SECURITIES AND EXCHANGE COMMISSION
                                Washington, D.C.

                                   FORM 10-KSB


 X     Annual Report under Section 13 or 15(d) of the Securities Exchange Act
       of 1934 for (fee required) for the fiscal year ended December 31, 1997.

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


                         Commission File Number 0-11526

                           FIRST COLONIAL GROUP, INC.
        ----------------------------------------------------------------
                 (Name of Small Business Issuer 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
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             (Address of principal executive offices)            (Zip Code)


                     Issuer's telephone number 610-746-7300

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

                                      None

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

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

     Check whether the issuer (1) has filed all reports  required to be filed by
Section 13 or 15 (d) of the  Exchange Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days.

                                    Yes X   No

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of Regulation S-B in this form, and no disclosure will 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-KSB or any  amendment to
this Form 10-KSB.

<PAGE>

     The  Issuer's  revenues  for the fiscal year ended  December  31, 1997 were
$29,267,000.

     The aggregate  market value of voting stock held by  non-affiliates  of the
registrant is $50,204,160. (1)

     The number of shares of the  Issuer's  common  stock,  par value  $5.00 per
share, outstanding as of March 18, 1998 was 1,655,101.



                      DOCUMENTS INCORPORATED BY REFERENCE:

         Part III:    Certain portions of the 1997 Proxy Statement










     (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 18,  1998.  Includes an
aggregate of 174,612 shares, with an aggregate market value of $6,286,032,  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 1

Item 1.     Description of Business

Investment Considerations

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

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

     Effect of Interest  Rates on the Bank and the Company.  The  operations  of
financial  institutions  such as the Company are  dependent to a large degree on
net interest income which is the difference  between  interest income from loans
and   investments  and  interest   expense  on  deposits  and   borrowings.   An
institution's  net interest income is significantly  affected by market rates of
interest which in turn are affected by prevailing  economic  conditions,  by the
fiscal and monetary  policies of the federal  government  and by the policies of
various regulatory agencies.  At December 31, 1997 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  $14,607,000,
representing  a negative  cumulative  one year gap of 91.2%.  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  6,  Management's
Discussion and Analysis or Plan of Operation".

<PAGE>

     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 7, Financial Statements".

     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.

<PAGE>

     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 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 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.

     Year 2000 Compliance.  The Company has 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
cost to be incurred to prepare for Year 2000  compliance  range from $100,000 to
$300,000; 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 6.  Management's  Discussion  and
Analysis or Plan of Operation".

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

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

<PAGE>

General

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

     The Company's  principal  activities  consist of owning and supervising the
Bank, which engages in a full service  commercial and consumer banking and trust
business. The Company, through the Bank, derives substantially all of its income
from the furnishing of banking and  banking-related  services.  The Bank has its
principal   banking  office  as  well  as  three  branch  offices  in  Nazareth,
Pennsylvania.   It  also   presently  has  two  branch   offices  in  Bethlehem,
Pennsylvania,  three  branch  offices  in  Easton,  Pennsylvania,  one branch in
Brodheadsville,  Pennsylvania,  one  branch in  Stroudsburg,  Pennsylvania,  one
branch  in  East   Stroudsburg,   Pennsylvania  and  one  branch  in  Allentown,
Pennsylvania.  The Bank has eighteen  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
and at St. Luke's Hospital, Fountain Hill, 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.

<PAGE>

     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, 1997 the Company,  on a  consolidated  basis,  had total
assets of $346,738,000,  total deposits of $282,255,000, and total shareholders'
equity of $30,357,000.

<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, 1997, the Bank had total assets of  $342,068,000,  total
deposits of $283,287,000  and total  shareholders'  equity of  $24,760,000.  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 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 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;  PNC Bank,
headquartered   in   Pittsburgh,   Pennsylvania,   with  branches  in  Nazareth,
Brodheadsville,   Easton  and  Allentown,  Pennsylvania;  and  Corestates  Bank,
headquartered in Philadelphia,  Pennsylvania, with branches in Bethlehem, 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, 1997, First C. G. Company, Inc.
had total assets of $4,787,000,  of which  $1,023,000 was invested in tax-exempt
municipal  obligations  and most of the  remaining  assets were in other taxable
securities and interest-bearing bank deposits. The total shareholders' equity at
December 31, 1997 was $4,113,000.

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 Insured 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  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
approval of the OCC.

     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
Corporation  bonds;  however,  banks  are  assessed  for  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.

<PAGE>

         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 of 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 debt
instruments, and the allowance for possible loan losses. Management believes, as
of December  31,  1997 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, 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>

<TABLE>
                                                                 To Be Well
                                                                 Capitalized
                                                 Required        Under Prompt
                                                For Capital       Corrective
                                Actual           Adequacy           Action
(Dollars in Thousands)
 At December 31, 1996        Amount   Ratio     Amount   Ratio   Amount  Ratio
<S>                        <C>      <C>       <C>       <C>    <C>      <C>
Total Capital
(To Risk-Weighted Assets)
  Company, (Consolidated)   $28,596  15.20%    $15,046   8.00%      ---    ---
  Bank                      $25,591  13.59%    $15,065   8.00%  $18,831  10.00%

Tier 1 Capital
(To Risk-Weighted Assets)
  Company, (Consolidated)   $26,243  13.95%    $ 7,522   4.00%      ---    ---
  Bank                      $22,435  11.91%    $ 7,532   4.00%  $11,299   6.00%

Tier 1 Capital
(To Average Assets,
 Leverage)
  Company, (Consolidated)   $26,243   8.35%    $12,578   4.00%      ---    ---
    Bank                    $22,435   7.20%    $12,456   4.00%  $15,570   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 24, 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, 1997 and 1996 in Note
U of the Notes to Consolidated Financial Statements contained under the caption,
"Item 7, Financial Statements".

         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 1997 and 1996. 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, 1997 the Company had  approximately  196  employees,  of
whom  46 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>
<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>
                                              1995
Available-for-Sale Securities                 Carrying Amount
                                 Amortized       at Fair
                                    Cost          Value
<S>                               <C>           <C>

U. S. Treasury                     $ 7,002       $ 7,050
U. S. Government Agency             17,066        17,159
State and Political Subdivisions     6,638         6,689
Mortgage-Backed Securities          24,529        24,689
Other Debt Securities                  300           307
Equity Securities                    2,727         3,155
                                   -------       -------
     Total                         $58,262       $59,049
</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>

 <TABLE>

                                               1995
Held-to-Maturity Securities   Carrying Amount at Approximate
                                   Amortized        Fair
                                     Cost          Value
<S>                               <C>          <C>

U. S. Treasury                     $ 2,997      $ 3,007
U. S. Government Agency              6,524        6,539
State and Political Subdivisions     2,086        2,118
Mortgage-Backed Securities           8,447        8,524
                                   -------       -------
     Total                         $20,054      $20,188
</TABLE>
<PAGE>

                          INVESTMENT SECURITIES YIELD BY MATURITY

         The maturity distribution and weighted average yield of the investment
portfolio of the Company at December 31, 1997 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, at December 31, 1997
<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
 Unaudited)                 Amount   Yield    Amount    Yield   Amount   Yield
<S>                      <C>         <C>      <C>        <C>    <C>       <C>

U. S. Treasury            $ 2,994     6.05 %   $ 6,072    6.12 % $    --    -- %
U. S. Government Agency        --       --          --      --     11,515  6.88
Mortgage-backed Securities     --       --       1,468    5.67      1,610  6.38
State and Political
 Subdivisions                 480     9.12       1,347    7.48      4,024  7.18
Equity Securities              --       --          --      --         --   --
                            -----     ----     -------    ----    -------  ----
 TOTAL AVAILABLE-FOR-SALE
  SECURITIES              $ 3,474     6.47 %   $ 8,887    6.25 %  $17,149  6.90%
                           =====     ====     =======    ====    =======  ====
Average Of Avail-for-Sale
 Securities in years         0.78                 2.98               7.74
                            ====                 ====               ====
</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                 $   --       -- %       $ 9,066    6.10 %
U. S. Government Agency          3,041    7.44          14,556    7.00
Mortgage-backed Securities      23,734    6.59          26,812    6.53
State and Political
 Subdivisions                   11,479    7.92          17,330    7.75
Equity Securities                5,260    4.06           5,260    4.06
                                 -----    ----           -----    ----
 TOTAL AVAILABLE-FOR-SALE
  SECURITIES                   $43,514    6.70 %       $73,024    6.68 %
                               =======    ====         =======    ====
Average Of Avail-for-Sale
 Securities in years             21.80                   13.88
                                 =====                   =====
</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   $   --       -- %   $    --      -- %  $ 6,008  6.79 %
Mortgage-backed Securities     2     9.71         961    6.61      1,465  6.40
State and Political
 Subdivisions                387     8.77       1,213    6.80      1,258  7.53
                          ------     ----     -------    ----    -------  ----
 TOTAL AVAILABLE-FOR-SALE
  SECURITIES              $  389     8.73 %   $ 2,174    6.72 %  $ 8,731  6.83%
                           =====     ====     =======    ====    =======  ====
Average Of Avail-for-Sale
 Securities in years        0.17                 3.94               8.47
                            ====                 ====               ====
</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       $     --      -- %       $ 6,008    6.79 %
Mortgage-backed Securities       6,151    7.03           8,579    6.88
State and Political
 Subdivisions                      311    7.80           3,169    7.43
                                 -----    ----           -----    ----
 TOTAL AVAILABLE-FOR-SALE
  SECURITIES                   $ 6,462    7.07 %       $17,756    6.94 %
                               =======    ====         =======    ====
Average Of Avail-for-Sale
 Securities in years             25.54                   13.96
                                 =====                   =====
</TABLE>

<PAGE>

LOAN PORTFOLIO BY TYPE

     The loan  portfolio by type is summarized  in the  following  table for the
years ended December 31, 1997, 1996, 1995, 1994 and 1993.
<TABLE>

Loan Portfolio by Type   (Unaudited)
(Dollars in Thousands) For the Year Ended December 31,

                                1997      1996      1995       1994      1993
<S>                          <C>       <C>       <C>       <C>        <C>

Real Estate - Residential     $138,539  $134,013  $122,293  $117,205   $102,481
Real Estate - Construction      12,361    10,923     4,959     2,861      2,557
Real Estate - Commercial        34,579    39,421    35,316    35,673     36,371
Consumer/Installment            35,914    28,870    27,685    24,626     20,743
Commercial (non-Real Estate)
    and Agricultural             9,086     8,715     5,403     7,503      7,168
State and Political
 Subdivisions                      944       906     1,290       288        476
Other                               20        28        13        18         22
                              --------  --------  --------  --------   --------
TOTAL GROSS LOANS              231,443   222,876   196,959   188,174    169,818

Unearned Income                 (1,856)   (2,759)   (3,829)   (2,959)    (1,252)
                              --------  --------  --------  --------   --------
Total Loans                    229,587   220,117   193,130   185,215    168,566

Allowance for Possible
    Loan Losses                 (2,664)   (2,532)   (2,443)   (2,187)    (1,953)
                              --------  --------  --------  --------   --------
NET LOANS                     $226,923  $217,585  $190,687  $183,028   $166,613
                              ========  ========  ========  ========   ========
</TABLE>

     At December 31, 1997 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, 1997,  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
(Unaudited)
<TABLE>

 As of December 31, 1997
(Dollars in Thousands)              Due in      Due in     Due in
                                   One Year     One to      Over
                                   or Less    Five Years  Five Years    Total
<S>                               <C>         <C>         <C>         <C>

Real Estate - Construction         $ 2,518     $ 1,204     $ 8,639     $12,361
Real Estate - Commercial             1,302       5,771      27,506      34,579
Commercial (Non-Real Estate)
     and Agricultural                  800       3,681       4,605       9,086
                                   -------     -------     -------     -------
     TOTAL                         $ 4,620     $10,656     $40,750     $56,026
                                   =======     =======     =======     =======

Loan Maturity After 1 Year With:

     Predetermined Interest Rate               $ 1,253     $ 4,764
     Floating Interest Rate                      9,403      35,986
                                               -------     -------
        TOTAL                                  $10,656     $40,750
                                               =======     =======
</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

                                  (Unaudited)
<TABLE>

                                         As of December 31,

                              1997     1996     1995     1994     1993

Loan Categories                        (Dollars in Thousands)
<S>                        <C>      <C>      <C>      <C>      <C>

Commercial                  $1,183   $  663   $1,049   $1,142   $  815
Real Estate- Construction        6        7        3       69       80
Real Estate - Residential      191      198      184      143       78
Consumer/Installment           785      811      534      451      393
Unallocated                    499      853      673      382      587
                            ------   ------   ------   ------   ------
     TOTAL                  $2,664   $2,532   $2,443   $2,187   $1,953
                            ======   ======   ======   ======   ======
</TABLE>

           PERCENTAGE OF TOTAL LOANS IN EACH CATEGORY TO TOTAL LOANS

                                  (Unaudited)
<TABLE>

                                            As of December 31,
                                  1997     1996      1995      1994      1993

Loan Categories                           (Dollars in Thousands)
<S>                             <C>      <C>       <C>       <C>       <C>
   Commercial                    19.28%   22.02%    21.33%    23.11%    26.12%
   Real Estate - Construction     5.34     4.90      2.52      1.52      1.52
   Real Estate - Residential     59.86    60.13     62.09     62.28     60.80
   Consumer/Installment          15.52    12.95     14.06     13.09     11.56
                                ------   ------    ------    ------    ------
        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,
1997, 1996 and 1995 are presented in the following table.

                AVERAGE DEPOSIT BALANCES BY MAJOR CLASSIFICATION

                                  (Unaudited)
<TABLE>
                                     For the Year Ended December 31,

                                   1997             1996            1995
                            Average         Average           Average
                            Balance  Rate   Balance   Rate    Balance   Rate

                                         (Dollars in Thousands)
<S>                      <C>       <C>    <C>       <C>      <C>       <C>
Demand Deposits
   Non-Interest Bearing   $ 31,074   --- % $ 27,826   --- %   $ 23,782   --- %
   Interest Bearing         45,338  1.17     43,206  1.55       42,955  1.84
Money Market Deposits       14,380  2.81     16,297  2.82       17,639  2.81

Savings & Club Accounts     62,746  2.44     62,783  2.49       65,452  2.67
Certificates of Deposit
   under $100,000          118,846  5.58    103,221  5.50       90,925  5.47
Certificates of Deposit
   of $100,000 or more       5,014  4.19      5,167  4.84        6,184  5.24
                            ------  ----     ------  ----       ------  ----

      Total Deposits      $246,324         $258,500           $246,937
                          ========         ========           ========
</TABLE>

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

                                  (Unaudited)
<TABLE>
                                              At December 31,

(Dollars in Thousands)                        1997     1996
<S>                                        <C>      <C>
Three Months or Less                        $  428   $  849
Over Three, Through Six Months               1,454    1,542
Over Six, Through Twelve Months                977    1,151
Over Twelve Months                           1,499    1,378
                                            ------   ------
     TOTAL                                  $4,358   $4,920
                                            ======   ======
</TABLE>

         There were no brokered deposits at December 31, 1997 and 1996.

<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

     Neither the  Company,  the Bank nor any of their  properties  is subject to
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>

Appendix A to Part I:  Executive Officers of the Registrant

     The following table sets forth certain  information,  as of March 28, 1998,
concerning the executive  officers of the Company and certain executive officers
of the Bank.  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

John J. Schlamp 72(a)  Chairman of the Board since    Chairman of the Board
                        January, 1987                 since 1984

S. Eric Beattie 51(b)  President and Chief            President since 1984;
                        Executive Officer since       Chief Executive Officer
                        January, 1987                 since January, 1987

Reid L. Heeren 56 (c)  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

Thomas J. Bamberger 56 (d) None                       Executive Vice President
                                                      and Senior Loan Officer
                                                      since September, 1997

Arthur Williams 52 (e)    None                        Executive Vice President,
                                                      Administration since
                                                      August, 1997;Senior Vice
                                                      President, Administration
                                                      since November, 1988.

Barbara A. Seifert 44 (f) None                        Vice President,
                                                      Senior Trust Officer
                                                      since December, 1985




(a)  Mr. Schlamp was previously (i) President and Chief Executive Officer of the
     Company from 1983 to January, 1987, (ii) President of the Bank from 1976 to
     1984 and (iii)  Chief  Executive  Officer of the Bank from 1976 to January,
     1987.


<PAGE>


(b)  Mr. Beattie was previously (i) Executive Vice President of the Company from
     1983 to January,  1987, (ii) Chief Operating  Officer of the Bank from 1984
     to January,  1987,  (iii) a Senior Vice  President of the Bank from 1981 to
     1984 and (iv) a Senior Trust Officer of the Bank from 1979 to 1981.

(c)  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).

(d)  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.

(e)  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).

(f)  Ms.  Seifert was  previously  Senior Trust Officer of the Bank from 1984 to
     December,  1985. Prior to 1984, Ms. Seifert held various officer  positions
     in the Trust Division of the Bank beginning in December, 1981.

<PAGE>

                                     PART II

Item 5.  Market for 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, 1997, there were 760 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 $35.50 in December 1997 and
$20.95 in December 1996. Stock prices and dividends per share have been restated
to reflect the 5% stock dividends of May 1996 and May 1997 (see "Note T - Equity
Transactions" in the "Notes to Consolidated  Financial  Statements" contained in
"Item 7, Financial Statements").

<TABLE>

1996                    High             Low         Cash Dividends
                                                       Declared
<S>                   <C>             <C>              <C>

     First Quarter     $17.91          $16.32           0.1542
     Second Quarter     18.14           16.32           0.1619
     Third Quarter      18.10           17.14           0.1619
     Fourth Quarter     21.90           17.14           0.1619
                                                        ------
     TOTAL                                              0.6399

1997
     First Quarter     $23.57          $21.19           0.1714
     Second Quarter     24.50           22.38           0.1700
     Third Quarter      34.25           23.50           0.1800
     Fourth Quarter     35.50           34.69           0.1800
                                                        ------
     TOTAL                                              0.7014
</TABLE>

The Company did not sell any of its equity  securities during 1997 that were not
registered under the Securities Act.

<PAGE>

Item 6.  Management's Discussion and Analysis or Plan of Operation

Consolidated Financial Highlights

<TABLE>
(Dollars in Thousands,                                       Percentage Change
 except per share data)     1997       1996       1995      1997/96    1996/95
<S>                      <C>        <C>        <C>          <C>       <C>
At Year-End
  Assets                  $346,738   $322,352   $298,514      7.6%      8.0 %
  Deposits                 282,255    267,668    254,102      5.5       5.3
  Loans                    229,587    220,117    193,130      4.3      14.0
  Shareholders' Equity      30,357     26,805     24,767     13.3       8.2
  Trust Assets             245,293    209,144    173,435     17.3      20.6

For the Year
  Net Interest Income     $ 14,613   $ 13,557   $ 12,644      7.8%      7.2 %
  Net Income                 3,283      2,822      1,401     16.3     101.4

Per Share *
  Basic and Diluted
    Net Income            $   2.02   $   1.76   $   0.89     14.8%     97.8 %
  Dividends Paid              0.70       0.64       0.62      9.4       3.2
  Book Value                 18.37      17.19      16.84      6.9       2.1

Financial Ratios
  Return on average assets     .97%       .92%       .48%
  Return on average equity   11.67%     11.16%      5.98%
  Average shareholders'
   equity to average assets   8.30%      8.24%      8.00%
</TABLE>


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

<PAGE>

                    MANAGEMENT'S DISCUSSION AND ANLAYSIS 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,  1997,  1996 and 1995.  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-KSB 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 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.  Certain of these risks,  uncertainties  and
other factors are  discussed in this Annual  Report or in the  Company's  Annual
Report on Form 10-KSB for the year ended  December 31, 1997, a copy of which may
be obtained  from the Company  upon request and without  charge  (except for the
exhibits thereto).

                         Financial Performance Summary

     First Colonial  Group  celebrated 100 years of service in 1997 and recorded
record net income of $3,283,000. The 1997 net income is 16.3% or $461,000 higher
than 1996 net income of $2,822,000. Net income in 1995 was $1,401,000. The basic
and diluted  earnings  per share were $2.02,  $1.76 and $0.89 in 1997,  1996 and
1995, respectively.  The Company has  adopted the Financial Accounting Standards

<PAGE>

Board  Statement  of  Financial  Accounting  Standard  (SFAS) No. 128, "Earnings
Per Share" which requires the Company to present both basic and diluted earnings
per  share.  Diluted  earnings  per share  include  the  effect of common  stock
equivalents such as options.  The Company's basic and diluted earnings per share
numbers were substantially the same for the years ended 1997, 1996 and 1995 (see
Note A.11 of the "Notes to Consolidated Financial Statements").

     The Company  continued to achieve  improvement  on return on average assets
and return on average  equity in 1997. The return on average assets rose to .97%
in 1997 from .92% in 1996 and .48% in 1995.  The  return on  average  equity was
11.67%,  11.16%  and 5.98% in 1997,  1996 and 1995,  respectively.

     The  Company  continued  to  achieve  growth  in total  assets,  loans  and
deposits.  Total  assets at December 31, 1997 were  $346,738,000  as compared to
$322,352,000  at year end 1996.  This is an  increase  of  $24,386,000  or 7.6%.
During 1997 total  deposits grew by 5.5% or  $14,587,000  to a year-end total of
$282,255,000. Total deposits at December 31, 1996 were $267,668,000. Total loans
amounted  to  $229,587,000  and  $220,117,000  at  December  31,  1997 and 1996,
respectively.  The loan increase in 1997 was  $9,470,000 or 4.3%.

     The  principal  factors  contributing  to  higher  earnings  in 1997 were a
$1,056,000  increase  in net  interest  income,  an  increase  in other  income,
including  service  charges,  Trust  revenues  and net  gains  on the  sales  of
securities and mortgages,  of $1,181,000 and a $65,000 decrease in the provision
for  possible  loan  losses  offset in part by a  $1,681,000  increase  in other
operating  expenses and higher Federal  income taxes of $160,000.  These changes
were the result of the Company's  continued  growth in all areas,  including the
addition of a new  supermarket  branch in East  Stroudsburg.

     The 1996 earnings increase was the result of a $1,128,000  reduction in the
provision for possible loan losses,  a $913,000  increase in net interest income
and an increase in other income of $368,000. Partially reducing earnings were an
increase in  operating  expenses of $367,000  and an increase in Federal  income
taxes of $1,421,000.


<PAGE>

SELECTED FINANCIAL DATA
<TABLE>
(Dollars in Thousands,
except per share data)
For the Year Ended December 31, 1997      1996       1995       1994      1993
<S>                        <C>       <C>        <C>        <C>        <C>
CONSOLIDATED SUMMARY OF INCOME:
 Interest Income             $ 25,444  $ 23,135   $ 21,896   $ 18,986  $ 18,525
 Interest Expense              10,831     9,578      9,252      7,152     7,568
                            --------- ---------  ---------  --------- ---------
 Net Interest Income           14,613    13,557     12,644     11,834    10,957
 Provision for Possible
   Loan Losses                    605       670      1,798        420       765
 Gains (Losses) on the
   Sale of Mortgage Loans         178       (30)        22         37       417
 Other Income, Excluding
   Securities and Loan
   Sale Gains                   3,044     2,364      2,230      1,896     1,705
 Securities Gains, Net            601       308         22         97       208
 Other Expense                 13,252    11,571     11,204     10,084     9,845
                            --------- ---------  ---------  --------- ---------
 Income Before Income Taxes
   and Cumulative Effect of
   Accounting Method Change     4,579     3,958      1,916      3,360     2,677
 Applicable Income Taxes        1,296     1,136        515      1,018       769
                            --------- ---------  ---------  --------- ---------
   Net Income                 $ 3,283   $ 2,822    $ 1,401    $ 2,342    $1,908
                            --------- ---------  ---------  --------- ---------
 Cash Dividends Paid          $ 1,139   $ 1,011   $    972   $    936   $   812
 Cash Dividends Paid Per Share   0.70      0.64       0.62       0.60      0.60
 Dividends Paid to Net Income   34.69%    35.82%     69.38%     39.97%    42.56%

PER SHARE DATA:
  Basic Income                $  2.02   $  1.76    $  0.89    $  1.51    $ 1.40
  Diluted Net Income             2.02      1.76       0.89       1.51      1.40
  Basic  Average Common
    Shares Outstanding      1,620,627 1,600,883  1,579,428  1,555,678 1,359,981
  Dilutive Average Common
    Shares Outstanding      1,625,456 1,603,590  1,579,802  1,555,678 1,359,981

CONSOLIDATED BALANCE SHEET DATA:
 Total Assets                $346,738  $322,352   $298,514   $284,553  $268,738
 Loans (Net of
  Unearned Discount)          229,587   220,117    193,130    185,215   168,566
 Mortgage Loans
  Held-for-Sale                   759       721      1,006         69    15,378
 Deposits                     282,255   267,668    254,102    247,532   235,565
 Securities Sold Under
  Agreements to Repurchase      8,804     3,795      6,096      9,027     4,711
 Debt (Short-Term
  and Long-Term)               18,390    18,512      7,643      1,612     1,331
 Shareholders' Equity          30,357    26,805     24,767     22,400    21,994
 Book Value Per Share           18.37     17.19      16.84      15.39     15.26

SELECTED CONSOLIDATED RATIOS:
 Net Income To:
  Average Total Assets            .97%      .92%       .48%       .85%      .76%
  Average Shareholders' Equity  11.67%    11.16%      5.98%     10.51%    10.43%

 Average Shareholders'
  Equity to Average Assets       8.30%     8.24%      8.00%      8.10%     7.24%
</TABLE>

<PAGE>
CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS
(Dollars in Thousands) For the Year Ended December 31,
<TABLE>
                         1997                1996                   1995
                        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 $  1,252  $  71 5.67%  $1,313 $    78  5.96% $  2,313 $  133  5.75%
 Fed Funds
  Sold             18      1 5.56       16       2  5.43       139      6  4.32
 Inv Sec
  Taxable      69,876  4,592 6.57   67,241   4,386  6.42    73,712  4,477  6.07
  Non-Tax(1)   16,653  1,268 7.62   12,318     935  7.59     8,408    583  6.94
  Loans(1(2)  229,205 19,972 8.71  206,378  18,083  8.76   190,874 16,927  8.87
  Allow for
  Loan Losses  (2,614)  ---  ---    (2,500)   ---   ---     (2,708)   ---   ---
             -------- ------      --------  ------        -------- ------
  Net Loans   226,591 19,972 8.81  203,878  18,083  8.87   188,166 16,927  9.00
             -------- ------      --------  ------        -------- ------
   Total Int-
   Earn
   Assets     314,390 25,904 8.24  284,766  23,484  8.25   272,738 22,126  8.11
  Non-Int
   Earn Assets 24,391   ---  ---    22,305    ---   ---     24,466    ---   ---
             -------- ------      --------  ------        -------- ------
  TOTAL ASSETS,
  INTEREST
  INCOME     $338,781 25,904 7.65 $307,071  23,484  7.65  $293,204 22,126  7.55
             -------- ------      --------  ------        -------- ------

LIABILITIES
INTEREST-BEARING
LIABILITIES
 Int-Bearing
 Deposits
  Demand
  Deposits   $ 45,338    532 1.17 $ 43,206     670  1.55  $ 42,955    791  1.84
  Money
  Market
  Deposits     14,380    404 2.81   16,297     460  2.82    17,639    496  2.81
  Savings &
  Club
  Deposits     62,746  1,530 2.44   62,783   1,566  2.49    65,452  1,750  2.67
  CD's over
  $100,000      5,014    210 4.19    5,167     250  4.84     6,184    324  5.24
  All Other
  Time Dep    118,846  6,636 5.58  103,221   5,675  5.50    90,925  4,970  5.47
             -------- ------      --------  ------        -------- ------
   Total Int-
   Bearing
   Deposits   246,324  9,312 3.78  230,674   8,622  3.74   223,155  8,331  3.73

 Securities
 Sold Under
 Agreements
 to Repurchase  6,459    240 3.72    4,740     149  3.14     9,298    346  3.72
 Other Short-
 Term
 Borrowings     2,792    181 6.48    8,648     487  5.63     5,743    338  5.89
 Long-Term Debt17,955  1,098 6.12    4,171     320  7.67     2,207    236 10.69
             -------- ------      --------  ------        -------- ------
  Total Int-
  Bearing
  Liabilities 273,530 10,831 3.96  248,233   9,578  3.86   240,403  9,251  3.85

<PAGE>

NON-INTEREST
BEARING
LIABILITIES
 Non-Int-
 Bearing
 Deposits      31,074   ---  ---    27,826    ---   ---     23,782    ---   ---
 Other Liab     6,054   ---  ---     5,724    ---   ---      5,575    ---   ---
             -------- ------      --------  ------        -------- ------
 TOTAL LIAB   310,658 10,831 3.49  281,783   9,578  3.40   269,760  9,251  3.43
 SHAREHOLDERS'
 EQUITY        28,123   ---  ---    25,288   ---   ---      23,444    ---   ---
             -------- ------      --------  ------        -------- ------
 TOTAL LIAB &
  SHAREHOLDERS'
  EQUITY,
  INTEREST
  EXPENSE    $338,781 10,831 3.20 $307,071   9,578  3.12  $293,204  9,251  3.16

NET INTEREST
INCOME              $ 15,073               $13,906                $12,875
                    --------               -------                -------
 Net Interest
 Spread (3)                  4.28                   4.39                   4.26

 Effect of
 Int-Free
 Sources
 Used to
 Fund Earnings
 Assets                      0.51                   0.49                   0.46

NET INTEREST
MARGIN (4)                   4.79%                  4.88%                  4.72%
       --                    ----                   ----                   ----

</TABLE>

<PAGE>


     (1) The  indicated  interest  income and average  yields are presented on a
taxable equivalent basis. The taxable equivalent  adjustments included above are
$460,000, $349,000 and $231,000 for the years 1997, 1996 and 1995, respectively.
The effective tax rate used for the taxable equivalent adjustment was 34%.

     (2) Loan fees of $377,000,  $303,000 and $101,000 for the years 1997,  1996
and 1995,  respectively,  are included in interest income. Average loan balances
include  non-accruing  loans and  average  loans  held-for-sale  of  $1,781,000,
$2,212,000 and $682,000 for 1997, 1996 and 1995, 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  $377,000,  $303,000  and  $101,000  for the years  ended
December 31, 1997, 1996 and 1995, 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,  increases in this  category are
considered by management to be essential to the continued  growth in the overall
net  income  of the  Company.  The  net  interest  income,  on a  fully  taxable
equivalent  basis,  amounted  to  $15,073,000  for 1997,  an increase of 8.4% or
$1,167,000  over  $13,906,000  in 1996. As shown in the  "Rate/Volume  Analysis"
table,  the increase in net interest  income in 1997 was  attributable to higher
net  interest  income from changes in volume of $860,000 and changes in rates of
$307,000.  The  volume-related  change resulted primarily from increased average
balances for loans including mortgage loans  held-for-sale;  (see discussions on
"Loan  Portfolio"  and  "Mortgage  Loans  Held-for-Sale")  and  an  increase  in
long-term  debt and other  time  deposits,  partially  offset  by a  decline  in
short-term  borrowings.  The rate-related change was primarily the result of the
decrease of interest  expense being greater than the decrease on interest earned
on assets.

     Net interest income, on a fully taxable equivalent basis, in 1996 increased
8.0% or $1,031,000  over the 1995 figure of  $12,875,000.  This increase was the
result of the increase in interest rates earned on assets exceeding the increase
of rates paid on deposits and debt.  Also affecting 1996 net interest income was
the growth in loans and non-interest- bearing deposits.

     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 4.79% for 1997,  4.88% for 1996 and 4.72% for 1995. The
decrease  in 1997 was the result of an  increase  in the  average  rate paid for
interest-bearing  deposits  and debt.  Also,  there was a small  decline  in the
average rate earned on interest-earning  assets. 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 4.28%,  4.39% and 4.26% for
1997, 1996 and 1995, respectively.

<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,  1997 and 1996,  as  compared  to the
respective previous periods,  into amounts  attributable to both rate and volume
variances. In calculating the variances,  the changes were first segregated into
(1)  changes in volume  (change in volume  times the old rate),  (2)  changes in
rates  (change  in rate times the old  volume)  and (3)  changes in  rate/volume
(changes in rate times the change in volume).  The changes in  rate/volume  have
been  allocated in their  entirety to the change in rates.  The interest  income
included  in the  "Rate/Volume  Analysis"  table  has been  adjusted  to a fully
taxable  equivalent  amount  using  the  Federal  statutory  tax  rate  of  34%.
Non-accruing  loans have been used in the daily  average  balances to  determine
changes in interest  income due to volume.  Loan fees  included in the  interest
income calculation are not material.
<TABLE>

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

                             Increase (Decrease) in Year Ended December 31,
                                1997 to 1996                1996 to 1995
                               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              $   (7) $  (3) $    (4)     $  (55) $   3   $  (58)
  Federal Funds Sold           (1)    (1)     ---          (4)     1       (5)
  Investment Securities       539     73      466         261    419     (158)
  Loans                     1,889   (140)   2,029       1,156    (88)   1,244
                            -----    ---    -----       -----  -----    -----
  Total Interest Income     2,420    (71)   2,491       1,358    335    1,023
                            -----    ---    -----       -----  -----    -----
Interest Expense
  Demand Deposits,
  Savings & Clubs            (231)  (235)       4        (340)  (250)     (90)
  Time Deposits               921     75      846         631     16      615
  Securities Sold Under
   Agreements to Repurchase    91     37       54        (197)   (27)    (170)
  Short-Term Borrowings      (306)    24     (330)        135    (43)     178
  Long-Term Borrowings        778   (279)   1,057          98   (100)     198
                            -----    ---    -----       -----  -----    -----
  Total Interest Expense    1,253   (378)   1,631         327   (404)     731
                            -----    ---    -----       -----  -----    -----
  Increase in Net
  Interest Income          $1,167   $307   $  860      $1,031 $  739   $  292
</TABLE>

<PAGE>

                                   Market Risk

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

     The  Company  and the  Bank  operate  as a  community  banking  institution
primarily in the counties of Northampton,  Lehigh and Monroe, Pennsylvania. As a
result of its location and nature of  operations,  the Company is not subject to
foreign  currency  exchange or commodity  price risk. The Bank makes real estate
loans  primarily in the counties  adjacent to its operations and thus is subject
to risks associated with those local  economies.  The Bank holds a concentration
of  residential  real estate loans (60.3% of total loans) and  commercial  loans
supported by real estate (15.1% 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

<PAGE>

specific  time  frame  is referred  to  as interest  sensitivity gap. Generally,
in an  environment  of rising  interest  rates, a negative gap will decrease net
interest income, and in an environment of falling interest rates, a negative gap
will increase net interest  income.

     Assets and  liabilities  are  allocated to a specific  time period based on
their scheduled  repricing date or on an historical basis. At December 31, 1997,
assets of  $151,613,000  (44% 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  $149,441,000  (46.4% of total assets) at the end of
1996 and  $124,779,000  (41.8% of total assets) at the end of 1995.  Liabilities
subject to rate  change  within  one year were  $166,220,000,  $167,266,000  and
$133,068,000  in 1997,  1996 and 1995,  respectively.  A negative  one-year  gap
position of  $14,607,000  existed as of December 31, 1997.  The gap positions at
December 31, 1996 and 1995 were negative  $17,825,000  and negative  $8,289,000,
respectively.  The ratio of rate-sensitive assets to rate-sensitive  liabilities
for the one-year  time frame was .91 at the end of 1997,  compared to .89 at the
end of 1996 and .94 at the end of 1995. The "Interest  Sensitivity  Analysis" in
the following table presents a sensitivity gap analysis of the Company's  assets
and  liabilities  at December 31, 1997 for five  time-intervals.  The  Company's
liability-sensitive  position  decreased  in 1997 as a result of an  increase in
non-interest-bearing  demand deposits and interest-bearing demand deposits. This
change in the deposit  mix was due to  marketing  programs  to  increase  demand
deposits.  Also affecting an increase in the  liability-sensitive  position were
increases in some longer term loans.  Management intends to continue to purchase
adjustable  rate  securities,  make adjustable  rate loans,  market  longer-term
certificates  of deposit  and sell  fixed-rate  mortgage  loans to  maintain  an
acceptable gap position.

<PAGE>
<TABLE>

Interest Sensitivity Analysis

(Dollars in Thousands) as of December 31, 1997

                      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 $   395  $   ---  $    ---   $    ---   $    ---    $   395
Federal Funds Sold    2,200      ---       ---        ---        ---      2,200
Inv Securities       17,236    8,108    19,812     31,969     13,655     90,780
Loans Held-for-Sale     759      ---       ---        ---        ---        759
Loans                47,400   13,218    29,856     74,853     61,596    226,923
Other Assets         12,629      ---       ---        ---     13,052     25,681
                    ------- --------  --------    -------   --------   --------
  TOTAL ASSETS      $80,619  $21,326  $ 49,668   $106,822   $ 88,303   $346,738
                    ------- --------  --------    -------   --------   --------
Non-Interest-Bearing
  Deposits (1)      $   ---  $   ---  $    ---    $   ---   $ 32,800   $ 32,800
Int-Bearing
 Deposits            83,282   22,887    32,857     49,005     61,424    249,455
Securities Sold
 Under Agreements
 to Repurchase        8,804      ---       ---        ---        ---      8,804
Short-Term Borrowings   ---    5,000       ---        ---        ---      5,000
Long-Term Debt          390      ---    13,000        ---        ---     13,390
Other                   ---      ---       ---        ---      6,932      6,932
Capital                 ---      ---       ---        ---     30,357     30,357
                    ------- --------  --------    -------   --------   --------
  TOTAL LIABILITIES
  AND CAPITAL      $ 92,476  $27,887 $ 45,857    $49,005    $131,513   $346,738
                    ------- --------  --------    -------   --------   --------
Net Interest
  Sensitivity Gap  $(11,857) $(6,561)$  3,811    $57,817   $(43,210)  $    ---

Cumulative Int
  Sensitivity Gap  $(11,857)$(18,418)$(14,607)   $43,210   $    ---   $    ---

Cumulative Gap
  RSA/RSL             87.2%    84.7%    91.2%     120.1%     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, 1997 are as follows:

<PAGE>

<TABLE>

  Dollars in Thousands at December 31, 1997

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

     + 400 basis points                  22,176                     (17.4)%
     + 300 basis points                  23,417                     (12.8)
     + 200 basis points                  24,774                      (7.7)
     + 100 basis points                  26,275                      (2.1)
         Flat Rate                       26,840                       ---
     - 100 basis points                  28,438                       5.9
     - 200 basis points                  33,184                      23.6
     - 300 basis points                  40,913                      52.4
     - 400 basis points                  49,456                      84.3
</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>

                        Service Charges and Other Income

     Service  charge income on deposit  accounts  amounted to $1,134,000 in 1997
compared to  $1,083,000 in 1996 and  $1,034,000  in 1995.  In 1997,  the service
charges  increased by $51,000 or 4.7% over 1996 and the 1996  increase over 1995
was $49,000 or 4.7%. The increases in 1997 and 1996 were primarily the result of
increases   in  the  number  of  deposit   accounts   and   increases   in  some
deposit-related fees.

     In 1997,  the Company had a gain on the sale of mortgage  loans of $178,000
as compared to a loss of $30,000 in 1996.  In 1995,  there was a gain of $22,000
(see discussion on "Mortgage Loans Held-for-Sale").

     Other  operating  income was  $860,000 in 1997,  an increase of $275,000 or
47.0%  compared  to  $585,000  in  1996.  Other  operating  income  for 1995 was
$560,000. The increase in 1997 was primarily from transaction fees earned from a
new debit card that was offered to customers in July 1997,  transaction  charges
assessed to non-customers using the Bank's automated teller machines and certain
new loan fees.

                    Investment Management and Trust Division

     Revenue from the Bank's Investment Management and Trust Division operations
was  $1,050,000  in 1997,  representing  an  increase  of $354,000 or 50.9% over
revenue of $696,000 in 1996. In comparison,  the Investment Management and Trust
Division  revenue for 1996 increased by 9.4% or $60,000 over the 1995 revenue of
$636,000.  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.  Trust assets were  $245,293,000  and $209,144,000 at December 31, 1997
and 1996,  respectively,  an increase of 17.3%. The market value of Trust assets
increased  by 22.8%  from  $252,990,000  in 1996 to  $310,773,000  in 1997.  The
increase in 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 $6,033,000,  increased by
$418,000 or 7.4% in 1997 compared to $5,615,000 in 1996.  These expenses in 1996
amounted  to an  increase  of 9.4% over the  $5,132,000  reported  in 1995.  The
increase in 1997 was primarily due to salary  increases of  approximately 4% and
the  addition of staff for the new East  Stroudsburg  branch  opened in January,
1997.  Salary  expense  in 1996  increased  due to normal  salary  increases  of
approximately  4% and a full year's  expense for the new branches added in 1995.

<PAGE>

     Occupancy and equipment  expenses were $2,178,000 in 1997, which was $6,000
less than the 1996 amount of $2,184,000.  The 1996 amount was 9.7% more than the
1995  occupancy and equipment  expense of  $1,991,000.  The decrease in 1997 was
achieved through the implementation of expense control measures which offset the
added expenses of the new East Stroudsburg  branch and the installation of check
image  equipment.  Most of the  increase  in 1996 was  related to a full  year's
expense of two new branches  opened in 1995 and some major  maintenance  work on
other  facilities.

     Other operating expenses (such as advertising, publicity, litigation costs,
deposit insurance premiums, data processing fees, legal,  accounting,  supplies,
postage and telephone) in 1997 were  $5,041,000,  compared to $3,772,000 in 1996
and  $4,081,000  in 1995.  The  increase  in 1997 of  $1,269,000  or  33.6%  was
primarily due to higher legal and professional fees and advertising  expenses as
a result of the implementation of a new marketing program.  The decrease in 1996
of $309,000 or 7.6% was the result of a reduction in Federal  Deposit  Insurance
premiums  and legal  fees  offset in part by higher  data  processing,  business
development,  auditing and supply expenses.  The Company's advertising costs are
expensed as incurred. Advertising costs were $524,000, $299,000 and $294,000 for
the years ended December 31, 1997, 1996 and 1995,  respectively  (see Notes A.15
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
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 1997 and 1996. 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").

<PAGE>

     Held-to-maturity  securities  totaled  $17,756,000 at December 31, 1997 and
$20,999,000 at December 31, 1996. The Company has the intent and ability to hold
these  securities  until  maturity.  The  fair  value of  these  securities  was
$17,946,000 and $21,124,000 at December 31, 1997 and 1996, respectively.

     The  Company,  at December 31, 1997 and 1996,  did not hold any  securities
identified as derivatives  in the form of  Collateralized  Mortgage  Obligations
(CMOs),  Planned  Amortization  Class  (PAC),  Real Estate  Mortgage  Investment
Conducts  (REMICs),  Stripped-Mortgage-Backed  Securities,  interest rate swaps,
futures or options.  At December 31, 1997 and 1996, the Company held  $1,000,000
in various U. S.  Agency  Step-up or Multi  Step-up  securities.  These  Step-up
securities are direct obligations of U. S. Government Agencies that have a fixed
coupon for an established time period with a call option at the end of that time
period.  The initial  yield is higher than  another  security  with the same end
maturity but without the call/step-up feature. If the security is not called, it
will  step-up to a higher  predetermined  coupon  that may be below the  current
market  yield  at  the  time  of  the  step-up.   Management   understands   the
characteristics of these securities and monitors their performance in comparison
to U. S. Treasury  securities.  The Company held adjustable rate mortgage-backed
securities issued by U. S. Government Agencies totaling  $27,426,000 at December
31, 1997 ($21,723,000 in available-for-sale  and $5,703,000 in held-to-maturity)
and  $19,395,000 at December 31, 1996  ($15,554,000  in  available-for-sale  and
$3,841,000 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  $7,943,000 at December 31, 1997  ($5,067,000  in
available-for-sale   and  $2,876,000  in  held-to-maturity)  and  $7,290,000  at
December  31,  1996   ($4,578,000  in   available-for-sale   and  $2,712,000  in
held-to-maturity).

                         Securities Available-for-Sale

     The Company had  $73,024,000 of securities  available-for-sale  at December
31, 1997, as compared to $56,779,000 at December 31, 1996. At December 31, 1997,
the net  unrealized  gain on these  securities  was  $1,300,000,  net of the tax
effect of $670,000.  There was a net unrealized gain of $347,000, net of the tax
effect of $179,000 on the  available-for-sale  securities  at December 31, 1996.
The net unrealized gain or loss is included in  shareholders'  equity (see Notes
A.2. and B of the "Notes to Consolidated Financial Statements").

<PAGE>

     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 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.

     During  1997,  $13,279,000  of  securities  available-for-sale  were  sold,
resulting  in a total net gain of  $601,000,  which was  recorded  in income and
includes net gains on equity  securities  held by First C. G. of  $560,000.  The
securities sold 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
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  1997  totaled   $46,283,000.   Included  in  these  purchases  were
$20,374,000 in U. S. Agency mortgage-backed  bonds,  $16,023,000 in U. S. Agency
fixed rate  bonds,  $6,629,000  in  municipal  securities,  $1,989,000  in U. S.
Treasury bonds, and $1,268,000 in equity securities. The securities sold in 1996
totaling   $19,842,000   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 1996 sales  resulted  in net gains of  $308,000.  These gains
include net gains of $293,000 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 1996  amounted  to  $39,591,000  which  were
primarily U. S. Agency fixed-rate,  U. S. Treasury bonds,  municipal  securities
and U. S.  Agency  mortgage-backed  bonds.  In  1995,  a net  gain  on  security
transactions of $22,000 was recorded on sales of $11,177,000.

<PAGE>

                                 Loan Portfolio

     At December 31, 1997, total loans (net of unearned  discounts of $1,856,000
in 1997 and $2,759,000 in 1996) of $229,587,000 were $9,470,000,  or 4.3% higher
than the 1996 amount of $220,117,000.  The growth in loans in 1997 was primarily
the result of an increase of $7,044,000 or 24.4% in consumer  loans, an increase
of  $4,526,000  or 3.4% in  residential  real  estate  loans and an  increase of
$1,438,000 or 13.2% in real estate  construction  loans  partially  reduced by a
$4,842,000 or 12.3% decline in real estate commercial  loans.  Total residential
real  estate  loans  were   $138,539,000   at  December  31,  1997  compared  to
$134,013,000  at December 31,  1996.  Consumer  loans  totaled  $35,914,000  and
$28,870,000  at December 31, 1997 and 1996,  respectively.  At December 31, real
estate  construction  loans were $12,361,000 in 1997 versus $10,923,000 in 1996.
Commercial  real estate loans were  $34,579,000 at December 31, 1997 as compared
to the  December  31, 1996 total of  $39,421,000.  Other  commercial  loans also
increased by $371,000 or 4.3% to $9,086,000 at December 31, 1997, as compared to
$8,715,000 at December 31, 1996.  Municipal  loans were $944,000 and $906,000 at
December  31,  1997 and 1996,  respectively.  This was an increase of $38,000 or
4.2%. 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 81.3% at  December  31,  1997,  and 82.2% at
December 31, 1996.  Funds used by the increase in loans were provided  primarily
by the increase in deposits. Additional information concerning loans is shown in
Note C of the  "Notes to  Consolidated  Financial  Statements".

                          Mortgage Loans Held-for-Sale

     In 1997,  management  continued  a  program  of  selling  most of its newly
originated  residential real estate loans in the secondary  market.  The 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.

<PAGE>

     The sales of residential real estate loans in the secondary market for 1997
amounted  to  $27,145,000.  The  amount of these  loans  originated  in 1997 was
$10,754,000,  with the remaining  $16,391,000 being originated in prior years of
which $721,000 was  identified as held-for-sale at December 31, 1996. A net gain
of $178,000 was recorded on these sales.  In addition,  $759,000 of  residential
real estate loans was identified as  held-for-sale  at December 31, 1997. All of
these loans were originated  during 1997. An unrealized loss of $13,000 on these
loans is included in other operating expenses for 1997.

     In 1996, the Company  originated  $18,504,000  of  residential  real estate
loans  which  were sold in the  secondary  market.  In  addition,  during  1996,
$1,006,000  of these loans that were  originated in prior years were sold. A net
loss of $30,000 was  recognized  on these sales in 1996.  At December  31, 1996,
$721,000 of  residential  real estate loans were  identified  as  held-for-sale.
Included in other operating expenses in 1996 is an unrealized loss of $10,000 on
these loans.  During  1995,  the Company had net gains of $22,000 on the sale of
$6,336,000 of residential  real estate loans.  The other operating  expenses for
1995 include an unrealized  loss of $4,000 on mortgage  loans  held-for-sale  of
$1,006,000 at year-end 1995.

     The Company intends to continue to originate  residential real estate loans
in 1998 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" on page 23 shows the balance
and the effect on interest  income of non-accrual  loans for each of the periods
indicated.  There were $813,000 of loans on a non-accrual status at December 31,
1997.  The decrease in non-accrual  loans during 1997 of $627,000  resulted from
the completion of collection efforts on certain loans and a general  improvement
in economic  conditions.

     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, 1997 and 1996.

<PAGE>

<TABLE>
Non-Accrual Loans

(Dollars in Thousands)
 at December 31,               1997      1996      1995     1994       1993
<S>                        <C>       <C>       <C>       <C>        <C>

Non-accrual loans on
  a cash basis               $  813    $1,440    $2,181    $1,724     $1,569
                             ------    ------    ------    ------     ------
Non-accrual loans as a
  percentage of total loans     .35%      .65%     1.13%      .93%       .93%
                             ------    ------    ------    ------     ------
Interest which would have
  been recorded at
  original rate              $   64    $  210    $  214    $  168     $  134

Interest that was reflected
  in income                     111        40        44       ---        ---
                             ------    ------    ------    ------     ------
Net impact on int income     $   47    $ (170)   $ (170)    $(168)    $ (134)
</TABLE>

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

<TABLE>

Accruing Loans Past Due 90 Days or More

(Dollars in Thousands)
 at December 31,                1997      1996      1995      1994      1993
<S>                           <C>     <C>        <C>        <C>      <C>

Accruing loans past due
  90 days or more                $802    $  986     $1,115    $1,069    $  672

Accruing loans past due
 90 days or more as a
 percentage of total loans       .35%      .45%       .58%      .58%      .40%
</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, 1997 and 1996 are as
follows:

<TABLE>

 (Dollars in Thousands)
   at December 31,                         1997        1996
<S>                                    <C>       <C>

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

 Valuation allowance at January 1,               $128       $238
 Provision for loan impairment                    158        206
 Direct charge-offs                              (148)      (325)
 Recoveries                                       ---          9
                                                 ----       ----
 Valuation allowance at December 31,             $138       $128
</TABLE>

     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.

     Total cash collected on impaired loans during 1996 was $1,486,000, of which
$1,446,000 was credited to the principal  balance  outstanding on such loans and
$40,000 was recognized as interest income. Interest that would have been accrued
on impaired loans was $64,000 and $210,000 in 1997 and 1996,  respectively.  The
valuation  allowance  for  impaired  loans of $138,000 at December  31, 1997 and
$128,000 at December 31, 1996 is included in the  "Allowance  for Possible  Loan
Losses"  which  amounts to  $2,664,000  and  $2,532,000 at December 31, 1997 and
1996, 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.
<TABLE>

 OTHER REAL ESTATE OWNED

 (Dollars in            1997    1996     1995     1994     1993
  Thousands)
  at December 31,
<S>                  <C>     <C>     <C>      <C>     <C>

 Other Real Estate    $  284  $  595   $  364   $  373  $  738
   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, 1997, the
allowance  for possible  loan losses was  $2,664,000 as compared to the December
31, 1996 amount of  $2,532,000  and the December 31, 1995 amount of  $2,443,000.
The  allowance  for  possible  loan  losses  as  a  percentage  of  total  loans
outstanding as of December 31, 1997 was 1.16%. This compares to 1.15% at the end
of 1996 and 1.26% at the end of 1995. The increase in the allowance for possible
loan  losses  of  $132,000  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
$1,615,000  as of December 31, 1997 as compared to $2,426,000 as of December 31,
1996 (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 $473,000 in 1997 or $108,000 less than the 1996 amount of $581,000.
The 1997  charge-offs  were the  result of losses on  commercial,  consumer  and
residential  real estate loans.  The net  charge-offs in 1996 were primarily the
result of losses on commercial and consumer loans. Net loans charged-off in 1995
were $1,542,000.  The ratio of net loan charge-offs to average loans outstanding
was .21%, .28% and .81% in 1997, 1996 and 1995, respectively.

     The  provision  for loan  losses for the year ended  December  31, 1997 was
$605,000 as  compared to $670,000  for the year ended  December  31,  1996,  and
$1,798,000  for the year ended December 31, 1995. The decrease in 1997 from 1996
was $65,000.  In 1996, the decrease in the provision was  $1,128,000  from 1995.
The  higher  level in 1995 was  principally  the result of the  increase  in net
charge-offs  due to an overdraft loss.

     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

<PAGE>

collectibility  of  the  principal  is unlikely.  The  risk  characteristics  of
the loan portfolio are managed  through  various  control  processes,  including
credit evaluations of individual borrowers, periodic reviews, diversification by
industry,  and the  establishment  of lending targets to various segments of the
portfolio.  Risk  is  further  mitigated  through  the  application  of  lending
procedures such as the holding of adequate  collateral and the  establishment of
contractual  guarantees.  Management  believes  that  these  procedures  provide
adequate  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>


ALLOWANCE FOR POSSIBLE LOAN LOSSES

(Dollars in Thousands)
 For the Year Ended December 31,
<TABLE>

                                     1997     1996     1995     1994     1993

<S>                             <C>      <C>      <C>      <C>       <C>
Allowance for Loan Losses
 at Beginning of Year            $  2,532 $  2,443 $  2,187 $  1,953  $  1,840
                                  -------- -------- -------- --------  -------
Loans Charged-Off by Category:
   Commercial                         249      365      161      259       392
   Real Estate - Construction          --       --       --       --        --
   Real Estate - Residential           20       31       --       35         3
   Consumer/Installment               301      271      319      144       348
   Other                               --       --    1,278       --        --
                                  -------- -------- -------- --------  -------
                                      570      667    1,758      438       743
                                  -------- -------- -------- --------  -------
Loans Recovered by Category:
   Commercial                          19       39      105      170        57
   Real Estate - Construction          --       --       --       --        --
   Real Estate - Residential            1       --       --       --        --
   Consumer/Installment                77       47       97       82        34
   Other                               --       --       14       --        --
                                  -------- -------- -------- --------  -------
                                       97       86      216      252        91
                                  -------- -------- -------- --------  -------
Net Loans Charged-Off                 473      581    1,542      186       652
                                  -------- -------- -------- --------  -------
Provision Charged to Expense          605      670    1,798      420       765
                                  -------- -------- -------- --------  -------

Allowance for Loan Losses
at End of Period                 $  2,664 $  2,532 $  2,443 $  2,187  $  1,953
                                 ======== ======== ======== ========  ========

Total Loans
   Average                       $228,245 $206,378 $190,874 $178,624  $180,850
   Year-End                      $229,587 $220,117 $193,130 $185,215  $168,566

Net Loans Charged Off to:
   Average Loans                      .21%     .28%     .81%     .10%      .36%
   Loans at Year-End                  .21%     .26%     .80%     .10%      .39%
   Allowance for Possible
    Loan Losses at Year-End         17.76%   22.95%   63.12%    8.50%    33.38%
   Provision for Possible
    Loan Losses                     78.18%   86.72%   85.76%   44.29%    85.23%

Allowance for Possible
 Loan Losses at Year-End to:
   Average Loans                     1.17%    1.23%    1.28%    1.22%     1.08%
   Loans at Year-End                 1.16%    1.15%    1.26%    1.18%     1.16%
</TABLE>

<PAGE>

                                    Deposits

     Deposits  are the  primary  source of the  Company's  funds.  During  1997,
deposits increased by $14,587,000 or 5.5% to a total of $282,255,000 at December
31, 1997, from a total of $267,668,000  at December 31, 1996.  Average  deposits
for 1997 were $277,398,000,  an increase of $18,898,000 or 7.3% over the average
total  deposits  for  1996 of  $258,500,000.  Contributing  to the  increase  in
deposits was the strong growth of certificates of deposit as consumers responded
to some special higher  interest rates offered by the Bank and continued  growth
in non-interest  bearing and  interest-bearing  checking deposits as a result of
the Bank's  marketing  programs  for Quality  Checking(R)  and Quality  Checking
Gold(R).  Quality Checking(R) is a non-interest  bearing account that provides a
package of services, including common-carrier accidental death insurance, credit
card  protection  and a discount  travel book.  Quality  Checking  Gold(R) is an
interest-bearing  account that provides all the benefits of Quality  Checking(R)
plus  Travelers  Advantage(R)  and  Shoppers  Advantage(R)  for a monthly fee of
$6.00.  The deposit growth in certificates of deposit and checking  deposits was
partially  offset by declines in savings  accounts,  money  market  accounts and
certificates of deposit over $100,000.  The continued  growth of deposits by the
Company and the banking  industry in general could be adversely  affected by the
flow of funds into mutual funds and other investment options.

     The Bank's time deposits, excluding certificates of deposit under $100,000,
increased in 1997 with average balances of  $118,846,000,  which was $15,625,000
or 15.1%  higher than the 1996  average  balance of  $103,221,000.  Non-interest
bearing  deposits  averaged  $31,074,000  in 1997 as compared to  $27,826,000 in
1996, an increase of $3,248,000 or 11.7%. In addition,  there was an increase in
average interest-bearing demand deposits of $2,132,000 or 4.9% to $45,338,000 in
1997 from  $43,206,000 in 1996.  Offsetting some of this growth were declines in
average  savings and club deposits of $37,000 or 0.6% from an average balance of
$62,783,000  in 1996 to an average  balance of $62,746,000 in 1997, and declines
in average money market deposits which averaged  $14,380,000 in 1997 as compared
to $16,297,000 in 1996, a decrease of $1,917,000 or 11.8%.  Average certificates
of deposit over  $100,000  were  $5,014,000 in 1997 as compared to $5,167,000 in
1996, a decline of $153,000 or 3.0%.

<PAGE>

                              Short-Term Borrowings

     The Bank had  securities  sold  under  agreements  to  repurchase  totaling
$8,804,000 at December 31, 1997 and $3,795,000 at December 31, 1996. At December
31, 1997 and 1996,  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 1997, cash, due from banks, Federal funds
sold  and  interest-bearing   deposits  with  banks  totaled  $15,224,000,   and
securities maturing within one year totaled $3,861,000.  At year-end 1996, cash,
due from banks,  Federal  funds sold and  interest-bearing  deposits  with banks
totaled $14,214,000, and securities maturing within one year were $2,858,000.

     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 $110,000 at December 31, 1997,  and $81,000
at December 31, 1996. 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 $12,895,000,
all of which was available at December 31, 1997.

     The Bank had  three  long-term  loans  from the  Federal  Home Loan Bank of
Pittsburgh  totaling  $18,000,000  at December 31, 1997. All of these loans were
originated in 1996 with the proceeds used to fund the growth in residential real
estate loans.  The loans are for $5,000,000 due November,  1998, at a fixed rate
of 5.96%,  $8,000,000  due August,  2000, at a fixed rate of 5.89% until August,
1998,  at which time the rate may be  converted at the option of the lender to a
variable rate at LIBOR plus 6 basis points;  and $5,000,000 due December,  2001,
at a variable  rate of 5.86%.   This  rate changes  quarterly in January, April,

<PAGE>

July  and  October  at  LIBOR  plus  8 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 the same three
long-term loans totaling $18,000,000 from the Federal Home Loan Bank at December
31, 1996 (see Note H of the "Notes to Consolidated Financial Statements").

     Cash flows for the year ended  December 31, 1997 consisted of Cash Provided
by Operating  Activities of $3,691,000 and Cash Provided by Financing Activities
of  $18,740,000,  offset  in part  by  Cash  Used  In  Investing  Activities  of
$21,531,000;  resulting  in a net  increase  in cash  and  cash  equivalents  of
$900,000. The Cash Provided by Operating Activities was comprised principally of
proceeds  from  mortgage loan sales of  $27,145,000,  net income of  $3,283,000,
depreciation  and  amortization  of $884,000 and a provision  for possible  loan
losses of $605,000  reduced in part by  mortgage  loans  originated  for sale of
$27,183,000  and  amortization  of deferred fees on loans of $601,000.  The Cash
Used in Investing  Activities  was primarily for the purchase of  $40,485,000 of
available-for-sale  securities, and $5,838,000 of held-to-maturity securities, a
net increase in loans to customers of $10,130,000 and the purchase of $1,126,000
of premises and equipment. These cash uses were partially offset by the proceeds
from the sale of securities available-for-sale of $13,279,000, proceeds from the
maturities of securities available-for-sale of $13,961,000 and proceeds from the
maturities of securities  held-to-maturity  of $8,047,000.  The Cash Provided by
Financing  Activities was comprised of a net increase in certificates of deposit
of  $10,783,000,  a net increase in interest  and  non-interest  bearing  demand
deposits  of  $3,804,000  and  a  net  increase  in  repurchase   agreements  of
$5,009,000.  The sale of common  shares  and  treasury  shares  pursuant  to the
Dividend   Reinvestment  Plan  resulted  in  proceeds  of  $394,000.   Partially
offsetting  these  increases  were cash  dividends  paid of  $1,139,000  and the
purchase of treasury stock of $107,000.

     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, 1997 was $30,357,000
as compared to  $26,805,000 at December 31, 1996,  an increase of $3,552,000 or
13.3%.  This increase was primarily  attributable  to retained  earnings and the
sale of common shares  pursuant to the Dividend  Reinvestment  Plan. At December
31, 1997, unrealized gains on securities available-for-sale,  which are included
in shareholders' equity, amounted to $1,300,000 (net of tax effect of $670,000).

<PAGE>

Included in  shareholders'  equity at  December  31, 1996  was $347,000  (net of
tax effect of $179,000) of unrealized  losses on  securities  available-for-sale
(see discussion on "Securities Available-for-Sale").

     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. Fractional share9s were paid in cash based on a per
share price of $23.625.  The Company  also paid a 5% stock  dividend on June 19,
1996 to shareholders of record on May 31, 1996. 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
1997,  11,696 common shares were  purchased  pursuant to this Plan at an average
price of $24.51 for total  proceeds of  $287,000.  The shares  purchased in 1997
were  comprised  of 10,292 new common  shares at an average  price of $24.73 for
proceeds of $254,000 and 1,404 common shares from Treasury  shares at an average
price of $22.86 for  proceeds of $33,000.  In 1996,  14,449  common  shares were
purchased  pursuant  to the Plan at an average  price of $17.16  per share.  The
total proceeds were $248,000. New common shares purchased in 1996 totaled 10,701
at an average price of $17.24 for proceeds of $184,000.  The remaining  purchase
of 3,749  shares  were from  Treasury  shares at an average  price of $17.09 for
proceeds of $64,000.

     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 1997. Pursuant
to this plan, in 1996,  options to purchase 1,157 shares of the Company's common
stock at a price of $17.62  per share  were  granted  to a certain  non-employee
director. A non-employee  director exercised options for 868 shares in 1997 at a
price of $14.69 per share.  During 1996, options for 289 shares of the Company's
common stock were exercised by a non-employee  director at a price of $14.69 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 1997,  options to purchase  19,000  shares of the  Company's
common  stock at a price of $23.50 per share were  granted to certain  officers.
There were no options  granted under these Plans in 1996.  In 1997,  options for
5,742  shares of the  Company's  common  stock  issued  under the 1986 Plan were
exercised  at  an average  price of $16.46 per share.  During  1996, options for

<PAGE>

5,742  shares  of  the Company's common  stock  issued pursuant to the 1986 Plan
were exercised at an average price of $17.75 per share. In January 1998, options
to purchase 29,500 shares of the Company's common stock at a price of $37.00 per
share were granted to certain officers.

     On January 1, 1996, the Company adopted the 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. The
adoption of SFAS No. 123 had no material  effect on the  Company's  consolidated
financial position or results of operations.  Additional information relating to
the Company's  Stock Option Plans can be found in Notes A.8. 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

     During 1997, the Company  conducted a comprehensive  review of its computer
systems and operations to identify the areas that could be affected by the "Year
2000" issue. The Company is in the process of implementing a plan to address all
"Year 2000" issues. To date, confirmations have been received from the Company's
primary  computer  software and processing  vendors that they are addressing the
"Year 2000" issue.  Current  estimates of the cost to be incurred to prepare for
the "Year 2000" range from  $100,000 to  $300,000.

     The Bank has contacted  its major  customers to advise them to review their
own systems for possible "Year 2000"  problems.  In making credit  decisions for
major  borrowers,  the Bank will consider the impact of "Year 2000" issues.

     The  "Year  2000"  potential  problems  create  risk for the  Company  from
unforeseen problems in its own computer systems and from third parties;  such as
other financial institutions,  the Federal government, Federal agencies, vendors
and  customers.  Failures of the Company's or third  parties'  computer  systems
could have a material effect on the Company's  abilities to conduct business and
especially  to process  and account  for the  transfer of funds  electronically.


                           Earnings Per Common Share

     During 1997,  the Company  adopted the provisions of Statement of Financial
Accounting  Standards  No.  128,  "Earnings  Per  Share  (SFAS  128)".  SFAS 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.

               Accounting for the Impairment of Long-Lived Assets

     On January 1, 1996, the Company adopted the Financial  Accounting Standards
Board Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for

<PAGE>

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 issued
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  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

     In June 1997,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement  of  Financial   Accounting   Standards  (SFAS)  No.  130,  "Reporting
Comprehensive Income", which is effective for years beginning after December 15,
1997.  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  effect of  adopting  SFAS No.  130 is not
expected to be material.

                Disclosures About Segments of an Enterprise and
                               Related Information

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information",  which is
effective  for all periods  beginning  after  December  15,  1997.  SFAS No. 131
requires that public  business  enterprises  report  certain  information  about
operating  segments in complete sets of financial  statements of the  enterprise
and in condensed financial statements of interim periods issued to shareholders.
It also requires that public  business  enterprises  report certain  information
about their products and services,  the geographic  areas in which they operate,
and their major  customers.  Management is currently  evaluating  the disclosure
impact of SFAS No. 131 on its financial statements.


                      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 May, 1997 and May, 1996.

<PAGE>


QUARTERLY FINANCIAL DATA (Unaudited)

Dollars in Thousands,
except per share data
<TABLE>

                                             Three Months Ended
      1997                      Dec. 31     Sept. 30     June 30     March 31
<S>                            <C>          <C>         <C>          <C>

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
                                ======       ======      ======       ======
Net income per share of
 common stock                   $ 0.56       $ 0.52      $ 0.50       $ 0.44
                                ======       ======      ======       ======


      1996                      Dec. 31     Sept. 30     June 30     March 31

Interest  income                $6,000       $5,904      $5,652       $5,579
Net interest income              3,522        3,478       3,322        3,235
Provision for possible
 loan losses                       155          105         305          105
Net gain (loss) on sale of
 securities and mortgages          (17)          18         145          132
Income before income taxes       1,151          980         970          857
Net income                      $  815       $  702      $  690      $   615
                                =======      ======      ======      =======
Net income per share of
 common stock                   $ 0.50       $ 0.44      $ 0.43      $  0.39
                                =======      ======      ======      =======
</TABLE>

               Report of Independent Certified Public Accountants



Board of Directors
First Colonial Group, Inc.

     We have  audited  the  accompanying  consolidated  balance  sheets of First
Colonial Group,  Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated  statements of income,  changes in shareholders' equity and
cash flows for each of the three years in the period  ended  December  31, 1997.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion of these financial  statements based
on our audits.

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

     In our opinion,  the financial statements referred to above present fairly,
in all material respects,  the consolidated financial position of First Colonial
Group,  Inc.  and  Subsidiaries  as of  December  31,  1997  and  1996,  and the
consolidated  results of their operations and their  consolidated cash flows for
each of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.



/s/ GRANT THORNTON LLP

Philadelphia, Pennsylvania
January 9, 1998

<PAGE>

Item 7.  Financial Statements

FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
(Dollars in Thousands) At December 31,          1997            1996
<S>                                         <C>              <C>
ASSETS
  Cash and Due From Banks                   $  12,629        $  11,729
  Federal Funds Sold                            2,200            2,200
                                            ---------        ---------
    Total Cash and Cash Equivalents            14,829           13,929

  Interest-Bearing Deposits With Banks            395              285
  Investment Securities
    (Fair Value:  1997 - $17,946;
     1996- $21,124)                            17,756           20,999
  Securities Available-for-Sale at Fair Value  73,024           56,779
  Mortgage Loans Held-for-Sale                    759              721
  Total Loans, Net of Unearned Discount       229,587          220,117
  Less:  Allowance for Possible Loan Losses    (2,664)          (2,532)
                                            ---------        ---------
  Net Loans                                   226,923          217,585
  Premises and Equipment, Net                   7,299            7,030
  Accrued Interest Income                       2,232            2,020
  Other Real Estate Owned                         284              595
  Other Assets                                  3,237            2,409
                                            ---------        ---------
    TOTAL  ASSETS                           $ 346,738        $ 322,352
                                            =========         ========
LIABILITIES
  Deposits
    Non-Interest-Bearing Deposits           $  32,800        $  31,450
    Interest-Bearing Deposits
     (Includes Certificates of Deposit
      in Excess of $100:  1997 - $4,358;
      1996 - $4,920)                          249,455          236,218
                                            ---------        ---------
  Total Deposits                              282,255          267,668

  Securities Sold Under Agreements
   to Repurchase                                8,804            3,795
  Long-Term Debt                               18,390           18,512
  Accrued Interest Payable                      3,466            3,205
  Other Liabilities                             3,466            2,367
                                            ---------        ---------
    TOTAL LIABILITIES                         316,381          295,547
                                            ---------        ---------
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:  1,655,413 shares in 1997
    and 1,560,634 shares in 1996                8,277            7,803
 Additional Paid-in Capital                    11,014            9,212
 Retained Earnings                             10,250            9,975
 Less: Treasury Stock at Cost: 2,779 shares
  in 1997 and 861 in 1996                         (94)             (20)
 Employee Stock Ownership Plan Debt              (390)            (512)
 Net Unrealized Gain on Securities
  Available-for-Sale                            1,300              347
                                            ---------        ---------
    TOTAL SHAREHOLDERS' EQUITY                 30,357           26,805
                                            ---------        ---------
    TOTAL LIAB AND SHAREHOLDERS' EQUITY     $ 346,738         $322,352
                                            =========         ========
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME


(Dollars in Thousands,
except per share data)
For the Year Ended December 31,
<TABLE>

                                               1997        1996        1995
<S>                                       <C>         <C>          <C>
INTEREST INCOME
    Interest and Fees on Loans             $ 19,943    $ 18,052     $ 16,896
    Interest on Investment Securities
      Taxable                                 4,592       4,386        4,477
      Tax-Exempt                                837         617          384
    Interest on Deposits with Banks and
      Federal Funds Sold                         72          80          139
                                             ------      ------       ------
        Total Interest Income                25,444      23,135       21,896
                                             ------      ------       ------
INTEREST EXPENSE
    Interest on Deposits                      9,312       8,622        8,332
    Interest on Short-Term Borrowings           421         636          684
    Interest on Long-Term Debt                1,098         320          236
                                             ------      ------       ------
        Total Interest Expense               10,831       9,578        9,252
                                             ------      ------       ------
NET INTEREST INCOME                          14,613      13,557       12,644
    Provision for Possible Loan Losses          605         670        1,798
                                             ------      ------       ------
    Net Interest Income After Provision
        for Possible Loan Losses             14,008      12,887       10,846
                                             ------      ------       ------
OTHER INCOME
    Trust Revenue                             1,050         696          636
    Service Charges on Deposit Accounts       1,134       1,083        1,034
    Investment Securities Gains, Net            601         308           22
    Gains (Loss) on Sale of Mortgage Loans      178         (30)          22
    Other Operating Income                      860         585          560
                                             ------      ------       ------
       Total Other Income                     3,823       2,642        2,274
                                             ------      ------       ------
OTHER EXPENSES
    Salaries and Employee Benefits            6,033       5,615        5,132
    Net Occupancy and Equipment Expense       2,178       2,184        1,991
    Other Operating Expenses                  5,041       3,772        4,081
                                             ------      ------       ------
        Total Other Expenses                 13,252      11,571       11,204
                                             ------      ------       ------
Income Before Income Taxes                    4,579       3,958        1,916
Applicable Income Taxes                       1,296       1,136          515
                                             ------      ------       ------
NET INCOME                                  $ 3,283     $ 2,822      $ 1,401
                                           ========    ========     ========
PER SHARE DATA
    Basic and Diluted Net Income            $  2.02     $  1.76      $  0.89
    Cash Dividends                          $  0.70     $  0.64      $  0.62

</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

(Dollars in Thousands)
<TABLE>

                                                            Unreal.
                                                            Net Gain
                           Add.                            (Loss) on
                Common   Paid-In Retained Treas.  ESOP     Sec. Avail
                 Stock   Capital Earnings Stock   Debt      for Sale   Total
<S>           <C>       <C>      <C>     <C>   <C>         <C>       <C>
Balance at
 Jan 1, 1995   $ 7,277   $ 7,794  $ 9,138 $ --- $ (775)     $(1,034)  $22,400
   1995

Net Income                          1,401                               1,401
Sale of
 Common
 Stock
 under
 Dividend
 Reinv
 Plan
 (15,573
 shares)            78       171                                          249
Cash
 Dividends
 Paid                                (972)                               (972)
ESOP Loan
 Pymt                                              132                    132
Unall ESOP
 Shares
 Committed
 to
 Employees
 (4,724
 shares)                       3                                            3
Unreal Net
 Gain on
 Sec Avail-
 for-Sale                                                    1,554      1,554
               -------   -------  ------- ----- ------      ------    -------
Balance at
 Dec 31, 1995    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

<PAGE>

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
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>
FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) For the Year Ended Dec 31,
<TABLE>

                                                    1997      1996       1995
<S>                                            <C>       <C>        <C>
OPERATING ACTIVITIES
   Net Income                                   $  3,283  $  2,822  $  1,401
   Adjustments to Reconcile Net Income to
    Net Cash Provided by (Used in)
    Operating Activities:
       Provision for Possible Loan Losses            605       670     1,798
       Depreciation and Amortization                 884       748       624
       Accretion of Security Discounts               (70)     (130)     (152)
       Amortization of Security Premiums             124       179       186
       Deferred Taxes                               (277)      (99)     (156)
       Amortization of Deferred Fees on Loans       (170)     (110)       48
       Investment Securities Gains, Net             (601)     (308)      (22)
       Loss (Gain) on Sale of Mortgage Loans        (178)       30       (22)
       Mortgage Loans Originated for Sale        (27,183)  (24,690)   (7,273)
       Mortgage Loan Sales                        27,145    19,509     6,336
       Changes in Assets and Liabilities:
           Increase in Accrued Interest Income      (212)     (142)     (130)
           Increase (Decrease) in Accrued
            Interest Payable                         261      (220)      743
           Decrease (Increase) in Other Assets      (545)        1        75
           Increase (Decrease) in Other
            Liabilities                              625        (6)      384
                                                --------  --------   -------
Net Cash Provided by (Used in)
 Operating Activities                              3,691    (1,746)    3,840
                                                --------  --------   -------
INVESTING ACTIVITIES
   Proceeds from Maturities of Securities
    Available-for-Sale                            13,986    15,401    11,055
   Proceeds from Maturities of Securities
    Held-to-Maturity                               8,047     5,671     3,284
   Proceeds from Sales of Securities
    Available-for-Sale                            13,279    19,842    11,177
   Purchase of Securities Available-for-Sale     (40,485)  (32,686)  (19,306)
   Purchase of Securities Held-to-Maturity        (5,838)   (6,905)   (2,836)
   Net (Increase) Decrease in Interest-
    Bearing Deposits With Banks                     (110)      550      (434)
   Net Increase in Loans                         (10,130)  (22,614)   (9,937)
   Purchase of Premises and Equipment             (1,126)     (997)   (1,508)
   Proceeds from Sale of Other
    Real Estate Owned                                846       361       463
                                                --------  --------   -------
Net Cash Used in Investing Activities            (21,531)  (21,377)   (8,042)
                                                --------  --------   -------
FINANCING ACTIVITIES
   Net (Decrease) Increase in Interest
    and Non-Interest-Bearing Demand Deposits
    and Savings Accounts                           3,804     3,143   (12,555)
   Net Increase in Certificates of Deposit        10,783    10,423    19,125
   Net Increase (Decrease) in Long-Term Debt         ---    18,000       (87)
   Net Increase (Decrease) in
    Repurchase Agreements                          5,009    (2,302)   (2,931)
   Net Increase (Decrease) in
    Short-Term Borrowings                            ---    (7,000)    6,250
   Proceeds from Issuance of Common Stock            361       290       252
   Purchase of Treasury Stock                       (107)     (102)      ---
   Proceeds from Sale of Treasury Stock               33        64       ---
   Cash Dividends Paid                            (1,139)   (1,011)     (972)
   Cash in Lieu of Fractional Shares                  (4)       (2)      ---
                                                --------  --------   -------
Net Cash Provided by Financing Activities         18,740    21,503     9,082
                                                --------  --------   -------
Increase (Decrease) in Cash and
 Cash Equivalents                                    900    (1,620)    4,880
Cash and Cash Equivalents, January 1,             13,929    15,549    10,669
                                                --------  --------   -------
Cash and Cash Equivalents, December 31,         $ 14,829  $ 13,929   $15,549
                                                ========  ========   =======
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands, except per share
data) December 31, 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.
Available-for-sale securities are measured at fair value, with unrealized  gains

<PAGE>

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. Mortgages  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. Income Taxes

     The  Company,  in  accordance  with SFAS No.  109,  "Accounting  for Income
Taxes",  computes the tax expense using the liability  method where 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.

8. Stock Option Plans

     Under Stock  Option  Plans,  options to acquire  shares of common stock are
granted to certain  officers  and  directors.  On January 1, 1996,  the  Company
adopted 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.

<PAGE>

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.  The  adoption  of SFAS No. 123 had no  material
effect on the Company's consolidated financial position or results of operations
(see Note N).

9.  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.
Effective  January 1, 1994,  the Company  adopted new accounting 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) in November 1993.
The  adoption  of SOP 93-6 was  applied  to shares  acquired  by the ESOP  after
December  31,  1992,  which  did not have a  material  effect  on the  Company's
financial  statements.  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).

     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).

<PAGE>

10.  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.

11.  Per Share Information

     During 1997,  the Company  adopted the provisions of Statement of Financial
Accounting  Standards  No.  128,  "Earnings  per  Share  (SFAS  128)".  SFAS 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, 1996 and 1995.

<PAGE>

  For the Year Ended December 31,
<TABLE>
                                                                       Average
                                             Income       Shares      Per Share
                                          (numerator) (denominator)     Amount
         1997
<S>                                       <C>         <C>            <C>

Net Income                                  $3,283

Basic Earnings Per Share
  Income Available to Common Shareholders   $3,283      1,620,627      $  2.02

Effect of Dilutive Securities
  Stock Options                                             4,829
                                            ------      ---------      -------
Diluted Earnings Per Share
  Income Available to Common Shareholders
  plus Assumed Exercise of Options          $3,283      1,625,456      $  2.02
                                            ------      ---------      -------
         1996

Net Income                                  $2,822

Basic Earnings Per Share
  Income Available to Common Shareholders   $2,822      1,600,883      $  1.76

Effect of Dilutive Securities
  Stock Options                                             2,707
                                            ------      ---------      -------
Diluted Earnings Per Share
  Income Available to Common Shareholders
  plus Assumed Exercise of Options          $2,822      1,603,590      $  1.76
                                            ------      ---------      -------
         1995

Net Income                                  $1,401

Basic Earnings Per Share
  Income Available to Common Shareholders   $1,401      1,579,428      $  0.89

Effect of Dilutive Securities
  Stock Options                                               174
                                            ------      ---------      -------
Diluted Earnings Per Share
  Income Available to Common Shareholders
  plus Assumed Exercise of Options          $1,401      1,579,602      $  0.89
                                            ------      ---------      -------
</TABLE>

Average common shares  outstanding in 1997, 1996 and 1995 do not include 23,138,
26,688 and 30,587,  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 May, 1997
and May, 1996.

<PAGE>

12.  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 $11,120,000,  $9,798,000 and $8,509,000, for the
years ended December 31, 1997, 1996 and 1995, respectively.  Cash paid for taxes
was $1,465,000 in 1997, $1,353,000 in 1996 and $440,000 in 1995.

13.  Financial Instruments

     The estimated  fair value as of December 31, 1997 and 1996 of the Company's
assets and  liabilities  considered to be financial  instruments,  which consist
primarily  of  securities,  loans and  deposits  as  required  by SFAS No.  107,
"Disclosures about Fair Value of Financial Instruments", are provided in Note U.

14.   Contributions

     In 1996, the Company adopted SFAS No. 116,  "Accounting  for  Contributions
Received and Made". This statement requires that unconditional  promises to make
contributions  be recognized as expenses in the period the promise is made.  The
present value of  contribution  commitments  was $5,000,  $18,000 and $38,000 at
December 31, 1997, 1996 and 1995,  respectively.  These amounts were included in
the Company's total  contribution  expense of $61,000,  $51,000 and $142,000 for
1997, 1996 and 1995, respectively.

15.  Advertising Costs

     The AICPA's Accounting  Standards  Executive  Committee issued Statement of
Position  (SOP)  93-7,   "Reporting  on  Advertising   Costs",   which  requires
disclosures  regarding  an  entity's  advertising   activities.   The  Company's
advertising  costs are expensed as incurred.  Advertising  costs were  $524,000,
$299,000  and $294,000  for the years ended  December  31, 1997,  1996 and 1995,
respectively.

16.  Intangibles

     On January 1, 1996, the Company adopted the Financial  Accounting Standards
Board (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 on 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.

17.  Transfer and Servicing of Assets and Extinguishments of Liabilities

     The  Financial  Accounting  Standards  Board  (FASB)  issued  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

<PAGE>

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.

18.  Reporting Comprehensive Income

     In June 1997,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement  of  Financial   Accounting   Standards  (SFAS)  No.  130,  "Reporting
Comprehensive Income", which is effective for years beginning after December 15,
1997.  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  effect of  adopting  SFAS No.  130 is not
expected to be material.

19.  Disclosures About Segments of an Enterprise and Related Information

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information",  which is
effective  for all periods  beginning  after  December  15,  1997.  SFAS No. 131
requires that public  business  enterprises  report  certain  information  about
operating  segments in complete sets of financial  statements of the  enterprise
and in condensed financial statements of interim periods issued to shareholders.
It also requires that public  business  enterprises  report certain  information
about their products and services,  the geographic  areas in which they operate,
and their major  customers.  Management is currently  evaluating  the disclosure
impact of SFAS No. 131 on its financial statements.

20.  Stock Dividend

     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.

21.  Reclassifications

     Certain  reclassifications of prior years amounts have been made to conform
to the 1997 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

<PAGE>

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  1997,  1996  and  1995.
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 $1,300,000
(net of the tax effect of  $670,000)  in 1997 and  unrealized  holding  gains of
$347,000 (net of the tax effect of $179,000) in 1996. At December 31, the equity
securities in the available-for-sale category include Federal Reserve Bank stock
in the amount of $239,000 in 1997 and 1996,  and Federal Home Loan Bank stock in
the amount of  $1,699,000  in 1997 and  $1,659,000  in 1996 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,
1997 and 1996 are summarized as follows.

<PAGE>
<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
Other Debt Securities                  ---       ---            --         ---
Equity Securities                    3,878     1,393            11       5,260
                                   -------   -------       -------     -------
     Total                         $71,054   $ 2,104       $   134     $73,024
</TABLE>


<TABLE>
                                                     1996
Available-for-Sale Securities                  Gross        Gross
                                  Amortized  Unrealized   Unrealized    Fair
                                    Cost       Gains        Losses      Value
<S>                               <C>       <C>           <C>         <C>

U. S. Treasury                     $ 7,020   $    37       $     3     $ 7,054
U. S. Government Agency             14,272        16           127      14,161
State and Political Subdivisions    11,808       121            65      11,864
Mortgage-Backed Securities          19,131       155           141      19,145
Other Debt Securities                  796         4            --         800
Equity Securities                    3,226       529            --       3,755
                                   -------   -------       -------     -------
     Total                         $56,253   $   862       $   336     $56,779
</TABLE>

<TABLE>

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

U. S. Treasury                     $   ---   $    --       $    --     $   ---
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>

<TABLE>

                                                     1996
Held-to-Maturity Securities         Gross      Gross
                                  Amortized  Unrealized   Unrealized    Fair
                                    Cost       Gains        Losses      Value
<S>                               <C>       <C>           <C>         <C>

U. S. Treasury                     $   999   $     4       $    --     $ 1,003
U. S. Government Agency             10,229        38            24      10,243
State and Political Subdivisions     3,217        46             2       3,261
Mortgage-Backed Securities           6,554        85            22       6,617
                                   -------   -------       -------     -------
     Total                         $20,999   $   173       $    48     $21,124
</TABLE>

<PAGE>

     The following table lists the maturities of debt securities at December 31,
1997 and 1996, 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.
Maturities of Debt Securities
<TABLE>
At December 31, 1997             Available-for-Sale     Held-to-Maturity
                                Carrying      Fair     Carrying       Fair
                                  Value       Value      Value       Value
<S>                           <C>           <C>       <C>          <C>

Debt Securities
  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>

Maturities of Debt Securities
<TABLE>
At December 31, 1967             Available-for-Sale     Held-to-Maturity
                                Carrying      Fair     Carrying       Fair
                                  Value       Value      Value       Value
<S>                           <C>           <C>       <C>          <C>

Debt Securities
  Due in one year or less      $    900      $  904    $ 1,954      $ 1,951
  Due after one year
   through five years            10,814      10,878      3,475        3,498
  Due after five years
   through ten years             11,293      11,213      7,566        7,598
  Due after ten years            10,889      10,884      1,450        1,460
                               --------     -------     ------       ------
                                 33,896      33,879     14,445       14,507
Mortgage-backed securities       19,131      19,145      6,554        6,617
Equity securities                 3,226       3,755        ---          ---
                               --------     -------     ------       ------
Total investments              $ 56,253     $56,779    $20,999      $21,124
</TABLE>

<PAGE>

     Investment  securities with a carrying amount of $14,001,000 and $7,994,000
at  December  31, 1997 and 1996,  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  1997,  1996  and  1995  were  $13,279,000,  $19,842,000  and
$11,177,000,  respectively.  Gross gains of $615,000 and gross losses of $14,000
were  realized on those sales in 1997.  Gross gains of $418,000 and gross losses
of $110,000 were realized on the sales in 1996. In 1995,  gross  realized  gains
were $93,000 and gross realized losses were $71,000.

<PAGE>
NOTE C - LOANS

     Major  classifications  of  loans  at  December  31,  1997  and 1996 are as
follows:
<TABLE>
                                       1997              1996
<S>                               <C>               <C>
Real Estate/Residential            $ 138,539         $ 134,013
Real Estate/Construction              12,361            10,923
Real Estate/Commercial                34,579            39,421
Consumer/Installment                  35,914            28,870
Commercial (Non-Real Estate)
  and Agricultural                     9,086             8,715
State and Political Subdivisions         944               906
Other                                     20                28
                                   ---------         ---------
  Total Gross Loans                  231,443           222,876
      Less Unearned Discount          (1,856)           (2,759)
                                   ---------         ---------
  Total Loans                      $ 229,587         $ 220,117
</TABLE>

     Included in total gross loans are unamortized  loan fees totaling  $137,000
at  December  31,  1997 and  $395,000 at  December  31,  1996.  There were loans
totaling  $813,000  on which the accrual of interest  has been  discontinued  or
reduced at December 31, 1997.  During 1997,  an average of $821,000 of loans was
on  non-accrual  status.  Non-accrual  loans at December  31,  1996  amounted to
$1,440,000 and averaged  $1,979,000 during 1996. Loans 90 days and over past due
and still  accruing  totaled  $802,000 at December  31, 1997 and  $1,283,000  at
December 31, 1996.

<PAGE>


NOTE D - ALLOWANCE FOR POSSIBLE LOAN LOSSES

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

Year Ended December 31,                 1997       1996       1995
<S>                                  <C>        <C>        <C>
Beginning Balance                     $ 2,532    $ 2,443    $ 2,187

Additions
  Provisions for loan losses
    charged to operating expenses         605        670      1,798
  Recoveries of loans                      97         86        216
                                      -------    -------    -------
      Total Additions                     702        756      2,014
  Deductions
    Loans charged-off                    (570)      (667)    (1,758)
                                      -------    -------    -------
  Ending Balance                      $ 2,664    $ 2,532    $ 2,443
</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,                           1997           1996            1995
<S>                                     <C>          <C>             <C>

 Principal amount of impaired loans      $  523       $  1,149        $  2,035
 Accrued Interest                           ---            ---             ---
 Deferred loan costs                          1              7               4
                                         ------       --------        --------
                                            524          1,156           2,039
 Less valuation allowance                  (138)          (128)           (238)
                                         ------       --------        --------
                                         $  386       $  1,028        $  1,801
</TABLE>

<PAGE>

<TABLE>

 At December 31,                           1997           1996            1995
<S>                                     <C>          <C>               <C>
 Cash collected on impaired loans
    credited to principal balance        $  657       $  1,446          $  138
    Recognized as interest income           111             40              44
                                          -----         ------          ------
        Total                            $  768       $  1,486          $  182

 Interest that would have accrued
    on impaired loans                     $  64         $  210          $  214
</TABLE>

     The valuation  allowance for impaired loans at December 31, 1997,  1996 and
1995 is included in the  "Allowance  for Possible  Loan Losses" which amounts to
$2,664,000, $2,532,000 and $2,443,000, respectively.

     On January 1, 1995, a valuation for credit losses related to impaired loans
was  established  as a part of the  allowance  for  possible  loan  losses.  The
activity in this allowance account is as follows.

<TABLE>

 Year ended December 31,                    1997           1996           1995
<S>                                     <C>             <C>           <C>

 Valuation allowance at January 1,       $  128          $  238         $  160
 Provision for loan impairment              158             206            187
 Direct charge-offs                        (148)           (325)          (125)
 Recoveries                                 ---               9             16
                                         ------            ----           ----
 Valuation allowance at December 31,     $  138            $128           $238
</TABLE>

NOTE F - PREMISES AND EQUIPMENT

     Major  classifications  of these  assets at December  31, 1997 and 1996 are
summarized     as    follows.
<TABLE>

                             Estimated Useful Lives     1997              1996
<S>                               <C>                <C>               <C>

    Land                               ----           $  939            $  939
    Premises                       10 - 20 years       6,948             6,855
    Equipment                       3 - 10 years       5,329             4,337
                                                      ------            ------
                                                      13,216            12,131
    Accumulated depreciation
     and amortization                                 (5,917)           (5,101)
                                                      ------            ------
    Total Premises and Equipment                      $7,299            $7,030
</TABLE>

     Depreciation  and amortization  expense amounted to $857,000,  $730,000 and
$607,000 in 1997, 1996 and 1995, respectively.

<PAGE>

NOTE G - SHORT-TERM BORROWINGS

 FEDERAL RESERVE DISCOUNT BORROWINGS
<TABLE>

 Year Ended December 31,                   1997          1996          1995
<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,                   1997          1996          199
<S>                                   <C>            <C>           <C>
 Balance outstanding at December 31,   $    ---       $  ---        $ 7,000
 Maximum amount outstanding at any
    month-end during the year          $  6,890       $10,000       $11,000
 Average amount outstanding
   during the year                     $  1,217       $ 3,400       $ 6,109
 Average interest rate during
   the year                                5.85%         5.51%         6.34%
</TABLE>

     The Federal Home Loan Bank of  Pittsburgh  provides the Bank with a line of
credit in the amount of $12,895,000,  all of which was available at December 31,
1997.

     There were no short-term  borrowings in the form of Federal Funds purchased
at December 31, 1997, 1996 and 1995.

 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
<TABLE>

 Year Ended December 31,                   1997          1996          1995
<S>                                   <C>            <C>           <C>
 Balance outstanding at December 31,   $  8,804       $ 3,795       $ 6,096
 Maximum amount outstanding at any
    month-end during the year          $ 14,290       $ 7,087       $12,332
 Average amount outstanding
   during the year                     $  6,459       $ 4,740       $ 9,298
 Average interest rate during
   the year                                3.72%         3.14%         3.72%
</TABLE>

<PAGE>

NOTE H -  LONG-TERM  DEBT

     The Company had  long-term  borrowings  from the Federal  Home Loan Bank of
Pittsburgh totaling $18,000,000 at December 31, 1997 and $18,000,000 at December
31, 1996.  These loans will mature in one to four years.  The  weighted  average
interest  rate on these loans was 5.94% and 5.65% at December 31, 1997 and 1996,
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, 1997 are as follows.

<TABLE>
                                      ESOP         FHLB          Total
                                      Debt         Debt           Debt
<S>                                 <C>        <C>            <C>

 1998                                $  65      $ 5,000        $ 5,065
 1999                                   65          ---             65
 2000                                   65        8,000          8,065
 2001                                   65        5,000          5,065
 2002                                   65          ---             65
 2003 and beyond                        65          ---             65
                                     -----      -------        -------
 Total                               $ 390      $18,000        $18,390
</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>
                                              1997       1996      1995
<S>                                        <C>        <C>       <C>

 Advertising                                $  524     $  299    $  294
 Consulting Fees                            $  530     $  269    $  276
 Data Processing Services                   $  607     $  594    $  515
 Federal Deposit Insurance Premiu           $   34     $    2    $  288
 Litigation Costs and Legal Fees            $  587     $  147    $  405
 Postage                                    $  247     $  247    $  258
 Printing, Stationery and Supplie           $  363     $  343    $  299
</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,                  1997           1996           1995
<S>                                    <C>          <C>              <C>
 Federal
     Current                            $1,573       $  1,235         $  671
     Deferred (benefit)                   (277)           (99)          (156)
                                        ------         ------           ----
     Total                              $1,296         $1,136           $515
</TABLE>

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

 Year Ended December 31,                  1997           1996           1995
<S>                                    <C>             <C>             <C>
 Federal tax expense
   at statutory rate                    $1,557         $1,346           $651
 Increase (decrease)
   in taxes resulting from:
     Tax-exempt investment
       securities income                  (261)          (195)          (124)
     Tax-exempt interest
       on loans                            (16)           (18)           (19)
   Other, net                               16              3              7
                                        ------       --------           ----
   Applicable Income Taxes              $1,296       $  1,136           $515
</TABLE>

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

 At December 31,                            1997           1996
<S>                                      <C>           <C>
 Deferred Tax Assets:
    Loan Loss Reserve                     $  614        $   561
    Deferred Compensation                    428            433
    Post-Retirement Benefits                  59             51
    Deferred Loan Fees                        67             84
    Depreciation                              30             21
    Miscellaneous Reserves                   220            ---
    Other                                     15             40
                                        ---------     ----------
       Total                               1,433          1,190
                                        ---------     ----------

 Deferred Tax Liability:
    Unrealized Securities Gains              670            179
    Other                                    ---             35
                                        ---------     ----------
       Total                                 670            214
                                        ---------     ----------
 Net                                  $      763    $       976
</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 1993, the ESOP borrowed $650,000 from a bank payable over ten years. The
interest rate on this loan is that bank's prime rate plus 1.25% (for an interest
rate of 9.75% at December 31, 1997 and 9.50% at December 31, 1996).  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. In 1985, the ESOP borrowed  $350,000 from a commercial bank. The loan was
payable over twelve years, with interest and principal due quarterly.  This loan
had  interest  at a rate of 87.5% of prime plus 1/4% which was 7.47% at December
31,  1996.  This loan was paid in full at maturity on March 31,  1997.  The ESOP
borrowed an additional $385,000 in August 1987 from a commercial bank. This loan
was payable over ten years, with interest and principal due quarterly.  The loan
had an interest  rate of 92% of the prime rate (for an interest rate of 7.59% at
December 31, 1996).  This loan matured on July 1, 1997 and was paid in full. The
ESOP's total outstanding debt at December 31, 1996 was $512,000.

     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
$41,000,  $52,000 and $67,000 for the years ended  December 31,  1997,  1996 and
1995, respectively.

     Compensation expense related to the ESOP amounted to $275,000, $229,000 and
$178,000 for the years ended December 31, 1997, 1996 and 1995, respectively.  As
provided by SOP 93-6 (see Note A.8.),  the ESOP  compensation  expense  includes
$50,000 in 1997 and $18,000 in 1996 and $3,000 in 1995, 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 4,415 in 1997,
5,637 in 1996 and 4,724 in 1995.

     Dividends on unallocated shares used for debt service were $23,000, $38,000
and $37,000 for the years ended December 31, 1997, 1996 and 1995, respectively.

<PAGE>

     The total  shares held by the ESOP were 215,066 and 213,446 at December 31,
1997 and 1996,  respectively.  ESOP shares have been  restated to reflect the 5%
stock dividends of May, 1997 and May, 1996.

NOTE L - OTHER BENEFIT PLAN

     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 $84,000,  $71,000 and $55,000 in
1997, 1996 and 1995, 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,  1997 and 1996.

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

                                              Officers'        Deferred
                                            Supplemental       Directors'
                                          Retirement Plan         Plan

at December 31,                            1997     1996     1997     1996
<S>                                      <C>      <C>      <C>      <C>
Accumulated benefit obligation, all of
 which is vested                          $  55    $  47    $ 477    $ 495

Projected benefit obligation
  for service rendered to date            $(366)   $(200)   $(477)   $(495)
Plan assets at fair value                    --       --       --       --
                                          -----    -----    -----    -----
Projected benefit obligation
  in excess of plan assets                 (366)    (200)    (477)    (495)
Unrecognized net (gain) loss from past
  experience different from that
  assumed and effects of changes
  in assumptions                            (43)    (207)       5        6
Prior service cost not yet recognized
  in net periodic pension cost               --       --       --       --
Unrecognized net assets at December 31,
  being recognized over 15 years             (5)      (5)      --       --
Adjustment to recognize
  additional minimum liability               --       --       (5)      (6)
                                          -----    -----    -----    -----
Accrued Pension Cost                      $(414)   $(412)   $(477)   $(495)
</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 7.0% and 6.0%,  respectively,  in
1997, 1996 and 1995 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 7.5% in
1997, 1996 and 1995. The weighted average  expected  long-term rate of return on
assets was 8% for 1997, 1996 and 1995 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,                    1997    1996    1995    1997   1996   1995
<S>                              <C>     <C>      <C>     <C>    <C>    <C>
Service cost - benefits
  earned during the period        $  10   $  15    $ 14    $ --   $ --   $ --
Interest cost on projected
  benefit obligation                 11      15      15      36     36     36
Net amortization and deferral       (19)    (10)    (11)     --     --     --
                                   ----    ----   ----     ----   ----   ----
Net Periodic Pension Cost          $  2    $ 20    $ 18    $ 36   $ 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  1997,  1996 and 1995.  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,                      1997       1996         1995
<S>                                        <C>        <C>          <C>
 Service cost - benefits
   earned during the period                 $  ---     $  ---       $   5
 Interest cost on accumulated
   benefit obligation                           14         15          25
 Amortization of transition obligation           8          8          15
                                            ------     ------       -----
 Net periodic post-retirement benefit cost  $   22     $   23       $  45
</TABLE>

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

                                      1997          1996          1995
<S>                                  <C>           <C>           <C>

 Discount rate                        7.00%         7.00%         7.00%
 Medical care cost trend rate        10.00%        11.00%        12.00%
</TABLE>

     The  medical  care  cost  trend  rate  used  in the  actuarial  computation
ultimately is reduced to 7.0% in the year 2000 and  subsequent  years.  This was
accomplished using 1.0% decrements for the years 1993 through 2000.

<PAGE>

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

 At December 31,                                            1997         1996
<S>                                                         <C>         <C>
 Accumulated post-retirement benefit obligation:
    Retirees                                                $203         $181
    Active, eligible employees                               ---           36
    Active, not-yet-eligible employees                       ---          --
                                                            ----         ----
 Accumulated post-retirement benefit obligation              203          217
 Plan assets at fair value                                   ---          ---
                                                            ----         ----
 Accumulated benefit obligation in excess of plan assets     203          217
 Unrecognized transition obligation                         (232)        (247)
 Unrecognized net gain (loss)                                 93           92
                                                            ----         ----
 Accrued post-retirement benefit cost                       $ 64         $ 62
</TABLE>

     At December 31, 1997, $173,000 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 $16,000 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 $22,000, $22,000 and $28,000 in 1997,
1996 and 1995,  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 1997,  options to purchase  19,000 common shares of
the Company's stock at a price of $23.50 per share were awarded under this plan.
No options were granted under these Plans in 1996.  In January of 1998,  options
to purchase 29,500 shares of the Company's common stock at a price of $37.00 per
share were  awarded.  The  aggregate  number of shares which may be issued under
these plans are 287,706 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 1,157 shares of the Company's common
stock at the fair  market  value of the  Company's  common  stock of $14.69  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  1,157 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  1,157 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
23,152 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,                         1997       1996       1995
<S>                          <C>             <C>        <C>        <C>
 Net Income                   As reported     $3,283     $2,822     $1,401
                              Pro forma       $3,265     $2,814     $1,385

 Basic earnings per share     As reported     $ 2.02     $ 1.76     $ 0.89
                              Pro forma       $ 2.01     $ 1.76     $ 0.88

 Diluted earnings per share   As reported     $ 2.02     $ 1.76     $ 0.89
                              Pro forma       $ 2.01     $ 1.75     $ 0.88
</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 1997, 1996 and 1995, respectively: dividend yield
of 2.1%, 3.1% and 3.8%; expected volatility of 39.0%, 39.5% and 54.3%; risk-free
interest rates of 6.7%, 7.0% and 7.2%; and expected lives of 10 years.

<PAGE>

     A summary of the status of the Company's  Employee Stock Option Plans as of
December 31, 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 May, 1997 and May, 1996.

<PAGE>

<TABLE>
Year Ended December 31,                        1997
                                                   Weighted
                                                    Average
                                                   Excercise
                                         Shares      Price
<S>                                     <C>       <C>
Outstanding at beginning of year         12,079    $  15.29
Granted                                  19,000       23.50
Exercised                                 5,742       16.46
                                         ------    --------
Outstanding at end of year               25,337    $  21.42

Options exercisable at year-end           4,753
Weighted average fair value of
   options granted during the year                 $  23.50
</TABLE>

<TABLE>
Year Ended December 31,                        1996
                                                   Weighted
                                                    Average
                                                   Excercise
                                         Shares      Price
<S>                                     <C>       <C>
Outstanding at beginning of year         17,821    $  16.43
Granted                                   None          ---
Exercised                                 5,742       17.75
                                         ------    --------
Outstanding at end of year               12,079    $  15.79

Options exercisable at year-end           8,913
Weighted average fair value of
   options granted during the year                     N/A
</TABLE>

<TABLE>
Year Ended December 31,                        1995
                                                   Weighted
                                                    Average
                                                   Excercise
                                         Shares      Price
<S>                                     <C>       <C>
Outstanding at beginning of year         17,821    $  16.43
Granted                                   None          ---
Exercised                                 None          ---
                                         ------    --------
Outstanding at end of year               17,821    $  16.43

Options exercisable at year-end          15,721
Weighted average fair value of
   options granted during the year                     N/A
</TABLE>

     The following  information  applies to options  outstanding at December 31,
1997.

                                    EMPLOYEE STOCK OPTION PLAN

      Number outstanding                                     25,337
      Range of exercise prices                           $15.19 - $23.50
      Weighted-average exercise price                        $21.42
      Weighted-average remaining contractual life          9.12 years

A  summary  of  the status  of the Company's  Non-Employee Director Stock Option
Plan as of December  31, 1997 and 1996,  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 May, 1997 and May, 1996.

<PAGE>

NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
<TABLE>

Year Ended December 31,                       1997
                                                  Weighted
                                                   Average
                                                  Excercise
                                        Shares      Price
<S>                                     <C>      <C>
Outstanding at beginning of year        10,413    $  14.92
Granted                                   None        ---
Exercised                                  868       14.69
Expired                                    289       14.69
                                         -----    --------
Outstanding at end of year               9,256    $  14.96

Options exercisable at year-end          5,785
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        10,413    $  14.60
Granted                                  1,157       17.62
Exercised                                  289       14.69
Expired                                    868       14.69
                                         -----    --------
Outstanding at end of year              10,413    $  14.92

Options exercisable at year-end          3,858
Weighted average fair value of
   options granted during the year                $  17.62
</TABLE>

<TABLE>

Year Ended December 31,                       1995
                                                  Weighted
                                                   Average
                                                  Excercise
                                        Shares      Price
<S>                                     <C>      <C>
Outstanding at beginning of year         9,256    $  14.69
Granted                                  2,314       14.29
Exercised                                 None        ---
Expired                                  1,157       14.69
                                         -----    --------
Outstanding at end of year              10,413    $  14.60

Options exercisable at year-end          2,025
Weighted average fair value of
   options granted during the year                $  14.29
</TABLE>

<PAGE>

The following information applies to options outstanding at December 31, 1997.

                      NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

 Number outstanding                                        9,256
 Range of exercise prices                             $14.29 - $17.62
 Weighted-average exercise price                          $14.96
 Weighted-average remaining contractual life             6.78 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, 1997 are payable as follows.

                         Operating Leases
             1998                           $   381
             1999                               373
             2000                               388
             2001                               406
             2002                               394
             2003 and beyond                  1,947
                                            -------

            Total                           $ 3,889

     The total rental expense was $421,000,  $530,000 and $594,000 in 1997, 1996
and 1995, 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, 1997 are as follows.

     Financial  instruments  whose contract  amounts
       represent credit risk:

          Commitments  to extend  credit  $18,354
          Standby  letters of credit      $ 5,330

     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
87.3% as of December 31, 1997.

<PAGE>

NOTE Q - CONCENTRATIONS OF CREDIT RIS

     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,  1997,  the  Bank  had  residential   real  estate  loans
outstanding totaling $138,539,000,  which is 60.3% of total loans. The Bank also
had real estate  related  commercial  loans  outstanding  at  December  31, 1997
totaling  $34,579,000,   which  is  15.1%  of  total  loans.  Loans  to  various
residential  apartment  building owners totaling  $8,368,000 are included in the
Bank's total real estate  commercial  loans.  These loans  represent  24% 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  $1,311,000  and  $3,087,000  at December  31, 1997 and 1996,
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 1997 activity of these loans follows.

            Balance, January 1, 1997            $  3,087
              New loans                              203
              Repayments                          (1,979)
                                                --------
            Balance, December 31, 1997          $  1,311

<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, 1997,  that the Bank could declare,  without the approval of the
Comptroller of the Currency, amounted to approximately $3,227,000.

     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, 1997, the Company and
the Bank met all capital adequacy requirements to which they were 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, 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>

<TABLE>
                                                                 To Be Well
                                                                 Capitalized
                                                 Required        Under Prompt
                                                For Capital       Corrective
                                Actual           Adequacy           Action
(Dollars in Thousands)
 At December 31, 1996        Amount   Ratio     Amount   Ratio   Amount  Ratio
<S>                       <C>      <C>       <C>       <C>    <C>      <C>
Total Capital
(To Risk-Weighted Assets)
  Company, (Consolidated)   $28,596  15.20%    $15,046   8.00%      ---    ---
  Bank                      $25,591  13.59%    $15,065   8.00%  $18,831  10.00%

Tier 1 Capital
(To Risk-Weighted Assets)
  Company, (Consolidated)   $26,243  13.95%    $ 7,522   4.00%      ---    ---
  Bank                      $22,435  11.91%    $ 7,532   4.00%  $11,299   6.00%

Tier 1 Capital
(To Average Assets,
 Leverage)
  Company, (Consolidated)   $26,243   8.35%    $12,578   4.00%      ---    ---
    Bank                    $22,435   7.20%    $12,456   4.00%  $15,570   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 1997 was approximately $4,305,000 and $4,702,000,  respectively. For
1996, the average  reserve  balance was  $3,585,000 and the year-end  amount was
$3,857,000.

NOTE T - EQUITY TRANSACTIONS

     The Company paid a 5% stock  dividend on its common  stock from  authorized
but unissued shares on June 19, 1997 to all  shareholders of record at the close
of business  on May 30,  1997.  On June 19,  1996,  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 31, 1996.  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 1997,  11,696 common shares were
purchased  pursuant to the Dividend  Reinvestment  and Stock Purchase Plan at an
average  cost of $24.51 per share for total  proceeds  of  $287,000.  The shares
purchased in 1997 were comprised of 10,292 new common shares at an average price
of $24.73 for proceeds of $254,000 and 1,404 shares from  Treasury  shares at an

<PAGE>

average  price  of  $22.86  for  proceeds of  $33,000.  In 1996,  14,449  common
shares were purchased  pursuant to the Dividend  Reinvestment and Stock Purchase
Plan at an average cost of $17.16 for proceeds of $248,000.

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, 1997 and 1996 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>
                                         1997                     1996
                                 Estimated  Carrying      Estimated  Carrying
                                Fair Value   Amount      Fair Value   Amount
<S>                            <C>       <C>            <C>       <C>
Cash and cash equivalents        $  14,829 $  14,829      $  13,929 $  13,929
Investment securities               17,946    17,756         21,124    20,999
Securities available-for-sale       73,024    73,024         56,779    56,779
Mortgage loans held-for-sale           759       759            721       721
</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>
                                         1997                     1996
                                 Estimated  Carrying      Estimated  Carrying
                                Fair Value   Amount      Fair Value   Amount
<S>                            <C>       <C>            <C>        <C>
Assets:
 Interest-bearing deposits
  with banks                     $     395 $     395       $    285  $    285
Liabilities:
 Deposits with stated
  maturities                       127,673   127,350        117,400   117,485
 Securities sold under
  agreements to repurchase           8,804     8,804          3,795     3,795
 Short-term borrowings               4,925     5,000            ---       ---
 Long-term debt                     12,805    13,390         17,994    18,512
</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>
                                         1997                     1996
                                 Estimated  Carrying      Estimated  Carrying
                                Fair Value   Amount      Fair Value    Amount
<S>                            <C>       <C>            <C>         <C>
Deposits with no
 stated maturities               $ 154,905 $ 154,905      $ 150,268   $150,268
</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>
                                         1997                     1996
                                 Estimated  Carrying      Estimated  Carrying
                                Fair Value   Amount      Fair Value    Amount
<S>                            <C>        <C>           <C>        <C>
Total loans                      $228,278   $229,587      $219,180   $220,117
</TABLE>

     There  is no  material  difference  between  the  carrying  amount  and the
estimated fair value of off-balance-sheet items totaling $23,684,000 at December
31, 1997 and  $20,643,000 at December 31, 1996 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,                            1997            1996
<S>                                    <C>             <C>
ASSETS
      Cash and Due from Banks            $     8         $    16
      Interest-Bearing Deposits
        with Banks                           904             656
      Loan to Banking Subsidiary           1,000           1,000
      Investment in Banking Subsidiary    24,760          22,633
      Investment in Other Subsidiary       4,113           3,073
      Other Assets                            12              12
                                         -------         -------
         TOTAL ASSETS                    $30,797         $27,390

LIABILITIES
      Long-Term Debt                     $   390         $   512
      Other Liabilities                       50              73
                                         -------         -------
         TOTAL LIABILITIES                   440             585

SHAREHOLDERS' EQUITY                      30,357          26,805
                                         -------         -------
     TOTAL LIABILITIES AND
      SHAREHOLDERS' EQUITY               $30,797         $27,390
</TABLE>

<PAGE>

<TABLE>
Condensed Statement of Income
   For the Year Ended December 31,             1997       1996      1995
<S>                                       <C>        <C>       <C>
INCOME
    Dividends from Subsidiaries             $ 1,139    $ 1,111   $   829
    Interest on Loan to Subsidiary               89        114       149
    Interest on Deposits with Banks              21         12         5
                                            -------    -------   -------
      Total Income                            1,249      1,237       983
                                            -------    -------   -------
EXPENSES
    Interest on Long-Term Debt                   41         52        67
    Other Expenses                               99        105        77
                                            -------    -------   -------
      Total Expenses                            140        157       144
                                            -------    -------   -------
    Income Before Taxes and
    Equity in Undistributed Net
        Earnings of Subsidiaries              1,109      1,080       839
    Federal Income Tax (Credit)                 (10)       (11)        3
                                            -------    -------   -------
    Income Before Equity in Undistributed
        Net Earnings of Subsidiaries          1,119      1,091       836
    Equity in Undistributed Net Earnings
        of Subsidiaries                       2,164      1,731       565
                                            -------    -------   -------

      NET INCOME                            $ 3,283    $ 2,822   $ 1,401
</TABLE>

<PAGE>
<TABLE>

Condensed Statement of Cash Flows
    For The Year Ended December 31,                  1997     1996     1995
<S>                                              <C>      <C>      <C>
OPERATING ACTIVITIES
 Net Income                                        $ 3,283  $ 2,822  $ 1,401
 Adjustments to Reconcile Net Income to Net Cash
   Provided by Operating Activities:
   Distribution in Excess of Undistributed
    Net Earnings of Subsidiaries                    (2,164)  (1,731)    (565)
   Changes in Assets and Liabilities:
    (Increase) Decrease in Interest-Bearing
     Deposits with Banks                              (248)    (366)     (94)
    (Increase) Decrease  in Other Assets               ---      (10)      40
     Increase (Decrease) in Other Liabilities           23        7       (7)
                                                   -------  -------  -------
NET CASH PROVIDED BY OPERATING ACTIVITIES              848      722      775
                                                   -------  -------  -------
INVESTING ACTIVITIES
 Repayment of Note from Bank Subsidiary                 --    1,600       --
 Issuance of Note Receivable to Bank Subsidiary         --   (1,000)      --
 Capital Contribution to Bank Subsidiary                --     (600)      --
                                                   -------  -------  -------
NET CASH PROVIDED BY INVESTING ACTIVITIES               --       --       --
                                                   -------  -------  -------
FINANCING ACTIVITIES
 Repayment of Long-Term Debt                            --       --      (87)
 Purchase of Treasury Stock                           (107)    (102)      --
 Proceeds from the Sale of Treasury Stock               33       64       --
 Proceeds from Issuance of Common Stock                361      290      252
 Cash Dividends Paid                                (1,139)  (1,011)    (972)
 Cash in Lieu of Fractional Shares                      (4)      (3)      --
                                                   -------  -------  -------
NET CASH USED IN FINANCING ACTIVITIES                 (856)    (762)    (807)
                                                   -------  -------  -------
Decrease in Cash and Cash Equivalents                    8      (40)     (32)
Cash and Cash Equivalents, January 1,                   16       56       88
                                                   -------  -------  -------
Cash and Cash Equivalents, December 31,            $     8  $    16  $    56
                                                   -------  -------  -------
</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 7, 1998 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, 1997, there were 760 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 1997 was $35.50 and
in December  1996 was $20.95.  Stock  prices and  dividends  per share have been
restated to reflect the 5% stock dividends of May, 1997 and May, 1996 (see "Note
T - Equity Transactions" in the "Notes to Consolidated Financial Statements").

<PAGE>

<TABLE>
1996                     High            Low         Cash Dividends
                                                        Declared
<S>                  <C>             <C>            <C>
     First Quarter     $17.91          $16.32         $ 0.1542
     Second Quarter     18.14           16.32           0.1619
     Third Quarter      18.10           17.14           0.1619
     Fourth Quarter     21.90           17.14           0.1619
                                                      --------
     TOTAL                                            $ 0.6399
</TABLE>

<TABLE>
1997
<S>                  <C>             <C>            <C>
     First Quarter     $23.57          $21.19         $ 0.1714
     Second Quarter     24.50           22.38           0.1700
     Third Quarter      34.25           23.50           0.1800
     Fourth Quarter     35.50           34.69           0.1800
                                                      --------
     TOTAL                                            $ 0.7014
</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-KSB for the year ended December 31, 1997.

FORM 10-KSB

Shareholders,  analysts and others  seeking a copy of Form 10-KSB 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 8.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure

         None.

                                    PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
         Compliance With Section 16 (a) of the Exchange Act

     The information  contained  under the captions  "Election Of Directors" and
"Compliance with Section 16 (a) of the Securities i Exchange Act of 1934" in the
Company's  1998 Proxy  Statement and "Executive  Officers of the  Registrant" in
Appendix A to Part I of this Form  10-KSB is  incorporated  herein by  reference
therefrom.

Item 10. Executive Compensation

     The information contained under the caption "Executive Compensation" in the
Company's 1998 Proxy Statement is incorporated herein by reference therefrom.

Item 11. Security Ownership of Certain Beneficial Owners and Management

     The  information   contained  under  the  caption  "Voting  Securities  and
Principal Holders Thereof" in the Company's 1998 Proxy Statement is incorporated
herein by reference therefrom.

Item 12. Certain Relationships and Related Transactions

     The information  contained  under the caption  "Certain  Relationships  and
Related  Transactions"  in the Company's  1997 Proxy  Statement is  incorporated
herein by reference therefrom.

<PAGE>

                                     PART IV
Item 13. Exhibits 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 7,  Financial
          Statements".

                  Report of Independent Certified Public Accountants

                  Consolidated Balance Sheets for the Years Ended
                           12/31/97 and 12/31/96

                  Consolidated Statements of Income for the Years Ended
                           12/31/97, 12/31/96 and 12/31/95

                  Consolidated Statement of Changes in Shareholders' Equity
                  for the Years Ended  12/31/97, 12/31/96 and 12/31/95

                  Consolidated Statements of Cash Flows for the Years Ended
                           12/31/97, 12/31/96 and 12/31/95

                  Notes to Consolidated Financial Statements

<PAGE>

2.   Exhibits:

     Number    Title

     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
*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

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

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.


(b)  Reports on Form 8-K

     No reports  on Form 8-K were filed in the fourth  quarter of the year ended
December 31, 1997.

<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, 1998                    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/ John J. Schlamp
        JOHN J. SCHLAMP
        Chairman of the Board
        and Director
        March 30, 1998

By:     /s/  S. Eric Beattie
        S. ERIC BEATTIE
        President, Chief Executive Officer
        and Director (Principal Executive Officer)
        March 30, 1998

By:     /s/  Reid L. Heeren
        REID L. HEEREN
        Executive Vice President and Treasurer
        (Principal Financial Officer and
        Principal Accounting Officer)
        March 30, 1998

By:     /s/  Robert J. Bergren
        ROBERT J. BERGREN
        Director
        March 30, 1998

<PAGE>

By:     /s/  Gordon Mowrer
        GORDON MOWRER
        Director
        March 30, 1998

By:     /s/ Daniel B. Mulholland
        DANIEL B. MULHOLLAND
        Director
        March 30, 1998

By:     /s/ Robert C. Nagel
        ROBERT C. NAGEL
        Director
        March 30, 1998

By:     /s/ Charles J. Peischl
        CHARLES J. PEISCHL, ESQUIRE
        Director
        March 30, 1998

By:     /s/ Richard Stevens
        RICHARD STEVENS
        Director
        March 30, 1998

By:     /s/ Maria Zumas Thulin
        MARIA ZUMAS THULIN
        Director
        March 30, 1998