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, 1995.

     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
 incorporation or organization)                  Identification No.)

               76 South Main Street, Nazareth, Pennsylvania 18064
               (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
<PAGE>

     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.
                                                          X

     The  Issuer's  revenues  for the fiscal year ended  December  31, 1995 were
$24,170,000.

     The aggregate  market value of voting stock held by  non-affiliates  of the
registrant is $23,783,181. (1)

     The number of shares of the  Issuer's  common  stock,  par value  $5.00 per
share, outstanding as of March 18, 1996 was $1,474,028.


DOCUMENTS INCORPORATED BY REFERENCE:

        Part III: Certain portions of the 1996 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,  1996.  Includes an
aggregate of 149,230 shares, with an aggregate market value of $2,891,331,  held
by the Trust  Department of Nazareth  National Bank & Trust Company in Trust for
persons other than executive  officers,  directors and 10%  shareholders  of the
registrant.  The  information  provided  shall  in no  way  be  construed  as an
admission  that any  officer,  director  or 10%  shareholder  may be  deemed  an
affiliate of the registrant or that such person is the  beneficial  owner of the
shares  reported  as  being  held  by him,  and any  such  inference  is  hereby
disclaimed.  The  information  provided  herein is  included  solely  for record
keeping purposes of the Securities and Exchange Commission.

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

PART I

Item 1.  Description of Business

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  continued
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, 1995 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  $8,289,000,
representing a negative cumulative one year gap of .94%. 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 of Financial Condition and Results of Operations".

     Federal and State Government Regulations. The operations of the Company and
the Bank are  heavily  regulated  and will be  affected  by  present  and future
legislation and by the policies established from time to time by various federal
and state regulatory  authorities.  In particular,  the monetary policies of the
<PAGE>

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 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  Financial  Statements  contained  under  the  caption,  "Item 7,
Financial Institutions.

     Competition.  The Company faces strong  competition  from many other banks,
savings institutions and other financial  institutions which have branch offices
or  otherwise  operate  in the  Company's  market  area,  as well as many  other
companies now offering a range of financial services.  Most of these competitors
have  substantially  greater  financial  resources than the Company  including a
larger capital base which allows them to attract  customers seeking larger loans
than the Bank is able to make.  In addition, many of the Bank's competitors have
higher  legal  lending  limits  than  does  the  Bank.    Particularly  intense 
competition  exists  for  sources  of  funds including  savings and retail time 
deposits and for loans, deposits and other services that the Bank offers.

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

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

     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.

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

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

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

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
<PAGE>

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 and one
branch in Allentown, Pennsylvania. The Bank has twelve automated teller machines
(ATMs),  one at each branch  office  (except the Main Street  Nazareth  and Hall
Square Nazareth  branches) 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. On January
26, 1996, the Bank opened an additional free standing  Automated  Teller Machine
location at the Northampton Crossings Shopping Center, Easton Pennsylvania. This
new location contains four drive-up ATM's.

        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 in respect of federal funds purchased and certain other borrowings,
as well as deposit liabilities.

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

     As of December 31, 1995, the Company,  on a consolidated  basis,  had total
assets of $298,514,000,  total deposits of $254,102,000, and total shareholders'
equity of $24,767,000.
<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, 1995, the Bank had total assets of  $298,514,000,  total
deposits of $254,102,000  and total  shareholders'  equity of  $24,767,000.  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 eleven full service banks, which includes drive-in  facilities
at most  locations,  ATMs at each branch office (except the Main Street Nazareth
and Hall Square Nazareth branches) and bank-by-mail services. Nine of the Bank's
full  service  offices  are located in  Northampton  County,  Pennsylvania.  Two
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  and in the lobby of St. Luke's Hospital in the
Borough of Fountain Hill, Pennsylvania.

     On January 26, 1996 the Bank opened a free-standing,  drive-up ATM location
at the Northampton  Crossings Shopping Center, Routes 248 and 33, Lower Nazareth
Township, Easton, Northampton County, Pennsylvania.  This location contains four
drive-up ATM units that are open twenty-four hours a day, seven days a week.

     In November of 1995, the Bank purchased the Pointe North branch,  including
approximately  $6.3 million in deposits  and $1.8  million in loans,  in Hanover
Township,   Northampton  County,  Pennsylvania  from  another  commercial  bank.
Concurrent  with this  purchase,  the Bank  closed  its Park  Plaza  office and
transferred  the Park Plaza  accounts and staff to the Pointe North branch.  The
new location will enable the Bank to improve operating  efficiencies and provide
better  access and  service to its  customers.  This new  branch  provides  full
banking and trust services, including safe deposit boxes and an ATM.

     The Bank  opened a new branch on March 1, 1995 which is located  within the
Redner's Supermarket on Airport Road, Allentown, Lehigh County,  Pennsylvania. A
second new branch was opened on December 8, 1995 within the Redner's Supermarket
at the  Northampton  Crossings  Shopping  Center  at  Routes  248 and 33,  Lower
Nazareth  Township,  Easton,  Northampton  County,  Pennsylvania.  Both of these
branches  are  full  service  facilities  that  include  an ATM and are open for
extended hours including evenings, Saturdays and Sundays.
<PAGE>

     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) (a deposit  package  program which provides for premium
interest rates on high balance interest-bearing  checking accounts, money market
accounts 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 car and truck
loans.

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

     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 Pennsylvania 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,
<PAGE>

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;  First Valley Bank,  headquartered  in Bethlehem,
Pennsylvania,  with branches in 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.

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

<PAGE>

First C. G. Company, Inc.

     In July 1986, the Company established a wholly-owned  subsidiary,  First C.
G.  Company,  Inc.,  a Delaware  corporation,  for the purpose of  investing  in
various types of securities.  As of December 31, 1995, First C. G. Company, Inc.
had total assets of $2,983,000,  of which  $1,631,000 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, 1995 was $2,811,000.

Supervision and Regulation

     Bank  holding  companies  and banks are  extensively  regulated  under both
federal and state law. 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").

     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 "Recent Legislation".

     The Company is  generally  prohibited  under the  Holding  Company Act from
engaging  in, or  acquiring  direct or  indirect  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 are closely related to banking within the meaning of the
Holding  Company  Act.  These  activities  include,  among  other,  operating  a
mortgage,  finance,  credit card or factoring  company;  performing certain data
processing  operations;  providing  investment and financial  advice;  acting as
insurance  agent or underwriter for certain types of  credit-related  insurance;
leasing personal  property on a full-payout,  nonoperating  basis;  and, certain
stock brokerage and investment advisory services.
<PAGE>

     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,
the  Pennsylvania  Department of Banking has the authority to examine the books,
records and affairs of any  Pennsylvania  bank holding company or to require any
documentation deemed necessary to ensure compliance with the Banking code.

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

     The Company,  as an affiliate of the Bank within the meaning of the Federal
Reserve Act, is subject to certain  restrictions  under the Federal  Reserve Act
regarding  extensions  of credit to it by the Bank,  and the use of the stock or
other  securities  of the  Company  as  collateral  for loans by the Bank to any
borrower.  Further,  under the Federal Reserve Act and the Federal Reserve Board
regulations,  a bank holding  company and its  subsidiaries  are prohibited from
engaging in certain  tie-in  arrangements  in  connection  with any extension of
credit or provision of credit or provisions  of any property or services.  These
so-called "anti-tie-in  provisions" generally provide that a bank may not extend
credit,  lease or sell  property,  or furnish  any  service,  or fix or vary the
consideration  for any of the  foregoing to, or obtain the same from, a customer
on the  condition  or  requirement  that the customer  provide  some  additional
credit, property or service to the bank, to the bank's holding company or to any
other  subsidiary  of  the  bank's  holding  company  or  on  the  condition  or
requirement that the customer not obtain other credit,  property or service from
a competitor of the bank,  the bank's  holding  company or any subsidiary of the
bank's holding company.

<PAGE>

     The Bank

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

     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, 1995 and 1994 in Note
U of the Notes to Consolidated Financial Statements contained under the caption,
"Item 7, Financial Statements".

     Accounting for Investment Securities

     The Company adopted on December 31, 1993 the Financial Accounting Standards
Board  Statement of Financial  Accounting  Standards  No. 115,  "Accounting  for
Certain Investments in Debt and Equity Securities". This statement provides that
the  Company  classify  its  debt and  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   had  no   trading   securities   in  1995  and   1994.
Available-for-sale securities are measured at fair value with the net unrealized
gains an dlosses reported in equity.  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".
<PAGE>

     Capital Regulation

     Banking  regulators  require bank holding  companies  and banks to maintain
certain capital levels,  through  risk-based capital standards by which all bank
holding  companies and banks are evaluated in terms of capital  adequacy.  These
capital  standards relate a banking company's capital to the risk profile of its
assets.  The risk-based  capital  standards now require all banks to have Tier 1
capital  of at  least  4%  and  total  capital,  Tier  1 and  Tier  2,  of 8% of
risk-adjusted  assets. 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 a limited amount of the allowance for
possible loan losses.

     Banking  regulators  also  require  bank  holding  companies  and  banks to
maintain a certain Tier 1 leverage  ratio.  The leverage  ratio  requirement  is
measured  as the  ratio  of Tier 1  capital  to  adjusted  average  assets.  The
following  tables  provide a comparison of the  Company's and Bank's  risk-based
capital ratios and leverage ratio to the minimum  regulatory  guidelines for the
periods indicated.

Capital Ratios of the Company
<TABLE>

                                                         Minimum  
                                    Company       Regulatory Requirement

at December 31,                  1995    1994       1996, 1995 and 1994
<S>                          <C>      <C>           <C>   

Tier 1 Leverage Ratio            8.20%   8.43%        3.00%  -  5.00%
Risk-Based Capital Ratio
     Tier 1 Capital             14.62%  14.82%             4.00%
     Total Capital              15.86%  16.06%             8.00%
</TABLE>


Capital Ratios of the Bank
<TABLE>

                                                         Minimum  
                                     Bank         Regulatory Requirement

at December 31,         1995    1994                1996, 1995 and 1994
<S>                           <C>    <C>           <C>   
      
Tier 1 Leverage Ratio            6.80%   7.23%        3.00%  -  5.00%
Risk-Based Capital Ratio
     Tier 1 Capital             12.41%  12.77%             4.00%
     Total Capital              13.66%  14.23%             8.00%
</TABLE>

     The 1991 Banking Law requires  each federal  Banking  agency  including the
Board of Governors of the Federal Reserve Bank to revise its risk-based  capital
standards to ensure that those standards take adequate  account of interest rate
risk, concentration of credit risk and the risks of non-traditional  activities,
as  well  as  reflect  the  actual  performance  and  expected  risk  of loss on
multi-family  mortgages.  All of the bank regulatory  agencies recently issued a
<PAGE>

final rule that amends  their  capital  guidelines  for  interest  rate risk and
requires  such  agencies  to consider in their  evaluation  of a bank's  capital
adequacy  the  exposure  of a bank's  capital and  economic  value to changes in
interest  rates.  This final rule does not  establish  an  explicit  supervisory
threshold.  The agencies intend,  at a subsequent date, to incorporate  explicit
minimum  requirements  for interest rate risk based  capital  standards and have
proposed a supervisory  model to be used  together with bank internal  models to
gather data and hopefully propose at a later date explicit minimum requirements.
This law also  requires  each  federal  Banking  agency,  including  the Federal
Reserve  Board,  to  specify,  by  regulation,  the  levels at which an  insured
institution would be considered  "well-capitalized",  "adequately  capitalized",
"undercapitalized",    "significantly    undercapitalized",    or    "critically
undercapitalized".

Recent Legislation

     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  one year  after  enactment.  Pennsylvania  law was  recently
amended to authorize any  out-of-state  bank holding company to accquire control
of any state bank or national  bank located in  Pennsylvania  afater it receives
written approval from the Pennsylvania Department of Banking.  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 recently
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
recently enacted such a law.

     On September 23, 1994, the President signed into law the "Riegle  Community
Development  and Regulatory  Improvement Act of 1994" (the  "Development  Act").
Among other things,  the  Development  Act  establishes a $382 million fund (the
"Fund") to promote economic  development and credit  availability in underserved
communities  by  providing  financial  and  technical  assistance  to  community
development financial institutions ("CDFI's").
<PAGE>

     CDFI's include banks, savings associations and bank holding companies which
have  a  primary  mission  of  promoting  community  development.   Institutions
receiving monies from the Fund will be required to provide matching funds dollar
for dollar.  Under the Fund,  a CDFI may receive up to $5 million  over a 3-year
period, with affiliates in other states not presently served eligible to receive
up to an additional $3.75 million over 3 years.

     One third of the Fund will be used to finance the Bank  Enterprise  Act, an
existing  (but  previously  unfunded)  incentive  program  designed to encourage
depository institutions to increase funding in distressed neighborhoods.

     In addition to the above, the Development Act contains  provisions relating
to,  among  others,  small  business  capital  formation,  small  business  loan
securitization, consumer protection for "reverse mortgages", paperwork reduction
and reform of the national flood insurance program.

     The foregoing  necessarily is a summary and general  description of certain
provisions of each of the Interstate  Act, the  Development Act and the recently
enacted  Pennsylvania  law,  and does not  purport to be  complete.  Many of the
provisions of each will be  implemented  through the adoption of  regulations by
the  various  Federal  and  state  banking  agencies.   Moreover,  many  of  the
significant  provisions of the legislation have not yet become effective.  As of
the date  hereof,  the  Company  is  continuing  to study  the  legislation  and
regulations  relating to the legislation but cannot yet assess its impact on the
Company.

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>

Employees

     As of December 31, 1995, the Company had  approximately  196 employees,  of
whom  52 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 Allowance for Possible Loan Losses
                Average Deposit Balances
                Maturities of Certificates of Deposit over $100,000

<PAGE>

                             INVESTMENT SECURITIES

                                  (Unaudited)

Summary of Available-for-Sale and Held-to-Maturity Securities at December 31,

<TABLE>

                            1995                 1994                1993

Avail-for-Sale Securities     Carrying             Carrying            Carrying
                              Amount at            Amount at           Amount at
                   Amort Cost Fair Val  Amort Cost Fair Val  Amort Cost Fair Val

<S>               <C>       <C>       <C>       <C>         <C>      <C>

U. S. Treas         $ 7,002   $ 7,050   $ 2,999   $ 2,922     $ 9,574   $ 9,598
U. S. Govt Agc       17,066    17,159    13,246    12,807       2,841     2,861
States and Political
 Subdivisions         6,638     6,689     4,507     4,431       4,121     4,225
Mtg Backed Sec       24,529    24,689    21,759    20,720      15,609    15,796
Other Debt Sec          300       307      --        --           --        --_
                    -------   -------   -------   -------     -------   -------
Equity Securities     2,727     3,155     2,666     2,730       2,406     2,587_
                    -------   -------   -------   -------     -------   -------
 Total Avail-for-Sale  
    Securities      $58,262   $59,049   $45,177   $43,610     $34,551   $35,067 
                    =======   =======   =======   =======     =======   ======= 
</TABLE>

<TABLE>

                            1995                 1994                1993

Held-to-Maturity Securities   Carrying             Carrying            Carrying
                              Amount at            Amount at           Amount at
                   Amort Cost Fair Val  Amort Cost Fair Val  Amort Cost Fair Val
<S>                <C>       <C>       <C>       <C>        <C>       <C>


U. S. Treas          $ 2,997   $ 3,007   $ 8,071   $ 7,653    $ 4,108   $ 4,151
U. S. Govt Agc         6,524     6,539     5,386     5,026      3,900     3,893
States and Political 
 Subdivisions          2,086     2,118     4,025     3,741      2,904     2,917
Mtg Backed Sec         8,447     8,524    18,535    17,479     15,311    15,246
Other Debt Sec          --        --         508       499        637       636
                     -------   -------   -------   -------    -------   -------
 Total Held-to-Mat 
  Securities         $20,054   $20,188   $36,525   $34,398    $26,860   $26,843
                     =======   =======   =======   =======    =======   =======
</TABLE>

<PAGE>

                    INVESTMENT SECURITIES YIELD BY MATURITY

     The maturity  distribution  and weighted  average  yield of the  investment
portfolio  of the Company at December 31, 1995 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.  Stocks 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, 1995
<TABLE>

AVAILABLE-FOR-SALE              
AT FAIR VALUE               After 1 But     After 1 
(Dollars in    Within 1 Yr  Within 5 Yrs Within 10 Yrs After 10 Yrs   Total
 Thousands,
 Unaudited)     Amt   Yld    Amt   Yld    Amt   Yld    Amt    Yld    Amt   Yld
<S>        <C>    <C>   <C>     <C>   <C>    <C>   <C>     <C>   <C>     <C>


US Treas     $2,018 5.76% $ 5,032 5.51% $  --    --% $   --   --%  $ 7,050 5.58%
US Gvt Agcy      --   --    8,561 6.31   5,693 6.58    2,905 7.98   17,159 6.68
Mtge-backed
 Securities       1 7.82    2,872 5.96   2,062 4.99   19,754 6.89   24,689 6.62
State and Pol
 Subdivisions   856 4.04    2,704 5.56   1,477 4.72    2,282 4.93    6,689 4.97
Other Debt Sec   --   --      307 6.64     --    --       --   --      307 6.64
Equity Sec       --   --       --   --     --    --    3,155 4.95    3,155 4.95
             ------ ----  ------- ----  ------ ----  ------- ----  ------- ---- 
 TOTAL AVAIL-
 FOR-SALE
 SECURITIES  $2,875 5.25% $18,846 5.97% $9,232 5.93% $28,096 6.63% $59,049 6.24%
             ====== ====  ======= ====  ====== ====  ======= ====  ======= ==== 
Average Of
 Avail-for-Sale
 Sec in yrs   0.67           3.59         7.53         24.24         12.68
              ====           ====         ====         =====         =====


HELD-TO-MATURITY              
AT AMORTIZED COST            After 1 But    After 1 
(Dollars in    Within 1 Yr  Within 5 Yrs Within 10 Yrs After 10 Yrs   Total
 Thousands,
 Unaudited)     Amt   Yld    Amt   Yld    Amt   Yld    Amt    Yld    Amt   Yld


US Treas     $1,000  4.39% $1,997 5.34% $  --    --% $  --     --% $ 2,997 5.02%
US Govt Agcy     --    --   1,895 5.36   4,629 7.00     --     --    6,524 6.52
Mtg-backed
 Securities      --    --      69 9.75     991 6.27   7,387  6.61    8,447 6.60
State and Pol
 Subdivisions    --    --   1,307 4.72     319 4.95     460  5.29    2,086 4.88
             ------  ----  ------ ---   ------ ----  ------  ----  ------- ---- 
 TOTAL HELD-
 TO-MATURITY
 SECURITIES  $1,000  4.39% $5,268 5.2%  $5,939 6.77% $7,847  6.53% $20,054 6.16%
             ======  ====  ====== ===   ====== ====  ======  ====  ======= ==== 

Average Of Held
-to-Maturity
Securities
in years       0.23          3.37         8.41        22.68          12.18
               ====          ====         ====        =====          =====
</TABLE>

<PAGE>

                             LOAN PORTFOLIO BY TYPE

     The loan  portfolio by type is summarized  in the  following  table for the
years ended December 31, 1995, 1994, 1993, 1992 and 1991.
<TABLE>

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

                           1995       1994       1993      1992        1991

<S>                   <C>        <C>        <C>        <C>        <C> 

Real Estate - Resid     $122,293   $117,205   $102,481   $124,778   $113,522
Real Estate - Const        4,959      2,861      2,557      2,353      2,793
Real Estate - Comm        35,316     35,673     36,371     30,686     30,849
Consumer/Installment      27,685     24,626     20,743     16,337     12,347
Commercial (non-RE)
    and Agricultural       5,403      7,503      7,168      8,515      9,152
State and Political
 Subdivisions              1,290        288        476        744      1,315
Other                         13         18         22        264         16
                         -------    -------    -------    -------    -------
TOTAL GROSS LOANS        196,959    188,174    169,818    183,677    169,994


Unearned Income           (3,829)    (2,959)    (1,252)      (445)      (262)
                         -------    -------    -------    -------    -------
Total Loans              193,130    185,215    168,566    183,232    169,732
Allowance for Possible
    Loan Losses           (2,443)    (2,187)    (1,953)    (1,840)    (1,702)
                         -------    -------    -------    -------    -------
NET LOANS               $190,687   $183,028   $166,613   $181,392   $168,030
                        ========   ========   ========   ========   ========
</TABLE>

     At December 31, 1995 there were no  categories  of loans  exceeding  10% of
total loans which is not otherwise disclosed as a category of loans 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, 1995,  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>

                                  Due in     Due in      Due in
As of December 31, 1995          One Year    One to       Over
(Dollars in Thousands)           or Less   Five Years   Five Year    Total 
<S>                            <C>       <C>          <C>         <C>   


Real Estate - Construction       $ 1,801   $   237      $ 2,921     $ 4,959
Real Estate - Commercial           2,350     6,339       26,627      35,316
Commercial (Non-Real Estate)
     and Agricultural              2,871     1,753          779       5,403
                                 -------   -------      -------     -------
     TOTAL                       $ 7,022   $ 8,329      $30,327     $45,678
                                 =======   =======      =======     =======

Loan Maturity After 1 Year With:

   Predetermined Interest Rate             $   463      $ 2,427
   Floating Interest Rate                    7,866       27,900
                                             -----       ------
     TOTAL                                 $ 8,329      $30,327
                                           =======      =======
</TABLE>

<PAGE>


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

              ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>

                                  (Unaudited)

                                               As of December 31,
                                   1995     1994     1993     1992     1991
Loan Categories                              (Dollars in Thousands)

<S>                            <C>      <C>      <C>     <C>         <C>  
     Commercial                  $1,049   $1,142   $  815   $  754    $ 799
     Real Estate- Construction        3       69       80       59       15
     Real Estate - Residential      184      143       78       82       87
     Consumer/Installment           534      451      393      254      214
     Unallocated                    673      382      587      691      587
                                 ------   ------   ------   ------   ------
          TOTAL                  $2,443   $2,187   $1,953   $1,840   $1,702
                                 ======   ======   ======   ======   ======

</TABLE>


           PERCENTAGE OF TOTAL LOANS IN EACH CATEGORY TO TOTAL LOANS

<TABLE>



Loan Categories         (Dollars in Thousands)

                                               As of December 31,
                                   1995     1994     1993     1992     1991
Loan Categories                              (Dollars in Thousands)
<S>                            <C>      <C>      <C>      <C>      <C> 

     Commercial                   21.33%   23.11%   26.12%   20.50%   24.32%
     Real Estate - Construction    2.52     1.52     1.52     1.31     1.64
     Real Estate - Residential    62.09    62.28    60.80    72.08    66.78
     Consumer/Installment         14.06    13.09    11.56     6.11     7.26
                                 ------   ------   ------   ------   ------ 
          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,
1995, 1994 and 1993 are presented in the following table.



                AVERAGE DEPOSIT BALANCE BY MAJOR CLASSIFICATION

                                  (Unaudited)
<TABLE>

                                   For the Year Ended December 31,
                                1995             1994          1993
                         Average            Average           Average
                         Balance    Rate    Balance   Rate    Balance     Rate
                                       (Dollars in Thousands)
<S>                   <C>       <C>      <C>       <C>     <C>        <C>

Demand Deposits
 Non-Interest Bearing   $ 23,782    --- %  $ 23,347    --- %  $ 19,778    --- %
 Interest Bearing         42,955   1.84      43,636   1.72      36,482   2.25
Money Market Deposits     17,639   2.81      20,383   2.40      22,802   2.62

Savings & Club Accounts   65,452   2.67      70,442   2.66      61,456   3.06
Certificates of Deposit
   under $100,000         90,925   5.47      79,650   4.55      78,796   4.97
Certificates of Deposit
   of $100,000 or more     6,184   5.24       2,961   3.75       3,523   3.78
                           -----              -----              -----       

      Total Deposits    $246,937           $240,419           $222,837
                        ========           ========           ========
</TABLE>

           MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
                                  (Unaudited)
<TABLE>

                                   At December 31,
(Dollars in Thousands)              1995     1994
<S>                             <C>      <C>   
   
Three Months or Less              $1,800   $2,623
Over Three, Through Six Months     2,312    1,131
Over Six, Through Twelve Months    1,064      671
Over Twelve Months                 1,447      705
                                  ------   ------
     TOTAL                        $6,623   $5,130
                                  ======   ======
</TABLE>

     There were no brokered deposits at December 31, 1995 and 1994.

<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  Instalment  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.

Item 3. Legal Proceedings

     Neither the  Company,  the Bank nor any of their  properties  is subject to
other  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 18, 1996,
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.



 Name/Age                   Positions                   Positions
                         with the Company             with the Bank

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

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

Reid L. Heeren       Treasurer since January,     Senior Vice President and
54  (c)              1987; Vice President since   Chief Financial Officer since
                     April, 1985                  January, 1987; Cashier since
                                                  November, 1984

Gerald E. Kemmerer   None                         Senior Vice President and
64  (d)                                           Senior Loan Officer since
                                                  July, 1994 

Arthur Williams      None                         Senior Vice President,
50  (e)                                           Administration since 
                                                  November, 1988

Barbara A. Seifert  None                          Vice President,
42  (f)                                           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  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 as Vice President, Community
    Banking, Chester County, Pennsylvania (March, 1982 to September, 1982).

(d)  Mr.  Kemmerer was  previously  Executive  Vice  President,  Chief
     Lending Officer of Twin Rivers Community Bank from June, 1990 to July,
     1994.  Prior to June, 1990 Mr. Kemmerer was employed by Merchants Bank, 
     N.A. (successor to Easton National Bank & Trust Co.) from September, 1949,
     retiring in December, 1989.  During those years, Mr. Kemmerer served by 
     bank in many different capacities and at the time of retirement was Senior
     Vice President, Senior Lender at Merchants.

(e)  Mr. Williams was previously  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, 1995 there were 808 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"  contained  in "Item 7,  Financial  Statements")  and a certain loan
agreement (see "Note H - Long-Term Debt" in the "Notes to Consolidated Financial
Statements" contained in "Item 7, 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 $18.00 in December 1995 and
$15.50 in December 1994. Stock prices and dividends per share have been restated
to reflect the 5% stock dividend of June 1994 (see "Note T Equity  Transactions"
in the  "Notes  to  Consolidated  Financial  Statements"  contained  in "Item 7,
Financial Statements").


 1994                    High            Low        Cash Dividends
                                                       Declared
     First Quarter     $19.05          $16.19        $  0.1619
     Second Quarter     17.26           15.48           0.1619
     Third Quarter      19.75           17.00           0.1700
     Fourth Quarter     19.25           15.50           0.1700
                                                     ---------
     TOTAL                                           $  0.6638
                                                     =========


1995

     First Quarter     $17.25          $15.75        $  0.1700
     Second Quarter     17.00           14.38           0.1700
     Third Quarter      18.25           15.75           0.1700
     Fourth Quarter     19.00           17.25           0.1700
                                                     ---------
     TOTAL                                           $  0.6800
                                                     =========

<PAGE>

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

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

     The  following  financial  review and  analysis  is  intended  to assist in
understanding  and evaluating  the major changes in the financial  condition and
earnings  performance  of First  Colonial  Group,  Inc. (the  "Company")  with a
primary focus on the analysis of operating  results for the years ended December
31,  1995,  1994 and 1993.  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.  

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 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, 1995, a copy of which may be obtained  from the
Company upon request and without charge (except for the exhibits thereto).

Financial Performance Summary

     Consolidated net income in 1995 was $1,401,000 as compared to $2,342,000 in
1994, a decrease of $941,000 or 40.2%. In 1994, net income increased by $434,000
or 22.7% from net income of $1,908,000 in 1993. Earnings per share were $0.98 in
1995 compared to $1.66 in 1994 and $1.55 in 1993.  The average  shares of common
stock  outstanding  in  1995,  1994  and  1993  were  1,432,753,  1,411,046  and
1,233,543, respectively.

     The  1995  earnings  decrease  is  principally  attributable  to a loss  of
$1,264,000 due to the overdrafts of a certain  customer.  These overdraft losses
were the primary  reason for the increase in the  provision  for  possible  loan
losses of  $1,378,000.  Also  affecting  earnings was an increase in total other
expenses of  $1,120,000  offset in part by a $810,000  increase in net  interest
income and an increase of $244,000 in total other income.

     The increase in the provision for possible loan losses is principally due
to overdrafts of a certain customer. The Company has taken legal action to
recover these funds (see discussion on "Allowance and Provision for Possible
Loan Losses"). Total operating expenses increased due to higher salary and
<PAGE>

occupancy  expenses  as  a  result  of  a   full   year's   operation   of   the
Stroudsburg  branch acquired in October 1994, the opening of the two supermarket
branches in 1995 (Airport Road in March and  Northampton  Crossings in December)
and the  acquisition  of the Pointe North branch in November  1995 combined with
the  concurrent  closing of the Park Plaza  branch.  Also  increasing  operating
expenses were higher legal expenses  related to the  overdrafts,  and additional
advertising  expenses  resulting  from  the new  branches.  These  increases  in
expenses  were  partially  offset by a  decrease  in Federal  Deposit  Insurance
premiums  (see  discussion  on  "Other  Expenses"  and Note I of the  "Notes  to
Consolidated Financial Statements"). Net interest income was $12,644,000 in 1995
as compared to $11,834,000 in 1994.  This increase of 6.8% is due in part to the
new branches and growth in loans and deposits  (see  discussion on "Net Interest
Income").  Total other  income  including  service  charges on  deposits,  trust
revenues,  net  securities  gains,  and gains on the sale of mortgage  loans was
$2,274,000 in 1995 as compared to $2,030,000,  a gain of 12.0% in 1994.  Most of
this  increase was in service  charges on deposit  accounts  (see  discussion on
"Service Charges and Other Income"). The net gains on the sale of securities was
$22,000  in  1995  versus  $97,000  in  1994  (see   discussion  on  "Securities
Available-for-Sale").

     The gain on the sale of mortgage loans  held-for-sale  for 1995 was $22,000
as   compared  to  $37,000  in  1994  (see   discussion   on   "Mortgage   Loans
Held-for-Sale").  Federal  income  taxes  decreased  by  $503,000  in 1995  from
$1,018,000 in 1994 to $515,000 as a result of the lower earnings.

     The improvement in 1994 net income  reflected  higher net interest  income,
increases in trust revenues,  service charges on deposit accounts and reductions
in the provision for possible loan losses partially  reduced by higher operating
expenses and  reductions in net security gains and gains on the sale of mortgage
loans.  Net interest  income for 1994 was $11,834,000 as compared to $10,957,000
for 1993, an increase of $877,000 or 8.0%.  Total other income  declined in 1994
by $300,000 or 12.8% to $2,030,000 from the 1993 amount of $2,330,000.  Included
in this decrease are a $380,000 reduction in gains on the sale of mortgage loans
from  $417,000  in 1993 to $37,000 in 1994 and a  reduction  in net gains on the
sale of securities of $111,000 from $208,000 in 1993. Service charges on deposit
accounts  increased in 1994 by $154,000 or 23.9%.  Trust  revenues  increased by
$10,000 in 1994 and other operating income  increased by $27,000.  The provision
for possible  loan losses was $420,000 for 1994 which is $345,000 or 45.1% lower
than the 1993  provision of $765,000.  The decline in the provision for possible
loan losses was the result of lower  charge-offs  in 1994.  Total other expenses
for 1994 were  $10,084,000  as compared to $9,845,000 in 1993.  This increase of
$239,000 or 2.4% is primarily  attributable  to the  acquisition of new branches
and normal expense  increases.  Federal income tax increased by $249,000 in 1994
to a total of $1,018,000  as compared to $769,000 in 1993.  This increase is the
result of higher net income before taxes.

<PAGE>

SELECTED FINANCIAL DATA
<TABLE>

(Dollars in Thousands, 
except per share data)
For the Year Ended December 31,   1995      1994      1993      1992     1991
<S>                         <C>        <C>       <C>       <C>       <C>

CONSOLIDATED SUMMARY OF INCOME:

Interest Income               $  21,896  $ 18,986  $ 18,525  $ 19,649  $ 20,645
  Interest Expense                9,252     7,152     7,568     9,346    11,467
                              --------- --------- --------- --------- ---------
  Net Interest Income            12,644    11,834    10,957    10,303     9,178
  Provision for Possible 
    Loan Losses                   1,798       420       765     1,119       810
  Gains on the Sale of 
    Mortgage Loans                   22        37       417      ---        ---
  Other Income, Excluding 
    Securities and Loan 
    Sale Gains                    2,230     1,896     1,705     1,554     1,423
  Securities Gains, Net              22        97       208       216        50
  Other Expense                  11,204    10,084     9,845    10,351     8,364
                              --------- --------- --------- --------- ---------
  Income Before Income Taxes
    and Cumulative Effect of
    Accounting Method Change      1,916     3,360     2,677       603     1,477
  Applicable Income Taxes           515     1,018       769        22       260
                              --------- --------- --------- --------- ---------
  Income Before Cumulative Effect
    of Accounting Method Change   1,401     2,342     1,908       581     1,217
  Cumulative Effect of Accounting
    Method Change(1)               ---       ---       ---        117      ---
                              --------- --------- --------- --------- ---------
  Net Income                   $  1,401   $ 2,342   $ 1,908   $   698   $ 1,217
                              --------- --------- --------- --------- ---------
Cash Dividends Paid            $    972   $   936   $   812       720   $   715
Cash Dividends Paid Per Share      0.68      0.66      0.65      0.65      0.65
Dividends Paid to Net Income      69.38%    39.97%    42.56%   103.15%    58.75%

PER SHARE DATA:
  Income Before Cumulative Effect
   of Accounting Method Change $   0.98   $  1.66   $  1.55   $  0.52   $  1.10
  Cumulative Effect of Accounting
   Method Change                    ---       ---       ---       .11      ---
  Net Income                       0.98      1.66      1.55       .63      1.10
  Average Common Shares 
   Outstanding                1,432,753 1,411,046 1,233,543 1,112,680 1,104,327

CONSOLIDATED BALANCE SHEET DATA:
  Total Assets                 $298,514  $284,553  $268,738  $246,072  $226,003
  Loans (Net of 
   Unearned Discount)           193,130   185,215   168,566   183,232   169,732
  Mortgage Loans Held-for-Sale    1,006        69    15,378       ---       ---
  Deposits                      254,102   247,532   235,565   218,378   198,753
  Securities Sold Under 
   Agreements to Repurchase       6,096     9,027     4,711     3,533     3,520
  Debt (Short-Term and Long-Term) 7,643     1,612     1,331     1,132     1,550
  Shareholders' Equity           24,767    22,400    21,994    16,058    15,912
  Book Value Per Share            16.84     15.39     15.26     14.37     14.35

SELECTED CONSOLIDATED RATIOS:
  Net Income To:
   Average Total Assets             .48%      .85%      .76%      .29%      .55%
   Average Shareholders' Equity    5.98%    10.51%    10.43%     4.27%     7.84%
   Average Shareholders' Equity
    to Average Assets              8.00%     8.10%     7.24%     6.81%     6.98%

</TABLE>

(1)  See Notes A7 and J to the Consolidated Financial Statements.

<PAGE>

CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS
(Dollars inThousands) 
For the Year Ended 
December 31,                    1995         1994         1993
                           Int   Avg           Int   Avg          Int   Avg
                     Avg   Inc/  Yld    Avg    Inc/  Yld    Avg   Inc/  Yld
                     Bal   Exp   Rate   Bal    Exp   Rate   Bal   Exp   Rate

ASSETS
INTEREST-EARNING 
ASSETS
Interest-Bearing 
Balances with 
  Banks        $2,313  $ 133  5.75%  $3,507  $ 158  4.49%  $3,649  $ 123  3.40%
Fed Fds Sold      139      6  4.32    1,471     57  3.86    1,430     42  2.94
Inv. Sec
 Taxable       73,712  4,477  6.07   66,967  3,439  5.13   45,301  2,372  5.24
 Non-Tax (1)    8,408    583  6.94    7,516    527  7.02    7,118    580  8.15
Loans (1) (2  190,874 16,927  8.87  178,624 15,012  8.40  180,850 15,632  8.64
Allowance for
 Loan Losses   (2,708)   ---   ---   (2,084)   ---   ---   (1,938)   ---   ---
              ------- ------        ------- ------        ------- ------      
Net Loans     188,166 16,927  9.00  176,540 15,012  8.50  178,912 15,632  8.59
              ------- ------        ------- ------        ------- ------      
 Total Int-
 Earn Assets  272,738 22,126  8.11  256,001 19,193  7.50  236,410 18,749  7.93
Non-Interest
Earning Assets 20,466    ---   ---   19,247   ---    ---   16,181    ---   ---
              ------- ------        ------- ------        ------- ------      
TOTAL ASSETS, 
INT INC      $293,204 22,126  7.55 $275,248 19,193  6.97 $252,591 18,749  7.42
              ------- ------        ------- ------        ------- ------      

LIABILITIES
INT-BEARING
LIABILITIES
Int-Bearing Dep
 Demand Dep  $ 42,955 $  791  1.84 $ 43,636    752  1.72 $ 36,482    821  2.25
 Money Market
  Deposits     17,639    496  2.81   20,383    490  2.40   22,802    598  2.62
 Svgs & Club
  Deposits     65,452  1,750  2.67   70,442  1,876  2.66   61,456  1,883  3.06
 CD's over
  $100,000      6,184    324  5.24    2,961    111  3.75    3,523    133  3.78
 All Other 
 Time Deposits 90,925  4,970  5.47   79,650  3,624  4.55   78,796  3,916  4.97
              ------- ------        ------- ------        ------- ------      
  Total Int-
   Bear Dep  $223,155  8,331  3.73  217,072  6,853  3.16  203,059  7,351  3.62

Securities Sold
 Under Agree
 to Repurchase  9,298    346  3.72    6,428    161  2.51    4,078     85  2.08
Other Short-Term
 Borrowing      5,743    338  5.89      177      8  4.44      317     15  4.73
Long-Term Debt  2,207    236 10.69    1,075    130 12.08    1,133    117 10.33
              ------- ------        ------- ------        ------- ------      
 Total Int-
 Bear Liab    240,403  9,251  3.85  224,752  7,152  3.18  208,587  7,568  3.63

NON-INT
BEARING LIAB
 Non-Int
 Bear Dep      23,782   ---   ---    23,347   ---   ---    19,778   ---    ---
 Other Liab     5,575   ---   ---     4,855   ---   ---     5,929   ---    ---
              ------- ------        ------- ------        ------- ------      
 TOTAL LIAB   269,760  9,251  3.43  252,954  7,152  2.83  234,294  7,568  3.23
 SHAREHOLDERS'
 EQUITY        23,444   ---   ---    22,294   ---   ---    18,297   ---    ---
              ------- ------        ------- ------        ------- ------      
 TOTAL LIAB &
 SHAREHOLDERS'
 EQUITY, 
 INT EXP     $293,204  9,251  3.16 $275,248  7,152  2.60 $252,591  7,568  3.00
              ------- ------        ------- ------        ------- ------      

NET INT INC          $12,875               $12,041               $11,181
                      ------                ------                ------      
 Net Int 
  Spread (3)                  4.26                  4.37                  4.30
 Effect of 
  Int-Free 
  Sources Used to 
  Fund Earn Assets            0.46                  0.33                   .43

NET INTEREST MARGIN (4)       4.72%                 4.70%                 4.73%
                              ----                  ----                  ----

<PAGE>

(1)  The indicated interest income and average yields are presented on a taxable
     equivalent  basis. The taxable  equivalent  adjustments  included above are
     $231,000,  $207,000  and  $224,000  for the  years  1995,  1994  and  1993,
     respectively.  The  effective  tax  rate  used for the  taxable  equivalent
     adjustment was 34%.

(2)  Loan fees of $101,000,  $406,000 and $728,000 for the years 1995,  1994 and
     1993, respectively,  are included in interest income. Average loan balances
     include  non-accruing  loans and average loans  held-for-sale  of $682,000,
     $2,462,000 and $42,000 for 1995, 1994 and 1993, 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  on page 8 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  "Notes  to  Consolidated  Financial  Statements".  Interest  income on loans
includes  loan fees of  $101,000,  $406,000  and  $728,000  for the years  ended
December 31, 1995, 1994 and 1993, 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  $12,875,000  for 1995,  an increase of 6.9% or
$834,000 over $12,041,000 in 1994. As shown in the "Rate/Volume Analysis" table,
the  increase  in net  interest  income in 1995 was  attributable  to higher net
interest  income  from  changes in volume of  $579,000  and  changes in rates of
$255,000.  The  volume-related  change resulted primarily from increased average
balances for investments,  loans (including  mortgage loans  held-for-sale;  see
discussion on Loans and Mortgages Held-for-Sale) and an increase in certificates
of deposit over $100,000 and other time deposits,  partially  offset by declines
in  interest-bearing  demand deposits,  money market deposits,  savings and club
deposits (see discussion on Deposits). The rate-related change was primarily the
result of the increase of interest paid on deposits being less than the increase
on interest earned on investments  and loans.  Net interest  income,  on a fully
taxable  equivalent  basis,  in 1994  increased  7.7% or $860,000  over the 1993
figure  of  $11,181,000.  This  increase  was  the  result  of  an  increase  in
investments  partially  reduced by a decline in loans (including  mortgage loans
held-for-sale)  as an  increase  in  average  demand,  savings,  club  and  time
deposits.  Also  affecting  1994 net  interest  income was a decline of interest
earned on loans and investments  that was less than the decline on interest paid
on 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 4.72% for 1995, 4.70% for 1994 and 4.73% for 1993. The
increase in 1995 was the result of interest-earning assets increasing at a
greater rate than non-interest earning assets which was partially offset by a
decrease in the net interest spread, the difference of interest earned on assets
less the interest paid on deposits and debt. The interest spread was 4.26%,
4.37% and 4.30% for 1995, 1994 and 1993, 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, 1995 and 1994,  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 latter, changes in rate/volume, has been allocated in
its  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,
                                1995 to 1994                   1994 to 1993
                               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     $  (25)  $   29  $   (54)    $   34   $  39   $   (5)
 Federal Funds Sold         (51)     --       (51)        15      14        1
 Investment Securities    1,094      688      406      1,014    (229)   1,243
 Loans                    1,915      720    1,195       (618)   (217)    (401)
                          -----      ---      ---      -----    ----    -----

 Total Interest Income    2,933    1,437    1,496        445    (393)     838
                          -----      ---      ---      -----    ----    -----

Interest Expense
 Demand Deposits,
  Savings & Clubs           (81)     114     (195)      (184)   (559)     375
 Time Deposits            1,559      903      656       (313)   (327)      14
 Federal Funds Purchased
  and Securities Sold
  Under Agreements
  to Repurchase             185      113       72         76      27       49
 Short-Term Borrowings      344       97      247         (7)     --       (7)
 Long-Term Borrowings        92      (45)     137         13      19       (6)
                          -----      ---      ---      -----    ----    -----

 Total Interest Expense   2,099    1,182      917       (415)   (840)     425
                          -----      ---      ---      -----    ----    -----

 Increase in Net
  Interest Income        $  834   $  255   $  579     $  860  $  447   $  413
                          -----      ---      ---      -----    ----    -----
</TABLE>

<PAGE>

Interest Rate Sensitivity

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

     Rate sensitivity  arises from the difference  between the volumes of assets
which are  rate-sensitive  as compared to the volumes of  liabilities  which are
rate-sensitive.  A  comparison  of  interest  rate-sensitive  assets to interest
rate-sensitive  liabilities  is monitored  by the Bank on a regular  basis using
several time periods.  The mismatch of assets and liabilities in a specific time
frame is referred to as interest  sensitivity gap. Generally,  in an environment
of rising interest rates, a negative gap will decrease net interest income,  and
in an  environment of falling  interest  rates, a negative gap will increase net
interest income.

     While using this 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  maintains a negative  gap
position  because of the unequal  sensitivity  of these assets and  liabilities,
this  position  does  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.
By using a simulation model which takes into account these factors combined with
the current  negative gap position as  indicated in the  "Interest  Sensitivity"
table, management believes there is no significant impact on net interest income
in both  rising and  declining  interest-rate  environments.  This  strategy  is
believed by the Bank to minimize the overall interest-rate risk.

     Assets and  liabilities  are  allocated to a specific  time period based on
their scheduled  repricing date or on an historical basis. At December 31, 1995,
assets of  $124,779,000  (41.8% 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  $127,565,000  (44.8% of total assets) at the end of
1994 and  $134,906,000  (50.2% of total assets) at the end of 1993.  Liabilities
subject to rate  change  within  one year were  $133,068,000,  $146,710,000  and
$136,858,000  in 1995,  1994 and 1993,  respectively.  A negative  one-year  gap
position of  $8,289,000  existed as of December 31, 1995.  The gap  positions at
December 31, 1994 and 1993 were negative  $19,145,000  and negative  $1,952,000,
respectively.  The ratio of rate-sensitive assets to rate-sensitive  liabilities
for the one-year  time frame was .94 at the end of 1995,  compared to .87 at the
end of 1994  and .99 at the end of 1993.  The  "Interest  Sensitivity  Analysis"
table on page below presents a sensitivity gap analysis of the Company's  assets
and  liabilities  at December 31, 1995 for five  time-intervals.  The  Company's
liability  sensitive  position  decreased  in 1995 as a result of an increase in
longer term  certificates  of deposit  combined with a reduction of money market
and savings deposits.  This change in the deposit mix was due to higher interest
rates early in the year and customer anticipation of lower interest rates in the
future. Also affecting an increase in the liability sensitive position were some
increases in some longer term loans.  Management intends to continue to purchase
adjustable rate  securities,  make adjustable rate loans and market  longer-term
certificates of deposit to maintain an acceptable gap position.

<PAGE>

<TABLE>

Interest Sensitivity Analysis

(Dollars in Thousands) as of December 31, 1995
                       0-90    91-180    181-365    1-5
                       Days     Days      Days     Years  Over 5 years   Totals
<S>               <C>      <C>         <C>     <C>        <C>        <C>

Int-Bearing Dep
  with Banks        $   538  $     99    $  --   $    198   $   --     $    835
Federal Funds Sold    3,600       --        --        --        --        3,600
Inv Sec              17,816    11,624    14,360    27,803     7,500      79,103
Loans Held for Sale   1,006       --        --        --        --        1,006
Loans                28,863    12,765    22,159    54,425    72,475     190,687
Other Assets         11,949       --        --        --     11,334      23,283
                    -------  --------   -------   -------  --------    --------

TOTAL ASSETS        $63,772  $ 24,488   $36,519  $ 82,426   $91,309    $298,514
                    -------  --------   -------   -------  --------    --------

Non-Interest-Bearing
  Deposits          $26,690  $    --    $   --    $   --   $   --      $ 26,690
Int-Bearing Dep      49,895    20,131    22,613    43,066    91,707     227,412
Sec Sold Under
  Agreements 
  to Repurchase       6,096       --        --        --        --        6,096
Long-Term Debt          643       --        --        --        --          643
Short-Term Borrowing  7,000       --        --        --        --        7,000
Other                   --        --        --        --      5,906       5,906
Capital                 --        --        --        --     24,767      24,767
                    -------  --------   -------   -------  --------    --------

 TOTAL LIABILITIES 
  AND CAPITAL       $90,324  $ 20,131   $22,613   $43,066  $122,380    $298,514
                    -------  --------   -------   -------  --------    --------


Net Interest
 Sensitivity Gap   $(26,552) $  4,357   $13,906   $39,360  $(31,071)   $   --

Cumulative Interest
  Sensitivity Gap  $(26,552) $(22,195)  $(8,289)  $31,071  $    --     $   --
</TABLE>

<PAGE>

Service Charges and Other Income

     Service  charge income  amounted to $1,034,000 in 1995 compared to $798,000
in 1994 and $644,000 in 1993. In 1995 the service charges  increased by $236,000
or 29.6% over 1994 and the 1994  increase  over 1993 was $154,000 or 23.9%.  The
increase in 1995 was  primarily the result of increases in the number of deposit
accounts  and the increase in some deposit  related  fees.  The increase in 1994
over 1993 was due primarily to increases in deposit volume and the establishment
of a fee for automated teller machine services.

     In 1995 the  Company  had gains on the sale of  mortgage  loans of  $22,000
which were $15,000 or 40.5% less than the 1994 gains of $37,000. The decrease in
1995 was due to a lower  volume  of  mortgage  loan  sales  (see  discussion  on
Mortgage Loans Held-for-Sale).

     Other income was $560,000 in 1995, an increase of $73,000 or 15.0% compared
to $487,000 in 1994. Other income for 1993 was $460,000. These increases are the
result of higher loan fees due to larger volumes and increases in  miscellaneous
non-deposit service fees.

Trust Department

     Revenue from the Bank's Trust  Department  operations was $636,000 in 1995,
representing an increase of $25,000 or 4.1% over revenue of $611,000 in 1994. In
comparison,  the Trust Department  revenue for 1994 increased by 1.7% or $10,000
over the 1993  revenue of  $601,000.  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 Department assets were $173,435,000
and $150,053,000 at December 31, 1995 and 1994, respectively.

     A new  investment  product was  developed in 1995 by the Trust  Department.
Smart  Accessible  Money  ("SAM") is a money market  mutual fund  program  which
provides  daily  liquidity  and  market  rates of  interest  to  customers  with
investable  balances in excess of $50,000.  The balances are invested  through a
trust custody  account.  The total amount invested in the SAM program at the end
of 1995 was $5,838,000.

 Other Expenses

     Salaries  and  employee  benefits   represent  a  significant   portion  of
non-interest  expense.  These  expenses,  amounting to $5,132,000,  increased by
$492,000 or 10.6 % in 1995  compared to $4,640,000  in 1994.  These  expenses in
1994 amounted to an increase of 8.0% over the  $4,295,000  reported in 1993. The
increase in 1995 was  primarily  due to salary  increases of  approximately  4%,
added staff as a result of the purchase of the Stroudsburg  branch,  the opening
of the two new supermarket  branches,  and modest other staff additions.  Salary
expense in 1994 increased due to normal salary increases of approximately 3% and
some staff additions including the new Brodheadsville and Stroudsburg branches.

     Occupancy and equipment expenses were $1,991,000 in 1995, which was a 17.3%
or a $293,000  increase from  $1,698,000 in 1994.  The 1994 amount was 9.8% more
than the  1993  occupancy  and  equipment  expense  of  $1,547,000.  Most of the
increase in 1995 was due to the  establishment  of two new supermarket  branches
(Airport  Road and  Northampton  Crossings),  the  purchase of the Pointe  North
branch and concurrent closing of the Park Plaza branch, and scheduled  increases
in building rent. The  additional  occupancy and equipment  expenses in 1994 are
primarily  due to the  purchase of our  Stroudsburg  branch,  major  maintenance
projects in several branches and scheduled increases in building rent. Occupancy
and  equipment  expenses are expected to increase by  approximately  $260,000 in
<PAGE>

1996 as the result of the planned purchase of additional computer  equipment,  a
full year of  expenses  for the new  supermarket  branches  and  scheduled  rent
increases.

     Other  operating  expenses  (such as litigation  costs,  deposit  insurance
premiums, data processing fees, legal, accounting, supplies, postage, telephone,
advertising and publicity) for 1995 were  $4,081,000,  in relation to $3,746,000
for 1994 and  $4,003,000  for 1993. The increase in 1995 of $335,000 or 8.9% was
primarily due to higher legal fees as a result of the  overdrafts of a customer,
increases in advertising, postage and data processing expenses offset in part by
lower Federal Deposit  Insurance  premiums.  The decrease in 1994 of $257,000 or
6.4% was the result of reduced  legal fees,  insurance  premiums and State taxes
partially offset by increases in loan collection  costs,  postage,  advertising,
supplies  and  Federal  Deposit  Insurance  premiums.   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  $294,000  and  $228,000  for the years ended
December 31, 1995 and 1994,  respectively (see Notes A.14 and I of the "Notes to
Consolidated Financial Statements").

Investment Securities

     The  Company  classifies  its debt and  marketable  securities  into  three
categories: trading, available-for-sale, and held-to-maturity as provided by the
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 115,  "Accounting  for Certain  Investments  in Debt and Equity  Securities"
(SFAS No.  115).  The  Company  adopted  SFAS No. 115 as of December  31,  1993.
Trading  securities are measured at fair value with unrealized holding gains and
losses  included in income.  The Company had no trading  securities  in 1995 and
1994.  Available-for-sale  securities  are stated  separately  on the  financial
statements   and   are   discussed   in  the   following   section   "Securities
Available-for-Sale".  Held-to-maturity  securities are carried at amortized cost
and identified as investment  securities in the financial  statements (see Notes
A.2. and B of the "Notes to Consolidated Financial Statements").

     Held-to-maturity  securities  totaled  $20,054,000 at December 31, 1995 and
$36,525,000 at December 31, 1994. The Company has the intent and ability to hold
these  securities  until  maturity.  The  fair  value of  these  securities  was
$20,188,000 and $34,398,000 at December 31, 1995 and 1994, respectively.

     The  Company,  at December 31, 1995 and 1994,  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, 1995,  the Company did hold  $7,500,000  in
various  U. S.  Agency  Step-up  or  Multi  Step-up  securities  ($5,000,000  in
available-for-sale and $2,500,000 in held-to-maturity). At December 31, 1994 the
Company held $8,000,000 of Step-up securities  ($5,000,000 in available-for-sale
and  $3,000,000  in  held-to-maturity).  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  pre-determined coupon that may be below the current market yield at
the time of the step-up.  Management  understands the  characteristics  of these
<PAGE>

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  $23,213,000  at  December  31,  1995
($18,152,000  in  available-for-sale  and  $5,061,000 in  held-to-maturity)  and
$29,199,000  at  December  31,  1994  ($16,527,000  in  available-for-sale   and
$12,672,000 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  $9,762,000 at December 31, 1995  ($6,375,000  in
available-for-sale  and  $3,387,000  in  held-to-maturity)  and  $11,093,000  at
December  31,  1994   ($5,231,000  in   available-for-sale   and  $5,862,000  in
held-to-maturity).

Securities Available-for-Sale

     The Company had  $59,049,000 of securities  available-for-sale  at December
31, 1995 as compared to  $43,610,000  at December 31, 1994. At December 31, 1995
the net unrealized gain on these securities was $520,000,  net of the tax effect
of  $267,000.  There was a net  unrealized  loss of  $1,034,000,  net of the tax
effect of $533,000 on the  available-for-sale  securities  at December 31, 1994.
The net unrealized gain or loss is included in  shareholders'  equity (see Notes
A.2 and B of the "Notes to Consolidated Financial Statements").

     These  securities are being held to meet the liquidity needs of the Company
and to provide  flexibility  to  support  earnings  in  changing  interest  rate
environments.  The  tax-free  municipal  securities  in  the  available-for-sale
category  will also be used to assist in  managing  the  Company's  Federal  Tax
position. While management has the intent 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  1995,  $10,844,000  of  securities   available-for-sale  were  sold
resulting in a net gain of $22,000, which was recorded in income. The securities
sold were primarily U. S. Treasury, U. S. Agency and municipal bonds held by the
Bank and equity  securities  held by First C. G. These  sales were  executed  to
provide  liquidity and improve future interest income.  Securities  purchased by
the  Company in 1995  totaled  $21,144,000.  Included  in these  purchases  were
$14,262,000  in U. S. Agency  fixed rate  bonds,  $1,945,000  in U. S.  Treasury
bonds,  $2,877,000  in  municipal  securities  and  $2,060,000  in U. S.  Agency
Mortgage-Backed bonds and other securities. The securities sold in 1994 totaling
$4,790,000  were  primarily U. S. Treasury bonds and equity  securities  held by
First C. G. The 1994 sales  resulted  in net gains of  $97,000  and were made to
improve  future  interest  income.   Security  purchases  in  1994  amounted  to
$37,770,000 which were primarily U. S. Agency Step-up and Adjustable Rate bonds.
In 1993, a net gain on security  transactions  of $208,000 was recorded on sales
of $13,146,000.
<PAGE>

Loan Portfolio

     At December 31, 1995, total gross loans of $196,959,000 were $8,785,000, or
4.7% higher than the 1994  amount of  $188,174,000.  The growth in loans in 1995
was primarily  the result of an increase of  $5,088,000  or 4.3% in  residential
real estate loans,  an increase of $3,059,000 or 12.4% in consumer  loans and an
increase  of  $2,098,000  or  73.3% in real  estate  construction  loans.  Total
residential real estate loans were $122,293,000 at December 31, 1995 as compared
to  $117,205,000  at December 31, 1994.  Consumer loans totaled  $27,685,000 and
$24,626,000  at December 31, 1995 and 1994,  respectively.  At December 31, real
estate  construction  loans were  $4,959,000 in 1995 versus  $2,861,000 in 1994.
Also  contributing  to the  growth  in  loans  during  1995 was an  increase  in
municipal  loans of  $1,002,000 to a total at December 31, 1995 of $1,290,000 as
compared  to the  December  31, 1994 total of  $288,000.  These  increases  were
partially  offset by  decreases  in  commercial  loans of  $2,100,000  or 28.0%,
commercial  real  estate  loans of $357,000 or 1.0% and other loans of $5,000 or
2.8%. 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.

     The unearned  discount on loans was  $3,829,000  and $2,959,000 in 1995 and
1994, respectively. The loan to deposit ratio was 76.0% at December 31, 1995 and
74.8% at December  31, 1994.  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 1995,  management  continued  a  program  of  selling  most of its newly
originated residential real estate loans in the secondary market. The purpose of
this plan is to reduce the Company's  interest rate risk and to provide funds to
support a higher level of loan originations.

     The sales of residential real estate loans in the secondary market for 1995
amounted  to  $6,336,000.  The  amount  of these  loans  originated  in 1995 was
$6,267,000  with the  remaining  $69,000  being  originated  in prior  years and
identified  as  held-for-sale  at December  31,  1994. A net gain of $22,000 was
recorded on these sales.  In addition,  $1,006,000  of  residential  real estate
loans was identified as  held-for-sale  at December 31, 1995. All of these loans
were originated  during the second half of 1995. An unrealized loss of $4,000 on
these loans is included in other operating expenses for 1995.

     In 1994, the Company originated $4,548,000 of residential real estate loans
which were sold in the secondary market. In addition,  during 1994,  $15,378,000
of these  loans that were  originated  in prior  years  were sold.  Net gains of
$37,000 were recognized on these sales in 1994. At December 31, 1994, $69,000 of
residential  real estate loans were  identified  as  held-for-sale.  Included in
other operating  expense in 1994 is an unrealized loss of $1,000 on these loans.
During 1993, the Company had net gains of $417,000 on the sale of $30,278,000 of
residential real estate loans. The other operating  expenses for 1993 include an
unrealized  loss of $70,000 on mortgage  loans  held-for-sale  of $15,378,000 at
year-end 1993.
<PAGE>

     The Company  will  continue to originate  residential  real estate loans in
1996 and  intends  to sell most of them in the  secondary  market.  The  Company
services all of its sold  residential  mortgage loans and plans to continue this
practice.

     The Financial Accounting Standards Board (FASB) issued a new standard, SFAS
No. 122,  "Accounting  for  Mortgage  Servicing  Rights,  an  amendment  of FASB
Statement No. 65", which requires that a mortgage banking  enterprise  recognize
as a separate asset rights to service  mortgage loans for others,  however those
servicing  rights  are  acquired.  In  circumstances  where  mortgage  loans are
originated,  separate  asset rights to service  mortgage loans are only recorded
when the  enterprise  intends  to sell  such  loans.  The  adoption  of this new
statement is not expected to have a material  impact on the Company's  financial
position or results of  operations.  The Company  will be required to adopt this
standard for its year ended December 31, 1996.

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 14 shows the balance
and the effect on interest  income of non-accrual  loans for each of the periods
indicated.  There were  $2,181,000 of loans on a non-accrual  status at December
31, 1995.  The increase in  non-accrual  loans during 1995 of $457,000  resulted
from the deteriorating financial position of a few borrowers.

     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, 1995 and 1994.

<PAGE>

<TABLE>

Non-Accrual Loans
(Dollars in Thousands) 
at December 31,                1995      1994      1993      1992       1991
                               ----      ----      ----      ----       ----
<S>                        <C>       <C>       <C>       <C>        <C>  

Non-accrual loans on
 a cash basis                $ 2,181   $ 1,724   $ 1,569   $ 1,395    $ 1,564
                             -------   -------   -------   -------    -------

Non-accrual loans as a
 percentage of total loans      1.13%      .93%      .93%      .76%       .92%
                             -------   -------   -------   -------    -------

Interest which would have
 been recorded at
 original rate               $   214   $   168   $   134   $    87    $   116

Interest that was
 reflected in income              44      --        --        --            7
                             -------   -------   -------   -------    -------

Net impact on
 interest income             $  (170)  $  (168)  $  (134)  $    87)   $  (109)
</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 expects they will eventually be paid in full.

<TABLE>

Accruing Loans Past Due 90 Days or More

(Dollars in Thousands) 
at December 31,               1995      1994    1993      1992      1991
                              ----      ----    ----      ----      ----
<S>                       <C>       <C>       <C>     <C>       <C> 
   
Accruing loans past due
 90 days or more            $1,115    $1,069    $672    $1,563    $1,427

Accruing loans past due
 90 days or more as a
percentage of total loans      .58%      .58%    .40%      .85%      .84%
</TABLE>
 
<PAGE>

     On  January 1, 1995 the  Company  adopted  SFAS No.  114,  "Accounting  for
Creditors for Impairment of a Loan", as amended by SFAS No. 118,  "Accounting by
Creditors for Impairment of a Loan - Income  Recognition and Disclosures".  SFAS
No. 114 requires that a creditor  measure  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, a creditor may measure impairment 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, 1995 are as follows:

(Dollars in Thousands) at December 31,          1995
                                                ----

Principal amount of impaired loans            $2,035
Accrued interest                                 ---
Deferred loan costs                                4
                                               2,039
                                               -----
Less valuation allowance at December 31, 1995    238
                                               -----
                                              $1,801

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

(Dollars in Thousands) for the year ended       1995
                                                ----

Valuation allowance at January 1, 1995          $160
Provision for loan impairment                    187
Direct charge-offs                               125
Recoveries                                        16
                                                ----
Valuation allowance at December 31, 1995        $238

     Total cash collected on impaired loans during 1995 was $182,000, of which
$138,000 was credited to the principal balance outstanding on such loans and
$44,000 was recognized as interest income. Interest that would have been accrued
on impaired loans during 1995 was $214,000. The valuation allowance for impaired
<PAGE>

     loans of $238,000 at December  31, 1995 is included in the  "Allowance  for
Possible Loan Losses" which amounts to $2,443,000 at December 31, 1995.

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

OTHER REAL ESTATE OWNED

(Dollars in Thousands) at December 31,  1995   1994   1993    1992    1991

Other Real Estate Owned                $ 364  $ 373  $ 738   $ 124   $ 285

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, 1995, the
allowance  for possible  loan losses was  $2,443,000 as compared to the December
31, 1994 amount of  $2,187,000  and the December 31, 1993 amount of  $1,953,000.
The  allowance  for  possible  loan  losses  as  a  percentage  of  total  loans
outstanding as of December 31, 1995 was 1.26%. This compares to 1.18% at the end
of 1994 and 1.16% at the end of 1993. The increase in the allowance for possible
loan losses of $256,000 was the result of management's  review of non-performing
loans (the sum of non-accrual loans and accruing loans past due 90 days or more)
of  $3,296,000  as of December 31, 1995 as compared to $2,793,000 as of December
31, 1994 (see tables on page 14). Net  charge-offs  as detailed in the tables on
page 16 were  $1,542,000 in 1995 or  $1,356,000  greater than the 1994 amount of
$186,000.  Net loans  charged-off  in 1993 were  $652,000.  The  increase in net
charge-offs in 1995 is primarily the result of a net loss of $1,264,000  (net of
recoveries) due to the overdrafts of a certain  customer.  The Company has filed
criminal charges and instituted  litigation to recover these funds.  There is no
assurance  that such  litigation  will  result  in  additional  recoveries.  Net
charge-offs related to loans in 1995 totaled $278,000 (net of recoveries). These
charge-offs were primarily due to higher consumer loan losses.  The reduction of
charge-offs  in 1994 is due to lower  charge-offs  of  commercial  and  consumer
loans. The ratio of net loan charge-offs to average loans  outstanding was .81%,
 .10% and .36% in 1995, 1994 and 1993, respectively.

     The  provision  for loan  losses for the year ended  December  31, 1995 was
$1,798,000  as  compared to $420,000  for the year ended  December  31, 1994 and
$765,000 for the year ended  December  31, 1993.  The increase in 1995 from 1994
was $1,378,000.  This increase was principally the result of the increase in net
charge-offs  for 1995 due to the overdraft  loss.  In 1994,  the decrease in the
provision  was $345,000 or 45.1% over 1993.  This decrease was due to lower loan
losses in 1994.

<PAGE>

ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>

(Dollars in Thousands)
For the Year Ended December 31,   1995      1994      1993      1992      1991
<S>                          <C>       <C>       <C>       <C>       <C>  

Allowance for Loan Losses
 at Beginning of Year         $  2,187  $  1,953  $  1,840  $  1,702  $  1,465
                              --------  --------  --------  --------  --------
Loans Charged-Off
by Category:
 Commercial                        161       259       392       600       374
 Real Estate - Construction        --         --        --        --        --
 Real Estate - Residential         --         35         3        72        30
 Consumer/Installment              319       144       348       337       244
 Other                           1,278        --        --        --        --
                              --------  --------  --------  --------  --------
                                 1,758       438       743     1,009       648
                              --------  --------  --------  --------  --------
Loans Recovered
by Category:
 Commercial                        105       170        57        22        67
 Real Estate - Construction         --        --        --        --        --
 Real Estate - Residential          --        --        --        --        --
 Consumer/Installment               97        82        34         6         8
 Other                              14        --        --        --        --
                              --------  --------  --------  --------  --------
                                   216       252        91        28        75
                              --------  --------  --------  --------  --------
Net Loans Charged-Off            1,542       186       652       981       573
                              --------  --------  --------  --------  --------
Provision Charged to Expense     1,798       420       765     1,119       810
                              --------  --------  --------  --------  --------
Allowance for Loan Losses
 at End of Period             $  2,443  $  2,187  $  1,953  $  1,840  $  1,702
                              ========  ========  ========  ========  ========

Total Loans
 Average                      $190,192  $178,624  $180,850  $177,842  $167,206
  ear-End                     $193,130  $185,215  $168,566  $183,232  $169,732

Net Loans Charged Off to:
 Average Loans                     .81%      .10%      .36%      .55%      .34%
 Loans at Year-End                 .80%      .10%      .39%      .54%      .34%
 Allowance to Possible
  Loan Losses at Year-End        63.12%     8.50%    33.38%    53.32%    33.67%
 Provision for Possible
  Loan Losses                    85.76%    44.29%    85.23%    87.67%    70.74%

Allowance for Possible
Loan Losses at Year-End to:
 Average Loans                    1.28%     1.22%     1.08%     1.03%     1.02%
 Loans at Year-End                1.26%     1.18%     1.16%     1.00%     1.00%
</TABLE>

<PAGE>

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

Deposits

     Deposits  are the  primary  source  of the  Company's  funds.  During  1995
deposits  increased by $6,570,000 or 2.7% to a total of $254,102,000 at December
31, 1995 from a total of $247,532,000 at December 31, 1994. Average deposits for
1995 were $246,937,000, an increase of $6,518,000 or 2.7% over the average total
deposits  for 1994 of  $240,419,000.  The major  reason for this  growth was the
purchase of  $6,200,000  in deposits  with the Pointe  North branch from another
commercial  bank.  Also  contributing to the increase in deposits was the strong
growth of  certificates of deposit as consumers moved to lock in higher interest
rates and a modest growth in non-interest  bearing checking deposits as a result
of the  introduction  by the  Bank  in 1995  of two  new  non-interest  checking
services,  "Value  Checking"  and "Just  Checking".  "Value  Checking"  provides
unlimited check writing with no minimum balance requirement,  monthly statements
and the  availability  of an automated  teller  machine card for a small monthly
fee. "Just  Checking" is a no service  charge,  no minimum  balance  requirement
non-interest  bearing  checking  account  with  unlimited  check  writing  and a
quarterly  statement.  An automated  teller machine card is not available with a
"Just  Checking"  account.  The deposit  growth in  certificates  of deposit and
non-interest  bearing  deposits  was  partially  offset by  declines  in savings
accounts,   money  market  accounts  and  interest  bearing  checking  accounts,
including  the  First  Colonial  Club(R)  products   (interest-bearing  checking
accounts  which include a package of services from discount  pharmacy,  discount
travel, to free money order and travelers checks). The slower growth of deposits
seen by the Company and the banking  industry in general is due primarily to the
flow of funds into  mutual  funds and other  investment  options.  In 1995,  the
Company  began  offering a money  market  mutual fund  product to its  customers
through  the Bank's  Trust  Department  (see  discussion  on Trust  Department).
Approximately  $2,500,000  of deposit  balances were  transferred  to this money
market mutual fund in 1995.

     The Bank's time deposits, including certificates of deposit under $100,000,
increased in 1995 with averages  balances of $90,925,000 which is $11,275,000 or
14.2% higher than the 1994 average balance of $79,650,000.  Average certificates
<PAGE>

of deposit over  $100,000  were  $6,184,000 in 1995 as compared to $2,961,000 in
1994, an increase of $3,223,000  or 108.8%.  The new "Just  Checking" and "Value
Checking"  products  accounted  for most of the growth in  non-interest  bearing
deposits in 1995.  Non-interest bearing deposits averaged $23,782,000 in 1995 as
compared to  $23,347,000  in 1994,  an increase of $435,000 or 1.9%.  Offsetting
some of this  growth  were  declines  in average  savings  and club  deposits of
$4,990,000 or 7.1% from an average  balance of $70,442,000 in 1994 to an average
balance of $65,452,000  in 1995,  and declines in average money market  deposits
which  averaged  $17,639,000  in 1995 as  compared  to  $20,383,000  in 1994,  a
decrease  of  $2,744,000  or 13.5%.  In  addition,  there was a $681,000 or 1.6%
decline in interest-bearing demand deposits with average balances of $42,955,000
in 1995 as compared to the 1994 average of $43,636,000.

Short-Term Borrowings

     The Company had  securities  sold under  agreements to repurchase  totaling
$6,096,000 at December 31, 1995 and $9,027,000 at December 31, 1994.  There were
also  short-term  borrowings in the form of Federal Home Loan Bank borrowings of
$7,000,000  December 31, 1995 and $750,000 at December 31, 1994. At December 31,
1995 and 1994,  there were no borrowings in the form of Federal Funds  purchased
or Federal Reserve Bank discount 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 1995, cash, due from banks, Federal funds
sold  and  interest-bearing   deposits  with  banks  totaled  $16,384,000,   and
securities maturing within one year totaled $4,955,000.  At year-end 1994, cash,
due from banks,  Federal funds sold,  and  interest-bearing  deposits with banks
totaled $11,070,000, and securities maturing within one year were $3,858,000.

     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 $538,000 at December 31, 1995 and $4,000 at
December 31, 1994. These deposits are included in interest-bearing deposits with
banks on the Company's financial  statements.  As a result of this relationship,
the Company 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  $27,666,000,  all of
which was available at December 31, 1995.

     Cash flows for the year ended  December 31, 1995 consisted of Cash Provided
by Operating  Activities of $3,840,000 and Cash Provided by Financing Activities
of $9,082,000, offset in part by Cash Used in Investing Activities of $8,042,000
resulting in a net increase in cash and cash equivalents of $4,880,000. The Cash
Provided by Operating  Activities  was  comprised  principally  of net income of
$1,401,000,  proceeds from the sale of mortgage loans of $6,336,000, a provision
for  possible  loan  losses of  $1,798,000,  depreciation  and  amortization  of
$624,000,  an increase in accrued  interest  payable of $743,000  resulting from
<PAGE>

increases  in  certificates  of  deposit  balances,  reduced by  mortgage  loans
originated for sale of $7,273,000 and an increase in accrued  interest income of
$130,000 as a result of higher loan  balances.  The Cash  Provided by  Financing
Activities was comprised of increases in  certificates of deposit of $19,125,000
and increases in short-term borrowings of $6,250,000.  The sale of common shares
pursuant to the  Dividend  Reinvestment  Plan  resulted in proceeds of $252,000.
Partially offsetting these increases were decreases in interest and non-interest
bearing demand and savings accounts of $12,555,000,  a decrease of $2,931,000 in
repurchase  agreements  and cash  dividends  paid of $972,000.  The Cash Used in
Investing   Activities   was  primarily  for  the  purchase  of  $19,306,000  of
available-for-sale  securities and $2,836,000 of held-to-maturity  securities, a
net increase of loans to customers  of  $9,937,000  and the purchase of premises
and equipment of $1,508,000,  primarily due to the acquisition of the new Pointe
North branch,  the opening of the two  supermarket  branches at Airport Road and
Northampton  Crossings,  and the drive-up  Automated  Teller Machines located at
Northampton  Crossings.  Offsetting these cash uses in investing activities were
proceeds from the maturities of  available-for-sale  securities of  $11,055,000,
and held-to-maturity securities of $3,284,000 and the proceeds from the sales of
available-for-sale  securities of $11,177,000  and the sale of other real estate
of $463,000.

     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, 1995 was $24,767,000
as compared to  $22,400,000  on December 31, 1994, for an increase of $2,367,000
or 10.6%.  This increase was primarily  attributable to retained  earnings,  the
sale of common shares pursuant to the Dividend  Reinvestment Plan and unrealized
gains on securities  available-for-sale of $520,000 (net tax effect of $267,000)
at December 31, 1995. Included in shareholders'  equity at December 31, 1994 was
$1,034,000  (net of tax effect of $533,000) of  unrealized  losses on securities
available-for-sale (see discussion on Securities Available-for-Sale).

     On June 28, 1994,  the Company paid a 5% stock dividend on its common stock
from authorized but unissued  shares to all  shareholders of record at the close
of business on June 6, 1994.  Fractional shares were paid in cash based on a per
share price of $17.31. The number of average shares and per share information in
this report has been restated to reflect this 5% stock dividend.

     The Company  maintains a Dividend  Reinvestment and Stock Purchase Plan. In
1995,  15,573 new common  shares were  purchased  from  authorized  and unissued
shares at an average price of $15.99 for proceeds of $249,000.  In 1994,  14,744
new common  shares were  purchased  from  authorized  and unissued  shares at an
average price of $16.48 per share for proceeds of $243,000.

     A Non-Employee  Director Stock Option Plan was adopted by the  shareholders
at the Annual  Meeting in April 1994.  This plan  provides  for the  awarding of
stock options to the Company's non-employee directors. Pursuant to this plan, in
1995,  options to purchase 2,100 shares of the Company's common stock at a price
of $15.75 per share were  granted to  certain  non-employee  directors.  Options
totaling 8,400 shares were granted to non-employee  directors under this plan in
1994 at a price of $16.19 per share.

     The  Company  also has a Stock  Option  Plan that was adopted in 1986 which
provides for the granting of options to acquire company common stock to officers
and key employees.  There were no options  granted in 1995. In 1994,  under this
<PAGE>

plan,  options for 5,750  shares were  granted to officers at a price of $16.75.
Total options outstanding under this plan at December 31, 1995 were 16,168 at an
average price of $18.11.

     At December 31, 1995,  the total of all options under both plans to acquire
shares  were 26,578 at an average  price of $17.32 per share.  There were 24,568
options to acquire shares at an average price of $17.45 per share outstanding at
December 31, 1994. No options have been exercised  under the stock option plans.
Authorized  shares  available for future option grants were 60,243 and 62,253 at
December 31, 1995 and 1994,  respectively.  The Financial  Accounting  Standards
Board  issued  a  new  standard,  SFAS  No.  123,  "Accounting  for  Stock-Based
Compensation",  which contains a fair value-based method for valuing stock-based
compensation that entities may use 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 equity  instruments under APB Opinion 25, "Accounting for Stock Issue to
Employees".  Entities  that  continue  to account  for stock  options  using APB
Opinion 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 has not determined which method it will follow
in the future,  but  anticipates  following  APB Opinion 25. The Company will be
required to adopt the new  standard  for its year ended  December  31, 1996 (see
Notes A. 8. and N of the "Notes to Consolidated Financial Statements").

     Banking  regulators  require bank holding  companies  and banks to maintain
certain capital levels through  risk-based  capital  standards by which all bank
holding  companies and banks are evaluated in terms of capital  adequacy.  These
capital  standards relate a banking company's capital to the risk profile of its
assets.  The risk-based  capital  standards now require all banks to have Tier 1
capital  of at  least  4%  and  total  capital,  Tier  1 and  Tier  2,  of 8% of
risk-adjusted  assets. 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.

     Banking  regulators  also  require  bank  holding  companies  and  banks to
maintain a certain Tier 1 leverage  ratio.  The leverage  ratio  requirement  is
measured  as the  ratio  of Tier 1  capital  to  adjusted  average  assets.  The
following  tables  provide a comparison of the  Company's and Bank's  risk-based
capital ratios and leverage ratio to the minimum  regulatory  guidelines for the
periods indicated.
<PAGE>

<TABLE>

Capital Ratios of the Company
                                                     Minimum
                                 Company      Regulatory Requirement
at December 31,               1995    1994      1996, 1995 and 1994
<S>                        <C>      <C>         <C>  

Tier 1 Leverage Ratio         8.20%   8.43%       3.00%  -  5.00%
Risk-Based Capital Ratio
     Tier 1 Capital          14.62%  14.82%            4.00%
     Total Capital           15.86%  16.06%            8.00%
</TABLE>

<TABLE>

Capital Ratios of the Bank
                                                      Minimum
                                    Bank       Regulatory Requirement
at December 31,               1995    1994       1996, 1995 and 1994
<S>                        <C>     <C>           <C> 
 
Tier 1 Leverage Ratio         6.80%   7.23%        3.00%  -  5.00%
Risk-Based Capital Ratio
     Tier 1 Capital          12.41%  12.77%             4.00%
     Total Capital           13.66%  14.23%             8.00%
</TABLE>

<PAGE>

     The  Federal  Deposit  Insurance   Corporation   Improvement  Act  of  1991
("FDICIA"),  which became law in December  1991,  required each federal  banking
agency,  including the Board of Governors of the Federal Reserve System ("FRB"),
to revise its risk-based  capital  standards to ensure that those standards take
adequate  account of interest  rate risk,  concentration  of credit risk and the
risks  of  non-traditional   activities,  as  well  as  to  reflect  the  actual
performance  and expected risk of loss on multifamily  mortgages.  This law also
requires  each  federal  banking  agency,  including  the FRB,  to  specify,  by
regulation, the levels at which an insured institution would be considered "well
capitalized",  "adequately  capitalized",   "undercapitalized",   "significantly
undercapitalized", or "critically undercapitalized".

     All of the bank  regulatory  agencies  recently  issued a final  rule  that
amends  their  capital  guidelines  for  interest  rate risk and  requires  such
agencies  to consider  in their  evaluation  of a bank's  capital  adequacy  the
exposure of a bank's  capital and economic  value to changes in interest  rates.
This  final rule does not  establish  an  explicit  supervisory  threshold.  The
agencies  intend,  at  a  subsequent  date,  to  incorporate   explicit  minimum
requirements for interest rate risk into their risk based capital  standards and
have proposed a supervisory  model to be used together with bank internal models
to  gather  data  and  hopefully  propose  at  a  later  date  explicit  minimum
requirements.

     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.
<PAGE>

Impact of Inflation and Changing Prices

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

     Management believes the most significant impact on financial results is the
Company's   ability  to  react  to  changes  in  interest  rates.  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.

Employers' Accounting for Employee Stock Ownership Plans

     The  Company  has  established  an  Employee  Stock  Ownership  Plan (ESOP)
covering  eligible  employees  with one year of  service as defined by the plan.
Effective  January 1, 1994,  the Company  adopted new accounting for its ESOP in
accordance with Statement of Position 93-6,  "Employers' Accounting for Employee
Stock Ownership Plans" ("SOP 93-6"), of the Accounting Standards Division of the
American  Institute of Certified Public Accountants issued in November 1993. SOP
93-6 requires that the employer record  compensation  expense in an amount equal
to the fair  value  of the  shares  committed  to be  released  from the ESOP to
employees.  The  adoption  of SOP 93-6 had no material  effect on the  Company's
financial  statements (see Notes A.8. and K of "Notes to Consolidated  Financial
Statements").

Employers' Accounting for Post-retirement Benefits Other Than Pensions

     The  Financial  Accounting  Standards  Board issued  Statement of Financial
Accounting  Standards  No.  106,  "Employers'   Accounting  for  Post-retirement
Benefits  Other Than  Pensions"  (SFAS 106) in  December  1990.  This  Statement
significantly  changes the  Company's  practice of  accounting  for  non-pension
post-retirement  benefits from a pay-as-you-go (cash) basis to an accrual basis.
The Company  studied this  statement to  determine  its effect on the  financial
statements.  If the  Company  had  elected  to  record  the full  amount  of its
estimated accumulated  post-retirement  benefits obligation other than pensions,
the  result  would  have  been  a  one-time   charge  to  earnings  in  1993  of
approximately $308,000. The Company,  however, elected the option under SFAS 106
to amortize the obligation  over 20 years which resulted in a charge to earnings
in 1995 and 1994 of approximately $45,000 and $41,000,  respectively (see Note M
of "Notes to Consolidated Financial Statements").

Accounting for the Impairment of Long-Lived Assets

     The Financial  Accounting  Standards Board issued a new standard,  SFAS No.
121,  "Accounting  for the  Impairment of Long-Lived  Assets and for  Long-Lived
Assets to be Disposed of", which provides  guidance on when to recognize and how
to measure  impairment  losses of  long-lived  assets and  certain  identifiable
intangibles and how to value  long-lived  assets to be disposed of. The adoption
of this new statement is not expected to have a material impact on the Company's
financial  position  or results of  operation.  The Company is required to adopt
this new standard for its year ended December 31, 1996.
<PAGE>

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 dividend of June 1994.

<TABLE>

Dollars in Thousands, 
except per share data                     Three Months Ended
    1995                         Dec. 31     Sept. 30     June 30     March 31
<S>                            <C>         <C>          <C>        <C> 

Interest  income                 $ 5,602     $ 5,620      $ 3,110     $ 3,174
                                 -------     -------      -------     -------
Provision (credit)
 for possible loan losses            100         100         (172)      1,770
                                 -------     -------      -------     -------
Net gain (losses) on sale
 of securities and mortgages          20          25           18         (19)
                                 -------     -------      -------     -------
Income (loss) before
 income taxes                        908         949        1,116      (1,057)
                                 -------     -------      -------     -------
Net income (loss)                $   634     $   659      $   771     $  (663)
                                 =======     =======      =======     =======
Net income (loss)
 per share of common stock       $  0.44     $  0.46      $  0.54     $ (0.46)
                                 =======     =======      =======     =======

    1994                         Dec. 31     Sept. 30     June 30     March 31

Interest  income                 $ 5,027     $ 4,812      $ 4,562     $ 4,585
Net interest income                3,137       3,028        2,844       2,825
                                 -------     -------      -------     -------
Provision for possible
 loan losses                         120         100          100         100
                                 -------     -------      -------     -------
Net gain (losses) on sale
 of securities and mortgages         (34)         (6)          80          94
                                 -------     -------      -------     -------
Income before income taxes           868         804          813         875
Net income                       $   605     $   561      $   568     $   608
                                 =======     =======      =======     =======
Net income per share
 of common stock                 $  0.43     $  0.40      $  0.40     $  0.43
                                 =======     =======      =======     =======
</TABLE>

<PAGE>

Item 7.         Financial Statements
<PAGE>

FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>

(Dollars in Thousands) At December                    1995         1994  
<S>                                             <C>         <C>  

ASSETS
  Cash and Due From Banks                         $  11,949    $  10,669
  Federal Funds Sold                                  3,600         --
                                                  ---------    ---------
    Total Cash and Cash Equivalents                  15,549       10,669

  Interest-Bearing Deposits With Banks                  835          401
  Investment Securities
    (Fair Value:  1995 - $20,188;
     1994 - $34,398)                                 20,054       36,525
  Securities Available-for-Sale at Fair Value        59,049       43,610
  Mortgage Loans Held-for-Sale                        1,006           69
  Total Loans, Net of Unearned Discount             193,130      185,215
  Less:  Allowance for Possible Loan Losses          (2,443)      (2,187)
                                                  ---------    ---------
  Net Loans                                         190,687      183,028
  Premises and Equipment                              6,763        5,862
  Accrued Interest Income                             1,878        1,748
  Other Real Estate Owned                               364          373
  Other Assets                                        2,329        2,268
                                                  ---------    ---------
    TOTAL  ASSSETS                                $ 298,514    $ 284,553
                                                  =========    =========
LIABILITIES
  Deposits
   Non-Interest Bearing Deposits                  $  26,690    $  25,028
   Interest-Bearing Deposits
   (Includes Certificates of Deposit in Excess
    of $100:  1995 - $6,623; 1994 - $5,130)         227,412      222,504
                                                  ---------    ---------
  Total Deposits                                    254,102      247,532

  Securities Sold Under
   Agreements to Repurchase                           6,096        9,027
  Short-Term Borrowing                                7,000          750
  Long-Term Debt                                        643          862
  Accrued Interest Payable                            3,425        2,682
  Other Liabilities                                   2,481        1,300
                                                  ---------    ---------
    TOTAL LIABILITIES                               273,747      262,153
                                                  ---------    ---------
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 and outstanding - 1995, 1,471,100 shs;
                           1994, 1,455,427 shs        7,355        7,277

 Additional Paid-in Capital                           7,056        6,882
 Retained Earnings                                   10,479       10,050
 Employee Stock Ownership Plan Debt                    (643)        (775)
 Net Unrealized Gain (Loss)
  on Securities Available-for-Sale                      520       (1,034)
                                                  ---------    ---------
  TOTAL SHAREHOLDERS' EQUITY                         24,767       22,400
                                                  ---------    ---------
  TOTAL LIABILITIES AND
   SHAREHOLDERS' EQUITY                           $ 298,514    $ 284,553
                                                  =========    =========
</TABLE>

See accompanying notes to consolidated financial statements.

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

(Dollars in Thousands, except per share data)
 For the Year Ended December 31,            1995         1994         1993
<S>                                    <C>          <C>          <C>
INTEREST INCOME
 Interest and Fees on Loans              $ 16,896     $ 14,984     $ 15,605
 Interest on Investment Securities
  Taxable                                   4,477        3,439        2,372
  Tax-Exempt                                  384          348          383
 Interest on Other Investments
  Deposits with Banks                         133          158          123
  Federal Funds Sold                            6           57           42
                                        ---------    ---------    ---------
   Total Interest Income                   21,896       18,986       18,525
                                        ---------    ---------    ---------
INTEREST EXPENSE
 Interest on Deposits                       8,332        6,853        7,351
 Interest on Short-Term Borrowings .          684          169          100
 Interest on Long-Term Debt                   236          130          117
                                        ---------    ---------    ---------
   Total Interest Expense                   9,252        7,152        7,568
                                        ---------    ---------    ---------
NET INTEREST INCOME                        12,644       11,834       10,957
 Provision for Possible Loan Losses         1,798          420          765
                                        ---------    ---------    ---------
 Net Interest Income After Provision
  for Possible Loan Losses                 10,846       11,414       10,192
                                        ---------    ---------    ---------
OTHER INCOME
 Trust Revenue                                636          611          601
 Service Charges on Deposit Accounts        1,034          798          644
 Investment Securities Gains, Net ..           22           97          208
 Gains on the Sale of Mortgage Loans           22           37          417
 Other Operating Income                       560          487          460
                                        ---------    ---------    ---------
  Total Other Income                        2,274        2,030        2,330
                                        ---------    ---------    ---------
OTHER EXPENSES
 Salaries and Employee Benefits             5,132        4,640        4,295
 Net Occupancy and Equipment Expense        1,991        1,698        1,547
 Other Operating Expenses                   4,081        3,746        4,003
                                        ---------    ---------    ---------
  Total Other Expenses                     11,204       10,084        9,845
                                        ---------    ---------    ---------
Income Before Income Taxes                  1,916        3,360        2,677
Applicable Income Taxes                       515        1,018          769
                                        ---------    ---------    ---------
NET INCOME                               $  1,401     $  2,342     $  1,908
                                        =========    =========    =========
PER SHARE DATA
  Net Income                             $   0.98     $   1.66     $   1.55
  Cash Dividends                             0.68         0.66         0.65

    Average Shares Outstanding          1,432,753    1,411,046    1,233,543
</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(Loss) 
                    Common   Capital   Retained    ESOP      on Sec
                    Stock    Surplus   Earnings    Debt  Avail-for-Sale  Total
<S>               <C>      <C>       <C>       <C>        <C>         <C>

Bal at Jan 1, 1993 $5,320    $3,166    $ 7,895   $ (323)    $  ---      $16,058
    1993
Net Income                               1,908                            1,908
Sale of Common Stk
 under Div Reinv
 Plan (8,262 shares)   41        94                                         135
Sale of Common Stk
 under Stk Off
 (300,000 shares)   1,500     3,448                                       4,948
Cash Div Paid                             (812)                            (812)
Proceeds from
 ESOP Loan                                         (650)                   (650)
ESOP Loan Payment                                    67                      67
Unrealized Net Gain
 on Sec Avail-for-Sale                                         340          340
                    -----     -----      -----     ----        ---       ------
    
 Dec 31, 1993       6,861     6,708      8,991     (906)       340       21,994

     1994
Net Income                               2,342                            2,342
Sale of Common Stk
 under Div Reinv
 Plan (14,401 shs)     72       171                                         243
Cash Dividends Paid                       (936)                            (936)
Stock Dividend of 5%
 (68,793 shares)      344                 (344)                             ---
Cash in Lieu of
 Fractional Shares                          (3)                              (3)
ESOP Loan Payment                                   131                     131
Unalloc ESOP Shs 
 Committed to
 Employees 
 (4,724 shares)                   3                                           3
Unrealized Net Loss 
on Sec Avail-for-Sale                                       (1,374)      (1,374)
                    -----     -----     ------     ----     ------       ------
Bal at
 Dec 31, 1994       7,277     6,882     10,050     (775)    (1,034)      22,400

     1995
Net Income                               1,401                            1,401
Sale of Common Stk 
under Div Reinv 
Plan (15,573 shs)      78       171                                         249
Cash Dividends Paid                       (972)                            (972)
ESOP Loan Payment                                   132                     132
Unalloc ESOP Shs 
 Committed to
 Employees (4,724 shs)            3                                           3
Unrealized Net Gain on
  Sec Avail-for-Sale                                         1,554        1,554
                   ------     ------   -------   ------     ------      -------
Bal at
 Dec 31, 1995      $7,355     $7,056   $10,479   $ (643)    $  520      $24,767
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

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

(Dollars in Thousands)
 For the Year Ended December 31, 
                                                1995        1994        1993
<S>                                        <C>         <C>         <C>

OPERATING ACTIVITIES
 Net Income                                  $  1,401    $  2,342    $  1,908
 Adjustments to Reconcile 
  Net Income to Net Cash Provided by
  Operating Activities:
   Provision for Possible Loan Losses           1,798         420         765
   Depreciation and Amortization                  624         458         353
   Amortization of Security Discounts            (152)        (98)        (57)
   Amortization of Security Premiums              186         261         221
   Deferred Taxes                                (156)          3         568
   Amortization of Deferred Fees on Loans          48        (238)       (561)
   Investment Securities Gains, Net               (22)        (97)       (208)
   Gain on Sale of Mortgage Loans                 (22)        (37)       (417)
   Mortgage Loans Originated for Sale          (7,273)     (4,548)     (9,984)
   Mortgage Loan Sales                          6,336      19,926      30,278
   Unrealized Loss on Mortgage
    Loans Held for Sale                           --          --           70
   Changes in Assets and Liabilities:
    (Increase) Decrease in Accr Int Inc          (130)       (354)         77
     Increase (Decrease) in Accr Int Pay          743        (292)     (1,027)
     Net Decrease (Increase) in Other Assets       78        (154)       (671)
     Net Increase (Decrease) in Other Liab        381        (156)       (871)
                                                -----      ------      ------
Net Cash Provided by Operating Activities       3,840      17,436      20,444
                                                -----      ------      ------
INVESTING ACTIVITIES
 Proceeds from Mat of Sec Avail-for-Sale       11,055       8,453        --
 Proceeds from Mat of Sec Held-to-Maturity      3,284       4,760      11,598
 Proceeds from Sales of Sec Avail-for-Sale     11,177       4,790      13,146
 Purchase of Sec Available-for-Sale           (19,306)    (23,963)       --
 Purchase of Securities Held-to-Maturity       (2,836)    (14,396)    (38,249)
 Net (Inc) Dec in Int Bearing Dep With Banks     (434)        245         544
 Net Increase in Loans                         (9,937)    (17,235)    (21,562)
 Purchase of Premises and Equipment            (1,508)     (1,446)     (3,318)
 Proceeds from Sale of Other RE Owned             463       1,092         198
                                                -----      ------      ------
 Net Cash Used in Investing Activities         (8,042)    (37,700)    (37,643)
                                                -----      ------      ------
FINANCING ACTIVITIES
 Net (Dec) Inc in Int and Non-Interest
  Bearing Demand Dep and Savgs Accounts       (12,555)      8,538      17,424
 Net Inc (Dec) in Certificates of Deposit      19,125       3,429        (237)
 Repayments of Long-Term Debt                     (87)       (338)       (384)
 Net Inc (Dec) in Repurchase Agreements        (2,931)      4,316       1,178
 Net Increase in Short-Term Borrowings          6,250         750        --
 Proceeds from Issuance of Common Stock           252         246       5,083
 Cash Dividends Paid                             (972)       (936)       (812)
 Cash in Lieu of Fractional Shares                --           (3)        --
                                                -----      ------      ------
 Net Cash Provided by Financing Activities      9,082      16,002      22,252
                                                -----      ------      ------
  Inc (Dec) in Cash and Cash Equivalents        4,880      (4,262)      5,053
  Cash and Cash Equivalents, January 1,        10,669      14,931       9,878
                                                -----      ------      ------
  Cash and Cash Equivalents, December 31,    $ 15,549    $ 10,669    $ 14,931
                                             ========    ========    ========
</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)
December 31, 1995 and 1994

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  throughout its
twelve  offices in  Northampton,  Lehigh,  and Monroe  counties in  Northeastern
Pennsylvania.

     The Bank competes with other  banking and  financial  institutions  in it's
primary market  communities,  including  financial  institutions  with resources
substantially  greater than it's own. Commercial banks,  savings banks,  savings
and loan associations, credit unions and money market funds actively compete for
savings and time deposit and for 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
affective 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  First
Colonial Group, Inc. (the Company) and its wholly-owned  subsidiaries,  Nazareth
National  Bank and Trust  Company (the Bank) and First C. G.  Company,  Inc. All
significant inter-company balances and transactions have been eliminated.

 2.  Investment Securities

     The  Company  adopted,  on  December  31,  1993,   Statement  of  Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity  Securities",  issued in May 1993.  SFAS No. 115  specifies  that the
Company classify its debt and marketable  equity securities in three categories:
trading securities,  available-for-sale and held-to-maturity securities. Trading
securities are measured at fair value, with unrealized  holding gains and losses
included  in  income.   The  Company  does  not  engage  in  security   trading.
Available-for-sale  securities are measured at fair value, with unrealized gains
and losses, net of tax effect, reported in equity.  Held-to-maturity  securities
are carried at  amortized  cost,  and the Company  has the  positive  intent and
ability to hold such securities until maturity. The Company's  classification of
its  investment  securities  into  these  categories  is  detailed  in  "Note  B
Investment Securities".

     Investment securities held-to-maturity that are principally debt securities
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.  The  Financial  Accounting  Standards  Board (FASB)
issued a new standard,  SFAS No. 122, "Accounting for Mortgage Servicing Rights,
an amendment of FASB Statement No. 65",  which requires that a mortgage  banking
enterprise  recognize as a separate  asset rights to service  mortgage loans for
others,  however those servicing  rights are acquired.  In  circumstances  where
mortgage loans are originated,  separate asset rights to service  mortgage loans
are only recorded when the enterprise  intends to sell such loans.  The adoption
of this new statement is not expected to have a material impact on the Company's
financial  position or results of  operations.  The Company  will be required to
adopt this standard for its year ended December 31, 1996.
<PAGE>

 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.

     The Bank adopted SFAS No. 114,  "Accounting for Creditors for Impairment of
a Loan" as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures" on January 1, 1995. This new standard
requires  that a  creditor  measure  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, a creditor may measure impairment 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.  The adoption of SAFS No. 114,
as amended by SFAS No. 118, on January 1, 1995 did not have a material impact on
the Company's financial condition or results of operations (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 related loan's yield.

 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 of equipment,  principally on an
accelerated method, over the estimated useful lives of the assets.

 7.  Income Taxes

     The Company adopted,  effective January 1, 1992, SFAS No. 109,  "Accounting
for  Income  Taxes".  Under the  liability  method  specified  by SFAS No.  109,
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.

     The deferred method,  used in years prior to 1992,  required the Company to
provide for  deferred tax expense  based on certain  items of income and expense
which were reported in different  years in the financial  statements and the tax
returns  as  measured  by the tax rate in  effect  for the  year the  difference
occurred.

 8.  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 93-6,  "Employer's Accounting for Employee
Stock Ownership Plans" ("SOP 93-6"), issued by the Accounting Standards Division
of The American  Institute of Certified Public Accountants 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,  Company  will  continue  the cash  contribution  method of
recognizing  expense to the extent that it exceeds the  cumulative  expense that
would be recognized under the shares allocated method (see Note K).

<PAGE>

     Employees who qualify may elect to participate in a deferred salary savings
(401k) 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).

     Under stock  option  plans,  options to acquire  shares of common stock are
granted  to  certain  officers  and  directors.   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 N).

     Effective  January 1, 1993, the Company  adopted SFAS No. 106,  "Employer's
Accounting  for  Post-retirement  Benefits  Other Than  Pensions",  whereby  the
Company  began to record the cost of  post-retirement  medical  benefits  on the
accrual  basis as employees  render  service to earn the benefits and recorded a
liability  for the  unfunded  accumulated  post-retirement  benefit  obligation.
Previously,  the Company  recognized  the cost of  providing  these  benefits by
expensing the annual  medical  premiums as they were  incurred.  As permitted by
SFAS  No.  106,  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.
Adoption of this  statement  did not have a material  impact on the Company (see
Note M).

9.  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.

10.  Per Share Information

     Earnings  per share is  computed  by  dividing  net income by the  weighted
average number of common shares  outstanding.  Average common shares outstanding
in 1994  includes  issued  shares  less 36,558 of average  weighted  unallocated
shares held by the ESOP. The exclusion of these  unallocated  shares held by the
ESOP in 1994 is due to the  Company's  adoption  of "SOP  93-6"  (see Note A.8).
Prior to 1994,  unallocated  shares  held by the ESOP were  included in weighted
average  number of common shares.  Average  weighted  unallocated  common shares
related to the ESOP loan of August  1993 held by the ESOP were 15,057 at the end
of December 1993.

     The  potential  dilutive  effect from the exercise of stock  options is not
material.

     Per share  information and weighted  average shares  outstanding  have been
restated to reflect the 5% stock dividend of June 1994.

11.  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 $8,509,000,  $7,444,000 and $8,595,000,  for the
years ended December 31, 1995, 1994 and 1993, respectively.  Cash paid for taxes
was $440,000 in 1995, $845,000 in 1994 and $300,000 in 1993.

12.  Financial Instruments

     The estimated  fair value as of December 31, 1995 and 1994 of the Company's
assets and  liabilities  considered  to be financial  instruments  which consist
primarily of securities, loans and deposits as required by SFAS 107, "Disclosure
About Fair Value of Financial Instruments", are provided in Note U.

13.   Contributions

     In 1995 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. At
December 31, 1995 the present  value of  contribution  commitments  was $38,000.
This amount was included in the  Company's  1995 total  contribution  expense of
$142,000.

14.  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 $294,000 and
$228,000 for the years ended December 31, 1995 and 1994, respectively.
<PAGE>

15.  Intangibles

     The Financial  Accounting  Standards Board issued SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", which provides guidance on when to recognize and how to measure  impairment
losses of  long-lived  assets and certain  identifiable  intangibles  and how to
value long-lived assets to be disposed of. The adoption of this new statement is
not expected to have a material  impact on the Company's  financial  position or
results of operation. The Company is required to adopt this new standard for its
year ended December 31, 1996.

16.  Reclassifications

     Certain amounts from prior periods have been  reclassified  for comparative
purposes.

<PAGE>

NOTE B - INVESTMENT SECURITIES

     The Company  classifies  debt and  marketable  equity  securities  in three
categories:  trading,  available-for-sale,  and  held-to-maturity as provided by
Statement of Financial  Accounting  Standards  (SFAS) No. 115,  "Accounting  for
Certain  Investments in Debt and Equity  Securities".  The Company  adopted this
method of  accounting  for certain  debt and equity  securities  on December 31,
1993.  Trading  securities are measured at fair value,  with unrealized  holding
gains and losses  included in income.  The Company had no trading  securities in
1995, 1994 and 1993.  Available-for-sale  securities are measured at fair value,
with net  unrealized  gains and losses  reported,  net of tax, as a component in
equity.

     In 1995, the Financial  Accounting  Standards Board (FASB) issued a special
report "A Guide to  Implementation  of SFAS No. 115". In this guide, FASB stated
it was permitting a one-time  opportunity to reassess the appropriateness of the
designation   of   securities.   The   guide   provided   that   any   resulting
reclassification must occur between November 15, 1995 and December 31, 1995. The
Company completed this  reassessment and reclassified  $15,134,000 of securities
from the held-to-maturity to available-for-sale effective December 19, 1995.

     Available-for-sale securities had unrealized holding gains of $520,000 (net
of the tax  effect  of  $267,000)  in 1995  and  unrealized  holding  losses  of
$1,034,000  (net  of the tax  effect  of  $533,000)  in  1994.  Held-to-maturity
securities are carried at amortized cost. At December 31, the equity  securities
in the  available-for-sale  category  include  Federal Reserve Bank stock in the
amount of  $220,000 in 1995 and 1994,  and  Federal  Home Loan Bank stock in the
amount of $1,660,000 in 1995 and $1,578,000 in 1994 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,
1995 and 1994 are summarized as follows:

<PAGE>

<TABLE>

                                1995                          1994
                            Gross  Gross                 Gross   Gross
                      Amort Unreal Unreal  Fair   Amort  Unreal  Unreal  Fair
                      Cost  Gains  Losses  Value  Cost   Gains   Losses  Value
<S>               <C>     <C>    <C>   <C>     <C>     <C>    <C>     <C>
Avail-for-Sale Sec

 U. S. Treasury     $ 7,002 $ 69   $  21 $ 7,050 $ 2,999 $ ---  $   77  $ 2,922
 U. S. Govt Agcy     17,066  129      36  17,159  13,246     2     441   12,807
 State and Political 
  Subdivisions        6,638   66      15   6,689   4,507    13      89    4,431
 Mtge-Backed Sec     24,529  270     110  24,689  21,759     1   1,040   20,720
 Other Debt Sec         300    7     ---     307     ---   ---     ---      ---
 Equity Securities    2,727  429       1   3,155   2,666   122      58    2,730
                    ------- ----   ----- ------- ------- -----  ------  -------
  Total             $58,262 $970   $ 183 $59,049 $45,177 $ 138  $1,705  $43,610
</TABLE>

<TABLE>
                                1995                         1994
                            Gross  Gross                 Gross   Gross
                      Amort Unreal Unreal  Fair   Amort  Unreal  Unreal  Fair
                      Cost  Gains  Losses  Value  Cost   Gains   Losses  Value
<S>               <C>     <C>    <C>   <C>     <C>    <C>     <C>     <C>    
Held-to-Mat Sec
 U. S. Treasury     $ 2,997 $ 14   $  4  $ 3,007 $ 8,071 $ ---  $  418  $ 7,653
 U. S. Govt Agcy      6,524   44     29    6,539   5,386   ---     360    5,026
 State and Political
  Subdivisions        2,086   36      4    2,118   4,025     4     288    3,741
 Mtg-Backed Sec       8,447   98     21    8,524  18,535     7   1,063   17,479
 Other Debt Sec         ---  ---    ---      ---     508   ---       9      499
                    ------- ----   ----  ------- ------- -----  ------  -------
  Total             $20,054 $192   $ 58  $20,188 $36,525 $  11  $2,138  $34,398
</TABLE>

<PAGE>

     The following table lists the maturities of debt securities at December 31,
1995 and 1994, classified as available-for-sale  and held-to-maturity.  Expected
maturities will differ from contractual  maturities  because  borrowers may have
the right to call or  prepay  obligations  with or  without  call or  prepayment
penalties.
<TABLE>

                                                        1995      1994

                         Available-   Held-to-Mat   Available-    Held-to-Mat
                          for-Sale     Carrying      for-Sale      Carrying
                         Fair Value      Value      Fair Value      Value
<S>                     <C>          <C>          <C>            <C>  
Due in one year
 or less                  $ 2,874      $ 1,999      $ 3,558        $   300
Due after one year
   through five years      15,974        4,201       13,280         10,683
Due after five years
   through ten years        7,170        4,947        1,818          6,547
Due after ten years         5,187          460        1,504            460
                           ------        -----       ------         ------
                           31,205       11,607       20,160         17,990

Mortgage-backed sec        24,689        8,447       20,720         18,535
Equity securities           3,155          --         2,730            --
                           ------        -----       ------         ------

Total Investments         $59,049      $20,054      $43,610        $36,525
</TABLE>

     Investment securities with a carrying amount of $14,043,000 and $14,006,000
at  December  31, 1995 and 1994,  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  1995,  1994  and  1993  were  $11,177,000,  $4,790,000,  and
$13,146,000  respectively.  Gross gains of $93,000  and gross  losses of $71,000
were  realized on those sales in 1995.  Gross gains of $108,000 and gross losses
of $11,000 were realized on the sales in 1994.  In 1993,  gross  realized  gains
were $279,000 and gross realized losses were $71,000.

<PAGE>

NOTE C - LOANS

     Major  classifications  of  loans  at  December  31,  1995  and 1994 are as
follows:
<TABLE>

                                        1995         1994
<S>                              <C>          <C>    

Real Estate/Residential            $ 122,293    $ 117,205
Real Estate/Construction               4,959        2,861
Real Estate/Commercial                35,316       35,673
Consumer/Installment                  27,685       24,626
Commercial (Non-Real Estate)
  and Agricultural                     5,403        7,503
State and Political Subdivisions       1,290          288
Other                                     13           18
                                   ---------    ---------
  Total Gross Loans                  196,959      188,174
      Less Unearned Discount          (3,829)      (2,959)
                                   ---------    ---------
  Total Loans                      $ 193,130    $ 185,215
</TABLE>

     Included in total gross loans are unamortized  loan fees totaling  $229,000
at  December  31,  1995 and  $226,000 at  December  31,  1994.  There were loans
totaling  $2,181,000 on which the accrual of interest has been  discontinued  or
reduced at December 31, 1995. During 1995 an average of $1,893,000 of loans were
on  non-accrual  status.  Non-accrual  loans at December  31,  1994  amounted to
$1,724,000 and averaged  $1,698,000 during 1994. Loans 90 days and over past due
totaled $1,115,000 at December 31, 1995 and $1,069,000 at December 31, 1994.

<PAGE>

NOTE D - ALLOWANCE FOR POSSIBLE LOAN LOSSES

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

Year Ended December 31,                1995       1994       1993
<S>                               <C>        <C>        <C>   

Beginning Balance                   $ 2,187    $ 1,953    $ 1,840

Additions
  Provisions for loan losses
    charged to operating expenses     1,798        420        765
  Recoveries of loans                   216        252         91
                                    -------    -------    -------
      Total Additions                 2,014        672        856
  Deduction
    Loans charged-off                (1,758)      (438)      (743)
                                    -------    -------    -------
  Ending Balance                    $ 2,443    $ 2,187    $ 1,953
</TABLE>


NOTE E  -  IMPAIRED LOANS

     On  January 1, 1995 the  Company  adopted  SFAS No.  114,  "Accounting  for
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 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 are as follows:

<TABLE>

At December 31,                         1995
<S>                                <C>    

Principal amount of impaired loans   $ 2,035
Accrued interest                        --
Deferred loan costs                        4
                                     -------
                                       2,039
Less valuation allowance                (238)
                                     -------
                                     $ 1,801
</TABLE>

<PAGE>

     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,                     1995
<S>                                      <C>   

Valuation allowance at January 1, 1995     $ 160
Provision for loan impairment                187
Direct charge-offs                          (125)
Recoveries                                    16
                                           -----
Valuation allowance at December 31, 1995   $ 238
</TABLE>

     Total cash collected on impaired  loans during 1995 was $182,000,  of which
$138,000 was credited to the  principal  balance  outstanding  on such loans and
$44,000 was recognized as interest income. Interest that would have been accrued
on impaired loans during 1995 was $214,000. The valuation allowance for impaired
loans of  $238,000  at December  31,  1995 is  included  in the  "Allowance  for
Possible Loan Losses" which amounts to $2,443,000 at December 31, 1995.

NOTE F - PREMISES AND EQUIPMENT

     Major  classifications  of these  assets at December  31, 1995 and 1994 are
summarized as follows:
<TABLE>

                                   1995        1994
<S>                          <C>         <C>   
  Land                         $    939    $    476
  Premises                        6,512       5,878
  Equipment                       3,707       3,437
                               --------    --------
                                 11,158       9,791
  Accumulated depreciation
        and amortization         (4,395)     (3,929)
                               --------    --------
 Total Premises and Equipment  $  6,763    $  5,862
</TABLE>

     Depreciation  and amortization  expense amounted to $624,000,  $458,000 and
$353,000 in 1995, 1994 and 1993, respectively.

     The Financial Accounting Standards Board issued new standard, SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", which provides guidance on when to recognize and how to measure
impairment losses of long-lived assets and certain identifiable  intangibles and
how to value  long-lived  assets to be  disposed  of. The  adoption  of this new
statement is not expected to have a material  impact on the Company's  financial
position  or results of  operation.  The  Company's  required  to adopt this new
standard for it's year ended December 31, 1996.
<PAGE>

NOTE G - SHORT-TERM BORROWINGS
<TABLE>

FEDERAL RESERVE DISCOUNT BORROWINGS
Year Ended December 31,                1995      1994        1993
<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                     $  --     $   59      $   --
Average interest rate during
  the year                              ---%      3.19%        ---%
</TABLE> 

<TABLE>

FEDERAL HOME LOAN BANK BORROWINGS

  Year Ended December 31,               1995       1994       1993
<S>                                 <C>        <C>        <C>   

Balance outstanding at December 31,   $ 7,000    $   750    $  --
Maximum amount outstanding at any
   month-end during the year          $11,000    $   750    $ 5,263
Average amount outstanding
  during the year                     $ 6,109    $   118    $   317
Average interest rate during
  the year                               6.34%      5.19%      3.31%
</TABLE>

          There  were no  short-term  borrowings  in the form of  Federal  Funds
     purchased at December 31, 1995, 1994 and 1993.

<TABLE>

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Year Ended December 31,                 1995       1994       1993
<S>                                 <C>        <C>        <C>    

Balance outstanding at December 31,   $ 6,096    $ 9,027          $
                                                              4,711
Maximum amount outstanding at any
   month-end during the year          $12,332    $12,347    $ 6,572
Average amount outstanding
  during the year                     $ 9,298    $ 6,428    $ 4,078
Average interest rate during
  the year                               3.72%      2.51%      2.08%
</TABLE>

<PAGE>

NOTE H - LONG-TERM DEBT

     Long-term  debt  consists  of the  Company's  obligation  as a party to the
Employee  Stock  Ownership Plan debt which is discussed in Note K. The principal
payments due on the ESOP debt at December 31, 1995 are as follows:
<TABLE>
                                  ESOP
                                  Debt
<S>      <C>                    <C>   

           1996                   $132
           1997                    121
           1998                     65
           1999                     65
           2000                     65
           2001 and beyond         195
                                  ----
           Total                  $643
</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>
                                                 1995   1994   1993
<S>                                            <C>    <C>    <C>   

Litigation Costs and Consulting and Legal Fees   $681   $470   $411
Data Processing Services                         $515   $361   $332
Printing, Stationery and Supplies                $299   $303   $287
Advertising                                      $294   $228   $174
Federal Deposit Insurance Premium                $288   $536   $499
Postage                                          $258   $226   $193
Loan Collection                                  $201   $258   $141
</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,    1995      1994     1993
<S>                    <C>       <C>      <C>    

Federal
    Current              $  671    $1,015   $  201
    Deferred (benefit)     (156)        3      568
                         ------    ------   ------
    Total                $  515    $1,018   $  769
</TABLE>

     The income tax provision  reconciled to the tax computed  statutory federal
rate was:
<TABLE>

Year Ended December 31,         1995       1994       1993
<S>                        <C>        <C>        <C>   
  
Federal tax expense
  at statutory rate          $   651    $ 1,142    $   910
Increase (decrease)
  in taxes resulting from:
    Tax-exempt investment
      securities income         (124)      (112)      (123)
    Tax-exempt interest
      on loans                   (19)       (17)       (16)
  Other, net                       7          5         (2)
                             -------    -------    -------
  Applicable Income Taxes    $   515    $ 1,018    $   769
</TABLE>

     Deferred tax assets and liabilities consist of the following:


<TABLE>
At December 31,                     1995     1994
<S>                             <C>      <C>   

Deferred Tax Assets:
   Loan Loss Reserve              $  540   $  477
   Deferred compensation             502      428
   Deferred loan fees                 81      117
   Unrealized securities losses     --        533
                                  ------   ------
      Total                       $1,123   $1,555
                                  ======   ======
Deferred Tax Liability:
   Depreciation of property
      and equipment               $   19   $   51
   Unrealized securities gains       302       71
   Other                              13       --
                                  ------   ------
      Total                       $  334   $  122
                                  ------   ------
Net                               $  789   $1,433
                                  ======   ======
</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 or Plan) for
the benefit of eligible employees.

     In 1985, the ESOP borrowed  $350,000 from a bank payable over twelve years.
The interest rate on this loan is 87.5% of that bank's prime rate plus 1/4% (for
an interest rate of 7.69% at December 31, 1995 and December 31, 1994).  In 1987,
the ESOP borrowed  $385,000 from a commercial bank. The loan is payable over ten
years with interest and principal due  quarterly.  The loan bears  interest at a
current interest rate of 92% of prime (for an interest rate of 7.82% at December
31, 1995 and December 31, 1994).  The ESOP  borrowed an  additional  $650,000 in
August 1993 from a  commercial  bank.  This loan is payable  over ten years with
interest  and  principal  due  quarterly.  The loan bears  interest at a current
interest rate of prime plus 1.25% (for an interest rate of 9.75% at December 31,
1995 and December 31, 1994).  The proceeds of this loan were used by the ESOP to
exercise its rights and purchase  40,152  shares of the  Company's  common stock
from the stock  offering  completed  on August 27, 1993 (see Note T). The ESOP's
total  outstanding debt at December 31, 1995 and 1994 was $643,000 and $775,000,
respectively.  These  obligations have been recorded as a liability on the books
of the Company and are  collateralized  by stock of Nazareth  National  Bank and
Trust Company.

     Interest  expense  represents  the actual  interest  paid by the ESOP.  The
interest  incurred on ESOP debt was  $67,000,  $69,000 and $33,000 for the years
ended December 31, 1995, 1994 and 1993, respectively.

     Compensation expense related to the Plan amounted to $178,000, $153,000 and
$125,000 for the years ended December 31, 1995, 1994 and 1993, respectively.  As
provided by SOP 93-6 (see Note A.8.),  the ESOP  compensation  expense  includes
$3,000 in 1995 and 1994 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 were 4,724 in 1995 and 1994.

     Dividends on unallocated shares used for debt service were $37,000, $42,000
and $31,000 for the years ended December 31, 1995, 1994 and 1993, respectively.

     The total  shares held by the ESOP were 195,481 and 191,931 at December 31,
1995 and 1994,  respectively.  ESOP shares have been  restated to reflect the 5%
stock dividend of June 1994.

NOTE L - OTHER BENEFIT PLANS

     Employees who qualify may elect to participate in a deferred salary savings
(401k) 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  expense.  These  contributions  were $55,000,  $57,000 and $53,000 in
1995, 1994 and 1993, respectively.

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

     The Company has a deferred  compensation  plan (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, 1994 and 1993.

Actuarial present value of benefit obligations:
<TABLE>

                                            Officers'           Deferred
                                          Supplemental          Directors' 
                                         Retirement Plan          Plan
at December 31,  
                                            1995     1994     1995     1994
<S>                                      <C>     <C>      <C>       <C>    

Accumulated benefit obligation, all of
        which is vested                    $  64    $  59    $ 498    $ 491


Projected benefit obligation
  for service rendered to date             $(221)   $(192)   $(498)   $(491)
Plan assets at fair value                     --       --       --       --
                                           -----    -----    -----    ----- 
Projected benefit obligation
  in excess of plan assets                  (221)    (192)    (498)    (491)
Unrecognized net (gain) loss from past
  experience different from that assumed
  and effects of changes in assumptions     (165)    (176)       6
                                                                         (2)
Prior service cost not yet recognized
  in net periodic pension cost                --       --       --       --
Unrecognized net assets at December 31,
  being recognized over 15 years              (6)      (6)      --       --
Adjustment to recognize
  additional minimum liability                --       --       (6)      --
                                           -----    -----    -----    ----- 
Accrued Pension Cost                       $(392)   $(374)   $(498)   $(493)
</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
1995, 7.75% and 6.0%,  respectively,  in 1994 and 7.0% and 7.0%, respectively in
1993. The weighted average expected  long-term rate of return on assets was 8.0%
for  1995,  8.0% for 1994  and  9.0%  for  1993 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,                 1995    1994    1995   1994
<S>                           <C>     <C>     <C>    <C>

Service cost - benefits
  earned during the period      $ 14    $ 33    $--    $--
Interest cost on projected
  benefit obligation              15      20      36     35
Net amortization and deferral    (11)     (1)    --     --
                                ----    ----    ----   ----
Net Periodic Pension Cost       $ 18    $ 52    $ 36   $ 35
</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 retire from the Company  after  attaining age 65 and are
fully vested in the "Employee  Stock  Ownership Plan" at the time of retirement.
This plan is currently unfunded.

     Effective as of the beginning of fiscal 1993, the Company  adopted SFAS No.
106,  "Employers'  Accounting for Post-retirement  Benefits Other Than Pension".
The Standard's provisions were adopted  prospectively and accordingly,  earnings
for 1992 have not been  restated.  As  permitted  by SFAS No.  106,  the Company
elected  to delay  the  recognition  of the  transition  obligation  aggregating
$308,000 at January 1, 1993, 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.  Prior to 1993,  the
Company  recognized  the cost of retiree  health care as benefits  premiums were
paid.

     The Company has determined the actuarially computed expense associated with
this  benefit  for  1995  and  1994.   The   components   of  the  net  periodic
post-retirement benefit cost for the years ended December 31, were:
<TABLE>

Year Ended December 31,    
                                                  1995  1994
<S>                                             <C>    <C>   

Service cost - benefits earned during the period   $ 5   $ 5
Interest cost on accumulated benefit obligation     25    21
Amortization of transition obligation               15    15
                                                   ---   ---
Net periodic post-retirement benefit cost          $45   $41
</TABLE>

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

                                     1995       1994
<S>                               <C>        <C>  

Discount rate                        7.00%      7.75%
Medical care cost trend rate        12.00%     13.00%
</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,   
                                                           1995     1994
<S>                                                    <C>      <C>  
Accumulated post-retirement benefit obligation:
     Retirees                                             $ 303    $ 256
     Active, eligible employees                              --       37
     Active, not-yet-eligible employees                      53       --
                                                           ----     ---- 
Accumulated post-retirement benefit obligation              356      293
Plan assets at fair value                                    --       --
                                                           ----     ---- 
Accumulated benefit obligation in excess of plan assets     356      293
Unrecognized transition obligation                         (262)    (278)
Unrecognized net gain                                       (37)      21
                                                           ----     ---- 
Accrued post-retirement                                   $  57    $  36
</TABLE>

     At December 31, 1995 $127,000 of the accrued  post-retirement  benefit cost
is included in the 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 $30,000 and the accrued post-retirement benefit
cost by $2,000.

     Health care benefits are provided to certain retired employees. The cost of
providing these benefits was approximately $28,000, $25,000 and $22,000 in 1995,
1994 and 1993,  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 1986.  Under the stock  option
plan,  options to acquire  shares of common stock may be granted to the officers
and key employees. The stock option plan provides for the granting of options at
the fair market value of the Company's  common stock at the time the options are
granted. Each option granted under the stock option plan 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.  No options were granted in 1995.
Options  totaling  5,750 shares were granted to officers under this plan in 1994
at a price of $16.75  per share.  Options  outstanding  under this plan  totaled
16,168  shares at an average  price per share of $18.11 at December 31, 1995 and
1994.

     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 1,050 shares of the Company's common
stock at the fair  market  value of the  Company's  common  stock of $16.19  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  1,050 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 1,050 shares of the Company's  common stock.  Pursuant to this plan, in
1995,  options to purchase 2,100 shares of the Company's common stock at a price
of $15.75 were granted to certain non-employee directors. Options totaling 8,400
shares were granted to non-employee directors under this plan in 1994 at a price
of $16.19 per share.

     At  December  31,  1995,  the total of all  options to acquire  shares were
26,578 at an average  price of $17.32 per share.  There were  24,568  options to
acquire  shares at an average price of $17.45 per share  outstanding at December
31,  1994.  No  options  have  been  exercised  under the  stock  option  plans.
Authorized  shares  available for future option grants were 60,243 and 62,253 at
December  31, 1995 and 1994,  respectively.  Shares and price per share data has
been restated to reflect the 5% stock dividend of June 1994.

     The Financial  Accounting  Standards Board issued a new standard,  SFAS No.
123,   "Accounting  for  Stock-Based   Compensation",   which  contains  a  fair
value-based method for valuing  stock-based  compensation that entities may use,
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
<PAGE>

continue  accounting for employee  stock options and similar equity  instruments
under APB Opinion 25, "Accounting for Stock Issued to Employees".  Entities that
continue to account for stock  options using APB Opinion 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  has not  determined  which  method it will  follow in the  future,  but
anticipates  following APB Opinion 25. The Company will be required to adopt the
new standard for its year ended December 31, 1996.

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, 1995 are payable as follows:
<TABLE>

     Operating Leases
<S>               <C>   
1996                $   528
1997                    383
1998                    249
1999                    238
2000                    246
2001 and beyond       1,541
                    -------
        Total       $ 3,185
</TABLE>

     The total rental expense was $594,000,  $543,000 and $573,000 in 1995, 1994
and 1993, respectively.

     The Company  does not  anticipate  any  material  losses as a result of the
commitments and contingent liabilities.
<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
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, 1995 are as follows:

     Financial instruments whose contract amounts
     represent credit risk:

        Commitments to extend credit    $ 1,549
        Standby letters of credit       $11,078

     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
85.7% as of December 31, 1995.

NOTE Q - CONCENTRATIONS OF CREDIT RISK

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

     At  December  31,  1995,  the  Bank  had  residential   real  estate  loans
outstanding  totaling  $122,293,000 which is 63.3% of total loans. The Bank also
had loans  outstanding  at December  31, 1995 to various  residential  apartment
building  owners  totaling  $10,187,000  which is 28.9% of the Bank's total real
estate commercial loans.

NOTE R - RELATED PARTY TRANSACTIONS

     The amount of loans by the Company to its directors and executive  officers
was  approximately  $2,788,000  and  $2,595,000  at December  31, 1995 and 1994,
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 1995 activity of these loans follows:
<TABLE>
<S>                        <C>   

     Balance, January 1, 1995     $ 2,595

             New loans                373
             Repayments              (180)
                                  -------
     Balance, December 31, 1995   $ 2,788
</TABLE>

<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, 1995 that the Bank could  declare,  without the approval of the
Comptroller of the Currency,  amounted to approximately $1,823,000.  The Bank is
also required to maintain  minimum  amounts of capital to total "risk  weighted"
assets, as defined by the banking regulators. At December 31, 1995, the Bank was
required  to have  minimum  Tier 1 and  total  capital  ratios of 4.0% and 8.0%,
respectively.  The Bank's  actual  ratios at  December  31,  1995 were 12.4% and
13.6%, respectively. The Bank's leverage ratio at December 31, 1995 was 6.8%.

     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 1995 was approximately $2,990,000 and $3,285,000,  respectively. For
1994, the average  reserve  balance was  $2,816,000 and the year-end  amount was
$3,511,000.

NOTE T - EQUITY TRANSACTIONS

     On June 28, 1994 the Company  paid a 5% stock  dividend on its common stock
from authorized but unissued  shares to all  shareholders of record at the close
of  business  on June 6, 1994.  The number of shares and  earnings  per share as
stated in the  following  discussion  of the  offering of August 1993 and shares
issued  under  the  Dividend  Reinvestment  and  Stock  Purchase  Plan have been
restated to reflect this 5% stock dividend.

     On August 27, 1993 the Company  completed an offering of 315,000  shares of
common stock at a price of $16.19 per share.  This offering resulted in proceeds
to the  Company  of  $4,948,000,  net  of  expenses  of  $152,000.  The  Company
contributed $4,700,000 of these funds to its Bank subsidiary.

     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 1994, the Dividend  Reinvestment
and Stock Purchase Plan purchased  14,744 new common shares from  authorized and
unissued shares at an average cost of $16.48 per share for proceeds of $243,000.
In 1995, the Dividend  Reinvestment and Stock Purchase Plan purchased 15,573 new
common shares from  authorized and unissued  shares at an average cost of $15.99
for proceeds of $249,000.

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  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, 1995 and 1994 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>
                                        1995                    1994
                               Estimated   Carrying    Estimated   Carrying
                               Fair Value   Amount     Fair Value   Amount
<S>                            <C>       <C>          <C>        <C>    

Cash and cash equivalents        $15,549   $15,549      $10,669    $10,669
Investment securities             20,188    20,054       34,398     36,525
Securities available-for-sale     59,049    59,049       43,610     43,610
Mortgage loans held-for-sale       1,006     1,006           69         69
</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>
                                        1995                    1994
                             Estimated   Carrying    Estimated   Carrying
                             Fair Value   Amount    Fair Value    Amount
<S>                        <C>         <C>         <C>         <C>    

Assets:
Int-bearing dep with banks   $    835    $    835    $    402    $    401
Liabilities:
Deposits with stated mat      106,532     106,939      85,812      87,729
Sec sold under agreements
   to repurchase                6,096       6,096       9,027       9,027
Short-term borrowings           6,992       7,000         750         750
Long-term debt                    643         643         862         862
</TABLE>

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


<TABLE>
                                       1995                      1994
                             Estimated    Carrying      Estimated     Carrying
                             Fair Value   Amount        Fair Value    Amount
<S>                        <C>         <C>            <C>          <C>
Dep with no stated mat       $ 147,163   $ 147,163      $ 159,803    $ 159,803
</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>
                                      1995                      1994
                             Estimated    Carrying    Estimated     Carrying
                             Fair Value   Amount      Fair Value    Amount
<S>                        <C>         <C>          <C>           <C>  

Total loans                  $ 195,162   $ 193,130    $ 181,278     $185,215
</TABLE>

     There  is no  material  difference  between  the  carrying  amount  and the
estimated fair value of off-balance-sheet items totaling $12,627,000 at December
31, 1995 and  $11,465,000 at December 31, 1994 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,                           1995      1994
<S>                                  <C>       <C>

ASSETS
  Cash and Due from Banks              $    56   $    88
  Interest-Bearing Deposits
    with Banks                             290       196
  Loan to Banking Subsidiary             1,600     1,600
  Investment in Banking Subsidiary      20,717    18,890
  Investment in Other Subsidiary         2,811     2,516
  Other Assets                               2        42
                                       -------   -------
    TOTAL ASSETS                       $25,476   $23,332

LIABILITIES AND SHAREHOLDERS' EQUITY
  Long-Term Debt                       $   643   $   862
  Other Liabilities                         66        70
                                       -------   -------
    TOTAL LIABILITIES                      709       932

SHAREHOLDERS' EQUITY                    24,767    22,400
                                       -------   -------
    TOTAL LIABILITIES AND

    SHAREHOLDERS' EQUITY               $25,476   $23,332
</TABLE>

<PAGE>

Condensed Statement  of Income
<TABLE>

For the Year Ended December 31,              1995      1994       1993
<S>                                     <C>       <C>        <C>   

INCOME
  Dividends from Subsidiaries             $   829   $   990    $   876
  Interest on Loan to Subsidiary              149       122        104
  Interest on Deposits with Banks               5         6         14
                                          -------   -------    -------
    Total Income                              983     1,118        994
                                          -------   -------    -------
EXPENSES
  Interest on Long-Term Debt                   67        83         68
  Other Expenses                               77        90        110
                                          -------   -------    -------
    Total Expenses                            144       173        178
                                          -------   -------    -------
  Income Before Taxes and
  Equity in Undistributed Net
  Earnings of Subsidiaries                    839       945        816
  Federal Income Tax (Credit)                   3       (13)       (20)
                                          -------   -------    -------
  Income Before Equity in Undistributed
    Net Earnings of Subsidiaries              836       958        836
  Equity in Undistributed Net
    Earnings of Subsidiaries                  565     1,384      1,072
                                          -------   -------    -------
      NET INCOME                          $ 1,401   $ 2,342    $ 1,908
</TABLE>

<PAGE>

Condensed Statement of Cash Flows
<TABLE>

For The Year Ended December 31,                       1995     1994     1993
<S>                                               <C>      <C>      <C>    

OPERATING ACTIVITIES
  Net Income                                        $ 1,401  $ 2,342  $ 1,908
  Adjustments to Reconcile Net Income to Net Cash
    Provided by Operating Activities:
    Distribution in Excess of Undistributed
      Net Earnings of Subsidiaries                     (565)  (1,384)  (1,072)
    Changes in Assets and Liabilities:
      (Increase) Decrease in Interest-Bearing
      Deposits with Banks                               (94)      26       24
      (Increase) Decrease  in Other Assets               40      (18)      (2)
       Increase (Decrease) in Other Liabilities          (7)     (17)      24
                                                    -------  -------  -------
NET CASH PROVIDED BY OPERATING ACTIVITIES               775      949      882
                                                    -------  -------  -------
INVESTING ACTIVITIES
  Capital contribution to Bank Subsidiary                --       --   (4,700)
                                                    -------  -------  -------
NET CASH USED IN INVESTING ACTIVITIES                    --       --   (4,700)
                                                    -------  -------  -------
FINANCING ACTIVITIES
  Repayment of Long-Term Debt                           (87)    (338)    (300)
  Proceeds from Issuance of Common Stock                252      246    5,083
  Cash Dividends Paid                                  (972)    (936)    (812)
  Cash in Lieu of Fractional Shares                      --       (3)      --
                                                    -------  -------  -------
Net Cash (Used in) Provided by Financing Activities    (807)  (1,031)   3,971
(Decrease) Increase in Cash and Cash Equivalents        (32)     (82)     153
Cash and Cash Equivalents, January 1,                    88      170       17
                                                    -------  -------  -------
Cash and Cash Equivalents, December 31,             $    56  $    88  $   170
                                                    -------  -------  -------
</TABLE>


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  Exchange Act of 1934" in the
Company's  1996 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 1996 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 1996 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  1996 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
                   12/31/95 and 12/31/94

           Consolidated Statements of Income for the Years Ended
                   12/31/95, 12/31/94 and 12/31/93

           Consolidated Statement of Changes in Shareholders' Equity
           for the Years Ended  12/31/95, 12/31/94 and 12/31/93

           Consolidated Statements of Cash Flows for the Years Ended
                   12/31/95, 12/31/94 and 12/31/93

           Notes to Consolidated Financial Statements
<PAGE>

3.   Exhibits:

  Number     Title                                                    Page No.

   3.1 (7)  Restated Articles of Incorporation of the Company, as
             amended.

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

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

 *10.1 (1)  Deferred Compensation Plan for Directors.

  10.2 (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 areeement dated July 19, 1994 by and
            between the Bank and S. Eric Beattie

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

<PAGE>

  Number     Title                                                    Page No.

 *10.12 (9)  Severance agreement dated July 19, 1994 by and
             between the Bank 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      Amendment Number 1 to the 1994 Stock Option Plan for
             Non-Employee Directors

 *10.17      1996 Employee Stock Option Plan

  11.1       Computation of Earnings per Share

  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 Agreement.
<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 fisscal year ended December 31, 1994.


(b)   Reports on Form 8-K

     No reports  on Form 8-K were filed in the fourth  quarter of the year ended
December 31, 1995.

<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 21, 1996                 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 21, 1996

By:     /s/  S. Eric Beattie
        S. ERIC BEATTIE President, Chief Executive Officer
        and Director (Principal Executive Officer)
        March 21, 1996

By:     /s/  Reid L. Heeren
        REID L. HEEREN Senior Vice President and Treasurer
        (Principal Financial Officer and
        Principal Accounting Officer)
        March 21, 1996

By:     /s/  Robert J. Bergren
        ROBERT J. BERGREN
        Director
        March 21, 1996

<PAGE>

By:     /s/  Paul A. Lentz
        PAUL A. LENTZ 
        Director March 21, 1996

By:     /s/  Gordon Mowrer
        GORDON MOWRER 
        Director March 21, 1996

By:     /s/  Daniel B. Mulholland
        DANIEL B. MULHOLLAND 
        Director March 21, 1996

By:     
        ROBERT C. NAGEL 
        Director March __, 1996

By:     
        RICHARD STEVENS 
        Director March __, 1996

By:     
        MARIA ZUMAS THULIN 
        Director March __, 1996