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, 1996.

_____ 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, 1996 were
$25,777,000.

     The aggregate  market value of voting stock held by  non-affiliates  of the
registrant is $31,529,520.  (1)

     The number of shares of the  Issuer's  common  stock,  par value  $5.00 per
share, outstanding as of March 18, 1997 was 1,562,673.


                      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,  1997.  Includes an
aggregate of 135,254 shares, with an aggregate market value of $3,246,096,  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 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, 1996 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  $17,825,000,
representing a negative cumulative one year gap of .89%. If interest rates rise,
the  Company  could  experience  a decrease  in net  interest  income.  Like all
financial institutions,  the Company's balance sheet is affected by fluctuations
in  interest   rates.   Volatility   in  interest   rates  can  also  result  in
disintermediation,  which is the flow of funds away from financial  institutions
into direct investments,  such as U. S. Government and corporate  securities and
other investment vehicles, including mutual funds, which, because of the absence
of federal  insurance  premiums and reserve  requirements,  generally pay higher
rates  of  return  than  financial  institutions.   See  "Item  6,  Management's
Discussion and Analysis or Plan of Operation".

<PAGE>

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

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

     Accounting  Standards.  The  operations  of the  Company  and the  Bank are
affected by accounting  standards issued by the Financial  Accounting  Standards
Board  ("FASB")  which the Company is required  to adopt.  The  adoption of such
standards  can have the effect of reducing the  Company's  earnings and capital.
Information  on current FASB  standards  that affect the Company can be found in
the Notes to  Consolidated  Financial  Statements  contained  under the caption,
"Item 7, Financial Statements".

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

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

     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.  See the  information
contained  under the  caption in "Item 5,  Market for Common  Equity and Related
Stockholder Matters".

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

     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.

<PAGE>

     The Company's  principal  activities  consist of owning and supervising the
Bank, which engages in a full service  commercial and consumer banking and trust
business. The Company, through the Bank, derives substantially all of its income
from the furnishing of banking and  banking-related  services.  The Bank has its
principal   banking  office  as  well  as  three  branch  offices  in  Nazareth,
Pennsylvania.   It  also   presently  has  two  branch   offices  in  Bethlehem,
Pennsylvania,  three  branch  offices  in  Easton,  Pennsylvania,  one branch in
Brodheadsville,  Pennsylvania,  one branch in Stroudsburg,  Pennsylvania and one
branch  in  Allentown,  Pennsylvania.  The Bank  has  sixteen  automated  teller
machines (ATMs),  one at each branch office (except the Main Street Nazareth and
Hall Square Nazareth  branches),  four  free-standing  drive-up  machines at the
Northampton  Crossings Shopping Center,  Easton,  Pennsylvania and free-standing
machines at its operation  center,  The First Colonial Building in the Bethlehem
Business  Park,  Hanover  Township,  Pennsylvania  and at St.  Luke's  Hospital,
Fountain Hill, Pennsylvania.  On January 29, 1997, the Bank opened an additional
branch in a  Wal-Mart  Supercenter  located in East  Stroudsburg,  Pennsylvania.
Included within this branch is an ATM.

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

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

     As of December 31, 1996 the Company,  on a  consolidated  basis,  had total
assets of $322,352,000,  total deposits of $267,668,000, and total shareholders'
equity of $26,805,000.

<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, 1996, the Bank had total assets of  $319,292,000,  total
deposits of $268,402,000  and total  shareholders'  equity of  $22,633,000.  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 twelve 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,  in the lobby of St.  Luke's  Hospital  in the
Borough of Fountain Hill,  Pennsylvania and four free-standing drive-up ATM's at
Northampton   Crossings  Shopping  Center,  Lower  Nazareth  Township,   Easton,
Pennsylvania.

     On January 29, 1997,  the Bank opened an  additional  full  service  branch
within the Wal-Mart Super Store located in East Stroudsburg,  Pennsylvania. This
new branch has  extended  hours and is open seven days a week.  There is also an
ATM at this location.

     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 and the  Christmas  Club.  The  Bank  offers
Mastercard and VISA, 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 and Quality  Checking  (deposit  package  programs  which provide
checking accounts with other services including credit card protection, discount
travel,  shopping services and other related financial  services).  Its services
also  include  making  secured and  unsecured  commercial  and  consumer  loans,
financing commercial transactions either directly or through regional industrial
development  corporations,  making  construction and mortgage loans, and renting
safe deposit facilities. Additional services include making residential mortgage
loans (both fixed rate and variable rate), home equity lines of credit, loans to
purchase  manufactured  homes,  revolving  credit loans with overdraft  checking
protection,  small business loans, student loans,  recreational vehicles and new
and used car and truck loans.

<PAGE>

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

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

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

     Competition

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

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

<PAGE>

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

First C. G. Company, Inc.

     In July 1986, the Company established a wholly-owned  subsidiary,  First C.
G.  Company,  Inc.,  a Delaware  corporation,  for the purpose of  investing  in
various types of securities.  As of December 31, 1996, First C. G. Company, Inc.
had total assets of $3,364,000,  of which  $1,430,000 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, 1996 was $3,073,000.

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

<PAGE>

that certain activities including, among others, operating a mortgage,  finance,
credit card or factoring company; performing certain data processing operations;
providing  investment  and  financial  advice;  acting  as  insurance  agent  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 are closely related to banking within the meaning
of the Holding Company Act.

     Under the policy of the Federal  Reserve Board with respect to bank holding
company  operations,  a bank  holding  company is deemed to serve as a source of
financial  strength  to its  subsidiary  depository  institutions  and to commit
resources to support such institutions in circumstances where it might not do so
absent such policy. Under the Federal Deposit Insurance Corporation  Improvement
Act of 1991 (the "1991 Act"),  a bank  holding  company is required to guarantee
that any  "undercapitalized"  (as such term is defined in the  statute)  insured
depository  institution  subsidiary  will  comply  with the terms of any capital
restoration  plan filed by such subsidiary with its appropriate  federal banking
agency to the  lesser of (i) an amount  equal to 5% of the  institution's  total
assets at the time the institution became  undercapitalized,  or (ii) the amount
which is necessary (or would have been necessary) to bring the institution  into
compliance with all capital  standards as of the time the institution  failed to
comply with such capital restoration plan.

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

     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.

<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, 1996 and 1995 in Note
U of the Notes to Consolidated Financial Statements contained under the caption,
"Item 7, Financial Statements".

     Accounting for Investment Securities

     The  Company  classifies  its debt and  marketable  securities  into  three
categories: trading, available-for-sale, and held-to-maturity as provided by the
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 115,  "Accounting  for Certain  Investments  in Debt and Equity  Securities"
(SFAS No. 115).  Trading  securities are measured at fair value with  unrealized
holding  gains and  losses  included  in  income.  The  Company  had no  trading
securities in 1996 and 1995. Available-for-sale securities are stated separately
on  the  financial  statements  and  are  discussed  in  the  following  section
"Securities  Available-for-Sale".  Held-to-maturity  securities  are  carried at
amortized  cost  and  identified  as  investment  securities  in  the  financial
statements. The classification of securities can be found in Note B of the Notes
to  Consolidated  Financial  Statements  contained  under the caption,  "Item 7,
Financial Statements".

<PAGE>

     Capital Regulation

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

     Quantitative  measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain  minimum amounts and ratios of Tier
1  capital  of at  least  4% and  total  capital,  Tier 1 and  Tier  2, of 8% of
risk-adjusted  assets and of Tier 1 capital of 4% of  average  assets  (leverage
ratio).  Tier 1 capital  includes  common  shareholders'  equity and  qualifying
perpetual preferred stock together with related surpluses and retained earnings.
Tier 2 capital may be comprised of limited life preferred stock, qualifying debt
instruments, and the allowance for possible loan losses. Management believes, as
of December  31, 1996,  that the Company and the Bank meet all capital  adequacy
requirements to which it is subject.

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

<PAGE>

CAPITAL RATIOS
<TABLE>
                                                                  To Be Well
                                                                 Capitalized
                                                 Required        Under Prompt
                                                For Capital       Corrective
                                Actual           Purposes         Provisions
(Dollars in Thousands)
 At December 31, 1996        Amount   Ratio     Amount   Ratio   Amount  Ratio
<S>                       <C>       <C>      <C>       <C>    <C>      <C>

Total Capital
(To Risk-Weighted Assets)
  Company, (Consolidated)   $28,596   15.20%   $15,046   8.00%     N/A 
  Bank                      $25,591   13.59%   $15,065   8.00%  $18,831  10.00%

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

Tier 1 Capital
(To Average Assets,
 Leverage)
  Company, (Consolidated)   $26,243   8.35%    $12,578   4.00%     N/A
  Bank                      $22,435   7.20%    $12,456   4.00%  $15,570   5.00%
</TABLE>

<TABLE>

                                                                 To Be Well
                                                                 Capitalized
                                                 Required        Under Prompt
                                                For Capital       Corrective
                                Actual           Adequacy           Action
(Dollars in Thousands)
 At December 31, 1995        Amount   Ratio     Amount   Ratio   Amount  Ratio
<S>                       <C>      <C>       <C>       <C>    <C>      <C>

Total Capital
(To Risk-Weighted Assets)
  Company, (Consolidated)   $26,060  15.86%    $13,142   8.00%     N/A
  Bank                      $22,308  13.66%    $13,061   8.00%  $16,327  10.00%

Tier 1 Capital
(To Risk-Weighted Assets)
  Company, (Consolidated)   $24,014  14.62%    $ 6,571   4.00%     N/A
  Bank                      $20,262  12.41%    $ 6,531   4.00%  $ 9,796   6.00%

Tier 1 Capital
(To Average Assets,
 Leverage)
  Company, (Consolidated)   $24,014   8.20%    $11,719   4.00%     N/A
    Bank                    $20,262   6.80%    $11,915   4.00%  $14,895   5.00%
</TABLE>
CAPITAL RATIOS

<PAGE>

     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  amended to
authorize any out-of-state  bank holding company to acquire control of any state
bank or national bank located in Pennsylvania after 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  enacted  a law  opting in
immediately  to  interstate  merger  and  interstate   branching   transactions.
Interstate  acquisitions  and  mergers  would both be subject,  in  general,  to
certain  concentration  limits and state entry rules  relating to the age of the
bank.

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

     The foregoing  necessarily is a summary and general  description of certain
provisions of the Interstate Act and  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.

<PAGE>

     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.

     Employees

     As of December 31, 1996 the Company had  approximately  202  employees,  of
whom  48 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 16 through 23 herein,
contain  unaudited  information  relevant to the business of the Company and the
Bank:

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

<PAGE>

                             INVESTMENT SECURITIES

                                  (Unaudited)


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

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

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

<TABLE>

Available-for-Sale Securities                     1995
                                                          Carrying 
                                                          Amount at 
                                    Amortized Cost        Fair Value 
<S>                                   <C>                <C>    

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

<TABLE>

Available-for-Sale Securities                     1994
                                                          Carrying 
                                                          Amount at 
                                    Amortized Cost        Fair Value 
<S>                                   <C>                <C>    

U. S. Treasury                          $ 2,999            $ 2,922
U. S. Government Agencies                13,246             12,807
States and Political Subdivisions         4,507              4,431
Mortgage Backed Securities               21,759             20,720
Other Debt Securities                       ---                ---
Equity Securities                         2,666              2,730
                                        -------            -------
  Total Available-for-Sale Securities   $45,177            $43,610
                                        =======            =======
</TABLE>

<TABLE>

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

U. S. Treasury                          $   999            $ 1,003
U. S. Government Agencies                10,229             10,243
States and Political Subdivisions         3,217              3,261
Mortgage Backed Securities                6,554              6,617
Other Debt Securities                       ---                ---
                                        -------            -------
  Total Available-for-Sale Securities   $20,999            $21,124
                                        =======            =======
</TABLE>

<PAGE>

<TABLE>

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

U. S. Treasury                          $ 2,997            $ 3,007
U. S. Government Agencies                 6,524              6,539
States and Political Subdivisions         2,086              2,118
Mortgage Backed Securities                8,447              8,524
Other Debt Securities                       ---                ---
                                        -------            -------
  Total Available-for-Sale Securities   $20,054            $20,188
                                        =======            =======
</TABLE>

<TABLE>

Held-to-Maturity Securities                       1994
                                                          Carrying 
                                                          Amount at 
                                    Amortized Cost        Fair Value 
<S>                                   <C>                <C>    

U. S. Treasury                          $ 8,071            $ 7,653
U. S. Government Agencies                 5,386              5,026
States and Political Subdivisions         4,025              3,741
Mortgage Backed Securities               18,535             17,479
Other Debt Securities                       508                499
                                        -------            -------
  Total Available-for-Sale Securities   $36,525            $34,398
                                        =======            =======
</TABLE>

<PAGE>

INVESTMENT SECURITIES YIELD BY MATURITY

     The maturity  distribution  and weighted  average  yield of the  investment
portfolio  of the Company at December 31, 1996 are  presented  in the  following
table. Weighted average yields on tax-exempt obligations have been computed on a
fully taxable  equivalent  basis  assuming a tax rate of 34%. All average yields
were  calculated on the book value of the related  securities.  Equity and other
securities  having no stated maturity have been included in the "After 10 Years"
category.

      Available-for-Sale and Held-to-Maturity Investment Securities Yield
                       by Maturity, at December 31, 1996
<TABLE>

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

U. S. Treasury             $  --       -- %   $ 7,054    6.15 % $    --    -- %
U. S. Government Agency       --       --       2,000    6.62      8,417  6.74
Mortgage-backed Securities    37     6.50       1,763    6.65        648  6.00
State and Political
 Subdivisions                904     5.71       1,522    5.30      2,796  4.74
Other Debt Securities         --       --         301    6.64         --   --
Equity Securities             --       --          --      --         --   --
                           -----     ----     -------    ----    -------  ---- 
 TOTAL AVAILABLE-FOR-SALE
  SECURITIES               $ 941     5.74 %   $12,640    6.06 %  $11,861  6.23%
                           =====     ====     =======    ====    =======  ==== 
Average Of Avail-for-Sale
 Securities in years        0.64                 3.79               8.06 
                            ====                 ====               ==== 
</TABLE>

<TABLE>

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

U. S. Treasury                 $   --       -- %       $ 7,054    6.15 % 
U. S. Government Agency          3,744    6.03          14,161    6.54   
Mortgage-backed Securities      16,697    6.52          19,145    6.42
State and Political
 Subdivisions                    6,642    5.28          11,864    5.19    
Other Debt Securities              499    7.23             800    7.01   
Equity Securities                3,755    4.37           3,755    4.37
                                 -----    ----           -----    ----
 TOTAL AVAILABLE-FOR-SALE
  SECURITIES                   $31,337    5.95 %       $56,779    6.03 %
                               =======    ====         =======    ====  
Average Of Avail-for-Sale
 Securities in years             21.70                   13.20
                                 =====                   =====
</TABLE>

<TABLE>

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

U. S. Treasury            $  999     6.07 %   $    --      -- % $    --    -- %
U. S. Government Agency      900     4.49       2,000    6.56      6,330  7.43
Mortgage-backed Securities    --       --         130    7.70        662  5.87
State and Political
 Subdivisions                 55     4.40       1,475    4.80      1,236  4.97
                          ------     ----     -------    ----    -------  ---- 
 TOTAL AVAILABLE-FOR-SALE
  SECURITIES              $1,954     5.30 %   $ 3,605    5.88 %  $ 8,228  6.93%
                           =====     ====     =======    ====    =======  ==== 
Average Of Avail-for-Sale
 Securities in years        0.72                 4.35               8.67 
                            ====                 ====               ==== 
</TABLE>

<PAGE>

<TABLE>

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

U. S. Treasury                 $   --       -- %       $   999    6.07 % 
U. S. Government Agency            999    7.45          10,229    7.00   
Mortgage-backed Securities       5,762    6.76           6,554    6.69
State and Political
 Subdivisions                      451    5.29           3,217    4.93    
                                 -----    ----           -----    ----
 TOTAL AVAILABLE-FOR-SALE
  SECURITIES                   $ 7,212    6.76 %       $20,999    6.54 %
                               =======    ====         =======    ====  
Average Of Avail-for-Sale
 Securities in years             19.87                   11.01
                                 =====                   =====
</TABLE>

<PAGE>

LOAN PORTFOLIO BY TYPE

     The loan  portfolio by type is summarized  in the  following  table for the
years ended December 31, 1996, 1995, 1994, 1993 and 1992.
<TABLE>

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

                                1996      1995      1994       1993      1992
<S>                         <C>       <C>       <C>       <C>        <C>  

Real Estate - Residential     $134,013  $122,293  $117,205  $102,481   $124,778
Real Estate - Construction      10,923     4,959     2,861     2,557      2,353
Real Estate - Commercial        39,421    35,316    35,673    36,371     30,686
Consumer/Installment            28,870    27,685    24,626    20,743     16,337
Commercial (non-Real Estate)
    and Agricultural             8,715     5,403     7,503     7,168      8,515
State and Political 
 Subdivisions                      906     1,290       288       476        744
Other                               28        13        18        22        264
TOTAL GROSS LOANS              222,876   196,959   188,174   169,818    183,677

Unearned Income                 (2,759)   (3,829)    (2,959)  (1,252)      (445)
Total Loans                    220,117   193,130    185,215  168,566    183,232

Allowance for Possible
    Loan Losses                 (2,532)   (2,443)    (2,187)  (1,953)    (1,840)
NET LOANS                     $217,585  $190,687   $183,028 $166,613   $181,392
</TABLE>

     At December 31, 1996 there were no  categories  of loans  exceeding  10% of
total loans which are not otherwise  disclosed as the categories of loans listed
in the above table.

<PAGE>

LOANS MATURITIES AND INTEREST SENSITIVITY

     The maturity ranges of items in the loan portfolio  (excluding  residential
mortgages of 1 to 4 family  residences  and consumer  loans) of the Bank and the
amount of loans with  predetermined  interest rates and floating  interest rates
due after one year,  as of December 31, 1996,  are  summarized  in the table set
forth below.  The  determination  of maturities  included in the table are based
upon contract terms.  Demand loans that do not have a defined repayment term are
reported  as  maturing  within  one year.  In  situations  where a  rollover  is
appropriate,  the Bank's  policy in this  regard is to  evaluate  the credit for
collectibility  consistent with the normal loan evaluation process.  This policy
is used primarily in evaluating  ongoing customers' use of their lines of credit
with the Bank that are at  floating  interest  rates.  Management  continues  to
emphasize  the  granting of  floating  interest  rate loans to better  match the
interest sensitivity of deposits.

Loan Maturity and Interest Sensitivity   
(Unaudited)
<TABLE>

 As of December 31, 1996
(Dollars in Thousands)              Due in      Due in     Due in
                                   One Year     One to      Over
                                   or Less    Five Years  Five Years    Total
<S>                              <C>         <C>         <C>         <C>

Real Estate - Construction         $ 2,110     $ 1,599     $ 7,214     $10,923
Real Estate - Commercial             2,803       5,493      31,125      39,421
Commercial (Non-Real Estate)
     and Agricultural                2,616       3,982       2,117       8,715
                                   -------     -------     -------     -------
     TOTAL                         $ 7,529     $11,074     $40,456     $59,059
                                   =======     =======     =======     =======

Loan Maturity After 1 Year With:

     Predetermined Interest Rate               $ 1,115     $ 4,159
     Floating Interest Rate                      9,959      36,297
                                               -------     -------
        TOTAL                                  $11,074     $40,456
                                               =======     =======
</TABLE>

<PAGE>

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

              ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES

                                  (Unaudited)
<TABLE>

                                         As of December 31,

                              1996     1995     1994     1993     1992

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

Commercial                  $  663   $1,049   $1,142   $  815   $  754
Real Estate- Construction        7        3       69       80       59
Real Estate - Residential      198      184      143       78       82
Consumer/Installment           811      534      451      393      254
Unallocated                    853      673      382      587      691
                            ------   ------   ------   ------   ------
     TOTAL                  $2,532   $2,443   $2,187   $1,953   $1,840
                            ======   ======   ======   ======   ======
</TABLE>



           PERCENTAGE OF TOTAL LOANS IN EACH CATEGORY TO TOTAL LOANS

                                  (Unaudited)
<TABLE>

                                            As of December 31,
        1996      1995       1994      1993      1992

Loan Categories                           (Dollars in Thousands)
<S>                            <C>      <C>       <C>       <C>       <C>    
   Commercial                    22.02%   21.33%    23.11%    26.12%    20.50%
   Real Estate - Construction     4.90     2.52      1.52      1.52      1.31
   Real Estate - Residential     60.13    62.09     62.28     60.80     72.08
   Consumer/Installment          12.95    14.06     13.09     11.56      6.11
                                ------   ------    ------    ------    ------
        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,
1996, 1995 and 1994 are presented in the following table.

                AVERAGE DEPOSIT BALANCES BY MAJOR CLASSIFICATION

                                  (Unaudited)
<TABLE>
                                     For the Year Ended December 31,
 
                                   1996             1995            1994
                            Average         Average           Average
                            Balance  Rate   Balance   Rate    Balance   Rate

                                         (Dollars in Thousands)
<S>                      <C>      <C>    <C>       <C>      <C>       <C>
Demand Deposits
   Non-Interest Bearing   $ 27,826   --- % $ 23,782   --- %   $ 23,347   --- %
   Interest Bearing         43,206  1.55     42,955  1.84       43,636  1.72
Money Market Deposits       16,297  2.82     17,639  2.81       20,383  2.40

Savings & Club Accounts     62,783  2.49     65,452  2.67       70,442  2.66
Certificates of Deposit
   under $100,000          103,221  5.50     90,925  5.47       79,650  4.55
Certificates of Deposit
   of $100,000 or more       5,167  4.84      6,184  5.24        2,961  3.75
                            ------  ----     ------  ----       ------  ----

      Total Deposits      $258,500         $246,937           $240,419
                          ========         ========           ========
</TABLE>

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

                                  (Unaudited)
<TABLE>
                                              At December 31,

(Dollars in Thousands)                        1996     1995
<S>                                       <C>      <C>
Three Months or Less                        $  849   $1,800
Over Three, Through Six Months               1,542    2,312
Over Six, Through Twelve Months              1,151    1,064
Over Twelve Months                           1,378    1,447
                                            ------   ------
     TOTAL                                  $4,920   $6,623
                                            ======   ======
</TABLE>

         There were no brokered deposits at December 31, 1996 and 1995.

<PAGE>

Item 2.  Description of Property

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

     The Bank also leases  facilities  for its branch office  located at 44 East
Broad Street,  Bethlehem,  Pennsylvania;  its branch office located at 4510 Bath
Pike in Hanover Township (Bethlehem), Pennsylvania; its branch office located at
101 South Third Street, Easton, Pennsylvania;  its branch office located at 1125
N. Ninth Street,  Stroudsburg,  Pennsylvania;  its branch office  located in the
Hall Square Retirement Center, 175 W. North Street, Nazareth,  Pennsylvania; its
branch office  located within  Redner's  Supermarket,  Airport Road,  Allentown,
Pennsylvania;  and  its  branch  office  located  within  Redner's  Supermarket,
Northampton Crossings Shopping Center, Lower Nazareth Township, Pennsylvania.

Item 3.  Legal Proceedings

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

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

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

<PAGE>

Appendix A to Part I:  Executive Officers of the Registrant

     The following table sets forth certain  information,  as of March 28, 1997,
concerning the executive  officers of the Company and certain executive officers
of the Bank.  All  executive  officers are elected by the  respective  Boards of
Directors of the Company and the Bank and hold office at the  discretion of such
Boards.



                               Positions                    Positions
 Name/Age                   with the Company               with the Bank

John J. Schlamp 71 (a)  Chairman of the Board since   Chairman of the Board
                        January, 1987                 since 1984

S. Eric Beattie 50 (b)  President and Chief           President since 1984; 
                        Executive Officer since       Chief Executive Officer 
                        January, 1987                 since January, 1987

Reid L. Heeren 55 (c)   Treasurer since January,      Senior Vice President and
                        1987; Vice President since    Chief Financial Officer
                        April, 1985                   since January, 1987;
                                                      Cashier since November,
                                                      1984

Gerald E. Kemmerer 65 (d) None                        Senior Vice President and
                                                      Senior Loan Officer since
                                                      July, 1994

Arthur Williams 51 (e)    None                        Senior Vice President,
                                                      Administration since 
                                                      November, 1988

Barbara A. Seifert 43 (f) None                        Vice President, 
                                                      Senior Trust Officer 
                                                      since December, 1985

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

<PAGE>

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

     (c) Mr.  Heeren was  previously  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 win 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  the 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 administra- tor 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, 1996 there were 782 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").

The  following  table sets  forth for the  periods  indicated  high and low sale
prices  reported for the  Company's  common stock and the  respective  dividends
declared per common  share.  The last sale price was $22.00 in December 1996 and
$17.14 in December 1995. Stock prices and dividends per share have been restated
to reflect the 5% stock  dividend of May 1996 (see "Note T Equity  Transactions"
in the  "Notes  to  Consolidated  Financial  Statements"  contained  in "Item 7,
Financial Statements").
<TABLE>

1995                    High             Low         Cash Dividends
                                                       Declared
<S>                  <C>             <C>              <C>    

     First Quarter     $16.43          $15.00           0.1619
     Second Quarter     16.19           13.70           0.1619
     Third Quarter      17.38           15.00           0.1619
     Fourth Quarter     18.10           16.43           0.1619
                                                        ------
     TOTAL                                              0.6476

1996
     First Quarter     $18.81          $17.14           0.1619
     Second Quarter     19.05           17.14           0.1700
     Third Quarter      19.00           18.00           0.1700
     Fourth Quarter     23.00           18.00           0.1700
                                                        ------
     TOTAL                                              0.6719
</TABLE>

     The  Company did not sell any of it's  equity  securities  during 1996 that
were not registered under the Securities Act.

<PAGE>

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

                       Consolidated Financial Highlights

<TABLE>
(Dollars in Thousands,                                       Percentage Change
 except per share data)     1996       1995       1994      1996/95    1995/94
<S>                     <C>        <C>        <C>          <C>       <C>
At Year-End
  Assets                  $322,352   $298,514   $284,553      8.0%      4.9 %
  Deposits                 267,668    254,102    247,532      5.3       2.7
  Loans                    220,117    193,130    185,215     14.0       4.3
  Shareholders' Equity      26,805     24,767     22,400      8.2      10.6
  Trust Assets             209,144    173,435    150,053     20.6      15.6

For the Year
  Net Interest Income     $ 13,557   $ 12,644   $ 11,834      7.2%      6.8 %
  Net Income                 2,822      1,401      2,342    101.4     (40.2)

Per Share *
  Net Income              $   1.85   $   0.93   $   1.58     98.9%    (41.1)%
  Dividends Paid              0.67       0.65       0.63      3.1       3.2
  Book Value                 17.19      16.84      15.39      2.1       9.4

Financial Ratios
  Return on average assets     .92%       .48%       .85%
  Return on average equity   11.16%      5.98%     10.51%
  Average shareholders'
   equity to average assets   8.24%      8.00%      8.10%
</TABLE>


* Per share data have been restated to reflect the 5% stock dividends of May 
  1996 and June 1994.

<PAGE>

                    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,  1996,  1995 and 1994.  The  Company's  consolidated  earnings  are  derived
primarily from the  operations of Nazareth  National Bank and Trust Company (the
"Bank") and First C. G. Company,  Inc.  ("First C. G."). The  information  below
should  be  read  in  conjunction  with  the  Company's  consolidated  financial
statements  and  accompanying  notes  thereto,  and other  detailed  information
appearing  elsewhere in this report.  Additional  financial  information  can be
found in the Company's Form 10-KSB report,  a copy of which may be obtained upon
request.  During the two most recent fiscal  years,there have been no changes in
or  disagreements  with the Company's  accountants  on accounting  and financial
disclosure. The information concerning share and per share data included in this
discussion  has been restated to reflect the 5% stock  dividends of May 1996 and
June 1994.

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, 1996, a copy of which may be obtained  from the
Company upon request and without charge (except for the exhibits thereto).

Financial Performance Summary

     In 1996,  the Company  established  a historical  record for net income and
achieved  strong  growth in both  deposits  and  loans.  Net income for 1996 was
$2,822,000 or $1.85 per share,  reflecting  growth of 98.9% on a per share basis
when compared to  $1,401,000 or $.93 per share for 1995.  Net income in 1994 was
$2,342,000 or $1.58 per share.

<PAGE>

     Total  deposits at year-end  1996 were  $267,668,000,  a 5.3% increase over
year-end  1995  deposits  of  $254,102,000.  Total  deposits  at the end of 1994
amounted to $247,532,000. In 1996, total loans grew by 14.0% to a year-end total
of  $220,117,000  as compared to the 1995 year-end  amount of  $193,130,000.  At
year-end 1994, total loans were $185,215,000.

     Two key measures of  profitability,  return on average assets and return on
average equity, also improved in 1996. The return on average assets rose to .92%
in 1996 from .48% in 1995 and .85% in 1994.  The  return on  average  equity was
11.16%, 5.98% and 10.51% in 1996, 1995 and 1994, respectively.

     The  improvement in 1996 net income  reflected a reduction in the provision
for possible  loan losses,  increases in net interest  income and other  income,
reduced in part by increases in operating expenses and Federal income taxes. The
provision  for  possible  loan  losses  was  $670,000  in  1996 as  compared  to
$1,798,000 in 1995. This is a decline of $1,128,000 or 62.7%.  The higher amount
in 1995 was due to losses  related to  overdrafts  of a customer.  Net  interest
income  grew  by  $913,000  or 7.2% to  $13,557,000  from  the  1995  amount  of
$12,644,000  (see  discussion  on "Net  Interest  Income").  This  increase  was
partially the result of growth in loans and deposits supported by the success of
the  new  branches  opened  in  1995  and  expanded  marketing  activities  (see
discussions on "Loan Portfolio" and "Deposits").  Total other income,  including
service charges on deposits,  trust services, net securities gains and losses on
the sale of mortgage loans,  was $2,642,000 in 1996 as compared to $2,274,000 in
1995.  This is a gain of  $368,000  or 16.2%.  Most of this  increase  is due to
higher net gains on securities  available-for-sale  of $308,000 in 1996 compared
to $22,000 in 1995 (see  discussion on "Securities  Available-for-Sale").  Total
operating expenses in 1996 grew by $367,000 or 3.3% to $11,571,000 from the 1995
amount of $11,204,000.  This increase is primarily attributable to a full year's
expense of the Northampton  Crossings  branch opened in December 1995 and normal
increases in expenses  (see  discussion  on "Other  Expenses"  and Note I of the
"Notes  to  Consolidated  Financial  Statements").  Higher  net  income  in 1996
resulted  in an  increase  in Federal  income  taxes of  $621,000  to a total of
$1,136,000 as compared to $515,000 in 1995.

     The 1995  earnings  decline was due to a loss of  $1,264,000 as a result of
overdrafts  of a  customer.  These  overdrafts  resulted  in an  increase in the
provision  for  possible loan  losses of  $1,378,000 to  $1,798,000 in 1995 from

<PAGE>

$1,798,000  in 1995  from  $420,000 in 1994.   Also affecting  1995 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 in other income of $244,000. The
increase in other  expenses is  attributable  to the addition of new branches in
1995 and higher legal expenses  related to the  overdrafts.  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.  Total
other income  increased in 1995 by $244,000 or 12.0% to $2,274,000 from the 1994
amount of  $2,030,000.  Most of this increase was in service  charges on deposit
accounts.  Federal income taxes decreased by $503,000 from $1,018,000 in 1994 to
$515,000 in 1995 as a result of the lower earnings.

<PAGE>

SELECTED FINANCIAL DATA 
<TABLE>
(Dollars in Thousands, 
except per share data) 
For the Year Ended December 31, 1996      1995       1994       1993      1992
<S>                        <C>       <C>        <C>        <C>        <C>
CONSOLIDATED SUMMARY OF INCOME:
 Interest Income             $ 23,135  $ 21,896   $ 18,986   $ 18,525  $ 19,649
 Interest Expense               9,578     9,252      7,152      7,568     9,346
                            --------- ---------  ---------  --------- ---------
  Net Interest Income          13,557    12,644     11,834     10,957    10,303
  Provision for Possible
   Loan Losses                    670     1,798        420        765     1,119
  Gains (Losses) on the
   Sale of Mortgage Loans         (30)       22         37        417       --
  Other Income, Excluding
   Securities and Loan
   Sale Gains                   2,364     2,230      1,896      1,705     1,554
  Securities Gains, Net           308        22         97        208       216
  Other Expense                11,571    11,204     10,084      9,845    10,351
                            --------- ---------  ---------  --------- ---------
  Income Before Income Taxes
   and Cumulative Effect of
   Accounting Method Change     3,958     1,916      3,360      2,677       603
  Applicable Income Taxes       1,136       515      1,018        769        22
                            --------- ---------  ---------  --------- ---------
  Income Before Cumulative
   Effect of Accounting
   Method Change                2,822     1,401      2,342      1,908       581
  Cumulative Effect of
   Accounting Method Change(1)    --        --         --         --        117
                            --------- ---------  ---------  --------- ---------
  Net Income                  $ 2,822   $ 1,401    $ 2,342    $ 1,908    $  698
                            --------- ---------  ---------  --------- ---------
 Cash Dividends Paid          $ 1,015   $   972    $   936    $   812    $  720
 Cash Dividends Paid Per Share   0.67      0.65       0.63       0.63      0.62
 Dividends Paid to Net Income   35.97%    69.38%     39.97%     42.56%   103.15%

PER SHARE DATA:
 Income Before Cumulative
  Effect of Accounting
  Method Change               $  1.85   $  0.93    $  1.58    $  1.47    $ 0.50
 Cumulative Effect of
  Accounting Method Change        --        --         --         --       0.10
 Net Income                      1.85      0.93       1.58       1.47      0.60
 Average Common Shares
  Outstanding               1,527,819 1,504,391  1,481,598  1,295,220 1,168,314

CONSOLIDATED BALANCE SHEET DATA:
 Total Assets                $322,352  $298,514   $284,553   $268,738  $246,072
 Loans (Net of
  Unearned Discount)          220,117   193,130    185,215    168,566   183,232
 Mortgage Loans
  Held-for-Sale                   721     1,006         69     15,378      --
 Deposits                     267,668   254,102    247,532    235,565   218,378
 Securities Sold Under
  Agreements to Repurchase      3,795     6,096      9,027      4,711     3,533
 Debt (Short-Term
  and Long-Term)               18,512     7,643      1,612      1,331     1,132
 Shareholders' Equity          26,805    24,767     22,400     21,994    16,058
 Book Value Per Share           17.19     16.84      15.39      15.26     14.37

SELECTED CONSOLIDATED RATIOS:
 Net Income To:
  Average Total Assets            .92%      .48%       .85%       .76%      .29%
  Average Shareholders' Equity  11.16%     5.98%     10.51%     10.43%     4.27%

 Average Shareholders'
  Equity to Average Assets       8.24%     8.00%      8.10%      7.24%     6.81%
</TABLE>

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

<PAGE>

CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS 
(Dollars in Thousands) For the Year Ended December 31,
<TABLE>
                         1996                1995                   1994
                        Int   Avg           Int    Avg             Int    Avg
                 Avg    Inc/ Yield/   Avg   Inc/  Yield/    Avg    Inc/  Yield/
                 Bal    Exp  Rate     Bal   Exp    Rate     Bal    Exp    Rate
<S>        <C>       <C>   <C>    <C>    <C>      <C>  <C>       <C>     <C> 
ASSETS
INT-EARNING 
ASSETS
 Int-Bearing
  Balances 
  with Banks $  1,313  $  78 5.96%  $2,313 $   133  5.75% $  3,507 $   158 4.49%
 Fed Funds 
  Sold             16      2 5.43      139       6  4.32     1,471      57 3.86
 Inv Sec
  Taxable      67,241  4,386 6.42   73,712   4,477  6.07    66,967   3,439 5.13
  Non-Tax(1)   12,318    935 7.59    8,408     583  6.94     7,516     527 7.02
  Loans(1(2)  206,378 18,083 8.76  190,874  16,927  8.87   178,624  15,012 8.40
  Allow for 
  Loan Losses  (2,500)  ---  ---    (2,708)   ---   ---     (2,084)   ---  ---
             -------- ------      --------  ------        --------  ------ 
  Net Loans   203,878 18,083 8.87  188,166  16,927  9.00   176,540  15,012 8.50
             -------- ------      --------  ------        --------  ------ 
   Total Int-
   Earn 
   Assets     284,766 23,484 8.25  272,738  22,126  8.11   256,001  19,193 7.50
  Non-Int
   Earn Assets 22,305   ---  ---    20,466    ---   ---     19,247    ---  ---
             -------- ------      --------  ------        --------  ------ 
  TOTAL ASSETS,
  INTEREST 
  INCOME     $307,071 23,484 7.65 $293,204  22,126  7.55  $275,248  19,193 6.97
             -------- ------      --------  ------        --------  ------ 

LIABILITIES
INTEREST-BEARING 
LIABILITIES
 Int-Bearing  
 Deposits
  Demand 
  Deposits   $ 43,206    670 1.55 $ 42,955     791  1.84  $ 43,636     752 1.72
  Money 
  Market
  Deposits     16,297    460 2.82   17,639     496  2.81    20,383     490 2.40
  Savings & 
  Club 
  Deposits     62,783  1,566 2.49   65,452   1,750  2.67    70,442   1,876 2.66
  CD's over  
  $100,000      5,167    250 4.84    6,184     324  5.24     2,961     111 3.75
  All Other 
  Time Dep    103,221  5,675 5.50   90,925   4,970  5.47    79,650   3,624 4.55
             -------- ------      --------  ------        --------  ------ 
   Total Int-
   Bearing
   Deposits   230,674  8,622 3.74  223,155   8,331  3.73   217,072   6,853 3.16

 Securities 
 Sold Under 
 Agreements
 to Repurchase  4,740    149 3.14    9,298     346  3.72     6,428     161 2.51
 Other Short-
 Term 
 Borrowings     8,648    487 5.63    5,743     338  5.89       177       8 4.44
 Long-Term Debt 4,171    320 7.67    2,207     236 10.69     1,075     13012.08
             -------- ------      --------  ------        --------  ------ 
  Total Int-
  Bearing 
  Liabilities 248,233  9,578 3.86  240,403   9,251  3.85   224,752   7,152 3.18

NON-INTEREST 
BEARING 
LIABILITIES
 Non-Int 
 Bearing
 Deposits      27,826   ---  ---    23,782    ---   ---     23,347     ---  ---
 Other Liab     5,724   ---  ---     5,575    ---   ---      4,855     ---  ---
             -------- ------      --------  ------        --------  ------ 
 TOTAL LIAB   281,783  9,578 3.40  269,760   9,251  3.43   252,954   7,152 2.83
 SHAREHOLDERS'
 EQUITY        25,288   ---  ---    23,444   ---   ---      22,294     ---  ---
             -------- ------      --------  ------        --------  ------ 
 TOTAL LIAB &
  SHAREHOLDERS'
  EQUITY,
  INTEREST 
  EXPENSE    $307,071  9,578 3.12 $293,204   9,251  3.16  $275,248   7,152 2.60
NET INTEREST 
INCOME              $ 13,906               $12,875                 $12,041 
                    --------               -------                 ------- 
 Net Interest 
 Spread (3)                  4.39                   4.26                   4.37

 Effect of 
 Int-Free 
 Sources
 Used to 
 Fund Earnings
 Assets                      0.49                   0.46                   0.33

NET INTEREST 
MARGIN (4)                   4.88%                  4.72%                  4.70%
       --                    ----                   ----                   ---- 

</TABLE>


     (1) The  indicated  interest  income and average  yields are presented on a
taxable equivalent basis. The taxable equivalent  adjustments included above are
$349,000, $231,000 and $207,000 for the years 1996, 1995 and 1994, respectively.
The effective tax rate used for the taxable equivalent adjustment was 34%.

     (2) Loan fees of $303,000,  $101,000 and $406,000 for the years 1996,  1995
and 1994,  respectively,  are included in interest income. Average loan balances
include  non-accruing  loans and  average  loans  held-for-sale  of  $2,212,000,
$682,000 and $2,462,000 for 1996, 1995 and 1994, respectively.

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

     (4) Net  interest  margin is computed by dividing  net  interest  income by
averaging interest-earning assets.

<PAGE>

Average Balances

     The  "Consolidated  Comparative  Statement  Analysis"  table  sets  forth a
comparison of average daily balances,  interest income and interest expense on a
fully taxable  equivalent  basis and interest  rates  calculated  for each major
category  of  interest-earning  assets  and  interest-bearing  liabilities.  For
purposes of this analysis,  the  computations in the  "Consolidated  Comparative
Statement Analysis" were prepared using the Federal statutory rate of 34%; there
are no state or local taxes on income  applicable  to the  Company.  For further
information relating to the effective income tax rate of the Company, see Note J
of the "Notes to Consolidated  Financial  Statements".  Interest income on loans
includes  loan fees of  $303,000,  $101,000  and  $406,000  for the years  ended
December 31, 1996, 1995 and 1994, 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  $13,906,000  for 1996,  an increase of 8.0% or
$1,031,000  over  $12,875,000  in 1995. As shown in the  "Rate/Volume  Analysis"
table,  the increase in net interest  income in 1996 was  attributable to higher
net  interest  income from changes in volume of $292,000 and changes in rates of
$739,000.  The  volume-related  change resulted primarily from increased average
balances for loans including mortgage loans  held-for-sale;  (see discussions on
"Loan  Portfolio"  and  "Mortgage  Loans  Held-for-Sale")  and  an  increase  in
interest-bearing  demand deposits and other time deposits,  partially  offset by
declines in  investment  securities,  money  market  deposits,  savings and club
deposits,   and  certificates  of  deposit  over  $100,000  (see  discussion  on
"Deposits"). The rate-related change was primarily the result of the increase of
interest  earned on assets being  greater than the increase on interest  paid on
deposits and debt. Net interest income, on a fully taxable  equivalent basis, in
1995  increased  6.9% or  $834,000  over the 1994  figure of  $12,041,000.  This
increase  was the result of an  increase  in  investments  and loans  (including
mortgage loans  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,  and savings and club
deposits.  Also affecting 1995 net interest  income was the increase of interest
paid on deposits being less than the increase on interest  earned on investments
and loans.

<PAGE>

     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 4.88% for 1996,  4.72% for 1995 and 4.70% for 1994. The
increase  in 1996 was the  result of  interest-earning  assets  increasing  at a
greater  rate  than  non-interest  earning  assets  and an  increase  in the net
interest  spread,  the difference of interest earned on assets less the interest
paid on deposits and debt.  The interest  spread was 4.39%,  4.26% and 4.37% for
1996, 1995 and 1994, 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,  1996 and 1995,  as  compared  to the
respective previous periods,  into amounts  attributable to both rate and volume
variances. In calculating the variances,  the changes were first segregated into
(1)  changes in volume  (change in volume  times the old rate),  (2)  changes in
rates  (change  in rate times the old  volume)  and (3)  changes in  rate/volume
(changes in rate times the change in volume).  The changes in  rate/volume  have
been  allocated in their  entirety to the change in rates.  The interest  income
included  in the  "Rate/Volume  Analysis"  table  has been  adjusted  to a fully
taxable  equivalent  amount  using  the  Federal  statutory  tax  rate  of  34%.
Non-accruing  loans have been used in the daily  average  balances to  determine
changes in interest  income due to volume.  Loan fees  included in the  interest
income calculation are not material.
<TABLE>

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

                             Increase (Decrease) in Year Ended December 31,
                                1996 to 1995                1995 to 1994 
                               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              $  (55) $   3   $  (58)     $  (25) $  29   $  (54)
  Federal Funds Sold           (4)     1       (5)        (51)   ---      (51)
  Investment Securities       261    419     (158)      1,094    688      406
  Loans                     1,156    (88)   1,244       1,915    720    1,195
                            -----    ---    -----       -----  -----    -----
  Total Interest Income     1,358    335    1,023       2,933  1,437    1,496
                            -----    ---    -----       -----  -----    -----
Interest Expense
  Demand Deposits, 
  Savings & Clubs            (340)  (250)     (90)        (81)   114     (195)
  Time Deposits               631     16      615       1,559    903      656
  Securities Sold Under 
   Agreements to Repurchase  (197)   (27)    (170)        185    113       72
  Short-Term Borrowings       135    (43)     178         344     97      247
  Long-Term Borrowings         98   (100)     198          92    (45)     137
                            -----    ---    -----       -----  -----    -----
  Total Interest Expense      327   (404)     731       2,099  1,182      917
                            -----    ---    -----       -----  -----    -----
  Increase in Net 
  Interest Income          $1,031   $739   $  292      $  834 $  255   $  579
</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 currently has a negative gap
position  because of the unequal  sensitivity  of these assets and  liabilities,
management  believes that this position will not materially impact earnings in a
changing rate  environment.  For example,  changes in the prime rate on variable
commercial  loans may not result in an equal  change in the rate of money market
deposits or short-term  certificates of deposit. A simulation model is therefore
used to estimate the impact of various  changes,  both upward and  downward,  in
market  interest  rates and volumes of assets and  liabilities on the Bank's net
income.  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 would be 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, 1996,
assets of  $149,441,000  (46.4% 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  $124,779,000 (41.8% of total assets)  at the end of

<PAGE>
of  1995  and  $127,565,000   (44.8%   of   total  assets)  at  the end of 1994.
Liabilities   subject  to  rate  change  within  one  year  were   $167,266,000,
$133,068,000 and $146,710,000 in 1996, 1995 and 1994,  respectively.  A negative
one-year gap position of  $17,825,000  existed as of December 31, 1996.  The gap
positions at December 31, 1995 and 1994 were  negative  $8,289,000  and negative
$19,145,000,  respectively. The ratio of rate-sensitive assets to rate-sensitive
liabilities for the one-year time frame was .89 at the end of 1996,  compared to
 .94 at the end of 1995 and .87 at the end of  1994.  The  "Interest  Sensitivity
Analysis" in the  following  table  presents a  sensitivity  gap analysis of the
Company's  assets and liabilities at December 31, 1996 for five  time-intervals.
The Company's  liability-sensitive  position increased in 1996 as a result of an
increase in  non-interest-bearing  demand deposits and  interest-bearing  demand
deposits.  This  change in the  deposit  mix was due to  marketing  programs  to
increase demand deposits.  Also affecting an increase in the liability-sensitive
position  were  increases  in some  longer  term  loans.  Management  intends to
continue to purchase  adjustable  rate  securities,  make adjustable rate loans,
market longer-term certificates of deposit and sell fixed-rate mortgage loans to
maintain an acceptable gap position.

<PAGE>

<TABLE>

Interest Sensitivity Analysis

(Dollars in Thousands) as of December 31, 1996

                      0-90   91-180   181-365     1-5          Over
                      Days    Days      Days      Years       5 years    Total
<S>               <C>     <C>       <C>         <C>       <C>         <C>
Interest-Bearing 
Deposits with Banks $   186  $    99  $    ---    $   ---   $    ---    $   285
Federal Funds Sold    2,200      ---       ---        ---        ---      2,200
Inv Securities       16,101   11,266    13,944     27,813      8,654     77,778
Loans Held-for-Sale     721      ---       ---        ---        ---        721
Loans                56,256   12,698    24,241     63,479     60,911    217,585
Other Assets         11,729      ---       ---        ---     12,054     23,783
                    ------- --------  --------    -------   --------   --------
  TOTAL ASSETS      $87,193  $24,063  $ 38,185    $91,292   $ 81,619   $322,352
                    ------- --------  --------    -------   --------   --------
Non-Interest-Bearing
  Deposits          $31,450  $   ---  $    ---    $   ---   $    ---   $ 31,450
Int-Bearing 
 Deposits            81,358   20,253    24,898     48,318     61,391    236,218
Securities Sold 
 Under Agreements 
 to Repurchase        3,795      ---       ---        ---        ---      3,795
Long-Term Debt        5,512      ---       ---     13,000        ---     18,512
Other                   ---      ---       ---        ---      5,572      5,572
Capital                 ---      ---       ---        ---     26,805     26,805
                    ------- --------  --------    -------   --------   --------
  TOTAL LIABILITIES 
  AND CAPITAL      $122,115  $20,253 $ 24,898    $61,318   $ 93,768   $322,352
                    ------- --------  --------    -------   --------   --------
Net Interest  
  Sensitivity Gap  $(34,922) $ 3,810 $ 13,287    $29,974   $(12,149)  $    ---

Cumulative Int
  Sensitivity Gap  $(34,922 $(31,112)$(17,825)   $12,149   $    ---   $    ---
</TABLE>

<PAGE>

Service Charges and Other Income

     Service charge income amounted to $1,083,000 in 1996 compared to $1,034,000
in 1995 and $798,000 in 1994. In 1996, the service charges  increased by $49,000
or 4.7% over 1995 and the 1995  increase  over 1994 was  $236,000 or 29.6%.  The
increase in 1996 was  primarily the result of increases in the number of deposit
accounts.  The  increase in 1995 over 1994 was due  primarily  to  increases  in
deposit volume and increase in some deposit-related fees.

     In 1996 the Company had a loss on the sale of mortgage  loans of $30,000 as
compared  to a gain of $22,000 in 1995.  The loss in 1996 was due to an increase
in interest  rates in the secondary  market (see  discussion on "Mortgage  Loans
Held-for-Sale").

     Other income was $585,000 in 1996,  an increase of $25,000 or 4.5% compared
to $560,000 in 1995. Other income for 1994 was $487,000. These increases are the
result of increases in miscellaneous non-deposit service fees.

Trust Department

     Revenue from the Bank's Trust  Department  operations was $696,000 in 1996,
representing an increase of $60,000 or 9.4% over revenue of $636,000 in 1995. In
comparison,  the Trust Department  revenue for 1995 increased by 4.1% or $25,000
over the 1994  revenue of  $611,000.  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 $209,144,000
and $173,435,000 at December 31, 1996 and 1995, respectively.

 Other Expenses

     Salaries  and  employee  benefits   represent  a  significant   portion  of
non-interest  expense.  These  expenses,  amounting to $5,615,000,  increased by
$483,000 or 9.4% in 1996 compared to $5,132,000 in 1995.  These expenses in 1995
amounted  to an  increase of 10.6% over the  $4,640,000  reported  in 1994.  The
increase in 1996 was primarily due to salary increases of approximately 4% and a
full year's expense for the new branches  added in 1995.  Salary expense in 1995
increased due to normal salary increases of approximately 4% and staff additions
related to the two new supermarket branches opened during the year.

     Occupancy and equipment  expenses were $2,184,000 in 1996, which was a 9.7%
or a $193,000  increase from  $1,991,000 in 1995. The 1995 amount was 17.3% more
than the  1994  occupancy  and  equipment  expense  of  $1,698,000.  Most of the
increase  in 1996 was  related to a full  year's  expenses  of the new  branches
opened  in 1995  and  some  major  maintenance  work on  other  facilities.  The

<PAGE>

additional  occupancy and  equipment  expenses  in  1994  are  primarily  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.

     Other  operating  expenses  (such as litigation  costs,  deposit  insurance
premiums, data processing fees, legal, accounting, supplies, postage, telephone,
advertising  and publicity) in 1996 were  $3,772,000,  compared to $4,081,000 in
1995 and  $3,746,000  in 1994.  The  decrease  in 1996 of  $309,000  or 7.6% was
primarily  due to a  reduction  in legal  fees  and  Federal  Deposit  Insurance
premiums  offset  in part  by  higher  data  processing,  business  development,
auditing and supply  expenses.  The increase in 1995 of $335,000 or 8.9% was the
result of higher legal fees, advertising,  postage and data processing expenses,
partially  offset by lower Federal  Deposit  Insurance  premiums.  The Company's
advertising  costs are expensed as incurred.  Advertising  costs were  $299,000,
$294,000  and $228,000  for the years ended  December  31, 1996,  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).  Trading  securities are measured at fair value, with unrealized
holding  gains and  losses  included  in  income.  The  Company  had no  trading
securities in 1996 and 1995. 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  $20,999,000 at December 31, 1996 and
$20,054,000 at December 31, 1995. The Company has the intent and ability to hold
these  securities  until  maturity.  The  fair  value of  these  securities  was
$21,124,000 and $20,188,000 at December 31, 1996 and 1995, respectively.

     The  Company,  at December 31, 1996 and 1995,  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, 1996,  the Company did hold  $1,000,000  in

<PAGE>

various  U. S. Agency  Step-up  or Multi  Step-up  securities.  At  December 31,
1995,  the  Company  held  $7,500,000  of  Step-up  securities   ($5,000,000  in
available-for-sale and $2,500,000 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
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  $19,395,000  at  December  31,  1996
($15,554,000  in  available-for-sale  and  $3,841,000 in  held-to-maturity)  and
$23,213,000  at  December  31,  1995  ($18,152,000  in  available-for-sale   and
$5,061,000 in held-to-maturity).  The interest rates on most of these securities
are tied to various  indexes,  are subject to various caps, and adjust annually.
The  Company  also held fixed rate  mortgage-backed  securities  issued by U. S.
Government  Agencies  totaling  $7,290,000 at December 31, 1996  ($4,578,000  in
available-for-sale   and  $2,712,000  in  held-to-maturity)  and  $9,762,000  at
December  31,  1995   ($6,375,000  in   available-for-sale   and  $3,387,000  in
held-to-maturity).

Securities Available-for-Sale

        The Company had $56,779,000 of securities available-for-sale at December
31, 1996, as compared to $59,049,000 at December 31, 1995. At December 31, 1996,
the net unrealized gain on these securities was $347,000, net of the tax effect
of $179,000. There was a net unrealized gain of $520,000, net of the tax effect
of $267,000 on the available-for-sale securities at December 31, 1995. 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,

<PAGE>

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  1996,  $19,842,000  of  securities  available-for-sale  were  sold,
resulting  in a total net gain of  $308,000,  which was  recorded  in income and
includes net gains on equity  securities  held by First C. G. of  $293,000.  The
securities sold were primarily U. S. Treasury, U. S. Agency, mortgage-backed and
municipal  bonds held by the Bank and equity  securities held by First C. G. The
sales by the Bank were executed to provide liquidity and improve future interest
income. The sales of equity securities by First C. G. were made to diversify the
equity  portfolio.   Securities   purchased  by  the  Company  in  1996  totaled
$39,591,000.  Included  in these  purchases  were  $18,400,000  in U. S.  Agency
fixed-rate  bonds,  $6,000,000 in U. S. Treasury bonds,  $7,700,000 in municipal
securities,   $6,591,000  in  U.  S.  Agency  mortgage-backed  bonds  and  other
securities,  and  $900,000 in equity  securities.  The  securities  sold in 1995
totaling  $11,177,000 were primarily U. S. Treasury bonds and equity  securities
held by First C. G. The 1995 sales  resulted  in net gains of  $22,000  and were
made to  provide  liquidity  and to improve  future  interest  income.  Security
purchases  in 1995  amounted to  $22,142,000  which were  primarily U. S. Agency
fixed-rate,  U.  S.  Treasury  bonds,  municipal  securities  and U.  S.  Agency
mortgage-backed  bonds. In 1994, a net gain on security  transactions of $97,000
was recorded on sales of $4,790,000.

Loan Portfolio

     At December 31, 1996, total loans (net of unearned  discounts of $2,759,000
in 1996 and $3,829,000 in 1995) of $220,117,000 were $26,987,000,  or 14% higher
than the 1995 amount of $193,130,000.  The growth in loans in 1996 was primarily
the result of an  increase of  $11,720,000  or 9.6% in  residential  real estate
loans,  an increase of $1,185,000  or 4.3% in consumer  loans and an increase of
$5,964,000 or 120.3% in real estate  construction  loans. Total residential real
estate loans were  $134,013,000 at December 31, 1996 compared to $122,293,000 at
December 31,  1995.  Consumer  loans  totaled  $28,870,000  and  $27,685,000  at
December  31,  1996  and  1995,  respectively.   At  December  31,  real  estate
construction  loans were  $10,923,000  in 1996 versus  $4,959,000 in 1995.  Also
contributing  to the growth in loans during 1996 were  increases  in  commercial
real estate  loans of  $4,105,000  or 11.6% to a total at  December  31, 1996 of
$39,421,000 as compared to the December 31, 1995 total of $35,316,000  and other
commercial  loans  of $3,312,000 or 61.3% to $8,715,000 at December 31, 1996, as

<PAGE>


compared  to $5,403,000  at December 31, 1995. These  increases  were  partially
offset by a decrease in  municipal  loans of $384,000  or 29.8%.  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 loan to deposit  ratio was 82.2% at  December  31,  1996,  and 76.0% at
December 31, 1995.  Funds used by the increase in loans were provided  primarily
by the increase in deposits and borrowings.  Additional  information  concerning
loans is shown in Note C of the "Notes to Consolidated Financial Statements".

Mortgage Loans Held-for-Sale

     In 1996,  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 1996
amounted  to  $19,510,000.  The  amount of these  loans  originated  in 1996 was
$18,504,000,  with the remaining  $1,006,000 being originated in prior years and
identified  as  held-for-sale  at December  31,  1995. A net loss of $30,000 was
recorded on these sales. In addition,  $721,000 of residential real estate loans
was  identified as  held-for-sale  at December 31, 1996. All of these loans were
originated during 1996. An unrealized loss of $10,000 on these loans is included
in other operating expenses for 1996.

     In 1995, the Company originated $6,267,000 of residential real estate loans
which were sold in the secondary  market. In addition,  during 1995,  $69,000 of
these loans that were  originated in prior years were sold. Net gains of $22,000
were  recognized  on these sales in 1995.  At December 31, 1995,  $1,006,000  of
residential  real estate loans were  identified  as  held-for-sale.  Included in
other operating expenses in 1995 is an unrealized loss of $4,000 on these loans.
During 1994,  the Company had net gains of $37,000 on the sale of $19,926,000 of
residential real estate loans. The other operating  expenses for 1994 include an
unrealized loss of $1,000 on mortgage loans held-for-sale of $69,000 at year-end
1994.

<PAGE>

     The Company intends to continue to originate  residential real estate loans
in 1997 and to sell most of the fixed-rate  loans in the secondary  market.  The
Company  services  all of its  sold  residential  mortgage  loans  and  plans to
continue this practice.

     On January 1, 1996, the Company adopted the Financial  Accounting Standards
Board standard,  SFAS No. 122, "Accounting for Mortgage Servicing Rights", 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 SFAS No. 122 did not have a material effect
on the Company's consolidated financial position or results of operation.

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  $1,440,000 of loans on a non-accrual  status at December
31, 1996.  The decrease in  non-accrual  loans during 1996 of $741,000  resulted
from the completion of collection efforts on certain loans and an improvement in
the quality of commercial loans.

     The Company does not have any  significant  loans that qualify as "Troubled
Debt  Restructuring"  as defined by SFAS No. 15,  "Accounting  for  Debtors  and
Creditors for Troubled Debt Restructuring", at December 31, 1996 and 1995.

<PAGE>

<TABLE>
Non-Accrual Loans

(Dollars in Thousands) 
 at December 31,               1996      1995      1994     1993       1992
<S>                        <C>       <C>       <C>       <C>        <C> 

Non-accrual loans on
  a cash basis               $1,440    $2,181    $1,724    $1,569     $1,395
                             ------    ------    ------    ------     ------
Non-accrual loans as a
  percentage of total loans     .65%     1.13%      .93%      .93%       .76%
                             ------    ------    ------    ------     ------
Interest which would have
  been recorded at 
  original rate              $  210    $  214    $  168    $  134     $   87

Interest that was reflected
  in income                      40        44       ---       ---        ---
                             ------    ------    ------    ------     ------
Net impact on int income     $ (170)   $ (170)   $ (168)    $(134)    $  (87)
</TABLE>


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

Accruing Loans Past Due 90 Days or More

(Dollars in Thousands) 
 at December 31,                1996      1995      1994      1993      1992
<S>                           <C>     <C>        <C>        <C>      <C>   

Accruing loans past due 
  90 days or more               $986    $1,115     $1,069     $672     $1,563

Accruing loans past due 
 90 days or more as a 
 percentage of total loans       .45%      .58%       .58%     .40%       .85%
</TABLE>

<PAGE>

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

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

        Loan impairment is measured by estimating the expected future cash flows
and discounting them at the respective effective interest rate or by valuing the
underlying collateral. The recorded investment in these loans and the valuation
for credit loses related to loan impairment at December 31, 1996 and 1995 are as
follows:

<TABLE>
(Dollars in Thousands)
  at December 31,                         1996            1995
<S>                                    <C>             <C>   

Principal amount of impaired loans       $1,149          $2,035
Accrued interest                            ---             ---
Deferred loan costs                           7               4
                                         ------          ------
                                          1,156           2,039
Less valuation allowance
  at December 31,                          (128)           (238)
                                         ------          ------
                                         $1,028          $1,801
</TABLE>

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

(Dollars in Thousands)   
 for the year ended                       1996            1995
<S>                                     <C>             <C>   

Valuation allowance at January 1,         $238            $160
Provision for loan impairment              206             187
Direct charge-offs                        (325)           (126)
Recoveries                                   9              16
                                          ----            ----
Valuation allowance at December 31,       $128            $238
</TABLE>

     Total cash collected on impaired loans during 1996 was $1,486,000, of which
$1,446,000 was credited to the principal balance  outstanding on such loans, and
$40,000 was recognized as interest income.

     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 was $210,000 and $214,000 in 1996 and 1995, respectively.  The
valuation  allowance  for  impaired  loans of $128,000 at December  31, 1996 and
$238,000 at December 31, 1995 is included in the  "Allowance  for Possible  Loan
Losses"  which  amounts to  $2,532,000  and  $2,443,000 at December 31, 1996 and
1995, respectively.

<PAGE>

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

OTHER REAL ESTATE OWNED
<TABLE>

(Dollars in  Thousands) 
 at December 31,                  1996     1995     1994     1993     1992

<S>                           <C>      <C>      <C>      <C>      <C>   
Other Real Estate Owned         $  595   $  364   $  373   $  738   $  124

</TABLE>

Allowance and Provision
for Possible Loan Losses

     The allowance for possible loan losses  constitutes the amount available to
absorb estimated losses within the loan portfolio.  As of December 31, 1996, the
allowance  for possible  loan losses was  $2,532,000 as compared to the December
31, 1995 amount of  $2,443,000  and the December 31, 1994 amount of  $2,187,000.
The  allowance  for  possible  loan  losses  as  a  percentage  of  total  loans
outstanding as of December 31, 1996 was 1.15%. This compares to 1.26% at the end
of 1995 and 1.18% at the end of 1994. The increase in the allowance for possible
loan  losses  of  $89,000  was  the  result  of  management's  review  of  loans
outstanding (see discussion on "Loan Portfolio") and  non-performing  loans (the
sum of  non-accrual  loans  and  accruing  loans  past  due 90 days or  more) of
$2,426,000  as of December 31, 1996 as compared to $3,296,000 as of December 31,
1995 (see tables on "Non-Accrual  Loans" and "Accruing Loans Past Due 90 Days or
More").  Net  charge-offs as detailed in the table  "Allowance for Possible Loan
Losses"  were  $581,000  in 1996 or  $961,000  less  than  the  1995  amount  of
$1,542,000.  Net  loans  charged-off  in 1994  were  $186,000.  Net  charge-offs
returned to a historical  level in 1996.  These  charge-offs  were the result of
losses on commercial and consumer loans. The increase in charge-offs in 1995 was
primarily the result of a net loss of $1,264,000  (net of recoveries) due to the
overdrafts of a customer and higher consumer loan losses.  The ratio of net loan
charge-offs to average loans  outstanding  was .28%, .81% and .10% in 1996, 1995
and 1994, respectively.

     The  provision  for loan  losses for the year ended  December  31, 1996 was
$670,000 as compared to  $1,798,000  for the year ended  December 31, 1995,  and
$420,000 for the year ended  December  31, 1994.  The decrease in 1996 from 1995
was  $1,128,000.  The  higher  level in 1995 was  principally  the result of the
increase in net  charge-offs due to the overdraft loss. In 1995, the increase in
the provision was $1,378,000 over 1994.

     The allowance for possible loan losses is  established  through a provision
for possible  loan  losses charged to expenses.  Loans  are  charged against the

<PAGE>

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.

<PAGE>

<TABLE>

ALLOWANCE FOR POSSIBLE LOAN LOSSES

(Dollars in Thousands) 
 For the Year Ended December 31,     1996     1995     1994     1993     1992

<S>                            <C>      <C>      <C>      <C>       <C>   
Allowance for Loan Losses
 at Beginning of Year            $  2,443 $  2,187 $  1,953 $  1,840  $  1,702
                                  -------- -------- -------- --------  -------
Loans Charged-Off by Category:
   Commercial                         365      161      259      392       600
   Real Estate - Construction          --       --       --       --        --
   Real Estate - Residential           31       --       35        3        72
   Consumer/Installment               271      319      144      348       337
   Other                               --    1,278       --       --        --
                                  -------- -------- -------- --------  -------
                                      667    1,758      438      743     1,009
                                  -------- -------- -------- --------  -------
Loans Recovered by Category:
   Commercial                          39      105      170       57        22
   Real Estate - Construction          --       --       --       --        --
   Real Estate - Residential           --       --       --       --        --
   Consumer/Installment                47       97       82       34         6
   Other                               --       14       --       --        --
                                  -------- -------- -------- --------  -------
                                       86      216      252       91        28
                                  -------- -------- -------- --------  -------
Net Loans Charged-Off                 581    1,542      186      652       981
                                  -------- -------- -------- --------  -------
Provision Charged to Expense          670    1,798      420      765     1,119
                                  -------- -------- -------- --------  -------

Allowance for Loan Losses 
at End of Period                 $  2,532 $  2,443 $  2,187 $  1,953  $  1,840
                                 ======== ======== ======== ========  ========

Total Loans
   Average                       $206,378 $190,874 $178,624 $180,850  $177,842
   Year-End                      $220,117 $193,130 $185,215 $168,566  $183,232

Net Loans Charged Off to:
   Average Loans                      .28%     .81%     .10%     .36%      .55%
   Loans at Year-End                  .26%     .80%     .10%     .39%      .54%
   Allowance for Possible 
    Loan Losses at Year-End         22.95%   63.12%    8.50%   33.38%    53.32%
   Provision for Possible 
    Loan Losses                     86.72%   85.76%   44.29%   85.23%    87.67%

Allowance for Possible 
 Loan Losses at Year-End to:
   Average Loans                     1.23%    1.28%    1.22%    1.08%     1.03%
   Loans at Year-End                 1.15%    1.26%    1.18%    1.16%     1.00%
</TABLE>

<PAGE>

Deposits

     Deposits  are the  primary  source of the  Company's  funds.  During  1996,
deposits increased by $13,566,000 or 5.3% to a total of $267,668,000 at December
31, 1996, from a total of $254,102,000  at December 31, 1995.  Average  deposits
for 1996 were $258,500,000,  an increase of $11,563,000 or 4.7% over the average
total  deposits  for  1995 of  $246,937,000.  Contributing  to the  increase  in
deposits was the strong growth of certificates of deposit as consumers responded
to some  special  higher  interest  rates  offered  by the  Bank and  growth  in
non-interest bearing and  interest-bearing  checking deposits as a result of the
introduction  by the Bank in 1996 of Quality  Checking(R)  and Quality  Checking
Gold(R).  Quality Checking(R) is a non-interest  bearing account that provides a
package of services, including common-carrier accidental death insurance, credit
card  protection  and a discount  travel book.  Quality  Checking  Gold(R) is an
interest-bearing  account that provides all the benefits of Quality  Checking(R)
plus  Travelers  Advantage(R)  and  Shoppers  Advantage(R)  for a monthly fee of
$6.00.  The deposit growth in certificates of deposit and checking  deposits was
partially  offset by declines in savings  accounts,  money  market  accounts and
certificates  of deposit over $100,000.  The growth of deposits  achieved by the
Company and the banking industry in general is adversely affected by the flow of
funds into mutual funds and other investment options.

     The Bank's time deposits, excluding certificates of deposit under $100,000,
increased in 1996 with average balances of $103,221,000, which is $12,296,000 or
13.5% higher than the 1995 average balance of $90,925,000.  Average certificates
of deposit over  $100,000  were  $5,167,000 in 1996 as compared to $6,184,000 in
1995, a decline of  $1,017,000  or 16.4%.  The new Quality  Checking(R)  product
accounted  for most of the  growth in  non-interest  bearing  deposits  in 1996.
Non-interest  bearing  deposits  averaged  $27,826,000  in 1996 as  compared  to
$23,782,000 in 1995, an increase of $4,044,000 or 17.0%. In addition,  there was
an increase in average  interest-bearing  demand deposits of $251,000 or 0.6% to
$43,206,000  in 1996 from  $42,955,000 in 1995.  Offsetting  some of this growth
were declines in average savings and club deposits of $2,669,000 or 4.1% from an
average  balance of $65,452,000 in 1995 to an average  balance of $62,783,000 in
1996, and declines in average money market  deposits which averaged  $16,297,000
in 1996 as compared to $17,639,000 in 1995, a decrease of $1,342,000 or 7.6%.

<PAGE>

Short-Term Borrowings

     The Bank had  securities  sold  under  agreements  to  repurchase  totaling
$3,795,000 at December 31, 1996 and $6,096,000 at December 31, 1995.  There were
no other  short-term  borrowings at December 31, 1996.  The Bank had  short-term
borrowings  in the form of Federal Home Loan Bank  borrowings  of  $7,000,000 at
December 31, 1995.  At December 31, 1996 and 1995,  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 1996, cash, due from banks, Federal funds
sold  and  interest-bearing   deposits  with  banks  totaled  $14,214,000,   and
securities maturing within one year totaled  $2,858,000.  At year-end 1995, cash
and due from banks, Federal funds sold, and interest-bearing deposits with banks
totaled $16,384,000, and securities maturing within one year were $4,955,000.

     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 $81,000 at December 31, 1996,  and $538,000
at December 31, 1995. These deposits are included in  interest-bearing  deposits
with  banks  on  the  Company's  financial  statements.  As  a  result  of  this
relationship,  the Bank places most of its short-term  funds at the Federal Home
Loan Bank of Pittsburgh  in place of other banks.  The Federal Home Loan Bank of
Pittsburgh provides the Bank with a line of credit in the amount of $12,148,000,
all of which was available at December 31, 1996.

     The Bank had  three  long-term  loans  from the  Federal  Home Loan Bank of
Pittsburgh  totaling  $18,000,000  at December 31, 1996. All of these loans were
originated in 1996 with the proceeds used to fund the growth in residential real
estate loans.  The loans are for $5,000,000 due November,  1998, at a fixed rate
of 5.96%,  $8,000,000  due August,  2000, at a fixed rate of 5.89% until August,
1998, at which time the rate  may be converted  at the option of the lender to a

<PAGE>

variable  rate  at  LIBOR  plus 6 basis points;  and  $5,000,000  due  December,
2001, at a fixed rate of 4.97% until March,  1997, at which time the rate may be
converted  at the option of the lender to a variable  rate at LIBOR plus 8 basis
points.  If the lender elects to convert the loans to a variable  rate, the Bank
may prepay  the loan in full at the time of  conversion  without a penalty.  The
Bank had no long-term loans from the Federal Home Loan Bank at December 31, 1995
(see Note H of the "Notes to Consolidated Financial Statements").

     Cash flows for the year ended  December 31, 1996  consisted of Cash Used In
Operating  Activities  of  $1,746,000  and Cash Used In Investing  Activities of
$21,377,000,  offset  in  part by  Cash  Provided  by  Financing  Activities  of
$21,503,000;  resulting  in a net  decrease  in cash  and  cash  equivalents  of
$1,620,000.  The Cash Used In Operating Activities was comprised  principally of
mortgage loans  originated for sale of $24,690,000  and net securities  gains of
$308,000,  reduced  by net  income  of  $2,822,000,  proceeds  from  the sale of
mortgage loans of $19,509,000,  a provision for possible loan losses of $670,000
and  depreciation  and  amortization  of  $748,000.  The Cash Used in  Investing
Activities was primarily for the purchase of  $32,686,000 of  available-for-sale
securities,  and $6,905,000 of  held-to-maturity  securities,  a net increase in
loans to customers of  $22,614,000  and the purchase of $997,000 of premises and
equipment. The Cash Provided by Financing Activities was comprised of additional
long-term  debt of $18,000,000  from the Federal Home Loan Bank (see  discussion
above),  a net  increase in  certificates  of deposit of  $10,423,000  and a net
increase in interest and non-interest bearing demand deposits of $3,143,000. The
sale of common shares and treasury shares pursuant to the Dividend  Reinvestment
Plan resulted in proceeds of $354,000. Partially offsetting these increases were
decreases in short-term  borrowings of $7,000,000 and  repurchase  agreements of
$2,301,000 and cash dividends paid of $1,011,000.

     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, 1996 was $26,805,000
as compared to  $24,767,000  at December 31, 1995,  an increase of $2,038,000 or
8.2%. This increase was primarily attributable to retained earnings and the sale
of common  shares  pursuant to the Dividend  Reinvestment  Plan. At December 31,
1996, unrealized gains on securities  available-for-sale,  which are included in
shareholders'  equity,  amounted  to $347,000  (net of tax effect of  $179,000).
Included in  shareholders'  equity at December 31, 1995 was $520,000 (net of tax
effect of $267,000) of unrealized losses on securities  available-for-sale  (see
discussion on "Securities Available-for-Sale").

<PAGE>

     On June 19, 1996,  the Company paid a 5% stock dividend on its common stock
from authorized but unissued  shares to all  shareholders of record at the close
of business on May 31, 1996.  Fractional shares were paid in cash based on a per
share  price of $18.50.  The Company  also paid a 5% stock  dividend on June 28,
1994 to  shareholders  of record June 6, 1994.  The number of average shares and
per share information in this report has been restated to reflect these 5% stock
dividends.

     The Company  maintains a Dividend  Reinvestment and Stock Purchase Plan. In
1996,  13,761 common shares were  purchased  pursuant to this Plan at an average
price of $18.06 for total  proceeds of  $248,000.  The shares  purchased in 1996
were  comprised  of 10,191 new common  shares at an average  price of $18.10 for
proceeds of $184,000 and 3,570 common shares from Treasury  shares at an average
price of $17.94 for proceeds of $64,000.  In 1995, 16,352 new common shares were
purchased from  authorized and unissued shares at an average price of $15.23 per
share for proceeds of $249,000.

     A  Non-Employee  Director  Stock  Option Plan was adopted by the Company in
1994.  This plan  provides  for the awarding of stock  options to the  Company's
non-employee  directors.  Pursuant  to this plan,  in 1996,  options to purchase
1,102 shares of the  Company's  common stock at a price of $18.50 per share were
granted to a certain non-employee  director.  Options totaling 2,204 shares were
granted to  non-employee  directors under this plan in 1995 at a price of $15.00
per share.  During 1996,  options for 275 shares of the  Company's  common stock
were exercised by a non-employee  director at a price of $15.42 per share. There
were no options exercised in 1995.

     The Company  also has a Stock  Option Plan that was  originally  adopted in
1986 and a 1996 Stock Option Plan that was adopted in 1996 which provide for the
granting of options to acquire the  Company's  common  stock to officers and key
employees.  There were no options  granted  under  these Plans in 1996 and 1995.
During  1996,  options for 5,469  shares of the  Company's  common  stock issued
pursuant  to the 1986 Plan were  exercised  at an  average  price of $18.64  per
share. There were no options exercised in 1995.

     On January 1, 1996, the Company adopted the Financial  Accounting Standards
Board standard SFAS No. 123,  "Accounting for Stock-Based  Compensation",  which
allows  an entity to use a  fair-value  based  method  for  valuing  stock-based
compensation  which  measures  compensation  cost at the grant date based on the
fair  value of the  award.  Compensation  is then  recognized  over the  service

<PAGE>

period,  which  is  usually  the  vesting  period.  Alternatively,  the Standard
permits  entities to continue  accounting for employee stock options and similar
instruments under Accounting  Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees",  and its related interpretations.  Entities that
continue to account for stock  options  using APB Opinion No. 25 are required to
make pro forma  disclosures  of net income  and  earnings  per share,  as if the
fair-value based method of accounting  defined in SFAS No. 123 had been applied.
The Company's  employee stock option plan is accounted for under APB Opinion No.
25.  The  adoption  of SFAS No.  123 had no  material  effect  on the  Company's
consolidated financial position or results of operations. Additional information
relating to the Company's Stock Option Plans can be found in Notes A.8. and N of
the "Notes to Consolidated Financial Statements".

     The  Company  and the  Bank  are  subject  to  various  regulatory  capital
requirements  administered  by the  federal  banking  agencies.  Failure to meet
minimum  capital  requirements  can  initiate  certain  mandatory  and  possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct  material  effect  on  the  Company's  financial  statements.  Additional
information  relating  to the  Company's  and Bank's  capital  requirements  and
capital  ratios can be found in Note S of the "Notes to  Consolidated  Financial
Statement".

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.

 Accounting for the Impairment
 of Long-Lived Assets

     On January 1, 1996, the Company adopted the Financial  Accounting Standards
Board Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived  Assets and  for Long-Lived Assets  to be Disposed 

<PAGE>

Of",  which   provides  guidance  on  when  to  recognize  and  how  to  measure
impairment losses of long-lived assets and certain  intangibles and how to value
long-lived  assets  to be  disposed  of.  The  adoption  of SFAS No.  121 had no
material effect on the Company's  consolidated  financial position or results of
operations.

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

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

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 May 1996.

<PAGE>

<TABLE>
QUARTERLY FINANCIAL DATA (Unaudited)

Dollars in Thousands, 
except per share data                       Three Months Ended
      1996                      Dec. 31     Sept. 30     June 30     March 31
<S>                           <C>          <C>         <C>          <C>   

Interest  income                $6,000       $5,904      $5,652       $5,579
Net interest income              3,522        3,478       3,322        3,235
Provision for possible 
 loan losses                       155          105         305          105
Net gain (loss) on sale 
of securities and mortgages        (17)          18         145          132
Income before income taxes       1,151          980         970          857
Net income                      $  815       $  702      $  690       $  615
                                ======       ======      ======       ======
Net income per share of 
 common stock                   $ 0.53       $ 0.46      $ 0.45       $ 0.41
                                ======       ======      ======       ======


      1995                      Dec. 31     Sept. 30     June 30     March 31

Interest  income                $5,602       $5,620      $5,433       $5,241
Net interest income              3,160        3,200       3,110        3,174
Provision (credit) for 
 possible loan losses              100          100        (172)       1,770
Net gain (loss) on sale of 
 securities and mortgages           20           25          18          (19)
Income before income taxes         908          949       1,116       (1,057)
Net income                      $  634       $  659      $  771      $  (663)
                                =======      ======      ======      =======
Net income per share of 
 common stock                   $ 0.42       $ 0.44      $ 0.51      $ (0.44)
                                =======      ======      ======      ======= 
</TABLE>

<PAGE>

Item 7.         Financial Statements

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

(Dollars in Thousands) At December 31,          1996            1995
<S>                                        <C>              <C>
ASSETS
  Cash and Due From Banks                   $  11,729        $  11,949
  Federal Funds Sold                            2,200            3,600
                                            ---------        ---------
    Total Cash and Cash Equivalents            13,929           15,549

  Interest-Bearing Deposits With Banks            285              835
  Investment Securities
    (Fair Value:  1996 - $21,124; 
     1995- $20,188)                            20,999           20,054
  Securities Available-for-Sale at Fair Value  56,779           59,049
  Mortgage Loans Held-for-Sale                    721            1,006
  Total Loans, Net of Unearned Discount       220,117          193,130
  Less:  Allowance for Possible Loan Losses    (2,532)          (2,443)
                                            ---------        ---------
  Net Loans                                   217,585          190,687
  Premises and Equipment                        7,030            6,763
  Accrued Interest Income                       2,020            1,878
  Other Real Estate Owned                         595              364
  Other Assets                                  2,409            2,329
                                            ---------        ---------
    TOTAL  ASSETS                           $ 322,352        $ 298,514
                                            =========         ========
LIABILITIES
  Deposits
    Non-Interest Bearing Deposits           $  31,450        $  26,690
    Interest-Bearing Deposits
     (Includes Certificates of Deposit 
      in Excess of $100:  1996 - $4,920; 
      1995 - $6,623)                          236,218          227,412
                                            ---------        ---------
  Total Deposits                              267,668          254,102

  Securities Sold Under Agreements 
   to Repurchase                                3,795            6,096
  Short-Term Borrowings                            --            7,000
  Long-Term Debt                               18,512              643
  Accrued Interest Payable                      3,205            3,425
  Other Liabilities                             2,367            2,481
                                            ---------        ---------
    TOTAL LIABILITIES                         295,547          273,747
                                            ---------        ---------
SHAREHOLDERS' EQUITY
 Preferred Stock, Par Value $5.00 a share          --               --
   Authorized - 500,000 shares, none issued

 Common Stock, Par Value $5.00 a share
   Authorized: 10,000,000 shares
   Issued:  1,560,634 shares in 1996 
    and 1,471,000 shares in 1995                7,803            7,355
 Additional Paid-in Capital                     9,212            7,968
 Retained Earnings                              9,975            9,567
 Less Treasury Stock at Cost:  861 shares
  in 1996 and none in 1995                        (20)              --
 Employee Stock Ownership Plan Debt              (512)            (643)
 Net Unrealized Gain on Securities 
  Available-for-Sale                              347              520
                                            ---------        ---------
    TOTAL SHAREHOLDERS' EQUITY                 26,805           24,767
                                            ---------        ---------
    TOTAL LIAB AND SHAREHOLDERS' EQUITY     $ 322,352         $298,514
                                            =========         ========
</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,               1996        1995        1994
<S>                                       <C>         <C>          <C>
INTEREST INCOME
    Interest and Fees on Loans             $ 18,052    $ 16,896     $ 14,984
    Interest on Investment Securities
      Taxable                                 4,386       4,477        3,439
      Tax-Exempt                                617         384          348
    Interest on Other Investments
      Deposits with Banks                        78         133          158
      Federal Funds Sold                          2           6           57
                                             ------      ------       ------ 
        Total Interest Income                23,135      21,896       18,986
                                             ------      ------       ------
INTEREST EXPENSE
    Interest on Deposits                      8,622       8,332        6,853
    Interest on Short-Term Borrowings           636         684          169
    Interest on Long-Term Debt                  320         236          130
                                             ------      ------       ------
        Total Interest Expense                9,578       9,252        7,152
                                             ------      ------       ------
NET INTEREST INCOME                          13,557      12,644       11,834
    Provision for Possible Loan Losses          670       1,798          420
                                             ------      ------       ------
    Net Interest Income After Provision
        for Possible Loan Losses             12,887      10,846       11,414
                                             ------      ------       ------
OTHER INCOME
    Trust Revenue                               696         636          611
    Service Charges on Deposit Accounts       1,083       1,034          798
    Investment Securities Gains, Net            308          22           97
    Gains (Loss) on Sale of Mortgage Loans      (30)         22           37
    Other Operating Income                      585         560          487
                                             ------      ------       ------
       Total Other Income                     2,642       2,274        2,030
                                             ------      ------       ------
OTHER EXPENSES
    Salaries and Employee Benefits            5,615       5,132        4,640
    Net Occupancy and Equipment Expense       2,184       1,991        1,698
    Other Operating Expenses                  3,772       4,081        3,746
                                             ------      ------       ------
        Total Other Expenses                 11,571      11,204       10,084
                                             ------      ------       ------
Income Before Income Taxes                    3,958       1,916        3,360
Applicable Income Taxes                       1,136         515        1,018
                                             ------      ------       ------
NET INCOME                                  $ 2,822     $ 1,401      $ 2,342
                                           ========    ========     ========
PER SHARE DATA
    Net Income                              $  1.85     $  0.93      $  1.58
    Cash Dividends                             0.67        0.65         0.63

    Average Shares Outstanding          1,527,819   1,504,391    1,481,598
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

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

(Dollars in Thousands)
                                                            Unreal.
                                                            Net Gain
                           Add.                            (Loss) on
                Common   Paid-In Retained Treas.  ESOP     Sec. Avail
                 Stock   Capital Earnings Stock   Debt      for Sale   Total
<S>           <C>       <C>      <C>     <C>   <C>         <C>       <C>
Balance at
 Jan 1, 1994   $ 6,861   $ 6,708  $ 8,991 $     $ (906)     $  340    $21,994
   1994

Net Income                          2,342                               2,342
Sale of
 Common
 Stock
 under
 Dividend
 Reinv 
 Plan 
 (14,401
 shares)            72       171                                          243
Cash
 Dividends
 Paid                                (936)                               (936)
Stock
 Dividend
 of 5%
 (68,793
 shares)           344       912   (1,256)                                ---
Cash in
 Lieu of
 Fractional
 Shares                                (3)                                 (3)
ESOP Loan
 Pmnt                                              131                    131
Unall ESOP
 Shares
 Committed
 to
 Employees
 (4,724
 shares)                       3                                            3
Unreal Net
 Loss on
 Sec Avail-
 for-Sale                                                   (1,374)    (1,374)
               -------   -------  ------- ----- ------      ------    -------
Balance at
 Dec 31, 1994    7,277     7,794    9,138   ---   (775)     (1,034)    22,400

   1995

Net Income                          1,401                               1,401
Sale of
 Common
 Stock
 under
 Dividend
 Reinv 
 Plan
 (15,573
 shares)            78       171                                          249
Cash Div Paid                       (972)                                (972)
ESOP Loan
 Pmnt                                              132                    132
Unall ESOP
 Shares
 Committed
 to
 Employees
 (4,724
 shares)                       3                                            3
Unreal Net
 Gain on
 Sec Avail-
 for-Sale                                                    1,554      1,554
               -------   -------  ------- ----- ------      ------    -------
Balance at
 Dec 31, 1995    7,355     7,968   9,567    ---   (643)        520     24,767

   1996

Net Income                         2,822                                2,822
Sale of
 Common
 Stock
 under
 Dividend
 Reinv 
 Plan
 (10,191
 shares)            51       133                                          184
Sale of
 Common
 Stock
 under
 Stock
 Option
 Plan (5,731
 shares)            28        78                                          106
Purchase of
 Treasury
 Stock
(4,431)
 shares)                                   (102)                         (102)
Sale of
 Treas Stock
 under
 Dividend
 Reinv Plan
(3,570
 shares)                     (18)            82                            64
Cash
 Dividends
 Paid                             (1,011)                              (1,011)
Stock
 Dividend
 of 5%
 (73,712
 shares)           369     1,032  (1,401)                                 ---
Cash in
 Lieu of
 Fractional
 Shares                               (2)                                  (2)
ESOP Loan
 Pmnt                                              131                    131
Unall ESOP
 Shares
 Committed
 to
 Employees
 (5,636
 shares)                      19                                           19
Unreal Net
 Gain on
 Sec Avail-
 for-Sale                                                     (173)      (173)
               -------   -------  ------- ----- ------      ------    -------
Balance at
 Dec 31, 1996  $ 7,803   $ 9,212  $ 9,975 $ (20)$ (512)      $  347    $26,805
</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 Dec 31,  1996      1995       1994
<S>                                            <C>       <C>        <C>
OPERATING ACTIVITIES
   Net Income                                   $  2,822  $  1,401  $  2,342
   Adjustments to Reconcile Net Income to
    Net Cash Provided by (Used in)
    Operating Activities:
       Provision for Possible Loan Losses            670     1,798       420
       Depreciation and Amortization                 748       624       458
       Amortization of Security Discounts           (130)     (152)      (98)
       Amortization of Security Premiums             179       186       261
       Deferred Taxes                                (99)     (156)        3
       Amortization of Deferred Fees on Loans       (110)       48      (238)
       Investment Securities Gains, Net             (308)      (22)      (97)
       Loss (Gain) on Sale of Mortgage Loans          30       (22)      (37)
       Mortgage Loans Originated for Sale        (24,690)   (7,273)   (4,548)
       Mortgage Loan Sales                        19,509     6,336    19,926
       Release of ESOP Shares                         20         3       ---
       Changes in Assets and Liabilities:
           Increase in Accrued Interest Income      (142)     (130)     (354)
           Increase (Decrease) in Accrued
            Interest Payable                        (220)      743      (292)
           Decrease (Increase) in Other Assets         1        75      (154)
           Increase (Decrease) in Other
            Liabilities                              (26)      381      (156)
                                                --------  --------   -------
Net Cash Provided by (Used in)
 Operating Activities                             (1,746)    3,840    17,436
                                                --------  --------   -------
INVESTING ACTIVITIES
   Proceeds from Maturities of Securities
    Available-for-Sale                            15,401    11,055     8,453
   Proceeds from Maturities of Securities
    Held-to-Maturity                               5,671     3,284     4,760
   Proceeds from Sales of Securities
    Available-for-Sale                            19,842    11,177     4,790
   Purchase of Securities Available-for-Sale     (32,686)  (19,306)  (23,963)
   Purchase of Securities Held-to-Maturity        (6,905)   (2,836)  (14,396)
   Net (Increase) Decrease in Interest
    Bearing Deposits With Banks                      550      (434)      245
   Net Increase in Loans                         (22,614)   (9,937)  (17,235)
   Purchase of Premises and Equipment               (997)   (1,508)   (1,446)
   Proceeds from Sale of Other
    Real Estate Owned                                361       463     1,092
                                                --------  --------   -------
Net Cash Used in Investing Activities            (21,377)   (8,042)  (37,700)
                                                --------  --------   -------
FINANCING ACTIVITIES
   Net (Decrease) Increase in Interest
    and Non-Interest Bearing Demand Deposits
    and Savings Accounts                           3,143   (12,555)    8,538
   Net Increase in Certificates of Deposit        10,423    19,125     3,429
   Net Increase (Decrease) in Long-Term Debt      18,000       (87)     (338)
   Net Increase (Decrease) in
    Repurchase Agreements                         (2,301)   (2,931)    4,316
   Net Increase (Decrease) in
    Short-Term Borrowings                         (7,000)    6,250       750
   Proceeds from Issuance of Common Stock            290       252       246
   Purchase of Treasury Stock                       (102)      ---       ---
   Proceeds from Sale of Treasury Stock               64       ---       ---
   Cash Dividends Paid                            (1,011)     (972)     (936)
   Cash in Lieu of Fractional Shares                  (3)      ---        (3)
                                                --------  --------   -------
Net Cash Provided by Financing Activities         21,503     9,082    16,002
                                                --------  --------   -------
Increase (Decrease) in Cash and
 Cash Equivalents                                 (1,620)    4,880    (4,262)
Cash and Cash Equivalents, January 1,             15,549    10,669    14,931
                                                --------  --------   -------
Cash and Cash Equivalents, December 31,         $ 13,929  $ 15,549   $10,669
                                                ========  ========   =======
</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, 1996 and 1995

NOTE A - SUMMARY OF ACCOUNTING POLICIES

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

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

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

1.  Principles of Consolidation

     The consolidated  financial  statements include the accounts of the Company
and its wholly-owned  subsidiaries,  the Bank and First C. G. Company,  Inc. All
significant  inter-company  balances and transactions  have been eliminated.  In
preparing the consolidated financial statements,  management is required to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities as of the dates of the balance sheets and revenues and  expenditures
for the periods. Therefore, actual results could differ significantly from those
estimates.

 2.  Investment Securities

     As required by Statement of Financial  Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities",  the Company
classifies debt and marketable equity  securities in three categories:  trading,
available-for-sale  and  held-to-maturity.  Trading  securities  are measured at

<PAGE>

fair  value,  with  unrealized  holding  gains  and  losses included  in income.
The  Company  does not have any  securities  classified  as trading  securities.
Available-for-sale  securities are measured at fair value, with unrealized gains
and losses, net of tax effect, reported in equity.  Held-to-maturity  securities
are carried at  amortized  cost,  and the Company  has the  positive  intent and
ability to hold such securities until maturity. The Company's  classification of
its  investment  securities  into  these  categories  is  detailed  in  "Note  B
Investment Securities".

     Investment securities  held-to-maturity are principally debt securities and
are  carried at cost,  net of  unamortized  premiums  and  discounts,  which are
recognized  in  interest  income  using the  interest  method over the period to
maturity.

     Gains or  losses  on  disposition  are  based on the net  proceeds  and the
adjusted   carrying   amount  of  the  securities   sold,   using  the  specific
identification method.

3.  Mortgages Held-for-Sale

     Mortgage loans  held-for-sale are carried at the lower of aggregate cost or
fair value. Unrealized losses are included in other operating expenses. Realized
gains and losses from  mortgage  loan sales are included in total other  income.
Interest  and fee income  earned  during the  holding  period  are  included  in
interest  and fees on loans.  On  January  1,  1996,  the  Company  adopted  the
Financial Accounting  Standards Board standard,  (SFAS) No. 122, "Accounting for
Mortgage  Servicing  Rights",  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 SFAS
No. 122 did not have a material effect on the Company's  consolidated  financial
position or results of operations.

 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.

<PAGE>

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

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

 5.  Loan Fees and Related Costs

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

 6. Premises and Equipment

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

 7.  Income Taxes

     The  Company,  in  accordance  with SFAS No.  109,  "Accounting  for Income
Taxes",  computes the tax expense using the liability  method where deferred tax
assets and  liabilities  are  determined  based on the  difference  between  the
financial  statement and tax bases of assets and  liabilities as measured by the
enacted tax rates which will be in effect when these

<PAGE>

differences  reverse.   Deferred  tax  expense  is  the  result  of  changes  in
deferred tax assets and liabilities.  The principal types of differences between
assets and  liabilities  for  financial  statement  and tax return  purposes are
accumulated  depreciation,  loan origination  fees,  provision for possible loan
losses, unrealized gains and deferred expenses.

 8.  Stock Option Plans

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

     On January 1, 1996,  the  Company  adopted  SFAS No. 123,  "Accounting  for
Stock-Based  Compensation",  which  allows an  entity to use a fair  value-based
method for valuing stock-based  compensation which measures compensation cost at
the  grant  date  based on the fair  value of the  award.  Compensation  is then
recognized  over the  service  period,  which is  usually  the  vesting  period.
Alternatively, the Standard permits entities to continue accounting for employee
stock options and similar  instruments  under Accounting  Principles Board (APB)
Opinion No. 25,  "Accounting  for Stock  Issued to  Employees",  and its related
interpretations.  Entities  that continue to account for stock options using APB
Opinion  No. 25 are  required  to make pro forma  disclosures  of net income and
earnings per share, as if the fair value-based  method of accounting  defined in
SFAS No. 123 had been  applied.  The Company's  Employee  Stock Option Plans are
accounted  for under APB  Opinion  No. 25. The  adoption  of SFAS No. 123 had no
material effect on the Company's  consolidated  financial position or results of
operations (see Note N).

9.  Employee Benefit Plans

     The  Company  has  established  an  Employee  Stock  Ownership  Plan (ESOP)
covering  eligible  employees  with one year of  service as defined by the ESOP.
Effective  January 1, 1994,  the Company  adopted new accounting for its ESOP in
accordance  with  Statement of Position (SOP) 93-6,  "Employer's  Accounting for
Employee Stock Ownership Plans",  issued by the Accounting Standards Division of
the American Institute of Certified Public Accountants (AICPA) in November 1993.
The  adoption  of SOP 93-6 was  applied  to shares  acquired  by the ESOP  after
December  31,  1992,  which  did not have a  material  effect  on the  Company's
financial  statements.  For  issuances  of stock to the ESOP after  December 15,
1989,  but prior to December 31, 1992,  the shares  allocated  method is used to
recognize expense in the Company's financial statements.  For issuances of stock
prior to December 15,  1989,  the Company  will  continue the cash  contribution
method of  recognizing  expense to the extent  that it  exceeds  the  cumulative
expense that would be recognized under the shares allocated method (see Note K).

<PAGE>

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

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

     The Company  records the cost of  post-retirement  medical  benefits on the
accrual  basis as  employees  render  service to earn the benefits and records a
liability for the unfunded accumulated  post-retirement benefit obligation.  The
transition  obligation,  representing the unfunded and unrecognized  accumulated
past-service benefit obligation for all plan participants,  will be amortized on
a straight-line basis over a 20-year period (see Note M).

10.  Trust Assets and Revenue

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

11.  Per Share Information

     Earnings  per share is  computed  by  dividing  net income by the  weighted
average number of common shares  outstanding.  Average common shares outstanding
in 1996,  1995 and 1994 include  issued  shares less 26,688,  30,587 and 36,558,
respectively,  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.

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

<PAGE>

     Share and per share  information have been restated to reflect the 5% stock
dividends of May 1996 and June 1994.

12.  Statement of Cash Flows

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

     Cash paid for interest was $9,798,000,  $8,509,000 and $7,444,000,  for the
years ended December 31, 1996, 1995 and 1994, respectively.  Cash paid for taxes
was $1,353,000 in 1996, $440,000 in 1995, $845,000 in 1994.

13.  Financial Instruments

     The estimated  fair value as of December 31, 1996 and 1995 of the Company's
assets and  liabilities  considered to be financial  instruments,  which consist
primarily  of  securities,  loans and  deposits  as  required  by SFAS No.  107,
"Disclosures about Fair Value of Financial Instruments", are provided in Note U.

14.   Contributions

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

15.  Advertising Costs

     The AICPA's Accounting  Standards  Executive  Committee issued Statement of
Position  (SOP)  93-7,   "Reporting  on  Advertising   Costs",   which  requires
disclosures  regarding  an  entity's  advertising   activities.   The  Company's
advertising  costs are expensed as incurred.  Advertising  costs were  $299,000,
$294,000  and $228,000  for the years ended  December  31, 1996,  1995 and 1994,
respectively.

16.  Intangibles

     On January 1, 1996, the Company adopted the Financial  Accounting Standards
Board (SFAS) No. 121,  "Accounting  for the Impairment of Long-Lived  Assets and
for Long-Lived  Assets to be Disposed Of",  which  provides  guidance on when to
recognize and how to measure  impairment losses on long-lived assets and certain
intangibles and how to value  long-lived  assets to be disposed of. The adoption
of SFAS No. 121 had no material effect on the Company's  consolidated  financial
position or results of operations.

<PAGE>

17.  Transfer and Servicing of Assets and Extinguishments of Liabilities

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

18.  Stock Dividends

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

19.  Reclassifications

     Certain   reclassifications   have  been  made  to   conform  to  the  1996
presentation.

<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 required by
Statement of Financial  Accounting  Standards  (SFAS) No. 115,  "Accounting  for
Certain  Investments  in Debt and Equity  Securities".  Trading  securities  are
measured at fair value,  with  unrealized  holding gains and losses  included in
income.  The  Company  had  no  trading  securities  in  1996,  1995  and  1994.
Available-for-sale  securities  are measured at fair value,  with net unrealized
gains  and  losses   reported,   net  of  tax,   as  a   component   in  equity.
Held-to-maturity securities are carried at amortized cost.

     In 1995, the Financial  Accounting  Standards Board (FASB) issued a special
report "A Guide to  Implementation  of SFAS No.  115".  In this guide,  the 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 held-to-maturity to available-for-sale effective December 19, 1995.

     Available-for-sale securities had unrealized holding gains of $347,000 (net
of the tax effect of $179,000) in 1996 and unrealized  holding gains of $520,000
(net of the tax  effect  of  $267,000)  in 1995.  At  December  31,  the  equity
securities in the available-for-sale category include Federal Reserve Bank stock
in the amount of $239,000 in 1996 and  $220,000 in 1995,  and Federal  Home Loan
Bank stock in the amount of $1,659,000 in 1996 and  $1,660,000 in 1995 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,
1996 and 1995 are summarized as follows:

<PAGE>

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

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


<TABLE>
                                                     1995   
Available-for-Sale Securities                  Gross        Gross
                                  Amortized  Unrealized   Unrealized    Fair
                                    Cost       Gains        Losses      Value
<S>                              <C>       <C>           <C>         <C>   

U. S. Treasury                     $ 7,002   $    69       $    21     $ 7,050
U. S. Government Agency             17,066       129            36      17,159
State and Political Subdivisions     6,638        66            15       6,689
Mortgage-Backed Securities          24,529       270           110      24,689
Other Debt Securities                  300         7            --         307
Equity Securities                    2,727       429             1       3,155
                                   -------   -------       -------     -------
     Total                         $58,262   $   970       $   183     $59,049
</TABLE>

<TABLE>

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

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

<TABLE>

                                                     1995   
Held-to-Maturity Securities         Gross      Gross
                                  Amortized  Unrealized   Unrealized    Fair
                                    Cost       Gains        Losses      Value
<S>                              <C>       <C>           <C>         <C>   

U. S. Treasury                     $ 2,997        14       $     4     $ 3,007
U. S. Government Agency              6,524        44            29       6,539
State and Political Subdivisions     2,086        36             4       2,118
Mortgage-Backed Securities           8,447        98            21       8,524
                                   -------   -------       -------     -------
     Total                         $20,054   $   192       $    58     $20,188
</TABLE>

<PAGE>

     The following table lists the maturities of debt securities at December 31,
1996 and 1995, classified as available-for-sale  and held-to-maturity.  Expected
maturities will differ from contractual  maturities  because  borrowers may have
the right to call or  prepay  obligations  with or  without  call or  prepayment
penalties.

Maturities of Debt Securities                   1996
<TABLE>
                                    Available-        Held-to-Maturity
                                     for-Sale             Carrying
                                    Fair Value             Value 
<S>                               <C>                  <C>    
Debt Securities
  Due in one year or less           $    904             $  1,954
  Due after one year
   through five years                 10,878                3,475
  Due after five years
   through ten years                  11,213                7,566
  Due after ten years                 10,884                1,450
                                    --------            ---------
                                      33,879               14,445
Mortgage-backed securities            19,145                6,554
Equity securities                      3,755                 --- 
                                    --------            ---------
Total investments                   $ 56,779            $  20,999
</TABLE>

Maturities of Debt Securities                   1995
<TABLE>
                                    Available-        Held-to-Maturity
                                     for-Sale             Carrying
                                    Fair Value             Value 
<S>                               <C>                  <C>    
Debt Securities
  Due in one year or less           $  2,874             $  1,999
  Due after one year
   through five years                 15,974                4,201
  Due after five years
   through ten years                   7,170                4,947
  Due after ten years                  5,187                  460
                                    --------            ---------
                                      31,205               11,607
Mortgage-backed securities            24,689                8,447
Equity securities                      3,155                 --- 
                                    --------            ---------
Total investments                   $ 59,049            $  20,054
</TABLE>

     Investment  securities with a carrying amount of $7,994,000 and $14,043,000
at  December  31, 1996 and 1995,  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  1996,  1995  and  1994  were  $19,842,000,  $11,177,000  and
$4,790,000,  respectively.  Gross gains of $418,000 and gross losses of $110,000
were realized on those sales in 1996. Gross gains of $93,000 and gross losses of
$71,000 were realized on the sales in 1995. In 1994,  gross  realized gains were
$108,000 and gross realized losses were $11,000.

<PAGE>

NOTE C - LOANS

     Major  classifications  of  loans  at  December  31,  1996  and 1995 are as
follows:
<TABLE>
                                       1996              1995
<S>                              <C>               <C>   
Real Estate/Residential            $ 134,013         $ 122,293
Real Estate/Construction              10,923             4,959
Real Estate/Commercial                39,421            35,316
Consumer/Installment                  28,870            27,685
Commercial (Non-Real Estate)
  and Agricultural                     8,715             5,403
State and Political Subdivisions         906             1,290
Other                                     28                13
                                   ---------         ---------
  Total Gross Loans                  222,876           196,959
      Less Unearned Discount          (2,759)           (3,829)
                                   ---------         ---------
  Total Loans                      $ 220,117         $ 193,130
</TABLE>

     Included in total gross loans are unamortized  loan fees totaling  $395,000
at  December  31,  1996 and  $229,000 at  December  31,  1995.  There were loans
totaling  $1,440,000 on which the accrual of interest has been  discontinued  or
reduced at December 31, 1996.  During 1996,  an average of  $1,979,000  of loans
were on non-accrual  status.  Non-accrual loans at December 31, 1995 amounted to
$2,181,000 and averaged  $1,893,000 during 1995. Loans 90 days and over past due
and still  accruing  totaled  $1,283,000 at December 31, 1996 and  $1,115,000 at
December 31, 1995.

<PAGE>

NOTE D - ALLOWANCE FOR POSSIBLE LOAN LOSSES

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

<TABLE>

Year Ended December 31,                 1996       1995       1994
<S>                                 <C>        <C>        <C>
Beginning Balance                     $ 2,443    $ 2,187    $ 1,953

Additions
  Provisions for loan losses
    charged to operating expenses         670      1,798        420
  Recoveries of loans                      86        216        252
                                      -------    -------    -------
      Total Additions                   3,199      2,014        672
  Deductions
    Loans charged-off                    (667)    (1,758)      (438)
                                      -------    -------    -------
  Ending Balance                      $ 2,532    $ 2,443    $ 2,187
</TABLE>

NOTE E - IMPAIRED LOANS

     The recorded  investment  in impaired  loans and the  valuation  for credit
losses related to loan impairment are as follows:
<TABLE>

At December 31,                                    1996       1995
<S>                                            <C>        <C>  
Principal amount of impaired loans               $ 1,149    $ 2,035
Deferred loan costs                                    7          4
                                                 -------    -------
                                                   1,156      2,039
Less valuation allowance                            (128)      (238)
                                                 -------    -------
                                                 $ 1,028    $ 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,                1996     1995
<S>                                 <C>      <C> 
Valuation allowance at January 1,     $ 238    $ 160
Provision for loan impairment           206      187
Direct charge-offs                     (325)    (125)
Recoveries                                9       16
                                      -----    -----
Valuation allowance at December 31,   $ 128    $ 238
</TABLE>

     During 1996,  total cash  collected on impaired  loans was  $1,486,000,  of
which $1,446,000 was credited to the principal  balance  outstanding and $40,000
was recognized as interest income.

     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 1996 and 1995 was $210,000 and $214,000,  respectively.
The  valuation  allowance  for  impaired  loans at December 31, 1996 and 1995 is
included in the "Allowance for Possible Loan Losses" which amounts to $2,532,000
and $2,443,000 at December 31, 1996 and 1995, respectively.

NOTE F - PREMISES AND EQUIPMENT

     Major  classifications  of these  assets at December  31, 1996 and 1995 are
summarized as follows:
<TABLE>
                                       1996        1995
<S>                              <C>         <C>
  Land                             $    939    $    939
  Premises                            6,855       6,512
  Equipment                           4,337       3,707
                                   --------    --------
                                     12,131      11,158
  Accumulated depreciation
        and amortization             (5,101)     (4,395)
                                   --------    --------
 Total Premises and Equipment      $  7,030    $  6,763
</TABLE>

     Depreciation  and amortization  expense amounted to $748,000,  $624,000 and
$458,000 in 1996, 1995 and 1994, respectively.

<PAGE>

NOTE G - SHORT-TERM BORROWINGS

FEDERAL RESERVE DISCOUNT BORROWINGS
<TABLE>

Year Ended December 31,                            1996       1995       1994
<S>                                           <C>        <C>         <C> 
Balance outstanding at December 31,             $    --    $    --     $   --
Maximum amount outstanding at
  any month-end during the year                 $    --    $    --     $   --
Average amount outstanding
  during the year                               $    10    $    --     $   59
Average interest rate during
  the year                                         5.12%        --%      3.19%
</TABLE>


<TABLE>
FEDERAL HOME LOAN BANK BORROWINGS
  Year Ended December 31,                          1996       1995        1994
<S>                                           <C>        <C>          <C>    
Balance outstanding at December 31,             $    --    $  7,000     $  750
Maximum amount outstanding at any
   month-end during the year                    $ 10,000   $ 11,000     $  750
Average amount outstanding
  during the year                               $  3,400   $  6,109     $  118
Average interest rate during
  the year                                          5.51%      6.34%      5.19%
</TABLE>

     The Federal Home Loan Bank of  Pittsburgh  provides the Bank with a line of
credit in the amount of $12,148,000,  all of which was available at December 31,
1996

     There were no short-term  borrowings in the form of Federal Funds purchased
at December 31, 1996, 1995 and 1994

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
<TABLE>

  Year Ended December 31,                          1996       1995        1994
<S>                                           <C>        <C>        <C>  
Balance outstanding at December 31,            $  3,795    $  6,096   $  9,027
Maximum amount outstanding at any
   month-end during the year                    $ 7,087    $ 12,332   $ 12,347
Average amount outstanding
  during the year                               $ 4,740    $  9,298   $  6,428
Average interest rate during
  the year                                         3.14%       3.72%      2.51%
</TABLE>

<PAGE>

NOTE H - LONG-TERM DEBT

     The Company had  long-term  borrowings  from the Federal  Home Loan Bank of
Pittsburgh totaling $18,000,000 at December 31, 1996. These loans will mature in
two to six years. The weighted average interest rate on these loans was 5.65% at
December 31, 1996. The Company also has an obligation as a party to the Employee
Stock Ownership Plan debt, which is discussed in Note K. The principal  payments
due on the Company's debt at December 31, 1996 are as follows:
<TABLE>

                            ESOP Debt       FHLB Debt       Total Debt
<S>                       <C>             <C>              <C> 
      1997                  $   121         $     --         $    121
      1998                       65            5,000            5,065
      1999                       65               --               65
      2000                       65            8,000            8,065
      2001                       65            5,000            5,065
      2002 and beyond           131               --              131
                            -------         --------         --------
      Total                 $   512         $ 18,000         $ 18,512
</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>
                                                   1996      1995      1994
<S>                                           <C>       <C>      <C> 
Data Processing Services                          $ 594     $ 515     $ 361
Litigation Costs and Consulting and Legal Fees    $ 416     $ 681     $ 470
Printing, Stationery and Supplies                 $ 343     $ 299     $ 303
Advertising                                       $ 299     $ 294     $ 228
Postage                                           $ 247     $ 258     $ 226
Loan Collection                                   $ 223     $ 201     $ 258
Federal Deposit Insurance Premium                 $   2     $ 288     $ 536
</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,               1996          1995          1994
<S>                               <C>           <C>           <C>
Federal
    Current                         $ 1,235       $   671       $ 1,015
    Deferred (benefit)                   99          (156)            3
                                    -------       -------       -------
    Total                           $ 1,136       $   515       $ 1,018
</TABLE>

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

Year Ended December 31,               1996          1995          1994
<S>                               <C>           <C>           <C> 
Federal tax expense
  at statutory rate                 $ 1,346       $   651       $ 1,142
Increase (decrease)
  in taxes resulting from:
    Tax-exempt investment
      securities income                (195)         (124)         (112)
    Tax-exempt interest
      on loans                          (18)          (19)          (17)
  Other, net                              3             7             5
                                    -------       -------       -------
  Applicable Income Taxes           $ 1,136       $   515       $ 1,018
</TABLE>

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

At December 31,                                     1996          1995
<S>                                             <C>           <C>    
Deferred Tax Assets:
   Loan Loss Reserve                              $   561       $   540
   Deferred Compensation                              433           502
   Post-Retirement Benefits                            51            --
   Deferred Loan Fees                                  84            81
   Depreciation                                        21            --
   Other                                               40            --
                                                  -------       -------
      Total                                         1,190         1,123
Deferred Tax Liability:
   Depreciation of Property
      and Equipment                                    --            19
   Unrealized Securities Gains                         28           302
   Other                                                6            13
                                                  -------       -------
      Total                                            34           334
                                                  =======       =======
Net                                               $   976       $   789
</TABLE>

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

<PAGE>

NOTE K- EMPLOYEE STOCK OWNERSHIP PLAN

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

     In 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 7.47% at December 31, 1996 and 7.69% at December 31, 1995).
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
7.59% at December 31, 1996 and 7.82% at December 31, 1995). 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
9.50% at December  31, 1996 and 9.75% at December  31,  1995).  The ESOP's total
outstanding  debt at  December  31,  1996 and 1995 was  $512,000  and  $643,000,
respectively.  These  obligations have been recorded as a liability on the books
of the Company and are collateralized by stock of the Bank.

     Interest  expense  represents  the actual  interest  paid by the ESOP.  The
interest  incurred on ESOP debt was  $52,000,  $67,000 and $69,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.

     Compensation expense related to the ESOP amounted to $229,000, $178,000 and
$153,000 for the years ended December 31, 1996, 1995 and 1994, respectively.  As
provided by SOP 93-6 (see Note A.8.),  the ESOP  compensation  expense  includes
$18,000 in 1996 and $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 was 5,637 in 1996,  4,724 in
1995 and 4,724 in 1994.

     Dividends on unallocated shares used for debt service were $38,000, $37,000
and $42,000 for the years ended December 31, 1996, 1995 and 1994, respectively.

     The total  shares held by the ESOP were 203,282 and 205,255 at December 31,
1996 and 1995,  respectively.  ESOP shares have been  restated to reflect the 5%
stock dividend of May 1996.

<PAGE>

NOTE L - OTHER BENEFIT PLANS

     Employees who qualify may elect to participate in a deferred salary savings
401(k) plan. A  participating  employee may contribute a maximum of 8% of his or
her  compensation.  The Company  will  contribute  $.50 for each $1.00 up to the
first 5% that each employee contributes. Company payments are charged to current
operating  expenses.  These  contributions were $71,000,  $55,000 and $57,000 in
1996, 1995 and 1994, respectively.

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

     The  Company has a deferred  compensation  plan (the  "Deferred  Directors'
Plan")  involving  Directors of the Company.  The plan requires  defined  annual
payments for 15 years beginning at age 65 or death.  The annual benefit is based
upon the amount  deferred plus  interest.  The Company has recorded the deferred
compensation liabilities using the present value method.

<PAGE>

     The  following  table  sets  forth  the  funded  status  of  the  Officers'
Supplemental  Retirement  Plan and the Deferred  Directors' Plan and the amounts
recognized in the Company's balance sheets at December 31, 1996 and 1995

Actuarial present value of benefit obligations is as follows:

                                              Officers'        Deferred
                                            Supplemental       Directors'
                                          Retirement Plan         Plan
<TABLE>
at December 31,                            1996     1995     1996     1995
<S>                                     <C>      <C>      <C>      <C>  
Accumulated benefit obligation, all of
 which is vested                          $  47    $  64    $ 495    $ 498

Projected benefit obligation
  for service rendered to date            $(200)   $(221)   $(495)   $(498)
Plan assets at fair value                    --       --       --       --
                                          -----    -----    -----    -----
Projected benefit obligation
  in excess of plan assets                 (200)    (221)    (495)    (498)
Unrecognized net (gain) loss from past
  experience different from that
  assumed and effects of changes
  in assumptions                           (207)    (165)       6        6
Prior service cost not yet recognized
  in net periodic pension cost               --       --       --       --
Unrecognized net assets at December 31,
  being recognized over 15 years             (5)      (6)      --       --
Adjustment to recognize
  additional minimum liability               --       --       (6)      (6)
                                          -----    -----    -----    -----
Accrued Pension Cost                      $(412)   $(392)   $(495)   $(498) 
</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
1996; 7.0% and 6.0%, respectively, in 1995; and 7.75% and 6.0%, respectively, in
1994. The weighted  average  expected  long-term rate of return on assets was 8%
for 1996, 1995 and 1994 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:
                                              Officers'        Deferred
                                            Supplemental       Directors'
                                          Retirement Plan         Plan
<TABLE>
at December 31,                         1996   1995   1994   1996   1995  1994
<S>                                  <C>    <C>    <C>    <C>    <C>    <C>
Service cost - benefits
  earned during the period             $  15  $  14  $  33  $  --  $  -- $  --
Interest cost on projected
  benefit obligation                      15     15     20     36     36    35
Net amortization and deferral            (10)   (11)    (1)    --     --    --
                                        ----   ----   ----   ----   ----  ----
Net Periodic Pension Cost               $ 20   $ 18   $ 52   $ 36   $ 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 ESOP at the time of  retirement.  This  plan is  currently
unfunded

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

     The Company has determined the actuarially computed expense associated with
this  benefit  for  1996,  1995 and 1994.  The  components  of the net  periodic
post-retirement benefit cost for the years ended December 31 were as follows:

<PAGE>
<TABLE>

Year Ended December 31,                                1996     1995     1994
<S>                                                 <C>      <C>      <C>  
Service cost - benefits earned during the period      $  --    $   5    $   5
Interest cost on accumulated benefit obligation          15       25       21
Amortization of transition obligation                     8       15       15
                                                      -----    -----    -----
Net periodic post-retirement benefit cost             $  23    $  45    $  41
</TABLE>

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

                                                       1996     1995     1994
<S>                                                 <C>      <C>      <C>  
Discount rate                                          7.00%    7.00%    7.75%
Medical care cost trend rate                          11.00%   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,                                           1996       1995
<S>                                                  <C>         <C>  
Accumulated post-retirement benefit obligation:
     Retirees                                          $  181      $  303
     Active, eligible employees                            36          --
     Active, not-yet-eligible employees                    --          53
                                                       ------      ------
Accumulated post-retirement benefit obligation            217         356
Plan assets at fair value                                  --          --
Accumulated benefit obligation in excess of
 plan assets                                              217         356
Unrecognized transition obligation                       (247)       (262)
Unrecognized net gain (loss)                               92         (37
                                                       ------      ------
Accrued post-retirement benefit cost                    $  62      $   57
</TABLE>

     At December 31, 1996, $151,000 of the accrued  post-retirement benefit cost
is included in "Total Other  Liabilities".  The effect of a one percentage point
increase in each future year's assumed medical care cost trend rate, holding all
other  assumptions  constant,  would  have  been to  increase  the net  periodic
post-retirement  benefit cost by $18,000 and the accrued post-retirement benefit
cost by $1,000

     Health care benefits are provided to certain retired  employees The cost of
providing these benefits was approximately $22,000, $28,000 and $25,000 in 1996,
1995 and 1994,  respectively.  The cost is accrued  over the service  periods of
employees  expected to receive benefits.  Past-service costs are being amortized
principally over 30 years

NOTE N - STOCK OPTIONS

     The  Company  adopted a Stock  Option  Plan in 1996 that was similar to the
Stock Option Plan established in 1986. Under the Stock Option Plans,  options to
acquire  shares of common stock may be granted to the officers and key employees
The Stock  Option  Plans  provide for the granting of options at the fair market
value of the  Company's  common stock at the time the options are granted.  Each
option granted under the Stock Option Plans may be exercised  within a period of
ten years from the date of grant. However, no option may be exercised within one
year from date of grant.  No options were granted under these Plan in 1996.  The
aggregate  number of shares  which may be issued  under  these plans are 274,006
shares of common stock

<PAGE>

     In 1994, a Non-Employee  Directors Stock Option Plan was adopted. This Plan
provides for the awarding of stock options to the Company's  Directors  Pursuant
to this Plan,  on May 1, 1994,  each  non-employee  director  of the Company was
automatically granted an option to purchase 1,102 shares of the Company's common
stock at the fair  market  value of the  Company's  common  stock of $15.42  per
share. The Pan 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 1,102 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 1,102
shares of the Company's  common stock.  The aggregate number of shares which may
be issued under the Non-Employee  Director Stock Option Plan is 22,050 shares of
common stock

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

Year Ended December 31,                              1996          1995

Net Income                         As reported     $ 2,822       $ 1,401
                                   Pro forma       $ 2,814       $ 1,385

Primary earnings per share         As reported     $  1.85       $  0.93
                                   Pro forma       $  1.85       $  0.92

Fully diluted earnings per share   As reported     $  1.85       $  0.93
                                   Pro forma       $  1.84       $  0.92

     The fair value of each option grant is estimated on the date of grant using
the  Black-Scholes  options-pricing  model with the  following  weighted-average
assumptions  used for grants in 1996 and 1995,  respectively:  dividend yield of
3.1% and 3.8%; expected volatility of 39.5% and 54.3%;  risk-free interest rates
of 7.0%  and 7.2% for 1996 and  1995,  respectively;  and  expected  lives of 10
years.

     A summary of the status of the Company's  Employee Stock Option Plans as of
December 31, 1996 and 1995,  and changes  during the years ending on those dates
is presented  below.  The number of shares and price per share has been restated
to reflect the 5% stock dividend of May 1996

<PAGE>

EMPLOYEE STOCK OPTION PLAN
<TABLE>

Year Ended December 31,                 1996                     1995
                                            Weighted                 Weighted
                                             Average                  Average 
                                            Excercise                Excercise
                                  Shares      Price        Shares      Price
<S>                            <C>       <C>            <C>        <C> 
Outstanding at beginning of year  16,975    $  17.25       16,975     $ 17.25
Granted                            None          ---        None          ---
Exercised                          5,469       18.64        None          ---
                                  ------    --------       ------     -------
Outstanding at end of year        11,506    $  16.58       16,975     $ 17.25

Options exercisable at year-end    8,489                   14,973
Weighted average fair value of
   options granted during the year   N/A                      N/A
</TABLE>

The following information applies to options outstanding at December 31, 1996:

EMPLOYEE STOCK OPTION PLAN

Number outstanding                                 11,506
Range of exercise prices                      $15.95  to  $17.28
Weighted-average exercise price                    $16.58
Weighted-average remaining contractual life      4.67 years

A summary of the status of the Company's Non-Employee Director Stock Option Plan
as of December 31, 1996 and 1995,  and changes  during the years ending on those
dates is  presented  below.  The  number of shares  and price per share has been
restated to reflect the 5% stock dividend of May 1996.

NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
<TABLE>

Year Ended December 31,                 1996                    1995
                                            Weighted                 Weighted
                                             Average                  Average
                                            Excercise                Excercise
                                  Shares      Price        Shares      Price
<S>                             <C>       <C>            <C>       <C>
Outstanding at beginning of year   9,922    $  15.33        8,820     $ 15.42
Granted                            1,102       18.50        2,204       15.00
Exercised                            275       15.42        None          ---
Expired                              827       15.42        1,102       15.42
                                   -----    --------        -----     -------
Outstanding at end of year         9,922    $  15.67        9,922    $  15.33

Options exercisable at year-end    3,858                    1,929
Weighted average fair value of
   options granted during the year          $  18.50                 $  15.00
</TABLE>

<PAGE>

The following information applies to options outstanding at December 31, 1996:

NON EMPLOYEE DIRECTOR STOCK OPTION PLAN

Number outstanding                                    9,922
Range of exercise prices                        $15.00 to $18.50
Weighted-average exercise price                      $15.67
Weighted-average remaining contractual life        7.44 years

NOTE O - COMMITMENTS AND CONTINGENCIES

     The Company has non-cancellable operating lease agreements in excess of one
year with respect to various buildings and equipment.  The minimum annual rental
commitments at December 31, 1996 are payable as follows:
<TABLE>

                                  Operating Leases
<S>                           <C>            <C>  
                                1997             $  411
                                1998                372
                                1999                364
                                2000                378
                                2001                397
                                2002 and beyond   2,316
                                                 ------
                                  Total          $4,238
</TABLE>

     The total rental expense was $530,000,  $594,000 and $543,000 in 1996, 1995
and 1994, respectively

<PAGE>

NOTE P - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

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

     The contract or notional amounts as of December 31, 1996 are as follows:

       Financial instruments whose contract amounts represent credit risk:

        Commitments to extend credit    $15,744
        Standby letters of credit       $ 4,899

     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
84.4% as of December 31, 1996.

<PAGE>

NOTE Q - CONCENTRATIONS OF CREDIT RISK

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

     At  December  31,  1996,  the  Bank  had  residential   real  estate  loans
outstanding totaling $134,013,000,  which is 60.9% of total loans. The Bank also
had loans  outstanding  at December  31, 1996 to various  residential  apartment
building  owners  totaling  $8,368,000,  which is 21.2% 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  $3,087,000  and  $2,788,000  at December  31, 1996 and 1995,
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 1996 activity of these loans follows:
<TABLE>

<S>                                      <C>    
Balance, January 1, 1996                   $ 2,788
        New loans                              558
        Repayments                            (259)
                                           -------
Balance, December 31, 1996                 $ 3,087
</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, 1996,  that the Bank could declare,  without the approval of the
Comptroller of the Currency, amounted to approximately $2,071,000.

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

     Quantitative  measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain  minimum amounts and ratios of Tier
I  capital  of at  least  4% and  total  capital,  Tier I and  Tier  2, of 8% of
risk-adjusted  assets  and of Tier 1 capital  of at least 4% of  average  assets
(leverage  ratio).  Tier 1 capital  includes  common  shareholders'  equity  and
qualifying  perpetual  preferred  stock  together  with  related  surpluses  and
retained  earnings.  Tier 2 capital may be comprised  of limited life  preferred
stock, qualifying debt instruments,  and the allowance for possible loan losses.
Management believes,  that as of December 31, 1996, the Company and the Bank met
all capital adequacy requirements to which they were subject.

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

<PAGE>

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

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

Tier 1 Capital
(To Average Assets,
 Leverage)
  Company, (Consolidated)   $26,243   8.35%    $12,578   4.00%     N/A
  Bank                      $22,435   7.20%    $12,456   4.00%  $15,570   5.00%
</TABLE>

<TABLE>
                                                                 To Be Well
                                                                 Capitalized
                                                 Required        Under Prompt
                                                For Capital       Corrective
                                Actual           Adequacy           Action
(Dollars in Thousands)
 At December 31, 1995        Amount   Ratio     Amount   Ratio   Amount  Ratio
<S>                       <C>      <C>       <C>       <C>    <C>      <C>
Total Capital
(To Risk-Weighted Assets)
  Company, (Consolidated)   $26,060  15.86%    $13,142   8.00%     N/A
  Bank                      $22,308  13.66%    $13,061   8.00%  $16,327  10.00%

Tier 1 Capital
(To Risk-Weighted Assets)
  Company, (Consolidated)   $24,014  14.62%    $ 6,571   4.00%     N/A
  Bank                      $20,262  12.41%    $ 6,531   4.00%  $ 9,796   6.00%

Tier 1 Capital
(To Average Assets,
 Leverage)
  Company, (Consolidated)   $24,014   8.20%    $11,719   4.00%     N/A
    Bank                    $20,262   6.80%    $11,915   4.00%  $14,895   5.00%
</TABLE>

<PAGE>

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

     Restrictions on cash and due from bank accounts are placed upon the banking
subsidiary by the Federal Reserve Bank.  Certain amounts of reserve balances are
required  to be on hand or on deposit  at the  Federal  Reserve  Bank based upon
deposit levels and other factors. The average and year-end amount of the reserve
balance for 1996 was approximately $3,585,000 and $3,857,000,  respectively. For
1995, the average  reserve  balance was  $2,990,000 and the year-end  amount was
$3,285,000.

NOTE T - EQUITY TRANSACTIONS

     On June 19, 1996,  the Company paid a 5% stock dividend on its common stock
from authorized but unissued  shares to all  shareholders of record at the close
of  business on May 31,  1996.  The number of shares and  earnings  per share as
stated in the  following  discussion  of the shares  issued  under the  Dividend
Reinvestment and Stock Purchase Plan have been restated to reflect this 5% stock
dividend.

     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 1996,  13,761 common shares were
purchased  pursuant to the Dividend  Reinvestment  and Stock Purchase Plan at an
average  cost of $18.06 per share for total  proceeds  of  $248,000.  The shares
purchased in 1996 were comprised of 10,191 new common shares at an average price
of $18.10 for proceeds of $184,000 and 3,510 shares from  Treasury  shares at an
average price of $17.94 for proceeds of $64,000.  In 1995,  16,352 common shares
were purchased pursuant to the Dividend  Reinvestment and Stock Purchase Plan at
an average cost of $15.23 for proceeds of $249,000.

<PAGE>

NOTE U - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

     Fair values have been estimated using data which management  considered the
best  available,  as  generally  provided  in the  Company's  FRY-9C  Regulatory
Reports, and estimation methodologies deemed suitable for the pertinent category
of financial instrument. The estimation methodologies and resulting fair values,
and recorded carrying amounts at December 31, 1996 and 1995 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>
                                         1996                     1995
                                 Estimated  Carrying      Estimated  Carrying
                                Fair Value   Amount      Fair Value   Amount
<S>                            <C>       <C>            <C>       <C> 
Cash and cash equivalents        $  13,929 $  13,929      $  15,549 $  15,549
Investment securities               21,124    20,999         20,188    20,054
Securities available-for-sale       56,779    56,779         59,049    59,049
Mortgage loans held-for-sale           721       721          1,006     1,006
</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>
                                         1996                     1995
                                 Estimated  Carrying      Estimated  Carrying
                                Fair Value   Amount      Fair Value   Amount
<S>                            <C>       <C>            <C>        <C>  
Assets:
 Interest-bearing deposits
  with banks                     $     285 $     285       $    835  $    835
Liabilities:
 Deposits with stated
  maturities                       117,400   117,485        106,532   106,939
 Securities sold under
  agreements to repurchase           3,795     3,795          6,096     6,096
 Short-term borrowings                  --        --          6,992     7,000
 Long-term debt                     17,994    18,512            643       643
</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>
                                         1996                     1995
                                 Estimated  Carrying      Estimated  Carrying
                                Fair Value   Amount      Fair Value    Amount
<S>                            <C>       <C>            <C>         <C> 
Deposits with no
 stated maturities               $ 150,268 $ 150,268      $ 147,163   $147,163
</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>
                                         1996                     1995
                                 Estimated  Carrying      Estimated  Carrying
                                Fair Value   Amount      Fair Value    Amount
<S>                            <C>        <C>           <C>        <C>  
Total loans                      $219,180   $220,117      $195,162   $193,130
</TABLE>

     There  is no  material  difference  between  the  carrying  amount  and the
estimated fair value of off-balance-sheet items totaling $20,643,000 at December
31, 1996 and  $12,627,000 at December 31, 1995 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,                            1996            1995
<S>                                    <C>             <C>
ASSETS
      Cash and Due from Banks            $    16         $    56
      Interest-Bearing Deposits
        with Banks                           656             290
      Loan to Banking Subsidiary           1,000           1,600
      Investment in Banking Subsidiary    22,633          20,717
      Investment in Other Subsidiary       3,073           2,811
      Other Assets                            12               2
                                         -------         -------
         TOTAL ASSETS                    $27,390         $25,476

LIABILITIES
      Long-Term Debt                     $   512         $   643
      Other Liabilities                       73              66
                                         -------         -------
         TOTAL LIABILITIES                   585             709

SHAREHOLDERS' EQUITY                      26,805          24,767
                                         -------         -------
     TOTAL LIABILITIES AND
      SHAREHOLDERS' EQUITY               $27,390         $25,476
</TABLE>

<PAGE>

<TABLE>
Condensed Statement of Income
   For the Year Ended December 31,             1996       1995      1994
<S>                                       <C>        <C>       <C>
INCOME
    Dividends from Subsidiaries             $ 1,111    $   829   $   990
    Interest on Loan to Subsidiary              114        149       122
    Interest on Deposits with Banks              12          5         6
                                            -------    -------   -------
      Total Income                            1,237        983     1,118
                                            -------    -------   -------
EXPENSES
    Interest on Long-Term Debt                   52         67        83
    Other Expenses                              105         77        90
                                            -------    -------   -------
      Total Expenses                            157        144       173
                                            -------    -------   -------
    Income Before Taxes and
    Equity in Undistributed Net
        Earnings of Subsidiaries              1,080        839       945
    Federal Income Tax (Credit)                 (11)         3       (13)
                                            -------    -------   -------
    Income Before Equity in Undistributed
        Net Earnings of Subsidiaries          1,091        836       958
    Equity in Undistributed Net Earnings
        of Subsidiaries                       1,731        565     1,384
                                            -------    -------   -------

      NET INCOME                            $ 2,822    $ 1,401   $ 2,342
</TABLE>

<PAGE>
<TABLE>

Condensed Statement of Cash Flows
    For The Year Ended December 31,                  1996     1995     1994
<S>                                              <C>      <C>      <C>    
OPERATING ACTIVITIES
 Net Income                                        $ 2,822  $ 1,401  $ 2,342
 Adjustments to Reconcile Net Income to Net Cash
   Provided by Operating Activities:
   Distribution in Excess of Undistributed
    Net Earnings of Subsidiaries                    (1,731)    (565)  (1,384)
   Changes in Assets and Liabilities:
    (Increase) Decrease in Interest-Bearing
     Deposits with Banks                              (366)     (94)      26
    (Increase) Decrease  in Other Assets               (10)      40      (18)
     Increase (Decrease) in Other Liabilities            7       (7)     (17)
                                                   -------  -------  -------
NET CASH PROVIDED BY OPERATING ACTIVITIES              722      775      949
                                                   -------  -------  -------
INVESTING ACTIVITIES
 Repayment of Note from Bank Subsidiary              1,600       --       --
 Issuance of Note Receivable to Bank Subsidiary     (1,000)      --       --
 Capital contribution to Bank Subsidiary              (600)      --       --
                                                   -------  -------  -------
NET CASH PROVIDED BY INVESTING ACTIVITIES               --       --       --
                                                   -------  -------  -------
FINANCING ACTIVITIES
 Repayment of Long-Term Debt                            --      (87)    (338)
 Purchase of Treasury Stock                           (102)      --       --
 Proceeds from the Sale of Treasury Stock               64       --       --
 Proceeds from Issuance of Common Stock                290      252      246
 Cash Dividends Paid                                (1,011)    (972)    (936)
 Cash in Lieu of Fractional Shares                      (3)      --       (3)
                                                   -------  -------  -------
NET CASH USED IN FINANCING ACTIVITIES                 (762)    (807)  (1,031)
                                                   -------  -------  -------
Decrease in Cash and Cash Equivalents                  (40)     (32)     (82)
Cash and Cash Equivalents, January 1,                   56       88      170
                                                   -------  -------  -------
Cash and Cash Equivalents, December 31,            $    16  $    56  $    88
                                                   -------  -------  -------
</TABLE>

<PAGE>

                              INVESTOR INFORMATION


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

ANNUAL SHAREHOLDERS' MEETING

The  annual  shareholders'  meeting will  be  held on Thursday, May 1, 1997 at 9
a.m. at the Bethlehem  Holiday Inn, Routes 22 and 512,  Bethlehem,  Pennsylvania
18017.

REGISTRAR AND TRANSFER AGENT

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

                Nazareth National Bank
                Trust Department
                76 S. Main Street
                Nazareth, PA   18064

STOCK INFORMATION

First Colonial Group,  Inc. common stock trades on the Nasdaq Stock Market under
the trading  symbol FTCG. In newspaper  listings,  First  Colonial  Group,  Inc.
shares are frequently listed as "First Colnl" or "First Col Group". At the close
of business on December 31, 1996, there were 782 shareholders of record.

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

The  following  table sets  forth for the  periods  indicated  high and low sale
prices  reported for the  Company's  common stock and the  respective  dividends
declared per common  share.  The last sale price in December 1996 was $22.00 and
in December  1995 was $17.14.  Stock  prices and  dividends  per share have been
restated  to  reflect  the 5% stock  dividend  of May 1996  (see  "Note T Equity
Transactions" in the "Notes to Consolidated Financial Statements").

<PAGE>
<TABLE>
1995                     High            Low         Cash Dividends
                                                        Declared
<S>                  <C>             <C>            <C>    
     First Quarter     $16.43          $15.00         $ 0.1619
     Second Quarter     16.19           13.70           0.1619
     Third Quarter      17.38           15.00           0.1619
     Fourth Quarter     18.10           16.43           0.1619
                                                      --------
     TOTAL                                            $ 0.6476
</TABLE>

<TABLE>
1996
<S>                  <C>             <C>            <C>   
     First Quarter     $18.81          $17.14         $ 0.1619
     Second Quarter     19.05           17.14           0.1700
     Third Quarter      19.00           18.00           0.1700
     Fourth Quarter     23.00           18.00           0.1700
                                                      --------
     TOTAL                                            $ 0.6719
</TABLE>

DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN

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

                Nazareth National Bank
                Trust Department
                76 S. Main Street
                Nazareth, PA   18064

INVESTMENT CONSIDERATIONS

In  analyzing  whether to make or to  continue  an  investment  in the  Company,
investors should  consider,  among other factors,  the information  contained in
this Annual Report and certain  investment  considerations and other information
described in the Company's Form 10-KSB for the year ended December 31, 1996.

FORM 10-KSB

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

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

MARKET MAKERS

The  following  investment  brokerage  houses  currently  make a market in First
Colonial Group,  Inc. common stock: F. J. Morrissey & Co., Inc.;  Gruntal & Co.,
Inc.; Hopper, Soliday & Co., Inc.; Ryan, Beck & Co.; and Wheat First Securities,
Inc.

<PAGE>

Item 8. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure

        None.


PART III

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

     The information  contained  under the captions  "Election Of Directors" and
"Compliance  with Section 16 (a) of the Securities  Exchange Act of 1934" in the
Company's  1997 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 1997 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 1997 Proxy Statement is incorporated
herein by reference therefrom.

Item 12.Certain Relationships and Related Transactions

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

<PAGE>

PART IV

Item 13.Exhibits and Reports on Form 8-K

(a)     Documents Filed as Part of this Report:

1.      Financial  Statements:  The Consolidated  Financial  Statements  of  the
        Company and  the  Report of  Independent  Certified  Public  Accountants
        thereon, as  listed  below, have  been  filed  under "Item  7, Financial
        Statements".

                Report of Independent Certified Public Accountants

                Consolidated Balance Sheets for the Years Ended
                        12/31/96 and 12/31/95

                Consolidated Statements of Income for the Years Ended
                        12/31/96, 12/31/95 and 12/31/94

                Consolidated Statement of Changes in Shareholders' Equity
                for the Years Ended  12/31/96, 12/31/95 and 12/31/94

                Consolidated Statements of Cash Flows for the Years Ended
                        12/31/96, 12/31/95 and 12/31/94

                Notes to Consolidated Financial Statements

<PAGE>

2. Exhibits:

Number          Title                                                Page No.

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

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

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

*10.1 (1)   Deferred Compensation Plan for Directors.

10.2        Intentionally omitted.

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

*10.4 (6)   Employee Stock Ownership Plan.

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

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

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

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

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

*10.10(9)   Severance 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(11)  Amendment Number 1 to the 1994 Stock Option
            Plan for Non-Employee Directors

*10.1(11)   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
        Arrangement.

<PAGE>

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

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

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

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

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

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

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

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

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

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

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

(b) Reports on Form 8-K

     No reports  on Form 8-K were filed in the fourth  quarter of the year ended
December 31, 1996.

<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 20, 1997                    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 20, 1997

By:     /s/  S. Eric Beattie
        S. ERIC BEATTIE 
        President, Chief Executive Officer 
        and Director (Principal Executive Officer) 
        March 20, 1997

By:     /s/  Reid L. Heeren
        REID L. HEEREN 
        Senior Vice President and Treasurer 
        (Principal Financial Officer and 
        Principal Accounting Officer) 
        March 20, 1997

By:     /s/  Robert J. Bergren
        ROBERT J. BERGREN 
        Director 
        March 20, 1997

<PAGE>

By:     /s/  Paul A. Lentz
        PAUL A. LENTZ 
        Director 
        March 20, 1997

By:     /s/  Gordon Mowrer
        GORDON MOWRER 
        Director 
        March 20, 1997

By:     /s/ Daniel B. Mulholland
        DANIEL B. MULHOLLAND 
        Director 
        March 20, 1997

By:     /s/ Robert C. Nagel
        ROBERT C. NAGEL 
        Director 
        March 20, 1997

By:     /s/ Charles J. Peischl
        CHARLES J. PEISCHL, ESQUIRE 
        Director 
        March 20, 1997

By:     /s/ Richard Stevens
        RICHARD STEVENS 
        Director 
        March 20, 1997

By:     /s/ Maria Zumas Thulin
        MARIA ZUMAS THULIN 
        Director 
        March 20, 1997