financial services). Its services also include making secured and
unsecured commercial and consumer loans, financing commercial transactions
either directly or through regional industrial development corporations, making
construction and mortgage loans, and renting safe deposit facilities. Additional
services include making residential mortgage loans (both fixed rate and variable
rate), home equity lines of credit, loans to purchase manufactured homes,
revolving credit loans with overdraft checking protection, small business loans,
student loans, recreational vehicles and new and used car and truck loans.

     The Bank's business loans include seasonal credit and collateral loans and
term loans as well as accounts receivable and inventory financing. Most of the
Bank's commercial customers are small to medium size businesses operating in
Northampton, Lehigh and Monroe Counties, Pennsylvania, with concentrations in
the Nazareth, Allentown, Bethlehem, Brodheadsville, Easton, and Stroudsburg
areas of Pennsylvania.

<PAGE>


     Trust and Wealth Management services provided by the Bank include services
as executor and trustee under wills and deeds, as guardian, custodian and as
trustee and agent for pension, profit sharing and other employee benefit trusts
as well as various investment, pension and estate planning services. Trust
services also include service as transfer agent and registrar of stock and bond
issues and as escrow agent. In addition, the Bank provides discount brokerage
through an outside supplier of this service, and various tax services.

     The Bank has a relatively stable deposit base and no material amount of
deposits is obtained from a single depositor or group of depositors (including
Federal, state and local governments). The Bank has not experienced any
significant seasonal fluctuations in the amount of its deposits.

     Competition
     -----------

     All phases of the Bank's business are highly competitive. The Bank's market
area is the primary trade area of Northampton and Lehigh Counties (known as the
Lehigh Valley), and Monroe County, Pennsylvania with concentrations in the
Nazareth, Allentown, Bethlehem, Brodheadsville, Easton, and Stroudsburg areas.
In order to keep pace with its competition and the continuing growth of these
areas, the Bank may, in the future, consider establishing additional new
branches, although no assurance can be given that any new branches will be
opened or if opened, that they will be successful. The Bank competes with local
commercial banks as well as other commercial banks with branches in the Bank's
market area. The Bank considers its major competition to be Ambassador/Lafayette
Bank, headquartered in Easton, Pennsylvania, with branches in Nazareth,
Bethlehem and Allentown, Pennsylvania, Vista Bank, headquartered in
Phillipsburg, New Jersey with branches in Easton, Pennsylvania, and Bethlehem
Pennsylvania; Wachovia Bank, NA, headquartered in Charlotte, North Carolina,
with branch offices in Easton, Bethlehem, Stroudsburg and Allentown,
Pennsylvania; Fleet National Bank, headquartered in Providence, Rhode Island,
with branches in Bethlehem, Easton and Allentown, Pennsylvania; and PNC Bank
headquartered in Pittsburgh, Pennsylvania, with branches in Nazareth,
Brodheadsville, Stroudsburg, Easton and Allentown, Pennsylvania.

     The Bank, along with other commercial banks, competes with respect to its
lending activities, as well as in attracting demand deposits, with savings
banks, savings and loan associations, insurance companies, regulated small loan
companies, credit unions and the issuers of commercial paper and other
securities, such as shares in money market funds. The Bank also competes with
insurance companies, investment counseling firms, mutual funds and other
business firms and individuals in the corporate trust and investment management
services. Many of the Bank's competitors have financial resources larger than
the Bank's.

     As a result of the recent repeal of the Glass-Steagall Act which separated
the commercial and investment banking industries, all banking organizations are
likely to face an increase in competition. See "Supervision and Regulation" -
"Recent Regulation".

     Management believes that the Bank is generally competitive with all
competing financial institutions in its service areas with respect to interest
rates paid on time and savings deposits, service charges on deposit accounts and
interest rates charged on loans.

<PAGE>


First C. G. Company, Inc.
-------------------------

     In July 1986, the Company established a wholly-owned subsidiary, First C.
G. Company, Inc., a Delaware corporation, for the purpose of investing in
various types of securities. As of December 31, 2001, First C. G. Company, Inc.
had total assets of $4,498,000, of which $3,032,000 was invested in common
stocks and $1,235,000 in loans to the Bank's ESOP and most of the remaining
assets were in interest-bearing bank deposits. The total shareholders' equity at
December 31, 2001 was $4,411,000.

Supervision and Regulation
--------------------------

     Bank holding companies and banks are extensively regulated under both
federal and state law. The regulatory framework is intended primarily for the
protection of depositors, other customers and the federal deposit insurance
funds and not for the protection of shareholders. To the extent that the
following information describes statutory and regulatory provisions, it is
qualified in its entirety by reference to the particular statutory and
regulatory provisions. Any change in applicable laws or regulations may have a
material effect on the business and prospects of the Company and the Bank.

     The Company
     -----------

     The Company is registered as a "bank holding company" under the Bank
Holding Act of 1956, as amended (the "Holding Company Act"), and is, therefore,
subject to supervision and regulation by the Board of Governors of the Federal
Reserve Board (the "Federal Reserve Board"). The Company is also regulated by
the Pennsylvania Department of Banking.

     Under the Holding Company Act, the Company is required to secure the prior
approval of the Federal Reserve Board before it can merge or consolidate with
any other bank holding company or acquire all or substantially all of the assets
of any bank or acquire direct or indirect ownership or control of any voting
shares of any bank that is not already majority owned by it, if after such
acquisition, it would directly or indirectly own or control more than 5% of the
voting shares of such bank.

     The Company is generally prohibited under the Holding Company Act from
engaging in, or acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company engaged in non-banking activities unless
the Federal Reserve Board, by order or regulation, has found such activities to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. In making such determination, the Federal Reserve Board
considers whether the performance of these activities by a bank holding company
can reasonably be expected to produce benefits to the public which outweigh
possible adverse effects.

     Satisfactory financial condition, particularly with regard to capital
adequacy, and satisfactory Community Reinvestment Act ratings are generally
prerequisites to obtaining federal regulatory approval to make acquisitions. The
Bank currently is rated "satisfactory" under the Community Reinvestment Act.

     Under the Federal Deposit Insurance Corporation Improvement Act of 1991
(the "1991 Act"), a bank holding company is required to guarantee that any
"undercapitalized" (as such term is defined in the statute) insured depository
institution subsidiary will comply with the terms



<PAGE>

of any capital restoration plan filed by such subsidiary with its appropriate
federal banking agency to the lesser of (i) an amount equal to 5% of the
institution's total assets at the time the institution became undercapitalized,
or (ii) the amount which is necessary (or would have been necessary) to bring
the institution into compliance with all capital standards as of the time the
institution failed to comply with such capital restoration plan.

     The Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA")
contains a "cross-guarantee" provision that could result in any insured
depository institution owned by the Company being assessed for losses incurred
by the FDIC in connection with assistance provided to, or the failure of, any
other depository institution owned by the Company. Also, under Federal Reserve
Board policy, the Company is expected to act as a source of financial strength
to each of its banking subsidiaries and to commit resources to support each such
bank in circumstances where such bank might not be in a financial position to
support itself. Consistent with the "source of strength" policy for subsidiary
banks, the Federal Reserve Board has stated that, as a matter of prudent
banking, a bank holding company generally should not maintain a rate of cash
dividends unless its net income available to common shareholders has been
sufficient to fully fund the dividends and the prospective rate of earnings
retention appears to be consistent with the corporation's capital needs, asset
quality and overall financial condition.

     Under the Holding Company Act, the Company is required to file periodic
reports and other information concerning its operations with, and is subject to
examination by, the Federal Reserve Board. In addition, under the Banking Code
of 1965, the Pennsylvania Department of Banking has the authority to examine the
books, records and affairs of any Pennsylvania bank holding company or to
require any documentation deemed necessary to ensure compliance with the Banking
code.

     The Company is under the jurisdiction of the Securities and Exchange
Commission and various state securities commissions for matters relating to the
offering and sale of its securities, and is subject to the Securities and
Exchange Commission's rules and regulations relating to periodic reporting,
reporting to shareholders, proxy solicitation and insider trading.

     There are various legal restrictions on the extent to which the Company and
its non-bank subsidiary can borrow or otherwise obtain credit from its banking
subsidiary. In general, these restrictions require that any such extensions of
credit must be secured by designated amounts of specified collateral and are
limited, as to any one of the Company of such non-bank subsidiary, to ten
percent of the lending bank's capital stock and surplus, and as to the Company
and its non-bank subsidiary in the aggregate, to 20 percent of such lending
bank's capital stock and surplus. Further, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services.

<PAGE>


     The Bank
     --------

     The Bank, as a national bank, is subject to The National Bank Act. The Bank
is also subject to the supervision of, and is regularly examined by, the Office
of the Comptroller of the Currency of the United States (the "OCC") and is
required to furnish quarterly reports to the OCC. The approval of the OCC is
required for the establishment of additional branch offices by any national
bank, subject to applicable state law restrictions. Under current Pennsylvania
law, banking institutions located in Pennsylvania, such as the Bank, may
establish branches within any county in the Commonwealth, subject to the prior
regulatory approval.

     Under the Community Reinvestment Act, as amended ("CRA"), a bank has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low-
and moderate-income neighborhoods. CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with CRA. CRA
requires that the applicable regulatory agency to assess an institution's record
of meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications by such institution. The CRA
requires public disclosure of an institution's CRA rating and requires that the
applicable regulatory agency provide a written evaluation of an institution's
CRA performance utilizing a four-tiered descriptive rating system. An
institution's CRA rating is considered in determining whether to grant charters,
branches and other deposit facilities, relocations, mergers, consolidations and
acquisitions. Performance less than satisfactory may be the basis for denying an
application. In addition, under applicable regulations a bank having a less than
satisfactory rating is not entitled to participate on the bid list for FDIC
offerings. For its most recent examinations, the Bank received an "outstanding"
rating.

     As a national bank, the Bank is a member of the FDIC and a member of the
Federal Reserve System and, therefore, is subject to additional regulation by
these agencies. Some of the aspects of the lending and deposit business of the
Bank which are regulated by these agencies include personal lending, mortgage
lending and reserve requirements. The operations of the Bank are also subject to
numerous Federal, state and local laws and regulations which set forth specific
restrictions and procedural requirements with respect to interest rates on
loans, the extension of credit, credit practices, the disclosure of credit terms
and discrimination in credit transactions.

     The Bank is subject to certain limitations on the amount of cash dividends
it can pay. See "Note R - Regulatory Matters" in the Notes to Consolidated
Financial Statements which appears elsewhere herein.

     The OCC has authority under the Financial Institutions Supervisory Act to
prohibit national banks from engaging in any activity which, in the OCC's
opinion, constitutes an unsafe or unsound practice in conducting their
businesses. The Federal Reserve Board has similar authority with respect to the
Company and the Company's non-bank subsidiary.

     Substantially all of the deposits of the Bank are insured up to applicable
limits by the Bank Insurance Fund ("BIF") of the FDIC and are subject to deposit
insurance assessments to maintain the BIF. The insurance assessments are based
upon a matrix that takes into account a bank's capital level and supervisory
rating. Effective January 1, 1996, the FDIC reduced the



<PAGE>

insurance premiums it charged on bank deposits insured by the BIF to the
statutory minimum of $2,000 annually for "well-capitalized" banks.

     Capital Regulation
     ------------------

     The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial condition and results of
operation. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's and the Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.

     Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of Tier
1 capital of at least 4% and total capital, Tier 1 and Tier 2, of 8% of
risk-adjusted assets and of Tier 1 capital from 3% to 5% of average assets
(leverage ratio). The 3% leverage ratio is a minimum for the top-rated banking
organizations without any supervisory, financial or operational weaknesses or
deficiencies and other banking organizations are expected to maintain leveral
capital ratios 100 to 200 basis points above the minimum depending on their
financial condition. Tier 1 capital includes common shareholders' equity and
qualifying perpetual preferred stock together with related surpluses and
retained earnings. Tier 2 capital may be comprised of limited life preferred
stock, qualifying debt instruments, and the allowance for possible loan losses.
Management believes, as of December 31, 2001 that the Company and the Bank meet
all capital adequacy requirements to which they are subject.

     The following tables provide a comparison of the Company's and Bank's
capital amounts, risk-based capital ratios and leverage ratios for the periods
indicated.

<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS                                                                Required                  To Be Well Capitalized
                                                                             For Capital               Under Prompt Corrective
                                              Actual                       Adequacy Purposes               Action Provisions
                                      ------------------------        -------------------------       --------------------------
at December 31, 2001                   Amount          Ratio           Amount           Ratio          Amount           Ratio
--------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>              <C>             <C>               <C>           <C>
Total Capital
(To Risk-Weighted Assets)
     Company, (Consolidated)           $37,926          15.38%          $19,738           8.00%         $    --             --
     Bank                              $32,931          13.50%          $19,515           8.00%         $24,393          10.00%

Tier I Capital
(To Risk-Weighted Assets)
     Company, (Consolidated)           $35,662          14.46%          $ 9,869           4.00%         $    --             --
     Bank                              $30,667          12.58%          $ 9,757           4.00%         $14,636           6.00%

Tier I Capital
(To Average Assets, Leverage)
     Company (Consolidated)            $35,662           7.65%          $18,661           4.00%         $    --             --
     Bank                              $30,667           6.61%          $18,575           4.00%         $23,218           5.00%
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                               Required                  To Be Well Capitalized
                                                                             For Capital               Under Prompt Corrective
                                              Actual                       Adequacy Purposes               Action Provisions
                                      ------------------------        -------------------------       --------------------------
at December 31, 2000                   Amount          Ratio           Amount           Ratio          Amount           Ratio
--------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>              <C>             <C>               <C>
Total Capital
(To Risk-Weighted Assets)
     Company, (Consolidated)           $35,733          15.16%          $18,862           8.00%              --             --
     Bank                              $31,161          13.03%          $19,127           8.00%         $23,909          10.00%

Tier I Capital
(To Risk-Weighted Assets)
     Company, (Consolidated)           $33,313          14.13%          $ 9,431           4.00%              --             --
     Bank                              $28,750          12.02%          $ 9,564           4.00%         $14,345           6.00%

Tier I Capital
(To Average Assets, Leverage)
     Company (Consolidated)            $33,313           8.00%          $16,654           4.00%              --             --
     Bank                              $28,750           6.95%          $16,557           4.00%         $20,697           5.00%

--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

     Recent Legislation
     ------------------

     On November 12, 1999 the Gramm-Leach-Bliley Act (the "Act") became law,
repealing the 1933 Glass-Steagall Act's separation of the commercial and
investment banking industries. The Act expands the range of nonbanking
activities a bank holding company may engage in, while preserving existing
authority for bank holding companies to engage in activities that are closely
related to banking. The new legislation creates a new category of holding
company called a "Financial Holding Company", a subset of bank holding companies
that satisfy the following criteria: (1) all of the depository institution
subsidiaries must be well capitalized and well managed; and (2) the holding
company must have made an effective election to be a financial holding company
to engage in activities that would not have been permissible before the Act. In
order for the election to be effective, all of the depository institution
subsidiaries must have a CRA rating of "satisfactory" or better at its most
recent examination. The Company has not elected to be a financial holding
company. Financial holding companies may engage in any activity that (i) is
financial in nature or incidental to such financial activity or (ii) is
complementary to a financial activity and does not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally. The Act specifies certain activities that are financial in nature.
These activities include - acting as principal, agent or broker for insurance; -
underwriting, dealing in or making a market in securities; and - providing
financial and investment advice. The Federal Reserve Board and the Secretary of
the Treasury have authority to decide whether other activities are also
financial in nature or incidental to financial activity, taking into account
changes in technology, changes in the banking marketplace, competition for
banking services and so on.

     The financial activities authorized by the Act may also be engaged in by a
"financial subsidiary" of a national or state bank, except for insurance or
annuity underwriting, insurance company portfolio investments, real estate
investment and development, and merchant banking, which must be conducted in a
financial holding company. In order for the new financial activities to be
engaged in by a financial subsidiary of a national or state bank, the Act
requires each of the parent bank (and its sister-bank affiliates) to be well
capitalized and well managed; the aggregate consolidated assets of all of that
bank's financial subsidiaries may not exceed the lesser of 45% of its
consolidated total assets or $50 billion; the bank must have at least a
satisfactory CRA rating; and, if that bank is one of the 100 largest national
banks, it must meet certain financial rating or other comparable requirements.

     The Act establishes a system of financial regulation, under which the
federal banking agencies will regulate the banking activities of financial
holding companies and bank's financial subsidiaries, the Securities and Exchange
Commission will regulate their securities activities and state insurance
regulators will regulate their insurance activities. The Act also provides new
protections against the transfer and use by financial institutions of consumers'
nonpublic, personal information.

<PAGE>

     National Monetary Policy
     ------------------------

     In addition to being affected by general economic conditions, the earnings
and growth of the Bank and, therefore, the earnings and growth of the Company,
are affected by the policies of regulatory authorities, including the OCC, the
Federal Reserve Board and the FDIC. An important function of the Federal Reserve
Board is to regulate the money supply, credit conditions and interest rates.
Among the instruments used to implement these objectives are open market
operations in United States Government securities, setting the discount rate and
changes in reserve requirements against bank deposits. These instruments are
used in varying combinations to influence overall growth and distribution of
credit, bank loans, investments and deposits, and their use may also affect
interest rates charged on loans or paid on deposits.

     The monetary policies and regulations of the Federal Reserve Board have had
a significant effect on the operating results of commercial banks in the past
and are expected to continue to do so in the future. The effects of such
policies upon the future business, earnings and growth of the Company and the
Bank cannot be predicted.

     Fair Value of Financial Instruments
     -----------------------------------

     The Financial Accounting Standards Board ("FASB") issued statement of
financial accounting standards (SFAS) No. 107, "Disclosures About Fair Value of
Financial Instruments", which requires all entities to disclose the estimated
fair value of its assets and liabilities considered to be financial instruments.
Financial instruments consist primarily of securities, loans and deposits. The
Company has provided these disclosures as of December 31, 2001 and 2000 in Note
T of the Notes to Consolidated Financial Statements contained under the caption,
"Item 8. Financial Statements and Supplementary Data".



<PAGE>

     Accounting for Investment Securities
     ------------------------------------

     The Company classifies its debt and marketable securities into three
categories: trading, available-for-sale, and held-to-maturity as provided by the
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
(SFAS No. 115). Trading securities are measured at fair value with unrealized
holding gains and losses included in income. The Company had no trading
securities in 2001 and 2000. Available-for-sale securities are stated separately
on the financial statements and are discussed in the following section
"Securities Available-for-Sale". Held-to-maturity securities are carried at
amortized cost and identified as investment securities in the financial
statements. The classification of securities can be found in Note B of the Notes
to Consolidated Financial Statements contained under the caption, "Item 8.
Financial Statements and Supplementary Data".

     Employees
     ---------

     As of December 31, 2001 the Company had approximately 231 employees, of
whom 47 were part-time. The Company considers its relationship with its
employees to be good.

     Additional Information
     ----------------------

     The tables listed below, which are set forth on pages 17 through 22 herein,
contain unaudited information relevant to the business of the Company and the
Bank:

           Investment Securities
           Investment Securities Yield by Maturity
           Loan Portfolio by Type
           Loan Maturities and Interest Sensitivity
           Allocation of the Allowance for Possible Loan Losses
           Percentage of Total Loans in each Category to Total Loans
           Average Deposit Balances by Major Classification
           Maturities of Certificates of Deposit of $100,000 or more

<PAGE>

                              INVESTMENT SECURITIES
                              ---------------------


Summary of Available-for-Sale and Held-to-Maturity Securities at December 31,
     (Dollars in Thousands)

<TABLE>
<CAPTION>
Available-for-Sale Securities                         2001                          2000                          1999
                                             -----------------------       -----------------------       -----------------------
                                                           Carrying                      Carrying                       Carrying
                                            Amortized     Amount at        Amortized    Amount at        Amortized     Amount at
                                               Cost       Fair Value         Cost       Fair Value          Cost       Fair Value
                                             -----------------------       -----------------------       -----------------------
<S>                                          <C>            <C>            <C>            <C>            <C>            <C>
U. S. Treasury                               $  5,074       $  5,108       $  4,011       $  4,022       $  4,001       $  3,992
U. S. Government Agencies                      43,977         43,704         79,145         79,099         53,112         49,747
States and Political Subdivisions              31,450         31,127         28,210         28,253         29,147         27,879
Mortgage Backed Securities                     87,461         87,253         44,110         44,129         47,332         46,030
Corporate Bonds                                   456            422             --             --             --             --
Equity Securities                              13,937         13,688          8,496          8,526          5,312          4,708
                                             -----------------------       -----------------------       -----------------------

   Total Available-for-Sale Securities       $182,355       $181,302       $163,972       $164,029       $138,904       $132,356
                                             =======================       =======================       =======================

<CAPTION>
                                                     2001                             2000                             1999
                                        -----------------------------    -----------------------------    -------------------------
Held-to-Maturity Securities                Carrying                         Carrying                       Carrying
                                           Amount at      Approximate       Amount at     Approximate      Amount at    Approximate
                                        Amortized Cost    Fair Value      Amortized Cost  Fair Value     Amortized Cost  Fair Value
                                        -----------------------------    -----------------------------   -----------------------
<S>                                          <C>            <C>            <C>            <C>            <C>            <C>
U. S. Government Agencies                    $  8,622       $  8,819       $  7,937       $  7,903       $  6,894       $  6,588
States and Political Subdivisions               7,885          7,811          8,016          7,991          7,974          7,583
Mortgage Backed Securities                      6,497          6,530          4,019          4,012          5,019          4,952
                                             -----------------------       -----------------------       -----------------------

   Total Held-to-Maturity Securities         $ 23,004       $ 23,160       $ 19,972       $ 19,906       $ 19,887       $ 19,123
                                             =======================       =======================       =======================
</TABLE>


<PAGE>

                     INVESTMENT SECURITIES YIELD BY MATURITY

         The maturity distribution and weighted average yield of the investment
portfolio of the Company at December 31, 2001 are presented in the following
table. Weighted average yields on tax-exempt obligations have been computed on a
fully taxable equivalent basis assuming a tax rate of 34%. All average yields
were calculated on the book value of the related securities. Equity and other
securities having no stated maturity have been included in the "After 10 Years"
category.

<TABLE>
<CAPTION>
          Available-for-Sale and Held-to-Maturity Investment Securities Yield by Maturity, at December 31, 2001


AVAILABLE-FOR-SALE                                        After 1 But         After 5 But
AT FAIR VALUE                        Within 1 Year       Within 5 Years     Within 10 Years      After 10 Years        Total

(Dollars in Thousands)             Amount    Yield     Amount    Yield     Amount    Yield     Amount    Yield    Amount    Yield
                                 ------------------   -----------------   -----------------   -----------------   ----------------

<S>                              <C>          <C>     <C>          <C>     <C>        <C>     <C>        <C>      <C>        <C>
U. S. Treasury                   $  4,082     4.18 %  $  1,026     2.50 %  $     --      -- % $     --       -- % $  5,108    3.84 %
U. S. Government Agency                --       --      16,921     4.73      12,333    5.39     14,450     6.37     43,704    5.46
Mortgage-Backed Securities             --       --         139     5.96      10,307    5.64     76,807     6.24     87,253    6.17
State and Political
  Subdivisions                         --       --       1,304     6.81      12,662    6.93     17,161     7.15     31,127    7.04
Corporate                              --       --          --       --         422    6.16         --       --        422    6.16
Equity Securities                      --       --          --       --          --      --     13,688     4.89     13,688    4.89
                                 -----------------    -----------------    ----------------   -----------------   ----------------
  TOTAL AVAILABLE-FOR-SALE
    SECURITIES                   $  4,082     4.18 %  $ 19,390     4.76 %  $ 35,724    6.01 % $122,106     6.23 % $181,302    5.99 %
                                 =================    =================    ================   =================   ================

Average Of Available-for-Sale
  Securities in Years                0.48                 3.66                 7.69              18.77               14.43
                                 ========             ========             ========           ========            ========

<CAPTION>
HELD-TO-MATURITY                                          After 1 But         After 5 But
AT AMORTIZED COST                   Within 1 Year       Within 5 Years      Within 10 Years     After 10 Years           Total

(Dollars in Thousands)            Amount     Yield     Amount    Yield     Amount    Yield     Amount    Yield     Amount    Yield
                                 ------------------   -----------------   -----------------   -----------------   ----------------

<S>                              <C>          <C>     <C>          <C>     <C>         <C>    <C>          <C>    <C>         <C>
U. S. Government Agency          $  4,000     2.41 %  $    994     5.66 %  $  2,500    6.76 % $  1,128     8.08 % $  8,622    4.79 %
Mortgage-Backed Securities            122     6.57          25     6.50         457    6.62      5,893     6.25      6,497    6.28
State and Political
  Subdivisions                         --       --       1,264     6.65       1,830    7.18      4,791     8.38      7,885    7.82
                                 -----------------    -----------------    ----------------   -----------------   ----------------
  TOTAL HELD-TO-MATURITY
    SECURITIES                   $  4,122     2.53 %  $  2,283     6.22 %  $  4,787    6.91 % $ 11,812     7.29 % $ 23,004    6.25 %
                                 =================    =================    ================   =================   ================

Average Of Held-to-Maturity
  Securities in Years                0.15                 4.04                 7.68              20.57               12.59
                                 ========             ========             ========           ========            ========
</TABLE>


<PAGE>

                             LOAN PORTFOLIO BY TYPE

     The loan portfolio by type is summarized in the following table for the
years ended December 31, 2001, 2000, 1999, 1998 and 1997.

Loan Portfolio by Type
(Dollars in Thousands) For the Year Ended December 31,
<TABLE>
<CAPTION>

                                                      2001         2000         1999         1998          1997
----------------------------------------------------------------------------------------------------------------
<S>                                               <C>          <C>          <C>          <C>           <C>
Real Estate - Residential                         $112,871     $128,862     $112,870     $119,914      $138,539
Real Estate - Construction                           6,127        5,923        6,737       11,689        12,361
Real Estate - Commercial                            32,317       27,206       26,809       29,587        34,579
Consumer/Installment                                59,205       53,062       45,886       40,184        35,914
Commercial (non-Real Estate)
   and Agricultural                                 13,762       10,214        9,538       10,900         9,086
State and Political Subdivisions                     1,702        2,089        1,096        1,178           944
Other                                                   23           19           13           10            20
                                              ------------------------------------------------------------------
TOTAL GROSS LOANS                                  226,007      227,375      202,949      213,462       231,443

Unearned Income                                       (250)        (431)        (691)      (1,025)       (1,856)
                                              ------------------------------------------------------------------
Total Loans                                        225,757      226,944      202,258      212,437       229,587

Allowance for Possible
   Loan Losses                                      (2,264)      (2,411)      (2,437)      (2,691)       (2,664)
                                              ------------------------------------------------------------------
NET LOANS                                         $223,493     $224,533     $199,821     $209,746      $226,923

</TABLE>

     At December 31, 2001 there were no categories of loans exceeding 10% of
total loans which are not otherwise disclosed as the categories of loans listed
in the above table.

<PAGE>

LOANS MATURITIES AND INTEREST SENSITIVITY

     The maturity ranges of items in the loan portfolio (excluding residential
mortgages of 1 to 4 family residences and consumer loans) of the Bank and the
amount of loans with predetermined interest rates and floating interest rates
due after one year, as of December 31, 2001, are summarized in the table set
forth below. The determination of maturities included in the table are based
upon contract terms. Demand loans that do not have a defined repayment term are
reported as maturing within one year. In situations where a rollover is
appropriate, the Bank's policy in this regard is to evaluate the credit for
collectibility consistent with the normal loan evaluation process. This policy
is used primarily in evaluating ongoing customers' use of their lines of credit
with the Bank that are at floating interest rates. Management continues to
emphasize the granting of floating interest rate loans to better match the
interest sensitivity of deposits.

Loan Maturity and Interest Sensitivity

<TABLE>
<CAPTION>
                                                               Due in            Due in
As of December 31, 2001                     One Year           One to             Over
     (Dollars in Thousands)                 or Less          Five Years        Five Years          Total

-------------------------------------------------------------------------------------------------------------

<S>                                         <C>                 <C>             <C>               <C>
Real Estate - Construction                     $ 1,708             $ 747           $ 3,672           $ 6,127
Real Estate - Commercial                        12,340            12,405             7,572            32,317
Commercial (Non-Real Estate)
   and Agricultural                              5,930             6,335             1,497            13,762
                                          -------------     -------------     -------------     -------------

   TOTAL                                      $ 19,978           $19,487           $12,741          $ 52,206
                                          =============     =============     =============     =============

Loan Maturity After 1 Year
With:

   Predetermined Interest Rate                                   $ 8,720           $10,308
   Floating Interest Rate                                         10,767             2,433
                                                            -------------     -------------

      TOTAL                                                      $19,487           $12,741
                                                            =============     =============
</TABLE>


<PAGE>

     The following table details the Allocation of the Allowance for Possible
Loan Losses by the various loan categories. The allocation is not necessarily
indicative of the categories in which future loan losses will occur, and the
entire allowance is available to absorb losses in any category of loans.


               ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES

<TABLE>
<CAPTION>
                                                                      As of December 31,
                                               2001            2000           1999            1998           1997
                                       ---------------------------------------------------------------------------
                                                                   (Dollars in Thousands)
<S>                                         <C>              <C>            <C>             <C>            <C>
Loan Categories
     Commercial                               $ 567           $ 779          $ 901          $1,350         $1,183
     Real Estate - Construction                   -               -              -               4              6
     Real Estate - Residential                  312             281            212             128            191
     Consumer/Installment                     1,182             964            764             738            785
     Unallocated                                203             387            560             471            499
                                       -------------    ------------   ------------    ------------   ------------

         TOTAL                              $ 2,264          $2,411         $2,437          $2,691         $2,664
                                       =============    ============   ============    ============   ============
</TABLE>

                      PERCENTAGE OF TOTAL LOANS IN EACH CATEGORY TO TOTAL LOANS

<TABLE>
<CAPTION>
                                                                      As of December 31,
                                               2001            2000           1999            1998           1997
                                       ---------------------------------------------------------------------------
<S>                                         <C>             <C>            <C>             <C>            <C>
Loan Categories
     Commercial                              21.15%          17.38%         18.46%          19.52%         19.28%
     Real Estate - Construction               2.71%           2.61%          3.32%           5.48%          5.34%
     Real Estate - Residential               49.94%          56.67%         55.61%          56.18%         59.86%
     Consumer/Installment                    26.20%          23.34%         22.61%          18.82%         15.52%
                                       -------------    ------------   ------------    ------------   ------------

         TOTAL                              100.00%         100.00%        100.00%         100.00%        100.00%
                                       =============    ============   ============    ============   ============
</TABLE>


<PAGE>

     The average balances of deposits for each of the years ended December 31,
2001, 2000 and 1999 are presented in the following table.


            AVERAGE DEPOSIT BALANCES BY MAJOR CLASSIFICATION


<TABLE>
<CAPTION>
                                                        For the Year Ended December 31,
                                           2001                         2000                         1999
                               ---------------------------------------------------------------------------------------
                                 Average                      Average                      Average
(Dollars in Thousands)           Balance        Rate          Balance        Rate          Balance        Rate
                               ---------------------------------------------------------------------------------------
<S>                                 <C>          <C>             <C>          <C>            <C>           <C>
Demand Deposits
   Non-Interest Bearing             $48,959           - %        $43,893         --- %       $ 41,337         --- %
   Interest Bearing                  55,087        0.89           53,151        1.01           52,395        1.18
Money Market Deposits                20,041        3.09           13,461        2.79           13,827        2.76

Savings & Club Accounts              65,079        2.09           62,834        2.22           63,199        2.06
Certificates of Deposits
   under $100,000                   162,303        5.36          157,164        5.60          139,076        5.26
Certificates of Deposits
   of $100,000 or more                7,334        4.86            5,886        5.18            5,040        4.01
                               -------------                -------------                -------------

   Total Deposits                  $358,803                     $336,389                    $ 314,874
                               =============                =============                =============
</TABLE>


                   MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE

<TABLE>
<CAPTION>
                                                                    At December 31,
                                                             2001                     2000
                                                       -----------------        -----------------
(Dollars in Thousands)
<S>                                                             <C>                      <C>
Three Months or Less                                            $ 7,493                  $ 3,564
Over Three, Through Six Months                                    2,015                    2,656
Over Six, Through Twelve Months                                   1,352                    1,577
Over Twelve Months                                                  732                      429
                                                       -----------------        -----------------

    TOTAL                                                      $ 11,592                  $ 8,226
                                                       =================        =================
</TABLE>

     There were no brokered deposits at December 31, 2001 and 2000.

<PAGE>

Item 2.  Description of Property
-------  -----------------------

     The principal banking office of the Bank and the Trust and Wealth
Management offices of the Bank and the Company are located at 76 South Main
Street in the Borough of Nazareth, Northampton County, Pennsylvania, which
building is owned by the Bank. In addition, the Bank owns additional properties
located at 29 South Broad Street, Nazareth, Pennsylvania (Mortgage and
Installment Loan Center); 553 Nazareth Drive, Nazareth, Pennsylvania (Branch
Office); 33 S. Broad Street, Nazareth (Branch Office), 47 Belvidere Street,
Nazareth, Pennsylvania (garage and parking lot), 2000 Sullivan Trail, Easton,
Pennsylvania (Branch Office), 3864 Adler Place, Bethlehem Business Park,
Bethlehem, Pennsylvania (First Colonial Building, Executive and Commercial
Lending and Operations offices), Rt. 209 Brodheadsville, Pennsylvania (Branch
Office), 3856 Easton-Nazareth Highway (Route 248), Lower Nazareth Township,
Easton, Pennsylvania (free-standing, drive-up ATM location), and 4261
Freemansburg Avenue, Bethlehem Township, Easton, Pennsylvania (future branch
location).

     The Bank also leases facilities for its branch office located at 44 East
Broad Street, Bethlehem, Pennsylvania; its branch office located at 4510 Bath
Pike in Hanover Township (Bethlehem), Pennsylvania; its branch office located at
101 South Third Street, Easton, Pennsylvania; its branch office located at 1125
N. Ninth Street, Stroudsburg, Pennsylvania; its branch office located at 713
Main Street, Stroudsburg, Pennsylvania; its branch office located in the Hall
Square Retirement Center, 175 W. North Street, Nazareth, Pennsylvania; its
branch office located within Redner's Supermarket, Airport Road, Allentown,
Pennsylvania; and its branch office located within Redner's Supermarket,
Northampton Crossings Shopping Center, Lower Nazareth Township, Pennsylvania;
its branch office located within Wal-Mart's at 355 Lincoln Avenue, East
Stroudsburg, Pennsylvania; its branch office located within Wal-Mart's at 500
Route 940, Mt. Pocono, Pennsylvania; its branch office located within the Giant
Supermarket, 2540 McArthur Road, Whitehall, Pennsylvania; and its branch office
located within the Giant Supermarket, 6900 Hamilton Boulevard, Trexlertown,
Pennsylvania..

Item 3.  Legal Proceedings
-------  -----------------

     From time-to-time, the Company and the Bank are parties to routine
litigation incidental to their business.

     Neither the Company, the Bank nor any of their properties is subject to any
material legal proceedings, nor are any such proceedings known to be
contemplated by any governmental authorities.

<PAGE>


Item 4.  Submission of Matters to a Vote of Security Holders
-------  ---------------------------------------------------

     No matter was submitted to a vote of shareholders during the fourth quarter
of the fiscal year covered by this report.

Item 4.1:  Executive Officers of the Registrant
---------  ------------------------------------

     The following table sets forth certain information, as of March 30, 2002,
concerning the executive officers of the Company and certain executive officers
of the Bank who are not also Directors.

<TABLE>
<CAPTION>
                                               Positions                                Positions
Name/Age                                    with the Company                          with the Bank
---------------------------------  -----------------------------------    --------------------------------------

<S>                                <C>                                    <C>
Reid L. Heeren                     Treasurer since January, 1987;         Executive Vice President and
60  (a)                            Vice President since April, 1985       Chief Financial Officer since
                                                                          August, 1997; Senior Vice President
                                                                          and Chief Financial Officer since
                                                                          January, 1987; Cashier since
                                                                          November, 1984

Tomas J. Bamberger                 None                                   Executive Vice President and
60  (b)                                                                   Senior Loan Officer since September,
                                                                          1997

Robert M. McGovern                 None                                   Executive Vice President,
63  (c)                                                                   Senior Trust Officer
                                                                          since February, 1999

Marna Hayden                       None                                   Senior Vice President,
64  (d)                                                                   Human Resources
                                                                          since January, 1999;
                                                                          Vice President of Human
                                                                          Resources since November,
                                                                          1982; Assistant Vice President,
                                                                          Personnel and Public Relations
                                                                          Director since October, 1976

Carl F. Kovacs                     None                                   Senior Vice President,
51 (e)                                                                    Strategic Planning and
                                                                          Internal Compliance
                                                                          since January, 2002
---------------------------------
</TABLE>

<PAGE>

(a) Mr. Heeren was previously Senior Vice President, Chief Financial Officer and
Cashier of the Bank from January 1987 to August 1997 and Vice President, Finance
of the Bank from November, 1984 to January, 1987. Prior to November, 1984, Mr.
Heeren was employed by the American Bank and Trust Company, headquartered in
Reading, Pennsylvania, as Vice President for Financial Management (September,
1982 to November, 1984) and was Vice President, Community Banking, Chester
County, Pennsylvania (March, 1982 to September, 1982).

(b) Mr. Bamberger was previously Executive Vice President and Senior Loan
Officer of First Valley Bank/Summit Bank (PA) from February 1984 to September
1997. Prior to that, he was Senior Vice President and Senior Loan Officer of the
First National Bank of Allentown from March 1982 to February 1984. Mr. Bamberger
started his banking career in October 1967 at Girard Bank in Philadelphia. He
was a Vice President and Divisional Manager in commercial lending when he left
in February 1982.

(c) Mr. McGovern was previously Vice President and Senior Trust Specialist of
First Union National Bank from April 1998 to February 1999. Prior to that, Mr.
McGovern was Vice President/Trust of CoreStates Bank from 1996 to 1998. From
1985 until 1996, Mr. McGovern was employed by Meridian Bank, most recently as
Vice President until it was acquired by CoreStates Bank in 1996.

(d) Ms. Hayden was previously Employment Manager, Alexander's Department Store
in New York, New York from 1967 to 1969 and was Personnel Manager, Alexander's
Rent-a-Car in New York, New York from 1965 to 1967.

(e) Mr. Kovacs was previously Site Manager, Aurum Technology, Inc. from
September 2001 to January 2002; Vice President, Regional Sales Marketing Leader,
First Union Bank from 1997 to March 2001; Vice President, Statement Services
Manager, First Union Bank from 1996 to 1997; Vice President Statement
Services/Signature Verification Manager, Global Processing Alliance from 1994 to
1996; Vice President, Encoding/Transportation Manager, First Fidelity Bank from
1991 to 1994; Vice President, Director of General Operations, Merchants Bank
from 1986 to 1991.

<PAGE>

                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters
-------  ---------------------------------------------------------------------

     First Colonial Group, Inc. common stock trades on the Nasdaq National
Market under the trading symbol FTCG. In newspaper listings, First Colonial
Group, Inc. shares are frequently listed as "First Colnl" or "First Col Group".
At the close of business on December 31, 2001, there were 682 shareholders of
record.

     The declaration and payment of dividends is at the sole discretion of the
Board of Directors, and their amount depends upon the earnings, financial
condition, and capital needs of the Company and the Bank and certain other
factors including restrictions arising from Federal banking laws and regulations
(see "Note R - Regulatory Matters" in the "Notes to Consolidated Financial
Statements") and a certain loan agreement (see "Note H - Long-Term Debt" in the
"Notes to Consolidated Financial Statements").

     The following table sets forth for the periods indicated high and low sale
prices reported for the Company's common stock and the respective dividends
declared per common share. The last sale price was $22.45 in December 2001 and
$12.86 in December 2000. Stock prices and dividends per share have been restated
to reflect the 5% stock dividends of June 2001 and June 2000 (see "Note S -
Equity Transactions" in the "Notes to Consolidated Financial Statements"
contained in "Item 8. Financial Statements and Supplementary Data").

-----------------------------------------------------------------------
                                                      Cash Dividends
                               High         Low        Declared
-----------------------------------------------------------------------
2000
First Quarter                    $17.80     $ 13.38       $ 0.1724
Second Quarter                    15.55       11.67         0.1724
Third Quarter                     16.19       11.43         0.1810
Fourth Quarter                    15.71       12.14         0.1810
                                                       ------------
   TOTAL                                                  $ 0.7068

-----------------------------------------------------------------------

2001
First Quarter                    $15.83     $ 12.85       $ 0.1810
Second Quarter                    16.35       14.04         0.1810
Third Quarter                     20.25       14.85         0.1900
Fourth Quarter                    24.95       17.60         0.1900
                                                       ------------
   TOTAL                                                  $ 0.7420

-----------------------------------------------------------------------

     The Company did not sell any of its equity securities during 2001 that were
not registered under the Securities Act.

<PAGE>

Item 6.   Selected Financial Data
-------   -----------------------

<TABLE>
<CAPTION>
                                                CONSOLIDATED FINANCIAL HIGHLIGHTS
                                                                                              Percentage Change
(Dollars in Thousands, except per share data)     2001           2000           1999        2001/00       2000/99
-------------------------------------------------------------------------------------------------------------------
AT YEAR END
<S>                                           <C>            <C>            <C>               <C>          <C>
Assets                                        $465,144       $443,051       $391,889          5.0 %        13.1 %
Deposits                                       379,886        353,190        324,480          7.6           8.8
Loans                                          225,757        226,944        202,258         (0.5)         12.2
Shareholders' Equity                            35,326         33,521         28,243          5.4          18.7

FOR THE YEAR
Net Interest Income                            $16,066        $15,340        $14,904          4.7 %         2.9 %
Net Income                                       3,557          2,072          3,282         71.7         (36.9)

PER SHARE *
Basic Net Income                                $ 1.77         $ 1.04         $ 1.67         70.2 %       (37.8)%
Diluted Net Income                                1.77           1.04           1.66         70.2         (37.5)
Dividends Paid                                    0.74           0.70           0.67          5.7           5.7
Book Value                                       16.96          17.08          15.28         (0.7)         11.8

FINANCIAL RATIOS
Return on Average Assets                         0.79%          0.50%          0.86%
Return on Average Equity                        10.10%          7.04%         10.90%
Tier 1 Capital
  to Average Assets (Leverage)                   7.65%          8.00%          8.32%

</TABLE>

*    Per share data have been restated to reflect the 5% stock dividends of June
     2001, June 2000 and June 1999.



<PAGE>

Item 7.   Management's Discussion and Analysis of Financial Condition and
-------   ---------------------------------------------------------------
          Results of Operations
          ---------------------

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


     The following financial review and analysis are intended to assist in
understanding and evaluating the major changes in the financial condition and
earnings performance of First Colonial Group, Inc. (the "Company") with a
primary focus on the analysis of operating results for the years ended December
31, 2001, 2000 and 1999. The Company's consolidated earnings are derived
primarily from the operations of Nazareth National Bank and Trust Company (the
"Bank") and First C. G. Company, Inc. ("First C. G."). The information below
should be read in conjunction with the Company's consolidated financial
statements and accompanying notes thereto, and other detailed information
appearing elsewhere in this report. Additional financial information can be
found in the Company's Form 10-K report, a copy of which may be obtained upon
request. During the two most recent fiscal years, there have been no changes in
or disagreements with the Company's accountants on accounting and financial
disclosure. The information concerning share and per share data included in this
discussion have been restated to reflect the 5% stock dividends of June 2001,
2000 and 1999.

                           Forward Looking Statements

     The information contained in this Annual Report contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including, without limitation, statements as to
future loan and deposit volumes, the allowance and provision for possible loan
losses, future interest rates and their effect on the Company's financial
condition or results of operations, the classification of the Company's
investment portfolio, statements as to litigation and the amount of reserves,
statements as to trends, and other statements which are not historical facts or
as to the Company's, the Bank's or management's intentions, plans, beliefs,
expectations or opinions. Such forward looking statements are subject to risks
and uncertainties and may be affected by various factors which may cause actual
results to differ materially from those in the forward looking statements
including, without limitation, the effect of economic conditions and related
uncertainties, the effect of interest rates on the Company and the Bank, Federal
and state government regulation, competition, changes in accounting standards
and policies, and the results of litigation.



<PAGE>

These and other risks, uncertainties and other factors are discussed in this
Annual Report or in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001, a copy of which may be obtained from the Company upon request
and without charge (except for the exhibits thereto).

                          Financial Performance Summary

     In 2001, First Colonial Group recorded net income of $3,557,000. The 2001
net income was $1,485,000 or 71.7% higher than 2000 net income of $2,072,000.
The Company's net income in 1999 was $3,282,000.

     The basic earnings per share were $1.77, $1.04 and $1.67 in 2001, 2000 and
1999, respectively. The diluted earnings per share were $1.77 in 2001, $1.04 in
2000 and $1.66 in 1999. Diluted earnings per share include the effect of common
stock equivalents such as options (see Note P of the "Notes to Consolidated
Financial Statements").

     The Company's return on average assets was .79% in 2001 as compared to .50%
in 2000 and .86% in 1999. The return on average equity was 10.10%, 7.04% and
10.90% in 2001, 2000 and 1999, respectively.

     The principal factors affecting the increase in earnings in 2001 were a
$726,000 or 4.7% increase in net interest income, an increase of $243,000 or
5.9% in other income, exclusive of the net gains on the sales of investment
securities and real estate loans held-for-sale, an increase of $755,000 or 433%
on the net gains on the sale of securities and an increase of $287,000 or 486%
on the gains on the sale of residential real estate loans. Also affecting
earnings was a $217,000 or 1.3% decrease in total other expenses (operating
expenses in 2000 included a special reserve of $1,012,000 for Funeral Trust
litigation). These increases in income were offset in part by increases of
$205,000 or 54.7% in the provisions for possible loans losses and $538,000 or
199% in Federal income taxes.

     The reduction in 2000 earnings was the result of a $2,272,000 or 15.5%
increase in expenses, a decrease of $389,000 in net gains on the sale of
securities and a decrease of $98,000 on the gains on the sale of residential
real estate loans. These reductions in earnings were offset in part by increases
of $436,000 in net interest income and $454,000 in other income and a reduction
of $659,000 in Federal income taxes.

     The Company continued to achieve growth in total assets and deposits. Total
assets at December 31, 2001 were $465,144,000 as compared to $443,051,000 at
year end 2000. This was an increase of $22,093,000 or 5%. During 2001, total
deposits grew by 7.6% or $26,696,000 to a year-end total of $379,886,000. Total
deposits at December 31, 2000 were $353,190,000. Total loans amounted to
$225,757,000 and $226,944,000


<PAGE>

at December 31, 2001 and 2000, respectively. The loan decrease in 2001 was
$1,187,000 or 0.5%. In addition, there were $3,808,000 of residential real
estate loans held-for-sale at December 31, 2001. There were no such loans at
year-end 2000.


<PAGE>

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
(Dollars in Thousands, except per share data)
As of and For the Year Ended December 31,                2001         2000         1999         1998          1997
                                                      ----------------------------------------------------------------
CONSOLIDATED SUMMARY OF INCOME
<S>                                                    <C>          <C>          <C>          <C>           <C>
Interest Income                                        $ 30,035     $ 29,287     $ 26,353     $ 25,367      $ 25,444
Interest Expense                                         13,969       13,947       11,449       10,871        10,831
                                                      ---------    ---------    ---------    ---------     ---------
Net Interest Income                                      16,066       15,340       14,904       14,496        14,613
Provision for Possible Loan Losses                          580          375          375          450           605
Gains on the Sale of Mortgage Loans                         346           59          157          398           178
Other Income, Excluding Securities and Loan Sale Gains    4,332        4,089        3,635        3,460         3,044
Securities Gains, Net                                       929          174          563          722           601
Other Expenses                                           16,728       16,945       14,673       14,563        13,252
                                                      ---------    ---------    ---------    ---------     ---------

Income Before Income Taxes                                4,365        2,342        4,211        4,063         4,579
Income Taxes                                                808          270          929        1,031         1,296
                                                      ---------    ---------    ---------    ---------     ---------

  Net Income                                            $ 3,557      $ 2,072      $ 3,282      $ 3,032       $ 3,283
                                                      ---------    ---------    ---------    ---------     ---------

Cash Dividends Paid                                     $ 1,489      $ 1,406      $ 1,321      $ 1,275       $ 1,139
Cash Dividends Paid Per Share                              0.74         0.70         0.67         0.64          0.58
Dividends Paid to Net Income                              41.86 %      67.86 %      40.25 %      42.05 %       34.69 %

PER SHARE DATA
Basic Income                                             $ 1.77       $ 1.04       $ 1.67       $ 1.52        $ 1.66
Diluted Net Income                                         1.77         1.04         1.66         1.51          1.66
Basic Average Common Shares Outstanding               2,009,353    1,994,687    1,969,086    1,990,069     1,969,882
Dilutive Average Common Shares Outstanding            2,014,771    1,996,914    1,972,716    1,998,720     1,975,750

CONSOLIDATED BALANCE SHEET DATA
Total Assets                                          $ 465,144    $ 443,051    $ 391,889    $ 358,496     $ 346,738
Loans (Net of Unearned Discount)                        225,757      226,944      202,258      212,437       229,587
Mortgage Loans Held-for-Sale                              3,808            -            -          603           759
Deposits                                                379,886      353,190      324,480      294,549       282,255
Securities Sold Under Agreements to Repurchase            8,380        7,215        1,730        5,094         8,804
Debt (Short-Term and Long-Term)                          34,804       39,695       30,000       20,000        18,390
Shareholders' Equity                                     35,326       33,521       28,243       31,717        30,357
Book Value Per Share                                      16.96        17.08        15.28        18.17         17.49

SELECTED CONSOLIDATED RATIOS Net Income To:
  Average Total Assets                                     0.79 %       0.50 %       0.86 %       0.86 %        0.97 %
  Average Shareholders' Equity                            10.10 %       7.04 %      10.90 %       9.79 %       11.67 %

Tier 1 Capital to Average Assets (Leverage)                7.65 %       8.00 %       8.32 %       8.60 %        8.33 %

---------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS
(Dollars in Thousands) For the Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                      2001                                                 2000
                                     ----------------------------------------            ----------------------------------------
                                                    Interest       Average                              Interest       Average
                                      Average        Income/       Yield/                  Average       Income/       Yield/
                                      Balance        Expense        Rate                   Balance       Expense        Rate
                                     ----------------------------------------            ----------------------------------------
ASSETS
INTEREST-EARNING ASSETS
<S>                                     <C>              <C>            <C>                  <C>             <C>            <C>
Interest-Bearing Balances with Banks    $ 4,787          $ 154          3.22 %               $ 2,281         $ 141          6.18 %
Federal Funds Sold                          427             14          3.28                     328            23          7.01
Investment Securities
  Taxable                               152,604          9,515          6.24                 139,283         9,440          6.78
  Non-Taxable (1)                        37,232          2,661          7.15                  30,142         2,374          7.88
Loans (1) (2)                           228,458         18,652          8.16                 214,856        18,171          8.46
Allowance for Loan Losses                (2,394)             -             -                  (2,474)            -             -
                                     -----------   ------------                          ------------  ------------
Net Loans                               226,065         18,652          8.25                 212,382        18,171          8.56
                                     -----------   ------------                          ------------  ------------
  Total Interest-Earning Assets         421,115         30,996          7.36                 384,416        30,149          7.84
Non-Interest Earning Assets              29,395              -             -                  31,926             -             -
                                     -----------   ------------  ------------            ------------  ------------  ------------
  TOTAL ASSETS,
    INTEREST INCOME                   $ 450,510         30,996          6.88               $ 416,342        30,149          7.24
                                     -----------   ------------

LIABILITIES
INTEREST-BEARING LIABILITIES
Interest-Bearing Deposits
  Demand Deposits                      $ 55,087            492          0.89                $ 53,151           536          1.01
  Money Market Deposits                  20,041            619          3.09                  13,461           375          2.79
  Savings & Club Deposits                65,079          1,362          2.09                  62,834         1,392          2.22
  CDs over $100,000                       7,334            356          4.86                   5,886           305          5.18
  All Other Time Deposits               162,303          8,692          5.36                 157,164         8,806          5.60
                                     -----------   ------------                          ------------  ------------
    Total Interest-Bearing Deposits     309,844         11,521          3.72                 292,496        11,414          3.90

Securities Sold Under Agreements
  to Repurchase                          12,591            366          2.90                   7,226           332          4.59
Other Short-Term Debt                     1,919             93          4.85                   3,994           256          6.41
Long-Term Debt                           34,104          1,989          5.83                  31,377         1,945          6.20
                                     -----------   ------------                          ------------  ------------
  Total Interest-Bearing Liabilitites   358,458         13,969          3.90                 335,093        13,947          4.16

NON-INTEREST-BEARING LIABILITIES
Non-Interest-Bearing Deposits            48,959              -             -                  43,893             -             -
Other Liabilities                         7,887              -             -                   7,913             -             -
                                     -----------   ------------                          ------------  ------------
  TOTAL LIABILITIES                     415,303         13,969          3.36                 386,899        13,947          3.60
SHAREHOLDERS' EQUITY                     35,207              -             -                  29,443             -             -
                                     -----------   ------------                          ------------  ------------
TOTAL LIABILITIES &
  SHAREHOLDERS' EQUITY,
  INTEREST EXPENSE                    $ 450,510         13,969          3.10               $ 416,342        13,947          3.35
                                                   ------------                                        ------------

NET INTEREST INCOME                                   $ 17,027                                            $ 16,202
                                                   ------------                                        ------------
Net Interest Spread (3)                                                 3.46                                                3.68
Effect of Interest-Free Sources
  Used to Fund Earning Assets                                           0.58                                                0.53

NET INTEREST MARGIN (4)                                                 4.04 %                                              4.21 %
                                                                 ------------                                        ------------

------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS
(Dollars in Thousands) For the Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                                1999
                                              ----------------------------------------------
                                                               Interest         Average
                                                Average         Income/         Yield/
                                                Balance         Expense          Rate
                                              ----------------------------------------------
ASSETS
INTEREST-EARNING ASSETS
<S>                                               <C>             <C>            <C>
Interest-Bearing Balances with Banks              $ 3,928         $ 196          4.99 %
Federal Funds Sold                                    975            47          4.82
Investment Securities
  Taxable                                         107,054         6,829          6.38
  Non-Taxable (1)                                  31,668         2,287          7.22
Loans (1) (2)                                     212,993        17,817          8.37
Allowance for Loan Losses                          (2,669)            -             -
                                              ------------  ------------
Net Loans                                         210,324        17,817          8.47
                                              ------------  ------------
  Total Interest-Earning Assets                   353,949        27,176          7.68
Non-Interest Earning Assets                        29,153             -             -
                                              ------------  ------------
  TOTAL ASSETS,
    INTEREST INCOME                             $ 383,102        27,176          7.09
                                              ------------  ------------

LIABILITIES
INTEREST-BEARING LIABILITIES
Interest-Bearing Deposits
  Demand Deposits                                $ 52,395           619          1.18
  Money Market Deposits                            13,827           382          2.76
  Savings & Club Deposits                          63,199         1,304          2.06
  CDs over $100,000                                 5,040           202          4.01
  All Other Time Deposits                         139,076         7,312          5.26
                                              ------------  ------------
    Total Interest-Bearing Deposits               273,537         9,819          3.59

Securities Sold Under Agreements
  to Repurchase                                     5,994           194          3.24
Other Short-Term Debt                               1,721            89          5.17
Long-Term Debt                                     23,534         1,347          5.72
                                              ------------  ------------
  Total Interest-Bearing Liabilitites             304,786        11,449          3.76

NON-INTEREST-BEARING LIABILITIES
Non-Interest-Bearing Deposits                      41,337             -             -
Other Liabilities                                   6,843             -             -
                                              ------------  ------------
  TOTAL LIABILITIES                               352,966        11,449          3.24
SHAREHOLDERS' EQUITY                               30,136             -             -
                                              ------------  ------------
TOTAL LIABILITIES &
  SHAREHOLDERS' EQUITY,
  INTEREST EXPENSE                              $ 383,102        11,449          2.99
                                                             ------------

NET INTEREST INCOME                                            $ 15,727
                                                            ------------
Net Interest Spread (3)                                                          3.92
Effect of Interest-Free Sources
  Used to Fund Earning Assets                                                    0.52

NET INTEREST MARGIN (4)                                                          4.44 %
                                                                          ------------

------------------------------------------------------------------------------------------------------------------------------------

<FN>
(1)  The indicated interest income and average yields are presented on a taxable
     equivalent basis. The taxable equivalent adjustments included above are
     $961,000, $862,000 and $823,000 for the years 2001, 2000 and 1999,
     respectively. The effective tax rate used for the taxable equivalent
     adjustment was 34%.

(2)  Loan fees of $(162,000), $285,000 and $212,000 for the years 2001, 2000 and
     1999, respectively, are included in interest income. Average loan balances
     include non-accruing loans and average loans held-for-sale of $2,953,000,
     $1,237,000 and $2,581,000 for 2001, 2000 and 1999, respectively.

(3)  Net interest spread is the arithmetic difference between yield on
     interest-earning assets and the rate paid on interest-bearing liabilities.

(4)  Net interest margin is computed by dividing net interest income by
     averaging interest-earning assets.
</FN>
</TABLE>

<PAGE>

                                Average Balances

     The "Consolidated Comparative Statement Analysis" table sets forth a
comparison of average daily balances, interest income and interest expense on a
fully taxable equivalent basis and interest rates calculated for each major
category of interest-earning assets and interest-bearing liabilities. For
purposes of this analysis, the computations in the "Consolidated Comparative
Statement Analysis" were prepared using the Federal statutory rate of 34%; there
are no state or local taxes on income applicable to the Company. For further
information relating to the effective income tax rate of the Company, see Note J
of the "Notes to Consolidated Financial Statements". Interest income on loans
included loan (expenses) and fees of $(162,000), $285,000 and $212,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.

                               Net Interest Income

     Net interest income is the difference between the interest income on loans,
investments and other interest-earning assets, and the interest paid on deposits
and other interest-bearing liabilities. Net interest income is the primary
source of earnings for the Company. Therefore, changes in this category can be
essential to the overall net income of the Company. The net interest income, on
a fully taxable equivalent basis, amounted to $17,027,000 for 2001, an increase
of $825,000 over $16,202,000 in 2000. As shown in the "Rate/Volume Analysis"
table, the increase in net interest income in 2001 was attributable to higher
net interest income of $1,893,000 due to changes in volume and a reduction in
net interest income of $1,068,000 due to changes in rates. The volume-related
change resulted primarily from increases in investment securities and average
balances for loans (see discussions on "Loan Portfolio" and "Mortgage Loans
Held-for-Sale"), partially offset by an increase in time deposits, debt and
demand, savings and club deposits. The rate-related change was primarily the
result of the decrease of interest earned on investment securities and loans
being greater than the decrease of interest rates paid on deposits and debt.

     Net interest income, on a fully taxable equivalent basis, in 2000 increased
$475,000 over the 1999 figure of $15,727,000. This increase was the result of
growth in investments and loans, reduced in part by increases in time deposits
and debt. Also affecting 2000 was the increase in interest rates paid on
deposits and debt, and an increase in the interest rate earned on investments
and loans.

     The net interest margin, a measure of net interest income performance, is
determined by dividing net interest income by total interest-earning assets. The
net interest margin was 4.04% for 2001, 4.21% for 2000 and 4.44% for 1999. The
decrease in 2001 was the result of the 0.48% decrease in the average rate


<PAGE>

earned on interest-earning assets being greater than the 0.26% decrease in the
average interest rate paid on interest-bearing liabilities. The result was a
decline in the interest spread, the difference of interest earned on assets less
the interest paid on deposits and debt. The interest spread was 3.46%, 3.68% and
3.92% for 2001, 2000 and 1999, respectively. The impact on earnings by the
reduction in the interest spread was diminished in part by the $5,066,000 or
11.5% increase in 2001 of average non-interest-bearing deposits.


<PAGE>

     The following table sets forth a "Rate/Volume Analysis", which segregates
in detail the major factors that contributed to the changes in net interest
income for the years ended December 31, 2001 and 2000, as compared to the
respective previous periods, into amounts attributable to both rate and volume
variances. In calculating the variances, the changes were first segregated into
(1) changes in volume (change in volume times the old rate), (2) changes in
rates (change in rate times the old volume) and (3) changes in rate/volume
(changes in rate times the change in volume). The changes in rate/volume have
been allocated in their entirety to the change in rates. The interest income
included in the "Rate/Volume Analysis" table has been adjusted to a fully
taxable equivalent amount using the Federal statutory tax rate of 34%.
Non-accruing loans have been used in the daily average balances to determine
changes in interest income due to volume. Loan fees included in the interest
income calculation are not material.


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
RATE/VOLUME ANALYSIS
(Dollars in Thousands) (Fully Taxable Equivalent)
--------------------------------------------------------------------------------------------------------------------------------
                                              Increase (Decrease) in Year Ended December 31,
                                                    2001 to 2000                                     2000 to 1999
                                                   Change Due To:                                   Change Due To:
                                        TOTAL          RATE         VOLUME               TOTAL          RATE          VOLUME
                                     -----------------------------------------        ------------------------------------------
<S>                                         <C>          <C>            <C>                 <C>             <C>           <C>
Interest Income
  Interest-Bearing Balances
    With Banks                              $ 13         $ (142)        $ 155               $ (55)          $ 27          $ (82)
  Federal Funds Sold                          (9)           (16)            7                 (24)             7            (31)
  Investment Securities                      363         (1,060)        1,423               2,698            680          2,018
  Loans                                      480           (670)        1,150                 354            180            174
                                     ------------   ------------  ------------        ------------   ------------   ------------
    Total Interest Income                    847         (1,888)        2,735               2,973            894          2,079
                                     ------------   ------------  ------------        ------------   ------------   ------------

Interest Expense
  Demand Deposits, Savings & Clubs           170            (21)          191                  (2)            (2)             -
  Time Deposits                              (63)          (431)          368               1,597            610            987
  Securities Sold Under Agreements
    to Repurchase                             34           (213)          247                 138             98             40
  Short-Term Debt                           (163)           (30)         (133)                167             49            118
  Long-Term Debt                              44           (125)          169                 598            149            449
                                     ------------   ------------  ------------        ------------   ------------   ------------

  Total Interest Expense                      22           (820)          842               2,498            904          1,594
                                     ------------   ------------  ------------        ------------   ------------   ------------

    Increase in Net Interest Income        $ 825       $ (1,068)       $1,893               $ 475          $ (10)         $ 485

--------------------------------------------------------------------------------------------------------------------------------
</TABLE>




<PAGE>

                                   Market Risk

     As a financial institution, the Company's primary component of market risk
is interest rate volatility. Fluctuations in interest will ultimately impact
both the level of income and expense recorded on a large portion of the
Company's assets and liabilities, and the market value of all interest-earning
assets, other than those which possess a short term to maturity. Since most of
the Company's interest-bearing assets and liabilities are located at the Bank,
the majority of the Company's interest rate risk is at the Bank level. As a
result, most interest rate risk management procedures are performed at the Bank
level (see discussion on "Interest Rate Sensitivity").

     The Company and the Bank operate as a community banking institution
primarily in the counties of Northampton, Lehigh and Monroe, Pennsylvania. As a
result of its location and nature of operations, the Company is not subject to
foreign currency exchange or commodity price risk. The Bank makes real estate
loans primarily in the counties adjacent to its operations and thus is subject
to risks associated with those local economies. The Bank holds a concentration
of residential real estate loans (50.0% of total loans) and commercial loans
supported by real estate (14.3% of total loans) in its loan portfolio. In
addition, 52.4% of the Bank's consumer, installment loans are for recreational
vehicles. These loans represent 13.7% of total loans (see Note Q of the "Notes
to Consolidated Financial Statements"). These loans are subject to interest and
economic risks. The Bank also originates residential real estate loans for sale
in the secondary market. Such loans are identified as "Mortgage Loans
Held-for-Sale" on the Company's Balance Sheet and are subject to interest rate
risk (see discussion on "Mortgage Loans Held-for-Sale"). The Company does not
own any trading assets and does not have any hedging transactions in place such
as interest rate swaps (see discussions on "Investment Securities" and
"Securities Available-for-Sale").

                            Interest Rate Sensitivity

     Interest rate sensitivity is a measure of the extent to which net interest
income would change due to changes in the level of interest rates. The objective
of interest rate sensitivity management is to reduce a company's vulnerability
to future interest rate fluctuations and to enhance consistent growth of net
interest income. The Bank's Asset/Liability Management Committee meets
semi-monthly to examine, among other subjects, interest rates for various
products and interest sensitivity.

     Rate sensitivity arises from the difference between the volumes of assets
which are rate-sensitive as compared to the volumes of liabilities which are
rate-sensitive. A comparison of interest-rate-sensitive assets to
interest-rate-sensitive liabilities is monitored by the



<PAGE>

Bank on a regular basis using several time periods. The mismatch of assets and
liabilities in a specific time frame is referred to as interest sensitivity gap.
Generally, in an environment of rising interest rates, a negative gap (interest
sensitive liabilities being greater than interest sensitive assets in a given
period of time) will decrease net interest income, and in an environment of
falling interest rates, a negative gap will increase net interest income.

     Assets and liabilities are allocated to a specific time period based on
their scheduled repricing date or on an historical basis. At December 31, 2001,
assets of $149,885,000 (32% of total assets) were subject to interest rate
changes within one year. This compares to assets subject to interest rate
changes within one year of $162,221,000 (37% of total assets) at the end of 2000
and $157,197,000 (40% of total assets) at the end of 1999. Liabilities subject
to rate change within one year were $151,885,000, $169,639,000 and $163,662,000
in 2001, 2000 and 1999, respectively. A negative one-year gap position of
$2,000,000 existed as of December 31, 2001. The gap positions at December 31,
2000 and 1999 were negative $7,418,000 and negative $6,465,000, respectively.
The ratio of rate-sensitive assets to rate-sensitive liabilities for the
one-year time frame was .99 at the end of 2001, compared to .96 at the end of
2000 and .96 at the end of 1999. The "Interest Sensitivity Analysis" in the
following table presents a sensitivity gap analysis of the Company's assets and
liabilities at December 31, 2001 for five time-intervals. The Company's negative
gap position for the one-year time frame increased in 2001 as a result of an
increase in interest-bearing demand deposits and short-term borrowings with a
maturity of one year or less and a reduction of loan maturities. The change in
the deposit mix was due to the sale of longer-term certificates of deposit to
customers. The change in loan maturities was due in part to the sale of
residential mortgage loans. Management intends to continue to purchase
adjustable rate securities, make adjustable rate loans, market longer-term
certificates of deposit and sell fixed-rate mortgage loans to maintain an
acceptable gap position.


<PAGE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
INTEREST SENSITIVITY ANALYSIS
(Dollars in Thousands)                           0-90         91-180         181-365         1-5          Over 5
as of December 31, 2001                          Days          Days           Days          Years          Years           Total
---------------------------------------------------------------------------------------------------------------------------------

<S>                                           <C>           <C>            <C>          <C>            <C>             <C>
Interest-Bearing Deposits with Banks             $ 919           $ -            $ -           $ -            $ -           $ 919
Investment Securities                           20,464        10,672         21,326        93,099         58,745         204,306
Loans                                           29,864        15,605         29,964        86,047         62,013         223,493
Loans Held-for-Sale                              3,808             -              -             -              -           3,808
Other Assets                                    17,263             -              -             -         15,355          32,618
                                           ------------  ------------   ------------  ------------   ------------    ------------

    TOTAL ASSETS                              $ 72,318      $ 26,277       $ 51,290     $ 179,146      $ 136,113       $ 465,144
                                           --------------------------------------------------------------------------------------

Non-Interest-Bearing Deposits (1)                  $ -           $ -            $ -           $ -       $ 57,931        $ 57,931
Interest-Bearing Deposits                       28,828        39,450         70,218        64,222        119,237         321,955
Securities Sold Under Agreements
  to Repurchase                                  8,380             -              -             -              -           8,380
Long-Term Debt                                   5,009             -              -        17,043         12,752          34,804
Other Liabilities                                    -             -              -             -          6,748           6,748
Capital                                              -             -              -             -         35,326          35,326
                                           ------------  ------------   ------------  ------------   ------------    ------------

    TOTAL LIABILITIES AND CAPITAL             $ 42,217      $ 39,450       $ 70,218      $ 81,265      $ 231,994       $ 465,144
                                           --------------------------------------------------------------------------------------

Net Interest Sensitivity Gap                  $ 30,101      $(13,173)      $(18,928)     $ 97,881       $(95,881)            $ -
Cumulative Interest Sensitivity Gap           $ 30,101      $ 16,928       $ (2,000)     $ 95,881            $ -             $ -

Cumulative Gap RSA/RSL                          171.3%        120.7%          98.7%        141.1%         100.0%
<FN>

(1)  Historically, non-interest-bearing deposits reflect insignificant change in
     deposit trends and, therefore, the Company classifies these deposits over
     five years.

---------------------------------------------------------------------------------------------------------------------------------
</FN>
</TABLE>




<PAGE>

     While using the interest sensitivity gap analysis is a useful management
tool because it considers the quantity of assets and liabilities subject to
repricing in a given time period, it does not consider the relative sensitivity
to market interest-rate changes that are characteristic of various
interest-rate-sensitive assets and liabilities. Consequently, even though the
Company currently has a negative gap position because of the unequal sensitivity
of these assets and liabilities, management believes that this position will not
materially impact earnings in a changing rate environment. For example, changes
in the prime rate on variable commercial loans may not result in an equal change
in the rate of money market deposits or short-term certificates of deposit. A
simulation model is therefore used to estimate the impact of various changes,
both upward and downward, in market interest rates and volumes of assets and
liabilities on the Bank's net income. This model produces an interest rate
exposure report that forecasts changes in the market value of portfolio equity
under alternative interest rate environments. The market value of portfolio
equity is defined as the present value of the Company's existing assets,
liabilities and off-balance sheet instruments. The calculated estimates of
changes in the market value of portfolio equity at December 31, 2001 are as
follows:

<PAGE>


---------------------------------------------------------------
At December 31, 2001
---------------------------------------------------------------

                                           Percent of Change
                                            in Market Value
             Changes in Rate              of Portfolio Equity
                                         ----------------------

             +400 basis points                   54.9%
             +300 basis points                   57.3%
             +200 basis points                   58.5%
             +100 basis points                    4.8%
                  Flat Rate                       0.0
             -100 basis points                  (10.8)%
             -200 basis points                   (3.9)%
             -300 basis points                   (4.4)%
             -400 basis points                  (12.5)%

---------------------------------------------------------------



     The assumptions used in evaluating the vulnerability of the Company's
earnings and capital to changes in interest rates are based on management's
consideration of past experience, current position and anticipated future
economic conditions. The interest rate sensitivity of the Company's assets and
liabilities as well as the estimated effect of changes in interest rates on the
market value of portfolio equity could vary substantially if different
assumptions are used or actual experience differs from the assumptions on which
the calculations were based.



<PAGE>




                        Service Charges and Other Income

     Service charge income on deposit accounts amounted to $2,335,000 in 2001
compared to $2,019,000 in 2000 and $1,682,000 in 1999. In 2001, the service
charges on deposit accounts increased by $316,000 or 16% over 2000 and the 2000
increase over 1999 was $337,000 or 20%. The increases in 2001 and 2000 were
primarily the result of increases in the number of deposit accounts and
increases in the usage of the Bank's debit card.

     In 2001, the Company had gains on the sale of mortgage loans of $346,000 as
compared to gains of $59,000 in 2000. In 1999, there were gains on the sale of
mortgage loans of $157,000 (see discussion on "Mortgage Loans Held-for-Sale").

     Other operating income was $710,000 in 2001, as compared to $825,000 in
2000. This was a decrease of $115,000 or 14%. Other operating income for 1999
was $707,000.

                      Trust and Wealth Management Division

     Revenue from the Bank's Trust and Wealth Management Division operations was
$1,287,000 in 2001, as compared to $1,245,000 in 2000. This was an increase of
$42,000 or 3%. The Trust and Wealth Management Division revenue for 1999 was
$1,246,000. Trust assets are held by the Bank for its customers in a fiduciary
or agency capacity, and thus, are not included in the financial statements of
the Company. Fees are assessed by the Trust Division to some customers based on
the market value of the assets held in the customers' account. As a result,
changing market values will impact the revenues earned from Trust operations.

                                 Other Expenses

     Salaries and employee benefits represent a significant portion of
non-interest expense. These expenses, amounting to $8,224,000, increased by
$787,000 or 10.6% in 2001 compared to $7,437,000 in 2000. These expenses in 2000
amounted to an increase of $657,000 or 9.7% over the $6,780,000 reported in
1999. The increase in 2001 was primarily due to salary increases of
approximately 3%, a full years expense related to the branches opened in Mount
Pocono, Whitehall and Trexlertown during 2000, increases in Lending and Trust
divisions staff and a cash bonus paid to all employees. Salary expense in 2000
increased due to normal salary increases of approximately 3.5%, and the addition
of staff related to the opening of the branches in Mount Pocono, Whitehall and
Trexlertown.

     Occupancy and equipment expenses were $2,528,000 in 2001 which was $136,000
or 5.7% greater than the 2000 amount of $2,392,000. The 2000 amount was $221,000
greater than the 1999



<PAGE>

occupancy and equipment expense of $2,171,000. The increase in 2001 was
primarily due to a full years expenses at the branches in Mount Pocono,
Whitehall and Trexlertown opened in 2000. The increase in 2000 was the result of
the establishment of the Mount Pocono, Whitehall and Trexlertown branches.

     Other operating expenses (such as advertising, publicity, deposit insurance
premiums, data processing fees, legal, accounting, supplies, postage and
telephone) in 2001 were $5,976,000, compared to $7,116,000 in 2000 and
$5,722,000 in 1999. These expenses decreased in 2001 as compared to 2000 by
$1,140,000 or 16%. Included in the 2000 expenses was $1,012,000 for a provision
to the special reserve for Funeral Trust litigation and a $184,000 write-down of
other real estate owned. There were no expenses incurred for these items in
2001. Also contributing to the reduction of expenses in 2001 were a reduction of
$188,000 in legal fees, an $83,000 reduction in advertising expenses, and a
$74,000 reduction in data processing expenses. These reductions were offset in
part by increases in professional fees of $313,000, loan origination costs of
$114,000, unrealized losses on residential real estate loans held-for-sale of
$93,000, telephone expenses of $65,000, and supplies of $45,000. The increase in
2000 of $1,394,000 or 24.4% was primarily the result of a provision of
$1,012,000 to the special reserve for Funeral Trust litigation, a $184,000
write-down of other real estate owned, $100,000 on losses due to theft, and
increases in consulting fees of $79,000, supplies of $54,000, data processing
fees of $40,000 and Federal Deposit Insurance premiums of $36,000. Advertising
costs were $463,000, $546,000 and $574,000 for the years ended December 31,
2001, 2000 and 1999, respectively (see Notes A.14 and I of the "Notes to
Consolidated Financial Statements").

                              Investment Securities

     The Company classifies its debt and marketable securities into three
categories: trading, available-for-sale, and held-to-maturity as provided by the
Financial Accounting Standards Board Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Trading securities are measured at fair value, with unrealized
holding gains and losses included in income. The Company had no trading
securities in 2001 and 2000. Available-for-sale securities are stated separately
on the financial statements and are discussed in the following section
"Securities Available-for-Sale". Held-to-maturity securities are carried at
amortized cost and identified as



<PAGE>

investment securities in the financial statements (see Notes A.2 and B of the
"Notes to Consolidated Financial Statements").

     Held-to-maturity securities totaled $23,004,000 at December 31, 2001 and
$19,972,000 at December 31, 2000. The Company has the intent and ability to hold
these securities until maturity. The fair value of these securities was
$23,160,000 and $19,906,000 at December 31, 2001 and 2000, respectively.

     The Company, at December 31, 2001 and 2000, did not hold any securities
identified as derivatives in the form of Collateralized Mortgage Obligations
(CMOs), Planned Amortization Class (PAC), Real Estate Mortgage Investment
Conduits (REMICs), Stripped-Mortgage-Backed Securities, interest rate swaps,
futures or options. The Company held adjustable rate mortgage-backed securities
issued by U. S. Government Agencies totaling $7,756,000 at December 31, 2001
($5,783,000 in available-for-sale and $1,973,000 in held-to-maturity) and
$19,980,000 at December 31, 2000 ($16,937,000 in available-for-sale and
$3,043,000 in held-to-maturity). The interest rates on most of these securities
are tied to various indexes, are subject to various caps, and are adjusted
annually. The Company also held fixed rate mortgage-backed securities issued by
U. S. Government Agencies totaling $85,994,000 at December 31, 2001 ($81,470,000
in available-for-sale and $4,524,000 in held-to-maturity) and $28,168,000 at
December 31, 2000 ($27,191,000 in available-for-sale and $977,000 in
held-to-maturity).

                          Securities Available-for-Sale

     The Company had $181,302,000 of securities available-for-sale at December
31, 2001, as compared to $164,029,000 at December 31, 2000. At December 31,
2001, the net unrealized loss on these securities was $694,000, net of the tax
effect of $359,000. There was a net unrealized gain of $37,000, net of the tax
effect of $20,000 on the available-for-sale securities at December 31, 2000. The
net unrealized gain or loss is included in shareholders' equity (see Notes A.2,
A.6 and B of the "Notes to Consolidated Financial Statements").

     These securities are being held to meet the liquidity needs of the Company
and to provide flexibility to support earnings in changing interest rate
environments. The tax-free municipal securities in the available-for-sale
category will also be used to assist in managing the Company's Federal tax
position. While management has the intent and the ability to hold
available-for-sale securities on a long-term basis or to maturity, they may sell
these securities under certain circumstances. Such occurrences could include,


<PAGE>

but are not limited to, meeting current liquidity needs, adjusting maturities or
repricing periods to reduce interest rate risk, reducing Federal Income Tax
liability, improving current or future interest income, adjusting risk-based
capital position, changing portfolio concentrations, and providing funds for
increased loan demand or deposit withdrawals. Upon the sale of an
available-for-sale security, the actual gain or loss is included in income.

     During 2001, $34,334,000 of securities available-for-sale were sold,
resulting in a total net gain of $929,000, which was recorded in income and
includes net gains on equity securities sold by First C. G. of $146,000. The
securities sold were primarily U. S. Agency mortgage-backed bonds and municipal
bonds held by the Bank and equity securities held by First C. G. The sales by
the Bank were executed to provide liquidity and reduce future interest rate
risk. The sales of equity securities by First C. G. were made to recognize
certain gains, and reposition the equity portfolio. Securities purchased by the
Company in 2001 totaled $143,457,000. Included in these purchases were
$46,345,000 in U. S. Agency bonds, $76,382,000 in U. S. Agency mortgage-backed
bonds, $8,944,000 in municipal securities, $5,110,000 in U. S. Treasury bonds,
$456,000 in corporate bonds, $5,246,000 in agency preferred stock, and $974,000
in equity securities. The securities sold in 2000 totaling $8,120,000 were
primarily U. S. Treasury, U. S. Agency, and municipal bonds held by the Bank and
equity securities held by First C. G. The 2000 sales resulted in net gains of
$174,000. These gains include net gains of $157,000 on equity securities sold by
First C. G. The sales made by the Bank were to provide liquidity and to improve
future income. The sales by First C. G. were made to provide funds for loans to
the Bank's Employee Stock Ownership Plan and reposition the equity portfolio.
Security purchases in 2000 amounted to $47,959,000 which were primarily U. S.
Agency mortgage-backed bonds, U. S. Agency fixed rate bonds, municipal
securities and U. S. Treasury bonds. In 1999, a net gain on security
transactions of $563,000 was recorded on sales of $16,295,000.

                                 Loan Portfolio

     At December 31, 2001, total loans (net of unearned discounts of $250,000 in
2001 and $431,000 in 2000) of $225,757,000 were $1,187,000, or 0.5% lower than
the 2000 amount of $226,944,000. The decrease in loans in 2001 was primarily the
result of a decrease of $15,991,000 or 12% in residential real estate loans (see
Mortgage Loans Held-for-Sale), and a decrease of $387,000



<PAGE>

or 18.5% in municipal loans, partially offset by an increase of $3,552,000 or
34.7% in commercial and other loans, and an increase of $5,111,000 or 18.8% in
commercial real estate loans, an increase of $6,143,000 or 11.6% in consumer
loans and an increase in real estate construction loans of $204,000 or 3.4%.

                        Loans Outstanding at December 31
                        by Major Category are as follows:

            -----------------------------------------------------------
            Dollars in Thousands at Dec. 31,      2001            2000
            -----------------------------------------------------------

            Real Estate Residential          $ 112,871       $ 128,862
            Real Estate Construction             6,127           5,923
            Real Estate Commercial              32,317          27,206
            Consumer                            59,205          53,062
            Municipal                            1,702           2,089
            Commercial & Other                  13,785          10,233
                                           ------------    ------------
               Total                           226,007         227,375

            Unearned Discount                     (250)           (431)
                                           ------------    ------------

            Total Loans                      $ 225,757       $ 226,944

            -----------------------------------------------------------


     The Company's primary geographic area for its lending activities includes
Monroe, Northampton and Lehigh counties, Pennsylvania.

     Making loans to businesses and individuals entails risks to the Company,
including ascertaining cash flows, evaluating the credit history, assets and
liabilities of a potential borrower, and determining the value of the various
types of collateral pledged as security. Lending involves determining risks,
managing those risks and charging an appropriate interest rate to compensate for
taking such risks, and to cover the cost of funds (see previous discussion on
"Market Risk").

     The loan to deposit ratio was 59.4% at December 31, 2001 and 64.3% at
December 31, 2000. Additional information concerning loans is shown in Note C of
the "Notes to Consolidated Financial Statements".

                          Mortgage Loans Held-for-Sale

     Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of aggregate cost or estimated fair value. Gains and losses
on sales of loans are also accounted for in accordance with SFAS No. 134,
"Accounting for Mortgage Securities Retained After the Securitizations of
Mortgage Loans Held-for-Sale by a Mortgage Banking Enterprise". This statement
requires that an entity engaged in mortgage banking activities classify the
retained mortgage-backed security or other interest, which resulted from the
securitizations of a mortgage loan held-for-sale based upon its ability and
intent to sell or hold these investments.

     In 2001, management continued a program to sell most of its newly
originated residential real estate loans in the secondary market. The Company
also sold a group of residential real estate loans originated in prior years.
The purpose of these sales was to reduce the Company's



<PAGE>

interest rate risk and to provide funds to support a higher level of loan
originations.

     The sales of residential real estate loans in the secondary market for 2001
amounted to $44,678,000. In 2001, the Bank originated $26,382,000 of the loans
sold. The remaining $18,296,000 of loans sold in 2001 were originated in prior
years. A net gain of $346,000 was recorded on the total amount of loans sold. At
December 31, 2001, there were $3,808,000 of residential real estate loans
identified as held-for-sale. The other operating expenses include an unrealized
loss of $93,000 on these loans held-for-sale.

     In 2000, the Company originated $7,718,000 of residential real estate loans
which were sold in the secondary market. A net gain of $59,000 was recognized on
the total loans sold in 2000. At December 31, 2000, there were no residential
real estate loans identified as held-for-sale.

     During 1999, the Company had a net gain of $157,000 on the sale of
$38,068,000 of residential real estate loans.

     The Company intends to continue to originate residential real estate loans
in 2002 and to sell some of these loans in the secondary market. The Company
services all of the residential mortgage loans sold and plans to continue this
practice.

                              Non-Performing Loans

     The following discussion relates to the Bank's non-performing loans, which
consist of loans on a non-accrual basis and accruing loans which are past due
ninety days or more.

     Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that the collection of interest is in
doubt. The Company recognizes these loans as non-accrual, but considers the
principal to be substantially collectible because the loans are protected by
adequate collateral or other resources. Payments received on non-accrual loans
are applied to principal until such time as the principal is paid off. Any
additional payments are then recognized as interest income.

     Loans on non-accrual status totaled $1,019,000 at December 31, 2001. This
balance represented a $29,000 decrease in non-accrual loans during 2001 due to
the collection efforts on certain commercial, residential real estate and
consumer loans. Management believes there is sufficient collateral to cover any
possible losses on these loans.




<PAGE>

The table "Non-Accrual Loans" shows the balance and the effect non-accrual loans
have had on interest income for each of the periods indicated.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
NON-ACCRUAL LOANS
(Dollars in Thousands) at December 31,               2001              2000              1999              1998              1997
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>               <C>               <C>               <C>                <C>
Non-accrual loans on a cash basis                  $1,019            $1,048            $1,311            $1,245             $ 813
----------------------------------------------------------------------------------------------------------------------------------
Non-accrual loans as a percentage of total loans     0.45 %            0.46 %            0.65 %            0.59 %            0.35 %
-----------------------------------------------------------------------------------------------------------------------------------
Interest which would have
  been recorded at original rate                     $ 22              $ 38              $ 56             $ 144              $ 64
Interest that was reflected in income                  33                42                35                23               111
-----------------------------------------------------------------------------------------------------------------------------------

Net impact on interest income                        $ 11               $ 4             $ (21)           $ (121)             $ 47
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>



         Set forth below are the amounts of loans outstanding as of the end of
each of the periods indicated that are 90 days and over past due and are on an
accrual basis and are not included in the table above. Management continues to
accrue interest on these loans since they are secured and in the process of
collection and are expected to be eventually paid in full.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
(Dollars in Thousands) at December 31,                         2001           2000           1999           1998            1997
------------------------------------------------------------------------------------------------------------------------------------
<S>                     <C>                                  <C>            <C>            <C>            <C>              <C>
Accruing loans past due 90 days or more                      $2,185         $1,469         $1,491         $1,021           $ 802
------------------------------------------------------------------------------------------------------------------------------------

Accruing loans past due 90 days or more
  as a percentage of total loans                               0.97 %         0.65 %         0.74 %         0.48 %          0.35 %

------------------------------------------------------------------------------------------------------------------------------------
</TABLE>



<PAGE>

       The Company measures impairment of a loan based on the present value of
expected future cash flows discounted at the loan's effective interest rate,
except that as a practical expedient, impairment may be measured based on a
loan's observable market price, or the fair value of the collateral if the loan
is collateral dependent. Regardless of the measurement method, a creditor must
measure impairment based on the fair value of the collateral when the creditor
determines that foreclosure is probable. SFAS No. 118 allows creditors to use
existing methods for recognizing interest income on impaired loans.

     The Company has identified a loan as impaired when it is probable that
interest and principal will not be collected according to the contractual terms
of the loan agreement. The accrual of interest is discontinued in such loans and
no income is recognized until all recorded amounts of interest and principal are
recovered in full.

     Loan impairment is measured by estimating the expected future cash flows
and discounting them at the respective effective interest rate or by valuing the
underlying collateral. The recorded investment in these loans and the valuation
for credit losses related to loan impairment at December 31, 2001 and 2000 are
as follows:

-----------------------------------------------------------------------------
(Dollars in Thousands) at Dec. 31,               2001                   2000
-----------------------------------------------------------------------------

Principal amount of impaired loans              $ 103                  $ 339
Accrued interest                                    -                      -
Deferred loan costs                                 -                      1
                                          ------------            -----------
                                                  103                    340
Less valuation allowance
  at December 31,                                 (43)                   (78)
                                          ------------            -----------
                                                $ 146                  $ 262

-----------------------------------------------------------------------------

     The activity in the allowance account for credit losses related to impaired
loans is as follows:

-----------------------------------------------------------------------------
(Dollars in Thousands)
  for the years                                  2001                   2000
-----------------------------------------------------------------------------

Valuation allowance at January 1,                $ 78                   $ 74
Provision for loan impairment                      22                     39
Direct charge-offs                                (17)                     -
Recoveries                                        (50)                     -
Transfers from (to) Unallocated Reserve            10                    (35)
                                          ------------            -----------
Valuation allowance
  at December 31,                                $ 43                   $ 78

-----------------------------------------------------------------------------


     Total cash collected on impaired loans during 2001 was $128,000, of which
$95,000 was credited to the principal balance outstanding on such loans, and
$33,000 was recognized as interest income.

     Total cash collected on impaired loans during 2000 was $201,000, of which
$159,000 was credited to the principal balance outstanding on such loans and
$42,000 was recognized as interest income. Interest that would have been accrued
on impaired loans was $22,000 and $38,000 in 2001 and 2000, respectively. The
valuation allowance for impaired loans of $43,000 at December 31, 2001 and
$78,000 at December 31, 2000 is included in the "Allowance for Possible Loan
Losses" which amounts to $2,264,000 and $2,411,000 at December 31, 2001 and
2000, respectively.

     Shown in the following table is the amount of "Other Real Estate Owned" as
of the end of each of the periods indicated and recorded as an asset on the
Company's



<PAGE>

books as the result of the foreclosure of certain non-performing real
estate loans.

--------------------------------------------------------------------------------
OTHER REAL ESTATE OWNED
(Dollars in Thousands)
  at December 31,             2001        2000       1999        1998      1997
--------------------------------------------------------------------------------
Other Real Estate
  Owned                       $ 93       $ 325      $ 571       $ 636     $ 284
--------------------------------------------------------------------------------



                             Allowance and Provision
                            for Possible Loan Losses

     The allowance for possible loan losses constitutes the amount available to
absorb estimated losses within the loan portfolio. As of December 31, 2001, the
allowance for possible loan losses was $2,264,000 as compared to the December
31, 2000 amount of $2,411,000 and the December 31, 1999 amount of $2,437,000.
The allowance for possible loan losses as a percentage of total loans
outstanding as of December 31, 2001 was 1.00%. This compares to 1.06% at the end
of 2000 and 1.20% at the end of 1999. The decrease in the allowance for possible
loan losses of $147,000 was the result of management's review of loans
outstanding (see discussion on "Loan Portfolio") and non-performing loans (the
sum of non-accrual loans and accruing loans past due 90 days or more). Included
in this review was an analysis of the related collateral of specific loans and
the assignment of a risk factor to all non-performing loans. Non-performing
loans totaled $3,204,000 at December 31, 2001 as compared to $2,517,000 at
December 31, 2000 (see tables on "Non-Accrual Loans" and "Accruing Loans Past
Due 90 Days or More"). Net charge-offs as detailed in the table "Allowance for
Possible Loan Losses" were $727,000 in 2001 or $326,000 more than the 2000
amount of $401,000. The 2001 and 2000 charge-offs were the result of losses on
commercial, consumer and residential real estate loans. Net loans charged-off in
1999 were $629,000. The ratio of net loan charge-offs to average loans
outstanding was .32%, .19% and .30% in 2001, 2000 and 1999, respectively.

     The provision for possible loan losses was $580,000 for the year ended
December 31, 2001, $375,000 for the years ended December 31, 2000 and 1999. In
2001, the increase in the provision was $205,000 due to the higher level of net
loan losses in 2001.

     The allowance for possible loan losses is established through a provision
for possible loan losses charged to expenses. Loans are charged against the
allowance for possible loan losses when management believes that the
collectibility of the principal is unlikely. The risk characteristics of the
loan portfolio are managed through various control processes, including credit
evaluations of individual borrowers, periodic reviews, diversification by
industry, and the establishment of lending targets to various segments of the
portfolio. Risk is further mitigated through the application of lending
procedures such as the holding of adequate collateral and the establishment of
contractual guarantees. Management believes that these procedures provide
adequate



<PAGE>

assurances against the adverse impact from any event or set of conditions, and
that the level of the allowance for possible loan losses is sufficient to meet
the present and potential risk characteristics of the loan portfolio, including
the current level of non-performing and past-due loans.

     The allowance for loan losses is evaluated based on an assessment of the
losses inherent in the loan portfolio. This assessment results in an allowance
consisting of two components, allocated and unallocated. The allocated component
of the allowance for loan losses reflects possible losses resulting from the
analysis of individual loans, pools of loans and commitments. The specific
allowance allocations for individual loans is based on an analysis of individual
loans where the internal credit rating is at or below a predetermined
classification. The general allocation for pools of loans and commitments is
based on historical loss experience adjusted for current trends in areas such as
lending policies, economic conditions, delinquencies and concentrations. The
historical loss factor is determined using actual loss experience and the
related internal risk rating of loans charged off. The unallocated portion of
the allowance is a function of the total allowance and the allocated portion of
the allowance. The analysis of the allowance is performed quarterly and
historical factors are updated periodically based on actual experience.

<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR POSSIBLE LOAN LOSSES

(Dollars in Thousands)
For the Year Ended December 31,                         2001             2000             1999             1998             1997
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>              <C>              <C>              <C>              <C>
Allowance for Loan Losses at Beginning of Year        $ 2,411          $ 2,437          $ 2,691          $ 2,664          $ 2,532

Loans Charged-Off by Category:
Commercial                                                 25               17              255              133              249
Real Estate -- Construction                                 -                -                -                -                -
Real Estate -- Residential                                171              219              147               59               20
Consumer/Installment                                      708              325              330              348              301
Other                                                       -                -                -                -                -
                                                  ------------     ------------     ------------     ------------     ------------
Total Loans Charged-Off                                   904              561              732              540              570
                                                  ------------     ------------     ------------     ------------     ------------

Loans Recovered by Category:
Commercial                                                 60                5               30               42               19
Real Estate -- Construction                                 -                -                -                -                -
Real Estate -- Residential                                 66              100               29                1                1
Consumer/Installment                                       51               55               44               74               77
Other                                                       -                -                -                -                -
                                                  ------------     ------------     ------------     ------------     ------------
Total Loans Recovered                                     177              160              103              117               97
                                                  ------------     ------------     ------------     ------------     ------------

Net Loans Charged-Off                                     727              401              629              423              473
                                                  ------------     ------------     ------------     ------------     ------------
Provision Charged to Expense                              580              375              375              450              605
                                                  ------------     ------------     ------------     ------------     ------------

Allowance for Loan Losses at End of Period            $ 2,264          $ 2,411          $ 2,437          $ 2,691          $ 2,664

Total Loans
Average Loans                                       $ 228,458        $ 214,856        $ 212,993        $ 217,191        $ 228,245
Year-End                                            $ 225,757        $ 226,944        $ 202,258        $ 212,437        $ 229,587

Net Loans Charged-Off to:
Average Loans                                            0.32 %           0.19 %           0.30 %           0.19 %           0.21 %
Loans at Year-End                                        0.32 %           0.18 %           0.31 %           0.20 %           0.21 %
Allowance for Possible Loan Losses at Year-End          32.11 %          16.63 %          25.81 %          15.72 %          17.76 %
Provision for Possible Loan Losses                     125.34 %         106.93 %         167.73 %          94.00 %          78.18 %

Allowance for Possible Loan Losses at Year-End to:
Average Loans                                            0.99 %           1.12 %           1.14 %           1.24 %           1.17 %
Loans at Year-End                                        1.00 %           1.06 %           1.20 %           1.27 %           1.16 %

------------------------------------------------------------------------------------------------------------------------------------
</TABLE>











<PAGE>

                                    Deposits

     Deposits are the primary source of the Company's funds. During 2001,
deposits increased by $26,696,000 or 7.6% to a total of $379,886,000 at December
31, 2001, from a total of $353,190,000 at December 31, 2000. Average deposits
for 2001 were $358,803,000, an increase of $22,414,000 or 6.7% over the average
total deposits for 2000 of $336,389,000. Contributing to the increase in
deposits were increases in savings, money market and checking products in
response to marketing campaigns to attract these types of deposits, and the
effects of lower interest rates and a slowing economy. The continued growth of
deposits held by the Company and the banking industry in general could be
adversely affected by the flow of funds into other banks, credit unions, mutual
funds and other investment options.

              The Bank's average time deposits, excluding certificates of
deposit over $100,000, increased in 2001 with average balances of $162,303,000,
which was $5,139,000 or 3.3% higher than the 2000 average balance of
$157,164,000. Non-interest bearing deposits averaged $48,959,000 in 2001 as
compared to $43,893,000 in 2000, an increase of $5,066,000 or 11.5%. In
addition, there was an increase in average interest-bearing demand deposits of
$1,936,000 or 3.6% to $55,087,000 in 2001 from $53,151,000 in 2000, an increase
in average certificates of deposit over $100,000 which averaged $7,334,000 in
2001 as compared to $5,886,000 in 2000, an increase of $1,448,000 or 24.6%, a
$6,580,000 or 48.9% increase in average money market deposits and an increase of
$2,245,000 or 3.6% in savings and club deposits. Average money market deposits
were $20,041,000 and $13,461,000 in 2001 and 2000, respectively. Average savings
and club deposits were $65,079,000 in 2001 as compared to $62,834,000 in 2000.

                                 Short-Term Debt

         The Bank had securities sold under agreements to repurchase totaling
$8,380,000 at December 31, 2001 and $7,215,000 at December 31, 2000. The Bank
had no short-term (overnight) debt at December 31, 2001 from the Federal Home
Loan Bank against a line of credit of $25,000,000. There was $5,695,000 in
short-term debt from the Federal Home Loan Bank outstanding at December 31,
2000. At December 31, 2001 and 2000, there was no short-term debt in the form of
Federal funds purchased, or Federal Reserve Bank discount borrowings. Additional
information relating to short-term debt can be found in Note G of the "Notes to
Consolidated Financial Statements".



<PAGE>

                         Liquidity and Capital Resources

         Liquidity is a measure of the Company's ability to raise funds to
support asset growth, meet deposit withdrawals and other borrowing needs,
maintain reserve requirements and otherwise operate the Company on an ongoing
basis. The Company manages its assets and liabilities to maintain liquidity and
earnings stability. Among the sources of asset liquidity are money market
investments, short-term investment securities, and funds received from the
repayment of loans and short-term debt. At year-end 2001, cash, due from banks,
Federal funds sold and interest-bearing deposits with banks totaled $18,189,000,
and securities maturing within one year totaled $8,050,000. At year-end 2000,
cash, due from banks, Federal funds sold and interest-bearing deposits with
banks totaled $17,833,000, and securities maturing within one year were
$2,345,000.

     The Bank is a member of the Federal Home Loan Bank of Pittsburgh,
Pennsylvania. The Bank had interest-bearing deposits at the Federal Home Loan
Bank of Pittsburgh in the amount of $891,000 at December 31, 2001, and $94,000
at December 31, 2000. These deposits are included in interest-bearing deposits
with banks on the Company's financial statements. As a result of this
relationship, the Bank places most of its short-term funds at the Federal Home
Loan Bank of Pittsburgh in place of other banks. The Federal Home Loan Bank of
Pittsburgh provides the Bank with a line of credit in the amount of $25,000,000,
all of which was available at December 31, 2001.

     The Bank had five long-term loans from the Federal Home Loan Bank of
Pittsburgh totaling $34,804,000 at December 31, 2001 and four long-term loans
totaling $34,000,000 at December 31, 2000. The loans outstanding at December 31,
2001 were originated in 2001, 2000, 1999 and 1998 with the proceeds used to fund
the growth in residential real estate loans and the investment portfolio. The
loans are for $7,000,000 originated in October, 1998 and due October, 2008, at a
fixed rate of 4.86% until October, 2003, at which time the rate may be converted
at the option of the lender to a variable rate of LIBOR plus 15 basis points;
$10,000,000 originated in August, 1999, and due in August, 2004, at a fixed rate
of 6.06% at December 31, 2001, the rate may be converted at the option of the
lender to a variable rate of LIBOR plus 15 basis points, if the LIBOR rate is
7.5% or higher; $12,000,000 originated in August, 2000, and due in August, 2010,
at a fixed rate of 6.23%; the rate may be converted at the option of the lender
to a variable rate of LIBOR plus 15 basis points, if the LIBOR rate is 8.0% or
higher; $804,000 originated in November, 2001, and due in November, 2006 at a
fixed rate of 6.43% with



<PAGE>

monthly interest and principal payments on a 30 year amortization schedule;
and $5,000,000 originated in December, 2001, and due in January, 2007 at 4.45%
fixed until December, 2002, at which time the rate may be converted at the
option of the lender to a variable rate of LIBOR plus 15 basis points if the
LIBOR rate is 7.5% or higher. If the lender elects to convert a fixed rate loan
to a variable rate, the Bank may prepay the loan converted in full at the time
of conversion without a penalty. The Bank had an additional loan from the
Federal Home Loan Bank at December 31, 2000 in the amount of $5,000,000 that was
paid in full in December, 2001. This loan was originated in 1996 and had a
variable interest rate of LIBOR plus 3 basis points (6.895% at December 31,
2000) (see Note H of the "Notes to Consolidated Financial Statements").

         Cash flows for the year ended December 31, 2001, consisted of cash used
by investing activities of $39,659,000 offset in part by cash provided by
financing activities of $21,949,000, and cash provided by operating activities
of $17,242,000 resulting in a net decrease in cash and cash equivalents of
$468,000. The cash used in investing activities was primarily for the purchase
of securities available-for-sale in the amount of $128,424,000, the purchase of
securities held-to-maturity in the amount of $15,033,000, a net increase in
loans of $18,288,000, a net increase in interest-bearing deposits with banks of
$824,000 and the purchase of premises and equipment in the amount of $706,000.
These cash uses were partially offset by the proceeds from the maturities of
securities available-for-sale of $75,806,000, proceeds from the sales of
securities available-for-sale of $35,263,000, proceeds from the maturities of
securities held-to-maturity of $11,843,000 and proceeds from the sale of other
real estate owned of $704,000. The cash provided by financing activities was
comprised of a net increase in interest and non-interest bearing demand and
savings deposits of $27,548,000, a net increase in repurchase agreements of
$1,165,000, a net increase in long-term debt of $804,000, proceeds from the sale
of common stock of $387,000 and a decrease in ESOP debt of $142,000. Partially
offsetting these increases were a decrease in short-term debt of $5,695,000, the
payment of cash dividends of $1,489,000 and a net decrease in certificates of
deposit of $852,000. The cash provided by operating activities was comprised
principally of the proceeds from mortgage loan sales of $44,678,000, net income
of $3,557,000, depreciation and amortization of $1,259,000, an increase in
accrued interest income of $938,000, the provision for possible loan losses of
$580,000, and amortization of security premiums of $426,000,



<PAGE>

reduced in part by mortgage loans originated for sale of $30,190,000, a decrease
in other liabilities of $1,611,000, a decrease in accrued interest payable of
$1,053,000, net investment securities gains of $929,000, accretion of security
discounts of $365,000, net gains on the sale of mortgage loans of $346,000, and
a net increase in other assets of $213,000.

         The Company recognizes the importance of maintaining adequate capital
levels to support sound, profitable growth and to encourage depositor and
investor confidence. Shareholders' equity at December 31, 2001 was $35,326,000
as compared to $33,521,000 at December 31, 2000, an increase of $1,805,000 or
5.4%. This increase was attributable to an increase of $1,347,000 in paid in
capital, an increase of $615,000 in common stock, an increase of $491,000 in
retained earnings and a decrease of $142,000 in ESOP debt. These increases were
offset in part by an increase of $59,000 in Treasury stock and a decrease of
$731,000 in accumulated other comprehensive income (see Note A.6 of the "Notes
to Consolidated Financial Statements"). The increases in paid in capital and
common stock was the result of the sale of common shares pursuant to the
Dividend Reinvestment Plan and the 5% stock dividend. Total shareholders'
equity, exclusive of accumulated other comprehensive income was $36,020,000 and
$33,484,000 at December 31, 2001 and 2000, respectively. This was an increase of
$2,536,000 or 7.6%. The accumulated other comprehensive income was comprised of
the unrealized gains or losses on securities available-for-sale. The unrealized
loss on securities available-for-sale at December 31, 2001 amounted to $694,000
(net of tax effect of $359,000). Included in shareholders' equity at December
31, 2000 was $37,000 (net of tax effect of $20,000) of unrealized gains on
securities available-for-sale (see discussion on "Securities
Available-for-Sale").

         The Company paid a 5% stock dividend on its common stock from
authorized but unissued shares on June 22, 2001 to all shareholders of record at
the close of business on June 4, 2001. On June 22, 2000, the Company paid a 5%
stock dividend on its common stock from authorized but unissued shares to all
shareholders of record at the close of business on June 2, 2000. The Company
also paid a 5% stock dividend on June 24, 1999 to shareholders of record on June
4, 1999. Fractional shares on the stock dividends were paid in cash. The number
of average shares and per share information in this report has been restated to
reflect these 5% stock dividends.



<PAGE>

     The Company maintains a Dividend Reinvestment and Stock Purchase Plan. In
2001, 20,426 new common shares were purchased pursuant to this Plan at an
average price of $16.04 for total proceeds of $328,000. In 2000, 22,728 new
common shares were purchased pursuant to the Plan at an average price of $13.77
per share. The total proceeds were $313,000.

     The Company adopted the "2001 Stock Option Plan" during 2001. This plan
provides for the awarding of stock options to key employees, officers, directors
of the Company and important consultants. During 2001, options to purchase
20,382 shares of the Company's common stock at an average price of $16.49 per
share were granted to certain officers and directors. In January 2002, options
to purchase 122,250 shares of the Company's common stock at an average price of
$22.17 per share were issued under the 2001 Stock Option Plan to certain
officers and directors.

         A Non-Employee Directors Stock Option Plan was adopted by the Company
in 1994. This plan provides for the awarding of stock options to the Company's
non-employee directors. There were no options awarded under this plan in 2001.
In 2000, options to purchase 2,814 shares of the Company's common stock at an
average price of $15.65 per share were granted to certain non-employee
directors. During 2000, options for 1,407 shares of the Company's common stock
issued pursuant to the plan were exercised at an average price of $12.09 per
share.

         The Company also has a Stock Option Plan that was adopted in 1986 and
the 1996 Stock Option Plan that was adopted in 1996 which provide for the
granting of options to acquire the Company's common stock for officers and key
employees. No new options may be issued under the 1986 Stock Option Plan. In
January 2001, options to purchase 41,479 shares of the Company's common stock at
an average price of $16.59 per share were granted to certain officers. During
2001, options for 4,692 shares of the Company's common stock issued pursuant to
the plan were exercised at an average price of $12.50 per share. As a result of
the adoption of the 2001 Stock Option Plan, no new options may be issued under
the 1996 Stock Option Plan. In 2000, no options were issued under the 1996 Stock
Option Plan. No options were exercised under these plans in 2000.

         The Company and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possible
additional discretionary actions by regulators that, if undertaken, could have



<PAGE>

a direct material effect on the Company's financial statements. Additional
information relating to the Company's and Bank's capital requirements and
capital ratios can be found in Note R of the "Notes to Consolidated Financial
Statements".

     The Company, in March, 2001, settled claims by a group of funeral
directors, against the Bank in connection with certain pre-need funeral trusts
which were allegedly directed by funeral directors to be invested in a private
placement annuity. In 1998, the Company established a reserve of $1.5 million
against these possible claims. The Company added an additional $1,012,000 to
this reserve in 2000. The reserve balance, as of December 31, 2001 and 2000
equaled $336,000 and $2,480,000, respectively. Payments made from this reserve
amounted to $2,025,000 in 2001. In addition, the reserve was reduced in 2001 by
$119,000 with a corresponding credit to operating expenses. This reduction in
the reserve was the result of an analysis by management of the funds required to
meet the remaining commitments. There were no additions to this reserve in 2001.
The Company expects the reserve to be sufficient to cover the remaining
liabilities. The Company has incurred legal expenses in regard to these claims
during 2001, 2000 and 1999. The Company will continue to incur legal expenses in
regard to these claims during 2002.

                     Impact of Inflation and Changing Prices

         The majority of assets and liabilities of a financial institution are
monetary in nature and, therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets or
inventories. However, inflation does have an important impact on the growth of
total assets in the banking industry and the resulting need to increase equity
capital at higher than normal rates in order to maintain an appropriate
equity-to-assets ratio. Another significant effect of inflation is on other
expenses, which tend to rise during periods of general inflation.

         Management believes the most significant impact on financial results is
the Company's ability to react to changes in interest rates (see discussions on
"Market Risk" and "Interest Rate Sensitivity").

                          New Accounting Pronouncements

     In June 2001, SFAS 141, Business Combinations, and SFAS 142, Goodwill and
Intangible Assets, were issued. Major provisions of these Statements are as
follows: all business combinations initiated after June 30, 2001 must use the
purchase method of accounting; the pooling of interest method of accounting is
prohibited except for transactions initiated before July 1, 2001, and



<PAGE>

intangible assets acquired in a business combination must be recorded separately
from goodwill. Effective January 1, 2002, goodwill and intangible assets with
indefinite lives are not amortized but are tested for impairment annually. The
adoption of this statement will not have a material impact on the Company's
financial position or results of operations.

     On July 6, 2001, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) 102, Selected Loan Loss Allowance Methodology and
Documentation Issues. SAB 102 provides guidance on the development,
documentation, and application of a systematic methodology for determining the
allowance for loans and leases in accordance with US GAAP. The issuance of SAB
No. 102 did not have a material impact on the Company's financial position or
results of operation.

     In August, 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS No. 144 retains the existing
requirements to recognize and measure the impairment of long-lived assets to be
held and used or to be disposed of by sale. However, SFAS 144 makes changes to
the scope and certain measurement requirements of existing accounting guidance.
SFAS 144 also changes the requirements relating to reporting the effects of a
disposal or discontinuation of a segment of a business. SFAS 144 is effective
for financial statements issued for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years. The adoption of this
statement is not expected to have a significant impact on the financial
condition or results of operations of the Company.


Item 7.A  Quantitative and Qualitative Disclosure About Market Risks
--------  ----------------------------------------------------------

          Contained in Item 7 "Management's Discussion and Analysis of Financial
          Condition And Results of Operation".


<PAGE>

Item 8.   Financial Statements and Supplementary Data
-------   -------------------------------------------

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Board of Directors
First Colonial Group, Inc.

      We have audited the accompanying consolidated balance sheets of First
Colonial Group, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 2001.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

      We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of First Colonial
Group, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.




GRANT THORNTON LLP


Philadelphia, Pennsylvania
January 18, 2002

<PAGE>

FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
---------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) At December 31,                                                     2001                       2000
---------------------------------------------------------------------------------------------------------------------------

ASSETS
<S>                                                                                     <C>                        <C>
Total Cash and Cash Equivalents                                                         $17,270                    $17,738

Interest-Bearing Deposits With Banks                                                        919                         95
Investments Securities Held-to-Maturity
  (Fair Value:  2001 - $23,160; 2000 - $19,906)                                          23,004                     19,972
Investment Securities Available-for-Sale                                                181,302                    164,029
Mortgage Loans Held-for-Sale                                                              3,808                          -
Total Loans                                                                             225,757                    226,944
Less:  Allowance for Possible Loan Losses                                                (2,264)                    (2,411)
                                                                                  --------------            ---------------
Net Loans                                                                               223,493                    224,533
Premises and Equipment, Net                                                               6,562                      6,832
Accrued Interest Income                                                                   2,888                      3,826
Other Real Estate Owned                                                                      93                        325
Other Assets                                                                              5,805                      5,701
                                                                                  --------------            ---------------

  TOTAL ASSETS                                                                         $465,144                   $443,051
                                                                                  --------------            ---------------

LIABILITIES
Deposits
  Non-Interest-Bearing Deposits                                                         $57,931                    $48,748
  Interest-Bearing Deposits
    (Includes Certificates of Deposit in Excess
      of $100:  2001 - $11,592; 2000 - $8,008)                                          321,955                    304,442
                                                                                  --------------            ---------------
  Total Deposits                                                                        379,886                    353,190

Securities Sold Under Agreements to Repurchase                                            8,380                      7,215
Short-Term Debt                                                                               -                      5,695
Long-Term Debt                                                                           34,804                     34,000
Accrued Interest Payable                                                                  3,949                      5,002
Other Liabilities                                                                         2,799                      4,428
                                                                                  --------------            ---------------

  TOTAL LIABILITIES                                                                     429,818                    409,530
                                                                                  --------------            ---------------

SHAREHOLDERS' EQUITY
Preferred Stock, Par Value $5.00 a share
  Authorized:  500,000 shares, none issued                                                  ---                        ---

Common Stock, Par Value $5.00 a share
  Authorized:  10,000,000 shares
  Issued: 2,085,778 shares in 2001 and 1,962,699 shares in 2000                          10,429                      9,814
Additional Paid-In Capital                                                               18,304                     16,957
Retained Earnings                                                                         8,581                      8,090
Less:  Treasury stock at Cost:
  2,463 shares in 2001 and no shares in 2000                                                (59)                         -
Employee Stock Ownership Plan Debt                                                       (1,235)                    (1,377)
Accumulated Other Comprehensive Income (Loss)                                              (694)                        37
                                                                                  --------------            ---------------

TOTAL SHAREHOLDERS' EQUITY                                                               35,326                     33,521
                                                                                  --------------            ---------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                             $465,144                   $443,051
                                                                                  --------------            ---------------

---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.


<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME

---------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, except per share data)
  For the Year Ended December 31,                           2001                       2000                     1999
---------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>                        <C>                      <C>
INTEREST INCOME
Interest and Fees on Loans                               $18,596                    $18,116                  $17,772
Interest on Investment Securities
  Taxable                                                  9,515                      9,440                    6,829
  Tax-Exempt                                               1,756                      1,567                    1,509
Interest on Deposits with Banks and
  Federal Funds Sold                                         168                        164                      243
                                                    -------------              -------------            -------------
    Total Interest Income                                 30,035                     29,287                   26,353
                                                    -------------              -------------            -------------

INTEREST EXPENSE
Interest on Deposits                                      11,521                     11,414                    9,819
Interest on Short-Term Debt                                  459                        588                      283
Interest on Long-Term  Debt                                1,989                      1,945                    1,347
                                                    -------------              -------------            -------------
    Total Interest Expense                                13,969                     13,947                   11,449
                                                    -------------              -------------            -------------

NET INTEREST INCOME                                       16,066                     15,340                   14,904
Provision for Possible Loan Losses                           580                        375                      375
                                                    -------------              -------------            -------------

Net Interest Income After Provision
  for Possible Loan Losses                                15,486                     14,965                   14,529
                                                    -------------              -------------            -------------

OTHER INCOME
Trust Revenue                                              1,287                      1,245                    1,246
Service Charges on Deposit Accounts                        2,335                      2,019                    1,682
Investment Securities Gains, Net                             929                        174                      563
Gains on Sales of Mortgage Loans                             346                         59                      157
Other Operating Income                                       710                        825                      707
                                                    -------------              -------------            -------------

    Total Other Income                                     5,607                      4,322                    4,355
                                                    -------------              -------------            -------------

OTHER EXPENSES
Salaries and Employee Benefits                             8,224                      7,437                    6,780
Net Occupancy and Equipment Expense                        2,528                      2,392                    2,171
Other Operating Expenses                                   5,976                      7,116                    5,722
                                                    -------------              -------------            -------------

    Total Other Expenses                                  16,728                     16,945                   14,673
                                                    -------------              -------------            -------------

Income Before Income Taxes                                 4,365                      2,342                    4,211
Income Taxes                                                 808                        270                      929
                                                    -------------              -------------            -------------

NET INCOME                                                $3,557                     $2,072                   $3,282
                                                    =============              =============            =============

PER SHARE DATA
Net Income - Basic                                        $ 1.77                     $ 1.04                   $ 1.67
Net Income - Diluted                                      $ 1.77                     $ 1.04                   $ 1.66
Cash Dividends                                            $ 0.74                     $ 0.70                   $ 0.67

---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.


<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)                                  Additional                                       Accumulated
                                            Common       Paid-In      Retained     Treasury    ESOP   Other Comprehensive
                                             Stock       Capital      Earnings      Stock      Debt      Income (Loss)      Total
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>         <C>          <C>            <C>      <C>          <C>           <C>
Balance at January 1, 1999                   $8,729      $13,873      $ 9,023        $ -      $ (435)      $ 527         $ 31,717

                      1999
Comprehensive Income
   Net Income                                                           3,282                                               3,282
   Change in Unrealized Securities
     Gains (Losses), Net                                                                                  (4,848)          (4,848)
                                                                                                                         ---------
Total Comprehensive Income (Loss)                                                                                          (1,566)
Sale of Common Stock under
  Dividend Reinvestment Plan (14,732 shares)     74          242                                                              316
Sale of Common Stock under
  Directors Stock Option Plan (496 shares)        2            2                                                                4
Cash Dividends Paid                                                    (1,321)                                             (1,321)
Stock Dividend of 5% (87,484 shares)            437        1,575       (2,012)                                                  -
Cash Paid in Lieu of Fractional Shares                                     (4)                                                 (4)
ESOP Loan Payment                                                                                115                          115
Loan to ESOP                                                                                  (1,000)                      (1,000)
Unallocated ESOP Shares Committed
  to Employees (3,691 shares)                                (18)                                                             (18)
                                            -------      -------      -------      -----    --------      ------         --------
Balance at December 31, 1999                  9,242       15,674        8,968          -      (1,320)     (4,321)          28,243

                      2000
Comprehensive Income
   Net Income                                                           2,072                                               2,072
   Change in Unrealized Securities
     Gains, Net                                                                                            4,358            4,358
                                                                                                                         ---------
Total Comprehensive Income                                                                                                  6,430
Sale of Common Stock under
  Dividend Reinvestment Plan (21,177 shares)    106          207                                                              313
Sale of Common Stock under
  Directors Stock Option Plan (332 shares)        2                                                                             2
Cash Dividends Paid                                                    (1,406)                                             (1,406)
Stock Dividend of 5% (92,752 shares)            464        1,078       (1,542)                                                  -
Cash Paid in Lieu of Fractional Shares                                     (2)                                                 (2)
ESOP Loan Payment                                                                                115                          115
Loan to ESOP                                                                                    (172)                        (172)
Unallocated ESOP Shares Committed
  to Employees (6,334 shares)                                 (2)                                                              (2)
                                            -------      -------      -------      -----    --------      ------         --------
Balance at December 31, 2000                  9,814       16,957        8,090          -      (1,377)         37           33,521

                      2001
Comprehensive Income
   Net Income                                                           3,557                                               3,557
   Change in Unrealized Securities
     Gains (Losses), Net                                                                                    (731)            (731)
                                                                                                                         ---------
Total Comprehensive Income                                                                                                  2,826
Sale of Common Stock under
  Dividend Reinvestment Plan (19,907 shares)    100          228                                                              328
Sale of Common Stock under
   Stock Option Plan (4,692 shares)              23           36                                                               59
Purchase of Treasury Shares (2,463 shares)                                           (59)                                     (59)
Cash Dividends Paid                                                    (1,489)                                             (1,489)
Stock Dividend of 5% (98,480 shares)            492        1,083       (1,575)                                                  -
Cash Paid in Lieu of Fractional Shares                                     (2)                                                 (2)
ESOP Loan Payment                                                                                142                          142
Unallocated ESOP Shares Committed
  to Employees (9,000 shares)                                  -                                                                -
                                            -------      -------      -------      -----    --------      ------         --------
Balance at December 31, 2001                $10,429      $18,304      $ 8,581      $ (59)   $ (1,235)     $ (694)        $ 35,326

----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>


FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) For the Year Ended December 31,                        2001                    2000                    1999
-----------------------------------------------------------------------------------------------------------------------------------

OPERATING ACTIVITIES
<S>                                                                        <C>                      <C>                     <C>
  Net Income                                                               $ 3,557                  $2,072                  $3,282
  Adjustments to Reconcile Net Income to
  Net Cash Provided by Operating Activities:
        Provision for Possible Loan Losses                                     580                     375                     375
        Depreciation and Amortization                                        1,259                   1,120                   1,027
        Accretion of Security Discounts                                       (365)                   (430)                   (267)
        Amortization of Security Premiums                                      426                     239                     251
        Deferred Taxes                                                         185                    (389)                     90
        Amortization of Deferred Fees on Loans                                 359                     479                      12
        Gain on Sale of Other Real Estate Owned                                (33)                   (119)                    (39)
        Loss from Writedown of Other Real Estate Owned                           -                     184                       -
        Investment Securities Gains, Net                                      (929)                   (174)                   (563)
        Gain on Sale of Mortgage Loans                                        (346)                    (59)                   (157)
        Mortgage Loans Originated for Sale                                 (30,190)                 (7,718)                (37,460)
        Mortgage Loan Sales                                                 44,678                   7,718                  38,068
        Changes in Assets and Liabilities
            Decrease (Increase) in Accrued Interest Income                     938                    (781)                   (503)
            (Decrease) Increase in Accrued Interest Payable                 (1,053)                    794                     672
            Increase in Other Assets                                          (213)                   (439)                   (970)
            (Decrease) Increase in Other Liabilities                        (1,611)                  1,181                      71
                                                                     --------------            ------------            ------------

Net Cash Provided by Operating Activities                                   17,242                   4,053                   3,889
                                                                     --------------            ------------            ------------

INVESTING ACTIVITIES
  Proceeds from Maturities of Securities Available-for-Sale                 75,806                  13,747                  15,331
  Proceeds from Maturities of Securities Held-to-Maturity                   11,843                   1,128                   3,622
  Proceeds from Sales of Securities Available-for-Sale                      35,263                   8,294                  16,858
  Purchase of Securities Available-for-Sale                               (128,424)                (45,625)                (72,150)
  Purchase of Securities Held-to-Maturity                                  (15,033)                 (2,334)                 (6,559)
  Net (Increase) Decrease in Interest-Bearing Deposits With Banks             (824)                  5,494                  (2,288)
  Net (Increase) Decrease in Loans                                         (18,288)                (25,949)                  9,412
  Purchase of Premises and Equipment                                          (706)                   (703)                 (1,143)
  Proceeds from Sale of Other Real Estate Owned                                704                     623                     382
                                                                     --------------            ------------            ------------

Net Cash Used in Investing Activities                                      (39,659)                (45,325)                (36,535)
                                                                     --------------            ------------            ------------

FINANCING ACTIVITIES
  Net Increase in Interest and Non-Interest Bearing
        Demand Deposits and Savings Accounts                                27,548                  12,074                   2,058
  Net (Decrease) Increase in Certificates of Deposit                          (852)                 16,636                  27,873
  Net Increase in Long-Term Debt                                               804                   4,000                  10,000
  Net Decrease (Increase) in ESOP Debt                                         142                     (57)                   (885)
  Net Increase (Decrease) in Repurchase Agreements                           1,165                   5,485                  (3,364)
  (Decrease) Increase in Short-Term Debt                                    (5,695)                  5,695                       -
  Proceeds from Issuance of Common Stock                                       387                     313                     302
  Purchase of Treasury Stock                                                   (59)                      -                       -
  Cash Dividends Paid                                                       (1,489)                 (1,406)                 (1,321)
  Cash Paid in Lieu of Fractional Shares                                        (2)                     (2)                     (4)
                                                                     --------------            ------------            ------------

Net Cash Provided by Financing Activities                                   21,949                  42,738                  34,659
                                                                     --------------            ------------            ------------
Increase (Decrease) in Cash and Cash Equivalents                              (468)                  1,466                   2,013
Cash and Cash Equivalents, January 1,                                       17,738                  16,272                  14,259
                                                                     --------------            ------------            ------------
Cash and Cash Equivalents, December 31,                                   $ 17,270                 $17,738                 $16,272

-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.


<PAGE>

FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands, except per share
data.)

NOTE A - SUMMARY OF ACCOUNTING POLICIES

First Colonial Group, Inc. (the "Company") is a one bank holding company of
Nazareth National Bank and Trust Company (the "Bank"). The Bank is an
independent community bank providing retail and commercial banking services
through its nineteen offices in Northampton, Lehigh, and Monroe counties in
northeastern Pennsylvania.

The Bank competes with other banking and financial institutions in its primary
market communities, including financial institutions with resources
substantially greater than its own. Commercial banks, savings banks, savings and
loan associations, credit unions and money market funds actively compete for
savings and time deposits and for various types of loans. Such institutions, as
well as consumer finance and insurance companies, may be considered competitors
of the Bank with respect to one or more of the services it renders.

The Company and the Bank are subject to regulations of certain state and Federal
agencies and, accordingly, they are periodically examined by those regulatory
agencies. As a consequence of the extensive regulation of commercial banking
activities, the Bank's business is particularly susceptible to being affected by
state and Federal legislation and regulation which may have the effect of
increasing the cost of doing business.

1.  BASIS OF FINANCIAL STATEMENT PRESENTATION

         The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, the Bank and First C. G. Company,
Inc. All significant inter-company balances and transactions have been
eliminated.

         In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the dates of the balance sheets and revenues and
expenditures for the periods. Therefore, actual results could differ
significantly from those estimates.

         The principal estimate that is particularly susceptible to significant
change in the near term relates to the allowance for loan losses. The evaluation
of the adequacy of the allowance for loan losses includes an analysis of the
individual loans and overall risk characteristics and size of the different loan
portfolios, and takes into consideration current economic and market conditions,
the capability of specific borrowers to pay specific loan obligations, as well
as current loan collateral values. However, actual



<PAGE>

losses on specific loans, which also are encompassed in the analysis, may vary
from estimated losses.

         The Company has one reportable segment, "Community Banking". All of the
Company's activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Company supports the others.
For example, commercial lending is dependent upon the ability of the Bank to
fund itself with retail deposits and other borrowings and to manage interest
rate and credit risk. This situation is also similar for consumer and
residential mortgage lending. Accordingly, all significant operating decisions
are based upon analysis of the Company as one operating segment or unit.

 2.  INVESTMENT SECURITIES

         As required by Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities", the
Company classifies debt and marketable equity securities in three categories:
trading, available-for-sale and held-to-maturity. Trading securities are
measured at fair value, with unrealized holding gains and losses included in
income. The Company does not have any securities classified as trading
securities. Available-for-sale securities are measured at fair value, with
unrealized gains and losses, net of tax effect, reported in equity. Investment
securities held-to-maturity are principally debt securities and are carried at
cost, net of unamortized premiums and discounts, which are recognized in
interest income using the interest method over the period to maturity. The
Company has the positive intent and ability to hold such securities until
maturity. Gains or losses on disposition are based on the net proceeds and the
adjusted carrying amount of the securities sold, using the specific
identification method.

3.  MORTGAGE LOANS HELD-FOR-SALE

         Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of aggregate cost or estimated fair value. Gains and
losses on the sales of loans are also accounted for in accordance with SFAS No.
134, "Accounting for Mortgage Securities Retained after the Securitizations of
Mortgage Loans Held-for-Sale by a Mortgage Banking Enterprise". This new
statement requires that an entity engaged in mortgage banking activities
classify the retained mortgage-backed security or other interest, which resulted
from the securitizations of a mortgage loan held-for-sale based upon its ability
and intent to sell or hold these investments.

4.  LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES

         Loans receivable that the Company has the intent and ability to hold
for the foreseeable future or until maturity or payoff are stated at the amount
of



<PAGE>

unpaid principal, reduced by unearned discount and an allowance for possible
loan losses. Interest income on loans is accrued using various methods which
approximate a constant yield.

         Certain origination and commitment fees, and certain direct loan
origination costs are deferred and amortized over the contractual life of the
related loans. This results in an adjustment of the yield on the related loan.

         Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that collection of interest is
doubtful. Upon such discontinuance, all unpaid accrued interest is reversed.

         The allowance for possible loan losses is established through a
provision for loan losses charged to expenses. Loans are charged against the
allowance for possible loan losses when management believes that the
collectibility of principal is unlikely. The allowance 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 and prior loan loss experience. The evaluations take into consideration
such factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current economic
conditions that may affect the borrower's ability to pay.

         As required by SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosures", the Company measures impairment
based on the present value of expected future cash flows discounted at the
loan's effective interest rate, except that, as a practical expedient,
impairment may be measured based on the observable market price of a loan, or
the fair value of the collateral if the loan is collateral dependent. The
Company measures impairment based on the fair value of the collateral when it
determines that foreclosure is probable.

         On July 6, 2001, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) 102, Selected Loan Loss Allowance Methodology
and Documentation Issues. SAB 102 provides guidance on the development,
documentation, and application of a systematic methodology for determining the
allowance for loans and leases in accordance with US GAAP. The issuance of SAB
No. 102 did not have a material impact on the Company's financial position or
results of operations.


<PAGE>


 5.  PREMISES AND EQUIPMENT

         Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation of buildings and land improvements is computed
principally on the straight-line method, and for equipment, principally on an
accelerated method, over the estimated useful lives of the assets.

 6.  COMPREHENSIVE INCOME

         The Company follows SFAS No. 130, "Reporting 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.




<PAGE>

The income tax effects allocated to comprehensive income are as follows:

------------------------------------------------------------------------------
For the Year Ended December 31,       Before Tax       Tax       Net of Tax
                                        Amount       Expense       Amount
                                                    (Credit)
                                     -----------------------------------------
2001
-------------------------------------
Unrealized Losses on Securities:
  Unrealized Holding Losses
    Arising During Period                   $ (181)      $ (63)        $ (118)
  Less:  Reclassification
    Adjustment for Gains
    Realized in Net Income                    (929)       (316)          (613)
                                     -----------------------------------------

Other Comprehensive Loss, Net             $ (1,110)     $ (379)        $ (731)
                                     =========================================

2000
-------------------------------------
Unrealized Gains on Securities:
  Unrealized Holding Gains
    Arising During Period                  $ 6,778    $ (2,305)       $ 4,473
  Less:  Reclassification
    Adjustment for Gains
    Realized in Net Income                    (174)         59           (115)
                                     -----------------------------------------

Other Comprehensive Income, Net            $ 6,604    $ (2,246)       $ 4,358
                                     =========================================

1999
-------------------------------------
Unrealized Losses on Securities:
  Unrealized Holding Losses
    Arising During Period                 $ (7,910)   $ (2,690)      $ (5,220)
  Less:  Reclassification
    Adjustment for Gains
    Realized in Net Income                     563         191            372
                                     -----------------------------------------

Other Comprehensive Loss, Net             $ (7,347)   $ (2,499)      $ (4,848)
                                     =========================================

------------------------------------------------------------------------------








<PAGE>

7. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

         SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was amended in June, 1999 by SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133", and in June, 2000, by SFAS 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", (collectively SFAS 133).
SFAS 133 requires that entities recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. Under SFAS 133 an entity may designate as a hedge of
exposure to either changes in: (a) fair value of a recognized asset or liability
or firm commitment, (b) cash flows of a recognized for forecasted transaction,
or (c) foreign currencies of a net investment in foreign operations, firm
commitments, available-for-sale securities or a forecasted transaction.
Depending upon the effectiveness of the hedge and/or the transaction being
hedged, any changes in the fair value of the derivative instrument is either
recognized in earnings in the current year, deferred to future periods, or
recognized in other comprehensive income. Changes in the fair value of all
derivative instruments not recognized as hedge accounting are recognized in
current year earnings. The Company adopted SFAS 133 effective January 1, 2001.
No adjustment was required as a result of the change in accounting principle.

         Statement of Financial Accounting Standards No. 119, "Disclosure About
Derivative Financial Instruments and Fair Value of Financial Instruments" ("SFAS
119") requires disclosures about financial instruments, which are defined as
futures, forwards, swap and option contracts and other financial instruments
with similar characteristics. On balance sheet receivables and payables are
excluded from this definition. The Company did not hold any derivative financial
instruments as defined by SFAS 119 at December 31, 2001, 2000 or 1999.

8. INCOME TAXES

         The Company calculates deferred income taxes under the liability method
called for in SFAS No. 109, "Accounting for Income Taxes", whereby deferred tax
assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences reverse.
Deferred tax expense is the result of changes in deferred tax assets and
liabilities.



<PAGE>

9. STOCK OPTION PLANS

         Under Stock Option Plans, options to acquire shares of common stock are
granted to certain officers, key employees and directors.

         The Company's Stock Option Plans are accounted for under SFAS No. 123,
"Accounting for Stock-Based Compensation". This standard contains a fair
value-based method for valuing stock-based compensation which measures
compensation cost at the grant date based on the fair value of the award.
Compensation is then recognized over the service period, which is usually the
vesting period. Alternatively, the standard permits entities to continue
accounting for employee stock options and similar instruments under APB Opinion
No. 25. Entities that continue to account for stock options using APB Opinion
No. 25 are required to make pro forma disclosures of net income and earnings per
share, as if the fair value-based method of accounting defined in SFAS No. 123
had been applied. The Company's stock option plans are accounted for under APB
Opinion No. 25.

10.  EMPLOYEE BENEFIT PLANS

         The Company has established an Employee Stock Ownership Plan (ESOP)
covering eligible employees with one year of service as defined by the ESOP. The
Company accounts for its ESOP in accordance with Statement of Position (SOP)
93-6, "Employer's Accounting for Employee Stock Ownership Plans", issued by the
Accounting Standards Division of the American Institute of Certified Public
Accountants (AICPA). SOP 93-6 is applied to shares acquired by the ESOP after
December 31, 1992.

         Employees who qualify may elect to participate in a deferred salary
savings 401(k) plan. The Company contributes $.50 for each $1.00 up to the first
5% that each employee contributes. The Company also has an executive
compensation plan which provides additional death, medical and retirement
benefits to certain officers.

         The Company has a deferred compensation plan involving the Directors of
the Company. This plan provides defined annual payments for 15 years beginning
at age 65 or death in exchange for the Directors deferring the payment of a
portion of their fees.

         The Company records the cost of post-retirement medical benefits on the
accrual basis as employees render service to earn the benefits and records a
liability for the unfunded accumulated post-retirement benefit obligation. The
transition obligation, representing the unfunded and unrecognized accumulated
past-service benefit



<PAGE>

obligation for all plan participants, will be amortized on a straight-line basis
over a 20-year period.

11. TRUST ASSETS AND REVENUE

         Assets held by the Trust Department of the Bank in fiduciary or agency
capacities for its customers are not included in the accompanying consolidated
balance sheets since such assets are not assets of the Company. Operating
revenue and expenses of the Trust Department are included under their respective
captions in the accompanying consolidated statements of income and are recorded
on the accrual basis.

12. PER SHARE INFORMATION

         The Company follows the provisions of SFAS No. 128, "Earnings Per
Share". Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average common shares
outstanding during the period. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock. Share and per share
amounts have been retroactively restated to reflect the three 5% stock dividends
in June 2001, 2000 and 1999.


13. STATEMENT OF CASH FLOWS

         The Company considers cash, due from banks and Federal funds sold as
cash equivalents for the purposes of the Consolidated Statements of Cash Flows.

         Cash paid for interest was $15,022,000, $13,153,000 and $10,777,000,
for the years ended December 31, 2001, 2000 and 1999, respectively. Cash paid
for taxes was $610,000 in 2001, $500,000 in 2000 and $1,060,000 in 1999.

14. ADVERTISING COSTS

         The Company expenses advertising costs as incurred.

15. TRANSFER AND SERVICING OF ASSETS AND EXTINGUISHMENTS OF LIABILITIES

         In September, 2000, SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", was issued.
SFAS No. 140 replaces SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", and revises the standards
for accounting for the securitizations and other transfers of financial assets
and collateral. This new standard also requires certain disclosures, but carries
over most of the provisions of SFAS 125. SFAS 140 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. However,


<PAGE>

for recognition and reclassification of collateral and for disclosures relating
to securitizations transactions and collateral this statement is effective for
fiscal years ending after December 15, 2000 with earlier application not allowed
and is to be applied prospectively. The adoption of this statement did not have
a material impact on the Company's consolidated financial statements.

16. NEW ACCOUNTING PRONOUNCEMENTS

         In June, 2001, SFAS 141, Business Combinations, and SFAS 142, Goodwill
and Intangible Assets, were issued. Major provisions of these Statements are as
follows: all business combinations initiated after June 30, 2001 must use the
purchase method of accounting; the pooling of interest method of accounting is
prohibited except for transactions initiated before July 1, 2001; and intangible
assets acquired in a business combination must be recorded separately from
goodwill. Effective January 1, 2002, goodwill and intangible assets with
indefinite lives are not amortized but are tested for impairment annually. The
adoption of this statement will not have a material impact on the Company's
financial position or results of operations.

         In August, 2001, the FASB issued SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 retains the existing
requirements to recognize and measure the impairment of long-lived assets to be
held and used or to be disposed of by sale. However, SFAS 144 makes changes to
the scope and certain measurement requirements of existing accounting guidance.
SFAS 144 also changes the requirements relating to reporting the effects of a
disposal or discontinuation of a segment of a business. SFAS 144 is effective
for financial statements issued for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years. The adoption of this
statement is not expected to have a significant impact on the financial
condition or results of operations of the Company.

17. RECLASSIFICATIONS

         Certain reclassifications of prior years amounts have been made to
conform to the 2001 presentation.


<PAGE>
NOTE B - INVESTMENT SECURITIES

         The amortized cost, unrealized gains and losses, and fair value of the
Company's available-for-sale and held-to-maturity securities at December 31,
2001 and 2000 are summarized as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Available-for-Sale Securities                                                 2001
-------------------------------------------------------------------------------------------------------------------------------
                                                                    Gross                    Gross
                                         Amortized               Unrealized                Unrealized                 Fair
                                            Cost                    Gains                    Losses                   Value
-------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                          <C>                      <C>                  <C>
U. S. Treasury                              $ 5,074                      $ 34                     $ -                  $ 5,108
U. S. Government Agency                      43,977                       127                    (400)                  43,704
State and Political Subdivisions             31,450                       130                    (453)                  31,127
Mortgage-Backed Securities                   87,461                       438                    (646)                  87,253
Corporate Bonds                                 456                         2                     (36)                     422
Equity Securities                            13,937                       269                    (518)                  13,688
                                     ---------------            --------------            ------------            -------------

Total                                      $182,355                   $ 1,000                $ (2,053)                $181,302

-------------------------------------------------------------------------------------------------------------------------------

                                                                              2000
                                     ------------------------------------------------------------------------------------------
                                                                    Gross                    Gross
                                         Amortized               Unrealized                Unrealized                 Fair
                                            Cost                    Gains                    Losses                   Value
                                     ------------------------------------------------------------------------------------------

U. S. Treasury                              $ 4,011                      $ 13                    $ (2)                 $ 4,022
U. S. Government Agency                      79,145                       672                    (718)                  79,099
State and Political Subdivisions             28,210                       233                    (190)                  28,253
Mortgage-Backed Securities                   44,110                       309                    (290)                  44,129
Corporate Bonds                                   -                         -                       -                        -
Equity Securities                             8,496                       417                    (387)                   8,526
                                     ---------------            --------------            ------------            -------------

Total                                      $163,972                   $ 1,644                $ (1,587)                $164,029

-------------------------------------------------------------------------------------------------------------------------------




-------------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity Securities                                                   2001
-------------------------------------------------------------------------------------------------------------------------------
                                                                    Gross                    Gross
                                         Amortized               Unrealized                Unrealized                 Fair
                                            Cost                    Gains                    Losses                   Value
-------------------------------------------------------------------------------------------------------------------------------

U. S. Government Agency                     $ 8,622                     $ 197                     $ -                  $ 8,819
State and Political Subdivisions              7,885                        38                    (112)                   7,811
Mortgage-Backed Securities                    6,497                        56                     (23)                   6,530
                                     ---------------            --------------            ------------            -------------
                                     ---------------            --------------            ------------            -------------

Total                                      $ 23,004                     $ 291                  $ (135)                 $23,160

-------------------------------------------------------------------------------------------------------------------------------

                                     ------------------------------------------------------------------------------------------
                                                                              2000
                                     ------------------------------------------------------------------------------------------
                                                                    Gross                    Gross
                                         Amortized               Unrealized                Unrealized                 Fair
                                            Cost                    Gains                    Losses                   Value
                                     ------------------------------------------------------------------------------------------

U. S. Government Agency                     $ 7,937                      $ 15                   $ (49)                 $ 7,903
State and Political Subdivisions              8,016                        45                     (70)                   7,991
Mortgage-Backed Securities                    4,019                        23                     (30)                   4,012
                                     ---------------            --------------            ------------            -------------

Total                                      $ 19,972                      $ 83                  $ (149)                 $19,906

-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

         At December 31, the equity securities in the available-for-sale
category include Federal Reserve Bank stock in the amount of $258,000 in 2001
and 2000, and Federal Home Loan Bank stock in the amount of $2,204,000 in 2001
and $2,306,000 in 2000 which are carried at cost.


<PAGE>

         The following table lists the maturities of debt securities at December
31, 2001, classified as available-for-sale and held-to-maturity. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
MATURITIES OF DEBT SECURITIES
-----------------------------------------------------------------------------------------------------------------------------------

At December 31, 2001                          Available-for-Sale                                  Held-to-Maturity
                                          Carrying Value             Fair Value                Carrying Value          Fair Value
                                          -----------------------------------------            ------------------------------------
<S>                                              <C>                       <C>                      <C>                     <C>
Due in one year or less                          $ 4,050                   $ 4,082                  $4,000                  $4,001
Due after one year through five years             19,304                    19,251                   2,258                   2,300
Due after five years through ten years            25,617                    25,417                   4,330                   4,418
Due after ten years                               31,986                    31,610                   5,919                   5,911
                                          ---------------            --------------            ------------            ------------
                                                  80,957                    80,360                  16,507                  16,630
Mortgage-Backed Securities                        87,461                    87,253                   6,497                   6,530
Equity Securities                                 13,937                    13,689                       -                       -
                                          ---------------            --------------            ------------            ------------
Total Investments                               $182,355                  $181,302                 $23,004                 $23,160
                                          ---------------            --------------            ------------            ------------

-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


         Investment securities with a carrying amount of $11,568,000 and
$7,651,000 at December 31, 2001 and 2000, respectively, were pledged to secure
public deposits, to qualify for fiduciary powers and for other purposes required
or permitted by law. There were no securities held other than U. S. Treasury or
U. S. Agencies from a single issuer which represented more than 10% of
shareholders' equity. Proceeds from sales of investments in debt and equity
securities available-for-sale during 2001, 2000 and 1999 were $35,263,000,
$8,294,000 and $16,858,000, respectively. Gross gains of $1,015,000 and gross
losses of $86,000 were realized on those sales in 2001. Gross gains of $252,000
and gross losses of $78,000 were realized on the sales in 2000. In 1999, gross
realized gains were $716,000 and gross realized losses were $153,000.


<PAGE>





NOTE C - LOANS

         Major classifications of loans at December 31, 2001 and 2000 are as
follows:

                                          2001                      2000
------------------------------------------------------------------------------

Real Estate/Residential                    $112,871                  $128,862
Real Estate/Construction                      6,127                     5,923
Real Estate/Commercial                       32,317                    27,206
Consumer/Installment                         59,205                    53,062
Commercial (Non-Real Estate)
    and Agricultural                         13,762                    10,214
State and Political Subdivisions              1,702                     2,089
Other                                            23                        19
                                     ---------------            --------------

    Total Gross Loans                       226,007                   227,375
       Less:  Unearned Discount                (250)                     (431)
                                     ---------------            --------------

Total Loans                                $225,757                  $226,944
------------------------------------------------------------------------------


         The Company makes loans to its directors and executive officers. These
loans were made in the ordinary course of business at substantially the same
terms and conditions as those with other borrowers.

         An analysis of the 2001 activity of these loans follows:

               --------------------------------------------------
               Balance, January 1, 2001                    $ 731
                    New loans                                178
                    Repayments                              (123)
                                                  ---------------
               Balance, December 31, 2001                  $ 786
               --------------------------------------------------



<PAGE>


NOTE D - ALLOWANCE FOR POSSIBLE LOAN LOSSES

Transactions in the allowance for possible loan losses were as follows:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Year Ended December 31,                 2001                      2000                     1999
----------------------------------------------------------------------------------------------------
<S>                                       <C>                       <C>                      <C>
Beginning Balance                         $ 2,411                   $ 2,437                  $2,691

  Provisions charged to
    operating expenses                        580                       375                     375
  Recoveries                                  177                       160                     103
  Loans charged-off                          (904)                     (561)                   (732)
                                   ---------------            --------------            ------------

Ending Balance                            $ 2,264                   $ 2,411                  $2,437
----------------------------------------------------------------------------------------------------
</TABLE>

         There were loans totaling $1,019,000 on which the accrual of interest
has been discontinued or reduced at December 31, 2001. During 2001, an average
of $943,000 of loans was on non-accrual status. Non-accrual loans at December
31, 2000 amounted to $1,048,000 and averaged $1,147,000 during 2000. Loans 90
days and over past due and still accruing totaled $2,185,000 at December 31,
2001 and $1,469,000 at December 31, 2000.

         The recorded investment in impaired loans was $103,000, $339,000 and
$370,000 at December 31, 2001, 2000 and 1999, respectively. The valuation
allowance for credit losses related to impaired loans is a part of the allowance
for possible loan losses. The total valuation allowance was $43,000, $78,000 and
$74,000 at December 31, 2001, 2000 and 1999, respectively. The average recorded
investment in impaired loans during the years ended December 31, 2001, 2000 and
1999 was approximately $201,000, $317,000 and $469,000, respectively. All
impaired loans were on a non-accrual status. Income on impaired loans is
recognized by the Company on a cash basis. The Company recognized interest
income of approximately $33,000, $42,000 and $35,000 on impaired loans in 2001,
2000 and 1999, respectively.



<PAGE>



NOTE E - PREMISES AND EQUIPMENT

         Major classifications of these assets at December 31, 2001 and 2000 are
summarized as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
                                  Estimated Useful Lives           2001                       2000
-----------------------------------------------------------------------------------------------------

<S>                                  <C>                          <C>                          <C>
Land                                        ---                   $ 1,324                      $ 939
Premises                               10-20 years                  7,550                      7,556
Equipment                               3-10 years                  7,168                      6,900
                                                             -------------               ------------
                                                                   16,042                     15,395
Accumulated depreciation
  and amortization                                                 (9,480)                    (8,563)
                                                             -------------               ------------

Total Premises and Equipment                                      $ 6,562                     $6,832

-----------------------------------------------------------------------------------------------------
</TABLE>

         Depreciation and amortization expense amounted to $975,000, $987,000
and $912,000 in 2001, 2000 and 1999, respectively.

NOTE F - DEPOSIT MATURITIES

         At December 31, 2001, the schedule of maturities of certificates of
deposit is as follows:

--------------------------------------------------------------------

                       2002                        $122,647
                       2003                          40,338
                       2004                           5,645
                       2005                           2,406
                       2006                           2,485
                 Thereafter                             252
                                               -------------
                                                   $173,773

--------------------------------------------------------------------

<PAGE>


NOTE G - SHORT-TERM DEBT
         Short-term debt consists of the following Federal Home Loan Bank
advances:

----------------------------------------------------------------------------
Year Ended December 31,                    2001        2000           1999
----------------------------------------------------------------------------

Balance outstanding at December 31,         $ -      $ 5,695            $ -
Maximum amount outstanding at
  any month-end during the year         $ 6,415      $11,255       $ 12,425
Average amount outstanding              $ 1,919      $ 3,994        $ 1,721
Average interest rate during the year     4.85%        6.41%          5.17%

----------------------------------------------------------------------------



         The Federal Home Loan Bank of Pittsburgh provides the Bank with a line
of credit in the amount of $25,000,000, all of which was available at December
31, 2001.

         There was no short-term debt in the form of Federal Reserve Discount
borrowings and Federal Funds purchased at December 31, 2001, 2000 and 1999.

         Securities sold under agreements to repurchase consist of the
following:

----------------------------------------------------------------------------
Year Ended December 31,                    2001        2000           1999
----------------------------------------------------------------------------

Balance outstanding at December 31,     $ 8,380      $ 7,215        $ 1,730
Maximum amount outstanding at
  any month-end during the year        $ 18,519      $12,950        $ 8,682
Average amount outstanding             $ 12,591      $ 7,226        $ 5,994
Average interest rate during the year     2.90%        4.59%          3.24%

----------------------------------------------------------------------------


<PAGE>


NOTE H - LONG-TERM DEBT

         The Company had long-term debt from the Federal Home Loan Bank of
Pittsburgh totaling $34,804,000 at December 31, 2001 and $34,000,000 at December
31, 2000. These loans will mature in one to ten years. The weighted average
interest rate on these loans was 5.8% and 6.0% at December 31, 2001 and 2000,
respectively.

         The Company also has an obligation as a party to the Employee Stock
Ownership Plan debt. The principal payments due on the Company's debt at
December 31, 2001 are as follows:


------------------------------------------------------------------------------
                         ESOP Debt          FHLB Debt              Total Debt
------------------------------------------------------------------------------

2002                          $ 142               $ 9                   $ 151
2003                            142                10                     152
2004                            142            10,010                  10,152
2005                            142                11                     153
2006                             57                12                      69
2007 and beyond                 610            24,752                  25,362
                     ---------------    --------------            ------------

Total                       $ 1,235          $ 34,804                 $36,039

------------------------------------------------------------------------------




NOTE I- OTHER OPERATING EXPENSES
         Other operating expenses consists of the following:


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
                                               2001                      2000                     1999
--------------------------------------------------------------------------------------------------------
<S>                                             <C>                       <C>                     <C>
Advertising                                     $ 463                     $ 546                   $ 574
Consulting Fees                                   894                       588                     511
Data Processing Services                          739                       813                     773
Litigation Costs and Legal Fees                   535                       723                     669
Loan Collection                                   155                       240                     298
Printing, Stationery and Supplies                 354                       320                     318
Provisions for Trust Reserve                     (110)                    1,012                      57
All Other                                       2,946                     2,874                   2,522
                                       ---------------            --------------            ------------

Total Other Operating Expenses                $ 5,976                   $ 7,116                  $5,722

--------------------------------------------------------------------------------------------------------
</TABLE>



<PAGE>




NOTE J- INCOME TAXES
         Income tax expense (benefit) is as follows:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Year Ended December 31,                   2001                 2000               1999
---------------------------------------------------------------------------------------
Federal
<S>                                      <C>                  <C>                <C>
    Current                              $ 352                $ 659              $ 840
    Deferred (benefit)                     456                 (389)                89
                                ---------------       --------------       ------------
    Total                                $ 808                $ 270              $ 929
</TABLE>



         The income tax provision reconciled to the tax computed statutory
Federal rate is as follows:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Year Ended December 31,                   2001                 2000               1999
---------------------------------------------------------------------------------------
<S>                                    <C>                    <C>              <C>
Federal tax expense
  at statutory rate                    $ 1,484                $ 796            $ 1,432
Increase (decrease)
  in taxes resulting from:
    Tax-exempt investment
      securities income                   (645)                (582)              (569)
    Tax-exempt interest
      on loans                             (37)                 (37)               (29)
Other, net                                   6                   93                 95
                                ---------------       --------------       ------------
Applicable Income Taxes                  $ 808                $ 270              $ 929

---------------------------------------------------------------------------------------
</TABLE>


         Deferred tax assets and liabilities consist of the following:

--------------------------------------------------------------------------
At December 31,                            2001                      2000
--------------------------------------------------------------------------

Deferred Tax Assets:
   Tax Credits                            $ 200                       $ -
   Unrealized Securities Losses             359                         -
   Loan Loss Reserve                        464                       514
   Deferred Compensation                    449                       428
   Post-Retirement Benefits                  81                        75
   Depreciation                             139                        74
   Miscellaneous Reserves                   243                       931
   Other                                    142                       152
                                                            --------------
                                 ---------------            --------------
     Total                              $ 2,077                   $ 2,174
                                 ---------------            --------------

Deferred Tax Liability:
   Unrealized Securities Gains              $ -                      $ 20
                                 ---------------            --------------
                                                            --------------
    Total                                   $ -                      $ 20
                                 ---------------            --------------

Net                                     $ 2,077                   $ 2,154

--------------------------------------------------------------------------



<PAGE>

NOTE K - EMPLOYEE STOCK OWNERSHIP PLAN

         The Company maintains an Employee Stock Ownership Plan (ESOP) for the
benefit of eligible employees.

         In October, 2000, the ESOP borrowed $71,875 from the Company's
subsidiary, First C. G., payable over ten years. The proceeds from this loan
were used to purchase shares from the market. In December, 2000, the ESOP
borrowed an additional $100,000 from the Company's subsidiary, First C. G.,
payable over five years. The proceeds from this loan were used to purchase the
shares from the account of a former employee pursuant to the provisions of the
Plan. The interest on these loans is at the Bank's prime rate (an interest rate
of 4.75% at December 31, 2001 and 9.50% at December 31, 2000). The balance on
these loans was $64,688 and $80,000, respectively at December 31, 2001 and
$71,875 and $100,000, respectively at December 31, 2000.

         In 1999, the ESOP borrowed $1,000,000 from the Company's subsidiary,
First C. G., payable over six years. The interest rate on this loan is at the
Bank's prime rate (an interest rate of 4.75% at December 31, 2001 and 9.50% at
December 31, 2000). The balance outstanding on this loan was $850,000 at
December 31, 2001 and $900,000 at December 31, 2000. The proceeds from this loan
were used to purchase shares from the market.

         In 1998, the ESOP borrowed $500,000 from the Company's subsidiary,
First C. G. The interest rate on this loan is at the bank's prime rate (an
interest rate of 4.75% at December 31, 2001 and 9.50% at December 31, 2000). The
balance outstanding on this loan was $240,000 at December 31, 2001 and $305,000
at December 31, 2000.

         These obligations have been recorded as a liability on the books of the
Company and are collateralized by stock of the Bank. Interest expense represents
the actual interest paid by the ESOP. The interest incurred on ESOP debt was
$108,000, $121,000 and $85,000 for the years ended December 31, 2001, 2000 and
1999, respectively.

         Compensation expense related to the ESOP amounted to $255,000, $238,000
and $210,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
As provided by SOP 93-6, the ESOP compensation expense includes an amount which
is the fair market value of the shares related to the loans that were allocated
to the employees during these years. There was no expense related to the



<PAGE>

release of shares in 2001. The amount related to the release of shares included
in compensation expense was a $2,000 credit in 2000 and a $20,000 credit in
1999. The number of shares released was 9,000 in 2001, 6,651 in 2000 and 4,171
in 1999.

         Dividends on unallocated shares used for debt service were $46,000,
$41,000 and $45,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.

         The total shares held by the ESOP were 320,461 and 312,024 at December
31, 2001 and 2000, respectively. ESOP shares have been restated to reflect the
three 5% stock dividends of June, 2001, 2000 and 1999.

NOTE L - OTHER BENEFIT PLANS

         Employees who qualify may elect to participate in a deferred salary
savings 401(k) plan. A participating employee may contribute a maximum of 12% of
his or her compensation. The Company will contribute $.50 for each $1.00 up to
the first 5% that each employee contributes. Company payments are charged to
current operating expenses. These contributions were $101,000, $91,000 and
$86,000 in 2001, 2000 and 1999, respectively.

         The Company also has an executive compensation plan (the "Officers'
Supplemental Retirement Plan") which provides additional death, medical and
retirement benefits to certain officers.

         The Company has a deferred compensation plan (the "Deferred Directors'
Plan") involving Directors of the Company. The plan requires defined annual
payments for five to fifteen years beginning at age 65 or death. The annual
benefit is based upon the amount deferred plus interest. The Company has
recorded the deferred compensation liabilities using the present value method.

<PAGE>


         The following table sets forth the changes in benefit obligations and
plan assets of the Officers' Supplemental Retirement Plan and the Deferred
Directors' Plan.

         Actuarial present value of benefit obligations is as follows:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
                                                        Officers' Supplemental                          Deferred
                                                           Retirement Plan                           Directors' Plan
                                               -------------------------------------------------------------------------------

At December 31,                                         2001              2000                   2001                    2000
------------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
<S>                                                    <C>               <C>                    <C>                     <C>
Benefit obligation at beginning of year                $ 388             $ 227                  $ 443                   $ 468
Service cost                                              57                46                      -                       -
Interest cost                                             39                27                     28                      30
Actual (gain) loss                                       177                88                     (1)                     (2)
Benefits paid                                              -                 -                    (53)                    (53)
                                               --------------   ---------------           ------------            ------------
Benefits obligation at end of year                       661               388                    417                     443
                                               --------------   ---------------           ------------            ------------

Change in plan assets:
Fair value of plan assets at beginning of year             -                 -                      -                       -
Actual return on plan assets                               -                 -                      -                       -
Employer contribution                                      -                 -                     53                      53
Benefits paid                                              -                 -                    (53)                    (53)
                                               --------------   ---------------           ------------            ------------
Fair value of plan assets at end of year                   -                 -                      -                       -

Funded status                                           (661)             (388)                  (417)                   (443)
Unrecognized net transition asset                         (3)               (3)                     -                       -
Unrecognized net actuarial (gain) loss                    16              (161)                    33                      35
Unrecognized prior service cost                            -                 -                      -                       -
Adjustment to recognize
  additional minimum liability                             -                 -                    (33)                    (35)
                                               --------------   ---------------           ------------            ------------
Accrued benefit cost                                  $ (648)           $ (552)                $ (417)                 $ (443)
                                               --------------   ---------------           ------------            ------------

------------------------------------------------------------------------------------------------------------------------------
</TABLE>



         The weighted average assumed discount rates used in determining the
actuarial present value of the projected benefit obligation were 7.0% in 2001
and 2000 and 6.75% in 1999 for the Officers' Supplemental Retirement Plan, and
7.0% in 2001, 2000 and 1999 for the Deferred Directors' Plan. The weighted
average expected long-term rate of return on assets was 9.0% for 2001 and 8.0%
for 2000 and 1999 for the Officers' Supplemental Retirement Plan and 9.0% in
each of those years for the Deferred Directors' Plan. The weighted average rate
of increase in future compensation levels used in determining the actuarial
present value for the Officers' Supplemental Retirement Plan was 6.0% in 2001,
2000 and 1999.

<PAGE>

         Components of the net periodic benefit costs is as follows for both
plans:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
OFFICERS' SUPPLEMENTAL RETIREMENT PLAN

Year Ended December 31,                         2001                      2000                    1999
-------------------------------------------------------------------------------------------------------
<S>                                             <C>                       <C>                     <C>
Service cost                                    $ 57                      $ 46                    $ 43
Interest cost                                     39                        27                      18
Net amortization and
  deferral of prior service costs                  -                       (12)                    (21)
                                       --------------            --------------            ------------
Net Periodic Benefit Cost                       $ 96                      $ 61                    $ 40

-------------------------------------------------------------------------------------------------------



-------------------------------------------------------------------------------------------------------
DEFERRED DIRECTORS' PLAN

Year Ended December 31,                         2001                      2000                    1999
-------------------------------------------------------------------------------------------------------

Service cost                                     $ -                       $ -                     $ -
Interest cost                                     28                        30                      32
Net amortization and
  deferral of prior service costs                  -                         -                       -
                                       --------------            --------------            ------------
Net Periodic Benefit Cost                       $ 28                      $ 30                    $ 32

-------------------------------------------------------------------------------------------------------
</TABLE>

NOTE M - POST-RETIREMENT BENEFIT

         The Company sponsors a post-retirement plan that covers a certain
number of retired employees and a limited group of current employees. This plan
generally provides medical insurance benefits to a group of previously qualified
retirees and spouses and to current full-time employees who were 60 years of age
or older on January 1, 1992 and who have retired from the Company after
attaining age 65 and are fully vested in the ESOP at the time of retirement.
This plan is currently unfunded.

         As permitted by SFAS No. 106, the Company elected to delay the
recognition of the transition obligation by aggregating $308,000, which arose
from adopting SFAS No. 106, and amortize this amount on a straight-line basis
over 20 years. This election is recorded in the financial statements as a
component of net periodic post-retirement benefit cost.

         The components of the net periodic post-retirement benefit cost are as
follows:


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
POST-RETIREMENT PLAN
Year Ended December 31,                         2001                      2000                    1999
-------------------------------------------------------------------------------------------------------
<S>                                             <C>                        <C>                    <C>
Interest cost                                   $ 11                       $ 9                    $ 11
Amortization of transition
  obligation                                       8                         3                       7
                                       --------------            --------------            ------------

Net Periodic Benefit Cost                       $ 19                      $ 12                    $ 18

-------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>


         The assumptions used to develop the net periodic post-retirement
benefit cost are as follows:

------------------------------------------------------------------
                            2001               2000          1999
------------------------------------------------------------------

Discount Rate              7.00%              7.00%         6.75%
Medical care cost
  trend rate               8.00%              8.50%         8.50%

------------------------------------------------------------------


         The medical care cost trend rate used in the actuarial computation
ultimately is reduced to 8.0% in the year 2001 and 6.0% in 2005 and subsequent
years. This was accomplished using 0.5% decrements through the year 2005 and
later.

         The table of actuarially computed plan assets and benefit obligations
for the Company is presented below.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
POST-RETIREMENT PLAN                                          2001                       2000
----------------------------------------------------------------------------------------------
<S>                                                          <C>                        <C>
Change in benefit obligation:
Benefit obligation at beginning of year                      $ 128                      $ 174
Service cost                                                     -                          -
Interest cost                                                   11                          8
Actual gain                                                      -                          -
Change due to change in experience                              37                        (40)
Change due to change in assumption                               -                          -
Benefits paid                                                  (18)                       (14)
                                                     --------------            ---------------
Benefits obligation at end of year                             158                        128
                                                     --------------            ---------------

Change in plan assets:
Fair value of plan assets at beginning of year                   -                          -
Actual return on plan assets                                     -                          -
Employer contribution                                            -                          -
Benefits paid                                                    -                          -
                                                     --------------            ---------------
Fair value of plan assets at end of year                         -                          -

Funded status                                                 (158)                      (128)
Unrecognized net transition obligation                         170                        185
Unrecognized net gain                                          (78)                      (122)
                                                     --------------            ---------------
Accrued benefit cost                                         $ (66)                     $ (65)
                                                     --------------            ---------------

----------------------------------------------------------------------------------------------
</TABLE>

         The effect of a one percentage point increase in each future year's
assumed medical care cost trend rate, holding all other assumptions constant,
would have been to increase the net periodic post-retirement benefit cost by
$11,000 and the accrued post-retirement benefit cost by $1,000.


<PAGE>

         Health care benefits are provided to certain retired employees. The
cost of providing these benefits was approximately $18,000, $13,000 and $16,000
in 2001, 2000 and 1999, respectively. The cost is accrued over the service
periods of employees expected to receive benefits.

NOTE N - STOCK OPTIONS

         The Company adopted the "2001 Stock Option Plan" during 2001. Under the
2001 Stock Option Plan, options to acquire shares of common stock may be granted
to key employees, officers, directors of the Company and important consultants.
The 2001 Stock Option Plan provides for the granting of options at the fair
market value of the Company's common stock at the time the options are granted.
Each option granted under this plan may be exercised within a period of ten
years from the date of grant. However, no option may be exercised within one
year of grant. In 2001, options to purchase 20,832 shares of the Company's
common stock at an average price of $16.49 per share were issued to certain
officers and directors under this plan. The aggregate number of shares which may
be issued under this plan are 315,000 shares of common stock. In January, 2002,
options to purchase 122,250 shares of the Company's common stock at an average
price of $22.17 per share were issued under the 2001 Stock Option Plan to
certain officers and directors.

         The Company adopted a Stock Option Plan in 1996 that was similar to the
Stock Option Plan established in 1986. Under the Stock Option Plans, options to
acquire shares of common stock may be granted to the officers and key employees.
The Stock Option Plans provide for the granting of options at the fair market
value of the Company's common stock at the time the options are granted. Each
option granted under the Stock Option Plans may be exercised within a period of
ten years from the date of grant. However, no option may be exercised within one
year from date of grant. In January, 2001, options to purchase 41,479 shares of
the Company's common stock at a price of $16.59 per share were issued to certain
officers under this plan. As a result of the adoption of the 2001 Stock Option
Plan, no new options may be issued under the 1996 Stock Option Plan. There were
no options awarded under this plan in 2000. The aggregate number of shares which
may be issued under these plans are 346,557 shares of common stock.

         The Non-Employee Directors Stock Option Plan provides for the awarding
of stock options to the Company's Directors. Pursuant to this Plan, on May 1,
1994, each non-employee director of the Company


<PAGE>

was automatically granted an option to purchase 1,407 shares of the Company's
common stock at the fair market value of the Company's common stock of $12.09
per share. In addition, on May 1, 1999, the fifth anniversary of the initial
option grant, persons who continue to be non-officer directors were each granted
additional options to purchase 1,407 shares of the Company's common stock at a
price of $19.12. The Plan additionally provides that any non-employee director
who is first elected or appointed as a director of the Company or any subsidiary
after May 1, 1994, shall, as of that date of such election or appointment,
automatically be granted an option to purchase 1,407 shares of the Company's
common stock. Such persons who continue to be non-officer directors shall also
be granted additional options to purchase 1,407 shares of the Company's common
stock on the fifth anniversary of the date they were first elected or appointed
to the Board of Directors. There were no options awarded under this plan in
2001. In 2000, options to purchase 2,814 shares of the Company's common stock at
a price of $15.65 per share were granted to certain non-employee directors
pursuant to the provisions of this plan. The aggregate number of shares which
may be issued under the Non-Employee Directors Stock Option Plan is 28,140
shares of common stock.

         Had compensation cost for the Plans been determined based on the fair
value of the options at the grant dates consistent with the method required by
SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Year Ended December 31,                             2001                       2000                    1999
------------------------------------------------------------------------------------------------------------
<S>                                               <C>                        <C>                     <C>
Net Income                      As reported       $3,557                     $2,072                  $3,282
                                 Pro forma        $3,433                     $1,937                  $3,194

Basic earnings per share        As reported       $ 1.77                     $ 1.09                  $ 1.75
                                 Pro forma        $ 1.71                     $ 1.01                  $ 1.70

Diluted earnings per share      As reported       $ 1.77                     $ 1.09                  $ 1.74
                                 Pro forma        $ 1.71                     $ 1.01                  $ 1.69

------------------------------------------------------------------------------------------------------------
</TABLE>

         The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in 2001, 2000 and 1999,
respectively: dividend yield of 4.4%, 2.8% and 2.8%; expected volatility of
26.0%, 27.0% and 39.0%; risk-free interest rates of 5.2%, 6.07% and 6.3%; and
expected lives of 10 years.

<PAGE>


         A summary of the 2001 Stock Option Plan as of December 31, 2001 and
changes during the year are presented below.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
2001 EMPLOYEE STOCK OPTION PLAN
Year Ended December 31, 2001
---------------------------------------------------------------------------------------------
                                                                                  Weighted
                                                                                   Average
                                                                                  Exercise
                                                           Shares                   Price
                                                         ------------            ------------
<S>                                                       <C>                      <C>
Outstanding at beginning of year                                   -                     $ -
Granted                                                       20,832                   16.49
Exercised                                                          -                       -
Expired                                                            -                       -
                                                         ------------            ------------
Outstanding at end of year                                    20,832                  $16.49
                                                         ============            ============

Options exercisable at year-end                                    -                     $ -
                                                         ============            ============
Weighted average fair value of
  options granted during the year                                                     $ 4.18

---------------------------------------------------------------------------------------------
</TABLE>

         The following table summarizes information concerning the 2001 Stock
Option Plan at December 31, 2001.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                               Options outstanding                                              Options exercisable
--------------------------------------------------------------------------            ------------------------------------
                                          Weighted
                                           Average            Weighted                                         Weighted
                                          Remaining            Average                                          Average
  Range of             Number            Contractual          Exercise                    Number               Exercise
Exercise Price        Outstanding        Life (years)           Price                   Exercisable              Price
--------------------------------------------------------------------------            ------------------------------------

<S>                       <C>                   <C>              <C>                    <C>                    <C>
$12.18 - $15.22            1,407                 9.6              $ 15.10                       -                 $ -

$15.23 - $18.26           19,425                 9.5              $ 16.59                       -                 $ -
                     ------------                                                     ------------

                          20,832                                                                -
                     ============                                                     ============

--------------------------------------------------------------------------------------------------------------------------
</TABLE>



<PAGE>


         A summary of the status of the Company's "1996 and 1986" Employee Stock
Option Plans as of December 31, 2001, 2000 and 1999, and changes during the
years ending on those dates is presented below:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
1996/1986 EMPLOYEE STOCK OPTION PLANS
Year Ended December 31,                        2001                             2000                              1999
------------------------------------------------------------------------------------------------------------------------------------
                                                    Weighted                          Weighted                          Weighted
                                                     Average                           Average                           Average
                                                    Exercise                          Exercise                          Exercise
                                      Shares          Price            Shares           Price            Shares           Price
                                    ------------   ------------      ------------    ------------      ------------    ------------
<S>                                      <C>            <C>               <C>             <C>               <C>             <C>
Outstanding at beginning of year         64,833         $24.35            64,833          $24.35            66,048          $24.47
Granted                                  41,479          16.59                 -               -                 -               -
Exercised                                (4,692)         12.50                 -               -                 -               -
Expired                                  (9,294)         22.21                 -               -            (1,215)          30.44
                                    ------------   ------------      ------------    ------------      ------------    ------------
Outstanding at end of year               92,326         $21.68            64,833          $24.35            64,833          $24.35
                                    ============   ============      ============    ============      ============    ============

Options exercisable at year-end          47,613         $24.61            42,044          $22.58            27,761          $20.84
                                    ============   ============      ============    ============      ============    ============
Weighted average fair value of
  options granted during the year                       $ 4.18                           $ -                               $ -
                                                   ============                      ============                      ============

-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>




<PAGE>

         The following table summarizes information concerning the 1996/1986
employee stock option plans outstanding at December 31, 2001:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                          Options outstanding                                                Options exercisable
-----------------------------------------------------------------------------       -------------------------------------
                                             Weighted
                                              Average          Weighted                                         Weighted
                                             Remaining         Average                                           Average
  Range of            Number                Contractual        Exercise                 Number                  Exercise
Exercise Price       Outstanding            Life (years)         Price                Exercisable                 Price
-----------------------------------------------------------------------------       -------------------------------------
<S>                       <C>                  <C>              <C>                       <C>                    <C>
$12.18 - $15.22           1,005                3.0              $ 12.50                   1,005                  $ 12.50

$15.23 - $18.26          41,479                8.4              $ 16.59                   3,150                  $ 16.59

$18.27 - $21.31          19,450                4.1              $ 19.33                  19,450                  $ 19.33

$27.40 - $30.44          30,392                5.1              $ 30.44                  24,008                  $ 30.44
                    ------------                                                    ------------

                         92,326                                                          47,613
                    ============                                                    ============

------------------------------------------------------------------------------------------------------------------------------
</TABLE>


A summary of the status of the Company's Non-Employee Directors Stock Option
Plan as of December 31, 2001, 2000, and 1999 and changes during the years ending
on those dates are presented below.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
NON-EMPLOYEE DIRECTORS
STOCK OPTION PLAN
Year Ended December 31,                         2001                             2000                            1999
---------------------------------------------------------------------------------------------------------------------------------
                                                     Weighted                        Weighted                         Weighted
                                                      Average                         Average                          Average
                                                     Exercise                        Exercise                         Exercise
                                      Shares           Price           Shares          Price           Shares           Price
                                    ------------    ------------     ------------   ------------     ------------    ------------
<S>                                      <C>             <C>              <C>            <C>              <C>             <C>
Outstanding at beginning of year         18,282          $15.77           18,283         $15.77           11,251          $12.30
Granted                                       -               -            2,814          15.65            8,439           19.78
Exercised                                     -               -           (1,407)         12.09           (1,407)          12.09
Expired                                       -               -           (1,408)         19.12                -               -
                                    ------------    ------------     ------------   ------------     ------------    ------------
Outstanding at end of year               18,282          $15.77           18,282         $15.77           18,283          $15.77
                                    ============    ============     ============   ============     ============    ============

Options exercisable at year-end          12,664          $14.65           10,200         $13.68            9,497          $12.26
                                    ============    ============     ============   ============     ============    ============
Weighted average fair value of
  options granted during the year                           $ -                          $ 5.83                           $ 9.28
                                                    ============                    ============                     ============

---------------------------------------------------------------------------------------------------------------------------------
</TABLE>



The following table summarizes information concerning non-employee director
options outstanding at December 31, 2001.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                          Options outstanding                                            Options exercisable
---------------------------------------------------------------------------     -------------------------------------

                                             Weighted
                                              Average            Weighted                                 Weighted
                                             Remaining           Average                                  Average
  Range of              Number              Contractual          Exercise          Number                 Exercise
Exercise Price       Outstanding            Life (years)          Price          Exercisable               Price
---------------------------------------------------------------------------     -------------------------------------
<S>      <C>              <C>                  <C>               <C>               <C>                    <C>
$11.75 - $15.65           11,259               4.34              $ 13.19           9,149                  $ 12.62

$19.13 - $21.09            7,033               7.38              $ 19.91           3,515                  $ 19.91
                     ------------                                               ---------

                          18,292                                                  12,664
                     ============                                               =========

---------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>




NOTE O - COMMITMENTS AND CONTINGENCIES

         The Company has non-cancelable operating lease agreements in excess of
one year with respect to various buildings and equipment. The minimum annual
rental commitments at December 31, 2001 are payable as follows:


                     ----------------------------------
                             Operating Leases
                     ----------------------------------

                     2002                        $ 564
                     2003                          541
                     2004                          530
                     2005                          474
                     2006                          383
                     2007 and beyond               855
                                           ------------

                     Total                      $3,347

                     ----------------------------------


         The total rental expense was $560,000, $479,000 and $397,000 in 2001,
2000 and 1999, respectively.


<PAGE>

NOTE P - EARNINGS PER SHARE


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
                                                         Income       Average Shares     Per Share
For the Year Ended December 31,                       (numerator)      (denominator)       Amount
                                                     ------------------------------------------------
<S>                                                         <C>               <C>             <C>
2001
-----------------------------------------------------
Net Income                                                  $ 3,557

Basic Earnings Per Share
   Income Available to Common Shareholders                  $ 3,557           2,009,353       $ 1.77

Effect of Dilutive Securities
  Stock Options                                                                   5,418
                                                     ------------------------------------------------

Diluted Earnings Per Share
   Income Available to Common Shareholders
   plus Assumed Exercise of Options                         $ 3,557           2,014,771       $ 1.77
                                                     ------------------------------------------------

2000
-----------------------------------------------------
Net Income                                                  $ 2,072

Basic Earnings Per Share
   Income Available to Common Shareholders                  $ 2,072           1,994,687       $ 1.04

Effect of Dilutive Securities
  Stock Options                                                                   2,227
                                                     ------------------------------------------------

Diluted Earnings Per Share
   Income Available to Common Shareholders
   plus Assumed Exercise of Options                         $ 2,072           1,996,914       $ 1.04
                                                     ------------------------------------------------

1999
-----------------------------------------------------
Net Income                                                  $ 3,282

Basic Earnings Per Share
   Income Available to Common Shareholders                  $ 3,282           1,969,086       $ 1.67

Effect of Dilutive Securities
  Stock Options                                                                   3,630        (0.01)
                                                     ------------------------------------------------

Diluted Earnings Per Share
   Income Available to Common Shareholders
   plus Assumed Exercise of Options                         $ 3,282           1,972,716       $ 1.66
                                                     ------------------------------------------------

-----------------------------------------------------------------------------------------------------
</TABLE>

         Average common shares outstanding in 2001, 2000 and 1999 do not include
60,611, 57,933 and 62,399, respectively, of average weighted unallocated shares
held by the ESOP. The exclusion of these unallocated shares held by the ESOP is
due to the Company's adoption of SOP 93-6. Share and per

<PAGE>

share information have been retroactively restated to reflect the three 5% stock
dividends of June, 2001, 2000 and 1999.

         In January 2002, options to purchase 122,250 shares of the Company's
common stock at prices ranging from $22.00 per share to $22.45 per share were
granted to certain officers and non-employee directors.

NOTE Q - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND
           CONCENTRATIONS OF CREDIT RISK

         The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the balance sheet.
The Bank's exposure to credit loss in the event of non-performance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.

         The contract or notional amounts as of December 31, 2001 and 2000 are
as follows:

Financial instruments whose contract amounts represent credit risk:

---------------------------------------------------------------------
                                    2001                    2000
                                 ------------            ------------

Commitments to extend credit         $35,217                 $31,773
Standby letters of credit             $1,189                  $2,222

---------------------------------------------------------------------


         Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
credit-worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation.



<PAGE>

         Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support contracts entered into by customers.
Most guarantees extend for one year. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan facilities
to customers.

         When deemed necessary, collateral held by the Bank for financial
instruments varies, but may include personal or commercial real estate, accounts
receivable, inventory, equipment, certificates of deposit or marketable
securities. The extent of collateral held for any one financial instrument
ranges up to 100%. The average collateral held on financial instruments was
67.0% as of December 31, 2001.

         The Bank grants commercial, real estate and installment loans to
customers primarily in Northampton, Monroe and Lehigh Counties, Pennsylvania.
Although the Bank has a diversified loan portfolio, a substantial portion of its
debtors' ability to honor their contracts is dependent upon the economy of
Northampton, Monroe and Lehigh Counties.

         At December 31, 2001, the Bank had residential real estate loans
outstanding totaling $112,871,000, which was 50.0% of total loans. The Bank also
had real estate related commercial loans outstanding at December 31, 2001
totaling $32,317,000, which was 14.3% of total loans. Loans to various borrowers
for land development totaling $2,074,000 are included in the Bank's total real
estate commercial loans. These loans represented 64.2% of the total real estate
related commercial loans. Loans to individuals for recreational vehicles totaled
$31,013,000 at December 31, 2001. This was 13.7% of total loans and 52.4% of the
Bank's consumer and installment loans which totaled $59,205,000 at December 31,
2001.

NOTE R - REGULATORY MATTERS

         The Bank, as a National Bank, is subject to the dividend restrictions
set forth by the Comptroller of the Currency. Under such restrictions, the Bank
may not, without the prior approval of the Comptroller of the Currency, declare
dividends in excess of the sum of the current year's earnings (as defined) plus
the retained earnings (as defined) from the prior two years. The dividends, as
of December 31, 2001, that the Bank could declare, without the approval of the
Comptroller of the Currency, amounted to approximately $2,381,000.

         Restrictions on cash and due from bank accounts are placed upon the
banking subsidiary by the Federal Reserve Bank. Certain amounts of reserve
balances are required to be on hand or on deposit at



<PAGE>

the Federal Reserve Bank based upon deposit levels and other factors. The
average and year-end amount of the reserve balance for 2001 was approximately
$3,364,000 and $977,000, respectively. For 2000, the average reserve balance was
$6,706,000 and the year-end amount was $7,421,000.

         The Company and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.

         Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and ratios
of Tier I capital of at least 4% and total capital, Tier I and Tier 2, of 8% of
risk-adjusted assets and of Tier 1 capital of at least 4% of average assets
(leverage ratio). Tier 1 capital includes common shareholders' equity and
qualifying perpetual preferred stock together with related surpluses and
retained earnings. Tier 2 capital may be comprised of limited life preferred
stock, qualifying subordinated debt instruments, and the allowance for possible
loan losses. Management believes that, as of December 31, 2001, the Company and
the Bank met all capital adequacy requirements to which they were subject.

         As of December 14, 2001, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as adequately capitalized
under the regulatory framework for prompt corrective action. To be categorized
as adequately capitalized, the Bank must maintain minimum total risk-based, Tier
I risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.



<PAGE>



         The following table provides a comparison of the Company's and Bank's
capital amounts, risk-based capital ratios and leverage ratios for the periods
indicated

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS                                                             Required                     To Be Well Capitalized
                                                                         For Capital                   Under Prompt Corrective
                                              Actual                  Adequacy Purposes                   Action Provisions
                                      ------------------------    ----------------------------     -------------------------------
at December 31, 2001                    Amount        Ratio         Amount           Ratio           Amount              Ratio

----------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>            <C>         <C>                 <C>           <C>                  <C>
Total Capital
(To Risk-Weighted Assets)
             Company, (Consolidated)     $ 37,926       15.38%      $ 19,738            8.00%              $ -                  -
             Bank                        $ 32,931       13.50%      $ 19,515            8.00%         $ 24,393             10.00%

Tier I Capital
(To Risk-Weighted Assets)
             Company, (Consolidated)     $ 35,662       14.46%       $ 9,869            4.00%              $ -                  -
             Bank                        $ 30,667       12.58%       $ 9,757            4.00%         $ 14,636              6.00%

Tier I Capital
(To Average Assets, Leverage)
             Company, (Consolidated)     $ 35,662        7.65%      $ 18,661            4.00%              $ -                  -
             Bank                        $ 30,667        6.61%      $ 18,575            4.00%         $ 23,218              5.00%

----------------------------------------------------------------------------------------------------------------------------------

                                                                           Required                     To Be Well Capitalized
                                                                         For Capital                   Under Prompt Corrective
                                              Actual                  Adequacy Purposes                   Action Provisions
                                      ------------------------    ----------------------------     -------------------------------
at December 31, 2000                    Amount        Ratio         Amount           Ratio           Amount              Ratio

----------------------------------------------------------------------------------------------------------------------------------
Total Capital
(To Risk-Weighted Assets)
             Company, (Consolidated)     $ 35,733       15.16%      $ 18,862            8.00%              $ -                  -
             Bank                        $ 31,161       13.03%      $ 19,127            8.00%         $ 23,909             10.00%

Tier I Capital
(To Risk-Weighted Assets)
             Company, (Consolidated)     $ 33,313       14.13%       $ 9,431            4.00%              $ -                  -
             Bank                        $ 28,750       12.02%       $ 9,564            4.00%         $ 14,345              6.00%

Tier I Capital
(To Average Assets, Leverage)
             Company, (Consolidated)     $ 33,313        8.00%      $ 16,654            4.00%              $ -                  -
             Bank                        $ 28,750        6.95%      $ 16,557            4.00%         $ 20,697              5.00%

----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


<PAGE>

NOTE S - EQUITY TRANSACTIONS

         The Company paid a 5% stock dividend on its common stock from
authorized but unissued shares on June 22, 2001 to all shareholders of record at
the close of business on June 4, 2001. On June 22, 2000, the Company paid a 5%
stock dividend on its common stock from authorized but unissued shares to all
shareholders of record at the close of business on June 2, 2000. The Company
also paid a 5% stock dividend on June 24, 1999 to shareholders of record on June
4, 1999. Fractional shares on these stock dividends were paid in cash. The
number of shares and earnings per share as stated in the following discussion of
the shares issued under the Dividend Reinvestment and Stock Purchase Plan have
been restated to reflect these 5% stock dividends.

         The Dividend Reinvestment and Stock Purchase Plan provides the holders
of common stock with a method to invest their cash dividends and voluntary cash
payments of not less than $100 or more than $1,000 per quarter in additional
shares of the Company's common stock. Under this plan, shares are sold, in
general, at a discounted price of 5% below the average of the high bid and asked
price for the Company's common stock on the trading day immediately preceding
the investment date. In 2001, 20,426 common new shares were purchased pursuant
to the Dividend Reinvestment and Stock Purchase Plan at an average cost of
$16.04 per share for total proceeds of $328,000. In 2000, 22,728 common shares
were purchased pursuant to the Dividend Reinvestment and Stock Purchase Plan at
an average cost of $13.77 for proceeds of $313,000.

NOTE T - FAIR VALUE OF FINANCIAL INSTRUMENTS

         SFAS No. 107, "Disclosures About Fair Value of Financial Instruments",
requires disclosure of the estimated fair value of their assets and liabilities
considered to be financial instruments. For the Company, as for most financial
institutions, the majority of its assets and liabilities are considered
financial instruments as defined in SFAS No. 107. However, many such instruments
lack an available trading market as characterized by a willing buyer and willing
seller engaging in an exchange transaction. Also, it is the Company's general
practice and intent to hold its financial instruments (other than
available-for-sale) to maturity and to not engage in trading or sales
activities. Therefore, the Company had to use significant estimations and
present value calculations to prepare this disclosure.



<PAGE>

         Changes in the assumptions or methodologies used to estimate fair
values may materially affect the estimated amounts. Also, management is
concerned that there may not be reasonable comparability between institutions
due to the wide range of permitted assumptions and methodologies in the absence
of active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.

         Fair values have been estimated using data which management considered
the best available, as generally provided in the Company's FRY-9C Regulatory
Reports, and estimation methodologies deemed suitable for the pertinent category
of financial instrument. The estimation methodologies and resulting fair values,
and recorded carrying amounts at December 31, 2001 and 2000 were as follows.



<PAGE>

         Fair value of loans and deposits with floating interest rates is
generally presumed to approximate the recorded carrying amounts. Fair value of
financial instruments actively traded in a secondary market has been estimated
using quoted market prices.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
                                  2001                                   2000
                        Estimated     Carrying                Estimated     Carrying
                       Fair Value      Amount                 Fair Value     Amount
                      ---------------------------            ---------------------------
<S>                         <C>          <C>                      <C>           <C>
Cash and
   cash
   equivalents              $17,270      $17,270                  $17,738       $17,738
Investment
   securities               204,462      204,306                  183,935       184,001
</TABLE>

         Fair value of financial instruments with stated maturities has been
estimated using present value cash flow, discounted at a rate approximating
current market for similar assets and liabilities. Fair value of financial
instrument liabilities with no stated maturities has been estimated to equal the
carrying amount (the amount payable on demand).

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
                                  2001                                   2000
                        Estimated     Carrying                Estimated     Carrying
                       Fair Value      Amount                 Fair Value     Amount
                      ---------------------------            ---------------------------
<S>                           <C>          <C>                       <C>           <C>
Assets:
   Interest-bearing
     deposits with
     banks                    $ 919        $ 919                     $ 95          $ 95
   Mortgage loans
     held-for-sale            3,808        3,808                        -             -
Liabilities:
   Deposits
     with stated
     maturities             176,539      172,368                  173,828       173,220
   Deposits with
     no stated
     maturities             184,473      207,518                  139,252       179,971
   Securities
     sold under
     agreements to
     repurchase               8,380        8,380                    7,215         7,215
   Short-term debt                -            -                    5,695         5,695
   Long-term debt            41,148       34,804                   34,068        34,000
</TABLE>



         The fair value of the net loan portfolio has been estimated using
present value cash flow, discounted at the approximate current market rates
adjusted for non-interest operating costs and giving consideration to estimated
prepayment risk and credit loss factors.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
                                  2001                                   2000
                        Estimated     Carrying                Estimated     Carrying
                       Fair Value      Amount                 Fair Value     Amount
                      ---------------------------            ---------------------------
<S>                        <C>          <C>                      <C>           <C>
Total loans                $229,673     $225,757                 $233,994      $226,944

</TABLE>

         The fair value of commitments to extend credit is estimated based on
the amount of unamortized deferred loan commitment fees. The fair value of
letters of credit is based on the amount of unearned fees plus the estimated
costs to terminate the letters of credit. Fair values of unrecognized financial
instruments including commitments to extend credit and fair value of letters of
credit are considered immaterial.


<PAGE>

         The Company's remaining assets and liabilities are not considered
financial instruments. No disclosure of the relationship value of the Company's
deposits is required by SFAS No. 107

NOTE U - QUARTERLY FINANCIAL DATA (Unaudited)

         The following represents summarized quarterly financial data of the
Company, which, in the opinion of management, reflects all adjustments
(comprising only normal recurring accruals) necessary for a fair presentation.
Net income per share of common stock has been restated to reflect retroactively
the 5% stock dividends of June, 2001, June, 2000 and June, 1999.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
QUARTERLY FINANCIAL DATA (Unaudited)
(Dollars in Thousands) except per share data                      Three Months Ended

--------------------------------------------------------------------------------------------------------
             2001                                Dec. 31        Sept. 30       June 30       March 31
--------------------------------------------------------------------------------------------------------
<S>                                                 <C>             <C>           <C>            <C>
Interest Income                                     $7,216          $7,460        $7,724         $7,635
Net interest income                                  3,998           3,961         4,179          3,928
Provision for possible loan losses                     125             125           230            100
Net gain on sale of securities and mortgages           656             291           191            137
Income before income taxes                           1,098           1,158         1,126            983
Net income                                           $ 903           $ 937         $ 912          $ 805
Basic net income per share                          $ 0.45          $ 0.46        $ 0.45         $ 0.41
Diluted net income per share                        $ 0.44          $ 0.46        $ 0.45         $ 0.41

--------------------------------------------------------------------------------------------------------
             2000                                Dec. 31        Sept. 30       June 30       March 31
--------------------------------------------------------------------------------------------------------

Interest Income                                     $7,791          $7,471        $7,169         $6,856
Net interest income                                  3,946           3,851         3,837          3,706
Provision for possible loan losses                     125             125           125              -
Net gain on sale of securities and mortgages            20              56           110             47
Income (loss) before income taxes                     (150)            724           744          1,024
Net income                                            $ 54           $ 603         $ 619          $ 796
Basic net income per share                          $ 0.02          $ 0.31        $ 0.31         $ 0.40
Diluted net income per share                        $ 0.02          $ 0.31        $ 0.31         $ 0.40

--------------------------------------------------------------------------------------------------------
</TABLE>


<PAGE>

NOTE V  -  FIRST COLONIAL GROUP, INC.
(PARENT COMPANY ONLY)

-----------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
-----------------------------------------------------------------------------
December 31,                                    2001                    2000
-----------------------------------------------------------------------------
ASSETS
  Cash and Due from Banks                       $ 17                    $ 31
  Interest-Bearing Deposits
    with Banks                                   851                     609
  Loan to Banking Subsidiary                   1,000                   1,000
  Investment in Banking
    Subsidiary                                30,264                  28,937
  Investment in Other
    Subsidiary                                 4,411                   4,343
  Other Assets                                    34                      20
                                         ------------            ------------
    TOTAL ASSETS                             $36,577                 $34,940

LIABILITIES
  Long-Term Debt                              $1,235                  $1,377
  Other Liabilities                               16                      42
                                         ------------            ------------
    TOTAL LIABILITIES                          1,251                   1,419
SHAREHOLDERS' EQUITY                          35,326                  33,521
                                         ------------            ------------
  TOTAL LIABILITIES AND
  SHAREHOLDERS' EQUITY                       $36,577                 $34,940

<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
CONDENSED STATEMENT OF INCOME
------------------------------------------------------------------------------------------------
For the Year Ended December 31,            2001                    2000                    1999
------------------------------------------------------------------------------------------------
<S>                                      <C>                     <C>                     <C>
INCOME
  Dividends from Subsidiaries            $1,489                  $1,405                  $1,321
  Interest on Loan
    to Subsidiary                            74                      97                      85
  Interest on Deposits
    with Banks                               19                      13                       6
                                    ------------            ------------            ------------

      TOTAL INCOME                        1,582                   1,515                   1,412
                                    ------------            ------------            ------------

EXPENSES
  Interest on Long-Term Debt                 94                     121                     105
  Other Expenses                             87                      39                      81
                                    ------------            ------------            ------------
     TOTAL EXPENSES                         181                     160                     186
                                    ------------            ------------            ------------

Income Before Taxes and
  Equity in Undistributed Net
  Earnings of Subsidiaries                1,401                   1,355                   1,226
Federal Income Tax (Credit)                 (30)                    (17)                    (32)
                                    ------------            ------------            ------------
Income Before Equity in
  Undistributed Net Earnings
  of Subsidiaries                         1,431                   1,372                   1,258
Equity in Undistributed Net
  Earnings of Subsidiaries                2,126                     700                   2,024
                                    ------------            ------------            ------------
  NET INCOME                             $3,557                  $2,072                  $3,282

------------------------------------------------------------------------------------------------
</TABLE>



<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENT OF CASH FLOWS
-------------------------------------------------------------------------------------------------------------
For the Year Ended December 31,                         2001                    2000                    1999
-------------------------------------------------------------------------------------------------------------
<S>                                                   <C>                     <C>                     <C>
OPERATING ACTIVITIES
  Net Income                                          $3,557                  $2,072                  $3,282
  Adjustments to Reconcile
    Net Income to Net Cash
    Provided by Operating
      Activities:
 Distribution in Excess
      of Undistributed Net
      Earnings of Subsidiaries                        (2,125)                   (687)                 (2,005)
Changes in Assets and
  Liabilities:
  Increase in
    Interest-Bearing Deposits
    with Banks                                          (242)                   (240)                   (239)
  (Increase) Decrease in
    Other Assets                                         (14)                     15                     (22)
  Increase (Decrease) in
    Other Liabilities                                    (27)                    (48)                      1
                                                 ------------            ------------            ------------

NET CASH PROVIDED BY
  OPERATING ACTIVITIES                                 1,149                   1,112                   1,017
                                                 ------------            ------------            ------------

FINANCING ACTIVITIES
  Net (Decrease) Increase in Long-Term Debt             (142)                     57                     885
  Net Decrease (Increase) in ESOP Debt                   142                     (57)                   (885)
  Purchase of Treasury Stock                             (59)                      -                       -
  Proceeds from Issuance
    of Common Stock                                      387                     313                     302
  Cash Dividends Paid                                 (1,489)                 (1,406)                 (1,321)
  Cash Paid in Lieu of
    Fractional Shares                                     (2)                     (2)                     (4)
                                                 ------------            ------------            ------------

NET CASH USED IN
  FINANCING ACTIVITIES                                (1,163)                 (1,095)                 (1,023)
                                                 ------------            ------------            ------------

Increase (Decrease) in Cash
  and Cash Equivalents                                   (14)                     17                      (6)
Cash and Cash Equivalents,
  January 1,                                              31                      14                      20
                                                 ------------            ------------            ------------
Cash and Cash Equivalents,
  December 31,                                          $ 17                    $ 31                    $ 14
-------------------------------------------------------------------------------------------------------------

</TABLE>


<PAGE>


                              INVESTOR INFORMATION


First Colonial Group, Inc.
76 South Main Street
Nazareth, PA   18064

ANNUAL SHAREHOLDERS' MEETING

         The annual shareholders' meeting will be held on Thursday, May 2, 2002
at 9 a.m. at the Bethlehem Holiday Inn, Routes 22 and 512, Bethlehem,
Pennsylvania 18017.

REGISTRAR AND TRANSFER AGENT

         The registrar and transfer agent is Registrar and Transfer Company.
Shareholders seeking assistance with stock registration, lost stock certificates
or dividend information should contact:

                  Registrar and Transfer Company
                  10 Commerce Drive
                  Cranford, NJ   07016-3572
                  800-368-5948

STOCK INFORMATION

         First Colonial Group, Inc. common stock trades on the Nasdaq Stock
Market under the trading symbol FTCG. In newspaper listings, First Colonial
Group, Inc. shares are frequently listed as "First Colnl" or "First Col Group".
At the close of business on December 31, 2001, there were 682 shareholders of
record.

         The declaration and payment of dividends is at the sole discretion of
the Board of Directors, and the amount depends upon the earnings, financial
condition, and capital needs of the Company and the Bank and certain other
factors including restrictions arising from Federal banking laws and
regulations.

         The following table sets forth for the periods indicated high and low
sale prices reported for the Company's common stock and the respective dividends
declared per common share. The last sale price in December, 2001 was $22.45 and
in December, 2000 was $12.86. Stock prices and dividends per share have been
restated to reflect the 5% stock dividends of June, 2001 and June, 2000.

<PAGE>


-------------------------------------------------------------------------
                                                  Cash Dividends
                  High        Low                    Declared
-------------------------------------------------------------------------
2000
First Quarter     $17.80      $13.38                 $0.1724
Second Quarter     15.55       11.67                  0.1724
Third Quarter      16.19       11.43                  0.1810
Fourth Quarter     15.71       12.14                  0.1810
                                                 ------------
                       TOTAL                         $0.7068

-------------------------------------------------------------------------

2001
First Quarter     $15.83      $12.85                 $0.1810
Second Quarter     16.35       14.04                  0.1810
Third Quarter      20.25       14.85                  0.1900
Fourth Quarter     24.95       17.60                  0.1900
                                                 ------------
                       TOTAL                         $0.7420

-------------------------------------------------------------------------




DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN

         Shareholders may participate in the Dividend Reinvestment and Stock
Purchase Plan. The plan provides that additional shares of common stock may be
purchased with reinvested cash dividends and with voluntary cash payments at a
5% discount from market. A description of the plan and additional information
may be obtained by writing to:

                  Registrar and Transfer Company
                  10 Commerce Drive
                  Cranford, NJ   07016-3572

INVESTMENT CONSIDERATIONS

         In analyzing whether to make or to continue an investment in the
Company, investors should consider, among other factors, the information
contained in this Annual Report and certain investment considerations and other
information described in the Company's Form 10-K for the year ended December 31,
2001.

FORM 10-K

         Shareholders, analysts and others seeking a copy of Form 10-K without
charge (except for exhibits) or additional financial information about First
Colonial Group, Inc. should send a written request to:

                  Reid L. Heeren, Vice President
                  First Colonial Group, Inc.
                  76 South Main Street
                  Nazareth, PA   18064

MARKET MAKERS

         The following investment brokerage houses currently make a market in
First Colonial Group, Inc. common stock: Ferris, Baker, Watts, Inc.; First
Tennessee Securities Corp.; Island ECN; Knight Secs LP; F. J. Morrissey & Co.,
Inc.; Ryan, Beck & Co.; and Spear Leeds & Kellogg Capital Markets.

<PAGE>

Item 9.   Changes in and Disagreements with Accountants on Accounting and
-------   ---------------------------------------------------------------
          Financial Disclosure
          --------------------

                  None

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant
--------  --------------------------------------------------

         The information contained under the captions "Election Of Directors"
and "Compliance with Section 16 (a) of the Securities Exchange Act of 1934" in
the Company's 2001 Proxy Statement and "Executive Officers of the Registrant" in
Item 4.1 of this Form 10-K is incorporated herein by reference therefrom.

Item 11.  Executive Compensation
--------  ----------------------

         The information contained under the caption "Executive Compensation" in
the Company's 2001 Proxy Statement is incorporated herein by reference
therefrom.

Item 12.  Security Ownership of Certain Beneficial Owners and Management
--------  --------------------------------------------------------------

         The information contained under the caption "Voting Securities and
Principal Holders Thereof" in the Company's 2001 Proxy Statement is incorporated
herein by reference therefrom.

Item 13.  Certain Relationships and Related Transactions
--------  ----------------------------------------------

         The information contained under the caption "Certain Relationships and
Related Transactions" in the Company's 2001 Proxy Statement is incorporated
herein by reference therefrom.


<PAGE>

                                     PART IV


Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K
--------  ---------------------------------------------------------------

     (a)  Documents Filed as Part of this Report:

     1.   Financial Statements: The Consolidated Financial Statements of the
          Company and the Report of Independent Certified Public Accountants
          thereon, as listed below, have been filed under "Item 8, Financial
          Statements and Supplementary Data".

               Report of Independent Certified Public Accountants

               Consolidated Balance Sheets for the Years Ended 12/31/01 and
               12/31/00

               Consolidated Statements of Income and Comprehensive Income for
               the Years Ended 12/31/01, 12/31/00 and 12/31/99

               Consolidated Statement of Changes in Shareholders' Equity for the
               Years Ended 12/31/01, 12/31/00 and 12/31/99

               Consolidated Statements of Cash Flows for the Years Ended
               12/31/01, 12/31/00 and 12/31/99

               Notes to Consolidated Financial Statements

<PAGE>

     2.   Exhibits:


<TABLE>
<CAPTION>
             Number          Title                                              Page No.
             ------          -----                                              --------

<S>                     <C>                                                     <C>
          3.1 (7) (18)  Restated Articles of Incorporation of the Company, as
                        amended.

               3.2 (7)  Bylaws of the Company, as amended.

               4.1 (1)  Specimen Common Stock Certificate of the Company.

            * 10.1 (1)  Deferred Compensation Plan for Directors.

         * 10.1.1 (18)  2001 Stock Option Plan

           * 10.2 (18)  Retirement Agreement with S. Eric Beattie

            * 10.3 (1)  Form of Executive Benefit Program Agreement.

            * 10.4 (6)  Employee Stock Ownership Plan.

              10.5 (1)  Loan Agreement (including Exhibits thereto), dated
                        October 5, 1984, by and between the Company and
                        Commonwealth Bank and Trust Company, N.A.

            * 10.6 (3)  First Colonial Group, Inc. Stock Option Plan.

                  10.7  Intentionally Omitted

            * 10.8 (8)  Restated Optional Deferred Salary Plan (401(k)).

           * 10.9 (10)  1994 Stock Option Plan for Non-Employee Directors, as
                        amended

           *10.10 (17)  Severance Agreement dated January 1, 2001 by and between
                        the Bank and S. Eric Beattie

           *10.11 (17)  Severance Agreement dated January 1, 2001 by and between
                        the Bank and Reid L. Heeren

            *10.12 (9)  Severance agreement dated July 19, 1994 by and between
                        the Bank and Arthur Williams


<PAGE>
             Number          Title                                              Page No.
             ------          -----                                              --------

         *10.12.1 (12)  Amendment No. 1 to Severance Agreement by and between
                        the Board and Arthur Williams

           *10.14 (10)  Amendment No. 1 dated September 27, 1994 to the Bank's
                        Employee Stock Ownership Plan

           *10.15 (10)  Amendment No. 1 dated September 22, 1994 to the Optional
                        Deferred Salary Plan (401K)

           *10.16 (11)  Amendment Number 1 to the 1994 Stock Option Plan for
                        Non-Employee Directors

           *10.17 (11)  1996 Employee Stock Option Plan

           *10.18 (17)  Severance Agreement dated January 1, 2001 by and between
                        the Board and Tomas J. Bamberger

            10.19 (14)  Loan Agreement dated April 22, 1998 by and between First
                        C. G. Company and the Employee Stock Ownership Plan

           *10.20 (17)  Severance Agreement dated January 1, 2001 by and between
                        the Board and Robert McGovern

            10.21 (16)  Loan Agreement dated February 8, 1999 by and between
                        First C. G. Company and the Employee Stock Ownership
                        Plan

            10.22 (17)  Loan Agreement dated October 19, 2000 by and between
                        First C. G. Company and the Employee Stock Ownership
                        Plan

            10.23 (17)  Loan Agreement dated December 22, 2000 by and between
                        First C. G. Company and the Employee Stock Ownership
                        Plan

           *10.24 (19)  Severance Agreement dated August 16, 2001 by and between
                        the Board and David W. Hughes

                *10.25  Agreement dated December 27, 2001 by and between the
                        Board and Scott V. Fainor

              21.1 (3)  Subsidiaries of the Company.


             Number          Title                                              Page No.
             ------          -----                                              --------

                  23.1  Consent of Accountants.

-----------------------

*  Represents a Management Contract or Compensatory Plan, Contract or Arrangement.
</TABLE>

<PAGE>


              (1)     Incorporated by reference from the Company's Registration
                      Statement on Form S-1 (Registration No. 33-4908), as filed
                      on April 16, 1986.

              (2)     Incorporated by reference from the Company's Registration
                      Statement on Form S-1 (Registration No. 33-20319), as
                      filed on February 25, 1988.

              (3)     Incorporated by reference from the Company's Annual Report
                      on Form 10-K (File No. 0-11526) for the fiscal year ended
                      December 31, 1986.

              (4)     Incorporated by reference from the Company's Annual Report
                      on Form 10-K (File No. 0-11526) for the fiscal year ended
                      December 31, 1988.

              (5)     Incorporated by reference from the Company's Current
                      Report on Form 8-K dated June 20, 1989 (File No. 0-11526).

              (6)     Incorporated by reference from the Company's Annual Report
                      on Form 10-K (File No. 0-11526) for the fiscal year ended
                      December 31, 1991.

              (7)     Incorporated by reference from the Company's Registration
                      Statement on Form S-1 (Registration No. 33-64816), as
                      filed on June 22, 1993.

              (8)     Incorporated by reference from the Company's Annual Report
                      on Form 10-KSB (File No. 0-11526) for the fiscal year
                      ended December 31, 1993.

              (9)     Incorporated by reference from the Company's Quarterly
                      Report on Form 10-QSB (File No. 0-11526) for the quarter
                      ended June 30, 1994.

              (10)    Incorporated by reference from the Company's Annual Report
                      on Form 10-KSB (File No. 0-11526) for the fiscal year
                      ended December 31, 1994.

              (11)    Incorporated by reference from the Company's Annual Report
                      on Form 10-KSB (File No. 0-11526) for the fiscal year
                      ended December 31, 1995.

              (12)    Incorporated by reference by the Company's Annual Report
                      on Form 10-KSB (File No. 0-11526) for the fiscal year
                      ended December 31, 1996.

              (13)    Incorporated by reference by the Company's Annual Report
                      on Form 10-KSB (File No. 0-11526) for the fiscal year
                      ended December 31, 1997.

              (14)    Incorporated by reference by the Company's Annual Report
                      on Form 10-K (File No. 0-11526) for the fiscal year ended
                      December 31, 1998.

              (15)    Incorporated by reference from the Company's Quarterly
                      Report on Form 10-Q (File No. 0-11526) for the quarter
                      ended June 30, 1999.

              (16)    Incorporated by reference from the Company's Annual Report
                      on Form 10-K (File No. 0-11526) for the fiscal year ended
                      December 31, 1999.

<PAGE>


              (17)    Incorporated by reference from the Company's Annual Report
                      on Form 10-K (File No. 0-11526) for the fiscal year ended
                      December 31, 2000.

              (18)    Incorporated by reference from the Company's Quarterly
                      Report on Form 10-Q on Form 10-Q (File No. 0-11526) for
                      the quarter ended June 30, 2001.

              (19)    Incorporated by reference from the Company's Quarterly
                      Report on Form 10-Q (File No. 0-11526) for the quarter
                      ended September 30, 2001.


<PAGE>

     (b)  Reports on Form 8-K

     No reports on Form 8-K were filed in the fourth quarter of the year ended
December 31, 2001.


<PAGE>

                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                             FIRST COLONIAL GROUP, INC.

Dated:  March 29, 2002                       By:  /s/  Scott V. Fainor
                                                  ------------------------------
                                                  SCOTT V. FAINOR, President and
                                                  Chief Executive Officer


         In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities as of
March 29, 2002.


By:       /s/ Richard Stevens, III
          -----------------------------------------------------------
          RICHARD STEVENS, III
          Chairman of the Board
          and Director
          March 29, 2002

By:       /s/  Scott V. Fainor
          -----------------------------------------------------------
          SCOTT V. FAINOR
          President, Chief Executive Officer
          and Director (Principal Executive Officer)
          March 29, 2002

By:       /s/  Reid L. Heeren
          -----------------------------------------------------------
          REID L. HEEREN
          Executive Vice President and Treasurer
          (Principal Financial Officer and
          Principal Accounting Officer)
          March 29, 2002

By:       /s/  Robert J. Bergren
          -----------------------------------------------------------
          ROBERT J. BERGREN
          Director
          March 29, 2002

By:       /s/ Christian F. Martin, IV
          -----------------------------------------------------------
          CHRISTIAN F. MARTIN, IV
          Director
          March 29, 2002


<PAGE>

By:       /s/  Gordon B. Mowrer
          -----------------------------------------------------------
          GORDON B. MOWRER
          Director
          March 29, 2002

By:       /s/ Daniel B. Mulholland
          -----------------------------------------------------------
          DANIEL B. MULHOLLAND
          Director
          March 29, 2002

By:       /s/ Charles J. Peischl
          -----------------------------------------------------------
          CHARLES J. PEISCHL, ESQUIRE
          Director
          March 29, 2002

By:       /s/ John H. Ruhle, Jr.
          -----------------------------------------------------------
          JOHN H. RUHLE, JR.
          Director
          March 29, 2002

By:       /s/ Maria Zumas Thulin
          -----------------------------------------------------------
          MARIA Z. THULIN
          Director
          March 29, 2002