SECURITIES AND EXCHANGE COMMISSION
                                Washington, D.C.

                                    FORM 10-K


    X     Annual  Report  Pursuant  to  Section  13 or 15(d)  of the  Securities
          Exchange  Act of 1934 for (fee  required)  for the  fiscal  year ended
          December 31, 1998.

                                       OR

          Transition  Report  Pursuant to Section 13 or 15(d) of the  Securities
          Exchange Act of 1934 for the transition  period from  ____________  to
          ____________.


                         Commission File 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.

<PAGE>

     The aggregate  market value of voting stock held by  non-affiliates  of the
registrant is $35,476,135. (1)

     The number of shares of the  Issuer's  common  stock,  par value  $5.00 per
share, outstanding as of March 24, 1999 was 1,745,725.



                      DOCUMENTS INCORPORATED BY REFERENCE:

     Certain portions of the Company's Proxy Statement to be filed in connection
with its 1999 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 24,  1999.  Includes an
aggregate of 146,373 shares, with an aggregate market value of $3,476,359,  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.

      Transitional Small Business Disclosure Format (Check one): Yes ; No X

<PAGE>

                                     PART I

Item 1.  Description of 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 or estimates
concerning  the effect of the "Year 2000"  issues on the  Company's  systems and
software  and the  Company's  plans with regard to "Year 2000"  issues and other
statements as to management's  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  statement  government   regulation,
competition,  and the time, expense and unanticipated problems in addressing the
Year 2000 issue.  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.

<PAGE>

     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, 1998 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  $31,238,000,
representing a negative  cumulative one year gap of 82%. If interest rates rise,
the  Company  could  experience  a decrease  in 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".

     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".

<PAGE>

     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.

     Allowance  for Loan Losses.  The Company has  established  an allowance for
loan losses which management  believes to be adequate to offset potential 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.

<PAGE>

     Year 2000  Compliance.  The Company  has  adopted a "Year 2000  Policy" and
conducted a  comprehensive  review of its  computer  systems and  operations  to
identify the areas that could be affected by the Year 2000 issue. The issue with
respect to Year 2000 is whether  systems will properly  recognize date sensitive
information  when  the  year  changes  to  2000.  Systems  that do not  properly
recognize  such  information  could  generate  erroneous  data or cause complete
system failures. The Company's estimates of the costs that incurred and costs to
be  incurred  to prepare for Year 2000  compliance  will not exceed  $1,100,000;
however,  there can be no assurance  that the 2000 year problem will not have an
adverse  effect on the  financial  condition  and results of  operations  of the
Company.  See  "Management  Discussion  and Analysis of Financial  Condition and
Results  of  Operations  - Year  2000" in "Item 7.  Management's  Discussion  of
Financial Condition and Results of Operations".

     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".

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

<PAGE>

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,  one  branch in  Stroudsburg,  Pennsylvania,  one
branch  in  East   Stroudsburg,   Pennsylvania  and  one  branch  in  Allentown,
Pennsylvania.  The Bank has nineteen  automated teller machines  (ATMs),  one at
each branch office (except the Main Street Nazareth branch),  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  and at a
hardware store in Nazareth, 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, 1998 the Company,  on a  consolidated  basis,  had total
assets of $358,496,000,  total deposits of $294,549,000, and total shareholders'
equity of $31,717,000.

<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,  Pennsylvania.  The Bank is a member of the Federal Reserve
System.

     As of December 31, 1998, the Bank had total assets of  $354,785,000,  total
deposits of $294,818,000  and total  shareholders'  equity of  $27,158,000.  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  thirteen  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.  Three  offices are
located in Monroe County, Pennsylvania.  One office is 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, in a hardware store in Nazareth,  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,  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

<PAGE>

     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,  Bethlehem,  Brodheadsville,  Easton,  and  Stroudsburg  areas of
Pennsylvania.

     Trust  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, 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  a  branch  in  Nazareth;  First  Union  Bank,
headquartered  in Charlotte,  North Carolina,  with branch offices in Easton and
Bethlehem, Pennsylvania; Summit Bancorporation,  headquartered in Princeton, New
Jersey, with branches in Bethlehem, Easton and Allentown,  Pennsylvania; and PNC
Bank  headquartered  in  Pittsburgh,  Pennsylvania,  with  branches in Nazareth,
Brodheadsville, 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.

<PAGE>

     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.

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, 1998, First C. G. Company, Inc.
had total  assets of  $4,273,000,  of which  $2,810,000  was  invested in common
stocks  and  $435,000  in a loan to the  Bank's  ESOP and most of the  remaining
assets were in other tax-exempt and taxable securities and interest-bearing bank
deposits. The total shareholders' equity at December 31, 1998 was $3,909,000.

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. See "Interstate Banking".

<PAGE>

     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. The Federal Reserve Board has by regulation determined
that certain activities including, among others, operating a mortgage,  finance,
credit card or factoring company; performing certain data processing operations;
providing investment and financial advice; acting as insurance agent for certain
types of credit-related  insurance;  leasing personal property on a full-payout,
nonoperating  basis;  and,  certain  stock  brokerage  and  investment  advisory
services,  are  closely  related to banking  within the  meaning of the  Holding
Company Act.

     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 policy of the Federal  Reserve Board with respect to bank holding
company  operations,  a bank  holding  company is deemed to serve as a source of
financial  strength  to its  subsidiary  depository  institutions  and to commit
resources to support such institutions in circumstances where it might not do so
absent such policy. 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 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.

     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.

<PAGE>

     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.

     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.

     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 S -  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 insurance  premiums it
charged on bank deposits  insured by the BIF to the statutory  minimum of $2,000
annually  for  "well-capitalized"  banks.  On September  30,  1996,  the Deposit
Insurance  Funds Act of 1996  ("DIFA")  was enacted  and signed  into law.  DIFA
reduced the amount of FDIC insurance premiums for savings  association  deposits
acquired by banks to the same levels assessed for deposits  insured by BIF. DIFA
further  provides  for  assessments  to be  imposed  on all  insured  depository
institutions  with  respect  to  deposits  to pay  for  the  cost  of  Financing

<PAGE>

Corporation  bonds;  however,  banks are  assessed for this purpose at only this
purpose at only  one-fifth the rate of the  assessment  on savings  associations
until  December 31, 1999. As a result of these  changes,  the deposit  insurance
assessment  for banks and for  thrifts  has been  nearly  equalized  and will be
identical for comparably rated institutions after January 1, 2000, at which time
banks will share equally in the FICO  assessment and the BIF and SAIF funds will
be merged.

     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, 1998 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>

Capital Ratios
<TABLE>
                                                                  To Be Well
                                                                 Capitalized
                                                 Required        Under Prompt
                                                For Capital       Corrective
                                Actual           Purposes         Provisions
(Dollars in Thousands)
 At December 31, 1998        Amount   Ratio     Amount   Ratio   Amount  Ratio
<S>                       <C>       <C>      <C>       <C>    <C>      <C>
Total Capital
(To Risk-Weighted Assets)
  Company, (Consolidated)   $33,555   16.97%   $15,819   8.00%      ---    ---
  Bank                      $29,450   15.02%   $15,684   8.00%  $19,605  10.00%

Tier 1 Capital
(To Risk-Weighted Assets)
  Company, (Consolidated)   $30,938   15.64%   $ 7,906   4.00       ---    ---
  Bank                      $26,596   13.57%   $ 7,842   4.00%  $11,763   6.00%

Tier 1 Capital
(To Average Assets,
 Leverage)
  Company, (Consolidated)   $30,938   8.60%    $14,114   4.00%      ---    ---
  Bank                      $26,596   7.47%    $13,951   4.00%  $17,439   5.00%
</TABLE>

CAPITAL RATIOS
<TABLE>
                                                                  To Be Well
                                                                 Capitalized
                                                 Required        Under Prompt
                                                For Capital       Corrective
                                Actual           Purposes         Provisions
(Dollars in Thousands)
 At December 31, 1997        Amount   Ratio     Amount   Ratio   Amount  Ratio
<S>                       <C>       <C>      <C>       <C>    <C>      <C>
Total Capital
(To Risk-Weighted Assets)
  Company, (Consolidated)   $31,271   16.03%   $15,609   8.00%      ---    ---
  Bank                      $27,200   13.97%   $15,576   8.00%  $19,470  10.00%

Tier 1 Capital
(To Risk-Weighted Assets)
  Company, (Consolidated)   $28,829   14.78%   $ 7,804   4.00       ---    ---
  Bank                      $24,163   12.41%   $ 7,788   4.00%  $11,682   6.00%

Tier 1 Capital
(To Average Assets,
 Leverage)
  Company, (Consolidated)   $28,829   8.33%    $13,551   4.00%      ---    ---
  Bank                      $24,163   7.06%    $13,416   4.00%  $16,770   5.00%
</TABLE>

<PAGE>


     Interstate Banking

     On  September  29, 1994,  the  President  signed into law the  "Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994" (the "Interstate Act").
Among other things, the Interstate Act permits bank holding companies to acquire
banks in any state after  September 9, 1995.  Beginning June 1, 1997, a bank may
merge with a bank in another  state so long as both states have not opted out of
interstate branching between the date of enactment of the Interstate Act and May
31, 1997.  States may enact laws opting out of interstate  branching before June
1, 1997,  subject to certain  conditions.  States may also enact laws permitting
interstate  merger  transactions  before June 1, 1997 and host states may impose
conditions on a branch  resulting  from an interstate  merger  transaction  that
occurs  before  June 1, 1997,  if the  conditions  do not  discriminate  against
out-of-state banks, are not preempted by Federal law and do not apply or require
performance  after  May 31,  1997.  Pennsylvania  has  enacted  a law  opting in
immediately  to  interstate  merger  and  interstate   branching   transactions.
Interstate  acquisitions  and  mergers  would both be subject,  in  general,  to
certain  concentration  limits and state entry rules  relating to the age of the
bank.

     Under the Interstate Act, the Federal  Deposit  Insurance Act is amended to
permit the responsible Federal regulatory agency to approve the acquisition of a
branch  of an  insured  bank by an  out-of-state  bank or bank  holding  company
without the acquisition of the entire bank or the  establishment  of a "de novo"
branch  only if the law of the state in which  the  branch  is  located  permits
out-of-state  banks to acquire a branch of a bank without  acquiring the bank or
permits  out-of-state  banks to establish "de novo" branches.  Pennsylvania  has
enacted such a law.

     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.

<PAGE>

     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, 1998 and 1997 in Note
U of the Notes to Consolidated Financial Statements contained under the caption,
"Item 8, Financial Statements and Supplementary Data".

     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 1998 and 1997. 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 7,
Financial Statements".

     Employees

     As of December 31, 1998 the Company had  approximately  204  employees,  of
whom  44 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 23 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,

<TABLE>
                                             1998   
Available-for-Sale Securities                 Carrying Amount
                                  Amortized      at Fair
                                    Cost          Value
<S>                               <C>           <C>   

U. S. Treasury                     $ 7,026       $ 7,125
U. S. Government Agency             24,482        24,441
State and Political Subdivisions    27,860        28,466
Mortgage-Backed Securities          33,322        33,141
Other Debt Securities                  ---           ---
Equity Securities                    4,900         5,216
                                   -------       -------       
     Total                         $97,590       $98,389
</TABLE>

<TABLE>
                                             1997   
Available-for-Sale Securities                 Carrying Amount
                                  Amortized      at Fair
                                    Cost          Value
<S>                               <C>           <C>   

U. S. Treasury                     $ 9,008       $ 9,066
U. S. Government Agency             14,512        14,556
State and Political Subdivisions    16,865        17,330
Mortgage-Backed Securities          26,791        26,812
Other Debt Securities                  ---           ---
Equity Securities                    3,878         5,260
                                   -------       -------       
     Total                         $71,054       $73,024
</TABLE>


<TABLE>
                                             1996   
Available-for-Sale Securities                 Carrying Amount
                                  Amortized      at Fair
                                    Cost          Value
<S>                               <C>           <C>             

U. S. Treasury                     $ 7,020       $ 7,054
U. S. Government Agency             14,272        14,161
State and Political Subdivisions    11,808        11,864
Mortgage-Backed Securities          19,131        19,145
Other Debt Securities                  796           800
Equity Securities                    3,226         3,755
                                   -------        -------  
     Total                         $56,253       $56,779
</TABLE>

<TABLE>
                                           1998
Held-to-Maturity Securities  Carrying Amount at  Approximate
                                  Amortized         Fair
                                    Cost           Value
<S>                               <C>          <C>           
U. S. Treasury                     $   ---      $   ---
U. S. Government Agency              4,992        5,026
State and Political Subdivisions     6,770        6,943
Mortgage-Backed Securities           5,961        5,951
                                   -------      -------
     Total                         $17,723      $17,920
</TABLE>

<TABLE>

                                               1997
Held-to-Maturity Securities  Carrying Amount at  Approximate
                                  Amortized         Fair
                                    Cost           Value
<S>                               <C>          <C>           
U. S. Treasury                     $   ---      $   ---
U. S. Government Agency              6,008        6,051
State and Political Subdivisions     3,169        3,233
Mortgage-Backed Securities           8,579        8,662
                                   -------      -------
     Total                         $17,756      $17,946
</TABLE>

<TABLE>

                                               1996   
Held-to-Maturity Securities   Carrying Amount at Approximate
                                   Amortized        Fair
                                     Cost          Value
<S>                               <C>          <C>            

U. S. Treasury                     $   999      $ 1,003
U. S. Government Agency             10,229       10,243
State and Political Subdivisions     3,217        3,261
Mortgage-Backed Securities           6,554        6,617
                                   -------       -------   
     Total                         $20,999      $21,124
</TABLE>

<PAGE>

                     INVESTMENT SECURITIES YIELD BY MATURITY

     The maturity  distribution  and weighted  average  yield of the  investment
portfolio  of the Company at December 31, 1998 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.

      Available-for-Sale and Held-to-Maturity Investment Securities Yield
                         by Maturity, December 31, 1998
<TABLE>

AVAILABLE-FOR-SALE
AT FAIR VALUE                                   After 1 But       After 5 But
(Dollars in Thousands,     Within One Year     Within 5 Years    Within 10 Years
                            Amount   Yield      Amount   Yield    Amount   Yield
<S>                      <C>         <C>      <C>        <C>    <C>       <C>

U. S. Treasury            $ 4,043     5.85 %   $ 3,082    6.27 % $    --    -- %
U. S. Government Agency        --       --          --      --     12,510  6.55
Mortgage-backed Securities     17     6.76       2,150    5.96      2,162  6.38
State and Political
 Subdivisions                 ---       --       2,010    7.29      7,584  7.12
Equity Securities              --       --          --      --         --   --
                            -----     ----     -------    ----    -------  ---- 
 TOTAL AVAILABLE-FOR-SALE
  SECURITIES              $ 4,060     5.85 %   $ 7,242    6.46 %  $22,256  6.73%
                            =====     ====     =======    ====    =======  ==== 
Average Of Avail-for-Sale
 Securities in years         0.59                 3.20               9.48 
                             ====                 ====               ==== 
</TABLE>

<TABLE>

AVAILABLE-FOR-SALE
AT FAIR VALUE                                        
(Dollars in Thousands,           After 10 Years             Total  
 Unaudited)                      Amount   Yield         Amount    Yield   
<S>                           <C>        <C>          <C>        <C>   

U. S. Treasury                 $   --       -- %       $ 7,125    6.03 % 
U. S. Government Agency         11,931    6.73          24,441    6.64   
Mortgage-backed Securities      28,812    6.16          33,141    6.16
State and Political
 Subdivisions                   18,872    7.50          28,466    7.38    
Equity Securities                5,216    3.56           5,216    3.56
                                 -----    ----           -----    ----
 TOTAL AVAILABLE-FOR-SALE
  SECURITIES                   $64,831    6.45 %       $98,389    6.49 %
                               =======    ====         =======    ====  
Average Of Avail-for-Sale
 Securities in years             19.21                   14.88
                                 =====                   =====
</TABLE>

<TABLE>

HELD-TO-MATURITY
AT AMORTIZED COST                                After 1 But       After 5 But
(Dollars in Thousands,     Within One Year     Within 5 Years    Within 10 Years
 Unaudited)                 Amount   Yield    Amount    Yield   Amount   Yield
<S>                      <C>        <C>      <C>        <C>     <C>      <C>

U. S. Government Agency   $   --       -- %   $    --      -- %  $ 4,992  7.00 %
Mortgage-backed Securities    --       --         756    6.12      1,137  6.79
State and Political
 Subdivisions                250     6.44         760    7.33      2,139  7.00
                          ------     ----     -------    ----    -------  ---- 
 TOTAL AVAILABLE-FOR-SALE
  SECURITIES              $  250     6.44 %   $ 1,516    6.73 %  $ 8,268  6.97%
                           =====     ====     =======    ====    =======  ==== 
Average Of Avail-for-Sale
 Securities in years        0.05                 3.79               8.31 
                            ====                 ====               ==== 
</TABLE>

<PAGE>

<TABLE>

AVAILABLE-FOR-SALE
AT FAIR VALUE                                        
(Dollars in Thousands,           After 10 Years             Total  
 Unaudited)                      Amount   Yield         Amount    Yield   
<S>                          <C>         <C>          <C>        <C>   

U. S. Government Agency       $     --      -- %       $ 4,992    7.00 %  
Mortgage-backed Securities       4,068    6.37           5,961    6.42
State and Political
 Subdivisions                    3,621    8.64           6,770    7.89    
                                 -----    ----           -----    ----
 TOTAL AVAILABLE-FOR-SALE
  SECURITIES                   $ 7,689    7.44 %       $17,723    7.15 %
                               =======    ====         =======    ====  
Average Of Avail-for-Sale
 Securities in years             21.97                   13.75
                                 =====                   =====
</TABLE>

<PAGE>

                             LOAN PORTFOLIO BY TYPE

     The loan  portfolio by type is summarized  in the  following  table for the
years ended December 31, 1998, 1997, 1996, 1995 and 1994.


Loan Portfolio by Type
<TABLE>

(Dollars in Thousands) For the Year Ended December 31,
                                   1998      1997      1996      1995      1994
-------------------------------------------------------------------------------
<S>                           <C>       <C>       <C>       <C>       <C> 
Real Estate - Residential      $119,914  $138,539  $134,013  $122,293  $117,205
Real Estate - Construction       11,689    12,361    10,923     4,959     2,861
Real Estate - Commercial         29,587    34,579    39,421    35,316    35,673
Consumer/Installment             40,184    35,914    28,870    27,685    24,626
Commercial (non-Real Estate)
    and Agricultural             10,900     9,086     8,715     5,403     7,503
State and Political Subdivisions  1,178       944       906     1,290       288
Other                                10        20        28        13        18
                              -------------------------------------------------
TOTAL GROSS LOANS               213,462   231,443   222,876   196,959   188,174
Unearned Income                  (1,025)   (1,856)   (2,759)   (3,829)   (2,959)
                              -------------------------------------------------
Total Loans                     212,437   229,587   220,117   193,130   185,215

Allowance for Possible
    Loan Losses                  (2,691)   (2,664)   (2,532)   (2,443)   (2,187)
                              -------------------------------------------------
NET LOANS                      $209,746  $226,923  $217,585  $190,687  $183,028
                              =================================================
</TABLE>

     At December 31, 1998 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, 1998,  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>

                                   Due in     Due in       Due in
As of December 31, 1998           One Year    One to        Over
      (Dollars in Thousands)      or Less   Five Years   Five Years     Total
-------------------------------------------------------------------------------
<S>                               <C>       <C>          <C>         <C>    

Real Estate - Construction         $ 988     $2,199       $8,502      $11,689
Real Estate - Commercial           1,377      6,850       21,360       29,587
Commercial (Non-Real Estate)
     and Agricultural              1,260      4,775        4,865       10,900
                                  ------     ------      -------      -------

     TOTAL                        $3,625    $13,824      $34,727      $52,176
                                  ======    =======      =======      =======

Loan Maturity After 1 Year With:

     Predetermined Interest Rate             $2,865      $6,384
     Floating Interest Rate                  10,959      28,343
                                             ------      ------

        TOTAL                               $13,824     $34,727
                                            =======     =======
</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>
                                               As of December 31,
                                1998      1997       1996       1995       1994
-------------------------------------------------------------------------------
Loan Categories                              (Dollars in Thousands)
<S>                         <C>        <C>          <C>      <C>        <C>

 Commercial                  $1,350     $1,183       $663     $1,049     $1,142
 Real Estate- Construction        4          6          7          3         69
 Real Estate - Residential      128        191        198        184        143
 Consumer/Installment           738        785        811        534        451
 Unallocated                    471        499        853        673        382
                             ------     ------     ------     ------     ------
      TOTAL                  $2,691     $2,664     $2,532     $2,443     $2,187
                             ======     ======     ======     ======     ======
</TABLE>

            PERCENTAGE OF TOTAL LOANS IN EACH CATEGORY TO TOTAL LOANS

<TABLE>
                                              As of December 31,
                                1998      1997      1996      1995       1994
   ----------------------------------------------------------------------------
Loan Categories                            (Dollars in Thousands)
<S>                           <C>       <C>       <C>       <C>        <C>  

 Commercial                    19.13 %   19.28 %   22.02 %   21.33 %   23.11 %
 Real Estate - Construction     5.50      5.34      4.90      2.52      1.52
 Real Estate - Residential     56.45     59.86     60.13     62.09     62.28
 Consumer/Installment          18.92     15.52     12.95     14.06     13.09
                               -----     -----     -----     -----     -----
      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,
1998, 1997 and 1996 are presented in the following table.

                AVERAGE DEPOSIT BALANCES BY MAJOR CLASSIFICATION
<TABLE>
                                     For the Year Ended December 31,
 
                                   1998             1997            1996
                            Average         Average           Average
                            Balance  Rate   Balance   Rate    Balance   Rate

                                         (Dollars in Thousands)
<S>                      <C>       <C>    <C>       <C>      <C>       <C>
Demand Deposits
   Non-Interest Bearing   $ 35,254   --- % $ 31,074   --- %   $ 27,826   --- %
   Interest Bearing         48,988  1.15     45,338  1.17       43,206  1.55
Money Market Deposits       14,366  2.81     14,380  2.81       16,297  2.82

Savings & Club Accounts     61,177  2.21     62,746  2.44       62,783  2.49
Certificates of Deposit
   under $100,000          124,823  5.59    118,846  5.58      103,221  5.50
Certificates of Deposit
   of $100,000 or more       4,700  3.72      5,014  4.19        5,167  4.84
                            ------  ----     ------  ----       ------  ----

      Total Deposits      $289,308         $277,398           $258,500
                          ========         ========           ========
</TABLE>


            MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
<TABLE>
                                                    At December 31,
(Dollars in Thousands)                          1998              1997
                                       -----------------------------------
<S>                                            <C>               <C>    

Three Months or Less                            $821              $428
Over Three, Through Six Months                 1,380             1,454
Over Six, Through Twelve Months                1,508               977
Over Twelve Months                             1,017             1,499
                                       -----------------------------------

     TOTAL                                    $4,726            $4,358
                                       ===================================
</TABLE>

     There were no brokered deposits at December 31, 1998 and 1997.

<PAGE>

Item 2.  Description of Property

     The principal  banking office of the Bank and the executive  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),  2000 Sullivan Trail,  Easton,  Pennsylvania  (Branch
Office),  3864 Adler Place,  Bethlehem  Business Park,  Bethlehem,  Pennsylvania
(First   Colonial   Building,   Computer  and   Operations   Center),   Rt.  209
Brodheadsville,  Pennsylvania (Branch Office), and 3856 Easton-Nazareth  Highway
(Route 248),  Lower  Nazareth  Township,  Easton,  Pennsylvania  (free-standing,
drive-up ATM 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 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;
and its branch office  located  within  Wal-Mart's at 355 Lincoln  Avenue,  East
Stroudsburg, Pennsylvania.

Item 3.  Legal Proceedings

     From time-to-time, the Company and the Bank are partners 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.

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.

<PAGE>

Item 4.1:  Executive Officers of the Registrant

     The following table sets forth certain  information,  as of March 30, 1999,
concerning the executive  officers of the Company and certain executive officers
of the Bank who are not also  Directors.  All executive  officers are elected by
the  respective  Boards of Directors of the Company and the Bank and hold office
at the discretion of such Boards.
                               Positions                    Positions
 Name/Age                   with the Company               with the Bank

Reid L. Heeren 57 (a)  Treasurer since January,       Executive Vice President
                        1987; Vice President since    and Chief Financial
                        April, 1985                   Officer since August, 1997
                                                      Senior Vice President and
                                                      Chief Financial Officer
                                                      since January, 1987;
                                                      Cashier since
                                                      November, 1984

Tomas J. Bamberger 57 (b) None                       Executive Vice President
                                                      and Senior Loan Officer
                                                      since September, 1997

Arthur Williams 53 (c)    None                        Executive Vice President,
                                                      Administration since 
                                                      August, 1997; Senior Vice
                                                      President, Administration
                                                      since November, 1988.

Robert M. McGovern 60 (d) None                        Executive Vice President, 
                                                      Senior Trust Officer 
                                                      since February, 1999


(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.

<PAGE>

(c)  Mr. Williams was previously  Senior Vice President,  Administration  of the
     Bank from  November,  1988 to August,  1997 and Vice President of the Bank,
     serving as branch  administrator  with business  development and commercial
     lending duties, from April 1985 to November, 1988. Prior to April 1985, Mr.
     Williams  was a Vice  President  of United  Penn Bank,  serving as Regional
     Administrator of its Northern Region (March 1980 to March 1985).

(d)  Mr. McGovern was previously  Vice President and Senior Trust  Specialist of
     First Union National Bank from April 1998 to February 1999.  Prior to that,
     Vice President/Trust of CoreStates Bank 1996 to 1998 and prior to that Vice
     President/Trust of Meridian Bank 1985 to 1996. The Meridian period postions
     progressed  from  Marketing  Officer in 1985 to Assistant Vice President to
     Vice  President in 1996.  Note:  The changes from Meridian to CoreStates to
     First Union were the result of mergers.

<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 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, 1998, there were 738 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  S-  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 $29.125 in December 1998 and
$33.80 in December 1997. Stock prices and dividends per share have been restated
to  reflect  the 5% stock  dividends  of June 1998 and May 1997  (see  "Note T -
Equity  Transactions"  in  the  "Notes  to  Consolidated  Financial  Statements"
contained in "Item 8, Financial Statements and Supplementary Data").

<TABLE>
-------------------------------------------------------------------------------
1997                                                          Cash Dividends
                             High              Low               Declared
-------------------------------------------------------------------------------
<S>                       <C>               <C>                <C> 

     First Quarter         $22.45            $20.18             $ 0.1633
     Second Quarter         23.33             21.31               0.1633
     Third Quarter          32.62             22.38               0.1714
     Fourth Quarter         33.81             33.04               0.1714
                                                                 -------

     TOTAL                                                      $ 0.6694
-------------------------------------------------------------------------------

1998
     First Quarter         $35.24            $32.62             $ 0.1810
     Second Quarter         36.50             33.33               0.1810
     Third Quarter          36.00             26.75               0.1900
     Fourth Quarter         29.75             26.75               0.1900
                                                                 -------

     TOTAL                                                      $ 0.7419
-------------------------------------------------------------------------------
</TABLE>

The Company did not sell any of its equity  securities during 1998 that were not
registered under the Securities Act.

<PAGE>

Item 6.  Selected Financial Data

<TABLE>
                        Consolidated Financial Highlights
--------------------------------------------------------------------------------

(Dollars in Thousands,                                         Percentage Change
except per share data)              1998       1997      1996   1998/97  1997/96

--------------------------------------------------------------------------------
<S>                            <C>        <C>        <C>        <C>      <C> 
At Year-End
  Assets                        $ 358,496  $ 346,738  $ 322,352   3.4 %    7.6%
  Deposits                        294,549    282,255     67,668   4.4      5.5
  Loans                           212,437    229,587    220,117  (7.5)     4.3
  Shareholders' Equity             31,717     30,357     26,805   4.5     13.3

For the Year
  Net Interest Income           $  14,496  $  14,613 $   13,557  (0.8)%    7.8%
  Net Income                        3,032      3,283      2,822  (7.6)    16.3

Per Share *
  Basic Net Income              $    1.76  $    1.92 $     1.68  (0.8)%   14.8%
  Diluted Net Income                 1.75       1.92       1.68  (0.9)    14.8
  Dividends Paid                     0.74       0.67       0.61  10.4      9.4
  Book Value                        18.17      17.49      16.37   3.9      6.8

Financial Ratios
  Return on average assets           .86%       .97%       .92%
  Return on average equity          9.79%     11.67%     11.16%
  Average shareholders' equity
    to average assets               8.78%      8.30%      8.24%

</TABLE>


* Per share data have been  restated to reflect the 5% stock  dividends  of June
1998, May 1997 and May 1996.

<PAGE>


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

     The  following  financial  review and  analysis  is  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,  1998,  1997 and 1996.  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 has been restated to reflect the 5% stock dividends of June 1998, May
1997 and May 1996.

                           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 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 or estimates
concerning  the effect of the "Year 2000"  issues on the  Company's  systems and
software  and the  Company's  plans with regard to "Year 2000"  issues and other
statements as to management's  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,
and the time,  expense and  unanticipated  problems in addressing  the Year 2000
issue.  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, 1998, a copy of which may be obtained  from the Company upon
request and without charge (except for the exhibits thereto).

<PAGE>

                          Financial Performance Summary

     In 1998,  First Colonial Group recorded net income of $3,032,000.  The 1998
net income is  $251,000  or 7.6% lower than 1997 net income of  $3,283,000.  The
decrease was  primarily  the result of a provision  expense of $1,000,000 to the
special reserve for possible  losses  resulting from specific  pre-need  funeral
trusts  which  the Bank had been  directed  to  invest  in a  private  placement
annuity.  The Company's net income in 1998,  exclusive of this special  reserve,
would have been $3,692,000,  an increase of 12.5% or $409,000 over net income in
1997. Net income in 1996 was $2,822,000.

     The basic earnings per share were $1.76,  $1.92 and $1.68 in 1998, 1997 and
1996, respectively.  The diluted earnings per share were $1.75 in 1998, $1.92 in
1997 and $1.68 in 1996.  Diluted earnings per share include the effect of common
stock  equivalents  such as options (see Note A.12 of the "Notes to Consolidated
Financial  Statements").  The basic and diluted earnings per share, exclusive of
the special reserve in 1998, would have been $2.14.

     The Company's return on average assets was .86% in 1998 as compared to .97%
in 1997 and .92% in 1996.  The  return on average  equity was 9.79%,  11.67% and
11.16% in 1998, 1997 and 1996, respectively

     The Company continued to achieve growth in total assets and deposits. Total
assets at December 31, 1998 were  $358,496,000  as compared to  $346,738,000  at
year end 1997.  This is an increase of  $11,758,000  or 3.4%.  During 1998 total
deposits grew by 4.4% or $12,294,000 to a year-end total of $294,549,000.  Total
deposits  at  December  31,  1997 were  $282,255,000.  Total  loans  amounted to
$212,437,000 and $229,587,000 at December 31, 1998 and 1997,  respectively.  The
loan decrease in 1998 was  $17,150,000  or 7.5%.  This decrease is attributed to
the sale of $42,880,000 of residential real estate loans during 1998.

     The principal factors  affecting  earnings in 1998 were a $757,000 or 19.8%
increase in other income,  including service charges,  trust revenues and higher
net gains on the sales of securities  and  mortgages of $341,000,  a decrease in
the  provision  for possible  loan losses of $155,000 and a reduction in Federal
income taxes of $265,000.  These earnings  improvement  factors were offset by a
decline in net  interest  income of $117,000  and higher  operating  expenses of
$1,311,000, including the provision for the special reserve of $1,000,000.

     The 1997 earnings  increase was the result of a $1,056,000  increase in net
interest  income,  an  increase  in other  income  of  $1,181,000  and a $65,000
reduction in the provision for possible loan losses.  Partially  offsetting  the
earnings  increases were higher operating expenses of $1,681,000 and an increase
in Federal income taxes of $160,000.

<PAGE>

<TABLE>

-------------------------------------------------------------------------------
SELECTED FINANCIAL DATA  
(Dollars in Thousands, 
except per share data) 
For the Year Ended 
December 31,                     1998      1997       1996       1995      1994
-------------------------------------------------------------------------------
<S>                        <C>       <C>        <C>        <C>        <C>
CONSOLIDATED SUMMARY OF INCOME:
 Interest Income             $ 25,367  $ 25,444   $ 23,135   $ 21,896  $ 18,986
 Interest Expense              10,871    10,831      9,578      9,252     7,152
                            --------- ---------  ---------  --------- ---------
 Net Interest Income           14,496    14,613     13,557     12,644    11,834
 Provision for Possible
   Loan Losses                    450       605        670      1,798       420
 Gains (Losses) on the
   Sale of Mortgage Loans         398       178        (30)        22        37
 Other Income, Excluding
   Securities and Loan
   Sale Gains                   3,460     3,044      2,364      2,230     1,896
 Securities Gains, Net            722       601        308         22        97
 Other Expense                 14,563    13,252     11,571     11,204    10,084
                            --------- ---------  ---------  --------- ---------
 Income Before Income Taxes
   and Cumulative Effect of
   Accounting Method Change     4,063     4,579      3,958      1,916     3,360
 Applicable Income Taxes        1,031     1,296      1,136        515     1,018
                            --------- ---------  ---------  --------- ---------
   Net Income                 $ 3,032   $ 3,283    $ 2,822    $ 1,401    $2,342
                            --------- ---------  ---------  --------- ---------
 Cash Dividends Paid          $ 1,275   $ 1,139   $  1,011   $    972   $   936
 Cash Dividends Paid Per Share   0.74      0.67       0.61       0.59      0.57
 Dividends Paid to Net Income   42.05%    34.69%     35.82%     69.38%    39.97%

PER SHARE DATA:
  Basic Income                $  1.76   $  1.92    $  1.68    $  0.85    $ 1.44
  Diluted Net Income             1.75      1.92       1.68       0.85      1.44
  Basic  Average Common
    Shares Outstanding      1,719,096 1,701,658  1,680,927  1,658,399 1,633,462
  Dilutive Average Common
    Shares Outstanding      1,726,569 1,706,729  1,683,770  1,658,792 1,633,462

CONSOLIDATED BALANCE SHEET DATA:
 Total Assets                $358,496  $346,738   $322,352   $298,514  $284,553
 Loans (Net of
  Unearned Discount)          212,437   229,587    220,117    193,130   185,215
 Mortgage Loans
  Held-for-Sale                   603       759        721      1,006        69
 Deposits                     294,549   282,255    267,668    254,102   247,532
 Securities Sold Under
  Agreements to Repurchase      5,094     8,804      3,795      6,096     9,027
 Debt (Short-Term
  and Long-Term)               20,000    18,390     18,512      7,643     1,612
 Shareholders' Equity          31,717    30,357     26,805     24,767    22,400
 Book Value Per Share           18.17     17.49      16.37      16.04     14.66

SELECTED CONSOLIDATED RATIOS:
 Net Income To:
  Average Total Assets           0.86%     0.97%      0.92%      0.48%     0.85%
  Average Shareholders' Equity   9.79%    11.67%     11.16%      5.98%    10.51%

 Average Shareholders'
  Equity to Average Assets       8.78%     8.30%      8.24%      8.00%     8.10%
-------------------------------------------------------------------------------
</TABLE>

<PAGE>


CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS 
(Dollars in Thousands) For the Year Ended December 31,
<TABLE>
                         1998                1997                   1996
                        Int   Avg           Int    Avg             Int    Avg
                 Avg    Inc/ Yield/   Avg   Inc/  Yield/    Avg    Inc/  Yield/
                 Bal    Exp  Rate     Bal   Exp    Rate     Bal    Exp    Rate
<S>        <C>       <C>   <C>    <C>    <C>      <C>  <C>       <C>     <C> 
ASSETS
INT-EARNING 
ASSETS
 Int-Bearing
  Balances 
  with Banks $  3,060  $ 176 5.75%  $1,252 $    71  5.67% $  1,313 $   78  5.96%
 Fed Funds 
  Sold            641     34 5.30       18       1  5.56        16      2  5.43
 Inv Sec
  Taxable      80,939  5,002 6.18   69,876   4,592  6.57    67,241  4,386  6.42
  Non-Tax(1)   26,155  1,923 7.35   16,653   1,268  7.62    12,318    935  7.59
  Loans(1(2)  219,357 18,910 8.62  229,205  19,972  8.71   206,378 18,083  8.76
  Allow for
  Loan Losses  (2,710)  ---  ---    (2,614)   ---   ---     (2,500)   ---   ---
             -------- ------      --------  ------        -------- ------ 
  Net Loans   216,647 18,910 8.73  226,591  19,972  8.81   203,878 18,083  8.87
             -------- ------      --------  ------        -------- ------ 
   Total Int-
   Earn 
   Assets     327,442 26,045 7.95  314,390  25,904  8.24   284,766 23,484  8.25
  Non-Int
   Earn Assets 25,419   ---  ---    24,391    ---   ---     22,305    ---   ---
             -------- ------      --------  ------        -------- ------ 
  TOTAL ASSETS,
  INTEREST 
  INCOME     $352,861 26,045 7.38 $338,781  25,904  7.65  $307,071 23,484  7.65
             -------- ------      --------  ------        -------- ------ 

LIABILITIES
INTEREST-BEARING 
LIABILITIES
 Int-Bearing  
 Deposits
  Demand 
  Deposits   $ 48,988    562 1.15 $ 45,338     532  1.17  $ 43,206    670  1.55
  Money 
  Market
  Deposits     14,366    404 2.81   14,380     404  2.81    16,297    460  2.82
  Savings & 
  Club 
  Deposits     61,177  1,350 2.21   62,746   1,530  2.44    62,783  1,566  2.49
  CD's over  
  $100,000      4,700    175 3.72    5,014     210  4.19     5,167    250  4.84
  All Other 
  Time Dep    124,823  6,975 5.59  118,846   6,636  5.58   103,221  5,675  5.50
             -------- ------      --------  ------        -------- ------ 
   Total Int-
   Bearing
   Deposits   254,054  9,466 3.73  246,324   9,312  3.78   230,674  8,622  3.74

 Securities 
 Sold Under 
 Agreements
 to Repurchase  5,821    210 3.61    6,459     240  3.72     4,680    149  3.18
 Other Short-
 Term 
 Borrowings       974     55 5.65    2,325     132  5.68     3,560    198  5.56
 Long-Term 
 Debt          18,631  1,140 6.12   18,422   1,147  6.23     9,319    609  6.54
             -------- ------      --------  ------        -------- ------ 
  Total Int-
  Bearing 
  Liabilities 279,480 10,871 3.89  273,530  10,831  3.96   248,233  9,578  3.86

<PAGE>

NON-INTEREST 
BEARING 
LIABILITIES
 Non-Int-
 Bearing
 Deposits      35,254   ---  ---    31,074    ---   ---     27,826    ---   ---
 Other Liab     7,157   ---  ---     6,054    ---   ---      5,724    ---   ---
             -------- ------      --------  ------        -------- ------ 
 TOTAL LIAB   321,891 10,871 3.38  310,658  10,831  3.49   281,783  9,578  3.40
 SHAREHOLDERS'
 EQUITY        30,970   ---  ---    28,123   ---     ---    25,288    ---   ---
             -------- ------      --------  ------        -------- ------ 
 TOTAL LIAB &
  SHAREHOLDERS'
  EQUITY,
  INTEREST 
  EXPENSE    $352,861 10,871 3.08 $338,781  10,831  3.20  $307,071  9,578  3.12

NET INTEREST 
INCOME              $ 15,174               $15,073                $13,906 
                    --------               -------                ------- 
 Net Interest 
 Spread (3)                  4.06                   4.28                   4.39

 Effect of 
 Int-Free 
 Sources
 Used to 
 Fund Earnings
 Assets                      0.57                   0.51                   0.49

NET INTEREST 
MARGIN (4)                   4.63%                  4.79%                  4.88%
                             ----                   ----                   ---- 

</TABLE>

(1) The indicated  interest income and average yields are presented on a taxable
equivalent  basis.  The  taxable  equivalent   adjustments  included  above  are
$678,000,  $460,000 and $349,000 for the years 1998, 1997and 1996, respectively.
The effective tax rate used for the taxable equivalent adjustment was 34%.

(2) Loan fees of $358,000,  $377,000  and $303,000 for the years 1998,  1997 and
1996,  respectively,  are included in interest  income.  Average  loan  balances
include  non-accruing  loans and  average  loans  held-for-sale  of  $3,726,000,
$1,781,000 and $2,212,000 for 1998, 1997 and 1996, 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.
<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
includes  loan fees of  $358,000,  $377,000  and  $303,000  for the years  ended
December 31, 1998, 1997 and 1996, 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 $15,174,000 for 1998, an increase
of $101,000 over  $15,073,000  in 1997. As shown in the  "Rate/Volume  Analysis"
table,  the increase in net interest  income in 1998 was  attributable to higher
net  interest  income from  changes in volume of  $348,000  reduced in part by a
reduction in rates of $247,000.  The  volume-related  change resulted  primarily
from increases in investment  securities  partially offset by decreased  average
balances for loans (see  discussions  on "Loan  Portfolio"  and "Mortgage  Loans
Held-for-Sale")  and an increase in time deposits.  The rate-related  change was
primarily the result of the decrease of interest earned on loans and investments
being greater than the decrease on interest paid on deposits and debt.

     Net interest income, on a fully taxable equivalent basis, in 1997 increased
$1,167,000 over the 1996 figure of $13,906,000.  This increase was the result of
growth in loans,  investments,  deposits and long-term debt. Also affecting 1997
was the  increase in interest  rates earned on deposits  exceeding  the interest
rates paid on interest-bearing liabilities.

     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 4.63% for 1998,  4.79% for 1997 and 4.88% for 1996. The
decrease  in 1998 was the result of a decrease  in the  average  rate  earned on
loans and  investments  being greater than the decrease in the average  interest
rate paid on interest-bearing deposits and debt. 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 4.06%,  4.28% and 4.39% for
1998,  1997 and 1996,  respectively.  The impact on earnings by the reduction in
the interest spread was diminished in part by the $4,180,000 increase in 1998 of
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,  1998 and 1997,  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.

RATE/VOLUME ANALYSIS
(Dollars in Thousands) (Fully Taxable Equivalent)

<TABLE>
                             Increase (Decrease) in Year Ended December 31,
                                1998 to 1997                1997 to 1996 
                               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              $  105  $   2  $   103      $   (7) $  (3)  $   (4)
  Federal Funds Sold           33     (2)      35          (1)    (1)     --- 
  Investment Securities     1,065   (328)   1,393         539     73      466 
  Loans                    (1,062)  (146)    (916)      1,889   (140)   2,029
                            -----    ---    -----       -----  -----    -----
  Total Interest Income       141   (474)     615       2,420    (71)   2,491
                            -----    ---    -----       -----  -----    -----
Interest Expense
  Demand Deposits, 
  Savings & Clubs            (150)  (192)      42        (231)  (235)       4 
  Time Deposits               304     (9)     313         921     75      846
  Securities Sold Under 
   Agreements to Repurchase   (30)    (6)     (24)         91     34       57 
  Short-Term Borrowings       (77)   ---      (77)        (66)     3      (69)
  Long-Term Borrowings         (7)   (20)      13         538    (57)     595
                            -----    ---    -----       -----  -----    -----
  Total Interest Expense       40   (227)     267       1,253    180    1,433
                            -----    ---    -----       -----  -----    -----
  Increase in Net 
  Interest Income          $  101  $(247)  $  348      $1,167 $  109   $1,058
</TABLE>

<PAGE>

                        Service Charges and Other Income

     Service  charge income on deposit  accounts  amounted to $1,594,000 in 1998
compared to  $1,349,000 in 1997 and  $1,083,000  in 1996.  In 1998,  the service
charges on deposit  accounts  increased  by  $245,000 or 18.2% over 1997 and the
1997  increase  over 1996 was $266,000 or 24.5%.  The increases in 1998 and 1997
were  primarily  the result of increases  in the number of deposit  accounts and
increases in some deposit-related fees, including the Bank's debit card.

     In 1998,  the Company had a gain on the sale of mortgage  loans of $398,000
as compared to a gain of $178,000 in 1997. In 1996,  there was a loss of $30,000
(see discussion on "Mortgage Loans Held-for-Sale").

     Other  operating  income was  $641,000 in 1998,  as compared to $645,000 in
1997.  Other operating income for 1996 was $585,000. 

                    Investment Management and Trust Division

     Revenue from the Bank's Investment Management and Trust Division operations
was  $1,225,000  in 1998,  representing  an  increase  of $175,000 or 16.7% over
revenue of $1,050,000 in 1997.  The  Investment  Management  and Trust  Division
revenue  for 1997  increased  by  50.9% or  $354,000  over the 1996  revenue  of
$696,000.  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.  The  increase  in 1998 and 1997  Trust  revenue  was the result of the
addition of new accounts and increased market values.

                                 Other Expenses

     Salaries  and  employee  benefits   represent  a  significant   portion  of
non-interest  expense.  These  expenses,  amounting to $6,385,000,  increased by
$352,000 or 5.8% in 1998 compared to $6,033,000 in 1997.  These expenses in 1997
amounted to an increase  of  $418,000  or 7.4% over the  $5,615,000  reported in
1996.   The  increase  in  1998  was  primarily  due  to  salary   increases  of
approximately  4% and the  addition  of staff in the  Lending  Division.  Salary
expense in 1997 increased due to normal salary increases of approximately 4% and
the addition of the East Stroudsburg branch opened in January, 1997.

     Occupancy and equipment expenses were $2,118,000 in 1998, which was $60,000
less than the 1997  amount of  $2,178,000.  The 1997 amount was $6,000 less than
the 1996 occupancy and equipment  expense of  $2,184,000.  The decreases in 1998
and 1997 were achieved through the continued  implementation  of expense control
measures which offset the added expenses of a new teller system and Trust system
in 1998, and the new East Stroudsburg branch and the installation of check image
equipment added in 1997.
<PAGE>

     Other  operating  expenses (such as the provision for the special  reserve,
advertising,  publicity,  litigation  costs,  deposit insurance  premiums,  data
processing fees,  legal,  accounting,  supplies,  postage and telephone) in 1998
were  $6,060,000,  compared to  $5,041,000 in 1997 and  $3,772,000 in 1996.  The
increase  of  $1,019,000  or 20.2% in other  operating  expense  during 1998 was
primarily  due to the povision of  $1,000,000  to the special  reserve for Trust
operations and higher legal and loan collection  costs.  The increase in 1997 of
$1,269,000  or 33.6% was the result of higher  legal and  professional  fees and
advertising expenses as a result of increased marketing programs.  The Company's
advertising  costs are expensed as incurred.  Advertising  costs were  $597,000,
$524,000  and $299,000  for the years ended  December  31, 1998,  1997 and 1996,
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 1998 and 1997. 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  (see  Notes  A.2  and B of  the  "Notes  to  Consolidated  Financial
Statements").

     Held-to-maturity  securities  totaled  $17,723,000 at December 31, 1998 and
$17,756,000 at December 31, 1997. The Company has the intent and ability to hold
these  securities  until  maturity.  The  fair  value of  these  securities  was
$17,920,000 and $17,946,000 at December 31, 1998 and 1997, respectively.

     The  Company,  at December 31, 1998 and 1997,  did not hold any  securities
identified as derivatives  in the form of  Collateralized  Mortgage  Obligations
(CMOs),  Planned  Amortization  Class  (PAC),  Real Estate  Mortgage  Investment

<PAGE>

Conducts  (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  $20,029,000 at December 31, 1998
($15,961,000  in  available-for-sale  and  $4,068,000 in  held-to-maturity)  and
$27,426,000  at  December  31,  1997  ($21,723,000  in  available-for-sale   and
$5,703,000 in held-to-maturity).  The interest rates on most of these securities
are tied to various  indexes,  are subject to various caps, and adjust annually.
The  Company  also held fixed rate  mortgage-backed  securities  issued by U. S.
Government  Agencies  totaling  $19,253,000 at December 31, 1998 ($17,360,000 in
available-for-sale   and  $1,893,000  in  held-to-maturity)  and  $7,943,000  at
December  31,  1997   ($5,067,000  in   available-for-sale   and  $2,876,000  in
held-to-maturity).

                          Securities Available-for-Sale

     The Company had  $98,389,000 of securities  available-for-sale  at December
31, 1998, as compared to $73,024,000 at December 31, 1997. At December 31, 1998,
the net unrealized gain on these securities was $527,000,  net of the tax effect
of  $272,000.  There was a net  unrealized  gain of  $1,300,000,  net of the tax
effect of $670,000 on the  available-for-sale  securities  at December 31, 1997.
The net unrealized gain or loss is included in  shareholders'  equity (see Notes
A.2 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,
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.

<PAGE>

     During  1998,  $11,342,000  of  securities  available-for-sale  were  sold,
resulting  in a total net gain of  $722,000,  which was  recorded  in income and
includes net gains on equity  securities  sold by First C. G. of  $694,000.  The
securities sold were primarily U. S. Treasury,  U. S. Agency and mortgage-backed
bonds  held by the Bank and equity  securities  held by First C. G. The sales by
the Bank were executed to provide  liquidity and improve future interest income.
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 1998 totaled $76,280,000.  Included in these purchases were $35,447,000 in U.
S. Agency fixed rate bonds,  $21,856,000 in U. S. Agency  mortgage-backed bonds,
$14,219,000  in  municipal  securities,  $2,127,000  in  public  housing  bonds,
$1,031,000 in U. S. Treasury  bonds,  and $1,600,000 in equity  securities.  The
securities sold in 1997 totaling  $13,279,000 were primarily U. S. Treasury,  U.
S.  Agency,  mortgage-backed  and  municipal  bonds  held by the Bank and equity
securities held by First C. G. The 1997 sales resulted in net gains of $601,000.
These gains include net gains of $560,000 on equity  securities held by First C.
G. The sales were made to provide liquidity, improve future income and diversify
the equity portfolio.  Security  purchases in 1997 amounted to $46,283,000 which
were  primarily  U. S. Agency  mortgage-backed  bonds,  U. S. Agency  fixed rate
bonds,  municipal  securities and U. S. Treasury  bonds.  In 1996, a net gain on
security transactions of $308,000 was recorded on sales of $19,842,000.

                                 Loan Portfolio

     At December 31, 1998, total loans (net of unearned  discounts of $1,025,000
in 1998 and $1,856,000 in 1997) of $212,437,000 were  $17,150,000,  or 7.5% less
than the 1997 amount of $229,587,000. The decline in loans in 1998 was primarily
the result of a decrease  of  $18,625,000  or 13.4% in  residential  real estate
loans,  a decrease of $4,992,000 or 14.4% in commercial  real estate loans and a
decrease of $672,000 or 5.4% in real estate  construction loans partially offset
by a $4,270,000  or 11.9%  increase in consumer  loans and a $2,038,000 or 20.3%
increase in commercial and municipal loans.  Loans Outstanding at December 31 by
Major Category are as follows:

<TABLE>
-------------------------------------------------------------------
Dollars in Thousands at              1998              1997
December 31,
-------------------------------------------------------------------
<S>                              <C>                 <C>    

Real Estate Residential            $119,914           $138,539
Real Estate Construction             11,689             12,361
Real Estate Commercial               29,587             34,579
Consumer                             40,184             35,914
Municipal                             1,178                944
Commercial & Other                   10,910              9,106
                                  ---------           --------
    Total                           213,462            231,443

Unearned Discount                     1,025              1,856
                           ----------------- ------------------

Net                                $212,437           $229,587
-------------------------------------------------------------------
</TABLE>

<PAGE>

     The decline in residential real estate loans was the result of management's
decision  to sell  $21,564,000  of these loans  originated  in the prior year to
reduce the Bank's interest rate risk and  concentration  in these types of loans
(see discussion on " Mortgage Loans Held-for-Sale").

     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  72.1% at  December  31,  1998 and 81.3% at
December 31, 1997. Additional information concerning loans is shown in Note C of
the "Notes to Consolidated Financial Statements".

                          Mortgage Loans Held-for-Sale

     In 1998,  management  continued  a  program  of  selling  most of its newly
originated residential real estate loans in the secondary market. The purpose of
this plan is to reduce the Company's  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 1998
amounted  to  $42,880,000.  The  amount of these  loans  originated  in 1998 was
$21,316,000,  with the remaining  $21,564,000 being originated in prior years of
which $759,000 was identified as held-for-sale at December 31, 1997. The sale of
prior years loans in excess of those  identified  as  held-for-sale  was done to
restructure  the loan  portfolio,  reducing  interest rate risk and the level of
concentration  in  residential  real estate  loans.  A net gain of $398,000  was
recorded on these sales. In addition,  $603,000 of residential real estate loans
was  identified as  held-for-sale  at December 31, 1998. All of these loans were
originated  during 1998. An unrealized loss of $1,000 on these loans is included
in other operating expenses for 1998.

     In 1997, the Company  originated  $10,754,000  of  residential  real estate
loans  which  were sold in the  secondary  market.  In  addition,  during  1997,
$16,391,000 of these loans that were  originated in prior years were sold. A net
gain  of $178,000  was  recognized on these sales in 1997. At December 31, 1997,

<PAGE>

At December 31, 1997,  $759,000 of residential real estate loans were identified
as held-for-sale.  Included in other operating expenses in 1997 is an unrealized
loss of $13,000 on these  loans.  During  1996,  the  Company  had net losses of
$30,000 on the sale of $19,509,000 of residential  real estate loans.  The other
operating  expenses for 1996 include an  unrealized  loss of $10,000 on mortgage
loans held-for-sale of $721,000 at year-end 1996.

     The Company intends to continue to originate  residential real estate loans
in 1999 and to sell most of the fixed-rate  loans in the secondary  market.  The
Company  services  all of its  sold  residential  mortgage  loans  and  plans to
continue this practice.

                              Non-Performing Loans

     The following  discussion relates to the Bank's  non-performing loans which
consist of those 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
doubtful.  The Company  views  these loans as  non-accrual,  but  considers  the
principal to be  substantially  collectible  because the loans are  protected by
adequate  collateral or other  resources.  Interest on these loans is recognized
only when  received.  The table  "Non-Accrual  Loans"  shows the balance and the
effect  on  interest  income  of  non-accrual  loans  for  each  of the  periods
indicated.  There were  $1,245,000 of loans on a non-accrual  status at December
31, 1998.  The increase in  non-accrual  loans during 1998 of $432,000  resulted
from the  deterioration  of certain  residential real estate and consumer loans.
Management believes there is sufficient  collateral to cover any possible losses
on these loans.

     The Company does not have any  significant  loans that qualify as "Troubled
Debt  Restructuring"  as defined by SFAS No. 15,  "Accounting  for  Debtors  and
Creditors for Troubled Debt Restructuring", at December 31, 1998 and 1997.

<PAGE>

Non-Accrual Loans
<TABLE>
-------------------------------------------------------------------------------
(Dollars in Thousands)
at December 31,            1998        1997       1996        1995        1994
-------------------------------------------------------------------------------
<S>                    <C>         <C>        <C>         <C>         <C>   

Non-accrual loans on
  a cash basis          $ 1,245     $   813    $ 1,440     $ 2,181     $ 1,724

Non-accrual loans
  as a percentage
  of total loans            .59%        .35%       .65%       1.13%        .93%

Interest which would
  have been recorded
  at original rate      $   144     $    64    $   210     $   214     $   168

Interest that was
  reflected in income        23         111         40          44        --

Net impact on
  interest income       $  (121)    $    47    $  (170)    $  (170)    $  (168)
-------------------------------------------------------------------------------
</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.

Accruing Loans Past Due 90 Days or More
<TABLE>
--------------------------------------------------------------------------------
(Dollars in Thousands) 
at December 31,              1998      1997      1996       1995       1994
--------------------------------------------------------------------------------
<S>                      <C>        <C>       <C>       <C>        <C>   

Accruing loans past due
  90 days or more         $ 1,021    $  802    $  986    $ 1,115    $ 1,069

Accruing loans past due
  90 days or more
  as a percentage
  of total loans             .48%      .35%      .45%       .58%       .58%

--------------------------------------------------------------------------------
</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 loses related to loan impairment at December 31, 1998 and 1997 are as
follows:

<TABLE>
------------------------------------------------------------
(Dollars in Thousands)
  at December 31,                        1998       1997
------------------------------------------------------------
<S>                                    <C>         <C>    

Principal amount of impaired loans      $524        $523
Accrued interest                         ---         ---
Deferred loan costs                      ---           1
                                     -------     -------
                                         524         524
Less valuation allowance
  at December 31,                       (303)       (138)
                                     --------    --------
                                        $221        $386
------------------------------------------------------------
</TABLE>

     The activity in the allowance account for credit losses related to impaired
loans is as follows:
<TABLE>
-----------------------------------------------------------------
(Dollars in Thousands)
  for the year ended                         1998       1997
-----------------------------------------------------------------
<S>                                         <C>        <C>    

Valuation allowance at January 1,            $138       $128
Provision for loan impairment                 294        158
Direct charge-offs                           (129)      (148)
Recoveries                                    ---        ---
                                          -------    -------
Valuation allowance at December 31,          $303       $138

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

     Total cash collected on impaired  loans during 1998 was $506,000,  of which
$483,000 was credited to the principal  balance  outstanding on such loans,  and
$23,000 was recognized as interest income.

     Total cash collected on impaired  loans during 1997 was $768,000,  of which
$657,000 was credited to the  principal  balance  outstanding  on such loans and
$111,000  was  recognized  as  interest  income.  Interest  that would have been
accrued  on  impaired   loans  was  $144,000  and  $64,000  in  1998  and  1997,
respectively. The valuation allowance for impaired loans of $303,000 at December
31, 1998 and  $138,000 at December  31, 1997 is included in the  "Allowance  for
Possible Loan Losses" which amounts to $2,691,000 and $2,664,000 at December 31,
1998 and 1997, respectively.

<PAGE>

     Shown in the following  table is the amount of "Other Real Estate Owned" as
of the  end of  each  of the  periods  indicated  recorded  as an  asset  on the
Company's books as the result of the foreclosure of certain  non-performing real
estate loans.

OTHER REAL ESTATE OWNED
<TABLE>
-----------------------------------------------------------------
(Dollars in             
 Thousands)
 at December 31,        1998     1997     1996      1995     1994
-----------------------------------------------------------------
<S>                  <C>       <C>      <C>      <C>     <C> 

Other Real Estate     $ 636    $ 284     $ 595     $ 364    $ 373
  Owned
-----------------------------------------------------------------
</TABLE>

                            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, 1998, the
allowance  for possible  loan losses was  $2,691,000 as compared to the December
31, 1997 amount of  $2,664,000  and the December 31, 1996 amount of  $2,532,000.
The  allowance  for  possible  loan  losses  as  a  percentage  of  total  loans
outstanding as of December 31, 1998 was 1.27%. This compares to 1.16% at the end
of 1997 and 1.15% at the end of 1996. The increase in the allowance for possible
loan  losses  of  $27,000  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) of
$2,266,000  as of December 31, 1998 as compared to $1,615,000 as of December 31,
1997 (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  $423,000 in 1998 or $50,000 less than the 1997 amount of $473,000.
The 1998  charge-offs  were the  result of losses on  commercial,  consumer  and
residential  real estate loans.  The net  charge-offs in 1997 were primarily the
result  of losses on  commercial,  consumer  and  residential  loans.  Net loans
charged-off in 1996 were $581,000.  The ratio of net loan charge-offs to average
loans outstanding was .19%, .21% and .28% in 1998, 1997 and 1996, respectively.

     The  provision  for loan  losses for the year ended  December  31, 1998 was
$450,000  as  compared  to  $605,000  for the year ended  December  31, 1997 and
$670,000 for the year ended  December  31, 1996.  The decrease in 1998 from 1997
was $155,000. In 1997, the decrease in the provision was $65,000 from 1996.

     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

<PAGE>

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  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.

     Management  ranks  loans or  portions  thereof  which  present  unfavorable
factors   according  to  the  degree  of   collectibility.   Such  analysis  and
examinations form the principal  foundation on which management makes an ongoing
evaluation as to the adequacy of the allowance for possible loan losses.

<PAGE>

<TABLE>
ALLOWANCE FOR POSSIBLE LOAN LOSSES
-------------------------------------------------------------------------------
(Dollars in Thousands) 
For the Year Ended December 31,      1998      1997      1996      1995     1994
-------------------------------------------------------------------------------
<S>                             <C>       <C>       <C>       <C>      <C>  

Allowance for Loan Losses
at Beginning of Year             $  2,664  $  2,532  $  2,443  $  2,187 $  1,953

Loans Charged-Off by Category:
   Commercial                         133       249       365       161      259
   Real Estate - Construction          --        --        --        --       --
   Real Estate - Residential           59        20        31        --       35
   Consumer/Installment               348       301       271       319      144
   Other                               --        --        --     1,278       --
                                 --------  --------  --------  --------  -------
Total Loans Charged-Off               540       570       667     1,758      438
                                 --------  --------  --------  --------  -------
Loans Recovered by Category:
   Commercial                          42        19        39       105      170
   Real Estate - Construction          --        --        --        --       --
   Real Estate - Residential            1         1        --        --       --
   Consumer/Installment                74        77        47        97       82
   Other                               --        --        --        14       --
                                 --------  --------  --------  -------- --------
Total Loans Recovered                 117        97        86       216      252
                                 --------  --------  --------  -------- --------
Net Loans Charged-Off                 423       473       581     1,542      186
                                 --------  --------  --------  -------- --------
Provision Charged to Expense          450       605       670     1,798      420
                                 --------  --------  --------  -------- --------
Allowance for Loan Losses
 at End of Period                $  2,691  $  2,664  $  2,532  $  2,443 $  2,187
                                 ========  ========  ========  ======== ========

Total Loans
   Average                       $217,191  $228,245  $206,378  $190,874 $178,624
   Year-End                      $212,437  $229,587  $220,117  $193,130 $185,215

Net Loans Charged Off to:
   Average Loans                     .19%      .21%      .28%      .81%    .10%
   Loans at Year-End                 .20%      .21%      .26%      .80%    .10%
   Allowance for Possible
     Loan Losses at Year-End       15.72%    17.76%    22.95%    63.12%   8.50%
   Provision for Possible
     Loan Losses                   94.00%    78.18%    86.72%    85.76%  44.29%

Allowance for Possible
 Loan Losses at Year-End to:
   Average Loans                    1.24%     1.17%     1.23%     1.28%   1.22%
   Loans at Year-End                1.27%     1.16%     1.15%     1.26%   1.18%

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

<PAGE>

                                    Deposits

     Deposits  are the  primary  source of the  Company's  funds.  During  1998,
deposits increased by $12,294,000 or 4.4% to a total of $294,549,000 at December
31, 1998, from a total of $282,255,000  at December 31, 1997.  Average  deposits
for 1998 were $289,308,000,  an increase of $11,910,000 or 4.3% over the average
total  deposits  for  1997 of  $277,398,000.  Contributing  to the  increase  in
deposits  was  the  strong  growth  of  checking   deposits  both  interest  and
non-interest  bearing as consumers  responded to a marketing campaign to attract
these types of deposits and continued  growth in  certificates  of deposit.  The
deposit growth in checking  deposits and  certificates  of deposit was partially
offset by declines in savings  accounts,  money market accounts and certificates
of deposit over $100,000.  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 credit unions, mutual funds and other investment options.

     The Bank's time deposits, excluding certificates of deposit under $100,000,
increased in 1998 with average balances of $124,823,000, which was $5,977,000 or
5.0% higher than the 1997 average balance of $118,846,000.  Non-interest bearing
deposits  averaged  $35,254,000  in 1998 as compared to  $31,074,000 in 1997, an
increase of $4,180,000 or 13.4%.  In addition,  there was an increase in average
interest-bearing  demand  deposits of $3,650,000 or 8.0% to  $48,988,000 in 1998
from  $45,338,000  in 1997.  Offsetting  some of this  growth  were  declines in
average  savings and club deposits of $1,569,000 or 2.5% from an average balance
of  $62,746,000  in 1997 to an  average  balance  of  $61,177,000  in 1998,  and
declines in average money market deposits which averaged  $14,366,000 in 1998 as
compared to $14,380,000 in 1997, a decrease of $14,000.  Average certificates of
deposit over $100,000 were $4,700,000 in 1998 as compared to $5,014,000 in 1997,
a decline of $314,000 or 6.3%.

<PAGE>

                              Short-Term Borrowings

     The Bank had  securities  sold  under  agreements  to  repurchase  totaling
$5,094,000 at December 31, 1998 and $8,804,000 at December 31, 1997. At December
31, 1998 and 1997,  there were no  short-term  borrowings in the form of Federal
funds purchased,  Federal Reserve Bank discount  borrowings or Federal Home Loan
Bank borrowings. Additional information relating to short-term borrowings can be
found in Note G of the "Notes to Consolidated Financial Statements".

                         Liquidity and Capital Resources

     Liquidity is a measure of the  Company's  ability to raise funds to support
asset  growth,  meet deposit  withdrawal  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 borrowings. At year-end 1998, cash, due from banks, Federal funds
sold  and  interest-bearing   deposits  with  banks  totaled  $17,560,000,   and
securities maturing within one year totaled $4,493,000.  At year-end 1997, cash,
due from banks,  Federal  funds sold and  interest-bearing  deposits  with banks
totaled $15,224,000, and securities maturing within one year were $3,861,000.

     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  $3,193,000  at  December  31,  1998,  and
$110,000 at December 31, 1997.  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, 1998.

     The Bank had  three  long-term  loans  from the  Federal  Home Loan Bank of
Pittsburgh totaling $20,000,000 at December 31, 1998 and $18,000,000 at December
31, 1997. These loans were originated in 1998 and 1996 with the proceeds used to
fund the growth in residential  real estate loans.  The loans are for $8,000,000
originated  in August,  1996,  and due August,  2000,  at a fixed rate of 5.89%,
$5,000,000  originated in December,  1996 and due December,  2001, at a variable
rate at LIBOR plus 3 basis points (5.36% at December 31, 1998),  and  $7,000,000
originated in  October, 1998  and  due  October,  2008, at a fixed rate of 4.86%

<PAGE>


at a fixed rate of 4.86%  until  December,  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.  If the lender elects to convert the fixed rate loan to a variable rate,
the  Bank  may  prepay  the loan 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, 1997 in the amount of $5,000,000 that was paid in full in November,
1998.  This loan was  originated in 1996 and had a fixed  interest rate of 5.96%
(see Note H of the "Notes to Consolidated Financial Statements").

     Cash flows for the year ended  December 31, 1998  consisted of cash used by
investing activities of $12,437,000 offset in part by cash provided by financing
activities of $9,295,000 and cash provided by operating activities of $2,572,000
resulting in a net decrease in cash and cash  equivalents of $570,000.  The cash
used in  investing  activities  was  primarily  for the  purchase of  securities
available-for-sale  in the amount of  $66,712,000,  the  purchase of  securities
held-to-maturity  in the  amount of  $9,722,000  and a  $2,906,000  increase  in
interest-bearing  deposits with banks.  These cash uses were partially offset by
the  proceeds  from  the   maturities  of   securities   available-for-sale   of
$29,744,000,  the proceeds from the maturities of securities held-to-maturity of
$9,403,000, the sales of securities  available-for-sale of $11,094,000 and a net
decrease in loans of $16,614,000.  The cash provided by financing activities was
comprised of a net increase in interest and non-interest bearing demand deposits
of $10,669,000,  a net increase in certificates of deposit of $1,625,000,  and a
net  increase  in  long-term  debt of  $1,610,000.  Partially  offsetting  these
increases  were  cash  dividends  paid  of  $1,275,000  and  a net  decrease  in
repurchase  agreements of $3,710,000.  The cash provided by operating activities
was comprised  principally of proceeds from mortgage loan sales of  $42,879,000,
net income of $3,032,000,  depreciation  and  amortization of $1,004,000 and the
provision  for  possible  loan losses of  $450,000,  reduced in part by mortgage
loans  originated for sale of $42,723,000,  net investment  securities  gains of
$722,000 and a net increase in other assets of $739,000.

     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, 1998 was $31,717,000
as compared to  $30,357,000  at December 31, 1997,  an increase of $1,360,000 or
4.5%. This increase was primarily attributable to retained earnings and the sale
of common  shares  pursuant to the Dividend  Reinvestment  Plan. At December 31,
1998, unrealized gains on securities  available-for-sale,  which are included in
shareholders'  equity,  amounted  to $527,000  (net of tax effect of  $272,000).
Included in shareholders' equity at December 31, 1997 was $1,300,000 (net of tax
effect of $670,000) of unrealized losses on securities  available-for-sale  (see
discussion on "Securities Available-for-Sale").

<PAGE>

     The Company paid a 5% stock  dividend on its common  stock from  authorized
but unissued shares on June 25, 1998 to all  shareholders of record at the close
of  business on June 5, 1998.  On June 19,  1997,  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 May 30,  1997.  The Company
also paid a 5% stock dividend on June 19, 1996 to  shareholders of record on May
31, 1996. 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.

     The Company  maintains a Dividend  Reinvestment and Stock Purchase Plan. In
1998,  10,390 common shares were  purchased  pursuant to this Plan at an average
price of $31.47 for total  proceeds of  $327,000.  The shares  purchased in 1998
were  comprised  of 7,611 new common  shares at an  average  price of $30.61 for
proceeds of $233,000 and 2,779 common shares from Treasury  shares at an average
price of $33.82 for  proceeds of $94,000.  In 1997,  12,280  common  shares were
purchased  pursuant  to the Plan at an average  price of $23.34  per share.  The
total proceeds were $287,000. New common shares purchased in 1997 totaled 10,806
at an average price of $23.55 for proceeds of $254,000.  The remaining  purchase
of 1,474  shares  were from  Treasury  shares at an average  price of $21.77 for
proceeds of $33,000.

     A  Non-Employee  Director  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. No options were issued under this Plan in 1998 and 1997.
No options were exercised under this plan in 1998. During 1997,  options for 911
shares of the Company's  common stock were exercised by a non-employee  director
at a price of $13.99 per share.

     The Company also has a "Stock Option Plan" that was  originally  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 to officers and
key  employees.  In 1998,  options to purchase  30,975  shares of the  Company's
common stock at a price of $35.24 per share were granted to certain officers. No
options were  exercised  under this plan in 1998.  In 1997,  options to purchase
19,950 shares of the Company's  common stock at a price of $22.38 per share were
granted  to certain  officers.  During  1997,  options  for 6,029  shares of the
Company's  common  stock issued  pursuant to the 1986 Plan were  exercised at an
average price of $15.68 per share.

<PAGE>

     The  Company  Stock  Option  Plans  are  accounted  for  under   Accounting
Principles  Board (APB) Opinion 25,  "Accounting  for Stock Issued to Employees"
and its related  interpretations.  This  accounting  method is  permitted  under
Financial  Accounting  Standards  Board standard SFAS No. 123,  "Accounting  for
Stock-Based  Compensation",  which  allows an entity to use 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 Accounting  Principles Board (APB)
Opinion  No. 25,  "Accounting  for Stock  Issued to  Employees  and Its  Related
Interpretations.  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. Additional  information  relating to the Company's
Stock Option Plans can be found in Notes A.9 and N of the "Notes to Consolidated
Financial Statements".

     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.  Additional
information  relating  to the  Company's  and Bank's  capital  requirements  and
capital  ratios can be found in Note S of the "Notes to  Consolidated  Financial
Statements".

                     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.

<PAGE>

     Management believes the most significant impact on financial results is the
Company's   ability  to  react  to  changes  in  interest  rates.  As  discussed
previously,  management  is  attempting  to  maintain  an  essentially  balanced
position between  interest-sensitive  assets and liabilities in order to protect
against wide interest-rate fluctuations.

                                    Year 2000

     The Company has adopted a Year 2000 policy to address the "Year 2000" Issue
concerning the inability of certain  information systems and automated equipment
to properly  recognize and process dates containing the Year 2000 and beyond. If
not  corrected,   these  systems  and  equipment  could  produce  inaccurate  or
unpredictable  results  commencing on January 1, 2000.  The Company,  similar to
most financial services providers,  is particularly  vulnerable to the potential
impact  of the Year  2000  Issue due to the  nature  of  financial  information.
Potential impacts to the Company may arise from software, computer hardware, and
other  equipment  both within the  Company's  direct  control and outside of the
Company's ownership,  yet with which the Company electronically or operationally
interfaces.

     In order to address the Year 2000 Issue,  the  Company  has  developed  and
implemented  a five phase  compliance  plan  divided  into the  following  major
components:  (1) Awareness; (2) Assessment;  (3) Renovation;  (4) Validation and
Testing;  and (5)  Implementation.  The  Company has  completed  the first three
phases  of the plan for all of its  mission-critical  systems  and is  currently
working on the final two phases.

     The  Company  has  identified  its  mission-critical  systems as those that
affect the Company's  ability to process  banking  transactions  and its general
accounting  systems.  Such systems include deposit,  loan and trust  accounting,
check and deposit processing and branch teller equipment.

     The Company  purchases  most of its computer  software  from major  outside
providers of bank software. A significant  component of the Year 2000 plan is to
install the Year 2000 compliant  software  provided by these vendors and also to
test these  supplied  systems.  The  Company's  major  software  providers  have
informed the Company  that,  based on tests they have  conducted and continue to
conduct,  they believe their  respective  systems to be Year 2000 compliant.  In
addition,  the Company is conducting its own tests on these systems  provided by
vendors.  The Company also has some internally  generated  programmed  software.
This  software has been  corrected  for Year 2000 and is in final  testing.  The
Company  anticipates  that all  mission-critical  systems will be tested by June
1999.

<PAGE>

     The Company has  reviewed  the impact of Year 2000 on other  equipment  and
systems such as heating, air conditioning, telecommunications, electric service,
vaults,  photocopiers,  personal  computers,  printers and other equipment where
necessary.  Some of  this  equipment,  such  as  personal  computers,  has  been
replaced.  Other items such as vaults,  heating, air conditioning,  photocopiers
and  printers  have been tested and found "not date  sensitive".  The  Company's
providers of telecommunications and electric service have been contacted.  These
providers have indicated they do not expect any  interruption  of service in the
Year 2000.

     Other  important  segments  of the Year  2000  plan are to  identify  those
suppliers and customers  whose  possible  lack of Year 2000  preparedness  might
expose  the  Company  to   financial   loss.   Included  in  this   process  was
communications  to all the Company's  customers and  identification  of loan and
deposit  customers  whose  failure to address the Year 2000 Issue  might  impact
their banking relationship.  As a result of this communication,  the Company has
identified  those  customers who may be affected by the Year 2000.  Risk factors
have been  assigned to these  customers.  The Company  does not  anticipate  any
significant  loss  as a  result  of  these  risks.  The  Company  has  initiated
communications with all of its significant  suppliers to determine the extent to
which the Company is  vulnerable  to those third  parties'  failure to remediate
their own Year 2000 issues.

     The Company has developed  contingency  plans to address any or all systems
that, despite all testing,  still do not operate correctly in the Year 2000. The
contingency  plans  provide for manual and personal  computer  based  systems to
process checks,  deposits and loan  transactions.  The Company will increase its
inventories  of the  various  required  supplies,  such as new  account and loan
forms,  deposit withdrawal forms and other pre-printed  forms,  available at the
Company's Main Office and branch  offices.  Alternative  communications  systems
have been  established  and  alternative  power sources are being  investigated.
These plans will be finalized  and tested during the first half of 1999. At this
time,  the Company  cannot  estimate the cost, if any, that might be required to
implement such contingency plans.

     During 1998, the Company spent $496,000 on Year 2000 compliance matters. As
of December 31, 1998,  $851,000 has been spent on this project.  These  expenses
are comprised of the  replacement  of branch teller and new account  systems for
$645,000,  replacement  of  personal  computers  for  $177,000,  replacement  of
mortgage  lending  software  for $17,000 and  enhancements  to banking and trust
systems of $12,000.  Additional expenses expected in 1999 include $70,000 for an
alternative  electric  power  system, $40,000 for  replacing an automated teller

<PAGE>


machine, $26,000 for replacing additional personal computers, $25,000 for branch
new account systems,  $23,000 for additional mortgage lending software,  $15,000
for check  processing  software  and  $50,000  for other  banking  systems.  The
expenses  related  to Year 2000 are  financed  by the  general  revenues  of the
Company  and are  included  in the  Company's  other  operating  expenses in the
Company's financial statement.

     The  Company  anticipates  that its total Year 2000  project  cost will not
exceed $1,100,000. This estimated project cost is based upon currently available
information.  The aforementioned Year 2000 project cost estimate also may change
as the  Company  progresses  in its Year 2000  program  and  obtains  additional
information and conducts further testing. At this time, no significant  projects
have been delayed as a result of the Company's Year 2000 effort.

     Financial  institution  regulators have intensively  focused upon Year 2000
exposures, issuing guidance concerning the responsibilities of senior management
and directors.  Year 2000 testing and  certification is being addressed as a key
safety and soundness  issue in conjunction  with regulatory  exams.  The Federal
banking agencies have highly  prioritized Year 2000 compliance in order to avoid
major disruptions to the operations of financial  institutions and the country's
financial systems when the new century begins.

     The Federal  banking  agencies have been  conducting  Year 2000  compliance
examinations.  The failure to  implement  an adequate  Year 2000  program can be
identified as an unsafe and unsound banking  practice.  The Company and the Bank
are subject to regulation and  supervision  by the Federal  Reserve Bank and the
Comptroller of the Currency which regularly  conducts  reviews of the safety and
soundness of the  Company's  operations,  including  the  Company's  progress in
becoming  Year  2000  compliant.   The  regulatory   agencies  have  established
examination    procedures   which   contain   three   categories   of   ratings:
"Satisfactory",  "Needs  Improvement" and  "Unsatisfactory".  Institutions  that
receive  a  Year  2000  rating  of  Unsatisfactory  may  be  subject  to  formal
enforcement action, supervisory agreements, cease and desist orders, civil money
penalties,  or the  appointment of a conservator.  In addition,  Federal banking
agencies  will be  taking  into  account  Year  2000  compliance  programs  when
reviewing  applications  and may deny an application  based on Year 2000 related
issues.  Failure by the Company to adequately prepare for Year 2000 issues could
negatively impact the Company's banking operations,  including the imposition of
restrictions upon its operations by the Comptroller of the Currency.

<PAGE>

     Despite the Company's  activities in regards to the Year 2000 Issue,  there
can be no assurance  that partial or total  systems  interruptions  or the costs
necessary  to update  hardware and  software  would not have a material  adverse
effect upon the Company's business,  financial condition, results of operations,
and business prospects.  There is also no guarantee that the hardware,  software
and systems of third parties such as utility  companies,  other banks,  computer
services and supply companies,  the Federal Reserve Bank, other Federal agencies
and other vendors who provide  services and supplies to the Company will be free
of unfavorable Year 2000 issues.  The failure of such third parties could have a
material adverse impact upon the Company.

                            Earnings Per Common Share

     The Company  adopted the  provisions  of Statement of Financial  Accounting
Standards (SFAS) No. 128,  "Earnings Per Share" in 1987. SFAS No. 128 eliminates
primary and fully diluted earnings per share and requires  presentation of basic
and  diluted  earnings  per  share in  conjunction  with the  disclosure  of the
methodology used in computing such 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.  Prior  periods'  earnings per share
calculations  have been  restated to reflect  the  adoption of SFAS No. 128 (see
Note A.12. of the "Notes to Consolidated Financial Statements").

                          Accounting for the Impairment
                              of Long-Lived Assets

     The Company has adopted the Financial  Accounting Standards Board Statement
of Financial  Accounting Standard (SFAS) No. 121, "Accounting for the Impairment
of  Long-Lived  Assets  and for  Long-Lived  Assets to be  Disposed  Of",  which
provides  guidance on when to recognize and how to measure  impairment losses of
long-lived assets and certain  intangibles and how to value long-lived assets to
be  disposed  of. The  adoption  of SFAS No. 121 had no  material  effect on the
Company's consolidated financial position or results of operations.

                    Accounting for Transfers and Servicing of
              Financial Assets and Extinguishments of Liabilities

     The Company has adopted the Financial  Accounting Standards Board Statement
of Financial  Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", as amended by
SFAS  No.  127,  which  provides  accounting  guidance on transfers of financial

<PAGE>

assets,  servicing of financial assets and  extinguishment of liabilities.  This
statement is effective for transfers of financial assets, servicing of financial
assets and  extinguishments  of liabilities  occurring  after December 31, 1996.
Adoption of this statement had no material impact on the Company's  consolidated
financial position or results of operations.  

                         Reporting Comprehensive Income

     On January 1, 1998, the Company adopted  Statement of Financial  Accounting
Standards  (SFAS)  No.  130,  "Reporting  Comprehensive  Income".  SFAS No.  130
requires entities  presenting a complete set of financial  statements to include
details of comprehensive income.  Comprehensive income consists of net income or
loss for the current period and income,  expenses,  gains and losses that bypass
the income  statement  and are  reported  directly  in a separate  component  of
equity. The Company's financial statements have been reclassified to reflect the
provision of SFAS No. 130 (see Note A.7 of the "Notes to Consolidated  Financial
Statements").   

                  Disclosures About Segments of an Enterprise
                                  and Related Information

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an
Enterprise and Related Information".  SFAS No. 131 established standards for the
method that public business  enterprises report selected  information  regarding
operating  segments in financial reports issued to shareholders.  The disclosure
information  required consists of a measure of segment profit and loss,  certain
revenue and expense items and segment assets based upon  specified  quantitative
thresholds,  as it is reported  internally to the chief operating decision maker
on both an interim and annual basis. The statement is effective for fiscal years
beginning   after  December  15,  1997.   Management  has  determined  that  the
Corporation consists of one segment: community banking.

                      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, 1998, May, 1997 and May, 1996.

<PAGE>

QUARTERLY FINANCIAL DATA (Unaudited)

Dollars in Thousands, 
except per share data   
<TABLE>
                                             Three Months Ended
      1998                      Dec. 31     Sept. 30     June 30     March 31
<S>                            <C>          <C>         <C>          <C>   

Interest  income                $6,234       $6,393      $6,355       $6,385
Net interest income              3,504        3,643       3,650        3,699
Provision for possible 
 loan losses                       112          113         113          112
Net gain (loss) on sale 
of securities and mortgages        350          135         495          140
Income before income taxes         630        1,175       1,219        1,039
Net income                      $  498       $  871      $  895       $  768
                                ======       ======      ======       ======
Basic net income per share      $ 0.28       $ 0.51      $ 0.52       $ 0.45
                                ======       ======      ======       ======

Diluted net income per share    $ 0.28       $ 0.51      $ 0.51       $ 0.45
                                ======       ======      ======       ======

      1997                      Dec. 31     Sept. 30     June 30     March 31

Interest  income                $6,471       $6,631      $6,312       $6,030
Net interest income              3,673        3,833       3,634        3,473
Provision for possible 
 loan losses                       162          143         187          113
Net gain (loss) on sale 
of securities and mortgages        424           72         144          139
Income before income taxes       1,289        1,191       1,132          967
Net income                      $  912       $  855      $  812       $  704
                                ======       ======      ======       ======
Basic net income per share      $ 0.53       $ 0.49      $ 0.48       $ 0.42
                                ======       ======      ======       ======

Diluted net income per share    $ 0.53       $ 0.49      $ 0.48       $ 0.42
                                ======       ======      ======       ======
</TABLE>

<PAGE>

Item 7A. Quantitative and Qualitative Discussion About Market Risk

                                   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 (56.5% of total loans) and  commercial  loans
supported by real estate (13.9% of total loans) in its loan  portfolio (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 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.

<PAGE>

     Assets and  liabilities  are  allocated to a specific  time period based on
their scheduled  repricing date or on an historical basis. At December 31, 1998,
assets of  $143,809,000  (40% 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 $151,613,000 (44% of total assets) at the end of 1997
and $149,441,000 (46% of total assets) at the end of 1996.  Liabilities  subject
to rate change within one year were $175,047,000,  $166,220,000 and $167,266,000
in 1998,  1997 and 1996,  respectively.  A negative  one-year  gap  position  of
$31,238,000  existed as of December 31, 1998.  The gap positions at December 31,
1997 and 1996 were negative $14,607,000 and negative $17,825,000,  respectively.
The  ratio  of  rate-sensitive  assets  to  rate-sensitive  liabilities  for the
one-year  time frame was .82 at the end of 1998,  compared  to .91 at the end of
1997 and .89 at the end of 1996.  The  "Interest  Sensitivity  Analysis"  in the
following table presents a sensitivity gap analysis of the Company's  assets and
liabilities at December 31, 1998 for five time-intervals. The Company's negative
gap  position  for the one year time frame  increased  in 1998 as a result of an
increase in interest-bearing demand deposits with a maturity of one year or less
and an  extension of loan  maturities.  The change in the deposit mix was due to
consumer concerns over lower interest rates paid on deposits. The change in loan
maturities was due in part to customers  refinancing at lower interest rates and
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>

Interest Sensitivity Analysis
<TABLE>
                     0-90   91-180   181-365       1-5        Over
                      Days    Days      Days        Years     5 years    Total
<S>               <C>     <C>       <C>         <C>       <C>         <C>
Interest-Bearing 
Deposits with Banks $ 3,301  $   ---  $    ---   $    ---   $    ---    $ 3,301
Federal Funds Sold    2,000      ---       ---        ---        ---      2,000
Inv Securities       21,980    9,627    18,944     44,252     21,309    116,112
Loans Held-for-Sale     603      ---       ---        ---        ---        603
Loans                35,007   15,334    24,754     72,841     61,810    209,746
Other Assets         12,259      ---       ---        ---     14,475     26,734
                    ------- --------  --------    -------   --------   --------
  TOTAL ASSETS      $75,150  $24,961  $ 43,698   $117,093   $ 97,594   $358,496
                    ------- --------  --------    -------   --------   --------
Non-Interest-Bearing
  Deposits (1)      $   ---  $   ---  $    ---    $   ---   $ 38,885   $ 38,885
Int-Bearing 
 Deposits            89,179   30,706    37,068     36,608     62,103    255,664
Securities Sold 
 Under Agreements 
 to Repurchase        5,094      ---       ---        ---        ---      5,094
Long-Term Debt          ---   13,000       ---      7,000        ---     20,000
Other                   ---      ---       ---        ---      7,136      7,136
Capital                 ---      ---       ---        ---     31,717     31,717
                    ------- --------  --------    -------   --------   --------
  TOTAL LIABILITIES 
  AND CAPITAL      $ 94,273  $43,706 $ 37,068    $43,608    $139,841   $358,496
                    ------- --------  --------    -------   --------   --------
Net Interest  
  Sensitivity Gap  $(19,123)$(18,745)$  6,630    $73,485   $ 42,247   $    ---

Cumulative Int
  Sensitivity Gap  $(19,123)$(37,868)$(31,238)   $42,247   $    ---   $    ---

Cumulative Gap
  RSA/RSL             79.7%    72.6%    82.5%     119.3%     100.0%
</TABLE>

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

<PAGE>

     While using the interest  sensitivity  gap analysis is a useful  management
tool as 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 value at December 31, 1998 are as follows:

<PAGE>


-------------------------------------------------------------------------------
Dollars in Thousands at December 31, 1998
-------------------------------------------------------------------------------
<TABLE>

                                    Market Value of               Percent of
     Changes in Rate               Portfolio Equity                 Change
---------------------------      ----------------------      ------------------
<S> <C>                                <C>                        <C>    

    + 400 basis points                  25,838                      (7.7)%
    + 300 basis points                  26,533                      (5.2)
    + 200 basis points                  27,298                      (2.5)
    + 100 basis points                  28,153                       0.6
        Flat Rate                       27,994                       ---
    - 100 basis points                  29,013                       3.6
    - 200 basis points                  32,667                      16.7
    - 300 basis points                  39,611                      41.5
    - 400 basis points                  47,275                      68.9

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

     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>

Item 8.  Financial Statements and Supplementary Data


FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
<TABLE>
-------------------------------------------------------------------------------
(Dollars in Thousands) At December 31,                  1998          1997
-------------------------------------------------------------------------------
<S>                                                <C>          <C>   
ASSETS
  Cash and Due From Banks                           $  12,259    $  12,629
  Federal Funds Sold                                    2,000        2,200
                                                    ---------    ---------
    Total Cash and Cash Equivalents                    14,259       14,829

  Interest-Bearing Deposits With Banks                  3,301          395
  Investment Securities
    (Fair Value:  1998 - $17,920; 1997- $17,946)       17,723       17,756
  Securities Available-for-Sale at Fair Value          98,389       73,024
  Mortgage Loans Held-for-Sale                            603          759
  Total Loans, Net of Unearned Discount               212,437      229,587
  Less:  Allowance for Possible Loan Losses            (2,691)      (2,664)
                                                    ---------    ---------
  Net Loans                                           209,746      226,923
  Premises and Equipment, Net                           6,885        7,299
  Accrued Interest Income                               2,542        2,232
  Other Real Estate Owned                                 636          284
  Other Assets                                          4,412        3,237
                                                    ---------    ---------

    TOTAL  ASSETS                                   $ 358,496    $ 346,738
                                                    =========    =========

LIABILITIES
  Deposits
    Non-Interest-Bearing Deposits                   $  38,885    $  32,800
    Interest-Bearing Deposits
     (Includes Certificates of Deposit in Excess
      of $100:  1998 - $4,726; 1997 - $4,358)         255,664      249,455
                                                    ---------    ---------
  Total Deposits                                      294,549      282,255

  Securities Sold Under Agreements to Repurchase        5,094        8,804
  Long-Term Debt                                       20,000       18,390
  Accrued Interest Payable                              3,536        3,466
  Other Liabilities                                     3,600        3,466
                                                    ---------    ---------

    TOTAL LIABILITIES                                 326,779      316,381
                                                    ---------    ---------

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:  1,745,725 shares in 1998 and 
            1,655,413 shares in 1997                    8,729        8,277
 Additional Paid-in Capital                            13,873       11,014
 Retained Earnings                                      9,023       10,250
 Less: Treasury Stock at Cost:  None in 1998 and
       2,779 shares in 1997                              --            (94)
 Employee Stock Ownership Plan Debt                      (435)        (390)
 Accumulated Other Comprehensive Income                   527        1,300
                                                     ---------    ---------

    TOTAL SHAREHOLDERS' EQUITY                          31,717       30,357
                                                     ---------    ---------

    TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY       $ 358,496    $ 346,738
                                                     =========    =========
</TABLE>


-------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.

<PAGE>

FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

<TABLE>

-------------------------------------------------------------------------------
(Dollars in Thousands, except per share data)
For the Year Ended December 31,                 1998        1997       1996
-------------------------------------------------------------------------------
<S>                                        <C>         <C>        <C>    

INTEREST INCOME
    Interest and Fees on Loans              $ 18,885    $ 19,943   $ 18,052
    Interest on Investment Securities
      Taxable                                  5,002       4,592      4,386
      Tax-Exempt                               1,269         837        617
    Interest on Deposits with Banks and
      Federal Funds Sold                         211          72         80
                                            --------    --------   --------
        Total Interest Income                 25,367      25,444     23,135
                                            --------    --------   --------

INTEREST EXPENSE
    Interest on Deposits                       9,466       9,312      8,622
    Interest on Short-Term Borrowings            265         372        347
    Interest on Long-Term Debt                 1,140       1,147        609
                                            --------    --------   --------
        Total Interest Expense                10,871      10,831      9,578
                                            --------    --------   --------

NET INTEREST INCOME                           14,496      14,613     13,557
    Provision for Possible Loan Losses           450         605        670
                                            --------    --------   --------

    Net Interest Income After Provision
        for Possible Loan Losses              14,046      14,008     12,887
                                            --------    --------   --------

OTHER INCOME
    Trust Revenue                              1,225       1,050        696
    Service Charges on Deposit Accounts        1,594       1,349      1,083
    Investment Securities Gains, Net             722         601        308
    Gain (Loss) on Sale of Mortgage Loans        398         178        (30)
    Other Operating Income                       641         645        585
                                            --------    --------   --------

        Total Other Income                     4,580       3,823      2,642
                                            --------    --------   --------

OTHER EXPENSES
    Salaries and Employee Benefits             6,385       6,033      5,615
    Net Occupancy and Equipment Expense        2,118       2,178      2,184
    Other Operating Expenses                   6,060       5,041      3,772
                                            --------    --------   --------

        Total Other Expenses                  14,563      13,252     11,571
                                            --------    --------   --------

Income Before Income Taxes                     4,063       4,579      3,958
Applicable Income Taxes                        1,031       1,296      1,136
                                            --------    --------   --------

NET INCOME                                  $  3,032    $  3,283   $  2,822
                                            ========    ========   ========

    Unrealized Gain (Loss) on Securities
        Net of Tax                          $ (1,108)   $    354   $   (282)
                                            --------    --------   --------
    Comprehensive Income                    $  1,924    $  3,637   $  2,540
                                            ========    ========   ========

PER SHARE DATA
    Basic Net Income                        $   1.76    $   1.92   $   1.68
    Diluted Net Income                      $   1.75    $   1.92   $   1.68
    Cash Dividends                          $   0.74    $   0.67   $   0.61
</TABLE>

-------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.

<PAGE>


FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
(Dollars in Thousands)
-------------------------------------------------------------------------------
                                                           Accumulated
                           Add.                              Other
                Common   Paid-In Retained Treas.  ESOP    Comprehensive
                 Stock   Capital Earnings Stock   Debt       Income     Total
-------------------------------------------------------------------------------
<S>             <C>       <C>      <C>     <C>   <C>          <C>     <C> 

Balance at
 Jan 1, 1996     7,355     7,968    9,567   ---   (643)        520     24,767
   1996
Net Income                          2,822                               2,822
Sale of
 Common
 Stock
 under
 Dividend
 Reinv 
 Plan
 (10,191
 shares)            51       133                                          184
Sale of
 Common Stock
 under Stock
 Option Plan
 (5,731 shs)        28        78                                          106
Purchase of
 Treasury Stock
 (4,431 shs)                                (102)                        (102)
Sale of
 Treasury Stock
 under Div
 Reinv Plan
 (3,570)                     (18)             82                           64
Cash Div Paid                      (1,011)                             (1,011)
Stock Div
 Paid of 5%
 (73,712 shs)      369     1,032   (1,401)                                ---
Cash in Lieu
 of Fractional
 Shares                                (2)                                 (2)
ESOP Loan
 Pymt                                              131                    131
Unall ESOP
 Shares
 Committed
 to
 Employees
 (5,636 shs)                   19                                           19
Unreal Net
 Loss on
 Sec Avail-
 for-Sale                                                     (173)      (173)
               -------   -------  ------- ----- ------      ------    -------
Balance at
 Dec 31, 1996    7,803     9,212   9,975    (20)  (512)        347     26,805
   1997
Net Income                         3,283                                3,283
Sale of
 Common
 Stock
 under
 Dividend
 Reinv 
 Plan
 (10,036
 shares)            50       204                                          254
Sale of
 Common
 Stock
 under
 Stock
 Option
 Plan (6,610
 shares)            33        74                                          107
Purchase of
 Treasury
 Stock
(3,279)
 shares)                                   (107)                         (107)
Sale of
 Treas Stock
 under
 Dividend
 Reinv Plan
(1,361
 shares)                                     33                            33
Cash
 Dividends
 Paid                             (1,139)                              (1,139)
Stock
 Dividend
 of 5%
 (78,132
 shares)           391     1,474  (1,865)                                 ---
Cash in
 Lieu of
 Fractional
 Shares                               (4)                                  (4)
ESOP Loan
 Pymt                                              122                    122
Unall ESOP
 Shares
 Committed
 to
 Employees
 (4,415
 shares)                      50                                           50
Unreal Net
 Gain on
 Sec Avail-
 for-Sale                                                      953        953 
               -------   -------  ------- ----- ------      ------    -------
Balance at
 Dec 31, 1997  $ 8,277   $11,014  $10,250 $ (94)$ (390)     $1,300    $30,357
   1998
Net Income                          3,032                               3,032
Sale of 
 Common
 Stock
 under
 Dividend
 Reinv
 Plan
 (7,611
 shares)            38       195                                          233
Sale of
 Treasury
 Stock
 under
 Dividend
 Reinv
 Plan
 (2,779
 shares)                                     94                            94
Cash
 Dividends
 Paid                              (1,275)                             (1,275)
Stock
 Dividend
 of 5%
 (82,701
 shares)           414     2,564   (2,978)                               ---
Cash in 
 Lieu of
 Fractional 
 Shares                                (6)                                 (6)
ESOP Loan 
 Payment                                           455                    455
Loan to ESOP                                      (500)                  (500)
Unallocated 
 ESOP Shares
 Committed
 to Employees
 (5,353 shares)              100                                          100
Unrealized
 Net Loss
 on Securities
 Available-
 for-Sale                                                     (773)      (773)
                ------   -------   ------   ---  -----        ----    -------
Balance 
 at Dec
  31, 1998      $8,729   $13,873   $9,023   ---  $(435)       $527    $31,717

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


See accompanying notes to consolidated financial statements.

<PAGE>

FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>

------------------------------------------------------------------------------
(Dollars in Thousands) 
For the Year Ended December 31,                    1998       1997       1996
------------------------------------------------------------------------------
<S>                                           <C>        <C>        <C>    

OPERATING ACTIVITIES
 Net Income                                    $  3,032   $  3,283   $  2,822
 Adjustments to Reconcile Net Income to
 Net Cash Provided by (Used in) 
 Operating Activities:
   Provision for Possible Loan Losses               450        605        670
   Depreciation and Amortization                  1,004        884        748
   Accretion of Security Discounts                  (78)       (70)      (130)
   Amortization of Security Premiums                242        124        179
   Deferred Taxes                                  (395)      (277)       (99)
   Amortization of Deferred Fees on Loans          (136)      (170)      (110)
   Investment Securities Gains, Net                (722)      (601)      (308)
   Loss (Gain) on Sale of Mortgage Loans           (397)      (178)        30
   Mortgage Loans Originated for Sale           (42,723)   (27,183)   (24,690)
   Mortgage Loan Sales                           42,879     27,145     19,509
   Changes in Assets and Liabilities:
    Increase in Accrued Interest Income            (310)      (212)      (142)
    Increase (Decrease) in Accrued Int Payable       70        261       (220)
    Decrease (Increase) in Other Assets            (740)      (545)         1
    Increase (Decrease) in Other Liabilities        396        625         (6)
                                               --------   --------   --------

 Net Cash Provided by (Used in) 
 Operating Activities                             2,572      3,69      (1,746)
                                               --------   --------   --------

INVESTING ACTIVITIES
 Proceeds from Maturities of
  Securities Available-for-Sale                  29,744    13,986      15,401
 Proceeds from Maturities of 
  Securities Held-to-Maturity                     9,403     8,047       5,671
 Proceeds from Sales of Securities 
  Available-for-Sale                             11,094    13,279      19,842
 Proceeds from Sales of Securities 
  Held-to-Maturity                                  248        --          --
 Purchase of Securities Available-for-Sale      (66,712)  (40,485)    (32,686)
 Purchase of Securities Held-to-Maturity         (9,722)   (5,838)     (6,905)
 Net (Increase) Decrease in Interest-Bearing 
  Deposits With Banks                            (2,906)     (110)        550
 Net (Increase) Decrease in Loans                16,614   (10,130)    (22,614)
 Purchase of Premises and Equipment                (494)   (1,126)       (997)
 Proceeds from Sale of Other Real Estate Owned      294       846         361
                                               --------  --------    --------

Net Cash Used in Investing Activities           (12,437)  (21,531)    (21,377)
                                                 ------  --------    --------

FINANCING ACTIVITIES
 Net Increase in Interest
  and Non-Interest-Bearing
  Demand Deposits and Savings Accounts           10,669     3,804       3,143
 Net Increase in Certificates of Deposit          1,625    10,783      10,423
 Net Increase in Long-Term Debt                   1,610        --      18,000
 Net Increase in ESOP Debt                          (45)       --          --
 Net Increase (Decrease) in 
  Repurchase Agreements                          (3,710)    5,009      (2,302)
 Net Decrease in Short-Term Borrowings               --        --      (7,000)
 Proceeds from Issuance of Common Stock             333       361         290
 Purchase of Treasury Stock                          --      (107)       (102)
 Proceeds from Sale of Treasury Stock                94        33          64
 Cash Dividends Paid                             (1,275)   (1,139)     (1,011)
 Cash in Lieu of Fractional Shares                   (6)       (4)         (2)
                                               --------  --------    --------

Net Cash Provided by Financing Activities         9,295    18,740      21,503
                                               --------  --------    --------
Increase (Decrease) in Cash and Cash Equivalents   (570)      900      (1,620)
Cash and Cash Equivalents, January 1,            14,829    13,929      15,549
                                               --------  --------    --------
Cash and Cash Equivalents, December 31,        $ 14,259  $ 14,829    $ 13,929
                                              =========  ========    ========

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

See accompanying notes to consolidated financial statements.

<PAGE>

FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands,
 except per share date.)
December 31, 1998, 1997 and 1996


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 thirteen  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. Principles of Consolidation

     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. 
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.
<PAGE>

Available-for-sale  securities are measured at fair value, with unrealized gains
and losses, net of tax effect, reported in equity.  Held-to-maturity  securities
are carried at  amortized  cost,  and the Company  has the  positive  intent and
ability to hold such securities until maturity. The Company's  classification of
its  investment  securities  into  these  categories  is  detailed  in "Note B -
Investment Securities".  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. 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  held-for-sale are carried at the lower of aggregate cost or
fair value. Unrealized losses are included in other operating expenses. Realized
gains and losses from  mortgage  loan sales are included in total other  income.
Interest  and fee income  earned  during the  holding  period  are  included  in
interest and fees on loans.

4.  Loans and Allowance for Possible Loan Losses

     Loans are stated at the  amount of 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.

     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.
<PAGE>

     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 (see Note E).

 5.  Loan Fees and Related Costs

     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.

 6. 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.

 7.  Comprehensive Income

     On  January  1,  1998,  the  Company  adopted  SFAS  No.  130,   "Reporting
Comprehensive Income". This standard requires entities presenting a complete set
of  financial   statements   to  include   details  of   comprehensive   income.
Comprehensive  income  consists of net income or loss for the current period and
income,  expenses,  gains,  and losses that bypass the income  statement and are
reported directly in a separate component of equity.  These financial statements
have been reclassified to reflect the provisions of SFAS No. 130.

<PAGE>

The income tax effects allocated to comprehensive income is as follows:
<TABLE>

--------------------------------------------------------------------------------
For the Year Ended December 31,            Before Tax      Tax     Net of Tax
                                             Amount      Expense     Amount
--------------------------------------------------------------------------------
<S>                                       <C>           <C>        <C>    
1998
------------------------------------------

Unrealized Gains on Securities
    Unrealized Holding Gains (Losses)
      Arising During Period                $ (773)       $(263)     $ (510)
    Less:  Reclassification
      Adjustment for Gains (Losses)
      Realized in Net Income                 (906)        (308)       (598)
                                          -------        -----     -------

Other Comprehensive Income, Net           $(1,679)       $(571)    $(1,108)
                                          -------        -----     -------


1997
-----------------------------------------

Unrealized Gains on Securities
    Unrealized Holding Gains
      Arising During Period                 $ 953        $ 324       $ 629
    Less:  Reclassification
      Adjustment for Gains (Losses)
      Realized in Net Income                 (417)        (142)       (275)
                                          -------        -----     -------

Other Comprehensive Income, Net             $ 536        $ 182       $ 354
                                          -------        -----     -------


1996
-----------------------------------------

Unrealized Gains on Securities
    Unrealized Holding Gains (Losses)
      Arising During Period                $ (173)       $ (59)     $ (114)
    Less:  Reclassification
      Adjustment for Gains (Losses)
      Realized in Net Income                 (255)         (87)       (168)
                                          -------        -----     -------

Other Comprehensive Income, Net            $ (428)      $ (146)     $ (282)
                                          -------        -----     -------

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


<PAGE>

 8.  Income Taxes

     The  Company,  in  accordance  with SFAS No.  109,  "Accounting  for Income
Taxes", computes the tax expense using the liability method 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.  The principal types of differences  between assets and liabilities
for financial  statement and tax return purposes are  accumulated  depreciation,
loan origination fees, provision for possible loan losses,  unrealized gains and
deferred expenses

 9.  Stock Option Plans

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

     The  Company  Stock  Option  Plans  are  accounted  for  under   Accounting
Principles Board (APB) Opinion 25 "Accounting for Stock Issued to Employees" and
its related interpretations". This accounting method is permitted under SFAS No.
123, "Accounting for Stock-Based Compensation". SFAS No. 123 allows an entity to
use 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 (see Note N).

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.  For issuances of stock to the ESOP after  December 15, 1989,
but prior to December 31, 1992, the shares allocated method is used to recognize
expense in the Company's financial  statements.  For issuances of stock prior to
December 15, 1989,  the Company will  continue the cash  contribution  method of
recognizing  expense to the extent that it exceeds the  cumulative  expense that
would be recognized under the shares allocated method (see Note K).
<PAGE>

     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 (see Note L).

     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 (see Note L)

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

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  adopted the  provisions  of Statement of Financial  Accounting
Standards (SFAS) No. 128,  "Earnings per Share" in 1997. SFAS No. 128 eliminates
primary and fully diluted earnings per share and requires  presentation of basic
and  diluted  earnings  per  share in  conjunction  with the  disclosure  of the
methodology used in computing such 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.  Prior periods  earnings per share
calculations  have been restated to reflect the adoption of SFAS No. 128.  Basic
and diluted earnings per share are calculated as follows. There is no difference
between  basic and diluted  earnings per share for the years ended  December 31,
1997 and 1996.

<PAGE>

<TABLE>

For the Year Ended December 31,                                        Average
                                            Income         Shares     Per Share
                                          (numerator)  (denominator)   Amount
1998
------------------------------------------
<S>                                       <C>          <C>            <C>  


Net Income                                 $3,032

Basic Earnings Per Share
  Income Available to Common Shareholders  $3,032       1,719,096      $1.76

Effect of Dilutive Securities
  Stock Options                                             7,473
                                           ------       ---------      -----

Diluted Earnings Per Share
  Income Available to Common Shareholders
  plus Assumed Exercise of Options         $3,032       1,726,569      $1.75
                                           ------       ---------      -----

1997
------------------------------------------
Net Income                                 $3,283

Basic Earnings Per Share
  Income Available to Common Shareholders  $3,283       1,701,658      $1.92

Effect of Dilutive Securities
  Stock Options                                             5,070
                                           ------       ---------      -----

Diluted Earnings Per Share
  Income Available to Common Shareholders
  plus Assumed Exercise of Options         $3,283       1,706,728      $1.92
                                           ------       ---------      -----

1996
------------------------------------------

Net Income                                 $2,822

Basic Earnings Per Share
  Income Available to Common Shareholders  $2,822       1,680,927      $1.68

Effect of Dilutive Securities
  Stock Options                                             2,842
                                           ------       ---------      -----

Diluted Earnings Per Share
  Income Available to Common Shareholders
  plus Assumed Exercise of Options         $2,822       1,683,769      $1.68
                                           ------       ---------      -----
</TABLE>

Average common shares  outstanding in 1998, 1997 and 1996 do not include 24,859,
27,949 and 32,964,  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  (see  Note  A.8).  Share  and per  share
information  have been restated to reflect the 5% stock dividends of June, 1998,
May, 1997 and May, 1996.

<PAGE>

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 $9,800,000,  $11,120,000 and $9,798,000, for the
years ended December 31, 1998, 1997 and 1996, respectively.  Cash paid for taxes
was $1,458,000 in 1998, $1,465,000 in 1997 and $1,353,000 in 1996.

14.  Advertising Costs

     The Company expenses advertising costs as incurred

15.  Transfer and Servicing of Assets and
     Extinguishments of Liabilities

     The  Financial  Accounting  Standards  Board issued  Statement of Financial
Accounting  Standards SFAS No. 125,  "Accounting  for Transfers and Servicing of
Financial Assets and  Extinguishments  of  Liabilities",  as amended by SFAS No.
127,  which  provides  accounting  guidance on transfers  of  financial  assets,
servicing  of  financial  assets,  and  extinguishments  of  liabilities.   This
statement is effective for transfers of financial assets, servicing of financial
assets, and  extinguishments  of liabilities  occurring after December 31, 1996.
Adoption of this new statement  did not have a material  impact on the Company's
consolidated financial position or results of operations.

16.  Disclosures About Segments of an Enterprise
     and Related Information

     In June, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an
Enterprise and Related Information".  SFAS No. 131 established standards for the
method that public business  enterprises report selected  information  regarding
operating  segments in financial reports issued to shareholders.  The disclosure
information  required consists of a measure of segment profit and loss,  certain
revenue and expense items and segment assets based upon  specified  quantitative
thresholds,  as it is reported  internally to the chief operating decision maker
on both an interim and annual basis. The statement is effective for fiscal years
beginning   after  December  15,  1997.   Management  has  determined  that  the
Corporation consists of one segment: community banking.

17.  Stock Dividends

     The  Company   reduced   retained   earnings   and   increased   additional
paid-in-capital for the year ended December 31, 1994 to charge retained earnings
for the stock dividends paid at the fair value of additional shares issued which
were previously recorded at par value. 

<PAGE>

18.  Reclassifications

     Certain  reclassifications of prior years amounts have been made to conform
to the 1998 presentation.

NOTE B - INVESTMENT SECURITIES

     The Company  classifies  debt and  marketable  equity  securities  in three
categories:  trading,  available-for-sale  and  held-to-maturity  as required by
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  1998,  1997  and  1996.
Available-for-sale  securities are measured at fair value, with unrealized gains
and losses  reported,  net of tax,  as a component  in equity.  Held-to-maturity
securities are carried at amortized cost.

     Available-for-sale securities had unrealized holding gains of $527,000 (net
of the tax  effect  of  $272,000)  in  1998  and  unrealized  holding  gains  of
$1,300,000  (net of the tax effect of  $670,000)  in 1997.  At December  31, the
equity  securities in the  available-for-sale  category  include Federal Reserve
Bank stock in the amount of $256,000 in 1998 and  $239,000 in 1997,  and Federal
Home Loan Bank stock in the amount of $1,835,000 in 1998 and  $1,699,000 in 1997
which are carried at cost.

     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,
1998 and 1997 are summarized as follows.

<PAGE>

<TABLE>
                                                     1998   
Available-for-Sale Securities                  Gross        Gross
                                  Amortized  Unrealized   Unrealized    Fair
                                    Cost       Gains        Losses      Value
<S>                               <C>       <C>           <C>         <C>   

U. S. Treasury                     $ 7,026   $    99       $    --     $ 7,125
U. S. Government Agency             24,482        94           135      24,441
State and Political Subdivisions    27,860       721           115      28,466
Mortgage-Backed Securities          33,322        85           266      33,141
Equity Securities                    4,900       519           203       5,216
                                   -------   -------       -------     -------
     Total                         $97,590   $ 1,518       $   719     $98,389
</TABLE>

<TABLE>

                                                     1997   
Available-for-Sale Securities                  Gross        Gross
                                  Amortized  Unrealized   Unrealized    Fair
                                    Cost       Gains        Losses      Value
<S>                               <C>       <C>           <C>         <C>   

U. S. Treasury                     $ 9,008   $    58       $    --     $ 9,066
U. S. Government Agency             14,512        72            28      14,556
State and Political Subdivisions    16,865       465            --      17,330
Mortgage-Backed Securities          26,791       116            95      26,812
Equity Securities                    3,878     1,393            11       5,260
                                   -------   -------       -------     -------
     Total                         $71,054   $ 2,104       $   134     $73,024
</TABLE>

<TABLE>

                                                     1998   
Held-to-Maturity Securities                    Gross        Gross
                                  Amortized  Unrealized   Unrealized    Fair
                                    Cost       Gains        Losses      Value
<S>                               <C>       <C>           <C>         <C>   

U. S. Government Agency            $ 4,992   $    35       $     1     $ 5,026
State and Political Subdivisions     6,770       179             6       6,943
Mortgage-Backed Securities           5,961        39            49       5,951
                                   -------   -------       -------     -------
     Total                         $17,723   $   253       $    56     $17,920
</TABLE>

<TABLE>

                                                     1997   
Held-to-Maturity Securities                    Gross        Gross
                                  Amortized  Unrealized   Unrealized    Fair
                                    Cost       Gains        Losses      Value
<S>                               <C>       <C>           <C>         <C>   

U. S. Government Agency            $ 6,008   $    46       $     3     $ 6,051
State and Political Subdivisions     3,169        64            --       3,233
Mortgage-Backed Securities           8,579        99            16       8,662
                                   -------   -------       -------     -------
     Total                         $17,756   $   209       $    19     $17,946
</TABLE>

<PAGE>


     The following table lists the maturities of debt securities at December 31,
1998 and 1997, 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>

--------------------------------------------------------------------------------
Maturities of Debt Securities

At December 31, 1998              Available-For-Sale        Held-To-Maturity
                                 Carrying       Fair       Carrying      Fair
                                   Value       Value         Value      Value
                                -----------  ---------     ---------  --------
<S>                             <C>         <C>           <C>        <C>    

Due in one year or less          $ 4,019     $ 4,043       $   250    $   251

Due after one year
   through five years              4,973       5,092           760        777

Due after five years
   through ten years              19,865      20,094         7,131      7,207

Due after ten years               30,511      30,803         3,621      3,734
                                 -------     -------       -------    -------
                                  59,368      60,032        11,762     11,969

Mortgage-Backed Securities        33,322      33,141         5,961      5,951

Equity Securities                  4,900       5,216           --         --
                                 -------     -------       -------    -------

Total Investments                $97,590     $98,389       $17,723    $17,920
                                 =======     =======       =======    ======
</TABLE>

<TABLE>

At December 31, 1997              Available-For-Sale        Held-To-Maturity
                                 Carrying       Fair       Carrying      Fair
                                   Value       Value         Value      Value
                                -----------  ---------     ---------  --------
<S>                             <C>         <C>           <C>        <C>   

Due in one year or less          $ 3,459     $ 3,474       $   387    $   389

Due after one year
   through five years              7,342       7,419         1,213      1,226

Due after five years
   through ten years              15,450      15,539         7,266      7,343

Due after ten years               14,134      14,520           311        326
                                 -------     -------       -------     -------
                                  40,385      40,952         9,177       9,284

Mortgage-Backed Securities        26,791      26,812         8,579       8,662

Equity Securities                  3,878       5,260           --          --
                                 -------     -------       -------     -------

Total Investments                $71,054     $73,024       $17,756    $17,946

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

     Investment securities with a carrying amount of $12,262,000 and $14,001,000
at  December  31, 1998 and 1997,  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  during  1998,  1997  and  1996  were  $11,342,000,  $13,279,000  and
$19,842,000,  respectively.  Gross gains of $740,000 and gross losses of $18,000
were  realized on those sales in 1998.  Gross gains of $615,000 and gross losses
of $14,000 were realized on the sales in 1997.  In 1996,  gross  realized  gains
were $418,000 and gross realized losses were $110,000.


<PAGE>


NOTE C - LOANS

     Major  classifications  of  loans  at  December  31,  1998  and 1997 are as
follows.
<TABLE>

                                        1998         1997
                                   ---------    ---------
<S>                               <C>          <C>   

Real Estate/Residential            $ 119,914    $ 138,539
Real Estate/Construction              11,689       12,361
Real Estate/Commercial                29,587       34,579
Consumer/Installment                  40,184       35,914
Commercial (Non-Real Estate)
  and Agricultural                    10,900        9,086
State and Political Subdivisions       1,178          944
Other                                     10           20
                                   ---------    ---------
  Total Gross Loans                  213,462      231,443
      Less Unearned Discount          (1,025)      (1,856)
                                   ---------    ---------
  Total Loans                      $ 212,437    $ 229,587
</TABLE>

     Included in total gross loans are unamortized  loan fees totaling  $293,000
at  December  31,  1998 and  $137,000 at  December  31,  1997.  There were loans
totaling  $1,245,000 on which the accrual of interest has been  discontinued  or
reduced at December 31, 1998. During 1998, an average of $1,560,000 of loans was
on  non-accrual  status.  Non-accrual  loans at December  31,  1997  amounted to
$813,000 and averaged  $821,000 during 1997. Loans 90 days and over past due and
still accruing totaled  $1,021,000 at December 31, 1998 and $802,000 at December
31, 1997.

<PAGE>


NOTE D - ALLOWANCE FOR POSSIBLE LOAN LOSSES

     Transactions in the allowance for possible loan losses were as follows.
<TABLE>

Year Ended December 31,                1998       1997       1996
                                    -------    -------    -------
<S>                                <C>        <C>        <C>    

Beginning Balance                   $ 2,664    $ 2,532    $ 2,443

Additions
  Provisions for loan losses
    charged to operating expenses       450        605        670
  Recoveries of loans                   117         97         86
                                    -------    -------    -------
      Total Additions                   567        702        756
  Deductions
    Loans charged-off                  (540)      (570)      (667)
                                    -------    -------    -------

  Ending Balance                    $ 2,691    $ 2,664    $ 2,532
</TABLE>


NOTE E  -  IMPAIRED LOANS

     The recorded  investment  in impaired  loans and the  valuation  for credit
losses related to loan impairment are as follows. 

<TABLE>
At December 31,                         1998       1997       1996
<S>                                 <C>        <C>        <C>   
Principal amount of impaired loans   $   524    $   523    $ 1,149
Accrued Interest                        --         --         --
Deferred loan costs                     --            1          7
                                     -------    -------    -------
                                         524        524      1,156
Less valuation allowance                (303)      (138)      (128)
                                     -------    -------    -------
                                     $   221    $   386    $ 1,028
</TABLE>

<PAGE>

<TABLE>

At December 31,                      1998     1997     1996
                                   ------   ------   ------
<S>                               <C>      <C>      <C>

Cash collected on impaired loans
   credited to principal balance   $  483   $  657   $1,446
   Recognized as interest income       23      111       40
                                   ------   ------   ------
       Total                       $  506   $  768   $1,486


Interest that would have accrued
   on impaired loans               $  144   $   64   $  210
</TABLE>


     The valuation  allowance for impaired loans at December 31, 1998,  1997 and
1996 is included in the  "Allowance  for Possible  Loan Losses" which amounts to
$2,691,000, $2,664,000 and $2,532,000, respectively.

     The valuation for credit losses  related to impaired loans is a part of the
allowance for possible  loan losses.  The activity in this  valuation  allowance
account is as follows.
<TABLE>

Year ended December 31,                1998     1997     1996
                                      -----    -----    -----
<S>                                  <C>      <C>      <C>  

Valuation allowance at January 1,     $ 138    $ 128    $ 238
Provision for loan impairment           294      158      206
Direct charge-offs                     (129)    (148)    (325)
Recoveries                             --       --          9
                                      -----    -----    -----

Valuation allowance at December 31,   $ 303    $ 138    $ 128
</TABLE>

NOTE F - PREMISES AND EQUIPMEN

     Major  classifications  of these  assets at December  31, 1998 and 1997 are
summarized as follows.
<TABLE>

                        Estimated Useful Lives        1998              1997
<S>                        <C>                      <C>               <C>  


   Land                         ----                  $939              $939
   Premises                 10 - 20 years            6,963             6,948
   Equipment                 3 - 10 years            5,768             5,329
                                                   -------            ------
                                                    13,670            13,216
   Accumulated depreciation
     and amortization                               (6,785)           (5,917)
                                                  --------           -------
   Total Premises and Equipment                     $6,885            $7,299
</TABLE>

Depreciation  and  amortization  expense  amounted  to  $908,000,  $857,000  and
$730,000 in 1998, 1997 and 1996, respectively.


<PAGE>


NOTE G - SHORT-TERM BORROWINGS

Federal Reserve Discount Borrowings 
<TABLE>

Year Ended December 31,                        1998         1997         1996
                                               ----         ----         ----
<S>                                        <C>           <C>         <C>   

Balance outstanding at December 31,         $    --       $   --      $    --
Maximum amount outstanding at
  any month-end during the year             $    --       $   --      $    --
Average amount outstanding
  during the year                           $    --       $   --      $    10
Average interest rate during
  the year                                      ---%         ---%        5.12%
</TABLE>


FEDERAL HOME LOAN BANK BORROWINGS
<TABLE>

Year Ended December 31,                  1998       1997       1996
<S>                                  <C>        <C>        <C>    

Balance outstanding at December 31,   $  --      $  --      $  --
Maximum amount outstanding at any
   month-end during the year          $ 1,422    $ 6,890    $10,000
Average amount outstanding
  during the year                     $   974    $ 1,217    $ 3,400
Average interest rate during
  the year                               5.65%      5.85%      5.51%
</TABLE>


        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, 1998.

        There were no short-term borrowings in the form of Federal Funds
purchased at December 31, 1998, 1997 and 1996.


Securities Sold Under Agreements to Repurchase
<TABLE>
Year Ended December 31,                    1998          1997          1996
<S>                                    <C>            <C>           <C>    

Balance outstanding at December 31,     $ 5,094        $ 8,804       $ 3,795
Maximum amount outstanding at any
   month-end during the year            $ 8,166        $14,290       $ 7,087
Average amount outstanding
  during the year                       $ 5,821        $ 6,459       $ 4,740
Average interest rate during
  the year                                 3.61%          3.72%         3.14%
</TABLE>


<PAGE>


NOTE H - LONG-TERM DEBT

     The Company had  long-term  borrowings  from the Federal  Home Loan Bank of
Pittsburgh totaling $20,000,000 at December 31, 1998 and $18,000,000 at December
31,  1997.  These loans will mature in two to ten years.  The  weighted  average
interest  rate on these loans was 5.41% and 5.94% at December 31, 1998 and 1997,
respectively.  The Company  also has an  obligation  as a party to the  Employee
Stock Ownership Plan debt, which is discussed in Note K. The principal  payments
due on the Company's  debt at December 31, 1998 are as follows.  
<TABLE>

                                    ESOP       FHLB       Total
                                    Debt       Debt       Debt
<S>                             <C>         <C>           <C>   
1999                             $   65   $    ---    $     65
2000                                 65      8,000       8,065
2001                                 65      5,000       5,065
2002                                 65        ---          65
2003                                 65        ---          65
2004 and beyond                     110      7,000       7,110
                                 ------    -------     -------

Total                            $  435   $ 20,000    $ 20,435
</TABLE>

NOTE I - OTHER OPERATING EXPENSES

     The  following  items which are greater than 1% of the  aggregate of "Total
Interest  Income"  and "Total  Other  Income" are  included in "Other  Operating
Expenses" for the respective years indicated.

<TABLE>

                                               1998         1997        1996
-------------------------------------------------------------------------------
<S>                                       <C>           <C>         <C>   

Advertising                                $    597      $   524     $   299
Consulting Fees                            $    416      $   430     $   269
Data Processing Services                   $    583      $   607     $   594
Litigation Costs and Legal Fees            $    418      $   237     $   147
Loan Collection                            $    346      $   240     $   223
Postage                                    $    256      $   247     $   247
Printing, Stationery and Supplies          $    328      $   363     $   343
Provisions for Trust Reserve               $  1,000      $   500     $   ---
-------------------------------------------------------------------------------
</TABLE>

<PAGE>

NOTE J - INCOME TAXES

     The Company  uses the  liability  method of  accounting  for income  taxes.
Applicable income tax expense (benefit) in the consolidated statements of income
is as follows.
<TABLE>

Year Ended December 31,        1998             1997             1996
-------------------------------------------------------------------------------
<S>                          <C>             <C>              <C>   

Federal
    Current                  $1,426           $1,573           $1,235
    Deferred (benefit)         (395)            (277)             (99)
                             ------           ------           ------

    Total                    $1,031           $1,296           $1,136
-------------------------------------------------------------------------------
</TABLE>


     The income tax provision  reconciled to the tax computed  statutory Federal
rate is as follows.
<TABLE>

Year Ended December 31,              1998            1997             1996
-------------------------------------------------------------------------------
<S>                               <C>             <C>              <C>    

Federal tax expense
  at statutory rate                $1,385          $1,557           $1,346
Increase (decrease)
  in taxes resulting from:
    Tax-exempt investment
      securities income              (363)           (261)            (195)
    Tax-exempt interest
      on loans                        (23)            (16)             (18)
  Other, net                           32              16                3
                                   ------          -------           ------

  Applicable Income Taxes          $1,031          $1,296           $1,136
-------------------------------------------------------------------------------
</TABLE>


     Deferred tax assets and liabilities consist of the following.
<TABLE>

At December 31,                             1998           1997
<S>                                     <C>             <C>    

Deferred Tax Assets:
   Loan Loss Reserve                     $   648         $  614
   Deferred Compensation                     432            428
   Post-Retirement Benefits                   64             59
   Deferred Loan Fees                         50             67
   Depreciation                               47             30
   Miscellaneous Reserves                    537            220
   Other                                      49             15
                                        ---------     ----------
      Total                                1,827          1,433
                                        ---------     ----------

Deferred Tax Liability:
   Unrealized Securities Gains               ---            670
   Other                                     ---            ---
                                        ---------     ----------
      Total                                  ---            670
                                        ---------     ----------
Net                                   $    1,827    $       763
</TABLE>

     Based on  management's  evaluation  of the  likelihood of  realization,  no
valuation allowance has been provided.

<PAGE>


NOTE K- EMPLOYEE STOCK OWNERSHIP PLAN

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

     In 1998, the ESOP borrowed $500,000 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 7.75% at  December  31,  1998).  The  balance
outstanding  on this loan was $435,000 at December 31, 1998.  The proceeds  from
this loan were used to purchase  shares from  retiring  employees and to pay off
the balance on the 1993 loan of $358,000.

     In 1993, the ESOP borrowed $650,000 from a bank payable over ten years. The
interest  rate on this loan was that bank's  prime rate plus 1.25% (an  interest
rate of 9.75% at December 31, 1997).  The balance  outstanding  on this loan was
$390,000 at December 31, 1997.  During 1997,  the ESOP made the final  principal
payments on two  additional  loans.  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  $40,000,  $41,000 and $52,000 for the years
ended  December  31, 1998,  1997 and 1996,  respectively.  Compensation  expense
related to the ESOP  amounted to  $310,000,  $275,000 and $229,000 for the years
ended December 31, 1998,  1997 and 1996,  respectively.  As provided by SOP 93-6
(see Note A.8), the  ESOP  compensation  expense  includes  $100,000 in 1998 and
$50,000  in 1997 and  $18,000  in 1996,  which is the fair  market  value of the
shares  related to the August  1993 loan that were  allocated  to the  employees
during these years.  The number of shares  released was 5,353 in 1998,  4,635 in
1997 and 5,918 in 1996.  Dividends on  unallocated  shares used for debt service
were $19,000,  $23,000 and $38,000 for the years ended  December 31, 1998,  1997
and 1996,  respectively.  The total  shares  held by the ESOP were  224,890  and
225,819 at  December  31,  1998 and 1997,  respectively.  ESOP  shares have been
restated to reflect the 5% stock  dividends of June,  1998,  May,  1997 and May,
1996.

<PAGE>

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 8% 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 $75,000,  $84,000 and $71,000 in
1998, 1997 and 1996, 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 15 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  funded  status  of  the  Officers'
Supplemental  Retirement  Plan and the Deferred  Directors' Plan and the amounts
recognized  in the  Company's  balance  sheets at  December  31,  1998 and 1997.

Actuarial present value of benefit obligations is as follows.
<TABLE>

                                              Officers'        Deferred
                                            Supplemental       Directors'
                                          Retirement Plan         Plan

At December 31,                            1998     1997     1998     1997
<S>                                      <C>      <C>      <C>      <C>  
Accumulated benefit obligation, all of
 which is vested                          $ 146    $  55    $ 491    $ 477

Projected benefit obligation
  for service rendered to date            $(200)   $(366)   $(491)   $(477)
Plan assets at fair value                    --       --       --       --
                                          -----    -----    -----    -----
Projected benefit obligation
  in excess of plan assets                 (200)    (366)    (491)    (477)
Unrecognized net (gain) loss from past
  experience different from that
  assumed and effects of changes
  in assumptions                           (247)     (43)      38        5
Prior service cost not yet recognized
  in net periodic pension cost               --       --       --       --
Unrecognized net assets at December 31,
  being recognized over 15 years             (4)      (5)      --       --
Adjustment to recognize
  additional minimum liability               --       --      (38)      (5)
                                          -----    -----    -----    -----
Accrued Pension Cost                      $(451)   $(414)   $(491)   $(477) 
</TABLE>

     The weighted  average  assumed  discount rate and weighted  average rate of
increase in future compensation levels used in determining the actuarial present
value of the  projected  benefit  obligation  were 6.5% in 1998 and 7.0% in 1997
and1996 for the Officers'  Supplemental  Retirement  Plan. The weighted  average
assumed  discount rate used in  determining  the actuarial  present value of the
projected benefit  obligation for the Deferred  Directors' Plan was 7.0% in 1998
and 7.5% in 1997 and 1996.  The  weighted  average  expected  long-term  rate of
return on assets was 8.0% for 1998, 1997 and 1996 for the Officers' Supplemental
Retirement  Plan and 9.0% in each of those  years  for the  Deferred  Directors'
Plan.

<PAGE>

 Net pension cost included the following components.
<TABLE>
                                              Officers'        Deferred
                                            Supplemental       Directors'
                                          Retirement Plan         Plan
At December 31,                    1998    1997    1996    1998   1997   1996
<S>                              <C>     <C>      <C>     <C>    <C>    <C>
Service cost - benefits
  earned during the period        $  37   $  10    $ 15    $ --   $ --   $ --
Interest cost on projected
  benefit obligation                 15      11      15      34     36     36
Net amortization and deferral       (15)    (19)    (10)     --     --     --
                                   ----    ----    ----    ----   ----   ----
Net Periodic Pension Cost          $ 37    $  2    $ 20    $ 34   $ 36   $ 36
</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 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 Company has determined the actuarially computed expense associated with
this  benefit  for  1998,  1997 and 1996.  The  components  of the net  periodic
post-retirement benefit cost for the years ended December 31 were as follows.

<PAGE>

<TABLE>

Year Ended December 31,                              1998      1997      1996
-------------------------------------------------------------------------------
<S>                                                 <C>      <C>       <C>   

Service cost - benefits earned during the period     $---     $ ---     $ ---
Interest cost on accumulated benefit obligation        11        14        15
Amortization of transition obligation                   6         8         8
                                                    -----     ------    -----
Net periodic post-retirement benefit cost            $ 17     $  22     $  23
-------------------------------------------------------------------------------
</TABLE>


     The assumptions  used to develop the net periodic  post-retirement  benefit
cost and the accrued post-retirement benefit cost were as follows.
<TABLE>

                                     1998             1997             1996
-------------------------------------------------------------------------------
<S>                                <C>             <C>              <C>   

Discount rate                       6.50%            7.00%            7.00%
Medical care cost trend rate        8.50%           10.00%           11.00%
-------------------------------------------------------------------------------
</TABLE>


     The  medical  care  cost  trend  rate  used  in the  actuarial  computation
ultimately  is reduced to 7.0% in the year 2000 and 6.0% in 2003 and  subsequent
years.  This was  accomplished  using 1.0% decrements  through the year 2000 and
0.5% decrements through the year 2003 and later.

<PAGE>


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

At December 31,                                              1998        1997
-------------------------------------------------------------------------------
<S>                                                        <C>         <C>   

Accumulated post-retirement benefit obligation:
     Retirees                                               $ 164       $ 203
     Active, eligible employees                               ---         ---
     Active, not-yet-eligible employees                       ---         ---
                                                            ------      -----
Accumulated post-retirement benefit obligation                164         203
Plan assets at fair value                                     ---         ---
                                                            -----        ----
Accumulated benefit obligation in excess of plan assets       164         203
Unrecognized transition obligation                           (216)       (232)
Unrecognized net gain                                         117          93
                                                            -----       -----
Accrued post-retirement benefit cost                        $  65       $  64
-------------------------------------------------------------------------------
</TABLE>


     At December 31, 1998, $190,000 of the accrued  post-retirement benefit cost
is included in "Total Other  Liabilities".  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 $13,000 and the accrued post-retirement benefit
cost by $1,000.

     Health care benefits are provided to certain retired employees. The cost of
providing these benefits was approximately $20,000, $22,000 and $22,000 in 1998,
1997 and 1996,  respectively.  The cost is accrued  over the service  periods of
employees  expected to receive benefits.  Past-service costs are being amortized
principally over 30 years.

     NOTE N - STOCK OPTIONS 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 1998,  options  to  purchase
30,975 common shares of the Company's  stock at a price of $35.24 per share were
awarded  under this plan.  In 1997,  options to  purchase  19,950  shares of the
Company's  common  stock  at a price of  $22.38  per  share  were  awarded.  The
aggregate  number of shares  which may be issued  under  these plans are 302,091
shares of common stock.

<PAGE>

     In 1994, a Non-Employee  Directors Stock Option Plan was adopted. This 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 was
automatically granted an option to purchase 1,214 shares of the Company's common
stock at the fair  market  value of the  Company's  common  stock of $13.99  per
share.  The Plan  additionally  provides that any  non-employee  director who is
first elected by the shareholders as a director of the Company or any subsidiary
after May 1, 1994,  shall,  as of that date of such election,  automatically  be
granted an option to purchase  1,214 shares of the Company's  common  stock.  In
addition,  on the fifth  anniversary  of the initial  option grant,  persons who
continue to be non-officer directors shall each be granted additional options to
purchase  1,214 shares of the Company's  common stock.  The aggregate  number of
shares which may be issued under the Non-Employee  Director Stock Option Plan is
24,309 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>

Year Ended December 31,                              1998      1997      1996
-------------------------------------------------------------------------------
<S>                               <C>              <C>       <C>       <C>   


Net Income                         As reported      $3,032    $3,283    $2,822
                                   Pro forma        $3,015    $3,265    $2,814

Basic earnings per share           As reported       $1.76     $1.92     $1.68
                                   Pro forma         $1.75     $1.91     $1.68

Diluted earnings per share         As reported       $1.75     $1.92     $1.68
                                   Pro forma         $1.74     $1.91     $1.67
-------------------------------------------------------------------------------
</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 1998, 1997 and 1996, respectively: dividend yield
of 2.8%, 2.1% and 3.1%; expected volatility of 39.0%, 39.0% and 39.5%; risk-free
interest rates of 5.7%, 6.7% and 7.0%; and expected lives of 10 years.

     A summary of the status of the Company's  Employee Stock Option Plans as of
December 31, 1998,  1997 and 1996,  and changes during the years ending on those
dates is  presented  below.  The  number of shares and price per share have been
restated to reflect the 5% stock  dividends of June,  1998,  May,  1997 and May,
1996.

<PAGE>
<TABLE>
Year Ended December 31,                        1998 
                                                   Weighted   
                                                    Average   
                                                   Excercise  
                                         Shares      Price    
<S>                                     <C>       <C>           
Outstanding at beginning of year         26,604    $  20.40   
Granted                                  30,975       35.24   
Exercised                                   ---         ---   
Expired                                     525       35.24   
                                         ------    --------   
Outstanding at end of year               57,054    $  28.32   

Options exercisable at year-end          11,641               
Weighted average fair value of
   options granted during the year                 $  35.24
</TABLE>

<TABLE>
Year Ended December 31,                        1997 
                                                   Weighted   
                                                    Average   
                                                   Excercise  
                                         Shares      Price    
<S>                                     <C>       <C>           
Outstanding at beginning of year         12,683    $  15.04   
Granted                                  19,950       22.38   
Exercised                                 6,029       15.68   
Expired                                     ---         ---
                                         ------    --------   
Outstanding at end of year               26,604    $  20.40   

Options exercisable at year-end           4,990               
Weighted average fair value of
   options granted during the year                 $  22.38
</TABLE>

<TABLE>
Year Ended December 31,                        1996 
                                                   Weighted   
                                                    Average   
                                                   Excercise  
                                         Shares      Price    
<S>                                     <C>       <C>           
Outstanding at beginning of year         18,712    $  15.65   
Granted                                     ---         ---   
Exercised                                 6,029       16.90   
Expired                                     ---         ---
                                         ------    --------   
Outstanding at end of year               12,683    $  15.04   

Options exercisable at year-end           9,358               
Weighted average fair value of
   options granted during the year                     N/A   
</TABLE>


         The following information applies to options outstanding at December
31, 1998.


                          EMPLOYEE STOCK OPTION PLAN

Number outstanding                                     57,054
Range of exercise prices                           $14.47 to $35.24
Weighted-average exercise price                        $28.32
Weighted-average remaining contractual life          8.48 years

A summary of the status of the Company's Non-Employee Director Stock Option Plan
as of December 31, 1998 and 1997,  and changes  during the years ending on those
dates are  presented  below.  The number of shares and price per share have been
restated to reflect the 5% stock  dividends of June,  1998,  May,  1997 and May,
1996.
<PAGE>

<TABLE>

NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

Year Ended December 31,                       1998
                                                  Weighted
                                                   Average
                                                  Excercise
                                        Shares      Price
<S>                                     <C>      <C>      
Outstanding at beginning of year         9,720    $  14.24       
Granted                                    ---        ---       
Exercised                                  ---        ---        
Expired                                    ---        ---        
                                         -----    --------       
Outstanding at end of year               9,720    $  14.24       

Options exercisable at year-end          8,504                   
Weighted average fair value of  
   options granted during the year                    N/A        
</TABLE>

<TABLE>

Year Ended December 31,                       1997
                                                  Weighted
                                                   Average
                                                  Excercise
                                        Shares      Price
<S>                                     <C>      <C>      
Outstanding at beginning of year        10,934    $  14.21       
Granted                                    ---        ---       
Exercised                                  911       13.99       
Expired                                    303       13.99       
                                         -----    --------       
Outstanding at end of year               9,720    $  14.24       

Options exercisable at year-end          6,074                   
Weighted average fair value of  
   options granted during the year                    N/A        
</TABLE>

<TABLE>

Year Ended December 31,                       1996
                                                  Weighted
                                                   Average
                                                  Excercise
                                        Shares      Price
<S>                                     <C>      <C>      
Outstanding at beginning of year        10,934    $  13.90       
Granted                                  1,215       16.78      
Exercised                                  303       13.99       
Expired                                    912       13.99       
                                         -----    --------       
Outstanding at end of year              10,934    $  14.21       

Options exercisable at year-end          4,050                   
Weighted average fair value of  
   options granted during the year                $  16.78
</TABLE>


<PAGE>


The following information applies to options outstanding at December 31, 1998.

                   NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

Number outstanding                                       9,720
Range of exercise prices                            $13.99 to $16.78
Weighted-average exercise price                         $14.24
Weighted-average remaining contractual life           5.83 years

NOTE O - COMMITMENTS AND CONTINGENCIES

     The Company has non-cancellable operating lease agreements in excess of one
year with respect to various buildings and equipment.  The minimum annual rental
commitments at December 31, 1998 are payable as follows.

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

1999                            $      371
2000                                   386
2001                                   400
2002                                   383
2003                                   377
2004 and beyond                      1,527
                                  ---------

        Total                   $    3,444
-------------------------------------------

     The total rental expense was $378,000,  $421,000 and $530,000 in 1998, 1997
and 1996, respectively.


<PAGE>


NOTE P - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET 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, 1998 are as follows.

Financial instruments whose
contract amounts represent credit risk:
---------------------------------------------------------------------------
       Commitments to extend credit                                $19,884
       Standby letters of credit                                    $2,618
---------------------------------------------------------------------------

     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.

     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
83.23% as of December 31, 1998.
<PAGE>


NOTE Q - CONCENTRATIONS OF CREDIT RISK

     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,  1998,  the  Bank  had  residential   real  estate  loans
outstanding totaling $119,914,000, which is 56.45% of total loans. The Bank also
had real estate  related  commercial  loans  outstanding  at  December  31, 1998
totaling  $29,587,000,  which  is  13.93%  of  total  loans.  Loans  to  various
residential  apartment  building owners totaling  $3,799,000 are included in the
Bank's total real estate commercial  loans.  These loans represent 12.84% of the
total real estate related commercial loans.

NOTE R - RELATED PARTY TRANSACTIONS

     The amount of loans by the Company to its directors and executive  officers
was  approximately  $1,298,000  and  $1,311,000  at December  31, 1998 and 1997,
respectively.  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 1998 activity of these loans follows.

      Balance, January 1, 1998              $1,311
      New loans                                601
      Repayments                               614
                                            ------
      Balance, December 31, 1998            $1,298


<PAGE>


NOTE S - 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, 1998,  that the Bank could declare,  without the approval of the
Comptroller of the Currency, amounted to approximately $3,547,000

     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, 1998, the Company and
the Bank met all capital adequacy requirements to which they were subject.

     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.

<PAGE>

CAPITAL RATIOS
<TABLE>
                                                                  To Be Well
                                                                 Capitalized
                                                 Required        Under Prompt
                                                For Capital       Corrective
                                Actual           Purposes         Provisions
(Dollars in Thousands)
 At December 31, 1998        Amount   Ratio     Amount   Ratio   Amount  Ratio
<S>                       <C>       <C>      <C>       <C>    <C>      <C>
Total Capital
(To Risk-Weighted Assets)
  Company, (Consolidated)   $33,555   16.97%   $15,819   8.00%      ---    ---
  Bank                      $29,450   15.02%   $15,684   8.00%  $19,605  10.00%

Tier 1 Capital
(To Risk-Weighted Assets)
  Company, (Consolidated)   $30,938   15.64%   $ 7,906   4.00       ---    ---
  Bank                      $26,596   13.57%   $ 7,842   4.00%  $11,763   6.00%

Tier 1 Capital
(To Average Assets,
 Leverage)
  Company, (Consolidated)   $30,938   8.60%    $14,114   4.00%      ---    ---
  Bank                      $26,596   7.47%    $13,951   4.00%  $17,439   5.00%
</TABLE>

CAPITAL RATIOS
<TABLE>
                                                                  To Be Well
                                                                 Capitalized
                                                 Required        Under Prompt
                                                For Capital       Corrective
                                Actual           Purposes         Provisions
(Dollars in Thousands)
 At December 31, 1997        Amount   Ratio     Amount   Ratio   Amount  Ratio
<S>                       <C>       <C>      <C>       <C>    <C>      <C>
Total Capital
(To Risk-Weighted Assets)
  Company, (Consolidated)   $31,271   16.03%   $15,609   8.00%      ---    ---
  Bank                      $27,200   13.97%   $15,576   8.00%  $19,470  10.00%

Tier 1 Capital
(To Risk-Weighted Assets)
  Company, (Consolidated)   $28,829   14.78%   $ 7,804   4.00       ---    ---
  Bank                      $24,163   12.41%   $ 7,788   4.00%  $11,682   6.00%

Tier 1 Capital
(To Average Assets,
 Leverage)
  Company, (Consolidated)   $28,829   8.33%    $13,551   4.00%      ---    ---
  Bank                      $24,163   7.06%    $13,416   4.00%  $16,770   5.00%
</TABLE>


<PAGE>


     The Company is not aware of any known trends,  events or uncertainties that
will have a material  effect on the Company's  liquidity,  capital  resources or
operations.  The  Company  is  not  under  any  agreement  with  the  regulatory
authorities  nor  is it  aware  of  any  current  recommendation  by  regulatory
authorities  which,  if they were  implemented,  would have a material effect on
liquidity, capital, resources, or the operations of the Company.

     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 the  Federal  Reserve  Bank based upon
deposit levels and other factors. The average and year-end amount of the reserve
balance for 1998 was approximately $5,152,000 and $5,675,000,  respectively. For
1997, the average  reserve  balance was  $4,305,000 and the year-end  amount was
$4,702,000.

     NOTE T - EQUITY  TRANSACTIONS  The Company paid a 5% stock  dividend on its
common  stock  from  authorized  but  unissued  shares  on June 25,  1998 to all
shareholders  of record at the close of  business  on June 5, 1998.  On June 19,
1997, 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
May 30,  1997.  The  Company  also paid a 5% stock  dividend on June 19, 1996 to
shareholders  of  record  on May 31,  1996.  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.

     A Dividend  Reinvestment  and Stock Purchase Plan was  established in 1988.
The 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 1998,  10,390 common shares were
purchased  pursuant to the Dividend  Reinvestment  and Stock Purchase Plan at an
average  cost of $31.47 per share for total  proceeds  of  $327,000.  The shares
purchased in 1998 were  comprised of 7,611 new common shares at an average price
of $30.61 for proceeds of $233,000 and 2,779 shares from  Treasury  shares at an
average price of $33.82 for proceeds of $94,000.  In 1997,  12,280 common shares
were purchased pursuant to the Dividend  Reinvestment and Stock Purchase Plan at
an average cost of $23.34 for proceeds of $287,000.
<PAGE>

NOTE U - FAIR VALUE OF FINANCIAL INSTRUMENTS

     SFAS No.  107,  "Disclosures  about Fair Value of  Financial  Instruments",
requires all entities to disclose 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.

     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, 1998 and 1997 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>
                                         1998                     1997
                                 Estimated  Carrying      Estimated  Carrying
                                Fair Value   Amount      Fair Value   Amount
<S>                            <C>       <C>            <C>       <C> 
Cash and cash equivalents        $  14,259 $  14,259      $  14,829 $  14,829
Investment securities               17,920    17,723         17,946    17,756
Securities available-for-sale       98,389    98,389         73,024    73,024
Mortgage loans held-for-sale           603       603            759       759
</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.


<TABLE>
                                         1998                     1997
                                 Estimated  Carrying      Estimated  Carrying
                                Fair Value   Amount      Fair Value   Amount
<S>                            <C>       <C>            <C>        <C>  
Assets:
 Interest-bearing deposits
  with banks                     $   3,301 $   3,301       $    395  $    395
Liabilities:
 Deposits with stated
  maturities                       136,024   128,711        127,673   127,350
 Securities sold under
  agreements to repurchase           5,094     5,094          8,804     8,804
 Long-term debt                     20,419    20,000         17,730    18,390
</TABLE>

     Fair value of financial  instrument  liabilities with no stated  maturities
has been estimated to equal the carrying amount (the amount payable on demand).

<TABLE>
                                         1998                     1997
                                 Estimated  Carrying      Estimated  Carrying
                                Fair Value   Amount      Fair Value    Amount
<S>                            <C>       <C>            <C>         <C> 
Deposits with no
 stated maturities               $ 173,301 $ 165,838      $ 154,905   $154,905
</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>
                                         1998                     1997
                                 Estimated  Carrying      Estimated  Carrying
                                Fair Value   Amount      Fair Value    Amount
<S>                            <C>        <C>           <C>        <C>  
Total loans                      $238,031   $212,437      $228,278   $229,587
</TABLE>

     There  is no  material  difference  between  the  carrying  amount  and the
estimated fair value of off-balance-sheet items totaling $22,502,000 at December
31, 1998 and  $23,684,000 at December 31, 1997 which are primarily  comprised of
unfunded loan  commitments  which are generally  priced at market at the time of
funding.

     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.

<PAGE>

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

<TABLE>

Condensed Balance Sheets                                               
-------------------------------------------------------------------------------
   December 31,                             1998      1997
-------------------------------------------------------------------------------
<S>                                     <C>       <C>    

ASSETS
      Cash and Due from Banks            $    20   $     8
      Interest-Bearing Deposits
        with Banks                           130       904
      Loan to Banking Subsidiary           1,000     1,000
      Investment in Banking Subsidiary    27,158    24,760
      Investment in Other Subsidiary       3,909     4,113
      Other Assets                            13        12
                                         -------   -------

         Total Assets                    $32,230   $30,797

LIABILITIES
      Long-Term Debt                     $   435   $   390
      Other Liabilities                       78        50
                                         -------   -------

         Total Liabilities                   513       440

Shareholders' Equity                      31,717    30,357
                                         -------   -------

     Total Liabilities and
      Shareholders' Equity               $32,230   $30,797

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

<PAGE>

<TABLE>

Condensed Statement of Income                                        
-------------------------------------------------------------------------------
   For the Year Ended December 31,              1998       1997        1996
-------------------------------------------------------------------------------
<S>                                         <C>        <C>        <C>   

INCOME
    Dividends from Subsidiaries              $   688    $ 1,139    $ 1,111
    Interest on Loan to Subsidiary                89         89        114
    Interest on Deposits with Banks                5         21         12
                                             -------    -------    -------

      Total Income                               782      1,249      1,237
                                             -------    -------    -------

EXPENSES
    Interest on Long-Term Debt                    39         41         52
    Other Expenses                                94         99        105
                                             -------    -------    -------

      Total Expenses                             133        140        157
                                             -------    -------    -------

    Income Before Taxes and
    Equity in Undistributed Net
        Earnings of Subsidiaries                 649      1,109      1,080
    Federal Income Tax (Credit)                  (12)       (10)       (11)
                                             -------    -------    -------
    Income Before Equity in Undistributed
        Net Earnings of Subsidiaries             661      1,119      1,091
    Equity in Undistributed Net Earnings 
        of Subsidiaries                        2,371      2,164      1,731
                                             -------    -------    -------

      Net Income                             $ 3,032    $ 3,283    $ 2,822
-------------------------------------------------------------------------------
</TABLE>

<PAGE>

<TABLE>

Condensed Statement of Cash Flows                                        
-------------------------------------------------------------------------------
For The Year Ended December 31,                       1998       1997      1996
-------------------------------------------------------------------------------
<S>                                               <C>        <C>       <C>  

OPERATING ACTIVITIES
 Net Income                                        $ 3,032    $ 3,283   $ 2,822
 Adjustments to Reconcile Net Income to Net Cash
    Provided by Operating Activities:
    Distribution in Excess of Undistributed
       Net Earnings of Subsidiaries                 (2,467)    (2,164)   (1,731)
    Changes in Assets and Liabilities:
        (Increase) Decrease in Interest-Bearing
          Deposits with Banks                          774       (248)     (366)
        (Increase) Decrease  in Other Assets            (1)      --         (10)
        Increase (Decrease) in Other Liabilities        28        (23)        7
                                                   -------    -------   -------

Net Cash Provided by Operating Activities            1,366        848       722
                                                   -------    -------   -------

INVESTING ACTIVITIES
 Repayment of Note from Bank Subsidiary               --         --       1,600
 Issuance of Note Receivable to Bank Subsidiary       --         --      (1,000)
 Capital Contribution to Bank Subsidiary              (500)      --        (600)
                                                   -------    -------   -------

Net Cash PROVIDED BY Investing Activities             (500)      --         --
                                                   -------    -------   -------

FINANCING ACTIVITIES
 Increase in Long-Term Debt                             45       --         --
 Increase in ESOP Debt                                 (45)      --         --
 Purchase of Treasury Stock                           --         (107)     (102)
 Proceeds from the Sale of Treasury Stock               94         33        64
 Proceeds from Issuance of Common Stock                333        361       290
 Cash Dividends Paid                                (1,275)    (1,139)   (1,011)
 Cash in Lieu of Fractional Shares                      (6)        (4)       (3)
                                                   -------    -------   -------

Net Cash Used in Financing Activities                 (854)      (856)     (762)
                                                   -------    -------    -------
Increase (Decrease) in Cash and Cash Equivalents        12         (8)      (40)
Cash and Cash Equivalents, January 1,                    8         16        56
                                                   -------    -------   -------
Cash and Cash Equivalents, December 31,            $    20    $     8   $    16
                                                   -------    -------   -------

-------------------------------------------------------------------------------
</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 13, 1999 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  Nazareth  National  Bank and Trust
Company.  Shareholders  seeking assistance with stock  registration,  lost stock
certificates  or  dividend  information  should  contact  Maria A. Keller at the
following address or by telephone at (610) 746-7317.

                  Nazareth National Bank
                  Trust Department
                  76 South Main Street
                  Nazareth, PA   18064

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, 1998, there were 738 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 S-  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 in December, 1998 was $29.125 and
in December,  1997 was $33.80.  Stock prices and  dividends  per share have been
restated  to reflect the 5% stock  dividends  of June,  1998 and May,  1997 (see
"Note  T  -  Equity  Transactions"  in  the  "Notes  to  Consolidated  Financial
Statements").

<PAGE>

<TABLE>
1997
<S>                  <C>             <C>            <C>   
     First Quarter     $22.45          $20.18         $ 0.1633
     Second Quarter     23.33           21.31           0.1633
     Third Quarter      32.62           22.38           0.1714
     Fourth Quarter     33.81           33.04           0.1714
                                                      --------
     TOTAL                                            $ 0.6694
</TABLE>

<TABLE>
1998
<S>                  <C>             <C>            <C>   
     First Quarter     $35.24          $32.62         $ 0.1810
     Second Quarter     36.50           33.33           0.1810
     Third Quarter      36.00           26.75           0.1900
     Fourth Quarter     29.75           26.75           0.1900
                                                      --------
     TOTAL                                            $ 0.7419
</TABLE>

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:

                  Nazareth National Bank
                  Trust Department
                  76 South Main Street
                  Nazareth, PA   18064

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, 1998.

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: F. J. Morrissey & Co., Inc.; Hopper,  Soliday
& Co., Inc.; Ryan, Beck & Co.; and Wheat First Securities, Inc.

<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  1999 Proxy  Statement and "Executive  Officers of the  Registrant" in
Appendix  A to Part I 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 1999 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 1999 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  1999 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
                  12/31/98 and 12/31/97

           Consolidated Statements of Income and Comprehensive Income
                  for the Years Ended 12/31/98, 12/31/97 and 12/31/96

           Consolidated Statement of Changes in Shareholders' Equity
           for the Years Ended  12/31/98, 12/31/97 and 12/31/96

           Consolidated Statements of Cash Flows for the Years Ended
                  12/31/98, 12/31/97 and 12/31/96

           Notes to Consolidated Financial Statements

<PAGE>

2.  Exhibits:

    Number    Title                                                 Page No.

    3.1 (7)   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.

   10.2       Intentionally omitted.

 * 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 (2)    Loan Agreement, dated July 17, 1987, by and between
              the Company and Commonwealth Bank and Trust Company, N.A.

* 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 (9)   Severance Agreement dated July 19, 1994 by and between the Bank
              and S. Eric Beattie

 *10.10.1(12) Amendment No. 1 to Severance Agreement by and between the Board
              and S. Eric Beattie

 *10.11 (9)   Severance Agreement dated July 19, 1994 by and between the Bank
              and Reid L. Heeren

<PAGE>

   Number     Title                                                   Page No.
 *10.11.1(12) Amendment No. 1 to Severance Agreement by and between the Board
              and Reid L. Heeren

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

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

 *10.13 (9)   Severance dated July 19, 1994 by and between the Bank and Gerald
              E. Kemmerer

 *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 (13)  Severance Agreement dated September 22, 1997 by and between the
              Board and Tomas J. Bamberger

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

  21.1 (3)    Subsidiaries of the Company.

  23.1        Consent of Accountants.

  27.1        Financial Data Schedule

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

*    Represents  a  Management   Contract  or  Compensatory  Plan,  Contract  or
     Arrangement.

<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.

(b)  Reports on Form 8-K

     No reports  on Form 8-K were filed in the fourth  quarter of the year ended
December 31, 1998.

<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 30, 1999                    By:  /s/  S. Eric Beattie
                                               S. ERIC BEATTIE, 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 and on
the dates indicated.

By:     /s/ Richard Stevens, III
        RICHARD STEVENS, III
        Chairman of the Board 
        and Director 
        March 30, 1999

By:     /s/  S. Eric Beattie
        S. ERIC BEATTIE 
        President, Chief Executive Officer 
        and Director (Principal Executive Officer) 
        March 30, 1999

By:     /s/  Reid L. Heeren
        REID L. HEEREN 
        Executive Vice President and Treasurer 
        (Principal Financial Officer and 
        Principal Accounting Officer) 
        March 30, 1999

By:     /s/  Robert J. Bergren
        ROBERT J. BERGREN 
        Director 
        March 30, 1999

<PAGE>

By:     /s/  Gordon Mowrer
        GORDON MOWRER 
        Director 
        March 30, 1999

By:     /s/ Daniel B. Mulholland
        DANIEL B. MULHOLLAND 
        Director 
        March 30, 1999

By:     /s/ Robert C. Nagel
        ROBERT C. NAGEL 
        Director 
        March 30, 1999

By:     /s/ Charles J. Peischl
        CHARLES J. PEISCHL, ESQUIRE 
        Director 
        March 30, 1999

By:     /s/ Maria Zumas Thulin
        MARIA ZUMAS THULIN 
        Director 
        March 30, 1999