FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D. C. 20549

                      ------------------------------------
(Mark One)

          [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 1998
                                       or
          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

           For the transition period from ____________ to ____________

                           Commission File No. 0-11526
             -----------------------------------------------------

                           FIRST COLONIAL GROUP, INC.
--------------------------------------------------------------------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

         PENNSYLVANIA                                  23-2228154
------------------------------                  -----------------------
(STATE OR OTHER JURISDICTION OF            (I.R.S. EMPLOYER IDENTIFICATION NO.)
 INCORPORATION OR ORGANIZATION) 

76 S. MAIN ST., NAZARETH, PA                           18064
------------------------------------------------------- -----------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE               (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 610-746-7300

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE  PRECEDING 12 MONTHS (OR FOR SUCH  SHORTER  PERIOD THAT THE  REGISTRANT  WAS
REQUIRED  TO FILE  SUCH  REPORTS),  AND  (2) HAS  BEEN  SUBJECT  TO SUCH  FILING
REQUIREMENTS FOR THE PAST 90 DAYS.

         YES     X            NO   _____
              -------

INDICATE THE NUMBER OF SHARES  OUTSTANDING  OF EACH OF THE  ISSUER'S  CLASSES OF
COMMON  STOCK AS OF THE  LATEST  PRACTICABLE  DATE:  1,742,643  SHARES OF COMMON
STOCK, $5 PAR VALUE, OUTSTANDING ON SEPTEMBER 30, 1998.

<PAGE>

                   FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES


                                      INDEX



PART I - FINANCIAL INFORMATION                                       PAGE NO.

     ITEM 1  -  Financial Statements

          Consolidated Balance Sheet                                     2
          Consolidated Statement of Income                               3
          Consolidated Statement of Comprehensive Income                 4
          Consolidated Statement of Cash Flows                           5
          Notes to Consolidated Financial Statements                     6

     ITEM 2  -  Management's Discussion and Analysis of
                Financial Condition and Results of Operations           13

     ITEM 3  -  Quantitative and Qualitative Discussion About           26
                Market Risk

PART II  -  OTHER INFORMATION

     ITEM 5  -  Other Information                                       30
     ITEM 6  -  Exhibits and Reports on Form 8-K                        30


SIGNATURES                                                              31

<PAGE>

                   FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in Thousands)
                                   (Unaudited)
<TABLE>

                                                     Sept. 30,       Dec. 31,
                                                       1998            1997
                                                     --------        --------
<S>                                                  <C>             <C>
ASSETS
  Cash and Due From Banks                             $13,793         $12,629
  Federal Funds Sold                                     ---            2,200
                                                     --------        --------
    Total Cash and Cash Equivalents                    13,793          14,829
  Interest-Bearing Deposits With Banks                  4,571             395
  Investment Securities Held-to-Maturity
    (Fair Value:  Sept. 30, 1998 - $19,931;
     Dec. 31, 1997 - $17,946)                          19,716          17,756
  Securities Available-for-Sale at Fair Value          98,145          73,024
  Mortgage Loans Held-for-Sale                          1,306             759
  Total Loans, Net of Unearned Discount               212,718         229,587
  LESS:  Allowance for Possible Loan Losses            (2,644)         (2,664)
                                                     --------        --------
  Net Loans                                           210,074         226,923
  Premises and Equipment, Net                           7,042           7,299
  Accrued Interest Income                               2,488           2,232
  Other Real Estate Owned                                 209             284
  Other Assets                                          4,928           3,237
                                                     --------        --------
      TOTAL ASSETS                                   $362,272        $346,738
                                                     ========        ========
LIABILITIES
  Deposits
    Non-Interest Bearing Deposits                     $36,974         $32,800
    Interest-Bearing Deposits                         260,923         249,455
                                                     --------        --------
      Total Deposits                                  297,897         282,255
  Securities Sold Under Agreements to Repurchase        7,805           8,804
  Long-Term Debt                                       18,000          18,390
  Accrued Interest Payable                              3,390           3,466
  Other Liabilities                                     3,382           3,466
                                                     --------        --------
      TOTAL LIABILITIES                               330,474         316,381
                                                     --------        --------
SHAREHOLDERS' EQUITY
  Preferred Stock, Par Value $5.00 a share
    Authorized - 500,000 shares, none issued             ---             ---
  Common Stock, Par Value $5.00 a share
    Authorized - 10,000,000 shares
    Issued     -  1,742,643 shares at Sept. 30, 1998
    and 1,655,413 shares at Dec. 31, 1997               8,713           8,277
  Additional Paid in Capital                           13,705          11,014
  Retained Earnings                                     8,853          10,250
  Less Treasury Stock at Cost: 0 shares at 
     Sept. 30, 1998 and 2,779 shares at Dec. 31, 1997    ---              (94)
  Employee Stock Ownership Plan Debt                     (500)           (390)
  Net Unrealized Gain on Securities Available-for-Sale  1,027           1,300
                                                     --------        --------
Total Shareholders' Equity                             31,798          30,357
                                                     --------        --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY           $362,272        $346,738
                                                     ========        ========
</TABLE>


See accompanying notes to interim consolidated financial statements.

<PAGE>

                   FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                             (Dollars in Thousands)
                                   (Unaudited)
<TABLE>

                                          Three Months Ended  Nine Months Ended
                                          Sept 30,  Sept 30,  Sept 30, Sept 30,
                                            1998      1997      1998     1997
                                       ----------  --------  --------  --------
<S>                                     <C>       <C>        <C>       <C>   

INTEREST INCOME:
 Interest and Fees on Loans              $ 4,722   $ 5,228    $14,382   $14,899
 Investment Securities Income
  Taxable                                  1,244     1,165      3,683     3,426
  Tax-Exempt                                 333       215        893       595
 Interest on Deposits with Banks and
  Federal Funds Sold                          94        23        175        53
                                         -------   -------    -------   -------
   Total Interest Income                   6,393     6,631     19,133    18,973
                                         -------   -------    -------   -------
INTEREST EXPENSE:
 Interest on Deposits                      2,422     2,411      7,101     6,897
 Interest on Short-Term Borrowing             48        95        193       280
 Interest on Long-Term Debt                  280       292        847       856
                                         -------   -------    -------   -------
   Total Interest Expense                  2,750     2,798      8,141     8,033
                                         -------   -------    -------   -------
NET INTEREST INCOME:                       3,643     3,833     10,992    10,940
 Provision for Possible Loan Losses          113       143        338       443
                                         -------   -------    -------   -------
  Net Interest Income After Provision
   For Possible Loan Losses                3,530     3,690     10,654    10,497
                                         -------   -------    -------   -------
OTHER INCOME:
 Trust Revenue                               275       191        750       570
 Service Charges on Deposit Accounts         419       284      1,180       835
 Investment Securities Gains, Net            ---         6        463       240
 Gains on the Sale of Mortgage Loans         135        66        307       115
 Other Operating Income                      162       219        477       621
                                         -------   -------    -------   -------
   Total Other Income                        991       766      3,177     2,381
                                         -------   -------    -------   -------
OTHER EXPENSES:
 Salaries and Employee Benefits            1,612     1,451      4,844     4,405
 Net Occupancy and Equipment Expense         501       549      1,582     1,655
 Other Operating Expenses                  1,233     1,265      3,972     3,528
                                         -------    -------   -------   -------
   Total Other Expenses                    3,346     3,265     10,398     9,588
                                         -------   -------    -------   -------

Income Before Income Taxes                 1,175     1,191      3,433     3,290
Provision for Income Taxes                   304       336        899       919
                                         -------   -------    -------   -------

NET INCOME                               $   871   $   855    $ 2,534   $ 2,371
                                         =======   =======    =======   =======
 Per Share Data
   Basic Net Income                      $  0.51   $  0.49    $  1.48   $  1.39
                                         =======   =======    =======   =======
  Diluted Net Income                     $  0.51   $  0.50    $  1.47   $  1.40
                                         =======   =======    =======   =======
  Cash Dividends                         $  0.19   $  0.17    $  0.55   $  0.50
                                         =======   =======    =======   =======
</TABLE>

See accompanying notes to interim financial statements.

<PAGE>

                   FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
                             (Dollars in Thousands)
                                   (Unaudited)
<TABLE>
                                     Three Months Ended     Nine Months Ended
                                    Sept 30,   Sept 30,    Sept 30,    Sept 30,
                                      1998       1997        1998        1997
                                    ------     ------       ------      ------
<S>                                <C>        <C>          <C>         <C>   

Net Income                          $  871     $  855       $2,534      $2,371

Other Comprehensive Income, 
  Net of Tax
 Unrealized gains (losses) 
  on securities:
   Unrealized gains (losses) 
    arising in period                  (22)       384         (180)       (490)
   Reclassification adjustment; 
    gain included in net income         (5)       (16)        (422)       (194)
                                    ------     ------       ------      ------
Other Comprehensive Income             (17)       368         (602)       (294)
                                    ------     ------       ------      ------
Comprehensive Income                $  888     $1,223       $1,932      $2,665
                                    ======     ======       ======      ======
</TABLE>

     Other comprehensive  income  is shown net of tax for the nine months  ended
Sept. 30, 1998 and Sept. 30, 1997 of $310,000 and $151,000, respectively and the
three months  ended Sept.  30, 1998 and Sept.  30, 1997 of $9,000 and  $190,000,
respectively.







See accompanying notes to interim consolidated financial statements.

<PAGE>

                   FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in Thousands)
                                   (Unaudited)
<TABLE>

                                                     Nine Months Ended
                                               Sept 30, 1998    Sept 30, 1997
OPERATING ACTIVITIES                                    (Unaudited)
<S>                                              <C>               <C>   
Net Income                                        $2,534            $2,371
Adjustments to Reconcile Net Income to Net Cash
 Provided by Operating Activities:
  Provision for Possible Loan Losses                 338               443
  Depreciation and Amortization                      750               644
  Amortization of Security Discounts                 (60)              (51)
  Amortization of Security Premiums                  151                93
  Amortization of Deferred Fees on Loans            (178)             (190)
  Mortgage Loans Originated for Sale             (36,949)          (23,242)
  Mortgage Loan Sales                             36,402            23,336
  (Gain) Losson Sale of Mortgage Loans              (307)              115
  Investment Securities Gains, Net                  (463)             (240)
 Changes in Assets and Liabilities:
  Increase in Accrued Interest Income               (256)             (442)
  Increase (Decrease) in Accrued Interest Payable    (76)              161 
  Net Increase in Other Assets                    (1,498)           (1,311)
  Net (Increase) Decrease in Other Liabilities      (207)              177 
                                                 -------           -------
Net Cash Provided By 
  Operating Activities                               181             1,634 
                                                 -------           -------
INVESTING ACTIVITIES
Proceeds from Maturities of Securities 
  Available-for-Sale                              22,796             7,389
Proceeds from Maturities of Securities 
  Held-to-Maturity                                 7,173             5,541
Proceeds from Sales of Securities 
  Available-for-Sale                               4,571            12,198
Proceeds from Sales of Securities 
  Held-to-Maturity                                   248               ---
Purchase of Securities Available-for-Sale        (54,627)          (32,282)
Purchase of Securities Held-to-Maturity           (7,284)           (5,838)
Net (Increase) in Interest Bearing
  Deposits With Banks                             (4,176)             (151)
Net (Increase) Decrease in Loans                  16,839            (8,154)
Purchase of Premises and Equipment, Net             (422)             (969)
Proceeds from Sale of Other Real Estate Owned        232               677
                                                 -------           -------
Net Cash (Used In) Investing Activities          (14,650)          (21,589)
                                                 -------           -------
FINANCING ACTIVITIES
Net Increase in Interest and Non-Interest
 Bearing Demand Deposits and Savings Accounts     10,629             6,482
Net Increase in Certificates of Deposits           5,013            10,750
Net Decrease in Long-Term Debt                      (390)              ---
Proceeds from Sale of Treasury Stock                  94                20
Net Increase in ESOP Debt                           (110)              ---
Net (Decrease) Increase in Repurchase Agreements    (999)            1,158 
Proceeds from Issuance of Stock                      150               190
Cash Dividends Paid                                 (948)             (846)
Cash in Lieu of Fractional Shares                     (6)               (4)
                                                 -------           -------
Net Cash Provided by Financing Activities         13,433            17,750
                                                 -------           -------
Increase in Cash and Cash Equivalents             (1,036)           (2,205)
Cash and Cash Equivalents, January 1              14,829            13,929
                                                 -------           -------
Cash and Cash Equivalents, Sept. 31,             $13,793           $11,724
                                                 =======           =======
</TABLE>

See accompanying notes to interim consolidated financial statements.

<PAGE>

                   FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES

               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)


NOTE A  -  GENERAL

The accompanying  financial statements,  footnotes and discussion should be read
in conjunction with the audited financial statements,  footnotes, and discussion
contained in the Company's Annual Report for the year ended December 31, 1997.

The financial information presented herein is unaudited; however, in the opinion
of management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the unaudited financial  information have been made.
The  results  for the three and nine  months  ended  September  30, 1998 are not
necessarily  indicative of results to be expected for the full year or any other
interim period.

NOTE B  -  SUBSIDIARIES

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. The Company has two wholly-owned  subsidiaries,  Nazareth National Bank
and Trust  Company (the "Bank")  founded in 1897 and First C. G.  Company,  Inc.
founded in 1986.

NOTE C  -  INVESTMENT CONSIDERATIONS

In analyzing  whether to make,  or to continue,  an  investment  in the Company,
investors   should   consider,   among   other   factors,   certain   investment
considerations  more  particularly  described in the Company's  Annual Report on
Form  10-KSB  for the year  ended  December  31,  1997,  a copy of which  can be
obtained from Reid L. Heeren, Vice President,  First Colonial Group, Inc., 76 S.
Main Street, Nazareth, PA 18064.

NOTE D  -  FORWARD LOOKING STATEMENTS

The  information  contained in this Quarterly  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,  the discussion in "Item 3
- Quantitative  and  Qualitative  Discussion  About Market Risk",  statements or
estimates  concerning  the  effect of the "Year  2000"  issues on the  Company's

<PAGE>


systems and software and the  Company's  plans with regard to "Year 2000" issues
and  other  statements  which  are not  historical  facts or 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  Quarterly  Report or in the  Company's  Annual Report on Form
10-KSB for the year ended  December  31,  1997,  a copy of which may be obtained
from the  Company  upon  request  and without  charge  (except for the  exhibits
thereto).

NOTE E  -  CASH DIVIDENDS

On August 21,  1998 the  Company  paid its 1998 third  quarter  dividend  on its
common stock of $.19 per share to shareholders of record on August 7, 1998.


NOTE F  -  STOCK DIVIDEND

On June 25, 1998 the Company paid a 5% stock dividend to  shareholders of record
on June 5, 1998.  Fractional shares were paid in cash based on the closing price
of $36.00 per share on the record date.  Net income per share and average shares
outstanding have been restated to reflect the 5% stock dividend.

NOTE G -  EARNINGS PER SHARE

During  1997,  the Company  adopted the  provisions  of  Statement  of Financial
Accounting  Standards  No.  128,  "Earnings  Per  Share  (SFAS  128)".  SFAS 128
eliminates   primary  and  fully   diluted   earnings  per  share  and  requires
presentation  of basic and diluted  earnings per share in  conjunction  with the
disclosures of the methodology used in computing such earnings per share.  Basic
earnings  per  share  excludes  dilution  and is  computed  by  dividing  income
available  to  common  shareholders  by  the   weighted-average   common  shares
outstanding during the period. Diluted earnings per share takes into account the
potential  dilution that could occur if  securities or other  contracts to issue
common stock were  exercised  and  converted  into common  stock.  Prior periods
earnings per share  calculations  have been  restated to reflect the adoption of
SFAS No. 128. Basic and diluted earnings per share are calculated as follows.

<PAGE>

For the Three Months Ended Sept. 30, 
<TABLE>
                                                        Average
                                             Income       Shares      Per Share
                                          (numerator) (denominator)     Amount
         1998
<S>                                        <C>         <C>            <C>   

Net Income                                  $  871

Basic Earnings Per Share
  Income Available to Common Shareholders   $  871      1,719,457      $  0.51

Effect of Dilutive Securities
  Stock Options                                             7,129
                                            ------      ---------      -------
Diluted Earnings Per Share
  Income Available to Common Shareholders
  plus Assumed Exercise of Options          $  871      1,726,586      $  0.51
                                            ------      ---------      -------
         1997

Net Income                                  $  855

Basic Earnings Per Share
  Income Available to Common Shareholders   $  855      1,705,031      $  0.50

Effect of Dilutive Securities
  Stock Options                                             8,180
                                            ------      ---------      -------
Diluted Earnings Per Share
  Income Available to Common Shareholders
  plus Assumed Exercise of Options          $  855      1,713,211      $  0.50
                                            ------      ---------      -------
</TABLE>


Average common shares outstanding in the three month period ending September 30,
1998 and 1997 do not include 21,770 and 22,583, respectively of average weighted
unallocated  shares held by the ESOP. The exclusion of these unallocated  shares
held by the ESOP is due to the  Company's  adoption  of SOP 93-6.  Share and per
share  information  have been restated to reflect the 5% stock  dividend of June
1998.

<PAGE>

For the Nine Months Ended Sept. 30, 
<TABLE>
                                                         Average
                                             Income       Shares      Per Share
                                          (numerator) (denominator)     Amount
         1998
<S>                                        <C>         <C>            <C>   

Net Income                                  $2,534

Basic Earnings Per Share
  Income Available to Common Shareholders   $2,534      1,717,220      $  1.48

Effect of Dilutive Securities
  Stock Options                                             6,501
                                            ------      ---------      -------
Diluted Earnings Per Share
  Income Available to Common Shareholders
  plus Assumed Exercise of Options          $2,534      1,723,721      $  1.47
                                            ------      ---------      -------
         1997

Net Income                                  $2,371

Basic Earnings Per Share
  Income Available to Common Shareholders   $2,371      1,700,370      $  1.39

Effect of Dilutive Securities
  Stock Options                                             8,180
                                            ------      ---------      -------
Diluted Earnings Per Share
  Income Available to Common Shareholders
  plus Assumed Exercise of Options          $2,371      1,708,550      $  1.39
                                            ------      ---------      -------
</TABLE>

Average common shares  outstanding in the nine month period ending September 30,
1998 and 1997 do not include 21,521 and 23,691, respectively of average weighted
unallocated  shares held by the ESOP. The exclusion of these unallocated  shares
held by the ESOP is due to the  Company's  adoption  of SOP 93-6.  Share and per
share  information  have been restated to reflect the 5% stock  dividend of June
1998.

<PAGE>

NOTE H  -  ALLOWANCE FOR POSSIBLE LOAN LOSSES

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

Nine Month Period Ended September 30,                   1998            1997
                                                    ----------      ----------
<S>                                                <C>             <C>    
Beginning Balance                                   $2,664,000      $2,532,000

Additions
   Provision for loan losses charged to
     operating expenses                                338,000         443,000
   Recoveries of loans                                  74,000          65,000
                                                    ----------      ----------
     Total Additions                                   412,000         508,000

Deductions
   Loans charged off                                   432,000         421,000
                                                    ----------      ----------
Ending Balance                                      $2,644,000      $2,619,000
</TABLE>


NOTE I  -   IMPAIRED LOANS

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  on such loans and no
income is  recognized  until all recorded  amounts of interest and principal are
recovered in full.

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

<PAGE>

<TABLE>

At September 30,                                 1998                  1997
                                           ---------------      --------------
<S>                                           <C>                   <C>   
Principal amount of impaired loans             $808,000              $292,000
Deferred loan costs                               2,000                 3,000
                                           ---------------      --------------
                                                810,000               295,000
Less valuation allowance                        188,000                89,000
                                           ----------------      --------------
                                               $622,000              $206,000
</TABLE>


On January 1, 1995 a valuation for credit losses  related to impaired  loans was
established.  The  activity in this  allowance  account  for the quarter  ending
September 30, 1998 is as follows:

<TABLE>

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

Valuation allowance at January 1,                  $138,000          $128,000
Provision for loan impairment                       179,000            55,000
Transfer from Unallocated Allowance for
   Possible Loan Losses                                ---               ---
Direct charge-offs                                 (129,000)           94,000
Recoveries                                             ---               ---
                                                -------------      ------------
Valuation allowance at September 30,               $188,000           $89,000
</TABLE>


Total cash  collected  on  impaired  loans  during the nine month  period  ended
September 30, 1998 was $489,000, of which $467,000 was credited to the principal
balance outstanding on such loans and $22,000 was recognized as interest income.
Interest  that would have been  accrued on impaired  loans during the first nine
months of 1998 was $125,000. Interest income recognized in the first nine months
of 1998 was $19,133,000.  The valuation allowance for impaired loans of $188,000
at September  30, 1998 is included in the  "Allowance  for Possible Loan Losses"
which  amounts to  $2,644,000  at September  30, 1998.  The  provision  for loan
impairment  of $179,000 for the nine month period  ended  September  30, 1998 is
included  in the  "Provision  for  Possible  Loan  Losses" as  reflected  on the
"Consolidated Statement of Income" for the same period.

NOTE J  -  REPORTING OF COMPREHENSIVE INCOME

On January 1, 1998, the Corporation adopted the Financial  Accounting  Standards
Board issued (SFAS) No. 130, "Reporting  Comprehensive  Income",  which requires
presenting  a  complete  set of  financial  statements  to  include  details  of
comprehensive  income that arises in the reporting period.  Comprehensive income
consists  of net income or loss for the current  period and other  comprehensive
income income,  expenses,  gains and losses that bypass the income statement and
are reported  directly in a separate  component of equity.  Other  comprehensive
income includes, for example,  foreign currency items, minimum pension liability
adjustments and unrealized  gains and losses on certain  investment  securities.
The  Corporation  has  elected  to report  comprehensive  income  on a  separate
scheduled titled "Statement of Comprehensive Income".

<PAGE>

NOTE K  -   DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
            RELATED INFORMATION

On January 1, 1998, the Corporation adopted the Financial  Accounting  Standards
Board issued (SFAS) No. 131,  "Disclosures  about  Segments of an Enterprise and
Related Information". This statement provides users of financial statements with
information  about an entity's  different  types of business  activities and the
different  economic  environments in which it operates to better  understand the
entity's  performance  and its prospects for future net cash flows,  and to make
more informed judgments about the entity as a whole. The effect of adopting SFAS
No. 131 is not  expected to have a material  impact on the  Company's  financial
statements.

NOTE L  -  ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
           ACTIVITY

In June, 1998, the Financial  Accounting Standards Board (FASB) issued Statement
of Financial  Accounting  Standards  (SFAS) No. 133,  "Accounting for Derivative
Instruments  and Hedging  Activity".  SFAS No. 133  establishes  accounting  and
reporting  standards for derivative  instruments,  including certain  derivative
instruments imbedded in other contracts, and for hedging activities. It requires
that an entity  recognize all derivatives as either assets or liabilities in the
statement of financial  position and measure those instruments at fair value. If
certain  conditions  are met, a derivative may be  specifically  designated as a
hedge.  The accounting for changes in the fair value of a derivative  (gains and
losses) depends on the intended use of the derivative and resulting designation.
SFAS No. 133 is  effective  for all fiscal  quarters of fiscal  years  beginning
after June 15, 1999.  Earlier  application is permitted only as of the beginning
of any fiscal quarter. The Company is currently reviewing the provisions of SFAS
No. 133.

<PAGE>

ITEM 2.

                     Management's Discussion and Analysis of

                  Financial Condition and Results of Operations



The following  financial  review and analysis is of the financial  condition and
earnings  performance of the Company and its wholly owned  subsidiaries  for the
three and nine month period ended September 30, 1998.

The  information  contained in this Quarterly  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,  the discussion in "Item 3
- Quantitative  and  Qualitative  Discussion  About Market Risk",  statements or
estimates  concerning  the  effect of the "Year  2000"  issues on the  Company's
systems and software and the  Company's  plans with regard to "Year 2000" issues
and  other  statements  which  are not  historical  facts or 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  Quarterly  Report or in the  Company's  Annual Report on Form
10-KSB for the year ended  December  31,  1997,  a copy of which may be obtained
from the  Company  upon  request  and without  charge  (except for the  exhibits
thereto).

In analyzing  whether to make,  or to continue,  an  investment  in the Company,
investors   should   consider,   among   other   factors,   certain   investment
considerations  more  particularly  described in the Company's  Annual Report on
Form  10-KSB  for the year  ended  December  31,  1997,  a copy of which  can be
obtained from Reid L. Heeren, Vice President,  First Colonial Group, Inc., 76 S.
Main Street, Nazareth, PA 18064.

     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  liquidity  are  money  market  investments,
securities  available-for-sale,  funds  received  from the  repayment  of loans,
short-term  borrowings  and  borrowings  from the  Federal  Home Loan  Bank.  At
September 30, 1998, cash, due from banks, Federal funds sold and

<PAGE>

interest  bearing  deposits  with  banks  totaled  $18,364,000,  and  securities
maturing  within one year totaled  $3,371,000.  At December 31, 1997,  cash, due
from banks, Federal funds sold and interest bearing deposits with banks, totaled
$15,224,000, and securities maturing within one year were $3,861,000. Securities
sold under an agreement to repurchase  totaled  $7,805,000 at September 30, 1998
and  $8,804,000  at December 31, 1997.  The Bank is a member of the Federal Home
Loan Bank of Pittsburgh.  The Bank had interest  bearing demand  deposits at the
Federal Home Loan Bank of  Pittsburgh  in the amount of  $4,493,000 at September
30, 1998 and $110,000 at December 31, 1997.  These  deposits are included in due
from  banks  on  the  Company's  financial  statements.  As  a  result  of  this
relationship,  the Company  places most of its  short-term  funds at the Federal
Home Loan Bank of Pittsburgh.  There were no Federal funds sold at September 30,
1998. At December 31, 1997 there were Federal funds sold totaling $2,200,000.

     The Federal Home Loan Bank of  Pittsburgh  provides the Bank with a line of
credit in the amount of  $25,000,000  at September 30, 1998,  subject to certain
collateral  requirements.  The Bank  had no  short-term  (overnight)  borrowings
against  this line at September  30, 1998 or at December 31, 1997.  The Bank had
additional  borrowings  from the Federal  Home Loan Bank at  September  30, 1998
totaling $18,000,000 of which $5,000,000 is due in November 1998,  $8,000,000 is
due in August 2000 and $5,000,000 is due in December 2001.

     Cash flows for the nine months ended  September 30, 1998  consisted of cash
used in investing  activities of $14,650,000  offset in part by cash provided by
financing activities of $13,433,000 and cash provided by operating activities of
$181,000 resulting in a decrease in cash and cash equivalents of $1,036,000.

     Cash provided by operating activities was the result of mortgage loan sales
of  $36,402,000,   net  operating   income  of  $2,534,000,   depreciation   and
amortization  of $750,000 and a provision  for possible loan losses of $338,000,
partially  reduced by mortgage  loans  originated  for sale of  $36,949,000,  an
increase in other assets of $1,498,000,  an increase in accrued  interest income
of $256,000 and a decrease in other  liabilities  of $207,000.  Cash was used in
investing  activities  for the  purchase of  securities  available-for-sale  and
held-to-maturity of $54,627,000 and $7,284,000,  respectively, plus net increase
in  interest-bearing  deposits  with banks of  $4,176,000,  partially  offset by
proceeds from maturities of securities  available-for-sale  and held-to-maturity
of  $22,796,000  and  $7,173,000,  respectively,  and net  decreases in loans of
$16,839,000,   proceeds   from  sales  of  securities   available-for-sale   and
held-to-maturity  of  $4,571,000  and $248,000,  respectively.  Cash provided by
financing  activities  consisted   principally  of  increases  in  interest  and
non-interest  bearing demand deposits and savings accounts of $10,629,000 and an
increase in certificates  of deposit of $5,013,000  offset in part by a decrease
in repurchase agreements of $999,000,  the payment of cash dividends of $948,000
and a decrease in long-term debt of $390,000.

<PAGE>

     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 September 30, 1998 was $31,798,000
as compared to  $30,357,000  at December 31, 1997, for an increase of $1,441,000
or 4.7%. This increase was  attributable to net income for the first nine months
of 1998 of $2,534,000,  proceeds from the sale of treasury stock in the Dividend
Reinvestment Plan of $94,000, proceeds from the sale of common stock pursuant to
the Dividend Reinvestment Plan of $150,000 less the payment of cash dividends of
$948,000,  a decrease of $273,000 in the value of the  securities  available for
sale (see  discussion on  "Investment  Securities"),  an increase of $110,000 in
debt related to Employee Stock  Ownership Plan and the payment of $6,000 in cash
in lieu of fractional shares from the 5% stock dividend of June 25, 1998.

     On June 25, 1998, the Company paid a 5% stock dividend to  shareholders  of
record  on June 5,  1998.  Fractioinal  shares  were  paid in cash  based on the
closing price of $36.00 per share on the record date.

     The Company  maintains a Dividend  Reinvestment  and Stock  Purchase  Plan.
During  the first  nine  months of 1998,  4,530  shares  of  common  stock  were
purchased from  authorized and unissued shares at an average price of $32.97 per
share for proceeds of approximately $150,000.

     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 September 30, 1998, the Company and the Bank met
all capital adequacy requirements to which they were subject.

<PAGE>

Capital Ratios
<TABLE>
                                                                  To Be Well
                                                                 Capitalized
                                                 Required        Under Prompt
                                                For Capital       Corrective
                                Actual           Purposes         Provisions
(Dollars in Thousands)
 At September 30, 1998       Amount   Ratio     Amount   Ratio   Amount  Ratio
<S>                        <C>       <C>      <C>       <C>    <C>      <C>
Total Capital
(To Risk-Weighted Assets)
  Company, (Consolidated)   $33,001   16.65%   $15,856   8.00%      ---    ---
  Bank                      $29,363   14.93%   $15,734   8.00%  $19,667  10.00%

Tier 1 Capital
(To Risk-Weighted Assets)
  Company, (Consolidated)   $30,520   15.40%   $ 7,927   4.00%      ---    ---
  Bank                      $26,502   13.48%   $ 7,864   4.00%  $11,800   6.00%

Tier 1 Capital
(To Average Assets,
 Leverage)
  Company, (Consolidated)   $30,520   8.61%    $14,179   4.00%      ---    ---
  Bank                      $26,502   7.57%    $14,004   4.00%  $17,514   5.00%
</TABLE>

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

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

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

<PAGE>

     The Company is not aware of any trends,  events or uncertainties  that will
have a  material  effect  on  the  Company's  liquidity,  capital  resources  or
operations,   except  for  higher  interest  rates  which  could  cause  deposit
disintermediation  and an increase in interest  expense and the  possibility  of
inflationary trends, the results of which cannot be determined at this time. 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  adverse effect on liquidity,  capital
resources, or the operations of the Company.

     Assets  and   Liabilities

     Total  assets at  September  30, 1998 were  $362,272,000,  representing  an
increase  of 4.5% over  total  assets of  $346,738,000  at  December  31,  1997.
Deposits increased by $15,642,000 or 5.5% from $282,255,000 on December 31, 1997
to  $297,897,000  on September  30, 1998.  Contributing  to this  increase  were
increases in interest bearing checking  deposits of $8,692,000,  certificates of
deposit of $4,748,000 and non-interest  bearing checking deposits of $4,174,000,
partially  offset  by  a  decline  in  savings  and  money  market  deposits  of
$1,972,000.  Loans  outstanding  at  September  30,  1998 were  $212,718,000  as
compared to $229,587,000 at December 31, 1997. This is a decrease of $16,869,000
or 7.3%.  The  decline  in loans  was  primarily  the  result of a  decrease  of
$13,708,000  or 14.8% in  residential  real estate loans.  During the first nine
months of 1998,  $36,402,000 of residential real estate loans were sold. Most of
the loans sold were fixed rate with 30 or 15 year  maturities.  These loans were
sold to reduce the  Company's  interest-rate  risk and to provide  liquidity for
future lending  opportunities.  Most of the loans sold were  originated in years
prior to 1998.  The Bank  continues  to service all of these  loans.  There were
$1,306,000  of  residential  real estate loans  identified as  held-for-sale  at
September  30,  1998.  Additionally,  the net decrease in loans during the first
nine months of 1998 included a $7,951,000 or 11.3% decrease in commercial  loans
partially offset by a $4,790,000 or 7.1% increase in consumer loans. The loan to
deposit ratio was 71.4% at September 30, 1998 and 81.3% at December 31, 1997.

     Premises and equipment decreased by $257,000 to $7,042,000 at September 30,
1998 from $7,299,000 at December 31, 1997.

     The Company had long-term  debt totaling  $18,000,000 at September 30, 1998
as compared to  $18,390,000  at December 31,  1997.  Included in this total were
outstanding  borrowings  of  $18,000,000  from the  Federal  Home  Loan  Bank of
Pittsburgh  at  September  30,  1998  and  December  31,  1997.  Of this  amount
$5,000,000  matures in November 1998,  $8,000,000 matures in August 2000 and the
remaining  $5,000,000  matures in December 2001.  The interest rates  associated
with  these  loans are 5.96%  fixed,  5.89%  fixed and 5.39%  variable  (changes
quarterly based on the three month LIBOR plus 8 basis points), respectively. The
loans are secured by the Bank's investment and residential real estate loans and
securities.  These funds were  borrowed to improve  liquidity and to fund loans.
Long-term  debt of $390,000  relating to Employee  Stock  Option Plan (ESOP) and

<PAGE>

payable to  another  bank was paid in full  during the first half of 1998.  This
debt was repaid by a loan from the Company's subsidiary,  First C. G. Company to
the ESOP in the  amount of  $500,000.  This new loan,  due in 2009,  carries  an
interest rate of prime plus 1/2  (currently 9% at 9/30/98) and annual  principal
payments of $50,000 starting in June 1999.

     At  September  30, 1998 and  December  31, 1997 the Bank had no  short-term
borrowings  from the  Federal  Home  Loan Bank of  Pittsburgh  against a line of
credit of $25,000,000.

Results of Operations

     The net income for the three months ended  September 30, 1998 was $871,000,
a $16,000  or 1.9%  increase  compared  to net income of  $855,000  for the same
period in 1997. The earnings improvement is attributable to an increase in total
other  income of $162,000 or 23.3%,  exclusive of gains on the sale of mortgages
of $135,000, a decrease in Federal income taxes of $32,000 or 9.5% and a $30,000
or 21.0% decrease in the provision for possible loan losses  partially offset by
a decrease in net  interest  income of $190,000 or 5.0% and an increase in other
expenses of $81,000 or 2.5%.

     Net income for the nine months  ended  September  30,  1998 was  $2,534,000
compared to $2,371,000 for the same period in 1997. The earnings  improvement is
primarily  attributable  to  increases  in total other  income and net  interest
income.  During the first nine months of 1998,  net  interest  income  increased
$52,000 or 0.5% as compared to September 30, 1997. Also affecting earnings was a
$381,000 increase in total other income exclusive of security gains and gains on
the sale of  mortgages  of  $463,000  and  $307,000,  an increase in total other
expenses of $810,000 and a decrease in Federal income taxes of $20,000.

     Basic earnings per share for the three months ended September 30, 1998 were
$0.51 as compared to $0.50 for the corresponding  period in 1997. Average shares
outstanding  during this three month period were 1,726,586 in 1998 and 1,712,170
in 1997.  Basic earnings per share for the nine months ended  September 30, 1998
were $1.48 as compared to $1.39 for the  corresponding  period in 1997.  Average
shares  outstanding  during this nine month  period were  1,723,721  in 1998 and
1,707,519 in 1997.  Diluted  earnings per share for the three month period ended
September  30,  1998 were $0.51  compared  to $0.50 for the same period in 1997.
Diluted  earnings per share for the nine month  period  ended  September 30 were
$1.47 and $1.40 in 1998 and 1997,  respectively.  Per share earnings and average
shares  outstanding  have been restated to reflect the 5% stock dividend paid on
June 25, 1998. (see Note F)

Net Interest Income

     Net  interest  income  amounted to  $3,643,000  for the three  months ended
September  30,  1998 as  compared  to  $3,833,000  for the  three  months  ended
September 30, 1997, a decrease of $190,000 or 5.0%.

<PAGE>

     The fully  taxable-equivalent  net interest  income was $11,469,000 for the
first nine months of 1998,  compared to $11,268,000 for the same period in 1997,
a 1.8% or $201,000  increase as shown in the  following  "Rate/Volume  Analysis"
table. This increase in taxable-equivalent net interest income was primarily due
to a $459,000 increase related to volume partially offset by a $258,000 decrease
related to interest rates.

     Total taxable-equivalent interest income grew $309,000 primarily the result
of the higher volumes in the investment security earning asset category.  Income
from  investment  securities for the third quarter  increased  $709,000 or 16.4%
over the same period in 1997. This was comprised of a $1,250,000 increase due to
volume  partially  offset  by a  $541,000  decrease  due to rates as a result of
declining yields.  Average year-to-date earning assets increased to $325,435,000
at September 30, 1998 from $312,096,000 at September 30, 1997, a 4.3% increase.

     Total interest  expense grew $108,000 during the first nine months of 1998,
compared to the same period in 1997.  This growth was  principally the result of
higher volumes, primarily due to an increase in time deposits.  Interest expense
attributed to time deposits  increased  $304,000 during the first nine months of
1998,  compared to the first nine months of 1997.  The increase in time deposits
was used to finance the earning asset growth.  Partially  offsetting this growth
in interest  expense  were lower  interest  rates paid on savings  accounts as a
result of repricing due to market  conditions  (see Item 3. -  Quantitative  and
Qualitative Discussion About Market Risk).

<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 nine months ended  September 30, 1998. The interest  income  included in
the table has been  adjusted  to a fully  taxable  equivalent  amount  using the
Federal statutory tax rate of 34%.

                              RATE/VOLUME ANALYSIS
                             (Dollars in Thousands)
                                   (Unaudited)
<TABLE>
                                                      Nine Months Ended
                                                     September 30, 1998
                                                       Over / (Under)
                                                     September 30, 1997
                                                       CHANGE DUE TO:
                                                TOTAL      RATE     VOLUME
<S>                                         <C>        <C>        <C>  
(Fully Taxable Equivalent)
INTEREST INCOME
Interest-Bearing Balances With Banks         $    93    $   (71)   $   164
Federal Funds Sold                                29        (36)        65
Investment Securities                            709       (541)     1,250
Loans Held for Sale                                5        (47)        52
Loans                                           (527)       265       (792)
                                             -------    -------    -------
Total Interest Income                            309       (430)       739
                                             -------    -------    -------

INTEREST EXPENSE
Demand Deposits, Savings & Clubs                (100)      (154)        54
Time Deposits                                    304        (66)       370
Federal Funds Purchased and Securities
   Sold Under Agreements to Repurchase           (11)         7        (18)
Short-Term Borrowings                            (76)        33       (109)
Long-Term Borrowings                              (9)         8        (17)
                                             -------    -------    -------
Total Interest Expense                           108       (172)       280
                                             -------    -------    -------

Net Increase (Decrease) in Interest Income   $   201    $  (258)   $   459

</TABLE>

<PAGE>

Other Income and Other Expenses

     Other  income for the three  months  ended  September  30,  1998  including
service  charges,  trust  fees,  gains on the sale of  mortgage  loans and other
miscellaneous  income, but exclusive of securities gains or losses, was $991,000
as  compared to  $760,000  for the same period in 1997.  This was an increase of
$231,000 or 30.4%. In the three month period ended  September 30, 1998,  service
charges  were  $419,000,  a $135,000 or 47.5%  increase  over the 1997 amount of
$284,000.  The revenues from the Trust  Department  operations were $275,000 for
the three months ended  September 30, 1998 as compared to $191,000 for the three
months ended  September  30, 1997,  an increase of $84,000 or 44.0%.  There were
$135,000 in gains on the sale of mortgage loans for the three month period ended
September  30,  1998 as  compared  to $66,000  for the same  period in 1997,  an
increase of $69,000 or 104.5%.  Other miscellaneous  income for the three months
ended  September  30,  1998 was  $162,000,  a decrease  of $57,000  compared  to
$219,000 for the same period in 1997.

     Other income for the nine months ended September 30, 1998 including service
charges,  trust  revenues,  gains  on the  sale  of  mortgage  loans  and  other
miscellaneous   income,  but  exclusive  of  securities  gains  or  losses,  was
$2,714,000  as compared to $2,141,000  for the same period in 1998.  This was an
increase of $573,000 or 26.8%. In the nine month period ended September 30, 1998
service  charges were  $1,180,000,  a $345,000 or 41.3%  increase  over the 1997
amount of $835,000.  The increase in service  charge income is the result of the
implementation  of fees assessed to  noncustomers  use of the Bank's ATM network
and the  introduction  of a new  Debit  Card  program.  The  revenues  from  the
Investment  Management and Trust Division  operations were $750,000 for the nine
months  ended  September  30, 1998 as  compared to $570,000  for the nine months
ended  September  30,  1997,  an increase of $180,000 or 31.6%.  During the nine
months ended  September 30, 1998,  sales of mortgage loans resulted in a gain of
$307,000 as compared  to  $115,000  for the same period in 1997,  an increase of
$192,000.  The  gain in 1998  was  the  result  of the  sale of  $36,402,000  of
residential real estate loans in the first nine months (see discussion on Assets
and Liabilities). Other operating income for the nine months ended September 30,
1998 was  $477,000  as  compared  to  $621,000  for the same  period in 1997,  a
decrease of $144,000 or 23.2%.

     Total other  expenses for the three month period ended  September  30, 1998
increased  by $81,000 or 2.5% to  $3,346,000  over total other  expenses for the
same period in 1997 of  $3,625,000.  Included in this  increase is a $161,000 or
11.1% increase in salary and benefit  expenses which were $1,612,000 as compared
to $1,451,000  in 1997.  These  increases  are  primarily due to general  salary
increases of approximately  4% and additional staff  necessitated by current and
planned  future growth.  Occupancy and equipment  expenses were $501,000 for the
three  months ended  September  30, 1998 and $549,000 for the three months ended
September 30, 1997, a decrease of $48,000 or 8.7%. Other operating  expenses for
the three month period ended September 30, 1998 were  $1,233,000,  a decrease of
$32,000 or 2.5% over the  $1,265,000  in other  expenses  for the same period in
1997.

<PAGE>

     Total other expenses for the nine months ended September 30, 1998 increased
by $810,000 or 8.4%, to $10,398,000 from $9,588,000 for the same period in 1997.
Salaries  and  employee  benefits  were  $4,844,000  for the nine  months  ended
September 30, 1998 as compared to $4,405,000 for the nine months ended September
30, 1997  representing  an increase of $439,000 or 10.0%.  These  increases  are
primarily due to general  salary  increases of  approximately  4% and additional
staff necessitated by current and planned future growth. Occupancy and equipment
expenses  were  $1,582,000  for the nine  months  ended  September  30, 1998 and
$1,665,000  for the nine months ended  September 30, 1997, a decrease of $73,000
or 4.4%.  Other operating  expenses for the nine months ended September 30, 1998
were  $3,972,000 in relation to $3,528,000  for the nine months ended  September
30,  1997,  an increase of  $444,000 or 12.6%.  Included in the other  operating
expense  total was a special  $300,000  provision  to a reserve  for  claims and
contingent  liabilities in the operation of the Trust Division.  This contingent
reserve totals $800,000 and is included in other liabilities on the Consolidated
Balance Sheet Statement.

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 No. 115, "Accounting for Certain Investments in
Debt and Equity Securities".  The Company had no trading securities at September
30, 1998 and December 31, 1997.

     Available-for-sale  securities  are  carried  at fair  value  with  the net
unrealized  gains or losses  reported in equity.  The Company had $98,145,000 in
available-for-sale  securities at September 30, 1998 with a net unrealized  gain
of $1,027,000.  At December 31, 1997  available-for-sale  securities amounted to
$73,024,000 with a net unrealized gain of $1,300,000.

     During the nine month  period  ended  September  30,  1998,  $4,571,000  of
securities  available-for-sale  were sold for a net gain of $463,000 as compared
to  $12,198,000  of  securities  available-for-sale  were sold for a net gain of
$240,000 for the same time period in 1997.

     Held-to-maturity  securities totaling $19,716,000 at September 30, 1998 are
carried at cost. At December 31, 1997, the  held-to-maturity  securities totaled
$17,756,000. The Company has the intent and ability to hold the held-to-maturity
securities until maturity.  The Company, at September 30, 1998, did not hold any
securities identified as derivatives.

Allowance and Provision for Possible Loan Losses

     The  provision  is based on  management's  analysis of the  adequacy of the
allowance for loan losses.  In its  evaluation,  management  considers past loan
experience,  overall  characteristics  of the loan portfolio,  current  economic

<PAGE>
condition and other relevant  facators.  Management  currently believes that the
allowance is adequate to absorb known and inherent losses in the loan portfolio.
Ultimately,  however,  the adequacy of the allowance is largely  dependent  upon
economic conditions which are beyond the scope of management's control.

     For the first  nine  months of 1998,  the  provision  for loan  losses  was
$338,000  compared to $443,000 for the same period in 1997. Net charge offs were
$358,000 for the nine months ended September 30, 1998 compared with $356,000 for
the nine months ended  September  30, 1997.  The ratio of the allowance for loan
losses to total  loans at  September  30,  1998 was 1.24%  compared  to 1.16% at
December 31, 1997 and 1.15% at September 30, 1997. This was primarily the result
of a  decline  in  total  loans to  $212,718,000  at  September  30,  1998  from
$229,587,000  at December 31,  1997.  This decline was the result of the sale of
$36,402,000  of  mortgage  loans  during  the first  nine  months  of 1998.  The
allowance for possible loan losses at September 30, 1998 totaled  $2,644,000,  a
decrease of $20,000 or 0.8% over the December 31, 1997 amount of $2,664,000  and
$25,000 or 1.0% over the September 30, 1997 balance of $2,619,000.

     As provided  by SFAS No.  114, as amended by SFAS No. 118,  $188,000 of the
Allowance for Possible  Loan Losses is allocated to impaired  loans at September
30, 1998 (See Note I "Impaired Loans").

     Transactions in the allowance for loan losses are as follows:

     ALLOWANCE FOR LOAN LOSSES 
<TABLE>
                                                1998               1997
<S>                                         <C>                <C>   

Balance,  January  1,                        $2,664,000         $2,532,000  
Provision  charged  to  Operating Expenses      338,000            443,000 
Loans Charged Off                              (432,000)          (421,000) 
Recoveries                                       74,000             65,000
                                             ----------         ----------  
Balance  June  30,                           $2,644,000         $2,619,000
</TABLE>


     The  following  table sets forth an  allocation  of the  allowance for loan
losses by loan category:

             At September 30, 1998
<TABLE>

<S>         <C>                                     <C>   

             Commercial                              $1,541,000
             Residential Real Estate                    141,000
             Consumer                                   672,000
             Unallocated                                290,000
                                                     ----------
             Total                                   $2,644,000
</TABLE>

<PAGE>

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 effort, 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  following  table shows the balance of  non-performing
loans for each of the periods indicated.

     Non performing  assets (non accruing loans and loans past due over 90 days)
were 1.18% of total loans at September  30, 1998  compared to 0.79% at September
30,  1997.  The  increase  in this ratio is the  result of a  $712,000  or 39.7%
increase in non performing  loans to $2,506,000  over the one year period ending
September 30, 1998. The ratio of the allowance for loan losses to non performing
assets was 105.5% at September 30, 1998 compared to 1.45% at September 30, 1997.

     Non  accruing  loans at September  30, 1998 of  $1,554,000  increased  from
September 30, 1997 level of $554,000. This $1,000,000 increase was primarily the
result of one  commercial  loan being placed on non accrual  status during 1998.
These  loans are  secured  by  commercial  real  estate.  At the  present  time,
management  is of the  opinion  that  these  loans  present a minimal  amount of
exposure to the bank.

     Loans past due 90 days or more and still  accruing  interest are loans that
are  generally  well secured and expected to be restored to a current  status in
the near future.  As of September  30, 1998,  loans past due 90 days or more and
still  accruing  interest were $952,000  compared to $1,240,000 at September 30,
1997. The $288,000 decrease in loans past due 90 days from September 30, 1997 to
September 30, 1998 was the result of increases in mortgage and commercial  loans
past due 90 days or more of $302,000 and $7,000,  respectively.  This was offset
in part by an increase in consumer loans of $21,000.

<PAGE>

<TABLE>

NON-PERFORMING LOANS
                                            Sept 30,  December 31,   Sept 30,
                                              1998        1997          1997
<S>                                      <C>          <C>           <C>    

Non-accrual loans on a cash basis         $1,554,000   $ 813,000     $  554,000
Non-accrual loans as a percentage
  of total loans                                .73%        .35%           .24%
Accruing loans past due 90 days
  or more                                 $  952,000   $ 802,000     $1,240,000
Accruing loans past due 90 days
  or more as a percentage of total
  loans                                         .45%        .35%           .59%
Other Real Estate Owned from
  Foreclosed Property                     $  209,000   $ 284,000     $  443,000
Allowance for loan losses to
  nonperforming loans                        105.51%     163.64%        145.99%
Nonperforming assets to total loans            1.18%        .71%           .79%
Allowance for loan losses to total loans       1.24%       1.16%          1.15%

</TABLE>

     There are no significant loans classified for regulatory purposes that have
not been included in the above table of non-performing loans. The Company has no
significant  loans that qualify as "Troubled Debt  Restructuring"  as defined by
the Financial  Accounting  Standards Board's  Statement of Financial  Accounting
Standards  No. 15  "Accounting  for  Debtors and  Creditors  for  Troubled  Debt
Restructuring" at September 30, 1998.

YEAR 2000

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

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

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

<PAGE>

ITEM 3.  Quantitative and Qualitative Discussion About Market Risk

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

     The following  table  "Consolidated  Comparative  Statement  Analysis" 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 the  purposes  of  this  analysis,  the  computations  in the  "Consolidated
Comparative  Statement  Analysis" were prepared using the Federal statutory rate
of 34%; there were no state or local taxes on income applicable to the Company.

<PAGE>
<TABLE>

                   FIRST COLONIAL GROUP, INC. AND SUBSIDIARIES
                   CONSOLIDATED COMPARATIVE STATEMENT ANALYSIS
                             (Dollars in Thousands)
                                   (Unaudited)
Nine Months Ended, September 30,             1998                   1997
                                             Int    Avg       Int   Avg
                                     Avg     Inc/  Yield/     Avg   Inc/ Yield/
                                     Bal     Exp    Rate      Bal   Exp   Rate
<S>                             <C>       <C>      <C>   <C>      <C>    <C>

ASSETS:
INTEREST-EARNING ASSETS
Int-Bearing Deposits with Banks  $  3,288  $  145   5.88% $   978  $  52  7.09%
Federal Funds Sold                    791      30   5.05       16      1  8.33
Investment Securities
      Taxable                      78,718   3,683   6.24   69,032  3,426  6.61
      Non-Taxable (1)              24,385   1,353   7.40   15,705    902  7.65
Net Loans Held for Sale             2,088      40   2.56      983     35  4.75
Loans (1) (2)                     218,882  14,359   8.75  227,982 14,886  8.71
Reserve for Loan Losses            (2,717)     --     --   (2,600)    --    --
                                ---------   -----        --------  -----     
Net Loans                         216,165  14,359   8.85  225,382 14,886  8.80
                                ---------   -----        --------  -----     
  Total Interest-Earning Assets   325,435  19,610   8.04  312,096 19,301  8.24
Non-Interest Earning Assets        25,000      --     --   24,138     --    --
                                ---------   -----        --------  -----     
  TOTAL ASSETS, INT INCOME      $ 350,435  19,610   7.47 $336,234 19,301  7.65
                                ---------   -----        --------  -----     

LIABILITIES
INTEREST-BEARING LIABILITIES
Interest-Bearing Deposits
  Demand Deposits               $  48,901     424   1.16 $ 44,630    393  1.17
  Money Market Deposits            14,343     303   2.81   14,144    297  2.80
  Savings & Club Deposits          61,373   1,014   2.20   63,177  1,151  2.43
  CD's over $100,000                4,755     134   3.76    5,202    165  4.23
  All Other Time Deposits         124,610   5,226   5.59  117,433  4,891  5.55
                                ---------   -----        --------  -----     
   Total Int-Bearing Deposits     253,982   7,101   3.73  244,586  6,897  3.76
Federal Funds Purchased 
 and Securities Sold Under 
 Agreements to Repurchase           5,654     159   3.75    6,141    170  3.69
Short-Term Borrowings                 751      34   6.04    2,970    110  4.93
Long-Term Borrowings               18,151     847   6.23   18,432    856  6.19
                                ---------   -----        --------  -----     
  Total Int-Bearing Liabilities   278,538   8,141   3.89  272,129  8,033  3.93

NON-INTEREST-BEARING LIABILITIES
Non-Interest-Bearing Deposits      34,021      --     --   30,579     --    --
Other Liabilities                   7,144      --     --    5,882     --    --
                                ---------   -----        --------  -----     
   TOTAL LIABILITIES              319,703   8,141   3.40  308,590  8,033  3.47
   SHAREHOLDERS' EQUITY            30,732      --     --   27,644     --    --
                                ---------   -----        --------  -----     
   TOTAL LIABILITIES AND EQUITY $ 350,435   8,141   3.09 $336,234  8,033  3.19

NET INTEREST INCOME                       $11,469                $11,268 
                                            -----                  -----     

    Net Interest Spread                             4.15                  4.31
    Effect of Interest-Free Sources
      Used to Fund Earnings Assets                  0.54                  0.50
    Net Interest Margin                             4.69%                 4.81%
                                                    ----                  ----
</TABLE>

<PAGE>

     The net interest  margin of 4.69% for the nine month period ended September
30, 1998, decreased from the 4.81% net interest margin for the first nine months
of 1997.  The yield on interest  earning  assets was 8.04% during the first nine
months of 1998 as compared to 8.24% in 1997. A decrease in yields on investments
securities  was  partially  offset by an  increase in loan  yields.  The average
interest rate paid on interest  bearing  deposits and other borrowings was 3.89%
for the first nine months of 1998 as compared to 3.93% in 1997.  The decrease in
the net interest  margin was  supported by an increase in the effect of interest
free  sources of funds to 0.54% for the first nine  months of 1998 from 0.50% in
the same  period in 1997.  This  increase  is the result of higher  non-interest
bearing deposits in 1998.

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

     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.  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.

     Assets and  liabilities  are  allocated to a specific  time period based on
their scheduled repricing date or on an historical basis. At September 30, 1998,
assets of  $154,088,000  (43% of total  assets)  were  subject to interest  rate
changes within one year. Liabilities subject to rate change within one year were
$188,724,000.  A negative  one-year  gap position of  $34,636,000  existed as of
September  30,  1998.  The  ratio of  rate-sensitive  assets  to  rate-sensitive
liabilities  for the  one-year  time frame was 90%.  The  "Interest  Sensitivity
Analysis" in the  following  table  presents a  sensitivity  gap analysis of the
Company's assets and liabilities at September 30, 1998.

<PAGE>

Interest Sensitivity Analysis
(Dollars in Thousands) as of September 30, 1998
<TABLE>

                      0-90   91-180   181-365       1-5        Over
                      Days    Days      Days        Years     5 years    Total
<S>                <C>      <C>     <C>         <C>        <C>         <C>
Interest-Bearing 
Deposits with Banks $ 4,571  $   ---  $    ---   $    ---   $    ---    $ 4,571
Inv Securities       21,301   15,496    18,757     43,292     19,015    117,861
Loans Held-for-Sale   1,306      ---       ---        ---        ---      1,306
Loans                37,457   15,939    25,468     71,434     59,776    210,074
Other Assets         13,793      ---       ---        ---     14,667     28,460
                    ------- --------  --------    -------   --------   --------
  TOTAL ASSETS      $78,428  $31,435  $ 44,225   $114,726   $ 92,458   $362,272
                    ------- --------  --------    -------   --------   --------
Non-Interest-Bearing
  Deposits (1)      $   ---  $   ---  $    ---    $   ---   $ 36,974   $ 36,974
Int-Bearing 
 Deposits            96,691   24,237    41,991     38,931     59,073    260,923
Time Deposits           ---      ---       ---        ---        ---        ---
Securities Sold 
 Under Agreements 
 to Repurchase        7,805      ---       ---        ---        ---      7,805
Long-Term Debt       18,000      ---       ---        ---        ---     18,000
Other                   ---      ---       ---        ---      6,772      6,772
Capital                 ---      ---       ---        ---     31,798     31,798
                    ------- --------  --------    -------   --------   --------
TOTAL LIABILITIES
  AND CAPITAL      $122,496  $24,237  $ 41,991    $38,931   $134,617   $362,272
                    ------- --------  --------    -------   --------   --------
Net Interest  
  Sensitivity Gap  $(44,068) $ 7,198 $   2,234    $75,795   $(41,159)  $    ---

Cumulative Int
  Sensitivity Gap  $(44,068)$(36,870)$ (34,636)   $41,159   $    ---   $    ---

Cumulative Gap
  RSA/RSL             64.02%   74.87%    81.65%    118.08%    100.0%
</TABLE>

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

<PAGE>

PART II  -  OTHER INFORMATION

ITEM 5.     Other Information
                  None

ITEM 6.     Exhibits and Reports on Form 8-K
            (a)   Exhibits
                  27.1 Financial Data Schedule

            (b)   Reports on Form 8K 

     No reports on Form 8K were filed for the quarter  during  which this report
is filed.

<PAGE>

                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.

                                      FIRST COLONIAL GROUP, INC.


DATE:   November 13, 1998             BY: /S/  S. ERIC BEATTIE
     -----------------------------    -------------------------------
                                      S. ERIC BEATTIE
                                      PRESIDENT
                                     (PRINCIPAL EXECUTIVE OFFICER)


DATE:   November 13, 1998             BY: /S/  REID L. HEEREN
    ------------------------------    -------------------------------
                                      REID L. HEEREN
                                      VICE PRESIDENT
                                     (PRINCIPAL FINANCIAL OFFICER)